10-Q 1 k78986e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 Commission file number 0-784 --------------- ----- DETREX CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-0480840 -------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 24901 Northwestern Hwy., Ste. 500, Southfield, MI 48075 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (248) 358-5800 ------------------------ Securities registered pursuant to section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Capital Stock, $2 Par Value ---------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of August 14, 2003 1,583,414 shares of the registrant's stock were outstanding. 1 DETREX CORPORATION INDEX

2 DETREX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS

SEE NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS 3 DETREX CORPORATION CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS

SEE NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS 4 DETREX CORPORATION CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS

SEE NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS 5 DETREX CORPORATION NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the results of operations for the periods presented. Certain amounts for 2002 have been reclassified to conform with 2003 classifications. The information furnished for the three and six month periods may not be indicative of results to be expected for the full year. 2. Effective September 30, 2000, the Company completed the sale of the assets, excluding real estate, of its paint subsidiary to Red Spot Paint & Varnish Co. The real property related to this discontinued segment is currently held for sale. 3. Under the terms of a two year Royalty Agreement between Detrex and Red Spot, Red Spot paid Detrex royalties of $1,091,590 in February, 2003 relating to incremental sales of certain products in 2002. For the first half of 2002, the Company had recorded $496,702 in royalty income; $327,838 was recorded in the second quarter. The Royalty Agreement expired at the end of 2002, and no royalty income was earned in 2003. 4. In 2001, the Company announced that it was exiting its Parts Cleaning Technologies segment ("PCT") and in accordance with APB Opinion 30, treated this segment as a discontinued operation for all periods presented. At December 31, 2002, previously accrued holding costs of $96,000 were reversed for certain PCT properties that were considered held and used under the transition provisions of the newly adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). During the first quarter of 2003, after further evaluation, it was determined that FAS 144 did not apply in this case to operations and assets properly recorded as discontinued operations under APB 30 prior to the adoption of FAS 144. It was concluded that since the properties were assets of the discontinued segment, the holding costs associated with the properties should be accrued pursuant to the provisions of APB 30. Accordingly, in the 2003 first quarter, the Company recorded a pre-tax charge of $286,000 ($188,760 net of tax) in discontinued operations to record its current estimate of the costs to hold the properties through the completion of any required environmental remediation. Additionally, the net book value of the properties totaling approximately $700,000 was reclassified to other non-current assets. On January 17, 2002 the Company consummated the sale of the Equipment Division (a business within the PCT segment) to Farr Manufacturing, which is located in Parkersburg, West Virginia. Under the terms of the transaction, the Company received $1.2 million in January 2002 and expected to receive additional monies from Farr in 2002, after final sales price adjustments. During 2002, a dispute arose between Farr and the Company regarding final sales price adjustments. The dispute was settled in August 2003; the Company will receive a total of $200,000 over a period of ten months. The settlement will not have a material effect on the overall financial position of the Company or the consolidated statement of operations, and will be accounted for in the third quarter of 2003. Effective June 1, 2002 the Company sold certain assets, including inventories, of its solvent distribution and waste business ("Solvents Division") to the former president of that division, for a total of $845,000. The Company received $300,000 at closing, and a promissory note for the remainder; approximately $380,000 was collected on the note in the second half of 2002, leaving a balance of $165,000 at December 31, 2002. This amount was received in the first quarter of 2003. In November, 2002 the Company entered into an agreement to sell property located in California, formerly a Solvents Division warehouse and office, for a total of $625,000. At December 31, 2002 the property was classified as property held for sale, since this transaction did not close until January 2003. After realtor 6 DETREX CORPORATION commissions and other transaction costs, the Company received net proceeds of $583,000, and recorded an after-tax gain of $291,170 through discontinued operations in the first quarter of 2003. 5. The Company maintains reserves for anticipated expenditures over the next several years in connection with remedial investigations, feasibility studies, remedial design, and remediation relating to the clean up of environmental contamination at several sites, including properties owned by the Company. Some of these studies have been completed; others are ongoing. In some cases, the methods of remediation remain to be agreed upon. At one such site, the Company has been a potentially responsible party for sharing the costs in a proceeding to clean up contaminated sediments in the Fields Brook watershed in Ashtabula, Ohio. The Fields Brook clean up was completed in the fourth quarter of 2002. During the final stages of the project, unanticipated additional contamination was discovered, making it necessary to perform additional remediation, which drove costs significantly over previous estimates. The Company's share of the increased costs totaled $860,000. Primarily as a result of this occurrence, and the reevaluation of other amounts within the environmental reserve, a pre-tax charge of $725,000 was recorded in the fourth quarter of 2002, and the reserve was increased by a like amount. In addition, the company added $250,000 to its environmental reserves in 2002 to cover the cost of operating and maintaining extraction test wells for source control installed on its Ashtabula, Ohio property to accomplish remediation of the site. These test wells have been operated for approximately nine months. Initial design and operating problems are currently being addressed. The system will continue to be modified and evaluated until the end of the year, and if deemed successful, could result in the design of a larger extraction system. At that time it may be necessary to add provisions to the reserve for installation of additional extraction wells and for operation and maintenance of those wells in the future. If the test wells are not considered successful, the Company intends to negotiate with the EPA for an alternative solution. It is not yet possible to estimate the cost of a larger extraction system, or assess the probability that one will be constructed. The Company expects to continue to incur professional fees, expenses and capital expenditures in connection with its environmental compliance efforts. In addition to the above, there are several other claims and lawsuits pending against the Company and its subsidiaries. In the first quarter of 2003, the Company settled litigation related to remediation at a drum recycler which the Company had utilized in the late 1980's, and signed an agreement to pay $1.2 million in four annual installments of $300,000. The first installment was paid in February 2003, and the next installment is scheduled to be paid in January, 2004. The remaining obligation of $900,000, which accrues interest at 1% over the prime rate, was reclassified from environmental reserves to debt at March 31, 2003; $300,000 is classified as current, $600,000 as non-current. The Company performs regular reviews of its reserves for environmental matters. The amounts of the reserves at December 31, 2002 were $7.6 million. After reclassifying the remediation litigation settlement note to long term debt, and spending approximately $200,000 for environmental matters in the first half of 2003, the environmental reserves totaled $6.2 million at June 30, 2003. In 2003, after the reclassification referred to above, the Company expects to spend approximately $500,000-750,000 for environmental matters and anticipates spending between $1-2 million for these matters in each of the next three to four years. The amount of liability to the Company with respect to costs of remediation of contamination of the Fields Brook watershed and of other sites, and the amount of liability with respect to several other claims and lawsuits against the Company, was based on available data. The Company has established its reserves in accordance with its interpretation of the principles outlined in Statement of Financial Accounting Standards No. 5 and Securities and Exchange Commission Staff Accounting Bulletin No. 92. In the event that any additional accruals should be required in the future with respect to such matters, the amounts of such additional accruals could have a material impact on the results of operations to be reported for a specific accounting period and could have a material impact on the Company's consolidated financial position. 7 DETREX CORPORATION 6. The Company has two operating segments that meet the quantitative thresholds of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information": o Harvel Plastics -- manufacturer of high quality PVC and CPVC pipe and custom extrusions o Elco Corporation -- manufacturer of high performance specialty chemicals including lubricant additives, fine chemicals, and hydrochloric acid See Note 4 regarding the Parts Cleaning Technologies exit. Data for the three and six month periods ended June 30, 2003 and 2002 is as follows:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL INFORMATION Results of Operations Detrex Corporation and its consolidated subsidiaries ("the Company") incurred a net loss from continuing operations of $39,760 during the second quarter of 2003, compared to net income from continuing operations of $372,608 for the second quarter of 2002. Net sales for the second quarter of 2003 were $15,403,895, a decrease of 7.5% compared to sales of $16,650,167 in the second quarter of 2002. For the first six months of 2003, revenues were $30,392,645, a decrease of $927,301, or 3.0%, compared to the same period in 2002. The Company reported a net loss from continuing operations of $155,351 in the first six months of 2003, compared to net income from continuing operations of $555,285 for the same period in 2002. Results for both the second quarter of 2002 and the first six months of 2002 were significantly enhanced by royalty income (pre-tax) of $327,838 and $496,702, respectively (see Note 3). The royalty agreement, which related to a business sold by the Company in 2000, expired at the end of 2002; therefore, no further royalties will be earned thereunder in 2003. 8 DETREX CORPORATION At December 31, 2002, after advice from, and in consultation with, its independent auditors, the Company reversed previously accrued holding costs of $96,000 for certain PCT properties that were considered held and used under newly adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets""("FAS 144"). During the first quarter of 2003, after further evaluation, it was determined that FAS 144 did not apply in this case to operations and assets properly recorded as discontinued operations under APB 30 prior to the adoption of FAS 144 and it was concluded that since the properties were assets of the discontinued segment, the holding costs associated with the properties should be accrued pursuant to the provisions of APB 30. Accordingly, the Company recorded a pre-tax charge of $286,000 ($188,760 after-tax) in discontinued operations to record its current estimate of the costs to hold the properties through any required environmental remediation . Additionally, net book value of the properties totalling approximately $712,000 was reclassified to other non-current assets. Also in the first quarter of 2003, the Company sold property located in California, formerly a Solvent division warehouse and office (see Note 4), and recognized a net after-tax gain of $291,170 in discontinued operations. There were no charges to discontinued operations in the second quarter of 2003; the overall net loss for the quarter was $39,760. For the year to date 2003, the net loss from continuing operations of $155,351 was reduced by the net gain of $102,410 from discontinued operations in the first quarter, resulting in an overall net loss of $52,941. Summarized below is selected operating data from continuing operations for the current fiscal period and the comparable data for the same period last year (in thousands):

Sales for the second quarter of 2003 decreased by approximately $1.2 million, or 7.5%, compared to the same period in 2002, due to decreases at each of the Company's business units. Revenues at Harvel Plastics, Inc. ("Harvel") declined by $897,000, or 7.8%, when compared to the same quarter in 2002, as conditions remained extremely weak in our markets, commercial and industrial construction. Revenue at The Elco Corporation ("Elco") declined in the second quarter of 2003 by $337,000, or 6.6%, compared to the same period in 2002, due primarily to decreased hydrochloric acid sales to semiconductor markets. For the year to date 2003, overall revenues have declined by $927,000, or 3.0%, compared to the first six months of 2002, primarily due to a $823,000 decrease at Elco. The gross margin of the Company decreased by approximately $440,000 in the second quarter of 2003, $498,000 for the year to date, compared to the same periods a year ago, due primarily to the decrease in revenue at Elco and, to a lesser extent, Harvel. Company margins expressed as a percentage of sales decreased from 24.1% in the second quarter of 2002 to 23.2% in the second quarter of 2003, and from 24.4% in the first half of 2002 to 23.5% in the first half of 2003, the result of lower volume and increased raw material costs at both Harvel and Elco, and an adverse shift in product mix at Elco. 9 DETREX CORPORATION Selling and administrative expenses decreased by approximately $92,000 in the second quarter of 2003 compared to the second quarter in 2002. The 2002 second quarter included $90,000 in nonrecurring charges for bad debt and legal fees at Elco. Cost containment actions initiated across the Company early in 2003 offset an increase in pension expense of $252,000 in the second quarter, most of which was recognized at the corporate level. For the first half of 2003, selling and administrative expense have increased by $101,000 compared to the same period a year earlier, entirely due to the increase of $579,000 in pension expense. Decreases in selling expenses, performance based variable compensation, and other discretionary expenditures have somewhat mitigated the impact of the increased pension expense. The provision for depreciation and amortization in the second quarter of 2003 is approximately $63,000 lower than that recognized in the second quarter of 2002, due in part to lower levels of capital expenditures in the first half of 2003 compared to prior years. Interest expense decreased in the second quarter of 2003 compared to the same quarter a year ago due to lower interest rates on the revolving credit facility, which is based on the prime rate, lower average outstanding balances on the revolver and a $600,000 principal payment of the Industrial Development bonds in January 2003, offset somewhat by interest accrued on the note payable for the settlement of the barrel and drum recycler litigation (See Note 5). For both the three and six months ended June 30, 2003, the provision for income taxes is the result of state and local income tax expense at the profitable operating units, partially offset by the federal tax credits at the 34% statutory rate due to the overall pre-tax operating loss from continuing operations. For the three and six month periods ended June 30, 2002, the provision for income taxes was approximately 40%, comprised of 6% for state and local income tax expense and the statutory 34% federal rate. Results of Operations -- Segment Discussion Harvel's sales declined by $897,000, or 7.8%, in the second quarter of 2003, compared to the second quarter of 2002. For the year to date 2003, revenues are approximately the same, compared to the same period in the prior year. The revenue decline in the second quarter of 2003 was due to a 13.7% decrease in pounds of pipe shipped, due to the continuing weak demand conditions in the industrial and commercial markets we serve. Partially offsetting the volume decrease was a 6.9% increase in selling price per pound, primarily due to a change in product mix and price increases instituted where possible to offset increases in resin costs, a primary raw material. Gross margins declined by $159,000 in the second quarter of 2003, compared to the second quarter of 2002, primarily due to the volume decrease for the period. Expressed as a percentage of sales, gross margins decreased from 15.2% in the second quarter of 2002 to 15.0% in the second quarter of 2003, as manufacturing inefficiencies caused by lower volumes more than offset a favorable shift in product mix. Although resin prices stabilized in the second quarter and are forecast to remain at current levels through the next quarter, margins will continue to remain under pressure until the overall economic conditions improve in Harvel's industrial and commercial markets. For the 2003 year to date, gross margins were 15.3%, compared to 14.8% in the comparable period a year ago. Selling, general and administrative expenses decreased by $30,000 in the second quarter compared to the second quarter of 2002, as lower selling expenses, including commissions and advertising, and tight controls over discretionary expenditures more than offset an increase of $54,000 in pension expense in the quarter. For the 2003 year to date, the lower selling and advertising expenses have been offset by a $114,000 increase in pension expense, resulting in a year over year increase of $35,000 in operating expenses. 10 DETREX CORPORATION Revenues at Elco declined $337,000, or 6.6%, in the second quarter of 2003, compared to the same period in 2002. This decline was caused primarily by continuing weakness in its hydrochloric acid markets, where we experienced a revenue decline of $277,000 during the comparable period. Revenues for the domestic lubricant additives product line in the second quarter of 2003 were approximately equal to those in the same quarter of 2002, while export additive sales declined by $60,000. Revenues declined $823,000 for the 2003 year to date, compared to the same period in 2002, due almost entirely to a $726,000 decline in hydrochloric acid sales. Sales for the hydrochloric acid product line are dependent on general economic activity including the semiconductor industry; business conditions in this market are weak. Domestic additive sales have declined $287,000 and export additive sales have increased $190,000 for the same comparative period. Gross margin declined $236,000 in the second quarter of 2003, compared to the same period in 2002, and for the 2003 year to date, declined by $594,000, compared to the first half of 2002. Both of these decreases are primarily attributable to the decrease in revenue. To a lesser extent, a shift in product mix and raw material cost pressure resulted in a decline in gross margins, expressed as a percentage of sales, from 30.7% in the second quarter of 2002, to 27.9% in the second quarter of 2003. Similarly, for the 2003 year to date, gross margin percentage declined to 27.0%, from 30.6% in 2002. Selling, general and administrative expenses declined by $187,000 in the second quarter of 2003, compared to the second quarter of 2002. The decline is due primarily to lower bad debt expense, continued tight controls over discretionary expenses, and reductions in employee related costs, including performance based variable compensation. For the 2003 year to date, operating expenses declined by $261,000 compared to the same period in 2002, due primarily to the aforementioned reasons, offset somewhat by increases in pension expense. Liquidity, Financial Condition, and Capital Resources The Company utilized internally generated funds, the receipt of $1.1 million in royalty payments (see Note 3) and $583,000 from the sale of the Los Angeles PCT property (see Note 4) and increased borrowings of $101,000 under its revolving credit facility to finance its overall operations, $900,000 debt principal payments and approximately $670,000 in capital expenditures in the first half of 2003. Inventory balances increased by nearly $1.8 million during the first half of 2003, as both Harvel and Elco replenished stocks which were driven lower than normal due to sales levels at year-end 2002 which were higher than anticipated. Current inventory levels approximate those maintained during 2002. The decline of $625,000 in accounts receivable during the first half of 2003 was due to the payment of the $1.1 million Red Spot royalty, offset in part by increases at Harvel of approximately $650,000 due to higher sales levels in the second quarter compared to the fourth quarter of 2002. Accounts payable increased by $284,000, primarily as the result of an increase of $1.2 million at Harvel, due to its increased purchases of inventory and higher activity levels than at year end 2002; offsetting this increase were payments of nearly $900,000 for environmental liabilities which were included in accounts payable at December 31, 2002. Working capital was $497,000 at June 30, 2003, compared to $16,000 at December 31, 2002. The increase in other assets is due to a reclassification of the net book value of excess properties related to the PCT exit out of property, plant and equipment in the first quarter of 2003 (see Note 4). The obligation of $1.2 million resulting from the settlement of litigation related to environmental remediation at a drum and barrel recycler which the Company had formerly utilized (see Note 5) was reclassified from environmental reserves to debt in the first quarter of 2003. Debt payments of $900,000 were made during the first quarter due to the $600,000 principal payment on the Industrial Development Bonds in January, 2003, and the initial $300,000 installment on the note related to the aforementioned remediation litigation settlement, paid in February 2003. The remaining obligation of $900,000 on this note was classified as follows: $300,000 current and $600,000 non-current. The Company performs regular reviews of its reserves for environmental matters. The amounts of the reserves at December 31, 2002 were $7.6 million. After reclassifying the remediation litigation settlement note to long term debt, and spending approximately $200,000 for environmental matters in the first half of 2003, the environmental reserves totaled $6.2 million at June 30, 2003. In 2003, after the reclassification referred to above, the Company expects to spend approximately $500,000-750,000 for environmental matters and anticipates spending between $1-2 million for these matters in each of the next three to four years. 11 DETREX CORPORATION The Company was not in compliance with the net worth covenant of its Credit Agreement ("the Agreement") with Comerica Bank ("Comerica") at December 31, 2002 because of reductions to shareholders' equity resulting from the recognition of additional minimum pension liability, due to increases in the underfunded position of the Company's pension plans. Comerica granted a waiver of the default at December 31, 2002. The Company was again in default of this covenant at March 31, 2003, and was also in default of its cash coverage covenants. Comerica again granted waivers of the defaults at March 31, 2003. An amendment to the Agreement was signed, effective March 31, 2003 extending the date of the Agreement to May 1, 2004, and adjusting both the net worth and the cash coverage covenants effective with the second quarter of 2003. The Company was not in compliance with the net worth covenant at the end of the second quarter of 2003, due in large part to the charge taken at the end of the first quarter relating to the PCT exit reserve. Comerica granted a waiver of the default, and an amendment to the Agreement adjusting the net worth covenant for future periods was signed on August 11, 2003. Outlook The difficult economic conditions the Company experienced in 2001 and 2002 have continued through the first half of 2003. Results for the first quarter gave rise to cautious optimism for the remainder of the year; however, operating results in the second quarter have clearly shown that the forecast improvement in the domestic economy has not yet materialized. In spite of the continued difficult operating environment, the management of the Company believes that cash generated by the operating business units, in combination with cash proceeds from sales of excess properties, and increased borrowings under its revolving credit facility, will be sufficient to fund environmental requirements as well as provide for capital expenditures, pension funding and other operating needs. However, economic uncertainties due to the continued weakness in both the domestic and international economies in which we conduct business and geopolitical issues around the world may have an impact on the Company's ability to achieve its operating goals. The Company has been, and will continue to be, closely monitoring its cash and operating situation, and will continue to adjust its projected outlays on capital projects, control other discretionary spending, and to the extent possible, environmental issues, as the situation demands. Risks and Uncertainties The Company has utilized the best available information to estimate its liability with respect to environmental issues. Cost estimates are reviewed periodically to assess changed conditions, and adjustments to recorded amounts are made if the changed conditions have a significant effect on cost estimates. The Company recorded a $5.7 million charge to its environmental reserves in 2001. Of this amount, $3.7 million was recorded as part of the PCT exit costs for estimated closure costs and remediation of certain properties, and $2.0 million related to continuing operations. An additional charge of $975,000 was recorded in the fourth quarter of 2002 for Fields Brook, operation of the Ashtabula source control test wells, and other matters. These estimates were based on input from internal company sources and third party reviews of estimated costs for characterization, closure, remediation, and monitoring for each of the sites, and are believed to be sufficient. However, such estimates for remediation, as well as other environmental factors, could change significantly in future periods to reflect new laws, regulations or regulatory approaches, advances in remediation technologies, changes in remediation approaches, additional sites requiring remediation, or the discovery of additional contamination. It is not possible to determine whether additional loss, due to such changed circumstances, will occur or to reasonably estimate the amount or range of any potential additional loss. 12 DETREX CORPORATION CRITICAL ACCOUNTING POLICIES The management of the Company has evaluated the accounting policies used in the preparation of the accompanying financial statements and related notes and believes those policies to be reasonable and appropriate. In applying accounting principles in accordance with generally accepted accounting standards, we are required to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the management of the Company must make estimates, which require the exercise of judgment. Actual results could differ from these estimates, and any such differences may be material to the financial statements. We consider an accounting estimate to be critical if: 1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and 2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. The management of the Company has discussed the development and selection of the following critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the foregoing disclosure. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. Environmental Reserves The Company determines the cost of environmental remediation of its facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technology. Management meets regularly to review its environmental matters, and makes use of both internal and third party data to provide a basis for the estimates recorded in the financial statements. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Company had a total of $7.6 million accrued for environmental obligations at December 31, 2002 and $6.2 million accrued for these obligations at June 30, 2003. This is the Company's best estimate of the costs with respect to environmental matters. There is a possibility that the environmental reserves may need to be increased in the next 6-24 months, to provide for a larger extraction system for the Ashtabula source control, if the pilot test well program proves successful. If the test wells are not not considered successful, the Company intends to negotiate with the EPA for an alternative solution. At this time, the Company is unable to assess the cost of a larger extraction system, or assess the probability that one will be constructed. Based on present knowledge, management does not believe any other material changes are reasonably possible in the near term (18-24 months). However, it must be pointed out that the Company has added approximately $3 million to the environmental reserves for unanticipated costs in the past two years. For further discussion, see Note 5 to the Consolidated Financial Statements and the Liquidity section of the Management's Discussion and Analysis of Financial Condition. 13 DETREX CORPORATION Deferred Tax Assets The Company currently has significant net deferred tax assets resulting from net operating losses and other deductible temporary differences, which are available to reduce taxable income in future periods. The Company recorded a valuation allowance of $500,000 in the fourth quarter of 2002, charged directly to the provision for income taxes. The valuation allowance was calculated in accordance with the provisions of FAS 109, "Accounting for Income Taxes", which places heavier emphasis on a company's cumulative operating results for the current and preceding years, and less emphasis on projected results. Although management believes that our results for the previous two years were heavily affected by a deliberate and planned PCT exit strategy, the cumulative losses in those periods represented negative evidence sufficient to require a valuation allowance under the provisions of FAS 109. The amount of the deferred tax assets determined to be more likely than not realizable was calculated based on the tax effect of future taxable earnings approximating average historical performance and, to a lesser extent, a forecasted component. Additionally, certain judgments were made regarding the availability of tax planning strategies. The range for the net unrealizable deferred tax asset value was estimated to be $0 to $2.3 million under different uncertainty assumptions. The amount of the deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or in future income. If the Company determines that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to income in the period such determination was made. Pensions and Other Postretirement Benefits (Retiree Medical Care) The amounts recognized in the financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions which include the following: expected return on plan assets, discount rates at which the liabilities could be settled, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually. In accordance with generally accepted accounting principles, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, will affect expense recognized and obligations recorded in future periods. The expected long term rate of return on assets is developed with input from the Company's actuarial firm. The Company's historical experience with the pension fund asset performance and comparisons to expected returns of other companies is also considered. The long term rate of return assumption used for determining net periodic pension expense for 2001 and 2002 was 8.5%. The Company bases the determination of pension expense or income on a market related valuation of plan assets, which reduces year-to-year volatility. This market related valuation recognizes investment gains or losses over a five year period from the year in which they occur. Investment gains or losses represent the difference between the expected return calculated using the market related value of plan assets, and the actual return based on the market value of plan assets. Since the market related value of plan assets recognizes gains or losses over a five year period, the future value of plan assets will be affected when previously deferred gains or losses are recognized. These gains or losses will affect future pension income when they are recognized. The discount rate used for determining future pension obligations of the pension plans is based on rates at year end on long term corporate bonds receiving ratings of AA or better by a recognized rating agency. These rates changed by approximately 50 basis points year-over-year, resulting in the change in discount rate from 7.25% at December 31, 2001, to 6.75% at December 31, 2002. The Company left its assumption for the long term rate of increases in future compensation levels unchanged at 4 percent. Health care cost trend assumptions underlying the Company's retiree health care plan are developed based on historical cost data, actual recent experience, the near-term outlook, and an assessment of likely long term trends. 14 DETREX CORPORATION The Company recorded approximately $327,000 in pension expense in the first quarter of 2003, and an additional $300,000 was recorded in the second quarter of 2003 based on the results of the actuarial valuation performed in the second quarter. The Company will be recognizing pension expense of approximately $1.25 million in 2003. Minimum cash funding requirements for the pension plans in 2003 will be approximately $300,000; in 2004, this amount rises to an estimated $500,000. Changes in interest rates and the market value of securities held by the pension plans during 2003 could materially affect the underfunded position of the plans, and impact the level of pension expense and required cash contributions in 2004 and beyond. Forward Looking Statements This report contains statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995 Reform Act"). The words "expect", "estimate", "anticipate", "predict", "believe" and similar expressions and variations thereof are intended to identify forward looking statements. Additional oral or written forward-looking statements may be made by or on behalf of the Company from time to time and such statements may be included in documents other than this report. Such forward-looking statements involve a number of known and unknown risks and uncertainties. While these statements represent the company's current judgment with respect to its business, readers of this report are cautioned that forward-looking statements are not guarantees of future performance and that such risks and uncertainties could cause actual results, performance and achievements, or industry results, to differ materially from those suggested herein. The Company undertakes no obligation to release the result of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Forward-looking statements in this report and elsewhere may include, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions and adequacy of resources. All forward-looking statements in this quarterly report and elsewhere are intended to be made pursuant to the safe harbor provisions of the 1995 Reform Act. Factors that could cause results to differ materially from those projected in the forward-looking statements include: geopolitical unrest, market conditions, cooperation of lenders, environmental remediation costs, liquidation value of assets, costs to exit leased facilities, cost and availability of environmental liability insurance, marketability of real estate, availability of buyers, execution of orders in backlog, retention of key personnel and other factors. PART II - OTHER INFORMATION ITEM 4(a) SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The 76th Annual Meeting of the Stockholders of Detrex Corporation was held in Southfield, Michigan on the 24th day of April 2003. Election of Messrs. Emmett, McCleary, and Thalacker as Directors of the Second Class to hold office for three year terms or until their successors have been elected and qualify: Mr. Emmett Mr. McCleary Mr. Thalacker For 906,216 906,116 881,066 Against -- -- -- Abstain 517,641 517,741 542,791 Messrs. Cox, Mark, King and Zimmer continue as directors. ITEM 4(b) CONTROLS AND PROCEDURES As of the end of the period covered by this quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's Disclosure Committee and the Company's management, including the Chiefs 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 Rules 13a-15(e) and 15d-15(e). 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 15 DETREX CORPORATION Company required to be included in the Company's periodic SEC filings. No change in the Company's internal control over financial reporting occurred during the Company's most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report: Exhibit 10 - Fifth Amendment to Credit Agreement dated August 11, 2003 Exhibit 31(a) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31(b) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (b) There were no reports on Form 8-K filed during the second quarter of 2003. 16 DETREX CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DETREX CORPORATION Date 8/14/03 /s/ T. E. Mark --------- -------------------------------------------- T. E. Mark President and Chief Executive Officer Date 8/14/03 /s/ S. J. Quinlan --------- -------------------------------------------- S. J. Quinlan Vice President-Finance, Treasurer, & Chief Financial Officer 17 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION -------------- ----------- Exhibit 10 - Fifth Amendment to Credit Agreement dated August 11, 2003 Exhibit 31(a) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31(b) - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes Oxley Act of 2002

DETREX CORPORATION 10-Q