UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..... to .....
Commission File Number 1-5263
THE LUBRIZOL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-0367600
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
29400 Lakeland Boulevard
Wickliffe, Ohio 44092-2298
(Address of principal executive offices)
(Zip Code)
(440) 943-4200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of the registrant's common shares, without par value, outstanding, as of
April 30, 2002: 51,361,025.
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1 Financial Statements
---------------------------
THE LUBRIZOL CORPORATION
------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------
March 31 December 31
(In Thousands of Dollars) 2002 2001
-------------------------------------------------------------------------------------------
ASSETS
Cash and short-term investments .............................. $ 201,605 $ 189,095
Receivables .................................................. 314,340 279,013
Inventories:
Finished products .......................................... 119,750 124,503
Products in process ........................................ 60,429 48,859
Raw materials .............................................. 61,335 64,504
Supplies and engine test parts ............................. 17,774 16,744
----------- -----------
259,288 254,610
----------- -----------
Other current assets ......................................... 40,075 34,006
----------- -----------
Total current assets ..................... 815,308 756,724
Property and equipment - net ................................. 660,535 644,281
Goodwill and intangible assets - net ......................... 172,378 166,558
Investments in nonconsolidated companies ..................... 8,414 30,915
Other assets ................................................. 64,252 63,841
----------- -----------
TOTAL ............................... $ 1,720,887 $ 1,662,319
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt ........ $ 10,565 $ 9,120
Accounts payable ............................................. 130,838 129,833
Accrued expenses and other current liabilities ............... 121,570 120,261
----------- -----------
Total current liabilities ................ 262,973 259,214
----------- -----------
Long-term debt ............................................... 386,122 388,111
Postretirement health care obligation ........................ 97,806 97,878
Noncurrent liabilities ....................................... 58,107 55,140
Deferred income taxes ........................................ 56,374 56,207
----------- -----------
Total liabilities ........................ 861,382 856,550
----------- -----------
Minority interest in consolidated companies .................. 52,927 32,577
Contingencies and commitments
Shareholders' equity:
Preferred stock without par value - authorized and unissued:
Serial Preferred Stock - 2,000,000 shares
Serial Preference Shares - 25,000,000 shares
Common shares without par value:
Authorized 120,000,000 shares
Outstanding - 51,347,399 shares as of Mar. 31,
2002 after deducting 34,848,495 treasury
shares, 51,152,107 shares as of December 31,
2001 after deducting 35,043,787 treasury shares ........ 115,778 109,692
Retained earnings .......................................... 793,129 763,312
Accumulated other comprehensive loss ....................... (102,329) (99,812)
----------- -----------
Total shareholders' equity ............... 806,578 773,192
----------- -----------
TOTAL ............................... $ 1,720,887 $ 1,662,319
=========== ===========
Amounts shown are unaudited.
2
THE LUBRIZOL CORPORATION
------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Three Months Ended
March 31
---------------------------
(In Thousands Except Per Share Data) 2002 2001
--------------------------------------------------------------------------------
Net sales ........................................ $ 466,713 $ 453,791
Royalties and other revenues ..................... 799 858
--------- ---------
Total revenues ......................... 467,512 454,649
Cost of sales .................................... 331,210 334,682
Selling and administrative expenses .............. 48,743 44,726
Research, testing and development expenses ....... 40,566 38,485
--------- ---------
Total cost and expenses ................ 420,519 417,893
Other income (expense) - net ..................... (719) (3,987)
Interest income .................................. 1,709 2,039
Interest expense ................................. (5,387) (6,554)
--------- ---------
Income before income taxes ....................... 42,596 28,254
Provision for income taxes ....................... 12,779 9,748
--------- ---------
Net income ....................................... $ 29,817 $ 18,506
========= =========
Net income per share ............................. $ 0.58 $ 0.36
========= =========
Net income per share, diluted .................... $ 0.58 $ 0.36
========= =========
Dividends per share .............................. $ 0.26 $ 0.26
========= =========
Weighted average common shares outstanding ....... 51,343 51,282
Amounts shown are unaudited.
3
THE LUBRIZOL CORPORATION
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Three Months Ended
March 31
------------------------
(In Thousands of Dollars) 2002 2001
--------------------------------------------------------------------------------
Cash provided from (used for):
Operating activities:
Net income ........................................... $ 29,817 $ 18,506
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization .................... 22,492 24,661
Deferred income taxes ............................ (365) 1,822
Change in current assets and liabilities:
Receivables .................................... (22,496) (27,774)
Inventories .................................... 10,650 (18,907)
Accounts payable and accrued expenses .......... 10,596 15,131
Other current assets ........................... (4,823) 900
Other items - net ................................ (421) 394
--------- ---------
Total operating activities ................. 45,450 14,733
Investing activities:
Capital expenditures ............................... (12,126) (15,916)
Acquisitions and investments in nonconsolidated
companies ........................................ (17,235) (14,989)
Other - net ........................................ 2,252 88
--------- ---------
Total investing activities ................. (27,109) (30,817)
Financing activities:
Short-term borrowings, net ......................... 1,528 6,776
Long-term repayments ............................... (14) (14)
Dividends paid ..................................... (13,328) (13,340)
Common shares purchased ............................ (20,026)
Stock options exercised ............................ 5,622 10,446
--------- ---------
Total financing activities ................. (6,192) (16,158)
Effect of exchange rate changes on cash .............. 361 (1,734)
--------- ---------
Net increase (decrease) in cash and short-term
investments ........................................ 12,510 (33,976)
Cash and short-term investments at beginning of period 189,095 145,937
--------- ---------
Cash and short-term investments at end of period ..... $ 201,605 $ 111,961
========= =========
Amounts shown are unaudited.
4
THE LUBRIZOL CORPORATION
------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Amounts in thousands (except per share data)
--------------------------------------------
March 31, 2002
1. The accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the financial position as of March 31, 2002 and December 31,
2001, and the results of operations and cash flows for the applicable
periods ended March 31, 2002 and 2001.
2. Net income per share is computed by dividing net income by average common
shares outstanding during the period, including contingently issuable
shares. Net income per diluted share includes the dilutive effect resulting
from outstanding stock options and stock awards.
Per share amounts are computed as follows:
Three Months Ended
March 31
--------------------
2002 2001
---------- ---------
Numerator:
Net income available to common
shareholders $29,817 $18,506
======= =======
Denominator:
Weighted average common shares
outstanding 51,343 51,282
Dilutive effect of stock options
and awards 401 186
------- -------
Denominator for net income
per share, diluted 51,744 51,468
======= =======
Net income per share $ 0.58 $ 0.36
======= =======
Net income per share, diluted $ 0.58 $ 0.36
======= =======
Weighted average shares issuable upon the exercise of stock options which
were excluded from the diluted earnings per share calculations because they
were antidilutive were 1.0 million in 2002 and 2.5 million in 2001.
3. Total comprehensive income for the three-month periods ended March 31, 2002
and 2001 is comprised as follows:
Three Months Ended
March 31
---------------------
2002 2001
---------- ----------
Net income $ 29,817 $ 18,506
Foreign currency translation adjustment (3,028) (13,598)
Cumulative effect of accounting change (1,314)
Unrealized gains (losses) - interest
rate swaps 511 (609)
-------- --------
Total comprehensive income $ 27,300 $ 2,985
======== ========
5
4. Beginning in 2002, the company reorganized its product lines into four
principal operating segments: fluid technologies for transportation, fluid
technologies for industry, advanced fluid systems and emulsified products.
Accordingly, the segment information for prior years has been restated to
conform to the current operating structure.
Fluid technologies for transportation ("FTT")is comprised of additives for
lubricating engine oils, such as for gasoline, diesel, marine and
stationary gas engines and additive components; additives for driveline
oils, such as automatic transmission fluids, gear oils and tractor
lubricants; and additives for fuel products and refinery and oil field
chemicals. In addition, this segment sells additive components and
viscosity improvers within its lubricant and fuel additives product lines.
The company's fluid technologies for transportation product lines are
generally produced in shared manufacturing facilities and sold largely to a
common customer base. Fluid technologies for industry ("FTI") includes
industrial additives, such as additives for hydraulic, grease and
metalworking fluids and compressor lubricants; and performance chemicals,
such as additives for coatings and inks, defoamers and process chemicals.
The company also operates several product lines that do not constitute
reportable business segments. The results of these product lines have been
aggregated into the "all other" segment, including advanced fluid systems,
which is comprised of fluid metering devices, particulate emission trap
devices, and FluiPak(TM) sensor systems; and Emulsified Products, or
PuriNOx(TM) low-emissions diesel fuel.
The company evaluates performance and allocates resources based on segment
contribution income, defined as revenues less expenses directly
identifiable to the product lines aggregated within each segment. In
addition, the company allocates corporate research, testing, selling and
administrative expenses, and excess production capacity costs, in arriving
at segment operating profit before tax. The following table presents a
summary of the company's reportable segments for the three months ended
March 31, 2002 and 2001 based on the current reporting structure.
6
Three Months Ended
March 31
---------------------------
2002 2001
-------------- ------------
Revenues from external customers:
Fluid technologies for transportation (FTT) $ 382,811 $ 370,525
Fluid technologies for industry (FTI) 78,873 77,906
All other 5,828 6,218
----------- -----------
Total revenues $ 467,512 $ 454,649
=========== ===========
Segment contribution income(loss):
Fluid technologies for transportation (FTT) $ 77,749 $ 63,473
Fluid technologies for industry (FTI) 15,835 11,422
All other (2,996) (4,131)
----------- -----------
Total segment contribution income $ 90,588 $ 70,764
=========== ===========
Segment operating profit(loss) before tax:
Fluid technologies for transportation (FTT) $ 39,292 $ 29,927
Fluid technologies for industry (FTI) 10,047 7,174
All other (3,065) (4,332)
----------- -----------
Total segment operating profit before tax 46,274 32,769
Interest expense - net (3,678) (4,515)
----------- -----------
Consolidated income before tax $ 42,596 $ 28,254
=========== ===========
Segment total assets:
Fluid technologies for transportation (FTT) $ 1,140,272 $ 1,160,844
Fluid technologies for industry (FTI) 221,746 211,294
All other 29,212 35,111
----------- -----------
Total segment assets $ 1,391,230 $ 1,407,249
Corporate assets 329,657 257,132
----------- -----------
Total consolidated assets $ 1,720,887 $ 1,664,381
=========== ===========
7
5. Effective January 1, 2002, the company began accounting for the investment
in its India joint venture, Lubrizol India Private Limited ("LIPL"),
through consolidation because an amendment to the joint venture agreement
gave the company control as of that date. The company has ownership of 50%
of the voting shares. The amended joint venture agreement grants the
company the authority to appoint three of LIPL's six board directors and
the unilateral and perpetual ability to appoint its managing director.
Further, the amended joint venture agreement delegates to the managing
director the authority to make all significant decisions to run the
day-to-day business of LIPL. The company had previously accounted for its
investment under the equity method of accounting because the company's
joint venture partner held certain substantive participating rights, which
were eliminated with the amendment to the joint venture agreement. The
change to consolidate LIPL had the effect of increasing revenues and total
cost and expenses by $13.7 million and $12.4 million, respectively, for the
three months ended March 31, 2002. The change had no impact on net income.
6. Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standards ("SFAS") 142, "Goodwill and Other Intangible Assets."
Under SFAS 142, goodwill and other intangibles determined to have
indefinite lives will no longer be amortized, but will be tested for
impairment upon adoption and annually thereafter.
In connection with adopting SFAS 142, the company also reassessed the
useful lives and the classification of our intangible assets. The major
components of our identifiable intangible assets are technology, land use
rights and trademarks. Excluding the trademarks, which are indefinite and
will not be amortized, the intangible assets will continue to be amortized
over the lives of the agreements, which range between five and forty years.
The following table shows the components of our identifiable intangible
assets as of March 31, 2002.
As of March 31, 2002
-----------------------------
Gross
Carrying Accumulated
Amount Amortization
-----------------------------
Amortized intangible assets:
Technology $ 30,095 $ 13,618
Land use rights 6,990 304
Other 2,458 1,004
---------- ---------
Total amortized intangible assets 39,543 14,926
---------- ---------
Unamortized intangible assets:
Trademarks 2,232 383
---------- ---------
Total $ 41,775 $ 15,309
========== =========
8
Amortization expense for intangible assets during the first quarter of 2002
was $.8 million and is estimated to be $3.8 million for 2002, which
includes an estimate for amortization expense arising from intangibles
purchased in the acquisition of Kabo Unlimited, Inc. in January 2002 and
Chemron Corporation in April 2002. The company is currently in the process
of allocating the purchase price for both of these acquisitions, so it is
possible the amount of amortization may change once the purchase price
allocation is complete. Excluding the impact of further acquisitions,
estimated annual intangible amortization expense for each of the next four
years should approximate $4.0 million per year.
SFAS 142 provides for a six-month period from the date of adoption for the
company to perform an assessment of potential impairment of goodwill. Any
impairment identified upon adoption will be recognized as a cumulative
effect of a change in accounting principle effective as of January 1, 2002.
Subsequent impairment losses will be reflected in normal results of
operation. The company is still in the process of evaluating whether or not
any transitional goodwill impairment exists as of January 1, 2002. The
carrying amount of goodwill as of March 31, 2002 by reporting segment is as
follows:
FTT FTI All Other Total
-------- -------- --------- --------
Balance, December 31, 2001 $ 42,685 $ 88,850 $ 7,668 $139,203
Goodwill acquired 6,361 - 6,361
Translation & other
adjustments 348 - - 348
-------- -------- -------- --------
Balance, March 31, 2002 $ 43,033 $ 95,211 $ 7,668 $145,912
======== ======== ======== ========
In accordance with SFAS 142, the company discontinued the amortization of
goodwill and trademarks effective January 1, 2002. Had the company been
accounting for its goodwill under SFAS 142 for all periods presented, the
company's net income and earnings per share would have been as follows:
Three Months Ended
March 31
------------------------
2002 2001
------------ -----------
Reported net income $ 29,817 $ 18,506
Add: Goodwill & trademark
amortization, net of tax - 1,801
---------- ----------
Pro forma adjusted net income $ 29,817 $ 20,307
========== ==========
Reported net income per share $ 0.58 $ 0.36
Add: Goodwill & trademark
amortization, net of tax - 0.04
---------- ----------
Pro forma adjusted basic and diluted
net income per share $ 0.58 $ 0.40
========== ==========
9
7. In June 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligations," which will become effective
for the company on January 1, 2003. This statement requires entities to
record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. The amount recorded as a liability will
be capitalized by increasing the carrying amount of the related long-lived
asset. Subsequent to initial measurement, the liability is accreted to the
ultimate amount anticipated to be paid and is also adjusted for revisions
to the timing or amount of estimated cash flows. The capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The company has not
determined the impact, if any, that SFAS 143 will have on its consolidated
financial position or results of operations.
10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
Our revenues increased in the first quarter of 2002 as compared with the first
quarter of 2001, primarily due to higher shipment volume, the consolidation of
Lubrizol India Private Limited ("LIPL") and the impact of an acquisition. Lower
raw material costs combined with lower manufacturing costs, partially offset by
lower average selling price, resulted in higher gross profit margins. A
favorable increase in other income and a lower effective tax rate, partially
offset by increased STAR (selling, testing, administrative and research)
expenses resulted in increased net income in the first quarter of 2002 as
compared to the first quarter of 2001.
We group our product lines into three reportable segments: fluid technologies
for transportation, fluid technologies for industry and all other. Fluid
technologies for transportation comprised approximately 82% of our consolidated
revenues and 85% of our segment pre-tax operating profits for the first quarter
of 2002. This discussion and analysis of our financial condition and results of
operations is primarily focused upon the company as a whole, since we believe
this provides the most appropriate understanding of our business. See Note 4 to
the financial statements for additional financial disclosures by reporting
segment.
Our consolidated revenues increased $12.9 million, or 3%, for the first quarter
of 2002 compared with the same period in 2001. The primary factor causing the
increase in revenues was a 9% increase in our shipment volume, partially offset
by a 5% decline in average selling prices. Excluding acquisitions (the Kabo
Unlimited, Inc. ("Kabo") acquisition and the consolidation of LIPL), shipment
volume increased 4%, but was more than offset by lower average selling prices,
the combination of which resulted in $3.8 million decrease in revenues. Fluid
technologies for transportation revenues increased $12.3 million, or 3%, due to
the consolidation of LIPL. Fluid technologies for industry revenues increased
$1.0 million, or 1%, and the total of the all other segment decreased $.4
million, or 6%, in the first quarter of 2002 compared with the first quarter of
2001.
Changes in our shipment volume vary in different geographic areas. The following
table shows our 2002 first quarter shipment volume by geographic area as well as
the corresponding changes compared with first quarter 2001:
1st Qtr
2002 Increase
Volume (Decrease)
------------- -----------------
North America 42% 9%
Europe, Middle East 33% 9%
Asia-Pacific 18% 20%
Latin America 7% (16%)
-------------
Total 100% 9%
The increases in North America and Europe are due to the strengthening of our
business with major customer accounts. Asia-Pacific volume increased 20% in
total, but was down 2% excluding the consolidation of LIPL. The decline in
ongoing Asian volume was primarily the result of lost business in Japan. Latin
America, our smallest zone, was down 16% as the result of economic conditions,
timing of orders and some business losses after the first quarter of 2001 due to
price increases.
11
Our average additive selling price decreased 5% in the first quarter of 2002
compared with the first quarter of 2001. The combination of price and mix
declined 3% from the first quarter along with 2% unfavorable currency effects,
due mainly to the strength of the dollar against the euro and the yen.
Sequentially, first quarter 2002 average additive selling price was 3% lower
than the fourth quarter of 2001 due to a 2% decline in the combination of price
and mix and 1% unfavorable currency effects.
Royalties and other revenues decreased $59 thousand, or 7%, primarily due to the
consolidation of LIPL. Royalties from India are eliminated when reporting
consolidated results.
Our cost of sales for the first quarter of 2002 decreased $3.5 million, or 1%
($17.8 million, or 6%, excluding acquisitions), compared with the first quarter
of 2001, primarily because of a 9% decrease in average raw material cost and a
1% decrease in total manufacturing costs. The decrease in average raw material
cost was primarily due to an 8% decline in raw material prices for our key
petrochemical-based raw materials, along with some favorable currency effects.
Sequentially, average raw material cost decreased 6% from the fourth quarter of
2001. We believe raw material costs may begin to increase in the second quarter
of 2002, under pressure from rising crude oil costs. Unit manufacturing costs
(manufacturing costs per metric ton sold) were down 9% for the first quarter of
2002 compared with the first quarter of 2001, primarily due to lower utility
costs and higher shipment volume.
Gross profit (net sales less cost of sales) for the first quarter of 2002
increased $16.4 million, or 14% ($13.5 million, or 11%, excluding acquisitions),
compared with the first quarter of 2001. The increase was primarily due to lower
average raw material cost, higher shipment volume and lower manufacturing costs,
partially offset by lower product selling prices and unfavorable currency
effects. Fluid technologies for transportation gross profit increased $17.1
million, or 18%; fluid technologies for industry gross profit increased $1.5
million, or 6%; and the all other segment decreased $.4 million, or 28%, in the
first quarter of 2002 compared with the first quarter of 2001. In calculating
gross profit at the operating segment level, we exclude excess capacity from
product costs.
Our gross profit percentage (gross profit divided by net sales) increased to
29.0% in the first quarter of 2002 compared to 26.2% in the first quarter of
2001 for the reasons stated above. Excluding the impact of the consolidation of
LIPL, our gross profit percentage would have been 29.4%. Sequentially, the
percentage increased from 27.5% in the fourth quarter of 2001.
Selling and administrative expenses increased by $4.0 million, or 9% ($3.2
million or 7% excluding acquisitions), for the first quarter of 2002 compared
with the same period of 2001. The non-acquisition increase was primarily due to
a $2.0 million accrual for the settlement of a contract claim related to an
employee offsite personal injury, higher salary and employee benefit costs for
existing businesses and incremental staffing and other costs associated with our
strategy to expand into new markets.
12
Our research, testing and development expenses (technology expenses) increased
$2.1 million, or 5% ($1.9 million, or 5%, excluding acquisitions), for the first
quarter of 2002 compared with the same period in 2001. Research expenses
increased because of high levels of platform development costs for the upcoming
U.S. passenger car motor oil technical standard, GF-4. This upgrade is currently
slated for commercial introduction in the third quarter of 2003 with mandatory
use by the spring of 2004. We expect continued high levels of GF-4 research
spending through the second quarter of 2002 followed by a shift to testing
expense in the third and fourth quarters of 2002. In addition, we have begun
testing programs for the next diesel engine oil specification, PC-9. Testing for
the PC-9 diesel program should wind down in the second quarter of 2002, in time
for formal product introduction in the third quarter of this year.
The change in other income (expense) favorably affected pre-tax income by $3.3
million for the first quarter of 2002 compared to the first quarter of 2001.
Beginning in 2002, this line item no longer includes amortization of goodwill or
equity income from the India joint venture. Goodwill amortization expense in the
first quarter of 2001 was approximately $2.8 million. Equity income for LIPL in
the first quarter of 2001 was $.7 million. The remaining variance was due to
favorable translation gains and higher equity income of our Saudi Arabia and
Mexico joint ventures.
Interest income decreased $.3 million for the first quarter of 2002 compared to
the first quarter of 2001. Although there was a higher level of cash investments
in the first quarter of 2002, this was more than offset by lower interest rates.
Interest expense decreased $1.2 million for the first quarter of 2002 compared
to the first quarter of 2001, also because of lower interest rates.
As a result of the above factors, our income before income taxes for the first
quarter of 2002 increased 51% to $42.6 million, as compared to $28.3 million for
the first quarter of 2001. Segment operating profit before tax, which excludes
interest expense, increased $9.4 million, or 31%, for fluid technologies for
transportation for the same reasons that caused the increase in consolidated
gross profit described above. Segment operating profit before tax increased $2.9
million, or 40%, for fluid technologies for industry, due to some economic
recovery in this segment's markets along with improved cost control.
Approximately $1.5 million of the elimination of goodwill amortization in 2002
benefited this segment. The total segment operating loss before tax for the all
other segment decreased $1.3 million, or 29%, in the first quarter of 2002
compared with the first quarter of 2001, primarily due to lower levels of equity
losses and the elimination of goodwill amortization in 2002.
We had an effective tax rate of 30.0% for the first quarter of 2002, compared
with 34.5% for the first quarter of 2001. The lower effective tax rate, which
favorably impacted first quarter earnings by $.04 per share, was primarily due
to the U.S. tax benefit from a charitable contribution of technology made in
2002 that did not occur in 2001, along with the elimination of book goodwill
amortization pursuant to the new accounting standard.
Changes in currency exchange rates during the first quarter of 2002 had minimal
effect on net income as compared with exchange rates in effect during 2001.
Primarily as a result of the above factors, our net income for the first quarter
of 2002 increased 61% to 29.8 million ($.58 per share) compared with $18.5
million ($.36 per share) for the first quarter of 2001.
13
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
------------------------------------------------
Cash provided from operating activities was $45.5 million for the first quarter
of 2002 as compared with $14.7 million for the first quarter of 2001. The
increase of $30.7 million in the first quarter of 2002 was primarily due to
higher net income and a lower working capital build compared with the first
quarter of 2001.
Our capital expenditures in the first three months of 2002 were $12.1 million as
compared with $15.9 million for same period in 2001. The slow first quarter 2002
spending reflects timing of projects. We estimate capital spending for the full
year 2002 will be in the range of $85 million to $90 million as compared with
$66.3 million in 2001.
During the first quarter of 2002 we completed an acquisition for $17.2 million
for Kabo Unlimited,Inc., which specializes in the development, manufacture and
sale of antifoam and defoaming agents to the food, fermentation, mining and
wastewater industries. Kabo's product lines expand the defoamer offering and
capabilities of our fluid technologies for industry segment.
Our net debt to capitalization ratio at March 31, 2002 was 21.9%. Net debt is
the total of short- and long-term debt, reduced by cash and short-term
investments in excess of an assumed operating cash level of $40 million and
excluding unrealized gains and losses on derivative instruments designated as
fair value hedges of fixed rate debt. Capitalization is shareholders' equity
plus net debt. Debt as a percent of capitalization, without adjusting for cash,
was 32.4% at March 31, 2002.
Our share repurchase program has been suspended indefinitely as we are holding
our financial resources in reserve for future acquisitions. Primarily as a
result of these activities and the payment of dividends, our balance of cash and
short-term investments increased $12.5 million at March 31, 2002 compared with
December 31, 2001.
Our financial position remains strong with a ratio of current assets to current
liabilities of 3.1 to 1 at March 31, 2002, an increase from 2.9 to 1 ratio at
December 31, 2001. We believe our existing credit facilities, internally
generated funds and ability to obtain additional financing, if desired, will be
sufficient to meet our future capital needs, including acquisitions to expand
into new and existing fluid technology markets.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
---------------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the federal
securities laws. As a general matter, forward-looking statements are those
focused upon future plans, objectives or performance as opposed to historical
items and include statements of anticipated events or trends and expectations
and beliefs relating to matters not historical in nature. Such forward-looking
statements are subject to uncertainties and factors relating to our operations
and business environment, all of which are difficult to predict and many of
which are beyond our control. These uncertainties and factors could cause our
actual results to differ materially from those matters expressed in or implied
by such forward-looking statements.
14
We believe that the following factors, among others, could affect our future
performance and cause our actual results to differ materially from those
expressed or implied by forward-looking statements made in this quarterly
report:
- the overall demand for lubricant and fuel additives on a worldwide basis,
which has a slow growth rate in mature markets such as North America and
Europe;
- the effect on our business resulting from economic and political
uncertainty within the Asia-Pacific and Latin American regions;
- the lubricant additive demand in developing regions such as China and
India, which geographic areas are an announced focus of our activities;
- the potential negative impact on product pricing and volume demand from the
consolidation of finished lubricant marketers;
- the degree of competition resulting from lubricant additive industry over
capacity;
- technology developments that affect longer-term trends for lubricant
additives, such as improved equipment design, fuel economy, longer oil
drain intervals, alternative fuel powered engines and emission system
compatibility;
- the overall economic uncertainty and weak business environment within the
global economy, which is affecting fluid technologies for industry in
particular;
- the extent to which we are successful in expanding our business in new and
existing fluid technology markets incorporating chemicals, systems and
services for industry and transportation;
- our ability to identify, complete and integrate acquisitions for profitable
growth;
- our success at continuing to develop proprietary technology to meet or
exceed new industry performance standards and individual customer and
original equipment manufacturers' expectations;
- the frequency of change in industry performance standards, which affects
the level and timing of our technology costs, the product life cycles and
the relative quantity of additives required for new specifications;
- our ability to continue to reduce complexities and conversion costs and
modify our cost structure to maintain and enhance our competitiveness;
- our success in strengthening relationships and growing business with our
largest customers, including those with affiliated lubricant additive
companies, and retaining the business of our largest customers over
extended time periods;
- the cost, availability and quality of raw materials, including
petroleum-based products;
- the cost and availability of energy, including natural gas and electricity;
- the effects of fluctuations in currency exchange rates upon our reported
results from international operations, together with non-currency risks of
investing in and conducting significant operations in foreign countries,
including those relating to political, social, economic and regulatory
factors;
- the extent to which we achieve market acceptance of our PuriNOx(TM)
low-emission, water-blend fuel product;
- significant changes in government regulations affecting environmental
compliance.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
We operate manufacturing and blending facilities, laboratories and offices
around the world and utilize fixed and variable rate debt to finance our
global operations. As a result, we are subject to business risks inherent
in non-U.S. activities, including political and economic uncertainty,
import and export limitations, and market risk related to changes in
interest rates and foreign currency exchange rates. We believe the
political and economic risks related to our foreign operations are
mitigated due to the stability of the countries in which our largest
foreign operations are located.
In the normal course of business, we use derivative financial instruments
including interest rate swaps and foreign currency forward exchange
contracts to manage our market risks. Our objective in managing our
exposure to changes in interest rates is to limit the impact of such
changes on earnings and cash flow and to lower our overall borrowing
costs. Our objective in managing our exposure to changes in foreign
currency exchange rates is to reduce volatility on our earnings and cash
flow associated with such changes. Our principal currency exposures are in
the major European currencies, the Japanese yen and certain Latin American
currencies. We do not hold derivatives for trading purposes.
A quantitative and qualitative discussion about our market risk is
contained on page 23 of our 2001 Annual Report to our shareholders. There
have been no material changes in the market risks faced by us since
December 31, 2001.
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PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) On January 17, 2002, 1,803 common shares were issued in transactions
exempt from registration under the Securities Act of 1933 pursuant
to Regulation S. The common shares were issued pursuant to an
employee benefit plan to 21 employees of a wholly-owned Canadian
subsidiary of the company.
On February 5, 2002, 28 common shares were issued in a transaction
exempt from registration under the Securities Act of 1933 pursuant
to Regulation S. The common shares were issued pursuant to an
employee benefit plan to an employee of a wholly-owned Canadian
subsidiary of the company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(10)(l)* The Lubrizol Corporation Executive Council Deferred
Compensation Plan, as amended.
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended March 31, 2002.
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LUBRIZOL CORPORATION
/s/John R. Ahern
------------------------------------
John R. Ahern
Chief Accounting Officer and
Duly Authorized Signatory of
The Lubrizol Corporation
Date: May 6, 2002
17