Page 1 of 21 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 March 31, 2002 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 April 30,
2002: 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
Ended March 31, 2002 and 2001 3
Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 5
Notes to Financial Statements 6-10
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11-19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
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
March 31
---------------------------------------
2002 2001
--------------- ------------------
Net sales $ 150,614 $ 217,260
Cost of goods sold 118,606 187,085
--------------- ------------------
Gross profit 32,008 30,175
TEL marketing agreements services 5,716 8,082
Selling, general, and administrative expenses 16,469 18,470
Research, development, and testing expenses 12,232 17,991
Special items expense - (10,707)
--------------- ------------------
Operating profit (loss) 9,023 (8,911)
Interest and financing expenses 7,038 8,194
Other expense, net (686) (694)
--------------- ------------------
Income (loss) before income taxes 1,299 (17,799)
Income tax expense (benefit) 416 (6,532)
--------------- ------------------
Income (loss) before cumulative effect of
accounting change 883 (11,267)
Cumulative effect of accounting change for
goodwill write-off (net of $615 tax) (2,505) -
--------------- ------------------
Net loss $ (1,622) $ (11,267)
=============== ==================
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of
accounting change $ $ 0.01 $ (0.14)
Cumulative effect of accounting change for
goodwill write-off (net of tax) (0.03) -
--------------- ------------------
Basic and diluted loss per share $ (0.02) $ (0.14)
=============== ==================
Shares used to compute basic earnings
(loss) per share 83,455 83,455
=============== ==================
Shares used to compute diluted earnings
(loss) per share 84,449 83,455
=============== ==================
See accompanying notes to financial statements.
3
ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31
2002 December 31
(unaudited) 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 11,707 $ 12,382
Restricted cash 866 996
Trade and other accounts receivable, less allowance
for doubtful accounts ($888 - 2002; $889 - 2001) 117,767 121,261
Receivable - TEL marketing agreements services 18,164 16,935
Inventories:
Finished goods and work-in-process 91,722 98,995
Raw materials 13,648 14,066
Stores, supplies and other 8,284 8,397
----------- -----------
113,654 121,458
Deferred income taxes and prepaid expenses 15,809 11,742
----------- -----------
Total current assets 277,967 284,774
----------- -----------
Property, plant and equipment, at cost 761,785 760,649
Less accumulated depreciation and amortization 551,922 544,892
----------- -----------
Net property, plant and equipment 209,863 215,757
----------- -----------
Prepaid pension cost 25,921 25,731
Other assets and deferred charges 107,635 114,447
Goodwill and other intangibles, net of amortization 73,780 78,916
----------- -----------
Total assets $ 695,166 $ 719,625
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,859 $ 54,376
Accrued expenses 51,551 59,907
Long-term debt, current portion 310,970 30,504
Income taxes payable 15,351 14,648
----------- -----------
Total current liabilities 422,731 159,435
----------- -----------
Long-term debt 24,064 305,453
Other noncurrent liabilities 105,453 109,444
Shareholders' equity
Common stock ($1 par value)
Issued - 83,454,650 in 2002 and 2001 83,455 83,455
Accumulated other comprehensive loss (27,923) (27,170)
Retained earnings 87,386 89,008
----------- -----------
142,918 145,293
----------- -----------
Total liabilities and shareholders' equity $ 695,166 $ 719,625
=========== ===========
See accompanying notes to financial statements.
4
ETHYL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months Ended
March 31
---------------------
2002 2001
--------- --------
Cash and cash equivalents at beginning of year $ 12,382 $ 4,470
--------- --------
Cash flows from operating activities:
Net loss (1,622) (11,267)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization 14,188 26,427
Write-off of goodwill 3,120 -
Accrued severance, early retirement, and other engine oil
additives rationalization charges - 11,625
Deferred income taxes (2,241) (3,933)
Prepaid pension cost 1,477 (2,815)
TEL working capital advance (322) -
Working capital changes (7,276) (8,285)
Other, net 471 1,131
--------- --------
Cash provided from operating activities 7,795 12,883
--------- --------
Cash flows from investing activities:
Capital expenditures (2,358) (2,287)
Prepayment for TEL marketing agreement services (3,200) -
Equity investments - (1,250)
Other, net (6) (16)
--------- --------
Cash used in investing activities (5,564) (3,553)
--------- --------
Cash flows from financing activities:
Repayment of term loans (38,640) (40,000)
Net borrowings 37,840 40,000
Debt issuance costs (1,983) (2,446)
Other, net (123) (116)
--------- --------
Cash used in financing activities (2,906) (2,562)
--------- --------
(Decrease) increase in cash and cash equivalents (675) 6,768
--------- --------
Cash and cash equivalents at end of period $ 11,707 $ 11,238
========= ========
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 for the fair presentation of, in all material respects,
our consolidated financial position as of March 31, 2002, as well as
the consolidated results of operations and the consolidated cash flows
for the three-months ended March 31, 2002 and 2001. 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 2001 Annual Report on Form 10-K. The
results of operations for the three-month period ended March 31, 2002
are not necessarily indicative of the results to be expected for the
full year.
2. The tables below show our consolidated net sales by segment, operating
profit by segment, and reconciliation to income (loss) before income
taxes.
Net Sales By Segment
(in millions)
First Quarter
2002 2001
---- ----
Petroleum additives $148.9 $205.9
Tetraethyl lead 1.7 11.4
------ -------
Consolidated net sales $150.6 $217.3
====== =======
6
Segment Operating Profit
(in millions)
First Quarter
2002 2001
---- ----
Petroleum additives before
nonrecurring items $ 10.6 $ 8.2
Nonrecurring items (1.5) (23.2)
------ -------
Total petroleum additives 9.1 (15.0)
Tetraethyl lead before
nonrecurring items 4.5 10.6
Nonrecurring items (1.6) -
------ -------
Total tetraethyl lead 2.9 10.6
------ -------
Segment operating profit (loss) 12.0 (4.4)
Add back current year nonrecurring
item to reconcile Segment Reporting
to Consolidated Statements
of Income 3.1 -
Corporate unallocated expense (2.3) (5.9)
Interest expense (7.0) (8.2)
Pension (expense) income (1.5) 2.8
Other expense, net (3.0) (2.1)
------ -------
Income (loss) before income taxes $ 1.3 $ (17.8)
====== =======
3. During first quarter 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.
4. Special items expense for 2001 includes a charge of $10.7 million ($6.8
million after tax or $.08 per share) for severance, early retirement,
and other expenses related to our engine oil additives rationalization.
5. Other expense, net for both the first quarter 2002 and 2001 was $700
thousand. The 2002 amount included $1.3 million for expenses related to
debt refinancing activities, while 2001 included $1.8 million for our
percentage share of losses in equity investments.
7
6. Long-term debt consisted of the following:
March 31 December 31
2002 2001
---- ----
New term loan $ 205,691 $ 205,691
Revolving credit agreement 60,000 40,800
Term loan agreement 44,774 83,414
Private borrowing 18,640 -
--------- -----------
329,105 329,905
Obligation under capital lease 5,929 6,052
---------- -----------
Total debt 335,034 335,957
Less current portion (310,970) (30,504)
--------- -----------
Long-term debt $ 24,064 $ 305,453
========= ===========
In March 2002, we entered the Fourth Amendment to Amended and Restated
Credit Agreement (the New Credit Facility) with our lenders. The New Credit
Facility includes a revolving line of credit of $146 million (including a
letter of credit sub-facility), the remaining balance on the original term
loan of $45 million, and the remaining balance on the new term loan of $205
million. The facility has a maturity date of March 31, 2003. However, the
maturity date can be further extended to March 31, 2004 provided certain
conditions are met.
The key provisions of the New Credit Facility are detailed in Note 26 of
our Form 10-K for the year ended December 31, 2001. 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, and certain other
transactions. The payment of dividends is not permitted and investments, as
well as capital expenditures are limited.
While the New Credit Facility does provide for an extension through March
31, 2004, our current forecast of operating earnings alone would not
achieve the extension conditions. We are pursuing certain strategic
initiatives, which if completed, would cause us to achieve the additional
extension through March 31, 2004. The completion of these initiatives
cannot be assured. If the extension is not achieved, we plan to enter into
negotiations with our lenders in the second half of 2002 to further extend
our borrowing facilities. However, there is no assurance that an agreement
will be accomplished. This would cause us to pursue other alternatives. We
believe the alternatives, if required, would be available to us. However,
there can be no assurance of their success. Consequently, borrowings under
the New Credit Facility are reflected as current liabilities in accordance
with generally accepted accounting principles beginning in the first
quarter of 2002 until such time as the extension conditions are achieved or
alternative longer-term borrowing facilities are secured.
On February 1, 2002, Bruce C. Gottwald, Chairman of the Board, made a loan
to Ethyl in the amount of $18.6 million. The loan is for three years at an
interest rate of 8.5%. Interest payments are due monthly during the term of
the loan, with the principal amount coming due at maturity. We used the
proceeds of the loan to pay down existing bank debt. The loan is
nonrecourse to Ethyl and is collateralized by a first deed of trust on the
three buildings at 330 South Fourth Street, Richmond, Virginia, that are
our principal offices. An independent appraiser valued the three buildings
at $18.6 million. We have a "put" right at the end of the loan term under
which we can convey the property to the lender in satisfaction of the debt.
If we
8
fail to pay the loan at maturity, the lender has a "call" right at the
end of the loan term under which he can require us to convey the
property to him in satisfaction of the debt.
7. The components of comprehensive loss consist of the following:
Three Months Ended
March 31
2002 2001
---- ----
Net loss $(1,622) $(11,267)
Other comprehensive loss, net of tax
Unrealized loss on marketable
equity securities (386) (4,222)
Foreign currency translation adjustments (367) (3,705)
------- --------
Other comprehensive loss (753) (7,927)
------- -------
Comprehensive loss $(2,375) $(19,194)
======= ========
The components of accumulated other comprehensive (loss) income consist
of the following:
March 31 December 31
2002 2001
---- ----
Unrealized (loss) gain on marketable equity securities $ (173) $ 213
Minimum pension liability adjustment (2,995) (2,995)
Foreign currency translation adjustments (24,755) (24,388)
-------- -----------
Accumulated other comprehensive loss $ (27,923) $ (27,170)
======== ===========
8. In conformity with Statement of Financial Accounting Standards No. 142,
during the first quarter 2002, we wrote-off goodwill of $3.1 million
($2.5 million after tax or $.03 per share.) If the write-off had
occurred on January 1, 2001, the 2001 net loss would have been reduced
by $151 thousand. There would have been no impact on basic and diluted
earnings per share.
9. Asset writedowns (through accelerated depreciation), severance, early
retirement, and other costs related to the rationalization of our
engine oil additives product lines in 2001 were $23.2 million ($14.8
million after tax or $.18 per share) for first quarter 2001. These
costs are included in the Consolidated Statements of Income as follows:
2001
----
Cost of goods sold $ 10.7
Research, development, and testing expenses 1.8
Special items expense 10.7
------
$ 23.2
======
Cost of goods sold includes a $10.7 million charge ($6.8 million after
tax or $.08 per share) for a portion of the accelerated depreciation of
the engine oil additives facilities that were idled in 2001, as well as
the writedown of certain inventories and shutdown costs.
9
Research, development, and testing expenses include a charge of $1.8
million ($1.2 million after tax or $.02 per share) 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.
We included severance, early retirement, and other expenses in special
items expense. See Note 4.
Depreciation and amortization in the 2001 Condensed Consolidated
Statement of Cash Flows includes accelerated depreciation of $11.6
million due to the shortened lives of certain engine oil additives
assets. Management considered if the indefinitely idled assets were
impaired and concluded that these assets should be depreciated over the
remaining useful lives through the second quarter 2001 closure dates.
10. The Financial Accounting Standards Board (FASB) issued several new
statements of Financial Accounting Standards (SFAS) during 2001.
SFAS 142 "Goodwill and Other Intangible Assets", issued in July 2001,
was effective for fiscal years beginning after December 15, 2001. The
statement eliminates the amortization of goodwill as of January 1,
2002. In addition, the statement no longer requires that intangibles be
amortized if the life of the intangible is determined to be indefinite.
Further, goodwill and intangibles will be reviewed at least annually
for possible impairment. Under this SFAS we wrote-off $3.1 million of
goodwill during the first quarter 2002.
SFAS 143 "Accounting for Asset Retirement Obligations" was issued in
August 2001. This statement addresses the obligations and asset
retirement costs associated with the retirement of tangible long-lived
assets. It requires that the fair value of the liability for an asset
retirement obligation be recorded when incurred instead of over the
life of the asset. The asset retirement costs must be capitalized as
part of the carrying value of the long-lived asset. If the liability is
settled for an amount other than the recorded balance, either a gain or
loss will be recognized at settlement. This statement is effective for
fiscal years beginning after June 15, 2002. We have not completed the
necessary analysis, and therefore, cannot yet assess the potential
impact on our financial statements.
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" was issued in October 2001 and was effective for fiscal years
beginning after December 15, 2001. While this statement supercedes SFAS
121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", SFAS 144 retains the framework
established in SFAS 121 and addresses implementation issues. SFAS 144
also supercedes Accounting Principles Board Opinion Number 30
"Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business" and addresses the accounting for disposal of
long-lived assets of a discontinued operation. Generally, SFAS 144
requires that impaired assets or assets to be disposed of, whether
reported in continuing operations or discontinued operations, be
recorded at the lower of carrying amount or fair value less cost to
sell. The statement has not had an impact on our first quarter 2002
results.
10
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, 2001. 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 of these factors in the Review of Operations in our 2001 Annual
Report and incorporate the same herein by reference.
Results of Operations
---------------------
Net Sales
---------
Our consolidated net sales for the first quarter 2002 amounted to $150.6
million, representing a decrease of 31% from the 2001 level of $217.3
million. The table below shows our consolidated net sales by segment. We
reclassified previously reported net sales amounts for the first quarter
2001 to comply with recent accounting guidance. There was no effect on net
income as a result of these reclassifications. The net effect of the
adoption was increased net sales, as well as increased cost of goods sold
of $6.0 million for the first quarter 2001.
Net Sales By Segment
(in millions)
First Quarter
2002 2001
---- ----
Petroleum additives $148.9 $205.9
Tetraethyl lead 1.7 11.4
------ ------
Consolidated net sales $150.6 $217.3
====== ======
Petroleum Additives Segment
---------------------------
Petroleum additives net sales in the first quarter 2002 of $148.9 million
were down $57.0 million (28%) from $205.9 million in first quarter 2001.
Shipments were significantly lower resulting in an unfavorable impact on
net sales of $52.8 million. This reduction in sales reflects the lower
engine oil shipments and includes the impact of the loss in 2001 of three
high-volume engine oil customers. Shipments to these customers continued
during the first quarter 2001, but were substantially complete by the end
of the second quarter 2001. Lower selling prices when compared to first
quarter 2001 resulted in a $4.2 million reduction in net sales.
11
TEL Segment
-----------
Most of the TEL marketing activity is through the agreements with Octel
and Alcor, under which we do not record the sales transactions.
Therefore, the TEL net sales shown in the table above are those made by
Ethyl in areas not covered by the agreements, as well as sales made to
Octel under the terms of the agreements.
TEL sales in the first quarter 2002 were $9.7 million lower than first
quarter 2001. During the first quarter 2001, Octel purchased
substantially all of the remaining inventory that they are required to
purchase under the agreements. This resulted in sales to Octel being
$7.8 million lower in first quarter 2002 as compared to first quarter
2001. We expect TEL net sales for 2002 to be lower than 2001. Sales,
other than to Octel, were $1.9 million lower for first quarter 2002
when compared to first quarter 2001.
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.
First quarter 2002 segment operating profit was $12.0 million and
included a nonrecurring charge of $3.1 million for the write-off of
goodwill upon the adoption of SFAS 142. Operating loss for the same
2001 period was $4.4 million and included a nonrecurring expense of
$23.2 million for costs related to the rationalization of our engine
oil additives business. Excluding these nonrecurring items, combined
segment operating profit decreased 20% from 2001 levels. This reduction
included an improvement in petroleum additives operating profit, which
was more than offset by lower TEL profit.
12
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)
First Quarter
2002 2001
---- ----
Petroleum additives before
nonrecurring items $ 10.6 $ 8.2
Nonrecurring items (1.5) (23.2)
------- -------
Total petroleum additives 9.1 (15.0)
------- -------
Tetraethyl lead before
nonrecurring items 4.5 10.6
Nonrecurring items (1.6) 0.0
------- -------
Total tetraethyl lead 2.9 10.6
------- -------
Segment operating profit (loss) 12.0 (4.4)
Add back current year nonrecurring
item to reconcile Segment
Reporting to the Consolidated
Statements of Income 3.1 0.0
Corporate unallocated expense (2.3) (5.9)
Interest expense (7.0) (8.2)
Pension (expense) income (1.5) 2.8
Other expense, net (3.0) (2.1)
------- -------
Income (loss) before income taxes $ 1.3 $ (17.8)
======= =======
Petroleum Additives Segment
---------------------------
Petroleum additives first quarter 2002 operating profit was $9.1
million as compared to operating loss of $15.0 million for first
quarter 2001. Excluding nonrecurring items, petroleum additives
operating profit for the first quarter 2002 of $10.6 million increased
29% from first quarter 2001 operating profit of $8.2 million on the
same basis.
When compared to first quarter 2001, operating profit for first quarter
2002 is higher in all major product lines, except for engine oil
additives. Engine oil additives operating profit is about even with
first quarter 2001. While the weakness in the engine oil additives
market negatively impacts our results, we continue to realize a
positive cash flow from this product line.
The higher profits this year resulted from significantly lower
research, development, and testing expenses (R&D), as well as lower
selling, general, and administrative expenses (SG&A). Results also
benefited from lower manufacturing and raw material costs. While raw
material costs were lower, it is difficult to predict the full impact
that recent increases in crude oil prices will have on our raw material
costs. These factors were partially offset by the unfavorable impact of
lower shipments and unfavorable foreign exchange.
The nonrecurring charge in the first quarter 2002 was for the write-off
of goodwill. This write-off was done in accordance with Statement of
Financial Accounting Standards No. 142. The nonrecurring charges in the
first quarter 2001 amounted to $23.2 million and related to the
rationalization of our engine oil additives product line. These costs
included a noncash charge of
13
$11.6 million for a portion of the accelerated depreciation of the
engine oil facilities that were indefinitely idled in the second
quarter 2001, as well as certain other related costs of $900 thousand.
Also included is $10.7 million for severance, early retirement, and
other expenses.
R&D expenses in the petroleum additives segment for the first quarter
2002 decreased 24% compared to the 2001 period. The decrease primarily
resulted from reduced R&D in our engine oil additive business.
SG&A decreased $1.7 million or 13% from first quarter 2001 levels. As a
percentage of net sales, SG&A expenses combined with R&D expenses,
increased from 14.4% for the first quarter 2001 to 16.2% in the same
period this year. This increase reflects the significant reduction in
net sales from first quarter 2001 partially offset by the impact of
lower SG&A and R&D expenses.
TEL Segment
-----------
TEL operating profit, excluding the nonrecurring item, for the first
quarter 2002 was $4.5 million and included $5.7 million from the TEL
marketing agreements. In comparison, first quarter 2001 amounted to
$10.6 million and included $8.1 million from the TEL marketing
agreements. Both volumes and selling prices improved moderately in our
TEL marketing agreement; however, certain costs associated with these
activities more than offset this benefit.
Including the $1.6 million nonrecurring charge, first quarter 2002
operating profit was $2.9 million. The nonrecurring item was for the
write-off of goodwill upon the adoption of SFAS 142.
In addition, operating profit for the first quarter 2001 included the
sale of substantially all of the remaining inventory that Octel is
required to purchase under the agreements. First quarter 2001 also
included a benefit of $1.5 million resulting from the liquidation of
LIFO inventory.
As the TEL market continues to decline, the quarter to quarter results
will fluctuate at a higher rate due to the timing of customer bulk
orders.
TEL operating profit includes our operations and the cost of certain
facilities that are not part of the TEL marketing agreements.
The following discussion references the Consolidated Financial
Statements beginning on page 3 of this Form 10-Q.
Special Items Expense
---------------------
The special items expense for the first quarter 2001 was a charge of
$10.7 million for severance, early retirement, and other expenses
related to our engine oil additive business. Of the remaining $12.5
million engine oil-related costs, we reported $10.7 million in cost of
goods sold and $1.8 million in research, development, and testing
expenses.
Interest and Financing Expenses
-------------------------------
In the first quarter 2002, interest and financing expenses were $7.0
million as compared to $8.2 million in 2001. Lower average debt
resulted in a decrease in interest and financing expenses of
14
$1.8 million, while lower average interest rates resulted in a
reduction of $1.3 million. Higher fees and amortization of financing
costs of $1.9 million partially offset these.
Interest costs under our credit facility are based on market rates plus
a premium. While the premium charged on borrowings under the credit
facility, which we entered in March 2002, is higher than was charged
under our previous facility, the reductions in market rates since first
quarter 2001 resulted in our interest and financing costs being lower
than if market rates had remained unchanged. If market rates begin to
increase, our interest and financing expenses will also rise on the
remaining debt.
Other Expense, Net
------------------
Other expense, net for both the first quarter 2002 and 2001 was $700
thousand. The 2002 amount included $1.3 million for expenses related to
debt refinancing activities, while 2001 included $1.8 million for our
percentage share of losses in equity investments.
Income Taxes
------------
Income taxes were $416 thousand expense for the first quarter 2002 and
a $6.5 million benefit for the first quarter 2001. The change in our
income (loss) before income taxes caused an increase of $7.0 million in
income taxes, while the change in the effective tax rate essentially
had no impact on income taxes. The effective income tax rate was 32.0%
in 2002 and 36.7% in 2001.
Cumulative Effect of Accounting Change
--------------------------------------
As discussed above in the "Segment Operating Profit" section, we
wrote-off goodwill of $3.1 million in first quarter 2002 in accordance
with Statement of Financial Accounting Standard No. 142. On an after
tax basis, this amounted to $2.5 million and is shown as a cumulative
effect of accounting change.
Net Income (Loss)
-----------------
Ethyl's net loss for first quarter 2002 was $1.6 million ($.02 per
share) as compared to a net loss of $11.3 million ($.14 per share) for
first quarter 2001. Included in net loss were nonrecurring charges of
$2.5 million ($.03 per share) in first quarter 2002 for the goodwill
write-off and $14.8 million ($.18 per share) for the same period in
2001 related to the engine oil additives rationalization charges.
Excluding the nonrecurring charges, net income was $900 thousand ($.01
per share) in 2002 and $3.5 million ($.04 per share) in 2001.
The first quarter 2002 net loss includes a decrease of $2.6 million in
corporate selling, general, and administrative expenses from first
quarter 2001. The first quarter 2002 also included pension expense of
$1.5 million, as compared to pension income of $2.8 million for the
same period last year. The significant reduction in the noncash pension
results from 2001 is the result of a lower surplus in our current
pension plan than was in the plan that was terminated in 2001.
15
A summary of (loss) earnings and (loss) earnings per share, in millions
except for per share amounts, is shown below:
First Quarter
-------------
2002 2001
---- ----
Net income (loss):
Earnings excluding nonrecurring items $ 0.9 $ 3.5
Nonrecurring items (a) (2.5) (14.8)
------- -------
Net (loss) $ (1.6) $ (11.3)
======= =======
Basic and diluted earnings (loss) per share:
Earnings excluding nonrecurring items $ .01 $ .04
Nonrecurring items (a) (.03) (.18)
------- -------
Net (loss) $ (.02) $ (.14)
======= =======
(a) Nonrecurring items after income taxes:
Write-off of goodwill $ (2.5) $ 0.0
Engine oil rationalization costs:
Write-off of assets 0.0 ( 8.0)
Severance, early retirement, and other costs 0.0 (6.8)
------- -------
$ (2.5) $ (14.8)
======= =======
Cash Flows, Financial Condition, and Liquidity
----------------------------------------------
Cash and cash equivalents at March 31, 2002 were $11.7 million, which
was a decrease of $700 thousand since December 31, 2001. Our cash flows
were more than sufficient to cover operating activities during the 2002
period. Cash flows from operating activities for the first quarter of
2002 were $7.8 million. We used this to fund capital expenditures of
$2.4 million, pay $3.5 million in debt issuance costs, make a net
repayment on bank debt of $800 thousand, and fund a payment for TEL
marketing agreement services of $3.2 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 for the first quarter 2001 includes accelerated
depreciation of $11.6 million due to the shortened lives of certain
engine oil additives assets which were idled in the second quarter of
2001.
We had restricted cash of $900 thousand at March 31, 2002 and $1
million at December 31, 2001. This was a portion of the funds we
received from the demutualization of MetLife, Inc. in 2000. Ethyl is
using this cash to offset the employee portion of retiree health
benefit costs.
In March 2002, we entered the Fourth Amendment to Amended and Restated
Credit Agreement (the New Credit Facility) with our lenders. The New
Credit Facility includes a revolving line of credit of $146 million
(including a letter of credit sub-facility), the remaining balance on
the original term loan of $45 million, and the remaining balance on the
new term loan of $205 million. The facility has a maturity date of
March 31, 2003. However, the maturity date can be further extended to
March 31, 2004 provided certain conditions are met.
16
The key provisions of the New Credit Facility are detailed in Note 26
of our Form 10-K for the year ended December 31, 2001. 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, and certain other
transactions. The payment of dividends is not permitted and
investments, as well as capital expenditures are limited.
While the New Credit Facility does provide for an extension through
March 31, 2004, our current forecast of operating earnings alone would
not achieve the extension conditions. We are pursuing certain strategic
initiatives, which if completed, would cause us to achieve the
additional extension through March 31, 2004. The completion of these
initiatives cannot be assured. If the extension is not achieved, we
plan to enter into negotiations with our lenders in the second half of
2002 to further extend our borrowing facilities. However, there is no
assurance that an agreement will be accomplished. This would cause us
to pursue other alternatives. We believe the alternatives, if required,
would be available to us. However, there can be no assurance of their
success. Consequently, borrowings under the New Credit Facility are
reflected as current liabilities in accordance with generally accepted
accounting principles beginning in the first quarter of 2002 until such
time as the extension conditions are achieved or alternative
longer-term borrowing facilities are secured.
On February 1, 2002, Bruce C. Gottwald, Chairman of the Board, made a
loan to Ethyl in the amount of $18.6 million. The loan is for three
years at an interest rate of 8.5%. Interest payments are due monthly
during the term of the loan, with the principal amount coming due at
maturity. We used the proceeds of the loan to pay down existing bank
debt. The loan is nonrecourse to Ethyl and is collateralized by a first
deed of trust on the three buildings at 330 South Fourth Street,
Richmond, Virginia, that are our principal offices. An independent
appraiser valued the three buildings at $18.6 million. We have a "put"
right at the end of the loan term under which we can convey the
property to the lender in satisfaction of the debt. If we fail to pay
the loan at maturity, the lender has a "call" right at the end of the
loan term under which he can require us to convey the property to him
in satisfaction of the debt.
Ethyl has combined current and noncurrent long-term debt of $335.0
million at March 31, 2001 and $335.9 million at December 31, 2001. We
utilized additional borrowings of $19.2 million on the revolving credit
agreement, as well as the $18.6 million loan from Bruce C. Gottwald to
make payments of $38.6 million on the term loan.
As a percentage of total capitalization, Ethyl's total debt increased
from 69.8% at the end of 2001 to 70.1% at March 31, 2002. This increase
is caused by the goodwill write-off, which reduced our equity resulting
in the slightly lower outstanding debt still representing a higher
percentage of capitalization than at December 31, 2002. Normally, we
repay long-term debt with cash from operations, as well as with
proceeds from occasional sales of business units, plant sites, or other
assets.
We expect to substantially complete the funding requirement associated
with the amendment of our TEL marketing alliance during the first half
of this year. While this will result in an increase in debt during the
first half of the year, we expect to make significant reductions in
debt during the second half of 2002.
Our capital spending during 2002 will be about $14 million. Ethyl will
continue to finance capital spending through cash provided from
operations.
17
We had negative working capital at March 31, 2002 of $144.8 million
resulting in a current ratio of .66 to 1. The negative working capital
was the result of all of our bank debt being classified as a current
liability at the end of first quarter 2002. At December 31, 2001, the
working capital was $125.3 million and the current ratio was 1.79 to 1.
In addition to the change in debt, working capital and the current
ratio reflect a decrease in accounts receivable and inventories.
Partially offsetting these, was an increase in deferred income taxes
and prepaid expenses, as well as decreases in accounts payable and
accrued expenses.
Remainder of 2002
-----------------
We are encouraged by the improved earnings in petroleum additives
compared to the first quarter of last year. The remainder of 2002 will
be influenced by the impact of the recent increases in crude oil
prices. It is difficult to anticipate at this time the full effect the
increases in crude oil prices, which we are now beginning to
experience, will have on our raw material cost, the world economy, and
our petroleum additives results for the remainder of the year. Our
improved cost structure positions us well in this highly competitive
market.
Our TEL business is on target for the year, as our marketing agreements
maximize earnings and cash flow in this declining market.
Our debt will increase during the first half of 2002 as we
substantially complete the funding requirement associated with the
amendment of our TEL marketing alliance. However, during the second
half of the year, we expect to make significant debt reductions.
Recently Issued Accounting Standards
------------------------------------
The Financial Accounting Standards Board (FASB) issued several new
Statements of Financial Accounting Standards (SFAS) during 2001.
SFAS 142 "Goodwill and Other Intangible Assets", issued in July 2001,
was effective for fiscal years beginning after December 15, 2001. The
statement eliminates the amortization of goodwill as of January 1,
2002. In addition, the statement no longer requires that intangibles be
amortized if the life of the intangible is determined to be indefinite.
Further, goodwill and intangibles will be reviewed at least annually
for possible impairment. Under this SFAS we wrote-off $3.1 million of
goodwill during the first quarter 2002.
SFAS 143 "Accounting for Asset Retirement Obligations" was issued in
August 2001. This statement addresses the obligations and asset
retirement costs associated with the retirement of tangible long-lived
assets. It requires that the fair value of the liability for an asset
retirement obligation be recorded when incurred instead of over the
life of the asset. The asset retirement costs must be capitalized as
part of the carrying value of the long-lived asset. If the liability is
settled for an amount other than the recorded balance, either a gain or
loss will be recognized at settlement. This statement is effective for
fiscal years beginning after June 15, 2002. We have not completed the
necessary analysis, and therefore, cannot yet assess the potential
impact on our financial statements.
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" was issued in October 2001 and was effective for fiscal years
beginning after December 15, 2001. While this statement supercedes SFAS
121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", SFAS 144 retains the framework
established in SFAS
18
121 and addresses implementation issues. SFAS 144 also supercedes
Accounting Principles Board Opinion Number 30 "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business" and addresses the accounting for disposal of long-lived
assets of a discontinued operation. Generally, SFAS 144 requires that
impaired assets or assets to be disposed of, whether reported in
continuing operations or discontinued operations, be recorded at the
lower of carrying amount or fair value less cost to sell. This
statement has not had an impact on our first quarter 2002 results.
Other Matters
-------------
Ethyl was served as a defendant in two cases filed in the Circuit
Court for Baltimore City, Maryland, on September 22, 1999. Both cases
claim damages attributable to lead. The cases were Cofield et al. v.
Lead Industries Association, Inc., et al. and Smith et al. v. Lead
Industries Association, Inc., et al. Cofield is no longer a named
plaintiff in the first case and the case is now identified as Young.
Young seeks recovery for alleged property damage from lead paint,
which Ethyl never produced or distributed. Smith is for alleged
personal injuries for six children from lead exposure due to lead
paint and dust from tailpipe emissions due to leaded gasoline. The
Court dismissed the Young case in its entirety in December 2001 and
dismissed Ethyl from the Smith case in February 2002. These decisions
could be appealed by the plaintiffs. Ethyl has strong defenses and has
vigorously defended the cases.
ITEM 3. Quantitative and Qualitative Disclosures About Market 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,
2001.
19
PART II - Other Information
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
20
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: May 10, 2002 By: /s/ D. A. Fiorenza
------------------------------
David A. Fiorenza
Vice President and
Treasurer
(Principal Financial Officer)
Date: May 10, 2002 By: /s/ Wayne C. Drinkwater
---------------------------
Wayne C. Drinkwater
Controller
(Principal Accounting Officer)
21