Page 1 of 59 pages
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Transition Period from to
For Quarter Ended September 30, 1998 Commission File Number 1-5112
ETHYL CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-0118820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH FOURTH STREET
P. O. BOX 2189
RICHMOND, VIRGINIA 23218-2189
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (804) 788-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Number of shares of common stock, $1 par value, outstanding as of October 31,
1998: 83,465,460.
ETHYL CORPORATION
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 3-4
Consolidated Statements of Income - Three Months and
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Financial Statements 7-10
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11-17
PART II. OTHER INFORMATION
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
EXHIBIT INDEX 20
EXHIBIT 10 Antiknock Marketing and Sales Agreement between
Ethyl Corporation and The Associated Octel Company
Limited 21-59
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30
1998 December 31
ASSETS (unaudited) 1997
----------- -----------
Current assets:
Cash and cash equivalents $ 11,265 $ 18,162
Accounts receivable, less allowance for doubtful
accounts ($1,847 in 1998 and $2,349 in 1997) 168,419 165,259
Inventories:
Finished goods and work-in-process 176,371 166,089
Raw materials 22,406 20,001
Stores, supplies and other 8,913 7,746
----------- -----------
207,690 193,836
Deferred income taxes and prepaid expenses 21,235 21,857
----------- -----------
Total current assets 408,609 399,114
----------- -----------
Property, plant and equipment, at cost 779,191 766,413
Less accumulated depreciation and amortization (394,039) (357,316)
----------- -----------
Net property, plant and equipment 385,152 409,097
----------- -----------
Other assets and deferred charges 182,140 179,918
Goodwill and other intangibles - net of amortization 102,481 79,148
----------- -----------
Total assets $ 1,078,382 $ 1,067,277
=========== ===========
See accompanying notes to financial statements.
3
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September
1998 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) 1997
----------- ------------
Current liabilities:
Accounts payable $ 69,288 $ 66,573
Accrued expenses 54,014 50,743
Dividends payable 5,217 5,217
Long-term debt, current portion 35,741 46,707
Income taxes payable 21,619 11,188
----------- -----------
Total current liabilities 185,879 180,428
----------- -----------
Long-term debt 555,637 594,429
Other noncurrent liabilities 88,658 86,308
Deferred income taxes 65,755 61,514
Shareholders' equity
Common stock ($1 par value)
Issued - 83,465,460 in 1998 and 1997 83,465 83,465
Accumulated other comprehensive (loss) income (5,447) 1,705
Retained earnings 104,435 59,428
----------- -----------
182,453 144,598
----------- -----------
Total liabilities and shareholders' equity $ 1,078,382 $ 1,067,277
=========== ===========
See accompanying notes to financial statements.
4
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 285,282 $ 254,074 $ 756,466 $ 789,123
Cost of goods sold 200,256 184,360 550,775 564,013
--------- --------- --------- ---------
Gross profit 85,026 69,714 205,691 225,110
Selling, general and administrative expenses 19,554 21,150 58,780 67,079
Research, development and testing expenses 16,718 15,883 49,256 48,675
Special items (income, net) (9,817) - (4,885) -
--------- --------- --------- ---------
Operating profit 58,571 32,681 102,540 109,356
Interest and financing expenses 10,072 4,926 30,754 15,489
Other income, net (430) (590) (22,750) (947)
--------- --------- --------- ---------
Income before income taxes 48,929 28,345 94,536 94,814
Income taxes 18,131 9,499 33,879 33,441
--------- --------- --------- ---------
Net income $ 30,798 $ 18,846 $ 60,657 $ 61,373
========= ========= ========= =========
Basic and diluted earnings per share $ .37 $ .16 $ .73 $ .52
========= ========= ========= =========
Shares used to compute basic earnings per share 83,465 118,444 83,465 118,444
========= ========= ========= =========
Cash dividends per share of common stock $ .0625 $ .125 $ .1875 $ .375
========= ========= ========= =========
See accompanying notes to financial statements.
5
ETHYL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Nine Months Ended
September 30
-------------------
1998 1997
--------- ---------
Cash and cash equivalents at beginning of year $ 18,162 $ 20,148
--------- ---------
Cash flows from operating activities:
Net income 60,657 61,373
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 46,561 46,887
Special charge 3,986 -
Gain on sale of certain non-operating assets (14,631) -
Working capital (increases) decreases (17,931) 16,372
Other, net 2,385 (9,383)
--------- ---------
Cash provided from operating activities 81,027 115,249
--------- ---------
Cash flows from investing activities:
Capital expenditures (19,429) (28,446)
Proceeds from sale of certain non-operating assets 25,562 -
Other, net (407) 372
--------- ---------
Cash provided from (used in) investing activities 5,726 (28,074)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (78,000) (50,000)
Cash dividends paid (15,650) (44,417)
--------- ---------
Cash used in financing activities (93,650) (94,417)
--------- ---------
Decrease in cash and cash equivalents (6,897) (7,242)
--------- ---------
Cash and cash equivalents at end of period $ 11,265 $ 12,906
========= =========
Supplemental investing and financing non-cash transactions
Increase in intangibles related to the recognition of
a portion of the contingent note payable to Texaco
Inc. (Including deferred interest costs of $3,798) (31,923) -
Recognition of portion of contingent note payable to
Texaco, Inc. 28,125 -
See accompanying notes to financial statements.
6
ETHYL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(In Thousands Except Per-Share Amounts)
(Unaudited)
1. In the opinion of management, the accompanying consolidated financial
statements of Ethyl Corporation and Subsidiaries (the "Company") contain
all adjustments necessary to present fairly, in all material respects, the
Company's consolidated financial position as of September 30, 1998 and the
consolidated results of operations for the three and nine-month periods
ended September 30, 1998 and 1997 and the consolidated cash flows for the
nine-month periods ended September 30, 1998 and 1997. All adjustments are
of a normal, recurring nature. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the December 31, 1997 Annual Report. The December 31, 1997
consolidated balance sheet data was derived from audited financial
statements but does not include all disclosures required by generally
accepted accounting principles. The results of operations for the
nine-month period ended September 30, 1998 are not necessarily indicative
of the results to be expected for the full year.
2. On October 2, 1997, the Company purchased 34,999,995 shares of its common
stock at $9.25 per share with the purchase price and related costs totaling
about $328.9 million. The purchase was financed under the Company's $750
million Competitive Advance, Revolving Credit Facility and Term Loan
Agreement which increased the committed funds available for borrowing.
As the Company's September 30, 1997 results of operations do not include
any effects of the purchase of the 34,999,995 shares, the following
selected unaudited pro forma information is being provided to present a
summary of the results of operations of the Company as if the purchase of
shares had occurred as of January 1, 1997. The pro forma information gives
effect to adjustments for the reduction in outstanding shares, interest
expense for additional debt and related income tax impact that would have
been incurred to finance the purchase of the shares. The pro forma data is
for informational purposes only and may not necessarily reflect the
financial position or results of operations of the Company had the purchase
of shares occurred on January 1, 1997.
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
Net income $ 15,520 $ 51,431
Basic and diluted earnings
per share $.19 $.62
Shares used to compute
earnings per share 83,444 83,444
7
3. Long-term debt consists of the following: September 30, December 31,
1998 1997
---- ----
Variable-rate bank loans (average effective
interest rate was 6.3% for the nine-month
period ended September 30, 1998 and 6.1% for
the year 1997) $524,000 $602,000
5.99% Note payable to Texaco 40,625 12,500
8.6% to 8.86% Medium-term notes due through 2001 27,000 27,000
------- -------
Total long-term debt 591,625 641,500
Less unamortized discount (247) (364)
------- -------
Net long-term debt 591,378 641,136
Less current portion (35,741) (46,707)
------- -------
Long-term debt $555,637 $594,429
======= =======
The Company has a contingent note payable to Texaco Inc. of up to $60
million that is associated with Ethyl's 1996 acquisition of Texaco's
worldwide lubricant additives business. The actual amount of the note
is being determined using an agreed-upon formula based on volumes of
certain acquired product lines shipped during calendar years 1996
through 1998. Based on actual shipments through September 30, 1998,
$40.6 million of the contingent note was included in long-term debt.
Management has classified the note as long term pursuant to the
Company's ability and intent to refinance the obligation on a long-term
basis.
4. The components of comprehensive income for the three-month periods ended
September 30, 1998 and 1997 follows:
Three Months Ended
September 30
1998 1997
-------- --------
Net income 30,798 $ 18,846
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized loss on marketable equity securities (432) -
Foreign currency translation adjustments 3,115 (3,401)
-------- --------
Other comprehensive income (loss), net of tax 2,683 (3,401)
-------- --------
Comprehensive income $ 33,481 $ 15,445
======== ========
8
The components of comprehensive income for the nine-month periods ended
September 30, 1998 and 1997 follows:
Nine Months Ended
September 30
------------------------------
1998 1997
---- ----
Net income $60,657 $61,373
------- -------
Other comprehensive income, net of tax:
Unrealized gain on marketable equity
securities $ 1,289 $ -
Less: Reclassification adjustment
for gain included in net
income (9,487) (8,198) - -
------- -------
Foreign currency translation
adjustments 1,046 (8,444)
------- -------
Other comprehensive (loss), net of tax (7,152) (8,444)
------- -------
Comprehensive income $53,505 $52,929
======= =======
The components of accumulated other
comprehensive income consist of the
following: September 30, December 31,
1998 1997
------------- ------------
Unrealized gain on marketable equity
securities $ 1,626 $ 9,824
Foreign currency translation adjustments (7,073) (8,119)
------- -------
Accumulated other comprehensive (loss)
income $(5,447) $ 1,705
======= =======
5. The special items consist of a benefit due to a settlement with the
Canadian government partially offset by a charge related to a 1998 enhanced
retirement offer. The settlement of $13 million net of related expenses
($3.2 million) resulted in a benefit of $9.8 million in the third quarter,
or $6.3 million after income taxes or $.07 per share and a $8.9 million
benefit for the nine months net of related expenses ($4.1 million), or $5.7
million after income taxes or $.07 per share. The settlement with the
Canadian government was to reimburse the Company for a portion of its legal
cost and lost profits following the repeal of the 1997 ban on the
importation and interprovincial trade of methylcyclopentadienyl manganese
tricarbonyl (MMT). The second quarter 1998 enhanced retirement offer
resulted in a charge of about $4.0 million or $2.5 million after income
taxes or $.03 per share. This charge covered a voluntary early retirement
program and severance and termination benefits affecting 40 employees. The
positions eliminated were administrative and support functions.
Approximately $0.3 million has been paid out during the nine months for
severance, vacation and termination benefits. The remainder will be paid
out over an extended period for retirement and health insurance benefits.
6. Other income, net for the nine-month period ended September 30, 1998
included a gain on the sale of certain non-operating assets of $14.6
million which occurred in the first and second quarters and a first quarter
gain of $7.9 million relating to the settlement of a federal income tax
audit.
7. FASB Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" is effective for annual periods beginning after
9
December 15, 1997 and for interim periods after the year of adoption. This
statement establishes standards for reporting information about operating
segments, including related disclosures about products and services,
geographic areas, and major customers. The Company has not yet completed
its analysis of what impact, if any, Statement No. 131 will have on
operating segments reported, or on the financial statements and related
disclosures.
In June 1998, FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued. This statement establishes
a comprehensive and consistent standard for the recognition and measurement
of derivatives and hedging activities. Statement No. 133 requires all
derivatives to be recorded on the balance sheet at fair value and the
hedged item in earnings in the same period. This new standard is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
implementation of this new standard is not expected to have a material
effect on the Company's consolidated results of operations or financial
position.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is management's discussion and analysis of certain significant
factors affecting the Company's results of operations during the periods
included in the accompanying consolidated statements of income and changes in
the financial condition since December 31, 1997. The Company's results of
operations for the third quarter and nine months of 1998 include the effect of
the repurchase of approximately 35 million shares of its common stock on October
2, 1997.
Some of the information presented in the following discussion, including certain
disclosures made related to the Year 2000, constitutes forward-looking comments
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Company believes its expectations are based on reasonable
assumptions within the bounds of knowledge of its business and operations, there
can be no assurance that actual results will not differ materially from its
expectations. Factors which could cause actual results to differ from
expectations include, without limitation, the timing of orders received from
customers, the gain or loss of significant customers, competition from other
manufacturers, a significant rise in interest rates, changes in the demand for
the Company's products, results of testing systems for Year 2000 compliance and
costs to remediate non-Year 2000 compliant systems, disruption of business
caused by the failure of vendors, suppliers, or customers to be Year 2000
compliant, non-Year 2000 compliant equipment, or the loss of electrical power
due to non-Year 2000 compliant energy providers. In addition, increases in the
cost of the product, changes in the market in general and significant changes in
new product introduction could result in actual results varying from
expectations.
Results of Operations
Third Quarter 1998 Compared to Third Quarter 1997
Net sales for the third quarter of 1998 amounted to $285.3 million, representing
an increase of $31.2 million (12.3%) from net sales of $254.1 million in the
third quarter of 1997. The $31.2 million increase was due to a $54.6 million
increase resulting from higher volumes shipped of both antiknocks and petroleum
additives. Most of the volume increase was reflected in antiknock shipments and
was primarily the result of expected fluctuations in order and shipping patterns
for lead, as well as an increase in MMT shipments following the lifting of the
MMT ban by the Canadian government. The favorable effect on net sales from the
increase in volumes was partly offset by a decrease in selling prices of $23.4
million. This reduction reflected lower selling prices in petroleum additives,
as well as antiknocks and an unfavorable foreign currency impact. The lower
selling prices were the result of competitive pricing pressures for both
petroleum additives and antiknock products, as well as weak Asia Pacific markets
for petroleum additives.
Cost of goods sold for the third quarter of 1998 increased $15.9 million (8.6%)
to $200.3 million in 1998 from $184.4 million in the third quarter of 1997. The
increase was a function of higher shipments, in both antiknocks and petroleum
additives, totaling $33.0 million, which was partially offset by lower costs of
11
$17.1 million. The lower costs in petroleum additives were the result of the
benefits of the Company's plant rationalization plan, a favorable foreign
currency impact, and overall lower raw material costs. The lower petroleum
additives costs were partially offset by an increase in antiknock material
costs.
Gross profit of $85.0 million in third quarter 1998 increased $15.3 million
(22.0%) from the third quarter 1997 level of $69.7 million. As a result of the
12.3% increase in net sales and the 8.6% increase in cost of sales, as outlined
above, the gross profit margin as a percentage of net sales improved from 27.4%
in 1997 to 29.8% in 1998. The higher profit and margins mainly reflected
increased shipments, particularly of antiknocks, which traditionally have higher
margins than petroleum additives.
Selling, general and administrative expenses combined with research, development
and testing expenses of $36.3 million in the third quarter 1998 were down $.8
million (2.1%) from the third quarter 1997. The reduction was primarily the
result of ongoing strict cost control efforts and a favorable foreign currency
impact. Selling, general and administrative expenses combined with research,
development and testing expenses as a percentage of net sales decreased from
14.6% in the third quarter 1997 to 12.7% in the third quarter 1998 reflecting an
increase in net sales of 12.3% combined with the 2.1% reduction in these
expenses.
The special item in the third quarter of $9.8 million ($6.3 million after-tax or
$.07 per share) represents a $13.0 million settlement, net of related expenses
($3.2 million), with the Canadian government. This settlement was for
reimbursement to the Company for a portion of its legal costs and lost profits
while the ban was in effect following the Government of Canada lifting its 1997
ban on the importation and interprovincial trade of methylcyclopentadienyl
manganese tricarbonyl (MMT).
Operating profit increased 79.2% to $58.6 million from $32.7 million in the
third quarter 1998. The higher operating profit primarily reflected higher
antiknock profit, as well as the settlement with the Canadian government, which
was partially offset by lower profit from petroleum additive products. The
increase in antiknocks resulted mostly from higher shipments. The lower
operating profit from petroleum additives reflected continuing pricing pressures
that were partially offset by higher shipments.
Interest and financing expenses of $10.1 million in 1998 were $5.1 million
higher than 1997. The increase was primarily the result of higher average debt
outstanding, which produced $4.9 million of the $5.1 million increase. The
higher average debt reflected the use of long-term debt to finance the October
1997 repurchase of almost 35 million shares of the Company's common stock.
Approximately $0.3 million of the increase was from higher fees, higher
amortization of deferred financing costs, and lower capitalized interest. These
increases were slightly offset by a decrease in average interest rates on
variable rate debt resulting in $0.1 million lower interest and financing
expenses.
Other income, net of $0.4 million in the third quarter of 1998 was comparable to
other income, net of $0.6 million in 1997.
Income taxes in the third quarter of 1998 increased $8.6 million (90.9%) to
$18.1 million from the third quarter 1997 amount of $9.5 million due to a 72.6%
12
increase in income before income taxes and a higher effective income tax rate.
The effective income tax rate of 37.1% in 1998 versus 33.5% in 1997 primarily
reflected the benefit in 1997 of settlement of certain tax issues with the
Internal Revenue Service.
As a result of the items outlined above, net income of $30.8 million in 1998 was
$12.0 million (63.4%) higher than the third quarter of 1997. Excluding the
benefit of the settlement with the Canadian Government, net income would have
been up 30.2%. Basic and diluted earnings per share of $.37 in 1998 increased
131% from $.16 in 1997 due to the increase in net income as well as the benefit
of the fourth quarter 1997 stock repurchase. The stock repurchase resulted in an
approximate reduction of 30% in the number of outstanding shares to 83,465,460
at September 30, 1998 compared to 118,443,835 at September 30, 1997.
Nine Months 1998 Compared to Nine Months 1997
Net sales for the nine months of 1998 amounted to $756.5 million which was down
$32.6 million (4.1%) from 1997 net sales of $789.1 million. The decrease in net
sales included a reduction of $67.1 million due to lower selling prices in both
petroleum additives and antiknocks. The lower average selling prices reflect the
highly competitive nature of today's petroleum additive and antiknock markets,
as well as an unfavorable foreign currency impact, and the slowdown in the Asia
Pacific petroleum additive markets. This was partially offset by an increase in
volumes shipped of both petroleum additives and antiknocks, which improved net
sales by $34.5 million.
Cost of goods sold of $550.8 decreased $13.2 million (2.3%) from nine months
1997 amount of $564.0 million. The decrease was the result of lower costs of
$36.9 million reflecting lower costs in petroleum additives due to the benefit
of the plant rationalization plan, a favorable foreign currency effect, and
overall lower raw material costs. The lower petroleum additives costs were
partially offset by an increase in antiknock costs, primarily due to higher
material costs, as well as higher volumes shipped of $23.7 million in both
petroleum additives and antiknocks.
Gross profit was $205.7 million for the nine months of 1998 compared to $225.1
million in 1997. This reduction of $19.4 million (8.6%) in gross profit resulted
in the gross profit margin as a percentage of sales decreasing to 27.2% in 1998
from 28.5% in 1997. The lower profit margins reflect the 4.1% reduction in net
sales and the 2.3% reduction in cost of sales, as outlined above.
Selling, general and administrative expenses combined with research, development
and testing expenses of $108.0 million in 1998 was $7.7 million (6.7%) lower
than 1997. This is the result of lower employee related costs reflecting the
ongoing strict cost controls, lower MMT related cost and a favorable foreign
currency impact. Selling, general and administrative expenses combined with
research, development and testing expenses as a percentage of net sales
decreased from 14.7% in 1997 to 14.3% in 1998 reflecting the impact of a 4.1%
reduction in net sales as compared to a 6.7% reduction in these expenses.
Special items for the nine months 1998 of $4.9 million included income of $8.9
million from the settlement with the Canadian government (see the third quarter
13
special item discussion), net of a special charge of about $4.0 million for an
enhanced retirement offer and the elimination of certain positions during the
second quarter. These initiatives affected 40 employees.
Operating profit decreased $6.8 million (6.2%) from $109.3 million in 1997 to
$102.5 million in 1998. The lower operating profit reflected both lower
antiknock profit (excluding the Canadian government settlement), as well as
lower profit from petroleum additives. The decrease in both antiknocks and
petroleum additives operating profit resulted from ongoing competitive pricing
pressures, partially offset by higher shipments. The cost of the enhanced
retirement offer and elimination of certain positions also reduced operating
profit in 1998.
Interest and financing expenses were $30.8 million for the nine months 1998,
which was $15.3 million higher than the 1997 amount of $15.5 million. Higher
average debt outstanding accounted for $14.3 million of the increase. The higher
average debt resulted from the use of long-term debt to finance the October 1997
repurchase of almost 35 million shares of the Company's common stock. Higher
average interest rates resulted in $0.2 million of the $15.3 million increase.
The remaining $0.8 million of the increase was caused by higher fees and
amortization of deferred financing costs, as well as lower capitalized interest.
Other income, net of $22.7 million in 1998 was $21.8 million higher than the
$0.9 million for the nine months 1997. The increase was primarily the result of
a $14.6 million gain on the sale of certain non-operating assets, as well as
interest income on the settlement of a federal income tax audit amounting to
$7.9 million.
Income taxes for the nine months 1998 increased $0.5 million (1.3%) to $33.9
million from the nine months 1997 amount of $33.4 million. The increase was
primarily due to a slightly higher effective income tax rate, offset by a small
reduction in income before income taxes of $0.3 million. The higher effective
income tax rate in 1998 of 35.8% as compared to 35.3% in 1997 was due primarily
to a settlement with the Internal Revenue Service in 1997, as well as a higher
state income tax rate largely offset by the tax benefit on the 1998 settlement
with the Internal Revenue Service.
As a result of the items discussed above, net income in 1998 decreased $0.7
million (1.2%) to $60.7 million from $61.4 million for the nine months 1997.
However, as a result of the 1997 stock repurchase, basic and diluted earnings
per share were $0.73 in 1998 as compared to $0.52 in 1997. At September 30,
1998, 83,465,460 shares were outstanding as compared to 118,443,835 at September
30, 1997.
Financial Condition and Liquidity
Cash and cash equivalents at September 30, 1998 totaled $11.3 million, a
decrease of $6.9 million since December 31, 1997. Cash flows were more than
sufficient to cover operating activities during the 1998 period. Cash flows from
operating activities for the nine months of 1998 of $81.0 million, combined with
cash-on-hand of $6.9 million and the proceeds from the sale of non-operating
assets of $25.6 million, were used to make principal payments on long-term debt
of $78.0 million, pay dividends of $15.7 million, and fund capital expenditures
of $19.4 million.
14
The combined current and noncurrent long-term debt amounted to $591.4 million at
September 30, 1998, as compared to $641.1 million at December 31, 1997. This net
decrease of $49.7 million represented a repayment of $78.0 million of debt
including $40.0 million on the Company's term loan, as well as a repayment of
$38.0 million under the Company's line of credit. The repayments of long-term
debt were partly offset by an $28.1 million increase in the note payable related
to the Texaco acquisition. The contingent note is payable to Texaco Inc. for up
to $60 million. The actual amount of the contingent note is being determined
using an agreed-upon formula based on volumes of certain acquired product lines
shipped during calendar years 1996 through 1998. Based on actual shipments
through September 30, 1998, $40.6 million of the contingent note was included in
long-term debt. The note is payable on February 26, 1999. Management has
classified the note as long term pursuant to the Company's ability and intent to
refinance the obligation on a long-term basis. The Company's long-term debt
(excluding the current portion) as a percentage of total capitalization was
75.3% at September 30, 1998 as compared to 80.4% at December 31, 1997. The
Company has historically targeted a range of 30% to 50% for its long-term debt
ratio, and intends to continue to use its cash flows to reduce long-term debt
outstanding.
The Company's capital spending during the year is expected to be lower than in
1997 reflecting the completion of several capital projects. Capital spending is
expected to be financed with cash from operations.
Working capital at September 30, 1998 was $222.7 million resulting in a current
ratio of 2.20 to 1. At December 31, 1997, the working capital was $218.7 and the
current ratio was 2.21 to 1. The slight increase in working capital primarily
resulted from an increase in inventories and a decrease in the current portion
of long-term debt. The slightly lower current ratio reflected a decrease in
cash, as well as increases in taxes payable, accounts payable and accrued
expenses. The Company anticipates that cash provided from operations will
continue to be sufficient to cover the Company's operating expenses, service
debt obligations, including reducing long-term debt, and make dividend payments
to shareholders.
Recent Developments
The Company announced that effective October 1, 1998, it had entered into an
agreement with The Associated Octel Company Limited (Octel) to market and sell
tetraethyl lead (TEL) antiknock compounds. The agreement finalizes the
memorandum of understanding signed by the companies in July 1998. This
arrangement includes all world areas except North America and the European
Union.
Ethyl and Octel believe that significant cost savings can be realized through
more efficient marketing, sales and distribution of TEL products in certain
areas of the world. All marketing and sales efforts made to customers will be in
the name of Octel. While Octel will continue to produce all products marketed
under this agreement, Ethyl will continue to provide bulk distribution services.
Other TEL services will be provided by one or both companies depending upon
cost, performance and flexibility.
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Both companies believe that this agreement is the most effective way to continue
to provide their TEL customers with safe product supply and responsive
world-class service.
In the third quarter of 1998, the Company received a $13 million reimbursement
from the Canadian government for a portion of the Company's lost profits and
legal costs related to the Canadian government's decision to lift its 1997 ban
on the importation and interprovincial trade of Ethyl's MMT fuel additive.
Also, regarding current year operations, while overall operating profits are on
track to be higher in the second half of 1998 operating profits for the year are
expected to be moderately lower than 1997. This is primarily due to lower lead
antiknock profits, as well as lower petroleum additive profits primarily due to
pricing reflecting competitive pressures.
Year 2000
The Company is continuing to address the Year 2000 issues and has an aggressive
program in place to assure compliance of all of its mission critical systems
that can affect product supply, internal operations, employees, customers, and
suppliers. The Company's senior management and Board of Directors have placed a
high priority on the Year 2000 project. Funding necessary to successfully
complete the Year 2000 effort has been approved. In addition, a Year 2000
Project Manager has been assigned to coordinate the initiative and provide
regular status updates to senior management.
The Company expects that its products and services will be continuously
available and the facilities, equipment, and information systems of the business
will be fully functional and will operate accurately and without interruption
both before and after January 1, 2000. The Company is confident that its
commercial and operational systems will not expose it to any significant delay
or interruption. The Company will continue testing in the fourth quarter of 1998
and plans to use scheduled fourth quarter plant shut downs to implement and test
Year 2000 upgrades and replacements.
The Company's state of readiness was enhanced by conversion in prior years of
all mainframe systems to modern client/server systems. This included
implementation of SAP, Peoplesoft and other commercial and desktop software, all
of which are represented to be Year 2000 compliant. The Company has also
reviewed its manufacturing systems, R&D systems, testing equipment, desktop
computers, and technical infrastructure and has plans in place to have both
software and hardware fully compliant by December 31, 1998. In addition, the
Company has contracted an independent third party to provide assistance with the
review of manufacturing systems and embedded controllers.
The Company also includes in its Year 2000 program efforts to ensure the
readiness of mission critical suppliers of products and services, as well as key
customers. Confirmation of the readiness of these business partners Year 2000
status is being actively pursued.
Since most of the Company's Year 2000 compliance was achieved in prior years
through the systems implementations previously mentioned, the costs associated
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with compliance in 1998 for the third quarter and nine months 1998 have been low
and total approximately $0.1 million and $0.2 million, respectively. The
expected remaining costs are estimated to be less than $2.6 million and will be
funded through cash provided from operations. Approximately $1.5 million of the
cost will be capitalized. The cost of this program that will not be capitalized
represents less than 6% of the Company's information resources operating budget.
Further, the emphasis that the Company has placed on the Year 2000 initiative
has not seriously delayed any of the Company's mission critical programs.
As part of the Year 2000 assessment, the Company has rated the impact of a Year
2000 problem for each of the systems in terms of risk to the business and the
probability of successfully resolving the issue. The Company believes that,
because of the extensive work which has already been completed and the plans in
place to obtain 100% compliance, sufficient time and resources are committed to
resolve any remaining Year 2000 issues. Consequently, the Company expects that
the internal risks are low and the overall risk of business interruption is
minimal.
Nevertheless, the Year 2000 program includes a review of both internal and
external risk factors, as well as the actions necessary to minimize any
potential impacts. By the end of the fourth quarter 1998, the Company will be
developing a formal contingency plan in the event that a critical system or
business partner is not or will not be compliant by January 1, 2000. The plan
will address worst case scenarios and could result in special staff training,
stockpiling critical raw materials, and scheduling production runs to minimize
losses in the event of power outages.
Finally, in order to further assure that the Company is proceeding on the proper
course to assess and remedy Year 2000 issues, an independent third party is
performing an independent status review of the Company's enterprise-wide Year
2000 program. The results of the review, which are expected soon, will be used
to enhance the Company's program. A follow-up review is planned during the first
half of 1999.
Recently Issued Accounting Standards
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for annual periods beginning after December 15, 1997
and for interim periods after the year of adoption. This statement establishes
standards for reporting information about operating segments, including related
disclosures about products and services, geographic areas, and major customers.
The Company has not yet completed its analysis of what impact, if any, Statement
No. 131 will have on operating segments reported, or on the financial statements
and related disclosures.
In June 1998, FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. This statement establishes a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. Statement No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and the hedged item in earnings in the same
period. This new standard is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The implementation of this new standard is not
expected to have a material effect on the Company's consolidated results of
operations or financial position.
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PART II - Other Information
ITEM 5. Other Information
Refer to "Recent Developments" in Item 2 "Management's Discussion and
Analysis of Results of Operations and Financial Condition" beginning
on page 15.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit No. Description
10 Antiknock Marketing and Sales Agreement, dated
October 1, 1998, between Ethyl Corporation and
The Associated Octel Company Limited*
- ------------------
* Subject to a request for confidential treatment, certain provisions of the
Antiknock Marketing and Sales Agreement have been intentionally omitted.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ETHYL CORPORATION
(Registrant)
Date: November 9, 1998 By: /s/ J. Robert Mooney
J. Robert Mooney
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 9, 1998 By:/s/ Wayne C. Drinkwater
Wayne C. Drinkwater
Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Page
Number
Number and Name of Exhibit
Exhibit 10 Antiknock Marketing and Sales Agreement
between Ethyl Corporation and The
Associated Octel Company Limited 21-59
Exhibit is not included except in 10-Q filed electronically. Copy of Exhibit is
available upon request.
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