10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission file number 1-6450 GREAT LAKES CHEMICAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-1765035 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE GREAT LAKES BOULEVARD P. O. BOX 2200 WEST LAFAYETTE, INDIANA 47906 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 317-497-6100 ---------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Common stock, $1.00 par value New York Stock Exchange Pacific Stock Exchange ---------------------------------- Securities registered pursuant to Section 12(g) of the Act: None ---------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for the past 90 days. Yes X No 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. [ ] ---------------------------------- As of March 6, 1995, the aggregate market value of the voting stock held by non-affiliates of the registrant was $3,980,759,677. As of March 6, 1995, 66,484,504 shares of the registrant's stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1994 Annual Report to Stockholders are incorporated by reference into Parts I, II and IV. Portions of the annual proxy statement dated March 28, 1995 are incorporated by reference into Part III. 2 PART I ------ Item 1. BUSINESS GENERAL Great Lakes Chemical Corporation is a Delaware corporation incorporated in 1933, having its principal executive offices in West Lafayette, Indiana. The Company's operations consist of one dominant industry segment - chemicals and allied products. Within this segment the Company is well diversified focusing on performance chemicals, water treatment chemicals, petroleum additives and specialized services and manufacturing. The Corporate profile on page 3 and the Review of Operations on pages 14 through 19 of the 1994 Annual Report to Stockholders are incorporated herein by reference. The term "Great Lakes" as used herein means Great Lakes Chemical Corporation and Subsidiaries unless the context indicates otherwise. Net sales by Business Unit are set forth in the following table (dollars in millions):
Year ended December 31 1994 1993 1992 ---- ---- ---- Flame Retardants $ 265 $ 240 $ 237 Intermediates and Fine Chemicals 262 240 255 Petroleum Additives 610 576 575 Polymer Stabilizers 162 81 16 Specialized Services and Manufacturing 383 294 154 Water Treatment 383 361 259 ------ ------ ------ Total Net Sales $2,065 $1,792 $1,496 ====== ====== ======
PRODUCTS AND SERVICES The following is a list of principal and certain other products and services provided by Great Lakes:
FLAME RETARDANTS Plants & Major Raw Products & Services Principal Markets Facilities Materials ------------------- ----------------- ---------- --------- Brominated and Computer and ElDorado, AR Bromine intumescent flame Business Equipment, Newport, TN Bisphenol A retardants Consumer Electronics, Aycliffe, U.K. Diphenyl Oxide Textiles, Urethanes and Construction Materials POLYMER STABILIZERS Antioxidants, UV Computer and Business Persan, France Alkylated absorbers and Light Equipment, Consumer Catenoy, France Phenols, Stabilizers Electronics, Packaging Waldkraiburg, Methyl Acrylate, Textiles, Building and Germany Phosphorus Construction Transportation Pedrengo, Italy Trichloride Ravenna, Italy
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INTERMEDIATES AND FINE CHEMICALS Plants & Major Raw Products & Services Principal Markets Facilities Materials ------------------- ----------------- ---------- --------- Bromine, Bromine derivatives Foundry Industry, Lube Oil ElDorado, AR Bromine, and Bromine-based specialty Refining, Pharmaceutical Marysville, AR Agricultural chemicals, Furfural, Furfural Industry, Agrochemical Memphis, TN By-Products derivatives and Furfural-based Industry, Electronics, Soil Omaha, NE Chlorine specialty chemicals, including Crop and Structural Pest Geel, Belgium furfuryl alcohol, Control, Production of Halebank, U.K. POLYMEG(R) Polyols and Photographic Papers and Konstanz, Germany Methyl Bromide Films and Rubber Newport, TN Compounds PETROLEUM ADDITIVES Antiknock boosters for Major Oil Refineries and Fuel Ellesmere Port, U.K. Ethylene, leaded gasoline, Cetane Blenders Worldwide Paimbouef, France Lead, Salt, number improvers, Multi- Bussi, Italy Electricity functional gasoline and diesel fuel additives, Gasoline and diesel detergents, Petroleum anti-oxidants, stabilizers, and corrosion inhibitors WATER TREATMENT CHEMICALS RECREATIONAL Water sanitizers - Pool and Spa Dealers and Adrian, MI BCDMH BioGuard(R), OMNI(R), Distributors, Mass Market Conyers, GA Chlorinated Hydrotech(R), Guardex(R), Retailers, Builders Lake Charles, LA Isocyanurates Pool Time(R), AquaChem(R) Munich, Germany Calcium Algicides, oxidizers, pH 43 U.S. Distribution hypochlorite balancers, mineral balancers locations Cyanuric acid and specialty chemicals pool equipment INDUSTRIAL BromiCide(R) and LiquiBrom(TM) Industrial Cooling Water Adrian, MI Bromine Specialty Biocides, Treatment, Industrial and ElDorado, AR Sodium Bromide Biocide dispensing Municipal Wastewater Treat- equipment ment, Pulp and Paper and Food Processing
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SPECIALIZED SERVICES AND MANUFACTURING Plants & Major Raw Products & Services Principal Markets Facilities Materials ------------------- ----------------- ---------- --------- ENVIRO-ENERGY PERFORMANCE GROUP Completion fluids, Sand Worldwide Oil and Gas Lafayette, LA Bromine, control and filtration, Industry Aberdeen, U.K. Zinc, Sodium, Reservoir analysis, Calcium Down-hole tools Waste management, Petrochemical Companies, Greensboro, NC Contamination assessment Waste Management Firms, Raleigh, NC and remediation, Geotech- Oil Refineries, Forest Baton Rouge, LA nical engineering, Resource Product Companies, recovery and material Government Agencies handling TOXICOLOGICAL SERVICES All phases of nonclinical Pharmaceutical, Chemical, Ashland, OH toxicological testing and Veterinary, Medical, Agri- bioanalytical services, cultural, Food and Consumer Design of specialized Products Industries toxicological, metabolic and analytical chemistry programs ENGINEERED SURFACE TREATMENTS Dry film lubrication, corrosion Aerospace, Automotive, North Hollywood, Molysulfide, and abrasion-resistant, chip- Railroad, Machine Tool, CA Various solvents and scuff-proof coatings, All Manufacturing Fort Worth, TX and resins Electrically conductive Industries Lombard, IL coatings Roseville, MI INTERNATIONAL TRADING Organic and inorganic Central and Eastern Budapest, Hungary chemicals, Plastic resins, European Chemical Finished agrochemicals and Industry fertilizers FLUORINE CHEMISTRY Fire extinguishing agent Data Processing ElDorado, AR Fluorine FM-200(R), Organofluorine Telecommunications compounds, Florinated Military intermediates
1994 DEVELOPMENTS The Review of Operations on pages 14 through 19 of the 1994 Annual Report to Stockholders are incorporated herein by reference. 3 5 Raw Materials The sources of essential raw materials for bromine are the brine from company-owned wells in Arkansas and sea water extraction plants in Europe. The Arkansas properties are located atop the Smackover lime deposits, which constitute a vast underground sea of bromine-rich brine. The area between ElDorado and Magnolia, Arkansas, (located about 35 miles west of ElDorado) provides the best known geological location for bromine production and both major domestic bromine manufacturers are located there. Based on projected production rates, the Company's brine reserves are conservatively estimated to be adequate for the foreseeable future. Furfural is extracted from agricultural by-products and waste materials such as corncobs, sugar cane bagasse, rice hulls and oat hulls for which there are few alternative uses. These raw material sources for furfural production are expected to remain abundant and relatively inexpensive. Other materials used in the chemical processes are obtained from outside suppliers through purchase contracts. Supplies of these materials are believed to be adequate for the Company's future operations. International Operations Great Lakes has a substantial presence in foreign markets. The Company's investment in foreign countries is principally in Western Europe and represents $1,073 million or 51 percent of total assets. Sales to customers in foreign countries (primarily Europe and the Far East) amount to 64, 62 and 61 percent of total sales for the years ended December 31, 1994, 1993, and 1992, respectively. Approximately 15, 15, and 19 percent of these foreign sales, respectively for the three years shown, are products exported from the U.S., with the balance of the Company's international sales primarily being products manufactured and sold by the Company's European subsidiaries and branches. The profitability on foreign sales (including U.S. exports and foreign manufactured products, except Octel) approximates those for domestic operations. Because of value-added pricing, Octel's alkyl lead products have a higher profitability than do most of the Company's other products. The geographic segment data contained in the note "Industry Segments and Foreign Operations" of Notes to Consolidated Financial Statements on page 37 of the 1994 Annual Report to Stockholders is incorporated herein by reference. Customers and Distribution During the last three years, no single customer accounted for more than 10 percent of Great Lakes' total consolidated sales. The Company has no material contracts or subcontracts with government agencies. A major portion of the Company's sales are sold to industrial or commercial users for use in the production of other products. Some products such as recreational water treatment chemicals and supplies are sold to a large number of retail pool stores, mass merchandizers and distributors. Some export sales are marketed through distributors and brokers. The Company's business does not normally reflect any material backlog of orders at year-end. Competition Great Lakes is in competition with businesses producing the same or similar products as well as businesses producing products intended for similar use. There is one other major bromine producer in the United States which competes with the Company in varying degrees, depending on the product involved, with respect to the sale of bromine and bromine derivatives. There is also one major overseas manufacturer of bromine and 4 6 brominated products. In addition, there are several small producers in the U.S. and overseas which are competitors in several individual products. The Company is the only U.S. producer of furfural and furfuryl alcohol, and it enjoys a significant market portion in every major geographic and product market in which it competes. The Company is a major producer of alkyl lead. The Company competes with several manufacturers and distributors of swimming pool and spa chemicals and equipment. Through its Bio-Lab subsidiary, the Company operates 43 branch distribution outlets for chemicals and pool and spa equipment in the U.S. Products are differentiated by brand names to the retail, wholesale and mass merchandising markets. Principal methods of competition are price, product quality and purity, technical services and ability to deliver promptly. The Company is able to move quickly in providing new products to meet identified market demands, and believes its production costs are among the lowest in the world. These factors, combined with high technical skills, allow the Company to compete effectively. One negative factor in its ability to compete with the major overseas producer of bromine is the fact that this producer receives significant subsidies from its government, and enjoys favorable duty advantages on its exports to certain markets. Seasonality and Working Capital The products, which the Company sells to the agricultural and swimming pool markets, exhibit some seasonality; however, the effect on overall Company sales and profits is not material. Seasonality results in the need to build inventories for rapid delivery at certain times of the year. The pool product season is strongest during the first six months, requiring a build-up of inventory at the beginning of the year. Except for certain arrangements with distributors and dealers of swimming pool and spa products, customers are not permitted to return unsold material at the end of a season. Extended credit terms are granted only in cases where the Company chooses to do so to meet competition. The alkyl lead products have somewhat larger working capital requirements than do the Company's other major products, because of extended distribution lines and credit terms for large volume refinery customers. The effect of the above items on working capital requirements is not material. Research and Development and Patents Research and development expenditures are included in the note "Research and Development Expense" of the Notes to Consolidated Financial Statements on page 37 of the 1994 Annual Report to Stockholders and is incorporated herein by reference. The Company holds no patents, licenses, franchises or concessions which are essential to its operations. Environmental and Toxic Substances Control The Company recognizes its responsibility for the sound environmental management of its businesses and operations. In partial fulfillment of this responsibility, the Company has subscribed to the comprehensive environmental stewardship program developed by the Chemical Manufacturers Association known as Responsible Care. The Company is in material compliance with all environmental laws and regulations to which it is subject. Employees The Company has approximately 7,900 employees. 5 7 Item 2. PROPERTIES Great Lakes has plants at 32 locations in 13 states and 15 plants in 9 foreign countries. Most principal plants are owned. Listed under Item 1 above in a table captioned Products and Services are the principal locations at which products are manufactured, distributed or marketed. The Company leases warehouses, distribution centers and space for offices throughout the world. All of the Company's facilities are in good repair, suitable for the Company's businesses, and have sufficient space to meet present marketing demands at an efficient operating level. Item 3. LEGAL PROCEEDINGS There are no material pending legal proceedings involving the Company, its subsidiaries or any of its properties. Furthermore, no director, officer or affiliate of the Company, or any associate of any director or officer is involved, or has a material interest in, any proceeding which would have a material adverse effect on the Company. Item 103 of Regulation S-K requires disclosure of administrative or judicial proceedings arising under any federal, state or local provisions dealing with protection of the environment, if the monetary sanctions might exceed $100,000. The following proceeding may result in sanctions exceeding $100,000. In 1993, the Company and the United States Environmental Protection Agency agreed in principle to settle an action brought by the EPA under Section 15(1)(c) of TOSCA for a payment of $125,000 and the performance of $2,000,000 of environmentally beneficial capital projects at the Company's ElDorado, Arkansas, site. The proposed consent decree states that the Company does not admit the allegations made by the EPA. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the quarter ended December 31, 1994. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 6, 1995, there were approximately 4,900 registered holders of Great Lakes Common Stock. Additional information is contained in the 1994 Annual Report to Stockholders, under the captions "Stock Price Data" and "Cash Dividends Paid" on page 25 all of which are incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA This information is contained in the 1994 Annual Report to Stockholders, under the caption "Financial Review" on pages 26 and 27, and is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 21 through 25 of the 1994 Annual Report to Stockholders, is incorporated herein by reference. 6 8 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements together with the report thereon of Ernst & Young LLP dated January 30, 1995, appearing on pages 28 through 38 and the "Quarterly Results of Operations" on page 39 of the 1994 Annual Report to Stockholders, are incorporated herein by reference. Item 9. DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE No change of auditors or disagreements on accounting methods have occurred which would require disclosure hereunder. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers
Served as Name and Age Office Officer Since ------------ ------ ------------- Robert B. McDonald, 58 President and Chief Executive Officer 1981 Robert T. Jeffares, 59 Executive Vice President and Chief Financial Officer 1983 David A. Hall, 50 Senior Vice President 1987 John S. Little, 63 Senior Vice President 1994 David R. Bouchard, 51 Vice President, Flame Retardants 1990 Steven D. Clark, 49 Vice President, Technology 1995 L. Donald Simpson, 59 Vice President, Intermediate and Fine Chemicals 1992 Lowell C. Horwedel, 62 Vice President 1984 Robert L. Hollier, 52 Vice President 1991 J. Larry Robertson, 46 Vice President, Environment and Engineering 1994 John B. Talpas, 51 Vice President, Manufacturing 1988 Richard R. Ferguson, 43 Vice President, Treasurer and Assistant Secretary 1991 Mary P. McClanahan, 51 Corporate Secretary 1994 David C. Sanders, 51 Associate Vice President, Research and Development 1990 Robert J. Smith, 48 Corporate Controller 1993 Stephen E. Brewer, 45 Assistant Treasurer 1994 John V. Lacci, 42 Assistant Secretary 1994
Information with respect to directors of the Company is contained under the heading "Proposal One: Election of Directors" in the Great Lakes' Proxy Statement relating to the 1995 Annual Meeting of Stockholders dated March 4, 1995, which is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION The information under the heading "Executive Compensation and Other Information" in the 1995 Proxy Statement is incorporated by reference in this report. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 1995 Proxy Statement is included by reference in this report. 7 9 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the heading "Compensation Committee Interlocks and Insider Participation" in the 1995 Proxy Statement is included by reference in this report. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following Consolidated Financial Statements of Great Lakes Chemical Corporation and Subsidiaries and related notes thereto, together with the report thereon of Ernst & Young LLP dated January 30, 1995, appearing on pages 28 through 38 of the 1994 Annual Report to Stockholders, are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1994 and 1993 Consolidated Statements of Income and Retained Earnings - Years ended December 31, 1994, 1993, and 1992 Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1993, and 1992 Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following additional information is filed as part of this report and should be read in conjunction with the 1994 financial statements. Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. 3. Exhibits 13. 1994 Annual Report to Stockholders 21. Subsidiaries - Incorporated herein by reference is the list of subsidiaries appearing on page 40 of the 1994 Annual Report to Stockholders 23. Consents of Independent Auditors (b) Reports on Form 8-K There were no Form 8-K's filed during the quarter ended December 31, 1994. (c) Exhibits The response to this section of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this section of Item 14 is submitted as a separate section of this report. 8 10 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. GREAT LAKES CHEMICAL CORPORATION (Registrant) Date March 6, 1995 /s/ Robert B. McDonald ------------------------------------- Robert B. McDonald, President 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: Date March 6, 1995 /s/ Robert T. Jeffares ------------------------------------- Robert T. Jeffares Executive Vice President and Chief Financial Officer Date March 6, 1995 /s/ Robert J. Smith ------------------------------------- Robert J. Smith, Corporate Controller (Principal Accounting Officer) Date March 6, 1995 /s/ William H. Congleton ------------------------------------- William H. Congleton, Director Date March 6, 1995 /s/ John S. Day ------------------------------------- John S. Day, Director Date March 6, 1995 /s/ Richard H. Leet ------------------------------------- Richard H. Leet, Director Date March 6, 1995 /s/ Martin M. Hale ------------------------------------- Martin M. Hale, Director Date ------------------------------------- Leo H. Johnstone, Director Date March 6, 1995 /s/ Robert B. McDonald ------------------------------------- Robert B. McDonald, Director Date ------------------------------------- Emerson Kampen, Director
9 11 SCHEDULE II GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1994
Additions Balance at -------------------------------- Beginning Charges to Costs Charged to Balance at End Description of Period and Expenses Other Accounts Deductions of Period ----------- ----------- ---------------- -------------- ------------ -------------- 1994: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 7,088,000 $ 1,174,000 $ -0- $ 504,000 (B) $ 7,758,000 =========== ============= ============== ============ ============ Accumulated amortization of excess of investment over net assets of subsidiaries acquired $43,242,000 $ 20,699,000 $ -0- $ -0- $ 63,941,000 =========== ============= ============== ============ ============ 1993: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 4,317,000 $ 2,833,000 $ 2,005,000 (A) $ 2,067,000 (B) $ 7,088,000 =========== ============= ============== ============ ============ Accumulated amortization of excess of investment over net assets of subsidiaries acquired $25,272,000 $ 17,970,000 $ -0- $ -0- $ 43,242,000 =========== ============= ============== ============ ============ 1992: Reserve deducted from asset: Allowance for doubtful accounts receivable $ 4,710,000 $ 9,428,000 $ -0- $ 9,821,000 (B) $ 4,317,000 =========== ============= ============== ============ ============ Accumulated amortization of excess of investment over net assets of subsidiaries acquired $17,624,000 $ 7,648,000 $ -0- $ -0- $ 25,272,000 =========== ============= ============== ============ ============
(A) Reserve balance of Bayrol and Lowi at date of acquisition. (B) Uncollectible accounts receivable written off, net of recoveries and foreign currency translation. 10 EX-13 2 FINANCIAL HIGHLIGHTS 1 EXHIBIT 13 Review of Operations FLAME RETARDANTS [PHOTO] DAVID R. BOUCHARD, Vice President, Flame Retardants Great Lakes established its place as the world's undisputed leader in flame retardant technology through the introduction of innovative new products, timely development of new markets, and continuous improvement of its manufacturing operations. In 1994, this formidable combination produced yet another year of progress with revenues and profits surpassing all previous levels. Strong worldwide demand for our bromine-based products continued accelerating in 1994. We initiated a series of measures throughout the year necessary to meeting our customers' future requirements. These moves ranged from investing in incremental capacity expansions to completing debottlenecking projects at our manufacturing facilities in Arkansas, Tennessee and the United Kingdom. Late in the year, we raised prices on most of our flame retardants in order to offset higher raw materials costs and to ensure an adequate return on these investments. Also during the year, we entered into a manufacturing joint venture with Bromine Compounds Limited to produce tetrabromobisphenol-A (TBBA), a key flame retardant and raw material for other flame retardants. This arrangement positions Great Lakes to meet rapidly expanding market demand in a cost-effective manner while maintaining our favorable competitive position for this versatile product. Located in Israel, the plant is slated for completion in late 1995 and will produce 25,000 metric tons annually, or nearly 30 percent of the world's capacity. In addition to meeting needs for existing products, we continue to develop applications for vast new markets. Our most recent addition is GPP-39(TM), a graft polymer of dibromostyrene and olefins. This product, used in such applications as carpeting and commercial wall coverings, results in textiles significantly more versatile and durable than those produced by conventional systems. Another dibromostyrene derivative, PDBS-80(TM), also continues to gain market acceptance. Widely recognized for its thermal stability and color consistency, this additive for engineered plastics and resins imparts critical flame retardant characteristics into automotive and electronics components. Our commercialization efforts have proven so successful that we will commission a new manufacturing unit in early 1995. PDBS-80(TM) and other recently-developed products promise to keep Great Lakes at the forefront of the brominated flame retardant industry. Later this year, the company also stands to gain a significant boost in the important Pacific Rim marketplace when the Japanese government lifts tariffs on most brominated flame retardants. U.S. bromine products previously faced a competitive disadvantage in Japan due to the relatively large duties imposed upon them. Without tariffs on bromine-based flame retardants used in industrial and consumer electronics, aerospace and a host of other applications, we will soon be competing on a level playing field in one of the world's largest flame retardant markets. Great Lakes also made further inroads in its polymer additives diversification efforts during 1994 by entering into a joint venture with Prochimie International, Inc., to construct an n-Phenylmaleimide plant. Plastics manufacturers use this value-added specialty intermediate to improve heat resistance in polymer systems. The plant, under construction in Abbeville, Alabama, should be completed by the end of 1995. OUTLOOK With additional capacity in place, pricing actions successfully bringing margins back to more normal levels, and new product introductions gaining market acceptance, Great Lakes is poised to take full advantage of the strong market demand for flame retardants anticipated in 1995 and beyond. 14 2 Review of Operations INTERMEDIATES AND FINE CHEMICALS [PHOTO] L. DONALD SIMPSON, Vice President, Intermediates and Fine Chemicals The Intermediates and Fine Chemicals business unit maximizes the company's strong foundation in bromine and furfural, and applies its manufacturing expertise to produce a wide range of fine chemicals, intermediates, and other specialty compounds. This business posted solid results in 1994, led by strong demand for a number of bromine and furfural compounds. INTERMEDIATES Extracted from brine in seawater or mineral deposits thousands of feet below the earth's surface, bromine is a non-metallic element used in a variety of specialty applications. This versatile chemical serves as the primary building block for many of Great Lakes' value-added products, including flame retardants, water treatment products and clear drilling fluids. Great Lakes holds the unique position as the only bromine producer serving world markets from manufacturing sites located on two continents. Worldwide demand for bromine and its derivatives rose significantly in 1994, and projections call for that trend to continue. Keeping pace with customers' accelerating requirements, we expanded bromine production at three of our South Arkansas plants. In addition to the expansions, debottlenecking helped keep production units running at or near maximum efficiencies. Since mid-1993, our investments in the production of bromine and its derivatives, including expansions planned for 1995, total more than $100 million. These actions represent steps vital to supporting our strategies for keeping pace with the expected growth of the bromine business in the years to come. Another important leg of this diverse business unit is furfural which is derived from readily-available agricultural by-products such as corn cobs, grain hulls, and sugar cane bagasse. Furfural-based specialty chemicals find use in such applications as engineered plastics, specialty resins to make sand cores for the foundry industry, and solvents for industrial and retail paint strippers. This highly-versatile chemistry makes an excellent base for developing value-added products for a variety of industry applications. One of the fastest growing furfural derivatives, PTMEG, is used primarily by the polyurethane industry with end uses encompassing colorful synthetic fibers used in athletic apparel, numerous engineered polymers, and industrial wheels and belts. Strong business conditions in the polyurethane industry resulted in sharply increased demand for PTMEG. We implemented several engineering improvements at our Memphis, Tennessee, manufacturing facility to increase production to meet customer requirements in the near-term. Additional plant expansions will be completed as market conditions warrant. FINE CHEMICALS Great Lakes takes advantage of its strong raw material positions in bromine, furfural, and other basic chemicals, to manufacture fine chemical intermediates used by other companies to make products for the pharmaceutical, photographic, and agricultural markets. The company meets customer requirements throughout the world from state-of-the-art, ISO 9000 certified manufacturing facilities located in the United Kingdom, Germany and the United States. Additionally, we extend our manufacturing and engineering expertise to single customer projects by creating and manufacturing custom compounds and intermediates that meet individual customers' demanding performance, environmental and quality requirements. The ability to manufacture customized compounds quickly and cost effectively satisfies a growing need in the industry and provides us with a profitable means of gaining experience in new technologies. An example offering significant business potential is our involvement with Johnson & Johnson's low-calorie sweetener, Sucralose(R). The product is already approved in Canada and currently awaits FDA approval for use in the United States. OUTLOOK All signs indicate demand for the company's bromine, furfural and other value-added products will remain strong for some time to come. Through investments in capacity expansions and other productivity enhancement measures, we have taken the steps necessary to ensure Great Lakes remains a leading manufacturer of specialty chemicals. 15 3 Review of Operations PETROLEUM ADDITIVES [PHOTO] JOHN S. LITTLE, Senior Vice President Through its Petroleum Additives business unit, Great Lakes is the world's largest supplier of a wide range of fuel additives for over 200 refineries in 65 countries around the world. By expanding market penetration, broadening research and development capabilities, and diversifying into new product areas, this business unit again this year realized gains in revenues and profits. Much of the year's success reflected the benefits from expanding this business to better serve growing markets throughout the world. The latest step in our diversification strategy occurred in 1994 when we formed Octel America, Inc. This wholly-owned subsidiary complements the growth of Octel Associates (Octel), our U.K.-based subsidiary recognized around the world as one of the leading developers, manufacturers and marketers of motor fuel additives. In its first move, Octel America acquired DuPont's petroleum additives business, which significantly expands our existing product line with over 100 new products. This addition greatly enhances our ability to respond to changing market and consumer needs by offering a full range of petroleum additives designed to make engines run more efficiently. Our comprehensive product offering now includes cetane enhancers, combustion improvers, and detergents for gasoline and diesel, to name just a few. Octel America also provides an outlet for introducing Octel's products into North America, the largest market in the world for efficient, environmentally-friendly petroleum additives. In the near future, our plans call for establishing a U.S. manufacturing base for these products which will enable the company to better serve U.S. and Canadian customers. Today, Great Lakes is positioned to effectively serve all major world markets for petroleum additives. Greater global penetration brings new opportunities for meeting differing fuel requirements. At the forefront of our fuel additives research is Octel's Fuel Technology and Engine Laboratory in the U.K. At this state-of-the-art engine facility, chemists and engineers design, develop, and test custom-blended fuel additives to meet customer demands while satisfying international fuel standards and requirements. With its expertise in gasoline and diesel additives, and their understanding as to how these products affect engine performance and exhaust emissions, Octel is well-suited to meet the challenging needs for current and future fuel markets. Octel also completed two major transactions in 1994, thereby enhancing the future of antiknock compound. Concurrent with Octel America's actions, Octel acquired DuPont's North American and South American tetraethyl lead business. This acquisition, coupled with Octel's long-term agreement to supply Ethyl Corporation's antiknock compound requirements, allows Octel to maintain high manufacturing rates, and reduce overall unit costs at its three remaining plants. With these moves, Octel solidified its position as being the only remaining significant supplier of antiknock compound anywhere in the world. Another key element in Octel's strategy for diversification entails extending its manufacturing capabilities so that it can offer a wider range of products. The company is broadening production capabilities at its Amlwch, U.K., site to produce aqueous inorganic bromide solutions used in oil extraction in the North Sea and other European locations. Octel also commissioned the construction of two new facilities: one in Amlwch to manufacture a wide variety of bromine-based chemicals, and another in Ellesmere Port, U.K., for producing a new chemical intermediate. With its European manufacturing base and international marketing and distribution network, Octel is positioned to become a major producer of specialty chemicals and intermediates. OUTLOOK Through a strategic focus on greater product diversification and further penetration of growing global markets, the Petroleum Additives business unit is taking full advantage of the expanding need for efficient, environmentally-friendly fuel additives in today's engines. 16 4 Review of Operations POLYMER STABILIZERS [PHOTO] GERD K. SCHUE, President, Great Lakes Chemical (Europe) Great Lakes adapts its fundamental strengths and vast expertise in flame retardant technology to an even broader part of the polymer additives industry. In just two years, the company has emerged into a formidable, world-scale supplier of a wide range of polymer stabilizers. In 1994, we posted our most impressive gains yet, with revenues 100 percent higher than the previous year. Acquiring EniChem Synthesis S.p.A.'s (Enichem) polymer additives and associated specialty chemicals business represents not only the most recent, but clearly the most significant action in our expansion strategy. Along with broadening our product range and European manufacturing base, Enichem brings complementary technologies and an experienced network of sales and technical specialists. Integrating Italy-based Enichem with operations in France and Germany creates an enviable foundation for expanding Great Lakes' position in the $2 billion, global polymer stabilizer industry. Accelerating this progress is market-driven research and development which has identified new molecules and alternate physical forms for cleaner, safer polymer processing. Many of these new blends and liquid forms also eliminate or reduce potential problems linked to dust dispersion during processing. In another area, humidity-resistant granular antioxidant blends maximize perfor- mance, greatly simplify polymer processing operations and improve dosage reliability. Our Silanox antioxidant family, currently under development, offers solutions to a wide variety of plastics problems by coupling excellent stabilization with extremely low extractability characteristics. One of our targeted market segments undergoing substantial expansion is Hindered Amine Light Stabilizers (HALS), used to protect plastics from ultraviolet (UV) ray degradation. We broadened our HALS manufacturing capabilities in 1994 by modifying a multipurpose production facility in Persan, France, to accommodate future growth from products such as our recently-patented Uvasil 299 and other related UV stabilizers. Finding new applications for polymer stabilizers like HALS starts with a close relationship with the markets we serve. Because customers' requirements vary geographically, Great Lakes operates Technical Service Centers on two continents -- one in Milan, Italy, and another recently commissioned in West Lafayette, Indiana. Scientists and technicians at these facilities work with major polymer producers and compounders to tailor customized products, and offer individual, customer- specific technical support. Future plans call for additional Technical Service Centers to be established in growing markets across the globe, thus providing progressively better service to our worldwide customer base. Our long-range plans also entail moving aggressively to ensure an adequate supply of product. During the year, we expanded production capacities for several antioxidants and UV stabilizers at manufacturing sites in Pedrengo and Ravenna, Italy, and Catenoy, France. Our Waldkraiburg, Germany, plant expansion ensures our ability to supply growing market needs for Lowilite(R) 77, another important product of the HALS family. Plus, to better serve our growing U.S. customer base and achieve greater market penetration, we will construct a new facility in the United States beginning mid-1995 to produce high-performance phenolic antioxidants used in a variety of engineered polymers. OUTLOOK The polymer stabilizers business represents one of Great Lakes' most dynamic growth businesses. We have in place all the tools necessary to grow our share of this $2 billion market: established technology, integrated manufacturing and market-driven research and development. Great Lakes enjoys a unique competitive advantage as the single source for customers requiring a bundle of products that range from flame retardants to a host of performance-enhancing polymer stabilizers. 17 5 Review of Operations SPECIALIZED SERVICES AND MANUFACTURING [PHOTO] DAVID A. HALL, Senior Vice President The Specialized Services and Manufacturing business unit showcases the benefits of carefully-planned, highly-selective diversification. Consisting of several key stand-alone businesses and other high growth technologies, the unit focuses on emerging technologies which serve diverse markets. In 1994, revenues increased in virtually every sector. FLUORINE CHEMICALS As a company driven by research and development, Great Lakes continually looks for new growth opportunities. One natural extension is fluorine, an element belonging to the same chemical family as bromine, the halogens. Fluorine chemistry provides a multitude of opportunities for developing products that serve wide ranging applications in refrigerants, medical, pharmaceutical, and fire suppression markets. One of the most promising fluorinated derivatives is our FM-200(TM) fire extinguishant, a product that didn't exist as recently as three years ago. In its first full year of commercialization, FM-200(TM) has received widespread market acceptance with installations exceeding 5,000. Much of this success can be attributed to the fact that an FM-200(TM) system became the first halon-replacement engineered system to receive the Underwriters Laboratories listing mark. Engineered systems safeguard such valuable assets as computer and telecommunications facilities, and represent the largest market segment for fire extinguishant agents. ENVIRO-ENERGY PERFORMANCE GROUP The company's Enviro-Energy Performance Group consists of two key Great Lakes subsidiaries--OSCA, Inc. (OSCA), and Four Seasons Industrial Services, Inc. Each holds a prominent position in growing world markets. Four Seasons and its affiliate, Aquaterra, provide complete environmental remediation and geo-technical consulting services, including groundwater treatment systems, soil reclamation, waste minimization and pollution prevention. During 1994, Four Seasons expanded its scope of service capabilities, completing sizable projects ranging from site assessment to complete remediation projects for major petrochemical and chemical processing companies. OSCA is a leading supplier of bromine-based clear workover and completion fluids and ancillary well completion services used in the production of oil and natural gas. OSCA extended its marketing and distribution opportunities in the oil-rich North Sea region by purchasing the remaining 50 percent of OSCA International, a joint venture between OSCA and M-I Drilling Fluids Company. TOXICOLOGICAL TESTING Great Lakes' wholly-owned WIL Research Laboratories, Inc., subsidiary is one of the few fully-integrated interdisciplinary research services firms that performs private and government-mandated toxicological assessments. WIL provides data essential to the development, and later, the approval of new chemical, pharmaceutical, and food additive products. Increasingly stringent requirements adopted in countries around the world have heightened the demand for toxicological services. With a multi-million dollar expansion of its facilities nearing completion, WIL will be able to offer expanded capabilities to a growing customer base. ENGINEERED SURFACE TREATMENTS E/M Corporation, a Great Lakes subsidiary since the early 1970's, is a leading developer and applicator of engineered surface treatments that impart such properties as corrosion control, lubricity and electromagnetic interference shielding. Extending its leadership positions to markets outside the traditional aerospace and transportation industries, E/M continues to adapt its products to new applications. One case in point, the company began in 1994 a long-term supply contract to provide lubricating blocks for London's underground transport system. INTERNATIONAL TRADING Through Great Lakes' 78 percent ownership, Chemol RT provides an outstanding avenue for introducing and distributing our products and services into emerging Central and Eastern European markets. The former state-owned trading company of Hungary, Chemol is a leading distributor of inorganic and organic chemicals, and petrochemicals. The combination of Chemol's extensive presence and a keen understanding of the chemical industry in this part of the world makes it a vital part of Great Lakes' international expansion. OUTLOOK The Specialized Services and Manufacturing business unit appears well-equipped to continue its progress. We have established leadership positions in specialty markets that promise to grow well into the future. 18 6 Review of Operations WATER TREATMENT [PHOTO] Marshall E. Bloom, Chairman and Chief Executive Officer, Bio-Lab, Inc. Great Lakes divides its Water Treatment business unit into two market segments, each providing excellent prospects for growth. The company is the premier supplier of chemicals and key operating equipment to the world's multi-billion dollar recreational water treatment market. Great Lakes also supplies specialty biocides for a variety of industrial applications. Sales in 1994 grew more than 10 percent over last year's record levels, reflecting gains from extending market penetration, expanding product applications and increasing manufacturing capacity. RECREATIONAL Consistent with its long-range objectives, Great Lakes benefited from improved manufacturing operations and broadened marketing and distribution capabilities. Late in 1994, our wholly-owned Bio-Lab, Inc. (BioLab), subsidiary acquired Olin Corporation's Lake Charles, Louisiana, trichloroisocyanuric (trichlor) dry sanitizer plant. Adding the capacity to produce trichlor, a key ingredient of many of our swimming pool and spa products, provides the vertical integration necessary to strengthen BioLab's already enviable position in global water treatment markets. Complementing its enhanced manufacturing base, BioLab also continues to find new avenues to access key market segments. During 1994, we added the assets of Pioneer Pool Products' wholesale distribution business. This move enhances our extensive coverage of the Southeast United States, one of the most important geographic regions for swimming pool and spa products. Our ability to control virtually every aspect of providing finished product to the pool owner gives us a significant competitive advantage. Along with strengthening our North American presence, BioLab tapped new opportunities in growing international markets. Acquiring CPC-Hydrochem, Ltd., the United Kingdom's leading packager and distributor of recreational water treatment chemicals and equipment, provides immediate access to the North Sea region. Coupled with our Germany-based Bayrol Chemische Fabrik GmbH, this newly-formed unit augments our ability to serve key markets in Central and Eastern Europe as well as in Mediterranean countries. Again in 1994, new product introduction enabled BioLab to penetrate new market sectors and advance its competitive position. BioLab introduced three self-contained systems, each targeted for specific distributor and dealer networks. Synergy(TM), Snap(TM) and Simplicity(TM) offer the residential pool owner effective water treatment capabilities with ease of handling characteristics. Additionally, BioLab expanded its BioGuard(R) SoftSwim(TM) ABC system of non-chlorine water treatment by adding SoftSwim(TM) C, a patented, enhanced clarifier. INDUSTRIAL Great Lakes' biocides find use in a variety of industrial applications, including cooling towers, the pulp and paper industry and wastewater treatment facilities. The company's proprietary products replace traditional biocides with environmentally-suitable alternatives that also eliminate safety and handling problems encountered with conventional products. Given this technology's performance advantages and its ability to meet stringent toxicological and regulatory standards, demand for bromine-based industrial water treatment products promises to continue rising for years to come. To keep pace with current and future market requirements, the company completed a series of capacity expansions and debottlenecking improvements at our Adrian, Michigan, facility, with additional expansions anticipated in 1995. Not satisfied with its progress to date, the company broadened its industrial water treatment business in two new product areas. We introduced a powdered form of BromiCide(R) with faster dissolution rates, providing a more effective shock disinfecting treatment for the pulp and paper industry. And for the first time, we extended our bromine technology into consumer water sanitizing markets with the development of the first concentrated bromine-based automatic toilet bowl cleaner for home use. OUTLOOK Just as it has in its other businesses, Great Lakes is moving its water treatment business forward through efficient manufacturing, greater market penetration and aggressive new product development. With BioLab leading the way and new strategies in place for 1995, this business unit promises to remain on its upward track. 19 7 MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL STATEMENTS [PHOTO] ROBERT T. JEFFARES, Executive Vice President and Chief Financial Officer The management of Great Lakes Chemical Corporation is responsible for the preparation and presentation of the accompanying consolidated financial statements and all other information in this Annual Report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts that are based on management's informed judgments and estimates. The company maintains accounting systems and internal accounting controls which management believes provide reasonable assurance that the company's financial reporting is reliable, that assets are safeguarded, and that transactions are executed in accordance with proper authorization. This internal control structure is supported by the selection and training of qualified personnel, and an organizational structure which permits the delegation of authority and responsibility. The systems are monitored worldwide by an internal audit function that reports its findings to management. The company's financial statements have been audited by Ernst & Young LLP, independent accountants, in accordance with generally accepted auditing standards. These standards provide for the review of internal accounting control systems to plan the audit and determine auditing procedures, and tests of transactions to the extent they deem appropriate. The Audit Committee of the Board of Directors, which consists solely of non-employee directors, is responsible for overseeing the functioning of the accounting systems and related internal controls and the preparation of annual financial statements. The Audit Committee periodically meets with management and the independent accountants to review and evaluate their accounting, auditing and financial reporting activities and responsibilities. The independent accountants and internal auditors have full and free access to the Audit Committee without management's presence to discuss internal accounting controls, results of their audits, and financial reporting matters. ROBERT T. JEFFARES Robert T. Jeffares Executive Vice President and Chief Financial Officer FINANCIAL CONTENTS 20 Management's Statement of Responsibility for Financial Statements 21 Management's Discussion and Analysis of Results of Operations and Financial Condition 26 Financial Review 28 Consolidated Statements of Income and Retained Earnings 29 Consolidated Balance Sheets 30 Consolidated Statements of Cash Flows 31 Notes to Consolidated Financial Statements 38 Report of Independent Auditors 39 Quarterly Results of Operations 20 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING RESULTS 1994 COMPARED WITH 1993 Revenues for 1994 were a record $2,111 million, an increase of 16 percent over the $1,828 million reported in 1993. For the five and ten-year periods ended in 1994, the Company's revenues have grown at annual compound rates of 20 percent and 22 percent, respectively. Net sales in 1994 were $2,065 million, an increase of $273 million, or 15 percent, over 1993 net sales of $1,792 million. Sales by business unit are set forth in the following table (in millions):
1994 1993 Percent ------------------- ------------------ Increase $ % $ % Flame Retardants 265 13 240 13 10 Intermediates and Fine Chemicals 262 13 240 13 9 Petroleum Additives 610 30 576 32 6 Polymer Stabilizers 162 8 81 5 100 Specialized Services and Manufacturing 383 18 294 16 30 Water Treatment 383 18 361 21 6 ------------------------------------------------------------------------------------------------ 2,065 100 1,792 100 15 ------------------------------------------------------------------------------------------------
Factors contributing to the increase in sales include (in millions): Selling Prices $ 48 Volume 114 Acquisitions 140 Divestitures (33) Foreign Exchange 4 -------------------------------------------------------------------- $273 --------------------------------------------------------------------
Flame Retardant sales reached $265 million for the year, a gain of $25 million from the prior year, reflecting strong demand in North America and the Pacific Rim. Capacity increases for several key products brought on stream during the latter part of the year and price increases that became effective in the fourth quarter contributed to the strong performance. Intermediates and Fine Chemicals achieved sales of $262 million, a $22 million improvement over the prior year. Volumes were strong and pricing flat to down across all product lines except for agricultural chemicals whose volume was constrained by legislated limitations on methyl bromide. Pricing for agricultural chemicals showed improvement. Furfural and related derivative products, which have been negatively impacted over the past few years by recessionary economies in Europe and Japan and by competitive price pressures from the foreign competition attempting to gain market share, saw price erosion abate during the year and turn slightly positive in the fourth quarter. Petroleum Additives sales gain for the year of $34 million includes about $20 million in sales attributable to the September acquisition of E. I. du Pont de Nemours fuel additives business. The balance of the improvement came primarily from price increases that more than offset lower volumes. During 1994, retail (direct sales to refineries) compound volumes declined a total of 17 percent. In the first half of the year, logistical problems and the temporary lack of hard currency by customers in Iran and Russia combined to drive retail volumes down 27 percent compared to the same period of 1993. In the second half of the year, the rate of decline in the retail market was about seven percent, which is on the low side of the expected seven percent to 10 percent annual market decline. Pricing for retail compound improved about 15 percent for the year which is consistent with historical trends. During the second quarter of 1994, the Company entered into an agreement to supply Ethyl Corporation's requirements for alkyl lead antiknock compound. As a result of this agreement, wholesale volumes almost doubled during 1994 while prices declined slightly. The ratio of retail to wholesale compound sales was about 70/30 in 1994 compared to about 85/15 in 1993. Polymer Stabilizers sales doubled during the period reflecting the acquisition of EniChem Synthesis S.p.A.'s polymer additives and associated specialty chemicals business in April 1994 and the full year effect of the acquisition of Chemishe Werke LOWI Beteiligungs GmbH & Co. in June of 1993. Specialized Services and Manufacturing posted an $89 million sales improvement over 1993. While all operations in this business unit registered year-over-year sales gains, the preponderance of the increase was derived from Chemol's chemical trading activities in Eastern Europe and Four Seasons' environmental remediation business. Water Treatment, benefiting from excellent weather conditions during the pool season and market expansion, improved sales by $22 million or six percent over 1993. Recreational water treatment chemical sales experienced strong volume gains in 1994. This coupled with the 1994 acquisitions of a U.K.-based distributor of pool and spa chemicals and a Southeastern U.S. distributor of pool and spa chemicals and equipment, and the full-year effect of the 1993 acquisition of Aqua Chem contributed to the improvement. Volume gains and the acquisitions more than offset the loss of about $25 million in sales associated with the disposition of Purex(R) Pool Products. Pricing in the business unit was slightly negative due to competitive activity. 21 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Gross Profit as a Year Percentage of Net Sales ------------------------------------------------------------------------- 1994 33.7 1993 36.8 1992 36.9
Gross profits of $695 million were up $36 million over 1993; however, as a percentage of sales, gross profits declined approximately 3 percentage points. The margin compression is attributable to price increases in business units other than Petroleum Additives not keeping pace with production cost increases primarily related to raw materials such as chlorine and caustic soda, volume gains coming predominantly in lower margin areas such as chemical trading and certain environmental services, the cessation of the highly profitable halon business at the end of 1993, increased alkyl lead compound sales to the wholesale market, and recently acquired businesses that have yet to achieve margins comparable with corporate norms. Although the Company continues to have approximately 50 percent of its business transacted in foreign currencies, particularly the pound sterling, currency changes did not have a significant impact on profit margins. To minimize the effect of currency fluctuations, the Company uses foreign exchange contracts, average rate options, and other financial instruments. In early 1993, a dollar billing program was implemented at Octel, and today approximately 50 percent of this foreign subsidiary's sales are in dollars, effectively insulating Octel's profits, measured in dollars, from fluctuations in the pound sterling.
SAR Expense as a Percentage of Net Sales Selling and Year Administration R&D Total --------------------------------------------------------------------------------------------------- 1994 9.5 2.9 12.4 1993 10.0 3.1 13.1 1992 9.5 3.1 12.6
Selling, administrative and research (SAR) expenses in 1994 were $257 million, an increase of $23 million over last year's $234 million. As a percentage of sales, SAR expense increased at a rate less than sales. In absolute terms, acquisitions account for about half of the increase. The balance of this increase is commensurate with the growth of the business. The Company continues to expand its investment in research and development. Total research and development spending amounted to $59 million in 1994, an increase of seven percent over the prior year. Efforts have focused on new and improved flame retardants, halon replacements, furfural derivatives and pharmaceutical intermediates, as well as new fuel additives and water treatment products. Equity in earnings of affiliates and other income amounted to $46 million, an increase of $10 million over the $36 million recorded in 1993. The significant earnings improvements at Huntsman Chemical Corporation (HCC), coupled with the increased earnings from the KAO-Quaker joint venture, resulted in the Company's share of affiliate earnings increasing $9 million to $20 million for the year. Interest income for the year declined about $2 million to $9 million as a result of lower average investments. Other income amounted to $17 million for 1994, an increase of $3 million over the prior year. One-time items in 1994 include insurance recoveries related to Octel's ethyl chloride plant fire, a gain recognized on the sale of the Purex swimming pool equipment business, and the settlement of a natural gas contract-related matter. Interest and other expenses amounted to $48 million in 1994 compared to $46 million in 1993. Interest expense, net of amounts capitalized, was $10 million, up from $7 million in 1993, reflecting increased borrowings in support of the share repurchase program, capital projects, and acquisitions combined with higher average interest rates. Amortization of intangible assets, primarily goodwill, increased $2 million to $30 million due to acquisitions and profit participation payments related to the Octel acquisition. Foreign currency exchange gains and losses which are netted in other expenses were insignificant. Other expenses declined $3 million to $8 million.
Income Before Taxes and Minority Year Interest as a Percentage of Revenue ------------------------------------------------------------------------------------- 1994 20.7 1993 22.7 1992 23.5
The minority interest in the income of subsidiaries, which includes both an approximate 12 percent minority interest in Octel and a 22 percent minority interest in Chemol, increased about $1 million to $33 million reflecting the higher earnings of these operations. The minority interest in Octel is before income taxes as earnings are predominantly from a partnership and, therefore, taxes apply to each partner individually.
Effective Tax Rate Year Percentage ------------------------------------------------------------------------------------- 1994 30.8 1993 28.8 1992 30.1
Income taxes of $124 million increased $13 million over last year's $111 million. The effective tax rate for the year was 30.8 percent compared to 28.8 percent in 1993. The 2.0 point increase in the rate results from 1993 benefiting from adoption of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (FAS 109) and a shift in earnings to higher tax jurisdictions. 22 10 Net income for 1994 was $279 million, or $4.00 per share, compared to 1993 net income of $273 million, or $3.82 per share. The year-over-year increase in net income and earnings per share was 2.2 percent and 4.7 percent, respectively. Share repurchases during 1994 increased earnings per share by approximately $.05. 1993 COMPARED TO 1992 Revenues for 1993 were $1,828 million, an increase of 19 percent over the $1,538 million reported in 1992. Net sales in 1993 were $1,792 million, an increase of 20 percent over 1992 net sales of $1,497 million. Price and volume gains in the core business amounted to approximately $95 million and acquisitions contributed about $290 million. These gains were offset by $90 million of unfavorable currency effects. The acquisitions of Bayrol, Lowi, Four Seasons and Aqua Chem, completed in 1993, added approximately $120 million in sales. In addition, the full year effect of the 1992 acquisitions of Chemol, Societe Francaise d'Organo-Synthese ( GLCF) and Octel Kuhlmann added approximately $170 million in sales. Gross margins of 37 percent remained essentially unchanged from 1992. Gross profits of $659 million were up $106 million, or 19 percent over 1992 gross profit of $552 million. On an overall basis, about half of the increase in gross profits was contributed by recent acquisitions. Profit margins of these businesses, especially the Hungarian trading company, are generally lower than the Company's average. The remainder of the gross profit increase came from the aforementioned price and volume improvements which more than offset negative currency effects. Changes in production costs and purchased material prices were not a significant factor on gross margin. SAR expenses in 1993 were $234 million, an increase of $45 million, or 24 percent, over 1992. As a percentage of sales, SAR expense increased 0.5 percentage points to 13 percent. Acquisitions accounted for most of the increase in expense and higher SAR percent to sales ratio. Equity in earnings of affiliates and other income amounted to $36 million in 1993, down $6 million from the $42 million recorded in 1992 primarily due to the decline in affiliate earnings and the late 1992 acquisition of a company that had previously been 50 percent owned. Interest and other expenses amounted to $46 million in 1993, compared to $44 million in 1992. Interest expense, net of amounts capitalized, declined $4 million, reflecting reduced borrowings at lower interest rates. Amortization of intangible assets, primarily goodwill, increased $11 million to $28 million from the $17 million recorded in 1992. In 1993, the Company accelerated the amortization of goodwill related to the purchase of Octel to better match amortization with the anticipated decline of the lead compound business resulting in an additional $9 million charge. The balance of the goodwill amortization increase is associated with recent acquisitions. In 1993, other expenses declined $8 million from 1992, due in large part to the 1992 write-off of a Russian receivable relating to sales made in 1991. Income taxes of $111 million increased 11 percent over the prior year as a result of higher net income offset by a lower effective tax rate. The effective tax rate for the year was 28.8 percent, down 1.3 points from 1992. The rate declined due to the adoption of FAS 109 partially offset by the cumulative effect of the change in tax laws resulting from the passage of the 1993 Tax Act. Net income in 1993 was $273 million, a 17 percent increase over 1992 net income of $233 million. Earnings per share increased to $3.82 per share, up 17 percent from the $3.27 per share earned in 1992. Net income as a percentage of revenues was 15 percent in both years. FINANCIAL CONDITION AND LIQUIDITY The Company's goal is to return 20 percent or more on stockholders' average equity. This goal was again exceeded in 1994. Management continues to emphasize allocating resources to capital projects and strategic acquisitions that meet or exceed the Company's return on investment targets.
Year Return on Equity ----------------------------------------------------------------------------- 1994 21.7 1993 23.6 1992 23.8
Cash provided by operating activities, exclusive of the special cash dividend received from HCC, amounted to $296 million, slightly less than the $300 million generated in 1993. The Company utilized this strong cash flow augmented by the special dividend and commercial paper borrowings to finance the expansion of its core businesses productive capacity, make strategic acquisitions, increase dividends to stockholders, and repurchase approximately 4.2 million shares of stock. Cash and cash equivalents were $145 million including $97 million of short-term cash investments, a decrease of $35 million from a year ago. 23 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company's investment in working capital, excluding cash and cash equivalents, amounted to $407 million as of December 31, 1994, an increase of $98 million from the prior year. Accounts receivable increased $110 million since the end of 1993 and reflect the impact of recent acquisitions and strong fourth quarter sales. Day sales outstanding in accounts receivable were 71 days, an improvement of 5 days compared to the 76 day sales outstanding at the end of 1993. In part, the improvement resulted from a higher level of sales in product areas where payment terms are shorter. Inventories increased $42 million to $317 million at the end of 1994 primarily due to acquisitions. Inventory turnover of 4.2 times improved slightly from 1993. Spending for plant and equipment amounted to $123 million in 1994, an increase of 55 percent over 1993. Capital investments centered on productive capacity additions in key product areas like flame retardants. In 1995, the Company anticipates capital spending in the $150 million range to expand productive capacity including the production of elemental bromine, a key building block in producing flame retardants, water treatment and other core products. Spending on environmental related capital projects was approximately $10 million in 1994 which is slightly lower than the prior year. Capital for environmental related projects in 1995 should be consistent with 1994 levels. Investments in and advances to unconsolidated subsidiaries declined $119 million in 1994, due primarily to a special, one time, cash dividend received from HCC in December 1994. The dividend declared by HCC's Board was payable in the form of cash or stock at the election of each shareholder. HCC's only other shareholder elected to receive additional shares of stock. The resultant effect is that the Company's ownership interest in HCC was reduced to 17 percent from 40 percent. The Company intends to use a portion of the proceeds to repurchase outstanding shares of common stock. The Company continues to utilize commercial paper borrowing as its primary source of external financing due to interest rate considerations. Commercial paper borrowings at December 31, 1994, amounted to $87 million. No commercial paper was outstanding at the end of 1993. At December 31, 1994, the level of debt to total capitalization was 9.7 percent, up from 5.1 percent at December 31, 1993. The Company recently negotiated a $250 million, five year credit facility with various banks. The new facility replaced a three year, $190 million facility. The credit facility provides backup to the commercial paper program. Additionally, the Company has a shelf registration on file with the Securities and Exchange Commission for $200 million of debt securities which could be issued to finance acquisitions or fund other corporate requirements. Management has no immediate plans to issue debt securities under the registration statement. Other noncurrent liabilities of $127 million include a $48 million reserve for expected future personnel reductions, plant closures and decontamination costs at Octel's alkyl lead plants in the United Kingdom, France, and Italy as demand for these products diminishes. Approximately $7 million was expended in 1994, compared to $4 million in 1993. The Company anticipates that operations in France and Italy will cease over the next 12 to 36 months. Spending on plant closures should be in the $7 million range in 1995 and the $10 million range in 1996. Production at the U.K. plants should continue into the next century at the current rate of market decline. Deferred revenues of $74 million included in other noncurrent liabilities represent partial payments for future delivery of product under a long-term supply agreement with a major customer. The Company recognizes revenue using the units-of-production method to amortize deferred revenue for this product over the expected life of the contract. There was no production under this agreement in 1994. Under the terms of the contract, the Company is entitled to retain the advanced payment regardless of production volumes. Stockholders' equity was $1,311 million, or $19.48 per share, at December 1994, compared to $1,257 million, or $17.63 per share, at the end of 1993. Over the past ten years, stockholders' equity has grown at a compound rate of 22 percent. Dividends increased for the twenty-second consecutive year totaling $27 million, or $.39 per share, compared with $25 million, or $.35 per share, in the prior year. In 1994, the Company purchased 4.2 million shares of its stock for a total cost of $232 million under various share repurchase programs authorized by the Board of Directors. The average price per share of the stock purchased was $55.47. At December 31, 1994, management had a remaining authorization to repurchase 3.2 million shares. Management's intention is to acquire additional shares to the extent of the authorization when market conditions warrant. 24 12 The cumulative translation adjustment component of stockholders' equity represents the remeasurement of foreign currency denominated assets and liabilities into U.S. dollars. The change in the cumulative translation adjustment increased stockholders' equity by $29 million in 1994. The increase reflects the strengthening of European currencies, particularly the British pound sterling, against the dollar. Approximately 50 percent of the Company's net assets are in Europe, predominantly the United Kingdom. OTHER MATTERS The Company's operations, like those of most companies which use or make chemicals, are subject to stringent laws and regulations relating to maintaining or improving the quality of the environment. Such laws and regulations, along with the Company's own internal compliance efforts, have required and will continue to require capital expenditures and associated operating costs. Normal spending for environmental compliance, including that associated with waste minimization and pollution prevention programs, amounted to approximately $28 million in 1994 and about $25 million in 1993, including approximately $10 million and $12 million for capital equipment in 1994 and 1993, respectively. Spending for environmental compliance is anticipated to be in the same range in 1995. The Company is a party to various governmental and private environmental actions associated with current and former manufacturing sites and waste disposal sites, including some sites that are on the Environmental Protection Agency's Superfund National Priority List. In most instances, the Company has been viewed as a de minimis contributor and has not expended any significant amounts for remediation. Future environmental compliance and remediation costs are, at best, difficult to quantify with reasonable assurance. This is due to many factors including the speculative nature of remediation methods and costs, conflicting and imprecise data regarding the nature and extent of waste, the number of other parties involved, and changing governmental regulations. Based upon the information currently available, management believes that adequate provisions have been made in the financial statements and future costs will not have a materially adverse impact on the Company's consolidated financial position. Inflation has not been a significant factor for the Company over the last several years. Management believes that inflation will continue to be moderate over the next several years and can be offset through a combination of price increases and productivity improvements. With the Company's strong balance sheet, substantial free cash flow, and access to low-cost external financing, the Company is well-positioned to capitalize on opportunities that may arise in 1995.
1994--Stock Price Data Low High ------------------------------------------------------------------------ 1st Quarter 67-1/2 82 2nd Quarter 48-3/4 71 3rd Quarter 53-5/8 61-1/2 4th Quarter 51-3/4 59-5/8 Year-End Close 57
1993--Stock Price Data Low High ------------------------------------------------------------------------ 1st Quarter 66-3/4 81-1/4 2nd Quarter 65-1/2 84 3rd Quarter 64-1/2 72-5/8 4th Quarter 70-3/4 79-1/4 Year-End Close 74-5/8
Cash Dividends Paid 1994 1993 ------------------------------------------------------------------------ 1st Quarter .09 .08 2nd Quarter .095 .085 3rd Quarter .095 .085 4th Quarter .10 .09
13 FINANCIAL REVIEW
(in thousands of dollars, except per share data) 1994 1993 1992 1991 SUMMARY OF EARNINGS Revenues $2,110,653 1,827,796 1,538,169 1,347,881 Percent increase over previous year 15.5 18.8 14.1 21.0 Income before taxes and minority interest $ 435,902 415,023 361,022 320,321 Percent of revenues 20.7 22.7 23.5 23.8 Income taxes $ 124,000 110,600 100,000 68,000 Percent of income before taxes 30.8 28.8 30.1 30.2 Net income $ 278,675 272,784 232,735 157,473 Per share* $ 4.00 3.82 3.27 2.23 Percent of revenues 13.2 14.9 15.1 11.7 Percent of stockholders' average equity 21.7 23.6 23.8 19.2 FINANCIAL POSITION AT YEAR-END Working capital $ 551,735 489,179 342,171 338,009 Current ratio 2.3 2.3 1.8 2.1 Capital expenditures $ 123,109 79,270 69,368 71,243 Total assets $2,111,465 1,900,864 1,731,989 1,649,132 Long-term debt $ 143,661 61,041 45,642 139,788 Percent of total capitalization 9.7 5.1 7.3 4.4** SHARE DATA Stockholders' equity $1,310,948 1,256,563 1,052,851 900,344 Per share* $ 19.48 17.63 14.75 12.69 Cash dividends per share* Declared during year $ .39 .35 .31 .27 Paid during year $ .38 .34 .30 .26 Payout as percent of net income 9.8 9.2 9.5 12.1 Shares outstanding* Average during year 69,658,653 71,329,145 71,164,010 70,700,332 At year-end 67,297,420 71,274,796 71,410,458 70,923,990 Stock price* High $ 82 84 71-3/8 58 Low $ 48-3/4 64-1/2 50-1/4 30-3/8 At year-end $ 57 74-5/8 69-1/4 57-1/4
*Restated to reflect the 100 percent stock dividends on January 30, 1992, and October 31, 1989. **Excludes debt of $125 million incurred to fund the acquisition of Shell's interest in Octel. 26 14 Great Lakes Chemical Corporation and Subsidiaries
Ten-Year Growth 1990 1989 1988 1987 1986 1985 1984 Percentage 1,113,519 847,738 616,046 501,010 305,703 281,952 283,261 22.2 31.4 37.6 23.0 63.9 8.4 (.5) 24.1 289,890 201,671 143,488 85,036 42,717 45,368 56,543 22.7 26.0 23.8 23.3 17.0 14.0 16.1 20.0 68,600 45,000 40,200 29,500 15,900 16,550 20,975 32.8 26.8 28.0 34.7 37.2 36.5 37.1 140,849 122,918 103,288 55,536 26,817 28,818 35,568 22.9 2.00 1.76 1.48 .83 .44 .48 .60 20.9 12.6 14.5 16.8 11.1 8.8 10.2 12.6 21.1 22.9 23.6 18.2 13.0 15.7 22.6 301,092 236,648 100,238 101,083 113,370 78,009 66,728 23.5 2.0 2.1 1.8 1.9 2.4 2.3 2.4 48,565 40,466 47,017 35,186 18,327 25,601 28,770 1,406,296 1,097,400 663,838 577,087 491,567 323,121 284,414 22.2 76,657 113,700 19,266 42,149 163,319 36,862 35,011 12.8 17.5 3.7 9.4 40.1 15.5 15.6 744,158 590,861 482,225 392,602 216,265 195,416 172,750 22.5 10.56 8.42 6.91 5.64 3.60 3.26 2.89 21.0 .23 .20 .18 .16 .14 .12 .10 14.6 .22 .19 .17 .15 .13 .11 .09 15.5 11.5 11.1 11.8 18.6 30.2 23.8 16.0 70,287,088 69,885,212 69,658,840 66,469,556 59,992,472 59,841,260 59,654,404 70,443,150 70,098,826 69,653,184 69,580,948 60,044,516 59,908,468 59,741,792 34 24 16-1/2 19-1/4 11-1/8 11-1/8 9-5/8 20-3/8 14-1/8 12-1/8 9 7-1/2 7-7/8 6 31-7/8 23-5/8 14-5/8 13-1/2 9 9-3/4 8-3/8 21.1
27 15 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Great Lakes Chemical Corporation and Subsidiaries
(in thousands of dollars, except per share data) YEAR ENDED DECEMBER 31 1994 1993 1992 REVENUES Net sales $2,065,008 $1,792,042 $1,496,478 Equity in earnings of affiliates and other income 45,645 35,754 41,691 ---------- ---------- ---------- 2,110,653 1,827,796 1,538,169 ---------- ---------- ---------- COSTS AND EXPENSES Cost of products sold 1,369,618 1,133,352 944,186 Selling, administrative and research expenses 256,701 233,909 189,282 Interest and other expenses 48,432 45,512 43,679 ---------- ---------- ---------- 1,674,751 1,412,773 1,177,147 ---------- ---------- ---------- INCOME BEFORE TAXES AND MINORITY INTEREST 435,902 415,023 361,022 MINORITY INTEREST IN INCOME OF SUBSIDIARIES 33,227 31,639 28,287 ---------- ---------- ---------- INCOME BEFORE TAXES 402,675 383,384 332,735 INCOME TAXES 124,000 110,600 100,000 ---------- ---------- ---------- NET INCOME 278,675 272,784 232,735 ---------- ---------- ---------- RETAINED EARNINGS AT BEGINNING OF YEAR 1,160,173 912,352 701,698 CASH DIVIDENDS DECLARED 26,958 24,963 22,081 ---------- ---------- ---------- RETAINED EARNINGS AT END OF YEAR $1,411,890 $1,160,173 $ 912,352 ========== ========== ========== NET INCOME PER SHARE $ 4.00 $ 3.82 $ 3.27 CASH DIVIDENDS DECLARED PER SHARE $ .39 $ .35 $ .31 AVERAGE SHARES OUTSTANDING 69,658,653 71,329,145 71,164,010
See notes to consolidated financial statements. 28 16 CONSOLIDATED BALANCE SHEETS Great Lakes Chemical Corporation and Subsidiaries
(in thousands of dollars) DECEMBER 31 1994 1993 ASSETS CURRENT ASSETS Cash and cash equivalents $ 144,666 $ 179,734 Accounts and notes receivable, less allowance of $7,758 and $7,088, respectively 493,614 383,129 Inventories 316,623 275,062 Prepaid expenses 24,774 18,994 ---------- ---------- TOTAL CURRENT ASSETS 979,677 856,919 ---------- ---------- PLANT AND EQUIPMENT 605,924 468,010 EXCESS OF INVESTMENT OVER NET ASSETS OF SUBSIDIARIES ACQUIRED 411,028 341,079 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 66,479 185,789 OTHER ASSETS 48,357 49,067 ---------- ---------- $2,111,465 $1,900,864 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 7,793 $ 10,253 Accounts payable 184,823 136,957 Accrued expenses 101,615 92,612 Income taxes payable 118,203 109,746 Dividends payable 6,730 6,415 Current portion of long-term debt 8,778 11,757 ---------- ---------- TOTAL CURRENT LIABILITIES 427,942 367,740 ---------- ---------- LONG-TERM DEBT, LESS CURRENT PORTION 143,661 61,041 OTHER NONCURRENT LIABILITIES 126,907 123,618 DEFERRED INCOME TAXES 75,652 73,298 MINORITY INTEREST 26,355 18,604 STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 200,000,000 shares, issued 72,024,520 and 71,817,996 shares, respectively 72,025 71,818 Paid-in capital 112,667 107,268 Retained earnings 1,411,890 1,160,173 Cumulative translation adjustment (25,222) (54,563) Less treasury stock, at cost, 4,727,100 and 543,200 shares, respectively (260,412) (28,133) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 1,310,948 1,256,563 ---------- ---------- $2,111,465 $1,900,864 ========== ==========
See notes to consolidated financial statements. 29 17 CONSOLIDATED STATEMENTS OF CASH FLOWS Great Lakes Chemical Corporation and Subsidiaries
(in thousands of dollars) YEAR ENDED DECEMBER 31 1994 1993 1992 OPERATING ACTIVITIES Net income $278,675 $272,784 $232,735 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 72,663 62,475 58,433 Amortization of intangible assets 29,634 27,541 16,450 Deferred income taxes 700 (3,000) 3,000 Net remitted (unremitted) earnings of affiliates 112,312 (4,348) (5,374) Loss (gain) on sale of assets (65) (4,418) 114 Other (1,365) 2,792 (4,609) Change in operating assets and liabilities, net of effects from business combinations: Accounts receivable (95,097) (33,281) (4,454) Inventories (9,969) 6,670 3,484 Other current assets (6,602) 2,042 (9,265) Accounts payable and accrued expenses 35,010 (51,048) (12,197) Income taxes and other current liabilities 10,131 21,765 42,257 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 426,027 299,974 320,574 INVESTING ACTIVITIES Plant and equipment additions (123,109) (79,270) (69,368) Business combinations, net of cash acquired (198,494) (89,827) (204,087) Use of time deposit to fund acquisition -- -- 114,000 Proceeds from sale of assets 11,700 14,024 480 Other 21,484 (8,449) 9,161 -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (288,419) (163,522) (149,814) FINANCING ACTIVITIES Net (repayment) and borrowings under short-term credit lines 1,243 (11,941) 4,256 Net proceeds from (payments of) long-term borrowings (8,026) 15,234 9,047 Net increase (decrease) in commercial paper and other long-term obligations 85,042 (49,995) (92,958) Net decrease in other noncurrent liabilities (8,098) (4,015) (5,640) Minority interest 9,751 (822) 6,301 Proceeds from stock options exercised 3,336 3,203 2,873 Cash dividends declared (26,958) (24,963) (22,081) Repurchase of common stock (232,279) (25,540) -- -------- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (175,989) (98,839) (98,202) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 3,313 1,320 (12,728) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (35,068) 38,933 59,830 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 179,734 140,801 80,971 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $144,666 $179,734 $140,801 ======== ======== ========
See notes to consolidated financial statements. Parentheses indicate decrease in cash and cash equivalents. 30 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Great Lakes Chemical Corporation and Subsidiaries ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include all subsidiaries of the Company after elimination of all significant intercompany accounts and transactions. Investments in less than majority-owned companies in which the Company has the ability to exercise significant influence over operating and financial policies of the investees are recorded at cost, plus equity in their undistributed earnings since acquisition. Cash Equivalents Investment securities with maturities of three months or less when purchased are considered to be cash equivalents. Inventories Approximately 90 percent of inventories are stated at the lower of cost (first-in, first-out method) or market. Plant and Equipment Plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line, declining-balance and unit-of-production methods. The costs of gas wells, leases and royalty interests are amortized by the unit-of-production method based upon estimated recoverable reserves and annual volumes of production. Excess of Investment Over Net Assets of Subsidiaries Acquired Excess of investment over net assets of subsidiaries acquired (goodwill) is amortized over periods of eight to 40 years. The Company regularly evaluates the realizability of goodwill based on projected undiscounted cash flows and operating income for each business having material goodwill balances. Based on its most recent analysis, the Company believes that no impairment of goodwill exists at December 31, 1994. As of December 31, 1994 and 1993, accumulated amortization was $63,941,000 and $43,242,000, respectively. Income Taxes Income taxes are provided on the portion of the income of unconsolidated affiliates that is expected to be remitted to the parent company and be taxable. Retirement Plans Noncontributory defined benefit pension plans cover substantially all employees located in the United States, and contributory defined benefit pension plans cover substantially all employees in the United Kingdom. Accrued pension costs of qualified plans are funded. Pension contributions are computed actuarially using the projected unit credit cost method and include normal costs and amortization of prior service costs over approximately 30 years. Share Data Net income per share is computed on the weighted average number of shares outstanding for all periods presented. The effect on net income per share resulting from the assumed issuance of shares reserved for stock options is not material. ACQUISITIONS On September 7, 1994, the Company completed the acquisition of E. I. du Pont de Nemours & Company's (DuPont) petroleum additives business including DuPont's North and South American tetraethyl lead business for approximately $50,000,000. Octel America, Inc., a wholly-owned subsidiary of Great Lakes, acquired the non-tetraethyl lead portion of the business whose products consist of corrosion inhibitors, petroleum dyes, conductivity improvers, antioxidants, metal sequestering agents, diesel fuel stabilizers and valve seat recession protectors. A wholly-owned subsidiary of The Associated Octel Company, Ltd. (Octel), purchased the tetraethyl lead portion of the business. Octel is a majority-owned subsidiary of the Company. The excess of purchase price over the book value of net assets acquired totaled approximately $35,000,000. The Company's acquisition of EniChem Synthesis S.p.A. (renamed GLCI) was completed on April 21, 1994, for approximately $90,000,000 in cash. The excess of purchase price over the net assets acquired amounted to $25,000,000. Headquartered in Milan, Italy, GLCI is a leading manufacturer of antioxidants and UV absorbers with annual revenues approaching $90,000,000. GLCI operates manufacturing facilities in Pedrengo and Ravenna, Italy, and a research and development center in Bolgiano, Italy. The acquisition complements the Company's existing polymer additives business by bringing an extensive line of new products and technology. The acquisition creates synergies and cost reduction opportunities in supplying a worldwide customer base. Other acquisitions completed in 1994 include a U.K.-based distributor of pool and spa chemicals and equipment, a Southeastern U.S. distributor of pool chemicals and spa equipment, a trichloroisocyanuric acid (trichlor) dry sanitizer plant that provides a key raw material used in the production of swimming pool products, and the 50 percent balance of a European joint venture involved in providing oil field services. The acquisitions cost approximately $43,000,000. The excess of purchase price over the net assets acquired amounted to approximately $6,000,000. In 1993, the Company completed four acquisitions described below at a total cost of $72,000,000, including $10,000,000 in future payments to be made over four years. The excess of purchase price over the net assets acquired amounted to approximately $30,000,000. 31 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Two of the acquisitions strengthened the Company's position in the recreational water treatment market. On January 4, 1993, the Company completed the purchase of Bayrol Chemische Fabrik GmbH (Bayrol). Bayrol's headquarters and manufacturing plants are in Munich, Germany, and it maintains sales and distribution centers in France and Spain. On May 3, 1993, the Company acquired Aqua Chem, a supplier of swimming pool and spa chemicals to mass merchants in the United States. In January 1993, the Company completed the purchase of Four Seasons Industrial Services, Inc., and two associated companies. Located at Greensboro, North Carolina, Four Seasons provides environmental remediation, consulting and on-site treatment services. In June 1993, the Company acquired LOWI, a Germany-based manufacturer of antioxidants and ultraviolet absorbers, to complement the Company's worldwide polymer stabilizers business. On October 2, 1992, the Company acquired Societe Francaise d'Organo-Syntheses (GLCF). The purchase price consisted of approximately $55,000,000 in cash at closing and annual cash payments for a period of five years totaling approximately $9,000,000. The excess of purchase price over the book value of net assets acquired amounted to approximately $12,000,000. GLCF, headquartered near Paris with manufacturing facilities in Catenoy and Persan, France, produces polymer additives and specialty polymers. On March 16, 1992, the Company completed its purchase of Shell U.K. Limited's (Shell) 36.67 percent interest in Octel Associates and The Associated Octel Company, Limited. Together with the Company's previous acquisition of 51.15 percent on May 18, 1989, its total interest in Octel is 87.82 percent. The purchase agreement had a July 1, 1991, effective date but closing was delayed pending resolution of various partnership issues. The Company has included the additional earnings from Octel effective January 1, 1992. At closing, the Company paid Shell approximately $138,000,000 plus interest from July 1, 1991. The Company received from Shell approximately $46,000,000 plus interest representing Shell's share of partnership distributions since July 1, 1991. Additionally, the Company compensated Shell for the related United Kingdom income tax liability from July 1, 1991, to closing. The excess of purchase price over the book value of net assets acquired was approximately $21,000,000, including purchase accounting adjustments. The Company's May 18, 1989, acquisition agreement for Octel with three major oil companies provides for profit participation payments for specified periods of time after the date of acquisition. Such profit participation is treated as an adjustment to the purchase price. These payments amounted to approximately $16,000,000 in 1994 and to approximately $149,000,000 since acquisition. All acquisitions have been accounted for as purchases and the results of operations of the acquired businesses are included in the consolidated financial statements from the dates of acquisition. The following represents the unaudited pro forma results of operations as if the above-noted business combinations had occurred at the beginning of the respective year in which the companies were acquired as well as at the beginning of the immediately preceding year:
(in thousands, except earnings per share) Year Ended December 31 1994 1993 1992 -------------------------------------------------------------------------------- Net sales $2,124,000 $1,926,500 $1,848,600 Net income $ 287,000 $ 283,000 $ 236,900 Earnings per share $ 4.12 $ 3.96 $ 3.33
The pro forma results do not purport to present the Company's actual operating results had the acquisitions been made at the beginning of 1994, 1993, and 1992, or the results which may be expected in the future. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of the following:
(in thousands) December 31 1994 1993 ------------------------------------------------- Cash $ 47,171 $ 28,415 Time deposits 97,495 151,319 -------- -------- $144,666 $179,734 ======== ========
INVENTORIES The major components of inventories are as follows:
(in thousands) December 31 1994 1993 -------------------------------------------------------- Finished products $223,822 $190,867 Raw materials 62,478 54,333 Supplies 30,323 29,862 -------- -------- $316,623 $275,062 ======== ========
Cost of applicable inventories using the last-in, first-out valuation method approximates current cost at December 31, 1994 and 1993. 32 20 Great Lakes Chemical Corporation and Subsidiaries PLANT AND EQUIPMENT Plant and equipment consist of the following:
(in thousands) December 31 1994 1993 ---------------------------------------------------------------------------------------- Land $ 24,229 $ 14,200 Buildings and land improvements 116,833 86,293 Equipment and leasehold improvements 789,951 674,354 Gas wells, leases and royalty interests 4,791 4,670 Construction in progress (estimated additional cost to complete at December 31, 1994, $97,000) 102,297 51,267 ---------- -------- 1,038,101 830,784 Less allowances for depreciation, depletion and amortization 432,177 362,774 ---------- -------- $ 605,924 $468,010 ========== ========
The estimated useful lives for purposes of computing depreciation are: buildings and land improvements, 7-40 years; equipment and leasehold improvements, 2-17 years. Maintenance and repairs charged to costs and expenses were $89,164,000, $81,420,000, and $72,070,000 for 1994, 1993, and 1992, respectively. Rent expense for all operating leases amounted to $20,747,000, $16,138,000, and $12,248,000 for 1994, 1993, and 1992, respectively. NOTES PAYABLE Data concerning borrowings are as follows:
1994 1993 1992 -------------------------------------------------------------------------------- Amounts borrowed (in thousands): Maximum during the year $34,758 $31,082 $25,487 Average for the year $11,916 $17,734 $16,606 Weighted average interest rates: At December 31 6.6% 8.5% 9.4% On borrowings during the year 6.7% 7.6% 9.4%
The Company has no confirmed short-term credit lines, but has available for its use substantial non-confirmed credit lines. LONG-TERM DEBT Long-term debt is summarized as follows:
(in thousands) December 31 1994 1993 --------------------------------------------------------------------------- Commercial paper, 1994 year-end average interest rate of 5.7% $ 86,954 $ -- Industrial development bonds, at fixed and variable interest rates from 3.0% to 7.6% at December 31, 1994 (weighted average 4.1%) with maturities to May 2025 21,685 22,335 Other 43,800 50,463 -------- ------- 152,439 72,798 Less current portion 8,778 11,757 -------- ------- $143,661 $61,041 ======== =======
The Company maintains a five-year, $250,000,000 credit agreement with a group of eight banks which serves as a backup facility for the Company's commercial paper program. The agreement provides various interest rate options, including the banks' prime interest rate, and contains restrictive financial covenants, including a maximum leverage ratio and an interest coverage rate. The Company's commercial paper is rated A-1 by Standard and Poor's and P-1 by Moody's. The Company has on file a shelf registration with the Securities and Exchange Commission for $200,000,000 of debt securities. Once issued, the security proceeds will be utilized by the Company as required from time to time for acquisitions and other corporate purposes. Long-term debt matures as follows: 1995, $8,778,000; 1996, $7,925,000; 1997, $6,181,000; 1998, $3,543,000; and 1999, $88,277,000. During 1994, 1993, and 1992, interest costs were $11,856,000, $8,174,000 and $12,383,000, respectively, of which $1,737,000, $928,000 and $1,023,000, respectively, were capitalized as additional costs of equipment and leasehold improvements in connection with the expansion of physical facilities. In these years, interest payments were $12,075,000, $8,167,000 and $11,946,000, respectively. 33 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist of the following:
(in thousands) December 31 1994 1993 ---------------------------------------------------------------------------------------- Future estimated closing costs of Octel's TEL manufacturing facilities $ 48,271 $ 48,646 Deferred revenue 74,116 62,433 Other 4,520 12,539 -------- -------- $126,907 $123,618 ======== ========
Deferred revenue represents funds provided as an advance partial payment for product to be delivered under the terms of a long-term supply contract with a major customer. The Company recognizes the deferred revenue in its earnings using a units-of-production method. INCOME TAXES The following is a summary of domestic and foreign income before income taxes, the components of the provisions for income taxes and deferred income taxes, a reconciliation of the U.S. statutory income tax rate to the effective income tax rate, and the components of deferred tax assets and liabilities. The 1994 and 1993 tax data is presented on the liability method. The 1992 data is on the deferred method. The cumulative effect of adopting the liability method in 1993 was an increase in net income of $3,000,000. Income Before Taxes:
(in thousands) Year Ended December 31 1994 1993 1992 ----------------------------------------------------------------------- Domestic $145,351 $148,078 $127,745 Foreign 257,324 235,306 204,990 -------- -------- -------- $402,675 $383,384 $332,735 ======== ======== ========
Provisions for Income Taxes:
(in thousands) Year Ended December 31 1994 1993 1992 --------------------------------------------------------------------------------- Current: Federal $ 39,500 $ 39,600 $ 34,250 State 6,000 5,600 4,700 Foreign 77,800 68,400 58,050 -------- -------- -------- 123,300 113,600 97,000 -------- -------- -------- Deferred: Domestic (6,100) 1,300 1,200 Foreign 6,800 (4,300) 1,800 -------- -------- -------- 700 (3,000) 3,000 -------- -------- -------- $124,000 $110,600 $100,000 ======== ======== ========
Provisions for Deferred Income Taxes:
(in thousands) Year Ended December 31 1994 1993 1992 ------------------------------------------------------------------------------ Equity in affiliates $(8,313) $ 559 $ 385 Depreciation 4,297 1,735 4,196 Other 4,716 (5,294) (1,581) ------- ------- ------- $ 700 $(3,000) $ 3,000 ======= ======= =======
Effective Income Tax Rates Reconciliation:
Year Ended December 31 1994 1993 1992 ---------------------------------------------------------------------------------- U.S. statutory income tax rate 35.0% 35.0% 34.0% Decrease resulting from: SFAS 109 -- (0.8) -- Reversal of prior provisions (2.0) (2.3) -- Other (2.2) (3.1) (3.9) ---- ---- ---- Effective income tax rate 30.8% 28.8% 30.1% ==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Components of Deferred Tax Assets and Liabilities:
(in thousands) December 31 1994 1993 -------------------------------------------------------------------- Deferred tax assets $17,215 $15,339 ======= ======= Deferred tax liabilities Depreciation $54,997 $50,700 Foreign liabilities pending settlements 20,000 20,000 Undistributed affiliate earnings 1,352 9,665 Other 11,224 4,632 ------- ------- $87,573 $84,997 ======= =======
Cash payments for income taxes were $109,337,000, $105,169,000 and $55,988,000 in 1994, 1993, and 1992, respectively. 34 22 Great Lakes Chemical Corporation and Subsidiaries STOCKHOLDERS' EQUITY Changes in common stock and paid-in capital accounts are summarized as follows:
Common Stock Paid-In (dollar amounts in thousands) Shares Amount Capital ---------------------------------------------------------------------------------------- Balance at December 31, 1991 71,090,090 $71,090 $ 91,570 Exercise of stock options, net of shares exchanged 486,468 486 2,387 Tax benefit from early disposition of stock by optionees -- -- 7,000 ---------- ------- -------- Balance at December 31, 1992 71,576,558 71,576 100,957 Exercise of stock options, net of shares exchanged 241,438 242 2,961 Tax benefit from early disposition of stock by optionees -- -- 3,350 ---------- ------- -------- Balance at December 31, 1993 71,817,996 71,818 107,268 Exercise of stock options, net of shares exchanged 206,524 207 3,129 Tax benefit from early disposition of stock by optionees -- -- 2,270 ---------- ------- -------- Balance at December 31, 1994 72,024,520 $72,025 $112,667 ========== ======= ========
The Company has a Stockholder Rights Plan. Under the Plan, the stockholders have received a right (the "Right") for each outstanding share of common stock of the Company. Each Right entitles the holder to purchase from the Company at an exercise price of $92.50 (after adjustment pursuant to the Plan), one unit consisting initially of one-tenth of a share of the Company's common stock and a note in a principal amount equal to nine-tenths of the market price of a share of the Company's common stock on the date of exercise. The Right becomes exercisable and transferable apart from the common stock only if a person or group acquires, obtains a right to acquire, or announces and/or commences a tender offer to acquire ("Acquiring Holder") beneficial ownership of 15 percent or more of the Company's outstanding common stock. Under certain conditions, the Right may be redeemed by the Company at a price of $.0025 per Right (after adjustment pursuant to the Plan) prior to their expiration on September 22, 1999. If the Right becomes exercisable and is not redeemed, the holder of each Right, except any Acquiring Holder, is entitled to purchase, at the Right's then-current exercise price, the number of Great Lakes common shares having a market value equal to twice the Right's exercise price. If the Company is acquired in a merger or other business combination, and the Right has not been redeemed, the holder of each Right is entitled to purchase, at the Right's then-current exercise price, that number of the acquiring company's common shares having a market value equal to twice the Right's exercise price. In 1994, the Company purchased 4,183,900 shares of its common stock for a total cost of $232,279,000. During 1993, the Company purchased 377,100 shares of its stock for a total cost of $25,540,000. Changes in the cumulative translation adjustment account are as follows:
(in thousands) Year Ended December 31 1994 1993 1992 ----------------------------------------------------------------------------------- Balance at beginning of year $(54,563) $(29,441) $38,579 Translation adjustments and gains and losses from hedging transactions 29,341 (25,122) (64,720) Allocated income taxes -- -- (3,300) -------- -------- -------- Balance at end of year $(25,222) $(54,563) $(29,441) ======== ======== ========
The 1994 increase in the cumulative translation adjustment account was principally due to the effect of the weakening U.S. dollar in relation to the currencies of the various foreign countries in which the Company operates, particularly the pound sterling. Conversely, the U.S. dollar strengthened in 1993 and 1992 decreasing the cumulative translation adjustment account. STOCK OPTIONS In May 1993, the stockholders adopted the 1993 Employee Stock Compensation Plan for officers and other key employees, authorizing the issuance of 2,000,000 shares of the Company's common stock upon exercise of incentive stock options, non-qualified stock options or other stock-based awards. The Plan generally replaces the 1984 Plan which expired in May 1994. Under the Plans, options are granted at the market value at date of grant, become exercisable over periods of one to three years after grant and expire ten years from the date of grant. 35 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summarizes the changes in options under the Plans for the years 1994 and 1993:
Shares Option Under Option Prices --------------------------------------------------------------- Outstanding at December 31, 1992 1,923,482 $5.88 to $69.25 Granted 227,100 67.63 to 78.25 Exercised (258,387) 5.88 to 61.88 Terminated (8,632) 5.88 to 78.25 --------- --------------- Outstanding at December 31, 1993 1,883,563 6.89 to 78.25 Granted 240,600 54.00 to 77.50 Exercised (233,315) 6.89 to 66.13 Terminated (40,211) 9.25 to 78.25 -------- --------------- Outstanding at December 31, 1994 1,850,637 $9.25 to $77.50 ========= =============== Currently Exercisable 1,409,791 $6.69 to $76.00 ========= ===============
Options outstanding at December 31, 1994, have an average option price of $39.47 per share and expire from March 11, 1995, to December 6, 2004. A total of 1,883,563 shares are reserved for future grants as of December 31, 1994. RETIREMENT PLANS The Company maintains several noncontributory defined benefit pension plans covering substantially all U.S. employees. Benefits are based on total compensation, as defined, and years of credited service reduced by social security benefits according to a plan formula. Normal retirement age is 65, but provisions are made for early retirement. The Company's funding policy is to contribute amounts to the plans to meet the funding requirements of federal laws and regulations, as determined by the Company's actuary. The plans' assets are invested by an insurance company, one bank, and four investment management companies in various commingled and segregated funds holding equities, bonds, guaranteed income contracts and cash or cash equivalents. The Company maintains two contributory defined benefit pension plans covering substantially all United Kingdom employees. Benefits are based on final salary and years of credited service, reduced by social security benefits according to a plan formula. Normal retirement age is 65, but provisions are made for early retirement. The Company's funding policy is to contribute amounts to the plans to cover service costs to date as recommended by the Company's actuary. The plans' assets are invested by two investment management companies in funds holding U.K. and overseas equities, U.K. and overseas fixed interest securities, index linked securities, property unit trusts and cash or cash equivalents. A summary of the components of net periodic pension cost for U.S. and U.K. pension plans is as follows: (in thousands)
Year Ended December 31 1994 1993 1992 -------------------------------------------------------------------------------------- Service cost $ 16,218 $ 14,160 $ 14,694 Interest cost on projected benefit obligation 37,855 34,590 37,246 Actual return on plan assets (16,280) (119,219) (10,204) Net amortization and deferral (28,317) 79,522 (33,709) -------- --------- -------- Net pension cost $ 9,476 $ 9,053 $ 8,027 ======== ========= ========
The funded status and accrued pension cost for the U.S. pension plans are as follows:
(in thousands) December 31 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated plan benefits: Vested $40,219 $37,447 $26,168 Non-vested 1,241 2,345 3,378 ------- ------- ------- Total accumulated benefit obligation 41,460 39,792 29,546 Additional amounts related to projected salary increases 12,074 18,549 14,781 ------- ------- ------- Total projected benefit obligation 53,534 58,341 44,327 Plan assets at fair value 50,975 43,982 36,470 ------- ------- ------- Projected benefit obligation in excess of plan assets 2,559 14,359 7,857 Unrecognized net gain (loss) 3,418 (5,605) (279) Unrecognized prior service cost (175) (13) 29 Unrecognized obligation at January 1, 1987, net of amortization (1,643) (1,834) (2,025) ------- ------- ------- Accrued pension cost $ 4,159 $ 6,907 $ 5,582 ======= ======= =======
36 24 Great Lakes Chemical Corporation and Subsidiaries The funded status and prepaid pension cost for the U.K. pension plans are as follows:
(in thousands) December 31 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated plan benefits, all vested $384,140 $353,963 $322,989 Additional amounts related to projected salary increases 13,310 34,997 25,519 -------- -------- -------- Total projected benefit obligation 397,450 388,960 348,508 Plan assets at fair value 486,242 448,028 352,887 -------- -------- -------- Plan assets in excess of projected benefit obligation 88,792 59,068 4,379 Unrecognized net (gain) loss (56,532) (32,487) 24,160 Unrecognized prior service cost 10,649 10,928 12,080 -------- -------- -------- Prepaid pension cost $ 42,909 $ 37,509 $ 40,619 ======== ======== ========
Assumptions used in determining the actuarial present value of the projected benefit obligations are set forth below. In 1994, the weighted average discount rate for U.S. plans was increased from 7.5 percent to 8.7 percent thus reducing the 1994 year-end projected benefit obligation by approximately $11,000,000. In 1993, the weighted average discount rate and the rates of increase in compensation level assumptions were revised downward for all plans to be consistent with prevailing market conditions. The changes resulted in increasing the projected benefit obligation of the U.S. plans by approximately $5,000,000. Weighted average discount rates 8.7% to 9.0% Rates of increase in compensation levels 4.8% to 7.0% Expected long-term return on assets 9.0% to 10.25% Supplemental defined benefit pension plans covering certain officers and directors are also maintained. These plans are non-qualified and unfunded. The pension liability associated with these plans is accrued using the same actuarial methods and assumptions as those used in the qualified U.S. plans. The cost for these plans which is included in the net pension cost shown above amounted to $800,000, $900,000 and $200,000 in 1994, 1993 and 1992, respectively. The unfunded projected benefit obligation, which is included in the accrued pension cost above, amounted to $4,519,000, $4,930,000 and $1,500,000 in 1994, 1993 and 1992. Benefits under these plans will be paid from general Company funds. The Company provides no significant postretirement benefits other than pensions. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were approximately $59,090,000, $55,152,000, and $46,579,000 in 1994, 1993 and 1992, respectively. INDUSTRY SEGMENTS AND FOREIGN OPERATIONS The Company's operations consist of one dominant industry segment, chemicals and allied products. Net sales, income before taxes and minority interest, and identifiable assets by geographic areas follow:
(in thousands) 1994 1993 1992 ---------------------------------------------------------------------------------------------------------- Net sales to unaffiliated customers: United States $ 938,214 $ 846,876 $ 763,002 Foreign 1,126,794 945,166 733,476 ---------- ---------- ---------- Total $2,065,008 $1,792,042 $1,496,478 ========== ========== ========== Intercompany sales between geographic areas: United States $ 96,668 $ 103,151 $ 98,408 Foreign 26,418 4,581 905 ---------- ---------- ---------- Total $ 123,086 $ 107,732 $ 99,313 ========== ========== ========== Income before taxes and minority interest: United States $ 138,123 $ 144,722 $ 126,827 Foreign 291,506 270,337 232,286 Earnings of affiliates 14,765 5,535 9,738 Corporate interest expense (8,492) (5,571) (7,829) ---------- ---------- ---------- Total $ 435,902 $ 415,023 $ 361,022 ========== ========== ========== Identifiable assets at year-end: United States $ 972,002 $ 922,091 $ 765,758 Foreign 1,072,984 792,984 780,161 Affiliates 66,479 185,789 186,070 ---------- ---------- ---------- Total $2,111,465 $1,900,864 $1,731,989 ========== ========== ==========
Most of the Company's foreign operations are conducted by European subsidiaries or U.S. branch offices. Sales between the United States and its foreign operations are generally priced to recover cost plus an appropriate markup for profit and are eliminated in the consolidated financial statements. Identifiable assets include assets directly identified with operations, principally: accounts receivable, inventories, and plant and equipment, plus an allocation of cost in excess of net assets acquired. Export sales for 1994, 1993 and 1992 amounted to approximately $199,000,000, $167,000,000 and $172,000,000, respectively, of which 88 percent, 87 percent and 88 percent, respectively, were outside the Western Hemisphere. 37 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVESTMENT IN UNCONSOLIDATED AFFILIATES As of December 31, 1994, the Company's investment in unconsolidated affiliates consists mainly of a 17 percent interest in Huntsman Chemical Corporation (HCC) and a 50 percent interest in KAO-Quaker, Co. Ltd., a Japanese marketer of furfural derivatives. Effective December 29, 1994, the Company's ownership interest in HCC, a producer of polystyrene and compounded specialty plastics, was reduced from 40 percent to 17 percent when the Company elected to receive a $130,000,000 cash dividend while HCC's other shareholder elected to receive additional shares. As a result of the reduced ownership interest in HCC, the Company now accounts for the investment using the cost method. The Company's equity in earnings of unconsolidated affiliates was $20,165,000, $10,935,000 and $15,138,000 for 1994, 1993, and 1992, respectively. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The carrying amounts reported in the balance sheet of cash and cash equivalents, notes payable and long-term debt do not materially differ from their fair value at December 31, 1994. The fair value of the Company's debt was estimated using a discounted cash flow analysis based upon the Company's current incremental borrowing rates for similar borrowing arrangements. The Company hedges certain portions of its exposure to foreign currency fluctuations in revenues and net foreign investments through the use of options and forward exchange contracts. Gains and losses arising from the use of such instruments are recorded in the income statement concurrently with gains and losses arising from the underlying hedged transactions. The Company enters into currency option contracts to hedge anticipated export sales that are exposed to foreign currency fluctuations over the next year. At December 31, 1994 and 1993, the Company had outstanding option contracts with a notional value of $67,000,000 and $76,000,000, respectively. At December 31, 1994, 64 percent of the contracts were for German marks with the balance Japanese yen. At the end of 1993, 54 percent were for German marks and the balance Japanese yen. The cost to acquire the contracts that hedge 1995 export sales was approximately $2,100,000 and that amount was deferred as of December 31, 1994. Had these contracts been acquired at December 31, 1994, their cost, fair value, would have been $553,000. The Company uses currency swap contracts to hedge long-term intercompany loans and the related interest. The terms of the swap contracts match the loan payment terms. Swap contracts in existence at December 31, 1994, are for French francs, German marks and Italian lira against the British pound sterling. The U.S. dollar equivalent of the notional amount of the contracts outstanding as of December 31, 1994, was $171,106,000. Liquidating the position at December 31, 1994, would cost the Company approximately $5,000,000. It is the Company's intention to hold the swap contracts to maturity. Counterparties to the foreign currency options and to the currency swap agreements are major financial institutions. Credit losses from counterparty non-performance are not anticipated. The Company sells a broad range of products to a diverse group of customers operating throughout the world. These industries generally are not significantly affected by changes in economic or other factors. Credit limits, ongoing credit evaluation and account monitoring procedures are utilized to minimize the risk of loss. Collateral is generally not required. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of the Great Lakes Chemical Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1994. 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 did not audit the 1993 financial statements of Huntsman Chemical Corporation and Arkansas Chemicals, Inc. The investment in and advances to these unconsolidated affiliated companies represent 9 percent of 1993 consolidated assets. Those statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the 1993 amounts included for Huntsman Chemical Corporation and Arkansas Chemicals, Inc., is based solely on reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. 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 and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Great Lakes Chemical Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Indianapolis, Indiana January 30, 1995 38 26 QUARTERLY RESULTS OF OPERATIONS Great Lakes Chemical Corporation and Subsidiaries (in thousands of dollars, except per share data)
1994 THREE MONTHS ENDED MAR. 31 JUN. 30 SEPT. 30 DEC. 31 Revenues Net Sales $ 448,676 $ 525,893 $ 525,216 $ 565,223 Equity in earnings of affiliates and other income 11,062 9,901 13,675 11,007 --------- --------- --------- -------- 459,738 535,794 538,891 576,230 --------- --------- --------- -------- Costs and Expenses Cost of products sold 288,605 352,487 346,342 382,184 Selling, administrative and research expenses 56,051 64,716 66,562 69,372 Interest and other expenses 10,417 13,212 12,244 12,559 --------- --------- --------- -------- 355,073 430,415 425,148 464,115 --------- --------- --------- -------- Income Before Taxes and Minority Interest 104,665 105,379 113,743 112,115 Minority Interest in Income of Subsidiaries 7,981 7,532 9,204 8,510 --------- --------- --------- -------- Income Before Taxes 96,684 97,847 104,539 103,605 Income Taxes 29,800 30,100 32,200 31,900 --------- --------- --------- -------- Net Income $ 66,884 $ 67,747 $ 72,339 $ 71,705 ========= ========= ========= ======== Net Income per Share $ .94 $ .96 $ 1.05 $ 1.05 ========= ========= ========= ======== 1993 Three Months Ended Mar. 31 Jun. 30 Sept. 30 Dec. 31 Revenues Net Sales $ 430,176 $ 461,839 $ 469,656 $ 430,371 Equity in earnings of affiliates and other income 6,406 8,924 6,586 13,838 --------- --------- --------- --------- 436,582 470,763 476,242 444,209 --------- --------- --------- --------- Costs and Expenses Cost of products sold 272,995 288,415 302,825 269,117 Selling, administrative and research expenses 59,570 62,196 58,175 53,968 Interest and other expenses 7,295 14,410 9,870 13,937 --------- --------- --------- --------- 339,860 365,021 370,870 337,022 --------- --------- --------- --------- Income Before Taxes and Minority Interest 96,722 105,742 105,372 107,187 Minority Interest in Income of Subsidiaries 7,780 8,136 8,175 7,548 --------- --------- --------- --------- Income Before Taxes 88,942 97,606 97,197 99,639 Income Taxes 24,700 27,500 28,700 29,700 --------- --------- --------- --------- Net Income $ 64,242 $ 70,106 $ 68,497 $ 69,939 ========= ========= ========= ========= Net Income per Share $ .90 $ .98 $ .96 $ .98 ========= ========= ========= =========
39 27 SUBSIDIARIES AND AFFILIATES DIRECTORS BAYROL CHEMISCHE FABRIK GMBH WILLIAM H. CONGLETON 1,4 Swimming Pool General Partner and Spa Products Palmer Partners 100% Owned Private investment partnership BIO-LAB, INC. Director since 1973 Swimming Pool and Spa Products JOHN S. DAY 1,2,3 100% Owned Vice President Emeritus of Purdue University CHEMISCHE WERKE LOWI BETEILIGUNGS GMBH & CO. Director since 1975 Specialty Chemicals 100% Owned THOMAS M. FULTON CEO and President of CHEMOL RT Landauer, Inc. Chemical Trading Company Director since 1995 78% Owned MARTIN M. HALE 1,3,4 Chairman of the Board E/M CORPORATION Executive Vice President Engineered Finishes Hellman Jordan and Coatings Management Company 100% Owned Investment management Boston, Massachusetts FOUR SEASONS INDUSTRIAL SERVICES, INC. Director since 1978 Environmental Remediation 100% Owned LEO H. JOHNSTONE 1,2,3 Retired Vice Chairman GREAT LAKES CHEMICAL (EUROPE), LTD. Phillips Petroleum Specialty Chemicals Company 100% Owned Director since 1982 GREAT LAKES CHEMICAL FRANCE S.A. EMERSON KAMPEN 3,4 Specialty Chemicals Chairman Emeritus 100% Owned Former Chairman, President and Chief GREAT LAKES CHEMICAL INTERNATIONAL, INC. Executive Officer Export Sales-FSC Director since 1971 100% Owned LOUIS E. LATAIF GREAT LAKES CHEMICAL ITALIA S.R.L. Dean of the School of Specialty Chemicals Management 100% Owned Boston University Director since 1995 KAO-QUAKER CO., LTD. Furfural Derivatives RICHARD H. LEET 1,2 50% Owned Retired Vice Chairman and Director OCTEL ASSOCIATES Amoco Corporation and Director since 1994 THE ASSOCIATED OCTEL COMPANY, LIMITED Fuel Additives and Specialty Chemicals ROBERT B. MCDONALD 87.8% Owned Chief Executive Officer and President OCTEL CHEMICALS LIMITED Director since 1994 Manufacturer of Fine and Specialty Chemicals and Intermediates 100% Owned OSCA, INC. 1 Member of the Audit High-Density, Clear Fluids Committee 100% Owned 2 Member of the Compensation and Incentive Committee 3 Member of the Executive WIL RESEARCH LABORATORIES, INC. Committee Toxicological Testing 4 Member of the Finance 100% Owned Committee SHAREHOLDER INFORMATION TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for Great Lakes' stock is Harris Trust Company of New York. Stockholders who wish to transfer their stock, or change the name in which the shares are registered, should contact: Harris Trust and Savings Bank Attn: Shareholder Services P.O. Box 755 Chicago, Illinois 60690-0755 (312) 461-2421 AUDITORS Ernst & Young LLP Indianapolis, Indiana LISTINGS New York Stock Exchange New York, New York Pacific Stock Exchange Los Angeles and San Francisco, California Ticker Symbol: GLK ANNUAL MEETING The Annual Meeting of the Stockholders will be held at 11:00 a.m., Thursday, May 4, 1995, at the University Place Conference Center and Hotel, 850 West Michigan, Indianapolis, Indiana FORM 10-K AND OTHER INFORMATION A complimentary copy of the company's 1994 Annual Report to the Securities and Exchange Commission on Form 10-K is available upon request. For this, or for other information concerning the company, please contact: William P. Blake Director, Investor Relations or Gregory J. Griffith Director, Public Affairs and Administration Great Lakes Chemical Corporation One Great Lakes Boulevard West Lafayette, Indiana 47906-0200 Phone: (317) 497-6100 [RECYCLE SYMBOL] 40 EX-23 3 CONSENT OF ERNST & YOUNG 1 Exhibit 23 Great Lakes Chemical Corporation and Subsidiaries CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Great Lakes Chemical Corporation of our report dated January 30, 1995, included in the 1994 Annual Report to Stockholders of Great Lakes Chemical Corporation. Our audits also included the financial statement schedule of Great Lakes Chemical Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Post-Effective Amendment Number 5 to the Registration Statement Number 2-53909 on Form S-8, dated May 1, 1980, in Registration Statement Number 33-02069 on Form S-3, dated December 11, 1985, in Post-Effective Amendment Number 1 to the Registration Statement Number 33-02074 on Form S-8, dated February 3, 1995, in Registration Statement Number 33-02075 on Form S-8, dated December 11, 1985, in Registration Statement Number 33-42477 on Form S-3, dated August 28, 1991, and in Registration Statement Number 33-57589 on Form S-8, dated February 3, 1995, of our report dated January 30, 1995, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Great Lakes Chemical Corporation. ERNST & YOUNG LLP Indianapolis, Indiana March 27, 1995 --------------------------------------- CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Post-Effective Amendment No. 5 to Registration Statement No. 2-53909 on Form S-8, in Registration Statement Nos. 33-02069 and 33-42477 both on Form S-3, in Post-Effective Amendment No. 1 to Registration Statement No. 33-02074 on Form S-8, and in Registration Statement Nos. 33-02075 and 33-57589 both on Form S-8 of our report dated January 31, 1994 (relating to the financial statements of Arkansas Chemicals, Inc. not presented separately herein) appearing in the Annual Report on Form 10-K of Great Lakes Chemical Corporation for the year ended December 31, 1993. Deloitte & Touche LLP Pittsburgh, Pennsylvania March 27, 1995 --------------------------------------- CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Post-Effective Amendment No. 5 to Registration Statement No. 2-53909 on Form S-8, in Registration Statement Nos. 33-02069 and 33-42477 both on Form S-3, in Post-Effective Amendment No. 1 to Registration Statement No. 33-02074 on Form S-8, and in Registration Statement Nos. 33-02075 and 33-57589 both on Form S-8 of our report dated January 26, 1994 (relating to the consolidated financial statements of Huntsman Chemical Corporation not presented separately herein) appearing in the Annual Report on Form 10-K of Great Lakes Chemical Corporation for the year ended December 31, 1993. Deloitte & Touche LLP Salt Lake City, Utah March 27, 1995 11 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, AND STATEMENT OF CASHFLOW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1994 DEC-31-1994 1 144,666 0 501,372 (7,758) 316,623 979,677 1,038,101 (432,177) 2,111,465 427,942 143,661 72,025 0 0 1,238,923 2,111,465 2,065,008 2,110,653 1,369,618 1,624,145 38,313 1,174 10,119 402,675 124,000 278,675 0 0 0 278,675 4.00 4.00