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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(NO FEE REQUIRED)
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from to
Commission file number 1-5112
ETHYL CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-0118820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH FOURTH STREET P. O. Box 2189
RICHMOND, VIRGINIA 23218-2189
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: 804-788-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $1 Par NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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 at least the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of December 31, 1996: $924,596,515.50.* Number of shares of
Common Stock outstanding as of December 31, 1996: 118,443,835.
*In determining this figure, an aggregate of 21,117,886 shares of Common Stock
reported in the registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders as beneficially owned by Floyd D. Gottwald, Jr., Bruce C.
Gottwald, and the members of their immediate families have been excluded
because the shares are held by affiliates. See Item 12 herein. The aggregate
market value has been computed on the basis of the closing price in the New
York Stock Exchange Composite Transactions on December 31, 1996, as reported
by The Wall Street Journal.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Ethyl Corporation's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of
1934 (the "Proxy Statement") are incorporated by reference into Part III of
this Form 10-K.
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PART I
Item 1. BUSINESS
DESCRIPTION OF BUSINESS
Ethyl Corporation (the "Company") is incorporated in Virginia and is a major
developer, manufacturer and blender of petroleum additives. Petroleum
additives products include additives for gasoline, diesel fuels, and home
heating oils as well as additives for passenger-car and diesel crankcase
lubricants including railroad engine oil additives, automatic transmission
fluids and lubricants for gears, hydraulic and industrial equipment. The
Company has about 1,800 employees.
RECENT DEVELOPMENTS
During 1994 through 1996, the Company completed certain actions in positioning
itself as a highly focused maker and marketer of petroleum additives to
customers in the United States and around the world.
On February 29, 1996, the Company purchased the worldwide lubricant
additives business of Texaco Inc. The acquisition enhances the Company's
already established ability to serve its customers with products meeting high
specifications. The acquisition added both a new product line and additional
presence in Europe, Latin America and the Far East. The purchase transaction
is discussed in Note 2 of the Notes to Financial Statements on page 32.
On September 15, 1994, the Company sold its wholly owned pharmaceuticals
subsidiary, Whitby, Inc., which marketed and distributed finished
pharmaceuticals. Earlier in the year, the Company completed the tax-free
spin-off of its wholly owned subsidiary, Albemarle Corporation ("Albemarle"),
at the close of business on February 28, 1994, which included the operations
of the olefins and derivatives, bromine chemicals and specialty chemicals
businesses. Since the completion of these transactions, the Company has been
solely in the petroleum additives business. The results of both the
pharmaceuticals subsidiary and Albemarle are included in the consolidated
financial statements through those dates.
The following discussion of the Company's businesses as of December 31,
1996, should be read in conjunction with the information contained in Item 7
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" section as of December 31, 1996, beginning on page 16. PRO FORMA
information is provided to illustrate the Company's results as if the
acquisition of the worldwide lubricant additives business of Texaco had been
included in the operations of the Company for the full year 1996 and 1995 (see
Note 2 of Notes to Financial Statements). PRO FORMA information has also been
provided to illustrate the Company's results without the two months 1994
results of the businesses spun-off as Albemarle Corporation (see Note 3 of
Notes to Financial Statements).
MANUFACTURING AND BLENDING
The Company manufactures and blends a broad range of performance enhancing
additives for motor fuels and lubricating oils. Most sales of fuel additives
for gasoline, diesel fuels and heating oils are directly to petroleum
refiners and marketers, terminals and blenders. Lubricant additive packages
are sold directly to companies producing finished oils and fluids in the
United States and throughout the world. The processes and technologies for
most of Ethyl's products were developed in the Company's research and
development laboratories, although some technology was obtained from acquired
businesses.
The Company manufactures and blends a majority of its lubricant additives
and non-antiknock fuel additives in the United States but also has
manufacturing and blending facilities in Belgium,Canada and Brazil and obtains
some products under long-term supply agreements (discussed on page 14). The
Company obtains lead antiknock fuel additives under a long-term supply
agreement with The Associated Octel Company Ltd. of London, England ("Octel")
(discussed on pages 14, 19 and 20), and its manganese based antiknock fuel
additive under a long-term supply agreement with Albemarle (discussed on pages
14 and 20). The Company receives its olefin copolymer viscosity index improver
under a long-term supply agreement with DSM Copolymer, Inc. (discussed on page
14).
COMPETITION
The Company operates in a highly competitive environment. Some market areas
involve a significant number of competitors, while others involve only a few.
The competitors are both larger and smaller than the Company in terms of
resources and market shares. Competition and specifications and regulatory
changes in connection with all of the Company's products require continuing
investments in research and development of new products or leading
technologies, in continuing product and process improvements and in providing
specialized customer services.
LUBRICANT ADDITIVES PRODUCTS
Lubricant additives extend the useful life of lubricants and assist them in
preventing wear and corrosion of metallic parts, protecting seals, allowing
metallic parts to withstand extremely high temperatures and pressures and
increasing adhesion of oils to metallic parts. Lubricant additives are used in
oils, fluids and greases for over-the-road and off-highway vehicles, aircraft,
power tools and marine, railroad and industrial equipment and machinery
requiring lubrication, thereby extending equipment life. Lubricant additives
are used in meeting government regulations and original equipment
manufacturers' specifications and standards, including improving fuel economy.
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Lubricant additives include packages for (i) passenger car motor oils for
gasoline engines, heavy-duty diesel oils for diesel-powered vehicles, diesel
oils for locomotive, marine and stationary power engines and oils for
two-cycle engines, and (ii) automatic transmission fluids, automotive and
industrial gear oils, hydraulic fluids and industrial oils; as well as
components for engine oil and other additive packages such as (i) antioxidants
to resist high-temperature degradation, antiwear agents to protect metal
surfaces from abrasion, (ii) detergents to prevent carbon and varnish deposits
from forming on engine parts, (iii) dispersants to keep engine parts clean by
suspending insoluble products of fuel combustion and oil oxidation, (iv)
friction reducers to facilitate movement, (v) pour point depressants to enable
oils to flow at cold temperatures, (vi) corrosion inhibitors to protect metal
parts and (vii) viscosity index improvers to provide uniform flow properties
over a wide range of temperatures.
FUEL ADDITIVES PRODUCTS
Fuel additives increase the quality of gasolines and diesel fuel by raising
the level of octane and cetane, respectively, retaining the quality of fuel
over time, maintaining engine cleanliness, protecting metals, reducing
friction and wear and lowering emissions. Fuel additives are used by refiners
to meet regulations and standards, including those reducing exhaust emissions.
Additives also are used in fuels for over-the-road and off-highway vehicles,
piston and jet aircraft, as well as railroad, marine and other gasoline,
diesel or synfuel powered engines and also in home heating oil.
Fuel additives include lead and manganese antiknock compounds to increase
octane and prevent power loss due to early or late combustion (engine knock)
in gasoline engines; cetane improvers to improve the combustion properties and
power delivery of diesel fuels; amine stabilizers and hindered phenolic
antioxidants to prevent thermal degradation during storage and transport;
corrosion inhibitors to prevent failures during fuel storage and pumping;
cold flow improvers to enhance diesel fuel pumping under cold-weather
conditions; detergent packages to keep carbon deposits from forming on fuel
injectors, intake valves, carburetors and combustion chambers; dyes for fuel
identification and leak detection; lubricity agents; and a conductivity
modifier to neutralize static charge build-up in fuel and products for home
heating oils. The Company also markets Greenburn (TM), an environmentally
friendly line of proprietary products designed for the diesel fuel, home
heating oil and power generation fuel markets worldwide. Greenburn (TM)
products contain HITEC (R) 3000 performance additive.
Lead antiknock compounds, sold to petroleum refiners in many countries
around the world, remain one of the Company's largest product lines. The
Company's sales comprise approximately one-third of the world's market for
lead antiknock compounds.
Lead antiknock compounds have been subject to regulation restricting the
amount of the product that can be used in motor gasoline. These regulations
began in the United States in the 1970s and have slowly spread to other
countries. Today, the use of lead antiknock compounds for motor gasoline has
been eliminated in the U.S. and Canada though use in certain other
applications continues in these countries. As the Company has forecast and
planned, the market for lead antiknock compounds continues to decline as the
use of unleaded gasoline grows and regulations limit use in leaded gasoline.
The Company also sells a manganese-based antiknock compound, HITEC (R) 3000
performance additive ("MMT"), which is used in leaded and conventional
unleaded gasoline. The compounds are manufactured by Albemarle under a
long-term supply contract with Ethyl. MMT has been used in Canadian unleaded
gasoline for nearly 21 years.
RAW MATERIALS
Major raw materials used by the Company include process oil, polybutene,
alcohols (including 2-ethyl-1-hexanol), antioxidants and phenates, as well as
electricity and natural gas as fuels, which are purchased or provided under
supply contracts at prices the Company believes are competitive.
PRODUCT DEVELOPMENTS
The market for lubricant additives has been experiencing significant changes
as a result of market and regulatory demands. The demands for better fuel
economy, reduced emissions and cleaner oils have led to new equipment design
and more stringent performance requirements. Such requirements mean
reformulation of many products, new product development and more product
qualification tests.
Recent product developments include formulated additive packages meeting
new industry specifications for passenger car motor oils, gear oils, and
gasoline protecting intake valve systems. In 1996 Ethyl also developed several
new fuel additive products including: a new gasoline performance additive for
global markets, a new premium diesel performance additive for North American
markets and a new lubricity additive for Europe and the Far East to support
the rapid introduction of low sulfur diesel fuels in these regions. New
automotive gear additives have been developed to enable Ethyl to expand its
position in world markets. In addition, Ethyl has grown its participation in
the European crankcase additive market launching new products specifically
13
designed to meet the requirements of the Association des Constructeurs
Europeens d' Automobiles ("ACEA") specifications.
These developments are part of the Company's major ongoing effort to expand
and improve its product lines and expand geographic distribution of its
petroleum additive products. As part of this effort, the Company has initiated
a product line review and integration process in order to take full advantage
of the technology obtained through the acquisition of the worldwide lubricant
additives business of Texaco. That product line integration process is
continuing.
To maintain and enhance a responsive worldwide product supply network for
its petroleum additives, the Company has constructed major new manufacturing
capacity for some products and expanded manufacturing capacity for other
products. Some of the new capacity replaced contract production of products by
Amoco Petroleum Additives Company. Certain of the new, more efficient
facilities began operations in late 1994 at Sauget, Illinois, and Natchez,
Mississippi, while others began operations in early 1995 at Houston, Texas,
and Feluy, Belgium. Additional new and replacement capacity, as well as
ceasing production at and mothballing certain facilities with excess capacity
for certain products, is currently underway as part of the Company's ongoing
facilities rationalization plan.
ENVIRONMENTAL CONSIDERATIONS
The Company maintains and operates manufacturing and distribution facilities
and equipment used in the petroleum additives business. These are subject to
environmental risks and regulations, which are discussed more fully in
Management's Discussion and Analysis under the heading "Environmental
Matters."
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on supporting
customers by providing products, performance data, and other technical
services. With the trend for oil companies to reduce their in-house research
capabilities, there is a growing reliance on the additive suppliers to perform
the majority of the technical work. In addition, there is an increasing demand
from governments and the original equipment manufacturers for products that
meet more stringent performance specifications. Research, development and
testing staff also participate in testing of existing products as well as
activities related to cost reduction, quality improvement and environmental
studies.
Within this environment, Ethyl's scientists, engineers and technicians have
used the Company's state-of-the-art R&D facilities to perform their research,
development and testing activities. As a result, Ethyl research has elevated
several of the Company's additive technologies to leading-edge status.
The acquisition of the worldwide lubricant additives business of Texaco
added a number of significant patents to the Company's lubricant additives
technology base. Since the acquisition, considerable effort has been focused
on combining the R&D activities, technologies and product lines of the two
companies. Significant synergy has been achieved from the consolidated R&D
operation. Further work is planned in 1997 to complete the merging together of
product formulations to optimize manufacturing operations.
On a consolidated basis, including prior-year operations spun off, the
Company spent approximately $72 million, $77 million and $83 million in 1996,
1995 and 1994, respectively, on research, development and testing expenses, of
which approximately $47 million, $54 million and $50 million in 1996, 1995 and
1994, respectively, qualified as research and development expense under the
technical accounting definition. Substantially all of research and development
activities were sponsored by the Company. Most of the research and development
expense was related to the Company's petroleum additives and, prior to the
spin-off of Albemarle, to the Company's petroleum additives and specialty
chemicals.
PATENTS
The Company owns over 1,000 active United States and foreign patents with
approximately 400 patents pending. Some of these patents are licensed to
others. In addition, rights under the patents and inventions of others have
been acquired by the Company through licenses. The Company's patent position
is actively managed and is considered to be adequate for the conduct of its
business.
FINANCIAL INFORMATION AS TO INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations, as of December 31, 1996, are in petroleum additives.
Geographic area information for the Company's operations for the three years
ended December 31, 1996, is presented in Management's Discussion and Analysis
on pages 22 through 24 (and the related notes on page 23).
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information about the Company's foreign and domestic operations and
export sales for the three years ended December 31, 1996, is set forth in the
Geographic Table and the related introduction and discussion on pages 22
through 24, and in Notes 1 and 5 of the Notes to Financial Statements on pages
30, 31 and 34. See also information concerning the Company's foreign lead
antiknock compounds business under "Description Of Business" above, as well
as in Management's Discussion and Analysis under the heading "Information
About Significant Product Lines."
14
Item 2. PROPERTIES
The following is a brief description of the principal plants and related
facilities of the Company, all of which are owned except as stated below.
LOCATION PRINCIPAL OPERATIONS
Bracknell, Berkshire, England Research, development and testing activities
Feluy, Belgium Production of lubricant additives and blends
Gent, Belgium Production of lubricant additives and blends
Houston, Texas Production of lubricant additive dispersants and blends and other petroleum additives
Natchez, Mississippi Production of lubricant additives, mainly detergents
Orangeburg, South Carolina Production of fuel additives, including diesel fuel cetane improver (leased land)
Port Arthur, Texas Production of lubricant additives
Richmond, Virginia Research, development and testing activities
Rio de Janeiro, Brazil Production of lubricant additives and blends
Sarnia, Ontario, Canada Blending of lubricant additives and production of diesel fuel cetane improver
Sauget, Illinois Production of lubricant additives, including detergents, dispersants, antioxidants,
antiwear agents, crankcase packages, transmission and gear packages and friction
reducers
The Company receives lead antiknock compounds under a long-term supply
agreement with Octel, as discussed on pages 19 and 20. The Company receives
its MMT under a long-term supply agreement with Albemarle, as discussed on
page 20.
The Company receives its olefin copolymer ("OCP") viscosity index improver
under a long-term supply agreement with DSM Copolymer, Inc. The Company also
is obtaining liquid OCP viscosity index improver under a supply agreement with
Mi Chang Oil Ind. Co., Ltd. in Ulsan, Korea, which receives solid OCP
viscosity index improver from DSM Copolymer, Inc.
The Company is obtaining lubricant additives, including crankcase packages
and certain components, under a supply agreement with a subsidiary of
Mitsubishi Kasei Corporation from its petroleum additives plant in Yokkaichi,
Japan.
The Company also receives certain miscellaneous products under various term
supply contracts.
The Company has selectively replaced manufacturing capacity of Amoco's Wood
River, Illinois, lubricant and fuel additives plant from which the Company
received products under a supply agreement that ended June 30, 1995. The new
and more efficient replacement facilities started up in late 1994 at Sauget,
Illinois, and Natchez, Mississippi, and early 1995 at Houston, Texas, and
Feluy, Belgium. Construction of additional new capacity and replacement
capacity, as well as ceasing production at and mothballing certain
facilities with excess capacity for certain products, is currently underway as
part of the Company's ongoing facilities rationalization plan.
The Company believes that its plants, including approved expansions, as
well as contract manufacturing under long-term supply agreements, are more
than adequate to meet projected sales levels. Operating rates of certain
plants vary with product mix and normal seasonal sales swings. The Company
believes that its plants generally are well maintained and in good operating
condition.
The Company owns its corporate headquarters offices in Richmond,
Virginia, and its regional offices in Bracknell, Berkshire, England. The
Company leases its regional offices in Brussels, Belgium; Mississauga,
Ontario, Canada; Sydney, Australia; Singapore; Tokyo, Japan; and Coral
Gables, Florida, as well as various sales and other offices.
15
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved from time to time in legal
proceedings of types regarded as common in the Company's businesses, including
administrative or judicial proceedings seeking remediation under environmental
laws, such as Superfund, and product liability litigation. While it is not
possible to predict or determine the outcome of such pending proceedings, in
the Company's opinion, they are not expected ultimately to have a material
adverse effect upon the results of operations or financial condition of the
Company and its subsidiaries on a consolidated basis.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no issues or matters submitted to a vote of security holders during
the fourth quarter of 1996.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded primarily on the New York Stock Exchange
under the symbol EY. The reported high and low prices by quarters for the
years 1996 and 1995 are shown in the following table.
1996 1995
- ------------------------------------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------
First Quarter 13 9 5/8 11 9 1/2
Second Quarter 10 7/8 9 5/8 12 3/8 10 1/4
Third Quarter 10 8 3/8 11 13/16 10 5/8
Fourth Quarter 9 3/4 8 1/4 13 1/8 10 7/8
- ------------------------------------------------------------------------------
Ethyl's current quarterly common stock dividend rate is $.125 per share or
$.50 on an annual basis. Equity per common share at December 31, 1996 was
$3.71 which reflects an increase of about 7% from $3.46 at December 31, 1995.
There were 118,443,835 shares of common stock held by 12,606 shareholders
of record as of December 31, 1996, compared to 118,443,835 shares of common
stock held by 13,079 shareholders of record as of December 31, 1995.
Item 6. SELECTED FINANCIAL DATA
The information required for the five years ended December 31, 1996, is
contained in the Five Year Summary on pages 47 and 48.
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Ethyl Corporation is a developer, manufacturer and blender of
performance-enhancing and environmentally beneficial fuel and lubricant
additives marketed worldwide to refiners and others who sell petroleum
products for use in transportation and industrial equipment in the United
States and in other countries around the world. The following Financial Review
includes a discussion of the accounts and operations of the Company and
certain actions taken by Ethyl Corporation that affect them.
1996 FINANCIAL REVIEW
One of the most recent actions was the Company's acquisition of the worldwide
lubricant additives business of Texaco Inc. ("Texaco") on February 29, 1996.
The acquisition enhances the Company's already established ability to serve
its customers with products meeting high specifications, and adds both a new
additives product line (viscosity index improvers) and additional presence in
Europe, Latin America and the Far East. The results of the acquired business
are included in the consolidated results since that date.
The actions taken also include the September 15, 1994, sale of its wholly
owned pharmaceuticals subsidiary, Whitby, Inc. ("Whitby"). Earlier in the
year, at the close of business on February 28, 1994, the Company also
completed the tax-free spin-off of its wholly owned subsidiary, Albemarle
Corporation ("Albemarle"), which included the operations of the olefins and
derivatives, bromine chemicals and specialty chemicals businesses. The
completion of these transactions places the Company solely in the petroleum
additives business. The results of both Whitby and Albemarle are included in
the consolidated results through those dates.
In addition to the consolidated information discussed for 1996 versus 1995
and 1995 versus 1994, PRO FORMA information is also provided to illustrate the
Company's results as if the operations of the worldwide lubricant additives
business of Texaco had been included in the Company's operations for the full
year in both 1996 and 1995 (see Note 2 of Notes to Financial Statements on
page 32). PRO FORMA information is also being provided to illustrate the
Company's 1994 results without the results of the businesses spun-off as
Albemarle Corporation (see Note 3 of Notes to Financial Statements on page
33).
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
NET SALES
Net sales for 1996 amounted to $1,149.7 million, an increase of $189.2 million
(20%) from $960.5 million in 1995. The increase in net sales was due to higher
shipments ($222.2 million), primarily reflecting the inclusion of ten months
operations of the worldwide lubricant additives business acquired from Texaco.
This was partially offset by the impact ($33 million) of lower selling prices
and an unfavorable foreign exchange effect.
The overall increase in revenues primarily reflected higher shipments of
lubricant additives, partially offset by lower selling prices for these
products, and higher shipments and selling prices of certain nonlead fuel
additives. Antiknock revenues were lower due to lower shipments of lead
antiknocks, partly offset by higher selling prices for these products and
higher shipments of HITEC (R) 3000 performance additive ("MMT"). Other refinery
fuel additives revenues decreased slightly due to lower selling prices.
COSTS AND EXPENSES
Cost of goods sold in 1996 of $804.6 million increased $168.5 million (27%)
from $636.1 million in 1995. The overall increase was primarily due to higher
shipments ($188.3 million) primarily reflecting the inclusion of ten months
operations of the worldwide lubricant additives business acquired from Texaco.
The increase in cost of goods sold in 1996 was partially offset by certain
lower costs ($19.8 million), including lower shipments of lead antiknocks and
lower per unit raw material costs. Also impacting the 1996 increase over 1995
cost of goods sold were certain nonrecurring costs in 1995, including costs
associated with the mid-year 1995 shutdown of operations at a contract
manufacturing site, the start-up of certain lubricant additives facilities,
the April 1995 strike at the Feluy, Belgium, manufacturing plant and the
Company's fourth quarter 1995 decision to terminate a supply contract early.
Average raw materials costs per unit decreased in 1996 from 1995, and
included the benefit of management actively reducing the number of raw
materials suppliers and improving its volume purchasing practices. Average
energy costs were largely unchanged, as lower electricity and steam costs were
substantially offset by higher natural gas prices.
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Gross profit for 1996 amounted to $345 million, an increase of $20.6
million (6%) from $324.4 in 1995. However, gross profit as a percent of sales
decreased to 30.0% in 1996 from 33.8% in 1995, mainly reflecting lower margins
due to continued soft market conditions in lubricant additives, and a change
in the Company's overall product mix reflecting an increase in the extent to
which sales and profits come from lubricant additives and other nonlead fuel
additives.
The Company's continuing application of strict cost controls resulted in
selling, general and administrative expenses combined with research,
development and testing expenses decreasing $1.9 million (1%) to $175.3
million in 1996 from $177.2 million in 1995. The decrease primarily results
from a general reduction in research, development and testing expenses, and
also largely reflects the synergistic benefit of the lubricant additives
acquisition and higher utilization of the Company's research laboratory,
partially offset by higher expenses related to marketing activities for MMT.
Continuing cost controls combined with increased sales have resulted in
selling, general and administrative expenses combined with research,
development and testing expenses as a percentage of sales, decreasing to 15.3%
during 1996 from 18.5% during 1995.
OPERATING PROFIT
Operating profit in 1996 was $169.7 million, an increase of $27.3 million
(19%) from $142.4 million in 1995. Most of the increase resulted from the
profit contribution of the acquired lubricant additives business as well as
the absence of the 1995 special charge provision of $4.75 million for a legal
settlement and certain other nonrecurring 1995 charges. These increases were
offset in part by expected lower operating profit from lead antiknocks, lower
lubricant additives margins in the 1996 period reflecting soft market
conditions, and lower margins reflecting changes to the Company's overall
product mix (reflecting an increase in the extent to which profits come from
lubricant additives and other nonlead fuel additives), as well as an
unfavorable foreign currency variance. Further discussion of the lead
antiknock profit contribution is covered later under the heading "Information
About Significant Product Lines."
INTEREST AND FINANCING EXPENSES
Interest and financing expenses in 1996 decreased 10% to $24.3 million from
$26.8 million in 1995. The $2.5 million decline reflects $7.3 million lower
interest cost from lower average interest rates, as a result of replacing a
$200 million, 9.8% note on September 15, 1995, with lower cost variable-rate
debt and a $1.2 million reduction in other fees. This was mostly offset by
$4.4 million higher interest expense from an increase in average debt
outstanding, reflecting the effect of funds used to finance the lubricant
additives acquisition, and a $1.6 million reduction in interest costs
capitalized in the 1996 period.
OTHER INCOME, NET
Other income, net, decreased to $0.4 million in 1996 from $0.6 million in the
1995 period. The decrease reflects lower interest income on short-term
securities and changes in a number of other nonoperating items, none of which
are material in either period.
INCOME TAXES
Income taxes in 1996 were $52.8 million, an increase of 25% from $42.2 million
in 1995, primarily due to a 25% increase in income before income taxes. The
effective income tax rate was 36.2% in 1996 versus 36.3% in 1995. (See Note 17
of Notes to Financial Statements on page 40 for details of effective income
tax rates.)
1995 COMPARED TO 1994
NET SALES
Net sales for 1995 were $960.5 million, down from $1,174.1 million in 1994.
The reduction in net sales resulted primarily from the absence of Albemarle
sales in 1995 versus two months of Albemarle sales included in 1994.
Net sales for 1995 of $960.5 million were down about $58.5 million (6%)
from PRO FORMA (excluding Albemarle) net sales of $1,019 million in 1994. The
decrease from PRO FORMA net sales primarily reflected the absence of
pharmaceutical sales during 1995 versus $48.7 million of sales in 1994 prior
to the sale of this business on September 15, 1994, as well as $9.8 million
lower sales revenue from the petroleum additives business.
The lower petroleum additives revenues were due to lower shipments ($60.7
million), largely offset by the impact of higher selling prices ($50.8
million). The decrease in shipments reflected lower shipments of antiknocks,
lubricant additives and certain other fuel additives, partly offset by
increased shipments of other refinery fuel additives. Lead antiknock sales
were slightly lower than the prior year, but the effect of lower shipments was
nearly offset by higher selling prices, while sales of certain other fuel
additives were well behind the prior year. Lubricant additives sales were
about even with the prior year, while sales of other refinery fuel additives
improved in 1995 from the prior year.
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COSTS AND EXPENSES
Cost of goods sold in 1995 decreased to $636.1 million from $776.5 million in
1994. The decline in aggregate cost of goods sold occurred primarily because
of the absence of Albemarle costs during 1995 versus the inclusion of two
months of Albemarle cost of goods sold in 1994.
Cost of goods sold in 1995 of $636.1 million was down about $21.3 million
(3%) from 1994 PRO FORMA cost of goods sold of $657.4 million. The decrease
reflected primarily the absence of pharmaceutical cost of sales during 1995
versus about $16.6 million in the 1994 period prior to the sale of this
business, and also about $4.7 million lower petroleum additives business cost
of goods sold. The lower petroleum additives business cost of goods sold
reflects lower shipments ($35.3 million), primarily of antiknocks, lubricant
additives and other fuel additives, largely offset by higher costs ($30.6
million). The higher costs include expenses reflecting the Company's
fourth-quarter 1995 decision to terminate a supply contract early, the costs
associated with the mid-year shutdown of operations at a contract
manufacturing site, costs of a strike at the Feluy plant, and higher per-unit
raw material costs, partly offset by the lower costs associated with starting
up the completed facilities at several plants (about $4.8 million in 1995
versus about $7.7 million in 1994).
Average raw materials costs increased slightly in 1995 over PRO FORMA 1994
due to higher costs of purchased components and to foreign exchange. Average
energy costs were largely unchanged, as lower electricity and steam costs were
substantially offset by higher natural gas prices.
As a result of a 6% decrease in 1995 net sales from 1994 PRO FORMA net
sales and a 3% decrease in 1995 cost of goods sold from 1994 PRO FORMA cost of
goods sold, the gross profit margin decreased to 33.8% in the 1995 period from
35.5% in the 1994 period. However, excluding the impact of the pharmaceuticals
business in 1994, the gross profit margin would have been 34% in the 1994
period.
Selling, general and administrative expenses combined with research,
development and testing expenses decreased to $177.2 million in 1995 from
$227.1 million in 1994. The decline reflects the absence of Albemarle and
pharmaceuticals expenses in 1995 versus their inclusion in 1994.
Selling, general and administrative expenses combined with research,
development and testing expenses in 1995 of $177.2 million were down $26.8
million (13%) from PRO FORMA 1994 expenses of $204 million. The decrease
reflects primarily the absence of expenses of Whitby during 1995 versus about
$31.1 million in expenses during 1994 prior to the sale of the pharmaceuticals
business in September 1994, partially offset by a $4.3 million increase in
petroleum additives expenses. This increase was primarily due to higher
research, development and testing expenses largely related to MMT approval
activities and higher salaries and benefits costs, partly offset by lower
outside consulting costs in 1995 and the 1994 charges related to closing
certain research facilities and certain organizational expenses. As a
percentage of net sales, selling, general and administrative expenses combined
with research, development and testing expenses decreased to 18.5% in 1995
from 20% on a PRO FORMA basis in 1994.
SPECIAL CHARGES
The $4.75 million special charge in 1995 ($4.1 million after income taxes, or
$.04 a share) reflects a provision for a legal settlement by an Ethyl
subsidiary with the civil division of the U.S. Department of Justice. (The
settlement was signed in March 1996.) The $2.7 million of special items in
1994 ($1.7 million after income taxes, or $.01 a share) consists of an $8
million provision for future environmental remediation and $2.7 million of
other nonrecurring charges, largely offset by an $8 million gain on the
settlement of a lawsuit.
OPERATING PROFIT
Operating profit in 1995 was approximately 15% lower than during 1994,
which included two months operating profit of Albemarle. Operating profit in
1995 of $142.4 million was $12.5 million (8%) lower than 1994 PRO FORMA
operating profit of $154.9 million. The decrease resulted from lower shipments
(approximately $25.4 million) partly offset by higher margins in antiknocks.
Lower operating profit in lubricant additives largely reflected lower
shipments and flat margins, while other fuel additives results reflected lower
shipments and lower margins. This was partly offset by higher operating
profits in refinery fuel additives due to higher shipments and margins, while
antiknock operating profit was essentially even with the prior year. Higher
research, development and testing expenses in lubricant and certain fuel
additives also contributed to the lower margins.
19
INTEREST AND FINANCING EXPENSES
Interest and financing expenses in 1995 increased slightly from the
1994 period reflecting a lower amount of interest capitalized substantially
offset by the absence in 1995 of interest included in 1994 for two months on
debt transferred to Albemarle. Interest and financing expenses in 1995 of
$26.8 million increased $4.3 million (19%) over 1994 PRO FORMA interest and
financing expenses of $22.5 million. The increase was primarily due to a lower
amount of interest capitalized in 1995 ($5.7 million) and a higher average
interest rate ($0.6 million), which were partly offset by the impact of a
lower average amount of long-term debt outstanding during the 1995 period ($2
million).
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, was $0.6 million income in 1995 versus $1.2
million in expense in 1994. On a PRO FORMA basis, other expense would have
been $1.8 million in 1994. The $2.4 million increase in other income in 1995
from the 1994 PRO FORMA reflects $0.8 million in additional interest income
from greater amounts invested in short-term securities in 1995 than in the
1994 period, as well as a net increase in income from various nonoperating
items, none of which was individually material.
INCOME TAXES
Income taxes in the 1995 period were $42.2 million, down about 3% from $43.4
million in 1994 on income before income taxes that decreased almost 18% from
the prior year, largely reflecting an increase over the unusually low
effective tax rate in 1994 (36.3% in 1995 versus 30.7% in 1994). Income taxes
in 1995 increased 8% from PRO FORMA income taxes of $39.2 million in 1994, in
spite of an 11% decrease in income before income taxes due to an increase over
the previously mentioned unusually low effective income tax rate in 1994
(36.3% in 1995 versus 30% in 1994). The 1994 effective tax rate was unusually
low, largely reflecting the tax benefit on the sale of Ethyl's pharmaceuticals
subsidiary, Whitby, Inc., which had a higher tax basis than book basis.
INFORMATION ABOUT SIGNIFICANT PRODUCT LINES
Lead antiknock compounds, which are sold worldwide to petroleum refiners,
remain one of the Company's largest product lines. The Company estimates that
it accounts for approximately one-third of the total worldwide sales of lead
antiknock compounds.
Lead antiknock compounds have been subject to regulation restricting the
amount of the product that can be used in motor gasoline. These regulations
began in the United States in the 1970s and have slowly spread to other
countries. Today, the use of lead antiknock compounds for motor gasoline has
been eliminated in the U.S. and Canada though use in certain other
applications continues in these countries. As the Company has forecast and
planned, the market for lead antiknock compounds continues to decline as the
use of unleaded gasoline grows and regulations limit use in leaded gasoline.
On a consolidated basis, including prior year operations of spun-off
businesses of Albemarle for the two months in 1994 while they were part of
Ethyl, the contribution of lead antiknock compounds to the Company's net sales
was about 20% in 1996, 26% in 1995 and 22% in 1994. On the same basis, the
lead antiknock profit contribution to the Company's consolidated operating
profit, excluding allocation of corporate expenses, is estimated to have been
approximately 59% in 1996, 74% in 1995 and 56% in 1994.
In recent years, the Company generally has been able to largely offset a
continuing decline in shipments of lead antiknock compounds with higher
margins due primarily to increases in selling prices, although in 1996 the
increases in selling prices were not enough to offset the effect of decreased
shipments. Further decline in the use of lead antiknocks will adversely affect
such sales and profit contributions unless the Company can offset such
declines with increased margins.
The Company has an agreement with The Associated Octel Company Limited
("Octel") of London, England, under which Octel allocates a portion of its
production capacity of lead antiknock compounds to the Company for sale and
distribution through the Company's worldwide network, and as a result, the
Company has discontinued production of lead antiknock compounds. The Company
had previously produced some of its lead antiknock compounds at its
subsidiary's Canadian plant, and prior to July 1994, the Company obtained
additional quantities under a supply agreement with E.I. DuPont de Nemours &
Company. The Octel agreement continues as long as the Company determines that
a market continues to exist for lead antiknock compounds. Under the agreement
with Octel, which is cancelable at the Company's option with no minimum
purchase obligations, the Company has the right to purchase from Octel
antiknock compounds which the Company estimates will be sufficient to cover
its needs in any contract year. Purchases are at a fixed price per pound with
periodic escalations and adjustments.
20
In addition to the supply agreement, Octel and the Company have agreed that
Ethyl will distribute for Octel any of its lead antiknock compounds that are
shipped in bulk in ocean-going vessels.
The Company believes the agreements with Octel will assure the Company of
an ongoing efficient source of supply for lead antiknock compounds as the
worldwide demand for these products continues to decline. The absence of
antiknock manufacturing operations and the entry into the Octel supply
agreement has not adversely affected its relations with its customers, and the
Company does not anticipate these changes will have a material effect on its
future results of operations. The Company and Octel continue to compete
vigorously in sales and marketing of lead antiknock compounds.
The Company also sells manganese-based antiknock compounds, HITEC (R) 3000
performance additive ("MMT"), which are used in leaded and conventional
unleaded gasoline. The compounds are manufactured by Albemarle under a
long-term supply contract with Ethyl. MMT has been used in Canadian unleaded
gasoline for nearly 21 years.
On October 20, 1995, the United States Court of Appeals for the District of
Columbia Circuit unanimously ordered the EPA to register MMT for use in
conventional unleaded gasoline retroactively to November 30, 1993, the date on
which the EPA determined that Ethyl's waiver application satisfied all
applicable Clean Air Act standards. In addition, the Court confirmed during
the proceedings that if the EPA continues to have health concerns with
reference to the product, the Clean Air Act provides adequate provisions in
which to address these issues. This decision eliminated the last legal hurdle
to commercial introduction of the product in the U.S.
Accordingly, in late December 1995, Ethyl began the sale of MMT to the U.S.
refining industry. Sales of MMT increased in 1996, but it is not practical to
determine with certainty the degree to which sales of MMT may increase in 1997
or future years in the U.S. or other countries.
On February 15, 1996, the Environmental Defense Fund ("EDF") initiated a
campaign, using distortions and half-truths, to try to prevent refiners from
using MMT in the U.S. The Company will continue to aggressively defend MMT
against this or any similar campaign which attempts to handicap the marketing
of this product.
In Canada, legislation was introduced in May 1995 in the Canadian
Parliament to restrict the interprovincial transport of MMT in Canada as well
as the import of MMT into Canada. When Parliament adjourned in mid-December
1995, the legislation had not passed the House of Commons. In April 1996 the
legislation was reintroduced, and it passed the House of Commons in December
1996. It was introduced into the Senate in December 1996, and it remains
pending before the Senate.
On September 10, 1996, the Company served notice of intent on the Canadian
government that the Company intends to file a claim against the Canadian
government for damages under an arbitration provision of the North American
Free Trade Agreement ("NAFTA"). The NAFTA allows a company to bring before an
arbitration panel claims against NAFTA governments for alleged violations of
their obligations toward foreign investors covered by the Treaty. The
Company's management contends the proposed legislation violates Canada's
obligations relating to the national treatment, performance and expropriation
provisions of the NAFTA which would cause a significant impact on the
Company's investment in Ethyl Canada, the Toronto-based subsidiary of Ethyl.
The Company continues to monitor the situation in Canada and to review its
options.
FINANCIAL CONDITION AND LIQUIDITY
CASH AND CASH EQUIVALENTS
Cash provided from operating activities grew to $185.2 million in 1996, an
increase of about 24% from $149.3 million in 1995. The Company's strong cash
flows were more than sufficient to cover operating activities during 1996.
Cash flows from 1996 operating activities of $185.2 million, supplemented by
$9.9 million from cash on hand and additional long-term debt of only $29
million under the revolving credit agreement, were used to finance the
acquisition of the worldwide lubricant additives business from Texaco in
February for a purchase price of $134.3 million, as well as to cover capital
expenditures of $29.4 million and cash dividends to shareholders of $59.2
million. Therefore, excluding the additional debt used to fund the Texaco
additives acquisition, Ethyl's strong cash flows enabled the Company to reduce
long-term debt by about $105.3 million in 1996.
Cash and cash equivalents at December 31, 1996, were about $20.1 million,
which represents a decrease of about $9.9 million from $30.0 million at
year-end 1995, which itself represented a decrease of about $1.2 million from
$31.2 million at year-end 1994.
21
Cash flows from 1995 operating activities of $149.3 million, supplemented
by $1.2 million from cash on hand, were used primarily to provide funds for
capital expenditures of $44.8 million, to pay cash dividends to shareholders
totalling $59.2 million and to reduce long-term debt by $47 million.
Management anticipates that the strong cash flow provided from operations
in the future will be sufficient to cover the Company's operating expenses,
service debt obligations (including reducing long-term debt), make dividend
payments to shareholders and take advantage of other opportunities.
LONG-TERM DEBT
The noncurrent portion of Ethyl's long-term debt amounted to $325.5 million at
December 31, 1996, compared to about $303.0 million at December 31, 1995. The
Company also has a contingent note associated with the acquisition of the
worldwide lubricant additives business of Texaco of up to $60 million. The
actual amount due on the contingent note will be determined using an agreed
upon formula based on volumes of certain acquired product lines shipped during
calendar years 1996 through 1998. The Company's long-term debt as a percent of
total capitalization was 42.5% at December 31, 1996, excluding the effect of
the contingent note, unchanged from 42.5% at December 31, 1995. The Company
targets a range of 30% to 50% for its long-term debt ratio, and currently
intends to continue to utilize its strong cash flows to reduce long-term debt
outstanding.
The Company's capital spending program over the next three to five years is
expected to be higher than in 1996. Capital spending for environmental and
safety projects on nonplant expansion and replacement related construction
will likely increase from current levels, largely reflecting the acquisition
of the lubricant additives business from Texaco and the related plant
rationalization plans. The capital spending will be financed primarily with
cash provided from operations. Proceeds from occasional sales of business
units or plant sites normally are used to repay long-term debt.
Ethyl's current interest in acquisitions is primarily within the petroleum
additives industry, such as the recent acquisition of Texaco's worldwide
lubricant additives business. Acquisitions are normally for cash, and are
normally funded through internal and external sources, including the use of
existing credit lines and long-term debt. The amount and timing of additional
borrowing will depend on the Company's cash requirements. (See Note 11 of
Notes to Financial Statements on page 35 for information on unused lines of
credit.)
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local requirements regulating the
handling, manufacture and use of materials (some of which may be classified as
hazardous or toxic by one or more regulatory agencies), the discharge of
materials into the environment and the protection of the environment. It is
the Company's policy to comply with these requirements and to provide
workplaces that are safe, healthful and environmentally sound for employees
and that will not adversely affect the safety, health or environment of
communities in which Ethyl does business. The Company believes that as a
general matter, its policies, practices and procedures are properly designed
to prevent any unreasonable risk of environmental damage, and of resulting
financial liability, in connection with its business.
To the best of the Company's knowledge, Ethyl currently is complying with,
and expects to continue to comply in every material respect with, all existing
environmental laws, regulations, statutes and ordinances, including the Clean
Air Act Amendment of 1990, even though compliance with government
pollution-abatement and safety regulations usually increases operating costs
and requires remediation costs and investment of capital that, in some cases,
produces no monetary return. Such compliance with federal, state, local and
foreign environmental protection laws has not in the past had, and is not
expected to have in the future, a material effect upon the Company's financial
position.
Consolidated environmental operating and remediation costs charged to
expense were approximately $18 million in 1996, $20 million in 1995 and $31
million in 1994 (excluding depreciation of previous capital expenditures).
Excluding the two months Albemarle cost included in 1994, operating and
remediation costs were approximately $24 million (which includes the $8
million environmental special charge) in 1994.
Environmental operating and remediation costs are expected to be somewhat
higher in the next few years than in 1996. The ongoing cost of operations was
about $15 million in 1996, while 1995 and 1994 amounted to $14 million and $11
million, respectively, excluding Albemarle in 1994, with the balance
representing remediation and monitoring costs incurred or accrued.
Consolidated capital expenditures for pollution prevention and safety
projects, including such costs that are included in other projects, were
approximately $7 million in 1996 versus $4 million in 1995 and $16 million in
1994. For each of the next few years, capital expenditures for these types of
projects are likely to range from about $3-$5 million.
22
Management's estimates of the effects of compliance with governmental
pollution prevention and safety regulations are subject to (1) the possibility
of changes in the applicable statutes and regulations or in judicial or
administrative construction of such statutes and regulations, (2) uncertainty
as to whether anticipated solutions to pollution problems will be successful
or whether additional expenditures may prove necessary and (3) the possibility
that emerging technology will change remediation methods and reduce
remediation and monitoring costs.
Among other environmental requirements, the Company is subject to the
federal Superfund law, and similar state laws, under which the Company may be
designated as a Potentially Responsible Party ("PRP") and may be liable for a
share of the costs associated with cleaning up various hazardous waste sites.
For sites where Ethyl has been named a PRP, in all but two cases, the Company
has been able to demonstrate it is only a de minimis participant (defined as
actual or estimated cost being less than $50,000) or a minor participant
(defined as actual or estimated cost being less than $300,000). Further,
almost all such sites, including the two largest, represent environmental
issues that are quite mature. They have been investigated, studied and, in
many cases, including the two largest, the remediation methodology and the
proportionate shares of each PRP have been established. The financial
viability of the other PRPs is reasonably assured. Therefore, point estimates
for remediation and monitoring costs had been accrued previously, and some or
all of the remediation has been completed. At some sites where remediation is
not complete, including one of the largest, the remediation and monitoring
probably will continue for extended periods of time.
In de minimis PRP matters and in some minor PRP matters, the Company's
policy generally is to negotiate a consent decree and to pay any apportioned
settlement, enabling the Company to be effectively relieved of any further
liability as a PRP, except for remote contingencies.
In PRP matters other than those that are de minimis or minor, the Company's
records indicate that unresolved exposures are not material individually or in
the aggregate to Ethyl's financial position or results of operations.
The Company reviews the status of significant existing or potential
environmental issues, including PRP matters, accrues and expenses its
proportionate share of environmental remediation and monitoring costs in
accordance with FASB Statement No. 5 and FASB Interpretation No. 14, as
clarified by AICPA Statement of Position 96 - 1, and adjusts reserves, as
appropriate, on the basis of additional information. The total gross
liabilities accrued at December 31, 1996 and 1995, were approximately $41.2
million and $41.6 million, respectively, with insurance recoveries expected
for a significant portion of the amounts. In addition, the Company has
contingent liabilities for environmental remediation costs associated with
past operations. Management expects accrued and contingent amounts may be
reduced as emerging technologies are proved to be viable. The Company believes
that the cost of remediation of current sites, which will occur over an
extended period of time, will not have a material adverse impact on its
consolidated financial position but possibly could have a material effect,
when ultimately resolved, on results of operations or liquidity in any
quarterly or annual period.
GEOGRAPHIC INFORMATION
INTRODUCTION TO GEOGRAPHIC INFORMATION
The Company's foreign operations, and the manufacturing facilities and
laboratories supporting them, are in European, Asian and Latin American
countries. The European and Asian countries have stable economies from which
repatriation of earnings has been successful. The Company's operations in
Latin America are conducted primarily in U.S. dollars, except for the
manufacturing operations in Brazil which are conducted in the local currency.
Consequently, there is no expectation that the Company will experience
significant currency exposures. Also, under current governmental regulations,
repatriation of earnings is possible. Sales in other areas are normally paid
for through letters of credit or are prepaid. Customer relationships of all
foreign operations mainly consist of financially viable governmental
organizations and large private companies.
The Company attempts to limit its exposure to fluctuating foreign currency
exchange rates primarily through operational actions. The Company both
manufactures for and purchases from certain foreign companies giving it a cost
basis to offset its revenue exposures in its foreign operations. The foreign
currency exposure risk has historically been relatively low. Since the
Company's practice has been to monitor its exposures and keep them at a
minimum by maintaining foreign currency assets and liabilities in approximate
balance, using external hedging transactions has not been utilized recently.
23
The following table includes the results and accounts of the lubricant
additives business of Texaco Inc. since its acquisition on February 29, 1996,
and the businesses spun off as Albemarle Corporation through the spin-off date
at the close of business on February 28, 1994.
GEOGRAPHIC AREAS
(In Thousands Except Per-Share Amounts)
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Net sales:
Domestic unaffiliated:
United States $ 453,488 $ 361,751 $ 502,427 $ 969,438 $ 829,432
Export 213,869 178,485 217,067 338,944 352,596
Transfers to foreign affiliates 188,621 221,159 210,884 258,966 270,887
Foreign unaffiliated 482,294 420,214 454,592 630,008 510,554
Elimination of transfers (188,621) (221,159) (210,884) (258,966) (270,887)
--------- -------- --------- --------- ---------
Total (a) $1,149,651 $ 960,450 $1,174,086 $1,938,390 $1,692,582
========= ======== ========= ========= =========
Operating profit: (b) (c) (d) (e)
Domestic $ 155,634 $ 134,123 $ 149,847 $ 161,590 $ 174,870
Foreign 38,263 31,947 44,828 42,392 35,068
--------- -------- --------- --------- ---------
Subtotal 193,897 166,070 194,675 203,982 209,938
Unallocated expenses (24,218) (23,641) (26,933) (36,377) (36,116)
--------- -------- --------- --------- ---------
Operating profit 169,679 142,429 167,742 167,605 173,822
Interest and financing expenses (24,268) (26,833) (25,378) (44,085) (62,279)
Gain on sale of 20% of First Colony Corporation - - - - 93,600
Other income (expense), net 361 580 (1,218) 9,987 1,475
Income before income taxes, extraordinary item,
cumulative effect of accounting changes and
--------- -------- --------- --------- ---------
discontinued insurance operations $ 145,772 $ 116,176 $ 141,146 $ 33,507 $ 206,618
========= ======== ========= ========= =========
Identifiable assets:
Domestic $ 698,976 $ 601,854 $ 642,814 $1,250,650 $1,155,860
Foreign 283,500 264,973 265,506 628,830 517,390
Non-operating assets 112,693 116,960 122,095 129,718 205,648
Net assets of discontinued insurance operations - - - - 658,550
--------- -------- --------- --------- ---------
Total $1,095,169 $ 983,787 $1,030,415 $2,009,198 $2,537,448
========= ======== ========= ========= =========
NOTES TO GEOGRAPHIC AREAS TABLE
(a) Net sales to Texaco Inc. and its worldwide subsidiaries and affiliates amounted to about $125,000 in
1996, which represents approximately 11% of net sales. No other customer accounted for over 10% of net
sales for any period presented.
(b) Operating profit for 1995 includes a net charge of $4,750 ($4,150 after income taxes) for a legal
settlement provision.
(c) Operating profit for 1994 includes a net charge of $2,720 ($1,690 after income taxes), including a
fourth-quarter environmental remediation provision of $8,000, as well as certain other charges largely
offset by an $8,000 benefit from a fourth-quarter legal settlement.
(d) Operating profit for 1993 includes special charges totalling $36,150 ($22,400 after income taxes) for the
write-down of the Canadian subsidiary's plant and other costs of $14,200, costs of a work-force-reduction
program in the U.S. and Europe amounting to $7,635 and $14,315 for downsizing costs of Whitby Research,
Inc., and relocation of employees and other related costs.
(e) Operating profit for 1992 includes a special charge of $9,500 ($6,000 after income taxes) for expenses
covering the 1994 relocation of the Petroleum Additives Division's research and development personnel
from St. Louis, Missouri, to Richmond, Virginia.
24
DISCUSSION AND ANALYSIS OF GEOGRAPHIC INFORMATION
Domestic operating profit includes profit from U.S. export sales and profit
from sales to foreign affiliates of products that are resold in foreign
markets. Intercompany transfers from foreign areas to the United States are
not material. Transfers between geographic areas are made at prices intended
to reflect arm's-length pricing.
Net unaffiliated sales of foreign subsidiaries are made primarily in
Europe, Canada and the Far East, and through 1995, the Middle East.
Net unaffiliated sales of foreign subsidiaries of $482.3 million for 1996
increased 15% from $420.2 million for 1995, primarily due to sales of products
manufactured by the subsidiaries of the recently acquired lubricant additives
business of Texaco in Europe, Latin America and the Far East, partly offset by
lower sales of lead antiknocks, primarily to Latin America and the Middle East.
Net unaffiliated sales of foreign subsidiaries for 1995 decreased 8% from
1994, primarily reflecting inclusion of two months of Albemarle sales in 1994.
Net unaffiliated sales of foreign subsidiaries of $420.2 million in 1995 were
about 2% higher than PRO FORMA sales of $413.4 million in 1994. The increase
was due to higher shipments of lubricant additives from the European
subsidiaries to Europe and the Middle East, largely offset by lower shipments
of lead antiknocks from Ethyl's Canadian subsidiary, following the
discontinuance of lead antiknock production at the Canadian lead antiknock
facility in early 1994.
Export sales from the United States to non-affiliates are made primarily to
Latin America, the Middle East, the Far East and Europe.
Export sales of $213.9 million in 1996 increased 20% from 1995 export sales
of $178.5 million, primarily reflecting the sales to the Far East and Latin
America associated with the acquired lubricant additives business. Lower sales
of antiknocks to Latin America were offset by higher sales to the Middle East
and the Far East.
Export sales decreased 18% in 1995 from 1994, primarily reflecting the
inclusion of two months of Albemarle export sales in 1994, as well as lower
petroleum additives sales. Export sales of $178.5 million in 1995 decreased 7%
from PRO FORMA export sales of $191.5 million in 1994, due to lower shipments
of lubricant and fuel additives, primarily to the Far East.
Foreign operating profit of $38.3 million for 1996 increased 20% from $31.9
million for 1995, primarily due to the profit contributed by the recently
acquired lubricant additives business, mainly from business in Europe and
Latin America, partially offset by foreign exchange losses in 1996 versus
foreign exchange gains in 1995.
Foreign operating profit for 1995 decreased 29% from $44.8 million for
1994, reflecting lower operating profit from Ethyl's Canadian subsidiary
following the discontinuance of lead antiknock production and lower operating
profit from Ethyl's European subsidiaries, mainly due to lower operating
margins. These were partially offset by the inclusion of two months of
operating losses of Albemarle's foreign subsidiaries in 1994. Foreign
operating profit in 1995 of $31.9 million was about 32% lower than PRO FORMA
foreign operating profit of $47.2 million in 1994. The reduction was due to
lower operating profit from Ethyl's Canadian and European subsidiaries, mainly
due to lower margins.
Total assets were $1,095.2 million at the end of 1996 which was an increase
of $111.4 million (11%) from the $983.8 million at the end of 1995. Most of
the increase was due to accounts receivable, inventory, property, plant and
equipment and intangible assets acquired as part of the worldwide lubricant
additives business purchased from Texaco in early 1996.
Total assets were $983.8 million at the end of 1995 which was a decrease of
$46.6 million (5%) from the $1,030.4 million at the end of 1994. About $43
million of the decrease was due to lower current assets in the U.S.,
reflecting lower accounts receivable partly offset by higher inventory.
25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Introduction to the Consolidated Financial Statements: The Company completed
the acquisition of the worldwide lubricant additives business of Texaco Inc.
on February 29, 1996. The operating results of this business are included in
the Consolidated Financial Statements and related Notes to Financial
Statements from March 1, 1996 forward. At the close of business on February
28, 1994, the Company completed the spin-off of its wholly owned subsidiary,
Albemarle Corporation ("Albemarle"), in the form of a tax-free stock dividend
to Ethyl common shareholders. The operating results of what is now Albemarle
are included in the financial statements for the two months ended February 28,
1994. (See Notes 2 and 3 on pages 32 and 33, respectively.)
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per-Share Amounts) Ethyl Corporation & Subsidiaries
Years ended December 31 1996 1995 1994
Net sales $1,149,651 $960,450 $1,174,086
Cost of goods sold 804,623 636,056 776,508
-------- -------- ----------
Gross profit 345,028 324,394 397,578
Selling, general and administrative expenses 103,626 100,062 144,455
Research, development and testing expenses 71,723 77,153 82,661
Special charges - 4,750 2,720
-------- -------- ----------
Operating profit 169,679 142,429 167,742
Interest and financing expenses 24,268 26,833 25,378
Other (income) expense, net (361) (580) 1,218
-------- -------- ----------
Income before income taxes 145,772 116,176 141,146
Income taxes 52,800 42,213 43,391
-------- -------- ----------
Net income $ 92,972 $ 73,963 $ 97,755
======== ======== ==========
Earnings per share $ .78 $ .62 $ .83
======== ======== ==========
See accompanying notes to financial statements.
26
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars Except Share Data)
- ----------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 20,148 $ 29,972
Accounts receivable, less allowance for doubtful
accounts (1996 - $2,375; 1995 - $2,317) 177,788 169,451
Inventories:
Finished goods and work-in-process 179,322 146,010
Raw materials 21,498 13,285
Stores, supplies and other 9,782 6,587
--------- ---------
210,602 165,882
Deferred income taxes and prepaid expenses 18,627 23,207
--------- ---------
Total current assets 427,165 388,512
--------- ---------
Property, plant and equipment, at cost 764,145 713,635
Less accumulated depreciation and amortization (333,268) (285,327)
--------- ---------
Net property, plant and equipment 430,877 428,308
--------- ---------
Other assets and deferred charges 159,470 151,833
Goodwill and other intangibles - net of amortization 77,657 15,134
--------- ---------
Total assets $1,095,169 $ 983,787
========= =========
See accompanying notes to financial statements.
27
Ethyl Corporation & Subsidiaries
December 31 1996 1995
Liabilities & shareholders' equity
Current liabilities:
Accounts payable $ 74,939 $ 55,903
Accrued expenses 64,167 58,682
Dividends payable 14,806 14,806
Long-term debt, current portion 6,701 -
Income taxes payable 20,298 16,379
--------- --------
Total current liabilities 180,911 145,770
--------- --------
Long-term debt 325,480 302,973
Other noncurrent liabilities 84,502 84,171
Deferred income taxes 64,376 40,745
Shareholders' equity:
Common stock ($1 par value)
Issued - 118,443,835 in 1996 and 1995 118,444 118,444
Additional paid-in capital 2,799 2,799
Foreign currency translation adjustments (1,888) 2,090
Retained earnings 320,545 286,795
--------- --------
439,900 410,128
--------- --------
Total liabilities & shareholders' equity $1,095,169 $ 983,787
========= ========
See accompanying notes to financial statements.
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands of Dollars Except Share Data) Ethyl Corporation & Subsidiaries
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Shares Amounts
- -----------------------------------------------------------------------------------------------------------------
Common stock
(authorized 400,000,000 shares)
Beginning balance 118,443,835 $118,444 118,434,401 $118,434 118,405,287 $118,405
Issued upon exercise of
stock options and SARs - - 9,434 10 75,723 76
Purchased and retired - - - - (46,609) (47)
----------- ------- ----------- ------- ----------- -------
Ending balance 118,443,835 118,444 118,443,835 118,444 118,434,401 118,434
=========== ------- =========== ------- =========== -------
Additional paid-in capital
Beginning balance 2,799 2,706 2,450
Exercise of stock options and SARs - 93 858
Retirement of purchased common stock - - (602)
------- ------- -------
Ending balance 2,799 2,799 2,706
------- ------- -------
Foreign currency translation adjustments
Beginning balance 2,090 (2,253) (1,757)
Translation adjustments (3,978) 4,343 3,647
Spin-off of Albemarle Corporation - - (4,143)
------- ------- -------
Ending balance (1,888) 2,090 (2,253)
------- ------- -------
Retained earnings
Beginning balance 286,795 272,050 633,483
Net income 92,972 73,963 97,755
Cash dividends declared:
First Preferred stock, $6.00 per share - - (12)
Common stock, $.50 per share (59,222) (59,218) (59,215)
Dividend of common stock of
Albemarle Corporation, at book value - - (399,957)
Redemption of 6% First Preferred stock - - (4)
------- ------- -------
Ending balance 320,545 286,795 272,050
------- ------- -------
Total shareholders' equity $439,900 $410,128 $390,937
======= ======= =======
See accompanying notes to financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars) Ethyl Corporation & Subsidiaries
- ---------------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year $ 29,972 $ 31,166 $ 48,201
-------- --------- ----------
Cash flows from operating activities:
Net income 92,972 73,963 97,755
Adjustments to reconcile income to cash flows from operating activities:
Depreciation and amortization 61,919 49,224 53,983
Special charges - 4,750 10,720
Gain on sale of subsidiary - - (4,150)
Deferred income taxes 7,860 15,714 10,262
Changes in assets and liabilities, net of effects from acquisition:
Decrease (increase) in accounts receivable 18,710 64,771 (29,701)
(Increase) decrease in inventories (1,241) (15,560) 9,166
Decrease (increase) in prepaid expenses 5,239 (2,366) (5,516)
(Decrease) in accounts payable and accrued expenses (78) (37,948) (2,621)
Increase (decrease) in income taxes payable 2,741 (1,208) (6,903)
Other, net (2,884) (2,003) (10,775)
-------- --------- ----------
Cash provided from operating activities 185,238 149,337 122,220
-------- --------- ----------
Cash flows from investing activities:
Capital expenditures (29,403) (44,831) (147,260)
Acquisition of business (net of $1,245 cash acquired) (133,032) - -
Proceeds from sale of subsidiary - - 60,500
Other, net (2,405) 217 (8,234)
-------- --------- ----------
Cash used in investing activities (164,840) (44,614) (94,994)
-------- --------- ----------
Cash flows from financing activities:
Additional long-term debt 29,000 153,000 47,400
Repayment of long-term debt - (200,000) -
Cash dividends paid (59,222) (59,220) (62,184)
Cash and cash equivalents of Albemarle spun off
as a dividend on February 28, 1994 - - (29,332)
Repurchases of capital stock - - (649)
Other, net - 303 504
-------- --------- ----------
Cash used in financing activities (30,222) (105,917) (44,261)
-------- --------- ----------
(Decrease) in cash and cash equivalents (9,824) (1,194) (17,035)
-------- --------- ----------
Cash and cash equivalents at end of year $ 20,148 $ 29,972 $ 31,166
======== ========= ==========
See accompanying notes to financial statements.
30
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts
and operations of Ethyl Corporation and all of its subsidiaries ("the
Company"). All significant intercompany accounts and transactions are
eliminated in consolidation.
BASIS OF PRESENTATION - The Company completed the acquisition of the
worldwide lubricant additives business of Texaco Inc. ("Texaco") on February
29, 1996. The Consolidated Financial Statements and related Notes to Financial
Statements include the results of operation of the Texaco additives business
from March 1, 1996 forward. The balance sheet accounts of this business are
included in the Consolidated Balance Sheet at December 31, 1996. At the close
of business on February 28, 1994, the Company completed the spin-off of its
wholly owned subsidiary, Albemarle Corporation ("Albemarle"), in the form of a
tax-free stock dividend to Ethyl common shareholders. The operating results of
what is now Albemarle are included in the consolidated financial statements
and related Notes to Financial Statements for the two months ended February
28, 1994. Certain amounts in the accompanying financial statements and notes
thereto have been reclassified to conform to the current presentation.
FOREIGN CURRENCY TRANSLATION - The financial statements of all foreign
subsidiaries were prepared in their respective local currencies and translated
into U.S. dollars based on the current exchange rate at the end of the period
for the balance sheet and a weighted-average rate for the period on the
statement of income. Translation adjustments (net of deferred income tax
liability of $56,000 and income tax benefits of $262,000 and $1,481,000 in
1996, 1995 and 1994, respectively), are reflected as foreign currency
translation adjustments in Shareholders' Equity and accordingly have no effect
on net income. Transaction adjustments for all foreign subsidiaries are
included in income.
INVENTORIES - Inventories are stated at the lower of cost or market, with
cost determined on the last-in, first-out (LIFO) basis for substantially all
domestic inventories, and on either the weighted-average cost or first-in,
first-out basis for other inventories. Cost elements included in inventories
are raw materials, direct labor and manufacturing overhead. Raw materials
include purchase and delivery costs. Stores and supplies include purchase
costs.
PROPERTY, PLANT & EQUIPMENT - Accounts include costs of assets constructed
or purchased, related delivery and installation costs and interest capitalized
on significant capital projects during their construction periods.
Expenditures for renewals and betterments also are capitalized, but
expenditures for repairs and maintenance are expensed as incurred. The cost
and accumulated depreciation applicable to assets retired or sold are removed
from the respective accounts, and gains or losses therein are included in
income. Depreciation is computed primarily by the straight-line method based
on the estimated useful lives of the assets.
The Company re-evaluates property, plant and equipment based on fair values
or undiscounted operating cash flows whenever significant events or changes
occur which might impair recovery of recorded costs, and it writes down
recorded costs of the assets to fair value when recorded costs, prior to
impairment, are higher.
ENVIRONMENTAL COMPLIANCE & REMEDIATION - Environmental compliance costs
include the costs of purchasing and/or constructing assets to prevent, limit
and control pollution or to monitor the environmental status at various
locations. These costs are capitalized and depreciated based on estimated
useful lives.
Environmental compliance costs also include maintenance and operating costs
with respect to pollution-prevention-and-control facilities and administrative
costs. Such operating costs are expensed as incurred.
Environmental remediation costs of facilities used in current operations
are generally immaterial and are expensed as incurred. Remediation costs and
post-remediation costs including post-remediation monitoring costs at
facilities or off-plant disposal sites that relate to an existing condition
caused primarily by past operations are accrued as liabilities and expensed
when costs can be reasonably estimated.
GOODWILL & OTHER INTANGIBLES - Goodwill acquired prior to November 1, 1970
($1,652,000) is not being amortized. Goodwill acquired subsequently
($6,559,000 and $8,500,000 at December 31, 1996 and 1995, respectively, net of
accumulated amortization) is being amortized on a straight-line basis, over a
period of ten years. Other intangibles ($69,446,000 and $4,982,000 at December
31, 1996 and 1995, respectively, net of accumulated amortization) are being
amortized on a straight-line basis primarily over periods from four to twenty
years. Amortization of goodwill and other intangibles amounted to $8,676,000
for 1996, $4,504,000 for 1995 and $9,379,000 for 1994. Accumulated
amortization of goodwill and other intangibles was $26,436,000 and $17,760,000
at the end of 1996 and 1995, respectively. The Company re-evaluates goodwill
31
and other intangibles based on fair values or undiscounted operating cash
flows whenever significant events or changes occur which might impair recovery
of recorded costs, and it writes down recorded costs of the assets to fair
value when recorded costs, prior to impairment, are higher.
PENSION PLANS & OTHER POSTEMPLOYMENT BENEFITS - Annual costs of pension
plans are determined actuarially based on Financial Accounting Standards Board
("FASB") Statement No. 87, "Employers' Accounting for Pensions." The policy
of the Company is to fund its U.S. pension plans at amounts not less than the
minimum requirements of the Employee Retirement Income Security Act of 1974.
Annual costs of other postretirement plans are accounted for based on FASB
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." The policy of the Company is to fund its postretirement
health benefits for retirees on a pay-as-you-go basis. Annual costs of other
postemployment plans for employees who leave the Company for reasons other
than retirement are immaterial and are accounted for based on FASB Statement
No. 112, "Employers' Accounting for Postemployment Benefits." The Company's
policy is to fund such benefits on a pay-as-you-go basis.
PROFIT-SHARING & EMPLOYEE SAVINGS PLAN - The Company's employees
participate in defined contribution profit-sharing and employee savings plans,
which are generally available to all full-time and hourly employees. Certain
other employees, who are covered by a collective bargaining agreement, may
participate pursuant to the terms of such bargaining agreement. The plans are
funded with contributions by participants and the Company. The Company has
recorded expenses of $2,952,000, $2,703,000 and $3,321,000 in 1996, 1995 and
1994, respectively, related to these plans.
RESEARCH, DEVELOPMENT & TESTING EXPENSES - Company-sponsored research,
development and testing expenses related to present and future products are
expensed as incurred. Research and development expenses determined in
accordance with FASB Statement No. 2, "Accounting for Research and Development
Costs," were $47.4 million, $54.5 million and $49.7 million in 1996, 1995 and
1994, respectively.
INCOME TAXES - Income taxes are determined based on FASB Statement No. 109,
"Accounting for Income Taxes." Deferred tax liabilities and assets are
recognized for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred tax liabilities
and assets are determined based on differences between financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
DERIVATIVE INSTRUMENTS & HEDGING OF FOREIGN CURRENCY EXPOSURES - The
Company's general practice has been not to make use of derivative financial
instruments or hedging transactions but rather to manage foreign currency
exposure by attempting to maintain assets and liabilities in approximate
balance for each of the major foreign currencies to which the Company has risk
exposure. At December 31, 1996, the Company was not a party to any derivative
financial instruments or hedging transactions.
EARNINGS PER SHARE - Earnings per share is computed after deducting
applicable preferred stock dividends from net income and using the
weighted-average number of shares of common stock and common stock equivalents
outstanding during the year. The numbers of shares used in computing earnings
per share were 118,448,000 in 1996, 118,446,000 in 1995, and 118,451,000 in
1994.
STOCK-BASED COMPENSATION - The Company currently accounts for its
stock-based compensation plans pursuant to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25").
In 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." This standard, which was
effective for the year ended December 31, 1996, allows companies to account
for stock-based compensation plans using a fair-value-based method or continue
measuring compensation expense using the intrinsic value method prescribed in
APB Opinion No. 25. Companies electing to continue using the intrinsic value
method must disclose PRO FORMA net income and earnings per share as if the
fair-value-based method of accounting had been applied. The Company has made
such required disclosures in Note 13 which begins on page 35.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ somewhat from those estimates.
32
2. ACQUISITION OF TEXACO LUBRICANT ADDITIVES BUSINESS
On February 29, 1996, the Company completed the acquisition of the worldwide
lubricant additives business of Texaco Inc., ("Texaco") including
manufacturing and blending facilities (with an allocated value of $27.1
million), identifiable intangibles (with an allocated value of $72.1 million)
and working capital. The acquisition (accounted for under the purchase
method), included a cash payment of $134.3 million, an estimated $6.4 million
for decommissioning and related costs for those acquired facilities that are
being phased out of production and shutdown during 1997, certain liabilities
assumed, and deferred taxes, as well as a future contingent payment of up to
$60 million. The cash payment was financed primarily under the Company's
revolving credit agreement. The payment of up to $60 million will become due
on February 26, 1999, with interest payable on the contingent debt until such
date. The actual amount of the contingent payment and total interest will be
determined using an agreed-upon formula based on volumes of certain acquired
product lines shipped during the calendar years 1996 through 1998, as
specified in the contingent note agreement. Texaco retained substantially all
noncurrent liabilities.
As the Company's 1996 financial statements only include ten months of
operations of the recently acquired lubricant additives business, the
following selected unaudited PRO FORMA information is being provided to
present a summary of the combined results of the Company and the worldwide
lubricant additives business of Texaco as if the acquisition had occurred as
of January 1, 1996 and 1995, giving effect to purchase accounting adjustments.
The PRO FORMA data is for informational purposes only and may not necessarily
reflect the results of operations of Ethyl had the acquired business operated
as part of the Company for the years ended December 31, 1996 and 1995.
(In Thousands Except Per-Share Amounts)
- -----------------------------------------------------------------------------
Year Ended December 31 1996 1995
PRO FORMA PRO FORMA
Historical (unaudited) Historical (unaudited)
- -----------------------------------------------------------------------------
Net sales $1,149,651 $ 1,198,826 $960,450 $1,304,012
Net income $ 92,972 $ 94,504 $ 73,963 $ 86,106
Earnings per share $ .78 $ .80 $ .62 $ .73
- -----------------------------------------------------------------------------
The PRO FORMA amounts reflect the results of operations for the Company, the
acquired business, and the following purchase accounting adjustments for the
periods presented:
- - Elimination of sales and costs of goods sold on
transactions between the Company and Texaco, primarily including certain of
the acquired business' blending and packaging operations pursuant to the
Company's agreement to blend and/or package certain products for Texaco
under a tolling arrangement. The tolling contract calls for the Company to
process, for a fee, products that the Company neither owns nor sells.
- - Depreciation on fixed assets and amortization of intangible assets based on
the purchase price allocation for each period presented.
- - Efficiencies realized in selling, general and administrative expenses, as
well as research, development and testing expenses, based on staffing levels
and the number of activities and research, development and testing and other
procedures actually being integrated into the combined company.
- - Elimination of historical interest expense of the acquired business as well
as the addition of the incremental interest expense on additional revolving
credit debt that would have been incurred to finance the acquisition.
- - Estimated income tax effect on the PRO FORMA adjustments.
33
3. SPIN-OFF OF ALBEMARLE CORPORATION
At the close of business on February 28, 1994, Ethyl completed the
spin-off of its wholly owned subsidiary, Albemarle, in the form of a tax-free
stock dividend. Following the spin-off, Albemarle owned, directly or
indirectly, the olefins and derivatives, bromine chemicals and specialty
chemicals businesses formerly owned directly or indirectly by the Company. One
share of Albemarle common stock was distributed to Ethyl common shareholders
for every two shares of Ethyl common stock held. Following the distribution,
in the opinion of management, expenses of Ethyl would not have differed
materially from the amounts remaining in the Ethyl consolidated financial
statements after eliminating those expenses attributable to Albemarle.
SUPPLEMENTAL PRO FORMA CONDENSED STATEMENTS OF INCOME (UNAUDITED) - As a
result of the aforementioned distribution, the Company believes that the
following PRO FORMA Condensed Statements of Income are important to enable the
reader to obtain a meaningful understanding of the Company's results of
operations for 1994. The PRO FORMA Condensed Statements of Income are for
informational purposes only to illustrate the estimated effects of the
distribution of Albemarle on Ethyl on a stand-alone basis and may not
necessarily reflect what the earnings or results of operations of Ethyl would
have been had Albemarle operated as a separate, independent company.
PRO FORMA CONDENSED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
(In Thousands Except Per-Share Amounts)
- -------------------------------------------------------------------------------
Year Ended December 31, 1994 Historical Adjustments(a) ProForma
- -------------------------------------------------------------------------------
Net sales $1,174,086 $(155,064) $1,019,022
Cost of goods sold 776,508 (119,086) 657,422
--------- -------- ---------
Gross profit 397,578 (35,978) 361,600
Selling, general & administrative expenses 144,455 (14,471) 129,984
Research, development & testing expenses 82,661 (8,662) 73,999
Special charges 2,720 - 2,720
--------- -------- ---------
Operating profit 167,742 (12,845) 154,897
Interest & financing expenses 25,378 (2,873)(b) 22,505
Other expense, net 1,218 543 1,761
--------- -------- ---------
Income before income taxes 141,146 (10,515) 130,631
Income taxes 43,391 (4,239)(c) 39,152
--------- -------- ---------
Net income $ 97,755 $ (6,276) $ 91,479
========= ======== ========
Earnings per share(d) $ .83 $ .78
========= ========
NOTES:
a. To eliminate the historical income and expenses of Albemarle for the period
presented, as if the distribution had occurred on January 1, 1994.
b. To eliminate interest expense that would have been incurred by Albemarle on
debt transferred to Albemarle (as if the distribution had occurred on
January 1, 1994), including debt under the credit facility transferred from
Ethyl. Interest eliminated under the credit facility was computed at the
weighted-average interest rate of 3.8% for the two months ended February
28, 1994, less capitalized interest of $124,000. Interest rates used to
calculate the Albemarle interest eliminated under the credit facility are
those rates that were available to Ethyl under its revolving credit
agreement during the period presented. Such rates were used because, during
management's negotiations to obtain the credit facility, the rates
available to Ethyl and Albemarle on a stand-alone basis were approximately
the same. Management was advised that these rates would have been the same
during the period presented.
c. To record the estimated income tax effect for the pro forma adjustments
described in Notes (a) and (b) for the two months ended February 28, 1994.
d. Historical and PRO FORMA earnings per share, based on net income are
computed after deducting applicable preferred-stock dividends from such
income and using the weighted-average number of shares of common stock and
common-stock equivalents outstanding for the period presented.
34
4. SUPPLEMENTAL CASH-FLOW INFORMATION
Supplemental information for the Consolidated Statements of Cash Flows is as
follows:
(In Thousands)
1996 1995 1994
Cash paid during the year for:
Income taxes $37,409 $ 22,881 $45,513
Interest and financing
expenses(net of capitalization) 24,644 31,390 24,118
Supplemental investing and
financing non-cash transactions:
Dividend of common stock of Albemarle
Corporation at book value - - 399,957
Liabilities assumed in connection with
the acquisition of the Texaco lubricant
additives business (primarily deferred
taxes and working capital liabilities) 63,610 - -
Also see Notes 2 and 3 with respect to acquired and spun-off operations.
5. GEOGRAPHIC AREAS
The geographic areas table on page 23 (and the related introduction and
notes on pages 22 and 23) is an integral part of the consolidated financial
statements. Information about the Company's geographic areas, as well as major
customers, is presented for the years 1992-1996. The discussion of geographic
areas information for the years 1994-1996 on page 24 is unaudited.
6. CASH & CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
(In Thousands)
1996 1995
------- -------
Cash and time deposits $13,894 $21,167
Short-term securities 6,254 8,805
------- -------
Total $20,148 $29,972
======= =======
Short-term securities (generally commercial paper maturing in less than 90
days) are stated at cost plus accrued income, which approximates market value.
7. INVENTORIES
Domestic inventories stated on the LIFO basis amounted to $103,521,000 and
$58,750,000 at December 31, 1996 and 1995, respectively, which are below
replacement cost by approximately $16,875,000 and $20,310,000, respectively.
8. DEFERRED INCOME TAXES & PREPAID EXPENSES
Deferred income taxes and prepaid expenses consist of the following:
(In Thousands)
1996 1995
------- -------
Deferred income taxes - current $15,907 $15,499
Prepaid expenses 2,720 7,708
------- -------
Total $18,627 $23,207
======= =======
9. PROPERTY, PLANT & EQUIPMENT, AT COST
Property, plant and equipment, at cost, consist of the following:
(In Thousands)
1996 1995
------- -------
Land $ 54,646 $ 49,346
Land improvements 30,565 29,516
Buildings 100,881 94,270
Machinery and equipment 548,178 489,511
Capitalized interest 21,638 21,004
Construction in progress 8,237 29,988
------- -------
Total $764,145 $713,635
======= =======
The cost of the property, plant and equipment is depreciated, generally by
the straight-line method, over the following useful lives:
Land improvements 5-30 years
Buildings 10-40 years
Machinery and equipment 3-25 years
Interest capitalized on significant capital projects in 1996, 1995 and 1994
was $634,000, $2,223,000 and $8,060,000, respectively, while amortization of
capitalized interest (which is included in depreciation expense) was
$1,864,000, $1,878,000, and $1,294,000, respectively.
35
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
(In Thousands)
1996 1995
Employee benefits, payroll and related taxes $ 15,356 $ 13,078
Other 48,811 45,604
-------- --------
Total $ 64,167 $ 58,682
======== ========
11. LONG-TERM DEBT
A summary of long-term debt maturities at December 31, 1996, is listed
below:
(In Thousands)
Variable-
Variable- Rate
Rate Medium-
Bank Term
Loans Notes Total
1997 $ 6,750 $ 6,750
1998 6,750 6,750
1999 $ 9,000 6,750 15,750
2000 290,000 6,750 296,750
2001 6,750 6,750
-------- -------- --------
$299,000 $ 33,750 332,750
======== ========
Less unamortized discount (569)
--------
Total long-term debt at December 31, 1996 332,181
Less amount maturing during 1997
(net of unamortized discount) 6,701
--------
Amount maturing after 1997 $325,480
========
The Company has an unsecured competitive advance and revolving credit
facility agreement with a group of banks permitting it to borrow up to $500
million. Fees of up to 3/8 of 1% per annum are assessed on the unused portion
of the commitment. The credit facility permits borrowing for the next three
years at various interest rate options. The facility contains a number of
covenants, representations and events of default typical of a credit facility
agreement of this size and nature, including financial covenants requiring the
Company to maintain consolidated indebtedness (as defined) of not more than
60% of the sum of shareholders' equity (as defined) and consolidated
indebtedness and maintenance of minimum shareholders' equity of at least $250
million. The Company was in compliance with such covenants at December 31,
1996. Under this agreement, $290 million was borrowed at December 31, 1996.
Amounts outstanding at February 16, 2000, mature on that date. Average
interest rates on variable-rate bank loans during 1996 and 1995 were 5.9% and
6.4%, respectively.
The Company also has four uncommitted agreements with banks providing for
immediate borrowings up to a maximum of $155 million at the individual bank's
money-market rate. No amounts were borrowed under these agreements at December
31, 1996. The average interest rates on borrowings during 1996 and 1995 under
these agreements were 5.6% and 6.1%, respectively.
The Company also has a $9 million variable-rate LIBOR based loan with
NationsBank, N.A. which is due February 27, 1999. The current interest rate is
determined every 90 days. The agreement contains a number of convenants,
representations and events of default typical of a loan of this nature. The
average interest rate was 5.76% during 1996.
The Company's $33.75-million variable-rate (ranging from 8.6% to 8.86%)
Medium-Term Notes were issued in five series (1 through 5) of $6.75 million
each, which are due annually in serial order at 100% of their principal
amount, beginning December 15, 1997, through December 15, 2001.
12. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities consist of the following:
(In Thousands)
1996 1995
Provision for environmental remediation
and future shutdown costs $50,954 $52,511
Other 33,548 31,660
------- -------
Total $84,502 $84,171
======= =======
13. CAPITAL STOCK & STOCK OPTIONS
SHAREHOLDER RIGHTS PLAN - Pursuant to a Rights Agreement dated September 24,
1987, the Company distributed one Preferred Stock, Series B purchase right
("Right") for each outstanding share of Common Stock to the shareholders of
record on October 5, 1987. Unless the Board of Directors directs otherwise,
one additional Right will be issued with respect to each additional share of
Common Stock issued prior to the occurrence of certain potential
change-in-control events. The Rights become exercisable upon certain potential
change-in-control events. When exercisable, the Rights entitle holders to
purchase 2.522 one-thousandth of a share (subject to adjustment) of Preferred
Stock, Series B, and upon the occurrence of certain events, the Rights entitle
holders to purchase shares of Common Stock at a substantial discount. Exercise
of the Rights will cause substantial dilution to a person or group attempting
36
to acquire control of the Company without the approval of the Board of
Directors. The Board of Directors may, under certain circumstances, cause the
Company to redeem the Rights in whole, but not in part, at a price of $.01 per
Right. The Rights expire on September 24, 1997, if not redeemed earlier. The
Rights have no voting or dividend privileges. Until such time as the Rights
become exercisable, they are attached to and do not trade separately from the
Common Stock.
REDEEMABLE PREFERRED STOCK - The Cumulative First Preferred 6% Series A
stock of 2,002 shares, which was previously outstanding, was called for
redemption in December 1994 at $101 per share, plus accrued dividends.
STOCK OPTION PLAN - The Company has an incentive stock option plan, whereby
incentive stock options and nonqualifying stock options may be granted to
officers and other key employees to purchase a specified number of shares of
common stock at an exercise price not less than the fair market value on the
date of grant and for a term not to exceed 10 years. Certain options become
exercisable upon the attainment of specified earnings objectives or market
price appreciation of the Company's common stock. The remaining options become
exercisable one year after the grant date. In addition to the stock options,
the recipient may also be granted a stock appreciation right ("SAR"). To date,
SARs generally have been granted for the same number of shares subject to
related options.
During 1994, the Board of Directors of the Company unanimously adopted and
the shareholders approved an amendment to the Company's incentive stock option
plan increasing the number of shares issuable under the option plan by
5,900,000 to 11,900,000 and establishing an annual limit of 200,000 on the
number of shares for which options may be granted to an individual. At
December 31, 1996 and 1995, 5,964,925 and 6,156,014 shares, respectively, were
available for grant.
A summary of the status of the Company's stock option plan as of December
31, 1994, 1995, and 1996, and changes during the years ending on those dates
is presented below:
Weighted-
Average
Exercise
Shares Price
- ----------------------------------------------------------------------------
Outstanding at January 1, 1994 607,613 $17.24
Granted 3,042,000 12.50
Adjustment for Albemarle Spin-off 168,650 11.56
Exercised (73,475) 12.29
Surrendered upon exercise of SARs (48,402) 12.17
Lapsed (413,112) 15.20
---------
Outstanding at December 31, 1994 3,283,274 12.40
Exercised (9,434) 10.85
---------
Outstanding at December 31, 1995 3,273,840 12.40
Granted 280,000 8.88
Lapsed (88,911) 12.73
---------
Outstanding at December 31, 1996 3,464,929 12.11
=========
Exercisable at:
December 31, 1994 241,274
December 31, 1995 944,240
December 31, 1996 895,329
The fair value, as of the grant date, of each option granted in 1996 was
estimated using a Black-Scholes type option-pricing model, as prescribed by
FASB Statement No. 123. The following assumptions were used for valuing the
options granted in 1996:
Dividend yield 4.6%
Expected volatility 19.4%
Risk-free interest rate 6.3%
Expected life 7 years
Based on these assumptions, the stock options granted in 1996 have an
estimated average value, as of the grant date, of $1.63 per share.
Had compensation cost for the Company stock option plan been determined
based on the fair value at the grant date consistent with the fair value
method prescribed by FASB Statement No. 123, the Company's 1996 net income
would have been reduced on a PRO FORMA basis from $92,972,000 to $92,881,000.
Earnings per share would have been unchanged at $.78.
However, the Company continues to apply APB Opinion No. 25 and related
interpretations in accounting for the stock option plan. Accordingly, no
compensation cost has been recognized for the stock option plan.
37
The following tables summarize information about the stock options outstanding
or exercisable at December 31, 1996:
Options Outstanding
- -----------------------------------------------------
Range of Number Weighted-Average
Exercise Outstanding Remaining Exercise
Prices at 12/31/96 Contractual Life Price
- -----------------------------------------------------
$8.88 280,000 9.9 years $ 8.88
9.00 - 9.86 59,681 3.1 9.59
11.22 - 11.71 201,328 3.9 11.51
12.50 - 12.83 2,909,270 7.2 12.51
14.11 14,650 1.0 14.11
---------
8.88 - 14.11 3,464,929 7.1 12.11
=========
Options Exercisable
------------------------------------------------
Range of Number
Exercise Exercisable Weighted-Average
Prices at 12/31/96 Exercise Price
------------------------------------------------
$ 8.88 - $ 8.88
9.00 - 9.86 59,681 9.59
11.22 - 11.71 201,328 11.51
12.50 - 12.83 619,670 12.53
14.11 14,650 14.11
-------
8.88 - 14.11 895,329 12.13
=======
14. LOSSES AND GAINS ON FOREIGN CURRENCY
Foreign currency transaction adjustments resulted in a loss of $3,158,000
in 1996 and gains of $1,827,000 in 1995 and $1,968,000 in 1994 and are
included in income.
15. CONTRACTUAL COMMITMENTS & CONTINGENCIES
Rental expense was $17,126,000 for 1996, $13,703,000 for 1995 and
$17,120,000 for 1994.
The Company has a number of operating lease agreements primarily for
office space, transportation equipment and storage facilities.
Future lease payments for the next five years for all noncancelable leases
as of December 31, 1996, are $8,891,000 for 1997, $4,343,000 for 1998,
$2,270,000 for 1999, $1,334,000 for 2000, $721,000 for 2001, and amounts
payable after 2001 are $2,613,000.
Contractual obligations for plant construction and purchases of real
property and equipment amounted to approximately $2,900,000 at December 31,
1996.
The Company and Albemarle entered into agreements, dated as of February
28, 1994, pursuant to which the Company and Albemarle agreed to coordinate
certain facilities and services of adjacent operating sites at plants in
Orangeburg, South Carolina; Houston, Texas; and Feluy, Belgium. On March 1,
1996, certain of the agreements were transferred to Amoco Chemical Company as
part of Albemarle's sale of a portion of its business. In addition, the
Company and Albemarle entered into agreements providing for the blending by
Albemarle of Ethyl's additive products and the production of antioxidants and
manganese-based antiknock compounds at the Orangeburg plant. Ethyl was billed
approximately $34 million in 1996 and $48 million during both 1995 and 1994 in
connection with these agreements. Also, as discussed in prior years, the
Company and Albemarle entered into a tax sharing agreement and an
indemnification agreement, which together allocate taxes and various
indemnifications, respectively, for periods prior to February 28, 1994.
The Company is from time to time subject to routine litigation incidental
to its business. The Company is not a party to any pending litigation
proceedings that are expected to have a materially adverse effect on the
Company's results of operations or financial condition. Further, no additional
disclosures are required in conformity with FASB Statement No. 5, "Accounting
for Contingencies," due to immateriality.
At December 31, 1996 and 1995, the Company had accruals of $41,200,000 and
$41,600,000, respectively, for environmental liabilities. In developing its
estimates of environmental remediation and monitoring costs, the Company
considers, among other things, risk-based assessments of the contamination,
currently available technological solutions, alternative cleanup methods, and
prior Company experience in remediation of contaminated sites, all of which
are based on presently enacted laws and regulations. Amounts accrued do not
take into consideration claims for recoveries from insurance. Although studies
have not been completed for certain sites, some amounts generally are
estimated to be expended over extended periods. When specific amounts within a
range cannot be determined, the Company has accrued the minimum amount in that
range.
Environmental exposures are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of regulations,
lack of reliable data, multiplicity of possible solutions, and length of time.
As the scope of the Company's environmental contingencies becomes more clearly
defined, it is possible that expenditures in excess of those amounts already
accrued may be necessary. However, management believes that these overall
costs are expected to be incurred over an extended period of time and, as a
result, such contingencies are not expected to have a material impact on the
consolidated financial position or liquidity of the Company, but they could
have a material adverse effect on the Company's results of operations in any
given future quarterly or annual period.
The Company has agreed to a contingent note payable of up to $60 million as
part of the acquisition of the lubricant additives business of Texaco Inc. See
Note 2 on page 32 for additional information.
38
16. PENSION PLANS & OTHER POSTRETIREMENT BENEFITS
U.S. PENSION PLANS - The Company has noncontributory defined benefit
pension plans covering most U.S. employees. The benefits for these plans are
based primarily on years of service and employees' compensation. The Company's
funding policy complies with the requirements of federal law and regulations.
Plan assets consist principally of common stock, U.S. government and corporate
obligations and group annuity contracts. The pension information for all
periods includes amounts related to the Company's salaried and hourly plans.
Some of the changes from 1994 to 1995 in the following tables reflect the
effects of the spin-off of Albemarle at the close of business on February 28,
1994. The impact from the related hourly plans and a portion of the salaried
plan identified with employees who were transferred to Albemarle is included
for the two months of 1994.
The components of U.S. net pension income are as follows:
(In Thousands)
Years ended December 31 1996 1995 1994
------- ------- -------
Return on plan assets:
Actual return $ 67,490 $ 48,411 $ 32,018
Actual return (higher)
lower than expected (35,451) (17,612) 3,256
------- ------- -------
Expected return 32,039 30,799 35,274
Amortization of transition asset 4,277 4,277 4,730
Service cost (benefits earned
during the year) (4,210) (2,821) (5,462)
Interest cost on projected
benefit obligation (21,428) (22,753) (24,122)
Amortization of prior
service costs (2,816) (2,683) (2,958)
------- ------- -------
Net pension income $ 7,862 $ 6,819 $ 7,462
======= ======= =======
Amortization of the transition asset is based on the amount determined at
the date of adoption of FASB Statement No. 87.
Net pension income and plan obligations are calculated using assumptions of
estimated discount and interest rates and rates of projected increases in
compensation. The discount rate on projected benefit obligations was assumed
to be 7.0% at December 31, 1996 and 1995, and 8.25% at December 31, 1994. The
assumed interest rate at the beginning of each year is the same as the
discount rate at the end of each prior year. The rates of projected
compensation increase were assumed to be primarily 4.5% at December 31, 1996,
1995 and 1994. The expected long-term rate of return on plan assets was
assumed to be 9% each year. Net pension income (table at left) is determined
using assumptions as of the beginning of each year. Funded status (table
below) is determined using assumptions as of the end of each year.
The following table presents a reconciliation of the funded status of the
U.S. pension plans to prepaid pension expense, which is included in "Other
assets and deferred charges":
(In Thousands)
Years ended December 31 1996 1995
Plan assets at fair value $426,671 $387,484
Less actuarial present value of
benefit obligations:
Accumulated benefit obligation
(including vested benefits of
$293,134 and $298,293, respectively) 297,031 302,079
Projected compensation increase 20,394 18,015
------- -------
Projected benefit obligation 317,425 320,094
------- -------
Plan assets in excess of projected
benefit obligation 109,246 67,390
Unrecognized net (gain) loss (34,142) 1,609
Unrecognized transition asset being
amortized principally over 16 years (22,307) (26,584)
Unrecognized prior-service costs
being amortized 21,069 22,897
------- -------
Prepaid pension expense $ 73,866 $ 65,312
======= =======
One of the Company's U.S. pension plans is the supplemental executive
retirement plan ("SERP"), which is an unfunded defined benefit plan. The
actuarial present value of accumulated benefit obligations related to the
Company's SERP totalled $12,451,000 and $11,999,000 at December 31, 1996 and
1995, respectively. The prepaid pension expense asset in the table above is
net of an accrued pension expense liability of $11,164,000 and $10,443,000
related to the SERP at December 31, 1996 and 1995, respectively. Pension
expense for the SERP totalled $1,410,000, $1,456,000 and $1,459,000 for 1996,
1995 and 1994, respectively.
39
FOREIGN PENSION PLANS - Pension coverage for employees of the Company's
foreign subsidiaries is provided through separate plans. Obligations under
such plans are systematically provided for by depositing funds with trustees
or under insurance policies. Pension cost for 1996, 1995 and 1994 for these
plans was $1,681,000, $1,195,000 and $3,317,000, respectively. The actuarial
present value of accumulated benefits at December 31, 1996 and 1995, was
$25,527,000 and $15,570,000, substantially all of which was vested, compared
with net assets available for benefits of $23,717,000 and $18,811,000,
respectively.
CONSOLIDATED - Consolidated net pension income for 1996, 1995 and 1994 was
$6,181,000, $5,624,000 and $4,145,000, respectively.
OTHER POSTRETIREMENT BENEFITS - The Company also provides postretirement
medical benefits and life insurance for certain groups of retired employees
which it accounts for based on FASB Statement No. 106.
The Company continues to fund medical and life insurance benefit costs
principally on a pay-as-you-go basis. Although the availability of medical
coverage after retirement varies for different groups of employees, the
majority of employees who retire from the Company before becoming eligible for
Medicare can continue group coverage by paying the full cost of a composite
monthly premium designed to cover the claims incurred by active and retired
employees. The availability of group coverage for Medicare-eligible retirees
also varies by employee group with coverage designed either to supplement or
coordinate with Medicare. Retirees generally pay a portion of the cost of the
coverage. The components of net periodic postretirement benefit cost are as
follows:
(In Thousands)
Years ended December 31 1996 1995 1994
------ ------ -------
Service cost (benefits attributed to
employee service during the year) $ (932) $ (720) $ (1,789)
Interest cost on accumulated
postretirement benefit obligation (3,424) (3,654) (4,419)
Amortization of prior service cost 28 72 -
Actual return on plan assets 2,286 2,309 2,101
------ ------ -------
Net periodic postretirement
benefit cost $(2,042) $(1,993) $ (4,107)
====== ====== =======
Summary information on the Company's plans is as follows:
(In Thousands)
Years ended December 31 1996 1995
-------- --------
Accumulated postretirement benefit
obligation (APBO) for:
Retirees $ 39,564 $ 40,277
Fully eligible, active plan participants 2,463 2,669
Other active plan participants 9,513 10,163
-------- --------
51,540 53,109
Plan assets at fair value (26,663) (25,615)
Unrecognized prior service cost 307 863
Unrecognized net gain (loss) 3,367 (270)
-------- --------
Accrued postretirement benefit cost $ 28,551 $ 28,087
======== ========
Plan assets are held under an insurance contract and reserved for retiree
life-insurance benefits.
The discount rate used in determining the APBO was 7.0% at December 31,
1996 and 1995, and 8.25% at December 31, 1994. The expected long-term rate of
return on plan assets used in determining the net periodic postretirement
benefit cost was 9% for each year, and the estimated pay increase was 4.5% at
December 31, 1996, 1995 and 1994. The assumed health-care cost trend rate used
in measuring the accumulated postretirement benefit obligation was 13% in
1994, 12% in 1995 and 11% in 1996, declining by 1% per year to an ultimate
rate of 7%, except that managed-care costs were assumed to begin at 10% in
1994, 9% in 1995 and 8% in 1996, declining by 1% per year to 6%.
If the health-care cost-trend rate assumptions were increased by 1%, the
APBO, as of December 31, 1996, would be increased by approximately $3.0
million. The effect of this change on the sum of the service cost and interest
cost components of net periodic postretirement benefit cost for 1996 would be
an increase of about $0.4 million.
CHANGES IN ESTIMATES - The lower discount rate at December 31, 1995,
increased the pension accumulated benefit obligation by about $31.3 million
and the pension projected benefit obligation by about $33.2 million. The lower
discount rate at December 31, 1995, increased the postretirement accumulated
benefit obligation by approximately $6.3 million. The rate-change effects on
net pension income and postretirement benefit costs are not material to the
Company's financial statements.
40
17. INCOME TAXES
Income before income taxes, and current and deferred income taxes are
composed of the following:
(In Thousands)
Years ended December 31 1996 1995 1994
------- ------- -------
Income before income taxes:
Domestic $114,547 $ 90,409 $103,083
Foreign 31,225 25,767 38,063
------- ------- -------
Total $145,772 $116,176 $141,146
Current income taxes:
Federal $ 28,982 $ 15,442 $ 19,451
State 2,579 2,409 3,109
Foreign 13,379 8,648 10,569
------- ------- -------
Total 44,940 26,499 33,129
Deferred income taxes:
Federal 8,196 12,002 6,180
State 1,370 1,427 (45)
Foreign (1,706) 2,285 4,127
------- ------- -------
Total 7,860 15,714 10,262
------- ------- -------
Total income taxes $ 52,800 $ 42,213 $ 43,391
======= ======= =======
The significant differences between the U.S. federal statutory rate and the
effective income tax rate are as follows:
% of Income
Before Income Taxes
1996 1995 1994
------ ------ ------
Federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit 1.8 2.1 1.8
Foreign sales corporation benefit (0.1) (0.6) (1.2)
Research tax credit (0.4) (1.7) -
Provision for legal settlement - 0.9 -
Gain on sale of subsidiary - - (3.8)
Other items, net (0.1) 0.6 (1.1)
------ ------ ------
Effective income tax rate 36.2% 36.3% 30.7%
====== ====== ======
Deferred income taxes result from temporary differences in the recognition
of income and expenses for financial and income tax reporting purposes, using
the liability or balance sheet method. Such temporary differences result
primarily from differences between the financial statement carrying amounts
and tax bases of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse.
The deferred income tax assets and deferred income tax liabilities recorded
on the balance sheets as of December 31, 1996 and 1995, are as follows:
(In Thousands)
Deferred tax assets: 1996 1995
------ ------
Environmental reserves $15,708 $14,720
Acquired fixed asset basis differences
of Belgian subsidiary 4,823 -
Future employee benefits 4,266 3,873
Undistributed earnings of
foreign subsidiaries 5,090 5,657
Intercompany profit in inventories 6,448 3,497
Inventory capitalization 978 905
Facilities write-down and other costs 4,749 2,758
Other 810 4,149
------ ------
Gross deferred assets 42,872 35,559
Valuation allowance (6,277) -
------ ------
Net deferred tax assets 36,595 35,559
------ ------
Deferred tax liabilities:
Depreciation 37,486 36,063
Long-term contingent note payable 22,422 -
Future employee benefits 17,346 14,302
Capitalization of interest 2,510 1,287
Other 5,300 9,153
------ ------
Deferred tax liabilities 85,064 60,805
------ ------
Net deferred tax liabilities $48,469 $25,246
====== ======
Reconciliation to financial statements:
Deferred tax assets $15,907 $15,499
Deferred tax liabilities 64,376 40,745
------ ------
Net deferred tax liabilities $48,469 $25,246
====== ======
During 1996, it was concluded that it is more likely than not that a
portion of the deferred tax assets related to a Belgian subsidiary acquired as
part of the Texaco additives acquisition will not be realized. A valuation
allowance was therefore established for these assets at the date of
acquisition. If this deferred tax asset is realized at a future date, the
valuation allowance will be used to reduce the bases of the identifiable
intangibles acquired. Based on current U.S. income tax rates, it is
anticipated that no additional U.S. income taxes would be incurred if the
unremitted earnings of the Company's foreign subsidiaries were remitted to
Ethyl Corporation due to available foreign tax credits.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and estimates were used by the Company in estimating
the fair values of its outstanding financial instruments in conformity with
the disclosure requirements of FASB Statement No. 107, "Disclosures About Fair
Value of Financial Instruments."
41
Cash & Cash Equivalents - The carrying value approximates fair value.
Long-Term Debt - The fair value of the Company's long-term debt is
estimated based on current rates available to the Company for debt of the same
remaining duration. The estimated fair values of Ethyl's financial instruments
are as follows:
(In Thousands)
Carrying Fair
Value Value
------- -------
December 31, 1996
Cash and cash equivalents $ 20,148 $ 20,148
Long-term debt, including current maturities $332,181 $334,275
December 31, 1995
Cash and cash equivalents $ 29,972 $ 29,972
Long-term debt, including current maturities $302,973 $306,279
19. SPECIAL CHARGES
A special charge in 1995 amounting to $4,750,000 ($4,150,000 after income
taxes, or $0.04 per share) covered a provision for the cost of a legal
settlement by a subsidiary.
Special charges in 1994 amounted to $2,720,000 ($1,690,000 after income
taxes, or $.01 per share) consisting of a charge of $10,720,000 primarily for
a provision for environmental remediation as well as other costs largely
offset by the benefit of an $8,000,000 legal settlement.
20. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
Information for 1996 includes the results of the worldwide lubricant
additives business of Texaco Inc. since its acquisition on February 29, 1996.
(In Thousands Except Earnings Per Share) (Unaudited)
- -------------------------------------------------------------------------------------------
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------
Net sales $242,185 $299,320 $304,169 $303,977
Gross profit $ 76,057 $ 81,804 $ 95,427 $ 91,740
Net income $ 19,030 $ 20,112 $ 28,485 $ 25,345
Earnings per share $ .16 $ .17 $ .24 $ .21
Shares used to compute earnings per share 118,456 118,448 118,444 118,444
- -------------------------------------------------------------------------------------------
1995
Net sales $234,291 $224,530 $241,672 $259,957
Gross profit $ 82,179 $ 70,599 $ 81,918 $ 89,698
Special charges (a) $ - $ - $ 4,750 $ -
Net income $ 21,493 $ 13,006 $ 16,967 $ 22,497
Earnings per share $ .18 $ .11 $ .14 $ .19
Shares used to compute earnings per share 118,438 118,443 118,442 118,460
- -------------------------------------------------------------------------------------------
(a) Refer to Note 19 "Special Charges."
42
MANAGEMENT'S REPORT ON THE FINANCIAL STATEMENTS
Ethyl Corporation's management has prepared the financial statements and
related notes appearing on pages 25 through 41 in conformity with generally
accepted accounting principles. In so doing, management makes informed
judgments and estimates of the expected effects of certain events and
transactions on the reported amounts of assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Financial data appearing elsewhere in this
annual report are consistent with these financial statements. However, actual
results could differ from the estimates on which these financial statements
are based.
The Company maintains a system of internal controls to provide reasonable,
but not absolute, assurance of the reliability of the financial records and
the protection of assets. The internal control system is supported by written
policies and procedures, careful selection and training of qualified personnel
and an extensive internal audit program.
These financial statements have been audited by Coopers & Lybrand, L.L.P.,
independent certified public accountants. Their audit was made in accordance
with generally accepted auditing standards and included a review of Ethyl's
internal accounting controls to the extent considered necessary to determine
audit procedures.
The Audit Committee of the Board of Directors, composed only of outside
directors, meets with management, internal auditors and the independent
accountants to review accounting, auditing and financial reporting matters.
The independent accountants are appointed by the Board on recommendation of
the Audit Committee, subject to shareholder approval.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
certified public accountants in principal areas of the world
Riverfront Plaza West
901 East Byrd Street
Suite 1200
Richmond, Virginia 23219
Telephone (804) 697-1900
To the Board of Directors & Shareholders of Ethyl Corporation
We have audited the accompanying consolidated balance sheets of Ethyl
Corporation and Subsidiaries (the Company) as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ethyl
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
January 30, 1997
- -------------------------------------------------------------------------------
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained in the Proxy Statement under the caption "Election
of Directors" concerning directors and persons nominated to become directors
of the Company is incorporated herein by reference.
The names and ages of all officers of the Company, as of March 5, 1997, are
set forth below.
Name Age Office
- -------------------------------------------------------------------------------
Bruce C. Gottwald * 63 Chairman of the Board and of the Executive Committee,
Chief Executive Officer, Director
Charles B. Walker * 58 Vice Chairman of the Board, Chief Financial Officer
& Treasurer, Director
Thomas E. Gottwald * 36 President and Chief Operating Officer, Director
E. Whitehead Elmore 58 Special Counsel to the Company's Executive Committee
& Corporate Secretary
Wayne C. Drinkwater 50 Controller - Principal Accounting Officer
David A. Fiorenza 47 Vice President - Business Evaluation & Support
Christopher Hicks 46 Vice President - Government Relations
C.S. Warren Huang 47 Vice President - Managing Director, Asia Pacific
Donald R. Lynam 58 Vice President - Air Conservation
Steven M. Mayer 53 Vice President & General Counsel
Alexander McLean 40 Vice President - Petroleum Additives
Ian A. Nimmo 55 Vice President - Global Marketing
Henry C. Page, Jr. 58 Vice President - Human Resources
Newton A. Perry 54 Vice President - Worldwide Refinery Chemicals
Ann M. Pettigrew 42 Vice President - Health, Safety & Environment
A. Prescott Rowe 59 Vice President - External Affairs
* Member of the Executive Committee
Thomas E. Gottwald is a son of Bruce C. Gottwald.
ADDITIONAL INFORMATION - OFFICERS OF THE COMPANY
The term of office of each such officer is until the meeting of the Board of
Directors following the next annual shareholders meeting (April 24, 1997). All
such officers have been employed by the Company for at least the last five
years, with the exception of Christopher Hicks, who joined the Company on May
1, 1994, after five years as a partner in the Washington law firm of Anderson,
Hibey & Blair, three years prior thereto as general counsel of the U.S.
Department of Agriculture, and five years prior thereto on the White House
staff, including service as deputy assistant to the President.
Item 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" concerning executive
compensation is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The
information contained in the Proxy Statement under the caption "Stock
Ownership"is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "Certain
Relationships and Related Transactions," specifically in the last several
paragraphs of such section, is incorporated herein by reference.
44
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The Consolidated Financial Statements of the Registrant, and related
information, are included in Part II Item 8 on pages 25 through 42:
Consolidated Statements of Income for each of the three years in the period
ended December 31, 1996 Consolidated Balance Sheets as of December 31, 1996
and 1995
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996
Consolidated Statements of Shareholders' Equity for each of the three years in
the period ended December 31, 1996
Notes to Consolidated Financial Statements
Management's Report on the Financial Statements
Report of Independent Accountants
(a) (2) Financial Statement Schedules - none required
(a) (3) Exhibits
The following documents are filed as exhibits to this Form 10-K pursuant to
Item 601 of Regulation S-K:
3.1 Amended and Restated Articles of Incorporation of the registrant (filed as
Exhibit 3.1 to the registrant's Report on Form 10-Q for the period ended
September 30, 1996, and incorporated herein by reference thereto).
3.2 By-laws of the registrant (filed as Exhibit 3.2 to the registrants Report
on Form 10-K for the period ended December 31, 1995, and incorporated
herein by reference thereto).
4.1 $500 million Credit Agreement, dated as of February 16, 1994 (filed as
Exhibit 4.1 to the registrant's Report on Form 10-K for the year
ended December 31, 1993, and incorporated herein by reference thereto) as
supplemented by the Extension Agreement thereto dated as of March 1, 1995
(filed as Exhibit 4.1 to the registrant's report on Form 10-K for the
period ended December 31, 1994, and incorporated herein by reference
thereto).
10.1 Bonus Plan of the registrant (filed as Exhibit 10.1 to the registrant's
Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference thereto).
10.2 Incentive Stock Option Plan of the registrant (filed as Exhibit 10.2 to
the registrant's Report on Form 10-K for the year ended December 31,
1992, and incorporated herein by reference thereto).
10.3 Non-Employee Directors' Stock Acquisition Plan (filed as Exhibit A to the
registrant's Proxy Statement for Annual Meeting of Shareholders filed on
March 17, 1993, and incorporated herein by reference thereto).
10.4 Excess Benefit Plan of the registrant (filed as Exhibit 10.4 to the
registrant's Report on Form 10-K for the year ended December 31, 1992,
and incorporated herein by reference thereto).
10.5 Supply Agreement, dated as of December 22, 1993, between Ethyl
Corporation and the Associated Octel Company Limited (filed as Exhibit 99
on the Registrant's Report on Form 8-K filed on February 17, 1994, and
incorporated herein by reference thereto).
10.6 Trust Agreement Between Ethyl Corporation and NationsBank of Georgia,
N.A., as amended by Amendment No. 1.
11.1 Computation of Earnings Per Share.
11.2 Computation of PRO FORMA Earnings Per Share. (Texaco Additives 1996-1995)
11.3 Computation of PRO FORMA Earnings Per Share. (Albemarle 1994)
21 List of subsidiaries of the registrant.
23 Consent of Independent Certified Public Accountants.
99 Five Year Summary
(b) A Form 8-K was filed on March 15, 1996, announcing the February 29, 1996,
acquisition of the worldwide lubricant additive business of Texaco Inc. A
Form 8-K/A was filed on May 13, 1996, which provided the audited
financial statements and the PRO FORMA financial statements related to
the acquired business and to the combined company, respectively.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ETHYL CORPORATION
By: /s/ Bruce C. Gottwald
(Bruce C. Gottwald, Chairman of the Board)
Dated: March 5, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 5, 1997.
Signature Title
- ------------------------------------------------------------------------------------------------------
/s/ Bruce C. Gottwald Chairman of the Board, Chairman of the Executive Committee,
(Bruce C. Gottwald) Chief Executive Officer and Director (Principal Executive Officer)
/s/ Charles B. Walker Vice Chairman of the Board, Treasurer,
(Charles B. Walker) Chief Financial Officer and Director (Principal Financial Officer)
/s/ Wayne C. Drinkwater Controller
(Wayne C. Drinkwater) (Principal Accounting Officer)
/s/ Thomas E. Gottwald President, Chief Operating Officer and Director
(Thomas E. Gottwald)
/s/ William W. Berry Director
(William W. Berry)
/s/ Phyllis Cothran Director
(Phyllis L. Cothran)
/s/ Gilbert M. Grosvenor Director
(Gilbert M. Grosvenor)
/s/ S.B. Scott Director
(Sidney Buford Scott)
46
EXHIBIT INDEX
Number and Name of Exhibit Page Number
(For consistency of cross referencing, the Form 10-K cover page is designated
as page 10 and the Form 10-K runs from page 10 through page 45 with the five
year summary on pages 47 and 48)
3.1 Restated Articles of Incorporated by reference -
Incorporation see Page 44
3.2 By-laws Incorporated by reference -
see Page 44
4.1 $500 million Credit Agreement, Incorporated by reference -
dated as of February 16, 1994, see Page 44
and Extension Agreement dated
March 1, 1995
10.1 Bonus Plan Incorporated by reference -
see Page 44
10.2 Incentive Stock Option Incorporated by reference -
Plan see Page 44
10.3 Non-Employee Directors' Stock Incorporated by reference -
Acquisition Plan see Page 44
10.4 Excess Benefit Plan Incorporated by reference -
see Page 44
10.5 Supply Agreement between Ethyl Incorporated by reference -
Corporation & Associated Octel Company see Page 44
10.6 Trust Agreement Pages 49 through 77
11.1 Computation of Earnings Per Share Page 78
11.2 Computation of Pro Forma Earnings Per
Share (Texaco Additives 1996-1995) Page 79
11.3 Computation of Pro forma Earnings Per
Share (Albemarle 1994) Page 80
21 List of Subsidiaries Page 81
23 Consent of Independent Page 82
Certified Public Accountants
99 Five Year Summary Pages 47 and 48