<PAGE> 1
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 June 30, 1998
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)
(440) 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
July 31, 1998 55,782,975
<PAGE> 2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1 Financial Statements
---------------------------
THE LUBRIZOL CORPORATION
------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
June 30 December 31
(In Thousands of Dollars) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 57,898 $ 86,504
Receivables........................................... 287,821 273,505
Inventories:
Finished products................................... 107,628 94,010
Products in process................................. 62,058 67,246
Raw materials....................................... 85,434 81,079
Supplies and engine test parts...................... 18,378 17,783
------- ------
273,498 260,118
-------- -------
Other current assets.................................. 31,783 36,949
------- ------
Total current assets.............. 651,000 657,076
Property and equipment - net.......................... 698,458 692,677
Investments in nonconsolidated companies.............. 25,360 25,904
Other assets.......................................... 97,722 86,635
------- ------
TOTAL........................ $1,472,540 $1,462,292
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt. $ 57,694 $ 38,095
Accounts payable...................................... 118,271 127,347
Income taxes and other current liabilities............ 97,789 96,488
------- ------
Total current liabilities......... 273,754 261,930
Long-term debt........................................ 181,709 182,165
Postretirement health care obligation................. 106,579 105,962
Noncurrent liabilities................................ 42,781 42,878
Deferred income taxes................................. 54,550 53,909
------- ------
Total liabilities................. 659,373 646,844
-------- -------
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 - 55,887,675 shares as of June 30,
1998 after deducting 30,308,219 treasury shares,
56,966,894 shares as of December 31, 1997 after
deducting 29,229,000 treasury shares............ 84,373 82,669
Retained earnings................................... 772,698 773,184
Accumulated other comprehensive income (loss)....... (43,904) (40,405)
-------- --------
Total shareholders' equity........ 813,167 815,448
-------- -------
TOTAL........................ $1,472,540 $1,462,292
=========== ==========
</TABLE>
Amounts shown are unaudited.
-2-
<PAGE> 3
THE LUBRIZOL CORPORATION
========================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
------------------------------------------------------------------------
(In Thousands Except Per Share Data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales........................... $405,160 $432,556 $805,060 $820,305
Royalties and other revenues........ 807 965 1,272 2,225
-------- -------- -------- --------
Total revenues............ 405,967 433,521 806,332 822,530
Cost of sales....................... 279,017 283,013 556,052 541,120
Selling and administrative expenses 42,992 42,330 85,020 82,344
Research, testing and development
expenses.......................... 35,092 36,107 70,372 71,089
-------- -------- -------- --------
Total cost and expenses... 357,101 361,450 711,444 694,553
Gain from litigation settlement..... 16,201 16,201
Other income (expense) - net........ 638 (909) 1,663 2,336
Interest income..................... 1,411 908 2,731 1,774
Interest expense.................... (3,865) (2,589) (6,938) (5,033)
-------- -------- -------- --------
Income before income taxes.......... 63,251 69,481 108,545 127,054
Provision for income taxes.......... 23,288 22,581 38,914 41,293
-------- -------- -------- --------
Net income.......................... $ 39,963 $ 46,900 $ 69,631 $ 85,761
======== ======== ======== ========
Net income per share................ $0.71 $0.81 $1.23 $1.47
====== ====== ====== ======
Net income per share, diluted....... $0.71 $0.80 $1.22 $1.46
====== ====== ====== ======
Dividends per share................. $0.26 $0.25 $0.52 $0.50
====== ====== ====== ======
Average common shares outstanding... 56,331 58,111 56,584 58,307
</TABLE>
Amounts shown are unaudited.
-3-
<PAGE> 4
THE LUBRIZOL CORPORATION
========================
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
------------------------------------
(In Thousands of Dollars) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Net income.......................................... $ 69,631 $ 85,761
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization................... 42,825 42,257
Deferred income taxes........................... 3,314 294
Equity earnings, net of distributions........... (1,062) (1,384)
Change in current assets and liabilities:
Receivables................................... (16,970) (52,979)
Inventories................................... (13,130) (10,063)
Accounts payable and accrued expenses......... (6,039) 39,770
Other current assets.......................... 2,516 8,144
Other items - net............................... 1,140 (8,395)
-------- --------
Total operating activities................ 82,225 103,405
Investing activities:
Capital expenditures.............................. (47,641) (43,905)
Proceeds from sale of investments................. 12,117
Acquisitions and investments in nonconsolidated
companies....................................... (14,630) (14,864)
Other - net....................................... 462 3,576
-------- --------
Total investing activities................ (61,809) (43,076)
Financing activities:
Short-term borrowing.............................. 22,292 13,427
Long-term borrowing............................... 5,572
Long-term repayments.............................. (1,906) (2,058)
Dividends paid.................................... (29,432) (29,209)
Common shares purchased, net of options exercised. (38,981) (26,996)
-------- --------
Total financing activities................ (48,027) (39,264)
Effect of exchange rate changes on cash............. (995) (1,374)
-------- --------
Net increase (decrease) in cash and short-term
investments....................................... (28,606) 19,691
Cash and short-term investments at the beginning
of period......................................... 86,504 55,073
-------- --------
Cash and short-term investments at end of period.... $ 57,898 $ 74,764
========= ========
</TABLE>
Amounts shown are unaudited.
-4-
<PAGE> 5
THE LUBRIZOL CORPORATION
========================
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 1998
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 June 30, 1998 and December 31,
1997, and the results of operations and cash flows for the applicable
periods ended June 30, 1998 and 1997.
2. Net income per share is computed by dividing net income by average common
shares outstanding during the period. Net income per share, diluted,
includes the dilution effect resulting from outstanding stock options and
stock awards.
Per share amounts are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income available to
common shareholder $39,963 $46,900 $69,631 $85,761
======= ======= ======= =======
Denominator:
Weighted average common
shares outstanding 56,331 58,111 56,584 58,307
Dilutive effect of stock
options and awards 275 267 295 248
------- ------- ------- -------
Denominator for net income
per share, diluted 56,606 58,378 56,879 58,555
======= ======= ======= =======
Net income per share $ .71 $ .81 $ 1.23 $ 1.47
======= ======= ======= =======
Net income per share,
diluted $ .71 $ .80 $ 1.22 $ 1.48
======= ======= ======= =======
</TABLE>
3. The company elected to adopt early SFAS 130 - Reporting Comprehensive
Income for its fiscal year ended December 31, 1997. Total comprehensive
income for the three- and six-month periods ended June 30, 1998 and 1997 is
comprised as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------ --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $39,963 $46,900 $69,631 $85,761
Other comprehensive
income (loss) (3,565) 241 (3,499) (25,183)
------- ------- ------- -------
Total comprehensive income $36,398 $47,141 $66,132 $60,578
======= ======= ======= =======
</TABLE>
Other comprehensive income (loss) in each of the periods above is solely
comprised of foreign currency translation adjustments, net of related tax
effects.
5
<PAGE> 6
THE LUBRIZOL CORPORATION
========================
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 1998
4. On July 7, 1998, the company purchased Carroll Scientific, Inc., which
specializes in the development and supply of varnish and wax-based
performance additives to the ink market. Also, effective August 1, 1998,
the company purchased the lubricants and fuel additives business (Adibis)
of British Petroleum Company P.L.C. Annual revenues of Carroll Scientific
are approximately $30 million and of Adibis are approximately $150 million.
These acquisitions have been financed primarily through increased
borrowings.
5. The company had $75 million in committed revolving credit facilities, which
were unused at June 30, 1998, that would permit the company to borrow at or
below the U.S. Prime rate. Effective July 1, 1998, these credit facilities
were increased to $300 million, of which $150 million would permit the
company to refinance short-term borrowings for a period beyond one year.
Accordingly, the company continues to classify as long-term the $18.4
million of Marine Terminal Refinancing Bonds, whose bondholders have the
right to put the bonds back to the company, and the amount of the
commercial paper borrowings at each balance sheet date expected to remain
outstanding for longer than 12 months.
6. The company has filed claims against Exxon Corporation and/or its
affiliates relating to various commercial matters, including alleged
infringements by Exxon of certain of the company's patents. These suits are
pending in the United States (in Ohio), Canada and the United Kingdom.
On April 23, 1998, the company reached a settlement with Exxon of a lawsuit
pending in federal court in Ohio and received cash of $19 million. After
deducting related expenses, this settlement increased pre tax income by
$16.2 million for the three- and six-month periods ended June 30, 1998.
Other lawsuits between the company and Exxon pending in the United States,
Canada and the United Kingdom were not settled by this agreement.
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 been returned to the trial court for an assessment of compensation
damages, but no date has been set for a 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 after the
compensation damages for patent infringement have been determined by the
court.
6
<PAGE> 7
THE LUBRIZOL CORPORATION
========================
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 1998
In November 1996, a patent trial court in London declared a Lubrizol United
Kingdom patent invalid, which patent was the subject of litigation brought
by the company against Exxon in that country. Although the trial court
decision did not involve any damage payments, the court awarded Exxon its
recoverable legal costs in the case, as is customary under U.K. practice.
Exxon originally filed with the court a request for legal costs of
approximately $12.0 million. The company made a $3.0 million contingent
payment to Exxon in July 1997, which was fully expensed in that year. On
April 30, 1998, some, but not all, of the findings against the company were
reversed and the percentage of Exxon's legal costs which are recoverable
was reduced from 90 percent to 25 percent. The proceedings in this case are
nearly completed. As a result of the actions taken on April 30, 1998, the
company believes that the amount it will ultimately have to reimburse Exxon
for its recoverable legal costs has been significantly reduced.
A reasonable estimation of the company's potential recovery relating to the
Exxon litigation referenced above can not be made at this time, and no
recovery amounts have been recorded in the company's financial statements
as of June 30, 1998.
7. In June 1997, the Financial Accounting Standards Board (FASB)issued SFAS
131 - Disclosures About Segments of an Enterprise and Related Information
which becomes effective for the company in 1998. SFAS 131 redefines how
operating segments are determined and requires disclosure of certain
financial and descriptive information about a company's operating segments.
Under currently effective accounting standards, the company's operations
are considered to be a single reportable segment. The company is currently
evaluating SFAS 131 to determine what effect it will have on future
financial statement disclosures.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which becomes effective for the company
no later than January 1, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
It requires that all derivatives be measured at fair value and recognized
as either assets or liabilities in the statement of financial position. The
accounting for changes in the fair value of a derivative (that is gains or
losses)depends on the intended use of the derivative and its resulting
hedge designation. The company uses derivative financial instruments only
to manage well-defined foreign currency and interest rate risks. The
company does not use derivative financial interests for trading purposes.
The company is currently evaluating the requirements of SFAS 133 but, based
on its limited use of derivative financial instruments, believes SFAS 133
will not have a significant effect on the company's reported financial
position or results of operations when adopted.
7
<PAGE> 8
THE LUBRIZOL CORPORATION
========================
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
-------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The results of the second quarter and first half of 1998 reflect the impact of
continuing market competition, and of the economic difficulties within Asia
Pacific that began in the latter part of 1997. Revenues declined in the second
quarter of 1998 compared with the strong second quarter of 1997, and led to
lower revenues for the first half of 1998 compared with the first half of 1997.
Profit margins were compressed as average selling prices declined while material
costs remained relatively level. This, and a higher effective tax rate, were the
principal factors leading to lower earnings in the second quarter and the first
half of 1998 as compared with the same respective periods of 1997. These
conditions are expected to continue in the second half of 1998 in addition to
interest expense increasing as a result of higher borrowing levels. The company
believes that earnings during the second half of 1998 are likely to be lower
than the earnings during the second half of 1997. More detailed comments
relating to the company's results of operations and financial position follow
below.
Consolidated revenues decreased $27.6 million or 6% for the second quarter of
1998 compared with the second quarter of 1997 and decreased $16.2 million or 2%
for the first half of 1998 compared with the first half of 1997. The primary
factors causing the revenue decreases were lower average selling prices and, in
the second quarter of 1998, lower volume. For the second quarter of 1998
compared with the second quarter of 1997, a 5% decrease in the average selling
price and 3% lower sales volume more than offset the $7.3 million of additional
revenues generated from acquisitions. The decline in average selling price for
the first half was due 70% to lower product pricing and changing product mix and
30% to currency. For the first half of 1998 compared with the first half of
1997, a 6% decline in average selling price more than offset the 2% increase in
sales volume and the $16.0 million contributed from acquisitions. The decline in
average selling price for the first half was due 65% to lower product pricing
and changing product mix and 35% to currency.
During the full year 1997, the company increased its global specialty chemical
shipments by 17% over 1996, and by 29% into the Asia Pacific region. For the
first half of 1998, sales volume increased 4% to North American customers and 3%
to international customers. For the 1998 second quarter, sales volume increased
2% to North American customers but declined 6% to international customers. The
continuing economic difficulties in certain countries within the Asia Pacific
region, where approximately 20% of the company's revenues were earned in 1997,
have had an accelerating, unfavorable effect on the company's 1998 results. The
majority of the sales volume decline in the second quarter was attributable to
the Asia Pacific region with revenues from Asia Pacific declining by $16 million
or 19% in the 1998 second quarter and by $12 million or 8% in the 1998 first
half as compared to the respective 1997 periods. In addition, a loss of market
share in Latin America also unfavorably affected 1998 revenues.
Cost of sales for the three-and six-month periods ended June 30, 1998, reflect
the change in shipment levels between the comparable periods as average raw
material costs and total manufacturing costs were relatively level with the same
comparative periods of 1997.
8
<PAGE> 9
THE LUBRIZOL CORPORATION
========================
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Gross profit (sales less cost of sales) decreased $23.4 million or 16% for the
second quarter of 1998, compared with the second quarter of 1997 and decreased
$30.2 million or 11% for the first half of 1998 compared with the same 1997
period. The decrease in gross profit for each of the respective periods was
primarily due to the decline in selling prices and, in the 1998 second quarter,
was compounded by lower sales volume. The company's second quarter and first
half comparisons were affected by the continuing economic difficulties within
certain countries within Asia Pacific region, such as Indonesia, Singapore,
Taiwan, and Korea. Although sales volume into this region was level for the
comparative six-month periods, sales volume and margins declined by 15% and 23%
respectively for the second quarter of 1998 compared with the second quarter of
1997. Acquisitions in the past year contributed $2.2 million and $5.2 million to
gross profit in the respective three- and six-month periods ended June 30, 1998,
but this was completely offset by unfavorable currency effects.
The gross profit percentage (net sales divided by cost of sales) of 31.1% in the
second quarter of 1998 was slightly higher than that achieved in the first
quarter of 1998, but declined significantly from the 34.6% earned during the
strong 1997 second quarter. For the six months ended June 30, 1998, the gross
profit percentage was 30.9%, slightly lower than the 31.4% earned in the second
half of 1997, but significantly lower than the 34.0% earned in the first half of
1997.
Selling and administrative expenses increased by approximately 2% and 3%,
respectively, when compared to the three- and six-month periods ended June 30,
1997. The increase in selling and administrative expenses was primarily due to
the effect of new acquisitions and higher expenses related to the implementation
of the new enterprise-wide management information system, partially offset by
lower variable pay expense.
Research, testing and development expenses (technology expenses) in the second
quarter of 1998 declined 3% from the second quarter of 1997 and, for the first
half of 1998, was 1% below the first half of 1997. The company's technology
expense during the first half of 1998 included costs related to new performance
specifications for heavy-duty engine oils expected to become effective during
1998 as well as new performance specifications for passenger car engine oils
expected to become effective during 2000.
Primarily as a result of the above factors, total costs and expenses for the
three-and six- month periods ended June 30, 1998, increased by $23.2 million and
$33.1 million, respectively, more than the change in consolidated revenues as
compared with the same periods of 1997.
The company is involved in litigation with Exxon Corporation in various
countries. On April 23, 1998, the company reached a settlement with Exxon of a
lawsuit pending in federal court in Ohio and the company received cash of $19
million from Exxon. The pre-tax gain from this litigation settlement, net of
related expenses, was $16.2 million, which contributed $.19 to consolidated
earnings per share for the second quarter and first half periods of 1998. Other
lawsuits between the company and Exxon pending in the United States, Canada and
the United Kingdom were not settled by this agreement. Please refer to Note 6 to
the financial statements for further discussion regarding the company's
litigation with Exxon.
9
<PAGE> 10
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. The principal currencies, other than the U.S. dollar, in which the
company transacts business are the French franc, German mark, British pound
sterling and Japanese yen. As compared with exchange rates in effect during the
respective 1997 second quarter and first half periods, currency fluctuations had
an unfavorable effect of $.02 and $.04, respectively, on net income per share
for the same 1998 periods.
The company increased its effective income tax rate for 1998 in the second
quarter to reflect a shift among the various taxing jurisdictions in which the
company's profits are earned, as well to adjust for higher than anticipated
translation losses, which are not deductible for tax purposes, for those foreign
entities whose functional currency is the U.S. Dollar. These factors, in
addition to the impact of certain tax law changes enacted by France, the United
States and the United Kingdom during the second half of 1997, caused the
effective tax rate to increase to 36.8 % for the second quarter of 1998 and to
35.9% for the first half of 1998, as compared with 32.5% for each of the same
respective periods of 1997. The higher effective tax rate in 1998 lowered
earnings per share by $.04 and $.06, respectively, for the three- and six-month
periods ended June 30, 1998, as compared to the respective 1997 periods.
Primarily as a result of the above factors, net income for the second quarter of
1998 was $40.0 million or $.71 per share as compared to $46.9 million or $.81
per share for the second quarter of 1998. For the first half of 1998 net income
was $69.6 million or $1.23 per share as compared to $85.8 million or $1.47 per
share for the first half of 1997. After excluding from 1998 the gain from the
Exxon litigation settlement, net income in the second quarter of 1998 was $29.5
million, or 37% lower (36% on a per share basis) than the second quarter of 1997
and, for the first six months of 1998, was $59.1 million or 31% lower (29% on a
per share basis) than the first half of 1997.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------------------------
Cash provided from operating activities was $82.2 million for the first six
months of 1998 as compared with $103.4 million for the first six months of 1997.
The decrease in cash flow from operations was principally attributable to the
decline in net income between the comparable periods. Working capital also
increased in the first half of 1998 affecting operating cash flow for the
period. This increase was largely due to the cyclical patterns of the business,
but also due to an increase in inventories due to the lower than anticipated
sales volume of the 1998 second quarter and a slowing in the collection of
accounts receivable due from customers in North America.
Capital expenditures in the first half of 1998 were $47.6 million as compared
with $43.9 million for same 1997 period and included $9.2 million and $10.0
million, respectively, related to the company's multi-year project to implement
an enterprise-wide management information system. The company implemented the
new enterprise-wide management information system in the United States in March
1998, and will continue to implement this system globally over the next two
years. The return on this investment is expected to be realized, beginning in
1999, by reducing costs and delivering products and services more
cost-effectively to the company's customers. Capital expenditures for the full
year 1998 are expected to approximate the 1997 amount, which was $100 million.
10
<PAGE> 11
THE LUBRIZOL CORPORATION
========================
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
During the first quarter of 1998, the company completed two acquisitions
aggregating $14.6 million. These acquisitions were not significant in relation
to the company as a whole and were in the company's existing business areas of
metalworking additives and coating additives.
The company maintains an active share repurchase program, and during the first
half of 1998 repurchased 1,189,400 of its common shares for $42.4 million. The
company currently plans to expend approximately $80 million for the full year
1998 in its share repurchase program. There were 3.5 million shares remaining
under the company's repurchase authorization at June 30, 1998.
The company's net borrowings during the first half of 1998 totaled $20.4
million. This increase was attributable primarily to the continuation of the
company's share repurchase program and financing of two acquisitions completed
during the 1998 period. The company's debt as a percent of capitalization
(shareholders' equity plus short-term and long-term debt) increased to 23% at
June 30, 1998, as compared to 21% at December 31, 1997.
Primarily as a result of these activities and the payment of dividends, the
balance of cash and short-term investments decreased $28.6 million at June 30,
1998 compared with December 31, 1997.
The company's financial position remains strong with a ratio of current assets
to current liabilities of 2.4 to 1 at June 30, 1998, compared to 2.5 to 1 at
December 31, 1997. Management believes the company's credit facilities,
internally generated funds and ability to obtain additional financing will be
sufficient to meet its future capital needs.
The company intends to continue to broaden its base in performance chemicals
through focused acquisitions. On July 7, 1998, the company purchased Carroll
Scientific, Inc., which specializes in the development and supply of varnish and
wax-based performance additives to the ink market. Also, effective August 1,
1998, the company purchased the lubricants and fuel additives business (Adibis)
of British Petroleum Company P.L.C. Annual revenues of Carroll Scientific are
approximately $30 million and of Adibis are approximately $150 million. These
acquisitions have been temporarily financed primarily through increased
commercial paper borrowings.
The company intends to replace a significant portion of its commercial paper
borrowings with long-term debt during the second half of 1998. On July 29, 1998,
the company filed a shelf registration statement with the Securities and
Exchange Commission to enable the company to publicly offer debt securities of
up to $200 million in aggregate principal amount. The company intends to issue
debt under this registration in the near term.
The company is focusing on actions to improve its operating results, including
selected product and regional price increases, reductions in the operating cost
structure and targeted acquisitions. The company is in the process of evaluating
alternatives to lower the operating cost structure and developing a definitive
action plan. The company believes it is reasonably likely that such an action
plan will result in a restructuring charge being taken yet in 1998, but is
unable to estimate at this time the potential amount of any such restructuring
charge.
11
<PAGE> 12
THE LUBRIZOL CORPORATION
========================
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The company relies on its computer-based management information systems, as well
as computer-based systems used for other purposes, in conducting its normal
business activities. Certain of these computer-based programs may not have been
designed to function properly with respect to the application of dating systems
relating to the Year 2000 and beyond. The company has designed a global "Year
2000" strategy covering each of its facilities so that all its computer-based
systems, including process control, testing and laboratory equipment and
embedded systems, will function without disruption with respect to dating system
applications relating to the Year 2000.
Implementation of the new enterprise-wide management information system is a key
component of the "Year 2000" strategy. In March 1998, the company implemented
its new enterprise-wide management information system in the United States and
will continue to implement this system globally over the next two years with
implementation in Europe scheduled for mid-1999. In addition, the company is in
the process of assessing the actions to be taken with respect to all of its
other systems in order to avoid Year 2000-related disruptions. The company has
substantially completed compiling and prioritizing all of its computer-based
systems at each facility. It is currently in the process of developing site
plans for remediation, testing and certification of such systems, including
contingency plans. The company has targeted completion of all remedial
activities, including testing and certification, by mid-1999. In addition, the
company has surveyed entities critical to its business, such as suppliers and
customers, for the purpose of obtaining assurance regarding their ability to
operate their systems in the Year 2000.
Except for expenditures related to the new enterprise-wide management
information system, the company is not yet able to estimate the total costs of
conducting its Year 2000 remedial activities. However, based upon information
developed to date, the company believes it has adequate liquidity and capital
resources to fund all remediation activities, and that (except for those costs
related to the new enterprise-wide management information system) the total
costs of Year 2000 remediation activities will not be material to the company's
results of operations or financial condition. The company expects to complete
its Year 2000 activities within a time frame that will enable its computer-based
systems to function without significant disruption in the Year 2000.
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 pages 21 - 22 of its 1997 Annual Report to its
shareholders, to which reference is made and which are incorporated by reference
herein.
12
<PAGE> 13
THE LUBRIZOL CORPORATION
========================
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not Applicable.
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Corporation was held
April 27, 1998. The following matters were voted on by the
shareholders:
1. Election of directors:
(a) Gordon D. Harnett. The vote was 52,248,767 shares
for and 493,828 shares to withhold authority.
(b) Victoria F. Haynes. The vote was 52,346,295 shares
for and 396,300 shares to withhold authority.
(c) William P. Madar. The vote was 52,374,003 shares for
and 368,592 shares to withhold authority.
(d) M. Thomas Moore. The vote was 52,364,657 shares for
and 377,938 shares to withhold authority.
2. A proposal to confirm the appointment of Deloitte & Touche
LLP as independent auditors. The vote was 52,590,589 shares
for; 68,496 shares against; and 83,510 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended June 30, 1998.
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: August 13, 1998
13
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
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<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<INCOME-TAX> 38,914
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<EXTRAORDINARY> 0
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<NET-INCOME> 69,631
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