UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarter ended September 30, 2002 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 1-6450
GREAT LAKES CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
| DELAWARE (State or other jurisdiction of incorporation or organization) |
95-1765035 (IRS Employer Identification No.) |
|
500 East 96th Street, Suite 500 Indianapolis, IN (Address of principal executive offices) |
46240 (Zip Code) |
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Registrant's telephone number, including area code (317) 715-3000
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 report(s), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý
No o
As of October 31, 2002, the Registrant had only one class of common stock, $1.00 par value, of which 50,192,685 shares were outstanding.
GREAT LAKES CHEMICAL CORPORATION
INDEX TO SEPTEMBER 30, 2002 FORM 10-Q
| PART I. | Financial Information | |||||
ITEM 1. |
Financial Statements (Unaudited) |
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—Consolidated Balance Sheets |
3 |
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—Consolidated Statements of Operations |
4 |
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—Consolidated Statements of Cash Flows |
5 |
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—Notes to Consolidated Financial Statements |
6 |
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ITEM 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations and Other Matters |
13 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
20 |
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ITEM 4. |
Controls and Procedures |
20 |
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PART II. |
Other Information |
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ITEM 1. |
Legal Proceedings |
21 |
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ITEM 6. |
Exhibits and Reports on Form 8-K |
21 |
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2
GREAT LAKES CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions, except per share data)
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September 30, 2002 |
December 31, 2001 |
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|---|---|---|---|---|---|---|---|---|---|---|
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(Unaudited) |
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| ASSETS | ||||||||||
| Current Assets | ||||||||||
| Cash and cash equivalents | $ | 232.1 | $ | 55.5 | ||||||
| Accounts and notes receivable, less allowances of $5.7 and $5.8, respectively | 269.2 | 253.4 | ||||||||
| Inventories | ||||||||||
| Finished products | 170.7 | 155.6 | ||||||||
| Raw materials | 32.9 | 41.6 | ||||||||
| Supplies | 33.8 | 30.3 | ||||||||
| Total inventories | 237.4 | 227.5 | ||||||||
| Prepaid expenses | 38.9 | 20.4 | ||||||||
| Deferred income taxes | 14.8 | 1.3 | ||||||||
| Current assets held for sale from discontinued operations | 31.5 | 123.3 | ||||||||
| Total Current Assets | 823.9 | 681.4 | ||||||||
| Plant and Equipment | 1,320.6 | 1,313.4 | ||||||||
| Less allowances for depreciation, depletion and amortization | (703.2 | ) | (690.3 | ) | ||||||
| Net plant and equipment | 617.4 | 623.1 | ||||||||
| Goodwill | 137.0 | 133.2 | ||||||||
| Intangible Assets | 27.0 | 29.5 | ||||||||
| Investments in and Advances to Unconsolidated Affiliates | 27.9 | 27.1 | ||||||||
| Deferred Income Taxes | — | 65.3 | ||||||||
| Other Assets | 40.0 | 39.0 | ||||||||
| Non-Current Assets Held for Sale from Discontinued Operations | 12.8 | 90.4 | ||||||||
| $ | 1,686.0 | $ | 1,689.0 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
| Current Liabilities | ||||||||||
| Accounts payable | $ | 138.4 | $ | 151.4 | ||||||
| Accrued expenses | 140.3 | 148.8 | ||||||||
| Income taxes payable | 116.1 | 88.7 | ||||||||
| Dividends payable | 4.0 | 4.0 | ||||||||
| Notes payable and current portion of long-term debt | 7.4 | 10.9 | ||||||||
| Current liabilities held for sale from discontinued operations | 16.4 | 48.8 | ||||||||
| Total Current Liabilities | 422.6 | 452.6 | ||||||||
| Long-Term Debt, less Current Portion | 433.5 | 500.8 | ||||||||
| Deferred Income Taxes | 11.4 | — | ||||||||
| Other Noncurrent Liabilities | 51.7 | 50.5 | ||||||||
| Non-Current Liabilities Held for Sale from Discontinued Operations | 7.5 | 29.5 | ||||||||
| Minority Interests | ||||||||||
| Continuing operations | 5.2 | 5.3 | ||||||||
| Discontinued operations | — | 36.8 | ||||||||
| Stockholders' Equity | ||||||||||
| Common stock, $1 par value, authorized 200.0 shares, issued 73.0 shares | 73.0 | 73.0 | ||||||||
| Additional paid-in capital | 133.5 | 133.3 | ||||||||
| Retained earnings | 1,679.6 | 1,574.2 | ||||||||
| Accumulated other comprehensive loss | (77.5 | ) | (112.5 | ) | ||||||
| Less treasury stock, at cost, 22.7 shares for 2002 and 2001 | (1,054.5 | ) | (1,054.5 | ) | ||||||
| Total Stockholders' Equity | 754.1 | 613.5 | ||||||||
| $ | 1,686.0 | $ | 1,689.0 | |||||||
See notes to consolidated financial statements
3
GREAT LAKES CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions, except per share data)
(Unaudited)
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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2002 |
2001 |
2002 |
2001 |
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| Net Sales | $ | 360.6 | $ | 321.0 | $ | 1,074.1 | $ | 1,069.5 | ||||||
| Operating Expenses | ||||||||||||||
| Cost of products sold | 276.6 | 299.6 | 818.5 | 876.1 | ||||||||||
| Selling, general and administrative expenses | 54.3 | 56.5 | 163.3 | 170.9 | ||||||||||
| Special charges (credit) | (0.4 | ) | 71.4 | 1.3 | 144.0 | |||||||||
| Total Operating Expenses | 330.5 | 427.5 | 983.1 | 1,191.0 | ||||||||||
| Operating Income (Loss) | 30.1 | (106.5 | ) | 91.0 | (121.5 | ) | ||||||||
Interest Income (Expense)—net |
(6.2 |
) |
(7.5 |
) |
(21.8 |
) |
(24.9 |
) |
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| Other Income (Expense)—net | (4.3 | ) | (11.3 | ) | (9.9 | ) | (38.8 | ) | ||||||
| Income (Loss) before Income Taxes | 19.6 | (125.3 | ) | 59.3 | (185.2 | ) | ||||||||
Income Taxes (Credit) |
5.9 |
(27.0 |
) |
18.4 |
(44.8 |
) |
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| Income (Loss) from Continuing Operations | $ | 13.7 | $ | (98.3 | ) | $ | 40.9 | $ | (140.4 | ) | ||||
| Discontinued Operations: | ||||||||||||||
| Income (Loss) from Discontinued Operations Before Minority Interest and Income Taxes | $ | (0.9 | ) | $ | (6.4 | ) | $ | 120.0 | $ | (122.2 | ) | |||
| Minority Interest | — | (2.0 | ) | 5.5 | (4.4 | ) | ||||||||
| Income Taxes (Credit) | (0.2 | ) | (0.1 | ) | 49.0 | (26.9 | ) | |||||||
| Income (Loss) from Discontinued Operations | $ | (0.7 | ) | $ | (8.3 | ) | $ | 76.5 | $ | (99.7 | ) | |||
| Net Income (Loss) | $ | 13.0 | $ | (106.6 | ) | $ | 117.4 | $ | (240.1 | ) | ||||
| Earnings (Loss) per Share—Basic: | ||||||||||||||
| Continuing Operations | $ | 0.27 | $ | (1.95 | ) | $ | 0.81 | $ | (2.79 | ) | ||||
| Discontinued Operations | (0.02 | ) | (0.17 | ) | 1.52 | (1.99 | ) | |||||||
| $ | 0.25 | $ | (2.12 | ) | $ | 2.33 | $ | (4.78 | ) | |||||
| Earnings (Loss) per Share—Diluted: | ||||||||||||||
| Continuing Operations | $ | 0.27 | $ | (1.95 | ) | $ | 0.81 | $ | (2.79 | ) | ||||
| Discontinued Operations | (0.02 | ) | (0.17 | ) | 1.52 | (1.99 | ) | |||||||
| $ | 0.25 | $ | (2.12 | ) | $ | 2.33 | $ | (4.78 | ) | |||||
| Cash Dividends Declared per Share | $ | 0.08 | $ | 0.08 | $ | 0.24 | $ | 0.24 | ||||||
See notes to consolidated financial statements
4
GREAT LAKES CHEMICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
| |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
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| OPERATING ACTIVITIES | |||||||||
| Income (loss) from continuing operations | $ | 40.9 | $ | (140.4 | ) | ||||
| Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: | |||||||||
| Depreciation and depletion | 57.6 | 57.8 | |||||||
| Amortization of intangibles | 2.5 | 8.2 | |||||||
| Provision for inventory write-downs | — | 32.2 | |||||||
| Deferred income taxes | 4.2 | (77.9 | ) | ||||||
| Net unremitted earnings of affiliates | 0.6 | (0.9 | ) | ||||||
| Loss on disposition of assets | 5.0 | 10.2 | |||||||
| Special charges | 1.3 | 144.0 | |||||||
| Other | 7.5 | 6.5 | |||||||
| Changes in operating assets and liabilities, net of effects of business combinations: | |||||||||
| Accounts receivable | (5.6 | ) | 51.8 | ||||||
| Inventories | (0.7 | ) | 14.5 | ||||||
| Other current assets | (24.6 | ) | 0.2 | ||||||
| Accounts payable and accrued expenses | (25.6 | ) | 5.1 | ||||||
| Income taxes and other current liabilities | 11.5 | 13.0 | |||||||
| Other noncurrent liabilities | 1.4 | 1.1 | |||||||
| Net Cash Provided by Operating Activities—Continuing Operations | 76.0 | 125.4 | |||||||
| Income (Loss) from Discontinued Operations | 76.5 | (99.7 | ) | ||||||
| Net Operating Activities—Discontinued Operations | (74.9 | ) | 140.2 | ||||||
| Net Cash Provided by Operating Activities—Discontinued Operations | 1.6 | 40.5 | |||||||
| Net Cash Provided by Operating Activities | $ | 77.6 | $ | 165.9 | |||||
| INVESTING ACTIVITIES | |||||||||
| Plant and equipment additions | $ | (47.9 | ) | $ | (109.1 | ) | |||
| Business combinations, net of cash acquired | — | (30.7 | ) | ||||||
| Proceeds from sale of assets | 0.1 | 0.8 | |||||||
| Other | 11.8 | 3.1 | |||||||
| Net Cash Used for Investing Activities—Continuing Operations | (36.0 | ) | (135.9 | ) | |||||
| Net Cash Provided by Investing Activities—Discontinued Operations | 217.4 | 3.0 | |||||||
| Net Cash Provided by (Used for) Investing Activities | $ | 181.4 | $ | (132.9 | ) | ||||
| FINANCING ACTIVITIES | |||||||||
| Net proceeds from (repayments on) short-term credit lines | $ | (3.1 | ) | $ | 0.8 | ||||
| Net repayments on commercial paper and long-term borrowings | (67.8 | ) | (18.4 | ) | |||||
| Proceeds from stock options exercised | — | 0.1 | |||||||
| Cash dividends paid | (12.0 | ) | (12.1 | ) | |||||
| Repurchase of common stock | — | (2.2 | ) | ||||||
| Other | (1.2 | ) | 1.7 | ||||||
| Net Cash Used for Financing Activities—Continuing Operations | (84.1 | ) | (30.1 | ) | |||||
| Net Cash Provided by (Used for) Financing Activities—Discontinued Operations | 0.5 | (3.5 | ) | ||||||
| Net Cash Used for Financing Activities | $ | (83.6 | ) | $ | (33.6 | ) | |||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 1.1 | (0.5 | ) | ||||||
| Increase (Decrease) in Cash and Cash Equivalents | 176.5 | (1.1 | ) | ||||||
| Change in Cash and Cash Equivalents—Discontinued Operations | 0.1 | (5.1 | ) | ||||||
| Cash and Cash Equivalents at Beginning of Year | 55.5 | 218.6 | |||||||
| Cash and Cash Equivalents at End of Period | $ | 232.1 | $ | 212.4 | |||||
See notes to consolidated financial statements
5
GREAT LAKES CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(millions, except as indicated)
(Unaudited)
NOTE 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations.
It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair presentation of the interim financial statements. The results for the interim period are not necessarily indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements included in the Company's 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
NOTE 2: New Accounting Standards and Reclassifications
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." As a result of the application of FAS 144 and the classification of the Energy Services and Products business unit, OSCA, and the Fine Chemicals portion of the Performance Chemicals business unit as discontinued operations (see Note 6), the Company was required to restate its consolidated financial position, results of operations and cash flows for all periods presented.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Other intangible assets continue to be amortized over their estimated useful lives. The Company adopted FAS 142 effective January 1, 2002.
With the adoption of FAS 142, the Company ceased amortization of goodwill as of January 1, 2002. The following table provides a reconciliation of previously reported net income and earnings per share to amounts adjusted to reflect the exclusion of goodwill amortization, net of related income taxes.
| |
Three Months Ended September 30, |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2002 |
2001 |
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| Income (loss)—Continuing Operations: | ||||||||||||||
| Reported income (loss)—continuing operations | $ | 13.7 | $ | (98.3 | ) | $ | 40.9 | $ | (140.4 | ) | ||||
| Add: Goodwill amortization, net of related income taxes | — | 1.4 | — | 3.8 | ||||||||||
| Adjusted income (loss)—continuing operations | $ | 13.7 | $ | (96.9 | ) | $ | 40.9 | $ | (136.6 | ) | ||||
| Basic and Diluted Earnings Per Share: | ||||||||||||||
| Reported income (loss) per share—continuing operations | $ | 0.27 | $ | (1.95 | ) | $ | 0.81 | $ | (2.79 | ) | ||||
| Add: Goodwill amortization, net of related income taxes | — | 0.03 | — | 0.08 | ||||||||||
| Adjusted income (loss) per share—continuing operations | $ | 0.27 | $ | (1.92 | ) | $ | 0.81 | $ | (2.71 | ) | ||||
The Company has completed the transitional impairment tests required by FAS 142. In connection with that review, the Company determined that the fair values of its reporting units exceeded the carrying value of those reporting units as of January 1, 2002. Accordingly, no impairment loss was recognized as a result of adopting
6
FAS 142. The Company will complete the annual impairment tests required by FAS 142 in the fourth quarter of 2002.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations," effective for fiscal years beginning after December 15, 2001. Under the Statement, the pooling of interest method is no longer permitted for business combinations initiated after June 30, 2001. The Company adopted this new standard beginning January 1, 2002.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (FAS 143), "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, which is adjusted to its present value each period. In addition, the companies must capitalize a corresponding amount by increasing the carrying amount of the related long-lived asset, which is depreciated over the useful life of the related asset. A gain or loss may be incurred upon settlement of the liability. FAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of adopting this statement.
NOTE 3: Income Taxes
A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate is as follows:
| |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|
2002 |
2001 |
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| U.S. federal income tax rate | 35.0 | % | (35.0 | )% | ||
| Changes resulting from: | ||||||
| State income taxes | 1.0 | 0.6 | ||||
| International operations | 5.0 | (1.0 | ) | |||
| Nondeductible goodwill | — | 3.1 | ||||
| Change in valuation allowance | (1.0 | ) | 6.2 | |||
| Low income housing credit | (4.4 | ) | (1.0 | ) | ||
| Other | (4.6 | ) | 2.9 | |||
| Effective income tax rate | 31.0 | % | (24.2 | )% | ||
NOTE 4: Comprehensive Income (Loss)
Comprehensive income (loss) for the three and nine months ended September 30 is as follows:
| |
Three Months Ended September 30, |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2002 |
2001 |
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| Net income (loss) | $ | 13.0 | $ | (106.6 | ) | $ | 117.4 | $ | (240.1 | ) | |||
| Change in fair value of derivatives, net of tax | 1.5 | (1.4 | ) | (0.3 | ) | (1.4 | ) | ||||||
| Currency translation adjustment | 1.5 | 28.1 | 35.3 | (14.2 | ) | ||||||||
| Comprehensive income (loss) | $ | 16.0 | $ | (79.9 | ) | $ | 152.4 | $ | (255.7 | ) | |||
7
NOTE 5: Earnings Per Share
The computation of basic and diluted earnings per share is determined by dividing net income as reported as the numerator, by the number of shares included in the denominator as follows:
| |
Three Months Ended September 30, |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|
2002 |
2001 |
2002 |
2001 |
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| Denominator for basic earnings per share (weighted-average shares) | 50.2 | 50.3 | 50.2 | 50.3 | ||||
| Effect of dilutive securities | 0.1 | — | 0.1 | — | ||||
| Denominator for diluted earnings per share | 50.3 | 50.3 | 50.3 | 50.3 | ||||
NOTE 6: Discontinued Operations