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 March 31, 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
April 30, 1996: 61,142,963
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
(In Thousands of Dollars) 1996 1995
---------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 41,294 $ 30,579
Receivables........................................... 267,861 255,377
Inventories:
Finished products................................... 99,132 102,628
Products in process................................. 97,141 96,061
Raw materials....................................... 78,339 89,267
Supplies and engine test parts...................... 22,752 22,583
---------- ----------
297,364 310,539
---------- ----------
Other current assets.................................. 35,988 43,199
---------- ----------
Total current assets............... 642,507 639,694
Property and equipment - net.......................... 679,829 676,816
Investments in nonconsolidated companies.............. 29,468 100,655
Intangible and other assets........................... 77,939 74,855
---------- ----------
TOTAL.......................... $1,429,743 $1,492,020
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt. $ 15,310 $ 52,685
Accounts payable...................................... 106,710 125,120
Income taxes and other current liabilities............ 121,644 87,786
---------- ----------
Total current liabilities........... 243,664 265,591
Long-term debt........................................ 152,358 194,423
Postretirement health care obligation................. 103,280 102,653
Noncurrent liabilities................................ 49,673 53,223
Deferred income taxes................................. 26,829 27,147
---------- ----------
Total liabilities................... 575,804 643,037
---------- ----------
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 - 61,541,709 shares as of March 31,
1996 after deducting 24,654,185 treasury shares,
62,951,288 shares as of December 31, 1995
after deducting 23,244,606 treasury shares........ 81,618 83,254
Retained earnings................................... 777,945 762,747
Accumulated translation adjustment.................. (5,624) 2,982
---------- ----------
Total shareholders' equity......... 853,939 848,983
---------- ----------
TOTAL.......................... $1,429,743 $1,492,020
========== ==========
</TABLE>
Amounts shown are unaudited.
<PAGE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
(In Thousands Except Per Share Data) 1996 1995
-------- --------
<S> <C> <C>
Net sales..................................................... $405,412 $414,931
Royalties and other revenues.................................. 1,689 1,790
-------- --------
Total revenues...................................... 407,101 416,721
Cost of sales................................................. 273,595 277,556
Selling and administrative expenses........................... 40,608 40,924
Research, testing and development expenses.................... 40,696 41,256
-------- --------
Total cost and expenses............................. 354,899 359,736
Net gain on investments....................................... 53,280 13,106
Other income - net............................................ 3,213 4,285
Interest income............................................... 1,116 1,320
Interest expense.............................................. (3,094) (2,028)
-------- --------
Income before income taxes.................................... 106,717 73,668
Provision for income taxes.................................... 35,481 24,566
-------- --------
Net income.................................................... $ 71,236 $ 49,102
======== ========
Net income per share.......................................... $1.14 $ .76
===== =====
Dividends per share........................................... $ .24 $ .23
===== =====
Average number of shares outstanding.......................... 62,615 64,722
</TABLE>
Amounts shown are unaudited.
<PAGE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
(In Thousands of Dollars) 1996 1995
-------- --------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Net income................................................... $ 71,236 $ 49,102
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization............................ 19,442 17,217
Deferred income taxes.................................... 1,849 2,199
Equity earnings, net of distributions.................... (940) (3,166)
Net gain on investments.................................. (53,280) (13,106)
Change in current assets and liabilities:
Accounts receivable.................................... (17,380) (25,504)
Inventories............................................ 9,955 5,477
Accounts payable and accrued expenses.................. 14,445 29,767
Other current assets................................... 5,360 (3,839)
Other items - net........................................ (5,850) (2,496)
-------- --------
Total operating activities......................... 44,837 55,651
Investing activities:
Proceeds from sale of investments............................ 127,480 13,676
Capital expenditures......................................... (27,607) (55,287)
Acquisition of subsidiary.................................... (3,521)
Other - net.................................................. 2,045 2,065
-------- --------
Total investing activities 101,918 (43,067)
Financing activities:
Short-term borrowing (repayment)............................. (20,032) 20,932
Long-term borrowing.......................................... 64
Long-term debt repayment..................................... (57,508) (903)
Dividends paid............................................... (15,111) (14,904)
Common shares purchased, net of options exercised............ (42,563) (15,272)
-------- --------
Total financing activities......................... (135,214) (10,083)
Effect of exchange rate changes on cash...................... (826) 2,041
-------- --------
Net increase in cash and short-term investments.............. 10,715 4,542
Cash and short-term investments at the beginning of period... 30,579 36,379
-------- --------
Cash and short-term investments at the end of period......... $ 41,294 $ 40,921
======== ========
</TABLE>
Amounts shown are unaudited.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 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 March 31, 1996 and
December 31, 1995, and the results of operations and cash flows for the
three months ended March 31, 1996 and 1995.
2. Pursuant to a definitive agreement to sell all of its interest in Mycogen
Corporation to DowElanco, in January 1996, the company exchanged its
remaining interest in an agribusiness joint venture with Mycogen and all
of its Mycogen Series A Preferred Stock into Mycogen Common Stock. Due
to the pending sale and the assignment by the company of certain
shareholder rights to DowElanco, the company suspended using the equity
method of accounting for its investment in Mycogen effective January 1,
1996. In February 1996, the sale of the company's interest in Mycogen
to DowElanco was completed, and the company collected gross cash proceeds
of $126.2 million. In addition, in January 1996, the company sold
certain rights to its SVO oil seed technology to Mycogen for $8.0
million, of which $2.0 million was collected in January 1996 with $2.5
million due in January 1997 and $3.5 million due in January 1998. After
transaction and other related costs of $4.9 million, the company
recognized a pre tax gain on these transactions of $57.3 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. These items
comprise the $53.3 million "Net Gain on Investments" reported in the
income statement for the three months ended March 31, 1996.
3. In November 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 related to a December 1992
verdict that the company willfully infringed an Exxon patent pertaining
to an oil soluble copper additive component. In February 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, was $129
million.
In September 1995, the United States Court of Appeals for the Federal
Circuit in Washington, D.C., which has jurisdiction over all patent
cases, overturned the jury verdict that the company infringed the Exxon
patent and entered judgment in favor of the company as a matter of law.
The ruling also vacated an injunction against the company and the $129
million judgment. In February 1996, the same court in Washington, D.C.,
denied Exxon's request for rehearing. The company expects Exxon to file
for Supreme Court review but does not know whether the Supreme Court
would grant any such review. The company's management continues to
believe that it has not infringed the Exxon patent, that the patent is
invalid, and that no portion of the overturned judgment will be
reinstated. Therefore, no amount related to the matter has been recorded
in the company's financial statements.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 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 Appeal's
decision. The case has returned to the trial court for an assessment of
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.
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
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated revenues were $407.1 million, a decrease of $9.6 million, or 2%,
for the first quarter of 1996 compared with the first quarter of 1995. This
revenue decline was caused by lower volume (3%) offset by favorable currency
effects (1%). Average selling prices were slightly less than the same period
last year. Volume increased over 1% in North America but declined 6%
internationally. The decline in international volume was principally in
Western Europe due to continued weak demand for finished lubricants, customer
order pattern and some net loss of business with certain customers.
Many of the company's customers in North America have converted during the
first quarter of 1996 to products that meet the new industry specification
for passenger car motor oils. This new specification requires approximately
10% less additive than the previous specification and, absent changes in
market share, is expected to negatively affect the company's annual volume in
North America by 4% (1.5% worldwide). Customers are expected to be fully
converted to this new specification by the middle of 1996.
Changing customer priorities, 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 experiences 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 where new industry specifications are
being introduced.
Gross profit (sales less cost of sales) was $131.8 million for the first
quarter of 1996 or 4% lower than the amount earned in the first quarter of
1995. The impact of slightly higher average material costs and lower sales
volume were partially offset by favorable currency effects and lower gross
manufacturing costs. Gross profit as a percent of sales was 32.5% as
compared with 33.1% for the same period last year and 29.5% for the fourth
quarter of 1995. Gross profit percentage improved from the fourth quarter of
1995 due to lower material costs and a reduction in manufacturing expenses.
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 the
manufacturing rationalization and organizational realignment initiatives that
began in 1993, and a worldwide freeze on salary increases and hiring
effective January 1996. The company's manufacturing costs and selling,
administrative, research and testing expenses were each lower than the year
ago period. Excluding currency effects and an acquisition made in April 1995,
these costs and expenses in the aggregate declined 2% compared with the first
quarter of 1995.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
On February 20, 1996, the company sold all of its investment in Mycogen
Corporation (Mycogen) to DowElanco for cash of $126.2 million, completing the
divestiture of its former agribusiness assets other than those relating to
specialty vegetable oil operations. In addition, on January 15, 1996, the
company sold certain rights to its SVO oilseed technology to Mycogen for $8.0
million, which is payable in installments through January 1998. After
transaction and other related costs of $4.9 million, the company recognized
a pretax gain on these transactions of $57.3 million. The company also
recognized a $4.0 million write-down of its assets related to a joint venture
in Venezuela due to the uncertainty of recoverability caused by the
devaluation of that country's local currency. These items comprise the $53.3
million ($.55 per share after tax) "Net Gain on Investments" shown in the
income statement for the first quarter of 1996. The $13.1 million gain ($.13
per share after tax) in the first quarter of 1995 was from the sale of
Genentech common stock.
Other income-net decreased $1.1 million for the first quarter of 1996
compared to the first quarter 1995. The 1995 period included $2.6 million of
equity earnings from the company's former equity investee, Mycogen which did
not recur in 1996 due to the sale of the company's interest as described
above.
Interest expense increased $1.1 million in the first quarter of 1996 over the
first quarter 1995. This increase is due to a greater portion of the company
debt being long-term and carrying higher interest rates than short-term,
combined with a higher average daily balance of total debt outstanding ($224
million and $190 million for the first quarter of 1996 and 1995,
respectively).
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. During 1995, the U.S. dollar weakened primarily during the second
and third quarters and particularly against the French franc, German deutsche
mark and Japanese yen, causing higher U.S. dollar revenue and earnings.
Currency had a slightly favorable effect on earnings reported for the first
quarter of 1996 as compared with exchange rates in effect during the first
quarter of 1995. However, if the current exchange rates continue, there will
be a negative effect on earnings for the second and third quarters of 1996
when compared with the weaker U.S. dollar that existed during the second and
third quarters of 1995.
As a result of the factors discussed above, net income in the first quarter
of 1996 was $71.2 million or 45% higher than the first quarter of 1995. The
corresponding earnings per share of $1.14 in the first quarter of 1996
reflects a 50% increase over the same period last year. After excluding the
after tax investment gain from both periods, net income decreased 10% to
$36.6 million or $.59 per share in the first quarter of 1996 as compared with
$40.6 million or $.63 per share for the first quarter 1995.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities was $44.8 million for the first
quarter of 1996 compared with $55.7 million for the first quarter of 1995.
This decrease is attributable to lower revenues between the comparative
periods and the change in working capital requirements.
Proceeds from sale of investments reflected under "Investing Activities" in
the Consolidated Statement of Cash Flows for the quarter ended March 31,
1996, are principally comprised of $126.2 million cash collected from the
sale of Mycogen and $2.0 million collected from the sale of certain SVO
technology rights, as described above.
Capital expenditures in the first quarter of 1996 were 50% lower than the
first quarter of 1995, due to the completion during 1995 of several major
projects.
During 1996, the company's share repurchase program is currently planned to
consist of shares repurchased with the approximately $110 million of after
tax cash proceeds realized from the sale of its Mycogen investment. During
the first quarter of 1996, the company repurchased 1,423,000 shares of its
common shares for $42.8 million. At March 31, 1996, there was authorization
remaining to repurchase 1.6 million common shares.
Total debt repayments of $77.5 million during the first quarter of 1996 were
largely due to the use of cash proceeds realized from the sale of Mycogen to
temporarily lower borrowings until such proceeds are used for repurchase of
the company's common shares. Debt as a percent of capitalization
(shareholders' equity plus short-term and long-term debt) declined to 16% as
compared to 23% at December 31, 1995. However, debt is expected to increase
during the remainder of 1996 as the company continues its share repurchase
program, and the debt-to-capitalization ratio is expected to return to the
20-25% range.
Primarily as a result of these activities and the payment of dividends, cash
and short-term investments increased $10.7 million to $41.3 million at
March 31, 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 March 31, 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.
As discussed in Note 3 to the financial statements, the company is involved
in patent litigation with Exxon Corporation, in various countries.
Management believes that the litigation will not have a material adverse
effect on the financial condition or results of operations of the company.
<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 March 31, 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: May 10, 1996
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
First 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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
------ ------
<S> <C> <C>
Average shares outstanding for computation
of primary earnings per share 62,615 64,722
Add adjustment to treat shares for options
exercised as if such shares were outstanding
during the entire period 7 49
Add equivalent shares for unexercised options
at end of period* 189 432
------ ------
Average shares outstanding for computation of
fully diluted earnings per share 62,811 65,203
====== ======
Primary earnings per share $1.14 $ .76
===== =====
Fully diluted earnings per share $1.13 $ .75
===== =====
</TABLE>
*Computed under the "Treasury Stock Method" using the higher of quoted ending
or average market price.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE RATE> 1.0
<CASH> 41,294
<SECURITIES> 0
<RECEIVABLES> 242,124
<ALLOWANCES> 1,212
<INVENTORY> 297,364
<CURRENT-ASSETS> 642,507
<PP&E> 1,457,444
<DEPRECIATION> 777,615
<TOTAL-ASSETS> 1,429,743
<CURRENT-LIABILITIES> 243,664
<BONDS> 152,358
0
0
<COMMON> 81,618
<OTHER-SE> 772,321
<TOTAL-LIABILITY-AND-EQUITY> 1,429,743
<SALES> 405,412
<TOTAL-REVENUES> 407,101
<CGS> 273,595
<TOTAL-COSTS> 273,595
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 3,094
<INCOME-PRETAX> 106,717
<INCOME-TAX> 35,481
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,236
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.13
</TABLE>
