<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, 2000
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, 2000: 53,052,017.
<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) 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
------
Cash and short-term investments ....................................... $ 104,054 $ 185,465
Receivables ........................................................... 320,884 301,256
Inventories:
Finished products ................................................... 123,579 118,135
Products in process ................................................. 57,804 56,855
Raw materials ....................................................... 69,942 66,102
Supplies and engine test parts ...................................... 17,250 17,057
----------- -----------
268,575 258,149
----------- -----------
Other current assets .................................................. 33,174 35,572
----------- -----------
Total current assets .............................. 726,687 780,442
Property and equipment - net .......................................... 655,138 670,512
Goodwill and intangible assets - net .................................. 168,321 149,779
Investments in nonconsolidated companies .............................. 39,120 30,441
Other assets .......................................................... 50,097 51,180
----------- -----------
TOTAL ........................................ $ 1,639,363 $ 1,682,354
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Short-term debt and current portion of long-term debt ................. $ 9,741 $ 37,584
Accounts payable ...................................................... 123,049 138,841
Accrued expenses and other current liabilities ........................ 128,817 134,875
----------- -----------
Total current liabilities ......................... 261,607 311,300
----------- -----------
Long-term debt ........................................................ 380,823 365,372
Postretirement health care obligation ................................. 101,732 108,717
Noncurrent liabilities ................................................ 49,822 45,054
Deferred income taxes ................................................. 60,447 61,787
----------- -----------
Total liabilities ................................. 854,431 892,230
----------- -----------
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 - 53,158,217 shares as of June 30, 2000 after deducting
33,037,677 treasury shares, 54,477,292 shares as of December 31,
1999 after deducting 31,718,602 treasury shares ................. 85,069 85,984
Retained earnings ................................................... 772,332 758,090
Accumulated other comprehensive loss ................................ (72,469) (53,950)
----------- -----------
Total shareholders' equity ........................ 784,932 790,124
----------- -----------
TOTAL ........................................ $ 1,639,363 $ 1,682,354
=========== ===========
</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) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales .......................... $ 439,347 $ 433,129 $ 874,381 $ 879,756
Royalties and other revenues ....... 1,212 1,056 2,339 1,974
--------- --------- --------- ---------
Total revenues ........... 440,559 434,185 876,720 881,730
Cost of sales ...................... 309,499 296,985 617,207 600,159
Selling and administrative expenses 43,366 47,519 86,865 92,522
Research, testing and development
expenses ......................... 36,454 35,600 71,103 72,498
--------- --------- --------- ---------
Total cost and expenses .. 389,319 380,104 775,175 765,179
Gain from litigation settlement .... 14,476
Special (charge) credit ............ 2,577 2,577 (3,136)
Other income (expense) - net ....... (2,612) (160) (4,353) (3,268)
Interest income .................... 1,972 1,795 4,522 2,802
Interest expense ................... (6,824) (7,284) (14,053) (14,424)
--------- --------- --------- ---------
Income before income taxes ......... 46,353 48,432 90,238 113,001
Provision for income taxes ......... 14,641 18,404 28,421 43,879
--------- --------- --------- ---------
Net income ......................... $ 31,712 $ 30,028 $ 61,817 $ 69,122
========= ========= ========= =========
Net income per share ............... $ 0.59 $ 0.55 $ 1.15 $ 1.27
========= ========= ========= =========
Net income per share, diluted ...... $ 0.59 $ 0.55 $ 1.14 $ 1.26
========= ========= ========= =========
Dividends per share ................ $ 0.26 $ 0.26 $ 0.52 $ 0.52
========= ========= ========= =========
Average common shares outstanding .. 53,547 54,564 53,924 54,556
</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) 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided from (used for):
Operating activities:
Net income .......................................... $ 61,817 $ 69,122
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization ................... 48,469 48,245
Deferred income taxes ........................... 3,435 1,994
Special charge (credit) ......................... (2,577) 3,136
Change in current assets and liabilities:
Receivables ................................... (27,929) (24,434)
Inventories ................................... (14,023) 17,123
Accounts payable and accrued expenses ......... 2,244 21,757
Other current assets .......................... 1,554 20,995
Other items - net ............................... (2) (1,380)
--------- ---------
Total operating activities ................ 72,988 156,558
Investing activities:
Capital expenditures .............................. (38,381) (34,034)
Acquisitions and investments in nonconsolidated
companies ....................................... (40,641)
Other - net ....................................... 189 675
--------- ---------
Total investing activities ................ (78,833) (33,359)
Financing activities:
Short-term repayments ............................. (4,808) (22,587)
Long-term borrowing ............................... 18,375 5,000
Long-term repayments .............................. (24,867) (2,640)
Dividends paid .................................... (28,074) (28,367)
Common shares (purchased) net of options exercised (34,597) 1,273
--------- ---------
Total financing activities ................ (73,971) (47,321)
Effect of exchange rate changes on cash ............. (1,595) (4,651)
--------- ---------
Net increase (decrease) in cash and short-term
investments ....................................... (81,411) 71,227
Cash and short-term investments at the beginning
of period ......................................... 185,465 53,639
--------- ---------
Cash and short-term investments at end of period .... $ 104,054 $ 124,866
========= =========
</TABLE>
Amounts shown are unaudited.
-4-
<PAGE> 5
THE LUBRIZOL CORPORATION
------------------------
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 2000
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, 2000 and December 31,
1999, and the results of operations and cash flows for the applicable
periods ended June 30, 2000 and 1999.
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
----------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income available to
common shares $31,712 $30,028 $61,817 $69,122
======= ======= ======= =======
Denominator:
Weighted average common
shares outstanding 53,547 54,564 53,924 54,556
Dilutive effect of stock
options and awards 107 167 142 113
------- ------- ------- -------
Denominator for net income
per share, diluted 53,654 54,731 54,066 54,669
======= ======= ======= =======
Net income per share $ .59 $ .55 $ 1.15 $ 1.27
======= ======= ======= =======
Net income per share,
diluted $ .59 $ .55 $ 1.14 $ 1.26
======= ======= ======= =======
</TABLE>
3. Total comprehensive income for the three- and six-month periods ended
June 30, 2000 and 1999 is comprised as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 31,712 $ 30,028 $ 61,817 $ 69,122
Other comprehensive
loss (7,338) (8,751) (18,519) (28,918)
-------- -------- -------- --------
Total comprehensive
income $ 24,374 $ 21,277 $ 43,298 $ 40,204
======== ======== ======== ========
</TABLE>
Other comprehensive 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, 2000
4. In March 2000, the company purchased certain assets of Alox Corporation
(Alox) from RPM, Inc. Alox is a leading supplier of additives for corrosion
prevention in metalworking products, with 1999 revenues of approximately
$20 million. In March 2000, the company also acquired an additional 10%
interest in its India joint venture, bringing the company's ownership
interest up to 50%. The aggregate purchase price of both acquisitions was
approximately $36 million, of which $26 million was assigned to goodwill
and intangible assets. Amortization of goodwill is on a straight-line basis
over 15 years. In June 2000, the company made an investment of
approximately $4.9 million in a joint venture with GE Transportation
Systems to develop and market products and services to manage critical
diesel engine fluids to optimize service intervals and improve fuel
consumption and fueling processes. This investment will be accounted for
using the equity method of accounting.
5. The second phase of the company's cost reduction program began in the third
quarter of 1999 and involves primarily the downsizing of the company's
Painesville, Ohio, manufacturing plant. In the second quarter of 2000, the
company recorded a pre-tax adjustment of $2.6 million ($1.7 million
after-tax or $.03 per share), to reduce the amount of the special charge
previously recorded in the third quarter of 1999, principally because the
cost of workforce reductions at Painesville will be less than originally
anticipated. This second phase will result in the reduction of
approximately 5% of the company's workforce, or 190 positions, and the
shutdown of 21 of Painesville's 36 production systems. Through June 30,
2000, the company has shut down 12 of the 21 targeted systems and completed
approximately 52% of the workforce reduction. Cash expenditures of
approximately $.4 million were made in 2000 related to the cost reduction
program. Approximately $7.6 million remains as an accrued liability at June
30, 2000.
6. On March 28, 2000, the company entered into an interest rate swap agreement
that effectively converts the interest on $25 million of outstanding 5.875%
notes due 2008 to a variable rate of three-month LIBOR less 143 basis
points. On April 5, 2000, the company entered into a similar agreement, for
another $25 million of these notes, at a rate of three-month LIBOR less 118
basis points. On May 12, 2000, the company entered into two additional
similar agreements for these notes, for $25 million each, at respective
rates of three-month LIBOR less 188 basis points and three-month LIBOR less
187.5 basis points.
7. The company had an effective tax rate of 31.6% for the three months ended
June 30, 2000 and 31.5% for the six months ended June 30, 2000 (31.4% for
both periods before the special charge adjustment) compared to 38.0% for
the three months ended June 30, 1999 and 38.8% for the six months ended
June 30, 1999 (38.0% before the litigation settlement and special charge).
The decrease in the effective tax rate is due in part to the U.S. tax
benefit from charitable contributions of technology to an educational
institution and to the favorable impact of statutory tax rate changes for
certain foreign subsidiaries.
8. On May 24, 2000, the company borrowed $18,375,000, through the issuance of
Harris County (Texas) Industrial Development Corporation Marine Terminal
Refunding Revenue Bonds, Series 2000 (the "Bonds"). Proceeds from the Bonds
were used, on June 30, 2000, to repay $18,375,000 aggregate amount of
Marine Terminal Refunding Revenue Bonds, Series 1991.
-6-
<PAGE> 7
THE LUBRIZOL CORPORATION
------------------------
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 2000
The Bonds have a stated maturity of July 1, 2018 and bear interest at a
variable interest rate which will be determined weekly by Morgan Stanley
and Co., the remarketing agent for the Bonds. At each weekly reset date,
the bondholders may put the Bonds back to the company; however, the
company expects that such bonds would then be remarketed. If the bonds
cannot be remarketed, the company has credit facilities in place that
would enable it to refinance the debt for a period beyond one year. The
bonds are, therefore, classified as long-term debt in the financial
statements.
9. The company aggregates its product lines into two principal operating
segments: chemicals for transportation and chemicals for industry. The
company evaluates performance and allocates resources based on segment
contribution income, defined as revenues less expenses directly
identifiable to the product lines aggregated within each segment. In
addition, the company allocates corporate research, testing, selling and
administrative expenses, and excess production capacity costs in arriving
at segment operating profit before tax.
The following table presents a summary of the company's reportable segments
for the three- and six- months ended June 30, 2000 and 1999 on a basis of
segmentation consistent with the previous year end:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue from external customers:
Chemicals for transportation $ 359,558 $ 360,624 $ 719,609 $ 733,862
Chemicals for industry 81,001 73,561 157,111 147,868
--------- --------- --------- ---------
Total revenues $ 440,559 $ 434,185 $ 876,720 $ 881,730
========= ========= ========= =========
Segment contribution income:
Chemicals for transportation $ 76,036 $ 86,972 $ 151,590 $ 175,168
Chemicals for industry 12,582 11,492 24,700 24,652
--------- --------- --------- ---------
Total segment contribution
income $ 88,618 $ 98,464 $ 176,290 $ 199,820
========= ========= ========= =========
Segment operating profit before tax:
Chemicals for transportation $ 40,670 $ 47,861 $ 81,644 $ 99,199
Chemicals for industry 7,958 6,060 15,548 14,084
--------- --------- --------- ---------
Total segment operating
profit before tax 48,628 53,921 97,192 113,283
Gain from litigation settlement 14,476
Special (charge) credit 2,577 2,577 (3,136)
Interest expense - net (4,852) (5,489) (9,531) (11,622)
--------- --------- --------- ---------
Consolidated income before tax $ 46,353 $ 48,432 $ 90,238 $ 113,001
========= ========= ========= =========
</TABLE>
Prior-year amounts have been restated to reflect reclassifications of
products between chemicals for transportation and chemicals for industry
operating segments. Prior-year segment contribution income has been
restated to reflect the exclusion, for internal management reporting
purposes, effective January 1, 2000, of excess production capacity from
product costs; this change had no effect on segment operating profit before
tax.
-7-
<PAGE> 8
THE LUBRIZOL CORPORATION
------------------------
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
Our revenues for the second quarter and first half of 2000 were not materially
different than for the corresponding periods of 1999. Significant increases in
raw material costs in both the first and second quarters of 2000 resulted in
lower profit margins for the first half of 2000 as compared to the first half of
1999. We benefited from lower operating expenses and a lower effective tax rate,
but were negatively impacted by currency effects. After excluding a litigation
settlement gain, a special charge and an adjustment to a special charge, net
income for the second quarter was the same as for the second quarter of 1999 and
decreased 5% for the first half as compared to the first half of 1999.
We group our product lines into two operating segments: chemicals for
transportation and chemicals for industry. Chemicals for transportation
comprised approximately 83% of our consolidated revenues and 87% of our segment
pre-tax operating profits for the full year 1999 (82% of revenues and 84% of
operating profits for the six months ended June 30, 2000). This discussion and
analysis of our financial condition and results of operations is primarily
focused upon the company as a whole, since we believe this provides the most
appropriate understanding of our business. See Note 9 to the financial
statements for further financial disclosures by operating segment.
Consolidated revenues increased $6.4 million, or 1% (and were flat excluding
acquisitions), for the second quarter of 2000 compared with the second quarter
of 1999, and decreased $5.0 million, or 1%, for the first half of 2000 compared
with the first half of 1999. On a year-to-year comparative basis, chemicals for
transportation revenues decreased $1.1 million, or less than 1%, for the second
quarter and $14.3 million, or 2%, for the six months. On a similar basis,
chemicals for industry revenues increased $7.4 million, or 10%, for the second
quarter and $9.2 million, or 6%, for the six months.
Shipment volume was flat in the second quarter of 2000 (and decreased 1%
excluding acquisitions) and decreased 1% in the first half of 2000 (2% excluding
acquisitions) compared with the same periods in 1999. Shipments to North
American customers decreased 3% for the second quarter and 4% for the first six
months of 2000, and international shipments increased 2% for the second quarter
and 1% for the first six months of 2000 compared with the same periods in 1999.
First half shipments in Asia Pacific increased 1% compared to 1999, as a strong
second quarter made up for an unfavorable first quarter comparison, and first
half shipments in Europe and Latin America increased 2% and 1%, respectively,
compared to the first half of 1999.
Average additive selling price increased 1% for the second quarter of 2000 and
was flat for the first six months of 2000 compared with the same periods in
1999, because of higher pricing offset by unfavorable currency. Sequentially,
average selling price remained the same from the first quarter to the second
quarter of 2000. Although we achieved an additional 2% contribution from the
phasing in of our December 1999 price increase (we also saw a 2% increase in the
first quarter of 2000), this was offset by unfavorable currency and weaker
product mix. We announced a second price increase in the first quarter to
recover higher raw material costs experienced during the first quarter, and we
expect to realize this price increase in the second half of 2000.
-8-
<PAGE> 9
THE LUBRIZOL CORPORATION
------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cost of sales increased 4% for the second quarter of 2000 and increased 3% for
the first half of 2000, compared to the same periods in 1999, because of higher
raw material costs partially offset by lower manufacturing expenses. Average raw
material cost increased 11% for the second quarter of 2000 and 9% for the first
half of 2000, compared with the same periods in 1999, due to the impact of
higher crude oil costs on petrochemical prices. Manufacturing costs were 10%
lower for the second quarter of 2000 compared with the second quarter of 1999
and 7% lower for the first half of 2000 compared with the first half of 1999,
due to savings resulting from the integration of the Adibis business and
favorable currency effects. Sequentially, raw material costs increased 2% in the
second quarter as compared to the first quarter. Our historical raw material
cost is a weighted average and is lagging our U.S. purchasing index for raw
materials, which increased 5% from March 31 to June 30, 2000. As a result, we
expect raw material costs to continue to increase during the third quarter. In
response to the higher raw material costs experienced during the second quarter,
we announced a third price increase in July 2000.
Gross profit (sales less cost of sales) decreased $6.3 million or 5% for the
second quarter of 2000, and $22.4 million or 8% for the first half of 2000,
compared with the same periods in 1999 because of higher raw material costs,
partially offset by lower manufacturing expense and the impact of an
acquisition. Chemicals for transportation gross profit decreased $8.7 million,
or 8%, for the second quarter of 2000, and $25.2 million, or 11%, for the first
half of 2000 compared with the same periods in 1999 due to the factors mentioned
above. Chemicals for industry gross profit increased $2.4 million, or 9%, for
the second quarter of 2000, and $2.8 million, or 5%, for the first half of 2000
compared with the same periods in 1999, primarily due to gross profit increases
in our performance chemicals, coatings and inks, and synthetic refrigerant
lubricant product groups. These factors caused our gross profit percentage
(gross profit divided by net sales) to be 29.6% in the second quarter of 2000
and 29.4% in the first half of 2000, compared with 31.4% and 31.8% in the
respective periods of 1999. Sequentially, gross profit increased 2% from the
first quarter of 2000 and the gross profit percentage increased from 29.3% in
the first quarter of 2000.
Selling and administrative expenses decreased $4.2 million, or 9%, for the
second quarter of 2000 and $5.7 million, or 6%, for the first half of 2000
compared with the respective 1999 periods, due to lower legal expenses and lower
implementation costs for our enterprise-wide management information system.
Our research, testing and development expenses (technology expenses) increased
$.9 million, or 2%, for the second quarter of 2000 and decreased $1.4 million,
or 2%, for the first six months of 2000 compared with the same periods of 1999.
The first half decrease is because of lower activity at third-party testing
facilities in the first three months of the year resulting, in part, from an
industry delay in finalizing specifications for the U.S. passenger car motor oil
technical standard, GF-3. The specification issues have now been resolved, and
testing is beginning in the third quarter. As a result, we expect technology
expenses will be higher in the second half of 2000 than in the first half of
2000.
The change in other income (expense) negatively affected pre-tax income by $2.5
million for the second quarter of 2000 and by $1.1 million for the first half of
2000 compared with the respective 1999 periods. The unfavorable change for the
second quarter was primarily due to an
-9-
<PAGE> 10
THE LUBRIZOL CORPORATION
------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
increase in currency translation and transaction losses and lower equity
earnings of affiliated companies. The unfavorable change for the first half of
2000 compared to the first half of 1999 was due primarily to lower equity
earnings of affiliated companies.
Interest income increased $.2 million for the second quarter of 2000 and $1.7
million for the first half of 2000 compared to the same periods in 1999
principally because of a higher level of cash investments in the first three
months of 2000.
On March 31, 1999, the company and Exxon Corporation reached a settlement of all
pending intellectual property litigation between the two companies and their
affiliates, except for litigation pending in Canada. Under the settlement
agreement, Exxon paid us cash of $16.8 million in April 1999. After deducting
related expenses, this settlement increased pre-tax income by $14.5 million
($9.0 million after-tax or $.16 per share) for the first half of 1999.
In the first quarter of 1999, we recognized additional expense of $3.1 million
($2.9 million after-tax or $.05 per share), to reflect an additional amount for
separation benefits, principally in Japan, under our cost reduction program
originally announced and recognized in the fourth quarter of 1998.
In the second quarter of 2000, we recorded a pre-tax adjustment of $2.6 million
($1.7 million after-tax or $.03 per share), to reduce the amount of a special
charge recorded in the third quarter of 1999 relating to the downsizing of our
Painesville manufacturing facility. The cost of workforce reductions at
Painesville will be less than we originally anticipated because we have
increased the planned number of employees at the end of the second phase of our
cost reduction program due to the assumption of Alox production, retention of a
waste incineration process and higher expected throughput. We also have
eliminated a number of positions without severance pay cost since we have been
able to transfer employees to positions in our other facilities outside of
Painesville.
We had an effective tax rate of 31.6% for the three months ended June 30, 2000
and 31.5% for the six months ended June 30, 2000 (31.4% for both periods before
the special charge adjustment) compared to 38.0% for the three months ended June
30, 1999 and 38.8% for the six months ended June 30, 1999 (38.0% before the
litigation settlement and special charge). We also anticipate an effective tax
rate of 31.4% for the full year 2000, as compared with 36.5% for the full year
1999, prior to the litigation settlement and special charge. This anticipated
decrease in the annual effective tax rate is due in part to the U.S. tax benefit
from charitable contributions of technology to an educational institution and
the favorable impact of statutory tax rate changes for certain of our foreign
subsidiaries. The lower tax rate used for the second quarter of 2000 and first
half of 2000, prior to special charge adjustment, had a favorable effect of $.05
per share and $.11 per share, respectively, when compared to the rate of 38.0%
(prior to litigation settlement and special charge) used for the comparable
periods in 1999.
Changes in currency exchange rates in effect during the second quarter and first
half of 2000 had an unfavorable effect on net income per share of $.04 and $.09
per share, respectively, as compared to exchange rates in effect during the
comparable periods in 1999.
-10-
<PAGE> 11
THE LUBRIZOL CORPORATION
------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Primarily as a result of the above factors, net income for the second quarter of
2000 was $31.7 million or $.59 per share ($30.0 million or $.56 per share, after
excluding the adjustment to the special charge) as compared to $30.0 million or
$.55 per share for the second quarter of 1999. For the first half of 2000, net
income was $61.8 million or $1.15 per share ($1.14 per share diluted) as
compared to $69.1 million or $1.27 per share ($1.26 per share diluted) for the
first half of 1999. After excluding the 2000 second quarter adjustment to the
special charge and the 1999 first quarter gain from the litigation settlement
and adjustment to the special charge, net income for the first half of 2000 was
$60.1 million ($1.12 per share; $1.11 per share diluted) compared to $63.0
million ($1.16 per share; $1.15 per share diluted) for the first half of 1999.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
------------------------------------------------
Cash provided from operating activities was $73.0 million for the first six
months of 2000 compared with $156.6 million for the first six months of 1999.
The decrease in cash flow from operations was principally attributable to a $38
million increase in working capital in 2000 compared to $35 million reduction in
working capital in 1999. The working capital change resulted from increased
inventories in 2000 in advance of planned maintenance at some of our facilities,
as compared to decreased inventory levels in the first half of last year as part
of our working capital initiative; reduced current liabilities in 2000 as
compared to the first six months of 1999 during which there was a large increase
in income taxes payable; and the collection of a $16.1 million income tax refund
in the first quarter of 1999, with no comparable collection this year.
Our capital expenditures in the first half of 2000 were $38.4 million compared
with $34.0 million for the same 1999 period. We estimate capital spending for
the full year 2000 will be $75 million to $80 million as compared to $64.9
million in 1999.
During the first quarter of 2000, we spent approximately $36 million on two
acquisitions. We acquired certain production assets and working capital of Alox
Corporation (Alox), a leading supplier of additives for corrosion prevention in
metalworking products, with annual revenues of approximately $20 million. We
will integrate the Alox operation into our existing infrastructure and, after a
transition period, relocate the manufacturing activity to our Painesville, Ohio
plant. We also acquired an additional 10% interest in our India joint venture,
bringing our ownership interest up to 50%. During the second quarter of 2000, we
made an investment of approximately $4.9 million in a joint venture with GE
Transportation Systems to develop and market products and services to manage
critical diesel engine fluids to optimize service intervals and improve fuel
consumption and fueling processes.
We have maintained an active share repurchase program for a number of years,
although we suspended repurchases for most of 1999. We resumed share repurchases
in late 1999 and repurchased approximately 1,380,000 shares for $35.9 million in
the first half of 2000. We plan to spend approximately $20 million on share
repurchases during the third quarter of 2000. Our net debt to capitalization
ratio, which had fallen from approximately 35% to 25% during the time share
repurchases were suspended, was 29.4% at June 30, 2000. Net debt is the total of
short-
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<PAGE> 12
THE LUBRIZOL CORPORATION
------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
and long-term debt, reduced by cash and short-term investments in excess of an
assumed operating cash level of $40 million. Capitalization is shareholders'
equity plus net debt.
Primarily as a result of these activities and the payment of dividends, our
balance of cash and short-term investments decreased $81.4 million at June 30,
2000 compared with December 31, 1999.
Our financial position remains strong with a ratio of current assets to current
liabilities of 2.8 to 1 at June 30, 2000 compared with a ratio of 2.5 to 1 at
December 31, 1999. We believe our current credit facilities, internally
generated funds and ability to obtain additional financing will be sufficient to
meet our future spending needs.
COST REDUCTION PROGRAM
----------------------
We initiated a program in 1998 to reduce costs and improve our worldwide
operating structure. The first phase of this program was substantially completed
by the end of the third quarter of 1999. The second phase, which began in the
third quarter of 1999 and involves primarily the downsizing of our Painesville,
Ohio manufacturing facility, will result in the reduction of approximately 5% of
our workforce, or 190 positions, and the shutdown of 21 of Painesville's 36
production systems. Through June 30, 2000, we have shut down 12 of the 21
targeted production systems and completed approximately 52% of the anticipated
workforce reduction. We estimate annualized savings from the second phase of
this program of $20 million beginning in 2001. We have achieved approximately
$3.0 million in savings through June 30, 2000, and we expect to achieve $7.0
million in savings by the end of 2000. We will spend approximately $8 million of
capital to transfer a portion of the capacity to our Deer Park, Texas plant, of
which $4.6 million has been spent through June 30, 2000.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
---------------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations 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 our operations
and business environment, all of which are difficult to predict and many of
which are beyond our control. Such uncertainties and factors could cause our
actual results to differ materially from those matters expressed in or implied
by such forward-looking statements. We identified certain, but not necessarily
all, of these uncertainties and factors in the Management's Discussion and
Analysis contained on pages 22 and 23 of our 1999 Annual Report to our
shareholders, and they are incorporated by reference herein.
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<PAGE> 13
THE LUBRIZOL CORPORATION
------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
We operate manufacturing and blending facilities, laboratories and offices
around the world and utilize fixed and variable rate debt to finance our
global operations. As a result, we are subject to business risks inherent
in non-U.S. activities, including political and economic uncertainty,
import and export limitations, and market risk related to changes in
interest rates and foreign currency exchange rates. We believe the
political and economic risks related to our foreign operations are
mitigated due to the stability of the countries in which our largest
foreign operations are located.
In the normal course of business, we use derivative financial instruments
including interest rate swaps and foreign currency forward exchange
contracts to manage our market risks. Our objective in managing our
exposure to changes in interest rates is to limit the impact of such
changes on earnings and cash flow and to lower our overall borrowing
costs. Our objective in managing our exposure to changes in foreign
currency exchange rates is to reduce the economic effect on earnings and
cash flow associated with such changes. Our principal currency exposures
are in the major European currencies, the Japanese yen and certain Latin
American currencies. We do not hold derivatives for trading purposes.
A quantitative and qualitative discussion about our market risk is
contained on page 23 of our 1999 Annual Report to our shareholders. There
have been no material changes in the market risks faced by us since
December 31, 1999.
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<PAGE> 14
PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) On May 3, 2000, we issued 577 common shares in private
placement transactions exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) of that Act.
We issued the shares to two former directors pursuant to a
deferred compensation plan for directors.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Corporation was held May 1,
2000. The following matters were voted on by the shareholders:
1. Election of directors:
(a) Jerald A. Blumberg. The vote was 47,492,767 shares
for and 471,785 shares to withhold authority.
(b) Forest J. Farmer, Sr. The vote was 47,473,306 shares
for and 491,246 shares to withhold authority.
(c) Ronald A. Mitsch. The vote was 47,471,324 shares for
and 493,228 shares to withhold authority.
(d) Daniel E. Somers. The vote was 47,491,400 shares for
and 473,152 shares to withhold authority.
2. A proposal to confirm the appointment of Deloitte & Touche LLP
as independent auditors. The vote was 47,788,974 shares for;
91,543 shares against; and 84,035 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, 2000.
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/John R. Ahern
-------------------------------
John R. Ahern
Chief Accounting Officer and
Duly Authorized Signatory of
The Lubrizol Corporation
Date: August 8, 2000
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