Page 1 of 20 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, 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 October 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 Nine Months Ended September 30, 1999 and 1998 3
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 4-5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
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 Nine Months Ended
September 30 September 30
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $216,637 $285,282 $628,193 $756,466
Cost of goods sold 163,920 200,256 483,362 550,775
------- ------- ------- -------
Gross profit 52,717 85,026 144,831 205,691
TEL marketing agreements services 15,649 - 43,286 -
Selling, general and administrative expenses 16,797 19,554 52,757 58,780
Research, development and testing expenses 16,291 16,718 47,798 49,256
Special items income - 9,817 7,200 4,885
------- ------- ------- -------
Operating profit 35,278 58,571 94,762 102,540
Interest and financing expenses 9,011 10,072 26,637 30,754
Other (expense) income, net (1,889) 430 153 22,750
------- ------- ------- -------
Income before income taxes 24,378 48,929 68,278 94,536
Income taxes 7,686 18,131 23,034 33,879
------- ------- ------- -------
Net income $ 16,692 $ 30,798 $ 45,244 $ 60,657
======= ======= ======= =======
Basic and diluted earnings per share $ .20 $ .37 $ .54 $ .73
======= ======= ======= =======
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 $ .1875 $ .1875
======= ======= ======= =======
See accompanying notes to financial statements.
3
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30
1999 December 31
(unaudited) 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 7,341 $ 8,403
Accounts receivable, less allowance for doubtful
accounts ($972 - 1999; $1,386 - 1998) 146,532 152,937
Receivable - TEL marketing agreements services 32,145 16,954
Inventories:
Finished goods and work-in-process 144,822 161,480
Raw materials 22,107 21,328
Stores, supplies and other 8,646 8,968
---------- ----------
175,575 191,776
Deferred income taxes and prepaid expenses 18,378 21,358
---------- ----------
Total current assets 379,971 391,428
---------- ----------
Property, plant and equipment, at cost 771,033 776,452
Less accumulated depreciation and amortization 429,391 400,426
---------- ----------
Net property, plant and equipment 341,642 376,026
---------- ----------
Other assets and deferred charges 172,206 182,785
Goodwill and other intangibles, net of amortization 104,779 115,305
---------- ----------
Total assets $ 998,598 $1,065,544
========== ==========
See accompanying notes to financial statements.
4
September 30
1999 December 31
(unaudited) 1998
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61,645 $ 82,369
Accrued expenses 52,469 48,496
Dividends payable 5,217 5,217
Long-term debt, current portion 67,008 26,965
Income taxes payable 16,074 14,519
----------- -----------
Total current liabilities 202,413 177,566
----------- -----------
Long-term debt 431,711 531,859
Other noncurrent liabilities 93,964 98,321
Deferred income taxes 61,698 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 (13,388) (5,604)
Retained earnings 138,735 109,141
----------- -----------
208,812 187,002
----------- -----------
Total liabilities and shareholders' equity $ 998,598 $ 1,065,544
=========== ===========
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
--------------------
1999 1998
------- -------
Cash and cash equivalents at beginning of year $ 8,403 $ 18,162
------- -------
Cash flows from operating activities:
Net income 45,244 60,657
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 49,303 46,561
Deferred income taxes (decrease) increase (1,178) 10,822
Prepaid pension cost (10,675) (8,610)
Gain on sale of certain nonoperating assets - (14,631)
Special charge - 3,986
Working capital decrease (increase) 5,848 (17,372)
Other, net (4,640) (386)
------- -------
Cash provided from operating activities 83,902 81,027
------- -------
Cash flows from investing activities:
Capital expenditures (10,580) (19,429)
Proceeds from sale of certain assets 2,650 25,562
Other, net 72 (407)
------- -------
Cash (used in) provided from investing activities (7,858) 5,726
------- -------
Cash flows from financing activities:
Repayment of long-term debt (60,000) (78,000)
Cash dividends paid (15,650) (15,650)
Other, net (1,456) --
------- -------
Cash used in financing activities (77,106) (93,650)
------- -------
Decrease in cash and cash equivalents (1,062) (6,897)
------- -------
Cash and cash equivalents at end of period $ 7,341 $ 11,265
======= =======
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 $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 contain all necessary
adjustments to present fairly, in all material respects, our consolidated
financial position as of September 30, 1999, as well as the consolidated
results of operations and the consolidated cash flows for the nine-months
ended September 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 nine-month period ended September 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 arrangements, 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: September 30, December 31,
1999 1998
---- ----
Variable-rate bank loans $ 445,000 $ 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 494,558 554,558
Obligations under capital lease 4,287 4,476
Less unamortized discount (126) (210)
--------- ---------
Net long-term debt 498,719 558,824
Less current portion (67,008) (26,965)
--------- ---------
Long-term debt $ 431,711 $ 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 Nine Months Ended
September 30 September 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $ 16,692 $ 30,798 $ 45,244 $ 60,657
Other comprehensive income (loss), net of tax
Unrealized (loss) on marketable equity securities (730) (432) (663) (8,198)
Foreign currency translation adjustments 4,057 3,115 (5,316) 1,046
Unrealized (loss) on derivative instruments (2,684) - (1,805) -
-------- -------- -------- --------
Other comprehensive income (loss) 643 2,683 (7,784) (7,152)
-------- -------- -------- --------
Comprehensive income $ 17,335 $ 33,481 $ 37,460 $ 53,505
======== ======== ======== ========
The components of accumulated other comprehensive income (loss) consist of the following:
September 30, December 31,
1999 1998
---------- ----------
Unrealized gain on marketable equity securities $ 2,158 $ 2,821
Foreign currency translation adjustments (11,074) (5,758)
Unrealized (loss) on derivative instruments (1,805) -
Minimum pension liability adjustment (2,667) (2,667)
--------- --------
Accumulated other comprehensive (loss) $ (13,388) $ (5,604)
========= ========
8
5. The special item income for nine months 1999 consists of the $7.2 million
benefit from a first quarter supply contract amendment. The special items
income of $4.9 million in 1998 included a net benefit of $8.9 million ($9.8
million occurred in the third quarter) from the settlement with the
Canadian government offset by a second quarter 1998 charge of about $4
million for an enhanced retirement offer. 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 nine-month period ended September 30, 1998
included interest income on a favorable tax settlement with the Internal
Revenue Service of $7.9 million in the first quarter. We also recorded
gains on the sales of nonoperating assets of $14.6 million during the first
and second quarters of 1998.
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 loss, net of tax, of $1.8 million in accumulated
other comprehensive income to recognize all derivatives, at fair value, as
of the balance sheet date.
8. From time to time, we become involved in routine litigation that is
incidental to our business. We are not a party to any pending litigation
proceedings that are expected to have a materially adverse effect on our
results of operations or financial condition.
Ethyl has been served as one of a number of defendants in two cases filed
in the Circuit Court for Baltimore City, Maryland on September 22, 1999,
claiming damages attributable to lead. Both cases have the same seventeen
defendants. They are styled Cofield et al. v. Lead Industries Association,
Inc., et al. and Smith et al. v. Lead Industries Association, Inc., et al.
Cofield seeks recovery for property damage from lead paint, which Ethyl
never produced or distributed, and Smith is for personal injuries for six
children from lead exposure from lead paint and dust from tailpipe
emissions from leaded gasoline. Ethyl has strong defenses and will defend
these cases vigorously.
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 third quarter of 1999 amounted to $217
million, representing a reduction of 24% from the 1998 level of $285 million.
Ethyl's nine months 1999 consolidated net sales of $628 million were 17% below
nine months 1998. Consolidated net sales for the third quarter and nine months
1999 are lower than the same periods last year primarily reflecting the change
in reporting TEL sales as well as lower petroleum additives net sales.
The table below shows our consolidated net sales by segment.
Net Sales By Segment
(in millions)
Third Quarter Nine Months
1999 1998 1999 1998
---- ---- ---- ----
Petroleum additives $206 $230 $609 $652
Tetraethyl lead 11 55 19 104
---- ---- ----- ----
Consolidated net sales $217 $285 $628 $756
==== ==== ==== ====
Petroleum Additives Segment
Petroleum additives net sales in the third quarter 1999 of $206 million were
down $24 million or 10% from $230 million in 1998. Continuing pricing pressures
resulted in a reduction in third quarter sales of about $13 million as compared
to the same 1998 period. In addition, lower volumes shipped caused the remaining
$11 million reduction in net sales.
10
The nine months petroleum additives net sales of $609 million were down $43
million or 7% from 1998 sales of $652 million. Lower selling prices reduced net
sales by $35 million compared to the same 1998 period. Slightly lower shipments
resulted in a $8 million reduction in sales.
TEL Segment
Beginning October 1, 1998, all tetraethyl lead sales under the TEL marketing
agreements with The Associated Octel Company Limited (Octel) are made by or on
behalf of Octel and are not recorded as sales by Ethyl. Consequently, TEL net
sales of $11 million in the third quarter 1999 and $19 million for the nine
months 1999 represented sales made by Ethyl in territories not covered by the
agreements with Octel. Third quarter 1998 TEL net sales of $55 million and nine
months net sales of $104 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 in the third quarter of 1999 was $38 million.
Third quarter 1998 segment operating profit was $64 million and included a
nonrecurring item of $10 million from a settlement with the Canadian government.
Excluding this nonrecurring item, combined segment operating profit was down 30%
from 1998 levels.
Nine month combined segment operating profit for 1999 amounted to $107 million
compared to $122 million for the same period in 1998. Excluding nonrecurring
items, combined segment operating profit for nine months 1999 was down 12%
compared with the same period last year. 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)
Third Quarter Nine Months
1999 1998 1999 1998
---- ---- ---- ----
Petroleum additives before
nonrecurring items $ 22 $ 29 $ 61 $ 71
Nonrecurring items - 10 7 9
---- ---- ---- ----
Total Petroleum additives 22 39 68 80
Tetraethyl lead 16 25 39 42
---- ---- ---- ----
Segment operating profit 38 64 107 122
Corporate unallocated expense (6) (6) (17) (19)
Interest expense (9) (10) (27) (30)
Other income, net 1 1 5 22
---- ---- ---- ----
Income before income taxes $ 24 $ 49 $ 68 $ 95
==== ==== ==== ====
11
Petroleum Additives Segment
Petroleum additives operating profit was $22 million for the third quarter 1999.
Third quarter 1998 was $39 million and included nonrecurring item income of $10
million from a settlement with the Canadian government. Excluding the
nonrecurring item income, operating profit decreased about 24% from 1998 levels.
This decrease resulted from the impact of lower selling prices and shipments, as
well as an unfavorable foreign exchange effect. While we have begun to see
recent significant increases in raw material costs, the overall raw material
costs for product shipped in the third quarter 1999 was lower than the same
period in 1998. Third quarter 1999 research, development and testing expenses,
as well as selling, general, and administrative (SG&A) expenses, were about even
with the third quarter 1998 reflecting our ongoing cost control efforts.
However, as a percentage of net sales, SG&A, including research, development and
testing expense, increased from 12.9% in 1998 to 14.3% in 1999 reflecting the
effect of about even SG&A expenses compared to lower sales revenue.
Petroleum additives nine months 1999 operating profit of $68 million included
nonrecurring item income of $7 million from a supply contract amendment. Nine
months 1998 operating profit of $80 million included nonrecurring item income of
$9 million from a settlement with the Canadian government. Excluding the
nonrecurring items, our petroleum additives operating profit was $61 million in
1999 compared to the 1998 level of $71 million. Similarly to the third quarter,
lower selling prices and slightly lower shipments negatively affected our nine
months 1999 operating profit. Partially offsetting these were the effects of
improved MMT earnings and lower raw material costs. However, as previously
discussed, raw material costs have begun to increase. Research, development and
testing expenses for nine months 1999 were down about 3% from 1998 levels, while
selling, general, and administrative expenses were up 1% for nine months 1999.
Despite combined lower expenses, SG&A, including research, development and
testing expenses, as a percentage of net sales, were 14.4% for nine months 1999
as compared to 13.6% for nine months 1998 reflecting the reduction in sales
revenue.
TEL Segment
Our TEL operating profit for the third quarter of 1999 amounted to $16 million
and included $15 million from the marketing agreements with Octel. In
comparison, the third quarter 1998 operating profit was $25 million reflecting
unusually high shipments due to shipping patterns. Nine months 1999 operating
profit was $39 million compared with nine months 1998 TEL operating profit of
$42 million reflecting the declining lead market. Ethyl's nine month 1999
results included $43 million from the marketing agreements.
Included in 1999 TEL results are the costs of certain facilities that are not
allocable to the marketing agreements with Octel.
12
The following discussion references the Consolidated Financial Statements
beginning on page 3.
Special Items:
The special item for the third quarter 1998 of about $10 million (net of
expenses) related to the settlement with the Canadian government. 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 special item of $7 million for nine months 1999 was the
supply contract amendment as noted in the petroleum additives segment operating
profit discussion. Nine months 1998 includes income of about $9 million (net of
expenses) from the Canadian settlement, as well as a charge of about $4 million
for the second quarter 1998 enhanced retirement offer and elimination of certain
positions.
Interest and Financing Expenses:
In the third quarter 1999, interest and financing expenses were $9 million as
compared to $10 million in 1998. This $1 million decrease primarily reflects
lower average debt outstanding.
Our nine months 1999 interest and financing expenses reflect both lower average
debt outstanding and a lower effective interest rate. These resulted in a 13%
decrease to $27 million in 1999 from $31 million in 1998. The lower average debt
contributed $3 million of the decrease, while the lower effective interest rate
caused a $2 million decrease. Higher amortization and fees of about $1 million
partially offset these decreases.
Other Income (Expense), Net:
Other income (expense), net totaled $2 million expense in the third quarter of
1999 compared to $400 thousand income in 1998.
Other income, net for the nine months 1999 was $153 thousand as compared to $23
million for nine 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.
Income Taxes:
Income tax expense was $8 million for the third quarter 1999 compared to $18
million for the third quarter 1998. The decrease of $10 million primarily
reflected a 50% decrease in our income before income taxes resulting in about $9
million lower income tax expense. In addition, the third quarter 1999 effective
income tax rate of 31.5% was lower than the 37.1% rate for the same period in
1998 which resulted in about $1 million lower taxes. The lower 1999 rate
reflected the recognition of certain income tax benefits.
The nine months income tax expense was $23 million in 1999 and $34 million in
1998. A 28% reduction in income before income taxes contributed to the decrease
in income taxes of $9 million, as did a slightly lower effective income tax rate
in 1999, which reduced taxes $2 million. The nine month 1999 effective rate of
33.7% reflected the recognition of certain income tax benefits. The nine months
1998 effective rate was 35.8%.
13
Net Income:
As a result of the items previously discussed, third quarter 1999 net income was
$17 million or 20 cents per share. Net income for the third quarter 1998
amounted to $31 million or 37 cents per share. Excluding nonrecurring items,
third quarter 1998 earnings amounted to $25 million or 30 cents per share.
Ethyl's net income for nine months 1999 was $45 million or 54 cents per share
compared to $61 million or 73 cents per share for nine months 1998. The nine
months 1999 net income reflects a reduction of $2 million in corporate general
and administrative expenses from nine months 1998 levels. Excluding nonrecurring
items, earnings for nine months 1999 amounted to $41 million or 49 cents per
share compared with nine months 1998 results of $42 million or 50 cents per
share.
A summary of earnings and earnings per share, both including and excluding the
nonrecurring items is shown below:
(In millions except per share amounts)
Third Quarter Nine Months
1999 1998 1999 1998
---- ---- ---- ----
Net income:
Earnings excluding
nonrecurring items $ 17 $ 25 $ 41 $ 42
Nonrecurring items (a) - 6 4 19
---- ---- ---- ----
Net income $ 17 $ 31 $ 45 $ 61
==== ==== ==== ====
Basic and diluted earnings per share:
Earnings excluding
nonrecurring items $.20 $.30 $.49 $.50
Nonrecurring items (a) - .07 .05 .23
---- ---- ---- ----
Net income $.20 $.37 $.54 $.73
==== ==== ==== ====
(a)Nonrecurring items after income taxes:
Supply contract amendment $ - $ - $ 4 $ -
Settlement with the Canadian government - 6 - 6
Gain on sales of nonoperating assets - - - 9
Enhanced retirement offer and
staff reduction - - - (2)
Tax settlement with Internal
Revenue Service - - - 6
---- ---- ---- ----
$ - $ 6 $ 4 $ 19
==== ==== ==== ====
Financial Condition and Liquidity
Cash and cash equivalents at September 30, 1999 totaled $7 million, which was a
decrease of about $1 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 nine months of 1999 were $84 million. This, as
14
well as cash on hand of $1 million and other proceeds of about $3 million, was
used to make principal payments on long-term debt of $60 million, pay dividends
of $16 million, and fund capital expenditures of $11 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 $499 million at
September 30, 1999 compared to $559 million at December 31, 1998. This decrease
of $60 million represents repayments of $40 million on our revolving loan and
$20 million on our term 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
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 67% at September 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 September 30, 1999 was $178 million resulting in a
current ratio of 1.88 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 primarily reflects a decrease in 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 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.
15
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, assessment, remediation, and testing phases are essentially
complete for our systems. The contingency phase is also complete and we maintain
a regular review.
We enhanced our Year 2000 readiness when we converted all mainframe systems to
modern client server systems over the last several years. This included
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 used
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 rest of the year.
Third Party Readiness
We have relationships with third parties, including customers and suppliers of
materials or services, whose noncompliance 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 $600 thousand in the
third quarter 1999 and almost $2 million for the nine months 1999. This brings
the total costs incurred since January 1, 1998 to about $2.4 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 $400 thousand. These costs are primarily for testing and
building control systems. Cash from operations will cover these costs. All of
the remaining estimated costs will be capitalized. Our emphasis on Year 2000
readiness has not seriously delayed any of Ethyl's other mission critical
programs.
16
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 essentially completed all of
our Year 2000 efforts and have plans in place for full compliance of all
systems, 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
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. These
plans are complete; however, as additional information becomes available, we
will continually update the plan throughout the remainder of the year.
17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our interest rate risk or marketable
security price risk from the information provided in our Form 10-K for the year
ended December 31, 1998. We have recently begun to experience some raw materials
price increases.
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 September 30, 1999, we had contracts in the amount
of $30 million with maturity dates in 1999 and 2000. With all other variables
held constant, a hypothetical 10% adverse change in the September 30, 1999
forward Yen rates would result in about $4 million negative impact in the value
of our forward contracts.
18
PART II - Other Information
ITEM 1. Legal Proceedings
Ethyl Corporation has been served as one of a number of defendants in
two cases filed in the Circuit Court for Baltimore City, Maryland on
September 22, 1999, claiming damages attributable to lead. Both cases
have the same seventeen defendants. They are styled Cofield et al. v.
Lead Industries Association, Inc., et al. and Smith et al. v. Lead
Industries Association, Inc., et al. Cofield seeks recovery for
property damage from lead paint, which Ethyl never produced or
distributed, and Smith is for personal injuries for six children from
lead exposure from lead paint and dust from tailpipe emissions from
leaded gasoline. Ethyl has strong defenses and will defend these cases
vigorously.
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.
19
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: November 1, 1999 By: s/ J. Robert Mooney
J. Robert Mooney
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 1, 1999 By: s/ Wayne C. Drinkwater
Wayne C. Drinkwater
Controller
(Principal Accounting Officer)
20