UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from to
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $1 Par NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
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 at least 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. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of January 31, 1999: $397,100,790.00.*
Number of shares of Common Stock outstanding as of January 31, 1999:
83,465,460.
*In determining this figure, an aggregate of 21,175,140 shares of Common Stock
reported in the registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders as beneficially owned by Floyd D. Gottwald, Jr., Bruce C. Gottwald,
and the members of their immediate families have been excluded and treated as
shares held by affiliates. See Item 12 herein. The aggregate market value has
been computed on the basis of the closing price in the New York Stock Exchange
Composite Transactions on January 30, 1999, as reported by The Wall Street
Journal.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Ethyl Corporation's definitive Proxy Statement for its 1998
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
(the "Proxy Statement") are incorporated by reference into Part III of this Form
10-K.
<PAGE>
ITEM CAPTIONS AND INDEX -- FORM 10-K ANNUAL REPORT
Item No. Page
Part I
1. Business 12-26
2. Properties 21-23, 51
3. Legal Proceedings 26
4. Submission of Matters to a Vote of Security Holders N/A
Part II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 49
6. Selected Financial Data 47-48
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-27
7a. Quantitative and Qualitative Disclosures
about Market Risk 25-26
8. Financial Statements and Supplementary Data See Item 14
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure N/A
Part III
10. Directors and Executive Officers of the Registrant (a)
11. Executive Compensation (a)
12. Security Ownership of Certain Beneficial Owners
and Management (a)
13. Certain Relationships and Related Transactions (a)
Part IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
(A) (1) Consolidated Statements of Income for
each of the three years in the periods ended
December 31, 1998, 1997 and 1996 28
Consolidated Statements of Comprehensive
Income for each of the three years in the
periods ended December 31, 1998, 1997 and 1996 28
Consolidated Balance Sheets as of December 31,
1998 and 1997 29
Consolidated Statements of Shareholders' Equity
for each of the three years in the periods ended
December 31, 1998, 1997 and 1996 30
Consolidated Statements of Cash Flows for each
of the three years in the periods ended
December 31, 1998, 1997 and 1996 31
Notes to Consolidated Financial Statements 32-45
Management's Report on the Financial Statements 27
Report of Independent Accountants 46
(A) (2) Financial Statement Schedules - none required N/A
(A) (3) Exhibits see Index to Exhibits 52
(B) No report on Form 8-K has been filed during 1998.
(C) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this Form 10-K.
(a) Part III will be incorporated by reference from the registrant's 1998
Proxy Statement pursuant to instructions G(1) and G(3) of the General
Instructions to Form 10-K.
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ETHYL CORPORATION
Statement of Differences
1. The Form 10-K runs from page 12 through 49 of the printed document.
The five year summary presented on pages 50 and 51, the inside covers
and page 52 of the printed document have been repositioned for the
electronic document.
2. The printed Annual Report and Form 10-K contains numerous graphs and
photographs not incorporated into the electronic Form 10-K.
3. The 10-K cover sheet and index, presented on pages 47 and 48 of the printed
document, have been repositioned to the front of the electronic document.
3
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inside front cover
About the Company
Since 1921, Ethyl Corporation has provided additive chemistry solutions to
enhance the performance of petroleum products. Ethyl develops, manufactures,
blends and delivers leading-edge additive technology for fuels and lubricants
around the world. Our products and services provide the chemistry that makes
fuels burn cleaner, engines run smoother and machines last longer. The 1,500 men
and women of Ethyl Corporation are dedicated to our industry, dedicated to our
customers and committed to a strong platform of research and technology with an
emphasis on safety, quality and service.
Our Vision
To be at the top of our customers' lists of suppliers
FINANCIAL HIGHLIGHTS
(in thousands except per-share amounts)
- -----------------------------------------------------------------------------
Percent
1998 1997 Increase (Decrease)
- -----------------------------------------------------------------------------
Operations:
Net Sales $974,190 $1,063,615 (8)
======= =========
Income After Income Taxes Before
Non-Recurring Items $ 51,910 $ 77,987 (33)
Non-Recurring Income (Loss) After
Income Taxes(a) 18,669 (457) -
------- ---------
Net Income $ 70,579 $ 77,530 (9)
======= =========
Per Common Share:
Basic and Diluted Earnings Per
Share:
Income After Income Taxes
Before Non-Recurring Items $ .62 $ .71 (13)
Non-Recurring Income After
Income Taxes(a) .23 - -
------- ---------
Net Income $ .85 $ .71 20
======= =========
Shares Used To Compute Basic
Earnings Per Share(b) 83,465 109,793
======= =========
(a) Non-Recurring Income (Loss)
After Income Taxes:
Enhanced Retirement Offer
and Staff Reduction $ (2,540) $ -
Gain (Loss) on Sales and
Impairments of Non-
Operating Assets 9,487 (3,820)
Tax Settlement with the
Internal Revenue
Service 6,071 -
Settlement with the
Canadian Government 5,651 -
Gain on Sale of Subsidiary - 3,363
------- ---------
$ 18,669 $ (457)
======== =========
(b) Amounts reflect the effect
of the October 2, 1997
acquisition of approximately
35 million shares of Ethyl's
common stock.
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<PAGE>
Since 1921, Ethyl Corporation has provided additive chemistry solutions to
enhance the performance of petroleum products. Ethyl chemistry makes fuels burn
cleaner, engines run smoother and machines last longer.
COMMITMENT TO SAFETY
At Ethyl, we pursue operational excellence by focusing on safety first. Based on
the belief that all accidents are preventable, our approach to safety is
proactive and incorporates means for continuous improvement.
Ethyl is committed to deliver safety performance that places us in the top
10% of member companies of the Chemical Manufacturer's Association (CMA). We are
proud to report that our 1998 safety record included only 8.4 recordable
accidents per 1,000 employees.
All of us at Ethyl are responsible for safety, and our management accepts
and demonstrates the type of leadership in safety that will ensure the continued
success of our efforts. Safety is a way of life here, enhancing operations, the
way we work and the relationships we maintain with our customers and our
communities.
Operations
Two very significant events occurred in 1998 regarding our operations. First, in
late July, the Canadian government lifted its 1997 ban on the importation and
inter-provincial trade of our environmentally beneficial fuel additive,
methylcyclopentadienyl manganese tricarbonyl (MMT). The Canadian government's
decision to lift the ban confirms current scientific information that MMT is
compatible with automobile emission control systems and is safe to use.
As part of the agreement reached with the Canadian government, Ethyl
received a $13 million reimbursement for a portion of our legal costs and lost
profits. In exchange, we agreed to drop our challenges to the ban. Sales in
Canada returned to normal shortly thereafter. MMT continues to gain acceptance
and is being sold in major markets around the world.
Second, in October, we entered into agreements with The Associated Octel
Company Limited (Octel) of London, England, to market and sell tetraethyl lead
(TEL) antiknock compounds. The agreements cover all world areas except North
America and the European economic area where Ethyl and Octel continue to
compete. Sales under the agreements are made in the name of Octel. Ethyl
provides Octel global bulk distribution services as well as marketing and other
services related to TEL sales. We believe that this arrangement will maximize
TEL's value and reduce costs through more efficient marketing, sales and
distribution.
[Photo]
[Photo Caption] Ethyl's state-of-the-art research facilities have extensive
in-house testing capabilities, like this rig test in our Richmond mechanical
lab. Keeping tests in-house helps deliver leading-edge technology to meet our
customers' requirements, with the added value of efficient, cost-effective
product development.
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Ethyl's operations are divided into two strategic business units, petroleum
additives and tetraethyl lead, reflecting the difference between realizing our
potential in petroleum additives and managing the decline of TEL.
See Segment Reporting in Note 1, page 34 for details on our segments.
PETROLEUM ADDITIVES
The imbalance of supply and demand that characterizes today's petroleum
additives market intensifies the level of competition. Consequently, as our
customers are consolidating to reduce costs, and as price continues to erode,
all additive suppliers are trying to find growth opportunities, while holding on
to market share.
Our strategy to develop our petroleum additives business is based on targeted
growth, value-added service, and innovative technology.
Targeted Growth
The global marketplace for petroleum additives varies by geographic region and
product lines. Ethyl maintains a strong presence in the petroleum additives
market in North America. Despite competitive pricing pressures, we have
successfully defended this market share through strong customer relationships.
We provide our customers market-leading technology and a variety of value-added
services: from first-to-market lubricant and fuel products to cost abatement
initiatives and inventory management.
In certain major markets where we are currently underrepresented, our
strategy is to develop new relationships and expand existing ones. We are
applying additional resources to our sales and product development efforts in
Europe, Latin America, and the Far East. Our focus on these areas provides great
opportunity to uncover additional business prospects and increases our ability
to compete in the global marketplace. We are proceeding carefully, balancing our
opportunities with the current economic situations in these regions.
While we enjoy a competitive advantage in certain product lines, we also
recognize the growth potential in product areas where we do not have a major
presence and where regional demand exists.
Value-Added Service
Ethyl's vision is all about being the best at serving our customers' needs. We
develop strong multi-level relationships with our customers, communicate openly
with them and listen to them. By doing this, we know our customers' needs and
share their goals, so we can provide value as they define it.
The primary emphasis of value-added service is reducing total cost. This
service benefits Ethyl as well as our customers. Total cost can include raw
material purchase, product development, inventory management, freight, process
and information technology, testing, customer service, problem resolution,
quality assurance, regulatory compliance, and even brand management. Ethyl
consistently provides value-added services that can reduce total cost, not only
for our customers but also for us.
Innovative Technology
Whether our customers want to be first-to-market, meet a specific performance
requirement or increase their own brand equity, Ethyl provides the additive
chemistry solutions to meet their needs. Our approach to innovative technology
includes fundamental studies of combustion and lubrication, formulation of new
additive chemistry, manufacturing process analysis and comprehensive testing of
finished fuels and lubricants.
Almost half of our professional research staff hold Ph.D.s in chemistry or
engineering. Their efforts are complemented by additional Ethyl employees
contributing from a diverse base of professional experience, education and
insight. As product development costs continue to rise and as new, more frequent
specification changes are implemented, we have found that our technology efforts
are more creative when supported by cross-functional teams.
Ethyl products from the petroleum additives segment have two distinct
applications: use in lubricants and use in fuels.
Lubricant additives are organic and synthetic chemical components that improve
the performance of lubricating oils, fluids and greases. Ethyl additives help
lubricants protect engine and other moving parts from wear, deposits, corrosion,
water and high operating temperatures. Ethyl lubricant additives are used in
oils, fluids and greases around the world to meet the most stringent oil
industry, government and original equipment manufacturer (OEM) specifications. A
lubricant additive package can comprise anywhere from 1% of a finished hydraulic
oil to approximately 20% of a typical multi-grade motor oil.
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<PAGE>
Ethyl sells lubricant additives to major oil marketers and independent
lubricant manufacturers around the world. Lubricant additive technology
applications include:
- passenger car motor oils
- heavy duty diesel engine oils
- railroad and marine diesel engine oils
- automatic transmission fluids
- automotive and industrial gear oils
- hydraulic oils
- industrial lubricants
Fuel additives are chemical components engineered to improve the
performance of gasoline, diesel and other fuels. Performance benefits from use
of fuel additives include octane and cetane enhancement, emissions reduction,
increased lubricity, storage stability and the protection against deposits for
fuel injectors, intake valves and the combustion chamber. Refiners and fuel
marketers use fuel additives to meet stringent government regulations and OEM
standards, including those requiring reduced emissions.
Ethyl sells fuel additives worldwide, directly to petroleum refiners and
fuel marketers as well as to fuel terminals and blenders. Fuel additive
technology applications include:
- gasolines
- diesel fuels
- aviation fuels
- power generation fuels
- heating oils
One of Ethyl's most notable fuel additives is MMT. MMT has been used in
unleaded gasoline in Canada for more than 20 years and is currently gaining
support in new markets around the world. Good science supports the many benefits
of MMT, one of the most comprehensively tested fuel additives in history. When
used in the refinery process, MMT economically provides octane enhancement while
reducing the amount of crude oil necessary to produce gasoline. This process
adjustment reduces refinery emissions of carbon dioxide, a greenhouse gas linked
to global warming.
When used in unleaded gasoline, MMT reduces tailpipe emissions of known
contributors to urban smog. These exhaust pollutants are carbon monoxide (CO)
and nitrogen oxide (NOx), which contains the potent greenhouse gas, nitrous
oxide (N2O). The Environmental Protection Agency (EPA) has approved MMT for use
in conventional unleaded gasoline and acknowledged that MMT can reduce tailpipe
emissions of CO and NOx.
[Photo]
[Photo Caption] Excerpt from a statement released by the government of Canada,
July 1998, when the Canadian Parliament reversed its trade ban on MMT.
The effect of manganese exposure has been studied for decades and
continues. In June 1998, Research Triangle Institute (RTI) of North Carolina,
the world's leading expert in exposure assessment, published the most rigorous
study on personal exposure to manganese. Spanning over 15 months, the study
collected thousands of samples in Toronto, Canada, where MMT has been used for
over twenty years.
RTI and a panel of independent scientists concluded that personal exposures
to manganese in Toronto were well below the most stringent guidelines set by the
U.S. EPA, the World Health Organization and Health Canada. In fact, the RTI
study found that the level of manganese in the air in Toronto is the same as the
level of manganese in the air in comparable U.S. cities where MMT is not used.
The study attributed the major source of manganese exposure in Toronto to
common, everyday dust. Manganese is a naturally occurring element that is found
throughout the earth's crust.
Over the last ten years, Ethyl has sponsored numerous scientifically
designed vehicle and personal exposure analyses through internal and independent
test facilities. Today, we have accumulated over 10 million miles of scientific
data supporting that MMT conserves natural resources, is compatible with
automotive emission systems and reduces tailpipe emissions and greenhouse gases.
14
<PAGE>
Good science supports that MMT is safe and effective for use in unleaded fuels.
TETRAETHYL LEAD
TEL improves the performance of gasoline by increasing its level of octane.
Higher octane gasoline prevents loss of power due to poor combustion timing, a
symptom commonly known as "engine knock". For years, TEL was used around the
world to improve the performance of gasoline powered engines.
In the 1970s, with the implementation of the Clean Air Act, U.S. automakers
were required to control emissions from vehicle tailpipes. Car manufacturers
began to install catalytic converters made of platinum, a metal that is rendered
inactive by lead. Catalytic converters change exhaust pollutants into carbon
dioxide and water.
Today, lead is no longer used in automotive gasoline in the United States
and Canada. As the rest of the world moves toward use of unleaded gasoline, the
product life of TEL has been greatly reduced as a useful additive in motor fuel.
TEL is sold to petroleum refiners and fuel marketers.
[Photo]
[Photo Caption] Ethyl's value-added service of inventory management helps our
customers reduce administrative costs and streamline the order process.
The TEL market is quite different from the petroleum additives market.
Worldwide demand throughout the last decade has decreased by as much as 15% each
year, a trend expected to continue as use of unleaded gasoline increases.
Despite this trend, TEL remains a profitable product for Ethyl as well as a
major source of cash.
Our strategy for managing TEL has always been and will continue to be to
aggressively lower the costs associated with this product. The TEL marketing
agreements with Octel will help us achieve this. The implementation and
integration of the TEL marketing agreements are working to our satisfaction,
providing worldwide TEL customers with safe product supply and responsive
world-class service.
DISCUSSION OF EARNINGS
In 1998, lower selling prices, reflecting the intense competition in both the
petroleum additives and TEL markets, resulted in lower net sales and operating
profit. Our business segment strategies allowed us to retain market share as
well as slightly increase shipments as compared to the previous year.
Net Sales
Consolidated net sales declined 8% from 1997 and 15% from 1996. The following
table reflects net sales for the last three years by segment:
Net Sales By Segment
(in millions of dollars)
1998 1997 1996
---- ---- ----
Petroleum additives (a) $857 $ 913 $ 924
Tetraethyl lead (b) 117 151 226
---- ----- -----
Consolidated net sales $974 $1,064 $1,150
==== ====== ======
(a) The petroleum additives segment reported net sales to Texaco and its
worldwide subsidiaries and affiliates of about $143 million in 1998, $137
million in 1997, and $125 million in 1996. Of total net sales, this
represents approximately 15% in 1998, 13% in 1997, and 11% in 1996. The
petroleum additives segment also reported net sales in 1998 to Shell and
its worldwide subsidiaries and affiliates of approximately $100 million, or
about 10% of total net sales. No other customer accounted for over 10% of
Ethyl's total net sales in any year. 1996 sales only included 10 months of
revenue from the worldwide lubricant additives business acquired from
Texaco.
(b) 1998 excludes those sales made under the TEL marketing agreements with
Octel which began October 1, 1998.
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[Photo]
[Photo Caption] After testing is completed, Ethyl researchers completely
dismantle a test rig to examine more closely how Ethyl additives help lubricants
and fuels protect against engine wear or harmful deposits.
Petroleum additives net sales in 1998 were down 6% from the 1997 level and
7% from 1996. We achieved a slight increase in volumes shipped in 1998, the
value of which was an improvement to net sales of $10 million compared to 1997
and $32 million compared to 1996. The effect of the volume gain was reduced not
only by price erosion but also by the slowdown in the Asia Pacific market,
fluctuating currencies and variations in product mix. The effect of this on
petroleum additives net sales was a $66 million reduction when compared to 1997
and a $99 million decrease compared to 1996.
Net sales of TEL were down 22% in 1998 from 1997 and 48% from 1996. The
lower net sales in 1998 reflected the continuing decline of worldwide demand and
the competitive market conditions during the year. In addition, our reported
sales were lower due to the TEL marketing agreements with Octel. Effective
October 1, 1998, all sales made under these agreements were and are made by or
on behalf of Octel and will not be recorded as a sale by Ethyl. For further
discussion, see Note 2, TEL Marketing Agreements Services on pages 34 and 35.
We achieved a slight increase in TEL volumes shipped in 1998, the value of
which was an improvement in net sales of $2 million as compared to 1997. This
volume gain was offset by lower selling prices causing a decrease of $36 million
when compared to 1997. When compared to 1996 the impact of volume on net sales
was a $74 million reduction, while lower selling prices caused a $35 million
decrease.
Segment Operating Profit
Ethyl evaluates the performance of petroleum additives and TEL based on segment
operating profit. Corporate departments and other expenses outside the control
of the segment manager are not allocated to segment operating profit.
Depreciation on segment property, plant and equipment and amortization of
segment intangible assets are included in the operating profit of each segment.
Combined segment operating profit fell 13% in 1998 from the level reported
in 1997 and declined 28% from that in 1996. The table below reports operating
profit by segment and provides a reconciliation to income before income taxes
for the last three years.
Segment Operating Profit
(in millions of dollars)
1998 1997 1996
---- ---- ----
Petroleum additives $ 97 $ 96 $ 87
Tetraethyl lead (a) 51 75 119
---- ---- ----
Segment operating profit 148 171 206
Corporate unallocated expense (27) (27) (29)
Interest expense (40) (26) (24)
Other income (expense), net 25 (8) (7)
---- ---- ----
Income before income taxes $106 $110 $146
==== ==== ====
(a) TEL operating profit in 1998 included $15 million from the TEL marketing
agreements with Octel.
Petroleum Additives Segment
Petroleum additives 1998 operating profit included a $9 million benefit net of
related expenses from the MMT settlement with the Canadian government. Excluding
this benefit, petroleum additives operating profit decreased 8% from 1997 and
increased 1% from 1996. When compared to 1997, the reduction in 1998 operating
profit reflected the impact of lower selling prices. When compared to 1996,
operating profit in 1998 was favorably affected by higher shipments and foreign
currencies, although lower prices offset these benefits. In 1998 we reduced cost
of goods sold by obtaining lower raw material costs and rationalizing plant
operations.
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By implementing tighter spending controls and cost reduction initiatives,
we reduced selling, general, and administrative (SG&A) expense by $6 million
when compared to 1997 and $10 million compared to 1996. SG&A, including
research, development and testing expense, as a percentage of net sales,
decreased to 14.0% in 1998 from 14.2% in 1997 and 14.5% in 1996.
TEL Segment
Including $15 million from the TEL marketing agreements with Octel, TEL
operating profit decreased 32% from 1997 and 57% from 1996. When comparing
operating profit from 1998 to 1997, a slight increase in volume was more than
offset by the continued erosion of selling price and higher product cost. The
decrease in TEL operating profit when comparing 1998 to 1996 was due not only to
lower selling prices but also to lower volume and higher product cost.
SG&A expense decreased $2 million when compared to 1997 and $5 million
compared to 1996. However, as a percentage of net sales, SG&A increased slightly
over the last three years, to 6.0% in 1998, compared to 5.8% in 1997 and 5.5% in
1996. As a percentage of net sales, SG&A showed an increase in 1998 due to the
decrease in total net sales and the impact of the TEL marketing agreements with
Octel.
The following discussion references the Consolidated Statements of Income on
page 28.
DISCUSSION OF INCOME AND EXPENSE
Ethyl continues to control and reduce costs by enhancing operational efficiency.
While lower pricing in 1998 negatively affected our net income, we remain
committed to delivering value to both our customers and our shareholders.
Net Income
Net income for 1998 totaled $71 million or $.85 per share as compared to $78
million or $.71 per share in 1997 and $93 million or $.78 per share in 1996. In
1998, non-recurring income included a net benefit of about $19 million or $.23
per share, and in 1997 these items included a net charge of about $500 thousand.
The 1998 results also included the effect of the October 1997 repurchase of
almost 35 million shares, or about 30%, of Ethyl's common stock. Subsequently,
while net income decreased in 1998, basic and diluted earnings per share
increased, benefiting from fewer shares outstanding.
[Photo]
[Photo Caption] MMT helps reduce greenhouse gases as well as certain exhaust
pollutants that contribute to urban smog. Based on data from refinery and
gasoline use of MMT in Canada, we estimate that use of MMT in all U.S. gasoline
would produce the same environmental benefit as taking 3 million cars off U.S.
roads annually.
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A strategic action in 1996 was our acquisition of the worldwide lubricant
additives business of Texaco Inc. The acquisition gave Ethyl an additional
presence in Europe, Latin America and Asia Pacific and enhanced our product
offerings. We quickly identified unneeded manufacturing capacity and sold a
subsidiary, that included a plant located in Gent, Belgium, in 1997.
Selling, General & Administrative Expense
(1996 - 1998)
[Graph]
In 1998, Ethyl continued to focus on reducing expenses. We took better
advantage of communication technologies such as video conferencing and the
Internet to keep in touch with our customers and employees around the world.
When visiting our customers we elected to travel more economically and make
every visit count. We further reduced SG&A expense by eliminating certain
positions and offering an enhanced retirement package for an overall reduction
of 40 positions.
Special Items Income, Net
The special items of $5 million in 1998 included income of $9 million net of
expenses from the settlement with the Canadian government. These items also
included a one-time charge of $4 million for the enhanced retirement offer and
elimination of certain positions.
Interest and Financing Expenses
Interest and financing expenses were $40 million in 1998, $26 million in 1997
and $24 million in 1996. During this three-year period, average debt increased
due to the use of long-term debt to fund the 1997 common stock repurchase. As a
result interest expense increased $14 million from 1997 and $16 million when
compared to 1996. With each of these increases, $14 million can be attributed to
higher average debt.
Other Income (Expense), Net
Other income (expense), net totaled $25 million in income in 1998 as compared to
$4 million in expense in 1997 and $400 thousand in income in 1996. The 1998
total included a $15 million net gain on the sale of non-operating assets in
addition to $8 million of interest income from a favorable tax settlement with
the Internal Revenue Service. The other expenses in 1997 were largely due to $16
million of impairment losses offset by $11 million of gains on sales of
non-operating assets. Immaterial items comprised the 1996 amount. See Note 16 on
page 42.
Income Taxes
Income taxes were $36 million in 1998, $32 million in 1997 and $53 million in
1996. The increase in 1998 reflected a higher effective income tax rate of 33.6%
compared to 29.5% the previous year. Lower pretax 1998 income partially offset
the impact of the higher effective tax rate. When we sold our Gent, Belgium
subsidiary in 1997, Ethyl received a $4 million tax benefit, reducing the 1997
effective tax rate. In that same year, we resolved some income tax audit issues,
which also contributed to the lower effective tax rate. A 27% reduction in
income before income taxes, as well as a decrease in the effective income tax
rate, contributed to the $17 million income tax decrease between 1998 and 1996.
The decrease in the effective income tax rate to 33.6% in 1998 from 36.2% in
1996 was primarily the result of the benefit from the 1998 tax settlement. See
Note 17 on page 43 for details of effective income tax rates.
[Photo]
[Photo Caption] In order to meet stringent specifications from manufacturers,
engine parts are evaluated rigorously after testing, a process known as
"rating," shown here at Ethyl's research lab in Richmond.
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[Photo]
[Photo Caption] Some of Ethyl's newest products are polymethacrylate (PMA)
viscosity modifiers and pour point depressants (PPD). These products help keep
lubricants flowing freely under the harshest of low environmental temperatures
and in some of the most demanding applications.
The following discussion references the Consolidated Statements of Cash Flows on
page 31.
DISCUSSION OF CASH FLOWS
In 1998, petroleum additives and TEL operations delivered strong cash flow to
Ethyl. We used our cash to repay $124 million of debt.
Cash from Ethyl's operating activities totaled $130 million in 1998, as compared
to $133 million in 1997 and $185 million in 1996. In 1998 we combined $130
million in cash from operating activities, $10 million cash-on-hand and $30
million in proceeds from the sale of non-operating assets. We used this cash to
repay our long-term debt by $124 million, pay dividends of $21 million, fund
capital expenditures of $23 million and invest $1 million to fund a trust, which
covers benefits for certain groups of retired employees.
Cash from operating activities totaled $133 million in 1997. We added $296
million in net additional long-term debt, $10 million from the sale of a Belgian
subsidiary, plus another $6 million from the sale of non-operating assets and $2
million from cash-on-hand. We used this cash to fund the repurchase of almost 35
million shares of common stock for $327 million plus the related transaction
costs of $2 million. In addition, cash flow covered capital expenditures of $43
million, dividends to shareholders of $59 million and $15 million to fund a
trust covering benefits for certain groups of retired employees.
In 1996, we combined $185 million in cash from operating activities, $10
million in cash-on-hand and $29 million in additional long-term debt. We used
our cash to fund the $134 million cash portion of the Texaco acquisition, $29
million in capital expenditures and dividend payments of $59 million.
Cash dividends per common share were $.25 in 1998 and $.50 in 1997 and
1996. At the same time we initiated the stock repurchase, Ethyl's board of
directors reduced the annual dividend rate from $.50 to $.25 per common share
effective January 1, 1998. Reducing the dividend rate together with fewer shares
outstanding significantly improved Ethyl's cash flow position.
Ethyl's management team anticipates that cash from operations in the future
should be sufficient to cover operating expenses and reduce our debt by another
$100 million in 1999.
FINANCIAL POSITION AND LIQUIDITY
At year end, Ethyl showed cash and cash equivalents of $8 million as compared to
$18 million the previous year. A popular measure of liquidity, working capital
indicates the amount of current assets remaining after covering current
liabilities. At the end of 1998, Ethyl had $214 million of working capital as
compared to $219 million at year-end 1997. Working capital, expressed as a
current ratio, was 2.20 to 1 in 1998, meaning we had $2.20 in current assets to
cover every $1.00 in current liabilities. For 1997, our current ratio was 2.21
to 1. While we reduced the current portion of long-term debt, the decrease in
19
<PAGE>
cash as well as an increase in accounts payable more than offset this reduction.
During the course of 1998, Ethyl repaid $40 million on our term loan, $57
million on other bank debt, $20 million on the Texaco note, and $7 million on
medium-term notes. This total $124 million repayment was partly offset by a $5
million capital lease and the recording of a $37 million accrual on the Texaco
note. For further information on long-term debt and related debt covenants, see
Note 10 on page 37.
Another impact on liquidity resulted from Ethyl's repurchase of almost 35
million shares of its common stock on October 2, 1997, at a price of $9.25 per
share. The total transaction cost was approximately $329 million including
related expenses.
In August 1997, in anticipation of the share repurchase, Ethyl replaced its
existing $500 million unsecured competitive advance and revolving credit
agreement with a new five year unsecured credit agreement for $900 million. As a
part of this transaction, Ethyl repaid $250 million outstanding under the former
credit agreement and borrowed this same amount under the new credit agreement.
In November 1997, we replaced the $900 million agreement with an Amended and
Restated Competitive Advance, Revolving Credit Facility and Term Loan Agreement
for up to $750 million. The term loan was for an initial borrowing of $300
million. The revolving credit agreement permits borrowing of up to $450 million.
[Photo]
[Photo Caption] Multi-grade motor oils are comprised of around 20% petroleum
additives blended into base oils.
Also in 1997, we borrowed $303 million, primarily on the term loan. In
December, we repaid the first of five annual $7 million medium-term notes. These
transactions resulted in net cash borrowing of $296 million.
As a percentage of total capitalization, Ethyl's long-term debt, excluding
the current portion, decreased from 80% at year-end 1997 to 74% at the end of
1998. The 1997 percentage excludes the effect of the then still-contingent
portion of the Texaco note. In addition to cash flows from operations, proceeds
from occasional sales of business units, plant sites or other assets normally
are used to repay long-term debt.
The construction and expansion programs following the Texaco acquisition
are now complete. Therefore, we expect capital expenditures to be moderately
lower in 1999 than in 1998. Following 1999, we anticipate capital expenditures
to increase slightly. Capital spending for environmental and safety projects
will likely remain near current levels. Ethyl will continue to finance capital
spending through cash provided from operations.
RESEARCH AND DEVELOPMENT
Ethyl's research and development (R&D) provides the basis for our market-leading
fuel and lubricant additive technology, as well as our ability to support our
customers with focused product development.
Our R&D efforts continue to elevate many of our additive technologies to
leading-edge status. With our R&D activities focused on supporting customers, we
provide product and performance testing as well as other technical services. As
our customers have reduced their in-house research capabilities, we have stepped
in to fill the gap. In addition, governments and OEMs set increasingly stringent
product performance specifications that, in turn, require more testing. Ethyl's
R&D staff also takes part in customer support teams to address issues related to
cost reduction, quality improvement and environmental studies.
Ethyl recently introduced new lubricant additive technology including fully
formulated packages that meet new industry specifications or customer
requirements for heavy duty diesel engine oils, automotive and industrial gear
oils, and hydraulic fluids. In 1998, we developed and commercialized several new
fuel additive products including a new gasoline detergent for use in global
markets and a new premium diesel fuel additive for use in North America.
20
<PAGE>
[Photo]
[Photo Caption] Gasoline and diesel fuel additives reduce deposits on intake
valves and keep fuel injectors, like this one, spraying in their designated
pattern. Our innovative approach to fuel technology has significantly increased
our fuel additives market share over the past few years.
Our new automotive gear, automatic transmission fluid and hydraulic
additive products have been commercialized for the Asia Pacific and Latin
American markets. We continue to increase our presence in the European crankcase
lubricant additives market by launching new viscosity modifier products
specifically designed to meet the requirements of the Association des
Constructeurs Europeens d'Automobiles (ACEA) specifications.
R&D efforts support Ethyl's strategy of targeted growth, value-added
service and innovative technology. To optimize our worldwide manufacturing and
supply operations, we also continue to conduct product line and process reviews.
Additional efforts continue to take full advantage of the technology obtained
through the acquisition of the worldwide lubricant additives business of Texaco.
Ethyl actively protects its inventions, new technologies and product
developments. We currently own approximately 900 issued United States and
foreign patents, with a significant number of additional patents pending. Some
of these patents are licensed to others. In addition, Ethyl has acquired the
rights under the patents and inventions of others through licenses. Ethyl's
patent position is strong, aggressively managed and sufficient for the conduct
of our business.
Total R&D expenses were $67 million in 1998, $71 million in 1997 and $72
million in 1996. Under the Financial Accounting Standards Board (FASB) Statement
No. 2 definition, R&D expenses were approximately $40 million in 1998, $42
million in 1997 and $47 million in 1996. One of the principal drivers for this
continuing decrease is use of more in-house testing. All of our R&D expenses
were related to petroleum additives.
PROPERTIES
The following is a list of Ethyl's principal operating properties. We own all of
the research and development facilities and manufacturing properties, which
primarily support the business segment of petroleum additives.
Research and Development
Ashland, Virginia
Bracknell, Berkshire, England
Richmond, Virginia
Manufacturing
Feluy, Belgium
Houston, Texas (also provides TEL storage and distribution)
Natchez, Mississippi
Orangeburg, South Carolina
Port Arthur, Texas
Rio de Janeiro, Brazil
Sarnia, Ontario, Canada
Sauget, Illinois
Incorporated in Virginia, Ethyl owns its corporate headquarters located in
Richmond. Ethyl generally leases its regional and sales offices in a number of
locations around the world. Our newest regional office opens in Beijing, China,
in 1999.
Raw Materials and Product Supply
Ethyl believes the sources of chemicals and base oils used in the manufacture
and blending of petroleum additives are adequate for our operations. Major raw
materials are purchased under long-term contracts with multi-source suppliers.
The following are significant long-term agreements for finished products:
- DSM Copolymer, Inc. supplies olefin copolymer
(OCP) viscosity index improver
- Octel supplies TEL
- Albemarle Corporation supplies MMT and antioxidants
Production Capacity
As part of our supply optimization plan, in 1997 we replaced and updated certain
production facilities at Sauget, Natchez, Houston and Feluy. In 1998 we
increased production at our Houston and Sarnia plants. We believe our plants and
our supply agreements are sufficient to meet projected sales levels. Operating
rates vary with product mix and normal sales swings. We keep our plants well
maintained and in good operating condition.
21
<PAGE>
Segment Assets
The table below discloses certain asset information by segment and the
reconciliation to consolidated assets. Segment assets consist of accounts
receivable, inventory and long-lived assets. Long-lived assets consist of
property, plant and equipment, net of depreciation and goodwill and other
intangibles, net of amortization.
Segment Assets and Related Information
(in millions of dollars)
1998 1997 1996
------ ------ ------
Segment assets
Petroleum additives $ 720 $ 677 $ 726
Tetraethyl lead(a) 82 95 118
------ ------ ------
802 772 844
Cash 8 18 20
Other accounts receivable 9 25 -
Deferred income taxes and prepaid expenses 21 22 19
Other assets and deferred charges 226 230 212
------ ------ ------
Total assets $ 1,066 $ 1,067 $ 1,095
====== ====== ======
Additions to long-lived assets
Petroleum additives(b) $ 70 $ 54 $ 26
Tetraethyl lead - 1 3
Other long-lived assets - 2 -
------ ------ ------
Total long-lived assets $ 70 $ 57 $ 29
====== ====== ======
Depreciation and amortization
Petroleum additives $ 57 $ 56 $ 56
Tetraethyl lead 2 2 2
Other long-lived assets 4 4 4
------ ------ ------
Total depreciation and amortization $ 63 $ 62 $ 62
====== ====== ======
(a) Tetraethyl lead segment assets include a receivable related to the TEL
marketing agreements of $17 million in 1998.
(b) Petroleum additives additions to long-lived assets include increases in
segment intangibles as a result of the recognition of a portion of the note
payable to Texaco. The amount of this non-cash transaction was $43 million
in 1998 and $14 million in 1997. In addition, in 1998, property, plant and
equipment increased due to a capital lease.
GEOGRAPHIC AREAS
Outside the U.S. Ethyl operates in European, Asian and Latin American countries
as well as in Australia and Canada. In most of the countries where we do
business, the economies are generally stable. In countries with more political
and economic uncertainty, Ethyl minimizes its exposure through U.S. dollar
denominated transactions and letters of credit. Our manufacturing operations in
Latin America are in Brazil and are conducted in the local currency. Because our
operations in Brazil are limited, the recent devaluation of the Brazilian Real
is not expected to have a significant impact on results of operations. Sales in
other South American countries are conducted primarily in U.S. dollars.
Consequently, there is no expectation that Ethyl will experience significant
exposure risk.
Ethyl seeks to transact business in foreign countries where it is most
likely that our earnings can be repatriated, or returned to the U.S. in cash.
Sales in other areas are normally prepaid or paid through letters of credit. Our
foreign customers mainly consist of financially viable government organizations
and large private companies.
Because of our international business activities, changes in foreign
currency rates affect us. As we move toward consolidating our manufacturing
operations in the U.S. and Europe, we have reduced our ability to minimize
foreign currency exposures through operational means.
22
<PAGE>
Therefore, Ethyl has begun participating in selective foreign currency forward
contracts to minimize the effects of changes in currency rates.
The table below reports net sales and long-lived assets by geographic area.
No transfers occurred between our business segments during the three-year period
shown. With the exception of the United States, no country exceeded 10% of net
sales or long-lived assets in any year. Ethyl allocated revenues to geographic
areas based on the location to which the product was shipped.
Geographic Areas
(in millions of dollars)
1998 1997 1996
------ ------ ------
Net sales
United States $ 440 $ 447 $ 406
Foreign 534 617 744
------ ------ ------
Total $ 974 $1,064 $1,150
====== ====== ======
Long-lived assets
United States $ 421 $ 421 $ 430
Foreign 70 67 79
------ ------ ------
Total $ 491 $ 488 $ 509
====== ====== ======
ENVIRONMENTAL MANAGEMENT
Ethyl operates under policies that comply with federal, state, local and foreign
requirements regarding the handling, manufacture and use of materials. Some of
these materials may be classified as hazardous or toxic by one or more
regulatory agencies. Ethyl also complies with all laws, regulations, statutes
and ordinances protecting the environment, including those related to the
discharge of materials. We expect to continue to comply in every material
respect. Complying with federal, state, local and foreign environmental
protection laws has not had a material effect on our financial position in the
past, nor do we expect it to in the future.
In 1998, Ethyl spent $17 million in environmental operating and clean-up
costs, excluding depreciation of previously capitalized expenditures. We spent
$17 million in 1997 and $18 million in 1996. The ongoing cost of operations was
about $15 million dollars for each of the three years, with the balance
representing clean-up, or remediation, and monitoring costs. In the next few
years, we expect environmental operating and remediation costs to be slightly
higher than in 1998.
[Photo]
[Photo Caption] Hydraulic oils need additives to resist the strains of their
environment. Ethyl hydraulic oil additives were the first to claim passage of
all hydraulic pump manufacturers' specification tests, including those involving
wet operating environments.
23
<PAGE>
Ethyl spent $7 million per year in 1998, 1997 and 1996 on capital
expenditures for pollution prevention and safety projects, including costs
assigned to other capital projects. For each of the next few years, we
anticipate capital expenditures for these types of projects to be about the
same.
Our estimate of the effects of complying with governmental pollution
prevention and safety regulations is subject to:
- potential changes in applicable statutes and regulations
- uncertainty as to the success of anticipated solutions
to pollution problems
- uncertainty as to whether additional expense may prove
necessary
- potential for emerging technology to affect remediation
methods and reduce associated costs
Ethyl is subject to the federal Superfund law and similar state laws under
which we may be designated as a Potentially Responsible Party (PRP). We may be
liable for a share of the costs associated with cleaning up various hazardous
waste sites. In all but three cases where Ethyl has been named a PRP, we
demonstrated that we were only a de minimis participant meaning our cost was
less than $50,000 or that we were a minor participant where our cost was less
than $300,000.
[Photo]
[Photo Caption] Ethyl railroad diesel engine oil additives are approved and used
by more railroads than any other additive package in the world.
Almost all Superfund sites, including the two largest, represent
environmental issues that are quite mature. The sites have been investigated,
and in many cases, the remediation methodology and the proportionate shares of
each PRP have been established. The financial viability of the other PRPs is
reasonably assured. Ethyl has previously accrued the estimated expense of the
remediation and monitoring of these sites. While remediation has been completed
at some sites, we expect the remediation and monitoring at other sites,
including one of the largest, to continue for an extended period.
In one other case, the identification of contaminants and remediation costs
is in the preliminary stages. The identification of PRPs and allocation of
responsibilities is also in early stages. We expect our share of the allocation
to be small, although allocation has not yet begun. Ethyl anticipates being a
minor participant in the ultimate clean-up.
In de minimis PRP matters and in some minor PRP matters, Ethyl generally
negotiates a consent decree to pay any apportioned settlement. This relieves
Ethyl of any further liability as a PRP, except for remote contingencies.
In all other PRP matters, Ethyl's records indicate that unresolved
exposures are not material, individually or collectively, to our financial
position or results of operations.
Ethyl reviews the status of significant existing or potential environmental
issues, including PRP matters. We accrue and expense our proportionate share of
environmental remediation and monitoring costs in accordance with FASB Statement
No. 5 and FASB Interpretation No. 14 as clarified by American Institute of
Certified Public Accountants (AICPA) Statement of Position 96-1. As appropriate,
we adjust our accruals on the basis of additional information.
At year-end 1998, total gross liabilities were $43 million as compared to
$44 million in 1997. We expect to receive insurance reimbursements for a portion
of the amounts. Ethyl has contingent liabilities for environmental remediation
costs associated with past operations. As new technology proves to be viable, we
expect accrued and contingent amounts may be reduced.
We believe that remediation costs for current sites, which will occur over
an extended period of time, will not have a material adverse impact on Ethyl's
financial position. However, these costs could possibly have a material effect
on results of operations or liquidity in any particular quarter or year.
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<PAGE>
Year 2000 Readiness Disclosure
The Year 2000 statement in this communication is being designated a Year 2000
Readiness Disclosure within the meaning of the United States Year 2000
Information and Readiness Disclosure Act of 1998.
Ethyl's senior management and board of directors place a high priority on and
have approved the necessary funding to complete the Year 2000 compliance effort.
Ethyl's Year 2000 project manager coordinates this initiative and provides
senior management with regular status updates.
We enhanced our Year 2000 readiness when we converted all mainframe systems
to modern client server systems over the last several years. This includes
implementation of SAP R/3, PeopleSoft, and other commercial and desktop
software, all of which are represented to be Year 2000 compliant. Ethyl has
reviewed our manufacturing and R&D systems, testing equipment, desktop computers
and technical infrastructure. We have plans in place to have both software and
hardware fully compliant by the end of the second quarter of 1999. In addition,
Ethyl contracted with an independent third party to provide assistance with the
review of manufacturing systems and embedded controllers. We will initiate a
follow-up review in the first half of 1999.
Ethyl expects our facilities, equipment and information systems will be
fully functional and will operate accurately and without interruption both
before and after January 1, 2000. We also expect that our products and services
will be available continuously. We have performed extensive testing and used
scheduled plant shutdowns to implement and test Year 2000 upgrades and
replacements. We will continue testing in 1999.
Our Year 2000 efforts include reviewing the readiness efforts of our
mission critical suppliers as well as those of our key customers. This review is
an ongoing process. When requested, we meet with customers regarding our
readiness.
Ethyl's costs associated with Year 2000 compliance are low, $400 thousand
in 1998, because we completed the majority of our compliance effort through
systems implementation over the last several years. We estimate remaining costs
in 1999 to be around $2 million and will be covered by cash from operations. Of
the remaining estimated costs, all but $400 thousand will be capitalized,
representing less than 5% of our information technology operating budget.
As part of our assessment, we rated the impact of a Year 2000 problem for
each mission critical system in terms of probable risk to the business and
successful resolution of the issue. Due to the extensive work that has been
completed and the plans in place for full compliance, Ethyl believes sufficient
time and resources are committed to resolve any remaining Year 2000 issues. We
anticipate that internal risks are low and the overall risk of business
interruption is minimal.
Our Year 2000 program also includes a review of external risk factors as
well as the determination of actions necessary to minimize any potential
impacts. We will develop a contingency plan by the end of the second quarter
1999 to address non-compliance of a critical system or business partner. This
plan will also address worst case scenarios and could result in special staff
training, stockpiling critical raw materials and inventory, and scheduling
production runs to minimize losses in the event of power outages.
Ethyl engaged a separate independent third party to perform a status review
of our company-wide Year 2000 program. The results have been used to enhance and
focus our effort. We plan to conduct a follow-up review during the first half of
1999. Our emphasis on Year 2000 readiness has not seriously delayed any of
Ethyl's mission critical programs.
The European Monetary Union
Ethyl is prepared for the operational and business requirements related to the
implementation of the Euro in the European Monetary Union. We contacted our
European customers to assure them of Ethyl's ability to conduct business using
Euro currency pricing and billing. We notified our primary suppliers in the
Eurozone that beginning January 1, 1999, Ethyl prefers to conduct business in
the Euro.
Ethyl's financial system is Euro compliant. We completed extensive testing
in 1998 to ensure that the system meets transaction and reporting requirements
for the Euro. Test results and operational performance have been satisfactory.
We do not expect any material impact on revenues, costs or income related to
price transparency due to the Euro conversion.
Market Risk
Ethyl is exposed to various market risk factors such as fluctuations in interest
and foreign currency rates, as well as changes in marketable security prices and
the cost of raw materials.
25
<PAGE>
These risk factors can impact our results of operations, cash flows and
financial position. We manage these risks through regular operating and
financing activities, and when necessary, use derivative financial instruments
such as foreign currency forward contracts. These derivative instruments are
with major financial institutions and are not for speculative or trading
purposes.
The following analysis presents the effect on Ethyl's earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on December 31, 1998. Only the potential impacts of our hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact Ethyl's business.
Interest Rate Risk
At year-end 1998, Ethyl carried $559 million of outstanding debt on its books,
with $505 million of that total held at variable interest rates. Holding all
other variables constant, if interest rates hypothetically increased by 10%, the
impact on earnings and cash flow would be an increase to interest expense of $3
million. Conversely, if interest rates hypothetically decreased by 10%, with all
other variables held constant, the change in rate would not materially impact
the fair market value of the outstanding debt.
Ethyl closely monitors short and long-term interest rates. We manage our
interest rate risk exposure through the ratio of fixed rate to variable rate
debt. In order to maintain an appropriate mix of fixed rate and variable rate
debt, Ethyl may choose to enter into interest rate swap agreements or a public
long-term fixed rate debt offering.
Foreign Currency Risk
Ethyl sells to customers in foreign markets through our foreign operations and
through export sales from our plants in the U.S. These transactions are often
denominated in currencies other than the U.S. dollar. Our primary currency
exposures are the Euro, Japanese Yen, Canadian Dollar and British Pound
Sterling.
Until recently, Ethyl limited foreign currency risk by operational means,
mostly by matching our cash flow exposures in major currencies. However, as we
continue to consolidate manufacturing operations, our currency risk exposure
increases. In 1998, Ethyl entered into forward contracts to minimize the risk of
foreign currency denominated receivables. We record gains and losses associated
with currency rate changes on the forward contracts in current income.
At year-end 1998, Ethyl had a series of Japanese Yen forward sale contracts
in the amount of $22 million to minimize currency exposure from anticipated
future cash flows from foreign operations. These contracts all have maturity
dates in 1999. Holding all other variables constant, a hypothetical 10% adverse
change in the Yen rate would result in a decrease of over $2 million in the
market value of the forward contracts.
Marketable Security Price Risk
Marketable securities at year-end 1998 were recorded at a fair value of $20
million, which included net unrealized gains of $4 million. The estimated loss
in the fair value of the securities resulting from a hypothetical 10% decrease
in price is $2 million. As the securities are classified as "available for
sale", any impact on the fair market value would be reported as a component of
Shareholders' Equity, and would not affect Ethyl's results of operations or cash
flows, until the securities are sold.
Raw Material Price Risk
Ethyl is exposed to the risk of increasing raw material prices, which could
impact profit margins. However, when raw material cost increases, we are
generally able to increase selling prices accordingly. Therefore, we expect the
impact of increasing raw material cost on our results of operations or cash
flows to be immaterial.
LITIGATION
Ethyl and our subsidiaries are involved in legal proceedings. These legal
proceedings are incidental to our business and include administrative or
judicial actions seeking remediation under environmental laws such as Superfund.
These actions also include premises asbestos cases and product liability cases.
While it is not possible to predict or determine the outcome of such pending
proceedings, it is our opinion that Ethyl and our subsidiaries will not
experience materially adverse effects on our results of operations or financial
condition.
26
<PAGE>
FINANCIAL POLICY
Ethyl Corporation's Financial Standards
Our goal is to present clearly Ethyl's financial information in order enhance
your understanding of Ethyl's sources of earnings and our financial condition.
We also present certain information to comply with the Form 10-K requirements of
the Securities and Exchange Commission.
Management's Report on the Financial Statements
Ethyl Corporation's management prepared the financial statements and related
notes appearing on pages 28 through 45 to conform to generally accepted
accounting principles. In doing so, management made informed judgments and
estimates of the expected effects of certain events and transactions on the
reported amounts of assets and liabilities at the dates of the financial
statements. The same holds true for the reported amounts of revenues and
expenses during these reporting periods. Financial data appearing elsewhere in
the annual report is consistent with these financial statements. However, actual
results could differ from the estimates on which these financial statements are
based.
Ethyl maintains a system of internal controls to provide reasonable, but
not absolute, assurance of the reliability of the financial records and the
protection of assets. Written policies and procedures, careful selection and
training of qualified personnel and an internal audit program support Ethyl's
internal control system.
The independent certified public accounting firm, PricewaterhouseCoopers
LLP, audited these financial statements in accordance with generally accepted
auditing standards. The audit included a review of Ethyl's internal accounting
controls to the extent considered necessary to determine audit procedures.
The audit committee of the board of directors, composed only of outside
directors, meets with management, internal auditors and the independent
accountants to review accounting, auditing and financial reporting matters. On
the recommendation of the audit committee, the board appoints the independent
accountants, subject to shareholder approval.
Forward-Looking Comments
Some of the information presented in the introductory message and subsequent
interviews, as well as in the review of operations, constitutes forward-looking
comments within the meaning of the Private Securities Litigation Reform Act of
1995. The forward-looking comments may focus on future objectives or
expectations about future performance and may include statements about trends or
anticipated events.
Ethyl believes our forward-looking comments are based on reasonable
expectations and assumptions, within the bounds of what we know about our
business and operations. However, Ethyl offers no assurance that actual results
will not differ materially from our expectations due to uncertainties and
factors that are difficult to predict and beyond our control.
These factors include, but are not limited to, timing of sales orders, gain
or loss of significant customers, competition from other manufacturers, a
significant rise in interest rates, or changes in the demand for Ethyl's
products. Other factors include significant changes in new product introduction,
increases in product cost, the impact of fluctuations in foreign exchange rates
on reported results of operations, changes in various markets or the impact of
consolidation of the petroleum additives industry. Additional factors that could
cause actual results to vary from expectations include Year 2000 compliance
testing outcomes, costs to remedy non-compliant systems, disruption of business
caused by the failure of vendors, suppliers or customers to be Year 2000
compliant, non-compliant equipment or the loss of electrical power due to
non-compliant energy providers.
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per-phare amounts) Ethyl Corporation & Subsidiaries
- ---------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
<S> <C> <C> <C>
Net sales $974,190 $1,063,615 $1,149,651
Cost of goods sold 725,018 761,660 804,623
-------- ---------- ----------
Gross profit 249,172 301,955 345,028
TEL marketing agreements services 14,944 - -
Selling, general and administrative expenses 79,387 90,859 103,626
Research, development and testing expenses 67,363 71,172 71,723
Special items income, net 4,885 -- --
-------- ---------- ----------
Operating profit 122,251 139,924 169,679
Interest and financing expenses 40,409 25,668 24,268
Other income (expense), net 24,519 (4,274) 361
-------- ---------- ----------
Income before income taxes 106,361 109,982 145,772
Income taxes 35,782 32,452 52,800
-------- ---------- ----------
Net income $ 70,579 $ 77,530 $ 92,972
======== ========== ==========
Basic and diluted earnings per share $ 0.85 $ .71 $ .78
======== ========== ==========
See accompanying notes to financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
<CAPTION>
(in thousands of dollars ) Ethyl Corporation & Subsidiaries
- ----------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $70,579 $77,530 $92,972
Other comprehensive income (loss), net of tax:
Unrealized gain on marketable securities $ 2,484 $ 9,824 $ -
Less: Reclassification adjustment
for gain included in net income (9,487) (7,003) - 9,824 - -
----- ------ ------
Foreign currency translation adjustments $2,361 (10,261) (3,978)
Less: Reclassification adjustment for
loss included in net income - 2,361 4,030 (6,231) - (3,978)
----- ------ ------
Minimum pension liability (2,667) - -
------ ------ ------
Other comprehensive income (loss) (7,309) 3,593 (3,978)
------ ------ ------
Comprehensive income $63,270 $81,123 $88,994
======= ======= =======
See accompanying notes to financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share amounts) Ethyl Corporation & Subsidiaries
- -----------------------------------------------------------------------------------------------------------
December 31 1998 1997
- -----------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,403 $ 18,162
Accounts receivable, less allowance for doubtful
accounts ($1,386 in 1998; $2,349 in 1997) 152,937 165,259
Receivable - TEL marketing agreements services 16,954
Inventories:
Finished goods and work-in-process 161,480 166,089
Raw materials 21,328 20,001
Stores, supplies and other 8,968 7,746
---------- ----------
191,776 193,836
Deferred income taxes and prepaid expenses 21,358 21,857
---------- ----------
Total current assets 391,428 399,114
---------- ----------
Property, plant and equipment, at cost 776,452 766,413
Less accumulated depreciation and amortization 400,426 357,316
---------- ----------
Net property, plant and equipment 376,026 409,097
---------- ----------
Other assets and deferred charges 182,785 179,918
Goodwill and other intangibles, net of amortization 115,305 79,148
---------- ----------
Total assets $1,065,544 $1,067,277
========== ==========
Liabilities & shareholders' equity
Current liabilities:
Accounts payable $ 82,369 $ 66,573
Accrued expenses 48,496 50,743
Dividends payable 5,217 5,217
Long-term debt, current portion 26,965 46,707
Income taxes payable 14,519 11,188
---------- ----------
Total current liabilities 177,566 180,428
---------- ----------
Long-term debt 531,859 594,429
Other noncurrent liabilities 98,321 86,308
Deferred income taxes 70,796 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 (5,604) 1,705
Retained earnings 109,141 59,428
---------- ----------
187,002 144,598
---------- ----------
Total liabilities and shareholders' equity $1,065,544 $1,067,277
========== ==========
See accompanying notes to financial statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands of dollars except share data) Ethyl Corporation & Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Shares Amounts
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock
(authorized 400,000,000 shares)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 83,465,460 $ 83,465 118,443,835 $ 118,444 118,443,835 $ 118,444
Issuance of restricted stock - - 21,620 21 - -
Purchased and retired - - (34,999,995) (35,000) - -
--------------- ------------ ---------------- -------------- ---------------- -------------
Ending balance 83,465,460 83,465 83,465,460 83,465 118,443,835 118,444
=============== ------------ ================ -------------- ================ -------------
Additional paid-in capital
Beginning balance - 2,799 2,799
Issuance of restricted stock - 178 -
Retirement of purchased common stock - (2,977) -
------------ -------------- -------------
Ending balance - - 2,799
------------ -------------- -------------
Accumulated other comprehensive (loss) income
Beginning balance 1,705 (1,888) 2,090
Foreign currency translation adjustments 2,361 (10,261) (3,978)
Realized foreign currency loss on
sale of subsidiary - 4,030 -
Unrealized gain on marketable equity securities 2,484 9,824 -
Realized gain on marketable equity securities (9,487) - -
Minimum pension liability (2,667) -
------------ -------------- -------------
Ending balance (5,604) 1,705 (1,888)
------------ -------------- -------------
Retained earnings
Beginning balance 59,428 320,545 286,795
Net income 70,579 77,530 92,972
Cash dividends declared ($.25 per share
in 1998, $.4375 in 1997 and $.50 in 1996) (20,866) (49,633) (59,222)
Stock repurchase - (289,014) -
------------ -------------- -------------
Ending balance 109,141 59,428 320,545
------------ -------------- -------------
Total shareholders' equity $ 187,002 $ 144,598 $ 439,900
============ ============== =============
See accompanying notes to financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) Ethyl Corporation & Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 18,162 $ 20,148 $ $ 29,972
------------ ------------- -------------
Cash flows from operating activities:
Net income 70,579 77,530 92,972
Adjustments to reconcile income to cash flows from operating activities:
Depreciation and amortization 63,310 61,752 61,919
Prepaid pension cost (8,051) (8,578) (7,933)
Net (gain) loss on sales and impairments of assets (15,682) 5,724 -
Deferred income taxes 17,202 (2,572) 7,860
Provision for enhanced retirement offer 3,986 - -
Change in assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable (6,416) 20,362 18,710
Increase in receivable - TEL marketing agreements services (16,954) - -
Decrease (increase) decrease in inventories 6,501 3,227 (1,241)
(Increase) decrease in prepaid expenses (2,243) (1,392) 5,239
Increase (decrease) in accounts payable and accrued expenses 11,877 (6,637) (78)
Increase (decrease) in income taxes payable 3,197 (8,912) 2,741
Other, net 2,404 (7,909) 5,049
------------ ------------- -------------
Cash provided from operating activities 129,710 132,595 185,238
------------ ------------- -------------
Cash flows from investing activities:
Capital expenditures (22,738) (43,496) (29,403)
Proceeds from sale of subsidiary - 10,048 -
Proceeds from sale of certain assets 29,852 5,596 -
Acquisition of business (net of $1,245 cash acquired) - - (133,032)
Rabbi trust funding (1,434) (15,192) -
Other, net (333) 158 (2,405)
------------ ------------- -------------
Cash provided from (used in) investing activities 5,347 (42,886) (164,840)
------------ ------------- -------------
Cash flows from financing activities:
Repayments of long-term debt (123,750) (256,750) -
Additional long-term debt - 553,000 29,000
Cash dividends paid (20,866) (59,222) (59,222)
Repurchases of common stock - (326,991) -
Other, net (200) (1,732) -
------------ ------------- -------------
Cash used in financing activities (144,816) (91,695) (30,222)
------------ ------------- -------------
(Decrease) increase in cash and cash equivalents (9,759) (1,986) (9,824)
------------ ------------- -------------
Cash and cash equivalents at end of year $ 8,403 $ 18,162 $ $ 20,148
============ ============= =============
See accompanying notes to financial statements
</TABLE>
31
<PAGE>
7
1. Summary of Significant Accounting Policies
Consolidation - The Consolidated Financial Statements include the accounts
and operations of Ethyl Corporation and all of its subsidiaries (the Company).
All significant intercompany accounts and transactions are eliminated in
consolidation.
Basis of Presentation - The Company's reporting of the TEL marketing
agreements with The Associated Octel Company Limited (Octel) from its effective
date of October 1, 1998 is discussed in Note 2. The Company accounts for its
proceeds from the agreements in accordance with the terms of the contract.
The Company repurchased 34,999,995 shares of the Company's outstanding
common stock on October 2, 1997 in accordance with the stock buy-back offer. The
related cost of approximately $328.9 million was funded with long-term debt.
Also, on December 31, 1997, the Company sold Ethyl Additives, BVBA, which
owned the Gent, Belgium, lubricant additives manufacturing and blending
facility.
The Company acquired the worldwide lubricant additives business of Texaco
Inc. (Texaco) on February 29, 1996. The Consolidated Financial Statements and
related Notes to Financial Statements include the results of operations of the
Texaco additives business since March 1, 1996.
Foreign Currency Translation - The financial statements of all foreign
subsidiaries were prepared in their respective local currencies and translated
into U.S. dollars based on the current exchange rate at the end of the period
for the balance sheet and a weighted-average rate for the period on the
statement of income. Translation adjustments (net of a deferred income tax
benefit of $1,519,000 in 1998 and $3,601,000 in 1997 and an income tax liability
of $56,000 in 1996) are reflected as foreign currency translation adjustments in
Accumulated Other Comprehensive (Loss) Income and accordingly have no effect on
net income. Transaction adjustments are included in net income.
Inventories - Inventories are stated at the lower of cost or market, with
cost determined on the last-in, first-out (LIFO) basis for substantially all
domestic and most foreign product inventories and on the weighted-average cost
basis for other inventories. Cost elements included in inventories are raw
materials, direct labor and manufacturing overhead. Raw materials include
purchase and delivery costs. Stores and supplies include purchase costs.
Property, Plant & Equipment - Accounts include costs of assets constructed
or purchased, related delivery and installation costs and interest capitalized
on significant capital projects during their construction periods. Expenditures
for renewals and betterments are also capitalized, but expenditures for repairs
and maintenance are expensed as incurred. The cost and accumulated depreciation
applicable to assets retired or sold are removed from the respective accounts,
and gains or losses therein are included in income. Depreciation is computed
primarily by the straight-line method based on the estimated useful lives of the
assets.
Capital leases are recorded at the lower of the fair value at the inception
of the lease or the present value of the minimum lease payments at the beginning
of the lease term. Amortization is computed by the straight-line method based on
the estimated economic life of the asset.
Impairment of Long-Lived Assets - The Company re-evaluates long-lived
assets based on undiscounted operating cash flows whenever significant events or
changes occur which might impair recovery of recorded costs and writes down net
recorded costs of the long-lived assets to fair value (based on discounted cash
flows or market values) when recorded costs, prior to impairment, are higher.
Environmental Compliance & Remediation - Environmental compliance costs
include the costs of purchasing and/or constructing assets to prevent, limit and
control pollution or to monitor the environmental status at various locations.
These costs are capitalized and depreciated based on estimated useful lives.
Environmental compliance costs also include maintenance, operating and
administrative costs with respect to facilities for pollution prevention and
control. Such operating costs are expensed as incurred.
Environmental remediation costs of facilities used in current operations
are generally immaterial and are expensed as incurred. Remediation costs and
post-remediation costs including post-remediation monitoring costs at facilities
or off-plant disposal sites that relate to an existing condition caused
primarily by past operations are accrued as liabilities and expensed when costs
can be reasonably estimated.
Goodwill & Other Intangibles - Goodwill acquired prior to November 1, 1970
($1,652,000) is not being amortized. Goodwill acquired subsequently ($4,664,000
and $4,991,000 at December 31, 1998 and 1997, respectively, net of accumulated
amortization) is being amortized on a straight-line basis, over a period of ten
years. Other intangibles ($108,989,000 and $72,505,000 at December 31, 1998 and
1997, respectively, net of accumulated amortization) are being amortized on a
32
<PAGE>
straight-line basis primarily over periods from four to twenty years, except for
the addition of a minimum pension liability adjustment intangible of $4,120,000
which is not amortized. Other intangibles also increased by $43,276,000 in 1998
and $13,784,000 in 1997 due to the realization of the contingent portion of the
purchase price of Texaco's worldwide lubricant additives business. The amount
was determined using an agreed-upon formula based on volumes of certain acquired
product lines shipped during calendar years 1996 through 1998. Amortization of
goodwill and other intangibles amounted to $11,784,000 for 1998, $9,416,000 for
1997 and $8,676,000 for 1996. Accumulated amortization of goodwill and other
intangibles was $47,636,000 and $35,852,000 at the end of 1998 and 1997,
respectively.
Pension Plans & Other Post-Employment Benefits - Annual costs of pension
plans are actuarially determined based on Financial Accounting Standards Board
(FASB) Statement No. 87, "Employers' Accounting for Pensions". The policy of the
Company is to fund its U.S. pension plans at amounts not less than the minimum
requirements of the Employee Retirement Income Security Act of 1974. Annual
costs of other post-retirement plans are accounted for based on FASB Statement
No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions". The policy of the Company is to fund its post-retirement health
benefits for retirees on a pay-as-you-go basis. Annual costs of other
post-employment plans for employees who leave the Company for reasons other than
retirement are immaterial and are accounted for based on FASB Statement No. 112,
"Employers' Accounting for Post-Employment Benefits". The Company's policy is to
fund such benefits on a pay-as-you-go basis. FASB Statement No. 132, "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits" was issued in
1998 as an amendment to FASB Statements No. 87, 88 and 106. The Company has
conformed its pension and other post-retirement disclosures to comply with FASB
Statement No. 132.
Profit-Sharing & Employee Savings Plan - The Company's employees
participate in defined contribution profit-sharing and employee savings plans,
which are generally available to all full-time and hourly employees. Certain
other employees, who are covered by collective bargaining agreements, may
participate pursuant to the terms of such bargaining agreements. The plans are
funded with contributions from participants and the Company. The Company has
recorded expenses of $3,072,000, $3,032,000 and $2,952,000 in 1998, 1997 and
1996, respectively, related to these plans.
Research, Development & Testing Expenses - Company-sponsored research,
development and testing expenses related to present and future products are
expensed as incurred. Research and development expenses determined in accordance
with FASB Statement No. 2, "Accounting for Research and Development Costs", were
$40.3 million, $42.2 million and $47.4 million in 1998, 1997 and 1996,
respectively.
Income Taxes - Income taxes are determined based on FASB Statement No. 109,
"Accounting for Income Taxes". Deferred tax liabilities and assets are
recognized for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax liabilities
and assets are determined based on differences between financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
Derivative Instruments & Hedging of Foreign Currency Exposures - Derivative
financial instruments are utilized by the Company to manage foreign exchange
risk. The Company does not enter into derivative financial instruments for
trading or speculative purposes.
Until recently, the Company limited foreign currency risk by operational
means, mostly by matching cash flow exposures in major currencies. As the
Company continues to consolidate manufacturing operations, our ability to
minimize currency exposure through operational means is reduced. In 1998, the
Company entered into forward contracts to hedge foreign currency receivables.
Gains and losses associated with currency rate changes on forward contract
hedges are recorded in current income.
Earnings Per Share - Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share, if different,
reflects the potential dilution that could occur if stock options or other
contracts result in the issue or exercise of additional shares of common stock
that share in the earnings.
Since the Company has only common shares, the only potential for dilution
are the options issued under the Company's stock-based compensation plan.
Options are assumed to be converted to common shares when the average market
price of the stock is higher than the option exercise price. The number of
33
<PAGE>
shares used to compute basic and diluted earnings per share is 83,465,460 in
1998, 109,793,327 and 109,800,596 in 1997 and 118,443,835 and 118,448,407 in
1996, respectively.
Stock-Based Compensation - The Company accounts for its stock-based
compensation plans pursuant to the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees".
FASB Statement No. 123, "Accounting for Stock-Based Compensation", allows
companies to account for stock-based compensation plans using a fair value based
method or to continue measuring compensation expense using the intrinsic value
method prescribed in APB Opinion No. 25. Since the Company continues to use the
intrinsic value method, pro forma net income and earnings per share are
disclosed as if the fair value based method of accounting had been applied. See
Note 12.
Comprehensive Income - The Company reports comprehensive income in
accordance with FASB Statement No. 130, "Reporting Comprehensive Income".
Accordingly, the Consolidated Statements of Comprehensive Income are included on
page 28, while Accumulated Other Comprehensive (Loss) Income is included in the
Shareholders' Equity section of the balance sheet. Amounts are reported net of
tax and include gains and losses on foreign currency translation adjustments,
unrealized gains and losses on marketable securities and the excess of the
minimum pension liability over the unrecognized prior service cost of a foreign
pension plan.
Segment Reporting - In 1998, the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information". FASB
Statement No. 131 supersedes FASB Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making decisions and assessing
performance as the source of the Company's segments. FASB Statement No. 131 also
requires disclosures about products and services, geographic areas and major
customers. The adoption of FASB Statement No. 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information. However, prior years' segment information has been restated to
conform to the new requirements. The Company's reportable segments, petroleum
additives and tetraethyl lead (TEL), are strategic business units that are
managed separately.
The segment tables and table notes disclosed on pages 15 through 23 are an
integral part of the annual report and are included in the review of operations.
The discussion of segment information on these pages is unaudited.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. TEL Marketing Agreements Services
On October 1, 1998, the Company entered into agreements with Octel to
market and sell tetraethyl lead (TEL). The area covered by the agreements (the
Territory) includes all world areas except for North America and the European
economic area. The Company continues to provide bulk distribution services,
marketing and other services related to sales made within the Territory. The
amounts for these services were not material in 1998. Octel continues to produce
TEL marketed under this arrangement and also provides marketing and other
services. The proceeds earned by the Company under this arrangement, net of cost
reimbursements, are reflected in the Consolidated Statements of Income in the
caption, "TEL Marketing Agreements Services".
All sales under the agreements are made in the name of or on behalf of
Octel. The proceeds generated from the sale of TEL in the Territory are included
in determining the proceeds for services from the agreements. The net proceeds
are paid to the Company and Octel as compensation for services and are based on
an agreed-upon formula with the Company receiving approximately one-third of the
total compensation for services provided.
As part of the arrangements, most of the Company's remaining inventory of
TEL will be sold to Octel over an agreed-upon period at a wholesale price.
Accordingly, these sales to Octel and distribution services are reflected in the
1998 Consolidated Statements of Income in net sales and cost of sales. Octel
will use the inventory for sales in the Territory.
34
<PAGE>
Summary financial information related to the TEL alliance for the period
October 1 through December 31, 1998 is as follows.
(in thousands)
1998
Territory sales $92,070
Contractual cost of sales 40,720
------
51,350
Selling, general & administrative expenses 6,605
------
Net proceeds for services $44,745
======
At December 31, 1998, assets under this alliance consisted of a receivable
of $54,228 due from Octel. Liabilities consisted of $37,274 due to Octel and
$16,954 due to Ethyl. Included in these liabilities are undistributed proceeds
of $30,427 for Octel and $14,318 for Ethyl.
3. Pro Forma Information (Unaudited)
On October 2, 1997, the Company completed the repurchase of 34,999,995
shares of its common stock at $9.25 per share, with the purchase price and
related costs totalling about $328,922,000. The purchase was financed under the
Company's new $900,000,000 Competitive Advance, Revolving Credit Facility and
Term Loan Agreement, which increased the committed funds available for
borrowing. Subsequently, on November 14, 1997, the Company elected to reduce the
committed funds under that agreement to $750,000,000 and, accordingly, entered
into an Amended and Restated Competitive Advance, Revolving Credit Facility and
Term Loan Agreement.
On February 29, 1996, the Company completed the acquisition of the
worldwide lubricant additives business of Texaco including manufacturing and
blending facilities (with an allocated value of $27.1 million), identifiable
intangibles (with an initially allocated value of $72.1 million) and working
capital. The acquisition was accounted for under the purchase method and
included a cash payment of $134.3 million financed primarily under the Company's
revolving credit agreement. Also included in the acquisition was an estimated
$6.4 million for decommissioning and related costs for those acquired facilities
that were shut down, deferred taxes, and certain assumed liabilities, as well as
a contingent note. The contingent note was based on volumes of certain acquired
product lines shipped during calendar years 1996 through 1998. The Company
repaid $20 million on the note in December 1998. See Note 10 for additional
information on the note. Texaco retained substantially all noncurrent
liabilities.
As the Company's financial statements only include the effects of the
purchase of the 34,999,995 shares and the related borrowing since October 2,
1997, and the 1996 financial statements only include the ten months of
operations of the acquired lubricant additives business after February 29, 1996,
the following selected unaudited pro forma information is provided to present a
summary of the results of operations of the Company as if the purchase of shares
and the acquisition of the Texaco worldwide lubricant additives business had
each occurred as of January 1, 1996. The pro forma information for 1997 and 1996
gives effect to adjustments for the reduction in outstanding shares and interest
expense on additional debt that would have been incurred to finance the purchase
of the shares, and the related income tax impact. The pro forma information for
the year 1996 also includes the combined operations of the Company and the
worldwide lubricant additives business acquired from Texaco after giving effect
to adjustments for interest expense that would have been incurred to finance the
acquisition and other purchase accounting adjustments. 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, 1996, and had the acquired business been part of the
Company for the full year of 1996.
(in thousands except per-share amounts, unaudited)
Pro Forma
Adjustments
Pro Forma for Purchase
Adjustments of Lubricant
Years ended Historical for Share Additives
December 31 Ethyl Repurchase Business Pro Forma
- -----------------------------------------------------------------------------
1997
- -----------------------------------------------------------------------------
Net sales $1,063,615 - - $1,063,615
Net income $ 77,530 $ (9,975) - $ 67,555
Basic and diluted
earnings per share $ .71 $ .81
Shares used to
compute basic
earnings per share 109,793 (26,344) - 83,449
- -----------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------
Net sales $1,149,651 - $49,175 $1,198,826
Net income $ 92,972 $(13,480) $ 1,532 $ 81,024
Basic and diluted
earnings per share $ .78 $ .97
Shares used to
compute basic
earnings per share 118,444 (35,000) - 83,444
35
<PAGE>
4. Supplemental Cash Flow Information
Supplemental information for the Consolidated Statements of Cash Flows is
as follows:
(in thousands)
Years ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------
Cash paid during the year for:
Income taxes $15,487 $48,875 $37,409
Interest and financing expenses(net of
capitalization) 38,733 22,477 24,644
Supplemental investing and financing
non-cash transactions:
Leased asset addition and related
obligation 4,676 - -
Increase in intangibles related
to a portion of the note payable
to Texaco (including deferred
interest cost of $5,347 in 1998
and $1,284 in 1997) 43,276 13,784 -
Recognition of contingent note
payable to Texaco 37,929 12,500 -
Liabilities assumed in connection
with the acquisition of the Texaco
lubricant additives business
(primarily deferred taxes and
working capital liabilities) - - 63,610
Also see Note 3 with respect to acquired operations.
5. Cash & Cash Equivalents
Cash and cash equivalents consist of the following:
(in thousands)
December 31 1998 1997
Cash and time deposits $7,687 $16,832
Short-term securities 716 1,330
----- ------
Total $8,403 $18,162
===== ======
Short-term securities (generally commercial paper maturing in less than 90
days) are stated at cost plus accrued income, which approximates market value.
6. Inventories
Domestic and European inventories stated on the LIFO basis amounted to
$153,886,000 and $156,056,000 at December 31, 1998 and 1997, respectively, which
are below replacement cost by approximately $15,806,000 and $21,976,000,
respectively.
7. Deferred Income Taxes & Prepaid Expenses
Deferred income taxes and prepaid expenses consist of the following:
(in thousands)
December 31 1998 1997
Deferred income taxes - current $14,964 $17,740
Prepaid expenses 6,394 4,117
------ ------
Total $21,358 $21,857
====== ======
8. Property, Plant & Equipment
Property, plant and equipment, at cost, consist of the following:
(in thousands)
December 31 1998 1997
Land $ 44,707 $ 49,050
Land improvements 31,225 30,885
Buildings 97,463 99,739
Machinery and equipment 571,472 546,162
Capitalized interest 20,544 20,958
Construction in progress 11,041 19,619
------- -------
Total $776,452 $766,413
======= =======
The cost of property, plant and equipment is depreciated, generally by the
straight-line method, over the following useful lives:
Land improvements 5 - 30 years
Buildings 10 - 40 years
Machinery and equipment 3 - 25 years
Interest capitalized in 1998, 1997 and 1996 was $218,000, $924,000 and
$634,000, respectively, while amortization of capitalized interest (which is
included in depreciation expense) was $1,824,000, $1,867,000 and $1,864,000,
respectively.
9. Accrued Expenses
Accrued expenses consist of the following:
(in thousands)
December 31 1998 1997
Employee benefits, payroll and
related taxes $12,831 $13,183
Other 35,665 37,560
------ ------
Total $48,496 $50,743
====== ======
36
<PAGE>
10. Long-Term Debt
A summary of long-term debt maturities at December 31, 1998, is listed
below:
(in thousands)
Variable-Rate
---------------------------------
Texaco Medium-
Note Term Bank Term
Payable Loan Loans Notes Total
1999 $ 20,000 $ 6,750 $ 26,750
2000 60,000 6,750 66,750
2001 80,000 6,750 86,750
2002 $29,308 100,000 $245,000 374,308
2003 -
------ ------- ------- ------ -------
$29,308 $260,000 $245,000 $20,250 554,558
====== ======= ======= ======
Obligations under capital lease 4,476
Less unamortized discount (210)
-------
Total long-term debt at December 31,1998 558,824
Less amount maturing during 1999
(net of unamortized discount) (26,965)
-------
Amount maturing after 1999 $531,859
=======
The Company has an unsecured Amended and Restated Competitive Advance,
Revolving Credit Facility and Term Loan Agreement with a group of banks that
permit it to borrow up to $750 million. The agreement is composed of a
competitive advance and revolving credit facility under which the Company can
borrow up to $450 million and a term loan pursuant to which the Company was able
to initially borrow up to $300 million. A facility fee of 0.175% is assessed on
the entire amount of the revolving credit facility. The credit facility permits
borrowing at various interest rate options. The facility contains a number of
covenants, representations and events of default typical of a credit facility
agreement of this size and nature, including financial covenants relating to
consolidated debt (as defined) including: (i) maximum consolidated leverage or
indebtedness to earnings of 3.5 to 1.0, (ii) minimum consolidated earnings to
fixed charges coverage of 1.25 to 1.0 and (iii) minimum consolidated net worth
(defined as a percentage of shareholders' equity after the effects of the
repurchase of about 35 million shares on October 2, 1997, plus 50% of net
income). The Company was in compliance with such covenants at December 31, 1998.
Amounts outstanding under the revolving credit facility at August 28, 2002
mature on that date. The term loan is being repaid in installments with the
final payment due on August 28, 2002. The average interest rate on variable-rate
bank loans during 1998 and 1997 was 6.2% and 6.1%, respectively.
At the beginning of 1998, the Company had uncommitted agreements with
NationsBank, N.A. and Bank of America NT & SA that provided for immediate
borrowings at its money-market rate. Both agreements have since been terminated.
The average interest rate on borrowings during 1998 and 1997 under the
agreements were 6.3% and 5.8%, respectively.
On December 23, 1998 the Company repaid the $9 million variable-rate
LIBOR-based loan with NationsBank, N.A. that was due February 27, 1999. The
average interest rate was 6.0% during 1998 and 6.1% during 1997.
The Company's $20.25 million variable-rate (ranging from 8.75% to 8.86%)
medium-term notes were issued in a series of $6.75 million each, which are due
annually in serial order at 100% of their principal amount, December 15, 1999
through December 15, 2001.
In mid-February 1999, the Company's $29.3 million 5.99% note payable to
Texaco was assigned by Texaco to a syndicate of investors at face value. In
connection with this assignment, the note was amended to reflect this change as
well as the change in maturity date to December 15, 1999. The Company has the
ability and intent to refinance this obligation on a long-term basis at
maturity. This note payable is classified as long-term debt. At December 31,
1997, the Company had a term loan of $300 million, bank loans of $302 million,
medium-term notes of $27 million and an accrued note payable to Texaco of $12.5
million.
A capital lease obligation was recorded at the fair market value of the
asset at the inception of the lease. The amount of this obligation was $4.5
million at December 31, 1998. The future minimum lease payments in excess of the
liability are included in the non-cancelable future lease payments discussed in
Note 14.
11. Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following:
(in thousands)
December 31 1998 1997
Provision for environmental
remediation and future shutdown
costs $54,361 $52,228
Employee benefits 43,960 34,080
------- -------
Total $98,321 $86,308
======= =======
37
<PAGE>
12. Capital Stock & Stock Options
Stock Repurchase - On October 2, 1997, the Company acquired approximately
35 million shares of the Company's common stock in accordance with the stock
buy-back offer further discussed in Note 3 on pages 35.
Stock Option Plan - The Company has an incentive stock option plan whereby
incentive stock options and nonqualifying stock options may be granted to
officers and other key employees to purchase a specified number of shares of
common stock at an exercise price not less than the fair market value on the
date of grant and for a term not to exceed 10 years. Certain options become
exercisable upon the attainment of specified earnings objectives or market price
appreciation of the Company's common stock. The remaining options become
exercisable one year after the grant date. In addition to the stock options, the
recipient may also be granted a stock appreciation right (SAR). To date, SARs
generally have been granted for the same number of shares subject to related
options. The Company's incentive stock option plan limits the number of shares
issuable under the option plan to 11,900,000, with an annual limit of 200,000
shares per individual. At December 31, 1998 and 1997, 6,536,087 and 6,254,721
shares, respectively, were available for grant.
A summary of the status of the Company's stock option plan as of December
31, 1996, 1997 and 1998, and changes during the years ending on those dates is
presented below:
Weighted-
Average
Exercise
Shares Price
Outstanding at January 1, 1996 3,273,840 $12.40
Granted 280,000 8.88
Lapsed (88,911) 12.73
--------- -----
Outstanding at December 31, 1996 3,464,929 12.11
Granted 200,000 9.25
Lapsed (489,796) 12.45
--------- -----
Outstanding at December 31, 1997 3,175,133 11.88
Lapsed (281,366) 12.13
--------- -----
Outstanding at December 31, 1998 2,893,767 11.85
========= =====
Exercisable at:
December 31, 1996 895,329
December 31, 1997 749,533
December 31, 1998 644,167
There were no options granted in 1998. The fair value, as of the grant
date, of each option granted in 1997 and 1996 was estimated using a
Black-Scholes type option pricing model, as prescribed by FASB Statement No.
123. The following assumptions were used for valuing the options granted:
1998 1997 1996
Dividend yield - 2.8% 4.6%
Expected volatility - 17.5% 19.4%
Risk-free interest rate - 5.7% 6.3%
Expected life - 7 years 7 years
Based on these assumptions, the stock options granted in 1997 and 1996 have
an estimated average value, as of the grant date, of $2.10 and $1.63 per share,
respectively.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date consistent with the fair value method
prescribed by FASB Statement No. 123, the Company's 1998, 1997 and 1996 net
income would have been reduced on a pro forma basis to $70,404,000, $77,355,000
and $92,881,000 respectively. Pro forma basic and diluted earnings per share
would have been $.84, $.70 and $.78 in 1998, 1997 and 1996 respectively.
The Company continues to apply APB Opinion No. 25 and related
interpretations in accounting for the stock option plan. Accordingly, no
compensation cost has been recognized for the stock option plan for the years
presented.
38
<PAGE>
The following tables summarize information about the stock options
outstanding or exercisable at December 31, 1998:
Options Outstanding
Range of Number Weighted Average
Exercise Outstanding Remaining Exercise
Prices At 12/31/98 Contractual Life Price
$8.88 280,000 7.9 years $8.88
9.25 - 9.86 231,774 7.8 9.33
11.54 - 11.71 140,313 2.6 11.56
12.50 - 12.83 2,241,680 5.2 12.50
------------- --------- --- -----
8.88 - 12.83 2,893,767 5.5 11.85
============= ========= === =====
Options Exercisable
Range of Number
Exercise Exercisable Weighted-Average
Prices At 12/31/98 Exercise Price
$8.88 - $8.88
9.25 - 9.86 31,774 9.86
11.54 - 11.71 140,313 11.56
12.50 - 12.83 472,080 12.52
------------- ------- -----
8.88 - 12.83 644,167 12.18
============= ======= =====
13. Gains and Losses On Foreign Currency
Foreign currency transaction adjustments resulted in a gain of $4,210,000
in 1998, and losses of $5,551,000 in 1997 and $3,158,000 in 1996 and are
included in income.
14. Contractual Commitments & Contingencies
The Company has a number of operating lease agreements primarily for office
space, transportation equipment and storage facilities.
Rental expense was $18,779,000 for 1998, $16,440,000 for 1997 and
$17,126,000 for 1996. Future lease payments for the next five years for all
non-cancelable leases as of December 31, 1998 are $14,929,000 for 1999,
$9,483,000 for 2000, $4,776,000 for 2001, $3,477,000 for 2002 and $2,299,000 for
2003. Amounts payable after 2003 are $4,832,000.
Contractual obligations for plant construction and purchases of real
property and equipment amounted to approximately $1,500,000 at December 31,
1998.
The Company and Albemarle Corporation (Albemarle) entered into agreements,
dated as of February 28, 1994, pursuant to which the Company and Albemarle
agreed to coordinate certain facilities and services of adjacent operating sites
at plants in Orangeburg, South Carolina; Houston, Texas and Feluy, Belgium. On
March 1, 1996, certain of the agreements were transferred to Amoco Chemical
Company as part of Albemarle's sale of a portion of its business. In addition,
the Company and Albemarle entered into agreements providing for the blending by
Albemarle of the Company's additive products and the production of antioxidants
and manganese-based compounds at the Orangeburg plant. Ethyl was billed
approximately $31 million in 1998, $29 million in 1997 and $34 million in 1996
in connection with these agreements. Also, the Company and Albemarle entered
into a tax sharing agreement and an indemnification agreement, which together
allocate taxes and various indemnifications, respectively, for periods prior to
February 28, 1994.
The Company is subject to routine litigation incidental to its business.
The Company is not a party to any pending litigation proceedings that are
expected to have a material adverse effect on the Company's results of
operations or financial condition.
At December 31, 1998 and 1997, the Company had accruals of $42,700,000 and
$44,300,000, respectively, for environmental liabilities. In developing its
estimates of environmental remediation and monitoring costs, the Company
considers, among other things, risk-based assessments of the contamination,
currently available technological solutions, alternative clean-up methods and
prior Company experience in remediation of contaminated sites, all of which are
based on presently enacted laws and regulations. Amounts accrued do not take
into consideration claims for recoveries from insurance. Although studies have
not been completed for certain sites, some amounts generally are estimated to be
expended over extended periods. When specific amounts within a range cannot be
determined, the Company has accrued the minimum amount in that range.
Environmental exposures are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of regulations,
lack of reliable data, multiplicity of possible solutions and length of time. As
the scope of the Company's environmental contingencies becomes more clearly
defined, it is possible that expenditures in excess of those amounts already
39
<PAGE>
accrued may be necessary. However, management believes that these overall costs
are expected to be incurred over an extended period of time and, as a result,
such contingencies are not expected to have a material impact on the
consolidated financial position or liquidity of the Company, but they could have
a material adverse effect on the Company's results of operations in any given
future quarterly or annual period.
15. Pension Plans & Other Post-retirement Benefits
U.S. Pension Plans - The Company has non-contributory defined benefit
pension plans covering most U.S. employees. The benefits for these plans are
based primarily on years of service and employees' compensation. The Company's
funding policy complies with the requirements of the Employee Retirement Income
Security Act of 1974, as amended. Plan assets consist principally of common
stock, U.S. government and corporate obligations and group annuity contracts.
The pension information for all periods includes amounts related to the
Company's salaried and hourly plans. Pension results are determined based upon
annual actuarial valuations and include the following components:
(in thousands)
Years ended December 31 1998 1997 1996
Service cost $ 4,275 $ 4,368 $ 4,210
Interest cost 22,249 21,561 21,428
Expected return on plan assets (36,380) (33,638) (32,039)
Amortization of prior service cost 2,648 2,265 2,784
Amortization of transition asset (4,277) (4,277) (4,277)
Amortization of net loss 425 419 32
Special termination benefits 3,592 - -
------- ------- -------
Net pension income $ (7,468) $ (9,302) $ (7,862)
======= ======= =======
The special termination benefits in 1998 are primarily related to the
enhanced retirement offer, which is discussed in Note 20, "Special Items Income,
Net". Amortization of the transition asset is based on the amount determined at
the date of adoption of FASB Statement No. 87.
Net pension income and plan obligations are calculated using assumptions of
estimated discount and interest rates and rates of projected increases in
compensation. The discount rate on projected benefit obligations was assumed to
be 7% at December 31, 1998, 1997 and 1996. The rates of projected compensation
increase were assumed to be primarily 4.5% at December 31, 1998, 1997 and 1996.
The expected long-term rate of return on plan assets was assumed to be 9% each
year.
The following presents a reconciliation of the change in the projected
benefit obligation and plan assets, as well as the funded status of the U.S.
pension plans. The prepaid pension expense is included in "Other assets and
deferred charges".
(in thousands)
Years ended December 31 1998 1997
Change in projected benefit obligation
Projected benefit obligation at
beginning of year $320,071 $317,425
Service cost 4,275 4,368
Interest cost 22,249 21,561
Plan amendments 1,827 -
Actuarial net loss 11,185 6,053
Benefits paid (29,634) (29,336)
------- -------
Projected benefit obligation at
end of year $329,973 $320,071
======= =======
Change in plan assets
Fair value of plan assets at
beginning of year $483,309 $426,671
Actual return on plan assets 61,616 84,672
Employer contribution 2,378 1,302
Benefits paid (29,634) (29,336)
------- -------
Fair value of plan assets at end of year $517,669 $483,309
======= =======
Funded status $187,696 $163,238
Unrecognized net actuarial gain (99,579) (79,542)
Unrecognized transition asset (13,753) (18,030)
Unrecognized prior service cost 17,141 18,285
------- -------
Prepaid pension expense $ 91,505 $ 83,951
======= =======
The Company has non-qualified, unfunded defined benefit plans, one of which
is a supplemental executive retirement plan. The obligations of this plan are
included in the table above.
In December 1997, the Company established a Rabbi Trust into which it
invested $15,192,000, an amount equivalent to the accumulated benefit obligation
of retired beneficiaries of the non-qualified plans. During 1998, the Company
invested $1,434,000 into the Rabbi Trust. Assets in the Rabbi Trust have a value
of $16,213,000 and $15,375,000 at December 31, 1998 and 1997, respectively. The
assets of the Rabbi Trust are not included in the above table.
40
<PAGE>
The previous table aggregates those plans with assets in excess of the
accumulated benefit obligation (ABO) and those with the ABO in excess of plan
assets including the supplemental executive retirement plan. For those plans
where the ABO exceeds plan assets, the ABO is $27,486,000 and the fair value of
plan assets is $5,785,000 at December 31, 1998. At December 31, 1997, the ABO is
$17,831,000 and the fair value of plan assets is $149,000.
For those plans where the projected benefit obligation (PBO) exceeds plan
assets, the PBO is $28,177,000 and the fair value of plan assets is $5,785,000
at December 31, 1998. At December 31, 1997, the PBO is $18,159,000 and the fair
value of plan assets is $149,000.
The prepaid pension expense in the previous table is net of an accrued
pension expense of $16,139,000 and $12,639,000 at December 31, 1998 and
1997.
Foreign Pension Plans - Pension coverage for employees of the Company's
foreign subsidiaries is provided through separate defined benefit and/or defined
contribution plans. Obligations under such plans are provided for by depositing
funds with trustees or under insurance policies. Pension cost for 1998, 1997 and
1996 for these plans was $2,257,000, $2,444,000 and $1,681,000, respectively.
The actuarial present value of accumulated benefits at December 31, 1998 and
1997, was $35,614,000 and $26,630,000, substantially all of which was vested,
compared with net assets available for benefits of $28,582,000 and $25,832,000,
respectively. The assets and benefit obligations of these foreign pension plans
are not included in the previous tables.
The Company has recognized a minimum pension liability for an underfunded
foreign plan. The minimum liability is equal to the excess of the accumulated
benefit obligation over plan assets. A corresponding amount is recognized as an
intangible asset to the extent of previously unrecognized prior service cost and
previously unrecognized transition obligation, and the remainder is reflected as
a reduction of shareholders' equity. The Company had recorded additional
liabilities of $7,986,000 as of December 31, 1998. An intangible asset of
$4,120,000 and a shareholders' equity reduction, net of income taxes of
$2,667,000 was recorded as of December 31, 1998.
Consolidated - Consolidated net pension income for 1998, 1997 and 1996 was
$5,211,000, $6,858,000 and $6,181,000, respectively.
Other Post-Retirement Benefits - The Company also provides post-retirement
medical benefits and life insurance for certain groups of retired employees,
which it accounts for based on FASB Statement No. 106.
The Company funds medical and life insurance benefit costs principally on a
pay-as-you-go basis. Although the availability of medical coverage after
retirement varies for different groups of employees, the majority of employees
who retire from the Company before becoming eligible for Medicare can continue
group coverage by paying the full cost of a composite monthly premium designed
to cover the claims incurred by active and retired employees. The availability
of group coverage for Medicare-eligible retirees also varies by employee group
with coverage designed either to supplement or coordinate with Medicare.
Retirees generally pay a portion of the cost of the coverage.
The components of net periodic post-retirement benefit cost are as follows:
(in thousands)
Years ended December 31 1998 1997 1996
Service cost $ 1,014 $ 912 $ 932
Interest cost 3,653 3,430 3,424
Expected return on plan assets (1,791) (2,317) (2,286)
Amortization of prior service cost (29) (28) (28)
Special termination benefits 461 - -
------ ------ ------
Net periodic post-retirement benefit cost $ 3,308 $ 1,997 $ 2,042
====== ====== ======
The special termination benefits relate to the enhanced retirement offer
which is discussed in Note 20, "Special Items Income, Net".
41
<PAGE>
A reconciliation of the change in the accumulated benefit obligation and
plan assets, as well as the funded status of the plans is as follows:
(in thousands)
Years ended December 31 1998 1997
Change in accumulated benefit obligation
Accumulated benefit obligation at
beginning of year $51,573 $51,540
Service cost 1,014 912
Interest cost 3,653 3,430
Actuarial net loss/(gain) 1,828 (1,074)
Benefits paid (3,114) (3,235)
------ ------
Accumulated benefit obligation at end of year $54,954 $51,573
====== ======
Change in plan assets
Fair value of plan assets at beginning of year $26,450 $26,663
Actual return on plan assets 1,841 1,081
Employer contribution 1,955 1,941
Benefits paid (3,114) (3,235)
------ ------
Fair value of plan assets at end of year $27,132 $26,450
====== ======
Funded status $(27,822) $(25,123)
Unrecognized net actuarial gain (1,887) (3,205)
Unrecognized prior service cost (249) (278)
------- -------
Accrued post-retirement benefit cost $(29,958) $(28,606)
======= =======
Plan assets are held under an insurance contract and reserved for retiree
life insurance benefits.
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7% at December 31, 1998, 1997 and 1996. The expected
long-term rate of return on plan assets used in determining the net periodic
post-retirement benefit cost was 7% at December 31, 1998 and 1997 and 9% for
1997 and 1996. The estimated pay increase was 4.5% at December 31, 1998, 1997
and 1996. The assumed health care cost trend rate used in measuring the
accumulated post-retirement benefit obligation was 11% in 1996, 10% in 1997 and
9% in 1998 declining by 1% per year to an ultimate rate of 7%. Managed care
costs were assumed to decline 1% per year to an ultimate rate of 6%, beginning
at 8% in 1996, 7% in 1997 and 6% in 1998.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated post-retirement benefit obligation, as of December 31, 1998, would
be increased by approximately $4.2 million. The effect of this change on the sum
of the service cost and interest cost components of net periodic post-retirement
benefit cost for 1998 would be an increase of about $0.5 million. A 1% reduction
in the assumed health care cost trend rate would result in a $3.4 million
reduction in the accumulated post-retirement benefit obligation as of December
31, 1998 and a $0.4 million decrease in the sum of the service cost and interest
cost components of the net periodic post-retirement cost for 1998.
Changes in Estimates - The rate change effects on net pension income and
post-retirement benefit cost are not material to the Company's financial
statements.
16. Other Income (Expense), Net
Other income (expense), net in 1998 includes a $14,631,000 net gain on the
sale of certain non-operating assets, comprised primarily of realized gains on
marketable securities, and $7,955,000 of interest income related to the
settlement of a federal income tax audit. Other income (expense), net in 1997
included a net loss relating to non-operating assets ($16,343,000 of impairment
losses offset by $10,619,000 of gains on sales). Proceeds of approximately $23.8
million were received in 1998 primarily from the sale of marketable securities
of which $7.1 million related to a late 1997 transaction. Proceeds of $5.6
million were received in 1997 from the sale of marketable securities.
17. Income Taxes
Income before income taxes and current and deferred income taxes are
composed of the following:
(in thousands)
Years ended December 31 1998 1997 1996
Income before income taxes:
Domestic $ 80,502 $ 82,235 $114,547
Foreign 25,859 27,747 31,225
------- ------- -------
Total $106,361 $109,982 $145,772
======= ======= =======
Current income taxes
Federal $ 8,328 $ 21,100 $ 28,982
State 1,866 2,034 2,579
Foreign 8,386 11,890 13,379
------ ------- -------
Total 18,580 35,024 44,940
------ ------- -------
Deferred income taxes:
Federal 14,848 452 8,196
State 1,440 (1,298) 1,370
Foreign 914 (1,726) (1,706)
------ ------- -------
Total 17,202 (2,572) 7,860
------ ------- -------
Total income taxes $35,782 $32,452 $52,800
====== ======= =======
42
<PAGE>
The deferred income tax assets and deferred income tax liabilities recorded
on the balance sheets as of December 31, 1998 and 1997, are as follows:
(in thousands)
Deferred tax assets: 1998 1997
Environmental reserves $14,787 $15,708
Intercompany profit in inventories 4,845 10,467
Undistributed earnings of foreign subsidiaries 4,642 4,744
Future employee benefits 4,153 4,268
Foreign currency translation adjustments 1,478 3,601
Inventory capitalization 1,366 1,689
Facilities write-down and other costs 798 744
Loss on impairment of non-operating assets 454 6,358
Other 2,878 1,391
------ ------
Net deferred tax assets 35,401 48,970
------ ------
Deferred tax liabilities:
Depreciation 44,928 41,056
Future employee benefits 20,758 20,056
Intangibles 18,126 -
Long-term contingent note payable - 18,169
Capitalization of interest 2,853 2,742
Unrealized gain on marketable securities 1,608 5,598
Other 2,960 5,123
------ ------
Deferred tax liabilities 91,233 92,744
------ ------
Net deferred tax liabilities $55,832 $43,774
====== ======
Reconciliation to financial statements:
Deferred tax assets - current $14,964 $17,740
Deferred tax liabilities - noncurrent 70,796 61,514
------ ------
Net deferred tax liabilities $55,832 $43,774
====== ======
Deferred income taxes result from temporary differences in the recognition
of income and expenses for financial and income tax reporting purposes, using
the liability or balance sheet method. Such temporary differences result
primarily from differences between the financial statement carrying amounts and
tax bases of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.
The significant differences between the U.S. federal statutory rate and the
effective income tax rate are as follows:
% of Income
Before Income Taxes
1998 1997 1996
Federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal
tax benefit 2.3 2.0 1.8
Foreign sales corporation benefit (0.4) (0.6) (0.1)
Research tax credit (0.7) (0.4) (0.4)
Favorable tax settlements and
adjustments (2.8) (3.5) -
Sale of Belgian subsidiary - (3.4) -
Other items, net 0.2 0.4 (0.1)
---- ---- ----
Effective income tax rate 33.6% 29.5% 36.2%
==== ==== ====
Based on current U.S. income tax rates, it is anticipated that no
additional U.S. income taxes would be incurred if the unremitted earnings of the
Company's foreign subsidiaries were remitted to Ethyl Corporation due to
available foreign tax credits.
18. Financial Instruments
The following methods and estimates were used by the Company in estimating
the fair values of its outstanding financial instruments in conformity with the
disclosure requirements of FASB Statement No. 107, "Disclosures About Fair
Value of Financial Instruments".
Cash & Cash Equivalents - The carrying value approximates fair
value.
Investments in Marketable Securities - These investments are classified as
"available for sale", and carried at fair value with the unrealized gains, net
of tax, reported as a component of Accumulated Other Comprehensive (Loss)
Income. Also see Notes 16 and 19.
Long-Term Debt - The fair value of the Company's long-term debt is
estimated based on current rates available to the Company for debt of the same
remaining duration.
43
<PAGE>
Foreign Currency Forward Contracts - The fair value of the Company's
foreign currency forward contracts is based on rates published by The Wall
Street Journal at December 31, 1998. At December 31, 1998 the Company had
outstanding foreign currency forward sale contracts which will require the
Company to sell $22 million notional amount of Japanese Yen at a fixed price on
varying maturity dates during 1999.
The estimated fair values of the Company's financial instruments are as
follows:
(in thousands)
Carrying Fair
Value Value
December 31, 1998:
Cash and cash equivalents $ 8,403 $ 8,403
Investments in marketable securities $ 19,663 $ 19,663
Long-term debt, including current
maturities $(558,824) $(559,342)
Foreign currency forward contracts $ (360) $ (886)
December 31, 1997:
Cash and cash equivalents $ 18,162 $ 18,162
Investments in marketable securities $ 32,684 $ 32,684
Long-term debt, including current
maturities $(641,136) $(641,887)
19. Comprehensive Income
FASB Statement No. 130, "Reporting Comprehensive Income" was adopted
effective December 31, 1997. This statement establishes standards for reporting
comprehensive income in financial statements. Material components of Accumulated
Other Comprehensive Income must also be disclosed. This statement only modifies
disclosures, including financial statement disclosures, and does not result in
other changes to the results or financial position of the Company.
Information on the tax effects on items in the Consolidated Statements of
Comprehensive Income is as follows:
(in thousands)
Years ended December 31 1998 1997 1996
Unrealized gain on marketable securities $ 3,899 $ 15,422 -
Income tax (1,415) (5,598) -
------- ------- ------
Unrealized gain on marketable securities,
net of tax $ 2,484 $ 9,824 -
======= ======= ======
Reclassification adjustment for the gain
included in net income, arising from sale
of securities $(14,891) - -
Income tax 5,404 - -
------- ------- ------
Reclassification adjustment for the gain on
marketable securities, net of tax $ (9,487) - -
======= ======= ======
Foreign currency translation adjustment $ 3,780 $(16,340) $(6,156)
Income tax (1,419) 6,079 2,178
------- ------- ------
Foreign currency translation adjustment,
net of tax $ 2,361 $(10,261) $(3,978)
======= ======= ======
Reclassification of foreign currency
translation adjustment for the loss
included in income, arising from sale of
foreign subsidiary - $ 6,326 -
Income tax - (2,296) -
------- ------- ------
Reclassification of foreign currency
translation adjustment, net of tax - $ 4,030 -
======= ======= ======
Minimum pension liability adjustment $ (3,865) - -
Income tax 1,198 - -
------- ------- ------
Minimum pension liability adjustment, net of tax $ (2,667) - -
======= ======= ======
44
<PAGE>
Accumulated other comprehensive (loss) income consists of the following:
(in thousands)
December 31 1998 1997
Foreign currency translation adjustments $(5,758) $(8,119)
Unrealized gains on marketable securities 2,821 9,824
Minimum pension liability adjustment (2,667) -
------ ------
Total $(5,604) $1,705
20. Special Items Income, Net
The special items consist of a benefit due to a settlement with the
Canadian government partially offset by a charge related to a 1998 enhanced
retirement offer. The settlement resulted in a benefit of $8,871,000, net of
related expenses ($5,651,000 after income taxes, or $.07 per share), to
reimburse the Company for a portion of its legal costs and lost profits during
the now repealed 1997-1998 ban on the import and inter-provincial trade of MMT.
The 1998 enhanced retirement offer resulted in a charge of $3,986,000
($2,540,000 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 $300,000 was paid during the year for severance,
vacation and termination benefits. The remainder will be paid over an extended
period for retirement and health insurance benefits.
21. Recently Issued Accounting Standard
In June 1998, FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued. This statement establishes a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. Statement No. 133 requires all derivatives
as well as the related hedged item to be recorded on the balance sheet at fair
value. In addition, the impact of foreign currency exchange rate fluctuations
should be recorded in earnings in the same period. This new standard is
effective for all quarters of fiscal years beginning after June 15, 1999. The
implementation of this new standard is not expected to have a material effect on
the Company's consolidated results of operations or financial position.
22. Selected Quarterly Consolidated Financial Data
(in thousands except earnings per share, unaudited)
- -------------------------------------------------------------------------------
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
Net sales $226,932 $244,252 $285,282 $217,724
Gross profit $ 53,449 $ 67,216 $ 85,026 $ 43,481
Special items (expense) income, net $ ( 419) $ (4,513) $ 9,817 -
Net income $ 13,079 $ 16,780 $ 30,798 $ 9,922
Basic and diluted earnings per
share $ .16 $ .20 $ .37 $ .12
Shares used to compute basic
earnings per share 83,465 83,465 83,465 83,465
1997
- -------------------------------------------------------------------------------
Net sales $265,713 $269,336 $254,074 $274,492
Gross profit $ 76,025 $ 79,371 $ 69,714 $ 76,845
Net income $ 20,589 $ 21,938 $ 18,846 $ 16,157
Basic and diluted earnings per
share $ .17 $ .19 $ .16 $ .19
Shares used to compute basic
earnings per share 118,444 118,444 118,444 83,842
======= ======= ======= =======
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Pricewaterhouse Coopers LLP
Riverfront Plaza West
901 East Byrd Street
Suite 1200
Richmond Va 23219-4071
Telephone (804) 697 1900
Facsimile (804) 697 1999
To the Board of Directors & Shareholders of Ethyl Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Ethyl Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 1, 1999 except
as to the information in
Note 10, for which the date
is February 18, 1999
46
<PAGE>
Five Year Summary
<TABLE>
Introduction to the Five Year Summary: The following Five Year Summary includes the results of the worldwide lubricant additives
business of Texaco, since its acquisition on February 29, 1996 and the businesses spun off as Albemarle Corporation through the
spin-off date at the close of business on February 28, 1994. The financial position and other data after that date reflect the
impact of both the acquisition of the additives business as well as the spin-off of Albemarle Corporation.
<CAPTION>
(in thousands except per-share amounts) Ethyl Corportion & Subsidiaries
Years ended December 31 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Results of Operations
<S> <C> <C> <C> <C> <C>
Net sales $ 974,190 $1,063,615 $1,149,651 $ 960,450 $1,174,086
Costs and expenses 871,768 923,691 979,972 813,271 1,003,624
TEL marketing agreements services 14,944 - - - -
Special items income, net (1) 4,885 - - (4,750) (2,720)
---------- ---------- ---------- ---------- ----------
Operating profit 122,251 139,924 169,679 142,429 167,742
Interest and financing expenses 40,409 25,668 24,268 26,833 25,378
Other income (expense), net (2) 24,519 (4,274) 361 580 (1,218)
---------- ---------- ---------- ---------- ----------
Income before income taxes 106,361 109,982 145,772 116,176 141,146
Income taxes 35,782 32,452 52,800 42,213 43,391
---------- ---------- ---------- ---------- ----------
Net income $ 70,579 $ 77,530 $ 92,972 $ 73,963 $ 97,755
========== ========== ========== ========== ==========
Financial Position and Other Data
Total assets $1,065,544 $1,067,277 $1,095,169 $ 983,787 $1,030,415
========== ========== ========== ========== ==========
Operations
Working capital $ 213,862 $ 218,686 $ 246,254 $ 242,742 $ 248,650
Current ratio 2.20 to 1 2.21 to 1 2.36 to 1 2.67 to 1 2.36 to 1
Depreciation and amortization $ 63,310 $ 61,752 $ 61,919 $ 49,224 $ 53,983
Capital expenditures 22,738 43,496 29,403 44,831 147,260
Acquisitions of businesses - - 133,032 - -
Gross margin as a % of net sales 25.6 28.4 30.0 33.8 33.9
Research, development and testing expenses (3) $ 67,363 $ 71,172 $ 71,723 $ 77,153 $ 82,661
Long-term debt (4) 531,859 594,429 325,480 302,973 349,766
Common and other shareholders' equity 187,002 144,598 439,900 410,128 390,937
Long-term debt as a % of total capitalization (4) 74.0 80.4 42.5 42.5 47.2
Net income as a % of average shareholders' equity 42.6 21.5 21.9 18.5 17.1
Common Stock
Basic and diluted earnings per share: (5)
Net income $ .85 $ .71 $ .78 $ .62 $ .83
========== ========== ========== ========== ==========
Shares used to compute basic earnings per share 83,465 109,793 118,444 118,436 118,427
Dividends per share:
Cash dividends declared (6) $ .25 $ .44 $ .50 $ .50 $ .50
Dividend of common stock of Albemarle Corporation, at book value - - - - 3.38
---------- ---------- ---------- ---------- ----------
Total $ .25 $ .44 $ .50 $ .50 $ 3.88
========== ========== ========== ========== ==========
Equity per share (7) $ 2.24 $ 1.73 $ 3.71 $ 3.46 $ 3.30
========== ========== ========== ========== ==========
</TABLE>
47
<PAGE>
(1) The special items in 1998 consist of a benefit of $8,871 net of related
expenses, or $5,651 after income taxes, due to a settlement with the
Canadian government partially offset by a charge related to an enhanced
retirement offer of $3,986 ($2,540 after income taxes. The special charge
in 1995 consists of a provision for a legal settlement ($4,150 after income
taxes). 1994 consists of $10,720 primarily for a provision for
environmental remediation as well as other costs, largely offset by the
benefit of an $8,000 legal settlement (totalling $1,690 after income
taxes).
(2) Other income (expense), net for 1998 includes a $14,631 gain on the sale of
a non-operating asset ($9,319 after income taxes)and $7,955 income related
to the settlement of a federal income tax audit ($6,071 after income
taxes). Other expense for 1997 includes a charge related to non-operating
assets of about $5,724 ($3,314 after income taxes) resulting from
impairment losses of $16,343 offset by gains on sales of $10,619.
(3) Research and development expenses determined in accordance with FASB
Statement No. 2 were $40,258 for 1998, $42,168 for 1997, $47,371 for 1996,
$54,475 for 1995 and $49,651 for 1994.
(4) The increase in long-term debt, decrease in shareholders' equity, and
increase in the long-term debt as a percentage of total capitalization in
1997 reflect the effects of the stock buy-back that took place on October
2, 1997. The Company acquired about 35 million shares of the Company's
common stock in accordance with the stock buy-back offer. The total
transaction cost of about $328.9 million was financed under the Company's
loan agreement.
(5) All earnings per share figures and number of shares used to compute
earnings per share have been restated in accordance with FASB Statement No.
128, adopted effective December 31, 1997.
(6) The decrease in cash dividends declared in 1997 reflects the reduction of
the annual cash dividend rate to $.25 per share from $.50 per share
effective for the dividend declared on October 30, 1997, and paid on
January 1, 1998.
(7) Based on the number of common shares outstanding at the end of each year.
The decline in 1997 reflects the repurchase of about 35 million common
shares on October 2, 1997.
48
<PAGE>
MARKET INFORMATION
Ethyl's common stock is traded on the New York and Pacific stock exchanges under
the Symbol EY.
DESCRIPTION OF COMMON STOCK
A total of 400 million shares of common stock is authorized, of which 83,465,460
shares were outstanding as of December 31, 1998.
NUMBER OF REGISTERED SHAREHOLDERS
1998 13,070
1997 11,368
COMMON STOCK MARKET PRICE RANGE AND DIVIDENDS PER SHARE
1998
Quarter 1st 2nd 3rd 4th
High $ 8.50 $ 8.38 $ 6.75 $ 6.50
Low $ 7.00 $ 5.50 $ 3.88 $ 3.44
Dividends Per Share $0.0625 $0.0625 $0.0625 $0.0625
====== ====== ====== ======
1997
Quarter 1st 2nd 3rd 4th
High $ 10.38 $ 9.63 $ 9.38 $ 9.94
Low $ 8.38 $ 8.50 $ 8.63 $ 7.50
Dividends Per Share $ 0.125 $ 0.125 $ 0.125 $0.0625
====== ====== ====== ======
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.
ETHYL CORPORATION
By: /s/ Bruce C. Gottwald
(Bruce C. Gottwald, Chairman of the Board)
Dated: March 10, 1999
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 indicated as of March 10, 1999.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ Bruce C. Gottwald Chairman of the Board, Chairman of the Executive Committee,
(Bruce C. Gottwald) Chief Executive Officer and Director (Principal Executive Officer)
/s/ Thomas E. Gottwald President, Chief Operating Officer and Director
(Thomas E. Gottwald)
/s/ J. Robert Mooney Senior Vice President and Chief Financial Officer (Principal Financial Officer)
(J. Robert Mooney)
/s/ Wayne C. Drinkwater Controller (Principal Accounting Officer)
(Wayne C. Drinkwater)
/s/ William W. Berry Director
(William W. Berry)
/s/ Phyllis Cothran Director
(Phyllis L. Cothran)
/s/ Gilbert M. Grosvenor Director
(Gilbert M. Grosvenor)
/s/ S.B. Scott Director
(Sidney Buford Scott)
/s/ Charles B. Walker Director
(Charles B. Walker)
</TABLE>
49
<PAGE>
DIRECTORS
*Bruce C. Gottwald
Chairman of the Board
Ethyl Corporation
Richmond, Virginia
*Thomas E. Gottwald
President
Ethyl Corporation
Richmond, Virginia
*William W. Berry
Retired Chairman of the Board
Dominion Resources
Richmond, Virginia
*Sidney Buford Scott
Chairman of the Board
Scott & Stringfellow, Inc.
Richmond, Virginia
Phyllis L. Cothran
Retired President
& Chief Operating Officer
Trigon Blue Cross Blue Shield
Richmond, Virginia
Gilbert M. Grosvenor
Chairman of the Board
National Geographic Society
Washington, D.C.
Charles B. Walker
Vice Chairman of the Board
Chief Financial Officer
Albemarle Corporation
Richmond, Virginia
* Member of the Executive Committee
OFFICERS & STAFF
Bruce C. Gottwald (65)**
Chairman of the Board
Chief Executive Officer
Chairman, Executive Committee
Thomas E. Gottwald (38)**
President
Chief Operating Officer
J. Robert Mooney (54)**
Senior Vice President
Chief Financial Officer
David A. Fiorenza (49)**
Vice President
Treasurer
Russell L. Gottwald, Jr. (47)**
Vice President, Product Supply
Donald R. Lynam (60)**
Vice President, Air Conservation
Steven M. Mayer (55)**
Vice President, General Counsel
Henry C. Page, Jr. (60)**
Vice President - Human Resources
& External Affairs
Ann M. Pettigrew (44)**
Vice President, Health, Safety &
Environment
Wayne C. Drinkwater (52)**
Controller
John S. Patton (64)
Director, Strategic Planning
M. Rudolph West (45)**
Secretary
Michael L. McKeever (58)**
Assistant Treasurer
Tetraethyl Lead
Newton A. Perry (56)**
Senior Vice President, Antiknocks
Roger H. Venable (52)**
Vice President, Antiknocks
Robert A. Yondola (50)
Worldwide Antiknocks
Sales Vice President
Richard M. Mendel (36)
Worldwide MMT Marketing
Vice President
Senior Ethyl
Representatives Assigned
To Ethyl/Octel Alliance
Alvin M. Conn, Jr. (52)
Ramon V. Martinez (58)
Photis G. Stephanides (55)
Petroleum Additives
Alexander McLean (42)**
Senior Vice President,
Petroleum Additives
Daniel J. Bradley (50)**
Vice President, Sales & Marketing
North America
Anthony F. Fagan (49)
Managing Director, Europe
C. S. Warren Huang (49)**
Vice President, Managing Director,
Asia Pacific
Ronald E. Kollman (52)**
Vice President, Research & Development
Global Business Management
Steven A. Factor (49)
Business Manager,
Worldwide Specialties
Andre Jordens (37)
Business Director,
Worldwide Crankcase and VII
Kimberly A. Flinn (40)
Business Director,
Worldwide Fuels
Age as of March 10, 1999 indicated in ( ).
** Officers
Additional Information - Officers of the Company
Term of office is until the meeting of the board of directors following the next
annual shareholders' meeting (April 22, 1999). All officers have been employed
with Ethyl for at least the last five years with the exception of J. Robert
Mooney, who joined Ethyl on October 1, 1997 after 21 years as a partner with
PricewaterhouseCoopers LLP, independent certified public accountants.
50
<PAGE>
inside back cover
Other Information
Corporate Headquarters
330 South Fourth Street
Post Office Box 2189
Richmond, Virginia 23218-2189
(804) 788-5000
Web Site
www.ethyl.com
Ticker Symbol: EY
Shareholder Information
A dividend reinvestment and stock purchase plan is available to shareholders of
Ethyl Corporation. For information about this plan, contact:
Harris Trust & Savings Bank
Attention: Dividend Reinvestment
Post Office Box A-3309
Chicago, Illinois 60690-3309
All other inquiries should be directed to Ethyl's toll-free Shareholder
Information Line at (800) 625-5191.
Annual Meeting
All shareholders are invited to attend the Ethyl Corporation annual
shareholders' meeting on Thursday, April 22, 1999 starting at 11 a.m. Eastern
Daylight Time. The meeting will be held at the restored Tredegar Iron Works gun
foundry building, 500 Tredegar Street, located near Ethyl's corporate
headquarters in Richmond, Virginia. Formal notices of the annual meeting,
proxies and proxy statements were mailed with this annual report.
Locations
Research & Development
Ashland, Virginia
Bracknell, Berkshire, England
Richmond, Virginia
Manufacturing
Feluy, Belgium
Houston, Texas
Natchez, Mississippi
Orangeburg, South Carolina
Port Arthur, Texas
Rio de Janeiro, Brazil
Sarnia, Ontario, Canada
Sauget, Illinois
Regional Offices
Beijing, China
Bracknell, Berkshire, England
Brussels, Belgium
Coral Gables, Florida
Detroit, Michigan
Hamburg, Germany
Houston, Texas
Mississauga, Ontario, Canada
Richmond, Virginia
Singapore
Sydney, Australia
Tokyo, Japan
51
<PAGE>
Index to Exhibits
Description
(3.1) Amended and Restated Articles of Incorporation (incorporated by reference
as Exhibit 3.1 to Form 10-Q filed on November 4, 1996).
(3.2) By-laws of the registrant (incorporated by reference as Exhibit 3.2 to
Form 10-K filed March 29, 1996).
(4.1) $750 million Credit Agreement, dated as of November 14, 1997 (incorporated
by reference as Exhibit 4.1 to Form 10-Q filed on November 14, 1997).
(10.1)Bonus Plan of the registrant (incorporated by reference as Exhibit 10.1 to
Form 10-K filed on February 25, 1993).
(10.2)Incentive Stock Option Plan (incorporated by reference as Exhibit 10 to
Form 10-Q filed on May 12, 1994).
(10.3)Non-Employee Directors' Stock Acquisition Plan (incorporated by reference
as Exhibit A to the registrant's Proxy Statement for the Annual Meeting of
Shareholders filed on March 17, 1993).
(10.4)Excess Benefit Plan (incorporated by reference as Exhibit 10.4 to Form
10-K filed on February 25, 1993).
(10.5)Supply Agreement, dated as of December 22, 1993, between Ethyl Corporation
and The Associated Octel Company Limited (incorporated by reference as
Exhibit 99 to Form 8-K filed on February 17, 1994).
(10.6)Employment and Severance Benefits Agreement dated October 1, 1997, with J.
Robert Mooney (incorporated by reference as Exhibit 10.7 to Form 10-K
filed March 24, 1998).
(10.7)Antiknock Marketing and Sales Agreement, dated October 1, 1998, between
Ethyl Corporation and The Associated Octel Company Limited (incorporated
by reference as Exhibit 10 to Form 10-Q filed on November 10, 1998).
(10.8)Trust Agreement between Ethyl Corporation and Merrill Lynch Trust Company
of America (incorporated by reference as Exhibit 4.5 to Form S-8, filed on
August 7, 1998).
(11.1)Computation of Basic and Diluted Earnings Per Share. 53
(11.2)Computation of Pro Forma Basic and Diluted Earnings Per Share (Stock
Repurchase 1997-1996 and Texaco Additives 1996). 54
(21) Subsidiaries of the registrant. 55
(23) Consent of PricewaterhouseCoopers LLP 56
(27) Financial Data Schedule 57
52
EXHIBIT 11.1
ETHYL CORPORATION AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
for the years ended December 31, 1998, 1997 and 1996
(In thousands except per share amounts)
1998 1997 1996
------- ------- -------
Net income applicable to common stock (1) $70,579 $77,530 $92,972
======= ======= =======
Average number of shares of common stock
outstanding (2,3) 83,465 109,793 118,444
======= ======= =======
Basic and diluted earnings per share $0.85 $0.71 $0.78
======= ======= =======
Notes:
(1) In the periods presented, the Company had only one class of common stock
outstanding.
(2) To determine the average number of shares of common stock and common stock
equivalents, the average number of common shares and common stock
equivalents outstanding (actual or assumed for equivalents) during each
month were added together and the sum was then divided by 12.
(3) For diluted earnings per share, the shares issuable upon the assumed
exercise of outstanding stock options would be 0, 7 and 4 in 1998, 1997 and
1996, respectively, and the shares of common stock equivalents would have
been 83,465, 109,800 and 118,448, respectively.
53
EXHIBIT 11.2
ETHYL CORPORATION AND SUBSIDIARIES
COMPUTATION OF PRO FORMA BASIC AND DILUTED EARNINGS PER SHARE
for the years ended December 31, 1998, 1997 and 1996
(In thousands except per share amounts)
On October 2, 1997, the Company completed the repurchase of 34,999,995
shares of the Company's outstanding common stock with the purchase price and
related costs totalling about $328.9 million. On February 29, 1996, the Company
completed the acquisition of the worldwide lubricant additives business of
Texaco Inc., ("Texaco") including manufacturing and blending facilities,
identifiable intangibles and working capital. As a result of the aforementioned
stock repurchase and business acquisition, the Company believes that the
following pro forma financial information is important to enable the reader to
obtain a meaningful understanding of the Company's results of operations. The
pro forma information is provided to present a summary of the results of the
Company as if the stock repurchase had occurred as of January 1, 1996 and the
Texaco acquisition had occurred as of January 1, 1996. The pro forma data is for
informational purposes only and may not necessarily reflect the results of
operations of Ethyl had the stock repurchase occurred on January 1, 1996 and had
the acquired business operated as part of the Company for the year ended
December 31, 1996.
1997 1996
------- -------
Pro forma net income (1) $67,555 $81,024
======= =======
Average number of shares of common stock outstanding (2,3) 83,449 83,444
======= =======
Pro forma basic and diluted earnings per share $0.81 $0.97
======= =======
Notes:
(1) In the periods presented, the Company had only one class of common stock
outstanding.
(2) To determine the average number of shares of common stock and common stock
equivalents, the average number of common shares and common stock
equivalents outstanding (actual or assumed for equivalents) during each
month were added together and the sum was then divided by 12.
(3) For diluted earnings per share, the shares issuable upon the assumed
exercise of outstanding stock options would be 7 and 4 in 1997 and 1996,
respectively, and the shares of common stock equivalents would have been
83,456 and 83,448, respectively.
54
EXHIBIT 21
The following is a list of the significant subsidiaries of the registrant as of
March 10, 1999. Each such subsidiary does business under its corporate name.
LIST OF SUBSIDIARIES
Jurisdiction of
Subsidiary Incorporation
EID Corporation Liberia
Ethyl Asia Pacific Company Virginia
Ethyl Brasil Aditivos S.A. Brazil
Ethyl Canada Inc. Province of Ontario, Canada
Ethyl Europe S.A. Belgium
Ethyl Foreign Sales Corporation U.S. Virgin Islands
Ethyl Interamerica Corporation Delaware
Ethyl Japan Corporation Japan
Ethyl Korea Limited Korea
Ethyl Mineraloel-Additive GmbH Germany
Ethyl Petroleum Additives, Inc. Delaware
Ethyl Petroleum Additives Limited United Kingdom
Ethyl Services Limited United Kingdom
Ethyl Shipping Company Limited United Kingdom
55
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Ethyl Corporation and Subsidiaries on Form S-8 (File Nos. 2-78933 and 333-60889)
and on Form S-3 (File No. 33-57243) of our report dated February 1, 1999, except
as to the information in Note 10, for which the date is February 18, 1999, on
our audits of the consolidated financial statements of Ethyl Corporation and
Subsidiaries as of December 31, 1998 and 1997, and for the years ended December
31, 1998, 1997 and 1996, which report is included on page 46 of this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
March 9, 1999
56
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8403
<SECURITIES> 0
<RECEIVABLES> 169891
<ALLOWANCES> 1386
<INVENTORY> 191776
<CURRENT-ASSETS> 391428
<PP&E> 776452
<DEPRECIATION> 400426
<TOTAL-ASSETS> 1065544
<CURRENT-LIABILITIES> 177566
<BONDS> 531859
<COMMON> 83465
0
0
<OTHER-SE> 103537
<TOTAL-LIABILITY-AND-EQUITY> 1065544
<SALES> 974190
<TOTAL-REVENUES> 974190
<CGS> 725018
<TOTAL-COSTS> 851939
<OTHER-EXPENSES> (24519)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40409
<INCOME-PRETAX> 106361
<INCOME-TAX> 35782
<INCOME-CONTINUING> 70579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70579
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
