UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2000 Commission File No. 1-14501
PENNZOIL-QUAKER STATE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 76-0200625
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 546-4000
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 stock were outstanding, as of latest
practicable date, July 31, 2000:
Common Stock, par value $0.10 per share, 78,544,218
shares.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 858,733 $ 757,514 $1,638,645 $1,461,576
COSTS AND EXPENSES
Cost of sales 647,401 546,031 1,243,125 1,046,580
Selling, general and administrative 131,465 142,197 266,584 289,897
Restructuring charges - - 34,405 -
Depreciation and amortization 24,258 30,356 50,118 63,870
Taxes, other than income 4,002 3,445 8,332 7,815
Interest charges, net 23,601 21,081 45,242 38,822
----------- ----------- ----------- -----------
INCOME(LOSS)BEFORE INCOME TAX 28,006 14,404 (9,161) 14,592
Income tax provision (benefit) 15,425 8,102 (3,834) 10,509
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 12,581 $ 6,302 $ (5,327) $ 4,083
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ 0.16 $ 0.08 $ (0.07) $ 0.05
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ 0.1875 $ 0.1875 $ 0.3750 $ 0.3750
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING:
BASIC 78,403 77,757 78,308 77,703
=========== =========== =========== ===========
DILUTED 79,641 78,053 78,308 78,006
=========== =========== =========== ===========
END OF PERIOD SHARES OUTSTANDING 78,496 77,823 78,496 77,823
=========== =========== =========== ===========
NET INCOME (LOSS) $ 12,581 $ 6,302 $ (5,327) $ 4,083
Change in:
Foreign currency translation adjustment (2,509) (3,969) (2,572) (507)
Unrealized loss on investment in securities (494) (462) (123) (432)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 9,578 $ 1,871 $ (8,022) $ 3,144
=========== =========== =========== ===========
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
2000 1999
------------- -------------
(Unaudited)
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 20,975 $ 20,155
Receivables 384,939 312,320
Inventories 295,770 298,202
Materials and supplies 10,049 11,063
Other current assets 44,876 44,298
------------- -------------
Total current assets 756,609 686,038
Property, plant and equipment, net 503,050 502,101
Deferred income taxes 277,233 272,677
Goodwill and other intangibles 1,103,010 1,065,143
Other assets 211,615 207,262
------------- -------------
TOTAL ASSETS $ 2,851,517 $ 2,733,221
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 2,697 $ 1,080
Accounts payable 187,873 210,700
Payroll accrued 23,265 28,328
Other current liabilities 128,414 129,295
------------- -------------
Total current liabilities 342,249 369,403
Total long-term debt, less current maturities 1,208,663 1,026,153
Capital lease obligations, less current maturities 64,677 68,786
Other liabilities 319,547 319,011
------------- -------------
TOTAL LIABILITIES 1,935,136 1,783,353
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 916,381 949,868
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,851,517 $ 2,733,221
============= =============
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
4
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------------------
2000 1999
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,327) $ 4,083
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 50,118 63,870
Deferred income tax (4,507) 7,732
Distributions from equity investees
less than earnings (7,859) (4,134)
Other non-cash items 13,962 4,618
Changes in accounts receivable (89,034) (46,150)
Changes in other operating assets and liabilities (41,590) (20,492)
----------- -----------
Net cash provided by (used in) operating activities (84,237) 9,527
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (29,240) (30,925)
Acquisitions (76,421) -
Proceeds from sales of assets 40,606 73,106
Other investing activities 2,487 (4,936)
----------- -----------
Net cash provided by (used in) investing activities (62,568) 37,245
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuances of debt 176,911 11,650
Dividends paid (29,286) (29,143)
Other financing activities - (7,090)
----------- -----------
Net cash provided by (used in) financing activities 147,625 (24,583)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 820 22,189
CASH AND CASH EQUIVALENTS, beginning of period 20,155 14,899
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 20,975 $ 37,088
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
5
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General -
The condensed consolidated financial statements included herein
have been prepared by Pennzoil-Quaker State Company ("Pennzoil-Quaker
State" or the "Company") without audit and should be read in
conjunction with the financial statements and the notes thereto
included in Pennzoil-Quaker State's latest annual report. The
foregoing financial statements include only normal recurring accruals
and all adjustments which Pennzoil-Quaker State considers necessary
for a fair presentation. Certain prior period items have been
reclassified in the condensed consolidated financial statements in
order to conform with the current year presentation.
(2) New Accounting Standards -
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, subsequently amended by SFAS No. 138, establishes accounting
and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The standards require that changes in
the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company formally document, designate,
and assess the effectiveness of transactions that receive hedge
accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133" which defers the effective
date of SFAS No. 133 until all fiscal years beginning after June 15,
2000. The Company is currently assessing SFAS No. 133 to determine
what impact, if any, this pronouncement will have on the Company's
financial position or results of operations.
(3) Summarized Financial Data of Excel Paralubes -
Summarized operations information for Excel Paralubes, an equal
partnership with Conoco Inc., for the three and six months ended June
30, 2000 and 1999 on a 100% basis follows:
Three months ended June 30 Six months ended June 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Expressed in thousands)
(Unaudited)
Revenues $ 128,646 $ 81,611 $ 243,510 $ 125,138
Operating earnings 29,299 17,733 43,769 24,601
Net income 19,105 8,099 23,478 5,285
Pennzoil-Quaker State's net investment in Excel Paralubes,
carried as a credit balance of $54.5 million and $61.5 million at
June 30, 2000 and December 31, 1999, respectively, is netted against
other equity investments and included in other assets on the
condensed consolidated balance sheet. Pennzoil-Quaker State's equity
in Excel Paralubes' pretax income for the three months ended June 30,
2000 and 1999 of $9.6 million and $4.0 million, respectively, is
included in revenues in the condensed consolidated statement of
operations and comprehensive income. Pennzoil-Quaker State's equity
in Excel Paralubes' pretax income for the six months ended June 30,
2000 and 1999 was $11.7 million and $2.6 million, respectively.
6
(4) Debt -
Pennzoil-Quaker State primarily utilizes commercial paper
programs to manage its cash flow needs and currently limits
aggregate borrowings under those commercial paper programs to $600.0
million. Commercial paper borrowings totaling $386.7 million at June
30, 2000 and $242.6 million at December 31, 1999 have been classified
as long-term debt. Such debt classification is based upon the
availability of long-term credit facilities to refinance the
commercial paper and the Company's intent to maintain such
commitments in excess of one year. The Company had three short-term
variable-rate credit arrangements with banks at June 30, 2000. The
Company currently limits its aggregate borrowings under these types
of credit arrangements to $300.0 million. Outstanding borrowings
were $50.0 million at June 30, 2000 and $16.0 million at December 31,
1999 and were classified as long-term debt. Such debt
classification is also based on the availability of long-term credit
facilities to refinance these arrangements and the Company's intent
to maintain such commitments in excess of one year. The Company has
a revolving credit facility with a group of banks that provides for
up to $600.0 million of committed unsecured revolving credit
borrowings through November 14, 2000, with any outstanding borrowings
on such date being converted into a term credit facility terminating
on November 14, 2001. There were no borrowings outstanding under
this revolving credit facility at June 30, 2000 or December 31, 1999.
Pennzoil-Quaker State also maintains a revolving credit facility
with a Canadian bank, which provides for up to US$18.2 million of
committed borrowings through October 29, 2000, with any outstanding
borrowings on such date being converted into a term credit facility
terminating on October 29, 2001. As of June 30, 2000 and December
31, 1999, borrowings under the Company's Canadian facility totaled
US$13.5 million and US$13.8 million, respectively, and have been
classified as long-term debt.
(5) Earnings Per Share -
Computations for basic and diluted earnings (loss) per share for
the three and six months ended June 30, 2000 and 1999 consist of the
following:
Three Months Six Months
ended June 30 ended June 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Expressed in thousands except per share amounts)
Net income(loss) $ 12,581 $ 6,302 $ (5,327) $ 4,083
Basic weighted average shares 78,403 77,757 78,308 77,703
Effect of dilutive securities (A)
Options 649 - - -
Awards 589 296 - 303
------------ ------------ ------------ ------------
Diluted weighted average shares 79,641 78,053 78,308 78,006
Basic and diluted earnings
(loss) per share $ 0.16 $ 0.08 $ (0.07) $ 0.05
<FN>
<F1> (A) A weighted average number of options to purchase 9.2 million shares of common stock were
outstanding for the three months ended June 30, 2000, but were not included in the
computation of diluted earnings per share because the options' prices were greater than
the average market price of the common shares. A weighted average number of options to
purchase 9.9 million shares of common stock and awards of 588.8 thousand shares of
common stock were outstanding for the six months ended June 30, 2000, but were not
included in the computation of diluted loss per share because these options and awards
would result in an antidilutive per share amount. A weighted average number of options
to purchase 6.9 million shares of common stock were outstanding for the three months and
six months ended June 30, 1999, but were not included in the computation of diluted
earnings per share because the options' prices were greater than the average market
price of the common shares.
</FN>
7
(6) Use of Derivatives -
Pennzoil-Quaker State has approved a tactical hedging program
to lock in the refining margins on up to ninety percent of its
production of certain refined fuel products through year-end 2000.
Pursuant to this strategy, Pennzoil-Quaker State entered into several
futures contracts in January 2000 and additional contracts in May
2000. Operating losses of $5.3 million and $6.9 million related
to this program were recognized in net sales during the quarter and
six months ended June 30, 2000, respectively. The estimated fair
value of the unrealized loss associated with the open futures
contracts was $5.1 million at June 30, 2000.
In April 2000, in conjunction with the purchase of two British
automotive consumer products companies, the Company entered into a
series of U.K. GBP forward swaps to hedge against foreign currency
risk. The acquired contracts called for a swap of 10.9 million GBP
to be swapped for $17.3 million USD. Unrealized gains or losses were
deferred until settlement of the swap, which occurred in August,
2000. No material gain or loss was recognized upon settlement.
(7) Comprehensive Income (Loss) -
The components of the Company's other comprehensive income
(loss) include changes in foreign currency translation adjustments,
unrealized holding gains and losses on available-for-sale securities
and minimum pension liability. The Company's comprehensive income
(loss) information is included in the accompanying condensed
consolidated statement of operations and comprehensive income.
(8) Cash Flow Information -
Cash paid for interest during the six months ended June 30, 2000
and 1999 was $49.5 million and $26.0 million, respectively. An
income tax refund, net of tax payments, of $1.0 million was received
during the six months ended June 30, 2000. Income taxes paid during
the six months ended June 30, 1999 were $0.6 million. The decrease in
cash flow from operating activities for the six months ended June 30,
2000 compared to the same period in 1999 is primarily due to an
increase in working capital.
(9) Restructuring Charges -
In the first quarter of 2000, the Company recorded a $34.4
million charge to accrue the costs associated with a general and
administrative cost reduction effort. The charge related to each
operating segment as follows: Lubricants and Consumer Products -
$11.0 million; Base Oil and Specialty Products - $5.4 million; Jiffy
Lube - $1.0 million; Other - $17.0 million. The Company is reducing
the number of employees and consolidating office space in order to
reduce general and administrative expenses. The restructuring is
expected to be completed by the end of 2000. These charges primarily
included severance for approximately 400 administrative and
operational employees, the accrual of future lease obligations and
restoration costs of office space in Houston. Also included in the
charge was the write-off of obsolete information technology assets.
During the three months ended June 30, 2000, 235 employees were
terminated as a result of workforce reductions and were paid pursuant
to the general and administrative cost reduction plan. The severance
payments for the former employees are expected to be paid out over a
minimum period of two months and a maximum period of up to two
years. The accrued liability balance of $27.9 million was reduced by
$2.3 million as a result of the severance expenses paid to the
employees during the three months ended June 30, 2000. The remaining
accrual at June 30, 2000 was $25.6 million.
8
(10) Sale of Rouseville Refinery -
In April 2000, Pennzoil-Quaker State completed a sale of its
Rouseville, Pennsylvania wax processing facilities and the related
assets at the Rouseville facility to Calumet Lubricants Company, LP.
Also included in the sale was Pennzoil-Quaker State's share of its
Bareco Products partnership with Baker Petrolite Corporation, a
division of Baker Hughes Incorporated. The Company received gross
proceeds of $27.6 million from the sale, with no gain or loss
resulting. Included in the Company's results are revenues of $36.0
million and operating income of $1.4 million for the first six months
of 2000.
(11) Acquisitions -
In April 2000, the Company acquired two automotive consumer
products companies, Airfresh UK Limited ("Airfresh") and Bluecol
Brands Limited ("Bluecol") from Armour Trust plc for approximately
$16.7 million. Airfresh manufactures, markets and distributes air
freshener and fragrance products for the automotive aftermarket with
primary markets in the U.K. and France. Bluecol manufactures,
markets and distributes branded anti-freeze, glass cleaning products,
rust treatments, cooling system treatments, and exterior appearance
products for the U.K. automotive aftermarket.
In March 2000, the Company completed the acquisition of certain
assets of Sagaz Industries ("Sagaz"), a manufacturer and marketer of
automobile seat covers and cushions in North America, for
approximately $62.5 million, subject to certain working capital
adjustments. Sagaz was absorbed into the Company's Axius auto
accessories business unit in Moorpark, California.
In February 2000, the Company completed the acquisition of Auto
Fashions, a 25 year-old Australian automotive accessories firm
operated by Robert Hicks Pty Ltd. for approximately US$5.3 million.
Auto Fashions is a leader in Australian automotive air fresheners,
sunshades and comfort accessories and has a leading share position in
most of the categories in which it participates.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Pennzoil-Quaker State's operations are conducted primarily
through the following three segments: (1) Lubricants and Consumer
Products, (2) Jiffy Lube and (3) Base Oil and Specialty Products.
Results of Operations
Net sales for Pennzoil-Quaker State increased by $92.5 million
and $160.2 million, or approximately 12% and 11% for the quarter
and six months ended June 30, 2000 to $839.1 million and $1,604.7
million, respectively. The increase in net sales was primarily
due to higher refined products prices partially offset by lower Jiffy
Lube net sales resulting from sales of stores.
Net income (loss) for the quarter and six months ended June 30,
2000 was $12.6 million, or 16 cents per basic share and ($5.3)
million, or (7) cents per basic share, respectively. This compares
with net income of $6.3 million, or 8 cents per basic share for the
quarter ended June 30, 1999 and $4.1 million, or 5 cents per basic
share for the six months ended June 30, 1999. The increase in income
for the quarter is primarily due to higher results in Jiffy Lube,
related to higher rental and royalty income, and lower overall
Company general and administrative expenses. The decrease in income
for the six months ended June 30, 2000 compared to the same period in
1999 is primarily due to charges of $13.0 million related to the fire
at the Shreveport, Louisiana refinery facility that occurred on
January 18, 2000, and one-time costs of $34.4 million associated with
the Company's general and administrative cost reduction project.
9
Lubricants and Consumer Products
Net sales for the Lubricants and Consumer Products segment
were $528.6 million and $1,014.4 million for the quarter and six
months ended June 30, 2000, respectively, compared to $501.2 million
and $980.3 million for the same periods last year. The increase
in net sales is primarily due to higher international and consumer
product sales and higher average lubricants product prices.
Operating income for this segment was $56.2 million and $102.9
million for the quarter and six months ended June 30, 2000 compared
to $51.6 million and $93.6 million for the same periods last year.
The increase in operating income for the quarter and six months ended
June 30, 2000 is primarily due to lower selling, general and
administrative expenses.
In April 2000, the Company acquired two automotive consumer
products companies, Airfresh UK Limited ("Airfresh") and Bluecol
Brands Limited ("Bluecol") from Armour Trust plc for approximately
$16.7 million. Airfresh manufactures, markets and distributes air
freshener and fragrance products for the automotive aftermarket with
primary markets in the U.K. and France. Bluecol manufactures,
markets and distributes branded anti-freeze, glass cleaning products,
rust treatments, cooling system treatments, and exterior appearance
products for the U.K. automotive aftermarket. In March 2000, the
Company completed the acquisition of certain assets of Sagaz
Industries ("Sagaz"), a manufacturer and marketer of automobile seat
covers and cushions in North America, for approximately $62.5
million, subject to certain working capital adjustments. Sagaz was
absorbed into the Company's Axius auto accessories business unit in
Moorpark, California. In February 2000, the Company completed the
acquisition of Auto Fashions, a 25 year-old Australian automotive
accessories firm operated by Robert Hicks Pty Ltd. for approximately
US$5.3 million. Auto Fashions is a leader in Australian automotive
air fresheners, sunshades and comfort accessories and has a leading
share position in most of the categories in which it participates.
Jiffy Lube
Net sales for this segment were $84.8 million and $166.9
million for the quarter and six months ended June 30, 2000,
respectively. This compares to net sales of $111.1 million and
$230.4 million for the same periods in 1999. The decrease in net
sales was primarily due to the sale of company-operated centers to
franchisees. Other income (loss) for this segment for the quarter
and six months ended June 30, 2000 was $1.2 million and $4.1 million,
respectively, compared to ($1.0) million and $0.8 million for the
same periods in 1999. The increase in other income was primarily due
to higher franchise fees and losses on sales of company centers in
1999. Operating income (loss) from this segment for the quarter and
six months ended June 30, 2000 was $7.7 million and $10.9 million,
respectively, compared to ($1.0) million and ($0.9) for the same
periods in 1999. The improvement in operating income was primarily
due to higher comparable sales in company-operated centers, higher
rental and royalty income, and lower selling, general and
administrative expenses and merger costs.
Base Oil and Specialty Products
Net sales for this segment were $293.2 million and $557.1
million for the quarter and six months ended June 30, 2000,
respectively. This compares to net sales of $188.4 million and
$339.3 million for the same periods in 1999. The increase is
primarily due to higher average sales prices for fuels, base oils and
other refined petroleum products. Other income for this segment for
the quarter and six months ended June 30, 2000 was $16.4 million and
$22.3 million, respectively, compared to $6.9 million and $12.1
million for the same periods in 1999. The increase in other income
was primarily due to higher equity earnings from Excel Paralubes due
to higher base oil margins. Operating income (loss) from this segment
for the quarter and six months ended June 30, 2000 was $8.0 million
and ($4.1) million, respectively, compared to operating income (loss)
of ($3.6) million and ($9.6) million for the same periods in 1999.
The increase in operating income for the quarter and six months ended
June 30, 2000 was primarily due to higher equity earnings from Excel
Paralubes, improved margins and lower expenses.
10
In April 2000, Pennzoil-Quaker State completed a sale of its
Rouseville, Pennsylvania wax processing facilities and the related
assets at the Rouseville facility to Calumet Lubricants Company, LP.
Also included in the sale was Pennzoil-Quaker State's share of its
Bareco Products partnership with Baker Petrolite Corporation, a
division of Baker Hughes Incorporated. The Company received gross
proceeds of $27.6 million from the sale. No gain or loss was
recognized on the sale. Included in the Company's consolidated
results are revenues of $36.0 million and operating income of
$1.4 million for the first six months of 2000.
Corporate Administrative Expense
Corporate administrative expense decreased $1.6 million to $17.1
million for the quarter ended June 30, 2000 compared to the same
period in 1999. Corporate administrative expense decreased $5.8
million to $34.7 million for the six months ended June 30, 2000
compared to the same period in 1999. The decrease for the six months
ended June 30, 2000 is primarily due to lower merger expenses.
Capital Resources and Liquidity
Cash Flow. As of June 30, 2000, Pennzoil-Quaker State had cash
and cash equivalents of $21.0 million. During the six months ended
June 30, 2000, cash and cash equivalents increased $0.8 million.
For purposes of the condensed consolidated statement of cash
flows, all highly liquid investments purchased with a maturity of
three months or less are considered to be cash equivalents.
The decrease in cash flow from operating activities for the six
months ended June 30, 2000 compared to the same period in 1999 is
primarily due to an increase in working capital.
Debt Instruments and Repayments. Pennzoil-Quaker State primarily
utilizes its commercial paper programs to manage its cash flow needs.
Pennzoil-Quaker State currently limits aggregate borrowings under its
commercial paper programs to $600.0 million. Commercial paper
borrowings totaling $386.7 million at June 30, 2000 and $242.6
million at December 31, 1999 have been classified as long-term debt.
Such debt classification is based upon the availability of long-term
credit facilities to refinance the commercial paper and the Company's
intent to maintain such commitments in excess of one year. The
Company had three short-term variable-rate credit arrangements with
banks at June 30, 2000. The Company currently limits its aggregate
borrowings under these types of credit arrangements to $300.0
million. Outstanding borrowings were $50.0 million at June 30, 2000
and $16.0 million at December 31, 1999 and were classified as long-
term debt. Such debt classification is also based on the
availability of long-term credit facilities to refinance these
arrangements and the Company's intent to maintain such commitments in
excess of one year. The Company has a revolving credit facility with
a group of banks that provides for up to $600.0 million of committed
unsecured revolving credit borrowings through November 14, 2000,
with any outstanding borrowings on such date being converted into a
term credit facility terminating on November 14, 2001. There were no
borrowings outstanding under this revolving credit facility at June
30, 2000 or December 31, 1999.
Pennzoil-Quaker State also maintains a revolving credit
facility with a Canadian bank, which provides for up to US$18.2
million of committed borrowings through October 29, 2000, with any
outstanding borrowings on such date being converted into a term
credit facility terminating on October 29, 2001. As of June 30, 2000
and December 31, 1999, borrowings under the Company's Canadian
facility totaled US$13.5 million and US$13.8 million, respectively,
and have been classified as long-term debt.
Accounts Receivable. Pennzoil-Quaker State, through its wholly
owned subsidiary Pennzoil Receivables Company ("PRC"), sells certain
of its accounts receivable to a third party purchaser. PRC is a
special limited purpose corporation and the assets of PRC are
available solely to satisfy the claims of its own creditors and not
those of Pennzoil-Quaker State or its affiliates. The Company
entered into a new receivables sales facility in June 1999 that
provides for ongoing sales of up to $160.0 million of accounts
receivable through August 2000, at which time the Company intends to
renew the facility. The Company's net accounts receivable sold under
its receivable sales facility totaled $160.0 million and $153.1
million at June 30, 2000 and December 31, 1999, respectively.
11
The Company maintains a lube center receivable purchase and
sale agreement, which provides for the sale of certain notes
receivable up to $275.0 million, through a wholly owned subsidiary,
Pennzoil Lube Center Acceptance Corporation ("PLCAC"). In June
2000, the Company increased the aggregate purchase price limit from
$220.0 million to $275.0 million. PLCAC is a Nevada corporation and
the assets of PLCAC are available solely to satisfy the claims of its
own creditors and not those of Pennzoil-Quaker State or its
affiliates. Through June 30, 2000, the Company has sold a total of
$213.0 million of notes receivable under this agreement, of which
$164.7 million were outstanding to the third party purchaser at June
30, 2000. Through December 31, 1999, the Company had sold a total of
$186.9 million of notes receivable under this agreement, of which
$153.2 million were outstanding to the third party purchaser at
December 31, 1999.
Disclosures about Market Risk
The Company's primary exposure to market risk includes changes
in interest rates, commodity prices and foreign currency exchange
rates.
Pennzoil-Quaker State has approved a tactical hedging program to
lock in refining margins on up to ninety percent of its production of
certain refined fuel products through year-end 2000. Pursuant to
this strategy, Pennzoil-Quaker State entered into several futures
contracts in January 2000 and additional contracts in May 2000.
Operating losses of $5.3 million and $6.9 million related to this
program were recognized in net sales during the quarter and six
months ended June 30, 2000, respectively. The estimated fair value
of the unrealized loss associated with the open futures contracts was
$5.1 million at June 30, 2000.
In April 2000, in conjunction with the purchase of two British
automotive consumer products companies, the Company entered into a
series of U.K. pound Sterling forward swaps to hedge against foreign
currency risk. The acquired contracts called for a swap of 10.9
million GBP to be swapped for $17.3 million USD. Unrealized gains or
losses were deferred until settlement of the swap, which occurred in
August 2000. No material gain or loss was recognized upon
settlement.
Forward-Looking Statements - Safe Harbor Provisions
This quarterly report on Form 10-Q of Pennzoil-Quaker State for
the quarter and six months ended June 30, 2000 contains certain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. To the extent that such statements
are not recitations of historical fact, such statements constitute
forward-looking statements, which, by definition, involve risks and
uncertainties. Where, in any forward-looking statements, Pennzoil-
Quaker State expresses an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be
achieved or accomplished.
The following are factors that could cause actual results or
events to differ materially from those anticipated, and include but
are not limited to: general economic, financial and business
conditions; competition in the motor oil and marketing business; base
oil margins and supply and demand in the base oil business; the
success and cost of advertising and promotional efforts; mechanical
failure in refining operations; unanticipated environmental
liabilities; changes in and compliance with governmental regulations;
changes in tax laws; and the cost and effects of legal proceedings.
12
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
The following table shows revenues and operating income by segment
and other components of income.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Dollar amounts expressed in thousands)
REVENUES
Net sales
Lubricants and Consumer Products $ 528,577 $ 501,192 $1,014,379 $ 980,274
Base Oil and Specialty Products 293,204 188,442 557,140 339,345
Jiffy Lube 84,810 111,129 166,894 230,429
Intersegment sales and other (67,527) (54,218) (133,704) (105,510)
----------- ----------- ----------- -----------
839,064 746,545 1,604,709 1,444,538
----------- ----------- ----------- -----------
Other income, net
Lubricants and Consumer Products 3,855 5,809 6,458 5,855
Base Oil and Specialty Products 16,352 6,925 22,326 12,055
Jiffy Lube 1,159 (1,022) 4,112 777
Other (1,697) (743) 1,040 (1,649)
----------- ----------- ----------- -----------
19,669 10,969 33,936 17,038
----------- ----------- ----------- -----------
Total revenues $ 858,733 $ 757,514 $1,638,645 $1,461,576
=========== =========== =========== ===========
OPERATING INCOME (LOSS)
Lubricants and Consumer Products $ 56,232 $ 51,568 $ 102,925 $ 93,646
Base Oil and Specialty Products 7,998 (3,628) (4,081) (9,606)
Jiffy Lube 7,627 (978) 10,876 (866)
Other (3,175) 7,251 (4,498) 10,780
----------- ----------- ----------- -----------
Total operating income 68,682 54,213 105,222 93,954
Corporate administrative expense 17,075 18,728 34,736 40,540
Restructuring charges - - 34,405 -
Interest charges, net 23,601 21,081 45,242 38,822
----------- ----------- ----------- -----------
Income(loss)before income tax 28,006 14,404 (9,161) 14,592
Income tax provision (benefit) 15,425 8,102 (3,834) 10,509
----------- ----------- ----------- -----------
NET INCOME(LOSS) $ 12,581 $ 6,302 $ (5,327) $ 4,083
=========== =========== =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES - 1.21
=========== ===========
AMOUNT BY WHICH FIXED CHARGES $ 16,567 -
EXCEEDS EARNINGS =========== ===========
13
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
OPERATING DATA
- --------------
LUBRICANTS AND CONSUMER PRODUCTS
Total revenues (in thousands):
Lubricants $ 375,856 $ 366,190 $ 722,318 $ 711,050
Consumer Products 96,869 82,924 184,152 167,219
International 66,229 58,071 123,202 108,015
Eliminations and other (6,522) (184) (8,835) (155)
------------ ------------ ------------ ------------
Total revenues $ 532,432 $ 507,001 $ 1,020,837 $ 986,129
============ ============ ============ ============
Operating income (in thousands):
Lubricants $ 44,014 $ 34,327 $ 73,686 $ 65,781
Consumer Products 7,509 13,213 20,063 22,204
International 4,709 4,028 9,176 5,661
------------ ------------ ------------ ------------
Total operating income $ 56,232 $ 51,568 $ 102,925 $ 93,646
============ ============ ============ ============
JIFFY LUBE
Domestic systemwide sales (in thousands) $ 301,753 $ 278,895 $ 581,211 $ 555,807
Same center sales(in thousands) $ 280,298 $ 266,328 $ 538,959 $ 510,999
Centers open 2,162 2,147 2,162 2,147
BASE OIL AND SPECIALTY PRODUCTS (A)
Raw materials processed (barrels per day)(B) 59,485 75,815 54,584 68,400
Refining capacity (barrels per day)(B) 60,800 76,000 68,300 76,000
Refiner's margin ($ per barrel) $ 6.49 $ 4.92 $ 6.41 $ 6.19
Operating costs ($ per barrel) $ 4.96 $ 3.50 $ 6.52 $ 4.53
Depreciation ($ per barrel) $ .40 $ 1.08 $ .44 $ 1.20
Refinery Feedstocks:
Paraffinic crude oil 46% 66% 46% 68%
Naphthenic crude oil 7% 6% 8% 7%
Other feedstocks and blendstocks 47% 28% 46% 25%
Refinery Yields:
Gasolines 25% 27% 23% 27%
Distillates 31% 33% 31% 32%
Lube base stocks 28% 27% 29% 27%
Waxes 1% 3% 2% 3%
Other products 15% 10% 15% 11%
Market Data:
WTI crude oil ($ per barrel) $ 28.60 $ 17.66 $ 28.67 $ 15.35
3-2-1 crack spread ($ per barrel) (C) $ 5.57 $ 1.62 $ 4.68 $ 1.50
Base oil gross margin ($ per barrel) (D) $ 23.06 $ 16.38 $ 20.41 $ 17.77
<FN>
<F1>
(A) Includes Pennzoil-Quaker State's 50% ownership of Excel Paralubes.
<F2>
(B) Rouseville, PA refinery stopped processing crude oil on February 2, 2000 and was sold on April 7, 2000.
<F3>
(C) Regular unleaded gasoline and low sulpher diesel vs. WTI crude oil.
<F4>
(D) Exxon 100N posting vs. WTI crude oil.
</FN>
14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a)Annual Meeting of Shareholders
May 4, 2000
(c) Broker
Proposals For Against Withheld Abstain Non-Votes
---------- ------- --------- ------- ---------
Election of Directors
Howard H. Baker, Jr. 68,596,925 - 1,457,072 - -
James L. Pate 67,911,320 - 2,142,677 - -
Gerald B. Smith 68,912,522 - 1,141,475 - -
Lorne R. Waxlax 68,895,069 - 1,158,928 - -
Approval of Appointment
of Arthur Andersen LLP
As Independent Public
Accountants 69,284,130 521,137 - 248,730 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
12 Computation of Ratio of Earnings to Fixed Charges for the
six months ended June 30, 2000 and 1999.
27 Financial Data Schedule.
(b) Reports -
No reports on Form 8-K were filed during the quarter for
which this report was filed.
15
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 thereunto duly
authorized.
PENNZOIL-QUAKER STATE COMPANY
Registrant
S/N Michael J. Maratea
Michael J. Maratea
Vice President and Controller
August 14, 2000