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, 1997
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, 1997: 58,280,720
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
---------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 54,592 $ 55,073
Receivables........................................... 259,017 238,401
Inventories:
Finished products................................... 90,420 88,176
Products in process................................. 65,749 77,910
Raw materials....................................... 68,855 66,590
Supplies and engine test parts...................... 18,852 19,229
---------- ----------
243,876 251,905
---------- ----------
Other current assets.................................. 34,226 39,720
---------- ----------
Total current assets............... 591,711 585,099
Property and equipment - net.......................... 686,408 707,314
Investments in nonconsolidated companies.............. 25,235 29,821
Other assets.......................................... 73,101 79,881
---------- ----------
TOTAL.......................... $1,376,455 $1,402,115
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt. $ 20,266 $ 40,871
Accounts payable...................................... 101,211 99,676
Income taxes and other current liabilities............ 101,493 86,563
---------- ----------
Total current liabilities........... 222,970 227,110
Long-term debt........................................ 153,936 157,628
Postretirement health care obligation................. 106,240 105,463
Noncurrent liabilities................................ 39,165 47,284
Deferred income taxes................................. 44,063 45,254
---------- ----------
Total liabilities................... 566,374 582,739
---------- ----------
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 - 58,303,396 shares as of March 31,
1997 after deducting 27,892,498 treasury shares,
58,522,676 shares as of December 31, 1996
after deducting 27,673,218 treasury shares........ 80,055 78,534
Retained earnings................................... 758,918 744,310
Accumulated translation adjustment.................. (28,892) (3,468)
---------- ----------
Total shareholders' equity......... 810,081 819,376
---------- ----------
TOTAL.......................... $1,376,455 $1,402,115
========== ==========
</TABLE>
Amounts shown are unaudited.
<PAGE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales..................................................... $387,749 $405,412
Royalties and other revenues.................................. 1,260 1,689
-------- --------
Total revenues...................................... 389,009 407,101
Cost of sales................................................. 258,107 273,595
Selling and administrative expenses........................... 40,014 40,608
Research, testing and development expenses.................... 34,982 40,696
-------- --------
Total cost and expenses............................. 333,103 354,899
Gain on investments........................................... 53,280
Other income - net............................................ 3,245 3,213
Interest income............................................... 866 1,116
Interest expense.............................................. (2,444) (3,094)
-------- --------
Income before income taxes.................................... 57,573 106,717
Provision for income taxes.................................... 18,712 35,481
-------- --------
Net income.................................................... $ 38,861 $ 71,236
======== ========
Net income per share.......................................... $ .66 $1.14
===== =====
Dividends per share........................................... $ .25 $ .24
===== =====
Average number of shares outstanding.......................... 58,504 62,615
</TABLE>
Amounts shown are unaudited.
<PAGE>
THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Net income................................................... $ 38,861 $ 71,236
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization............................ 21,026 19,442
Deferred income taxes.................................... 768 1,849
Equity earnings, net of distributions.................... (471) (940)
Gain on investments...................................... (53,280)
Change in current assets and liabilities:
Receivables............................................ (28,494) (17,380)
Inventories............................................ 140 9,955
Accounts payable and accrued expenses.................. 23,165 14,445
Other current assets................................... 4,548 5,360
Other items - net........................................ (8,943) (5,850)
-------- --------
Total operating activities......................... 50,600 44,837
Investing activities:
Proceeds from sale of investments............................ 12,117 127,480
Capital expenditures......................................... (19,078) (27,607)
Investments in nonconsolidated companies..................... (1,359)
Other - net.................................................. 1,526 2,045
-------- --------
Total investing activities (6,794) 101,918
Financing activities:
Short-term (repayment)....................................... (19,780) (76,657)
Long-term borrowing.......................................... 23
Long-term (repayment)........................................ (795) (883)
Dividends paid............................................... (14,639) (15,111)
Common shares purchased, net of options exercised............ (8,093) (42,563)
-------- --------
Total financing activities......................... (43,284) (135,214)
Effect of exchange rate changes on cash...................... (1,003) (826)
-------- --------
Net increase (decrease) in cash and short-term investments... (481) 10,715
Cash and short-term investments at the beginning of period... 55,073 30,579
-------- --------
Cash and short-term investments at the end of period......... $ 54,592 $ 41,294
======== ========
</TABLE>
Amounts shown are unaudited.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997
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, 1997 and
December 31, 1996, and the results of operations and cash flows for the
applicable periods ended March 31, 1997 and 1996.
2. During the first quarter of 1996, the company sold its investments in
Mycogen Corporation and Agrigenetics, Inc., for cash of $126.2 million.
The Company also sold certain rights to its SVO oil seed technology for
$8 million, of which $2 million was received in 1996, and $2.5 million
was received in 1997, with the remaining balance of $3.5 million due in
1998. These transactions resulted in pretax gains of $57.3 million.
Losses on other investment activity reduced the gain on investments
recognized during the first quarter of 1996 to $53.3 million.
3. In February 1997, the Financial Accounting Standards Board issued
SFAS 128, Earnings Per Share. SFAS 128 becomes effective for interim and
annual financial statements issued after December 15, 1997. SFAS 128
simplifies the current standard for computing earnings per share (EPS)
found in APB No. 15 and requires the dual presentation of "Basic" and
"Diluted" EPS on the face of the income statement and certain footnote
disclosures. "Basic" EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number
of common shares outstanding during the period. The EPS currently
reported for the company excludes the effect of outstanding stock options
and awards as the dilution effect is less than 3%. Therefore, EPS to be
reported by the company under "Basic" EPS will be the same amount as
calculated under the current standard. "Diluted" EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common shares were exercised or converted into common shares or
resulted in the issuance of common shares. At March 31, 1997, the
company's outstanding stock options and awards, would have an
insignificant effect when reporting "Diluted" EPS.
4. The company is involved in patent litigation with Exxon Corporation
and/or its affiliates in various countries. The company has prevailed
in a case brought in Canada against Exxon's Canadian affiliate, Imperial
Oil, Ltd., for infringement of the company's patent pertaining to
dispersants, 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,
and a tentative trial date of November 17, 1997 has been set regarding
the determination of such damages. In October 1994, the trial court
judge determined that Imperial Oil had violated an earlier injunction for
the manufacture or sale of the dispersant which is the subject of this
case. The determination of penalty damages, if any, on account of this
violation will be made only after the compensation damages for patent
infringement have been determined by the lower court. A reasonable
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997
estimation of the company's potential recovery for compensation and
penalty damages cannot be made at this time and no amount has been
recorded in the company's financial statements.
In November 1996, a patent trial court in London declared a Lubrizol
United Kingdom patent invalid, which patent is the subject of litigation
with Exxon in that country. The company is appealing this decision.
Although the trial court decision does not involve any damage payments,
the court awarded Exxon its recoverable legal costs in the case, as is
customary under U.K. practice. Exxon has filed with the court a request
for legal costs of approximately $11 million. The determination of which
of those costs may be recoverable will be subject to a separate
proceeding for which no date has been set at this time. Based on the
advise of legal counsel, management believes that the November 1996 trial
court decision will not be upheld on appeal, in which case the
recoverable legal costs would be reduced or eliminated and, if already
paid contingently by the company, refunded in whole or in part.
Therefore, no amount related to Exxon's legal costs has been recorded in
the company's financial statements.
<PAGE>
THE LUBRIZOL CORPORATION
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The company made significant progress during the first quarter of 1997 in
growing its business at targeted accounts and in continuing to reduce its
cost structure. The resulting higher sales volume and lower operating costs,
together with lower raw material cost, more than offset continued competitive
pricing, unfavorable effects of changing product mix and unfavorable currency
effects. Despite lower revenues and a highly competitive marketplace, the
company was able to improve its overall gross profit percentage as well
increase the level of cash generated from operating activities. Earnings per
share increased 12% on 4% lower revenues for the first quarter 1997 compared
with the first quarter of 1996. More detailed comments relating to the
company's results of operations and financial position follow below.
As expected, acquisitions, mergers and joint ventures within the lubricant
industry announced during 1996 coupled with customers searching for stronger,
longer-term relationships with a few key suppliers and the continued weak
demand for finished lubricants is causing a very competitive marketplace
within certain product lines and continuing pressure on prices for the
company's products. These same factors will continue to make revenue growth
a challenge in 1997. Revenues in the first quarter of 1997 decreased $18.1
million, or 4%, compared with the first quarter of 1996. First quarter
revenues declined, despite a 5% increase in volume, as average selling prices
were 8% lower (6% due to negative mix/price and 2% due to unfavorable
currency), and revenues declined 1% due to the net effect of
acquisition/divestiture activity between the periods.
Sales volume increased 4% to North American customers and 6% to International
customers, primarily in Asia-Pacific and Western Europe, when comparing the
first quarter of 1997 with 1996. The company believes these business gains
were a result of actively pursuing strategic relationships with finished
lubricant suppliers and being well positioned to compete within the current
industry environment, which led to market share gains from these
opportunities. The volume gains in North America more than offset the impact
of a new engine oil standard that customers converted to during the first
nine months of 1996, which requires approximately 10% less additive than the
previous specification.
Gross profit (sales less cost of sales) decreased $2.2 million, or 2% for the
first quarter of 1997, compared with the first quarter of 1996 as the impact
of lower average selling prices more than offset the benefits of higher sales
volume and lower cost of sales. Cost of sales declined primarily as a result
of lower raw material costs, although manufacturing cost per metric ton sold
was also lower. Excluding the unfavorable effects of currency, gross profit
would have increased $2.4 million over the comparable 1996 period. Gross
profit as a percent of sales improved to 33.4% from 32.5% for the comparable
first quarter periods.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The company has continued to lower its operating costs despite lifting the
freeze on salary increases that was in place throughout 1996. Employee
levels are approximately 6% lower at March 31, 1997 compared with March 31,
1996 and 2% lower compared with December 31, 1996 as retiring or departing
employees have not been replaced. The company's manufacturing costs and
selling, administrative, research and testing expenses were each lower than
the year ago period. Research and testing expenses were 14% lower than the
comparable year ago period, due to the reduction in workforce, greater
internalization of testing activity and timing of testing programs,
particularly within the engine oil product lines. The quarterly rate of
technical spending is planned to increase over the remaining three quarters
of 1997 due to the timing of testing activities, primarily within engine
oils. However, the company believes technical spending for the full year
1997 will be lower than that of 1996.
During the first quarter of 1996, the company recognized a gain of $53.3
million ($.55 per share after taxes) primarily from the sale of its
investment in Mycogen Corporation and the sale of certain rights of its SVO
oilseed technology.
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. The principal currencies, other than the U.S. dollar, in which the
company transacts business are the French franc, German deutsche mark,
British pound sterling and Japanese yen. The U.S. dollar continued to
strengthen during the first quarter of 1997 and, as compared with exchange
rates in effect during first quarter of 1996, caused a $.02 unfavorable
effect on net income per share.
Primarily as a result of the above factors, net income in the first quarter
of 1997 was $38.9 million or $.66 per share, which was a 6% increase (12%
increase on a per share basis) over the $36.6 million or $.59 per share for
the first quarter of 1996, excluding the 1996 investment gain. Including the
investment gain, 1996 first quarter net income was $71.2 million, or $1.14
per share.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities increased 13% to $50.6 million for
the first quarter of 1997, as compared with $44.8 million generated for the
same period in 1996. This improvement was primarily attributable to the
positive effects of lower material costs and lower operating expenses more
than offsetting the negative effects of lower revenues.
Proceeds from the sale of investments for the quarter ended March 31, 1997,
reflect $9.6 million from the sale of a non-strategic investment and $2.5
million collected on a promissory note from the 1996 sale of certain SVO
technology rights. Proceeds from the sale of investments for the quarter
ended March 31, 1996 are principally comprised of $126.2 million collected
from the sale of Mycogen and $2.0 million initially collected from the sale
of certain SVO technology rights.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Capital expenditures in the first quarter of 1997 were $19.1 million as
compared to $27.6 million for the quarter ended March 31, 1996. Capital
expenditures for the full year 1997 are expected to approximate $110 million,
including approximately $30 million to be expended in 1997 as a part of a
multi-year project to implement an enterprise-wide system which will fully
integrate the company's information management systems on a global basis.
The company maintains an active share repurchase program. During the first
quarter of 1997, the company repurchased 290,000 of its common shares for
$10.0 million. The company currently plans to expend at least $40 million
during 1997 in its share repurchase program. At March 31, 1997, the company
had 2.3 million shares remaining under its current share repurchase
authorization. In addition, approximately $1.9 million was collected from
the exercise of stock options during the first quarter of 1997. During the
first quarter of 1996, the share repurchase program was expanded to utilize
the after-tax proceeds from the sale of investments as the company
repurchased 1,423,000 shares for $42.8 million.
Cash outlays for financing activities included $20.6 million in net
repayments of short-term and long-term debt and reflects the utilization of
cash generated from operating activities during the period. Debt as a
percent of capitalization (shareholders' equity plus short-term and long-term
debt) declined to 18% as compared to 20% at December 31, 1996.
Primarily as a result of these activities and the payment of dividends, the
balance of cash and short-term investments of $54.6 million at March 31, 1997
declined slightly as compared with $55.1 million at December 31, 1996.
The company's financial position continues to be strong with a ratio of
current assets to current liabilities of 2.7 to 1 at March 31, 1997, compared
to 2.6 to 1 at December 31, 1996. 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 4 to the financial statements for
further discussion regarding the company's patent litigation with Exxon.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
This Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) contains forward-looking statements within the meaning
of the federal securities laws. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance as
opposed to historical items and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward looking statements are subject to uncertainties and
factors relating to the company's operations and business environment, all
of which are difficult to predict and many of which are beyond the control
of the company, that could cause actual results of the company to differ
materially from those matters expressed in or implied by such forward-looking
statements. The company identified certain, but not necessarily all, of
these uncertainties and factors in its MD&A contained on page 21 of its 1996
Annual Report to its shareholders, to which reference is made and which are
incorporated by reference herein.
<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, 1997.
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 14, 1997
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
First Quarter 1997
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
March 31,
------------------
1997 1996
------ ------
Average shares outstanding for computation
of primary earnings per share 58,504 62,615
Add adjustment to treat shares for options
exercised as if such shares were outstanding
during the entire period 48 7
Add equivalent shares for unexercised options
at end of period* 344 189
------ ------
Average shares outstanding for computation of
fully diluted earnings per share 58,896 62,811
====== ======
Primary earnings per share $ .66 $1.14
===== =====
Fully diluted earnings per share $ .66 $1.13
===== =====
*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 qulified 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.0
<CASH> 54,592
<SECURITIES> 0
<RECEIVABLES> 233,762
<ALLOWANCES> 1,183
<INVENTORY> 243,876
<CURRENT-ASSETS> 591,711
<PP&E> 1,504,225
<DEPRECIATION> 817,817
<TOTAL-ASSETS> 1,376,455
<CURRENT-LIABILITIES> 222,970
<BONDS> 153,936
0
0
<COMMON> 80,055
<OTHER-SE> 730,026
<TOTAL-LIABILITY-AND-EQUITY> 1,376,455
<SALES> 387,749
<TOTAL-REVENUES> 389,009
<CGS> 258,107
<TOTAL-COSTS> 258,107
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 2,444
<INCOME-PRETAX> 57,573
<INCOME-TAX> 18,712
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,861
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
