<PAGE>
Page 1 of 17 pages
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Transition Period from _________________ to ________________________
For Quarter Ended June 30, 1998 Commission File Number 1-5112
ETHYL CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-0118820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH FOURTH STREET
P. O. BOX 2189
RICHMOND, VIRGINIA 23218-2189
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (804) 788-5000
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 ___
Number of shares of common stock, $1 par value, outstanding as of June 30,
1998: 83,465,460.
<PAGE>
ETHYL CORPORATION
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and
December 31, 1997 3-4
Consolidated Statements of Income - Three Months
and Six Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Notes to Financial Statements 7-9
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-15
PART II. OTHER INFORMATION
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30
1998 December 31
ASSETS (unaudited) 1997
---------- ----------
Current assets:
Cash and cash equivalents $ 8,232 $ 18,162
Accounts receivable, less allowance for doubtful
accounts ($2,339 in 1998 and $2,349 in 1997) 135,823 165,259
Inventories:
Finished goods and work-in-process 182,855 166,089
Raw materials 19,474 20,001
Stores, supplies and other 8,505 7,746
---------- ----------
210,834 193,836
Deferred income taxes and prepaid expenses 24,171 21,857
---------- ----------
Total current assets 379,060 399,114
---------- ----------
Property, plant and equipment, at cost 770,450 766,413
Less accumulated depreciation and amortization (379,762) (357,316)
---------- ----------
Net property, plant and equipment 390,688 409,097
Other assets and deferred charges 183,994 179,918
Goodwill and other intangibles - net of amortization 94,530 79,148
---------- ----------
Total assets $1,048,272 $1,067,277
========== ==========
See accompanying notes to financial statements.
3
<PAGE>
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30
1998 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) 1997
--------- ---------
Current liabilities
Accounts payable $ 68,877 $ 66,573
Accrued expenses 51,197 50,743
Dividends payable 5,217 5,217
Long-term debt, current portion 40,729 46,707
Income taxes payable 20,221 11,188
--------- ---------
Total current liabilities 186,241 180,428
--------- ---------
Long-term debt 558,735 594,429
Other noncurrent liabilities 84,204 86,308
Deferred income taxes 64,903 61,514
Shareholders' equity
Common stock ($1 par value)
Issued - 83,465,460 in 1998 and 1997 83,465 83,465
Accumulated other comprehensive (loss) income (8,130) 1,705
Retained earnings 78,854 59,428
--------- ---------
154,189 144,598
--------- ---------
Total liabilities and shareholders' equity $1,048,272 $1,067,277
========= =========
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
In Thousands Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ----------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $244,252 $269,336 $471,184 $535,049
Cost of goods sold 177,036 189,965 350,519 379,653
-------- -------- -------- --------
Gross profit 67,216 79,371 120,665 155,396
Selling, general and administrative expenses 20,130 23,670 40,172 45,929
Research, development and testing expenses 15,688 16,395 32,538 32,792
Special charge 3,986 - 3,986 -
-------- -------- -------- --------
Operating profit 27,412 39,306 43,969 76,675
Interest and financing expenses 10,348 5,265 20,682 10,563
Other income, net (9,392) (19) (22,320) (357)
-------- -------- -------- --------
Income before income taxes 26,456 34,060 45,607 66,469
Income taxes 9,676 12,122 15,748 23,942
-------- -------- -------- --------
Net income $ 16,780 $ 21,938 $ 29,859 $ 42,527
======== ======== ======== ========
Basic and diluted earnings per share $ .20 $ .19 $ .36 $ .36
======== ======== ======== ========
Shares used to compute basic earnings per share 83,465 118,444 83,465 118,444
======== ======== ======== ========
Cash dividends per share of common stock $ .062 $ .125 $ .125 $ .25
======== ======== ======== ========
See accompanying notes to financial statements.
</TABLE>
5
<PAGE>
ETHYL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------------------
1998 1997
-------------------
<S> <C> <C>
Cash and cash equivalents at beginning of year $ 18,162 $ 20,148
-------- --------
Cash flows from operating activities:
Net income 29,859 42,527
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 30,670 32,359
Gain on sale of certain non-operating assets (14,631) -
Working capital (increases) decreases (2,766) 7,214
Other, net 7,064 (6,361)
-------- --------
Cash provided from operating activities 50,196 75,739
-------- --------
Cash flows from investing activities:
Capital expenditures (14,685) (16,159)
Proceeds from sale of certain non-operating assets 25,562 -
Other, net (70) (131)
-------- --------
Cash provided from (used in) investing activities 10,807 (16,290)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (60,500) (34,200)
Cash dividends paid (10,433) (29,611)
-------- --------
Cash used in financing activities (70,933) (63,811)
-------- --------
Decrease in cash and cash equivalents (9,930) (4,362)
-------- --------
Cash and cash equivalents at end of period $ 8,232 $ 15,786
======== ========
Supplemental investing and financing non-cash transactions
Increase in intangibles related to the recognition
of a portion of the contingent note payable to
Texaco Inc. (Including deferred interest costs of $2,392) $(21,142) -
Recognition of portion of contingent note payable to Texaco Inc. $ 18,750 -
See accompanying notes to financial statements
</TABLE>
6
<PAGE>
ETHYL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(In Thousands Except Per-Share Amounts)
(Unaudited)
1. In the opinion of management, the accompanying consolidated financial
statements of Ethyl Corporation and Subsidiaries (the "Company") contain all
adjustments necessary to present fairly, in all material respects, the
Company's consolidated financial position as of June 30, 1998 and the
consolidated results of operations for the three and six-month periods ended
June 30, 1998 and 1997 and the consolidated cash flows for the six-month
periods ended June 30, 1998 and 1997. All adjustments are of a normal,
recurring nature. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
December 31, 1997 Annual Report. The December 31, 1997 consolidated balance
sheet data was derived from audited financial statements but does not include
all disclosures required by generally accepted accounting principles. The
results of operations for the six-month period ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
2. On October 2, 1997, the Company purchased 34,999,995 shares of its common
stock at $9.25 per share with the purchase price and related costs totaling
about $328.9 million. The purchase was financed under the Company's $750
million Competitive Advance, Revolving Credit Facility and Term Loan
Agreement which increased the committed funds available for borrowing.
As the Company's June 30, 1997 results of operations do not include any
effects of the purchase of the 34,999,995 shares, the following selected
unaudited pro forma information is being provided to present a summary of
the results of operations of the Company as if the purchase of shares had
occurred as of January 1, 1997. The pro forma information gives effect to
adjustments for the reduction in outstanding shares, interest expense for
additional debt and related income tax impact that would have been
incurred to finance the purchase of the shares. The pro forma data is for
informational purposes only and may not necessarily reflect the financial
position or results of operations of the Company had the purchase of shares
occurred on January 1, 1997.
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
Net income $ 18,617 $ 35,911
Basic and diluted earnings per share $.22 $.43
Shares used to compute
earnings per share 83,444 83,444
7
<PAGE>
3. Long-term debt consists of the following: June 30, December 31,
1998 1997
Variable-rate bank loans (average effective
interest rate was 6.3% for the six-month
period ended June 30, 1998 and 6.1% for
the year 1997) $541,500 $602,000
5.99% Note payable to Texaco 31,250 12,500
8.6% to 8.86% Medium-term notes due through 2001 27,000 27,000
------- -------
Total long-term debt 599,750 641,500
Less unamortized discount (286) (364)
------- -------
Net long-term debt 599,464 641,136
Less current portion (40,729) (46,707)
------- -------
Long-term debt $558,735 $594,429
======= =======
The Company has a contingent note payable to Texaco Inc. of up to $60
million that is associated with Ethyl's 1996 acquisition of Texaco's
worldwide lubricant additives business. The actual amount of the note will
be determined using an agreed-upon formula based on volumes of certain
acquired product lines shipped during calendar years 1996 through 1998.
Based on actual shipments through June 30, 1998, $31.2 million of the
contingent note was included in long-term debt. Management has classified
the note as long term pursuant to the Company's ability and intent to
refinance the obligation on a long-term basis.
4. The components of comprehensive income for the three-month periods ended
June 30, 1998 and 1997 follows:
Three Months Ended
June 30
1998 1997
Net income $ 16,780 $ 21,938
------ ------
Other comprehensive income (loss),
net of tax
Unrealized gain on
marketable equity securities $ (377) $ -
Less: Reclassification
adjustment for gain
included in net income (6,305) (6,682) - -
------
Foreign currency translation
adjustments (1,832) 476
------ ------
Other comprehensive (loss) income,
net of tax (8,514) 476
------ ------
Comprehensive income $ 8,266 $ 22,414
====== ======
8
<<PAGE>
The components of comprehensive income for the six-month periods ended
June 30, 1998 and 1997 follows:
Six Months Ended
June 30
-----------------------------------
1998 1997
Net income $ 29,859 $ 42,527
------ ------
Other comprehensive income
(loss), net of tax
Unrealized gain on marketable
equity securities $ 1,721 $ -
Less: Reclassification
adjustment for gain
included in net income (9,487) (7,766) - -
------
Foreign currency translation
adjustments (2,069) (5,043)
------ ------
Other comprehensive (loss),
net of tax (9,835) (5,043)
------ ------
Comprehensive income $ 20,024 $ 37,484
====== ======
The components of accumulated other
comprehensive income consist of the
following: June 30, December 31,
1998 1997
-------- ------------
Unrealized gain on marketable equity
securities $ 2,058 $ 9,824
Foreign currency translation adjustments (10,188) (8,119)
------ -----
Accumulated other comprehensive (loss)
income $ (8,130) $ 1,705
====== =====
5. The special charge relates to a second quarter 1998 enhanced retirement
offer resulting in a charge of about $4.0 million or $2.5 million after
income taxes or $.03 per share. This charge covered a voluntary early
retirement program and severance and termination benefits affecting 40
employees. The positions eliminated were administrative and support
functions. Approximately $0.3 million has been paid out during the second
quarter for severance, vacation and termination benefits. The remainder
will be paid out over an extended period for the retirement and health
insurance benefits.
6. Other income, net for the six-month period ended June 30, 1998 included a
gain on the sale of certain non-operating assets of $14.9 million ($9.9
million occurred in the second quarter) and a first quarter gain of $7.9
million relating to the settlement of a federal income tax audit.
7. FASB Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" is effective for annual periods beginning after
December 15, 1997 and for interim periods after the year of adoption.
This statement establishes standards for reporting information about
operating segments, including related disclosures about products and
services, geographic areas, and major customers. The Company has not yet
completed its analysis of what impact, if any, Statement No. 131 will have
on operating segments reported, or on the financial statements and related
disclosures.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is management's discussion and analysis of certain significant
factors affecting the Company's results of operations during the periods
included in the accompanying consolidated statements of income and changes in
the financial condition since December 31, 1997. The Company's results of
operations for the second quarter and six months of 1998 include the effect of
the repurchase of approximately 35 million shares of its common stock on October
2, 1997.
Some of the information presented in the following discussion constitutes
forward-looking comments within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Factors which could cause actual results to
differ from expectations include, without limitation, the timing of orders
received from customers, the gain or loss of significant customers, competition
from other manufacturers and changes in the demand for the Company's products.
In addition, increases in the cost of the product, changes in the market in
general and significant changes in new product introduction could result in
actual results varying from expectations.
Results of Operations
Second Quarter 1998 Compared to Second Quarter 1997
Net sales for the second quarter of 1998 amounted to $244.3 million,
representing a reduction of $25.0 million (9.3%) from net sales of $269.3
million in the second quarter of 1997. Of the $25.0 million decrease, $20.7
million was the result of lower selling prices in both antiknocks and petroleum
additives, changing product mix, and unfavorable foreign currency impact. The
lower selling prices were the result of competitive pricing pressures for both
antiknock and petroleum additive products, as well as weak Asia Pacific markets
for petroleum additives. While shipments of petroleum additives increased in the
second quarter 1998 versus the same 1997 period, the impact was more than offset
by lower antiknock shipments, resulting in a net reduction in sales revenue of
$4.3 million. The lower shipments in antiknocks resulted from an expected
declining lead market and fluctuations in order and shipping patterns.
Cost of goods sold for the second quarter of 1998 decreased $13.0 million (6.8%)
to $177.0 million in 1998 from $190.0 million in the second quarter of 1997. The
decrease was a function of lower costs of $11.8 million, as well as $1.2 million
of lower shipments. The lower costs, primarily in petroleum additives, were the
result of the benefits of the Company's plant rationalization plan, a favorable
foreign currency impact, and overall lower raw material costs. The lower
petroleum additives costs were partially offset by an increase in antiknock
costs, primarily due to higher material costs. The lower shipments were in
antiknocks and were partially offset by an increase in petroleum additive
shipments.
Gross profit of $67.2 million in second quarter 1998 decreased $12.2 million
(15.3%) from the second quarter 1997 level of $79.4 million. As a result of the
9.3% reduction in net sales and the 6.8% decrease in cost of sales, as outlined
above, the gross profit margin as a percentage of net sales dropped from 29.5%
in 1997 to 27.5% in 1998. The lower profit and margins mainly reflected lower
shipments and margins of antiknocks and the change in product mix reflecting the
10
<PAGE>
increase in the extent sales and profits come from petroleum additives which
have a lower gross margin.
Selling, general and administrative expenses combined with research, development
and testing expenses of $35.8 million in the second quarter 1998 were down $4.3
million (10.6%) from the second quarter 1997. The reduction was primarily the
result of ongoing strict cost control efforts, efficient research, development,
and testing spending, lower commissions, lower employee related costs and a
favorable foreign currency impact. Selling, general and administrative expenses
combined with research, development and testing expenses as a percentage of net
sales decreased from 14.9% in the second quarter 1997 to 14.7% in the second
quarter 1998 reflecting a reduction in net sales of 9.3% as compared to the
10.6% reduction in these expenses.
The special charge of about $4.0 million in 1998 was the result of an enhanced
retirement offer and the elimination of certain positions. During the second
quarter, the Company announced the enhanced retirement offer to selected
salaried employees. In addition, the Company identified a number of positions
that were eliminated. Incumbents were provided a severance allowance. These
initiatives affected 40 employees.
Operating profit decreased 30.3% to $27.4 million from $39.3 million in the
second quarter 1997. The lower operating profit primarily reflected lower
antiknock profit as well as lower profit from petroleum additives products. The
decrease in antiknocks resulted from lower shipments, as well as lower gross
margins. In addition, the lower operating profit from petroleum additives
reflected continuing pricing pressures that were partially offset by higher
shipments. The cost of the enhanced retirement offer and elimination of certain
positions also reduced operating profit in 1998.
Interest and financing expenses of $10.3 million in 1998 were $5.1 million
higher than 1997. The increase was primarily the result of higher average debt
outstanding, which produced $4.7 million of the $5.1 million increase. The
higher average debt reflected the use of long-term debt to finance the October
1997 repurchase of almost 35 million shares of the Company's common stock.
Approximately $0.1 million of the increase in interest and financing expenses
was from an increase in average interest rates on variable rate debt. Higher
fees, higher amortization of deferred financing costs, and lower capitalized
interest of $0.3 million were also a component of the $5.1 million increase.
Other income, net of $9.4 million in the second quarter of 1998 compares to
other income of only $19 thousand in 1997. The increase consisted primarily of a
gain of $9.9 million on the sale of a non-operating asset.
Income taxes in the second quarter of 1998 decreased $2.4 million (20.2%) to
$9.7 million from the second quarter 1997 amount of $12.1 million due to a 22.3%
decrease in income before income taxes, which was offset by a slightly higher
effective income tax rate. The effective income tax rate was 36.6% in 1998
versus 35.6% in 1997.
As a result of the items outlined above, net income of $16.8 million in 1998 was
$5.1 million (23.5%) lower than the second quarter of 1997. However, basic and
diluted earnings per share of $.20 in 1998 increased 5.3% from $.19 in 1997 due
to the benefit of the fourth quarter 1997 stock repurchase. This resulted in an
approximate reduction of 30% in the number of outstanding shares to 83,465,460
at June 30, 1998 compared to 118,443,835 at June 30, 1997.
11
<PAGE>
Six Months 1998 Compared to Six Months 1997
Net sales for the six months of 1998 amounted to $471.2 million which was down
$63.8 million (11.9%) from 1997 net sales of $535.0. The reduction in net sales
of $43.5 million was due to a reduction in selling prices in both antiknocks and
petroleum additives. This was the result of both antiknock and petroleum
additives pricing pressures, changing product mix, and unfavorable foreign
currency impact, as well as the slowdown in the Asia Pacific petroleum additive
markets. A reduction in volumes shipped negatively impacted net sales by $20.3
million. The reduction in antiknock shipments resulted from an expected
declining lead market, as well as fluctuations in order and shipping patterns.
The reduction in antiknock shipments was partially offset by an increase in
shipments of petroleum additives.
Cost of goods sold of $350.5 decreased $29.2 million (7.7%) from six months 1997
amount of $379.7 million. The decrease was the result of lower costs of $22.6
million and a $6.6 million reduction reflecting lower volume shipped. The lower
costs in petroleum additives were a result of the plant rationalization plan, a
favorable foreign currency effect, and overall lower raw material costs. The
lower petroleum additives costs were partially offset by an increase in
antiknock costs, primarily due to higher material costs. The reduced volumes
shipped were primarily in the antiknock market and were partially offset by
increased shipments in petroleum additives.
Gross profit was $120.7 million for the six months of 1998 as compared to $155.4
million in 1997. This reduction of $34.7 million in gross profit resulted in the
gross profit margin as a percentage of sales decreasing to 25.6% in 1998 from
29.0% in 1997. The lower profit margins reflect the 11.9% reduction in net sales
and the 7.7% reduction in cost of sales, as outlined above.
Selling, general and administrative expenses combined with research, development
and testing expenses of $72.7 million in 1998 was $6.0 million (7.6%) lower than
1997. This is the result of lower commissions, lower employee related costs
reflecting the ongoing strict cost controls, and a favorable foreign currency
impact. Selling, general and administrative expenses combined with research,
development and testing expenses as a percentage of net sales increased from
14.7% in 1997 to 15.4% in 1998 reflecting the impact of a 11.9% reduction in net
sales as compared to a 7.6% reduction in these expenses.
The special charge of about $4.0 million was the result of the enhanced
retirement offer and elimination of certain positions previously covered in the
second quarter discussion.
Operating profit decreased $32.7 million (42.7%) from $76.7 million in 1997 to
$44.0 million in 1998. The lower operating profit primarily reflected lower
antiknock profit, as well as lower profit from petroleum additives. The decrease
in antiknocks resulted from lower shipments and lower gross margins. The
decrease in petroleum additives operating profit resulted from ongoing
competitive pricing pressures, which were partially offset by higher shipments.
The cost of the enhanced retirement offer and elimination of certain positions
also reduced operating profit in 1998.
Interest and financing expenses were $20.7 million for the six months 1998,
which was $10.1 million higher than the 1997 amount of $10.6 million. Higher
average debt outstanding accounted for $9.3 million of the increase. The higher
average debt resulted from the use of long-term debt to finance the October 1997
repurchase of almost 35 million shares of the Company's common stock. Higher
12
<PAGE>
average interest rates resulted in $.4 million of the $10.1 million increase.
The remaining $.4 million of the increase was caused by higher fees and
amortization of deferred financing costs, as well as lower capitalized interest.
Other income, net of $22.3 million in 1998 was $22.0 million higher than the $.3
million for the six months 1997. The increase was primarily the result of a
$14.9 million gain on the sale of certain non-operating assets, as well as
interest income on the settlement of a federal income tax audit amounting to
$7.9 million.
Income taxes for the six months 1998 decreased $8.2 million (34.2%) to $15.7
million from the six months 1997 amount of $23.9 million. The decrease was due
to a 31.4% decrease in income before income taxes, as well as a lower effective
income tax rate. The lower effective income tax rate in 1998 of 34.5% as
compared to 36.0% in 1997 was due primarily to the tax benefit on the settlement
of the federal income tax audit.
As a result of the items discussed above, net income in 1998 decreased $12.6
million (29.8%) to $29.9 million from $42.5 million for the six months 1997.
However, as a result of the 1997 stock repurchase, basic and diluted earnings
per share were unchanged from 1997 at $.36 per share. At June 30, 1998,
83,465,460 shares were outstanding as compared to 118,443,835 at June 30, 1997.
Financial Condition and Liquidity
Cash and cash equivalents at June 30, 1998 totaled $8.2 million, a decrease of
$9.9 million since December 31, 1997. Cash flows were more than sufficient to
cover operating activities during the 1998 period. Cash flows from operating
activities for the six months of 1998 of $50.2 million, combined with
cash-on-hand of $9.9 million and the proceeds from the sale of non-operating
assets of $25.5 million, were used to make principal payments on long-term debt
of $60.5 million, pay dividends of $10.4 million, and fund capital expenditures
of $14.7 million.
The combined current and noncurrent long-term debt amounted to $599.4 million at
June 30, 1998, as compared to $641.1 million at December 31, 1997. This net
decrease of $41.7 million represented a repayment of $60.5 million of debt
including $30.0 million on the Company's term loan, as well as a repayment of
$30.5 million under the Company's line of credit. The repayments of long-term
debt were partly offset by an $18.8 million increase in the note payable related
to the Texaco acquisition. The contingent note is payable to Texaco Inc. for up
to $60 million. The actual amount of the contingent note will be determined
using an agreed-upon formula based on volumes of certain acquired product lines
shipped during calendar years 1996 through 1998. Based on actual shipments
through June 30, 1998, $31.2 million of the contingent note was included in
long-term debt. The note is payable on February 26, 1999. Management has
classified the note as long term pursuant to the Company's ability and intent
to refinance the obligation on a long-term basis. The Company's long-term debt
(excluding the current portion) as a percentage of total capitalization was
78.4% at June 30, 1998 as compared to 80.4% at December 31, 1997. The Company
has historically targeted a range of 30% to 50% for its long-term debt ratio,
and intends to continue to use its cash flows to reduce long-term debt
outstanding.
The Company's capital spending during the year is expected to be lower than in
1997 reflecting the completion of several capital projects. Capital spending is
expected to be financed with cash from operations.
13
<PAGE>
Working capital at June 30, 1998 was $192.8 million resulting in a current ratio
of 2.04 to 1. At December 31, 1997, the working capital was $218.7 and the
current ratio was 2.21 to 1. The reduction in working capital and the current
ratio primarily resulted from a decrease in accounts receivable and cash, as
well as an increase in taxes payable partially offset by an increase in
inventories. The Company anticipates that cash provided from operations will
continue to be sufficient to cover the Company's operating expenses, service
debt obligations, including reducing long-term debt, and make dividend payments
to shareholders.
Recent Developments
In 1997, the government of Alberta, joined by the governments of Quebec,
Saskatchewan and Nova Scotia challenged the MMT restriction in the first-ever
use of the Agreement on Internal Trade (AIT) dispute settlement procedures. The
panel found the MMT restriction to be inconsistent with the Canadian Federal
Government's obligation under the AIT and recommended a regulatory change under
the Act that would allow interprovincial trade in MMT.
On July 20, 1998, the Government of Canada announced that is has lifted its 1997
ban on the importation and interprovincial trade of methylcyclopentadienyl
manganese tricarbonyl (MMT). This decision by the Canadian government states
that current scientific information fails to demonstrate that MMT impairs the
proper functioning of automotive on-board diagnostic systems. Furthermore, there
is no new scientific evidence to modify the conclusions drawn by Health Canada
in 1994 that MMT poses no health risk. The Canadian government will compensate
the Company for a portion of its legal costs and lost profits. In addition, the
Company will drop its challenges to the 1997 ban.
Also, on July 27, 1998, the Company announced that it has signed a memorandum of
understanding with Octel Corporation to market and sell tetraethyl lead (TEL)
antiknock compounds. While Ethyl Corporation's board has given approval, it is
still subject to Octel Corporation's final board approval and a definitive
agreement. This arrangement includes all world areas except North America and
the European Union. Because no new entity or organization will be created and no
assets will be transferred, the companies plan to implement this arrangement as
soon as possible.
Ethyl and Octel believe that significant cost savings can be realized through
more efficient marketing, sales and distribution of TEL products in certain
areas of the world. All marketing and sales efforts made to customers will be in
the name of Octel. While Octel will continue to produce all products marketed
under this agreement, Ethyl will continue to provide bulk distribution services.
Other TEL services will be provided by one or both companies depending upon
cost, performance and flexibility.
Both companies believe that this agreement is the most effective way to continue
to provide their TEL customers with safe product supply and responsive
world-class service.
Also, regarding current year operations, while total operating profits in the
second half of 1998 are expected to improve over the first half of the year, it
is now anticipated that operating profits for the year will be lower than 1997.
This is primarily due to lower lead antiknock profits, as well as somewhat lower
petroleum additive profits.
14
<PAGE>
The Company is continuing to address the Year 2000 issues. Prior to 1998, the
Company completed the conversion of all mainframe systems to modern
client/server systems, as well as completed the implementation of SAP,
Peoplesoft and other commercial and desktop software which are all Year 2000
compliant. The Company has also been reviewing both hardware and software for
plant process control systems, analytical systems, and research, development,
and testing systems to determine Year 2000 compliance. All of the systems are
either compliant or solutions have been identified to solve potential problems
within the required time frame. The Company continues to review the Year 2000
compliance status of its major suppliers, customers and other business
associates, but expects they will also be in compliance by 2000 or have prepared
alternative solutions. Because most of the Company's major systems were Year
2000 compliant prior to 1998, there have been no significant expenses related to
this issue in either the second quarter or the six months of 1998.
Recently Issued Accounting Standards
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for annual periods beginning after December 15, 1997
and for interim periods after the year of adoption. This statement establishes
standards for reporting information about operating segments, including related
disclosures about products and services, geographic areas, and major customers.
The Company has not yet completed its analysis of what impact, if any, Statement
No. 131 will have on operating segments reported, or on the financial statements
and related disclosures.
15
<PAGE>
PART II - Other Information
ITEM 5. Other Information
Refer to "Recent Developments" in Item 2 "Management's Discussion and
Analysis of Results of Operations and Financial Condition" beginning on
page 14.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
16
<PAGE>
SIGNATURE
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 there-unto duly authorized.
ETHYL CORPORATION
(Registrant)
Date: July 31, 1998 By:/s/ J. Robert Mooney
J. Robert Mooney
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: July 31, 1998 By:/s/ Wayne C. Drinkwater
Wayne C. Drinkwater
Controller
(Principal Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8232
<SECURITIES> 0
<RECEIVABLES> 135823
<ALLOWANCES> 2339
<INVENTORY> 210834
<CURRENT-ASSETS> 379060
<PP&E> 770450
<DEPRECIATION> 379762
<TOTAL-ASSETS> 1048272
<CURRENT-LIABILITIES> 186241
<BONDS> 558735
<COMMON> 83465
0
0
<OTHER-SE> 70724
<TOTAL-LIABILITY-AND-EQUITY> 1048272
<SALES> 471184
<TOTAL-REVENUES> 471184
<CGS> 350519
<TOTAL-COSTS> 427215
<OTHER-EXPENSES> (22320)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20682
<INCOME-PRETAX> 45607
<INCOME-TAX> 15748
<INCOME-CONTINUING> 29859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29859
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
