Page 1 of 19 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 June 30, 1999 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 July 31,
1999: 83,465,460.
ETHYL CORPORATION
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Income - Three Months and Six Months
Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 4-5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 6
Notes to Financial Statements 7-9
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales $ 206,230 $ 244,252 $ 411,556 $ 471,184
Cost of goods sold 157,562 177,036 319,442 350,519
--------- --------- --------- ---------
Gross profit 48,668 67,216 92,114 120,665
TEL marketing agreements services 13,961 - 27,637 -
Selling, general and administrative expenses 17,854 19,603 35,960 39,226
Research, development and testing expenses 16,201 15,688 31,507 32,538
Special items (expense) income - (4,513) 7,200 (4,932)
--------- --------- --------- ---------
Operating profit 28,574 27,412 59,484 43,969
Interest and financing expenses 8,775 10,348 17,626 20,682
Other income, net 1,140 9,392 2,042 22,320
--------- --------- --------- ---------
Income before income taxes 20,939 26,456 43,900 45,607
Income taxes 7,691 9,676 15,348 15,748
--------- --------- --------- ---------
Net income $ 13,248 $ 16,780 $ 28,552 $ 29,859
========= ========= ========= =========
Basic and diluted earnings per share $ .16 $ .20 $ .34 $ .36
========= ========= ========= =========
Shares used to compute basic and diluted
earnings per share 83,465 83,465 83,465 83,465
========= ========= ========= =========
Cash dividends per share of common stock $ .0625 $ .0625 $ .1250 $ .1250
========= ========= ========= =========
See accompanying notes to financial statements.
3
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30
1999 December 31
(unaudited) 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,731 $ 8,403
Accounts receivable, less allowance for doubtful
accounts ($1,364 - 1999; $1,386 - 1998) 151,139 152,937
Receivable - TEL marketing agreements services 26,357 16,954
Inventories:
Finished goods and work-in-process 145,925 161,480
Raw materials 23,557 21,328
Stores, supplies and other 9,635 8,968
----------- -----------
179,117 191,776
Deferred income taxes and prepaid expenses 17,973 21,358
----------- -----------
Total current assets 378,317 391,428
----------- -----------
Property, plant and equipment, at cost 769,091 776,452
Less accumulated depreciation and amortization 418,690 400,426
----------- -----------
Net property, plant and equipment 350,401 376,026
----------- -----------
Other assets and deferred charges 172,920 182,785
Goodwill and other intangibles, net of amortization 107,536 115,305
----------- -----------
Total assets $1,009,174 $1,065,544
=========== ===========
See accompanying notes to financial statements.
4
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30
1999 December 31
(unaudited) 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 63,104 $ 82,369
Accrued expenses 47,180 48,496
Dividends payable 5,217 5,217
Long-term debt, current portion 56,994 26,965
Income taxes payable 10,466 14,519
----------- -----------
Total current liabilities 182,961 177,566
----------- -----------
Long-term debt 471,761 531,859
Other noncurrent liabilities 95,205 98,321
Deferred income taxes 62,553 70,796
Shareholders' equity
Common stock ($1 par value)
Issued - 83,465,460 in 1999 and 1998 83,465 83,465
Accumulated other comprehensive loss (14,031) (5,604)
Retained earnings 127,260 109,141
----------- -----------
196,694 187,002
----------- -----------
Total liabilities and shareholders' equity $ 1,009,174 $ 1,065,544
=========== ===========
See accompanying notes to financial statements.
5
ETHYL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Six Months Ended
June 30
--------------------------
1999 1998
-------- --------
Cash and cash equivalents at beginning of year $ 8,403 $ 18,162
-------- --------
Cash flows from operating activities:
Net income 28,552 29,859
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 32,908 30,670
Deferred income taxes 1,359 8,190
Prepaid pension cost (7,115) (5,751)
Gain on sale of certain nonoperating assets - (14,631)
Working capital increases (10,327) (2,766)
Other, net (3,115) 4,625
-------- --------
Cash provided from operating activities 42,262 50,196
-------- --------
Cash flows from investing activities:
Capital expenditures (7,673) (14,685)
Proceeds from sale of certain assets 2,650 25,562
Other, net (86) (70)
-------- --------
Cash (used in) provided from investing activities (5,109) 10,807
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (30,000) (60,500)
Cash dividends paid (10,433) (10,433)
Other, net (1,392) -
-------- --------
Cash used in financing activities (41,825) (70,933)
-------- --------
Decrease in cash and cash equivalents (4,672) (9,930)
-------- --------
Cash and cash equivalents at end of period $ 3,731 $ 8,232
======== ========
Supplemental investing and financing non-cash transactions
Assignment of note payable by Texaco Inc. $ 29,208 $ -
Increase in intangibles related to the recognition of a portion of
the contingent note payable to Texaco Inc. (Including
deferred interest costs of $2,392) $ - $ 21,142
Recognition of portion of contingent note payable to Texaco Inc. $ - $ 18,750
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 contain all necessary
adjustments to present fairly, in all material respects, our
consolidated financial position as of June 30, 1999, as well as the
consolidated results of operations and the consolidated cash flows for
the six-months ended June 30, 1999 and 1998. All adjustments are of a
normal, recurring nature. These financial statements should be read in
conjunction with the consolidated financial statements and related
notes included in the December 31, 1998 Annual Report and Form 10-K.
The results of operations for the six-month period ended June 30, 1999
are not necessarily indicative of the results to be expected for the
full year.
Certain amounts in the accompanying financial statements and notes
thereto have been reclassified to conform to the current presentation.
2. On October 1, 1998, Ethyl entered into agreements with Octel to market
and sell tetraethyl lead (TEL). The area covered by the agreements (the
Territory) includes all world areas except for North America and the
European Economic Area where Ethyl and Octel continue to compete. Ethyl
continues to provide bulk distribution services, marketing and other
services related to sales made within the Territory. Octel continues to
produce TEL marketed under this arrangement and also provides marketing
and other services. The proceeds earned by Ethyl under this
arrangement, net of cost reimbursements, are reflected in the
Consolidated Statements of Income in the caption, "TEL Marketing
Agreements Services".
All sales under the agreements are made in the name of or on behalf of
Octel and therefore not reported as sales by Ethyl. The proceeds
generated from the sale of TEL in the Territory are included in
determining the proceeds for services from the agreements. The net
proceeds are paid to Ethyl and Octel as compensation for services and
are based on an agreed-upon formula with Ethyl receiving approximately
one-third of the total compensation for services provided.
As part of the arrangement, most of our remaining inventory of TEL
will be sold to Octel over an agreed-upon period at a wholesale price.
Accordingly, these sales to Octel and distribution services are
reflected in the 1999 Consolidated Statement of Income in net sales and
cost of sales. Octel will use the inventory for sales in the Territory.
7
3. Long-term debt consists of the following: June 30, December 31,
1999 1998
Variable-rate bank loans $ 475,000 $ 505,000
Note payable to syndicate of investors 29,308 -
Note payable to Texaco Inc. - 29,308
Medium-term notes due through 2001 20,250 20,250
--------- ---------
Total long-term debt 524,558 554,558
Obligations under capital lease 4,351 4,476
Less unamortized discount (154) (210)
--------- ---------
Net long-term debt 528,755 558,824
Less current portion (56,994) (26,965)
--------- ---------
Long-term debt $ 471,761 $ 531,859
========= =========
On February 18, 1999, our $29.3 million note payable to Texaco Inc.
was assigned by Texaco to a syndicate of investors at face value. At
the same time, the maturity date was amended to December 15, 1999.
Because we have the ability and intent to refinance this obligation on
a long-term basis at maturity, it has been classified as long-term
debt.
4. The components of comprehensive income consist of the following:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
Net income $ 13,248 $ 16,780 $ 28,552 $ 29,859
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on marketable
equity securities 1,385 (6,682) 67 (7,766)
Foreign currency translation adjustments (185) (1,832) (9,373) (2,069)
Unrealized gain on derivative instruments 480 - 879 -
-------- -------- -------- --------
Other comprehensive income (loss) 1,680 (8,514) (8,427) (9,835)
-------- -------- -------- --------
Comprehensive income $ 14,928 $ 8,266 $ 20,125 $ 20,024
======== ======== ======== ========
8
The components of accumulated other comprehensive income (loss) consist
of the following:
June 30, December 31,
1999 1998
Unrealized gain on marketable equity securities $ 2,888 $ 2,821
Unrealized gain on derivative instruments 879
Minimum pension liability adjustment (2,667) (2,667)
Foreign currency translation adjustments (15,131) (5,758)
-------- --------
Accumulated other comprehensive (loss) $(14,031) $ (5,604)
======== ========
5. The special items consist of $7.2 million income in 1999 from a supply
contract amendment and a $4.9 million expense in 1998 ($4.5 million
occurred in the second quarter) primarily related to an enhanced
retirement and staff reduction charge. The offer covered a voluntary
early retirement program and severance and termination benefits
affecting 40 employees. The positions eliminated were administrative
and support functions.
6. Other income, net for the six-month period ended June 30, 1998 included
interest income on a favorable tax settlement with the Internal Revenue
Service of $7.9 million and a gain on the sale of a nonoperating asset
of $14.9 million ($9.9 million occurred in the second quarter).
7. Ethyl adopted Statement of Financial Accounting Standards No. 133 (FAS
133), Accounting for Derivatives and Hedging Activities, on January 1,
1999.
We have a series of Japanese Yen forward sales contracts to minimize
currency exposure on forecasted foreign-currency-denominated sales. In
accordance with FAS 133, we have designated these contracts as cash
flow hedging instruments. The relationships between these forward sales
contracts to the forecasted sales have been documented as well as the
risk-management objectives and strategy for undertaking these hedge
transactions. Assessment, both at the inception and on an ongoing
basis, is made to judge the effectiveness of the hedge to offset the
change in fair value of the hedged forecasted transactions.
Derivatives are recognized on the balance sheet at their fair value.
Since these Japanese Yen forward sales contracts have been designated
as cash flow hedges and are highly effective, changes in their fair
value are recorded in accumulated other comprehensive income, net of
tax, until the contracts are settled at which time the gain or loss is
reflected in earnings. Hedge accounting will be discontinued if it is
determined that the forecasted transactions will not occur or it is
determined that the derivative no longer qualifies as an effective cash
flow hedge. The derivative will be carried on the balance sheet at its
fair value and gains and losses that were accumulated in other
comprehensive income will be recognized immediately in earnings upon
such change in circumstance.
We recorded an unrealized gain, net of tax, of $879 thousand in
accumulated other comprehensive income to recognize all derivatives, at
fair value, as of the balance sheet date.
9
ITEM 2. 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 our results of operations and changes in financial condition
since December 31, 1998. Our reportable segments, petroleum additives and
tetraethyl lead (TEL), are strategic business units that we manage separately.
Some of the information presented in the following discussion constitutes
forward-looking comments within the meaning of the Private Securities Litigation
Reform Act of 1995. The forward-looking comments may focus on future objectives
or expectations about future performance and may include statements about trends
or anticipated events.
Ethyl believes our forward-looking comments are based on reasonable expectations
and assumptions, within the bounds of what we know about our business and
operations. However, we offer no assurance that actual results will not differ
materially from our expectations due to uncertainties and factors that are
difficult to predict and beyond our control. We identified certain, but not all,
of these factors in the Review of Operations on page 27 of our 1998 Annual
Report and incorporate the same herein by reference.
Results of Operations
Net Sales:
Our consolidated net sales for the second quarter of 1999 amounted to $206
million, representing a reduction of 16% from the 1998 level of $244 million.
Ethyl's six months 1999 consolidated net sales of $412 million were 13% below
six months 1998. The table below shows our consolidated net sales by segment.
Net Sales By Segment
(in millions)
Second Quarter Six Months
1999 1998 1999 1998
---- ---- ---- ----
Petroleum additives $200 $211 $403 $422
Tetraethyl lead 6 33 9 49
---- ---- ---- ----
Consolidated net sales $206 $244 $412 $471
==== ==== ==== ====
Petroleum Additives Segment
Petroleum additives net sales in the second quarter 1999 of $200 million were
down $11 million (5%) from $211 million in 1998. The lower second quarter
petroleum additives sales were caused by the continuing pricing pressures in the
business which reduced net sales about $12 million compared to the same 1998
period. This was partially offset by a favorable mix of product shipped in
second quarter 1999. This had a favorable impact of about $1 million although
total tons shipped was slightly lower.
10
The six months petroleum additives net sales of $403 million were down $19
million (5%) from 1998 sales of $422 million reflecting the same basic factors.
Lower selling prices reduced net sales by $23 million compared to the same 1998
period. This was partially offset by a $4 million favorable result from the mix
of products shipped, while volumes shipped were down slightly.
TEL Segment
Beginning October 1, 1998, all tetraethyl lead sales made under the TEL
marketing agreements with The Associated Octel Company Limited (Octel) are being
made by or on behalf of Octel and are not being recorded as sales by Ethyl.
Consequently, TEL net sales of $6 million in the second quarter 1999 and $9
million for the six months 1999 represented sales made by Ethyl in territories
not covered by the agreements with Octel. Second quarter 1998 TEL net sales of
$33 million and six months net sales of $49 million represented our worldwide
TEL net sales for those periods in 1998 prior to the marketing agreements.
Segment Operating Profit:
Ethyl evaluates the performance of petroleum additives and TEL based on segment
operating profit. Corporate departments and other expenses outside the control
of the segment manager are not allocated to segment operating profit.
Depreciation on segment property, plant and equipment and amortization of
segment intangible assets are included in the operating profit of each segment.
Combined segment operating profit of $33 million in the second quarter of 1999
represents a decrease of 11% compared to operating profit of $37 million in
second quarter 1998. However, six months 1999 combined segment operating profit
increased 19% to $69 million in 1999 from $58 million in 1998. Operating profit
by segment and a reconciliation to income before income taxes is shown below
followed by a review of the results.
Segment Operating Profit
(in millions)
Second Quarter Six Months
1999 1998 1999 1998
---- ---- ---- ----
Petroleum additives $ 20 $ 23 $ 46 $ 40
Tetraethyl lead 13 14 23 18
---- ---- ---- ----
Segment operating profit 33 37 69 58
Corporate unallocated expense (6) (7) (12) (13)
Interest expense (9) (10) (18) (21)
Other income, net 3 6 5 22
---- ---- ---- ----
Income before income taxes $ 21 $ 26 $ 44 $ 46
==== ==== ==== ====
Petroleum Additives Segment
Petroleum additives operating profit was $20 million for the second quarter
1999, which was a 13% decrease from $23 million for the second quarter 1998.
This decrease from 1998 levels resulted from the impact of lower selling prices
and slightly lower shipments, as previously discussed. Improved MMT earnings and
11
lower raw material costs, as well as favorable foreign exchange partially offset
these negative impacts. Second quarter 1999 research, development and testing
expenses, as well as selling, general, and administrative (SG&A) expenses, were
about even with the second quarter 1998 reflecting our ongoing cost control
efforts. SG&A, including research, development and testing expense, as a
percentage of net sales increased slightly from 13.9% in 1998 to 14.9% in 1999
reflecting the effect of about even SG&A expenses compared to lower sales
revenue.
Petroleum additives six months 1999 operating profit of $46 million included
special item income of $7 million from a supply contract amendment. Excluding
this, our petroleum additives operating profit was $39 million in 1999 compared
to the 1998 level of $40 million. Similarly to the second quarter, lower selling
prices and slightly lower shipments negatively affected our six months 1999
operating profit. This was largely offset by the effects of improved MMT
earnings, lower raw material costs and favorable foreign exchange. Research,
development and testing expenses for six months 1999 were down slightly from
1998 levels, while selling, general, and administrative expense was down about
2% for six months 1999. Despite lower expenses, SG&A, including research,
development and testing expense, as a percentage of net sales was 14.4% for six
months 1999 as compared to 14.1% for six months 1998 reflecting the reduction in
sales revenue.
TEL Segment
Our TEL operating profit for the second quarter of 1999 amounted to $13 million
and included $14 million from the marketing agreements with Octel. In
comparison, the second quarter 1998 operating profit was $14 million. Shipping
patterns and timing of orders caused the slight decrease.
Six months 1999 operating profit was $23 million and included $28 million from
the marketing agreements. Ethyl's six months 1998 TEL operating profit was $18
million. The higher 1999 results reflect the effectiveness of the marketing
agreements with Octel, as well as an unusually low 1998 first quarter resulting
from shipping patterns and timing of orders.
Included in 1999 TEL results are the cost of certain facilities that are not
allocable to the marketing agreements with Octel.
The following discussion references the Consolidated Financial Statements
beginning on page 3.
Special Items:
The special item of $7 million for six months 1999 was the supply contract
amendment that we reviewed in the petroleum additives segment operating profit
discussion. The special charges for both 1998 periods primarily reflects about
$4 million for the second quarter 1998 enhanced retirement offer and elimination
of certain positions.
Interest and Financing Expenses:
In the second quarter 1999, interest and financing expenses were $9 million as
compared to $10 million in 1998. This 10% decrease reflects lower average debt
12
outstanding, as well as a lower effective interest rate. These factors resulted
in a decrease of $1 million each in expense that was partially offset by
slightly higher amortization and fees.
Our six months 1999 interest and financing expenses also reflect both lower
average debt outstanding and a lower effective interest rate. This resulted in a
14% decrease to $18 million in 1999 from $21 million in 1998. The lower average
debt contributed $2 million of the decrease, as did the lower effective interest
rate. Higher amortization and fees partially offset these decreases.
Other Income, Net:
Other income, net totaled $1 million in the second quarter of 1999 compared to
$9 million in 1998. Second quarter 1998 consisted primarily of a gain of about
$10 million on the sale of a nonoperating asset. The 1999 amount did not include
any individually material items.
Other income, net for the six months 1999 was $2 million as compared to $22
million for six months 1998. The 1998 total was primarily interest income on a
favorable tax settlement with the Internal Revenue Service of $8 million, as
well as a gain of $15 million on the sale of nonoperating assets. The 1999
amount did not include any individually material items.
Income Taxes:
Income tax expense was $8 million for the second quarter 1999 and $10 million
for the second quarter 1998. The decrease of $2 million mostly reflected a 21%
decrease in our income before income taxes. The effective income tax rate was
essentially even at 36.7% in 1999 compared to 36.6% in 1998.
The six months income tax expense was $15 million in 1999 and $16 million in
1998. A 4% reduction in income before income taxes contributed to the $1 million
decrease in income taxes. However, the 35.0% effective income tax rate in 1999
was slightly higher than the 34.5% rate in 1998. The lower rate in 1998
reflected the benefit on the settlement of income tax issues.
Net Income:
Because of the items discussed above, second quarter net income was $13 million
($.16 per share) in 1999 and $17 million ($.20 per share) in 1998. These results
reflect lower corporate selling, general, and administrative expenses for second
quarter 1999 as compared to second quarter 1998. The 1998 results included a net
benefit of $4 million ($.04 per share) related to several nonrecurring items.
Excluding the nonrecurring items, our second quarter 1999 results were about
even with 1998.
Ethyl's net income for six months 1999 was $29 million ($.34 per share) as
compared to $30 million ($.36 per share) for six months 1998. The six months
1999 net income reflects a reduction in corporate selling, general, and
administrative expenses from six months 1998 levels. Nonrecurring income of
almost $5 million ($.05 per share) for the supply contract amendment was
included in 1999. The nonrecurring items in 1998 amounted to a net benefit of
$13 million ($.15 per share). Excluding the nonrecurring items, our 1999
earnings were $24 million ($.29 per share). The 1998 results, excluding
nonrecurring items, were $17 million ($.21 per share).
13
A summary of earnings and earnings per share, both including and excluding, the
non-recurring items is shown below:
(In millions except per share amounts)
Second Quarter Six Months
1999 1998 1999 1998
Net income:
Earnings excluding
nonrecurring items $ 13 $ 13 $ 24 $ 17
Nonrecurring items (a) - 4 5 13
---- ---- ---- ----
Net income $ 13 $ 17 $ 29 $ 30
==== ==== ==== ====
Basic and diluted earnings per share:
Earnings excluding
nonrecurring items $.16 $.16 $.29 $.21
Nonrecurring items (a) - .04 .05 .15
---- ---- ---- ----
Net income $.16 $.20 $.34 $.36
==== ==== ==== ====
(a)Nonrecurring items after income taxes:
Supply contract amendment $ - $ - $ 5 $ -
Gain on sales of
nonoperating assets - 6 - 10
Enhanced retirement
offer and staff reduction - (2) - (2)
Tax settlement with
Internal Revenue Service - - - 6
Other - - - (1)
---- ---- ---- ----
$ - $ 4 $ 5 $ 13
==== ==== ==== ====
Financial Condition and Liquidity
Cash and cash equivalents at June 30, 1999 totaled $4 million, which was a
decrease of about $4 million since December 31, 1998. Our cash flows were more
than sufficient to cover operating activities during the 1999 period. Cash flows
from operating activities for the six months of 1999 were $42 million. This, as
well as cash on hand of over $4 million and other proceeds of about $3 million,
was used to make principal payments on long-term debt of $30 million, pay
dividends of $10 million, and fund capital expenditures of $8 million. We
anticipate that cash provided from operations will continue to be sufficient to
cover operating expenses, service debt obligations, including reducing long-term
debt, and make dividend payments to our shareholders.
Ethyl has combined current and noncurrent long-term debt of $529 million at June
30, 1999 compared to $559 million at December 31, 1998. This decrease of $30
million represents repayments of $15 million on our term loan and on our
revolving loan.
On February 18, 1999, our $29 million note payable to Texaco Inc. was assigned
by Texaco to a syndicate of investors at face value. At the same time, the
14
maturity date was amended to December 15, 1999. Because we have the ability and
intent to refinance this obligation on a long-term basis at maturity, it is
classified as long-term debt.
As a percentage of total capitalization, Ethyl's long-term debt, excluding the
current portion, decreased from 74% at the end of 1998 to 71% at June 30, 1999.
We expect our capital spending during 1999 to be moderately lower than 1998
reflecting the completion of the construction and expansion following the Texaco
Additives acquisition. Ethyl will continue to finance capital spending through
cash provided from operations.
Our working capital at June 30, 1999 was $195 million resulting in a current
ratio of 2.07 to 1. At December 31, 1998, the working capital was $214 million
and the current ratio was 2.20 to 1. The reduction in working capital and the
current ratio reflects a decrease in cash and inventories, as well as an
increase in the current portion of long-term debt. Partially offsetting these,
was an increase in the receivable from the TEL marketing agreement services and
a reduction in accounts payable.
Year 2000 Readiness Disclosure
- -------------------------------------------------------------------------------
The Year 2000 statement in this communication is being designated a Year 2000
Readiness Disclosure within the meaning of the United States Year 2000
Information and Readiness Disclosure Act of 1998.
- -------------------------------------------------------------------------------
We continue aggressively addressing and making solid progress on the Year 2000
problem. It is a global effort covering information systems, process control
systems, and embedded controllers. Ethyl's senior management and board of
directors place a high priority on and have approved the necessary funding to
complete the Year 2000 compliance effort. Our Year 2000 manager coordinates this
initiative and provides senior management with regular status updates.
Our Year 2000 initiatives encompass both information technology (IT) and non-IT
systems, including manufacturing and R&D systems, testing equipment, desktop
computers, and technical infrastructure. The following phases are part of the
initiative:
1. Inventory - Identification of all hardware, software and processes
that are date-aware.
2. Assessment - Determination of Year 2000 compliance of all hardware,
software and processes.
3. Remediation - Correction of any areas which are not compliant.
4. Testing - Review of all hardware, software, and processes for
compliance.
5. Contingency - Development of a plan to address our worst case
scenarios and risk factors.
The inventory and assessment phases are 100% complete, while the remediation and
testing phases are approximately 95% complete. We expect remediation and testing
will be completed in the third quarter 1999.
We enhanced our Year 2000 readiness when we converted all mainframe systems to
modern client server systems over the last several years. This included
15
implementation of SAP R/3, PeopleSoft, and other commercial and desktop
software, all of which are represented to be Year 2000 compliant.
During 1998, we contracted with an independent third party, which provided
assistance with the review of manufacturing systems and embedded controllers. In
addition, Ethyl engaged another independent third party to perform a status
review of our company-wide Year 2000 program. This independent third party
performed a follow-up review of our company-wide program in June 1999. We are
using the results to enhance and focus our Year 2000 efforts.
Ethyl expects our facilities, equipment, and information systems will be fully
functional and will operate accurately and without interruption both before and
after January 1, 2000. We also expect that our products and services will be
available continuously. As part of our remediation and testing phases, we used
scheduled plant shutdowns to implement and test Year 2000 upgrades and
replacements. Our testing results have been satisfactory.
We will continue testing during the year.
Third Party Readiness
We have relationships with third parties, including customers and suppliers of
materials or services, whose non-compliance could have a material effect on our
business operations and financial condition. Therefore, our Year 2000 efforts
include reviewing the readiness efforts of our mission critical third parties.
We have contacted, either through a questionnaire or in person, all of our
mission critical third parties. Although this review is an ongoing process, we
have currently received no information that indicates any of our critical
business partners' Year 2000 results will have a negative impact on our
business.
Costs
Ethyl's costs associated with Year 2000 compliance were $800 thousand in the
second quarter 1999 and $1 million for the six months 1999. This brings the
total costs incurred since January 1, 1998 to about $2 million. The costs are
low because we completed the majority of our compliance effort through systems
implementation over the last several years. We estimate remaining costs in 1999
to be around $1 million. Cash from operations will cover these costs. Of the
remaining estimated costs, all but $200 thousand will be capitalized. The
noncapitalized costs represent less than 5% of our information technology
operating budget. Our emphasis on Year 2000 readiness has not seriously delayed
any of Ethyl's other mission critical programs.
Risks
As part of the assessment phase, we rated the impact of a Year 2000 problem for
each mission critical system in terms of probable risk to the business and
successful resolution of the issue. Because we have completed most of our Year
2000 efforts and have plans in place for full compliance, Ethyl believes
sufficient time and resources are committed to resolve any remaining Year 2000
issues. We anticipate that internal risks are low and the overall risk of
business interruption is minimal.
Nonetheless, there is no guarantee that there will not be a material failure of
a critical system or those of a supplier or customer. A material failure could
have an adverse impact on our business, operations, or financial condition. In
16
consideration of these risks, we have determined that the most reasonably likely
worst case scenario is delays in the distribution of products or in the receipt
of materials.
We primarily use the railroads to ship product to our customers and receive raw
materials to our production facilities. Our most reasonably likely worst case
scenario involves the potential for railroads to experience problems in tracking
and routing railcars due to the loss of information, as well as problems in
communications between the rail companies. These potential problems could result
in the railroads needing several weeks to identify and route railcars, therefore
affecting our ability to supply our customers and production facilities.
Contingency Plan
As part of our contingency plan, we have addressed this most reasonably likely
worst case scenario. This aspect of the contingency plan is being coordinated by
our logistics group and includes:
1. Ensuring enough supply of critical products for key customers at the
usage sites to allow for two weeks of no railroad deliveries.
2. Minimizing materials in transit on the railroads at 1/1/2000.
3. Documenting, just before 1/1/2000, a listing of our railcars and their
location, cargo, and destination.
4. Converting to truck delivery, in December 1999, any materials that are
in short supply.
5. Coordinating alternative shipping with our trucking company provider.
6. Assigning trained personnel to be available on 1/1/2000 to address any
problem areas that occur.
In addition to our contingency plan to address our worst case scenario, we have
further developed plans to address noncompliance of a critical system or those
of a supplier or customer. This includes special staff training, stockpiling
critical raw materials and inventory, obtaining alternate sources of supply, and
scheduling production runs to minimize losses in case of power outages. We
expect the plans will be essentially complete by the end of the third quarter.
As additional information becomes available, we will continually improve the
plan throughout the year.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our interest rate risk, marketable
security price risk, or raw material price risk from the information provided in
our Form 10-K for the year ended December 31, 1998.
Because of additional Japanese Yen forward sale contracts, Ethyl's foreign
currency risk has changed from that disclosed in our Form 10-K for the year
ended December 31, 1998. At June 30, 1999, we had contracts in the amount of $35
million with maturity dates in 1999 and 2000. With all other variables held
constant, a hypothetical 10% adverse change in the June 30, 1999 forward Yen
rates would result in a $4 million negative impact in the value of our forward
contracts.
17
PART II - Other Information
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
18
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 there-unto duly authorized.
ETHYL CORPORATION
(Registrant)
Date: August 4, 1999 By: s/ J. Robert Mooney
------------------------
J. Robert Mooney
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 4, 1999 By: s/ Wayne C. Drinkwater
---------------------------
Wayne C. Drinkwater
Controller
(Principal Accounting Officer)
19