Page 1 of 26 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, 2001 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, 2001:
83,454,650.
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, 2001 and 2000 3
Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001 and 2000 5
Notes to Financial Statements 6-11
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 12-23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
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
-------------------------- --------------------------
2001 2000 2001 2000
--------- -------- --------- --------
Net sales $ 171,849 $214,566 $ 383,129 $413,078
Cost of goods sold 167,570 168,125 348,675 324,373
--------- -------- --------- --------
Gross profit 4,279 46,441 34,454 88,705
TEL marketing agreements services 11,532 8,947 19,614 14,094
Selling, general, and administrative expenses 16,717 19,020 35,187 38,000
Research, development, and testing expenses 14,288 18,310 32,279 36,228
Special items (expense) income, net (106,261) 4,050 (116,968) 46,419
--------- -------- --------- --------
Operating (loss) profit (121,455) 22,108 (130,366) 74,990
Interest and financing expenses 9,783 9,196 17,977 17,564
Other income (expense), net 299 1,606 (395) 1,057
--------- -------- --------- --------
(Loss) income before income taxes (130,939) 14,518 (148,738) 58,483
Income tax (benefit) expense (36,155) 5,249 (42,687) 21,390
--------- -------- --------- --------
Net (loss) income ($ 94,784) $ 9,269 ($106,051) $ 37,093
========= ======== ========= ========
Basic and diluted (loss) earnings per share ($ 1.13) $ .11 ($ 1.27) $ .44
========= ======== ========= ========
Shares used to compute basic and diluted
earnings per share 83,455 83,465 83,455 83,465
========= ======== ========= ========
Cash dividends per share of common stock $ - $ .0625 $ - $ .1250
========= ======== ========= ========
See accompanying notes to financial statements.
3
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30
2001 December 31
(unaudited) 2000
--------------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,188 $ 4,470
Restricted cash 1,299 1,262
Accounts receivable, less allowance for doubtful
accounts ($899 - 2001; $908 - 2000) 131,790 137,501
Receivable for pension fund reversion 130,770 -
Receivable - TEL marketing agreements services 6,497 12,555
Inventories:
Finished goods and work-in-process 97,486 104,584
Raw materials 13,069 15,562
Stores, supplies and other 8,365 9,540
------------ --------------
118,920 129,686
Deferred income taxes and prepaid expenses 11,266 12,767
------------ --------------
Total current assets 408,730 298,241
------------ --------------
Property, plant and equipment, at cost 763,049 767,675
Less accumulated depreciation and amortization 531,357 476,573
------------ --------------
Net property, plant and equipment 231,692 291,102
------------ --------------
Prepaid pension cost 19,603 224,892
Deferred income taxes 16,169 -
Other assets and deferred charges 91,940 100,166
Goodwill and other intangibles, net of amortization 81,298 87,238
------------ --------------
Total assets $ 849,432 $ 1,001,639
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 50,545 $ 56,521
Accrued expenses 41,417 49,140
Long-term debt, current portion 102,232 87,191
Excise tax payable 26,154 -
Income taxes payable on pension reversion 50,640 -
Income taxes payable 9,712 11,480
------------ --------------
Total current liabilities 280,700 204,332
------------ --------------
Long-term debt 324,870 356,053
Other noncurrent liabilities 99,893 99,297
Deferred income taxes - 82,544
Shareholders' equity
Common stock ($1 par value)
Issued - 83,454,650 in 2001 and 2000 83,455 83,455
Accumulated other comprehensive loss (27,483) (18,090)
Retained earnings 87,997 194,048
------------ --------------
143,969 259,413
------------ --------------
Total liabilities and shareholders' equity $ 849,432 $ 1,001,639
============ ==============
See accompanying notes to financial statements.
4
ETHYL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Six Months Ended
June 30
-----------------------------
2001 2000
----------- -----------
Cash and cash equivalents at beginning of year $ 4,470 $ 15,846
----------- -----------
Cash flows from operating activities:
Net (loss) income (106,051) 37,093
Adjustments to reconcile net (loss) income to cash flows from
operating activities:
Depreciation and amortization 71,750 34,347
Accrued severance, early retirement, and other
crankcase rationalization charges 27,428 -
Deferred income taxes (91,775) 12,450
Prepaid pension cost (5,628) (7,427)
Gain on sale of certain assets (956) (2,290)
Asset write-off - 7,524
Loss (gain) on pension contract settlements 62,000 (49,893)
Excise tax on pension reversion 26,154 -
Working capital decreases (increases) 49,331 (1,240)
Other, net (619) 686
----------- -----------
Cash provided from operating activities 31,634 31,250
----------- -----------
Cash flows from investing activities:
Capital expenditures (4,864) (6,150)
Proceeds from sale of certain assets 2,873 2,635
Investment in Envera LLC (1,250) -
Prepayment for TEL marketing agreements services - (39,448)
Other, net (16) 157
----------- -----------
Cash used in investing activities (3,257) (42,806)
----------- -----------
Cash flows from financing activities:
Repayment of long-term debt-term loan agreement (60,000) (45,000)
Net borrowings on revolving credit agreement 44,059 65,000
Debt issuance costs (9,792) -
Cash dividends paid - (10,433)
Other, net 1,074 (184)
----------- -----------
Cash (used in) provided from financing activities (24,659) 9,383
----------- -----------
Increase (decrease) in cash and cash equivalents 3,718 (2,173)
----------- -----------
Cash and cash equivalents at end of period $ 8,188 $ 13,673
=========== ===========
See accompanying notes to financial statements.
5
ETHYL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(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, 2001, as well as the
consolidated results of operations and the consolidated cash flows for
the six-months ended June 30, 2001 and 2000. 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, 2000 Annual Report and Form 10-K.
The results of operations for the six-month period ended June 30, 2001
are not necessarily indicative of the results to be expected for the
full year.
Ethyl adopted Statement of Financial Accounting Standards No. 133 (FAS
133), "Accounting for Derivatives and Hedging Activities", on January
1, 1999. FAS 133 has been consistently applied for all periods
presented.
2. Asset writedowns (through accelerated depreciation), severance, early
retirement, and other costs related to the rationalization of our
crankcase product lines were $50.3 million ($31.6 million after tax or
$.38 per share) for second quarter 2001 and $73.6 million ($46.4
million after tax or $.56 per share) for six months 2001. These costs
are included in the Consolidated Statements of Income as follows:
(in millions)
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Cost of goods sold $ 31.0 $ 41.8
Research, development, and testing expenses 1.2 3.0
Special items expense, net 18.1 28.8
------ ------
$ 50.3 $ 73.6
====== ======
Cost of goods sold includes a $31.0 million charge ($19.3 million after
tax or $.23 per share) for second quarter 2001 and a $41.8 million
charge ($26.1 million after tax or $.32 per share) for the year 2001
for a portion of the accelerated depreciation of the crankcase
facilities that were indefinitely idled this year, as well as the
writedown of certain inventories and shutdown costs.
Research, development, and testing expenses include a $1.2 million
charge ($800 thousand after tax or $.01 per share) for second quarter
2001 and a charge of $3.0 million ($1.9 million after tax or $.02 per
share) for the year 2001 for a portion of the accelerated depreciation
of the research and development facilities that were shutdown in the
second quarter 2001, as well as the writedown of certain inventories.
6
We included severance, early retirement, and other expenses in special
items (expense) income, net. See Note 5.
Depreciation and amortization in the Condensed Consolidated Statement
of Cash Flows includes accelerated depreciation of $41.2 million due to
the shortened lives of certain crankcase assets. Management has
considered if the indefinitely idled assets were impaired and concluded
that these assets should be depreciated over the remaining useful lives
through the anticipated closure dates in the second quarter of 2001.
3. During 2001, TEL inventory quantities were reduced which resulted in a
liquidation of LIFO inventory layers. The effect of the liquidation was
to decrease cost of goods sold by $1.5 million and increase net income
by $900 thousand or $.01 per share. During second quarter 2000, TEL
inventories were also reduced. The effect of the liquidation was to
decrease cost of goods sold by $1.1 million and increase net income by
$700 thousand or $.01 per share.
4. The tables below show our consolidated net sales by segment, operating
profit by segment, and reconciliation to (loss) income before income
taxes.
Net Sales By Segment
(in millions)
Second Quarter Six Months
2001 2000 2001 2000
---- ---- ---- ----
Petroleum additives $169.9 $204.9 $370.4 $399.6
Tetraethyl lead 1.9 9.7 12.7 13.5
------ ------ ------ ------
Consolidated net sales $171.8 $214.6 $383.1 $413.1
====== ====== ====== ======
Segment Operating Profit
(in millions)
Second Quarter Six Months
2001 2000 2001 2000
----- ------- ------- -------
Petroleum additives before
nonrecurring items $ 10.6 $ 11.5 $ 18.9 $ 23.8
Nonrecurring items (50.3) - (73.6) (7.5)
------- ------- ------- -------
Total petroleum additives (39.7) 11.5 (54.7) 16.3
Tetraethyl lead 10.0 11.4 20.6 14.5
------- ------- ------- -------
Segment operating (loss) profit (29.7) 22.9 (34.1) 30.8
Corporate unallocated expense (5.1) (5.9) (11.0) (12.7)
Interest expense (9.8) (9.2) (18.0) (17.6)
Pension settlement (expense)
income including 2001
excise tax provision (88.2) - (88.2) 49.9
Demutualization income - 4.0 - 4.0
Other income, net 1.8 2.7 2.5 4.1
------- ------- ------- -------
(Loss) income before income taxes $(131.0) $ 14.5 $(148.8) $ 58.5
======= ======= ======= =======
7
5. Special items (expense) income, net for the second quarter of 2001 includes
a charge of $18.1 million ($11.5 million after tax or $.14 per share) for
severance, early retirement, and other expenses related to our crankcase
rationalization; the recognition of a noncash charge of $62.0 million
($42.7 million after tax or $.51 per share) related to the settlement of
certain liabilities as part of the termination of our U.S. salaried pension
plan and a $26.2 million charge ($26.2 million after tax or $.31 per share)
for excise tax on the pension reversion.
The special items (expense) income, net for the second quarter of 2000
included an insurance demutualization distribution of $4 million ($2.6
million after tax or $.03 per share) from MetLife, Inc.
The six months 2001 amounts include a charge of $28.8 million ($18.4
million after tax or $.22 per share) for severance, early retirement, and
other expenses related to our crankcase rationalization; the noncash charge
of $62.0 million ($42.7 million after tax or $.51 per share) for the
pension plan transaction and a $26.2 million charge ($26.2 million after
tax or $.31 per share) for excise tax on the pension reversion.
The six months 2000 special items (expense) income, net include the
recognition of $49.9 million income ($31.6 million after tax or $.38 per
share) due to a pension plan election and $4.0 million income ($2.6 million
after tax or $.03 per share) for the demutualization of MetLife, Inc.
offset by a $7.5 million charge ($4.8 million after tax or $.06 per share)
related to the write-off of plant assets.
As part of the crankcase rationalization, we announced an involuntary
severance program that resulted in a reduction of 319 positions. Included
were staff at the crankcase plants being indefinitely idled, staff at our
Bracknell and Richmond research facilities, and corporate staff. We also
announced a voluntary early retirement program for most domestic salaried
employees over age 52. The involuntary severance program included 98
employees who were eligible for early retirement. Thirty-two additional
employees, whose positions were not eliminated, voluntarily retired. Of the
351 employees who were involuntarily severed or voluntarily retired, 138
positions were in manufacturing, 115 were in research and testing, and 98
were administrative positions. Most of the nonmanufacturing terminations
were effective April 30, 2001; however, some occurred later in the second
quarter 2001. For the six months 2001, we paid $5.8 million for costs
related to the 200 employees who were terminated by June 30, 2001. We paid
$4.7 million during the second quarter 2001.
The recognition of the $49.9 million pension-related gain in February 2000
was due to an election made regarding certain contracts in our pension
plan. This election resulted in the settlement of liabilities for certain
pension contracts and the recognition of a significant gain on our pension
assets. The settlement gain had no cash effect nor did any retiree benefits
change.
The charge of $7.5 million included in six months 2000 special items was
for the write-off of the production assets of a previously idled petroleum
additives facility in Orangeburg, South Carolina. There were no employee or
other incremental costs
8
included in this charge. As part of our ongoing cost improvement
process, during first quarter 2000 we reviewed a third party supply
contract for product as well as our manufacturing facilities. We
concluded that the market for product previously produced at this
facility had not grown as anticipated and excess supply and production
facilities were in place. Further, there were no specific market
changes expected to impact these conditions. As a result of this
review, we cancelled our original supply contract in first quarter
2000, restructured, and entered a new, more limited supply agreement.
There were no one-time charges related to the contract change. We also
decided to permanently idle this manufacturing facility and wrote off
the book value of these assets in the first quarter 2000.
6. Other income (expense), net for the second quarter 2001 was $300
thousand income and included a gain of $1.0 million on the sale of a
nonoperating asset partially offset by $1.3 million of expenses related
to the refinancing of our debt.
The $1.0 million gain ($600 thousand after tax or $.01 per share) on
the sale of the nonoperating asset was for the sale of certain real and
personal property in King William, Virginia, to Old Town, LLC (Old
Town). Old Town is a separate legal entity organized by members of the
Gottwald family. The property was sold for $2.9 million. We will
continue to manage the property for Old Town. Management expenses
incurred will be partially offset by any income generated by use of the
property.
Other income (expense), net totaled $1.6 million income for the second
quarter 2000 and consisted primarily of a gain of about $2.3 million on
the sale of a nonoperating asset.
Other income (expense), net for six months 2001 was $400 thousand
expense and included $1.8 million for our percentage share of the
losses of Envera LLC (Envera). Envera, which recently merged with
ChemConnect, Inc., is a global electronic-marketplace for business to
business transactions and services. Also included in six months 2001 is
the $1.3 million of expenses related to the refinancing of our debt, as
well as the $1.0 million gain on the sale of a nonoperating asset.
Other income (expense), net for six months 2000 was $1.1 million.
7. Long-term debt consisted of the following:
(in thousands)
June 30 December 31
2001 2000
---- ----
New term loan $ 229,059 $ -
Revolving credit agreement 65,000 250,000
Term loan agreement 120,000 180,000
Medium-term notes due through 2001 6,750 6,750
--------- ---------
Total long-term debt 420,809 436,750
Obligations under capital lease 6,293 6,526
Less unamortized discount - (32)
--------- ---------
Net long-term debt 427,102 443,244
Less current portion (102,232) (87,191)
--------- ---------
Long-term debt $ 324,870 $ 356,053
========= =========
9
On April 10, 2001, we entered into the First Amended and Restated
Credit Agreement (the New Credit Facility) with our lenders as a result
of our anticipating and not being in compliance with one of the
covenants of the previous agreement at the end of the first quarter
2001.
The New Credit Facility includes a revolving line of credit of $170
million (including a letter of credit sub-facility), the remaining
portion of the original term loan, and a new term loan of $230 million.
Instead of entering into a qualified asset-based secured financing
facility to be utilized to reduce the term loan and revolving debt by
$115 million before May 31, 2001, we paid an additional fee of $675
thousand. The New Credit Facility will mature on August 28, 2002.
The key provisions of the New Credit Facility include collateralizing
substantially all of our assets in the United States and higher
interest rates. Mandatory prepayments on debt are required from excess
cash flow, asset dispositions, distributions from our pension plan, and
certain other transactions. The payment of dividends is not permitted
and investments, as well as capital expenditures are limited. The New
Credit Facility includes certain financial covenants, including among
others, minimum EBITDA, interest coverage, and leverage coverage
ratios.
Unforeseen events or business conditions could restrict us from meeting
our targeted financial results. Should this occur, we have alternative
plans, including additional asset sales and reductions in working
capital that we believe could enable us to comply with the debt
covenants. However, in the event that we are not in compliance with
debt covenants at some future date, we would pursue various
alternatives. These alternatives may include, among other things,
refinancing of debt or obtaining covenant amendments or waivers. While
we believe we could successfully complete alternative arrangements if
necessary, there can be no assurances that such alternatives would be
available or that we would be successful in their implementation.
8. The components of comprehensive income consist of the following:
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
Net (loss) income $(94,784) $ 9,269 $(106,051) $ 37,093
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on marketable
equity securities (547) (3,090) (4,769) (562)
Foreign currency translation adjustments (919) (2,086) (4,624) (4,248)
Minimum pension liability adjustment - - - (1,811)
Unrealized gain on derivative instruments - 809 - 1,347
-------- -------- --------- --------
Other comprehensive (loss) (1,466) (4,367) (9,393) (5,274)
-------- -------- --------- --------
Comprehensive (loss) income $(96,250) $ 4,902 $(115,444) $ 31,819
======== ======== ========= ========
10
The components of accumulated other comprehensive (loss) income consist
of the following:
June 30 December 31
2001 2000
---- ----
Unrealized (loss) gain on marketable equity securities $ (1,966) $ 2,803
Minimum pension liability adjustment (907) (907)
Foreign currency translation adjustments (24,610) (19,986)
-------- --------
Accumulated other comprehensive (loss) $(27,483) $(18,090)
======== ========
9. On May 30, 2001, Bruce C. Gottwald announced his retirement as Chief
Executive Officer, effective June 1, 2001. He will continue as a
director and Chairman of the Board of Directors.
The Board of Directors elected Thomas E. (Teddy) Gottwald to the role
of Chief Executive Officer, effective June 1, 2001. Teddy Gottwald
joined Ethyl Corporation in 1984 in the Plastics Division. He was
elected a Vice President of Ethyl and named divisional president of our
Petroleum Additives Division in 1991. Mr. Gottwald was elected
President and Chief Operating Officer of Ethyl Corporation in 1994. He
also serves as a director and member of the Executive Committee.
10. At December 31, 2000, we terminated an overfunded U.S. salaried
employee pension plan. Ethyl received regulatory approval for the plan
termination in second quarter 2001. The proceeds from the terminated
plan amount to $178.9 million. After fully funding a new pension plan
for U.S. salaried employees which has comparable provisions and benefit
formula, we received $130.8 million in third quarter 2001 which
represent the reversion of pension assets. The reversion amount is
subject to the usual corporate income taxes, as well as a 20% Federal
excise tax. Total federal income, state income, and excise taxes
amounted to $76.8 million. The excise tax is payable in the third
quarter 2001 and the federal tax is payable in December of this year.
The net cash received, after taxes, was $54.0 million and was used to
pay down our debt in the third quarter of 2001.
11. The Financial Accounting Standards Board issued two new Statements of
Financial Accounting Standards (SFAS.) The standards are SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and Other Intangible
Assets." We are currently evaluating the impact that these statements
will have.
11
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, 2000. 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.
We believe 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 identify certain, but not all, of these factors in the
Review of Operations in our 2000 Annual Report and incorporate the same
herein by reference.
The financial statements in this Form 10-Q have been updated from the
preliminary financial statements included with our earnings release on
Thursday, July 26, 2001. The adjustment is due to our receiving a $2.6
million higher pension reversion from the termination of an overfunded
U.S pension plan than had been anticipated and reflected in the
preliminary financial statements included with our earnings release.
This resulted in a reduction of $1.3 million after tax, or 2 cents per
share, in the pension-related charges reported as nonrecurring items.
Earnings excluding nonrecurring items are unchanged from the amount
reported in the earnings release.
Results of Operations
---------------------
Net Sales
---------
Our consolidated net sales for the second quarter 2001 amounted to
$171.8 million, representing a decrease of 20% from the 2000 level of
$214.6 million. Consolidated net sales for six months 2001 were $383.1
million, or a 7% decrease from the six months 2000 amount of $413.1
million. The table below shows our consolidated net sales by segment.
Net Sales By Segment
(in millions)
Second Quarter Six Months
2001 2000 2001 2000
---- ---- ---- ----
Petroleum additives $169.9 $204.9 $370.4 $399.6
Tetraethyl lead 1.9 9.7 12.7 13.5
------ ------ ------- ------
Consolidated net sales $171.8 $214.6 $383.1 $413.1
====== ====== ====== ======
12
Petroleum Additives Segment
---------------------------
Petroleum additives net sales in the second quarter 2001 of $169.9
million were down $35.0 million (17%) from 2000. Lower shipments
resulted in lower sales of $37.2 million. This was partially offset by
higher selling prices, which had a benefit to net sales of $2.2
million.
The six months 2001 net sales were $29.2 million (7%) lower than 2000.
Lower shipments resulted in lower sales of $40.7 million partially
offset by an $11.5 million benefit from higher selling prices.
The lower volumes shipped in both the second quarter and six months
periods reflect the impact of the previously announced loss of three
major crankcase customers. Shipments of crankcase products to these
customers substantially ceased by the end of the first quarter.
TEL Segment
-----------
Most of the TEL marketing activity is through the marketing agreements
with Octel and Alcor, under which we do not record the sales
transactions. Therefore, the TEL net sales reflected in the table above
were made in areas not covered by the agreements, as well as to Octel
under the terms of the agreements.
The decrease in TEL sales in the second quarter 2001 compared to second
quarter 2000 was the result of $6.9 million lower sales to Octel in
2001. During the first quarter 2001, Octel purchased substantially all
of the remaining inventory they are required to purchase under the
agreements. Sales, other than to Octel, were $900 thousand lower for
second quarter 2001 than second quarter 2000.
TEL net sales decreased $800 thousand (6%) from six months 2000 to six
months 2001. However, sales to Octel increased $1.0 million during this
period due to Octel's first quarter 2001 purchase of substantially the
entire remaining inventory requirement under the agreements. The
decrease in TEL sales, excluding Octel, reflects the expected and
continuing market decline and shipment patterns.
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 and the
prepayment for services are included in the operating profit of each
segment.
Second quarter 2001 segment operating loss was $29.7 million and
included a nonrecurring expense of $50.3 million for costs related to
rationalization of our crankcase business. Operating profit for the
same 2000 period was $22.9 million. Excluding the nonrecurring charge
in 2001, combined segment operating profit of $20.6 million decreased
10% from the same period last year.
Six months 2001 segment operating loss was $34.1 million. This included
a nonrecurring expense for costs related to rationalization of our
crankcase business of $73.6 million. Operating profit six months 2000
was $30.8 million and included a nonrecurring charge
13
of $7.5 million for the write-off of a previously idled petroleum additives
manufacturing facility. Excluding these nonrecurring items, combined segment
operating profit of $39.5 million increased 3% from 2000 levels for the same
period.
Operating profit by segment and 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
2001 2000 2001 2000
---- ---- ---- ----
Petroleum additives before
nonrecurring items $ 10.6 $11.5 $ 18.9 $ 23.8
Nonrecurring items (50.3) - (73.6) (7.5)
------- ----- ------- ------
Total petroleum additives (39.7) 11.5 (54.7) 16.3
Tetraethyl lead 10.0 11.4 20.6 14.5
------- ----- ------- ------
Segment operating (loss) profit (29.7) 22.9 (34.1) 30.8
Corporate unallocated expense (5.1) (5.9) (11.0) (12.7)
Interest expense (9.8) (9.2) (18.0) (17.6)
Pension settlement (expense)
income including 2001
excise tax provision (88.2) - (88.2) 49.9
Demutualization income - 4.0 - 4.0
Other income, net 1.8 2.7 2.5 4.1
------- ----- ------- ------
(Loss) income before income taxes $(131.0) $14.5 $(148.8) $ 58.5
======= ===== ======= ======
Petroleum Additives Segment
- ---------------------------
Second Quarter 2001 vs. Second Quarter 2000 - Excluding nonrecurring items,
- -------------------------------------------
petroleum additives operating profit for the second quarter 2001 of $10.6
million decreased 8% from second quarter 2000 operating profit of $11.5 million
on the same basis. Including nonrecurring charges, petroleum additives second
quarter 2001 operating loss was $39.7 million.
The decrease in operating profit in the second quarter included larger losses in
our crankcase business as the impact of previously announced business losses in
the product line for the period more than offset the benefit of our cost
reduction program which is now in place. Excluding the crankcase business,
petroleum additives operating profit showed modest increases when comparing
second quarter 2001 with the same period in 2000.
In addition to lost crankcase business and therefore, significantly lower
crankcase shipments, the lower profits for the second quarter 2001, excluding
the nonrecurring charge, resulted from higher raw material and energy costs, as
well as unfavorable foreign currency effects. These were partially offset by the
favorable impact of higher selling prices, as well as lower selling, general,
and administrative expenses (SG&A) and research, development, and testing
expenses (R&D).
14
The nonrecurring charges in the second quarter 2001 amounted to $50.3 million
and related to charges for our crankcase product line. These costs included a
noncash charge of $29.8 million for a portion of the accelerated depreciation of
the crankcase facilities, which were indefinitely idled in the second quarter
2001, as well as certain other related costs. Also included is $18.1 million for
severance, early retirement, and other expenses, as well as $2.4 million for
shutdown costs.
R&D expenses in the petroleum additives segment for the second quarter 2001
decreased 29% compared to the 2000 period. The decrease primarily resulted from
reduced R&D in our crankcase business, as well as the related downsizing of our
R&D facilities. Substantially all of the R&D performed at the Bracknell, England
facility is being consolidated into our modern facilities in Richmond, Virginia
which improves efficiencies of operation and reduces costs. In addition, staff
reductions, as well as being able to internally perform more testing which
previously had been done by external labs, has contributed to the significantly
lower R&D expenses. Finally, we completed in 2000 most of the testing related to
the next generation of additive product specifications.
Selling, general, and administrative expenses combined with research,
development, and testing expense, as a percentage of net sales, decreased from
15.9% for the second quarter 2000 to 15.0% in the same period this year. This
decrease reflects the effect of lower SG&A and R&D expenses due to the impact of
the cost reduction program in the second quarter 2001.
Six Months 2001 vs. Six Months 2000 - Excluding nonrecurring items, petroleum
- -----------------------------------
additives operating profit for the six months 2001 of $18.9 million decreased
21% from six months 2000 operating profit of $23.8 million on the same basis.
Including nonrecurring charges, the petroleum additives operating loss for six
months 2001 was $54.7 million as compared to operating profit of $16.3 million
for six months 2000.
Similarly to the second quarter, the overall decrease in operating profit for
the six months reflects the impact of our previously announced reductions in the
scope of our crankcase business. Our cost reduction efforts have been
essentially completed at the end of the second quarter 2001, and we are
beginning to realize the full benefit of these efforts.
The lower profits, excluding nonrecurring charges, for six months 2001 resulted
primarily from higher raw material and energy costs, as well as significantly
lower crankcase shipments. Unfavorable foreign currency effects also contributed
to the lower profits. These were partially offset by higher selling prices and
the benefit of our cost reduction initiatives resulting in lower selling,
general, and administrative expenses (SG&A) and research, development, and
testing expenses (R&D).
The nonrecurring charges for our crankcase product line for the six months 2001
were $73.6 million. These costs included a noncash charge of $42.4 million for a
portion of the accelerated depreciation of the crankcase facilities, which were
indefinitely idled in the second quarter 2001, as well as certain other related
costs. Also included is $28.8 million for severance, early retirement, and other
expenses, as well as $2.4 million for shutdown costs. The nonrecurring charge in
the first quarter 2000 of $7.5 million related to the writedown of an idled
petroleum additives facility.
15
R&D expenses in the petroleum additives segment for six months 2001 decreased
19% compared to six months 2000. The decrease is the result of restructuring our
R&D operations. We have significantly reduced R&D in our crankcase business, as
well as downsized our related R&D facilities as discussed in the second quarter
review above. Contributing to further cost reductions, we have reduced staff and
are now performing internally more testing which had been done by external
testing facilities. We also completed most of the testing related to the next
generation of additive product specifications last year.
Selling, general, and administrative expenses combined with research,
development, and testing expense, as a percentage of net sales, decreased from
17.6% for the six months 2000 to 16.7% for six months 2001. This decrease
reflects the effect of lower SG&A and R&D due to the impact of the cost
reduction program.
TEL Segment
- -----------
Our TEL operating profit for the second quarter 2001 amounted to $10.0 million
and included $11.5 million from the TEL marketing agreements. In comparison,
second quarter 2000 operating profit was $11.4 million including $9.0 million
from the marketing agreements and a $1.1 million benefit from the liquidation of
LIFO inventory.
Six months 2001 operating profit was $20.6 million and included $19.6 million
from the marketing agreements, as well as a benefit of $1.5 million from the
liquidation of LIFO inventory. Operating profit for the six months 2001 reflects
the sale of substantially the entire remaining inventory that Octel is required
to purchase under the agreements. Six months 2000 operating profit was $14.5
million and included $14.1 million from the marketing agreements, as well as
$1.1 million benefit from the liquidation of LIFO inventory.
The improvement in the 2001 operating profit for the marketing agreements over
the second quarter and first half of last year primarily reflects improved
product pricing. This was favorably influenced by the customer mix in the
current year periods, as well as achieving certain price increase successes.
As the TEL market continues to decline, the quarter to quarter results could
fluctuate at a higher rate due to the timing of customer bulk orders.
TEL results include the cost of certain facilities that are not allocable to the
TEL marketing agreements.
The following discussion references the Consolidated Financial Statements
beginning on page 3 of this Form 10-Q.
Special Items (Expense) Income, Net
- -----------------------------------
Second Quarter 2001 vs. Second Quarter 2000 - The special items (expense)
- -------------------------------------------
income, net for the second quarter 2001 was a charge of $106.3 million and
included pension-related charges, as well as crankcase rationalization charges.
The termination of our U.S. salaried pension plan and the subsequent settlement
of the pension contracts resulted in a
16
noncash charge of $62.0 million. The excise tax on the reversion of the pension
assets was $26.2 million. The charge for severance, early retirement, and other
expenses related to our crankcase business amounted to $18.1 million.
There were $32.2 million crankcase-related costs not included in special items
of which we reported $31.0 million in cost of goods sold and $1.2 million in
research, development, and testing expenses.
The special items (expense) income, net for second quarter 2000 was a benefit of
$4.0 million related to the demutualization of MetLife, Inc.
Six Months 2001 vs. Six Months 2000 - The special items (expense) income, net
- -----------------------------------
for six months 2001 was a charge of $117.0 million. As discussed in the Second
Quarter section, the termination of the pension plan resulted in a noncash
charge of $62.0 million, as well as excise taxes of $26.2 million. The crankcase
rationalization charge of $28.8 million was for severance, early retirement, and
other expenses.
There were $44.8 million crankcase-related costs not included in special items
of which we reported $41.8 million in cost of goods sold and $3.0 million in
research, development, and testing expenses.
The special items (expense) income, net for six months 2000 totaled $46.4
million income. Settlements of certain pension contracts resulted in the
recognition of a noncash gain of $49.9 million. In addition, the demutualization
of MetLife, Inc. resulted in $4.0 million income. These were partly offset by a
$7.5 million charge for the write-off of the idled Orangeburg, South Carolina,
petroleum additives manufacturing facility.
Interest and Financing Expenses
- -------------------------------
Second quarter 2001, interest and financing expenses were $9.8 million as
compared to $9.2 million in 2000. Lower average debt resulted in a decrease in
interest and financing expenses of $1.1 million. Higher fees and amortization of
financing costs of $1.5 million, as well as a higher effective interest rate
causing a $200 thousand increase more than offset the lower average debt.
Interest and financing costs for six months 2001 were $18.0 million as compared
to $17.6 million for the same period last year. Again, lower average debt caused
a decrease of $1.6 million. This was more than offset by higher fees and
amortization resulting in an increase of $1.7 million and a higher effective
interest rate causing an increase of $300 thousand.
Interest costs under the credit facility are based on market rates plus a
premium. While the premium charged under our current credit facility entered
into in April 2001 is higher than was charged under our previous facility, the
recent reductions in the market rates have resulted in our interest and
financing costs being lower than if market rates had remained unchanged. In
addition, we expect to reduce debt, and therefore interest and financing costs,
with cash from operations, asset sales, and the reversion of assets from the
pension termination. If market rates begin to increase, our interest and
financing costs will also rise on the remaining debt.
17
Other Income (Expense), Net
- ---------------------------
Other income (expense), net for the second quarter 2001 was $300 thousand income
and included a gain of $1.0 million on the sale of a nonoperating asset, as well
as a number of small income items. These were partially offset by $1.3 million
of expenses related to the refinancing of our debt. Other income (expense), net
totaled $1.6 million income for the second quarter 2000 and consisted primarily
of a gain of about $2.3 million on the sale of a nonoperating asset.
The $1.0 million gain ($600 thousand after tax or $.01 per share) on the sale of
a nonoperating asset was for the sale of certain real and personal property in
King William, Virginia, to Old Town, LLC (Old Town). Old Town is a separate
legal entity organized by members of the Gottwald family. The property was sold
for $2.9 million. We will continue to manage the property for Old Town.
Management expenses incurred will be partially offset by any income generated by
use of the property.
Six months 2001 amounted to $400 thousand expense and included $1.8 million for
our percentage share of the losses of Envera LLC (Envera). Envera, which
recently merged with ChemConnect, Inc., is a global electronic-marketplace for
business to business transactions and services. Also included in six months 2001
is the $1.3 million of expenses related to the refinancing of our debt, as well
as the $1.0 million gain on the sale of a nonoperating asset. Other income
(expense), net for six months 2000 was $1.1 million.
Income Taxes
- ------------
Income taxes were a $36.2 million benefit for the second quarter 2001 and a $5.2
million expense for the second quarter 2000. The change in our (loss) income
before income taxes resulted in $52.6 million of the decrease in income taxes.
Offsetting this was the impact of $11.2 million from a lower effective income
tax rate on the loss. The effective income tax rate was 27.6% for the second
quarter 2001 and 36.2% for the second quarter 2000. The lower effective rate on
the loss in 2001 primarily reflects the impact of the nondeductible excise tax
expense on the reversion of pension assets.
Income taxes were a benefit of $42.7 million for the six months 2001 as compared
to expense of $21.4 million for six months 2000. The change in our (loss) income
before income taxes resulted in $75.8 million of the decrease in income taxes.
This was offset by the effect of a lower effective income tax rate in 2001 of
$11.7 million. The effective income tax rate was 28.7% for six months 2001 and
36.6% for six months 2000. As in the second quarter, the lower effective income
tax rate on this year's loss primarily reflects the nondeductible excise tax on
the reversion of pension assets.
Net (Loss) Income
- -----------------
Excluding the nonrecurring items, our second quarter 2001 earnings were $5.1
million ($.06 per share) compared to $5.3 million ($.06 per share) for the 2000
period. Six months 2001 earnings, excluding nonrecurring items, was $8.6 million
($.10 per share), while six months 2000 earnings, on the same basis, were $6.3
million ($.07 per share).
Ethyl's net loss for second quarter 2001, including nonrecurring charges, was
$94.8 million ($1.13 per share) as compared to net income of $9.3 million ($.11
per share) for second quarter 2000. Our net loss for six months 2001, including
nonrecurring charges,
18
was $106.1 million ($1.27 per share). The six months 2000 net income was $37.1
million ($.44 per share). The second quarter 2001 net loss includes a decrease
of $800 thousand in corporate general and administrative expenses from second
quarter 2000, while six months 2001 includes a decrease of $1.7 million. The
nonrecurring items for the second quarter and six months periods, which have
been discussed above, are summarized in the following table.
A summary of (loss) income and related per share information, follows:
(in millions except for per share amounts)
Second Quarter Six Months
-------------- ----------
2001 2000 2001 2000
---- ---- ---- ----
Net (loss) income:
Earnings excluding nonrecurring items $ 5.1 $ 5.3 $ 8.6 $ 6.3
Nonrecurring items (a) (99.9) 4.0 (114.7) 30.8
------ ----- ------- ------
Net (loss) income $(94.8) $ 9.3 $(106.1) $ 37.1
====== ===== ======= ======
Basic and diluted (loss) earnings per share:
Earnings excluding nonrecurring items $ .06 $ .06 $ .10 $ .07
Nonrecurring items (a) (1.19) .05 (1.37) .37
------ ----- ------- ------
Net (loss) income $(1.13) $ .11 $ (1.27) $ .44
====== ===== ======= ======
(a) Nonrecurring items after income taxes:
Crankcase rationalization costs:
Write-off of assets $(18.4) $ - $ (25.8) $ -
Severance, early retirement, and other costs (13.2) - (20.6) -
Pension settlement (expense) income
including 2001 excise tax provision (68.9) - (68.9) 31.6
Gain on sale of nonoperating asset 0.6 1.4 0.6 1.4
Income from demutualization of MetLife, Inc. - 2.6 - 2.6
Manufacturing facility write-off - - (4.8)
------ ----- ------- ------
$(99.9) $ 4.0 $(114.7) $ 30.8
====== ===== ======== ======
Cash Flows, Financial Condition, and Liquidity
- ----------------------------------------------
Cash and cash equivalents at June 30, 2001 were $8.2 million, which was an
increase of $3.7 million since December 31, 2000. Our cash flows were more than
sufficient to cover operating activities during the 2001 period. Cash flows from
operating activities for six months 2001 were $31.6 million. We used this, as
well as $2.9 million from the sale of certain assets, to make a net repayment on
debt of $16.1 million, to fund capital expenditures of $4.9 million, to invest
$1.3 million in Envera, to pay $9.8 million in debt issuance costs, and to
increase cash and cash equivalents on hand by $3.7 million. Ethyl expects that
cash from operations will continue to be sufficient to cover our operating
expenses.
Depreciation and amortization in the Condensed Consolidated Statements of Cash
Flows includes accelerated depreciation of $41.2 million due to the shortened
lives of certain crankcase assets.
19
At June 30, 2001, we had restricted cash of $1.3 million, which was a
portion of the funds we received from the demutualization of MetLife,
Inc. in 2000. Ethyl must use this cash to offset the employee portion
of health benefit costs.
Ethyl has combined current and noncurrent long-term debt of $427.1
million at June 30, 2001, as compared to $443.2 million at December 31,
2000. We paid down $60 million on the term loan, partially by utilizing
additional borrowings on the revolving credit agreement of $44.1
million. Our capital leases also decreased $200 thousand.
As a percentage of total capitalization, Ethyl's long-term debt,
excluding the current portion, increased from 57.9% at the end of 2000
to 69.3% at June 30, 2001. This increase was primarily the result of
the special charges associated with the crankcase rationalization, as
well as the one-time charges related to the pension termination, which
reduced equity more than our reduction in debt for the period.
We expect our capital spending during 2001 will be about $11 million,
somewhat lower than 2000. Ethyl will continue to finance capital
spending through cash provided from operations.
Our working capital at June 30, 2001 was $128.0 million, resulting in a
current ratio of 1.46 to 1. At December 31, 2000, the working capital
was $93.9 million and the current ratio was 1.46 to 1. The increase in
working capital reflects an increase in the pension reversion
receivable, as well as decreases in accrued expenses and accounts
payable. Partially offsetting these, were decreases in inventories and
accounts receivable, as well as an increase in taxes payable and the
current portion of long-term debt.
Pension Plan
------------
At December 31, 2000, we terminated an overfunded U.S. salaried
employee pension plan. Ethyl received regulatory approval for the plan
termination in second quarter 2001. The proceeds from the terminated
plan amount to $178.9 million. After fully funding a new pension plan
for U.S. salaried employees which has comparable provisions and benefit
formula, we received $130.8 million in third quarter 2001 which
represent the reversion of pension assets. The reversion amount is
subject to the usual corporate income taxes, as well as a 20% Federal
excise tax. Total federal income, state income, and excise taxes
amounted to $76.8 million. The excise tax is payable in the third
quarter 2001 and the federal tax is payable in December of this year.
The net cash received, after taxes, was $54.0 million and is being used
to pay down our debt in the third quarter. In addition, the funds
available prior to the tax payments will be used for the temporary
reduction of debt. In 2001 and future years, Ethyl will report reduced
noncash pension income, since the amount of surplus in the new pension
plan will be less than that in the terminated plan.
New Credit Facility
-------------------
On April 10, 2001, we entered the First Amended and Restated Credit
Agreement (the New Credit Facility) with our lenders. This was a result
of our anticipating not being in compliance with one of the covenants
of the previous agreement at the end of the first quarter 2001.
20
The New Credit Facility includes a revolving line of credit of $170
million (including a letter of credit sub-facility), the remaining
portion of the original term loan, and a new term loan of $230 million.
Instead of entering into a qualified asset-based secured financing
facility to be utilized to reduce the term loans and revolving debt by
$115 million before May 31, 2001, we paid an additional fee of $675
thousand. The New Credit Facility will mature on August 28, 2002.
The key provisions of the New Credit Facility are detailed in Note 23
of our Form 10-K for the year ended December 31, 2000. These provisions
include collateralizing substantially all of our assets in the United
States and higher interest rates. Mandatory prepayments on debt are
required from excess cash flow, asset dispositions, distributions from
our pension plan, and certain other transactions. The payment of
dividends is not permitted and investments, as well as capital
expenditures are limited.
Recently Issued Accounting Standards
------------------------------------
The Financial Accounting Standards Board issued two new Statements of
Financial Accounting Standards (SFAS.) The standards are SFAS 141
"Business Combinations" SFAS 142 "Goodwill and Other Intangible
Assets." We are currently evaluating the impact of these statements.
New Business Model
------------------
Our two business segments, TEL and petroleum additives, both reported
declines in earnings in each of the last two full years. The rate of
decline in TEL operating profit in 2000 was 19% compared to 1999 and
23% compared to 1998. While TEL earnings for six months 2001 were
higher than six months 2000, we expect continued average annual
declines in the TEL market of approximately 15%.
Operating profit of the petroleum additives business declined 71% in
2000 compared to 1999 and 74% compared to 1998. Six months 2001 profits
were also down from six months 2000. The petroleum additives market for
some time has continued to reflect excess capacity, substantial raw
material and energy cost increases, unfavorable currency conditions,
and the pricing leverage of the consolidating oil industry. The market
dynamics for one of our key product lines within the petroleum
additives segment, crankcase products, deteriorated to such an extent
we were not earning an adequate return. We attempted to recover some of
the increased cost through price increases. However, these initiatives
were not successful in keeping up with cost increases and were factors
in the loss of business with three major customers that represented a
significant portion of our crankcase business. A substantial portion of
the crankcase business with these three former customers was completed
by the end of the first quarter 2001.
In an effort to improve profitability, we announced in February 2001
and are implementing a new business model for petroleum additives. We
will continue offering chemical technology solutions and systems for
fuels, refinery operations, driveline and industrial lubricants, engine
oils and other formulations, applying our resources in a way that is
consistent with our new strategy. The model also includes the idling of
production and research facilities, as well as a workforce reduction.
Our cost reduction and restructuring efforts are now essentially
complete. We expect that these actions will reduce operating expenses
by approximately $60 million on an annualized basis.
21
The crankcase production facilities that were indefinitely idled during
the second quarter 2001 included a small plant in Natchez, Mississippi
and portions of the plants in Houston, Texas and Rio de Janeiro,
Brazil. We are consolidating production in plants that have spare
capacity. These actions will reduce our total capacity for crankcase
production by approximately 50%. We have also consolidated certain
research and testing activities from our Bracknell, England facility to
our modern facilities located in Richmond, Virginia, and have reduced
research on products where the market does not provide an adequate
return on investment.
In first quarter 2001, we evaluated all crankcase assets, including the
related intangible assets, for impairment in accordance with Statement
of Financial Accounting Standard No. 121, "Accounting for Long-Lived
Assets and for Long Lived Assets to be Disposed Of." We considered if
the indefinitely idled assets were impaired and concluded that these
assets should be depreciated over the remaining useful lives through
the anticipated closure dates in the second quarter 2001. The
intangible assets had a book value of approximately $76 million at
March 31, 2001. We determined that a writedown of the intangible assets
was not appropriate.
As part of the workforce reduction, we announced an involuntary
severance program that resulted in a reduction of 319 positions.
Included were staff at the crankcase plants being indefinitely idled,
staff at our Bracknell and Richmond research facilities, and corporate
staff. We also announced a voluntary early retirement program for most
domestic salaried employees over age 52. The involuntary severance
program included 98 employees who were eligible for early retirement.
Thirty-two additional employees, whose positions were not eliminated,
voluntarily retired. Of the 351 employees who were involuntarily
severed or voluntarily retired, 138 positions were in manufacturing,
115 were in research and testing, and 98 were administrative positions.
Most of the nonmanufacturing terminations were effective April 30,
2001; however, some occurred later in the second quarter 2001. For the
six months 2001, we paid $5.8 million for cost related to the 200
employees who were terminated by June 30, 2001. We paid $4.7 million
during the second quarter 2001.
We charged $50.3 million for costs related to our crankcase
rationalization program during the second quarter 2001. Of this,
severance, early retirement, and other expenses amounted to $18.1
million. Noncash charges from the accelerated depreciation due to the
shortened life of certain indefinitely idled crankcase facilities, as
well as certain related costs, amounted to $29.8 million. Shutdown
costs were $2.4 million. For the second quarter 2001, we reported $18.1
million of severance, early retirement, and other expenses as a special
item. Cost of goods sold included $31.0 million and research,
development, and testing expenses included $1.2 million.
During six months 2001, we reported charges of $73.6 million for the
crankcase rationalization program. Severance, early retirement, and
other expenses amounted to $28.8 million. Accelerated depreciation and
related costs were $42.4 million and shutdown costs were $2.4 million.
Of these costs, we reported $28.8 million of severance, early
retirement, and other expenses as a special item. Cost of goods sold
included $41.8 million and research, development, and testing expenses
included $3.0 million.
22
We believe that we have the ability to successfully implement our new
business model for petroleum additives, which will enable us to comply
with the terms of the New Credit Facility. While we believe our plan is
sound and attainable, the possibility exists that unforeseen events or
business conditions may adversely affect our ability to meet certain
financial covenants of the New Credit Facility.
If unforeseen events or conditions restrict us from meeting our
targeted results, we have alternative plans that we believe would
enable us to comply with the debt covenants. These plans include
additional asset sales, additional reductions in operating costs,
deferral of capital expenditures, and reductions in working capital. In
the event that we are not in compliance with the debt covenants at some
future date, we would pursue various alternatives. These may include,
among other things, refinancing of debt or obtaining covenant
amendments or waivers. While we believe we could successfully complete
alternative arrangements if necessary, there can be no assurance that
such alternatives would be available or that we would be successful in
their implementation.
Other Matters
-------------
On May 30, 2001, Bruce C. Gottwald announced his retirement as Chief
Executive Officer, effective June 1, 2001. He will continue as a
director and Chairman of the Board of Directors.
The Board of Directors elected Thomas E. (Teddy) Gottwald to the role
of Chief Executive Officer, effective June 1, 2001. Teddy Gottwald
joined Ethyl Corporation in 1984 in the Plastics Division. He was
elected a Vice President of Ethyl and named divisional president of our
Petroleum Additives Division in 1991. Mr. Gottwald was elected
President and Chief Operating Officer of Ethyl Corporation in 1994. He
also serves as a director and member of the Executive Committee.
23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Except for the interest rate risk and marketable security price risk,
there have been no significant changes in our market risk from the
information provided in our Form 10-K for the year ended December 31,
2000.
On April 10, 2001 when we entered into the new credit facility, the
premium charged on market interest rates under the new facility
increased. As a result, a hypothetical 10% increase in interest rates
may result in a significant difference on our earnings and cash flows
from the effect that was reported in our Form 10-K for the year-end
December 31, 2000. Currently, as market rates have decreased since
December 31, 2000, the change in our interest rate risk has not
resulted in a significant change in our interest and financing
expenses.
At June 30, 2001, we recorded our marketable securities at a fair value
of $16.9 million including net unrealized losses of $3.2 million. The
estimated loss in the fair value of marketable securities resulting
from a hypothetical 10% decrease in price is $1.7 million.
24
PART II - Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the annual meeting of shareholders held on May 30, 2001, the
shareholders elected the directors nominated in the Proxy with the
following affirmative votes and votes withheld:
Director Affirmative Votes Votes Withheld
William W. Berry 74,864,622 1,547,473
Phyllis L. Cothran 74,834,228 1,577,867
Bruce C. Gottwald 71,824,467 4,587,628
Thomas E. Gottwald 73,890,495 2,521,600
Gilbert M. Grosvenor 74,789,102 1,622,993
Sidney Buford Scott 74,872,883 1,539,212
Charles B. Walker 74,866,913 1,545,182
The shareholders also approved the selection of PricewaterhouseCoopers
LLP as the Company's auditors with 75,690,145 affirmative votes,
535,322 votes against and 186,628 abstentions.
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.
25
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 9, 2001 By: s/ D. A. Fiorenza
-------------------------
David A. Fiorenza
Vice President and Treasurer
(Principal Financial Officer)
Date: August 9, 2001 By: s/ Wayne C. Drinkwater
--------------------------
Wayne C. Drinkwater
Controller
(Principal Accounting Officer)
26