Volume Losses Lower Lubrizol Profits


Lubrizol Corp. announced last week that its earnings for 2003 were down 23 percent from 2002, mostly due to lower sales volumes and the cost of job cuts. Revenues rose 3 percent to $2.05 billion.

While reporting that business now appears to be improving, officials also cautioned that the company now faces the challenge of passing through product development expenses and manufacturing cost increases.

Lubrizol said Friday that it recorded consolidated earnings of $90.8 million or $1.76 per share in 2003, compared to $118.5 million or $2.30 per share a year earlier. Results from both years included significant one-time charges. In 2003, the Wickliffe, Ohio, company spent $22.5 million on a restructuring plan that eliminated 150 jobs. In 2002, it took a $7.8 million write-off due to an accounting change.

Vice President and Chief Financial Officer Charles P. Cooley told investment analysts during a conference call Friday that the companys biggest problem has been a downturn in sales volumes for its Fluid Technologies for Transportation segment. Sales volumes by the segment have dropped 6.5 percent since the fourth quarter of 2002 due the loss of business with a large customer, Cooley said. Another 1.5 percent of sales – to the same customer – will be lost during the second half of 2004, he added.

Volumes to other customers also dropped in 2003, due to the general downturn in the market, Cooley said. As a result, revenues for Fluid Technologies for Transportation fell 1 percent to $1.55 billion in 2003, driving the segments operating profit down 9.8 percent, to $147 million.

Cooley said the drop in Fluid Technologies for Transportation sales volumes also dragged down Lubrizols other main line of business, its Fluid Technologies for Industry segment, since some plants make products for both. According to management calculations, the transportation segment cost the industrial segment $7 million in operating profit. Fluid Technologies for Industry also took one-time charges in 2003 due to a fire at a plant in Detroit and the integration of a newly acquired plant in South Carolina.

Consequently, operating profit for the industrial segment fell 19 percent to $40 million. Segment revenue rose 21 percent to $464 million, with acquisitions and organic growth contributing about equally to the increase.

Lubrizol said sales volumes should improve this year. The company projects the economic rebound to boost sales volumes by Fluid Technologies for Transportation by 1.5 percent and new accounts to bring another 3 percent. The company also expects revenue from the industrial segment to grow by 15 percent.

But Cooley allowed that bottom line performance in 2004 will depend in part on Lubrizols success in passing on price increases by its transportation segment. The segment announced price hikes of 5 percent to 7 percent last week for North and Latin America in an attempt to pass on base oil and energy expense increases. The segment also plans to charge more for passenger car motor oil additive packages meeting the new GF-4 standard, although prices have not been set. Officials acknowledged the difficulty of passing on dual price hikes at the same time.

The challenge for our commercial organization is to keep distinct and keep in front of our customers what were trying to do as far as recovering the large increase in our cost structure to date and also to get a decent return on the high investment that we have in the development of new products, Cooley said.

Although the American Petroleum Institute is scheduled to begin licensing GF-4 oils in late July, Lubrizol officials said they do not expect the passenger car motor oil market to make its major shift to the new specification until the fourth quarter of this year. They added that some blenders have yet to select suppliers and that prices for additive packages are still in flux.

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