-----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, ISK4N+5qwNPwUfe4aZXwqgeHJCRzg9lrx6bAcUqndiqyM79eGOpzHvQ7UGSWPz0G dLsfj8+Xnzu5W+83bsjfHg== 0000950152-02-002454.txt : 20020415 0000950152-02-002454.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-002454 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05263 FILM NUMBER: 02589820 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-K 1 l93056ae10-k.txt THE LUBRIZOL CORPORATION 10-K/YEAR END 12-31-01 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 of incorporation) (I.R.S. Employer Identification No.) 29400 Lakeland Boulevard Wickliffe, Ohio 44092-2298 (Address of principal executive officers, including zip code) Registrant's telephone number, including area code: (440) 943-4200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------- ------------------------ Common Shares without par value New York Stock Exchange Common Share purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value (on basis of closing sale price) of voting stock held by nonaffiliates as of March 1, 2002 $1,641,227,630 Number of the registrant's Common Shares, without par value, outstanding as of March 1, 2002 51,232,974 Documents Incorporated by Reference ----------------------------------- Portions of the registrant's 2001 Annual Report to its shareholders (Incorporated into Part I and II of this Form 10-K) Portions of the registrant's Proxy Statement dated March 13, 2002 (Incorporated into Part III of this Form 10-K) -1- PART I ------ ITEM 1. BUSINESS The Lubrizol Corporation was organized under the laws of Ohio in 1928. The company began business as a compounder of special-purpose lubricants, and in the early 1930's was among the first to commence research in the field of lubricant additives. Today, the company is a global fluid technology company that develops, produces and sells high-performance chemicals, systems and services for industry and transportation. The company creates these products, including specialty additive packages and related equipment, for use in transportation and industrial lubricants and other markets. The company does this by applying advanced chemical and mechanical technologies in order to enhance the performance, quality and value and reduce the environmental impact of the customer products in which our products are used. The company groups its product lines into two operating segments: fluid technologies for transportation and fluid technologies for industry. PRINCIPAL PRODUCTS. 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. 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, defoamers and process chemicals; and performance systems, comprised principally of fluid metering devices and particulate emission trap devices. Revenues within the fluid technologies for transportation segment comprised 83%, 82% and 83% of consolidated revenues in 2001, 2000 and 1999, respectively. Additives for lubricating engine oils comprised 55%, 53% and 53% of consolidated revenues in 2001, 2000 and 1999, respectively. Additives for driveline oils comprised 22%, 23% and 23% of consolidated revenues for these same respective periods. Further financial information for the company's operating segments is contained in Note 12 to the Financial Statements, which is included in the company's 2001 Annual Report to its shareholders and is incorporated herein by reference. Additives improve the lubricants and fuels used in cars, trucks, buses, off-highway equipment, marine engines and industrial applications. In lubricants, additives enable oil to withstand a broader range of temperatures, limit the buildup of sludge and varnish deposits, reduce wear, inhibit the formation of foam, rust and corrosion, and retard oxidation. In fuels, additives help maintain efficient operation of the fuel delivery system, help control deposits and corrosion, improve combustion and assist in preventing decomposition during storage. The company sells a proprietary dispersant/surfactant additive package that enables the emulsion of water in diesel fuel, resulting in a low-emission fuel (PuriNOxTM) for diesel engines. The company also manufactures and sells or leases the specialized blending units to blend the additive, water and diesel fuel into the stable emulsion. Due to the variety of oil properties and applications, a number of different chemicals are used to formulate the company's products. Each additive combination is designed to fit the characteristics of the customer's base oil and the level of performance specified. Engine oils for passenger cars contain a combination of chemical additives which usually includes one or more detergents, dispersants, oxidation inhibitors and wear inhibitors, pour point depressants and viscosity improvers. Other chemical combinations are used in specialty additive systems for heavy duty engine oils used by trucks and off-highway equipment and in formulations for gear oils, automatic transmission -2- fluids, industrial oils, metalworking fluids, and gasoline, diesel and residual fuels. The company's performance systems products principally involve products used in emission controls, such as catalyst, exhaust and filter systems and precision metering devices used in blending and additive injection operations. COMPETITION. The company's fluid technologies for transportation segment and fluid technologies for industry segment are highly competitive in terms of price, technology development, product performance and customer service. The company's principal competitors within its fluid technologies for transportation segment, both in the United States and overseas, are Infineum, a joint venture involving two major petroleum companies (Shell Oil Company and Exxon Mobil Corporation); Chevron Oronite Company, a subsidiary of Chevron Corporation, a major petroleum company; and one chemical company (Ethyl Corporation). The petroleum companies either directly or indirectly produce lubricant and fuel additives for their own use and also sell additives to others. These petroleum companies are also customers of the company and may also sell base oil to the company. The company believes, based on volume sold, that it is the largest supplier to the petroleum industry of performance additive packages for lubricants. In fluid technologies for industry, we compete primarily in the metalworking fluids, hydraulic fluids and additives for paints, coatings and inks markets with numerous competitors within each market. CUSTOMERS. In the United States, the company markets its fluid technologies for transportation and fluid technologies for industry products through its own sales organization. The company's additive customers consist primarily of oil refiners and independent oil blenders and are located in more than 100 countries. In 2001, approximately 45% of the company's consolidated sales were made to customers in North America, 30% to customers in Europe and the Middle East and 25% to customers in Asia-Pacific and Latin America. The company's ten largest customers, most of which are international oil companies and a number of which are groups of affiliated entities, accounted for approximately 53% of consolidated sales in 2001. The loss of one or more of these customers could have a material adverse effect on the company's business, specifically in the fluid technologies for transportation segment. There was no single customer, including any group of affiliated entities, that accounted for more than 10% of 2001 consolidated revenues. The company's fluid technologies for industry segment is not materially dependent on a single customer or on a few customers. RAW MATERIALS. The company utilizes a broad variety of chemical raw materials in the manufacture of its additives and uses oil in processing and blending additives. These materials are obtainable from several sources, and for the most part are derived from petroleum. Political and economic conditions in the Middle East have, in the past, caused and may continue to cause the cost of raw materials to fluctuate significantly; however, the availability of raw materials to the company has not been significantly affected when these conditions occurred. The company expects raw materials to be available in adequate quantities during 2002. RESEARCH, TESTING AND DEVELOPMENT. The company has historically emphasized research and has developed a large percentage of the additives it manufactures and sells. Technological developments in the design of engines and other automotive equipment, combined with rising demands for environmental protection and fuel economy, require increasingly sophisticated chemical additives to meet industry performance standards. The frequency of changes in industry performance affects the company's technical spending patterns. -3- Consolidated research and development expenditures were $87.6 million in 2001, $86.4 million in 2000 and $78.3 million in 1999. These amounts were equivalent to 4.7%, 4.9% and 4.4% of the respective revenues for such years. These amounts include expenditures for the performance evaluation of additive developments in engines and other types of mechanical equipment as well as expenditures for the development of specialty chemicals for industrial applications. In addition, $70.9 million, $64.4 million and $67.7 million was spent in 2001, 2000 and 1999, respectively, for technical service (testing) activities, principally for evaluation in mechanical equipment of specific lubricant formulations designed for the needs of petroleum industry customers throughout the world. Research, testing and development expenditures by operating segment were as follows (in thousands of dollars):
2001 2000 1999 ------- ------- ------- Research and development expenditures: Fluid technologies for transportation $74,415 $74,632 $66,268 Fluid technologies for industry 13,167 11,763 11,984 ------- ------- ------- Total $87,582 $86,395 $78,252 ======= ======= ======= Testing expenditures: Fluid technologies for transportation $57,616 $55,035 $58,978 Fluid technologies for industry 13,275 9,375 8,697 ------- ------- ------- Total $70,891 $64,410 $67,675 ======= ======= =======
The company has two research facilities at Wickliffe, Ohio, one of which is principally for lubricant additive research and the other for research in the field of other specialty chemicals. The company also maintains a mechanical testing laboratory at Wickliffe, equipped with a variety of gasoline and diesel engines and other mechanical equipment to evaluate the performance of additives for lubricants and fuels. The company has similar mechanical testing laboratories in England and Japan and, in addition, makes extensive use of independent contract research firms. Extensive field testing is also conducted through various arrangements with fleet operators and others. Liaison offices in Detroit, Michigan; Hazelwood, England; Hamburg, Germany; Tokyo, Japan; and Paris, France, maintain close contact with the principal automotive and equipment manufacturers of the world and keep the company abreast of the performance requirements for its products in the face of changing technologies. These liaison activities also serve as contacts for cooperative development and evaluation of products for future applications. Contacts with the automotive and equipment industry are important so that the company may have the necessary direction and lead time to develop products for use in engines, transmissions, gear sets, and other areas of equipment that require lubricants of advanced design. PATENTS. The company owns a variety of United States and foreign patents relating to lubricant and fuel additives, lubricants, chemical compositions and processes, and protective coating materials and processes. While such domestic and foreign patents expire from time to time, the company continues to apply for and obtain patent protection on an ongoing basis. Although the company believes that, in the aggregate, its patents constitute an important asset, it does not regard its business as being materially dependent upon any single patent or any group of related patents. We utilize patents in both the fluid technologies for transportation segment and the fluid technologies for industry segment. ENVIRONMENTAL MATTERS. The company is subject to federal, state and local laws and regulations designed to protect the environment and limit manufacturing wastes and emissions. The company believes that as a general matter its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the company. Compliance with the environmental laws and -4- regulations requires continuing management effort and expenditures by the company. Capital expenditures for environmental projects were $2.5 million in 2001, which represented 3.8% of 2001 capital expenditures. The company believes that the cost of complying with environmental laws and regulations will not have a material affect on the earnings, liquidity or competitive position of the company. The company is engaged in the handling, manufacture, use, transportation and disposal of substances that are classified as hazardous or toxic by one or more regulatory agencies. The company believes that its handling, manufacture, use, transportation and disposal of such substances generally have been in accord with environmental laws and regulations. Among other environmental laws, the company is subject to the federal "Superfund" law, under which the company has been designated as a "potentially responsible party" that may be liable for cleanup costs associated with various waste sites, some of which are on the U.S. Environmental Protection Agency Superfund priority list. The company's experience, consistent with what it believes to be the experience of others in similar cases, is that Superfund site liability tends to be apportioned among parties based upon contribution of materials to the Superfund site. Accordingly, the company measures its liability and carries out its financial reporting responsibilities with respect to Superfund sites based upon this standard, even though Superfund site liability is technically joint and several in nature. The company views the expense of such remedial cleanups as a part of its product cost, and accrues for estimated environmental liabilities with charges to cost of sales. The company considers its environmental accrual to be adequate to provide for its portion of costs for all such known environmental liabilities. Based upon consideration of currently available information, the company believes liabilities for environmental matters will not have a material adverse affect on the company's financial position, operating results or liquidity. EMPLOYEES. At December 31, 2001, the company and its subsidiaries had 4,530 employees of which approximately 54% were in the U.S. GEOGRAPHIC AREA INFORMATION. Financial information with respect to domestic and foreign operations is contained in Note 12 to the Financial Statements which is included in the company's 2001 Annual Report to its shareholders, and is incorporated herein by reference. The company supplies its additive customers abroad through export from the United States and from overseas manufacturing plants. Sales and technical service offices are maintained in more than 30 countries outside the United States. As a result, the company is 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. The company believes the political and economic risks related to its foreign operations are mitigated due to the stability of the countries in which its largest foreign operations are located. While changes in the U.S. dollar value of foreign currencies will affect earnings from time to time, the longer-term economic effect of these changes should not be significant given the company's net asset exposure, currency mix and use of U.S. dollar-based pricing in certain countries. The company's consolidated net income will generally benefit as foreign currencies increase in value compared to the U.S. dollar and will generally decline as foreign currencies decrease in value. ITEM 2. PROPERTIES The general offices of the company are located in Wickliffe, Ohio. The company has various leases for general office space primarily located in Anaheim, California; Houston, Texas; Naperville, Illinois; Wilmington, Delaware; Southfield, Michigan; Oakville, Ontario; and London, England. The -5- company leases office and laboratory space in Spartanburg, South Carolina. The company owns three additive manufacturing plants in the United States; one located in the Cleveland, Ohio area, at Painesville, and two near Houston, Texas, at Deer Park and Bayport. Outside the United States, the company owns additive manufacturing/blending plants in Australia, Brazil, Canada, England, France (three locations), Japan, South Africa and Singapore. All of these plants, other than Singapore, are owned in fee. In Singapore, the company owns the plant but leases the land on which the plant is located. The company owns in fee research, development and testing facilities in Wickliffe, Ohio; Hazelwood, England; and Kinuura, Japan. The company also owns in fee a facility in Midland, Michigan, at which air and refrigeration compressor lubricants are developed and marketed; manufacturing plants in Countryside, Illinois; Mountaintop, Pennsylvania; and Germany that manufacture performance specialty chemical additives for the coatings and specialty metalworking fluid and industrial lubricant markets; a manufacturing plant in Atlanta, Georgia, that manufactures fluid metering devices; manufacturing plants in Newmarket and London, Ontario, Canada, and Reno, Nevada, that manufacture particulate emission control devices; a manufacturing plant in Fareham, Hampshire, England, that manufactures additive injection equipment; and manufacturing plants in Fountain Inn, South Carolina, and Cheyenne, Wyoming, that manufacture antifoam and defoaming agents to the coatings, inks, textile, food, fermentation, mining, wastewater and metalworking industries. The company leases space in Countryside, Illinois, at which specialty chemical additives for the coatings and specialty metalworking fluid and industrial lubricant markets are manufactured. Additive manufacturing/blending plants in India, Saudi Arabia, and China are owned and operated by joint venture companies licensed by Lubrizol. Lubrizol's ownership of each of these companies ranges from 49% to 50.05%. The company has entered into long-term contracts for its exclusive use of major marine terminal facilities at the Port of Houston, Texas. In addition, Lubrizol has leases for storage facilities in Australia, Chile, Denmark, Ecuador, England, Finland, France, Holland, Singapore, Spain, South Africa, Sweden and Turkey; Los Angeles, California; St. Paul, Minnesota; Bayonne, New Jersey; and Tacoma, Washington. In some cases, the ownership or leasing of such facilities is through certain of its subsidiaries or affiliates. The company maintains a capital expenditure program to support its operations and believes its facilities are adequate for its present operations and for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The company and its subsidiaries are participants in ordinary routine litigation incidental to the business but are not defendants in any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the vote of the security holders during the three months ended December 31, 2001. -6- EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth the name, age, recent business experience and certain other information relative to each person who is an executive officer of the company as of March 1, 2002. Name Business Experience ---- ------------------- W. G. Bares Mr. Bares, age 60, became Chairman of the Board on April 22, 1996, and Chief Executive Officer on January 1, 1996. He has been President since 1982. J. R. Ahern Mr. Ahern, age 55, has been Controller - Accounting and Financial Reporting and Principal Accounting Officer since April 26, 1999. From 1993 to April 1999 he was Controller - Operations. J. W. Bauer Mr. Bauer, age 48, has been Vice President and General Counsel since April 1992. D. W. Bogus Mr. Bogus, age 54, joined the company and became Vice President in May, 2000. He is responsible for fluid technologies for industry. Prior to joining the company, he was with PPG Industries, Inc., where he was Vice President of Governmental Affairs from May 1999 to February 2000, Vice President-Packaging Coatings from October 1998 to May 1999, and Vice President Industrial Coatings from September 1996 to October 1998. C. P. Cooley Mr. Cooley, age 46, has been Vice President and Chief Financial Officer since he joined the company in April 1998. In addition, he was Treasurer from April 1998 to September 2001. In June 1998 he also became responsible for corporate strategic planning. Prior to joining the company, he was Assistant Treasurer - Corporate Finance at Atlantic Richfield Company. S. A. Di Biase Dr. Di Biase, age 49, has been Vice President since September 1993. He has been responsible for emulsified products since October 2001. Prior to that, he was responsible for research and development. J. L. Hambrick Mr. Hambrick, age 47, was elected Vice President responsible for managing corporate strategies in the Asia-Pacific region in May, 2000. From October 1998 to April 2000 he was global business manager - engine oils. From January 1994 to September 1998 he was FSU and China business development manager. G. R. Hill Dr. Hill, age 60, has been Senior Vice President since 1988. He has been responsible for research and development since October 2001 and has been responsible for business development since October 1993. From 1996 to June 1998 he was also responsible for corporate strategic planning. J. E. Hodge Mr. Hodge, age 59, has been Vice President since September 1993. He is responsible for operations. -7- Name Business Experience - ---- ------------------- K. H. Hopping Mr. Hopping, age 55, has been Vice President since April 1991. He is responsible for global communications and investor relations. From 1991 to April 2001 he was also Corporate Secretary. S. F. Kirk Mr. Kirk, age 52, has been Vice President since September 1993. Since January 1999, he has been responsible for sales and marketing. From April 1996 to January 1999, he was responsible for sales. Y. Le Couedic Mr. Le Couedic, age 54, has been Vice President since September 1993. He is responsible for management information systems. G.R. Lewis Mr. Lewis, age 42, was named Assistant Secretary in April 2001, and has been Assistant to the General Counsel since October 1997. From September 1993 to October 1997 he was Corporate Counsel. G. P. Lieb Mr. Lieb, age 49, has been Controller - Commercial Analysis and Support since April 26, 1999. From 1993 to April 1999 he was Controller - Accounting and Financial Reporting. From 1994 to April 1999 he was also Principal Accounting Officer. M. W. Meister Mr. Meister, age 47, has been Vice President since April 1993, and was named Chief Ethics Officer in April 1998. He is responsible for human resources. R. S. Potter Ms. Potter, age 42, joined the company and was named Treasurer in September 2001. Prior to joining the company, she was Vice President and Treasurer at Dexter Corporation from 1999 to 2000, Leader of Facilities Integration at Hercules, Inc. from 1998 to 1999, and Assistant Vice President and Treasurer at BetzDearborn Corporation from 1996 to 1998. L. M. Reynolds Ms. Reynolds, age 41, was named Corporate Secretary in April 2001, and has been Counsel since February 1991. From April 1995 until April 2001, she was Assistant Secretary. R. D. Robins Dr. Robins, age 59, became Vice President in April 1996. From January 1999 to October 2001 he was responsible for performance systems functions. From April 1996 to January 1999, he was responsible for segment management. All executive officers serve at the pleasure of the Board. -8- PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common shares of the company are listed on the New York Stock Exchange under the symbol LZ. The number of shareholders of record of common shares was 4,268 as of March 1, 2002. Information relating to the recent price and dividend history of the company's common shares follows:
Common Share Price History --------------------------- Dividends 2001 2000 Per Common Share ---- ---- ---------------- High Low High Low 2001 2000 ---- --- ---- --- ---- ---- 1st quarter $33.65 $24.13 $33.50 $23.75 $ .26 $ .26 2nd quarter 33.69 28.25 28.06 21.00 .26 .26 3rd quarter 37.69 28.00 24.12 18.56 .26 .26 4th quarter 35.75 27.75 26.00 19.06 .26 .26 ----- ----- $1.04 $1.04 ===== =====
On November 16, 2001, the company issued 725 common shares in a transaction exempt from registration under the Securities Act of 1933 pursuant to Regulation S. The common shares were issued pursuant to an employee benefit plan to an employee of a wholly-owned UK subsidiary of the company. ITEM 6. SELECTED FINANCIAL DATA. The summary of selected financial data for each of the last five years included in the Historical Summary contained on pages 42 and 43 of the company's 2001 Annual Report to its shareholders is incorporated herein by reference. Other income for 2000 includes a litigation settlement gain of $19.4 million and credits of $4.5 million for adjustments to the second program of the company's cost reduction initiative. Other income (charges) for 1999 includes litigation settlement gains of $17.6 million and special charges of $19.6 million for the second program of the company's cost reduction initiative and adjustments to the first program of the company's cost reduction initiative. Other income (charges) for 1998 includes litigation settlement gain of $16.2 million and special charges of $23.3 million for the first program of the company's cost reduction initiative and of $13.6 million for the write-off of purchased technology under development resulting from the acquisition of Adibis. Total debt reported in the Historical Summary includes the following amounts classified by maturity date as long-term at December 31: $388.1 million in 2001, $378.8 million in 2000, $365.4 million in 1999, $390.4 million in 1998 and $182.2 million in 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Management's Discussion and Analysis of Financial Condition and Results of Operations, including the information appearing under the heading "Cautionary Statement For `Safe Harbor' Purposes Under the Private Securities Litigation Reform Act of 1995", contained on pages 14 through 23, inclusive, of the company's 2001 Annual Report to its shareholders is incorporated herein by reference. -9- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information appearing under the heading "Quantitative and Qualitative Disclosures about Market Risk" contained on page 23 of the company's 2001 Annual Report to its shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of the company and its subsidiaries, together with the independent auditors' report relating thereto, contained on pages 24 through 41, inclusive, of the company's 2001 Annual Report to its shareholders, and the Quarterly Financial Data (Unaudited) contained on page 24 of such 2001 Annual Report, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained under the heading "Election of Directors" on pages 3 to 7, inclusive, and under "Section 16(a) Beneficial Ownership Reporting Compliance" on page 20 of the company's Proxy Statement dated March 13, 2002, is incorporated herein by reference. Information relative to executive officers of the company is contained under "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information relating to executive compensation contained under the headings "Director Compensation" on page 9, "Executive Compensation - - Summary Compensation Table" and "- Stock Incentive Plans" on pages 12 through 14, inclusive, and under "Employee and Executive Officer Benefit Plans - Pension Plans" and "- Executive Agreements" on pages 18 through 20, inclusive, of the company's Proxy Statement dated March 13, 2002, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information relating to security ownership set forth under the heading "Share Ownership of Directors, Executive Officers and Large Beneficial Owners" on pages 10 and 11 of the company's Proxy Statement dated March 13, 2002, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information contained in footnote (1) under the heading "Share Ownership of Directors, Executive Officers and Large Beneficial Owners - Five Percent Beneficial Owners" on page 11 of the company's Proxy Statement dated March 13, 2002, is incorporated herein by reference. -10- PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Annual Report: 1. The following consolidated financial statements of The Lubrizol Corporation and its subsidiaries, together with the independent auditors' report relating thereto, contained on pages 24 through 41, inclusive, of Lubrizol's 2001 Annual Report to its shareholders, and incorporated herein by reference: Independent Auditors' Report Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Balance Sheets at December 31, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 Notes to Financial Statements Quarterly Financial Data (Unaudited) 2. Schedules No financial statement schedules are required to be filed as part of this Annual Report. 3. Exhibits (3)(a) Amended Articles of Incorporation of The Lubrizol Corporation, as adopted September 23, 1991. (Reference is made to Exhibit (3)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (3)(b) Regulations of The Lubrizol Corporation, as amended effective April 27, 1992. (Reference is made to Exhibit (3)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibit (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (4)(b) Indenture dated as of November 25, 1998, between The Lubrizol Corporation and The First National Bank of Chicago as Trustee. (Reference is made to Exhibit (4)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1998, -11- which Exhibit is incorporated herein by reference.) The company agrees, upon request, to furnish to the Securities and Exchange Commission a copy of any instrument authorizing long-term debt that does not authorize debt in excess of 10% of the total assets of the company and its subsidiaries on a consolidated basis. (4)(c) Amended and Restated Rights Agreement between The Lubrizol Corporation and American Stock Transfer & Trust Company dated as of July 26, 1999. (Reference is made to Exhibit 4.l to The Lubrizol Corporation's Registration Statement on Form 8-A/A dated August 17, 1999, which Exhibit is incorporated herein by reference.) (10)(a)* The Lubrizol Corporation 1985 Employee Stock Option Plan, as amended. (Reference is made to Exhibit (10)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, which Exhibit is incorporated herein by reference.) (10)(b)* The Lubrizol Corporation Amended Deferred Compensation Plan for Directors. (Reference is made to Exhibit (10)(b) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(c)* Form of Employment Agreement between The Lubrizol Corporation and certain of its senior executive officers. (Reference is made to Exhibit (10)(c) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which Exhibit is incorporated herein by reference.) (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended. (10)(e)* The Lubrizol Corporation Excess Defined Contribution Plan, as amended. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay Plan, as amended. (Reference is made to Exhibit (10)(f) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1998, which Exhibit is incorporated herein by reference.) (10)(g)* The Lubrizol Corporation Executive Death Benefit Plan, as amended. (Reference is made to Exhibit (10)(g) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, which Exhibit is incorporated herein by reference.) (10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan, as amended. (Reference is made to Exhibit (10)(h) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, -12- 2000, which Exhibit is incorporated herein by reference.) (10)(i)* The Lubrizol Corporation Deferred Stock Compensation Plan for Outside Directors, as amended. (Reference is made to Exhibit (10)(i) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(j)* The Lubrizol Corporation Officers' Supplemental Retirement Plan, as amended. (Reference is made to Exhibit (10)(j) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, which Exhibit is incorporated herein by reference.) (10)(k)* The Lubrizol Corporation Deferred Compensation Plan for Officers, as amended. (10)(l)* The Lubrizol Corporation Executive Council Deferred Compensation Plan, as amended. (Reference is made to Exhibit (10)(l) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(m)* Supplemental Retirement Plan for Donald W. Bogus. (12) Computation of Ratio of Earnings to Fixed Charges. (13) The following portions of The Lubrizol Corporation 2001 Annual Report to its shareholders: Pages 14-23 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 24 Quarterly Financial Data (Unaudited) Page 24 Independent Auditors' Report Page 25 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 Page 26 Consolidated Balance Sheets at December 31, 2001 and 2000 Page 27 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Page 28 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 Pages 29-41 Notes to Financial Statements Pages 42-43 Historical Summary (21) List of Subsidiaries of The Lubrizol Corporation -13- (23) Consent of Independent Auditors *Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 2001. -14- SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on March 25, 2002, on its behalf by the undersigned, thereunto duly authorized. THE LUBRIZOL CORPORATION BY /s/W. G. Bares --------------------------------------- W. G. Bares, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 25, 2002, by the following persons on behalf of the Registrant and in the capacities indicated. /s/W. G. Bares Chairman of the Board, President and Chief - ------------------------------- Executive Officer W. G. Bares (Principal Executive Officer) /s/C. P. Cooley Vice President and Chief Financial Officer - ------------------------------- (Principal Financial Officer) C. P. Cooley /s/J. R. Ahern Controller, Accounting and Financial - ------------------------------- Reporting J. R. Ahern (Principal Accounting Officer) /s/Jerald A. Blumberg Director - ------------------------------- Jerald A. Blumberg /s/Forest J. Farmer, Sr. Director - ------------------------------- Forest J. Farmer, Sr. /s/Gordon D. Harnett Director - ------------------------------- Gordon D. Harnett /s/Victoria F. Haynes Director - ------------------------------- Victoria F. Haynes /s/David H. Hoag Director - ------------------------------- David H. Hoag /s/William P. Madar Director - ------------------------------- William P. Madar /s/Peggy Gordon Miller Director - ------------------------------- Peggy Gordon Miller /s/Ronald A. Mitsch Director - ------------------------------- Ronald A. Mitsch /s/M. Thomas Moore Director - ------------------------------- M. Thomas Moore /s/Daniel E Somers Director - ------------------------------- Daniel E. Somers EXHIBIT INDEX ------------- Exhibits (3)(a) Amended Articles of Incorporation of The Lubrizol Corporation, as adopted September 23, 1991. (Reference is made to Exhibit (3)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (3)(b) Regulations of The Lubrizol Corporation, as amended effective April 27, 1992. (Reference is made to Exhibit (3)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibit (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (4)(b) Indenture dated as of November 25, 1998, between The Lubrizol Corporation and The First National Bank of Chicago as Trustee. (Reference is made to Exhibit (4)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1998, which Exhibit is incorporated herein by reference.) The company agrees, upon request, to furnish to the Securities and Exchange Commission a copy of any instrument authorizing long-term debt that does not authorize debt in excess of 10% of the total assets of the company and its subsidiaries on a consolidated basis. (4)(c) Amended and Restated Rights Agreement between The Lubrizol Corporation and American Stock Transfer & Trust Company dated as of July 26, 1999. (Reference is made to Exhibit 4.l to The Lubrizol Corporation's Registration Statement on Form 8-A/A dated August 17, 1999, which Exhibit is incorporated herein by reference.) (10)(a)* The Lubrizol Corporation 1985 Employee Stock Option Plan, as amended. (Reference is made to Exhibit (10)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, which Exhibit is incorporated herein by reference.) (10)(b)* The Lubrizol Corporation Amended Deferred Compensation Plan for Directors. (Reference is made to Exhibit (10)(b) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(c)* Form of Employment Agreement between The Lubrizol Corporation and certain of its senior executive officers. (Reference is made to Exhibit (10)(c) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which Exhibit is incorporated herein by reference.) (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended. (10)(e)* The Lubrizol Corporation Excess Defined Contribution Plan, as amended. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay Plan, as amended. (Reference is made to Exhibit (10)(f) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1998, which Exhibit is incorporated herein by reference.) (10)(g)* The Lubrizol Corporation Executive Death Benefit Plan, as amended. (Reference is made to Exhibit (10)(g) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, which Exhibit is incorporated herein by reference.) (10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan, as amended. (Reference is made to Exhibit (10)(h) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(i)* The Lubrizol Corporation Deferred Stock Compensation Plan for Outside Directors, as amended. (Reference is made to Exhibit (10)(i) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(j)* The Lubrizol Corporation Officers' Supplemental Retirement Plan, as amended. (Reference is made to Exhibit (10)(j) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, which Exhibit is incorporated herein by reference.) (10)(k)* The Lubrizol Corporation Deferred Compensation Plan for Officers, as amended. (10)(l)* The Lubrizol Corporation Executive Council Deferred Compensation Plan, as amended. (Reference is made to Exhibit (10)(l) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(m)* Supplemental Retirement Plan for Donald W. Bogus. (12) Computation of Ratio of Earnings to Fixed Charges. (13) The following portions of The Lubrizol Corporation 2001 Annual Report to its shareholders: Pages 14-23 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 24 Quarterly Financial Data (Unaudited) Page 24 Independent Auditors' Report Page 25 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 Page 26 Consolidated Balance Sheets at December 31, 2001 and 2000 Page 27 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Page 28 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 Pages 29-41 Notes to Financial Statements Pages 42-43 Historical Summary (21) List of Subsidiaries of The Lubrizol Corporation (23) Consent of Independent Auditors *Indicates management contract or compensatory plan or arrangement. EX-10.D 3 l93056aex10-d.txt EXHIBIT (10)(D) Exhibit (10)(d) THE LUBRIZOL CORPORATION EXCESS DEFINED BENEFIT PLAN (As Amended 11/12/01) The Lubrizol Corporation hereby establishes, effective as of January 1, 1986, The Lubrizol Corporation Excess Defined Benefit Plan (the "Plan") for the purpose of providing supplemental benefits to certain employees, as permitted by Section 3(36) of the Employee Retirement Income Security Act of l974. ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. For the purposes hereof, the following words and phrases shall have the meanings indicated, unless a different meaning is plainly required by the context: (a) CODE. the term "Code" shall mean the Internal Revenue Code as amended from time to time. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (b) COMPANY. The term "Company" shall mean The Lubrizol Corporation, an Ohio corporation, its corporate successors and the surviving corporation resulting from any merger of The Lubrizol Corporation with any other corporation or corporations, and any subsidiaries of The Lubrizol Corporation which adopt the Plan. (c) LUBRIZOL PENSION PLAN. The term "Lubrizol Pension Plan" shall mean The Lubrizol Corporation Revised Pension Plan as the same shall be in effect on the date of a Participant's retirement, death, or other termination of employment. (d) PARTICIPANT. Effective June 22, 1992, the term "Participant" shall mean any person employed by the Company who is listed on Appendix A attached hereto, or who is designated by the Board of Directors as an officer for the purposes of Section 16 of the Securities Exchange Act of 1934, or whose benefits under the Lubrizol Pension Plan are limited by the application of Section 401(a)(17) of the Internal Revenue Code of 1986, as amended. (e) PLAN. The term "Plan" shall mean the excess defined benefit pension plan as set forth herein, together with all amendments hereto, which Plan shall be called "The Lubrizol Corporation Excess Defined Benefit Plan." (f) TRUST. The term "Trust" shall mean The Lubrizol Corporation Excess Defined Benefit Plan Trust established pursuant to the Trust Agreement. (g) TRUST AGREEMENT. The term "Trust Agreement" shall mean The Lubrizol Corporation Excess Defined Benefit Plan Trust Agreement. 1.2. ADDITIONAL DEFINITIONS. All other words and phrases used herein shall have the meanings given them in the Lubrizol Pension Plan, unless a different meaning is clearly required by the context. ARTICLE II SUPPLEMENTAL PENSION BENEFIT 2.1 ELIGIBILITY. Effective January 1, 1997, A Participant who retires, dies, or otherwise terminates his employment with the Company and its subsidiaries and (a) whose benefits under the Lubrizol Pension Plan are limited by the provisions of Section 401(a)(17) or 415 of the Code, (b) who either was a Participant on January 1, 1989 or had attained age 55 on January 1, 1989, and thereafter became a Participant, and whose benefits under the Lubrizol Pension Plan are curtailed due to the revision of the pension benefit formula, effective as of January 1, 1989, to comply with the requirements of the Tax Reform Act of 1986, as amended, (c) who participated in The Lubrizol Corporation Deferred Compensation Plan for Officers (which was adopted effective July 25, 1994), or (d) who participated in The Lubrizol Corporation Executive Council Deferred Compensation Plan (which was adopted effective January 1, 1997) shall be eligible for a supplemental pension benefit determined in accordance with the provisions of Section 2.2. 2.2 AMOUNT. Effective January 1, 1997, subject to the provisions of Article III, the monthly supplemental pension benefit payable to an eligible Participant shall be an amount which when added to the monthly pension payable to such Participant under the Lubrizol Pension Plan (prior to any reduction applicable to an optional method of payment) equals the monthly pension benefit which would have been payable under the Lubrizol Pension Plan (prior to any reduction applicable to an optional method of payment and adjusted for any amount payable under The Lubrizol Corporation Excess Defined Contribution Plan which is attributable to The Lubrizol Corporation Employees' Profit-Sharing Plan and which would have affected the benefit that the Participant would have received under the Lubrizol Pension Plan had it been payable from The Lubrizol Corporation Employees' Profit-Sharing Plan) if the limitations of Section 401(a)(17) and 415 of the Code were not in effect and, (if he is a Participant described in Section 2.1(ii)), his benefits had not been curtailed due to the revision of the Lubrizol Pension Plan effective as of January 1989, to comply with the provisions of the Tax Reform Act of 1986, as amended, and, (if he is a Participant described in Section 2.1(iii)), if he did not participate in The Lubrizol Corporation Deferred Compensation Plan for Officers (which was adopted effective July 25, 1994) or in The Lubrizol Corporation Executive Council Deferred Compensation Plan (which was adopted effective January 1, 1997). 2.3 PAYMENT. The terms of payment of the supplemental pension benefit shall be identical to those specified in the Lubrizol Pension Plan for the type of benefit the Participant receives under the Lubrizol Pension Plan. 2.4 VESTING. Each Participant as of December 31, 1993, shall be 100 percent vested in his supplemental pension benefit determined in accordance with the provisions of Section 2.2. Each new Participant after December 31, 1993, shall be vested in his supplemental pension benefit under this Plan as determined in accordance with the vesting provisions of the Lubrizol Pension Plan. ARTICLE III PAYMENT OF BENEFITS 3.1 PAYMENT TO PARTICIPANT. (Effective November 27, 1995) (a) Each Participant who terminates employment with the Company and its related corporations shall receive payment of his supplemental pension benefit under the Plan determined as of his date of termination of employment in the standard form of benefit of a monthly retirement benefit commencing within 30 days following employment termination and payable to such Participant for his lifetime following such employment termination, with the continuance to his Beneficiary of such amount after his death for the remainder, if any, of the 120-month term that commenced with the date as of which the first payment of such monthly benefit is made, and with any such monthly benefits remaining unpaid upon the death of the survivor of the Participant and his Beneficiary to be made to the estate of such survivor. (b) Participants may instead elect within a 60 day period commencing 90 days prior to employment termination to receive the actuarial equivalent of the standard form of benefit determined under paragraph (a), on the date of employment termination, in accordance with any one of the following options: (i) for Participants hired prior to February 1, 1984, a single lump-sum payment payable within 30 days following employment termination; (ii) effective October 1, 2000, for Participants hired prior to February 1, 1984, a single lump-sum payment payable within 30 days following the end of the calendar year in which the Participant's employment terminated. Interest on the lump-sum deferral shall accrue and be paid with the lump-sum; such interest to be computed at the applicable interest rate, as defined in Section 417(e)(3)(A)(ii)(II) of the Code, in effect on the date of the employment termination. (iii) a reduced monthly retirement benefit commencing within 30 days following employment termination and payable to such Participant for his lifetime following such employment termination, with the continuance of a monthly benefit equal to fifty percent (50%) of such reduced amount after his death to the Participant's Beneficiary during the lifetime of the Beneficiary, provided that such Beneficiary is living at the time of such Participant's employment termination and survives such Participant; (iv) a reduced monthly retirement benefit commencing within 30 days following employment termination and payable to such Participant during his lifetime following his termination, with the continuance of a monthly benefit equal to one hundred percent (100%) of such reduced amount after his death to the Participant's Beneficiary during the lifetime of the Beneficiary, provided such Beneficiary is living at the time of such Participant's termination and survives such Participant. Such optional forms of payment described above shall be calculated using the same actuarial factors and interest rates used under The Lubrizol Corporation Pension Plan (or its successor) as in effect on the date of employment termination; provided, however, that for any person who was a Participant as of December 31, 1993, who elects to have his supplemental pension benefit paid in a single lump-sum payment, the interest rate used to discount the portion of the Participant's supplemental pension benefit which represents his accrued benefit as of December 31, 1993, shall be the arithmetic average of the 7-day compound yield rates for the six full calendar months prior to the month of termination as published in Donoghue's Tax-Free MONEY FUND AVERAGE which is reported weekly in BARRON'S; provided further that such rate with respect to any month shall be the rate reported in the first issue of BARRON'S published during such month. Notwithstanding the foregoing provisions of the Plan to the contrary, if the present actuarial value of any retirement benefit or survivor benefit under the Plan to any person, determined as described above, is less than $25,000, such benefit shall be paid in a single lump-sum payment to such person within 30 days following employment termination. 3.2 PAYMENT IN THE EVENT OF DEATH PRIOR TO COMMENCEMENT OF DISTRIBUTION. If a Participant dies prior to commencement of benefits under the Plan, his surviving spouse, if any, shall be eligible for a survivor benefit which is equal to one-half of the reduced monthly benefit the Participant would have received under the Plan if the Participant had retired on the day before his death and had elected to receive his benefit under the Lubrizol Pension Plan in a 50 percent joint and survivor annuity form. In making the determinations and reductions required in this Section 3.2, the Company shall apply the assumptions then in use under the Lubrizol Pension Plan. For purposes hereof, a surviving spouse shall only be eligible for a benefit under this Section 3.2, if such spouse had been married to the deceased Participant for at least one year as of the date of the Participant's death. 3.3 SPECIAL FORM OF BENEFIT FOR E. VICTOR LUOMA. Notwithstanding the first sentence of Section 3.1, E. Victor Luoma may elect prior to his retirement or other termination of employment to receive payment of his supplemental pension benefit under the Plan in the form of a single sum amount, determined and payable in accordance with the second and third sentences of Section 3.1. 3.4 LUMP SUM FORM OF BENEFIT FOR ROGER Y. K. HSU. Effective January 1, 1996, notwithstanding the provisions of Section 3.1(b), Roger Y. K. Hsu shall receive payment of his supplemental pension benefit under the Plan in the form of a single sum amount. ARTICLE IV ADMINISTRATION The Company shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making, or causing the Trust to make, any required supplemental benefit payments. The Company shall have all such powers as may be necessary to carry out the provisions of the Plan, including the power to determine all questions relating to eligibility for and the amount of any supplemental pension benefit and all questions pertaining to claims for benefits and procedures for claim review; to resolve all other questions arising under the Plan, including any questions of construction; and to take such further action as the Company shall deem advisable in the administration of the Plan. The Company may delegate any of its powers, authorities, or responsibilities for the operation and administration of the Plan to any person or committee so designated in writing by it and may employ such attorneys, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Company hereunder shall be final and binding upon all interested parties. ARTICLE V AMENDMENT AND TERMINATION The Company reserves the right to amend or terminate the Plan in whole or in part at any time and to suspend operation of the Plan, in whole or in part, at any time, by resolution or written action of its Board of Directors or by action of a committee to which such authority has been delegated by the Board of Directors; provided, however, that no amendment shall result in the forfeiture or reduction of the interest of any Participant or person claiming under or through any one or more of them pursuant to the Plan. Any amendment of the Plan shall be in writing and signed by authorized individuals. ARTICLE VI MISCELLANEOUS 6.1 NON-ALIENATION OF RETIREMENT RIGHTS OR BENEFITS. No Participant shall encumber or dispose of his right to receive any payments hereunder, which payments or the right thereto are expressly declared to be non-assignable and non-transferable. If a Participant attempts to assign, transfer, alienate or encumber his right to receive any payment hereunder or permits the same to be subject to alienation, garnishment, attachment. execution, or levy of any kind, then thereafter during the life of such Participant, and also during any period in which any Participant is incapable in the judgment of the Company of attending to his financial affairs, any payments which the Company is required to make hereunder may be made, in the discretion of the Company, directly to such Participant or to any other person for his use or benefit or that of his dependents, if any, including any person furnishing goods or services to or for his use or benefit or the use or benefit of his dependents, if any. Each such payment may be made without the intervention of a guardian, the receipt of the payee shall constitute a complete acquittance to the Company with respect thereto, and the Company shall have no responsibility for the proper allocation thereof. 6.2 PLAN NON-CONTRACTUAL. Nothing herein contained shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established. 6.3 TRUST. In order to provide a source of payment for its obligations under the Plan, the Company has established the Trust, the terms of which are governed by the Trust Agreement. 6.4 INTEREST OF A PARTICIPANT. Subject to the provisions of the Trust Agreement, the obligation of the Company under the Plan to provide a Participant with a supplemental pension benefit constitutes the unsecured promise of the Company to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Company. 6.5 CONTROLLING STATUS. No Participant shall be eligible for a benefit under the Plan unless such Participant is a Participant on the date of his retirement, death, or other termination of employment. 6.6 CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no event be construed as giving any person, firm or corporation any legal or equitable right as against the Company, its officers, employees, or directors, except any such rights as are specifically provided for in the plan or are hereafter created in accordance with the terms and provisions of the Plan. 6.7 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. 6.8 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. APPENDIX A TO THE LUBRIZOL CORPORATION EXCESS DEFINED BENEFIT PLAN Participants(1) Effective Date - --------------- -------------- 1. W. G. Bares December 31, 1986 2. G. R. Hill December 31, 1986 3. J. R. Ahern April 1, 1990 4. K. H. Hopping April 21, 1991 5. J. W. Bauer April 27, 1992 6. S. F. Kirk April 26, 1993 7. Y. Le Couedic April 26, 1993 8. J. E. Hodge April 26, 1993 9. M. W. Meister April 26, 1993 10. S. A. Di Biase April 26, 1993 11. G. P. Lieb April 25, 1994 12. L. M. Reynolds April 24, 1995 13. R. D. Robins April 22, 1996 14. C. P. Cooley April 1, 1998 15. D. W. Bogus April 1, 2000 16. J. L. Hambrick May 1, 2000 17. G. R. Lewis April 23, 2001 18. R. S. Potter September 4, 2001 Former Participants(2) - ---------------------- 1. P. L. Krug (R) 2. W. T. Beargie (R) 3. W. D. Manning (R) 4. R. W. Scher (R) 5. J. P. Arzul (D) 6. J. R. Cooper (R) 7. J. I. Rue (R) 8. R. J. Senz (T) 9. E. V. Luoma (R) 10. R. Y. K. Hsu (R) 11. L. E. Coleman (R) 12. J. G. Bulger (R) 13. D. A. Muskat (R) 14. W. R. Jones (R) 15. R. A. Andreas (R) 16. J. A. Thomas (R) - -------- (1) This listing of Participants is limited to those Participants who are also officers for purposes of Section 16 of the Securities Exchange Act of 1934. (2) R = Retired, D = Deceased, T = Terminated. EX-10.K 4 l93056aex10-k.txt EXHIBIT (10)(K) Exhibit (10)(k) THE LUBRIZOL CORPORATION DEFERRED COMPENSATION PLAN FOR OFFICERS (Amended as of November 12, 2001) 1. PURPOSE. The purpose of this Deferred Compensation Plan For Officers (the "Plan") is to permit an officer (as identified by the Company for Section 16 purposes under the Securities Exchange Act of 1934) (sometimes hereinafter referred to as "officer" or as the "Participant") of The Lubrizol Corporation (the "Company"), who wishes, to defer a portion of such officer's compensation as provided in the Plan. 2. ADMINISTRATION. The Plan shall be administered by the Organization and Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee's interpretation and construction of all provisions of the Plan shall be binding and conclusive upon all Participants and their heirs and/or successors. 3. RIGHT TO DEFER COMPENSATION. (a) An officer of the Company may, at any time prior to January 1 of a given calendar year, elect, for one or more future successive calendar years, to defer under the Plan a pre-selected amount of such officer's cash compensation, including bonus, which such officer may thereafter be entitled to receive for services performed during such elected calendar year or years. (b) The election under this Section 3 shall take effect on the first day of the calendar year following the date on which the election is made and such election shall be irrevocable for any elected calendar year after such elected calendar year shall have commenced. (c) The pre-selected amount that an officer may elect to defer shall be one or more of the following: (i) a fixed dollar amount or percentage of the officer's bi-weekly base salary; (ii) a fixed dollar amount or percentage of the officer's quarterly pay; (iii) a fixed dollar amount or percentage of the officer's participation in the performance pay plan , if any. (iv) a fixed number of shares or percentage of the officer's stock compensation in the performance share program. 1 (d) Notwithstanding paragraphs (a), (b) and (c), where an officer first becomes eligible to participate in the Plan, the newly eligible officer may make the election under this Section 3 to defer the specified compensation for services to be performed subsequent to the election and for the remainder of the calendar year in which the election under this Section 3 is made provided such election is made within 30 days after the date the officer first becomes eligible. (e) Within such periods of time as the Committee shall designate, and in addition to the provisions of paragraphs (a) through (d), an officer may elect to defer that portion or all of the officer's cash and/or stock compensation (i) described in paragraph (c) and/or (ii) any other plan or program that provides for cash or stock compensation, to the extent that such amounts would otherwise be nondeductible by the Company pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended. For purposes of the preceding sentence, the amount to be deferred with respect to any compensation plans payable in Company shares shall be determined by taking into consideration any fixed cash compensation (including biweekly and quarterly pay) to be received subsequent to the date on which shares are distributable under such program. Notwithstanding any other provision of this Plan, deferrals under this paragraph (e) shall be distributable only upon termination of employment in accordance with Section 6. (f) All elections under this Plan shall be made by written notice delivered to the Vice President, Human Resources, of the Company specifying (i) the number of calendar years, one or more, during which the election shall apply, (ii) the portion, if any, determined under paragraph (c), of each category of the Participant's compensation to be deferred for such year or years, as described above, (iii) the time of distribution, and (iv) if, applicable, the payment option as provided in Section 6 for distributions upon termination of employment. (g) A Participant may designate that the deferral election under this Section 3 shall remain in effect until the Participant, on a prospective basis, withdraws the election or changes the amount to be deferred. Any notice of the withdrawal of the deferral election or change of amount to be deferred shall be effective on the first day of the calendar year following the date on which such notice is given to the Company's Vice President, Human Resources; provided that, such notice shall not change, alter or terminate the deferral of the officer's participation in the performance pay plan for the year in which such notice of withdrawal is given which, except for the deferral, would be payable in the calendar year following the date on which such notice of withdrawal is given. (h) Notwithstanding paragraph (f) and the first sentence of paragraph (g), any compensation earned after the end of the first month in which a Participant under this Plan no longer is an officer of the Company, as defined in Section 1, but continues to be employed by the Company, shall not be deferred, provided however, the balance in the Participant's Deferral Accounts shall continue to be held and administered pursuant to the Plan. 2 4. DEFERRAL OF CASH COMPENSATION. (a) On the date the cash compensation deferred under the Plan would have become payable to the Participant in the absence of an election under the Plan to defer payment thereof, the amount of such deferred compensation shall be credited to a Stock Deferral Account and/or any of the Cash Deferral Account investment portfolios designated as available by the Committee from time to time. All Deferral Accounts shall be established and maintained for each Participant in the Company's accounting books and records and the Company shall be under no obligation to purchase any investments designated by the Participant. To the extent that, at the time amounts are credited to a Participant's Deferral Accounts, any federal, state or local payroll withholding tax applies (e.g., Medicare withholding tax), the Participant shall be responsible for the payment of such amount to the Company and the Company shall promptly remit such amount to the proper taxing authority. (b) Participant's Cash Deferral Accounts shall be credited with any gains or losses equal to those generated as if the Participant's Cash Deferral Account balances had been invested in the applicable investment portfolio(s) selected by the Participant (c) A Participant's deferred cash compensation credited to a Participant's Stock Deferral Account shall be used to determine the number of full and fractional units ("Units") representing Company Common Shares ("Shares") which the deferred amount would purchase at the closing price for the Shares on the New York Stock Exchange ("NYSE") composite transactions reporting system on the date that the deferred amount is credited pursuant to paragraph (a) and if Shares were not traded on that date on the NYSE, then such computation shall be made as of the first preceding day on which Shares were so traded. The Company shall credit the Participant's Stock Deferral Account with the number of full and fractional Units so determined. A Participant's Stock Deferral Account shall be administered in accordance with Section 5(b) through (e). (d) A Participant may elect pursuant to rules established by the Committee to transfer a portion or all of the balance of any Deferral Account established under this Section 4 to any other such Deferral Account. (e) Notwithstanding the foregoing, a Participant may elect to have any portion or all of the Participant's cash deferrals credited to any of the Deferral Accounts listed in paragraph (a) and may transfer balances in accordance with paragraph (d) provided that the Participant is considered, in the judgement of the Chief Executive Officer of the Company, to be on plan to meet the Participant's Company Share ownership guideline. Otherwise, a Participant must elect that at least 50% of any cash deferral hereunder be credited to a Stock Deferral Account and may not transfer any portion of the balance of the Stock Deferral Account to another Deferral Account. 3 5. DEFERRAL OF STOCK COMPENSATION. (a) At the time that Shares are distributable to a Participant, who has elected to defer the receipt thereof under Section 3(c) or (e), in lieu of Shares being issued, there shall be credited to a separate Stock Deferral Account for the Participant, full stock equivalent units ("Units') which shall be established and maintained on the Company's records. One Unit shall be allocated to the Stock Deferral Account for each such Share. The balance of a Stock Deferral Account established under this Section 5(a) may not be transferred to any other Deferral Account. (b) As of each dividend payment date established by the Company for the payment of cash dividends with respect to its Shares, the Company shall credit each separate Stock Deferral Account of a Participant with an additional number of whole and/or fractional Units equal to: (i) the product of (x) the dividend per Share which is payable with respect to such dividend payment date, multiplied by (y) the number of whole and fractional Units credited to the separate Stock Deferral Account of a Participant as of such payment date; DIVIDED BY (ii) The closing price of a Share on the dividend payment date (or if Shares were not traded on that date, on the next preceding day on which Shares were so traded), as reported on the NYSE-composite tape. (c) At no time prior to actual delivery of Shares pursuant to the Plan, shall the Company be obligated to purchase or reserve Shares for delivery of a Participant and the Participant shall not be a shareholder nor have any of the rights of a shareholder with respect to the Units credited to the Participant's Stock Deferral Accounts. (d) To the extent that, at the time Units are credited to a Stock Deferral Account of a Participant, any federal, state or local payroll withholding tax applies (e.g., Medicare withholding tax), the Participant shall be responsible for the payment of such amount to the Company and the Company shall promptly remit such amount to the proper taxing authority. (e) In the event of any change in the number of outstanding Shares by reason of any stock dividend, stock split up, recapitalization, merger, consolidation, exchange of shares or other similar corporate change, the number of Units in each separate Stock Deferral Account of a Participant shall be appropriately adjusted to take into account any such event. 6. PAYMENT OF DEFERRED COMPENSATION UPON TERMINATION. 4 (a) The total amount standing as a credit in a Participant's Cash Deferral Accounts shall, upon termination of employment, be payable to the Participant either in a lump sum or in periodic installments over such period, not exceeding ten years, as the Participant shall have selected pursuant to Section 3(f)(iv). Such periodic payments shall begin or the lump sum payment shall be made, as the case may be, from the Participant's Cash Deferral Accounts, at such time, not more than twelve (12) months after the Participant ceases to be an employee of the Company, as the Participant shall have selected pursuant to Section 3 (f)(iv). All amounts payable in accordance with this Section 6(a) shall be subject to applicable federal, state and/or local payroll withholding taxes then in effect. Notwithstanding the foregoing, a Participant may elect no later than thirty (30) days prior to the Participant's termination of employment, nor earlier than ninety (90) days prior thereto, to change the form of distribution of the Participant's Cash Deferral Accounts. (b) The amount of each installment payable to a Participant shall be determined by dividing the aggregate balance of such Participant's Cash Deferral Accounts by the number of periodic installments (including the current installment) remaining to be paid. Until a Participant's Cash Deferral Accounts has been completely distributed, the balance thereof remaining, from time to time, shall be credited with gains and losses on a monthly basis as provided in Section 4(b). (c) The total number of Units credited to the Participant's Stock Deferral Accounts shall upon termination of employment be payable to the Participant either in a lump sum or in periodic installments, over such period, not exceeding ten years, as the Participant shall have selected pursuant to Section 3(f)(iv). Such periodic payments shall begin or the lump sum payment shall be made, as the case may be, at such time, not more than twelve (12) months after the Participant ceased to be an employee of the Company, as the Participant shall have selected pursuant to Section 3(f)(iv). All amounts payable in accordance with this Section 6(c) shall be subject to applicable federal, state and/or local payroll withholding taxes then in effect. Notwithstanding the foregoing, a Participant may elect no later than thirty (30) days prior to the Participant's termination of employment, no earlier than ninety (90) days prior thereto, to change the form of distribution of the Participant's Stock Deferral Accounts. (d) The amount of any installment payable from the Stock Deferral Accounts to a Participant shall be determined by dividing the balance of the aggregate number of Units in the Participant's Stock Deferral Accounts by the number of periodic installments (including the current installment) remaining to be paid and the quotient shall be the number of Shares that are payable. If the determination of the installment payable from the Participant's Stock Deferral Accounts results in a fractional Share being payable, the installment payment shall exclude any such fractional Share payment except that, in the final installment payment, any such fractional Share shall be paid in cash in an amount as determined by the Committee. Until the Participant's Stock Deferral 5 Accounts have been completely distributed, the balance in the Stock Deferral Accounts shall continue to be credited with the dividend equivalents on such balances as provided in Section 5(b). (e) If the Participant elects to satisfy tax withholding under paragraph (c) with Shares, then such withholding shall be from those Shares otherwise issuable pursuant to paragraph (c) above, and shall be such number of Shares that will provide for the federal, state and/or local income tax at the rates then applicable for supplemental wages, unless otherwise requested by the Participant, but in no event less than the statutory minimums for tax withholding. (f) For purposes under paragraph (e) of determining the number of Shares that are to be withheld to provide for the tax withholding, Shares shall be valued at the closing price on the New York Stock Exchange of a Share on the date the Shares are distributable (or if the Shares were not traded on that date, on the next preceding day on which the Shares were so traded). If the determination of the tax withholding would require the withholding of a fractional Share, the Participant shall remit cash to the Company in lieu of such fractional Share. (g) In the event a Participant dies prior to receiving payment of the entire amount in that Participant's Cash Deferral Accounts and/or Stock Deferral Accounts, as the case may be, the unpaid balance shall be paid to such beneficiary as the Participant may have designated in writing to the Vice President, Human Resources, of the Company as the beneficiary to receive any such post-death distribution under the Plan or, in the absence of such written designation, to the Participant's legal representative or to the beneficiary designated in the Participant's last will as the one to receive such distributions. Distributions subsequent to the death of a Participant may be made either in a lump sum or in periodic installments in such amounts and over such period, not exceeding ten years from the date of death, as the Committee may direct and the amount of each installment shall be computed as provided in Section 6(b), and (d) as the case may be. (h) Payments from the Cash Deferral Accounts shall be made in cash and payments from the Stock Deferral Accounts shall be made in Shares. The amount of any distribution pursuant to Sections 6 through 9 shall reduce the balance held in the Participant's corresponding Deferral Accounts as of the date of such distribution. Installment payments shall be made pro-rata from a Participant's Deferral Accounts. 7. IN-SERVICE DISTRIBUTIONS. Pursuant to Section 3 and other than for deferrals pursuant to Section 3(e), a Participant may elect to receive an in-service distribution of all or any specified percentage of the Participant's deferral for any calendar year commencing not earlier than the first year following the year that such compensation would have been payable. In-service distributions shall be made in a lump sum payment. A Participant may elect once for any calendar year of deferral for which the Participant has elected an in-service distribution, to change the date of distribution to another in-service year or upon termination; 6 provided, however, that any such modification must be made in writing at least twelve (12) months prior to the date originally elected for the in-service distribution. Notwithstanding the foregoing, any distribution hereunder shall be subject to further deferral pursuant to an election under Section 3(e). 8. SPECIAL DISTRIBUTIONS. Notwithstanding any other provision of this Plan, a Participant may elect to receive distribution of part or all of the total of Participant's eligible Deferral Accounts, other than from deferrals pursuant to Section 3(e), in one or more distributions if (and only if) the amount of the distribution is reduced by ten (10) percent. The ten (10) percent reduction shall be forfeited. Distributions shall be made pro-rata among Participant's eligible Deferral Accounts. Any distribution made pursuant to such an election shall be made within sixty (60) days of the date such election is submitted to Vice President - Human Resources. Notwithstanding the foregoing, any distribution hereunder shall be limited to an amount that would not be subject to further deferral pursuant to an election under Section 3(e). 9. HARDSHIP DISTRIBUTIONS. The Committee may accelerate the distribution of part or all, in any or all, of a Participant's Deferral Accounts for reasons of severe financial hardship. For purposes of the Plan, severe financial hardship shall be deemed to exist in the event the Committee determines that a Participant needs a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of the Participant's family, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship. 10. NON-ASSIGNABILITY. None of the rights or interests in any of the Participant's Deferral Accounts shall, at any time prior to actual payment or distribution pursuant to the Plan, be assignable or transferable in whole or in part, either voluntarily or by operation of law or otherwise, and such rights and interest shall not be subject to payment of debts by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner; provided that, upon the occurrence of any such assignment or transfer or the attempted assignment or transfer, all payments hereunder shall be payable in the sole and unrestricted judgment and discretion of the Committee, as to time and amount (including a lump sum amount), and shall be distributable to the person who would have received the payment but for this Section 10 only at such time or times and in such amounts as the Committee, from time to time, and in its sole and unrestricted judgment and discretion, shall determine. Should an event covered by this Section 10 occur prior to the death of a Participant, the balance, if any, in the Participant's accounts shall, after such death, be thereafter distributed as provided in Section 6 subject to the provisions of this Section 10. 11. INTEREST OF PARTICIPANT. The Company shall be under no obligation to segregate or reserve any funds or other assets for purposes relating to the Plan and, except as set forth in this Plan, no Participant shall have any rights 7 whatsoever in or with respect to any funds or other assets held by the Company for purposes of the Plan or otherwise. Each Participant's accounts maintained for purposes of the Plan merely constitute bookkeeping entries on records of the Company, constitute the unsecured promise and obligation of the Company to make payments as provided herein, and shall not constitute any allocation whatsoever of any cash, shares or other assets of the Company or be deemed to create any trust or special deposit with respect to any of the Company's assets. Notwithstanding the foregoing provisions, nothing in this Plan shall preclude the Company from setting aside Shares or funds in trust pursuant to one or more trust agreements between a trustee and the Company. However, no Participant shall have any secured interest or claim in any assets or property of the Company or any such trust and all Shares or funds contained in such trust shall remain subject to the claims of the Company's general creditors. 12. AMENDMENT. The Board of Directors of the Company, or the Organization and Compensation Committee may, from time to time, amend or terminate the Plan, provided that no such amendment or termination of the Plan shall adversely affect a Participant's accounts as they existed immediately before such amendment or termination or the manner of distribution thereof, unless such Participant shall have consented thereto in writing. Notice of any amendment or termination of the Plan shall be given promptly to all Participants. 13. PLAN IMPLEMENTATION. This Plan is adopted and effective on the 25th day of July, 1994, as amended on June 17, 1995, as further amended September 25, 1995, effective as of January 1, 1995, further amended on September 22, 1997 and further amended on September 27, 1999, effective as of January 1, 2000; provided, however that any deferrals made hereunder into a Stock Deferral Account prior to January 1, 2000, shall be governed by the provisions of the Plan in effect prior to January 1, 2000, further amended on February 28, 2000, effective as of January 1, 2000, further amended on March 11, 2000, and further amended on November 12, 2001. 8 EX-10.M 5 l93056aex10-m.txt EXHIBIT (10)(M) Exhibit (10)(m) SUPPLEMENTAL RETIREMENT PLAN FOR DONALD W. BOGUS In addition to the benefits accrued under The Lubrizol Corporation Pension Plan and Employees' Profit Sharing and Savings Plan, and any accrued benefits under the associated excess plans, Lubrizol will also establish a supplemental retirement plan on behalf of Donald W. Bogus with the following terms and conditions: 1) On Mr. Bogus' first day of employment, and on each anniversary of that date thereafter, 500 phantom shares of Lubrizol stock will be credited to a supplemental retirement account on Mr. Bogus' behalf. 2) If Mr. Bogus works until age 65, over the 12 year period a total of 6,000 phantom shares would be credited to the account. 3) Dividends on accumulated phantom shares will be posted throughout the year and will be used as the basis for purchasing additional phantom shares under the plan. 4) In the event of a change in control, as defined in the Executive Employment Agreement, or at the time of Mr. Bogus' death, Lubrizol would fully credit the account with the remaining balance of the 6,000 phantom shares. In the event of employment termination for other than the above reasons, the account balances as of the date of termination would be distributable under the plan. 5) Phantom shares accumulated under the plan will be included when considering share ownership objectives under the Executive Council Ownership Guidelines. 6) Shares may be withheld at the time of distribution for tax purposes. Mr. Bogus, or his estate, may elect distribution in the form of shares or cash at the time of distribution. 7) As the shares are unregistered, certain restrictions on selling/trading may apply at the time of distribution. 8) The Medicare tax on the increase in the value of the account year over year will be entered into Mr. Bogus' pay on an annual basis. EX-12 6 l93056aex12.txt EXHIBIT 12 EXHIBIT 12 THE LUBRIZOL CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (all amounts except ratios are shown in thousands)
2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- Pretax income $ 139,949 $ 170,348 $ 195,350 $ 118,814 $ 231,147 Add (deduct) earnings of less than 50% owned affiliates (net of distributed earnings) included in pretax income (558) 1,135 (3,195) (1,470) (3,018) Add losses of less than 50% owned affiliates included in pretax income 2,162 1,818 18 888 66 Add fixed charges net of capitalized interest 25,041 26,869 29,696 18,976 10,803 Add previously capitalized interest amortized during period 1,634 1,255 1,446 1,191 1,118 --------- --------- --------- --------- --------- "Earnings" $ 168,228 $ 201,425 $ 223,315 $ 138,399 $ 240,116 ========= ========= ========= ========= ========= Gross interest expense including capitalized interest ("Fixed Charges") $ 24,142 $ 26,282 $ 28,953 $ 20,743 $ 13,194 Ratio of earnings to fixed charges 6.96 7.66 7.71 6.67 18.2 Special adjustments: - -------------------- "Earnings" $ 168,228 $ 201,425 $ 223,315 $ 138,399 $ 240,116 Plus (less) special charges/credits (4,484) 19,569 36,892 Less litigation settlements (19,395) (17,626) (16,201) --------- --------- --------- --------- --------- Adjusted "Earnings" $ 168,228 $ 177,546 $ 225,258 $ 159,090 $ 240,116 ========= ========= ========= ========= ========= Ratio of adjusted earnings to fixed charges 6.97 6.76 7.78 7.67 18.2
EX-13 7 l93056aex13.txt EXHIBIT 13 Exhibit 13 The Lubrizol Corporation - 2001 Annual Report [PICTURES] Why Lubrizol? THE LUBRIZOL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Lubrizol Corporation is a global fluid technology company that develops, produces and sells high-performance chemicals, systems and services for industry and transportation. We create these products, including specialty additive packages and related equipment, for use in transportation and industrial lubricant and other markets. We do this by applying advanced chemical and mechanical technologies in order to enhance the performance, quality and value and reduce the environmental impact of the customer products in which our products are used. We are a geographically diverse company operating manufacturing and blending facilities, laboratories and offices around the world, through the efforts of approximately 4,500 employees. Our product lines are grouped into two operating segments: fluid technologies for transportation and fluid technologies for industry. Fluid technologies for transportation comprised approximately 83% of our consolidated revenues and 96% of segment pre-tax operating profit in 2001. This discussion and analysis of our financial condition and results of operations generally is focused on Lubrizol in its entirety, since we believe this provides the most appropriate understanding of our business. Note 12 to the financial statements contains a further description of the nature of our operations, the product lines within each of the operating segments, segment operating profit and related financial disclosures. We believe the global growth rate for transportation lubricant additives is approximately 1% per year. A variety of industry market forces and conditions continues to present significant challenges in this business. Among these market factors are improved engine design and longer drain intervals, industry overcapacity, frequent product specification changes and consolidation of the customer base. Although we are the market leader in this business, the marketplace continues to be extremely competitive. We plan to continue to invest in and run our traditional transportation lubricant additive business so as to remain the market leader and generate strong cash flows consistent with our historical track record. In addition, we believe there are opportunities for growth in both the transportation market and the faster-growing industrial markets. Accordingly, we are expanding beyond our traditional business by using our strengths, including our technology and broad geographic infrastructure, to develop and invest in new fluid technology applications that will expand the markets in which we participate. In addition to internal investment in research and development, prudent acquisitions will be key to our growth. 2001 RESULTS OF OPERATIONS In 2001, our results reflected the competitive conditions in our industry and the economic uncertainty and weak business environment within the global economy. Although we had record shipment volume, 2001 earnings were lower than the prior year due primarily to our inability to recover higher average raw material cost. Higher operating expenses (manufacturing, selling and administrative, research, development and testing expenses), a higher effective tax rate and a prior year gain from a litigation settlement and special charge adjustments that did not recur in 2001 also contributed to the lower earnings. In 2001, we achieved record consolidated revenues of $1.84 billion, which represented an increase of $68.9 million, or 4% (2% excluding acquisitions), compared with 2000. The revenue increase was due to a 4% increase in shipment volume, one-half of which was due to acquisitions including the consolidation of our China subsidiaries in the fourth quarter of 2000. Average additive selling price for 2001 remained flat with the prior year. This was the result of a 3% increase in product selling prices due to the price increases initiated during 2000 and offsetting unfavorable currency effects and product mix changes. Fluid technologies for transportation revenues increased $68.9 million, or 5%, compared with 2000 primarily due to increased shipment volume from acquisitions and market share gains. Fluid technologies for industry revenues were approximately the same as 2000, as the impact of the weak manufacturing sector in North America offset the additional revenues from an acquisition in 2001. The $1.0 million increase in royalties and other revenues was primarily due to increased royalties for synthetic refrigeration lubricants. [GRAPH] Changes in our shipment volume vary in different geographical areas. The following table shows our 2001 shipment volume by geographic area as well as the corresponding changes compared with 2000: Increase 2001 Volume (Decrease) - -------------------------------------------------------------- North America 42% 7% Europe, Middle East 33% 5% Asia-Pacific 18% (1%) Latin America 7% (3%) ----- Total 100% 4% 14 THE LUBRIZOL CORPORATION The 2001 increases over 2000 were primarily due to business gains in our engine oil additives product group in North America and strong shipments to many of our multinational engine oil customers in Europe. The 1% decrease in Asia-Pacific includes the favorable impact of the consolidation of our China subsidiaries during the fourth quarter of 2000. Excluding China, Asia-Pacific volume would have declined 9% for the year, primarily due to the economic weakness in the region and some lost engine oil additive business in Japan. In Latin America, shipment volume was down due to order patterns and the economic slowdown in the region. Cost of sales for 2001 increased 4% (2% from acquisitions) from 2000 due to increased shipment levels and higher raw material costs. Average raw material cost in 2001 increased 2% over the prior year because of the higher cost of crude oil and natural gas and the use of higher-cost raw materials to meet the new U.S. engine oil specification. During the first half of 2001, our raw material costs were higher than the first half of 2000 due to the impact of higher crude oil costs on petrochemical prices and the impact of higher natural gas costs on our butylene-based raw materials. Crude oil and natural gas costs started to come down during the second quarter and sequentially declined in the third and fourth quarters of 2001. Although there have been some announced raw material price decreases early in 2002, we are uncertain as to the level of raw material prices for the remainder of the year. Manufacturing costs, which are included in cost of sales, increased by 1% in 2001 compared with 2000, but decreased by 2% after excluding acquisitions. Unit manufacturing costs (manufacturing costs per metric ton sold) were down 3% compared with 2000. Gross profit (net sales less cost of sales) increased by $10.7 million, or 2% ($3.1 million, or less than 1%, excluding acquisitions), in 2001 compared with 2000 primarily for the reasons expressed above. Gross profit for fluid technologies for transportation increased by $12.6 million, or 3%, for 2001 compared with 2000, for the same reasons. Gross profit for fluid technologies for industry decreased by $9.7 million, or 9%, in 2001 compared with 2000. Excluding the impact of acquisitions, this gross profit decreased by $14.4 million, or 13%, primarily because the weak manufacturing sector in North America adversely affected our industrial additives and performance chemicals product groups. We also incurred a write-off of $2.8 million for obsolete inventory in our performance systems product group during the second half of 2001. In calculating gross profit at the operating segment level, we exclude excess capacity from product costs. (See Note 12 to the financial statements.) [GRAPH] The gross profit percentage (gross profit divided by net sales) decreased to 27.4% for 2001 as compared with 27.8% for 2000 due to the reasons explained previously. The corresponding gross profit percentages for fluid technologies for transportation and fluid technologies for industry (excluding excess capacity) were 28.4% and 32.8% in 2001, respectively, compared with 28.8% and 35.8% in 2000. Selling and administrative expenses increased $9.4 million, or 6% ($6.7 million, or 4%, excluding acquisitions), in 2001 compared with 2000. The non-acquisition increase was primarily due to higher salary and employee benefit costs for existing businesses and incremental staffing and other costs associated with our strategy to expand into new markets, partially offset by lower legal expenses and favorable currency effects. Research, testing and development expenses (technology expenses) increased $7.7 million, or 5% ($6.9 million, or 5%, excluding acquisitions), in 2001 compared with 2000. Product standards change periodically to meet new emissions, efficiency, durability and other performance factors as engine and transmission designs are improved by equipment manufacturers. These changes influence the timing and amount of technology expense. The increases during 2001 were due to high levels of testing, primarily for GF-3, which is the new U.S. passenger car motor oil technical standard, along with increased development spending for growth programs and product development costs for the next diesel engine oil specification, PC-9. We expect PC-9 testing will continue at a high pace in the first half of 2002. During 2001, approximately 76% of our technology cost was incurred in company-owned facilities and 24% was incurred at third-party testing facilities. [GRAPH] The change in revenues together with the change in total costs and expenses had an unfavorable effect of $5.5 million for 2001. Unusual items for the year 2000 consisted of $19.4 million for a litigation settlement gain and $4.5 million for favorable adjustments to previously taken special charges related to the 15 THE LUBRIZOL CORPORATION restructuring of the Painesville, Ohio, manufacturing facility. (See "2000 Results of Operations.") There were no similar items in 2001. The change in other income (expense) had an unfavorable effect of $1.0 million for 2001 as compared with 2000. Higher currency exchange translation losses and increased goodwill amortization expense were partially offset by higher equity earnings from joint ventures and lower losses from the disposal of assets. Goodwill amortization expense will be eliminated in 2002 due to a change in accounting standards. Our goodwill amortization expense in 2001 was $11.4 million. (See Note 2 to the financial statements.) Net interest expense was approximately the same in 2001 and 2000. Interest income decreased $1.8 million in 2001 compared with 2000 due to lower interest rates and lower levels of cash investments during 2001. Interest expense also decreased $1.8 million in 2001 compared with 2000, principally because of lower interest rates. We conduct a significant amount of our business outside of the U.S. and are subject to business risks inherent in non-U.S. activities, including currency exchange rate fluctuations. While changes in the dollar value of foreign currencies will affect earnings from time to time, the longer-term economic effect of these changes should not be significant given our net asset exposure, currency mix and use of U.S. dollar-based pricing in some countries. As the U.S. dollar strengthens or weakens against other international currencies in which we transact business, our financial results will be affected. During 2001, the U.S. dollar strengthened against most other currencies, especially the euro and the yen, and the change in currency exchange rates had an unfavorable effect on net income as compared with exchange rates in effect during 2000. As a result of the factors previously discussed and after excluding from 2000 the litigation settlement gain and adjustments to special charges, 2001 income before taxes decreased by $6.5 million, or 4%, compared with 2000. Including the unusual items, income before income taxes decreased by $30.4 million, or 18%, as compared with 2000. Segment operating profit before tax, which excludes interest expense and unusual items and allocates corporate technology, selling and administrative expenses to the segments, increased $10.9 million, or 8%, for the fluid technologies for transportation segment and decreased $17.4 million, or 75%, for the fluid technologies for industry segment. The effective tax rate on 2001 income was 32.7%, compared with 29.6% on 2000 income, excluding the litigation settlement gain and adjustments to special charges in 2000. The increase in the effective tax rate, which decreased 2001 earnings before these items by $.08 per share, was primarily due to the U.S. tax benefit of a charitable contribution made in 2000, which did not recur in 2001. The overall effective tax rate for 2000 including the special charge adjustments and the litigation gain was 30.7%. Based upon the information currently available, we expect our effective tax rate for 2002 to be reduced to approximately 30% as a result of enacted tax rate reductions, the anticipated tax benefits of a charitable contribution of technology and other factors. Net income in 2001 was $94.1 million, or $1.84 per share. In 2000, net income was $118.0 million, or $2.22 per share. After excluding from 2000 income the litigation settlement gain and the adjustments to special charges, 2001 net income decreased 9% compared with 2000 net income of $103.1 million. On this same basis, 2001 net income per share decreased 5% from the 2000 net income per share of $1.94. 2000 RESULTS OF OPERATIONS In 2000, our results reflected the challenging economic and competitive conditions within our industry. We experienced significant increases in raw material costs that we did not fully recover despite a series of product price increases and we were unfavorably affected by the stronger U.S. dollar. These factors caused our gross profit and gross profit percentage to decline. Although we benefited from lower operating expenses, unusual items and a lower effective tax rate, 2000 earnings were lower than the prior year's earnings. Our consolidated revenues for 2000 were $1.78 billion, which was a decrease of $4.5 million, or less than 1%, from 1999 revenues. Excluding acquisitions, the decrease was $26.9 million, or 2%. The revenue decrease was attributable to a reduction in our shipment volume, which decreased 1% from the prior year (2% excluding acquisitions). Higher product selling prices in 2000 were completely offset by product and regional mix effects and a significant negative impact from the stronger U.S. dollar. Fluid technologies for transportation revenues decreased $16.7 million, or 1%, compared with 1999 primarily due to a decrease in shipment volume. Fluid technologies for industry revenues increased $12.2 million, or 4%, over 1999 primarily due to an acquisition that offset some business losses in our industrial product group, and stronger volume in our compressor lubricant business. Changes in our shipment volume vary in different geographical areas. The percentage changes in our 2000 shipment volume by geographical area, as compared with 1999, are: Increase (Decrease) - ------------------------------------------------------------- North America (4%) Europe, Middle East (3%) Asia-Pacific 9% Latin America 9% We believe 1999 results benefited from advance customer purchases in late 1999 related to "Year 2000" concerns and an announced price increase. The weakness in North America 16 THE LUBRIZOL CORPORATION also reflected the timing of some passenger car business shifting from late 2000 into the first quarter of 2001 and a decline in driveline factory-fill volumes resulting from automobile and diesel truck production slowdowns. We lost some business at smaller accounts in Europe due to recent price increases. The favorable comparisons in Asia-Pacific and Latin America primarily were due to business gains mostly related to our new heavy-duty diesel platform and sales by our new subsidiaries in China. Cost of sales for 2000, including acquisitions, increased 4% from 1999, reflecting higher average raw material cost partially offset by lower manufacturing cost. The prices we paid for raw materials increased every quarter throughout 2000 due to the impact of higher crude oil costs on petrochemical prices, and as a result, our average raw material cost increased 9% compared with 1999. We implemented three price increases in 2000, but they did not fully recover the higher raw material costs and we began a fourth price increase, which was announced in November 2000. In addition, our average raw material cost was further affected in 2001 by increases in natural gas prices. Manufacturing costs, which are included in cost of sales, decreased 6% (8% excluding acquisitions) in 2000 compared with 1999. Approximately two-thirds of this decrease was due to the favorable impact of currency. Manufacturing savings also resulted from the full integration of our Adibis business, which we purchased in 1998, and the cost reduction program at our Painesville plant. Gross profit (net sales less cost of sales) decreased $55.5 million, or 10% ($62.0 million, or 11%, excluding acquisitions), in 2000 compared with 1999. The decrease primarily was due to the impact of higher raw material costs partially offset by product price increases and lower manufacturing costs. Additionally, approximately $18 million of the decrease in gross profit was due to the impact of unfavorable changes in currency exchange rates. In calculating gross profit at the operating segment level we exclude excess production capacity from product costs. (See Note 12 to the financial statements.) On that basis, fluid technologies for transportation gross profit decreased $61.1 million, or 13%, in 2000 compared with 1999 due to the same factors noted above. Fluid technologies for industry gross profit decreased $1.0 million, or 1%, in 2000 compared with 1999. Excluding the Alox acquisition, this gross profit decreased $7.0 million, or 6%, primarily due to business losses in our industrial products group. The gross profit percentage (gross profit divided by net sales) decreased to 27.8% for 2000 as compared with 30.9% for 1999 due to the reasons explained above. The gross profit percentages for fluid technologies for transportation and fluid technologies for industry were 28.8% and 35.8%, respectively, compared with 32.4% and 37.4% in 1999. Selling and administrative expenses decreased $13.3 million, or 7%, in 2000 compared with 1999 ($14.4 million, or 8%, excluding acquisitions) due to lower variable compensation costs, lower implementation costs for our enterprise-wide management information system, lower legal expenses and favorable currency effects. Research, testing and development expenses (technology expenses) increased $4.9 million, or 3%, in 2000 compared with 1999. During 2000, approximately 80% of our technology cost was incurred in Lubrizol-owned facilities and 20% was incurred at third-party testing facilities. Our technology expenses were favorably affected in the first half of the year because of lower activity at third-party testing facilities in the first quarter of the year, resulting in part from an industry delay in finalizing specifications for the U.S. passenger car motor oil technical standard GF-3. Once these specification issues were resolved, we began related testing in the third quarter of 2000, which resulted in technology costs being 12% higher in the second half than in the first half of 2000. Primarily as a result of the factors previously discussed, the change in revenues together with the change in total costs and expenses unfavorably affected our pre-tax profits by $47.1 million for 2000 compared with 1999. During 2000, we recorded adjustments relating to our Painesville cost reduction program to reduce the special charge accrual by $4.5 million ($2.9 million after-tax or $.05 per share). These adjustments to the special charge are discussed under the caption "Cost Reduction Programs and Related Special Charges" below and in Note 15 to the financial statements. On October 12, 2000, we reached a settlement of pending patent litigation with Imperial Oil Limited (Imperial), a Canadian affiliate of Exxon Mobil Corporation. Under the settlement agreement, Imperial paid us $25.0 million in October 2000. After deducting related expenses, this settlement increased pre-tax income by $19.4 million ($12.0 million after-tax, or $.23 per share). We also entered into a ten-year agreement for the supply of $490 million (Canadian dollars) of product to Imperial. Further information regarding our litigation with Exxon Mobil Corporation is contained in Note 16 to the financial statements. The change in other income (expense) unfavorably affected 2000 pre-tax income by $7.4 million compared with 1999. The change primarily resulted from lower equity earnings of affiliated companies and losses on miscellaneous sales of assets. Net interest expense decreased $3.6 million in 2000 compared with 1999 principally because of lower interest rates due to interest rate swap agreements entered into in the first half of 2000. 17 THE LUBRIZOL CORPORATION As the U.S. dollar strengthens or weakens against other international currencies in which we transact business, our financial results will be affected. During 2000 the U.S. dollar strengthened against most other currencies, especially the euro and British pound sterling, and the change in currency exchange rates had an unfavorable effect on net income for the year as compared with exchange rates in effect during 1999. As a result of the factors discussed above, income before income taxes decreased by $25.0 million, or 13%, as compared with 1999. After excluding from both years the special charges and the gains from litigation settlements, income before income taxes decreased by $50.8 million, or 26%, compared with 1999. Segment operating profit before tax, which excludes interest expense, decreased $51.5 million, or 27%, for fluid technologies for transportation, and decreased $2.9 million, or 11%, for fluid technologies for industry, as compared with 1999. The effective tax rate on 2000 income, before litigation gains and special charges, decreased to 29.6% as compared with 36.5% in 1999. This decrease, which increased 2000 earnings before these items by $.19 per share, primarily was due to the U.S. tax benefit from charitable contributions of technology to an educational institution, the favorable impact of statutory tax rate changes for certain of our foreign subsidiaries and an increase in the U.S. Foreign Sales Corporation tax benefit on export sales. The overall effective tax rate for 2000 including the special charge adjustments and the litigation gain was 30.7%. Net income in 2000 was $118.0 million, or $2.22 per share. In 1999, net income was $123.0 million, or $2.25 per share. After excluding from 2000 and 1999 the special charges and the gains from litigation settlements, net income in 2000 was $103.1 million, as compared with $125.3 million in 1999, a decrease of 18%. On this same basis, 2000 net income per share was $1.94, a decrease of 16% from the $2.30 per share earned in 1999. 1999 RESULTS OF OPERATIONS In 1999, our consolidated revenues were $1.78 billion, which represented an increase of $130.1 million, or 8% (3% excluding acquisitions), as compared with 1998. The primary factor causing the increase in revenues from 1998 was a 9% increase in our shipment volume (5% excluding acquisitions). Our average selling price declined 2% as compared with 1998, all of which was due to lower product pricing and changing product mix. Fluid technologies for transportation revenues increased $87.6 million, or 6%, over 1998. Approximately two-thirds of the increase was due to our 1998 acquisition of Adibis. Fluid technologies for industry revenues increased $42.5 million, or 16%, over 1998. Approximately one-half of the increase was due to acquisitions, primarily our acquisition of Carroll Scientific, Inc. The increase in 1999 shipment volume, excluding acquisitions, was attributable to North America and Asia-Pacific. Shipment volume to North American customers increased 13% primarily due to new business awarded at the end of 1998 and in 1999. Shipments to Asia-Pacific customers in 1999, excluding acquisitions, increased 14% compared with 1998 primarily due to the economic improvement in the region. Shipments to European and Latin American customers in 1999, excluding acquisitions, decreased 4% and 10% respectively, due primarily to sluggish economies with some business loss. We believe 1999 results benefited from some advance buying in late 1999 related to "Year 2000" concerns, and customer purchases in advance of an announced price increase. Cost of sales for 1999, including acquisitions, increased 5% reflecting higher shipment levels partially offset by lower average raw material cost compared with 1998. On a sequential basis, we experienced a 4% increase in average raw material cost during the third quarter and an additional 2% increase during the fourth quarter, as a result of higher crude oil pricing and its downstream effect. In November 1999, we announced a global price increase ranging from 3% to 7% depending on the product group, to recover the increasing raw material cost. The price increase, which was effective December 15, 1999, was successful and resulted in an average increase of 4% to 4.5%. We began to see the impact on revenues in the first quarter of 2000, and the full impact was felt by the end of the second quarter. Manufacturing costs, included in cost of sales, increased 7% (3% excluding acquisitions) in 1999 compared with 1998. Gross profit (net sales less cost of sales) increased $67.4 million, or 14%, in 1999 compared with 1998. Excluding acquisitions, gross profit increased $50.3 million, or 10%, in 1999 compared with 1998. Most of the increase was due to higher volume and the impact of lower average raw material cost partially offset by lower average selling price. Additionally, $10.0 million of the increased gross profit was due to the impact on cost of sales of favorable changes in currency exchange rates. Fluid technologies for transportation gross profit increased $53.6 million, or 13%, and fluid technologies for industry gross profit increased $13.7 million, or 14%. Acquisitions accounted for one-fourth of the fluid technologies for transportation increase and one-half of the fluid technologies for industry increase, and the remainder was due to the factors noted above. The gross profit percentage (gross profit divided by net sales) improved to 30.9% for 1999 as compared with 29.2% for 1998 for the same reasons as discussed above. In addition, the 1998 gross profit percentage was unusually low as explained in the discussion of 1998 results of operations. 18 THE LUBRIZOL CORPORATION The gross profit percentages for fluid technologies for transportation and fluid technologies for industry were 32.4% and 37.4%, respectively, compared with 30.6% and 38.3% in 1998. Selling and administrative expenses increased by $1.5 million, or 1%, in 1999 compared with 1998. Excluding acquisitions, selling and administrative expenses decreased $4.4 million, or 2%, in 1999 due to lower legal expenses, efficiencies from the integration of Adibis, lower pension costs, reduced spending on our global enterprise-wide management information system and favorable currency effects. These factors were partially offset by higher variable pay and costs associated with "Year 2000" compliance activities. Research, testing and development expenses (technology expenses) decreased $5.1 million, or 3%, in 1999 compared with 1998. Excluding acquisitions, technology expenses decreased $8.3 million, or 6%. During 1999, approximately 80% of our technology cost was incurred in company-owned facilities and 20% was incurred at third-party testing facilities. The reduction in technology expenses was achieved, in part, by reduced spending in 1999 for engine tests conducted at third-party facilities. In addition, an industry delay in the effective date of the new U.S. passenger car motor oil technical standard, GF-3, resulted in a deferral of related testing activities. This delay, along with savings generated from the first phase of our cost reduction program implemented in late 1998, also contributed to lower technical expenses in 1999 compared with 1998. Primarily as a result of the factors previously discussed, consolidated revenues increased $72.0 million more than the increase in total costs and expenses in 1999. We recorded special charges for the year of $19.6 million ($13.2 million after-tax or $.24 per share) relating to both programs of our cost reduction initiative. These special charges are discussed under the caption "Cost Reduction Programs and Related Special Charges" below and in Note 15 to the financial statements. On March 31, 1999, Lubrizol and Exxon Corporation reached a settlement of all pending intellectual property litigation between the two companies and their affiliates, except for litigation that was pending in Canada. Under the settlement agreement, Exxon paid us cash of $16.8 million in April 1999. After deducting related expenses, this settlement increased 1999 pre-tax income by $14.5 million ($9.0 million after-tax or $.16 per share). Further information regarding our litigation with Exxon is contained in Note 16 to the financial statements. Additionally, we recorded a pre-tax gain of $3.1 million ($1.9 million after-tax or $.04 per share) in the fourth quarter for the settlement of litigation unrelated to Exxon. The change in other income (expense) unfavorably affected 1999 pre-tax income by $5.6 million compared with 1998. The change resulted primarily from higher goodwill amortization related to acquisitions made in the second half of 1998, and higher currency translation and transaction losses, principally in Brazil, partially offset by higher equity earnings of affiliated companies. Net interest expense increased $8.6 million in 1999 compared with 1998, principally because of higher borrowings necessitated by the acquisitions made during the second half of 1998 and 1998 share repurchases. As the U.S. dollar strengthens or weakens against other international currencies in which we transact business, our financial results will be affected. Changes in currency exchange rates during 1999 had a favorable effect on net income as compared with exchange rates in effect during 1998. This was primarily a result of the weakening of the U.S. dollar against the Japanese yen, partially offset by a strengthening of the U.S. dollar against the pound sterling and other currencies. As a result of the factors discussed above, income before income taxes increased by $76.5 million or 64% over 1998. After excluding from both years the special charges and the gains from litigation settlements, income before income taxes increased by $57.8 million, or 41%, over 1998. Segment operating profit before tax, which excludes interest expense, increased $61.5 million, or 47%, for fluid technologies for transportation, and increased $4.9 million, or 22%, for fluid technologies for industry, as compared with 1998. The effective tax rate on 1999 income, before litigation gains and special charges, decreased to 36.5% as compared with 38.0% in 1998. This decrease, which increased 1999 earnings before these items by $.05 per share, was primarily due to improvement in the profitability of certain foreign subsidiaries with loss carryforwards, a reduction in the amount of non-deductible translation losses at certain foreign subsidiaries and a significant increase in pre-tax profit which diluted the effect of non-deductible items. Net income in 1999 was $123.0 million, or $2.25 per share. In 1998, net income was $71.2 million, or $1.27 per share. After excluding from 1999 and 1998 the special charges and the gains from litigation settlements, net income in 1999 was $125.3 million, as compared with $86.5 million in 1998, an increase of 45%. On this same basis, 1999 net income per share was $2.30, an increase of 48% from the $1.55 per share earned in 1998. 19 THE LUBRIZOL CORPORATION COST REDUCTION PROGRAMS AND RELATED SPECIAL CHARGES We have completed the cost reduction programs initiated in November 1998 to reduce costs and improve our operating structure. The first program, which was completed by the end of 1999, included the reorganization of our commercial structure, changes in work processes using our new globally integrated management information system, the shutdown of some production units and the consolidation of some facilities and offices. We have achieved annual savings of approximately $28 million related to this first program. The second program, which was completed by the end of 2000, involved primarily the downsizing of our Painesville, Ohio, manufacturing facility. We achieved approximately $19 million of savings in 2001 from the second program. (See also Note 15 to the financial statements.) The first program, which began in the fourth quarter of 1998, resulted in the reduction of approximately 7% of our workforce, or 300 employees, at both domestic and international locations. Approximately 55% of this reduction occurred by December 31, 1998, a further 35% occurred in the first quarter of 1999, and the remainder was substantially completed by the end of the third quarter of 1999. Of the 300 employees, approximately 40% were in the manufacturing area and 60% were in the selling, administrative, research and testing areas. In addition, we permanently removed seven component production units from service during this first program. We recorded a special charge of $23.3 million in the fourth quarter of 1998 for the cost directly associated with this first program. In the first quarter of 1999, we recognized additional expense of $3.1 million ($2.9 million after-tax or $.05 per share) to reflect a greater amount for separation benefits, principally in Japan. In the fourth quarter of 1999, an adjustment was made to reduce the special charge by $4.3 million ($2.5 million after-tax or $.05 per share) to reflect the settlement gain recorded as a result of settling employee pension obligations and other accrual adjustments. As adjusted, employee severance costs approximated $20.0 million of the total charge of $22.1 million and other exit costs approximated $2.1 million, virtually all of which related to asset impairments for component production units taken out of service. We spent approximately $.4 million, $14.7 million and $5.0 million in 2000, 1999 and 1998, respectively, related to this program. The second program, which began in the third quarter of 1999, resulted in the additional reduction of approximately 5% of our workforce, or 187 employees, and the shutdown of 20 of Painesville's 36 production systems. The Painesville plant continues to operate as a producer of small-volume specialized intermediates and as a blender of certain additive packages. We recorded a special charge of $20.8 million in the third quarter of 1999 relating to this second program. In the second quarter of 2000, we recorded a pre-tax adjustment of $2.6 million ($1.7 million after-tax or $.03 per share) to reduce the amount of the special charge. The cost of workforce reductions at Painesville was less than originally anticipated because of an increase in the planned number of employees due to the assumption of Alox production, retention of a waste incineration process and higher than expected throughput. We also eliminated a number of positions without severance pay cost through the transfer of employees to other facilities outside of Painesville. In the fourth quarter of 2000, we recorded a pre-tax adjustment of $1.9 million ($1.2 million after-tax or $.02 per share) to reduce further the amount of the special charge due to lower than anticipated equipment dismantling costs ($1.5 million) and lower workforce reduction costs ($.4 million) because additional employees transferred to other Lubrizol locations. As adjusted, employee severance costs were $5.5 million of the charge and other exit costs were $10.8 million, including $7.4 million related to asset impairment for component production units taken out of service. We spent approximately $1.8 million, $.9 million and $1.3 million in 2001, 2000 and 1999, respectively, related to this program. Additionally, we have spent approximately $6.8 million of capital to transfer a portion of the Painesville capacity to our Texas facilities. RETURN ON AVERAGE SHAREHOLDERS' EQUITY Return on average shareholders' equity was 12% in 2001, 15% in 2000 and 16% in 1999 (12%, 13% and 16%, respectively, excluding litigation gains and special charges and credits). [GRAPH] WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES Our cash flows for the years 1999 through 2001 are presented in the consolidated statements of cash flows. Cash provided from operating activities decreased by $30.3 million, or 13%, compared with 2000, to a total of $195.8 million in 2001. This decrease primarily was due to lower earnings significantly impacted by the non-recurrence in 2001 of the litigation settlement gain as well as an $8.5 million increase in working capital items in 2001 compared with a $2.0 million increase in working capital items in 2000. [GRAPH] Capital expenditures in 2001 were $66.3 million compared with $85.8 million in 2000. The lower level of capital expenditures in 2001 is primarily due to the timing of various envi- 20 THE LUBRIZOL CORPORATION ronmental and process improvement projects. Prior-year expenditures included capital spent to transfer capacity from our Painesville to our Texas facilities as part of our cost reduction program, which was completed in 2000. Capital expenditures have been below depreciation expense in each of the past three years. In 2002, we estimate expenditures will approximate depreciation expense and be in the range of $85 million to $90 million. In 2001 we spent $14.7 million on an acquisition to purchase ROSS Chem, Inc., a manufacturer and supplier of antifoam and defoaming agents, with annual sales of $10 million, that expanded our product lines in metalworking and paints, coatings and inks. We spent $35.7 million on two acquisitions in 2000 in which we purchased certain production assets and working capital of Alox Corporation, a supplier of additives for corrosion prevention in metalworking products, and acquired an additional 10% interest in our India joint venture, increasing our ownership interest to 50%. We also made a $5.0 million investment in 2000 in a joint venture with GE Transportation Systems. We made one acquisition in 1999 for $1.9 million. In 2001, we dissolved our joint venture with GE Transportation Systems and replaced the joint venture with separate cross-licensing agreements. We have entered into a technical services agreement to license our FluiPakTM technology (i.e., fluid management technology for use in monitoring fluids in machines and services) for railroad applications to GE Transportation Systems. This is expected to result in an additional royalty stream beginning in 2003, after design changes are made to the FluiPak unit. In the first quarter of 2002, we completed one acquisition and signed a definitive agreement for a second acquisition for a total estimated cost of $71 million. In January 2002, we acquired Kabo Unlimited, Inc., which specializes in the development, manufacture and sale of antifoam and defoaming agents to the food, fermentation, mining and wastewater industries. Kabo's product lines expand the defoamer offering and capabilities of our fluid technologies for industry business. In January 2002, we signed a definitive agreement to acquire Chemron Corporation, a supplier of specialty surfactants. This acquisition, upon completion, would extend our business into high-growth surfactants markets, including personal care products and industrial and institutional cleaners, in which we currently do not compete. During 2001, the annual revenues of Kabo and Chemron were approximately $14 million and $55 million, respectively. Our net debt to capitalization ratio at December 31, 2001, was 23%, compared with 28% at December 31, 2000, due to strong net operating cash flow in 2001 and the completion of only one acquisition during the year. 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. Debt as a percent of capitalization, without adjusting for cash and derivative instruments, was 34% in both 2001 and 2000. [GRAPH] During the first half of 2001, we repurchased approximately 1.0 million common shares for $30.0 million dollars. During 2000 we repurchased 3.2 million shares for $76.0 million and in 1999 we repurchased approximately 140,000 shares for $4.2 million. Our financial position remains strong with a ratio of current assets to current liabilities of 2.9:1 at December 31, 2001, compared with 2.6:1 at December 31, 2000. In July 2001, we increased our committed revolving credit facilities to $575 million by adding $525 million of new facilities and canceling $100 million in existing facilities due to expire in June 2003. These credit facilities may be used for working capital requirements, capital expenditures, acquisitions or other corporate purposes and also to support commercial paper borrowings made under our $525 million commercial paper program. There were no borrowings under these credit facilities at December 31, 2001. These facilities allow us to borrow at or below the U.S. prime rate and expire in the amount of $175 million on July 16, 2002, $50 million on June 30, 2003, and $350 million on July 16, 2006. The following table shows our contractual cash obligations (in millions of dollars) under debt agreements, leases and contracts at December 31, 2001. Additional information on debt and operating leases can be found in Notes 4 and 10 to the financial statements. Payments Due by Period -------------------------------------------------- Less Contractual Cash Than 1 1-3 4-5 After 5 Obligations Total Year Years Years Years - -------------------------------------------------------------------------------- Debt ....................... $ 397.2 $ 9.1 $ 7.6 $ 50.0 $ 330.5 Operating Leases ........... 49.3 12.5 15.6 9.2 12.0 Natural Gas Purchase Contracts ......... 5.9 5.9 Service Contracts .......... 2.0 1.0 1.0 -------- ------- ------- ------- -------- Total Contractual Cash Obligations ........... $ 454.4 $ 28.5 $ 24.2 $ 59.2 $ 342.5 ======== ======= ======= ======= ======== In addition, we have contingent obligations aggregating $12.4 million under standby letters of credit issued to financial institutions, customers and insurance companies to secure short-term support for a variety of commercial transactions and insurance and benefit programs undertaken in the ordinary course of business. These standby letters of credit expire in 2002. 21 THE LUBRIZOL CORPORATION We believe that our existing credit facilities, internally generated funds and ability to obtain additional financing, if desired, will be sufficient to meet our future capital and growth needs, including acquisitions to expand into new and existing fluid technology markets. If we were to incur significant additional indebtedness (for example, to make a large acquisition) that caused a change in our current long-term debt ratings, we would expect to be able to continue to meet our liquidity needs but at some increased cost for interest and commitment fees under our credit facilities. We do not believe any such increased costs would have a material impact upon our results of operations or financial condition. ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires us to make assumptions and estimates regarding future events. These assumptions and estimates affect the amounts reported in our financial statements. Accounting policies for which our subjective judgment is particularly important include estimating valuation reserves for slow moving or obsolete inventory, estimating the cost of future environmental remediation obligations in order to establish reserves, and providing reserves for tax exposure in the various taxing jurisdictions in which we conduct business. To the extent actual experience differs from our assumptions and estimates, we may have to increase or decrease these reserves and earnings could be affected. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 142, "Goodwill and Other Intangible Assets" which became effective for us on January 1, 2002. Under SFAS 142, there is no goodwill amortization for business combinations that occur after June 30, 2001 and amortization of goodwill on pre-June 30, 2001 acquisitions ceased effective January 1, 2002. Goodwill amortization, which was $11.4 million in 2001, is replaced with a requirement to test goodwill annually for impairment. Our initial impairment test must be completed by June 30, 2002. We have not determined the impact, if any, that the initial goodwill impairment test will have on our financial position or results of operations. We expect acquisitions to play an important role in our future growth strategy and accordingly expect SFAS 142 to be important to the presentation of our financial condition and results of operations. The annual goodwill impairment test will require us to make a number of assumptions and estimates concerning future levels of earnings and cash flow and any impairment of goodwill will reduce earnings. In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations" which will become effective for us on January 1, 2003. This statement requires entities to record a liability for an asset retirement obligation in the period in which it is incurred. The amount recorded as a liability is capitalized by increasing the carrying amount of the related long-lived asset, which is then depreciated over its useful life. We have not determined the impact, if any, that SFAS 143 will have on our financial position or results of operations. CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Management's Discussion and Analysis of Financial Condition and Results of Operations and the letter "To Our Shareholders" from W. G. Bares, Chairman, President and Chief Executive Officer of Lubrizol, contain 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. 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. These uncertainties and factors could cause our actual results to differ materially from those matters expressed in or implied by any forward-looking statements. We believe that the following factors, among others, could affect our future performance and cause our actual results to differ materially from those expressed or implied by forward-looking statements made in this annual report: - - the overall demand for lubricant and fuel additives on a worldwide basis, which has a slow growth rate in mature markets such as North America and Europe; - - the effect on our business resulting from economic and political uncertainty within the Asia-Pacific and Latin American regions; - - the lubricant additive demand in developing regions such as China and India, which geographic areas are an announced focus of our activities; - - the potential negative impact on product pricing and volume demand from the consolidation of finished lubricant marketers; - - the degree of competition resulting from lubricant additive industry over capacity; - - 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; - - the overall economic uncertainty and weak business environment within the global economy, which is affecting fluid technologies for industry in particular; 22 THE LUBRIZOL CORPORATION - - the extent to which we are successful in expanding our business in new and existing fluid technology markets incorporating chemicals, systems and services for industry and transportation; - - our ability to identify, complete and integrate acquisitions for profitable growth; - - our success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer and original equipment manufacturers' expectations; - - the frequency of change in industry performance standards, which affects the level and timing of our technology costs, the product life cycles and the relative quantity of additives required for new specifications; - - our ability to continue to reduce complexities and conversion costs and modify our cost structure to maintain and enhance our competitiveness; - - our success in strengthening relationships and growing business with our largest customers, and retaining the business of these customers over extended time periods; - - the cost, availability and quality of raw materials, including petroleum-based products; - - the cost and availability of energy, including natural gas and electricity; - - the effects of fluctuations in currency exchange rates upon our reported results from international operations, together with non-currency risks of investing in and conducting significant operations in foreign countries, including those relating to political, social, economic and regulatory factors; - - the extent to which we achieve market acceptance of our PuriNOx(TM) low-emission, water-blend fuel product; - - significant changes in government regulations affecting environmental compliance. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We operate manufacturing and blending facilities, laboratories and offices around the world and utilize fixed and floating 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. Additional information regarding our financial instruments is contained in Notes 4 and 13 to the financial statements. Our objective in managing our exposure to changes in interest rates is to limit the impact of such changes on our earnings and cash flow and to lower our overall borrowing costs. Our objective in managing the exposure to changes in foreign currency exchange rates is to reduce volatility on our 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. We measure our market risk related to our holdings of financial instruments based on changes in interest rates and foreign currency rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in fair values, cash flows and earnings based on a hypothetical 10% change (increase and decrease) in interest and currency exchange rates. We used current market rates on our debt and derivative portfolio to perform the sensitivity analysis. Certain items such as lease contracts, insurance contracts and obligations for pension and other post-retirement benefits were not included in the analysis. Our primary interest rate exposures relate to our cash and short-term investments, fixed and variable rate debt and interest rate swaps. The calculation of potential loss in fair values is based on an immediate change in the net present values of our interest rate-sensitive exposures resulting from a 10% change in interest rates. The potential loss in cash flows and income before tax is based on the change in the net interest income/expense over a one-year period due to an immediate 10% change in rates. A hypothetical 10% change in interest rates would have had a favorable/unfavorable impact on fair values of $20.2 million, cash flows of $1.0 million and income before tax of $1.0 million in 2001, and $22.4 million, $1.2 million and $1.2 million in 2000, respectively. Our primary currency rate exposures are to foreign denominated debt, intercompany debt, cash and short-term investments and foreign currency forward exchange contracts. The calculation of potential loss in fair values is based on an immediate change in the U.S. dollar equivalent balances of our currency exposures due to a 10% shift in exchange rates. The potential loss in cash flows and income before tax is based on the change in cash flow and income before tax over a one-year period resulting from an immediate 10% change in currency exchange rates. A hypothetical 10% change in currency exchange rates would have had a favorable/unfavorable impact on fair values of $7.4 million, cash flows of $13.3 million and income before tax of $3.7 million in 2001, and $7.8 million, $16.4 million and $5.3 million in 2000, respectively. 23 THE LUBRIZOL CORPORATION QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended ------------------------------------------------------------ March 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------------------------------------------- (In Thousands of Dollars Except Per Share Data) 2001 Net sales ...................................... $453,791 $485,928 $461,109 $438,416 Gross profit ................................... 119,109 135,926 128,222 120,526 Net income ..................................... 18,506 32,015 22,797 20,798 Net income per share ........................... $.36 $.63 $.45 $.41 Net income per share, diluted .................. $.36 $.62 $.44 $.40 2000 Net sales ...................................... $444,008 $448,979 $432,442 $445,888 Gross profit ................................... 127,326 129,848 121,624 114,332 Net income ..................................... 30,105 31,712 23,255 32,937 Net income per share ........................... $.55 $.59 $.44 $.64 Net income per share, diluted .................. $.55 $.59 $.44 $.63
In the second quarter of 2000, the company recorded a pre-tax adjustment of $2.6 million ($.03 per share) to reduce the amount of the special charge to reflect a lower cost of workforce reductions than was anticipated. In the fourth quarter of 2000, the company recorded a pre-tax adjustment of $1.9 million ($.02 per share) to further reduce the amount of the special charge due to lower-than-anticipated equipment dismantling costs ($1.5 million) and lower workforce reduction costs ($.4 million) because additional employees transferred to other company locations. In the fourth quarter of 2000, the company recorded a pre-tax gain from litigation settlement of $19.4 million ($.23 per share). - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT DELOITTE & TOUCHE TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE LUBRIZOL CORPORATION We have audited the accompanying consolidated balance sheets of The Lubrizol Corporation and its subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Lubrizol Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Cleveland, Ohio February 4, 2002 24 THE LUBRIZOL CORPORATION
Consolidated Statements of Income Year Ended December 31 ---------------------------------------------- (In Thousands of Dollars Except Per Share Data) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- Net sales ................................ $ 1,839,244 $ 1,771,317 $ 1,775,867 Royalties and other revenues ............. 5,400 4,463 4,462 ----------- ----------- ----------- Total revenues ...................... 1,844,644 1,775,780 1,780,329 Cost of sales ............................ 1,335,461 1,278,187 1,227,271 Selling and administrative expenses ...... 177,431 167,999 181,292 Research, testing and development expenses 158,473 150,805 145,927 ----------- ----------- ----------- Total cost and expenses ............. 1,671,365 1,596,991 1,554,490 Special (charges) credits ................ 4,484 (19,569) Gain from litigation settlements ......... 19,395 17,626 Other income (expense) - net ............. (15,076) (14,062) (6,704) Interest income .......................... 6,787 8,611 7,854 Interest expense ......................... (25,041) (26,869) (29,696) ----------- ----------- ----------- Income before income taxes ............... 139,949 170,348 195,350 Provision for income taxes ............... 45,833 52,339 72,358 ----------- ----------- ----------- Net income ............................... $ 94,116 $ 118,009 $ 122,992 =========== =========== =========== Net income per share ..................... $ 1.84 $ 2.22 $ 2.25 =========== =========== =========== Net income per share, diluted ............ $ 1.83 $ 2.22 $ 2.25 =========== =========== =========== Dividends per share ...................... $ 1.04 $ 1.04 $ 1.04 =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 25 THE LUBRIZOL CORPORATION
CONSOLIDATED BALANCE SHEETS December 31 ---------------------------- (In Thousands of Dollars) 2001 2000 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and short-term investments ....................................... $ 189,095 $ 145,937 Receivables ........................................................... 279,013 290,556 Inventories ........................................................... 254,610 260,133 Other current assets .................................................. 34,006 31,282 ----------- ----------- Total current assets ............................................. 756,724 727,908 ----------- ----------- Property and equipment - at cost ...................................... 1,648,096 1,641,046 Less accumulated depreciation ......................................... 1,003,815 963,804 ----------- ----------- Property and equipment - net ..................................... 644,281 677,242 ----------- ----------- Goodwill and intangible assets - net .................................. 166,558 170,593 Investments in non-consolidated companies ............................. 30,915 34,247 Other assets .......................................................... 63,841 49,500 ----------- ----------- TOTAL ........................................................ $ 1,662,319 $ 1,659,490 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt and current portion of long-term debt ................. $ 9,120 $ 17,152 Accounts payable ...................................................... 129,833 141,574 Accrued expenses and other current liabilities ........................ 120,261 123,520 ----------- ----------- Total current liabilities ........................................ 259,214 282,246 ----------- ----------- Long-term debt ........................................................ 388,111 378,783 Postretirement health care obligation ................................. 97,878 100,275 Noncurrent liabilities ................................................ 55,140 52,821 Deferred income taxes ................................................. 56,207 60,614 ----------- ----------- Total liabilities ................................................ 856,550 874,739 ----------- ----------- Minority interest in consolidated companies ........................... 32,577 32,470 Contingencies and commitments Preferred stock without par value - unissued Common shares without par value - outstanding 51,152,107 shares in 2001 and 51,307,688 shares in 2000 ...................................... 109,692 82,128 Retained earnings ..................................................... 763,312 750,779 ACCUMULATED OTHER COMPREHENSIVE LOSS .................................. (99,812) (80,626) ----------- ----------- Total shareholders' equity ....................................... 773,192 752,281 ----------- ----------- TOTAL ........................................................ $ 1,662,319 $ 1,659,490 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 26 THE LUBRIZOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (In Thousands of Dollars) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- CASH PROVIDED FROM (USED FOR): OPERATING ACTIVITIES: Net income .................................................................. $ 94,116 $ 118,009 $ 122,992 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization .......................................... 98,832 100,834 99,720 Deferred income taxes .................................................. (2,392) 7,799 1,312 Special charges (credits) .............................................. (4,484) 19,569 Change in current assets and liabilities net of acquisitions: Receivables ........................................................ 2,217 542 (10,749) Inventories ........................................................ 866 (6,124) 13,500 Accounts payable, accrued expenses and other current liabilities ........................................ (8,399) 2,981 28,408 Other current assets ............................................... (3,171) 582 19,052 --------- --------- --------- (8,487) (2,019) 50,211 Change in noncurrent liabilities ....................................... 4,740 1,250 370 Other items - net ...................................................... 9,029 4,775 (5,153) --------- --------- --------- TOTAL OPERATING ACTIVITIES .................................... 195,838 226,164 289,021 INVESTING ACTIVITIES: Capital expenditures ........................................................ (66,316) (85,757) (64,872) Acquisitions and investments in nonconsolidated companies ................... (14,989) (41,476) (1,923) Other - net ................................................................. (340) 1,997 2,246 --------- --------- --------- Total investing activities .................................... (81,645) (125,236) (64,549) FINANCING ACTIVITIES: Short-term borrowing (repayment) ............................................ (4,579) 4,099 (8,404) Long-term borrowing ......................................................... 18,428 5,000 Long-term repayment ......................................................... (3,120) (29,015) (24,447) Debt issuance costs ......................................................... (351) Dividends paid .............................................................. (53,218) (55,370) (56,757) Common shares purchased ..................................................... (30,039) (75,957) (4,178) Common shares issued upon exercise of stock options ......................... 22,294 1,310 1,553 --------- --------- --------- Total financing activities .................................... (68,662) (136,856) (87,233) Effect of exchange rate changes on cash ..................................... (2,373) (3,600) (5,413) --------- --------- --------- Net increase (decrease) in cash and short-term investments .................. 43,158 (39,528) 131,826 Cash and short-term investments at the beginning of year .................... 145,937 185,465 53,639 --------- --------- --------- Cash and short-term investments at the end of year .......................... $ 189,095 $ 145,937 $ 185,465 ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. 27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shareholders' Equity ------------------------------------------------ Number of Accumulated Other Shares Common Retained Comprehensive (Dollars in Thousands) Outstanding Shares Earnings Income (Loss) Total - ------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998.................... 54,548,110 $ 84,651 $709,994 $ (25,527) $769,118 -------- Comprehensive income: Net income 1999.......................... 122,992 122,992 Other comprehensive loss................. (28,423) (28,423) -------- Comprehensive income.......................... 94,569 Cash dividends................................ (70,938)* (70,938) Common shares - treasury: Shares purchased......................... (139,600) (220) (3,958) (4,178) Shares issued upon exercise of stock options............................... 68,782 1,553 1,553 ---------- -------- -------- --------- -------- BALANCE, DECEMBER 31, 1999.................... 54,477,292 85,984 758,090 (53,950) 790,124 -------- Comprehensive income: Net income 2000.......................... 118,009 118,009 Other comprehensive loss................. (26,676) (26,676) -------- Comprehensive income.......................... 91,333 Cash dividends................................ (54,529) (54,529) Common shares - treasury: Shares purchased......................... (3,232,096) (5,166) (70,791) (75,957) Shares issued upon exercise of stock options............................... 62,492 1,310 1,310 ---------- -------- -------- --------- -------- BALANCE, DECEMBER 31, 2000.................... 51,307,688 82,128 750,779 (80,626) 752,281 -------- Comprehensive income: Net income 2001.......................... 94,116 94,116 Other comprehensive loss (19,186) (19,186) -------- Comprehensive income.......................... 74,930 Cash dividends................................ (53,206) (53,206) Deferred stock compensation................... 5,474 5,474 Common shares - treasury: Shares purchased......................... (967,610) (1,662) (28,377) (30,039) Shares issued upon exercise of stock options............................... 812,029 23,752 23,752 ---------- -------- -------- --------- -------- BALANCE, DECEMBER 31, 2001.................... 51,152,107 $109,692 $763,312 $ (99,812) $773,192 ========== ======== ======== ========= ========
*Represents five dividends declared, of which four were paid in 1999. The accompanying notes to financial statements are an integral part of these statements. 28 NOTES TO FINANCIAL STATEMENTS (In Thousands of Dollars Unless Otherwise Indicated) NOTE 1-- NATURE OF OPERATIONS The Lubrizol Corporation is a global fluid technology company that develops, produces and sells high-performance chemicals, systems and services for industry and transportation. We create these products, including specialty additive packages and related equipment, for use in transportation and industrial lubricant and other markets. We do this by applying advanced chemical and mechanical technologies in order to enhance the performance, quality and value and reduce the environmental impact of the customer products in which our products are used. The company groups its product lines into two operating segments: fluid technologies for transportation and fluid technologies for industry. Fluid technologies for transportation comprise approximately 83% of the company's consolidated revenues and 96% of segment pre-tax operating profit in 2001. Refer to Note 12 for a further description of the nature of the company's operations, the product lines within fluid technologies for transportation and fluid technologies for industry and related financial disclosures. NOTE 2 -- ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of The Lubrizol Corporation and its subsidiaries where ownership is 50% or greater and the company has effective management control. For nonconsolidated companies (affiliates), the equity method of accounting is used when ownership, unless temporary, exceeds 20% and when the company has the ability to exercise significant influence over the policies of the investee. The book value of investments carried at equity was $30.0 million and $32.7 million at December 31, 2001 and 2000, respectively. Investments carried at cost were $.9 million and $1.5 million at December 31, 2001 and December 31, 2000, respectively. ESTIMATES - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions pending completion of related events. These estimates and assumptions affect the amounts reported at the date of the consolidated financial statements for assets, liabilities, revenues and expenses and the disclosure of contingencies. Actual results could differ from those estimates. CASH EQUIVALENTS - The company invests its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the company and are comprised of investments having maturities of three months or fewer when purchased. INVENTORIES - Inventories are stated at the lower of cost or market value. Cost of inventories is determined by either first-in, first-out (FIFO) method or moving average method, except in the United States of America for chemical inventories, which are primarily valued using the last-in, first-out (LIFO) method. PROPERTY AND EQUIPMENT - Property and equipment are carried at cost. Repair and maintenance costs are charged against income while renewals and betterments are capitalized as additions to the related assets. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and immediately expensed for preliminary project activities or post-implementation activities. Accelerated depreciation methods are used in computing depreciation on certain machinery and equipment, which comprise approximately 16% and 18% in 2001 and 2000, respectively, of the depreciable assets. The remaining assets are depreciated using the straight-line method. The estimated useful lives are 10 to 40 years for buildings and land and building improvements and range from 3 to 20 years for machinery and equipment. GOODWILL AND INTANGIBLE ASSETS - Intangibles resulting from business acquisitions including costs in excess of net assets of businesses acquired (goodwill), purchased technology and trademarks are being amortized on a straight-line method over periods ranging from 5 to 25 years. The recoverability of goodwill and intangible assets is evaluated at the business unit level by analysis of operating results and consideration of other significant events or changes in the business environment. If a business unit has operating losses and based upon projections there is a likelihood that such operating losses will continue, the company will evaluate whether impairment exists on the basis of undiscounted expected future cash flows from operations before interest for the remaining amortization period. When estimated future discounted cash flows are less than the carrying amount of the net assets (tangible and identifiable intangibles) and related goodwill, impairment losses of goodwill are charged to operations. Impairment losses, limited to the carrying amount of goodwill, represent the excess of the sum of the carrying amount of the net assets (tangible and identifiable intangibles) and goodwill in excess of the discounted cash flows of the business unit being evaluated. In June 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. The company did not enter into any business combinations in the second half of 2001. In June 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible Assets," which became effective for the company on January 1, 2002. Under the provisions of SFAS 142 there is no goodwill amortization for business combinations that occur after June 30, 2001, and amortization of goodwill on pre-June 30, 2001 acquisitions ceased effective January 1, 2002. The Company's goodwill amortization expense in 2001 was $11.4 million. Goodwill amortization is 29 NOTES CONTINUED 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 test of goodwill for impairment will have on its consolidated financial position or results of operations. RESEARCH, TESTING AND DEVELOPMENT - Research, testing and development costs are expensed as incurred. Research and development expenses, excluding testing, were $87.6 million in 2001, $86.4 million in 2000 and $78.3 million in 1999. ENVIRONMENTAL LIABILITIES - The company accrues for expenses associated with environmental remediation obligations when such expenses are probable and reasonably estimable. These accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. The company's environmental reserves totaled $9.5 million and $7.3 million at December 31, 2001 and 2000, respectively. Of these amounts, $.5 million and $1.0 million was included in other current liabilities at December 31, 2001 and 2000, respectively. FOREIGN CURRENCY TRANSLATION - The assets and liabilities of certain of the company's international subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at weighted average exchange rates in effect during the period. Unrealized translation adjustments are recorded as a component of other comprehensive income in shareholders' equity, except for subsidiaries for which the functional currency is the U.S. dollar, where translation adjustments are realized in income. Transaction gains or losses that arise from exchange rate changes on transactions denominated in a currency other than the functional currency, except those transactions that function as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment, are included in income as incurred. SHARE REPURCHASES - The company utilizes the par value method of accounting for its treasury shares. Under this method, the cost to reacquire shares in excess of paid-in capital related to those shares is charged against retained earnings. REVENUE RECOGNITION - Revenues are recognized at the time of shipment of products to customers, or at the time of transfer of title if later, with appropriate provision for uncollectible accounts. All amounts billed to a customer in a sales transaction related to shipping and handling are reported as revenues. PER SHARE AMOUNTS - Net income per share is computed by dividing net income by average common shares outstanding during the period, including contingently issuable shares. Net income per diluted share includes the dilution effect resulting from outstanding stock options and stock awards. Per share amounts are computed as follows:
2001 2000 1999 -------- -------- -------- Numerator: Net income ..................... $ 94,116 $118,009 $122,922 ======== ======== ======== Denominator: Weighted average common shares outstanding .................. 51,209 53,116 54,577 Dilutive effect of stock options and awards ........... 285 104 139 -------- -------- -------- Denominator for net income per share, diluted ............. 51,494 53,220 54,716 ======== ======== ======== Net income per share .............. $ 1.84 $ 2.22 $ 2.25 ======== ======== ======== Net income per share, diluted ........................ $ 1.83 $ 2.22 $ 2.25 ======== ======== ========
Weighted average shares issuable upon the exercise of stock options which were excluded from the diluted earnings per share calculation because they were antidilutive were 1.8 million in 2001, 3.8 million in 2000 and 3.1 million in 1999. ACCOUNTING FOR DERIVATIVE INSTRUMENTS - Effective January 1, 2001, the company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 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 either 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. 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 these statements did not have a material cumulative 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 (See notes 6 and 13). ASSET RETIREMENT OBLIGATIONS - In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations," which will become effective for the company on January 1, 2003. This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The amount recorded as a liability will be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the 30 THE LUBRIZOL CORPORATION obligation for its recorded amount or incurs a gain or loss upon settlement. The company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS - In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which became effective for the company on January 1, 2002. This statement further refines the rules for accounting for long-lived assets and measuring impairment. The company believes the adoption of this statement will not have a material impact on its consolidated financial position or results of operations. Note 3 -- Inventories
2001 2000 -------- -------- Finished products............. $124,503 $124,755 Products in process........... 48,859 56,908 Raw materials................. 64,504 61,706 Supplies and engine test parts....................... 16,744 16,764 -------- -------- $254,610 $260,133 ======== ========
Inventories on the LIFO method were 27% and 22% of consolidated inventories at December 31, 2001 and 2000, respectively. The current replacement cost of these inventories exceeded the LIFO cost at December 31, 2001 and 2000, by $49.7 million and $54.5 million, respectively. During 2000, some inventory quantities were reduced, resulting in a liquidation of certain LIFO inventory quantities carried at lower costs in prior years as compared with costs at December 31, 2000. The effect of this liquidation increased income before income taxes by $1.4 million. Note 4 -- Short-term and Long-term Debt
2001 2000 -------- -------- Long-term debt consists of: 5.875% notes, due 2008, including fair value adjustment of $11,851 for derivative hedge instruments in 2001 ..................... $211,851 $200,000 7.25% debentures, due 2025 ..... 100,000 100,000 Debt supported by long-term banking arrangements: Commercial paper at weighted average rates of 2.1% and 6.5% .................. 50,000 50,000 Marine terminal refunding revenue bonds, at 1.7% and 4.9%, due 2018 ............ 18,375 18,375 Term loans: Yen denominated, at 1.6% to 2.8%, due 2002 - 2003 ..... 8,728 13,253 Euro denominated, at 3.5% to 5.0%, due 2004 - 2010 .. 372 458 -------- -------- 389,326 382,086 Less current portion ........... (1,215) (3,303) -------- -------- $388,111 $378,783 ======== ========
2001 2000 -------- -------- Short-term debt consists of: Commercial paper at weighted average rate of 6.5% ......... $ 1,300 Other short-term debt at weighted average rates of 1.1% and 3.6% ................ $ 7,905 $ 12,549 Current portion of long-term debt ......................... 1,215 3,303 ------- -------- $ 9,120 $ 17,152 ======= ========
In May 2000, the company borrowed $18,375,000 through the issuance of marine terminal refunding revenue bonds, the proceeds of which were used to repay previously issued marine terminal refunding revenue bonds. The bonds have a stated maturity of July 1, 2018, and bear interest at a variable rate which is determined weekly by the remarketing agent (the interest rate at December 31, 2001, was 1.65%). The bonds may be put to the company by the bondholders at each weekly interest reset date; however, the company expects that these bonds would then be remarketed. In November 1998, the company issued notes having an aggregate principal amount of $200 million. The notes are unsecured, senior obligations of the company that mature on December 1, 2008, and bear interest at 5.875% per annum, payable semi-annually on June 1 and December 1 of each year. The notes have no sinking fund requirement but are redeemable, in whole or in part, at the option of the company. The company incurred debt issuance costs aggregating $10.5 million, including a loss of $6.5 million related to closed Treasury rate lock agreements originally entered into as a hedge against changes in interest rates relative to the anticipated issuance of these notes. Debt issuance costs are deferred and then amortized as a component of interest expense over the term of the notes. Including debt issuance costs, these notes have an effective annualized interest rate of 6.6% to the company. The company has debentures outstanding in an aggregate principal amount of $100 million. These debentures are unsecured, senior obligations of the company that mature on June 15, 2025, and bear interest at an annualized rate of 7.25% payable semi-annually on June 15 and December 15 of each year. The debentures are not redeemable prior to maturity and are not subject to any sinking fund requirements. The company has committed revolving credit facilities of $575 million. $175 million of these facilities expire on July 16, 2002; $50 million on June 30, 2003; and $350 million on July 17, 2006. These facilities, which were unused at December 31, 2001, permit the company to borrow at or below the U.S. prime rate. These facilities also permit the company to refinance beyond one year $400 million of debt, which by its terms is due within one year. As permitted by these and previously existing credit facilities, the company classified as long-term at each balance sheet date the portion of commercial paper borrowings expected to remain outstanding 31 NOTES CONTINUED throughout the following year and the amount due under the marine terminal refunding revenue bonds, whose bondholders have the right to put the bonds back to the company. Amounts due on long-term debt are $1.2 million in 2002, $7.6 million in 2003, $50.0 million in 2006 and $330.5 million thereafter. The company has interest rate swap agreements, which expire in March 2005, that exchange variable rate interest obligations on a notional principal amount of $50 million for a fixed rate of 7.6%. The company also has interest rate swap agreements, which expire in December 2008, which effectively convert the interest on $100 million of outstanding 5.875% notes due 2008 to a variable rate of three-month LIBOR less 159.125 basis points (see Note 13). Interest paid, net of amounts capitalized, amounted to $23.3 million, $26.9 million and $28.8 million during 2001, 2000 and 1999, respectively. The company capitalizes interest on qualifying capital projects. The amount of interest capitalized during 2001, 2000 and 1999 amounted to $.2 million, $.2 million and $.1 million, respectively. Note 5 -- Other Balance Sheet Information
Receivables: 2001 2000 -------- -------- Customers .......................... $242,408 $261,881 Affiliates ......................... 6,664 6,408 Other .............................. 29,941 22,267 -------- -------- $279,013 $290,556 ======== ========
Receivables are net of allowance for doubtful accounts of $5.3 million in 2001 and $5.7 million in 2000.
Property and Equipment - at cost: 2001 2000 ---------- ---------- Land and improvements .................. $ 105,795 $ 106,009 Buildings and improvements ............. 303,924 311,683 Machinery and equipment ................ 1,190,710 1,174,254 Construction in progress ............... 47,667 49,100 ---------- ---------- $1,648,096 $1,641,046 ========== ==========
Depreciation and amortization of property and equipment was $84.7 million in 2001, $88.0 million in 2000 and $88.3 million in 1999.
Goodwill and Intangible Assets - net: 2001 2000 -------- -------- Goodwill ................................... $187,978 $177,686 Intangible assets .......................... 41,669 41,878 -------- -------- 229,647 219,564 Less accumulated amortization .............. 63,089 48,971 -------- -------- $166,558 $170,593 ======== ========
Dividends payable was $13.3 million at the end of both 2001 and 2000 and is included in accounts payable.
Accrued Expenses and Other Current Liabilities: 2001 2000 -------- -------- Employee compensation ........................ $ 41,728 $ 39,888 Income taxes ................................. 28,885 34,403 Taxes other than income ...................... 19,502 18,109 Special charges and acquisition assimilation costs ........................ 150 1,886 Other ........................................ 29,996 29,234 -------- -------- $120,261 $123,520 ======== ========
Noncurrent Liabilities: ...................... 2001 2000 -------- -------- Employee benefits ............................ $ 36,807 $ 39,250 Other ........................................ 18,333 13,571 -------- -------- $ 55,140 $ 52,821 ======== ========
NOTE 6 -- SHAREHOLDERS' EQUITY The company has 147 million authorized shares consisting of 2 million shares of serial preferred stock, 25 million shares of serial preference shares and 120 million common shares, each of which is without par value. Common shares outstanding exclude common shares held in treasury of 35,043,787 and 34,888,206 at December 31, 2001 and 2000, respectively. The company has a shareholder rights plan under which one right to buy one-half common share has been distributed for each common share held. The rights may become exercisable under certain circumstances involving actual or potential acquisitions of 20% or more of the common shares by a person or affiliated persons who acquire stock without complying with the requirements of the company's articles of incorporation. The rights would entitle shareholders, other than this person or affiliated persons, to purchase common shares of the company or of certain acquiring persons at 50% of then current market value. At the option of the directors, the rights may be exchanged for common shares, and may be redeemed in cash, securities or other consideration. The rights will expire in 2007 unless redeemed earlier. 32 THE LUBRIZOL CORPORATION Accumulated other comprehensive income (loss) shown in the consolidated statements of shareholders' equity at December 31, 2001, 2000 and 1999 is comprised of the following:
Foreign Accumulated Currency Unrealized Pension Plan Other Translation Losses Interest Minimum Comprehensive Adjustment Rate Swaps Liability Loss ------------------------------------------------------------- December 31, 1998 ........................................ $(25,527) $(25,527) Other Comprehensive Income: Pre-tax ............................................... (27,923) $ (838) (28,761) Tax benefit ........................................... 45 293 338 -------- -------- -------- Total ................................................. (27,878) (545) (28,423) -------- -------- -------- December 31, 1999 ........................................ (53,405) (545) (53,950) -------- -------- -------- Other Comprehensive Income: Pre-tax ............................................... (26,543) (738) (27,281) Tax benefit ........................................... 300 305 605 -------- -------- -------- Total ................................................. (26,243) (433) (26,676) -------- -------- -------- December 31, 2000 ........................................ (79,648) (978) (80,626) -------- -------- -------- Other Comprehensive Income: Pre-tax cumulative effect of accounting change - SFAS 133...................................... (2,021) (2,021) Pre-tax ................................................. (17,022) (1,715) (538) (19,275) Tax benefit ............................................. 528 1,308 274 2,110 -------- -------- -------- -------- Total ................................................. (16,494) (2,428) (264) (19,186) -------- -------- -------- -------- December 31, 2001 ........................................ $(96,142) $ (2,428) $ (1,242) $(99,812) ======== ======== ======== ========
- ------------------------------------------------------------------------------- NOTE 7 -- OTHER INCOME (EXPENSE) - NET
2001 2000 1999 -------- -------- -------- Equity earnings of noncon- solidated companies ... $ 2,196 $ 1,483 $ 5,735 Amortization of goodwill and intangible assets................ (14,118) (12,847) (11,430) Currency exchange/ transaction loss ...... (3,041) (1,528) (3,108) Other - net .............. (113) (1,170) 2,099 -------- -------- -------- $(15,076) $(14,062) $ (6,704) ======== ======== ========
NOTE 8 -- INCOME TAXES The provision for income taxes is based upon income before tax for financial reporting purposes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. In estimating future tax consequences, the company considers anticipated future events, except changes in tax laws or rates, which are recognized when enacted. Income before income taxes consists of the following:
2001 2000 1999 -------- -------- -------- United States ... $ 79,576 $ 94,016 $113,904 Foreign ......... 60,373 76,332 81,446 -------- -------- -------- Total ........... $139,949 $170,348 $195,350 ======== ======== ========
The provision for income taxes consists of the following:
2001 2000 1999 -------- -------- -------- Current: United States... $ 25,891 $ 14,679 $ 46,983 Foreign ........ 22,334 29,861 24,063 -------- -------- -------- 48,225 44,540 71,046 -------- -------- -------- Deferred: United States... (4,992) 6,613 (3,467) Foreign ........ 2,600 1,186 4,779 -------- -------- -------- (2,392) 7,799 1,312 -------- -------- -------- Total .......... $ 45,833 $ 52,339 $ 72,358 ======== ======== ========
The United States tax provision includes the U.S. tax on foreign income distributed to the company. The provision for taxes outside the United States includes withholding taxes. The differences between the provision for income taxes at the U.S. statutory rate and the tax shown in the consolidated statements of income are summarized as follows:
2001 2000 1999 -------- -------- -------- Tax at statutory rate of 35%....................... $ 48,982 $ 59,622 $ 68,373 State and local taxes ....... 1,230 1,081 2,815 Foreign sales corporation earnings ................. (4,223) (4,767) (1,923) Technology donation ......... (6,027) Foreign deferred tax valuation allowance ...... 124 (974) (3,904) Other foreign tax differences............... 1,034 3,388 3,954 Equity income ............... (3,857) (267) (875) Other - net ................. 2,543 283 3,918 -------- -------- -------- Provision for income taxes .. $ 45,833 $ 52,339 $ 72,358 ======== ======== ========
33 NOTES CONTINUED The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31 are as follows:
2001 2000 --------- --------- Deferred tax assets: Accrued compensation and benefits .................. $ 46,595 $ 46,489 Intercompany profit in inventory...................... 9,267 11,163 Net operating losses carried forward ............... 6,151 7,687 Other ........................... 9,436 7,613 --------- --------- Total gross deferred tax assets .... 71,449 72,952 Less valuation allowance ........... (4,303) (4,179) --------- --------- Net deferred tax assets ............ 67,146 68,773 --------- --------- Deferred tax liabilities: Depreciation and other basis differences ............. 91,580 95,049 Undistributed foreign equity income ................. 4,501 6,662 Inventory basis differences ..... 177 2,227 Other ........................... 7,545 5,954 --------- --------- Total gross deferred tax liabilities.................... 103,803 109,892 --------- --------- Net deferred tax liabilities ....... $ 36,657 $ 41,119 ========= =========
At December 31, 2001, certain foreign subsidiaries had net operating loss carryforwards of $20.1 million for income tax purposes, of which $1.2 million expire in years 2001 through 2011 and $18.9 million has no expiration. After evaluating tax planning strategies and historical and projected profitability, a valuation allowance has been recognized to reduce the deferred tax assets related to those carryforwards to the amount expected to be realized. The net change in the total valuation allowance for the years ended December 31, 2001, 2000 and 1999, was an increase of $0.1 million, a decrease of $1.0 million and a decrease of $3.9 million, respectively. U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries, which are considered to be indefinitely reinvested in the operations of such subsidiaries. The amount of these earnings was approximately $409.6 million at December 31, 2001. Determination of the net amount of unrecognized U.S. income tax with respect to these earnings is not practicable. Income taxes paid during 2001, 2000 and 1999 were $49.7 million, $36.4 million and $59.1 million, respectively. NOTE 9-- PENSION, PROFIT SHARING AND OTHER POSTRETIREMENT BENEFIT PLANS The company has noncontributory defined benefit pension plans covering most employees. Pension benefits under these plans are based on years of service and the employee's compensation. The company's funding policy in the United States is to contribute amounts to satisfy the Internal Revenue Service funding standards and elsewhere to fund amounts in accordance with local regulations. Several of the company's defined benefit plans are not funded. Plan assets are invested principally in marketable equity securities and fixed income instruments. The company also provides certain non-pension postretirement benefits, primarily health care and life insurance benefits, for retired employees. Most of the company's full-time employees in the U.S. become eligible for health care benefits after attaining specified years of service and age 55 at retirement. Full-time employees who retire before January 1, 2003 are also eligible for life insurance benefits. Participants contribute a portion of the cost of these benefits. The company's non-pension postretirement benefit plans are not funded. Net periodic pension cost of the company's defined benefit pension plans consists of:
2001 2000 1999 -------- -------- -------- Service cost - benefits earned during period .. $ 11,673 $ 10,379 $ 11,843 Interest cost on projected benefit obligation .... 20,425 17,972 17,589 Expected return on plan assets ........... (26,860) (25,809) (25,873) Amortization of prior service costs ......... 3,127 2,124 1,771 Amortization of initial net asset ............. (1,218) (1,106) (1,264) Recognized net actuarial (gain) loss ........... (1,045) (2,370) 507 Settlement (gain) loss ... 142 (5,474) -------- -------- -------- Net periodic pension cost................... $ 6,244 $ 1,190 $ (901) ======== ======== ========
The company also has defined contribution plans, principally involving profit sharing plans and a 401(k) savings plan, covering most employees in the United States and at certain non-U.S. subsidiaries. Expense for all defined contribution retirement plans was $9.6 million in 2001, $7.9 million in 2000 and $9.0 million in 1999. As discussed in Note 15, the company initiated a cost reduction program and recognized special termination benefits of $11.6 million in 1999, comprised of $3.1 million and $8.5 million included in the special charges recognized in the first and third quarters of 1999, respectively. The $8.5 million of special termination benefits includes $3.2 million and $1.5 million of special termination benefits that were recognized as part of the U.S. pension benefit obligation in 2000 and 1999, respectively. The company also recognized a settlement gain of $10.0 million in the fourth quarter of 1999 in the United States, $4.5 million of which was recorded as an adjustment to the special charge and $5.5 million recorded as a reduction in net periodic pension cost. 34 THE LUBRIZOL CORPORATION Net non-pension postretirement benefit cost consists of:
2001 2000 1999 ------- ------- ------- Service cost - benefits earned during period......................... $ 1,569 $ 1,326 $ 1,468 Interest cost on accumulated benefit obligation...................... 6,387 5,387 4,728 Amortization of prior service costs.................................. (4,501) (3,173) (3,218) Recognized net actuarial loss........................................ 944 7 23 Curtailment gain..................................................... (1,358) Settlement loss...................................................... 853 ------- ------- ------- Net non-pension postretirement benefits cost......................... $ 3,894 $ 3,547 $ 3,001 ======= ======= =======
The change in benefit obligation and plan assets for 2001 and 2000 and the amounts recognized in the consolidated balance sheets at December 31 of the company's defined benefit pension and non-pension postretirement plans are as follows:
Pension Plans Other Benefits ------------------------- -------------------------- 2001 2000 2001 2000 -------- -------- --------- --------- Change in benefit obligation: Benefit obligation at beginning of year.............. $294,835 $264,877 $ 74,659 $71,500 Service cost...................................... 11,673 10,379 1,569 1,326 Interest cost..................................... 20,425 17,972 6,387 5,387 Plan participants' contributions.................. 202 114 Actuarial loss.................................... 15,269 961 42,846 426 Currency exchange rate change..................... (5,147) (9,165) (114) (96) Amendments........................................ 2,592 21,368 (26,312) 504 Acquisitions...................................... 2,110 719 Curtailments...................................... (1,600) Special termination benefits...................... 3,226 Benefits paid..................................... (27,890) (17,007) (6,408) (4,388) -------- -------- --------- --------- Benefit obligation at end of year.................... 311,959 294,835 91,746 74,659 -------- -------- --------- --------- Change in plan assets: Fair value of plan assets at beginning of year.... 319,635 324,534 Actual return on plan assets.................... (21,145) 13,427 Acquisition..................................... 3,130 Employer contributions.......................... 4,400 4,255 6,408 4,388 Plan participants' contributions................ 202 114 Currency exchange rate change................... (1,488) (8,818) Benefits paid................................... (27,890) (17,007) (6,408) (4,388) -------- -------- --------- --------- Fair value of plan assets at end of year.......... 273,714 319,635 -------- -------- --------- --------- Plan assets greater (less) than the benefit obligation........................................ (38,245) 24,800 (91,746) (74,659) Unrecognized net loss (gain)...................... 24,138 37,419) 35,755 (5,083) Unrecognized net transition obligation (asset).... (1,488) (1,839) Unrecognized prior service cost................... 26,847 26,509 (45,556) (23,725) -------- -------- --------- --------- Net amount recognized................................ $ 11,252 $ 12,051 $(101,547) $(103,467) ======== ======== ========= ========= Amount recognized in the statement of financial position consists of: Prepaid benefit cost.............................. $ 27,934 $ 25,031 Accrued benefit liability......................... (20,361) (16,365) $(101,547) $(103,467) Accumulated other comprehensive income............ 2,114 1,576 Intangible asset.................................. 1,565 1,809 -------- -------- --------- --------- Net amount recognized................................ $ 11,252 $ 12,051 $(101,547) $(103,467) ======== ======== ========= =========
35 NOTES CONTINUED
Pension Plans Other Benefits ------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- The weighted average assumptions as of December 31: Discount rate for determining funded status............. 6.67% 7.00% 7.31% 7.69% Expected return on plan assets.......................... 8.45% 8.55% Rate of compensation increase........................... 3.82% 3.93%
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $304.2 million and $265.6 million, respectively, as of December 31, 2001, and $30.0 million and $9.4 million, respectively, as of December 31, 2000. The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $23.7 million and $7.1 million, respectively, as of December 31, 2001, and $23.2 million and $7.9 million, respectively, as of December 31, 2000. The weighted average of the assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation for the company's postretirement benefit plans at December 31, 2001, was 8.82%, (5.99% at December 31, 2000), with subsequent annual decrements to an ultimate trend rate of 4.95% by 2009. The assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rate would have the following effects as of and for the year ended December 31, 2001:
One-Percentage-Point ------------------------- Increase Decrease -------- -------- Effect on postretirement benefit obligation....................... $13,228 $(11,105) Effect on total service and interest cost components.......................... $ 1,681 $ (1,281)
- ------------------------------------------------------------------------------- NOTE 10 -- LEASES The company has commitments under operating leases primarily for office space, terminal facilities, land, railroad tank cars and various computer and office equipment. Rental expense was $14.0 million in 2001, $16.2 million in 2000 and $18.5 million in 1999. Future minimum rental commitments under operating leases having initial or remaining noncancelable lease terms exceeding one year are $12.5 million in 2002, $9.1 million in 2003, $6.5 million in 2004, $5.9 million in 2005, $3.3 million in 2006 and $12.0 million thereafter. Minimum rental commitments are net of estimated credits for railroad usage of $2.3 million in 2002, $1.8 million in 2003, $1.5 million in 2004, $1.3 million in 2005, $.7 million in 2006 and $.5 million thereafter. NOTE 11 -- ACQUISITIONS In 2001, the company spent $14.7 million on an acquisition to purchase ROSS Chem, Inc., a manufacturer and supplier of antifoam and defoaming agents, with annual revenues of $10.0 million, that expanded the company's product lines in metalworking and paints, coatings and inks. Also in 2001, the company dissolved the joint venture with GE Transportation Systems and replaced the joint venture with separate cross-licensing agreements. In 2000, the company acquired certain assets of a metalworking additive company with 1999 revenues of approximately $20 million; acquired an additional 10% interest in its India joint venture, bringing the ownership interest up to 50%; and invested in a joint venture with GE Transportation Systems relating to products and services for diesel engine fluids. The company's aggregate investment in these acquisitions was approximately $41 million. NOTE 12 -- BUSINESS SEGMENTS AND GEOGRAPHIC REPORTING 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's accounting policies for its operating segments are the same as those described in Note 2. The company evaluates performance and allocates resources based on segment contribution income, which is 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 in arriving at segment operating profit before tax. 36 The following table presents a summary of the company's reportable segments for the years ended December 31:
2001 2000 1999 ----------- ----------- ----------- Fluid technologies for transportation: Revenues from external customers ........................... $ 1,531,542 $ 1,462,601 $ 1,479,331 Equity earnings (loss) ......................... 4,091 3,064 5,288 Goodwill and intangibles amortization ................................. 5,595 5,290 5,100 Segment contribution income ....................................... 288,385 277,879 345,276 Operating profit before tax ................................... 152,474 141,609 193,094 Segment total assets ........................... 1,084,084 1,132,782 1,116,680 Capital expenditures ........................... 60,304 78,887 58,123 Depreciation ................................... 78,208 81,769 82,129 Fluid technologies for industry: Revenues from external customers .................................... $ 313,102 $ 313,179 $ 300,998 Equity earnings (loss) ......................... (1,895) (1,581) 447 Goodwill and intangibles amortization ................................. 8,523 7,557 6,330 Segment contribution income ....................................... 23,605 39,695 45,827 Operating profit before tax ................................... 5,729 23,118 26,041 Segment total assets ........................... 237,259 249,782 247,779 Capital expenditures ........................... 6,012 6,870 6,749 Depreciation ................................... 6,506 6,218 6,161 Reconciliation to consolidated income before tax: Segment operating profit before tax ................................... $ 158,203 $ 164,727 $ 219,135 Gain from litigation settlements .................................. 19,395 17,626 Special (charges) credits ...................... 4,484 (19,569) Interest expense - net ......................... (18,254) (18,258) (21,842) ----------- ----------- ----------- Consolidated income before tax ................................... $ 139,949 $ 170,348 $ 195,350 =========== =========== =========== Revenues from external customers by product group: Engine oil additives ........................... $ 1,019,465 $ 944,538 $ 942,618 Driveline oil additives ........................ 407,514 401,267 414,929 Fuel additives and refinery oil additives ....................... 74,730 90,262 105,406 Additive components ............................ 29,833 26,534 16,378 ----------- ----------- ----------- Fluid technologies for transportation ............................. 1,531,542 1,462,601 1,479,331 ----------- ----------- ----------- Industrial additives ........................... 171,566 173,262 158,147 Performance chemicals .......................... 117,850 112,142 108,692 Performance systems ............................ 23,686 27,775 34,159 ----------- ----------- ----------- Fluid technologies for industry ............................... 313,102 313,179 300,998 ----------- ----------- ----------- Total revenues from external customers ............................. $ 1,844,644 $ 1,775,780 $ 1,780,329 =========== =========== ===========
In order to conform amounts to current-year classifications, prior-year amounts have been restated to reflect reclassifications of products between fluid technologies for transportation and fluid technologies for industry operating segments. Segment results reflect the exclusion for internal management reporting purposes, effective January 1, 2000, of excess production capacity from product costs (this change has no effect on segment operating profit before tax). Revenues are attributable to countries based on the location of the customer. The United States is the only country where sales to external customers comprise in excess of 10% of the company's consolidated revenues. Revenues from external customers by geographic area are as follows:
2001 2000 1999 ---------- ---------- ---------- United States ......................... $ 740,786 $ 692,720 $ 684,037 Other North American................... 82,962 66,478 60,994 Europe, Middle East ................... 551,691 533,049 583,475 Asia-Pacific .......................... 337,185 347,658 324,349 Latin America ......................... 132,020 135,875 127,474 ---------- ---------- ---------- Total revenues from external customers.................. $1,844,644 $1,775,780 $1,780,329 ========== ========== ==========
The company's sales and receivables are concentrated in the oil and chemical industries. The company's lubricant and fuel additive customers consist primarily of oil refiners and independent oil blenders and are located in more than 100 countries. The ten largest customers, most of which are international oil companies and a number of which are groups of affiliated entities, comprised approximately 53% of consolidated sales in 2001, 48% of consolidated sales in 2000 and 46% of consolidated sales in 1999. In 2001, there was no single customer that accounted for more than 10% of revenues. The company's largest single customer, including its affiliated entities, predominantly within fluid technologies for transportation segment, accounted for revenues of $185.3 million in 2000 and $214.4 million in 1999. The table below presents a reconciliation of segment total assets to consolidated total assets for the years ended December 31:
2001 2000 1999 ---------- ---------- ---------- Total segment assets ................... $1,321,343 $1,382,564 $1,364,459 Corporate assets ....................... 340,976 276,926 317,895 ---------- ---------- ---------- Total consolidated assets............... $1,662,319 $1,659,490 $1,682,354 ========== ========== ==========
Segment assets include receivables, inventories and long-lived assets including goodwill and intangible assets. Corporate assets include cash and short-term investments, investments accounted for on the cost basis and other current and noncurrent assets. 37 NOTES CONTINUED The company's principal long-lived assets are located in the following countries at December 31:
2001 2000 -------- -------- United States........................... $532,827 $535,909 France.................................. 66,638 77,806 England................................. 106,008 114,174 All other............................... 105,366 119,946 -------- -------- Total long-lived assets................. $810,839 $847,835 ======== ========
Net income of non-U.S. subsidiaries was $35 million in 2001, $45 million in 2000 and $53 million in 1999; and dividends received from these subsidiaries were $55 million, $31 million and $22 million, respectively. NOTE 13 -- FINANCIAL INSTRUMENTS The company has various financial instruments, including cash and short-term investments, investments in nonconsolidated companies, foreign currency forward contracts, interest rate swaps and short- and long-term debt. The company has determined the estimated fair value of these financial instruments by using available market information and generally accepted valuation methodologies. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. The estimated fair value of the company's debt instruments at December 31, 2001 approximates $391.6 million compared with the carrying value of $397.2 million. The company uses derivative financial instruments only to manage well-defined foreign currency and interest rate risks. The company does not use derivative financial instruments for trading purposes. Effective January 1, 2001, the company adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended. SFAS 133 requires the company to recognize all derivatives on the balance sheet at fair value and establishes 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 either 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. The adoption of SFAS 133 did not have a material cumulative effect on net income as of January 1, 2001, but did result in a $2 million reduction ($1.3 million net of tax) of other comprehensive income. 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 generally relate to transactions with maturities of less than one year. The maximum amount of foreign currency forward contracts outstanding at any one time was $17.9 million in 2001, $24.3 million in 2000 and $18.9 million in 1999. At December 31, 2001, the company had short-term forward contracts to sell currencies at various dates during 2002 for $4.9 million. These forward contracts are not designated as hedges. Any changes in the fair value of these contracts are recorded in other income. The fair value of these instruments at December 31, 2001 and the related adjustment recorded in other income was an unrealized loss of $.2 million. The company is exposed to market risk from changes in interest rates. The company's policy is to manage interest rate cost using a mix of fixed and variable rate debt. To manage this mix in a cost-efficient manner, 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. Interest payments receivable and payable under the terms of the interest rate swap agreements are accrued over the period to which the payment relates and the net difference is treated as an adjustment of interest expense related to the underlying liability. At December 31, 2001, the company had interest rate swap agreements to convert existing fixed-rate debt to variable rates. The fair value of these swaps was an unrealized gain of $11.9 million. These swaps are designated as fair value hedges of underlying fixed rate debt obligations and are recorded as an increase in noncurrent assets and long-term debt. These interest rate swaps qualify for the short-cut method for assessing hedge effectiveness per SFAS 133. Changes in fair value of the interest rate swaps are offset by the change in fair value of the underlying debt. As a result, there was no impact to earnings in 2001 due to hedge ineffectiveness. At December 31, 2001, the company had interest rate swap agreements to convert existing variable rate debt to fixed rates. The fair value of these swaps was an unrealized loss of $4.8 million. These swaps 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 2001 of $3.7 million ($2.4 million net of tax) unrealized loss was recorded in other comprehensive income. This includes the transition adjustment of $2.0 million ($1.3 million net of tax) as of January 1, 2001. Ineffectiveness was determined to be immaterial in 2001. The company does not expect any significant portion of these existing losses to be reclassified into earnings within the next 12 months. 38 THE LUBRIZOL CORPORATION NOTE 14 -- STOCK COMPENSATION PLANS The 1991 Stock Incentive Plan provides for the granting of restricted and unrestricted shares and options to buy common shares up to an amount equal to 1% of the outstanding common shares at the beginning of any year, plus any unused amount from prior years. Options are intended either to qualify as "incentive stock options" under the Internal Revenue Code or to be "non-statutory stock options" not intended to so qualify. Under the 1991 Plan, options generally become exercisable 50% one year after grant, 75% after two years, 100% after three years, and expire up to ten years after grant. "Reload options," which are options to purchase additional shares if a grantee uses already-owned shares to pay for an option exercise, are granted automatically once per year for options granted prior to March 28, 2000 under the 1991 Plan; and may be granted at the discretion of the administering committee under the 1985 Employee Stock Option Plan and for options granted on or after March 28, 2000 under the 1991 Plan. The 1991 Plan generally supersedes the 1985 Plan, although options outstanding under the 1985 Plan remain exercisable until their expiration dates. The option price for stock options under the 1985 Plan is the fair market value of the shares on the date of grant. The option price for stock options under the 1991 Plan is not less than the fair market value of the shares on the date of grant. Both plans permit or permitted the granting of stock appreciation rights in connection with the grant of options. In addition, the 1991 Plan provides to each outside director of the company an automatic annual grant of an option to purchase 2,500 common shares in 2001 and 2000 and 2,000 common shares in 1999, with terms generally comparable to employee stock options. In 2001, the 1991 Plan provided for the grant to each outside director of a one-time additional option to purchase 2,500 common shares as an incentive relating to Lubrizol's five-year strategic initiatives. Under the 1991 Stock Incentive Plan, the company has granted performance share stock awards to certain executive officers. Common shares equal to the number of performance share stock awards granted will be issued if the market price of the company's common stock reaches $45 per common share for ten consecutive trading days, or on March 24, 2003, whichever occurs first. Under certain conditions such as retirement, a grantee of performance share stock awards may be issued a pro-rata number of common shares. The market value of the company's common shares at date of grant of the performance share stock awards was $30.40 per share (for 750 awards) in 2001, $28.06 per share (for 3,000 awards) and $25.38 (for 1,500 awards) in 2000. No awards were granted in 1999. The company recognizes compensation expense related to performance share stock awards ratably over the estimated period of vesting. Compensation costs recognized for performance share stock awards were approximately $50,000 in 2001, $.1 million in 2000 and $.8 million in 1999. Under the deferred stock compensation plan for outside directors, each nonemployee director receives 500 share units on each October 1 and is credited with additional share units for quarterly dividends paid on the company's shares. When a participant ceases to be a director, the company issues shares equal to the number of share units in the director's account. The company has allocated to nonemployee directors 6,028, 6,210 and 5,932 share units under this plan in 2001, 2000 and 1999, respectively. Director fee expense recognized for share units was approximately $.2 million in 2001, $.1 million in 2000 and $.2 million in 1999. At December 31, 2001, 37,229 share units for nonemployee directors were outstanding. Under the deferred compensation plan for executive officers, participants may elect to defer any amount of their variable pay. Deferred amounts are converted into share units based on the current market price of the company's shares, which are then multiplied by 1.25. Additional share units are credited for quarterly dividends paid on the company's shares. At the end of the deferral period, which is at least three years, the company issues shares equal to the number of share units in the participant's account. The company has allocated to executive officers 16,628, 26,787 and 862 share units under this plan in 2001, 2000 and 1999, respectively. Compensation costs recognized for share units were approximately $.5 million in 2001, $.7 million in 2000 and $20,000 in 1999. At December 31, 2001, 54,925 share units for executive officers were outstanding. Accounting principles generally accepted in the United States of America encourage the fair-value based method of accounting for stock compensation plans under which the value of stock-based compensation is estimated at the date of grant using valuation formulas, but permit the use of intrinsic-value accounting. The company accounts for its stock compensation plans using the intrinsic-value accounting method (measured as the difference between the exercise price and the market value of the stock at date of grant). If the fair value method to measure compensation cost for the company's stock compensation plans had been used, excluding the performance share stock awards, the company's net income would have been reduced by $6.0 million in 2001, $3.5 million in 2000 and $2.5 million in 1999 with a corresponding reduction in net income per share of $.12 in 2001, $.07 in 2000 and $.05 in 1999. 39 NOTES CONTINUED Disclosures under the fair value method are estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants of stock options in the following years:
2001 2000 1999 ---- ---- ---- 1985 Plan: Risk-free interest rate............. 6.5% Dividend yield...................... 3.4% Volatility.......................... 23% Expected life (years)............... .5 1991 Plan: Risk-free interest rate............. 5.1% 6.0% 6.4% Dividend yield...................... 2.9% 4.0% 3.4% Volatility.......................... 25% 27% 24% Expected life (years)............... 9.7 9.8 9.9
The fair value per share of the performance share stock awards granted in 2001 was $28.69, using the following assumptions: risk-free interest rate of 3.15%; dividend yield of 2.9%; volatility of 25%; and an expected life of two years. The fair value per share of the performance share stock awards granted in 2000 was $24.90 (for 3,000 awards) and $22.52 (for 1,500 awards), using the following assumptions: risk-free interest rate of 6.49%; dividend yield of 4.0%; volatility of 27%; and an expected life of three years. There was no activity for 1999. Dividends do not accumulate on performance share stock awards. Information regarding these option plans, excluding the performance share stock awards, follows:
Weighted- Average Shares Exercise Price --------- -------------- Outstanding, January 1, 2001................... 4,624,135 $30.68 Granted........................................ 1,461,945 30.39 Exercised...................................... (911,696) 28.05 Forfeited...................................... (347,118) 35.64 --------- Outstanding, December 31, 2001................. 4,827,266 $30.74 ========= ====== Options exercisable, December 31, 2001........................... 2,850,184 $31.73 ========= ====== Weighted-average fair value of options granted during the year............. $ 8.69 ======
Weighted- Average Shares Exercise Price --------- -------------- Outstanding, January 1, 2000.................. 3,968,742 $31.06 Granted....................................... 816,136 28.02 Exercised..................................... (77,898) 20.41 Forfeited..................................... (82,845) 32.08 --------- Outstanding, December 31, 2000................ 4,624,135 $30.68 ========= ====== Options exercisable, December 31, 2000.......................... 3,415,820 $31.87 ========= ====== Weighted-average fair value of options granted during the year............ $ 7.49 ====== Outstanding, January 1, 1999.................. 3,483,316 $32.64 Granted....................................... 730,516 22.99 Exercised..................................... (79,675) 20.31 Forfeited..................................... (165,415) 33.98 Outstanding, December 31, 1999................ 3,968,742 $31.06 ========= ====== Options exercisable, December 31, 1999.......................... 2,993,380 $32.51 ========= ====== Weighted-average fair value of options granted during the year............ $ 5.87 ======
Information regarding the performance share stock awards follows:
Shares ------ Outstanding, January 1, 2001.................. 65,500 Granted....................................... 750 ------ Outstanding, December 31, 2001................ 66,250 ====== Outstanding, January 1, 2000.................. 67,000 Granted....................................... 4,500 Forfeited..................................... (3,043) Common Shares Issued.......................... (2,957) ------ Outstanding, December 31, 2000................ 65,500 ====== Outstanding, January 1, 1999.................. 67,166 Forfeited..................................... (166) ------ Outstanding, December 31, 1999................ 67,000 ======
- ------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding, excluding the performance share stock awards, at December 31, 2001:
Options Outstanding Options Exercisable ------------------------------------------------- --------------------------------- Number Weighted-Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/01 Contractual Life Exercise Price at 12/31/01 Exercise Price ----------- ---------------- -------------- ------------ -------------- $19 - $25.......... 379,104 7.1 Years 21.35 257,597 21.35 25 - 31.......... 2,963,906 7.6 29.49 1,114,331 28.95 31 - 38.......... 1,477,832 3.5 35.62 1,471,832 35.62 38 - 45.......... 6,424 5.9 38.46 6,424 38.46 --------- --------- 4,827,266 6.3 $30.74 2,850,184 $31.73 ========= === ====== ========= ======
40 THE LUBRIZOL CORPORATION NOTE 15 -- SPECIAL CHARGES In January 1998, the company initiated a series of steps to reduce costs and improve its worldwide operating structure and executed these steps in two programs over a period of approximately two years. The first program, which began in the fourth quarter of 1998, resulted in the reduction of approximately 7% of the company's workforce, or 300 employees worldwide. Approximately 55% of this reduction occurred prior to December 31, 1998, a further 35% occurred in the first quarter of 1999 and the remainder was substantially completed by the third quarter of 1999. Of the 300 employees, approximately 40% were in the manufacturing area and 60% were in the selling, administrative, research and testing areas. In addition, the company permanently removed seven component production units from service during this first program. As adjusted, the first program included workforce reduction cost estimated at $20.0 million and other exit costs estimated at $2.1 million, including $2.0 million related to asset impairments for production units taken out of service. Cash expenditures of approximately $.4 million were made in 2000 and $14.7 million in 1999 related to the cost reduction program. The second program began in the third quarter of 1999 and involved primarily the downsizing of the company's Painesville, Ohio, manufacturing plant. This resulted in the additional reduction of approximately 5% of the company's workforce, or 187 employees, and the shutdown of 20 of Painesville's 36 production systems. Approximately 23% of the workforce reduction and shutdown of 12 of the production systems occurred during 1999. The remainder of the workforce reduction and production system shutdowns was completed in 2000. As adjusted, the second program included workforce reduction cost estimated at $5.5 million and other exit costs estimated at $10.8 million, including $7.4 million related to asset impairments for production units to be taken out of service. Cash expenditures of approximately $1.8 million, $.9 million and $1.3 million were made in 2001, 2000 and 1999, respectively, related to the second cost reduction program. Additionally, $3.2 million and $1.5 million of special termination benefits were recognized as part of the U.S. pension benefit obligation in 2000 and 1999, respectively (see Note 9). Approximately $.2 million remains as an accrued liability at December 31, 2001, for equipment dismantling. In the first quarter of 1999, the company recognized an expense of $3.1 million, related to the first program to reflect an adjustment for separation benefits, principally in Japan. After-tax, this charge reduced net income by $2.9 million or $.05 per share. In the third quarter of 1999, the company recognized special charges of $20.8 million related to the second program. After-tax, this special charge reduced net income by $12.9 million, or $.24 per share. In the fourth quarter of 1999, the company recorded an adjustment of $4.3 million to reduce the special charge related to the first program principally to reflect a gain related to the settlement of pension obligations for workforce reductions (see Note 9). After-tax, this adjustment increased net income by $2.5 million or $.05 per share. In the second quarter of 2000, the company recorded an adjustment of $2.6 million to reduce the amount of the special charge related to the second program, principally because the cost of workforce reductions at the company's Painesville facility was less than originally anticipated. After-tax this adjustment increased net income by $1.7 million or $.03 per share. In the fourth quarter of 2000, the company recorded a pre-tax adjustment of $1.9 million ($1.2 million after-tax or $.02 per share), to further reduce the amount of the special charge due to lower-than-anticipated equipment dismantling costs ($1.5 million) and lower workforce reduction costs ($.4 million). NOTE 16 -- LITIGATION The company previously filed claims against Exxon Corporation and/or its affiliates relating to various commercial matters, including alleged infringements by Exxon of certain of the company's patents. On October 12, 2000, the company reached a settlement of all pending patent litigation with Imperial Oil Limited (Imperial), a Canadian affiliate of Exxon Mobil Corporation. Under the settlement agreement, Lubrizol received cash of $25.0 million in October 2000. After deducting related expenses, this settlement increased pre-tax income by $19.4 million in 2000. On March 31, 1999, the company and Exxon Corporation reached a settlement of all pending intellectual property litigation between the two companies and their affiliates, except for litigation pending in Canada. Under the settlement agreement, Exxon paid the company cash of $16.8 million in April 1999. After deducting related expenses, this settlement increased pre-tax income by $14.5 million in 1999. The company is party to lawsuits, threatened lawsuits and other claims arising out of the normal course of business. Management is of the opinion that any liabilities that may result are adequately covered by insurance, or to the extent not covered by insurance, are adequately accrued for at December 31, 2001, or would not be significant in relation to the company's financial position at December 31, 2001, or its results of operations for the year then ended. 41 THE LUBRIZOL CORPORATION HISTORICAL SUMMARY (In Millions, Except Shareholders, Employees and Per Share Data)
2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS: Revenues....................................... $1,844.6 $1,775.8 $1,780.3 $1,650.2 Total cost and expenses........................ 1,671.4 1,597.0 1,554.5 1,496.3 Other income (charges)......................... (15.1) (8.4) (30.5) (35.0) Net income..................................... 94.1 118.0 123.0 71.2 - Before unusual items and accounting changes............................. 94.1 103.1 125.3 86.5 Net income per share........................... 1.84 2.22 2.25 1.27 - Before unusual items and accounting changes............................. 1.84 1.94 2.30 1.55 FINANCIAL RATIOS: Gross profit percentage........................ 27.4 27.8 30.9 29.2 Percent of revenues: Selling and administrative expenses......... 9.6 9.5 10.2 10.9 Research and testing expenses............... 8.6 8.5 8.2 9.1 Return on average shareholders' equity (%)..... 12.3 15.3 15.8 9.0 - Before unusual items and accounting changes (%)......................... 12.3 13.4 16.1 10.9 Debt to capitalization (%)..................... 33.9 34.5 33.8 35.8 Current ratio.................................. 2.9 2.6 2.5 2.5 OTHER INFORMATION: Dividends declared per share................... $1.04 $1.04 $1.04 $1.04 Average common shares outstanding.............. 51.2 53.1 54.6 55.9 Capital expenditures........................... $66.3 $85.8 $64.9 $93.4 Depreciation expense........................... 84.7 88.0 88.3 79.7 At Year End: Total assets................................ $1,662.3 $1,659.5 $1,682.4 $1,643.2 Total debt.................................. 397.2 395.9 403.0 429.3 Total shareholders' equity.................. 773.2 752.3 790.1 769.1 Shareholders' equity per share.............. 15.10 14.66 14.50 14.10 Common share price.......................... 35.09 25.75 30.88 25.69 Number of shareholders...................... 4,335 4,681 5,126 5,609 Number of employees......................... 4,530 4,390 4,074 4,324
Unusual items include special charges and credits for restructuring and for write-off of purchased technology, gains on investments, litigation settlement gains and accounting changes. In 2000 the company began reporting shipping fees and shipping costs gross in net sales and cost of sales, respectively. The company had previously netted shipping fees against shipping costs in cost of sales. This change has no effect on the dollar amount of the company's gross profit or net income. Revenues, total cost and expenses, and gross profit percentage for 1996-1999 have been reclassified to conform with current period classification. 42 THE LUBRIZOL CORPORATION
1997 1996 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- $1,706.9 $1,629.2 $1,663.6 $1,599.0 $1,525.5 $1,552.2 $1,476.3 1,474.6 1,434.6 1,478.0 1,397.0 1,362.2 1,390.5 1,308.7 (1.1) 56.1 40.0 49.4 (43.6) 15.4 10.5 154.9 169.8 151.6 175.6 45.6 124.6 123.7 154.9 135.2 126.6 148.8 113.5 124.6 123.7 2.68 2.80 2.37 2.67 .67 1.81 1.79 2.68 2.23 1.98 2.26 1.67 1.81 1.79 32.1 31.4 31.5 32.7 32.0 31.7 32.4 10.0 9.7 9.8 10.0 10.4 11.7 11.7 8.6 9.9 10.8 10.3 11.2 10.0 9.8 19.0 20.4 18.0 22.5 5.9 15.4 16.2 19.0 16.2 15.1 19.0 14.6 15.4 16.2 21.3 19.5 22.5 16.8 8.7 5.6 7.9 2.5 2.6 2.4 2.5 2.5 2.9 2.7 $1.01 $.97 $.93 $.89 $.85 $.81 $.77 57.8 60.7 63.8 65.7 67.7 69.0 69.3 $100.7 $94.3 $189.3 $160.5 $127.9 $95.8 $82.4 82.7 78.7 71.8 63.9 59.6 58.4 54.6 $1,462.3 $1,402.1 $1,492.0 $1,394.4 $1,182.6 $1,127.1 $1,171.7 220.3 198.5 247.1 167.9 69.6 48.4 67.8 815.4 819.4 849.0 832.0 732.2 819.4 794.5 14.31 14.00 13.48 12.83 11.00 11.97 11.51 36.88 31.00 27.75 33.88 34.13 27.25 28.25 5,661 5,764 6,304 6,494 6,616 6,822 6,767 4,291 4,358 4,601 4,520 4,613 4,609 5,299
43 EX-21 8 l93056aex21.txt EXHIBIT 21 EXHIBIT 21 THE LUBRIZOL CORPORATION
% OF STATE/COUNTRY PRINCIPAL SUBSIDIARIES OWNERSHIP OF INCORPORATION Lubrizol Adibis (UK) Limited 100% United Kingdom Lubrizol do Brasil Aditivos Ltda. 100% Brazil Lubrizol Canada Limited 100% Canada Lubrizol de Chile Limitada 100% Chile Lubrizol China, Inc. 100% Ohio Lubrizol Coating Additives GmbH 100% Germany Lubrizol Espanola, S.A. 100% Spain Lubrizol Europe B.V. 100% The Netherlands Lubrizol France S.A.S. 100% France Lubrizol Gesellschaft m.b.H. 100% Austria Lubrizol GmbH 100% Germany Lubrizol International, Inc. 100% Cayman Islands Lubrizol International Management Corporation 100% Nevada Lubrizol Italiana S.p.A. 100% Italy Lubrizol Japan Limited 100% Japan Lubrizol Limited 100% United Kingdom Lubrizol de Mexico, S. de R.L. 100% Mexico Lubrizol de Mexico Comercial, S. de R.L. de C.V. 100% Mexico Lubrizol Overseas Trading Corporation 100% Delaware Lubrizol Performance Systems Inc. 100% Georgia Lubrizol Performance Systems Limited 100% United Kingdom Lubrizol Servicios Tecnicos, S. de R.L. de C.V. 100% Mexico Lubrizol South Africa (Pty) Limited 100% South Africa Lubrizol Southeast Asia (Pte.) Ltd. 100% Singapore Lubrizol de Venezuela, C.A. 99.9% Venezuela Carroll Scientific, Inc. 100% Illinois CPI Engineering Services, Inc. 100% Michigan Gateway Additive Company 100% Nevada Kabo Unlimited, Inc. 100% Wyoming ROSS Chem, Inc. 100% South Carolina Lanzhou Lubrizol - Lanlian Additive Co., Ltd. 50% China Shanghai Lubrizol International Trading Co., Ltd. 100% China Tianjin Lubrizol - Lanlian Additive Co., Ltd. 50.05% China AFFILIATES Industrias Lubrizol, S.A. de C.V. 40% Mexico Lubrizol India Private Limited 50% India Lubrizol Transarabian Company Limited 49% Saudi Arabia
EX-23 9 l93056aex23.txt EXHIBIT 23 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- THE LUBRIZOL CORPORATION We consent to the incorporation by reference in Registration Statement No. 2-99983 on Form S-8, in Registration Statement No. 33-61091 on Form S-8, in Registration Statement No. 33-42211 on Form S-8 and in Registration Statement No. 333-42338 on Form S-8 of our report dated February 4, 2002, incorporated by reference in this Annual Report on Form 10-K of The Lubrizol Corporation for the year ended December 31, 2001. /s/Deloitte & Touche LLP - ---------------------------------- DELOITTE & TOUCHE LLP Cleveland, Ohio March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----