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 March 31, 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
April 30, 2001: 51,180,911.
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1 Financial Statements
---------------------------
THE LUBRIZOL CORPORATION
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------------
March 31 December 31
(In Thousands of Dollars) 2001 2000
---------------------------------------------------------------------------------------------
ASSETS
Cash and short-term investments ..................... $ 111,961 $ 145,937
Receivables ......................................... 311,197 290,556
Inventories:
Finished products ................................. 125,603 124,755
Products in process ............................... 55,758 56,908
Raw materials ..................................... 78,196 61,706
Supplies and engine test parts .................... 16,259 16,764
----------- -----------
275,816 260,133
----------- -----------
Other current assets ................................ 28,656 31,282
----------- -----------
Total current assets ............ 727,630 727,908
Property and equipment - net ........................ 661,824 677,242
Goodwill and intangible assets - net ................ 177,443 170,593
Investments in nonconsolidated companies ............ 33,834 34,247
Other assets ........................................ 63,650 49,500
----------- -----------
TOTAL ...................... $ 1,664,381 $ 1,659,490
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt $ 22,774 $ 17,152
Accounts payable .................................... 147,256 141,574
Accrued expenses and other current liabilities ...... 113,039 123,520
----------- -----------
Total current liabilities ....... 283,069 282,246
----------- -----------
Long-term debt ...................................... 389,100 378,783
Postretirement health care obligation ............... 100,241 100,275
Noncurrent liabilities .............................. 49,233 52,821
Deferred income taxes ............................... 59,315 60,614
----------- -----------
Total liabilities ............... 880,958 874,739
----------- -----------
Minority interest in consolidated companies ......... 31,952 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 - 51,146,289 shares as of March 31,
2001 after deducting 35,049,605 treasury
shares, 51,307,688 shares as of December 31,
2000 after deducting 34,888,206 treasury shares 97,285 82,128
Retained earnings ................................. 750,333 750,779
Accumulated other comprehensive loss .............. (96,147) (80,626)
----------- -----------
Total shareholders' equity ...... 751,471 752,281
----------- -----------
TOTAL ...................... $ 1,664,381 $ 1,659,490
=========== ===========
Amounts shown are unaudited.
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THE LUBRIZOL CORPORATION
------------------------
CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------------------------------
Three Months Ended
March 31
-------------------------
(In Thousands Except Per Share Data) 2001 2000
----------------------------------------------------------------------------
Net sales ..................................... $ 453,791 $ 444,008
Royalties and other revenues .................. 858 1,127
--------- ---------
Total revenues ........................ 454,649 445,135
Cost of sales ................................. 334,682 316,682
Selling and administrative expenses ........... 44,726 43,499
Research, testing and development expenses .... 38,485 34,649
--------- ---------
Total cost and expenses ............... 417,893 394,830
Other income (expense) - net .................. (3,987) (1,741)
Interest income ............................... 2,039 2,550
Interest expense .............................. (6,554) (7,229)
--------- ---------
Income before income taxes .................... 28,254 43,885
Provision for income taxes .................... 9,748 13,780
--------- ---------
Net income .................................... $ 18,506 $ 30,105
========= =========
Net income per share .......................... $ 0.36 $ 0.55
========= =========
Net income per share, diluted ................. $ 0.36 $ 0.55
========= =========
Dividends per share ........................... $ 0.26 $ 0.26
========= =========
Average common shares outstanding ............. 51,282 54,300
Amounts shown are unaudited.
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THE LUBRIZOL CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------
Three Months Ended
March 31
------------------------
(In Thousands of Dollars) 2001 2000
---------------------------------------------------------------------------------
Cash provided from (used for):
Operating activities:
Net income ......................................... $ 18,506 $ 30,105
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization .................. 24,661 24,099
Deferred income taxes .......................... 1,822 1,805
Change in current assets and liabilities:
Receivables .................................. (27,774) (23,621)
Inventories .................................. (18,907) (13,839)
Accounts payable and accrued expenses ........ 15,131 6,987
Other current assets ......................... 900 3,272
Other items - net .............................. 394 (4,775)
--------- ---------
Total operating activities ............... 14,733 24,033
Investing activities:
Capital expenditures ............................. (15,916) (17,774)
Acquisitions and investments in nonconsolidated
companies ...................................... (14,989) (35,741)
Other - net ...................................... 88 183
--------- ---------
Total investing activities ............... (30,817) (53,332)
Financing activities:
Short-term borrowings ............................ 6,776 19
Long-term repayments ............................. (14) (14)
Dividends paid ................................... (13,340) (14,152)
Common shares purchased .......................... (20,026) (15,850)
Stock options exercised .......................... 10,446 1,201
--------- ---------
Total financing activities ............... (16,158) (28,796)
Effect of exchange rate changes on cash ............ (1,734) (799)
--------- ---------
Net decrease in cash and short term investments .... (33,976) (58,894)
Cash and short-term investments at the beginning
of period ........................................ 145,937 185,465
--------- ---------
Cash and short-term investments at the end
of period ........................................ $ 111,961 $ 126,571
========= =========
Amounts shown are unaudited.
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THE LUBRIZOL CORPORATION
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Notes to Consolidated Financial Statements
------------------------------------------
March 31, 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 March 31, 2001 and December 31,
2000, and the results of operations and cash flows for the applicable periods
ended March 31, 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 diluted share includes
the dilutive effect resulting from outstanding stock options and stock
awards.
Per share amounts are computed as follows:
Three Months Ended
March 31
---------------------
2001 2000
------- -------
Numerator:
Net income available to common
shareholders $18,506 $30,105
======= =======
Denominator:
Weighted average common shares
outstanding 51,282 54,300
Dilutive effect of stock options
and awards 186 178
------- -------
Denominator for net income
per share, diluted 51,468 54,478
======= =======
Net income per share $ .36 $ .55
======= =======
Net income per share, diluted $ .36 $ .55
======= =======
3. Total comprehensive income for the three-month periods ended March 31, 2001
and 2000 is comprised as follows:
Three Months Ended
---------------------
March 31
---------------------
2001 2000
------- -------
Net income $18,506 $30,105
Foreign currency translation adjustment (13,598) (11,181)
Cumulative effect of accounting change (1,314)
Net unrealized losses on
derivative contracts (609)
------- -------
Total comprehensive income $ 2,985 $18,924
======= =======
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THE LUBRIZOL CORPORATION
------------------------
Notes to Consolidated Financial Statements
------------------------------------------
March 31, 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 months ended March 31, 2001 and 2000 on a basis of
segmentation consistent with the previous year end:
Three Months Ended
March 31
------------------------
2001 2000
--------- ---------
Revenue from external customers:
Fluid technologies for transportation $ 373,037 $ 367,095
Fluid technologies for industry 81,612 78,040
--------- ---------
Total revenues $ 454,649 $ 445,135
========= =========
Segment contribution income:
Fluid technologies for transportation $ 64,516 $ 75,100
Fluid technologies for industry 6,615 12,699
--------- ---------
Total segment contribution income $ 71,131 $ 87,799
========= =========
Segment operating profit before tax:
Fluid technologies for transportation $ 30,745 $ 40,277
Fluid technologies for industry 2,024 8,287
--------- ---------
Total segment operating profit
before tax 32,769 48,564
Interest expense - net (4,515) (4,679)
--------- ---------
Consolidated income before tax $ 28,254 $ 43,885
========= =========
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.
5. The company had an effective tax rate of 34.5% for the three months ended
March 31, 2001 compared to 31.4% for the three months ended March 31, 2000.
The effective tax rate was lower in the first quarter of 2000 primarily due
to the U.S. tax benefit from charitable contributions of technology made in
2000, which were not repeated in 2001.
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THE LUBRIZOL CORPORATION
------------------------
Notes to Consolidated Financial Statements
------------------------------------------
March 31, 2001
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 March 31, 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 $10.9 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 first 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.
At March 31, 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 $4.1 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
first quarter of 2001 of $.9 million ($.6 million net of tax) was recorded in
other comprehensive income. Ineffectiveness was determined to be immaterial
during the first 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.
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THE LUBRIZOL CORPORATION
------------------------
Notes to Consolidated Financial Statements
------------------------------------------
March 31, 2001
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 March 31, 2001, the company had short-term forward contracts to sell
currencies at various dates during 2001 for $6.9 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 March 31, 2001 was not material, and the net impact of the
related gains and losses on other income was a gain of $.1 million in the
quarter ended March 31, 2001.
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Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
Our revenues improved slightly in the first quarter of 2001 as compared to the
first quarter of 2000, primarily due to higher average selling prices. However,
significantly higher raw material costs than in the first quarter of 2000
resulted in lower profit margins for the first quarter of 2001. The lower gross
profit combined with higher operating expenses, unfavorable currency effects and
a higher effective tax rate resulted in reduced net income in the first quarter
of 2001 as compared to the first quarter of 2000.
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 94%
of our segment pre-tax operating profits for the first quarter of 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 $9.5 million or 2% for the first quarter of
2001 compared with the same period in 2000. Excluding acquisitions, revenues
declined 1%. Fluid technologies for transportation revenues increased $5.9
million, or 2%, and fluid technologies for industry revenues increased $3.6
million, or 5%, in the first quarter of 2001 compared to the first quarter of
2000.
Our shipment volume increased 1% in the first quarter of 2001 compared with the
first quarter of 2000. Excluding acquisitions, shipment volume decreased 2%. The
percentage changes in our first quarter 2001 shipment volume by geographical
area, as compared with first quarter 2000, were:
Increase
(Decrease)
----------
North America 4%
Europe, Middle East (1%)
Asia-Pacific (4%)
Latin America 3%
The increases in North America and Latin America are primarily due to business
gains in our engine oil additives product group in North America and from our
new global diesel platform in Latin America. The decrease in Asia-Pacific is due
to general weakness in most of our markets in the region and the timing of order
pattern. Compared with a strong fourth quarter of 2000, Asia-Pacific volumes are
down 22%. We believe that shipment volumes in Asia-Pacific may begin to improve
as the year progresses, although full-year volumes for the region are likely to
be lower than we previously expected. We believe we have maintained our market
share in Asia-Pacific.
Our average additive selling price increased 2% in the first quarter of 2001
compared with the first quarter of 2000, due to 7% higher product pricing
partially offset by a 2% unfavorable currency impact caused by the strong U.S.
dollar and 3% unfavorable product mix. Sequentially, first quarter 2001 average
additive selling price was 3% higher than fourth quarter of 2000 due to
increased product selling prices. These increases are due to the effect of the
four price increases that were initiated since late 1999.
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THE LUBRIZOL CORPORATION
------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Our cost of sales for the first quarter of 2001 increased $18.0 million over the
first quarter of 2000 because of 8% higher average raw material costs, which is
made up of 14% higher real raw material costs, partially offset by favorable
currency and product mix. The higher real raw material costs are due to the
impact of higher crude oil costs on petrochemical prices and the impact of
higher natural gas costs on our butylene-based raw materials. Sequentially,
average raw material costs increased 2% over the fourth quarter of 2000. We
believe raw material costs may begin to decline in the second quarter of 2001,
although we believe they will remain above 2000 average levels throughout the
remainder of 2001.
Gross profit (net sales less cost of sales) for the first quarter of 2001
decreased $8.2 million, or 6%, compared with the same 2000 period. Although
higher product selling prices completely offset the impact of higher real raw
material costs, unfavorable currency and higher utility costs caused gross
profit to decline. Approximately 83% of the decrease in gross profit was
attributable to the fluid technologies for transportation segment due to the
factors mentioned above. Our gross profit percentage (gross profit divided by
net sales) decreased to 26.2% in the first quarter of 2001 compared to 28.7% in
the first quarter of 2000 for the same reasons. Sequentially, the percentage
increased from 25.6% in the fourth quarter of 2000.
Selling and administrative expenses increased by $1.2 million, or 3%, for the
first quarter of 2001 compared with the same period of 2000. Two-thirds of the
increase in selling and administrative expenses was due to the impact of
acquisitions.
Our research, testing and development expenses (technology expenses) increased
$3.8 million, or 11%, for the first quarter of 2001 compared with 2000 because
of high levels of testing for the new U.S. passenger car motor oil technical
standard, GF-3. We expect continued high levels of GF-3 spending through the
second quarter of 2001 as we complete customer approvals.
The change in other income (expense) unfavorably affected pre-tax income by $2.2
million for the first quarter of 2001 compared to the first quarter of 2000
principally due to higher goodwill amortization, lower equity earnings of
affiliated companies and an increase in currency translation and transaction
losses.
Interest income decreased $.5 million for the first quarter of 2001 compared to
the first quarter of 2000 because of a lower level of cash investments in the
first quarter of 2001. Interest expense decreased $.7 million for the first
quarter of 2001 compared to the first quarter of 2000 principally because of
lower interest rates due to the interest rate swap agreements we entered into
during the first half of 2000.
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THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
As a result of the above factors, our income before income taxes for the first
quarter of 2001 decreased 36% to $28.3 million, as compared to $43.9 million for
the first quarter of 2000. Segment operating profit before tax, which excludes
interest expense, decreased $9.5 million, or 24%, for fluid technologies for
transportation for the same reasons that caused the decline in consolidated
gross profit as described above. Segment operating profit before tax decreased
$6.3 million, or 76%, for fluid technologies for industry because of weak demand
in our industrial additives product group and spending to commercialize PuriNOx
and other products in our performance systems product group.
We had an effective tax rate of 34.5% for the first quarter of 2001 compared to
31.4% for the first quarter of 2000. The higher effective tax rate, which
unfavorably impacted first quarter earnings by $.02 per share, was primarily due
to the U.S. tax benefit from charitable contributions of technology made in 2000
that were not repeated in 2001.
Changes in currency exchange rates during the first quarter of 2001 had an
unfavorable effect on net income per share of $.07 as compared to exchange rates
in effect during the first quarter of 2000. This was the result of the
strengthening of the U.S. dollar against most currencies since the first quarter
of 2000, primarily the Euro and the Japanese Yen.
Primarily as a result of the above factors, our net income for the first quarter
of 2001 decreased 39% to $18.5 million ($.36 per share) as compared to $30.1
million ($.55 per share) for the first quarter of 2000.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
------------------------------------------------
Cash provided from operating activities was $14.7 million for the first quarter
of 2001 as compared with $24.0 million for the first quarter of 2000. The
decrease was caused principally by the reduction in net income compared to the
first quarter of 2000.
Our capital expenditures in the first three months of 2001 were $15.9 million as
compared with $17.8 million for same period in 2000. We estimate capital
spending for the full year 2001 will be $90 million to $95 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.
As part of our share repurchase program, during the first quarter of 2001 we
repurchased approximately 655,000 of our shares for $20.0 million. For the
second quarter we expect to continue repurchasing shares up to a maximum of $20
million, although the level of repurchases will depend on the timing of any
acquisitions and the level of our operating cash flow during the quarter.
Our net debt to capitalization ratio at March 31, 2001 was 30.4%. 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.
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THE LUBRIZOL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Primarily as a result of these activities and the payment of dividends, our
balance of cash and short-term investments decreased $34.0 million at March 31,
2001 compared with December 31, 2000.
Our financial position remains strong with a ratio of current assets to current
liabilities of 2.6 to 1 at March 31, 2001, the same as at December 31, 2000. We
believe our existing credit facilities, internally generated funds and ability
to obtain additional financing, if desired, will be sufficient to meet our
future capital needs.
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 $.8 million remains as an accrued
liability at March 31, 2001, for severance payments to 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 costs 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 annual report:
- 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;
- the effect on our business resulting from economic and political uncertainty
within the Asia-Pacific and Latin American regions;
- the lubricant additive demand in developing regions such as China and India,
which geographic areas are an announced focus of our activities;
- 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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THE LUBRIZOL CORPORATION
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
- 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;
- our success at continuing to develop proprietary technology to meet or exceed
new industry performance standards and individual customer and original
equipment manufacturers' expectations;
- 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;
- our ability to continue to reduce complexities and conversion costs and
modify our cost structure to maintain and enhance our competitiveness;
- our success in strengthening relationships and growing business with our
largest customers, and retaining the business of these customers over
extended time periods;
- our ability to identify, complete and integrate acquisitions for profitable
growth;
- the potential negative impact on product pricing and volume demand from the
consolidation of finished lubricant marketers;
- the degree of competition resulting from lubricant additive industry
over-capacity;
- the cost, availability and quality of raw materials, including
petroleum-based products;
- the cost and availability of energy, including natural gas and electricity;
- 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;
- the extent to which we achieve market acceptance of our PuriNOx low emission,
water blend fuel product;
- 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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THE LUBRIZOL CORPORATION
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) On February 1, 2001, 235 common shares were issued in a
private placement transaction exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2)
of that Act. The company issued the shares to the widow of a
former director pursuant to a deferred compensation plan for
directors.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(10)(g)* The Lubrizol Corporation Executive Death Benefit
Plan.
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, the Lubrizol
Corporation filed a Current Report on Form 8-K dated February
2, 2001, reporting under "Item 5 - Other Events," reclassified
information in accordance with a newly effective
accounting rule for shipping and handling fees and costs.
Signatures
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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: May 11, 2001
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