-----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, EFgPbIUq1V/vouf9GdFghixYXPhBxD0cpwAh3sC+QnngVfg+eE2SbUruuTtdyAjL 3UfpWD9kP5YQShWzgIDMgg== 0000950152-02-003819.txt : 20020506 0000950152-02-003819.hdr.sgml : 20020506 ACCESSION NUMBER: 0000950152-02-003819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBRIZOL CORP CENTRAL INDEX KEY: 0000060751 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 340367600 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05263 FILM NUMBER: 02634559 BUSINESS ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 BUSINESS PHONE: 2169434200 MAIL ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 10-Q 1 l94012ae10-q.txt THE LUBRIZOL CORPORATION FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ..... to ..... Commission File Number 1-5263 THE LUBRIZOL CORPORATION (Exact name of registrant as specified in its charter) Ohio 34-0367600 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 29400 Lakeland Boulevard Wickliffe, Ohio 44092-2298 (Address of principal executive offices) (Zip Code) (440) 943-4200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of the registrant's common shares, without par value, outstanding, as of April 30, 2002: 51,361,025. PART I. FINANCIAL INFORMATION ----------------------------- Item 1 Financial Statements --------------------------- THE LUBRIZOL CORPORATION ------------------------
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------- March 31 December 31 (In Thousands of Dollars) 2002 2001 - ------------------------------------------------------------------------------------------- ASSETS Cash and short-term investments .............................. $ 201,605 $ 189,095 Receivables .................................................. 314,340 279,013 Inventories: Finished products .......................................... 119,750 124,503 Products in process ........................................ 60,429 48,859 Raw materials .............................................. 61,335 64,504 Supplies and engine test parts ............................. 17,774 16,744 ----------- ----------- 259,288 254,610 ----------- ----------- Other current assets ......................................... 40,075 34,006 ----------- ----------- Total current assets ..................... 815,308 756,724 Property and equipment - net ................................. 660,535 644,281 Goodwill and intangible assets - net ......................... 172,378 166,558 Investments in nonconsolidated companies ..................... 8,414 30,915 Other assets ................................................. 64,252 63,841 ----------- ----------- TOTAL ............................... $ 1,720,887 $ 1,662,319 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt and current portion of long-term debt ........ $ 10,565 $ 9,120 Accounts payable ............................................. 130,838 129,833 Accrued expenses and other current liabilities ............... 121,570 120,261 ----------- ----------- Total current liabilities ................ 262,973 259,214 ----------- ----------- Long-term debt ............................................... 386,122 388,111 Postretirement health care obligation ........................ 97,806 97,878 Noncurrent liabilities ....................................... 58,107 55,140 Deferred income taxes ........................................ 56,374 56,207 ----------- ----------- Total liabilities ........................ 861,382 856,550 ----------- ----------- Minority interest in consolidated companies .................. 52,927 32,577 Contingencies and commitments Shareholders' equity: Preferred stock without par value - authorized and unissued: Serial Preferred Stock - 2,000,000 shares Serial Preference Shares - 25,000,000 shares Common shares without par value: Authorized 120,000,000 shares Outstanding - 51,347,399 shares as of Mar. 31, 2002 after deducting 34,848,495 treasury shares, 51,152,107 shares as of December 31, 2001 after deducting 35,043,787 treasury shares ........ 115,778 109,692 Retained earnings .......................................... 793,129 763,312 Accumulated other comprehensive loss ....................... (102,329) (99,812) ----------- ----------- Total shareholders' equity ............... 806,578 773,192 ----------- ----------- TOTAL ............................... $ 1,720,887 $ 1,662,319 =========== ===========
Amounts shown are unaudited. 2 THE LUBRIZOL CORPORATION ------------------------ CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- Three Months Ended March 31 --------------------------- (In Thousands Except Per Share Data) 2002 2001 - -------------------------------------------------------------------------------- Net sales ........................................ $ 466,713 $ 453,791 Royalties and other revenues ..................... 799 858 --------- --------- Total revenues ......................... 467,512 454,649 Cost of sales .................................... 331,210 334,682 Selling and administrative expenses .............. 48,743 44,726 Research, testing and development expenses ....... 40,566 38,485 --------- --------- Total cost and expenses ................ 420,519 417,893 Other income (expense) - net ..................... (719) (3,987) Interest income .................................. 1,709 2,039 Interest expense ................................. (5,387) (6,554) --------- --------- Income before income taxes ....................... 42,596 28,254 Provision for income taxes ....................... 12,779 9,748 --------- --------- Net income ....................................... $ 29,817 $ 18,506 ========= ========= Net income per share ............................. $ 0.58 $ 0.36 ========= ========= Net income per share, diluted .................... $ 0.58 $ 0.36 ========= ========= Dividends per share .............................. $ 0.26 $ 0.26 ========= ========= Weighted average common shares outstanding ....... 51,343 51,282 Amounts shown are unaudited. 3 THE LUBRIZOL CORPORATION ------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Three Months Ended March 31 ------------------------ (In Thousands of Dollars) 2002 2001 - -------------------------------------------------------------------------------- Cash provided from (used for): Operating activities: Net income ........................................... $ 29,817 $ 18,506 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization .................... 22,492 24,661 Deferred income taxes ............................ (365) 1,822 Change in current assets and liabilities: Receivables .................................... (22,496) (27,774) Inventories .................................... 10,650 (18,907) Accounts payable and accrued expenses .......... 10,596 15,131 Other current assets ........................... (4,823) 900 Other items - net ................................ (421) 394 --------- --------- Total operating activities ................. 45,450 14,733 Investing activities: Capital expenditures ............................... (12,126) (15,916) Acquisitions and investments in nonconsolidated companies ........................................ (17,235) (14,989) Other - net ........................................ 2,252 88 --------- --------- Total investing activities ................. (27,109) (30,817) Financing activities: Short-term borrowings, net ......................... 1,528 6,776 Long-term repayments ............................... (14) (14) Dividends paid ..................................... (13,328) (13,340) Common shares purchased ............................ (20,026) Stock options exercised ............................ 5,622 10,446 --------- --------- Total financing activities ................. (6,192) (16,158) Effect of exchange rate changes on cash .............. 361 (1,734) --------- --------- Net increase (decrease) in cash and short-term investments ........................................ 12,510 (33,976) Cash and short-term investments at beginning of period 189,095 145,937 --------- --------- Cash and short-term investments at end of period ..... $ 201,605 $ 111,961 ========= ========= Amounts shown are unaudited. 4 THE LUBRIZOL CORPORATION ------------------------ Notes to Consolidated Financial Statements ------------------------------------------ Amounts in thousands (except per share data) -------------------------------------------- March 31, 2002 1. The accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of March 31, 2002 and December 31, 2001, and the results of operations and cash flows for the applicable periods ended March 31, 2002 and 2001. 2. 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 dilutive effect resulting from outstanding stock options and stock awards. Per share amounts are computed as follows:
Three Months Ended March 31 -------------------- 2002 2001 ---------- --------- Numerator: Net income available to common shareholders $29,817 $18,506 ======= ======= Denominator: Weighted average common shares outstanding 51,343 51,282 Dilutive effect of stock options and awards 401 186 ------- ------- Denominator for net income per share, diluted 51,744 51,468 ======= ======= Net income per share $ 0.58 $ 0.36 ======= ======= Net income per share, diluted $ 0.58 $ 0.36 ======= =======
Weighted average shares issuable upon the exercise of stock options which were excluded from the diluted earnings per share calculations because they were antidilutive were 1.0 million in 2002 and 2.5 million in 2001. 3. Total comprehensive income for the three-month periods ended March 31, 2002 and 2001 is comprised as follows:
Three Months Ended March 31 --------------------- 2002 2001 ---------- ---------- Net income $ 29,817 $ 18,506 Foreign currency translation adjustment (3,028) (13,598) Cumulative effect of accounting change (1,314) Unrealized gains (losses) - interest rate swaps 511 (609) -------- -------- Total comprehensive income $ 27,300 $ 2,985 ======== ========
5 4. Beginning in 2002, the company reorganized its product lines into four principal operating segments: fluid technologies for transportation, fluid technologies for industry, advanced fluid systems and emulsified products. Accordingly, the segment information for prior years has been restated to conform to the current operating structure. Fluid technologies for transportation ("FTT")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, this segment 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 ("FTI") includes industrial additives, such as additives for hydraulic, grease and metalworking fluids and compressor lubricants; and performance chemicals, such as additives for coatings and inks, defoamers and process chemicals. The company also operates several product lines that do not constitute reportable business segments. The results of these product lines have been aggregated into the "all other" segment, including advanced fluid systems, which is comprised of fluid metering devices, particulate emission trap devices, and FluiPak(TM) sensor systems; and Emulsified Products, or PuriNOx(TM) low-emissions diesel fuel. The company evaluates performance and allocates resources based on segment contribution income, defined as revenues less expenses directly identifiable to the product lines aggregated within each segment. In addition, the company allocates corporate research, testing, selling and administrative expenses, and excess production capacity costs, in arriving at segment operating profit before tax. The following table presents a summary of the company's reportable segments for the three months ended March 31, 2002 and 2001 based on the current reporting structure. 6
Three Months Ended March 31 --------------------------- 2002 2001 -------------- ------------ Revenues from external customers: Fluid technologies for transportation (FTT) $ 382,811 $ 370,525 Fluid technologies for industry (FTI) 78,873 77,906 All other 5,828 6,218 ----------- ----------- Total revenues $ 467,512 $ 454,649 =========== =========== Segment contribution income(loss): Fluid technologies for transportation (FTT) $ 77,749 $ 63,473 Fluid technologies for industry (FTI) 15,835 11,422 All other (2,996) (4,131) ----------- ----------- Total segment contribution income $ 90,588 $ 70,764 =========== =========== Segment operating profit(loss) before tax: Fluid technologies for transportation (FTT) $ 39,292 $ 29,927 Fluid technologies for industry (FTI) 10,047 7,174 All other (3,065) (4,332) ----------- ----------- Total segment operating profit before tax 46,274 32,769 Interest expense - net (3,678) (4,515) ----------- ----------- Consolidated income before tax $ 42,596 $ 28,254 =========== =========== Segment total assets: Fluid technologies for transportation (FTT) $ 1,140,272 $ 1,160,844 Fluid technologies for industry (FTI) 221,746 211,294 All other 29,212 35,111 ----------- ----------- Total segment assets $ 1,391,230 $ 1,407,249 Corporate assets 329,657 257,132 ----------- ----------- Total consolidated assets $ 1,720,887 $ 1,664,381 =========== ===========
7 5. Effective January 1, 2002, the company began accounting for the investment in its India joint venture, Lubrizol India Private Limited ("LIPL"), through consolidation because an amendment to the joint venture agreement gave the company control as of that date. The company has ownership of 50% of the voting shares. The amended joint venture agreement grants the company the authority to appoint three of LIPL's six board directors and the unilateral and perpetual ability to appoint its managing director. Further, the amended joint venture agreement delegates to the managing director the authority to make all significant decisions to run the day-to-day business of LIPL. The company had previously accounted for its investment under the equity method of accounting because the company's joint venture partner held certain substantive participating rights, which were eliminated with the amendment to the joint venture agreement. The change to consolidate LIPL had the effect of increasing revenues and total cost and expenses by $13.7 million and $12.4 million, respectively, for the three months ended March 31, 2002. The change had no impact on net income. 6. Effective January 1, 2002, the company adopted Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets." Under SFAS 142, goodwill and other intangibles determined to have indefinite lives will no longer be amortized, but will be tested for impairment upon adoption and annually thereafter. In connection with adopting SFAS 142, the company also reassessed the useful lives and the classification of our intangible assets. The major components of our identifiable intangible assets are technology, land use rights and trademarks. Excluding the trademarks, which are indefinite and will not be amortized, the intangible assets will continue to be amortized over the lives of the agreements, which range between five and forty years. The following table shows the components of our identifiable intangible assets as of March 31, 2002.
As of March 31, 2002 ----------------------------- Gross Carrying Accumulated Amount Amortization ----------------------------- Amortized intangible assets: Technology $ 30,095 $ 13,618 Land use rights 6,990 304 Other 2,458 1,004 ---------- --------- Total amortized intangible assets 39,543 14,926 ---------- --------- Unamortized intangible assets: Trademarks 2,232 383 ---------- --------- Total $ 41,775 $ 15,309 ========== =========
8 Amortization expense for intangible assets during the first quarter of 2002 was $.8 million and is estimated to be $3.8 million for 2002, which includes an estimate for amortization expense arising from intangibles purchased in the acquisition of Kabo Unlimited, Inc. in January 2002 and Chemron Corporation in April 2002. The company is currently in the process of allocating the purchase price for both of these acquisitions, so it is possible the amount of amortization may change once the purchase price allocation is complete. Excluding the impact of further acquisitions, estimated annual intangible amortization expense for each of the next four years should approximate $4.0 million per year. SFAS 142 provides for a six-month period from the date of adoption for the company to perform an assessment of potential impairment of goodwill. Any impairment identified upon adoption will be recognized as a cumulative effect of a change in accounting principle effective as of January 1, 2002. Subsequent impairment losses will be reflected in normal results of operation. The company is still in the process of evaluating whether or not any transitional goodwill impairment exists as of January 1, 2002. The carrying amount of goodwill as of March 31, 2002 by reporting segment is as follows: FTT FTI All Other Total -------- -------- --------- -------- Balance, December 31, 2001 $ 42,685 $ 88,850 $ 7,668 $139,203 Goodwill acquired 6,361 - 6,361 Translation & other adjustments 348 - - 348 -------- -------- -------- -------- Balance, March 31, 2002 $ 43,033 $ 95,211 $ 7,668 $145,912 ======== ======== ======== ======== In accordance with SFAS 142, the company discontinued the amortization of goodwill and trademarks effective January 1, 2002. Had the company been accounting for its goodwill under SFAS 142 for all periods presented, the company's net income and earnings per share would have been as follows:
Three Months Ended March 31 ------------------------ 2002 2001 ------------ ----------- Reported net income $ 29,817 $ 18,506 Add: Goodwill & trademark amortization, net of tax - 1,801 ---------- ---------- Pro forma adjusted net income $ 29,817 $ 20,307 ========== ========== Reported net income per share $ 0.58 $ 0.36 Add: Goodwill & trademark amortization, net of tax - 0.04 ---------- ---------- Pro forma adjusted basic and diluted net income per share $ 0.58 $ 0.40 ========== ==========
9 7. In June 2001, the Financial Accounting Standards Board 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 obligation for its recorded amount or incurs a gain or loss upon settlement. The company has not determined the impact, if any, that SFAS 143 will have on its consolidated financial position or results of operations. 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- RESULTS OF OPERATIONS - --------------------- Our revenues increased in the first quarter of 2002 as compared with the first quarter of 2001, primarily due to higher shipment volume, the consolidation of Lubrizol India Private Limited ("LIPL") and the impact of an acquisition. Lower raw material costs combined with lower manufacturing costs, partially offset by lower average selling price, resulted in higher gross profit margins. A favorable increase in other income and a lower effective tax rate, partially offset by increased STAR (selling, testing, administrative and research) expenses resulted in increased net income in the first quarter of 2002 as compared to the first quarter of 2001. We group our product lines into three reportable segments: fluid technologies for transportation, fluid technologies for industry and all other. Fluid technologies for transportation comprised approximately 82% of our consolidated revenues and 85% of our segment pre-tax operating profits for the first quarter of 2002. This discussion and analysis of our financial condition and results of operations is primarily focused upon the company as a whole, since we believe this provides the most appropriate understanding of our business. See Note 4 to the financial statements for additional financial disclosures by reporting segment. Our consolidated revenues increased $12.9 million, or 3%, for the first quarter of 2002 compared with the same period in 2001. The primary factor causing the increase in revenues was a 9% increase in our shipment volume, partially offset by a 5% decline in average selling prices. Excluding acquisitions (the Kabo Unlimited, Inc. ("Kabo") acquisition and the consolidation of LIPL), shipment volume increased 4%, but was more than offset by lower average selling prices, the combination of which resulted in $3.8 million decrease in revenues. Fluid technologies for transportation revenues increased $12.3 million, or 3%, due to the consolidation of LIPL. Fluid technologies for industry revenues increased $1.0 million, or 1%, and the total of the all other segment decreased $.4 million, or 6%, in the first quarter of 2002 compared with the first quarter of 2001. Changes in our shipment volume vary in different geographic areas. The following table shows our 2002 first quarter shipment volume by geographic area as well as the corresponding changes compared with first quarter 2001: 1st Qtr 2002 Increase Volume (Decrease) ------------- ----------------- North America 42% 9% Europe, Middle East 33% 9% Asia-Pacific 18% 20% Latin America 7% (16%) ------------- Total 100% 9% The increases in North America and Europe are due to the strengthening of our business with major customer accounts. Asia-Pacific volume increased 20% in total, but was down 2% excluding the consolidation of LIPL. The decline in ongoing Asian volume was primarily the result of lost business in Japan. Latin America, our smallest zone, was down 16% as the result of economic conditions, timing of orders and some business losses after the first quarter of 2001 due to price increases. 11 Our average additive selling price decreased 5% in the first quarter of 2002 compared with the first quarter of 2001. The combination of price and mix declined 3% from the first quarter along with 2% unfavorable currency effects, due mainly to the strength of the dollar against the euro and the yen. Sequentially, first quarter 2002 average additive selling price was 3% lower than the fourth quarter of 2001 due to a 2% decline in the combination of price and mix and 1% unfavorable currency effects. Royalties and other revenues decreased $59 thousand, or 7%, primarily due to the consolidation of LIPL. Royalties from India are eliminated when reporting consolidated results. Our cost of sales for the first quarter of 2002 decreased $3.5 million, or 1% ($17.8 million, or 6%, excluding acquisitions), compared with the first quarter of 2001, primarily because of a 9% decrease in average raw material cost and a 1% decrease in total manufacturing costs. The decrease in average raw material cost was primarily due to an 8% decline in raw material prices for our key petrochemical-based raw materials, along with some favorable currency effects. Sequentially, average raw material cost decreased 6% from the fourth quarter of 2001. We believe raw material costs may begin to increase in the second quarter of 2002, under pressure from rising crude oil costs. Unit manufacturing costs (manufacturing costs per metric ton sold) were down 9% for the first quarter of 2002 compared with the first quarter of 2001, primarily due to lower utility costs and higher shipment volume. Gross profit (net sales less cost of sales) for the first quarter of 2002 increased $16.4 million, or 14% ($13.5 million, or 11%, excluding acquisitions), compared with the first quarter of 2001. The increase was primarily due to lower average raw material cost, higher shipment volume and lower manufacturing costs, partially offset by lower product selling prices and unfavorable currency effects. Fluid technologies for transportation gross profit increased $17.1 million, or 18%; fluid technologies for industry gross profit increased $1.5 million, or 6%; and the all other segment decreased $.4 million, or 28%, in the first quarter of 2002 compared with the first quarter of 2001. In calculating gross profit at the operating segment level, we exclude excess capacity from product costs. Our gross profit percentage (gross profit divided by net sales) increased to 29.0% in the first quarter of 2002 compared to 26.2% in the first quarter of 2001 for the reasons stated above. Excluding the impact of the consolidation of LIPL, our gross profit percentage would have been 29.4%. Sequentially, the percentage increased from 27.5% in the fourth quarter of 2001. Selling and administrative expenses increased by $4.0 million, or 9% ($3.2 million or 7% excluding acquisitions), for the first quarter of 2002 compared with the same period of 2001. The non-acquisition increase was primarily due to a $2.0 million accrual for the settlement of a contract claim related to an employee offsite personal injury, higher salary and employee benefit costs for existing businesses and incremental staffing and other costs associated with our strategy to expand into new markets. 12 Our research, testing and development expenses (technology expenses) increased $2.1 million, or 5% ($1.9 million, or 5%, excluding acquisitions), for the first quarter of 2002 compared with the same period in 2001. Research expenses increased because of high levels of platform development costs for the upcoming U.S. passenger car motor oil technical standard, GF-4. This upgrade is currently slated for commercial introduction in the third quarter of 2003 with mandatory use by the spring of 2004. We expect continued high levels of GF-4 research spending through the second quarter of 2002 followed by a shift to testing expense in the third and fourth quarters of 2002. In addition, we have begun testing programs for the next diesel engine oil specification, PC-9. Testing for the PC-9 diesel program should wind down in the second quarter of 2002, in time for formal product introduction in the third quarter of this year. The change in other income (expense) favorably affected pre-tax income by $3.3 million for the first quarter of 2002 compared to the first quarter of 2001. Beginning in 2002, this line item no longer includes amortization of goodwill or equity income from the India joint venture. Goodwill amortization expense in the first quarter of 2001 was approximately $2.8 million. Equity income for LIPL in the first quarter of 2001 was $.7 million. The remaining variance was due to favorable translation gains and higher equity income of our Saudi Arabia and Mexico joint ventures. Interest income decreased $.3 million for the first quarter of 2002 compared to the first quarter of 2001. Although there was a higher level of cash investments in the first quarter of 2002, this was more than offset by lower interest rates. Interest expense decreased $1.2 million for the first quarter of 2002 compared to the first quarter of 2001, also because of lower interest rates. As a result of the above factors, our income before income taxes for the first quarter of 2002 increased 51% to $42.6 million, as compared to $28.3 million for the first quarter of 2001. Segment operating profit before tax, which excludes interest expense, increased $9.4 million, or 31%, for fluid technologies for transportation for the same reasons that caused the increase in consolidated gross profit described above. Segment operating profit before tax increased $2.9 million, or 40%, for fluid technologies for industry, due to some economic recovery in this segment's markets along with improved cost control. Approximately $1.5 million of the elimination of goodwill amortization in 2002 benefited this segment. The total segment operating loss before tax for the all other segment decreased $1.3 million, or 29%, in the first quarter of 2002 compared with the first quarter of 2001, primarily due to lower levels of equity losses and the elimination of goodwill amortization in 2002. We had an effective tax rate of 30.0% for the first quarter of 2002, compared with 34.5% for the first quarter of 2001. The lower effective tax rate, which favorably impacted first quarter earnings by $.04 per share, was primarily due to the U.S. tax benefit from a charitable contribution of technology made in 2002 that did not occur in 2001, along with the elimination of book goodwill amortization pursuant to the new accounting standard. Changes in currency exchange rates during the first quarter of 2002 had minimal effect on net income as compared with exchange rates in effect during 2001. Primarily as a result of the above factors, our net income for the first quarter of 2002 increased 61% to 29.8 million ($.58 per share) compared with $18.5 million ($.36 per share) for the first quarter of 2001. 13 WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES - ------------------------------------------------ Cash provided from operating activities was $45.5 million for the first quarter of 2002 as compared with $14.7 million for the first quarter of 2001. The increase of $30.7 million in the first quarter of 2002 was primarily due to higher net income and a lower working capital build compared with the first quarter of 2001. Our capital expenditures in the first three months of 2002 were $12.1 million as compared with $15.9 million for same period in 2001. The slow first quarter 2002 spending reflects timing of projects. We estimate capital spending for the full year 2002 will be in the range of $85 million to $90 million as compared with $66.3 million in 2001. During the first quarter of 2002 we completed an acquisition for $17.2 million for 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 segment. Our net debt to capitalization ratio at March 31, 2002 was 21.9%. 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, was 32.4% at March 31, 2002. Our share repurchase program has been suspended indefinitely as we are holding our financial resources in reserve for future acquisitions. Primarily as a result of these activities and the payment of dividends, our balance of cash and short-term investments increased $12.5 million at March 31, 2002 compared with December 31, 2001. Our financial position remains strong with a ratio of current assets to current liabilities of 3.1 to 1 at March 31, 2002, an increase from 2.9 to 1 ratio at December 31, 2001. We believe our existing credit facilities, internally generated funds and ability to obtain additional financing, if desired, will be sufficient to meet our future capital needs, including acquisitions to expand into new and existing fluid technology markets. CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES - --------------------------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These uncertainties and factors could cause our actual results to differ materially from those matters expressed in or implied by such forward-looking statements. 14 We believe that the following factors, among others, could affect our future performance and cause our actual results to differ materially from those expressed or implied by forward-looking statements made in this quarterly report: - - 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; - - 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, including those with affiliated lubricant additive companies, and retaining the business of our largest 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. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- We operate manufacturing and blending facilities, laboratories and offices around the world and utilize fixed and variable rate debt to finance our global operations. As a result, we are subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. We believe the political and economic risks related to our foreign operations are mitigated due to the stability of the countries in which our largest foreign operations are located. In the normal course of business, we use derivative financial instruments including interest rate swaps and foreign currency forward exchange contracts to manage our market risks. Our objective in managing our exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flow and to lower our overall borrowing costs. Our objective in managing our exposure to changes in foreign currency exchange rates is to reduce 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. A quantitative and qualitative discussion about our market risk is contained on page 23 of our 2001 Annual Report to our shareholders. There have been no material changes in the market risks faced by us since December 31, 2001. 16 PART II. OTHER INFORMATION -------------------------- Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- (c) On January 17, 2002, 1,803 common shares were issued in transactions 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 21 employees of a wholly-owned Canadian subsidiary of the company. On February 5, 2002, 28 common shares were issued 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 Canadian subsidiary of the company. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits (10)(l)* The Lubrizol Corporation Executive Council Deferred Compensation Plan, as amended. * Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended March 31, 2002. Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LUBRIZOL CORPORATION /s/John R. Ahern ------------------------------------ John R. Ahern Chief Accounting Officer and Duly Authorized Signatory of The Lubrizol Corporation Date: May 6, 2002 17 EX-10.F 3 l94012aex10-f.txt EX-10(F) DEFERRED COMPENSATION PLAN Exhibit (10)(l) THE LUBRIZOL CORPORATION EXECUTIVE COUNCIL DEFERRED COMPENSATION PLAN As Amended 1. PURPOSE. The purpose of this Executive Council Deferred Compensation Plan (the "Plan") is to permit a member of the Executive Council (sometimes hereinafter referred to as the "Member" or as the "Participant") who is employed by The Lubrizol Corporation (the "Company"), to defer a portion of such Member's compensation as provided in this 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) A Member may, at any time prior to January 1 of a given calendar year, elect, for one or more future successive calendar years commencing with the calendar year immediately following the election (each a "Participation Year"), to defer under the Plan a pre-selected fixed dollar amount or percentage of such Member's variable compensation, if any (the "deferred compensation"), under The Lubrizol Corporation Performance Pay Plan ("Performance Pay Plan"), which such Participant may thereafter be entitled to receive for services performed during each elected Participation Year. (b) The election under this Section 3 shall take effect on the first day of the first elected Participation Year and such election shall be irrevocable for any elected Participation Year once such Participation Year shall have commenced. (c) Notwithstanding paragraphs (a) and (b), when an individual Member first becomes eligible to participate in the Plan, the newly eligible Member may make the election under this Section 3 to defer the specified compensation for services to be performed subsequent to the date specified in the election and for the remainder of the calendar year in which the election under this Section 3 is made, provided that such election is made within 30 days after the date that the Member is notified of the Member's eligibility. (d) All elections under this Plan shall be made by written notice (on a form provided by the Company) specifying (i) the number of calendar years, one or more, during which the election shall apply, and (ii) the deferred compensation, if any, determined under paragraph (a). (e) A Participant may designate that the 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 or change in the amount of the election shall be effective on the first day of the calendar year next following the year on which such notice is given; provided that, such notice shall not change, alter or terminate the deferral of the Member's participation in the Performance 1 Pay Plan for the year in which such notice of withdrawal or change is given which, except for the deferral, would be payable in the calendar year next following the year in which such notice of withdrawal or change is given. Notwithstanding paragraph (b) and the first sentence of this paragraph (e), any variable compensation earned after the end of the first month in which a Participant under this Plan ceases to be a Member, 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 Stock Deferral Accounts shall continue to be held and administered pursuant to the Plan. (f) All notices by a Participant under the Plan shall be in writing and shall be given to the Company's Vice President, Human Resources. 4. STOCK DEFERRAL ACCOUNTS. (a) At the close of business of the day on which the Performance Pay Plan deferred compensation would have been payable to the Participant in the absence of the election under the Plan to defer payment thereof, there shall be credited to a separate Stock Deferral Account for each Participant full and fractional stock equivalent units ("Units") which shall be established as hereinafter provided and shall be maintained for each Participant on the Company's records. (b) The number of full and fractional Units that shall be credited to a separate Stock Deferral Account for a Participant shall be equal to an amount determined by: (i) Dividing the Participant's deferred compensation for the applicable Participation Year by the average of the closing price for Lubrizol Common Shares ("Shares") on the New York Stock Exchange ("NYSE") composite transactions reporting system ("composite tape") for each of the ten (10) consecutive trading days commencing on the fourth business day following the release of earnings for such Participation Year; and (ii) multiplying the quotient determined in subparagraph (i) by 1.25. (c) 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. (d) The amount of deferred compensation used in the formula set forth in paragraph (b) shall not constitute a sum due and owing to Participant. Such amount shall be used solely as part of the formula to determine the number of full and fractional Units. (e) 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: 2 (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 the 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. (f) 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 to any Participant and a Participant shall not be a shareholder or have any of the rights of a shareholder with respect to the Units credited to each separate Stock Deferral Account of a Participant. 5. PAYMENT OF DEFERRED COMPENSATION. (a) All Units credited to a separate Stock Deferral Account of Participant, including dividend equivalents thereon, shall be payable to the Participant at the end of three years from the first date Units were credited to such separate Stock Deferral Account of the Participant under Section 4(a); provided, however, that a Participant may elect once for any calendar year of deferral, to change the date of distribution to another in-service year or upon retirement; provided further, that any such modification must be made in writing at least twelve (12) months prior to the original date of distribution; provided further, that if a Participant's employment is terminated for any reason other than retirement or death, the Units credited to each separate Stock Deferral Account of a Participant as of the Participant's termination of employment date, including all dividend equivalents thereon, shall be payable to the Participant within 30 days of such termination of employment. (b) All distributions or payments of Units to a Participant shall be made in Shares equal to the number of whole Units credited to the separate Stock Deferral Account(s) of the Participant which become payable in accordance with Section 5(a). Any fractional number of Units shall be paid in cash in lieu of Shares. (c) To the extent that, at the time Shares are distributed to a Participant, any federal, state or local payroll withholding tax applies, 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. Such payment may be made in cash, in Shares, or in any combination of cash and Shares, at the election of the Participant. All elections must be made in writing and be submitted to the Vice President - Human Resources. If the Participant elects to satisfy tax withholding with Shares, then such withholding shall be from those Shares otherwise issuable pursuant to paragraph (b) 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. If no election is made prior to the first distribution of Shares, the Company 3 shall withhold a sufficient number of Shares to pay the withholding taxes at the highest marginal tax rate in effect for such Participant. In no event shall the withholding be less than the statutory minimum for tax withholding. (d) In the event a Participant dies prior to receiving payment of the entire amount in each separate Stock Deferral Account of the Participant, 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 accordance with Section 5(a) and (b) or earlier, as determined by the Committee. (e) To the extent the Committee deems necessary, the Shares distributed to a Participant pursuant to Section 5(a) and (b) or 6(a) or to a successor pursuant to Section 5(d) may contain such restrictions on the right of immediate transfer as the Committee may reasonably determine. 6. ACCELERATION OF PAYMENTS. (a) The Committee may accelerate the distribution of part or all of one or more of a Participant's separate Stock 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. 7. NON-ASSIGNABILITY. None of the rights or interests in any of the Participant's separate Stock 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 under Section 5 shall be payable in the sole and unrestricted judgment and discretion of the Committee, as to time and amount, and shall be distributable to the person who would have received the payment but for this Section 7 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 7 occur prior to the death of a Participant, the balance, if any, in each of the Participant's Stock Deferral Accounts shall, after such death, be thereafter distributed as provided in Section 5(d) subject to the provisions of this Section 7. 8. 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 4 forth in this Plan, no Participant shall have any rights 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 separate Stock Deferral Accounts maintained for purposes of the Plan merely constitutes a bookkeeping entry on records of the Company, constitutes the unsecured promise and obligation of the Company to make payments as provided herein, and shall not constitute any allocation whatsoever of any cash 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. 9. MISCELLANEOUS. 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 credited to each separate Stock Deferral Account of a Participant shall be appropriately adjusted to take into account any such event. 10. 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 any Stock Deferral Account of a Participant as it 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. 11. PLAN IMPLEMENTATION. This Plan is adopted and effective as of the 1st day of January, 1997, amended effective November 23, 1998, amended effective September 27, 1999, amended effective February 29, 2000, amended effective March 11, 2000 and amended effective February 26, 2001. 5 -----END PRIVACY-ENHANCED MESSAGE-----