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 June 30, 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 July 31, 1994: 65,596,721
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<CAPTION>
June 30 December 31
1994 1993
---------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 19,950 $ 24,220
Receivables........................................... 269,051 225,603
Inventories:
Finished products................................... 95,872 89,817
Products in process................................. 90,465 92,067
Raw materials and supplies.......................... 89,556 102,653
---------- ----------
275,893 284,537
---------- ----------
Other current assets.................................. 31,991 34,553
---------- ----------
Total current assets............... 596,885 568,913
Property and equipment - net.......................... 489,254 437,635
Investments in nonconsolidated companies.............. 180,724 103,246
Intangible and other assets........................... 74,758 72,786
---------- ----------
TOTAL.......................... $1,341,621 $1,182,580
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt....................................... $ 47,452 $ 14,590
Accounts payable...................................... 115,700 116,775
Income taxes and other current liabilities............ 95,958 92,883
---------- ----------
Total current liabilities........... 259,110 224,248
Long-term debt........................................ 58,257 55,298
Accumulated postretirement benefit obligation......... 93,823 89,423
Noncurrent liabilities................................ 68,039 70,022
Deferred income taxes................................. 33,927 11,353
---------- ----------
Total liabilities................... 513,156 450,344
---------- ----------
Contingencies and commitments
Shareholders' equity:
Preferred stock without par value - unissued
Common Shares without par value:
Authorized 120,000,000 shares
Outstanding - 65,744,715 shares as of June 30,
1994 after deducting 20,415,179 treasury shares,
66,590,028 shares as of December 31, 1993
after deducting 19,605,866 treasury shares........ 82,943 80,830
Retained earnings................................... 711,796 683,269
Unrealized gain on marketable securities............ 47,092
Accumulated translation adjustment.................. (13,366) (31,863)
---------- ----------
Total shareholders' equity......... 828,465 732,236
---------- ----------
TOTAL.......................... $1,341,621 $1,182,580
========== ==========
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
<TABLE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
<CAPTION>
Second Quarter Six Months
Ended June 30 Ended June 30
------------------- ----------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales........................... $407,163 $392,236 $804,979 $757,816
Royalties and other revenues........ 1,341 2,082 3,218 3,842
-------- -------- -------- --------
Total revenues............ 408,504 394,318 808,197 761,658
Cost of sales....................... 272,442 270,611 545,048 518,023
Selling and administrative expenses. 39,994 40,298 79,031 77,892
Research, testing and development
expenses.......................... 38,665 43,147 78,790 80,764
-------- -------- -------- --------
Total cost and expenses... 351,101 354,056 702,869 676,679
Gain on sale of investments......... 11,875 23,387
Other income - net.................. 1,876 5,540 6,481 12,986
Interest income..................... 1,271 952 1,910 1,616
Interest expense.................... (661) (1,323) (1,494) (2,800)
-------- -------- -------- --------
Income before income taxes.......... 71,764 45,431 135,612 96,781
Provision for income taxes.......... 22,632 14,089 43,199 30,008
-------- -------- -------- --------
Income before accounting changes.... 49,132 31,342 92,413 66,773
Cumulative effect of accounting
changes............................. (39,375)
-------- -------- -------- --------
Net income.......................... $ 49,132 $ 31,342 $ 92,413 $ 27,398
======== ======== ======== ========
Per Common Share:
Income before accounting changes.. $ .74 $ .46 $1.40 $ .98
Cumulative effect of accounting
changes........................... (.58)
----- ----- ----- -----
Net income per share................ $ .74 $ .46 $1.40 $ .40
===== ===== ===== =====
Dividends per share................. $ .22 $ .21 $ .44 $ .42
===== ===== ===== =====
Average number of shares outstanding 65,953 67,995 66,230 68,209
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
<TABLE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<CAPTION>
Six Months Ended
June 30
--------------------------
1994 1993
--------- ---------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Received from customers............................... $ 769,428 $ 733,418
Paid to suppliers and employees....................... (670,708) (635,245)
Income taxes paid..................................... (32,531) (24,222)
Interest and dividends received....................... 2,465 2,811
Interest paid......................................... (1,306) (2,553)
Other - net........................................... 1,463 2,085
--------- ---------
Total operating activities.................. 68,811 76,294
Investing activities:
Proceeds from sale of investments.................... 24,978 -
Capital expenditures.................................. (70,318) (53,620)
Acquisition........................................... - (25,581)
Other - net........................................... 712 241
--------- ---------
Total investing activities (44,628) (78,960)
Financing activities:
Short-term borrowings................................. 32,338 27,553
Long-term borrowings.................................. 102 17,016
Long-term debt repayment.............................. (1,128) -
Dividends paid........................................ (29,217) (28,694)
Common shares purchased, net of options exercised..... (32,557) (25,731)
--------- ---------
Total financing activities.................. (30,462) (9,856)
Effect of exchange rate changes on cash............... 2,009 313
--------- ---------
Net decrease in cash and short-term investments....... (4,270) (12,209)
Cash and short-term investments at the
beginning of period................................ 24,220 76,593
--------- ---------
Cash and short-term investments at the
end of period...................................... $ 19,950 $ 64,384
========= =========
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 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 June 30, 1994 and
December 31, 1993, and the results of operations and the cash flows for
the six months ended June 30, 1994 and 1993.
2. The company adopted SFAS 115 "Accounting for Certain Investments in Debt
and Equity Securities" as of January 1, 1994. 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.
At June 30, 1994, investments classified as available-for-sale had a cost
basis of $5.3 million and an aggregate fair value of $77.8 million
resulting in unrealized gains of $72.5 million or $47.1 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 $34.1 million at
June 30, 1994.
3. The following is a reconciliation of net income to net cash provided by
operating activities:
Six Months Ended
June 30
---------------------
1994 1993
-------- --------
(in thousands of dollars)
Net income $ 92,413 $ 27,398
Depreciation and amortization 30,496 30,626
Deferred income taxes (942) (1,663)
Undistributed earnings of nonconsolidated
companies (5,785) (10,261)
Gain on sale of investments (23,387)
Change in current assets and liabilities:
Accounts receivable (38,769) (29,235)
Inventory 17,203 (4,724)
Accounts payable and accrued expenses 3,459 19,397
Other current assets (1,922) 3,322
Cumulative effect of changes in accounting
principles 39,375
Other items - net (3,955) 2,059
-------- --------
Net cash provided by operating activities $ 68,811 $ 76,294
======== ========
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 1994
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.
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 appealed 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 compared to the previous year's periods by $14.2 million
or 4% for the second quarter and $46.5 million or 6% for the six months ended
June 30, 1994. Volume increased 2% for the quarter and 5% for the six months
ended June 30,1994. Volume increased 2% in both the North American and
international markets for the second quarter of 1994 compared to the second
quarter of 1993. North American volume decreased 2% for the six months ended
June 30, 1994 while international volume increased 9%. The volume increase
in the international markets was primarily due to spot business in the Middle
East. Price levels for higher performing products introduced late in 1993 to
meet new passenger car motor oil standards in the U.S. markets combined with
price increases in the first quarter of 1994, resulted in higher average
selling prices in the North Anerican market which were largely offset by spot
business in the Middle East, which carries lower average selling prices, and
a negative foreign currency impact in Western Europe. Price increases
announced in the first half of 1994 in the international markets are expected
to provide a slightly favorable effect on consolidated revenues during the
last half of the year.
Gross profit (sales less cost of sales) increased 11% to $134.7 million for
the second quarter and 8% to $259.9 million for the first six months of 1994.
Gross profit as a percentage of sales increased from 31.0% to 33.1% for the
second quarter and from 31.6% to 32.3% for the six months ended June 30,
1994. These improvements were primarily a result of the higher selling
prices combined with stable material costs and manufacturing costs per unit.
Late in the second quarter, raw material costs began increasing and are
expected to continue to increase further during the second half of 1994.
Even though the price increases in international markets will have a slightly
positive affect, the higher material costs may result in a decrease in the
gross profit percentage for the second half as compared to the first half of
1994.
Selling and administrative expenses for the six months ended June 30, 1994
increased $1.1 million or 1% and decreased $.3 million or 1% for the second
quarter compared to the previous year's periods. The modest increase for the
six months and decrease for the second quarter were a result of fewer
employees due to early retirements related to the company's realignment
initiative, a focus on reduced spending and lower legal expenses. Research,
testing and development expenses (technology expenses) decreased $4.5 million
or 10% for the quarter and $2.0 million or 2% for the six month period. This
decrease is primarily attributable to completion of testing required for
passenger car motor oil specification upgrades. Total selling,
administrative and technology expenses are expected to increase in the second
half of 1994 over first half levels, primarily to complete the new heavy duty
diesel specification upgrade testing, but total expenses in the second half
of 1994 are still expected to be less than the second half of 1993.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (Continued)
The company sold approximately 250,000 shares of Genentech, Inc. common stock
in each of the first two quarters of 1994 resulting in pretax gains of $11.9
million (12 cents per share) for the second quarter and $23.0 million (23
cents per share) for the first six months. The company owned 1.5 million
Genentech shares at June 30, 1994, and management anticipates continuing to
sell Genentech common stock during 1994.
The change in other income is primarily a result of equity earnings and
related dividend income from the company's investment in Mycogen Corporation
and its agribusiness joint venture with Mycogen. Compared to 1993, such
equity earnings and related dividend income in 1994 were $1.4 million less
for the second quarter and $4.6 million less for the six months 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. The equity losses for the second
half of 1994 are expected to be lower than the losses recorded in the second
half of 1993 as a result of the company's lower agribusiness joint venture
ownership percentage and anticipated reduced Mycogen losses.
The company's results are affected by the strengthening or weakening of the
U.S. dollar against other currencies in which the company transacts business.
For the six months ended June 30, 1994, there was a net unfavorable currency
effect of approximately 3 cents per share due to lower amounts when
international operations were translated into U.S. dollars.
Primarily as a result of the above factors, income before taxes increased
$26.3 million for the second quarter and $38.8 million for the six months
ended June 30, 1994 compared to the respective prior year periods. Income
before accounting changes increased $17.8 million, or 57% for the second
quarter and $25.6 million, or 38% for the first six months of 1994.
As a result of the factors discussed above, second half earnings before the
sale of Genentech are expected to be lower than the first half of 1994 but
should improve significantly from a relatively weak second half of 1993.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $68.8 million for the six months ended
June 30, 1994 compared to $76.3 million in 1993. Short-term debt increased
$32.3 million during this period, and proceeds from the sale of investments
were $25.0 million. The cash provided by operations, the after tax proceeds
from the sales of investments and the increase in short-term debt were used
primarily for capital expenditures, the repurchase of 489,000 common shares
of the company under its share repurchase program and the payment of
dividends. Primarily, as a result of the above, cash and short-term
investments declined $4.3 million to $19.9 million at June 30, 1994.
The company recorded a special charge of $86.3 million in the third quarter
of 1993 in connection with manufacturing rationalization and organizational
realignment initiatives. Overall, these initiatives are expected to be fully
implemented over approximately a three-year period.
The special charge initiatives were projected to involve outlays of cash of
approximately $36 million through full implementation with the remainder of
the charge consisting of asset write-downs. Through June 30, 1994, cash
expenditures have totaled approximately $16 million, of which $12 million was
spent in 1994.
The company has approximately 2 million shares remaining on its share
repurchase authorization and management expects to continue its share
repurchases.
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 June 30, 1994 financial statements was
to increase investments in nonconsolidated companies by $72.5 million,
increase shareholders' equity by $47.1 million and increase deferred tax
liabilities by $25.4 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 2.3 to 1 at June 30, 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.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 appealed 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Corporation was held
April 25, 1994. The following matters were voted on by the shareholders:
1. Election of directors:
(a) Edward F. Bell. The vote was
57,456,383 shares for and 455,794
shares to withhold authority.
(b) L. E. Coleman. The vote was
57,274,969 shares for and 637,209
shares to withhold authority.
(c) Peggy Gordon Elliott. The vote was
57,422,419 shares for and 489,758
shares to withhold authority.
(d) Ronald A. Mitsch. The vote was
57,492,057 shares for and 420,120
shares to withhold authority.
<PAGE>
PART II. OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Security Holders (Continued)
(e) Renold D. Thompson. The vote was
57,394,052 shares for and 518,125
shares to withhold authority.
2. A proposal to confirm the appointment of Deloitte & Touche as
independent auditors. The vote was 55,967,612 shares for;
142,685 shares against and 171,144 shares abstaining. A total
of 1,630,737 shares that were represented at the meeting did
not exercise any of the options set forth above.
3. A proposal to adopt a shareholder proposal concerning
confidential voting. The vote was 23,601,010 shares for;
31,398,303 shares against and 2,393,879 shares abstaining. A
total of 518,986 shares that were represented at the meeting
did not exercise any of the options set forth above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(b) There were no reports on Form 8-K filed for the
quarter ended June 30, 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: August 12, 1994
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
Second 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 Six Months Ended
June 30, June 30,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ ------
Average shares outstanding for
computation of primary
earnings per share 65,953 67,995 66,230 68,209
Add adjustment to treat shares
for options exercised as if
such shares were outstanding
during the entire period 54 67 123 89
Add equivalent shares for
unexercised options at end
of period* 505 529 545 537
------ ------ ------ ------
Average shares outstanding for
computation of fully diluted
earnings per share 66,512 68,591 66,898 68,835
====== ====== ====== ======
Primary earnings per share $.74 $.46 $1.40 $ .40
==== ==== ===== =====
Fully diluted earnings per share $.74 $.46 $1.38 $ .40
==== ==== ===== =====
*Computed under the "Treasury Stock Method" using the higher of quoted ending
or average market price.
