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, 2001
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, 2001: 50,942,129.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------
June 30 December 31
(In Thousands of Dollars) 2001 2000
--------------------------------------------------------------------------------------------------------
ASSETS
Cash and short-term investments .............................. $ 119,251 $ 145,937
Receivables .................................................. 333,940 290,556
Inventories:
Finished products .......................................... 119,143 124,755
Products in process ........................................ 56,252 56,908
Raw materials .............................................. 68,381 61,706
Supplies and engine test parts ............................. 16,551 16,764
---------- ----------
260,327 260,133
---------- ----------
Other current assets ......................................... 25,899 31,282
---------- ----------
Total current assets ..................... 739,417 727,908
Property and equipment - net ................................. 654,426 677,242
Goodwill and intangible assets - net ......................... 173,152 170,593
Investments in nonconsolidated companies ..................... 32,976 34,247
Other assets ................................................. 61,644 49,500
---------- ----------
TOTAL ............................... $1,661,615 $1,659,490
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt ........ $ 21,981 $ 17,152
Accounts payable ............................................. 138,500 141,574
Accrued expenses and other current liabilities ............... 114,778 123,520
---------- ----------
Total current liabilities ................ 275,259 282,246
---------- ----------
Long-term debt ............................................... 385,739 378,783
Postretirement health care obligation ........................ 100,321 100,275
Noncurrent liabilities ....................................... 51,195 52,821
Deferred income taxes ........................................ 58,436 60,614
---------- ----------
Total liabilities ........................ 870,950 874,739
---------- ----------
Minority interest in consolidated companies .................. 32,688 32,470
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 - 50,882,185 shares as of June 30,
2001 after deducting 35,313,709 treasury
shares, 51,307,688 shares as of December 31,
2000 after deducting 34,888,206 treasury shares ........ 100,996 82,128
Retained earnings .......................................... 759,621 750,779
Accumulated other comprehensive loss ....................... (102,640) (80,626)
---------- ----------
Total shareholders' equity ............... 757,977 752,281
---------- ----------
TOTAL ............................... $1,661,615 $1,659,490
========== ==========
Amounts shown are unaudited.
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THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------------------------------------------------------------------------
Second Quarter Six Month
Ended June 30 Period Ended June 30
------------------------------------------------------------------------
(In Thousands Except Per Share Data) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------
Net sales ............................ $485,928 $448,979 $939,719 $892,987
Royalties and other revenues ......... 1,856 1,212 2,714 2,339
-------- -------- -------- --------
Total revenues ............. 487,784 450,191 942,433 895,326
Cost of sales ........................ 350,002 319,131 684,684 635,813
Selling and administrative expenses... 44,074 43,366 88,800 86,865
Research, testing and development
expenses ........................... 38,876 36,454 77,361 71,103
-------- -------- -------- --------
Total cost and expenses .... 432,952 398,951 850,845 793,781
Special credit ....................... 2,577 2,577
Other income (expense) - net ......... (3,807) (2,612) (7,794) (4,353)
Interest income ...................... 1,293 1,972 3,332 4,522
Interest expense ..................... (6,179) (6,824) (12,733) (14,053)
-------- -------- -------- --------
Income before income taxes ........... 46,139 46,353 74,393 90,238
Provision for income taxes ........... 14,124 14,641 23,872 28,421
-------- -------- -------- --------
Net income ........................... $ 32,015 $ 31,712 $ 50,521 $ 61,817
======== ======== ======== ========
Net income per share ................. $ 0.63 $ 0.59 $ 0.99 $ 1.15
======== ======== ======== ========
Net income per share, diluted ........ $ 0.62 $ 0.59 $ 0.98 $ 1.14
======== ======== ======== ========
Dividends per share .................. $ 0.26 $ 0.26 $ 0.52 $ 0.52
======== ======== ======== ========
Average common shares outstanding .... 51,205 53,547 51,243 53,924
Amounts shown are unaudited.
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THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------
Six Month Period Ended
June 30
------------------------------
(In Thousands of Dollars) 2001 2000
---------------------------------------------------------------------------------------------
Cash provided from (used for):
Operating activities:
Net income .......................................... $ 50,521 $ 61,817
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization ................... 49,214 48,469
Deferred income taxes ........................... 2,110 3,435
Special credit .................................. (2,577)
Change in current assets and liabilities:
Receivables ................................... (53,586) (27,929)
Inventories ................................... (5,751) (14,023)
Accounts payable and accrued expenses ......... 13,296 2,244
Other current assets .......................... 2,941 1,554
Other items - net ............................... 4,162 (2)
-------- --------
Total operating activities ................ 62,907 72,988
Investing activities:
Capital expenditures .............................. (33,627) (38,381)
Acquisitions and investments in nonconsolidated
companies ....................................... (14,989) (40,641)
Other - net ....................................... 81 189
-------- --------
Total investing activities ................ (48,535) (78,833)
Financing activities:
Short-term repayments ............................. 6,957 (4,808)
Long-term borrowing ............................... 18,375
Long-term repayments .............................. (2,025) (24,867)
Dividends paid .................................... (26,642) (28,074)
Common shares purchased ........................... (30,039) (35,883)
Stock options exercised ........................... 14,438 1,286
-------- --------
Total financing activities ................ (37,311) (73,971)
Effect of exchange rate changes on cash ............. (3,747) (1,595)
-------- --------
Net(decrease) in cash and short-term
investments ....................................... (26,686) (81,411)
Cash and short-term investments at the beginning
of period ......................................... 145,937 185,465
-------- --------
Cash and short-term investments at end of period .... $119,251 $104,054
======== ========
Amounts shown are unaudited.
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THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2001
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, 2001 and December 31,
2000, and the results of operations and cash flows for the applicable
periods ended June 30, 2001 and 2000.
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:
Second Quarter Ended Six Month Period Ended
June 30 June 30
---------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Net income available to
common shares $32,015 $31,712 $50,521 $61,817
======= ======= ======= =======
Denominator:
Weighted average common
shares outstanding 51,205 53,547 51,243 53,924
Dilutive effect of stock
options and awards 246 107 216 142
------- ------- ------- -------
Denominator for net income
per share, diluted 51,451 53,654 51,459 54,066
======= ======= ======= =======
Net income per share $ .63 $ .59 $ 0.99 $ 1.15
======= ======= ======= =======
Net income per share,
diluted $ .62 $ .59 $ 0.98 $ 1.14
======= ======= ======= =======
3. Total comprehensive income for the three- and six-month periods ended June
30, 2001 and 2000 is comprised as follows:
Second Quarter Ended Six Month Period Ended
June 30 June 30
---------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 32,015 $31,712 $ 50,521 $ 61,817
Foreign currency
translation adjustment (6,746) (7,338) (20,344) (18,519)
Cumulative effect of
accounting change (1,314)
Net unrealized gains (losses)
on derivative contracts 253 (356)
-------- ------- -------- --------
Total comprehensive
income $ 25,522 $24,374 $ 28,507 $ 43,298
======== ======= ======== ========
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THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2001
4. The company aggregates its product lines into two principal operating
segments: fluid technologies for transportation and fluid technologies for
industry. Fluid technologies for transportation is comprised of additives
for lubricating engine oils, such as for gasoline, diesel, marine and
stationary gas engines and additive components; additives for driveline
oils, such as automatic transmission fluids, gear oils and tractor
lubricants; and additives for fuel products and refinery and oil field
chemicals. In addition, the company sells additive components and viscosity
improvers within its lubricant and fuel additives product lines. The
company's fluid technologies for transportation product lines are generally
produced in shared manufacturing facilities and sold largely to a common
customer base. Fluid technologies for industry includes industrial
additives, such as additives for hydraulic fluids, metalworking fluids and
compressor lubricants; performance chemicals, such as additives for
coatings and inks and process chemicals; and performance systems, comprised
principally of fluid metering devices and particulate emission trap
devices. 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, 2001 and 2000 on a basis of
segmentation consistent with the previous year-end:
Quarter Ended Six Month Period Ended
June 30 June 30
------------------------------ ------------------------------
2001 2000 2001 2000
------------------------------ ------------------------------
Revenue from external customers:
Fluid technologies for
transportation $408,143 $368,385 $781,180 $735,480
Fluid technologies for industry 79,641 81,806 161,253 159,846
-------- -------- -------- --------
Total revenues $487,784 $450,191 $942,433 $895,326
======== ======== ======== ========
Segment contribution income:
Fluid technologies for
transportation $ 80,799 $ 76,933 $145,315 $152,033
Fluid technologies for industry 7,842 11,832 14,457 24,531
-------- -------- -------- --------
Total segment contribution
income $ 88,641 $ 88,765 $159,772 $176,564
======== ========= ======== ========
Segment operating profit
before tax:
Fluid technologies for
transportation $ 47,384 $ 41,137 $ 78,129 $ 81,414
Fluid technologies for industry 3,641 7,491 5,665 15,778
-------- -------- -------- --------
Total segment operating
profit before tax 51,025 48,628 83,794 97,192
Special credit 2,577 2,577
Interest expense - net (4,886) (4,852) (9,401) (9,531)
-------- -------- -------- --------
Consolidated income before tax $ 46,139 $ 46,353 $ 74,393 $ 90,238
======== ======== ======== ========
Prior-year amounts have been restated to reflect reclassifications of
products between fluid technologies for transportation and fluid
technologies for industry operating segments and changes in allocation
methodology for corporate expenses.
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THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2001
5. The company had an effective tax rate of 30.6% for the three-month period
ended June 30, 2001 and 32.1% for the six-month period ended June 30, 2001,
compared to 31.6% and 31.5% for the corresponding periods in 2000. The
effective tax rate for the second quarter was lower than the effective rate
for the six months ended June 30, 2001, due in large part to a
non-recurring revaluation of deferred taxes to reflect a statutory tax rate
change in India enacted during the second quarter. The effective tax rate
for the six months ended June 30, 2001 was higher than the corresponding
period in 2000, primarily due to the U.S. tax benefit of a non-recurring
charitable contribution made in 2000.
6. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB
amended certain provisions of that statement by issuing SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities". These statements require the company to recognize all
derivatives on the balance sheet at fair value and establish criteria for
designation and effectiveness of hedging relationships. Derivatives that
are not hedges must be adjusted to fair value through income. Depending
upon the nature of the hedge, changes in fair value of the derivative are
offset against the change in fair value of assets, liabilities or firm
commitments through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of
a derivative's change in value is immediately recognized in earnings.
Effective January 1, 2001, the company adopted the provisions of these
statements. The company uses derivative financial instruments only to
manage well-defined interest rate and foreign currency risks. The company
does not use derivatives for trading purposes. The adoption of SFAS 133 did
not have a material effect on net income as of January 1, 2001, but did
result in a $2.0 million reduction ($1.3 million net of tax) of other
comprehensive income.
Interest Rate Contracts
The company is exposed to market risk from changes in interest rates. The
company's policy is to manage interest costs using a mix of fixed and
variable rate debt. To manage this mix, the company may enter into interest
rate swaps, in which the company agrees to exchange, at specified
intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed upon notional principal amount.
At June 30, 2001, the company had interest rate swap agreements to convert
existing fixed rate debt to variable rates. The fair value of these swaps
was an unrealized gain of $8.7 million, they are designated as fair value
hedges of underlying fixed rate debt obligations and are recorded as an
increase in non-current assets and long-term debt. These interest rate
swaps qualify for the short-cut method for assessing hedge effectiveness
per SFAS 133. As a result, there was no impact to earnings for the second
quarter of 2001 due to hedge ineffectiveness. Future changes in fair value
of the interest rate swaps will be offset by the changes in fair value of
the underlying debt.
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THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2001
At June 30, 2001, the company had interest rate swap agreements to convert
existing variable rate debt to fixed rates. The fair value of these swaps
was an unrealized loss of $3.7 million, they are designated as cash flow
hedges of underlying variable rate debt obligations and are recorded as a
noncurrent liability. The adjustment to record the net change in fair value
during the second quarter of 2001 of $.4 million ($.3 million net of tax)
unrealized gain was recorded in other comprehensive income. Ineffectiveness
was determined to be immaterial during the second quarter of 2001. The
company does not expect any significant portion of these existing losses to
be reclassified into earnings within the next 12 months.
Currency Contracts
The company is exposed to the effect of changes in foreign currency rates
on its earnings and cash flow as a result of doing business
internationally. In addition to working capital management, pricing and
sourcing, the company selectively uses foreign currency forward contracts
to lessen the potential effect of currency changes. These contracts are
generally in connection with specific transactions having maturities of
less than one year.
At June 30, 2001, the company had short-term forward contracts to sell
currencies at various dates during 2001 for $7.1 million. These forward
contracts are not designated as hedges. Any unrealized gains or losses on
these contracts are recorded in other income. The fair value of these
instruments at June 30, 2001 was not material, and the net impact of the
related gains and losses on other income was a loss of $.1 million in the
quarter ended June 30, 2001 and no impact on the six months ended June 30,
2001.
7. In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, "Business
Combinations" which prohibits the pooling-of-interests method for business
combinations completed after June 30, 2001 and includes criteria for
recognition of intangible assets separate from goodwill. Any business
combinations the company enters into after June 30, 2001 will have to be
accounted for under the provisions of this statement.
In July 2001 the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets" which will become effective for the company on January 1, 2002.
Under the provisions of SFAS 142 there will be no goodwill amortization for
business combinations that occur after June 30, 2001 and amortization of
goodwill on pre-June 30, 2001 acquisitions will cease effective January 1,
2002. The adoption of this statement will result in the elimination of
approximately $10 million of annual goodwill amortization expense beginning
on January 1, 2002. Goodwill amortization will be replaced with the
requirement to test goodwill annually for impairment. The initial
impairment test must be completed within six months of adoption of the new
standard. The company has not determined the impact, if any, that the
requirement to test goodwill for impairment will have on its consolidated
financial position or results of operations.
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THE LUBRIZOL CORPORATION
Notes to Consolidated Financial Statements
June 30, 2001
8. Effective July 17, 2001, the company increased its committed revolving
credit facilities from $150 million to $575 million. This resulted from the
addition of $525 million in new facilities, $175 million of which expires
on July 16, 2002 and $350 million of which expires on July 16, 2006; and
the cancellation of $100 million in existing facilities that would have
expired on June 30, 2003. We currently have no borrowings under these
credit facilities.
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LUBRIZOL CORPORATION
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Our revenues increased in the 2001 second quarter as compared to the 2000 second
quarter, largely as a result of record shipment volume during the quarter. Raw
material costs declined from the first quarter of 2001 and, combined with lower
per-unit manufacturing costs, resulted in improved profitability in the second
quarter as compared to the prior two quarters. We had higher operating expenses
and currency had an unfavorable impact in the second quarter. After excluding
the special credit taken in the second quarter of 2000, net income for the 2001
second quarter increased 7% from net income for the 2000 second quarter.
However, the stronger 2001 second quarter did not offset the poor results from
the 2001 first quarter, so that net income for the first half of 2001 was 16%
below that for the first half of 2000 (after excluding the special credit).
We group our product lines into two operating segments: fluid technologies for
transportation and fluid technologies for industry. Fluid technologies for
transportation comprised approximately 82% of our consolidated revenues and 85%
of our segment pre-tax operating profits for the full year 2000 (83% of revenues
and 93% of operating profits for the six months ended June 30, 2001). 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 4 to the financial
statements for further financial disclosures by operating segment.
Our consolidated revenues increased $37.6 million, or 8% (6% excluding
acquisitions), for the second quarter of 2001 compared with the second quarter
of 2000, and increased $47.1 million, or 5% (3% excluding acquisitions), for the
first half of 2001 compared with the first half of 2000. On a year-to-year
comparative basis, fluid technologies for transportation revenues increased
$39.8 million, or 11%, for the second quarter and $45.7 million, or 6%, for the
first half. On a similar basis, fluid technologies for industry revenues
decreased $2.2 million, or 3%, for the second quarter and increased $1.4
million, or 1%, for the first half.
Our shipment volume increased 9% in the second quarter of 2001 (7% excluding
acquisitions) compared to the second quarter of 2000, after increasing only 1%
in the first quarter (and decreasing 2% excluding acquisitions). Our shipment
volume for the first half of 2001 increased 5% (2% excluding acquisitions)
compared with the first half of 2000. Our second quarter 2001 and first half
2001 shipment volume increased in all geographical areas as compared with
comparable prior-year periods, as follows:
Increase
-----------------------------
2nd Quarter First Half
----------- ----------
North America 8% 6%
Europe, Middle East 12% 5%
Asia-Pacific 11% 4%
Latin America 1% 2%
The increases are primarily due to business gains in our engine oil additives
product group in North America and strong shipments to many of our global engine
oil customers in Europe. We believe some of the second quarter engine oil
shipments in North America represent pipeline-filling and new specification
change-over for GF-3, the new passenger car motor
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THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
oil standard, that will not recur in subsequent quarters. The increase in
Asia-Pacific is primarily due to consolidation of our new China subsidiaries
during the fourth quarter of 2000.
Average additive selling price was flat for the 2001 second quarter and
increased only 1% for the 2001 first half, as compared with the same periods in
2000. This resulted from 6% higher pricing for the 2001 second quarter and 7%
higher product pricing for 2001 first half due to the four price increases
initiated since late 1999, offset approximately equally by unfavorable currency
impact and product mix for both the second quarter and first half. Sequentially,
average selling price decreased 2% from the 2001 first quarter primarily due to
the impact of unfavorable currency.
Cost of sales increased 10% for the 2001 second quarter and increased 8% for the
2001 first half, compared to the same periods in 2000, reflecting the increase
in shipment levels, higher raw material costs and higher manufacturing expenses.
Average raw material cost increased 3% for the 2001 second quarter and 5% for
the 2001 first half, compared with the same periods in 2000, due to increases in
real raw material costs, partially offset by the effect of favorable currency
and product mix. This increase in real raw material cost reflected the effect of
higher crude oil costs on petrochemical prices and the impact of higher natural
gas costs on our butylene-based raw materials. We have started to see these
costs decline, as average raw material cost decreased 3% in the second quarter
as compared to the first quarter. Current market projections indicate that raw
material costs may continue to decline to some extent during the second half of
the year. Manufacturing costs were 6% higher for the 2001 second quarter
compared with the 2000 second quarter and 3% higher for the 2001 first half
compared with the 2000 first half, primarily due to higher utility costs in the
U.S. as a result of higher natural gas costs, and acquisitions, partially offset
by the effect of favorable currency.
Gross profit (sales less cost of sales) increased $6.1 million, or 5%, for the
second quarter of 2001, and decreased $2.1 million, or 1%, for the first half of
2001, compared with the same periods in 2000. The second quarter gross profit
rose because the effect of the shipment volume increase more than offset higher
raw material costs and manufacturing expenses. However, for the first half, the
effect of the shipment volume increase did not offset those increased costs.
Gross profit for fluid technologies for transportation increased $8.6 million,
or 8%, for the second quarter of 2001, and $1.8 million, or 1%, for the first
half of 2001 compared with the same periods in 2000 due to the factors mentioned
above. Gross profit for fluid technologies for industry decreased $2.5 million,
or 9%, for the second quarter of 2001, and $3.9 million, or 7%, for the first
half of 2001 compared with the same periods in 2000, primarily because the weak
manufacturing sector in North America adversely affected our metalworking and
paints, coatings and inks additive businesses. These factors caused our gross
profit percentage (gross profit divided by net sales) to be 28.0% in the 2001
second quarter (as compared to 28.9% in the 2000 second quarter) and 27.1% in
the 2001 first half (as compared with 28.8% in the 2000 first half).
Sequentially, gross profit increased 14% from the first quarter of 2001 and the
gross profit percentage increased from 26.2% in the first quarter of 2001
primarily because of higher volume and lower average raw material cost. However,
our current gross profit percentage is still well below our gross profit
percentage in late 1999 when raw material costs began to increase.
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THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Selling and administrative expenses increased $.7 million, or 2%, for the second
quarter of 2001 and $1.9 million, or 2%, for the first half of 2001 compared
with the respective 2000 periods, primarily due to the impact of acquisitions.
Our research, testing and development expenses (technology expenses) increased
$2.4 million, or 7%, for the second quarter of 2001 and increased $6.3 million,
or 9%, for the first half of 2001 compared to the same periods of 2000. The
increase was due to high levels of testing, primarily in the first quarter, for
GF-3, the new U.S. passenger car motor oil technical standard, and increased
development spending, primarily in the second quarter, for growth programs and
early stage expenses required for the next diesel engine oil specification,
PC-9.
The change in other income (expense) negatively affected pre-tax income by $1.2
million for the second quarter of 2001 and by $3.4 million for the first half of
2001 compared with the respective 2000 periods. The unfavorable change for the
second quarter was primarily due to lower equity earnings of our joint ventures
in India and Saudi Arabia, higher expense for our joint venture with GE and the
accounting effect of consolidating our majority-owned China subsidiaries,
partially offset by currency gains. The unfavorable change for the first half of
2001 compared to the first half of 2000 was primarily due to higher expenses for
our joint venture with GE and higher goodwill amortization.
Interest income decreased $.7 million for the 2001 second quarter and $1.2
million for the 2001 first half, compared to the same periods in 2000,
principally because we had a lower level of cash investments in 2001. Interest
expense decreased $.6 million for the 2001 second quarter and $1.3 million for
the 2001 first half, compared to the same periods in 2000, principally because
of lower interest rates due to the interest rate swap agreements we entered into
during the first half of 2000.
As a result of the above factors, our income before income taxes decreased 1%
for the second quarter of 2001 (but increased 5% excluding the 2000 second
quarter special charge adjustment) and decreased 18% for the first half of 2001
(15% excluding the 2000 second quarter special charge adjustment) compared to
the same periods in 2000. Segment operating profit before tax, which excludes
interest expense, for fluid technologies for transportation increased $6.2
million, or 15%, for the 2001 second quarter and decreased $3.3 million, or 4%,
for the 2001 first half compared to the same periods in 2000 for the same
reasons that caused the changes in consolidated gross profit as described above.
Segment operating profit before tax for fluid technologies for industry
decreased $3.9 million, or 51%, for the 2001 second quarter and decreased $10.1
million, or 64%, for the 2001 first half compared to the same periods in 2000
because of weak demand in the manufacturing sector in North America and spending
to commercialize PuriNOx(TM) and other products in our performance systems
product group.
We had an effective tax rate of 30.6% for the 2001 second quarter and 32.1% for
the 2001 first half compared to 31.6% and 31.5% for the corresponding periods in
2000. The effective tax rate for the 2001 second quarter was lower than the
effective rate for the 2001 first half, due in large part to a non-recurring
revaluation of deferred taxes to reflect a statutory tax rate change in India
enacted during the 2001 second quarter. The effective tax rate for the 2001
first half was higher than the
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THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
corresponding period in 2000, primarily due to the U.S. tax benefit of a
non-recurring charitable contribution made in 2000. We anticipate an effective
tax rate of 33.5% for the second half of 2001.
Currency exchange rates in effect during the second quarter and first half of
2001 had an unfavorable effect on net income per share of $.05 and $.12 per
share, respectively, as compared to exchange rates in effect during the
comparable periods in 2000.
Primarily as a result of the above factors, and after excluding the adjustment
to the special charge, net income for the 2001 second quarter was $32.0 million
or $.63 per share, as compared to $30.0 million or $.56 per share for the 2000
second quarter. For the first half of 2001, on the same basis, net income was
$50.5 million or $.99 per share, as compared to $60.1 million or $1.12 per share
for the first half of 2000.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities was $62.9 million for the first half of
2001 compared with $73.0 million for the first half of 2000. The decrease was
caused principally by the reduction in net income compared to the first half of
2000.
Our capital expenditures in the first half of 2001 were $33.6 million compared
with $38.4 million for the same 2000 period. We estimate capital spending for
the full year 2001 will be $75 million to $80 million as compared with $85.8
million in 2000.
During the first quarter of 2001 we completed one acquisition for $15.0 million.
The business acquired, ROSS Chem, Inc., produces defoamers and anti-foam agents
that expand our product lines in metalworking and paints, coatings and inks.
During the first half of 2001 we repurchased approximately 968,000 of our shares
for $30.0 million. We currently do not anticipate making share repurchases
during the third quarter of 2001.
Our net debt to capitalization ratio at June 30, 2001 was 29.7%. Net debt is the
total of short- and long-term debt, reduced by cash and short-term investments
in excess of an assumed operating cash level of $40 million and excluding
unrealized gains and losses on derivative instruments designated as fair value
hedges of fixed rate debt. 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 $26.7 million at June 30,
2001 compared with December 31, 2000.
Our financial position remains strong with a ratio of current assets to current
liabilities of 2.7 to 1 at June 30, 2001 compared with a ratio of 2.6 to 1 at
December 31, 2000. We believe our current credit facilities, internally
generated funds and our ability to obtain additional financing will enable us to
meet our future spending needs.
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THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Effective July 17, 2001, we increased our committed revolving credit facilities
from $150 million to $575 million. This resulted from the addition of $525
million in new facilities ($175 million of which expires on July 16, 2002 and
$350 million of which expires on July 16, 2006); and the cancellation of $100
million in existing facilities that would have expired on June 30, 2003. We
currently have no borrowings under these credit facilities.
COST REDUCTION PROGRAMS
We initiated a series of steps in 1998 to reduce costs and improve our worldwide
operating structure and executed these steps in two programs over a two-year
period, completing the process at December 31, 2000. The first program of this
initiative was substantially completed by the end of the third quarter of 1999.
The second program, which began in the third quarter of 1999 and involved
primarily the downsizing of our Painesville, Ohio manufacturing facility, was
completed at December 31, 2000. Approximately $.6 million remains as an accrued
liability at June 30, 2001, for severance-related payments for employees
separated prior to December 31, 2000 and costs to complete the dismantling of
assets that were taken out of service as of December 31, 2000. We expect these
expenses to be incurred before the end of the year.
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 believe that the following factors, among others, could affect our future
performance and cause our actual results to differ materially from those
expressed or implied by forward-looking statements made in this quarterly
report:
o the overall demand for lubricant and fuel additives on a worldwide basis,
which has a slow growth rate in mature markets such as North America and
Europe;
o the effect on our business resulting from economic and political
uncertainty within the Asia-Pacific and Latin American regions;
o the lubricant additive demand in developing regions such as China and
India, which geographic areas are an announced focus of our activities;
o technology developments that affect longer-term trends for lubricant
additives, such as improved equipment design, fuel economy, longer oil
drain intervals, alternative fuel-powered engines and emission system
compatibility;
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15
THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
o the extent to which we are successful in expanding our business in new and
existing fluid technology markets incorporating chemicals, systems and
services for industry and transportation;
o our success at continuing to develop proprietary technology to meet or
exceed new industry performance standards and individual customer and
original equipment manufacturers' expectations;
o the frequency of change in industry performance standards, which affects
the level and timing of our technology costs, the product life cycles and
the relative quantity of additives required for new specifications;
o our ability to continue to reduce complexities and conversion costs and
modify our cost structure to maintain and enhance our competitiveness;
o our success in strengthening relationships and growing business with our
largest customers, and retaining the business of these customers over
extended time periods;
o our ability to identify, complete and integrate acquisitions for profitable
growth;
o the potential negative impact on product pricing and volume demand from the
consolidation of finished lubricant marketers;
o the degree of competition resulting from lubricant additive industry
over-capacity;
o the cost, availability and quality of raw materials, including
petroleum-based products;
o the cost and availability of energy, including natural gas and electricity;
o the effects of fluctuations in currency exchange rates upon our reported
results from international operations, together with non-currency risks of
investing in and conducting significant operations in foreign countries,
including those relating to political, social, economic and regulatory
factors;
o the extent to which we achieve market acceptance of our PuriNOx(TM) low
emission, water blend fuel product;
o significant changes in government regulations affecting environmental
compliance.
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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 2000 Annual Report to our shareholders. There
have been no material changes in the market risks faced by us since
December 31, 2000.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) On May 1, 2001, we issued 602 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
Our Annual Meeting of Shareholders was held April 23, 2001. The
following matters were voted on by the shareholders:
1. Election of directors:
(a) Gordon D. Harnett. The vote was 45,235,457 shares for and
393,451 shares to withhold authority.
(b) Victoria F. Haynes. The vote was 45,226,870 shares for and
402,037 shares to withhold authority.
(c) William P. Madar. The vote was 45,235,916 shares for and
392,991 shares to withhold authority.
(d) M. Thomas Moore. The vote was 45,215,285 shares for and
413,622 shares to withhold authority.
2. A proposal to confirm the appointment of Deloitte & Touche LLP as
independent auditors. The vote was 45,297,317 shares for; 283,268
shares against; and 48,324 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan,
as amended.
* Indicates management contract or compensatory plan or
agreement.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
June 30, 2001.
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 9, 2001
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