Form 10K

2002
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002
OR
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to __________
Commission file number 1-8142

     ENGELHARD CORPORATION    
(Exact name of registrant as specified in its charter)

DELAWARE 22-1586002
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (732) 205-5000

Securities registered pursuant to Section 12(b) of the Act:  
Title of each class                                  Name of each exchange on which registered
Common Stock, par value $1 per share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X].

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

The aggregate market value of the registrant's voting common stock held by non-affiliates of the registrant, based on the closing price on the New York Stock Exchange on June 28, 2002 was approximately $3,659,220,233.

As of March 14, 2003, 127,344,885 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference to the Proxy Statement for the 2003 Annual Meeting of Shareholders, which will be filed by April 30, 2003.


TABLE OF CONTENTS     

Item     Page     
          Part I  
1. Business  
  (a) General development of business 3
  (b) Available information of Engelhard 3
  (c) Segment and geographic area data 3-6, 63-66
  (d) Description of business 3-6, 63-66
  (e) Environmental matters 7-8
     
2. Properties 8
     
3. Legal Proceedings 8-9
     
4. Submission of Matters to a Vote of Security Holders 9
     
4A. Executive Officers of the Registrant 10
     
          Part II  
     
5. Market for Registrant's Common Equity and Related Stockholder Matters 11
     
6. Selected Financial Data 11-12, 75
     
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-26
     
7A. Quantitative and Qualitative Disclosures About Market Risk 27-28
     
8. Financial Statements and Supplementary Data 29-74
     
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 75
     
          Part III  
     
10. Directors and Executive Officers of the Registrant 10, 76
     
11. Executive Compensation 76
     
12. Security Ownership of Certain Beneficial Owners and Management 77-78
     
13. Certain Relationships and Related Transactions 78
     
          Part IV  
     
14. Controls and Procedures 78-79
     
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 79-248

PART I

ITEM 1.  BUSINESS

      Engelhard Corporation (which together with its subsidiaries, is collectively referred to as the Company) was formed under the laws of Delaware in 1938 and became a public company in 1981. The Company's principal executive offices are located at 101 Wood Avenue, Iselin, NJ, 08830 (telephone number (732) 205-5000).

      The Company maintains a Web site, free of charge, at www.Engelhard.com, which contains information about us, including links to our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and related amendments, which are available as soon as reasonably practicable after such reports are filed or furnished electronically with the SEC. Our Web site and the information contained in it shall not be deemed incorporated by reference to this Form 10-K.

      The Company develops, manufactures and markets technology-based performance products and engineered materials for a wide spectrum of industrial customers. The Company also serves its technology segments, their customers and others with precious and base metals and related services.

      The Company employed approximately 6,650 people as of January 1, 2003 and operates on a worldwide basis with corporate headquarters in the United States, manufacturing facilities, mineral reserves and other operations in the Asia-Pacific region, the European community, North America, the Russian Federation, South Africa and South America.

       The Company's businesses are organized into four reportable segments -- Environmental Technologies, Process Technologies, Appearance and Performance Technologies and Materials Services.

       The following information on the Company is included in Note 18, "Business Segment and Geographic Area Data," of the Notes to Consolidated Financial Statements: net sales to external customers, operating earnings/(loss), special (charge)/credit, interest income, interest expense, depreciation, depletion and amortization, equity in earnings of affiliates, total assets, income taxes, equity investments, equity investment impairment and capital expenditures.

Environmental Technologies

       The Environmental Technologies segment markets cost-effective compliance with environmental regulations enabled by sophisticated emission-control technologies and systems.

       Environmental catalysts are used in applications such as the abatement of carbon monoxide, oxides of nitrogen and hydrocarbon emissions from gasoline, diesel and alternate-fueled vehicles. These catalysts also are used to remove odors, fumes and pollutants associated with a variety of process industries, co-generation and gas-turbine power generation, household appliances and lawn and garden power tools.

       The products of the Environmental Technologies segment compete in the marketplace on the basis of value, performance and cost. No single competitor is dominant in the markets in which the Company operates.

       The manufacturing operations of the Environmental Technologies segment are carried out in the United States, Italy, Germany, India, South Africa, Brazil, China, Thailand and the United Kingdom, with equity investments located in South Korea and the United States. The products are sold principally through the Company's sales organizations or those of its equity investments, supplemented by independent distributors and representatives.

       Principal raw materials used by the Environmental Technologies segment include precious metals, procured by the Materials Services segment, and a variety of minerals and chemicals that are generally readily available.

       As of January 1, 2003, the Environmental Technologies segment had approximately 1,990 employees worldwide. Most hourly employees are not covered by collective bargaining agreements. Employee relations have generally been good.

Process Technologies

       The Process Technologies segment enables customers to make their processes more productive, efficient, environmentally sound and safer through the supply of advanced chemical-process catalysts, additives and sorbents.

      Process Technologies' chemical-process catalysts are used in the manufacture of a variety of products and intermediates made by chemical, petrochemical, pharmaceutical and agricultural chemical producers. In addition, they are used in the production of polypropylene which is used in a wide range of products, including food packaging, carpets, toys and automobile bumpers. Sorbents are used to purify and decolorize naturally occurring fats and oils for the manufacture of shortenings, margarines and cooking oils. Petroleum catalysts and additives are used by refiners to provide economies in petroleum processing and to meet increasingly stringent fuel-quality requirements. The segment's catalyst products are based on the Company's proprietary technology and often are application-specific.

      The products of the Process Technologies segment compete in the marketplace on the basis of value, performance and cost. No single competitor is dominant in the markets in which the Company operates.

      The manufacturing operations of the segment are carried out in the United States, Italy, The Netherlands and Spain. The products are sold principally through the Company's sales organizations supplemented by independent distributors and representatives.

      The principal raw materials used by the segment include metals, procured by the Materials Services segment and from third parties; kaolin-based intermediates supplied by the Appearance and Performance Technologies segment; and a variety of other minerals and chemicals that are generally readily available.

       As of January 1, 2003, the Process Technologies segment had approximately 1,750 employees worldwide. Most hourly employees are covered by collective bargaining agreements. Employee relations have generally been good.

Appearance and Performance Technologies

       The Appearance and Performance Technologies segment provides pigments, effect materials and performance additives that enable its customers to market enhanced image and functionality in their products. This segment serves a broad array of end markets including coatings, plastics, cosmetics, construction and paper. This segment's products help customers improve the look, performance and overall cost of their products. This segment is also the internal supply source of precursors for some of the Company's advanced refining-process catalysts.

      The segment's principal products include special-effect materials and films, color pigments and dispersions, paper pigments and extenders and specialty performance additives. The segment's special-effect pigments provide a range of aesthetic effects in coatings, personal care and cosmetics products, packaging, plastics, inks, glitter, gift wrap, textiles and other applications. Color pigments include a broad range of organic and inorganic products, dispersions and universal colorants that impart color to automotive finishes, coatings, plastics and inks. Paper pigments are used as coating and extender pigments to improve the opacity, brightness, gloss and printability of coated and uncoated papers. Specialty performance additives are used to improve the functionality, appearance and value of liquid and powder coatings, plastics, rubber, adhesives, inks, concrete and cosmetics. Iridescent and specialty films are used to visually enhance a variety of products in such applications as product packaging, labels, glitter, gift wrap and textiles.

      In November 2002, the Company acquired certain operating assets of Shuozhou Anpeak Kaolin Co., Ltd., a China-based producer of calcined kaolin products. This acquisition enhances the Company's ability to provide specialty mineral technologies to the Asian market.

       The products of the Appearance and Performance Technologies segment compete in the marketplace on the basis of value, performance and cost. No single competitor is dominant in the markets in which the Company operates.

      The manufacturing operations of the segment are carried out in the United States, South Korea, China and Finland. Subsidiary sales and distribution centers are located in France, Hong Kong, Japan, Mexico, and The Netherlands, in addition to the manufacturing site locations noted above. Products are sold through the Company's sales organization supplemented by independent distributors and representatives.

       The principal raw materials used by the Appearance and Performance Technologies segment include naturally occurring minerals such as kaolin, attapulgite and mica, which are mined from mineral reserves owned or leased by the Company, and a variety of other minerals and chemicals that are readily available.

       As of January 1, 2003, the Appearance and Performance Technologies segment had approximately 2,170 employees worldwide. Most hourly employees are covered by collective bargaining agreements. Employee relations have generally been good.

Materials Services

       The Materials Services segment serves the Company's technology segments, their customers and others with precious and base metals and related services. This is a distribution and materials services business that purchases and sells precious metals, base metals and related products and services. It does so under a variety of pricing and delivery arrangements structured to meet the logistical, financial and price-risk management requirements of the Company, its customers and suppliers. Additionally, it offers the related services of precious-metal refining and storage and produces salts and solutions.

       The Materials Services segment is responsible for procuring precious and base metals to meet the requirements of the Company's operations and its customers. Supplies of newly mined platinum group metals are obtained primarily from South Africa and the Russian Federation, and to a lesser extent, from the United States and Canada, the only four regions that are known significant sources. Most of these platinum group metals are obtained pursuant to a number of contractual arrangements with different durations and terms. Gold, silver and base metals are purchased from various sources. In addition, in the normal course of business, certain customers and suppliers deposit significant quantities of precious metals with the Company under a variety of arrangements. Equivalent quantities of precious metals are returnable as product or in other forms.

       Offices are located in the United States, Italy, Japan, the Russian Federation, Switzerland and the United Kingdom. As of January 1, 2003, the Materials Services segment had approximately 90 employees worldwide.

Equity Investments

      The Company has equity investments in affiliates that are accounted for under the equity method. These investments are N.E. Chemcat Corporation (N.E. Chemcat), Heesung-Engelhard, Engelhard-CLAL and Prodrive-Engelhard. N.E. Chemcat is a 38.8%-owned, publicly traded Japanese corporation and a leading producer of automotive and chemical catalysts, electronic chemicals and other precious-metals-based products. Heesung-Engelhard, a 49%-owned joint venture in South Korea, manufactures and markets catalyst products for automobiles. Engelhard-CLAL, a 50%-owned joint venture, manufactures and markets certain products containing precious metals. Prodrive-Engelhard, a 50%-owned joint venture in the United States, specializes in the design, development and testing of vehicle emission systems.

Major Customers

       For the years ended December 31, 2002, 2001 and 2000, Ford Motor Company, a customer of the Environmental Technologies and Materials Services segments, accounted for more than 10% of the Company's net sales. Sales to this customer included both fabricated products and precious metals and were therefore significantly influenced by fluctuations in precious-metal prices as was the quantity and type of metal purchased. In such cases, market price fluctuations, quantities and types of product purchased can result in material variations in sales reported, but do not usually have a direct or significant effect on earnings.

Research and Patents

       The Company currently employs approximately 568 scientists, technicians and auxiliary personnel engaged in research and development in the fields of surface chemistry and materials science. These activities are conducted in the United States and abroad. Research and development expenses were $88.2 million in 2002, $84.3 million in 2001 and $82.8 million in 2000.

       Research facilities include fully staffed instrument analysis laboratories that the Company maintains in order to achieve the high level of precision necessary for its technology businesses and to assist customers in understanding how the Company's products and services add value to their businesses.

       The Company owns, or is licensed under, numerous patents secured over a period of years. It is the policy of the Company to normally apply for patents whenever it develops new products or processes considered to be commercially viable and, in appropriate circumstances, to seek licenses when such products or processes are developed by others. While the Company deems its various patents and licenses to be important to certain aspects of its operations, it does not consider any significant portion or its business as a whole to be materially dependent on patent protection.

Environmental Matters

      With the oversight of environmental agencies, the Company is currently preparing, has under review, or is implementing environmental investigations and cleanup plans at several currently or formerly owned and/or operated sites, including Plainville, Massachusetts. The Company is continuing to investigate contamination at Plainville under a 1993 agreement with the United States Environmental Protection Agency (EPA). The Company is continuing to address decommissioning issues under authority delegated by the Nuclear Regulatory Commission to the Commonwealth of Massachusetts. A Salt Lake City, Utah site was sold in 2002, with the primary liability for remediating the site contractually transferred to the buyer and Engelhard remaining responsible for specified remediation costs.

      In addition, as of December 31, 2002, twelve sites have been identified at which the Company believes liability as a potentially responsible party is probable under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or similar state laws (collectively referred to as Superfund) for the cleanup of contamination resulting from the historic disposal of hazardous substances allegedly generated by the Company, among others. Superfund imposes strict, joint and several liability under certain circumstances. In many cases, the dollar amount of the claim is unspecified and claims have been asserted against a number of other entities for the same relief sought from the Company. Based on existing information, the Company believes that it is a de-minimis contributor of hazardous substances at a number of the sites referenced above. Subject to the reopening of existing settlement agreements for extraordinary circumstances or natural resource damages, the Company has settled a number of other cleanup proceedings. The Company has also responded to information requests from EPA and state regulatory authorities in connection with other Superfund sites.

      The accruals for environmental cleanup-related costs recorded in the consolidated balance sheets at December 31, 2002 and 2001 were $18.5 million and $23.2 million, respectively, including $0.1 million and $0.6 million, respectively, for Superfund sites. These amounts represent those costs that the Company believes are probable and reasonably estimable. Based on currently available information and analysis, the Company's accrual represents approximately 40% of what it believes are the reasonably possible environmental cleanup-related costs of a noncapital nature. The estimate of reasonably possible costs is less certain than the probable estimate upon which the accrual is based.

      Cash payments for environmental cleanup-related matters were $1.8 million in 2002 and $1.7 million in both 2001 and 2000. The amounts accrued in connection with environmental cleanup-related matters were not significant over this time period.

      For the past three-year period, environmental-related capital projects have averaged less than 10% of the Company's total capital expenditure programs, and the expense of environmental compliance (e.g., environmental testing, permits, consultants and in-house staff) was not material.

       There can be no assurances that environmental laws and regulations will not become more stringent in the future or that the Company will not incur significant costs in the future to comply with such laws and regulations. Based on existing information and currently enacted environmental laws and regulations, cash payments for environmental cleanup-related matters are projected to be $2.9 million for 2003, which has already been accrued. Further, the Company anticipates that the amounts of capitalized environmental projects and the expense of environmental compliance will approximate current levels. While it is not possible to predict with certainty, management believes environmental cleanup-related reserves at December 31, 2002 are reasonable and adequate, and environmental matters are not expected to have a material adverse effect on financial condition. These matters, if resolved in a manner different from the estimates, could have a material adverse effect on the Company's operating results or cash flows.

ITEM 2.  PROPERTIES

       The Company leases a building on approximately seven acres of land with an area of approximately 271,000 square feet in Iselin, NJ. This building serves as the principal executive and administrative office of the Company and its operating segments. The Company owns approximately eight acres of land and three buildings with a combined area of approximately 150,000 square feet in Iselin, NJ. These buildings serve as the major research and development facilities for the Company's operations. The Company also owns or leases research facilities in Gordon, GA; Union, NJ; Buchanan and Ossining, NY; Beachwood, OH; Pasadena, TX; Hannover, Germany; and De Meern, The Netherlands.

       The Environmental Technologies segment operates company-owned plants in Huntsville, AL; East Windsor, CT; Wilmington, MA; Duncan, SC; East Newark and Carteret, NJ; Fremont, CA; Nienburg, Germany; Madras, India; Port Elizabeth, South Africa; Rome, Italy; Indiatuba, Brazil; Shanghai, China; Rayoung, Thailand; and Coleford and Cinderford in the United Kingdom.

       The Process Technologies segment operates company-owned plants in Attapulgus and Savannah, GA; Elyria, OH; Erie, PA; Seneca, SC; Jackson, MS; Pasadena, TX; Rome, Italy; De Meern, The Netherlands; and Tarragona, Spain.

       The Appearance and Performance Technologies segment operates company-owned attapulgite processing plants in Quincy, FL near the area containing its attapulgite reserves, plus a mica mine and processing facilities in Hartwell, GA. In addition, the segment operates five company-owned kaolin mines and five milling facilities in Middle Georgia, which serve an 85-mile network of pipelines to three processing plants. It also operates on company-owned land containing kaolin and leases on a long-term basis kaolin mineral rights to additional acreage. The segment also operates company-owned sales and manufacturing facilities in Helsinki, Kotka, and Rauma, Finland; Shanxi, China; and Tokyo, Japan, in addition to owning and operating color, pearlescent pigment and film manufacturing facilities in Sylmar, CA; Louisville, KY; Eastport, ME; Peekskill, NY; Elyria, OH; Charleston, SC; and Inchon, South Korea. Management believes the Company's kaolin, attapulgite and mica reserves will be sufficient to meet its needs for the foreseeable future.

       The Materials Services segment's operations are conducted at leased facilities in Iselin, NJ; Lincoln Park, MI; Tokyo, Japan; Moscow, Russia; Zug, Switzerland; and London, United Kingdom. In addition, the segment's operations are conducted at company-owned facilities in Seneca, SC; Carteret, NJ and Rome, Italy.

       Management believes that the Company's processing and refining facilities, plants and mills are suitable and have sufficient capacity to meet its normal operating requirements for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is one of a number of defendants in numerous proceedings that allege that the plaintiffs were injured from exposure to hazardous substances purportedly supplied by the Company and other defendants or that existed on Company premises. The Company is also subject to a number of environmental contingencies (see Note 20, "Environmental Costs," for further detail) and is a defendant in a number of lawsuits covering a wide range of other matters. In some of these matters, the remedies sought or damages claimed are substantial. While it is not possible to predict with certainty the ultimate outcome of these lawsuits or the resolution of the environmental contingencies, management believes, after consultation with counsel, that resolution of these matters is not expected to have a material adverse effect on financial condition. These matters, if resolved in a manner different from management's current expectations, could have a material adverse effect on the Company's operating results or cash flows.

      In 1998, management learned that Engelhard and several other companies operating in Japan had been victims of an elaborate scheme involving base-metal inventory held in third-party warehouses in Japan. The inventory loss was approximately $40 million in 1997 and $20 million in 1998. In the first quarter of 1998, Engelhard recorded a receivable from the insurance carriers and third parties involved for approximately $20 million. This amount represented management's and counsel's best estimate of the minimum probable recovery from the various insurance policies and other parties involved in the fraudulent scheme. As of June 30, 2002, the Company had recovered $11.2 million. In July 2002, the Company received an additional $19.8 million, net of legal fees, from insurance settlements reached in June. Accordingly, the Company recorded a gain of $11.0 million ($6.8 million after tax) in the second quarter of 2002 in its Materials Services segment.

      The Company is involved in a value-added tax dispute in Peru. Management believes the Company was targeted by corrupt officials within a former Peruvian government. On December 2, 1999, Engelhard Peru, S.A., a wholly owned subsidiary, was denied refund claims of approximately $28 million. The Peruvian tax authority also determined that Engelhard Peru, S.A. is liable for approximately $63 million in refunds previously paid, fines and interest as of December 31, 1999. Interest and fines continue to accrue at rates established by Peruvian law. The Peruvian Tax Court ruled on February 11, 2003 that Engelhard Peru, S.A. was liable for these amounts, overruling precedent to apply a "form over substance" theory without any determination of fraudulent participation by Engelhard Peru, S.A. The Tax Court is part of the Peruvian Ministry of Economics and Finance. Engelhard Peru, S.A. is contesting these determinations vigorously, and management believes, based on consultation with counsel, that Engelhard Peru, S.A. is entitled to all refunds claimed and is not liable for these additional taxes, fines or interest. In late October 2000, a criminal proceeding alleging tax fraud and forgery related to this value-added tax dispute was initiated against two Lima-based officials of Engelhard Peru, S.A. Although Engelhard Peru, S.A. is not a defendant, it may be civilly liable in Peru if its representatives are found responsible for criminal conduct. In its own investigation, and in detailed review of the materials presented in Peru, management has not seen any evidence of tax fraud by these officials. Accordingly, Engelhard Peru, S.A. is assisting in the vigorous defense of this proceeding. Management believes the maximum economic exposure is limited to the aggregate value of all assets of Engelhard Peru, S.A. That amount, which is approximately $30 million including unpaid refunds, has been fully provided for in the accounts of the Company.

      On October 29, 2002, a jury in the New York County Supreme Court awarded the Company $29.8 million in damages in a breach of contract action the Company had brought against Research Corporation and Research Corporation Technologies in 1998. The jury found that the defendants did not share with the Company all of the royalties to which the Company was entitled under a royalty-sharing agreement it entered into with Research Corporation in 1979. Statutory interest to the date of the verdict would have increased the amount awarded to approximately $42.2 million. On March 21, 2003, the Company entered into a settlement agreement, releasing this claim in exchange for payment of $38 million.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
             Not applicable.



ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT
             

ARTHUR A. DORNBUSCH, II Age 59. Vice President, General Counsel and Secretary of the Company from prior to 1994.
   
MARK DRESNER Age 51. Vice President of Corporate Communications effective December 17, 1998. Director of Corporate Communications from October 1995 to December 1998.
   
JOHN C. HESS Age 51. Vice President, Human Resources effective August 1, 1997.
   
PETER B. MARTIN Age 63. Vice President, Investor Relations effective June 18, 1997.
   
BARRY W. PERRY * Age 56. Chairman and Chief Executive Officer of the Company since January 2001. President and Chief Operating Officer from 1997 until 2001. Mr. Perry is also a director of Arrow Electronics, Inc. and Cookson Group plc.
   
ALAN J. SHAW Age 54. Controller of the Company effective January 1, 2003. Vice President-Finance of Materials Services from January 1993 to January 2003.
   
MICHAEL A. SPERDUTO Age 45. Vice President and Chief Financial Officer of the Company effective August 2, 2001. Controller of the Company from August 1999 to August 2001. Vice President-Finance from July 1998 to August 1999. Treasurer prior thereto.


* Also a director of the Company

       Officers of the Company are elected at the meeting of the Board of Directors held in May of each year after the annual meeting of shareholders and serve until their successors shall be elected and qualified and shall serve as such at the pleasure of the Board.














PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      As of March 1, 2003, there were 5,199 holders of record of the Company's common stock, which is traded on the New York Stock Exchange (ticker symbol "EC"), as well as on the London and Swiss stock exchanges.

      The range of market prices and cash dividends for each quarterly period were as follows:

  NYSE
Market Price
  Cash
dividends paid
  High
Low
  per share
2002
First quarter
$ 31.16   $ 25.02     $ 0.10  
Second quarter   33.00     26.62       0.10  
Third quarter   29.00     22.44       0.10  
Fourth quarter   25.44     21.18       0.10  
                     
2001
First quarter
$ 27.35   $ 19.31     $ 0.10  
Second quarter   29.20     24.10       0.10  
Third quarter   27.23     18.20       0.10  
Fourth quarter   28.40     22.27       0.10  

ITEM 6.  SELECTED FINANCIAL DATA

Selected Financial Data
($ in millions, except per-share amounts)


  2002
  2001
  2000
  1999
  1998
Net sales $ 3,753.6     $ 5,096.9     $ 5,542.6     $ 4,488.0     $ 4,246.6  
Net earnings (1)   171.4       225.6       168.3       197.5       187.1  
Basic earnings per share   1.34       1.73       1.33       1.49       1.30  
Diluted earnings per share   1.31       1.71       1.31       1.47       1.29  
Total assets   3,020.7       2,995.5       3,166.8       2,920.5       2,866.3  
Long-term debt   247.8       237.9       248.6       499.5       497.4  
Shareholders' equity   1,077.2       1,003.5       874.6       764.4       901.6  
Cash dividends paid per share   0.40       0.40       0.40       0.40       0.40  
Return on average shareholders' equity (1)   16.5 %     24.0 %     20.5 %     23.7 %     22.2 %

(1)  Net earnings in 2002 include the following: an impairment charge of $57.7 million associated with the Engelhard-CLAL joint venture (see Note 9, "Investments," for further detail), an impairment charge of $4.1 million associated with an investment in fuel-cell developer Plug Power Inc. (see Note 9, "Investments," for further detail), a charge of $1.9 million related to a manufacturing consolidation plan and a $6.8 million insurance settlement gain (see Note 5, "Special and Other Charges," for further detail).

      Net earnings in 2000 include the following: fourth-quarter special and other charges of $75.1 million for a variety of events (see Note 5, "Special and Other Charges," for further detail), a third-quarter impairment charge of $16.9 million related to the write-down of goodwill and fixed assets of the Company's HexCore business unit and net gains of $12.9 million on sales of investments.

      Net earnings in 1999 include net gains of $6.0 million on sales of investments and land.













































ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

      Unless otherwise indicated, all per-share amounts are presented as diluted earnings per share, as calculated under Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."

      For a discussion of the Company's critical accounting policies, see page 23.

Results of Operations

      Net sales were $3.8 billion in 2002, compared with $5.1 billion in 2001 and $5.5 billion in 2000. Net earnings were $171.4 million ($1.31 per share) in 2002, compared with $225.6 million ($1.71 per share) in 2001 and $168.3 million ($1.31 per share) in 2000.

      Excluding certain items reported in 2002 and 2000, the Company would have reported net earnings of $228.3 million and $247.4 million for the years ended December 31, 2002 and 2000, respectively. Management believes the amounts as adjusted better reflect the core earnings of the Company. The following table reconciles the Company's net earnings as adjusted with reported net earnings (in millions):

  2002
  2001
  2000
Net earnings - as adjusted $ 228.3     $ 225.6     $ 247.4  
Plug Power Inc. investment impairment   (4.1 )     -       -  
Equity investment impairment   (57.7 )     -       -  
Special credit/(charge), net - see Note 5   4.9       -       (92.0 )
Net gains on asset sales  
-
 
   
-
 
   
12.9
 
     Net earnings - as reported $
171.4
 
  $
225.6
 
  $
168.3
 

      The information in the discussion of each segment's results is derived directly from the internal financial reporting system used for management purposes. Items allocated to each segment's results include the majority of corporate operating charges. Unallocated items include interest expense, interest income, royalty income, sale of precious metals accounted for under the last-in, first-out (LIFO) method, certain special and other charges, income taxes, certain information technology development costs and other miscellaneous corporate items.

Environmental Technologies

      The Environmental Technologies segment markets cost-effective compliance with environmental regulations enabled by sophisticated emission-control technologies and systems.

2002 Performance

      Sales increased 5% to $680.4 million, and operating earnings decreased 23% to $109.2 million.

Discussion

      The majority of this segment's sales and operating earnings are derived from technologies to control pollution from mobile sources, including gasoline- and diesel-powered passenger cars, sport-utility vehicles, trucks, buses and off-road vehicles.

      Sales increased primarily from the addition of higher pass-through substrate costs of $32.2 million, an estimated 2% increase in worldwide production of light-duty vehicles and higher volumes in both OEM and retrofit diesel markets. Higher sales were reduced by $15.8 million on lower volumes of emission-control systems for gas turbines used in power-generation applications and by $7.8 million on lower volumes to the surface coatings markets.

      Operating earnings decreased primarily from higher expenses of $11.4 million associated with rework for power-generation applications, higher depreciation, depletion and amortization costs of $5.5 million, a manufacturing consolidation charge of $3.1 million recorded in 2002 and higher research and development costs of $3.0 million.

Outlook

      This segment expects growth in sales and operating earnings as emission-control regulations become stricter around the world and address a much broader range of emission sources. Demand from the automotive market is expected to remain strong in response to the Company's development of several new technologies. Although auto builds are forecasted to be down slightly in 2003, ongoing productivity improvements and increased demand in Asia are expected to support modest growth in this portion of the segment. A significant decline in auto builds could have an unfavorable effect on this segment, depending on the demand for platforms where the segment provides catalysts.

      Stationary source comparisons are expected to be unfavorable for catalysts for emission-control systems for gas turbines used in peak-power-generation applications from higher sales a year ago and a decline in demand. Demand is expected to remain soft for technologies related to peak-power-generation due to the current lack of funding for these projects.

       Sales of advanced catalysts for medium- and heavy-duty diesel trucks increased in the second half of 2002 and are expected to expand in 2003 as new regulations begin to take effect. Investment in research for medium- and heavy-duty diesel continues at an accelerated pace in anticipation of more stringent regulations scheduled to begin phasing in during 2005 and 2007.

       This segment continues to work to reduce its reliance on the automotive market by developing an array of applications not only for medium-and heavy-duty diesel markets, but also for non-automotive markets, including technologies for motorcycles; small engines, such as lawn and garden power equipment; charbroilers; mining and construction; and ozone management.

2001 compared with 2000

      Sales increased 2% to $646.7 million, and operating earnings increased 22% to $142.4 million. Excluding the impact of special and other charges of $15.4 million in 2000, operating earnings increased 8%.

Discussion (excluding the impact of special and other charges in 2000)

      Sales and operating earnings from technologies to control pollution from mobile sources increased 3% and 8%, respectively. In spite of a 5% decline in production of light-duty vehicles in both North America and Europe, earnings increased primarily from higher volumes of auto-emission catalysts in North America.

      Sales and earnings also were favorably impacted by strength in the segment's non-automotive markets, primarily from increased volumes of emission-control systems for gas turbines used in peak-power-generation. These increases were partly offset by the absence of operating earnings of $5.2 million from the segment's metal-joining products business sold in September 2000 and $1.1 million from the segment's silver nitrate business sold in February 2001. Excluding the results of these dispositions, sales and operating earnings would have increased 9% and 14%, respectively.

Process Technologies

      The Process Technologies segment enables customers to make their processes more productive, efficient, environmentally sound and safer through the supply of advanced chemical-process catalysts, additives and sorbents.

2002 Performance

      Sales decreased 5% to $538.8 million, and operating earnings decreased 1% to $93.0 million.

Discussion

      Sales and operating earnings were lower in 2002 primarily from lower volumes to the chemical-process and petroleum-refining markets. These decreases were partially offset by increased demand for Lynx 1000 (trademark) polypropylene catalysts, NaphthaMax (trademark) refining catalysts and petroleum-refining additives which aggregated $37.2 million, plus the full-year inclusion of the fats and oils catalyst business acquired from Sud Chemie in October 2001 and the introduction of a new gas-to-liquids catalyst in 2002. Sales also were reduced by $17.6 million due to lower precious metal prices, which are passed through to chemical-process catalyst customers in Europe.

      Operating earnings were favorably impacted by lower energy and raw material costs of $6.3 million, the elimination of goodwill amortization of $3.6 million related to the adoption of Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets," full-year inclusion of results from the fats and oils catalyst business acquired from Sud Chemie in October 2001 of $2.5 million and favorable impact of foreign exchange of $1.6 million.

Outlook

      Sales and earnings growth in this segment are expected to come from custom process catalysts such as those that enable conversion of gas-to-liquids; high value-add petroleum refining catalysts (primarily NaphthaMax (trademark) and FlexTec (trademark)); petroleum refining additives; and increased market penetration for polypropylene catalysts. Continued cost management, productivity improvements and product technology advances will also contribute to earnings growth. Capacity expansion of a polyolefin catalyst plant will come online in 2003. Overall weakness in the chemical-process market and relatively flat demand in the petroleum refining market are expected to continue for most of 2003.

2001 compared with 2000

      Sales of $568.2 million in 2001 were essentially unchanged compared with the same period in 2000, and operating earnings increased 16% to $94.3 million. Excluding the impact of special and other charges of $5.5 million in 2000, operating earnings increased 9%.


Discussion (excluding the impact of special and other charges in 2000)

      Sales were unchanged compared with 2000 as higher volumes to chemical-process and petroleum-refining markets were offset by significantly lower precious metal prices, which are passed through to chemical-process catalyst customers in Europe. Excluding the impact of these pass-through metal costs, sales would have increased 8% on higher volumes and prices. The higher volumes were driven by strong demand for Lynx 1000 (trademark) catalyst used in the production of polypropylene and NaphthaMax (trademark), which enables petroleum refiners to increase gasoline yields.

      The increase in operating earnings was driven primarily from higher sales volumes that favorably impacted earnings by $7 million, reduced costs from productivity improvements of $5 million, the full-year inclusion of results from the polyolefin catalyst business of Targor GmbH acquired in September 2000 and moderate price increases of $2 million. Earnings in 2001 were held back by higher energy and raw material costs of $9 million.

Appearance and Performance Technologies

      The Appearance and Performance Technologies segment provides pigments, effect materials and performance additives that enable its customers to market enhanced image and functionality in their products. This segment serves a broad array of end markets including coatings, plastics, cosmetics, construction and paper. This segment's products help customers improve the look, performance and overall cost of their products. This segment is also the internal supply source of precursors for some of the Company's advanced refining-process catalysts.

2002 Performance

      Sales increased 3% to $650.8 million, and operating earnings increased 87% to $87.1 million.

Discussion

      Sales and operating earnings were up primarily from increased sales volumes to the coatings, automotive, agricultural, cosmetics/personal care and plastics markets. Operating earnings were also favorably impacted by lower costs from productivity improvements of $21.5 million, the elimination of goodwill amortization of $5.7 million related to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," lower energy costs of $4.6 million, the recording of a $7.1 million charge in 2001 relating to asset redeployment actions and productivity initiatives, and selective price increases in the paper market in the range of three to four percent.

Outlook

      Earnings growth within this segment is expected to increase at more normal rates as compared to the exceptional growth experienced in 2002, which was driven by modest sales increases and significant productivity improvements, compared to weak results reported in 2001.

      Sales growth is expected to be somewhat improved over the prior year as slow economic recovery is expected in most of the major markets served. Sales to the paper market are expected to increase gradually with earnings again being favorably impacted by industry-wide price increases and continued productivity improvements. Higher natural gas costs could have an unfavorable impact on earnings. Efforts to focus on higher value end markets and customers for kaolin-based technologies will continue to be a priority.

      Sales and earnings to other major markets served, including coatings, cosmetics/personal care, automotive and agriculture, are expected to grow from ongoing new product development and new market applications plus market diversification opportunities through expansion of the segment's technology bases. Productivity improvement opportunities throughout the business will continue to be an important driver of increased earnings.

2001 compared with 2000

      Sales decreased 7% to $634.4 million, and operating earnings increased 52% to $46.5 million. Excluding the impact of special and other charges of $49.7 million in 2000, operating earnings decreased 42%.

Discussion (excluding the impact of special and other charges in 2000)

      Declines in this segment's sales and operating earnings resulted from weak end markets and significantly higher energy costs of $11.8 million. Most notable was the paper market, where weak pigment demand and industry overcapacity kept prices at depressed levels. Markets for special-effect materials were mixed as lower volumes for technologies used in automotive finishes were partially offset by higher demand for those utilized in cosmetics.

Materials Services

      The Materials Services segment serves the Company's technology segments, their customers and others with precious and base metals and related services. This is a distribution and materials services business that purchases and sells precious metals, base metals and related products and services. It does so under a variety of pricing and delivery arrangements structured to meet the logistical, financial and price-risk management requirements of the Company, its customers and suppliers. Additionally, it offers the related services of precious-metal refining and storage and produces salts and solutions.

2002 Performance

      Sales decreased 43% to $1.8 billion, and operating earnings decreased 6% to $52.7 million.

Discussion

      Sales for this segment include substantially all of the Company's sales of metals to industrial customers of all segments. Sales also include fees invoiced for services rendered (e.g., refining and handling charges). Because of the logistical and hedging nature of much of this business and the significant precious metal values included in both sales and cost of sales, gross margins tend to be low in relation to the Company's other technology businesses as does capital employed. This effect also dampens the gross margin percentages of the Company as a whole, but improves the return on investment.

      While most customers for the Company's platinum-group-metal catalysts purchase the metal from Materials Services, some choose to deliver metal from other sources prior to the manufacture of the catalysts. In such cases, precious metal values are not included in sales. The mix of such arrangements and the extent of market price fluctuations can significantly affect the reported level of sales and cost of sales. Consequently, there is no direct correlation between year-to-year changes in reported sales and operating earnings.

      Operating earnings were down as a result of lower volumes and lower results from the recycling (refining) of platinum group metals of $11.0 million. Operating earnings in both years were favorably affected by several items that triggered recognition of events reflecting operations from prior periods. In 2002, operating earnings were favorably impacted by $22.0 million of income related to platinum-group-metal transactions realized previously but deferred pending the resolution of certain contractual provisions, an insurance settlement gain ($11.0 million), the receipt of cash related to the settlement of litigation for a customer receivable recorded in 1997 that was previously written off ($3.0 million) and $5.5 million from the realization of a previously unrecognized contractual benefit. In 2001, operating earnings were favorably impacted by the recovery of metal from an unexpected industrial customer bankruptcy ($6.2 million) and the restructuring of a professional services contract ($3.3 million). Sales decreased from lower platinum-group-metal prices and lower volumes.

Outlook

      The results of this segment are likely to be below recent historical levels rather than the exceptional results reported in 2000 and the higher levels of 2001. Overall weakness projected in the basic industrial markets will adversely impact the recycling and refining of platinum group metals, as well as the volume of metal sales. Uncertainty also exists with respect to the volume and customer mix impact of a change in producer channels to market. While a sustainable level of base business is anticipated, the benefits of potential market volatility combined with other market factors represents an upside for this segment. Volatility not only increases the spreads on transactions, but also provides opportunities to benefit from strong and prudent physical positions (see the "Commodity Price Risk" section on page 28 for further details).

2001 compared with 2000

      Sales decreased 11% to $3.2 billion, and operating earnings decreased 57% to $56.1 million.

Discussion

      Operating earnings and sales were down due to significantly lower platinum-group-metal prices and lower volumes. The decrease in earnings was partially offset by increased earnings in the recycling (refining) of platinum group metals of $7.1 million and the reversal of certain expense accruals that are no longer necessary due to the recovery of metal from an unexpected industrial customer bankruptcy ($6.2 million) and the restructuring of a professional services contract ($3.3 million).















Acquisitions

Other Party
  Business Arrangement
  Transaction Date
  Business Opportunity
Shuozhou Anpeak Kaolin Co., Ltd.   Acquired certain operating assets of a China-based producer of calcined kaolin products for $12.1 million   November 2002   Enhances the Company's ability to provide specialty mineral technologies to the Asian market
             
Sud-Chemie AG (Sud Chemie)   Acquired the fats and oils catalyst business of Sud Chemie for $13.6 million   October 2001   Broadens the Company's catalyst technology offering to oleochemical markets
             
Targor GmbH   Acquired the polyolefin catalyst business for $35.1 million   September 2000   Expansion of catalyst business


Consolidated Gross Profit

      Gross profit as a percentage of sales was 17.4% in 2002, compared with 13.0% in 2001 and 13.2% in 2000. The increase in 2002 was primarily related to a $1.3 billion decrease in sales from lower precious metal prices. The decrease in 2001 was primarily driven by lower margins earned in the Materials Services segment. Sales from this segment decreased 11% in 2001 to $3.2 billion and provided a gross profit of 3%, while 2001 sales from all other reportable segments decreased 2% to $1.8 billion and provided a gross profit of 31%. As described earlier, the lower margins on Materials Services sales are driven by the inclusion of the value of precious metals in both sales and cost of sales.

Selling, Administrative and Other Expenses

      Selling, administrative and other expenses were $350.1 million in 2002, compared to $336.0 million in 2001 and $382.3 million in 2000. The increase in 2002 was primarily due to increased information technology expenses of $5.7 million, increased research and development expenses of $3.9 million, increased administrative rent expenses of $2.6 million and increased professional fees of $2.4 million. The decrease in 2001 was primarily due to the absence of special and other charges of $23.8 million reported in 2000 and lower compensation costs.

Equity Earnings

      Absent the impairment charge discussed below, equity in earnings of affiliates was $16.2 million in 2002, compared with equity earnings of $29.1 million in 2001 and $24.2 million in 2000. The decrease was primarily from lower earnings from Engelhard-CLAL, a 50%-owned precious-metal-fabrication joint venture, from gains reported in the prior year related to a change in the mix of platinum group metals used in its operations and lower volumes due to the absence of divested business units. The increase in 2001 was primarily due to higher earnings from Engelhard-CLAL primarily on gains related to a change in the mix of platinum group metals used in its operations. Higher equity earnings were also reported in 2001 for Heesung-Engelhard, a 49%-owned environmental catalyst joint venture in South Korea.

      In the third quarter of 2002, the Company recorded an impairment charge of $57.7 million associated with its Engelhard-CLAL joint venture (see Note 9, "Investments," for further detail).

Loss/Gain on Investments, Net

      In the second quarter of 2002, the Company recorded an impairment charge of $6.7 million ($4.1 million after tax) associated with its Plug Power Inc. investment (see Note 9, "Investments," for further detail).

      In the first quarter of 2000, the Company recorded a loss of $6.0 million ($4.1 million after tax) associated with the divestiture of the International Dioxide, Inc. business unit.

      In the third quarter of 2000, the Company sold its metal-joining products business located in Warwick, Rhode Island and recorded a gain of $24.8 million ($17.0 million after tax).

Interest

      Interest expense was $27.4 million in 2002, compared with $47.3 million in 2001 and $64.8 million in 2000. Interest expense in 2002 and 2001 decreased due to decreased borrowings and lower short-term interest rates.

      Interest income was $2.0 million in 2002, $3.3 million in 2001 and $2.1 million in 2000.

      The Company capitalized interest of $3.0 million in 2002 and 2001, and $3.9 million in 2000.

Taxes

      The worldwide income tax expense was $66.5 million in 2002, compared with $79.7 million in 2001 and $77.4 million in 2000. The effective income tax rate was 22.5% in 2002 (excluding the equity investment impairment of $57.7 million), 26.1% in 2001 and 31.5% in 2000.

       The decrease in the worldwide effective tax rate in 2002 was primarily the result of higher percentage depletion deductions. Additionally, the rate was favorably impacted by the recognition of foreign tax items and research and development tax credits in excess of previous estimates, and a shift in the geographical mix of earnings. The decrease in the worldwide effective tax rate in 2001 was primarily due to the recognition of foreign tax credits generated in previous years and the recognition of favorable tax variances from the foreign sales corporation and percentage depletion deductions (see Note 13, "Income Taxes," for further detail of variances).

      Net deferred tax assets are more likely than not realizable. Their utilization is dependent upon the ability to generate the appropriate types of income (e.g., foreign source income) in the periods in which temporary differences turnaround or in periods prior to the expiration of applicable carryforward items.

Financial Condition and Liquidity

      Working capital was $179.8 million at December 31, 2002, compared with a deficit of $7.1 million at December 31, 2001. The current ratio was 1.1 in 2002 and 1.0 in 2001. The year-end market value of the Company's precious metals accounted for under the LIFO method exceeded carrying cost by $58.3 million at December 31, 2002, compared with $111.1 million at December 31, 2001. The decrease in excess value reflects lower market values and the impact of slightly reduced inventory levels (See Note 7, "Inventories," for further detail).

      The Company's total debt decreased to $596.6 million at December 31, 2002 from $626.9 million at December 31, 2001. The percentage of total debt to total capitalization decreased to 36% at December 31, 2002 from 38% at December 31, 2001, primarily due to decreased borrowings and increased retained earnings.

      The Company currently has a $400 million, five-year committed credit facility that expires in May 2006 and a $400 million, 364-day committed credit facility that expires in May 2003, with a group of major U.S. and overseas banks. Unused, uncommitted lines of credit were $471 million at December 31, 2002.

      The Company has filed a shelf registration for $300 million of corporate debt. Plans to issue long-term debt in 2003 are under consideration by management.

      Operating activities provided net cash of $302.3 million in 2002 compared with $345.8 million in 2001 and $180.1 million in 2000. The variance in cash flows from operating activities primarily occurred in the Materials Services segment and reflects changes in metal positions used to facilitate requirements of the Company, its metal customers and suppliers (see Note 23, "Supplemental Information," for Materials Services variances). Materials Services routinely enters into a variety of arrangements for the sourcing of metals. Generally, transactions are hedged on a daily basis (see Note 1, "Summary of Significant Accounting Policies," for further detail). Hedging is accomplished primarily through forward, future and option contracts. However, in closely monitored situations for which exposure levels have been set by senior management, the Company from time to time holds large unhedged industrial commodity positions that are subject to future market price fluctuations. These positions are included in committed metal positions along with hedged metal holdings. The bulk of hedged metal obligations represent spot short positions. As these positions generate cash, their cash effect is included in the financing activities section of the Company's "Consolidated Statements of Cash Flows." Other than in closely monitored situations, these positions are hedged with forward purchases. In addition, the aggregate fair value of derivatives in a loss position are reported in hedged metal obligations (derivatives in a gain position are included in committed metal positions). Materials Services works to ensure that the Company and its customers have an uninterrupted source of metals, primarily platinum group metals, utilizing supply contracts and commodities markets around the world. Committed metal positions include significant advances made for the purchase of precious metals that have been delivered to the Company but for which the final purchase price has not yet been determined (see discussion in "Credit Risk" section on page 22 for further detail).

      The variance in cash flows from investing activities is primarily related to changes in capital expenditures, proceeds received from the sale of the Company's metal-joining products business in September 2000, the acquisition of certain operating assets of Shuozhou Anpeak Kaolin Co., Ltd. in November 2002, the acquisition of the fats and oils catalyst business of Sud Chemie in October 2001 and the acquisition of the Targor polyolefin catalyst business in September 2000.

      The variance in cash flows from financing activities was impacted by the repayment of long-term debt in 2001 and 2000, cash received from the exercise of stock options, particularly in 2001, a change in hedged metal obligations in 2000 and increased purchases of treasury stock in 2002 and 2001.

      The following table represents the Company's contractual obligations as of December 31, 2002:

  PAYMENTS DUE BY PERIOD
   
CONTRACTUAL OBLIGATIONS
Total
Less than
1 year

2-3 years
4-5 years
After
5 years

(in millions)
Short-term borrowings
$ 348.7   $ 348.7   $ -   $ -   $ -  
Accounts payable   225.0     225.0     -     -     -  
Hedged metal obligations   537.2     537.2     -     -     -  
Long-term debt   247.8     -     1.4     127.8     118.6  
Operating leases  
190.4
   
35.0
   
52.7
   
25.8
   
76.9
 
     Total contractual obligations $
1,549.1
  $
1,145.9
  $
54.1
  $
153.6
  $
195.5
 

      In the normal course of business, the Company incurs obligations with regard to contract completion and product performance. Under certain circumstances, these obligations are supported through the issuance of letters of credit. At December 31, 2002, the aggregate outstanding amount of letters of credit supporting such obligations amounted to $132.3 million, of which $122.7 million will expire in less than one year (of which $80.0 million will not be renewed), $1.3 million will expire in two to three years, $0.2 million will expire in four to five years, and $8.1 million will expire after five years. In the opinion of management, such obligations will not significantly affect the Company's financial position or results of operations as the Company anticipates fulfilling its performance obligations.

      At December 31, 2002, the Company did not have any guarantees of any unconsolidated subsidiary obligations.

      The Company has consistently derived considerable cash flow from operations, which has been used, along with both short- and long-term debt, to pay for capital expenditures, acquisitions, dividends and other corporate requirements. The continuation of these levels of cash flow is expected, but is subject to the risk factors listed elsewhere in this report (particularly in the Forward-Looking Statements section on page 26). In addition, the Company has always maintained investment-grade credit ratings that it considers important for cost-effective and ready access to the credit markets. Management fully expects to be able to obtain future funding from both short- and long-term debt for cash requirements in excess of cash flow from operations. In the event that any of these sources prove to be below expectations, the Company has access to committed lines of credit aggregating $800 million as of December 31, 2002. Management intends to renew $400 million of this committed line of credit that expires in May 2003.

Credit Risk

      The Company believes that its financial instruments do not represent a concentration of credit risk because the Company deals with a variety of major banks worldwide and its accounts receivable are spread among a number of major industries, customers and geographic areas. A centralized credit committee reviews significant credit transactions and risk-management issues before granting of credit, and an appropriate level of reserves is maintained. In addition, the Company monitors the financial condition of its customers to help ensure collections and to minimize losses.

      The Company may enter into transactions in which it advances funds after receipt of metal as provisional payment for the metal which is to be finally priced under market-based pricing formulae that will result in a determination of that price. If the final price is less than the provisional price paid, the supplier will be obligated to return the difference to the Company. Therefore, if the market price (and the anticipated final price) falls below the provisional price, the Company is exposed to the potential credit risk associated with the possibility of non-payment by the supplier, although no payment is due until after the final price is determined. As of December 31, 2002, the aggregate market value of metals purchased under a contract for which a provisional price had been paid had fallen below the amounts advanced by a total of $332.2 million. This excess may grow or may be eliminated based on market price changes. In March 2003 an agreement was reached that, when performed, including receipt of cash by the Company which is anticipated before the end of the second quarter, will result in the elimination of this excess. The Company expects that no loss will be incurred due to non-performance.

Capital Expenditures, Commitments and Contingencies

      Capital projects are designed to maintain capacity, expand operations, improve efficiency or protect the environment. Capital expenditures amounted to $113.3 million in 2002, $168.9 million in 2001 and $136.6 million in 2000. Capital expenditures in 2003 are expected to be approximately $140.0 million. For information about commitments and contingencies, see Note 20, "Environmental Costs" and Note 21, "Litigation and Contingencies."

Dividends and Capital Stock

      The annualized common stock dividend rate at the end of 2002, 2001 and 2000 was $0.40 per share.

Japan Fraud Update/Peru Update

      See Note 21, "Litigation and Contingencies," for a discussion of Japan and Peru.

Special and Other Charges

      See Note 5, "Special and Other Charges," for a discussion of the Company's special and other charges.

Other Matters

      See Note 1, "Summary of Significant Accounting Policies," for a discussion of new accounting pronouncements.

Critical Accounting Policies

      Certain key policies are explained below to assist in understanding the Company's consolidated financial statements. More detailed explanations may be found elsewhere in the MD&A section and in Note 1, "Summary of Significant Accounting Policies."

Sales

      A significant portion of consolidated net sales represent the sale of platinum group metals to industrial customers who buy the metals from Materials Services in connection with products manufactured by the Environmental and Process Technologies segments. Accordingly, almost all of these sales are reported in the Materials Services segment, with a limited amount included in Environmental and Process Technologies' reported sales. Because metal price levels may vary widely, there is no consistent relationship between consolidated sales and gross profit.

      Because the timing of the purchase of spot metals often does not coincide with the timing of the subsequent sales to industrial users, Materials Services needs to hedge price risk, usually by selling forward (i.e., for future delivery) to investment-grade trading entities, industrial companies or on futures exchanges. If a surplus of physical metal develops, Materials Services may also sell spot and buy forward to balance the risk position. Other than hedges entered into with industrial customers, sales related to these hedging transactions are not included in reported sales, as they are not meaningful in an industrial context.

      Customers of the Environmental and Process Technologies segments who purchase products that improve efficiency and yields are often unable to precisely predict the dates that catalysts will be required. Accordingly, they may request that product that has already been ordered, manufactured and prepared for shipment at the agreed upon date be temporarily held by the Company until that customer's manufacturing facility is prepared to accept the new charge of catalyst. In cases where the customer requests the Company to hold the goods, agrees to be invoiced and to pay the invoices on normal terms as well as to accept title to the goods, the Company will recognize the sale prior to shipment. Great care is exercised to make sure that these sales are only recognized in accordance with the applicable revenue recognition guidance.

Mark-to-market

      Materials Services procures physical metal from third parties for resale and enters into forward contracts and other relatively straight-forward hedging derivatives that are recorded as either assets or liabilities at their fair value. By acting in its capacity as a distributor and materials service provider to the Company's technology businesses and their customers and by taking closely monitored unhedged positions as described below, Materials Services takes on the attributes of a dealer in metals. Both spot metal and derivative instruments used in hedging (i.e., forwards, futures, swaps and options) are stated at fair value. The Company values platinum, palladium, gold and silver based on the daily closing NYMEX settlement prices. There are no so-called "terminal" markets for rhodium, ruthenium and iridium, so the Company's own published Industrial Bullion (EIB) prices are used. However, these are compared to other reference prices published in Metals Week, an independent trade journal. Values for base metals come from the closing prices of the LME (London Metals Exchange).

      In closely monitored situations, for which exposure levels and transaction size limits have been set by senior management, the Company holds unhedged metal positions that are subject to future market fluctuations. Such positions may include varying levels of derivative instruments. At times, these positions can be significant. All unhedged metal transactions are monitored and marked to market daily. The portion of this metal that has not been hedged is therefore subject to price risk and is disclosed in Note 10, "Committed Metal Positions and Hedged Metal Obligations."

      The fair values of Materials Services' various spot and derivative positions are included in committed metal positions on the asset side of the Consolidated Balance Sheet and hedged metal obligations on the liability side. The credit (performance) risk associated with the fair value of derivatives in a gain position is greatly mitigated through the selection of investment-grade counterparties.




Precious metals

      Most of the platinum group metals used by Environmental and Process Technologies to manufacture products are provided in advance by the customers. The customers often purchase these metals from Materials Services, but they may also be shipped in from other sources.

      Certain quantities of precious metals are carried at historical cost using the LIFO method, which provides a better matching of current costs with current revenues. Because most of the metal was acquired some time ago, the market value of this metal, while fluctuating from year to year, has generally been substantially above cost. While this excess of market over cost is useful in evaluating the consolidated balance sheet from a credit perspective, the annual changes are not reflected in the income statement except to the extent that periodic liquidations of LIFO layers produce book profits. LIFO liquidation profits are separately disclosed and not included in the operating earnings of the technology segments.

Kaolin mining operations

      In order to provide kaolin-based products to the Company's customers and the Process Technologies segment, the Company engages in kaolin mining operations that are integrated into the manufacturing processes. The Company owns and leases land containing kaolin deposits on a long-term basis. The Company does not own any mining reserves or conduct any mining operations with respect to platinum, palladium or other metals. The kaolin mining process includes exploration, topsoil and overburden removal, extraction of kaolin and the subsequent reclamation of mined areas. In order to match the costs of the mining process with revenues associated with kaolin-based products, certain mining process costs are expensed by the Company over the life of the related estimated mineable reserves.

Pensions and other postretirement/postemployment costs

      The Company's employee pension and other postretirement/postemployment benefit costs and obligations are dependent on its assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, salary growth, expected returns on plan assets, retirement rates, mortality rates and other factors. The discount rate assumption is based on investment yields available at the Company's measurement date of September 30 on AA-rated corporate long-term bond yields. The salary growth assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. The health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Retirement rates are based primarily on actual plan experience. Mortality rates are based on published data. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and recorded obligation in such future periods. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension and other postretirement/postemployment benefit costs and obligations. Based on a review of the current environment, we have lowered our long-term rate of return assumption from 10% in 2001 to 9.7% in 2002. In 2003, we have further lowered this assumption to 8.9%. The Company has determined that its net pension cost is projected to be approximately $19 million in 2003, compared to $12 million in 2002 and $8 million in 2001. The plan assets have earned a rate of return substantially less than 10% in the last two years. Should this trend continue, the Company would be required to reconsider its assumed expected rate of return on plan assets. If the Company were to lower this rate, future pension expense would likely increase. See Note 15, "Benefits," for further detail regarding costs and assumptions.

Forward-Looking Statements

      This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to the future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" and similar terms and phrases, including references to assumptions. These forward-looking statements involve risks and uncertainties that may cause the Company's actual future activities and results of operations to be materially different from those suggested or described in this document.

      Among the risks and uncertainties that could cause actual results to differ materially are the following:

  • competitive pricing or product development activities that could affect the demand for our products, particularly competing catalyst and kaolin producers
  • the Company's ability to achieve and execute internal business plans
  • worldwide political instability as the Company operates primarily in the United States, the European community, the Asia-Pacific region, the Russian Federation, South Africa and South America
  • alliances and geographic expansions developing differently than anticipated
  • fluctuations in the supply and prices of precious and base metals and fluctuations in the relationships between forward prices to spot prices
  • government legislation and/or regulation (particularly on environmental issues), including tax obligations
  • technology, manufacturing and legal issues
  • the impact of any economic downturns and inflation
  • interest rate risk, foreign currency exchange rate risk, commodity price risk and credit risk (these are discussed further in the Company's MD&A section)
  • the impact of higher energy and raw material costs, and the availability of natural gas and rare earth elements
  • the success of research and development activities and the speed with which regulatory authorizations and product launches may be achieved
  • the impact of increased health care costs and/or the resultant impact on employee relations
  • contingencies related to actual or alleged environmental contamination to which the Company may be a party
  • the impact of acquisitions, divestitures and restructurings
  • overall demand for the Company's products, including demand from the worldwide automotive and chemical-process markets
  • product quality/performance issues
  • exposure to product liability and other types of lawsuits
  • the impact of physical inventory losses, particularly with regard to precious and base metals
  • the loss of business from property and casualty exposure

      Investors are cautioned not to place undue reliance upon these forward-looking statements, which speak only as of their dates. The Company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Sensitive Transactions

      The Company is exposed to market risks arising from adverse changes in interest rates, foreign currency exchange rates and commodity prices. In the normal course of business, the Company uses a variety of techniques and instruments, including derivatives, as part of its overall risk management strategy. The Company enters into derivative agreements with a diverse group of major financial and other institutions with individually determined credit limits to reduce exposure to the risk of nonperformance by counterparties.

Interest rate risk

      The Company uses a sensitivity analysis to assess the market risk of its debt-related financial instruments and derivatives. Market risk is defined here as the potential change in the fair value of debt resulting from an adverse movement in interest rates. The fair value of the Company's total debt was $616.6 million at December 31, 2002 and $624.8 million at December 31, 2001 based on average market quotations of price and yields provided by investment banks. A 100 basis-point increase in interest rates could result in a reduction in the fair value of total debt of $18.8 million at December 31, 2002 compared with $17.7 million at December 31, 2001.

      The Company also uses interest rate derivatives to help achieve its fixed and floating rate debt objectives. In 2001, the Company entered into two interest rate swap agreements with a total notional value of $100 million to effectively change a fixed rate debt obligation into a floating rate obligation. The total notional amount of these agreements is equal to the face value of the designated debt instrument. The swap agreements are expected to settle in August 2006, the maturity date of the corresponding debt issuance.

      Approximately 76% and 78% of the Company's borrowings had variable interest rates as of December 31, 2002 and 2001, respectively.

Foreign currency exchange rate risk

      The Company uses a variety of strategies, including foreign currency forward contracts, to minimize or eliminate foreign currency exchange rate risk associated with substantially all of its foreign currency transactions, including metal-related transactions denominated in other than U.S. dollars.

      The Company uses a sensitivity analysis to assess the market risk associated with its foreign currency transactions. Market risk is defined here as the potential change in fair value resulting from an adverse movement in foreign currency exchange rates. A 10% adverse movement in foreign currency rates could result in a net loss of $13.3 million at December 31, 2002 compared with $8.6 million at December 31, 2001 on the Company's foreign currency forward contracts. However, since the Company limits the use of foreign currency derivatives to the hedging of contractual and anticipated foreign currency payables and receivables, this loss in fair value for those instruments generally would be offset by a gain in the value of the underlying payable or receivable.

      A 10% adverse movement in foreign currency rates could result in an unrealized loss of $40.9 million at December 31, 2002 compared with $48.6 million at December 31, 2001 on the Company's net investment in foreign subsidiaries and affiliates. However, since the Company views these investments as long term, the Company would not expect such a loss to be realized in the near term.

Commodity price risk

      In closely monitored situations, for which exposure levels and transaction size limits have been set by senior management, the Company from time to time holds large, unhedged industrial commodity positions that are subject to market price fluctuations. Such positions may include varying levels of derivative commodity instruments. All unhedged industrial commodity transactions are monitored and marked to market daily. All other industrial commodity transactions are hedged on a daily basis, using forward, future, option or swap contracts to substantially eliminate the exposure to price risk. These positions are also marked to market daily.

      The Company performed a "value-at-risk" analysis on all of its metal-related commodity assets and liabilities. The "value-at-risk" calculation is a statistical model that uses historical price and volatility data to predict market risk on a one-day interval with a 95% confidence level. While the "value-at-risk" models are relatively sophisticated, the quantitative information generated is limited by the historical information used in the calculation. For example, the volatility in the platinum and palladium markets in 2001 and 2000 was greater than historical norms. Therefore, the Company uses this model only as a supplement to other risk management tools and not as a substitute for the experience and judgment of senior management and dealers who have extensive knowledge of the markets and adjust positions and revise strategies as the markets change. Based on the "value-at-risk" analysis in the context of a 95% confidence level, the maximum potential one-day loss in fair value was approximately $6.0 million as of December 31, 2002 compared with $3.4 million as of December 31, 2001. The actual one-day changes in fair value of the Company's metal-related commodity assets and liabilities never exceeded the average of the "value-at-risk" amounts as of the yearly open and close for each of the Company's 2002 and 2001 fiscal years.

      The Company is also exposed to commodity price risk related to its purchase of natural gas that is used in the manufacture of its products. At December 31, 2002, a uniform one-dollar increase in the price of natural gas would result in a decrease in operating earnings of approximately $10.5 million for the year ending December 31, 2003.























ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS



Year ended December 31 (in thousands, except per-share amounts)
  2002
  2001
  2000
 
Net sales   $ 3,753,571     $ 5,096,926     $ 5,542,648  
Cost of sales    
3,099,806
     
4,433,709
     
4,812,450
 
     Gross profit     653,765       663,217       730,198  
Selling, administrative and other expenses     350,137       335,994       382,287  
Special (credit)/charge, net    
(7,862
)    
7,100
     
82,548
 
     Operating earnings     311,490       320,123       265,363  
Equity in earnings of affiliates     16,207       29,095       24,187  
Equity investment impairment     (57,704 )     -       -  
(Loss)/gain on investments, net     (6,659 )     -       18,786  
Interest income     1,968       3,297       2,119  
Interest expense    
(27,378
)    
(47,291
)    
(64,768
)
     Earnings before income taxes     237,924       305,224       245,687  
Income tax expense    
66,516
     
79,663
     
77,391
 
     Net earnings   $
171,408
    $
225,561
    $
168,296
 
Basic earnings per share   $
1.34
    $
1.73
    $
1.33
 
Diluted earnings per share   $
1.31
    $
1.71
    $
1.31
 
Average number of shares outstanding - basic    
128,089
     
130,018
     
126,351
 
Average number of shares outstanding - diluted    
130,450
     
132,155
     
128,141
 


See accompanying Notes to Consolidated Financial Statements.













ENGELHARD CORPORATION
CONSOLIDATED BALANCE SHEETS


December 31 (in thousands)
  2002
  2001
Assets
     Cash
  $ 48,246     $ 33,034  
     Receivables, net of allowances of $9,739 and
           $5,219, respectively
    380,270       347,656  
     Committed metal positions     615,441       569,109  
     Inventories     427,162       401,647  
     Other current assets    
94,922
     
142,301
 
               Total current assets     1,566,041       1,493,747  
     Investments     136,804       213,467  
     Property, plant and equipment, net     860,475       822,520  
     Goodwill     272,353       253,603  
     Other intangible and noncurrent assets    
185,041
     
212,212
 
               Total assets   $
3,020,714
    $
2,995,549
 
Liabilities and Shareholders' Equity
     Short-term borrowings
  $ 348,749     $ 389,051  
     Accounts payable     225,045       252,319  
     Hedged metal obligations     537,243       517,681  
     Other current liabilities    
275,250
     
341,749
 
               Total current liabilities     1,386,287       1,500,800  
     Long-term debt     247,805       237,853  
     Other noncurrent liabilities    
309,455
     
253,390
 
               Total liabilities    
1,943,547
     
1,992,043
 
Shareholders' equity
     Preferred stock, no par value, 5,000 shares
          authorized and unissued
    -       -  
     Common stock, $1 par value, 350,000 shares
          authorized and 147,295 shares issued
    147,295       147,295  
     Additional paid-in capital     20,876       7,378  
     Retained earnings     1,436,637       1,316,721  
     Treasury stock, at cost, 19,937 and 18,220
          shares, respectively
    (412,451 )     (335,879 )
     Accumulated other comprehensive loss    
(115,190
)    
(132,009
)
               Total shareholders' equity    
1,077,167
     
1,003,506
 
               Total liabilities and shareholders' equity   $
3,020,714
    $
2,995,549
 

See accompanying Notes to Consolidated Financial Statements.


ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS


Year ended December 31 (in thousands)
  2002
  2001
  2000
Cash flows from operating activities
     Net earnings
  $ 171,408     $ 225,561     $ 168,296  
     Adjustments to reconcile net earnings to
          net cash provided by operating activities:
               Depreciation and depletion
    110,676       94,996       103,326  
               Amortization of intangible assets     2,886       13,521       13,733  
               Loss/(gain) on investments, net     6,659       -       (18,786 )
               Equity results, net of dividends     (12,279 )     (24,937 )     (19,823 )
               Equity investment impairment     57,704       -       -  
               Net change in assets and liabilities:
                     Materials Services related
    (30,053 )     59,734       (115,569 )
                     All other    
(4,732
)    
(23,082
)    
48,878
 
                          Net cash provided by operating activities    
302,269
     
345,793
     
180,055
 
Cash flows from investing activities
     Capital expenditures
    (113,309 )     (168,882 )     (136,579 )
     Proceeds from sale of investments     -       3,400       52,811  
     Acquisitions and other investments     (7,606 )     (16,559 )     (40,095 )
     Other    
-
     
-
     
838
 
                         Net cash used in investing activities    
(120,915
)    
(182,041
)    
(123,025
)
Cash flows from financing activities                        
     Proceeds from short-term borrowings     264,155       285,000       305,560  
     Repayment of short-term borrowings     (304,457 )     (248,064 )     (305,483 )
     Increase in hedged metal obligations     3,784       11,333       69,188  
     Repayment of long-term debt     (148 )     (159,308 )     (104,132 )
     Purchase of treasury stock     (133,543 )     (101,154 )     (71 )
     Cash from exercise of stock options     48,781       101,175       11,400  
     Dividends paid    
(51,492
)    
(52,267
)    
(51,002
)
                          Net cash used in financing activities     (172,920 )     (163,285 )     (74,540 )
Effect of exchange rate changes on cash    
6,778
     
(967
)    
(3,331
)
                          Net increase/(decrease) in cash     15,212       (500 )     (20,841 )
Cash at beginning of year    
33,034
     
33,534
     
54,375
 
                          Cash at end of year   $
48,246
    $
33,034
    $
33,534
 

See accompanying Notes to Consolidated Financial Statements.



ENGELHARD CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except per-share amounts)
  Common
stock

  Additional
paid-in
capital

  Retained
earnings

  Treasury
stock

  Comprehensive
income/(loss)

  Accumulated
other
comprehensive
income/(loss)

  Total
shareholders'
equity

Balance at December 31, 1999   $ 147,295     $ (25,660 )   $ 1,026,133     $ (352,282 )           $ (31,096 )   $ 764,390  
Comprehensive income/(loss):                                                        
     Net earnings                     168,296             $
168,296
              168,296  
     Other comprehensive income/(loss):
          Foreign currency translation adjustment
                                    (20,993 )                
          Minimum pension liability adjustment                                    
1,020
                 
     Other comprehensive loss                                    
(19,973)
      (19,973 )     (19,973 )
Comprehensive income                                    
148,323
                 
Dividends ($0.40 per share)                     (51,002 )                             (51,002 )
Treasury stock acquired                             (71 )                     (71 )
Stock bonus and option plan transactions    
 
 
 
 
4,610
 
 
 
 
 
 
 
8,317
 
 
 
 
 
 
 
 
 
 
 
12,927
 
Balance at December 31, 2000     147,295       (21,050 )     1,143,427       (344,036 )             (51,069 )     874,567  
Comprehensive income/(loss):                                                        
     Net earnings                     225,561              
225,561
              225,561  
     Other comprehensive loss:
          Cash flow derivative adjustment, net of tax
                                    (4,550 )                
          Foreign currency translation adjustment                                     (51,035 )                
          Minimum pension liability adjustment, net of tax                                    
(25,355)
                 
          Other comprehensive loss                                    
(80,940)
      (80,940 )     (80,940 )
Comprehensive income                                    
144,621
                 
Dividends ($0.40 per share)                     (52,267 )                             (52,267 )
Treasury stock acquired                             (101,154 )                     (101,154 )
Stock bonus and option plan transactions    
 
 
 
 
28,428
 
 
 
 
 
 
 
109,311
 
 
 
 
 
 
 
 
 
 
 
137,739
 
Balance at December 31, 2001     147,295       7,378       1,316,721       (335,879 )             (132,009 )     1,003,506  
Comprehensive income/(loss):                                                        
     Net earnings                     171,408              
171,408
              171,408  
     Other comprehensive income/(loss):
          Cash flow derivative adjustment, net of tax
                                    4,424                  
          Foreign currency translation adjustment                                     70,284                  
          Minimum pension liability adjustment, net of tax                                     (57,689 )                
          Investment adjustment, net of tax                                    
(200)
                 
          Other comprehensive income                                    
16,819
      16,819       16,819  
Comprehensive income                                   $
188,227
                 
Dividends ($0.40 per share)                     (51,492 )                             (51,492 )
Treasury stock acquired                             (133,543 )                     (133,543 )
Stock bonus and option plan transactions    
 
 
 
 
13,498
 
 
 
 
 
 
 
56,971
 
 
 
 
 
 
 
 
 
 
 
70,469
 
Balance at December 31, 2002   $
147,295
 
 
$
20,876
 
 
$
1,436,637
 
 
$
(412,451
)
 
 
 
 
 
$
(115,190
)
 
$
1,077,167
 

See accompanying Notes to Consolidated Financial Statements.

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of Engelhard Corporation and its subsidiaries (collectively referred to as Engelhard or the Company). All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform with the current-year presentation.

Use of Estimates

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

      Cash equivalents include all investments purchased with an original maturity of three months or less.

Inventories

      Inventories are stated at the lower of cost or market. The elements of inventory cost includes direct labor and materials, variable overhead and fixed manufacturing overhead. The majority of the Company's physical metal is carried in committed metal positions at fair value with the remainder carried in inventory at historical cost. The cost of owned precious metals included in inventory is determined using the last-in, first-out (LIFO) method of inventory valuation. The cost of other inventories is principally determined using the first-in, first-out (FIFO) method.

Property, Plant and Equipment

      Property, plant and equipment are stated at cost. Depreciation of buildings and equipment is provided primarily on a straight-line basis over the estimated useful lives of the assets. Buildings and building improvements are depreciated over 20 years, while machinery and equipment is depreciated based on lives varying from 3 to 10 years. Depletion of mineral deposits and deferred mine development costs is provided under the units-of-production method. When assets are sold or retired, the cost and related accumulated depreciation is removed from the accounts, and any gain or loss is included in earnings. The Company continually evaluates the reasonableness of the carrying value of its fixed assets. If it becomes probable that expected future undiscounted cash flows associated with these assets are less than their carrying value, the assets are written down to their fair value.

Intangible Assets

       Identifiable intangible assets, such as patents and trademarks, are amortized using the straight-line method over their estimated useful lives. Goodwill was amortized by the straight-line method over periods up to 40 years for all acquisitions completed prior to June 30, 2001. Effective January 1, 2002, with the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets (SFAS No. 142)," goodwill and other intangible assets that have indefinite useful lives will not be amortized, but will be tested for impairment based on the specific guidance of SFAS No. 142 (see Note 3, "Goodwill and Other Intangible Assets," for further detail).

      The Company continually evaluates the reasonableness of the carrying value of its intangible assets. For its identifiable intangible assets, an impairment would be recognized if it became probable that expected future undiscounted cash flows would be less than their carrying amounts. For goodwill and other intangible assets that have indefinite useful lives, an impairment would be recognized if the carrying amount of a respective reporting unit exceeded the fair value of that reporting unit.

      In 2000, the Company wrote off goodwill of $30.4 million as follows: in the first quarter, the Company wrote off $6.0 million of goodwill associated with the divestiture of its International Dioxide, Inc. business unit; in the third quarter, the Company wrote off $21.9 million of goodwill related to the impairment of its HexCore business unit; and in the fourth quarter, the Company wrote off $2.5 million of goodwill as part of its fourth-quarter special charge related to the impairment of its colors business.

Committed Metal Positions and Hedged Metal Obligations

      Committed metal positions reflect the fair value of the long spot metal positions (other than LIFO inventory) held by the Company plus the fair value of contracts that are in a gain position undertaken to economically hedge price exposures. Because most of the spot metal has been hedged through forward/future sales or other derivative arrangements (e.g., swaps), it is referred to as being "committed," although the physical metal can be used by the Company until such time as the sales are settled. The portion of this metal that has not been hedged and, therefore, is subject to price risk is discussed below and disclosed in Note 10, "Committed Metal Positions and Hedged Metal Obligations."

      The bulk of hedged metal obligations represents spot short positions. As these positions generate cash, their cash effect is included in the financing activities section of the Company's "Consolidated Statements of Cash Flows." Other than in the closely monitored situations noted below, these positions are hedged with forward purchases. In addition, the aggregate fair value of derivatives in a loss position are reported in hedged metal obligations (derivatives in a gain position are included in committed metal positions).

      For the purpose of determining whether the Company is in a net spot long or short position with respect to a metal, purchased quantities received for which the Company is not exposed to market price risk (because of provisional rather than final pricing) are considered a component of its spot positions.

      To the extent metal prices increase subsequent to a spot purchase that has been hedged, the Company will recognize a gain as a result of marking the spot metal to market while at the same time recognizing a loss related to the fair value of the derivative instrument. As noted above, the aggregate fair value of derivatives in a loss position is classified as part of hedged metal obligations at the balance sheet date because the Company has incurred a liability to the counterparty. Should the reverse occur and metal prices decrease, the resultant gain on the derivative will be offset against the spot loss within committed metal positions.

      Both spot metal and derivative instruments used in hedging (i.e., forwards, futures, swaps and options) are stated at fair value. If listed market prices are not available or if liquidating the Company's positions would reasonably be expected to impact market prices, fair value is determined based on other relevant factors, including dealer price quotations and price quotations in different markets, including markets located in different geographic areas. Any change in value, whether realized or unrealized, is recognized as an adjustment to cost of sales in the period of the change.

      In closely monitored situations, for which exposure levels and transaction size limits have been set by senior management, the Company holds unhedged metal positions that are subject to future market fluctuations. Such positions may include varying levels of derivative instruments. At times, these positions can be significant. All unhedged metal transactions are monitored and marked to market daily. The metal that has not been hedged is therefore subject to price risk and is disclosed in Note 10, "Committed Metal Positions and Hedged Metal Obligations."

Environmental Costs

      In the ordinary course of business, like most other industrial companies, the Company is subject to extensive and changing federal, state, local and foreign environmental laws and regulations and has made provisions for the estimated financial impact of environmental cleanup-related costs. The Company's policy is to accrue for environmental cleanup-related costs of a noncapital nature when those costs are believed to be probable and can be reasonably estimated. Environmental cleanup costs are deemed probable when litigation has commenced or a claim or an assessment has been asserted, or, based on available information, commencement of litigation or assertion of a claim or an assessment is probable, and, based on available information, it is probable that the outcome of such litigation, claim or assessment will be unfavorable. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. For certain matters, the Company expects to share costs with other parties. The Company does not include anticipated recoveries from insurance carriers or other third parties in its accruals for environmental liabilities.

Revenue Recognition

      Revenues are recognized on sales of product at the time the goods are shipped or when risks of ownership have passed to the customer. Sales of product include sales of catalysts, pigments, performance additives, sorbents and precious metal sold to industrial customers. Revenues for refining services are recognized on the contractually agreed settlement date. In limited situations, revenue is recognized on a bill-and-hold basis as title passes to the customer before shipment of goods. These bill-and-hold sales meet the criteria of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," for revenue recognition. Sales recognized on a bill-and-hold basis were approximately $31.0 million as of December 31, 2002, $28.9 million as of December 31, 2001 and $24.2 million as of December 31, 2000. With regard to the balance classified as bill-and-hold sales, the Company has collected $23.5 million of the outstanding balance as of December 31, 2002.

      In accordance with Emerging Issues Task Force EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company reports amounts billed to customers for shipping and handling fees as sales in the Company's "Consolidated Statements of Earnings." Costs incurred by the Company for shipping and handling fees are reported as cost of sales.

Sales and Cost of Sales

      Some of the Company's businesses use precious metals in their manufacturing processes. Precious metals are included in sales and cost of sales if the metal has been supplied by the Company. Often, customers supply the precious metals for the manufactured product. In those cases, precious-metals values are not included in sales or cost of sales. The mix of such arrangements, the extent of market-price fluctuations and the general price level of platinum group and other metals can significantly affect the reported level of sales and cost of sales. Consequently, there is no direct correlation between year-to-year changes in reported sales and operating earnings.

      In addition to the cost of precious metals recognized as revenues, cost of sales includes all manufacturing costs (raw materials, direct labor and overhead). Cost of sales also includes shipping and handling fees and warranties.

      For all Materials Services activities, a gain or loss is recorded as an element of cost of sales based on changes in the market value of the Company's positions.

Selling, Administrative and Other Expenses

      The selling, administrative and other expenses line item in the "Consolidated Statements of Earnings" includes management and administrative compensation, research and development, professional fees, information technology expenses, travel expenses, administrative rent expenses, sales commissions and insurance expenses.

Income Taxes

      Deferred income taxes reflect the differences between the assets and liabilities recognized for financial reporting purposes and amounts recognized for tax purposes. Deferred taxes are based on tax laws as currently enacted.

Equity Method of Accounting

      The Company's investments in companies in which it has the ability to exercise significant influence over operating and financial policies, generally 20% to 50% owned, are accounted for using the equity method. Accordingly, the Company's share of the earnings of these companies is included in consolidated net income. Investments in nonsubsidiary companies in which the Company does not have significant influence are carried at cost.

Foreign Currency Translation

      The functional currency for the majority of the Company's foreign operations is the applicable local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an appropriate average exchange rate during the period. The resulting translation adjustments are recorded as a component of shareholders' equity. Gains or losses resulting from foreign currency transactions are included in the Company's "Consolidated Statements of Earnings."

Stock Option Plans

      The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) in 1995 and adopted Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123," in December 2002. In conjunction with the adoption of these standards, the Company will continue to apply the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" with pro forma disclosure of net income and earnings per share as if the fair-value-based method prescribed by SFAS No. 123 had been applied. In general, no compensation cost related to the Company's stock option plans is recognized in the Company's "Consolidated Statements of Earnings" as options are issued at market price on the date of grant.

      Had compensation cost for the Company's stock option plans been determined based on the fair value at grant date consistent with the provisions of Statement of Financial Accounting Standards No.123, "Accounting for Stock Based Compensation," the Company's net earnings and earnings per share would have been as follows:

PRO FORMA INFORMATION
(in millions, except per-share data)

  2002
 
2001
 
2000
Net earnings--as reported $ 171.4     $ 225.6     $ 168.3  
Deduct: Total stock-based employee
compensation expense determined under fair
                     
value based method for all awards, net of tax  
(6.3
)    
(5.9
)    
(8.4
)
     Net earnings--pro forma $
165.1
    $
219.7
    $
159.9
 
 
Earnings Per Share:
                     
Basic earnings per share--as reported $ 1.34     $ 1.73     $ 1.33  
Basic earnings per share--pro forma   1.29       1.69       1.27  
Diluted earnings per share--as reported   1.31       1.71       1.31  
Diluted earnings per share--pro forma   1.27       1.66       1.25  

Research and Development Costs

      Research and development costs are charged to expense as incurred and were $88.2 million in 2002, $84.3 million in 2001 and $82.8 million in 2000. These costs are included within selling, administrative and other expenses in the Company's "Consolidated Statements of Earnings."

New Accounting Pronouncements

      In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The Company adopted this statement on January 1, 2002. SFAS No. 142 addresses post-acquisition financial accounting and reporting for acquired goodwill and other intangible assets. Under this new statement, goodwill and other intangible assets that have indefinite useful lives will not be amortized, but rather will be tested for impairment based on the specific guidance of SFAS No. 142. The Company did not recognize an impairment loss as a result of the impairment testing that was completed in 2002. See Note 3, "Goodwill and Other Intangible Assets," for further detail of this standard.

      In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted this statement on January 1, 2003 and is currently evaluating the impact it will have on its financial statements.

      In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Under this statement, a single accounting model is to be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. In addition, the statement broadens the presentation of discontinued operations to include more disposal transactions. The adoption of this statement by the Company on January 1, 2002 did not have a material effect on the Company's financial statements.

      In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The primary difference between this Statement and Issue 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this statement on January 1, 2003. This statement did not have any impact on the accompanying financial statements.

      In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123 (SFAS No. 148)." This statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company adopted this statement in December 2002 and will continue to account for stock-based employee compensation using the intrinsic value method under APB No. 25, "Accounting for Stock Issued to Employees" with pro forma disclosure of net income and earnings per share as if the fair value method prescribed by SFAS No. 123 had been applied.

      In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain guarantees to be recorded at fair value. The initial recognition and measurement provisions of FIN 45 are applicable, on a prospective basis, to guarantees issued or modified after December 31, 2002. FIN 45 also elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. These disclosure requirements are effective for financial statements ending after December 15, 2002. The Company has incorporated the disclosure requirements related to product warranties into these consolidated financial statements.

2.  DERIVATIVE INSTRUMENTS AND HEDGING

      The Company reports all derivative instruments on the balance sheet at their fair value. Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in comprehensive income and are reclassified to earnings in the period the hedged item is reflected in earnings. Changes in the fair value of derivatives that are not designated as cash flow hedges are reported immediately in earnings.

      In order to manage in a manner consistent with historical processes, procedures and systems and to achieve operating economies, certain economic hedge transactions are not designated as hedges for accounting purposes. In those cases, which primarily relate to platinum group metals, the Company will continue to mark to market both the hedge instrument and the related position constituting the risk hedged, recognizing the net effect in current earnings.

      The Company documents all relationships between derivative hedging instruments and items impacted by cash flow hedges at the time the hedges are initiated, as well as its risk-management objectives and strategy for entering into various hedge transactions. For the years ended December 31, 2002 and 2001, there was no gain or loss recognized in earnings resulting from hedge ineffectiveness.

Foreign Exchange Contracts

      The Company designates as cash flow hedges certain foreign currency forward contracts entered into as hedges against anticipated receivables or payables which will arise from forecasted transactions that are denominated in currencies other than the functional currency of the entity which will hold those assets or liabilities. The ultimate maturities of the contracts are timed to coincide with the expected occurrence of the underlying sale or purchase transaction.

      For the twelve-month periods ended December 31, 2002 and 2001, the Company reported after-tax losses of $0.3 million and after-tax gains of $0.2 million, respectively, in accumulated other comprehensive income relating to the change in the fair value of derivatives designated as foreign exchange cash flow hedges. It is expected that cumulative losses of $0.1 million as of December 31, 2002 will be reclassified into earnings within the next twelve months. There was no gain or loss reclassified from accumulated other comprehensive income into earnings as a result of the discontinuance of cash flow hedges due to the probability of the original forecasted transactions not occurring. As of December 31, 2002, the maximum length of time over which the Company is hedging its exposure to movements in foreign exchange rates for forecasted transactions is three months.

      A second group of forward contracts entered into to hedge the exposure to foreign currency fluctuations associated with certain monetary assets and liabilities is not designated as hedging instruments for accounting purposes. Changes in the fair value of these items are recorded in earnings to offset the foreign exchange gains and losses arising from the effect of changes in exchange rates used to measure related monetary assets and liabilities.

Commodity Contracts

      The Company enters into contracts that are designated as cash flow hedges to protect a portion of its exposure to movements in certain commodity prices. The ultimate maturities of the contracts are timed to coincide with the expected usage of these commodities.

       For the twelve-month periods ended December 31, 2002 and 2001, the Company reported after-tax gains of $4.7 million and after-tax losses of $4.8 million, respectively, in accumulated other comprehensive income relating to the change in the fair value of derivatives designated as cash flow commodity hedges. These amounts primarily relate to derivatives designated as natural gas cash flow hedges. It is expected that cumulative losses of $0.1 million as of December 31, 2002 will be reclassified into earnings within the next twelve months. There was no gain or loss reclassified from accumulated other comprehensive income into earnings as a result of the discontinuance of cash flow commodity hedges due to the probability of the original forecasted transactions not occurring. As of December 31, 2002, the maximum length of time over which the Company is hedging its exposure to movements in commodity prices for forecasted transactions is six months.

      The use of derivative metal instruments is discussed on page 34 under "Committed Metal Positions and Hedged Metal Obligations." To the extent that the maturities of these instruments are mismatched, the Company may be exposed to interest rate risk. This exposure is mitigated through the use of Eurodollar futures that are marked to market daily along with the underlying commodity instruments.

Interest Rate Derivatives

      The Company uses interest rate derivatives that are designated as fair value hedges to help achieve its fixed and floating rate debt objectives. The Company currently has two interest rate swap agreements with a total notional value of $100 million to effectively change a fixed rate debt obligation into a floating rate obligation. The total notional amount of these agreements is equal to the face value of the designated debt instrument. The swap agreements are expected to settle in August 2006, the maturity date of the corresponding debt issuance. For these fair value hedges, there was no gain or loss recognized from hedged firm commitments no longer qualifying as fair value hedges for the twelve-month periods ending December 31, 2002 and 2001.

3.  GOODWILL AND OTHER INTANGIBLE ASSETS

      The Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," for all acquisitions made after June 30, 2001. This statement requires that all business combinations be accounted for by the purchase method and that intangible assets be recognized apart from goodwill if they meet certain criteria. Adoption of this statement did not have a material effect on the Company's financial statements.

      The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. SFAS No. 142 addresses post-acquisition financial accounting and reporting for acquired goodwill and other intangible assets. Under this new statement, goodwill and other intangible assets that have indefinite useful lives will not be amortized, but rather will be tested for impairment based on the specific guidance of SFAS No. 142. The Company did not recognize an impairment loss as a result of the impairment testing that was completed in 2002.



















      The following table sets forth the pro forma impact of applying the new non-amortization provisions of SFAS No. 142 on net income and earnings per share reported for the twelve-month period ended December 31, 2002 (in millions, except per-share amounts):

  Twelve Months Ended
December 31,

  2002
(as reported)

2001
(pro forma)

2000
(pro forma)

Net Income
     Reported net income
$ 171.4   $ 225.6   $ 168.3  
     Add back: Goodwill amortization, net of tax   -     8.4     8.9  
                      Tradename amortization, net of tax  
-
   
0.6
   
0.6
 
               Adjusted net income $
171.4
  $
234.6
  $
177.8
 
Basic Earnings Per Share
     Reported basic earnings per share
$ 1.34   $ 1.73   $ 1.33  
     Add back: Goodwill amortization, net of tax   -     0.06     0.07  
                      Tradename amortization, net of tax  
-
   
-
   
-
 
               Adjusted basic earnings per share $
1.34
  $
1.79
  $
1.40
 
Diluted Earnings Per Share
     Reported diluted earnings per share
$ 1.31   $ 1.71   $ 1.31  
     Add back: Goodwill amortization, net of tax   -     0.06     0.07  
                      Tradename amortization, net of tax  
-
   
-
   
-
 
               Adjusted diluted earnings per share $
1.31
  $
1.77
  $
1.38
 


     The following information relates to acquired amortizable intangible assets (in millions):

  As of December 31, 2002
As of December 31, 2001
  Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
Amortization

Acquired Amortizable Intangible Assets                        
     Usage right $ 17.2   $ 2.6   $ 14.6   $ 1.2  
     Supply agreements   15.4     3.1     13.5     1.9  
     Technology licenses   7.4     1.9     3.8     1.3  
     Other (a)  
3.7
   
1.8
   
24.7
   
4.3
 
               Total $
43.7
  $
9.4
  $
56.6
  $
8.7
 

(a) SFAS No. 141 provides that an intangible asset shall be recognized apart from goodwill if it arises from contractual or other legal rights or if it is separable from the acquired entity. In accordance with the transition provisions of the statement, the Company reviewed its intangible assets to determine if they met the new criteria. As a result, it was determined that an other intangible asset of $18.6 million did not meet the new criteria and should thus be recognized as goodwill upon adoption of SFAS No. 142.

      Total accumulated amortization for goodwill and other intangible assets amounted to $76.8 million and $73.9 million at December 31, 2002 and 2001, respectively. As of December 31, 2002, the estimated aggregate amortization expense for each of the five succeeding years is as follows (in millions):

Estimated Annual Amortization Expense:
2003 $ 3.1
2004   3.0
2005   3.0
2006   2.8
2007   2.8

      The following table represents the changes in the carrying amount of goodwill for the year ended December 31, 2002 (in millions):

  Environmental
Technologies

  Process
Technologies

  Appearance &
Performance
Technologies

  All
Other

  Total
Balance as of January 1, 2002 $   12.3     $   108.2     $   132.3     $   0.8     $ 253.6  
Goodwill additions     0.8         -         -         -       0.8  
Reclassification of other intangible
     asset (a)
    -         -         18.6         -       18.6  
Foreign currency translation
     adjustment
    0.1         0.6         1.1         -       1.8  
Purchase accounting adjustment     -         (1.9 )       -         -       (1.9 )
Other  
 
(0.2
)    
 
-
     
 
-
     
 
(0.3
)    
(0.5
)
Balance as of December 31, 2002 $
 
13.0
    $
 
106.9
    $
 
152.0
    $
 
0.5
    $
272.4
 

(a) SFAS No. 141 provides that an intangible asset shall be recognized apart from goodwill if it arises from contractual or other legal rights or if it is separable from the acquired entity. In accordance with the transition provisions of the statement, the Company reviewed its intangible assets to determine if they met the new criteria. As a result, it was determined that an other intangible asset of $18.6 million did not meet the new criteria and should thus be recognized as goodwill upon adoption of SFAS No. 142.

4.  ACQUISITIONS AND DIVESTITURES

      In November 2002, the Company acquired certain operating assets of Shuozhou Anpeak Kaolin Co., Ltd., a China-based producer of calcined kaolin products for approximately $12.1 million. This acquisition enhances the Company's ability to provide specialty mineral technologies to the Asian market. This acquisition was recorded under the purchase method of accounting. The results of operations of this acquisition, integrated into the Appearance and Performance Technologies segment, are included in the accompanying consolidated financial statements from the date of acquisition. Pro forma information is not provided because the impact of the acquisition does not have a material effect on the Company's results of operations, cash flows or financial position.

      In October 2001, the Company acquired the fats and oils catalyst business of Sud Chemie for approximately $13.6 million. This acquisition broadened the Company's catalyst technology offering to oleochemical markets. This acquisition was recorded under the purchase method of accounting. The results of operations of this acquisition, integrated into the Process Technologies segment, are included in the accompanying consolidated financial statements from the date of acquisition. A portion of the purchase price has been allocated to assets acquired based on their fair values, while the remaining balance was recorded as goodwill. Pro forma information is not provided since the impact of the acquisition does not have a material effect on the Company's results of operations, cash flows or financial position.

      During 2000, the Company recorded a gain of $24.8 million ($17.0 million after tax) on the sale of its metal-joining products business located in Warwick, Rhode Island. In addition, the Company recorded a loss of $6.0 million ($4.1 million after tax) associated with the divestiture of the International Dioxide, Inc. business unit.

      In September 2000, the Company acquired a polyolefin catalyst business located in Tarragona, Spain from Targor GmbH, a subsidiary of BASF AG, for approximately $35.1 million. As part of the acquisition, the Company obtained a supply agreement to become the exclusive supplier of polyolefin catalysts to Novolen Technology Holdings C.V. This acquisition was recorded under the purchase method of accounting. The results of operations of this acquisition, integrated into the Process Technologies segment, are included in the accompanying consolidated financial statements from the date of acquisition. A portion of the purchase price has been allocated to assets acquired and liabilities assumed based on their fair values. Pro forma information is not provided since the impact of the acquisition does not have a material effect on the Company's results of operations, cash flows or financial position.


5.  SPECIAL AND OTHER CHARGES

     In the second quarter of 2002, the Company recorded a charge of $3.1 million ($1.9 million after tax) primarily related to a manufacturing consolidation plan within a business that serves the aerospace turbine-engine overhaul and repair market in the Company's Environmental Technologies segment. This charge includes asset write-offs of $1.7 million, employee severance costs of $0.6 million and other exit costs of $0.8 million related to the plant closure. The employee severance charges include an actual reduction of 43 salaried employees. These actions are expected to be substantially complete by the end of 2003.

      In the second quarter of 2002, the Company recorded a gain of $11.0 million ($6.8 million after tax) related to insurance settlements stemming from events in 1997 and 1998 in which Engelhard and other companies were victimized in an elaborate scheme involving base-metal inventories held in third-party warehouses in Japan. A special charge recorded by the Company in 1997 included an inventory loss of approximately $40 million associated with the Japan matter. An additional $20 million inventory loss was recorded in 1998. In the first quarter of 1998, the Company recorded a receivable from insurance carriers and third parties involved for approximately $20 million. As of June 30, 2002, the Company had recovered $11.2 million. In July 2002, the Company received an additional $19.8 million, net of legal fees, from insurance settlements reached in June. Accordingly, the Company recorded a gain of $11.0 million in the second quarter of 2002 in its Materials Services segment.

      The Company recorded a charge of $7.1 million ($4.3 million after tax) in the second quarter of 2001 related to the redeployment of assets between the Company's kaolin-based operations in Middle Georgia and its petroleum refining catalyst facility in Savannah, Georgia. Some assets previously dedicated to providing kaolin-based products to the paper industry are being redirected to enable the Company to produce more value-added catalyst technologies for petroleum refining. This charge includes employee severance costs of $3.2 million, asset write-offs of $2.6 million and other costs of $1.3 million related to the asset redeployment actions and productivity initiatives. The actual number of employees terminated as a result of this action was 213 and these employees were primarily located at the Middle Georgia facility. This charge was recorded in the Appearance and Performance Technologies segment. These actions were substantially complete by the end of 2002.

      The Company recorded special and other charges of $134.2 million ($92.0 million after tax) in 2000 for a variety of events.

      The following table sets forth the impact of these charges in the Company's 2000 "Consolidated Statements of Earnings":

FINANCIAL IMPACT
(in millions)
Total
   
Cost of sales $          (27.1)
Selling, administrative and other expenses           (23.8)
Special charge           (82.5)
     Operating loss           (133.4)
Equity in losses of affiliates           (0.8)
     Loss before income taxes           (134.2)
Income tax benefit           42.2 
     Net loss $          (92.0)

The 2000 special and other charges are described below:

      The Environmental Technologies segment incurred charges of $15.4 million, primarily related to additional provisions for warranty costs associated with the segment's stationary-source, emission-control capital equipment business, which was sold in 1998.

      The Process Technologies segment incurred charges of $5.5 million, primarily for the write-off of the unamortized balance of a customer supply agreement recognized in connection with the acquisition of the chemical catalyst businesses of Mallinckrodt Inc. in 1998. The Company does not expect future deliveries under the contract.

      The Appearance and Performance Technologies segment incurred charges of $50.5 million, including the write-down of assets of $30.4 million in the segment's colors business, the write-off of $4.6 million of obsolete inventory within the segment's minerals business, charges of $3.6 million related to the Company's decision to divest its 50%-owned interest in the Dnipro Kaolin (Ukraine) joint venture, which had previously generated immaterial losses, charges of $3.5 million related to the write-off of an obsolete computer system and other charges of $8.4 million.

      As a result of declining sales, a shift in product mix to higher volume, low-gross-profit products and severe price pressure for all product lines, the colors business continued operating at a loss in 2000. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company performed an impairment review of its long-lived assets. During the fourth quarter of 2000, the Company determined that the estimated future undiscounted cash flows of the segment's colors business were below the carrying value of its assets. Accordingly, the Company adjusted the carrying value of the long-lived assets and goodwill to their estimated fair values. The estimated fair values of the machinery and equipment and goodwill were based on anticipated future cash flows discounted at a rate commensurate with the Company's estimated cost of capital. The resulting impairment charge consisted primarily of a write-down of machinery and equipment.

      Based on a reassessment of the volumes of usable crude kaolin contained in stockpiles in Middle Georgia, a determination was made to adjust quantities downward resulting in a charge of $4.6 million. Crude kaolin is used to produce high-quality pigments and additives for a variety of end markets.

      Within the Company's "All Other" category, the Company incurred special and other charges of $62.8 million, primarily related to the decision to exit from its residual, desiccant-based, climate-control-system business. This business comprised the Company's HexCore subsidiary and a cost-based investment in Fresh Air Solutions, a limited partnership. These charges primarily result from asset write-offs and recognition of the Company's obligation under a guarantee. Revenues and net losses from the HexCore subsidiary were immaterial for each of the three years ended December 31, 2000.

      With regard to the special charges incurred in 2000, non-separation-related cash spending consisted primarily of obligations under guarantees related to the Fresh Air Solutions limited partnership. Spending consisted of payments related to the shutdown of facilities and the satisfaction of warranty obligations. The actions undertaken by the Company in relation to the 2000 special and other charges were substantially complete by the end of 2002.


      The following table sets forth the components of the Company's reserves for restructuring costs:

RESTRUCTURING RESERVES
(in millions)

    Separations
 

  Other
 

   
    Pre-2001
  2001
  2002
  Pre-2001
  2001
  2002
  Total
Balance at December 31, 1999   $ 3.2     $ --     $ --     $ 1.9     $ --     $ --     $ 5.1  
Cash spending     (2.3 )     --       --       (1.1 )     --       --       (3.4 )
Provision    
1.1
 
 
 
--
 
 
 
--
 
 
 
17.2
 
 
 
--
 
 
 
--
 
 
 
18.3
 
Balance at December 31, 2000     2.0       --       --       18.0       --       --       20.0  
Cash spending     (1.2 )     (1.4 )     --       (13.2 )     --       --       (15.8 )
Provision    
--
 
 
 
3.2
 
 
 
--
 
 
 
--
 
 
 
1.3
 
 
 
--
 
 
 
4.5
 
Balance at December 31, 2001     0.8       1.8       --       4.8       1.3       --       8.7  
Cash spending     (0.6 )     (1.8 )     (0.3 )     (1.7 )     (0.7 )     (0.2 )     (5.3 )
Provision    
--
 
 
 
--
 
 
 
0.6
 
 
 
--
 
 
 
--
 
 
 
0.8
 
 
 
1.4
 
Balance at December 31, 2002   $
0.2
 
 
$
--
 
 
$
0.3
 
 
$
3.1
 
 
$
0.6
 
 
$
0.6
 
 
$
4.8
 

6.  GUARANTEES AND WARRANTIES

      In the normal course of business, the Company incurs obligations with regard to contract completion and product performance. Under certain circumstances, these obligations are supported through the issuance of letters of credit. At December 31, 2002, the aggregate outstanding amount of letters of credit supporting such obligations amounted to $132.3 million, of which $122.7 million will expire in less than one year (of which $80.0 million will not be renewed), $1.3 million will expire in two to three years, $0.2 million will expire in four to five years, and $8.1 million will expire after five years. In the opinion of management, such obligations will not significantly affect the Company's financial position or results of operations as the Company anticipates fulfilling its performance obligations.

      The Company accrues for anticipated product warranty expenses on certain products in the non-automotive businesses of its Environmental Technologies segment and its Ventures business. This is not a customary practice within the Company's other segments. Accruals for anticipated warranty liabilities are recorded based upon a review of historical warranty claims experience. Adjustments are made to accruals as claim data and historical experience warrant. The Company also incurs discretionary costs to service its products in connection with product performance issues.

      The following table sets forth information regarding the Company's product warranty reserves (in millions):

  2002
 
2001
 
2000
Balance at beginning of year $ 14.7     $ 15.9     $ 4.6  
Payments   (10.1 )     (1.6 )     (3.5 )
Provision   11.4       0.4       14.8  
Reversal of reserve (a)  
(4.9
)
 
 
-
 
 
 
-
 
Balance at end of year $
11.1
 
 
$
14.7
 
 
$
15.9
 

(a) In 2002, the Company reduced its warranty accrual for a particular stationary-source, emission-control capital equipment project by $4.9 million as a result of improved catalyst technology.

7.   INVENTORIES

      Inventories consist of the following:

INVENTORIES
(in millions)

  2002
 
2001
Raw materials $ 95.4     $ 92.0  
Work in process   77.0       67.2  
Finished goods   237.4       221.8  
Precious metals  
17.4
 
 
 
20.6
 
     Total inventories $
427.2
 
 
$
401.6
 

      The majority of the Company's physical metal is carried in the committed metal positions line on the balance sheet at fair value with the remainder carried in the inventory line at historical cost. The remaining portion of precious metals are stated at LIFO cost. The market value of the precious-metals recorded at LIFO exceeded cost by $58.3 million and $111.1 million at December 31, 2002 and 2001, respectively. Net earnings include after-tax gains of $3.1 million in 2002, $3.4 million in 2001 and $2.5 million in 2000 from the sale of precious metals accounted for under the LIFO method.

      In the normal course of business, certain customers and suppliers deposit significant quantities of precious metals with the Company under a variety of arrangements. Equivalent quantities of precious metals are returnable as product or in other forms. Metals held for the accounts of customers and suppliers are not reflected in the Company's financial statements.


8.  PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consist of the following:

PROPERTY, PLANT AND EQUIPMENT
(in millions)

  2002
 
2001
Land $ 27.8     $ 29.2  
Buildings and building improvements   244.4       217.6  
Machinery and equipment   1,508.6       1,416.2  
Construction in progress   94.6       126.4  
Mineral deposits and mine development costs  
73.8
 
 
 
75.6
 
    1,949.2       1,865.0  
Accumulated depreciation and depletion  
1,088.7
 
 
 
1,042.5
 
     Property, plant and equipment, net $
860.5
 
 
$
822.5
 


      Mineral deposits and mine development costs consist of industrial mineral reserves including kaolin, attapulgite and mica. The Company does not own any mining reserves or conduct any mining operations with respect to platinum, palladium or other metals.

      The Company capitalized interest of $3.0 million in 2002 and 2001, and $3.9 million in 2000.


9.    INVESTMENTS

      The Company has investments in affiliates that are accounted for under the equity method. These investments are N.E. Chemcat Corporation (N.E. Chemcat), Heesung-Engelhard, Engelhard-CLAL and Prodrive-Engelhard. N.E. Chemcat is a 38.8%-owned, publicly traded Japanese corporation and a leading producer of automotive and chemical catalysts, electronic chemicals and other precious-metals-based products. Heesung-Engelhard, a 49%-owned joint venture in South Korea, manufactures and markets catalyst products for automobiles. Engelhard-CLAL, a 50%-owned joint venture, manufactures and markets certain products containing precious metals. Prodrive-Engelhard, a 50%-owned joint venture in the United States, specializes in the design, development and testing of vehicle emission systems.

      The unaudited financial information below represents a summary of the Company's Engelhard-CLAL investment on a 100% basis, unless otherwise noted:

FINANCIAL INFORMATION
(unaudited) (in millions)

 
2002
 
2001
 
2000
Earnings data:
     Revenue
$ 366.9     $ 892.1     $ 1,228.8  
     Gross profit   32.7       51.6       96.4  
     Net earnings   (18.6 )     28.4       27.2  
     Engelhard's equity investment impairment   (57.7 )     -       -  
     Engelhard's equity in net earnings   1.6       14.2       11.0  
Balance sheet data:
     Current assets
$ 148.8     $ 264.9     $ 266.4  
     Noncurrent assets   23.2       42.3       60.1  
     Current liabilities   63.2       100.4       123.6  
     Noncurrent liabilities   3.6       27.1       34.5  
     Net assets   105.2       179.7       168.4  
     Engelhard's equity investment   6.0       88.6       78.5  

      In the third quarter of 2002, the Company recorded an impairment charge of $57.7 million associated with its Engelhard-CLAL joint venture. On September 19, 2002, the Company and its partner, Fimalac, formally agreed to adopt a plan to unwind their Paris-based joint venture, Engelhard-CLAL. The adoption of this plan will cause the joint venture to incur certain costs which will reduce the future cash flows of the joint venture and has caused the Company to include the associated currency translation loss in the carrying value of the investment. The Company has recognized the resulting impairment and reduced the carrying amount of the investment to its fair value. The Company previously disclosed that upon adoption of a plan to liquidate the joint venture, an impairment would likely be recognized. The Company received a distribution in the form of cash and operating assets of approximately $16.0 million in the fourth quarter of 2002 net of the working capital requirements of the distributed operating assets. The Company expects to receive an additional distribution in the first half of 2003.














      The unaudited financial information below represents an aggregation of the Company's nonsubsidiary affiliates, excluding Engelhard-CLAL, on a 100% basis, unless otherwise noted:

FINANCIAL INFORMATION
(unaudited) (in millions)

 
2002
 
2001
 
2000
Earnings data:
     Revenue
$ 644.6     $ 748.2     $ 657.3  
     Gross profit   109.7       106.4       98.8  
     Net earnings   33.2       34.4       33.0  
     Engelhard's equity in net earnings   14.6       14.9       13.2  
Balance sheet data:
     Current assets
$ 306.0     $ 286.6     $ 342.8  
     Noncurrent assets   182.6       165.5       153.6  
     Current liabilities   155.8       148.5       177.9  
     Noncurrent liabilities   24.7       20.8       28.4  
     Net assets   308.1       282.8       290.1  
     Engelhard's equity investment   126.8       116.3       115.4  

      The Company's share of undistributed earnings of affiliated companies included in consolidated retained earnings were earnings of $41.4 million, $87.1 million and $60.3 million in 2002, 2001 and 2000, respectively. Dividends from affiliated companies were $3.9 million in 2002, $4.2 million in 2001 and $4.4 million in 2000.

      In the second quarter of 2002, the Company recorded an impairment charge of $6.7 million ($4.1 million after tax) associated with a non-equity investment. The write down was taken to reflect the lower current value of an investment in fuel-cell developer Plug Power Inc. This investment was made as part of agreements between the two companies for development of advanced materials for fuel cells. The carrying amount of this investment has been reduced to its estimated fair value based on quoted market prices. The Company considered this market decline to be other than temporary. Plug Power Inc. designs and develops on-site electric power generation systems utilizing proton exchange membrane fuel cells for stationary applications. This impairment charge was reported in the Company's "All Other" category and was recorded in "(Loss)/gain on investments, net" in the Company's "Consolidated Statements of Earnings."















10.   COMMITTED METAL POSITIONS AND HEDGED METAL OBLIGATIONS

      Both spot metal positions and derivative instruments are stated at fair value. Fair value is based on published market prices. The following table sets forth the Company's unhedged metal positions included in committed metal positions on the Company's "Consolidated Balance Sheets":


METAL POSITIONS INFORMATION
(in millions)

  2002
  2001
  Gross
Position

Value
  Gross
Position

Value
Platinum group metals Long  $ 16.6   Long  $ 44.3
Gold Long   1.1   Long   0.2
Silver Long   0.4   Long   0.9
Base metals Short  
2.3
  Short  
5.9
     Total unhedged metal positions    $
20.4
     $
51.3

      Committed metal positions include significant advances made for the purchase of precious metals that have been delivered to the Company but for which the final purchase price has not yet been determined. As of December 31, 2002, the aggregate market value of metals purchased under a contract for which a provisional price had been paid had fallen below the amounts advanced by a total of $332.2 million. This excess may grow or may be eliminated based on market price changes. In March 2003 an agreement was reached that, when performed, including receipt of cash by the Company, will result in the elimination of this excess. The Company expects that no loss will be incurred due to non-performance.

      Derivative metal and foreign currency instruments are used to hedge metal positions and obligations. As of December 31, 2002, over 98% of these instruments have settlement terms of less than one year, with the remaining instruments expected to settle within 15 months. These derivative metal and foreign currency instruments consist of the following:

METAL HEDGING INSTRUMENTS
(in millions)

  2002
  2001
  Buy
Sell
  Buy
Sell
Metal forwards/futures $                  1,234.5   $                   494.4   $                  1,510.5   $                   699.1
Eurodollar futures 113.0   86.0   93.2   127.2
Swaps 4.7   7.7   38.3   24.1
Options 101.7   98.7   72.0   64.4
Foreign exchange
      forwards/futures
-   93.1   -   24.8


11.  FINANCIAL INSTRUMENTS

      The Company's nonderivative financial instruments consist primarily of cash in banks, temporary investments, accounts receivable and debt. The fair value of financial instruments in working capital approximates book value. The fair value of long-term debt was $267.0 million as of December 31, 2002 and $235.8 million as of December 31, 2001 based on prevailing interest rates at those dates, compared with a book value of $247.8 million as of December 31, 2002 and $237.9 million as of December 31, 2001.

      The Company believes that its financial instruments do not represent a concentration of credit risk because the Company deals with a variety of major banks worldwide, and its accounts receivable are spread among a number of major industries, customers and geographic areas. A centralized credit committee reviews significant credit transactions and risk-management issues before the granting of credit, and an appropriate level of reserves is maintained. In addition, the Company monitors the financial condition of its customers to help ensure collections and to minimize losses.


Foreign Currency Instruments

      Aggregate foreign exchange transaction gains and losses were not significant for any year presented. The following table sets forth, in U.S. dollars, the Company's open foreign exchange contracts used for hedging other than metal-related transactions as of the respective year-ends (see Note 10, "Committed Metal Positions and Hedged Metal Obligations," for further detail):

FOREIGN EXCHANGE CONTRACTS INFORMATION
(in millions)

  2002
  2001
  Buy
Sell
  Buy
Sell
Japanese yen $                           14.7   $                         0.3   $                           0.3   $                         7.2
Australian dollar -   0.1   -   -
Euro 34.0   60.0   5.1   63.3
South African rand -   7.2   -   3.7
British pound -   -   7.2   -
Brazilian real -
  0.8
  -
  -
Total open foreign exchange
     contracts
$                     48.7
  $                   68.4
  $                      12.6
  $                    74.2

      None of these contracts exceeds a year in duration. These contracts were marked to market at December 31, 2002 and 2001.

12.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

      At December 31, 2002, the Company had two unsecured committed revolving credit agreements for $400 million each with a group of major North American banks and foreign banks. The $400 million, five-year agreement expires in May 2006, and the $400 million, 364-day agreement expires in May 2003. In connection with these credit facilities, the Company has agreed to certain covenants, including maintaining a debt-to-EBITDA ratio of less than 3:1 (as defined in the credit agreements). At December 31, 2002, the Company was fully compliant with all of its debt covenants. Facility fees are paid to the bank group for these lines. Management intends to renew the $400 million committed credit facility that expires in May 2003.

      At December 31, 2002 and 2001, short-term bank borrowings were $136.7 million and $198.8 million, respectively. Weighted-average interest rates were 2.0%, 4.1% and 6.4% during 2002, 2001 and 2000, respectively. Long-term debt due within one year was $0.2 million at December 31, 2002 and $0.1 million at December 31, 2001.

      At December 31, 2002 and 2001, commercial paper borrowings were $212.0 million and $190.2 million, respectively. Weighted-average interest rates were 1.9%, 4.1% and 6.3% during 2002, 2001 and 2000, respectively.

      Unused, uncommitted lines of credit available were $471 million at December 31, 2002. The Company's lines of credit with its banks are available in accordance with normal terms for prime commercial borrowers and are not subject to commitment fees or other restrictions.

      The Company has filed a shelf registration for $300 million of corporate debt. Plans to issue long-term debt in 2003 are under consideration by management.

      The following table sets forth the components of long-term debt:

DEBT INFORMATION
(in millions)

  2002
 
2001
Notes, with a weighted-average interest rate
     of 12.1%, due 2003-2006
$ 14.1     $ 14.1  
7.375% Notes, due 2006, net of discount   107.0       98.0  
6.95% Notes, due 2028, net of discount   118.6       118.5  
Industrial revenue bonds, 5.375%, due 2006   6.5       6.5  
Foreign bank loans with a weighted-average interest
     rate of 7.0%, due 2004
  1.2       0.2  
Other, with a weighted-average rate of 6.3%, due 2003-2007  
0.6
 
 
 
0.7
 
    248.0       238.0  
Amounts due within one year  
0.2
 
 
 
0.1
 
     Total long-term debt $
247.8
 
 
$
237.9
 

      As of December 31, 2002, the aggregate maturities of long-term debt for the succeeding five years are as follows: $0.2 million in 2003, $1.3 million in 2004, $0.1 million in 2005, $127.6 million in 2006, $0.2 million in 2007 and $118.6 million thereafter.

      Interest expense was $27.4 million in 2002, compared with $47.3 million in 2001 and $64.8 million in 2000. Interest expense in 2002 and 2001 decreased due to decreased borrowings and lower short-term interest rates. Interest income was $2.0 million in 2002, $3.3 million in 2001 and $2.1 million in 2000.


13.  INCOME TAXES

      The components of income tax expense are shown in the following table:

INCOME TAX EXPENSE
(in millions)

  2002
 
2001
 
2000
Current income tax expense
     Federal
$ 24.8     $ 8.8     $ 105.7  
     State and local   13.3       3.3       10.1  
     Foreign  
15.6
 
 
 
27.5
 
 
 
14.5
 
   
53.7
 
 
 
39.6
 
 
 
130.3
 
Deferred income tax expense/(benefit)
     Federal
  12.3       38.1       (55.1 )
     State and local   (1.1 )     6.5       (11.3 )
     Foreign  
1.6
 
 
 
(4.5
)
 
 
13.5
 
   
12.8
 
 
 
40.1
 
 
 
(52.9
)
          Income tax expense $
66.5
 
 
$
79.7
 
 
$
77.4
 

      The foreign portion of earnings before income tax expense was $10.1 million in 2002, $112.6 million in 2001 and $126.3 million in 2000. The decrease in 2002 was primarily due to the Engelhard-CLAL equity investment impairment charge of $57.7 million recorded in the third quarter of 2002. Taxes on income of foreign consolidated subsidiaries and affiliates are provided at the tax rates applicable to their respective foreign tax jurisdictions.





















      The following table sets forth the components of the net deferred tax asset that result from temporary differences between the amounts of assets and liabilities recognized for financial reporting and tax purposes:

NET DEFERRED INCOME TAX ASSET
(in millions)

  2002
 
2001
Deferred tax assets
     Accrued liabilities
$ 167.0     $ 168.8  
     Noncurrent liabilities   60.4       65.1  
     Unrealized net loss - pension liability   51.0       21.0  
     Tax credits/carryforwards  
65.1
 
 
 
6.5
 
Total deferred tax assets  
343.5
 
 
 
261.4
 
Valuation allowance  
(11.7
)
 
 
(8.6
)
Total deferred tax assets, net of              
     valuation allowance  
331.8
 
 
 
252.8
 
Deferred tax liabilities
     Prepaid pension expense
  (45.6 )     (30.5 )
     Property, plant and equipment   (38.8 )     (2.2 )
     Timing of dealing results   (71.3 )     (12.8 )
     Other assets  
(64.4
)
 
 
(36.7
)
Total deferred tax liabilities  
(220.1
)
 
 
(82.2
)
     Net deferred tax asset $
111.7
 
 
$
170.6
 

      Net current deferred tax assets of $60.2 million (net of a $1.2 million valuation allowance) and $99.9 million (net of a $1.2 million valuation allowance) at December 31, 2002 and December 31, 2001, respectively, are included in other current assets and net noncurrent deferred tax assets of $51.5 million (net of a $10.5 million valuation allowance) and $70.7 million (net of a $7.4 million valuation allowance) at December 31, 2002 and December 31, 2001, respectively, are included in other intangible and noncurrent assets in the Company's "Consolidated Balance Sheets."

      At December 31, 2002, the Company had approximately $13.6 million of foreign tax credit carryforwards of which $8.7 million will expire in 2006 and $4.9 million will expire in 2007. The Company had a $4.9 million valuation allowance against these foreign tax credits. The Company also had approximately $7.5 million of foreign net operating losses of which $5.3 million will expire in 2005, $0.5 million will expire in 2007 and $1.7 million will carry forward indefinitely. Minimum tax credit carryforwards at December 31, 2002 totaled approximately $31.7 million and will carry forward indefinitely. At December 31, 2002, the Company also had approximately $282.1 million of State net operating loss carryforwards of which $5.0 million will expire in 2006, $158.8 million will expire in 2008, $9.5 million will expire in 2011, $27.7 million will expire in 2016 and $81.1 million will expire in 2021. The carryback of U.S. tax losses resulting from temporary differences related to the timing of dealing results substantially increased deferred tax assets in 2002 primarily from tax credit carryforwards.

      A reconciliation of the difference between the Company's consolidated income tax expense and the expense computed at the federal statutory rate is shown in the following table:


CONSOLIDATED INCOME TAX EXPENSE RECONCILIATION
(in millions)

  2002
 
2001
 
2000
Income tax expense at federal
     statutory rate
$ 83.3     $ 106.8     $ 86.0  
State income taxes, net of
     federal effect
  7.9       5.4       4.0  
Percentage depletion   (19.5 )     (7.8 )     (9.8 )
Equity earnings   (3.6 )     (3.5 )     (3.4 )
Equity investment impairment with no tax benefit   20.2       -       -  
Taxes on foreign income which differ from
      U.S. statutory rate
  3.0       1.5       9.5  
Tax credits/carrybacks   (18.7 )     (20.3 )     (11.1 )
Export sales exclusion   (10.5 )     (6.8 )     (7.9 )
Non-deductible goodwill   -       2.0       2.9  
Valuation allowance   5.6       (2.5 )     3.6  
Other items, net  
(1.2
)
 
 
4.9
 
 
 
3.6
 
     Income tax expense $
66.5
 
 
$
79.7
 
 
$
77.4
 

       No provision has been made for U.S. or additional foreign taxes on the undistributed earnings of foreign subsidiaries because such earnings are expected to be reinvested indefinitely in the subsidiaries' operations. At December 31, 2002, the Company's share of the cumulative undistributed earnings of foreign subsidiaries upon which taxes have not been provided was approximately $510.0 million. It is not practical to estimate the amount of additional tax, net of applicable foreign tax credits, that might be payable on these foreign earnings in the event of distribution or sale. However, under existing law, foreign tax credits would be available to substantially reduce U.S. taxes payable.

14.   RELATED PARTY TRANSACTIONS

      In the ordinary course of business, the Company has related party transactions with its equity affiliates, including N.E. Chemcat, Engelhard-CLAL and Heesung-Engelhard. The Company's transactions with such entities amounted to: purchases-from of $26.0 million in 2002, $4.0 million in 2001 and $5.5 million in 2000; sales-to of $36.4 million in 2002, $17.1 million in 2001 and $27.8 million in 2000; and metal leasing-to of $1.1 million in 2002, $2.6 million in 2001 and $9.9 million in 2000. At December 31, 2002 and 2001, net amounts due to such entities totaled $1.9 million and $1.3 million, respectively.

      Citibank, N.A., a subsidiary of Citigroup Inc., which reports beneficial ownership of more than 5% of our Common Stock, participated with other lenders in lines of credit available to Engelhard under revolving credit facilities. Citibank's total commitment is $34,000,000, none of which was drawn in 2002. In 2002, Citibank received an initial fee of $59,000 and annual facility fees of $33,000 for these facilities. We use subsidiaries of Citigroup, as well as other firms, to provide cash management services to Engelhard. Fees to subsidiaries of Citigroup for these services aggregated less than $60,000 in 2002. In addition, Barclays Global Investors, N.A., which reports beneficial ownership of more than 5% of our Common Stock, provides certain investment management services to Engelhard's pension plans. Fees for such services aggregated approximately $130,000 in 2002

      Barclays Bank, plc, an affiliate of Barclays Global Investors, subsidiaries of Citigroup and other firms, engage in foreign exchange and commodities transactions with Engelhard in the ordinary course of business. All of these transactions are negotiated at arms length as principals in competitive markets. During 2002, foreign exchange and metals transactions with subsidiaries of Citigroup aggregated approximately $190,000,000 and metals transactions with Barclays Bank, plc aggregated approximately $50,000,000. In addition, during 2002, Engelhard provided services in precious metals financing transactions in which subsidiaries of Citigroup and Barclays Bank, plc received funds from third parties. Engelhard received approximately $230,000 in fees from subsidiaries of Citigroup and approximately $37,000 in net revenues from these transactions in which Barclays Bank, plc participated.

15.   BENEFITS

      The Company has domestic and foreign pension plans covering substantially all employees. Plans covering most salaried employees generally provide benefits based on years of service and the employee's final average compensation. Plans covering most hourly bargaining unit members generally provide benefits of stated amounts for each year of service. The Company makes contributions to the plans as required and to such extent contributions are currently deductible for tax purposes. Plan assets primarily consist of listed stocks, fixed income securities and cash.





























      The following table sets forth the plans' funded status:

FUNDED STATUS
(in millions)
2002
  2001
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year
$ 452.7     $ 416.0  
Service cost   15.6       14.7  
Interest cost   32.3       29.9  
Plan amendments   3.9       1.2  
Engelhard-CLAL asset distribution   22.3       -  
Actuarial losses   39.0       20.5  
Benefits paid   (34.8 )     (27.1 )
Foreign exchange  
10.1
 
   
(2.5
)
     Projected benefit obligation at end of year $
541.1
 
  $
452.7
 
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year
$ 382.7     $ 488.6  
Actual loss on plan assets   (26.6 )     (80.4 )
Employer contribution   56.3       4.8  
Benefits paid   (34.8 )     (27.1 )
Engelhard-CLAL asset distribution   18.1       -  
Foreign exchange  
9.6
 
   
(3.2
)
     Fair value of plan assets at end of year $
405.3
 
  $
382.7
 
Funded status $ (135.8 )   $ (70.0 )
Unrecognized net actuarial loss   236.5       123.4  
Unrecognized prior service cost   13.2       9.7  
Unrecognized transition asset, net of amortization   -       (0.1 )
Fourth quarter contribution  
0.4
 
   
0.2
 
     Prepaid pension asset $
114.3
 
  $
63.2
 
Amounts recognized in the consolidated balance sheets consist of:              
               
Prepaid benefit cost $ 67.9     $ 68.6  
Accrued benefit liability   (94.4 )     (54.3 )
Intangible asset   5.9       5.9  
Accumulated other comprehensive loss  
134.9
 
   
43.0
 
     Net amount recognized $
114.3
 
  $
63.2
 

      The prepaid pension asset balances of $67.9 million and $68.6 million at December 31, 2002 and December 31, 2001, respectively, and the intangible asset balances of $5.9 million at December 31, 2002 and 2001 are included in other intangible and noncurrent assets in the Company's "Consolidated Balance Sheets." The Company recorded a minimum pension liability adjustment of $91.9 million ($57.7 million after tax) in 2002 and a minimum pension liability adjustment of $43.0 million ($25.4 million after tax) in 2001. These adjustments were recognized and charged to "Accumulated Other Comprehensive Loss" within shareholders' equity. The aggregate accummulated benefit obligation (ABO) for plans with ABOs in excess of plan assets was $389 million in 2002. The fair value of assets for plans with ABOs in excess of plan assets was $296 million in 2002.

      The components of net periodic pension expense for all plans are shown in the following table:

NET PERIODIC PENSION EXPENSE
(in millions)

  2002
 
2001
 
2000
Service cost $ 15.6     $ 14.7     $ 13.3  
Interest cost   32.3       29.9       26.8  
Expected return on plan assets   (41.1 )     (40.7 )     (37.7 )
Amortization of prior service cost   1.5       2.2       1.9  
Amortization of transition asset   (0.1 )     (0.5 )     (0.6 )
Recognized actuarial loss  
4.1
 
 
 
2.5
 
 
 
2.9
 
     Net periodic pension expense $
12.3
 
 
$
8.1
 
 
$
6.6
 

      The Company uses September 30 as the measurement date for pension assets and liabilities. The assumptions chosen to measure the current years' liabilities are also used to determine the subsequent years' net periodic pension expense. The following table sets forth the key weighted-average assumptions used in determining the worldwide projected benefit obligation:

   2002
 
 2001
 
 2000
Discount rate   6.6 %     7.2 %     7.4 %
Rate of compensation increase   3.8 %     4.2 %     4.4 %
Expected return on plan assets  
9.7
%
 
 
10.0
%
 
 
10.3
%

      The Company also sponsors three savings plans covering certain salaried and hourly paid employees. The Company's contributions, which may equal up to 50% of certain employee contributions, were $4.3 million in 2002, $4.1 million in 2001 and $3.9 million in 2000. These amounts were recorded as an expense in the Company's "Consolidated Statements of Earnings."

      The Company also currently provides postretirement medical and life insurance benefits to certain retirees (and their spouses), certain disabled employees (and their families) and spouses of certain deceased employees. Substantially all U.S. salaried employees and certain hourly paid employees are eligible for these benefits, which are paid through the Company's general health care and life insurance programs, except for certain medicare-eligible salaried and hourly retirees who are provided a defined contribution towards the cost of a partially insured health plan. In addition, the Company provides postemployment benefits to former or inactive employees after employment but before retirement. These benefits are substantially similar to the postretirement benefits, but cover a much smaller group of employees. Effective January 1, 2003, the Company eliminated postretirement benefits for those employees (excluding employees under collective bargaining agreements) hired on or after January 1, 2003.



      The following table sets forth the components of the accrued postretirement and postemployment benefit obligation, all of which are unfunded:

POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
(in millions)

  2002
  2001
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year
$ 128.5     $ 123.0  
Service cost   3.1       2.8  
Interest cost   9.2       9.1  
Actuarial losses   12.0       5.5  
Engelhard-CLAL asset distribution   4.9       -  
Benefits paid  
(12.8
)
   
(11.9
)
Benefit obligation at end of year $
144.9
 
  $
128.5
 
Unrecognized net loss   (24.2 )     (11.4 )
Unrecognized prior service cost  
10.9
 
   
15.8
 
     Accrued benefit obligation $
131.6
 
  $
132.9
 

      The postretirement and postemployment benefit balances of $131.6 million and $132.9 million at December 31, 2002 and December 31, 2001, respectively, are included in other noncurrent liabilities in the Company's "Consolidated Balance Sheets."

      The components of the net expense for these postretirement and postemployment benefits are shown in the following table:

POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
(in millions)

  2002
 
2001
 
2000
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost
$ 3.1     $ 2.8     $ 2.8  
Interest cost   9.2       9.1       8.7  
Net amortization  
(5.8
)
 
 
(5.8
)
 
 
(5.8
)
     Net periodic benefit cost $
6.5
 
 
$
6.1
 
 
$
5.7
 

      The weighted-average discount rate used in determining the actuarial present value of the accumulated postretirement and postemployment benefit obligation is 6.75% for 2002 and 7.50% for 2001. The average assumed health care cost trend rate used for 2002 is 5% to 10%. A 1% increase in the assumed health care cost trend rate would have increased aggregate service and interest cost in 2002 by $0.8 million and the accumulated postretirement and postemployment benefit obligation as of December 31, 2002 by $7.5 million. A 1% decrease in the assumed health care cost trend rate would have decreased aggregate service and interest cost in 2002 by $1.3 million and the accumulated postretirement and postemployment benefit obligation as of December 31, 2002 by $12.4 million.

16.   STOCK OPTION AND BONUS PLANS

      The Company's Stock Option Plans of 1999 and 1991, as amended (the Key Option Plans), generally provide for the granting of options to key employees to purchase an aggregate of 5,500,000 and 16,875,000 common shares, respectively, at fair market value on the date of grant. No options under the Stock Option Plans of 1999 and 1991 may be granted after December 16, 2009 and June 30, 2003, respectively.

      In 1993, the Company established the Employee Stock Option Plan of 1993, as amended, which generally provided for the granting to all employees (excluding U.S. bargaining unit employees and key employees eligible under the Key Option Plans) of options to purchase an aggregate of 2,812,500 common shares at fair market value on the date of grant. No additional options may be granted under this plan. In 1995, the Company established the Directors Stock Option Plan, which generally provides for the annual granting to each non-employee director the option to purchase up to 3,000 common shares at the fair market value on the date of grant. Options under all plans become exercisable in four installments beginning after one year, and no options may be exercised after 10 years from the date of grant.

      On May 2, 2002, shareholders approved the 2002 long-term incentive compensation plan. The plan provides for the grant to eligible employees and directors of stock options, share appreciation rights (SARs), restricted shares, restricted share units, performance units, and other share based awards. An aggregate of 6,000,000 shares of common stock have been reserved for issuance under the plan, of which no more than 500,000 shares may be issued in connection with awards other than options and SARs. All terms and conditions of each grant are generally set on the date of grant including the grant price of options which is based on the fair market value on the day of grant. No grants may be made under the plan after March 7, 2012.

      The weighted-average fair value at date of grant for options granted during 2002, 2001 and 2000 was $8.62, $8.13 and $4.28, respectively. Fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used:

   2002
 
 2001
 
 2000
Dividend yield   1.4 - 1.8 %     1.5 - 1.8 %     2.1 - 2.4 %
Expected volatility   36 %     35 - 36 %     33 %
Risk-free interest rate   3.1 - 3.8 %     3.8 - 5.1 %     6.0 %
Expected life (years)   5 - 6       5       4 - 5  














      Stock option transactions under all plans are as follows:

    2002   2001   2000  
    Number
of Shares

  Weighted-Average
Exercise Price
Per Share

  Number
of Shares

  Weighted-Average
Exercise Price
Per Share

  Number
of Shares

  Weighted-Average
Exercise Price
Per Share

Outstanding at beginning of year     12,915,835     $ 19.32       17,686,507     $ 18.20       16,472,791     $ 18.30  
Granted     1,352,754     $ 25.61       1,317,008     $ 24.55       1,611,786     $ 16.87  
Forfeited     (51,129 )   $ 19.56       (187,330 )   $ 19.40       (255,840 )   $ 19.22  
Exercised    
(2,696,603
)
  $
18.09
 
   
(5,900,350
)
  $
17.15
 
   
(142,230
)
  $
12.14
 
Outstanding at end of year     11,520,857     $ 20.34       12,915,835     $ 19.32       17,686,507     $ 18.20  
Exercisable at end of year     7,777,411     $ 19.26       9,472,409     $ 18.92       13,692,608     $ 18.24  
Available for future grants     8,951,711               4,253,336               5,383,014          

      The following table summarizes information about fixed-price options outstanding at December 31, 2002:

  Options Outstanding
  Options Exercisable
Range of
Exercise Prices

 
Weighted-Average Remaining Contractual
Life (years)

 
Number
Outstanding
at 12/31/02

 
Weighted-
Average
Exercise
Price

  Number Exercisable
at 12/31/02

 
Weighted-Average Exercise Price
$14.21 to 19.14   1-2   930,511   $17.05   930,511   $17.05
16.83 to 23.88   4-5   3,600,094   20.38   3,600,094   20.38
17.34 to 21.69   6   1,319,896   18.64   1,199,343   18.59
17.81 to 20.75   7   1,800,088   18.72   1,203,984   18.83
16.84 to 18.75   8   1,275,142   16.87   635,321   16.86
22.75 to 26.90   9   1,245,304   24.63   208,158   23.50
22.80 to 28.75   10   1,349,822
  25.61
  -
  -
        11,520,857   $20.34   7,777,411   $19.26

      The Company's Key Employee Stock Bonus Plan, as amended (the Bonus Plan) provides for the award of up to 15,187,500 common shares to key employees as compensation for future services, not exceeding 1,518,750 shares in any year (plus any canceled awards or shares available for award but not previously awarded). The Bonus Plan terminates on June 30, 2006. Shares awarded vest in five annual installments, provided the recipient is still employed by the Company on the vesting date. Compensation expense is measured on the date the award is granted and is amortized over five years. Shares awarded are considered issued and outstanding at the date of grant and are included in shares outstanding for purposes of computing diluted earnings per share. Employees have both dividend and voting rights on all unvested shares. In 2002 and 2001, the Company granted 158,200 and 423,685 shares to key employees at a fair value of $28.11 and $22.75, respectively, per share. Unvested shares were 674,930 and 626,112 at December 31, 2002 and 2001, respectively. Shares available for grant under this plan are 1,500,000 at December 31, 2002.

      Compensation expense relating to stock awards was $5.0 million in 2002, $4.4 million in 2001 and $5.0 million in 2000.

      The Company has certain deferred compensation arrangements where shares earned under the Engelhard stock bonus plan are deferred and placed in a "Rabbi Trust." Until February 2001, the plan permitted employees to convert their deferred stock balance to deferred cash under certain conditions. In February 2001, the Company terminated this deferred cash option. With the termination of the deferred cash option, increases/decreases in the deferred compensation liability will no longer be recognized in earnings. Shares held in the trust are recorded as treasury stock with the corresponding liability recorded as a credit within shareholders' equity.

      For the year ended December 31, 2001, the Company recognized expense of $0.9 million related to the increase in the value of its common stock held in a Rabbi Trust for deferred compensation from $20.38 at December 31, 2000 to $22.65 at February 1, 2001 (as the deferred cash option was terminated at this time). For the year ended December 31, 2000, the Company recognized expense of $0.4 million related to changes in the value of its common stock held in the Rabbi Trust. The total value of the Rabbi Trust at December 31, 2002 was $9.4 million compared to $8.7 million at December 31, 2001.


17.   EARNINGS PER SHARE

      Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS No. 128) specifies the computation, presentation, and disclosure requirements for basic and diluted earnings per share (EPS). The following table represents the computation of basic and diluted EPS as required by SFAS No. 128:

EARNINGS PER SHARE COMPUTATIONS
Year ended December 31
(in millions, except per-share data)

  2002
 
2001
 
2000
BASIC EPS COMPUTATION                      
Net income applicable to common shares $
171.4
 
 
$
225.6
 
 
$
168.3
 
Average number of shares outstanding-basic  
128.1
 
 
 
130.0
 
 
 
126.4
 
     Basic earnings per share $
1.34
 
 
$
1.73
 
 
$
1.33
 
DILUTED EPS COMPUTATION                      
Net income applicable to common shares $
171.4
 
 
$
225.6
 
 
$
168.3
 
Average number of shares outstanding-basic   128.1       130.0       126.4  
Effect of dilutive stock options
     and other incentives
  2.4       2.2       0.5  
Effect of Rabbi Trust  
-
 
 
 
-
 
 
 
1.2
 
Total number of shares outstanding-diluted  
130.5
 
 
 
132.2
 
 
 
128.1
 
     Diluted earnings per share $
1.31
 
 
$
1.71
 
 
$
1.31
 

      Options to purchase additional shares of common stock of 1,282,641 (at a price range of $26.90 to $28.75), 570,380 at a price of $26.90 and 11,684,042 (at a price range of $17.50 to $23.88) were outstanding at the end of 2002, 2001 and 2000, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average annual market price of the common shares. Shares held in the Rabbi Trust were excluded from basic shares outstanding in 2000. Effective February 2001, the Company terminated the deferred cash option of the Rabbi Trust. With the termination of this option, shares held in the Rabbi Trust were included in basic shares outstanding in 2001 and 2002.

18.    BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA

      The Company has four reportable business segments: Environmental Technologies, Process Technologies, Appearance and Performance Technologies, and Materials Services.

      The Environmental Technologies segment, located principally in the United States, Europe and South Africa, markets cost-effective compliance with environmental regulations enabled by sophisticated emission-control technologies and systems.

      The Process Technologies segment, located principally in the United States and Europe, enables customers to make their processes more productive, efficient, environmentally sound and safer through the supply of advanced chemical-process catalysts, additives and sorbents.

      The Appearance and Performance Technologies segment, located principally in the United States, South Korea, China and Finland, provides pigments, effect materials and performance additives that enable its customers to market enhanced image and functionality in their products. This segment serves a broad array of end markets including coatings, plastics, cosmetics, construction and paper. This segment's products help customers improve the look, performance and overall cost of their products. This segment is also the internal supply source of precursors for some of the Company's advanced refining-process catalysts.

      The Materials Services segment, located principally in the United States, Europe and Japan, serves the Company's technology segments, their customers and others with precious and base metals and related services. This is a distribution and materials services business that purchases and sells precious metals, base metals and related products and services. It does so under a variety of pricing and delivery arrangements structured to meet the logistical, financial and price-risk management requirements of the Company, its customers and suppliers. Additionally, it offers the related services of precious-metal refining and storage and produces salts and solutions.

      Within the "All Other" category, sales to external customers and operating earnings/(losses) are derived primarily from the Ventures business. The sale of precious metals accounted for under the LIFO method, royalty income and other miscellaneous income and expense items not related to the reportable segments are included in the "All Other" category.

      The majority of Corporate operating expenses have been charged to the segments on either a direct-service basis or as part of a general allocation. Environmental Technologies and, to a much lesser extent, Process Technologies utilize metal in their factories in excess of that provided by customers. This metal is provided by Materials Services.







      The following table presents certain data by business segment:

BUSINESS SEGMENT INFORMATION
(in millions)

 
 
Environmental
Technologies

 
Process
Technologies

 
Appearance
and
Performance
Technologies

 
Materials
Services

 
Reportable
Segments
Subtotal

 
All
Other

 
Total
2002
Net sales to external customers
  $ 680.4     $ 538.8     $ 650.8     $ 1,836.0     $ 3,706.0     $ 47.6     $ 3,753.6  
Operating earnings/(loss)     109.2       93.0       87.1       52.7       342.0       (a) (30.5 )     311.5  
Special (charge)/credit     (3.1 )     -       -       11.0       7.9       -       7.9  
Interest income     -       -       -       -       -       2.0       2.0  
Interest expense     -       -       -       -       -       27.4       27.4  
Depreciation, depletion
     and amortization
    27.0       24.0       46.0       2.3       99.3       14.3       113.6  
Equity in earnings of affiliates     8.2       -       -       -       8.2       8.0       16.2  
Equity investment impairment     -       -       -       -       -       57.7       57.7  
Income taxes     -       -       -       -       -       66.5       66.5  
Total assets     595.2       572.4       795.3       641.2       2,604.1       416.6       3,020.7  
Equity investments     31.5       -       -       -       31.5       101.3       132.8  
Capital expenditures
 
 
40.2
 
 
 
18.4
 
 
 
29.4
 
 
 
5.2
 
 
 
93.2
 
 
 
20.1
 
 
 
113.3
 
2001
Net sales to external customers
  $ 646.7     $ 568.2     $ 634.4     $ 3,207.9     $ 5,057.2     $ 39.7     $ 5,096.9  
Operating earnings/(loss)     142.4       94.3       46.5       56.1       339.3       (a) (19.2 )     320.1  
Special charge     -       -       (7.1 )     -       (7.1 )     -       (7.1 )
Interest income     -       -       -       -       -       3.3       3.3  
Interest expense     -       -       -       -       -       47.3       47.3  
Depreciation, depletion
     and amortization
    21.5       24.6       51.4       1.3       98.8       9.7       108.5  
Equity in earnings of affiliates     8.6       -       -       -       8.6       20.5       29.1  
Income taxes     -       -       -       -       -       79.7       79.7  
Total assets     506.9       563.4       799.7       593.1       2,463.1       532.4       2,995.5  
Equity investments     23.0       -       -       -       23.0       181.9       204.9  
Capital expenditures
 
 
68.7
 
 
 
30.4
 
 
 
36.9
 
 
 
8.2
 
 
 
144.2
 
 
 
24.7
 
 
 
168.9
 
2000
Net sales to external customers
  $ 636.7     $ 566.6     $ 684.4     $ 3,614.2     $ 5,501.9     $ 40.7     $ 5,542.6  
Operating earnings/(loss),
     excluding special and
      other charges
    131.8       86.5       80.2       129.3       427.8       (a) (29.0 )     398.8  
Special and other charges     (15.4 )     (5.5 )     (49.7 )     -       (70.6 )     (62.8 )     (133.4 )
Operating earnings/(loss),
     as reported
    116.4       81.0       30.5       129.3       357.2       (91.8 )     265.4  
Interest income     -       -       -       -       -       2.1       2.1  
Interest expense     -       -       -       -       -       64.8       64.8  
Depreciation, depletion and
     amortization
    21.6       28.2       51.0       1.5       102.3       14.8       117.1  
Equity in earnings/(loss)
     of affiliates
    6.6       -       (1.2)       -       5.4       18.8       24.2  
Income taxes     -       -       -       -       -       77.4       77.4  
Total assets     492.8       540.1       825.0       790.2       2,648.1       518.7       3,166.8  
Equity investments     15.7       -       -       -       15.7       178.2       193.9  
Capital expenditures
 
 
40.2
 
 
 
30.5
 
 
 
45.9
 
 
 
1.0
 
 
 
117.6
 
 
 
19.0
 
 
 
136.6
 
(a) Includes pretax gains on the sale of certain precious metals accounted for under the LIFO method of $5.1 million in 2002, $5.3 million in 2001 and $3.9 million in 2000.

      The following table presents certain data by geographic area:

GEOGRAPHIC AREA DATA
(in millions)

 
2002
 
2001
 
2000
Net sales to external customers:
     United States
$ 2,010.4     $ 2,983.9     $ 3,559.3  
     International
 
1,743.2
 
 
 
2,113.0
 
 
 
1,983.3
 
Total consolidated net sales to
     external customers

$
3,753.6
 
 
$
5,096.9
 
 
$
5,542.6
 
Long-lived assets:
     United States
$ 1,089.3     $ 1,092.5     $ 1,065.6  
     International
 
216.5
 
 
 
245.1
 
 
 
205.0
 
Total long-lived assets
$
1,305.8
 
 
$
1,337.6
 
 
$
1,270.6
 

      The Company's international operations are predominantly based in Europe.






























      The following table reconciles segment operating earnings with earnings before income taxes as shown in the Company's "Consolidated Statements of Earnings":

SEGMENT RECONCILIATIONS
(in millions)

  2002
 
2001
 
2000
Net sales to external customers:
     Net sales for reportable segments
$ 3,706.0     $ 5,057.2     $ 5,501.9  
     Net sales for other business units   35.0       32.0       37.7  
     All other  
12.6
 
 
 
7.7
 
 
 
3.0
 
Total consolidated net sales to                      
external customers $
3,753.6
 
 
$
5,096.9
 
 
$
5,542.6
 
Earnings before income taxes:
     Operating earnings for reportable segments
$ 342.0     $ 339.3     $ 357.2  
     Operating earnings/(loss) for other business units   0.4       (0.9 )     (35.6 )
     Special and other charges - Corporate   -       -       (28.3 )
     Other operating loss - Corporate  
(30.9
)
 
 
(18.3
)
 
 
(27.9
)
Total operating earnings $ 311.5     $ 320.1     $ 265.4  
     Interest income   2.0       3.3       2.1  
     Interest expense   (27.4 )     (47.3 )     (64.8 )
     Equity in earnings of affiliates   16.2       29.1       24.2  
     Equity investment impairment   (57.7 )     -       -  
     (Loss)/gain on investments, net  
(6.7
)
 
 
-
 
 
 
18.8
 
Earnings before income taxes $
237.9
 
 
$
305.2
 
 
$
245.7
 
Total assets
     Total assets for reportable segments
$ 2,604.1     $ 2,463.1     $ 2,648.1  
     Assets for other business units   30.3       28.5       29.1  
     All other  
386.3
 
 
 
503.9
 
 
 
489.6
 
Total consolidated assets $
3,020.7
 
 
$
2,995.5
 
 
$
3,166.8
 
                       
Equity investments for reportable segments $ 31.5     $ 23.0     $ 15.7  
Equity investments - All other   101.3       181.9       178.2  
Other investments not carried on the equity method  
4.0
 
 
 
8.6
 
 
 
6.2
 
          Total investments $
136.8
 
 
$
213.5
 
 
$
200.1
 

      An unaffiliated customer of the Environmental Technologies and Materials Services segments accounted for approximately $625 million, $796 million and $830 million of the Company's net sales in 2002, 2001 and 2000, respectively.



19.   LEASE COMMITMENTS

      The Company rents real property and equipment under long-term operating leases. Rent expense and sublease income for all operating leases are summarized as follows:

(in millions)
2002
 
2001
 
2000
Rents paid $ 35.2     $ 33.0     $ 26.7  
Less: sublease income
 
(1.1
)
 
 
(1.3
)
 
 
(0.8
)
     Rent expense, net
$
34.1
 
 
$
31.7
 
 
$
25.9
 

      Future minimum rent payments at December 31, 2002, required under noncancellable operating leases, having initial or remaining lease terms in excess of one year, are as follows:

(in millions)
 
          2003 $   35.0  
          2004 32.3  
          2005 20.4  
          2006 13.8  
          2007 12.0  
          Thereafter
76.9
 
Total minimum lease payments 190.4  
Less: minimum sublease income
(3.7
)
     Net minimum lease payments
$  186.7
 

      In 2000, the Company entered into a sale-leaseback transaction for $97.3 million for machinery and equipment that is used in the Process Technologies segment. The term of this operating lease is five years. The Company intends to renew this lease at the end of the lease term in 2005. In 1998, the Company entered into a sale-leaseback transaction for $67.2 million for property that serves as the principal executive and administrative offices of the Company and its operating businesses. The term of this operating lease is 20 years.

20.   ENVIRONMENTAL COSTS

      With the oversight of environmental agencies, the Company is currently preparing, has under review, or is implementing environmental investigations and cleanup plans at several currently or formerly owned and/or operated sites, including Plainville, Massachusetts. The Company is continuing to investigate contamination at Plainville under a 1993 agreement with the United States Environmental Protection Agency (EPA). The Company is continuing to address decommissioning issues under authority delegated by the Nuclear Regulatory Commission to the Commonwealth of Massachusetts. A Salt Lake City, Utah site was sold in 2002, with the primary liability for remediating the site contractually transferred to the buyer and Engelhard remaining responsible for specified remediation costs.

      In addition, as of December 31, 2002, twelve sites have been identified at which the Company believes liability as a potentially responsible party is probable under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or similar state laws (collectively referred to as Superfund) for the cleanup of contamination resulting from the historic disposal of hazardous substances allegedly generated by the Company, among others. Superfund imposes strict, joint and several liability under certain circumstances. In many cases, the dollar amount of the claim is unspecified and claims have been asserted against a number of other entities for the same relief sought from the Company. Based on existing information, the Company believes that it is a de minimis contributor of hazardous substances at a number of the sites referenced above. Subject to the reopening of existing settlement agreements for extraordinary circumstances or natural resource damages, the Company has settled a number of other cleanup proceedings. The Company has also responded to information requests from EPA and state regulatory authorities in connection with other Superfund sites.

      The accruals for environmental cleanup-related costs recorded in the consolidated balance sheets at December 31, 2002 and 2001 were $18.5 million and $23.2 million, respectively, including $0.1 million and $0.6 million, respectively, for Superfund sites. These amounts represent those costs that the Company believes are probable and reasonably estimable. Based on currently available information and analysis, the Company's accrual represents approximately 40% of what it believes are the reasonably possible environmental cleanup-related costs of a noncapital nature. The estimate of reasonably possible costs is less certain than the probable estimate upon which the accrual is based.

      Cash payments for environmental cleanup-related matters were $1.8 million in 2002 and $1.7 million in both 2001 and 2000. The amounts accrued in connection with environmental cleanup-related matters were not significant over this time period.

      For the past three-year period, environmental-related capital projects have averaged less than 10% of the Company's total capital expenditure programs, and the expense of environmental compliance (e.g., environmental testing, permits, consultants and in-house staff) was not material.

       There can be no assurances that environmental laws and regulations will not become more stringent in the future or that the Company will not incur significant costs in the future to comply with such laws and regulations. Based on existing information and currently enacted environmental laws and regulations, cash payments for environmental cleanup-related matters are projected to be $2.9 million for 2003, which has already been accrued. Further, the Company anticipates that the amounts of capitalized environmental projects and the expense of environmental compliance will approximate current levels. While it is not possible to predict with certainty, management believes environmental cleanup-related reserves at December 31, 2002 are reasonable and adequate, and environmental matters are not expected to have a material adverse effect on financial condition. These matters, if resolved in a manner different from the estimates, could have a material adverse effect on the Company's operating results or cash flows.

21.  LITIGATION AND CONTINGENCIES

      The Company is one of a number of defendants in numerous proceedings that allege that the plaintiffs were injured from exposure to hazardous substances purportedly supplied by the Company and other defendants or that existed on company premises. The Company is also subject to a number of environmental contingencies (see Note 20, "Environmental Costs," for further detail) and is a defendant in a number of lawsuits covering a wide range of other matters. In some of these matters, the remedies sought or damages claimed are substantial. While it is not possible to predict with certainty the ultimate outcome of these lawsuits or the resolution of the environmental contingencies, management believes, after consultation with counsel, that resolution of these matters is not expected to have a material adverse effect on financial condition. These matters, if resolved in a manner different from management's current expectations, could have a material adverse effect on the Company's operating results or cash flows.

      In 1998, management learned that Engelhard and several other companies operating in Japan had been victims of an elaborate scheme involving base-metal inventory held in third-party warehouses in Japan. The inventory loss was approximately $40 million in 1997 and $20 million in 1998. In the first quarter of 1998, Engelhard recorded a receivable from the insurance carriers and third parties involved for approximately $20 million. This amount represented management's and counsel's best estimate of the minimum probable recovery from the various insurance policies and other parties involved in the fraudulent scheme. As of June 30, 2002, the Company had recovered $11.2 million. In July 2002, the Company received an additional $19.8 million, net of legal fees, from insurance settlements reached in June. Accordingly, the Company recorded a gain of $11.0 million ($6.8 million after tax) in the second quarter of 2002 in its Materials Services segment.

      The Company is involved in a value-added tax dispute in Peru. Management believes the Company was targeted by corrupt officials within a former Peruvian government. On December 2, 1999, Engelhard Peru, S.A., a wholly owned subsidiary, was denied refund claims of approximately $28 million. The Peruvian tax authority also determined that Engelhard Peru, S.A. is liable for approximately $63 million in refunds previously paid, fines and interest as of December 31, 1999. Interest and fines continue to accrue at rates established by Peruvian law. The Peruvian Tax Court ruled on February 11, 2003 that Engelhard Peru, S.A. was liable for these amounts, overruling precedent to apply a "form over substance" theory without any determination of fraudulent participation by Engelhard Peru, S.A. The Tax Court is part of the Peruvian Ministry of Economics and Finance. Engelhard Peru, S.A. is contesting these determinations vigorously, and management believes, based on consultation with counsel, that Engelhard Peru, S.A. is entitled to all refunds claimed and is not liable for these additional taxes, fines or interest. In late October 2000, a criminal proceeding alleging tax fraud and forgery related to this value-added tax dispute was initiated against two Lima-based officials of Engelhard Peru, S.A. Although Engelhard Peru, S.A. is not a defendant, it may be civilly liable in Peru if its representatives are found responsible for criminal conduct. In its own investigation, and in detailed review of the materials presented in Peru, management has not seen any evidence of tax fraud by these officials. Accordingly, Engelhard Peru, S.A. is assisting in the vigorous defense of this proceeding. Management believes the maximum economic exposure is limited to the aggregate value of all assets of Engelhard Peru, S.A. That amount, which is approximately $30 million including unpaid refunds, has been fully provided for in the accounts of the Company.

      On October 29, 2002, a jury in the New York County Supreme Court awarded the Company $29.8 million in damages in a breach of contract action the Company had brought against Research Corporation and Research Corporation Technologies in 1998. The jury found that the defendants did not share with the Company all of the royalties to which the Company was entitled under a royalty-sharing agreement it entered into with Research Corporation in 1979. Statutory interest to the date of the verdict would have increased the amount awarded to approximately $42.2 million. On March 21, 2003, the Company entered into a settlement agreement, releasing this claim in exchange for payment of $38 million.









22.  COMPREHENSIVE INCOME

      Changes in accumulated other comprehensive income/(loss) are as follows:

(in millions) Cash flow
derivative
adjustment, net of tax

  Foreign currency
translation
adjustment

  Minimum pension liability adjustment, net of tax
  Investment adjustment,
net of tax

  Total accumulated other comprehensive income/(loss)
Balance at December 31, 1999   $ -       $ (30.1 )     $ (1.0 )     $ -     $ (31.1 )
Period change  
 
-
 
 
 
 
(20.9
)
 
 
 
1.0
 
 
 
 
-
 
 
 
(19.9
)
Balance at December 31, 2000     -         (51.0 )       -         -       (51.0 )
Period change  
 
(4.6
)
 
 
 
(51.0
)
 
 
 
(25.4
)
 
 
 
-
 
 
 
(81.0
)
Balance at December 31, 2001     (4.6 )       (102.0 )       (25.4 )       -       (132.0 )
Period change  
 
4.4
 
 
 
 
70.3
 
 
 
 
(57.7
)
 
 
 
(0.2
)
 
 
16.8
 
Balance at December 31, 2002  
$
(0.2
)
 
 
$
(31.7
)
 
 
$
(83.1
)
 
 
$
(0.2
)
 
$
(115.2
)































23.  SUPPLEMENTAL INFORMATION

      The following table presents certain supplementary information to the Company's "Consolidated Statements of Cash Flows":

SUPPLEMENTARY CASH FLOW INFORMATION
(in millions)

  2002
 
2001
 
2000
Cash paid during the year for:
     Interest
$ 28.1     $ 48.7     $ 61.7  
     Income taxes  
31.4
 
 
 
95.1
 
 
 
60.9
 
Materials Services related:
Change in assets and liabilities - source/(use):
     Receivables
$ (4.5 )   $ 13.5     $ 0.4  
     Committed metal positions   (25.3 )     62.3       (150.4 )
     Inventories   (1.0 )     -       (0.3 )
     Other current assets   16.4       2.2       22.9  
     Other noncurrent assets   0.2       0.2       0.2  
     Accounts payable   11.8       (16.6 )     (32.9 )
     Accrued liabilities  
(27.7
)
 
 
(1.9
)
 
 
44.5
 
Net cash flows from changes in assets and liabilities $
(30.1
)
 
$
59.7
 
 
$
(115.6
)
All Other:
Change in assets and liabilities - source/(use):
     Special and other charges
$ -     $ 7.1     $ 133.4  
     Receivables   7.7       98.0       (79.8 )
     Inventories   (7.4 )     (29.2 )     (22.4 )
     Other current assets   (0.9 )     15.8       (52.6 )
     Other noncurrent assets   6.0       8.1       (13.4 )
     Accounts payable   27.9       (32.8 )     13.1  
     Accrued liabilities   (7.1 )     (69.6 )     76.6  
     Noncurrent liabilities  
(30.9
)
 
 
(20.5
)
 
 
(6.0
)
Net cash flows from changes in assets and liabilities $
(4.7
)
 
$
(23.1
)
 
$
48.9
 













      The following tables present certain supplementary information to the Company's "Consolidated Balance Sheets":

SUPPLEMENTARY BALANCE SHEET INFORMATION
Other current assets
(in millions)

  2002
  2001
Prepaid insurance $ 10.3     $ 8.1  
Current deferred taxes   60.2       99.9  
Other  
24.4
 
   
34.3
 
     Other current assets $
94.9
 
  $
142.3
 

Other current liabilities
(in millions)

  2002
  2001
Income taxes payable $ 59.2     $ 79.2  
Payroll-related accruals   69.4       77.9  
Deferred revenue   10.3       43.9  
Interest payable   3.1       3.8  
Restructuring reserves   4.8       8.7  
Product warranty reserves   11.1       14.7  
Environmental accrual   2.8       7.5  
Refining reserves   3.0       6.6  
Other  
111.6
 
   
99.4
 
     Other current liabilities $
275.3
 
  $
341.7
 



















REPORT OF INDEPENDENT AUDITORS


      To the Board of Directors and Shareholders of Engelhard Corporation:

      We have audited the accompanying consolidated balance sheet of Engelhard Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of earnings, cash flows and shareholders' equity for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Engelhard Corporation and subsidiaries as of and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 31, 2002, before the revisions and disclosures described below.

      We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Engelhard Corporation and subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

      As described in Notes 1 and 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards ("Statement") No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.

      As discussed above, the consolidated financial statements for Engelhard Corporation as of December 31, 2001 and 2000, and for the years then ended were audited by other auditors who have ceased operations. These consolidated financial statements have been revised to include the transitional requirements of Statement No. 142 which impacted the classification of goodwill and other intangible assets in the consolidated balance sheet and Note 3, and, in Note 23, the Company separately disclosed cash flows from changes in assets and liabilities related to Materials Services. Our audit procedures consisted of agreeing the previously reported net income and earnings per share amounts in Note 3 to previously reported amounts, and the additional and expanded disclosures in Notes 3 and 23 to underlying records obtained from management, and testing the mathematical accuracy of the tables in the aforementioned notes. In our opinion these revisions and disclosures are appropriate. However, we were not engaged to audit, review, or apply any procedures to the Company's consolidated financial statements for 2001 and 2000 other than with respect to such revisions and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the Company's 2001 and 2000 consolidated financial statements taken as a whole.

/s/ Ernst & Young LLP
Ernst & Young LLP
MetroPark, New Jersey
February 4, 2003, except for the February 11 and March 2003 events disclosed in Notes 10 and 21, as to which the date is March 21, 2003.

REPORT OF INDEPENDENT AUDITORS


      To the Shareholders and Board of Directors of Engelhard Corporation:

      We have audited the accompanying consolidated balance sheets of Engelhard Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Engelhard Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.


/s/ Arthur Andersen LLP
Arthur Andersen LLP
New York, New York
January 31, 2002



Note:  Reprinted above is a copy of the report previously expressed by such firm which has ceased operations. The reprinting of this report is not equivalent to a current reissuance of such report as would be required if such firm was still operating. The consolidated balance sheet as of December 31, 2001 and the consolidated statements of earnings, cash flows and shareholders' equity for the two years ended December 31, 2001 referred to in this report have been included in the accompanying financial statements. Because such firm has not consented to the inclusion of this report in this Form 10-K, your ability to make a claim against such firm may be limited or prohibited.












SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
($ in millions, except per-share amounts)

  First quarter
 
Second quarter
 
Third quarter
 
Fourth quarter
2002
Net sales
$ 1,001.8     $ 982.3     $ 858.6     $ 910.9  
Gross profit   160.7       177.2       155.8       160.2  
Earnings before income taxes   69.8       80.1       17.1       70.9  
Net earnings   52.4       60.1       2.9       56.1  
Basic earnings per share   0.41       0.47       0.02       0.44  
Diluted earnings per share   0.40       0.46       0.02       0.44  
 
2001
Net sales
$ 1,611.3     $ 1,471.6     $ 1,143.0     $ 871.0  
Gross profit   166.2       173.1       168.2       155.7  
Earnings before income taxes   69.8       80.3       80.7       74.4  
Net earnings   47.9       59.5       57.7       60.5  
Basic earnings per share   0.37       0.45       0.44       0.47  
Diluted earnings per share   0.37       0.45       0.43       0.46  

      Results in the second quarter of 2002 include an impairment charge of $6.7 million ($4.1 million after tax) associated with an investment in fuel-cell developer Plug Power Inc., a charge of $3.1 million ($1.9 million after tax) related to a manufacturing consolidation plan and an $11.0 million ($6.8 million after tax) insurance settlement gain.

      Results in the third quarter of 2002 include an impairment charge of $57.7 million associated with the Company's Engelhard-CLAL joint venture.

      The above amounts are calculated independently for each of the quarters presented. The sum of the quarters may not equal the full year amounts.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
   
  Not applicable











PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   
  (a) Directors -

      Information concerning directors of the Company is included under the caption "Election of Directors," "Information with Respect to Nominees and Directors Whose Terms Continue," "Share Ownership of Directors and Officers," and "Board of Directors' Meetings, Committees and Fees" in the Proxy Statement for the 2003 Annual Meeting of Shareholders and is incorporated herein by reference.

  (b) Executive Officers - See information of Executive Officers under item 4A on page 10.

ITEM 11. EXECUTIVE COMPENSATION

       Information concerning executive compensation is included under the captions "Executive Compensation and Other Information," "Pension Plans," "Employment Contracts, Termination of Employment and Change in Control Arrangements" and the "Performance Graph" of the Proxy Statement for the 2003 Annual Meeting of Shareholders and is incorporated herein by reference.
































ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

      Information concerning security ownership of certain beneficial owners and management is included under the captions "Information as to Certain Shareholders" and "Share Ownership of Directors and Officers" of the Proxy Statement for the 2003 Annual Meeting of Shareholders and is incorporated herein by reference.

Securities Authorized for Issuance under Equity Compensation Plans as of December 31, 2002

      We have seven plans approved by shareholders: The Engelhard Corporation Stock Option Plan of 1991, the Engelhard Corporation 2002 Long Term Incentive Compensation Plan, the Engelhard Corporation Directors Stock Option Plan, the Key Employee Stock Bonus Plan of Engelhard Corporation, the Engelhard Corporation Deferred Stock Plan for Non Employee Directors, the Stock Bonus Plan for Non Employee Directors of Engelhard Corporation, and the Deferred Compensation Plan for Directors of Engelhard Corporation.

      We have two plans that did not require approval by shareholders: The Engelhard Corporation Stock Option Plan of 1999 and the Engelhard Corporation Employee Stock Option Plan.

EQUITY COMPENSATION PLAN INFORMATION


 
  (a)
  (b)
  (c)
Plan category   Number of securities to be issued upon exercise of outstanding options, warrants and rights   Weighted-average exercise price of outstanding options, warrants and rights   Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
             
Equity compensation plans approved by            
security holders   8,691,114   $20.08   (3)(4) 7,991,110
             
Equity compensation plans not approved            
by security holders (1) (2)   2,829,743
  $21.02
  2,608,248
             
     Total   11,520,857
  $20.34
  10,599,358

(1) The Engelhard Corporation Stock Option Plan of 1999 was approved by the Company's Board of Directors on December 16, 1999. This plan as amended, reserved up to 5,500,000 shares of the Company's common stock for issuance under the plan to key employees (excluding elected officers). Options granted are nonqualified stock options and the grant price is the fair market value of the Company's stock on the date of grant. Options vest in equal installments over a four year period. Options expire no later than the 10th anniversary from the date of grant. No option may be granted under the plan after December 16, 2009. Options outstanding under this plan are 2,575,215 as of December 31, 2002.
   
(2) The Engelhard Corporation Employees Stock Option Plan was approved by the Company Board of Directors on March 9, 1993. No options may be granted after December 31, 1994 under this plan. This plan as amended reserves up to 2,812,500 shares of the Company's common stock for issuance under the plan. This was a broad based stock option plan that generally provided for the granting to all employees (excluding collective bargained employees and employees eligible for grants under key employee stock option plans) of nonqualified stock options to purchase shares of the Company's common stock based on the fair market value of the date of grant. Options vested in equal installments over a four year period. Options expire no later than the 10th anniversary from the date of grant. Options outstanding under this plan are 254,528 as of December 31, 2002.
   
(3) Includes a combined 1,545,580 shares available under the Key Employee Stock Bonus Plan and the Stock Bonus Plan for Non-Employee Directors, both of which are restricted share programs. In addition, includes 102,067 phantom stock units under the Engelhard Corporation Deferred Stock Plan for Non Employee Directors. The Engelhard Corporation 2002 Long Term Incentive Compensation Plan permits the issuance of up to 500,000 restricted shares, restricted share units, performance shares, performance units and other share based awards.
   
(4) The Deferred Compensation Plan for Directors of Engelhard Corporation permits non-employee directors to defer director fees. The deferred fees may at the election of the director be applied towards the purchase of deferred stock units based on a then current market price of the Company's common stock. The directors make an irrevocable election as to the timing of when these deferred stock units will be converted into shares of the Company's common stock. This plan, although approved by shareholders, did not provide a maximum number of shares to be issued under the plan. The Company filed a registration statement during 1991 under the Securities Act of 1933, as amended, which registered 168,750 shares (adjusted for stock splits). As of December 31, 2002, 124,690 shares have been used against this registration leaving 44,060 available for future issuance. This amount is not included in the shares available for issuance in column c above.

ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS

      Information concerning certain transactions is included under the caption "Certain Transactions" of the Proxy Statement for the 2003 Annual Meeting of Shareholders and is incorporated herein by reference.


PART IV

ITEM 14. CONTROLS AND PROCEDURES

      Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.


ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
Pages

(a) (1) Financial Statements and Schedules  
       
    Reports of Independent Auditors 73-74
       
    Consolidated Statements of Earnings for each of the three years in the period ended December 31, 2002 29
       
    Consolidated Balance Sheets at December 31, 2002 and 2001 30
       
    Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2002
31
       
    Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2002 32
       
    Notes to Consolidated Financial Statements 33-72
       
  (2) Financial Statement Schedules  
       
    Consolidated financial statement schedules not filed herein have been omitted either because they are not applicable or the required information is shown in the Notes to Consolidated Financial Statements in this Form 10-K.  
       
(b) (1) In report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2002, the Company reported that it changed its certifying accountant. *
       
  (2) In a report on Form 8-K filed with the Securities and Exchange Commission on August 9, 2002, the Company reported that its Principal Executive Officer and its Principal Financial Officer had filed sworn statements with the Securities and Exchange Commission pursuant to order of the Commission dated June 27, 2002. *


Exhibits   Pages

(3) (a) Certificate of Incorporation of the Company (incorporated by reference
to Form 10, as amended on Form 8-K filed with the Securities and
Exchange Commission on May 19, 1981).
*
       
(3) (b) Certificate of Amendment to the Restated Certificate of Incorporation of
the Company (incorporated by reference to Form 10-K for the year
ended December 31, 1987).
*

*   Incorporated by reference as indicated.

Exhibits   Pages

(3) (c) Certificate of Amendment to the Restated Certificate of Incorporation of the Company (incorporated by reference to Form 10-Q for the quarter ended March 31, 1993). *
       
(3) (d) Amendment to the Restated Certificate of Incorporation of the Company, filed with the State of Delaware, Office of the Secretary of State on May 2, 1996 (incorporated by reference to Form 10-Q filed with the Securities and Exchange Commission on May 14, 1996). *
       
(3) (e) By-laws of the Company as amended June 12, 1997 (incorporated by reference to Form 10-Q filed with the Securities and Exchange Commission on August 13, 1997). *
       
(3) (f) Article II of the By-laws of the Company as amended December 17, 1998 (incorporated by reference to Form S-8 filed with the Securities and Exchange Commission on January 29, 1999). *
       
(3) (g) Certificate of Designation relating to Series A Junior Participating Preferred Stock, filed with the State of Delaware, Office of the Secretary of State on November 12, 1998 (incorporated by reference to Form 10-K filed with the Securities and Exchange Commission on March 19, 1999). *
       
(3) (h) Article II, Section 8 of the By-Laws of the Company as amended March 1, 2001 (incorporated by reference to Form 10-K filed with the Securities and Exchange Commission on March 30, 2001). *
       
(10) (a) Form of Agreement of Transfer entered into between Engelhard Minerals & Chemicals Corporation and the Company, dated May 18, 1981 (incorporated by reference to Form 10, as amended on Form 8 filed with the Securities and Exchange Commission on May 19, 1981). *
       
(10) (b) Rights Agreement, dated as of October 1, 1998 between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on October 29, 1998). *
       
(10) (c) Consulting agreement for Orin R. Smith (incorporated by reference to Form
10-Q, filed with the Securities and Exchange Commission on May 15, 2001).
*
       
(10) (d) Employment agreement for Barry W. Perry, effective August 2, 2001 (incorporated by reference to Form 10-Q, filed with the Securities and Exchange Commission on August 13, 2001). *
       

*   Incorporated by reference as indicated.




Exhibits   Pages

(10) (e) Amendment to Employment Agreement for Barry W. Perry, effective February 13, 2002 (incorporated by reference to Form 10-K, filed with the Securities and Exchange Commission on March 21, 2002). *
       
(10) (f) 2002 Share Performance Incentive Plan for Barry W. Perry, effective May 2, 2002 (incorporated by reference to Form 10-Q, filed with the Securities and Exchange Commission on August 13, 2002). *
       
(10) (g) 2003 Share Performance Incentive Plan for Barry W. Perry, effective January 1, 2003. 89-91
       
(10) (h) Five-Year Credit Agreement, dated as of May 11, 2001 (incorporated by reference to Form 10-K, filed with the Securities and Exchange Commission on March 21, 2002). *
       
(10) (i) Amendment No. 1 to the Five-Year Credit Agreement, dated May 10, 2002. 92-97
       
(10) (j) 364-Day Credit Agreement, dated as of May 10, 2002. 98-147
       
(10) (k) Engelhard Corporation Form of Change in Control Agreement (incorporated by reference to Form 10-Q filed with the Securities and Exchange Commission on August 13, 1998). *
       
(10) (l) Engelhard Corporation Annual Restricted Cash Incentive Compensation Plan, effective as of December 15, 2000 (incorporated by reference to Form 10-K filed with the Securities and Exchange Commission on March 30, 2001). *
       
(10) (m) Engelhard Corporation 2002 Long Term Incentive Plan, effective May 2, 2002 (incorporated by reference to the 2001 Proxy Statement filed with the Securities and Exchange Commission on March 26, 2002). *
       
(10) (n) Engelhard Corporation Stock Option Plan of 1991 - conformed copy includes amendments through March 2002. 148-154
       
(10) (o) Engelhard Corporation Stock Option Plan of 1999 for Certain Key Employees (Non Section 16(b) Officers), effective February 1, 2001 - conformed copy includes amendments through March 2001. 155-159
       
(10) (p) Deferred Compensation Plan for Key Employees of Engelhard Corporation, effective August 1, 1985 - conformed copy includes amendments through October 2001. 160-165
       
(10) (q) Deferred Compensation Plan for Directors of Engelhard Corporation, as restated as of May 7, 1987 - conformed copy includes amendments through December 2002. 166-172

*  Incorporated by reference as indicated.



Exhibits   Pages

(10) (r) Key Employees Stock Bonus Plan of Engelhard Corporation, effective July 1, 1986 - conformed copy includes amendments through March 2002. 173-178
       
(10) (s) Stock Bonus Plan for Non-Employee Directors of Engelhard Corporation, effective July 1, 1986 - conformed copy includes amendments through October 1998. 179-184
       
(10) (t) Engelhard Corporation Directors and Executives Deferred Compensation Plan (1986-1989) - conformed copy includes amendments through December 2001. 185-190
       
(10) (u) Engelhard Corporation Directors and Executives Deferred Compensation Plan (1990-1993) - conformed copy includes amendments through December 2001. 191-196
       
(10) (v) Retirement Plan for Directors of Engelhard Corporation, effective January 1, 1985 - conformed copy includes amendments through April 2000. 197-198
       
(10) (w) Supplemental Retirement Program of Engelhard Corporation as amended and restated, effective January 1, 1989 - conformed copy includes amendments through February 2001. 199-211
       
(10) (x) Supplemental Retirement Trust Agreement, effective April 2002. 212-221
       
(10) (y) Engelhard Corporation Directors Stock Option Plan as amended and restated, effective May 4, 1995 - conformed copy includes amendments through March 2001. 222-226
       
(10) (z) Engelhard Corporation Employee Stock Option Plan as amended and restated, effective May 4, 1995. 227-230
       
(10) (aa) Engelhard Corporation Deferred Stock Plan for Non-Employee Directors - conformed copy includes amendments made through December 2002. 231-237
       
(12)   Computation of the Ratio of Earnings to Fixed Charges. 238
       
(21)   Subsidiaries of the Registrant. 239-240
       
(23)   Consent of Independent Auditors. 241
       
(24)   Powers of Attorney. 242-247
       
(99)   Certification Accompanying Periodic Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 248

*   Incorporated by reference as indicated.





SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Iselin, New Jersey on the 25th day of March 2003.




  Engelhard Corporation
 
  Registrant  



  /s/Barry W. Perry
 
  Barry W. Perry
(Chairman and Chief Executive Officer)
 

       Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature   Title    Date
         
        /s/ Barry W. Perry        
Barry W. Perry
  Chairman and Chief Executive
Officer & Director
(Principal Executive Officer)
  March 25, 2003
         
         
     /s/ Michael A. Sperduto      
Michael A. Sperduto
  Vice President and
Chief Financial Officer
(Principal Financial Officer)
  March 25, 2003
         
         
     /s/ Alan J. Shaw      
Alan J. Shaw
  Controller
(Principal Accounting Officer)
  March 25, 2003












*
  Director   March 5, 2003
Marion H. Antonini        
         
*
  Director   March 5, 2003
James V. Napier        
         
*
  Director   March 5, 2003
Norma T. Pace        
         
*
  Director   March 5, 2003
Henry R. Slack        
         
*
  Director   March 7, 2003
Louis J. Giuliano        
         
*
  Director   March 5, 2003
Douglas G. Watson        
         


* By this signature below, Arthur A. Dornbusch, II has signed this Form 10-K as attorney-in-fact for each person indicated by an asterisk pursuant to duly executed powers of attorney filed with the Securities and Exchange Commission included herein as Exhibit 24.


/s/ Arthur A. Dornbusch, II
      March 25, 2003
Arthur A. Dornbusch, II        


















Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


      I, Barry W. Perry, Chairman and Chief Executive Officer of Engelhard Corporation (the "Company"), certify that:


  1. I have reviewed this annual report on Form 10-K of the Company;

  2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

  3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

  4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)       designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
   
(b)       evaluated the effectiveness of the registrant's disclosure controls and procedures as of the date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
   
(c)       presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  1. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

(a)       all significant deficiencies in the design or operation of internal controls which would adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
   
(b)       any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and




  1. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

       
       
       
       
       
Date: March 25, 2003
                     /s/ Barry W. Perry
                         Barry W. Perry
                         Chairman and Chief
                         Executive Officer
       



































Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


      I, Michael A. Sperduto, Vice President and Chief Financial Officer of Engelhard Corporation (the "Company"), certify that:


  1. I have reviewed this annual report on Form 10-K of the Company;

  2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

  3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

  4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)       designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
   
(b)       evaluated the effectiveness of the registrant's disclosure controls and procedures as of the date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
   
(c)       presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  1. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

(a)       all significant deficiencies in the design or operation of internal controls which would adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
   
(b)       any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and




  1. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

       
       
       
       
       
Date: March 25, 2003
                     /s/ Michael A. Sperduto
                         Michael A. Sperduto
                         Vice President and Chief
                         Financial Officer
       


































EXHIBIT (10)(g)

2003 SHARE PERFORMANCE INCENTIVE PLAN

         1.   Provided the conditions set forth in Section 2 or Section 4 below are met, a cash bonus shall be awarded to Barry W. Perry (the "Employee") on the terms and subject to the conditions set forth herein.

         2.   Except as otherwise set forth in Section 4 below, in order for a bonus award to be made to the Employee hereunder, the following conditions must be satisfied: (a) the average closing price per share of the Company's common stock on the New York Stock Exchange for the period from January 1, 2003 through December 31, 2003 (the "Award Period"), computed by averaging the closing price on each day on which the New York Stock Exchange was open for trading during the Award Period (the "Average Share Price"), must exceed $28; (b) the Return on the Company's common stock for the Award Period must exceed the Return on the S&P All Chemicals Index (except as discussed below, as constituted for purposes of the Company's proxy statement) for the Award Period, and for all purposes of this Plan, (x) Return shall be computed based on share price without regard to dividends, (y) Return on the Company's common stock for the Award Period shall mean (Average Share Price during Award Period less closing price per share of the Company common stock on December 31, 2002) divided by the closing price per share of Company common stock on December 31 2002, and (z) Return on the S&P All Chemicals Index for the Award Period shall mean the average, weighted on the basis of market capitalization on December 31, 2002, of the Return of each company constituting such index, where each such Return is (the average closing share price of the applicable company during the Award Period less the closing price per share of the applicable company on December 31, 2002) divided by the closing price per share of the applicable company on December 31, 2002; and (c) the Employee must be actively employed as the Chairman and Chief Executive Officer of the Company on January 6, 2004. If the composition of the S&P All Chemicals Index changes during the Award Period, the Return on the shares of the constituent companies shall be taken into account for the period during which they are included in the S&P All Chemicals Index with appropriate adjustments to the weighting of such Returns, all as determined reasonably and in good faith by the Company subject to the review of the Compensation Committee of the Company's Board of Directors.

         3.   If the conditions set forth in Section 2 above are met, the amount of the bonus award granted to the Employee shall be computed by first determining the excess of the Return on the Company's common stock for the Award Period over the Return on the S&P All Chemicals Index for the Award Period (the "Excess Total Return Percentage"). The amount of the bonus will then be determined by multiplying the number of shares of issued and outstanding Company common stock on December 31, 2002 by the closing price per share on such date and then multiplying that product by 0.0033 times the Excess Total Return Percentage (stated as a decimal).

         4.   Notwithstanding any provision hereof to the contrary, provided the average closing price per share of the Company's common stock for the last twenty trading days of calendar year 2003 exceeds $26.195 per share, a bonus award shall be granted to the Employee under this 2003 Share Performance Incentive Plan in an amount not less than $750,000. For the avoidance of doubt, any bonus award in the amount of $750,000 granted pursuant to this Section 4 shall not be in addition to any amount granted pursuant to Section 3 above, and it is intended that any award granted under this 2003 Share Performance Incentive Plan shall be the higher of the amount, if any, determined under either Section 3 or Section 4 hereof.

         5.   In the event of the first to occur of (i) a public announcement of an intention by an individual, entity or group (within the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) to engage in a transaction the consummation of which would result in a Change in Control (as defined in clauses (a), (c) or (d) of Section 5(b) of the Company's 1991 Stock Option Plan) or (ii) the occurrence of a Change in Control (as so defined), for purposes of determining the Average Share Price and the Excess Total Return Percentage and the amount of the bonus award, if any, the closing trading price and the fair market value of a share of Company common stock for the date of such public announcement or Change in Control, as the case may be, and each following day shall not exceed the closing trading price per share on the New York Stock Exchange on the trading day immediately preceding such public announcement or Change in Control, as the case may be. Such limitation on value of the Company common stock will continue for purposes hereof until such time as the Board of Directors determines, in good faith, that a Change in Control (as so defined) is unlikely to occur, and the fair market value of Company common stock for each day thereafter shall be the actual closing trading price on the New York Stock Exchange.

         6.   Any bonus award granted hereunder will be credited to an account for the Employee as of January 6, 2004, and it will be increased by an interest factor from the date of grant through the date of payment. The interest rate utilized to calculate such increase shall be set monthly and shall be equal to 120% of the long-term federal rate, compounded monthly (within the meaning of Section 1274(d) of the Internal Revenue Code of 1986, as amended) as in effect for the month for which interest is being computed. Any such award (together with interest on the award) will vest in three equal annual installments, beginning on the first anniversary of the date of grant. The award shall be payable as set forth in Sections 8 and 9 below.

         7.   Any unvested portion of an award (together with interest attributable to such unvested portion) will be forfeited immediately upon the termination of employment of the Employee, except that: (i) if such termination is by reason of disability or retirement at normal, deferred or early retirement age, under any retirement plan maintained by the Company or any of its subsidiaries, or for any other reason specifically approved in advance by the Compensation Committee of the Company's Board of Directors, any unvested portion of an award held by the Employee shall thereupon become vested in full; (ii) if such termination is by action of the Company or a subsidiary other than as provided in (i) above and other than discharge by reason of willful violation of the rules of the Company or instructions of superior(s), the unvested portion of any award shall continue to vest on its regular vesting schedule, notwithstanding such termination of employment; and (iii) in the event of the death of the Employee while employed, any unvested portion of any awards then held by the Employee shall thereupon become vested in full.

         8.   The amount of any bonus award granted hereunder which is (or becomes) vested at the time of termination of employment of the Employee (together with interest accrued thereon) shall be paid to the Employee as soon as practicable following such termination of employment; provided, however, that if the Employee's termination of employment is described in Section 7(ii) above, then the bonus award shall be paid on the date of vesting, if later; provided further, however, that the Employee may elect in writing at least one year prior to termination of his employment to receive payment of all amounts hereunder in up to ten annual installments, beginning upon termination of employment or the first anniversary of termination of employment, as so elected by the Employee (or, if later, the date of vesting). If amounts are payable hereunder in installments, the amount of each installment shall be determined by dividing the unpaid amount credited to the Employee under the Plan at such date (together with interest accrued thereon) by the number of installments remaining to be paid.

         9.   Upon the occurrence of a Change in Control (as defined in the Company's 1991 Stock Option Plan), the unvested portion of an award shall immediately become vested in full, and the entire amount payable hereunder (together with interest accrued thereon) shall be paid in cash to the Employee immediately upon the Change in Control. In the event of a Change in Control the Employee shall be entitled to an additional payment computed as set forth in the last paragraph of Section 6 of the Company's Deferred Compensation Plan for Key Employees.

         10.   In the event of a stock split, stock dividend, combination of shares, recapitalization, reorganization, merger, consolidation, rights offering, acquisition or divestiture by the Company, or any other change in the corporate structure or shares of the Company, the Board of Directors shall make such adjustments, if any, as it deems appropriate in the provisions hereof in order to equitably reflect such change.

         11.    This 2003 Share Performance Incentive Plan shall be an unfunded incentive compensation arrangement. Nothing contained herein, and no action taken pursuant hereto, shall create or be construed to create a trust of any kind. The Employee's right to receive payments hereunder shall not be transferable (other than by will or the laws of descent and distribution) and shall be no greater than the right of an unsecured general creditor of the Company. All amounts payable hereunder shall be paid from the general funds of the Company.

         12.   No award payable hereunder shall be deemed salary or compensation for the purpose of computing benefits under any benefit plan or other arrangement of the Company or its subsidiaries for the benefit of its employees unless the Company shall determine otherwise; provided, however, any award payable hereunder shall be taken into account in computing benefits payable under Section 3 of the Company's Change in Control Agreements.

         13.   This 2003 Share Performance Incentive Plan shall be interpreted, construed and administered in accordance with the laws of the state of New Jersey, without giving effect to principles of conflict of laws thereof.

         14.   The Company shall deduct from any amount payable hereunder the amount of any taxes required to be withheld by any governmental authority.
























EXHIBIT (10)(i)

EXECUTION COPY

AMENDMENT NO. 1 TO THE
FIVE YEAR
CREDIT AGREEMENT

         AMENDMENT NO. 1 TO THE FIVE YEAR CREDIT AGREEMENT, dated as of May 10, 2002 (this "Amendment"), by and among ENGELHARD CORPORATION, a Delaware corporation (the "Borrower"), each of the lenders that is a signatory hereto (individually, a "Bank" and, collectively, the "Banks"), JPMORGAN CHASE BANK (f/k/a The Chase Manhattan Bank), as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"), J.P. MORGAN SECURITIES INC., as lead arranger and book manager for the Banks (the "Arranger"), BANK OF TOKYO-MITSUBISHI TRUST COMPANY and WACHOVIA BANK, N.A., as documentation agents for the Banks (the "Documentation Agents"), COMMERZBANK AG, as syndication agent for the Banks (the "Syndication Agent").

W I T N E S S E T H:

         WHEREAS:

         A.   The Borrower, the Banks, the Arranger, the Documentation Agents, the Syndication Agent and the Administrative Agent are parties to the Five Year Credit Agreement, dated as of May 11, 2001, as amended hereby (as it may be further amended, modified and supplemented from time to time, the "Credit Agreement"); and

         B.   The parties hereto wish to amend the Credit Agreement to make certain changes to the conditions precedent to the making of the Loans to the Borrower; and

         C.   Each initially capitalized term used but not otherwise defined herein shall have the meaning ascribed thereto in the Credit Agreement;

         NOW, THEREFORE, the parties hereto hereby agree as follows:

         Section 1.  Amendment to Credit Agreement.

         1.1   This Amendment shall be deemed to be an amendment to the Credit Agreement and shall not be construed in any way as a replacement or substitution therefor. All of the terms and conditions of, and terms defined in, this Amendment are hereby incorporated by reference into the Credit Agreement as if such terms and provisions were set forth in full therein.

         1.2   Paragraph (b) of Section 6.02 "Initial and Subsequent Loans" is hereby amended and restated in its entirety to read as follows:

         (b)   the representations and warranties made by the Company in Section 7 hereof (other than Section 7.07 hereof) shall be true and complete on and as of the date of the making of such Loan, or the date of issuance, amendment, renewal or extension of such Letters of Credit, as applicable, with the same force and effect as if made on and as of such date (or, if any such representation and warranty is expressly stated to have been made as of a specific date, as of such specific date) provided that, notwithstanding the foregoing, the representation and warranty made by the Company in Section 7.05 hereof shall not be required to be true and complete on and as of the making of any Loan.

         1.3   Paragraph (b) of Section 11.02 "Notices" is hereby amended and restated in its entirety to read as follows:

         (b)   if to the Administrative Agent, to JPMorgan Chase Bank, Global Chemicals Group, 270 Park Avenue, New York, New York 10017, Attention: Lawrence Palumbo (Telecopy No. (212) 270-7939), with a copy to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, New York, New York 10081 Attention: Lisa Pucciarelli (Telecopy No. (212) 552-5777);

         1.4   The Credit Agreement, the Notes and all agreements, instruments and documents executed and delivered in connection with any of the foregoing, shall each be deemed to be amended hereby to the extent necessary, if any, to give effect to the provisions of this Amendment. Except as so amended hereby, the Credit Agreement and the Notes shall remain in full force and effect in accordance with their respective terms.

         Section 2.  Representations and Warranties of the Borrower.

         The Borrower hereby represents and warrants to the Administrative Agent that:

         2.1   After giving effect to the amendment of the Credit Agreement pursuant to this Amendment, and on the date hereof (i) each of the representations and warranties set forth in Section 7 of the Credit Agreement is, and will be, true and correct in all respects as if made on the date hereof and (ii) there exists and will exist no Default or Event of Default under the Credit Agreement after giving effect to this Amendment.

         2.2  The Borrower has full corporate power and authority to execute and deliver this Amendment and to perform the obligations on its part to be performed thereunder and under the Credit Agreement as amended hereby.

         Section 3.  Conditions Precedent to Amendments.

         The effectiveness of the amendments contained in Section 1 of this Amendment, are each and all subject to the satisfaction, in form and substance satisfactory to the Administrative Agent, of each of the following conditions precedent:

         3.1  The Borrower and the Majority Banks shall have duly executed and delivered this Amendment.

         Section 4.  Reference to and Effect Upon the Credit Agreement and other Loan Documents.

         4.1   Except as specifically amended in Section 1 above, the Credit Agreement and the Notes shall remain in full force and effect and each is hereby ratified and confirmed.

         4.2   The execution, delivery and effect of this Amendment shall be limited precisely as written and shall not be deemed to (i) be a consent to any waiver of any term or condition or to any amendment or modification of any term or condition of the Credit Agreement or the Notes, except, upon the effectiveness, if any, of this Amendment, as specifically amended in Section 1 above, or (ii) prejudice any right, power or remedy which the Administrative Agent now has or may have in the future under or in connection with the Credit Agreement or the Notes. Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or any other word or words of similar import shall mean and be a reference to the Credit Agreement as amended hereby, and each reference in the Notes to the Credit Agreement or any word or words of similar import shall mean and be a reference to the Credit Agreement as amended hereby.

         Section 5.  Miscellaneous.

         5.1   This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed an original, but all such counterparts shall constitute one and the same instrument.

         5.2   The Borrower shall pay on demand all reasonable fees, costs and expenses incurred by the Administrative Agent in connection with the preparation, execution and delivery of this Amendment (including, without limitation, all reasonable attorneys' fees).

         5.3  GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) OF THE STATE OF NEW YORK.


[SIGNATURE PAGE FOLLOWS]
































         IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on the date first above written.


  ENGELHARD CORPORATION

By: /s/ Peter R. Rapin
Title: Treasurer

JPMORGAN CHASE BANK
as Administrative Agent

By: /s/ Lawrence Palumbo, Jr.
Title: Vice President

J.P. MORGAN SECURITIES INC.,
as Lead Arranger and Book Manager

By: /s/ Jackson Dunckel
Title: Vice President

BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
as Documentation Agent

By: /s/ R.F. Kay
Title: Vice President

WACHOVIA BANK, NATIONAL ASSOCIATION,
as Documentation Agent

By: /s/ Nathan R. Rantala
Title: Vice President

COMMERZBANK, AG-NEW YORK AND
GRAND CAYMAN BRANCHES,
as Syndication Agent

By: /s/ Robert Donohue
Title: Senior Vice President;

By: /s/ Peter Doyle
Title: Vice President

BANK OF AMERICA, N.A.
as Managing Agent

By: /s/ Wendy J. Gorman
Title: Principal



CITIBANK, N.A.,
as Managing Agent

By: /s/ Diane Pockaj
Title: Director

MELLON BANK, N.A.,
as Managing Agent

By: /s/ William M. Feathers
Title: Vice President

THE BANK OF NEW YORK,
as a Bank

By: /s/ Ernest Fung
Title: Vice President

THE BANK OF NOVA SCOTIA,
as a Bank

By: /s/ Kevin Clark
Title: Unit Head

FLEET NATIONAL BANK,
as a Bank

By: /s/ Michael J. Lessig for WRT
Title: Executive Vice President

BANK ONE, N.A. (Main Office-Chicago),
as a Bank

By: /s/ Mahua Thakurta
Title: Associate Director

NORDDEUTSCHE LANDESBANK,
as a Bank

By: /s/ Raimund Ferley
Title: Senior Vice President

By: /s/ Josef Haas
Title: Vice President

ING BANK N.V.,
as a Bank

By: /s/ Signature illegible
Title: 

By: /s/Michael Fenlon
Title: Vice President

ALLFIRST BANK,
as a Bank

By: /s/ Corey Burgess
Title: Vice President

BANCA POPOLARE DI MILANO,
as a Bank

By:/s/ Robert P. Desantes
Title: Head of Corporate Banking

By: /s/ Giorgio Cuccolo
Title: Executive Vice President & General Manager

SUMITOMO MITSUI BANKING CORPORATION,
as a Bank

By: /s/ Edward D. Henderson
Title: Senior Vice President

WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH,
as a Bank

By: /s/ Andreas Schroter
Title: Director

By: /s/ Walter T. Duffy III
Title: Associate Director

INTESABCI, NEW YORK BRANCH,
as a Bank

By: /s/ Charles Dougherty
Title: Vice President


By: /s/ F. Maffei
Title: Vice President

SUNTRUST BANK,
as a Bank

By: /s/ Karen C. Copeland
Title: Vice President



EXHIBIT (10)(j)







*******************************************************

ENGELHARD CORPORATION

                              

364-DAY AMENDED AND RESTATED CREDIT AGREEMENT


Dated as of May 10, 2002

                              

JPMORGAN CHASE BANK,

as Administrative Agent

J.P. MORGAN SECURITIES INC.,

as Lead Arranger and Book Manager

BANK OF TOKYO-MITSUBISHI TRUST COMPANY and
WACHOVIA BANK, N.A.,

as Documentation Agents

COMMERZBANK AG,

as Syndication Agent

and Each of the Banks Listed on the Signature Pages Hereof

*******************************************************










           AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 10, 2002, between ENGELHARD CORPORATION, a corporation duly organized and validly existing under the laws of the State of Delaware (the "Company"); each of the lenders that is a signatory hereto identified under the caption "BANKS" on the signature pages hereto and each lender that becomes a "Bank" after the date hereof pursuant to Section 11.06(b) hereof (individually, a "Bank" and, collectively, the "Banks"), JPMORGAN CHASE BANK, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Administrative Agent"), J.P. MORGAN SECURITIES INC., as lead arranger and book manager for the Banks (in such capacity, together with its successors in such capacity, the "Arranger"), BANK OF TOKYO-MITSUBISHI TRUST COMPANY and WACHOVIA BANK, N.A., as documentation agents for the Banks (in such capacity, together with their successors in such capacity, the "Documentation Agents"), COMMERZBANK AG, as syndication agent for the Banks (in such capacity, together with its successors in such capacity, the "Syndication Agent").

           On May 11, 2001, the Company, certain Banks listed on the signature pages thereof, the Administrative Agent, the Arranger, the Documentation Agents and the Syndication Agent entered into a Credit Agreement (the "Credit Agreement"). As of the date hereof the parties wish to amend and restate the Credit Agreement, to provide for the extension by 364 days of the maturity thereof, and to make other amendments and modifications more fully described herein.

           The Company has requested that the Banks make loans to it in an aggregate principal amount not exceeding $400,000,000 (as the same may be reduced pursuant to Section 2.04(b) hereof) at any one time outstanding by way of Syndicated Loans (which may be Eurodollar Loans or Base Rate Loans) and/or pursuant to a competitive bid option providing for Competitive Bid Loans (which may be LIBOR Bid Loans or Absolute Rate Loans) and the Banks are prepared to make such loans upon and subject to the terms and conditions hereof. Accordingly, the parties hereto agree as follows:

Section 1.  Definitions and Accounting Matters.

        1.01
  Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa):

           "Absolute Rate" shall have the meaning assigned to such term in Section 2.03(c)(ii)(D) hereof.

           "Absolute Rate Auction" shall mean a solicitation of Competitive Bid Quotes setting forth Absolute Rates pursuant to Section 2.03 hereof.

           "Absolute Rate Loans" shall mean Competitive Bid Loans, the interest rates on which are determined on the basis of Absolute Rates pursuant to an Absolute Rate Auction.

           "Administrative Questionnaire" shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent.

           "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

           "Aggregate Permitted Amount" shall mean $50,000,000.

           "Applicable Facility Fee Rate", "Applicable Margin", "Applicable Utilization Fee Rate" and "Applicable Margin During Term-Out" shall mean, during any period when any of the Rating Groups specified below is in effect, the percentage set forth below opposite the reference to such fee or to the relevant Type of Syndicated Loan: