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| LZ > SEC Filings for LZ > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
The following factors most affected our consolidated results during the first
quarter of 2009:
• The ongoing global recession has affected the markets we serve and
negatively impacted our results. Volume declined 27% compared with the same
period in 2008 as demand declined sharply and customers continued to reduce
their inventory levels.
• Our disciplined margin management largely offset the volume decline and resulted in an increase in our gross profit percentage to 27.1% from 23.9% in the same period in 2008.
• Our aggressive cost reduction actions and organizational restructuring eliminated operating inefficiencies and improved profitability. We reduced manufacturing expenses during the quarter by curtailing production and reducing spending on supplies and services. Selling, testing, administrative and research (STAR) expenses declined by 12% due to reductions in travel and entertainment, salaries and benefits, information technology expenses, outside services and lower incentive compensation. Manufacturing and STAR expenses both benefited from a favorable currency impact. In conjunction with our organizational restructuring, we incurred $10.9 million of severance and benefit charges. We estimate these cost reduction and organizational restructuring actions will result in approximately $50.0 million to $60.0 million of pre-tax savings during 2009.
• Our inventory reduction initiatives contributed to the significant cash flow from operations. We significantly reduced production to achieve our inventory reduction goals and in response to lower sales volume. As a result of our abnormally low production, we incurred $38.1 million of unabsorbed manufacturing costs. The reduction in inventory quantities also resulted in incremental charges of $7.1 million due to a liquidation of LIFO inventory quantities carried at higher costs.
• As compared with the same period in 2008, currency fluctuations were unfavorable to revenues by 3%, favorable to operating costs and unfavorable to net income attributable to The Lubrizol Corporation by an estimated $0.08 per share.
• Our issuance of $500.0 million of 8.875% senior unsecured notes at a price of 99.256% in January 2009 was intended primarily to repay our 4.625% notes due October 1, 2009. We entered into a $150.0 million term loan in February 2009 to fund, in part, the acquisition of the thermoplastic polyurethane business from The Dow Chemical Company (Dow). The proceeds from these borrowings will be sufficient to retire in full the 4.625% notes due 2009 and enabled us to repay in full our outstanding U.S. revolver balance, while strengthening our liquidity with approximately $175.0 million of additional cash. However, the additional interest costs associated with these borrowings, coupled with lower interest income, reduced our earnings by approximately $0.12 per share as compared with the same period in 2008.
During the year ended December 31, 2008, we determined goodwill associated with our performance coatings, Estane and TempRite reporting units within our Lubrizol Advanced Materials segment was impaired as the carrying value of goodwill within these reporting units exceeded its fair value. No goodwill remained within our performance coatings reporting unit at March 31, 2009. The remaining value of goodwill associated with our Estane and TempRite reporting units totaled $61.8 million and $73.3 million at March 31, 2009, respectively. A 10% decrease in the fair value of our Estane reporting unit or any further decrease in the fair value of our TempRite reporting unit could indicate the potential for an additional impairment of goodwill. The products within our Estane reporting unit are used within film and sheet for various coating processes, wire and cable insulation, athletic equipment (such as footwear), medical applications, pneumatic tubing and automotive molded parts, and the demand for these products are affected by overall economic conditions. Our TempRite reporting unit serves customers who produce plastic piping for residential and commercial plumbing, fire sprinkler systems and industrial piping applications, and is thus subject to cyclical demand patterns within these markets. To the extent the weakness in the economy, including the residential and commercial construction markets, persists longer than expected or our cost of capital increases, our Estane or TempRite reporting units could experience a decline in fair value that may result in an additional impairment of goodwill.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2009 Compared With Three Months Ended March 31,
2008
Three Months
Ended March 31,
(In Millions of Dollars Except Per Share Data) 2009 2008 $ Change % Change
Revenues $ 1,012.4 $ 1,227.3 $ (214.9 ) (18 %)
Cost of sales 738.5 934.5 (196.0 ) (21 %)
Gross profit 273.9 292.8 (18.9 ) (6 %)
Selling and administrative expenses 93.8 108.6 (14.8 ) (14 %)
Research, testing and development expenses 49.0 54.1 (5.1 ) (9 %)
Amortization of intangible assets 6.3 7.0 (0.7 ) (10 %)
Restructuring and impairment charges 11.4 4.8 6.6 *
Other income - net (5.2 ) (4.9 ) 0.3 6 %
Interest income (2.7 ) (4.2 ) (1.5 ) (36 %)
Interest expense 29.4 17.9 11.5 64 %
Income before income taxes 91.9 109.5 (17.6 ) (16 %)
Provision for income taxes 26.7 33.5 (6.8 ) (20 %)
Net income 65.2 76.0 (10.8 ) (14 %)
Net income attributable to noncontrolling
interests 1.0 2.4 (1.4 ) (58 %)
Net income attributable to The Lubrizol
Corporation $ 64.2 $ 73.6 $ (9.4 ) (13 %)
Basic earnings per share attributable to The
Lubrizol Corporation $ 0.95 $ 1.07 $ (0.12 ) (11 %)
Diluted earnings per share attributable to The
Lubrizol Corporation $ 0.95 $ 1.06 $ (0.11 ) (10 %)
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* Calculation not meaningful
Revenues The decrease in revenues during the first quarter of 2009 compared with the same period in 2008 was due to a 27% decrease in volume and a 3% unfavorable currency impact, partially offset by a 12% improvement in the combination of price and product mix. Included in these factors were incremental revenues from the thermoplastic polyurethane businesses acquired from Dow and SK Chemicals Co., Ltd. (SK), which contributed 1% to revenues for the quarter.
The following table shows the geographic mix of our volume during the first quarter of 2009 as well as the percentage changes compared with the same period in 2008:
Excluding
the Impact of
2009 2009 vs. 2008 Acquisitions
Volume % Change % Change
North America 42 % (30 %) (31 %)
Europe 28 % (25 %) (25 %)
Asia-Pacific / Middle East 23 % (24 %) (25 %)
Latin America 7 % (27 %) (27 %)
Total 100 % (27 %) (28 %)
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We experienced volume decreases across all geographic zones and product
categories as a result of inventory destocking by our customers and the
continued weakness in the global economy and its impact on demand for our
products.
Segment volume variances by geographic zone, as well as the factors explaining
the changes in segment revenues during the first quarter of 2009 compared with
the same period in 2008, are contained within the "Segment Analysis" section.
Cost of Sales The decrease in cost of sales in the first quarter of 2009
compared with the same period in 2008 primarily was due to lower volume. Average
raw material cost increased 1% in the first quarter of 2009 compared with the
same period in 2008. Total manufacturing expenses decreased 2% in the first
quarter of 2009 compared with the same quarter last year primarily due to a
favorable currency impact, reductions in spending on supplies and services and
lower utility costs, offset by $38.1 million of unabsorbed manufacturing costs
due to abnormally low production. Cost of sales during the first quarter of 2009
also included incremental charges of $7.1 million associated with a liquidation
of LIFO inventory quantities carried at higher costs.
Gross Profit Gross profit decreased $18.9 million, or 6%, during the first
quarter of 2009 compared with the same period in 2008. The decrease primarily
was due to lower volume, the impact of unfavorable manufacturing cost absorption
and an unfavorable currency impact, partially offset by an improvement in the
combination of price and product mix. Our gross profit percentage increased in
the first quarter of 2009 to 27.1% compared with 23.9% in the same quarter last
year as a result of price increases initiated in 2008 to recover higher costs.
Selling and Administrative Expenses Selling and administrative expenses
decreased $14.8 million, or 14%, during the first quarter of 2009 compared with
the same period in 2008. The decrease primarily was due to our cost reduction
initiatives that resulted in lower travel and entertainment, salaries and
benefits and expenses associated with information technology and outside
services, along with lower incentive compensation and a favorable currency
impact.
Research, Testing and Development Expenses Research, testing and development
expenses decreased $5.1 million, or 9%, during the first quarter of 2009
compared with the same period in 2008. The decrease primarily was due to a
favorable currency impact and our cost reduction initiatives that resulted in
lower spending on supplies and services.
Restructuring and Impairment Charges The components of restructuring charges recorded during the first quarter of 2009 are as follows:
Three Months Ended March 31, 2009
Asset Severance
Impairments and Benefits Total
Corporate organizational restructuring $ - $ 10.9 $ 10.9
Lubrizol Additives plant closure and workforce
reductions - 0.5 0.5
Total restructuring charges $ - $ 11.4 $ 11.4
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Restructuring charges of $10.9 million related to our organizational restructuring initiated during the first quarter of 2009,
which eliminated operating inefficiencies and improved profitability. These organizational changes are expected to result in
approximately $14.0 million of pre-tax savings for 2009.
Restructuring charges of $0.5 million related to the decision made in the third quarter of 2008 to close a Lubrizol Additives
blending, packaging and warehouse facility in Ontario, Canada. We expect to record an additional $5.3 million of restructuring
charges related to this facility closure, of which $0.8 million is expected to be recognized in 2009.
The components of restructuring and impairment charges recorded during the first quarter of 2008 are as follows:
Three Months Ended March 31, 2008
Asset Severance
Impairments and Benefits Total
Performance coatings 2008 business improvement
initiatives $ 4.0 $ 0.8 $ 4.8
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We recorded aggregate restructuring and impairment charges of $4.8 million
primarily related to business improvement initiatives in the performance
coatings product line of the Lubrizol Advanced Materials segment. We completed
the disposition of a textile compounding plant and recognized an asset
impairment for a textile coatings production line.
Interest Expense The increase in interest expense in the first quarter of 2009
compared with the same period in 2008 primarily was due to the incremental
interest expense associated with the issuance of our 8.875% notes due 2019 and
borrowings under our $150.0 million term loan in the first quarter of 2009. In
addition, we repurchased $177.0 million of our 4.625% notes due 2009 at a
purchase price of 100.5% per note, resulting in a loss on retirement of
$1.3 million and accelerated amortization of $0.6 million in debt issuance
costs, Treasury rate lock agreements and original issue discounts associated
with the repurchased notes.
Provision for Income Taxes Our effective tax rate of 29.1% in the first quarter
of 2009 decreased from 30.6% in the same period in 2008 as the prior-year period
did not contain a benefit from the U.S. research credit.
Net Income Attributable to The Lubrizol Corporation Primarily as a result of the
above factors, net income per diluted share attributable to The Lubrizol
Corporation decreased 10% to $0.95 during the first quarter of 2009 compared
with $1.06 in the same period in 2008.
SEGMENT ANALYSIS
We primarily evaluate performance and allocate resources based on segment
operating income, defined as revenues less expenses identifiable to the product
lines included within each segment, as well as projected future performance.
Segment operating income will reconcile to consolidated income before income
taxes by deducting corporate expenses and corporate other income that are not
attributable to the operating segments, restructuring and impairment charges and
net interest expense.
In the fourth quarter of 2008, the company reorganized its reporting structure
for the following two businesses:
• The AMPS® specialty monomer business, with 2008 annual revenues of $35.3
million, which previously was reported as part of the Noveon consumer
specialties product line, and
• The ADEXTM explosives emulsifier business, with 2008 annual revenues of $45.0 million, which previously was reported as part of the engineered polymers product line.
The results for these two businesses now are reported in the driveline and
industrial additives product line within the Lubrizol Additives segment.
Additionally, upon the adoption of Statement of Financial Accounting Standards
(SFAS) 160, the company revised its measurement of segment operating income to
include income attributable to noncontrolling interests. Previously, segment
operating income excluded the portion of income attributable to noncontrolling
interests. The results for the prior period presented have been retrospectively
adjusted to conform to the current year presentation.
The proportion of consolidated revenues and segment operating income attributed
to each segment was as follows:
Three Months Ended
March 31,
2009 2008
Revenues:
Lubrizol Additives 72 % 69 %
Lubrizol Advanced Materials 28 % 31 %
Segment Operating Income:
Lubrizol Additives 82 % 80 %
Lubrizol Advanced Materials 18 % 20 %
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OPERATING RESULTS BY SEGMENT
Three Months Ended
March 31, %
2009 2008 $ Change Change
Revenues:
Lubrizol Additives $ 727.8 $ 844.7 $ (116.9 ) (14 %)
Lubrizol Advanced Materials 284.6 382.6 (98.0 ) (26 %)
Total $ 1,012.4 $ 1,227.3 $ (214.9 ) (18 %)
Gross Profit:
Lubrizol Additives $ 188.7 $ 193.0 $ (4.3 ) (2 %)
Lubrizol Advanced Materials 85.2 99.8 (14.6 ) (15 %)
Total $ 273.9 $ 292.8 $ (18.9 ) (6 %)
Segment Operating Income:
Lubrizol Additives $ 118.7 $ 116.8 $ 1.9 2 %
Lubrizol Advanced Materials 25.5 29.2 (3.7 ) (13 %)
Total $ 144.2 $ 146.0 $ (1.8 ) (1 %)
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Three Months Ended March 31, 2009 Compared With Three Months Ended March 31, 2008
LUBRIZOL ADDITIVES SEGMENT
Revenues Revenues decreased 14% during the first quarter of 2009 compared with the same period in 2008. The decrease was due to a 24% decrease in volume and a 3% unfavorable currency impact, partially offset by a 13% increase in the combination of price and product mix.
The following table shows the geographic mix of our volume during the first quarter of 2009 as well as the percentage changes compared with the same period in 2008:
2009 2009 vs. 2008
Volume % Change
North America 34 % (25 %)
Europe 32 % (24 %)
Asia-Pacific / Middle East 26 % (23 %)
Latin America 8 % (24 %)
Total 100 % (24 %)
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We experienced volume decreases across all geographic zones as a result of weak
end-market demand and continued destocking of customers' inventories. We believe
that this customer destocking substantially is complete. Declines were seen in
both of our product lines; however, our driveline and industrial additives were
affected more severely than engine additives. By comparison, demand in the first
quarter of 2008 was very strong and benefitted from business gains in our
international regions.
Gross Profit Gross profit decreased $4.3 million, or 2%, in the first quarter of
2009 compared with the same period in 2008. The decrease primarily related to
lower volume, higher manufacturing costs and an unfavorable currency impact,
offset by improvements in the combination of price and product mix. Average raw
material cost increased 1% during the first quarter of 2009 compared with the
same period in 2008. Total manufacturing costs increased 5% in the first quarter
of 2009 compared with the same period in 2008. We significantly reduced
production to
achieve our inventory reduction goals and in response to lower sales volume. As
a result, we incurred $27.6 million of unabsorbed manufacturing costs due to
abnormally low production. Although we experienced higher manufacturing costs,
we realized savings from a favorable currency impact, lower utility and other
variable production costs and cost reduction initiatives at our plants. Cost of
sales during the first quarter of 2009 also included incremental charges of
$6.3 million associated with a liquidation of LIFO inventory quantities carried
at higher costs.
The gross profit percentage increased to 25.9% during the first quarter of 2009
from 22.8% in the same period in 2008 as a result of price increases initiated
in 2008 to recover higher costs.
Selling, Testing, Administrative and Research Expenses STAR expenses decreased
$5.4 million, or 7%, during the first quarter of 2009 compared with the same
period in 2008. The decrease in STAR expenses primarily was due to a favorable
currency impact and cost reduction initiatives taken during the first quarter of
2009, including decreases in travel and entertainment.
Segment Operating Income Segment operating income increased 2% during the first
quarter of 2009 compared with the same period in 2008 due to the factors
discussed above.
LUBRIZOL ADVANCED MATERIALS SEGMENT
Revenues Revenues decreased 26% during the first quarter of 2009 compared with
. . .
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