UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..... to .....
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
October 31, 1996: 59,610,838
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<CAPTION>
September 30 December 31
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 99,235 $ 30,579
Receivables........................................... 241,958 255,377
Inventories:
Finished products................................... 87,507 102,628
Products in process................................. 79,035 96,061
Raw materials....................................... 67,377 89,267
Supplies and engine test parts...................... 21,055 22,583
---------- ----------
254,974 310,539
---------- ----------
Other current assets.................................. 31,911 43,199
---------- ----------
Total current assets............... 628,078 639,694
Property and equipment - net.......................... 686,295 676,816
Investments in nonconsolidated companies.............. 29,010 100,655
Intangible and other assets........................... 78,358 74,855
---------- ----------
TOTAL.......................... $1,421,741 $1,492,020
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt. $ 11,077 $ 52,685
Accounts payable...................................... 106,336 125,120
Income taxes and other current liabilities............ 125,621 87,786
---------- ----------
Total current liabilities........... 243,034 265,591
Long-term debt........................................ 160,216 194,423
Postretirement health care obligation................. 104,534 102,653
Noncurrent liabilities................................ 47,064 53,223
Deferred income taxes................................. 27,574 27,147
---------- ----------
Total liabilities................... 582,422 643,037
---------- ----------
Contingencies and commitments
Shareholders' equity:
Preferred stock without par value - authorized
and unissued:
Serial Preferred Stock - 2,000,000 shares
Serial Preferred Shares - 25,000,000 shares
Common Shares without par value:
Authorized 120,000,000 shares
Outstanding - 59,773,688 shares as of September 30,
1996 after deducting 26,422,206 treasury shares,
62,951,288 shares as of December 31, 1995
after deducting 23,244,606 treasury shares........ 79,835 83,254
Retained earnings................................... 767,521 762,747
Accumulated translation adjustment.................. (8,037) 2,982
---------- ----------
Total shareholders' equity......... 839,319 848,983
---------- ----------
TOTAL.......................... $1,421,741 $1,492,020
========== ==========
<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
-------------------- -----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales........................... $392,114 $412,428 $1,218,057 $1,264,133
Royalties and other revenues........ 811 1,296 3,338 4,776
-------- -------- ---------- ----------
Total revenues............ 392,925 413,724 1,221,395 1,268,909
Cost of sales....................... 267,183 282,443 829,302 847,908
Selling and administrative expenses. 39,064 39,862 119,290 122,952
Research, testing and development
expenses.......................... 39,815 46,421 119,360 132,599
-------- -------- ---------- ----------
Total cost and expenses... 346,062 368,726 1,067,952 1,103,459
Net gain on investments............. 53,280 38,459
Other income (expense) - net........ 921 (2,905) 4,342 5,570
Interest income..................... 1,378 1,035 5,798 3,611
Interest expense.................... (2,838) (2,278) (8,246) (6,386)
-------- -------- ---------- ----------
Income before income taxes.......... 46,324 40,850 208,617 206,704
Provision for income taxes.......... 14,591 12,908 67,578 68,409
-------- -------- ---------- ----------
Net income.......................... $ 31,733 $ 27,942 $ 141,039 $ 138,295
======== ======== ========== ==========
Net income per share................ $ .53 $ .44 $2.31 $2.16
===== ===== ===== =====
Dividends per share................. $ .24 $ .23 $ .72 $ .69
===== ===== ===== =====
Average number of shares outstanding 59,979 63,460 61,166 64,083
<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
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Net income................................................... $ 141,039 $ 138,295
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization............................ 60,921 54,536
Deferred income taxes.................................... 4,800 1,740
Equity earnings, net of distributions.................... 311 (443)
Net gain on investments.................................. (53,280) (38,459)
Change in current assets and liabilities:
Accounts receivable.................................... 3,931 (15,199)
Inventories............................................ 40,499 (1,262)
Accounts payable and accrued expenses.................. 8,768 22,260
Other current assets................................... 5,393 (4,643)
Other items - net........................................ (9,212) (3,660)
--------- ---------
Total operating activities......................... 203,170 153,165
Investing activities:
Proceeds from sale of investments and assets................. 148,960 40,160
Capital expenditures......................................... (71,538) (143,750)
Acquisition of subsidiary.................................... (1,718) (3,521)
Other - net.................................................. 3,296 3,170
--------- ---------
Total investing activities 79,000 (103,941)
Financing activities:
Short-term borrowing (repayment) - net....................... (82,914) (56,859)
Long-term borrowing.......................................... 28,425 100,064
Long-term debt repayment..................................... (17,757) (2,388)
Dividends paid............................................... (44,161) (44,277)
Common shares purchased, net of options exercised............ (95,523) (54,829)
--------- ---------
Total financing activities......................... (211,930) (58,289)
Effect of exchange rate changes on cash...................... (1,584) 1,504
--------- ---------
Net increase (decrease) in cash and short-term investments... 68,656 (7,561)
Cash and short-term investments at the beginning of period... 30,579 36,379
--------- ---------
Cash and short-term investments at the end of period......... $ 99,235 $ 28,818
========= =========
<FN>
Amounts shown are unaudited.
</TABLE>
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1996
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 September 30, 1996 and
December 31, 1995, and the results of operations and cash flows for the
applicable periods ended September 30, 1996 and 1995.
2. During 1996, the company substantially completed the divestiture of its
former agribusiness assets. In January 1996, pursuant to a definitive
agreement to sell all of its interest in Mycogen Corporation to
DowElanco, the company exchanged its interest in an agribusiness joint
venture with Mycogen and all of its Mycogen Series A Preferred Stock for
Mycogen Common Stock. In February 1996, the sale of the company's
interest in Mycogen Common Stock to DowElanco was completed, and the
company collected gross cash proceeds of $126.2 million.
The company also sold substantially all of the assets of SVO Specialty
Products, Inc. (SVO), a wholly-owned subsidiary. In January 1996, certain
rights to SVO oil seed technology were sold to Mycogen for $8.0 million,
of which $2.0 million was received in January 1996 with $2.5 million and
$3.5 million due in January 1997 and 1998, respectively. In September
1996, the company sold the majority of the remaining SVO oil seed assets,
excluding a seed crushing plant, for cash of $20.8 million. The gain or
loss from the September 1996 sale of SVO assets, including the ultimate
disposition of the seed crushing facility, is not expected to be
significant. SVO's revenues approximated $33.0 million in each of the
nine month periods ended September 30, 1996 and 1995 and were $5.8
million and $11.7 million for the three months ended September 30, 1996
and 1995, respectively. The SVO operations were not material to the
company's results of operations or financial position.
The company recognized a pretax gain on the transactions described above
of $57.3 million, after transaction and other related costs of $4.9
million. The company also recognized a $4.0 million write-down of assets
related to a joint venture in Venezuela due to the uncertainty of
recoverability caused by the devaluation of that country's local currency
during the first quarter of 1996. These items comprise the $53.3 million
"Net Gain on Investments" reported in the income statement for the nine
months ended September 30, 1996.
3. On June 24, 1996, the U.S. Supreme Court denied the request of Exxon
Corporation to review the September 1995 decision of the United States
Court of Appeals for the Federal Circuit in Washington, D.C. The Court
of Appeals' decision overturned a previous jury verdict that the company
had infringed an Exxon patent and vacated an injunction and a $129
million judgment against the company. The Supreme Court decision
terminates, with finality, the judgment against the company.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1996
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
compensation damages. In October 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. In April 1996, the Federal Court of Appeals of
Canada vacated the award of special penalty damages and concluded that
penalty damage determination should be made after the compensation
damages for patent infringement have been determined. No date has been
set for determination of the compensation damages. A reasonable
estimation of the company's potential recovery for compensation damages
and penalty damages cannot be made at this time.
<PAGE>
THE LUBRIZOL CORPORATION
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The company continued to make progress during the first nine months of 1996 in
a challenging business environment generally marked by slow market growth,
competitive pricing and unfavorable currency effects. The company's successful
efforts to reduce operating costs and working capital resulted in improved cash
flow from operations for the year-to-date period and contributed to a net income
improvement of 14% for the third quarter of 1996 compared with 1995, despite
lower revenues. In addition, capital expenditures for the first nine months of
1996 were substantially lower than the same period last year. More detailed
comments relating to the company's results of operations and financial position
follow below.
Revenues decreased $20.8 million, or 5%, for the third quarter of 1996 compared
with the third quarter of 1995 and $47.5 million, or 4%, for the nine months
ended September 30, 1996, compared with the nine months ended September 30,
1995. Third quarter revenues declined because average selling prices were 4%
lower (2% due to unfavorable currency and 2% due to negative price/mix) and due
to the sale of the vegetable oil business in early September 1996. Volume in
the third quarter was level with the third quarter of 1995. For the comparable
year-to-date periods average selling price declined 3% due to unfavorable
price/mix/currency effects and volume declined 1%.
During 1996, the company began to ship products that meet the new industry
specification for passenger car motor oils in North America. This new
specification requires approximately 10% less additive than the existing
specification and, when fully implemented and absent changes in market share,
may lessen the company's annual sales volume in North America by 4% (1.5%
worldwide). By September 30, 1996, most of the company's customers had
converted to this new specification, which the company estimates reduced its
worldwide volume by approximately 1% for the first nine months of 1996.
Changing priorities of customers, along with the continuing consolidation among
additive suppliers, are resulting in some customers seeking new supply
relationships for additives. This, along with a weak demand for finished
lubricants, is causing a more competitive marketplace in certain product lines.
Although the company has experienced both gains and losses of business in the
normal course of its operations, such changes may occur more frequently under
these conditions and in periods when new industry specifications are being
introduced.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Gross profit (sales less cost of sales) decreased $5.1 million or 4% for the
third quarter of 1996 compared with the third quarter of 1995 as the impact of
lower average selling prices was partially offset by lower manufacturing costs
and average material costs, each being 4% lower. For the nine months ended
September 30, 1996, gross profit declined $27.5 million or 7% compared with the
nine-month period ended September 30, 1995, principally due to the same factors
described for the third quarter comparison. Unfavorable currency effects
contributed approximately 55% and 28%, respectively, toward the decline in gross
profit amount for the respective three and nine-month periods ended
September 30, 1996. Gross profit as a percent of sales improved to 31.9% from
31.5% for the third quarter but declined to 31.9% from 32.9% for the nine
months ended September 30, 1996 as compared with the year ago periods.
The company has continued to lower its operating costs. Management has various
initiatives in place relating to the cost structure of the company, both on a
short-term and a long-term basis. These include a worldwide freeze on salary
increases and hiring effective January 1996 and the manufacturing
rationalization and organizational realignment initiatives that began in 1993.
Employee levels are approximately 5% lower at September 30, 1996, compared with
December 31, 1995, as retiring or departing employees were not replaced.
The company's manufacturing costs and selling, administrative, research and
testing expenses were each lower than the year ago period. Excluding currency
effects, these costs and expenses, in the aggregate, declined 5% for the
comparative third quarter periods and 4% for the comparative year-to-date
periods.
As explained in Note 2 to the financial statements, during 1996 the company
completed the divestiture of substantially all of its former agribusiness assets
comprised of its equity investment in Mycogen Corporation and the assets of the
company's wholly-owned subsidiary, SVO Specialty Products, Inc. (SVO). These
transactions have resulted in proceeds from the sale of investments of $149.0
million during 1996 and a pretax gain of $57.3 million, after transaction and
other related costs of $4.9 million. The company also recognized a $4.0 million
write-down of its assets related to a joint venture in Venezuela due the
uncertainty of recoverability caused by the devaluation of that country's local
currency. These items comprise the $53.3 million gain recognized in the first
quarter of 1996 ($.55 per share after tax) and reflected in the income statement
line item "Net gain on investments." The $38.5 million gain ($.39 per share
after tax) recognized in the first half of 1995 was from the sale of Genentech
common stock.
Other income-net improved by $3.8 million as compared with the third quarter of
1995, due to equity losses recorded in 1995 related to Mycogen's seasonal
operating results. On a year-to-date basis for 1995, Mycogen equity losses were
$1.5 million.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The company transacts business in over 100 countries. As the U.S. dollar
strengthens or weakens against other international currencies in which the
company transacts business, the financial results of the company will be
affected. In 1995, primarily during the second quarter, the U.S. dollar
weakened, particularly against the French franc, German deutsche mark and
Japanese yen, causing higher U.S. dollar revenues and earnings for the 1995
period. The U.S. dollar has strengthened during 1996 as compared with exchange
rates in effect during 1995 causing an unfavorable effect on net income of
approximately $3.0 million or $.05 per share for the nine-month period ended
September 30, 1996. Currency also had an unfavorable effect of $.02 per share
when comparing the third quarter of 1996 with the third quarter of 1995.
Net income in the third quarter of 1996 was $31.7 million or $.53 per share,
which was a 14% increase (20% increase on a per share basis) over the $27.9
million or $.44 per share for the third quarter of 1995. On a year-to-date
basis, net income before inclusion of the after-tax gain on investments, was
$106.4 million or $1.76 per share for 1996, which was 6% less (1% less on a per
share basis) than the $113.3 million or $1.77 per share for the first nine
months of 1995.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities increased 33% to $203.2 million for the
first nine months of 1996, compared with $153.2 million generated for the same
period in 1995. This increase in cash flow from operations was principally
attributable to cash generated from reducing working capital, primarily
inventory, and the positive cash effect of lowering operating costs. Excluding
cash and short-term investments, working capital has been reduced by $58
million, or 17%, from December 31, 1995, approximately 60% of which was due to
liquidation of SVO inventories and receivables and the sale of this business in
September of 1996.
Proceeds from the sale of investments reflected under "Investing Activities" in
the Consolidated Statement of Cash Flows for the nine months ended September 30,
1996 are comprised of $126.2 million cash collected from the sale of Mycogen and
$22.8 million collected from the sale of SVO assets, as described in Note 2 to
the financial statements.
During 1995, capital expenditures reached record levels, as the company was
completing several large construction projects to enhance or maintain production
capabilities at plant facilities principally in the United States and France, as
well as investing in new corporate administrative and technical facilities. As
expected, the level of capital spending has declined sharply in 1996 due to the
completion of these projects. Capital expenditures for the first nine months of
1996 were $71.5 million or approximately one-half the spending level for the
same 1995 period. Capital expenditures for the full year 1996 are expected to
approximate $100 million, as compared with $189 million for full year 1995.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The company's share repurchase program for 1996 is currently planned to consist
of approximately $135 million generated by the after-tax proceeds from the sale
of its Mycogen investment and SVO assets. During the nine-month period ended
September 30, 1996, the company repurchased 3.2 million of its common shares for
$96.4 million. At September 30, 1996, there was authorization remaining to
repurchase 3.8 million common shares.
Total short-term and long-term debt decreased $76 million, or 31%, at
September 30, 1996, compared with December 31, 1995. This decline was the
result of improved cash flow from operations, lower capital expenditures and the
utilization of approximately $36 million of cash proceeds from the sale of the
Mycogen investment and SVO to reduce borrowings until such proceeds may be used
in the company's common share repurchase program. Debt as a percent of
capitalization (shareholders' equity plus short-term and long-term debt)
declined to 17% as compared to 23% at December 31, 1995.
Primarily as a result of these activities and the payment of dividends, cash and
short-term investments increased $68.7 million to $99.2 million at September 30,
1996.
The company's financial position continues to be strong with a ratio of current
assets to current liabilities of 2.6 to 1 at September 30, 1996, compared to 2.4
to 1 at December 31, 1995. Management believes the company's credit facilities
and internally generated funds will be sufficient to meet its future capital
needs.
The company is involved in patent litigation with Exxon Corporation in various
countries. Please refer to Note 3 to the financial statements for further
discussion regarding the company's patent litigation with Exxon.
<PAGE>
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 September 30, 1996.
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 13, 1996
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
Third Quarter 1996
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,
------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
Average shares outstanding for
computation of primary
earnings per share 59,979 63,460 61,166 64,083
Add adjustment to treat shares
for options exercised as if
such shares were outstanding
during the entire period 13 5 51 47
Add equivalent shares for
unexercised options at end
of period* 148 355 178 404
------ ------ ------ ------
Average shares outstanding for
computation of fully diluted
earnings per share 60,140 63,820 61,395 64,534
====== ====== ====== ======
Primary earnings per share $ .53 $ .44 $2.31 $2.16
===== ===== ===== =====
Fully diluted earnings per share $ .53 $ .44 $2.30 $2.14
===== ===== ===== =====
*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 sheet 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.0
<CASH> 99,235
<SECURITIES> 0
<RECEIVABLES> 219,176
<ALLOWANCES> 1,254
<INVENTORY> 254,974
<CURRENT-ASSETS> 628,078
<PP&E> 1,493,670
<DEPRECIATION> 807,375
<TOTAL-ASSETS> 1,421,741
<CURRENT-LIABILITIES> 243,034
<BONDS> 160,216
0
0
<COMMON> 79,835
<OTHER-SE> 759,484
<TOTAL-LIABILITY-AND-EQUITY> 1,421,741
<SALES> 1,218,057
<TOTAL-REVENUES> 1,221,395
<CGS> 829,302
<TOTAL-COSTS> 829,302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 61
<INTEREST-EXPENSE> 8,246
<INCOME-PRETAX> 208,617
<INCOME-TAX> 67,578
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,039
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 2.30
</TABLE>
