<PAGE> 1
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, 1995
Commission File Number 1-5263
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 [ ]
Number of the registrant's common shares, without par value, outstanding, as of
April 30, 1995: 64,372,991
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31
(In Thousands of Dollars) 1995 1994
- ------------------------- ----------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 40,921 $ 36,379
Receivables........................................... 285,089 250,392
Inventories:
Finished products................................... 98,118 102,605
Products in process................................. 98,333 98,105
Raw materials and supplies.......................... 106,177 97,621
---------- ----------
302,628 298,331
---------- ----------
Other current assets.................................. 41,603 39,286
---------- ----------
Total current assets............... 670,241 624,388
Property and equipment - net.......................... 613,998 558,744
Investments in nonconsolidated companies.............. 130,735 138,013
Intangible and other assets........................... 75,891 73,219
---------- ----------
TOTAL.......................... $1,490,865 $1,394,364
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt....................................... $ 75,486 $ 53,700
Accounts payable...................................... 118,064 114,244
Income taxes and other current liabilities............ 118,485 85,589
---------- ----------
Total current liabilities........... 312,035 253,533
Long-term debt........................................ 117,908 114,161
Postretirement health care obligation................. 99,293 98,453
Noncurrent liabilities................................ 69,323 68,799
Deferred income taxes................................. 24,822 27,379
---------- ----------
Total liabilities................... 623,381 562,325
---------- ----------
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 - 64,422,060 shares as of March 31,
1995 after deducting 21,773,834 treasury shares,
64,844,560 shares as of December 31, 1994
after deducting 21,351,334 treasury shares........ 83,921 84,059
Retained earnings................................... 753,597 734,533
Unrealized gain on marketable securities............ 16,406 23,169
Accumulated translation adjustment.................. 13,560 (9,722)
---------- ----------
Total shareholders' equity......... 867,484 832,039
---------- ----------
TOTAL.......................... $1,490,865 $1,394,364
========== ==========
</TABLE>
Amounts shown are unaudited.
-2-
<PAGE> 3
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
(In Thousands Except Per Share Data) 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales..................................................... $414,931 $397,816
Royalties and other revenues.................................. 1,790 1,877
-------- --------
Total revenues...................................... 416,721 399,693
Cost of sales................................................. 277,556 272,606
Selling and administrative expenses........................... 40,924 39,037
Research, testing and development expenses.................... 41,256 40,125
-------- --------
Total cost and expenses............................. 359,736 351,768
Gain on sale of Genentech..................................... 13,106 11,512
Other income - net............................................ 4,285 4,605
Interest income............................................... 1,320 639
Interest expense.............................................. (2,028) (833)
-------- --------
Income before income taxes.................................... 73,668 63,848
Provision for income taxes.................................... 24,566 20,567
-------- --------
Net income.................................................... $ 49,102 $ 43,281
======== ========
Net income per share.......................................... $ .76 $ .65
======== ========
Dividends per share........................................... $ .23 $ .22
======== ========
Average number of shares outstanding.......................... 64,722 66,506
</TABLE>
Amounts shown are unaudited.
-3-
<PAGE> 4
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
(In Thousands of Dollars) 1995 1994
- ------------------------- -------- --------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Net income................................................... $ 49,102 $ 43,281
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization............................ 17,217 15,045
Deferred income taxes.................................... 2,199 (1,736)
Equity earnings, net of distributions.................... (3,166) (3,861)
Gain on sale of investments.............................. (13,106) (11,512)
Change in current assets and liabilities:
Accounts receivable.................................... (25,504) (22,259)
Inventories............................................ 5,477 14,399
Accounts payable and accrued expenses.................. 29,767 9,819
Other current assets................................... (3,839) (4,691)
(Decrease) in noncurrent liabilities..................... (2,302) (8,926)
Other items - net........................................ 1,806 (2,137)
-------- --------
Total operating activities......................... 57,651 27,422
Investing activities:
Proceeds from sale of investments............................ 13,676 12,023
Capital expenditures......................................... (55,287) (33,652)
Acquisition of subsidiary.................................... (3,521)
Other - net.................................................. 65 (10)
-------- --------
Total investing activities (45,067) (21,639)
Financing activities:
Short-term borrowing......................................... 20,932 31,243
Long-term borrowing.......................................... 64 102
Long-term debt repayment..................................... (903) (778)
Dividends paid............................................... (14,904) (14,687)
Common shares purchased, net of options exercised............ (15,272) (18,411)
-------- --------
Total financing activities......................... (10,083) (2,531)
Effect of exchange rate changes on cash...................... 2,041 444
-------- --------
Net increase in cash and short-term investments.............. 4,542 3,696
Cash and short-term investments at the beginning of period... 36,379 24,220
-------- --------
Cash and short-term investments at the end of period......... $ 40,921 $ 27,916
======== ========
</TABLE>
Amounts shown are unaudited.
-4-
<PAGE> 5
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1995
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, 1995 and December
31, 1994, and the results of operations and the changes in financial
position for the three months ended March 31, 1995 and 1994.
2. Certain of the company's marketable equity securities, included in
investments in nonconsolidated companies, are classified as
available-for-sale. At March 31, 1995, investments classified as
available-for-sale had a cost basis of $3.4 million and an aggregate fair
value of $28.6 million resulting in unrealized gains of $25.2 million or
$16.4 million after tax. There were no unrealized losses. Subsequent to
March 31, 1995, the company sold its remaining shares of Genentech common
stock realizing proceeds of $26.5 million and a gain of $25.4 million.
The amount of unrealized gain shown as a component of shareholders'
equity decreased $6.8 million during the first quarter of 1995 as a
result of sales of these securities and the change in the fair value of
investments classified as available-for- sale.
The company also holds other investments in nonconsolidated companies,
including certain investments in marketable securities that are either
accounted for on the equity basis or the cost basis due to restrictions
placed on the securities. These marketable investments have quoted
market values which exceed the book carrying values by $26.7 million at
March 31, 1995.
3. The company uses derivative financial instruments only to manage
well-defined foreign currency, interest rate and commodity price risk.
The company does not use derivative financial instruments for trading
purposes. At March 31, 1995, the company had forward contracts to sell
currencies at various dates during 1995 for $9.7 million. The maximum
amount of foreign currency forward contracts outstanding at any one time
was $15.2 million during the first quarter of 1995.
The company has an interest rate swap agreement that effectively converts
floating rate debt on $18.4 million of Marine Terminal Refunding Revenue
Bonds due July 1, 2000 to a fixed rate of 6.5%. In addition during the
first quarter of 1995, the company entered into an interest rate swap
agreement that converts $50 million of short-term borrowing to a fixed
rate of 7.6% for up to 10 years.
-5-
<PAGE> 6
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1995
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, oral
arguments on the February 1994 damages award were heard by the same court
in Washington, D.C., on March 8, 1995, and the company does not know when
a decision will be announced. 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. 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.
-6-
<PAGE> 7
THE LUBRIZOL CORPORATION
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Revenue increased 4% in the first quarter of 1995 compared to the first quarter
of 1994. Price increases implemented in the first quarter of 1995 and a more
favorable product mix accounted for a 5% increase in revenues, and the impact
of translating various international currencies into a weakened U.S. dollar
accounted for a 2% increase in revenues. Overall volume in the first quarter
of 1995 declined 3% as compared to the first quarter of 1994. Volume declined
8% internationally due to unusually high 1994 spot business in the Middle East
that did not recur in 1995, but volume increased 5% in North America.
Management expects volumes to increase during the remainder of 1995 and, for
the year, to exceed 1994 levels.
Gross profit (sales less cost of sales) increased $12.2 million to $137.4
million in the first quarter of 1995 compared to the same period in 1994.
Gross profit as a percentage of sales, increased from 31.5% in the first
quarter of 1994 to 33.1% in 1995. This improvement was a result of higher
revenues more than offsetting an 8% increase in average material costs per
metric ton and reflects the absence of the 1994 spot business to the Middle
East which had a relatively low gross profit.
The company's organizational realignment initiatives, which began in 1993, have
slowed the rate of increase in its cost and expenses. Selling and
administrative expenses increased $1.9 million or 5% compared to the first
quarter of 1994. Research, testing and development expenses (technology
expenses) increased $1.1 million or 3% compared to the first quarter of 1994.
The company's manufacturing, technology and selling and administrative expenses
increased a total of 4% over the first quarter of 1994. However, excluding the
affects of currency, such expenses increased less than 2%.
During the first quarter of 1995, the company sold 278,200 shares of Genentech,
Inc. common stock resulting in a pretax gain of $13.1 million which contributed
13 cents to earnings per share. This compares to a gain of $11.5 million
pretax or 11 cents per share in the first quarter of 1994.
Interest expense increased $1.2 million as a result of the higher average
borrowings outstanding.
The company's financial position and results of operation are affected by the
strengthening or weakening of the U.S. dollar against other currencies in which
the company transacts business. In the quarter ended March 31, 1995, the U.S.
dollar weakened as compared to the exchange rates in effect at December 31,
1994 and during the first quarter of 1994. The weaker U.S. dollar resulted in
the change in the accumulated translation adjustment amount, a component of
shareholders' equity, and favorably impacted earnings per share in the first
quarter of 1995 by 4 cents.
-7-
<PAGE> 8
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (Continued)
Excluding gains on sale of Genentech common stock, net income was $40.6 million
in the first quarter of 1995 compared to $35.8 million in the first quarter of
1994 and the related earnings per share amounts improved by 17% to 63 cents
from 54 cents, respectively.
Primarily as a result of selling price increases, a weaker U.S. dollar and a
lower rate of spending, consolidated net income increased over the first
quarter of 1994 by $5.8 million, or 13%, to $49.1 million resulting in earnings
per share of 76 cents in the first quarter of 1995.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities during the first quarter of 1995 was
$57.7 million, an increase of $30.2 million over the comparable prior year
quarter. This increase was attributable to higher earnings, and changing
working capital requirements, including an $11.8 million refund of 1994
estimated income tax payments.
Total debt increased $25.5 million from the prior year end and, as a percent of
capitalization (shareholders' equity plus short-term and long-term debt), was
18% at March 31, 1995 versus 17% at December 31, 1994. Borrowings, net of debt
repayments, were $20.1 million during the first quarter of 1995 and were used
to help finance capital expenditures and an acquisition. In addition,
translating debt denominated in foreign currencies into U.S. dollars at March
31, 1995 contributed $5.4 million to the increase in debt.
Capital expenditures were $55.3 million in the first quarter of 1995, up 13%
over the fourth quarter of 1994 and 64% higher than the first quarter of 1994.
These expenditures were primarily in the United States and France, of which 70%
pertained to capital additions at manufacturing plants to enhance or maintain
production capabilities, including maintaining facilities in compliance with
environmental and safety regulations, and the remaining 30% was principally for
construction of new administrative and technical facilities at the company's
headquarters. Capital expenditures for the 1995 year may exceed the amount
spent in 1994 of $160.5 million as the company continues with its capital
spending program. At March 31, 1995, the company acquired Engine Control
Systems, Ltd., a Canadian company for $3.5 million.
During the first quarter, the company repurchased 462,000 of its common shares
for $15.7 million. At March 31, 1995, there was authorization remaining to
repurchase .5 million common shares. On April 24, 1995, the company's board of
directors authorized an additional 4.0 million shares to be repurchased. The
company intends to continue its share repurchase program during 1995.
-8-
<PAGE> 9
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES (Continued)
As a result of these activities, cash and short-term investments increased $4.5
million to $40.9 million at March 31, 1995.
The company's financial position continues to be strong with a ratio of current
assets to current liabilities of 2.1 to 1 at March 31, 1995, and 2.5 to 1 at
December 31, 1994. 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.
Subsequent to March 31, 1995, the company sold its remaining shares of
Genentech common stock and realized proceeds of $26.5 million. The company
used the after-tax proceeds to repurchase its shares.
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, the 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.
-9-
<PAGE> 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
March 31, 1995.
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 12, 1995
-10-
<PAGE> 1
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
First Quarter, 1995
The computation of primary earnings per share and fully diluted earnings per
share is as follows:
(In Thousands of Shares Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1995 1994
------ -------
<S> <C> <C>
Average shares outstanding for computation
of primary earnings per share 64,722 66,506
Add adjustment to treat shares for options
exercised as if such shares were outstanding
during the entire period 49 72
Add equivalent shares for unexercised options
at end of period* 432 586
------- -------
Average shares outstanding for computation of
fully diluted earnings per share 65,203 67,164
======= =======
Primary earnings per share $ .76 $ .65
======= =======
Fully diluted earnings per share $ .75 $ .64
======= =======
</TABLE>
*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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 40,921
<SECURITIES> 0
<RECEIVABLES> 244,610
<ALLOWANCES> 2,764
<INVENTORY> 302,628
<CURRENT-ASSETS> 670,241
<PP&E> 1,356,410
<DEPRECIATION> 742,412
<TOTAL-ASSETS> 1,490,865
<CURRENT-LIABILITIES> 312,035
<BONDS> 117,908
<COMMON> 83,921
0
0
<OTHER-SE> 783,563
<TOTAL-LIABILITY-AND-EQUITY> 1,490,865
<SALES> 414,931
<TOTAL-REVENUES> 416,721
<CGS> 277,556
<TOTAL-COSTS> 277,556
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 19
<INTEREST-EXPENSE> 2,028
<INCOME-PRETAX> 73,668
<INCOME-TAX> 24,566
<INCOME-CONTINUING> 49,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,102
<EPS-PRIMARY> .76
<EPS-DILUTED> .75
</TABLE>
