1
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, 1998 Commission File No. 1-5591
PENNZOIL PRODUCTS COMPANY
(or "Pennzoil Products Group" - to be renamed "Pennzoil-Quaker State
Company")
(Exact name of registrant as specified in its charter)
Delaware 74-1597290
(State or other jurisdiction of (I.R.S. Employer
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
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 . No X .
No shares of stock were outstanding as of latest practicable
date, November 11, 1998.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL PRODUCTS GROUP
CONDENSED COMBINED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 474,852 $ 515,656 $1,417,264 $1,544,971
COSTS AND EXPENSES
Cost of sales 336,011 295,851 920,258 920,372
Purchases from affiliate 5,513 83,114 109,839 254,030
Selling, general and administrative 91,330 89,368 254,777 254,923
Depreciation and amortization 19,654 17,195 56,329 47,159
Taxes, other than income 2,969 3,022 9,051 9,025
Affiliated interest charges 14,204 14,156 42,413 41,794
Non-affiliated interest charges, net 3,028 2,869 8,978 2,335
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 2,143 10,081 15,619 15,333
Income tax provision 1,507 4,882 8,334 8,483
----------- ----------- ----------- -----------
NET INCOME $ 636 $ 5,199 $ 7,285 $ 6,850
=========== =========== =========== ===========
<FN>
<F1>
See Notes to Condensed Combined Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL PRODUCTS GROUP
CONDENSED COMBINED BALANCE SHEET
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 6,643 $ 9,132
Receivables 152,139 143,303
Crude oil, motor oil and refined products inventories 199,597 198,273
Materials and supplies, at average cost 12,419 11,814
Other current assets 33,146 36,838
------------- -------------
Total current assets 403,944 399,360
Property, plant and equipment, net 800,394 790,177
Goodwill 159,902 158,489
Long-term receivables 33,249 40,520
Marketable securities and other investments 50,041 45,574
Other assets 134,963 125,503
------------- -------------
TOTAL ASSETS $ 1,582,493 $ 1,559,623
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt $ 677 $ 2,363
Accounts payable 137,997 120,577
Payable to affiliates 514,025 544,390
Payroll accrued 17,803 17,825
Other current liabilities 28,601 46,161
------------- -------------
Total current liabilities 699,103 731,316
Long-term debt, less current maturities
Long-term debt-affiliated 328,674 336,172
Other long-term debt 47,637 49,798
------------- -------------
Total long-term debt, less current maturities 376,311 385,970
Deferred income tax 20,076 1,179
Capital lease obligations, less current maturities 66,217 67,136
Other liabilities 129,892 117,642
------------- -------------
TOTAL LIABILITIES 1,291,599 1,303,243
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY 290,894 256,380
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,582,493 $ 1,559,623
============= =============
<FN>
<F1>
See Notes to Condensed Combined Financial Statements.
</FN>
4
PART I. FINANCIAL INFORMATION - continued
PENNZOIL PRODUCTS GROUP
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
---------------------------------
1998 1997
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,285 $ 6,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,329 47,159
Deferred income tax 20,421 22,921
Gain on sales of assets (9,716) (1,558)
Equity investee distributions in excess of earnings 8,856 -
Other non-cash items 21,954 7,735
Changes in operating assets and liabilities (102,501) 19,256
----------- -----------
Net cash provided by operating activities 2,628 102,363
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (43,349) (114,866)
Proceeds from sales of assets 17,982 10,384
Other investing activities 8,916 (22,560)
----------- -----------
Net cash used in investing activities (16,451) (127,042)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt and capital lease obligation repayments (6,401) (8,417)
Proceeds from notes payable to affiliate 17,735 25,802
----------- -----------
Net cash provided by financing activities 11,334 17,385
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,489) (7,294)
CASH AND CASH EQUIVALENTS, beginning of period 9,132 15,797
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 6,643 $ 8,503
=========== ===========
<FN>
<F1>
See Notes to Condensed Combined Financial Statements.
</FN>
5
PART I. FINANCIAL INFORMATION - continued
PENNZOIL PRODUCTS GROUP
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation -
The combined financial statements reflected herein include the
accounts of Pennzoil Products Company ("PPC") and Jiffy Lube
International ("Jiffy Lube"), wholly owned subsidiaries of Pennzoil
Company ("Pennzoil"), collectively referred to as Pennzoil
Products Group ("PPG"), and have been prepared without audit. The
foregoing financial statements include only normal recurring
accruals and all adjustments which PPG considers necessary for a
fair presentation. Earnings per share have been omitted from the
Condensed Combined Statement of Income and Comprehensive Income
because PPG consists of wholly owned subsidiaries of Pennzoil and
is not a separate legal entity.
(2) New Accounting Standards -
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosure about Segments of an Enterprise and Related
Information," which establishes standards for reporting information
about operating segments in annual financial statements and
requires that selected information be reported about the operating
segments in interim financial reports issued to the shareholders.
It also establishes standards for related disclosure about products
and services, geographic areas, and major customers. PPG plans to
adopt SFAS No. 131 in its annual financial statement disclosures
for the fiscal year ending December 31, 1998.
In March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-
1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP is effective for fiscal years
beginning after December 15, 1998 and earlier adoption is
permitted. The adoption of SOP No. 98-1 is not expected to have a
material impact on PPG's results of operations.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on
the Costs of Start-Up Activities." This SOP is effective for
financial statements for fiscal years beginning after December 15,
1998 and earlier adoption is permitted. PPG is currently
evaluating the impact of SOP No. 98-5.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This SFAS 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 standard requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
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 a company to formally document, designate,
and assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and early adoption is permitted. The effect of
adopting SFAS No. 133 has not been determined, but is not expected
to have a material impact on PPG's results of operations
(Reference is made to Note 6 of Notes to Condensed Combined
Financial Statements).
6
PART I. FINANCIAL INFORMATION - continued
(3) Principles of Combination -
The accompanying combined financial statements include all
majority-owned subsidiaries of PPC and Jiffy Lube. Also included
in these financial statements, in accordance with the distribution
agreement as discussed in Note 4 of Notes to Condensed Combined
Financial Statements, is Pennzoil Sales Company, certain assets and
liabilities of Pennzoil's captive insurance company and certain
assets and liabilities reported in Pennzoil's corporate
segment related to PPC and Jiffy Lube. PPG is engaged primarily in
the manufacturing and marketing of lubricants, car care products
and specialty industrial products as well as the franchising,
ownership and operation of fast lube centers. The accompanying
combined financial statements reflect the historical costs and
results of operations of PPG. All significant intercompany
accounts and transactions within PPG have been eliminated. PPG
follows the equity method of accounting for investments in 20% to
50% owned entities.
(4) Proposed Spin-off of PPG and Merger of PPG with Quaker
State Corporation -
On April 14, 1998, Pennzoil, PPC and Downstream Merger
Company, a wholly owned subsidiary of PPC ("Merger Sub"), entered
into an Agreement and Plan of Merger (the "Merger Agreement") with
Quaker State Corporation ("Quaker State"). The Merger Agreement
and related agreements provide for the separation of Pennzoil's
motor oil, refined products and fast lube operations (which
generally includes PPC and Jiffy Lube and their respective
subsidiaries) from its exploration and production operations and
for the combination of the motor oil, refined products and fast
lube operations with Quaker State.
The transactions contemplated by the Merger Agreement are (1)
a pro rata distribution (or spin-off), on a share-for-share basis,
of all of the issued and outstanding Common Stock of PPC (which,
among other things, will at such time hold the motor oil and
refined products operations of PPC and the fast lube operations of
Jiffy Lube) to the holders of Common Stock of Pennzoil and (2) a
merger of Merger Sub with and into Quaker State, in which holders
of Capital Stock of Quaker State will receive, in exchange for each
share held, 0.8204 shares of Common Stock of PPC. Immediately
following the transactions contemplated by the Merger Agreement,
approximately 38.5% of PPC will be owned by former Quaker State
stockholders and approximately 61.5% of PPC will be owned by
stockholders of Pennzoil.
Upon completion of the merger, shareholder's equity will be
increased to reflect a capital contribution from Pennzoil and the
fair value of Quaker State net assets.
Quaker State's shareholders approved the merger on September
18, 1998 and the required waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 has expired. The spin-off
and merger are expected to occur during the fourth quarter of 1998
following the anticipated receipt of a favorable tax ruling from
the Internal Revenue Service.
7
PART I. FINANCIAL INFORMATION - continued
(5) Debt -
PPG currently has two revolving credit agreements with
Pennzoil that provide for borrowings of up to $590 million through
December 31, 1998 and $340 million through December 31, 2004. At
September 30, 1998, borrowings under the credit agreements with
Pennzoil were $247.7 million outstanding classified as payable to
affiliates and $328.7 million outstanding classified as long-term
debt-affiliated. Also classified as payable to affiliates are
amounts totaling $266.3 million related to intercompany net payables
due to Pennzoil that are not covered under the revolving credit
agreements. Upon consummation of the merger with Quaker State, up to
$500 million of payables will be repaid and the remainder forgiven
by Pennzoil. On the basis of a proposed financing agreement, PPG
believes it will be able to enter into third-party financing
agreements that will provide it sufficient funding to settle
obligations with Pennzoil and provide sufficient funding for future
periods. Prior to the spin-off, PPG will arrange a credit facility
of approximately $1.0 billion that will be used to repay existing
intercompany indebtedness in accordance with the merger agreement
to Pennzoil.
PPG also maintains a long-term credit facility with a
Canadian bank, which provides for up to C$27 million through
October 25, 1999. Outstanding borrowings under the Canadian
facility totaled US$9.1 million at September 30, 1998.
(6) Use of Derivatives -
In order to lock in future interest rates covering pending
debenture issuances of $100 million, PPG entered into four interest
rate locks, based upon the 30-year Treasury rate. To accomplish its
hedged position, PPG entered into forward rate agreements in which
it will pay or receive the difference between (1) the 30-year
Treasury rate at the time the forward was entered into and (2) the
30-year Treasury rate at the time of maturity.
Under current accounting, these transactions qualify as a hedge
of an anticipated transaction. Any gains or losses from the interest
rate hedges are deferred during the interim period with the offset to
a payable or receivable. Upon maturity of the hedge contracts, any
gain or loss will be treated as an adjustment to the issue price of
the debt instrument, effectively creating a premium or discount that
is amortized over the life of the borrowings. The estimated value of
the amount payable by PPG under its open interest rate hedge was
$10.2 million at September 30, 1998, which has been recorded as a
deferred charge in other assets.
(7) Comprehensive Income -
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which requires that an enterprise classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance
sheet. PPG adopted SFAS No. 130 in the first quarter of 1998.
Components of comprehensive income consist of foreign currency
translation adjustments, unrealized holding gains and losses on
available-for-sale securities and minimum pension liability. For
the three months ended September 30, 1998 and 1997, PPG's
comprehensive income was $(.5) million and $3.9 million, respectively.
For the nine months ended September 30, 1998 and 1997, PPG's
comprehensive income was $5.1 million and $3.5 million, respectively.
8
PART I. FINANCIAL INFORMATION - continued
(8) Statement of Cash Flow Information -
Changes in operating assets and liabilities, net of effects
from the purchase of equity interests in certain businesses
acquired, consist of the following (expressed in thousands):
Nine Months Ended
September 30
----------------------------
1998 1997
----------- -----------
(Unaudited)
Receivables $ (30,977) $ (10,060)
Inventories (8,844) (29,195)
Accounts payable and accrued liabilities 21,561 (17,052)
Payable to affiliates (37,863) 137,810
Other assets and liabilities (46,378) (62,247)
----------- -----------
Decrease (increase) in operating assets
and liabilities $ (102,501) $ 19,256
=========== ===========
Cash paid during the period for
interest (net of amounts capitalized) $ 8,747 $ 1,997
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net sales for PPG for the quarter ended September 30, 1998
were $457.7 million, a decrease of $48.0 million, or approximately
9.5%, from the same period in 1997. Net sales for the nine months
ended September 30, 1998 were $1,369.9 million, a decrease of
$146.3 million, or approximately 9.6%. The decrease was primarily
due to lower net sales reported by the motor oil and refined
products segment as a result of the contribution of its specialty
industrial products business to its partnership with Conoco, Inc.,
known as Penreco, in October 1997. The Penreco partnership is
accounted for under the equity method. Prior to the creation of
this partnership, net sales from the contributed operations were
fully consolidated in the financial statement of PPG. Purchases
from affiliates, related to purchases of crude oil at market prices
from Pennzoil, have decreased in the three month and nine month
periods ended September 30, 1998 as compared to the same periods in
1997. PPG began purchasing crude oil primarily from third parties
during 1998.
Net income for the quarter and nine months ended September 30,
1998 was $.6 million and $7.3 million, respectively. This compares
with net income of $5.2 million and $6.9 million for the third
quarter and nine months ended September 30, 1997, respectively.
The decrease in income for the quarter ended September 30, 1998 was
primarily due to lower results from Fast Lube Operations. The
increase in income for the nine months ended September 30, 1998 was
primarily due to improved results from the Motor Oil and Refined
Products segment partially offset by lower results from Fast Lube
Operations.
9
PART I. FINANCIAL INFORMATION - continued
Motor Oil & Refined Products
Net sales for this segment were $384.5 million and $1,153.5
million for the quarter and nine months ended September 30, 1998,
respectively. This compares to net sales of $432.5 million and
$1,304.6 million for the same periods in 1997, respectively. The
decrease in net sales for the quarter and nine months ended
September 30, 1998 compared to the same periods in 1997 were
primarily due to the formation of the Penreco partnership and lower
product prices. Specialty industrial product sales totaled $39.7
million and $121.2 million for the quarter and nine months ended
September 30, 1997, respectively.
Lower lubricating product prices offset higher lubricating
product volumes for both the quarter and nine months ended
September 30, 1998, respectively, compared to the same periods in
1997. Domestic motor oil sales volumes, part of total lubricating
products, increased 3.5% and 3.7% for the quarter and nine months
ended September 30, 1998, respectively, compared to the same
periods in 1997. Pennzoil(tm) motor oil is in its thirteenth
consecutive year as the leading marketer of motor oil in the U.S.
with a market share of more than 22 percent.
Gross margin, excluding the impact of specialty industrial
products contributed to Penreco, increased $4.2 million and $28.0
million for the quarter and nine months ended September 30, 1998
compared to the same periods in 1997. These increases were
primarily due to decreases in feedstock costs, which have declined
faster than product prices.
Operating income from this segment was $31.6 million and $88.7
million for the quarter and nine months ended September 30, 1998,
respectively. This compares to operating income of $32.3 million
and $71.2 million for the quarter and nine months ended September
30, 1997, respectively. The decrease in operating income for the
quarter ended September 30, 1998 compared to the same period in
1997 was primarily due to lower income from Penreco due to the
formation of the joint venture. Partially offsetting this decrease
was higher gross margins and higher equity income from Excel
Paralubes. The increase in operating income for the nine months
ended September 30, 1998 compared to the same period in 1997 was
primarily due to higher gross margins and higher equity income from
Excel Paralubes. These increases were partially offset by lower
Penreco results due to formation of the joint venture. The
increase in equity income from Excel Paralubes for the third
quarter of 1998 and nine months ended September 30, 1998 compared
to the same periods in 1997 was primarily due to higher sales
volumes.
Fast Lube Operations
Net sales recorded by the fast lube operations segment,
operating through Jiffy Lube, for the quarter and nine months
ended September 30, 1998 increased 1.5% and 3.1%, respectively,
compared to the same periods in 1997. Systemwide sales increased
$11.0 million, or 5.5%, for the quarter ended September 30, 1998
and $37.8 million, or 6.6%, for the nine months ended September 30,
1998 from comparable periods in 1997. Systemwide average ticket
prices for the quarter ended September 30, 1998 increased $0.54 to
$36.12 and for the nine months ended September 30, 1998 increased
$0.88 to $36.62, from comparable periods in 1997. There were 1,574
domestic lube centers (including 589 Jiffy Lube company-operated
centers) open as of September 30, 1998. In 1998, Jiffy Lube has
opened 58 centers and plans to open an additional 17 by year-end
1998. As of September 30, 1998, there were 166 fast-oil change
units open in Sears Centers of which 134 are company operated.
10
PART I. FINANCIAL INFORMATION - continued
The fast lube operations segment recorded operating income of
$1.0 million and $12.5 million, respectively, for the quarter and
nine months ended September 30, 1998. This compares with operating
income of $7.6 million and $18.4 million, respectively, for the
same periods in 1997. The decrease in operating income for the
quarter and nine months ended September 30, 1998 was primarily due
to a legal settlement and increased expenses for labor and
advertising.
Corporate Administrative Expense
Pennzoil and its wholly owned subsidiary, Richland, provide
administrative services to PPG. PPG is charged by Pennzoil for all
direct costs associated with its operations, and certain
administrative costs not directly charged to PPG are allocated
through a monthly charge from Richland. Based upon a formula that
takes into account business segment assets, sales and employees,
approximately 65% of indirect charges incurred by Pennzoil on
behalf of its business segments has historically been charged to
PPG. These charges, referred to as corporate administrative
expense, totaled $12.5 million and $32.0 million for the quarter
and nine months ended September 30, 1998, respectively, compared to
$12.2 million and $32.0 million, for the same periods in 1997.
Capital Resources and Liquidity
Cash Flow. As of September 30, 1998, PPG had cash and cash
equivalents of $6.6 million. During the nine months ended
September 30, 1998, cash and cash equivalents decreased $2.5
million.
For purposes of the combined statement of cash flows, all
highly liquid investments purchased with a maturity of three months
or less are considered to be cash equivalents. The effect of
changes in foreign exchange rates on cash balances has been
immaterial.
Debt Instruments and Repayments.
PPG currently has two revolving credit agreements with
Pennzoil that provide for borrowings of up to $590 million through
December 31, 1998 and $340 million through December 31, 2004. At
September 30, 1998, borrowings under the credit agreements with
Pennzoil were $247.7 million outstanding classified as payable to
affiliates and $328.7 million outstanding classified as long-term
debt-affiliated. Also classified as payable to affiliates are
amounts totaling $266.3 million related to intercompany net payables
due to Pennzoil that are not covered under the revolving credit
agreements. Upon consummation of the merger with Quaker State, up to
$500 million of payables will be repaid and the remainder forgiven
by Pennzoil. On the basis of a proposed financing agreement, PPG
believes it will be able to enter into third-party financing
agreements that will provide it sufficient funding to settle
obligations with Pennzoil and provide sufficient funding for future
periods. Prior to the spin-off, PPG will arrange a credit facility
of approximately $1.0 billion that will be used to repay existing
intercompany indebtedness in accordance with the merger agreement
to Pennzoil.
PPG also maintains a long-term credit facility with a
Canadian bank, which provides for up to C$27 million through
October 25, 1999. Outstanding borrowings under the Canadian
facility totaled US$9.1 million at September 30, 1998.
11
PART I. FINANCIAL INFORMATION - continued
Year 2000 Issues
PPG has conducted a review of its key computer systems and has
identified a number of systems that were affected by the year 2000
issue. PPG is undertaking or has completed conversion of these non-
compliant financial, operating, human resources and payroll systems
to the SAP system in 1998. In addition, PPG is currently upgrading
electronic commerce systems to compliant versions in 1998.
Conversion of operating and financial software as well as desktop
hardware and software used in international locations for PPG, to
compliant versions began in the second quarter, 1998, with
completion expected in the second quarter of 1999. Upgrades and
standardization to network, infrastructure, desktop and
communications systems to make these assets compliant are in
progress. This effort is scheduled for completion in the first
quarter of 1999 following the release of compliant updates from the
vendors. The only system replacements that have been accelerated
to remedy non-compliance are the PPG voicemail systems and the
international desktop hardware, software, financial and operational
systems. No major IT projects have been deferred due to year 2000
compliance issues. Contingency planning will be started for the
IT systems in the first quarter of 1999 and will include backup,
standby and storage service solutions to reduce the impact of
critical service providers.
PPG has conducted a comprehensive inventory and assessment of
systems and devices with embedded chips in the manufacturing and
non-manufacturing environments. The manufacturing environment
which consists of refining, blending, storage and the movement of
petrochemicals has the greatest inherent risk since embedded chip
systems control and monitor these processes. At this time, two PPG
manufacturing facilities have non-compliant control systems. These
deficiencies will be addressed upon the release of a compliant
version of the software from the vendor, which is expected by
December 1998. These systems will first undergo a pilot test at a
PPG research facility, followed by a full system test at the
manufacturing facilities during a scheduled plant shutdown. If for
any reason, these systems are still found to be non-compliant,
additional plant or operations shutdowns could be necessary to
conduct further remediation and testing. In addition, all
currently compliant control systems that have potential for
environmental, safety, or business interruption impact will be
tested during scheduled maintenance. In order to prevent safety
and environmental problems due to non-compliant embedded-chip
systems, operation of these systems would be reduced or
discontinued. Contingency planning is also underway to provide
alternatives in the event these systems are partially or completely
inoperable
PPG is contacting key suppliers, banks, customers and other
unaffiliated companies that have business relationships with PPG to
assess their year 2000 compliance programs. PPG could be adversely
affected by the failure of these unaffiliated companies to
adequately address the year 2000 issue. This assessment includes
activities such as face-to-face meetings, reviews of year 2000
readiness and co-operative testing. Contingency planning will be
included in this assessment to identify arrangements to mitigate
the impact of disruptions from outside sources. In addition, PPG
has implemented internal procedures to respond cooperatively to
inquiries from regulatory agencies and other businesses about its
year 2000 program.
As with most companies, PPG anticipates more issues arising
from international business partners, especially in the banking,
utility, shipping and governmental segments. PPG is currently
reviewing all banking relationships in international locations. In
addition, PPG is actively involved in a joint industry effort
through the American Petroleum Institute to collectively address
the readiness of their common business partners such as utilities
and governmental agencies, and to share approaches to solving the
specific problems of each international location.
If these steps are not completed successfully in a timely
manner, PPG operations and financial performance could be adversely
affected through disruptions in operations. Costs associated with
such disruptions currently cannot be estimated.
12
PART I. FINANCIAL INFORMATION - continued
Both incremental historical and estimated future costs related
to the year 2000 issue are not expected to be material to the
financial results of PPG for several reasons. Most of the
remediation is being accomplished with upgrades to existing
software that is under maintenance contracts. The implementation
of the major IT systems was not accelerated to remedy year 2000
problems. Independent quality assurance services and tools are to
be used to assure the reliability of the assessment and costs.
These services will be supplemented with PPG resources. Costs for
all year 2000 activities are estimated to be less than $7 million.
PPG has a June 30, 1999 target readiness date for all major
phases of its year 2000 preparations. PPG's existing emergency
response plan will be re-evaluated in the fourth quarter of 1999
using the latest information available for infrastructure services
such as utilities. Adjustments to this plan will be made based on
this information. PPG expects to be fully ready for the new
millenium.
Readers are cautioned that forward-looking statements
contained in the Year 2000 Update should be read in conjunction
with the company's disclosures under the heading: "Forward-Looking
Statements - Safe Harbor Provisions".
Forward-Looking Statements - Safe Harbor Provisions
This quarterly report on Form 10-Q of PPG for the quarter
ended September 30, 1998 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, PPG
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 the 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.
13
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
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Dollar amounts expressed in thousands)
REVENUES
Net Sales
Motor Oil & Refined Products $ 384,503 $ 432,540 $1,153,546 $1,304,643
Fast Lube Operations 83,356 82,112 244,310 237,045
Other 176 195 248 262
Intersegment sales (10,333) (9,145) (28,201) (25,740)
----------- ----------- ----------- -----------
457,702 505,702 1,369,903 1,516,210
----------- ----------- ----------- -----------
Other income, net
Motor Oil & Refined Products $ 13,936 $ 8,953 $ 40,066 $ 22,898
Fast Lube Operations 4,539 2,347 11,431 6,211
Other (1,325) (1,346) (4,136) (348)
----------- ----------- ----------- -----------
17,150 9,954 47,361 28,761
----------- ----------- ----------- -----------
Total Revenues $ 474,852 $ 515,656 $1,417,264 $1,544,971
=========== =========== =========== ===========
OPERATING INCOME
Motor Oil & Refined Products $ 31,561 $ 32,302 $ 88,739 $ 71,153
Fast Lube Operations 985 7,554 12,547 18,366
Other (703) (523) (2,235) 1,933
----------- ----------- ----------- -----------
Total operating income 31,843 39,333 99,051 91,452
Corporate administrative expense 12,468 12,227 32,041 31,990
Interest charges, net 17,232 17,025 51,391 44,129
----------- ----------- ----------- -----------
Income before income tax 2,143 10,081 15,619 15,333
Income tax provision 1,507 4,882 8,334 8,483
----------- ----------- ----------- -----------
NET INCOME $ 636 $ 5,199 $ 7,285 $ 6,850
=========== =========== =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES 1.25 -
=========== ===========
AMOUNT BY WHICH FIXED CHARGES EXCEEDS EARNINGS - 2,695
=========== ===========
14
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, 1998 and 1997.
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 PRODUCTS COMPANY
Registrant
S/N Michael J. Maratea
Michael J. Maratea
Vice President and Controller,
Pennzoil Company
November 12, 1998