1
Exhibit 13
THE LUBRIZOL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Lubrizol Corporation is a full service supplier of performance
chemicals to diverse markets worldwide. These specialty chemical products are
created through the application of advanced chemical, mechanical and biological
technologies to enhance the performance, quality and value of the products in
which they are used. The company develops, produces and sells specialty
additive systems for gasoline and diesel engine lubricating oils, for automatic
transmission fluids and for gear oils, and marine and tractor lubricants. The
company also supplies specialty products for industrial lubricants and
functional fluids, fuel additives and diversified specialty chemical products.
Prior to December 1, 1992, the company had a separately reportable Agribusiness
segment. That segment developed, produced and marketed planting seeds and
specialty vegetable oils, and also conducted strategic biotechnology research
and development. As described in Note 16 to the financial statements, the
company transferred substantially all of its Agribusiness segment, other than
the specialty vegetable oil operations, to Mycogen Corporation and to a joint
venture formed with Mycogen. The transferred assets are referred to in the
following discussion as "Agrigenetics." The agribusiness assets and operations
retained by the company are not reportable as a separate industry segment after
1992.
In 1993, the company began initiatives to eliminate its separate business unit
structure and realign activities into one combined organization, consolidate
intermediate production activities, improve the timeliness of product
development, simplify its product offerings and continued the restructuring of
its agribusiness investments.
As discussed in Note 17 to the financial statements, the company recorded a
special pretax charge of $86.3 million in the third quarter of 1993 primarily
for the manufacturing rationalization and organizational realignment
initiatives. When substantially complete in 1996, the number of intermediate
production units will have been reduced by one-third, and the number of
employees will have been reduced by approximately 5%. Through December 31,
1994, the company has completed approximately one-half of the production unit
reductions and two-thirds of the employee reductions. Approximately $22
million has been expended since the third quarter of 1993 implementing the
initiatives, primarily for employee reductions. Future cash expenditures of $24
million are estimated to be necessary to complete implementation of the
initiatives. These initiatives reduced the rate of increase in 1994 costs, as
compared to historical trends, which resulted in estimated savings in 1994 of
$20 to $25 million. These savings resulted from fewer employees, lower
operating costs and reductions in the number of manufacturing units. When fully
implemented, annual savings are expected to approximate $50 million of which $40
million will represent cash savings.
1994 RESULTS OF OPERATIONS
IN 1994, the company achieved record revenues and results of operations. As
discussed below, the primary factors contributing to 1994 results were higher
average selling prices, lower research, testing and development expenses and
better results from agribusiness investments.
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Revenues by Segment(millions)
Specialty Chemicals $1,335.5 $1,348.8 $1,433.4 $1,525.5 $1,599.0
Agribusiness $117.2 $127.5 $118.9
In 1994, consolidated revenues were $1.6 billion, an increase of $73.5 million
or 5% from 1993. This increase was comprised of 4% higher average selling
prices, including currency, and 1% volume increases. Average selling prices
increased primarily as a result of price increases and new product
introductions. The company implemented price increases in the first quarter of
1994 to more fully recover the costs of product technology and the costs
resulting from increased requirements of environmental, health and safety
regulations at the company's facilities. Higher performing products, which
carry higher selling prices, were introduced late in 1993 to meet new passenger
car motor oil standards in the U.S. markets.
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Gross Profit by Segment(millions)
Specialty Chemicals $398.2 $429.9 $451.0 $485.4 $520.7
Agribusiness $40.2 $45.7 $39.3
Gross profit (sales less cost of sales) increased 7% to $520.7 million in 1994
from $485.4 million in 1993. The improvement in gross profit was primarily
attributable to the positive effects of implementing selling price increases,
new product introductions and growth from business development activities.
These improvements were partially offset by higher material costs in the second
half of the year and higher manufacturing costs. Gross profit as a percentage
of sales increased to 32.7% in 1994 from 32.0% in 1993.
Raw material prices increased during the last half of 1994, and at year-end
were approximately 7% higher than the prior year. Additionally, plant operating
costs to comply with changing environmental, health and safety regulations have
continued to increase. The company was able to manage the near-term impact of
the higher raw material costs through operating expense control. However, these
higher material costs will impact future earnings if not recovered through
higher prices; therefore, the company is implementing worldwide price increases
of 5% to 7% in the first quarter of 1995.
Selling and administrative expenses increased less than 1% to $159.5 million
in 1994. This increase is significantly lower than the company's previous
historical cost trend because of lower legal
20
2
expenses and a decline in the number of employees as a result of early
retirements related to the company's realignment initiative.
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Research Testing and
Development by Segment (millions)
Specialty Chemicals $107.4 $127.7 $139.8 $171.5 $165.5
Agribusiness $16.6 $16.3 $15.0
Research, testing and development expenses (technology expenses) decreased $6.1
million or 4% to $165.5 million in 1994. This decrease is primarily
attributable to completion in early 1994 of testing required for passenger car
motor oil specification upgrades, the decline in the number of employees
resulting from realignment and increased efficiencies in the product
development process.
Primarily as a result of the above factors, consolidated revenues increased
$38.8 million more than the increase in total costs and expenses in 1994.
The company continued its program of selling its investment in Genentech common
stock. During 1994 and 1993, respectively, the company sold 869,100 and
1,001,776 shares of Genentech common stock resulting in pretax gains of $41.2
million and $42.4 million. The net proceeds of these sales were used to
repurchase common shares of the company.
Other income-net increased $6.8 million primarily due to improved equity
earnings from the company's investment in Mycogen, including its agribusiness
joint venture, net of a gain on the sale of an agribusiness investment in 1993.
The company conducts a significant amount of its business and has a number of
operating facilities in countries outside the United States. As a result, the
company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located.
While changes in the dollar value of foreign currencies will affect earnings
from time to time, the longer term economic effect of these changes should not
be significant given the company's net asset exposure, currency mix and pricing
flexibility. Generally, the income statement effect of changes in the dollar
value of foreign currencies is partially or wholly offset by the company's
ability to make corresponding price changes in local currency. The company's
consolidated net income will generally benefit as foreign currencies increase
in value compared to the U.S. dollar and will generally decline as foreign
currencies decrease in value. In 1994, there was not a significant net earnings
effect due to foreign currency fluctuations.
As a result of the above factors and a decrease in interest expense,
consolidated income before taxes increased $131.8 million from 1993. Excluding
the gain on the sales of Genentech stock and the 1993 special charge, income
before taxes increased $46.7 million or 29% from 1993.
The company made donations of Genentech common stock during 1994 (see Note 7
to the financial statements) which reduced the company's 1994 effective tax
rate by 2%. This benefit is nonrecurring. The company anticipates its 1995
effective tax rate will approximate 33%.
Excluding gains on the sales of Genentech common stock and the 1993 special
charge and accounting changes (discussed below), net income was $148.8 million
in 1994 compared to $113.5 million in 1993, and the related earnings per share
amounts improved by 35% to $2.26 in 1994 from $1.67 in 1993.
RETURN ON AVERAGE SHAREHOLDERS' EQUITY
RETURN ON AVERAGE SHAREHOLDERS' EQUITY was 22% in 1994, 6% in 1993 and 15% in
1992. Excluding Genentech gains and the 1993 accounting changes and special
charge, return on average shareholders' equity was 19% in 1994 and 14% in 1993.
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Return on Equity(percent) 27% 16% 15% 6% 22%
1993 RESULTS OF OPERATIONS
IN 1993, consolidated revenues increased $61.9 million or 4% from 1992 after
excluding $88.6 million of Agrigenetics revenue in 1992. Selling prices
increased 4% as a result of price increases implemented in the fourth quarter
of 1992 and the introduction late in 1993 of higher performing products to meet
new passenger car motor oil standards in the U.S. market. Favorable product mix
(including sales by Langer & Company acquired early in 1993) of 3% was offset
by unfavorable currency effects of 2% and volume decreases of 1%. North
American volume decreased 9% in 1993 from the record levels of volume in 1992
as a result of a decrease in market share. The revenue impact of this volume
decrease was offset by an increase in sales of more profitable products.
International volume increased 6% over 1992 and accounts for approximately 60%
of revenues.
Gross profit increased $30.4 million or 7% from $455.0 million in 1992
(excluding $35.3 million of Agrigenetics gross profit in 1992) primarily as a
result of the higher average selling prices. Gross profit as a percentage of
sales was 32.0% in 1993 compared to 31.2% (excluding Agrigenetics) in 1992.
Excluding Agrigenetics expenses of $29.1 million in 1992, selling and
administrative expenses increased $6.3 million or 4% in 1993 primarily because
of the acquisition of Langer. Technology expenses increased $30.3 million or
21% in 1993 after excluding Agrigenetics expenses of $13.5 million from 1992.
This increase was a result of higher testing costs associated with customer
test programs to meet new industry performance standards for passenger car and
diesel engine oils and automatic transmission fluids. These standards change
periodically as engine and transmission designs are improved by the equipment
manufacturers to meet new
21
3
emissions, efficiency, durability and other performance factors. The frequency
of these performance upgrades compressed the time cycles for new product
development and resulted in an increase in the company's technology expenses.
As a result of the above factors and increased royalties, after excluding
Agrigenetics from 1992, total cost and expenses increased $5.9 million more
than revenues increased in 1993.
During 1993, the company recorded a special pretax charge of $86.3 million and
pretax gains of $42.4 million on the sale of Genentech common stock as
discussed above. Other income-net was $.5 million in 1993 compared to $11.9
million in 1992. Other income includes the company's share of equity losses in
Mycogen and the agribusiness joint venture. Mycogen recorded restructuring
charges and incurred weather-related problems in the Midwest which adversely
affected agribusiness results. The reduction in other income was attributable
to increased equity losses of $18.3 million in Mycogen and the agribusiness
joint venture, partially offset by increased gains on the sale of investments,
excluding Genentech, of $6.7 million.
The equity losses related to Mycogen and the agribusiness joint venture, net of
preferred stock dividends and a gain on the sale of investment, were $4.1
million less in 1993 than the Agrigenetics operating loss and equity losses
recorded in 1992.
Interest income decreased $3.2 million due to lower average balances of cash
and short-term investments. An increase in borrowings resulted in slightly
higher interest expense in 1993.
As discussed previously, the company conducts a significant amount of its
business outside of the United States and is therefore subject to risks
including currency fluctuations. In 1993, European currencies weakened and the
Japanese yen strengthened resulting in an insignificant net earnings effect.
As a result of the above factors, income before income taxes decreased $57.5
million in 1993 compared to 1992. Net income in 1993, excluding the special
charge, Genentech gain and the accounting changes discussed below, decreased 9%
to $113.5 million or $1.67 per share, from $124.6 million or $1.81 per share in
1992.
As described in Note 10 to the financial statements, effective January 1, 1993,
the company adopted SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The company recorded the cumulative effect of
this accounting change of $79.9 million before taxes ($51.5 million or $.76
per common share after taxes) in the first quarter of 1993. As a result of this
accounting change, postretirement health care and life insurance costs
increased $8.1 million ($.08 per share after taxes) in 1993. This expense is
allocated among the various cost and expense categories in the consolidated
statements of income. SFAS 106 has no effect on cash flows since the company
continues to pay claims as incurred.
As described in Note 8 to the financial statements, effective January 1, 1993,
the company also adopted SFAS 109, "Accounting for Income Taxes." The
cumulative effect of this accounting change reduced net deferred tax
liabilities and increased net income in 1993 by $12.1 million or $.18 per
share. The positive effect of adopting SFAS 109 was primarily attributable to
more favorable treatment of the deferred income taxes on intercompany profit in
inventory. SFAS 109 has no effect on cash flows.
1992 RESULTS OF OPERATIONS
Following is a discussion of the results of operations for 1992. The discussion
is presented first on a summary consolidated basis and then on a historical
business segment basis.
IN 1992, consolidated revenues increased $75.9 million or 5% compared to 1991
primarily as a result of record volume in the Specialty Chemicals segment. The
increased revenues were partially offset by increased manufacturing costs in
Specialty Chemicals, and higher specialty vegetable oil production costs, with
the result that gross profit increased $14.7 million or 3%. Gross profit as a
percentage of sales was 31.7% in 1992, compared to 32.4% in 1991. Selling,
administrative and technology expenses increased $19.7 million or 6% (all in
the Specialty Chemicals segment), more than offsetting the higher gross profit.
As a result of these factors and reduced royalties, total cost and expenses
increased $5.8 million more than revenues.
Other income-net increased $2.4 million in 1992, primarily as a result of a
gain on sales of investments of $6.5 million, partially offset by the company's
share of losses related to the agribusiness joint venture formed in December
1992, and expenses related to closing facilities in the mining chemicals
market. Accordingly, combined segment income was $3.4 million lower in 1992
than in 1991. As explained in the segment discussions, this consisted of a $6.0
million increase in Specialty Chemicals and a $9.4 million decrease in
Agribusiness. Net interest income increased $2.4 million primarily as a result
of the repayment of debt early in the year.
As a result of the above factors, income before income taxes was $1.0 million
or 1% lower than 1991. However, due principally to increased tax benefits from
foreign dividends, net income in 1992 increased $1.0 million or 1% over 1991.
SPECIALTY CHEMICALS SEGMENT: In 1992, the Specialty Chemicals segment accounted
for 92% of consolidated revenues. The segment's revenues increased $84.6
million or 6% in 1992 as a volume increase of 8% and favorable currency effects
of 2% were partially offset by unfavorable product and geographic mix of 4%.
Volume was at a record level for the year. North American volume was up 21% for
the year as a result of market share gains and a comparatively weak first half
of 1991. International volume was flat for the year. Average selling prices
declined slightly during the first three quarters. In the fourth quarter, the
company announced price increases which increased revenues for part of the
period.
Gross profit increased $21.1 million or 5% compared to 1991. The increase in
gross profit resulting from higher revenues was partially offset by higher
manufacturing costs that primarily reflected the effects of higher volume,
increased pension and health care costs and environmental costs. As a
percentage of sales, gross profit decreased in 1992 to 31.6% from 32.1% in
1991.
Selling and administrative expenses increased $7.7 million or 6% primarily due
to higher international selling expenses and higher pension and health care
costs. Technology expenses increased $12.1 million or 10% as a result of
increased operating and staffing levels necessary to meet customer and product
development needs relating to new performance standards for gasoline engine oil
effective in July 1993, and diesel engine oils in 1994.
22
4
In 1992, the U.S. dollar weakened against other currencies, resulting in a net
favorable effect on the company when international transactions were translated
into U.S. dollars.
The increase in gross profit was greater than the increase in expenses, and
when combined with a $5.6 million increase in other income-net, Specialty
Chemicals segment income was $6 million or 3% higher than in 1991.
AGRIBUSINESS SEGMENT: In 1992, Agribusiness revenues decreased $8.6 million or
7% as a result of lower specialty vegetable oil volume due to more competition
in international markets and a fire at a customer's plant in Asia. Gross profit
decreased $6.4 million or 14% as a result of the lower sales, costs associated
with inventory market adjustments and higher storage costs, all of which
related to specialty vegetable oil operations. Gross profit as a percent of
sales decreased in 1992 to 33.1% compared to 35.9% in 1991.
Selling, administrative and research expenses were approximately the same as
1991. Lower specialty vegetable oil selling expenses and lower research
expenses offset costs associated with the company's partnership with Mycogen.
Agribusiness segment loss increased $9.4 million due to the lower gross profit
and the company's share of losses in Mycogen and the agribusiness joint venture.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
The company's cash flows for the years 1992 through 1994 are presented in the
consolidated statements of cash flows. Cash provided from operating activities
during 1994 was $156.8 million, a decrease of $5.7 million compared to 1993.
Cash received from customers increased $69.0 million or 5% due to higher
revenues. However, this increase was more than offset by amounts paid to
suppliers and employees, including payments of $18 million for costs which had
been accrued in the 1993 special charge, and higher income tax payments.
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Cash Provided from Operating
Activities (millions) $114.3 $192.1 $135.2 $162.5 $156.8
Net cash outflows from investing activities were $117.2 million in 1994
compared to $106.8 million in 1993. Capital expenditures increased $32.7
million or 26% in 1994, of which one-half was attributable to increases at
manufacturing facilities, and the balance was primarily due to improvements and
additions at the company's Wickliffe facilities. During 1993, the company
expended $40.3 million to acquire Langer and certain commercial and technology
assets of Great Lakes Chemical, S.A. Cash proceeds from the sale of Genentech
common stock were $43.6 million in 1994 compared to $44.5 million in 1993. In
1993, investment proceeds also included amounts aggregating $17.0 million
from the sale and redemption of portions of the company's agribusiness
investments.
Throughout 1994, the company continued its share repurchase program. In 1994
and 1993, the net proceeds from the sale of Genentech common stock as well as
cash generated from operations were used to repurchase common shares of the
company. The company repurchased 2,007,721, or 3%, of its common shares for
$68.3 million during 1994 compared to the repurchase of 2,075,645 common shares
for $67.1 million in 1993. At December 31, 1994, there was Board
authorization remaining for the repurchase of 1,031,234 million common shares.
As a result of the activities discussed above and the increase in debt
discussed below, cash and short-term investments at December 31, 1994,
increased by $12.2 million compared to December 31, 1993.
As described in Note 3 to the financial statements, effective January 1, 1994,
the company adopted SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities." SFAS 115 requires that certain of the company's marketable
equity securities, included in investments in consolidated companies, be
reported at fair value rather than historical cost. The effect at December 31,
1994, of adopting SFAS 115 was to increase investments in nonconsolidated
companies by $35.6 million, increase shareholders' equity by $23.2 million
and increase deferred tax liabilities by $12.4 million. SFAS 115 had no effect
on 1994 net income or cash flows.
The company held 830,900 shares of Genentech common stock as of December 31,
1994. The company has continued to sell Genentech stock during the first
quarter of 1995 and expects to sell its remaining shares throughout 1995.
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Capitalization(millions)
Equity $736.2 $794.5 $819.4 $732.2 $832.0
Long-term Debt $54.0 $35.0 $23.3 $55.3 $114.2
The company's financial position continues to be strong. The ratio of current
assets to current liabilities was 2.5:1 at both December 31, 1994 and 1993. The
level of capital spending and the continuation of the company's share
repurchase program were principal factors in the company incurring net
borrowings of $92.7 million in 1994. Total debt as a percent of capitalization
(shareholders' equity plus short-term and long-term debt) increased to 17% at
the end of 1994 compared to 9% at the end of 1993. The company anticipates
that, during 1995, its capital expenditures, primarily for manufacturing,
technical and administrative support, and its share repurchase program will
continue at approximately the same levels as 1994. Total debt is therefore
expected to continue at or above the December 31, 1994 levels throughout 1995.
The company's strategy of using additional debt to finance capital requirements
reflects management's continuing efforts to enhance shareholder value.
At December 31, 1994, the company had unused revolving credit agreements and
other credit lines aggregating $95 million. Under a currently effective shelf
registration statement, the company has the ability to offer to the public up
to $100 million of debt securities. As described in Note 4 to the financial
statements, the company has
23
5
the ability to refinance on a long-term basis $56.6 million of outstanding
commercial paper under its revolving credit agreements. Management believes the
company's internally generated funds as well as its credit facilities and shelf
registration will be sufficient to meet its cash requirements.
Implementation of the remaining special charge activities is estimated to
involve future cash outlays aggregating $24 million, primarily in 1995 and
1996. Offsetting the cash outlays will be cash savings which are expected to
grow to approximately $40 million annually after the plans are fully
implemented. The impact of the special charge on the balance sheet at December
31, 1994, after recognition of deferred taxes, was to reduce working capital by
$6.9 million, reduce noncurrent assets by $5.9 million and increase noncurrent
liabilities by $13.5 million.
The company is involved in patent litigation with Exxon Corporation in various
countries. Determinations of liability against the company in the U.S., which
is being heard on appeal, and against Exxon in Canada have been made by the
courts. Management is unable to predict the eventual outcomes of this
litigation and, therefore, their impact on future cash flows is not known. If
Exxon prevails in the U.S. case, management believes the company has sufficient
financial resources to meet any resulting obligation and, other than a
potential one-time charge against income, the litigation would not have a
material adverse effect on future results of operations. Refer to Note 18 for
further information regarding this litigation.
INDEPENDENT AUDITORS' REPORT Deloitte &
Touche LLP
-----------
[DELOITTE & TOUCHE LLP CORPORATION LOGO]
To the Shareholders and Board of Directors of
The Lubrizol Corporation
We have audited the accompanying consolidated balance sheets of The Lubrizol
Corporation and its subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Lubrizol Corporation and its
subsidiaries at December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994 in conformity with generally accepted accounting principles.
As discussed in Notes 8 and 10 to the financial statements, in 1993 the
Company changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards ("SFAS") No. 109 and its method of
accounting for postretirement benefits to conform with SFAS No. 106.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
February 14, 1995
24
6
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
--------------------------------------------
(In Thousands of Dollars Except Per Share Data) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------
Net sales $1,592,750 $1,517,631 1,544,670
Royalties and other revenues 6,244 7,869 7,578
---------- ---------- ----------
Total revenues 1,598,994 1,525,500 1,552,248
Cost of sales 1,072,025 1,032,199 1,054,376
Selling and administrative expenses 159,459 158,506 181,326
Research, testing and development expenses 165,480 171,540 154,762
---------- ---------- ----------
Total cost and expenses 1,396,964 1,362,245 1,390,464
Special charge (86,303)
Gain on sale of Genentech 41,235 42,443
Other income - net 7,332 537 11,905
Interest income 4,011 3,873 7,070
Interest expense (3,149) (4,154) (3,615)
---------- ---------- ----------
Income before income taxes 251,459 119,651 177,144
Provision for income taxes 75,884 34,676 52,498
---------- ---------- ----------
Income before accounting changes 175,575 84,975 124,646
Cumulative effect of accounting changes (39,375)
---------- ---------- ----------
Net income $ 175,575 $ 45,600 $ 124,646
========== ========== ==========
Per Common Share:
Income before accounting changes $2.67 $1.25 $1.81
Cumulative effect of accounting changes (.58)
----- ----- -----
Net income per share $2.67 $ .67 $1.81
===== ===== =====
Dividends per share $ .89 $ .85 $ .81
===== ===== =====
<FN>
The accompanying notes to financial statements are an integral part of these statements.
25
7
CONSOLIDATED BALANCE SHEETS
December 31
-----------------------------------------
(In Thousands of Dollars) 1994 1993
-----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and short-term investments $ 36,379 $ 24,220
Receivables 250,392 225,603
Inventories 298,331 284,537
Other current assets 39,286 34,553
------------ ------------
Total current assets 624,388 568,913
------------ ------------
Property and equipment - at cost 1,266,249 1,089,106
Less accumulated depreciation 707,505 651,471
------------ ------------
Property and equipment - net 558,744 437,635
------------ ------------
Investments in nonconsolidated companies 138,013 103,246
Other assets 73,219 72,786
------------ ------------
TOTAL $ 1,394,364 $ 1,182,580
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 53,700 $ 14,590
Accounts payable 114,244 116,775
Income taxes and other current liabilities 85,589 92,883
------------ ------------
Total current liabilities 253,533 224,248
------------ ------------
Long-term debt 114,161 55,298
Postretirement health care obligation 98,453 89,423
Noncurrent liabilities 68,799 70,022
Deferred income taxes 27,379 11,353
------------ ------------
Total liabilities 562,325 450,344
------------ ------------
Contingencies and commitments
Preferred stock without par value - unissued
Common shares without par value - Outstanding 64,844,560 shares in 1994
and 66,590,028 shares in 1993 84,059 80,830
Retained earnings 734,533 683,269
Other shareholders' equity 13,447 (31,863)
------------ ------------
Total shareholders' equity 832,039 732,236
------------ ------------
TOTAL $ 1,394,364 $ 1,182,580
============ ============
<FN>
The accompanying notes to financial statements are an integral part of these statements.
26
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------------
(In Thousands of Dollars) 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED FOR):
OPERATING ACTIVITIES:
Net income $ 175,575 $ 45,600 $ 124,646
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 65,934 61,674 62,013
Deferred income taxes 19,797 (32,751) (37)
Equity (earnings) losses, net of distributions (382) 18,138 2,792
Special charge 86,303
Gain on sale of investments (41,235) (55,617) (6,484)
Cumulative effect of changes in accounting principles. 39,375
Change in current assets and liabilities:
Receivables (20,682) (16,066) (2,400)
Inventories (3,150) (14,043) (30,807)
Accounts payable and accrued expenses (17,745) 16,056 (13,693)
Other current assets (12,921) 7,359 (316)
Increase in noncurrent liabilities 3,246 12,370 714
Other items - net (11,600) (5,887) (1,265)
----------- ----------- -----------
Total operating activities 156,837 162,511 135,163
INVESTING ACTIVITIES:
Proceeds from sale or redemption of investments 43,582 61,494 8,512
Capital expenditures (160,527) (127,855) (95,814)
Acquisitions and investments in nonconsolidated companies (1,734) (40,346) (2,402)
Other - net 1,488 (87) 1,541
----------- ----------- -----------
Total investing activities (117,191) (106,794) (88,163)
FINANCING ACTIVITIES:
Short-term borrowing (repayment) 38,359 168 (3,837)
Long-term borrowing 56,741 36,048 3,690
Long-term repayment (2,370) (23,146) (20,000)
Dividends paid (58,588) (57,608) (55,883)
Common shares purchased, net of options exercised (64,372) (64,073) (19,235)
----------- ----------- -----------
Total financing activities (30,230) (108,611) (95,265)
Effect of exchange rate changes on cash 2,743 521 (1,289)
----------- ----------- -----------
Net increase (decrease) in cash and short-term investments 12,159 (52,373) (49,554)
Cash and short-term investments at the beginning of year 24,220 76,593 126,147
----------- ----------- -----------
Cash and short-term investments at the end of year $ 36,379 $ 24,220 $ 76,593
=========== =========== ===========
<FN>
The accompanying notes to financial statements are an integral part of these statements.
27
9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shareholders' Equity
--------------------------------------------
Number of Other
Shares Common Retained Shareholders'
Outstanding Shares Earnings Equity
--------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
BALANCE, DECEMBER 31, 1991 69,031,464 $ 77,423 $ 713,229 $ 3,814
Net income 1992 124,646
Cash dividends (55,883)
Translation adjustment for 1992 (24,632)
Common shares - Treasury:
Shares purchased (835,200) (957) (22,086)
Shares issued upon exercise of stock options 254,322 3,808
---------- -------- --------- --------
BALANCE, DECEMBER 31, 1992 68,450,586 80,274 759,906 (20,818)
Net income 1993 45,600
Cash dividends (57,608)
Translation adjustment for 1993 (11,045)
Common shares - Treasury:
Shares purchased (2,075,645) (2,479) (64,629)
Shares issued upon exercise of stock options 215,087 3,035
---------- -------- --------- --------
BALANCE, DECEMBER 31, 1993 66,590,028 80,830 683,269 (31,863)
Net income 1994 175,575
Cash dividends (58,588)
Unrealized gain on marketable securities 23,169
Translation adjustment for 1994 22,141
Common shares - Treasury:
Shares purchased (2,007,721) (2,528) (65,723)
Shares issued upon exercise of stock options 208,210 3,879
Other 54,043 1,878
---------- -------- --------- --------
BALANCE, DECEMBER 31, 1994 64,844,560 $ 84,059 $ 734,533 $313,447
========== ======== ========= ========
<FN>
The accompanying notes to financial statements are an integral part of these statements.
28
10
NOTES TO FINANCIAL STATEMENTS
(In Thousands of Dollars Unless Otherwise Indicated)
NOTE 1 - ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
The Lubrizol Corporation and its majority-owned subsidiaries. For
nonconsolidated companies (affiliates), the equity method of accounting is used
when ownership exceeds 20% or when the company has the ability to exercise
significant influence over the policies of the investee. Other affiliates are
carried at cost or fair market value (see Note 3). Refer to Note 16 regarding
changes in Agribusiness.
ACCOUNTING CHANGES - Effective January 1, 1993, the company changed its method
of accounting for postretirement benefits to conform with Statement of
Financial Accounting Standards (SFAS) 106 (see Note 10) and its method of
accounting for income taxes to conform with SFAS 109 (see Note 8). The
cumulative effect at adoption of these changes in accounting principles, net of
tax, is separately reported on the Consolidated Statements of Income. Effective
January 1, 1994, the company changed its method of accounting for certain
investments in marketable securities to conform to SFAS 115 (see Note 3).
CASH EQUIVALENTS - The company generally invests its excess cash in
short-term investments with various banks and financial institutions.
Short-term investments are cash equivalents as they are part of the cash
management activities of the company and are comprised primarily of investments
having maturities when purchased of less than three months.
INVENTORIES - Inventories are stated at cost which is not in excess of market.
Cost of inventories is determined by the last-in, first-out (LIFO) method in
the United States and the first-in, first-out (FIFO) method elsewhere. The
average cost method is used for specialty vegetable oil.
DEPRECIATION AND AMORTIZATION - Accelerated depreciation methods are used in
computing depreciation on certain machinery and equipment which comprise
approximately 60% of the depreciable assets. The remaining assets are
depreciated using the straight-line method. Effective January 1, 1993, the
company changed to the straight-line method for newly acquired machinery and
equipment. Management believes that straight-line depreciation provides for a
better matching of costs and revenues over the lives of the newly acquired
assets and conforms to predominant industry practices. The new depreciation
method did not have a material effect on net income reported in the periods.
The estimated useful lives are 10 to 40 years for buildings and land
improvements and range from 3 to 20 years for machinery and equipment.
Amortization of intangible and other assets is on a straight-line method over
periods ranging from 5 to 25 years.
For income tax purposes, different methods and rates are used in certain
instances.
RESEARCH, TESTING AND DEVELOPMENT - Research, testing and development costs are
expensed when incurred. Research and development expenses, excluding testing,
were $90.7 million, $88.5 million and $91.2 million in 1994, 1993 and 1992,
respectively.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of most non-U.S.
subsidiaries are translated into U.S. dollars at exchange rates in effect at
the balance sheet date. Operating results are translated at weighted average
exchange rates in effect during the period. Net unrealized translation
adjustments are recorded as a component of other shareholders' equity and
totaled $(9,722), $(31,863) and $(20,818) at December 31, 1994, 1993 and 1992,
respectively.
PER SHARE AMOUNTS - Net income per share has been computed by dividing net
income by the average number of common shares outstanding during the period.
Net income per share has not been adjusted for the effect of stock options as
the dilution effect would be less than 3% in any year. All share and per share
data have been restated to reflect the 2-for-1 stock split effective August 31,
1992.
NOTE 2 - INVENTORIES
1994 1993
-------- --------
Finished products $102,605 $ 89,817
Products in process 98,105 92,067
Raw materials and
supplies 97,621 102,653
-------- --------
$298,331 $284,537
======== ========
Inventories on the LIFO method were 27% and 25% of consolidated inventories at
December 31, 1994 and 1993, respectively. The current replacement cost of
these inventories exceeded the LIFO cost at December 31, 1994 and 1993 by $49.9
and $43.0 million, respectively.
NOTE 3 - INVESTMENTS IN NONCONSOLIDATED COMPANIES
1994 1993
--------- ---------
Investments carried at equity $ 60,523 $ 59,909
Investments carried at cost 37,890 43,337
Investments classified as available-
for-sale 39,600
--------- ---------
$ 138,013 $ 103,246
========= =========
The company adopted SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities" as of January 1, 1994. SFAS 115 requires that certain
investments in marketable debt and equity securities classified as
available-for-sale be reported at fair value, rather than historical cost, with
the unrealized gain or loss recorded in shareholders' equity. The effect of
adopting SFAS 115 at January 1, 1994 was to increase investments in
nonconsolidated companies by $99.2 million, increase shareholders' equity by
$64.5 million and increase deferred tax liabilities by $34.7 million.
At December 31, 1994, investments classified as available-for-sale had an
average cost basis of $4.0 million and an aggregate fair value of $39.6 million
resulting in unrealized gains of $36.2 million or $23.5 million after tax and
unrealized losses of $.6 million or $.4 million after tax.
The company also holds other investments in nonconsolidated companies,
including certain investments in marketable securities that are either
accounted for on the equity basis or the cost basis due to restrictions placed
on the securities. These marketable investments have quoted market values
which exceed the book carrying values by $17.7 million at December 31, 1994.
29
11
NOTE 4 - SHORT-TERM AND LONG-TERM DEBT
1994 1993
-------- -------
Long-term debt consists of:
Debt supported by long-term
banking arrangements:
Commercial paper at weighted
average rate of 5.97% $ 56,625
6.5% Marine terminal refunding
revenue bonds, due 2000 18,375 $18,375
7.875% Industrial development
revenue bonds, due 2000 1,000 1,000
Term loans:
Yen denominated, at 3.8% to
5.8%, due 1995-2002 24,898 24,210
Deutsche mark denominated, at
6.78%, due 1996 15,484 13,825
Other (5% in 1994, 5.9% in 1993) 325 184
-------- -------
116,707 57,594
Less current portion (2,546) (2,296)
-------- -------
$114,161 $55,298
======== =======
Short-term debt consists of:
Commercial paper at weighted
average rates of 5.97% and 3.3% $ 46,375 $ 4,400
Other short-term debt at weighted
average rates of 5.2% and 6.1% 4,779 7,894
Current portion of long-term debt 2,546 2,296
--------- --------
$ 53,700 $ 14,590
========= ========
Commercial paper debt is due within one year. The company has available $95
million in credit facilities, including $75 million in committed revolving
credit agreements which would permit the company to borrow at or below the U.S.
prime rate. These facilities, which were unused at December 31, 1994, would
permit the company to refinance for a period beyond one year the Marine
Terminal Refunding Revenue Bonds, whose bondholders have the right to put the
bonds back to the company, and $56.6 million of commercial paper outstanding.
Accordingly, the company has classified these balances as long-term debt.
Amounts due on long-term debt are $2.5 million in 1995, $18.0 million in 1996,
$2.6 million in 1997, $12.1 million in 1998, $3.6 million in 1999 and $77.9
million thereafter, which includes $56.6 million of commercial paper.
The company has an effective shelf registration with the Securities and Exchange
Commission which permits the company to offer up to $100 million of debt
securities in amounts, at prices and on terms, to be determined at the time of
offering. Such debt securities would be unsecured senior securities ranking
equal with all other unsecured senior securities of the company.
The Marine Terminal Refunding Revenue Bonds have a variable interest rate. The
company has entered into an interest rate swap agreement that effectively fixes
the interest rate at 6.5%.
During 1994, 1993 and 1992, interest paid, net of amounts capitalized, amounted
to $3.0 million, $3.9 million and $5.2 million, respectively.
NOTE 5 - OTHER BALANCE SHEET INFORMATION
Receivables: 1994 1993
----------- -----------
Customers $ 219,475 $ 200,218
Affiliates 9,174 10,459
Other 21,743 14,926
----------- -----------
$ 250,392 $ 225,603
=========== ===========
30
12
Receivables are net of allowance for doubtful accounts of $2.6 million in 1994
and $2.1 million in 1993.
Other Current Assets: 1994 1993
----------- -----------
Deferred income taxes $ 20,232 $ 28,453
Other 19,054 6,100
----------- -----------
$ 39,286 $ 34,553
=========== ===========
Property and Equipment: 1994 1993
----------- -----------
Land and improvements $ 90,069 $ 80,669
Buildings and improvements 217,002 181,618
Machinery and equipment 828,340 727,409
Construction in progress 130,838 99,410
----------- -----------
$ 1,266,249 $ 1,089,106
=========== ===========
Depreciation expense was $61.3 million in 1994, $59.6 million in 1993 and $58.4
million in 1992.
Other Assets: 1994 1993
------------ ------------
Goodwill and other intangibles $ 41,381 $ 36,609
Deferred income taxes 18,229 25,821
Other 13,609 10,356
------------ ------------
$ 73,219 $ 72,786
============ ============
Accumulated amortization of intangible and other assets was $19.0 million and
$14.3 million at December 31, 1994 and 1993, respectively.
Accounts Payable: 1994 1993
------------ ------------
Trade $ 109,151 $ 106,005
Affiliates 5,093 10,770
------------ ------------
$ 114,244 $ 116,775
============ ============
Income Taxes and Other Current
Liabilities: 1994 1993
------------ ------------
Employee compensation $ 33,763 $ 30,369
Income taxes 10,504 25,714
Taxes other than income 11,030 9,793
Other 30,292 27,007
------------ ------------
$ 85,589 $ 92,883
============ ============
Noncurrent Liabilities: 1994 1993
------------ ------------
Employee benefits $ 35,687 $ 35,070
Other 33,112 34,952
------------ ------------
$ 68,799 $ 70,022
============ ============
NOTE 6 - SHAREHOLDERS' EQUITY
The company has 147 million authorized shares consisting of 2 million shares of
Serial Preferred Stock, 25 million shares of Serial Preference Shares and 120
million Common Shares, each of which is without par value. The outstanding
Common Shares shown on the balance sheets exclude Common Shares held in
treasury of 21,351,334 and 19,605,866 at December 31, 1994 and 1993,
respectively. The company effected a two-for-one stock split effective August
31, 1992.
The company has a shareholder rights plan under which one right to buy one-half
Common Share has been distributed for each Common Share held. The rights may
become exercisable under certain circumstances involving actual or potential
acquisitions of 20% or more of the Common Shares by a person or affiliated
persons who acquire such stock without complying with the requirements of the
company's articles of incorporation. The rights would entitle shareholders,
other than such person or affiliated persons, to purchase Common Shares of the
company or of certain acquiring persons at 50% of then current market value.
At the option of the directors, the rights may be exchanged for Common Shares,
and may be redeemed in cash, securities or other consideration. The rights will
expire in 1997 unless earlier redeemed.
Under another shareholder rights plan, each holder of Common Shares has one
right to buy shares of Serial Preferred Stock for each Common Share held. The
rights may become exercisable under certain circumstances involving actual or
potential acquisitions of 20% or more of the company's Common Shares by a
person or affiliated persons. The rights would entitle shareholders, other than
such person or affiliated persons, to purchase shares of Serial Preferred Stock
at the purchase price of 1 dollar plus 25 rights per share. The dividend and
redemption value of the Serial Preferred Stock would be determined in relation
to after-tax amounts which have been or may be recovered by the company from
Exxon or its affiliates as a result of certain patent claims. The rights will
expire in November 1996 unless earlier redeemed.
NOTE 7 - OTHER INCOME AND GENENTECH GAIN
The company sold 869,100 and 1,001,776 shares of Genentech, Inc. redeemable
common stock for cash during 1994 and 1993, respectively. The gains realized
on these transactions were $41.2 million in 1994 and $42.4 million in 1993 and,
after tax, contributed $.41 per share in each year. At December 31, 1994, the
company held 830,900 shares of Genentech redeemable common stock. Genentech, at
its option, may redeem the common stock in whole, but not in part, at various
redemption prices per share ranging from $58.75 at January 1, 1995, to $60 at
June 30, 1995.
Other income - net consists of the following:
1994 1993 1992
-------- -------- --------
Equity earnings (losses) of non-
consolidated companies $ 2,972 $(15,966) $ 1,798
Gain on donations of
Genentech stock 13,967
Donations of Genentech stock
to The Lubrizol Foundation (14,581)
Gain on sale of investments,
excluding Genentech 13,174 6,484
Other - net 4,974 3,329 3,623
-------- -------- --------
$ 7,332 $ 537 $ 11,905
======== ======== ========
NOTE 8 - INCOME TAXES
Effective January 1, 1993, the company adopted SFAS 109, which is an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the company's financial statements and tax returns. In estimating
future tax consequences, SFAS 109 generally considers all expected future
events other than changes in tax laws or rates not yet enacted. Previously, the
company accounted for income taxes under SFAS 96, which gave no recognition to
future events other than the recovery of assets and settlement of liabilities
at their carrying value. As permitted under SFAS 109, the company elected not
to restate the financial statements of any prior years. The cumulative effect
of adopting SFAS 109 at January 1, 1993 increased net income by $12.1 million,
or $.18 per share. The effects of the change on both income before income taxes
and the effective tax rate for the years ended December 31, 1994 and 1993, were
not material.
Income before income taxes consists of the following:
1994 1993 1992
-------- -------- --------
United States $163,508 $ 68,673 $ 80,248
Foreign 87,951 50,978 96,896
-------- -------- --------
Total $251,459 $119,651 $177,144
======== ======== ========
The provision for income taxes consists of the following:
1994 1993 1992
--------- --------- ---------
Current:
United States $ 28,698 $ 31,560 $ 13,981
Foreign 27,389 34,774 37,791
--------- --------- ---------
56,087 66,334 51,772
--------- --------- ---------
Deferred:
United States 12,605 (15,306) 1,603
Foreign 7,192 (16,352) (877)
--------- --------- ---------
19,797 (31,658) 726
--------- --------- ---------
Total $ 75,884 $ 34,676 $ 52,498
========= ========= =========
Foreign taxes include withholding taxes. The United States tax provision
includes the U.S. tax on foreign income distributed to the company. U.S. and
foreign income tax rate changes occurring during the periods presented did not
have a material effect on the company's provision for income taxes. The
differences between the provision for income taxes at the U.S. statutory rate
(35% for 1994 and 1993 and 34% for 1992) and the tax shown in the consolidated
statements of income are summarized as follows:
1994 1993 1992
--------- --------- ---------
Tax at statutory rate $ 88,011 $ 41,878 $ 60,229
Contribution of appreciated
property (5,050)
Foreign sales corporation
earnings (3,885) (2,964) (3,702)
Equity income (812) (1,551) (1,955)
Other - net (2,380) (2,687) (2,074)
--------- --------- ---------
Provision for income taxes $ 75,884 $ 34,676 $ 52,498
========= ========= =========
31
13
The components of deferred tax assets (liabilities) as of December 31 are as
follows:
1994 1993 1992
-------- -------- --------
Accrued compensation and
benefits $ 42,468 $ 42,425 $ 2,791
Intercompany profit in
inventory 12,055 11,208 3,829
Net operating losses carried
forward 5,660 6,668
Equity investments and
partnerships 1,495 (2,003) (5,964)
Depreciation and other
basis differences (40,111) (28,238) (32,555)
Marketable securities
valuation (12,476)
Undistributed foreign
equity income (4,124) (3,877) (3,644)
Other - net 3,174 13,892 4,378
-------- -------- --------
Net deferred tax assets
(liabilities) $ 8,141 $ 40,075 $(31,165)
======== ======== ========
At December 31, 1994, certain foreign subsidiaries have net operating loss
carry forwards of $13 million for income tax purposes, of which $6 million
expires in years 1995 through 2002 and $7 million has no expiration. After
evaluating tax planning strategies and historical and projected profitability,
the tax benefit of these net operating loss carry forwards has been recognized
as a deferred tax asset.
U.S. income taxes or foreign withholding taxes are not provided on
undistributed earnings of foreign subsidiaries which are considered to be
indefinitely reinvested in the operations of such subsidiaries. The amount of
such earnings was approximately $275 million at December 31, 1994.
Determination of the net amount of unrecognized U.S. income tax with respect to
these earnings is not practicable. Income taxes paid during 1994, 1993 and
1992, amounted to $70.9 million, $61.2 million and $62.6 million, respectively.
NOTE 9 - PENSION AND PROFIT SHARING PLANS
The company has retirement plans, including non-contributory defined benefit
pension plans and a profit sharing plan, covering most employees in the United
States and at non-U.S. subsidiaries. Pension benefits are based on years of
service and the employee's compensation. The company's funding policy in the
United States is to contribute amounts to satisfy the Internal Revenue Service
funding standards and elsewhere to fund amounts in accordance with local
regulations. Several defined benefit plans are unfunded. Plan assets are
invested principally in marketable equity securities and fixed income
instruments.
Expense for all retirement plans was $24.1 million in 1994, $25.1 million in
1993 and $20.0 million in 1992, including profit sharing contributions in the
U.S. of $5.7 million in 1994, $3.8 million in 1993 and $3.9 million in 1992.
Net periodic pension cost of U.S. and significant international defined benefit
plans consists of:
1994 1993 1992
-------- -------- --------
Service cost - benefits earned
during period $ 11,454 $ 10,107 $ 9,814
Interest cost on projected
benefit obligation 16,769 16,115 14,787
Actual return on plan assets 1,510 (24,830) (17,926)
Net amortization and
deferral (14,695) 16,363 5,779
-------- -------- --------
Net periodic pension cost $ 15,038 $ 17,755 $ 12,454
======== ======== ========
The increase in net periodic pension cost for 1993 results largely from the
company's realignment and early retirement programs accounted for in the
special charge (see Note 17).
The weighted average assumptions used at December 31 were:
1994 1993 1992
------ ------ ------
Discount rate for determin-
ing funded status 8.2% 7.2% 8.0%
Compensation increase 5.2% 5.1% 5.8%
Return on plan assets 8.6% 8.5% 8.9%
The funded status of such defined benefit pension plans and the amounts
recognized in the consolidated balance sheets at December 31 is as follows:
1994 1993
------------------- ------------------
Assets Accum. Assets Accum.
Exceed Benefits Exceed Benefits
Accum. Exceed Accum. Exceed
Benefits Assets Benefits Assets
-------- -------- -------- --------
Fair value of plan
assets $180,905 $ 6,273 $133,755 $ 48,142
Projected benefit
obligation (186,988) (36,599) (140,363) (79,541)
-------- -------- -------- --------
Projected benefit
obligation in
excess of plan
assets (6,083) (30,326) (6,608) (31,399)
Unrecognized net
transition
obligation (asset) (14,871) 3,531 (12,794) 119
Unrecognized net
loss (gain) 14,408 1,670 (446) 12,049
Unrecognized prior
service cost 15,299 4,222 17,566 3,179
Minimum liability
adjustment (983) (3,177)
-------- -------- -------- --------
Accrued pension
asset (liability) $ 8,753 $(21,886) $ (2,282) $(19,229)
======== ======== ======== ========
Accumulated
benefit obligation $138,258 $ 26,020 $ 88,735 $ 70,608
======== ======== ======== ========
Vested benefits $133,880 $ 21,901 $ 83,543 $ 67,344
======== ======== ======== ========
32
14
NOTE 10 - POSTRETIREMENT HEALTH CARE
The company provides certain postretirement benefits other than pensions,
primarily health care, for retired employees. Currently, substantially all of
the company's full-time employees in the U.S. become eligible for these
benefits after attaining specified years of service and age 55 at retirement.
Participants contribute a portion of the cost of such benefits. The company's
postretirement health care plans are not funded.
Effective January 1, 1993, the company adopted SFAS 106 which requires the
company to accrue the estimated cost of retiree benefit payments during the
years the employee provides services. The company previously expensed the cost
of these benefits as claims were incurred. The company elected to immediately
recognize the cumulative effect of this change in accounting principle.
The cumulative effect at January 1, 1993 of adopting SFAS 106 was to record a
liability for the accumulated postretirement benefit obligation of $79.9
million, an increase in deferred income tax assets of $28.4 million and a
decrease in net income of $51.5 million ($.76 per share).
The status of the U.S. health care plans at December 31 is as follows:
1994 1993
------- -------
Accumulated postretirement benefit
obligations:
Retirees $33,778 $32,885
Fully eligible active plan participants 16,941 20,866
Other active plan participants 18,724 38,198
------- -------
Total accumulated postretirement
benefit obligation 69,443 91,949
Unrecognized net (loss) gain 7,949 (2,526)
Unrecognized net reduction in prior
service costs 20,036
------- -------
Accrued postretirement health
care costs $97,428 $89,423
======= =======
The net postretirement health care cost for 1994 was determined based on the
provisions of the company's medical plan in effect on January 1, 1994. In late
1994, the company amended its U.S. health care plan, including several changes
with delayed effective dates. These amendments changed the eligibility
requirements by requiring 15 years of service prior to retirement for new
employees and current employees under the age of 40 at the effective date of
January 1, 1995, and changed the cost sharing provisions of the plan by
indexing deductibles and copayments and introducing a cap on the company's
share of future premium costs. These changes reduced the accumulated
postretirement benefit obligation at December 31, 1994 by $20.0
million, which will be amortized as a reduction in annual cost on a
straight-line basis over 12 years.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10.5% in 1994 (11.25% in 1993), with
subsequent annual decrements of .75% to an ultimate trend rate of 6%. A
one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation by
approximately 14% and net postretirement benefit cost by approximately 23%.
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.75% in 1994 and 7.5% in 1993.
Net postretirement health care cost consists of the following components for
the company's U.S. plans:
1994 1993
-------- -------
Service cost - benefits earned during
the year $ 2,916 $ 2,620
Interest cost on accumulated
postretirement benefit obligation 7,131 6,724
-------- -------
Net postretirement health care cost $ 10,047 $ 9,344
======== =======
In 1994, the company applied SFAS 106 for its international locations and
recognized expense and accrued postretirement health care cost of $4.0 million
for the transition obligation.
The postretirement health care cost increased $8.1 million ($.08 per share
after taxes) in 1993 as a result of adopting SFAS 106. Postretirement health
care expense on a pay-as-you-go basis was $1.8 million in 1992.
NOTE 11 - LEASES
The company has commitments under operating leases primarily for office space,
terminal facilities, land, railroad tank cars and various office equipment.
Rental expense was $19.3 million in 1994, $19.0 million in 1993 and $18.3
million in 1992. Future minimum rental commitments under operating leases
having initial or remaining non-cancelable lease terms exceeding one year are
$14.0 million in 1995, $7.3 million in 1996, $5.4 million in 1997, $3.5 million
in 1998, $2.2 million in 1999 and $23.4 million thereafter.
33
15
NOTE 12 - OPERATIONS IN GEOGRAPHIC AREAS
Financial data by geographic area, based on the location of the subsidiary
which shipped and billed the product, is as follows:
1994 1993 1992
---------- ---------- ----------
Revenues from customers:
United States $ 707,103 $ 660,674 $ 734,273
Europe 512,279 501,551 472,982
Far East 215,632 203,327 178,702
Other 163,980 159,948 166,291
---------- ---------- ----------
1,598,994 1,525,500 1,552,248
Intercompany transfers
United States 296,693 290,487 258,673
Europe 28,835 22,276 20,657
Far East 360 496
Other 27,717 26,707 32,674
---------- ---------- ----------
353,605 339,966 312,004
---------- ---------- ----------
Gross revenues 1,952,599 1,865,466 1,864,252
Less: Intercompany
transfers (353,605) (339,966) (312,004)
---------- ---------- ----------
Consolidated revenues $1,598,994 $1,525,500 $1,552,248
========== ========== ==========
Operating profit:
United States $ 145,971 $ 105,591 $ 94,800
Europe 49,783 58,781 63,141
Far East 15,486 14,374 9,493
Other 14,251 11,392 13,640
Eliminations (2,249) (129) 6,500
---------- ---------- ----------
223,242 190,009 187,574
General corporate expenses: (21,212) (26,754) (25,790)
Special charge (86,303)
Gain on sale of Genentech 41,235 42,443
Other income - net 7,332 537 11,905
Interest - net 862 (281) 3,455
---------- ---------- ----------
Income before income taxes $ 251,459 $ 119,651 $ 177,144
========== ========== ==========
Identifiable assets:
United States $ 731,651 $ 637,919 $ 548,601
Europe 337,457 289,649 248,723
Far East 157,344 143,542 124,132
Other 74,768 71,651 73,836
Eliminations (81,640) (88,012) (88,619)
---------- ---------- ----------
1,219,580 1,054,749 906,673
Corporate assets 174,784 127,831 220,447
---------- ---------- ----------
Total assets $1,394,364 $1,182,580 $1,127,120
========== ========== ==========
<FN>
Notes:
A. Intercompany transfers are made at prices comparable to normal unaffiliated
customer sales for similar products.
B. Affiliated companies are not allocated to geographic segments.
C. Corporate assets consist of short-term investments and investments in
affiliated companies.
Export sales from the United States to customers, primarily in Latin America,
the Middle East and Asia, were $139 million in 1994, $119 million in 1993 and
$136 million in 1992.
Net assets of non-U.S. subsidiaries at December 31, 1994 and 1993 were $388
million and $326 million, respectively. Net income of these subsidiaries was
$55 million in 1994, $42 million in 1993 and $59 million in 1992; and dividends
received from the subsidiaries were $8 million, $34 million and $26 million,
respectively.
NOTE 13 - FINANCIAL INSTRUMENTS
The company has various financial instruments, including cash and
short-term investments, investments in nonconsolidated companies, foreign
currency forward contracts, interest rate swaps and short- and long-term debt.
The company has determined the estimated fair value of these financial
instruments by using available market information and generally accepted
valuation methodologies. The use of different market assumptions or estimation
methodologies could have a material effect on the estimated fair value amounts.
The company believes the carrying values of financial instruments approximate
their fair values except for certain investments in marketable securities (see
Note 3). The company uses derivative financial instruments only to manage
well-defined foreign currency, interest rate and commodity price risks, as
described below. The company does not use derivative financial instruments for
trading purposes.
The company is exposed to the effect of changes in foreign currency rates on
its earnings and cash flow as a result of doing business internationally. In
addition to working capital management, pricing and sourcing, the company
selectively uses foreign currency forward contracts to lessen the potential
effect of these changes. Such contracts are generally in connection with
transactions with maturities of up to one year.
Realized and unrealized gains or losses on these contracts are recorded in the
statement of income, or in the case of transactions designated as hedges of net
foreign investments, in the cumulative translation adjustment account in other
shareholders' equity. Additionally, foreign currency forward contract gains and
losses on certain future transactions may be deferred until the future
transaction is recorded. The company's deferred currency gains at December 31,
1994 on foreign exchange contracts were insignificant.
At December 31, 1994, the company had short-term forward contracts to sell
currencies at various dates during 1995 for $12.2 million.
The maximum amount of foreign currency forward contracts outstanding
at any one time was $25.7 million in 1994 and $45.6 million in 1993.
The company has also entered into an interest rate swap to effectively convert
floating rate debt to a fixed rate on $18.4 million of Marine Terminal
Refunding Revenue Bonds due July 1, 2000 (see Note 4). The company also uses
commodity futures contracts to reduce its exposure to fluctuations in raw
material costs for its specialty vegetable oils. Realized gains and losses on
these contracts are included in inventory cost.
34
16
NOTE 14 - BUSINESS SEGMENT INFORMATION
The company has a concentration of sales and receivables in the oil and
chemical industries. The ten largest customers, most of which are international
oil companies and a number of which are groups of affiliated entities,
accounted for approximately 45% in 1994 and 44% of consolidated sales in 1993
and 1992. Although the largest single group accounted for 9% of sales in 1994
and 1993 and 10% in 1992, this group is made up of a number of separate
entities that the company believes make independent purchasing decisions.
The company's Agribusiness activities ceased being reportable as a separate
industry segment after December 1, 1992 (see Note 16). A description of the
company's reportable segments prior to December 1, 1992, is contained on page
20. Industry segment information as of and for the year ended December 31,
1992, is presented below:
Specialty
Chemicals Agribusiness Total
--------- ------------ -----
Operating results:
Revenues $1,433,358 $ 118,890 $1,552,248
Gross profit 450,967 39,327 490,294
Selling and administrative
expenses 147,653 33,673 181,326
Research, testing and
development expenses 139,810 14,952 154,762
Segment income (loss) 185,148 (11,459) 173,689
Identifiable assets 871,401 104,339 975,740
Other related disclosures:
Capital expenditures 89,172 6,642 95,814
Depreciation and
amortization 55,024 6,989 62,013
Segment income (loss) is before interest and taxes. Consolidated total assets
at December 31, 1992 included corporate investments of $151,380 which are not
allocable to industry segments.
NOTE 15 - STOCK OPTIONS
The 1991 Stock Incentive Plan provides for granting of options to buy Common
Shares intended either to qualify as "incentive stock options" under the
Internal Revenue Code or "non-statutory stock options" not intended to so
qualify, up to an amount equal to one percent of the outstanding Common Shares
at the beginning of any year, plus any unused amount from prior years. Under the
1991 Plan, options generally become exercisable 50% one year after grant, 75%
after two years, and 100% after three years, and expire up to ten years after
grant. "Reload options," which are options to purchase additional shares if a
grantee uses already-owned shares to pay for an option exercise are granted
automatically under the 1991 Plan and may be granted in the discretion of the
administering committee under their 1985 Employee Stock Option Plan. The 1991
Plan generally supersedes the 1985 Plan, although options outstanding under the
1985 Plan remain exercisable until their expiration dates. The option price
under both plans is the fair market value of the shares on the date of grant.
Both plans permit or permitted the granting of stock appreciation rights in
connection with the grant of options, and the 1991 Plan also permits the grant
of restricted and unrestricted shares. In addition, the 1991 Plan provides for
an automatic annual grant to each outside director of the company of an option
to purchase 2,000 Common Shares, with terms generally comparable to employee
stock options.
Information regarding these option plans is as follows:
Number of Shares
---------------------------------------
1994 1993 1992
---------- --------- ---------
Outstanding, January 1 2,338,875 2,147,263 1,970,446
Granted at $26.06 to
$37.50 per share 614,815 624,546 596,290
Exercised at $9.31 to
$32.81 per share (364,519) (394,178) (407,697)
Surrendered at $11.69 to
$37.50 per share (5,450) (38,756) (11,776)
---------- --------- ---------
Outstanding, December 31 2,583,721 2,338,875 2,147,263
========= ========= =========
Exercisable, December 31 1,652,012 1,341,767 1,210,767
========= ========= =========
Available for grant,
December 31 1,873,286 1,816,751 1,718,036
========= ========= =========
The 1985 Plan options expire June 1995 to November 2004, with an average option
price of $24.72. The 1991 Plan options expire April 2001 to June 2004, with an
average option price of $33.33.
NOTE 16 - TRANSACTIONS WITH MYCOGEN CORPORATION
On December 1, 1992, the company transferred certain of its Agribusiness assets
to Mycogen Corporation in exchange for 2,294,590 shares of Mycogen Common Stock
and $39.4 million par value of Mycogen Series A Preferred Stock. The remainder
of its Agribusiness assets, plus cash of $4.6 million, and exclusive of
specialty vegetable oil operations, was transferred to Agrigenetics, L.P., a
partnership with Mycogen, in exchange for a 49% partnership interest.
On December 31, 1993, the company sold 29.54% of Agrigenetics, L.P. to Mycogen
in exchange for cash of $7.0 million and 2,000,000 shares of Mycogen Common
Stock valued at $20.5 million. This transaction increased the company's
ownership of the outstanding Mycogen Common Stock from 25% to 32%. Mycogen
liquidated Agrigenetics, L.P. into a successor corporation named Agrigenetics
Inc. ("AGI") and issued to the company AGI common shares representing a 19.46%
ownership interest.
The company has the right to convert some or all of its interest in AGI into
Mycogen Common Stock or, after November 30, 2000, the company may require
Mycogen to purchase, and Mycogen may require the company to sell, some or all
of its then remaining interest in AGI for cash. The company and Mycogen have
agreed the value for the conversion or sale of the company's interest in AGI
will not be less than $21.4 million nor more than $26.3 million.
On December 1, 1993, Mycogen mandatorily redeemed $10 million of the Preferred
Stock for cash. The Preferred Stock held by the company pays cumulative
dividends of 5% per year through November 30, 1996; 8.5% from December 1, 1996
through
35
17
November 30, 2000; and the higher of 10% or prime plus 3% per annum thereafter.
At Mycogen's option, dividends may be paid in cash or additional shares of
Preferred Stock through November 30, 1997 and, thereafter, are payable in cash.
The company, at its option, may convert the Preferred Stock into Mycogen Common
Stock at the lower of $17.96 per share or 125% of the market price.
At December 31, 1994, the book carrying values of the company's investments
aggregated $41.2 million for Mycogen and AGI Common Stock and $30.0 million
for Mycogen Preferred Stock.
The company uses the equity method of accounting for its investment in the
Common Stock of Mycogen which includes AGI (formerly Agrigenetics, L.P.).
Other income-net includes the following amounts related to these investments.
1994 1993 1992
-------- -------- --------
Preferred dividends $ 1,454 $ 1,975 $ 164
Equity losses (94) (20,997) (2,708)
Gain on sale of investments 13,174
-------- -------- --------
$ 1,360 $ (5,848) $ (2,544)
======== ======== ========
The 1992 consolidated financial statements include revenues of $88.6 million,
costs and expenses of $95.9 million and segment loss of $6.1 million related to
the agribusiness transferred assets.
NOTE 17 - SPECIAL CHARGE
The company recorded a special charge of $86.3 million ($.83 per share after
tax) in the third quarter of 1993 in connection with manufacturing
rationalization and organizational realignment initiatives. The manufacturing
rationalization plan will be substantially complete by the end of 1996 and
through consolidation is resulting in cost savings from a reduced number of
employees, lower operating costs and fewer manufacturing units used to produce
intermediate products.
Approximately $51 million of the special charge relates to the manufacturing
rationalization of which $27 million relates to asset write-downs, including $16
million for the shutdown of manufacturing units used to produce intermediate
products. The remainder of the rationalization portion of the special charge
relates to expected employee reduction at manufacturing locations through early
retirements, equipment cleanup and dismantling, employee relocation and other
transitional costs.
The organizational realignment relates to the consolidation of the company's
nonmanufacturing activities. This portion of the special charge is approximately
$35 million and includes $16 million for employee early retirement and
relocation. The remainder of this portion of the special charge relates to asset
write-downs of $13 million, primarily in the company's Agribusiness investments
and accruals for transitional costs.
In 1994, the company updated the estimated costs to complete the initiatives and
as a result reclassified approximately $5 million of the special charge from the
manufacturing rationalization portion to the organizational realignment portion.
This reclassification reduced the amount of asset write-downs and increased the
amount related to employee reductions and other transitional items related to
the two initiatives.
Cash outlays related to the special charge were approximately $18 million during
1994 and $4 million in 1993. Included in liabilities at December 31, 1994, are
future cash outlays of $24 million, primarily for employee reductions and lease
terminations, of which $9 million is expected to be spent in 1995.
NOTE 18 - LITIGATION
On November 18, 1993, a federal court jury in Houston, Texas, awarded Exxon
Corporation $48 million in damages in a patent case brought, in 1989, against
the company. The damages award relates to a December 1992 verdict that the
company willfully infringed an Exxon patent pertaining to an oil soluble copper
additive component. On February 18, 1994, the trial court judge doubled the
damages amount and awarded prejudgment interest, court costs and additional
attorneys' fees to Exxon. The total amount of the judgment, including
previously awarded attorneys' fees, is $129 million. The company has obtained a
bond to stay enforcement of the judgment pending the company's appeal discussed
below.
The original December 1992 finding of willful infringement, as well as the
jury's determination that the patent is valid, remains on appeal to the
United States Court of Appeals for the Federal Circuit Court in Washington,
D.C., which has jurisdiction over all patent cases. Oral arguments on this
appeal were held on December 6, 1993, and the company does not know when a
decision will be announced. This decision could reverse or modify the judgment
against the company. In addition, oral arguments on the company's appeal of the
February 1994 damages award will be heard by the same court in Washington,
D.C., on March 8, 1995. The company's management continues to believe that it
has not infringed the Exxon patent and that the patent is invalid. Based on the
advice of legal counsel, management believes that the December 1992 trial court
judgment will not be upheld on appeal. Therefore, no amount related to the
judgment has been recorded in the company's financial statements.
The company has prevailed in a separate case brought in Canada against Exxon's
Canadian affiliate, Imperial Oil, Ltd., for infringement of the company's
patent pertaining to dispersant, the largest additive component used in motor
oils. A 1990 trial court verdict in favor of the company regarding the issue of
liability was upheld by the Federal Court of Appeals of Canada in December
1992, and in October 1993, the Supreme Court of Canada dismissed Imperial Oil's
appeal of the Court of appeals decision. The case has returned to the trial
court for an assessment of damages. On October 4, 1994, the trial court judge
awarded the company $15 million (Canadian) in special penalty damages, plus
attorneys' fees, against Imperial Oil for disregarding an earlier injunction
for the manufacture or sale of the dispersant which is the subject of this
case. Imperial Oil commenced proceedings to appeal the award of penalty
damages. The company has not reflected the award of penalty damages within its
financial statements pending the outcome of the appeal process. The penalty
damages are in addition to compensation damages, as to which no date has been
set for a determination. A reasonable estimation of the company's potential
recovery for compensation damages cannot be made at this time.
36
18
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
--------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-----------------------------------------------------------------------------------------------------
(In Thousands of Dollars Except Per Share Data)
1994
Net sales $397,816 $407,163 $396,478 $391,293
Gross profit 125,210 134,721 134,601 126,193
Genentech gain (net of tax) 7,483 7,719 7,812 3,789
Net income 43,281 49,132 47,933 35,229
Net income per share $.65 $.74 $.73 $.54
1993
Net sales $365,580 $392,236 $390,819 $368,996
Gross profit 118,168 121,625 129,225 116,414
Genentech gain (net of tax) 13,070 14,517
Income before accounting changes 35,431 31,342 (15,905) 34,107
Net income (3,944) 31,342 (15,905) 34,107
Net income per share:
Before accounting change .52 .46 (.24) .51
Net income $(.06) $.46 $(.24) $.51
<FN>
In the third quarter of 1993, the company recorded a special charge decreasing net income $56.1 million ($.83 per share).
37
19
HISTORICAL SUMMARY
(In Thousands of Dollars Except Per Share Data) 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Revenues $1,598,994 $1,525,500 $1,552,248
Cost of sales 1,072,025 1,032,199 1,054,376
Selling, administrative, research, testing and development expenses 324,939 330,046 336,088
----------- ---------- ----------
Total cost and expenses 1,396,964 1,362,245 1,390,464
Other income (charges) 49,429 (43,604) 15,360
----------- ---------- ----------
Income before income taxes 251,459 119,651 177,144
Provision for income taxes 75,884 34,676 52,498
Changes in accounting principles (39,375)
----------- ---------- ----------
Net income $ 175,575 $ 45,600 $ 124,646
=========== ========== ==========
For the Year:
Net income per share $2.67 $.67 $1.81
Dividends declared per share .89 .85 .81
Average Common Shares outstanding (in thousands) 65,737 67,706 68,966
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Current assets $ 624,388 $ 568,913 $ 591,016
Property - net 558,744 437,635 375,587
Other assets 211,232 176,032 160,517
----------- ---------- ----------
Total assets 1,394,364 1,182,580 1,127,120
Less:
Short-term debt 53,700 14,590 25,140
Other current liabilities 199,833 209,658 181,108
Long-term debt 114,161 55,298 23,258
Other noncurrent liabilities 194,631 170,798 78,252
----------- ---------- ----------
Shareholders' equity $ 832,039 $ 732,236 $ 819,362
=========== ========== ==========
OTHER DATA
Return on average shareholders' equity 22% 6% 15%
Capital investments $ 162,261 $ 168,201 $ 98,216
Depreciation 61,278 59,595 58,435
At End of Year:
Number of employees 4,520 4,613 4,609
Number of shareholders 6,494 6,616 6,822
Common Shares outstanding (in thousands) 64,845 66,590 68,451
Shareholders' equity per share $12.83 $11.00 $11.97
<FN>
All share and per share data have been restated to reflect the 2-for-1 stock split effected on August 31, 1992.
38
20
1991 1990 1989 1988 1987 1986 1985 1984
-----------------------------------------------------------------------------------------------------------------------------
$1,476,306 $1,452,701 $1,227,910 $ 1,125,731 $1,022,277 $ 985,182 $ 913,351 $ 844,175
992,275 1,006,341 864,576 783,113 713,152 695,068 659,130 627,378
316,401 282,050 245,132 226,776 203,236 180,650 158,358 114,501
--------- ---------- ---------- ----------- ---------- --------- ---------- ----------
1,308,676 1,288,391 1,109,708 1,009,889 916,388 875,718 817,488 741,879
10,510 106,902 19,544 69,908 23,310 19,200 7,582 12,788
---------- ---------- ---------- ----------- ---------- --------- ---------- ----------
178,140 271,212 137,746 185,750 129,199 128,664 103,445 115,084
54,481 81,166 43,766 54,544 47,864 50,479 43,221 47,353
8,751
---------- ---------- ---------- ----------- ---------- --------- ---------- ----------
$ 123,659 $ 190,046 $ 93,980 $ 139,957 $ 81,335 $ 78,185 $ 60,224 $ 67,731
========== ========== ========== =========== ========== ========= ========== ==========
$1.79 $2.67 $1.26 $1.81 $1.03 $.99 $.74 $.87
.77 .73 .69 .65 .61 .59 .58 .56
69,260 71,121 74,665 77,391 79,117 79,356 80,817 78,276
$ 701,571 $ 668,810 $ 543,166 $ 573,002 $ 513,342 $ 462,982 $ 447,441 $ 376,050
380,030 353,551 316,493 298,670 297,573 289,078 290,298 251,735
90,082 92,235 100,525 98,999 128,463 125,847 116,706 74,189
---------- ---------- ---------- ----------- ---------- --------- ---------- ----------
1,171,683 1,114,596 960,184 970,671 939,378 877,907 854,445 701,974
32,801 12,552 8,002 5,483 13,561 4,303 31,448 9,381
229,361 235,799 172,906 179,405 155,605 158,494 151,095 122,871
34,982 54,023 53,180 55,339 56,138 52,616 73,444 30,416
80,073 76,011 62,832 66,136 92,441 89,815 79,160 64,963
---------- ---------- ---------- ----------- ---------- --------- ---------- ----------
$ 794,466 $ 736,211 $ 663,264 $ 664,308 $ 621,633 $ 572,679 $ 519,298 $ 474,343
========== ========== ========== =========== ========== ========= ========== ==========
16% 27% 14% 22% 14% 14% 12% 14%
$ 83,541 $ 92,231 $ 82,720 $ 71,891 $ 56,460 $ 52,986 $ 103,990 $ 49,001
54,614 53,960 48,682 46,598 47,229 42,591 44,605 38,723
5,299 5,169 5,030 4,781 4,817 4,802 5,205 4,176
6,767 6,692 7,370 7,782 8,335 9,240 10,803 10,804
69,031 69,397 74,016 76,020 77,922 79,382 79,321 78,221
$11.51 $10.61 $8.96 $8.74 $7.98 $7.21 $6.55 $6.06
39