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, 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
April 30, 1998: 56,469,996
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE LUBRIZOL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS March 31 December 31
(In Thousands of Dollars) 1998 1997
---------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments....................... $ 91,340 $ 86,504
Receivables........................................... 267,412 273,505
Inventories:
Finished products................................... 96,304 94,010
Products in process................................. 68,930 67,246
Raw materials....................................... 86,071 81,079
Supplies and engine test parts...................... 17,796 17,783
---------- ----------
269,101 260,118
---------- ----------
Other current assets.................................. 33,344 36,949
---------- ----------
Total current assets............... 661,197 657,076
Property and equipment - net.......................... 696,867 692,677
Investments in nonconsolidated companies.............. 26,322 25,904
Other assets.......................................... 98,546 86,635
---------- ----------
TOTAL.......................... $1,482,932 $1,462,292
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt. $ 68,378 $ 38,095
Accounts payable...................................... 111,826 127,347
Income taxes and other current liabilities............ 101,170 96,488
---------- ----------
Total current liabilities........... 281,374 261,930
Long-term debt........................................ 183,500 182,165
Postretirement health care obligation................. 106,302 105,962
Noncurrent liabilities................................ 43,469 42,878
Deferred income taxes................................. 54,584 53,909
---------- ----------
Total liabilities................... 669,229 646,844
---------- ----------
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 - 56,536,106 shares as of March 31,
1998 after deducting 29,659,788 treasury shares,
56,966,894 shares as of December 31, 1997
after deducting 29,229,000 treasury shares........ 85,203 82,669
Retained earnings................................... 768,839 773,184
Accumulated other comprehensive income (loss)....... (40,339) (40,405)
---------- ----------
Total shareholders' equity......... 813,703 815,448
---------- ----------
TOTAL.......................... $1,482,932 $1,462,292
========== ==========
</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) 1998 1997
-------- --------
<S> <C> <C>
Net sales..................................................... $399,900 $387,749
Royalties and other revenues.................................. 465 1,260
-------- --------
Total revenues...................................... 400,365 389,009
Cost of sales................................................. 277,035 258,107
Selling and administrative expenses........................... 42,028 40,014
Research, testing and development expenses.................... 35,280 34,982
-------- --------
Total cost and expenses............................. 354,343 333,103
Other income - net............................................ 1,025 3,245
Interest income............................................... 1,320 866
Interest expense.............................................. (3,073) (2,444)
-------- --------
Income before income taxes.................................... 45,294 57,573
Provision for income taxes.................................... 15,626 18,712
-------- --------
Net income.................................................... $ 29,668 $ 38,861
======== ========
Net income per share.......................................... $ .52 $ .66
===== =====
Net income per share, diluted................................. $ .52 $ .66
===== =====
Average common shares outstanding............................. 56,838 58,504
</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) 1998 1997
-------- --------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Net income................................................... $ 29,668 $ 38,861
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization............................ 20,935 21,026
Deferred income taxes.................................... 1,556 768
Change in current assets and liabilities:
Receivables............................................ 7,929 (28,494)
Inventories............................................ (6,523) 140
Accounts payable and accrued expenses.................. (13,109) 23,165
Other current assets................................... 2,075 4,548
Other items - net........................................ 1,793 (9,414)
-------- --------
Total operating activities......................... 44,324 50,600
Investing activities:
Capital expenditures......................................... (23,048) (19,078)
Proceeds from sale of investments............................ 12,117
Acquisitions and investments in nonconsolidated companies.... (14,630) (1,359)
Other - net.................................................. 55 1,526
-------- --------
Total investing activities (37,623) (6,794)
Financing activities:
Short-term borrowing (repayment)............................. 30,673 (19,780)
Long-term borrowing.......................................... 23
Long-term repayments......................................... (706) (795)
Dividends paid............................................... (14,785) (14,639)
Common shares purchased, net of options exercised............ (16,694) (8,093)
-------- --------
Total financing activities......................... (1,512) (43,284)
Effect of exchange rate changes on cash...................... (353) (1,003)
-------- --------
Net increase (decrease) in cash and short-term investments... 4,836 (481)
Cash and short-term investments at the beginning of period... 86,504 55,073
-------- --------
Cash and short-term investments at the end of period......... $ 91,340 $ 54,592
======== ========
</TABLE>
Amounts shown are unaudited.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
------------------------------------------
March 31, 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 March 31, 1998 and
December 31, 1997, and the results of operations and cash flows for the
applicable periods ended March 31, 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:
Three Months Ended
March 31
-------------------
1998 1997
------- -------
Numerator:
Net income available to common
shareholders $29,668 $38,861
======= =======
Denominator:
Weighted average common shares
outstanding 56,838 58,504
Dilutive effect of stock options
and awards 315 229
------- -------
Denominator for net income per share,
diluted 57,153 58,733
======= =======
Net income per share $ .52 $ .66
======= =======
Net income per share, diluted $ .52 $ .66
======= =======
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
------------------------------------------
March 31, 1998
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 month periods ended March 31, 1998 and 1997 is
comprised as follows:
Three Months Ended
March 31
-------------------
1998 1997
------- -------
Net income $29,668 $38,861
Other comprehensive income (loss) 66 (25,424)
------- -------
Total comprehensive income $29,734 $13,437
======= =======
Other comprehensive income in each of the periods above is solely
comprised of foreign currency translation adjustments, net of related
tax effects.
4. 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 the company received
cash of $19 million from Exxon. Other lawsuits between the company
and Exxon pending in Ohio, Canada, the United Kingdom and the U.S.
Court of Appeals for the Federal Circuit 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.
<PAGE>
THE LUBRIZOL CORPORATION
Notes to Consolidated 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
brought by the company against Exxon in that country. The company
appealed 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 $12
million. The determination of which of those costs may be recoverable
will be subject to a separate proceeding. The company has obtained a
stay of this separate proceeding pending the outcome of the appeal of
the trial court decision. As a court ordered condition to obtain the
stay, the company made a $3.0 million contingent payment to Exxon in
July 1997. This amount was fully expensed in 1997. On April 30, 1998,
a decision was rendered in the appeal of the trial court decision, which
reversed some, but not all, of the findings against the company. The
impact of this decision on the recovery of legal costs by either party,
including those already contingently paid by the company, can not be
made at this time.
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 March 31, 1998.
5. 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 has not yet completed its analysis of SFAS 131 and
accordingly has not yet determined what effect, if any, it may have on
future financial statement disclosures.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accounting issued Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides
guidance on when costs incurred for internal-use computer software are
and are not to be capitalized. As permitted by SOP 98-1, the company
elected early adoption of this statement for its internal-use software
costs effective January 1, 1998. The effect of implementing this
statement was not significant.
<PAGE>
THE LUBRIZOL CORPORATION
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
------------------------------------------------
RESULTS OF OPERATIONS
The competitive marketplace that existed throughout 1997 is continuing in
1998. Results of the first quarter of 1998 reflected the impact of
continued market competition and weaker than expected sales volumes.
Although sales volumes were higher than for the 1997 first quarter, the
resultant revenue increase was almost totally offset by the effects of
competitive pricing, changing product mix and unfavorable currency. In
addition, slightly higher average material costs and operating expenses,
lower other income and a higher effective tax rate each contributed to lower
earnings in the first quarter of 1998 as compared with the first quarter of
1997. Lower year-over-year selling prices and higher material costs will
likely cause the company's 1998 second quarter earnings to be lower than that
achieved in the 1997 second quarter. More detailed comments relating to the
company's results of operations and financial position follow below.
Consolidated revenues increased $11.4 million or 3% for the first quarter of
1998 compared with the first quarter of 1997. This increase, including recent
acquisitions which generated $8.7 million in revenues, was primarily a result
of 10% higher specialty chemical shipment volume being offset by a decline of
6% in the average selling price per metric ton. Although the average selling
price has stabilized since mid-1997, the year-over-year decline in the first
quarter of 1998 was attributable approximately 30% from lower product pricing,
30% from changing product mix and 40% from unfavorable currency effects.
Specialty chemical shipments increased 10% as compared to the first quarter of
1997, despite shipment volumes in the first quarter of 1998 being impacted by
weaker than expected customer order patterns in North America and by economic
difficulties in Asia-Pacific. For the 1998 first quarter, sales volume
increased 7% to North American customers and 12% to international customers,
primarily in Asia-Pacific, Western Europe and Latin America, as compared with
the 1997 first quarter. These increases reflect the success achieved during
1997 by the company's strategy of building global and regional alliances with
targeted finished lubricant suppliers. However, shipment volumes for the first
quarter of 1998 were lower than those achieved during each of the previous
three quarters. Compared to the fourth quarter of 1997, specialty chemical
shipments declined by nearly 6%, with shipments declining to North American
customers by 7% and to Asian-Pacific customers by 14%.
Cost of sales for the first quarter of 1998 increased in line with the higher
sales volume, as average raw material costs increased about 1% and total
manufacturing costs were level as compared with the first quarter of 1997.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Gross profit (sales less cost of sales) decreased $6.8 million or 5% for
the first quarter of 1998, compared with the first quarter of 1997. The
decrease in gross profit was primarily due to the lower average selling
price and slightly higher material costs more than offsetting the margin
benefit generated from higher sales volume for the comparable first quarter
period. Recent acquisitions also contributed $2.9 million to the increase
in gross profit in the 1998 first quarter, but this was more than offset by
unfavorable currency effects. Gross profit percent of 30.7% in the first
quarter of 1998 was the same as the fourth quarter of 1997, but lower than
the 33.4% achieved in the first quarter of 1997. This decrease in the gross
profit percentage as compared to the 1997 first quarter resulted from the
combined effects of the decline in average selling price and the slight
increase in raw material costs being more than offset by the benefit of
lower manufacturing costs per metric ton sold.
Selling and administrative expenses were $2.0 million or 5% higher in the
first quarter of 1998 compared with the first quarter of 1997. The company
has continued its focus on cost management as the increase in selling and
administrative expenses was primarily due to the effect of acquisitions and
expenses related to the implementation of the new enterprise-wide
management information system.
Research, testing and development expenses (technology expenses) in the
first quarter of 1998 were level with those incurred in the first quarter
of 1997. The company's technology expense during the first quarter 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. The company expects its technology expense in 1998
will be slightly higher than in 1997.
Primarily as a result of the above factors, total costs and expenses
increased $9.9 million more than the increase in consolidated revenues.
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 comparable 1997 first quarter, currency fluctuations had an
unfavorable effect of $.02 net income per share for the three-month period
ended March 31, 1998.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The company's effective income tax rate was 34.5% in the first quarter of
1998 as compared with 32.5% during the first quarter of 1997. The higher
effective income tax rate is principally attributable to certain tax law
changes enacted by France, the United States and the United Kingdom during
the second half of 1997.
Primarily as a result of the above factors, net income for the first
quarter of 1998 was $29.7 million, or $.52 per share, which was a 24%
decrease (21% on a per share basis) compared to the $38.9 million or $.66
per share for the first quarter of 1997.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities was $44.3 million for the first
quarter of 1998 as compared with $50.6 million for the first quarter of
1997. The decrease in cash flow from operations was principally
attributable to the decline in net income between the comparable periods.
Capital expenditures in the 1998 first quarter were $23.0 million as
compared with $19.1 million for same 1997 period and included $6.9 million
and $3.0 million, respectively, related to the company's multi-year project
to implement an enterprise-wide management information system. The company
installed 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.
Proceeds from the sale of investments in the three-month period 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.
During the first quarter of 1998, the company completed two acquisitions
aggregating $14.6 million. These acquisitions were in the company's
existing business areas of metalworking additives and coating additives.
The company intends to continue to broaden its base in performance
chemicals through focused acquisitions.
<PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The company maintains an active share repurchase program and, during the
first quarter of 1998, repurchased 535,000 of its common shares for $20.0
million. The company currently plans to expend at least $80 million for the
full year 1998 in its share repurchase program. There were 4.2 million
shares remaining under the company's repurchase authorization at March 31,
1998.
The company's debt increased by $30.0 million during the first quarter of
1998. This increase was attributable primarily to the continuation of the
company's share repurchase program and financing of two acquisitions
completed in the quarter. The company's debt as a percent of capitalization
(shareholders' equity plus short-term and long-term debt) increased to 23%
at March 31, 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 increased $4.8 million at March
31, 1998, compared with December 31, 1997.
The company's financial position continues to be strong with a ratio of
current assets to current liabilities of 2.3 to 1 at March 31, 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, if desired, will be sufficient to meet its
future capital needs.
The company is involved in patent 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 income from this settlement, net of
related expenses, will be recognized in the company's financial statements
during the second quarter of 1998. Other lawsuits between the company and
Exxon pending in Ohio, Canada, the United Kingdom and the U.S.
Court of Appeals for the Federal Circuit were not settled by this agreement.
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 pages 21 -
22 of its 1997 Annual Report to its shareholders, to which reference is made
and which are incorporated by reference herein. <PAGE>
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
PART II. OTHER INFORMATION
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 March 31, 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: May 11, 1998
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.0
<CASH> 91,340
<SECURITIES> 0
<RECEIVABLES> 240,180
<ALLOWANCES> 1,286
<INVENTORY> 269,101
<CURRENT-ASSETS> 661,197
<PP&E> 1,530,552
<DEPRECIATION> 833,685
<TOTAL-ASSETS> 1,482,932
<CURRENT-LIABILITIES> 281,374
<BONDS> 183,500
0
0
<COMMON> 85,203
<OTHER-SE> 728,500
<TOTAL-LIABILITY-AND-EQUITY> 1,482,932
<SALES> 399,900
<TOTAL-REVENUES> 400,365
<CGS> 277,035
<TOTAL-COSTS> 277,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 322
<INTEREST-EXPENSE> 3,073
<INCOME-PRETAX> 45,294
<INCOME-TAX> 15,626
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,668
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
