Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ETHYL CORPORATION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code - (804) 788-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Number of shares of common stock, $1 par value, outstanding as of October 31, 2002: 16,689,009.

Table of Contents

ETHYL CORPORATION
INDEX

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)

3

Table of Contents

ETHYL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes to financial statements.

4

Table of Contents

ETHYL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

See accompanying notes to financial statements.

5

Table of Contents

ETHYL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

6

Table of Contents

Net Sales by Segment
(in millions)

Segment Operating Profit
(in millions)

4.

During first quarter 2001, TEL inventory quantities were permanently reduced resulting in a liquidation of LIFO inventory layers. The effect of the liquidation was to decrease cost of goods sold by $1.5 million and increase net income by $900 thousand or $.06 per share.

7

Table of Contents

 

		September 30				December 31
		2002				2001
New term loan		$	205,691			$	205,691
Revolving credit agreement			54,000				40,800
Term loan agreement			24,774				83,414
Private borrowing			18,640				-
			303,105				329,905
Obligation under capital lease			5,684				6,052
Total debt			308,789				335,957
Less current portion			(284,993	)			(30,504	)
Long-term debt		$	23,796			$	305,453

8

Table of Contents

 

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2002				2001				2002				2001
Net income (loss)		$	10,867			$	661			$	6,783			$	(105,390	)
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on marketable equity securities			(709	)			(717	)			(982	)			(5,486	)
Foreign currency translation adjustments			(927	)			2,158				3,958				(2,466	)
Other comprehensive (loss) income			(1,636	)			1,441				2,976				(7,952	)
Comprehensive income (loss)		$	9,231			$	2,102			$	9,759			$	(113,342	)

The components of accumulated other comprehensive loss consist of the following:

9

Table of Contents

9.		Upon adopting Statement of Financial Accounting Standards No. 142, during the first quarter 2002, we wrote-off goodwill of $3.1 million ($2.5 million after tax or $.15 per share.) If the write-off had occurred on January 1, 2001, the third quarter 2001 net income would have been increased by $141 thousand and the nine month 2001 net loss, exclusive of the goodwill writeoff, would have been reduced by $435 thousand. The impact on basic and diluted earnings per share would have been $.01 for the third quarter 2001 and $.03 for the nine months 2001.
10.		Asset writedowns (through accelerated depreciation), severance, early retirement, and other costs related to the rationalization of our engine oil additives product lines in 2001 were $500 thousand ($315 thousand after tax or $.02 per share) for third quarter 2001 and $74.0 million ($46.7 million after tax or $2.80 per share) for nine months 2001. These costs are included in the Consolidated Statements of Income as follows:

		(in millions)
		Three Months			Nine Months
		Ended			Ended
		September 30			September 30
		2001			2001
Cost of goods sold		$	-		$	41.8
Selling, general, and administrative expenses			0.1			0.1
Research, development, and testing expenses			-			3.0
Special items income (expense), net			0.4			29.1
		$	0.5		$	74.0

Cost of goods sold in 2001 includes a $41.8 million charge ($26.1 million after tax or $1.56) for the nine months 2001 for a portion of the accelerated depreciation of the engine oil additives facilities that were idled in 2001, as well as the writedown of certain inventories and shutdown costs. Selling, general, and administrative expenses in 2001 include a $135 thousand charge ($88 thousand after tax) for third quarter and nine months for a portion of the accelerated depreciation and related expenses. The 2001 research, development, and testing expenses include a charge of $3.0 million ($1.9 million after tax or $.12 per share) for the nine months 2001 for a portion of the accelerated

10

Table of Contents

11

Table of Contents

ITEM 2.    Management’s Discussion and Analysis of
                   Results of Operations and Financial Condition

The following is management’s discussion and analysis of certain significant factors affecting our results of operations and changes in financial condition since December 31, 2001. Our reportable segments, petroleum additives and tetraethyl lead (TEL), are strategic business units that we manage separately.

Some of the information presented in the following discussion constitutes forward-looking comments within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking comments may focus on future objectives or expectations about future performance and may include statements about trends or anticipated events.

We believe our forward-looking comments are based on reasonable expectations and assumptions, within the bounds of what we know about our business and operations. However, we offer no assurance that actual results will not differ materially from our expectations due to uncertainties and factors that are difficult to predict and beyond our control. We identify certain of these factors in Item 7 in our 2001 Annual Report on Form 10-K and incorporate the same herein by reference.

Results of Operations

Overview

We are continuing to make steady progress in essentially all areas of the petroleum additives segment following our restructuring in 2001. We have strengthened our product marketing teams and regional management teams. We continue to make a significant investment in research and development to more fully leverage our technology and product portfolio.

Reflecting the efforts to grow all areas of our petroleum additive business with a focus on profitability instead of market share, third quarter 2002 and nine months 2002 net sales were higher in substantially all areas, excluding engine oil additives, than the same periods in 2001. We have stabilized our business base in engine oil and when compared to the same periods in 2001, excluding the engine oil additives product line, petroleum additive net sales were 11% higher for nine months 2002 and 18% higher for third quarter 2002.

Operating results have also improved in all areas of petroleum additives. Excluding nonrecurring items, petroleum additives segment operating profit for nine months 2002 is nearly double the results of nine months 2001, and is the highest it has been for nine months since 1999. The third quarter 2002 operating profit also improved significantly and was the best quarterly results this segment has had since 1998.

We now expect that we will achieve the extension of our loan facility to March 31, 2004. In addition, through nine months 2002, we met certain covenant conditions, which will result in a decrease in the interest rate that we are charged on our loan facility. The interest rate charged on our loan facility is LIBOR plus a premium. We expect the premium will be reduced 0.75% in the fourth quarter 2002.

Going forward, Ethyl remains committed to building our business and providing the most advanced products and comprehensive testing programs in the industry to support our customers worldwide.

12

Table of Contents

Net Sales

Our consolidated net sales for the third quarter 2002 amounted to $177.6 million, representing an increase of 7% from the 2001 level of $166.0 million. The nine months 2002 net sales of $503.6 million were 10% lower than the nine months 2001 amount of $560.9 million. The table below shows our consolidated net sales by segment. We reclassified previously reported net sales amounts for the third quarter 2001 and nine months 2001 to comply with recent accounting guidance. There was no effect on net income as a result of these reclassifications. The net effect of the adoption was increased net sales, as well as increased cost of goods sold, of $5.3 million for the third quarter 2001 and $17.1 million for the nine months 2001.

Net Sales by Segment
(in millions)

Petroleum Additives Segment

Petroleum additives net sales in the third quarter 2002 of $175.5 million were up $11.5 million (7%) from $164.0 million in the third quarter 2001. While total shipments were about even for third quarter 2002 when compared to the same period in 2001, shipments excluding engine oil additives products were up 15%. Favorable currency resulted in approximately $4 million improvement in net sales. The remaining improvement primarily reflects a change in mix from third quarter 2001 caused by shipping more higher-priced petroleum additives products.

The nine months 2002 net sales were $48.6 million (9%) lower than 2001. Lower shipments resulted in lower sales of $47.9 million, including a negative currency impact of about $3 million. This reduction in sales reflects the lower engine oil shipments and includes the impact of the loss in 2001 of three high-volume engine oil customers. Shipments to these customers continued during the first quarter 2001, but were substantially complete by the end of the second quarter 2001. Net sales of petroleum additives, excluding the engine oil product line, were up 11% for the first nine months.

TEL Segment

Most of the TEL marketing activity is through the agreements with Octel, under which we do not record the sales transactions. Therefore, the TEL net sales shown in the table above are those made by Ethyl in areas not covered by the agreements, as well as sales made to Octel under the terms of the agreements.

Total TEL sales in the third quarter 2002 were about even with third quarter 2001, while nine months 2002 was $8.7 million lower than nine months 2001.

During first quarter 2001, Octel purchased substantially all of the remaining inventory that they were to purchase under the agreements. This resulted in sales to Octel being $8.3 million lower

13

Table of Contents

for nine months 2002 as compared to the same period in 2001. There were no sales to Octel in the third quarter for either 2002 or 2001. Third quarter 2002 sales, other than to Octel, were even with third quarter 2001 and $400 thousand lower for nine months 2002 when compared to the same 2001 period.

Segment Operating Profit

Ethyl evaluates the performance of petroleum additives and TEL based on segment operating profit. Corporate departments and other expenses outside the control of the segment manager are not allocated to segment operating profit. Depreciation on segment property, plant, and equipment and amortization of segment intangible assets and the prepayment for services are included in the operating profit of each segment.

Operating profit by segment and reconciliation to income before income taxes is shown below followed by a review of the results.

Segment Operating Profit
(in millions)

Third quarter 2002 segment operating profit was $28.1 million as compared to $12.5 million for the same 2001 period. Third quarter 2001 included nonrecurring income, net of $2.9 million. Excluding nonrecurring items, combined segment operating profit increased significantly from 2001 levels. Most of this increase reflects an improvement in petroleum additives operating profit.

14

Table of Contents

Nine months 2002 segment operating profit was $57.1 million and included a nonrecurring charge of $3.1 million for the write-off of goodwill upon the adoption of SFAS 142, as well as a second quarter nonrecurring income item of $255 thousand for a change in estimate of the restructuring accrual for the engine oil additives rationalization. The segment operating loss for nine months 2001 was $21.6 million and included a nonrecurring expense of $70.6 million for costs related to the engine oil additives rationalization. Excluding these nonrecurring items, combined segment operating profit increased 22% from 2001 levels. The nine months reflected improvement in petroleum additives operating profit, which was partially offset by lower TEL profit.

Petroleum Additives Segment

Third Quarter 2002 vs. Third Quarter 2001 - Petroleum additives third quarter 2002 operating profit was $25.0 million as compared to $9.1 million for third quarter 2001. Excluding nonrecurring items, petroleum additives operating profit for the third quarter 2002 of $25.0 million increased over 300% from third quarter 2001 operating profit of $6.2 million on the same basis.

When compared to third quarter 2001, operating profit for third quarter 2002 is higher in all product lines, including improved engine oil additives results.

The improved third quarter profits this year reflect the combined impact of improved asset utilization resulting in lower manufacturing costs following our 2001 restructuring initiatives, as well as strong third quarter plant production and increased shipments of higher margin products. The strong plant production during the third quarter included some increase of inventory in anticipation of scheduled plant maintenance during the fourth quarter. Shipments, excluding engine oil additives products, were up 15% for the 2002 quarter compared to third quarter 2001, but overall, shipments were about even when comparing third quarter 2002 to the same 2001 period. Raw material costs were also up slightly between the two quarters. A positive impact from foreign exchange also contributed to the improved results.

The nonrecurring items in the third quarter 2001 amounted to $2.9 million income. The gain on the sale of Bracknell, England assets amounted to $3.4 million. This was partially offset by a $500 thousand charge related to further cost reduction initiative expenses. These costs included a noncash charge of $100 thousand for accelerated depreciation, as well as certain other related costs, and $400 thousand for severance and early retirement.

Research, development, and testing expenses (R&D) in the petroleum additives segment were about even when comparing third quarter 2002 to the same period in 2001. Decreases for such expenses in the engine oil additives business were offset by similar increases across other product lines.

Selling, general, and administrative expenses (SG&A) increased $1.2 million or 10.3% from third quarter 2001 levels. As a percentage of net sales, SG&A expenses combined with R&D expenses, decreased from 14.5% for the third quarter 2001 to 14.1% for the same period this year. This decrease reflects the 7% increase in net sales from third quarter 2001, partially offset by higher SG&A expenses.

Nine Months 2002 vs. Nine Months 2001 – Excluding nonrecurring items, petroleum additives operating profit for nine months 2002 of $49.0 million almost doubled from the nine months 2001 level of $25.0 million. All major product lines reflect improved operating results. Including nonrecurring charges, the petroleum additives operating profit for nine months 2002

15

Table of Contents

was $47.8 million as compared to an operating loss of $45.6 million for the same period last year.

Similarly to the third quarter, the increase in operating profit compared to nine months 2001 reflects lower manufacturing costs, which include the benefit of our improved asset utilization efforts, and an increase in shipments of higher margin products. In addition, although raw material costs are now increasing, when comparing nine months 2002 to the same period in 2001, raw material costs were somewhat lower. Significantly lower R&D expenses also contributed to the higher operating profit. These factors were partially offset by unfavorable foreign exchange and lower shipments in engine oil additives products. Selling, general, and administrative expenses were about even when comparing nine months 2002 and nine months 2001.

The nonrecurring item for nine months 2002 was for a $1.5 million write-off of goodwill, which was partially offset by a $255 thousand benefit related to a change in estimate of the restructuring accrual for the engine oil additives rationalization. The goodwill write-off was done in accordance with Statement of Financial Accounting Standards No. 142. The nonrecurring charges for our engine oil additives product line for nine months 2001 amounted to $70.6 million. These costs included a noncash charge of $42.5 million for a portion of the accelerated depreciation of the engine oil facilities that were indefinitely idled in the second quarter 2001, as well as certain other related costs. Also included is $29.1 million for severance, early retirement, and other expenses, as well as $2.4 million for shutdown costs. These are offset by the $3.4 million gain on the sale of Bracknell, England assets.

R&D expenses in the petroleum additives segment for nine months 2002 decreased 10% compared to the 2001 period. The decrease primarily resulted from reduced R&D in our engine oil additives business, which was partially offset by increases in certain other product lines. Also, included in nine months 2001 R&D as shown on the Consolidated Statements of Income is $3.0 million related to the engine oil additives rationalization.

SG&A expenses were about even when comparing nine months 2002 with nine months 2001. As a percentage of net sales, SG&A expenses, combined with R&D expenses, increased from 14.5% for nine months 2001 to 15.1% for nine months 2002. This increase reflects the significant reduction in net sales for nine months 2002, as compared to nine months 2001. This impact was partially offset by lower R&D expenses.

TEL Segment

TEL operating profit for the third quarter 2002 was $3.1 million and included $8.3 million from the TEL marketing agreements. In comparison, third quarter 2001 amounted to $3.4 million and included $5.9 million from the TEL marketing agreements.

Third quarter 2002 also includes an increase in our provision for legal proceedings. This provision is for a charge for administrative or judicial actions including, for example, claims for remediation under environmental laws such as Superfund, product liability cases, and premises asbestos cases.

Nine months 2002 TEL operating profit was $10.9 million, excluding a nonrecurring charge of $1.6 million for the write-off of goodwill upon the adoption of SFAS 142, and included $18.5 million from the TEL marketing agreements. Including the $1.6 million nonrecurring charge, nine months 2002 operating profit was $9.3 million.

16

Table of Contents

Operating profit for nine months 2001 was $24.0 million, including $25.5 million from the TEL marketing agreements. Nine months 2001 also reflects a benefit of $1.5 million resulting from the liquidation of LIFO inventory. In addition, operating profit for the nine months 2001 included the sale of substantially all of the remaining inventory that Octel is required to purchase under the agreements.

This business is characterized by significant quarterly swings in shipments and profits. While the first half of 2001 included 64% of TEL earnings for the year, we expect the second half of 2002 to be the stronger TEL earnings period for this year. We further expect that TEL earnings for the year will be lower than last year. We have given guidance in the past that the long-term rate of volume decline for this product would average 15% per year. As the use of this product continues to be phased out around the world, the annual rate of decline in usage will be more difficult to predict. It now appears that the decline rate could be greater than previously indicated. This business continues to supply strong cash flow.

TEL operating profit includes our operations and the cost of certain facilities that are not part of the TEL marketing agreements.

The following discussion references the Consolidated Financial Statements beginning on page 3 of this Form 10-Q.

Special Items Income (Expense)

The special items income (expense) for the third quarter 2001 was income of $3.1 million and included a gain of $3.4 million related to the sale of certain assets in Bracknell, England. Cost reduction initiative charges amounted to $355 thousand for the third quarter 2001.

There were $100 thousand engine oil costs related to our rationalization program in third quarter 2001 not included in special items. We reported these costs in selling, general, and administrative expenses.

The special items income (expense) for nine months 2001 was a charge of $113.9 million and included pension-related charges and engine oil additives rationalization charges which were partially offset by the gain on the sale of assets in Bracknell, England.

The termination of the pension plan resulted in a noncash charge of $62.0 million, as well as excise taxes of $26.2 million. The engine oil rationalization charge of $29.1 million was for severance, early retirement, and other expenses.

Of the remaining $44.9 million engine oil-related costs not recorded as a special item, we reported $41.8 million in cost of goods sold; $3.0 million in research, development, and testing expenses; and $100 thousand in selling, general, and administrative expenses.

Interest and Financing Expenses

Third quarter 2002 interest and financing expenses were $6.4 million as compared to $7.8 million in 2001. Lower average debt resulted in a decrease in interest and financing expenses of $500 thousand, while lower average interest rates resulted in a reduction of $100 thousand. Fees and amortization of financing costs were also $800 thousand lower.

17

Table of Contents

Interest and financing costs for nine months 2002 were $20.0 million as compared to $25.8 million for the same period last year. Again, lower average debt caused a decrease of $4.1 million and lower average interest rates resulted in a reduction of $2.3 million. Higher fees and amortization of financing costs of $600 thousand partially offset these.

Interest costs under our credit facility are based on LIBOR plus a premium. While the premium charged on borrowings under our credit facility since March 2002 was higher than was charged under our previous facility, the reductions in market rates since first quarter 2001 resulted in our interest and financing costs being lower than if market rates had remained unchanged. Based on our results through nine months 2002, we expect the premium charged on the revolving and term loans will decrease 0.75% during the fourth quarter.

Other Income (Expense), Net

Other income (expense), net was $1.4 million income for third quarter 2002 and included $1.2 million of interest income from a settlement with the Internal Revenue Service. Third quarter 2001 amounted to $87 thousand and included a number of small items.

Nine months 2002 amounted to $3.0 million expense, primarily including the $4.1 million impairment of nonoperating assets, as well as $1.1 million for debt refinancing expenses. These were partially offset by the $1.2 million interest income discussed above. Other income (expense), net for nine months 2001 was $300 thousand expense and primarily included $1.8 million for our percentage share of losses in equity investments, as well as the $1.5 million of expenses related to the refinancing of our debt. Partially offsetting these was the $1.0 million gain in 2001 on the sale of a nonoperating asset.

The $1.0 million gain on the sale of the nonoperating asset was for the sale of certain real and personal property in King William, Virginia, to Old Town, LLC (Old Town). Old Town is a separate legal entity organized by members of the Gottwald family. The property was sold for its appraised value of $2.9 million. We continue to manage the property for Old Town.

Income Taxes

Income taxes were $5.4 million expense for the third quarter 2002 and a $1.4 million benefit for the third quarter 2001. The effective income tax rate was 33.3% in 2002. In 2001, we received preferential tax treatment related to the gain on the sale of assets in Bracknell, England. Excluding the preferential treatment, the effective income tax rate for the third quarter 2001 would have been 37.4%. Also, excluding the preferentially treated gain last year, the change in third quarter income (loss) before income taxes resulted in an $7.7 million increase in taxes. This was partially offset by the change in the effective income tax rate between third quarter 2002 and third quarter 2001.

Income taxes were $6.6 million expense for nine months 2002 as compared to a benefit of $44.1 million for nine months 2001. The change in the income (loss) before income taxes resulted in $48.8 million of the increase in taxes. The change in the effective income tax rate caused the remaining increase of $1.9 million. The effective tax rate for nine months 2002 was 41.5%. The nine months 2001 effective tax rate was 29.5%.

The tax expense for nine months 2002 includes the impact of the possible nondeductibility of the capital losses related to the impairment of certain nonoperating assets. A valuation allowance of approximately $1.4 million was recorded at September 30, 2002, primarily due to the uncertainty of whether the capital loss carryforward related to these impairments may ultimately be realized.

18

Table of Contents

The effective tax rate for nine months 2001 reflects the impact of the nondeductible excise tax expense on the reversion of pension assets.

Cumulative Effect of Accounting Change

As discussed above in the “Segment Operating Profit” section, we wrote-off goodwill of $3.1 million in first quarter 2002 in accordance with Statement of Financial Accounting Standard No. 142. On an after-tax basis, this amounted to $2.5 million and is shown as a cumulative effect of accounting change.

Net Income (Loss)

Subsequent to our October 29, 2002 press release on earnings, we increased our accrual for legal proceedings. As a result of this increase, earnings for the third quarter and nine months 2002, as reported herein, include an additional $1.8 million charge before income taxes ($1.2 million after tax or $.07 per share) from that which was disclosed in the press release. The financial statements and Management’s Discussion and Analysis in this Form 10-Q include the impact of this accrual. Including this accrual, Ethyl’s net income for third quarter 2002 was $10.8 million ($.65 per share) as compared to net income of $700 thousand ($.04 per share) for third quarter 2001. Included in the net income for the third quarter 2001 was nonrecurring income, net of $3.0 million ($.18 per share). Excluding the nonrecurring items, third quarter 2001 was a net loss of $2.3 million ($.14 per share).

Our net income for nine months 2002 was $6.8 million ($.41 per share), while the net loss for nine months 2001 was $105.4 million ($6.31 per share). Nonrecurring charges were $6.4 million ($.38 per share) in 2002 and $111.7 million ($6.69 per share) in 2001. Excluding the nonrecurring charges, net income was $13.2 million ($.79 per share) for the nine months 2002 and $6.3 million ($.38 per share) for the same 2001 period.

The nine months 2002 results include a decrease of $4.5 million in corporate unallocated general and administrative expenses from nine months 2001, while the third quarter 2002 is about even with the same period last year, as disclosed on the Segment Operating Profit Table.

Nine months 2002 also included pre-tax pension expense of $3.4 million, as compared to pre-tax pension income of $5.1 million for the same period last year. The third quarter 2002 pension expense was even with third quarter 2001. The significant reduction from 2001 in the noncash pension results is caused by lower assets in our current pension plan than were in the plan that was terminated in 2001.

A summary of earnings (loss) and earnings (loss) per share, in millions except for per share amounts, is shown below:

19

Table of Contents