1995 FINANCIAL REVIEW
The following Financial Review includes a discussion of the accounts and
operations of the Company and certain actions taken by Ethyl Corporation that
affect them.
The most recent action is the Company's acquisition of the worldwide
lubricant additives business of Texaco Inc. on February 29, 1996. While the
following financial review does not discuss this 1996 transaction, its effects
are discussed in the subsequent event footnote (See Note 21 of Notes to
Financial Statements on page 44), which also includes certain supplemental
financial statement information.
The actions taken by the Company also include the September 15, 1994, sale
of its wholly owned pharmaceuticals subsidiary, Whitby, Inc. Earlier in that
year, at the close of business on February 28, 1994, the Company completed the
tax-free spin-off of its wholly-owned subsidiary, Albemarle Corporation
(Albemarle), which included the operations of the olefins and derivatives,
bromine chemicals and specialty chemicals businesses. The results of both the
pharmaceuticals subsidiary and Albemarle are included in the consolidated
results through those dates.
The Company also completed the tax-free spin-off of its approximately 80%
interest in First Colony Corporation (First Colony) on July 1, 1993, which
included the operations of First Colony Life Insurance Company and subsidi-
aries. The accounts and operations of the Insurance segment are reported as
"Discontinued Insurance Operations" through that date.
In addition to the consolidated information discussed for 1995 versus 1994
and 1994 versus 1993, pro forma information is also provided and discussed to
illustrate the Company's results without the prior-year results of the spun-off
businesses of Albemarle Corporation and First Colony Corporation. Pro forma
Statements of Income for prior years also are provided as supplementary
information on page 35.
RESULTS OF OPERATIONS
1995 Compared to 1994
NET SALES
Net sales for 1995 were $960.5 million, down from $1.17 billion in 1994.
The reduction in net sales resulted primarily from the absence of Albemarle
sales in 1995 versus two months of Albemarle sales included in 1994.
Net sales for 1995 of $960.5 million were down about $58.6 million (6%)
from pro forma (excluding Albemarle) net sales of $1.02 billion in 1994. The
decrease from pro forma net sales primarily reflected the absence of
pharmaceutical sales during 1995 versus $48.7 million of sales in 1994 prior to
the sale of this business on September 15, 1994, as well as $9.9 million (1%)
lower sales revenue from the petroleum additives business.
The lower petroleum additives revenues were due to lower shipments ($60.7
million), largely offset by the impact of higher selling prices ($50.8 million).
The decrease in shipments reflected lower shipments of antiknocks, lubricant
additives and certain other fuel additives, partly offset by increased shipments
of other refinery fuel additives. Lead antiknock sales were slightly lower than
the prior year, but the effect of lower shipments was nearly offset by higher
selling prices while sales of certain other fuel additives were well behind the
prior year. Lubricant additives sales were about even with the prior year, while
sales of other refinery fuel additives improved in 1995 from the prior year.
COSTS AND EXPENSES
Cost of goods sold in 1995 decreased to $636.1 million from $776.5 million
in 1994. The decline in aggregate cost of goods sold occurred primarily because
of the absence of Albemarle costs during 1995 versus the inclusion of two months
of Albemarle cost of goods sold in 1994.
Cost of goods sold in 1995 of $636.1 million was down about $21.3 million
(3%) from 1994 pro forma cost of goods sold of $657.4 million. The decrease
reflected primarily the absence of pharmaceutical cost of sales during 1995
versus about $16.6 million in the 1994 period prior to the sale of this
business, and also about $4.7 million lower petroleum additives business cost of
goods sold. The lower petroleum additives business cost of goods sold reflects
lower shipments ($35.3 million), primarily of antiknocks, lubricant additives
and other fuel additives, largely offset by higher costs ($30.6 million). The
higher costs include expenses reflecting the Company's fourth-quarter 1995
decision to terminate a supply contract early, the costs associated with the
mid-year shutdown of operations at a contract manufacturing site, costs of a
strike at Feluy, and higher per-unit raw material costs, partly offset by the
lower costs associated with starting up the recently completed facilities at
several plants (about $4.8 million in 1995 versus about $7.7 million in 1994).
Average raw materials costs increased slightly in 1995 over pro forma 1994
due to higher costs of purchased components and to foreign exchange. Average
energy costs were largely unchanged, as lower electricity and steam costs were
substantially offset by higher natural gas prices.
As a result of a 6% decrease in 1995 net sales from 1994 pro forma net
sales and a 3% decrease in 1995 cost of goods sold from 1994 pro forma cost of
goods sold, the gross profit margin decreased to 33.8% in the 1995 period from
35.5% in the 1994 period. However, excluding the impact of the pharmaceuticals
business in 1994, the gross profit margin would have been 34% in the 1994
period.
Selling, general and administrative expenses combined with research,
development and testing expenses decreased to $177.2 million in 1995 from $227.1
million in 1994. The decline reflects the absence of Albemarle and
pharmaceuticals expenses in 1995 versus their inclusion in 1994.
Selling, general and administrative expenses, including research,
development and testing expenses, in 1995 of $177.2 million were down $26.8
million (13%) from pro forma 1994 expenses of $204 million. The decrease
reflects primarily the absence of expenses of Whitby, Inc., during 1995 versus
about $31.1 million in expenses during 1994 prior to the sale of the
pharmaceuticals business in September 1994, partially offset by a $4.3 million
increase in petroleum additives expenses. This increase was primarily due to
higher research, development and testing expenses largely related to MMT
approval activities and higher salaries and benefits costs, partly offset by
lower outside consulting costs in 1995 and the 1994 charges related to closing
certain research facilities and certain organizational expenses. As a percentage
of net sales, selling, general and administrative expenses, including research,
development and testing expenses, decreased to 18.5% in 1995 from 20% on a pro
forma basis in 1994.
SPECIAL CHARGES
The $4.75 million special charge in 1995 ($4.1 million after income taxes,
or $.04 a share) reflects a provision for an anticipated legal settlement by an
Ethyl subsidiary with the civil division of the U.S. Department of Justice. The
$2.7 million of special items in 1994 ($1.7 million after income taxes, or $.01
a share) consists of an $8 million provision for future environmental
remediation and $2.7 million of other nonrecurring charges, largely offset by an
$8 million gain on the settlement of a lawsuit.
OPERATING PROFIT
Operating profit in 1995 was approximately 15% lower than during 1994,
which included two months operating profit of Albemarle. Operating profit in
1995 of $142.4 million was $12.5 million (8%) lower than 1994 pro forma
operating profit of $154.9 million. The decrease resulted from lower shipments
(approximately $25.4 million) partly offset by higher margins in antiknocks.
Lower operating profit in lubricant additives largely reflected lower shipments
and flat margins, while other fuel additives results reflected lower shipments
and lower margins. This was partly offset by higher operating profits in
refinery fuel additives due to higher shipments and margins, while antiknock
operating profit was essentially even with the prior year. Higher research,
development and testing expenses in lubricant and certain fuel additives also
contributed to the lower margins.
Further discussion of the lead antiknock profit contribution is covered
under Information About Significant Product Lines beginning on page 19.
INTEREST AND FINANCING EXPENSES
Interest and financing expenses in 1995 increased slightly from the 1994
period reflecting a lower amount of interest capitalized substantially offset by
the absence in 1995 of interest included in 1994 for two months on debt
transferred to Albemarle. Interest and financing expenses in 1995 of $26.8
million increased $4.3 million (19%) over 1994 pro forma interest and financing
expenses of $22.5 million. The increase was primarily due to a lower amount of
interest capitalized in 1995 ($5.7 million), a higher average interest rate
($0.6 million), partly offset by the impact of a lower average amount of
long-term debt outstanding during the 1995 period ($2 million).
OTHER (INCOME) EXPENSES, NET
Other (income) expenses, net, was $0.6 million income in 1995 versus $1.2
million in expenses in 1994. On a pro forma basis, other expenses would have
been $1.8 million in 1994. The $2.4 million increase in other income in 1995
from the 1994 pro forma reflects $0.8 million in additional interest income from
greater amounts invested in short-term securities in 1995 than in the 1994
period, as well as a net increase in income from various nonoperating items,
none of which was individually material.
INCOME TAXES
Income taxes in the 1995 period were $42.2 million, down about 3% from
$43.4 million in 1994 on income before income taxes that decreased almost 18%
from the prior year, largely reflecting an increase over the unusually low
effective tax rate in 1994 (36.3% in 1995 versus 30.7% in 1994). Income taxes in
1995 increased 8% from pro forma income taxes of $39.2 million in 1994, in spite
of an 11% decrease in income before income taxes due to an increase over the
previously mentioned unusually low effective income tax rate in 1994 (36.3% in
1995 versus 30% in 1994). The 1994 effective tax rate was unusually low, largely
reflecting the tax benefit on the sale of Ethyl's pharmaceuticals subsidiary,
Whitby, Inc., which had a higher tax basis than book basis. (See Note 16 of
Notes to Financial Statements on page 42 for details of changes in effective
income tax rates.)
1994 Compared to 1993
NET SALES
Net sales for 1994 were $1.17 billion, down from $1.94 billion in 1993. The
reduction in net sales resulted primarily from two months of Albemarle sales
being included in 1994 versus 12 months of Albemarle sales included in 1993.
On a pro forma basis, without the spun-off businesses, net sales for 1994
would have been $1.02 billion, down about $16 million (2%) from $1.03 billion in
1993. The decrease in pro forma net sales reflected the effect of the sale of
the pharmaceuticals business in September 1994, with pharmaceutical revenues
decreasing by about $22.9 million, partially offset by about $6.9 million in
higher sales revenue from the petroleum additives business. The increase
represents about $42.8 million from sales price increases, partly offset by
$35.9 million from lower shipments. Lubricant additives sales increased slightly
due to higher selling prices, primarily in the U.S., largely offset by lower
shipments, while lower fuel additives sales reflected lower selling prices. Lead
antiknock sales were about even with the prior year, as lower shipments were
substantially offset by higher selling prices. Other refinery fuel additives
sales increased due to higher shipments and selling prices.
COSTS AND EXPENSES
Cost of goods sold in 1994 decreased to $776.5 million from $1.39 billion
in 1993. The decline in aggregate cost of goods sold occurred primarily because
of the inclusion of two months of Albemarle cost of goods sold in 1994 versus 12
months included in 1993.
On a pro forma basis, cost of goods sold in 1994 would have been $657.4
million in 1994, down about $17.9 million (3%) from $675.3 million in 1993.
About $10.7 million of the decrease reflected lower antiknock and lubricant
additives shipments, partly offset by higher cost of goods sold per unit and
increased shipments of other refinery fuel additives. The absence of
pharmaceuticals cost of goods sold following the sale of the business also
contributed about $5.6 million to the reduction of cost of goods sold. Lubricant
additives cost of goods sold reflected higher costs per unit due in part to
start-up costs of $7.7 million associated with the construction and completion
of new and expanded lubricant additives manufacturing facilities to replace
production provided by Amoco under a short-term supply agreement, partly offset
by higher costs incurred in 1993 resulting from an inventory-reduction program.
Lead antiknock costs were higher due to product sourcing.
On a pro forma basis, average raw material unit costs were slightly lower
in 1994 than in 1993. Process oils and polybutene costs were lower, but olefin
costs increased and other raw material costs were mixed. Average energy costs
were mixed, with natural gas prices lower in 1994 than in 1993, while
electricity costs remained stable.
On a pro forma basis, the gross profit margin increased to 35.5% in 1994
from 34.8% in 1993, primarily due to improvements in lubricant additives as well
as in lead antiknocks.
Selling, general and administrative expenses including research,
development and testing expenses decreased to $227.1 million in 1994 from $348.4
million in 1993 primarily reflecting the effect of the spin-off of Albemarle.
The discontinuance of pharmaceuticals research operations of Whitby Research,
Inc., at the end of 1993 as well as the absence of Whitby, Inc., expenses
following the September sale also contributed to the decline. On a pro forma
basis, selling, general and administrative expenses, including research,
development and testing expenses, would have been $204 million in 1994, down
$7.9 million (4%) from $211.9 in 1993. The decrease primarily reflects an $8.4
million effect from the discontinuance of the pharmaceuticals research
operations of Whitby Research, Inc., at the end of 1993 and a decline of $11.4
million of Whitby, Inc., expenses after the sale of the pharmaceuticals business
in September 1994. These decreases were offset partly by a $6.4 million increase
in research, development and testing expenses for the petroleum additives
businesses and higher expenses for outside consulting. The benefit of the
work-force-reduction program implemented at the end of 1993 was largely offset
by increases in other employee related costs.
As a percentage of net sales, selling, general and administrative expenses,
including research, development and testing expenses decreased to 20% in 1994
from 20.5% in 1993.
SPECIAL CHARGES
The $2.7 million of special charges in 1994 ($1.7 million after income
taxes, or $ .01 per share) consists primarily of an $8-million provision for
future environmental remediation as well as $2.7 million in other nonrecurring
charges, largely offset by an $8 million benefit from a legal settlement.
The $36.1 million of special charges in 1993 ($22.4 million after income
taxes, or $.19 per share) resulted from the development of a Company-wide
restructuring plan which was designed to focus the Company on certain business
operations, reduce operating costs and position the Company for maximum growth
potential. These special charges would not have occurred without this
restructuring plan, which included the provisions for corporate downsizing,
plant write-down and related costs. The plant write-down was a noncash charge of
$11.4 million, which has reduced depreciation and amortization by about $1.5
million a year, but which was substantially offset by higher per-unit costs of
the lead antiknock fluids obtained through the Octel Agreement. The pro forma
special charges in 1993 would have amounted to $28.8 million ($17.8 million
after income taxes, or $.15 per share) consisting primarily of a charge of $14.2
million related to the decision to discontinue production at the Canadian
antiknock facility in 1994, (including an $11.4 noncash charge for write-down of
facilities as well as severance and other related costs), a $6 million charge
covering downsizing costs of Whitby Research, Inc., prior to sale in April 1994,
and an $8.6 million charge for various early retirement and other
work-force-reduction programs affecting approximately 175 employees in the
petroleum additives and corporate staffs in the U.S. and Europe, as well as
relocation costs for certain research and development and administrative groups.
All of the early retirements and work-force reductions were completed in early
1994, and substantially all of the relocations were completed by year-end 1994.
The differences between amounts accrued and costs incurred were de minimis.
OPERATING PROFIT
Operating profit in the 1994 period was essentially even with the 1993
period. However, 1994 included only two months of Albemarle operating profit
compared with 12 months of Albemarle operating profit in 1993. Operating profit
also reflected the impact of special charges of $2.7 million in 1994 versus
$36.1 million in 1993.
On a pro forma basis, operating profit in the 1994 period would have shown
an increase of $36 million, or 30% from 1993, of which $26.1 million was due to
lower special charges in 1994. Excluding the effects of these special charges,
pro forma operating profit in 1994 increased 7% from 1993, primarily due to
higher profit in lubricant additives, reflecting higher margins primarily
resulting from higher selling prices and improved product mix, as well as higher
pharmaceuticals profit due to the year-end 1993 shutdown of Whitby Research,
Inc. This was partly offset by lower fuel additives profit due to lower margins
and higher research, development and testing expenses for this product line.
Lead antiknock profit in 1994 improved over 1993, excluding the effect of
special charges, primarily because of higher margins in 1994.
INTEREST AND FINANCING EXPENSES
Interest and financing expenses in 1994 decreased 42% from the 1993 period
primarily reflecting the reduction of interest expense resulting from the debt
transferred to Albemarle as part of the spin-off. On a pro forma basis, 1994
interest and financing expenses would have decreased $4.2 million (16%) from
1993 due to a $2.2 million increase in interest capitalized in 1994 and a $9.6
million benefit from a lower average interest rate in 1994 due to the early
redemption of the Company's 9 3/8% sinking fund debentures in December
1993, partly offset by an increase in interest of about $7.6 million reflecting
higher average debt outstanding during the 1994 period.
OTHER EXPENSES (INCOME), NET
Other expenses (income), net, amounted to $1.2 million in expenses in 1994
versus $10 million income in 1993. On a pro forma basis, other expenses would
have been $1.8 million in 1994 versus $8.3 million income in 1993. The reduction
in other income on both a consolidated and pro forma basis primarily results
from the inclusion in 1993 of a pretax gain of about $5.9 million on the sale of
a financial-services subsidiary as well as lower interest income and certain
charges associated with the sale of Whitby, Inc., in 1994.
INCOME TAXES
Income tax expense in 1994 was essentially even with 1993, reflecting a
lower 1994 effective tax rate (30.7% in 1994 versus 32.6% in 1993) on a 6%
increase in income before income taxes, extraordinary item and discontinued
insurance operations. On a pro forma basis, income taxes in 1994 would have
increased 48%, reflecting a 30% increase in income before income taxes,
extraordinary item and discontinued insurance operations, as well as a higher
effective income tax rate (30% in 1994 versus 26.2% in 1993). Both the
consolidated and pro forma effective tax rates reflected various tax benefits
(1994-from the sale of Ethyl's pharmaceuticals subsidiary, Whitby, Inc.;
1993-from the downsizing of Whitby Research, Inc., and from the sale
of a financial-services subsidiary). The 1993 rate also included one-time
charges from 1993 tax legislation, and also reflected the absence of a tax
benefit on operating losses of the Company's former Belgian subsidiary, which
was included as part of the spin-off of Albemarle.
EXTRAORDINARY ITEM
In December 1993, the Company redeemed its $116.25 million 9 3/8%
Sinking Fund Debentures, resulting in an after-tax charge of $5 million
($.04 per share). See Note 19 of Notes to Financial Statements on page 43.
DISCONTINUED INSURANCE OPERATIONS
The Company spun off its approximate 80% interest in First Colony on July
1, 1993. Accordingly, no income from the insurance operation was reported in the
1994 period, whereas $90.5 million was reported in the 1993 period.
INFORMATION ABOUT
SIGNIFICANT PRODUCT LINES
Lead antiknock compounds, which are sold worldwide to petroleum refiners,
remain one of the Company's largest product lines. The Company estimates that it
accounts for approximately one-third of the total worldwide sales of lead
antiknock compounds.
Lead antiknock compounds have been subject to regulations restricting the
amount of the product that can be used in gasoline in the United States since
the 1970s and in Canada since 1990. The North American market for these products
in motor vehicles has effectively been eliminated, but the market for their use
in piston aircraft and certain other applications has remained at about the same
level for years and is expected to remain stable. As the Company has forecasted
and planned, the market for lead antiknock compounds in other major markets,
particularly Western Europe, continues to decline as the use of unleaded
gasoline grows.
On a consolidated basis, including prior year operations of spun-off
businesses while they were part of Ethyl, the contribution of lead antiknock
compounds to the Company's net sales was about 26% in 1995, 22% in 1994 and 13%
in 1993. The lead antiknock profit contribution to the Company's consolidated
operating profit, excluding allocation of corporate expenses, is estimated to
have been 74% in 1995, 56% in 1994 and 49% in 1993.
On a pro forma basis, excluding the spun-off businesses, the contribution
of lead antiknock compounds to net sales would have been about 25% in 1994 and
1993. On a pro forma basis, the estimated contribution to operating profit would
have been approximately 60% in 1994 and 70% in 1993.
In recent years, the Company has been able to offset a continuing decline
in shipments of lead antiknock compounds with higher margins due primarily to
increases in selling prices. Any further decline in the use of lead antiknocks
would adversely affect such sales and profit contributions unless the Company
can offset such declines with increased margins.
The Company has an agreement with The Associated Octel Company Limited
("Octel") of London, England, under which Octel allocates a portion of its
production capacity of lead antiknock compounds to the Company for sale and
distribution through the Company's worldwide network, and as a result, the
Company has discontinued production of lead antiknock compounds. The Company had
previously produced some of its lead antiknock compounds at its subsidiary's
Canadian plant, and prior to July 1994, the Company obtained additional
quantities under a supply agreement with E.I. DuPont de Nemours & Company. The
Octel agreement continues as long as the Company determines that a market
continues to exist for lead antiknock compounds. Under the agreement with Octel,
which is cancelable at the Company's option with no minimum purchase
obligations, the Company has the right to purchase from Octel antiknock
compounds which the Company estimates will be sufficient to cover its needs in
any contract year. Purchases are at a fixed price per pound with periodic
escalations and adjustments.
In addition to the supply agreement, Octel and the Company have agreed that
Ethyl will distribute for Octel any of its lead antiknock compounds that are
shipped in bulk in ocean-going vessels.
The Company believes the agreements with Octel will assure the Company of
an ongoing efficient source of supply for lead antiknock compounds as the
worldwide demand for these products continues to decline. It does not anticipate
that the absence of antiknock manufacturing operations and the entry into the
Octel supply agreement will adversely affect its relations with its customers,
nor will these changes have a material effect on its future results of
operations. The Company and Octel continue to compete vigorously in sales and
marketing of lead antiknock compounds.
The Company also sells manganese-based antiknock compounds, HiTEC 3000
performance additive (MMT), which are used in leaded and conventional unleaded
gasoline. The compounds are manufactured by Albemarle under a long-term supply
contract with Ethyl. MMT has been used in Canadian unleaded gasoline for nearly
20 years.
The following paragraphs summarize the events in the successful completion
of the Company's 17-year effort to market this fuel additive in the U.S.
The Company conducted extensive testing of this product prior to filing a
request in 1990 for a fuel-additive waiver from the U.S. Environmental
Protection Agency (EPA) which is required in order to begin marketing the
additive for use in conventional unleaded gasoline in the U.S. The Company
voluntarily withdrew its waiver application in November 1990 after public
hearings and detailed exchanges of information with the EPA, when the EPA raised
several health and environmental questions near the end of the 180-day statutory
review period. The Company continued testing and filed a new waiver request in
July 1991, followed by additional public hearings and detailed exchanges of
information with the EPA.
In January 1992, the EPA denied the Company's application for a waiver. An
appeal was filed with the United States Court of Appeals for the District of
Columbia Circuit contesting the EPA's denial of the application for a waiver for
the use of the additive in unleaded gasoline. In April 1993, the Court remanded
the case to the EPA for reconsideration within 180 days of its denial of the
Company's waiver application, directing the EPA to consider new evidence and
make a new decision.
On November 30, 1993, the EPA determined that emissions data contained in
the Company's application satisfy all Clean Air Act standards, but reported that
it was not able to complete its assessment of the overall public health
implications of manganese. The Company and the EPA mutually agreed to an 180-day
extension, subsequently extended for an additional six weeks, to resolve this
last remaining issue.
In July 1994, the EPA refused to grant the waiver for the use of the
additive in unleaded gasoline, finding that there was insufficient data to
alleviate its concerns about the overall public health implications of manganese
despite their own previous statements about favorable health effects. The
Company filed an appeal in July 1994, with the United States Court of Appeals
for the District of Columbia Circuit seeking relief from the EPA's actions. The
Court heard oral arguments in Ethyl's appeal on January 13, 1995.
On April 14, 1995, a three-judge panel ruled unanimously in Ethyl's favor
and ordered the EPA to grant the waiver for MMT. The Court's opinion noted the
Administrator of the EPA "violated the clear terms" of the Clean Air Act in
denying Ethyl's waiver application. The EPA granted the waiver on July 11, 1995.
In a related matter, a different three-judge panel of the District of
Columbia Circuit heard oral arguments on September 11, 1995, in Ethyl's lawsuit
challenging the EPA's July 13, 1994, determination that the Company must
complete additional manganese health testing before it can obtain a
"registration" under the Clean Air Act for sale of MMT as an unleaded gasoline
fuel additive. On October 20, 1995, the Court unanimously ordered the EPA to
register MMT for use in unleaded gasoline retroactively to November 30,
1993-the date on which the EPA determined that Ethyl's waiver application
satisfied all applicable Clean Air Act standards. In addition, the Court
confirmed during the proceedings that if the EPA continues to have health
concerns with reference to the product, the Clean Air Act provides adequate
provisions in which to address these issues. This decision eliminated the
last hurdle to commercial introduction of the product in the U.S.
Accordingly, in late December 1995, Ethyl began sale of MMT to the U.S.
refining industry. It is not practical to determine with certainty the degree to
which sales of MMT will increase in 1996 in the U.S., as well as in other
countries.
In May 1995, Canada's Minister of Environment introduced a bill in the
Canadian Parliament to ban the inter-provincial transport of MMT. Effectively,
passage of Bill C-94 would ban the use of MMT in that country. The Minister
reacted to unsubstantiated claims made by the Motor Vehicle Manufacturers
Association of Canada (MVMA) about MMT's compatibility with automobile exhaust
emission systems. Ethyl believes the MVMA has made its claims without the
support of credible studies or test data. The Canadian Petroleum Products
Institute supports Ethyl's view. Substantial opposition to Bill C-94 surfaced
during Canadian Parliamentary sessions in 1995. When Parliament adjourned in
mid-December 1995, Bill C-94 had not passed the House of Commons. On February 2,
1996, the Prime Minister took administrative actions in the first session of the
35th Parliament, causing all bills and motions currently before the House of
Commons and the Senate to automatically die, including Bill C-94.
On February 15, 1996, the Environmental Defense Fund (EDF) initiated a
campaign, using distortions and half-truths, to try to prevent refiners from
using MMT in the U.S. The Company will continue to aggressively defend MMT
against this or any similar campaign which attempts to handicap the marketing of
this product.
FINANCIAL CONDITION
AND LIQUIDITY
Cash and cash equivalents at December 31, 1995, were about $30 million,
which represents a decrease of about $1.2 million from $31.2 million at year-end
1994, which itself represented a decrease of $17 million from year-end 1993. The
large decrease in 1994 primarily reflected the effect of the spin-off of
Albemarle at the close of business on February 28, 1994, whereby $29.3 million
in cash and cash equivalents was included as part of the spin-off.
Cash flows from 1995 operating activities of $149.3 million, supplemented
by $1.2 million from cash on hand, were used primarily to provide funds for
capital expenditures of $44.8 million, to pay cash dividends to shareholders
totaling $59.2 million and to reduce long-term debt by $47 million.
Cash flows from 1994 operating activities of $122.2 million, together with
$47.4 million in additional long-term debt and $60.5 million from the sale of
Whitby, Inc., on September 15, 1994, were used to cover capital expenditures of
$147.3 million and cash dividends to shareholders of $62.2 million, as well as
partly replace the reduction of $29.3 million in cash and cash equivalents which
occurred as part of the spin-off of Albemarle.
Management anticipates that cash provided from operations in the future
will be sufficient to cover the Company's operating expenses, service debt
obligations and make dividend payments to shareholders.
Ethyl's long-term debt, all of which is noncurrent, amounted to $303
million at December 31, 1995, representing a reduction in long-term debt of $47
million from December 31, 1994. In September 1995, the Company refinanced its
$200 million 9.8% Notes with lower cost revolving debt. The Company's long-term
debt as a percent of long-term debt plus shareholders' equity was 42.5% at
December 31, 1995, compared to 47.2% at December 31, 1994. The Company targets a
range of 30% to 50% for its long-term debt ratio.
The Company's capital spending program over each of the next three to five
years is expected to be somewhat higher than in 1995, but lower than in 1994 and
1993, reflecting the completion of major construction and expansion programs.
Capital spending for environmental and safety projects likely will increase
somewhat from current levels, except for the portion of major construction
projects that is identified as for environmental or safety purposes, which also
will reflect the decline in spending on major projects. The capital spending
will be financed primarily with cash provided from operations.
Ethyl's acquisition searches are primarily for petroleum additives
businesses and are normally for cash, and are funded through internal and
external sources, including the use of existing credit lines and long-term debt.
On February 29, 1996, the Company completed the acquisition of the worldwide
lubricant additives business of Texaco using existing credit lines. The Company
has filed a S-3 shelf registration for up to $300 million of debt securities or
preferred stock. The proceeds from occasional sales of businesses normally are
used to repay long-term debt.
The amount and timing of additional borrowing, or issuance of stock will
depend on the Company's specific cash requirements. See Note 10 of Notes to
Financial Statements on page 37 for information on unused lines of credit.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local requirements regulating
the handling, manufacture and use of materials (some of which may be classified
as hazardous or toxic by one or more regulatory agencies), the discharge of
materials into the environment and the protection of the environment. It is the
Company's policy to comply with these requirements and to provide workplaces
that are safe, healthful and environmentally sound for employees and that will
not adversely affect the safety, health or environment of communities in which
Ethyl does business. The Company believes that as a general matter its
policies, practices and procedures are properly designed to prevent any
unreasonable risk of environmental damage, and of resulting financial liability,
in connection with its business.
To the best of the Company's knowledge, Ethyl currently is complying with,
and expects to continue to comply in every material respect with, all existing
environmental laws, regulations, statutes and ordinances, including the Clean
Air Act Amendment of 1990, even though compliance with government
pollution-abatement and safety regulations usually increases operating costs and
requires remediation costs and investment of capital that in some cases produces
no monetary return. Such compliance with federal, state, local and foreign
environmental protection laws has not in the past had, and is not expected to
have in the future, a material effect upon the Company's financial position.
Consolidated environmental operating and remediation costs charged to
expense were approximately $20 million in 1995, $31 million in 1994 and $61
million in 1993 (excluding depreciation of previous capital expenditures).
On a pro forma basis, operating and remediation costs were approximately
$24 million (which includes the $8 million environmental special charge) in 1994
and $13 million in 1993. Actual operating and remediation costs were $20 million
in 1995 and are expected to be somewhat higher in the next few years than in
1995. The ongoing cost of operations was about $14 million in 1995, while 1994
and 1993 amounted to $11 million and $6 million, respectively, on a pro forma
basis, with the balance representing remediation and monitoring costs incurred
or accrued.
Consolidated capital expenditures for pollution abatement and safety
projects, including such costs that are included in other projects, were
approximately $4 million in 1995 versus $16 million in 1994 and $30 million in
1993.
On a pro forma basis, such expenditures were $14 million in 1994 and $4
million in 1993. For each of the next few years, capital expenditures for these
types of projects are likely to range from about $3-$5 million.
Management's estimates of the effects of compliance with governmental
pollution abatement and safety regulations are subject to (1) the possibility of
changes in the applicable statutes and regulations or in judicial or
administrative construction of such statutes and regulations, (2) uncertainty as
to whether anticipated solutions to pollution problems will be successful or
whether additional expenditures may prove necessary and (3) the possibility that
emerging technology will change remediation methods and reduce remediation and
monitoring costs.
Among other environmental requirements, the Company is subject to the
federal Superfund law, and similar state laws, under which the Company may be
designated as a Potentially Responsible Party (PRP) and may be liable for a
share of the costs associated with cleaning up various hazardous waste sites.
For sites where Ethyl has been named a PRP, in all but two cases, the Company
has been able to demonstrate it is only a de minimis participant (defined as
actual or estimated cost being less than $50,000) or a minor participant
(defined as actual or estimated cost being less than $300,000). Further, almost
all such sites, including the two largest, represent environmental issues that
are quite mature. They have been investigated, studied and, in many cases,
including the two largest, the remediation methodology and the proportionate
shares of each PRP have been established. The financial viability of the other
PRPs is reasonably assured. Therefore, point estimates for remediation and
monitoring costs had been accrued previously, and some or all of the remediation
has been completed. At some sites where remediation is not complete, including
one of the largest, the remediation and monitoring probably will continue for
extended periods of time.
In de minimis PRP matters and in some minor PRP matters, the Company's
policy generally is to negotiate a consent decree and to pay any apportioned
settlement, enabling the Company to be effectively relieved of any further
liability as a PRP, except for remote contingencies.
In PRP matters other than those that are de minimis or minor, the Company's
records indicate that unresolved exposures are not material individually or in
the aggregate to Ethyl's financial position or results of operations.
The Company reviews the status of significant existing or potential
environmental issues, including PRP matters, accrues and expenses its
proportionate share of environmental remediation and monitoring costs in
accordance with FASB Statement No. 5 and FASB Interpretation No. 14, and adjusts
reserves, as appropriate, on the basis of additional information. The total
gross liabilities accrued at December 31, 1995 and 1994, were approximately
$41.6 million and $38.4 million, respectively, with insurance recoveries
expected for a significant portion of the amounts. In addition, the Company has
contingent liabilities for environmental remediation costs associated with past
operations. Management expects accrued and contingent amounts may be reduced as
emerging technologies are proved to be viable. The Company believes that the
cost of remediation of current sites, which will occur over an extended period
of time, will not have a material adverse impact on its consolidated financial
position but possibly could have a material effect when ultimately resolved, on
results of operations or liquidity in any quarterly or annual period.
INTRODUCTION TO GEOGRAPHIC AREAS: The following table includes the results and
accounts of the businesses spun off as Albemarle Corporation through the
spin-off date at the close of business on February 28, 1994.
- ---------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREAS:
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
Net sales:
Domestic unaffiliated:
United States $ 361,751 $ 502,427 $ 969,438 $ 829,432 $ 712,826
Export 178,485 217,067 338,944 352,596 323,564
Transfers to foreign affiliates 221,159 210,884 258,966 270,887 331,751
Foreign unaffiliated 420,214 454,592 630,008 510,554 498,181
Elimination of transfers $ (221,159) (210,884) (258,966) (270,887) (331,751)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 960,450 $1,174,086 $1,938,390 $1,692,582 $1,534,571
===========================================================================================================================
Operating profit:(a) (b) (c) (d) (e)
Domestic $ 134,123 $ 149,847 $ 161,590 $ 174,870 $ 178,776
Foreign 31,947 44,828 42,392 35,068 52,058
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 166,070 194,675 203,982 209,938 230,834
Unallocated expenses (23,641) (26,933) (36,377) (36,116) (38,169)
- ---------------------------------------------------------------------------------------------------------------------------
Operating profit 142,429 167,742 167,605 173,822 192,665
Interest and financing expenses (26,833) (25,378) (44,085) (62,279) (59,097)
Gain on sale of 20% of First Colony Corporation - - - 93,600 -
Other income (expenses), net 580 (1,218) 9,987 1,475 1,652
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item,
cumulative effect of accounting changes and
discontinued insurance operations $ 116,176 $ 141,146 $ 133,507 $ 206,618 $ 135,220
===========================================================================================================================
Identifiable assets:
Domestic $ 601,854 $ 642,814 $1,250,650 $1,155,860 $ 975,415
Foreign 264,973 265,506 628,830 517,390 484,498
Non-operating assets 116,960 122,095 129,718 205,648 110,592
Net assets of discontinued insurance operations - - - 658,550 909,876
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 983,787 $1,030,415 $2,009,198 $2,537,448 $2,480,381
===========================================================================================================================
Refer to notes on page 26.
GEOGRAPHIC
Domestic operating profit includes profit from U.S. export sales and profit
from sales to foreign affiliates of products that are resold in foreign markets.
Intercompany transfers from foreign areas to the United States are not material.
Transfers between geographic areas are made at prices intended to reflect
arm's-length pricing.
Net unaffiliated sales of foreign subsidiaries for 1995 decreased 8% from
1994, primarily reflecting inclusion of two months of Albemarle's sales in 1994.
Net unaffiliated sales of foreign subsidiaries for 1994 decreased 28% from 1993,
also primarily reflecting the inclusion of Albemarle's foreign unaffiliated
sales for two months in 1994 versus 12 months in 1993.
Net unaffiliated sales of foreign subsidiaries of $420.2 million in 1995
were about 2% higher than pro forma sales of $413.4 million in 1994. The
increase was due to higher shipments of lubricant additives from European
subsidiaries to Europe and the Middle East, largely offset by lower shipments of
lead antiknocks from Ethyl's Canadian subsidiary, following the discontinuance
of lead antiknock production at the Canadian lead antiknock facility in early
1994. On a pro forma basis, net unaffiliated sales of foreign subsidiaries in
1994 would have been down about 2% from some $422.7 million in 1993. Most of the
decrease was due to lower lead antiknock sales by Ethyl's Canadian subsidiary
and slightly lower sales of lubricant and fuel additives in the Far East.
Export sales decreased 18% in 1995 from 1994, primarily reflecting the
inclusion of two months of Albemarle's export sales in 1994, as well as lower
petroleum additives sales. Export sales decreased 36% in 1994 from 1993,
primarily reflecting the inclusion of only two months of Albemarle's export
sales in 1994 versus 12 months of export sales in 1993.
Export sales of $178.5 million in 1995 decreased 7% from pro forma export
sales of $191.5 million in 1994, due to lower shipments of lubricant and fuel
additives, primarily to the Far East. On a pro forma basis, export sales in 1994
were down about 2% from $194.4 million in 1993 due to lower shipments of lead
antiknocks and lubricant and fuel additives to the Far East, partly offset by
increased antiknock shipments to Latin America.
Foreign operating profit for 1995 decreased 29% from 1994, reflecting lower
operating profit from Ethyl's Canadian subsidiary following the discontinuance
of lead antiknock production and lower operating profit from Ethyl's European
subsidiaries, mainly due to lower operating margins. These were partially offset
by the inclusion of two months of operating losses of Albemarle's foreign
subsidiaries in 1994. Foreign operating profit for 1994 increased 6% from 1993,
reflecting primarily the effect of the spin-off, whereby Albemarle's foreign
subsidiaries' operating losses are included only for the first two months of
1994 versus the inclusion of 12 months of operating losses for 1993, and the
1993 special charge of $14.2 million related to the discontinuance of production
at Ethyl's Canadian subsidiary's lead antiknock facility, partially offset by
lower operating profit in 1994 following the discontinuance.
Foreign operating profit in 1995 of $31.9 million was about 32% lower than
pro forma foreign operating profit of $47.2 million in 1994. The reduction was
due to lower operating profit from Ethyl's Canadian and European subsidiaries,
mainly due to lower margins. On a pro forma basis, foreign operating profit in
1994 was down about 19% from approximately $58.1 million in 1993, because of
lower lead antiknock sales by the Company's Canadian subsidiary, partially
offset by the charge for write-down of the facility in 1993.
Total assets were $983.8 million at the end of 1995 which was a decrease of
$46.6 million (5%) from the $1,030.4 million at the end of 1994. About $43
million of the decrease was due to lower current assets in the U.S.,
reflecting lower accounts receivable partly offset by higher inventory.
Total assets were $1,030.4 million at the end of 1994, a decrease of $978.8
million from $2,009.2 million at the end of 1993, primarily reflecting the
effect of the spin-off of Albemarle.
INTRODUCTION TO SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA: The
first-quarter 1994 information includes the results of the businesses spun off
as Albemarle Corporation at the close of business on February 28, 1994.
- ---------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
(In Thousands Except Earnings Per Share) (Unaudited)
- ---------------------------------------------------------------------------------------------------------
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
Net sales $234,291 $224,530 $241,672 $259,957
Gross profit $ 82,179 $ 70,599 $ 81,918 $ 89,698
Special charge (a) $ - $ - $ 4,750 $ -
Net income $ 21,493 $ 13,006 $ 16,967 $ 22,497
Earnings per share $ .18 $ .11 $ .14 $ .19
Shares used to compute earnings per share 118,438 118,443 118,442 118,460
1994
- ---------------------------------------------------------------------------------------------------------
Net sales $389,082 $276,083 $244,935 $263,986
Gross profit $115,541 $107,763 $ 86,856 $ 87,418
Special charges (b) $ 638 $ 1,332 $ - $ 750
Net income $ 20,264 $ 30,378 $ 22,494 $ 24,619
Earnings per share $ .17 $ .26 $ .19 $ .21
Shares used to compute earnings per share 118,462 118,454 118,448 118,441
- ---------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL TABLES
(a) Operating profit for 1995 includes a net charge of $4,750 ($4,150 after
income taxes) for a legal settlement provision.
(b) Operating profit for 1994 includes a net charge of $2,720 ($1,690 after
income taxes) including a fourth-quarter environmental remediation
provision of $8,000 as well as certain other charges largely offset by an
$8,000 benefit from a fourth-quarter legal settlement.
(c) Operating profit for 1993 includes special charges totalling $36,150
($22,400 after income taxes) for the write-down of the Canadian subsidiary's
plant and other costs of $14,200, costs of a
work-force-reduction program in the U.S. and Europe amounting to $7,635
and $14,315 for downsizing costs of Whitby Research, Inc., and
relocation of employees and other related costs.
(d) Operating profit for 1992 includes a special charge of $9,500 ($6,000
after income taxes) for expenses covering the 1994 relocation of
Petroleum Additives Division research and development personnel from
St. Louis, Missouri, to Richmond, Virginia.
(e) Operating profit for 1991 includes special charges of $4,835 ($3,000
after income taxes) for expenses covering the 1992 relocation of the
Petroleum Additives Division headquarters to Richmond, and $6,350
($4,000 after income taxes) for expenses and write-offs resulting from the
discontinuance of certain developmental research programs.
HOW ETHYL USED THE REVENUES IT RECEIVED (1994 EXCLUDES SPUN-OFF OPERATIONS)
[PIE CHARTS SHOWING PERCENTAGES FOR 1995 AND 1994 WERE PART OF TABLE]
- ------------------------------------------------------------------------------------------
(In Millions) (Unaudited)
1995 1994
---------------------------------------------
[] Materials, services, etc. $629.8 65.5% $ 682.5 67.1%
[] Payrolls & employee benefits 119.2 12.4 119.6 11.8
[] Dividends declared 59.2 6.2 59.2 5.8
[] Current income & other taxes 41.6 4.3 41.6 4.1
[] Interest expense 26.8 2.8 22.5 2.2
[] For use in the business including
expansion & modernization 84.4 8.8 91.9 9.0
- ------------------------------------------------------------------------------------------
Total revenues $961.0 100.0% $1,017.3 100.0%
==========================================================================================
DIVIDEND INFORMATION & EQUITY
PER COMMON SHARE
Ethyl's current quarterly common stock dividend rate of $.125 per share, or
$.50 on an annual basis, reflects the March 3, 1994 adjustment by the Company's
board of directors of the prior common stock dividend rate to reflect the effect
of the dividend to be paid by Albemarle Corporation, which was spun-off at the
close of business on February 28, 1994. The combination of Ethyl's current
quarterly dividend rate of $.125 per share or $.50 on an annual basis and the
Albemarle dividend, established at the time of the spin-off, equals the annual
dividend rate prior to the spin-off.
Equity per common share at December 31, 1995, was $3.46. This reflects an
increase of about 5% from $3.30 at December 31, 1994.
MARKET PRICES OF COMMON STOCK
& SHAREHOLDER DATA
The Company's common stock is traded primarily on the New York Stock Exchange
under the symbol EY. The reported high and low prices by quarters for the years
1995 and 1994 are shown in the following table.
1995 1994
- ----------------------------------------------------------------------
High Low High Low
- ----------------------------------------------------------------------
First Quarter 11 9 1/2 19 5/8 11 1/8
Second Quarter 12 3/8 10 1/4 13 3/4 11
Third Quarter 11 13/16 10 5/8 13 5/8 10 3/4
Fourth Quarter 13 1/8 10 7/8 11 3/4 9 1/2
- ----------------------------------------------------------------------
The first-quarter 1994 common-stock-price high was reached before the
spin-off of Ethyl's wholly owned subsidiary, Albemarle Corporation, at the close
of business on February 28, 1994. Shareholders of record on that date received
one share of Albemarle common stock for every two shares of Ethyl common stock
held. There were 118,414,769 shares of Ethyl common stock outstanding on
February 28, 1994, the distribution date.
There were 118,443,835 shares of common stock held by 13,079 shareholders of
record as of December 31, 1995.
CONSOLIDATED BALANCE SHEETS
INTRODUCTION TO THE CONSOLIDATED FINANCIAL STATEMENTS: At the close of business
on February 28, 1994, the Company completed the spin-off of its wholly owned
subsidiary, Albemarle Corporation. The operating results of what is now
Albemarle are included in the Consolidated Statements of Income, Consolidated
Statements of Shareholders' Equity and Consolidated Statements of Cash Flows for
the two months ended February 28, 1994, and the full year 1993. The Company is
including certain pro forma financial statements to illustrate the Company's
prior year's estimated financial results excluding the operations and accounts
of the businesses spun off (see Note 2 beginning on page 34).
- ------------------------------------------------------------------------------
(In Thousands of Dollars Except Share Data)
- ------------------------------------------------------------------------------
December 31 1995 1994
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 29,972 $ 31,166
Accounts receivable, less allowance for doubtful
accounts (1995 - $2,317; 1994 - $2,395) 169,451 229,477
Inventories:
Finished goods 134,087 118,731
Work-in-process 11,923 9,959
Raw materials 13,285 10,842
Stores, supplies and other 6,587 5,531
- ------------------------------------------------------------------------------
165,882 145,063
Deferred income taxes and prepaid expenses 23,207 25,744
- ------------------------------------------------------------------------------
Total current assets 388,512 431,450
- ------------------------------------------------------------------------------
Property, plant and equipment, at cost 713,635 684,379
Less accumulated depreciation and amortization (285,327) (250,012)
- ------------------------------------------------------------------------------
Net property, plant and equipment 428,308 434,367
- ------------------------------------------------------------------------------
Other assets and deferred charges 151,833 144,856
Goodwill and other intangibles - net of amortization 15,134 19,742
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 983,787 $1,030,415
==============================================================================
See accompanying notes to financial statements.
Ethyl Corporation & Subsidiaries
- -----------------------------------------------------------------------------
December 31 1995 1994
- -----------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 55,903 $ 77,223
Accrued expenses 58,682 73,118
Dividends payable 14,806 14,807
Income taxes payable 16,379 17,652
- -----------------------------------------------------------------------------
Total current liabilities 145,770 182,800
- -----------------------------------------------------------------------------
Long-term debt 302,973 349,766
Other noncurrent liabilities 84,171 78,902
Deferred income taxes 40,745 28,010
Shareholders' equity:
Common stock ($1 par value)
Issued - 118,443,835 in 1995 and
118,434,401 in 1994 118,444 118,434
Additional paid-in capital 2,799 2,706
Foreign currency translation adjustments 2,090 (2,253)
Retained earnings 286,795 272,050
- -----------------------------------------------------------------------------
410,128 390,937
- -----------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $983,787 $1,030,415
=============================================================================
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per-Share Amounts) Ethyl Corporation & Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $960,450 $1,174,086 $1,938,390
Cost of goods sold 636,056 776,508 1,386,251
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 324,394 397,578 552,139
Selling, general and administrative expenses 100,062 144,455 221,384
Research, development and testing expenses 77,153 82,661 127,000
Special charges 4,750 2,720 36,150
- ---------------------------------------------------------------------------------------------------------------------------
Operating profit 142,429 167,742 167,605
Interest and financing expenses 26,833 25,378 44,085
Other (income) expenses, net (580) 1,218 (9,987)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item
and discontinued insurance operations 116,176 141,146 133,507
Income taxes 42,213 43,391 43,485
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item
and discontinued insurance operations 73,963 97,755 90,022
Extraordinary after-tax charge due to early extinguishment of debt - - (5,000)
- ---------------------------------------------------------------------------------------------------------------------------
Income before discontinued insurance operations 73,963 97,755 85,022
Income from discontinued insurance operations - - 90,483
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 73,963 $ 97,755 $ 175,505
===========================================================================================================================
Earnings per share:
Income before extraordinary item and discontinued insurance operations $ .62 $ .83 $ .76
Extraordinary item - - (.04)
- ---------------------------------------------------------------------------------------------------------------------------
Income before discontinued insurance operations .62 .83 .72
Income from discontinued insurance operations - - .76
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ .62 $ .83 $ 1.48
===========================================================================================================================
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands of Dollars Except Share Data) Ethyl Corporation & Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Shares Amounts
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
(AUTHORIZED 400,000,000 SHARES)
Beginning balance 118,434,401 $118,434 118,405,287 $ 118,405 118,357,515 $ 118,358
Issued upon exercise of stock options
and SARs 9,434 10 75,723 76 75,714 75
Purchased and retired - - (46,609) (47) (27,942) (28)
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance 118,443,835 118,444 118,434,401 118,434 118,405,287 118,405
===========================================================================================================================
ADDITIONAL PAID-IN CAPITAL
Beginning balance 2,706 2,450 1,708
Exercise of stock options and SARs 93 858 1,374
Retirement of purchased common stock - (602) (621)
Distribution of common stock under bonus plan - - (11)
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance 2,799 2,706 2,450
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Beginning balance (2,253) (1,757) 9,840
Translation adjustments 4,343 3,647 (11,597)
Spin-off of Albemarle Corporation - (4,143) -
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance 2,090 (2,253) (1,757)
- ----------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAIN ON MARKETABLE EQUITY SECURITIES
Beginning balance - - 64,901
Unrealized gains - - 13,326
Spin-off of First Colony Corporation - - (78,227)
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance - - -
- ----------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Beginning balance 272,050 633,483 1,206,472
Net income 73,963 97,755 175,505
Cash dividends declared:
First Preferred stock, $6.00 per share - (12) (12)
Common stock, $.50 per share in 1995 and 1994
and $.60 per share in 1993 (59,218) (59,215) (71,033)
Dividend of common stock of Albemarle Corporation,
at book value - (399,957) -
Dividend of common stock of First Colony Corporation,
at book value - - (677,449)
Redemption of 6% First Preferred stock - (4) -
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance 286,795 272,050 633,483
TOTAL SHAREHOLDERS' EQUITY $410,128 $ 390,937 $ 752,581
===========================================================================================================================
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars) Ethyl Corporation & Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 31,166 $ 48,201 $ 162,988
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (earnings before discontinued insurance operations in 1993) 73,963 97,755 85,022
Adjustments to reconcile income to cash flows from operating activities:
Depreciation and amortization 49,224 53,983 127,456
Special charges 4,750 10,720 36,150
Gain on sale of subsidiary - (4,150) (6,121)
Deferred income taxes 15,714 10,262 (7,663)
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable 64,771 (29,701) (16,268)
(Increase) decrease in inventories (15,560) 9,166 (918)
(Increase) in prepaid expenses (2,366) (5,516) (999)
(Decrease) in accounts payable and accrued expenses (37,948) (2,621) (13,686)
(Decrease) in income taxes payable (1,208) (6,903) (2,454)
Income-tax payment on 1992 gain on sale of 20% of First Colony Corporation - - (60,552)
Other, net (2,003) (10,775) 166
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided from operating activities
(before discontinued insurance operations in 1993) 149,337 122,220 140,133
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (44,831) (147,260) (205,029)
Acquisitions of businesses (net of $5,369 cash acquired in 1993) - - (125,431)
Proceeds from sale of subsidiary - 60,500 10,000
Other, net 217 (8,234) 537
- ---------------------------------------------------------------------------------------------------------------------------
Cash (used in) investing activities
(before discontinued insurance operations in 1993) (44,614) (94,994) (319,923)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional long-term debt 153,000 47,400 360,448
Repayment of long-term debt (200,000) - (230,355)
Cash dividends paid (59,220) (62,184) (71,037)
Cash and cash equivalents of Albemarle spun off as a dividend on February 28, 1994 - (29,332) -
Repurchases of capital stock - (649) (649)
Other, net 303 504 1,448
- ---------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided from financing activities
(before discontinued insurance operations in 1993) (105,917) (44,261) 59,855
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in operations (before discontinued insurance operations in 1993) (1,194) (17,035) (119,935)
Cash provided by discontinued insurance operations - - 5,148
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalents (1,194) (17,035) (114,787)
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,972 $ 31,166 $ 48,201
===========================================================================================================================
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
Ethyl Corporation & Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
CONSOLIDATION - The consolidated financial statements include the accounts
and operations of Ethyl Corporation and all of its subsidiaries (the Company).
All significant intercompany accounts and transactions are eliminated in
consolidation.
BASIS OF PRESENTATION - At the close of business on February 28, 1994, the
Company completed the spin-off of its wholly owned subsidiary, Albemarle
Corporation (Albemarle), in the form of a tax-free stock dividend to Ethyl
common shareholders. The operating results of what is now Albemarle are included
in the Consolidated Statements of Income, Consolidated Statements of
Shareholders' Equity and the Consolidated Statements of Cash Flows and related
notes to financial statements for the two months ended February 28, 1994, and
the full year 1993.
On July 1, 1993, the Company completed the spin-off of its then 80-percent
interest in First Colony Corporation (First Colony) in the form of tax-free
stock dividend to Ethyl common shareholders. The Company has accounted for the
financial results of First Colony prior to the spin-off as a discontinued
insurance operation in accordance with Accounting Principles Board (APB) Opinion
No. 30.
FOREIGN CURRENCY TRANSLATION - The financial statements of all foreign
subsidiaries were prepared in their respective local currencies and translated
into U.S. dollars based on the current exchange rate at the end of the period
for the balance sheet and a weighted-average rate for the period on the
statement of income. Translation adjustments (net of deferred income tax
benefits of $262,000, $1,481,000 and $1,164,000 in 1995, 1994 and 1993,
respectively), are reflected as foreign currency translation adjustments in
Shareholders' Equity and accordingly have no effect on net income. Transaction
adjustments for all foreign subsidiaries are included in income.
INVENTORIES - Inventories are stated at the lower of cost or market, with
cost determined on the last-in, first-out (LIFO) basis for substantially all
domestic inventories, and on either the weighted-average cost or first-in,
first-out basis for other inventories. Cost elements included in work-in-process
and finished-goods inventories are raw materials, direct labor and manufacturing
overhead. Raw materials include purchase and delivery costs. Stores and supplies
include purchase costs.
PROPERTY, PLANT & EQUIPMENT - Accounts include costs of assets constructed or
purchased, related delivery and installation costs and interest incurred on
significant capital projects during their construction periods. Expenditures for
renewals and betterments also are capitalized, but expenditures for repairs and
maintenance are expensed as incurred. The cost and accumulated depreciation
applicable to assets retired or sold are removed from the respective accounts,
and gains or losses therein are included in income. Depreciation is computed
primarily by the straight-line method based on the estimated useful lives of the
assets.
The Company re-evaluates property, plant and equipment based on fair values
or undiscounted operating cash flows whenever significant events or changes
occur which might impair recovery of recorded costs, and it writes down recorded
costs of the assets to fair value when recorded costs, prior to impairment, are
higher.
ENVIRONMENTAL COMPLIANCE & REMEDIATION - Environmental compliance costs
include the costs of purchasing and/or constructing assets to prevent, limit and
control pollution or to monitor the environmental status at various locations.
These costs are capitalized and depreciated based on estimated useful lives.
Environmental compliance costs also include maintenance and operating costs
with respect to pollution-prevention-and-control facilities and administrative
costs. Such operating costs are expensed as incurred.
Environmental remediation costs of facilities used in current operations are
generally immaterial and are expensed as incurred. Remediation costs and
post-remediation costs including post-remediation monitoring costs at
facilities or off-plant disposal sites that relate to an existing condition
caused primarily by past operations are accrued as liabilities and expensed when
costs can be reasonably estimated.
GOODWILL & OTHER INTANGIBLES - Goodwill acquired prior to November 1, 1970
($1,652,000) is not being amortized. Goodwill acquired subsequently ($8,500,000
and $9,815,000 at December 31, 1995 and 1994, respectively, net of accumulated
amortization) is being amortized on a straight-line basis, over a period of 10
years. Other intangibles ($4,982,000 and $8,275,000 at December 31, 1995 and
1994, respectively, net of accumulated amortization) are being amortized on a
straight-line basis primarily over periods from three to seven years.
Amortization of goodwill and other intangibles amounted to $4,504,000 for 1995,
$9,379,000 for 1994 and $14,464,000 for 1993. Accumulated amortization of
goodwill and other intangibles was $17,760,000 and $13,256,000 at the end of
1995 and 1994, respectively.
The Company re-evaluates goodwill and other intangibles based on fair values
or undiscounted operating cash flows whenever significant events or changes
occur which might impair recovery of recorded costs, and it writes down recorded
costs of the assets to fair value when recorded costs, prior to impairment, are
higher.
NOTES TO FINANCIAL STATEMENTS
PENSION PLANS & OTHER POSTEMPLOYMENT BENEFITS - Annual costs of pension plans
are determined actuarially based on Financial Accounting Standards Board (FASB)
Statement No. 87, "Employers' Accounting for Pensions." The policy of the
Company is to fund its U.S. pension plans at amounts not less than the minimum
requirements of the Employee Retirement Income Security Act of 1974. Annual
costs of other postretirement plans are accounted for based on FASB Statement
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The policy of the Company is to fund its postretirement health
benefits for retirees on a pay-as-you-go basis. Annual costs of other
postemployment plans for employees who leave the Company for reasons other than
retirement are immaterial and are accounted for based on FASB Statement No. 112,
"Employers' Accounting for Postemployment Benefits." The Company's policy is to
fund such benefits on a pay-as-you-go basis.
PROFIT SHARING & EMPLOYEE SAVINGS PLAN - The Company's employees participate
in the Ethyl-defined contribution 401(k) profit-sharing and employee savings
plan, which is generally available to all full-time and non-union hourly
employees. Certain other employees are covered by a collective bargaining
agreement pursuant to the terms of such agreement. The plans are funded with
contributions by participants and the Company. Expenses recorded for the 401(k)
plans in 1995, 1994 and 1993 were $2,352,000, $2,879,000 and $7,478,000,
respectively.
RESEARCH, DEVELOPMENT & TESTING EXPENSES - Company-sponsored research,
development and testing expenses related to present and future products are
expensed currently as incurred. Research and development expenses determined in
accordance with FASB Statement No. 2, "Accounting for Research and Development
Costs," were $54.5 million, $49.7 million and $75.6 million in 1995, 1994 and
1993, respectively.
INCOME TAXES - Income taxes are determined based on FASB Statement No. 109,
"Accounting for Income Taxes." Deferred tax liabilities and assets are
recognized for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax liabilities
and assets are determined based on differences between financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
DERIVATIVE INSTRUMENTS & HEDGING OF FOREIGN CURRENCY EXPOSURES - The
Company's current policy is not to make use of derivative financial instruments
but rather to manage foreign currency exposure by attempting to maintain assets
and liabilities in approximate balance for each of the major foreign currencies
to which the Company has risk exposure. At December 31, 1995, the Company was
not a party to any derivative financial instruments.
EARNINGS PER SHARE - Earnings per share is computed after deducting
applicable preferred stock dividends from net income and using the
weighted-average number of shares of common stock and common stock equivalents
outstanding during the year. The numbers of shares used in computing earnings
per share were 118,446,000 in 1995, 118,451,000 in 1994 and 118,436,000 in 1993.
2. SPIN-OFF OF ALBEMARLE CORPORATION:
- --------------------------------------------------------------------------------
At the close of business on February 28, 1994, Ethyl completed the spin-off
of its wholly owned subsidiary, Albemarle, in the form of a tax-free stock
dividend. Following the spin-off, Albemarle owned, directly or indirectly, the
olefins and derivatives, bromine chemicals and specialty chemicals businesses
formerly owned directly or indirectly by the Company. One share of Albemarle
common stock was distributed to Ethyl common shareholders for every two shares
of Ethyl common stock held.
SUPPLEMENTAL PRO FORMA CONDENSED STATEMENTS OF INCOME (UNAUDITED) - As a result
of the aforementioned distribution, the Company believes that the following pro
forma Condensed Statements of Income are important to enable the reader to
obtain a meaningful understanding of the Company's prior year's results of
operations. The pro forma Condensed Statements of Income are for informational
purposes only to illustrate the estimated effects of the distribution of
Albemarle on Ethyl on a stand-alone basis and may not necessarily reflect what
the earnings or results of operations of Ethyl would have been had Albemarle
operated as a separate, independent company.
PRO FORMA CONDENSED STATEMENTS OF INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per-Share Amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
1994 1993
Pro Pro
Years Ended December 31 Historical Adjustments(a) Forma Historical Adjustments(a) Forma
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $1,174,086 $(155,064) $1,019,022 $1,938,390 $(903,418) $1,034,972
Cost of goods sold 776,508 (119,086) 657,422 1,386,251 (710,970) 675,281
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 397,578 (35,978) 361,600 552,139 (192,448) 359,691
Selling, general & administrative expenses 144,455 (14,471) 129,984 221,384 (85,470) 135,914
Research, development & testing expenses 82,661 (8,662) 73,999 127,000 (50,994) 76,006
Special charges 2,720 - 2,720 36,150 (7,322) 28,828
- ----------------------------------------------------------------------------------------------------------------------------------
Operating profit 167,742 (12,845) 154,897 167,605 (48,662) 118,943
Interest & financing expenses 25,378 (2,873)(b) 22,505 44,085 (17,358)(b) 26,727
Other expenses (income), net 1,218 543 1,761 (9,987) 1,640 (8,347)
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item and
discontinued insurance operations 141,146 (10,515) 130,631 133,507 (32,944) 100,563
Income taxes 43,391 (4,239)(c) 39,152 43,485 (17,098)(c) 26,387
- ----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
discontinued insurance operations $ 97,755 $ (6,276) $ 91,479 $ 90,022 $ (15,846) $ 74,176
==================================================================================================================================
Earnings per share based on income
before extraordinary item and
discontinued insurance operations (d) $ .83 $ .78 $ .76 $ .63
==================================================================================================================================
INTRODUCTION TO NOTES: The following is a summary of the adjustments reflected
in the pro forma condensed Statements of Income. Following the distribution, in
the opinion of management, expenses of Ethyl would not have differed materially
from the amounts remaining in the Ethyl consolidated financial statements after
eliminating those expenses attributable to Albemarle.
NOTES:
(a) To eliminate the historical income and expenses of Albemarle for the
respective periods presented, as if the distribution had occurred on January
1, 1993.
(b) To eliminate interest expense that would have been incurred by Albemarle on
debt transferred to Albemarle (as if the distribution had occurred on
January 1, 1993), including debt under the credit facility transferred
from Ethyl. Interest eliminated under the credit facility was computed at
the weighted-average interest rates of 3.8% and 3.6% for the two months
ended February 28, 1994, and the year ended December 31, 1993,
respectively, less capitalized interest of $124,000 and $1,101,000,
respectively. Interest rates used to calculate the Albemarle interest
eliminated under the credit facility are those rates that were available
to Ethyl under its revolving credit agreement during the respective
periods presented. Such rates were used because, during management's
negotiations to obtain the credit facility, the rates available to Ethyl
and Albemarle on a stand-alone basis were approximately the same.
Management was advised that these rates would have been the same during the
respective periods presented.
(c) To record the estimated income-tax effect for the pro forma adjustments
described in Notes (a) and (b) for the two months ended February 28, 1994,
and the year ended December 31, 1993, respectively.
(d) Historical and pro forma earnings per share, based on income
before discontinued insurance operations and extraordinary item are computed
after deducting applicable preferred-stock dividends from such income and
using the weighted-average number of shares of common stock and common-stock
equivalents outstanding for the periods presented.
3. SUPPLEMENTAL CASH-FLOW INFORMATION:
- --------------------------------------------------------------------------------
Supplemental information for the Consolidated Statements of Cash Flows is as
follows:
(In Thousands)
1995 1994 1993
- ---------------------------------------------------------------------
Cash paid during the year for:
Income taxes $22,881 $ 45,513 $110,867
Interest and financing expenses
(net of capitalization) 31,390 24,118 45,352
Supplemental investing and
financing non-cash transactions:
Dividend of common stock
of Albemarle Corporation -
at book value - 399,957 -
Dividend of common stock
of First Colony Corporation -
at book value - - 677,449
Assumption of liabilities in
connection with the acquisition
of Potasse et Produits Chimiques
(PPC) in February 1993 - - 49,000
Also see Notes 2 and 20 with respect to spun-off operations.
4. GEOGRAPHIC AREAS:
- --------------------------------------------------------------------------------
The geographic areas table on page 24 (and the related notes on page 26) is
an integral part of the consolidated financial statements. Information about the
Company's geographic areas is presented for the years 1991-1995. The discussion
of geographic areas information is unaudited.
5. CASH & CASH EQUIVALENTS:
- -------------------------------------------------------------------
Cash and cash equivalents consist of the following:
(In Thousands)
1995 1994
- -------------------------------------------------------------------
Cash and time deposits $21,167 $31,166
Short-term securities 8,805 -
- -------------------------------------------------------------------
Total $29,972 $31,166
===================================================================
Short-term securities (generally commercial paper maturing in less than 90
days) are stated at cost plus accrued income, which approximates market value.
6. INVENTORIES:
- --------------------------------------------------------------------------------
Domestic inventories stated on the LIFO basis amounted to $58,750,000 and
$49,889,000 at December 31, 1995 and 1994, respectively, which are below
replacement cost by approximately $20,310,000 and $17,080,000, respectively.
7. DEFERRED INCOME TAXES & PREPAID EXPENSES:
- --------------------------------------------------------------------------------
Deferred income taxes and prepaid expenses consist of the following:
(In Thousands)
1995 1994
- ----------------------------------------------------------------
Deferred income taxes - current $15,499 $20,404
Prepaid expenses 7,708 5,340
- ----------------------------------------------------------------
Total $23,207 $25,744
================================================================
8. PROPERTY, PLANT & EQUIPMENT, AT COST:
- --------------------------------------------------------------------------------
Property, plant and equipment, at cost, consist of the following:
(In Thousands)
1995 1994
- --------------------------------------------------------------
Land $ 49,346 $ 48,781
Land improvements 29,516 27,947
Buildings 94,270 94,224
Machinery and equipment 489,511 408,982
Capitalized interest 21,004 19,283
Construction in progress 29,988 85,162
- --------------------------------------------------------------
Total $713,635 $684,379
- --------------------------------------------------------------
The cost of the property, plant and equipment is depreciated, generally by
the straight-line method, over the following useful lives:
Land improvements 5-30 years
Buildings 10-40 years
Machinery and equipment 3-25 years
Interest capitalized on significant capital projects in 1995, 1994 and 1993
was $2,223,000, $8,060,000 and $6,864,000, respectively, while amortization of
capitalized interest (which is included in depreciation expense) was $1,878,000,
$1,294,000 and $3,246,000, respectively.
9. ACCRUED EXPENSES:
- --------------------------------------------------------------------------------
Accrued expenses consist of the following:
(In Thousands)
1995 1994
- ----------------------------------------------------------------
Employee benefits, payroll and
related taxes $13,078 $11,871
Other 45,604 61,247
- ----------------------------------------------------------------
Total $58,682 $73,118
================================================================
10. LONG-TERM DEBT:
- --------------------------------------------------------------------------------
A summary of long-term debt maturities at December 31, 1995, is listed below:
(In Thousands)
Variable-
Variable- Rate
Rate Medium-
Bank Term
Loans Notes Total
- --------------------------------------------------------------------------------
1996 -
1997 $ 6,750 $ 6,750
1998 6,750 6,750
1999 6,750 6,750
2000 $270,000 6,750 276,750
2001 6,750 6,750
- --------------------------------------------------------------------------------
$270,000 $33,750 303,750
================================================================================
Less unamortized discount (777)
- --------------------------------------------------------------------------------
Total long-term debt at December 31, 1995 $302,973
================================================================================
The Company has an unsecured competitive advance and revolving credit
facility agreement with a group of banks permitting it to borrow up to $500
million. Fees of up to 3/8 of 1% per annum are assessed on the unused portion of
the commitment. The credit facility permits borrowing for the next four years at
various interest rate options. The facility contains a number of covenants,
representations and events of default typical of a credit facility agreement of
this size and nature, including financial covenants requiring the Company to
maintain consolidated indebtedness (as defined) of not more than 60% of the sum
of shareholders' equity (as defined) and consolidated indebtedness and
maintenance of minimum shareholders' equity of at least $250 million. The
Company was in compliance with such covenants at December 31, 1995. Under this
agreement, $270 million was borrowed at December 31, 1995. Amounts outstanding
at February 16, 2000, mature on that date. Average interest rates on
variable-rate bank loans during 1995 and 1994 were 6.4% and 4.5%, respectively.
The Company also has four uncommitted agreements with banks providing for
immediate borrowings up to a maximum of $155 million at the individual bank's
money-market rate. No amounts were borrowed under these agreements at December
31, 1995. The average interest rates on borrowings during 1995 and 1994 under
these agreements were 6.1% and 4.0%, respectively.
The Company's $33.75-million variable-rate (ranging from 8.6% to 8.86%)
Medium-Term Notes were issued in five series (1 through 5) of $6.75 million
each, which are due annually in serial order at 100% of their principal amount,
beginning December 15, 1997, through December 15, 2001.
11. OTHER NONCURRENT LIABILITIES:
- ----------------------------------------------------------------
Other noncurrent liabilities consist of the following:
(In Thousands)
1995 1994
- ----------------------------------------------------------------
Provision for environmental remediation
and future shutdown costs $52,511 $47,609
Other 31,660 31,293
- ----------------------------------------------------------------
Total $84,171 $78,902
================================================================
12. CAPITAL STOCK:
- --------------------------------------------------------------------------------
SHAREHOLDER RIGHTS PLAN - Pursuant to a Rights Agreement dated September 24,
1987, the Company distributed one Preferred Stock, Series B purchase right
("Right") for each outstanding share of Common Stock to the shareholders of
record on October 5, 1987. Unless the Board of Directors directs otherwise, one
additional Right will be issued with respect to each additional share of Common
Stock issued prior to the occurrence of certain potential change-in-control
events. The Rights become exercisable upon certain potential change-in-control
events. When exercisable, the Rights entitle holders to purchase 2.522
one-thousandth of a share (subject to adjustment) of Preferred Stock, Series B,
and upon the occurrence of certain events, the Rights entitle holders to
purchase shares of Common Stock at a substantial discount. Exercise of the
Rights will cause substantial dilution to a person or group attempting to
acquire control of the Company without the approval of the Board of Directors.
The Board of Directors may, under certain circumstances, cause the Company to
redeem the Rights in whole, but not in part, at a price of $.01 per Right. The
Rights expire on September 24, 1997, if not redeemed earlier. The Rights have no
voting or dividend privileges. Until such time as the Rights become exercisable,
they are attached to and do not trade separately from the Common Stock.
STOCK-OPTION PLAN - The Company has an incentive stock-option plan, whereby
incentive stock options and nonqualifying stock options may be granted to
officers and other key employees to purchase a specified number of shares of
common stock at a price not less than the fair market value on the date of grant
and for a term not to exceed 10 years. Certain options become exercisable upon
the attainment of specified earnings objectives or market price appreciation of
the Company's common stock. The remaining options become exercisable one year
after the grant date. In addition to the stock options, the optionee also may be
granted a stock appreciation right (SAR). To date, SARs generally have been
granted for the same number of shares subject to related options. During 1994,
the Board of Directors of the Company unanimously adopted and the shareholders
approved an amendment to the Company's incentive stock option plan increasing
the number of shares issuable under the option plan by 5,900,000 to 11,900,000
and established an annual limit of 200,000 on the number of shares for which
options may be granted to an individual. Activity in 1993, 1994 and 1995 is
shown below:
Shares Option Prices
- ---------------------------------------------------------------------
Outstanding at January 1, 1993 653,518 $20.07-$31.49
Adjustments for First Colony spin-off 238,711 $13.22-$20.73
Exercised (71,865) $13.22-$28.74
Surrendered upon exercise of SARs (59,212) $14.49-$26.13
Lapsed (153,539) $15.94-$31.49
- ---------------------------------------------------------------------
Outstanding at December 31, 1993 607,613 $13.22-$20.73
Granted 3,042,000 $ 12.50
Adjustment for Albemarle spin-off 168,650 $ 9.00-$14.11
Exercised (73,475) $ 9.00-$17.20
Surrendered upon exercise of SARs (48,402) $ 9.86-$18.85
Lapsed (413,112) $ 9.86-$20.73
- ---------------------------------------------------------------------
Outstanding at December 31, 1994 3,283,274 $ 9.00-$14.11
Exercised (9,434) $ 10.85
- ---------------------------------------------------------------------
Outstanding at December 31, 1995 3,273,840 $ 9.00-$14.11
=====================================================================
All of the unexercised options and related SARs granted prior to 1994 were
exercisable at December 31, 1995, while 582,400 of the stock options and related
SARs granted in 1994 were exercisable at December 31, 1995. On December 31, 1994
and 1995, 6,156,014 shares were available for grant.
During 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." This standard, which will be
effective for the fiscal year ended December 31, 1996, defines a fair value
method of accounting for employee stock option plans and similar equity
instruments, but also allows for continued use of present accounting standards
for measuring expense for the employee compensation costs of these plans.
Entities electing to remain with present accounting standards to measure costs
must make certain pro forma disclosures as if the fair value based method had
been applied. The Company plans to continue recognizing expense for employee
stock-based compensation under the current APB Opinion No. 25 methodology and
expects incremental pro forma amounts disclosed to be immaterial to 1996
earnings.
REDEEMABLE PREFERRED STOCK - The Cumulative First Preferred 6% Series A stock
of 2002 shares, which was previously outstanding, was called for redemption in
December 1994 at $101 per share, plus accrued dividends.
13. GAINS ON FOREIGN CURRENCY:
- --------------------------------------------------------------------------------
Foreign currency transaction adjustments resulted in gains of $1,827,000 in
1995, $1,968,000 in 1994 and $1,725,000 in 1993 and are included in income.
14. CONTRACTUAL COMMITMENTS & CONTINGENCIES:
- --------------------------------------------------------------------------------
Rental expense was $13,703,000 for 1995, $17,120,000 for 1994 and $29,680,000
for 1993.
The Company has a number of operating lease agreements primarily for office
space, transportation equipment and storage facilities.
Future lease payments for the next five years for all noncancelable leases as
of December 31, 1995, are $8,481,000 for 1996, $5,152,000 for 1997, $2,005,000
for 1998, $1,133,000 for 1999, $865,000 for 2000, and amounts payable after 2000
are $3,907,000.
Contractual obligations for plant construction and purchases of real property
and equipment amounted to approximately $10,600,000 at December 31, 1995.
The Company and Albemarle entered into agreements, dated as of February 28,
1994, pursuant to which the Company and Albemarle agreed to coordinate certain
facilities and services of adjacent operating sites at plants in Orangeburg,
South Carolina; Houston, Texas; and Feluy, Belgium. In addition, the Company and
Albemarle entered into agreements providing for the blending by Albemarle of
Ethyl's additive products and the production of antioxidants and manganese-based
antiknock compounds at the Orangeburg plant. Ethyl was billed approximately $48
million in connection with these agreements during both 1995 and 1994.
The Company is from time to time subject to routine litigation incidental to
its business. The Company is not a party to any pending litigation proceedings
that are expected to have a materially adverse effect on the Company's results
of operations or financial condition. Further, no additional disclosures are
required in conformity with FASB Statement No. 5, "Accounting for
Contingencies," due to immateriality.
At December 31, 1995 and 1994, the Company had accruals of $41,600,000 and
$38,400,000, respectively, for environmental liabilities. In developing its
estimates of environmental remediation and monitoring costs, the Company
considers, among other things, risk-based assessments of the contamination,
currently available technological solutions, alternative cleanup methods, and
prior Company experience in remediation of contaminated sites, all of which are
based on presently enacted laws and regulations. Amounts accrued do not take
into consideration claims for recoveries from insurance. Although studies have
not been completed for certain sites, some amounts generally are estimated to be
expended over extended periods. When specific amounts within a range cannot be
determined, the Company has accrued the minimum amount in that range.
Environmental exposures are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of regulations,
lack of reliable data, multiplicity of possible solutions, and length of time.
As the scope of the Company's environmental contingencies becomes more clearly
defined, it is possible that expenditures in excess of those amounts already
accrued may be necessary. However, management believes that these overall costs
are expected to be incurred over an extended period of time and, as a result,
such contingencies are not expected to have a material impact on the
consolidated financial position or liquidity of the Company, but they could have
a material adverse effect on the Company's results of operations in any given
future quarterly or annual period.
15. PENSION PLANS & OTHER POSTRETIREMENT BENEFITS:
- --------------------------------------------------------------------------------
U.S. PENSION PLANS - The Company has noncontributory defined-benefit pension
plans covering most U.S. employees. The benefits for these plans are based
primarily on years of service and employees' compensation. The Company's funding
policy complies with the requirements of federal law and regulations. Plan
assets consist principally of common stock, U.S. government and corporate
obligations and group annuity contracts. The pension information for all periods
includes amounts related to the Company's salaried plan and to the hourly plans.
The major changes from 1993 to 1994 in the following tables reflect the
effects of the spin-off of Albemarle at the close of business on February 28,
1994, with the related wage-roll plans and a portion of the salaried plan
identified with employees who were transferred to Albemarle. Some of the changes
from 1994 to 1995 reflect the absence of the impact of the Albemarle plans in
1995 versus the inclusion of two months' effects in 1994.
As a result of the spin-off, plan assets and projected benefit obligations
reported at December 31, 1993, were reduced by $286,035,000 and $240,278,000,
respectively, as of January 1, 1994. The expected returns and interest cost
reported for 1994 and 1995 are computed based upon the lesser amounts.
The components of net pension income are as follows:
(In Thousands)
Years ended December 31 1995 1994 1993
- -------------------------------------------------------------------
Return on plan assets:
Actual return $48,411 $ 32,018 $ 50,130
Actual return (higher)
lower than expected (17,612) 3,256 3,679
- -------------------------------------------------------------------
Expected return 30,799 35,274 53,809
Amortization of transition asset 4,277 4,730 6,995
Service cost (benefits earned
during the year) (2,821) (5,462) (12,355)
Interest cost on projected
benefit obligation (22,753) (24,122) (36,978)
Amortization of prior
service costs (2,683) (2,958) (4,318)
- -------------------------------------------------------------------
Net pension income $ 6,819 $ 7,462 $ 7,153
===================================================================
Amortization of the transition asset is based on the amount determined at the
date of adoption of FASB Statement No. 87.
Net pension income and plan obligations are calculated using assumptions of
estimated discount and interest rates and rates of projected increases in
compensation. The discount rate on projected benefit obligations was primarily
assumed to be 7.0% at December 31, 1995, 8.25% at December 31, 1994, and 6.75%
at December 31, 1993. The assumed interest rate at the beginning of each year
is the same as the discount rate at the end of each prior year. The rates of
projected compensation increase were assumed to be primarily 4.5% at December
31, 1995, 1994 and 1993. The expected long-term rate of return on plan assets
was assumed to be primarily 9% each year. Net pension income (preceding page)
is determined using assumptions as of the beginning of each year. Funded status
(table below) is determined using assumptions as of the end of each year.
The following table presents a reconciliation of the funded status of the
U.S. pension plans to prepaid pension expense, which is included in "Other
assets and deferred charges:"
(In Thousands)
Years ended December 31 1995 1994
- ----------------------------------------------------------------
Plan assets at fair value $387,484 $367,471
Less actuarial present value of
benefit obligations:
Accumulated benefit obligation
(including vested benefits of
$298,293 and $271,458, respectively) 302,079 274,346
Projected compensation increase 18,015 13,666
- ----------------------------------------------------------------
Projected benefit obligation 320,094 288,012
Plan assets in excess of projected
benefit obligation 67,390 79,459
Unrecognized net loss (gain) 1,609 (16,087)
Unrecognized transition asset being
amortized principally over 16 years (26,584) (30,861)
Unrecognized prior-service costs
being amortized 22,897 24,992
- ----------------------------------------------------------------
Prepaid pension expense $ 65,312 $ 57,503
================================================================
One of the Company's U.S. pension plans is the supplemental executive
retirement plan (SERP), which is an unfunded defined benefit plan. The actuarial
present value of accumulated benefit obligations related to the Company's SERP
totalled $11,999,000 and $10,263,000 at December 31, 1995 and 1994,
respectively. The prepaid pension expense asset in the table above is net of an
accrued pension expense liability of $10,443,000 and $9,255,000 related to the
SERP at December 31, 1995 and 1994, respectively. Pension expense for the SERP
totalled $1,456,000, $1,459,000 and $1,550,000 for 1995, 1994 and 1993,
respectively.
FOREIGN PENSION PLANS - Pension coverage for employees of the Company's
foreign subsidiaries is provided through separate plans. Obligations under such
plans are systematically provided for by depositing funds with trustees or under
insurance policies. 1995, 1994 and 1993 pension cost for these plans was
$1,195,000, $3,317,000 and $2,265,000, respectively. The actuarial present value
of accumulated benefits at December 31, 1995 and 1994, was $15,570,000 and
$12,159,000, substantially all of which was vested, compared with net assets
available for benefits of $18,811,000 and $15,571,000, respectively.
CONSOLIDATED - Consolidated net pension income for 1995, 1994 and 1993 was
$5,624,000, $4,145,000 and $4,888,000, respectively.
OTHER POSTRETIREMENT BENEFITS - The Company also provides postretirement
medical benefits and life insurance for certain groups of retired employees
which it accounts for based on FASB Statement No. 106.
The Company continues to fund medical and life insurance benefit costs
principally on a pay-as-you-go basis. Although the availability of medical
coverage after retirement varies for different groups of employees, the majority
of employees who retire from the Company before becoming eligible for Medicare
can continue group coverage by paying the full cost of a composite monthly
premium designed to cover the claims incurred by active and retired employees.
The availability of group coverage for Medicare-eligible retirees also varies by
employee group with coverage designed either to supplement or coordinate with
Medicare. Retirees generally pay a portion of the cost of the coverage.
The components of net periodic postretirement benefit cost are as follows:
(In Thousands)
Years ended December 31 1995 1994
- -----------------------------------------------------------------------
Service cost (benefits attributed to employee
service during the year) $ (720) $(1,789)
Interest cost on accumulated postretirement
benefit obligation (3,654) (4,419)
Amortization of prior service cost 72 -
Actual return on plan assets 2,309 2,101
- -----------------------------------------------------------------------
Net periodic postretirement benefit cost $(1,993) $(4,107)
=======================================================================
Summary information on the Company's plans is as follows:
(In Thousands)
Years ended December 31 1995 1994
- ----------------------------------------------------------------------
Accumulated postretirement benefit
obligation (APBO) for:
Retirees $40,277 $41,985
Fully eligible, active plan participants 2,669 2,008
Other active plan participants 10,163 7,709
- ----------------------------------------------------------------------
53,109 51,702
Plan assets at fair value (25,615) (24,447)
Unrecognized prior service cost 863 -
Unrecognized net (loss) gain (270) 717
- ----------------------------------------------------------------------
Accrued postretirement benefit cost $28,087 $27,972
======================================================================
Plan assets are held under an insurance contract and reserved for retiree
life-insurance benefits.
As a result of the spin-off, plan assets and projected benefit
obligations reported at December 31, 1993, were reduced by approximately
$7,242,000 and $46,002,000, respectively, as of January 1, 1994. The
expected returns and interest costs reported for 1995 and 1994 are computed
based on the lesser amounts.
The discount rate used in determining the APBO was 7.0% at December 31, 1995,
8.25% at December 31, 1994 and 6.75% at December 31, 1993. The expected
long-term rate of return on plan assets used in determining the net periodic
postretirement benefit cost was 9% in 1995 and 1994, and the estimated pay
increase was 4.5% at December 31, 1995, 1994 and 1993. The assumed health-care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 14% in 1993, 13% in 1994 and 12% in 1995, declining by 1% per
year to an ultimate rate of 7%, except that managed-care costs were assumed to
begin at 11% in 1993, 10% in 1994 and 9% in 1995, declining by 1% per year to
6%.
If the health-care cost-trend rate assumptions were increased by 1%, the
APBO, as of December 31, 1995, would be increased by approximately $3.1 million.
The effect of this change on the sum of the service cost and interest cost
components of net periodic postretirement benefit cost for 1995 would be an
increase of about $0.3 million.
CHANGES IN ESTIMATES - The lower discount rate at December 31, 1995,
increased the pension accumulated benefit obligation by about $31.3 million and
the pension projected benefit obligation by about $33.2 million. The lower
discount rate at December 31, 1995, increased the postretirement accumulated
benefit obligation by approximately $6.3 million. The rate-change effects on net
pension income and postretirement benefit costs are not material to the
Company's financial statements.
16. INCOME TAXES:
- --------------------------------------------------------------------------------
Income before income taxes, extraordinary item and discontinued insurance
operations, and current and deferred income taxes are composed of the following:
(In Thousands)
Years ended December 31 1995 1994 1993
- -------------------------------------------------------------------
Income before income taxes,
extraordinary item and
discontinued insurance
operations:
Domestic $ 90,409 $103,083 $121,486
Foreign 25,767 38,063 12,021
- -------------------------------------------------------------------
Total $116,176 $141,146 $133,507
===================================================================
Current income taxes:
Federal $ 15,442 $ 19,451 $ 33,195
State 2,409 3,109 4,171
Foreign 8,648 10,569 13,782
- -------------------------------------------------------------------
Total 26,499 33,129 51,148
- -------------------------------------------------------------------
Deferred income taxes:
Federal 12,002 6,180 (10,944)
State 1,427 (45) (282)
Foreign 2,285 4,127 3,563
- -------------------------------------------------------------------
Total 15,714 10,262 (7,663)
- -------------------------------------------------------------------
Total income taxes $ 42,213 $ 43,391 $ 43,485
===================================================================
The significant differences between the U.S. federal statutory rate and the
effective income tax rate are as follows:
% of Income
Before Income Taxes
- ----------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit 2.1 1.8 1.9
Foreign sales corporation benefit (0.6) (1.2) (1.8)
Research tax credit (1.7) - -
Provision for legal settlement 0.9 - -
Gain on sale of subsidiary - (3.8) (1.7)
Deferred-tax benefit attributable to
Whitby Research downsizing - - (7.0)
Higher net tax on foreign related
operations primarily due to absence
of tax benefit on significant losses
of Belgian subsidiary - - 3.9
Increase in federal deferred taxes to
enacted 35% rate - - 1.8
Other items, net 0.6 (1.1) 0.5
- ----------------------------------------------------------------------
Effective income tax rate 36.3% 30.7% 32.6%
======================================================================
Deferred income taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes, using the
liability or balance sheet method. Such temporary differences result primarily
from differences between the financial statement carrying amounts and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
Federal income tax legislation enacted in 1993 increased the corporate income
tax rate to 35% retroactive to January 1, 1993. This rate was applied to all
future years and resulted in an increase in the deferred income tax liability
and a decrease in net income of $2.3 million, or $.02 per share in 1993. The
deferred income tax assets and deferred income tax liabilities recorded on
the balance sheets as of December 31, 1995 and 1994, are as follows:
(In Thousands)
Deferred tax assets: 1995 1994
- ----------------------------------------------------------------
Environmental reserves $14,720 $12,892
Future employee benefits 3,873 3,903
Undistributed earnings of
foreign subsidiaries 5,657 7,267
Intercompany profit in inventories 3,497 4,916
Inventory capitalization 905 654
Facilities write-down and other costs 2,758 5,555
Foreign currency translation adjustment 262 1,481
Other 3,887 3,510
- ----------------------------------------------------------------
Deferred tax assets 35,559 40,178
- ----------------------------------------------------------------
Deferred tax liabilities:
Depreciation 36,063 25,259
Future employee benefits 14,302 11,441
Capitalization of interest 1,287 2,011
Other 9,153 9,073
- ----------------------------------------------------------------
Deferred tax liabilities 60,805 47,784
- ----------------------------------------------------------------
Net deferred tax liabilities $25,246 $ 7,606
================================================================
Reconciliation to financial statements:
Current tax assets $15,499 $20,404
Deferred tax liabilities 40,745 28,010
- ----------------------------------------------------------------
Net deferred tax liabilities $25,246 $ 7,606
================================================================
Based on current U.S. income tax rates, it is anticipated that no additional
U.S. income taxes would be incurred if the unremitted earnings of the
Company's foreign subsidiaries were remitted to Ethyl Corporation due to
available foreign tax credits.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
- --------------------------------------------------------------------------------
The following methods and estimates were used by the Company in estimating
the fair values of its outstanding financial instruments in conformity with the
disclosure requirements of FASB Statement No. 107, "Disclosures About Fair Value
of Financial Instruments."
CASH & CASH EQUIVALENTS - The carrying value approximates fair value.
LONG-TERM DEBT - The fair value of the Company's long-term debt is estimated
based on current rates available to the Company for debt of the same remaining
duration.
The estimated fair values of Ethyl's financial instruments are as follows:
(In Thousands)
Carrying Fair
Value Value
- ------------------------------------------------------------
December 31, 1995
Cash and cash equivalents $ 29,972 $ 29,972
Long-term debt, including
current maturities $302,973 $306,279
December 31, 1994
Cash and cash equivalents $ 31,166 $ 31,166
Long-term debt, including
current maturities $349,766 $360,489
18. SPECIAL CHARGES:
- --------------------------------------------------------------------------------
A special charge in 1995 amounting to $4,750,000 ($4,150,000 after income
taxes, or $0.04 per share) covered a provision for the cost of an expected legal
settlement by a subsidiary.
Special charges in 1994 amounted to $2,720,000 ($1,690,000 after income
taxes, or $.01 per share) consisting of a charge of $10,720,000 primarily for a
provision for environmental remediation as well as other costs largely offset by
the benefit of an $8,000,000 legal settlement.
Special charges for 1993 amounted to $36,150,000 ($22,400,000 after income
taxes, or $.19 per share), of which $14,200,000 was incurred for plant
write-down and other related costs in connection with the Company's decision to
discontinue production of lead antiknock compounds at Ethyl's subsidiary's
Sarnia, Ontario, plant. This decision resulted from entering into an agreement
with The Associated Octel Company whereby Ethyl is assured of an ample long-term
supply of lead antiknock compounds. The remainder of the special charges related
to costs of work-force reductions in the U.S. and Europe amounting to $7,635,000
and $14,315,000 for downsizing costs of Whitby Research, Inc., relocation of
employees and other miscellaneous costs.
19. EXTRAORDINARY CHARGE:
- --------------------------------------------------------------------------------
The extraordinary charge of $5,000,000, or $.04 per share (net of income
taxes of $3,000,000), due to early extinguishment of debt results from the
Company redeeming its $116.25-million 93/8% Sinking Fund Debentures due December
15, 2016, on December 15, 1993, at a redemption price of $105.081 of the
principal amount and the write-off of remaining deferred financing costs
associated with the sinking fund debt.
20. DISCONTINUED INSURANCE OPERATIONS:
- --------------------------------------------------------------------------------
On July 1, 1993, the Company's 80-percent investment in First Colony
Corporation was spun off in a tax-free distribution to the Company's
shareholders. The distribution consisted of the net assets of the Company's
investment in First Colony Corporation totaling $757,211,000 less unrealized
gains on marketable equity securities amounting to $78,227,000 (net of deferred
income taxes of $40,299,000) and retroactive income tax charges of $1,535,000
due to a change in federal tax legislation.
The results of operations during the first six months of 1993 were as
follows:
STATEMENT OF INCOME (In Thousands)
Six Months
Ended
June 30,
1993
- --------------------------------------------------------------------
Revenues $737,137
Benefits and expenses 566,174
- --------------------------------------------------------------------
Income before income taxes 170,963
Income taxes 58,316
- --------------------------------------------------------------------
Net income 112,647
Less provision for minority interest 22,164
- --------------------------------------------------------------------
Income from discontinued
insurance operations $ 90,483
====================================================================
21. SUBSEQUENT EVENT:
- --------------------------------------------------------------------------------
ACQUISITION OF TEXACO LUBRICANT ADDITIVES BUSINESS (UNAUDITED) - On February 29,
1996, the Company completed the acquisition of the worldwide lubricant additives
business of Texaco Inc., including manufacturing and blending facilities,
identifiable intangibles and working capital. The acquisition, to be accounted
for under the purchase method, included a cash payment of $135.9 million
(subject to adjustment based on final working capital determinations) and a
future contingent payment of up to $60 million. The cash payment was financed
primarily under the Company's revolving credit agreement. The payment of up to
$60 million will become due on February 26, 1999, with interest payable on the
contingent debt until such date. The actual amount of the contingent payment and
total interest will be determined using an agreed-upon formula based on volumes
of certain acquired product lines shipped during the calendar years 1996 through
1998, as specified in the contingent note agreement. Texaco retained
substantially all noncurrent liabilities.
MANAGEMENT'S REPORT ON THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Ethyl Corporation & Subsidiaries
Ethyl Corporation's management has prepared the financial statements and
related notes appearing on pages 28 through 44 in conformity with generally
accepted accounting principles. In so doing, management makes informed judgments
and estimates of the expected effects of certain events and transactions on the
reported amounts of assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Financial data appearing elsewhere in this annual report are
consistent with these financial statements. However, actual results could differ
from the estimates on which these financial statements are based.
The Company maintains a system of internal controls to provide reasonable,
but not absolute, assurance of the reliability of the financial records and the
protection of assets. The internal control system is supported by written
policies and procedures, careful selection and training of qualified personnel
and an extensive internal audit program.
These financial statements have been audited by Coopers & Lybrand, L.L.P.,
independent certified public accountants. Their audit was made in accordance
with generally accepted auditing standards and included a review of Ethyl's
internal accounting controls to the extent considered necessary to determine
audit procedures.
The audit committee of the board of directors, composed only of outside
directors, meets with management, internal auditors and the independent
accountants to review accounting, auditing and financial reporting matters. The
independent accountants are appointed by the board on recommendation of the
audit committee, subject to shareholder approval.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
certified public accountants Riverfront Plaza West in principal areas
901 East Byrd Street of the world
Suite 1200
Richmond, Virginia 23219
Telephone (804) 697-1900
TO THE BOARD OF DIRECTORS & SHAREHOLDERS OF ETHYL CORPORATION
We have audited the accompanying consolidated balance sheets of Ethyl
Corporation and Subsidiaries (the Company) as of December 31, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ethyl
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
January 29, 1996
FIVE-YEAR SUMMARY
Ethyl Corporation & Subsidiaries
- --------------------------------------------------------------------------------
INTRODUCTION TO THE FIVE-YEAR SUMMARY: The following Five-Year Summary includes
the results of the businesses spun off as Albemarle Corporation through the
spin-off date at the close of business on February 28, 1994. The financial
position and other data after that date reflect the impact of the spin-off of
Albemarle. The results and net assets of the Insurance segment, spun off on July
1, 1993, are reported as discontinued insurance operations.
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per-Share Amounts)
Years Ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales $960,450 $1,174,086 $1,938,390
Costs and expenses 813,271 1,003,624 1,734,635
Special charges (1) 4,750 2,720 36,150
- ----------------------------------------------------------------------------------------------------------------------------------
Operating profit 142,429 167,742 167,605
Interest and financing expenses 26,833 25,378 44,085
Gain on sale of 20% of First Colony Corporation (2) - - -
Other (income) expenses, net (580) 1,218 (9,987)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary charge,
cumulative effect of accounting changes and discontinued
insurance operations 116,176 141,146 133,507
Income taxes 42,213 43,391 43,485
- ----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge, cumulative effect of accounting
changes and discontinued insurance operations 73,963 97,755 90,022
Extraordinary after-tax charge due to early extinguishment of debt (3) - - (5,000)
Cumulative effect of accounting changes for: (4)
Postretirement health-care benefits (net of tax) - - -
Deferred income taxes - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Income before discontinued insurance operations 73,963 97,755 85,022
Income from discontinued insurance operations - - 90,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 73,963 $ 97,755 $ 175,505
==================================================================================================================================
FINANCIAL POSITION AND OTHER DATA
Total assets - before discontinued insurance operations $983,787 $1,030,415 $2,009,198
Net assets of discontinued insurance operations - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total $983,787 $1,030,415 $2,009,198
==================================================================================================================================
Continuing Operations:
Working capital $242,742 $ 248,650 $ 407,182
Current ratio 2.67 to 1 2.36 to 1 2.25 to 1
Depreciation and amortization $ 49,224 $ 53,983 $ 127,456
Capital expenditures 44,831 147,260 205,029
Acquisitions of businesses - - 125,431
Gross margin as a % of net sales 33.8 33.9 28.5
Research, development and testing expenses (5) $ 77,153 $ 82,661 $ 127,000
Long-term debt (6) 302,973 349,766 686,986
Redeemable preferred stock - - 200
Common and other shareholders' equity 410,128 390,937 752,581
Long-term debt as a % of total capitalization (6) 42.5 47.2 47.7
Net income as a % of shareholders' equity 18.5 17.1 16.3
COMMON STOCK
Earnings per share:
Income before extraordinary charge, cumulative effect
of accounting changes and discontinued insurance operations $ .62 $ .83 $ .76
Extraordinary charge - - (.04)
Cumulative effect of accounting changes - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Income before discontinued insurance operations .62 .83 .72
Income from discontinued insurance operations - - .76
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ .62 $ .83 $ 1.48
==================================================================================================================================
Shares used to compute earnings per share 118,446 118,451 118,436
Dividends per share:
Cash dividends declared $ .50 $ .50 $ .60
Dividend of common stock of Albemarle Corporation, at book value - 3.38 -
Dividend of common stock of First Colony Corporation, at book value - - 5.72
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ .50 $ 3.88 $ 6.32
==================================================================================================================================
Equity per share (7) $ 3.46 $ 3.30 $ 6.36
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per-Share Amounts)
Years Ended December 31 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales $1,692,582 $1,534,571
Costs and expenses 1,509,260 1,330,721
Special charges (1) 9,500 11,185
- ----------------------------------------------------------------------------------------------------------------------------
Operating profit 173,822 192,665
Interest and financing expenses 62,279 59,097
Gain on sale of 20% of First Colony Corporation (2) (93,600) -
Other (income) expenses, net (1,475) (1,652)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary charge,
cumulative effect of accounting changes and discontinued
insurance operations 206,618 135,220
Income taxes 99,373 41,168
- ----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge, cumulative effect of accounting
changes and discontinued insurance operations 107,245 94,052
Extraordinary after-tax charge due to early extinguishment of debt (3) - -
Cumulative effect of accounting changes for: (4)
Postretirement health-care benefits (net of tax) (34,348) -
Deferred income taxes 19,616 -
- ----------------------------------------------------------------------------------------------------------------------------
Income before discontinued insurance operations 92,513 94,052
Income from discontinued insurance operations 162,472 112,616
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 254,985 $ 206,668
============================================================================================================================
FINANCIAL POSITION AND OTHER DATA
Total assets - before discontinued insurance operations $1,878,898 $1,570,505
Net assets of discontinued insurance operations 658,550 909,876
- ----------------------------------------------------------------------------------------------------------------------------
Total $2,537,448 $2,480,381
============================================================================================================================
Continuing Operations:
Working capital $ 327,840 $ 318,716
Current ratio 1.71 to 1 2.25 to 1
Depreciation and amortization $ 105,765 $ 89,879
Capital expenditures 157,412 166,148
Acquisitions of businesses 136,500 24,035
Gross margin as a % of net sales 29.2 31.9
Research, development and testing expenses (5) $ 111,698 $ 114,732
Long-term debt (6) 711,736 810,849
Redeemable preferred stock 200 200
Common and other shareholders' equity 1,401,279 1,219,313
Long-term debt as a % of total capitalization (6) 33.7 39.9
Net income as a % of shareholders' equity 19.5 18.2
COMMON STOCK
Earnings per share:
Income before extraordinary charge, cumulative effect
of accounting changes and discontinued insurance operations $ .90 $ .80
Extraordinary charge - -
Cumulative effect of accounting changes (.12) -
- ----------------------------------------------------------------------------------------------------------------------------
Income before discontinued insurance operations .78 .80
Income from discontinued insurance operations 1.37 .95
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 2.15 $ 1.75
============================================================================================================================
Shares used to compute earnings per share 118,380 118,380
Dividends per share:
Cash dividends declared $ .60 $ .60
Dividend of common stock of Albemarle Corporation, at book value - -
Dividend of common stock of First Colony Corporation, at book value - -
- ----------------------------------------------------------------------------------------------------------------------------
Total $ .60 $ .60
============================================================================================================================
Equity per share (7) $ 11.84 $ 10.31
- ----------------------------------------------------------------------------------------------------------------------------
(1) Special charge in 1995 consists of a provision for a legal settlement
($4,150 after income taxes). 1994 consists of $10,720 primarily for a
provision for environmental remediation as well as other costs, largely
offset by the benefit of an $8,000 legal settlement (totalling $1,690 after
income taxes). 1993 includes the write-down of the Canadian plant and other
related costs of $14,200, costs of work-force reductions in the U.S. and
Europe amounting to $7,635, and $14,315 for downsizing costs of Whitby
Research, Inc., and relocation of employees and other related costs
(totalling $22,400 after income taxes). 1992 includes charges for the
relocation of the Petroleum Additives Division R&D personnel ($6,000 after
taxes). 1991 includes expenses and write-offs of $6,350 resulting from the
discontinuance of certain developmental research programs as well as
expenses of $4,835 covering the relocation of the Petroleum Additives
Division headquarters ($7,000 after income taxes).
(2) Resulted from the December 1992 sale of approximately 20% of First Colony
Corporation stock ($30,200 after income taxes).
(3) The extraordinary after-tax charge is the result of the early redemption
of the $116,250, 9-3/8% Sinking Fund Debentures, net of income taxes of
$3,000.
(4) Change in accounting for postretirement health benefits ($54,460 before
income taxes) and deferred income taxes in accordance with FASB Statements
No. 106 and 109,respectively, adopted effective January 1, 1992.
(5) Research and development expenses determined in accordance with FASB
Statement No. 2 were $54,475 for 1995, $49,651 for 1994, $75,624 for 1993,
$73,831 for 1992 and $69,119 for 1991.
(6) The reduction in long-term debt in 1994 reflects $384,924 of debt
transferred to Albemarle at the close of business on February 28, 1994.
Excluding the debt and net assets of the businesses spun off, the
consolidated debt-to-total-capitalization ratio at December 31, 1993,
would have been 46.2%. 1992 includes $250 million of debt of First Colony
Corporation spun off July 1, 1993.
(7) Based on the number of common shares outstanding at the end of each year.
The decline in 1994 reflects the dividend of common stock of Albemarle
Corporation of $3.38 per share at book value. The decline in 1993 reflects
the dividend of common stock of First Colony Corporation of $5.72 per share
at book value.