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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, 1997
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
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. [__]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of January 31, 1998: $446,308,416.25.* Number of shares of Common Stock
outstanding as of January 31, 1998: 83,465,460.
*In determining this figure, an aggregate of 21,370,376 shares of Common Stock
reported in the registrant's Proxy Statement for the 1998 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 and treated as
shares 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 January 30, 1998, as reported by The Wall Street
Journal.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Ethyl Corporation's definitive Proxy Statement for its 1998
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.
11
PART I
Item 1. BUSINESS
DESCRIPTION OF BUSINESS
Ethyl Corporation (the "Company") is incorporated in Virginia and is a major
developer, manufacturer, blender and marketer of products in the petroleum
additives industry. Lubricant additive products include additives for
passenger-car and diesel crankcase lubricants, as well as railroad engine oils,
automatic transmission fluids and lubricants for gears and hydraulic and
industrial equipment. Fuel additive (non-antiknock) products include additives
for gasoline, diesel fuels, and home heating oils. Antiknock products include
lead and manganese additives for gasoline. The Company has about 1,500
employees.
Recent Developments
On December 31, 1997, the Company completed the sale of a Belgian subsidiary,
which operated a manufacturing and blending facility at Gent, Belgium,
reflecting the Company's program of consolidation of its global petroleum
additives manufacturing operations.
On October 2, 1997, the Company repurchased almost 35 million shares of its
outstanding common stock. The transaction is discussed in Note 2 of Notes to
Financial Statements on pages 32 and 33.
On February 29, 1996, the Company purchased the worldwide lubricant
additives business of Texaco Inc. ("Texaco"). The acquisition furthered the
consolidation of the petroleum additives industry. The purchase transaction is
discussed in Note 2 of Notes to Financial Statements on pages 32 and 33.
The following discussion of the Company's businesses as of December 31,
1997, 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 beginning on page 16.
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 most 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 and 19), and its manganese-based antiknock fuel additive under a long-term
supply agreement with Albemarle Corporation (discussed on pages 14 and 19). 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's worldwide market for lubricant additives and non-antiknock fuel
additives is highly competitive. Some market areas are mature regions, such as
the U.S. and Western Europe, having large but saturated additive markets with
relatively homogeneous additive specifications and requirements which change
periodically. Other market areas, such as Latin America and parts of Asia
Pacific, have additive specifications and requirements that vary from country to
country but offer greater growth potential. Some market areas involve numerous
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 specification and regulatory changes in connection with all
of the Company's additives products require continuing investments in research,
development and testing of new products or leading technologies, in continuing
product and process improvements and in providing specialized customer services.
The Company's antiknock products are also in a competitive environment.
Further, government regulations restrict use of lead antiknock compounds in some
of the largest and most developed automotive markets, and the worldwide lead
antiknock market is declining as use of unleaded gasoline continues to grow. In
the lead antiknocks market, there is one major competitor, with a greater market
share, and there are a few smaller ones. The Company continues marketing efforts
for its HiTEC(R) 3000 performance additive in countries around the world.
12
Lubricant Additive 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.
Lubricant additives include packages for (a) 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 (b) 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, (ii) antiwear agents to protect metal surfaces from abrasion, (iii)
detergents to prevent carbon and varnish deposits from forming on engine parts,
(iv) dispersants to keep engine parts clean by suspending insoluble products of
fuel combustion and oil oxidation, (v) friction reducers to facilitate movement,
(vi) pour-point depressants to enable oils to flow at cold temperatures, (vii)
corrosion inhibitors to protect metal parts and (viii) viscosity index improvers
to provide uniform flow properties over a wide range of temperatures.
Fuel Additive Products
Fuel additives (non-antiknocks) increase the quality of gasolines and diesel
fuel by retaining the quality of fuel over time, maintaining engine cleanliness,
protecting metals, reducing friction and wear, lowering emissions and increasing
the level of cetane of diesel fuel. Fuel additives are used by refiners to meet
regulations and standards, including those requiring reduced exhaust emissions.
Additives also are used in fuels for over-the-road and off-highway vehicles, jet
and piston aircraft, as well as railroad, marine and other gasoline, diesel or
synfuel-powered engines and also in home heating oil.
Fuel additives include 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; lubricity agents;
and a conductivity modifier to neutralize static charge buildup in fuel and
products for home heating oils. The Company also markets Greenburn(R) combustion
products, an environmentally friendly line of proprietary products designed for
the diesel fuel, home heating oil and power generation fuel markets worldwide.
Greenburn(R) combustion products contain HiTEC(R) 3000 performance additive.
Antiknocks
Antiknocks improve the quality of gasolines by increasing the level of octane of
gasoline. Antiknock products include lead and manganese antiknock compounds to
increase octane and prevent power loss due to early or late combustion (engine
knock) in gasoline engines. These additives are used in over-the-road and
off-highway vehicles and piston aircraft.
Lead antiknock compounds, sold to petroleum refiners in many countries
around the world, remain one of the Company's largest product lines. Although
volatile competitive market conditions make estimation difficult, the Company
estimates that it accounts for appoximately 25% of the total worldwide sales of
lead antiknock compounds.
Lead antiknock compounds have been subject to regulations 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 of leaded gasoline.
The Company also sells a manganese-based antiknock compound, HiTEC(R) 3000
performance additive ("MMT"), which is used primarily in conventional unleaded
gasoline. The compound is manufactured by Albemarle Corporation under a
long-term supply contract with Ethyl. MMT is being marketed for sale in
conventional unleaded gasoline in the U.S., Canada and other countries around
the world. The product is gaining acceptance, but it is not practicable at this
time to predict the impact on sales or profits.
Raw Materials
Major raw materials used by the Company include process oil, polybutene,
alcohols (including 2-ethyl-1-hexanol), antioxidants, phenates and olefins, as
well as electricity and natural gas as fuels, which are purchased or provided
under supply contracts at prices the Company believes are competitive.
13
Product Developments
The market for lubricant additives, as well as fuel 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
that protects intake valve systems. In 1997, Ethyl also developed and
commercialized several new fuel additive products, including a new gasoline
performance additive for global markets and a new heavy duty premium diesel
performance additive for North American markets. New automotive gear and
automatic transmission and hydraulic fluid additives have been developed to
enable Ethyl to expand its position in world markets. In addition, Ethyl has
continued to grow its participation in the European crankcase additives market
by launching new products specifically designed to meet the requirements of the
Association des Constructeurs Europeens d'Automobiles ("ACEA") specifications.
These developments reflect the Company's major ongoing effort to expand and
improve its product lines and expand targeted geographic distribution of its
petroleum additive products. As part of this effort, the Company has been
conducting 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.
To maintain and enhance a responsive worldwide product supply network for
its petroleum additives, the Company has selectively expanded manufacturing
capacity for certain products and has constructed new or replacement
manufacturing capacity for others. Some of the new capacity replaced contract
production of certain products. Selectively expanding capacity and replacing
capacity for certain products, as well as ceasing production at and mothballing
or selling certain facilities with excess capacity for certain other products,
is part of the Company's ongoing facilities rationalization plan. The Company
has also transformed its distribution system by consolidating leased terminal
storage operations and separately coordinating shipments and storage of products
for bulk and less-than-bulk customers.
Environmental Considerations
The Company maintains and operates manufacturing and distribution facilities and
equipment used in the petroleum additives industry. These are subject to
environmental risks and regulations, which are discussed in Management's
Discussion and Analysis under the heading "Environmental Matters."
Research and Development
The Company's research and development (R&D) 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 original equipment manufacturers for products that
meet more stringent performance specifications. Research, development and
testing staff also take part 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 1996 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. The
integration is nearly complete. Significant synergy has been achieved from the
consolidated R&D operation. Work will continue in 1998 merging product
formulations to optimize manufacturing operations.
The Company spent approximately $71 million, $72 million and $77 million in
1997, 1996 and 1995, respectively, on research, development and testing
expenses, of which approximately $42 million, $47 million and $54 million,
respectively, qualified as research and development expense under the technical
accounting definition. Substantially all research and development activities
were sponsored by the Company. Most of the research and development expense was
related to the Company's lubricant additives and fuel additives other than
antiknocks.
Patents
The Company owns approximately 900 active United States and foreign patents with
a significant number of additional 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.
14
FINANCIAL INFORMATION AS TO INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations, as of December 31, 1997, are all in the petroleum
additives industry. Geographic area information for the Company's operations for
the three years ended December 31, 1997, is presented in Management's Discussion
and Analysis on pages 22 through 24.
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, 1997, is set forth in the
Geographic Table and the related introduction and discussion on pages 22 through
24 and in Notes 1 and 4 of Notes to Financial Statements on pages 30, 31 and 34.
See also information concerning the Company's sales and distribution of foreign
lead antiknock compounds under "Description Of Business" above, as well as in
Management's Discussion and Analysis under the heading "Information About
Significant Product Lines."
- --------------------------------------------------------------------------------
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
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 page 19. The Company receives its MMT
under a long-term supply agreement with Albemarle Corporation, as discussed on
page 19.
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 its liquid OCP viscosity index improver under supply agreements with
Antwerp Distribution and Product Operations N.V. from its manufacturing plant in
Gent, Belgium, and with Mi Chang Oil Ind. Co., Ltd. in Ulsan, Korea, both of
which receive solid OCP viscosity index improver from DSM Copolymer, Inc.
The Company has been 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, but it is consolidating production into U.S. and European facilities in
early 1998.
The Company continues to receive certain other miscellaneous products under
various term supply contracts.
The Company has been expanding production capacity of certain products with
efficient new facilities, most of which began operating in late 1997 at Sauget,
Illinois; Natchez, Mississippi; Houston, Texas; and Feluy, Belgium. Additional
capacity is expected to be utilized at Houston in early 1998. Selective
expansion and replacement of production capacity for selected products, as well
as ceasing production at and mothballing or selling certain facilities with
excess capacity for certain other products, is continuing as part of the
Company's ongoing facilities rationalization plan.
15
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.
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 business, including
administrative or judicial proceedings seeking remediation under environmental
laws, such as Superfund, premises asbestos 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 1997.
- --------------------------------------------------------------------------------
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 quarter for the years
1997 and 1996 are shown in the following table.
1997 1996
- ------------------------------------------------------
High Low High Low
- ------------------------------------------------------
First Quarter 10 3/8 8 3/8 13 9 5/8
Second Quarter 9 5/8 8 1/2 10 7/8 9 5/8
Third Quarter 9 3/8 8 5/8 10 8 3/8
Fourth Quarter 9 15/16 7 1/2 9 3/4 8 1/4
- ------------------------------------------------------
During 1997, Ethyl's management re-evaluated both its capital structure and
its dividend policy. Accordingly, on August 26, the Company announced a tender
offer in which the Company offered to repurchase up to 35 million shares of its
common stock out of approximately 118,444,000 common shares then outstanding. On
October 2, 1997, the Company completed the repurchase of 34,999,995 shares, at
$9.25 per share plus related costs, for a total transaction cost of
$328,922,000, which was financed with additional long-term debt. Shareholders'
equity was decreased by $326,991,000 and deferred financing costs of $1,931,000
are being amortized.
The Company also announced it was reducing the annual dividend rate from
$.50 per share to $.25 per share effective with the fourth quarter 1997 dividend
paid on January 1, 1998, or a revised quarterly dividend rate of $.0625 per
share. This lower rate makes the Company's dividend payout rate (cash dividends
per share as a percent of earnings per share) more comparable with the dividend
payout rate of other U.S. industrial companies.
The reduction in shares outstanding, together with the reduction in the
annual dividend, will significantly improve future cash flow amounts available
for debt reduction and other corporate purposes.
Shareholders' equity at December 31, 1997, was $144,598,000 compared with
$439,900,000 at December 31, 1996, reflecting the reduction in equity from the
repurchase of common stock. This resulted in equity per common share of $1.73
and $3.71 at the end of 1997 and 1996, respectively. There were 83,465,460
shares of common stock held by 11,368 shareholders of record as of December 31,
1997, compared to 118,443,835 shares of common stock held by 12,606 shareholders
of record as of December 31, 1996.
Item 6. SELECTED FINANCIAL DATA
The information required for the five years ended December 31, 1997, 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
The following Financial Review includes a discussion of the accounts and
operations of the Company as well as certain strategic steps taken by the
Company that affect them. The Company's operations in the petroleum additives
industry include lubricant additive products, fuel additive products (other than
antiknocks) and antiknock products, and the manufacturing, blending and
distribution of these products, and are described in Item 1 beginning on page
11.
1997 FINANCIAL REVIEW
In recent years the Company has invested heavily in growing its petroleum
additives product lines (other than antiknocks), including growth through two
major acquisitions, which has enabled the Company to establish itself as a
leading supplier to the worldwide petroleum industry. With additional large
acquisitions in the petroleum additives industry not currently available, the
Company re-evaluated its capital structure and dividend policy in 1997.
Accordingly, the Company made the strategic decision to reduce equity capital
through the stock repurchase offer and to reduce the annual dividend from $.50
per share to $.25 per share, beginning with the dividend declared during the
fourth quarter of 1997 but paid on January 1, 1998.
On October 2, 1997, the Company completed the repurchase of almost 35
million shares of its outstanding common stock, with the purchase price and
related costs totalling about $328.9 million, which was financed under the
Company's new Competitive Advance, Revolving Credit Facility and Term Loan
Agreement. The reduction in shares outstanding, together with the reduction in
the annual dividend, significantly improves future cash flow amounts available
for debt reduction or other corporate purposes.
Also in 1997, the Company completed the sale of a Belgian subsidiary, which
operated a lubricant additives manufacturing and blending facility at Gent,
Belgium. This sale advanced the Company's continuing program of consolidating
its global petroleum additives manufacturing operations to lower the cost
structure and enhance operating efficiencies.
An earlier action was the Company's acquisition of the lubricant additives
business of Texaco Inc. ("Texaco") on February 29, 1996. The acquisition
enhanced the Company's already established ability to serve its customers with
products meeting high specifications and added both a new product line
(viscosity index improvers) and additional presence in Europe, Latin America and
the Far East.
The Company's 1997 financial statements only include the effects of the
purchase of the 34,999,995 shares and the related borrowing since October 2,
1997, and the 1996 financial statements only include ten months operations of
the acquired lubricant additives business after February 29, 1996. Therefore,
selected unaudited pro forma information is provided for informational purposes
only and may not necessarily reflect the financial position or results of
operations of the Company had the shares been repurchased on January 1, 1996,
and had the acquired business been part of the Company for the full year in 1995
and 1996. (See Note 2 of Notes to Financial Statements on pages 32 and 33).
Some of the information presented in the following discussion (as well as
the Letter to Shareholders from the Chairman and the President) constitutes
forward-looking comments within the meaning of the Private Securities Litigation
Reform Act of 1995. The forward-looking comments may be focused on future
objectives or expectations about future performance, and may include statements
about trends or anticipated events, while financial information and related
disclosures have more traditionally been based on historical information.
Although the Company believes its forward-looking comments are based on
reasonable expectations and assumptions, within the bounds of its knowledge of
its business and operations, there can be no assurance that actual results will
not differ materially from its expectations because of uncertainties and factors
which are difficult to predict and are often beyond the control of the Company
and its management. Factors which could cause actual results to differ from
expectations include, without limitation, the timing of orders received from
customers, the gain or loss of significant customers, competition from other
manufacturers, changes in the demand for the Company's products, significant
changes in new product introduction, increases in the cost of the product, the
impact of fluctuations in foreign exchange rates on reported results of
operations, changes in the market in general and the impact of consolidation of
the petroleum additives industry.
RESULTS OF OPERATIONS
1997 Compared to 1996
Net Sales
Net sales for 1997 amounted to $1,063.6 million, a decrease of $86.1 million
(7%) from $1,149.7 million in 1996. The decrease in net sales in 1997 includes a
$56.6 million reduction due to shipments. While total volume shipped was higher
in 1997, the dollar value of lower lead antiknock shipments was greater than the
effect of higher shipments of other petroleum additives. Net sales were also
lower due to a combination of selling prices and unfavorable foreign exchange
which reduced 1997 sales $29.5 million compared to last year.
17
The lower shipments of antiknocks were due to a larger-than-anticipated
lead antiknock market decline, and also included lower shipments of other
antiknocks. Lubricant and non-antiknock fuel additives sales included lower
selling prices reflecting the competitive pricing conditions in the business.
The impact of the lower selling prices of these additives was offset by higher
shipments of these products. Selling prices for lead antiknocks were up slightly
for the year, but were under competitive pressures, especially later in the
year. Sales included revenues from the worldwide lubricant additives business
acquired from Texaco for twelve months of 1997 versus only ten months of 1996.
Costs and Expenses
Cost of goods sold for 1997 of $761.7 million decreased $42.9 million (5%) from
$804.6 million in 1996. The primary cause of the decrease in cost of goods sold
was the lower shipments of lead antiknock compounds, partly offset by higher
shipments of other petroleum additives, together resulting in $17.2 million
lower cost of sales. The decrease in 1997 was also due in part to lower per unit
raw material costs, the efficiency of strict management of product supply
procedures and the favorable impact of foreign currencies on costs incurred in
foreign (mainly European) operations, all of which reduced cost of goods sold
$25.7 million. The cost reductions, which were all in the non-antiknock
petroleum additives product lines, were slightly offset by certain charges
associated with the Company's facilities rationalization plan. Costs included
cost of goods sold of the worldwide lubricant additives business acquired from
Texaco for twelve months in 1997 versus ten months in 1996.
Average raw material costs per unit decreased overall in 1997 from 1996,
although raw material costs had started increasing in late 1997 over comparable
periods in late 1996. Average energy costs were largely unchanged, as lower
electricity and steam costs were largely offset by higher natural gas prices.
Gross profit for 1997 was $302 million, a decrease of $43 million (12%)
from $345 million in 1996. As a result of a 7% decrease in net sales and a 5%
decrease in cost of goods sold in 1997 from 1996, the gross profit margin
decreased to 28.4% in 1997 from 30.0% in 1996. The lower gross profit margin
mainly reflected a change in product mix, due to an increase in the extent to
which sales and profits come from additives other than antiknocks, a net
unfavorable foreign currency effect and competitive pricing conditions for
petroleum additives.
The Company's continuing application of strict cost controls is evidenced
by selling, general and administrative expenses combined with research,
development and testing expenses decreasing $13.3 million (8%) to $162 million
in 1997 from $175.3 million in 1996. The decrease also included the overall
effect of a lower number of employees. The Company also incurred lower expenses
related to marketing activities for the Company's manganese-based octane
improver, HiTEC (R) 3000 performance additive ("MMT") and lower selling and
administrative expenses for lead antiknocks. Research, development and testing
expenses were also down slightly. As a percentage of net sales, selling, general
and administrative expenses, including research, development and testing
expenses continued to decrease to 15.2% during 1997 from 15.3 % during 1996.
Operating Profit
Operating profit in the growing petroleum additives product lines (other than
antiknocks) improved 14% over last year. However, total operating profit in 1997
of $139.9 million was down $29.8 million (18%) from $169.7 million in 1996. Most
of the decrease resulted from lower lead antiknock shipments, an unfavorable
foreign currency effect, partly offset by higher shipments and profits from most
of the other product lines. Some of the benefit reflects inclusion of the
acquired worldwide lubricant additives business for twelve months in 1997 versus
ten months in 1996, as well as lower selling, general and administrative
expenses in 1997. Lower profit margins reflect a change in the product mix due
to the increase in the extent to which profits come from lubricant and
non-antiknock fuel additives. Further discussion of the lead antiknock profit
contribution is covered under the heading "Information About Significant Product
Lines."
Interest and Financing Expenses
Interest and financing expenses in 1997 increased 6% to $25.7 million from $24.3
million in 1996. The $1.4 million increase primarily reflects a $0.6 million
increase from higher average debt outstanding, primarily reflecting the use of
long-term debt to fund the repurchase of about 35 million shares of common
stock, as well as $0.7 million from higher average interest rates and $0.4
million from increases in various financing fees, partly offset by $0.3 million
from an increase in interest costs capitalized.
Other Expense (Income), Net
Other expense, net was $4.3 million in 1997, which contrasts with other income,
net of $0.4 million in 1996. The other expenses in 1997 are primarily due to a
$5.7 million net loss related to non-operating assets ($16.3 million of
impairment losses largely offset by $10.6 million of gains on sales). About $7.1
million of the $12.7 million proceeds from the sales was not received until
January 1998. Other changes include lower interest income on short-term
securities and changes in a number of other immaterial non-operating items.
18
Income Taxes
Income taxes in 1997 of $32.5 million decreased 39% from $52.8 million in 1996,
primarily due to a 25% reduction in income before income taxes, as well as the
impact of a lower effective income tax rate (29.5% in 1997 versus 36.2 % in
1996). The lower effective rate in 1997 is primarily due to a $4 million tax
benefit on the sale of the manufacturing facility in Gent, Belgium, which had a
larger tax basis than book basis, the settlement of certain income tax audit
issues with the Internal Revenue Service, and lower state income taxes. (See
Note 17 of Notes to Financial Statements on pages 39 and 40 for details of
effective income tax rates.)
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
into the Company's growing petroleum additives product lines. 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 and non-antiknock fuel additives, partly offset by lower selling
prices of these products. Antiknock revenues were lower due to lower shipments
of lead antiknocks, partly offset by higher selling prices for these products
and higher shipments of MMT.
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) mainly reflecting the inclusion of ten months of
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-1995 shutdown of operations at a contract manufacturing site, the
start-up of certain petroleum 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 material costs per unit decreased in 1996 from 1995 and
included the benefit of management actively reducing the number of raw material
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.
Gross profit for 1996 amounted to $345 million, an increase of $20.6
million (6%) from $324.4 million in 1995. However, gross profit margin decreased
to 30.0% in 1996 from 33.8% in 1995, mainly reflecting lower margins due to
continued soft market conditions for lubricant and non-antiknock fuel additives,
and a change in product mix reflecting an increase in the extent to which sales
and profits come from petroleum additives other than antiknocks.
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 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, including research,
development and testing expenses as a percentage of net sales decreasing to
15.3% during 1996 from 18.5% during 1995.
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.
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 petroleum additives
margins in the 1996 period reflecting soft market conditions and lower margins
due to changes in the Company's overall product mix (reflecting an increase in
the extent to which profits come from lubricant additives and non-antiknock fuel
additives), as well as an unfavorable foreign currency variance.
19
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 non-operating 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.
INFORMATION ABOUT SIGNIFICANT PRODUCT LINES
Although lead antiknock profits were significantly lower than last year, as the
product continues its worldwide phasedown, this product continues to be a major
source of earnings and cash flow. Lead antiknock compounds remain one of the
Company's largest product lines. Although volatile competitive market conditions
make estimation difficult, the Company estimates that it accounts for
appoximately 25% 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 of leaded gasoline.
The contribution of lead antiknock compounds to the Company's net sales was
about 14% in 1997, 20% in 1996 and 26% in 1995. 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 43% in 1997, 59% in 1996 and 74% in 1995.
In prior years, the Company generally had been able to largely offset a
continuing decline in shipments of lead antiknock compounds with higher margins
due primarily to increases in selling prices. In 1997, prices were up only
slightly for the year; however, volume was substantially lower reflecting both a
declining market and severe competitive pressures. To a lesser degree, in 1996
the increases in selling prices were also 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 or regain market share.
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. 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.
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 a manganese-based antiknock compound, HiTEC (R) 3000
performance additive ("MMT"), which is used in leaded and conventional unleaded
gasoline. MMT is registered by the Environmental Protection Agency for use in
conventional unleaded gasoline. The compounds are manufactured by Albemarle
Corporation under a long-term supply contract with Ethyl. The compounds are
20
being marketed for sale in unleaded gasoline in the U.S. and in countries around
the world. The product is gaining acceptance, but it is not practicable at this
time to predict the impact on sales or profits.
MMT has been used in Canadian unleaded gasoline for nearly 22 years.
However, on April 25, 1997, Canada enacted a law (with an effective date of June
24, 1997) banning the inter-provincial transport of the Company's
manganese-based octane improver in unleaded gasoline in Canada, as well as the
import of MMT into Canada for such use. On October 2, 1997, the Company filed a
Statement of Claim against the Canadian government for damages under the
arbitration provisions of the North American Free Trade Agreement ("NAFTA"). The
NAFTA allows a company to bring before an arbitration panel claims against a
NAFTA government for alleged violations of that country's obligations toward
foreign investors as required by the Treaty. The Company's management contends
the legislation violates Canada's obligations relating to national treatment and
performance requirements and constitutes expropriation which would cause a
significant impact on the Company's Toronto-based subsidiary. The arbitration
process is proceeding according to the schedule established by the arbitration
panel.
FINANCIAL CONDITION AND LIQUIDITY
Cash and Cash Equivalents
Cash provided from operating activities of $132.6 million in 1997 was about 28%
lower than $185.2 million in 1996, but was still more than sufficient to cover
operating activities.
Cash provided was primarily from operating activities of $132.6 million,
together with approximately $296.2 million in net additional long-term cash
borrowed, $10 million from the sale of the manufacturing and blending facility
at Gent, Belgium, and $5.6 million from the sale of non-operating assets
together with $2 million from cash on hand. The cash flows were primarily used
to fund the repurchase of almost 35 million shares of common stock for $327
million plus the related transaction costs of $1.9 million, as well as to cover
capital expenditures of $43.5 million and cash dividends to shareholders of
$59.2 million and to invest $15.2 million to provide funds for existing
retirement plans covering certain groups of already retired employees.
Cash and cash equivalents at December 31, 1997, were about $18.1 million,
which represented a decrease of about $2 million from $20.1 million at year-end
1996, which itself represented a decrease of about $9.9 million from $30 million
at year-end 1995.
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 together with $29 million in additional long-term debt
under the Company's revolving credit agreement, were used to fund the
acquisition of the worldwide lubricant additives business from Texaco 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.
The reduction in the annual dividend rate from $.50 to $.25 per common
share, effective with the payment on January 1, 1998, together with the
reduction in shares outstanding, significantly improves future cash flow amounts
available for corporate purposes. Management anticipates that cash provided from
operations in the future will continue to 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
On October 2, 1997, the Company repurchased almost 35 million shares of its
common stock, at a price of $9.25 per share, with a total transaction cost of
approximately $328.9 million including related expenses. In August 1997, in
anticipation of the share repurchase, the Company replaced its existing $500
million unsecured competitive advance and revolving credit agreement with a new
five-year unsecured credit agreement, which was amended on November 14, 1997,
when the Company entered into an Amended and Restated Competitive Advance,
Revolving Credit Facility and Term Loan Agreement. The term loan is for an
initial borrowing of $300 million and the revolving credit agreement is for
borrowings up to $450 million.
On August 26, 1997, the Company paid off the $250 million then outstanding
under the old revolving credit agreement with $250 million borrowed under the
new revolving credit agreement. The Company also borrowed an additional $303
million during 1997, primarily the $300 million term loan borrowed on October 2,
1997, and repaid the first of five annual $6.8 million medium-term notes when
due, on December 15, 1997. Total new long-term debt of $553 million, net of
repayments of $256.8 million, resulted in net additional cash borrowing of
$296.2 million in 1997.
21
The noncurrent portion of Ethyl's long-term debt amounted to $594.4 million
at December 31, 1997, representing a net increase in long-term debt of $268.9
million from $325.5 million at December 31, 1996. The net increase primarily
represents $296.2 million of net additional cash borrowed in 1997 plus $12.5
million of the contingent note to Texaco recognized during 1997, less $40
million of the borrowing which was included in the current portion of long-term
debt.
The Company's contingent note payable to Texaco of up to $60 million is
associated with Ethyl's 1996 acquisition of Texaco's worldwide lubricant
additives business. 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. Based on actual
shipments through December 31, 1997, $12.5 million of the contingent note has
been recognized as a note payable to Texaco and included in long-term debt.
The Company's long-term debt as a percent of total capitalization was 80.4%
at December 31, 1997, excluding the effect of the still-contingent portion
($47.5 million) of the Texaco note, compared to 42.5% at December 31, 1996. The
Company has historically targeted a range of 30% to 50% for its long-term debt
ratio, and currently intends to continue to utilize its cash flows to reduce
long-term debt outstanding.
The Company's capital spending over the next three to five years is
expected to be moderately lower than in 1997 but higher than in 1996, reflecting
the completion of construction and expansion programs following the Texaco
acquisition. Capital spending for environmental and safety projects on non-plant
expansion and replacement-related construction will likely increase from current
levels largely reflecting 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 would be primarily within the
petroleum additives industry, such as the 1996 acquisition of Texaco's worldwide
lubricant additives business. The Company's 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. Also, the Company repurchased about
30% of its own stock during 1997 with long-term debt. The amount and timing of
additional borrowing will depend on the Company's cash requirements. (See Note
10 of Notes to Financial Statements on page 35 for information on unused lines
of credit.)
YEAR 2000 COMPLIANCE
The Company has recently completed major projects of (1) conversion of 100%
mainframe systems to modern client/server systems, and (2) implementation of
SAP, Peoplesoft and other commercial and desktop software. These new systems are
Year 2000 compliant. The Company also has been reviewing plant process control
systems and research, development and testing information and analytical
systems, and has either determined those systems are Year 2000 compliant or has
identified solutions to solve potential problems within the required time frame.
Management is uncertain about the Year 2000 compliance status of its major
suppliers, customers and other business associates, but expects they will also
be in compliance by 2000 or have prepared alternative solutions.
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 $17 million in 1997, $18 million in 1996 and $20
million in 1995 (excluding depreciation of previous capital expenditures).
Environmental operating and remediation costs are expected to be slightly
higher in the next few years than in 1997. The ongoing cost of operations was
22
about $15 million in both 1997 and 1996, while 1995 amounted to $14 million,
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 both 1997 and 1996 versus $4 million in 1995. For
each of the next few years, capital expenditures for these types of projects are
likely to range from about $3-$5 million.
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 three 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).
In one other case, the identification of contaminants and remediation costs
is in the preliminary stages. The identification of PRPs and allocation of
responsibilities are also in early stages. The Company's allocable share is
expected to be very small, but allocation has not begun at this time. Management
expects the Company is more likely than not to be a minor participant in the
ultimate cleanup.
Almost all such sites, including the two largest, represent environmental
issues that are quite mature. They have been investigated and 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 is
expected to 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, 1997 and 1996, were approximately $44.3 million and $41.2 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 proven to be viable. The Company believes that the cost of remediation of
current sites, which will occur over extended periods 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 and in Canada. However, in 1998 the Company will be terminating its
manufacturing supply agreement in Japan, and reducing the extent of its
laboratory support there as well. In Canada, Europe and the most significant of
the Asian countries where the Company does business, the economies are generally
stable and repatriation of earnings has been successful. The Company's only
manufacturing operations in Latin America are in Brazil and are conducted in the
local currency. Other operations in Latin America are conducted primarily in U.
S. dollars. Consequently, there is no expectation that the Company will
experience significant currency exposure risk.
Also, under current governmental regulations in countries where the Company
operates, repatriation of earnings is possible. Sales in other areas are
normally prepaid or paid for through letters of credit. Customer relationships
of all foreign operations mainly consist of financially viable governmental
organizations and large private companies. Recent problems in certain Asian
countries have not yet significantly affected the Company's operations in Asia,
and are not expected to unless these problems increase and spread to other
countries where the Company is most heavily involved.
The Company has, in the past, attempted to limit its exposure to
fluctuating foreign exchange rates primarily through operational actions. The
Company has both manufactured for and purchased from certain foreign companies
giving it a foreign currency cost basis to offset some of its foreign currency
revenue exposures in its foreign operations. Since the Company's practice has
been to monitor its exposures and keep them at a minimum, using external hedging
transactions has not been utilized recently.
However, in recent years fluctuations in foreign currency exchange rates
have been more volatile. At the same time, the Company's exposure to foreign
currencies has increased slightly. Therefore, foreign exchange losses have been
larger.
As the Company moves toward consolidating its manufacturing operations
increasingly in the U. S. and, to a lesser extent, in European manufacturing and
blending facilities, its ability to minimize foreign currency exposures through
operational means is expected to be reduced. Therefore, the Company is
investigating and may participate in external foreign currency hedging
transactions.
23
The following table includes the results and accounts of the lubricant
additives business of Texaco 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)
- -----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Net sales:
Domestic unaffiliated:
United States $ 443,402 $ 453,488 $361,751 $ 502,427 $ 969,438
Export 166,161 213,869 178,485 217,067 338,944
Transfers to foreign affiliates 193,470 188,621 221,159 210,884 258,966
Foreign unaffiliated 454,052 482,294 420,214 454,592 630,008
Elimination of transfers (193,470) (188,621) (221,159) (210,884) (258,966)
---------- ---------- -------- ---------- ----------
Total (a) $1,063,615 $1,149,651 $960,450 $1,174,086 $1,938,390
========== ========== ======== ========== ==========
Operating profit: (b) (c) (d)
Domestic $ 126,268 $ 155,634 $134,123 $ 149,847 $ 161,590
Foreign 36,057 38,263 31,947 44,828 42,392
---------- ---------- -------- ---------- ----------
Subtotal 162,325 193,897 166,070 194,675 203,982
Unallocated expenses (22,401) (24,218) (23,641) (26,933) (36,377)
---------- ---------- -------- ---------- ----------
Operating profit 139,924 169,679 142,429 167,742 167,605
Interest and financing expenses (25,668) (24,268) (26,833) (25,378) (44,085)
Other (expense) income, net (e) (4,274) 361 580 (1,218) 9,987
---------- ---------- -------- ---------- ----------
Income before income taxes,
extraordinary item and
discontinued insurance
operations $ 109,982 $ 145,772 $116,176 $ 141,146 $ 133,507
========== ========== ======== ========== ==========
Identifiable assets:
Domestic $ 706,301 $ 698,976 $601,854 $ 642,814 $1,250,650
Foreign 240,340 283,500 264,973 265,506 628,830
Non-operating assets 120,636 112,693 116,960 122,095 129,718
---------- ---------- -------- ---------- ----------
Total $1,067,277 $1,095,169 $983,787 $1,030,415 $2,009,198
========== ========== ======== ========== ==========
Notes to Geographic Areas Table
(a) Net sales to Texaco and its worldwide subsidiaries and affiliates amounted to about
$137,000 and $125,000 in 1997 and 1996, respectively, which represents approximately 13%
and 11% of net sales in 1997 and 1996, respectively. 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) Other expense for 1997 includes a charge related to non-operating assets of about $5,724
($3,314 after income taxes) resulting from impairment losses of $16,343 net of gains on
sales of $10,619.
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, the Far East and the Middle East.
Net unaffiliated sales of foreign subsidiaries of $454.1 million for 1997
decreased 6% from $482.3 million for 1996. The decrease was primarily in
European sales of lubricant additives and non-antiknock fuel additives,
reflecting, among other factors, lower selling prices and the negative impact of
foreign currency fluctuations. Antiknock sales were also lower in Europe,
reflecting significant volume declines and competitive pressures, and in Canada,
reflecting lower shipments of Canadian manufactured antiknock compounds than in
1996.
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 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.
Export sales from the United States to unaffiliated customers are made
primarily to Latin America, the Middle East, the Far East and Europe.
Export sales of $166.2 million in 1997 decreased 22% from 1996 export sales
of $213.9 million due to significantly lower antiknock shipments to the Far
East, Latin America and the Middle East. Higher export sales of lubricant
additives and non-antiknock fuel additives to Europe and Latin America offset
part of the decrease.
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.
Foreign operating profit of $36.1 million in 1997 decreased 6% from $38.3
million in 1996. Most of the decrease in operating profit was from the European
subsidiaries, reflecting lower shipments of antiknocks, and the unfavorable
impact of foreign currency fluctuations. Profits were also slightly lower in 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, partly offset by foreign exchange losses in 1996 versus foreign
exchange gains in 1995.
Total assets of $1,067.3 million at the end of 1997 were $27.9 million (3%)
lower than $1,095.2 million at the end of 1996. Foreign assets decreased to
$240.3 million in 1997 from $283.5 million at the end of 1996. The decrease in
foreign assets primarily represents the accounts receivable, inventory and
property, plant and equipment of the Belgian subsidiary that was sold at the end
of December 1997, as well as lower accounts receivable of operations in Europe
and the Far East. Some of the decrease is due to the impact of foreign exchange
rates on asset values. This was partly offset by increases in assets (primarily
non-operating assets) in the U. S.
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.
25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------
(In Thousands of Dollars Except Per-Share Amounts) Ethyl Corporation & Subsidiaries
- -----------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Net sales $1,063,615 $1,149,651 $960,450
Cost of goods sold 761,660 804,623 636,056
---------- ---------- --------
Gross profit 301,955 345,028 324,394
Selling, general and administrative expenses 90,859 103,626 100,062
Research, development and testing expenses 71,172 71,723 77,153
Special charges - - 4,750
---------- ---------- --------
Operating profit 139,924 169,679 142,429
Interest and financing expenses 25,668 24,268 26,833
Other expense (income), net 4,274 (361) (580)
---------- ---------- --------
Income before income taxes 109,982 145,772 116,176
Income taxes 32,452 52,800 42,213
---------- ---------- --------
NET INCOME $ 77,530 $ 92,972 $ 73,963
========== ========== ========
BASIC AND DILUTED EARNINGS PER SHARE $ .71 $ .78 $ .62
========== =========== ========
See accompanying notes to financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -----------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Net income $77,530 $92,972 $73,963
Other comprehensive income,
net of tax:
Unrealized gain on marketable
equity securities 9,824 - -
Foreign currency translation
adjustments $(10,261) $(3,978) $4,343
Less: Reclassification
adjustment for loss
included in net income 4,030 (6,231) - (3,978) - 4,343
------- ------- ------ ------- ----- -------
Other comprehensive income (loss) 3,593 (3,978) 4,343
------- ------- -------
Comprehensive income $81,123 $88,994 $78,306
======= ======= =======
See accompanying notes to financial statements.
26
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars Except Share Data)
- --------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 18,162 $ 20,148
Accounts receivable, less allowance for doubtful
accounts (1997 - $2,349; 1996 - $2,375) 165,259 177,788
Inventories:
Finished goods and work-in-process 166,089 179,322
Raw materials 20,001 21,498
Stores, supplies and other 7,746 9,782
---------- -----------
193,836 210,602
Deferred income taxes and prepaid expenses 21,857 18,627
---------- ----------
Total current assets 399,114 427,165
---------- ----------
Property, plant and equipment, at cost 766,413 764,145
Less accumulated depreciation and amortization 357,316 333,268
---------- ----------
Net property, plant and equipment 409,097 430,877
---------- ----------
Other assets and deferred charges 179,918 159,470
Goodwill and other intangibles-
net of amortization 79,148 77,657
---------- ----------
Total assets $1,067,277 $1,095,169
========== ==========
See accompanying notes to financial statements
27
Ethyl Corporation & Subsidiaries
- --------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------
Liabilities & shareholders' equity
Current liabilities:
Accounts payable $ 66,573 $ 74,939
Accrued expenses 50,743 64,167
Dividends payable 5,217 14,806
Long-term debt, current portion 46,707 6,701
Income taxes payable 11,188 20,298
----------- ----------
Total current liabilities 180,428 180,911
----------- ----------
Long-term debt 594,429 325,480
Other noncurrent liabilities 86,308 84,502
Deferred income taxes 61,514 64,376
Shareholders' equity:
Common stock ($1 par value)
Issued - 83,465,460 in 1997 and
118,443,835 in 1996 83,465 118,444
Additional paid-in capital - 2,799
Foreign currency translation adjustments (8,119) (1,888)
Unrealized gain on marketable equity securities 9,824 -
Retained earnings 59,428 320,545
----------- ----------
144,598 439,900
----------- ----------
Total liabilities & shareholders' equity $1,067,277 $1,095,169
========== ==========
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 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Shares Amounts
Common stock
(authorized 400,000,000 shares)
Beginning balance 118,443,835 $118,444 118,443,835 $118,444 118,434,401 $118,434
Issued upon exercise of
stock options and SARs - - - - 9,434 10
Issue restricted stock 21,620 21 - - - -
Purchased and retired (34,999,995) (35,000) - - - -
------------ -------- ----------- ------- ----------- -------
Ending balance 83,465,460 83,465 118,443,835 118,444 118,443,835 118,444
============ -------- =========== ------- =========== -------
Additional paid-in capital
Beginning balance 2,799 2,799 2,706
Exercise of stock options and SARs - - 93
Issue restricted stock 178 - -
Retirement of purchased common stock (2,977) - -
------- ------- -------
Ending balance - 2,799 2,799
------- ------- -------
Foreign currency translation adjustments
Beginning balance (1,888) 2,090 (2,253)
Translation adjustments (10,261) (3,978) 4,343
Realized foreign currency loss on
sale of subsidiary 4,030 - -
------- ------- -------
Ending balance (8,119) (1,888) 2,090
------- ------- -------
Unrealized gain on marketable equity securities
Beginning balance - - -
Unrealized gain 9,824 - -
------- ------- ------
Ending balance 9,824 - -
------- ------- ------
Retained earnings
Beginning balance 320,545 286,795 272,050
Net income 77,530 92,972 73,963
Cash dividends declared:($.4375 per share in
1997 and $.50 in 1996 and 1995) (49,633) (59,222) (59,218)
Stock repurchase (289,014) - -
-------- ------- -------
Ending balance 59,428 320,545 286,795
-------- ------- -------
Total shareholders' equity $144,598 $439,900 $410,128
======== ======== ========
See accompanying notes to financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars) Ethyl Corporation & Subsidiaries
- ---------------------------------------------------------------------------------------------
Years ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year $ 20,148 $ 29,972 $ 31,166
---------- -------- ---------
Cash flows from operating activities:
Net income 77,530 92,972 73,963
Adjustments to reconcile income to cash flows
from operating activities:
Depreciation and amortization 61,752 61,919 49,224
Special charges - - 4,750
Prepaid pension costs (8,578) (7,933) (7,204)
Net loss on non-operating assets (impairment losses of
$16,343 net of gains on sales of $10,619) 5,724 - -
Deferred income taxes (2,572) 7,860 15,714
Changes in assets and liabilities, net of effects
from acquisition:
Decrease in accounts receivable 20,362 18,710 64,771
Decrease (increase) in inventories 3,227 (1,241) (15,560)
(Increase) decrease in prepaid expenses (1,392) 5,239 (2,366)
(Decrease) in accounts payable and accrued expenses (6,637) (78) (37,948)
(Decrease) increase in income taxes payable (8,912) 2,741 (1,208)
Other, net (7,909) 5,049 5,201
---------- -------- --------
Cash provided from operating activities 132,595 185,238 149,337
---------- -------- --------
Cash flows from investing activities:
Capital expenditures (43,496) (29,403) (44,831)
Proceeds from sale of subsidiary 10,048 - -
Proceeds from sale of certain non-operating assets 5,596 - -
Acquisition of business (net of $1,245 cash acquired) - (133,032) -
Pension plan funding (15,192) - -
Other, net 158 (2,405) 217
---------- -------- ---------
Cash used in investing activities (42,886) (164,840) (44,614)
---------- -------- ---------
Cash flows from financing activities:
Additional long-term debt 553,000 29,000 153,000
Repayment of long-term debt (256,750) - (200,000)
Cash dividends paid (59,222) (59,222) (59,220)
Repurchases of common stock (326,991) - -
Other, net (1,732) - 303
---------- -------- ---------
Cash used in financing activities (91,695) (30,222) (105,917)
---------- -------- ---------
(Decrease) in cash and cash equivalents (1,986) (9,824) (1,194)
---------- -------- ---------
Cash and cash equivalents at end of year $ 18,162 $ 20,148 $ 29,972
========== ========= =========
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 repurchase of 34,999,995
of the Company's outstanding common shares on October 2, 1997, in accordance
with the stock buy-back offer. The related cost (approximately $328.9 million)
was funded by the increase in long-term debt and is reflected as a reduction in
shareholders' equity compared to the 1996 balance sheet. Also, on December 31,
1997, the Company completed the sale of Ethyl Additives, BVBA, which owned the
Gent, Belgium, lubricant additives manufacturing and blending facility. 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
operations of the Texaco additives business from March 1, 1996 forward.
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 benefit
of $3,601,000 in 1997, income tax liability of $56,000 in 1996 and income tax
benefit of $262,000 in 1995) are reflected as foreign currency translation
adjustments in Shareholders' Equity and accordingly have no effect on net
income. Transaction adjustments are included in net 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 and most foreign product inventories and on the weighted-average cost
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 are also 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
undiscounted operating cash flows whenever significant events or changes occur
which might impair recovery of recorded costs, and it writes down net recorded
costs of the assets to fair value (based on discounted cash flows or market
values) 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 ($4,991,000
and $6,559,000 at December 31, 1997 and 1996, respectively, net of accumulated
amortization) is being amortized on a straight-line basis, over a period of ten
years. Other intangibles ($72,505,000 and $69,446,000 at December 31, 1997 and
1996, 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 $9,416,000 for 1997,
$8,676,000 for 1996 and $4,504,000 for 1995. Accumulated amortization of
goodwill and other intangibles was $35,852,000 and $26,436,000 at the end of
1997 and 1996, respectively.
The Company re-evaluates goodwill and other intangibles based on
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 (based on discounted cash flows or market values)
when recorded costs, prior to impairment, are higher.
Pension Plans & Other Postemployment Benefits - Annual costs of pension
plans are actuarially determined 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.
31
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 post-retirement 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 $3,032,000, $2,952,000 and $2,703,000 in 1997, 1996 and
1995, 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
$42.2 million, $47.4 million and $54.5 million in 1997, 1996 and 1995,
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 - At
December 31, 1997, the Company was not party to any hedging transactions or
derivative financial instruments. Until recently, the Company was able to limit
foreign currency risk by operational means, primarily matching its cash flow
exposures in major currencies. The ongoing consolidation of manufacturing
operations is expected to reduce the ability to minimize exposures through
operational means. Because foreign exchange rates have been more volatile in
recent years, the Company's risk of incurring foreign exchange losses and gains
increased significantly, even though net foreign currency translation exposures
increased only slightly. Therefore, the Company is investigating and may in the
future participate in external foreign currency hedging transactions.
Unrealized Gain on Marketable Equity Securities - Investments in marketable
equity securities are classified as "available for sale" and are carried at fair
value, which is based on market value. At December 31, 1997, the fair value of
$17,491,500 exceeded cost by $15,422,000, which resulted in an adjustment to
Shareholders' Equity of $9,824,000, net of $5,598,000 in taxes.
Earnings Per Share - Effective December 31, 1997, the Company adopted FASB
Statement No. 128, "Earnings Per Share," which supersedes Accounting Principles
Board ("APB") Opinion No. 15, "Earnings Per Share." This new statement requires
that "basic earnings per share" be computed by dividing income available to com-
mon shareholders by the weighted-average number of common shares outstanding for
the period. "Diluted earnings per share," if different, reflects the potential
dilution that could occur if stock options or other contracts resulted in the
issue or exercise of additional shares of common stock that share in the
earnings.
Since the Company has only common shares, the only potential for dilution
are the options issued under the Company's stock-based compensation plan.
Options are assumed to be converted to common shares when the average market
price of the stock is higher than the option exercise price.
The number of shares used to compute basic and diluted earnings per share
is 109,793,327 and 109,800,596 in 1997, 118,443,835 and 118,448,407 in 1996 and
118,435,921 and 118,447,201 in 1995, respectively.
Stock-Based Compensation - The Company currently accounts for its
stock-based compensation plans pursuant to the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees".
FASB Statement No. 123, "Accounting for Stock- Based Compensation ," allows
companies to account for stock-based compensation plans using a fair-value-based
method or to 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 12, which begins on page 36.
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 from those estimates.
32
2. Pro Forma Information (Unaudited)
On October 2, 1997, the Company completed the repurchase of 34,999,995
shares at $9.25 per share, with the purchase price and related costs totalling
about $328,922,000. The purchase was financed under the Company's new
$900,000,000 Competitive Advance, Revolving Credit Facility and Term Loan
Agreement, which increased the committed funds available for borrowing.
Subsequently, on November 14, 1997, the Company elected to reduce the committed
funds under that agreement to $750,000,000 and, accordingly, has entered into an
Amended and Restated Competitive Advance, Revolving Credit Facility and Term
Loan Agreement.
On February 29, 1996, the Company completed the acquisition of the
worldwide lubricant additives business of Texaco including manufacturing and
blending facilities (with an allocated value of $27.1 million), identifiable
intangibles (with an initially 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 is being 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. To date, the Company has recognized $12.5 million of the contingent
note, which has been allocated to intangible assets. Texaco retained
substantially all noncurrent liabilities.
As the Company's financial statements only include the effects of the
purchase of the 34,999,995 shares and the related borrowing since October 2,
1997, and the 1996 financial statements only include the ten months of
operations of the acquired lubricant additives business after February 29, 1996,
the following selected unaudited pro forma information is being provided to
present a summary of the results of operations of the Company as if the purchase
of shares had occurred as of January 1, 1996, and the acquisition of the Texaco
worldwide lubricant additives business had occurred as of January 1, 1995. The
pro forma information for 1997 and 1996 gives effect to adjustments for the
reduction in outstanding shares and interest expense on additional debt that
would have been incurred to finance the purchase of the shares, and the related
income tax impact. The pro forma information for the years 1996 and 1995 also
includes the combined operations of the Company and the worldwide lubricant
additives business acquired from Texaco after giving effect to adjustments for
interest expense that would have been incurred to finance the acquisition and
other purchase accounting adjustments. The pro forma data is for informational
purposes only and may not necessarily reflect the financial position or results
of operations of the Company had the purchase of shares occurred on January 1,
1996, and had the acquired business been part of the Company for the full years
1996 and 1995.
33
(In thousands Except Per-Share Amounts)(Unaudited)
Pro Forma Pro Forma
Historical Adjustments
Pro Forma Purchased for Purchase
Adjustments Lubricant of Lubricant
Historical for Share Additives Additives
Years ended December 31 Ethyl Repurchase Business Business Pro Forma
- --------------------------------------------------------------------------------------------------------
1997
Net sales $ 1,063,615 - - - $ 1,063,615
Net income $ 77,530 $ (9,975) - - $ 67,555
Basic and diluted earnings per share $ .71 $ .81
Shares used to compute basic
earnings per share 109,793 (26,344) - - 83,449
1996
Net sales $ 1,149,651 - $ 49,854 $ (679) $ 1,198,826
Net income $ 92,972 $ (13,480) $ 711 $ 821 $ 81,024
Basic and diluted earnings per share $ .78 $ .97
Shares used to compute basic
earnings per share 118,444 (35,000) - - 83,444
1995
Net sales $ 960,450 - $396,312 $(52,750) $ 1,304,012
Net income $ 73,963 - $ 503 $ 11,640 $ 86,106
Basic and diluted earnings per share $ .62 $ .73
Shares used to compute basic
earnings per share 118,436 - - - 118,436
The pro forma amounts for 1997 and 1996 give effect to adjustments for the reduction in outstanding shares, the
increase in interest expense on additional debt that would have been incurred to finance the purchase of the
shares, and the related income tax impact.
The pro forma amounts for 1996 and 1995 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 including certain of the acquired business's blending
and packaging operations pursuant to the Company's agreement to blend
and/or package certain products for Texaco under a tolling arrangement ($0
in 1996 and $48,678 in 1995) and intercompany sales ($679 in 1996 and
$4,072 in 1995) had the purchase been completed on January 1, 1995. 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.
- - Reduction of expenses ($2,835 in 1996 and $22,756 in 1995) in selling,
general and administrative expenses, as well as research, development and
testing expenses, realized at the acquisition date, based on staffing
levels and the number of activities and research, development and testing
and other procedures actually being combined because only a small portion
of the staff employed by Texaco was hired by the 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.
34
3. Supplemental Cash-Flow Information
Supplemental information for the Consolidated Statements of Cash Flows is
as follows:
(In Thousands)
1997 1996 1995
------ ------ ------
Cash paid during the year for:
Income taxes $48,875 $37,409 $22,881
Interest and financing
expenses (net of capitalization) 22,477 24,644 31,390
Supplemental investing and financing non-cash
transactions:
Increase in intangibles related to a portion
of the contingent note payable to Texaco
(including deferred interest cost of $1,284) 13,784 - -
Recognition of a portion of contingent note
payable to Texaco 12,500 - -
Liabilities assumed in connection with the
acquisition of the Texaco lubricant
additives business (primarily deferred
taxes and working capital liabilities) - 63,610 -
Also see Note 2 with respect to acquired operations
4. 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 1993-1997. The discussion of geographic
areas information for the years 1995-1997 on page 24 is unaudited.
5. Cash & Cash Equivalents
Cash and cash equivalents consist of the following:
(In Thousands)
1997 1996
------ -------
Cash and time deposits $16,832 $13,894
Short-term securities 1,330 6,254
------- -------
Total $18,162 $20,148
======= =======
Short-term securities (generally commercial paper maturing in less than 90
days) are stated at cost plus accrued income, which approximates market value.
6. Inventories
Domestic and European inventories stated on the LIFO basis amounted to
$156,056,000 and $153,610,000 at December 31, 1997 and 1996, respectively, which
are below replacement cost by approximately $21,976,000 and $16,289,000,
respectively.
7. Deferred Income Taxes & Prepaid Expenses
Deferred income taxes and prepaid expenses consist of the following:
(In Thousands)
1997 1996
------- -------
Deferred income taxes - current $17,740 $15,907
Prepaid expenses 4,117 2,720
------- -------
Total $21,857 $18,627
======= =======
8. Property, Plant & Equipment
Property, plant and equipment, at cost, consist of the following:
(In Thousands)
1997 1996
------- -------
Land $ 49,050 $ 54,646
Land improvements 30,885 30,565
Buildings 99,739 100,881
Machinery and equipment 546,162 548,178
Capitalized interest 20,958 21,638
Construction in progress 19,619 8,237
------- -------
Total $766,413 $764,145
======= =======
The cost of 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 in 1997, 1996 and 1995 was $924,000, $634,000 and
$2,223,000, respectively, while amortization of capitalized interest (which is
included in depreciation expense) was $1,867,000, $1,864,000 and $1,878,000,
respectively.
35
9. Accrued Expenses
Accrued expenses consist of the following:
(In Thousands)
1997 1996
Employee benefits, payroll and
related taxes $ 13,183 $15,356
Other 37,560 48,811
------- ------
Total $ 50,743 $64,167
======= ======
10. Long-Term Debt
A summary of long-term debt maturities at December 31, 1997, is listed below:
(In Thousands)
Variable-Rate
------------------------------
Note Medium-
Payable to Term Bank Term
Texaco Loan Loans Notes Total
1998 $ 40,000 $ 6,750 $ 46,750
1999 $ 12,500 20,000 $ 9,000 6,750 48,250
2000 60,000 6,750 66,750
2001 80,000 6,750 86,750
2002 100,000 293,000 393,000
------- ------- ------- ------ --------
$ 12,500 $300,000 $ 302,000 $27,000 641,500
======= ======= ======== ======
Less unamortized discount (364)
-------
Total long-term debt at December 31, 1997 641,136
Less amount maturing during 1998
(net of unamortized discount) (46,707)
-------
Amount maturing after 1998 $594,429
=======
The Company has an unsecured Amended and Restated Competitive Advance,
Revolving Credit Facility and Term Loan Agreement with a group of banks that
permit it to borrow up to $750 million. The agreement is composed of a
competitive advance and a revolving credit facility, under which the Company can
borrow up to $450 million, and a term loan, pursuant to which the Company was
able to initially borrow up to $300 million. A facility fee, 0.175% or 17.5
basis points, based on the Company's debt rating, is assessed on the entire
amount of the revolving credit facility. The credit facility permits borrowing
for the next five 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
relating to consolidated debt (as defined) including: (i) maximum consolidated
leverage or indebtedness to earnings of 3.5 to 1.0, (ii) minimum consolidated
earnings to fixed charges coverage of 1.25 to to 1.0 and (iii) minimum
consolidated net worth (defined as a percentage of shareholders' equity after
the effects of the repurchase of about 35 million shares on October 2, 1997,
plus 50% of future net income). The Company was in compliance with such
covenants at December 31, 1997. Under this agreement, $275 million was borrowed
under the revolving credit facility and $300 million was borrowed under the term
loan at December 31, 1997. Amounts outstanding under the revolving credit
facility at August 28, 2002, mature on that date. The term loan is to be repaid
over the next five years. Average interest rates on variable-rate bank loans
during 1997 and 1996 were 6.1% and 5.9%, respectively.
The Company has an uncommitted agreement with NationsBank, N.A. providing
for immediate borrowings of up to $50 million at its money-market rate. There
was $18 million outstanding under this agreement at December 31, 1997. The
average interest rates on borrowing during 1997 and 1996 under the agreement
were 5.8% and 5.6%, 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 covenants,
representations and events of default typical of a loan of this nature. The
average interest rate was 6.1% during 1997 and 5.76% during 1996.
The Company's $27 million variable-rate (ranging from 8.7% to 8.86%)
medium-term notes were issued in a series of $6.75 million each, which are due
annually in serial order at 100% of their principal amount, December 15, 1998,
through December 15, 2001.
The Company also has a 5.99% contingent note payable to Texaco of up to $60
million that is associated with Ethyl's 1996 acquisition of Texaco's worldwide
lubricant additives business. The actual amount due on the contingent note is
being determined using an agreed-upon formula based on volumes of certain
acquired product lines shipped during calendar years 1996 through 1998 and is
due February 26, 1999. Based on actual shipments through December 31, 1997,
$12.5 million of the contingent note is recorded as of December 31, 1997.
36
11. Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following:
(In Thousands)
1997 1996
Provision for environmental remediation
and future shutdown costs $52,228 $50,954
Other 34,080 33,548
------ ------
Total $86,308 $84,502
====== ======
12. Capital Stock & Stock Options
Stock Repurchase - On October 2, 1997, the Company acquired approximately
35 million shares of the Company's common stock in accordance with the stock
buy-back offer further discussed in Note 2 on pages 32 and 33.
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. The Company's incentive stock option plan limits the number of shares
issuable under the option plan to 11,900,000, with an annual limit of 200,000
shares for which options may be granted to an individual. At December 31, 1997
and 1996, 6,254,721 and 5,964,925 shares, respectively, were available for
grant.
A summary of the status of the Company's stock option plan as of December
31, 1995, 1996 and 1997, and changes during the years ending on those dates is
presented below:
Weighted-
Average
Exercise
Shares Price
- -------------------------------------------------------------------
Outstanding at January 1, 1995 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
Granted 200,000 9.25
Lapsed (489,796) 12.45
---------
Outstanding at December 31, 1997 3,175,133 11.88
=========
Exercisable at:
December 31, 1995 944,240
December 31, 1996 895,329
December 31, 1997 749,533
The fair value, as of the grant date, of each option granted in 1997 and
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:
1997 1996
---- ----
Dividend yield 2.8% 4.6%
Expected volatility 17.5% 19.4%
Risk-free interest rate 5.7% 6.3%
Expected life 7 years 7 years
Based on these assumptions, the stock options granted in 1997 and 1996 have
an estimated average value, as of the grant date, of $2.10 and $1.63 per share,
respectively.
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 1997 and 1996 net income
would have been reduced on a pro forma basis from $77,530,000 to $77,355,000 and
from $92,972,000 to $92,881,000, respectively. Basic and diluted earnings per
share in 1997 would have decreased from $.71 to $.70. Basic and diluted earnings
per share in 1996 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 for the years
presented.
37
The following tables summarize information about the stock options
outstanding or exercisable at December 31, 1997:
Options Outstanding
---------------------------------------------------------------
Range of Number Weighted-Average
Exercise Outstanding Remaining Exercise
Prices at 12/31/97 Contractual Life Price
---------------------------------------------------------------
$ 8.88 280,000 8.9 years $ 8.88
9.00 - 9.86 259,681 8.0 9.33
11.54 - 11.71 161,679 3.6 11.57
12.50 - 12.83 2,473,773 6.2 12.51
---------
8.88 - 12.83 3,175,133 6.4 11.88
=========
Options Exercisable
-----------------------------------------------
Range of Number
Exercise Exercisable Weighted-Average
Prices at 12/31/97 Exercise Price
-----------------------------------------------
$ 8.88 - $ 8.88
9.00 - 9.86 59,681 9.59
11.54 - 11.71 161,679 11.57
12.50 - 12.83 528,173 12.53
-------
8.88 - 12.83 749,533 12.08
=======
13. Losses and Gains On Foreign Currency
Foreign currency transaction adjustments resulted in losses of $5,551,000
in 1997 and $3,158,000 in 1996 and a gain of $1,827,000 in 1995 and are included
in income.
14. Contractual Commitments & Contingencies
The Company has a number of operating lease agreements primarily for office
space, transportation equipment and storage facilities.
Rental expense was $16,440,000 for 1997, $17,126,000 for 1996 and
$13,703,000 for 1995.
Future lease payments for the next five years for all noncancelable leases
as of December 31, 1997, are $12,099,000 for 1998, $6,156,000 for 1999,
$3,458,000 for 2000, $1,342,000 for 2001, $951,000 for 2002, and amounts payable
after 2002 are $2,159,000.
Contractual obligations for plant construction and purchases of real
property and equipment amounted to approximately $3,000,000 at December 31,
1997.
The Company and Albemarle Corporation ("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 $29 million in 1997, $34 million in 1996 and $48
million in 1995 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 ex-pected 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, 1997 and 1996, the Company had accruals of $44,300,000 and
$41,200,000, 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.
38
As of December 31, 1997, $12.5 million of a possible $60 million contingent
note is recognized in long-term debt. The Company agreed to this contingent note
as part of the acquisition of the lubricant additives business of Texaco. See
Note 2 on pages 32 and 33 for additional information.
15. 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. The
components of U.S. net pension income are as follows:
(In Thousands)
Years ended December 31 1997 1996 1995
Return on plan assets:
Actual return $84,672 $67,490 $48,411
Actual return (higher)
than expected (51,034) (35,451) (17,612)
------ ------ ------
Expected return 33,638 32,039 30,799
Amortization of transition
asset 4,277 4,277 4,277
Service cost (benefits earned
during the year) (4,368) (4,210) (2,821)
Interest cost on projected
benefit obligation (21,561) (21,428) (22,753)
Amortization of prior
service cost (2,684) (2,816) (2,683)
------ ------ ------
Net pension income $ 9,302 $ 7,862 $ 6,819
------ ------ ------
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% at December 31, 1997, 1996 and 1995. 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, 1997, 1996 and 1995. The expected long-term rate of return
on plan assets was assumed to be 9% each year. Net pension income (table above)
is determined using assumptions as of the beginning of each year. Funded status
(table at right) 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 1997 1996
Plan assets at fair value $483,309 $426,671
Less actuarial present value of
benefit obligations:
Accumulated benefit obligation
(including vested benefits of
$294,721 in 1997 and $293,134
in 1996) 298,531 297,031
Projected compensation increase 21,540 20,394
------- -------
Projected benefit obligation 320,071 317,425
------- -------
Plan assets in excess of projected
benefit obligation 163,238 109,246
Unrecognized net (gain) (79,542) (34,142)
Unrecognized transition asset being
amortized principally over 16 years (18,030) (22,307)
Unrecognized prior service cost
being amortized 18,285 21,069
------- -------
Prepaid pension expense $ 83,951 $ 73,866
======= =======
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 $17,612,000 and $12,451,000 at December 31, 1997 and
1996, respectively. In December 1997, the Company established a Rabbi Trust into
which it invested $15,192,000, an amount equivalent to the accumulated benefit
obligation of the already retired beneficiaries of the SERP. The prepaid pension
asset in the table above is net of an accrued pension liability of $12,495,000
and $11,164,000 related to the SERP at December 31, 1997 and 1996, respectively.
Pension expense for the SERP totalled $2,093,000, $1,410,000 and $1,456,000 for
1997, 1996 and 1995, respectively.
Foreign Pension Plans - Pension coverage for employees of the Company's
foreign subsidiaries is provided through separate defined benefit and/or defined
contribution plans. Obligations under such plans are systematically provided for
by depositing funds with trustees or under insurance policies. Pension cost for
1997, 1996 and 1995 for these plans was $2,444,000, $1,681,000 and $1,195,000,
respectively. The actuarial present value of accumulated benefits at December
31, 1997 and 1996, was $26,630,000 and $25,527,000, substantially all of which
was vested, compared with net assets available for benefits of $25,832,000 and
$23,717,000, respectively. The assets and benefit obligations of these foreign
pension plans are not included in the tables above.
39
Consolidated - Consolidated net pension income for 1997, 1996 and 1995 was
$6,858,000, $6,181,000 and $5,624,000, 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 funds 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 1997 1996 1995
---- ---- ----
Service cost (benefits earned
during the year) $ (912) $ (932) $ (720)
Interest cost on accumulated
postretirement benefit
obligation (3,430) (3,424) (3,654)
Amortization of prior service cost 28 28 72
Actual return on plan assets 2,317 2,286 2,309
----- ----- -----
Net periodic postretirement
benefit cost $(1,997) $(2,042) $(1,993)
===== ===== =====
Summary information on the Company's plans is as follows:
(In Thousands)
Years ended December 31 1997 1996
Accumulated postretirement benefit
obligation (APBO) for:
Retirees $ 37,538 $ 39,564
Fully eligible, active plan
participants 3,096 2,463
Other active plan participants 10,939 9,513
------ ------
51,573 51,540
Plan assets at fair value (26,450) (26,663)
Unrecognized prior service cost 278 307
Unrecognized net gain 3,205 3,367
------ ------
Accrued postretirement benefit cost $ 28,606 $ 28,551
====== ======
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% at December 31, 1997,
1996 and 1995. The expected long-term rate of return on plan assets used in
determining the net periodic postretirement benefit cost was 7% at December 31,
1997, and 9% for the years 1997, 1996 and 1995, and the estimated pay increase
was 4.5% at December 31, 1997, 1996 and 1995. The assumed health-care cost trend
rate used in measuring the accumulated postretirement benefit obligation was 12%
in 1995, 11% in 1996 and 10% in 1997, declining by 1% per year to an ultimate
rate of 7%, except that managed-care costs were assumed to begin at 9% in 1995,
8% in 1996 and 7% in 1997, 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, 1997, would be increased by approximately $3.2 million.
The effect of this change on the sum of the service cost and interest cost
components of net periodic postretirement benefit cost for 1997 would be an
increase of about $0.4 million.
Changes in Estimates - The rate-change effects on net pension income and
postretirement benefit cost are not material to the Company's financial
statements.
16. Other Expense (Income), Net
Other expense (income), net in 1997 included a net loss relating to
non-operating assets ($16,343,000 of impairment losses net of $10,619,000 of
gains on sales). About $7.1 million of the $12.7 million proceeds from the sale
was not received until January 1998.
17. Income Taxes
Income before income taxes and current and deferred income taxes are
composed of the following:
(In Thousands)
Years ended December 31 1997 1996 1995
Income before income taxes:
Domestic $ 82,235 $114,547 $ 90,409
Foreign 27,747 31,225 25,767
------- ------- -------
Total $109,982 $145,772 $116,176
======= ======= =======
Current income taxes:
Federal $ 21,100 $ 28,982 $ 15,442
State 2,034 2,579 2,409
Foreign 11,890 13,379 8,648
------- ------- -------
Total 35,024 44,940 26,499
------- ------- -------
Deferred income taxes:
Federal 452 8,196 12,002
State (1,298) 1,370 1,427
Foreign (1,726) (1,706) 2,285
------- ------- -------
Total (2,572) 7,860 15,714
------- ------- -------
Total income taxes $ 32,452 $ 52,800 $ 42,213
======= ======= =======
40
The deferred income tax assets and deferred income tax liabilities recorded
on the balance sheets as of December 31, 1997 and 1996, are as follows:
(In Thousands)
Deferred tax assets: 1997 1996
------ -------
Environmental reserves $15,708 $15,708
Intercompany profit in
inventories 10,467 6,448
Loss on impairment of
non-operating assets 6,358 -
Undistributed earnings of
foreign subsidiaries 4,744 5,090
Future employee benefits 4,268 4,266
Foreign currency translation
adjustments 3,601 (56)
Inventory capitalization 1,689 978
Facilities write-down and other costs 744 4,749
Acquired fixed asset basis differences
of Belgian subsidiary - 4,823
Other 1,391 866
------ -------
Gross deferred tax assets 48,970 42,872
Valuation allowance - (6,277)
------ -------
Net deferred tax assets 48,970 36,595
------ -------
Deferred tax liabilities:
Depreciation 41,056 37,486
Future employee benefits 20,056 17,346
Long-term contingent note
payable 18,169 22,422
Unrealized gain on marketable
equity securities 5,598 -
Capitalization of interest 2,742 2,510
Other 5,123 5,300
------ -------
Deferred tax liabilities 92,744 85,064
------ -------
Net deferred tax liabilities $43,774 $48,469
====== =======
Reconciliation to financial statements:
Deferred tax assets $17,740 $15,907
Deferred tax liabilities 61,514 64,376
------ -------
Net deferred tax liabilities $43,774 $48,469
====== ======
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 would not be realized. Therefore, a
valuation allowance of $6,277,000 (related to fixed asset basis differences of
$4,823,000 and dismantling and decontamination reserves of $1,454,000) was
established for these assets at the date of acquisition. In 1997, this
subsidiary was sold, the benefit realized, and the related accounts have been
removed from the balance sheet.
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 significant differences between the U.S. federal statutory rate and the
effective income tax rate are as follows:
% of Income
Before Income Taxes
1997 1996 1995
Federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit 2.0 1.8 2.1
Foreign sales corporation benefit (0.6) (0.1) (0.6)
Research tax credit (0.4) (0.4) (1.7)
Sale of Belgian subsidiary (3.4) - -
Favorable tax settlements and adjustments (3.5) - -
Provision for legal settlement - - 0.9
Other items, net 0.4 (0.1) 0.6
---- ---- ----
Effective income tax rate 29.5% 36.2% 36.3%
==== ==== ====
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."
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, 1997
Cash and cash equivalents $ 18,162 $ 18,162
Long-term debt, including current maturities $641,136 $641,887
December 31, 1996
Cash and cash equivalents $ 20,148 $ 20,148
Long-term debt, including current maturities $332,181 $333,889
41
19. Comprehensive Income
Information on the tax effects on items in the Consolidated Statements of
Comprehensive Income is as follows:
(In Thousands)
1997 1996 1995
------- ------- -------
Unrealized gain on
marketable equity securities $ 15,422 - -
Income tax (5,598) - -
------- ------- -------
Unrealized gain on
marketable equity securities, net of tax $ 9,824 - -
======= ======= =======
Foreign currency translation
adjustment $(16,340) $(6,156) $6,994
Income tax 6,079 2,178 (2,651)
------- ------- -------
Foreign currency translation
adjustment, net of tax $(10,261) $(3,978) $4,343
======= ======= =======
Reclassification of foreign
currency translation adjustment for the
loss included in income, arising from sale
of foreign subsidary $ 6,326 - -
Income tax (2,296) - -
------- ------- -------
Reclassification of foreign currency
translation adjustment, net of tax $ 4,030 - -
======= ======= =======
FASB Statement No. 130, "Reporting Comprehensive Income" was adopted
effective December 31, 1997. This statement establishes standards for reporting
"comprehensive income" in financial statements, including display of accumulated
other comprehensive income in separate captions in the equity section of the
balance sheet. Material components of accumulated other comprehensive income
must also be disclosed. This statement only modifies disclosures, including
financial statement disclosures, and does not result in other changes to
financial statements.
20. 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.
21. Recently Issued Accounting Standard
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" is effective for annual periods beginning after December
15, 1997, and for interim periods after the year of adoption. This statement
establishes standards for reporting information about operating segments,
including related disclosures about products and services, geographic areas, and
major customers. The Company has not identified what impact, if any, Statement
No. 131 will have on operating segments reported, or on the financial statements
and related disclosures.
22. Selected Quarterly Consolidated Financial Data
Information for 1996 includes the results of the worldwide lubricant
additives business of Texaco since its acquisition on February 29, 1996.
(In Thousands Except Earnings Per Share) (Unaudited)
- --------------------------------------------------------------------------------
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales $265,713 $269,336 $254,074 $274,492
Gross profit $ 76,025 $ 79,371 $ 69,714 $ 76,845
Net income $ 20,589 $ 21,938 $ 18,846 $ 16,157
Basic and diluted earnings
per share (a) $ .17 $ .19 $ .16 $ .19
Shares used to compute basic earnings
per share(a) 118,444 118,444 118,444 83,842
1996
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
Basic and diluted earnings
per share (a) $ .16 $ .17 $ .24 $ .21
Shares used to compute basic earnings
per share(a) 118,444 118,444 118,444 118,444
(a) Earnings per share figures and number of shares used to compute basic
earnings per share have been restated in accordance with FASB Statement No.
128, adopted effective December 31, 1997.
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, 1997 and 1996, and
the related consolidated statements of income, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
January 20, 1998
- --------------------------------------------------------------------------------
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 19, 1998, are set
forth below.
Name Age Office
- -------------------------------------------------------------------------------------------
Bruce C. Gottwald * 64 Chairman of the Board and of the Executive Committee,
Chief Executive Officer, Director
Thomas E. Gottwald * 37 President and Chief Operating Officer, Director
J. Robert Mooney 53 Senior Vice President and Chief Financial Officer
Alexander McLean 41 Senior Vice President - Petroleum Additives
Newton A. Perry 55 Senior Vice President - Antiknocks
Wayne C. Drinkwater 51 Controller - Principal Accounting Officer
David A. Fiorenza 48 Vice President and Treasurer
Russell L. Gottwald, Jr 46 Vice President - Product Supply
C.S. Warren Huang 48 Vice President - Managing Director, Asia Pacific
Ronald E. Kollman 51 Vice President - Research and Development
Donald R. Lynam 59 Vice President - Air Conservation
Steven M. Mayer 55 Vice President - General Counsel
Ian A. Nimmo 56 Vice President - Global Marketing
Henry C. Page, Jr 59 Vice President - Human Resources & External Affairs
Ann M. Pettigrew 43 Vice President - Health, Safety & Environment
Roger H. Venable 51 Vice President - Antiknocks
M. Rudolph West 44 Secretary
*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 23, 1998). All
such officers have been employed by the Company for at least the last five
years, with the exception of J. Robert Mooney, who joined the Company on October
1, 1997, after 21 years as a partner with Coopers & Lybrand L.L.P., independent
certified public accountants.
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" 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, 1997
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997
Consolidated Statements of Shareholders' Equity for each of the three years in
the period ended December 31, 1997
Consolidated Statement of Comprehensive Income for each of the three years in
the period ended December 31, 1997.
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 $750 million Credit Agreement, dated as of November 14, 1997 (filed as
Exhibit 4.1 to the registrant's Report on Form 10-Q for the quarter ended
September 30, 1997, 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 to the
registrant's Report on Form 10-Q for the quarter ended March 31, 1994, 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 (filed as Exhibit 10.6 to the registrant's
Report on Form 10-K for the year ended December 31, 1996, and incorporated
herein by reference thereto).
10.7 Employment and Severance Benefits Agreement dated October 1, 1997, for J.
Robert Mooney, Senior Vice President and Chief Financial Officer.
11.1 Computation of Basic and Diluted Earnings Per Share.
11.2 Computation of Pro Forma Basic and Diluted Earnings Per Share (Stock
Repurchase 1997-1996 and Texaco Additives 1996-1995).
21 List of subsidiaries of the registrant.
23 Consent of Independent Certified Public Accountants.
99 Five Year Summary.
(b) No report on Form 8-K has been filed during 1997.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this Form 10-K 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 19, 1998
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 19, 1998.
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/ Thomas E. Gottwald President, Chief Operating Officer and Director
(Thomas E. Gottwald)
/s/ J. Robert Mooney Senior Vice President and Chief Financial Officer
(J. Robert Mooney) (Principal Financial Officer)
/s/ Wayne C. Drinkwater Controller
(Wayne C. Drinkwater) (Principal Accounting Officer)
/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)
/s/ Charles B. Walker Director
(Charles B. Walker)
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 $750 million Credit Agreement, Incorporated by reference -
dated as of November 14, 1997, 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 Incorporated by reference -
see Page 44
10.7 Employment and Severance Benefits
Agreement dated October 1, 1997 Pages 49 through 63
11.1 Computation of Earnings Per Share Page 64
11.2 Computation of Pro Forma Earnings Per
Share (Stock Repurchase 1997-1996
And Texaco Additives 1996-1995) Page 65
21 List of Subsidiaries Page 66
23 Consent of Independent Page 67
Certified Public Accountants
27 Finanical Data Schedule Page 68
99 Five Year Summary Pages 47 and 48