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 March 31, 1999 Commission File No. 1-5591
PENNZOIL-QUAKER STATE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 76-0200625
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer 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, April 30, 1999:
Common Stock, par value $0.10 per share, 77,736,208
shares.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31
----------------------------
1999 1998(A)
----------- -----------
(Expressed in thousands
except per share amounts)
(Note 2)
REVENUES $ 723,881 $ 443,442
COSTS AND EXPENSES
Cost of sales 504,531 255,057
Purchases from affiliate - 69,997
Selling, general and administrative 163,537 77,841
Depreciation and amortization 33,514 17,764
Taxes, other than income 4,370 3,502
Interest charges, net 17,741 2,693
Affiliated interest - 14,053
----------- -----------
INCOME BEFORE INCOME TAX 188 2,535
Income tax provision 2,407 1,936
----------- -----------
NET INCOME (LOSS) $ (2,219) $ 599
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (0.03) $ 0.01
=========== ===========
DIVIDENDS PER COMMON SHARE $ 0.1875 $ -
=========== ===========
BASIC AND DILUTED AVERAGE SHARES OUTSTANDING 77,648 47,847
=========== ===========
END OF PERIOD SHARES OUTSTANDING 77,697 47,847
=========== ===========
NET INCOME (LOSS) $ (2,219) $ 599
OTHER COMPREHENSIVE INCOME, NET OF TAX 3,492 36
----------- -----------
COMPREHENSIVE INCOME $ 1,273 $ 635
=========== ===========
<FN>
<F1>
(A) Excludes Quaker State Corporation results.
<F2>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, December 31,
1999 1998
------------- -------------
(Unaudited)
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 219,343 $ 14,899
Receivables 376,934 291,997
Inventories 316,851 306,512
Materials and supplies, at average cost 12,996 12,422
Deferred income taxes 47,413 47,413
Other current assets 66,405 63,328
------------- -------------
Total current assets 1,039,942 736,571
Property, plant and equipment, net 1,013,797 1,032,076
Deferred income taxes 34,693 36,614
Goodwill 1,092,799 1,104,353
Other assets 209,068 235,380
------------- -------------
TOTAL ASSETS $ 3,390,299 $ 3,144,994
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,338 $ 1,283
Accounts payable 249,880 245,721
Payroll accrued 28,661 18,734
Other current liabilities 143,210 147,609
------------- -------------
Total current liabilities 423,089 413,347
Total long-term debt, less current maturities 1,281,329 1,026,054
Capital lease obligations, less current maturities 72,508 74,464
Other liabilities 276,033 280,922
------------- -------------
TOTAL LIABILITIES 2,052,959 1,794,787
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 1,337,340 1,350,207
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,390,299 $ 3,144,994
============= =============
<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)
Three Months Ended
March 31
---------------------------------
1999 1998(A)
----------- -----------
(Expressed in thousands)
(Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,219) $ 599
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 33,514 17,764
Deferred income tax 1,815 5,840
Distributions from equity investees
in excess of (less than) earnings (980) 1,054
Other non-cash items 2,963 6,748
Changes in accounts receivable (90,353) (14,993)
Changes in other operating assets and liabilities 3,089 (30,348)
----------- -----------
Net cash used in operating activities (52,171) (13,336)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (11,343) (16,370)
Proceeds from sales of assets 30,479 11,200
Other investing activities 4,674 7,267
----------- -----------
Net cash provided by investing activities 23,810 2,097
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt and capital lease obligation repayments (372,573) (1,671)
Proceeds from note payable to affiliate - 12,685
Proceeds from issuances of debt 626,087 1,082
Dividends paid (14,560) -
Other financing activities (6,149) -
----------- -----------
Net cash provided by financing activities 232,805 12,096
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 204,444 857
CASH AND CASH EQUIVALENTS, beginning of period 14,899 9,132
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 219,343 $ 9,989
=========== ===========
<FN>
<F1>
(A) Excludes Quaker State Corporations results.
<F2>
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) Spin-off from Pennzoil Company and Acquisition of Quaker State
-
On December 30, 1998, Pennzoil Company distributed ("Spin-off")
to its stockholders 47.8 million shares of common stock of its
wholly owned subsidiary Pennzoil-Quaker State representing all of
the shares of Pennzoil-Quaker State owned by Pennzoil Company. As
a result of the distribution, Pennzoil Company, now renamed
PennzEnergy Company, and Pennzoil-Quaker State are no longer
affiliated entities.
Also, on December 30, 1998, Pennzoil-Quaker State acquired
Quaker State Corporation ("Quaker State") in a merger transaction,
and Quaker State became a wholly owned subsidiary of Pennzoil-
Quaker State. As a result of the acquisition, stockholders of
Quaker State received .8204 of a share of common stock of Pennzoil-
Quaker State in exchange for each share of Quaker State capital
stock previously owned.
Pennzoil-Quaker State has accounted for the acquisition using
the purchase method of accounting and, accordingly, has included
the results of operations of Quaker State beginning on the date
acquired. The purchase price, which was calculated based on the
market capitalization of Quaker State, was allocated to the assets
and liabilities acquired based upon the estimated fair value of
those assets and liabilities as of the acquisition date. The
excess of the aggregate purchase price over estimated fair value of
the net assets acquired has been reflected as goodwill in the
condensed consolidated financial statements and is being amortized
on a straight-line basis over 40 years.
The condensed consolidated financial statements reflect the
preliminary allocation of purchase price. A final allocation of
the purchase price will be made by the end of 1999. Pennzoil-
Quaker State does not anticipate material changes in this
allocation.
At December 31, 1998, Pennzoil-Quaker State recognized certain
liabilities related to the merger. Those liabilities related to
Quaker State operations ($27.9 million) were recognized as an
adjustment to the purchase price. Other liabilities accrued of
$10.6 million that related to the acquiror (Pennzoil-Quaker State)
were expensed. During the three months ended March 31, 1999, the
$27.9 million liability related to the Quaker State operations was
reduced by $1.8 million primarily for severance paid to certain
Quaker State employees. No additional liabilities were recorded in
connection with the acquisition during the three months ended March
31, 1999. The remaining accrual of $26.1 million at March 31, 1999
includes amounts for severance costs for certain Quaker State
employees, closing costs of some of Quaker State's Q Lube company-
operated fast lube service centers and relocation costs of certain
Quaker State employees.
7
PART I. FINANCIAL INFORMATION - continued
During the three months ended March 31, 1999, the $10.6 million
accrued liability related to the acquiror was reduced by $2.5
million primarily related to payments for resolving certain
conflicts between Jiffy Lube and Q Lube franchise-operated service
centers. No additional liabilities resulting from restructuring or
reorganizations related to the acquisition of Quaker State were
accrued during the three months ended March 31, 1999. The
remaining accrual of $8.1 million at March 31, 1999 includes
amounts for costs of closing some Jiffy Lube company-operated fast
lube service centers and the resolution of certain conflicts
between Jiffy Lube and Q Lube franchise-operated service centers.
The Company also incurred approximately $13.1 million in previously
unaccrued expenses during the three months ended March 31, 1999
primarily due to current period acquisition-related systems
integration costs and Quaker State employee transition bonuses and
key employee bonuses earned during the period.
The Company expects to incur additional acquisition-related
costs and expenses in future periods and will adjust the
preliminary purchase price allocation or charge these amounts to
income, as appropriate, depending on their nature. These future
costs and expenses relate to additional facility closings, conflict
resolution between franchise-operated service centers, employee
severance, systems integration and conversion costs of Q Lube
franchise-operated service centers. These costs and expenses are
not accruable until a plan is formulated and approved and amounts
are paid or certain obligations are contractually committed. The
restructurings and reorganizations related to the Quaker State
acquisition are expected to be completed in mid 2000.
The following unaudited pro forma information for the three
months ended March 31, 1998 has been prepared as if the acquisition
of Quaker State occurred on January 1, 1998 after including the
additional amortization of goodwill, brands and other intangible
assets, interest expense and related income tax effects. The
unaudited pro forma information does not reflect adjustments for
any estimated general and administrative expense savings,
operational efficiencies and one-time costs related to the
acquisition of Quaker State, nor is it necessarily indicative of
results that would have actually occurred had the acquisition of
Quaker State been consummated on January 1, 1998 or future results
of operations.
Three months ended
March 31, 1998
------------------------------
(Expressed in thousands except
per share amounts)
Revenues $ 743,601
Net income 3,686
Basic and diluted earnings per share 0.05
(3) 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 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 SFAS requires 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.
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 Pennzoil-Quaker State's results of operations.
8
PART I. FINANCIAL INFORMATION - continued
(4) Summarized Financial Data of Excel Paralubes -
Summarized operations information for Excel Paralubes, an
equal partnership with Conoco Inc., for the three months ended
March 31, 1999 and 1998 on a 100% basis follows:
Three months ended March 31
----------------------------
1999 1998
----------- -----------
(Expressed in thousands)
(Unaudited)
Revenues $ 43,527 $ 58,112
Operating earnings 6,868 10,037
Net income (loss) (2,814) 449
Pennzoil-Quaker State's net investment in Excel Paralubes,
carried as a credit balance of $50.5 million and $37.2 million at
March 31, 1999 and 1998, 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 (loss) for the three months ended
March 31, 1999 and 1998 of $(1.4) million and $0.2 million,
respectively, is included in revenues in the condensed consolidated
statement of income and comprehensive income.
(5) Debt -
In January 1999, Pennzoil-Quaker State, using funds from its
commercial paper and money market facilities, repaid $370.0 million
of borrowings under a Quaker State revolving credit agreement and
terminated the revolving credit agreement. On March 30, 1999,
Pennzoil-Quaker State issued debt in the form of $200.0 million of
6 3/4% Notes due April 1, 2009 and $400.0 million of 7 3/8%
Debentures due April 1, 2029. The net proceeds of $592.2 million
from the Notes and Debentures were ultimately used to pay down
variable rate debt, although $194 million was held as a temporary
cash investment at March 31, 1999 to avoid breaching of commercial
paper contracts maturing in early April 1999. Due to the issuance
of the Notes and Debentures, Pennzoil-Quaker State reduced the
capacity under its revolving credit facility from $1.0 billion to
$700 million on March 30, 1999 as required by the credit facility
agreement. There were no borrowings under this facility during the
quarter ended March 31, 1999. Pennzoil-Quaker State also maintains
a long-term credit facility with a Canadian bank, which provides
for up to C$27 million through October 25, 1999. As of March 31,
1999, borrowings under the Company's Canadian facility totaling
US$9.6 million have been classified as long-term debt. Such debt
classification is based upon the availability of long-term credit
facilities to refinance this facility and the Company's intent to
maintain such commitments in excess of one year.
9
PART I. FINANCIAL INFORMATION - continued
(6) Earnings Per Share -
Computations for basic and diluted earnings (loss) per share
for the three months ended March 31, 1999 and 1998 consist of the
following:
Three Months Ended March 31
----------------------------
1999 1998(A)
----------- -----------
(Expressed in thousands
except per share amounts)
Net income (loss) $ (2,219) $ 599
Basic and diluted weighted average shares (B) 77,648 47,847
Basic and diluted earnings (loss) per share (0.03) 0.01
<FN>
<F1> (A) Excludes Quaker State Corporation results and shares issued in acquisition.
<F2> (B) A weighted average number of options to purchase 6.9 million shares
of common stock and awards of 308.8 thousand shares of common stock
were outstanding for the three months ended March 31, 1999 but were
not included in the computation of diluted earnings per share because
these options and awards would result in an antidilutive per share
amount.
</FN>
(7) Use of Derivatives -
In order to hedge interest rate exposure on the debentures
issued in March 1999, in August 1998, Pennzoil-Quaker State entered
into four interest rate locks covering a total of $100 million,
based upon the 30-year Treasury rate. To achieve its hedged
position, Pennzoil-Quaker State entered into forward rate
agreements in which it would 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 qualified as a hedge
of an anticipated transaction. Any gains or losses from the
interest rate hedges were deferred during the interim period with
the offset to a payable or receivable. The hedge contracts matured
in March 1999 when the Company issued $400 million of 30-year
debentures. The total loss of $ 2.1 million on the interest rate
hedges was treated as an adjustment to the issue price of the
debentures, effectively creating a discount that will be amortized
over the life of the borrowings.
(8) 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. Pennzoil-Quaker State adopted SFAS No. 130 effective
January 1, 1998. The components of Pennzoil-Quaker State's
comprehensive income consist of foreign currency translation
adjustments, unrealized holding gains and losses on available-for-
sale securities and minimum pension liability. For the quarter
ended March 31, 1999, other comprehensive income is primarily
related to favorable foreign currency translation adjustments of
$3.5 million.
10
PART I. FINANCIAL INFORMATION - continued
(9) Transactions with PennzEnergy Company -
As a result of the Spin-off, PennzEnergy and Pennzoil-Quaker
State have an arrangement to share certain services for a period of
up to one year after the date of the Spin-off. Any or all of the
services being provided may be discontinued with at least 30 days
prior written notice of the discontinuation. Where corporate
administrative costs can be directly associated with Pennzoil-
Quaker State or PennzEnergy, fees are paid based upon actual costs
of providing these services. Indirect administrative costs
incurred are allocated through a monthly charge based on a formula
that considers the relative total assets, sales and employees of
the companies.
(10) Cash Flow Information -
Cash paid for interest during the three months ended March 31,
1999 and 1998 was $10.2 million and $2.6 million, respectively.
Cash paid for income taxes during the three months ended March 31,
1999 was $0.3 million and no payments were made during the three
months ended March 31, 1998.
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) Base Oil and Specialty Products and (3) Fast Lube
Operations.
Results of operations of Pennzoil-Quaker State do not include
Quaker State's results of operations for 1998. The assets and
liabilities of Quaker State are included in Pennzoil-Quaker State's
condensed consolidated balance sheet for the periods presented. In
addition, operating results for the three months ended March 31, 1998
included certain affiliated charges for interest and services
provided by Pennzoil Company prior to the Spin-off.
Results of Operations
Net sales for Pennzoil-Quaker State for the quarter ended
March 31, 1999 were $717.8 million, an increase of $290.7 million,
or approximately 68.1%, from the same period in 1998. The increase
in net sales is primarily due to the acquisition of Quaker State.
Purchases from affiliates for the three months ended March 31, 1998
relate to purchases of crude oil at market prices from Pennzoil
Company. Pennzoil-Quaker State began purchasing crude oil
primarily from third parties in the third quarter of 1998.
Net loss for the quarter ended March 31, 1999 was $2.2
million, or 3 cents per basic share. This compares with net income
of $0.6 million, or 1 cent per basic share for the quarter ended
March 31, 1998. The decrease in income is primarily due to one-
time costs (legal, severance, rationalization of Q Lube centers
and other charges) associated with the Company's merger with Quaker
State.
11
PART I. FINANCIAL INFORMATION - continued
Lubricants and Consumer Products
Net sales for this segment were $498.9 million for the quarter
ended March 31, 1999. This compares to net sales of $228.4 million
for the same period in 1998. The increase in net sales is
primarily due to the acquisition of Quaker State. Other income for
this segment for the quarter ended March 31, 1999 was $0.1 million
compared to $3.8 million for the same period in 1998. The decrease
in other income was primarily due to gains on the sale of assets
included in first quarter 1998 results. Operating income from this
segment for the quarter ended March 31, 1999 was $42.1 million
compared to $20.4 million for the same period in 1998. The
increase in operating income is primarily due to the acquisition of
Quaker State. Higher lubricants and domestic consumer product
sales, combined with lower overall expenses, also contributed to
the increases, which were partially offset by one-time merger
costs.
Base Oil and Specialty Products
Net sales for this segment were $150.9 million for the quarter
ended March 31, 1999. This compares to net sales of $181.4 million
for the same period in 1998. The decrease is primarily due to lower
average sales prices for fuels, base oils and other refined
petroleum products. The decline in sales prices generally followed
the market price decrease of crude oil and other petroleum
products. Other income for this segment for the quarter ended March
31, 1999 was $5.1 million compared to $10.3 million for the same
period in 1998. The decrease in other income was primarily due to
lower equity earnings from Excel Paralubes, Pennzoil-Quaker State's
base oil partnership with Conoco Inc., due to a scheduled
turnaround. Operating loss from this segment for the quarter ended
March 31, 1999 was $6.0 million compared to operating income of
$4.4 million for the same period in 1998. The decrease in
operating income was primarily due to lower fuels margins driven
principally by sales price declines.
Fast Lube Operations
Net sales for this segment were $119.3 million for the quarter
ended March 31, 1999. This compares to net sales of $77.0 million
for the same period in 1998. The increase in net sales is
primarily due to the addition of Quaker State's Q Lube operations.
Other income for this segment for the quarter ended March 31, 1999
was $1.8 million compared to $3.7 million for the same period in
1998. The decrease in other income was primarily due to lower gains
on sale of assets. Operating income from this segment for the
quarter ended March 31, 1999 was $0.1 million compared to $4.7
million for the same period in 1998. The decrease in operating
income was primarily due to increased operating costs within
company operated centers and higher selling, general and
administrative expenses primarily related to one-time merger costs.
Corporate Administrative Expense
Corporate administrative expense increased $12.3 million to
$21.8 million for the quarter ended March 31, 1999 compared to the
same period in 1998. The increase is primarily due to the addition
of Quaker State and one-time merger costs.
As a result of the Spin-off, PennzEnergy and Pennzoil-Quaker
State have an arrangement to share certain services for a period of
up to one year after the date of the Spin-off. Any or all of the
services being provided may be discontinued with at least 30 days
prior written notice of the discontinuation. Where corporate
administrative costs can be directly associated with Pennzoil-
Quaker State or PennzEnergy, fees are paid based upon actual costs
of providing these services. Indirect administrative costs
incurred are allocated through a monthly charge based on a formula
that considers the relative total assets, sales and employees of
the companies.
Prior to the Spin-off, Pennzoil Company charged Pennzoil-Quaker
State for all direct costs associated with its operations and
indirect administrative costs were allocated through a monthly
charge.
12
PART I. FINANCIAL INFORMATION - continued
Capital Resources and Liquidity
Cash Flow. As of March 31, 1999, Pennzoil-Quaker State had
cash and cash equivalents of $219.3 million. During the quarter
ended March 31, 1999, cash and cash equivalents increased $204.4
million. The increase is primarily due to the issuance of debt in
March 1999. Reference is made to Note 5 of the Notes to Condensed
Consolidated Financial Statements for additional information.
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.
Debt Instruments and Repayments. In January 1999, Pennzoil-
Quaker State, using funds from its commercial paper and money
market facilities, repaid $370.0 million of borrowings under a
Quaker State revolving credit agreement and terminated the
revolving credit agreement. On March 30, 1999, Pennzoil-Quaker
State issued debt in the form of $200.0 million of 6 3/4% Notes due
April 1, 2009 and $400.0 million of 7 3/8% Debentures due April 1,
2029. The net proceeds of $592.2 million from the Notes and
Debentures were ultimately used to pay down variable rate debt,
although $194 million was held as a temporary cash investment at
March 31, 1999 to avoid breaching of commercial paper contracts
maturing in early April 1999. Due to the issuance of the Notes and
Debentures, Pennzoil-Quaker State reduced the capacity under its
revolving credit facility from $1.0 billion to $700 million on
March 30, 1999 as required by the credit facility agreement. There
were no borrowings under this facility during the quarter ended
March 31, 1999. Pennzoil-Quaker State also maintains a long-term
credit facility with a Canadian bank, which provides for up to C$27
million through October 25, 1999. As of March 31, 1999, borrowings
under the Company's Canadian facility totaling US$9.6 million have
been classified as long-term debt. Such debt classification is
based upon the availability of long-term credit facilities to
refinance this facility and the Company's intent to maintain such
commitments in excess of one year.
Accounts Receivable. Pennzoil-Quaker State Company, 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 Company or its
affiliates. The Company entered into a new one-year receivables
sales facility in February 1999 that provides for ongoing sales of
up to $120.0 million of accounts receivable. The Company's net
accounts receivable sold under its receivable sales facility
totaled $90.8 million at March 31, 1999.
The Company maintains a lube center receivable purchase and
sale agreement, which provides for the sale of certain notes
receivable up to $150.0 million, through a wholly owned subsidiary,
Pennzoil Lube Center Acceptance Corporation ("PLCAC"). PLCAC is a
special limited purpose corporation and the assets of PLCAC are
available solely to satisfy the claims of its own creditors and not
those of Pennzoil-Quaker State Company or its affiliates. Through
March 31, 1999, the Company has sold a total of $130.3 million of
notes receivable under this agreement, of which $109.1 million were
outstanding to the third party purchaser at March 31, 1999.
13
PART I. FINANCIAL INFORMATION - continued
Year 2000 Issues
The Company has conducted a review of its key computer systems
and has identified a number of systems that were affected by the
year 2000 issue. The Company has completed conversion of these non-
compliant financial, operating, human resource and payroll systems
to a new information technology system in 1998. In addition, the
Company is currently upgrading electronic commerce systems to
compliant versions. Conversion of operating and financial software
as well as desktop hardware and software used in international
locations for the Company to compliant versions began in the second
quarter of 1998, with completion expected in the second quarter of
1999. Upgrades and standardization of network, infrastructure,
desktop and communications systems to make these assets compliant
are in progress. This effort is scheduled for completion in the
second quarter of 1999. The only system replacements that have
been accelerated to remedy non-compliance are the Company voice
mail systems and the international desktop hardware, software,
financial and operational systems. No major information technology
projects have been deferred due to year 2000 compliance matters.
Contingency planning will be started for the information technology
systems in the second quarter of 1999, and will include backup,
standby and storage service solutions to reduce the impact of
critical service providers.
The Company 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 Company manufacturing facilities have
non-compliant control systems. One of these systems will be
upgraded in July 1999. The other system will be upgraded in
September 1999, during a scheduled plant shutdown. Compliant
versions of the software now exist for both systems. System
testing will be performed at both facilities at the time of their
system upgrade. 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 the 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.
The Company is contacting key suppliers, banks, customers and
other unaffiliated companies that have business relationships with
the Company to assess their year 2000 compliance programs. The
Company 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 cooperative testing. Contingency
planning will be included in this assessment to identify
arrangements to mitigate the impact of disruptions from outside
sources. In addition, the Company has implemented internal
procedures to respond cooperatively to inquiries from regulatory
agencies and other businesses about its year 2000 program.
As with most companies, the Company anticipates more issues
arising from international business partners, especially in the
banking, utility, shipping and governmental segments. The Company
is currently reviewing all banking relationships in international
locations. In addition, the Company 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.
14
PART I. FINANCIAL INFORMATION - continued
If these steps are not completed successfully in a timely
manner, the Company's operations and financial performance could be
adversely affected through disruptions in operations. Costs
associated with such disruptions currently cannot be estimated.
Both incremental historical and estimated future costs related
to the year 2000 issue are not expected to be material to the
financial position or results of operations of the Company for
several reasons. Most of the remediation is being accomplished
with upgrades to existing software that are under maintenance
contracts. The implementation of the major information technology
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 Company resources. Costs for all year
2000 activities are estimated to be less than $7.0 million.
Quaker State continued to make progress in addressing the
issue of computer systems and embedded computer chips that may be
unable to accommodate the year 2000. Quaker State has completed
reviews of computer systems and embedded technologies at all
locations, including its blending and packaging facilities. In
addition, certain aspects of Quaker State's year 2000 program
included not upgrading or replacing certain systems as they were
deemed to be redundant as a result of the acquisition by the
Company. These systems are currently being evaluated and replaced.
At present, the Q Lube Point of Sale ("POS") software utilized
in Q Lube stores is not year 2000 compliant. The software vendor
is expected to release a compliant version in May or June 1999.
Current plans include the conversion of Q Lube locations, including
information systems, to Jiffy Lube stores, which utilize compliant
POS software. In the event the conversion is delayed, contingency
plans provide for the remaining stores to upgrade to the compliant
version of the Q Lube POS software. This upgrade would begin in
September 1999 to allow enough time to complete the conversions.
The Company has a June 30, 1999 target readiness date for all
major phases of its year 2000 preparations. The Company'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.
Forward-looking statements contained under this "Year 2000
Issues" subpart 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 Pennzoil-Quaker State
for the quarter ended March 31, 1999 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 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.
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
March 31
----------------------------
1999 1998(A)
----------- -----------
(Dollar amounts expressed
in thousands)
REVENUES
Net sales
Lubricants and Consumer Products $ 498,901 $ 228,431
Base Oil and Specialty Products 150,903 181,391
Fast Lube Operations 119,300 76,998
Intersegment sales and other (51,292) (59,696)
----------- -----------
717,812 427,124
----------- -----------
Other income, net
Lubricants and Consumer Products $ 46 $ 3,816
Base Oil and Specialty Products 5,130 10,259
Fast Lube Operations 1,799 3,712
Other (906) (1,469)
----------- -----------
6,069 16,318
----------- -----------
Total revenues $ 723,881 $ 443,442
=========== ===========
OPERATING INCOME
Lubricants and Consumer Products $ 42,078 $ 20,405
Base Oil and Specialty Products (5,978) 4,435
Fast Lube Operations 112 4,650
Other 3,529 (742)
----------- -----------
Total operating income 39,741 28,748
Corporate administrative expense 21,812 9,467
Interest charges, net 17,741 16,746
----------- -----------
Income before income tax 188 2,535
Income tax provision 2,407 1,936
----------- -----------
NET INCOME (LOSS) $ (2,219) $ 599
=========== ===========
RATIO OF EARNINGS TO FIXED CHARGES - 1.12
=========== ===========
AMOUNT BY WHICH FIXED CHARGES EXCEEDS EARNINGS $ 301 -
=========== ===========
<FN>
<F1>
(A) Excludes Quaker State Corporation results.
</FN>
16
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended
March 31
------------------------------
1999 1998(A)
------------ ------------
OPERATING DATA
- --------------
LUBRICANTS AND CONSUMER PRODUCTS
Total revenues (in thousands):
Lubricants $ 355,904 $ 191,608
Consumer Products 93,100 12,979
International 49,943 27,660
------------ ------------
Total revenues $ 498,947 $ 232,247
============ ============
Operating income (in thousands):
Lubricants $ 36,538 $ 24,687
Consumer Products 10,386 2,551
International 1,633 (1,652)
Division overhead (6,479) (5,181)
------------ ------------
Total operating income $ 42,078 $ 20,405
============ ============
FAST LUBE OPERATIONS
Domestic systemwide sales (in thousands) $ 259,048 $ 191,847
Same center sales Jiffy Lube (in thousands)(B) $ 193,503 $ 190,447
Centers open 2,127 1,537
BASE OIL AND SPECIALTY PRODUCTS (C)
Raw materials processed (barrels per day) 60,983 71,143
Refining capacity (barrels per day) 76,000 76,000
Refiner's margin ($ per barrel) $ 7.80 $ 8.00
Operating costs ($ per barrel) $ 5.82 $ 5.78
Depreciation ($ per barrel) $ 1.35 $ 1.12
Refinery Feedstocks:
Paraffinic Crude Oil 70% 71%
Naphthenic Crude Oil 8% 7%
Other Feedstocks and Blendstocks 22% 22%
Refinery Yields:
Gasolines 29% 30%
Distillates 31% 33%
Lube Base Stocks 25% 23%
Waxes 3% 3%
Other Products 12% 11%
Market Data:
WTI Crude Oil ($ per barrel) $ 13.06 $ 15.92
3-2-1 crack spread ($ per barrel) (D) $ 1.41 $ 2.57
Base oil gross margin ($ per barrel) (E) $ 19.03 $ 20.29
<FN>
<F1>
(A) Excludes Quaker State Corporation statistics.
<F2>
(B) Excludes Q Lube centers acquired from Quaker State Corporation.
<F3>
(C) Includes Pennzoil-Quaker State's 50% ownership in Excel Paralubes.
<F4>
(D) Regular unleaded gasoline and low sulphur diesel vs. WTI crude oil.
<F5>
(E) Exxon 100N posting vs. WTI crude oil.
</FN>
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 three months ended March 31, 1999 and 1998.
27 Financial Data Schedule
(b) Reports -
During the first quarter of 1999, Pennzoil-Quaker State
filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission:
Date of Report Items Reported
January 13, 1999 Information relatd to Pennzoil-
Quaker State's December 30, 1998
acquisition of Quaker State
Corporation
January 20, 1999 Amendment to Current Report on Form
8-K filed on January 13, 1999
March 30, 1999 Information related to Pennzoil-
Quaker State's issuance of 6 3/4%
Notes due April 1, 2009 and 7 3/8%
Debentures due April 1, 2029
18
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
May 13, 1999