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 September 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 October 31, 1994: 65,035,630
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<CAPTION>
September 30 December 31
1994 1993
------------ -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 45,720 $ 24,220
Receivables........................................... 253,389 225,603
Inventories:
Finished products................................... 84,603 89,817
Products in process................................. 94,969 92,067
Raw materials and supplies.......................... 102,401 102,653
---------- ----------
281,973 284,537
---------- ----------
Other current assets.................................. 36,124 34,553
---------- ----------
Total current assets............... 617,206 568,913
Property and equipment - net.......................... 520,620 437,635
Investments in nonconsolidated companies.............. 164,969 103,246
Intangible and other assets........................... 75,719 72,786
---------- ----------
TOTAL.......................... $1,378,514 $1,182,580
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt....................................... $ 75,775 $ 14,590
Accounts payable...................................... 105,009 116,775
Income taxes and other current liabilities............ 102,857 92,883
---------- ----------
Total current liabilities........... 283,641 224,248
Long-term debt........................................ 57,887 55,298
Accumulated postretirement benefit obligation......... 95,834 89,423
Noncurrent liabilities................................ 71,290 70,022
Deferred income taxes................................. 29,278 11,353
---------- ----------
Total liabilities................... 537,930 450,344
---------- ----------
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands of Dollars)
<CAPTION>
September 30 December 31
1994 1993
------------ -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (Continued)
Commitments and contingencies
Shareholders' equity:
Preferred stock without par value - unissued
Common Shares without par value:
Authorized 120,000,000 shares
Outstanding - 65,222,403 shares as of September 30,
1994 after deducting 20,973,491 treasury shares,
66,590,028 shares as of December 31, 1993
after deducting 19,605,866 treasury shares........ 84,189 80,830
Retained earnings................................... 726,978 683,269
Unrealized gain on marketable securities............ 37,984
Accumulated translation adjustment.................. (8,567) (31,863)
---------- ----------
Total shareholders' equity......... 840,584 732,236
---------- ----------
TOTAL.......................... $1,378,514 $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>
Third Quarter Nine Months
Ended September 30 Ended September 30
--------------------- ------------------------
1994 1993 1994 1993
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales............................ $396,478 $390,819 $1,201,457 $1,148,635
Royalties and other revenues......... 1,377 1,946 4,595 5,788
-------- -------- ---------- ----------
Total revenues............. 397,855 392,765 1,206,052 1,154,423
Cost of sales........................ 261,877 261,594 806,925 779,617
Selling and administrative expenses.. 38,626 40,088 117,657 117,980
Research, testing and development
expenses........................... 41,893 45,394 120,683 126,158
-------- -------- ---------- ----------
Total cost and expenses.... 342,396 347,076 1,045,265 1,023,755
Special charge....................... (86,303) (86,303)
Gain on sale of investments.......... 12,019 20,108 35,406 20,108
Other income (expense) - net......... 1,904 (7,263) 8,385 5,723
Interest income...................... 952 1,389 2,862 3,005
Interest expense..................... (494) (1,069) (1,988) (3,869)
-------- -------- ---------- ----------
Income (loss) before income taxes.... 69,840 (27,449) 205,452 69,332
Provision (benefit) for income taxes. 21,907 (11,544) 65,106 18,464
-------- -------- ---------- ----------
Income (loss) before accounting
changes............................ 47,933 (15,905) 140,346 50,868
Cumulative effect of accounting
changes............................ (39,375)
-------- -------- ---------- ----------
Net income (loss).................... $ 47,933 $(15,905) $ 140,346 $ 11,493
======== ======== ========== ==========
Per Common Share:
Income (loss) before accounting
changes.......................... $ .73 $(.24) $2.13 $ .75
Cumulative effect of accounting
changes.......................... (.58)
----- ----- ----- -----
Net income (loss) per share.......... $ .73 $(.24) $2.13 $ .17
===== ===== ===== =====
Dividends declared per share......... $ .22 $ .21 $ .66 $ .63
===== ===== ===== =====
Average number of shares outstanding. 65,486 67,464 65,982 67,961
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
<TABLE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<CAPTION>
Nine Months Ended
September 30
----------------------------
1994 1993
---------- ----------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Received from customers............................... $1,186,248 $1,122,210
Paid to suppliers and employees....................... (1,010,730) (960,023)
Income taxes paid..................................... (50,266) (35,430)
Interest and dividends received....................... 4,582 4,200
Interest paid......................................... (1,887) (3,441)
Other - net........................................... 2,510 3,031
---------- ----------
Total operating activities.................. 130,457 130,547
Investing activities:
Capital expenditures.................................. (111,479) (83,516)
Acquisition........................................... (1,502) (25,581)
Proceeds from sale of investments..................... 37,713 21,132
Other - net........................................... (366) 426
---------- ----------
Total investing activities (75,634) (87,539)
Financing activities:
Short-term borrowings................................. 60,487 18,291
Long-term borrowings.................................. 102 21,471
Long-term debt repayment.............................. (2,007) (22,796)
Dividends paid........................................ (43,660) (42,865)
Common shares purchased, net of options exercised..... (51,495) (41,931)
---------- ----------
Total financing activities.................. (36,573) (67,830)
Effect of exchange rate changes on cash............... 3,250 1,250
---------- ----------
Net increase (decrease) in cash and short-term
investments........................................ 21,500 (23,572)
Cash and short-term investments at the
beginning of period................................ 24,220 76,593
---------- ----------
Cash and short-term investments at the
end of period...................................... $ 45,720 $ 53,021
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1994
1. The accompanying unaudited consolidated financial statements contain all
adjustments necessary to present fairly the financial position as of
September 30, 1994 and December 31, 1993, and the results of operations
and the cash flows for the quarters and nine months ended September 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 September 30, 1994, investments classified as available-for-sale had
a cost basis of $4.6 million and an aggregate fair value of $63.0 million
resulting in unrealized gains of $58.4 million or $38.0 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 $25.5 million at
September 30, 1994.
3. The following is a reconciliation of net income to net cash provided by
operating activities:
Nine Months Ended
September 30
---------------------
1994 1993
-------- --------
(in thousands of dollars)
Net income $140,346 $ 11,493
Depreciation and amortization 48,122 45,766
Deferred income taxes 902 (32,647)
Undistributed earnings of nonconsolidated
companies (4,078) (2,483)
Special charge 86,303
Gain on sale of investments (35,406) (20,108)
Change in current assets and liabilities:
Accounts receivable (19,804) (33,715)
Inventory 13,435 (1,800)
Accounts payable and accrued expenses (2,212) 30,196
Other current assets (6,891) 6,339
Cumulative effect of changes in accounting
principles 39,375
Other items - net (3,957) 1,828
-------- --------
Net cash provided by operating activities $130,457 $130,547
======== ========
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1994
In the third quarter of 1994, the company donated to The Lubrizol
Foundation Genentech stock having a market value at the date of
contribution of $4.9 million. Included in "Other items-net" is the $4.9
million contribution expense and the related $4.7 million gain
representing the excess of market value over the cost of shares
contributed.
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 the company
does not know when a decision will be announced. 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 judgment 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. On October 4, 1994, the trial court judge awarded the company
$15 million (Canadian) in special penalty damages, plus attorneys' fees,
against Imperial Oil for disregarding an earlier injunction for the
manufacture or sale of the dispersant which is the subject of this case.
Imperial Oil commenced proceedings to appeal the award of penalty
damages. The company has not reflected the award of penalty damages
within its financial statements pending the outcome of the appeal
process. The penalty damages are in addition to compensation damages,
as to which no date has been set for a determination. A reasonable
estimation of the company's potential recovery for compensation damages
cannot be made at this time.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1994
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 decrease net
income by $51.5 million for the change in accounting for postretirement
benefits and to increase net income by $12.1 million for the change in
accounting for income taxes.
6. Special Charge
The company recorded a special charge of $86.3 million ($.83 per share
after tax) in the third quarter of 1993 in connection with manufacturing
rationalization and organizational realignment initiatives. The
manufacturing rationalization plan is resulting in cost savings from a
reduction in the number of employees, lower operating costs and fewer
manufacturing units used to produce intermediate products. The
organizational realignment relates to the consolidation of the company's
nonmanufacturing activities and has reduced expenses through operating
efficiencies and fewer employees.
From initiation through completion, the special charge will involve
outlays of cash of approximately $36 million, primarily for early
retirements. Approximately $4 million was expended during the fourth
quarter of 1993, and approximately $17 million has been expended in the
first nine months of 1994.
<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 $5.1 million or
1% for the third quarter and $51.6 million or 5% for the nine months ended
September 30, 1994. These revenue increases were a result of higher average
selling prices (including the impact of product mix and currency) of 5% for
the quarter and 3% for the nine months ended September 30, 1994, compared to
the prior year periods. Increased 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
American market for the quarter and nine months ended September 30, 1994.
Additionally, favorable product mix and currency in international markets
contributed to the third quarter increase in average selling prices. Volume
decreased 4% in the third quarter of 1994 compared to the third quarter of
1993. This decrease is primarily a result of the continued economic weakness
in Europe and order patterns in the Asia-Pacific region. Volume increased 2%
for the nine months ended September 30, 1994, primarily due to spot business
in the Middle East during the first half of 1994.
Gross profit (sales less cost of sales) increased 4% to $134.6 million for
the third quarter and 7% to $394.5 million for the first nine months of 1994.
Gross profit as a percentage of sales increased from 33.1% to 33.9% for the
third quarter and from 32.1% to 32.8% for the nine months ended September 30,
1994. These improvements in the gross profit percentages were primarily a
result of higher average selling prices. Raw material costs (including the
impact of product mix and currency) increased 3% in the third quarter
compared to the second quarter and are expected to increase further during
the fourth quarter of 1994. The higher material costs may result in a
decrease in the gross profit percentage for the fourth quarter compared to
the second and third quarters of 1994.
Selling and administrative expenses for the third quarter decreased $1.5
million or 4% compared to the previous year's period and decreased slightly
for the comparable nine month period. The decreases were caused by a decline
in the number of employees as a result of 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 $3.5 million or 8% for the quarter and $5.5 million or 4% for the
nine month period. These decreases were primarily attributable to completion
of testing required for passenger car motor oil specification upgrades, the
decline in the number of employees and increased efficiencies in the product
development process.
<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 three quarters of 1994 resulting in pretax gains of
$12.0 million (12 cents per share after tax) for the third quarter and $35.0
million (35 cents per share after tax) for the first nine months. During
1993, the company had pretax gains on the sale of Genentech shares of $20.1
million for both the quarter and nine months ended September 30. The company
owned 1.15 million Genentech shares at September 30, 1994, and management
anticipates continuing to sell Genentech common stock.
The change in other income for the quarter and year-to-date periods was
primarily a result of equity earnings and related dividend income from the
company's investment in Mycogen Corporation. Compared to 1993, such equity
earnings and related dividend income in 1994 were favorable by $7.8 million
for the third quarter and $3.1 million for the nine months as a result of a
lower ownership percentage in the agribusiness joint venture. 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 second half
of the year. The equity losses for 1994 are expected to be lower than the
losses recorded in 1993 because of improved Mycogen results and the company's
lower agribusiness joint venture ownership percentage.
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 quarter and nine months ended September 30, 1994, the effect of
currency fluctuations on earnings was not significant.
Primarily as a result of the above factors, income before tax (excluding the
gain on sale of investments in each period and the impact of the special
charge and accounting changes in 1993) increased $19.1 million or 49% in the
third quarter and $34.5 or 25% for the nine month period.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $130.5 million in each of the nine month
periods ended September 30, 1994 and 1993. Short-term debt increased $60.5
million during the nine months ended September 30, 1994, and proceeds from
the sale of investments were $37.7 million. Cash received from customers and
short-term borrowings were used for working capital needs, capital
expenditures, share repurchases and dividends. Proceeds from the sale of
investments were used to support the company's share repurchase program.
Construction of new technical and administrative facilities at the company
headquarters and increased capital investment in plant and equipment equally
contributed to the 34% increase in capital expenditures for the nine months
ended September 30, 1994, compared to the same period in 1993. The company
has approximately 1.46 million shares remaining on its share repurchase
authorization, and management expects to continue its share repurchases. As
a result of the above and the other items set forth in the consolidated
statements of cash flows, cash and short-term investments increased $21.5
million to $45.7 million at September 30, 1994.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
implemented over the next several years with completion expected in 1997.
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. Partially offsetting the cash
outlays will be cash savings which are expected to grow to approximately $40
million annually when the plans are fully implemented. Through September 30,
1994, cash expenditures have totaled approximately $21 million, of which $17
million was spent in 1994.
The company's financial position continues to be strong with a ratio of
current assets to current liabilities of 2.2 to 1 at September 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 cash requirements.
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 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 September 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: November 14, 1994
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
Third 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
------ ------ ------ ------
Average shares outstanding for
computation of primary
earnings per share 65,486 67,464 65,982 67,961
Add adjustment to treat shares
for options exercised as if
such shares were outstanding
during the entire period 5 69 90 141
Add equivalent shares for
unexercised options at end
of period* 397 580 496 580
------ ------ ------ ------
Average shares outstanding for
computation of fully diluted
earnings per share 65,888 68,113 66,568 68,682
====== ====== ====== ======
Primary earnings per share $ .73 $(.24) $2.13 $.17
===== ===== ===== ====
Fully diluted earnings per share $ .73 $(.23) $2.11 $.17
===== ===== ===== ====
*Computed under the "Treasury Stock Method" using the higher of quoted
ending or average market price.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1.0
<CASH> 45,720
<SECURITIES> 0
<RECEIVABLES> 255,074
<ALLOWANCES> 1,685
<INVENTORY> 281,973
<CURRENT-ASSETS> 617,206
<PP&E> 1,232,938
<DEPRECIATION> 712,318
<TOTAL-ASSETS> 1,378,514
<CURRENT-LIABILITIES> 283,641
<BONDS> 57,887
<COMMON> 84,189
0
0
<OTHER-SE> 756,395
<TOTAL-LIABILITY-AND-EQUITY> 1,378,514
<SALES> 1,201,457
<TOTAL-REVENUES> 1,206,052
<CGS> 806,925
<TOTAL-COSTS> 806,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 511
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 205,452
<INCOME-TAX> 65,106
<INCOME-CONTINUING> 140,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140,346
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.13
</TABLE>
