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 September 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, October 31, 2000:
Common Stock, par value $0.10 per share, 78,681,368 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 Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 798,701 $ 760,340 $2,437,346 $2,221,916
COSTS AND EXPENSES
Cost of sales 592,478 571,814 1,835,603 1,618,394
Selling, general and administrative 123,744 139,686 390,328 429,583
Restructuring charges - - 34,405 -
Depreciation and amortization 24,764 31,656 74,882 95,526
Taxes, other than income 5,406 4,677 13,738 12,492
Interest charges, net 24,334 20,143 69,576 58,965
----------- ----------- ----------- -----------
INCOME(LOSS)BEFORE INCOME TAX 27,975 (7,636) 18,814 6,956
Income tax provision (benefit) 21,106 (892) 17,272 9,617
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 6,869 $ (6,744) $ 1,542 $ (2,661)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ 0.09 $ (0.09) $ 0.02 $ (0.03)
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ 0.1875 $ 0.1875 $ 0.5625 $ 0.5625
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING:
BASIC 78,573 77,874 78,395 77,760
=========== =========== =========== ===========
DILUTED 79,910 77,874 79,254 77,760
=========== =========== =========== ===========
END OF PERIOD SHARES OUTSTANDING 78,663 77,926 78,663 77,926
=========== =========== =========== ===========
NET INCOME (LOSS) $ 6,869 $ (6,744) $ 1,542 $ (2,661)
CHANGE IN:
Foreign currency translation adjustment 2,275 7,269 (297) 6,762
Unrealized loss on investment in securities (247) (124) (370) (556)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 8,897 $ 401 $ 875 $ 3,545
=========== =========== =========== ===========
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30 December 31
2000 1999
------------- -------------
(Unaudited)
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 22,325 $ 20,155
Receivables 345,589 312,320
Inventories 346,100 298,202
Materials and supplies 9,936 11,063
Other current assets 46,485 44,298
------------- -------------
Total current assets 770,435 686,038
Property, plant and equipment, net 491,940 502,101
Deferred income taxes 258,282 272,677
Goodwill and other intangibles 1,091,628 1,065,143
Other assets 218,148 207,262
------------- -------------
TOTAL ASSETS $ 2,830,433 $ 2,733,221
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 11,044 $ 1,080
Accounts payable 180,509 210,700
Payroll accrued 17,971 28,328
Other current liabilities 124,485 129,295
------------- -------------
Total current liabilities 334,009 369,403
Total long-term debt, less current maturities 1,206,543 1,026,153
Capital lease obligations, less current maturities 63,289 68,786
Other liabilities 314,419 319,011
------------- -------------
TOTAL LIABILITIES 1,918,260 1,783,353
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 912,173 949,868
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,830,433 $ 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)
Nine Months Ended
September 30
---------------------------------
2000 1999
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,542 $ (2,661)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 74,882 95,526
Deferred income tax 14,562 6,751
Distributions from equity investees in
excess of (less than) earnings (4,548) 2,100
Other non-cash items 12,455 14,407
Changes in accounts receivable (49,987) (50,008)
Changes in inventories (58,026) (12)
Changes in other operating assets and liabilities (41,510) (4,915)
----------- -----------
Net cash provided by (used in) operating activities (50,630) 61,188
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (51,728) (50,395)
Acquisitions, net of cash acquired (76,282) -
Proceeds from sales of assets 49,262 95,513
Other investing activities 4,260 (10,449)
----------- -----------
Net cash provided by (used in) investing activities (74,488) 34,669
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayments of) debt 171,309 (40,613)
Dividends paid (44,021) (43,747)
Other financing activities - (7,302)
----------- -----------
Net cash provided by (used in) financing activities 127,288 (91,662)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,170 4,195
CASH AND CASH EQUIVALENTS, beginning of period 20,155 14,899
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 22,325 $ 19,094
=========== ===========
<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 statement
requires that changes in the derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative instrument'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
will adopt this statement on January 1, 2001.
SFAS No. 133 provides that the effective portion of the
gain or loss on a derivative instrument designated and qualifying as
a cash flow hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same
period or periods during which the hedged transaction affects
earnings. The ineffective portion of a hedging derivative's change
in fair value will be immediately recognized in earnings. The Company
currently utilizes futures contracts as cash flow hedges to manage
the price risk of refined fuel products. Based upon the Company's
assessment of its derivative contracts, if the Company had adopted
SFAS No. 133 on October 1, 2000, it would have recorded a current
liability of approximately $6.6 million, representing the fair market
value of its derivative instruments on that date and a reduction of
equity through other comprehensive income of $6.6 million,
representing the intrinsic value of the cash flow hedges using NYMEX
West Texas Intermediate prices as of September 29, 2000. As the
futures contracts settle each month, the current liability would be
adjusted to reflect the current fair market value and the monthly
settlement would be recorded in revenues through an adjustment to
other comprehensive income. The futures contracts expire on December
31, 2000.
6
PART I. FINANCIAL INFORMATION - continued
(3) Summarized Financial Data of Excel Paralubes -
Summarized financial information for Excel Paralubes for
the three and nine months ended September 30, 2000 and 1999 on a 100%
basis follows:
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Expressed in thousands)
(Unaudited)
Revenues $ 135,715 $ 91,079 $ 379,225 $ 216,217
Operating earnings 25,756 13,492 69,525 38,093
Net income 15,688 3,839 39,166 9,124
Pennzoil-Quaker State's net investment in Excel
Paralubes, accounted for using the equity method and carried as a
credit balance of $59.1 million and $61.5 million at September 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 September 30,
2000 and 1999 of $7.8 million and $1.9 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 nine months ended September
30, 2000 and 1999 was $19.6 million and $4.6 million, respectively.
(4) Segment Reporting -
During 1999, the Company completed a strategic review of
its manufacturing assets and businesses, including refineries,
partnerships and packaging plants. During the review, it evaluated
the strategic and financial advantages and disadvantages it derives
from the vertical integration of its manufacturing and marketing
capabilities. Based on the results of this review, the Company
decided to withdraw from the refining business and to dispose of its
refineries and related assets. Effective July 1, 2000, the Company
realigned its business segments to report Excel as a separate
segment. This segment includes Pennzoil-Quaker State's investment in
Excel Paralubes, a 50/50 partnership with Conoco Inc. The
partnership operates a facility that produces approximately 20,000
barrels per day of high-quality base oils. The segment results
include the purchase of base oils from the partnership at market
price and the subsequent intercompany sale to the Lubricants and
Consumer Products segment. Prior to the third quarter of 2000, Excel
was reported in the Base Oil and Specialty Products segment. Results
for the first nine months of 2000 and prior year have been restated
to conform with the new presentation.
7
PART I. FINANCIAL INFORMATION - continued
(5) 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 $361.2 million at September 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 September 30, 2000.
The Company currently limits its aggregate borrowings under these
types of credit arrangements to $300.0 million. Outstanding
borrowings were $55.5 million at September 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
increase in short-term borrowings over December 31, 1999 is primarily
due to increased accounts receivable, higher inventories and
acquisitions made during 2000. 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. The Company is currently negotiating an extension on the
revolving facility. There were no borrowings outstanding under this
revolving credit facility at September 30, 2000 or December 31, 1999.
Pennzoil-Quaker State also maintains a revolving credit
facility with a Canadian bank, which provides for up to $18.0 million
of committed borrowings through October 28, 2001, with any
outstanding borrowings on such date being converted into a term
credit facility terminating on October 28, 2002. As of September 30,
2000 and December 31, 1999, borrowings under the Company's Canadian
facility totaled $13.3 million and $13.8 million, respectively, and
have been classified as long-term debt.
(6) Earnings Per Share -
Computations for basic and diluted earnings (loss) per
share for the three and nine months ended September 30, 2000 and 1999
consist of the following:
Three Months Nine Months
ended September 30 ended September 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Expressed in thousands except per share amounts)
Net income(loss) $ 6,869 $ (6,744) $ 1,542 $ (2,661)
Basic weighted average shares 78,573 77,874 78,395 77,760
Effect of dilutive securities (A)
Options 772 - 474 -
Awards 565 - 385 -
------------ ------------ ------------ ------------
Diluted weighted average shares 79,910 77,874 79,254 77,760
Basic and diluted earnings
(loss) per share $ 0.09 $ (0.09) $ 0.02 $ (0.03)
<FN>
<F1> (A) A weighted average number of options to purchase 6.3 million and 7.6 million shares of
common stock were outstanding for the three months and nine months ended September 30,
2000, respectively, 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 6.9 million shares of
common stock were outstanding for the three months and nine months ended September 30,
1999, and awards of 269.2 and 291.3 thousand shares of common stock were outstanding
for the three months and nine months ended September 30, 1999, respectively, but were
not included in the computation of diluted earnings per share because these options and
awards would have resulted in an antidilutive per share amount.
</FN>
8
PART I. FINANCIAL INFORMATION - continued
(7) 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 $4.4 million and $11.3 million related
to this program were recognized in net sales during the quarter and
nine months ended September 30, 2000, respectively. The estimated
fair value of the unrealized loss associated with the open futures
contracts was $6.6 million at September 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. British pound forward swaps to hedge against
foreign currency risk. The acquired contracts called for an April
26, 2000 swap of $17.3 million for British pounds of 10.9 million.
The contracts settled on August 2, 2000, and no material gain or loss
was recognized upon settlement. As of September 30, 2000, the
Company had no foreign currency swaps outstanding.
(8) Comprehensive Income -
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 information is included in the accompanying
condensed consolidated statement of operations and comprehensive
income.
(9) Cash Flow Information -
Cash paid for interest during the nine months ended
September 30, 2000 and 1999 was $60.8 million and $30.5 million,
respectively. Income tax refunds, net of tax payments, of $7.3
million and $26.6 million were received during the nine months ended
September 30, 2000 and 1999, respectively. The decrease in cash flow
from operating activities for the nine months ended September 30,
2000, compared to the same period in 1999 is primarily due to an
increase in working capital caused by the effect of higher product
prices on accounts receivable and higher inventories.
(10) 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 September 30, 2000, 35 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 $25.6 million was reduced by $0.3
million as a result of the severance expenses paid to the employees
during the three months ended September 30, 2000. Through September
30, 2000, 270 employees had been terminated as a result of workforce
reductions and were paid pursuant to the general and administrative
cost reduction plan. The accrued liability balance was reduced by
$2.6 million through the nine-month period ended September 30, 2000
as a result of the severance expenses paid to the employees. The
remaining accrual at September 30, 2000 totaled $25.3 million.
9
PART I. FINANCIAL INFORMATION - continued
(11) 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 ("Bareco") 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 consolidated
results are revenues of $36.4 million and operating income of $1.0
million related to the operations of Rouseville and Bareco in 2000.
(12) 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 certain assets of Auto Fashions, a 25 year-old Australian
automotive accessories firm operated by Robert Hicks Pty Ltd. for
approximately $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.
The acquisitions referred to above were accounted for
using the purchase method of accounting. The excess of the purchase
price over the estimated fair value of the net assets acquired has
been reflected as goodwill and is being amortized on a straight-line
basis.
10
PART I. FINANCIAL INFORMATION - continued
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 four segments: (1) Lubricants and
Consumer Products, (2) Jiffy Lube, (3) Base Oil and Specialty
Products and (4) Excel.
Results of Operations
Net sales for Pennzoil-Quaker State increased by $28.9
million and $189.1 million, or approximately 4% and 9% for the
quarter and nine months ended September 30, 2000, to $776.2 million
and $2,380.9 million, respectively. The increase in net sales was
primarily due to higher refined product prices partially offset by
lower Jiffy Lube net sales resulting from the sale of stores.
Net income for the quarter and nine months ended
September 30, 2000 was $6.8 million, or 9 cents per basic share and
$1.5 million, or 2 cents per basic share, respectively. This
compares with net loss of $6.7 million, or 9 cents per basic share
for the quarter ended September 30, 1999 and a net loss of $2.7
million, or 3 cents per basic share for the nine months ended
September 30, 1999. The increase in income for the quarter is
primarily due to higher results in all operating business segments
partially offset by higher interest expense. The increase in income
for the nine months ended September 30, 2000, compared to the same
period in 1999, is primarily due to higher results in Jiffy Lube
related to higher rental and royalty income, higher results in Excel
due to higher equity income in the partnership and higher base oil
margins and lower overall Company general and administrative
expenses. These improvements were partially offset by charges of
$13.0 million related to a fire at the Shreveport, Louisiana refinery
facility that occurred on January 18, 2000, one-time costs of $34.4
million associated with the Company's general and administrative cost
reduction project and higher interest expense.
Lubricants and Consumer Products
Net sales for the Lubricants and Consumer Products
segment were $502.4 million and $1,516.8 million for the quarter and
nine months ended September 30, 2000, respectively, compared to
$466.0 million and $1,446.2 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. International net sales increased primarily due to
acquisitions and higher average product prices. Operating income for
this segment was $51.3 million and $154.2 million for the quarter and
nine months ended September 30, 2000, compared to $45.1 million and
$138.7 million for the same periods last year. The increase in
operating income for the quarter and nine months ended September 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 certain assets of Auto
Fashions, a 25 year-old Australian automotive accessories firm
operated by Robert Hicks Pty Ltd. for approximately $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.
11
PART I. FINANCIAL INFORMATION - continued
Jiffy Lube
Net sales for this segment were $84.0 million and $250.8
million for the quarter and nine months ended September 30, 2000,
respectively. This compares to net sales of $101.1 million and
$331.5 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 for this segment for the quarter and nine
months ended September 30, 2000 was $3.4 million and $7.5 million,
respectively, compared to $2.0 million and $2.8 million for the same
periods in 1999. The increase in other income was primarily due to
higher franchise fees in 2000 and net losses on sales of company
centers in 1999. Operating income (loss) from this segment for the
quarter and nine months ended September 30, 2000 was $7.9 million and
$18.8 million, respectively, compared to ($0.3) million and ($1.2)
million for the same periods in 1999. The improvement in operating
income was primarily due to lower selling, general and administrative
expenses, higher rental and royalty income and lower merger costs.
Base Oil and Specialty Products
Net sales for this segment were $256.7 million and $813.8
million for the quarter and nine months ended September 30, 2000,
respectively. This compares to net sales of $236.7 million and
$576.0 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 nine months ended September 30, 2000 was $2.4 million
and $13.0 million, respectively, compared to $8.5 million and $17.9
million for the same periods in 1999. The decrease in other income
was primarily due to higher crude related feedstock costs for
Penreco. Operating loss from this segment for the quarter and nine
months ended September 30, 2000 was $5.8 million and $29.0 million,
respectively, compared to an operating loss of $13.5 million and $28.7
million for the same periods in 1999. The increase in operating
income for the quarter ended September 30, 2000 was primarily due to
higher base oil margins. Working capital increased during the
quarter due to a build-up of crude oil inventories in preparation for
supply interruptions expected to result from a six month shut-down of
the Exxon pipeline used to deliver a large portion of the Shreveport
refinery feedstock.
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 $36.4 million and operating
income of $1.0 million related to the operations of Rouseville and
Bareco in 2000.
12
PART I. FINANCIAL INFORMATION - continued
Excel
Net sales, all of which were to the Lubricants and
Consumer Products segment, were $49.7 million and $142.2 million for
the quarter and nine months ended September 30, 2000, respectively.
This compares to net sales of $33.5 million and $81.8 million for the
same periods in 1999. The increase is primarily due to higher base
oil prices resulting from higher crude oil prices. Other income for
this segment for the quarter and nine months ended September 30, 2000
was $7.8 million and $19.6 million, respectively, compared to $1.9
million and $4.6 million for the same periods in 1999. Other income
represents the earnings from the 50/50 partnership with Conoco Inc.,
which is recorded using the equity method of accounting. The increase
in equity income reflects the higher base oil margins. Operating
income from this segment for the quarter and nine months ended
September 30, 2000 was $11.9 million and $31.0 million, respectively,
compared to operating income of $4.4 million and $10.0 million for
the same periods in 1999. The increase in operating income for the
quarter and nine months ended September 30, 2000 was primarily due to
higher base oil margins.
Corporate Administrative Expense
Corporate administrative expense decreased $1.0 million
to $16.5 million for the quarter ended September 30, 2000 compared to
the same period in 1999. Corporate administrative expense decreased
$6.8 million to $51.3 million for the nine months ended September 30,
2000, compared to the same period in 1999. The decrease for the nine
months ended September 30, 2000 is primarily due to lower merger
expenses.
Capital Resources and Liquidity
Cash Flow. As of September 30, 2000, Pennzoil-Quaker
State had cash and cash equivalents of $22.3 million. During the
nine months ended September 30, 2000, cash and cash equivalents
increased $2.2 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 nine
months ended September 30, 2000 compared to the same period in 1999
is primarily due to an increase in working capital caused by the
effect of higher prices on accounts receivable and higher
inventories.
13
PART I. FINANCIAL INFORMATION - continued
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 $361.2 million at September 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 September 30, 2000.
The Company currently limits its aggregate borrowings under these
types of credit arrangements to $300.0 million. Outstanding
borrowings were $55.5 million at September 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
increase in short-term borrowings over December 31, 1999 is primarily
due to increased accounts receivable, higher inventories and
acquisitions made during 2000. 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. The Company is currently negotiating an extension on the
revolving facility. There were no borrowings outstanding under this
revolving credit facility at September 30, 2000 or December 31, 1999.
Pennzoil-Quaker State also maintains a revolving credit
facility with a Canadian bank, which provides for up to $18.0 million
of committed borrowings through October 28, 2001, with any
outstanding borrowings on such date being converted into a term
credit facility terminating on October 28, 2002. As of September 30,
2000 and December 31, 1999, borrowings under the Company's Canadian
facility totaled $13.3 million and $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
renewed and increased the receivable sales facility during August
2000. The renewed facility provides for ongoing sales of $170.0
million (previously $160.0 million) through August 2001, at which
time the Company intends to renew the facility. The Company's net
accounts receivable sold under its receivable sales facility totaled
$169.7 million and $153.1 million at September 30, 2000 and December
31, 1999, respectively.
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 September 30, 2000, the Company has sold a total
of $219.0 million of notes receivable under this agreement, of which
$160.5 million were outstanding to the third party purchaser at
September 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.
14
PART I. FINANCIAL INFORMATION - continued
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 $4.4 million and $11.3 million related to
this program were recognized in net sales during the quarter and nine
months ended September 30, 2000, respectively. The estimated fair
value of the unrealized loss associated with the open futures
contracts was $6.6 million at September 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. British pound forward swaps to hedge
against foreign currency risk. The acquired contracts called for an
April 26, 2000 swap of $17.3 million for British pounds of 10.9
million. The contracts settled on August 2, 2000, and no material
gain or loss was recognized upon settlement. As of September 30,
2000, the Company had no foreign currency swaps outstanding.
Forward-Looking Statements - Safe Harbor Provisions
This quarterly report on Form 10-Q of Pennzoil-Quaker
State for the quarter and nine months ended September 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.
15
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
The following table shows revenues and operating income by segment
and other components of income.
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Dollar amounts expressed in thousands)
REVENUES
Net sales
Lubricants and Consumer Products $ 502,439 $ 465,952 $1,516,818 $1,446,226
Base Oil and Specialty Products 256,709 236,682 813,849 576,026
Jiffy Lube 83,951 101,078 250,845 331,507
Excel (a) 49,744 33,453 142,211 81,806
Intersegment sales and other (116,617) (89,846) (342,788) (243,708)
----------- ----------- ----------- -----------
776,226 747,319 2,380,935 2,191,857
----------- ----------- ----------- -----------
Other income, net
Lubricants and Consumer Products 4,990 2,353 11,448 8,208
Base Oil and Specialty Products 2,435 8,507 13,019 17,921
Jiffy Lube 3,366 1,994 7,478 2,771
Excel 7,843 1,920 19,585 4,561
Other 3,841 (1,753) 4,881 (3,402)
----------- ----------- ----------- -----------
22,475 13,021 56,411 30,059
----------- ----------- ----------- -----------
Total revenues $ 798,701 $ 760,340 $2,437,346 $2,221,916
=========== =========== =========== ===========
OPERATING INCOME (LOSS)
Lubricants and Consumer Products $ 51,286 $ 45,051 $ 154,211 $ 138,697
Base Oil and Specialty Products (5,800) (13,485) (29,019) (28,710)
Jiffy Lube 7,921 (330) 18,797 (1,196)
Excel 11,859 4,382 30,997 10,001
Other 3,582 (5,622) (916) 5,158
----------- ----------- ----------- -----------
Total operating income 68,848 29,996 174,070 123,950
Corporate administrative expense 16,539 17,489 51,275 58,029
Restructuring charges - - 34,405 -
Interest charges, net 24,334 20,143 69,576 58,965
----------- ----------- ----------- -----------
Income(loss)before income tax 27,975 (7,636) 18,814 6,956
Income tax provision (benefit) 21,106 (892) 17,272 9,617
----------- ----------- ----------- -----------
NET INCOME(LOSS) $ 6,869 $ (6,744) $ 1,542 $ (2,661)
=========== =========== =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES 1.16 1.10
=========== ===========
<FN>
<F1>
(a) All net sales amounts shown for Excel are eliminated in intersegment sales and other. Income related to Excel
is accounted for using the equity method.
</FN>
16
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
OPERATING DATA
- --------------
LUBRICANTS AND CONSUMER PRODUCTS
Total revenues (in thousands):
Lubricants $ 362,460 $ 342,990 $ 1,084,778 $ 1,054,040
Consumer Products 81,722 71,560 265,874 238,779
International 66,189 53,666 189,391 161,681
Eliminations and other (2,942) 89 (11,777) (66)
------------ ------------ ------------ ------------
Total revenues $ 507,429 $ 468,305 $ 1,528,266 $ 1,454,434
============ ============ ============ ============
Operating income (in thousands):
Lubricants $ 44,113 $ 34,003 $ 117,799 $ 99,784
Consumer Products 4,919 7,611 24,982 29,815
International 2,254 3,437 11,430 9,098
------------ ------------ ------------ ------------
Total operating income $ 51,286 $ 45,051 $ 154,211 $ 138,697
============ ============ ============ ============
JIFFY LUBE
Domestic systemwide sales (in thousands) $ 307,394 $ 279,818 $ 888,605 $ 809,386
Same center sales(in thousands) $ 288,146 $ 272,246 $ 827,277 $ 783,377
Centers open 2,172 2,117 2,172 2,117
BASE OIL AND SPECIALTY PRODUCTS
Shreveport raw materials processed (bbls per day) 46,553 50,025 40,547 47,191
Shreveport average refiner's margin ($ per bbl) $ 2.87 $ 2.75 $ 2.79 $ 3.38
WTI Crude Oil $ 31.58 $ 21.72 $ 29.64 $ 17.47
EXCEL
Base oil production (barrels per day) 9,763 10,010 10,024 8,790
Average base oil margin ($ per barrel) $ 21.49 $ 14.09 $ 19.60 $ 16.41
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
12 Computation of Ratio of Earnings to Fixed Charges for the
nine months ended September 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.
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
November 9, 2000