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, 2005
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
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(Exact
name of registrant as specified in its
charter)
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DELAWARE
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22-1586002
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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101
WOOD AVENUE, ISELIN, NEW JERSEY
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08830
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code
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(732)
205-5000
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $1 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x.
No o.
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or 15(d) of the Act. Yes o.
No x.
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.
No o.
Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Act. (Check one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes o.
No x
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, 2005 was approximately $3,429,142,955.
As
of
February 28, 2006, 123,758,521 shares of common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III
incorporates certain information by reference to the Proxy Statement for
the
2006 Annual Meeting of Shareholders, which will be filed by May 4,
2006.
Item
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Page
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Part
I
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(a)
General development of business
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3
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(b)
Available information of Engelhard
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3
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(c)
Segment and geographic area data
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3-5,
77-80
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(d)
Description of business
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3-5,
77-80
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(e)
Environmental matters
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6-7
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7
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7
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8
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8-10
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11
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11
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Part
II
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12
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13-14
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15-41
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42-43
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44-86,
89
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90
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90
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Part
III
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11,
91
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91
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91-92
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93
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93
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Part
IV
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94-112
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PART
I
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.
On
January 9, 2006, BASF Aktiengesellschaft (“BASF”), acting through its indirect
wholly owned subsidiary Iron Acquisition Corporation, commenced an unsolicited
tender offer (the “BASF Offer”) in which it offered to purchase all of the
outstanding shares of the Company for $37.00 per share, subject to certain
conditions. On January 23, 2006, the Company announced that the Company’s Board
of Directors had voted unanimously to recommend that the Company’s stockholders
reject the BASF Offer as inadequate and not in the best interests of the
Company’s stockholders. The full text of the Board’s recommendation is contained
in the Company’s Schedule 14D-9 filed with the SEC. In connection with the BASF
Offer, BASF filed a preliminary proxy statement to solicit proxies from the
Company’s stockholders to elect two BASF nominees to the Company’s Board of
Directors at the 2006 Annual Meeting of Shareholders, and has indicated its
intent to solicit written consents from the Company’s stockholders to amend the
Company’s bylaws to expand the size of the Board and fill the newly created
vacancies with BASF nominees. Copies of these filings by the Company and
BASF
with the SEC may be viewed on the SEC’s web site at www.sec.gov.
A
description of litigation filed against the Company and its directors that
is
related to the BASF Offer is described below under “Item 3. Legal
Proceedings.”
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 7,100 people as of January 1, 2006 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 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 20,
“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 other products made from
precious 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 environmental 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 (primarily platinum group metals), procured by the Materials Services
segment and/or supplied by customers, substrates and a variety of minerals
and
chemicals that are generally available.
As
of
January 1, 2006, the Environmental Technologies segment had approximately
1,800
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, China 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, 2006, the Process Technologies segment had approximately 2,400
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 effect materials,
personal care active ingredients, paper coating and pigment extenders 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 coatings and
pigment extenders and specialty performance additives. The segment’s
special-effect pigments and film 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. Kaolin products are used as
coating and pigment extenders 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.
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, France 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, 2006, the Appearance and Performance Technologies segment had
approximately 2,000 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, 2006, the Materials
Services segment had 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 (NECC),
Heesung-Engelhard, H. Drijfhout & Zoon’s Edelmetaalbedrijen (HDZ) and
Prodrive-Engelhard. N.E. Chemcat is a 42.1%-owned, publicly traded Japanese
corporation and a leading producer of automotive and chemical catalysts,
electronic chemicals and other precious-
metal-based
products in Japan. Heesung-Engelhard, a 49%-owned joint venture in South
Korea,
primarily 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.
During
the first quarter of 2005, the Company exchanged a 7.5% interest in its Chinese
automotive catalyst operations for approximately 2.6% of N.E. Chemcat. This
transaction was recorded as an exchange of similar productive assets in
accordance with APB29, “Accounting for Nonmonetary Transactions.” The Company
also acquired an additional 0.7% of N.E. Chemcat through a public tender
offer.
These transactions increased the Company’s ownership percentage in N.E. Chemcat
from 38.8% to 42.1%.
Major
Customers
No
customer accounted for more than 10% of the Company’s net sales for the years
ended December 31, 2005, 2004 or 2003.
Research
and Patents
At
December 31, 2005, 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 $108.2 million in 2005, $99.9 million in 2004 and $93.1 million in
2003.
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, 2005, 14 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, 2005 and 2004 were $18.0 million and $19.1
million, respectively, including $0.1 million at December 31, 2005 and 2004
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 39% 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 $1.2 million in 2005,
$1.3 million in 2004 and $1.8 million in 2003. 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 $2.5 million for 2006, 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. The Company has an Environmental, Health and Safety (EH&S)
department that implements and assesses compliance to policies, procedures
and
controls around the Company’s environmental exposures and possible liabilities.
These policies, procedures and controls are intended to assure that the
Corporate EH&S department is aware of all issues that may have a potential
impact on the Company. While it is not possible to predict with certainty,
management believes environmental cleanup-related reserves at December 31,
2005
are reasonable and adequate, and environmental matters are not expected to
have
a material adverse effect on financial condition.
There
are
a number of risk factors faced by the Company. These are primarily addressed
in
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS in connection with the presentation of recent results and
projections which include forward-looking statements. In particular, readers
should review the following:
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·
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“Overview”
on page 15 which summarizes specific economic
factors.
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·
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“Critical
Accounting Policies and Estimates” on pages 30-34 which includes
assumptions and estimates that form the basis for certain financial
statement amounts.
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·
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“Risk
Factors” on pages 35-38
which detail both internal and external
risks.
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·
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“Key
Assumptions” on pages 38-41
which list the underlying basis for projections made in
the various
"Outlook" sections.
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Additionally,
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK discusses
risk with respect to interest rates, foreign currency and
commodities.
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UNRESOLVED
STAFF COMMENTS
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Not
applicable.
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 160,000 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; Lyon, France; Hannover, Germany; and De Meern, The Netherlands.
The Company is currently constructing a research and development facility
on
Company-owned property in Shanghai, China.
The
Environmental Technologies segment operates company-owned plants in Huntsville,
AL; East Windsor, CT; Wilmington, MA; Duncan, SC; East Newark, 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 manufacturing operations at the Carteret,
NJ facility have been discontinued. See Note 7, “Discontinued Operations,” for
more information.
The
Process Technologies segment operates company-owned plants in Attapulgus
and
Savannah, GA; Elyria, OH; Erie, PA; Seneca, SC; Jackson, MS; Pasadena, TX;
Nanjing, China; 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 and sales facilities in Sylmar, CA; Louisville, KY; Eastport,
ME;
Peekskill and Setauket, NY; New York, NY; Elyria, OH; Charleston, SC; Lyon,
France; Paris, France; Tokyo, Japan; Mexico City, Mexico; 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.
The
Ventures Group operates company-owned plants in Port Allen and Vidalia, LA;
Jackson, MS; and Nienburg, Germany. The Company operates mines in Cheto,
AZ.
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 22, “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.
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., (now Engelhard Peru
S.A.C. en liquidaciόn
or
“Engelhard Peru”), a wholly owned subsidiary, was denied refund claims of
approximately $28 million. The Peruvian tax authority also determined that
Engelhard Peru 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
was
liable for these amounts, overruling precedent to apply a “form over substance”
theory without any determination of fraudulent participation by Engelhard
Peru.
Engelhard Peru filed a constitutional action against the Peruvian tax authority
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 based on several grounds, including improper use of a presumption of
guilt
with no actual proof of irregularity in the transactions of Engelhard Peru.
The
government of Peru prevailed on appeal to the Superior Court and prevailed
again
on appeal to Peru’s Constitutional Court. Although management believes, based on
consultation with counsel, that this is an extraordinary decision that is
plainly inconsistent with the law and the facts, no further appeal in Peru
is
likely to be productive. Management believes, based on consultation with
counsel, that the maximum economic exposure is limited to the aggregate value
of
all assets of Engelhard Peru. That amount, which is approximately $30 million,
including unpaid refunds, has been fully provided for in the accounts of
the
Company.
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. In September 2005, a Superior prosecutor concluded that there
was no basis for the criminal proceedings against several defendants, including
both officials of Engelhard Peru. Final dismissal of those criminal charges
remains subject to judicial review and determination of the Supreme Prosecutor.
Although Engelhard Peru 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 is assisting in the vigorous defense of this
proceeding. As noted above, management believes the economic exposure is
limited
to the aggregate of all assets of Engelhard Peru, which has been fully provided
for in the accounts of the Company.
On
January 4, 2006, Scott Sebastian, who alleges that he is a stockholder of
the
Company, commenced a purported class action on behalf of the stockholders
of the
Company against the Company and all of its directors in the Chancery Division
of
the New Jersey Superior Court for Middlesex County. The complaint alleges
that
the defendants breached their fiduciary duties in connection with their response
to BASF’s proposal to acquire the Company and seeks declaratory and injunctive
relief and damages. On January 4, 2006, Hindy Silver, who alleges that she
is a
stockholder of the Company, commenced a purported class action on behalf
of the
stockholders of the Company against the Company and all of its directors
in the
Chancery Division of the New Jersey Superior Court for Mercer County. The
complaint alleges that the defendants breached their fiduciary duties in
connection with their response to BASF’s proposal to acquire the Company and
seeks injunctive relief and an accounting. On January 17, 2006, the plaintiffs
in the Sebastian and Silver actions moved to transfer the Sebastian action
to
the New Jersey Superior Court for Mercer County and to consolidate the two
actions in that Court. The defendants cross-moved to stay the New Jersey
actions
until the Delaware actions, described below, have been resolved or, in the
alternative, to dismiss the New Jersey actions for failure to state a claim,
and
plaintiffs moved for expedited discovery. Plaintiffs opposed defendants’
cross-motions and requested leave to file an amended complaint if the Court
was
inclined to grant defendants’ motion to dismiss. The proposed amended complaint
adds, among other things, allegations that the Schedule 14D-9 filed by the
Company with the SEC fails to disclose material information that the proposed
amended complaint alleges is needed by Engelhard shareholders to be able
to make
an informed decision concerning whether to tender their shares to BASF. The
proposed amended complaint seeks declaratory and injunctive relief and damages.
Defendants opposed plaintiffs’ motion for expedited discovery and motion to
amend their complaint. Argument on all motions and cross-motions was held
on
February 9, 2006 in the New Jersey Superior Court for Mercer County. The
Court
stated that the motion to consolidate would be granted and took the other
matters under advisement.
On
January 5, 2006, Laura Benjamin and Sam Cohn, and on January 6, 2006, Stewart
Simon, all of whom purport to be stockholders of the Company, each commenced
a
purported class action on behalf of the stockholders of the Company against
the
Company and all of its directors in the Delaware Court of Chancery for New
Castle County. Each complaint alleged that the defendants breached their
fiduciary duties in connection with their response to BASF’s proposal to acquire
the Company and sought injunctive relief. The Benjamin and Cohn complaints
also
sought damages and the Simon complaint sought an accounting. On January 13,
2006
these three actions were consolidated under the caption In
re: Engelhard Corporation Shareholders Litigation,
Consolidated C.A. No. 1871-N, in the Delaware Court of Chancery for New Castle
County, and a Consolidated Amended Complaint was filed and served which names
the same defendants and contains allegations similar to those made in the
complaints initially filed in the underlying actions, and seeks injunctive
relief and damages. On the same day,
plaintiffs
served a request for production of documents. On January 17, 2006, the court
entered an order governing the protection and exchange of confidential
information. On January 24, 2006, the Court entered a case management order.
Defendants have begun to produce documents to plaintiffs. On January 25,
2006,
with defendants’ consent, the Court granted plaintiffs leave to file a Second
Consolidated Amended Complaint. The Second Consolidated Amended Complaint
adds,
among other things, allegations that the Schedule 14D-9 filed by the Company
with the SEC fails to disclose material information concerning what the Company
and its Board of Directors are doing with respect to the exploration of
strategic alternatives to BASF’s offer and fails to disclose information that is
material to evaluating the opinion Merrill Lynch provided to the Company’s Board
of Directors that BASF’s offer is inadequate from a financial
point of view.
The
Company and the individual defendants believe the claims made in each of
the
putative class action suits described above are without merit and intend
to
vigorously defend against these suits.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
Not
applicable.
|
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
GAVIN
A. BELL
|
Age
44. 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 2001.
|
|
|
ARTHUR
A. DORNBUSCH, II
|
Age
62. Vice President, General Counsel and Secretary of the Company
from
prior to 2001.
|
|
|
MARK
DRESNER
|
Age
54. Vice President, Corporate Communications from prior to 2001.
|
|
|
JOHN
C. HESS
|
Age
54. Vice President, Human Resources from prior to 2001.
|
|
|
MAC
C.P. MAK
|
Age
57. 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 2001.
|
|
|
BARRY
W. PERRY *
|
Age
59. Chairman and Chief Executive Officer of the Company since January
2001. Mr. Perry is also a director of Arrow Electronics, Inc. and
Cookson
Group plc.
|
|
|
ALAN
J. SHAW
|
Age
57. Controller of the Company effective January 1, 2003. Vice
President-Finance of Materials Services from prior to
2001.
|
|
|
MICHAEL
A. SPERDUTO
|
Age
48. Vice President and Chief Financial Officer of the Company effective
August 2, 2001. Controller of the Company from prior to 2001.
|
|
|
DR.
EDWARD T. WOLYNIC
|
Age
57. Vice President and Chief Technology Officer of the Company
effective
August 5, 2005. Group Vice President, Strategic Technologies and
Chief
Technology Officer effective March 1, 2001. Group Vice President,
Strategic Technogies 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
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.
PART
II
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
(a)
As of
February 28, 2006, there were 4,125 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
|
|
2005
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
30.82
|
|
$
|
28.64
|
|
$
|
0.12
|
|
Second
quarter
|
|
|
31.37
|
|
|
27.68
|
|
|
0.12
|
|
Third
quarter
|
|
|
29.96
|
|
|
27.35
|
|
|
0.12
|
|
Fourth
quarter
|
|
|
31.11
|
|
|
26.80
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(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,
2005:
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)
|
|
10/1/05
- 10/31/05
|
|
|
4,000(b)
|
|
$
|
26.98
|
|
|
4,000
|
|
|
5,765,532
|
|
11/1/05
- 11/30/05
|
|
|
24,000
|
|
$
|
28.42
|
|
|
24,000
|
|
|
5,741,532
|
|
12/1/05
- 12/31/05
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,741,532
|
|
|
|
|
28,000
|
|
$
|
28.21
|
|
|
28,000
|
|
|
|
|
|
(a)
|
Share
repurchase program of 6 million shares authorized in May
2005.
|
|
(b)
|
Excludes
286 shares obtained through dividend reinvestment by the Rabbi
Trust under
the Deferred Compensation Plan for Key Employees of Engelhard
Corporation.
|
Selected
Financial Data
($
in millions, except per-share amounts)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Net
sales
|
|
$
|
4,597.0
|
|
$
|
4,136.1
|
|
$
|
3,687.8
|
|
$
|
3,753.6
|
|
$
|
5,096.9
|
|
Net
earnings from continuing operations
|
|
|
246.3
|
|
|
237.2
|
|
|
237.1
|
|
|
171.4
|
|
|
225.6
|
|
Earnings
per share from continuing operations - basic
|
|
|
2.05
|
|
|
1.93
|
|
|
1.89
|
|
|
1.34
|
|
|
1.73
|
|
Earnings
per share from continuing operations - diluted
|
|
|
2.02
|
|
|
1.89
|
|
|
1.86
|
|
|
1.31
|
|
|
1.71
|
|
Total
assets
|
|
|
3,879.0
|
|
|
3,178.6
|
|
|
2,933.0
|
|
|
3,020.7
|
|
|
2,995.5
|
|
Long-term
debt
|
|
|
430.5
|
|
|
513.7
|
|
|
390.6
|
|
|
247.8
|
|
|
237.9
|
|
Shareholders’
equity
|
|
|
1,489.2
|
|
|
1,414.3
|
|
|
1,285.4
|
|
|
1,077.2
|
|
|
1,003.5
|
|
Cash
dividends paid per share
|
|
|
0.48
|
|
|
0.44
|
|
|
0.41
|
|
|
0.40
|
|
|
0.40
|
|
Return
on average shareholders’ equity
|
|
|
17.0
|
%
|
|
17.6
|
%
|
|
20.0
|
%
|
|
16.5
|
%
|
|
24.0
|
%
|
Net
earnings from continuing operations in 2005 include a tax provision benefit
of
$2.7 million resulting from an agreement with the Internal Revenue Service
with
respect to the Company’s tax returns for 2001.
Net
earnings from continuing operations 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 from continuing operations 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 from continuing operations in 2002 include the following: 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 $6.8 million insurance settlement
gain.
The
following tables provide information related to the adoption of Statement
of
Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement
Obligations” (see Note 4, “Accounting for Asset Retirement Obligations,” for
further detail):
Selected
Financial Data
($
in millions, except per-share amounts)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Net
earnings from continuing operations before cumulative effect of
a change
in accounting principle
|
|
$
|
246.3
|
|
$
|
237.2
|
|
$
|
239.4
|
|
$
|
171.4
|
|
$
|
225.6
|
|
Cumulative
effect of a change in accounting principle, net of tax of $1,390
|
|
|
—
|
|
|
—
|
|
|
(2.3
|
)
|
|
—
|
|
|
—
|
|
Net
earnings from continuing operations
|
|
$
|
246.3
|
|
$
|
237.2
|
|
$
|
237.1
|
|
$
|
171.4
|
|
$
|
225.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share from continuing operations - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before cumulative effect of a change
in
accounting principle
|
|
$
|
2.05
|
|
$
|
1.93
|
|
$
|
1.91
|
|
$
|
1.34
|
|
$
|
1.73
|
|
Cumulative
effect of a change in accounting principle, net of tax
|
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
|
—
|
|
|
—
|
|
Earnings
per share from continuing operations - basic
|
|
$
|
2.05
|
|
$
|
1.93
|
|
$
|
1.89
|
|
$
|
1.34
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share from continuing operations - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before cumulative effect of a change
in
accounting principle
|
|
$
|
2.02
|
|
$
|
1.89
|
|
$
|
1.88
|
|
$
|
1.31
|
|
$
|
1.71
|
|
Cumulative
effect of a change in accounting principle, net of tax
|
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
|
—
|
|
|
—
|
|
Earnings
per share from continuing operations - diluted
|
|
$
|
2.02
|
|
$
|
1.89
|
|
$
|
1.86
|
|
$
|
1.31
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma amounts assuming the provisions of SFAS No. 143 were applied
retroactively:
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
Net
earnings from continuing operations
|
|
$
|
246.3
|
|
$
|
237.2
|
|
$
|
239.4
|
|
$
|
170.8
|
|
$
|
225.0
|
|
Basic
earnings per share from continuing operations
|
|
|
2.05
|
|
|
1.93
|
|
|
1.91
|
|
|
1.33
|
|
|
1.73
|
|
Diluted
earnings per share from continuing operations
|
|
|
2.02
|
|
|
1.89
|
|
|
1.88
|
|
|
1.31
|
|
|
1.70
|
|
|
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
30.
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 20,
“BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA” in this Form 10-K.
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 generally operating close to capacity generating demand for
the
extra yields provided by the Company’s advanced fluid cracking catalysts and
performance additives; (4) markets for effect pigments, colors and active
ingredients in cosmetics, auto finishes and coatings have remained positive
during the recent economic downturns and tend to be less cyclical; however,
the
Company is currently experiencing growing competition from Asian producers;
(5)
the coated, free-sheet paper market has strengthened, but market share loss
continues to negatively impact the Company; and (6) inflationary pressures
for
raw materials and energy, particularly natural gas, are expected to have
a
negative impact across the Company’s technology segments compared to the recent
low inflationary period, which the Company will attempt to mitigate via price
increases.
Results
of Operations
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 expenses. Unallocated items include interest
expense, interest income, certain 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.
In
2005,
the Company discontinued operations at its Carteret, NJ manufacturing facility.
The discussion below excludes the impact of these discontinued operations.
Prior
period operating earnings of the Environmental Technologies segment reflect
the
reclassification of the facility as a discontinued operation.
Environmental
Technologies
The
majority of this segment’s sales is derived from technologies to control harmful
emissions from mobile sources, including gasoline- and diesel-powered passenger
cars, sport-utility vehicles, trucks, buses and motorcycles. This segment’s
customers 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, temperature sensing 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.
Results
of Operations (in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
%
change 2004 to 2005
|
|
%
change 2003 to 2004
|
|
Sales
|
|
$
|
1,008.7
|
|
$
|
883.3
|
|
$
|
814.8
|
|
|
14.2
|
%
|
|
8.4
|
%
|
Operating
earnings before special items
|
|
|
140.9
|
|
|
138.1
|
|
|
129.2
|
|
|
2.0
|
%
|
|
6.9
|
%
|
Special
charge (credit)
|
|
|
—
|
|
|
(0.2
|
)
|
|
5.2
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
140.9
|
|
|
138.3
|
|
|
124.0
|
|
|
1.9
|
%
|
|
11.5
|
%
|
Discussion
Results
from this segment were as expected, driven primarily by operations serving
the
overseas mobile-source environmental markets.
Revenues
from mobile-source markets increased 15% in 2005 compared with 2004.
Approximately 95% of this increase was due to increased pass-through substrate
costs. Substrate costs were higher primarily due to increased demand for
catalyzed soot filters (CSF) for the European light duty diesel market. This
also increased the segment’s working capital requirements by approximately $50
million, which is about half of the overall increase in this segment’s working
capital requirements of $100 million compared to last year. This trend of
increasing substrate costs, revenues and associated working capital requirements
is expected to continue in the near term, as the Company continues to grow
its
CSF business. The Company serves a wide customer base, and changes in the
mix of
sales to these markets are common. In 2005 compared with 2004, sales to North
American automotive customers decreased significantly, while sales to European
and Asian automotive customers increased. In North America, demand for the
vehicles for which the Company provides catalytic solutions declined more
rapidly than the overall demand for light-duty vehicles in North America.
The
Company expects this trend to continue near-term. The Company continues to
experience improved market penetration from operations located in emerging
markets such as China, India, Brazil and Thailand. Sales from these emerging
market operations increased over 20% in 2005 compared to 2004. Sales to the
motorcycle market more than doubled, but represent less than 2% of the segment’s
sales. Sales of catalyst to the heavy-duty diesel original equipment
manufacturers (OEMs) were flat compared to last year, as US regulatory
requirements will change for 2007 model year vehicles, and overall demand
for
these vehicles remained relatively flat in 2005. Diesel retrofit sales, which
are largely dependent on government funding for projects, declined
modestly.
Operating
earnings from mobile-source markets decreased 1% in 2005 compared with 2004.
Operating earnings from light-duty markets were consistent with the above
mentioned sales mix, as increased earnings from European and emerging markets
were offset by decreased earnings from US light duty markets. Modest
productivity improvements were offset by higher selling, general and
administrative expenses driven by higher heavy-duty diesel research and
development expenses of $2 million and higher bad debt expense of $1 million
due
to the bankruptcy of Delphi. The Company continues to assess counterparty
risk
on sales to the North American automotive market and establish credit limits
and
assess collectibility accordingly. Heavy-duty diesel earnings were down due
to
the aforementioned diesel research and development expense of $2.0 million
and
absence of warranty reversals of $1.5 million, which occurred in 2004. Sales
to
the motorcycle market now contribute to earnings, with operating margin
percentages similar to those experienced in other mobile source markets.
The
Company serves the large Asian markets of Japan and Korea through joint ventures
accounted for under the equity method. Accordingly, the results of those
operations, reflecting continued strength in the Asian markets, are included
on
the equity earnings line.
Sales
to
industrial markets increased 7% in 2005 compared with 2004. Approximately
half
of this increase was to the temperature-sensing market. The Company continues
to
invest in the operations serving the temperature-sensing market, and anticipates
significant growth from this small market. Sales to the aerospace market
increased, while sales of catalyst to the small engine market declined due
to
the loss of a customer. Results from the Company’s Carteret, NJ manufacturing
facility are no longer included in this discussion, as these results are
now
included in discontinued operations.
Operating
earnings from industrial markets increased in 2005 compared with 2004. Earnings
from sales to most served markets were higher. Notably, earnings from sales
of
ozone converting catalyst to the aerospace industry, increased on higher
volumes
sold. The temperature-sensing market represents a niche growth area for the
Company, and experienced higher earnings, although volumes need to increase
substantially to meet the Company’s
long
term
growth projections. While sales and earnings from the Company’s thermal spray
and coating operations serving the aerospace and power generation markets
improved modestly in 2005, more work needs to be done, and the Company augmented
operational management in 2005. The Company expects continued near-term
improvement in overall earnings from industrial markets.
Outlook
Please
see the section labeled “Key Assumptions” on page 38 for a detailed discussion
of the Company’s basis for the discussion below.
Demand
for the Company’s products sold to mobile-source markets is expected to remain
at 2005 levels for the first half of 2006, with a stronger second half relative
to 2005, as customers ramp up for the 2007 model year. Worldwide automobile
builds for 2006 are forecast to grow at 4%, and at 2% CAGR through 2010.
The
Company expects a 6% CAGR in light-duty automotive catalyst sales through
2010,
driven by the aforementioned growth in automobile builds, penetration in
the
light-duty diesel market, and stricter worldwide environmental regulations.
Demand for diesel-emission technologies is expected to increase, as stricter
regulations for light-duty and heavy-duty vehicles come into effect, and
more
light-duty vehicles are sold. Additionally, the Company expects an increase
in
market share from the light-duty diesel markets. Diesel retrofit markets
are
expected to remain at current levels driven by local political pressure to
reduce emissions from existing vehicles in urban areas. Demand for the Company’s
technology to mobile-source markets is subject to changes in mix, the level
of
worldwide auto builds and competitive pressures. The Company maintains a
strong
technology position in these markets and continues to invest significantly
in
research and development.
In
businesses serving 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 cyclicality.
The
Company maintains the technical ability and capacity to serve the
power-generation market when demand returns. These businesses also serve
the
food service market. Sales to the food service market are expected to grow
from
approximately $3 million in 2005 to $10 million in 2010, representing about
half
the growth expected from this business.
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 will focus on cost reduction efforts
and
will continue to develop applications of its technology for previously unserved
markets.
Other
industrial markets served include temperature-sensing. The Company has
positioned itself via acquisition in 2004 and internal development to
participate in the projected 6% worldwide growth of the temperature-sensing
market through 2010. The Company also expects an increase in market share
from
the temperature-sensing markets.
2004
compared with 2003
Sales
to
mobile-source markets increased 10% in 2004 compared with 2003. Approximately
half this increase related to higher substrate costs. Substrate costs rose
in
2004 due to an increase in demand for emission-control systems for diesel
engines. Foreign currency 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. 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 research and development expense of $1.4 million. In 2004, profits
from
mobile-source diesel markets increased while profits from other mobile-source
markets decreased compared with 2003. 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.
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. Profits from temperature sensing markets were
flat in
2004 versus 2003.
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.
Results
of Operations (in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
%
change 2004 to 2005
|
|
%
change 2003 to 2004
|
|
Sales
|
|
$
|
687.1
|
|
$
|
615.2
|
|
$
|
569.2
|
|
|
11.7
|
%
|
|
8.1
|
%
|
Operating
earnings before special items
|
|
|
98.0
|
|
|
87.3
|
|
|
98.5
|
|
|
12.3
|
%
|
|
-11.4
|
%
|
Special
charge
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
98.0
|
|
|
87.3
|
|
|
95.9
|
|
|
12.3
|
%
|
|
-9.0
|
%
|
Discussion
This
segment experienced strong results in 2005 as productivity improvements coupled
with continuing demand in operations serving the petroleum-refining business
yielded strong results, and catalyst sales to the major chemical markets
increased.
Sales
to
the petroleum-refining market increased 10% in 2005 compared with 2004. Higher
volumes and prices of petroleum-refining catalysts drove the improvement,
as
demand remained strong for catalyst based on the Company’s Distributed Matrix
Structure (DMS) technology platform. DMS technology allows refiners to increase
yields, and accordingly, these products sell at premium prices. In 2005,
the
Company completed a productivity initiative that reduced the cost, and increased
the capacity of the Company’s DMS products. The Company operates at or near
capacity in these operations. Approximately 80% of the Company’s product mix to
this market is now DMS-based. In 2005, the Company implemented price increases
and energy surcharges to this market, which accounted for approximately $3
million of increased revenues. The Company experienced decreased demand in
the
year for certain older product offerings. Demand for these older product
offerings is expected to remain at current levels for the near-term, and
decrease over the long-term. Sales of additives, which have been a source
of
growth over the past two years, increased significantly, due to increased
fourth
quarter volumes of product sold to potential new customers who are assessing
the
effectiveness of these additives in their processes.
Operating
earnings from products sold to petroleum-refining markets increased in 2005
compared with 2004 primarily due to the aforementioned increase in additive
volumes and improved pricing and volumes of catalysts sold. These improvements
were partially offset by higher natural gas costs of approximately $5 million,
net of the aforementioned energy surcharges, other Hurricane Katrina impacts
(see the section on Hurricane and Natural Gas Impacts), higher selling, general
and administrative expense of approximately $3 million and higher raw material
costs. During 2004, strong demand for DMS technology began to exceed existing
capacity at the operating facilities that produce these products. In the
second
quarter of 2005, the Company completed and implemented a project to reduce
costs
and increase capacity at these facilities, resulting in lower per-unit
manufacturing costs compared to 2004. The Company plans to maintain an asset
utilization rate of approximately 90% for DMS offerings for the foreseeable
future.
Sales
of
catalysts to the chemical-process markets increased 13% in 2005 compared
with
2004. The increase in revenues came from the oleochemical, petrochemical
and
fine chemical markets, and was partially offset by decreased sales to the
polyolefins markets. Sales of precious metal included in products sold accounted
for
approximately
$7 million of the increase in revenues. The second-quarter acquisition of
the
catalyst business of Nanjing Chemical Industry Corporation accounted for
$9
million of increased revenues. Demand in 2006 is expected to increase compared
to 2005, as customers continue to drive more volume through their reactors
with
capacity utilization rates near 90%. Volumes of polypropylene catalysts were
flat in 2005 compared with 2004. Tightness in the Asian supply of monomer
in the
first half of 2005 and some decreased domestic demand negatively impacted
the
Company’s revenues from products sold to the polyolefins market. Price increases
initiated in 2004 and 2005 accounted for $5 million of higher revenues from
the
chemical-process markets.
Operating
earnings from products sold to chemical-process markets were higher in 2005
compared with 2004, as all served markets experienced improved results. The
aforementioned price increases and the positive results of productivity
initiatives were somewhat offset by higher selling, general and administrative
expense spending of approximately $5 million and higher raw material costs.
Margins as a percent of sales were somewhat lower due to higher sales of
lower
margin products, and the impact of higher precious metal costs which are
passed
through to customers, but are included in revenue and cost of
sales.
Outlook
Please
see the section labeled “Key Assumptions”on page 38 for a detailed discussion of
the Company’s basis for the discussion below.
The
outlook for operations serving the petroleum-refining markets is strong for
2006
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 operates at utilization rates
of
approximately 90%, and therefore near-term growth is dependent upon maximizing
the profitability of the Company’s product mix. The Company continues to invest
in research and development to maintain the competitive advantage derived
from
its unique DMS technology platform, as demonstrated by the recent introduction
of the next generation fluid cracking catalyst, Napthamax II. Over the long
term, sales of refining catalyst are expected to grow modestly at approximately
2% CAGR through 2010. Additives sold to these markets remain a growth area,
and
the Company expects significant growth through 2010, driven predominantly
by new
product offerings, as existing additives are not expected to increase at
growth
rates experienced in recent years. Additionally, the Company expects to leverage
existing technologies and market presence to serve the diesel, distillate
and
petrochemical feedstock markets. These newly served markets are expected
to
contribute approximately $38 million in revenues in 2010.
The
outlook for operations serving chemical-process markets is good for 2006,
as
sales levels experienced in the second half of 2005 to the Company’s existing
customer base are expected to continue. Long-term growth to existing markets
will be relatively modest, while growth to previously unserved petrochemical
markets, the emerging gas economy catalyst market, and continued expansion
into
the polyethylene catalyst market will drive overall revenue growth of 8%
CAGR.
Growth in the polypropylene market will be driven by increased commercial
relationships and licensing arrangements.
2004
compared with 2003
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 DMS technology platform. 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. 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.
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.
Appearance
and Performance Technologies
The
Appearance and Performance Technologies segment provides coatings and pigment
extenders, 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 and personal care, coatings, plastics, automotive, packaging,
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.
Results
of Operations (in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
%
change 2004 to 2005
|
|
%
change 2003 to 2004
|
|
Sales
|
|
$
|
726.1
|
|
$
|
690.2
|
|
$
|
653.8
|
|
|
5.2
|
%
|
|
5.6
|
%
|
Operating
earnings before special items
|
|
|
65.6
|
|
|
75.1
|
|
|
77.3
|
|
|
-12.6
|
%
|
|
-2.8
|
%
|
Special
charge
|
|
|
—
|
|
|
6.6
|
|
|
7.8
|
|
|
|
|
|
|
|
Operating
earnings
|
|
|
65.6
|
|
|
68.5
|
|
|
69.5
|
|
|
-4.2
|
%
|
|
-1.4
|
%
|
Discussion
Results
from this segment were down, as higher costs in operations serving the paper
and
effect materials markets more than offset the impact of higher revenues from
the
personal care actives and specialty minerals markets.
Sales
from the Company’s mineral-based operations increased 1% in 2005 compared with
2004. This modest increase is due to improved sales of kaolin-based products
to
non-paper specialty markets and higher attapulgite volumes mostly offset
by
lower volumes of kaolin-based products to the paper market. Lower sales to
the
paper market were partially attributable to customer strikes in Finland and
Canada. The Company has implemented price increases and energy surcharges
for
mineral-based products late in 2005, and has seen some positive results,
but
expects 2006 pricing to be substantially better than 2005. Overall, volumes
to
the paper market were off approximately 8% versus last year. The Company
continues to focus on non-paper kaolin markets to maximize cash flows from
these
assets. These markets include plastics, construction, automotive, agriculture,
coatings and refining catalysts.
Operating
earnings from mineral-based products decreased significantly in 2005 compared
with 2004 in spite of absence of restructuring charges totaling $6.6 million
in
2004. Earnings from kaolin-based products to the paper market decreased as
a
result of higher natural gas prices, exacerbated by Hurricanes Katrina and
Rita,
of approximately $12 million in 2005 compared to 2004. The Company has initiated
price increases and energy surcharges to these markets, and expects significant
improvement in 2006. Increased sales of kaolin-based products to specialty
markets yielded improved results. Cash flows from kaolin-based operations
remain
substantial, and these assets continue to be monitored with respect to SFAS
No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Sales
of
effect materials, colors and personal care actives collectively increased
10% in
2005 compared with 2004. Earlier in the year, the Company strengthened its
position in the personal care market by acquiring
Coletica,
S.A., a French company that develops performance-based, skin-care compounds
and
related technologies. In 2004, the Company acquired The Collaborative Group,
a
domestic company serving similar markets. These operations, along with certain
previously existing operations, serve the personal care markets. The recent
acquisitions accounted for $44 million of sales increases in 2005 compared
to
2004. Effect materials sales were lower due to lower sales of cosmetic-grade
borosilicate products compared to strong volumes in 2004, lower cosmetic
mica
sales, and lower iridescent film sales due to competitive pressure in Asia.
Colorant sales were down modestly in 2005 compared to 2004, as a significant
customer built inventory late in 2004, resulting in lower volumes for
2005.
Operating
earnings from personal care actives increased in 2005, while earnings from
effect materials and colorant markets decreased compared to 2004. Increased
earnings from the above mentioned personal care acquisitions of $7.7 million
were partially offset by lower volumes of colorants, lower effect materials
sales, discussed above, and increased operating costs.
Outlook
Please
see the section labeled “Key Assumptions” on page 38 for a detailed discussion
of the Company’s basis for the discussion below.
Earnings
from the sale of minerals-based products are expected to improve in 2006
as the
Company expects significantly improved pricing from paper customers, and
continued diversification away from traditional paper markets. In addition
to
price increases, the Company has also implemented energy surcharges to paper
and
other kaolin customers. These operations are currently profitable, and generate
significant cash flows. The Company expects these operations to remain
profitable, but changes in volumes, pricing or energy costs could cause this
situation to change. These businesses experience significant competition
from
Brazilian and other kaolin producers and not-in-kind competition from calcium
carbonate. The Company expects modest long-term growth from these operations
as
a result of diversification efforts, specifically penetration into crop
protectants and other high-margin kaolin applications.
The
Company is in the process of implementing EITF 04-6, “Accounting for Stripping
Costs Incurred during Production in the Mining Industry.” As a result of EITF
04-6, the Company expects an equity charge of approximately $29 million in
the
first quarter of 2006. The Company does not expect this standard to have
an
impact on the Company’s future cash flows.
Recent
investments 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’s two recent acquisitions serving these markets are
substantially integrated and are positioned to increase revenues due to their
combined global presence. In 2010, the Company expects revenues from these
operations to be double their current levels.
The
Company expects long-term growth from operations serving the effect materials
and colorants markets to grow at approximately 6% CAGR through 2010. The
Company
will continue to manage competitive risks, including increasing pressures
from
producers in Asia, through cost management, innovation and continued expansion
of its market presence in China.
2004
compared with 2003
Sales
of
minerals-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. 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.
Operating
earnings from minerals-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.
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. 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.
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.
Results
of Operations (in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
%
change 2004 to 2005
|
|
%
change 2003 to 2004
|
|
Sales
|
|
$
|
2,096.3
|
|
$
|
1,895.0
|
|
$
|
1,598.2
|
|
|
10.6
|
%
|
|
18.6
|
%
|
Operating
earnings
|
|
|
28.4
|
|
|
16.8
|
|
|
10.1
|
|
|
69.0
|
%
|
|
66.3
|
%
|
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
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 of 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. The revenue increase in
2005
was due to higher prices and volumes of platinum group metals.
Operating
earnings in 2004 include $3.6 million of legal provisions related to litigation,
while 2005 included recovery of $0.7 million of legal fees resulting from
settlement of litigation. Earnings from metal sourcing operations increased
19%
in 2005 compared with 2004 due to increased platinum group metal prices and
volumes partially driven by demand related to pending diesel regulations.
These
earnings and volumes are at levels higher than the Company anticipates going
forward. Refining and related service operations were improved compared with
the
same period last year. Increased volumes and improved operating efficiencies
at
the Company’s refinery drove the improvement. The Company’s operations within
the Process Technologies segment serving the
petrochemical
industry are an indicator of refining volume, as customers requiring new
catalyst generally refine their spent catalyst upon change out.
Outlook
Operating
earnings from this segment are expected to approach $20 million in 2006 as
strong demand for platinum group metals is expected to continue. Sourcing
and
recycling opportunities are difficult to predict, but the Company maintains
industry knowledge to seek out and capitalize on opportunities.
2004
compared with 2003
Operating
earnings in 2004 include $3.6 million of legal provisions related to 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.
Ventures
Please
see the section labeled “Key Assumptions” on page 38 for a detailed discussion
of the Company’s basis for the discussion below.
The
Ventures group, which is not a reportable segment as defined in SFAS 131,
“Disclosures about Segment of an Enterprise and Related Information,” develops
opportunities that leverage attractive markets, new technologies and the
Company’s core competencies in surface and materials science. Through its
existing Separation Systems business, this group also serves a broad array
of
end markets with adsorbents, agents and desiccants which purify liquids and
gases. In September 2005, the Company acquired U.S.-based Almatis AC, Inc.,
a
major developer and producer of alumina-based adsorbents and purification
catalysts for approximately $65 million. In addition, this group is currently
developing market positions that will serve the oil and gas field services,
fuel
cell and battery materials markets in the future. Current expectations for
the
oil and gas field services market include opening a plant in the second half
of
2006, while fuel cell and battery material remain in development stages.
In
2005, this group earned $6.1 million of operating earnings on $76.0 million
of
revenues.
Hurricane
and Natural Gas Impacts
In
the
current year, the Company experienced a negative economic impact from Hurricanes
Katrina and Rita. The Company operates a number of facilities in Georgia,
and
some facilities in Louisiana, Mississippi and Texas that were affected by
these
hurricanes. Additionally, many of the Company’s suppliers, customers and
logistics network providers were directly impacted by these hurricanes. Direct
impacts from these hurricanes, such as customer and supplier force majeure
declarations, lost production time and facility damage, are readily quantifiable
and were approximately $1 million. Indirect impacts, such as higher natural
gas
and other energy costs, higher raw material costs as a result of supplier
difficulties, higher logistics costs due to fuel and disrupted distribution
networks and short-term productivity costs, exist but are not readily
quantifiable. Already high natural gas prices further increased because of
Gulf
Coast hurricanes. Natural gas prices negatively impacted the Company by
approximately $20 million in 2005 compared with 2004.
Acquisitions
Counter
party
|
|
Business
arrangement
|
|
Transaction
date
|
|
Business
opportunity
|
|
|
|
|
|
|
|
Almatis
AC, Inc.
|
|
Acquired
alumina-based adsorbents and catalyst business for $65
million
|
|
September
2005
|
|
Expand
adsorbent and purification portfolio to include
aluminas
|
|
|
|
|
|
|
|
Nanjing
Chemical Industry Corporation
|
|
Acquired
syngas catalyst business for $20 million
|
|
June
2005
|
|
Expand
syngas growth strategy
|
|
|
|
|
|
|
|
Coletica
S.A.
|
|
Acquired
manufacturing, research and development and distribution facilities
for
$73 million, net of cash acquired
|
|
March
2005
|
|
Expand
personal care actives business to include major European
presence
|
|
|
|
|
|
|
|
The
Collaborative Group, Ltd.
|
|
Acquired
manufacturing and research and development facilities for $62
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
|
Consolidated
Gross Profit
Gross
profit as a percentage of sales was 15.6% in 2005, compared with 16.2% in
2004
and 17.2% in 2003. 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, 2005, 2004 and
2003.
|
|
2005
|
|
2004
|
|
2003
|
|
Materials
Services
|
|
|
2.9
|
%
|
|
2.5
|
%
|
|
2.3
|
%
|
Technology
segments and the “All Other” category
|
|
|
26.3
|
%
|
|
27.8
|
%
|
|
28.7
|
%
|
Total
Company
|
|
|
15.6
|
%
|
|
16.2
|
%
|
|
17.2
|
%
|
The
overall decrease in 2005 compared to 2004 was primarily due to lower margins
in
all technology segments (see Management’s Discussion and Analysis sections on
Environmental Technologies, Process Technologies, and Appearance and Performance
Technologies for further discussion), partially offset by higher margins
in the
Materials Services segment (see Management’s Discussion and Analysis section on
Materials Services for a further discussion on the lack of correlation between
sales and earnings in Materials Services). 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. The trend of lower margins
in
the Environmental Technologies segment from 2003 through 2005 is primarily
a
result of catalyzed soot filter (CSF) substrate costs, which are passed through
to customers (see Management’s Discussion and Analysis section on Environmental
Technologies). Gross profit as a percentage of sales is expected to improve
in
2006, as improved pricing on kaolin-based products sold to the paper market
will
impact the Appearance and Performance Technologies segment.
Selling,
Administrative and Other Expenses
Selling,
administrative and other expenses were $419.4 million in 2005 compared with
$389.1 million in 2004 and $361.8 million in 2003. The increase in 2005 was
primarily due to incremental operating expenses from acquisitions of $18.0
million, higher compensation and employee benefit costs of $10.6 million,
increased research and development expense of $8.3 million, increased
information technology expenses of $4.1 million, partially offset by decreased
rent expense of $3.0 million and decreased legal fees of $3.2
million.
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 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
Company expects selling, administrative and other expenses to increase in
2006
compared to 2005. Key drivers will be the new SFAS No. 123(R), “Share-Based
Payment,” requirements regarding stock option expense, information technology
expenses, full-year operating expenses from the acquisitions, the inflationary
impact on other expenses and expenses associated with the BASF hostile tender
offer.
Equity
Earnings
Equity
in
earnings of affiliates was $32.6 million in 2005 compared to $37.6 million
in
2004 and $39.4 million in 2003.
The
Company recognized earnings from its Asian joint ventures (N.E. Chemcat
Corporation and Heesung-Engelhard) of $30.9 million in 2005, $27.8 million
in
2004 and $18.2 million in 2003. The Company participates in these joint ventures
primarily to serve the Japanese and Korean mobile-source environmental markets.
The strong improvements from 2003 through 2005 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.
During the first quarter of 2005, the Company exchanged a 7.5% interest in
its
Chinese automotive catalyst operations for approximately 2.6% of N.E. Chemcat
Corporation (NECC), a publicly-traded joint venture. This transaction was
recorded as an exchange of similar productive assets in accordance with APB
29,
“Accounting for Nonmonetary Transactions.” The Company also acquired an
additional 0.7% of NECC through a public tender offer. These transactions
increase the Company’s ownership percentage in NECC from 38.8% to 42.1%. The
Company expects earnings from these operations to remain at current levels,
as
the Japanese and Korean automotive markets are not anticipated to grow
substantially.
The
Company currently owns 45% of HDZ, a former subsidiary of Engelhard-CLAL.
The
Company recognized earnings from this joint venture and related holdings
of $0.1
million in 2005, $7.9 million in 2004 and $19.6 million in 2003. Prior years’
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. The Company has substantially
liquidated this joint venture and related holdings.
Interest
Income and Expense
Interest
expense increased to $33.7 million in 2005 compared with $23.7 million in
2004
due to both higher short-term borrowing rates and higher average debt levels,
partially offset by the issuance of yen-denominated notes at low interest
rates.
Interest income increased to $8.2 million in 2005 compared with $5.2 million
in
2004. Higher debt levels were driven by acquisitions and working capital
requirements.
Income
Taxes
The
worldwide income tax expense was $59.1 million in 2005 compared with $57.4
million in 2004 and $65.9 million in 2003.
The
effective tax rate was 19.3% in 2005, 19.5% in 2004 and 21.6% in 2003.
The
Company believes that its effective tax rate on future recurring business
operations will be approximately 24%.
The
Company’s effective tax rate is dependent upon many factors including (1) the
impact of enacted tax laws in jurisdictions in which the Company operates,
(2)
the amount of earnings by jurisdiction due to varying tax rates by country,
(3)
the amount of depletion deductions related to the Company's mining activities,
(4) the ability to utilize minimum tax credits, foreign tax credits and research
and development tax credits , (5) the ability to utilize
state
tax
net operating losses and various state tax credits and (6) the amount of
extraterritorial income and domestic production related benefits.
In
respect of certain provisions of the American Jobs Creation Act of 2004 (the
"Act"), the Company decided not to repatriate certain offshore earnings from
its
foreign subsidiaries at a reduced tax rate due to its intention to increase
its
investments outside of the United States.
In
the
first quarter of 2005, the Company recorded a $2.7 million reduction of tax
expense resulting from an agreement with the IRS relating to the audit of
the
Company’s tax return for 2001. The Company is currently under examination for
the 2002 and 2003 tax periods with the IRS, and the Company also seeks
resolution with tax authorities in foreign jurisdictions in which the Company
operates.
In
the
second quarter, the Company recorded a benefit of $5.7 million related to
prior
tax periods in the Netherlands and a tax expense of $3.3 million related
to
prior tax periods in Germany, due to changes in estimates based upon information
obtained during the audit process.
In
the
third quarter, as a result of the Company filing its 2004 federal income
tax
return, the Company recorded a tax benefit of approximately $6 million
associated with the American Jobs Creation Act in respect of foreign tax
credits relating to its minority investments in certain foreign corporations
which had previously been subject to a valuation allowance. In addition,
due to
the expiration of a tax closing agreement covering the tax years 1998-2004
with
the state of New Jersey, which the state has not agreed to extend to 2005
and
beyond, the Company recorded an additional state income tax expense of
approximately $2 million (after federal income tax effect).
In
the
fourth quarter, the Company recorded a net tax benefit of approximately $5.2
million. Of this amount, $4.1 million relates to the reversal of a FTC valuation
allowance based upon earnings and profit analyses and foreign source income
analyses for 2005, both of which were completed in the fourth
quarter.
Liquidity
and Capital Resources
Liquidity
Working
capital was $513.8 million at December 31, 2005, compared with $659.8 million
at
December 31, 2004. The current ratio was 1.3 and 1.7 at December 31, 2005
and
December 31, 2004, respectively. This reflects the Company’s utilization of
existing cash balances to fund three acquisitions (see Note 5, “Acquisitions”).
Also impacting the current ratio are corresponding increases in the Company’s
committed metal positions and hedged metal obligations, and an increase in
the
working capital requirements of the Company’s Environmental Technologies
segment. The overall working capital of the Company’s technology segments
(Environmental Technologies, Process Technologies and Appearance and Performance
Technologies) has not been subject to significant fluctuations from period
to
period; however, in the current year, Environmental Technologies has experienced
a fundamental increase in working capital employed of approximately $100
million. This increase is primarily due to Environmental Technologies' recent
market penetration into catalyzed soot filter (CSF) technology for light-duty
diesel applications to the mobile-source environmental markets (see
Environmental Technologies section for further discussion). This trend is
expected to continue, and will negatively impact net cash provided by operating
activities through 2006. The working capital of the Materials Services segment
may vary due to the timing of metal contracts, but is monitored closely by
senior management. In the recent period, committed metal positions and hedged
metal obligations have increased due to the effects of higher prices and
usage,
a shift in the mix of metals and inclusion of significant advances made for
the
purchase of precious metals that have been received but for which the final
price has yet to be determined. While long-term working capital requirements
cannot be readily predicted, it is expected that they will grow proportionally
with the revenues of the technology segments.
On
March
7, 2005, the Company replaced existing committed credit facilities with a
new
$800 million, five-year committed credit facility. This facility is available
for general corporate purposes, including, without limitation, to provide
liquidity support for the issuance of commercial paper and acquisition
financing. As of December 31, 2005, the Company had $28.0 million of commercial
paper outstanding, all of which matured on January 3, 2006.
In
May
2005, the Company entered into a five-year committed credit facility for
approximately $33 million (270 million Chinese Renminbi) with three major
foreign banks. The facility is available for general corporate purposes for
various subsidiaries within China. In addition, in March 2006 the Company
replaced an existing $12 million credit facility with a new $17 million,
five-year committed, dual currency revolving credit facility for its
Environmental Technologies business within China.
On
August
12, 2005, the Company issued a third tranche of Japanese yen 5.5 billion
notes
(approximately $50 million) bearing a coupon of 0.75% 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.
In
the
fourth quarter of 2005, the Company entered into a cross-currency swap with
a
notional amount of $150 million. This transaction effectively swaps the
Company’s US dollar floating rate exposure for a Euro floating rate exposure.
The notional Euro amount has been designated as a net investment hedge of
a
portion of the Company’s Euro-denominated investments.
The
Company’s total debt increased to $600.1 million at December 31, 2005 from
$525.7 million at December 31, 2004 due to acquisitions, higher working capital
requirements and a voluntary pension contribution of $50 million. The percentage
of total debt to total capitalization was 29% at December 31, 2005 compared
with
27% at December 31, 2004.
The
Company maintains a shelf registration of $450 million to facilitate 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.
In
January of 2006, BASF announced a tender offer for all of the outstanding
shares
of the Company’s stock, for $37.00 per share. Since then, the Company’s stock
has traded above $40.00 per share. As a result, many employees and former
employees exercised vested stock options resulting in proceeds of $59.7 million
and an increase in the shares outstanding of 2.8 million as of February 21,
2006. As a result of the BASF Offer, the Company was required to fund a trust
account for certain previously unfunded retirement programs for current and
former senior executives and directors, resulting in a cash payment to this
trust of approximately $111 million in January 2006. Should a change in control
of the Company occur at a price of $37.00 per share, additional cash payments
of
approximately $85 million will be due to certain employees.
The
Company’s available cash and unused committed credit lines represent a measure
of the Company’s short-term liquidity position. The Company’s Materials Services
segment provides sufficient cash to fund the Company’s committed metal
positions, as discussed in the Capital Resources section. The Company believes
that its short-term liquidity position is sufficient to meet the cash
requirements of the Company. 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 generate significant cash flow. Cash flows from the Materials Services
segment tend to fluctuate from period to period due to the timing of metal
contracts. The “All Other” category includes the Ventures group, 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.
Net
cash
provided by operating activities was $258.1 million in 2005 compared with
$323.4
million in 2004. The Company voluntarily contributed $50 million to its domestic
defined benefit pension plans in response to economic factors in 2005. The
Environmental Technologies segment experienced reduced cash flows from
operations of approximately $100 million primarily due to an increase in
working
capital requirements associated with the segment’s diesel catalyzed soot filter
business. Other variances in cash flows from operating activities occurred
in
the Materials Services segment and reflect changes in metal positions used
to
facilitate requirements of the Company, its metal customers and suppliers
(see
Note 25 “Supplemental Information,” for Material Services variations). Materials
Services routinely enters into a variety of arrangements for the sourcing
of
metals. Generally,
transactions
are hedged on a daily basis. 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 for these
transactions. 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, 2005, the fair value of precious metal received but not
priced exceeded provisional payments by $138.9 million.
The
Company’s joint ventures operate independently of additional Company financing.
These joint ventures returned $15.4 million of cash to the Company in 2005.
The
Company anticipates cash proceeds from its joint ventures to remain at this
level in 2006.
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 acquisitions. Notably,
during 2005, the Company invested $108.2 million in research and development,
$141.6 million in capital projects and $166.0 million in acquisitions and
other
investments. Capital expenditures for 2006 are expected to approximate $150
million. Acquisitions during 2005 included approximately $73 million, net
of
cash acquired, for the acquisition of Coletica, S.A. and related holdings
(see
Note 5 “Acquisitions”). In the second quarter of 2005, the Company acquired the
catalyst business of Nanjing Chemical Industry Corporation (NCIC) for
approximately $20 million (see Note 5 “Acquisitions”). The Company has paid $14
million of this to date, and expects to pay the remaining $6 million due
to the
former owners of NCIC in 2006. In the third quarter of 2005, the Company
acquired Almatis AC, Inc. for a total purchase price of $65 million (see
Note 5
“Acquisitions”). 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.
In
addition to investment opportunities, the Company will return value to the
shareholders through effective capital structure management. This is done
through share buy-back programs and dividends. In 2005, the Company purchased
approximately 2.1 million outstanding shares of common stock, net of stock
options exercised. In May 2005, the Company’s Board of Directors authorized a
share repurchase program of 6 million shares. In addition, the Company’s Board
of Directors approved an increase in the quarterly dividend from $0.11 per
share
to $0.12 per share in the first quarter of 2005. 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, 2005 (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
|
|
$
|
48.8
|
|
$
|
48.8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Accounts
payable
|
|
|
562.0
|
|
|
562.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
current liabilities
|
|
|
265.4
|
|
|
265.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Hedged
metal obligations
|
|
|
640.8
|
|
|
640.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-term
debt, including interest payments (a)
|
|
|
764.4
|
|
|
140.1
|
|
|
33.1
|
|
|
170.5
|
|
|
420.7
|
|
Other
long-term liabilities reflected on the balance sheet under GAAP
(b)
|
|
|
319.1
|
|
|
1.0
|
|
|
45.2
|
|
|
39.1
|
|
|
233.8
|
|
Purchase
obligations - metal supply contracts (c)
|
|
|
5,355.4
|
|
|
874.8
|
|
|
1,823.4
|
|
|
1,328.6
|
|
|
1,328.6
|
|
Pool
accounts (d)
|
|
|
455.2
|
|
|
455.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
leases
|
|
|
180.1
|
|
|
24.9
|
|
|
48.7
|
|
|
44.9
|
|
|
61.6
|
|
PGM
leases (e)
|
|
|
108.3
|
|
|
108.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
purchase obligations (f)
|
|
|
100.3
|
|
|
82.4
|
|
|
17.9
|
|
|
—
|
|
|
—
|
|
Total
contractual obligations
|
|
$
|
8,799.8
|
|
$
|
3,203.7
|
|
$
|
1,968.3
|
|
$
|
1,583.1
|
|
$
|
2,044.7
|
|
(a)
Future interest payments calculated using the December 31, 2005 LIBOR rate
and
foreign exchange rates as of December 31, 2005.
(b)
Amounts relate to postretirement/postemployment obligations (see Note 17,
“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 22, “Environmental
Costs,” for further detail). The ‘More than 5 years’ category includes $81.7
million related to the Company’s minimum pension liability (see Note 17,
“Benefits”), as well as $58.1 million of other noncurrent liabilities for which
the timing of payment is not readily determinable.
(c)
These
amounts reflect minimum purchase obligations for the purchase of platinum
group
metals (PGM) assuming the December 31, 2005 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)
Represents the December 31, 2005 value of precious metals deposited with
the
Company, principally for the manufacture of catalysts utilizing those
metals
(e)
Represents the December 31, 2005 value of PGM which the Company has leased
from third parties and then onward leased to industrial customers.
(f)
Amounts primarily relate to purchase orders for raw material purchases and
warehousing- and transportation-related costs.
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, 2005, the aggregate outstanding amount
of
letters of credit supporting such obligations amounted to $121.4 million,
of
which $114.7 million will expire in less than one year, $1.0 million will
expire
in two to three years, $0.2 million will expire in four to five years and
$5.5 million will expire after five years.
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, 2005, 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 $138.9 million. As a
result,
this amount was recorded in committed metal positions and accounts payable
at
December 31, 2005, and no credit risk existed.
Commitments
and Contingencies
For
information about commitments and contingencies, see Note 22, “Environmental
Costs” and Note 23, “Litigation and Contingencies.”
Dividends
and Capital Stock
Common
stock dividends paid were $0.48 per share in 2005, $0.44 per share in 2004
and
$0.41 per share in 2003.
Peru
Update
See
Note
23, “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
16, “Related Party Transactions,” for a discussion of related party
transactions.
Critical
Accounting Policies and Estimates
Certain
key policies and estimates 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 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. Stringent
procedures and controls are in place to ensure 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 commodities. 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 settlement prices. There are no so-called “terminal” markets
for rhodium. The Company values rhodium based upon prices published in “Metals
Week,” an independent trade journal. Values for base metals come from the
closing prices of the London Metals Exchange.
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 12, “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 but are included in the “All
Other” category.
Provision
for environmental remediation
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, 2005, 14 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, 2005 and 2004 were $18.0 million and $19.1
million, respectively, including $0.1 million at December 31, 2005 and 2004
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 39% 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 $1.2 million in 2005,
$1.3 million in 2004 and $1.8 million in 2003. 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 $2.5 million for 2006, 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. The Company has an Environmental, Health and Safety (EH&S)
department that implements and assesses compliance to policies, procedures
and
controls around the Company’s environmental exposures and possible liabilities.
These policies, procedures and controls are intended to assure that the
Corporate EH&S department is aware of all issues that may have a potential
impact on the Company. While it is not possible to predict with certainty,
management believes environmental cleanup-related reserves at December 31,
2005
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.
Goodwill
As
of
December 31, 2005, the Company had $400.7 million of goodwill that, based
on
impairment testing in 2005, 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
95% 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 5% 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 $19.9 million. Included in this amount is $15.9
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.
Income
taxes
As
of
December 31, 2005, net deferred tax assets are approximately $100.1 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 income taxes from earnings that may result 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, 2005, the Company had approximately $400.0 million of state
net
operating loss carryforwards that expire at various intervals between 2006
and
2025. The probability of not being able to utilize these net operating loss
carryforwards is low under a wide range of scenarios. Due to shortened available
carryover periods in certain state jurisdictions, the Company has recorded
a
valuation allowance of approximately $52 million of the state net operating
loss
carryforwards.
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.
As
of December 31, 2005, the Company has recorded appropriate reserves for tax
exposures it has determined are probable.
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
2001 and it is currently examining the Company’s tax returns for 2002 and
2003.
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 $41 million in 2006, compared with $33 million in 2005 and
$26 million in 2004. Based on a review of the current environment, the Company
used a long-term rate of return assumption of 8.9% (domestic) and 7% (foreign)
to value its net periodic pension expense in 2005 and expects to maintain
these
assumptions in 2006. A 1% change in the long-term rate of return assumption
would increase or decrease net periodic pension expense by approximately
$6
million in 2006. The Company lowered its domestic discount rate for determining
net periodic pension expense from 6.25% in 2004 to 6.0% in 2005. Further
adjustments are being made in 2006 to lower the domestic rate to 5.5%. 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 $3 million in 2006 and decrease the 2005 projected benefit
obligation (PBO) by approximately $25 million. A 25 basis-point decrease
in the
discount rate would increase pension expense by approximately $3 million
in 2006
and increase the 2005 PBO by approximately $27 million. The Company used
September 30, 2005 as the measurement date for its assets and liabilities.
Assets on this date were $640 million. The value of the assets increased
to $651
million at December 31, 2005. The Company expects its
postretirement/postemployment benefit costs to be $12 million in
2006.
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. A summary of key assumptions used to develop these forward
looking statements is included below under the caption “Key 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. A discussion of these risk factors is included below under the
caption
“Risk Factors”. Investors are cautioned not to place undue reliance upon these
forward-looking statements, which speak only as of their dates.
Risk
Factors
Internal
risks and uncertainties that could cause actual results to differ materially
and
negatively impact the Company include:
|
·
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The
Company’s ability to achieve and execute internal business
plans.
The Company is engaged in growth and productivity initiatives in
all
technology segments. Specifically, the Company has major growth
initiatives in businesses serving the personal care, energy materials,
polyethylene, diesel emissions and gas-to-liquids markets. These
initiatives represent forays into relatively new markets for the
Company,
and therefore are subject to greater risk than the Company’s traditional
markets. Additionally, 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 to replace obsolete
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.
|
|
·
|
Capacity
constraints. Some
of the Company’s businesses operate near current capacity levels, notably
operations serving the petroleum refining operations. Should demand
for
certain products increase, the Company would experience short-term
difficulty meeting the increased demand, hindering growth
opportunities.
|
|
·
|
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.
|
|
·
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Litigation
and legal claims. The
Company is currently engaged in various legal disputes, including
litigation related to the BASF Offer. 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 22, “Environmental Costs”).
|
|
·
|
Uncertainty
regarding the outcome of the BASF Offer may affect the Company’s stock
price and future business.
The uncertainty as to the outcome of the BASF Offer may have an
adverse
effect on employee retention and recruitment, and may negatively
impact
supplier and customer
relationships.
|
|
·
|
Exposure
to product liability lawsuits.
As
a manufacturer, the Company is subject to end-user product liability
litigation associated with the Company’s products.
|
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. Notably, some North American
automobile producers have recently experienced financial difficulties
and
decreased product demand. 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. Certain customers of
the
Company, who supply parts to the North American automobile producers,
have
recently experienced financial difficulties, including bankruptcy.
Bankruptcy of other customers remains a threat. These customers
represent
a substantial portion of the Environmental Technologies segment’s
business. The Company actively establishes and monitors credit
limits to
all customers.
|
|
·
|
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. A decrease
in the
availability of these precious metals could impact the profitability
of
the Company. 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. Significant
changes in market prices could negatively impact the
Company.
|
|
·
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A
decrease in the availability or an increase in the cost of energy,
notably
natural gas. The
Company consumes more than 11 million MMBTUs of natural gas annually.
Compared with other sources of energy, natural gas is subject to
volatility in availability and price, due to transportation, processing
and storage requirements. Recent hurricanes impacting the Gulf
Coast have
driven up natural gas prices and have limited availability. A prolonged
continuation of these higher prices, absent the ability to recover
these
costs via price increases or energy surcharges, will negatively
impact the
Company. Changes could include customer and product rationalization,
plant
closures and asset impairments, particularly in certain minerals
operations serving the paper
market.
|
|
·
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The
availability and price of rare earth compounds.
The Company uses certain rare earth compounds, produced in limited
locations worldwide.
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·
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The
availability of substrates. In
the Environmental Technologies segment, the Company purchases large
quantities of catalyst substrates from a limited number of suppliers.
These substrates are specifically designed and manufactured to
requirements established by the Company’s customers. An inability to
obtain substrates in sufficient volumes to meet customer demand
would
negatively impact the Company.
|
|
·
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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 approximately 7,100 employees worldwide and
is subject
to recent adverse trends in benefit costs, notably pension and
medical
benefits.
|
|
·
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Higher
interest rates.
A
portion 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.
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|
·
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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.
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·
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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.
|
|
·
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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 conditions. Recent inflationary
pressures have resulted in higher material costs. The inability
of the
Company to pass these higher costs to customers via price increases
and
surcharges would have a negative impact on the Company.
|
|
·
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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.
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·
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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 has decided not to repatriate any amounts from its
foreign
subsidiaries at a reduced tax rate under the Act due to its intention
to
increase its investments outside of the United
States.
|
|
·
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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 and regulations. The Company will
be
impacted by changes in these laws and regulations. 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
regulations.
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.
|
|
·
|
The
impact of natural disasters. Natural
disasters causing damage to the Company and our customers and suppliers
would negatively impact the
Company.
|
Key
Assumptions
The
Company does not as a matter of course make detailed public projections as
to
future performance or earnings. After BASF commenced its $37 per share tender
offer, the Board of Directors, on January 20, 2006, unanimously determined
that
the BASF Offer was inadequate and not in the best interest of the Company’s
stockholders (other than BASF and its affiliates). This determination was
in
part based on the Board’s belief that the offer did not fully reflect the value
of the Company’s businesses, particularly its future growth prospects. As a
result, the Company decided to publicly release information regarding its
annual
management operation plans that was developed in August 2005, prior to the
BASF
Offer. The key assumptions used in developing these plans, arranged by
businesses within the Company’s segments, are set forth below.
The
Company's internal financial forecasts are prepared solely for internal use
and
capital budgeting and other management decisions and are subjective in many
respects and thus susceptible to interpretations and periodic revisions based
on
actual experience and business developments. The projections were not prepared
with a view to public disclosure or compliance with the published guidelines
of
the SEC or the guidelines established by the American Institute of Certified
Public Accountants regarding projections or forecasts. The Company's independent
accountants have not examined, compiled or otherwise applied procedures to
the
projections and, accordingly, do not express an opinion or any other form
of
assurance with respect to the projections.
The
projections also reflect numerous assumptions made by management of the Company
with respect to industry performance, general business, economic, market
and
financial conditions and other matters, all of which are difficult to predict
and many of which are beyond the Company's control. Accordingly, there can
be no
assurance that the assumptions made in preparing the projections will prove
accurate. It is expected that there will be differences between actual and
projected results, and actual results may be materially greater or less than
those contained in the projections. The inclusion of the projections herein
should not be regarded as an indication that the Company or its affiliates
or
representatives considered or considers the projections herein should be
relied
upon as such.
Neither
the Company nor any of its affiliates or representatives have made or makes
any
representations to any person regarding the ultimate performance of the Company
compared to the information contained in the projections.
Environmental
Technologies
Light
Duty Vehicles
|
·
|
Light
duty vehicle builds will grow globally at 2% over the plan period,
from 62
million vehicles in 2005 to 68 million by 2010, driven primarily
by
increasing living standards in emerging
markets.
|
|
·
|
N.
America with strictest regulation and largest engines averages
almost
three catalysts per vehicle. Europe, with increasing penetration
rates of
catalyzed soot filters (CSF) will increase to slightly over two
catalysts
per vehicle. Tightening regulatory standards in developing countries
will
bring the average in these regions up to one catalyst per
vehicle.
|
|
·
|
Increasingly
strict regulatory standards and fluctuating precious metal pricing
will
require more advanced technology with related value
pricing.
|
|
·
|
Net
effect of the above is that the global market for light duty emission
control catalysts will grow at a 5% CAGR, from $1.5 billion in
2005 to
$1.9 billion by 2010. Of the $1.9 billion in 2010, $1.4 billion
relates to
gasoline with the remaining $0.5 billion relating to light-duty
diesel,
primarily in Europe.
|
|
o
|
Global
segment will grow from 103 million catalysts in 2005 to 115 million
by
2010, a 2.2% CAGR, with an average catalyst manufacturing charge
of
$12/catalyst.
|
|
o
|
N.
America and Europe will show minimal growth with Japan and Korea
flat.
Most of the growth
|
|
|
will come from emerging markets, led by
China. |
|
o
|
Stricter
regulations will be adopted in the emerging markets over the
plan period.
China and India will begin Euro 3 this year and Euro 4 by 2008-10.
Brazil
will adopt a US Tier 2 program in 2009. Russia will begin to
implement
Euro 2 this year and Euro 3 by
2008.
|
|
o
|
Europe,
which accounts for 75% of the market, will grow from 9.4 million
vehicles
in 2005 to almost 12 million by 2010, a 5% CAGR. A large percentage
of the
remaining 25% is produced in Japan and Korea for export into
Europe.
|
|
o
|
The
biggest driver for this growth is the diesel penetration rate growing
from
46% this year to 50% by 2010.
|
|
o
|
The
catalyst market for light-duty diesels in Europe is currently forecasted
to be almost $400 million by the end of 2010. The largest growth
opportunity is the accelerated adoption rate of
CSF’s.
|
|
o
|
Euro
4, which began phasing in during 2004 (2005 new platforms) has
not been
filter (CSF) forcing. However, several European countries became
aware
that ambient air quality standards were being exceeded in urban
areas,
primarily due to particulate matter. Driving restrictions on unfiltered
vehicles were discussed as a possible solution which prompted OEMs
to
“voluntarily” install filters.
|
|
o
|
Awareness
of particulate matter has forced the EU to accelerate the adoption
of Euro
5 for light-duty diesel (now projected for 2009). Euro 5 reduces
particulate emissions by 80% vs. Euro 4 and will be filter forcing
for a
majority of diesel vehicles.
|
|
o
|
Grow
EC’s market share in Europe from 24% to 35% by
2008.
|
Heavy-Duty
Diesel
|
·
|
Heavy-duty
diesel engine demand will increase only 1% per year, from 1.6 million
engines in 2005 to 1.7 million engines in 2010 in the U.S., Europe
and
Japan.
|
|
·
|
However,
tightening regulations will increase the catalyst market from 1.4
million
units in 2005 to 5 million units in
2010.
|
|
·
|
Revenues
(ex-PGM/ex-substrate) are projected to grow from $100 million in
2005 to
$330 million in 2010.
|
|
·
|
For
On-Road, US 2007 & 2010, Euro 4 & 5 and Japan 2005 & 2009 are
“On Track” for implementation.
|
|
·
|
Successful
fleet testing of US07 emission systems in 2006.
|
|
·
|
Non-vanadium
SCR will be required in US, Europe and
Japan.
|
|
·
|
European
tax incentive programs will drive early adoption of
CSF’s.
|
|
·
|
New
off-road regulations begin in 2008 and are not included in revenues
or
earnings estimates.
|
Stationary
Source
|
·
|
The
Food Service market will grow from $3 million in 2005 to $10 million
in
2010 driven by pending charbroiler regulations (2007). Addresses
fine
particulate control and health and safety benefits for ventless
ovens.
|
|
·
|
Successful
development of differentiated mercury sorbent technology for coal-fired
power plants assumed for 2008-2010.
|
Temperature
Sensing
|
·
|
Market
will grow from $225 million in 2005 to $300 million in 2010, a
CAGR of
6%.
|
|
·
|
EC
will improve on its 8% market share through three growth
strategies:
|
|
·
|
Accelerate
optical thermometry commercialization by penetrating new
markets.
|
|
·
|
Continue
Asia geographic expansion.
|
|
·
|
Add
wafer thermocouple technology to complete EC temperature measurement
portfolio.
|
Process
Technologies
Chemicals
|
·
|
Gas
economy catalyst market forecast to approximate $350 million in
2006 with
a CAGR of 15%.
|
|
·
|
Additional
Gas economy catalyst growth from:
|
|
o
|
Planned
expansion from current “gas-to-liquids” (GTL)
customer.
|
|
o
|
Leveraging
Fischer-Tropsch catalyst technology to other major GTL
players.
|
|
o
|
Leverage
our syngas position from Nanjing
acquisition.
|
|
·
|
Successful
entry into unserved petrochemical markets, including ethane-based
styrene,
ethane-based acetic acid, propane-based acrylic acid and propane-based
propylene oxide, based on current commercial
agreements.
|
|
·
|
Growth
rates for catalyst markets for oleochemicals, petrochemicals and
fine
chemicals range from 2% to 10% over the plan
period.
|
Petroleum
Refining
|
·
|
FCC
additives growth approximating 22% over the plan
period.
|
|
·
|
Underlying
market growth of 10% over the plan
period.
|
|
·
|
Additional
growth from the expansion into environmental and gasoline conversion
additive technologies to meet increasing global demands of propylene
and
petrochemical feedstocks and regulatory
compliance.
|
|
·
|
Entry
into new refining market areas by leveraging EC technology through
prospective licensing agreements, including hydrocracking, deep
catalytic
cracking and reforming.
|
|
·
|
FCC
market growth only projected at 2% over the plan period with additional
income from productivity gains.
|
|
·
|
Natural
gas price used was $7.25 per MMBTU. Adverse variances are expected
to be
substantially covered by surcharges and other pricing
actions.
|
Polyolefins
|
·
|
Polypropylene
growth approximating 26% over the plan
period.
|
|
·
|
Assumed
growth of 7% over the plan period in proprietary catalyst representing
underlying market growth of 5-6% and remaining growth through
differentiation and acceleration of our technology development
into the
packaging and film markets.
|
|
·
|
Growth
in volume from new licenses.
|
|
·
|
Continuation
of entry into polyethylene market.
|
Appearance
and Performance Technologies
Personal
Care Materials
|
·
|
7%
growth per year in delivery systems for personal care through 2009.
In the
case of commodity vitamins (30% of market) where we don’t participate, the
rate is 5%. For more specialized actives, such as unique extracts
from
plants, the growth rate is closer to
10%.
|
|
·
|
Additional
revenues/earnings from expanding the product offerings globally
from the
acquisitions made in the U.S. and France in 2004 and
2005.
|
Additional
earnings from optimizing synergies in technology, manufacturing and sales
as we
continue to integrate the two acquisitions.
Effects
|
·
|
Market
for effects pigments in cosmetics and personal care will grow at
7% per
year. The market growth rate for industrial applications will be
4-5%.
Growth in the automotive market will be
lower.
|
|
·
|
Expanding
our innovation track into new programs beyond mica and borosilicate
glass,
bismuth and film by focusing research and development on technology
platforms and away from line extensions will add $15 million to
revenues
by 2010.
|
|
·
|
Cost
reductions will add $10 million to earnings by
2010.
|
|
·
|
Faster
innovation and an applications lab in China will work to counter
Chinese
competition, and cost management.
|
Kaolin
|
·
|
Recover
$10 million in revenue and $4 million in earnings from customer
strikes in
Finland and Canada.
|
|
·
|
$24
million in revenue in 2010 from Décor Growth Program (decorative laminate
paper market with substitution for
TiO2).
|
|
·
|
Crop
protectants (Surround) will add $28 million of revenues and $10
millions
of earnings by 2010.
|
|
·
|
Cost
reduction initiatives will add $12 million in earnings by
2010.
|
|
·
|
Natural
gas price used was $7.25 per MMBTU. Adverse variances are expected
to be
substantially covered by surcharges and other pricing
actions.
|
Ventures
|
·
|
Alumina
business acquired in 2005 accounts for $12 million of 2010 operating
earnings with modest growth rates.
|
|
·
|
Proppants
accounts for $9 million of 2010 operating earnings and depends
mostly on
continued demand from the energy sector.
|
|
·
|
Aseptrol/water
treatment are slated to generate $7 million of operating earnings
by 2010
related to health requirements.
|
|
·
|
Nothing
included in revenues and earnings for ceramic proppants and battery
materials programs.
|
Corporate
|
·
|
Share
buy-back programs, enabled by operating cash flows, will offset
the
dilutive impact of employee benefit plans. Diluted shares outstanding
for
Operating Plan period are 122
million.
|
|
·
|
The
average effective tax rate for the Operating Plan period is 23%,
with the
2010 period at 24%.
|
|
·
|
Equity
earnings from the Company’s equity method joint ventures, which primarily
serve the Japanese and Korean automotive catalyst markets, have
conservatively been held constant throughout the plan period, despite
a
25% CAGR over the past three years.
|
|
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
$564.2 million and $520.8 million at December 31, 2005 and 2004, respectively,
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
$8.1 million at December 31, 2005, compared with $13.6 million at December
31,
2004.
The
Company also 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 three interest rate swap agreements with a total notional value
of
$150 million maturing in May 2013. 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, 2005, 2004
and
2003.
In
December 2005, the Company entered into an interest rate derivative contract,
referred to as a Forward Rate Agreement (FRA) contract. This derivative
economically hedged the Company’s interest rate exposure for the May 15, 2006
Euribor rate reset under two US dollar to Euro cross-currency interest rate
derivative swap agreements.
In
September 2005, the Company terminated two interest rate swap agreements,
with a
total notional value of $100 million maturing in August 2006, that were
designated as fair value hedges. The accumulated gain of $0.4 million
resulting from the termination of these two interest rate swap agreements
will
be amortized to earnings over the remaining term of the underlying debt
instrument.
In
June
2005, the Company terminated two interest rate swap agreements, with a total
notional value of $120 million maturing in June 2028, that were designated
as
fair value hedges. The termination of these two interest rate swap agreements
resulted in an accumulated gain of $20.1 million that will be amortized to
earnings over the remaining term of the underlying debt instrument.
In
January 2005, the Company entered into two additional FRA contracts, which
economically hedged the Company’s interest rate exposure for the May 16, 2005
and the June 1, 2005 LIBOR rate reset under two pre-existing interest rate
swap
agreements. The FRA contracts were terminated in March 2005 due to favorable
market conditions and the gain was reflected in earnings.
In
January 2005, the Company entered into a derivative agreement with a total
notional value of $74.7 million maturing in January 2012. This agreement
effectively changes a rental obligation that varies directly with short-term
commercial paper rates to a fixed payment obligation. The total notional
value
and other terms of this agreement are equal to the rental payments and other
terms of an operating lease for machinery and equipment used in the Process
Technologies segment that was renewed in January 2005. This derivative is
designated as a cash flow hedge, and as such, it is marked-to-market with
the
gain/loss reflected in other comprehensive income. As of December 31, 2005,
the
Company reported an after tax gain of $1.2 million in accumulated other
comprehensive income. There was no gain or loss reclassified from accumulated
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 or hedge ineffectiveness.
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.
In
March
2004, the Company entered into a FRA contract, which hedged the Company’s
interest rate exposure for the May 15, 2004 LIBOR rate reset under a
pre-existing interest rate swap agreement. 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. These FRAs have been marked-to-market
with the gain/loss being reflected in earnings.
Approximately
33% and 76% of the Company’s borrowings had variable interest rates as of
December 31, 2005 and 2004, net of related interest rate swaps, 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 derivative contracts. 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 $19.2 million at December 31, 2005, compared with
$19.5
million at December 31, 2004, on the Company’s foreign currency derivative
contracts. However, since the Company limits the use of foreign currency
derivative contracts to the hedging of contractual and anticipated foreign
currency payables and receivables, this loss in fair value for those contracts
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
$42.9 million at December 31, 2005, compared with $59.1 million at December
31,
2004, 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 $4.8 million at December 31, 2005, compared with
$2.3
million as of December 31, 2004. 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 2005 and 2004 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, 2005, the Company has hedged
approximately 30% of its expected natural gas purchases for 2006. At December
31, 2005, a uniform
one-dollar increase in the price of natural gas would result in a decrease
in
operating earnings of approximately $8.2 million for the year ending December
31, 2006 based upon the Company’s unhedged portion of its expected natural gas
purchases for 2006.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
ENGELHARD
CORPORATION
CONSOLIDATED
STATEMENTS OF EARNINGS
Year
ended December 31 (in thousands, except per-share amounts)
|
|
2005
|
|
2004
|
|
2003
|
|
Net
sales
|
|
$
|
4,597,016
|
|
$
|
4,136,109
|
|
$
|
3,687,821
|
|
Cost
of sales
|
|
|
3,879,014
|
|
|
3,465,509
|
|
|
3,051,778
|
|
Gross
profit
|
|
|
718,002
|
|
|
670,600
|
|
|
636,043
|
|
Selling,
administrative and other expenses
|
|
|
419,397
|
|
|
389,095
|
|
|
361,765
|
|
Special
charge (credit), net
|
|
|
—
|
|
|
5,304
|
|
|
(11,978
|
)
|
Operating
earnings
|
|
|
298,605
|
|
|
276,201
|
|
|
286,256
|
|
Equity
in earnings of affiliates
|
|
|
32,564
|
|
|
37,582
|
|
|
39,368
|
|
Loss
on investment
|
|
|
(239
|
)
|
|
(663
|
)
|
|
—
|
|
Interest
income
|
|
|
8,205
|
|
|
5,205
|
|
|
4,035
|
|
Interest
expense
|
|
|
(33,709
|
)
|
|
(23,704
|
)
|
|
(24,330
|
)
|
Earnings
before income taxes
|
|
|
305,426
|
|
|
294,621
|
|
|
305,329
|
|
Income
tax expense
|
|
|
59,078
|
|
|
57,405
|
|
|
65,934
|
|
Net
earnings from continuing operations before cumulative effect of
a change
in accounting principle
|
|
|
246,348
|
|
|
237,216
|
|
|
239,395
|
|
Cumulative
effect of a change in accounting principle, net of tax of
$1,390
|
|
|
—
|
|
|
—
|
|
|
(2,269
|
)
|
Net
earnings from continuing operations
|
|
|
246,348
|
|
|
237,216
|
|
|
237,126
|
|
Loss
from discontinued operations, net of tax
|
|
|
(8,106
|
)
|
|
(1,688
|
)
|
|
(2,903
|
)
|
Net
Earnings
|
|
$
|
238,242
|
|
$
|
235,528
|
|
$
|
234,223
|
|
Earnings
per share - basic:
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before cumulative effect of a change
in
accounting principle
|
|
$
|
2.05
|
|
$
|
1.93
|
|
$
|
1.91
|
|
Cumulative
effect of a change in accounting principle, net of tax
|
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
Earnings
from continuing operations
|
|
|
2.05
|
|
|
1.93
|
|
|
1.89
|
|
Loss
from discontinued operations, net of tax
|
|
|
(0.07
|
)
|
|
(0.01
|
)
|
|
(0.02
|
)
|
Earnings
per share - basic
|
|
$
|
1.98
|
|
$
|
1.91
|
|
$
|
1.87
|
|
Earnings
per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations before cumulative effect of a change
in
accounting principle
|
|
$
|
2.02
|
|
$
|
1.89
|
|
$
|
1.88
|
|
Cumulative
effect of a change in accounting principle, net of tax
|
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
Earnings
from continuing operations
|
|
|
2.02
|
|
|
1.89
|
|
|
1.86
|
|
Loss
from discontinued operations, net of tax
|
|
|
(0.07
|
)
|
|
(0.01
|
)
|
|
(0.02
|
)
|
Earnings
per share - diluted
|
|
$
|
1.95
|
|
$
|
1.88
|
|
$
|
1.84
|
|
Average
number of shares outstanding - basic
|
|
|
120,291
|
|
|
123,155
|
|
|
125,359
|
|
Average
number of shares outstanding - diluted
|
|
|
122,215
|
|
|
125,350
|
|
|
127,267
|
|
See
accompanying Notes to Consolidated Financial Statements.
ENGELHARD
CORPORATION
CONSOLIDATED
BALANCE SHEETS
December
31 (in thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
41,619
|
|
$
|
126,229
|
|
Receivables,
net of allowances of $14,466 and $12,411, respectively
|
|
|
526,962
|
|
|
406,962
|
|
Committed
metal positions
|
|
|
904,953
|
|
|
457,498
|
|
Inventories
|
|
|
532,638
|
|
|
458,020
|
|
Other
current assets
|
|
|
145,392
|
|
|
140,740
|
|
Total
current assets
|
|
|
2,151,564
|
|
|
1,589,449
|
|
Investments
|
|
|
204,495
|
|
|
179,160
|
|
Property,
plant and equipment, net
|
|
|
936,193
|
|
|
902,751
|
|
Goodwill
|
|
|
400,719
|
|
|
330,798
|
|
Other
intangible assets, net and other noncurrent assets
|
|
|
186,007
|
|
|
176,434
|
|
Total
assets
|
|
$
|
3,878,978
|
|
$
|
3,178,592
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
48,784
|
|
$
|
11,952
|
|
Current
maturities of long-term debt
|
|
|
120,852
|
|
|
73
|
|
Accounts
payable
|
|
|
561,955
|
|
|
375,343
|
|
Hedged
metal obligations
|
|
|
640,812
|
|
|
292,880
|
|
Other
current liabilities
|
|
|
265,359
|
|
|
249,419
|
|
Total
current liabilities
|
|
|
1,637,762
|
|
|
929,667
|
|
Long-term
debt
|
|
|
430,500
|
|
|
513,680
|
|
Other
noncurrent liabilities
|
|
|
321,554
|
|
|
320,933
|
|
Total
liabilities
|
|
|
2,389,816
|
|
|
1,764,280
|
|
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
|
|
|
39,782
|
|
|
34,334
|
|
Retained
earnings
|
|
|
1,980,893
|
|
|
1,800,531
|
|
Treasury
stock, at cost, 27,172 and 25,393 shares, respectively
|
|
|
(634,116
|
)
|
|
(572,815
|
)
|
Accumulated
other comprehensive (loss) income
|
|
|
(44,692
|
)
|
|
4,967
|
|
Total
shareholders’ equity
|
|
|
1,489,162
|
|
|
1,414,312
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
3,878,978
|
|
$
|
3,178,592
|
|
See
accompanying Notes to Consolidated Financial Statements.
ENGELHARD
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
ended December 31 (in thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
238,242
|
|
$
|
235,528
|
|
$
|
234,223
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and depletion
|
|
|
126,933
|
|
|
124,951
|
|
|
124,315
|
|
Amortization
of intangible assets
|
|
|
5,463
|
|
|
3,736
|
|
|
3,357
|
|
Loss
on investment
|
|
|
239
|
|
|
663
|
|
|
—
|
|
Equity
results, net of dividends
|
|
|
(17,167
|
)
|
|
(16,038
|
)
|
|
(14,805
|
)
|
Net
change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Materials
Services related
|
|
|
6,152
|
|
|
(31,566
|
)
|
|
107,590
|
|
All
other
|
|
|
(101,768
|
)
|
|
6,107
|
|
|
(48,696
|
)
|
Net
cash provided by operating activities
|
|
|
258,094
|
|
|
323,381
|
|
|
405,984
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(141,616
|
)
|
|
(123,168
|
)
|
|
(113,557
|
)
|
Proceeds
from sale of investments
|
|
|
—
|
|
|
1,988
|
|
|
6,651
|
|
Acquisitions
and other investments, net of cash acquired
|
|
|
(165,970
|
)
|
|
(68,640
|
)
|
|
(1,000
|
)
|
Net
cash used in investing activities
|
|
|
(307,586
|
)
|
|
(189,820
|
)
|
|
(107,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
31,163
|
|
|
—
|
|
|
—
|
|
Repayment
of short-term borrowings
|
|
|
—
|
|
|
(56,250
|
)
|
|
(284,283
|
)
|
Repayment
of long-term debt
|
|
|
(73
|
)
|
|
(73
|
)
|
|
(184
|
)
|
Proceeds
from issuance of long-term debt
|
|
|
48,945
|
|
|
108,669
|
|
|
150,224
|
|
Purchase
of treasury stock
|
|
|
(92,156
|
)
|
|
(113,027
|
)
|
|
(119,568
|
)
|
Cash
from exercise of stock options
|
|
|
23,395
|
|
|
24,420
|
|
|
32,880
|
|
Dividends
paid
|
|
|
(57,880
|
)
|
|
(54,281
|
)
|
|
(51,576
|
)
|
Net
cash used in financing activities
|
|
|
(46,606
|
)
|
|
(90,542
|
)
|
|
(272,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
11,488
|
|
|
(4,679
|
)
|
|
14,072
|
|
Net
(decrease)increase in cash
|
|
|
(84,610
|
)
|
|
38,340
|
|
|
39,643
|
|
Cash
and cash equivalents at beginning of year
|
|
|
126,229
|
|
|
87,889
|
|
|
48,246
|
|
Cash
and cash equivalents at end of year
|
|
$
|
41,619
|
|
$
|
126,229
|
|
$
|
87,889
|
|
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, 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
|
|
Comprehensive
income(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
|
|
|
|
|
|
238,242
|
|
|
|
|
$
|
238,242
|
|
|
|
|
|
238,242
|
|
Other
comprehensive income(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow derivative adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,001
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,927
|
)
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,733
|
)
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,659
|
)
|
|
(49,659
|
)
|
|
(49,659
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188,583
|
|
|
|
|
|
|
|
Dividends
($.48 per share)
|
|
|
|
|
|
|
|
|
(57,880
|
)
|
|
|
|
|
|
|
|
|
|
|
(57,880
|
)
|
Treasury
stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
(92,156
|
)
|
|
|
|
|
|
|
|
(92,156
|
)
|
Stock
bonus and option plan transactions
|
|
|
|
|
|
5,448
|
|
|
|
|
|
30,855
|
|
|
|
|
|
|
|
|
36,303
|
|
Balance
at December 31, 2005
|
|
$
|
147,295
|
|
$
|
39,782
|
|
$
|
1,980,893
|
|
$
|
(634,116
|
)
|
|
|
|
$
|
(44,692
|
)
|
$
|
1,489,162
|
|
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. Certain prior year balances
have
been reclassified to conform to current year presentation, including the
impact
of the discontinued operations of the Company’s Carteret, NJ facility (See Note
7 “Discontinued Operations”).
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
3 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 the 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 12, “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 12, “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. The Company has an Environmental, Health and Safety (EH&S)
department that implements and assesses compliance with policies, procedures
and
controls around the Company’s environmental exposures and possible liabilities.
These policies, procedures and
controls
are intended to assure that the Corporate EH&S department is aware of all
EH&S issues that may have a potential impact on the
Company.
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 $13.8 million as of December 31, 2005, $15.3 million as of
December 31, 2004 and $19.4 million as of December 31, 2003. With regard
to the
balance classified as bill-and-hold sales, the Company has collected $11.8
million of the outstanding balance as of February 23, 2006.
The
Company accrues for warranty costs, sales returns and other allowances, based
on
experience and other relevant factors, when sales are recognized.
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
sold to the customer 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
Income
taxes are based on income(loss) for financial reporting purposes and reflect
a
current tax liability (asset) for the estimated taxes payable (recoverable)
in
the current year tax return and changes in deferred taxes. Deferred tax assets
or liabilities are determined based on differences between financial reporting
and tax basis of assets and liabilities and are measured using enacted tax
laws
and rates. A valuation allowance is provided on deferred tax assets if it
is
determined that it is more likely than not that the asset will not be
realized.
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 and adopted by the Company on January
1,
2006.
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)
|
|
2005
|
|
2004
|
|
2003
|
|
Net
earnings — as reported
|
|
$
|
238.2
|
|
$
|
235.5
|
|
$
|
234.2
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair-value-based method for all awards, net of tax
|
|
|
(6.8
|
)
|
|
(7.4
|
)
|
|
(5.8
|
)
|
Net
earnings — pro forma
|
|
$
|
231.4
|
|
$
|
228.1
|
|
$
|
228.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share — as reported
|
|
$
|
1.98
|
|
$
|
1.91
|
|
$
|
1.87
|
|
Basic
earnings per share — pro forma
|
|
|
1.92
|
|
|
1.85
|
|
|
1.82
|
|
Diluted
earnings per share — as reported
|
|
|
1.95
|
|
|
1.88
|
|
|
1.84
|
|
Diluted
earnings per share — pro forma
|
|
|
1.89
|
|
|
1.82
|
|
|
1.79
|
|
Research
and Development Costs
Research
and development costs are charged to expense as incurred and were $108.2
million
in 2005, $99.9 million in 2004 and $93.1 million in 2003. These costs are
included within selling, administrative and other expenses in the Company’s
“Consolidated Statements of Earnings.”
New
Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes” and FASB Statement No.
3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154
requires retrospective application to prior periods’ financial statements for
voluntary changes in accounting principle unless it is impracticable. SFAS
No.
154 is effective for accounting changes and corrections of errors made in
fiscal
years beginning after June 1, 2005. This did not impact the Company in
2005.
At
the
March 17, 2005 EITF (Emerging Issues Task Force) meeting, the Task Force
reached
a consensus on Issue No. 04-06, “Accounting for Stripping Costs Incurred during
Production in the Mining Industry.” In the
mining
industry, companies may be required to remove overburden and other mine waste
materials to access mineral deposits. The costs of removing overburden and
waste
materials are referred to as stripping costs. During the development of a
mine
(before production begins), it is generally accepted in practice that stripping
costs are capitalized as part of the depreciable cost of building, developing,
and constructing the mine. Those capitalized costs are typically amortized
over
the productive life of the mine using the units of production method. A mining
company may continue to remove overburden and waste materials, and therefore
incur stripping costs, during the production phase of the mine. The EITF
has
reached a consensus that stripping costs incurred during the production phase
of
a mine are variable production costs that should be included in the costs
of the
inventory produced during the period that the stripping costs are incurred.
The
Board ratified this consensus at its March 30, 2005 meeting. The guidance
in
this consensus will be effective for financial statements issued for fiscal
years beginning after December 15, 2005. The Company adopted EITF No. 04-06
on
January 1, 2006 and is in the process of implementing it. The Company expects
to
record a charge to equity of approximately $29 million in the first quarter
of
2006 as a result of the adoption of EITF No. 04-06. The Company does not
expect
this standard to have an effect on the Company’s future cash flows.
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. The Company adopted
this
statement on January 1, 2006. Prior to adoption, the Company measured
compensation costs related to share-based payments under APB No. 25, as allowed
by SFAS No. 123, and provided 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 will be using the Modified-Prospective transition
method. Under this method, compensation cost is recognized beginning with
the
effective date (a) based on the requirements of SFAS No. 123(R) for all
share-based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to
the
effective date of Statement 123(R) that remain unvested on the effective
date.
The future impact on the Company's "Consolidated Statements of Earnings"
is
expected to approximate the "Pro Forma Information" provided on page 51.
The
Statement also requires the Company to include the benefits of tax deductions
in
excess of recognized compensation expense to be reported as financing activity
in the Company's "Consolidated Statements of Cash Flows." The future impact
on
the Company's "Consolidated Statements of Cash Flows" cannot be accurately
predicted.
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 either cash flow hedges
or
net investment 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 maintain an effective control environment 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,
2005, 2004 and 2003, 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, 2005, 2004 and 2003, the Company reported after-tax
gains of $1.4 million and losses of $1.5 million and $1.7 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 gains of $1.4 million as of December 31, 2005 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, 2005,
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 foreign currency derivative 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 other
commodity 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, 2005, the Company reported an after-tax gain of $6.8
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 losses of $0.3 million and gains of $1.6 million in
accumulated other comprehensive income for the years ended December 31, 2004
and
2003, respectively. It is expected that the cumulative gain of $6.5 million
as
of December 31, 2005 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 commodity hedges due to the probability of the original forecasted
transactions not occurring. As of December 31, 2005, the maximum length of
time
over which the Company has hedged its exposure to movements in commodity
prices
for forecasted transactions is 13 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 12, “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 three interest rate swap agreements with a total notional value
of
$150 million maturing in May 2013. 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, 2005, 2004
and
2003.
In
December 2005, the Company entered into an interest rate derivative contract,
referred to as a Forward Rate Agreement (FRA) contract. This derivative
economically hedged the Company’s interest rate exposure for the
May
15,
2006 Euribor rate reset under two US dollar to euro cross-currency interest
rate
derivative swap agreements.
In
September 2005, the Company terminated two interest rate swap agreements,
with a
total notional value of $100 million maturing in August 2006, that were
designated as fair value hedges. The accumulated gain of $0.4 million resulting
from the termination of these two interest rate swap agreements will be
amortized to earnings over the remaining term of the underlying debt
instrument.
In
June
2005, the Company terminated two interest rate swap agreements, with a total
notional value of $120 million maturing in June 2028, that were designated
as
fair value hedges. The termination of these two interest rate swap agreements
resulted in an accumulated gain of $20.1 million that will be amortized to
earnings over the remaining term of the underlying debt instrument.
In
January 2005, the Company entered into two additional FRA contracts, which
economically hedged the Company’s interest rate exposure for the May 16, 2005
and the June 1, 2005 LIBOR rate reset under two pre-existing interest rate
swap
agreements. The FRA contracts were terminated in March 2005 due to favorable
market conditions and the gain was reflected in earnings.
In
January 2005, the Company entered into a derivative agreement with a total
notional value of $74.7 million maturing in January 2012. This agreement
effectively changes a rental obligation that varies directly with short-term
commercial paper rates to a fixed payment obligation. The total notional
value
and other terms of this agreement are equal to the rental payments and other
terms of an operating lease for machinery and equipment used in the Process
Technologies segment that was renewed in January 2005. This derivative is
designated as a cash flow hedge, and as such, it is marked-to-market with
the
gain/loss reflected in other comprehensive income. As of December 31, 2005,
the
Company reported an after tax gain of $1.2 million in accumulated other
comprehensive income. There was no gain or loss recorded to earnings as a
result
of the discontinuance of cash flow hedges due to the probability of the original
forecasted transactions not occurring or hedge ineffectiveness.
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.
In
March
2004, the Company entered into a FRA contract, which hedged the Company’s
interest rate exposure for the May 15, 2004 LIBOR rate reset under a
pre-existing interest rate swap agreement.
Net
Investment Hedges
The
Company issued three tranches (the first tranche in April 2004, the second
tranche in August 2004 and the third tranche in August 2005) of 5.5 billion
Japanese yen notes (approximately $50 million for each tranche) with a blended
coupon rate of 1.0% and maturity dates of April 2009. 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
represented the balance within accumulated other comprehensive income relating
to the mark-to-market of these notes. In 2005, the Company recorded an after-tax
gain of $12.8 million in comprehensive income, resulting in an after-tax
gain
balance of $5.7 million at December 31, 2005 relating to the mark-to-market
of
these notes.
In
October 2005, the Company entered into two US dollar to Euro cross-currency
interest rate derivative contracts with a total notional value of 124 million
Euro (approximately $150 million). This transaction effectively swaps the
Company’s US dollar floating rate exposure for a Euro floating rate exposure.
The notional Euro liability of this cross-currency swap is designated as
a net
investment hedge of a portion of the Company’s Euro-denominated investments, and
as such it is marked-to-market with the gain/loss reflected in accumulated
other
comprehensive income. As of December 31, 2005, the Company reported an after-tax
gain of $2.0 million in accumulated other comprehensive income.
3.
|
GOODWILL
AND OTHER 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
3 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
following information relates to acquired amortizable intangible assets (in
millions):
|
|
As
of December 31, 2005
|
|
As
of December 31, 2004
|
|
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Acquired
amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
Usage
right
|
|
$
|
19.4
|
|
$
|
6.8
|
|
$
|
22.2
|
|
$
|
6.3
|
|
Supply
agreements
|
|
|
18.1
|
|
|
7.3
|
|
|
19.0
|
|
|
6.3
|
|
Technology
licenses
|
|
|
11.5
|
|
|
4.8
|
|
|
9.1
|
|
|
3.5
|
|
Other
|
|
|
23.6
|
|
|
4.0
|
|
|
3.7
|
|
|
2.3
|
|
Total
|
|
$
|
72.6
|
|
$
|
22.9
|
|
$
|
54.0
|
|
$
|
18.4
|
|
Yearly
2005 amortization expense was in excess of the change in the accumulated
amortization of intangible assets balance as of December 31, 2005 due to
the
negative impact of foreign exchange rate changes. The increase in the gross
carrying amount balance as of December 31, 2005 represents approximately
$24
million of additional intangibles primarily related to acquisitions, offset
by a
$4.8 million negative impact of foreign exchange rates. Intangible assets
related to acquisitions include customer relationships and technology licenses.
Intangible assets with indefinite useful lives, and thus not subject to
amortization, are $2.1 million and $1.9 million at December 31, 2005 and
2004,
respectively. Total accumulated amortization for goodwill amounted to $66.5
million and $65.5 million at December 31, 2005 and 2004, respectively. As
of
December 31, 2005, the estimated aggregate amortization expense for each
of the
five succeeding years is as follows (in millions):
Estimated
Annual Amortization Expense:
|
|
2006
|
|
$
|
5.6
|
|
2007
|
|
|
5.6
|
|
2008
|
|
|
5.6
|
|
2009
|
|
|
5.4
|
|
2010
|
|
|
5.0
|
|
The
following table represents the changes in the carrying amount of goodwill
for
the years ended December 31, 2005 and 2004 (in millions):
|
|
Environmental
Technologies
|
|
Process
Technologies
|
|
Appearance
& Performance Technologies
|
|
All
Other
|
|
Total
|
|
Balance
as of January 1, 2004
|
|
$
|
13.7
|
|
$
|
107.5
|
|
$
|
153.4
|
|
$
|
0.5
|
|
$
|
275.1
|
|
Goodwill
additions (a)
|
|
|
6.0
|
|
|
—
|
|
|
47.4
|
|
|
—
|
|
|
53.4
|
|
Foreign
currency translation adjustment
|
|
|
0.7
|
|
|
0.6
|
|
|
1.7
|
|
|
—
|
|
|
3.0
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
—
|
|
|
(0.7
|
)
|
Balance
as of December 31, 2004
|
|
$
|
20.4
|
|
$
|
108.1
|
|
$
|
201.8
|
|
$
|
0.5
|
|
$
|
330.8
|
|
Goodwill
additions (b)
|
|
|
—
|
|
|
1.5
|
|
|
51.8
|
|
|
29.7
|
|
|
83.0
|
|
Purchase
accounting adjustments (c)
|
|
|
—
|
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
(4.5
|
)
|
Foreign
currency translation adjustment
|
|
|
(1.7
|
)
|
|
—
|
|
|
(5.6
|
)
|
|
—
|
|
|
(7.3
|
)
|
Goodwill
impairment (d)
|
|
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.3
|
)
|
Balance
as of December 31, 2005
|
|
$
|
17.4
|
|
$
|
109.6
|
|
$
|
243.5
|
|
$
|
30.2
|
|
$
|
400.7
|
|
|
(a)
|
Goodwill
additions amount includes $6.0 million related to the Company’s
acquisition of Platinum Sensors, SrL during the second quarter
of 2004 and
$47.4 million related to the Company’s acquisition of The Collaborative
Group, Ltd., including its wholly owned subsidiary Collaborative
Laboratories, Inc., during the third quarter of 2004. These amounts
represent the excess of the purchase price paid over the fair market
value
of the net assets acquired.
|
|
(b)
|
Goodwill
additions amount includes $51.8 million related to the Company’s
acquisition of Coletica, S.A. during the first quarter of 2005,
$29.7
million related to the acquisition of Almatis AC, Inc. during the
third
quarter and $1.5 million related to the acquisition of the catalyst
business of Nanjing Chemical Industry Corporation (NCIC) during
the second
quarter of 2005. These amounts represent the excess of the purchase
price
paid over the fair market value of the net assets acquired. The
Company is
engaged in the process of assessing the fair value of these assets
and
liabilities, and thus the allocation of the purchase price is subject
to
revision.
|
|
(c)
|
Purchase
accounting adjustments include $4.5 million related to a revision
of the
allocation of the purchase price of the Collaborative Group, Ltd.,
including its wholly owned subsidiary Collaborative Laboratories,
Inc. All
adjustments were made in accordance with SFAS No. 141, “Business
Combinations.”
|
|
(d)
|
Goodwill
impairment charge of $1.3 million was recorded by the Company in
the
second quarter of 2005, in accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” related to the Company’s discontinuance of
manufacturing operations at its Carteret, New Jersey
facility.
|
4.
|
ACCOUNTING
FOR ASSET RETIREMENT
OBLIGATIONS
|
The
Company’s asset retirement obligations primarily relate to kaolin mining
operations of its Appearance and Performance Technologies segment. In order
to
provide kaolin-based products to the Company’s customers and the Process
Technologies segment, the Company engages in kaolin mining operations. The
kaolin mining process includes exploration, topsoil and overburden removal,
extraction of kaolin and the subsequent reclamation of mined areas. The Company
has a legal obligation to reclaim mined areas under state regulations. Prior
to
adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations,” the
Company expensed reclamation costs as the mined areas were
reclaimed.
At
January 1, 2003, the Company recognized transition amounts for existing asset
retirement obligation liabilities, associated capitalizable costs and
accumulated depreciation. A transition charge of $3.7 million ($2.3 million
after tax or $0.02 per share on a diluted basis) was recorded on January
1, 2003
as the cumulative effect of an accounting change.
The
following table represents the change in the Company’s asset retirement
obligation liability for the years ended December 31, 2005 and 2004 (in
millions):
|
|
2005
|
|
2004
|
|
Asset
retirement obligation at beginning of year
|
|
$
|
10.8
|
|
$
|
10.5
|
|
Liability
recognized during the twelve-month period ended December
31
|
|
|
0.5
|
|
|
1.2
|
|
Accretion
expense
|
|
|
0.6
|
|
|
0.6
|
|
Payments
|
|
|
(1.9
|
)
|
|
(1.5
|
)
|
Asset
retirement obligation at end of year
|
|
$
|
10.0
|
|
$
|
10.8
|
|
In
September 2005, the Company acquired U.S.-based Almatis AC, Inc., formerly
the
adsorbents and catalyst business of Almatis Holdings 1.25 BV, for approximately
$65 million. Almatis AC, Inc. is a major developer and producer of alumina-based
adsorbents and purification catalysts for the natural gas, petrochemical,
compressed air and hydrogen peroxide markets. The acquisition strengthens
the
Company’s leadership position in moisture control and purification for a variety
of industries around the world. It expands the Company’s technology portfolio to
include high-purity alumina products, catalyst supports and alumina-based
adsorbents and desiccants. The Company also acquired new production
capabilities, including two manufacturing facilities in Port Allen, LA and
Vidalia, LA. The results of operations of this acquisition, integrated into
the
Ventures group of the “All Other” category, are included in the accompanying
financial statements from the date of acquisition. A portion of the purchase
price has been allocated to assets acquired based on their fair values, while
the remaining balance was recorded as goodwill. The Company is completing
its
review and determination of these fair values, and thus the allocation of
the
purchase price is subject to revision. Pro forma information is not provided
as
the impact of the acquisition does not have a material effect on the Company’s
results of operations, cash flow, or financial position.
In
June
2005, the Company acquired the syngas catalyst business of Nanjing Chemical
Industry Corporation (NCIC), a wholly owned subsidiary of SINOPEC, one of
China’s largest integrated energy and chemical companies, for approximately $20
million. As of December 31, 2005, the Company has paid approximately 70%
of the
purchase price with the remaining 30% recorded in accounts payable and expected
to be paid within the next 12 months. The Company acquired NCIC’s syngas
business operations, catalyst technology and Nanjing-based manufacturing
assets.
The acquisition supports the Company’s growth strategy and broadens the
competencies in surface and material sciences as it expands the Company’s
portfolio of served markets and applications. The results of operations of
this
acquisition, integrated into the Process Technologies segment, are included
in
the accompanying consolidated financial statements from the date of acquisition.
A portion of the purchase price has been allocated to assets acquired based
on
their fair values, while the remaining balance was recorded as goodwill.
The
Company is completing its review and determination of these fair values,
and
thus the allocation of the purchase price is subject to revision. Pro forma
information is not provided as the impact of the acquisition does not have
a
material effect on the Company’s results of operations, cash flow, or financial
position.
In
March
2005, the Company acquired a majority stake in Coletica, S.A., a French company
that develops performance-based, skin-care compounds and related technologies
for the cosmetic and personal care industry. The Company purchased 77.87%
of
Coletica’s outstanding shares for approximately €50 million ($65 million). In
the second quarter of 2005, the Company made a tender offer and acquired
the
remaining publicly held shares. The total purchase price of shares amounted
to
€65.5 million ($86 million), which
included cash acquired of approximately $13 million, for 100%
ownership. This acquisition further strengthens the Company’s position as a
leading global supplier of materials technology to the cosmetic and personal
care industries. Coletica has two facilities in Lyon, France and sales offices
in Paris, New York and Tokyo. A portion of the purchase price has been allocated
to assets acquired based on their fair values, while the remaining balance
was
recorded as goodwill. The results of operations of this acquisition, integrated
into the Appearance and Performance Technologies segment, are included in
the
accompanying consolidated financial statements from the date of acquisition.
The
Company is completing its review and determination of these fair values,
and
thus the allocation of the purchase price is subject to revision. Pro forma
information is not provided as the impact of the acquisition does not have
a
material effect on the Company’s results of operations, cash flows or financial
position.
During
the first quarter of 2005, the Company exchanged a 7.5% interest in its
Chinese
automotive catalyst operations for approximately 2.6% of N.E. Chemcat
Corporation (NECC), a publicly-traded joint venture. This transaction was
recorded as an exchange of similar productive assets in accordance with
APB 29,
“Accounting for Nonmonetary Transactions.” The Company also acquired an
additional 0.7% of NECC through a public tender offer. These transactions
increase the Company’s ownership percentage in NECC from 38.8% to 42.1%.
In
July
2004, the Company acquired The Collaborative Group, Ltd., including its
wholly
owned subsidiary Collaborative Laboratories, Inc., a unique, high-growth
company, located in Setauket, New York, that provides products and services
to
the cosmetic and personal care industries for approximately $62.0 million.
This
acquisition allows the Company to create a unique combination of technical
capabilities bringing together its surface and materials science expertise
with
Collaborative’s special materials capability and in-depth, technical-application
knowledge in personal care. The transaction strengthens the Company’s position
as a leading supplier of materials technology to the cosmetic and personal
care
industries by expanding the Company’s capabilities into the growing market for
performance-based, skin-care materials and applications. The results of
operations of this acquisition, integrated into the Appearance and Performance
Technologies segment, are included in the accompanying consolidated financial
statements from the date of acquisition. A portion of the purchase price
has
been allocated to assets acquired based on their fair values, while the
remaining balance was recorded as goodwill. Pro forma information is not
provided as the impact of the acquisition does not have a material effect
on the
Company’s results of operations, cash flows or financial
position.
In
April
2004, the Company acquired Platinum Sensors, SrL, a worldwide developer and
manufacturer of temperature-sensing technologies for approximately $7 million.
This acquisition strengthens the Company’s leading position in temperature
sensing by expanding the Company’s technology-development capabilities and
geographic reach. Platinum Sensors is based in Rome, Italy, and also has
facilities in Singapore. The results of operations of this acquisition,
integrated into the Environmental Technologies segment, are included in the
accompanying consolidated financial statements from the date of acquisition.
A
portion of the purchase price has been allocated to assets acquired based
on
their fair values, while the remaining balance was recorded as goodwill.
Pro
forma information is not provided as the impact of the acquisition does not
have
a material effect on the Company’s results of operations, cash flows or
financial position.
6.
|
SPECIAL
CHARGES AND CREDITS
|
In
the
fourth quarter of 2004, the Company recorded a net pretax charge totaling
$5.3
million ($3.3 million after tax) primarily related to a management consolidation
productivity initiative in the Appearance and Performance Technologies segment,
as well as the reversal of prior year special charge accruals in the
Environmental Technologies segment and the “All Other” category. The amount of
the charge reported in the Appearance and Performance Technologies segment
was
$6.6 million ($4.1 million after tax). Credit amounts of $0.2 million ($0.1
million after tax) and $1.1 million ($0.7 million after tax) were reported
in
the Environmental Technologies segment and the “All Other” category,
respectively. These amounts are included in the “Special charge (credit), net”
line in the “Consolidated Statements of Earnings.”
In
the
Appearance and Performance Technologies segment, the charge of $6.6 million
relates to management’s consolidation of certain manufacturing operations to
improve efficiency at its Middle Georgia operations, which manufacture
kaolin-based products. These actions are consistent with the Company’s ongoing
efforts to simplify processing and manage product mix to maximize profitability
and growth opportunities. These actions resulted in the recording of a $1.3
million employee severance charge and an impairment charge of $5.3 million
for
idled equipment. The employee severance charges related to the actual reduction
of 25 salaried employees. The actions undertaken by the Company in relation
to
this charge have been completed.
In
the
Environmental Technologies segment, the credit of $0.2 million relates to
the
reversal of the remaining liability associated with the 2003 charge resulting
from the closure of the segment’s Coleford, United Kingdom plant, discussed
below. The actions associated with this charge have been completed.
In
the
“All Other” category, the credit of $1.1 million relates to the reversal of a
portion of the remaining liability associated with the 2000 charge resulting
from the Company’s decision to exit from its desiccant-based, climate control
systems business. Of this credit amount, $0.7 million relates to warranty
reserve reversals due to expiration of warranties (see Note 8, “Guarantees and
Warranties”).
In
2003,
the Company entered into a settlement agreement, releasing a claim the Company
had brought against Research Corporation and Research Corporation Technologies
in exchange for payment of $38.0 million. Accordingly, the Company recorded
a
gain of $28.4 million ($17.6 million after tax) in the first quarter of 2003,
net of legal fees and the portion of the settlement related to future royalties.
This gain was included in the Company’s “All Other” category and in the “Special
charge (credit), net” line in the “Consolidated Statements of Earnings.”
Also
in
2003, the Company recorded charges totaling $8.7 million ($5.6 million after
tax) primarily related to a management consolidation and productivity initiative
in the Environmental and Process Technologies segments and within the “All
Other” category. The amounts of $5.3 million ($3.5 million after tax), $2.6
million ($1.6 million after tax) and $0.8 million ($0.5 million after tax)
were
reported in the Environmental Technologies segment, the Process Technologies
segment and the “All Other” category, respectively. These charges are included
in the “Special charge (credit), net” line in the “Consolidated Statements of
Earnings.”
In
the
Environmental Technologies segment, the charge of $5.3 million primarily
relates
to the closure of the segment’s Coleford, United Kingdom plant ($2.8 million)
and employee severance costs related to productivity initiatives ($2.5 million).
The employee severance charges include an actual reduction of 96 salaried
and
eight hourly employees. As a result of closing this plant, the segment has
outsourced the canning operations associated with this business. The closure
resulted in an impairment charge of $1.5 million to write down fixed assets
and
other exit-related costs of $1.3 million. The actions related to this charge
have been completed.
In
the
Process Technologies segment, the charge of $2.6 million primarily relates
to
employee severance and the termination of an agency agreement associated
with
sales to the chemical-process market. The employee severance charges relate
to
the actual reduction of 13 salaried employees. Selling activities associated
with the termination of this agency agreement will be covered by the segment’s
internal sales force. The actions related to this charge have been
completed.
In
the
“All Other” category, the charge of $0.8 million was for employee severance
costs related to the actual reduction of six salaried employees. The actions
related to this charge have been completed.
In
2003,
the Company recorded a charge of $7.8 million ($4.8 million after tax) for
the
fair value of the remaining lease costs of certain minerals-storage facilities
no longer needed because of productivity initiatives. As of June 30, 2003,
the
Company’s Appearance and Performance Technologies segment had ceased using these
facilities and, accordingly, a provision for the fair value of remaining
lease
costs was reported in the “Special charge (credit), net” line in the
“Consolidated Statements of Earnings.”
The
following table sets forth the components of the Company’s reserves for
restructuring costs, excluding reserves for the Company’s Carteret, NJ facility
that has been discontinued (see Note 7 “Discontinued Operations”):
RESTRUCTURING
RESERVES
(in
millions)
|
|
Separations
|
|
Other
|
|
|
|
|
|
Pre-2004
|
|
2004
|
|
Pre-2004
|
|
2004
|
|
Total
|
|
Balance
at December 31, 2002
|
|
$
|
0.5
|
|
$
|
—
|
|
$
|
4.3
|
|
$
|
—
|
|
$
|
4.8
|
|
Cash
spending
|
|
|
(5.2
|
)
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
(9.7
|
)
|
Provision
|
|
|
5.3
|
|
|
—
|
|
|
3.3
|
|
|
—
|
|
|
8.6
|
|
Reserve
reversals
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.6
|
)
|
Reserve
reclasses
|
|
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
Balance
at December 31, 2003
|
|
|
0.3
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.3
|
|
Cash
spending
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(0.6
|
)
|
|
—
|
|
|
(0.9
|
)
|
Provision
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
Reserve
reversals
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.5
|
)
|
Reserve
reclasses
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
Balance
at December 31, 2004
|
|
|
—
|
|
|
1.2
|
|
|
0.7
|
|
|
—
|
|
|
1.9
|
|
Cash
spending
|
|
|
—
|
|
|
(1.1
|
)
|
|
(0.7
|
)
|
|
—
|
|
|
(1.8
|
)
|
Provision
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance
at December 31, 2005
|
|
$
|
—
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
0.1
|
|
7.
|
DISCONTINUED
OPERATIONS
|
In
the
second quarter of 2005, the Company committed to a plan to discontinue
manufacturing operations at its Carteret, New Jersey facility, which
manufactured specialty precious metal products. Operations at the Carteret,
New
Jersey facility ceased in the third quarter. In accordance with SFAS No.
144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company
has classified the results of this manufacturing operation as Discontinued
Operations in the accompanying Consolidated Statements of Earnings. As of
December 31, 2005, the Company recorded charges related to the discontinuance
of
operations at its Carteret facility of $11.2 million. These charges consist
of
$4.8 million related to severance and other employee expenses, $3.3 million
related to the impairment of assets, $1.3 million related to the impairment
of
goodwill and $1.8 million related to work-in-process inventory not expected
to
be completed or sold. As of December 31, 2005, the Company made payments
of
approximately $3.8 million, resulting in a reserve provision balance of $1
million.
Net
sales
from discontinued operations and operating losses from discontinued operations
were as follows (in millions):
|
|
2005
|
|
2004
|
|
2003
|
|
Net
sales
|
|
$
|
21.1
|
|
$
|
30.3
|
|
$
|
26.7
|
|
Closure
costs
|
|
|
(11.2
|
)
|
|
—
|
|
|
—
|
|
Other
operating loss
|
|
|
(1.9
|
)
|
|
(2.7
|
)
|
|
(4.7
|
)
|
Total
operating loss
|
|
|
(13.1
|
)
|
|
(2.7
|
)
|
|
(4.7
|
)
|
After-tax
loss from discontinued operations
|
|
|
(8.1
|
)
|
|
(1.7
|
)
|
|
(2.9
|
)
|
The
assets and liabilities related to the Carteret manufacturing operation have
been
aggregated and included within “Other current assets,” “Other intangible and
noncurrent assets” and “Other current liabilities” in the accompanying “Consolidated
Balance Sheets.” An analysis
of
these assets and liabilities follows (in millions):
|
|
2005
|
|
2004
|
|
Receivables,
net
|
|
$
|
0.1
|
|
$
|
3.4
|
|
Inventories
|
|
|
—
|
|
|
1.7
|
|
Other
current assets
|
|
|
—
|
|
|
0.2
|
|
Current
assets from discontinued operations
|
|
$
|
0.1
|
|
$
|
5.3
|
|
Property,
plant and equipment, net
|
|
|
—
|
|
|
8.3
|
|
Noncurrent
assets from discontinued operations
|
|
|
—
|
|
$
|
8.3
|
|
Assets
from discontinued operations
|
|
$
|
0.1
|
|
$
|
13.6
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
—
|
|
$
|
0.5
|
|
Accrued
expenses
|
|
|
1.0
|
|
|
0.5
|
|
Liabilities
from discontinued operations
|
|
$
|
1.0
|
|
$
|
1.0
|
|
8.
|
GUARANTEES
AND WARRANTIES
|
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, 2005, the aggregate outstanding amount
of
letters of credit supporting such obligations amounted to $121.4 million,
of
which $114.7 million will expire in less than one year, $1.0 million will
expire
in two to three years, $0.2 million will
expire
in
four to five years and $5.5 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 accrues for anticipated product warranty expenses on certain products.
Accruals for anticipated warranty liabilities are recorded based upon a review
of historical warranty claims experience and other relevant data. Adjustments
are made to accruals as claim data and historical experience warrant. The
Company’s accrual is primarily comprised of warranty liabilities within the
non-automotive business of the Environmental Technologies segment.
The
changes in the Company’s product warranty reserves for the years ended December
31, 2005, 2004 and 2003 are as follows (in millions):
|
|
2005
|
|
2004
|
|
2003
|
|
Balance
at beginning of year
|
|
$
|
8.7
|
|
$
|
10.0
|
|
$
|
11.1
|
|
Payments
|
|
|
(2.2
|
)
|
|
(4.5
|
)
|
|
(4.0
|
)
|
Provision
|
|
|
0.4
|
|
|
5.4
|
|
|
2.3
|
|
Reclass
of reserve (a)
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
Reversal
of reserve (b)
|
|
|
(2.7
|
)
|
|
(2.2
|
)
|
|
(0.2
|
)
|
Balance
at end of year
|
|
$
|
4.2
|
|
$
|
8.7
|
|
$
|
10.0
|
|
(a)
|
In
2003, as a result of FASB Interpretation No. 45, “Guarantor’s Accounting
and Disclosure Requirements for Guarantees,” the Company reclassed $0.8
million from its restructuring reserves to its product warranty
reserves
related to the Company’s residual, desiccant-based, climate control
systems business that was exited in
2000.
|
(b)
|
In
2005, the Company reversed $2.7 million of warranty accruals ($1.5
million
due to favorable experience related to the Environmental Technologies
segment and $1.2 million due to expiration of warranties). In 2004,
the
Company reversed a $2.2 million warranty accrual due to favorable
experience ($1.5 million related to the Environmental Technologies
segment
and $0.7 million due to the expiration of warranties related to
the
Company’s residual, desiccant-based, climate control systems business,
which was provided for in the 2000 special charge provision). In
2003, the
Company reversed $0.2 million warranty accrual due to the expiration
of a
warranty.
|
Inventories
at December 31, 2005 and 2004 consist of the following:
INVENTORIES
(in
millions)
|
|
2005
|
|
2004
|
|
Raw
materials
|
|
$
|
174.4
|
|
$
|
137.2
|
|
Work
in process
|
|
|
54.6
|
|
|
49.3
|
|
Finished
goods
|
|
|
287.7
|
|
|
253.8
|
|
Precious
metals
|
|
|
15.9
|
|
|
17.7
|
|
Total
inventories
|
|
$
|
532.6
|
|
$
|
458.0
|
|
The
majority of the Company’s physical metal is carried in the committed metal
positions line on the balance sheet at fair value with the remainder carried
in
the inventory line at historical cost. The inventory portion of precious
metals
is stated at LIFO cost. The market value of the precious metals recorded
at LIFO
exceeded cost by $125.7 million and $70.8 million at December 31, 2005 and
2004,
respectively. Net earnings include after-tax gains of $1.5 million in 2005,
$1.5
million in 2004 and $3.1 million in 2003 from the sale of precious metals
accounted for under the LIFO method.
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. Metals held for the accounts of customers and suppliers are not reflected
in the Company’s financial statements.
10. |
PROPERTY,
PLANT AND
EQUIPMENT
|
Property,
plant and equipment at December 31, 2005 and 2004 consist of the following
(in
millions):
|
|
2005
|
|
2004
|
|
Land
|
|
$
|
46.9
|
|
$
|
36.4
|
|
Buildings
and building improvements
|
|
|
311.2
|
|
|
280.2
|
|
Machinery
and equipment
|
|
|
1,824.4
|
|
|
1,749.5
|
|
Construction
in progress
|
|
|
87.0
|
|
|
59.6
|
|
Mineral
deposits and mine development costs
|
|
|
87.5
|
|
|
87.7
|
|
|
|
|
2,357.0
|
|
|
2,213.4
|
|
Accumulated
depreciation and depletion
|
|
|
1,420.8
|
|
|
1,310.6
|
|
Property,
plant and equipment, net
|
|
$
|
936.2
|
|
$
|
902.8
|
|
Mineral
deposits and mine development costs consist of industrial mineral reserves
including kaolin, attapulgite and mica. The Company does not own any mining
reserves or conduct any mining operations with respect to platinum, palladium
or
other metals. The Company capitalized interest of $3.0 million in 2005, $2.4
million in 2004 and $3.0 million in 2003.
The
Company has investments in affiliates that are accounted for under the equity
method. These investments are N.E. Chemcat Corporation (NECC),
Heesung-Engelhard, H. Drijfhout & Zoon’s Edelmetaalbedrijen (HDZ) and
Prodrive-Engelhard. NECC is a 42.1%-owned, publicly traded Japanese corporation
and a leading producer of automotive and chemical catalysts, electronic
chemicals and other precious-metals-based products in Japan. 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. As of December 31, 2005, the Engelhard-CLAL joint venture
was
substantially liquidated. Prodrive-Engelhard, a 50%-owned joint venture in
the
United States, specializes in the design, development and testing of vehicle
emission systems.
During
the first quarter of 2005, the Company exchanged a 7.5% interest in its Chinese
automotive catalyst operations for approximately 2.6% of NECC. This transaction
was recorded as an exchange of similar productive assets in accordance with
APB29, “Accounting for Nonmonetary Transactions.” The Company also acquired an
additional 0.7% of NECC through a public tender offer. These transactions
increased the Company’s ownership percentage in NECC from 38.8% to
42.1%.
The
unaudited financial information below represents an aggregation of the Company’s
nonsubsidiary affiliates, excluding HDZ, on a 100% basis, unless otherwise
noted:
FINANCIAL
INFORMATION
(unaudited)
(in millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Earnings
data:
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
759.3
|
|
$
|
638.1
|
|
$
|
483.3
|
|
Gross
profit
|
|
|
176.9
|
|
|
157.4
|
|
|
138.1
|
|
Income
from continuing operations
|
|
|
68.1
|
|
|
65.8
|
|
|
43.4
|
|
Net
earnings
|
|
|
68.1
|
|
|
65.8
|
|
|
43.4
|
|
Engelhard’s
equity in net earnings
|
|
|
32.5
|
|
|
29.7
|
|
|
19.8
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
420.1
|
|
$
|
434.8
|
|
$
|
345.1
|
|
Noncurrent
assets
|
|
|
227.0
|
|
|
206.8
|
|
|
198.3
|
|
Current
liabilities
|
|
|
159.5
|
|
|
166.8
|
|
|
125.6
|
|
Noncurrent
liabilities
|
|
|
36.6
|
|
|
55.3
|
|
|
51.5
|
|
Net
assets
|
|
|
451.0
|
|
|
419.5
|
|
|
366.3
|
|
Engelhard’s
equity investment
|
|
|
196.0
|
|
|
177.0
|
|
|
152.5
|
|
The
Company’s share of undistributed earnings of affiliated companies included in
consolidated retained earnings was $109.0 million, $91.8 million and $75.8
million in 2005, 2004 and 2003, respectively. Dividends from affiliated
companies, excluding proceeds from HDZ, were $15.3 million in 2005, $13.7
million in 2004 and $5.0 million in 2003.
In
2005
and 2004 the Company recorded a loss of $0.2 million ($0.1 million after
tax)
and $0.7 million ($0.4 million after tax), respectively, related to Plug
Power,
a non-equity investment in fuel-cell developer Plug Power, Inc. This loss
represents the mark-to-market adjustment of this investment, classified as
trading, to its fair value, based on quoted market prices, in accordance
with
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities.”
12.
|
COMMITTED
METAL POSITIONS AND HEDGED METAL
OBLIGATIONS
|
(in
millions) |
|
December
31, 2005
|
|
December
31, 2004
|
|
Committed
metal positions were comprised of the following:
|
|
|
|
|
|
Metals
in a net spot long position economically hedged with derivatives
(primarily forward sales)
|
|
$
|
572.2
|
|
$
|
324.1
|
|
Fair
value of hedging derivatives in a “gain” position
|
|
|
8.8
|
|
|
14.2
|
|
Unhedged
metal positions, net (see analysis below)
|
|
|
72.1
|
|
|
19.3
|
|
Fair
value of metals received with prices to be determined, net of hedged
spot
sales
|
|
|
251.9
|
|
|
99.9
|
|
Total
committed metal positions
|
|
$
|
905.0
|
|
$
|
457.5
|
|
Both
spot
metal positions and derivative instruments are stated at fair value. Fair
value
is based on relevant published market prices. The following table sets forth
the
Company’s unhedged metal positions included in the “Committed metal positions”
line on the Company’s “Consolidated Balance Sheets”:
Metal
Positions Information (in millions):
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
Net
position
|
|
Value
|
|
Net
position
|
|
Value
|
|
Platinum
group metals
|
|
|
Long
|
|
$
|
66.3
|
|
|
Long
|
|
$
|
19.4
|
|
Gold
|
|
|
Long
|
|
|
3.8
|
|
|
Flat
|
|
|
—
|
|
Silver
|
|
|
Short
|
|
|
(1.8
|
)
|
|
Short
|
|
|
(0.9
|
)
|
Base
metals
|
|
|
Long
|
|
|
3.8
|
|
|
Long
|
|
|
0.8
|
|
Unhedged
metal positions, net
|
|
|
|
|
$
|
72.1
|
|
|
|
|
$
|
19.3
|
|
Committed
metal positions include significant advances made for the purchase of precious
metals delivered to the Company, but for which final purchase price has not
yet
been determined. As of December 31, 2005 and 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 $138.9 million and
$49.9 million, respectively, and is included in accounts payable.
(in
millions) |
|
December
31, 2005
|
|
December
31, 2004
|
|
Hedged
metal obligations were comprised of the following:
|
|
|
|
|
|
Metals
in a net spot short position economically hedged with derivatives
(primarily forward purchases) - represents a payable for the return
of
spot metal to counterparties
|
|
$
|
611.5
|
|
$
|
265.1
|
|
Fair
value of hedging derivatives in a “loss” position
|
|
|
29.3
|
|
|
27.8
|
|
Total
hedged metal obligations
|
|
$
|
640.8
|
|
$
|
292.9
|
|
At
December 31, 2005 and December 31, 2004, hedged metal obligations relating
to
1,272,994 and 603,330 troy ounces of gold, respectively, were outstanding.
These
quantities were sold short on a spot basis generating cash approximating
$619
million and $266 million, respectively. These spot sales were hedged with
forward purchases for the same number of ounces at an average price of $486.22
at December 31, 2005 and $441.23 at December 31, 2004. Unless a forward
counterparty failed to perform, there was no risk of loss in the event prices
rose. All counterparties for such transactions are investment
grade.
Derivative
metal and foreign currency instruments are used to hedge metal positions
and
obligations. As of December 31, 2005, 98% of these instruments have settlement
terms of less than one year, with the remaining instruments expected to settle
within 54 months. The notional value of these derivative metal and foreign
currency instruments is presented below:
Metal
Hedging Instruments (in millions):
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
Buy
|
|
Sell
|
|
Buy
|
|
Sell
|
|
Metal
forwards/futures
|
|
$
|
1,022.6
|
|
$
|
791.4
|
|
$
|
625.2
|
|
$
|
662.6
|
|
Eurodollar
futures
|
|
|
89.2
|
|
|
95.9
|
|
|
11.2
|
|
|
136.6
|
|
Swaps
|
|
|
37.5
|
|
|
18.8
|
|
|
31.2
|
|
|
9.8
|
|
Options
|
|
|
10.0
|
|
|
7.5
|
|
|
3.9
|
|
|
—
|
|
Foreign
exchange forwards/futures - Japanese yen
|
|
|
—
|
|
|
70.2
|
|
|
—
|
|
|
130.8
|
|
Foreign
exchange forwards/futures - Euro
|
|
|
—
|
|
|
39.0
|
|
|
—
|
|
|
23.4
|
|
Foreign
exchange forwards/futures - Other
|
|
|
4.5
|
|
|
—
|
|
|
5.5
|
|
|
—
|
|
13.
|
FINANCIAL
INSTRUMENTS
|
The
Company’s nonderivative financial instruments consist primarily of cash in
banks, temporary investments, accounts receivable and debt. The fair value
of
financial instruments in working capital approximates book value. The fair
value
of long-term debt and current maturities of long-term debt was $564.2 million
as
of December 31, 2005 and $520.8 million as of December 31, 2004 based on
prevailing interest rates at those dates, compared with a book value of $551.3
million as of December 31, 2005 and $513.8 million as of December 31,
2004.
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 monitors the financial condition of its customers to
help
ensure collections and to minimize losses.
Foreign
Currency Instruments
Aggregate
foreign exchange transaction gains and losses were not significant for any
year
presented. The following table sets forth, in U.S. dollars, the Company’s open
foreign exchange contracts used for hedging other than metal-related
transactions and net investment hedges as of the respective year-ends (see
Note 12, “Committed Metal Positions and Hedged Metal Obligations” and Note 2,
“Derivative
Instruments and Hedging,” for
further
detail):
FOREIGN
EXCHANGE CONTRACTS INFORMATION
(in
millions)
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
Buy
|
|
Sell
|
|
Buy
|
|
Sell
|
|
Japanese
yen
|
|
$
|
9.4
|
|
$
|
7.3
|
|
$
|
2.5
|
|
$
|
9.0
|
|
Euro
|
|
|
77.9
|
|
|
106.4
|
|
|
24.5
|
|
|
40.1
|
|
Thai
baht
|
|
|
—
|
|
|
7.7
|
|
|
—
|
|
|
—
|
|
South
African rand
|
|
|
—
|
|
|
3.9
|
|
|
—
|
|
|
17.0
|
|
Brazilian
real
|
|
|
—
|
|
|
2.2
|
|
|
—
|
|
|
0.7
|
|
British
pound
|
|
|
0.3
|
|
|
41.8
|
|
|
—
|
|
|
0.5
|
|
Indian
rupee
|
|
|
—
|
|
|
4.4
|
|
|
—
|
|
|
0.6
|
|
Singapore
dollar
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Total
open foreign exchange contracts
|
|
$
|
87.6
|
|
$
|
173.7
|
|
$
|
27.2
|
|
$
|
67.9
|
|
None
of
these contracts exceed a year in duration. These contracts were marked-to-market
at December 31, 2005 and 2004.
14.
|
SHORT-TERM
BORROWINGS AND LONG-TERM
DEBT
|
At
December 31, 2005, the Company had a five-year revolving credit agreement
in the
amount of $800 million, expiring in March 2010. In connection with the credit
facility, the Company has agreed to certain covenants, including maintaining
a
debt-to-EBITDA ratio of less than 3:1 (as defined in the credit agreement).
At
December 31, 2005, the Company was fully compliant with all of its debt
covenants.
In
May
2005, the Company entered into a new five-year committed revolving credit
facility with three major foreign banks for RMB 270 million (approximately
$33
million). The facility is available for general corporate purposes for various
subsidiaries within China.
In
2003,
the Company entered into a seven-year committed revolving credit facility
with
two major foreign banks for $12 million relating to a plant expansion in
China.
This credit facility expires in October 2010. Facility fees are paid to both
banks for this credit line. As of December 31, 2005 and 2004, the Company
borrowed $11.3 million under this credit facility.
At
December 31, 2005 and 2004, short-term bank borrowings were $20.8 million
and
$12.0 million, respectively. At December 31, 2005, commercial paper borrowings
were $28.0 million. The Company did not hold any commercial paper borrowings
at
December 31, 2004. Weighted-average interest rates were 3.5%, 7.6% and 12.4%
during 2005, 2004 and 2003, respectively. Long-term debt due within one year
was
$120.9 million at December 31, 2005 and $0.1 million at December 31,
2004.
Unused,
uncommitted lines of credit available were $320.5 million and $355.5 million
at
December 31, 2005, and 2004, respectively. The Company’s lines of credit with
its banks are available in accordance with normal terms for prime commercial
borrowers and are not subject to commitment fees or other
restrictions.
The
Company issued three tranches (the first tranche in April 2004, the second
tranche in August 2004 and the third tranche in August 2005) of 5.5 billion
Japanese yen notes (approximately $50 million for each tranche) with a blended
coupon rate of 1.0% and maturity dates of April 2009. 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
represented the balance within accumulated other comprehensive income relating
to the mark-to-market of these notes. In 2005, the Company recorded a net
after-tax gain of $12.8 million in accumulated other comprehensive income,
resulting in an after-tax gain balance of $5.7 million at December 31, 2005
relating to the mark-to-market of these notes.
The
following table sets forth the components of long-term debt at December 31,
2005
and 2004:
DEBT
INFORMATION
(in
millions)
|
|
2005
|
|
2004
|
|
Notes,
with a weighted-average interest rate of 10.7%, due 2006
|
|
$
|
14.0
|
|
$
|
14.0
|
|
7.375%
Notes, due 2006, net of discount
|
|
|
100.3
|
|
|
101.7
|
|
6.95%
Notes, due 2028, net of discount
|
|
|
138.3
|
|
|
129.0
|
|
4.25%
Notes, due 2013, net of discount
|
|
|
140.7
|
|
|
144.0
|
|
1.10%
and 0.75% JPY Notes, due 2009, net of discount
|
|
|
140.2
|
|
|
107.0
|
|
Industrial
revenue bonds, 5.375%, due 2006
|
|
|
6.5
|
|
|
6.5
|
|
Foreign
bank loans with a weighted-average interest rate of 5.1% in 2005
and 3.8%
in 2004 due 2010
|
|
|
11.3
|
|
|
11.3
|
|
Other,
with a weighted-average rate of 7.0% in 2005 and 6.5% in 2004,due
2006-2009
|
|
|
0.1
|
|
|
0.3
|
|
|
|
|
551.4
|
|
|
513.8
|
|
Amounts
due within one year
|
|
|
120.9
|
|
|
0.1
|
|
Total
long-term debt
|
|
$
|
430.5
|
|
$
|
513.7
|
|
As
of
December 31, 2005, the aggregate maturities of long-term debt for the succeeding
five years are as follows: $120.9 million in 2006, $2.3 million in 2007,
$3.4
million in 2008, $145.8 million in 2009 and $279.0 million
thereafter.
Interest
expense increased to $33.7 million in 2005 compared with $23.7 million in
2004
due to both higher short-term borrowing rates and higher average debt levels,
partially offset by the issuance of yen-denominated notes at low interest
rates.
Higher debt levels were driven by acquisitions and working capital
requirements.
The
components of income tax expense are shown in the following table:
INCOME
TAX EXPENSE
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Current
income tax expense
|
|
|
|
|
|
|
|
Federal
|
|
$
|
23.2
|
|
$
|
25.5
|
|
$
|
21.1
|
|
State
and local
|
|
|
13.4
|
|
|
6.0
|
|
|
5.4
|
|
Foreign
|
|
|
30.2
|
|
|
33.1
|
|
|
47.8
|
|
|
|
|
66.8
|
|
|
64.6
|
|
|
74.3
|
|
Deferred
income tax expense(benefit)
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6.3
|
)
|
|
(10.5
|
)
|
|
17.1
|
|
State
and local
|
|
|
(1.1
|
)
|
|
(0.8
|
)
|
|
(6.0
|
)
|
Foreign
|
|
|
(0.3
|
)
|
|
4.1
|
|
|
(19.5
|
)
|
|
|
|
(7.7
|
)
|
|
(7.2
|
)
|
|
(8.4
|
)
|
Income
tax expense
|
|
$
|
59.1
|
|
$
|
57.4
|
|
$
|
65.9
|
|
The
foreign portion of earnings before income tax expense was $126.6 million
in
2005, $143.6 million in 2004 and $120.1 million in 2003. Taxes on income
of
foreign consolidated subsidiaries and affiliates are provided at the tax
rates
applicable to their respective foreign tax jurisdictions.
The
following table sets forth the components of the net deferred tax asset that
results from temporary differences between the amounts of assets and liabilities
recognized for financial reporting and tax purposes:
NET
DEFERRED INCOME TAX ASSET
(in
millions)
|
|
2005
|
|
2004
|
|
Deferred
tax assets
|
|
|
|
|
|
Accrued
liabilities
|
|
$
|
103.0
|
|
$
|
117.5
|
|
Noncurrent
liabilities
|
|
|
56.2
|
|
|
59.1
|
|
Unrealized
net loss - pension liability
|
|
|
60.7
|
|
|
53.5
|
|
Tax
credits/attribute carryforward amounts
|
|
|
125.3
|
|
|
121.5
|
|
Total
deferred tax assets
|
|
|
345.2
|
|
|
351.6
|
|
Valuation
allowance
|
|
|
(38.1
|
)
|
|
(44.2
|
)
|
Total
deferred tax assets, net of valuation allowance
|
|
|
307.1
|
|
|
307.4
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
Prepaid
pension expense
|
|
|
(56.7
|
)
|
|
(45.7
|
)
|
Property,
plant and equipment
|
|
|
(92.1
|
)
|
|
(88.7
|
)
|
Timing
of dealing results
|
|
|
—
|
|
|
(23.9
|
)
|
Other
assets
|
|
|
(58.2
|
)
|
|
(46.7
|
)
|
Total
deferred tax liabilities
|
|
|
(207.0
|
)
|
|
(205.0
|
)
|
Net
deferred tax asset
|
|
$
|
100.1
|
|
$
|
102.4
|
|
Deferred
income taxes reflect the tax effect of temporary differences between the
amounts
of assets and liabilities for financial reporting purposes and amounts as
measured for tax purposes. The Company will establish a valuation allowance
if
it is more likely than not that the deferred tax assets will not be realized.
The valuation allowance is reviewed and adjusted based on management’s
assessment of realizable deferred tax assets.
Net
current deferred tax assets of $102.6 million (net of a $38.1 million valuation
allowance) and $99.1 million (net of a $28.4 million valuation allowance)
at
December 31, 2005 and December 31, 2004, respectively, are
included
in other current assets in the Company’s “Consolidated Balance Sheets.” Net
noncurrent deferred tax liabilities of $2.5 million at December 31, 2005
are
included in other noncurrent liabilities in the Company’s “Consolidated Balance
Sheet.” Deferred tax assets of $3.3 million (net of a $15.8 million valuation
allowance) at December 31, 2004 are included in other intangible and noncurrent
assets in the Company’s “Consolidated Balance Sheets.”
At
December 31, 2005, the Company had approximately $1.1 million of foreign
tax
credit carryforwards of which $0.6 million will expire in 2010 and $0.5 million
will expire in 2011. The Company also had approximately $10.9 million of
research and development credits, of which $2.6 million will expire in 2022,
$3.3 million will expire in 2023, $3.0 million will expire in 2024 and $2.0
million will expire in 2025, and approximately $14.5 million of foreign net
operating losses of which $0.1 million will expire in 2006, $0.4 million
will
expire in 2007, $1.2 million will expire in 2008, $1.4 million will expire
in
2009, $2.8 million will expire in 2010 and $8.6 million will carryforward
indefinitely. Minimum tax credits at December 31, 2005 totaled approximately
$50.4 million and will carry forward indefinitely.
At
December 31, 2005, the Company had approximately $1.1 million of capital
loss
carryforwards for U.S. Federal tax purposes, which will expire in 2009, and
approximately $1.4 million of capital loss carryforwards for state tax purposes,
which expire between 2006 and 2009. Approximately $1.2 million of the state
capital loss carryforward amount is offset by a valuation allowance. The
Company
also has state net operating loss carryforwards of approximately $400 million,
$52 million of which are offset by a valuation allowance, and which expire
between 2006 and 2025. State investment, research, and other tax credit
carryforwards are approximately $29.3 million, of which $28.0 million are
offset
by a valuation allowance. These state investment, research, and other tax
credits expire between 2006 and 2013.
A
reconciliation of the difference between the Company’s consolidated income tax
expense and the expense computed at the federal statutory rate is shown in
the
following table:
CONSOLIDATED
INCOME TAX EXPENSE RECONCILIATION
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
tax expense at federal statutory rate
|
|
$
|
106.9
|
|
$
|
103.1
|
|
$
|
106.9
|
|
State
income taxes, net of federal effect
|
|
|
12.3
|
|
|
6.4
|
|
|
2.9
|
|
Percentage
depletion
|
|
|
(11.5
|
)
|
|
(17.3
|
)
|
|
(14.6
|
)
|
Equity
earnings
|
|
|
(6.8
|
)
|
|
(5.0
|
)
|
|
(0.9
|
)
|
Domestic
production deduction
|
|
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
Taxes
on foreign income which differ from U.S. statutory rate
|
|
|
5.1
|
|
|
12.4
|
|
|
19.9
|
|
Tax
credits
|
|
|
(39.3
|
)
|
|
(31.7
|
)
|
|
(51.7
|
)
|
Export
sales exclusion
|
|
|
(8.0
|
)
|
|
(8.1
|
)
|
|
(9.7
|
)
|
Valuation
allowance
|
|
|
3.0
|
|
|
(6.8
|
)
|
|
10.9
|
|
Other
items, net
|
|
|
(1.7
|
)
|
|
4.4
|
|
|
2.2
|
|
Income
tax expense
|
|
$
|
59.1
|
|
$
|
57.4
|
|
$
|
65.9
|
|
The
Company maintains reserves for taxes that may become payable in future years
as
a result of tax examinations. In 2005, the Company reduced such reserves
by $2.7
million resulting from an agreement with the Internal Revenue Service (IRS)
relating to the audit of the Company’s tax returns for 2001. Accordingly, the
favorable adjustment relating to the agreement with the IRS reduced the
Company’s effective tax rate below its normal level for the year.
The
Company intends to indefinitely reinvest earnings from certain foreign
operations. Accordingly, U.S. and non-U.S. income and withholding taxes for
which deferred taxes might otherwise be required, have not been provided
on a
cumulative amount of temporary differences (including, for this purpose,
any
difference between the tax basis in the stock of a consolidated subsidiary
and
the amount of the subsidiary’s net equity determined for financial reporting
purposes) related to investments in foreign subsidiaries of approximately
$647
million and $529 million at December 31, 2005 and 2004, respectively. The
additional U.S. and non-U.S. income and withholding tax that would arise
on the
reversal of the temporary differences could be offset, in part, by tax credits.
Because the determination of the amount of available tax credits and the
limitations imposed on annual utilization of such credits
are
subject to a highly complex series of calculations and expense allocations,
it
is impractical to estimate the amount of net income and withholding tax that
might be payable.
16.
|
RELATED
PARTY TRANSACTIONS
|
In
the
ordinary course of business, the Company has related party transactions with
its
equity affiliates, including N.E. Chemcat, HDZ, and Heesung-Engelhard. The
Company’s transactions with such entities amounted to: purchases-from of $34.8
million in 2005, $28.6 million in 2004 and $29.0 million in 2003; sales-to
of
$223.3 million in 2005, $226.6 million in 2004 and $154.5 million in 2003;
other income earned-from of $3.1 million in 2005, $2.7 million in 2004 and
$2.4
million in 2003 and metal leasing-to of $0.3 million in 2005, $0.6 million
in
2004 and $0.6 million in 2003. Net amounts due from such entities totaled
$8.8
million and $5.6 million at December 31, 2005 and 2004,
respectively.
Citibank,
N.A., a subsidiary of Citigroup Inc., which reported beneficial ownership
of
more than 5% of the Company’s Common Stock for a part of 2005, participated with
other lenders in lines of credit available to the Company under
revolving credit facilities. Citibank’s total commitment was $39,000,000 through
March 2005, none of which was drawn in 2005. In 2003 and 2004, Citibank received
initial fees of $10,000 and $6,000, respectively, for these facilities. Citibank
received annual facility fees of approximately $6,400, $35,500 and $34,000
in
2005, 2004 and 2003, respectively, for these facilities. Citigroup received
$85,000 in underwriting fees in the Company’s May 13, 2003 note offering. The
Company uses subsidiaries of Citigroup, as well as other firms, to provide
cash
management services to the Company. Fees to subsidiaries of Citigroup for
these
services aggregated less than $15,000 in 2005 and less than $30,000 in each
of
2004 and 2003. In addition, Barclays Global Investors, N.A., which reported
beneficial ownership of more than 5% of the Company’s Common Stock prior to July
2003, provides certain investment management services to the Company’s
pension plans. Fees for such services aggregated approximately $165,000 in
2005,
$156,000 in 2004 and $135,000 in 2003.
Barclays
Bank, plc, an affiliate of Barclays Global Investors, subsidiaries of Citigroup
and other firms, engage in foreign exchange and commodities transactions
with the Company in the ordinary course of business. All of these
transactions are negotiated at arm’s length as principals in competitive
markets. Foreign exchange transactions with subsidiaries of Citigroup aggregated
approximately $17,000,000 in 2005, $57,000,000 in 2004 and $126,600,000 in
2003.
Metals transactions with Barclays Bank, plc aggregated approximately
$537,000,000 in 2005, $656,000,000 in 2004 and $330,000,000 in 2003. Metals
transactions with Citigroup, Inc. aggregated approximately $145,000,000 in
2005.
In addition, during 2004 and 2003, the Company provided services in precious
metals financing transactions in which subsidiaries of Citigroup and Barclays
Bank, plc received funds from third parties. The Company received approximately
$160,000 in 2004 and $157,000 in 2003 from subsidiaries of Citigroup and
net
revenues of approximately $1,500 in 2004 and $8,000 in 2003 from these
transactions in which Barclays Bank, plc participated.
Included
in the assets held by the Company's pension trusts are approximately 65,000
and
108,000 shares of Citigroup Inc. common stock having a market value of $3.2
million and $5.2 million at December 31, 2005 and 2004, respectively. Citigroup
paid an annualized dividend of $1.76 and $1.60 per share during 2005 and
2004,
respectively. Purchases and sales of this security were made by independent
investment managers and were not material.
State
Street Bank and Trust Company (State Street), which reported beneficial
ownership of more than 5% of the Company’s Common Stock for a part of 2005,
provides asset management services for the Company’s domestic pension plans.
Plan assets under State Street’s management are $52,857,328 and $51,721,370 at
December 31, 2005 and 2004, respectively. Fees paid by the Company’s pension
plan trust totaled $26,918 and $27,635 for the years ended December 31, 2005
and
2004, respectively.
Vanguard
Group, an affiliate of Vanguard Windsor Funds, which reported beneficial
ownership of more than 5% of the Company’s Common Stock for a part of 2005,
received $97,353, $121,260 and $100,293 for administering 401(k) plans for
the
Company’s employees during 2005, 2004 and 2003, respectively.
The
Company has domestic and foreign pension plans covering substantially all
employees. Plans covering most salaried employees generally provide benefits
based on years of service and the employee’s final average
compensation.
Plans covering most hourly bargaining unit members generally provide benefits
of
stated amounts for each year of service. The Company makes contributions
to the
plans as required and to such extent contributions are currently deductible
for
tax purposes. Plan assets primarily consist of listed stocks, fixed income
securities and cash.
The
following table sets forth the plans’ funded status:
FUNDED
STATUS (in
millions)
|
|
2005
|
|
2004
|
|
CHANGE
IN PROJECTED BENEFIT OBLIGATION
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Projected
benefit obligation at beginning of year
|
|
$
|
547.3
|
|
$
|
165.2
|
|
$
|
712.5
|
|
$
|
496.2
|
|
$
|
144.3
|
|
$
|
640.5
|
|
Service
cost
|
|
|
20.1
|
|
|
4.3
|
|
|
24.4
|
|
|
18.7
|
|
|
3.2
|
|
|
21.9
|
|
Interest
cost
|
|
|
32.0
|
|
|
8.3
|
|
|
40.3
|
|
|
30.2
|
|
|
7.9
|
|
|
38.1
|
|
Plan
amendments
|
|
|
—
|
|
|
0.8
|
|
|
0.8
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Employee
contributions
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
Actuarial
losses
|
|
|
64.6
|
|
|
19.3
|
|
|
83.9
|
|
|
32.3
|
|
|
4.3
|
|
|
36.6
|
|
Benefits
paid
|
|
|
(32.4
|
)
|
|
(6.8
|
)
|
|
(39.2
|
)
|
|
(30.2
|
)
|
|
(6.6
|
)
|
|
(36.8
|
)
|
Foreign
exchange
|
|
|
—
|
|
|
(19.8
|
)
|
|
(19.8
|
)
|
|
—
|
|
|
11.5
|
|
|
11.5
|
|
Projected
benefit obligation at end of year
|
|
$
|
631.6
|
|
$
|
171.9
|
|
$
|
803.5
|
|
$
|
547.3
|
|
$
|
165.2
|
|
$
|
712.5
|
|
CHANGE
IN PLAN ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
421.8
|
|
$
|
145.6
|
|
$
|
567.4
|
|
$
|
387.9
|
|
$
|
125.2
|
|
$
|
513.1
|
|
Actual
gain on plan assets
|
|
|
47.3
|
|
|
22.1
|
|
|
69.4
|
|
|
49.2
|
|
|
11.1
|
|
|
60.3
|
|
Employer
contribution
|
|
|
54.5
|
|
|
5.0
|
|
|
59.5
|
|
|
14.9
|
|
|
5.1
|
|
|
20.0
|
|
Employee
contribution
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
Benefits
paid
|
|
|
(32.4
|
)
|
|
(6.8
|
)
|
|
(39.2
|
)
|
|
(30.2
|
)
|
|
(6.6
|
)
|
|
(36.8
|
)
|
Foreign
exchange
|
|
|
—
|
|
|
(17.0
|
)
|
|
(17.0
|
)
|
|
—
|
|
|
10.2
|
|
|
10.2
|
|
Fair
value of plan assets at end of year
|
|
$
|
491.2
|
|
$
|
149.5
|
|
$
|
640.7
|
|
$
|
421.8
|
|
$
|
145.6
|
|
$
|
567.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$
|
(140.4
|
)
|
$
|
(22.4
|
)
|
$
|
(162.8
|
)
|
$
|
(125.5
|
)
|
$
|
(19.6
|
)
|
$
|
(145.1
|
)
|
Unrecognized
net actuarial loss
|
|
|
257.1
|
|
|
51.1
|
|
|
308.2
|
|
|
214.5
|
|
|
51.8
|
|
|
266.3
|
|
Unrecognized
prior service cost
|
|
|
9.1
|
|
|
3.5
|
|
|
12.6
|
|
|
10.1
|
|
|
3.6
|
|
|
13.7
|
|
Fourth
quarter contribution
|
|
|
—
|
|
|
1.7
|
|
|
1.7
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
Prepaid
pension asset
|
|
$
|
125.8
|
|
$
|
33.9
|
|
$
|
159.7
|
|
$
|
99.1
|
|
$
|
36.3
|
|
$
|
135.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the consolidated financial statements consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$
|
54.2
|
|
$
|
33.9
|
|
$
|
88.1
|
|
$
|
47.7
|
|
$
|
36.0
|
|
$
|
83.7
|
|
Accrued
benefit liability
|
|
|
(67.8
|
)
|
|
(14.4
|
)
|
|
(82.2
|
)
|
|
(73.4
|
)
|
|
(11.4
|
)
|
|
(84.8
|
)
|
Intangible
asset
|
|
|
1.0
|
|
|
3.4
|
|
|
4.4
|
|
|
1.6
|
|
|
3.5
|
|
|
5.1
|
|
Accumulated
other comprehensive loss
|
|
|
138.4
|
|
|
11.0
|
|
|
149.4
|
|
|
123.2
|
|
|
8.2
|
|
|
131.4
|
|
Net
amount recognized
|
|
$
|
125.8
|
|
$
|
33.9
|
|
$
|
159.7
|
|
$
|
99.1
|
|
$
|
36.3
|
|
$
|
135.4
|
|
The
prepaid benefit costs of $88.1 million and $83.7 million at December 31,
2005
and December 31, 2004, respectively, and the intangible asset balances of
$4.4
million and $5.1 million at December 31, 2005 and 2004, respectively, are
included in other intangible and noncurrent assets in the Company’s
“Consolidated Balance Sheets.” The Company recorded a minimum pension liability
loss of $17.9 million ($10.7 million after tax) in 2005 and a minimum pension
liability loss of $26.8 million ($16.0 million after tax) in 2004. These
adjustments were reported in “Accumulated other comprehensive income (loss)”
within shareholders’ equity.
Included
in the Projected Benefit Obligation is an unfunded liability of $38.4 million
related to the Supplemental Retirement Program of Engelhard Corporation (SERP)
and a liability of $13.5 million related to an unfunded plan in Germany,
which
does not have funding requirements or tax benefits. Excluding these
two
liabilities,
the plan would be underfunded by $110.9 million, or 85% funded. The SERP
is an
unfunded program that provides enhanced benefits for certain executive officers,
as well as makes up for the amount that cannot be paid out of the qualified
plans due to Internal Revenue Service limitations.
The
following table sets forth certain information regarding the Plans benefit
obligations (in millions):
|
|
2005
|
|
2004
|
|
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Accumulated
Benefit Obligation
|
|
$
|
550.4
|
|
$
|
158.0
|
|
$
|
708.4
|
|
$
|
485.9
|
|
$
|
150.3
|
|
$
|
636.2
|
|
Aggregate
Projected Benefit Obligation (PBO) for those plans with PBOs in
excess of
plan assets
|
|
|
538.1
|
|
|
70.9
|
|
|
609.0
|
|
|
466.7
|
|
|
62.2
|
|
|
528.9
|
|
Aggregate
fair value of assets for those plans with PBOs in excess of plan
assets
|
|
|
390.5
|
|
|
45.0
|
|
|
435.5
|
|
|
333.4
|
|
|
41.7
|
|
|
375.1
|
|
Aggregate
Accumulated Benefit Obligation (ABO) for those plans with ABOs
in excess
of plan assets
|
|
|
419.3
|
|
|
59.9
|
|
|
479.2
|
|
|
391.1
|
|
|
50.3
|
|
|
441.4
|
|
Aggregate
fair value of assets for those plans with ABOs in excess of plan
assets
|
|
|
351.6
|
|
|
45.0
|
|
|
396.6
|
|
|
317.7
|
|
|
41.7
|
|
|
359.4
|
|
The
components of net periodic pension expense for all plans are shown in the
following table:
NET
PERIODIC PENSION EXPENSE
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Service
cost
|
|
$
|
20.1
|
|
$
|
4.3
|
|
$
|
24.4
|
|
$
|
18.7
|
|
$
|
3.2
|
|
$
|
21.9
|
|
$
|
15.6
|
|
$
|
2.9
|
|
$
|
18.5
|
|
Interest
cost
|
|
|
32.0
|
|
|
8.3
|
|
|
40.3
|
|
|
30.2
|
|
|
7.9
|
|
|
38.1
|
|
|
28.6
|
|
|
5.9
|
|
|
34.5
|
|
Expected
return on plan assets
|
|
|
(38.9
|
)
|
|
(9.8
|
)
|
|
(48.7
|
)
|
|
(38.8
|
)
|
|
(9.5
|
)
|
|
(48.3
|
)
|
|
(35.6
|
)
|
|
(6.7
|
)
|
|
(42.3
|
)
|
Amortization
of prior service cost
|
|
|
1.7
|
|
|
0.4
|
|
|
2.1
|
|
|
1.8
|
|
|
1.7
|
|
|
3.5
|
|
|
1.4
|
|
|
0.7
|
|
|
2.1
|
|
Recognized
actuarial loss
|
|
|
12.7
|
|
|
1.8
|
|
|
14.5
|
|
|
8.7
|
|
|
2.1
|
|
|
10.8
|
|
|
6.4
|
|
|
2.2
|
|
|
8.6
|
|
Net
periodic pension expense
|
|
$
|
27.6
|
|
$
|
5.0
|
|
$
|
32.6
|
|
$
|
20.6
|
|
$
|
5.4
|
|
$
|
26.0
|
|
$
|
16.4
|
|
$
|
5.0
|
|
$
|
21.4
|
|
The
Company uses September 30th as the measurement date for pension assets and
liabilities. The assumptions chosen to measure the current year’s liabilities
are also used to determine the subsequent years’ net periodic pension expense.
The following table sets forth the key weighted-average assumptions used
in
determining the worldwide projected benefit obligation:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Domestic
|
|
Foreign
|
|
Domestic
|
|
Foreign
|
|
Domestic
|
|
Foreign
|
|
Discount
rate used to determine projected benefit obligation
|
|
|
5.50
|
%
|
|
4.71
|
%
|
|
6.00
|
%
|
|
5.49
|
%
|
|
6.25
|
%
|
|
5.50
|
%
|
Discount
rate used to determine net periodic pension costs
|
|
|
6.00
|
%
|
|
5.48
|
%
|
|
6.25
|
%
|
|
5.50
|
%
|
|
6.75
|
%
|
|
5.77
|
%
|
Rate
of compensation increase used to determine projected benefit
obligation
|
|
|
3.75
|
%
|
|
3.37
|
%
|
|
3.75
|
%
|
|
3.46
|
%
|
|
3.75
|
%
|
|
3.65
|
%
|
Rate
of compensation increase used to determine net periodic pension
costs
|
|
|
3.75
|
%
|
|
3.39
|
%
|
|
3.75
|
%
|
|
3.64
|
%
|
|
3.75
|
%
|
|
3.84
|
%
|
Expected
return on plan assets
|
|
|
8.90
|
%
|
|
7.01
|
%
|
|
9.00
|
%
|
|
7.00
|
%
|
|
9.00
|
%
|
|
7.00
|
%
|
The
Company’s weighted-average asset allocations at December 31, 2005 and 2004 by
asset category are as follows:
|
|
2005
|
|
2004
|
|
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
Equity
Securities
|
|
|
72
|
%
|
|
53
|
%
|
|
67
|
%
|
|
70
|
%
|
|
44
|
%
|
|
64
|
%
|
Debt
Securities
|
|
|
27
|
%
|
|
47
|
%
|
|
32
|
%
|
|
29
|
%
|
|
56
|
%
|
|
35
|
%
|
Other
|
|
|
1
|
%
|
|
—
|
|
|
1
|
%
|
|
1
|
%
|
|
—
|
|
|
1
|
%
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The
following benefit payments, which reflect expected future service, are expected
to be paid (in millions):
Year(s)
|
|
Domestic
|
|
Foreign
|
|
Total
|
|
2006
|
|
$
|
31.5
|
|
$
|
6.0
|
|
$
|
37.5
|
|
2007
|
|
|
33.1
|
|
|
6.2
|
|
|
39.3
|
|
2008
|
|
|
34.3
|
|
|
6.1
|
|
|
40.4
|
|
2009
|
|
|
37.2
|
|
|
6.2
|
|
|
43.4
|
|
2010
|
|
|
37.9
|
|
|
6.5
|
|
|
44.4
|
|
2011
- 2015
|
|
|
233.6
|
|
|
37.2
|
|
|
270.8
|
|
The
Pension and Employee Benefit Plans Committee, a committee currently comprised
of
four members of the Engelhard Corporation Board of Directors, is established
to
review pension-related matters, set corporate investment policy and monitor
performance.
Investment
risk is controlled by placing investments in various asset classes using
a
combination of active and passive investment strategies. The pension plan
assets
are allocated to multiple investment management firms. These firms cover
a broad
range of investment styles and are combined in a way that seeks to diversify
capitalization, style biases and interest rate exposures.
Engelhard,
through its pension consultants and actuaries, performs periodic asset/liability
studies which seek an investment strategy to provide the optimal investment
risk/return scenario for meeting the future retirement plan obligations.
These
studies are a tool used for determining the allocation of investments among
various asset classes. Investments are placed predominantly in the following
asset classes:
-
Equity:
Common stocks of large, medium and small companies including equity securities
issued by companies domiciled outside the U.S. and in depository receipts
that
represent ownership of securities of non-U.S. companies.
-
Debt:
Fixed income securities issued or guaranteed by the U.S. government, and
to a
lesser extent by non-U.S. governments, or by their respective agencies and
instrumentalities, mortgage backed securities, including collateralized mortgage
obligations, corporate debt obligations and dollar-denominated obligations
issued in the United States by non-U.S. banks and corporations (Yankee
bonds).
In
certain circumstances, investment managers are given the authority for the
limited use of derivatives. Futures contracts, options on futures and interest
rate swaps are occasionally employed in place of direct investment in securities
to gain efficient exposure to markets. Derivatives are not used to leverage
portfolios.
The
Company used an 8.9% return to calculate its domestic net periodic pension
expense in 2005 and will use an 8.9% return to calculate its domestic net
periodic pension expense in 2006. This calculation was based on the
following:
|
Market
expected return
|
|
Active
management expectation
|
|
All-in
expected return
|
|
Portfolio
weight
|
Equity
Securities
|
8.7%
|
|
1.0%
|
|
9.7%
|
|
73%
|
Debt
Securities
|
6.1%
|
|
1.0%
|
|
7.1%
|
|
27%
|
Total
Domestic Portfolio
|
7.9%
|
|
1.0%
|
|
8.9%
|
|
100%
|
The
Company used the weighted-average 7% return to calculate its foreign net
periodic pension expense in 2005 and will use the weighted-average 7%
return to calculate its foreign net periodic pension expense in 2006. This
calculation was based on the following:
|
Market
expected return
|
|
Active
management expectation
|
|
All-in
expected return
|
|
Portfolio
weight
|
Equity
Securities
|
9.3%
|
|
0.4%
|
|
9.7%
|
|
53%
|
Debt
Securities
|
3.6%
|
|
0.3%
|
|
3.9%
|
|
47%
|
Total
Foreign Portfolio
|
6.6%
|
|
0.4%
|
|
7.0%
|
|
100%
|
The
Company expects to contribute approximately $3.0 million to its domestic
pension
plans and $4.6 million to its foreign pension plans during 2006.
The
Company also sponsors three savings plans covering certain salaried and hourly
paid employees. The Company’s contributions, which may equal up to 50% of
certain employee contributions, were $4.8 million in 2005, $4.7 million in
2004
and $4.6 million in 2003. These amounts were recorded as an expense in the
Company’s “Consolidated Statements of Earnings.”
Effective
January 1, 2003, the Company Stock Fund of the Salary Deferral Savings Plan
of
Engelhard Corporation has been designated as an Employee Stock Ownership
Plan
(ESOP) as permitted under the Internal Revenue Code. Contributions to the
plan
may be made directly by the employee or as part of the employer matching
contributions noted above. Employer contributions are recorded as expense
at
fair market value in the period in which they are earned. Dividends are paid
on
these shares to the extent a dividend is declared and paid on the Company's
common stock. Dividends are charged to retained earnings when they are declared.
As of December 31, 2005, the ESOP held 1,849,972 shares of Company Stock.
These
shares are considered outstanding for determining basic and diluted earnings
per
share.
The
Company also currently provides postretirement medical and life insurance
benefits to certain retirees (and their spouses), certain disabled employees
(and their families) and spouses of certain deceased employees. Substantially
all U.S. salaried employees and certain hourly paid employees are eligible
for
these benefits, which are paid through the Company’s general health care and
life insurance programs, except for certain medicare-eligible salaried and
hourly retirees who are provided a defined contribution towards the cost
of a
partially insured health plan. In addition, the Company provides postemployment
benefits to former or inactive employees after employment but before retirement.
These benefits are substantially similar to the postretirement benefits,
but
cover a much smaller group of employees. Effective January 1, 2003, the Company
eliminated postretirement benefits for those employees (excluding employees
under collective bargaining agreements) hired on or after January 1,
2003.
The
following table sets forth the components of the accrued postretirement and
postemployment benefit obligation, all of which are unfunded.
POSTRETIREMENT
AND POSTEMPLOYMENT BENEFITS
(in
millions)
|
|
2005
|
|
2004
|
|
CHANGE
IN BENEFIT OBLIGATION
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
141.4
|
|
$
|
159.7
|
|
Service
cost
|
|
|
4.0
|
|
|
4.0
|
|
Interest
cost
|
|
|
8.1
|
|
|
8.6
|
|
Actuarial
(gains) losses
|
|
|
5.4
|
|
|
(18.8
|
)
|
Foreign
exchange
|
|
|
(0.4
|
)
|
|
0.2
|
|
Benefits
paid
|
|
|
(12.6
|
)
|
|
(12.3
|
)
|
Benefit
obligation at end of year
|
|
$
|
145.9
|
|
$
|
141.4
|
|
Unrecognized
net loss
|
|
|
(20.2
|
)
|
|
(15.9
|
)
|
Unrecognized
prior service cost
|
|
|
0.7
|
|
|
2.9
|
|
Accrued
benefit obligation
|
|
$
|
126.4
|
|
$
|
128.4
|
|
The
postretirement and postemployment benefit balances of $126.4 million and
$128.4
million at December 31, 2005 and December 31, 2004, respectively, are included
in other noncurrent liabilities in the Company’s “Consolidated Balance
Sheets.”
The
components of the net expense for these postretirement and postemployment
benefits are shown in the following table:
POSTRETIREMENT
AND POSTEMPLOYMENT BENEFITS
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
COMPONENTS
OF NET PERIODIC BENEFIT COST
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4.0
|
|
$
|
4.0
|
|
$
|
3.4
|
|
Interest
cost
|
|
|
8.1
|
|
|
8.6
|
|
|
9.3
|
|
Net
amortization
|
|
|
(1.4
|
)
|
|
(1.1
|
)
|
|
(4.9
|
)
|
Net
periodic benefit cost
|
|
$
|
10.7
|
|
$
|
11.5
|
|
$
|
7.8
|
|
The
weighted-average discount rate used in determining the actuarial present
value
of the accumulated postretirement and postemployment benefit obligation is
5.50%
for 2005 and 6.00% for 2004. The average assumed health care cost trend rate
used for 2005 is 5% to 8%. A 1% increase in the assumed health care cost
trend
rate would have increased aggregate service and interest cost in 2005 by
$0.4
million and the accumulated postretirement and postemployment benefit obligation
as of December 31, 2005 by $2.8 million. A 1% decrease in the assumed health
care cost trend rate would have decreased aggregate service and interest
cost in
2005 by $0.4 million and the accumulated postretirement and postemployment
benefit obligation as of December 31, 2005 by $2.5 million.
The
following benefit payments, which reflect expected future service, are expected
to be paid (in millions):
Year(s)
|
|
Domestic
|
|
2006
|
|
$
|
12.9
|
|
2007
|
|
|
13.3
|
|
2008
|
|
|
13.7
|
|
2009
|
|
|
13.8
|
|
2010
|
|
|
14.1
|
|
2011
- 2015
|
|
|
75.5
|
|
On
December 8, 2003, the President of the United States signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act).
This Act introduces a prescription drug benefit under Medicare (Medicare
Part
D), as well as a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to Medicare
Part D. After a review of the Company’s plan design, the Company and its
consulting actuaries believe the Company’s plan is actuarially equivalent to
Medicare Part D. In accordance with FASB Staff Position (FSP) No. 106-2,
“Accounting and Disclosure Requirement Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003,” the Company revalued the
benefit obligation and determined that the reduction in the accumulated
postretirement benefit obligation for the subsidy related to benefits attributed
to past service is $15 million. The Company was able to reduce its net
postretirement benefit costs by $2.2 million as a result of the Act during
2005
and $1.6 million in 2004.
The
Company expects the following reimbursements under the subsidy portion of
the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (in
millions):
Year(s)
|
|
|
|
2006
|
|
$
|
2.0
|
|
2007
|
|
|
2.2
|
|
2008
|
|
|
2.3
|
|
2009
|
|
|
2.4
|
|
2010
|
|
|
2.5
|
|
2011
- 2015
|
|
|
12.8
|
|
18.
|
STOCK
OPTION AND BONUS PLANS
|
The
Company’s Stock Option Plans of 1999 and 1991, as amended (the Key Option
Plans), generally provide for the granting of options to key employees to
purchase an aggregate of 5,500,000 and 16,875,000 common shares, respectively,
at fair market value on the date of grant. No options under the Stock Option
Plans of 1999 and 1991 may be granted after December 16, 2009 and June 30,
2003,
respectively.
In
1995,
the Company established the Directors Stock Option Plan, which generally
provides for the annual granting to each non-employee director the option
to
purchase up to 3,000 common shares at the fair market value on the date of
grant.
On
May 2,
2002, shareholders approved the 2002 Long-Term Incentive Compensation Plan.
The
plan provides for the grant to eligible employees and directors of stock
options, share appreciation rights (SARs), restricted shares, restricted
share
units, performance units and other share-based awards. An aggregate of 6,000,000
shares of common stock have been reserved for issuance under the plan, of
which
no more than 500,000 shares may be issued in connection with awards other
than
options and SARs. All terms and conditions of each grant have been set on
the
date of grant, including the grant price of options which is based on the
fair
market value on the day of grant. No grants may be made under the plan after
March 7, 2012.
Options
under all plans become exercisable in four installments beginning after one
year, and no options may be exercised after 10 years from the date of grant.
The
Company amortizes the pro forma expense using the graded expense attribution
method over four years. However, if an employee is eligible to retire, the
pro
forma expense is recognized on the date of the grant.
The
weighted-average fair value at date of grant for options granted during 2005,
2004 and 2003 was $10.12, $9.83 and $8.42, respectively. Fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used:
|
|
2005
|
|
2004
|
|
2003
|
|
Dividend
yield
|
|
|
1.5
- 1.8
|
%
|
|
1.5
|
%
|
|
1.5
- 2.0
|
%
|
Expected
volatility
|
|
|
30
- 32
|
%
|
|
32
- 34
|
%
|
|
35
- 36
|
%
|
Risk-free
interest rate
|
|
|
3.9
- 4.5
|
%
|
|
3.5
- 3.9
|
%
|
|
3.2
- 3.8
|
%
|
Expected
life (years)
|
|
|
6.75
|
|
|
6
- 7
|
|
|
6
- 7
|
|
Stock
option transactions under all plans are as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Number
of shares
|
|
Weighted-average
exercise price per share
|
|
Number
of shares
|
|
Weighted-average
exercise price per share
|
|
Number
of shares
|
|
Weighted-average
exercise price per share
|
|
Outstanding
at beginning of year
|
|
|
10,738,154
|
|
$
|
22.15
|
|
|
11,013,511
|
|
$
|
20.98
|
|
|
11,520,857
|
|
$
|
20.34
|
|
Granted
|
|
|
1,138,028
|
|
$
|
29.96
|
|
|
1,119,856
|
|
$
|
28.82
|
|
|
1,351,892
|
|
$
|
24.28
|
|
Forfeited/expired
|
|
|
(116,516
|
)
|
$
|
20.79
|
|
|
(120,510
|
)
|
$
|
16.67
|
|
|
(111,459
|
)
|
$
|
19.39
|
|
Exercised
|
|
|
(1,081,605
|
)
|
$
|
21.76
|
|
|
(1,274,703
|
)
|
$
|
18.42
|
|
|
(1,747,779
|
)
|
$
|
19.36
|
|
Outstanding
at end of year
|
|
|
10,678,061
|
|
$
|
23.04
|
|
|
10,738,154
|
|
$
|
22.15
|
|
|
11,013,511
|
|
$
|
20.98
|
|
Exercisable
at end of year
|
|
|
7,841,136
|
|
$
|
21.27
|
|
|
7,677,476
|
|
$
|
20.50
|
|
|
7,411,637
|
|
$
|
19.57
|
|
Available
for future grants
|
|
|
5,219,033
|
|
|
|
|
|
6,481,495
|
|
|
|
|
|
7,579,411
|
|
|
|
|
The
following table summarizes information about fixed-price options outstanding
at
December 31, 2005:
|
|
|
|
Options
outstanding
|
|
Options
exercisable
|
|
Range
of exercise prices
|
|
Weighted-average
remaining contractual life (years)
|
|
Number
outstanding at 12/31/05
|
|
Weighted-average
exercise price
|
|
Number
exercisable at 12/31/05
|
|
Weighted-average
exercise price
|
|
$18.56-23.88
|
|
|
1-2
|
|
|
1,467,454
|
|
$
|
19.49
|
|
|
1,467,454
|
|
$
|
19.49
|
|
17.34-21.69
|
|
|
3-4
|
|
|
2,386,034
|
|
|
18.72
|
|
|
2,386,034
|
|
|
18.72
|
|
16.84-26.90
|
|
|
5-6
|
|
|
2,026,190
|
|
|
21.17
|
|
|
2,026,190
|
|
|
21.17
|
|
20.47-29.99
|
|
|
7-8
|
|
|
2,571,344
|
|
|
25.04
|
|
|
1,659,883
|
|
|
25.23
|
|
27.29-30.09
|
|
|
9-10
|
|
|
2,227,039
|
|
|
29.40
|
|
|
301,575
|
|
|
28.82
|
|
|
|
|
|
|
|
10,678,061
|
|
|
23.04
|
|
|
7,841,136
|
|
|
21.27
|
|
The
Company’s Key Employee Stock Bonus Plan, as amended (the Bonus Plan) provides
for the award of up to 15,187,500 common shares to key employees as compensation
for future services, not exceeding 1,518,750 shares in any year (plus any
canceled awards or shares available for award but not previously awarded).
The
Bonus Plan terminates on June 30, 2006. Shares awarded vest in five annual
installments, provided the recipient is still employed by the Company on
the
vesting date. Compensation expense is measured on the date the award is granted
and is amortized on a straight-line basis over five years. Shares awarded
are
considered issued and outstanding at the date of grant and are included in
shares outstanding for purposes of computing diluted earnings per share.
Employees have both dividend and voting rights on all unvested shares. In
2005,
2004 and 2003, the Company granted 118,620; 107,260 and 149,905 shares to
key
employees at a fair value of $30.09, $28.64 and $20.47, respectively, per
share.
Unvested shares were 415,255; 490,894 and 596,670 at December 31, 2005, 2004
and
2003, respectively. Shares available for grant under this plan are 1,124,215
at
December 31, 2005.
Compensation
expense relating to stock awards was $4.4 million in 2005, $5.2 million in
2004
and $4.7 million in 2003.
The
Company has certain deferred compensation arrangements where shares earned
under
the Engelhard stock bonus plan are deferred and placed in a “Rabbi Trust.”
Shares held in the trust are recorded as treasury stock with the corresponding
liability recorded as a credit within shareholders’ equity. At December 31, 2005
and 2004, the Rabbi Trust held 519,939 and 513,518 shares, respectively,
of
Engelhard Corporation Common Stock. The value of the Rabbi Trust at historical
cost was $12.8 million and $12.2 million at December 31, 2005 and 2004,
respectively.
SFAS
No.
128, “Earnings Per Share” specifies the computation, presentation and disclosure
requirements for basic and diluted earnings per share (EPS). The following
table
represents the computation of basic and diluted EPS as required by SFAS No.
128:
EARNINGS
PER SHARE COMPUTATIONS
Year
ended December 31
(in
millions, except per-share data)
|
|
2005
|
|
2004
|
|
2003
|
|
Basic
EPS Computation
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
246.3
|
|
$
|
237.2
|
|
$
|
237.1
|
|
Loss
from discontinued operations, net of tax
|
|
|
(8.1
|
)
|
|
(1.7
|
)
|
|
(2.9
|
)
|
Net
earnings applicable to common shares
|
|
$
|
238.2
|
|
$
|
235.5
|
|
$
|
234.2
|
|
Average
number of shares outstanding - basic
|
|
|
120.3
|
|
|
123.2
|
|
|
125.4
|
|
Basic
earnings per share from continuing operations
|
|
$
|
2.05
|
|
$
|
1.93
|
|
$
|
1.89
|
|
Basic
earnings per share from discontinued operations
|
|
|
(0.07
|
)
|
|
(0.01
|
)
|
|
(0.02
|
)
|
Basic
earnings per share
|
|
$
|
1.98
|
|
$
|
1.91
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS Computation
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
246.3
|
|
$
|
237.2
|
|
$
|
237.1
|
|
Loss
from discontinued operations, net of tax
|
|
|
(8.1
|
)
|
|
(1.7
|
)
|
|
(2.9
|
)
|
Net
earnings applicable to common shares
|
|
$
|
238.2
|
|
$
|
235.5
|
|
$
|
234.2
|
|
Average
number of shares outstanding - basic
|
|
|
120.3
|
|
|
123.2
|
|
|
125.4
|
|
Effect
of dilutive stock options and other incentives
|
|
|
1.9
|
|
|
2.2
|
|
|
1.9
|
|
Average
number of shares outstanding - diluted
|
|
|
122.2
|
|
|
125.4
|
|
|
127.3
|
|
Diluted
earnings per share from continuing operations
|
|
$
|
2.02
|
|
$
|
1.89
|
|
$
|
1.86
|
|
Diluted
earnings per share from discontinued operations
|
|
|
(0.07
|
)
|
|
(0.01
|
)
|
|
(0.02
|
)
|
Diluted
earnings per share
|
|
$
|
1.95
|
|
$
|
1.88
|
|
$
|
1.84
|
|
Options
to purchase additional shares of common stock of 1,634,316 (at a price range
of
$29.36 to $30.09), 551,084 (at a price range of $29.36 to $29.99) and 1,820,004
(at a price range of $26.90 to $29.99) were outstanding at the end of 2005,
2004
and 2003, respectively, but were not included in the computation of diluted
EPS
because the options’ exercise prices were greater than the average annual market
price of the common shares.
20.
|
BUSINESS
SEGMENT AND GEOGRAPHIC AREA
DATA
|
The
Company has four reportable business segments: Environmental Technologies,
Process Technologies, Appearance and Performance Technologies and Materials
Services.
The
Environmental Technologies segment, located principally in the United States,
Europe, South Africa, Brazil and Asia, markets cost-effective compliance
with
environmental regulations, enabled by sophisticated emission-control
technologies and systems. The segment also provides products made principally
from precious metals, as well as thermal spray and coating
technologies.
The
Process Technologies segment, located principally in the United States, Europe
and China, enables customers to make their processes more productive, efficient,
environmentally sound and safer through the supply of advanced chemical-process
catalysts, additives and sorbents.
The
Appearance and Performance Technologies segment, located principally in the
United States, South Korea, China, France and Finland, provides pigments,
effect
materials, personal care 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 coatings, plastics, cosmetics and personal
care, automotive, construction and paper. The segment’s products help customers
improve the look, 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
Materials Services segment, located principally in the United States, Europe
and
Japan, 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.
Within
the “All Other” category, sales to external customers and operating earnings are
derived primarily from the Ventures business. The sale of precious metals
accounted for under the LIFO method, royalty income, expenses 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
majority of Corporate operating expenses have been charged to the segments
on
either a direct-service basis or as part of a general allocation. Environmental
Technologies and, to a much lesser extent, Process Technologies, utilize
metal
in their factories in excess of that provided by customers. This metal is
provided by Materials Services.
The
following table presents certain data by business segment:
BUSINESS
SEGMENT INFORMATION
(in
millions)
|
|
Environmental
Technologies
|
|
Process
Technologies
|
|
Appearance
and Performance Technologies
|
|
Materials
Services
|
|
Reportable
Segments Subtotal
|
|
All
Other (a)
|
|
Total
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
1,008.7
|
|
$
|
687.1
|
|
$
|
726.1
|
|
$
|
2,096.3
|
|
$
|
4,518.2
|
|
$
|
78.8
|
|
$
|
4,597.0
|
|
Operating
earnings (loss)
|
|
|
140.9
|
|
|
98.0
|
|
|
65.6
|
|
|
28.4
|
|
|
332.9
|
|
|
(b)(34.3
|
)
|
|
298.6
|
|
Interest
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8.2
|
|
|
8.2
|
|
Interest
expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33.7
|
|
|
33.7
|
|
Depreciation,
depletion and amortization
|
|
|
31.2
|
|
|
28.8
|
|
|
46.6
|
|
|
2.6
|
|
|
109.2
|
|
|
23.2
|
|
|
132.4
|
|
Equity
in earnings of affiliates
|
|
|
15.2
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
15.7
|
|
|
16.9
|
|
|
32.6
|
|
Income
taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59.1
|
|
|
59.1
|
|
Total
assets
|
|
|
691.4
|
|
|
701.8
|
|
|
920.7
|
|
|
946.0
|
|
|
3,259.9
|
|
|
619.1
|
|
|
3,879.0
|
|
Equity
investments
|
|
|
68.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68.2
|
|
|
127.8
|
|
|
196.0
|
|
Capital
expenditures
|
|
|
29.9
|
|
|
42.1
|
|
|
34.3
|
|
|
3.7
|
|
|
110.0
|
|
|
31.6
|
|
|
141.6
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
883.3
|
|
$
|
615.2
|
|
$
|
690.2
|
|
$
|
1,895.0
|
|
$
|
4,083.7
|
|
$
|
52.4
|
|
$
|
4,136.1
|
|
Operating
earnings (loss)
|
|
|
138.3
|
|
|
87.3
|
|
|
68.5
|
|
|
16.8
|
|
|
310.9
|
|
|
(b)(34.7
|
)
|
|
276.2
|
|
Special
charge (credit), net
|
|
|
(0.2
|
)
|
|
—
|
|
|
6.6
|
|
|
—
|
|
|
6.4
|
|
|
(1.1
|
)
|
|
5.3
|
|
Interest
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.2
|
|
|
5.2
|
|
Interest
expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23.7
|
|
|
23.7
|
|
Depreciation,
depletion and amortization
|
|
|
29.6
|
|
|
26.7
|
|
|
49.8
|
|
|
2.3
|
|
|
108.4
|
|
|
20.3
|
|
|
128.7
|
|
Equity
in earnings of affiliates
|
|
|
14.1
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
14.4
|
|
|
23.2
|
|
|
37.6
|
|
Income
taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57.4
|
|
|
57.4
|
|
Total
assets
|
|
|
606.5
|
|
|
648.7
|
|
|
830.9
|
|
|
487.8
|
|
|
2,573.9
|
|
|
604.7
|
|
|
3,178.6
|
|
Equity
investments
|
|
|
65.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65.5
|
|
|
111.5
|
|
|
177.0
|
|
Capital
expenditures
|
|
|
31.4
|
|
|
38.7
|
|
|
27.6
|
|
|
2.7
|
|
|
100.4
|
|
|
22.8
|
|
|
123.2
|
|
|
|
Environmental
Technologies
|
|
Process
Technologies
|
|
Appearance
and Performance
Technologies
|
|
Materials
Services
|
|
Reportable
Segments Subtotal
|
|
All
Other (a)
|
|
Total
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to external customers
|
|
$
|
814.8
|
|
$
|
569.2
|
|
$
|
653.8
|
|
$
|
1,598.2
|
|
$
|
3,636.0
|
|
$
|
51.8
|
|
$
|
3,687.8
|
|
Operating
earnings (loss)
|
|
|
124.0
|
|
|
95.9
|
|
|
69.5
|
|
|
10.1
|
|
|
299.5
|
|
|
(b)
(13.2
|
)
|
|
286.3
|
|
Special
charge (credit), net
|
|
|
5.2
|
|
|
2.6
|
|
|
7.8
|
|
|
—
|
|
|
15.6
|
|
|
(27.6
|
)
|
|
(12.0
|
)
|
Interest
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.0
|
|
|
4.0
|
|
Interest
expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24.3
|
|
|
24.3
|
|
Depreciation,
depletion and amortization
|
|
|
29.6
|
|
|
26.0
|
|
|
49.1
|
|
|
1.9
|
|
|
106.6
|
|
|
21.1
|
|
|
127.7
|
|
Equity
in earnings of affiliates
|
|
|
12.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12.0
|
|
|
27.4
|
|
|
39.4
|
|
Income
taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65.9
|
|
|
65.9
|
|
Total
assets
|
|
|
574.1
|
|
|
614.3
|
|
|
783.0
|
|
|
369.5
|
|
|
2,340.9
|
|
|
592.1
|
|
|
2,933.0
|
|
Equity
investments
|
|
|
49.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49.6
|
|
|
102.9
|
|
|
152.5
|
|
Capital
expenditures
|
|
|
20.8
|
|
|
29.5
|
|
|
30.6
|
|
|
7.0
|
|
|
87.9
|
|
|
25.7
|
|
|
113.6
|
|
|
(a)
|
All
other includes total assets; depreciation, depletion and amortization;
and
capital expenditures from discontinued operations. See Note 7,
“Discontinued Operations” for more
information.
|
|
(b)
|
Includes
pretax gains on the sale of certain precious metals accounted for
under
the LIFO method of $2.5 million in 2005, $2.6 million in 2004 and
$5.2
million in 2003.
|
The
following table presents certain data by geographic area:
GEOGRAPHIC
AREA DATA
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Net
sales to external customers:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
2,092.0
|
|
$
|
1,964.2
|
|
$
|
1,834.7
|
|
International
|
|
|
2,505.0
|
|
|
2,171.9
|
|
|
1,853.1
|
|
Total
consolidated net sales to external customers
|
|
$
|
4,597.0
|
|
$
|
4,136.1
|
|
$
|
3,687.8
|
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,258.3
|
|
$
|
1,162.1
|
|
$
|
1,089.0
|
|
International
|
|
|
334.9
|
|
|
288.1
|
|
|
255.1
|
|
Total
long-lived assets
|
|
$
|
1,593.2
|
|
$
|
1,450.2
|
|
$
|
1,344.1
|
|
The
Company’s international sales are predominantly to customers in
Europe.
The
following table reconciles segment operating earnings with earnings before
income taxes as shown in the Company’s “Consolidated Statements of
Earnings”:
SEGMENT
RECONCILIATIONS
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Net
sales to external customers:
|
|
|
|
|
|
|
|
Net
sales for reportable segments
|
|
$
|
4,518.2
|
|
$
|
4,083.7
|
|
$
|
3,636.0
|
|
Net
sales for other business units
|
|
|
76.0
|
|
|
50.3
|
|
|
43.5
|
|
All
other
|
|
|
2.8
|
|
|
2.1
|
|
|
8.3
|
|
Total
consolidated net sales to external customers
|
|
$
|
4,597.0
|
|
$
|
4,136.1
|
|
$
|
3,687.8
|
|
Earnings
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings for reportable segments
|
|
$
|
332.9
|
|
$
|
310.9
|
|
$
|
299.5
|
|
Operating
earnings for Ventures business
|
|
|
6.1
|
|
|
3.2
|
|
|
—
|
|
Other
operating loss - Corporate and other
|
|
|
(40.4
|
)
|
|
(37.9
|
)
|
|
(13.2
|
)
|
Total
operating earnings
|
|
$
|
298.6
|
|
$
|
276.2
|
|
$
|
286.3
|
|
Interest
income
|
|
|
8.2
|
|
|
5.2
|
|
|
4.0
|
|
Interest
expense
|
|
|
(33.7
|
)
|
|
(23.7
|
)
|
|
(24.3
|
)
|
Equity
in earnings of affiliates
|
|
|
32.6
|
|
|
37.6
|
|
|
39.4
|
|
Loss
on investment
|
|
|
(0.2
|
)
|
|
(0.7
|
)
|
|
—
|
|
Earnings
before income taxes
|
|
$
|
305.5
|
|
$
|
294.6
|
|
$
|
305.4
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
Total
assets for reportable segments
|
|
$
|
3,259.9
|
|
$
|
2,573.9
|
|
$
|
2,340.9
|
|
Assets
for other business units
|
|
|
112.7
|
|
|
38.3
|
|
|
38.4
|
|
All
other
|
|
|
506.4
|
|
|
566.4
|
|
|
553.7
|
|
Total
consolidated assets
|
|
$
|
3,879.0
|
|
$
|
3,178.6
|
|
$
|
2,933.0
|
|
Equity
investments for reportable segments
|
|
$
|
68.2
|
|
$
|
65.5
|
|
$
|
49.6
|
|
Equity
investments - All other
|
|
|
127.8
|
|
|
111.5
|
|
|
102.9
|
|
Other
investments not carried on the equity method
|
|
|
8.5
|
|
|
2.1
|
|
|
6.2
|
|
Total
investments
|
|
$
|
204.5
|
|
$
|
179.1
|
|
$
|
158.7
|
|
No
customer accounted for more than 10% of the Company’s net sales in 2005, 2004 or
2003.
The
Company rents real property and equipment under long-term operating leases.
Rent
expense and sublease income for all operating leases are summarized as
follows:
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Rents
paid
|
|
$
|
33.8
|
|
$
|
42.2
|
|
$
|
44.4
|
|
Less:
sublease income
|
|
|
(0.7
|
)
|
|
(1.2
|
)
|
|
(1.2
|
)
|
Rent
expense, net
|
|
$
|
33.1
|
|
$
|
41.0
|
|
$
|
43.2
|
|
Future
minimum rent payments at December 31, 2005, required under noncancellable
operating leases, having initial or remaining lease terms in excess of one
year,
are as follows:
(in
millions)
|
|
|
|
2006
|
|
$
|
24.9
|
|
2007
|
|
|
24.1
|
|
2008
|
|
|
24.6
|
|
2009
|
|
|
21.8
|
|
2010
|
|
|
23.1
|
|
Thereafter
|
|
|
61.6
|
|
Total
minimum lease payments
|
|
|
180.1
|
|
Less:
minimum sublease income
|
|
|
(4.1
|
)
|
Net
minimum lease payments
|
|
$
|
176.0
|
|
In
January 2005, the Company renewed its operating lease for machinery and
equipment that is used in the Process Technologies segment. The term of the
lease is seven years. In 1998, the Company entered into a sale-leaseback
transaction for $67.2 million for property that serves as the principal
executive and administrative offices of the Company and its operating
businesses. The term of this operating lease is 20 years.
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, 2005, 14 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, 2005 and 2004 were $18.0 million and $19.1
million, respectively, including $0.1 million at December 31, 2005 and 2004
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 39% 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 $1.2 million in 2005,
$1.3 million in 2004 and $1.8 million in 2003. 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 $2.5 million for 2006, 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. The Company has an Environmental, Health and Safety (EH&S)
department that implements and assesses compliance to policies, procedures
and
controls around the Company’s environmental exposures and possible liabilities.
These policies, procedures and controls are intended to assure that the
Corporate EH&S department is aware of all issues that may have a potential
impact on the Company. While it is not possible to predict with certainty,
management believes environmental cleanup-related reserves at December 31,
2005
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.
23.
|
LITIGATION
AND CONTINGENCIES
|
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 22, “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., (now Engelhard
Peru
S.A.C. en liquidaciόn or “Engelhard Peru”), a wholly owned subsidiary, was
denied refund claims of approximately $28 million. The Peruvian tax authority
also determined that Engelhard Peru 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 was liable for these amounts, overruling
precedent to apply a “form over substance” theory without any determination of
fraudulent participation by Engelhard Peru. Engelhard Peru filed a
constitutional action against the Peruvian tax authority 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 based
on
several grounds, including improper use of a presumption of guilt with no
actual
proof of irregularity in the transactions of Engelhard Peru. The government
of
Peru prevailed on appeal to the Superior Court and prevailed again on appeal
to
Peru’s Constitutional Court. Although management believes, based on consultation
with counsel, that this is an extraordinary decision that is plainly
inconsistent with the law and the facts, no further appeal in Peru is likely
to
be productive. Management believes based on consultation with counsel, that
the
maximum economic exposure is limited to the aggregate value of all assets
of
Engelhard Peru. That amount, which is approximately $30 million, including
unpaid refunds, has been fully provided for in the accounts of the
Company.
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. In September 2005, a Superior prosecutor concluded that there
was no basis for the criminal proceedings against several defendants, including
both officials of Engelhard Peru. Final dismissal of those criminal charges
remains subject to judicial review and determination of the Supreme Prosecutor.
Although Engelhard Peru 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 is assisting in the vigorous defense of this
proceeding. As noted above, management believes the economic exposure is
limited
to the aggregate of all assets of Engelhard Peru, which amount has been fully
provided for in the accounts of the Company.
On
January 4, 2006, Scott Sebastian, who alleges that he is a stockholder of
the
Company, commenced a purported class action on behalf of the stockholders
of the
Company against the Company and all of its directors in the Chancery Division
of
the New Jersey Superior Court for Middlesex County. The complaint alleges
that
the defendants breached their fiduciary duties in connection with their response
to BASF’s proposal to acquire the Company and seeks declaratory and injunctive
relief and damages. On January 4, 2006, Hindy Silver, who alleges that she
is a
stockholder of the Company, commenced a purported class action on behalf
of the
stockholders of the Company against the Company and all of its directors
in the
Chancery Division of the New Jersey Superior Court for Mercer County. The
complaint alleges that the defendants breached their fiduciary duties in
connection with their response to BASF’s proposal to acquire the Company and
seeks injunctive relief and an accounting. On January 17, 2006, the plaintiffs
in the Sebastian and Silver actions moved to transfer the Sebastian action
to
the New Jersey Superior Court for Mercer County and to consolidate the two
actions in that Court. The defendants cross-moved to stay the New Jersey
actions
until the Delaware actions, described below, have been resolved or, in the
alternative, to dismiss the New Jersey actions for failure to state a claim,
and
plaintiffs moved for expedited discovery. Plaintiffs opposed defendants’
cross-motions and requested leave to file an amended complaint if the Court
was
inclined to grant defendants’ motion to dismiss. The proposed amended complaint
adds, among other things, allegations that the Schedule 14D-9 filed by the
Company with the SEC fails to disclose material information that the proposed
amended complaint alleges is needed by Engelhard shareholders to be able
to make
an informed decision concerning whether to tender their shares to BASF. The
proposed amended complaint seeks declaratory and injunctive relief and damages.
Defendants opposed plaintiffs’ motion for expedited discovery and motion to
amend their complaint. Argument on all motions and cross-motions was held
on
February 9, 2006 in the New Jersey Superior Court for Mercer County. The
Court
stated that the motion to consolidate would be granted and took the other
matters under advisement.
On
January 5, 2006, Laura Benjamin and Sam Cohn, and on January 6, 2006, Stewart
Simon, all of whom purport to be stockholders of the Company, each commenced
a
purported class action on behalf of the stockholders of the Company against
the
Company and all of its directors in the Delaware Court of Chancery for New
Castle County. Each complaint alleged that the defendants breached their
fiduciary duties in connection with their response to BASF’s proposal to acquire
the Company and sought injunctive relief. The Benjamin and Cohn complaints
also
sought damages and the Simon complaint sought an accounting. On January 13,
2006
these three actions were consolidated under the caption In
re: Engelhard Corporation Shareholders Litigation,
Consolidated C.A. No. 1871-N, in the Delaware Court of Chancery for New Castle
County, and a Consolidated Amended Complaint was filed and served which names
the same defendants and contains allegations similar to those made in the
complaints initially filed in the underlying actions, and seeks injunctive
relief and damages. On the same day, plaintiffs served a request for production
of documents. On January 17, 2006, the court entered an order governing the
protection and exchange of confidential information. On January 24, 2006,
the
Court entered a case management order. Defendants have begun to produce
documents to plaintiffs. On January 25, 2006, with defendants’ consent, the
Court granted plaintiffs leave to file a Second Consolidated Amended Complaint.
The Second Consolidated Amended Complaint adds, among other things, allegations
that the Schedule 14D-9 filed by the Company with the SEC fails to disclose
material information concerning what the Company and its Board of Directors
are
doing with respect to the exploration of strategic alternatives to BASF’s offer
and fails to disclose information that is material to evaluating the opinion
Merrill Lynch provided to the Company’s Board of Directors that BASF’s offer is
inadequate from a financial point of view.
The
Company and the individual defendants believe the claims made in each of
the
putative class action suits described above are without merit and intend
to
vigorously defend against these suits.
Changes
in accumulated other comprehensive income(loss) are as follows:
(in
millions)
|
|
Cash
flow derivative adjustment, net of tax
|
|
Foreign
currency translation adjustment
|
|
Minimum
pension liability adjustment, net of tax
|
|
Investment
adjustment, net of tax
|
|
Total
accumulated other comprehensive income(loss)
|
|
Balance
at December 31, 2002
|
|
$
|
(0.2
|
)
|
$
|
(31.7
|
)
|
$
|
(83.1
|
)
|
$
|
(0.2
|
)
|
$
|
(115.2
|
)
|
Period
change
|
|
|
(0.1
|
)
|
|
77.8
|
|
|
21.1
|
|
|
0.5
|
|
|
99.3
|
|
Balance
at December 31, 2003
|
|
|
(0.3
|
)
|
|
46.1
|
|
|
(62.0
|
)
|
|
0.3
|
|
|
(15.9
|
)
|
Period
change
|
|
|
(1.5
|
)
|
|
38.7
|
|
|
(16.0
|
)
|
|
(0.3
|
)
|
|
20.9
|
|
Balance
at December 31, 2004
|
|
|
(1.8
|
)
|
|
84.8
|
|
|
(78.0
|
)
|
|
—
|
|
|
5.0
|
|
Period
change
|
|
|
11.0
|
|
|
(50.0
|
)
|
|
(10.7
|
)
|
|
—
|
|
|
(49.7
|
)
|
Balance
at December 31, 2005
|
|
$
|
9.2
|
|
$
|
34.8
|
|
$
|
(88.7
|
)
|
$
|
—
|
|
$
|
(44.7
|
)
|
The
cash
flow derivative adjustment is shown net of income tax (expense) benefit of
$(7.6) million, $1.1 million and less than $0.1 million in 2005, 2004 and
2003, respectively.
The
foreign currency translation adjustments are not currently adjusted for income
taxes as they relate to permanent investments in non-U.S. entities, however
the
balance as of December 31, 2005 is shown net of income tax expense of $5.1
million, related to the mark-to-market of the Company’s net investment hedges.
The
minimum pension liability adjustment is shown net of income tax (expense)
benefit of $7.2 million, $10.8 million and $(8.3) million in 2005, 2004 and
2003, respectively.
The
investment adjustment is shown net of income tax (expense) benefit of $0.2
million and $(0.3) million in 2004 and 2003, respectively.
25.
|
SUPPLEMENTAL
INFORMATION
|
The
following table presents certain supplementary information to the Company’s
“Consolidated Statements of Cash Flows”:
SUPPLEMENTARY
CASH FLOW INFORMATION
(in
millions)
|
|
2005
|
|
2004
|
|
2003
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
33.7
|
|
$
|
26.9
|
|
$
|
25.9
|
|
Income
taxes
|
|
|
44.0
|
|
|
55.9
|
|
|
46.2
|
|
Materials
Services related:
|
|
|
|
|
|
|
|
|
|
|
Change
in assets and liabilities - source(use):
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
3.3
|
|
$
|
(2.7
|
)
|
$
|
11.8
|
|
Committed
metal positions
|
|
|
(357.0
|
)
|
|
(144.8
|
)
|
|
341.8
|
|
Inventories
|
|
|
(0.1
|
)
|
|
0.3
|
|
|
0.8
|
|
Other
current assets
|
|
|
(0.7
|
)
|
|
0.1
|
|
|
(0.2
|
)
|
Other
noncurrent assets
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Accounts
payable
|
|
|
11.5
|
|
|
124.1
|
|
|
4.6
|
|
Hedged
metal obligations
|
|
|
346.5
|
|
|
(8.6
|
)
|
|
(225.0
|
)
|
Other
current liabilities
|
|
|
2.6
|
|
|
—
|
|
|
(26.2
|
)
|
Net
cash flows from changes in assets and liabilities
|
|
$
|
6.2
|
|
$
|
(31.6
|
)
|
$
|
107.6
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
All
Other:
|
|
|
|
|
|
|
|
Change
in assets and liabilities - source(use):
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
(126.2
|
)
|
$
|
9.3
|
|
$
|
(8.1
|
)
|
Inventories
|
|
|
(73.0
|
)
|
|
(2.4
|
)
|
|
1.9
|
|
Other
current assets
|
|
|
(9.2
|
)
|
|
(3.9
|
)
|
|
4.4
|
|
Other
noncurrent assets
|
|
|
0.8
|
|
|
7.4
|
|
|
(29.6
|
)
|
Accounts
payable
|
|
|
82.4
|
|
|
(7.5
|
)
|
|
(23.4
|
)
|
Other
current liabilities
|
|
|
30.0
|
|
|
(14.5
|
)
|
|
0.4
|
|
Noncurrent
liabilities
|
|
|
(6.6
|
)
|
|
17.7
|
|
|
5.7
|
|
Net
cash flows from changes in assets and liabilities
|
|
$
|
(101.8
|
)
|
$
|
6.1
|
|
$
|
(48.7
|
)
|
The
above
changes in assets and liabilities exclude the impact of foreign currency
changes
on existing balances. Changes in foreign currency accounts are translated
at
appropriate average rates.
The
following tables present certain supplementary information to the Company’s
“Consolidated Balance Sheets”:
SUPPLEMENTARY
BALANCE SHEET INFORMATION
Other
current assets
(in
millions)
|
|
2005
|
|
2004
|
|
Prepaid
insurance
|
|
$
|
9.0
|
|
$
|
9.3
|
|
Current
deferred taxes
|
|
|
102.6
|
|
|
99.1
|
|
Fair
value derivative instruments
|
|
|
14.9
|
|
|
10.5
|
|
Current
assets from discontinued operations
|
|
|
0.1
|
|
|
5.3
|
|
Other
|
|
|
18.8
|
|
|
16.5
|
|
Other
current assets
|
|
$
|
145.4
|
|
$
|
140.7
|
|
|
|
|
|
|
|
|
|
Other
current liabilities
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
Income
taxes payable
|
|
$
|
62.2
|
|
$
|
39.3
|
|
Payroll-related
accruals
|
|
|
76.9
|
|
|
73.1
|
|
Deferred
revenue
|
|
|
1.4
|
|
|
3.1
|
|
Interest
payable
|
|
|
6.7
|
|
|
6.7
|
|
Non-income
tax accruals
|
|
|
5.5
|
|
|
7.3
|
|
Restructuring
reserves
|
|
|
0.1
|
|
|
1.9
|
|
Product
warranty reserves
|
|
|
4.2
|
|
|
8.7
|
|
Fair
value derivative instruments
|
|
|
—
|
|
|
7.3
|
|
Accrued
professional fees
|
|
|
4.8
|
|
|
5.2
|
|
Accrued
insurance expense
|
|
|
7.6
|
|
|
3.8
|
|
Current
liabilities from discontinued operations
|
|
|
1.0
|
|
|
1.0
|
|
Other
|
|
|
95.0
|
|
|
92.0
|
|
Other
current liabilities
|
|
$
|
265.4
|
|
$
|
249.4
|
|
In
January of 2006, BASF announced a tender offer for all of the outstanding
shares
of the Company’s stock, for $37.00 per share. Since then, the Company’s stock
has traded above $40.00 per share. As a result, many employees and former
employees exercised vested stock options resulting in proceeds of $59.7 million
and an increase in the shares outstanding of 2.8 million shares as of February
21, 2006. As a result of the BASF Offer, the Company was required to fund
a
trust account for certain previously unfunded retirement programs for current
and former senior executives and directors, resulting in a cash payment to
this
trust of approximately $111 million in January 2006. Should a change in control
of the Company occur at a price of $37.00 per share, additional cash payments
of
approximately $85 million will be due to certain employees.
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Engelhard Corporation
We
have
audited the accompanying consolidated balance sheets of Engelhard Corporation
as
of December 31, 2005 and 2004, and the related consolidated statements of
earnings, cash flows, and shareholders' equity for each of the three years
in
the period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Engelhard Corporation
at December 31, 2005 and 2004, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31,
2005, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Engelhard Corporation’s
internal control over financial reporting as of December 31, 2005, based
on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our
report
dated March 2, 2006 expressed an unqualified opinion thereon.
As
described in Note 4 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards (“Statement”) No. 143,
Accounting for Asset Retirement Obligations, effective January 1, 2003.
/s/
Ernst
& Young LLP
MetroPark,
New Jersey
March
2,
2006
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Engelhard Corporation
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Engelhard Corporation
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Engelhard Corporation’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Engelhard Corporation maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Engelhard Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based
on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2005 consolidated financial statements
of
Engelhard Corporation and our report dated March 2, 2006 expressed an
unqualified opinion thereon.
/s/
Ernst
& Young LLP
MetroPark,
New Jersey
March
2,
2006
SUPPLEMENTARY
FINANCIAL INFORMATION (UNAUDITED)
($
in
millions, except per-share amounts)
|
|
First
quarter
|
|
Second
quarter
|
|
Third
quarter
|
|
Fourth
quarter
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,018.7
|
|
$
|
1,098.2
|
|
$
|
1,208.3
|
|
$
|
1,271.8
|
|
Gross
profit
|
|
|
168.7
|
|
|
185.4
|
|
|
174.6
|
|
|
189.3
|
|
Net
earnings
|
|
|
58.0
|
|
|
57.9
|
|
|
58.5
|
|
|
63.9
|
|
Basic
earnings per share
|
|
|
0.48
|
|
|
0.48
|
|
|
0.49
|
|
|
0.53
|
|
Diluted
earnings per share
|
|
|
0.47
|
|
|
0.47
|
|
|
0.48
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,031.1
|
|
$
|
1,099.3
|
|
$
|
995.4
|
|
$
|
1,010.3
|
|
Gross
profit
|
|
|
159.4
|
|
|
169.7
|
|
|
169.7
|
|
|
171.8
|
|
Net
earnings
|
|
|
50.3
|
|
|
68.0
|
|
|
59.1
|
|
|
58.1
|
|
Basic
earnings per share
|
|
|
0.41
|
|
|
0.55
|
|
|
0.48
|
|
|
0.48
|
|
Diluted
earnings per share
|
|
|
0.40
|
|
|
0.54
|
|
|
0.47
|
|
|
0.47
|
|
Results
in the first quarter 2005 include a tax provision benefit of $2.7 million
resulting from an agreement reached with the Internal Revenue Service with
respect to the Company’s tax returns for 2001.
Results
in the second quarter 2004 include 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.
Results
in the fourth quarter 2004 include a charge of $6.6 million ($4.1 million
after
tax) resulting from the consolidation of certain manufacturing operations
to
improve efficiency and a credit of $1.3 million ($0.8 million after tax)
related
to the reversal of prior year special charges accruals (see Note 6, “Special
Charges and Credits,” for further detail).
The
above
amounts are calculated independently for each of the quarters presented.
The sum
of the quarters may not equal the full year amounts.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
Not
applicable.
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted
an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as
amended (the Exchange Act). Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure
controls and procedures as of the end of the period covered by this annual
report were effective to provide reasonable assurance that material information
related to the Company (including its consolidated subsidiaries) required
to be
included in the Company’s periodic SEC filings would be communicated to them on
a timely basis. There was no change in the Company’s internal control over
financial reporting during the Company’s fourth fiscal quarter of 2005 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting. There have been no significant
changes in the Company’s internal control over financial reporting which could
significantly affect internal control over financial reporting subsequent
to the
date the Company carried out its evaluation.
The
Company’s management, including the CEO and CFO, do not expect that our
disclosure controls or our internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because
of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the Company have been detected. These inherent limitations include
the reality that judgments and estimates can be faulty, and that breakdowns
can
occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons or by collusion of two
or
more people. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can
be no
assurance that any design will succeed in achieving its stated goals under
all
potential future conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and
not be detected. Accordingly, the Company’s disclosure controls and procedures
are designed to provide reasonable, not absolute, assurance that the objectives
of our disclosure control system are met and, as set forth above, the Company’s
Chief Executive Officer and Chief Financial Officer have concluded, based
on
their evaluation as of December 31, 2005, that our disclosure controls and
procedures were effective to provide reasonable assurance that the objectives
of
our disclosure control system were met.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the criteria established in Internal Control
-
Integrated Framework issued by the Committee of Sponsoring Organizations
of the
Treadway Commission (COSO). Based on our evaluation under this framework,
our
management concluded that our internal control over financial reporting was
effective as of December 31, 2005.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in
their
report which is included herein.
PART
III
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
(a)
Directors -
Information
concerning directors of the Company is included under the caption “Election of
Directors,” “Information with Respect to Nominees and Directors Whose Terms
Continue,” “Share Ownership of Directors and Officers,” and “Corporate
Governance” in the Proxy Statement for the 2006 Annual Meeting of Shareholders
and is incorporated herein by reference.
(b)
Executive Officers - See information of Executive Officers under item 4A
on page
11.
(c)
Copies of the charters for the Audit, Compensation and Nominating and Governance
committees, as well as Engelhard’s Corporate Governance Guidelines, Engelhard’s
Policies of Business Conduct and Senior Financial Officer Ethics Code, are
available under the Corporate Governance portion of the Investor Relations
section of our website at www.engelhard.com and without charge in print to
any
stockholder who requests them from the Company’s Corporate Secretary. Changes to
and waivers granted with respect to the Company’s Policies of Business Conduct
and Senior Financial Ethics Code related to executive officers or Directors
required to be disclosed pursuant to applicable rules and regulations will
be
posted on the Company’s website.
Information
concerning executive compensation is included under the captions “Executive
Compensation and Other Information,” “Pension Plans,” “Employment Contracts,
Termination of Employment and Change in Control Arrangements” and the
“Performance Graph” of the Proxy Statement for the 2006 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
concerning security ownership of certain beneficial owners and management
is
included under the captions “Information as to Certain Shareholders” and “Share
Ownership of Directors and Officers” of the Proxy Statement for the 2006 Annual
Meeting of Shareholders and is incorporated herein by reference.
Securities
Authorized for Issuance under Equity Compensation Plans as of December 31,
2005
We
have
seven plans approved by shareholders: The Engelhard Corporation Stock Option
Plan of 1991, the Engelhard Corporation 2002 Long Term Incentive Compensation
Plan, the Engelhard Corporation Directors Stock Option Plan, the Key Employee
Stock Bonus Plan of Engelhard Corporation, the Engelhard Corporation Deferred
Stock Plan for Non-Employee Directors, the Stock Bonus Plan for Non-Employee
Directors of Engelhard Corporation and the Deferred Compensation Plan for
Directors of Engelhard Corporation.
We
have
one plan that did not require approval by shareholders: The Engelhard
Corporation Stock Option Plan of 1999.
EQUITY
COMPENSATION PLAN INFORMATION
|
|
(a)
|
|
(b)
|
|
(c)
|
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(1)
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
Equity
compensation plans approved by security holders
|
|
6,977,993
(2)
|
|
$22.12
|
|
5,769,824(3)(4)
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders (5)
|
|
3,882,109
|
|
$24.65
|
|
700,989
|
|
|
|
|
|
|
|
Total
|
|
10,860,102
|
|
$23.04
|
|
6,470,813
|
(1)
|
The
weighted-average exercise price of outstanding options, warrants
and
rights excludes phantom stock units discussed in item (2) below.
These
shares have already been earned by the participant and as such
have no
exercise price.
|
(2)
|
Includes
78,742 phantom stock units granted under the Deferred Stock Plan
for
Non-Employee Directors. This also includes 103,299 phantom stock
units
granted under the Deferred Compensation Plan for
Directors.
|
(3)
|
Includes
a combined 1,161,443 shares available under the Key Employee Stock
Bonus
Plan and the Stock Bonus Plan for Non-Employee Directors, both
of which
are restricted share programs. In addition, includes 88,388 phantom
stock
units available for grant under the Engelhard Corporation Deferred
Stock
Plan for Non-Employee Directors. The Engelhard Corporation 2002
Long Term
Incentive Compensation Plan permits the issuance of up to 500,000
restricted shares, restricted share units, performance shares,
performance
units and other share-based awards.
|
(4)
|
The
Deferred Compensation Plan for Directors of Engelhard Corporation
permits
non-employee directors to defer director fees. The deferred fees
may at
the election of the director be applied towards the purchase of
deferred
stock units based on a then current market price of the Company’s common
stock. The directors make an irrevocable election as to the timing
of when
these deferred stock units will be converted into shares of the
Company’s
common stock. This plan, although approved by shareholders, did
not
provide a maximum number of shares to be issued under the plan.
The
Company filed a registration statement during 1991 under the Securities
Act of 1933, as amended, which registered 168,750 shares (adjusted
for
stock splits). As of December 31, 2005, 148,331 shares have been
used
against this registration leaving 20,419 available for future issuance.
This amount is included in the shares available for future issuance
in
column c above.
|
(5)
|
The
Engelhard Corporation Stock Option Plan of 1999 was approved by
the
Company’s Board of Directors on December 16, 1999. This plan, as amended,
reserved up to 5,500,000 shares of the Company’s common stock for issuance
under the plan to key employees (excluding elected officers). Options
granted are nonqualified stock options and the grant price is the
fair
market value of the Company’s stock on the date of grant. Options vest in
equal installments over a four-year period. Options expire no later
than
the 10th anniversary from the date of grant. No option may be granted
under the plan after December 16, 2009. Options outstanding under
this
plan are 3,882,109 as of December 31,
2005.
|
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Information
concerning certain transactions is included under the caption “Certain
Transactions” of the Proxy Statement for the 2006 Annual Meeting of Shareholders
and is incorporated herein by reference.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
Information
concerning certain transactions is included under the caption “Independent
Registered Public Accounting Firm” of the Proxy Statement for the 2006 Annual
Meeting of Shareholders and is incorporated herein by
reference.
PART
IV
|
EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES
|
Exhibits
|
|
|
Pages
|
|
|
|
|
(a)
|
(1)
|
|
Financial
Statements and Schedules
|
|
|
|
|
|
|
|
|
|
Reports
of Independent Auditors
|
87-88
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Earnings for each of the three years in the period
ended
December 31, 2005
|
44
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets at December 31, 2005 and 2004
|
45
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period
ended
December 31, 2005
|
46
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity for each of the three years in the
period ended December 31, 2005
|
47
|
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
48-86
|
|
|
|
|
|
|
(2)
|
|
Financial
Statement Schedules
|
|
|
|
|
|
|
|
|
|
Consolidated
financial statement schedules not filed herein have been omitted
either
because they are not applicable or the required information is
shown in
the Notes to Consolidated Financial Statements in this Form
10-K.
|
|
|
|
|
|
|
Exhibits
|
|
|
|
|
|
|
|
(3)
|
(a)
|
|
Certificate
of Incorporation of the Company (incorporated by reference to Form
10, as
amended on Form 8-K filed with the Securities and Exchange Commission
on
May 19, 1981).
|
*
|
|
|
|
|
|
(3)
|
(b)
|
|
Certificate
of Amendment to the Restated Certificate of Incorporation of the
Company
(incorporated by reference to Form 10-K for the year ended December
31,
1987).
|
*
|
|
|
|
|
|
(3)
|
(c)
|
|
Certificate
of Amendment to the Restated Certificate of Incorporation of the
Company
(incorporated by reference to Form 10-Q for the quarter ended March
31,
1993).
|
*
|
|
|
|
|
|
(3)
|
(d)
|
|
Amendment
to the Restated Certificate of Incorporation of the Company, filed
with
the State of Delaware, Office of the Secretary of State on May
2, 1996
(incorporated by reference to Form 10-Q filed with the Securities
and
Exchange Commission on May 14, 1996).
|
*
|
|
|
|
|
|
(3)
|
(e)
|
|
Certificate
of Designation relating to Series A Junior Participating Preferred
Stock,
filed with the State of Delaware, Office of the Secretary of State
on
November 12, 1998 (incorporated by reference to Form 10-K filed
with the
Securities and Exchange Commission on March 19, 1999).
|
*
|
*
Incorporated by reference as indicated.
Exhibits
|
|
|
Pages
|
|
|
|
|
(3)
|
(f)
|
|
Composite
By-Laws of the Company as amended through October 2002 (incorporated
by
reference to Form 10-Q filed with the Securities and Exchange Commission
on May 7, 2004).
|
*
|
|
|
|
|
|
(10)
|
(a)
|
|
Form
of Agreement of Transfer entered into between Engelhard Minerals
&
Chemicals Corporation and the Company, dated May 18, 1981 (incorporated
by
reference to Form 10, as amended on Form 8 filed with the Securities
and
Exchange Commission on May 19, 1981).
|
*
|
|
|
|
|
|
(10)
|
(b)
|
|
Rights
Agreement, dated as of October 1, 1998 between the Company and
ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (incorporated by
reference
to Form 8-K filed with the Securities and Exchange Commission on
October
29, 1998).
|
*
|
|
|
|
|
|
(10)
|
(c)
|
|
Employment
Agreement for Barry W. Perry, effective August 2, 2001 (incorporated
by
reference to Form 10-Q filed with the Securities and Exchange Commission
on August 13, 2001).
|
*
|
|
|
|
|
|
(10)
|
(d)
|
|
Amendment
to Employment Agreement for Barry W. Perry, effective February
13, 2002
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 21, 2002).
|
*
|
|
|
|
|
|
(10)
|
(e)
|
|
Amendment
to Employment Agreement for Barry W. Perry, effective February
3, 2005
(incorporated by reference to Form 8-K filed with the Securities
and
Exchange Commission on February 3, 2005).
|
*
|
|
|
|
|
|
(10)
|
(f)
|
|
2004
Share Performance Incentive Plan for Barry W. Perry, effective
February
12, 2004 (incorporated by reference to Form 10-K filed with the
Securities
and Exchange Commission on March 11, 2004).
|
*
|
|
|
|
|
|
(10)
|
(g)
|
|
Engelhard
Corporation Form of Change in Control Agreement (incorporated by
reference
to Form 10-Q filed with the Securities and Exchange Commission
on May 8,
2003).
|
*
|
|
|
|
|
|
(10)
|
(h)
|
|
Engelhard
Corporation Annual Restricted Cash Incentive Compensation Plan,
effective
as of December 15, 2000 (incorporated by reference to Form 10-K
filed with
the Securities and Exchange Commission on March 30, 2001).
|
*
|
|
|
|
|
|
(10)
|
(i)
|
|
Engelhard
Corporation 2002 Long Term Incentive Plan, effective May 2, 2002
(incorporated by reference to the 2001 Proxy Statement filed with
the
Securities and Exchange Commission on March 26, 2002).
|
*
|
|
|
|
|
|
(10)
|
(j)
|
|
Engelhard
Corporation Stock Option Plan of 1991 - conformed copy includes
amendments
through March 2002 (incorporated by reference to Form 10-K filed
with the
Securities and Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(k)
|
|
Engelhard
Corporation Stock Option Plan of 1999 for Certain Key Employees
(Non
Section 16(b) Officers), effective February 1, 2001 - conformed
copy
includes amendments through March 2001 (incorporated by reference
to Form
10-K filed with the Securities and Exchange Commission on March
25,
2003).
|
*
|
*
Incorporated by reference as indicated.
Exhibits
|
|
|
Pages
|
|
|
|
|
(10)
|
(l)
|
|
Deferred
Compensation Plan for Key Employees of Engelhard Corporation, effective
August 1, 1985 - conformed copy includes amendments through October
2001
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(m)
|
|
Deferred
Compensation Plan for Directors of Engelhard Corporation, as restated
as
of May 7, 1987 - conformed copy includes amendments through December
2002
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(n)
|
|
Key
Employees Stock Bonus Plan of Engelhard Corporation, effective
July 1,
1986 - conformed copy includes amendments through March 2002 (incorporated
by reference to Form 10-K filed with the Securities and Exchange
Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(o)
|
|
Stock
Bonus Plan for Non-Employee Directors of Engelhard Corporation,
effective
July 1, 1986 - conformed copy includes amendments through October
1998
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(p)
|
|
Amendment
to Key Employees Stock Bonus Plan of Engelhard Corporation Employees
(incorporated by reference to Form 10-Q filed with the Securities
and
Exchange Commission on November 8, 2004).
|
*
|
|
|
|
|
|
(10)
|
(q)
|
|
Engelhard
Corporation Directors and Executives Deferred Compensation Plan
(1986-1989) - conformed copy includes amendments through December
2001
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(r)
|
|
Engelhard
Corporation Directors and Executives Deferred Compensation Plan
(1990-1993) - conformed copy includes amendments through December
2001
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(s)
|
|
Retirement
Plan for Directors of Engelhard Corporation, effective January
1, 1985 -
conformed copy includes amendments through April 2000 (incorporated
by
reference to Form 10-K filed with the Securities and Exchange Commission
on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(t)
|
|
Supplemental
Retirement Program of Engelhard Corporation as amended and restated,
effective January 1, 1989 - conformed copy includes amendments
through
February 2001 (incorporated by reference to Form 10-K filed with
the
Securities and Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(u)
|
|
Amendment
to the Supplemental Retirement Program of Engelhard Corporation,
effective
as of October 2, 2003 (incorporated by reference to Form 10-Q filed
with
the Securities and Exchange Commission on November 13, 2003).
|
*
|
|
|
|
|
|
(10)
|
(v)
|
|
Supplemental
Retirement Trust Agreement, effective April 2002 (incorporated
by
reference to Form 10-K filed with the Securities and Exchange Commission
on March 25, 2003).
|
*
|
*
Incorporated by reference as indicated.
Exhibits
|
|
|
Pages
|
|
|
|
|
(10)
|
(w)
|
|
Engelhard
Corporation Directors Stock Option Plan as amended and restated,
effective
May 4, 1995 - conformed copy includes amendments through March
2001
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(x)
|
|
Engelhard
Corporation Employee Stock Option Plan as amended and restated,
effective
May 4, 1995 (incorporated by reference to Form 10-K filed with
the
Securities and Exchange Commission on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(y)
|
|
Engelhard
Corporation Deferred Stock Plan for Non-Employee Directors - conformed
copy includes amendments made through December 2002 (incorporated
by
reference to Form 10-K filed with the Securities and Exchange Commission
on March 25, 2003).
|
*
|
|
|
|
|
|
(10)
|
(z)
|
|
Instruments
with respect to other long-term debt of Engelhard and its consolidated
subsidiaries are omitted pursuant to Item 601 (b) (4) (iii) of
Regulation
S-K since the amount of debt authorized under each such omitted
instrument
does not exceed 10 percent of the total assets of Engelhard and
its
subsidiaries on a consolidated basis. Engelhard hereby agrees to
furnish a
copy of any such instrument to the Securities and Exchange Commission
upon
request.
|
*
|
|
|
|
|
|
(10)
|
(aa)
|
|
Form
of Stock Option Agreement used pursuant to the Engelhard Corporation
Stock
Option Plan of 1999 for Certain Key Employees (incorporated by
reference
to Form 10-Q filed with the Securities and Exchange Commission
on August
6, 2004).
|
*
|
|
|
|
|
|
(10)
|
(bb)
|
|
Form
of Stock Option Agreement used pursuant to the Engelhard Corporation
2002
Long Term Incentive Plan (incorporated by reference to Form 10-Q
filed
with the Securities and Exchange Commission on August 6,
2004).
|
*
|
|
|
|
|
|
(10)
|
(cc)
|
|
Form
of Restricted Share Unit Agreement used pursuant to the Engelhard
Corporation 2002 Long Term Incentive Plan Employees (incorporated
by
reference to Form 10-Q filed with the Securities and Exchange Commission
on August 6, 2004).
|
*
|
|
|
|
|
|
(10)
|
(dd)
|
|
Summary
of the Compensation of Non-Employee Directors of Engelhard Corporation
(incorporated by reference to Form 10-K filed with the Securities
and
Exchange Commission on March 11, 2005)
|
*
|
|
|
|
|
|
(10)
|
(ee)
|
|
Five-Year
Credit Agreement, dated as of March 7, 2005 (incorporated by reference
to
Form 10-K filed with the Securities and Exchange Commission on
March 11,
2005)
|
*
|
|
|
|
|
|
(10)
|
(ff)
|
|
Amendment
to Key Employees Stock Bonus Plan of Engelhard Corporation (incorporated
by reference to Form 10-Q filed with the Securities and Exchange
Commission on August 8, 2005).
|
*
|
*
Incorporated by reference as indicated.
Exhibits
|
|
|
Pages
|
|
|
|
|
(10)
|
(gg)
|
|
Enhanced
Salary Continuation Policy (incorporated by reference to Form 8-K
filed
with the Securities and Exchange Commission on January 23,
2006).
|
*
|
|
|
|
|
|
(10)
|
(hh)
|
|
Salary
Continuation Policy (incorporated by Reference to Form 8-K filed
with the
Securities and Exchange Commission on January 23, 2006).
|
*
|
|
|
|
|
|
(10)
|
(ii)
|
|
Form
of letter agreement (incorporated by reference to Form 8-K filed
with the
Securities and Exchange Commission on January 23, 2006).
|
*
|
|
|
|
|
|
(10)
|
(jj)
|
|
Change
in Control Agreement for Edward Wolynic, effective January 21,
2006
(incorporated by reference to Form 8-K filed with the Securities
and
Exchange Commission on January 23, 2006).
|
*
|
|
|
|
|
|
(10)
|
(kk)
|
|
Form
of Directors Nonqualified Stock Option Agreement (incorporated
by
reference to Form 8-K filed with the Securities and Exchange Commission
on
December 8, 2005).
|
*
|
|
|
|
|
|
(10)
|
(11)
|
|
Amendment
to Employment Agreement for Barry W. Perry, dated as of February
3, 2005
(incorporated by reference to Form 8-K filed with the Securities
and
Exchange Commission on February 3, 2005).
|
*
|
|
|
|
|
|
(10)
|
(mm)
|
|
Form
of LTPU award letter under the Engelhard Corporation 2002 Long
Term
Incentive Plan (incorporated by reference to Form 8-K filed with
the
Securities and Exchange Commission on February 3, 2005).
|
*
|
|
|
|
|
|
(10)
|
(nn)
|
|
Summary
of Management Incentive Plan (incorporated by reference to Form
8-K filed
with the Securities and Exchange Commission on February 3,
2005).
|
*
|
|
|
|
|
|
|
|
|
Computation
of the Ratio of Earnings to Fixed Charges.
|
101
|
|
|
|
|
|
|
|
|
Subsidiaries
of the Registrant.
|
102-103
|
|
|
|
|
|
|
|
|
Consent
of Independent Auditors.
|
104
|
|
|
|
|
|
|
|
|
Powers
of Attorney.
|
105-109
|
|
|
|
|
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
110
|
|
|
|
|
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
111
|
|
|
|
|
|
|
|
|
Section
1350 Certifications of Chief Executive Officer and Chief Financial
Officer. This certification accompanies this report pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed
by the
Company for purposes of Section 18 or any other provision of the
Securities Exchange Act of 1934, as amended.
|
112
|
*
Incorporated by reference as indicated.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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, in Iselin, New Jersey on the
3rd day
of March 2006.
|
Engelhard
Corporation
|
|
|
Registrant
|
|
|
|
|
|
|
|
|
/s/
Barry W. Perry
|
|
|
Barry
W. Perry
|
|
|
(Chairman
and Chief Executive Officer)
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Barry W. Perry
|
|
Chairman
and Chief Executive Officer &
|
|
March
3, 2006
|
Barry
W. Perry
|
|
Director
(Principal Executive Officer)
|
|
|
|
|
_________________________________
|
|
|
/s/
Michael A. Sperduto
|
|
Vice
President and Chief Financial
|
|
March
3, 2006
|
Michael
A. Sperduto
|
|
Officer
(Principal Financial Officer)
|
|
|
|
|
|
|
|
/a/
Alan J. Shaw
|
|
Controller
(Principal Accounting Officer)
|
|
March
3, 2006
|
Alan
J. Shaw
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March
3, 2006
|
Marion
H. Antonini
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March
3, 2006
|
David
L. Burner
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March
3, 2006
|
James
V. Napier
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March
3, 2006
|
Henry
R. Slack
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March
3, 2006
|
Douglas
G. Watson
|
|
|
|
|
*
|
By
this signature below, Arthur A. Dornbusch, II has signed this Form
10-K as
attorney-in-fact for each person indicated by an asterisk pursuant
to duly
executed powers of attorney filed with the Securities and Exchange
Commission included herein as Exhibit
24.
|
/s/
Arthur A. Dornbusch, II
|
|
March
3, 2006
|
Arthur
A. Dornbusch, II
|
|
|