-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, e+SooTwVHEwfhIN3xMlIVm7eWZ/UfJyIPI22novklNvNWLQrm+VVI8iG3FqRg4L8 F/Mxqd8asEqrYcWzV8axfg== 0000060751-94-000016.txt : 19940819 0000060751-94-000016.hdr.sgml : 19940819 ACCESSION NUMBER: 0000060751-94-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBRIZOL CORP CENTRAL INDEX KEY: 0000060751 STANDARD INDUSTRIAL CLASSIFICATION: 2890 IRS NUMBER: 340367600 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05263 FILM NUMBER: 94543562 BUSINESS ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 BUSINESS PHONE: 2169434200 MAIL ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 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) (216) 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 1994: 65,596,721 PART I. FINANCIAL INFORMATION THE LUBRIZOL CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars)
June 30 December 31 1994 1993 ---------- ----------- ASSETS Cash and short-term investments....................... $ 19,950 $ 24,220 Receivables........................................... 269,051 225,603 Inventories: Finished products................................... 95,872 89,817 Products in process................................. 90,465 92,067 Raw materials and supplies.......................... 89,556 102,653 ---------- ---------- 275,893 284,537 ---------- ---------- Other current assets.................................. 31,991 34,553 ---------- ---------- Total current assets............... 596,885 568,913 Property and equipment - net.......................... 489,254 437,635 Investments in nonconsolidated companies.............. 180,724 103,246 Intangible and other assets........................... 74,758 72,786 ---------- ---------- TOTAL.......................... $1,341,621 $1,182,580 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt....................................... $ 47,452 $ 14,590 Accounts payable...................................... 115,700 116,775 Income taxes and other current liabilities............ 95,958 92,883 ---------- ---------- Total current liabilities........... 259,110 224,248 Long-term debt........................................ 58,257 55,298 Accumulated postretirement benefit obligation......... 93,823 89,423 Noncurrent liabilities................................ 68,039 70,022 Deferred income taxes................................. 33,927 11,353 ---------- ---------- Total liabilities................... 513,156 450,344 ---------- ---------- Contingencies and commitments Shareholders' equity: Preferred stock without par value - unissued Common Shares without par value: Authorized 120,000,000 shares Outstanding - 65,744,715 shares as of June 30, 1994 after deducting 20,415,179 treasury shares, 66,590,028 shares as of December 31, 1993 after deducting 19,605,866 treasury shares........ 82,943 80,830 Retained earnings................................... 711,796 683,269 Unrealized gain on marketable securities............ 47,092 Accumulated translation adjustment.................. (13,366) (31,863) ---------- ---------- Total shareholders' equity......... 828,465 732,236 ---------- ---------- TOTAL.......................... $1,341,621 $1,182,580 ========== ========== Amounts shown are unaudited.
THE LUBRIZOL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Data)
Second Quarter Six Months Ended June 30 Ended June 30 ------------------- ---------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Net sales........................... $407,163 $392,236 $804,979 $757,816 Royalties and other revenues........ 1,341 2,082 3,218 3,842 -------- -------- -------- -------- Total revenues............ 408,504 394,318 808,197 761,658 Cost of sales....................... 272,442 270,611 545,048 518,023 Selling and administrative expenses. 39,994 40,298 79,031 77,892 Research, testing and development expenses.......................... 38,665 43,147 78,790 80,764 -------- -------- -------- -------- Total cost and expenses... 351,101 354,056 702,869 676,679 Gain on sale of investments......... 11,875 23,387 Other income - net.................. 1,876 5,540 6,481 12,986 Interest income..................... 1,271 952 1,910 1,616 Interest expense.................... (661) (1,323) (1,494) (2,800) -------- -------- -------- -------- Income before income taxes.......... 71,764 45,431 135,612 96,781 Provision for income taxes.......... 22,632 14,089 43,199 30,008 -------- -------- -------- -------- Income before accounting changes.... 49,132 31,342 92,413 66,773 Cumulative effect of accounting changes............................. (39,375) -------- -------- -------- -------- Net income.......................... $ 49,132 $ 31,342 $ 92,413 $ 27,398 ======== ======== ======== ======== Per Common Share: Income before accounting changes.. $ .74 $ .46 $1.40 $ .98 Cumulative effect of accounting changes........................... (.58) ----- ----- ----- ----- Net income per share................ $ .74 $ .46 $1.40 $ .40 ===== ===== ===== ===== Dividends per share................. $ .22 $ .21 $ .44 $ .42 ===== ===== ===== ===== Average number of shares outstanding 65,953 67,995 66,230 68,209 Amounts shown are unaudited.
THE LUBRIZOL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
Six Months Ended June 30 -------------------------- 1994 1993 --------- --------- Cash provided from (used for): Operating activities: Received from customers............................... $ 769,428 $ 733,418 Paid to suppliers and employees....................... (670,708) (635,245) Income taxes paid..................................... (32,531) (24,222) Interest and dividends received....................... 2,465 2,811 Interest paid......................................... (1,306) (2,553) Other - net........................................... 1,463 2,085 --------- --------- Total operating activities.................. 68,811 76,294 Investing activities: Proceeds from sale of investments.................... 24,978 - Capital expenditures.................................. (70,318) (53,620) Acquisition........................................... - (25,581) Other - net........................................... 712 241 --------- --------- Total investing activities (44,628) (78,960) Financing activities: Short-term borrowings................................. 32,338 27,553 Long-term borrowings.................................. 102 17,016 Long-term debt repayment.............................. (1,128) - Dividends paid........................................ (29,217) (28,694) Common shares purchased, net of options exercised..... (32,557) (25,731) --------- --------- Total financing activities.................. (30,462) (9,856) Effect of exchange rate changes on cash............... 2,009 313 --------- --------- Net decrease in cash and short-term investments....... (4,270) (12,209) Cash and short-term investments at the beginning of period................................ 24,220 76,593 --------- --------- Cash and short-term investments at the end of period...................................... $ 19,950 $ 64,384 ========= ========= Amounts shown are unaudited.
THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements June 30, 1994 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, 1994 and December 31, 1993, and the results of operations and the cash flows for the six months ended June 30, 1994 and 1993. 2. The company adopted SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. SFAS 115 requires that certain investments in debt and equity securities be reported at fair value, rather than historical cost. Certain of the company's marketable equity securities, included in investments in nonconsolidated companies, are classified as available-for-sale. The effect of adopting SFAS 115 at January 1, 1994 was to increase investments in nonconsolidated companies by $99.2 million, increase shareholders' equity by $64.5 million and increase deferred tax liabilities by $34.7 million. At June 30, 1994, investments classified as available-for-sale had a cost basis of $5.3 million and an aggregate fair value of $77.8 million resulting in unrealized gains of $72.5 million or $47.1 million after tax. There were no unrealized losses. Investments in nonconsolidated companies also includes investments in certain marketable securities not affected by SFAS 115. The market value of these investments exceed the book carrying value by $34.1 million at June 30, 1994. 3. The following is a reconciliation of net income to net cash provided by operating activities: Six Months Ended June 30 --------------------- 1994 1993 -------- -------- (in thousands of dollars) Net income $ 92,413 $ 27,398 Depreciation and amortization 30,496 30,626 Deferred income taxes (942) (1,663) Undistributed earnings of nonconsolidated companies (5,785) (10,261) Gain on sale of investments (23,387) Change in current assets and liabilities: Accounts receivable (38,769) (29,235) Inventory 17,203 (4,724) Accounts payable and accrued expenses 3,459 19,397 Other current assets (1,922) 3,322 Cumulative effect of changes in accounting principles 39,375 Other items - net (3,955) 2,059 -------- -------- Net cash provided by operating activities $ 68,811 $ 76,294 ======== ======== THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements June 30, 1994 4. On November 18, 1993, a federal court jury in Houston, Texas, awarded Exxon Corporation $48 million in damages in a patent case brought, in 1989, against the company. The damages award relates to a December 1992 verdict that the company willfully infringed an Exxon patent pertaining to an oil soluble copper additive component. On February 18, 1994, the trial court judge doubled the damages amount and awarded prejudgment interest, court costs and additional attorneys' fees to Exxon. The total amount of the judgment, including previously awarded attorneys' fees, is $129 million. The company has obtained a bond to stay enforcement of the judgment pending the company's appeal discussed below. The original December 1992 finding of willful infringement, as well as the jury's determination that the patent is valid, remains on appeal to the United States Court of Appeals for the Federal Circuit Court in Washington, D.C., which has jurisdiction over all patent cases. Oral arguments on this appeal were held on December 6, 1993, and a decision may be forthcoming in 1994. This decision could reverse or modify the judgment against the company. In addition, the company has appealed the February 1994 damages award to the same court in Washington, D.C. The company's management continues to believe that it has not infringed the Exxon patent and that the patent is invalid. Based on the advice of legal counsel, management believes that the December 1992 trial court judgment will not be upheld on appeal. Therefore, no amount related to the judgement has been recorded in the company's financial statements. The company has prevailed in a separate case brought in Canada against Exxon's Canadian affiliate, Imperial Oil, Ltd., for infringement of the company's patent pertaining to dispersant, the largest additive component used in motor oils. A 1990 trial court verdict in favor of the company regarding the issue of liability was upheld by the Federal Court of Appeals of Canada in December 1992, and in October 1993, the Supreme Court of Canada dismissed Imperial Oil's appeal of the Court of Appeals decision. The case has returned to the trial court for an assessment of damages. A reasonable estimation of the company's potential recovery cannot be made at this time. 5. Effective January 1, 1993, the company changed its method of accounting for postretirement benefits to conform with SFAS 106 and its method of accounting for income taxes to conform with SFAS 109. The cumulative effect at January 1, 1993 of these accounting changes was to increase net income by $12.1 million for the change in accounting for income taxes and to decrease net income by $51.5 million for the change in accounting for postretirement benefits. THE LUBRIZOL CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Revenues increased compared to the previous year's periods by $14.2 million or 4% for the second quarter and $46.5 million or 6% for the six months ended June 30, 1994. Volume increased 2% for the quarter and 5% for the six months ended June 30,1994. Volume increased 2% in both the North American and international markets for the second quarter of 1994 compared to the second quarter of 1993. North American volume decreased 2% for the six months ended June 30, 1994 while international volume increased 9%. The volume increase in the international markets was primarily due to spot business in the Middle East. Price levels for higher performing products introduced late in 1993 to meet new passenger car motor oil standards in the U.S. markets combined with price increases in the first quarter of 1994, resulted in higher average selling prices in the North Anerican market which were largely offset by spot business in the Middle East, which carries lower average selling prices, and a negative foreign currency impact in Western Europe. Price increases announced in the first half of 1994 in the international markets are expected to provide a slightly favorable effect on consolidated revenues during the last half of the year. Gross profit (sales less cost of sales) increased 11% to $134.7 million for the second quarter and 8% to $259.9 million for the first six months of 1994. Gross profit as a percentage of sales increased from 31.0% to 33.1% for the second quarter and from 31.6% to 32.3% for the six months ended June 30, 1994. These improvements were primarily a result of the higher selling prices combined with stable material costs and manufacturing costs per unit. Late in the second quarter, raw material costs began increasing and are expected to continue to increase further during the second half of 1994. Even though the price increases in international markets will have a slightly positive affect, the higher material costs may result in a decrease in the gross profit percentage for the second half as compared to the first half of 1994. Selling and administrative expenses for the six months ended June 30, 1994 increased $1.1 million or 1% and decreased $.3 million or 1% for the second quarter compared to the previous year's periods. The modest increase for the six months and decrease for the second quarter were a result of fewer employees due to early retirements related to the company's realignment initiative, a focus on reduced spending and lower legal expenses. Research, testing and development expenses (technology expenses) decreased $4.5 million or 10% for the quarter and $2.0 million or 2% for the six month period. This decrease is primarily attributable to completion of testing required for passenger car motor oil specification upgrades. Total selling, administrative and technology expenses are expected to increase in the second half of 1994 over first half levels, primarily to complete the new heavy duty diesel specification upgrade testing, but total expenses in the second half of 1994 are still expected to be less than the second half of 1993. THE LUBRIZOL CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS (Continued) The company sold approximately 250,000 shares of Genentech, Inc. common stock in each of the first two quarters of 1994 resulting in pretax gains of $11.9 million (12 cents per share) for the second quarter and $23.0 million (23 cents per share) for the first six months. The company owned 1.5 million Genentech shares at June 30, 1994, and management anticipates continuing to sell Genentech common stock during 1994. The change in other income is primarily a result of equity earnings and related dividend income from the company's investment in Mycogen Corporation and its agribusiness joint venture with Mycogen. Compared to 1993, such equity earnings and related dividend income in 1994 were $1.4 million less for the second quarter and $4.6 million less for the six months as a result of a lower ownership percentage in the agribusiness joint venture partnership. Mycogen's income is seasonal, with the majority of income recorded during the first half of the year, and losses expected to be recorded during the remainder of the year. The equity losses for the second half of 1994 are expected to be lower than the losses recorded in the second half of 1993 as a result of the company's lower agribusiness joint venture ownership percentage and anticipated reduced Mycogen losses. The company's results are affected by the strengthening or weakening of the U.S. dollar against other currencies in which the company transacts business. For the six months ended June 30, 1994, there was a net unfavorable currency effect of approximately 3 cents per share due to lower amounts when international operations were translated into U.S. dollars. Primarily as a result of the above factors, income before taxes increased $26.3 million for the second quarter and $38.8 million for the six months ended June 30, 1994 compared to the respective prior year periods. Income before accounting changes increased $17.8 million, or 57% for the second quarter and $25.6 million, or 38% for the first six months of 1994. As a result of the factors discussed above, second half earnings before the sale of Genentech are expected to be lower than the first half of 1994 but should improve significantly from a relatively weak second half of 1993. THE LUBRIZOL CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations was $68.8 million for the six months ended June 30, 1994 compared to $76.3 million in 1993. Short-term debt increased $32.3 million during this period, and proceeds from the sale of investments were $25.0 million. The cash provided by operations, the after tax proceeds from the sales of investments and the increase in short-term debt were used primarily for capital expenditures, the repurchase of 489,000 common shares of the company under its share repurchase program and the payment of dividends. Primarily, as a result of the above, cash and short-term investments declined $4.3 million to $19.9 million at June 30, 1994. The company recorded a special charge of $86.3 million in the third quarter of 1993 in connection with manufacturing rationalization and organizational realignment initiatives. Overall, these initiatives are expected to be fully implemented over approximately a three-year period. The special charge initiatives were projected to involve outlays of cash of approximately $36 million through full implementation with the remainder of the charge consisting of asset write-downs. Through June 30, 1994, cash expenditures have totaled approximately $16 million, of which $12 million was spent in 1994. The company has approximately 2 million shares remaining on its share repurchase authorization and management expects to continue its share repurchases. As described in Note 2 to the financial statements, the company adopted Statement of Financial Accounting Standards (SFAS) 115 at January 1, 1994. The effect of adopting SFAS 115 on the June 30, 1994 financial statements was to increase investments in nonconsolidated companies by $72.5 million, increase shareholders' equity by $47.1 million and increase deferred tax liabilities by $25.4 million. SFAS 115 had no effect on cash flow or net income for the quarter. The company's financial position continues to be strong with a ratio of current assets to current liabilities of 2.3 to 1 at June 30, 1994, and 2.5 to 1 at December 31, 1993. Under a currently effective shelf registration statement, the company has the ability to offer to the public up to $100 million of debt securities. Management believes the company's internally generated funds as well as its credit facilities and proceeds available from debt issuable under the shelf registration will be sufficient to meet its capital needs. THE LUBRIZOL CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations As discussed in Note 4 to the financial statements, the company is involved in patent litigation with Exxon Corporation in various countries. Determinations of liability against the company in the U.S., which is subject to appeal, and against Exxon in Canada have been made by the courts. Management is unable to predict the eventual outcomes of this litigation and, therefore, their impact on future cash flows is not known. If Exxon prevails in the U.S., management believes the company has sufficient financial resources to meet any resulting obligation and, other than a potential one- time charge against income, the litigation would not have a material adverse effect on future results of operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is a party in a case brought by Exxon Corporation and its affiliates, Exxon Chemical Patents, Inc. and Exxon Research & Engineering Company, in the Southern District of Texas, Houston Division on September 19, 1989. In December 1992, the trial jury rendered a verdict that the company willfully infringed an Exxon patent pertaining to an oil soluble copper additive component. In early 1993, the court prohibited the company from making or selling any additive packages in the United States that contained this component and awarded Exxon $18.1 million for attorneys' fees. On November 18, 1993, another jury in the same case awarded Exxon $48 million in damages. The findings of infringement and validity of the Exxon patent as well as the $18.1 million attorneys' fee award are on appeal to the United States Court of Appeals for the Federal Circuit in Washington, D.C., which has jurisdiction over all patent cases. Oral argument in this appeal was heard on December 6, 1993, and a decision may be forthcoming in 1994. On February 18, 1994, acting on a request from Exxon that the damages amount be tripled, the trial court judge doubled the damages amount and awarded prejudgment interest, court costs and additional attorneys' fees to Exxon. The total amount of the judgment, including the previously awarded attorneys' fees, is $129 million. The company has appealed the February 1994 damages award to the same court in Washington, D.C., as is considering the appeal of the original verdict. The company's management continues to believe that it has not infringed the Exxon patent and that the patent is invalid. Based on the advice of legal counsel, management believes that the December 1992 trial court judgment will not be upheld on appeal. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Corporation was held April 25, 1994. The following matters were voted on by the shareholders: 1. Election of directors: (a) Edward F. Bell. The vote was 57,456,383 shares for and 455,794 shares to withhold authority. (b) L. E. Coleman. The vote was 57,274,969 shares for and 637,209 shares to withhold authority. (c) Peggy Gordon Elliott. The vote was 57,422,419 shares for and 489,758 shares to withhold authority. (d) Ronald A. Mitsch. The vote was 57,492,057 shares for and 420,120 shares to withhold authority. PART II. OTHER INFORMATION (Continued) Item 4. Submission of Matters to a Vote of Security Holders (Continued) (e) Renold D. Thompson. The vote was 57,394,052 shares for and 518,125 shares to withhold authority. 2. A proposal to confirm the appointment of Deloitte & Touche as independent auditors. The vote was 55,967,612 shares for; 142,685 shares against and 171,144 shares abstaining. A total of 1,630,737 shares that were represented at the meeting did not exercise any of the options set forth above. 3. A proposal to adopt a shareholder proposal concerning confidential voting. The vote was 23,601,010 shares for; 31,398,303 shares against and 2,393,879 shares abstaining. A total of 518,986 shares that were represented at the meeting did not exercise any of the options set forth above. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Computation of Per Share Earnings (b) There were no reports on Form 8-K filed for the quarter ended June 30, 1994. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LUBRIZOL CORPORATION /s/Gregory P. Lieb ---------------------------- Gregory P. Lieb Chief Accounting Officer and Duly Authorized Signatory of The Lubrizol Corporation Date: August 12, 1994 EX-11 2 EXHIBIT 11 THE LUBRIZOL CORPORATION Computation of Per Share Earnings Second Quarter, 1994 The computation of primary earnings per share and fully diluted earnings per share is as follows: (In Thousands of Shares Except Per Share Data) Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1994 1993 1994 1993 ------ ------ ------ ------ Average shares outstanding for computation of primary earnings per share 65,953 67,995 66,230 68,209 Add adjustment to treat shares for options exercised as if such shares were outstanding during the entire period 54 67 123 89 Add equivalent shares for unexercised options at end of period* 505 529 545 537 ------ ------ ------ ------ Average shares outstanding for computation of fully diluted earnings per share 66,512 68,591 66,898 68,835 ====== ====== ====== ====== Primary earnings per share $.74 $.46 $1.40 $ .40 ==== ==== ===== ===== Fully diluted earnings per share $.74 $.46 $1.38 $ .40 ==== ==== ===== ===== *Computed under the "Treasury Stock Method" using the higher of quoted ending or average market price. -----END PRIVACY-ENHANCED MESSAGE-----