UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
THE LUBRIZOL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-0367600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
29400 Lakeland Boulevard
Wickliffe, Ohio 44092-2298
(Address of principal executive offices)
(Zip Code)
(216) 943-4200
(Registrant's telephone number, including area code)
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 and
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of April 30, 1994: 66,047,310
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PART I. FINANCIAL INFORMATION
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<CAPTION>
March 31 December 31
1994 1993
---------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 27,916 $ 24,220
Receivables........................................... 248,571 225,603
Inventories:
Finished products................................... 94,078 89,817
Products in process................................. 89,374 92,067
Raw materials and supplies.......................... 89,754 102,653
---------- ----------
273,206 284,537
---------- ----------
Other current assets.................................. 37,933 34,553
---------- ----------
Total current assets............... 587,626 568,913
Property and equipment - net.......................... 460,929 437,635
Investments in nonconsolidated companies.............. 181,811 103,246
Intangible and other assets........................... 71,301 72,786
---------- ----------
TOTAL.......................... $1,301,667 $1,182,580
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt....................................... $ 45,880 $ 14,590
Accounts payable...................................... 115,995 116,775
Income taxes and other current liabilities............ 100,094 92,883
---------- ----------
Total current liabilities........... 261,969 224,248
Long-term debt........................................ 56,830 55,298
Postretirement health care obligation................. 91,560 89,423
Noncurrent liabilities................................ 60,163 70,022
Deferred income taxes................................. 34,144 11,353
---------- ----------
Total liabilities................... 504,666 450,344
---------- ----------
Contingencies and commitments
Shareholders' equity:
Preferred stock without par value - authorized
and unissued:
Serial Preferred Stock - 2,000,000 shares
Serial Preference Shares - 25,000,000 shares
Common Shares without par value:
Authorized 120,000,000 shares
Outstanding - 66,125,135 shares as of March 31,
1994 after deducting 20,070,759 treasury shares,
66,590,028 shares as of December 31, 1993
after deducting 19,605,866 treasury shares........ 80,639 80,830
Retained earnings................................... 693,643 683,269
Unrealized gain on marketable securities............ 48,647
Accumulated translation adjustment.................. (25,928) (31,863)
---------- ----------
Total shareholders' equity......... 797,001 732,236
---------- ----------
TOTAL.......................... $1,301,667 $1,182,580
========== ==========
<FN>
Amounts shown are unaudited.
</TABLE>
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<TABLE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
<CAPTION>
Three Months Ended
March 31
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Net sales..................................................... $397,816 $365,580
Royalties and other revenues.................................. 1,877 1,760
-------- --------
Total revenues...................................... 399,693 367,340
Cost of sales................................................. 272,606 247,412
Selling and administrative expenses........................... 39,037 37,594
Research, testing and development expenses.................... 40,125 37,617
-------- --------
Total cost and expenses............................. 351,768 322,623
Gain on sale of Genentech..................................... 11,512
Other income - net............................................ 4,605 7,446
Interest income............................................... 639 664
Interest expense.............................................. (833) (1,477)
-------- --------
Income before income taxes.................................... 63,848 51,350
Provision for income taxes.................................... 20,567 15,919
-------- --------
Income before accounting changes.............................. 43,281 35,431
Cumulative effect of accounting changes....................... (39,375)
-------- --------
Net income (loss)............................................. $ 43,281 $ (3,944)
======== ========
Per Common Share
Income before accounting changes............................ $ .65 $ .52
Cumulative effect of accounting changes..................... (.58)
----- -----
Net income (loss)............................................. $ .65 $(.06)
===== =====
Dividends per share........................................... $ .22 $ .21
Average number of shares outstanding.......................... 66,506 68,423
<FN>
Amounts shown are unaudited.
</TABLE>
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<TABLE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<CAPTION>
Three Months Ended
March 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Received from customers...................................... $377,434 $339,291
Paid to suppliers and employees.............................. (335,286) (315,639)
Income taxes paid............................................ (15,255) (6,756)
Interest and dividends received.............................. 639 664
Interest paid................................................ (803) (1,715)
Other - net.................................................. 693 869
-------- --------
Total operating activities......................... 27,422 16,714
Investing activities:
Proceeds from sale of investments............................ 12,023
Capital expenditures......................................... (33,652) (26,672)
Acquisition.................................................. (25,581)
Other - net.................................................. (10) 99
-------- --------
Total investing activities (21,639) (52,154)
Financing activities:
Short-term borrowing......................................... 31,243 18,077
Long-term borrowing.......................................... 102 5,386
Long-term debt repayment..................................... (778)
Dividends paid............................................... (14,687) (14,382)
Common shares purchased, net of options exercised............ (18,411) (9,141)
-------- --------
Total financing activities......................... (2,531) (60)
Effect of exchange rate changes on cash...................... 444 300
-------- --------
Net increase (decrease) in cash and short-term investments... 3,696 (35,200)
Cash and short-term investments at the beginning of period... 24,220 76,593
-------- --------
Cash and short-term investments at the end of period......... $ 27,916 $ 41,393
======== ========
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1994
1. The accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the financial position as of March 31, 1994 and
December 31, 1993, and the results of operations and the changes in
financial position for the three months ended March 31, 1994 and 1993.
2. At January 1, 1994, the company adopted SFAS 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 115 requires that
certain investments in debt and equity securities be reported at fair
value, rather than historical cost. Certain of the company's marketable
equity securities, included in investments in nonconsolidated companies,
are classified as available-for-sale. The effect of adopting SFAS 115
at January 1, 1994, was to increase investments in nonconsolidated
companies by $99.2 million, increase shareholders' equity by $64.5
million and increase deferred tax liabilities by $34.7 million.
The amount of unrealized gain shown as a component of shareholders'
equity decreased $15.8 million during the first quarter as a result of
sales of securities and a decrease in the fair value of investments
classified as available-for-sale.
During the first quarter of 1994, investments classified as available-
for-sale with an average cost basis totaling $.5 million were sold for
$12.0 million resulting in a realized gain of $11.5 million.
At March 31, 1994, investments classified as available-for-sale had a
cost basis of $5.8 million and an aggregate fair value of $80.6 million
resulting in unrealized gains of $74.8 million or $48.6 million after
tax. There were no unrealized losses.
Investments in nonconsolidated companies also includes investments in
certain marketable securities not affected by SFAS 115. The market value
of these investments exceed the book carrying value by $25.9 million at
March 31, 1994.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1994
3. The following is a reconciliation of net income to net cash provided by
operating activities:
Three Months Ended
March 31
---------------------
1994 1993
-------- --------
(in thousands of dollars)
Net income (loss) $ 43,281 $ (3,944)
Depreciation and amortization 15,045 15,528
Deferred income taxes (1,736) 195
Equity (earnings) losses, net of distributions (3,861) (7,164)
Gain on sale of investments (11,512)
Cumulative effect of changes in accounting
principles 39,375
Change in current assets and liabilities:
Accounts receivable (22,259) (28,542)
Inventory 14,399 (1,524)
Accounts payable and accrued expenses 9,819 1,350
Other current assets (4,691) 1,961
(Decrease) in noncurrent liabilities (8,926) 1,235
Other items - net (2,137) (1,756)
-------- --------
Net cash provided by operating activities $ 27,422 $ 16,714
======== ========
4. On November 18, 1993, a federal court jury in Houston, Texas, awarded
Exxon Corporation $48 million in damages in a patent case brought, in
1989, against the company. The damages award relates to a December 1992
verdict that the company willfully infringed an Exxon patent pertaining
to an oil soluble copper additive component. On February 18, 1994, the
trial court judge doubled the damages amount and awarded prejudgment
interest, court costs and additional attorneys' fees to Exxon. The total
amount of the judgment, including previously awarded attorneys' fees, is
$129 million. The company has obtained a bond to stay enforcement of the
judgment pending the company's appeal discussed below.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1994
The original December 1992 finding of willful infringement, as well as
the jury's determination that the patent is valid, remains on appeal to
the United States Court of Appeals for the Federal Circuit Court in
Washington, D.C., which has jurisdiction over all patent cases. Oral
arguments on this appeal were held on December 6, 1993, and a decision
may be forthcoming in 1994. This decision could reverse or modify the
judgment against the company. In addition, the company has the right to
appeal the February 1994 damages award to the same court in Washington,
D.C. The company's management continues to believe that it has not
infringed the Exxon patent and that the patent is invalid. Based on the
advice of legal counsel, management believes that the December 1992 trial
court judgment will not be upheld on appeal. Therefore, no amount
related to the judgement has been recorded in the company's financial
statements.
The company has prevailed in a separate case brought in Canada against
Exxon's Canadian affiliate, Imperial Oil, Ltd., for infringement of the
company's patent pertaining to dispersant, the largest additive component
used in motor oils. A 1990 trial court verdict in favor of the company
regarding the issue of liability was upheld by the Federal Court of
Appeals of Canada in December 1992, and in October 1993, the Supreme
Court of Canada dismissed Imperial Oil's appeal of the Court of Appeals
decision. The case has returned to the trial court for an assessment of
damages. A reasonable estimation of the company's potential recovery
cannot be made at this time.
5. Effective January 1, 1993, the company changed its method of accounting
for postretirement benefits to conform with SFAS 106 and its method of
accounting for income taxes to conform with SFAS 109. The cumulative
effect at January 1, 1993 of these accounting changes was to increase net
income by $12.1 million for the change in accounting for income taxes and
to decrease net income by $51.5 million for the change in accounting for
postretirement benefits.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Revenues increased $32.4 million or 9% in the first quarter of 1994 compared
to the first quarter of 1993. Higher shipments of specialty chemicals
increased revenues by 7% while the remaining 2% of the increase was
attributable to sales of excess specialty vegetable oil inventory. The
specialty chemical volume increase was in the international markets primarily
as a result of spot business in the Middle East and order patterns. North
American volume decreased 6% compared to the first quarter of 1993 as a
result of a decrease in market share. The North American volume decrease was
more than offset by increased selling prices for higher performing products
that meet new passenger car motor oil standards. Average worldwide selling
price increases of 1% were offset by 1% unfavorable currency effects. Price
increases implemented during the first quarter should be more fully reflected
in the company's revenues during the remainder of the year.
Gross profit (sales less cost of sales) increased 6% to $125.2 million in the
first quarter of 1994 compared to $118.2 million for the same period in 1993.
Gross profit as a percentage of sales, decreased from 32.3% in the first
quarter of 1993 to 31.5% in 1994 as the excess specialty vegetable inventory
was sold at break-even prices, and the spot business in the Middle East has
a relatively low gross profit.
Selling and administrative expenses increased $1.4 million or 4% compared to
the first quarter of 1993, but as a percentage of revenues, decreased
slightly to under 10%. Research, testing and development expenses
(technology expenses) increased $2.5 million or 7% compared to the first
quarter of 1993. This increase is due to higher testing costs associated
with customer test programs to meet new industry performance standards for
engine oils and automatic transmission fluids. The amount of technology
expenses decreased 12% from the fourth quarter of 1993. Technology expenses
were 10% of revenues for the first quarters of 1994 and 1993. The company's
plan is to keep technology expenses at approximately that level during 1994.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
During the first quarter of 1994, the company sold approximately 250,000
shares of Genentech, Inc. common stock resulting in a pretax gain of $11.5
million which contributed 11 cents to earnings per share. The company owned
1.75 million shares of Genentech shares at March 31, 1994, and management
anticipates continuing to sell Genentech common stock during 1994.
Other income includes equity earnings and related dividend income from the
company's investment in Mycogen Corporation and its agribusiness joint
venture with Mycogen. Such equity earnings and related dividend income in
1994 is $2.8 million less than 1993 as a result of a lower ownership
percentage in the agribusiness joint venture partnership. Mycogen's income
is seasonal, with the majority of income recorded during the first half of
the year, and losses expected to be recorded during the remainder of the
year.
As a result of the above factors, net income was $43.3 million in 1994
compared to income before accounting changes of $35.4 million in the first
quarter of 1993.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities was $27.4 million for the three
months ended March 31, 1994 compared to $16.7 million in the first quarter of
1993. This increase of $10.7 million was a result of higher 1994 revenues.
The net cash utilized in investing activities during the first quarter of
1994 was $30.5 million less than the prior year period primarily as a result
of sales of Genentech common stock in 1994 and the acquisition of Langer &
Co. included in 1993.
The after tax proceeds from the sales of Genentech common stock as well as
cash generated from operating activities were used to repurchase 507,300
common shares of the company. The company has 2.5 million shares remaining
on its share repurchase authorization. Management expects to continue its
share repurchases.
Short-term borrowings of $31.2 million were incurred to finance normal first
quarter working capital needs during the three months ended March 31, 1994.
As a result of the above activity, cash and short-term investments increased
$3.7 million to $27.9 million at March 31, 1994.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
As described in Note 2 to the financial statements, the company adopted
Statement of Financial Accounting Standards (SFAS) 115 at January 1, 1994.
The effect of adopting SFAS 115 on the March 31, 1994 financial statements
was to increase investments in non-consolidated companies by $74.8 million,
increase shareholders' equity by $48.6 million and increase deferred tax
liabilities by $26.2 million. SFAS 115 had no effect on cash flow or net
income for the quarter.
The company's financial position continues to be strong with a ratio of
current assets to current liabilities of 2.2 to 1 at March 31, 1994, and 2.5
to 1 at December 31, 1993. Under a currently effective shelf registration
statement, the company has the ability to offer to the public up to $100
million of debt securities. Management believes the company's internally
generated funds as well as its credit facilities and proceeds available from
debt issuable under the shelf registration will be sufficient to meet its
capital needs.
As discussed in Note 4 to the financial statements, the company is involved
in patent litigation with Exxon Corporation in various countries.
Determinations of liability against the company in the U.S., which is subject
to appeal, and against Exxon in Canada have been made by the courts.
Management is unable to predict the eventual outcomes of this litigation and,
therefore, their impact on future cash flows is not known. If Exxon prevails
in the U.S., management believes the company has sufficient financial
resources to meet any resulting obligation and, other than a potential one-
time charge against income, the litigation would not have a material adverse
effect on future results of operations.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The company is a party in a case brought by Exxon Corporation and
its affiliates, Exxon Chemical Patents, Inc. and Exxon Research & Engineering
Company, in the Southern District of Texas, Houston Division on September 19,
1989. In December 1992, the trial jury rendered a verdict that the company
willfully infringed an Exxon patent pertaining to an oil soluble copper
additive component. In early 1993, the court prohibited the company from
making or selling any additive packages in the United States that contained
this component and awarded Exxon $18.1 million for attorneys' fees. On
November 18, 1993, another jury in the same case awarded Exxon $48 million in
damages. The findings of infringement and validity of the Exxon patent as
well as the $18.1 million attorneys' fee award are on appeal to the United
States Court of Appeals for the Federal Circuit in Washington, D.C., which
has jurisdiction over all patent cases. Oral argument in this appeal was
heard on December 6, 1993, and a decision may be forthcoming in 1994. On
February 18, 1994, acting on a request from Exxon that the damages amount be
tripled, the trial court judge doubled the damages amount and awarded
prejudgment interest, court costs and additional attorneys' fees to Exxon.
The total amount of the judgment, including the previously awarded attorneys'
fees, is $129 million. The company has the right to appeal the February 1994
damages award to the same court in Washington, D.C., as is considering the
appeal of the original verdict.
The company's management continues to believe that it has not
infringed the Exxon patent and that the patent is invalid. Based on the
advice of legal counsel, management believes that the December 1992 trial
court judgment will not be upheld on appeal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(b) A Form 8-K/A, containing amended disclosure
under "Item 5 - Other Events" related to
litigation between the company and Exxon
Corporation was filed on January 11, 1994.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LUBRIZOL CORPORATION
/s/Gregory P. Lieb
--------------------------------
Gregory P. Lieb
Chief Accounting Officer and
Duly Authorized Signatory of
The Lubrizol Corporation
Date: May 13, 1994
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
First Quarter, 1994
The computation of primary earnings per share and fully diluted earnings per
share is as follows:
(In Thousands of Shares Except Per Share Data)
Three Months Ended
March 31,
------------------
1994 1993
------ ------
Average shares outstanding for computation
of primary earnings per share 66,506 68,423
Add adjustment to treat shares for options
exercised as if such shares were outstanding
during the entire period 72 35
Add equivalent shares for unexercised options
at end of period* 586 541
------ ------
Average shares outstanding for computation of
fully diluted earnings per share 67,164 68,999
====== ======
Primary earnings per share $ .65 $(.06)
===== =====
Fully diluted earnings per share $ .64 $(.06)
===== =====
*Computed under the "Treasury Stock Method" using the higher of quoted ending
or average market price.
