Form 10-Q for March 31, 2004
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 


 

FORM 10-Q

 


 

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

 

For Quarterly Period Ended March 31, 2004

 

OR

 

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

 

For Transition Period from              to             .

 

Commission File Number 1-12658

 


 

ALBEMARLE CORPORATION

(Exact name of registrant as specified in its charter)

 


 

VIRGINIA   54-1692118

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

330 SOUTH FOURTH STREET

RICHMOND, VIRGINIA

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

 

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

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

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

 

Number of shares of common stock, $.01 par value, outstanding as of April 30, 2004: 41,527,392

 



Table of Contents

ALBEMARLE CORPORATION

 

I  N  D  E  X

 

            

Page

Number(s)


PART I.

  FINANCIAL INFORMATION     
   

ITEM 1.

  Financial Statements     
        Consolidated Balance Sheets – March 31, 2004 and December 31, 2003    3-4
        Consolidated Statements of Income – Three - Months Ended March 31, 2004 and 2003    5
        Consolidated Statements of Comprehensive Income – Three - Months Ended March 31, 2004 and 2003    6
        Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2004 and 2003    7
        Notes to the Consolidated Financial Statements    8-17
   

ITEM 2.

  Management’s Discussion and Analysis of Results of Operations and Financial Condition, Additional Information, and Recent Developments    18-25
   

ITEM 3.

  Quantitative and Qualitative Disclosures About Market Risk    25-26
   

ITEM 4.

  Controls and Procedures    26

PART II.

  OTHER INFORMATION     
   

ITEM 1.

  Legal Proceedings    26
   

ITEM 2.

  Changes in Securities and Use of Proceeds    26-27
   

ITEM 4.

  Submission to Matters to a Vote of Security Holders    27
   

ITEM 6.

  Exhibits and Reports on Form 8-K    28

SIGNATURES

   29

EXHIBITS

   30-45

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands)

 

     March 31,
2004


   December 31,
2003


     (Unaudited)     

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 50,521    $ 35,173

Accounts receivable, less allowance for doubtful accounts (2004 - $1,073; 2003 - $2,287)

     233,847      226,026

Inventories:

             

Finished goods

     137,242      154,594

Raw materials

     21,364      22,384

Stores, supplies and other

     27,868      27,725
    

  

       186,474      204,703

Deferred income taxes and prepaid expenses

     16,658      15,467
    

  

Total current assets

     487,500      481,369
    

  

Property, plant and equipment, at cost

     1,603,415      1,605,048

Less accumulated depreciation and amortization

     1,089,903      1,078,043
    

  

Net property, plant and equipment

     513,512      527,005

Prepaid pension assets

     186,167      185,531

Other assets and deferred charges

     77,199      74,802

Goodwill

     36,700      36,832

Other intangibles, net of amortization

     84,085      81,752
    

  

Total assets

   $ 1,385,163    $ 1,387,291
    

  

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands)

 

     March 31,
2004


   December 31,
2003


     (Unaudited)     

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 108,179    $ 111,431

Long-term debt, current portion

     47      190

Accrued expenses

     70,597      70,610

Dividends payable to shareholders

     11,556      5,494

Income taxes payable

     26,406      22,346
    

  

Total current liabilities

     216,785      210,071
    

  

Long-term debt

     217,185      228,389

Postretirement benefits

     68,299      66,969

Other noncurrent liabilities

     102,875      101,976

Deferred income taxes

     139,597      143,665

Commitments and contingencies (Note 18)

             

Shareholders’ equity:

             

Common stock, $.01 par value, issued and outstanding - 41,470,782 in 2004 and 41,153,008 in 2003

     415      412

Additional paid-in capital

     5,136      736

Accumulated other comprehensive income

     21,859      23,643

Retained earnings

     613,012      611,430
    

  

Total shareholders’ equity

     640,422      636,221
    

  

Total liabilities and shareholders’ equity

   $ 1,385,163    $ 1,387,291
    

  

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands Except Per-Share Amounts)

(Unaudited)

 

    

Three Months Ended

March 31,


 
     2004

    2003

 

Net sales

   $ 322,009     $ 266,739  

Cost of goods sold

     261,225       208,197  
    


 


Gross profit

     60,784       58,542  

Selling, general and administrative expenses

     30,354       27,626  

Research and development expenses

     4,579       4,942  

Special items

     4,507       —    
    


 


Operating profit

     21,344       25,974  

Interest and financing expenses

     (1,559 )     (1,337 )

Other (expense) income, net including minority interest

     (1,083 )     3,573  
    


 


Income before income tax and cumulative effect of a change in accounting principle, net

     18,702       28,210  

Income taxes

     5,095       4,423  
    


 


Income before cumulative effect of a change in accounting principle, net

     13,607       23,787  

Cumulative effect of a change in accounting principle, net

     —         (2,220 )
    


 


Net income

   $ 13,607     $ 21,567  
    


 


Basic earnings per share:

                

Income before cumulative effect of a change in accounting principle, net

   $ 0.33     $ 0.57  

Cumulative effect of a change in accounting principle, net

     —         (0.05 )
    


 


Net income

   $ 0.33     $ 0.52  
    


 


Diluted earnings per share:

                

Income before cumulative effect of a change in accounting principle, net

   $ 0.32     $ 0.56  

Cumulative effect of a change in accounting principle, net

     —         (0.05 )
    


 


Net income

   $ 0.32     $ 0.51  
    


 


Cash dividends declared per share of common stock

   $ 0.29     $ 0.28  
    


 


 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars In Thousands)

(Unaudited)

 

    

Three Months Ended

March 31,


 
     2004

    2003

 

Net income

   $ 13,607     $ 21,567  

Other comprehensive income (loss), net of tax:

                

Unrealized gain (loss) on securities available for sale

     8       (18 )

Unrealized (loss) on hedging derivatives

     (51 )     —    

Foreign currency translation

     (1,741 )     3,268  
    


 


Other comprehensive income (loss)

     (1,784 )     3,250  
    


 


Comprehensive income

   $ 11,823     $ 24,817  
    


 


 

See accompanying notes to the consolidated financial statements.

 

6


Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars In Thousands)

(Unaudited)

 

     Three Months Ended
March 31,


 
     2004

    2003

 

Cash and cash equivalents at beginning of year

   $ 35,173     $ 47,784  
    


 


Cash flows from operating activities:

                

Net income

     13,607       21,567  

Cumulative effect of a change in accounting principle, net (a)

     —         2,220  
    


 


Income before cumulative effect of a change in accounting principle, net

     13,607       23,787  

Adjustments to reconcile net income before cumulative effect of a change in accounting principle, net to cash flows from operating activities:

                

Depreciation and amortization

     21,566       20,138  

Working capital changes, net of the effects of acquisitions

     11,023       15,239  

Increase in prepaid pension assets

     (636 )     —    

Increase in income tax receivable

     —         (11,083 )

Other, net

     (835 )     639  
    


 


Net cash provided from operating activities

     44,725       48,720  
    


 


Cash flows from investing activities:

                

Capital expenditures

     (8,398 )     (8,857 )

Investments in joint ventures and nonmarketable securities

     (4,725 )     (1,813 )

Acquisitions of assets

     (600 )     (26,579 )

Proceeds from liquidation of nonmarketable security

     —         4,216  
    


 


Net cash used in investing activities

     (13,723 )     (33,033 )
    


 


Cash flows from financing activities:

                

Proceeds from borrowings

     7,965       42,033  

Proceeds from exercise of stock options

     3,499       —    

Repayments of long-term debt

     (19,369 )     (35,502 )

Purchases of common stock

     (827 )     (13,213 )

Dividends paid to shareholders

     (5,963 )     (5,918 )

Dividends paid to minority interest

     (500 )     —    
    


 


Net cash used in financing activities

     (15,195 )     (12,600 )
    


 


Net effect of foreign exchange on cash and cash equivalents

     (459 )     1,829  
    


 


Increase in cash and cash equivalents

     15,348       4,916  
    


 


Cash and cash equivalents at end of period

   $ 50,521     $ 52,700  
    


 


(a) Supplemental noncash disclosures due to a cumulative change in accounting principle:

                

Increase in property, plant and equipment

   $ —       $ (6,520 )

Increase in accumulated depreciation

     —         3,083  

Increase in other noncurrent liabilities

     —         6,922  

Decrease in deferred tax liabilities

     —         (1,265 )
    


 


Cumulative effect of a change in accounting principle, net

   $ —       $ 2,220  
    


 


 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

1. In the opinion of management, the accompanying consolidated financial statements of Albemarle Corporation and its wholly-owned subsidiaries (“Albemarle” or the “Company”) contain all adjustments necessary for a fair presentation, in all material respects, of the Company’s consolidated financial position as of March 31, 2004, and December 31, 2003, the consolidated results of operations and comprehensive income for the three-month periods ended March 31, 2004, and 2003, and condensed consolidated cash flows for the three-month periods ended March 31, 2004, and 2003. All adjustments are of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report & Form 10-K. The December 31, 2003 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results of operations for the three-month period ended March 31, 2004, are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the accompanying consolidated financial statements and the notes thereto to conform to the current presentation.

 

2. Long-term debt consists of the following:

 

    

March 31,

2004


  

December 31,

2003


Variable-rate bank loans

   $ 200,585    $ 207,935

Industrial revenue bonds

     11,000      11,000

Foreign borrowings

     4,732      8,687

Miscellaneous

     915      957
    

  

Total

     217,232      228,579

Less amounts due within one year

     47      190
    

  

Long-term debt

   $ 217,185    $ 228,389
    

  

 

3. Cost of goods sold includes foreign exchange transaction gains of $392 and $61 for the three-month periods ended March 31, 2004 and 2003, respectively.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

4. Basic and diluted earnings per share for the three-month periods ended March 31, 2004 and 2003, are calculated as follows:

 

     Three Months Ended
March 31,


 
     2004

   2003

 

Basic earnings per share

               

Numerator:

               

Income before cumulative effect of a change in accounting principle, net

   $ 13,607    $ 23,787  

Cumulative effect of a change in accounting principle, net

     —        (2,220 )
    

  


Income available to shareholders, as reported

   $ 13,607    $ 21,567  
    

  


Denominator:

               

Average number of shares of common stock outstanding

     41,365      41,496  
    

  


Basic earnings per share:

               

Income before cumulative effect of a change in accounting principle, net

   $ 0.33    $ 0.57  

Cumulative effect of a change in accounting principle, net

     —        (0.05 )
    

  


Basic earnings per share

   $ 0.33    $ 0.52  
    

  


Diluted earnings per share

               

Numerator:

               

Income before cumulative effect of a change in accounting principle, net

   $ 13,607    $ 23,787  

Cumulative effect of a change in accounting principle, net

     —        (2,220 )
    

  


Income available to shareholders, as reported

   $ 13,607    $ 21,567  
    

  


Denominator:

               

Average number of shares of common stock outstanding

     41,365      41,496  

Shares issuable upon exercise of stock options and other common stock equivalents

     835      790  
    

  


Total shares

     42,200      42,286  
    

  


Diluted earnings per share:

               

Income before cumulative effect of a change in accounting principle, net

   $ 0.32    $ 0.56  

Cumulative of a change in accounting principle, net

     —        (0.05 )
    

  


Diluted earnings per share

   $ 0.32    $ 0.51  
    

  


 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

5. The following table reflects the changes in consolidated shareholders’ equity from December 31, 2003 through March 31, 2004:

 

     Common Stock

  

Additional

Paid-In
Capital


   

Accumulated

Other

Comprehensive

Income


    Retained
Earnings


   

Total
Share-

holders’
Equity


 
     Shares

    Amounts

        

Balance at December 31, 2003

   41,153,008     $ 412    $ 736     $ 23,643     $ 611,430     $ 636,221  

Net income

   —         —        —         —         13,607       13,607  

Foreign currency translation, net

   —         —        —         (1,741 )     —         (1,741 )

Change in unrealized gain on marketable equity securities, net

   —         —        —         8       —         8  

Change in unrealized (loss) on hedging derivatives, net

   —         —        —         (51 )     —         (51 )

Cash dividends declared

   —         —        —         —         (12,025 )     (12,025 )

Stock option revaluation

   —         —        665       —         —         665  

Shares repurchased and retired

   (27,569 )     —        (826 )     —         —         (826 )

Shares issued upon exercise of stock options

   305,724       3      3,496       —         —         3,499  

Issuance of incentive award stock

   39,619       —        1,065       —         —         1,065  
    

 

  


 


 


 


Balance at March 31, 2004

   41,470,782     $ 415    $ 5,136       21,859       613,012     $ 640,422  
    

 

  


 


 


 


 

6. At March 31, 2004, goodwill and other intangibles consist principally of goodwill, customer lists, trademarks, patents and other intangibles.

 

    

Balances at

Beginning of

Year


  

Additions at

Cost


   

Amortization

Charged to

Expense


  

SFAS No.

52

Adjustments


   

Balances at

March 31,

2004


Goodwill

   $ 36,832    $ —       $ —      $ (132 )   $ 36,700
    

  


 

  


 

Other intangibles

   $ 81,752    $ 2,694  (a)   $ 1,452    $ 1,090     $ 84,085
    

  


 

  


 


(a) Other intangibles additions consist of a non-compete agreement ($416), an employment contract ($1,292), a customer list ($820) and other intangibles ($166) associated with the acquisition of the assets of Taerim International Corporation.

 

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ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

7. The significant differences between the U.S. Federal statutory income tax rate on pretax income and the effective income tax rate for the three-month periods ended March 31, 2004 and 2003, respectively, are as follows:

 

    

% of Income Before

Income Taxes


 
    

Three Months

Ended March 31,


 
     2004

    2003

 

Federal statutory rate

   35.0 %   35.0 %

State taxes, net of federal tax benefit

   0.9     0.9  

Extraterritorial income exclusion

   (3.2 )   (2.5 )

Depletion

   (2.4 )   (1.6 )

Internal Revenue Service settlement

   —       (15.9 )

Other items, net

   (3.1 )   (0.2 )
    

 

Effective income tax rate

   27.2 %   15.7 %
    

 

 

In March 2003, the Company recorded a receivable for an income tax refund of $11,083. The refund related to the Internal Revenue Service’s examination of the Company’s 1996 and 1997 tax returns. The net effect of the refund on the Condensed Consolidated Statement of Income for the period ended March 31, 2003 amounted to $7,092 or 17 cents per diluted share, including interest $4,113 ($2,620 after income taxes) and a refund of $6,970, offset by the reversal of a deferred tax asset previously recognized, totaling $2,498.

 

8. On January 21, 2003, the Company acquired Ethyl’s fuel and lubricant antioxidants working capital, patents and other intellectual property for $26,579, including $1,500 ($1,250 paid through March 31, 2004) in additional consideration after Ethyl’s purchases of antioxidant products from Albemarle and Albemarle’s sales of antioxidant products to third parties for fuel and lubricant additive use met certain specified performance criteria. The Company acquired the antioxidants assets to further leverage core strengths in alkyls and orthoalkylation. A summary of the final purchase price allocation is as follows:

 

Current assets

   $ 4,685  

Property, plant and equipment

     300  

Other assets

     613  

Intangibles

     24,161  

Current liabilities

     (2,230 )

Noncurrent liabilities

     (950 )
    


Net cash paid

   $ 26,579  
    


 

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ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

9. Effective January 1, 2004, the Company acquired the business assets, customer lists and other intangibles of Taerim International Corporation (“Taerim”) and formed Albemarle Korea Corporation located in Seoul. Taerim was formerly Albemarle’s Korean distributor and representative. The acquisition purchase price, which totaled approximately $600 in cash and payables due over five years amounting to $2,400 on a discounted basis, consisted primarily of intangible assets. The final allocation of the purchase price will be completed in the second quarter of 2004.

 

Inventory and other assets

   $ 570  

Intangibles

     2,694  

Liabilities

     (2,664 )
    


Net cash paid

   $ 600  
    


 

10. During the first quarter of 2004, the Company recorded a special item charge in its Fine Chemicals segment of $4,507 ($2,871 after income taxes) that resulted from the layoff of 53 employees at the Pasadena plant zeolite facility and the related SFAS No. 88 pension curtailment charge ($898). The following table summarizes the total special charges related to the 2004 layoff and 2003 voluntary separation programs:

 

Beginning accrual balance, January 1, 2004

   $ 1,193  

Workforce reduction charges, net

     3,449  

Payments

     (2,624 )

Overaccrual amounts reversed to income

     (519 )
    


Ending accrual balance, March 31, 2004

   $  1,499 *
    



* The remaining 2004 amount will be paid during the year.

 

11. At March 31, 2004 and 2003, other assets and deferred charges include a receivable related to the probable insurance recovery of an insurance claim for 2002 amounting to $5,783.

 

12. The Company has the following recorded environmental liabilities primarily included in “Other noncurrent liabilities” at March 31, 2004:

 

Beginning balance at December 31, 2003

   $ 29,122  

Payments

     (93 )

Foreign exchange

     (652 )
    


Ending balance at March 31, 2004

   $ 28,377  
    


 

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ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

The amounts recorded represent management’s best estimate of the Company’s future remediation and other anticipated environmental costs relating to past operations. Although it is difficult to quantify the potential financial impact of compliance with environmental protection laws, management estimates, based on the latest available information, that there is a reasonable possibility that future environmental remediation costs associated with the Company’s past operations, in excess of amounts already recorded, could be up to approximately $10,000 before income taxes, to be incurred over a period of time. However, the Company believes that any sum it may be required to pay in connection with environmental remediation matters in excess of the amounts recorded should occur over a period of time and should not have a material adverse effect upon results of operations, financial condition or cash flows of the Company on a consolidated basis but could have a material adverse impact in a particular quarterly reporting period.

 

13. The Company is a global manufacturer of specialty polymer and fine chemicals, grouped into two operating segments: Polymer Chemicals and Fine Chemicals. The operating segments were determined based on management responsibility. The Polymer Chemicals segment is comprised of flame retardants, catalysts and polymer additives. The Fine Chemicals segment is comprised of agrichemicals, pharmachemicals, fine chemistry services and intermediates and performance chemicals. Segment data includes intersegment transfers of raw materials at cost and foreign exchange transaction gains and losses, as well as allocations for certain corporate costs. The corporate and other expenses include certain corporate-related items not allocated to the reportable segments.

 

Summary of Segment Results

 

     Three Months Ended March 31,

 
     2004

    2003

 
     Revenues

   Income

    Revenues

   Income

 

Polymer Chemicals

   $ 195,383    $ 21,333     $ 147,227    $ 16,349  

Fine Chemicals

     126,626      5,286       119,512      14,288  
    

  


 

  


Segment totals

   $ 322,009      26,619     $ 266,739      30,637  
    

          

        

Corporate and other expenses

            (5,275 )            (4,663 )
           


        


Operating profit

            21,344              25,974  

Interest and financing expenses

            (1,559 )            (1,337 )

Other (expense) income, net including minority interest

            (1,083 )            3,573  
           


        


Income before income taxes and cumulative effect of a change in accounting principle, net

          $ 18,702            $ 28,210  
           


        


 

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ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

14. On January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. At the time of adoption, the Company identified certain assets for which there are future retirement obligations. These future obligations are comprised primarily of the cost of closing various facilities and of capping brine wells. The financial statement impact at adoption of this Statement on the Company’s consolidated statements of income in 2003 is reflected as a cumulative effect of a change in accounting principle amounting to $3,485 or $2,220 after income taxes.

 

15. Cash dividends declared for the three-month period ended March 31, 2004 totaled 29 cents per share, which included a dividend of 14.5 cents per share declared on January 30, 2004, payable April 1, 2004, as well as a dividend of 14.5 cents per share declared March 31, 2004, payable July 1, 2004. In 2003, the cash dividends declared for the three-month period ended March 31 totaled 28 cents per share, which included a dividend of 14 cents per share declared on January 31, 2003, payable on April 1, 2003, as well as a dividend of 14 cents per share declared March 26, 2003, payable July 1, 2003. The primary reason for the two dividend declarations in both first-quarter periods is the timing of the Board of Directors meeting dates.

 

16. During January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46” or the “Interpretation”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties; such entities are known as variable interest entities (“VIEs”). FIN 46 applied to all VIEs created after January 31, 2003. The FASB issued a revision to FIN 46 (“FIN 46-R”) in December 2003. FIN 46-R is effective for the interim period ending March 31, 2004 for all new or existing VIEs. The Company has determined that the adoption of FIN 46-R at March 31, 2004 does not impact the Company or its results for this period then ended.

 

17. SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) encourages, but does not require, companies to record at fair value, compensation cost for stock-based employee compensation plans. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB Opinion No. 25”) and related interpretations. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. If compensation cost had been determined based on the fair value at the grant date under the

 

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ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

plans consistent with the method of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

         

Three Months Ended

March 31,


          2004

   2003

Stock based compensation expense, net of taxes

   as reported
pro forma
   $
$
922
1,655
   $
$
174
1,051
         

  

Income before cumulative effect of a change in accounting principle, net

   as reported
pro forma
   $
$
13,607
12,874
   $
$
23,787
23,043
         

  

Net income

   as reported
pro forma
   $
$
13,607
12,874
   $
$
21,567
20,754
         

  

Basic earnings per share on income before cumulative effect of a change in accounting principle, net

   as reported
pro forma
   $
$
0.33
0.31
   $
$
0.57
0.56
         

  

Basic earnings per share on Net income

   as reported
pro forma
   $
$
0.33
0.31
   $
$
0.52
0.50
         

  

Diluted earnings per share on income before cumulative effect of a change in accounting principle, net

   as reported
pro forma
   $
$
0.32
0.30
   $
$
0.56
0.54
         

  

Diluted earnings per share on net income

   as reported
pro forma
   $
$
0.32
0.30
   $
$
0.51
0.49
         

  

 

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for options granted in the three-months periods ended March 31, 2004 and 2003.

 

    

Three Months Ended

March 31,


 
     2004

    2003

 

Fair values of options granted

   $10.02     $8.62  

Dividend Yield

   2.37 %   2.54 %

Volatility

   30.23 %   31.23 %

Average expected life (in years)

   10     10  

Risk-free interest rate

   4.15 %   4.21 %

 

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ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

18. The following table summarizes the Company’s contractual obligations for plant construction, purchases of equipment, unused letters of credit and various take or pay and throughput agreements:

 

    

2Q

2004


  

3Q

2004


  

4Q

2004


   2005

   2006

   2007

   2008

   There-
after


Take or pay / throughput agreements

   $ 10,574    $ 10,574    $ 10,573    $ 15,141    $ 11,372    $ 9,695    $ 8,147    $ 34,864

Additional investment commitment payments

   $ 1,703    $ 283    $ 327    $ 803    $ 805    $ 805    $ 30    $ 229

Capital projects

   $ 6,862    $ 969    $ 1,791    $ 1,955    $ 1,554    $ 1,554    $ 3,263      —  

Letters of credit and guarantees

   $ 263    $ 654    $ 1,203    $ 22,654      —        —        —      $ 52
    

  

  

  

  

  

  

  

Total

   $ 19,402    $ 12,480    $ 13,894    $ 40,553    $ 13,731    $ 12,054    $ 11,440    $ 35,145
    

  

  

  

  

  

  

  

 

In addition, the Company has commitments, in the form of guarantees, for 50% of the loan amounts outstanding (which at March 31, 2004, amounted to $28,300) of its 50%-owned joint venture company, Jordan Bromine Company Limited (“JBC”). JBC entered into the loans in 2000 to finance construction of certain bromine and derivatives manufacturing facilities on the Dead Sea. The Company’s total loan guarantee commitment for JBC is 50% of JBC’s total loans, which could amount up to $45,000 if JBC makes all of its allowable draws.

 

19. In accordance with Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits— an amendment of FASB Statements No. 87, 88, and 106”, the following information is provided for interim domestic financial statements (foreign information is excluded from the requirements until the period ended December 15, 2004):

 

    

March 31,

2004


   

March 31,

2003


 

Net Periodic Pension Benefit Cost:

                

Service cost

   $ 2,276     $ 1,960  

Interest cost

     6,230       4,962  

Expected return of assets

     (10,342 )     (8,757 )

Plan pension curtailment *

     898       —    

Amortization of Unrecognized Amounts:

                

Net transition (asset)/obligation

     (2 )     (10 )

Prior service charge

     179       318  

Net (gain)/loss

     638       202  
    


 


Total income

   $ (123 )   $ (1,325 )
    


 


 

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ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Share and Per-Share Amounts)

(Unaudited)

 

    

March 31,

2004


   

March 31,

2003


 

Net Periodic Postretirement Benefit Expense:

                

Service cost

   $ 487     $ 456  

Interest cost

     1,070       1,123  

Expected return of assets

     (114 )     (133 )

Amortization of Unrecognized Amounts:

                

Net transition (asset)/obligation

     —         —    

Prior service charge

     (339 )     (365 )

Net (gain)/loss

     96       94  
    


 


Total expense

   $ 1,200     $ 1,175  
    


 



* During first quarter ended March 31, 2004, a SFAS No. 88 pension curtailment charge was incurred totaling $898 due to the layoffs at the Pasadena plant zeolite facility.

 

The Company did not make any contributions to its pension plans in the first quarter of 2004; and at this time, none are anticipated for the remainder of the year.

 

On December 8, 2003, U. S. Government enacted legislation that expands Medicare, primarily adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. The Company anticipates that the benefits it pays after 2006 will be lower as a result of the new Medicare provisions; however, the retiree medical obligations and costs reported do not reflect the impact of this legislation. The Company has deferred the recognition of the new Medicare provisions’ impact as permitted by FASB Staff Position 106-1 due to open guidance about certain matters. The final accounting guidance could require changes to previously reported information.

 

20. On April 19, 2004, Albemarle announced that it expects to complete an agreement with Akzo Nobel N.V. (Akzo Nobel”) to acquire its catalyst business, a leader in the production of petroleum refining catalysts, for 625 million euros in cash, subject to the advice of Akzo Nobel’s Works Council and the approval of certain regulatory authorities. The acquisition is expected to close in the second quarter of 2004.

 

The transaction will be financed initially through a new senior credit facility and a bridge loan.

 

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Table of Contents

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

 

The following data and discussion provides an analysis of certain significant factors affecting the results of operations of Albemarle Corporation and its subsidiaries (“Albemarle” or the “Company”), during the periods included in the accompanying consolidated statements of income and changes in the Company’s financial condition since December 31, 2003.

 

Some of the information presented in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the Company’s current expectations, which are in turn based on our reasonable assumptions within the bounds of our knowledge of the business and operations. There can be no assurance, however, that the Company’s actual results will not differ materially from the results and expectations in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation, the timing of orders received from customers, the gain or loss of significant customers, competition from other manufacturers, changes in the demand for our products, increases in the cost of products, increases in the cost of energy and raw materials (notably, ethylene, chlorine and natural gas), changes in the Company’s markets in general, fluctuations in foreign currencies, changes in new product introductions resulting in increases in capital project requests and approvals leading to additional capital spending, changes in laws and regulations, unanticipated claims or litigation, the inability to obtain current levels of product or premises liability insurance or the denial of such coverage, political unrest affecting the global economy and changes in accounting standards.

 

The following factors, among others, could affect the consummation of the proposed transaction with Akzo Nobel: the execution of a definitive sale and purchase agreement, the advice from Akzo Nobel’s Works Council, the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Act and the receipt of other competition law clearances. The following factors, among others, could affect the anticipated results of that transaction: consummation of the financing on terms favorable to the Company, the ability to integrate successfully the acquired business within the expected timeframes or at all, and ongoing operations of the business. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

 

Results of Operations

 

First Quarter 2004 Compared with First Quarter 2003

 

Net Sales

 

Net sales by operating segment for the first-quarter periods ended March 31, 2004 and 2003 are as follows:

 

    

Net Sales

(In Thousands)


     2004

   2003

Polymer Chemicals

Fine Chemicals

   $
 
195,383
126,626
   $
 
147,227
119,512
    

  

Segment Totals

   $ 322,009    $ 266,739
    

  

 

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Net sales for first quarter 2004 of $322.0 million were up $55.3 million (20.7%) from first-quarter 2003 net sales of $266.7 million. Polymer Chemicals’ net sales increased $48.2 million (32.7%) primarily due to the contributions made by the Company’s 2003 acquisitions ($17.1 million), the favorable impact of foreign exchange ($9.6 million) and higher volumes in flame retardants ($15.9 million) and catalysts and additives ($9.1 million) offset, in part, by lower prices ($3.5 million), primarily in flame retardants. Fine Chemicals’ net sales increased $7.1 million (6.0%) primarily due to the favorable impact of foreign exchange ($6.9 million), higher volumes in bulk active pharmaceuticals and agricultural chemicals ($4.5 million), the contributions made by the Company’s 2003 acquisition ($4.0 million) and higher sales prices in fine chemistry services and intermediates ($1.8 million). The increase was partially offset by an unfavorable sales mix in performance chemicals ($8.4 million) and lower prices in bulk active pharmaceuticals ($1.4 million).

 

Operating Costs and Expenses

 

Cost of goods sold in the first quarter of 2004 increased $53.0 million (25.5%) from the corresponding 2003 period. The increase was primarily due to the impact of the Company’s 2003 acquisitions and higher sales volumes in the 2004 period as well as the idling of the zeolite business assets and higher raw material costs. The gross profit margin decreased approximately 300 basis points to 18.9% in first-quarter 2004 from 21.9% for the corresponding period in 2003.

 

Selling, general and administrative (“SG&A”) expenses and research and development (“R&D”) expenses increased $2.4 million (7.3%) in the first quarter of 2004 versus first-quarter 2003 primarily due to higher employee incentive costs ($1.7 million), the unfavorable impact of foreign exchange ($1.1 million) and higher outside legal costs ($0.5 million) offset, in part, by the benefits of cost reduction efforts and a voluntary separation program implemented in the third quarter of 2003. As a percentage of net sales, SG&A expenses and R&D expenses were 10.8% in 2004 versus 12.2% in the 2003 quarter.

 

Operating Profit

 

Operating profit by reportable operating segment for the three-month period ended March 31, 2004, and 2003 is as follows:

 

    

Operating Profit

(In Thousands)


 
     2004

    2003

 

Polymer Chemicals

   $ 21,333     $ 16,349  

Fine Chemicals

     5,286       14,288  
    


 


Segment Totals

     26,619       30,637  

Corporate and Other Expenses

     (5,275 )     (4,663 )
    


 


Operating Profit

   $ 21,344     $ 25,974  
    


 


 

First-quarter 2004 operating profit, including a special item charge in the Fine Chemicals’ segment of $4.5 million that resulted from the layoff of 53 employees at the Pasadena plant zeolite facility and their related SFAS No. 88 pension curtailment charge ($0.9 million), was down $4.6 million (17.8%) from first-quarter 2003 operating profit. Excluding the workforce reduction, first-quarter 2004 operating profit approximated the 2003 period.

 

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Table of Contents

Polymer Chemicals’ first-quarter 2004 segment operating profit increased $5.0 million (30.5%) from first-quarter 2003. The increase was primarily due to higher shipments ($5.6 million) in catalysts and additives ($3.2 million) and flame retardants ($2.4 million), the overall favorable net effects of foreign exchange ($3.9 million) and favorable manufacturing and production costs ($0.8 million), offset, in part, by lower prices ($3.5 million), primarily in flame retardants, and unfavorable raw material costs ($1.8 million).

 

Fine Chemicals’ first-quarter 2004 segment operating profit, including a special item charge of $4.5 million that resulted from the layoff of 53 employees at the Pasadena plant zeolite facility and their related SFAS No. 88 pension curtailment charge ($0.9 million), decreased $9.0 million (63.0%) from first-quarter 2003. Excluding the special item, first-quarter 2004 segment operating profit decreased $4.5 million (31.5%) from first-quarter 2003 primarily due to unfavorable plant utilization and manufacturing costs ($6.3 million), unfavorable sales mix in performance chemicals ($1.9 million) and lower prices in bulk active pharmaceuticals ($1.4 million). The decrease was partially offset by higher shipments in bulk active pharmaceuticals ($2.8 million), higher prices in performance chemicals ($0.9 million) and the overall favorable net effects of foreign exchange ($0.9 million).

 

Corporate and other expenses for the first-quarter of 2004 increased $0.6 million (13.1%) from first-quarter 2003 primarily due to higher estimated employee incentive costs offset, in part, by the Company’s overall cost reduction efforts.

 

Interest and Financing Expenses

 

Interest and financing expenses for first-quarter 2004 amounted to $1.6 million, up slightly from $1.3 million in first-quarter 2003 due to higher average outstanding debt in the 2004 period.

 

Other (Expense) Income Net, Including Minority Interest

 

Other (expense) income for the first-quarter 2004 amounted to $(1.1) million, down $4.7 million from the 2003 corresponding period. First-quarter 2003 included interest income of $4.1 million from an Internal Revenue Service (“IRS”) income tax settlement mentioned in Income Taxes below.

 

Income Taxes

 

First-quarter 2004 effective income tax rate was 27.2%, up from 15.7% for the corresponding period in 2003. Income taxes for the 2003 period primarily benefited from an IRS income tax settlement detailed in the following table.

 

    

Income Tax

Expense

(Benefit)


   

Impact

on Profit

(Loss)


 

Tax Refund

   $ (6,970 )   $ 6,970  

Interest on Refund

     1,493       2,620  

Reversal of Deferred Tax Item

     2,498       (2,498 )
    


 


Total

   $ (2,979 )   $ 7,092  
    


 


 

20


Table of Contents

Financial Condition and Liquidity

 

Cash and cash equivalents at March 31, 2004, were $50.5 million, representing an increase of $15.3 million from $35.2 million at year-end 2003.

 

Cash flows provided from operating activities of $44.7 million, together with approximately $8.0 million of proceeds from borrowings, were used to cover operating activities, repay debt of $19.4 million, fund capital expenditures, pay quarterly dividends to shareholders, fund investments in joint ventures and nonmarketable securities, purchase 27,569 shares of the Company’s common stock, purchase the assets and intellectual property of Taerim for approximately $0.6 million, and increase cash and cash equivalents by $15.3 million. We anticipate that cash provided from operations in the future will be sufficient to pay our operating expenses, satisfy debt-service obligations and make dividend payments.

 

The change in the Company’s accumulated other comprehensive loss from December 31, 2003, was due primarily to net foreign currency translation adjustments (strengthening of the the U.S. Dollar versus the Euro and Japanese Yen), net of related deferred taxes.

 

The noncurrent portion of the Company’s long-term debt amounted to $217.2 million at March 31, 2004, compared to $228.4 million at the end of 2003. The Company’s long-term debt, including the current portion, as a percentage of total capitalization amounted to 25.3% at March 31, 2004. The Company is guarantor of $45.0 million of long-term debt, in the form of commitments, on behalf of its 50-percent owned joint venture company, Jordan Bromine Company Limited. The Company’s long-term debt, including the guarantee, as a percent of total capitalization amounted to 29.1% at March 31, 2004.

 

Borrowings under the Company’s Credit Agreement dated September 10, 2002, are conditioned upon compliance with the following financial covenants: (a) consolidated interest coverage ratio, as defined, must be greater or equal to 3.00:1.00, (b) consolidated leverage ratio, as defined, must be less than or equal to 3.50:1.00, (c) consolidated tangible domestic assets, as defined, must be equal to or greater than $750 million for the Company to make investments in entities and enterprises that are organized outside the United States, (d) with the exception of liens specified in the Credit Agreement, liens may not attach to assets with a value of more than 10% of consolidated net worth, as defined in the agreement. As of March 31, 2004, the Company was in compliance with these covenants.

 

The Company’s capital expenditures in the first three months of 2004 decreased 5.2% from the three-month period of 2003. For the year, capital expenditures are forecasted to be greater than the 2003 level. Capital spending will be financed primarily with cash flow provided from operations with additional cash needed, if any, provided from debt. The amount and timing of any additional borrowings will depend on the Company’s specific cash requirements.

 

The Company is subject to federal, state, local and foreign requirements regulating the handling, manufacture and use of materials (some of which may be classified as hazardous or toxic by one or more regulatory agencies), the discharge of materials into the environment and the protection of the environment. To our knowledge, we are currently complying, and expecting to continue to comply, in all material respects with existing environmental laws, regulations, statutes and ordinances. Such compliance with federal, state, local and foreign environmental protection laws is not expected to have in the future a material effect on earnings or the competitive position of Albemarle.

 

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Table of Contents

Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which the Company may be designated as a potentially responsible party and may be liable for a share of the costs associated with cleaning up various hazardous waste sites.

 

Additional Information

 

Outlook

 

Overview

 

The first-quarter of 2004 marked a significant period in Albemarle’s history with the announcement of our intention to acquire the refinery catalysts business of Akzo Nobel N. V. (“Akzo”), subject to advice of their Works Council and the approval of certain regulatory authorities. Akzo has a leading market position in the refinery catalysts business in refineries around the world.

 

The refinery catalysts business to be acquired had sales of about $406 million in 2003 (based upon a conversion rate of 1.20 USD to Euro), with additional sales totaling $160 million in three 50 percent-owned joint ventures.

 

While the Akzo refinery catalysts business acquisition is the most significant corporate news this quarter, other corporate initiatives continue to progress. The status of a manufacturing cost reduction program, which began in 2003 with the intent of reducing expenses by $50 million over three years, is now marking about $15 million in savings recognized to date. The Company will continue this program and expand it to incorporate the Akzo team following the closing of the acquisition. In addition, we delivered an outstanding effort in lowering our working capital requirements in the first-quarter—our cash-to-cash measure was reduced by about 40 percent from fourth-quarter 2003 levels driven by exceptional inventory management across the business portfolio. The Company intends to continue its close management of this effort in hopes of capturing additional working capital benefits even as sales volumes climb.

 

Inflation in raw materials continues to be a concern as the global economy continues to make moderate growth. Alumina trihydrate, chlorine, bisphenol-A and phenol are all up in the first quarter of 2004, resulting in a negative impact of about $2 million versus last year’s same quarter. As it looks today, we believe that raw material costs will be up about $10 million in 2004 versus 2003, with energy costs adding another $2 or $3 million to that. We will continue to look for efficient purchasing methods, lowering plant costs and increasing prices across a wide array of products to help overcome these headwinds.

 

Asian manufacturers, and new capacity in developing countries continued to provide aggressive competition across a range of products in the first quarter of 2004, and we expect this trend to continue. Over the past five years, our margins have been affected by more aggressive global competition, but over the long-term, Albemarle’s objective is to construct a global, low-cost portfolio network of sourcing locations based on new technology—both internally developed and acquired—and, providing a high level of service to our customers. We continue to meet the global competitive changes, and expect to remain very competitive across all our chosen product lines.

 

Foreign exchange fluctuations affect our sales and operating profits. The weakened dollar of 2003 now seems to be rebounding. In the short-term, this is a positive for our acquisitions

 

22


Table of Contents

denominated in the relatively weakening currencies. Generally, the weaker dollar is good for Albemarle sales, however. Based on the 2003 sales mix, Albemarle calculated the impact on net sales of movement in exchange rates of the dollar against significant sales currencies for the Company: A movement of 1% in the Japanese yen will affect dollar sales figures by about $700,000 on an annual basis. The European Union’s euro’s fluctuation of 1% against the dollar will change Albemarle sales by about $3 million on an annual basis. These figures will change as we integrate the anticipated Akzo refinery catalyst acquisition in the third and fourth quarters of 2004, as we will be adding employees and facilities in The Netherlands.

 

Albemarle continues to forecast an effective tax rate of 29 percent.

 

As a further example of the cost reduction efforts in place, Albemarle limited wage and salary increases this year and instituted a variable pay program tied to improvement in earnings-per-share growth. Such programs will have an impact on costs going forward, and should provide a way to achieve additional productivity gains.

 

Fine Chemicals

 

The fine chemistry services and intermediates (“Services”) area of Fine Chemicals has developed a portfolio of about 83 products, which is up 75 percent over a two-year period. Our team quoted on over 150 projects in February and March 2004, setting a record level of proposals in February and a second highest level ever in March.

 

Services operating profit was up about $1 million versus the fourth quarter of 2003 in the first quarter of 2004, and up 40 percent versus last year’s first quarter as customer acceptance and new product commercialization continues to grow. In this area, we are developing a strong portfolio of new products for major global customers such as Glaxo Smith Kline, Pfizer, Schering-Plough, BASF, Dow, and Dupont. Our efforts to build a broader product and customer base are continuing, and we’re very pleased with the progress of this changeover from our traditional focus on large-scale products for a limited number of customers.

 

Overall Fine Chemicals volumes also improved in the first quarter of 2004 versus the first quarter of 2003, driven by bromine from our Jordan Bromine joint venture, methyl bromide, pharmaceuticals and intermediates. The expansion of our fine chemistry services and the effective development of our world-class bromine franchise are the two critically important aspects of our strategy in this segment, and we are very pleased with our progress in both areas.

 

The soil fumigant methyl bromide was to be phased out of use in the United States, Europe and Japan by the beginning of 2005, except for critical uses and other limited exemptions. Recent regulatory decisions have provided another year of transition, and this extension through 2005 is a very positive development.

 

We have been in the process of rebuilding the portfolio of Fine Chemicals for several years, and we have experienced maturation of some products. In the case of zeolites, which are used in the deteriorating powder detergent marketplace, we expect to transition these assets into other value-adding activities. The elimination of the zeolite detergent builder volume will continue to affect Fine Chemicals revenues by about $9 million quarter-to-quarter throughout 2004, and our Fine Chemicals’ team has addressed this reduction in sales with increased shipments in other areas. By the end of February, we significantly reduced our fixed costs in the zeolite plant, and the loss from this event is likely to be limited as a result—an earnings effect of about one to two cents per quarter is estimated.

 

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Table of Contents

Fine Chemicals also is affected by Asian competitors - particularly in the larger quantity, generic pharmaceutical products. We combat these competitive issues through increased marketing efforts, product enhancements, cost control and sourcing initiatives. These competitive pressures are not new to the Company or the chemical industry, but it is often difficult to predict the impact on our customers. In the case of ibuprofen, we have seen a nominal price decrease from the first quarter of 2003 to the present. While this will affect our margins, we continue to drive down costs in our plant, and will maintain our supply position in key accounts. Volume growth in pharmaceuticals continues to be good, and this is also helping to offset market pricing pressure. As world markets continue to develop for ibuprofen and naproxen, and as new products with combinations of these drugs with others are developed, the growth in this product area should continue at strong single digit percentages per year into the near future.

 

Our bromine franchise continues to generate positive results. Pricing and volumes are increasing at double-digit rates as supply is tight and demand is increasing globally. Our agricultural chemical intermediates volumes were sequentially higher in the first quarter of 2004, due to stronger volumes of intermediates for pre-emergent herbicides. While volumes are expected to continue strong in many of the agricultural chemicals for the remainder of the year, an intermediate used in Lorsban and Dursban trademarked pesticide products will decrease due to restrictions on residential use.

 

The Fine Chemicals’ segment team continues to work against these raw material, energy and product maturation issues with a strong development track record. While this effort is showing early signs of success in many areas, we believe the performance of the segment in 2004 will be down, with some recovery coming in 2005.

 

Polymer Chemicals

 

General indicators of the economic recovery for consumer electronics, such as the book-to-bill ratio for printed wiring boards continue strong; and television and personal computer sales continue to drive higher shipments in Albemarle’s Polymer Chemicals segment. Segment revenues and operating profit grew at 30 percent in the first quarter of 2004 versus the same quarter in 2003. Mineral flame retardants, antioxidants, and curatives all showed strengthening year-to-year performance, and we expect the strong demand to continue for the foreseeable future.

 

The demand strength, along with increases in raw materials and energy, has set the stage for increases in prices for our polymer chemicals. We announced price increases of 10 percent for CP-2000, our tetrabrom product, HP900 and chlorinated phosphate ester flame retardants effective in March and April. This activity to raise prices is a general trend in the industry, and we are beginning to see improvements in this area. Additionally, for the first quarter, we achieved higher pricing for key mineral flame retardants which are also in tight supply.

 

Albemarle’s joint venture CP-2000 tetrabrom plant in Jordan which uses a patented continuous process, has made qualification runs of the product, and customers have been qualifying the new plant’s output. The timing of our new production and the general economic recovery coincide, and we now are producing a very high quality product for the markets in Asia and Europe. The plant’s production will be increased gradually over time as customers are set up to receive from this facility. We expect to be producing at a 12,000 metric tons capacity for this plant by year-end 2004. The plant is readily expandable, and further capacity can be added as demand increases.

 

Performance is also strong in our recently acquired fuel and lube antioxidant business, polyurethane curatives, and intermediates for PVC stabilization.

 

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The combination of increasing demand and the prospects of rising prices are positive indicators for the Polymer Chemicals segment in 2004, and the Company expects to continue to benefit from these trends in the near term. Significant raw material increases, particularly for alumina trihydrate, phenol and phosphorus-based products must be dealt with and success of the price increases is critical to our profitability in our Polymer Chemicals in 2004. While such raw materials concerns are not insurmountable, the success of the price increases is an important factor in improving margins in Polymer Chemicals in 2004.

 

Additional information regarding the Company, its products, markets and financial performance is provided at the Company’s Internet web site, www.albemarle.com.

 

Recent Developments

 

The Company and Traveler’s Insurance Company have successfully mediated a dispute related to payments to be made to the Company in connection with coverage for the period 1950 through 2000. Pursuant to the understanding reached by the parties, Travelers would pay to the Company a total of $7.425 million in the following installments: $4.675 million within 21 days of execution of the settlement agreement, $1.375 million on February 1, 2005 and $1.375 million on February 1, 2006. The Company expects the parties to enter into a definitive settlement agreement in the near future.

 

On April 19, 2004, Albemarle announced that it expects to complete an agreement with Akzo Nobel N.V. (“Akzo Nobel”) to acquire its catalyst business, a leader in the production of petroleum refining catalysts, for 625 million euros in cash, subject to the advice of Akzo Nobel’s Works Council and the approval of certain regulatory authorities. The acquisition is expected to close in the second quarter of 2004.

 

The transaction will be financed initially through a new senior credit facility and a bridge loan.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no significant changes in our interest rate risk, marketable security price risk or raw material price risk from the information provided in our Form 10-K for the year ended December 31, 2003, except as noted below.

 

The operations of the Company are exposed to market risk from changes in natural gas prices. The Company purchases natural gas to meet its production requirements. In the second quarter of 2003, the Company began hedging a portion of its 12 month rolling forecast for North American natural gas requirements, by entering into natural gas futures contracts, to help mitigate uncertainty and volatility.

 

Hedge transactions are executed with a major financial institution by the Company’s purchasing personnel. Such derivatives are held to secure natural gas at fixed prices and not for trading.

 

The natural gas contracts qualify as cash flow hedges under SFAS No. 133 and are marked to market. The unrealized gains and/or losses are deferred and reported in Other Comprehensive Income to the extent that the unrealized gains and losses are offset by the

 

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forecasted transaction. Any unrealized gains and/or losses on the derivative instrument that are not offset by the forecasted transaction are recorded in earnings. At March 31, 2004, the Company recorded unrealized losses of approximately $80 ($51 net of tax) in Other Comprehensive Income.

 

ITEM 4. Controls and Procedures

 

The Company carried out an evaluation, with the participation of the Company’s management, including the Company’s President and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer, and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

The Company is involved from time to time in legal proceedings of types regarded as common in the Company’s businesses, particularly administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, products liability and premises liability litigation.

 

The Company maintains a financial accrual for these proceedings which includes defense costs and potential damages, as estimated by its General Counsel. The Company also maintains insurance to mitigate such risks. The Company is not party to any pending litigation proceedings that are expected to have a material adverse effect on the Company’s results of operations, financial position or cash flows.

 

ITEM 2. Changes in Securities and Use of Proceeds

 

(e) Market for the Registrant’s Common Equity and Related Stockholder Matters

 

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The following table provides information about purchases made by or on behalf of the issuer during the quarter ended March 31, 2004 of shares of equity securities that are registered by the issuer pursuant to Section 12 of the Exchange Act:

 

Period


   Total Number
of Shares
Purchased (1)


   Average
Price Paid
per Share


  

Total Number of Shares

Purchased as Part of
Publicly Announced
Plan(s) (2)


  

Maximum Number of

Shares that May Yet
Be Purchased Under
the Plan(s)


February 2004

   27,569    $ 29.99    27,569    3,875,401
    
  

  
  

Total

   27,569    $ 29.99    27,569    3,875,401
    
  

  
  

(1) We repurchased an aggregate of 27,569 shares of our common stock pursuant to the repurchase plan that we publicly announced on October 25, 2000 (the “Repurchase Plan”). We repurchase shares of our common stock in open market transactions and in private transactions.
(2) On October 25, 2000, our board of directors approved the repurchase by us of up to an aggregate of 5 million shares of our common stock pursuant to the Repurchase Plan. The Repurchase Plan will expire when we have repurchased all shares authorized for repurchase thereunder, unless the Repurchase Plan is earlier terminated by action of our board of directors.

 

ITEM 4. Submission of Matters to a Vote of Security Holders

 

At the annual meeting of shareholders held on March 31, 2004, there were 41,419,000 shares of common stock outstanding and entitled to vote, of which 37,129,752 were represented in person or by proxy. The voting shareholders elected the directors nominated in the Proxy Statement with the following affirmative votes and votes withheld:

 

Director


   Affirmative Votes

Mark C. Rohr

   36,842,813

Lloyd B. Andrew

   36,840,044

Charles E. Stewart

   36,846,939

William M. Gottwald

   36,740,188

Seymour S. Preston III

   36,845,340

John Sherman, Jr.

   36,846,056

Floyd D. Gottwald, Jr.

   36,732,003

Richard L. Morrill

   36,844,059

Anne M. Whittemore

   36,848,839

John D. Gottwald

   36,738,863

 

The shareholders also approved the ratification of PricewaterhouseCoopers LLP as the Company’s auditors for the fiscal year ending December 31, 2004 with 36,593,316 affirmative votes, 511,409 negative votes and 25,026 abstained.

 

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ITEM 6. Exhibits and Reports on Form 8-K

 

  (a) Exhibits

 

  10.11 Amended and Restated Directors’ Deferred Compensation Plan

 

  31.1 Section 302 Certification of Chief Executive Officer

 

  31.2 Section 302 Certification of Chief Financial Officer

 

  32.1 Section 906 Certification of Chief Executive Officer

 

  32.2 Section 906 Certification of Chief Financial Officer

 

  (b) Reports on Form 8-K

 

  (1) The Company furnished a Form 8-K, on January 29, 2004 under Item 12 thereof, which included the Company’s earnings press release for the quarter ended December 31, 2003.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

        

ALBEMARLE CORPORATION

        

(Registrant)

Date: May 7, 2004

  By:   

/s/ PAUL F. ROCHELEAU


        

Paul F. Rocheleau

        

Senior Vice President and

        

Chief Financial Officer

 

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EXHIBIT INDEX

 

         

Page

Numbers


10.11

   Amended and Restated Directors’ Deferred Compensation Plan    31-41

31.1

   Section 302 Certification of Chief Executive Officer    42

31.2

   Section 302 Certification of Chief Financial Officer    43

32.1

   Section 906 Certification of Chief Executive Officer    44

32.2

   Section 906 Certification of Chief Financial Officer    45

 

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