-----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, E6bkxmVGig9k1mbYh2M8A/cnJ+27srTgqz5v8hry4RYM3S1ZeNJO7ee+Hi5Uoos0 4YYP62722cEMLlhezJuY7g== 0000950152-97-002180.txt : 19970327 0000950152-97-002180.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950152-97-002180 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05263 FILM NUMBER: 97563077 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-K405 1 LUBRIZOL CORPORATION ANNUAL REPORT 1 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, 1996 [ ] 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: (216) 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 Preferred 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. [X] Aggregate market value (on basis of closing sale price) of voting stock held by nonaffiliates as of March 7, 1997: $2,002,703,196 Number of the registrant's Common Shares, without par value, outstanding as of March 7, 1997 58,490,294 Documents Incorporated By Reference ----------------------------------- Portions of the registrant's 1996 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 19, 1997 (Incorporated into Part III of this Form 10-K) 2 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 worldwide supplier of performance chemicals for lubricants, fuels and other specialty chemical markets. These specialty chemical products are created through the application of advanced chemical and mechanical technologies to enhance the performance, quality and value of the customer products in which they are used. The company develops, produces and sells specialty additive systems for gasoline and diesel engine lubricating oils, automatic transmission fluids, gear oils, marine and tractor lubricants, fuel products and industrial fluids. The company also supplies coatings additives, refinery and oil field chemicals, specialty monomers, process chemicals, synthetic refrigerant compressor lubricants, fluid metering devices and particulate emission trap devices. Prior to December 1, 1992, the company had a separately reportable Agribusiness segment. That segment developed, produced and marketed planting seeds and specialty vegetable oils, and also conducted strategic biotechnology research and development. Over the past five years the company has divested its non-strategic assets comprised primarily of its assets associated with its former Agribusiness segment, including its investments in Mycogen Corporation, and its investments in Genentech, Inc. common stock. The company has substantially liquidated its non-strategic assets as of December 31, 1996. (Please refer to Note 8 to the Financial Statements which is included in the company's 1996 Annual Report to its shareholders and is incorporated herein by reference.) PRINCIPAL PRODUCTS. The company's principal products are specialty additive systems for gasoline and diesel engine lubricating oils, automatic transmission fluids, gear oils, industrial fluids, metalworking compounds and fuels. The company also offers other specialty chemical products, fluid metering devices and particulate emission trap devices. Additives for engine lubricating oils accounted for 51% of consolidated revenues in 1996, 1995 and 1994. Additives for driveline oils accounted for 25%, 24% and 24% of consolidated revenues for these respective periods. 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. 3 Due to the variety in the properties and applications of oils, 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 fluids, industrial oils, metalworking fluids, and gasoline, diesel and residual fuels. COMPETITION. The chemical additive field is highly competitive in terms of price, technology development, product performance and customer service. The company's principal competitors, both in the United States and overseas, are three major petroleum companies and one chemical company. The petroleum companies produce lubricant and fuel additives for their own use, and also sell additives to others. These competing companies are also customers of the company. Excluding viscosity improvers, management believes, based on volume sold, that the company is the largest supplier to the petroleum industry of performance additive systems for lubricants. CUSTOMERS. In the United States, the company markets its additive 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. Approximately 40% of the company's sales are made to customers in North America, 33% in Europe and 27% in Asia-Pacific, Middle East and Latin America. Sales to Mobil Corporation and its affiliates accounted for 10% of consolidated sales in 1996 and 1995, and no customer exceeded 10% of consolidated sales in 1994. 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 44% of consolidated sales in 1996. The loss of one or more of these customers could have a material adverse effect on the company's business. However, the largest of these customers are made up of a number of separate business units that the company believes make independent purchasing decisions with respect to chemical additives. 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. Unstable 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 1997. 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 standards compresses time -2- 4 cycles for new product development and affects the company's technical spending patterns. Research and development expenditures were $93.4 million in 1996, $104.9 million in 1995 and $90.7 million in 1994. These amounts were equivalent to 5.8%, 6.3% and 5.7% 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, $67.6 million, $74.7 million and $74.8 million was spent in 1996, 1995 and 1994, respectively, for technical service activities, principally for evaluation in mechanical equipment of specific lubricant formulations designed for the needs of petroleum industry customers throughout the world. 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 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 certain United States patents relating to lubricant and fuel additives, lubricants, chemical compositions and processes, and protective coating materials and processes. It also owns similar patents in foreign countries. 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. The company has filed claims against Exxon Corporation and its affiliates ("Exxon") alleging infringements by Exxon of certain of the company's patents. These suits are pending in the United States, Canada, France and the United Kingdom, and are at various stages. The international suits allege infringement of patents that correspond to a United States patent admitted as valid by Exxon in a settlement in 1988. In the suit in Canada, a determination of liability has been made by the courts against Exxon and in favor of the company, and the case has been returned to the -3- 5 trial court for an assessment of damages. In the suit in the United Kingdom, a patent trial court declared the company's patent invalid and the company will appeal that decision. In another patent infringement suit, instituted by Exxon in the United States, liability and damage determinations, previously made in favor of Exxon and against the company, have been overturned by an appeals court which has been affirmed by the U.S. Supreme Court. For further information regarding these cases, refer to Note 18 to the Financial Statements which is included in the company's 1996 Annual Report to its shareholders and is incorporated herein by reference. 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 regulations requires continuing management effort and expenditures by the company. Capital expenditures for environmental projects approximated $8 million in 1996, and over the past three years have averaged 15% of annual capital spending. Management 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 remedial cleanup as a part of its product cost, and accrues for estimated environmental liabilities with charges to cost of sales. Management considers its environmental accrual to be adequate to provide for its portion of costs for all known environmental matters, including Superfund sites. Based upon consideration of currently available information, management does not believe liabilities for environmental matters will have a material adverse affect on the company's financial position, operating results or liquidity. -4- 6 GENERAL - ------- EMPLOYEES. At December 31, 1996 the company and its wholly- owned subsidiaries had 4,358 employees of which approximately 64% were in the U.S. INTERNATIONAL OPERATIONS. Financial information with respect to domestic and foreign operations is contained in Note 14 to the Financial Statements which is included in the company's 1996 Annual Report to its shareholders and is incorporated herein by reference. The company supplies its additive customers abroad from overseas manufacturing plants and through export from the United States. 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 uncertainty, import and export limitations, exchange controls and currency fluctuations. The company believes risks related to its foreign operations are mitigated due to the political and economic 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 pricing flexibility. Generally, the income statement effect of changes in the U.S. dollar value of foreign currencies is partially or wholly offset by the company's ability to make corresponding price changes in local currency. 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 Houston, Texas; and London, England. 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 Atsugi, Japan. The company also owns in fee a facility in Midland, Michigan, at which air and refrigeration compressor lubricants are developed and marketed; a manufacturing plant in Germany that manufactures performance chemical additives for the coatings industry; a manufacturing plant in Atlanta, Georgia, that manufactures fluid metering devices; and a manufacturing plant in Newmarket, Ontario, Canada, that manufactures particulate emission control devices. -5- 7 Additive manufacturing plants in India and Saudi Arabia, are owned and operated by joint venture companies licensed by Lubrizol. Lubrizol's ownership of each of these companies ranges from 40% to 49%. 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, Ecuador, Finland, France, Holland, Singapore, Spain, South Africa, Sweden, and Turkey; East Liverpool, Ohio; 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. Management continues to maintain a capital expenditure program to support the company's operations and believes that the company's facilities are adequate for its present operations and for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The company is a party in a case brought by Exxon Corporation and its affiliates, Exxon Chemical Patents, Inc. and Exxon Research & Engineering Company, in the Southern District of Texas, Houston Division on September 19, 1989. In December 1992, the trial jury rendered a verdict that the company willfully infringed an Exxon patent pertaining to an oil soluble copper additive component. In early 1993, the court prohibited the company from making or selling any additive packages in the United States that contained this component and awarded Exxon $18.1 million for attorneys' fees. In November 1993, another jury in the same case awarded Exxon $48 million in damages, and in February 1994, the trial court judge doubled the damages amount and awarded prejudgment interest, court costs and additional attorney's fees for a total judgment of $129 million. The findings of infringement and validity of the Exxon patent as well as the $129 million judgment were appealed to the United States Court of Appeals for the Federal Circuit in Washington, D.C., which has jurisdiction over all patent cases. On September 1, 1995, the Appellate Court overturned the jury verdict that the company infringed the Exxon patent and entered judgment in favor of the company as a matter of law. The ruling also vacated the injunction against the company and the $129 million judgment. On February 23, 1996, the same court in Washington, D.C., denied Exxon's request for a rehearing. On June 24, 1996, the U.S. Supreme Court denied Exxon's request to review the Appellate Court judgment. The Supreme Court decision finalizes the Appellate Court judgment. Notwithstanding the Supreme Court decision, Exxon filed a motion for another trial under the patent on an allegedly different theory of infringement, which motion was denied by the trial judge following the Supreme Court ruling. However, Exxon has pursued an appeal of the denial of the motion for another trial, which appeal is pending. -6- 8 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, 1996. 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, 1997.
Name Business Experience ---- ------------------- W. G. Bares Mr. Bares, age 55, became Chairman of the Board on April 22, 1996, and Chief Executive Officer on January 1, 1996. He has been President since 1982. From 1987 through 1995, he was also Chief Operating Officer. R. A. Andreas Mr. Andreas, age 52, has been Vice President and Chief Financial Officer since June 1990. J. W. Bauer Mr. Bauer, age 43, became Vice President and General Counsel in April 1992, after serving as General Counsel from August 1991. S. A. Di Biase Dr. Di Biase, age 44, has been Vice President since September 1993. He is responsible for Research and Development. From 1990 to September 1993, he was Director of Strategic Research. G. R. Hill Dr. Hill, age 55, has been Senior Vice President since 1988. In 1996, he became responsible for Corporate Strategic Planning and has been responsible for Business Development since October 1993. Prior to October 1993, he was responsible for Research and Development. J. E. Hodge Mr. Hodge, age 54, has been Vice President since September 1993. He is responsible for Operations. During 1989 through 1993, he was General Manager - Deer Park/Bayport Plants. K. H. Hopping Mr. Hopping, age 50, has been Vice President and Secretary of the Corporation since April 1991. W. R. Jones Mr. Jones, age 54, has been Treasurer since 1980.
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Name Business Experience ---- ------------------- S. F. Kirk Mr. Kirk, age 47, has been Vice President since September 1993. In April 1996, he became responsible for Sales. From 1993 to April 1996, he was responsible for Segment Management. From January 1991 to 1993, he was Senior Vice President - Marketing and Technology for Lubrizol Petroleum Chemicals Company. Y. Le Couedic Mr. Le Couedic, age 49, has been Vice President since September 1993. He is responsible for Management Information Systems. From 1991 to 1993, he was Division Head - Corporate R&D - Administrative Services. G. P. Lieb Mr. Lieb, age 44, was named Controller - Accounting and Financial Reporting in November 1993, and was named Principal Accounting Officer in January 1994. From October 1991 to October 1993, he was Administrative Manager for the Hazelwood, U.K. Laboratory. M. W. Meister Mr. Meister, age 42, has been Vice President since April 1993. He is responsible for Human Resources. From November 1992 to April 1993, he was General Manager - Human Resources. During 1989 to 1992, he was Director - Human Resources for Agrigenetics Company, formerly a wholly-owned subsidiary of The Lubrizol Corporation. D. A. Muskat Mr. Muskat, age 57, was named Operations Manager in August 1993. From September 1989 to August 1993 he was Vice President - Operations for Lubrizol Petroleum Chemicals Company. L. M. Reynolds Ms. Reynolds, age 36, was named Assistant Secretary in April 1995, and has been Counsel since February 1991. R. D. Robins Mr. Robins, age 54, became Vice President in April 1996. He is responsible for Segment Management. From October 1993 to April 1996 he was Passenger Car Segment Manager. From November 1991 to October 1993 he was Fuel Products Group Business Manager.
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Name Business Experience ---- ------------------- J. A. Thomas Mr. Thomas, age 58, has been Vice President since April 1994. In 1996, he became responsible for managing Corporate Strategies in the Asia Pacific Region. From April 1994 through April 1996, he was responsible for Corporate Planning and Development. From December 1990 to April 1994, he was General Manager - Sales for Asia Pacific, Latin American and the Middle East.
All executive officers serve at the pleasure of the Board. 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 5,988 as of March 7, 1997. Information relating to the recent price and dividend history of the company's Common Shares follows:
Common Share Price History Dividends -------------------------- --------- 1996 1995 Per Common Share ---- ---- ---------------- High Low High Low 1996 1995 ---- --- ---- --- ---- ---- 1st quarter $31 $26 5/8 $35 1/2 $32 1/2 $ .24 $.23 2nd quarter 30 1/2 27 1/4 36 7/8 34 1/8 .24 .23 3rd quarter 30 1/2 27 7/8 37 3/8 30 .24 .23 4th quarter 32 3/8 28 1/2 33 1/4 25 1/2 .25 .24 --- ---- $.97 $.93 ==== ====
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 38 and 39 of the company's 1996 Annual Report to its shareholders is incorporated herein by reference. Other income (charges) for 1996, 1995, 1994 and 1993 includes $53.3 million, $38.5 million, $41.2 million and $42.4 million, respectively, for gains on sale of investments; in 1995, a charge of $9.5 million for an asset impairment; and in 1993, a special charge of $86.3 million (See Notes 8 and 17 to the Financial Statements included in the company's 1996 Annual Report to its shareholders). In addition, the company changed its method of accounting for postretirement benefits and for income taxes, effective January 1, 1993, to comply with two newly effective accounting standards, which reduced 1993 net income by $39.4 million. -9- 11 Total debt reported in the Historical Summary includes the following amounts classified as long-term at December 31: $157.6 million in 1996, $194.4 million in 1995, $114.2 million in 1994, $55.3 million in 1993 and $23.3 million in 1992. 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 company's cautionary statement for "Safe Harbor" purposes under the Private Securities Litigation Reform Act of 1995, contained on pages 16 through 21, inclusive, of the company's 1996 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 22 through 36, inclusive, of the company's 1996 Annual Report to its shareholders, and the Quarterly Financial Data (Unaudited) contained on page 37 of such 1996 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 2 to 6, inclusive, of the company's Proxy Statement dated March 19, 1997, is incorporated herein by reference. Information relative to executive officers of the company is contained under "Executive Officers of the Registrant" Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information relating to executive compensation contained under the headings "Committees and Compensation of the Board of Directors" on pages 6 and 7, "Executive Compensation" on pages 10 through 12, inclusive, and under "Employee and Executive Officer Benefit Plans - Pension Plans" and "- Executive Agreements" on pages 17 through 19, inclusive, of the company's Proxy Statement dated March 19, 1997, is incorporated herein by reference. -10- 12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information relating to security ownership set forth under the heading "Security Ownership of Directors and Management and Certain Beneficial Owners" on pages 8 and 9 of the company's Proxy Statement dated March 19, 1997, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. 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 22 through 36, inclusive, of Lubrizol's 1996 Annual Report to its shareholders and incorporated herein by reference: Independent Auditors' Report Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets at December 31, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 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. -11- 13 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, 1993, 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, 1993, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibits (3)(a) and (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibits are incorporated herein by reference.) (4)(b) The company agrees, upon request, to furnish to the Securities and Exchange Commission copies of instruments authorizing long-term debt. No one instrument authorizes debt in excess of 10% of the total assets of the company and its subsidiaries on a consolidated basis. (4)(c) Rights Agreement between The Lubrizol Corporation and National City Bank dated October 6, 1987. (Reference is made to Exhibit (4)(c) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (4)(d) Amendment to Rights Agreement dated October 6, 1987, between The Lubrizol Corporation and National City Bank, effective October 24, 1988. (Reference is made to Exhibit (4)(d) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) -12- 14 (4)(e) Amendment No. 2 to Rights Agreement dated October 6, 1987, as amended, between The Lubrizol Corporation and National City Bank, effective October 28, 1991. (Reference is made to Exhibit (4)(f) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (4)(f) Amendment No. 3 to Rights Agreement dated October 6, 1987, as amended, between The Lubrizol Corporation and American Stock Transfer & Trust Company, effective February 17, 1997. (10)(a)* The Lubrizol Corporation 1985 Employee Stock Option Plan, as amended. (Reference is made to Exhibit (10)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, 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 Annual Report on Form 10-K for the year ended December 31, 1994, 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)(e) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended. (Reference is made to Exhibit (10)(d) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, which Exhibit is incorporated herein by reference.) (10)(e)* The Lubrizol Corporation Excess Defined Contribution Plan, as amended. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay Plan (formerly Variable Award Plan), as amended. -13- 15 (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, 1995, which Exhibit is incorporated herein by reference.) (10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan, as amended. (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 Annual Report on Form 10-K for the year ended December 31, 1995, 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, 1995, which Exhibit is incorporated herein by reference.) (10)(k)* The Lubrizol Corporation Deferred Compensation Plan for Officers, as amended. (Reference is made to Exhibit (10) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995, which Exhibit is incorporated herein by reference.) (10)(l)* The Lubrizol Corporation Executive Council Deferred Compensation Plan. (11) Statement setting forth Computation of Per Share Earnings. (12) Computation of Ratio of Earnings to Fixed Charges. (13) The following portions of The Lubrizol Corporation 1996 Annual Report to its shareholders: Pages 16-21 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 22 Independent Auditors' Report Page 23 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 -14- 16 Page 24 Consolidated Balance Sheets at December 31, 1996 and 1995 Page 25 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Page 26 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Pages 27-36 Notes to Financial Statements Page 37 Quarterly Financial Data (Unaudited) Pages 38-39 Historical Summary (21) List of Subsidiaries of The Lubrizol Corporation (23) Consent of Independent Auditors (27) Financial Data Schedule *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, 1996. -15- 17 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 24, 1997, 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 24, 1997, 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/R. A. Andreas Vice President and Chief Financial Officer - --------------------------------- (Principal Financial Officer) R. A. Andreas /s/G. P. Lieb Controller, Accounting and Financial Reporting - --------------------------------- (Principal Accounting Officer) G. P. Lieb /s/Edward F. Bell Director - --------------------------------- Edward F. Bell /s/L. E. Coleman Director - --------------------------------- L. E. Coleman /s/Peggy G. Elliott Director - --------------------------------- Peggy G. Elliott /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/Thomas C. MacAvoy Director - ----------------------------------- Thomas C. MacAvoy /s/William P. Madar Director - ----------------------------------- William P. Madar /s/Ronald A. Mitsch Director - ------------------------------------ Ronald A. Mitsch
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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, 1993, 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, 1993, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibits (3)(a) and (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibits are incorporated herein by reference.) (4)(b) The company agrees, upon request, to furnish to the Securities and Exchange Commission copies of instruments authorizing long-term debt. No one instrument authorizes debt in excess of 10% of the total assets of the company and its subsidiaries on a consolidated basis. (4)(c) Rights Agreement between The Lubrizol Corporation and National City Bank dated October 6, 1987. (Reference is made to Exhibit (4)(c) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (4)(d) Amendment to Rights Agreement dated October 6, 1987, between The Lubrizol Corporation and National City Bank, effective October 24, 1988. (Reference is made to Exhibit (4)(d) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (4)(e) Amendment No. 2 to Rights Agreement dated October 6, 1987, as amended, between The Lubrizol Corporation and National City Bank, effective October 28, 1991. (Reference is made to Exhibit (4)(f) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (4)(f) Amendment No. 3 to Rights Agreement dated October 6, 1987, as amended, between The Lubrizol Corporation and American Stock Transfer & Trust Company, effective February 17, 1997. (10)(a)* The Lubrizol Corporation 1985 Employee Stock Option Plan, as amended. (Reference is made to Exhibit (10)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, 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 Annual Report on Form 10-K for the year ended December 31, 1994, which Exhibit is incorporated herein by reference.)
19
(10)(c)* Form of Employment Agreement between The Lubrizol Corporation and certain of its senior executive officers. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended. (Reference is made to Exhibit (10)(d) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, which Exhibit is incorporated herein by reference.) (10)(e)* The Lubrizol Corporation Excess Defined Contribution Plan, as amended. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay Plan (formerly Variable Award Plan), as amended. (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, 1995, which Exhibit is incorporated herein by reference.) (10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan, as amended. (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 Annual Report on Form 10-K for the year ended December 31, 1995, 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, 1995, which Exhibit is incorporated herein by reference.) (10)(k)* The Lubrizol Corporation Deferred Compensation Plan for Officers, as amended. (Reference is made to Exhibit (10) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995, which Exhibit is incorporated herein by reference.) (10)(l)* The Lubrizol Corporation Executive Council Deferred Compensation Plan. (11) Statement setting forth Computation of Per Share Earnings. (12) Computation of Ratio of Earnings to Fixed Charges.
20
(13) The following portions of The Lubrizol Corporation 1996 Annual Report to its shareholders: Pages 16-21 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 22 Independent Auditors' Report Page 23 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 Page 24 Consolidated Balance Sheets at December 31, 1996 and 1995 Page 25 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Page 26 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Pages 27-36 Notes to Financial Statements Page 37 Quarterly Financial Data (Unaudited) Pages 38-39 Historical Summary (21) List of Subsidiaries of The Lubrizol Corporation (23) Consent of Independent Auditors (27) Financial Data Schedule *Indicates management contract or compensatory plan or arrangement.
EX-4.F 2 EXHIBIT 4(F) 1 Exhibit (4)(f) February 17, 1997 American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11214 RE: Amendment No. 3 to Rights Agreement Dear Sir or Madam: Pursuant to Section 26 of the Rights Agreement, dated as of October 6, 1987, between The Lubrizol Corporation, an Ohio corporation (the "Company"), and National City Bank (which has been succeeded by American Stock Transfer & Trust Company as Rights Agent), which Agreement has been amended by Amendments to Rights Agreement, dated October 24, 1988 and October 28, 1991, respectively (as amended "Rights Agreement"), the Company by resolutions by its Board of Directors, hereby amends the Rights Agreement as follows: 1. To amend the fifth sentence of Section 21 to change the capital and surplus requirements from $50 million to $10 million. Very truly yours, THE LUBRIZOL CORPORATION By: /s/ K.H. Hopping ---------------------------------- Name: K. H. Hopping Title: Vice President and Secretary Agreed to and Accepted: AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/ Herbert J. Lemmer -------------------------------------- Name: Herbert J. Lemmer ------------------------------------ Title: Vice President ----------------------------------- EX-10.F 3 EXHIBIT 10(F) 1 Exhibit (10)(f) THE LUBRIZOL CORPORATION PERFORMANCE PAY PLAN (Formerly Variable Award Plan) (As Amended) INTRODUCTION ------------ The Lubrizol Corporation (hereinafter referred to as the "Corporation") hereby amends, effective as of January 1, 1997, The Lubrizol Corporation Performance Pay Plan (formerly The Lubrizol Corporation Variable Award Plan) (hereinafter referred to as the "Plan") in order to provide an award for employees which reflects the pursuit of superior performance, increased customer satisfaction and enhancement of shareholder value. Awards for participating employees under the Plan shall depend upon corporate performance measures as determined by the Committee for the Plan Year. Except as otherwise provided, the Plan shall be administered by the Organization and Compensation Committee (hereinafter referred to as the "Committee") of the Board of Directors of the Corporation. The Committee shall have conclusive authority to construe and interpret the Plan and any agreements entered into under the Plan and to establish, amend, and rescind rules and regulations for its administration. The Committee shall also have any additional authority as the Board may from time to time determine to be necessary or desirable. ARTICLE I DEFINITIONS ----------- 1.01 DEFINITIONS. The following terms shall have the indicated meanings for purposes of the Plan: (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Chief Executive Officer" shall mean the chief executive officer of the Corporation. (c) "Committee" shall mean the Organization and Compensation Committee of the Board, or other designated committee of the Board, consisting of persons who are not Employees or Foreign Employees. (d) "Corporation" shall mean The Lubrizol Corporation, a corporation organized under the laws of the State of Ohio. (e) "Director" shall mean a member of the Board. (f) "Employee" shall mean any person other than an Officer, who is employed for a wage or salary by the Corporation or a domestic Subsidiary. (g) "Foreign Employee" shall mean any person who is employed for a wage or salary by an international Subsidiary of the Corporation. 1 2 (h) "Foreign Participant" shall mean any Foreign Employee who has been selected by the Committee pursuant to Article VI of the Plan, and who has not for any reason become ineligible to participate in the Plan. (i) "Individual Award" shall mean the amount paid (or to be paid) to a Participant or Foreign Participant, as the case may be, by the Corporation pursuant to the Plan. (j) "Individual Performance Shares" shall have the definition, and shall be determined, as set forth in Section 3.02 herein. (k) "Officer" shall mean an employee of the Corporation or a Subsidiary who is a member of the Executive Council of the Corporation. (l) "Participant" shall mean all Officers, and any Employee who has been selected by the Committee pursuant to Article II herein to participate in the Plan, and have not for any reason become ineligible to participate in the Plan. (m) "Pay" shall be determined at the time of calculating the Individual Performance Shares and shall mean: (i) for a participating Employee, his current bi-weekly salary multiplied by 26. (ii) for a participating Officer: (A) Add 1.0 to the decimal rate that applies in computing his quarterly pay; (B) Multiply his current bi-weekly base pay by the sum determined in (A); and (C) Multiply the product determined in (B) by 26. (n) "Plan" shall mean The Lubrizol Corporation Performance Pay Plan (formerly The Lubrizol Corporation Variable Award Plan), effective January 1, 1990, as amended effective January 1, 1996, and as further amended effective January 1, 1997, as herein set forth. (o) "Plan Year" shall mean each twelve-month period commencing January 1 and ending December 31. (p) "Subsidiary" shall mean any corporation, foreign or domestic, that is wholly or partially (but not less than 50%) owned directly or indirectly by the Corporation. 1.02 CONSTRUCTION. Where necessary or appropriate to the meaning of a word, the singular shall be deemed to include the plural, the plural to include the singular, the masculine to include the feminine, and the feminine to include the masculine. 2 3 ARTICLE II ELIGIBILITY AND PARTICIPATION ----------------------------- 2.01 ELIGIBILITY. All Employees and Officers shall be eligible to participate in the Plan. 2.02 PARTICIPATION. All Officers shall participate in the Plan. In addition, the Committee shall determine which Employees shall participate in the Plan for each Plan Year. The Committee may also determine which Employees hired during the Plan Year shall participate in the Plan for such Plan Year. The Committee's selection of Participants shall be after considering recommendations presented to it by the Chief Executive Officer. ARTICLE III INDIVIDUAL PERFORMANCE SHARES ----------------------------- 3.01 IN GENERAL. At the time the Committee selects Participants for any Plan Year, the Committee shall, after consideration of the recommendations of the Chief Executive Officer, establish, for each Plan Year, Individual Performance Shares for each Participant. 3.02 CALCULATION OF INDIVIDUAL PERFORMANCE SHARES. Individual Performance Shares shall be calculated in the following manner: (a) The Pay of each Participant shall be multiplied by a designated percentage which shall take into account the Participant's position in the Corporation. Such designated percentage shall be determined by the Committee. (b) The product for each Participant, determined pursuant to the calculation in paragraph (a) above, shall be divided by the sum of all such amounts produced for all Participants calculated in accordance with paragraph (a) above. (c) The quotient determined for each Participant, calculated pursuant to paragraph (b) above, shall be multiplied by 100 and rounded, up or down, to the nearer whole number to produce the number of each Participant's Individual Performance Shares. Individual Performance Shares may be either increased or decreased, at any time, or from time to time, during a Plan Year, for any Participant at the sole discretion of the Committee in order to reflect any change in the individual contribution under the formula set forth in this Section 3.02. ARTICLE IV DETERMINATION OF FUND --------------------- 4.01 FUND. A fund shall be accrued on a monthly basis during each Plan Year, based upon a fixed percentage of the Corporation's monthly consolidated net income during such Plan Year (the "Fund"), as established by the Committee, which percentage may be increased or decreased at any time, and from time to time, prior to the end of the Plan Year at the discretion of the Committee. The Fund shall consist of bookkeeping accruals on the books of the Corporation and no cash or other property shall be set aside by the Corporation for these purposes. 3 4 4.02 POST-PLAN YEAR FUND ADJUSTMENT. At the beginning of each Plan Year, corporate initiatives for the Plan Year will be categorized into corporate performance measures and shall be presented to the Committee by the Chief Executive Officer. In January following the Plan Year, the Chief Executive Officer shall evaluate the outcome of the performance measures for the Plan Year just concluded and shall present his evaluation to the Committee which the Committee may, at its discretion, increase or decrease the amount of the Fund. ARTICLE V INDIVIDUAL AWARDS ----------------- 5.01 ALLOCATION. Each Participant's Individual Award for a Plan Year shall be calculated in January following the close of the Plan Year and shall be an amount determined as follows: (a) Divide the total Fund, as finally approved by the Committee, by the total Individual Performance Shares of all Participants; (b) For each Participant, multiply the amount determined in paragraph (a) by such Participant's Individual Performance Shares; and (c) The product determined in paragraph (b) shall be the tentative amount of the Participant's Individual Award which may be increased or decreased in the sole discretion of the Committee. The Committee may also in its sole and unrestricted discretion determine Individual Awards for Participants who were hired during the Plan Year. No Participant shall have any vested interest in, or be entitled to, any Individual Award unless and until payment is authorized by the Committee. 5.02 TIME AND METHOD OF PAYMENT OF INDIVIDUAL AWARDS. In the event the Committee determines that a Participant is entitled to an Individual Award, the Corporation shall pay such Individual Award to that Participant as soon after the close of the Plan Year as may be feasible, but in no event later than thirty 30 days after the date that the Corporation releases its public announcement of the Corporation's earnings for such Plan Year. A Participant, who leaves the Corporation's employ after the Plan Year but prior to the payment of an Individual Award, except in the case of retirement under the provisions of a qualified defined benefit plan maintained by the Corporation, disability or death, will not be eligible to receive any payment under this Plan. However, an Individual Award may be made to such a Participant in those instances where recommendation for such a payment has been made by the Chief Executive Officer and approved by the Committee. In the event a Participant dies after the Plan Year but prior to the payment of any Individual Award with respect to the Plan Year, any Individual Award determined to be payable by the Committee shall be paid by the Corporation to the Participant's estate. 5.03 CONDITIONS. Anything contained herein to the contrary notwithstanding, the payment of Individual Awards to Participants with respect to any Plan Year is conditioned upon the availability of adequate corporate profits for the Corporation's fiscal year coinciding with any Plan Year. The determination of whether adequate corporate profits exist shall be made by the Board in its sole and unrestricted judgment and discretion and such determination shall be conclusive and binding. 4 5 ARTICLE VI AWARDS FOR FOREIGN EMPLOYEES ---------------------------- 6.01 PARTICIPATION. The Committee shall determine which Foreign Employees shall participate in the Plan for each Plan Year. The Committee's selection of Foreign Participants shall be made after considering recommendations presented to it by the Chief Executive Officer. 6.02 INDIVIDUAL AWARDS. At the time the Individual Awards are determined for Participants, the Committee shall, in its discretion, after consideration of the recommendations of the Chief Executive Officer, establish for each Plan Year Individual Awards for each Foreign Participant. 6.03 PAYMENT OF AWARDS. Individual Awards to each Foreign Participant shall be paid by the international Subsidiary that is the employer of such Foreign Participant at the same time as payment is made to Participants under Section 5.02. All payments shall be converted from the U.S. dollar measurement under the Plan to the currency of the country of the such Subsidiary at the currency exchange rate in effect at the time the Individual Award is determined. All applicable withholding taxes shall be withheld from the distribution and remitted by the international subsidiary to the appropriate taxing authority. 6.04 CONDITIONS. (a) A Foreign Employee who leaves the international Subsidiary's employ after the end of the Plan Year but prior to the payment of an Individual Award, except in the case of retirement in accordance with the customary practice of such Subsidiary, disability or death, will not be eligible to receive any payment under this Plan. However, an Individual Award may be made to such a Foreign Participant in those instances where recommendation for such a payment has been made by the Chief Executive Officer and approved by the Committee. (b) In the event a Foreign Participant dies after the Plan year but prior to the payment of any Individual Award with respect to the Plan Year, any Individual Award determined by the Committee to be payable, shall be paid by the international Subsidiary to the Foreign Participant's estate or in accordance with local laws. ARTICLE VII CHANGE OF CONTROL ----------------- 7.01 EFFECT OF CHANGE IN CONTROL. In the event a Change in Control of the Corporation (as defined in Section 7.02) occurs prior to final determination by the Committee of the amounts of Individual Awards to be paid under the Plan with respect to any Plan Year, the Committee shall calculate such Individual Awards as soon as practicable after such Change in Control. The Fund from which Individual Awards are to be made shall be based upon accruals by the Corporation up to the time of such Change in Control and Individual Awards shall be calculated in accordance with Sections 5.01 and 6.02 herein. Payment of such Individual Awards shall be made within thirty (30) days of the date on which the determination is made to compute the payments according to the terms of this Section 7.01. 5 6 7.02 For all purposes of the Plan, a "Change in Control of the Corporation" shall have occurred if any of the following events shall occur: (a) The Corporation is merged, consolidated or reorganized into or with another corporation or other legal person, and, as a result of such merger, consolidation or reorganization, less than a majority of the combined voting power of the then-outstanding securities of such surviving corporation or person entitled to vote, immediately after such transaction, is held in the aggregate by the holders of Voting Stock (as hereinafter defined) of the Corporation immediately prior to such transaction; (b) The Corporation sells all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person, immediately after such sale, is held in the aggregate by the holders of Voting Stock of the Corporation immediately prior to such sale; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Corporation ("Voting Stock"); (d) The Corporation files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Corporation has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (e) If during any period of two consecutive years, individuals who, at the beginning of any such period constitute the Directors of the Corporation, cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's stockholders, of each Director of the Corporation first elected during such period was approved by a vote of at least two-thirds of the Directors of the Corporation then still in office who were Directors of the Corporation at the beginning of any such period. Notwithstanding the foregoing provisions, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Corporation, (ii) an entity in which the Corporation directly or indirectly beneficially owns 50% or more of the voting securities or (iii) any Corporation-sponsored employee stock ownership plan or any other employee benefit plan of the Corporation, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or 6 7 because the Corporation reports that a change in control of the Corporation has or may have occurred or will or may occur in the future by reason of such beneficial ownership. ARTICLE VIII ADMINISTRATION -------------- 8.01 PLAN ADMINISTRATOR. The Committee shall be the Plan administrator. 8.02 DUTIES OF PLAN ADMINISTRATOR. (a) The Committee shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan including, but not limited to, the following: (1) Determination of Employees and Foreign Employees who are eligible for Plan participation; (2) Determination of the amount of the Fund to be distributed to Participants and Foreign Participants for each Plan Year; and (3) Determination of each Officer's actual Individual Award. (b) The Committee shall interpret the Plan and shall resolve all questions arising in the administration, interpretation, and application of the Plan. Any such determination of the Committee shall be conclusive and binding on all persons. (c) The Committee shall establish such procedures and keep such records or other data as the Committee in its discretion determines necessary or proper for the administration of the Plan. (d) The Committee may delegate administrative responsibilities to such person or persons as the Committee deems necessary or desirable in connection with the administration of the Plan. ARTICLE IX MISCELLANEOUS ------------- 9.01 UNFUNDED PLAN. The Corporation shall be under no obligation to segregate or reserve any funds or other assets for purposes relating to this Plan and no Participant or Foreign Participant shall have any rights whatsoever in or with respect to any funds or assets of the Corporation. 9.02 NON-ALIENATION. Since a Participant or Foreign Participant does not have any rights to any Individual Award under the Plan until the time that payment of such Individual Award is made, no anticipated payment of any Individual Award shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment or encumbrance of any kind. If a Participant or Foreign Participant attempts to alienate, sell, transfer, assign, pledge or otherwise encumber any such anticipated Individual Award, or if he has filed or will be filing for bankruptcy, the Committee in its discretion may cause such amounts as would otherwise become payable to such Participant or Foreign Participant at such time or times to be paid to or applied for the benefit of such one or more of the following as the Committee in its 7 8 sole and unrestricted judgment and discretion may designate: the Participant or Foreign Participant, his spouse, child or children, or other dependents. 9.03 UNCLAIMED PAYMENTS. Should the whereabouts of any Participant or Foreign Participant entitled to receive any Individual Award be unknown to the Corporation, and unascertainable after reasonable inquiry by the Corporation, for a period of two years from the date of scheduled payment of the Individual Award, the right of such person to receive payments hereunder shall be terminated, and the amounts which would otherwise have been payable to such person shall be forfeited. 9.04 ACTIONS OR DECISIONS WITH RESPECT TO THE PLAN. Any decision or action of the Corporation, the Board, or the Committee, arising out of or in connection with the administration and operation of this Plan, may be made or taken in their sole and unrestricted judgment and discretion, and such decision or action shall be conclusive and binding upon all Participants and Foreign Participants. 9.05 NO EMPLOYMENT RIGHTS. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Participant, Foreign Participant, Employee or Foreign Employee hereunder to continue his employment with the Corporation or a Subsidiary, and nothing herein contained shall be construed as a commitment on the part of the Corporation or any Subsidiary to continue the employment or rate of compensation of any Participant or Foreign Participant hereunder or any Employee or Foreign Employee for any period. 9.06 AMENDMENT OF THE PLAN. The Corporation reserves the right, to be exercised by instruction from the Committee, to modify or amend this Plan at any time. 9.07 DURATION AND TERMINATION OF THE PLAN. The Corporation also reserves the right, to be exercised by action of the Board, to discontinue or terminate the Plan; provided that, and subject to all the provisions of this plan, any termination shall be effective only for all Plan Years following December 31 of the plan Year in which the decision to terminate occurs. -END- 8 EX-10.H 4 EXHIBIT 10(H) 1 Exhibit (10)(h) THE LUBRIZOL CORPORATION 1991 STOCK INCENTIVE PLAN (As Amended January 1, 1997) SECTION 1. PURPOSE. The purposes of The Lubrizol Corporation 1991 Stock Incentive Plan are to encourage selected employees of The Lubrizol Corporation and its Subsidiaries and directors of the Company to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of shareholders, and to enhance the ability of the Company and its Subsidiaries to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, or Stock Award granted pursuant to the provisions of the Plan. (b) "Award Agreement" means a written document evidencing any Award granted hereunder, signed by the Company and delivered to the Participant or Outside Director, as the case may be. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means a committee of not less than three (3) Outside Directors of the Board, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3(d)(3) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule or statute. (f) "Company" means The Lubrizol Corporation. (g) "Employee" means any employee of the Company or of any Subsidiary. (h) "Fair Market Value" means the average of the high and low price of a Share on the New York Stock Exchange on the Grant Date (in the case of a Grant), or any other relevant date. (i) "Grant Date" means the date on which the Board approves the grant of an Option, Stock Appreciation Right, Restricted Stock Award, or Stock Award, and, with 2 THE LUBRIZOL CORPORATION Page 2 1991 STOCK INCENTIVE PLAN respect to an Option granted to an Outside Director pursuant to Section 10, the date of the Shareholders' Meeting on which such Option is granted. (j) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422A of the Code or any successor provision thereto. (k) "Non-Statutory Stock Option" means an Option that is not intended to be an Incentive Stock Option. (l) "Option" means an option to purchase Shares granted hereunder. (m) "Option Price" means the purchase price of each Share under an Option. (n) "Outside Director" means a member of the Board who is not an employee of the Company or of any Subsidiary. (o) "Participant" means an Employee who is selected by the Committee to receive an Award under the Plan. (p) "Plan" means The Lubrizol Corporation 1991 Stock Incentive Plan. (q) "Restricted Stock Award" means an award of restricted Shares under Section 8 hereof. (r) "Restriction Period" means the period of time specified in an Award Agreement during which the following conditions remain in effect: (i) certain restrictions on the sale or other disposition of Shares awarded under the Plan, (ii) subject to the terms of the applicable Award Agreement, the continued employment of the Participant, and (iii) such other conditions as may be set forth in the applicable Award Agreement. (s) "Shareholders' Meeting" means the annual meeting of shareholders of the Company in each year. (t) "Shares" means common shares without par value of the Company. (u) "Stock Appreciation Right" means the right to receive a payment in cash or in Shares, or in any combination thereof, from the Company equal to the excess of the Fair Market Value of a stated number of Shares at the exercise date over a fixed price for such Shares. (v) "Stock Award" means the grant of unrestricted Shares under the Plan. (w) "Subsidiary" means a corporation which is at least 80% owned, directly or indirectly, by the Company. (x) "Voting Stock" means the then-outstanding securities entitled to vote generally in the election of directors of the Company. 3 THE LUBRIZOL CORPORATION Page 3 1991 STOCK INCENTIVE PLAN SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. Members of the Committee shall be appointed by and serve at the pleasure of the Board, and may resign by written notice filed with the Chairman of the Board or the Secretary of the Company. A vacancy on the Committee shall be filled by the appointment of a successor member by the Board. Subject to the express provisions of this Plan, the Committee shall have conclusive authority to select Employees to be Participants for Awards and determine the type and number of Awards to be granted, to construe and interpret the Plan, any Award granted hereunder, and any Award Agreement entered into hereunder, and to establish, amend, and rescind rules and regulations for the administration of this Plan and shall have such additional authority as the Board may from time to time determine to be necessary or desirable. Notwithstanding the foregoing, the Committee shall not have discretion with respect to Options granted to Outside Directors pursuant to Section 10 such as to prevent any Award granted under this Plan from meeting the requirements for exemption from Section 16(b) of the Exchange Act, as set forth in Rule 16b-3 thereunder or any successor rule or statute. SECTION 4. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in the Plan, the total number of Shares available under the Plan in each calendar year shall be one percent (1%) of the total outstanding Shares as of the first day of any year for which the Plan is in effect; provided that such number shall be increased in any year by the number of Shares available for grant hereunder in previous years but not covered by Awards granted hereunder in such previous years; provided further, that a total of no more than two million (2,000,000) Shares shall be available for the grant of Incentive Stock Options Under the Plan; and provided further, that no more than four hundred thousand (400,000) Shares shall be available for grant to any Participant during a calendar year. Settlement of an Award, whether by the issuance of Shares or the payment of cash, shall not be deemed to be the grant of an Award hereunder. In addition, any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the Shares available for grants under the Plan. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares or treasury shares. If any Shares subject to any Award granted hereunder are forfeited or if such Award otherwise terminates without the issuance of such Shares or payment of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan as if such Shares had not been subject to an Award. (b) The number of Shares which remain available for grant pursuant to this Plan, together with Shares subject to outstanding Awards, at the time of any change in the Company's capitalization, including stock splits, stock dividends, mergers, reorganizations, consolidations, recapitalizations, or other changes in corporate structure, shall be appropriately and proportionately adjusted to reflect such change in capitalization. 4 THE LUBRIZOL CORPORATION Page 4 1991 STOCK INCENTIVE PLAN SECTION 5. ELIGIBILITY. Any Employee shall be eligible to be selected as a Participant. SECTION 6. STOCK OPTIONS. Non-Statutory Stock Options and Incentive Stock Options may be granted hereunder to Participants either separately or in conjunction with other Awards granted under the Plan. Any Option granted to a Participant under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. (a) OPTION PRICE. The purchase price per Share under an Option shall be one hundred percent (100%) of the Fair Market Value of the Share on the Grant Date of the Option. Payment of the Option Price may be made in cash, Shares, or a combination of cash and Shares, as provided in the Award Agreement relating thereto. (b) OPTION PERIOD. The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Incentive Stock Option shall be exercisable after the expiration of ten years from the Grant Date; and provided further, that no reload Option granted to a Participant pursuant to the terms of Section 6(e) shall be exercisable after the expiration of the term of the Option that gave rise to the grant of such reload Option. (c) EXERCISE OF OPTION. Options shall be exercisable to the extent of fifty percent (50%) of the Shares subject thereto after one year from the Grant Date, seventy-five percent (75%) of such Shares after two years from the Grant Date, and one hundred percent (100%) of such Shares after three years from the Grant Date, subject to any provisions respecting the exercisability of Options that may be contained in an Award Agreement; provided that a reload Option granted to a Participant pursuant to the terms of Section 6(e) shall be exercisable to the extent of one hundred percent (100%) of such Shares from the Grant Date. (d) INCENTIVE STOCK OPTIONS. The aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options held by any Participant which are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company, of any parent corporation, or Subsidiary) shall not exceed $100,000 or, if different, the maximum limitation in effect at the Grant Date under Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. 5 THE LUBRIZOL CORPORATION Page 5 1991 STOCK INCENTIVE PLAN (e) RELOAD. In the event that a Participant or an Outside Director exercises an Option and pays some or all of the Option Price with Shares, such Participant or Outside Director shall be granted a reload Option to purchase the number of Shares equal to the number of Shares used as payment of the Option Price, such reload Option to be granted at the time and subject to the limitation described below. The Grant Date for the reload Option shall be the next date on which the Committee otherwise grants Options under this Plan to employees generally, whether or not during the same calendar year in which the original Option is exercised. Options granted to Participants pursuant to this Section 6(e) shall have terms and conditions as described in this Section 6 and Options granted to Outside Directors pursuant to this Section 6(e) shall have terms and conditions as described in Section 10. Options granted pursuant to this Section 6(e) shall be of the same character (i.e., Non-Statutory Stock Options or Incentive Stock Options) as the Option that is exercised to give rise to the grant of the reload Option, provided that if an Incentive Stock Option cannot be granted under this Section 6(e) in compliance with Section 422A of the Code, then a Non-Statutory Stock Option shall be granted in lieu thereof. Options shall be granted pursuant to this Section 6(e) only to the extent that the number of Shares covered by such Option grants does not, when added to the number of Shares covered by Awards previously granted during such calendar year, exceed the limitation set forth in Section 4(a). If such limitation would otherwise be exceeded by the operation of this Section 6(e), each Participant or Outside Director entitled to receive an Option under this Section 6(e) shall have the number of Shares subject to such Option reduced appropriately and proportionately (i.e., by the same percentage) so that the limitation set forth in Section 4(a) will not be exceeded. Shares received upon the exercise of an Option granted pursuant to this Section 6(e) may not be sold or otherwise transferred (i) by a Participant until such Participant ceases to be employed by the Company or a Subsidiary, or (ii) by an Outside Director until such Outside Director ceases to be an Outside Director, provided, however, that a Participant or Outside Director may use such Shares as payment of the Option Price of Options granted under this Plan to the extent permitted by the applicable Award Agreement, in which case a number of the Shares (equal to the number of Shares used for such payment) purchased by the exercise of such Options also shall be subject to the same restrictions upon transferability. Certificates for such Shares with a transferability restriction shall bear a legend referencing such restriction. SECTION 7. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted hereunder to Participants either separately or in conjunction with other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each Participant. Any Stock Appreciation Right related to a Non-Statutory Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted. Any Stock Appreciation Right related to an Option shall be exercisable only to the extent the related Option is exercisable. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right or 6 THE LUBRIZOL CORPORATION Page 6 1991 STOCK INCENTIVE PLAN applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option. Similarly, upon exercise of a Stock Appreciation Right as to some or all of the Shares covered by a related Option, the related Option shall be canceled automatically to the extent of the Stock Appreciation Rights exercised, and such Shares shall not thereafter be eligible for grant under Section 4(a). The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. RESTRICTED STOCK AWARDS. (a) ISSUANCE. Restricted Stock Awards may be issued hereunder to Participants, either separately or in conjunction with other Awards granted under the Plan. Each Award under this Section 8 shall be evidenced by an Award Agreement between the Participant and the Company which shall specify the vesting schedule, any rights of acceleration and such other terms and conditions as the Board shall determine, which need not be the same with respect to each Participant. (b) REGISTRATION. Shares issued under this Section 8 shall be evidenced by issuance of a stock certificate or certificates registered in the name of the Participant bearing the following legend and any other legend required by, or deemed appropriate under, any federal or state securities laws: The sale or other transfer of the common shares represented by this certificate is subject to certain restrictions set forth in the Award Agreement between ___________________ (the registered owner) and The Lubrizol Corporation dated _______________, under The Lubrizol Corporation 1991 Stock Incentive Plan. A copy of the Plan and Award Agreement may be obtained from the Secretary of The Lubrizol Corporation. Unless otherwise provided in the Award Agreement between the Participant and the Company, such certificates shall be retained by the Company until the expiration of the Restriction Period. Upon the expiration of the Restriction Period, the Company shall (i) cause the removal of the legend from the certificates for such Shares as to which a Participant is entitled in accordance with the Award Agreement between the Participant and the Company and (ii) release such Shares to the custody of the Participant. (c) FORFEITURE. Except as otherwise determined by the Committee at the Grant Date, upon termination of employment of the Participant for any reason during the Restriction Period, all Shares still subject to restriction shall be forfeited by the Participant and retained by the Company; provided that in the event of a Participant's retirement, permanent disability, death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such Participant's Shares. In such case, unrestricted Shares shall be issued to the Participant at such time as the Committee determines. 7 THE LUBRIZOL CORPORATION Page 7 1991 STOCK INCENTIVE PLAN (d) RIGHTS AS SHAREHOLDERS. At all times during the Restriction Period, Participants shall be entitled to full voting rights with respect to all Shares awarded under this Section 8 and shall be entitled to dividends with respect to such Shares. SECTION 9. STOCK AWARDS. Awards of Shares may be granted hereunder to Participants, either separately or in conjunction with other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine (i) the Employees to whom such Awards shall be granted, (ii) the time or times at which such Awards shall be granted, (iii) the number of Shares to be granted pursuant to such Awards, and (iv) all other conditions of the Awards. Such conditions may include issuance of Shares at the time of the Award is granted or issuance of Shares at a time or times subsequent to the time the Award is granted, which subsequent times may be specifically established by the Committee and/or may be determined by reference to the satisfaction of one or more performance measures specified by the Committee. The provisions of stock awards need not be the same with respect to each Participant. SECTION 10. OUTSIDE DIRECTORS' OPTIONS. On the close of business on the date of each Shareholders' Meeting, each Outside Director shall automatically be granted an Option to purchase 2,000 Shares. All such Options shall be Non-Statutory Stock Options and shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as are contained in the applicable Award Agreement. (a) OPTION PRICE. The purchase price per Share shall be one hundred percent (100%) of the Fair Market Value of the Share on the Grant Date. Payment of the Option Price may be made in cash, Shares, or a combination of cash and Shares, as provided in the Award Agreement in effect from time to time. (b) OPTION PERIOD. The term during which Options granted under this Section 10 shall be exercisable shall be ten (10) years from the Grant Date; provided that no reload Option granted to an Outside Director pursuant to the terms of Section 6(e) shall be exercisable after the expiration of the term of the Option that gave rise to the grant of such reload Option. (c) EXERCISE OF OPTIONS. Subject to the provisions of this Section 10(c), Options shall be exercisable to the extent of fifty percent (50%) of the Shares subject thereto after one year from the Grant Date, seventy-five percent (75%) of such Shares after two years from the Grant Date, and one hundred percent (100%) of such Shares after three years from the Grant Date; provided that a reload Option granted to an Outside Director pursuant to the terms of Section 6(e) shall be exercisable to the extent of one hundred percent (100%) of such Shares from the Grant Date. Options may be exercised by an Outside Director during the period that the Outside Director remains a member of the Board and under the circumstances described below. 8 THE LUBRIZOL CORPORATION Page 8 1991 STOCK INCENTIVE PLAN (i) If an Outside Director retires under a retirement plan or policy of the Company, then Options held by such Outside Director may be exercised for a period of thirty-six (36) months following retirement, to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise such Options at the date of retirement), provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (ii) In the event of the death of an Outside Director while serving as a director, Options held by such Outside Director may be exercised for a period of twelve (12) months following the date of death, (A) to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise the Option at the date of death), and (B) only by the executor or administrator of the Outside Director's estate or by the person or persons to whom the Outside Director's rights under the Options shall pass by the Outside Director's will or the laws of descent and distribution, provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (iii) If an Outside Director shall cease to be a director for any reason other than retirement under a retirement plan or policy of the Company or death, Options held by such Outside Director may be exercised for a period of three (3) months following such cessation, to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise such Options at the date of such cessation), provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (iv) In the event an Outside Director, after ceasing to be a director, dies during and subject to one of the periods described in Section 10(c)(i) or (iii), while possessed of unexercised Options, the executor or administrator of the Outside Director's estate, or the person entitled by will or the applicable laws of descent and distribution, may exercise such Options held by the Outside Director at the time of the Outside Director's death during the period that is applicable, as follows: (A) If Section 10(c)(i) was in effect, for one year after the Outside Director's death; (B) If Section 10(c)(iii) was in effect, for three months after the Outside Director's death; 9 THE LUBRIZOL CORPORATION Page 9 1991 STOCK INCENTIVE PLAN provided that, in no event shall the Option be exercisable after the expiration of the Option period provided in Section 10(b). SECTION 11. CHANGE IN CONTROL. Notwithstanding the provisions of Sections 6(c) and 10(c), Options shall become exercisable with respect to 100% of the Shares upon the occurrence of any Change in Control (as hereafter defined) of the Company; except that no Options shall be exercised prior to the end of six months from the Grant Date. Notwithstanding the provisions of Section 8 and the applicable Award Agreement, any restricted Shares shall be 100% vested and without any restrictions upon the occurrence of any Change in Control of the Company. For all purposes of the Plan, a "Change in Control" shall have occurred if any of the following events shall occur: (a) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (b) The Company sells all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale; (c) There is a report filed on Schedule 13D or Schedule 14D-I (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the Voting Stock; (d) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or 10 THE LUBRIZOL CORPORATION Page 10 1991 STOCK INCENTIVE PLAN (e) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors of the Company cease for any reason to constitute at least a majority thereof, provided, however, that for purposes of this Section 11(e), each Director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two thirds of the Directors of the Company (or a committee thereof) then still in office who were Directors of the Company at the beginning of any such period will be deemed to have been a Director of the Company at the beginning of such period. Notwithstanding the foregoing provisions of Section 11(c) or 11(d) hereof, unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (iii) any employee stock ownership plan or any other employee benefit plan sponsored by the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-I, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. SECTION 12. AMENDMENTS AND TERMINATION. The Board may, at any time, amend, alter or terminate the Plan, but no amendment, alteration, or termination shall be made that would impair the rights of an Outside Director or Participant under an Award theretofore granted, without the Outside Director's or Participant's consent, or that without the approval of the shareholders would: (a) except as is provided in Sections 4(b) and 13(c) of the Plan, increase the total number of Shares which may be issued under the Plan; (b) change the class of employees eligible to participate in the Plan; or (c) materially increase the benefits accruing to Participants under the Plan; so long as such approval is required by law or regulation; provided that, as long as required by law or regulation, the provisions of Section 10 hereof may not be amended or altered more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. The Committee may amend the terms of any Award heretofore granted (except, with respect to Options granted pursuant to Section 10 hereof, only to the extent not inconsistent with Rule 16b-3 under the Exchange Act or any successor rule or statute), prospectively or retroactively, but no such amendment shall impair the rights of any Participant or Outside Director without his consent. 11 THE LUBRIZOL CORPORATION Page 11 1991 STOCK INCENTIVE PLAN SECTION 13. GENERAL PROVISIONS. (a) No Option, Stock Appreciation Right, or Restricted Stock Award shall be assignable or transferable by a Participant or an Outside Director otherwise than by will or the laws of descent and distribution, and Options and Stock Appreciation Rights may be exercised during the Participant's or Outside Director's lifetime only by the Participant or the Outside Director or, if permissible under applicable law, by the guardian or legal representative of the Participant or Outside Director. (b) The term of each Award shall be for such period of months or years from its Grant Date as may be determined by the Committee or as set forth in the Plan; provided that in no event shall the term of any Incentive Stock Option or any Stock Appreciation Right related to any Incentive Stock Option exceed a period of ten (10) years from the Grant Date. (c) In the event of a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that Shares are changed into or become exchangeable for a larger or smaller number of Shares, thereafter the number of Shares subject to outstanding Awards granted to Participants and to any Shares subject to Awards to be granted to Participants pursuant to this Plan shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of Shares by reason of such change in corporate structure; provided, however, that the number of Shares shall always be a whole number, and the purchase price per Share of any outstanding Options shall, in the case of an increase in the number of Shares, be proportionately reduced, and, in the case of a decrease in the number of Shares, shall be proportionately increased. The above adjustment shall also apply to any Shares subject to Options granted to Outside Directors pursuant to the provisions of Section 10. (d) No Employee shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan. (e) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an Award Agreement, and otherwise complied with the then applicable terms and conditions. (f) All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 12 THE LUBRIZOL CORPORATION Page 12 1991 STOCK INCENTIVE PLAN (g) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, Participants shall not be required, under the Plan, to make any payment other than the rendering of services. (h) The Company shall be authorized to withhold from any payment under the Plan, whether such payment is in Shares or cash, all withholding taxes due in respect of such payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (i) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (j) Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor shall the Plan confer upon any Participant any right to continued employment with the Company or any Subsidiary. SECTION 14. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall be effective as of April 22, 1991, and shall continue in effect until terminated by the Board. EX-10.L 5 EXHIBIT 10(L) 1 Exhibit (10)(l) THE LUBRIZOL CORPORATION EXECUTIVE COUNCIL DEFERRED COMPENSATION PLAN 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 (each a "Participation Year"), to defer under the Plan a pre-selected fixed dollar amount or percentage of such Member's variable compensation (the "deferred compensation"), if any, under The Lubrizol Corporation Performance Pay Plan, ("Performance Pay Plan"), if any, 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 after 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 following the date 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 Pay Plan 1 2 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. Notwithstanding paragraph (d) 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 no longer is 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 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 the Participant shall be determined by: (i) Dividing the deferral compensation by the average closing price for Lubrizol Common Shares ("Shares") on the New York Stock Exchange ("NYSE") composite transactions reporting system ("composite tape") for the ten trading days immediately prior to the date described in paragraph (a); 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 that are the equivalent of Shares. (e) As of each dividend record date established by the Company for the payment of cash dividends with respect to its Shares, the Company shall credit each STOCK DEFERRAL ACCOUNT of a Participant with an additional number of whole and/or fractional Units equal to: 2 3 (i) the product of (x) the dividend per Share which is payable with respect to such dividend record date, multiplied by (y) the number of whole and fractional Units credited to the STOCK DEFERRAL ACCOUNT of Participant as of such record date; DIVIDED BY ---------- (ii) the closing price of a Share on the dividend record 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 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 STOCK DEFERRAL ACCOUNTS 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 distributed to the Participant at the end of three years from the first date of Units were credited to the separate STOCK DEFERRAL ACCOUNT of the Participant under Section 4(a); provided, however, that if a Participant's employment is terminated for any reason other than retirement or death, the Units credited to a separate STOCK DEFERRAL ACCOUNT of Participant as of the Participant's termination of employment date, including the dividend equivalents thereon, shall be distributed to the Participant within 30 days of such termination of employment. (b) Payment to Participant shall be made in Shares equal to the number of whole Units credited to the STOCK DEFERRAL ACCOUNT of Participant which are 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; provided that, the Committee may adopt a policy to permit the Participant to direct that all or a part of such withholding taxes may be paid by withholding shares from the distribution to Participant. (d) In the event a Participant dies prior to receiving payment of the entire amount in any STOCK DEFERRAL ACCOUNT of 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 a lump sum in accordance with Section 5(a) and (b) or earlier, as determined by the Committee. 3 4 (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 a Participant's STOCK DEFERRAL ACCOUNT 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 a Participant's STOCK DEFERRAL ACCOUNT 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 the Participant's STOCK DEFERRAL ACCOUNT shall, after such death, be thereafter distributed as provided in Section 5(c) subject to the provisions of this Section 7. 8. PLAN TO BE UNFUNDED. 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 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 STOCK DEFERRAL ACCOUNT 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. 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 in each 4 5 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 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 STOCK DEFERRAL ACCOUNT 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 on the 1st day of January, 1997. -END- 5 EX-11 6 EXHIBIT 11 1
EXHIBIT 11 THE LUBRIZOL CORPORATION Computation of Per Share Earnings (In Thousands, Except Per Share Data) The computation of primary earnings per share and fully diluted earnings per share is as follows: For the Year Ended December 31 ------------------------------ 1996 1995 1994 ---- ---- ---- Average shares outstanding for computation of primary earnings per share 60,694 63,840 65,737 Add adjustment to treat shares for options exercised as if such shares were out- standing during the entire year 52 37 183 Add equivalent shares for unexercised options at end of year (A) 213 352 473 ------ ------ ------ Average shares outstanding for computation of fully diluted earnings per share 60,959 64,229 66,393 ====== ====== ====== Primary earnings per share $2.80 $2.37 $2.67 ===== ===== ===== Fully diluted earnings per share (B) $2.79 $2.36 $2.64 ===== ===== ===== NOTES: (A) Computed under the "Treasury Stock Method" using the higher of quoted ending or average market price. (B) Fully diluted earnings per share have not been presented in the consolidated statements of income because the dilutive effect is less than 3%.
EX-12 7 EXHIBIT 12 1
EXHIBIT 12 THE LUBRIZOL CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (all amounts except ratios are shown in thousands) 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------ Pretax income $250,608 $225,574 $251,459 $119,651 $177,144 Deduct earnings of less than 50% owned affiliates (net of distributed earnings) included in pretax income (48) (1,384) (871) (2,355) 9 Add losses of less than 50% owned affiliates included in pretax income 56 1,808 490 21,063 2,769 Add fixed charges net of capitalized interest 10,955 10,376 3,149 4,154 3,615 Add previously capitalized interest amortized during period 968 1,096 452 272 162 -------- -------- -------- -------- -------- "Earnings" $262,539 $237,470 $254,679 $142,785 $183,699 ======== ======== ======== ======== ======== Gross interest expense including capitalized interest ("Fixed Charges") $ 14,010 $ 14,693 $ 6,922 $ 6,292 $ 4,981 Ratio of earnings to fixed charges 18.7 16.2 36.8 22.7 36.9 Special adjustments: - -------------------- "Earnings" $262,539 $237,470 $254,679 $142,785 Plus asset impairment and special charges 9,489 86,303 Less gains on investments (53,280) (38,459) (41,235) (42,443) -------- -------- -------- -------- Adjusted "Earnings" $209,259 $208,500 $213,444 $186,645 ======== ======== ======== ======== Ratio of adjusted earnings to fixed charges 14.9 14.2 30.8 29.7
EX-13 8 EXHIBIT 13 1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Lubrizol Corporation is a full-service supplier of performance chemicals and products to diverse markets worldwide. These specialty chemical products are created through the application of advanced chemical and mechanical technologies to enhance the performance, quality and value of the products in which they are used. The company develops, produces and sells specialty additive systems for gasoline and diesel engine lubricating oils, automatic transmission fluids, gear oils, marine and tractor lubricants, fuel products and industrial fluids. The company also supplies coatings additives, refinery and oil field chemicals, specialty monomers, process chemicals, synthetic refrigerant compressor lubricants, fluid metering devices and particulate emission trap devices. As discussed in Note 17 to the financial statements, the company has been engaged in initiatives since late 1993 to eliminate its separate business unit structure and realign activities into one combined organization and to consolidate intermediate production activities, improve the timeliness of product development, simplify its product offerings and complete the divestiture of its agribusiness investments. At December 31, 1996, these initiatives were substantially complete as the number of intermediate production units has been reduced by almost one-third and the number of employees reduced by nearly 9% (versus an original target of 5%). Approximately $45 million of cash has been expended through December 31, 1996, with future cash expenditures of $7 million estimated to complete these initiatives. For the four-year period preceding 1994, the company's manufacturing, technology and selling and administrative costs for its additives businesses were growing at an annual rate of approximately 9%. Through implementation of these initiatives and aggressive cost management, the cost trend beginning in 1994 has significantly changed. Compared with the respective preceding year, 1994 costs increased 1%, 1995 increased 4% and 1996 costs decreased 6%. These initiatives reduced the rate of increase in the operating costs of the company, and the results have exceeded original expectations of annual savings approximating $50 million. In 1996, there were announcements of acquisitions, mergers and joint ventures within the lubricant industry. Customers are searching for stronger, longer-term relationships with a few key suppliers for help in reducing costs and improving the quality and performance of their products and services. This, along with a weak demand for finished lubricants, is causing a more competitive marketplace in certain product lines and continuing pressure on prices for the company's products. The company expects this environment to continue in 1997. Although the company generally experiences both gains and losses of business in the normal course of its operations, such changes may occur more frequently under these conditions and in periods when new industry specifications are being introduced. The company has entered into and will continue to actively pursue strategic relationships with finished lubricant suppliers in order to eliminate redundant cost structures and jointly pursue business growth in developing regions of the world. In addition, management has various initiatives relating to the cost structure of the company, both short-term and long-term, to enhance its competitiveness and market leadership position. Management believes that the company is well positioned to compete in the current industry environment and gain market share from these opportunities. 1996 RESULTS OF OPERATIONS IN 1996, management of the company took action early in the year to improve its cost structure as part of its continuing efforts to enhance its efficiency as an additive supplier. Although revenues in 1996 declined 4% from 1995, this was offset by the effects of aggressive cost management and management's focus on strengthening of customer and supplier relationships. In addition, lower working capital, significantly reduced capital expenditures and the sale of non-strategic investments resulted in improved cash flow and enabled the company to repurchase 7% of its common shares outstanding during 1996. As a result, the company was able to grow net income and earnings per share, despite unfavorable currency effects.
1993 1994 1995 1996 ---- ---- ---- ---- REVENUES (millions) $1,525.5 $1,599.0 $1,663.6 $1,597.6
Consolidated revenues were $1.60 billion in 1996, a decrease of $66 million, or 4%, from record 1995 levels. Volume in 1996 was equal with 1995 despite the introduction of a new industry specification discussed below. Revenues decreased 2% due to price/mix effects and 1% due to unfavorable currency effects. In addition, the sale of the specialty vegetable oil business in September 1996 reduced consolidated revenues by 1% as compared with 1995. During 1996, new passenger car engine oil additives were introduced to meet a new U.S. industry specification. Most of the company's customers converted to this new specification by September 1996. This new specification required approximately 10% less additive than the prior specification, and the company estimates that it negatively impacted annual sales volume in North America by 2% in 1996 (1% worldwide). THE LUBRIZOL CORPORATION 16 2 However, other volume gains, primarily in heavy duty engine oils, more than offset the impact from the new specification and overall volume in North America increased 1% over 1995. Internationally, volume declined 1%, as growth in Asia-Pacific was offset by lower volume in Western Europe.
1993 1994 1995 1996 ---- ---- ---- ---- GROSS PROFIT (millions) $485.4 $520.7 $532.4 $509.5
Gross profit (sales less cost of sales) of $509.5 million was $23.0 million, or 4%, lower in 1996 compared with 1995. Unfavorable currency effects accounted for one-half of this decline with the balance attributable to lower revenues. However, the company aggressively managed its procurement costs of raw materials and continued its cost management efforts under the manufacturing rationalization initiative discussed below. These efforts lowered the cost of production to maintain gross profit as a percent of sales at 32% for 1996. The company has continued to lower its operating costs through aggressive cost management. This included a worldwide freeze on salary increases and hiring throughout all of 1996 and the manufacturing rationalization and organizational realignment initiatives that began in 1993. Employee levels, excluding acquisitions and divestitures during the year, were reduced by nearly 6% at December 31, 1996, compared with December 31, 1995, as retiring or departing employees were not replaced. The company's manufacturing costs and selling, administrative and technology expenses in 1996 were each lower than in 1995 and, in the aggregate, declined nearly 6%, or $40 million. Currency had a favorable effect on costs and accounted for approximately 25% of this reduction. In 1997, the company has eliminated the freeze on salary increases.
1993 1994 1995 1996 ---- ---- ---- ---- RESEARCH TESTING & DEVELOPMENT (millions) $171.5 $165.5 $179.6 $161.0
Research, testing and development expenses (technology expenses) decreased 10% in 1996 compared with 1995. In addition to the effects of cost management strategies discussed above, the decrease was due to reduced testing requirements for product specifications primarily within driveline and engine oils. The effect of currency on technology expenses was not significant. Product standards change periodically as engine and transmission designs are improved by the equipment manufacturers to meet new emissions, efficiency, durability and other performance factors. The company expects additional new performance specifications in 1998 for heavy-duty engine oils and, in 2000, for passenger car engine oils. These changes will influence the timing and amount of technology expenses in the future. Primarily as a result of the above factors, total costs and expenses declined $65.5 million in 1996, offsetting the revenue decline for the year. During 1996, the company completed the divestiture of substantially all of its agribusiness assets comprised of its equity investment in Mycogen Corporation and the assets of the company's wholly-owned subsidiary, SVO Specialty Products, Inc. (SVO). These transactions generated cash proceeds of $149.0 million and, after losses on other investment activity, resulted in the $53.3 million ($34.6 million or $.57 per share after taxes) gain on investments. The $38.5 million gain ($.39 per share after taxes) recognized in 1995 was from the sale of Genentech common stock. (See Note 8 to the financial statements.) The company has substantially liquidated its non-strategic investments and does not anticipate significant investment gains in 1997. The company transacts business in over 100 countries and has a number of operating facilities in countries outside of the United States. As a result, the company is subject to business risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations. The company believes risks related to its foreign operations are mitigated due to the political and economic stability of the countries in which its largest foreign operations are located. 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 the company's net asset exposure, currency mix and pricing flexibility. Generally, the income statement effect of changes in the dollar value of foreign currencies is partially or wholly offset by the company's ability to make corresponding price changes in local currency. The company's consolidated net income will generally benefit as foreign currencies increase in value compared with the U.S. dollar and will generally decline as foreign currencies decrease in value. The U.S. dollar strengthened during 1996 as compared with exchange rates in effect during 1995, particularly against the French franc, German deutsche mark and Japanese yen, causing an unfavorable effect on 1996 net income of $4.9 million or $.08 per share. Interest expense, net of interest income, declined $2.4 million in 1996 compared with 1995. Proceeds collected from the sale of investments were used to temporarily reduce commercial paper borrowings and acquire short-term investments until used in the company's share repurchase program. The average daily balance of total debt outstanding during 1996 was $188 million as compared with $203 million for 1995. 17 THE LUBRIZOL CORPORATION 3 As a result of the factors discussed above and the 1995 provision for asset impairment (discussed below), 1996 net income was $169.8 million, an increase of 12% or $18.2 million from 1995. Earnings per share for 1996 was $2.80, or 18% higher than in 1995 and reflected the impact of the company's share repurchase program. Excluding the gains on investments from both years and the provision for asset impairment in 1995, net income increased to $135.2 million from $132.8 million in 1995, a 2% increase. The corresponding earnings per share of $2.23 in 1996 was a 7% increase from the $2.08 earnings per share in 1995. 1995 RESULTS OF OPERATIONS IN 1995, the company achieved record revenues but, despite a strong first half, annual earnings declined from the record earnings of 1994. As discussed below, the primary factors contributing to the 1995 results were lower demand for engine oil additives particularly during the second half of 1995, the U.S. Government trade restrictions regarding sales to certain customers in the Middle East and the inability to maintain profit margins during a period of rising raw material costs. Consolidated revenues were $1.66 billion, an increase of $64.6 million, or 4%, in 1995 compared with 1994. Price increases implemented in early 1995 and a more favorable product mix increased 1995 revenues by 3% and the translation of various international currencies, which strengthened during the period when compared with the U.S. dollar, increased revenues by 3%. Volume declined 2% from the 1994 level. Sequentially, revenues in the second half of 1995 were 5% lower than the first half due to lower volume (3%) and unfavorable price/product mix (2%). For the year, sales volume declined in 1995 compared with 1994, principally in international markets. North American volume declined less than 1% from 1994. International volume declined 3% mainly because of the cessation of spot business with certain customers in the Middle East due to a U.S. Presidential Order restricting such trade. Excluding from the comparison this 1994 spot business, which occurred during the first half of the year, international volume increased 1%, and worldwide volume in 1995 was even with 1994. Sequentially, volume declined 3% in North America and 4% internationally in the second half compared with the first half of 1995 as demand for engine oil lubricants in North America and Europe weakened, causing lower additive shipment volumes. Gross profit increased 2% to $532.4 million in 1995 from $520.7 million in 1994. Despite lower volume, the amount of gross profit increased as higher average selling prices, aided by favorable currency and mix, more than offset an increase in average material cost of 9%, over half of which was due to the effects of currency and mix. However, gross profit as a percent of sales declined to 32.1% in 1995 from 32.7% in 1994 as raw material costs increased faster than selling prices and, combined with slightly higher manufacturing costs and lower volumes, negatively impacted margin percentage. Sequentially, gross profit percentage declined to 30.5% in the second half of 1995 compared with 33.6% in the first half due to the effect of unfavorable price/mix, less favorable currency, higher raw material costs and lower volume. The company's manufacturing rationalization and organizational realignment initiatives have slowed the rate of increase in the company's cost and expenses. The company's manufacturing expenses, as well as its selling and administrative expenses, increased 3% in 1995 as compared with 1994. Excluding increases in expenses due to currency translation and an acquisition made during 1995, manufacturing costs and selling and administrative expenses were each level with the 1994 amounts. Technology expenses increased 9% to $179.6 million. Technology expenses increased, as anticipated, due to worldwide testing programs for the engine oils, driveline oils and fuel products areas together with a greater emphasis on longer-term strategic research. Primarily as a result of the above factors, total cost and expenses increased $7.0 million more than the increase in total revenues in 1995. The company recorded a provision for asset impairment of $9.5 million ($.10 per share after taxes) in the fourth quarter of 1995. This charge related primarily to an intermediate processing unit that became permanently impaired due to a change in product formulation caused by a new industry-wide product specification. The company sold all of its remaining shares of Genentech, Inc. common stock during the first half of 1995 and realized a pretax gain of $38.5 million ($.39 per share after taxes). During 1994, the company had a pretax gain on the sale of Genentech common stock of $41.2 million ($.41 per share after taxes). Other income - net, was $7.1 million in 1995 compared with $7.3 million in 1994 (see Note 9 to the financial statements). Other income was impacted by equity losses recognized from the company's investment in Mycogen Corporation and by other transactions involving Mycogen. Mycogen's results are seasonal with the majority of its income recorded in the first half of the calendar year and losses recorded in the second half. The company recorded equity losses from Mycogen of $5.4 million in 1995 compared with equity losses of $.1 million in 1994. In late 1995, the company recognized a noncash gain of $4.5 million, representing an increase in the value of the company's ownership interest in the net assets of Mycogen, when Mycogen issued new common shares to another investor. THE LUBRIZOL CORPORATION 18 4 Interest expense increased $7.2 million in 1995 over 1994 as a result of higher average debt outstanding to meet the requirements of the capital expenditure and share repurchase programs. The average daily balance of total debt outstanding during 1995 was $203 million as compared with $111 million for 1994. As discussed previously, the company conducts a significant amount of its business outside of the United States and is, therefore, subject to certain related risks including currency fluctuations. During 1995, the U.S. dollar weakened, primarily against the French franc, German deutsche mark and Japanese yen, when compared with exchange rates in effect during the year 1994. This resulted in 1995 net income being favorably impacted by approximately $.20 per share. As a result of the factors discussed above, income before income taxes decreased 10%, or $25.9 million, from 1994. The company's 1995 effective tax rate was 32.8% as compared with the 1994 rate of 30.2%, which was lower than normal due to charitable donations of appreciated securities made by the company in 1994. After application of the 1995 higher effective tax rate, net income was $151.6 million in 1995, a decrease of 14% or $24.0 million from 1994. Excluding the gains realized from sale of Genentech common stock in 1995 and 1994 and the provision for asset impairment in 1995, net income decreased 11% to $132.8 million in 1995 compared with $148.8 million in 1994. The corresponding earnings per share of $2.08 in 1995 declined 8% compared with $2.26 in 1994. 1994 RESULTS OF OPERATIONS IN 1994, the company achieved record revenues and results of operations. As discussed below, the primary factors contributing to 1994 results were higher average selling prices, lower research, testing and development expenses and better results from agribusiness investments. In 1994, consolidated revenues were $1.6 billion, an increase of $73.5 million or 5% from 1993. This increase was comprised of 4% higher average selling prices, including currency, and 1% volume increases. Average selling prices increased primarily as a result of price increases and new product introductions. The company implemented price increases in the first quarter of 1994 to more fully recover the costs of product technology and the costs resulting from increased requirements of environmental, health and safety regulations at the company's facilities. Higher performing products, which carry higher selling prices, were introduced late in 1993 to meet new passenger car motor oil standards in the U.S. markets. Gross profit increased 7% to $520.7 million in 1994 from $485.4 million in 1993. The improvement in gross profit was primarily attributable to the positive effects of implementing selling price increases, new product introductions and growth from business development activities. These improvements were partially offset by higher material costs in the second half of the year and higher manufacturing costs. Gross profit as a percentage of sales increased to 32.7% in 1994 from 32.0% in 1993. Raw material prices increased during the last half of 1994, and at year-end were approximately 7% higher than the prior year. Additionally, plant operating costs to comply with changing environmental, health and safety regulations increased during 1994. The company was able to manage the near-term impact of the higher raw material costs through operating expense control. Selling and administrative expenses increased less than 1% to $159.5 million in 1994. This increase was significantly lower than the company's previous historical cost trend because of lower legal expenses and a decline in the number of employees as a result of early retirements related to the company's realignment initiative. Research, testing and development expenses decreased $6.1 million or 4% to $165.5 million in 1994. This decrease was primarily attributable to completion in early 1994 of testing required for passenger car motor oil specification upgrades, the decline in the number of employees resulting from realignment and increased efficiencies in the product development process. Primarily as a result of the above factors, consolidated revenues increased $38.8 million more than the increase in total costs and expenses in 1994. The company continued its program of selling its investment in Genentech common stock. During 1994, the company sold shares of Genentech common stock resulting in pretax gains of $41.2 million. Other income - net increased $6.8 million primarily due to improved equity earnings from the company's investment in Mycogen, including its agribusiness joint venture, net of a gain on the sale of an agribusiness investment in 1993. As a result of the above factors and a decrease in interest expense, consolidated income before taxes increased $131.8 million from 1993. Excluding the gain on the sales of Genentech stock and the 1993 special charge, income before taxes increased $46.7 million or 29% from 1993. The company made donations of Genentech common stock during 1994 (see Note 9 to the financial statements) which reduced the company's 1994 effective tax rate by 2%. This benefit was nonrecurring. Excluding gains on the sales of Genentech common stock, the 1993 special charge ($.83 per share after taxes) and accounting changes effective January 1, 1993, relating to postretirement benefits and income taxes ($39.4 million or $.58 per share after taxes), net income was $148.8 million in 1994 compared with $113.5 million in 1993, and the related earnings per share amounts improved by 35% to $2.26 in 1994 from $1.67 in 1993. In 1994, there was not a significant net earnings effect due to foreign currency fluctuations. 19 THE LUBRIZOL CORPORATION 5 RETURN ON AVERAGE SHAREHOLDERS' EQUITY RETURN ON AVERAGE SHAREHOLDERS' EQUITY was 20% in 1996, 18% in 1995 and 22% in 1994. Excluding gains on investments from each year and the 1995 asset impairment charge, return on average shareholders' equity was 16% in 1996 and 1995 and 19% in 1994.
1993 1994 1995 1996 ---- ---- ---- ---- RETURN ON EQUITY* (percent) 15% 19% 16% 16% *(Before investment gains, the 1995 provision for asset impairment and the 1993 special charge and accounting changes.)
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES The company's cash flows for the years 1994 through 1996 are presented in the consolidated statements of cash flows. Cash provided from operating activities in 1996 increased 23%, or $43.6 million, to $231.0 million compared with $187.4 million generated in 1995. This increase is primarily attributable to the benefits of the company's programs to modify its cost structure and reduce operating costs and the reduction of inventory levels. Excluding cash and short-term investments, working capital has been reduced by $40.6 million, or 12%, from December 31, 1995, approximately 50% of which was due to liquidation of SVO inventories and receivables prior to the sale of its assets in September 1996.
1993 1994 1995 1996 ---- ---- ---- ---- CASH PROVIDED FROM OPERATING ACTIVITIES (millions) $162.5 $156.8 $187.4 $231.0
Over the past several years the company has divested its marketable securities, primarily Genentech common stock, and its non-strategic assets, primarily agribusiness assets. The after-tax proceeds from these activities have been used in the company's share repurchase program discussed below. Proceeds from the sale of investments for 1996 were comprised principally of $126.2 million from the sale of Mycogen and $22.8 million from the sale of SVO assets. Proceeds from the sale of investments in 1995 and 1994 were from the sale of Genentech common stock. (See Note 8 to the financial statements.) Capital expenditures for 1996 were $94.3 million, one-half the level of 1995. Capital expenditures during 1995 reached record levels, as the company completed several large construction projects to enhance or maintain production capabilities at plant facilities principally in the United States and France, as well as investing in new corporate administrative and technical facilities. As expected, the level of capital spending declined sharply in 1996 due to the completion of these projects. Approximately 65% of 1996 capital expenditures (and 70% of 1995) pertained to manufacturing plants to enhance or maintain production capabilities, including maintaining facilities in compliance with environmental and safety regulations. Capital spending for environmental and safety projects totaled $8 million in 1996, $37 million in 1995 and $20 million in 1994. Capital spending on environmental projects was substantially lower in 1996 compared with 1995 due to the timing of completion of the related projects. Capital expenditures for 1997 are estimated at $110 million, including approximately $30 million to be expended in 1997 as part of a multi-year project to implement a new global computer-based information system. In December 1996, the company acquired CPI Engineering Services, Inc., a formulator of specialty synthetic lubricants used by original equipment manufacturers in air and refrigeration compressors, for $24.6 million in cash. Also in 1996, the company invested $2.7 million in two joint ventures in China. The company is prepared to invest further capital in China during 1997 to strengthen the company's position in this rapidly growing market.
1993 1994 1995 1996 ---- ---- ---- ---- CAPITALIZATION (millions) EQUITY $732.2 $832.0 $849.0 $819.4 TOTAL DEBT $69.6 $167.9 $247.1 $198.5
The company had net repayments on short- and long-term debt totaling $43.6 million, which when combined with currency effects, reduced total borrowings outstanding by $48.6 million, or 20%, at December 31, 1996, versus 1995. This decrease was the result of improved cash flow and lower capital expenditures. In June 1995, the company publicly issued $100 million of 7.25%, 30-year debentures and used the net proceeds to repay a portion of the commercial paper borrowings then outstanding. Debt as a percent of capitalization (shareholders' equity plus short- and long-term debt) declined to 20% at December 31, 1996, compared with 23% at December 31, 1995. Management plans to maintain the percentage of debt to capitalization within a range of 20 to 25 percent to leverage its financial strength while still retaining financial flexibility for future opportunities. The company maintains an active share repurchase program. In 1996, the company repurchased 4.5 million, or 7% of its shares outstanding at the beginning of the year, for $135.2 million using the after-tax proceeds generated from the sale of its Mycogen investment and SVO assets. In 1995 and 1994, the company expended $66.6 million and $68.3 million, respectively, to repurchase its shares. Since the beginning of 1994, the company has repurchased 13% of its shares outstanding. The company plans to expend at least $40 million during 1997 in its repurchase program, and at December 31, 1996, had 2.6 million shares remaining under its current share repurchase authorization. THE LUBRIZOL CORPORATION 20 6 Primarily as a result of these activities and the payment of dividends, total debt, net of cash and short-term investments, decreased $73.1 million to $143.4 million at December 31, 1996. The company's financial position continues to be strong with a ratio of current assets to current liabilities of 2.6 to 1 at December 31, 1996, compared to 2.4 to 1 at December 31, 1995. At December 31, 1996, the company had unused revolving credit agreements and other credit lines aggregating $95 million. As described in Note 5 to the financial statements, the company has the ability to refinance up to $56.6 million of its outstanding commercial paper on a long-term basis under existing revolving credit agreements. Management believes the company's credit facilities and internally generated funds will be sufficient to meet its future capital needs. The company is involved in patent litigation with Exxon Corporation in various countries. Refer to Note 18 to the financial statements for further discussion regarding this litigation. CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report, including 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 the company, 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 the company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company, that could cause actual results of the company to differ materially from those matters expressed in or implied by such forward-looking statements. The company believes that the following factors, among others, could affect its future performance and cause actual results of the company to differ materially from those expressed or implied by forward-looking statements made by or on behalf of the company: - - the overall demand for lubricant additives on a worldwide basis, which has been slowing in mature markets such as North America and Europe; - - the lubricant additive demand in Asia-Pacific and Latin America, which has been growing at significantly higher rates than mature markets, along with lubricant additive demand in developing regions such as China and the former Soviet Union, which geographic areas are an announced focus of the company's activities; - - technology developments that affect longer-term trends for lubricant additives, such as: improved engine design, fuel economy, longer oil drain intervals and emission system compatibility; - - the company's success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer expectations; - - the frequency of change in industry performance standards, which affects the level and timing of the company's technology costs, the product life cycles and the relative quantity of additives required for new specifications; - - the rate of progress in reducing complexities and conversion costs and in modifying the company's cost structure to maintain and enhance its competitiveness; - - the success of the company in strengthening relationships with lubricant additive customers, growing sales at targeted accounts, and expanding geographically; - - the extent to which the company is successful in expanding beyond its core lubricant additives businesses; - - the recoveries, judgments, costs, and future impact of legal proceedings, including those relating to intellectual property litigation with Exxon Corporation and its affiliates; - - the potential impact of consolidation among lubricant additive manufacturers; - - the relative degree of price pressure for lubricant additives; - - the cost, availability and quality of raw materials, including petroleum-based products, required for the manufacture of lubricant additives; - - the effects of fluctuations in currency exchange rates upon the company's reported results from its international operations, together with noncurrency risks of investing in and conducting significant operations in foreign countries, including those relating to political, social, economic, and regulatory factors; and - - changes in significant government regulations affecting environmental compliance. 21 THE LUBRIZOL CORPORATION 7 INDEPENDENT AUDITORS' REPORT DELOITTE & TOUCHE LLP LOGO 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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Cleveland, Ohio February 4, 1997 THE LUBRIZOL CORPORATION 22 8 CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 ---------------------------------------------- (In Thousands of Dollars Except Per Share Data) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Net sales .................................................. $1,592,877 $1,657,821 $1,592,750 Royalties and other revenues ............................... 4,685 5,773 6,244 ---------- ---------- ---------- Total revenues ...................................... 1,597,562 1,663,594 1,598,994 Cost of sales .............................................. 1,083,394 1,125,386 1,072,025 Selling and administrative expenses ........................ 158,633 163,493 159,459 Research, testing and development expenses ................. 160,978 179,649 165,480 ---------- ---------- ---------- Total cost and expenses ............................. 1,403,005 1,468,528 1,396,964 Provision for asset impairment ............................. (9,489) Gain on investments ........................................ 53,280 38,459 41,235 Other income - net ......................................... 6,012 7,150 7,332 Interest income ............................................ 7,714 4,764 4,011 Interest expense ........................................... (10,955) (10,376) (3,149) ---------- ---------- ---------- Income before income taxes ................................. 250,608 225,574 251,459 Provision for income taxes ................................. 80,806 73,959 75,884 ---------- ---------- ---------- Net income ................................................. $ 169,802 $ 151,615 $ 175,575 ========== ========== ========== Net income per share ....................................... $2.80 $2.37 $2.67 ===== ===== ===== Dividends per share ........................................ $ .97 $ .93 $ .89 ===== ===== =====
The accompanying notes to financial statements are an integral part of these statements. 23 THE LUBRIZOL CORPORATION 9 CONSOLIDATED BALANCE SHEETS
December 31 --------------------------- (In Thousands of Dollars) 1996 1995 - ------------------------------------------------------------------------------------------ ASSETS Cash and short-term investments .............................. $ 55,073 $ 30,579 Receivables .................................................. 238,401 255,377 Inventories .................................................. 251,905 310,539 Other current assets ......................................... 39,720 43,199 ----------- ---------- Total current assets .................................. 585,099 639,694 ----------- ---------- Property and equipment - at cost ............................. 1,529,187 1,477,764 Less accumulated depreciation ................................ 821,873 784,798 ----------- ---------- Property and equipment - net .......................... 707,314 692,966 ----------- ---------- Investments in nonconsolidated companies ..................... 29,821 100,655 Other assets ................................................. 79,881 58,705 ----------- ---------- TOTAL .......................................... $ 1,402,115 $1,492,020 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt and current portion of long-term debt ........ $ 40,871 $ 52,685 Accounts payable ............................................. 99,676 125,120 Income taxes and other current liabilities ................... 86,563 87,786 ----------- ---------- Total current liabilities ............................. 227,110 265,591 ----------- ---------- Long-term debt ............................................... 157,628 194,423 Postretirement health care obligation ........................ 105,463 102,653 Noncurrent liabilities ....................................... 47,284 53,223 Deferred income taxes ........................................ 45,254 27,147 ----------- ---------- Total liabilities ..................................... 582,739 643,037 ----------- ---------- Contingencies and commitments Preferred stock without par value - unissued Common shares without par value - outstanding 58,522,676 shares in 1996 and 62,951,288 shares in 1995 .............. 78,534 83,254 Retained earnings ............................................ 744,310 762,747 Other shareholders' equity ................................... (3,468) 2,982 ----------- ---------- Total shareholders' equity ............................ 819,376 848,983 ----------- ---------- TOTAL .......................................... $ 1,402,115 $1,492,020 =========== ==========
The accompanying notes to financial statements are an integral part of these statements. THE LUBRIZOL CORPORATION 24 10 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 ------------------------------------------- (In Thousands of Dollars) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- CASH PROVIDED FROM (USED FOR): OPERATING ACTIVITIES: Net income ............................................... $ 169,802 $ 151,615 $ 175,575 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ....................... 80,964 74,247 65,934 Deferred income taxes ............................... 23,074 16,899 19,797 Provision for asset impairment ...................... 9,489 Gain on investments ................................. (53,280) (38,459) (41,235) Change in current assets and liabilities, net of acquisitions and dispositions: Receivables ..................................... 9,834 (386) (20,682) Inventories ..................................... 46,658 (7,885) (3,150) Accounts payable and accrued expenses ........... (38,693) (3,768) (17,745) Other current assets ............................ (1,610) (175) (12,921) Change in noncurrent liabilities ...................... (1,317) (2,486) 3,246 Other items - net ..................................... (4,430) (11,729) (11,982) --------- --------- --------- Total operating activities ................. 231,002 187,362 156,837 INVESTING ACTIVITIES: Proceeds from sale of investments ........................ 149,603 40,160 43,582 Capital expenditures ..................................... (94,297) (189,259) (160,527) Acquisitions and investments in nonconsolidated companies (27,309) (3,521) (1,734) Other - net .............................................. 4,357 3,654 1,488 --------- --------- --------- Total investing activities ................. 32,354 (148,966) (117,191) FINANCING ACTIVITIES: Short-term borrowing (repayment) ......................... (52,890) (18,676) 38,359 Long-term borrowing ...................................... 28,425 100,064 56,741 Long-term repayment ...................................... (19,141) (2,746) (2,370) Dividends paid ........................................... (59,033) (59,414) (58,588) Common shares purchased, net of options exercised ........ (133,926) (64,792) (64,372) --------- --------- --------- Total financing activities ................. (236,565) (45,564) (30,230) Effect of exchange rate changes on cash .................. (2,297) 1,368 2,743 --------- --------- --------- Net increase (decrease) in cash and short-term investments ............................................ 24,494 (5,800) 12,159 Cash and short-term investments at the beginning of year . 30,579 36,379 24,220 --------- --------- --------- Cash and short-term investments at the end of year ....... $ 55,073 $ 30,579 $ 36,379 ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. 25 THE LUBRIZOL CORPORATION 11 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shareholders' Equity ------------------------------------------- Number of Other Shares Common Retained Shareholders' Outstanding Shares Earnings Equity - -------------------------------------------------------------------------------------------------------------------- (In Thousands of Dollars) BALANCE, DECEMBER 31, 1993 ....................... 66,590,028 $ 80,830 $ 683,269 $(31,863) Net income 1994 .................................. 175,575 Cash dividends ................................... (58,588) Change in unrealized gain on marketable securities .................................... 23,169 Translation adjustment for 1994 .................. 22,141 Common shares - Treasury: Shares purchased .............................. (2,007,721) (2,528) (65,723) Shares issued upon exercise of stock options .. 208,210 3,879 Other ......................................... 54,043 1,878 ---------- -------- --------- -------- BALANCE, DECEMBER 31, 1994 ....................... 64,844,560 84,059 734,533 13,447 Net income 1995 .................................. 151,615 Cash dividends ................................... (59,414) Change in unrealized gain on marketable securities ..................................... (23,169) Translation adjustment for 1995 .................. 12,704 Common shares - Treasury: Shares purchased .............................. (1,982,969) (2,604) (63,987) Shares issued upon exercise of stock options .. 89,697 1,799 ---------- -------- --------- -------- BALANCE, DECEMBER 31, 1995 ....................... 62,951,288 83,254 762,747 2,982 Net income 1996 .................................. 169,802 Cash dividends ................................... (59,033) Translation adjustment for 1996 .................. (6,450) Common shares - Treasury: Shares purchased .............................. (4,496,427) (5,982) (129,206) Shares issued upon exercise of stock options .. 67,815 1,262 ---------- -------- --------- -------- BALANCE, DECEMER 31, 1996 ....................... 58,522,676 $ 78,534 $ 744,310 $ (3,468) ========== ======== ========= ========
The accompanying notes to financial statements are an integral part of these statements. THE LUBRIZOL CORPORATION 26 12 NOTES TO FINANCIAL STATEMENTS (In Thousands of Dollars Unless Otherwise Indicated) NOTE 1 - NATURE OF OPERATIONS The Lubrizol Corporation is a full-service supplier of performance chemicals and products to diverse markets worldwide. These specialty chemical products are created through the application of advanced chemical and mechanical technologies to enhance the performance, quality and value of the products in which they are used. The company develops, produces and sells specialty additive systems for gasoline and diesel engine lubricating oils, automatic transmission fluids, gear oils, marine and tractor lubricants, fuel products and industrial fluids. The company also supplies coatings additives, refinery and oil field chemicals, specialty monomers, process chemicals, synthetic refrigerant compressor lubricants, fluid metering devices and particulate emission trap devices. The company's sales and receivables are concentrated in the oil and chemical industries. The company's additive customers consist primarily of oil refiners and independent oil blenders and are located in more than 100 countries. Approximately 40% of the company's sales are made to customers in North America, 33% in Europe and 27% in Asia-Pacific, Middle East and Latin America. The ten largest customers, most of which are international oil companies and a number of which are groups of affiliated entities, comprised approximately 44% of consolidated sales in 1996 and 1995 and 45% in 1994. Although the largest single customer in each year accounted for 10% of sales in 1996 and 1995 and 9% in 1994, these customers are made up of a number of separate entities that the company believes make independent purchasing decisions. NOTE 2 - ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of The Lubrizol Corporation and its majority-owned subsidiaries. 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 (see Note 4). ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements for assets, liabilities, revenues and expenses and the disclosure of contingencies. Actual results could differ from those estimates. CASH EQUIVALENTS - The company generally 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 primarily of investments having maturities when purchased of three months or less. INVENTORIES - Inventories are stated at cost which is not in excess of market. Cost of inventories is determined by the last-in, first-out (LIFO) method in the United States and on the first-in, first-out (FIFO) method elsewhere. DEPRECIATION AND AMORTIZATION - Accelerated depreciation methods are used in computing depreciation on certain machinery and equipment which comprise approximately 30% 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 improvements and range from 3 to 20 years for machinery and equipment. Amortization of intangible and other assets is on a straight-line method over periods ranging from 5 to 25 years. RESEARCH, TESTING AND DEVELOPMENT - Research, testing and development costs are expensed when incurred. Research and development expenses, excluding testing, were $93.4 million, $104.9 million and $90.7 million in 1996, 1995 and 1994, respectively. FOREIGN CURRENCY TRANSLATION - The assets and liabilities of non-U.S. subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Operating results are translated at weighted average exchange rates in effect during the period. Net unrealized translation gains (losses) are recorded as a component of other shareholders' equity and totaled $(3,468), $2,982 and $(9,722) at December 31, 1996, 1995 and 1994, respectively. 27 THE LUBRIZOL CORPORATION 13 PER SHARE AMOUNTS - Net income per share has been computed by dividing net income by the average number of common shares outstanding during the period. Net income per share has not been adjusted for the effect of stock options as the dilution effect would be less than 3% in any year. NOTE 3 - INVENTORIES
1996 1995 -------- -------- Finished products .......................... $ 88,176 $102,628 Products in process ........................ 77,910 96,061 Raw materials .............................. 66,590 89,267 Supplies and engine test parts ............. 19,229 22,583 -------- -------- $251,905 $310,539 ======== ========
Inventories on the LIFO method were 25% and 26% of consolidated inventories at December 31, 1996 and 1995, respectively. The current replacement cost of these inventories exceeded the LIFO cost at December 31, 1996 and 1995, by $49.1 million and $51.0 million, respectively. During 1996, the company sold its specialty vegetable oil assets (see Note 8), which had inventories at December 31, 1995, of $29.6 million. NOTE 4 - INVESTMENTS IN NONCONSOLIDATED COMPANIES
1996 1995 -------- -------- Investments carried at equity .............. $ 22,551 $ 60,029 Investments available-for-sale ............. 6,234 Investments carried at cost ................ 1,036 40,626 -------- -------- $ 29,821 $100,655 ======== ========
During 1996, the company sold its investment in Mycogen Corporation, including its remaining interest in Agrigenetics, Inc. (AGI), a joint venture between the company and Mycogen (see Note 8). At December 31, 1995, Mycogen-related investments had book values of $40.3 million carried at equity and $31.5 million carried at cost. The company holds investments in securities of certain publicly traded companies. At December 31, 1996, these investments were classified as available-for-sale and their market values approximated their costs. At December 31, 1995, these investments were accounted for on the cost basis due to restrictions placed on such securities. NOTE 5 - SHORT-TERM AND LONG-TERM DEBT
1996 1995 --------- --------- Long-term debt consists of: 7.25% debentures, due 2025 ................. $ 100,000 $ 100,000 Debt supported by long-term banking arrangements: Commercial paper at weighted average rates of approximately 6% ..... 56,625 6.5% Marine terminal refunding revenue bonds, due 2000 ............... 18,375 18,375 Term loans: Yen denominated, at 2.8% to 5.8%, due 1997-2002 ......................... 26,232 21,508 Deutsche mark denominated, at 6.8% due 1996 ...................... 16,748 Deutsche mark denominated, at 4.9% due 1999 ...................... 16,884 Other (4.3% in 1996 and 7.1% in 1995) ...... 403 1,365 --------- --------- 161,894 214,621 Less current portion ....................... (4,266) (20,198) --------- --------- $ 157,628 $ 194,423 ========= ========= Short-term debt consists of: Commercial paper at weighted average rates of approximately 6% ....... $ 34,200 $ 17,375 Other short-term debt at weighted average rates of 3.3% and 2.1% .......... 2,405 15,112 Current portion of long-term debt .......... 4,266 20,198 --------- --------- $ 40,871 $ 52,685 ========= =========
In June 1995, the company publicly issued debentures in the 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. Commercial paper debt is due within one year. The company has credit facilities, which were unused at December 31, 1996, aggregating $95 million, including $75 million in committed revolving credit agreements which would permit the company to borrow at or below the U.S. prime rate. These facilities permit the company to refinance for a period beyond one year the amount due under the Marine Terminal Refunding Revenue Bonds, whose bondholders have the right to put the bonds back to the company, and up to $56.6 million of commercial paper borrowings. Accordingly, the portion of this debt expected to remain outstanding throughout the following year is classified as long-term at each balance sheet date. THE LUBRIZOL CORPORATION 28 14 Amounts due on long-term debt are $4.3 million in 1997, $12.4 million in 1998, $22.0 million in 1999, $20.9 million in 2000, $1.5 million in 2001 and $100.8 million thereafter. The company has an interest rate swap agreement that effectively converts variable rate interest payable on $18.4 million of Marine Terminal Refunding Revenue Bonds due July 1, 2000, to a fixed rate of 6.5%. In addition, during 1995, the company entered into 10-year interest rate swap agreements, which expire in March 2005, that exchange variable rate interest obligations on $50 million notional principal amount for a fixed payment obligation of 7.6% (see Note 15). Interest paid, net of amounts capitalized, amounted to $10.4 million, $9.8 million and $3.0 million during 1996, 1995 and 1994, respectively. The company capitalizes interest on qualifying capital projects. The amount of interest capitalized during 1996, 1995 and 1994 amounted to $3.0 million, $4.3 million and $3.8 million, respectively. NOTE 6 - OTHER BALANCE SHEET INFORMATION
Receivables: 1996 1995 -------- -------- Customers ........................ $213,308 $221,557 Affiliates ....................... 6,582 9,993 Other ............................ 18,511 23,827 -------- -------- $238,401 $255,377 ======== ========
Receivables are net of allowance for doubtful accounts of $1.2 million in 1996 and $2.2 million in 1995. During 1996, the company sold its specialty vegetable oil business which had receivables of $12.4 million at December 31, 1995 (see Note 8).
Property and Equipment: 1996 1995 ---------- ---------- Land and improvements .................. $ 105,071 $ 101,457 Buildings and improvements ............. 274,420 264,580 Machinery and equipment ................ 1,081,850 1,002,678 Construction in progress ............... 67,846 109,049 ---------- ---------- $1,529,187 $1,477,764 ========== ==========
In late 1996, the company began a multi-year project to implement a computer system to support its global information processing and access needs. Direct internal and external costs subsequent to the preliminary stage of this project are being capitalized as property and equipment. Capitalized costs will be amortized over the estimated useful life beginning when each site installation or module is complete and ready for its intended use. Other capitalized software, previously reported within Other Assets (cost of $30.7 million and accumulated amortization of $14.6 million at December 31, 1995), has been reclassified to conform with the current presentation. Depreciation and amortization of property and equipment, including software, was $78.7 million in 1996, $71.8 million in 1995 and $63.9 million in 1994.
Other Assets: 1996 1995 ------- ------- Goodwill and other intangibles ............. $46,585 $29,793 Deferred income taxes ...................... 4,149 9,928 Other ...................................... 29,147 18,984 ------- ------- $79,881 $58,705 ======= =======
On December 11, 1996, the company purchased CPI Engineering Services, Inc. (CPI) for cash of $24.6 million. CPI develops, formulates and markets lubricants primarily for the air compressor and refrigeration markets. Goodwill of $16.0 million was recognized related to this acquisition and will be amortized on a straight-line basis over 15 years. CPI's operating results are not material to the company's consolidated financial statements. Accumulated amortization of intangible and other assets was $12.2 million and $9.9 million at December 31, 1996 and 1995, respectively.
Accounts Payable: 1996 1995 -------- -------- Trade .............................. $ 99,593 $118,639 Affiliates ......................... 83 6,481 -------- -------- $ 99,676 $125,120 ======== ======== Income Taxes and Other Current Liabilities: 1996 1995 -------- -------- Employee compensation .................... $ 35,463 $ 33,256 Income taxes ............................. 12,914 10,707 Taxes other than income .................. 10,893 13,912 Other .................................... 27,293 29,911 -------- -------- $ 86,563 $ 87,786 ======== ======== Noncurrent Liabilities: 1996 1995 -------- -------- Employee benefits .................... $ 33,239 $ 33,998 Other ................................ 14,045 19,225 -------- -------- $ 47,284 $ 53,223 ======== ========
NOTE 7 - 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. The outstanding Common Shares shown on the balance sheets exclude Common Shares held in treasury of 27,673,218 and 23,244,606 at December 31, 1996 and 1995, respectively. 29 THE LUBRIZOL CORPORATION 15 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 such stock without complying with the requirements of the company's articles of incorporation. The rights would entitle shareholders, other than such 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 1997 unless earlier redeemed. NOTE 8 - GAIN ON INVESTMENTS During 1996, the company completed the divestiture of its former agribusiness assets through the sale of its investments in Mycogen Corporation and AGI, and the sale of substantially all the assets of SVO Specialty Products, Inc. (SVO), a wholly-owned subsidiary. In January 1996, the company exchanged its remaining interest in AGI and all of its Mycogen Series A Preferred Stock into Mycogen Common Stock. In February 1996, the sale of the company's interest in Mycogen was completed, and the company realized cash proceeds of $126.2 million and recognized a pretax gain of $49.3 million, after transaction and other related costs. In January 1996, the company sold certain rights to its SVO oil seed technology to Mycogen and recognized a pretax gain of $8.0 million. Cash proceeds were collected of $2.0 million in January 1996 and $2.5 million in January 1997 with $3.5 million due in January 1998. In September 1996, the company sold the assets of SVO, excluding a seed crushing plant, for cash of $20.8 million. Net of a $5.9 million provision to reduce the seed crushing plant to its estimated net realizable value, no gain or loss has been recognized on this sale. SVO revenues were $33.4 million in 1996 compared with $44.0 million in 1995. SVO operations were not material to the company's financial position or results of operations. The company recognized pretax gains on the transactions described above of $57.3 million, after transaction costs and other related expenses of $4.9 million. Losses on other investment activity reduced the gain on investments to $53.3 million. On an after-tax basis these gains contributed $.57 per average share outstanding for the year 1996. During the first half of 1995, the company sold all of its remaining shares of Genentech Inc. common stock and received proceeds of $40.2 million, generating gross realized gains of $38.5 million. Sales of Genentech common stock generated proceeds of $43.6 million and gross realized gains of $41.2 million in 1994. On an after-tax basis these gains contributed $.39 per share in 1995 and $.41 per share in 1994. The company determined the gross realized gains using the average cost method. The investment in Genentech was reported at fair value in the company's balance sheets, until sold, as investments available-for-sale, with changes in unrealized gains recorded in other shareholders' equity. NOTE 9 - OTHER INCOME Other income - net consists of the following:
1996 1995 1994 -------- ------- ------ Equity earnings (losses) of nonconsolidated companies .................... $ 4,350 $(2,081) $2,972 Gain on donations of Genentech stock .............. 13,967 Donations of Genentech stock to The Lubrizol Foundation ................... (14,581) Gain on investee stock issuance ............... 4,530 Other - net ..................... 1,662 4,701 4,974 -------- ------- ------ $ 6,012 $ 7,150 $7,332 ======== ======= ======
Included above are equity losses from Mycogen of $5.4 million and $.1 million in 1995 and 1994, respectively, and in both of 1995 and 1994, preferred dividend income of $1.5 million. Gains on investee stock issuance represents a noncash gain, from the increase in the value of the company's ownership interest in the net assets of Mycogen, due to Mycogen's issuance of new shares in 1995 at a price in excess of the company's carrying value per share. (See Note 8). NOTE 10 - 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:
1996 1995 1994 -------- -------- -------- United States ............ $196,390 $136,801 $163,508 Foreign .................. 54,218 88,773 87,951 -------- -------- -------- Total .................... $250,608 $225,574 $251,459 ======== ======== ========
THE LUBRIZOL CORPORATION 30 16 The provision for income taxes consists of the following:
1996 1995 1994 ------- ------- ------- Current: United States ............ $39,688 $28,294 $28,698 Foreign .................. 18,044 28,766 27,389 ------- ------- ------- 57,732 57,060 56,087 ------- ------- ------- Deferred: United States ............ 16,842 8,334 12,605 Foreign .................. 6,232 8,565 7,192 ------- ------- ------- 23,074 16,899 19,797 ------- ------- ------- Total .................... $80,806 $73,959 $75,884 ======= ======= =======
Foreign taxes include withholding taxes. The United States tax provision includes the U.S. tax on foreign income distributed to the company. U.S. and foreign income tax rate changes occurring during the periods presented did not have a material effect on the company's provision for income 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:
1996 1995 1994 -------- -------- -------- Tax at statutory rate of 35% ...... $ 87,713 $ 78,951 $ 88,011 Foreign sales corporation earnings ........... (3,477) (4,389) (3,885) Equity income ..................... (1,324) (856) (812) Contribution of appreciated property ........... (5,050) Other - net ....................... (2,106) 253 (2,380) -------- -------- -------- Provision for income taxes ........ $ 80,806 $ 73,959 $ 75,884 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31 are as follows: 1996 1995 -------- -------- Deferred tax assets: Accrued compensation and benefits ......... $ 39,522 $ 40,792 Intercompany profit in inventory .......... 13,107 13,285 Net operating losses carried forward ...... 13,131 9,084 Equity investments and partnerships ....... 3,864 Other ..................................... 4,949 10,148 -------- -------- Total gross deferred tax assets .............. 70,709 77,173 Less valuation allowance ..................... (4,239) (3,565) -------- -------- Net deferred tax assets ...................... 66,470 73,608 -------- -------- Deferred tax liabilities: Depreciation and other basis differences ................. 75,869 58,472 Undistributed foreign equity income ....... 4,672 4,458 Inventory basis differences ............... 3,920 3,557 Equity investments and partnerships ....... 1,271 Other ..................................... 2,533 4,001 -------- -------- Total gross deferred tax liabilities ......... 88,265 70,488 -------- -------- Net deferred tax assets (liabilities) ........ $(21,795) $ 3,120 ======== ========
At December 31, 1996, certain foreign subsidiaries have net operating loss carryforwards of $32.6 million for income tax purposes, of which $10.6 million expires in years 1998 through 2003 and $22.0 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, 1996 and 1995, was an increase of $.7 million and an increase of $3.6 million, respectively. U.S. income taxes or 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 such earnings was approximately $346.6 million at December 31, 1996. Determination of the net amount of unrecognized U.S. income tax with respect to these earnings is not practicable. Income taxes paid during 1996, 1995 and 1994 amounted to $55.0 million, $56.9 million and $70.9 million, respectively. NOTE 11 - PENSION AND PROFIT SHARING PLANS The company has retirement plans, including noncontributory defined benefit pension plans and a profit sharing plan, covering most employees in the United States and at non-U.S. subsidiaries. Pension benefits 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 defined benefit plans are unfunded. Plan assets are invested principally in marketable equity securities and fixed income instruments. Expense for all retirement plans was $19.6 million in 1996, $20.7 million in 1995 and $24.1 million in 1994, including profit sharing contributions in the U.S. of $5.1 million in 1996, $4.4 million in 1995 and $5.7 million in 1994. Net periodic pension cost of defined benefit plans consists of:
1996 1995 1994 -------- ------- -------- Service cost - benefits earned during period ............. $ 11,097 $10,089 $ 11,454 Interest cost on projected benefit obligation ............... 17,690 17,804 16,769 Actual return on plan assets......... (33,585) (47,965) 1,510 Net amortization and deferral ..................... 14,229 31,833 (14,695) -------- ------- -------- Net periodic pension cost ........... $ 9,431 $11,761 $ 15,038 ======== ======= ========
31 THE LUBRIZOL CORPORATION 17 The weighted average assumptions used at December 31 were:
1996 1995 1994 ------ ------ ------ Discount rate for determining funded status ............ 7.5% 7.3% 8.2% Compensation increase ................... 4.5% 4.8% 5.2% Return on plan assets ................... 8.9% 8.8% 8.6%
The funded status of such defined benefit pension plans and the amounts recognized in the consolidated balance sheets at December 31 are as follows:
1996 1995 ------------------------ ---------------------- Assets Accum. Assets Accum. Exceed Benefits Exceed Benefits Accum. Exceed Accum. Exceed Benefits Assets Benefits Assets --------- -------- --------- -------- Fair value of plan assets ........... $ 264,949 $ 6,431 $ 234,819 $ 6,328 Projected benefit obligation ............ (217,173) (31,448) (211,709) (31,724) --------- -------- --------- -------- Plan assets in excess of (less than) projected benefit obligation ............ 47,776 (25,017) 23,110 (25,396) Unrecognized net transition obligation (asset) ............... (11,833) 3,882 (13,206) 4,513 Unrecognized net loss (gain) ....... (28,162) 845 (7,508) (611) Unrecognized prior service cost .................. 10,091 2,689 14,208 3,210 Minimum liability adjustment ............ (1,699) (906) --------- -------- --------- -------- Accrued pension asset (liability) ..... $ 17,872 $(19,300) $ 16,604 $(19,190) ========= ======== ========= ======== Accumulated benefit obligation ............ $ 155,071 $ 24,702 $ 152,714 $ 23,928 ========= ======== ========= ======== Vested benefits .......... $ 149,318 $ 20,442 $ 146,672 $ 20,170 ========= ======== ========= ========
NOTE 12 - POSTRETIREMENT HEALTH CARE The company provides certain postretirement benefits other than pensions, primarily health care, for retired employees. Currently, substantially all of the company's full-time employees in the U.S. become eligible for these benefits after attaining specified years of service and age 55 at retirement. Participants contribute a portion of the cost of such benefits. The company's postretirement health care plans are not funded. The status of the U.S. health care plans at December 31 is as follows:
1996 1995 -------- --------- Accumulated postretirement benefit obligations: Retirees ..................................... $ 29,794 $ 27,915 Fully eligible active plan participants ...... 14,385 16,104 Other active plan participants ............... 19,776 20,004 -------- --------- Total accumulated postretirement benefit obligation ........................ 63,955 64,023 Unrecognized net (loss) gain ................. 652 (3,503) Unrecognized net reduction in prior service costs ....................... 37,056 40,274 -------- --------- Accrued postretirement health care costs ......................... $101,663 $ 100,794 ======== =========
The amount of unrecognized net reduction in prior service costs results from plan amendments in 1994 that changed eligibility requirements and certain cost sharing provisions of the plan and, in 1995, that incorporated assumptions within the health care plan regarding participation in Medicare Risk HMO plans. These reductions in prior service costs do not immediately reduce the accrued postretirement liability, but are amortized as a reduction of expense over the participant's average future service period to full eligibility (remaining amortization period at December 31, 1996, of approximately 12 years). THE LUBRIZOL CORPORATION 32 18 The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9.0% in 1996 (9.75% in 1995), with subsequent annual decrements of .75% to an ultimate trend rate of 5%. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation by approximately 11% and the aggregate of the service and interest cost components of net postretirement health care cost by approximately 13%. A discount rate of 7.5% was used in determining the accumulated postretirement benefit obligation at December 31, 1996 and 1995. Net postretirement benefit cost consists of the following components for the company's U.S. plans:
1996 1995 1994 ------- ------- ------- Service cost - benefits earned during the year ....... $ 1,501 $ 1,361 $ 2,916 Interest cost on accumu- lated postretirement benefit obligation ........... 4,817 6,066 7,131 Amortization of unrecognized net gains ....... (3,218) (1,766) ------- ------- ------- Net postretirement health care cost ............. $ 3,100 $ 5,661 $10,047 ======= ======= =======
The company also provides postretirement health care benefits at several of its international locations. Accumulated benefits and net postretirement health care costs for these locations were not significant. NOTE 13 - LEASES The company has commitments under operating leases primarily for office space, terminal facilities, land, railroad tank cars and various office equipment. Rental expense was $16.9 million in 1996, $19.5 million in 1995 and $19.3 million in 1994. Future minimum rental commitments under operating leases having initial or remaining non-cancelable lease terms exceeding one year are $11.0 million in 1997, $7.6 million in 1998, $4.7 million in 1999, $4.1 million in 2000, $3.7 million in 2001 and $26.1 million thereafter. NOTE 14 - OPERATIONS IN GEOGRAPHIC AREAS Financial data by geographic area, based on the location of the subsidiary which shipped and billed the product, is as follows:
1996 1995 1994 ----------- ----------- ----------- Revenues from customers: United States ......... $ 711,781 $ 722,879 $ 707,103 Europe ................ 480,250 533,920 512,279 Far East .............. 229,659 225,773 215,632 Other ................. 175,872 181,022 163,980 ----------- ----------- ----------- 1,597,562 1,663,594 1,598,994 Intercompany transfers: United States ......... 318,492 319,671 296,693 Europe ................ 26,364 37,556 28,835 Far East .............. 182 301 360 Other ................. 22,507 30,905 27,717 ----------- ----------- ----------- 367,545 388,433 353,605 ----------- ----------- ----------- Gross revenues ........... 1,965,107 2,052,027 1,952,599 Less: Intercompany transfers ............. (367,545) (388,433) (353,605) ----------- ----------- ----------- Consolidated revenues .... $ 1,597,562 $ 1,663,594 $ 1,598,994 =========== =========== =========== Operating profit: United States ......... $ 162,090 $ 138,398 $ 145,971 Europe ................ 27,746 51,172 49,783 Far East .............. 9,078 9,731 15,486 Other ................. 13,178 17,476 14,251 Eliminations .......... (671) (2,555) (2,249) ----------- ----------- ----------- 211,421 214,222 223,242 General corporate expenses .............. (16,864) (19,156) (21,212) Provision for asset impairment ............ (9,489) Gain on investments ...... 53,280 38,459 41,235 Other income - net ....... 6,012 7,150 7,332 Interest - net ........... (3,241) (5,612) 862 ----------- ----------- ----------- Income before income taxes .......... $ 250,608 $ 225,574 $ 251,459 =========== =========== =========== Identifiable assets: United States ......... $ 796,154 $ 804,045 $ 731,651 Europe ................ 400,639 395,053 337,457 Far East .............. 151,015 154,992 157,344 Other ................. 91,768 82,708 74,768 Eliminations .......... (114,546) (82,310) (81,640) ----------- ----------- ----------- 1,325,030 1,354,488 1,219,580 Corporate assets ......... 77,085 137,532 174,784 ----------- ----------- ----------- Total assets ............. $ 1,402,115 $ 1,492,020 $ 1,394,364 =========== =========== ===========
33 THE LUBRIZOL CORPORATION 19 NOTES: A. Intercompany transfers are made at prices comparable to normal unaffiliated customer sales for similar products. B. Affiliated companies are not allocated to geographic segments. C. Corporate assets consist of short-term investments and investments in affiliated companies. Export sales from the United States to customers, primarily in Latin America and Asia in 1996 and 1995 and also in the Middle East for 1994, were $144 million, $138 million and $139 million, respectively. Net assets of non-U.S. subsidiaries at December 31, 1996 and 1995, were $487 million and $446 million, respectively. Net income of these subsidiaries was $29 million in 1996, $52 million in 1995 and $55 million in 1994; and dividends received from the subsidiaries were $18 million, $7 million and $8 million, respectively. NOTE 15 - 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 company believes the carrying values of financial instruments approximate their fair values, except for certain interest rate swap agreements discussed below. 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. 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. Such contracts are generally in connection with transactions with maturities of up to one year. The maximum amount of foreign currency forward contracts outstanding at any one time was $41.2 million in 1996 and $16.6 million in 1995. At December 31, 1996, the company had short-term forward contracts to sell currencies at various dates during 1997 for $7.3 million. Realized and unrealized gains or losses on these contracts are recorded in the statement of income, or in the case of transactions designated as hedges of net foreign investments, in the cumulative translation adjustment account in other shareholders' equity. Additionally, foreign currency forward contract gains and losses on certain future transactions may be deferred until the future transaction is recorded. Deferred currency gains on foreign exchange contracts at December 31, 1996, were not material. 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 enters 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. The company has entered into interest rate swap agreements to convert variable rate debt to fixed rates (see Note 5). 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. Changes in the underlying market value of the remaining swap payments are generally not recognized in income, unless the underlying liability being hedged is extinguished or partially extinguished to a level less than the notional amount of the interest rate swaps. The company would pay approximately $4.2 million if it had terminated these interest rate swap agreements at December 31, 1996, and in 1996 recognized $1.1 million of this loss as a charge against income. NOTE 16 - STOCK COMPENSATION PLANS The 1991 Stock Incentive Plan provides for granting of options to buy Common Shares intended either to qualify as "incentive stock options" under the Internal Revenue Code or "non-statutory stock options" not intended to so qualify, up to an amount equal to one percent of the outstanding Common Shares at the beginning of any year, plus any unused amount from prior years. 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 under the 1991 Plan and may be granted in the discretion of the administering committee under the 1985 Employee Stock Option Plan. The 1991 Plan generally supersedes the 1985 Plan, although options outstanding under the 1985 Plan remain exercisable until the expiration dates. The option price under both plans is 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, and the 1991 THE LUBRIZOL CORPORATION 34 20 Plan also permits the grant of restricted and unrestricted shares. In addition, the 1991 Plan provides to each outside director of the company an automatic annual grant of an option to purchase 2,000 Common Shares, with terms generally comparable to employee stock options. The company accounts for its stock option plans using the intrinsic-value accounting method (measured as the difference between the option exercise price and the market value of the stock at date of grant) under APB Opinion 25 and related interpretations. Accordingly, no compensation expense has been recognized for its stock-based compensation plans in the accompanying financial statements as all option exercise prices were equal with market price on the date of grant. The Financial Accounting Standards Board issued SFAS 123 - Accounting for Stock-Based Compensation, which was effective for 1996. SFAS 123 encourages the fair-value based method of accounting for stock compensation plans under which the value of stock options is estimated at the date of grant using valuation formulas, but permits the continuance of intrinsic-value accounting. If the fair value method to measure compensation cost had been used, the company's net income would have been reduced by $2.0 million and $1.7 million in 1996 and 1995, respectively with a corresponding reduction in earnings per share of $.03 for each year. Disclosures under the fair value method are estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1996 and 1995, respectively:
1996 1995 ---- ---- 1985 Plan: Risk free interest rate ................... 7.0% 7.1% Dividend yield ............................ 3.4% 3.4% Volatility ................................ 23% 23% Expected life (years) ..................... 6.6 8.6 1991 Plan: Risk free interest rate ................... 6.6% 7.0% Dividend yield ............................ 3.4% 3.4% Volatility ................................ 23% 23% Expected life (years) ..................... 8.5 8.2
Information regarding these option plans is as follows:
1996 1995 -------------------------- ------------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price --------- --------- --------- --------- Outstanding, January 1 ......... 2,958,416 $ 30.70 2,583,721 $ 29.28 Granted .............. 497,566 29.96 528,210 35.12 Exercised ............ (99,427) 18.25 (148,887) 21.57 Forfeited ............ (108,442) 31.86 (4,628) 34.56 --------- --------- Outstanding, December 31 ....... 3,248,113 $ 30.93 2,958,416 $ 30.70 ========= ========= Options exercisable, December 31 ....... 2,574,762 $ 30.57 1,975,878 $ 28.77 Weighted-average fair value of options granted during the year ... $ 8.05 $ 10.05
- -------------------------------------------------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable --------------------------------------------------- --------------------------------- Number Weighted-Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price ------------- ---------------- -------------- --------------- -------------- $13 - $19 ............. 148,134 3.0 Years $16.00 148,134 $16.00 19 - 25 .............. 127,477 2.4 21.80 127,477 21.80 25 - 31 .............. 1,380,466 5.5 28.68 975,742 28.14 31 - 38 .............. 1,592,036 5.1 34.99 1,323,409 34.83 --------- --------- 3,248,113 5.1 30.93 2,574,762 30.57 ========= =========
35 THE LUBRIZOL CORPORATION 21 NOTE 17 - SPECIAL CHARGE AND PROVISION FOR ASSET IMPAIRMENT In 1993, the company recorded an $86.3 million special charge related to its manufacturing rationalization and organizational realignment initiatives. It was originally estimated that these initiatives would take approximately three years to fully implement and would reduce the number of the company's production units by up to one-third and the number of employees by approximately 5%. Originally, 30% of the special charge was for employee reductions; 55% was for asset writedowns primarily related to manufacturing assets and Agribusiness investments; and 15% was for tank cleaning and dismantling, lease exit costs and other transitional costs. As of December 31, 1996, the company has substantially completed its planned activities under the special charge initiatives, including reducing the number of production units by approximately 30%, with three remaining units to be removed in 1997 and reducing its worldwide employment by approximately 9%, or over 400 employees, through early retirements, separations and attrition. Although there was no change in the aggregate amount of the special charge, certain components have been revised as actual costs to implement became known. Asset write-offs decreased due to lower than originally estimated net book values of the assets removed from service. Costs for employee reductions were greater than originally estimated due to more employee separations. Through completion, approximately 45% of the special charge relates to employee separations; 40% to asset writedowns and 15% to other areas. Cash outlays related to the special charge were approximately $9 million in 1996, $14 million in 1995, $18 million in 1994 and $4 million in 1993. At December 31, 1996, there is approximately $9 million remaining in the special charge accrual, of which $7 million will require disbursement of cash in 1997. Implementation of these initiatives has resulted in continued cost savings from a reduced number of employees, lower operating costs and fewer manufacturing units used to produce intermediate products. During the fourth quarter of 1995, the company recorded a provision of $9.5 million for the write-down of assets. This charge is primarily related to an intermediate processing unit that became permanently impaired due to product formulation changes caused by a new industry-wide specification. NOTE 18 - LITIGATION On June 24, 1996, the U.S. Supreme Court denied Exxon's request to review the September 1995 decision of the United States Court of Appeals for the Federal Circuit in Washington, D.C. The Court of Appeals' decision overturned a December 1992 jury verdict, in Houston, Texas, that the company had infringed an Exxon patent and vacated a $129 million judgment against the company. The decision of the Supreme Court terminates, with finality, the prior judgment against the company. Notwithstanding the Supreme Court decision, Exxon filed a motion for another trial under the patent on an allegedly different theory of infringement, which motion was denied by the trial judge following the Supreme Court ruling. However, Exxon has pursued an appeal of the denial of this motion for another trial, which appeal is pending. The company has prevailed in a separate case brought in Canada against Exxon's Canadian affiliate, Imperial Oil, Ltd., for infringement of the company's patent pertaining to dispersant, the largest additive component used in motor oils. A 1990 trial court verdict in favor of the company regarding the issue of liability was upheld by the Federal Court of Appeals of Canada in December 1992, and in October 1993, the Supreme Court of Canada dismissed Imperial Oil's appeal of the Court of Appeals' decision. The case has returned to the trial court for an assessment of compensation damages but no date has been set for a determination. In October 1994, the trial court judge awarded $15 million (Canadian) to the company for special penalty damages, plus attorneys' fees, for Imperial Oil's disregard of an earlier injunction for the manufacture or sale of the dispersant which is the subject of this case. In April 1996, the Federal Court of Appeals of Canada vacated the award of special penalty damages and concluded that any penalty damage determination should be made after the compensation damages for patent infringement have been determined by the lower court. A reasonable estimation of the company's potential recovery for compensation and penalty damages cannot be made at this time and no amount has been recorded in the company's financial statements. In November 1996, a patent trial court in London declared a Lubrizol United Kingdom patent invalid, which patent is the subject of litigation with Exxon in that country. The company will appeal this decision and believes it should succeed on appeal. Although the trial court decision does not involve any damage payments, the court awarded Exxon its attorneys' fees in the case, as is customary under U.K. practice. The amount of such fees has not yet been determined, but are not expected to be material to the company. The company has not recorded any amount for payment to Exxon for its attorneys' fees pending the outcome of its appeal. THE LUBRIZOL CORPORATION 36 22 QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended ------------------------------------------------------------ March 31 June 30 Sept. 30 Dec. 31 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands of Dollars Except Per Share Data) 1996 Net sales .......................................... $405,412 $420,531 $392,114 $374,820 Gross profit ....................................... 131,817 132,007 124,931 120,728 Gain on investments (net of tax) ................... 34,632 Net income ......................................... 71,236 38,070 31,733 28,763 Net income per share ............................... $ 1.14 $ .63 $ .53 $ .49 1995 Net sales .......................................... $414,931 $436,774 $412,428 $393,688 Gross profit ....................................... 137,375 148,865 129,985 116,210 Gain on investments (net of tax) ................... 8,519 16,479 Net income ......................................... 49,102 61,251 27,942 13,320 Net income per share ............................... $ .76 $ .96 $ .44 $ .21
In September 1996, the company sold its specialty vegetable oil business, which reduced net sales by $5.9 million and $10.5 million for the third and fourth quarters of 1996 compared with 1995, respectively. The impact on gross profit, net income or income per share was insignificant. See Note 8 for discussion of gain on investments. In the fourth quarter of 1995, the company recognized a provision for asset impairment which decreased net income by $6.2 million ($.10 per share). 37 THE LUBRIZOL CORPORATION 23 HISTORICAL SUMMARY
(In Millions, Except Shareholders, Employees and Per Share Data) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS: Revenues ............................................................ $ 1,597.6 $ 1,663.6 $ 1,599.0 Total cost and expenses ............................................. 1,403.0 1,468.5 1,397.0 Other income (charges) .............................................. 56.1 30.5 49.4 Net income .......................................................... 169.8 151.6 175.6 - Before unusual items and accounting changes .................... 135.2 132.8 148.8 Net income per share ................................................ 2.80 2.37 2.67 - Before unusual items and accounting changes .................... 2.23 2.08 2.26 FINANCIAL RATIOS: Gross profit percentage ............................................. 32.0 32.1 32.7 Percent of revenues: Selling and administrative expenses .............................. 9.9 9.8 10.0 Research and testing expenses .................................... 10.1 10.8 10.3 Return on average shareholders' equity (%) .......................... 20.4 18.0 22.5 - Before unusual items and accounting changes (%) ................ 16.2 15.8 19.0 Debt to capitalization (%) .......................................... 19.5 22.5 16.8 Current ratio ....................................................... 2.6 2.4 2.5 OTHER INFORMATION: Dividends declared per share ........................................ $ .97 $ .93 $ .89 Average common shares outstanding ................................... 60.7 63.8 65.7 Capital expenditures ................................................ $ 94.3 $ 189.3 $ 160.5 Depreciation expense ................................................ 78.7 71.8 63.9 At Year End: Total assets ..................................................... $ 1,402.1 $ 1,492.0 $ 1,394.4 Total debt ....................................................... 198.5 247.1 167.9 Total shareholders' equity ....................................... 819.4 849.0 832.0 Shareholders' equity per share ................................... 14.00 13.48 12.83 Common share price ............................................... 31.00 27.75 33.88 Number of shareholders ........................................... 5,764 6,304 6,494 Number of employees .............................................. 4,358 4,601 4,520
All share and per share data have been restated to reflect the 2-for-1 stock split effected on August 31, 1992. THE LUBRIZOL CORPORATION 38 24
1993 1992 1991 1990 1989 1988 1987 1986 - --------------------------------------------------------------------------------------------------------------------------- $1,525.5 $1,552.2 $1,476.3 $1,452.7 $1,227.9 $1,125.7 $1,022.3 $ 985.2 1,362.2 1,390.5 1,308.7 1,288.4 1,109.7 1,009.9 916.4 875.7 (43.6) 15.4 10.5 106.9 19.5 69.9 23.3 19.2 45.6 124.6 123.7 190.0 94.0 140.0 81.3 78.2 113.5 124.6 123.7 133.5 94.0 88.4 73.7 78.2 .67 1.81 1.79 2.67 1.26 1.81 1.03 .99 1.67 1.81 1.79 1.87 1.26 1.14 .94 .99 32.0 31.7 32.4 30.3 29.2 29.9 29.6 28.8 10.4 11.7 11.7 10.9 10.8 10.5 10.8 10.3 11.2 10.0 9.8 8.5 9.2 9.6 9.1 8.1 5.9 15.4 16.2 27.2 14.2 21.8 13.6 14.3 14.6 15.4 16.2 18.0 14.2 13.7 12.0 14.3 8.7 5.6 7.9 8.3 8.5 8.4 10.1 9.0 2.5 2.9 2.7 2.7 3.0 3.1 3.0 2.8 $ .85 $ .81 $ .77 $ .73 $ .69 $ .65 $ .61 $ .59 67.7 69.0 69.3 71.1 74.7 77.4 79.1 79.4 $ 127.9 $ 95.8 $ 82.4 $ 77.4 $ 64.7 $ 54.6 $ 42.0 $ 40.5 59.6 58.4 54.6 54.0 48.7 46.6 47.2 42.6 $1,182.6 $1,127.1 $1,171.7 $1,114.6 $ 960.2 $ 970.7 $ 939.4 $ 877.9 69.6 48.4 67.8 66.6 61.2 60.8 69.7 56.9 732.2 819.4 794.5 736.2 663.3 664.3 621.6 572.7 11.00 11.97 11.51 10.61 8.96 8.74 7.98 7.21 34.13 27.25 28.25 23.63 18.75 17.75 16.44 15.75 6,616 6,822 6,767 6,692 7,370 7,782 8,335 9,240 4,613 4,609 5,299 5,169 5,030 4,781 4,817 4,802
39 THE LUBRIZOL CORPORATION EX-21 9 EXHIBIT 21 1
EXHIBIT 21 THE LUBRIZOL CORPORATION % OF STATE/COUNTRY PRINCIPAL SUBSIDIARIES OWNERSHIP OF INCORPORATION Lubrizol do Brasil Aditivos, Ltda. 100% Brazil Lubrizol Canada Limited 100% Canada Lubrizol de Chile Limitada 100% Chile Lubrizol China, Inc. 100% Ohio Lubrizol Espanola, S.A. 100% Spain Lubrizol France S.A. 99.995% France Lubrizol Gesellschaft m.b.H. 100% Austria Lubrizol G.m.b.H. 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 Scandinavia AB 100% Sweden Lubrizol Servicios Tecnicos S. de R.L. 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 Anedco Inc. 100% Nevada CPI Engineering Services, Inc. 100% Michigan Engine Control Systems, Ltd. 100% Canada Gate City Equipment Company, Inc. 100% Georgia Langer & Company G.m.b.H. 100% Germany AFFILIATES Industrias Lubrizol S.A. de C.V. 40% Mexico Lanzhou Lubrizol - Lanlian Additive Co., Ltd. 50.05% China Lubrizol India Limited 40% India Lubrizol Transarabian Company Limited 49% Saudi Arabia Solub Limited 40% Russia Tianjin Lubrizol - Lanlian Additive Co., Ltd. 50.05% China
EX-23 10 EXHIBIT 23 1 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 and in Registration Statement No. 33-42211 on Form S-8 of our report dated February 4, 1997, incorporated by reference in this Annual Report on Form 10-K of The Lubrizol Corporation for the year ended December 31, 1996. /s/ Deloitte & Touche LLP - ------------------------------ DELOITTE & TOUCHE LLP Cleveland, Ohio March 24, 1997 EX-27 11 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME 0000060751 THE LUBRIZOL CORPORATION 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1.0 55,073 0 214,501 1,193 251,905 585,099 1,529,187 821,873 1,402,115 227,110 157,628 78,534 0 0 740,842 1,402,115 1,592,877 1,597,562 1,083,394 1,083,394 0 117 10,955 250,608 80,806 0 0 0 0 169,802 2.80 2.79
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