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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-5112
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ETHYL CORPORATION
Incorporated pursuant to the Laws of the Commonwealth of Virginia
Internal Revenue Service Employer Identification No. 54-0118820
330 South Fourth Street P. O. Box 2189
Richmond, Virginia 23218-2189
804-788-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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COMMON STOCK, $1 Par Value NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
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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 February 28, 2002: $84,660,309.00.*
Number of shares of Common Stock outstanding as of February 28, 2002:
83,454,650
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Ethyl Corporation's definitive Proxy Statement for its 2002
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.
- --------
* In determining this figure, an aggregate of 9,836,990 shares of Common Stock
reported in the registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders as beneficially owned by Bruce C. Gottwald and members of his
immediate family have been excluded and treated as shares held by affiliates.
See Item 12. The aggregate market value has been computed on the basis of the
closing price in the New York Stock Exchange Composite Transactions on
February 28, 2002, as reported by The Wall Street Journal.
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FINANCIAL HIGHLIGHTS
2001 2000
--------- --------
(in thousands except
per-share amounts)
OPERATIONS:
Income after income taxes before nonrecurring items................ $ 9,762 $ 8,583
Nonrecurring (expense) income after income taxes (a)............... (114,802) 52,414
--------- --------
Net (loss) income.................................................. $(105,040) $ 60,997
========= ========
PER COMMON SHARE:
Basic and diluted (loss) earnings per share:
Income after income taxes before nonrecurring items............ $ .12 $ .10
Nonrecurring (expense) income after income taxes (a)........... (1.38) .63
--------- --------
Net (loss) income.................................................. $ (1.26) $ .73
========= ========
Shares used to compute basic and diluted (loss) earnings per
share............................................................ 83,455 83,462
========= ========
FINANCIAL POSITION:
Total debt..................................................... $ 335,957 $443,244
========= ========
- --------
(a) Nonrecurring (expense) income after income taxes:
Engine oil additives rationalization costs:
Write-off of assets........................................ $ (25,886) $ --
Severance, early retirement, and other costs............... (21,769) --
Gain on sale of assets..................................... 3,289 --
Pension settlement (expense) income including
2001excise tax provision..................................... (68,825) 51,348
(Loss) gain on impairments and sales of nonoperating assets.... (1,611) 1,459
Income tax election credit..................................... -- 2,737
Income from demutualization of MetLife, Inc.................... -- 2,580
Write-off of plant assets...................................... -- (4,793)
Special retirement charge...................................... -- (917)
--------- --------
$(114,802) $ 52,414
========= ========
Form 10-K
Table of Contents
Page
----
Form 10-K Cover Page
PART I
Item 1. Business............................................................................ 1
Item 2. Properties.......................................................................... 8
Item 3. Legal Proceedings................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................................. 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 10
Item 6. Selected Financial Data............................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.......................... 24
Item 8. Financial Statements and Supplementary Data......................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 59
Item 11. Executive Compensation.............................................................. 59
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 59
Item 13. Certain Relationships and Related Transactions...................................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 60
Signatures................................................................................... 62
PART I
ITEM 1. BUSINESS
Ethyl Corporation develops, manufactures, blends, and markets fuel and
lubricant additives technology and products around the world. Our tetraethyl
lead (TEL) profits are derived primarily through marketing agreements in which
we participate in the proceeds from the sale of TEL, a gasoline octane
enhancer. A review of these operations is included in the Business Segments
section. We are incorporated in Virginia and employed approximately 1,100
people at year-end 2001.
Recent Developments
In the first quarter of 2001 we began the implementation of a new business
plan for our petroleum additives segment. With the engine oil additives market
being in a prolonged state of weakness, we have taken steps to reduce our cost
structure and create a more efficient company that continues to serve our
customers with high quality goods and services. The new plan included
consolidating the bulk of our engine oil production and research efforts into a
few world-class facilities, the idling of certain facilities, and a workforce
reduction. We are more focused on profitability rather than maintaining our
historic market share. This plan is essentially complete and our efforts are
already showing rewards.
This new initiative also included reorganizing our product marketing teams,
strengthening our regional management teams, and renewing our focus on helping
customers grow their business and control their costs. We continue to
aggressively pursue new profitable businesses and are making some gains.
Further discussion of the new business plan is included in Item 7 of this
report.
In 2001 we made progress on our debt reduction program. Continuing strong
cash flows from operations, together with generating cash from our pension
surplus and other strategic initiatives, enabled us to reduce our debt $107
million during the year.
We completed the Fourth Amendment to Amended and Restated Credit Agreement
amounting to $396 million with our lenders in March 2002. This agreement is
collateralized. As part of our financing strategy, we also completed a loan
agreement with Bruce C. Gottwald, Chairman of the Board of Ethyl, under which
he loaned Ethyl $18.6 million in February 2002. The note is secured by a deed
of trust on our headquarters property located in Richmond, Virginia. Proceeds
from this loan were used to reduce bank debt. Details of these agreements are
discussed further in the Liquidity section of Item 7.
On May 30, 2001, Bruce C. Gottwald announced his retirement as Chief
Executive Officer. He continues as Chairman of the Board of Directors and
Executive Committee.
The Board of Directors elected Thomas E. (Teddy) Gottwald to the role of
Chief Executive Officer, effective June 1, 2001. Teddy Gottwald joined Ethyl
Corporation in 1984 in the Plastics Division. He was elected a Vice President
of Ethyl and named divisional president of our Petroleum Additives Division in
1991. Mr. Gottwald was elected President and Chief Operating Officer of Ethyl
Corporation in 1994. He also serves as a director and member of the Executive
Committee.
Effective January 2000, Ethyl's Swiss subsidiaries entered into TEL
marketing agreements with Alcor Chemie AG and Alcor Chemie Vertriebs AG
(collectively, Alcor), to market and sell TEL outside North America and the
European Economic Area. The Associated Octel Company Limited (Octel) purchased
Alcor in the fall of 1999. These Alcor marketing agreements are similar to the
marketing agreements we already had in place with Octel.
1
During 2001, the Alcor TEL marketing agreements were amended to include the
proceeds from the sale of TEL resulting from agreements recently entered into
by an Alcor subsidiary. These agreements are with Veritel Chemicals BV
(Veritel) and its parent company, General Innovative Investment NV and provide
for the exclusive right to market and sell TEL sourced from Veritel in certain
areas of the world, excluding primarily the United States and the Russian
Federation. Veritel is party to supply agreements under which it has the
exclusive right to distribute TEL manufactured by OAO Sintez, a Russian
company, to areas outside the Russian Federation and the United States. Further
discussion of the TEL marketing agreements is included in Note 3.
We believe the strategic actions we have taken in 2001 are beginning to
improve earnings and provide growth prospects for our company. The entire Ethyl
team continues to aggressively pursue initiatives to continue this progress.
On December 20, 2001, we received notification from the New York Stock
Exchange (NYSE) that our share price had fallen below the continued listing
criteria of the NYSE which requires an average closing price of not less than
$1.00 over a consecutive 30 trading-day period. In accordance with NYSE
procedure, we are required to bring our share price and average share price
above $1.00 by the later of six months following receipt of the notification or
our next annual meeting if shareholder approval is deemed necessary. As a
result, on March 27, 2002, the Board of Directors unanimously approved and
recommended to shareholders a one for five reverse stock split of Ethyl's
common stock. The proposed reverse stock split will be presented to
shareholders for approval at Ethyl's annual meeting, which has been rescheduled
for 11:00 a.m. on June 4, 2002.
Business Segments
Ethyl reports our business in two distinct segments: petroleum additives and
tetraethyl lead. We divide our business this way due to the operational
differences between the two business units. The petroleum additives business
operates in a market that we actively review for opportunities, while TEL is a
mature product marketed primarily through third-party agreements.
Petroleum Additives--Petroleum additives are used in lubricants or fuels and
have many different applications. The petroleum additives market is highly
competitive with three other major companies, as well as a number of other
companies in the industry.
Lubricant additives are organic and synthetic chemical components that
enhance wear protection, prevent deposits, and protect against the hostile
operating environment of an engine, transmission, axle, hydraulic pump, or
industrial machine. Our lubricant additives are used in oils, fluids, and
greases. Ethyl additives are rigorously tested and designed to meet or exceed
the most stringent oil industry, government, and original equipment
manufacturer (OEM) specifications. We sell lubricant additives to major oil
marketers and independent lubricant manufacturers around the world.
Lubricant additive technology applications include:
Driveline
. automatic transmission fluids
. automotive and commercial gear oils
Industrial
. hydraulic oils
. turbine oils
. slideway oils
. specialty lubricants
2
Engine Oil
. passenger car engine oils
. light and heavy duty diesel engine oils
. railroad and marine, medium-speed diesel engine oils
Fuel additives are chemical components that improve the refining process and
performance of gasoline, diesel, and other fuels. Benefits of fuel additives in
the refining process include reduced use of crude oil during refining and
improved fuel storage properties. Fuel performance benefits include fuel
ignition improvements, emissions reduction, and protection against deposits for
fuel injectors, intake valves, and the combustion chamber. Ethyl fuel additives
are also tested extensively and designed to meet stringent industry,
government, and OEM requirements.
One of our most notable fuel additives is MMT(R) (MMT). Good science
continues to support the many benefits of MMT, one of the most comprehensively
tested fuel additives in history. MMT continues to gain support in new markets
around the world. When used in the refinery process, MMT provides octane
enhancement while reducing the amount of crude oil necessary to produce
gasoline. When MMT is used in unleaded gasoline, it reduces tailpipe emissions
of known contributors to urban smog.
Ethyl sells fuel additives worldwide to major fuel marketers and refiners,
as well as independent terminals and other fuel blenders. Fuel additive
applications include:
. gasolines
. diesel fuels
. aviation fuels
. racing fuels
. power generation fuels
. heating oils
Tetraethyl Lead--TEL is an octane enhancer used in gasoline. Ignition
qualities and operating performance of gasoline improve with higher levels of
octane. When introduced in the 1920s, TEL was used to prevent "engine knock," a
condition of poor combustion timing causing loss of engine power. In the 1970s,
automobile manufacturers began including emissions control technology in
vehicles to comply with the Clean Air Act. When the surface metal of the
catalytic converter in emissions control systems was deemed incompatible with
lead, unleaded gasoline became the fuel standard in the United States with
other countries following.
TEL is marketed to petroleum refiners, through our agreements with Octel and
Alcor, in all world areas except for North America. We continue to sell and
compete in North America.
We expect the market for TEL to decline at an average rate of about 15%
annually. Ethyl's marketing agreements with Octel and Alcor help us manage this
shrinking market by providing efficiencies of operation.
Raw Materials and Product Supply
We use a variety of raw materials in our manufacturing processes. Base oil,
poly isobutylene, olefin copolymers, antioxidants, and alcohols are the most
significant of these raw materials. Generally, we purchase major raw materials
under long-term contracts with multi-source suppliers and believe the
availability of the raw materials is sufficient for our operations. Certain
products are obtained through single-source suppliers.
We have the following long-term agreements for finished products:
. DSM Copolymer, Inc. supplies olefin copolymer viscosity index improvers
. Octel supplies TEL
. Albemarle Corporation supplies MMT and antioxidants
The agreement with DSM Copolymer, Inc. was extended in March 2002 for an
additional ten years.
3
Research, Development, and Testing
Ethyl's research, development, and testing (R&D) provides the basis for our
global petroleum additives technology. Through product development and
performance testing, Ethyl R&D provides our customers with technology and
support to achieve desired product performance.
As we implemented the new petroleum additives business model, Ethyl reduced
R&D expenditures from $73 million in 2000 to $58 million in 2001. Most of the
reduction was related to development and testing of engine oil additive
products to align our research effort with the new business model. In other
product areas, our research and testing efforts are at similar or increased
levels from 2000 as we remain committed to providing some of the most advanced
products and comprehensive testing programs in the industry to support our
customers worldwide. The 2001 total included $3.2 million related to the engine
oil additives rationalization program.
Ethyl completed development of several new products during 2001 that either
have been commercialized or are ready for commercialization in 2002. These
include fuel economy improving factory fill gear oils; automatic transmission
fluid additives aimed at automakers in North America, Europe, and Japan;
additives for continuously variable transmission fluids; and a more cost
effective gasoline detergent, as well as a more cost effective diesel
detergent. We also developed viscosity index improvers; hydraulic fluid
additives; tractor hydraulic fluid additives, and advanced low phosphorus
passenger car engine oil additive technology.
Patents and Trademarks
Ethyl actively protects our inventions, new technologies, and product
developments. We currently own approximately 700 issued United States and
foreign patents, with a significant number of additional patents pending. Some
of these patents are licensed to others. In addition, Ethyl has acquired the
rights under patents and inventions of others through licenses. We believe our
patent position is strong, aggressively managed, and sufficient for the conduct
of our business.
Ethyl also has several hundred trademark registrations throughout the world
for our marks including Ethyl(R), MMT(R), HiTEC(R), and GREENBURN(R), as well
as pending trademark applications.
Commitment to Responsible Care(R)
We are committed to supporting the principles of the American Chemistry
Council (ACC) Responsible Care program. As part of this commitment, we have
established Responsible Care goals. These goals are worldwide in nature and are
just a portion of the metrics we use to manage the environmental and safety
aspects of our business. They are continuous and ongoing.
. Goal 1: We will have zero reportable spills involving Ethyl products and all chemicals Ethyl handles.
In both 2001 and 2000, Ethyl had two spills that were reported since they were over the listed
reportable quantities. The environmental impact of these spills was negligible.
. Goal 2: We will have zero reportable process safety incidents.
Ethyl had no significant process safety incidents in 2001 and 2000. Significant process safety
incidents are fires, explosions and toxic releases which result in a lost-time injury, off-site
consequences, or greater than $25 thousand of damages.
. Goal 3: We will have zero recordable injuries.
Ethyl's worldwide recordable rate for 2000 was 0.98 injuries per 200,000 manhours worked. In
2001 the recordable rate was 1.39 injuries per 200,000 manhours worked. We are not satisfied
with the increase in 2001 and are committed to re-establishing our continuous progress toward
zero injuries.
4
All of us at Ethyl are responsible for environmental and safety excellence,
and we accept and demonstrate the type of leadership that will ensure the
continued success of our efforts. Responsible Care is a way of life at Ethyl,
enhancing operations, the way we work, and the relationships we maintain with
our customers and our communities.
Environmental
Ethyl operates under policies that comply with federal, state, local, and
foreign requirements regarding the handling, manufacture, and use of materials.
One or more regulatory agencies may classify some of these materials as
hazardous or toxic. We also comply with laws, regulations, statutes, and
ordinances protecting the environment, including those related to the discharge
of materials. We expect to continue to comply in every material respect.
We regularly review the status of significant existing or potential
environmental issues. We accrue and expense our proportionate share of
environmental remediation and monitoring costs in accordance with FASB
Statement No. 5 and FASB Interpretation No. 14 as clarified by the American
Institute of Certified Public Accountants Statement of Position 96-1. As
necessary, we adjust our accruals based on additional information.
Total gross liabilities accrued at year-end for environmental remediation
were $26 million for 2001 and $28 million for 2000. We recorded expected
insurance reimbursement assets for these amounts of $6 million in 2001 and $5
million in 2000. As new technology becomes available, it may be possible to
reduce accrued amounts. While we are currently fully accrued for known
environmental issues, it is possible that unexpected future costs could have a
significant impact.
Ethyl spent $12 million in 2001 for environmental operating and clean-up
costs, excluding depreciation of previously capitalized expenditures. We spent
$12.4 million in 2000 and $14 million in 1999. Of these amounts, the ongoing
costs of operations were $11 million in 2001, $11.7 million in 2000, and $13
million in 1999. The balance represents clean-up, or remediation and monitoring
costs. These environmental operating and clean-up expenses are included in cost
of goods sold. In the next year, we expect environmental operating and
remediation costs to be about the same as 2001.
On capital expenditures for pollution prevention and safety projects, we
spent $2 million in 2001 and $3 million in both 2000 and 1999. Over the next
few years, we expect capital expenditures to be about the same as 2001.
Our estimate of the effects of complying with governmental pollution
prevention and safety regulations is subject to:
. Potential changes in applicable statutes and regulations
. Uncertainty as to the success of anticipated solutions to pollution
problems
. Uncertainty as to whether additional expense may prove necessary
. Potential for emerging technology to affect remediation methods and
reduce associated costs
Ethyl is subject to the federal Superfund law and similar state laws under
which we may be designated as a potentially responsible party (PRP). As a PRP,
we may be liable for a share of the costs associated with cleaning up hazardous
waste sites.
In de minimis PRP matters and in some minor PRP matters, Ethyl generally
negotiates a consent decree to pay an apportioned settlement. This relieves us
of any further liability as a PRP, except for remote contingencies. Costs for a
de minimis participant are less than $50,000. Costs for a minor participant are
less than $300,000.
Most Superfund sites where we are a PRP represent environmental issues that
are quite mature. The sites have been investigated, and in many cases, the
remediation methodology, as well as the proportionate shares of each PRP have
been established. The financial viability of the other PRPs is reasonably
assured. Ethyl has previously accrued the estimated expense of the remediation
and monitoring of these sites. Generally, remediation and monitoring will go on
for an extended period.
5
During 2000, the Environmental Protection Agency (EPA) named Ethyl as a PRP
under Superfund law for the clean-up of soil and groundwater contamination at
the Sauget Area 2 Site in Sauget, Illinois. Without admitting any fact,
responsibility, fault, or liability in connection with this site, Ethyl is
participating with other PRPs in site investigations and feasibility studies.
We are responsible for 6.47% of the study cost and have accrued for the
estimated expenses. Because of the early stage, we cannot make a reasonable
estimate of the total cost of Ethyl's share of responsibilities related to any
site remediation or clean-up.
At another United States site, Ethyl and the other PRPs had previously
appointed a management company to facilitate the remediation and monitoring of
the site. During 2000, the management company informed us of a favorable change
in the necessary work at the site. This change resulted in 30% lower costs in
2001 and should continue to result in significantly lower monitoring costs over
the next 15 years.
Ethyl also owns several other environmental sites where we are in the
process of remediation and monitoring. At our largest United States site, we
have substantially completed remediation and will be monitoring the site for an
extended period. In addition, we substantially completed dismantling and
remediation on TEL bulk storage facilities in Europe and Singapore in 2001.
6
Segment Assets
The following table shows asset information by segment and the
reconciliation to consolidated assets. Segment assets consist of accounts
receivable, inventory, and long-lived assets. Long-lived assets include
property, plant, and equipment, net of depreciation; intangible assets and
prepayments for services, both net of amortization.
Segment Assets and Related Information
2001 2000 1999
---- ------ ----
(in millions of dollars)
Segment assets
Petroleum additives.......................... $477 $ 579 $667
Tetraethyl lead.............................. 95 85 55
---- ------ ----
572 664 722
Cash and cash equivalents....................... 12 5 16
Restricted cash................................. 1 1 --
Other accounts receivable....................... 12 21 4
Deferred income taxes........................... 21 8 13
Prepaid expenses................................ 3 5 5
Prepaid pension cost............................ 26 225 127
Other assets and deferred charges............... 73 73 104
---- ------ ----
Total assets............................. $720 $1,002 $991
==== ====== ====
Additions to long-lived assets
Petroleum additives.......................... $ 11 $ 15 $ 15
Tetraethyl lead (a).......................... 25 39 --
Other long-lived assets...................... 1 1 1
---- ------ ----
Total additions to long-lived assets..... $ 37 $ 55 $ 16
==== ====== ====
Depreciation and amortization
Petroleum additives (b)...................... $ 86 $ 54 $ 58
Tetraethyl lead (a).......................... 7 8 2
Other long-lived assets...................... 7 4 5
---- ------ ----
Total depreciation and amortization...... $100 $ 66 $ 65
==== ====== ====
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(a) The addition to TEL long-lived assets in 2001 and 2000 relate to the
payment for services paid to Alcor. The amortization of the prepayment for
services was $6 million in 2001 and $7 million in 2000.
(b) Depreciation and amortization includes $41 million of accelerated
depreciation related to the engine oil additives rationalization in 2001.
Geographic Areas
Ethyl has operations in the United States, Europe, Asia, and Latin America,
as well as in Australia and Canada. The economies are stable in most of the
countries where we operate. In countries with more political or economic
uncertainty, we generally minimize our risk of loss by utilizing U.S. dollar
denominated transactions, letters of credit, and prepaid transactions. We have
also participated in selective foreign currency forward contracts in past
years. Our foreign customers mainly consist of financially viable government
organizations and large companies.
7
The table below reports net sales and long-lived assets by geographic area.
No transfers occurred between segments during the three years shown. Except for
the United States and Canada, no country exceeded 10% of net sales. The United
States was the only country that exceeded 10% of long-lived assets in any year.
Ethyl allocated revenues to geographic areas based on the location to which the
product was shipped. The reduction in net sales in the United States in 2001 is
primarily the result of the loss of our engine oil additives position with
three major customers, which is discussed more fully in Item 7.
Geographic Areas
2001 2000 1999
------- ------ ------
(in millions of dollars)
Net Sales (a)
United States................................. $ 282 $ 413 $ 410
Canada........................................ 74 72 65
Other foreign................................. 369 359 395
------- ------ ------
Consolidated net sales.................... $ 725 $ 844 $ 870
======= ====== ======
Long-lived assets
United States................................. $ 264 $ 333 $ 378
Foreign....................................... 55 77 54
------- ------ ------
Total long-lived assets................... $ 319 $ 410 $ 432
======= ====== ======
- --------
(a) Certain amounts have been reclassified to conform to our current
presentation.
ITEM 2. PROPERTIES
Ethyl's principal operating properties are shown below. Unless indicated, we
own the research, development, and testing facilities and manufacturing
properties, which primarily support the petroleum additives business segment.
Research, Development, and Ashland, Virginia (leased)
Testing Bracknell, England
Richmond, Virginia
Tsukuba, Japan (leased)
Manufacturing Feluy, Belgium
Houston, Texas (also
provides TEL storage and
distribution)
Natchez, Mississippi
(idled facility)
Orangeburg, South
Carolina (idled facility,
leased land)
Port Arthur, Texas
Rio de Janeiro, Brazil
Sarnia, Ontario, Canada
Sauget, Illinois
We own our corporate headquarters located in Richmond, Virginia, and
generally lease our regional and sales offices located in a number of areas
around the world.
Production Capacity
We believe our plants and supply agreements are sufficient to meet expected
sales levels. Operating rates of the plants vary with product mix and normal
sales swings. Our facilities are well maintained and in good operating
condition.
8
Under our supply optimization plan, Ethyl continuously evaluates production
facilities. In February 2001, we announced a new business strategy related to
our engine oil additives business (see Recent Developments). As part of this
business plan, we idled engine oil additive units in our Houston, Texas plant
and one of the units at our plant in Brazil. We also idled a smaller plant in
Natchez, Mississippi. We evaluated all engine oil additive assets for
impairment. The positive cash flows being generated by these assets continue to
support their value on our balance sheet. The assets that were idled in 2001
were fully depreciated by their closure date.
During 2000, we permanently idled the facility in Orangeburg, South Carolina
and wrote its value down to zero. We concluded that the market for the product
that was produced at the facility had not grown as anticipated and that
available supply and production facilities were adequate for demand of the
product.
ITEM 3. LEGAL PROCEEDINGS
Ethyl was served as a defendant in two cases filed in the Circuit Court for
Baltimore City, Maryland, on September 22, 1999. Both cases claim damages
attributable to lead. The cases were Cofield et al. v. Lead Industries
Association, Inc., et al. and Smith et al. v. Lead Industries Association,
Inc., et al. Cofield is no longer a named plaintiff in the first case and the
case is now identified as Young. Young seeks recovery for alleged property
damage from lead paint, which Ethyl never produced or distributed. Smith is for
alleged personal injuries for six children from lead exposure due to lead paint
and dust from tailpipe emissions due to leaded gasoline. The Court dismissed
the Young case in its entirety in December 2001 and dismissed Ethyl from the
Smith case in February 2002. These decisions could be appealed by the
plaintiffs. Ethyl has strong defenses and has vigorously defended the cases.
Ethyl and our subsidiaries are involved in other legal proceedings. These
legal proceedings are incidental to our business and include administrative or
judicial actions seeking remediation under environmental laws such as
Superfund. These proceedings also include product liability cases, as well as
premises asbestos cases.
While it is not possible to predict or determine the outcome of any legal
proceedings, it is our opinion that Ethyl and our subsidiaries will not
experience materially adverse effects on our results of operations or financial
condition as a result of any pending or threatened proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no issues submitted to a vote of security holders during the
fourth quarter of 2001.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Ethyl's common stock is traded on the New York and Pacific stock exchanges
under the symbol EY. A total of 400 million shares of common stock is
authorized, of which 83,454,650 shares were outstanding as of December 31,
2001. The registered shareholders were 10,945 at December 31, 2001 and 11,654
at December 31, 2000.
The following table shows the high and low prices of our common stock each
quarter, as well as the dividends declared. On July 27, 2000, the Board of
Directors suspended our dividend.
2001
---------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High........................ $ 2.44 $ 1.68 $1.68 $1.00
Low......................... $ .99 $ 1.12 $ .87 $ .55
2000
---------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High........................ $ 4.00 $ 3.69 $2.81 $2.00
Low......................... $ 2.69 $ 2.19 $1.44 $1.31
Dividends declared per share $.0625 $.0625 $ -- $ --
10
ITEM 6. SELECTED FINANCIAL DATA
Ethyl Corporation & Subsidiaries
Five Year Summary
Years Ended December 31
-----------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands except per-share amounts)
Results of Operations
Net sales (1)................................ $ 724,462 $ 843,575 $ 869,876 $1,001,091 $1,090,487
Costs and expenses (2)....................... 758,928 827,240 815,042 898,669 950,563
TEL marketing agreements services............ 36,571 36,619 53,993 14,944 --
Special items (expense) income, net (2)(3)... (114,016) 76,009 7,200 4,885 --
---------- ---------- ---------- ---------- ----------
Operating (loss) profit..................... (111,911) 128,963 116,027 122,251 139,924
Interest and financing expenses.............. 32,808 36,075 35,506 40,409 25,668
Other (expense) income, net (4).............. (4,274) (2,793) 601 24,519 (4,274)
---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes............ (148,993) 90,095 81,122 106,361 109,982
Income tax (benefit) expense................. (43,953) 29,098 25,825 35,782 32,452
---------- ---------- ---------- ---------- ----------
Net (loss) income............................ $ (105,040) $ 60,997 $ 55,297 $ 70,579 $ 77,530
========== ========== ========== ========== ==========
Financial Position and Other Data
Total assets................................. $ 719,625 $1,001,639 $ 991,380 $1,082,239 $1,080,472
Operations:
Working capital............................. $ 125,339 $ 93,909 $ 161,766 $ 213,862 $ 218,686
Current ratio............................... 1.79 to 1 1.46 to 1 1.80 to 1 2.20 to 1 2.21 to 1
Depreciation and amortization (2)........... $ 99,518 $ 66,256 $ 65,125 $ 63,310 $ 61,752
Capital expenditures........................ 9,515 13,828 13,793 22,738 43,496
Gross margin as a % of net sales (1)( 2).... 12.9 19.6 22.3 24.9 27.7
Research, development, and testing expenses
(5)....................................... $ 57,607 $ 72,941 $ 66,957 $ 67,363 $ 71,172
Total debt (6)............................... 335,957 443,244 474,222 558,824 641,136
Common and other shareholders' equity (6).... 145,293 259,413 215,209 187,002 144,598
Total debt as a % of total capitalization (6) 69.8 63.1 68.8 74.9 81.6
Net (loss) income as a % of average
shareholders' equity.......................
(51.9) 25.7 27.5 42.6 21.5
Common Stock
Basic and diluted (loss) earnings per
share (7).................................. $ (1.26) $ .73 $ .66 $ .85 $ .71
Shares used to compute basic earnings per
share...................................... 83,455 83,462 83,465 83,465 109,793
Shares used to compute diluted earnings per
share...................................... 83,455 83,462 83,465 83,465 109,800
Cash dividends declared per share (8)........ $ -- $ .125 $ .25 $ .25 $ .44
Equity per share (6)......................... $ 1.74 $ 3.11 $ 2.58 $ 2.24 $ 1.73
11
Notes to the Five Year Summary
(1) Freight costs have been reclassified from net sales to cost of sales for
all periods presented. This reclassification amounted to $17 million for
the first nine months of 2001, $23 million in 2000, $26 million in 1999,
$27 million in 1998, and $27 million in 1997.
(2) Asset writedowns, severance, early retirement, and other costs related to
the rationalization of our engine oil additives product lines were $76
million ($48 million after income taxes) for 2001. Costs and expenses were
$47 million ($29 million after income taxes) and included $41 million
related to the accelerated depreciation of certain engine oil additive
assets and $6 million of other costs. Early retirement, severance, and
related expenses amount to $29 million ($19 million after income taxes) and
are included in special items (expense) income, net.
(3) In addition to the 2001 special items expense discussed above in Note (2),
there was a recognition of a $62 million noncash loss ($43 million after
income taxes) on the settlement of our pension liabilities related to the
termination of our U.S. salaried pension plan. Also included was a $26
million charge ($26 million after income taxes) related to excise taxes on
the pension reversion partially offset by a $3 million gain ($3 million
after income taxes) on the sale of certain assets in Bracknell, England.
The special items in 2000 include a benefit of $81 million ($51 million
after income taxes) related to settlements of certain pension contracts
resulting in the recognition of noncash gains and a $4 million benefit ($3
million after income taxes) related to the demutualization of MetLife, Inc.
These items were partially offset by an $8 million charge ($5 million after
income taxes) for the write-off of plant assets and a $1.4 million special
retirement charge ($900 thousand after income taxes). The special item in
1999 consists of a supply contract amendment of $7 million income ($4
million after income taxes). The special items in 1998 consist of a benefit
of $9 million, net of related expenses, ($6 million after income taxes) due
to a settlement with the Canadian government partially offset by a charge
related to an enhanced retirement offer of $4 million ($3 million after
income taxes).
(4) Other (expense) income, net in 2001 includes $3 million of expenses related
to the refinancing of our debt. Also included is a net charge related to
nonoperating assets of $3 million ($2 million after income taxes) resulting
from impairment losses of $4 million partially offset by a gain on a sale
of $1 million. Other (expense) income, net for 2000 includes a $3 million
charge for our percentage share of losses in equity investments ($2 million
after income taxes) offset by a $2 million gain ($1 million after income
taxes) on the sale of a nonoperating asset. Other income for 1998 includes
a $15 million gain on the sale of a nonoperating asset ($9 million after
income taxes) and $8 million income related to the settlement of a federal
income tax audit ($6 million after income taxes). Other expense for 1997
includes a charge related to nonoperating assets of about $6 million ($3
million after income taxes) resulting from impairment losses of $16 million
offset by gains on sales of $10 million.
(5) Research and development expenses related to new products and processes
were $33 million in 2001, $40 million in 2000, $41 million in 1999, $40
million in 1998, and $42 million in 1997.
(6) In 1997, total debt and total debt as a percentage of total capitalization,
as well as the decrease in shareholders' equity and equity per share,
reflect the effects of the stock buy-back that took place on October 2,
1997. Ethyl acquired about 35 million shares of our common stock in
accordance with the stock buy-back offer. We financed the total transaction
cost of about $329 million under our loan agreement. We base equity per
share on the number of common shares outstanding at the end of each year.
(7) We restated the earnings per share figures and number of shares used to
compute earnings per share in accordance with FASB Statement No. 128,
adopted effective December 31, 1997.
(8) The decrease in cash dividends declared in 2001 and 2000 reflects the
suspension of the dividend effective July 27, 2000. The decrease in cash
dividends declared in 1998 reflects the reduction of the annual cash
dividend rate to $.25 per share from $.50 per share effective for the
dividend declared on October 30, 1997 and paid on January 1, 1998.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Comments
Some of the information presented 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.
Ethyl believes our forward-looking comments are based on reasonable
expectations and assumptions, within the bounds of what we know about our
business and operations. However, Ethyl offers 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.
These factors include, but are not limited to, timing of sales orders, gain
or loss of significant customers, competition from other manufacturers, a
significant rise in interest rates, resolution of environmental liabilities, or
changes in the demand for Ethyl's products. Other factors include significant
changes in new product introduction, increases in product cost, the impact of
fluctuations in foreign exchange rates on reported results of operations,
changes in various markets, or the impact of consolidation of the petroleum
additives industry.
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales in 2001 reflected the transitions taking place in our
engine oil additives business during the year. During 2000, the conditions in
the engine oil additives business continued to erode to an extent that the
return on our investment was unsatisfactory. In December 2000 we attempted to
increase prices for this product line, but were unsuccessful. These were the
factors for the loss of our engine oil additive position with three major
customers. Those three customers were Equilon, Pennzoil-Quaker State, and Exxon
Mobil Corporation.
Recovering from the loss of significant volumes early in 2001, we are making
gains in our petroleum additives product lines and in most regions. It is the
nature of the petroleum additives business that once new business is awarded,
there can be a time lag before shipping begins. Even though we are making
gains, weak margins in engine oils continue to hurt our results.
In 2000, net sales to each of the three customers of our petroleum additives
segment whose engine oil business we lost exceeded 10% of total net sales.
Equilon amounted to $112 million (13% of total net sales), Pennzoil-Quaker
State also amounted to $112 million (13% of total net sales), and Exxon Mobil
Corporation amounted to $95 million (11% of total net sales). These sales
primarily represented engine oil products.
The petroleum additives segment reported net sales in 1999 of $121 million
(14% of total net sales) to Equilon and $105 million (12% of total net sales)
to Pennzoil-Quaker State.
No other customer accounted for over 10% of Ethyl's total net sales in any
year.
Consolidated net sales for 2001 reflected the impact of the issues discussed
above and were lower than both 2000 and 1999 as reflected in the following
table. We reclassified previously reported net sales amounts for the first nine
months of 2001, as well as the years 2000 and 1999 to comply with recent
accounting guidance. There
13
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 $17 million for the first nine months of 2001, $23 million in
2000, and $26 million in 1999.
Net Sales By Segment
2001 2000 1999
---- ---- ----
(in millions of dollars)
Petroleum additives... $708 $817 $844
Tetraethyl lead....... 17 27 26
---- ---- ----
Consolidated net sales $725 $844 $870
==== ==== ====
Petroleum Additives--While our petroleum additives sales, excluding engine
oil additives, improved over 2000, the loss of the high volume engine oil
customers discussed above resulted in overall sales being 13% lower than 2000
and 16% lower than 1999. We had substantially completed shipments of engine oil
additives to these customers by the end of the second quarter 2001.
The reduction in net sales from 2000 reflects lower shipments resulting in
an unfavorable impact of $127 million. The impact of lower volumes was partly
offset by a very modest overall improvement in selling prices which, including
some benefit of product mix, increased net sales in 2001 by only $18 million.
Shipments were also lower when compared to 1999 causing an unfavorable
impact of $164 million on net sales. A modest increase in selling prices only
partially offset the impact of the volumes by increasing net sales $28 million
when compared to 1999.
Tetraethyl Lead--Most of the TEL marketing activity is through the
agreements with Octel and Alcor, under which we do not record the sales
transactions. Therefore, TEL net sales reflected 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.
TEL net sales were down in 2001 when compared to both 2000 and 1999. Sales
to Octel were down $6 million when compared to 2000 and $1 million when
compared to 1999. During the first quarter 2001, Octel purchased substantially
all of the remaining inventory they are required to purchase from Ethyl under
the agreements. The decrease in TEL sales, excluding Octel, reflects the
expected and continuing market decline. Because of the anticipated continued
market decline, we expect net sales next year to be lower than 2001.
Segment Operating (Loss) 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 prepayments for services are included in the
operating profit of each segment.
14
The table below reports operating (loss) profit by segment, as well as a
reconciliation to (loss) income before income taxes for the last three years.
Segment Operating (Loss) Profit
2001 2000 1999
----- ---- ----
(in millions of dollars)
Petroleum additives before nonrecurring items $ 36 $ 33 $ 78
Nonrecurring items........................... (72) (8) 7
----- ---- ----
Petroleum additives.......................... (36) 25 85
Tetraethyl lead.............................. 32 39 48
----- ---- ----
Segment operating (loss) profit........... (4) 64 133
Corporate general and administrative expense. (19) (26) (24)
Interest expense............................. (33) (36) (35)
Pension contract settlements................. (88) 81 --
Other (expense) income, net.................. (5) 7 7
----- ---- ----
(Loss) income before income taxes............ $(149) $ 90 $ 81
===== ==== ====
Petroleum Additives--Petroleum additives operating profit, excluding
nonrecurring charges, improved to $36 million in 2001. This represents an
improvement of 13% from year 2000 operating profit on the same basis. Compared
with 1999 earnings of $78 million, excluding nonrecurring items, current year
results were 54% lower.
When compared to 2000, our operating profit, excluding nonrecurring items,
reflected improved operating results in our overall petroleum additives
business. We also benefited from our cost reduction initiatives, which resulted
in lower selling, general, and administrative expenses (SG&A), as well as
reduced costs for research, development, and testing. There was also a modest
improvement in overall selling prices, and while average raw material cost for
2001 was higher than 2000, during the fourth quarter we did begin to realize
the benefit of lower raw material costs. Offsetting the overall improvement in
earnings on this basis is the continuing adverse industry conditions in the
engine oil additives market and weak margins, which continues to negatively
impact our results. Foreign exchange was also unfavorable.
When compared to 1999, the lower profits in 2001 resulted from significantly
lower shipments and higher raw material costs. Partially offsetting the impact
of these, were higher selling prices, lower SG&A, and lower R&D.
Total R&D expenses, excluding the nonrecurring engine oils rationalization
charges, were $54 million in 2001, $73 million in 2000, and $67 million in
1999. The decrease in R&D expenses reflects the benefit of our cost reduction
initiative undertaken as part of the engine oil additives rationalization. This
included the consolidation of more of the R&D activities into our facilities in
Richmond, Virginia, which improved efficiencies of operation. In addition,
staff reductions, as well as performing internally more testing which
previously had been done by external labs, has contributed to the significantly
lower R&D expenses. Finally, in 2000 we completed a significant portion of the
testing related to certain additive product specifications. R&D related to new
products and processes was $33 million in 2001, $40 million in 2000, and $41
million in 1999. All of our R&D expenses were related to petroleum additives.
SG&A decreased $5 million or 10% from 2000 and $4 million or 8% from 1999
levels. As a percentage of net sales, SG&A combined with R&D expenses were
14.7% in 2001, 15.7% in 2000, and 14.3% in 1999. The decrease primarily
reflects the effect of lower SG&A and R&D expenses due to the impact of the
cost reduction program.
The nonrecurring charge of $72 million in 2001 was for costs related to the
rationalization of our engine oil additives business of $75.5 million, which
was partially offset by a $3 million gain on the sale of certain Bracknell,
England assets. In 2000, petroleum additives operating profit included a
nonrecurring charge of
15
$8 million for the write-off of an idled manufacturing facility. This write-off
was part of an ongoing plant rationalization effort and improved the petroleum
additives cost structure. A nonrecurring benefit of $7 million from a supply
contract amendment is included in 1999.
Tetraethyl Lead--Operating profit for TEL was on target for the year. The
operating profit contribution from our marketing agreements of about $37
million was even with last year, but down compared to the $54 million operating
profit in 1999. While volumes have decreased as expected in the three-year
period, selling prices have improved and certain costs have been reduced.
The TEL operating profit includes our operations and the costs of certain
facilities that are not a part of the marketing agreements.
The TEL operations for 2001, excluding the marketing agreements, were
unfavorable compared to last year and slightly favorable to 1999 results. The
year 2000 results benefited from the sale of TEL to Octel for use under the
terms of the marketing agreements. These operations also included benefits of
$1 million in 2001, $2 million in 2000, and $900 thousand in 1999 from the
liquidation of last-in first-out (LIFO) inventory.
In total, TEL operating profit decreased 18% when compared to 2000 and 33%
when compared to 1999.
The following discussion references certain captions on the Consolidated
Statements of Income on page 26 of this Form 10-K.
Special Items (Expense) Income, Net
Special items (expense) income, net totaled $114 million expense in 2001 and
included pension-related charges and engine oil additives rationalization
charges which were partially offset by the $3 million gain on the sale of some
of the assets in Bracknell, England. The termination of our U.S. salaried
pension plan and the subsequent settlement of the pension contracts resulted in
a noncash charge of $62 million. The excise tax on the reversion of the pension
assets was $26 million. Severance, early retirement, and other expenses
amounted to $29 million.
There were $46.5 million engine oil additives-related costs not included in
special items of which we reported $43 million in cost of goods sold; $3.2
million in research, development, and testing expenses; and $300 thousand in
selling, general, and administrative expenses.
Special items income, net totaled $76 million in 2000. Settlements of
pension contracts resulted in the recognition of noncash gains of $81 million.
In addition, the demutualization of MetLife, Inc. resulted in $4 million
income. These were partly offset by an $8 million charge for the write-off of
the idled Orangeburg manufacturing facility in petroleum additives and a
special retirement charge of $1 million.
The special item of $7 million income in 1999 was for a supply contract
amendment in petroleum additives.
Interest and Financing Expenses
Interest and financing expenses were $33 million in 2001, $36 million in
2000, and $35 million in 1999. Compared to 2000, lower average debt outstanding
resulted in a reduction of $6 million, while lower average interest rates
resulted in a reduction of $2 million. Partially offsetting these were higher
amortization of financing costs and fees of $5 million. Compared to 1999, lower
debt outstanding resulted in a $9 million decrease in expense in 2001, which
was partially offset by a higher effective interest rate amounting to a $2
million impact. Fees and amortization of financing costs were $5 million higher
in 2001 than in 1999.
16
Interest costs under the credit facility are based on market rates plus a
premium. While the premium charged under our credit facility entered in April
2001 is higher than was charged under our previous facility, the reductions in
the market rates resulted in our interest and financing costs being lower than
if market rates had remained unchanged. In addition, interest and financing
costs have decreased due to the significant reduction in outstanding debt. If
market rates begin to increase, our interest and financing costs will also rise
on the remaining debt.
Other (Expense) Income, Net
Other expense, net for 2001 was $4 million and included expenses of $2.6
million related to the refinancing of our debt, as well as $2 million for our
percentage share of losses in equity investments. Also included is a loss on
impairments of nonoperating assets of $4 million, which was partially offset by
a gain of $1 million on the sale of a nonoperating asset.
The $1 million gain in 2001 on the sale of a 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.
Other expense, net for 2000 was $3 million. The 2000 total included $3
million for our percentage share of losses in equity investments, which was
partially offset by a $2 million gain on the sale of nonoperating assets.
Other income, net totaled $600 thousand in 1999.
Income Taxes
Income taxes were a benefit of $44 million in 2001 and expense of $29
million in 2000 and $26 million in 1999. The change in our (loss) income before
income taxes resulted in $77 million of the decrease in income taxes. This was
partially offset $4 million by the effect of a lower effective income tax rate
in 2001. The effective tax rate was 29.5% in 2001 and 32.3% in 2000. The lower
effective income tax rate on the 2001 loss primarily reflects the nondeductible
excise tax on the reversion of pension assets. The rate for 2000 reflected the
recognition of certain income tax benefits.
In comparison to 1999, the decrease in our (loss) income before taxes
contributed $73 million to the reduction in income taxes. This was partially
offset by $3 million as the result of a lower effective income tax rate in
2001. The effective tax rate in 1999 was 31.8% and included the recognition of
certain income tax benefits.
While our deferred taxes are in a net asset position, we believe that we
will recover the full benefit of our deferred tax assets. See Note 19 in the
Notes to Consolidated Financial Statements for details on income taxes.
Net (Loss) Income
The net loss was $105 million ($1.26 per share) in 2001. Net income was $61
million ($.73 per share) in 2000 and $55 million ($.66 per share) in 1999.
Included in net (loss) income were nonrecurring charges, net totaling $115
million ($1.38 per share) in 2001. Nonrecurring income, net totaled $52 million
($.63 per share) in 2000 and $4 million ($.05 per share) in 1999. Excluding the
nonrecurring items, net income was $10 million ($.12 per share) in 2001, $9
million ($.10 per share) in 2000, and $51 million ($.61 per share) in 1999.
Included in our 2001 results is a decrease of $7 million in corporate
general and administrative expenses from 2000 levels and $5 million from 1999.
The year 2001 also included pension income (before income taxes and excluding
terminations and settlements) of $4 million as compared to $13 million in 2000
and $15 million in 1999. The significant reduction in noncash pension income
from prior year levels is the result of a lower surplus in the new pension plan
than that in the terminated plan.
17
CASH FLOWS DISCUSSION
We generated cash from operating activities of $126 million in 2001, as
compared to $89 million in 2000 and $128 million in 1999. The cash flows from
operating activities in 2001 included the net cash benefit of $54 million from
the asset reversion of one of our pension plans. In 2001, we combined the cash
from operating activities, as well as $11 million from the sale of certain
assets to primarily make a net repayment on debt of $107 million, to pay $12
million in debt issuance costs, to fund capital expenditures of $10 million,
and to increase cash and cash equivalents on hand by $8 million. We also funded
a payment of TEL marketing agreement services of $2.5 million.
In 2000, we used the cash from operating activities, as well as cash-on-hand
of $11 million and other proceeds of $3 million to fund the prepayment of TEL
marketing agreement services of $39 million and pay dividends of $16 million.
In addition, we funded capital expenditures of $14 million, reduced long-term
debt $32 million, and spent $4 million on an equity investment.
In 1999, we used the cash from operating activities to repay $86 million of
long-term debt, pay dividends of $21 million, fund $14 million of capital
expenditures, and increase our cash balance $7 million.
Cash dividends paid per common share were $0.1875 in 2000 and $0.25 in 1999.
The reduction in dividends paid in 2000 is the result of the suspension of our
dividend. The Board of Directors took this action on July 27, 2000 to improve
our cash flow.
Ethyl expects that cash from operations will continue to be sufficient to
cover our operating expenses.
Depreciation and amortization in the Consolidated Statements of Cash Flows
for 2001 includes accelerated depreciation of $41 million due to the shortened
lives of certain engine oil assets.
FINANCIAL POSITION AND LIQUIDITY
In the year 2001, we had three primary goals. These goals were profitable
growth, debt reduction and ongoing cost management. Solid progress was made
toward each of these goals. Improved earnings, excluding nonrecurring items,
was a result of continuing to offer high quality goods and services to our
customers through the dedicated efforts of our employees, as well as the
benefits of our aggressive debt reduction and cost reduction programs.
The major restructuring from early 2001 has given us a more competitive cost
structure. We made a significant reduction in debt in 2001 amounting to $107
million and expect to make a further net reduction in debt of approximately $40
million in 2002.
We believe the initiatives on which we are focused will continue to improve
our profitability. While 2001 was a difficult year for our company, we enter
2002 in a better position. The future still remains a challenge as the
petroleum additives market remains highly competitive and the engine oils
market continues to reflect weak margins. Our TEL outlook is more secure as our
marketing agreements maximize our earnings and cash flows in the declining
market.
In March 2002, we entered into the Fourth Amendment to Amended and Restated
Credit Agreement (the New Credit Facility) with our lenders. The New Credit
Facility includes the following key provisions:
. A revolving line of credit of $146 million, including a letter of credit
sub-facility of $55 million.
. A balance on the term loan of $45 million. The repayment schedule is $5
million at both May 31 and September 30, 2002. Payments of $10 million
are due at August 31 and November 30, 2002, as well as at February 28,
2003. The balance is due on March 31, 2003.
18
. The outstanding amount on the new term loan is $205 million, which is
due in full on March 31, 2003.
. The maturity date is extended to March 31, 2003 with all unpaid balances
being due on that date. The maturity date may be extended to March 31,
2004 if certain conditions are met.
. Interest rates increased and are based on a premium to variable base
rates. The initial premium is 325 to 425 basis points, depending on the
type of borrowing. The premium will be reduced if certain criteria are
met.
. Substantially all of our assets in the United States are collateralized.
. Mandatory prepayments are required for excess cash flow, asset
dispositions, debt and equity issuances, all tax refunds, and certain
other funds received.
. Covenants include minimum EBITDA, minimum interest coverage ratio, and
maximum leverage coverage ratio, among others.
. The payment of dividends is not permitted.
. Investments and capital expenditures are limited. The capital
expenditures limitation does not conflict with our current capital plan.
While the New Credit Facility does provide for an extension through March
31, 2004, our current forecast of operating earnings alone would not achieve
the extension conditions. We are pursuing certain strategic initiatives, which
if completed, would cause us to achieve the additional extension through March
31, 2004. The completion of these initiatives cannot be assured. If the
extension is not achieved, we plan to enter into negotiations with our lenders
in the second half of 2002 to further extend our borrowing facilities.
Consequently, borrowings under the New Credit Facility will be reflected as
current liabilities beginning in the first quarter of 2002 until such time as
the extension conditions are achieved or alternative longer-term borrowing
facilities are secured.
On February 1, 2002, Bruce C. Gottwald made a loan to Ethyl in the amount of
$18.6 million. The loan is for three years at an interest rate of 8.5%.
Interest payments are due monthly during the term of the loan, with the
principal amount coming due at maturity. We used the proceeds of the loan to
pay down existing bank debt. The loan is nonrecourse to Ethyl and is
collateralized by a first deed of trust on the three buildings at 330 South
Fourth Street, Richmond, Virginia, that are our principal offices. An
independent appraiser valued the three buildings at $18.6 million. We have a
"put" right at the end of the loan term under which we can convey the property
to the lender in satisfaction of the debt. If we fail to pay the loan at
maturity, the lender has a "call" right at the end of the loan term under which
he can require us to convey the property to him in satisfaction of the debt.
We continue to make debt repayment a high priority so that we will have more
flexibility in the future. Our cash flows from operations remain strong and we
will continue to minimize working capital requirements as well as sell
nonstrategic assets when possible.
We believe our new business model will continue to improve our profits and
financial position and that it will enable us to comply with the terms of the
New Credit Facility. While we believe our plan is sound, and we are making good
progress, the possibility exists that unforeseen events, significantly higher
interest rates, adverse business conditions, or a combination of these factors
could prevent us from meeting certain financial covenants.
Should unforeseen events or conditions restrict us from meeting our targeted
operating results, we believe we could pursue alternative plans such as
additional asset sales, deferrals of capital expenditures, or other options
that might be available. In the event we may not be in compliance with the debt
covenants at some future date, we would pursue various alternative
possibilities including, among other things, the refinancing of debt or
obtaining covenant amendments or waivers. We believe we could successfully
complete alternative arrangements, if necessary. However, there can be no
assurance that such alternatives would be available or that we would be
successful in their implementation.
19
Cash
At December 31, 2001, Ethyl had cash and cash equivalents of $12 million as
compared to $4 million at the end of 2000.
We also had restricted cash of $1 million at both year-end 2001 and 2000.
This was a portion of the funds we received from the demutualization of
MetLife, Inc. in 2000. Ethyl is using this cash to offset the employee portion
of retiree health benefit costs.
Debt
In 2001, our $107 million debt repayment included $97 million on the term
loan, $24 million on the new term loan, and $7 million on medium-term notes.
These payments were partially offset by an increase of $21 million on our
revolving credit agreement.
In 2000, Ethyl reduced debt by $32 million, excluding the addition of a $1
million capital lease commitment. The net reduction in debt included payments
of $60 million on the term loan and $7 million on the medium term notes. These
payments were partially offset by a net increase of $35 million on our
revolving credit agreement.
As a percentage of total capitalization, Ethyl's total debt increased from
63.1% at the end of 2000 to 69.8% at the end of 2001. This increase reflects
the result of the special charges associated with the engine oil additives
rationalization, as well as the one-time charges related to the pension
termination. These items substantially reduced equity resulting in the lower
debt outstanding still representing a higher percentage of capitalization than
at December 31, 2000. Normally, we repay long-term debt with cash from
operations as well as with proceeds from occasional sales of business units,
plant sites, or other assets.
Working Capital
At December 31, 2001, we had working capital of $125 million, resulting in a
current ratio of 1.79 to 1. Our working capital at year-end 2000 was $94
million resulting in a current ratio of 1.46 to 1. The change in working
capital was primarily the result of a reduction in the current portion of
long-term debt, as well as an increase in cash. Decreases in inventories and
accounts receivable, as well as an increase in a liability under the TEL
marketing agreements partially offset these.
Capital Expenditures
We expect capital expenditures will be about $14 million in 2002. Capital
spending for environmental and safety projects will be about the same as 2001.
Ethyl will continue to finance capital spending through cash provided from
operations.
Commitments
The table below shows our year-end contractual obligations, excluding
long-term debt, by year due.
Payments Due by Period
(in millions)
----------------------
After
Contractual Obligations Total 2002 2003 2003
----------------------- ----- ---- ---- -----
Operating and Capital Lease Obligations............................. $41 $14 $ 9 $18
Unconditional Purchase Obligations---Property and Equipment......... 1 1 -- --
TEL Marketing Agreement Payments (due if certain conditions are met) 22 22 -- --
20
We have a commitment to pay up to $22 million under the TEL marketing
agreements. These payments are discussed more fully in Note 3. In addition, we
have contractual obligations for the construction of assets, as well as
purchases of property and equipment of $1 million related to petroleum
additives. Our lease commitments are shown in Notes 12 and 16.
Under the TEL Marketing Agreements, we are required to provide approximately
one-third of the cost of product sold to customers in the territory from our
inventory or provide an equivalent dollar value. The value of our available
inventory fell below the requirement at year-end 2000 and was substantially
depleted at year-end 2001 as it was utilized for sales under the agreements.
The dollar value requirement was $14 million at December 31, 2001 and $16
million at December 31, 2000. We now cover this requirement to the marketing
agreement through the value of the receivable from Octel. The receivable is
being paid to Ethyl as the requirement decreases and will be paid in full at
the end of the agreement. These amounts have been recorded in other assets and
deferred charges.
Pension Plan
At December 31, 2000, we terminated an overfunded U.S. salaried employee
pension plan. Ethyl received regulatory approval for the plan termination in
the second quarter 2001. The proceeds from the terminated plan amounted to $179
million. After fully funding a new pension plan for U.S. salaried employees
which has comparable provisions and benefit formula, we received $131 million
in the third quarter 2001 which represented the reversion of pension assets.
The reversion amount was subject to the usual corporate income taxes, as well
as a 20% federal excise tax. Total federal income, state income, and excise
taxes amounted to $77 million. Most of these taxes were paid in the second half
of 2001. The net cash received, after taxes, was $54 million and was used to
pay down our debt. In 2001 and future years, Ethyl will report noncash pension
expense, since the amount of surplus in the new pension plan will be less than
that in the terminated plan.
RELATED PARTY TRANSACTIONS
Bruce C. Gottwald, our Chairman of the Board, loaned Ethyl Corporation $18.6
million on February 1, 2002. The loan is for three years at an interest rate of
8.5%. Further details of this agreement are included under the heading
"Financial Position and Liquidity."
Ethyl and Albemarle Corporation (Albemarle) have agreements to coordinate
certain facilities and services, including the production of MMT. In connection
with these agreements, Albemarle billed us approximately $24 million in 2001,
$28 million in 2000, and $29 million in 1999. In addition, the two companies
have agreements that describe the conditions under which Albemarle must
reimburse Ethyl for tax liabilities. Generally, Albemarle is responsible for
tax exposures related to its operations before February 28, 1994. We believe
that Albemarle has the ability and intent to comply with this indemnification
agreement.
During 2001, Ethyl sold 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.
BUSINESS MODEL
During 2000, the conditions in the engine oil additives business had eroded
to an extent that the return on our investment was unsatisfactory. In December
2000 we attempted to increase prices for this product line, but were
unsuccessful. This was a factor in the loss of business with three major
customers that represented a significant portion of our engine oil additives
business.
21
In an effort to improve profitability, we announced in February 2001 and
have implemented a new business model for petroleum additives. We will continue
offering chemical technology solutions and systems for fuels, refinery
operations, driveline and industrial lubricants, engine oils, and other
formulations, applying our resources in a way that is consistent with our new
strategy. The model also included the idling of production and research
facilities, as well as a workforce reduction. Our cost reduction and
restructuring efforts are now essentially complete.
The engine oil additives production facilities that were indefinitely idled
during the second quarter 2001 included a small plant in Natchez, Mississippi
and portions of the plants in Houston, Texas and Rio de Janeiro, Brazil. We
consolidated production in other plants. We have also consolidated certain
research and testing activities from our Bracknell, England facility to our
facilities located in Richmond, Virginia, and have reduced research on products
where the market does not provide an adequate return on investment.
In the first quarter 2001, we evaluated all engine oil additives assets for
impairment. We considered if the indefinitely idled assets were impaired and
concluded that these assets should be depreciated over the remaining useful
lives through the anticipated closure dates in the second quarter 2001.
We also evaluated the related intangible assets that had a book value of
approximately $76 million at March 31, 2001. We determined that the positive
cash flows generated by these assets continue to support their value on our
balance sheet. We performed the same evaluation at December 31, 2001 when the
intangible assets had a book value of $69 million and determined at year-end
2001 that the values reflected on our balance sheet were appropriate.
As part of the workforce reduction, we announced an involuntary severance
program that resulted in a reduction of 322 positions. Included were staff at
the engine oil additives plants being indefinitely idled, staff at our
Bracknell and Richmond research facilities, and corporate staff. We also
announced a voluntary early retirement program for most domestic salaried
employees over age 52. The involuntary severance program included 101 employees
who were eligible for early retirement. Thirty-two additional employees, whose
positions were not eliminated, voluntarily retired. Of the 354 employees who
were involuntarily severed or voluntarily retired, 133 positions were in
manufacturing, 115 were in research and testing, and 106 were administrative
positions. Most of the nonmanufacturing terminations were effective April 30,
2001; however, some occurred later in the second and third quarters. For the
year 2001, we paid $9 million for costs related to the employees who were
terminated during the year, as well as other shutdown costs.
For the year 2001, charges for the engine oil additives rationalization
program were $76 million. Early retirement charges were $23 million, while
severance and other related expenses amounted to $6 million. Accelerated
depreciation was $41 million, shutdown costs were $4 million, and other costs
were $2 million. Of these costs, we reported $29 million of severance, early
retirement, and other related expenses as a special item. Cost of goods sold
included $43 million; selling, general, and administrative expenses included
$300 thousand; and research, development, and testing expenses included $3.2
million.
At December 31, 2001, the remaining balance in accrued expenses was $2
million for shutdown and other expenses. The early retirement reserve will be
paid out over an extended period for pension and post-retirement benefits.
The initiatives we have taken have already begun to improve our
profitability. While the petroleum additive market remains highly competitive,
we have met the challenges of 2001 and begin 2002 in a better position to
compete than the past year.
CRITICAL ACCOUNTING POLICIES
It is our goal to clearly present our financial information in a manner that
enhances the understanding of Ethyl Corporation's sources of earnings and our
financial condition. We do this by including the information
22
required by the Securities and Exchange Commission, as well as additional
information that gives further insight into our financial operations.
Our financial report includes a discussion of our accounting principles, as
well as methods and estimates used in the preparation of our financial
statements. We believe these discussions and statements fairly represent the
financial position and operating results of our company. The purpose of this
portion of our discussion is to further emphasize some of the more critical
areas where a significant change in facts and circumstances in our operating
and financial environment might cause a change in reported financial results.
As discussed in various sections of our report, we have made certain
payments related to our TEL marketing agreements and will make additional
payments of $22 million in 2002. The unamortized total, including the payments
being made in 2002, is $50 million. We are amortizing these costs on an
accelerated method using a declining balance method over the life of the
contracts. We feel this is the appropriate methodology and time period for this
amortization based on the facts and circumstances of our TEL operations and the
estimated product life of TEL. If conditions change that cause a shorter
product life or other restrictions outside of our control, the amortization
period would have to be adjusted accordingly. While we feel the basis being
used is appropriate, we continue to keep our accounting for this issue current
with the business conditions.
We also have certain identifiable intangibles amounting to $69 million at
year-end 2001 that are discussed in Note 10 of this report. These intangibles
relate to our petroleum additives business and are being amortized over periods
with up to fourteen years of remaining life. We continue to assess the market
related to these intangibles, as well as their specific values, and conclude
the amortization periods and values are appropriate. We also evaluate these
intangibles for any potential impairment. These evaluations continue to support
the value at which these identifiable intangibles are carried on our financial
statements. However, if conditions were to substantially deteriorate in this
market, it could possibly cause a reduction in the periods of this amortization
charge or could possibly result in a noncash write-off of a portion of the
intangibles' carrying value. While we do not anticipate such a change in the
market conditions, this disclosure is provided to enhance the understanding of
the factors involved.
We have made disclosure of our environmental issues in Part I, Item I of
this report, as well as in the Notes to Consolidated Financial Statements. We
feel our environmental accruals are appropriate for the exposures and
regulatory guidelines under which we currently operate. While we currently do
not anticipate significant changes to the many factors that could impact our
environmental requirements, we continue to keep our accruals consistent with
these requirements as they change.
Also, as noted in the discussion of Legal Proceedings in Item 3, while it is
not possible to predict or determine the outcome of any legal proceeding, it is
our opinion that we will not experience materially adverse effects on our
results of operations or financial condition as a result of any pending or
threatened proceeding.
We believe the preceding discussion of some of the more critical accounting
policies and assumptions will enhance the understanding of certain issues
related to our efforts to provide an informative financial report.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued four new Statements
of Financial Accounting Standards (SFAS) during 2001.
SFAS 141 "Business Combinations", issued in July 2001, requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. The pooling-of-interests method of accounting is no longer
allowed. We do not expect this statement to have a significant impact on
Ethyl's financial statements.
SFAS 142 "Goodwill and Other Intangible Assets", issued in July 2001, is
effective for fiscal years beginning after December 15, 2001. The statement
eliminates the amortization of goodwill as of January 1, 2002.
23
In addition, the statement no longer requires that intangibles be amortized if
the life of the intangible is determined to be indefinite. Further, goodwill
and intangibles will be reviewed at least annually for possible impairment. We
will discontinue goodwill amortization on December 31, 2001 leaving us with a
balance of $3 million. We are currently evaluating the full impact of this
statement.
SFAS 143 "Accounting for Asset Retirement Obligations" was issued in August
2001. This statement addresses the obligations and asset retirement costs
associated with the retirement of tangible long-lived assets. It requires that
the fair value of the liability for an asset retirement obligation be recorded
when incurred instead of over the life of the asset. The asset retirement costs
must be capitalized as part of the carrying value of the long-lived asset. If
the liability is settled for an amount other than the recorded balance, either
a gain or loss will be recognized at settlement. This statement is effective
for fiscal years beginning after June 15, 2002. We have not completed the
necessary analysis, and therefore, cannot yet assess the potential impact on
our financial statements.
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
was issued in October 2001 and is effective for fiscal years beginning after
December 15, 2001. While this statement supercedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
SFAS 144 retains the framework established in SFAS 121 and addresses
implementation issues. SFAS 144 also supercedes Accounting Principles Board
Opinion Number 30 "Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business" and addresses the accounting for disposal
of long-lived assets of a discontinued operation. Generally, SFAS 144 requires
that impaired assets or assets to be disposed of, whether reported in
continuing operations or discontinued operations, be recorded at the lower of
carrying amount or fair value less cost to sell. We are currently evaluating
the impact of this statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ethyl is exposed to many market risk factors including fluctuations in
interest and foreign currency rates, as well as changes in the cost of raw
materials and marketable security prices. These risk factors may affect our
results of operations, cash flows, and financial position.
We manage these risks through regular operating and financing methods,
including the use of derivative financial instruments. When we have had
derivative instruments, they have been with major financial institutions and
were not for speculative or trading purposes. Also, as part of our financial
risk management, we regularly review significant contracts for embedded
derivatives. Based on our review, we have no contracts with a built-in
derivative.
The following analysis presents the effect on Ethyl's earnings, cash flows,
and financial position as if the hypothetical changes in market risk factors
occurred at year-end 2001, 2000, and 1999. We analyzed only the potential
impacts of our hypothetical assumptions. This analysis does not consider other
possible effects that could impact our business.
Interest Rate Risk
At year-end 2001, we had $336 million of debt with $330 million of that
total at variable interest rates. Holding all other variables constant, if our
weighted-average interest rates hypothetically increased 10% (approximately 70
basis points), the effect on our earnings and cash flows would be higher
interest expense of $2.5 million.
At the end of 2000, $430 million of our $443 million total debt was at
variable rates. At December 31, 1999, we had $474 million of total debt and
$455 million at variable rates. A hypothetical 10% increase in our
weighted-average interest rates in either year would have resulted in $3
million higher interest expense in that year.
24
A hypothetical 10% decrease in interest rates, holding all other variables
constant, would not materially affect the fair value of outstanding debt at
year-end 2001, 2000, or 1999.
Foreign Currency Risk
Ethyl sells to customers in foreign markets through our foreign operations,
as well as through export sales from our plants in the U.S. These transactions
are often denominated in currencies other than the U.S. dollar. Our primary
currency exposures are the Euro, Japanese Yen, Canadian Dollar, and British
Pound Sterling.
In the past, we minimized our foreign currency risk by matching cash flow
exposures in major currencies. However, as we consolidated manufacturing
operations, that became more difficult. Therefore, Ethyl sometimes enters
forward contracts to minimize the risk of foreign currency denominated sales.
We did not enter into forward contracts during 2001. At December 31, 2000, we
did not have any outstanding forward contracts.
At year-end 1999, we had a series of Japanese Yen forward sale contracts for
$24 million to minimize currency exposure from expected cash flows from foreign
operations. The contracts all had maturity dates in 2000. With all other
variables held constant, a hypothetical 10% adverse change in the December 31,
1999 forward Yen rates would have resulted in about a $3 million negative
impact in the value of our forward contracts.
Raw Material Price Risk
Ethyl is exposed to the risk of increasing raw material prices. When raw
material prices increase, we attempt to recover these costs by increasing
selling prices. However, if increases in raw material costs outpace the
increase in selling price, these costs will have a negative effect on operating
profit.
Marketable Security Price Risk
The fair value of our marketable securities at December 31, 2001 was $14
million. The estimated loss in the fair value of these securities from a
hypothetical 10% decrease in price is $1 million.
At December 31, 2000, we recorded our marketable securities at a fair value
of $26 million, including net unrealized gains of $5 million. The estimated
loss in the fair value resulting from a hypothetical 10% decrease in price
would have been $3 million.
At year-end 1999, our marketable securities had a fair value of $20 million
including net unrealized gains of $4 million. The estimated loss in the fair
value of these securities due to a hypothetical 10% decrease in the price would
have been $2 million.
Since the securities are classified as "available for sale," adjustments to
fair value of a temporary nature are reported in accumulated other
comprehensive loss, and would not impact our results of operations or cash
flows until such time as the securities are sold or determined to be
permanently impaired.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Ethyl Corporation & Subsidiaries
Consolidated Statements of Income
Years Ended December 31
---------------------------------------
2001 2000 1999
--------- -------- --------
(in thousands except per-share amounts)
Net sales............................................... $ 724,462 $843,575 $869,876
Cost of goods sold...................................... 631,133 678,423 675,459
--------- -------- --------
Gross profit........................................ 93,329 165,152 194,417
TEL marketing agreements services....................... 36,571 36,619 53,993
Selling, general, and administrative expenses........... 70,188 75,876 72,626
Research, development, and testing expenses............. 57,607 72,941 66,957
Special items (expense) income, net..................... (114,016) 76,009 7,200
--------- -------- --------
Operating (loss) profit............................. (111,911) 128,963 116,027
Interest and financing expenses......................... 32,808 36,075 35,506
Other (expense) income, net............................. (4,274) (2,793) 601
--------- -------- --------
(Loss) income before income taxes....................... (148,993) 90,095 81,122
Income tax (benefit) expense............................ (43,953) 29,098 25,825
--------- -------- --------
Net (loss) income....................................... $(105,040) $ 60,997 $ 55,297
========= ======== ========
Basic and diluted (loss) earnings per share............. $ (1.26) $ .73 $ .66
========= ======== ========
Shares used to compute basic and diluted (loss) earnings
per share............................................. 83,455 83,462 83,465
========= ======== ========
Cash dividends declared per share of common stock....... $ -- $ .125 $ .25
========= ======== ========
See accompanying Notes to Consolidated Financial Statements.
26
Ethyl Corporation & Subsidiaries
Consolidated Balance Sheets
December 31
--------------------
2001 2000
-------- ----------
(in thousands except
per-share amounts)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 12,382 $ 4,470
Restricted cash................................. 996 1,262
Trade and other accounts receivable, net........ 121,261 137,501
Receivable--TEL marketing agreements services... 16,935 12,555
Inventories..................................... 121,458 129,686
Deferred income taxes........................... 8,735 8,353
Prepaid expenses................................ 3,007 4,414
-------- ----------
Total current assets........................ 284,774 298,241
-------- ----------
Property, plant, and equipment, at cost............ 760,649 767,675
Less accumulated depreciation and amortization.... 544,892 476,573
-------- ----------
Net property, plant, and equipment.............. 215,757 291,102
-------- ----------
Prepaid pension cost............................... 25,731 224,892
Deferred income taxes.............................. 12,440 --
Other assets and deferred charges.................. 102,007 100,166
Goodwill and other intangibles, net of amortization 78,916 87,238
-------- ----------
TOTAL ASSETS....................................... $719,625 $1,001,639
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 54,376 $ 56,521
Accrued expenses................................ 59,907 49,140
Long-term debt, current portion................. 30,504 87,191
Income taxes payable............................ 14,648 11,480
-------- ----------
Total current liabilities................... 159,435 204,332
-------- ----------
Long-term debt..................................... 305,453 356,053
Other noncurrent liabilities....................... 109,444 99,297
Deferred income taxes.............................. -- 82,544
Shareholders' equity:
Common stock ($1 par value)..................... 83,455 83,455
Accumulated other comprehensive loss............ (27,170) (18,090)
Retained earnings............................... 89,008 194,048
-------- ----------
145,293 259,413
-------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $719,625 $1,001,639
======== ==========
See accompanying Notes to Consolidated Financial Statements.
27
Ethyl Corporation & Subsidiaries
Consolidated Statements of Shareholders' Equity
Common Stock
(400 million Accumulated
shares authorized) Other Total
------------------- Comprehensive Retained Shareholders'
Shares Amounts (Loss) Income Earnings Equity
---------- ------- ------------- --------- -------------
(in thousands except share amounts)
Balance at December 31, 1998.......................... 83,465,460 $83,465 $ (5,604) $ 109,141 $ 187,002
Comprehensive income:
Net income......................................... 55,297 55,297
Changes in:
Foreign currency translation adjustments........ (6,779) (6,779)
Unrealized gains on marketable securities....... (213) (213)
Minimum pension liability....................... 2,667 2,667
Unrealized losses on derivative instruments..... (1,899) (1,899)
---------
Total comprehensive income................... 49,073
---------
Cash dividends declared ($.25 per share).............. (20,866) (20,866)
---------- ------- -------- --------- ---------
Balance at December 31, 1999.......................... 83,465,460 83,465 (11,828) 143,572 215,209
Comprehensive income:
Net income......................................... 60,997 60,997
Changes in:
Foreign currency translation adjustments........ (7,449) (7,449)
Unrealized gains on marketable securities....... 195 195
Minimum pension liability....................... (907) (907)
Unrealized losses on derivative instruments..... 1,899 1,899
---------
Total comprehensive income................... 54,735
---------
Retire restricted stock............................... (10,810) (10) (88) (98)
Cash dividends declared ($.125 per share)............. (10,433) (10,433)
---------- ------- -------- --------- ---------
Balance at December 31, 2000.......................... 83,454,650 83,455 (18,090) 194,048 259,413
Comprehensive (loss) income:
Net loss........................................... (105,040) (105,040)
Changes in:
Foreign currency translation adjustments........ (4,402) (4,402)
Unrealized losses on marketable securities...... (2,590) (2,590)
Minimum pension liability....................... (2,088) (2,088)
---------
Total comprehensive (loss) income............ (114,120)
---------- ------- -------- --------- ---------
Balance at December 31, 2001.......................... 83,454,650 $83,455 $(27,170) $ 89,008 $ 145,293
========== ======= ======== ========= =========
See accompanying Notes to Consolidated Financial Statements.
28
Ethyl Corporation & Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31
- - ------------------------------
2001 2000 1999
--------- -------- ---------
(in thousands)
Cash and Cash Equivalents at Beginning of Year................ $ 4,470 $ 15,846 $ 8,403
--------- -------- ---------
Cash Flows from Operating Activities
Net (loss) income............................................ (105,040) 60,997 55,297
Adjustments to reconcile net (loss) income to cash flows from
operating activities:......................................
Depreciation and amortization.............................. 99,518 66,256 65,125
Accrued early retirement and other engine oil additives
rationalization charges.................................. 25,145 -- --
Prepaid pension cost....................................... (2,412) (9,989) (12,186)
Net (gain) loss on sales and impairments of assets......... (748) 5,234 (125)
Deferred income tax (benefit) expense...................... (91,998) 26,951 2,084
Pension reversion.......................................... 130,801 -- --
Loss (gain) on pension contract settlements................ 62,000 (80,923) --
TEL working capital advance................................ 2,170 (15,785) --
Provision for retirement offer............................. -- 1,440 --
Change in assets and liabilities:
Trade and other accounts receivable, net................... 13,813 (5,531) 18,280
Receivable--TEL marketing agreements services.............. (4,380) 10,100 (5,701)
Inventories................................................ 5,982 40,775 13,459
Prepaid expenses........................................... 1,325 1,116 730
Accounts payable and accrued expenses...................... (14,355) (10,332) (10,167)
Income taxes payable....................................... 6,594 (942) (2,160)
Other, net................................................... (2,601) 113 3,164
--------- -------- ---------
Cash provided from operating activities................ 125,814 89,480 127,800
--------- -------- ---------
Cash Flows from Investing Activities
Capital expenditures......................................... (9,515) (13,828) (13,793)
Prepayment for TEL marketing agreement services.............. (2,500) (39,448) --
Proceeds from sale of certain assets......................... 10,873 2,635 2,650
Equity investments........................................... (1,250) (3,682) --
Other, net................................................... 896 262 (770)
--------- -------- ---------
Cash used in investing activities...................... (1,496) (54,061) (11,913)
--------- -------- ---------
Cash Flows from Financing Activities
Repayments of debt........................................... (127,677) (66,750) (86,311)
Net borrowings on revolving credit agreement................. 20,832 35,000 --
Debt issuance costs.......................................... (11,680) -- --
Cash dividends paid.......................................... -- (15,650) (20,866)
Other, net................................................... 2,119 605 (1,267)
--------- -------- ---------
Cash used in financing activities...................... (116,406) (46,795) (108,444)
--------- -------- ---------
Increase (decrease) in cash and cash equivalents.............. 7,912 (11,376) 7,443
--------- -------- ---------
Cash and Cash Equivalents at End of Year...................... $ 12,382 $ 4,470 $ 15,846
========= ======== =========
See accompanying Notes to Consolidated Financial Statements.
29
Notes to Consolidated Financial Statements
(tabular amounts in thousands, except share and per-share amounts)
1. Summary of Significant Accounting Policies
Consolidation--Our consolidated financial statements include the accounts of
Ethyl Corporation and subsidiaries (Ethyl). All significant intercompany
transactions are eliminated upon consolidation.
Foreign Currency Translation--We translate the balance sheets of our foreign
subsidiaries into U.S. dollars based on the current exchange rate at the end of
each period. We translate the statements of income using the weighted-average
exchange rates for the period. Ethyl includes translation adjustments in the
balance sheet as part of accumulated other comprehensive loss and transaction
adjustments in net (loss) income.
Revenue Recognition--Our policy is to recognize revenue from the sale of
products when title and risk of loss have transferred to the buyer, the price
is fixed and determinable, and collectibility is reasonably assured. Provisions
for rebates to customers are provided for in the same period the related sales
are recorded. Freight costs are included in cost of goods sold.
We reclassified freight costs from net sales to cost of sales in 2001 to
comply with recent accounting guidance. The net effect of the adoption was
increased net sales, as well as increased cost of goods sold of $17 million for
the first nine months of 2001, $23 million in 2000, and $26 million in 1999.
These reclassifications had no effect on our results of operations or financial
position.
Inventories--Ethyl values inventories at the lower of cost or market, with
cost primarily determined on the last-in, first-out (LIFO) basis. For remaining
inventories, we use weighted-average cost or first-in, first-out (FIFO) basis.
Inventory cost includes raw materials, direct labor, and manufacturing overhead.
Property, Plant, and Equipment--We state property, plant, and equipment at
cost and compute depreciation primarily by the straight-line method based on
the estimated useful lives of the assets. Ethyl capitalizes expenditures for
significant improvements. We expense repairs and maintenance as incurred. When
property is sold or retired, we remove the cost and accumulated depreciation
from the accounts and any related gain or loss is included in income.
Our policy on capital leases is to record the asset at the lower of fair
value at lease inception or the present value of the total minimum lease
payments. We compute amortization by the straight-line method over the lesser
of the estimated economic life of the asset or the term of the lease.
Impairment of Long-Lived Assets--When significant events or circumstances
occur that might impair the value of long-lived assets, we evaluate
recoverability of the recorded cost of these assets. Assets are considered to
be impaired if their carrying value is not recoverable from the undiscounted
cash flows associated with the assets. If we determine an asset is impaired and
its recorded cost is higher than fair market value based on the present value
of future cash flows, we adjust the asset to fair market value.
Environmental Costs--Ethyl capitalizes environmental compliance costs if
they extend the useful life of the related property or prevent future
contamination. Environmental compliance costs also include maintenance and
operation of pollution prevention and control facilities. We expense these
costs as incurred.
Accrued environmental remediation and monitoring costs relate to an existing
condition caused by past operations. Ethyl accrues these costs in current
operations when it is probable that we have incurred a liability and the amount
can be reasonably estimated. Amounts accrued exclude claims for recoveries from
insurance companies. Ethyl records these claims separately.
30
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
We generally record environmental liabilities on an undiscounted basis. When
we can reliably determine the amount and timing of future cash flows, we
discount these liabilities. We incorporate an inflation factor in determining
the discount rate.
Intangible Assets--Intangible assets include identifiable intangibles and
goodwill. Identifiable intangibles include the cost of acquired favorable
contracts, patents, and formulas. We assign a value to identifiable intangibles
based on independent appraisals and internal estimates. Goodwill arises from
the excess of cost over net assets of businesses acquired. Goodwill represents
the residual purchase price after allocation to all identifiable net assets.
Ethyl amortizes intangibles using the straight-line method over the estimated
economic life of the intangible.
Employee Savings Plan--Most of our full-time salaried and hourly employees
may participate in defined contribution savings plans. Employees who are
covered by collective bargaining agreements may also participate in a savings
plan according to the terms of their bargaining agreements. Employees, as well
as Ethyl, contribute to the plans. We spent $2 million in 2001 and $3 million
in both 2000 and 1999 related to these plans.
Research, Development, and Testing Expenses--Ethyl expenses all research,
development, and testing costs. Research and development expenses related to
new products and processes were $33 million in 2001, $40 million in 2000, and
$41 million in 1999.
Income Taxes--We recognize deferred income taxes for temporary differences
between the financial reporting basis and the income tax basis of assets and
liabilities. We also adjust for changes in tax rates and laws at the time the
changes are enacted. A valuation allowance is recorded when it is more likely
than not that a deferred tax asset will not be realized.
Derivative Financial Instruments--We have used derivative financial
instruments to manage the risk of foreign currency exchange. Ethyl does not
enter into derivative financial instruments for trading or speculative
purposes. When using hedge accounting for derivative instruments, we record
realized gains and losses in net (loss) income, and unrealized gains and losses
in accumulated other comprehensive loss.
Earnings Per Share--Basic earnings per share reflect reported earnings
divided by the weighted-average number of common shares outstanding. Diluted
earnings per share include the effect of dilutive stock options outstanding
during the year.
Stock-Based Compensation--We account for the stock-based compensation plan
using the intrinsic-value method. Under this method, we do not record
compensation cost unless the quoted market price of the stock at grant date or
other measurement date exceeds the amount the employee must pay to exercise the
stock option.
Segment Reporting--Ethyl operates and manages two distinct strategic
business segments, petroleum additives and tetraethyl lead (TEL).
Investments --We classify marketable securities as "available for sale" and
record them at fair value with the unrealized gains or losses, net of tax,
included as a component of shareholders' equity in accumulated other
comprehensive loss. The fair value is determined based on quoted market prices.
We use the equity method of accounting for investments in which we have
ownership or partnership equity of 20% to 50% or have the ability to exert
significant influence.
When a decline in the fair value of a marketable security is considered
other than temporary, we writedown the investment to market value with a
corresponding charge to net (loss) income.
31
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Reclassifications--We reclassified some amounts in the consolidated
financial statements and the related notes to conform to the current
presentation.
2. Engine Oil Additives Rationalization
During 2001, Ethyl recorded a charge of $76 million or $48 million after
income taxes ($.57 per share) to cover the costs associated with the engine oil
additives rationalization. These charges included the idling of production and
research facilities, as well as a workforce reduction.
In the first quarter 2001, we evaluated all engine oil additive assets for
impairment. We considered if the assets to be indefinitely idled were impaired
and concluded that these assets should be depreciated over the remaining useful
lives through the anticipated closure dates in the second quarter 2001.
We also evaluated the related intangible assets that had a book value of
approximately $76 million at March 31, 2001. We determined that the positive
cash flows generated by these assets continue to support their value on our
balance sheet. We performed the same evaluation at December 31, 2001 when the
intangible assets had a book value of $69 million and determined at year-end
2001 that the balance sheet values were appropriate.
The engine oil additives production facilities that were indefinitely idled
during the second quarter 2001 included a small plant in Natchez, Mississippi
and portions of the plants in Houston, Texas and Rio de Janeiro, Brazil. We
consolidated production in other plants. We have also consolidated certain
research and testing activities from our Bracknell, England facility to our
facilities located in Richmond, Virginia.
As part of the workforce reduction, we announced an involuntary severance
program that resulted in a reduction of 322 positions. Included were staff at
the engine oil additives plants being indefinitely idled, staff at our
Bracknell and Richmond research facilities, and corporate staff. We also
announced a voluntary early retirement program for most domestic salaried
employees over age 52. The involuntary severance program included 101 employees
who were eligible for early retirement. Thirty-two additional employees, whose
positions were not eliminated, voluntarily retired. Of the 354 employees who
were involuntarily severed or voluntarily retired, 133 positions were in
manufacturing, 115 were in research and testing, and 106 were administrative
positions. Most of the nonmanufacturing terminations were effective April 30,
2001; however, some occurred later in the second and third quarters. For the
year 2001, we paid $9 million for costs related to the employees who were
terminated during the year, as well as other shutdown costs.
For the year 2001, we reported charges of $76 million for the engine oil
additives rationalization program. Early retirement charges were $23 million,
while severance and other related expenses amounted to $6 million. Accelerated
depreciation was $41 million, shutdown costs were $4 million, and other costs
were $2 million. Of these costs, we reported $29 million of severance, early
retirement, and other related expenses in special items (expense), income, net.
Cost of goods sold included $43 million; selling, general, and administrative
expenses included $300 thousand; and research, development, and testing
expenses included $3.2 million.
At December 31, 2001, the remaining balance in accrued expenses was $2
million for shutdown and other expenses. The early retirement reserve will be
paid out over an extended period for pension and post-retirement benefits.
32
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
3. TEL Marketing Agreements Services
On October 1, 1998, Ethyl entered into agreements with The Associated Octel
Company Limited (Octel) to market and sell TEL in all world areas except for
North America and the European Economic Area (Octel Marketing Agreements).
Sales made under the agreements are in the name of Octel. We provide certain
bulk distribution, marketing, and other services related to sales made under
these agreements. Octel produces the TEL marketed under this arrangement and
also provides marketing and other services.
Effective January 1, 2000, Ethyl's Swiss subsidiaries entered into TEL
marketing agreements with Alcor Chemie AG and Alcor Chemie Vertriebs AG
(collectively, Alcor), to market and sell TEL outside North America and the
European Economic Area (Alcor Marketing Agreements). Octel purchased Alcor,
another TEL producer, in the fall of 1999. These agreements are similar to the
Octel Marketing Agreements. On April 19, 2000, Ethyl's Swiss subsidiaries made
a payment of $39 million to Alcor as a prepayment for services provided under
the terms of the Alcor Marketing Agreements. This payment was funded under our
loan agreements.
During 2001, the Alcor Marketing Agreements were amended to include the
proceeds from the sale of TEL resulting from agreements recently entered into
by an Alcor subsidiary. These agreements are with Veritel Chemicals BV
(Veritel) and its parent company, General Innovative Investment NV (GII) and
provide for the exclusive right to market and sell TEL sourced from Veritel in
certain areas of the world, excluding primarily the United States and the
Russian Federation. Veritel is party to supply agreements granting it the
exclusive right to distribute TEL manufactured by OAO Sintez, a Russian
company, to areas outside the United States and the Russian Federation. The
amended Alcor Marketing Agreements are effective for an initial period from
January 1, 2000 to December 31, 2010, but may be extended under certain
circumstances. Ethyl's Swiss subsidiaries made a payment of $2.5 million to
Alcor in December 2001 as a payment for services under the terms of the amended
marketing agreements.
Under the amended Alcor Marketing Agreements, Ethyl's Swiss subsidiaries
have agreed to pay Alcor up to $22 million, representing a portion of the
amount Alcor's subsidiary is required to pay to Veritel provided certain
actions described in the agreements with Veritel and GII have taken place. We
recorded this amount as a liability at year-end 2001. An initial payment was
made in January 2002 and remaining payments are anticipated to be substantially
completed by year-end 2002. These payments will be funded through our loan
agreements.
The payments related to the amended Alcor Marketing Agreements are being
amortized over the life of the agreements using a declining balance method and
are designed to be in proportion to future cash flows from the marketing
agreements as a result of declining volumes. The unamortized portion of the
payments totalled $50 million at year-end 2001 and $32 million at year-end
2000. The amortization expense was $6 million in 2001 and $7 million in 2000.
Under the Octel and Alcor Marketing Agreements, approximately one-third of
the net proceeds is paid for services provided by Ethyl. The proceeds earned by
Ethyl under all of these marketing agreements are reflected in the Consolidated
Statements of Income under TEL marketing agreements services. Also, as part of
the marketing agreements, Octel purchased most of our remaining TEL inventory
and used this inventory for third-party sales. Sales of inventory to Octel have
been included in our net sales and cost of goods sold in the Consolidated
Statements of Income. Sales of TEL to Octel totalled $9 million in 2001, $15
million in 2000, and $10 million in 1999.
33
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Summary financial information related to the Marketing Agreements is
presented below:
Years Ended December 31
----------------------------
2001 2000 1999
-------- -------- --------
Territory sales................................ $276,806 $303,497 $341,100
Contractual cost of sales...................... 127,605 142,695 155,985
-------- -------- --------
149,201 160,802 185,115
Selling, general, and administrative expenses.. 18,629 26,427 20,589
-------- -------- --------
Net proceeds for services...................... $130,572 $134,375 $164,526
======== ======== ========
Ethyl's share.................................. $ 41,783 $ 43,000 $ 52,648
Amortization expense and adjustments........... (5,212) (6,381) 1,345
-------- -------- --------
Proceeds from TEL marketing agreements services $ 36,571 $ 36,619 $ 53,993
======== ======== ========
At December 31, Octel and Alcor owed Ethyl approximately $17 million in 2001
and $12 million in 2000 for our share of net proceeds for services and
unreimbursed costs, as provided by the agreements. We received cash proceeds
from these agreements of $37 million in 2001 and $53 million in 2000.
We record reimbursement of expenses as a reduction of the related expenses.
Expense reimbursements received from Octel and Alcor under the Marketing
Agreements totalled $4 million in 2001, $7 million in 2000, and $9 million in
1999. These reimbursements were for certain bulk distribution, marketing and
other services we provided under the agreements.
Under the TEL Marketing Agreements, we are required to provide approximately
one-third of the cost of product sold to customers in the territory from our
TEL inventory or provide an equivalent dollar value. Our inventories fell below
the requirement at year-end 2000 due to the planned sale of inventory to Octel,
per the agreements. The approximate requirement is $14 million at year-end 2001
and $16 million at year-end 2000. The receivable from Octel for inventory sold
to them now covers our part of this requirement. The receivable is being paid
to Ethyl as the requirement decreases and will be paid in full at the end of
the agreement. These amounts have been recorded in other assets and deferred
charges.
4. Supplemental Cash Flow Information
Years Ended December 31
-----------------------
2001 2000 1999
------- ------- -------
Cash paid during the year for
Interest and financing expenses (net of capitalization). $31,095 $36,473 $33,678
Income taxes............................................ 36,624 16,797 6,834
Excise taxes on pension reversion....................... 26,160 -- --
Supplemental investing and financing noncash transactions
Leased asset addition and related obligation............ -- 1,143 1,600
34
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
5. Cash and Cash Equivalents
December 31
--------------
2001 2000
------- ------
Cash and time deposits $11,597 $3,649
Short-term securities. 785 821
------- ------
$12,382 $4,470
======= ======
Our short-term securities are generally commercial paper maturing in less
than 90 days. We state these securities at cost plus accrued income, which
approximates market value.
We also have restricted cash of $1 million from the demutualization of
MetLife, Inc. at both year-end 2001 and 2000. This cash must be used to offset
the employee portion of employee welfare benefit costs and therefore is not
included above.
6. Trade and Other Accounts Receivable, Net
December 31
------------------
2001 2000
-------- --------
Trade receivables.............. $100,474 $109,152
Income tax receivables......... 13,131 18,807
Other.......................... 8,545 10,450
Allowance for doubtful accounts (889) (908)
-------- --------
$121,261 $137,501
======== ========
7. Inventories
December 31
-----------------
2001 2000
-------- --------
Finished goods and work-in-process $ 98,995 $104,584
Raw materials..................... 14,066 15,562
Stores, supplies, and other....... 8,397 9,540
-------- --------
$121,458 $129,686
======== ========
Our inventories which are stated on the LIFO basis amounted to $87 million
at year-end 2001, which was below replacement cost by approximately $18
million. At year-end 2000, LIFO basis inventories were $95 million, about $19
million below replacement cost. During 2001 and 2000 TEL inventory quantities
were reduced resulting in a liquidation of LIFO layers. The effect of these
liquidations increased net income by $800 thousand in 2001, $1 million in 2000,
and $500 thousand in 1999.
35
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
8. Property, Plant, and Equipment, at Cost
December 31
-----------------
2001 2000
-------- --------
Land.................... $ 39,608 $ 43,594
Land improvements....... 29,583 30,116
Buildings............... 93,713 95,835
Machinery and equipment. 576,477 573,594
Capitalized interest.... 17,834 18,273
Construction in progress 3,434 6,263
-------- --------
$760,649 $767,675
======== ========
We depreciate the cost of property, plant, and equipment generally by the
straight-line method and primarily over the following useful lives:
Land improvements...... 5-30 years
Buildings.............. 10-40 years
Machinery and equipment 3-15 years
Interest capitalized was $21 thousand in 2001, $63 thousand in 2000, and $99
thousand in 1999. Depreciation expense was $78 million in 2001, $44 million in
2000, and $49 million in 1999. The 2001 amount includes $41 million related to
the accelerated depreciation of certain engine oil additive assets.
Amortization of capitalized interest, which is included in depreciation
expense, was $1.6 million in both 2001 and 2000, and $1.8 million in 1999.
9. Other Assets and Deferred Charges
December 31
-----------------
2001 2000
-------- --------
TEL prepayment for services, net of amortization $ 50,252 $ 32,081
TEL working capital advance to Octel............ 13,615 15,785
Rabbi trust assets.............................. 12,575 15,912
Deferred charges................................ 5,858 2,424
Other........................................... 19,707 33,964
-------- --------
$102,007 $100,166
======== ========
Deferred charges in 2001 include $4.6 million in financing fees related to
our Credit Agreement.
10. Goodwill and Other Intangibles, Net of Amortization
December 31
---------------
2001 2000
------- -------
Identifiable intangibles. $69,483 $79,190
Minimum pension liability 6,276 3,697
Goodwill................. 3,157 4,351
------- -------
$78,916 $87,238
======= =======
36
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
We amortize the cost of intangible assets by the straight-line method, over
the following economic lives:
Identifiable intangibles 5-20 years
Goodwill................ 10 years
Goodwill of $2 million acquired prior to November 1, 1970 and the minimum
pension liability are not amortized. The remaining goodwill will not be
amortized effective January 1, 2002, in accordance with the recently issued
SFAS 142. Goodwill and intangibles will be reviewed at least annually for
possible impairment.
Accumulated amortization was $51 million at year-end 2001 and $56 million at
year-end 2000. The amortization expense amounted to $11 million in 2001 and $14
million in both 2000 and 1999.
11. Accrued Expenses
December 31
---------------
2001 2000
------- -------
TEL liability................................ $22,400 $ --
Employee benefits, payroll, and related taxes 9,526 10,601
Customer rebates............................. 6,144 12,845
Environmental remediation.................... 2,960 1,870
Other........................................ 18,877 23,824
------- -------
$59,907 $49,140
======= =======
12. Long-Term Debt
December 31
------------------
2001 2000
-------- --------
New term loan agreement........................ $205,691 $ --
Term loan agreement............................ 83,414 180,000
Revolving credit agreement..................... 40,800 250,000
Medium-term notes.............................. -- 6,750
Capital lease obligations...................... 6,052 6,526
-------- --------
335,957 443,276
Unamortized discount........................... -- (32)
-------- --------
335,957 443,244
Current maturities, net of unamortized discount (30,504) (87,191)
-------- --------
$305,453 $356,053
======== ========
In April 2001, we entered into the First Amended and Restated Credit
Agreement (the Credit Agreement) with a group of banks as a result of our
anticipating and not being in compliance with one of the covenants of our
previous agreement at the end of the first quarter 2001. The Credit Agreement
includes a revolving line of credit (including a letter of credit
sub-facility), the remaining portion of the original term loan, and a new term
loan, all of which mature on August 28, 2002.
37
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Under the revolving credit agreement portion of this facility, we could
initially borrow up to $170 million at variable interest rates and terms. At
December 31, 2001, we can borrow up to $151.8 million under this facility. We
currently pay an annual fee of 1% on the commitment amount.
The term loan portion of this facility, which amounted to $140 million when
we entered into the Credit Agreement, has variable interest rates. We are
repaying this loan in installments with the final payment due on August 28,
2002.
The new term loan originally amounted to $230 million and also has variable
interest rates. In addition, we pay an annual fee of 1% on the outstanding
balance.
The key provisions of the Credit Agreement include collateralizing
substantially all of our assets in the United States. Mandatory prepayments on
debt are required from excess cash flow, asset dispositions, distributions from
our pension plan, and certain other transactions. The payment of dividends is
not permitted and investments, as well as capital expenditures, are limited.
The weighted-average interest rate on these bank loans was 6.6% in 2001 and
7.0% in 2000. Substantially all of our debt is at variable rates.
These agreements contained covenants, representations, and events of default
typical of a credit agreement of this nature. We were in compliance with these
provisions at December 31, 2001. The financial covenants under the Credit
Agreement include:
. A maximum leverage ratio
. A minimum interest coverage ratio
. A minimum consolidated earnings before interest, taxes, depreciation,
and amortization
We recorded our capital lease obligations at the fair market value of the
related asset at the inception of the lease. Capital lease obligations are
approximately $900 thousand each year for the next nine years. The future
minimum lease payments in excess of the capital lease obligation are included
in the noncancelable future lease payments discussed in Note 16.
In March 2002, we completed the Fourth Amendment to Amended and Restated
Credit Agreement amounting to $396 million. This agreement is also
collateralized and is discussed more fully in Note 26.
Under the agreement signed in March 2002, $30 million is due during 2002,
with the remaining balance outstanding due at the maturity date of March 31,
2003.
On February 1, 2002, Bruce C. Gottwald, Chairman of the Board, made a loan
to Ethyl in the amount of $18.6 million. The loan is for three years at an
interest rate of 8.5%. Interest payments are due monthly during the term of the
loan, with the principal amount coming due at maturity. We used the proceeds of
the loan to pay down existing bank debt. The loan is nonrecourse to Ethyl and
is collateralized by a first deed of trust on the three buildings at 330 South
Fourth Street, Richmond, Virginia, that are our principal offices. An
independent appraiser valued the three buildings at $18.6 million. We have a
"put" right at the end of the loan term under which we can convey the property
to the lender in satisfaction of the debt. If we fail to pay the loan at
maturity, the lender has a "call" right at the end of the loan term under which
he can require us to convey the property to him in satisfaction of the debt.
38
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
13. Other Noncurrent Liabilities
December 31
----------------
2001 2000
-------- -------
Employee benefits........ $ 74,728 $61,630
Environmental remediation 23,531 25,825
Other.................... 11,185 11,842
-------- -------
$109,444 $99,297
======== =======
14. Stock Options
Officers and other key employees may be granted incentive stock options, as
well as nonqualifying stock options, to purchase a specified number of shares
of common stock. We issue these options with an exercise price of fair market
value on the date of grant and for a maximum term of ten years. Some currently
granted options become exercisable when the market price of our common stock
reaches specified levels or when our earnings meet designated objectives. Other
options become exercisable over a stated period of time. We may also grant a
stock appreciation right (SAR) along with an option.
The maximum number of shares issuable under the incentive stock option plan
is 11.9 million, with an annual limit of 200 thousand shares per individual.
A summary of Ethyl's stock option plan is presented below in whole shares:
2001 2000 1999
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at January 1.......... 2,368,822 $12.03 2,640,596 $11.80 2,893,767 $11.85
Granted........................... 3,745,000 .87 -- -- -- --
Lapsed............................ (205,339) 11.93 (271,774) 9.80 (253,171) 12.45
--------- ------ --------- ------ --------- ------
Outstanding at December 31........ 5,908,483 $ 4.96 2,368,822 $12.03 2,640,596 $11.80
========= ====== ========= ====== ========= ======
Exercisable at December 31........ 398,683 540,022 579,796
========= ========= =========
Available for grant at December 31 3,521,371 7,061,032 6,789,258
========= ========= =========
We granted 3,745,000 options in 2001. No options were granted in 2000 or
1999. Based on the following assumptions, the stock options granted in 2001
have an estimated average value of $.33 per share at the grant date. We
estimated the fair value of the options granted in 2001 using an option-pricing
model similar to Black-Scholes. We used the following assumptions in valuing
the options granted:
2001
-------
Dividend yield......... 0.0%
Expected volatility.... 30.2%
Risk-free interest rate 4.2%
Expected life.......... 6 years
39
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
We continue to use the intrinsic value method to account for our stock
option plan. Accordingly, we have recognized no compensation cost. However, had
we accounted for the plan using the fair value method, our net loss would have
been increased $157 thousand in 2001 and net income would have been reduced $59
thousand in 2000 and $143 thousand in 1999. In addition, basic and diluted
(loss) earnings per share would have been unchanged in 2001, 2000, and 1999.
The following table summarizes information in whole shares about the stock
options outstanding or exercisable at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------ -------------------
Weighted Average
-------------------- Weighted
Remaining Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ --------- ----------- -------- ------- --------
$.87............... 3,745,000 9.74 years $ .87 -- $ --
8.88.............. 280,000 4.95 8.88 -- --
12.50 to 12.83.... 1,883,483 2.15 12.50 398,683 12.52
--------- ---------- ------ ------- ------
$.87 to 12.83...... 5,908,483 7.09 $ 4.96 398,683 $12.52
--------- ---------- ------ ------- ------
15. Gains and Losses on Foreign Currency
Foreign currency transactions resulted in a net gain of $364 thousand in
2001, a net loss of $3 million in 2000, and a net gain of $2 million in 1999.
16. Contractual Commitments and Contingencies
Contractual Commitments--Ethyl has operating lease agreements primarily for
office space, transportation equipment, and storage facilities. Rental expense
was $18 million in 2001 and $20 million in both 2000 and 1999.
Future lease payments for all noncancelable operating leases, as well as the
future minimum lease payments in excess of the capital lease obligation as of
December 31, 2001 are:
. 2002...... $13 million
. 2003...... $ 8 million
. 2004...... $ 5 million
. 2005...... $ 3 million
. 2006...... $ 3 million
. After 2006 $ 3 million
We have contractual obligations for the construction of assets, as well as
purchases of property and equipment of $1 million at December 31, 2001.
Ethyl and Albemarle Corporation (Albemarle) have agreements to coordinate
certain facilities and services, including the production of MMT. In connection
with these agreements, Albemarle billed us approximately $24 million in 2001,
$28 million in 2000, and $29 million in 1999. In addition, the two companies
have agreements
40
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
that describe the conditions under which Albemarle must reimburse Ethyl for tax
liabilities. Generally, Albemarle is responsible for tax exposures related to
its operations before February 28, 1994. We believe that Albemarle has the
ability and intent to comply with this indemnification agreement.
Under the TEL Marketing Agreements, we are required to provide approximately
one-third of the cost of product sold to customers in the territory from our
TEL inventory or provide an equivalent dollar value. Our inventories fell below
the requirement at year-end 2000 due to the planned sale of inventory to Octel,
per the agreements. The approximate requirement is $14 million at year-end 2001
and $16 million at year-end 2000. The receivable from Octel for inventory sold
to them now covers our part of this requirement. The receivable is being paid
to Ethyl as the requirement decreases and will be paid in full at the end of
the agreement. These amounts have been recorded in other assets and deferred
charges.
During 2001, the Alcor Marketing Agreements were amended to include the
proceeds from the sale of TEL resulting from agreements recently entered by an
Alcor subsidiary. Under the amended TEL marketing agreements, Ethyl's Swiss
subsidiaries are required to pay $22 million, representing a portion of the
amount the Alcor subsidiary has agreed to pay to Veritel, provided actions set
forth in the agreement with Veritel and GII have taken place. These payments,
which began in January 2002, are anticipated to be substantially completed by
year-end 2002 and will be funded through our loan agreements.
Litigation--Ethyl Corporation was served as a defendant in two cases filed
in the Circuit Court for Baltimore City, Maryland on September 22, 1999. Both
cases claim damages attributable to lead. The cases were Cofield et al. v. Lead
Industries Association, Inc., et al. and Smith et al. v. Lead Industries
Association, Inc., et al. Cofield is no longer a named plaintiff in the first
case and the case is now identified as Young. Young seeks recovery for alleged
property damage from lead paint, which Ethyl never produced or distributed.
Smith is for alleged personal injuries for six children from lead exposure due
to lead paint and dust from tailpipe emissions due to leaded gasoline. The
Court dismissed the Young case in its entirety in December 2001 and dismissed
Ethyl from the Smith case in February 2002. These decisions could be appealed
by the plaintiffs. Ethyl has strong defenses and has vigorously defended these
cases.
Ethyl is involved in other legal proceedings that are incidental to our
business. We are not a party to any such litigation proceedings that are
expected to have a materially adverse effect on our results of operations or
financial condition.
Environmental--During 2000, the Environmental Protection Agency (EPA) named
Ethyl as a potentially responsible party (PRP) under Superfund law for the
clean-up of soil and groundwater contamination at the Sauget Area 2 Site in
Sauget, Illinois. Without admitting any fact, responsibility, fault, or
liability in connection with this site, Ethyl is participating with other PRPs
in site investigations and feasibility studies. We are responsible for 6.47% of
the study cost and have accrued for the estimated expenses. Because of the
early stage, we cannot make a reasonable estimate of the total cost of, or
Ethyl's share of responsibilities, related to any site remediation or clean-up.
As additional facts become known to Ethyl, we will accrue and pay our
proportionate share of remediation or clean-up costs, if any.
At our largest United States site, we have substantially completed
remediation and will be monitoring the site for an extended period. The reserve
for this site was $8 million at both year-end 2001 and 2000. We based these
amounts on the best estimate of future costs discounted at approximately 4%. We
incorporated an inflation factor in determining the discount rate. The
remaining environmental liabilities are not discounted.
41
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
We accrue for environmental remediation and monitoring activities for which
costs can be reasonably estimated and are probable. These estimates are based
on an assessment of the site, available clean-up methods, and prior experience
in handling remediation. While we are currently fully accrued for known
environmental issues, it is possible that unexpected future costs could have a
significant impact.
At December 31, our accruals for environmental remediation were $26 million
in 2001 and $28 million in 2000. We recorded expected insurance reimbursement
assets for these amounts of $6 million in 2001 and $5 million in 2000. When
significant events or circumstances occur that might impair the value of this
nonoperating insurance receivable, we evaluate recoverability of the recorded
amounts. If we determine an asset is impaired, we adjust the asset to net
realizable value.
Ethyl spent $12 million in 2001 for environmental operating and clean-up
costs, excluding depreciation of previously capitalized expenditures. We spent
$12.4 million in 2000 and $14 million in 1999. Of these amounts, the ongoing
costs of operations were $11 million in 2001, $11.7 million in 2000, and $13
million in 1999. The balance represents clean-up, or remediation and monitoring
costs. On capital expenditures for pollution prevention and safety projects, we
spent $2 million in 2001 and $3 million in both 2000 and 1999.
17. Pension Plans and Other Post-Retirement Benefits
U.S. Retirement Plans--Ethyl sponsors pension plans for most U.S. employees
that offer a benefit based primarily on years of service and compensation.
Employees do not contribute to these pension plans. Plan assets are held and
distributed by trusts and consist principally of common stock, U.S. government
obligations, and corporate obligations.
In addition, we offer unfunded, nonqualified supplemental pension plans.
These plans restore a part of the pension benefits from our regular pension
plans that would have been payable to designated participants if it were not
for limitations imposed by income tax regulations.
We also provide post-retirement health care benefits and life insurance to
eligible retired employees. Ethyl and retirees share in the cost of
post-retirement health care benefits. Ethyl pays the premium for the insurance
contract that holds plan assets for retiree life insurance benefits.
At December 31, 2000 we terminated an overfunded U.S. salaried pension plan.
Ethyl received regulatory approval for the plan termination in second quarter
2001. The proceeds from the terminated plan amounted to $179 million. After
fully funding a new pension plan for U.S. salaried employees which has
comparable provisions and benefit formula, we received $131 million in the
third quarter 2001 which represented a reversion of pension assets. The
reversion amount was subject to the usual corporate income taxes, as well as a
20% federal excise tax. Total federal income, state income, and excise taxes
amounted to $77 million. Most of these taxes were paid in the second half of
2001. The net cash received, after taxes, was $54 million. We also recognized a
noncash charge of $62 million related to the termination of the plan and
subsequent settlement of the related pension liabilities. The loss is reported
in special items (expense) income, net on the Consolidated Statements of Income.
During 2000, we settled some of the liabilities of the U.S. salaried plan
for certain groups of former employees. The groups included both retired
employees, as well as terminated vested plan participants. No retiree benefits
changed due to the settlements. The settlements resulted in the recognition of
a noncash gain of $81 million. The gain is reported in special items (expense)
income, net on the Consolidated Statements of Income.
42
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Because of the settlements in both 2001 and 2000, the benefit obligation, as
well as the fair value of plan assets, was reduced.
Pension income and post-retirement benefit cost are shown below:
Years Ended December 31
-------------------------------------------------------
Pension Benefits Post-Retirement Benefits
---------------------------- -------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- ------- ------- -------
Service cost...................... $ 3,208 $ 4,096 $ 4,412 $ 831 $ 952 $ 1,056
Interest cost..................... 6,614 12,713 21,917 4,132 3,974 3,779
Expected return on plan assets.... (14,646) (31,089) (39,747) (2,017) (1,856) (1,829)
Amortization of prior service cost 1,396 2,542 2,541 (29) (34) (29)
Amortization of transition asset.. (976) (2,049) (4,264) -- -- --
Amortization of net loss (gain)... 208 321 386 (87) -- --
Special termination benefits...... 17,759 1,703 161 3,438 49 85
Settlements loss (gain)........... 62,000 (80,923) -- -- -- --
-------- -------- -------- ------- ------- -------
Net periodic benefit cost (income) $ 75,563 $(92,686) $(14,594) $ 6,268 $ 3,085 $ 3,062
======== ======== ======== ======= ======= =======
The special termination benefits in 2001 are associated with the enhanced
early retirement offer made during the year. The special termination benefits
in 2000 are related to retirement charges for several individuals.
43
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Changes in the plans' benefit obligations and assets, as well as a
reconciliation of the funded status, follow.
Years Ended December 31
---------------------------------------------
Pension Benefits Post-Retirement Benefits
-------------------- -----------------------
2001 2000 2001 2000
--------- --------- -------- --------
Change in benefit obligation
Benefit obligation at beginning of year............. $ 103,161 $ 311,102 $ 55,803 $ 53,787
Service cost........................................ 3,208 4,096 831 952
Interest cost....................................... 6,614 12,713 4,132 3,974
Plan amendments..................................... 19,801 1,703 3,438 (16)
Actuarial net loss.................................. 16,674 17,785 1,792 138
Benefits paid....................................... (3,976) (10,115) (4,483) (3,032)
Settlements......................................... (65,198) (234,123) -- --
--------- --------- -------- --------
Benefit obligation at end of year................... $ 80,284 $ 103,161 $ 61,513 $ 55,803
========= ========= ======== ========
Change in plan assets
Fair value of plan assets at beginning of year...... $ 270,490 $ 546,382 $ 29,938 $ 27,593
Actual return on plan assets........................ (19,190) (34,257) 1,115 3,918
Employer contribution............................... 3,030 2,603 2,167 1,459
Benefits paid....................................... (3,976) (10,115) (4,483) (3,032)
Reversion of assets................................. (130,801) -- -- --
Settlements......................................... (65,198) (234,123) -- --
--------- --------- -------- --------
Fair value of plan assets at end of year............ $ 54,355 $ 270,490 $ 28,737 $ 29,938
========= ========= ======== ========
Reconciliation of funded status
Funded status....................................... $ (25,929) $ 167,329 $(32,776) $(25,865)
Unrecognized net actuarial loss/(gain).............. 19,013 24,755 (3,944) (6,677)
Unrecognized transition asset....................... -- (976) -- --
Unrecognized prior service cost..................... 5,459 11,198 (174) (251)
--------- --------- -------- --------
(Accrued) prepaid benefit cost...................... $ (1,457) $ 202,306 $(36,894) $(32,793)
========= ========= ======== ========
Amounts recognized in the consolidated balance sheet
Prepaid benefit cost................................ $ 23,216 $ 222,488 -- --
Accrued benefit cost................................ (30,596) (23,402) $(36,894) $(32,793)
Intangible asset.................................... 4,027 1,796 -- --
Accumulated other comprehensive income.............. 1,896 1,424 -- --
--------- --------- -------- --------
Net amount recognized............................... $ (1,457) $ 202,306 $(36,894) $(32,793)
========= ========= ======== ========
The amount recognized in the consolidated balance sheet in the table above
is the total net balance sheet position of our domestic pension plans.
The fair market value of the plan assets of our largest salaried pension
plan exceeds both the accumulated benefit obligation and projected benefit
obligation of the salaried plan at December 31, 2001. This plan is included in
prepaid pension cost on our balance sheet.
The accumulated benefit obligation and projected benefit obligation exceeded
the fair market value of plan assets for the nonqualified plans and most of the
other qualified plans at December 31, 2001. At year-end 2000, the accumulated
benefit obligation and projected benefit obligation also exceeded the fair
market value of assets
44
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
for the nonqualified plans. The accrued benefit cost of these plans is included
in other noncurrent liabilities on the balance sheet.
The following table shows the fair market value of assets, accumulated
benefit obligation, and projected benefit obligation for these plans.
2001 2000
------- -------
Plans with the accumulated benefit obligation in excess of the fair market value of
plan assets
Accumulated benefit obligation..................................................... $36,658 $22,136
Fair market value of plan assets................................................... 7,922 --
Plans with the projected benefit obligation in excess of the fair market value of plan
assets
Projected benefit obligation....................................................... $41,906 $22,136
Fair market value of plan assets................................................... 11,663 --
While there were no assets held in the nonqualified plans by the trustee, we
maintain a rabbi trust for the retired beneficiaries of the nonqualified plans.
At December 31, assets in the rabbi trust were valued at $13 million in 2001
and $16 million in 2000. The assets of the rabbi trust are not included in any
of the pension tables above.
We used the following assumptions to calculate the results of our retirement
plans:
December 31
-----------------------------------------
Pension Benefits Post-Retirement Benefits
--------------- -----------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Discount rate................................... 7% 7.5% 7.5% 7% 7.5% 7.5%
Rate of projected compensation increase......... 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets 9% 9% 9% 7% 7% 7%
For 2002, the assumption for the health care cost trend rate is 7% and will
remain at that level. The trend rate for managed care costs is 6% where it will
remain.
A one-percent change in the assumed health care cost trend rate would have
the following effects:
1% 1%
Increase Decrease
-------- --------
Effect on accumulated postretirement benefit obligation as of December 31, 2001 $4,781 $(3,905)
Effect on net periodic postretirement benefit cost in 2001..................... $ 549 $ (433)
45
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Foreign Pension Plans--For most employees of our foreign subsidiaries, Ethyl
has pension plans that offer benefits based primarily on years of service and
compensation. Ethyl generally contributes to investment trusts and insurance
policies to provide for these plans. Pension cost for these plans was $3
million in 2001, $2 million in 2000, and $3 million in 1999. Included in the
2001 cost were termination benefit and plan curtailment expenses of $1 million.
At December 31, the actuarial present value of accumulated benefits was $36
million in 2001 and $37 million in 2000, substantially all of which was vested.
Net assets available for pension benefits at December 31, were $31 million in
2001 and $35 million in 2000.
Because the accumulated benefit obligation exceeded plan assets for three
foreign plans in 2001 and two plans in 2000, Ethyl recognized a minimum pension
liability. At December 31, we recorded minimum pension liabilities of $5
million in 2001 and $2 million in 2000.
Consolidated--The net pension expense for U.S. and foreign plans was $79
million in 2001 and included expense of $62 million from the termination of the
U.S. salaried plan and subsequent settlement of the related pension contracts.
Also included were expenses of $19 million for the special termination benefits
and plan curtailments. The net pension income for U.S. and foreign plans was
$91 million in 2000 and $12 million in 1999. The year 2000 included income of
$81 million from the pension contract settlements.
18. Other (Expense) Income, Net
Other expense, net for 2001 was $4 million and included expenses of $2.6
million related to the refinancing of our debt, as well as $2 million for our
percentage share of losses in equity investments. Also included is a loss on
impairments of nonoperating assets of $4 million, which was partially offset by
a gain on the sale of a nonoperating asset of $1 million.
The $1 million gain in 2001 on the sale of a 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.
Other (expense) income, net in 2000 included a $3 million charge for our
percentage share of losses in equity investments. Additionally, other (expense)
income, net included a $2 million gain on the sale of nonoperating assets.
In 1999, other (expense) income, net totaled $600 thousand income.
46
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
19. Income Taxes
Our (loss) income before income taxes, as well as the provision for taxes
follows:
Years Ended December 31
---------------------------
2001 2000 1999
--------- ------- -------
(Loss) income before income taxes
Domestic...................................... $(186,291) $64,583 $58,778
Foreign....................................... 37,298 25,512 22,344
--------- ------- -------
$(148,993) $90,095 $81,122
========= ======= =======
Current income taxes
Federal....................................... $ 29,694 $(7,672) $12,719
State......................................... 6,754 (682) 414
Foreign....................................... 11,597 10,501 10,608
--------- ------- -------
48,045 2,147 23,741
--------- ------- -------
Deferred income taxes
Federal....................................... (86,475) 26,911 6,016
State......................................... (5,896) 669 (124)
Foreign....................................... 373 (629) (3,808)
--------- ------- -------
(91,998) 26,951 2,084
--------- ------- -------
Total income tax (benefit) expense............... $ (43,953) $29,098 $25,825
========= ======= =======
The reconciliation of the U.S. federal statutory rate to the effective
income tax rate follows:
% of (Loss) Income
Before Income Taxes
--------------------
2001 2000 1999
------ ------ ----
Federal statutory rate................................ 35.0% 35.0% 35.0%
State taxes, net of federal tax....................... 2.0 1.2 1.7
Foreign sales corporation benefit..................... 0.4 (0.7) (0.8)
Research tax credit................................... 0.3 (0.5) (0.6)
Tax settlements and adjustments....................... (2.4) (4.5) (3.9)
Excise taxes on pension reversion..................... (6.3) -- --
Other items, net...................................... 0.5 1.8 0.4
------ ------ ----
Effective income tax rate............................. 29.5% 32.3% 31.8%
====== ====== ====
The effective income tax rate for 2001 reflects a tax benefit of $44 million
as a result of the loss before income taxes of $149 million. Both the 2000 and
1999 rates reflect tax expense as a percent of income before taxes.
Based on available foreign tax credits and current U.S. income tax rates, no
additional U.S. taxes would be incurred if a foreign subsidiary returned its
earnings in cash to Ethyl.
47
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Our deferred income tax assets and liabilities follow:
December 31
----------------
2001 2000
------- --------
Deferred income tax assets
Future employee benefits............................. $17,167 $ 3,492
Environmental and future shutdown reserves........... 11,135 12,407
Foreign currency translation adjustments............. 10,397 9,517
Intercompany profit in inventories................... 1,530 521
Inventory capitalization............................. 1,519 1,513
Unrealized loss on marketable securities............. 1,292 --
Undistributed earnings of foreign subsidiaries....... 837 3,411
Other................................................ 10,199 9,742
------- --------
54,076 40,603
------- --------
Deferred income tax liabilities
Depreciation......................................... 18,510 34,299
Intangibles.......................................... 10,556 12,177
Capitalization of interest........................... 955 1,432
Future employee benefits............................. -- 61,561
Unrealized gain on marketable securities............. -- 1,708
Other................................................ 2,880 3,617
------- --------
32,901 114,794
------- --------
Net deferred income tax assets (liabilities)............ $21,175 $(74,191)
======= ========
Reconciliation to financial statements
Deferred income tax assets--current.................. $ 8,735 $ 8,353
Deferred income tax assets (liabilities)--noncurrent. 12,440 (82,544)
------- --------
Net deferred income tax assets (liabilities)............ $21,175 $(74,191)
======= ========
20. Financial Instruments
Fair Value--We determine the fair value of our outstanding financial
instruments as follows:
Cash and Cash Equivalents--The carrying value approximates fair value.
Restricted Cash--The carrying value approximates fair value.
Investments in Marketable Securities--We classify these investments as
"available for sale" and record them at fair value with the unrealized gains
or losses, net of tax, included as a component of shareholders' equity in
accumulated other comprehensive loss. When a decline in the fair value of a
marketable security is considered other than temporary, we writedown the
investment to market value with a corresponding charge to net (loss) income.
See Notes 19 and 21.
Long-Term Debt--Ethyl estimates the fair value of our long-term debt
based on current rates available to us for debt of the same remaining
duration.
Foreign Currency Forward Contracts--We record foreign currency forward
contracts at fair value in our consolidated balance sheet. The fair value is
based on published forward rates. We include the unrealized gains and
losses, net of tax, as a component of shareholders' equity in accumulated
other comprehensive loss.
48
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
The estimated fair values of our financial instruments are:
2001 2000
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Cash and cash equivalents.................. $ 12,382 $ 12,382 $ 4,470 $ 4,470
Restricted cash............................ $ 996 $ 996 $ 1,262 $ 1,262
Investments in marketable securities....... $ 14,073 $ 14,073 $ 25,621 $ 25,621
Long-term debt including current maturities $(335,957) $(342,512) $(443,244) $(460,267)
Derivatives--As part of our strategy to minimize the risk of foreign
currency exposure, Ethyl has used foreign currency forward contracts to hedge
the risk on forecasted intercompany sales transactions denominated in Japanese
Yen.
Ethyl did not use any derivative instruments during 2001. In 2000, Ethyl
used derivative instruments with maturity dates throughout the year to hedge
the foreign currency exposure of approximately $24 million of Japanese Yen
denominated intercompany sales. These cash flow hedges were highly effective
since a foreign currency rate change on the forward contract was offset by a
corresponding change in the value of the hedged Yen intercompany sale.
At year-end 2001 and 2000, Ethyl had no foreign currency forward contracts
outstanding.
Ethyl recognized a $1 million loss on the contracts in 2000 and $500
thousand in 1999. A corresponding increase in the U.S. dollar value of the
Japanese Yen intercompany sales offset the losses in both years. Ethyl includes
foreign currency transaction gains and losses in cost of goods sold.
49
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
21. Accumulated Other Comprehensive (Loss) Income
The pre-tax, tax, and after-tax effects related to the adjustments in
accumulated other comprehensive (loss) income follow:
Unrealized
Gain
Foreign (Loss) on Minimum Unrealized Accumulated
Currency Marketable Pension Loss on Other
Translation Securities Liability Derivative Comprehensive
Adjustments Adjustments Adjustments Instruments (Loss) Income
----------- ----------- ----------- ----------- -------------
December 31, 1998.......................... $ (5,758) $ 2,821 $(2,667) $ -- $ (5,604)
======== ======= ======= ======= ========
Adjustments................................ (10,719) (334) 3,865 (3,488)
Reclassification adjustment for the loss
included in net income resulting from the
maturity of contracts.................... -- -- -- 507
Tax benefit (expense)...................... 3,940 121 (1,198) 1,082
-------- ------- ------- -------
Other comprehensive (loss) income.......... (6,779) (213) 2,667 (1,899) (6,224)
-------- ------- ------- ------- --------
December 31, 1999.......................... $(12,537) $ 2,608 $ -- $(1,899) $(11,828)
======== ======= ======= ======= ========
Adjustments................................ (11,676) 2,706 (1,424) 2,161
Reclassification adjustment for the gain
included in net income resulting from the
sale of securities....................... -- (2,290) -- --
Reclassification adjustment for the loss
included in net income resulting from the
maturity of contracts.................... -- -- -- 820
Tax benefit (expense)...................... 4,227 (221) 517 (1,082)
-------- ------- ------- -------
Other comprehensive (loss) income.......... (7,449) 195 (907) 1,899 (6,262)
-------- ------- ------- ------- --------
December 31, 2000.......................... $(19,986) $ 2,803 $ (907) $ -- $(18,090)
======== ======= ======= ======= ========
Adjustments................................ (7,044) (7,810) (3,042) --
Reclassification adjustment for the loss
included in net loss resulting from
impairment writedowns.................... -- 3,633 -- --
Tax benefit................................ 2,642 1,587 954 --
-------- ------- ------- -------
Other comprehensive loss................... (4,402) (2,590) (2,088) -- (9,080)
-------- ------- ------- ------- --------
December 31, 2001.......................... $(24,388) $ 213 $(2,995) $ -- $(27,170)
======== ======= ======= ======= ========
22. Special Items (Expense) Income, Net
Special items (expense) income, net in 2001 of $114 million expense, or $85
million after taxes ($1.00 per share) included a charge of $29 million, or $19
million after taxes ($.22 per share) for severance, early retirement, and other
expenses related to our engine oil additives rationalization. Special items
also consisted of a noncash charge of $62 million, or $43 million after taxes
($.51 per share) on the settlement of our pension liabilities related to the
termination of our U.S. salaried pension plan. Additionally, special items
included a $26 million charge, or $26 million after taxes ($.31 per share) for
excise tax on the pension reversion partially offset by the $3 million, or $3
million after taxes ($.04 per share) gain on the sale of certain assets in
Bracknell, England.
50
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
In 2000, special items consisted of $81 million income, or $51 million after
taxes ($.62 per share), related to settlements of certain pension contracts
resulting in the recognition of noncash gains. Additionally, special items
included $4 million income, or $3 million after taxes ($.03 per share), related
to the demutualization of MetLife, Inc. These income items were partly offset
by an $8 million charge, or $5 million after taxes ($.06 per share) related to
the write-off of plant assets and a $1.4 million special retirement charge, or
$900 thousand after taxes ($.01 per share).
The pension charge of $62 million in 2001 and the $81 million income in 2000
related to the settlement of liabilities for certain pension contracts and the
recognition of significant losses and gains related to our pension assets. The
settlement losses and gains had no cash effect on Ethyl, and no retiree
benefits changed.
The charge of $8 million in 2000 was for the writeoff of the production
assets of a previously idled petroleum additives facility in Orangeburg, South
Carolina. There were no employee or other incremental costs included in this
charge. As part of our ongoing cost improvement process, we reviewed a
third-party supply contract for product, as well as our manufacturing
facilities. We concluded that the market for product previously produced at
this facility had not grown as anticipated, and excess supply and production
facilities were in place. Further, there were no specific market changes
expected to impact these conditions. As a result of this review, we cancelled
the original supply contract, restructured, and entered a new, more limited
supply agreement. There were no one-time charges related to the contract
change. We also decided to permanently idle this manufacturing facility and
wrote off the book value of these assets.
In 1999, special item income consisted of $7 million, or $4 million after
taxes ($.05 per share), from a supply contract amendment.
23. Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) issued four new Statements
of Financial Accounting Standards (SFAS) in 2001.
SFAS 141 "Business Combinations", issued in July 2001, requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. The pooling-of-interests method of accounting is no longer
allowed. We do not expect this statement to have a significant impact on
Ethyl's financial statements.
SFAS 142 "Goodwill and Other Intangible Assets", issued in July 2001, is
effective for fiscal years beginning after December 15, 2001. The statement
eliminates the amortization of goodwill as of January 1, 2002. In addition, the
statement no longer requires that intangibles be amortized if the life of the
intangible is determined to be indefinite. Further, goodwill and intangibles
will be reviewed at least annually for possible impairment. We will discontinue
goodwill amortization on December 31, 2001, leaving us with a balance of $3
million. We are currently evaluating the full impact of this statement.
SFAS 143 "Accounting for Asset Retirement Obligations" was issued in August
2001. This statement addresses the obligations and asset retirement costs
associated with the retirement of tangible long-lived assets. It requires that
the fair value of the liability for an asset retirement obligation be recorded
when incurred instead of over the life of the asset. The asset retirement costs
must be capitalized as part of the carrying value of the long-lived asset. If
the liability is settled for an amount other than the recorded balance, either
a gain or loss will be recognized at settlement. This statement is effective
for fiscal years beginning after June 15, 2002. We have not completed the
necessary analysis, and therefore, cannot yet assess the potential impact on
our financial statements.
51
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
was issued in October 2001 and is effective for fiscal years beginning after
December 15, 2001. While this statement supercedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
SFAS 144 retains the framework established in SFAS 121 and addresses
implementation issues. SFAS 144 also supercedes Accounting Principles Board
Opinion Number 30 "Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business" and addresses the accounting for disposal
of long-lived assets of a discontinued operation. Generally, SFAS 144 requires
that impaired assets or assets to be disposed of, whether reported in
continuing operations or discontinued operations, be recorded at the lower of
carrying amount or fair value less cost to sell. We are currently evaluating
the impact of this statement.
24. Selected Quarterly Consolidated Financial Data (unaudited)
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
- ---- -------- --------- -------- --------
Net sales (1)............................................... $217,260 $ 177,643 $166,043 $163,516
Gross profit................................................ $ 30,175 $ 4,279 $ 26,984 $ 31,891
Special items (expense) income, net......................... $(10,707) $(106,261) $ 3,070 $ (118)
Net (loss) income........................................... $(11,267) $ (94,784) $ 661 $ 350
Basic and diluted (loss) earnings per share................. $ (.14) $ (1.13) $ .01 $ --
Shares used to compute basic and diluted (loss) earnings per
share..................................................... 83,455 83,455 83,455 83,455
2000
- ----
Net sales (1)............................................... $203,943 $ 220,831 $209,234 $209,567
Gross profit................................................ $ 42,264 $ 46,441 $ 45,183 $ 31,264
Special items income, net................................... $ 42,369 $ 4,050 $ 27,185 $ 2,405
Net income.................................................. $ 27,824 $ 9,269 $ 21,556 $ 2,348
Basic and diluted earnings per share........................ $ .33 $ .11 $ .26 $ .03
Shares used to compute basic and diluted earnings per share. 83,465 83,465 83,463 83,455
- --------
(1) Freight costs have been reclassified from net sales to cost of sales for
all periods presented.
25. Segment and Geographic Area Information
Segment Information--We manage our business in two distinct segments:
petroleum additives and tetraethyl lead. We divided our business this way due
to the operational differences between the two business units. The petroleum
additives business operates in a market that we actively review for
opportunities, while TEL is a mature product primarily marketed through third
party agreements.
The accounting policies of the segments are the same as those described in
Note 1. We evaluate the performance of our operating segments based on
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
prepayments for services and segment intangible assets are included in the
operating profit of each segment. No transfers occurred between the segments
during the periods presented. TEL sales made through the marketing agreements
with Octel are not recorded as sales by Ethyl. The table below reports net
sales and operating profit by segment, as well as a reconciliation to income
before income taxes for the last three years.
52
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
2001 2000 1999
--------- -------- --------
Net sales
Petroleum additives.......................... $ 707,935 $816,587 $843,770
Tetraethyl lead.............................. 16,527 26,988 26,106
--------- -------- --------
Consolidated net sales (a) (b)........ $ 724,462 $843,575 $869,876
========= ======== ========
Segment operating (loss) profit
Petroleum additives before nonrecurring items $ 36,414 $ 32,053 $ 77,861
Nonrecurring items........................... (72,080) (7,524) 7,200
--------- -------- --------
Petroleum additives.......................... (35,666) 24,529 85,061
Tetraethyl lead.............................. 32,005 39,341 48,359
--------- -------- --------
Segment operating (loss) profit........... (3,661) 63,870 133,420
Corporate general and administrative expense. (19,469) (26,142) (24,087)
Interest expense............................. (32,808) (36,075) (35,506)
Pension contract settlements................. (88,160) 80,923 --
Other (expense) income, net.................. (4,895) 7,519 7,295
--------- -------- --------
(Loss) income before income taxes..... $(148,993) $ 90,095 $ 81,122
========= ======== ========
- --------
(a) Certain amounts have been reclassified to conform to the current
presentation.
(b) Net sales of the petroleum additives segment to three customers amounted to
$319 million in 2000. The petroleum additives segment reported net sales to
two customers of $226 million in 1999.
53
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
The following table shows asset information by segment and the
reconciliation to consolidated assets. Segment assets consist of accounts
receivable, inventory, and long-lived assets. Long-lived assets include
property, plant, and equipment, net of depreciation, as well as intangible
assets and prepayments for services, both net of amortization.
2001 2000 1999
-------- ---------- --------
Segment assets
Petroleum additives..................... $476,759 $ 579,480 $666,721
Tetraethyl lead......................... 94,907 84,532 55,316
-------- ---------- --------
571,666 664,012 722,037
Cash and cash equivalents............... 12,382 4,470 15,846
Restricted cash......................... 996 1,262 --
Other accounts receivable............... 12,318 20,783 4,458
Deferred income taxes................... 21,175 8,353 12,575
Prepaid expenses........................ 3,007 4,414 5,699
Prepaid pension cost.................... 25,731 224,892 127,212
Other assets and deferred charges....... 72,350 73,453 103,553
-------- ---------- --------
Total assets......................... $719,625 $1,001,639 $991,380
======== ========== ========
Additions to long-lived assets
Petroleum additives..................... $ 10,735 $ 14,487 $ 14,521
Tetraethyl lead (a)..................... 24,583 39,583 683
Other long-lived assets................. 1,267 1,392 700
-------- ---------- --------
Total additions to long-lived assets. $ 36,585 $ 55,462 $ 15,904
======== ========== ========
Depreciation and amortization
Petroleum additives (b)................. $ 86,294 $ 54,243 $ 57,683
Tetraethyl lead (a)..................... 6,647 8,176 2,040
Other long-lived assets................. 6,577 3,837 5,402
-------- ---------- --------
Total depreciation and amortization.. $ 99,518 $ 66,256 $ 65,125
======== ========== ========
- --------
(a) The addition to TEL long-lived assets in 2001 and 2000 relate to the
payment for services paid to Alcor. The amortization of the prepayment for
services was $6 million in 2001 and $7 million in 2000.
(b) Depreciation and amortization includes $41 million of accelerated
depreciation related to the engine oil additives rationalization in 2001.
54
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
Geographic Area Information--The table below reports net sales and
long-lived assets by geographic area. No transfers occurred between segments
during the years shown. Except for the United States and Canada, no country
exceeded 10% of net sales. The United States was the only country that exceeded
10% of long-lived assets in any year. Ethyl allocated revenues to geographic
areas based on the location to which the product was shipped.
2001 2000 1999
-------- -------- --------
Net sales
United States.............. $281,336 $413,127 $410,496
Canada..................... 73,876 72,093 64,724
Other foreign.............. 369,250 358,355 394,656
-------- -------- --------
Consolidated net sales.. $724,462 $843,575 $869,876
======== ======== ========
Long-lived assets
United States.............. $263,862 $332,996 $378,016
Foreign.................... 55,353 77,425 54,123
-------- -------- --------
Total long-lived assets. $319,215 $410,421 $432,139
======== ======== ========
26. Liquidity
In March 2002, we entered into the Fourth Amendment to Amended and Restated
Credit Agreement (the New Credit Facility) with our lenders. The New Credit
Facility includes the following key provisions:
. A revolving line of credit of $146 million, including a letter of credit
sub-facility of $55 million.
. A balance on the term loan of $45 million. The repayment schedule is $5
million at both May 31 and September 30, 2002. Payments of $10 million
are due at August 31 and November 30, 2002, as well as at February 28,
2003. The balance is due on March 31, 2003.
. The outstanding amount on the new term loan is $205 million, which is
due in full on March 31, 2003.
. The maturity date is extended to March 31, 2003 with all unpaid balances
being due on that date. The maturity date may be extended to March 31,
2004 if certain conditions are met.
. Interest rates increased and are based on a premium to variable base
rates. The initial premium is 325 to 425 basis points, depending on the
type of borrowing. The premium will be reduced if certain criteria are
met.
. Substantially all of our assets in the United States are collateralized.
. Mandatory prepayments are required for excess cash flow, asset
dispositions, debt and equity issuances, all tax refunds, and certain
other funds received.
55
Notes to Consolidated Financial Statements--Continued
(tabular amounts in thousands, except share and per-share amounts)
. Covenants include minimum EBITDA, minimum interest coverage ratio, and
maximum leverage coverage ratio, among others.
. The payment of dividends is not permitted.
. Investments and capital expenditures are limited. The capital
expenditures limitation does not conflict with our current capital plan.
While the New Credit Facility does provide for an extension through March
31, 2004, our current forecast of operating earnings alone would not achieve
the extension conditions. We are pursuing certain strategic initiatives, which
if completed, would cause us to achieve the additional extension through March
31, 2004. The completion of these initiatives cannot be assured. If the
extension is not achieved, we plan to enter into negotiations with our lenders
in the second half of 2002 to further extend our borrowing facilities.
Consequently, borrowings under the New Credit Facility will be reflected as
current liabilities beginning in the first quarter of 2002 until such time as
the extension conditions are achieved or alternative longer-term borrowing
facilities are secured.
On February 1, 2002, Bruce C. Gottwald, Chairman of the Board, made a loan
to Ethyl in the amount of $18.6 million. The loan is for three years at an
interest rate of 8.5%. Interest payments are due monthly during the term of the
loan, with the principal amount coming due at maturity. We used the proceeds of
the loan to pay down existing bank debt. The loan is nonrecourse to Ethyl and
is collateralized by a first deed of trust on the three buildings at 330 South
Fourth Street, Richmond, Virginia, that are our principal offices. An
independent appraiser valued the three buildings at $18.6 million. We have a
"put" right at the end of the loan term under which we can convey the property
to the lender in satisfaction of the debt. If we fail to pay the loan at
maturity, the lender has a "call" right at the end of the loan term under which
he can require us to convey the property to him in satisfaction of the debt.
We continue to make debt repayment a high priority so that we will have more
flexibility in the future. Our cash flows from operations remain strong, and we
will continue to minimize working capital requirements, as well as sell
nonstrategic assets when possible.
We believe our new business model will continue to improve our profits and
financial position and that it will enable us to comply with the terms of the
New Credit Facility. While we believe our plan is sound, and we are making good
progress, the possibility exists that unforeseen events, significantly higher
interest rates, adverse business conditions or a combination of these factors
could prevent us from meeting certain financial covenants.
Should unforeseen events or conditions restrict us from meeting our targeted
operating results, we believe we could pursue alternative plans such as
additional asset sales, deferrals of capital expenditures or other options that
might be available. In the event we may not be in compliance with the debt
covenants at some future date, we would pursue various alternative
possibilities including, among other things, the refinancing of debt or
obtaining covenant amendments or waivers. We believe we could successfully
complete alternative arrangements, if necessary. However, there can be no
assurance that such alternatives would be available or that we would be
successful in their implementation.
56
FINANCIAL POLICY
Ethyl Corporation's Financial Standards--Our goal is to present clearly
Ethyl's financial information to enhance your understanding of our sources of
earnings and our financial condition.
Management's Report on the Financial Statements--Ethyl prepared the
financial statements and related notes on pages 26 through 56 to conform to
generally accepted accounting principles. In doing so, management made 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. The same is true for the reported amounts of revenues
and expenses during these reporting periods. Financial data appearing elsewhere
in the annual report is consistent with these financial statements. However,
actual results could differ from the estimates on which these financial
statements are based.
We maintain a system of internal controls to provide reasonable, but not
absolute, assurance of the reliability of the financial records and the
protection of assets. Written policies and procedures, careful selection and
training of qualified personnel, and an internal audit program support Ethyl's
internal control system.
The independent certified public accounting firm, PricewaterhouseCoopers LLP
(PwC), audited these financial statements in accordance with generally accepted
auditing standards. The audit 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 independent
directors, meets with management and PwC to review accounting, auditing, and
financial reporting matters. In early 2000, PwC informed the Committee that it
had notified the Securities and Exchange Commission (SEC) that there was a
delay in the transfer from PwC's control of certain retirement and other
benefits which were due to Ethyl's then Chief Financial Officer. Our former CFO
had been a partner of Coopers & Lybrand, a predecessor of PwC. The transfers,
which should have occurred in November 1997, were completed on February 16,
2000.
The SEC advised Ethyl that because of the delay, PwC was not in compliance
with auditor independence regulations. The SEC further advised Ethyl that it
did not intend to take any action against the company with respect to Ethyl's
financial statements as a result of PwC's noncompliance. The audit committee
reviewed the situation and concluded, based on its examination, that the
delayed transfer of the benefits did not affect the quality or integrity of
PwC's audits of Ethyl's financial statements.
57
Report of Independent Accountants
To the Board of Directors and Stockholders of Ethyl Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Ethyl Corporation
and its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As more fully discussed in Notes 12 and 26 to the consolidated financial
statements, the Company has amended its borrowing facilities to extend the
maturity date through March 31, 2003.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Richmond, Virginia
February 1, 2002, except as to
Notes 12 and 26 for which the date is
March 26, 2002
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is in our 2001 Proxy Statement and is
incorporated by reference. In addition, the names and ages of all officers as
of March 28, 2002 follow.
Name Age Positions
- ---- --- ---------
Bruce C. Gottwald....... 68 Chairman of the Board and Chairman of the
Executive Committee
Thomas E. Gottwald...... 41 President and Chief Executive Officer
Alexander McLean........ 45 Senior Vice President--Petroleum Additives
Newton A. Perry......... 59 Senior Vice President--Antiknocks
David A. Fiorenza....... 52 Vice President, Treasurer, and Principal Financial Officer
Russell L. Gottwald, Jr. 50 Vice President--Supply Chain
Bruce R. Hazelgrove, III 42 Vice President--Corporate Resources
C. S. Warren Huang...... 52 Vice President and Managing Director--Asia Pacific
Ronald E. Kollman....... 55 Vice President--Product Management and Technology
Barbara A. Little....... 45 Vice President--Government Relations
Donald R. Lynam......... 63 Vice President--Air Conservation
Steven M. Mayer......... 59 Vice President--General Counsel
Ann M. Pettigrew........ 47 Vice President--Health, Safety, and Environment
Roger H. Venable........ 55 Vice President--Antiknocks
Wayne C. Drinkwater..... 55 Controller and Principal Accounting Officer
M. Rudolph West......... 48 Secretary
Michael L. McKeever..... 61 Assistant Treasurer
The term of office is until the meeting of the board of directors following
the next annual shareholders' meeting (June 4, 2002). All officers have been
employed with Ethyl for at least the last five years.
Effective April 1, 2002, Newton A. Perry will be promoted to Senior Vice
President--Strategy and C. S. Warren Huang will be promoted to Senior Vice
President--Fuel Additives.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is in our 2001 Proxy Statement and is
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is in our 2001 Proxy Statement and is
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is in our 2001 Proxy Statement and is
incorporated by reference.
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A)(1) Consolidated Statements of Income for each of the three years in the periods ended December 31,
2001, 2000, and 1999 are on page 26.
Consolidated Balance Sheets as of December 31, 2001 and 2000 are on page 27.
Consolidated Statements of Shareholders' Equity for each of the three years in the periods ended
December 31, 2001, 2000, and 1999 are on page 28.
Consolidated Statements of Cash Flows for each of the three years in the periods ended
December 31, 2001, 2000, and 1999 are on page 29.
Notes to Consolidated Financial Statements begin on page 30.
Management's Report on the Financial Statements is on page 57.
Report of Independent Accountants is on page 58.
(A)(2) Financial Statement Schedules--none required
(A)(3) Exhibits
3.1 Amended and Restated Articles of Incorporation (incorporated by reference as Exhibit 3.1 to
Form 10-Q filed on November 4, 1996)
3.2 By-laws of the registrant (incorporated by reference as Exhibit 3.2 to Form 10-K filed on
March 29, 1996)
4.1 First Amendment and Restatement of Amended and Restated Credit Agreement, dated as of
April 10, 2001 (incorporated by reference as Exhibit 4.1 to Form 10-K filed on April 10,
2001)
4.2 Second Amendment to Amended and Restated Credit Agreement, dated as of December 3,
2001
4.3 Third Amendment to Amended and Restated Credit Agreement, dated as of January 15, 2002
4.4 Fourth Amendment to Amended and Restated Credit Agreement, dated as of March 22, 2002
10.1 Incentive Stock Option Plan (incorporated by reference as Exhibit 10 to Form 10-Q filed on
May 12, 1994)
10.2 Non-Employee Directors' Stock Acquisition Plan (incorporated by reference as Exhibit A to
the registrant's Proxy Statement for the Annual Meeting of Shareholders filed on March 17,
1993)
10.3 Excess Benefit Plan (incorporated by reference as Exhibit 10.4 to Form 10-K filed on
February 25, 1993)
10.4 Supply Agreement, dated as of December 22, 1993, between Ethyl Corporation and The
Associated Octel Company Limited (incorporated by reference as Exhibit 99 to Form 8-K
filed on February 17, 1994)
60
10.5 Employment and Severance Benefits Agreement dated October 1, 1997, with J. Robert
Mooney (incorporated by reference as Exhibit 10.7 to Form 10-K filed on March 24, 1998)
10.6 Antiknock Marketing and Sales Agreement, dated October 1, 1998, between Ethyl
Corporation and The Associated Octel Company Limited (incorporated by reference as
Exhibit 10 to Form 10-Q filed on November 10, 1998)
10.7 Trust Agreement between Ethyl Corporation and Merrill Lynch Trust Company of America
(incorporated by reference as Exhibit 4.5 to Form S-8, filed on August 7, 1998)
10.8 Amended and Restated Product Marketing and Sales Agreement, dated as of June 13, 2001,
between Ethyl Services GmbH and Alcor Chemie Vertriebs AG, Alcor Chemie AG, and
Noofot GmbH*
11.1 Computation of Basic and Diluted Earnings Per Share
21 Subsidiaries of the registrant
23 Consent of PricewaterhouseCoopers LLP
(B) No report on Form 8-K has been filed during 2001.
(C) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this Form
10-K.
* Subject to a request for confidential treatment, certain provisions of the
Amended and Restated Product Marketing and Sales Agreement have been
intentionally omitted.
A copy of any of the exhibits listed above will be provided upon written
request for a reasonable charge, to any shareholder whose proxy is being
solicited by the Board of Directors. The written request should be directed to:
M. Rudolph West, Esq.,
Secretary
Ethyl Corporation
330 South Fourth Street
P.O. Box 2189
Richmond, Virginia 23218-2189
61
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 28, 2002
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 28, 2002.
SIGNATURE TITLE
--------- -----
/s/ BRUCE C. GOTTWALD Chairman of the Board,
- ----------------------------- Chairman of the Executive
(Bruce C. Gottwald) Committee, and Director
/s/ THOMAS E. GOTTWALD President, Chief Executive
- ----------------------------- Officer and Director
(Thomas E. Gottwald) (Principal Executive
Officer)
/s/ D. A. FIORENZA Vice President and Treasurer
- ----------------------------- (Principal Financial
(David A. Fiorenza) Officer)
/s/ WAYNE C. DRINKWATER
- ----------------------------- Controller (Principal
(Wayne C. Drinkwater) 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/ C. B. WALKER Director
- -----------------------------
(Charles B. Walker)
62
EXHIBIT INDEX
Number of Exhibit Name of Exhibit
- ----------------- ---------------
4.2 Second Amendment to Amended and Restated Credit Agreement dated as of December 3,
2001
4.3 Third Amendment to Amended and Restated Credit Agreement, dated as of January 15,
2002
4.4 Fourth Amendment to Amended and Restated Credit Agreement, dated as of March 22,
2002
10.8 Amended and Restated Product Marketing and Sales Agreement, dated as of June 13, 2001,
between Ethyl Services GmbH and Alcor Chemie Vertriebs AG, Alcor Chemie AG, and
Noofot GmbH
63