-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oi0ReY/Spr2YAOS3N9gu7s1RzOntSqzc1QdDcXSWeDt98luShl+cj3g2gGyWmsAk JXxrLUisPgRVoxmdaBkLUA== 0000950152-01-503656.txt : 20010810 0000950152-01-503656.hdr.sgml : 20010810 ACCESSION NUMBER: 0000950152-01-503656 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBRIZOL CORP CENTRAL INDEX KEY: 0000060751 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] 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: 1702392 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 l89598ae10-q.txt LUBRIZOL CORPORATION 10-Q/QTR END 6-30-01 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. 2 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. 2 3 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. 3 4 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. 4 5 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 ======== ======= ======== ========
5 6 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. 6 7 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. 7 8 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. 8 9 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. 9 10 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 10 11 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. 11 12 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 12 13 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. 13 14 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; 14 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. 15 16 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. 16 17 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 17 EX-10.H 3 l89598aex10-h.txt EXHIBIT 10(H) - STOCK INCENTIVE PLAN 1 Exhibit (10)(h) THE LUBRIZOL CORPORATION 1991 STOCK INCENTIVE PLAN (As Amended April 23, 2001) SECTION 1. PURPOSE. The purposes of The Lubrizol Corporation 1991 Stock Incentive Plan are to encourage selected employees of The Lubrizol Corporation and its Subsidiaries and directors of the Company to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of shareholders, and to enhance the ability of the Company and its Subsidiaries to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, or Stock Award granted pursuant to the provisions of the Plan. (b) "Award Agreement" means a written document evidencing any Award granted hereunder, signed by the Company and delivered to the Participant or Outside Director, as the case may be. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means a committee of not less than three (3) Outside Directors of the Board, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3(d)(3) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule or statute. (f) "Company" means The Lubrizol Corporation. (g) "Employee" means any employee of the Company or of any Subsidiary. (h) "Fair Market Value" means the average of the high and low price of a Share on the New York Stock Exchange on the Grant Date (in the case of a Grant), or any other relevant date. (i) "Grant Date" means the date on which the Board approves the grant of an Option, Stock Appreciation Right, Restricted Stock Award, or Stock Award, and, with respect to an Option granted to an Outside Director pursuant to Section 10, the date of the Shareholders' Meeting on which such Option is granted. 2 THE LUBRIZOL CORPORATION Page 2 1991 STOCK INCENTIVE PLAN (j) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422A of the Code or any successor provision thereto. (k) "Non-Statutory Stock Option" means an Option that is not intended to be an Incentive Stock Option. (l) "Option" means an option to purchase Shares granted hereunder. (m) "Option Price" means the purchase price of each Share under an Option. (n) "Outside Director" means a member of the Board who is not an employee of the Company or of any Subsidiary. (o) "Participant" means an Employee who is selected by the Committee to receive an Award under the Plan. (p) "Plan" means The Lubrizol Corporation 1991 Stock Incentive Plan. (q) "Restricted Stock Award" means an award of restricted Shares under Section 8 hereof. (r) "Restriction Period" means the period of time specified in an Award Agreement during which the following conditions remain in effect: (i) certain restrictions on the sale or other disposition of Shares awarded under the Plan, (ii) subject to the terms of the applicable Award Agreement, the continued employment of the Participant, and (iii) such other conditions as may be set forth in the applicable Award Agreement. (s) "Shareholders' Meeting" means the annual meeting of shareholders of the Company in each year. (t) "Shares" means common shares without par value of the Company. (u) "Stock Appreciation Right" means the right to receive a payment in cash or in Shares, or in any combination thereof, from the Company equal to the excess of the Fair Market Value of a stated number of Shares at the exercise date over a fixed price for such Shares. (v) "Stock Award" means the grant of unrestricted Shares under the Plan. (w) "Subsidiary" means a corporation which is at least 80% owned, directly or indirectly, by the Company. (x) "Voting Stock" means the then-outstanding securities entitled to vote generally in the election of directors of the Company. 3 THE LUBRIZOL CORPORATION Page 3 1991 STOCK INCENTIVE PLAN SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. Members of the Committee shall be appointed by and serve at the pleasure of the Board, and may resign by written notice filed with the Chairman of the Board or the Secretary of the Company. A vacancy on the Committee shall be filled by the appointment of a successor member by the Board. Subject to the express provisions of this Plan, the Committee shall have conclusive authority to select Employees to be Participants for Awards and determine the type and number of Awards to be granted, to construe and interpret the Plan, any Award granted hereunder, and any Award Agreement entered into hereunder, and to establish, amend, and rescind rules and regulations for the administration of this Plan and shall have such additional authority as the Board may from time to time determine to be necessary or desirable. Notwithstanding the foregoing, the Committee shall not have discretion with respect to Options granted to Outside Directors pursuant to Section 10 such as to prevent any Award granted under this Plan from meeting the requirements for exemption from Section 16(b) of the Exchange Act, as set forth in Rule 16b-3 thereunder or any successor rule or statute. SECTION 4. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in the Plan, the total number of Shares available under the Plan in each calendar year shall be one percent (1%) of the total outstanding Shares as of the first day of any year for which the Plan is in effect; provided that such number shall be increased in any year by the number of Shares available for grant hereunder in previous years but not covered by Awards granted hereunder in such previous years; provided further, that a total of no more than two million (2,000,000) Shares shall be available for the grant of Incentive Stock Options under the Plan; and provided further, that no more than four hundred thousand (400,000) Shares shall be available for grant to any Participant during a calendar year. Settlement of an Award, whether by the issuance of Shares or the payment of cash, shall not be deemed to be the grant of an Award hereunder. In addition, any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the Shares available for grants under the Plan. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares or treasury shares. If any Shares subject to any Award granted hereunder are forfeited or if such Award otherwise terminates without the issuance of such Shares or payment of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan as if such Shares had not been subject to an Award. (b) The number of Shares which remain available for grant pursuant to this Plan, together with Shares subject to outstanding Awards, at the time of any change in the Company's capitalization, including stock splits, stock dividends, mergers, reorganizations, consolidations, recapitalizations, or other changes in corporate structure, shall be appropriately and proportionately adjusted to reflect such change in capitalization. SECTION 5. ELIGIBILITY. Any Employee shall be eligible to be selected as a Participant. 4 THE LUBRIZOL CORPORATION Page 4 1991 STOCK INCENTIVE PLAN SECTION 6. STOCK OPTIONS. Non-Statutory Stock Options and Incentive Stock Options may be granted hereunder to Participants either separately or in conjunction with other Awards granted under the Plan. Any Option granted to a Participant under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. (a) OPTION PRICE. The purchase price per Share under an Option shall be fixed by the Committee in its sole discretion; provided that the purchase price shall not be less than one hundred percent (100%) of the Fair Market Value of the Share on the Grant Date of the Option. Payment of the Option Price may be made in cash, Shares, or a combination of cash and Shares, as provided in the Award Agreement relating thereto. (b) OPTION PERIOD. The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Incentive Stock Option shall be exercisable after the expiration of ten years from the Grant Date; and provided further, that no reload Option granted to a Participant pursuant to the terms of Section 6(e) shall be exercisable after the expiration of the term of the Option that gave rise to the grant of such reload Option. (c) EXERCISE OF OPTION. Options shall be exercisable to the extent of fifty percent (50%) of the Shares subject thereto after one year from the Grant Date, seventy-five percent (75%) of such Shares after two years from the Grant Date, and one hundred percent (100%) of such Shares after three years from the Grant Date, subject to any provisions respecting the exercisability of Options that may be contained in an Award Agreement; provided that a reload Option granted to a Participant pursuant to the terms of Section 6(e) shall be exercisable to the extent of one hundred percent (100%) of such Shares from the Grant Date. (d) INCENTIVE STOCK OPTIONS. The aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options held by any Participant which are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company, of any parent corporation, or Subsidiary) shall not exceed $100,000 or, if different, the maximum limitation in effect at the Grant Date under Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. (e) RELOAD. In the event that a Participant or an Outside Director exercises an Option other than a reload Option granted pursuant to this Section 6(e), and pays some or all of the Option Price with Shares, the Committee in its discretion may grant to such Participant or Outside Director a reload Option to purchase the number of Shares equal to the number of Shares used as payment of the Option Price, subject to the limitations described below. Options granted to Participants pursuant to this Section 6(e) shall have terms and conditions as described in this Section 6 and Options granted to Outside Directors pursuant to this Section 6(e) shall have terms and conditions as described in 5 THE LUBRIZOL CORPORATION Page 5 1991 STOCK INCENTIVE PLAN Section 10. Options granted pursuant to this Section 6(e) shall be of the same character (i.e., Non-Statutory Stock Options or Incentive Stock Options) as the Option that is exercised to give rise to the grant of the reload Option, provided that if an Incentive Stock Option cannot be granted under this Section 6(e) in compliance with Section 422A of the Code, then a Non-Statutory Stock Option shall be granted in lieu thereof. Options may be granted pursuant to this Section 6(e) only to the extent that the number of Shares covered by such Option grants does not, when added to the number of Shares covered by Awards previously granted during such calendar year, exceed the limitation set forth in Section 4(a). Shares received upon the exercise of an Option granted pursuant to this Section 6(e) may not be sold or otherwise transferred (i) by a Participant until such Participant has met the Share ownership guideline for such Participant, if any, set by the Company, and then only to the extent that the Participant continues to meet such ownership guideline immediately after such sale, or (ii) by an Outside Director until such Outside Director ceases to be an Outside Director, provided, however, that a Participant or Outside Director may use such Shares as payment of the Option Price of Options granted under this Plan to the extent permitted by the applicable Award Agreement, in which case a number of the Shares (equal to the number of Shares used for such payment) purchased by the exercise of such Options also shall be subject to the same restrictions upon transferability. Certificates for such Shares with a transferability restriction shall bear a legend referencing such restriction. SECTION 7. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted hereunder to Participants either separately or in conjunction with other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each Participant. Any Stock Appreciation Right related to a Non-Statutory Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted. Any Stock Appreciation Right related to an Option shall be exercisable only to the extent the related Option is exercisable. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option. Similarly, upon exercise of a Stock Appreciation Right as to some or all of the Shares covered by a related Option, the related Option shall be canceled automatically to the extent of the Stock Appreciation Rights exercised, and such Shares shall not thereafter be eligible for grant under Section 4(a). The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. RESTRICTED STOCK AWARDS. (a) ISSUANCE. Restricted Stock Awards may be issued hereunder to Participants, either separately or in conjunction with other Awards granted under the Plan. Each Award under this Section 8 shall be evidenced by an Award Agreement between the Participant and the Company which shall specify the vesting schedule, any rights of acceleration and 6 THE LUBRIZOL CORPORATION Page 6 1991 STOCK INCENTIVE PLAN such other terms and conditions as the Board shall determine, which need not be the same with respect to each Participant. (b) REGISTRATION. Shares issued under this Section 8 shall be evidenced by issuance of a stock certificate or certificates registered in the name of the Participant bearing the following legend and any other legend required by, or deemed appropriate under, any federal or state securities laws: The sale or other transfer of the common shares represented by this certificate is subject to certain restrictions set forth in the Award Agreement between __________________ (the registered owner) and The Lubrizol Corporation dated _______________, under The Lubrizol Corporation 1991 Stock Incentive Plan. A copy of the Plan and Award Agreement may be obtained from the Secretary of The Lubrizol Corporation. Unless otherwise provided in the Award Agreement between the Participant and the Company, such certificates shall be retained by the Company until the expiration of the Restriction Period. Upon the expiration of the Restriction Period, the Company shall (i) cause the removal of the legend from the certificates for such Shares as to which a Participant is entitled in accordance with the Award Agreement between the Participant and the Company and (ii) release such Shares to the custody of the Participant. (c) FORFEITURE. Except as otherwise determined by the Committee at the Grant Date, upon termination of employment of the Participant for any reason during the Restriction Period, all Shares still subject to restriction shall be forfeited by the Participant and retained by the Company; provided that in the event of a Participant's retirement, permanent disability, death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such Participant's Shares. In such case, unrestricted Shares shall be issued to the Participant at such time as the Committee determines. (d) RIGHTS AS SHAREHOLDERS. At all times during the Restriction Period, Participants shall be entitled to full voting rights with respect to all Shares awarded under this Section 8 and shall be entitled to dividends with respect to such Shares. SECTION 9. STOCK AWARDS. Awards of Shares may be granted hereunder to Participants, either separately or in conjunction with other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine (i) the Employees to whom such Awards shall be granted, (ii) the time or times at which such Awards shall be granted, (iii) the number of Shares to be granted pursuant to such Awards, and (iv) all other conditions of the Awards. Such conditions may include issuance of Shares at the time of the Award is granted or issuance of Shares at a time or times subsequent to the time the Award is granted, which subsequent times may be specifically established by the Committee and/or may be determined by reference to the satisfaction of one or more performance measures specified by the Committee. The provisions of stock awards need not be the same with respect to each Participant. 7 THE LUBRIZOL CORPORATION Page 7 1991 STOCK INCENTIVE PLAN SECTION 10. OUTSIDE DIRECTORS' OPTIONS. On the close of business on the date of each Shareholders' Meeting, each Outside Director shall automatically be granted an Option to purchase 2,500 Shares. In addition, on April 23, 2001, each Outside Director shall automatically be granted an Option to purchase 2,500 Shares. All Options granted under this Section 10 shall be Non-Statutory Stock Options and shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as are contained in the applicable Award Agreement. (a) OPTION PRICE. The purchase price per Share shall be one hundred percent (100%) of the Fair Market Value of the Share on the Grant Date. Payment of the Option Price may be made in cash, Shares, or a combination of cash and Shares, as provided in the Award Agreement in effect from time to time. (b) OPTION PERIOD. The term during which Options granted under this Section 10 shall be exercisable shall be ten (10) years from the Grant Date; provided that no reload Option granted to an Outside Director pursuant to the terms of Section 6(e) shall be exercisable after the expiration of the term of the Option that gave rise to the grant of such reload Option. (c) EXERCISE OF OPTIONS. Subject to the provisions of this Section 10(c), Options shall be exercisable to the extent of fifty percent (50%) of the Shares subject thereto after one year from the Grant Date, seventy-five percent (75%) of such Shares after two years from the Grant Date, and one hundred percent (100%) of such Shares after three years from the Grant Date; provided that a reload Option granted to an Outside Director pursuant to the terms of Section 6(e) shall be exercisable to the extent of one hundred percent (100%) of such Shares from the Grant Date. Options may be exercised by an Outside Director during the period that the Outside Director remains a member of the Board and under the circumstances described below. (i) If an Outside Director retires under a retirement plan or policy of the Company, then Options held by such Outside Director may be exercised for a period of thirty-six (36) months following retirement, to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise such Options at the date of retirement), provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (ii) In the event of the death of an Outside Director while serving as a director, Options held by such Outside Director may be exercised for a period of twelve (12) months following the date of death, (A) to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise the Option at the date of death), and (B) only by the executor or administrator of the Outside Director's estate or by the person or persons to whom the Outside Director's rights under the Options shall pass by the Outside Director's will or the laws of descent and 8 THE LUBRIZOL CORPORATION Page 8 1991 STOCK INCENTIVE PLAN distribution, provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (iii) If an Outside Director shall cease to be a director for any reason other than retirement under a retirement plan or policy of the Company or death, Options held by such Outside Director may be exercised for a period of three (3) months following such cessation, to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise such Options at the date of such cessation), provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (iv) In the event an Outside Director, after ceasing to be a director, dies during and subject to one of the periods described in Section 10(c)(i) or (iii), while possessed of unexercised Options, the executor or administrator of the Outside Director's estate, or the person entitled by will or the applicable laws of descent and distribution, may exercise such Options held by the Outside Director at the time of the Outside Director's death during the period that is applicable, as follows: (A) If Section 10(c)(i) was in effect, for one year after the Outside Director's death; (B) If Section 10(c)(iii) was in effect, for three months after the Outside Director's death; provided that, in no event shall the Option be exercisable after the expiration of the Option period provided in Section 10(b). SECTION 11. CHANGE IN CONTROL. Notwithstanding the provisions of Sections 6(c) and 10(c), Options shall become exercisable with respect to 100% of the Shares upon the occurrence of any Change in Control (as hereafter defined) of the Company; except that no Options shall be exercised prior to the end of six months from the Grant Date. Notwithstanding the provisions of Section 8 and the applicable Award Agreement, any restricted Shares shall be 100% vested and without any restrictions upon the occurrence of any Change in Control of the Company. For all purposes of the Plan, a "Change in Control" shall have occurred if any of the following events shall occur: (a) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; 9 THE LUBRIZOL CORPORATION Page 9 1991 STOCK INCENTIVE PLAN (b) The Company sells all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale; (c) There is a report filed on Schedule 13D or Schedule 14D-l (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the Voting Stock; (d) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (e) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors of the Company cease for any reason to constitute at least a majority thereof, provided, however, that for purposes of this Section 11(e), each Director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two thirds of the Directors of the Company (or a committee thereof) then still in office who were Directors of the Company at the beginning of any such period will be deemed to have been a Director of the Company at the beginning of such period. Notwithstanding the foregoing provisions of Section 11(c) or 11(d) hereof, unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (iii) any employee stock ownership plan or any other employee benefit plan sponsored by the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-l, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. SECTION 12. AMENDMENTS AND TERMINATION. The Board may, at any time, amend, alter or terminate the Plan, but no amendment, alteration, or termination shall be made that would impair the rights of an Outside Director or Participant under an Award theretofore granted, without the Outside Director's or Participant's consent, or that without the approval of the shareholders would: 10 THE LUBRIZOL CORPORATION Page 10 1991 STOCK INCENTIVE PLAN (a) except as is provided in Sections 4(b) and 13(c) of the Plan, increase the total number of Shares which may be issued under the Plan; (b) change the class of employees eligible to participate in the Plan; or (c) materially increase the benefits accruing to Participants under the Plan; so long as such approval is required by law or regulation; provided that, as long as required by law or regulation, the provisions of Section 10 hereof may not be amended or altered more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. The Committee may amend the terms of any Award heretofore granted (except, with respect to Options granted pursuant to Section 10 hereof, only to the extent not inconsistent with Rule 16b-3 under the Exchange Act or any successor rule or statute), prospectively or retroactively, but no such amendment shall impair the rights of any Participant or Outside Director without his consent. SECTION 13. GENERAL PROVISIONS. (a) No Option, Stock Appreciation Right, or Restricted Stock Award shall be assignable or transferable by a Participant or an Outside Director otherwise than by will or the laws of descent and distribution, and Options and Stock Appreciation Rights may be exercised during the Participant's or Outside Director's lifetime only by the Participant or the Outside Director or, if permissible under applicable law, by the guardian or legal representative of the Participant or Outside Director. (b) The term of each Award shall be for such period of months or years from its Grant Date as may be determined by the Committee or as set forth in the Plan; provided that in no event shall the term of any Incentive Stock Option or any Stock Appreciation Right related to any Incentive Stock Option exceed a period of ten (10) years from the Grant Date. (c) In the event of a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that Shares are changed into or become exchangeable for a larger or smaller number of Shares, thereafter the number of Shares subject to outstanding Awards granted to Participants and to any Shares subject to Awards to be granted to Participants pursuant to this Plan shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of Shares by reason of such change in corporate structure; provided, however, that the number of Shares shall always be a whole number, and the purchase price per Share of any outstanding Options shall, in the case of an increase in the number of Shares, be proportionately reduced, and, in the case of a decrease in the number of Shares, shall be proportionately increased. The above adjustment shall also apply to any Shares subject to Options granted to Outside Directors pursuant to the provisions of Section 10. 11 THE LUBRIZOL CORPORATION Page 11 1991 STOCK INCENTIVE PLAN (d) No Employee shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan. (e) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an Award Agreement, and otherwise complied with the then applicable terms and conditions. (f) All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (g) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, Participants shall not be required, under the Plan, to make any payment other than the rendering of services. (h) The Company shall be authorized to withhold from any payment under the Plan, whether such payment is in Shares or cash, all withholding taxes due in respect of such payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (i) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (j) Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor shall the Plan confer upon any Participant any right to continued employment with the Company or any Subsidiary. SECTION 14. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall be effective as of April 22, 1991, and shall continue in effect until terminated by the Board. -----END PRIVACY-ENHANCED MESSAGE-----