##### 



Exhibit 13.1 Managements
Discussion and Analysis of Financial Condition and Results of Operations 
 This Managements Discussion and Analysis
of Financial Condition and Results of Operations should be read in
conjunction with the consolidated financial statements, the
notes thereto and the historical summary appearing elsewhere in
this annual report. Historical results and percentage
relationships set forth in the consolidated financial
statements, including trends that might appear, should not be
taken as indicative of future operations. The following
discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from
those discussed in such forward-looking statements as a result of
various factors, including those described under the section
Cautionary Statements for Safe Harbor Purposes included
elsewhere in this annual report. Overview GENERALWe are an innovative specialty chemical
company that produces and supplies technologies that
improve the quality and performance of our
customers products in the global transportation, industrial
and consumer markets. Our business is founded on
technological leadership. Innovation provides opportunities
for us in growth markets as well as advantages over our
competitors. From a base of approximately 2,800 patents, we
use our product development and formulation expertise to
sustain our leading market positions and fuel our future
growth. We create additives, ingredients, resins and
compounds that enhance the performance, quality and value
of our customers products, while minimizing their environmental
impact. Our products are used in a broad range of
applications, and are sold into stable markets such as
those for engine oils, specialty driveline lubricants and
metalworking fluids, as well as higher-growth markets such
as personal care and pharmaceutical products and
performance coatings and inks. Our specialty materials
products are also used in a variety of industries,
including the construction, sporting goods, medical
products and automotive industries. We are an industry
leader in the majority of our businesses. We are geographically diverse, with an extensive
global manufacturing, supply chain, technical and
commercial infrastructure. We operate facilities in 27
countries, including production facilities in 21
countries and laboratories in nine countries through
the efforts of approximately 7,800 employees. We sell
our products in more than 100 countries and believe
that our customers value our ability to provide
customized, high-quality, cost-effective performance
formulations and solutions worldwide. We also believe
that our customers value our global supply chain
capabilities. On June 3, 2004, we completed the acquisition of
Noveon International, Inc. (Noveon International), a
leading global producer and marketer of technologically
advanced specialty materials and chemicals used in the
industrial and consumer markets. With the acquisition
of Noveon International, we have accelerated our
program to attain a substantial presence in the
personal care and coatings markets by adding a number
of higher-growth, industry-leading products under
highly recognizable brand names, including
Carbopol®, to our already strong portfolio
of lubricant and fuel additives, and consumer products.
Additionally, Noveon International has a number of
industry-leading and strong, cash flow-generating
specialty materials businesses, including
TempRite®chlorinated polyvinyl chloride
(CPVC) and Estane®thermoplastic
polyurethane (TPU). Noveon International was acquired for cash of $920.2
million (inclusive of certain seller expenses of $32.9
million) plus transaction costs of $11.4 million and
less cash acquired of $103.0 million. In addition, we
assumed $1,103.1 million of long-term indebtedness from
Noveon International. Noveon International had 2003
revenues of $1,135.9 million. The acquisition and related costs were initially
financed with the proceeds of a $2,450.0 million
364-day bridge credit facility. Shortly after the
acquisition, we repaid substantially all of the assumed
debt with proceeds of the temporary bridge
loan. The temporary bridge loan was repaid in full
in September 2004 when we secured our permanent
financing. This permanent financing structure included
the issuance of 14.7 million common shares in
underwritten offerings, $1,150.0 million in unsecured
senior notes and debentures and a $575.0 million bank
term loan resulting in $2,170.0 million of net proceeds
to Lubrizol. Our consolidated balance sheet as of December 31, 2004 reflects the acquisition of Noveon International under the
purchase method of accounting. We recorded the various
assets acquired and liabilities assumed, primarily
working capital accounts, of Noveon International at
their estimated fair values that we determined as of
the acquisition date. The allocation of the purchase
price has not yet been finalized, but is substantially
complete, as of December 31, 2004. While we do not
expect any material changes, the purchase price
allocation remains subject to revision through the end
of the allocation period ending in the second quarter
of 2005. Actuarial valuations were completed for the
projected pension and other post-employment benefit
obligations and were reflected in the purchase price
allocation. In addition, appraisals of long-lived
assets and identifiable intangible assets, including
an evaluation of in-process research and development
(IPR&D) projects, have also been completed. The
purchase price includes the estimated fair value of
research and development projects totaling $34.0
million that, as of the acquisition date, had not yet
reached technological feasibility and had no
alternative future use. Approximately $33.5 million was
expensed through the third quarter and $0.5 million was
expensed in the fourth quarter, based upon the refinement of our valuation analysis. The $34.0 million
charge for 2004 approximates $0.39 on a per-share
basis. The inventory step-up to fair value totaled
$24.2 million, of which $9.8 million, or $0.11 on a
per-share basis, was expensed in 2004. As the remaining
step-up relates to inventories accounted for on the
LIFO (last-in, first-out) method of accounting, we do
not anticipate that additional amounts of step-up will
be expensed in the near term. The 2004 historical
results include revenues and expenses of Noveon
International only since the date of acquisition. In June 2004, we reorganized our business as a
result of the Noveon International acquisition into two
operating and reporting segments: the Lubricant
Additives segment and the Specialty Chemicals segment.
The Lubricant Additives segment is comprised of our
previous business in fluid technologies for
transportation (FTT), advanced fluid systems, emulsified products and the
former industrial additives product
group of fluid technologies for industry (FTI). The
Specialty Chemicals segment is comprised of the
businesses of the THE LUBRIZOL CORPORATION
nn 9




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations 
 acquired Noveon International and the former
performance chemicals group of FTI. Note 14 to the
consolidated financial statements contains our segment
reporting disclosure including a further description of
the nature of our operations, the product lines within
each of the reporting segments and related financial
disclosures for the reportable segments. See also Segment
Analysis for further financial disclosures by reporting segment, including
segment profitability. LUBRICANT ADDITIVES SEGMENTA variety of
industry market forces and conditions continue to influence the Lubricant Additives business. A key factor is
the low global growth rate for this market, which we
believe is in the range of approximately 0% to 1% per
year. Additional characteristics of this market are: o
    
    Consolidation of the customer base in
recent years, which has increased the
competitiveness of the transportation lubricant
additives market.o
    
    Frequent product specification changes
driven primarily by original equipment
manufacturers (OEMs) and the impact of
environmental and fuel economy regulations on the
OEMs. The specification changes require us to
incur product development and testing costs, but
also enable us to apply our technology know-how to
create products and solve problems. We believe our
technology, and our expertise in applying it, are
key strengths.o
    
    Improved engine design, which can result
in longer lubricant drain intervals. Longer drain
intervals lessen demand for lubricants.o
    
    New vehicle production levels, which
affect our specialty driveline fluids in
particular because the initial factory fill is an
important market factor in that product line.
 We believe we are the market leader in lubricant
additives and intend to remain the leader by continuing
to invest in this business. SPECIALTY CHEMICALS SEGMENTOur Specialty
Chemicals segments growth strategy involves a combination of
internal growth and acquisitions. Since 2000 and prior
to the Noveon International acquisition, we made eight
acquisitions with aggregate annual revenues at the time of
acquisition of approximately $200.0 million. In 2002, we
completed four acquisitions having aggregate annual
revenues at the time of acquisition of $85.0 million,
including Chemron Corporation, a supplier of specialty
surfactants principally for the personal care market. In
2003, we acquired a personal care ingredients business
from Amerchol Corporation, a subsidiary of The Dow
Chemical Company. Also in 2003, we acquired silicone
product lines, which expanded our foam control additives
business to $40.0 million in annual revenues in 2004. In
January 2004, we acquired the additives business of
Avecia, with annual revenues of approximately $50.0
million. This business develops, manufactures and markets
high-value additives used in coatings and inks. With the
acquisition of Noveon International in June 2004, our
Specialty Chemicals segment now represents nearly half of
pro forma consolidated revenues. We have a strategy to
continue to achieve internal growth in the Specialty
Chemicals segment by using our strengths, including our
technology, formulating skills and broad geographic
infrastructure, to
develop and invest in new fluid technology
applications in higher-growth industrial and consumer
markets. Key factors to our success continue to be the
introduction of new products, development of new
applications for existing products, cross-selling of
products, the integration of acquisitions and geographic
expansion. PRIMARY FACTORS AFFECTING 2004 RESULTSIn
addition to higher shipment volume in the Lubricant
Additives segment, along with the contribution from
Noveon International and other acquisitions and ongoing
organic business growth in the Specialty Chemicals
segment, the factors that most affected our 2004 results
were: o
    
    increased raw material costs;o
    
    our ability to raise selling prices;o
    
    integration of Noveon International;o
    
    cost control initiatives, including restructuring programs; ando
    
    favorable currency effects.
 For Lubricant Additives, raw material costs are
significantly influenced by the price of crude oil and
natural gas, which have been subject to periods of rapid
and significant increases in price. In 2004, the cost of
our other raw materials has also increased significantly. Our results are affected by how quickly and the
extent to which we are able to change our product selling
prices in reaction to raw material cost and operating
cost increases. The increases in material costs were more
significant in North America than in our other
geographic zones. The Lubricant Additives segment
implemented four price increases in 2004 in order to
attempt to recover these costs. In connection with the acquisition of Noveon
International, we established a target of achieving
annual savings from acquisition cost synergies of
approximately $40.0 million within three years from June
2004 when we completed the acquisition. In 2004, we
realized pre-tax synergy savings of approximately $10.0
million, including $6.4 million of savings associated
with the 2004 workforce reductions announced in
June 2004. We are projecting to realize annual savings
in 2005 of approximately $35.0 million. We currently
expect to reach our target run rate of $40.0 million in
annual savings by the end of 2005, which is 18 months
ahead of schedule. Our operating cost structure has been
pressured by higher energy, insurance, pension and
health care expenses. Additionally, a large portion of
our manufacturing expenses are fixed in the short term.
As a result of these cost pressures, primarily in the
Lubricant Additives segment, we implemented several
restructuring programs in 2003 to further lower our cost
structure while simultaneously improving our service
capabilities for our customers. We achieved
approximately $10.4 million of pre-tax savings in 2004
from the 2003 restructuring programs. In our continuing
efforts to rationalize our manufacturing operations, in
January 2005, we announced the decision to close our
Lubricant Additives manufacturing facility in
Bromborough, United Kingdom. Production phase-out of
this site is planned to begin in the second quarter of
2005 and is expected to be completed by late 2006. 10nn THE LUBRIZOL CORPORATION




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##### 



Managements
Discussion and Analysis CONTINUED 
 During this phase-out, United Kingdom production will
be transferred to facilities in France and the United
States. We recognized a $17.0 million impairment charge
in the fourth quarter of 2004 relating to the site
property, plant and equipment. Approximately 69
employees will be impacted by this closure, although
some employees may be retained. We expect the
Bromborough facility closure and transfer of production
to more efficient manufacturing locations ultimately
to generate annual pre-tax cost savings of
approximately $10.0 million by 2007. We conduct a significant amount of our business
outside the United States and are subject to business
risks inherent in non-U.S. activities, including
currency exchange rate fluctuations. As the U.S. dollar strengthens or
weakens against other international currencies in which
we transact business, our financial results will be
affected. Currency had an overall favorable effect on
our 2004 and 2003 operating results. 2004 Results of Operations
Compared with 2003 Our 2004 revenues as compared to 2003, excluding
acquisitions, increased primarily due to higher ongoing
shipment volume and higher average selling price. The
increased revenues partially were offset by higher raw
material costs and higher manufacturing expenses.
Primarily as a result of these factors and
acquisitions, gross profit increased 47% in 2004
compared with 2003. The changes in consolidated revenues are
summarized as follows: ANALYSIS OF REVENUES ExcludingAcquisitions$
    
    
    %
    
    
    $
    
    
    %(In Millions of Dollars)
    
    
    2004
    
    
    
    2003
    
    
    Change
    
    
    Change
    
    
    Change
    
    
    ChangeNet sales
    
    
    $
    3,155.6
    
    
    
    $
    2,049.1
    
    
    $
    1,106.5
    
    
    
    54%
    
    
    $
    271.2
    
    
    
    13%Royalties and
other revenues
    
    
    
    3.9
    
    
    
    
    3.0
    
    
    
    0.9
    
    
    
    30%
    
    
    
    0.6
    
    
    
    18%Total revenues
    
    
    $
    3,159.5
    
    
    
    $
    2,052.1
    
    
    $
    1,107.4
    
    
    
    54%
    
    
    $
    271.8
    
    
    
    13%
 The 2004 and 2003 acquisitions accounted for
the majority of the increase in consolidated revenues
in 2004. Acquisitions in 2004 included Noveon
International and the hyperdispersants business
purchased from Avecia. Acquisitions in 2003 included
the personal care specialty ingredients business
purchased from Amerchol Corporation, a subsidiary of
The Dow Chemical Company, and the silicone product
lines purchased from BASF. The 2004 and 2003
acquisitions contributed $835.6 million toward the
increase in 2004 consolidated revenues compared with
2003. Excluding acquisitions, the increase in
consolidated revenues in 2004 compared to 2003 was due
to a 7% increase in ongoing shipment volume, a 3%
increase in average selling price and a 3% favorable
currency impact. Shipment volume patterns vary in different
geographic zones. The following table shows our 2004
shipment volume by geographic zone as well as the
changes compared with 2003: Analysis of Volume  2004 vs. 2003 Excluding2004
    
    
    
    
    
    
    
    AcquisitionsVolume
    
    
    
    % Change
    
    
    % ChangeNorth America
    
    
    
    49
    %
    
    
    
    39
    %
    
    
    4
    %Europe
    
    
    
    26
    %
    
    
    
    22
    %
    
    
    9
    %Asia-Pacific / Middle East
    
    
    
    19
    %
    
    
    
    31
    %
    
    
    16
    %Latin America
    
    
    
    6
    %
    
    
    
    8
    %
    
    
    (8
    %)Total
    
    
    
    100
    %
    
    
    
    31
    %
    
    
    7
    %
 Segment shipment volume variances by geographic zone,
as well as the factors explaining the changes in segment revenues for
2004 compared with 2003, are contained under the Segment Analysis section. ANALYSIS OF COSTS AND EXPENSES ExcludingAcquisitions$
    
    
    %
    
    
    $
    
    
    %(In Millions of Dollars)
    
    
    2004
    
    
    
    2003
    
    
    Change
    
    
    Change
    
    
    Change
    
    
    ChangeCost of sales
    
    
    $
    2,359.5
    
    
    
    $
    1,507.8
    
    
    $
    851.7
    
    
    
    56
    %
    
    $
    226.5
    
    
    
    15
    %Selling and administrative
expenses
    
    
    
    304.6
    
    
    
    
    202.9
    
    
    
    101.7
    
    
    
    50
    %
    
    
    14.6
    
    
    
    7
    %Research, testing
and development
expenses
    
    
    
    190.8
    
    
    
    
    166.9
    
    
    
    23.9
    
    
    
    14
    %
    
    
    (9.6
    )
    
    
    (6
    %)Amortization of
intangible assets
    
    
    
    18.0
    
    
    
    
    4.9
    
    
    
    13.1
    
    
    
    *
    
    
    
    0.1
    
    
    
    2
    %Write-off of acquired
in-process research
and development
    
    
    
    34.0
    
    
    
    
    
    
    
    
    34.0
    
    
    
    *
    
    
    
    
    
    
    
    *Restructuring
charges
    
    
    
    38.6
    
    
    
    
    22.5
    
    
    
    16.1
    
    
    
    *
    
    
    
    (0.3
    )
    
    
    *Total costs
and expenses
    
    
    $
    2,945.5
    
    
    
    $
    1,905.0
    
    
    $
    1,040.5
    
    
    
    55
    %
    
    $
    231.3
    
    
    
    12
    %
 *
    
    Calculation not meaningful Cost of sales increased due to acquisitions,
higher average raw material cost and higher
manufacturing expenses. Excluding acquisitions, average
raw material cost increased 10% in 2004 compared with
2003, primarily due to higher unit raw material cost
and, to a lesser extent, unfavorable currency effects.
Sequentially, the fourth quarter 2004 average raw
material cost, excluding acquisitions, increased 7%
compared to the third quarter and 11% compared to the
second quarter, primarily due to higher prices of crude
oil and natural gas and unfavorable currency effects.
Material cost, including acquisitions, also included
inventory step-up adjustments associated with the
increased valuation of inventory of $12.5 million in
2004 for the Noveon International and hyperdispersants
acquisitions. The Noveon International portion of the
inventory step-up adjustment was $9.8 million, or $0.11
per share. Total manufacturing expenses, which are
included in cost of sales, increased 49% (8% excluding
acquisitions) in 2004 compared with 2003, primarily due
to acquisitions. We estimate that currency effects
accounted for approximately 51% of the increase
excluding acquisitions. The remainder of the increase
primarily was due to higher shipment volumes and an
increase in base and incentive compensation expense of
$4.4 million. In addition, manufacturing expenses
included an increase of $3.3 million for environmental
accruals and $2.4 mil- THE LUBRIZOL CORPORATION nn 11




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations 
 lion for increased utility costs. Excluding
acquisitions, currency effects and environmental
accruals, manufacturing expenses increased 3% in 2004
compared with 2003. On a per-unit-sold basis,
manufacturing costs were flat in 2004 compared to
2003, excluding acquisitions. Gross profit (net sales less cost of sales)
increased $254.8 million, or 47% ($44.7 million, or 8%,
excluding acquisitions), in 2004 compared with 2003.
Excluding acquisitions, the increase primarily was due
to higher shipment volume and higher average selling
price, partially offset by higher unit average raw
material cost and higher manufacturing expenses. Our
2004 gross profit percentage (gross profit divided by
net sales) decreased to 25.2% (25.3% excluding
acquisitions) compared to 26.4% in 2003. Sequentially,
our gross profit percentage decreased 90 basis points
to 24.0% in the fourth quarter of 2004 compared to
24.9% in the third quarter of 2004. The decrease for
both periods primarily was due to higher raw material
costs outpacing our ability to raise selling prices
sufficiently to sustain gross profit percentages. The
selling and administrative expenses increase, excluding
acquisitions, primarily was due to an increase in
incentive compensation expense of $12.2 million. We
estimate that currency effects accounted for
approximately 30% of the increase, excluding
acquisitions. The timing and amount of research, testing and
development expenses (technology expenses) are affected
by lubricant additives product standards, which change
periodically to meet new emissions, efficiency,
durability and other performance factors as engine and
transmission designs are improved by OEMs. Technology
expenses, excluding acquisitions, decreased 6% in 2004
compared with 2003. Despite an approximate 3%
unfavorable currency impact in 2004, this decrease
primarily was due to greater utilization of inside
testing facilities as compared to outside laboratories,
leading to a decrease in testing at outside
laboratories of $8.3 million in 2004 compared with
2003, along with a $3.1 million reduction in salary and
benefit expenses as a result of the reduction in
workforce. During 2004, approximately 87% of our
technology cost was incurred in company-owned
facilities and approximately 13% was incurred at
third-party facilities, compared with approximately 82%
and 18%, respectively, in 2003. Testing costs for
Noveon International primarily occur at company-owned
facilities, which also contributed to the decrease in
the percentage of testing performed at third-party
facilities. The increased amortization expense in 2004
compared with 2003 primarily was due to the Noveon
International and hyperdispersants acquisitions in
2004 and the personal care specialty ingredients
business acquisition in 2003. These three acquisitions
resulted in an increase in gross amortized intangible
assets of approximately $334.5 million with useful
lives ranging between three and 20 years. We included a one-time, non-cash charge of $34.0
million, or $0.39 per share, in total costs and
expenses in 2004 to write off the estimated fair value
of acquired IPR&D projects associated with the Noveon
International acquisition. Costs to acquire IPR&D
projects that have no alternative future use and that
have not yet reached technological feasibility at the
date of acquisition are expensed upon acquisition. We
obtained appraisals to determine the estimated fair
value of IPR&D projects. There were approximately nine
projects acquired in the Noveon International
transaction in several different product lines. The projects are at varying
stages of completeness ranging from the early
development stage to prototype testing. We estimate the
need to spend approximately $3.0 million to develop the
acquired technology, and we expect the benefit from
these projects to be generated starting in 2005 and
continuing into 2006. In 2004, we recorded aggregate
restructuring charges of $38.6 million, or $0.47 per
share, primarily related to asset impairments and
workforce reductions. The components of the 2004
restructuring charges are detailed as follows: (In Millions of Dollars)
    
    
    2004Asset impairments  Bromborough
    
    
    $
    17.0Asset impairments  PuriNOxTM
    
    
    
    2.8Employee severance
    
    
    
    11.1Pension settlement obligation
    
    
    
    7.7Total restructuring charges
    
    
    $
    38.6
 In December 2004, management made the
decision to close our Lubricant Additives manufacturing
facility in Bromborough, United Kingdom to lower our
cost structure further while simultaneously improving
our service capabilities for our customers. We
announced this decision in January 2005. We determined,
as of December 31, 2004, that an impairment of the
facilitys long-lived assets had been triggered by this decision. As a
result, a $17.0 million impairment charge was recorded
in December 2004 to reflect the related assets at
their estimated fair values. Production phase-out of
this site is planned to begin in the second quarter of
2005 and is expected to be completed by late 2006.
During this phase-out, United Kingdom production will
be transferred to higher-capacity facilities in France
and the United States. Approximately 69 employees will
be impacted by this closure, some of whom may have an
opportunity to relocate to other facilities. We
currently anticipate that future pre-tax charges and
cash expenditures of approximately $13.0 million to
$15.0 million will be incurred in 2005 through 2006 to
satisfy anticipated severance and retention
obligations, plant dismantling, site restoration and
other site environmental evaluation costs and
lease-related costs. In addition to the restructuring
charges, we also expect to invest approximately $20.0
million over the next two years for capacity upgrades
at alternative manufacturing facilities that will
absorb production previously undertaken at the
Bromborough facility. We expect the Bromborough
facility closure and transfer of production to more
efficient manufacturing locations to generate annual
pre-tax cost savings of approximately $10.0 million by
2007. In 2004, we eliminated more than 100 positions,
primarily affecting technical and commercial employees
located at our Wickliffe, Ohio headquarters. Most of
these workforce reductions were related to our
restructuring following our acquisition of Noveon
International. In addition to the employee severance
costs, we incurred a non-cash pension benefit
settlement charge. These reductions were completed by
December 31, 2004 and resulted in pre-tax savings of
approximately $7.1 million in 2004. We estimate future
annual pre-tax savings of approximately $18.3 million. In addition, we realized approximately $10.4
million of pre-tax savings in 2004 relating to the 2003
restructuring programs discussed in the section 2003
Results of Operations Compared with 2002. 12nn THE LUBRIZOL CORPORATION




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##### 



Managements Discussion and Analysis CONTINUED 
 ANALYSIS OF OTHER ITEMS AND NET INCOME ExcludingAcquisitions$
    
    
    %

    
    $
    
    
    %(In Millions of Dollars)
    
    
    2004
    
    
    
    2003
    
    
    Change
    
    
    Change
    
    Change
    
    
    ChangeOther income
 net
    
    
    $
    4.9
    
    
    
    $
    3.3
    
    
    $
    1.6
    
    
    
    *
    
    
    $
    (0.2
    )
    
    
    *Interest
expense  net
    
    
    
    72.3
    
    
    
    
    21.3
    
    
    
    51.0
    
    
    
    *
    
    
    
    (4.4
    )
    
    
    *Income before
income taxes
    
    
    
    146.6
    
    
    
    
    129.1
    
    
    
    17.5
    
    
    
    14
    %
    
    
    44.9
    
    
    
    35
    %Provision for
income taxes
    
    
    
    53.1
    
    
    
    
    38.3
    
    
    
    14.8
    
    
    
    39
    %
    
    
    24.0
    
    
    
    63
    %Net income
    
    
    
    93.5
    
    
    
    
    90.8
    
    
    
    2.7
    
    
    
    3
    %
    
    
    20.9
    
    
    
    23
    %
  *
    
    Calculation not meaningful The net other income in 2004 included a gain
of $6.4 million, or $0.07 per share, on a currency
forward contract to purchase pound sterling related to
the acquisition of the hyperdispersants business in the
first quarter. We secured the forward contract in
December 2003 and completed the acquisition at the end
of January 2004. This gain partially was offset by
other currency translation losses. The increase in net
interest expense in 2004, compared with 2003, primarily
was due to the Noveon International acquisition-related
financing costs of $56.7 million, or $0.66 per share.
These costs were comprised of the interest incurred
relating to the permanent transaction financing as
well as interest on the bridge loan and assumed Noveon
International debt not repaid at the time of
acquisition of $42.6 million, amortization of bridge
loan fees of $11.2 million and termination of an
interest rate swap of $2.9 million. During 2004, the
U.S. dollar weakened against most currencies,
especially the euro. The change in currency exchange
rates in 2004, as compared with 2003 exchange rates,
had a favorable effect on 2004 net income. We had an
effective tax rate of 36.2% in 2004 as compared with
29.7% in 2003 as the result of the net impact of a
number of factors. Items driving the increased tax rate
included an increase in tax on unrepatriated earnings
of foreign subsidiaries, a reduction in our ability to
claim both U.S. foreign tax credits and to obtain U.S.
tax benefits on exports following the Noveon
International acquisition, and less significant
non-taxable currency gains than occurred in 2003. These
factors partially were offset by the favorable impact
of foreign tax rate differences and other less significant items. As of December 31, 2004, we had U.S. net operating
loss carryforwards (NOLs) of $326.0 million. These
NOLs are a combination of NOLs acquired from Noveon
International, as well as those generated in 2004
primarily as a result of transaction-related costs. We
expect that these NOLs will be fully utilized during
the carryforward period. Primarily as a result of the above factors, our
net income per share, basic was $1.68 in 2004 compared
with $1.76 in 2003. Earnings for 2004 benefited from
Noveon Internationals operating income before financing costs, inventory step-up
charges and the write-off of IPR&D projects, of $78.3
million, or $0.91 per share. Earnings in 2004 included
a one-time write-off of IPR&D projects from the
Noveon International acquisition of $0.39 per
share, a purchase adjustment associated with the
increased valuation of Noveon International acquired
inventory of $0.11 per share, restructuring charges of
$0.47 per share, acquisition-related financing costs of $0.66
per share and a gain on a foreign currency forward
contract of $0.07 per share. The 2003 restructuring
charge reduced earnings by $0.29 per share in 2003. 2003 Results of Operations Compared with 2002 Income per share, basic before cumulative effect of a change in
accounting principle declined 28% in 2003 to $1.76 per share, from
$2.45 per share in 2002. The primary operating drivers of the lower
earnings were lower shipment volume and higher raw material costs
and manufacturing expenses, which more than offset higher average
selling price due to the combination of price and product mix,
favorable currency, a lower effective tax rate and acquisitions that were
accretive to earnings. In addition, restructuring charges reduced 2003
earnings by $0.29 per share. ANALYSIS OF REVENUES ExcludingAcquisitions$
    
    
    %
    $
    
    
    %(In Millions of Dollars)
    
    
    2003
    
    
    2002
    
    
    Change
    
    
    Change
    Change
    
    
    ChangeNet sales
    
    
    $
    2,049.1
    
    
    $
    1,980.3
    
    
    $
    68.8
    
    
    
    3
    %
    
    $
    25.8
    
    
    
    1
    %Royalties and other revenues
    
    
    
    3.0
    
    
    
    3.6
    
    
    
    (0.6
    )
    
    
    (17
    %)
    
    
    (0.6
    )
    
    
    (17
    %)Total revenues
    
    
    $
    2,052.1
    
    
    $
    1,983.9
    
    
    $
    68.2
    
    
    
    3
    %
    
    $
    25.2
    
    
    
    1
    %
 In 2003, the increase in consolidated revenues was due to
a 9% increase in average selling price, partially offset by a 6% decline
in shipment volume. Changes in our shipment volume vary by geographic area.
The following table shows our 2003 shipment volume by geographic
zone as well as the changes compared with 2002: Analysis of Volume  2003 vs. 2002 Excluding2003
    
    
    
    
    
    AcquisitionsVolume
    
    
    % Change
    
    
    % ChangeNorth America
    
    
    
    45
    %
    
    
    (5
    %)
    
    
    (9
    %)Europe
    
    
    
    28
    %
    
    
    (8
    %)
    
    
    (8
    %)Asia-Pacific / Middle East
    
    
    
    20
    %
    
    
    (5
    %)
    
    
    (5
    %)Latin America
    
    
    
    7
    %
    
    
    (2
    %)
    
    
    (2
    %)Total
    
    
    
    100
    %
    
    
    (6
    %)
    
    
    (8
    %)
 Excluding acquisitions, approximately half
of the decline in shipment volume was due to the loss
of a portion of the business associated with a major
international customer and 16% of the decline was due
to a shift in our viscosity modifier product line from
liquids to higher-value concentrated solid form. All
geographic zones were affected by the loss of business
with this customer and the viscosity modifier shift,
though the effects were mostly seen in North America and Europe. In addition, weak
worldwide demand for lubricants negatively impacted
volume for the year. We believe that the economic and
political conditions within certain countries of the
Asia-Pacific / Middle East region contributed to the
volume decline in this zone. See Segment Analysis
below for additional explanations of shipment volume
changes by business segment and geographic zone in 2003
compared with 2002. THE LUBRIZOL CORPORATION
nn 13




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations 
 The 9% increase in average selling price was
due to a 5% increase in the combination of price and
product mix and 4% favorable currency effects. We
combine the impact of price and product mix as frequent
product changes in our Lubricant Additives segment have
made it difficult to distinguish between the two
components. Sequentially, the fourth quarter 2003
average selling price was 3% higher than the third
quarter of 2003, due to favorable currency effects, and
6% higher than the first quarter of 2003, due to
favorable currency effects and price increases
implemented in the first half of the year. ANALYSIS OF COSTS AND EXPENSES ExcludingAcquisitions$
    
    
    %
    
    
    $
    
    
    %(In Millions of Dollars)
    
    
    2003
    
    
    2002
    
    
    Change
    
    
    Change
    
    
    Change
    
    
    ChangeCost of sales
    
    
    $
    1,507.8
    
    
    $
    1,416.3
    
    
    $
    91.5
    
    
    
    6
    %
    
    $
    61.7
    
    
    
    4
    %Selling and
administrative
expenses
    
    
    
    202.9
    
    
    
    196.9
    
    
    
    6.0
    
    
    
    3
    %
    
    
    2.2
    
    
    
    1
    %Research, testing
and development
expenses
    
    
    
    166.9
    
    
    
    168.3
    
    
    
    (1.4
    )
    
    
    (1
    %)
    
    
    (2.9
    )
    
    
    (2
    %)Amortization of
intangible assets
    
    
    
    4.9
    
    
    
    4.2
    
    
    
    0.7
    
    
    
    *
    
    
    
    0.5
    
    
    
    11
    %Restructuring
charges
    
    
    
    22.5
    
    
    
    
    
    
    
    22.5
    
    
    
    *
    
    
    
    22.5
    
    
    
    *Total costs
and expenses
    
    
    $
    1,905.0
    
    
    $
    1,785.7
    
    
    $
    119.3
    
    
    
    7
    %
    
    $
    84.0
    
    
    
    5
    %
  *
    
    Calculation not meaningful Cost of sales increased due to higher
average raw material cost and higher manufacturing
expenses, partially offset by lower shipment volume.
Average raw material cost increased 9% in 2003 compared
with 2002, primarily due to 6% higher raw material
costs and, to a lesser extent, unfavorable currency
effects. Raw material costs started to increase in the
second half of 2002 and continued to increase in the first and third quarters of 2003. Sequentially, the
fourth quarter 2003 average raw material cost increased
2% compared with the third quarter and 7% compared with
the first quarter, primarily due to higher unit raw
material costs driven by higher prices of crude oil and
natural gas and unfavorable currency effects. Manufacturing expenses, which are included in cost of
sales, increased 14% (12% excluding acquisitions) in
2003 compared with 2002. The increase was due to
unfavorable currency effects, acquisitions, higher
utility expenses and higher salary and benefit
expenses, partially offset by a reduction in variable
pay expense. In addition, total manufacturing expenses
in 2003 included a $2.6 million reclassification of
expenses at certain subsidiaries of our Specialty
Chemicals segment that were charged in 2002 to selling
and administrative expenses or material costs. Cost of
sales in 2003 also included approximately $3.4 million
in manufacturing expenses to cover costs associated
with two fires that occurred during the second quarter
of 2003. In April 2003, an after-working-hours fire destroyed a metalworking additive blending facility we
leased in Detroit. There were no injuries, nor any
damage to a nearby warehouse where we stored finished
goods. We were able to supply customers from this
warehouse and have permanently shifted production to
our Painesville, Ohio plant. In April 2003, a
fire associated with a maintenance shutdown
occurred in a dispersant production unit at our plant
in Le Havre, France. Again, there were no injuries and
we were able to continue to supply customers from other
facilities. Excluding currency effects, acquisitions
and the cost associated with the fires, consolidated
manufacturing expense increased 5% over 2002. Gross
profit decreased $22.7 million, or 4% ($35.8 million,
or 6%, excluding acquisitions), in 2003 compared with
2002. Our gross profit percentage decreased to 26.4%
in 2003 compared with 28.5% in 2002. Excluding the
impact of acquisitions, our gross profit percentage
was 26.3% in 2003. These decreases primarily were due
to lower shipment volume, higher average raw material
cost and higher manufacturing expenses, partially
offset by higher average selling price and favorable
net currency effects. The selling and administrative
expenses increase, excluding acquisitions, was due to
higher salary and benefit expenses and unfavorable
currency effects, partially offset by lower variable
pay expense and the reclassification to manufacturing
expense of approximately $1.1 million that was classified as selling and administrative expenses in 2002. The
decrease in technology expenses was due to lower
testing activity at outside laboratories and a
reduction in our variable pay expense, partially offset
by unfavorable currency effects and higher salary and
benefit expenses. In addition, technology expenses in
2003 included a write-down of $1.1 million related to a
former technical facility in Japan that we sold during
the third quarter of 2003. During 2003, approximately
82% of our technology cost was incurred in
company-owned facilities and approximately 18% was
incurred at third-party testing facilities, compared
with approximately 78% and 22%, respectively, in 2002.
In 2003, we completed a development program for GF-4,
the U.S. passenger car motor oil technical standard
that began in the second half of 2004. The increased
amortization expense in 2003 as compared with 2002
primarily was due to the acquisition of the personal
care specialty ingredients business from Amerchol
Corporation, a subsidiary of The Dow Chemical Company,
in 2003. In 2003, we recorded restructuring charges of
$22.5 million, with $0.29 per share, related to the
separation of approximately 250 employees in the United
States, Europe and India, comprising 5% of our
worldwide workforce. The components of the 2003
restructuring charges are shown in the table below: (In Millions of Dollars)
    
    
    U.S.
    
    
    Europe
    
    
    India
    
    
    TotalEmployee severance costs
    
    
    $
    11.2
    
    
    $
    4.6
    
    
    $
    1.5
    
    
    $
    17.3Asset impairments
    
    
    
    
    
    
    
    3.3
    
    
    
    
    
    
    
    3.3Other*
    
    
    
    1.6
    
    
    
    0.3
    
    
    
    
    
    
    
    1.9Total restructuring charges
    
    
    $
    12.8
    
    
    $
    8.2
    
    
    $
    1.5
    
    
    $
    22.5
  *
    
    Other costs primarily include outplacement costs In November 2003, we announced workforce
reductions of approximately 150 employees primarily at
our headquarters in Wickliffe, Ohio, at our Deer Park
and Bayport, Texas manufacturing facilities and at our
Hazelwood, United Kingdom technical facility. 14nn THE LUBRIZOL CORPORATION




---



##### 



Managements Discussion and Analysis CONTINUED 
 This resulted in a restructuring charge primarily for
employee severance costs in both the United States and
the United Kingdom. The workforce reductions were
completed prior to the end of 2003. The charge for
Europe also included costs associated with the
restructuring program announced in February 2003 for
our Bromborough, United Kingdom intermediate production
and blending facility. We eliminated some capacity at
this facility and completed workforce reductions of 45
positions. An asset impairment charge of $3.3 million
was recorded at Bromborough for production units taken
out of service. The charge for Europe also included
some severance-related costs for the closing of a sales
office in Scandinavia. The charge for India pertains
to a voluntary separation program of approximately 55
employees at our joint venture in India. The 2003
restructuring programs were undertaken to achieve a
more competitive cost structure, primarily within the
Lubricant Additives segment, and to help mitigate cost
pressures from
higher energy, pension, health care and insurance
expenses. Approximately $5.0 million and $10.4 million
of pre-tax savings were realized in 2003 and 2004,
respectively, relating to these programs. ANALYSIS OF OTHER ITEMS AND NET INCOME ExcludingAcquisitions$
    
    
    %
    
    
    $
    
    
    %(In Millions of Dollars)
    
    
    2003
    
    
    2002
    
    
    Change
    
    
    Change
    
    
    Change
    
    
    ChangeOther income
(expense)  net
    
    
    $
    3.3
    
    
    $
    (1.2
    )
    
    $
    4.5
    
    
    
    *
    
    
    $
    4.0
    
    
    
    *Interest expense  net
    
    
    
    21.3
    
    
    
    16.6
    
    
    
    4.7
    
    
    
    *
    
    
    
    4.7
    
    
    
    *Income before income
taxes and cumulative
effect of change in
accounting principle
    
    
    
    129.1
    
    
    
    180.4
    
    
    
    (51.3
    )
    
    
    (28
    %)
    
    
    (58.5
    )
    
    
    (32
    %)Provision for income taxes
    
    
    
    38.3
    
    
    
    54.1
    
    
    
    (15.8
    )
    
    
    (29
    %)
    
    
    (17.9
    )
    
    
    (33
    %)Income before cumulative
effect of change in
accounting principle
    
    
    
    90.8
    
    
    
    126.3
    
    
    
    (35.5
    )
    
    
    (28
    %)
    
    
    (40.6
    )
    
    
    (32
    %)Cumulative effect of
change in accounting
principle
    
    
    
    
    
    
    
    (7.8
    )
    
    
    7.8
    
    
    
    *
    
    
    
    7.8
    
    
    
    *Net income
    
    
    
    90.8
    
    
    
    118.5
    
    
    
    (27.7
    )
    
    
    (23
    %)
    
    
    (32.8
    )
    
    
    (28
    %)
  *
    
    Calculation not meaningful The favorable change in other income
(expense) primarily was due to an increase in currency
translation gains. Interest income decreased $2.9 million in 2003
compared with 2002 as a result of lower interest rates.
Interest expense increased $1.8 million in 2003
compared with 2002, due to the absence of the interest
rate swap agreements that we utilized in 2002. In 2002,
we had swap agreements that reduced interest expense by
approximately $4.2 million ($3.1 million impact from
outstanding swaps and $1.1 million amortization of
deferred gain). We terminated the interest rate swap
agreements in 2002 and recorded a deferred gain, which
is being amortized as a reduction of interest expense
through December 1, 2008. Amortization of the deferred
gain reduced interest expense in 2003 by approximately
$2.7 million. During 2003, the U.S. dollar weakened
against most currencies, especially the euro. We
believe the change in currency exchange rates in 2003,
as compared with 2002 exchange rates, had a favorable
effect on 2003 net income. We had an effective tax rate of 29.7% in 2003 as
compared with 30.0% in 2002. The 2003 effective tax
rate was lower than the U.S. statutory rate of 35%,
primarily due to significant nontaxable translation
gains at foreign subsidiaries utilizing a U.S. dollar
functional currency. The low effective tax rate in 2002
was due primarily to a non-recurring U.S. tax benefit
resulting from the charitable contribution of
technology, partially offset by nontaxable translation
losses. As a result of the factors described above,
income per share, basic before the cumulative effect of
a change in accounting principle was $1.76 in 2003
compared with $2.45 in 2002. The restructuring charges
reduced earnings in 2003 by $0.29 per share. During the
first half of 2002, we completed the impairment
analysis required pursuant to Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, which we adopted on January
1, 2002. There was no impairment in the Specialty
Chemicals segment. However, for the Lubricant
Additives segment, we recorded an impairment change of
$7.8 million. The charge was recorded as a cumulative
effect of a change in accounting principle as of
January 1, 2002. There was no tax benefit associated
with this charge. After adjustment for the cumulative effect of a
change in accounting principle from the implementation
of SFAS No. 142 in 2002, net income per share, basic
was $1.76 in 2003 compared with $2.30 for 2002. 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 returns. Segment operating income will
reconcile to consolidated income before tax by
deducting the write-off of acquired IPR&D projects,
restructuring charges, net interest expense, corporate
expenses and corporate other income that we do not
attribute to either operating segment. During 2004, we
reclassified certain unallocated corporate expenses to
segment operating income, which previously had been
excluded from our previously disclosed segment
contribution income. We have restated our segment
results for 2003 and 2002 to reflect the new reporting
classifications of products between the two operating
and reporting segments and the new definition of
segment operating income. The Lubricant Additives
segment represents approximately 65% and 74% of our
consolidated revenues and segment operating income,
respectively, for 2004. The Specialty Chemicals segment
represents approximately 35% and 26% of our
consolidated revenues and segment operating income,
respectively, for 2004. On a pro forma basis, the
Lubricant Additives segment represents approximately
55% and 62% of our pro forma consolidated revenues and
pro forma segment operating income, respectively, for
2004. The Specialty Chemicals segment represents
approximately 45% and 38% of our consolidated pro forma
revenues and pro forma segment operating income,
respectively, for 2004. THE LUBRIZOL CORPORATION
nn 15




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##### 



Managements Discussion
and Analysis of Financial Condition and Results of Operations 
 OPERATING RESULTS BY SEGMENT 2004 vs. 2003
    
    
    
    2003 vs. 2002Excluding Acquisitions(In Millions of Dollars)
    
    
    2004
    
    
    
    2003
    
    
    2002
    
    
    
    $ Change
    
    
    % Change
    
    
    $ Change
    
    
    % Change
    
    
    
    $ Change
    
    
    % ChangeREVENUES:Lubricant Additives
    
    
    $
    2,038.8
    
    
    
    $
    1,798.9
    
    
    $
    1,798.2
    
    
    
    $
    239.9
    
    
    
    13
    %
    
    $
    239.9
    
    
    
    13
    %
    
    
    $
    0.7
    
    
    
    Specialty Chemicals
    
    
    
    1,120.7
    
    
    
    
    253.2
    
    
    
    185.7
    
    
    
    
    867.5
    
    
    
    343
    %
    
    
    31.9
    
    
    
    13
    %
    
    
    
    67.5
    
    
    
    36
    %Total
    
    
    $
    3,159.5
    
    
    
    $
    2,052.1
    
    
    $
    1,983.9
    
    
    
    $
    1,107.4
    
    
    
    54
    %
    
    $
    271.8
    
    
    
    13
    %
    
    
    $
    68.2
    
    
    
    3
    %GROSS PROFIT:Lubricant Additives
    
    
    $
    520.0
    
    
    
    $
    481.2
    
    
    $
    515.0
    
    
    
    $
    38.8
    
    
    
    8
    %
    
    $
    38.8
    
    
    
    8
    %
    
    
    $
    (33.8
    )
    
    
    (7
    %)Specialty Chemicals
    
    
    
    276.1
    
    
    
    
    60.1
    
    
    
    49.0
    
    
    
    
    216.0
    
    
    
    359
    %
    
    
    5.9
    
    
    
    10
    %
    
    
    
    11.1
    
    
    
    23
    %Total
    
    
    $
    796.1
    
    
    
    $
    541.3
    
    
    $
    564.0
    
    
    
    $
    254.8
    
    
    
    47
    %
    
    $
    44.7
    
    
    
    8
    %
    
    
    $
    (22.7
    )
    
    
    (4
    %)SEGMENT OPERATING INCOME:Lubricant Additives
    
    
    $
    244.3
    
    
    
    $
    201.5
    
    
    $
    235.2
    
    
    
    $
    42.8
    
    
    
    21
    %
    
    
    42.8
    
    
    
    21
    %
    
    
    $
    (33.7
    )
    
    
    (14
    %)Specialty Chemicals
    
    
    
    85.6
    
    
    
    
    0.9
    
    
    
    0.4
    
    
    
    
    84.7
    
    
    
    *
    
    
    
    6.2
    
    
    
    *
    
    
    
    
    0.5
    
    
    
    *Total
    
    
    $
    329.9
    
    
    
    $
    202.4
    
    
    $
    235.6
    
    
    
    $
    127.5
    
    
    
    63
    %
    
    $
    49.0
    
    
    
    24
    %
    
    
    $
    (33.2
    )
    
    
    (14
    %)
  *
    
    Calculation not meaningful LUBRICANT ADDITIVES SEGMENTSegment revenues
increased 13% in 2004 compared to 2003, due to 7%
higher volume and 6% higher average selling price,
approximately one-half of which was due to favorable
currency. Shipment volume patterns vary in different
geographic zones. The following table shows our
shipment volume by geographic zone in 2004 as well as
the changes compared with 2003: Analysis of Volume  2004 vs. 2003 2004Volume
    
    
    
    % ChangeNorth America
    
    
    
    41
    %
    
    
    
    4
    %Europe
    
    
    
    30
    %
    
    
    
    8
    %Asia-Pacific / Middle East
    
    
    
    23
    %
    
    
    
    16
    %Latin America
    
    
    
    6
    %
    
    
    
    (9
    %)Total
    
    
    
    100
    %
    
    
    
    7
    %
 The shipment volume increase in North
America in 2004 compared with 2003 primarily resulted
from increases in our specialty driveline and
industrial oil additives product line and in our
PuriNOxTMemulsion fuels products, which
more than offset a modest decline in the engine
additives product line due to lost business. Higher
shipment volume in Europe in 2004 compared with 2003
primarily was due to increases in our engine additives
product line and market share gains in our specialty
driveline and industrial oil additives product line.
The shipment volume increase in Asia-Pacific / Middle
East in 2004 compared with 2003 primarily was due to
economic recovery in the region, market share gains in
China primarily in our engine additives and specialty
driveline and industrial oil additives product lines,
along with favorable timing of orders. The decrease in
Latin America in 2004 compared with 2003 substantially
was due to some lost business primarily within our
engine additives product line and changes in order
pattern for a major customer in that region. The Lubricant Additives segment implemented
a price increase in March 2004 for products sourced
from North American plants and in the second quarter
2004 for products sourced from Asia-Pacific / Middle
East and Latin America. A second price increase was
implemented beginning in mid-June for products sourced
from North America and beginning in mid-July for
targeted areas outside North America. A third price
increase began in October 2004 for products sourced
from North America and Europe and in November 2004 for
the rest of the world. We announced a fourth price
increase effective beginning in mid-December 2004 for
products sourced from North America and Europe and
beginning in mid-January 2005 for the rest of the
world. The announced price increases were in response
to continuing raw material cost increases, particularly
during the second half of the year, and higher prices
for natural gas used for utilities in our plants. We
anticipate raw material costs will increase in the first quarter of 2005 as compared to the fourth quarter
of 2004, but at a lower rate than the level of
increases experienced in the fourth quarter of 2004 as
compared to the third quarter of 2004. Segment gross
profit is defined as sales less cost of sales, which
includes material cost and all
manufacturing expenses. The increase in segment
gross profit of $38.8 million, or 8%, in 2004 compared
with 2003, primarily was due to higher revenues
partially offset by higher average raw material cost
and higher manufacturing expenses. In 2004, average
material cost increased 11% and manufacturing expenses
increased 8% compared with 2003. The increase in
manufacturing expenses primarily was due to unfavorable
currency, higher manufacturing throughput,
environmental accruals, higher utilities and higher
compensation expense including increased variable pay. The gross profit percentage for the segment was 25.5%
for 2004 compared with 26.8% in 2003. The decrease
primarily was due to raw material costs increasing
faster than selling price increases. 16nn THE LUBRIZOL CORPORATION




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##### 



Managements Discussion and Analysis CONTINUED 
 Selling, technical, administrative and research
(STAR) expenses decreased $3.2 million, or 1%, in 2004
compared with 2003, primarily due to lower outside
testing expenses as a result of higher utilization of
our internal testing facilities and the effects of the
reductions in workforce discussed previously, partially
offset by a $3.9 million charge related to an employee
offsite personal injury along with higher incentive
compensation expense. Segment operating income (revenues less expenses
attributable to the product lines aggregated within
each segment) increased 21% in 2004 compared with 2003
due to the factors previously discussed. Segment revenues were flat in 2003 compared with
2002 due to an 8% decrease in shipment volume partially
offset by a 7% increase in average selling price. The
increase in average selling price in 2003 primarily was
due to favorable currency effects of 5% and the
remainder was due to higher prices and favorable
product mix. Lubricant Additives implemented a price increase
in December 2002 for the North America zone and in
January 2003 for the rest of the world. A second price
increase was implemented in late March 2003 for North
America and in late April for Asia-Pacific / Middle
East and Latin America as well as for select products
in Europe. This price increase was designed to address
the continuing rise in raw material costs and natural
gas-fired utility costs that had occurred since the
last price increase in the fourth quarter of 2002. The following table shows the changes in shipment
volume by geographic zone in 2003 as well as the
changes compared with 2002: Analysis of Volume  2003 vs. 2002 2003Volume
    
    
    % ChangeNorth America
    
    
    
    42
    %
    
    
    (11
    %)Europe
    
    
    
    30
    %
    
    
    (9
    %)Asia-Pacific / Middle East
    
    
    
    21
    %
    
    
    (6
    %)Latin America
    
    
    
    7
    %
    
    
    (2
    %)Total
    
    
    
    100
    %
    
    
    (8
    %)
 Approximately half of the total shipment
volume decline in 2003 was due to business losses
associated with a major international customer. Lower
unit sales of viscosity modifiers products in 2003
also contributed to the decline, principally caused by
a shift from liquid polymers to solid polymers.
Generally, solids are one-tenth the volume of liquids.
Excluding
this shift in our viscosity modifier product
line, total shipment volume decreased 7% in 2003. The
shift had no impact on gross profit dollars. All
geographic zones were affected by the loss of business
with this customer and the viscosity modifier shift,
though the effects were mostly seen in North America
and Europe. The declines in North America for 2003 also
were due to the conversion of some products in our
specialty driveline product line to more concentrated
formulations. In addition, weak worldwide demand for
lubricants contributed to the declines in the North
America and Europe zones in 2003. The decrease in
Asia-Pacific / Middle East volume primarily was due to
the weak business environment stemming from economic
and political conditions in some parts of this region. Segment gross profit decreased $33.8 million, or
7%, in 2003 compared with 2002. The decrease primarily
was due to lower shipment volume, higher average raw
material cost and higher manufacturing expenses,
partially offset by higher average selling price and
favorable net currency effects. For these reasons, the
gross profit percentage for this segment decreased to
26.8% in 2003, compared with 28.7% in 2002. STAR expense decreased $2.9 million, or 1%, in
2003 compared with 2002, primarily due to lower
technical spending at outside test laboratories. Segment operating income decreased $33.7 million,
or 14%, in 2003 compared with 2002 as a result of lower
gross profit and lower equity earnings from our joint
venture in Saudi Arabia, partially offset by lower
technology expenses. SPECIALTY CHEMICALS SEGMENTIn 2004,
revenues for the Specialty Chemicals segment increased
343% compared with 2003 primarily due to the 2004
acquisitions of Noveon International and the
hyperdispersants business and the 2003 acquisition of
the personal care specialty ingredients business from
The Dow Chemical Company. Excluding acquisitions,
segment revenues increased 13% in 2004 compared with
2003 due to a 7% increase in shipment volume, 4%
improvement in the combination of price and product mix
and 2% favorable currency impact. The higher-priced
product mix for 2004 primarily occurred in our consumer
specialties product line. Shipment volume patterns vary in different
geographic zones. The following table shows our
shipment volume by geographic zone in 2004 as well as
the changes compared with 2003: Analysis of Volume  2004 vs. 2003 Excluding2004
    
    
    
    
    
    
    AcquisitionsVolume
    
    
    % Change
    
    
    % ChangeNorth America
    
    
    
    71
    %
    
    
    173
    %
    
    
    6
    %Europe
    
    
    
    16
    %
    
    
    231
    %
    
    
    13
    %Asia-Pacific / Middle East
    
    
    
    9
    %
    
    
    825
    %
    
    
    21
    %Latin America
    
    
    
    4
    %
    
    
    184
    %
    
    
    8
    %Total
    
    
    
    100
    %
    
    
    201
    %
    
    
    7
    %
 Excluding acquisitions, the shipment volume
increase in North America for 2004 was due to increases
in our specialty emulsifier products in our consumer
specialties product line resulting from market share
gains and improvements in the mining sector, and
increased customer demand and market share gains in our
personal care products in our consumer specialties
product line. The increase in Europe was due to
increased customer demand and market share gains
in our performance coatings product line and new
business in our specialty emulsifier products. The
increase in Asia-Pacific / Middle East was due to market
share gains in our consumer specialties product line
and higher shipment volumes in our performance coatings
product line as some approvals we have obtained in the
United States and Europe have been extended by our
customers into Asia. THE LUBRIZOL CORPORATION
nn 17




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations  Segment gross profit increased $216.0
million, or 359% (increased $5.9 million, or 10%,
excluding acquisitions), in 2004 compared with 2003.
Excluding acquisitions, the increase in segment gross
profit in 2004 was due to higher revenues partially
offset by higher material costs and manufacturing
expenses. Average material cost increased 9% in 2004
compared with 2003. Manufacturing expenses increased 5%
in 2004 compared with 2003, however average unit
manufacturing expense decreased 2% due to the higher
shipment volumes. The gross profit percentage for this segment was
24.7% (23.2% excluding acquisitions) in 2004, compared
with 23.8% in 2003. The decrease in gross profit
percentage excluding acquisitions was due to higher raw
material costs that were only partially offset by an
improvement in the combination of price and product mix
and lower average unit manufacturing expense. We
implemented price increases across most of the
businesses during the year in response to the rising
raw material costs. STAR expenses increased $118.3 million, or 205%,
in 2004 (decreased $2.3 million, or 4%, excluding
acquisitions), compared with 2003. Segment operating income increased $84.7 million
in 2004 (increased $6.2 million, excluding
acquisitions) compared with a profit of $0.9 million
in 2003. Excluding acquisitions, the increase in
segment operating profit primarily was due to the
increase in segment gross profit. In 2003, segment revenues increased
$67.5 million, or 36% ($26.7 million, or 14%, excluding acquisitions),
compared with 2002. The acquisition-related increase
primarily was due to the 2002 acquisitions of Dock
Resins Corporation and Chemron Corporation and the 2003
acquisition of a personal care ingredients business.
The 2003 increase in segment revenues, excluding
acquisitions, was due to a 9% increase in shipment
volume along with a 4% favorable currency impact and 1%
stronger price and product mix. The following table shows our shipment volume by
geographic zone in 2003 as well as the changes compared
with 2002: Analysis of Volume  2003 vs. 2002 Excluding2003
    
    
    
    
    
    
    AcquisitionsVolume
    
    
    % Change
    
    
    % ChangeNorth America
    
    
    
    78
    %
    
    
    36
    %
    
    
    7
    %Europe
    
    
    
    14
    %
    
    
    16
    %
    
    
    14
    %Asia-Pacific / Middle East
    
    
    
    3
    %
    
    
    31
    %
    
    
    26
    %Latin America
    
    
    
    5
    %
    
    
    16
    %
    
    
    16
    %Total
    
    
    
    100
    %
    
    
    31
    %
    
    
    9
    %
 The 2003 shipment volume increase in North
America primarily was due to the 2002 acquisitions of
Chemron and Dock Resins and the 2003 acquisition of a
personal care ingredients business. Excluding
acquisitions, the increase in North America in 2003 was
due to market share gains in our consumer specialties
product line along with increases in our performance
coatings product line from the introduction of new
products. The increase in Europe in 2003 primarily was
due to market share gains and new applications in
our specialty monomers products. The increase in 2003
for the Asia-Pacific / Middle East zone was spread
across many product lines and was due to an increasing
focus in this region leading to new business in most of
our businesses. The increase in Latin America in 2003
was due to a shift from North America to Latin America
of our specialty emulsifiers products with some of our
existing customers, along with some business gains in
our coatings and inks, defoamer and specialty monomers
products. Segment gross profit increased $11.1 million, or
23% (decreased $2.0 million, or 4%, excluding
acquisitions), in 2003 compared with 2002. Excluding
acquisitions, the decrease in segment gross profit in
2003 was due to higher manufacturing expenses and
average raw material cost partially offset by higher
shipment volume and higher average selling price due to
favorable currency effects. The increase in
manufacturing expenses was due to higher shipment
volume, $2.4 million in expenses associated with the
integration of a multi-purpose chemical production
facility in Spartanburg, South Carolina that was
purchased in the second quarter of 2003, and higher
manufacturing overhead for some specialty chemicals
products produced at Lubricant Additives facilities as
a result of unusually low Lubricant Additives volumes
in 2003. The gross profit percentage for this segment
was 23.6% in 2003, compared with 26.4% in 2002. The
decrease in the gross profit percentage in 2003 was
due to higher raw material costs and increased
manufacturing expenses. Segment operating income increased $0.5 million
(decreased $6.7 million excluding acquisitions), in
2003 compared with 2002. Excluding acquisitions, the
decrease primarily was due to lower gross profit,
higher direct technology and selling expenses and
higher amortization expenses of intangibles that
resulted from acquisitions. Pro Forma Analysis The following table presents major components of
and information derived from the pro forma consolidated
statements of income and pro forma consolidated
statements of cash flows. The major components of the
pro forma consolidated statements of income and pro
forma consolidated statements of cash flows reflect
the effect of the acquisition of Noveon International
on June 3, 2004 as if the acquisition occurred at the
beginning of each of the periods reflected in the
table. We believe that this data provides the financial statement reader with information that is
useful in understanding the impact of the acquisition
of Noveon International on our results of operations
and cash flows. The components of and information derived from the
pro forma consolidated statements of income and the pro
forma consolidated statements of cash flows for the
years ended December 31, 2004 and 2003 are derived from
our consolidated financial statements for the years
ended December 31, 2004 and 2003 and the unaudited
consolidated financial statements of Noveon
International for the period from January 1, 2004 to
the acquisition date. 18nn THE LUBRIZOL CORPORATION




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##### 



Managements Discussion and Analysis CONTINUED  Our consolidated balance sheet as of December 31,
2004 reflects the acquisition of Noveon International
under the purchase method of accounting. We recorded
the various assets acquired and liabilities assumed,
primarily working capital accounts, of Noveon
International at their estimated fair values that we
determined as of the acquisition date. The allocation
of the purchase price has not yet been finalized, but
is substantially complete, as of December 31, 2004.
While we do not expect any material changes, the
purchase price allocation remains subject to revision
through the end of the allocation period ending in the
second quarter of 2005. Actuarial valuations were
completed for the projected pension and other
post-employment benefit obligations and were reflected in the purchase price allocation. In addition,
appraisals of long-lived assets and identifiable
intangible assets, including an evaluation of IPR&D
projects, have also been completed. The pro forma data gives effect to actual
operating results of Noveon International prior to the
acquisition. Adjustments to cost of sales for the
inventory step-up charge of $9.8 million, the write-off
of acquired IPR&D of $34.0 million and intangible asset
amortization are reflected in the pro forma data for
each period in the table. The entire
inventory step-up charge is attributable to the
Specialty Chemicals segment and is reflected in each
pro forma period of the table. In the fourth quarter of
2004, we reflected a reduction in our long-lived
assets as a result of the completion of appraisals of
these Noveon International assets. In the fourth
quarter, we recognized a $4.4 million reduction in
depreciation expense for the period from the
acquisition date to December 31, 2004 to reflect
changes in estimated fair values and asset lives for
the long-lived assets. In the pro forma data for each
period in the table, these changes in estimates
resulted in a reduction of $7.5 million of depreciation
expense in each year. We also assumed that the bridge
loan was replaced with the permanent long-term financing, consisting of both debt and equity, at the end
of the fourth month of each period presented. This pro
forma data is consistent with the pro forma data that
is disclosed in Note 3 to the consolidated financial
statements for the years ended December 31, 2004 and
2003. These pro forma amounts are presented for
informational purposes only and do not purport to be
indicative of the results that would have actually been
obtained if the acquisition had occurred as of the
beginning of the periods presented or that may be
obtained in the future. PRO FORMA DATA (In Millions of Dollars)
    
    


    2004
    
    
    
    2003CONSOLIDATED PRO FORMA DATATotal revenues
    
    
    $
    3,697.1
    
    
    
    $
    3,182.2Gross profit
    
    
    $
    952.4
    
    
    
    $
    843.8Income before income taxes and
cumulative effect of change in
accounting principle
    
    
    $
    172.9
    
    
    
    $
    96.6Income before cumulative effect of
change in accounting principle
    
    
    $
    110.6
    
    
    
    $
    66.2Depreciation expense
    
    
    $
    166.4
    
    
    
    $
    164.3Amortization of intangible assets
    
    
    $
    25.0
    
    
    
    $
    21.6Capital expenditures
    
    
    $
    156.2
    
    
    
    $
    145.0SEGMENT PRO FORMA DATALubricant Additives segment:Total revenues
    
    
    $
    2,038.8
    
    
    
    $
    1,798.9Gross profit
    
    
    $
    520.0
    
    
    
    $
    481.2Segment operating income
    
    
    $
    244.3
    
    
    
    $
    201.5Depreciation expense
    
    
    $
    86.8
    
    
    
    $
    85.0Amortization of intangible assets
    
    
    $
    3.0
    
    
    
    $
    3.0Capital expenditures
    
    
    $
    83.0
    
    
    
    $
    73.9Specialty Chemicals segment:Total revenues
    
    
    $
    1,658.3
    
    
    
    $
    1,383.3Gross profit
    
    
    $
    432.4
    
    
    
    $
    362.6Segment operating income
    
    
    $
    152.5
    
    
    
    $
    106.8Depreciation expense
    
    
    $
    78.6
    
    
    
    $
    78.2Amortization of intangible assets
    
    
    $
    22.0
    
    
    
    $
    18.6Capital expenditures
    
    
    $
    73.1
    
    
    
    $
    71.1Unallocated corporate
depreciation expense
    
    
    $
    1.0
    
    
    
    $
    1.1Corporate capital expenditures
    
    
    $
    0.1
    
    
    
    $
    RECONCILIATION OF PRO FORMA SEGMENT
OPERATING INCOME TO PRO FORMA INCOME
BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLEPro forma segment operating income:Lubricant Additives
    
    
    $
    244.3
    
    
    
    $
    201.5Specialty Chemicals
    
    
    
    152.5
    
    
    
    
    106.8Total segment operating income
    
    
    
    396.8
    
    
    
    
    308.3Corporate expenses
    
    
    
    (44.1
    )
    
    
    
    (33.6
    )Corporate other income
    
    
    
    5.7
    
    
    
    
    4.1Write-off of acquired in-process research
and development
    
    
    
    (34.0
    )
    
    
    
    (34.0
    )Restructuring charges
    
    
    
    (41.9
    )
    
    
    
    (35.7
    )Interest expense  net
    
    
    
    (109.6
    )
    
    
    
    (112.5
    )Pro forma income before income taxes and
cumulative effect of change in
accounting principle
    
    
    $
    172.9
    
    
    
    $
    96.6
 THE LUBRIZOL CORPORATION
nn 19




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations 
 Return on Average Shareholders Equity Return on average shareholders equity was 7.6%
in 2004, 10.0% in 2003 and 14.4% in 2002 (15.4% in
2002, excluding the cumulative effect of the change in
accounting principle in 2002). The return on average
shareholders equity is calculated as current year net
income divided by the average of year-end shareholders
equity for the current and prior year. The write-off of
acquired IPR&D in 2004 and the restructuring charges in
2004 and 2003 lowered the return on average
shareholders equity by approximately 3.5% and 1.6% in
2004 and 2003, respectively. Working Capital, Liquidity and
Capital Resources The following table summarizes our financial
performance indicators of liquidity: SELECTED MEASURES OF
LIQUIDITY AND CAPITAL RESOURCES 2004
    
    
    
    2003Cash and short-term investments
(in millions of dollars)
    
    
    $
    335.9
    
    
    
    $
    258.7Working capital (in millions of dollars)
    
    
    
    940.7
    
    
    
    
    638.4Current ratio
    
    
    
    2.4
    
    
    
    
    3.1Debt as a % of capitalization
    
    
    
    56.2
    %
    
    
    
    29.0
    %Net debt as a % of capitalization
    
    
    
    51.6
    %
    
    
    
    11.0
    %Number of days sales in receivables
    
    
    
    52.8
    
    
    
    
    54.1Number of days sales in inventories
    
    
    
    86.8
    
    
    
    
    89.4
 The following table summarizes the major
components of cash flow: SUMMARY OF CASH FLOWS (In Millions of Dollars)
    

    
    2004
    
    
    
    2003
    
    
    2002Cash provided from (used in):Operating activities
    
    
    $
    328.2
    
    
    
    $
    194.8
    
    
    $
    244.9Investing activities
    
    
    
    (1,088.8
    )
    
    
    
    (155.9
    )
    
    
    (148.5
    )Financing activities
    
    
    
    811.9
    
    
    
    
    (59.5
    )
    
    
    (30.4
    )Effect of exchange-rate changes
on cash
    
    
    
    25.9
    
    
    
    
    12.9
    
    
    
    11.3Net increase (decrease) in cash and
short-term investments
    
    
    $
    77.2
    
    
    
    $
    (7.7
    )
    
    $
    77.3
 OPERATING ACTIVITIESThe
increase in cash provided by operating activities in
2004 compared with 2003 primarily was due to an
increase in earnings after adjusting for non-cash
items. The increase in earnings was offset partially by
a working capital build-up in accounts receivable,
which used cash of $38.4 million. Our receivables
increased by $258.2 million compared with 2003,
primarily due to the Noveon International and
hyperdispersants acquisitions. The increase in
inventory used cash of $50.0 million primarily due to
increased material costs and a higher weighting to finished goods and products in-process inventories, as
well as some build-up of strategic inventory
stocks at December 31, 2004. The increase in
inventories was offset by a similar increase in
accounts payable and an increase in accrued expenses
for employee compensation accruals. We manage our levels of inventories and accounts
receivables on the basis of average days sales in
inventory and average days sales in receivables,
respectively. Our target for accounts receivable is
established taking into consideration the weighted
average of our various terms of trade for each segment.
Our target for days sales in inventory for each segment
is established with the goal of minimizing our
investment in inventories while at the same time
ensuring adequate supply for our customers. In 2004, we
outperformed our receivables targets and achieved our
inventory targets. INVESTING ACTIVITIESOur
capital expenditures in 2004 were $133.2 million, as
compared with $88.5 million and $65.3 million in 2003
and 2002, respectively. The 2004 expenditures include
approximately $41.1 million for the newly acquired
Noveon International business. In June 2004, we completed the acquisition of Noveon International for cash of $920.2 million
plus transaction costs of $11.4 million and less cash acquired of $103.0 million. In January 2004,
we completed the acquisition of the hyperdispersants business of Avecia for cash totaling $129.7
million. This additives business is headquartered in Blackley, United Kingdom and develops,
manufactures and markets high-value additives that are based on polymeric dispersion technology and
used in coatings and inks. These products enrich and strengthen color while reducing production
costs and solvent emissions, and are marketed under the brand names Solsperse®, Solplus®
and Solthix®. Historical annual revenues of this business are approximately $50.0
million. We funded the
acquisition through43.0 million borrowings ($55.0
million equivalent) under a
364-day credit facility, $5.0 million in yen borrowings and the remainder in cash. At December 31,
2003, we had a foreign currency forward contract of $125.0 million in order to fix the U.S. dollar
price for this acquisition. In the first quarter of 2004, we recorded a pre-tax gain of $6.4
million ($0.07 per share) upon the termination of this foreign currency forward contract. FINANCING ACTIVITIESThe
increase in cash provided from financing activities of
$811.9 million in 2004 primarily was due to the
aggregate net proceeds of $2,170.0 million received
relating to the issuance of 14.7 million of the
companys common shares, $1,150.0 million in unsecured
senior notes and debentures and a $575.0 million bank
term loan, which were used to repay the temporary
bridge loan that funded the Noveon International
acquisition including the repayment of $1,103.1 million
in assumed debt. CAPITALIZATION AND CREDIT FACILITIES
At December 31, 2004, our total debt
outstanding of $1,972.3 million consisted of 54% fixed-rate debt and 46% variable-rate debt, including
$400.0 million of fixed-rate debt, that has been
effectively swapped to a variable rate. Our
weighted-average interest rate as of December 31, 2004
was approximately 5%. 20nn THE LUBRIZOL CORPORATION




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##### 



Managements Discussion and Analysis CONTINUED  Our net debt to capitalization ratio at December
31, 2004 was 51.6%. Net debt is the total of short-term
and long-term debt, reduced by cash and short-term
investments excluding original issue discounts and
unrealized gains and losses on derivative instruments
designated as fair-value hedges of fixed-rate debt.
Capitalization is shareholders equity plus net debt.
Total debt as a percent of capitalization was 56.2% at
December 31, 2004. Our ratio of current assets to current liabilities
declined from 3.1 at December 31, 2003 to 2.4 at
December 31, 2004 due to the Noveon International and
hyperdispersants acquisitions. After the announcement of the Noveon International
acquisition, our long-term debt and commercial paper
credit ratings were downgraded. The credit rating
change eliminated our access to the commercial paper
markets. As a result, we repaid our outstanding
commercial paper and terminated our existing floating-to-fixed rate interest rate swaps with a
notional value of $50.0 million effective April
29, 2004. The termination of the swaps resulted in
a $2.9 million pre-tax charge that was recognized in
the second quarter of 2004. In addition, we called the
outstanding $18.4 million marine terminal refunding
revenue bonds, at par, in the second quarter of 2004. At December 31, 2004, we had a $500.0 million
revolving credit facility that matures in August 2009,
which allows us to borrow at variable rates based upon
the U.S. prime rate or LIBOR plus a specified credit
spread. As of December 31, 2004, we had no outstanding
borrowings under this agreement. In May 2004, we obtained a 364-day bridge credit
facility of $2,450.0 million for the purpose of financing the Noveon International acquisition. This
temporary bridge facility enabled us to borrow at or
below the U.S. prime rate. In June 2004, we borrowed
$1,797.0 million under this facility to finance
initially the Noveon International acquisition and
repay a portion of the assumed Noveon International
debt. In addition, in July 2004, we borrowed an
additional $175.0 million under this facility to repay
the outstanding notes also assumed as part of the
Noveon International acquisition. On September 28,
2004, we repaid the bridge facility in full with
proceeds from our permanent financing structure and
the facility was cancelled. The equity component of our
permanent financing included the issuance of 14.7
million common shares: 13.4 million shares on September
28, 2004 and an additional 1.3 million shares issued
related to the exercise of the over-allotment option on
October 27, 2004. The shares were issued at a price of
$33.25 per share, resulting in net proceeds to the
company of $470.0 million. The debt component of the financing included both public debt and bank term loans.
We issued unsecured senior notes and debentures having
an aggregate principal amount of $1,150.0 million and
borrowed $575.0 million in bank term loans. In the
fourth quarter of 2004, we prepaid $75.0 million in
bank term loans. In June 2004, we entered into several Treasury
rate lock agreements with an aggregate notional
principal amount of $900.0 million, all maturing on
September 30, 2004, whereby we had locked in Treasury
rates relating to a portion of the then anticipated
public debt securities issuance discussed above. These
rate locks were designated as cash-flow hedges of the
forecasted semi-annual interest payments associated
with the expected debt issuance. In September
2004, we incurred a loss on the termination of these
agreements in an aggregate amount of $73.9 million,
which was funded through a portion of the financing
proceeds, and is being amortized to interest expense
over the life of the corresponding debt using the
effective interest method. CONTRACTUAL CASH OBLIGATIONS
The following table shows our contractual cash
obligations under debt agreements, leases,
non-cancelable purchase commitments and other long-term
liabilities at December 31, 2004: Payments
Due by  Period2006-
    
    
    2008-
    
    
    2010 and(In Millions of Dollars)
    

    
    Total
    
    
    2005
    
    
    2007
    
    
    2009
    
    
    AfterTotal debt (1)
    
    
    $
    1,965.1
    
    
    $
    8.2
    
    
    $
    102.6
    
    
    $
    1,002.7
    
    
    $
    851.6Interest (2)
    
    
    
    1,120.8
    
    
    
    81.9
    
    
    
    163.6
    
    
    
    151.7
    
    
    
    723.6Operating leases
    
    
    
    75.4
    
    
    
    21.9
    
    
    
    26.3
    
    
    
    12.8
    
    
    
    14.4Non-cancelable
purchase
commitments (3)
    
    
    
    137.4
    
    
    
    37.6
    
    
    
    56.7
    
    
    
    40.9
    
    
    
    2.2Other long-term
liabilities (4) (5)
    
    
    
    44.3
    
    
    
    1.5
    
    
    
    16.9
    
    
    
    7.5
    
    
    
    18.4Total contractual
cash obligations
    
    
    $
    3,343.0
    
    
    $
    151.1
    
    
    $
    366.1
    
    
    $
    1,215.6
    
    
    $
    1,610.2
  (1)
    
    Total debt includes both the current and long-term
portions of debt as reported in Note 6 to the
consolidated financial statements, excluding original
issue discounts and unrealized gains on derivative
instruments designated as fair-value hedges of
fixed-rate debt.(2)
    
    Represents estimated contractual interest payments
for fixed-rate debt only. We are not able to estimate
reasonably the cash payments for interest associated
with variable-rate debt due to the significant
estimation required relating to both market interest
rates as well as projected principal payments.(3)
    
    Non-cancelable purchase commitments primarily include raw materials purchased under take-or-pay
contracts, drumming, warehousing and service contracts, utility purchase agreements, terminal
agreements and toll processing arrangements.(4)
    
    Other long-term liabilities disclosed in the table
represent long-term liabilities reported in our consolidated balance sheet at December 31, 2004
under noncurrent liabilities, excluding pension, postretirement, environmental and other
non-contractual liabilities.(5)
    
    We are required to make minimum contributions to
our U.S. defined benefit pension plans pursuant to the
minimum funding requirements of the Internal Revenue
Code of 1986, as amended, and the Employee Retirement
Income Security Act of 1974, as amended. Funding
requirements for plans outside the United States are
subject to applicable local regulations. In 2005, we
expect to make employer contributions of approximately
$28.7 million to the qualified plans to satisfy these
minimum statutory funding requirements. In 2005, we
expect to make payments of approximately $2.2 million
relating to our unfunded pension plans. The expected
payments associated with the unfunded plans represent
an actuarial estimate of future assumed payments based
upon retirement and payment patterns. Actual amounts
paid could differ from this estimate. In addition,
non-pension postretirement benefit payments are
expected to approximate $4.9 million in 2005. Due to
uncertainties regarding significant assumptions
involved in estimating future required contributions to
our defined benefit pension and other plans, such as
interest rate levels, the amount and timing of asset
returns and future restructurings, if any, we are not
able to reasonably estimate our contributions beyond
2005. In addition, we have contingent obligations
aggregating $33.4 million under standby letters of
credit issued in the ordinary course of business to financial institutions, customers and insurance companies
to secure short-term support for a variety of
commercial transactions, insurance and benefit
programs. THE LUBRIZOL CORPORATION
nn 21




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations  
 We had $1,972.3 million of debt outstanding
at December 31, 2004, a majority of which originated
from our acquisition of Noveon International, including
the $1,150.0 million in senior notes and debentures
issued in September 2004. As a result, our total debt
as a percent of capitalization has increased from 29.0%
at December 31, 2003 to 56.2% at December 31, 2004. We
will also incur increased interest expense relating to
the permanent Noveon International transaction financing. Our debt level will require us to dedicate a
significant portion of our cash flow to make interest
and principal payments, thereby reducing the
availability of our cash flow for acquisitions or
other purposes. Nevertheless, we believe our future
operating cash flows will be sufficient to cover our
debt repayments and other obligations and that we have
untapped borrowing capacity that can provide us with
additional financial resources. We currently have a
shelf registration statement filed with the Securities
and
Exchange Commission under which $359.8 million of
debt securities, preferred shares or common shares may
be issued. In addition, as of December 31, 2004, we
maintained cash and short-term investment balances of
$335.9 million and had $500.0 million available under
our revolving credit facility. Critical Accounting Policies The preparation of financial statements and
related disclosures in accordance with accounting
principles generally accepted in the United States of
America requires us to make judgments, assumptions and
estimates at a specific point in time that affect the
amounts reported in the accompanying consolidated financial statements and related notes. In preparing
these financial statements, we have utilized available
information including our past history, industry
standards and the current economic environment, among
other factors, in forming our estimates and judgments
of certain amounts included in the consolidated financial statements, giving due consideration to
materiality. It is possible that the ultimate outcome
as anticipated by management in formulating our
estimates inherent in these financial statements may
not materialize. Application of the critical accounting
policies described below involves the exercise of
judgment and the use of assumptions as to future
uncertainties and, as a result, actual results could
differ from these estimates. In addition, other
companies may utilize different estimates, which may
impact the comparability of our results of operations
to similar businesses. ACCOUNTING FOR RESERVES AND CONTINGENCIES Our accounting policies for reserves and
contingencies cover a wide variety of business
activities, including reserves for potentially
uncollectible receivables, slow-moving or obsolete
inventory, legal and environmental exposures and tax
exposures. We accrue these reserves when our
assessments indicate that it is probable that a
liability has been incurred or an asset will not be
recovered and an amount can be reasonably estimated. We
review these estimates quarterly based on currently
available information. Actual results may differ from
our estimates and our estimates may be revised upward
or downward, depending upon the outcome or changed
expectations based on the facts surrounding each
exposure. We discuss annually with the audit committee
of our board of directors our reserves and
contingencies, as well as our policies and processes
for evaluating them. ACCOUNTING FOR SALES DISCOUNTS AND REBATES Sales discounts and rebates are offered to
certain customers to promote customer loyalty and to
encourage greater product sales. These rebate programs
provide that upon the attainment of pre-established
volumes or the attainment of revenue milestones for a
specified period, the customer receives credits
against purchases. We estimate the provision for
rebates based upon the specific terms in each
agreement at the time of shipment and an estimate of
the customers achievement of the respective revenue
milestones. Customer claims, returns and allowances and
discounts are accrued based upon our history of claims
and sales returns and allowances. The estimated
provisions could be significantly affected if future
occurrences and claims differ from these assumptions
and historical trends. DETERMINATION OF NET PERIODIC PENSION COST Each year we review with our actuaries the
actuarial assumptions used in the determination of net
periodic pension cost, as prescribed by SFAS No. 87,
Employers Accounting for Pensions. The determination
of net periodic pension cost is based upon a number of
actuarial assumptions. The two critical assumptions are
the expected return on plan assets and the discount
rate for determining the funded status. Other
assumptions include the rate of compensation increase
and demographic factors such as retirement age,
mortality and turnover. We review the critical
assumptions for our U.S. pension plans with the audit
committee of our board of directors. Our net periodic
pension cost
for all pension plans was $34.9 million in 2004, $14.1
million in 2003 and $8.4 million in 2002. The net
periodic pension cost includes a settlement loss of
$7.7 million and $0.3 million in 2004 and 2003,
respectively. In accordance with generally accepted
accounting principles, actual results that differ from
the assumptions are accumulated and amortized over
future periods and, therefore, affect expense
recognized and obligations recorded in future periods. In developing our assumption for the expected
long-term rate of return on plan assets, we considered
historical returns and the future expectations for
returns for each asset class, as well as the target
asset allocation of the pension portfolio. During 2004,
we maintained our assumption for the U.S. pension plans
of 9.0% (7.82% on a weighted-average basis for all
plans) because we believed that it represented a
reasonable return that could be achieved over the long
term using our current asset allocation. We did not
substantially change our investment philosophy or
investment mix of the asset portfolio in any of our
Lubrizol plans existing prior to the Noveon
International acquisition (legacy Lubrizol plans) in
2004. From the date of acquisition through the end of
December, the Noveon International U.S. pension plans
assets had an investment mix that approximated 50% in
both equity and debt securities, as compared to the
legacy Lubrizol U.S. pension plan target allocation of
approximately 70% in equity securities and 30% in debt
securities. However, in January 2005, we transferred
the Noveon International U.S. pension assets into one
master-trust arrangement with our existing U.S. pension
plans. As a result, the combined assets will be subject
to the same overall investment strategy and management
going forward. 22nn THE LUBRIZOL CORPORATION




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Managements Discussion and Analysis CONTINUED  A change in the rate of return of 100 basis points
would have the following effects on the net periodic
pension cost: Effect on net periodic pension cost
from change in the rate of return 100 Basis Point(In Millions of Dollars)
    
    
    Increase
    
    
    DecreaseU.S. pension plans
    
    
    $
    (1.9
    )
    
    $
    1.9International pension plans
    
    
    
    (1.4
    )
    
    
    1.4All pension plans
    
    
    $
    (3.3
    )
    
    $
    3.3
 The selection of a discount rate for pension
plans is required to determine the value of future
pension obligations and represents our best estimate of
our cost in the marketplace to settle all pension
obligations through annuity purchases. Historically, we
have determined the discount rate based upon current
market indicators, including rates of return on
Aa-rated corporate bonds or on long-term U.S. Treasury
obligations. However, in 2004, we further refined this
discount rate setting process by also looking at yields
from dedicated bond portfolios that provide for a
general matching of bond maturities with the projected
benefit cash flows from our plans. The dedicated bond
portfolios consist of non-callable corporate bonds that
are at least Aa quality. Under this enhanced approach,
the 2004 year-end discount rate assumption for our
legacy Lubrizol U.S. pension plans was set at 6.25%,
which remains unchanged from our 2003 year-end
assumption. The Noveon International U.S. pension plans
utilized a discount rate of 6.00% at December 31, 2004.
On a worldwide basis, the 2004 weighted-average
discount rate utilized was lowered to 5.74% from 5.88%
used in 2003. A change in the discount rate of 100
basis points would have the following effects on the
net periodic pension cost: Effect on net periodic pension cost
from change in the discount rate 100 Basis Point(In Millions of Dollars)
    
    
    Increase
    
    
    DecreaseU.S. pension plans
    
    
    $
    (3.3
    )
    
    $
    5.3International pension plans
    
    
    
    (4.3
    )
    
    
    4.7All pension plans
    
    
    $
    (7.6
    )
    
    $
    10.0
 The accumulated benefit obligation for all
pension plans worldwide exceeds the value of plan
assets by $68.0 million. This represents an increase
compared to 2003 of $45.1 million. The worldwide Noveon
International plans accounted for $13.7 million of the
increase. The value of the plan assets of the legacy
Lubrizol U.S. pension plans at December 31, 2004
exceeded the accumulated benefit obligation liability
by $0.1 million as compared to $18.9 million at
December 31, 2003. This decrease in the funding status
was due to an increase in the accumulated benefit
obligation primarily related to losses generated from
the workforce reductions. Changes in pension plan assumptions are expected
to increase pension expense for most pension plans
worldwide in 2005. After considering a full year of
expense related to the Noveon International plans, 2005
pension expense is expected to approximate between
$39.0 million and $41.0 million, excluding the impact
of any settlement charges. The expected increase in
pension expense in 2005, excluding the impact of
settlement charges, is due to 12 months of
expense for the Noveon International plans, the decline
in both the legacy Lubrizol U.S. and Noveon
International U.S. plans expected return on plan
assets, the decline in the discount rate for the Noveon
International U.S. plans and the recognition of loss
amortization. DETERMINATION OF POSTRETIREMENT BENEFIT COST Annually, we review with our actuaries the key economic assumptions used in calculating
postretirement benefit cost as prescribed by SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions. Postretirement benefits include health care and
life insurance plans. The determination of postretirement benefit cost is based upon a number of
actuarial assumptions, including the discount rate for determining the accumulated postretirement
benefit obligation, the assumed health care cost trend rates and ultimate health care trend rate.
The same discount rate selected for the pension plans generally is used for calculating the
postretirement benefit obligation by country. Net non-pension postretirement benefit cost was
$5.8 million in 2004, $5.6 million in 2003 and $4.7 million in 2002. A change in the discount rate
of 100 basis points would have the following effects on the postretirement benefit cost: Effect on postretirement benefit cost
from change in the discount rate 100 Basis Point(In Millions of Dollars)
    
    
    Increase
    
    
    DecreaseU.S. postretirement plans
    
    
    $
    (1.5
    )
    
    $
    1.8International postretirement plans
    
    
    
    (0.1
    )
    
    
    0.1All postretirement plans
    
    
    $
    (1.6
    )
    
    $
    1.9
 A change in the assumed health care cost
trend rate of 100 basis points would have the following
effects on the postretirement benefit cost: Effect on postretirement benefit cost from
change in assumed health care cost trend rate 100 Basis Point(In Millions of Dollars)
    
    
    Increase
    
    
    DecreaseU.S. postretirement plans
    
    
    $
    1.8
    
    
    $
    (1.4
    )International postretirement plans
    
    
    
    0.1
    
    
    
    All postretirement plans
    
    
    $
    1.9
    
    
    $
    (1.4
    )
 ACCOUNTING FOR BUSINESS COMBINATIONSDuring the past three years, we
have completed several business combination
transactions, the most significant of which was the
Noveon International acquisition, which occurred on
June 3, 2004. We allocate the purchase price to assets
acquired and liabilities assumed based on their
relative fair value at the date of acquisition pursuant
to the provisions of SFAS No. 141, Business
Combinations. In estimating the fair value of the
tangible and intangible assets and liabilities
acquired, we consider information obtained during our
due diligence process and utilize various valuation
methods including market prices, where available,
appraisals, comparisons to transactions for similar
assets and liabilities and present value of estimated
future cash flows. We are required to make subjective
estimates in connection with these valuations and
allocations. THE LUBRIZOL CORPORATION
nn
23




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations  ACCOUNTING FOR IMPAIRMENT
OF LONG-LIVED ASSETS We review the carrying value of our long-lived
assets, including property and equipment, whenever
events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. An
impairment loss may be recognized when estimated
undiscounted future cash flows expected to result from
the use of the asset, including disposition, are less
than the carrying value of the asset. The measurement
of the impairment loss to be recognized is based on the
difference between the fair value and the carrying
amounts of the assets. Fair value is generally
determined based upon a discounted cash flow analysis.
In order to determine if an asset has been impaired,
assets are grouped and tested at the lowest level for
which identifiable, independent, cash flows are
available. The determination of both undiscounted and
discounted cash flows requires us to make significant
estimates and considers the expected course of action
at the balance sheet date. Subsequent changes in
estimated undiscounted and discounted cash flows
arising from changes in anticipated actions could
impact the determination of whether an impairment
exists, the amount of the impairment charge recorded
and whether the effects could materially impact our net
income. In connection with the acquisition and integration
of Noveon International, we selected an investment
banker in January 2005 to assist us in divesting
underperforming and nonstrategic businesses. These
potential divestitures have total revenues of
approximately $300.0 million to $500.0 million. We have
not identified buyers for these businesses. As such,
none of the businesses or assets that we are evaluating
is considered held for sale pursuant to the provisions
of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. ACCOUNTING FOR GOODWILL IMPAIRMENTGoodwill represents the excess of
purchase price and related costs over the value
assigned to the net tangible and identifiable
intangible assets of businesses acquired and, effective
January 1, 2002, is no longer amortized, in accordance
with SFAS No. 142, Goodwill and Other Intangible
Assets. This standard requires goodwill to be tested
annually and between annual tests if events occur or
circumstances change that would more likely than not
reduce the fair value of an operating segment below its
carrying amount. We have elected October 1 as the
annual evaluation date to test for potential goodwill
impairment. The annual goodwill impairment test
requires us to make a number of assumptions and
estimates concerning future levels of earnings and cash
flow, which are based upon our strategic plans. The
combination of a discounted cash flow analysis and
terminal value model is used to determine the fair
value of each reporting unit. While we use available
information to prepare estimates and to perform the
impairment evaluation, actual results could differ
significantly resulting in future impairment and
losses related to recorded goodwill balances. No
impairment of goodwill was identified in the annual
impairment test completed in 2004. (See Note 5 to the
consolidated financial statements.) NEW ACCOUNTING STANDARDS SFAS No. 123(R) In December 2004, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123(R),
Share-Based Payment. This standard will require
compensation costs related to share-based payment
transactions to be recognized in the financial
statements. With limited exceptions, the amount of
compensation cost will be measured based on the
grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will
be remeasured each reporting period. Compensation cost
will be recognized over the period that an employee
provides service in exchange for the award. This
standard replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and applies to all awards
granted, modified, repurchased or cancelled after July
1, 2005. We are currently evaluating the provisions of
this standard to determine the impact on our
consolidated financial statements. It is, however,
expected to reduce consolidated net income. SFAS No. 153 In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets. This standard
amended APB Opinion No. 29, Accounting for Nonmonetary
Transactions, to eliminate the exception from fair
value measurement for nonmonetary exchanges of similar
productive assets. This standard replaces this
exception with a general exception from fair value
measurement for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange
has no commercial substance if the future cash flows
of the entity are expected to change significantly as
a result of the exchange. This statement is effective
for all nonmonetary asset exchanges we complete
starting January 1, 2006. We do not believe the
adoption of this standard will have a material impact
on our financial position, results of operations or
cash flows. SFAS No. 151 In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, to clarify the accounting for
abnormal amounts of idle facility expense, freight,
handling costs and wasted material. This standard
requires that such items be recognized as
current-period charges. The standard also establishes
the concept of normal capacity and requires the
allocation of fixed production overhead to inventory
based on the normal capacity of the production
facilities. Any unallocated overhead must be recognized
as an expense in the period incurred. This standard is
effective for inventory costs incurred starting January
1, 2006. We do not believe the adoption of this
standard will have a material impact on our financial
position, results of operations or cash flows. Medicare Prescription Drug Improvement
and Modernization Act The Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) was signed into law
on December 8, 2003. The Act introduces a prescription
drug benefit under Medicare (Medicare Part D), which
will begin in 2006. 24nn THE LUBRIZOL CORPORATION




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Managements Discussion and Analysis CONTINUED 
 We have determined that our postretirement health
care plan provides prescription drug benefits that
will qualify for the federal subsidy provided by the Act. As a
result, the following actuarially determined changes in
accounting for this plan have been recognized starting
in the third quarter of 2004 due to the legislation and
in accordance with the provisions of FASB Staff
Position (FSP) No. FAS 106-2, Accounting and
Disclosure Requirements Related to the Medicare
Prescription Drug Improvement and Modernization Act of
2003 (FSP 106-2).  o
    The accumulated postretirement benefit obligation determined as of January 1, 2004 has been
reduced by approximately $5.8 million. This reduction
caused an actuarial gain in accordance with FSP 106-2.  o
    The effect of the above gain is to reduce the annual amortization of unrecognized
actuarial loss by approximately $0.4 million.  o
    The interest and service cost components of the related periodic expense for fiscal year 2004 have been reduced by approximately $0.3
million. For 2004, our annual net periodic postretirement
benefit expense has been reduced by approximately $0.7
million in the aggregate as a result of this benefit. New Tax Legislation and Related Guidance On October 22, 2004, the American Jobs Creation
Act (Jobs Act) was signed into law. Included in the
Jobs Act is a provision for a special one-time tax
deduction of 85% of certain foreign earnings, in excess
of a base amount, that are repatriated prior to
December 31, 2005 (for calendar-year taxpayers). In
December 2004, the FASB issued FSP No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American
Jobs Creation Act of 2004. In January 2005, the
Internal Revenue Service provided, in Notice 2005-10,
additional guidance regarding how the Jobs Act rules on
the repatriation of foreign subsidiary earnings are
intended to operate. In accounting for the acquisition of Noveon
International, we considered the pre-acquisition
undistributed earnings of the foreign subsidiaries of
Noveon International not to be indefinitely reinvested
overseas. Therefore, the acquisition date balance sheet
contains a deferred tax liability for the estimated
U.S. and foreign tax cost of repatriating these
earnings. As of December 31, 2004, our balance sheet
included a deferred tax liability relating to a
repatriation plan, which will result in approximately
$180.0 million of cash being brought back to the United
States. The calculation of this deferred tax liability
assumes that we will be unable to use foreign tax
credits to offset any portion of the U.S. tax cost of
the planned repatriation. The Jobs Act also includes a tax deduction of up
to 9.0% (when fully phased in) of the lesser of (a)
qualified production activities income, as defined
in the Jobs Act, or (b) taxable income, after the
deduction for the utilization of any net operating loss
carryforwards. In December 2004, the FASB issued FSP
No. FAS 109-1, Application of FASB Statement No. 109,
Accounting for Income Taxes, to the
 Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004. We
will be unable to obtain any benefit from this new
deduction until our U.S. federal tax net operating loss
carryforwards are completely utilized. Cautionary Statements for Safe
Harbor Purposes This Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements within the meaning of the federal securities
laws. As a general matter, forward-looking statements
are those focused upon future plans, objectives or
performance as opposed to historical items and include
statements of anticipated events or trends and
expectations and beliefs relating to matters not
historical in nature. Forward-looking statements are
subject to uncertainties and factors relating to our
operations and business environment, all of which are
difficult to predict and many of which are beyond our
control. These uncertainties and factors could cause
our actual results to differ materially from those
matters expressed in or implied by any forward-looking
statements, although we believe that our expectations
reflected in those forward-looking statements are
based upon reasonable assumptions. For this purpose,
any statements contained herein that are not statements
of historical fact should be deemed to be
forward-looking statements. We believe that the following factors, among
others, could affect our future performance and cause
our actual results to differ materially from those
expressed or implied by forward-looking statements made
in this annual report:  o
    the cost, availability and quality of raw materials, including petroleum-based products;  o
    our ability to increase the prices of our products in a competitive environment;  o
    the effect of required principal and interest payments on our ability to fund
capital expenditures and acquisitions and to meet operating needs;  o
    the overall global economic environment and the overall demand for our
products on a worldwide basis;  o
    technology developments that affect longer-term trends for our products;  o
    the extent to which we are successful in expanding our business in new and existing markets;  o
    our ability to identify, complete and integrate acquisitions for profitable
growth and operating efficiencies, especially our ability to integrate the acquisition of
Noveon International;  o
    our success at continuing to develop proprietary technology to meet or exceed
new industry performance standards and individual customer expectations;  o
    our ability to continue to reduce complexities and conversion costs and modify our cost structure to maintain and enhance our competitiveness; THE LUBRIZOL CORPORATION
nn 25




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Managements Discussion and Analysis of Financial Condition and Results of Operations   o
    our success in retaining and growing the business that we have with our largest
customers;  o
    the cost and availability of energy, including natural gas and electricity;  o
    the effect of interest rate fluctuations on our interest expense;  o
    the effects of fluctuations in currency exchange rates upon our reported results
from international operations, together with non-currency risks of investing in and conducting
significant operations in foreign countries, including those relating to political, social,
economic and regulatory factors;  o
    the extent to which we achieve market acceptance of our commercial development
programs;  o
    significant changes in government regulations affecting environmental
compliance;  o
    the ability to identify, understand and manage risks inherent in new markets in
which we choose to expand; and  o
    our ability to maintain operating continuity for those businesses identified as
divestiture candidates. Quantitative and Qualitative Disclosures
About Market Risk We operate manufacturing and blending facilities,
laboratories and offices around the world and utilize
fixed and variable-rate debt to finance our global
operations. As a result, we are subject to business
risks inherent in non-U.S. activities, including
political and economic uncertainties, import and export
limitations, and market risks related to changes in
interest rates and foreign currency exchange rates. We
believe the political and economic risks related to our
foreign operations are mitigated due to the stability
of the countries in which our largest foreign
operations are located. In the normal course of business, we use
derivative financial instruments including interest
rate and commodity hedges and forward foreign currency exchange
contracts to manage our market risks. Our objective in
managing our exposure to changes in interest rates is
to limit the impact of such changes on our earnings and
cash flow. Our objective in managing the exposure to
changes in foreign currency exchange rates is to reduce
volatility on our earnings and cash flow associated
with such changes. Our principal currency exposures are
the euro, the pound sterling, the Japanese yen and
certain Latin American currencies. Our objective in
managing our exposure to changes in commodity prices is
to reduce the volatility on earnings of utility
expense. We do not hold derivatives for trading
purposes. We measure our market risk related to our holdings
of financial instruments based on changes in interest
rates, foreign currency rates and commodity prices
utilizing a sensitivity analysis. The sensitivity
analysis measures the potential loss in fair value,
cash flow and earnings based on a hypothetical 10%
change (increase and decrease) in interest, currency
exchange rates and commodity prices.
 We use current market rates on our debt and derivative
portfolios to perform the sensitivity analysis. Certain
items such as lease contracts, insurance contracts and
obligations for pension and other postretirement
benefits are not included in the analysis. Our primary interest rate exposures relate to our cash and short-term investments, fixed and
variable-rate debt and interest rate swaps. The calculation of potential loss in fair value is
based on an immediate change in the net present values of our interest rate-sensitive exposures
resulting from a 10% change in interest rates. The potential loss in cash flow and income before
tax is based on the change in the net interest income/expense over a one-year period due to an
immediate 10% change in rates. A hypothetical 10% increase in interest rates would have had a
favorable impact and a hypothetical 10% decrease in interest rates would have had an unfavorable
impact on fair values of $47.3 million in 2004. In addition, a hypothetical 10% increase in
interest rates would have had an unfavorable impact and a hypothetical 10% decrease in interest
rates would have had a favorable impact on cash flows and income before tax of $2.9 million in 2004. Our primary currency exchange rate exposures are to foreign currency denominated debt,
intercompany debt, cash and short-term investments and forward foreign currency exchange contracts.
The calculation of potential loss in fair value is based on an immediate change in the U.S. dollar
equivalent balances of our currency exposures due to a 10% shift in exchange rates. The potential
loss in cash flow and income before tax is based on the change in cash flow and income before tax
over a one-year period resulting from an immediate 10% change in currency exchange rates. A
hypothetical 10% increase in currency exchange rates would have had an unfavorable impact and a
hypothetical 10% decrease in currency exchange rates would have had a favorable impact on fair
values of $26.1 million, cash flows of $43.7 million and income before tax of $13.5 million in
2004. Our primary commodity hedge exposures relate to
natural gas and electric utility expenses. The
calculation of potential loss in fair value is based on
an immediate change in the U.S. dollar equivalent
balances of our commodity exposures due to a 10% shift
in the underlying commodity prices. The potential loss
in cash flow and income before tax is based on the
change in cash flow and income before tax over a
one-year period resulting from an immediate 10% change
in commodity prices. A hypothetical 10% increase in
commodity prices would have had a favorable impact and
a hypothetical 10% decrease in commodity prices would
have had an unfavorable impact on fair value, cash flow and income before tax of $0.3 million in 2004. 26nn THE LUBRIZOL CORPORATION




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##### 



Managements Report on Internal Control Over Financial Reporting  The management of The Lubrizol Corporation and
its subsidiaries (the Company) is responsible for
establishing and maintaining adequate internal control
over financial reporting. The Lubrizol Corporations internal control system was
designed to provide reasonable assurance to the
Companys management and board of directors regarding
the preparation and fair presentation of published financial statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide
only reasonable assurance with respect to financial
statement preparation and presentation. The Lubrizol Corporations management assessed the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004. In making
this assessment, management used the criteria set forth
by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal ControlIntegrated Framework. Based on this assessment,
management believes that, as of December 31, 2004, the
Companys internal control over financial reporting is
effective based on those criteria. Managements assessment of the effectiveness of
internal control over financial reporting as of
December 31, 2004 has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm,
who expressed an unqualified opinion as stated in
their report, a copy of which is included in this
annual report. (-s- JAMES L. HAMBRICK)
James L. Hambrick
Chairman, President and Chief Executive Officer (-s- CHARLES P. COOLEY)
Charles P. Cooley
Senior Vice President and Chief Financial Officer (-s- W. SCOTT EMERICK)
W. Scott Emerick
Corporate
Controller March 2, 2005 New York Stock Exchange Certifications  On April 27, 2004, James L. Hambrick, as chief
executive officer, certified, as required by Section
303A.12(a) of the New York Stock Exchange (NYSE) Listed
Company Manual, that as of that date he was not aware
of any violations by the Company of the NYSEs
Corporate Governance listing standards. This certification has been delivered to the NYSE. The chief executive officer and chief financial
officer certifications created by Section 302 of the
Sarbanes-Oxley Act of 2002 are included as exhibits to
our Form 10-K and are incorporated herein by reference. THE LUBRIZOL CORPORATION nn 27




---



##### 



Reports of Independent Registered Public Accounting Firm  Deloitte. TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
THE LUBRIZOL CORPORATION We have audited managements assessment, included
in the accompanying Managements Report on Internal
Control Over Financial Reporting, that The Lubrizol
Corporation and subsidiaries (the Company) maintained
effective internal control over financial reporting as
of December 31, 2004, based on the criteria established
in Internal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is
responsible for maintaining effective internal control
over financial reporting and for its assessment of the
effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material
respects. Our audit included obtaining an understanding
of internal control over financial reporting,
evaluating managements assessment, testing and
evaluating the design and operating effectiveness of
internal control, and performing such other procedures
as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for
our opinions. A companys internal control over financial
reporting is a process designed by, or under the
supervision of, the companys principal executive and
principal financial officers, or persons performing
similar functions, and effected by the companys board
of directors, management, and other personnel to
provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial
statements in accordance with generally accepted
accounting principles, and that receipts and
expenditures of the company are being made only in
accordance with authorizations of management and
directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on
the financial statements. Because of the inherent limitations of internal
control over financial reporting, including the
possibility of collusion or improper management
override of controls, material misstatements due to
error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. In our opinion, managements assessment that the
Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria
established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Also in our opinion, the
Company maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2004, based on the criteria established in
Internal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway
Commission. We have also audited, in accordance with the
standards of the Public Company Accounting Oversight
Board (United States) the consolidated financial
statements as of and for the year ended December 31,
2004 of the Company and our report dated March 2, 2005
expressed an unqualified opinion on those financial
statements. (DELOITTE & TOUCHE LLP)
Cleveland, Ohio
March 2, 2005   Deloitte. TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
THE LUBRIZOL CORPORATION We have audited the accompanying consolidated
balance sheets of The Lubrizol Corporation and
subsidiaries (the Company) as of December 31, 2004
and 2003, and the related consolidated statements of
income, shareholders equity, and cash flows for each
of the three years in the period ended December 31,
2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial
statements present fairly, in all material respects,
the financial position of The Lubrizol Corporation and
subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004,
in conformity with accounting principles generally
accepted in the United States of America. As discussed in Notes 2 and 5 to the consolidated
financial statements, in 2002 the Company changed its
method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting
Standards No. 142. We have also audited, in accordance with the
standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the
Companys internal control over financial reporting as
of December 31, 2004, based on the criteria established
in Internal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 2, 2005 expressed
an unqualified opinion on managements assessment of
the effectiveness of the Companys internal control
over financial reporting and an unqualified opinion
on the effectiveness of the Companys internal control
over financial reporting. (DELOITTE & TOUCHE LLP)
Cleveland, Ohio
March 2, 2005 28nn THE LUBRIZOL CORPORATION




---



##### 



Consolidated Statements of Income  Year Ended December 31(In Millions of Dollars Except Per-Share Data)
    
    
    2004
    
    
    
    2003
    
    
    2002Net sales
    
    
    $
    3,155.6
    
    
    
    $
    2,049.1
    
    
    $
    1,980.3Royalties and other revenues
    
    
    
    3.9
    
    
    
    
    3.0
    
    
    
    3.6Total revenues
    
    
    
    3,159.5
    
    
    
    
    2,052.1
    
    
    
    1,983.9Cost of sales
    
    
    
    2,359.5
    
    
    
    
    1,507.8
    
    
    
    1,416.3Selling and administrative expenses
    
    
    
    304.6
    
    
    
    
    202.9
    
    
    
    196.9Research, testing and development expenses
    
    
    
    190.8
    
    
    
    
    166.9
    
    
    
    168.3Amortization of intangible assets
    
    
    
    18.0
    
    
    
    
    4.9
    
    
    
    4.2Write-off of acquired in-process research and development
    
    
    
    34.0
    
    
    
    
    
    
    
    
    Restructuring charges
    
    
    
    38.6
    
    
    
    
    22.5
    
    
    
    Total costs and expenses
    
    
    
    2,945.5
    
    
    
    
    1,905.0
    
    
    
    1,785.7Other income (expense)  net
    
    
    
    4.9
    
    
    
    
    3.3
    
    
    
    (1.2
    )Interest income
    
    
    
    4.8
    
    
    
    
    3.8
    
    
    
    6.7Interest expense
    
    
    
    (77.1
    )
    
    
    
    (25.1
    )
    
    
    (23.3
    )Income before income taxes and cumulative effect of change
in accounting principle
    
    
    
    146.6
    
    
    
    
    129.1
    
    
    
    180.4Provision for income taxes
    
    
    
    53.1
    
    
    
    
    38.3
    
    
    
    54.1Income before cumulative effect of change in accounting principle
    
    
    
    93.5
    
    
    
    
    90.8
    
    
    
    126.3Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    (7.8
    )Net income
    
    
    $
    93.5
    
    
    
    $
    90.8
    
    
    $
    118.5Basic net income per share:Income before cumulative effect of change in accounting principle
    
    
    $
    1.68
    
    
    
    $
    1.76
    
    
    $
    2.45Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    (0.15
    )Net income per share, basic
    
    
    $
    1.68
    
    
    
    $
    1.76
    
    
    $
    2.30Diluted net income per share:Income before cumulative effect of change in accounting principle
    
    
    $
    1.67
    
    
    
    $
    1.75
    
    
    $
    2.44Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    (0.15
    )Net income per share, diluted
    
    
    $
    1.67
    
    
    
    $
    1.75
    
    
    $
    2.29Dividends per share
    
    
    $
    1.04
    
    
    
    $
    1.04
    
    
    $
    1.04
 The accompanying notes are
an integral part of these consolidated financial statements. THE LUBRIZOL CORPORATION nn 29




---



##### 



Consolidated Balance Sheets  December 31(In Millions of Dollars)
    
    
    2004
    
    
    
    2003ASSETSCash and short-term investments
    
    
    $
    335.9
    
    
    
    $
    258.7Receivables
    
    
    
    582.8
    
    
    
    
    324.6Inventories
    
    
    
    568.7
    
    
    
    
    311.9Other current assets
    
    
    
    110.6
    
    
    
    
    42.6Total current assets
    
    
    
    1,598.0
    
    
    
    
    937.8Property and equipment  at cost
    
    
    
    2,731.3
    
    
    
    
    1,960.6Less accumulated depreciation
    
    
    
    1,413.4
    
    
    
    
    1,270.6Property and equipment  net
    
    
    
    1,317.9
    
    
    
    
    690.0Goodwill
    
    
    
    1,153.8
    
    
    
    
    208.7Intangible assets  net
    
    
    
    437.1
    
    
    
    
    62.4Investments in non-consolidated companies
    
    
    
    7.4
    
    
    
    
    6.3Other assets
    
    
    
    52.1
    
    
    
    
    37.1TOTAL
    
    
    $
    4,566.3
    
    
    
    $
    1,942.3LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current portion of long-term debt
    
    
    $
    8.2
    
    
    
    $
    2.9Accounts payable
    
    
    
    339.6
    
    
    
    
    143.1Accrued expenses and other current liabilities
    
    
    
    309.5
    
    
    
    
    153.5Total current liabilities
    
    
    
    657.3
    
    
    
    
    299.5Long-term debt
    
    
    
    1,964.1
    
    
    
    
    386.7Postretirement health care obligations
    
    
    
    106.4
    
    
    
    
    98.4Noncurrent liabilities
    
    
    
    170.7
    
    
    
    
    100.3Deferred income taxes
    
    
    
    90.7
    
    
    
    
    52.8Total liabilities
    
    
    
    2,989.2
    
    
    
    
    937.7Minority interest in consolidated companies
    
    
    
    53.6
    
    
    
    
    51.3Contingencies and commitmentsPreferred stock without par value  unissued
    
    
    
    
    
    
    
    
    Common shares without par value  66,778,865 and 51,588,190 outstanding shares
at December 31, 2004 and 2003, respectively
    
    
    
    610.6
    
    
    
    
    123.8Retained earnings
    
    
    
    897.4
    
    
    
    
    865.5Accumulated other comprehensive income (loss)
    
    
    
    15.5
    
    
    
    
    (36.0
    )Total shareholders equity
    
    
    
    1,523.5
    
    
    
    
    953.3TOTAL
    
    
    $
    4,566.3
    
    
    
    $
    1,942.3
 The accompanying notes are
an integral part of these consolidated financial statements. 30nn THE LUBRIZOL CORPORATION




---



##### 



Consolidated Statements of Cash Flows  Year Ended December 31(In Millions of Dollars)
    
    
    2004
    
    
    
    2003
    
    
    2002CASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet income
    
    
    $
    93.5
    
    
    
    $
    90.8
    
    
    $
    118.5Adjustments to reconcile net income to cash provided
by operating activities:Depreciation and amortization
    
    
    
    154.7
    
    
    
    
    100.4
    
    
    
    95.8Write-off of acquired in-process research and development
    
    
    
    34.0
    
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    
    5.9
    
    
    
    
    1.5
    
    
    
    3.2Restructuring charges
    
    
    
    27.5
    
    
    
    
    3.3
    
    
    
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    7.8Change in current assets and liabilities, net of acquisitions:Receivables
    
    
    
    (38.4
    )
    
    
    
    4.7
    
    
    
    29.0Inventories
    
    
    
    (50.0
    )
    
    
    
    17.4
    
    
    
    (10.2
    )Accounts payable, accrued expenses and other current liabilities
    
    
    
    80.5
    
    
    
    
    (26.8
    )
    
    
    2.6Other current assets
    
    
    
    2.5
    
    
    
    
    (4.3
    )
    
    
    (7.5
    )(5.4
    )
    
    
    
    (9.0
    )
    
    
    13.9Change in noncurrent liabilities
    
    
    
    9.0
    
    
    
    
    11.7
    
    
    
    3.6Other items  net
    
    
    
    9.0
    
    
    
    
    (3.9
    )
    
    
    2.1Total operating activities
    
    
    
    328.2
    
    
    
    
    194.8
    
    
    
    244.9INVESTING ACTIVITIESCapital expenditures
    
    
    
    (133.2
    )
    
    
    
    (88.5
    )
    
    
    (65.3
    )Acquisitions  net of cash received and liabilities assumed
    
    
    
    (958.4
    )
    
    
    
    (68.6
    )
    
    
    (86.7
    )Other items  net
    
    
    
    2.8
    
    
    
    
    1.2
    
    
    
    3.5Total investing activities
    
    
    
    (1,088.8
    )
    
    
    
    (155.9
    )
    
    
    (148.5
    )FINANCING ACTIVITIESChanges in short-term debt, net
    
    
    
    (72.6
    )
    
    
    
    (5.8
    )
    
    
    (1.4
    )Repayments of long-term debt
    
    
    
    (1,193.0
    )
    
    
    
    (9.2
    )
    
    
    (2.3
    )Proceeds from the issuance of long-term debt
    
    
    
    1,743.3
    
    
    
    
    4.5
    
    
    
    Dividends paid
    
    
    
    (57.6
    )
    
    
    
    (53.6
    )
    
    
    (53.4
    )Proceeds from sale of common shares, net of underwriting
commissions and offering expenses of $20.2 million
    
    
    
    470.0
    
    
    
    
    
    
    
    
    Payment of debt issuance costs
    
    
    
    (16.8
    )
    
    
    
    
    
    
    
    Payment of Treasury rate lock upon settlement
    
    
    
    (73.9
    )
    
    
    
    
    
    
    
    Proceeds (payment) on termination of interest rate swaps
    
    
    
    (2.9
    )
    
    
    
    
    
    
    
    18.1Proceeds from the exercise of stock options
    
    
    
    15.4
    
    
    
    
    4.6
    
    
    
    8.6Total financing activities
    
    
    
    811.9
    
    
    
    
    (59.5
    )
    
    
    (30.4
    )Effect of exchange rate changes on cash
    
    
    
    25.9
    
    
    
    
    12.9
    
    
    
    11.3Net increase (decrease) in cash and short-term investments
    
    
    
    77.2
    
    
    
    
    (7.7
    )
    
    
    77.3Cash and short-term investments at the beginning of year
    
    
    
    258.7
    
    
    
    
    266.4
    
    
    
    189.1Cash and short-term investments at the end of year
    
    
    $
    335.9
    
    
    
    $
    258.7
    
    
    $
    266.4
 The accompanying notes are
an integral part of these consolidated financial statements. THE LUBRIZOL CORPORATION nn 31




---



##### 



Consolidated Statements of Shareholders Equity  Shareholders EquityNumber of
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherShares
    
    
    Common
    
    
    Retained
    
    
    Comprehensive(In Millions)
    
    
    Outstanding
    
    
    Shares
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBALANCE, JANUARY 1, 2002
    
    
    
    51.2
    
    
    $
    109.7
    
    
    $
    763.3
    
    
    $
    (99.8
    )
    
    $
    773.2Comprehensive income:Net income 2002
    
    
    
    
    
    
    
    
    
    
    
    118.5
    
    
    
    
    
    
    
    118.5Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.7
    
    
    
    21.7Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140.2Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    (53.5
    )
    
    
    
    
    
    
    (53.5
    )Deferred stock compensation
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Common shares  treasury:Shares issued upon exercise of
stock options and awards
    
    
    
    0.3
    
    
    
    8.8
    
    
    
    
    
    
    
    
    
    
    
    8.8BALANCE, DECEMBER 31, 2002
    
    
    
    51.5
    
    
    
    119.0
    
    
    
    828.3
    
    
    
    (78.1
    )
    
    
    869.2Comprehensive income:Net income 2003
    
    
    
    
    
    
    
    
    
    
    
    90.8
    
    
    
    
    
    
    
    90.8Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42.1
    
    
    
    42.1Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    132.9Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    (53.6
    )
    
    
    
    
    
    
    (53.6
    )Deferred stock compensation
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    1.1Common shares  treasury:Shares issued upon exercise of
stock options and awards
    
    
    
    0.1
    
    
    
    3.7
    
    
    
    
    
    
    
    
    
    
    
    3.7BALANCE, DECEMBER 31, 2003
    
    
    
    51.6
    
    
    
    123.8
    
    
    
    865.5
    
    
    
    (36.0
    )
    
    
    953.3Comprehensive income:Net income 2004
    
    
    
    
    
    
    
    
    
    
    
    93.5
    
    
    
    
    
    
    
    93.5Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51.5
    
    
    
    51.5Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145.0Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    (61.6
    )
    
    
    
    
    
    
    (61.6
    )Common shares  issued in public offerings
    
    
    
    14.7
    
    
    
    470.0
    
    
    
    
    
    
    
    
    
    
    
    470.0Deferred stock compensation
    
    
    
    
    
    
    
    3.4
    
    
    
    
    
    
    
    
    
    
    
    3.4Common shares  treasury:Shares issued upon exercise of
stock options and awards
    
    
    
    0.5
    
    
    
    13.4
    
    
    
    
    
    
    
    
    
    
    
    13.4BALANCE, DECEMBER 31, 2004
    
    
    
    66.8
    
    
    $
    610.6
    
    
    $
    897.4
    
    
    $
    15.5
    
    
    $
    1,523.5
 The accompanying notes are
an integral part of these consolidated financial statements. 32nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements(In Millions Except Per-Share Data)
 Note 1  NATURE OF OPERATIONS The Lubrizol Corporation is a specialty chemical
company that produces and supplies technologies to the
global transportation, industrial and consumer markets.
These technologies include lubricant additives for
engine oils, other transportation-related fluids and
industrial lubricants, as well as additives for
gasoline and diesel fuel. In addition, the company
makes ingredients and additives for personal care
products and pharmaceuticals; specialty materials,
including plastics technology; performance coatings in
the form of specialty resins and additives; and
additives for the food and beverage industry. On June 3, 2004, the company consummated its acquisition of
Noveon International, Inc. (Noveon International). As a result of
this acquisition, the company reorganized its product lines into
two operating and reporting segments: Lubricant Additives and
Specialty Chemicals. Refer to Note 14 for a further description
of the nature of the companys operations, the product lines
within each of the operating segments, segment
operating income and related financial disclosures for the
reportable segments. Note 2  SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATIONThe consolidated financial
statements include the accounts of The Lubrizol
Corporation and its consolidated subsidiaries. The
company consolidates certain entities in which it owns
less than a 100% equity interest if it is either deemed
to be the primary beneficiary in a variable interest
entity, as defined in Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities or where
its ownership interest is at least 50% and the company
has effective management control. The equity method of
accounting is applied to non-consolidated entities in
which the company can exercise significant influence
over the entity with respect to its operations and
major decisions. The book value of investments carried
on the equity method was $5.6 million at both December
31, 2004 and 2003. Investments carried at cost were
$1.8 million and $0.7 million at December 31, 2004 and
December 31, 2003, respectively. ESTIMATESThe preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of
America requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates. CASH EQUIVALENTSThe company invests its
excess cash in short-term investments with various
banks and financial institutions. Short-term
investments are cash equivalents, as they are part of
the cash management activities of the company and are
comprised of investments having maturities of three
months or less when purchased. INVENTORIESInventories are stated
at the lower of cost or market value. Cost of
inventories is determined by either the first-in, first-out (FIFO) method or the moving-average method,
except in the United States for chemical inventories,
which are primarily valued using the last-in, first-out (LIFO) method. The company accrues volume discounts on purchases
from vendors where it is probable that the required
volume will be attained and the amount can be
reasonably estimated. The company records the discount
as a reduction in the cost of the purchase (generally
raw materials), based on projected purchases over the
purchase agreement period. In November 2004, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 151,
Inventory Costs, to clarify the accounting for
abnormal amounts of idle facility expense, freight,
handling costs and wasted material. This standard
requires that such items be recognized as
current-period charges. The standard also establishes the concept of normal capacity and requires
the allocation of fixed production overhead to
inventory based on the normal capacity of the
production facilities. Any unallocated overhead must be
recognized as an expense in the period incurred. This
standard is effective for inventory costs incurred
starting January 1, 2006. The company does not believe
the adoption of this standard will have a material
impact on its financial position, results of
operations or cash flows. PROPERTY AND EQUIPMENTProperty and equipment are carried at
cost. Repair and maintenance costs are charged against
income while renewals and betterments are capitalized
as additions to the related assets. Costs incurred for
computer software developed or obtained for internal
use are capitalized for application development
activities and immediately expensed for preliminary
project activities or post-implementation activities.
Accelerated depreciation methods are used in computing
depreciation on certain machinery and equipment, which
comprised approximately 7% and 12% of the depreciable
assets at December 31, 2004 and 2003, respectively. The
remaining assets are depreciated using the
straight-line method. The estimated useful lives are 10
to 40 years for buildings and land and building
improvements and range from 3 to 20 years for machinery
and equipment. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETSThe company reviews the carrying value of its
long-lived assets, including property and equipment,
whenever events or changes in circumstances indicate
that the carrying value of the assets may not be
recoverable. An impairment loss may be recognized when
estimated undiscounted future cash flows expected to
result from the use of the asset, including
disposition, are less than the carrying value of the
asset. The measurement of the impairment loss to be
recognized is based on the difference between the fair
value and the carrying amounts of the assets. Fair
value is generally determined based on a discounted
cash flow analysis. In order to determine if an asset
has been impaired, assets are grouped and tested at the
lowest level for which identifiable, independent, cash
flows are available. THE LUBRIZOL
CORPORATION nn
33




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##### 



Notes To Financial Statements(In
Millions Except Per-Share Data)
 GOODWILL AND INTANGIBLE ASSETSGoodwill represents
the excess of purchase price and related costs over the
value assigned to the net tangible and identifiable
intangible assets of businesses acquired and, effective
January 1, 2002, is no longer amortized, in accordance
with SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill is tested for impairment annually,
and between annual tests if an event occurs or
circumstances change that indicate the carrying amount
may be impaired. The company has elected to perform its
annual tests for potential impairment of goodwill and
indefinite-lived intangible assets as of October 1st of
each year. Impairment testing is done at the reporting
unit level. An impairment loss generally would be
recognized when the carrying amount of the reporting units net
assets exceeds the estimated fair value of the reporting
unit. The estimated fair value of a reporting unit is
determined through a combination of discounted cash flow analysis and terminal value calculations. Intangible assets resulting from business
acquisitions, including customer lists, purchased
technology, trademarks, patents, land-use rights and
non-compete agreements, are amortized on a
straight-line method over periods ranging from 3 to 40
years. Under SFAS No. 142, intangible assets determined
to have indefinite lives are no longer amortized, but
are tested for impairment at least annually. As part of
the annual impairment test, the useful lives of the
non-amortized intangible assets are reviewed to
determine if the indefinite status remains
appropriate. DEFERRED FINANCING COSTSCosts incurred with
the issuance of debt and credit facilities are
capitalized and amortized over the life of the
associated debt as a component of interest expense
using the effective interest method of amortization. In
June 2004, the company initially financed the Noveon
International acquisition with a temporary bridge
facility. Fees associated with the bridge facility were
capitalized and amortized over the bridge financing
period. A total of $11.2 million was incurred in bridge
facility fees in June 2004. These fees were expensed
ratably through September 2004 when the bridge facility
was repaid in full. In September 2004, the company
incurred $16.8 million in debt issuance costs and fees
relating to the issuance of $1,150.0 million in senior
notes and debentures, and the new $1,075.0 million five-year credit facilities. Such costs are being
amortized under the effective interest method over the
respective terms of the debt. The net deferred financing costs were $20.9 million and $6.4 million at
December 31, 2004 and 2003, respectively. Amortization
expense recorded in 2004, 2003 and 2002 was $1.6
million, $1.3 million and $1.3 million, respectively. ENVIRONMENTAL LIABILITIESThe company
accrues for expenses associated with environmental
remediation obligations when such expenses are probable
and reasonably estimable, based upon current law and
existing technologies. These accruals are adjusted as
further information develops or circumstances change.
Costs of future expenditures for environmental
remediation obligations are not discounted to their
present value. SHARE REPURCHASESThe company uses the
par-value method of accounting for its treasury shares.
Under this method, the cost to reacquire shares in
excess of paid-in capital related to those shares is
charged against retained earnings. FOREIGN CURRENCY TRANSLATIONThe assets and liabilities of
the companys international subsidiaries are translated into
U.S. dollars at exchange rates in effect at the balance sheet date,
and revenues and expenses are translated at weighted-average exchange rates
in effect during the period. Unrealized translation adjustments are recorded
as a component of other comprehensive income in shareholders
equity, except for subsidiaries for which the functional currency is other than the
local currency, where translation adjustments are recognized in income.
Transaction gains or losses that arise from exchange rate changes on
transactions denominated in a currency other than the functional currency,
except those transactions that function as a hedge of an identifiable
foreign currency commitment or as a hedge of a foreign currency
investment, are included in income as incurred. REVENUE RECOGNITIONRevenues are recognized
at the time of shipment of products to customers, or at
the time of transfer of title if later and when
collection is reasonably assured. All amounts in a sales
transaction billed to a customer related to shipping and
handling are reported as revenues. Provisions for sales discounts and rebates to
customers are recorded, based upon the terms of sales
contracts, in the same period the related sales are
recorded, as a deduction to the sale. Sales discounts
and rebates are offered to certain customers to promote
customer loyalty and encourage greater product sales.
These rebate programs provide that upon the attainment
of pre-established volumes or the attainment of revenue
milestones for a specified period, the customer
receives credits against purchases. The company
estimates the provision for rebates based on the specific terms in each agreement at the time of shipment and an
estimate of the customers achievement of the respective revenue milestones. COMPONENTS OF COST OF SALESCost of sales is
comprised of raw material costs including freight and
duty, inbound handling costs associated with the receipt
of raw materials, direct production, maintenance and
utility costs, plant and engineering overhead, terminals
and warehousing costs, and outbound shipping and
handling costs. RESEARCH, TESTING AND DEVELOPMENTResearch,
testing and development costs are expensed as incurred.
Research and development expenses, excluding testing,
were $108.3 million in 2004, $93.9 million in 2003 and
$93.5 million in 2002. Costs to acquire in-process
research and development (IPR&D) projects that have no
alternative future use and that have not yet reached
technological feasibility at the date of acquisition are
expensed upon acquisition. INCOME TAXESThe
company provides for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. SFAS No.
109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the financial statement
carrying amounts and the tax bases of the assets and
liabilities. PER SHARE AMOUNTSNet income per share is
computed by dividing net income by average common shares
outstanding during the period, including contingently
issuable shares. Net income per diluted share includes
the dilutive impact resulting from outstanding stock
options and stock awards. Per share amounts are computed
as follows: 34 nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED
 2004
    
    
    
    2003
    
    
    2002Numerator:Income before cumulative effect of change
in accounting principle
    
    
    $
    93.5
    
    
    
    $
    90.8
    
    
    $
    126.3Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    (7.8
    )Net income
    
    
    $
    93.5
    
    
    
    $
    90.8
    
    
    $
    118.5Denominator:Weighted-average common
shares outstanding
    
    
    
    55.7
    
    
    
    
    51.7
    
    
    
    51.5Dilutive effect of stock options and awards
    
    
    
    0.3
    
    
    
    
    0.2
    
    
    
    0.3Denominator for net income
per share, diluted
    
    
    
    56.0
    
    
    
    
    51.9
    
    
    
    51.8Basic net income per share:Income before cumulative effect of change
in accounting principle
    
    
    $
    1.68
    
    
    
    $
    1.76
    
    
    $
    2.45Net income per share, basic
    
    
    $
    1.68
    
    
    
    $
    1.76
    
    
    $
    2.30Diluted net income per share:Income before cumulative effect of change
in accounting principle
    
    
    $
    1.67
    
    
    
    $
    1.75
    
    
    $
    2.44Net income per share, diluted
    
    
    $
    1.67
    
    
    
    $
    1.75
    
    
    $
    2.29
 Weighted-average shares issuable upon the
exercise of stock options that were excluded from the
diluted earnings per share calculations because they
were antidilutive were 1.1 million in 2004, 2.5 million
in 2003 and 2.4 million in 2002. ACCOUNTING FOR DERIVATIVE INSTRUMENTSDerivative financial instruments are recognized on the
balance sheet as either assets or liabilities and are
measured at fair value. Derivatives that are not hedges
are adjusted to fair value through income. Depending
upon the nature of the hedge, changes in fair value of
the derivative are either offset against the change in
fair value of assets, liabilities or firm commitments
through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings.
The ineffective portion of a derivatives change in value is
immediately recognized in earnings.
The company only uses derivative financial instruments
to manage well-defined interest rate, foreign currency
and commodity price risks. The company does not use
derivatives for trading purposes. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIESLiabilities for costs associated with exit or
disposal activities are recognized and measured
initially at fair value when the liability is incurred
pursuant to the requirements of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which became effective for the company for
exit or disposal activities initiated after December
31, 2002. GUARANTEESFIN No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others requires the disclosure of any
guarantees existing prior to January 1, 2003 and the
recognition of a liability for any guarantees entered
into or modified on or after that date. The company
does not have any material guarantees within the scope
of FIN 45. STOCK-BASED COMPENSATIONThe company
currently uses the intrinsic value method to account
for employee stock options. The following table shows
the pro forma effect on net income and earnings per
share if the company had applied the fair-value
recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee
compensation. 2004
    
    
    
    2003
    
    
    2002Reported net income
    
    
    $
    93.5
    
    
    
    $
    90.8
    
    
    $
    118.5Plus: Stock-based employee compensation
(net of tax) included in net income
    
    
    
    2.1
    
    
    
    
    0.3
    
    
    
    0.1Less: Stock-based employee compensation
(net of tax) using the fair-value method
    
    
    
    (6.0
    )
    
    
    
    (4.4
    )
    
    
    (6.1
    )Pro forma net income
    
    
    $
    89.6
    
    
    
    $
    86.7
    
    
    $
    112.5Reported net income per share, basic
    
    
    $
    1.68
    
    
    
    $
    1.76
    
    
    $
    2.30Pro forma net income per share, basic
    
    
    $
    1.61
    
    
    
    $
    1.68
    
    
    $
    2.18Reported net income per share, diluted
    
    
    $
    1.67
    
    
    
    $
    1.75
    
    
    $
    2.29Pro forma net income per share, diluted
    
    
    $
    1.60
    
    
    
    $
    1.67
    
    
    $
    2.17
 In December 2004, the FASB issued SFAS No.
123(R), Share-Based Payment. This standard will
require compensation costs related to share-based
payment transactions to be recognized in the financial
statements. With limited exceptions, the amount of
compensation cost will be measured based on the
grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will
be remeasured each reporting period. Compensation cost
will be recognized over the period that an employee
provides service in exchange for the award. This
standard replaces SFAS No. 123 and supersedes
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and applies
to all awards granted, modified, repurchased or
cancelled after July 1, 2005. The company is currently
evaluating the provisions of this standard to determine
the impact on its consolidated financial statements.
It is, however, expected to reduce consolidated net
income. EXCHANGES
OF NONMONETARY ASSETS In December 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets. This
standard amended APB Opinion No. 29, Accounting for
Nonmonetary Transactions, to eliminate the exception
from fair value measurement for nonmonetary exchanges
of similar productive assets. This standard replaces
this exception with a general exception from fair value
measurement for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange
has no commercial substance if the future cash flows
of the entity are expected to change significantly as
a result of the exchange. This statement is effective
for all nonmonetary asset exchanges completed by the
company starting January 1, 2006. The company does not
believe the adoption of this standard will have a
material impact on its financial position, results of
operations or cash flows. ACCOUNTING FOR THE MEDICARE PRESCRIPTION DRUG
IMPROVEMENT AND MODERNIZATION ACTThe Medicare
Prescription Drug Improvement and Modernization Act of
2003 (the Act) was signed into law on December 8, 2003.
The Act introduces a prescription drug benefit under
Medicare (Medicare Part D), which will begin in 2006. THE LUBRIZOL
CORPORATION nn
35




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##### 



Notes To Financial Statements(In Millions Except Per-Share Data)
 The company has determined that its
postretirement health care plans provide prescription
drug benefits that will qualify for the federal
subsidy provided by the Act. As a result, the following
actuarially determined changes in accounting for this
plan have been recognized starting in the third quarter
of 2004 due to the legislation and in accordance with
the provisions of FASB Staff Position (FSP) FAS No.
106-2, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (FSP 106-2).  o
    The accumulated postretirement benefit
obligation determined as of January 1, 2004 has
been reduced by approximately $5.8 million. This
reduction caused an actuarial gain in accordance
with FSP 106-2.o
    The effect of the above gain is to reduce
the annual amortization of unrecognized actuarial
loss by approximately $0.4 million.o
    The interest and service cost components
of the related periodic expense for fiscal year
2004 have been reduced by approximately $0.3
million. For 2004, annual net periodic postretirement
benefit expense has been reduced by approximately $0.7
million in the aggregate as a result of this benefit. RECLASSIFICATIONSCertain
prior period amounts have been reclassified to conform
to the current year presentation. Note 3  ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION On June 3, 2004, we completed the acquisition of
Noveon International for cash of $920.2 million
(inclusive of $32.9 million in certain seller expenses)
plus transaction costs of $11.4 million and less cash
acquired of $103.0 million. In addition, the company
assumed $1,103.1 million of long-term indebtedness from
Noveon International. Noveon International had 2003
revenues of $1,135.9 million. With the acquisition of
Noveon International, the company has accelerated its
program to attain a substantial presence in the
personal care and coatings markets by adding a number
of higher-growth, industry-leading products under
highly recognizable brand names, including
Carbopol®, to the companys portfolio of lubricant and fuel additives, and consumer products.
Additionally, Noveon International has a number of
industry-leading specialty materials businesses,
including TempRite®chlorinated polyvinyl
chloride and Estane®thermoplastic
polyurethane. The acquisition and related costs were initially
financed with the proceeds of a $2,450.0 million
364-day bridge credit facility. Shortly after the
acquisition, the company repaid substantially all of
the assumed long-term debt of Noveon International with
proceeds of the temporary bridge loan. In addition, the
temporary bridge loan was repaid in full in September
2004 with the proceeds from the permanent financing
obtained by the issuance of senior notes, debentures
and equity and the borrowing of $575.0 million of bank
term loans, resulting in proceeds of approximately
$2,170.0 million, net of underwriting commissions,
discounts and transaction costs. Our consolidated balance sheet as of December 31,
2004 reflects the acquisition of Noveon International
under the purchase method of accounting. We recorded
the various assets acquired and liabilities assumed,
primarily working capital accounts, of Noveon
International at their estimated fair values that we
determined as of the acquisition date. The allocation
of the purchase price has not yet been finalized, but
is substantially complete, as of December 31, 2004.
While we do not expect any
material changes, the purchase price allocation
remains subject to revision through the end of the
allocation period ending in the second quarter of 2005.
Actuarial valuations were completed for the projected
pension and other post-employment benefit obligations
and were reflected in the purchase price allocation.
In addition, appraisals of long-lived assets and
identifiable intangible assets, including an
evaluation of IPR&D projects, have also been completed. The purchase price includes the estimated fair
value of IPR&D projects totaling $34.0 million that, as
of the acquisition date, had not yet reached
technological feasibility and had no alternative future
use. As a result, the full amount allocated to IPR&D
was expensed in 2004. There were nine projects acquired
in the Noveon International transaction in several
different product lines. The projects are at varying
stages of completeness ranging from the early
development stage to prototype testing. The company
estimates the need to spend approximately $3.0 million
to develop the acquired technology and expects the
benefit from these projects to be generated starting
in 2005 and continuing into 2006. The inventory step-up
to fair value totaled $24.2 million, of which $9.8
million was expensed in 2004. As the remaining step-up
relates to inventories accounted for on the LIFO method
of accounting, the company does not anticipate that
additional amounts of step-up will be expensed in the
near term. In the fourth quarter of 2004, the company
reflected a reduction in the long-lived assets as a
result of the completion of appraisals of these Noveon
International assets. In the fourth quarter, the
company recognized a $4.4 million reduction in
depreciation expense for the period from the
acquisition date to December 31, 2004 to reflect
changes in estimated fair values and asset lives for
the long-lived assets. The 2004 historical results only include revenues
and expenses of Noveon International since the date of
acquisition. The following unaudited pro forma operating data
is presented for the years ended December 31, 2004 and
2003 as if the Noveon International acquisition had been
completed at the beginning of each of the periods
presented below in the table. The pro forma data gives
effect to actual operating results prior to the
acquisition. Adjustments to cost of sales for the
inventory step-up charge, fixed asset depreciation,
intangible asset amortization, the write-off of
acquired IPR&D, interest expense, income taxes and
weighted-average common shares outstanding related to
the acquisition are reflected in the pro forma data.
In addition, the company assumed that the bridge loan
was replaced with the permanent long-term financing,
consisting of both debt and equity, at the end of the
fourth month in both 2004 and 2003. These pro forma
amounts do not purport to be indicative of the results
that would have actually been obtained if the
acquisition had occurred as of the beginning of the
periods presented or that may be obtained in the
future. 36 nn  THE LUBRIZOL CORPORATION




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##### 



Notes To Financial Statements CONTINUED
 2004
    
    
    
    2003Total revenues
    
    
    $
    3,697.1
    
    
    
    $
    3,182.2Income before cumulative effect of change
in accounting principle
    
    
    $
    110.6
    
    
    
    $
    66.2Net income
    
    
    $
    110.6
    
    
    
    $
    65.7Income per share before cumulative effect of
change in accounting principle, basic
    
    
    $
    1.79
    
    
    
    $
    1.07Income per share before cumulative effect of
change in accounting principle, diluted
    
    
    $
    1.78
    
    
    
    $
    1.07Net income per share, basic
    
    
    $
    1.79
    
    
    
    $
    1.07Net income per share, diluted
    
    
    $
    1.78
    
    
    
    $
    1.06
 In January 2004, the company completed the
acquisition of the coatings hyperdispersants business
from Avecia for cash totaling $129.7 million, including
transaction costs of $2.2 million. This business is
headquartered in Blackley, United Kingdom and develops,
manufactures and markets high-value additives that are
based on polymeric dispersion technology and used in
coatings and inks. These products enrich and strengthen
color while reducing production costs and solvent
emissions, and are marketed under the brand names
Sol-sperse®,
Solplus® and
Solthix®. Annualized revenues of this
business are approximately $50.0 million. The fair value of assets acquired and liabilities
assumed in 2004 acquisitions is as follows: Fair Value of Net Assets Acquired in 2004Noveon
    
    
    Hyper-International
    
    
    dispersants
    
    
    Other
    
    
    TotalReceivables
    
    
    $
    184.8
    
    
    $
    7.3
    
    
    $
    
    
    
    $
    192.1Inventories
    
    
    
    180.6
    
    
    
    10.5
    
    
    
    
    
    
    
    191.1Other current assets
    
    
    
    54.6
    
    
    
    
    
    
    
    
    
    
    
    54.6Property and equipment
    
    
    
    614.8
    
    
    
    5.5
    
    
    
    
    
    
    
    620.3Goodwill
    
    
    
    830.1
    
    
    
    76.4
    
    
    
    
    
    
    
    906.5Intangible assets
    
    
    
    378.8
    
    
    
    42.7
    
    
    
    
    
    
    
    421.5Other noncurrent assets
    
    
    
    17.3
    
    
    
    
    
    
    
    0.1
    
    
    
    17.4Total assets
    
    
    
    2,261.0
    
    
    
    142.4
    
    
    
    0.1
    
    
    
    2,403.5Accounts payable
    
    
    
    129.4
    
    
    
    7.0
    
    
    
    
    
    
    
    136.4Accrued expenses
    
    
    
    107.0
    
    
    
    
    
    
    
    
    
    
    
    107.0Current and long-term debt
    
    
    
    1,103.1
    
    
    
    
    
    
    
    
    
    
    
    1,103.1Noncurrent liabilities
    
    
    
    92.9
    
    
    
    5.7
    
    
    
    
    
    
    
    98.6Total liabilities
    
    
    
    1,432.4
    
    
    
    12.7
    
    
    
    
    
    
    
    1,445.1Increase in net assets
from acquisitions
    
    
    $
    828.6
    
    
    $
    129.7
    
    
    $
    0.1
    
    
    $
    958.4
 In 2003, the company completed two
acquisitions in the Specialty Chemicals segment for
cash of $68.6 million. In July 2003, the company
purchased the product lines of a silicones business
from BASF, which expanded the foam control additives
business to approximately $40.0 million in annual
revenues. Assets acquired from BASF included customer
lists, certain trademarks, manufacturing technology and
other related intellectual property specifically
developed for
silicone products in the North America region and finished goods inventory. Silicones are used in the
manufacture of sealants, caulks and water-proofing
products. Historical annual revenues for these silicone
products approximate $6.0 million. In September 2003,
the company completed an acquisition of a selected
personal care ingredients business from Amerchol
Corporation, a subsidiary of The Dow Chemical Company.
Products from this business go into a wide range of end
uses, including skin care and hair conditioners.
Products include methyl glucoside derivatives, lanolin
derivatives and PromulgenTMpersonal care
ingredients. Annualized revenues of this acquisition
were approximately $30.0 million. The fair value of assets acquired and liabilities
assumed in 2003 acquisitions is as follows: Fair Value of Net AssetsAcquired in 2003Receivables
    
    
    $
    0.4Inventories
    
    
    
    7.8Property and equipment
    
    
    
    1.8Goodwill
    
    
    
    36.2Intangible assets
    
    
    
    23.4Other assets
    
    
    
    0.2Total assets
    
    
    
    69.8Accrued expenses
    
    
    
    1.0Deferred income taxes  noncurrent
    
    
    
    0.2Total liabilities
    
    
    
    1.2Increase in net assets from acquisitions
    
    
    $
    68.6
 Note 4  INVENTORIES 2004
    
    
    
    2003Finished products
    
    
    $
    311.2
    
    
    
    $
    150.7Products in process
    
    
    
    75.9
    
    
    
    
    62.3Raw materials
    
    
    
    153.1
    
    
    
    
    78.9Supplies and engine test parts
    
    
    
    28.5
    
    
    
    
    20.0Total inventory
    
    
    $
    568.7
    
    
    
    $
    311.9
 Inventories on the LIFO method were 37% and
24% of consolidated inventories at December 31, 2004
and 2003, respectively. The current replacement cost of
these inventories exceeded the LIFO cost at December
31, 2004 and 2003 by $80.5 million and $57.2 million,
respectively. During 2003, some inventory quantities were
reduced, resulting in a liquidation of certain LIFO
inventory quantities carried at lower costs in prior
years as compared with costs at December 31, 2003. The
effect of this liquidation increased income before
taxes by $0.6 million. THE LUBRIZOL
CORPORATION nn 37




---



##### 



Notes To Financial Statements(In Millions Except Per-Share Data)
 Note 5  GOODWILL & INTANGIBLE ASSETS GoodwillEffective January 1, 2002, the
company adopted SFAS No. 142, pursuant to which
goodwill is no longer amortized but rather is reviewed
for impairment annually or more frequently if
impairment indicators arise. The company performed the
transitional impairment review of goodwill as of
January 1, 2002. This evaluation indicated that
goodwill recorded in the advanced fluid systems
operating segment (a separate operating segment prior
to the reorganization of the companys operating segments in 2004) was impaired as of that
date. The economic conditions at the time of impairment
testing, including declining revenues, reduced the
estimated future expected performance of this operating
segment, which included the equipment businesses the
company acquired in fluid metering and particulate
traps. Accordingly, the company recognized a
transitional impairment charge of $7.8 million in 2002.
This non-cash charge was recorded as a cumulative
effect of a change in accounting principle in the
consolidated statement of income in 2002. There was no
tax benefit associated with this charge. No impairment of goodwill was identified in
connection with the 2004 and 2003 tests performed
annually as of October 1st. The carrying amount of
goodwill by reporting segment is as follows: Lubricant
    
    
    SpecialtyAdditives
    
    
    Chemicals
    
    
    TotalBalance, January 1, 2003
    
    
    $
    95.8
    
    
    $
    72.6
    
    
    $
    168.4Goodwill acquired
    
    
    
    
    
    
    
    36.2
    
    
    
    36.2Translation & other adjustments
    
    
    
    3.5
    
    
    
    0.6
    
    
    
    4.1Balance, December 31, 2003
    
    
    
    99.3
    
    
    
    109.4
    
    
    
    208.7Goodwill acquired
    
    
    
    
    
    
    
    906.5
    
    
    
    906.5Translation & other adjustments
    
    
    
    1.6
    
    
    
    37.0
    
    
    
    38.6Balance, December 31, 2004
    
    
    $
    100.9
    
    
    $
    1,052.9
    
    
    $
    1,153.8
 Intangible AssetsPursuant to SFAS No. 142,
indefinite-lived intangible assets are no longer
amortized but rather are reviewed annually or more
frequently if impairment indicators arise. The
companys indefinite-lived assets consist primarily of
trademarks. The company assesses the indefinite-lived
trademarks for impairment separately from goodwill. As
part of the annual test, the useful lives of the
non-amortized trademarks are also reviewed to determine
if the indefinite status remains appropriate. After
considering the expected use of the trademarks and
reviewing any legal, regulatory, contractual,
obsolescence, demand, competitive or other economic
factors that could limit the useful lives of the
trademarks, in accordance with SFAS No. 142, the
company determined that the trademarks had indefinite
lives. No impairment of the non-amortized trademarks
was identified in connection with the 2004 and 2003
tests performed annually as of October 1st. Excluding the non-amortized trademarks, the
intangible assets are amortized over the lives of the
agreements or other periods of value, which range
between 3 and 40 years. The following table shows the components of
identifiable intangible assets as of December 31, 2004
and 2003: 2004
    
    
    
    2003Gross
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    
    Amount
    
    
    AmortizationAmortized
intangible assets:Customer lists
    
    
    $
    151.9
    
    
    $
    6.4
    
    
    
    $
    3.3
    
    
    $
    0.3Technology
    
    
    
    144.4
    
    
    
    25.4
    
    
    
    
    38.7
    
    
    
    18.3Trademarks
    
    
    
    24.4
    
    
    
    2.3
    
    
    
    
    2.2
    
    
    
    1.1Patents
    
    
    
    13.2
    
    
    
    1.5
    
    
    
    
    1.0
    
    
    
    0.3Land-use rights
    
    
    
    7.1
    
    
    
    0.8
    
    
    
    
    7.1
    
    
    
    0.6Non-compete
agreements
    
    
    
    8.9
    
    
    
    3.8
    
    
    
    
    6.9
    
    
    
    2.0Other
    
    
    
    11.3
    
    
    
    0.9
    
    
    
    
    10.7
    
    
    
    0.4Total amortized
intangible assets
    
    
    
    361.2
    
    
    
    41.1
    
    
    
    
    69.9
    
    
    
    23.0Non-amortized
intangible assets:Non-amortized
trademarks
    
    
    
    117.0
    
    
    
    
    
    
    
    
    15.5
    
    
    
    Total
    
    
    $
    478.2
    
    
    $
    41.1
    
    
    
    $
    85.4
    
    
    $
    23.0
 Excluding the impact of further
acquisitions, estimated annual intangible amortization
expense for the next five years will approximate $25.6
million in 2005, $25.4 million in 2006, $23.9 million
in 2007, $22.4 million in 2008 and $20.6 million in
2009. The fair value of intangible assets acquired in
2004 and 2003 are shown below by major asset class. The
intangible assets will be amortized over periods
ranging from 3 to 20 years. Fair Value of AssetsNoveon
    
    
    Hyper-
    
    
    
    2004
    
    
    
    2003International
    
    
    dispersants
    
    
    
    Total
    
    
    
    TotalAmortized intangible assets:Customer lists
    
    
    $
    120.7
    
    
    $
    24.0
    
    
    
    $
    144.7
    
    
    
    $
    0.2Technology
    
    
    
    105.7
    
    
    
    
    
    
    
    
    105.7
    
    
    
    
    7.2Trademarks
    
    
    
    22.2
    
    
    
    
    
    
    
    
    22.2
    
    
    
    
    Patents
    
    
    
    
    
    
    
    11.6
    
    
    
    
    11.6
    
    
    
    
    Non-compete agreements
    
    
    
    2.0
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    1.4Other
    
    
    
    34.0
    
    
    
    0.1
    
    
    
    
    34.1
    
    
    
    
    5.4Total amortized
intangible assets
    
    
    
    284.6
    
    
    
    35.7
    
    
    
    
    320.3
    
    
    
    
    14.2Non-amortized
intangible assets:Non-amortized trademarks
    
    
    
    94.2
    
    
    
    7.0
    
    
    
    
    101.2
    
    
    
    
    9.2Total
    
    
    $
    378.8
    
    
    $
    42.7
    
    
    
    $
    421.5
    
    
    
    $
    23.4
 The Noveon International purchase price
included the estimated fair value of research and
development projects totaling $34.0 million that, as of
the acquisition date, had not reached technological
feasibility and had no future alternative use. As a
result, the full amount was expensed in 2004. This
amount is reflected in the table above as an other
amortized intangible asset. 38nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED
 The weighted-average amortization periods for intangible
assets acquired in 2004 and 2003 are as follows: 2004
    
    2003Amortized intangible assets:Customer lists
    
    
    16
    
    years
    
    5
    
    yearsTechnology
    
    
    
    15
    
    
    
    
    19Trademarks
    
    
    
    15
    
    
    
    
    Patents
    
    
    
    9
    
    
    
    
    Non-compete agreements
    
    
    
    4
    
    
    
    
    5Other
    
    
    
    3
    
    
    
    
    20Total
    
    
    
    15
    
    
    
    
    18
 Note 6  SHORT-TERM
AND LONG-TERM DEBT The companys debt is comprised of the following at December 31, 2004 and 2003: 2004
    
    
    
    2003Short-term debt consists of:Yen denominated, at weighted-average rates
of 0.6% and 0.8%
    
    
    $
    7.8
    
    
    
    $
    2.8Current portion of long-term debt
    
    
    
    0.4
    
    
    
    
    0.1Total
    
    
    $
    8.2
    
    
    
    $
    2.9Long-term debt consists of:5.875% notes, due 2008, including a fair value adjustment of $4.8 million for unrealized gain on derivative
hedge instruments in 2004 and remaining unamortized gain on termination of swaps of $10.7 million
and $13.4 million in 2004 and 2003, respectively
    
    
    $
    215.5
    
    
    
    $
    213.44.625%
notes, due 2009, net of original issue discount of $0.3 million and
fair value adjustment of $0.1 million for unrealized loss on
derivative hedge instruments
    
    
    
    399.6
    
    
    
    
    5.5% notes, due 2014, net of original issue discount
of $2.9 million
    
    
    
    447.1
    
    
    
    
    7.25% debentures, due 2025
    
    

    
    100.0
    
    
    
    
    100.06.5% debentures, due 2034, net of original issue
discount of $5.0 million
    
    
    
    295.0
    
    
    
    
    Debt supported by long-term banking arrangements:Term loans, at LIBOR plus 1.25%
(3.7% at December 31, 2004)
    
    
    
    500.0
    
    
    
    
    Commercial paper, at a weighted-average rate of 1.1%
    
    
    
    
    
    
    
    
    50.0Marine terminal refunding revenue bonds, at 1.3%
    
    
    
    
    
    
    
    
    18.4Other
    
    
    
    7.3
    
    
    
    
    5.01,964.5
    
    
    
    
    386.8Less current portion
    
    
    
    0.4
    
    
    
    
    0.1Total
    
    
    $
    1,964.1
    
    
    
    $
    386.7
 The scheduled principal payments for all
outstanding debt are $8.2 million in 2005, $45.0
million in 2006, $57.6 million in 2007, $257.7 million
in 2008, $745.0 million in 2009 and $851.6 million
thereafter. In September 2004, the company issued senior
unsecured notes and debentures having an aggregate
principal amount of $1,150.0 million including: $400.0
million 4.625% notes due October
1, 2009; $450.0 million 5.5% notes due October 1, 2014;
and $300.0 million 6.5% debentures due October 1, 2034.
The price to the public was 99.911% per 2009 note,
99.339% per 2014 note and 98.341% per 2034 debenture.
The resulting original issue discount from the issuance
of these notes and debentures of $8.3 million was
recorded as a reduction of the underlying debt
issuances and is being amortized over the life of the
debt using the effective interest method. Interest is
payable semi-annually on April 1 and October 1 of each
year, beginning April 1, 2005. The notes and debentures
have no sinking fund requirement, but are redeemable,
in whole or in part, at the option of the company. The company's
wholly owned direct and indirect
domestic subsidiaries guarantee the notes and
debentures on an unsecured and unsubordinated basis.
The proceeds from these notes and debentures were used
to repay a portion of the 364-day credit facility that
was utilized to bridge finance the Noveon
International acquisition. Including debt issuance costs,
original issue discounts and losses on Treasury rate
lock agreements, the 2009 notes, 2014 notes and 2034
debentures have effective annualized interest rates of
approximately 5.2%, 6.2% and 6.7%, respectively, with a
weighted-average interest rate for the aggregate
issuances of approximately 6.0%. In August 2004, the company entered into a new five-year $1,075.0 million unsecured bank credit
agreement consisting of: $575.0 million in term loans
and a $500.0 million committed revolving credit
facility. This credit agreement permits the company to
borrow at variable rates based upon the U.S. prime rate
or LIBOR plus a specified spread. The spread is
dependent on the company's long-term unsecured senior debt rating from
Standard and Poor's and Moody's Investor Services. Each of the
company's wholly owned direct and indirect
domestic subsidiaries unconditionally guarantees all of
the obligations under the credit agreement. In
September 2004, the company borrowed $575.0 million in
term loans, the proceeds of which were used to repay a
portion of the 364-day credit facility used to bridge
finance the Noveon International acquisition.
Principal on the term loans is due quarterly in equal
installments of $14.4 million beginning March 31, 2005,
with any remaining unpaid balance due in September
2009. The loans are prepayable at any time without
penalty, and prepayments are applied in forward order
of maturity. In the fourth quarter of 2004, the
company prepaid $75.0 million, and, as a result, the
next required principal payment on the term loans is
due in June 2006. There were no outstanding revolving
credit facility borrowings as of December 31, 2004. In May 2004, the company obtained a 364-day credit
facility of $2,450.0 million for the purpose of bridge
financing the Noveon International acquisition. This
credit facility enabled the company to borrow at or
below the U.S. prime rate. In June 2004, the company
borrowed $1,797.0 million to finance the Noveon
International acquisition and repay a portion of the
assumed Noveon International debt. In addition, in July
2004, the company borrowed $175.0 million to repay the
outstanding seller notes also assumed as part of the
Noveon International acquisition. The company repaid
the bridge credit facility in September 2004 with
proceeds from the equity issuance, $1,150.0 in notes
and debentures and $575.0 million in bank term loans.
The company cancelled the bridge credit facility
effective September 28, 2004. THE LUBRIZOL CORPORATION nn 39




---



##### 



Notes To Financial Statements(In
Millions Except Per-Share Data)
 In addition, the company had a committed
revolving credit facility of $350.0 million with an
original expiration date of July 17, 2006. The company
repaid all outstanding borrowings and cancelled this
credit facility on September 28, 2004. Immediately
prior to cancellation, there were outstanding
borrowings under this facility of $75.0 million, the
proceeds of which were used to fund the repayment of
previously outstanding commercial paper and marine
terminal refunding revenue bonds, and liabilities
associated with the termination of various floating-to-fixed rate swaps. This credit facility
permitted the company to borrow at or below the U.S.
prime rate. This facility also permitted the company to
refinance beyond one year $350.0 million of debt,
which by its terms is due within one year. As a result,
the company classified as long-term, at December 31,
2003, the portion of commercial paper borrowings
expected to remain outstanding throughout the following
year and the amount due under the marine terminal
refunding revenue bonds, whose bondholders had the
right to put the bonds back to the company. In May 2000, the company borrowed $18.4 million
through the issuance of marine terminal refunding
revenue bonds, the proceeds of which were used to repay
previously issued marine terminal refunding revenue
bonds. The bonds had a stated maturity of July 1, 2018;
however, the company called the bonds, at par,
effective June 1, 2004. In November 1998, the company issued notes having
an aggregate principal amount of $200.0 million. The
notes are unsecured, senior obligations of the company
that mature on December 1, 2008, and bear interest at
5.875% per annum, payable semi-annually on June 1 and
December 1 of each year. The notes have no sinking fund
requirement but are redeemable, in whole or in part, at
the option of the company. The companys wholly owned direct and indirect domestic
subsidiaries guarantee the notes and debentures on an
unsecured and unsubordinated basis. The company
incurred debt issuance costs aggregating $10.5 million,
including a loss of $6.5 million related to closed
Treasury rate lock agreements originally entered into
as a hedge against changes in interest rates relative
to the anticipated issuance of these notes. The company has debentures outstanding, issued in
June 1995, in an aggregate principal amount of $100.0
million. These debentures are unsecured, senior
obligations of the company that mature on June 15,
2025, and bear interest at an annualized rate of 7.25%,
payable semi-annually on June 15 and December 15 of
each year. The debentures are not redeemable prior to
maturity and are not subject to any sinking fund
requirements. The company's wholly owned direct and indirect domestic
subsidiaries guarantee the notes and debentures on an
unsecured and unsubordinated basis. In November 2004, the company entered into
interest rate swap agreements that effectively convert
the interest on $200.0 million of outstanding 4.625%
notes due 2009 to a variable rate of six-month LIBOR
plus 40 basis points. In June 2004, the company entered
into interest rate swap agreements that effectively
convert the interest on $200.0 million of outstanding
5.875% notes due 2008 to a variable rate of six-month
LIBOR plus 111 basis points. In addition, the company
has an interest rate swap agreement, which expires in
October
2006, that exchanges variable-rate interest obligations
on a notional principal amount of Japanese yen 500.0
million for a fixed rate of 2.0%. This interest rate
swap is designated as a cash-flow hedge. The company also had interest rate swap
agreements, with an original expiration date of March
2005, that exchanged variable-rate interest obligations
on a notional principal amount of $50.0 million for a
fixed rate of 7.6%. In April 2004, the company
terminated these interest rate swap agreements (see
Note 7). In July 2002, the company terminated its interest
rate swap agreements expiring December 2008, which
converted fixed-rate interest on $100.0 million of its

5.875% debentures to a variable rate. In terminating
the swaps, the company received cash of $18.1 million,
which is being amortized as a reduction of interest
expense through December 1, 2008, the due date of the
underlying debt. Gains and losses on terminations of
interest rate swap agreements designated as fair value
hedges are deferred as an adjustment to the carrying
amount of the outstanding obligation and amortized as
an adjustment to interest expense related to the
obligation over the remaining term of the original
contract life of the terminated swap agreement. In the
event of early extinguishment of the outstanding
obligation, any unamortized gain or loss from the swaps
would be recognized in the consolidated statement of
income at the time of such extinguishment. In 2002, the
company recorded a $17.3 million unrealized gain, net
of accrued interest, on the termination of the interest
rate swaps as an increase in the underlying long-term
debt. The remaining unrealized gain was $10.7 million
and $13.4 million at December 31, 2004 and 2003,
respectively. Interest paid, net of amounts capitalized,
amounted to $80.0 million, $26.1 million and $23.8
million during 2004, 2003 and 2002, respectively. The
company capitalizes interest on qualifying capital projects. The amount of interest
capitalized during 2004, 2003 and 2002 amounted to $0.6
million, $0.2 million and zero, respectively. Note 7  FINANCIAL INSTRUMENTS The company has various financial instruments,
including cash and short-term investments, investments in
nonconsolidated companies, foreign currency forward
contracts, commodity forward contracts, interest rate swaps
and short-term and long-term debt. The company has
determined the estimated fair value of these financial
instruments by using available market information and
generally accepted valuation methodologies. The use of
different market assumptions or estimation methodologies
could have a material effect on the estimated fair
value amounts. The estimated fair value of the companys
 debt instrument at December 31, 2004 and 2003 approximated $1,966.0 million and $424.9 million, compared with
the carrying value of $1,972.3 million and $389.6 million,
respectively. The company is exposed to market risk from changes
in interest rates. The companys policy is to manage interest expense using a mix of fixed- and
variable-rate debt. To manage this mix in a cost-efficient manner, the company may enter into interest rate
swaps in which the company agrees to exchange, at
specified intervals, the difference between fixed and
variable interest amounts calculated by 40nn  THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED
 reference to an agreed-upon notional principal amount.
Interest payments receivable and payable under the
terms of the interest rate swap agreements are accrued
over the period to which the payment relates and the
net difference is treated as an adjustment of interest
expense related to the underlying liability. In November 2004, the company entered into
interest rate swap agreements that effectively convert
the interest on $200.0 million of outstanding 4.625%
notes due 2009 to a variable rate of six-month LIBOR
plus 40 basis points. The fair value of the interest
rate swaps included in long-term debt was $(0.1)
million at December 31, 2004. In June 2004, the company
entered into interest rate swap agreements that
effectively convert the interest on $200.0 million of
outstanding 5.875% notes due 2008 to a variable rate of
six-month LIBOR plus 111 basis points. The fair value
of the interest rate swaps included in long-term debt
was $4.8 million at December 31, 2004. These swaps are
designated as fair-value hedges of underlying fixed-rate debt obligations and are recorded as an
increase in noncurrent assets and long-term debt. These
interest rate swaps qualify for the short-cut method
for assessing hedge effectiveness per SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Changes in fair value of the swaps are
offset by the change in fair value of the underlying
debt. As a result, there was no impact to earnings in
2004 due to hedge ineffectiveness. The company also has an interest rate swap
agreement that exchanges variable-rate interest
obligations for a fixed rate on a notional principal
amount of Japanese yen 500.0 million. At December 31, 2003, the company had interest
rate swap agreements, with an original expiration date
of March 2005, that exchanged variable-rate interest
obligations on a notional principal amount of $50.0
million for a fixed rate of 7.6%. After the
announcement of the Noveon International acquisition,
the companys long-term debt and commercial paper credit ratings were
downgraded. The credit rating change eliminated the companys
access to the commercial paper market. As a result, in April 2004, the
company terminated these interest rate swap agreements,
which resulted in a $2.9 million pre-tax charge
recognized in the second quarter of 2004. The fair
values of these swaps at December 31, 2003, were an
unrealized loss of $3.5 million. Prior to their
termination, these swaps were designated as cash flow
hedges of underlying variable-rate debt obligations and
were recorded as a noncurrent liability. The
adjustments to record the net changes in fair value
during 2003 of $2.2 million ($1.4 million net of tax)
were recorded in other comprehensive income.
Ineffectiveness was determined to be immaterial in
2003. In July 2002, the company terminated its interest
rate swap agreements expiring December 2008, which
converted fixed-rate interest on $100.0 million of 5.875%
debentures to a variable rate (see Note 6). In June 2004, the company entered into several
Treasury rate lock agreements with an aggregate
notional principal amount of $900.0 million, all
maturing September 30, 2004, whereby the company had
locked in Treasury rates relating to a portion of the
then anticipated public debt securities issuance. These
rate locks were designated as cash-flow hedges of the forecasted
semi-annual interest payments associated with the
expected debt issuance. In September 2004, the company
incurred a pre-tax loss on the termination of these
agreements in an aggregate amount of $73.9 million.
Gains and losses on terminations of Treasury rate lock
agreements designated as cash-flow hedges are deferred
and amortized as an adjustment to interest expense over
the life of the corresponding debt issuance using the
effective interest method. The unamortized balance of
the Treasury rate lock recorded in accumulated other
comprehensive income as of December 31, 2004 was $47.4
million, net of tax. The company is exposed to the effect of changes in
foreign currency rates on its earnings and cash flow
as a result of doing business internationally. In
addition to working capital management, pricing and
sourcing, the company selectively uses foreign currency
forward contracts to lessen the potential effect of
currency changes. The maximum amount of foreign
currency forward contracts outstanding at any one time
was $140.8 million in 2004, $130.9 million in 2003 and
$14.8 million in 2002. At December 31, 2004, the
company had short-term forward contracts to buy or sell
currencies at various dates during 2005 for $27.6
million. At December 31, 2003, the company had
short-term forward contracts to buy or sell currencies
at various dates during 2004 for $128.0 million, most
of which related to the company acquisition of the additives
business of Avecia. Changes in the fair
value of these contracts are recorded in other income.
The fair value of these instruments at December 31,
2004 and 2003, and the related adjustments recorded in
other income, were unrealized gains of $0.7 million and
$1.6 million, respectively. The company is exposed to market risk from changes
in commodity prices. In 2003, the company modified its
commodity hedging program policy to include the use of
financial instruments to manage the cost of natural
gas and electricity purchases. These contracts
have been designated as cash-flow hedges and,
accordingly, any effective unrealized gains or losses
on open contracts are recorded in other comprehensive income, net of related tax
effects. At December 31, 2004 and 2003, the notional
amounts of open contracts totaled $3.3 million and $5.4
million, respectively. A hedge liability of $0.1
million ($0.1 million net of tax) was recorded at
December 31, 2004, and a hedge asset of $0.1 million
($0.1 million net of tax) was recorded on December 31,
2003, which represents the net unrealized losses or
gains based upon current futures prices at that date.
Ineffectiveness was determined to be immaterial in 2004
and 2003. Contract maturities are less than 12 months.
As such, the company expects that all of these losses
will be reclassified into earnings within the next 12
months. Note 8  OTHER BALANCE SHEET INFORMATION Receivables:
    
    
    2004
    
    
    
    2003Customers
    
    
    $
    519.8
    
    
    
    $
    284.6Affiliates
    
    
    
    9.1
    
    
    
    
    4.8Other
    
    
    
    53.9
    
    
    
    
    35.2$
    582.8
    
    
    
    $
    324.6
 THE LUBRIZOL CORPORATION nn 41




---



##### 



Notes To Financial Statements(In Millions Except Per-Share Data)
 Receivables are net of allowance for doubtful accounts of $11.0 million and $4.2 million
at December 31, 2004 and 2003, respectively. Property and equipment - at cost:
    
    
    2004
    
    
    
    2003Land and improvements
    
    
    $
    171.3
    
    
    
    $
    121.6Buildings and improvements
    
    
    
    494.1
    
    
    
    
    363.9Machinery and equipment
    
    
    
    1,960.6
    
    
    
    
    1,420.2Construction in progress
    
    
    
    105.3
    
    
    
    
    54.9$
    2,731.3
    
    
    
    $
    1,960.6
 Depreciation and amortization of property and equipment was $136.7 million, $95.5
million and $91.6 million in 2004, 2003, and 2002, respectively. Accrued expenses and other current liabilities:
    
    
    2004
    
    
    
    2003Employee compensation
    
    
    $
    109.7
    
    
    
    $
    59.8Income taxes
    
    
    
    55.9
    
    
    
    
    18.7Taxes other than income
    
    
    
    35.2
    
    
    
    
    15.5Sales allowances and rebates
    
    
    
    32.2
    
    
    
    
    11.9Restructuring charges
    
    
    
    8.8
    
    
    
    
    12.4Other
    
    
    
    67.7
    
    
    
    
    35.2$
    309.5
    
    
    
    $
    153.5
 Dividends payable at December 31, 2004 and 2003 were $17.4 million and $13.4 million,
respectively, and are included in accounts payable in the consolidated balance sheet. Noncurrent liabilities:
    
    
    2004
    
    
    
    2003Pensions
    
    
    $
    96.9
    
    
    
    $
    48.6Employee benefits
    
    
    
    45.8
    
    
    
    
    32.8Other
    
    
    
    28.0
    
    
    
    
    18.9$
    170.7
    
    
    
    $
    100.3
 Note 9  SHAREHOLDERS EQUITY The company has
147.0 million authorized shares consisting of 2.0 million shares of serial
preferred stock, 25.0 million shares of serial preference shares and 120.0 million common shares, each of
which is without par value. Common shares outstanding exclude common shares held in treasury of 19.4 million
and 34.6 million at December 31,  2004 and 2003, respectively. In
September 2004, the company issued and sold 13.4 million common shares at a price of $33.25
per share. Net proceeds from the sale of common shares were
$427.2 million and were used primarily to
repay the temporary bridge loan that financed a portion of the Noveon International acquisition. In
October 2004, the company issued an additional 1.3 million
common shares at a price of $33.25 per share due
to the exercise of the over-allotment option relating to the
September common share offering. This issuance
generated net proceeds to the company of $42.8 million, which
were utilized to prepay $40.0 million in
term loan debt. The
company has a shareholder rights plan under which one right to buy one-half common share has
been distributed for each common share held. The rights may become
exercisable under certain circumstances
involving actual or potential acquisitions of 20% or  more of the
common shares by a person or affiliated persons who acquire stock
without complying with the requirements of the companys articles of
incorporation. The rights would entitle shareholders, other than this person or affiliated persons,
to purchase common shares of the company or of certain acquiring
persons at 50% of the then current market
value. At the option of the directors, the rights may be exchanged for common shares, and may be
redeemed in cash, securities or other consideration. The rights will expire in 2007 unless redeemed earlier. Accumulated other comprehensive income (loss) shown in the consolidated statements of shareholders equity at
December 31, 2004, 2003 and 2002 is comprised of the following: Foreign
    
    
    
    
    
    Unrealized
    
    
    Pension
    
    
    AccumulatedCurrency
    
    
    Treasury
    
    
    Gains (Losses)
    
    
    Plan
    
    
    OtherTranslation
    
    
    Rate
    
    
    on Interest
    
    
    Minimum
    
    
    ComprehensiveAdjustment
    
    
    Locks
    
    
    Rate Swaps
    
    
    Liability
    
    
    Income (Loss)Balance, January 1, 2002
    
    
    $
    (96.2
    )
    
    $
    
    
    
    $
    (2.4
    )
    
    $
    (1.2
    )
    
    $
    (99.8
    )Other comprehensive income (loss):Pre-tax
    
    
    
    44.2
    
    
    
    
    
    
    
    (1.2
    )
    
    
    (29.4
    )
    
    
    13.6Tax benefit (provision)
    
    
    
    (1.2
    )
    
    
    
    
    
    
    0.4
    
    
    
    8.9
    
    
    
    8.1Total
    
    
    
    43.0
    
    
    
    
    
    
    
    (0.8
    )
    
    
    (20.5
    )
    
    
    21.7Balance, December 31, 2002
    
    
    
    (53.2
    )
    
    
    
    
    
    
    (3.2
    )
    
    
    (21.7
    )
    
    
    (78.1
    )Other comprehensive income (loss):Pre-tax
    
    
    
    51.5
    
    
    
    
    
    
    
    2.2
    
    
    
    (12.0
    )
    
    
    41.7Tax benefit (provision)
    
    
    
    (2.4
    )
    
    
    
    
    
    
    (0.8
    )
    
    
    3.6
    
    
    
    0.4Total
    
    
    
    49.1
    
    
    
    
    
    
    
    1.4
    
    
    
    (8.4
    )
    
    
    42.1Balance, December 31, 2003
    
    
    
    (4.1
    )
    
    
    
    
    
    
    (1.8
    )
    
    
    (30.1
    )
    
    
    (36.0
    )Other comprehensive income (loss):Pre-tax
    
    
    
    97.5
    
    
    
    (72.9
    )
    
    
    3.2
    
    
    
    1.9
    
    
    
    29.7Tax benefit (provision)
    
    
    
    (1.9
    )
    
    
    25.5
    
    
    
    (1.1
    )
    
    
    (0.7
    )
    
    
    21.8Total
    
    
    
    95.6
    
    
    
    (47.4
    )
    
    
    2.1
    
    
    
    1.2
    
    
    
    51.5Balance, December 31, 2004
    
    
    $
    91.5
    
    
    $
    (47.4
    )
    
    $
    0.3
    
    
    $
    (28.9
    )
    
    $
    15.5
 42nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED
 Note 10  OTHER
INCOME (EXPENSE)  NET 2004
    
    
    
    2003
    
    
    2002Currency exchange/transaction
gain (loss)
    
    
    $
    6.2
    
    
    
    $
    3.5
    
    
    $
    (0.4
    )Equity earnings of
nonconsolidated companies
    
    
    
    0.8
    
    
    
    
    0.1
    
    
    
    0.9Other  net
    
    
    
    (2.1
    )
    
    
    
    (0.3
    )
    
    
    (1.7
    )$
    4.9
    
    
    
    $
    3.3
    
    
    $
    (1.2
    )
 Dividends received from the nonconsolidated companies
were $0.4 million in 2004, $1.0 million in 2003 and $2.7 million
in 2002. Note
11  INCOME TAXES
 Income before income taxes and cumulative effect of change in accounting principle consists of the following: 2004
    
    
    
    2003
    
    
    2002United States
    
    
    $
    37.8
    
    
    
    $
    39.3
    
    
    $
    95.5Foreign
    
    
    
    108.8
    
    
    
    
    89.8
    
    
    
    84.9Total
    
    
    $
    146.6
    
    
    
    $
    129.1
    
    
    $
    180.4
 The provision for income taxes consists of the following: 2004
    
    
    
    2003
    
    
    2002Current:United States
    
    
    $
    5.3
    
    
    
    $
    6.1
    
    
    $
    14.8Foreign
    
    
    
    41.9
    
    
    
    
    30.7
    
    
    
    36.147.2
    
    
    
    
    36.8
    
    
    
    50.9Deferred:United States
    
    
    
    16.0
    
    
    
    
    3.0
    
    
    
    1.2Foreign
    
    
    
    (10.1
    )
    
    
    
    (1.5
    )
    
    
    2.05.9
    
    
    
    
    1.5
    
    
    
    3.2Total
    
    
    $
    53.1
    
    
    
    $
    38.3
    
    
    $
    54.1
 The differences between the provision for income taxes at
the U.S. statutory rate and the tax shown in the consolidated statements of income are summarized as follows: 2004
    
    
    
    2003
    
    
    2002Tax at statutory rate of 35%
    
    
    $
    51.3
    
    
    
    $
    45.2
    
    
    $
    63.1U.S. and foreign tax on
foreign dividends
    
    
    
    13.8
    
    
    
    
    3.5
    
    
    
    (0.9
    )U.S. tax benefit on exports
    
    
    
    (1.8
    )
    
    
    
    (3.7
    )
    
    
    (4.1
    )Technology donation
    
    
    
    
    
    
    
    
    
    
    
    
    (5.2
    )Untaxed translation (gains) losses
    
    
    
    (2.5
    )
    
    
    
    (5.4
    )
    
    
    1.6Foreign rate differences
    
    
    
    (7.8
    )
    
    
    
    (0.3
    )
    
    
    0.5Other - net
    
    
    
    0.1
    
    
    
    
    (1.0
    )
    
    
    (0.9
    )Provision for income taxes
    
    
    $
    53.1
    
    
    
    $
    38.3
    
    
    $
    54.1
 The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities at December
31 are as follows: 2004
    
    
    
    2003Deferred tax assets:Accrued compensation and benefits
    
    
    $
    120.7
    
    
    
    $
    65.5Intercompany profit in inventory
    
    
    
    11.5
    
    
    
    
    8.7Net operating losses and tax credits
carried forward
    
    
    
    146.0
    
    
    
    
    2.8Other
    
    
    
    22.2
    
    
    
    
    5.0Total gross deferred tax assets
    
    
    
    300.4
    
    
    
    
    82.0Less valuation allowance
    
    
    
    (18.8
    )
    
    
    
    (1.9
    )Net deferred tax assets
    
    
    
    281.6
    
    
    
    
    80.1Deferred tax liabilities:Depreciation and other basis differences
    
    
    
    255.7
    
    
    
    
    104.6Foreign subsidiary and affiliate
undistributed earnings
    
    
    
    30.0
    
    
    
    
    6.1Other
    
    
    
    10.3
    
    
    
    
    6.9Total gross deferred tax liabilities
    
    
    
    296.0
    
    
    
    
    117.6Net deferred tax liabilities
    
    
    $
    14.4
    
    
    
    $
    37.5
 At December 31, 2004, the company had
federal, state and foreign net operating loss
carryforwards (NOLs) and federal tax credit
carryforwards. The companys U.S. federal NOLs and credits totaled $326.0 million and $6.7 million,
respectively. The federal benefit of these NOLs and
tax credits expires in 2021 through 2024. The company
had $15.6 million of state tax benefit from NOLs, of
which $6.1 million expires in 2005 through 2020 and
$9.5 million expires in 2020 through 2024. The company
had foreign NOLs of $38.2 million, of which $16.0
million expire in 2006-2019 and $22.2 million have no
expiration. A valuation allowance totaling $18.8 million has
been recorded to reduce foreign and state deferred tax
assets, related primarily to the NOLs, to the amounts
expected to be realized. No valuation allowance has
been recognized against the U.S. federal NOLs or tax
credits because management believes that it is more
likely than not that the company will generate sufficient future taxable income during the carryforward
period to utilize them. Of the total $18.8 million valuation allowance,
$14.5 million is associated with deferred tax assets
established in purchase price accounting for Noveon
International. Any future reversal of the valuation
allowance that was recorded in purchase price
accounting would reduce goodwill. The net change in the total valuation allowance
for the years ended December 31, 2004, 2003 and 2002
was an increase of $16.9 million, a decrease of $1.7
million and a decrease of $0.7 million, respectively. The American Jobs Creation Act of 2004 (the Jobs
Act), enacted on October 22, 2004, provides for a
temporary 85% dividends received deduction on certain
foreign earnings repatriated during a one-year period,
which, for the company, will be 2005. The deduction
would result in an approximate 5.25% federal tax on the
repatriated earnings. To qualify for the deduction, the
earnings must be reinvested in the United States
pursuant to a domestic reinvestment THE LUBRIZOL CORPORATION nn 43




---



##### 



Notes
To Financial Statements(In Millions Except Per-Share Data)
 plan approved by a companys chief executive (or
comparable) officer and board of directors. Certain
other criteria in the Jobs Act must be satisfied as
well. As of December 31, 2004, the company has
established a deferred tax liability of $21.2 million
for the planned 2005 repatriation of foreign earnings.
Of this amount, $11.7 million of deferred taxes was
provided in 2004, $3.2 million was provided in prior
years and $6.3 million was established in the purchase
price accounting of Noveon International, because the
company did not intend Noveon Internationals
pre-acquisition earnings to be indefinitely reinvested
overseas. U.S. income taxes and foreign withholding taxes
are not provided on the remaining undistributed
earnings of foreign subsidiaries, which are considered
to be indefinitely reinvested in the operations of
such subsidiaries. The amount of these earnings was
approximately $454.6 million at December 31, 2004.
Determination of the net amount of unrecognized U.S.
income tax with respect to these earnings is not
practicable. Income taxes paid during 2004, 2003 and 2002 were
$34.6 million, $50.8 million and $48.8 million,
respectively. Note 12  PENSION, PROFIT SHARING AND OTHER POSTRETIREMENT BENEFIT PLANS The company has noncontributory defined benefit
pension plans covering most employees. Pension benefits
under these plans are based on years of service and
the employees compensation. The companys funding
policy in the United States is to contribute amounts to
satisfy the funding standards of the Internal Revenue
Code of 1986, as amended, and the Employee Retirement
Income Security Act of 1974, as amended, and elsewhere
to fund amounts in accordance with local regulations.
Several of the companys smaller defined benefit
plans are not funded. The investment objective of the funded pension
plans sponsored by the company and certain subsidiaries
is to assure the timely payment of promised benefits
at a minimum cost consistent with prudent standards of
investment, given the strength of the company and the
subsidiaries, their earnings record, the adequacy of
each plans funding and the age of each entitys work
force. The plans utilize diversified investment
portfolios and seek to earn returns consistent with a
reasonable level of risk. The long-term expected return
on plan assets is based upon each entitys investment
allocation and anticipated returns for specific
investment classes. During 2004, the company maintained
the expected long-term rate of return assumption for
the U.S. plans of 9.0% (7.82% on a weighted average
basis for all plans) to determine the net periodic
pension cost. As long-term asset allocation is recognized as the
primary determinant of performance, the sponsoring
entities generally utilize the following asset
allocation targets to achieve their plan investment
objectives: 70% equity securities and 30% debt
securities. The non-U.S. plans have a slightly higher
allocation to debt securities than the U.S. plans. As
appropriate, allocation targets and ranges may be
established for various subcategories. Allocations are
reviewed periodically and adjusted as necessary. From
the date of acquisition through
the end of December 2004, the Noveon International U.S.
pension plans assets had an investment mix that
approximated 50% in both equity and debt securities.
However, in January 2005, the company transferred the
Noveon International U.S. pension plans assets into
one master-trust arrangement with the Lubrizol U.S.
pension plans existing prior to the Noveon
International acquisition. As a result, the combined
assets will be subject to the same overall investment
strategy and management going forward. Approved pension plan investments include, but are
not limited to: equities, fixed-income securities,
real estate, venture capital, cash and cash equivalent
instruments and such other instruments (including
mutual fund investments), as the company may approve.
Investments in tax-exempt securities, commodities and
options, other than covered calls, and the use of
leverage are prohibited. Plan investment managers may
use derivatives to hedge currency risk and to keep
fully invested. Any other use of derivative instruments
must be approved by the sponsoring entity. The market values of pension plan assets are
compared periodically to the value of plan benefit
obligations. The future value of assets, as calculated
based on the expected long-term rate of return, are
also compared to expected future plan benefit
distributions and contributions to determine the sufficiency
of expected plan funding levels. Investment
asset allocations are revised as appropriate. Plan assets are invested principally in marketable
equity securities and fixed income instruments. The
allocation of pension plan assets by major asset class
is shown below on a weighted-average basis: Percentage of Plan Assetsat December 312004
    
    
    
    2003Asset Category:Equity securities
    
    
    
    70
    %
    
    
    
    72
    %Debt securities
    
    
    
    27
    %
    
    
    
    23
    %Real estate
    
    
    
    3
    %
    
    
    
    5
    %Total
    
    
    
    100
    %
    
    
    
    100
    %
 No equity or debt securities of the company or any
of its subsidiaries were included in the plans assets
for 2004 and 2003, respectively. The company also provides certain non-pension
postretirement benefits, primarily health care and
life insurance benefits, for retired employees. Most
of the legacy Lubrizol full-time employees in the
United States may become eligible for health care
benefits upon retirement. Full-time employees who
retired on or after January 1, 1992 are also eligible
for life insurance benefits. Participants contribute a
portion of the cost of these benefits. The companys
non-pension postretirement benefit plans are not
funded. The change in the projected benefit obligation
and plan assets for 2004 and 2003 and the amounts
recognized in the consolidated balance sheets at
December 31 of the companys defined benefit pension
and non-pension postretirement plans are as follows: 44nn THE LUBRIZOL CORPORATION




---



##### 



Notes
To Financial Statements CONTINUED
 Pension Plans
    
    
    
    Other Benefits2004
    
    
    
    2003
    
    
    
    2004
    
    
    
    2003Change in projected benefit obligation:Projected benefit obligation at beginning of year
    
    
    $
    419.3
    
    
    
    $
    355.9
    
    
    
    $
    113.2
    
    
    
    $
    106.5Service cost
    
    
    
    22.0
    
    
    
    
    14.5
    
    
    
    
    2.5
    
    
    
    
    2.0Interest cost
    
    
    
    27.9
    
    
    
    
    22.3
    
    
    
    
    6.9
    
    
    
    
    7.0Plan
participants contributions
    
    
    
    0.4
    
    
    
    
    0.3
    
    
    
    
    2.9
    
    
    
    
    2.5Actuarial loss (gain)
    
    
    
    37.0
    
    
    
    
    26.7
    
    
    
    
    (0.5
    )
    
    
    
    6.5Currency exchange rate change
    
    
    
    17.0
    
    
    
    
    17.0
    
    
    
    
    0.4
    
    
    
    
    0.7Amendments
    
    
    
    0.9
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    (5.4
    )Settlements
    
    
    
    (39.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisitions/divestitures
    
    
    
    84.9
    
    
    
    
    (0.1
    )
    
    
    
    3.9
    
    
    
    
    Benefits paid
    
    
    
    (11.5
    )
    
    
    
    (18.2
    )
    
    
    
    (6.8
    )
    
    
    
    (6.6
    )Benefit obligation at end of year
    
    
    
    558.5
    
    
    
    
    419.3
    
    
    
    
    122.5
    
    
    
    
    113.2Change in plan assets:Fair value of plan assets at beginning of year
    
    
    
    306.5
    
    
    
    
    249.1
    
    
    
    
    
    
    
    
    
    Actual return on plan assets
    
    
    
    39.5
    
    
    
    
    53.7
    
    
    
    
    
    
    
    
    
    Acquisitions/divestitures
    
    
    
    32.8
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    Employer contributions
    
    
    
    19.9
    
    
    
    
    10.6
    
    
    
    
    3.9
    
    
    
    
    4.1Settlements
    
    
    
    (37.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
participants contributions
    
    
    
    0.4
    
    
    
    
    0.3
    
    
    
    
    2.9
    
    
    
    
    2.5Currency exchange rate change
    
    
    
    10.5
    
    
    
    
    11.1
    
    
    
    
    
    
    
    
    
    Adjustments
    
    
    
    (3.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Benefits paid
    
    
    
    (11.5
    )
    
    
    
    (18.2
    )
    
    
    
    (6.8
    )
    
    
    
    (6.6
    )Fair value of plan assets at end of year
    
    
    
    357.2
    
    
    
    
    306.5
    
    
    
    
    
    
    
    
    
    Reconciliation of funded status:Plan assets less than projected
benefit obligation
    
    
    
    (201.3
    )
    
    
    
    (112.8
    )
    
    
    
    (122.5
    )
    
    
    
    (113.2
    )Unrecognized net loss
    
    
    
    104.4
    
    
    
    
    89.4
    
    
    
    
    46.1
    
    
    
    
    49.2Unrecognized net transition obligation (asset)
    
    
    
    0.7
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    Unrecognized prior service cost
    
    
    
    23.3
    
    
    
    
    24.2
    
    
    
    
    (33.7
    )
    
    
    
    (39.8
    )Net amounts recognized
    
    
    $
    (72.9
    )
    
    
    $
    0.7
    
    
    
    $
    (110.1
    )
    
    
    $
    (103.8
    )Net amounts recognized in the consolidated balance sheets:Prepaid benefit cost
    
    
    $
    0.6
    
    
    
    $
    5.4
    
    
    
    $
    
    
    
    
    $
    Accrued benefit liability
    
    
    
    (120.6
    )
    
    
    
    (53.1
    )
    
    
    
    (110.1
    )
    
    
    
    (103.8
    )Accumulated other comprehensive income
    
    
    
    41.6
    
    
    
    
    43.5
    
    
    
    
    
    
    
    
    
    Intangible asset
    
    
    
    5.5
    
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    Net amounts recognized
    
    
    $
    (72.9
    )
    
    
    $
    0.7
    
    
    
    $
    (110.1
    )
    
    
    $
    (103.8
    )
 The accumulated benefit obligation for all
defined benefit pension plans was $425.3 million and
$329.4 million at December 31, 2004 and 2003,
respectively. The projected benefit obligation and
fair value of plan assets for pension plans with
projected benefit obligations in excess of plan assets
were $548.9 million and $347.0 million, respectively,
at December 31, 2004, and $414.5 million and $301.5
million, respectively, at December 31, 2003. The
accumulated benefit obligation and fair value of plan
assets for pension plans with accumulated benefit
obligations in excess of plan assets were $234.7
million and $155.8 million, respectively, at December
31, 2004 and $149.8 million and $98.5 million,
respectively, at December 31, 2003. The company amortizes gains and losses, as well as
the effects of changes in actuarial assumptions and
plan provisions, over the average remaining service
period of participating employees expected to receive
benefits under the plans. Net periodic pension cost of the companys defined benefit pension plans consists of: 2004
    
    
    
    2003
    
    
    2002Service cost  benefits earned during period
    
    
    $
    22.0
    
    
    
    $
    14.5
    
    
    $
    12.6Interest cost on projected benefit obligation
    
    
    
    27.9
    
    
    
    
    22.3
    
    
    
    20.5Expected return on plan assets
    
    
    
    (27.4
    )
    
    
    
    (26.4
    )
    
    
    (26.7
    )Amortization of prior service costs
    
    
    
    1.6
    
    
    
    
    3.3
    
    
    
    3.2Amortization of initial net asset
    
    
    
    (0.7
    )
    
    
    
    (0.7
    )
    
    
    (0.7
    )Recognized net actuarial (gain) loss
    
    
    
    3.8
    
    
    
    
    0.8
    
    
    
    (0.5
    )Settlement loss
    
    
    
    7.7
    
    
    
    
    0.3
    
    
    
    Net periodic pension cost
    
    
    $
    34.9
    
    
    
    $
    14.1
    
    
    $
    8.4
 The company recorded a $7.7 million
settlement charge in 2004 primarily associated with
workforce reductions announced in June 2004 in the
United States. Net non-pension postretirement benefit cost consists of: 2004
    
    
    
    2003
    
    
    2002Service cost  benefits earned during period
    
    
    $
    2.5
    
    
    
    $
    2.0
    
    
    $
    1.6Interest cost on projected benefit obligation
    
    
    
    6.9
    
    
    
    
    7.0
    
    
    
    6.5Amortization of prior service costs
    
    
    
    (6.1
    )
    
    
    
    (5.6
    )
    
    
    (5.1
    )Recognized net actuarial loss
    
    
    
    2.5
    
    
    
    
    2.2
    
    
    
    1.7Net non-pension postretirement benefit cost
    
    
    $
    5.8
    
    
    
    $
    5.6
    
    
    $
    4.7
 The companys actuarial assumptions used to
determine benefit obligations and earnings effects for
its defined benefit pension and non-pension
postretirement plans are as follows: Pension Plans
    
    
    
    Other Benefits2004
    
    
    
    2003
    
    
    
    2004
    
    
    
    2003The weighted-average assumptions
used to determine benefit
obligations at December 31:Measurement date
    
    
    
    12/31/04
    
    
    
    
    12/31/03
    
    
    
    
    12/31/04
    
    
    
    
    12/31/03Discount rate
    
    
    
    5.74
    %
    
    
    
    5.88
    %
    
    
    
    6.20
    %
    
    
    
    6.20
    %Rate of compensation increase
    
    
    
    4.08
    %
    
    
    
    3.87
    %
    
    
    
    *
    
    
    
    
    *The weighted-average assumptions
used to determine net periodic
benefit cost for years ended
December 31:Discount rate
    
    
    
    5.94
    %
    
    
    
    6.34
    %
    
    
    
    6.24
    %
    
    
    
    6.70
    %Expected long-term return on
plan assets
    
    
    
    7.82
    %
    
    
    
    8.34
    %
    
    
    
    *
    
    
    
    
    *Rate of compensation increase
    
    
    
    3.86
    %
    
    
    
    3.78
    %
    
    
    
    *
    
    
    
    
    *
 *     Disclosure not applicable The following table shows the amounts the company
contributed to its postretirement plans in 2004 and
2003 and the expected contributions for 2005: Pension
    
    
    OtherEmployer contributions:
    
    Plans
    
    
    Plans
    
    
    Total2003
    
    
    $
    10.6
    
    
    $
    4.1
    
    
    $
    14.72004
    
    
    $
    19.9
    
    
    $
    3.9
    
    
    $
    23.82005 (expected)
    
    
    $
    30.9
    
    
    $
    4.9
    
    
    $
    35.8
 THE LUBRIZOL CORPORATION nn45




---



##### 



Notes
To Financial Statements(In
Millions Except Per-Share Data)
 Expected employer contributions for pension benefits in 2005 include $2.2 million for unfunded plans. The
expected contributions to these plans represent an
actuarial estimate of future assumed payments based on
historic retirement and payment patterns. Actual
amounts paid could differ from this estimate. Contributions by participants to the other benefit plans were $2.9 million and $2.5 million for the
years ending December 31, 2004 and 2003, respectively. The following table shows the benefits expected
to be paid in each of the next five years and the
aggregate benefits expected to be paid for the
subsequent five years: Pension
    
    
    Other
    
    
    TotalEstimated future benefit payments:
    
    Benefits
    
    
    Benefits
    
    
    Benefits2005
    
    
    $
    18.5
    
    
    $
    4.9
    
    
    $
    23.42006
    
    
    $
    19.7
    
    
    $
    4.8
    
    
    $
    24.52007
    
    
    $
    24.3
    
    
    $
    5.1
    
    
    $
    29.42008
    
    
    $
    24.6
    
    
    $
    5.3
    
    
    $
    29.92009
    
    
    $
    28.2
    
    
    $
    5.6
    
    
    $
    33.82010-2014
    
    
    $
    171.9
    
    
    $
    32.9
    
    
    $
    204.8
 The other benefits in the above table are
presented net of expected Medicare Part D subsidy
payments of zero in 2005, $0.5 million in 2006, $0.6
million in 2007, $0.7 million in 2008, $0.8 million in
2009 and $4.9 million in 2010-2014. The weighted average of the assumed health care
cost trend rates used in measuring the accumulated
postretirement benefit obligation for the companys
postretirement benefit plans at December 31, 2004 was
9.37% (7.98% at December 31, 2003), with subsequent
annual decrements to an ultimate trend rate of 4.74% by
2014. The assumed health care cost trend rates have a
significant effect on the amounts reported for the
health care plans. A one-percentage-point change in the
assumed health care cost trend rate would have the
following effects as of and for the year ended December
31, 2004: One-Percentage-PointIncrease
    
    
    
    DecreaseEffect on postretirement benefit obligation
    
    
    $
    18.9
    
    
    
    $
    (15.2
    )Effect on total service and interest
cost components
    
    
    $
    1.9
    
    
    
    $
    (1.4
    )
 The company also has defined contribution plans,
principally involving profit sharing plans and/or
401(k) savings plans, covering most employees in the
United States and at certain non-U.S. subsidiaries.
Expense for all defined contribution retirement plans
was $12.8 million in 2004, $9.5 million in 2003 and
$10.0 million in 2002. Note 13  LEASES The company has commitments under operating leases
primarily for office space, terminal facilities, land,
railcars and various computer and office equipment.
Rental expense was $26.4 million in 2004, $15.8 million
in 2003 and $15.6 million in 2002. Future minimum
rental commitments under operating leases having
initial or remaining non-cancelable lease terms
exceeding one year are $21.9 million in 2005, $14.8
million in 2006, $11.5 million in 2007, $7.3 million in
2008, $5.5 million in 2009 and $14.4 million
thereafter. Minimum rental commitments are net of
estimated credits for railcar mileage of
$0.6 million in 2005, $0.4 million in 2006, $0.3
million in 2007, $0.2 million in 2008, $0.1 million in
2009 and $0.1 million thereafter. Note 14  SEGMENT AND GEOGRAPHIC INFORMATION Beginning in the second quarter of 2004, the company
reorganized as a result of the Noveon International
acquisition into two operating and reporting segments:
Lubricant Additives and Specialty Chemicals. The
Lubricant Additives segment, also referred to as
Lubrizol Additives, represents 65% of the companys
2004 consolidated revenues and is comprised of the
companys previous businesses in fluid technologies
for transportation (FTT), advanced fluid systems,
emulsified products and the former industrial
additives product group of fluid technologies for
industry (FTI). The Specialty Chemicals segment, also
referred to as the Noveon segment, represents 35% of
the companys 2004 consolidated revenues and is
comprised of the businesses of the acquired Noveon
International and the former performance chemicals
group of FTI. Lubricant Additives consists of three product
lines: engine additives; specialty driveline and
industrial oil additives; and services and equipment.
Engine additives is comprised of additives for
lubricating engine oils, such as for gasoline, diesel,
marine and stationary gas engines and additive
components, additives for fuel products and refinery
and oil field chemicals and PuriNOxTMlow-emissions diesel fuel. In addition, this
product line sells additive components and viscosity
improvers within its lubricant and fuel additives
product areas. Specialty driveline and industrial oil
additives is comprised of additives for driveline oils,
such as automatic transmission fluids, gear oils and
tractor lubricants and industrial oil additives, such
as additives for hydraulic, grease and metalworking fluids, as well as compressor lubricants. Services and
equipment is comprised of fluid metering devices,
particulate emission trap devices, FluiPakTMsensor systems and outsourcing strategies for
supply chain and knowledge center management. Lubricant
Additives product lines are produced generally in
company-owned shared manufacturing facilities and sold
largely to a common customer base. The Specialty Chemicals segment consists of
consumer specialties, specialty materials and
performance coatings product lines. The consumer
specialties product line is characterized by global
production of acrylic thickeners, specialty monomers,
film formers, fixatives, emollients, silicones,
surfactants, botanicals, active pharmaceutical
ingredients and intermediates, process chemicals,
benzoate preservatives, fragrances, defoamers,
synthetic food dyes, natural colorants, rubber and
lubricant oxidants and rubber accelerators. The company
markets products in the consumer specialties product
line to the following primary end-use industries:
personal care, pharmaceuticals, textiles, food and
beverage, automotive and aerospace. The consumer
specialties products are sold to customers worldwide
and these customers include major manufacturers of
cosmetics, personal care products, water soluble
polymers, household products, soft drinks and food
products and major manufacturers in the automotive and
aerospace industries. The specialty materials product
line is
characterized by products such as chlorinated
polyvinyl chloride (CPVC) resins and compounds and is
also a producer of thermoplastic polyurethane (TPU)
and cross-linked polyethylene compounds (PEX). The 46nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED  company markets products of specialty materials through
the primary product category of specialty plastics.
Specialty materials products are sold to a diverse
customer base comprised of major manufacturers in the
construction, automotive, telecommunications,
electronics and recreation industries. The performance
coatings product line includes high-performance
polymers for specialty paper, printing and packaging,
industrial and architectural specialty coatings and
textile applications. The company markets the
performance coatings products through the primary
product categories of performance polymers and coatings
and textile performance chemicals. Performance coatings
products serve major companies in the specialty paper,
printing and packaging, paint and coatings, and textile
industries. The following table presents a summary of the
results of the companys reportable segments for the
years ended December 31, 2004, 2003 and 2002 based on
the current reporting structure. During 2004, the
company reclassified certain unallocated corporate
expenses to segment operating income, which previously
had been excluded from the previously disclosed segment
contribution income. Prior years have been restated to
reflect the new reporting classifications of products
between the two operating segments and the new definition of segment operating income. 2004
    
    
    
    2003
    
    
    2002Lubricant Additives:Revenues from external customers
    
    
    $
    2,038.8
    
    
    
    $
    1,798.9
    
    
    $
    1,798.2Equity earnings
    
    
    
    0.8
    
    
    
    
    0.1
    
    
    
    1.0Amortization of intangibles
    
    
    
    3.0
    
    
    
    
    3.0
    
    
    
    3.0Segment operating income
    
    
    
    244.3
    
    
    
    
    201.5
    
    
    
    235.2Segment total assets
    
    
    
    1,337.1
    
    
    
    
    1,168.1
    
    
    
    1,176.4Capital expenditures
    
    
    
    82.9
    
    
    
    
    74.6
    
    
    
    60.4Depreciation
    
    
    
    86.8
    
    
    
    
    85.0
    
    
    
    81.3Specialty Chemicals:Revenues from external customers
    
    
    $
    1,120.7
    
    
    
    $
    253.2
    
    
    $
    185.7Amortization of intangibles
    
    
    
    15.0
    
    
    
    
    1.9
    
    
    
    1.2Segment operating income
    
    
    
    85.6
    
    
    
    
    0.9
    
    
    
    0.4Segment total assets
    
    

    
    2,733.3
    
    
    
    
    403.6
    
    
    
    294.0Capital expenditures
    
    
    
    50.2
    
    
    
    
    13.9
    
    
    
    4.9Depreciation
    
    
    
    48.9
    
    
    
    
    9.4
    
    
    
    9.4Corporate:Total assets
    
    
    $
    495.9
    
    
    
    $
    370.6
    
    
    $
    389.7Capital expenditures
    
    
    
    0.1
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    1.0
    
    
    
    
    1.1
    
    
    
    0.9Reconciliation to consolidated income
before income taxes and cumulative
effect of change in accounting principle:Segment operating income
    
    
    $
    329.9
    
    
    
    $
    202.4
    
    
    $
    235.6Corporate expenses
    
    
    
    (44.1
    )
    
    
    
    (33.6
    )
    
    
    (36.4
    )Corporate other income (expense)
    
    
    
    5.7
    
    
    
    
    4.1
    
    
    
    (2.2
    )Write-off of acquired IPR&D
    
    
    
    (34.0
    )
    
    
    
    
    
    
    
    Restructuring charges
    
    
    
    (38.6
    )
    
    
    
    (22.5
    )
    
    
    Interest expense  net
    
    
    
    (72.3
    )
    
    
    
    (21.3
    )
    
    
    (16.6
    )Income before income taxes and
cumulative effect of change in
accounting principle
    
    
    $
    146.6
    
    
    
    $
    129.1
    
    
    $
    180.4
 The company primarily evaluates performance and
allocates 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 returns. The companys accounting
policies for its operating segments are the same as
those described in Note 2. Segment operating income
will reconcile to consolidated income before tax by
deducting the write-off of acquired IPR&D projects,
restructuring charges, net interest expense, corporate
expenses and corporate other income (expense) that are
not directly attributable to the operating segments. Revenues from external customers by product line are as follows: 2004
    
    
    
    2003
    
    
    2002Engine additives
    
    
    $
    1,222.9
    
    
    
    $
    1,127.4
    
    
    $
    1,159.9Specialty
driveline / industrial
oil additives
    
    
    
    743.2
    
    
    
    
    622.6
    
    
    
    606.6Services and equipment
    
    
    
    72.7
    
    
    
    
    48.9
    
    
    
    31.7Total Lubricant Additives
    
    
    
    2,038.8
    
    
    
    
    1,798.9
    
    
    
    1,798.2Consumer specialties
    
    
    
    481.7
    
    
    
    
    144.2
    
    
    
    101.4Performance coatings
    
    
    
    391.9
    
    
    
    
    109.0
    
    
    
    84.3Specialty materials
    
    
    
    247.1
    
    
    
    
    
    
    
    
    Total Specialty Chemicals
    
    
    
    1,120.7
    
    
    
    
    253.2
    
    
    
    185.7Total revenues from external customers
    
    
    $
    3,159.5
    
    
    
    $
    2,052.1
    
    
    $
    1,983.9
 Revenues are attributable to countries based on
the location of the customer. The United States is the
only country where sales to external customers comprise
in excess of 10% of the companys consolidated
revenues. Revenues from external customers by
geographic zone are as follows: 2004
    
    
    
    2003
    
    
    2002United States
    
    
    $
    1,347.0
    
    
    
    $
    820.5
    
    
    $
    815.0Other North America
    
    
    
    172.1
    
    
    
    
    93.7
    
    
    
    83.7Europe
    
    
    
    886.8
    
    
    
    
    602.6
    
    
    
    551.8Asia-Pacific / Middle East
    
    
    
    581.0
    
    
    
    
    404.1
    
    
    
    405.8Latin America
    
    
    
    172.6
    
    
    
    
    131.2
    
    
    
    127.6Total revenues from external customers
    
    
    $
    3,159.5
    
    
    
    $
    2,052.1
    
    
    $
    1,983.9
 The companys sales and receivables are
concentrated in the oil and chemical industries. Lubricant
Additives customers consist primarily of oil refiners
and independent oil blenders and are located in more
than 100 countries. The 10 largest customers, most of
which are international oil companies and a number of
which are groups of affiliated entities, comprised
approximately 38% of consolidated net sales in 2004,
52% of consolidated net sales in 2003 and 55% of
consolidated net sales in 2002. In 2004, there was no
single customer that accounted for more than 10% of
consolidated net sales. In 2003, the company had one
customer, predominantly within the Lubricant Additives
segment, that accounted for revenues of $217.6 million,
representing more than 10% of consolidated net sales.
In 2002, the company had two customers that accounted for
revenues of $229.7 million and $195.2 million,
respectively, individually representing more than 10%
of consolidated net sales. THE LUBRIZOL CORPORATION
nn 47




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##### 



Notes To Financial Statements(In Millions Except Per-Share Data)
 Segment assets include receivables, inventories
and long-lived assets including goodwill and intangible
assets. Corporate assets include cash and short-term
investments, investments accounted for on the cost
basis and other current and noncurrent assets. The companys principal long-lived assets are
located in the following countries at December 31: 2004
    
    
    
    2003
    
    
    2002United States
    
    
    $
    1,860.0
    
    
    
    $
    671.0
    
    
    $
    617.8Belgium
    
    
    
    402.0
    
    
    
    
    20.9
    
    
    
    15.3United Kingdom
    
    
    
    180.2
    
    
    
    
    71.8
    
    
    
    74.2France
    
    
    
    84.5
    
    
    
    
    77.9
    
    
    
    69.4Hong Kong
    
    
    
    83.2
    
    
    
    
    
    
    
    
    Germany
    
    
    
    65.3
    
    
    
    
    13.3
    
    
    
    12.3Other
    
    
    
    233.6
    
    
    
    
    106.2
    
    
    
    101.7Total long-lived assets
    
    
    $
    2,908.8
    
    
    
    $
    961.1
    
    
    $
    890.7
 Net income of non-United States subsidiaries was
$74.8 million in 2004, $61.1 million in 2003 and $41.2
million in 2002; dividends received from these
subsidiaries were $1.2 million, $28.0 million and $12.0
million, respectively. Note 15  STOCK
COMPENSATION PLANS The 1991 Stock Incentive Plan (1991 Plan) provided for
the granting of restricted and unrestricted shares and
options to buy common shares up to an amount equal to
1% of the
outstanding common shares at the beginning of any year,
plus any unused amount from prior years. Options are
intended either to qualify as incentive stock options
under the Internal Revenue Code or to be non-statutory
stock options not intended to so qualify. Under the
1991 Plan, options generally become exercisable 50% one
year after grant, 75% after two years, 100% after three
years and expire up to 10 years after grant. The 1991
Plan generally superseded the 1985 Employee Stock
Option Plan (1985 Plan), although options outstanding
under the 1985 Plan remain exercisable until their
expiration dates. The option price for stock options
under the 1985 Plan is the fair market value of the
shares on the date of grant. The option price for stock
options under the 1991 Plan is not less than the fair
market value of the shares on the date of grant. Both
plans permitted the granting of stock appreciation
rights in connection with the grant of options. In
addition, the 1991 Plan provided to each outside
director of the company an automatic annual grant of an
option to purchase 2,500 common shares, with terms
generally comparable to employee stock options. (All
references to share numbers in Note 15 are based on
actual share numbers and are not shown in millions.) Under the 1991 Plan, the company has granted
performance share stock awards to certain executive
officers. Common shares equal to the number of
performance share stock awards granted were to be
issued if the market price of the companys common
stock reached $45.00 per common share for 10
consecutive trading days, or on March 24, 2003,
whichever occurred first. Under certain conditions
such as retirement, a grantee of performance share
stock awards
could have been issued a pro-rata number of common
shares. The market value of the companys common shares
at date of grant of the performance share stock awards
was $33.45 per share (for 500 awards) in 2002. The
company recognized compensation expense related to
performance share stock awards ratably over the
estimated period of vesting. Compensation costs
recognized for performance share stock awards were less
than $0.1 million in 2003 and 2002. On March 24, 2003,
3,500 shares were issued and 57,250 shares were
deferred to the deferred compensation plan for officers. The company allocated 1,415 share units under
this plan in 2003, which represent quarterly dividends
paid on the companys shares. At December 31, 2004,
59,962 share units were outstanding. Compensation
expense recognized for the dividends on the deferred
shares was $0.1 million in each of 2004 and 2003. The 1991 Plan was terminated by the board of
directors with respect to future grants effective
November 15, 2004. Outstanding grants under the 1991
Plan will remain effective subject to their terms. Under a supplemental retirement plan, an account
for the participant is credited with 500 share units
each year and is credited with additional share units
for quarterly dividends paid on the companys shares.
When the participant retires, the company will issue
shares equal to
the number of share units in the participants
account or the cash equivalent. The company has
allocated 67, 567 and 546 share units under this plan
in 2004, 2003 and 2002, respectively. At December 31,
2004, 2,226 share units were outstanding. Compensation
costs recognized for this plan were less than $0.1
million in each of 2004, 2003 and 2002. For share units
attributable to grants credited after January 1, 2004,
the payment will be in cash. Under the deferred stock compensation plan for
outside directors, each nonemployee director received
500 share units on each October 1 and is credited with
additional share units for quarterly dividends paid on
the companys shares. When a participant ceases to be a
director, the company issues shares equal to the number
of share units in the directors account. The company
has allocated to nonemployee directors 1,351, 6,048
and 6,208 share units under this plan in 2004, 2003 and
2002, respectively. Director fee expense recognized for
share units was less than $0.1 million in 2004 and $0.2
million in each of 2003 and 2002. At December 31, 2004,
40,939 share units for nonemployee directors were
outstanding. No new grants will be made under this plan
after January 1, 2004. In addition, under a separate deferred
compensation plan for outside directors, the company
has allocated to nonemployee directors 569, 620 and 573
share units under this plan in 2004, 2003 and 2002,
respectively. These share units continue to accrue
quarterly dividends paid on the companys shares. When
a participant ceases to be a director, the company
issues shares equal to the number of share units in the
directors account. At December 31, 2004, 18,917 share
units for nonemployee directors were outstanding.
Director fee expense recognized for share units for
this plan was less than $0.1 million in each of 2004,
2003 and 2002. 48nn THE LUBRIZOL CORPORATION




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##### 



Notes
To Financial Statements CONTINUED
 Under the deferred compensation plan for executive
officers, participants may elect to defer any amount
of their variable pay. Deferred amounts are converted
into share units based on the current market price of
the companys shares. There is a 25% company match.
Additional share units are credited for quarterly
dividends paid on the companys shares. At the end of
the deferral period, which is at least three years, the
company issues shares equal to the number of share
units in the participants account. The company has
allocated to executive officers 16,743, 23,060 and
8,010 share units under this plan in 2004, 2003 and
2002, respectively. Compensation costs recognized for
share units were approximately $0.5 million in 2004,
$0.7 million in 2003 and $0.3 million in 2002. At
December 31, 2004, 71,857 share units for executive
officers were outstanding. For share units
attributable to company match credited after January 1,
2004, distributions will be made in cash. Under the 1991 Stock Plan, effective January 1,
2003, the company granted 15,000 restricted shares to
each of three executive officers. The shares will be
issued only if the executive remains an employee until
January 1, 2008. Also, effective January 1, 2003, the
company granted 5,000 restricted shares to one
executive officer, which would be issued only if the
executive remained with the company until January 1,
2008. On July 26, 2004, this grant was amended to issue
the shares if the executive remained employed until
July 29, 2004. The shares will be issued July 29, 2005.
There are no voting or dividend rights on the
restricted shares described in this paragraph unless
and until they are issued. The restricted shares stock
awards had a fair value of $25.83 at the date of grant.
The company recognizes compensation expense related to
restricted shares ratably over the estimated period of
vesting. Compensation costs recognized for restricted
share stock awards were approximately $0.3 million in
each of 2004 and 2003 and zero in 2002. Under the Long-Term Incentive Plan, dollar-based
target awards were determined by the organization and
compensation committee of the board of directors in
December 2002 and 2003 for the three-year performance
periods of 2003-2005 and 2004-2006, respectively. A
portion of the award was converted into a number of
share units based on the price of Lubrizol stock on the
date of the award. There are no voting or dividend
rights associated with the share units until the end of
the performance period and a distribution of shares, if
any, is made. The target awards correspond to a
pre-determined three-year earnings per share growth
rate target. Based on the awards granted for the
2003-2005 and 2004-2006 performance periods, the
company recognized compensation expense of $2.6 million
in 2004. The other portion of the award is a cash award
which is also determined for the same three-year
performance periods. Based on awards granted for these
performance periods, the company recognized
compensation expense of $5.1 million for the cash
awards in 2004. No expense was recorded in 2003 as the
company did not believe as of December 31, 2003 it was
probable that shares would have been issued or cash
awards would have been earned under the plan. Information regarding these option plans,
excluding the performance share stock awards, the
restricted share stock awards and the long-term
incentive plan stock awards, follows: Weighted-AverageShares
    
    
    Exercise PriceOutstanding, January 1, 2004
    
    
    
    5,393,042
    
    
    $
    31.28Granted
    
    
    
    508,896
    
    
    
    30.20Exercised
    
    
    
    (556,582
    )
    
    
    29.01Forfeited
    
    
    
    (320,208
    )
    
    
    36.44Outstanding, December 31, 2004
    
    
    
    5,025,148
    
    
    $
    31.09Options exercisable, December 31, 2004
    
    
    
    4,170,614
    
    
    $
    31.10Weighted-average fair value of options
granted during the year
    
    
    
    
    
    
    $
    6.50Outstanding, January 1, 2003
    
    
    
    5,272,723
    
    
    $
    31.38Granted
    
    
    
    525,401
    
    
    
    30.35Exercised
    
    
    
    (151,112
    )
    
    
    27.87Forfeited
    
    
    
    (253,970
    )
    
    
    33.60Outstanding, December 31, 2003
    
    
    
    5,393,042
    
    
    $
    31.28Options exercisable, December 31, 2003
    
    
    
    4,173,632
    
    
    $
    31.18Weighted-average fair value of options
granted during the year
    
    
    
    
    
    
    $
    6.78Outstanding, January 1, 2002
    
    
    
    4,827,266
    
    
    $
    30.74Granted
    
    
    
    949,102
    
    
    
    34.06Exercised
    
    
    
    (396,420
    )
    
    
    29.25Forfeited
    
    
    
    (107,225
    )
    
    
    34.11Outstanding, December 31, 2002
    
    
    
    5,272,723
    
    
    $
    31.38Options exercisable, December 31, 2002
    
    
    
    3,560,650
    
    
    $
    31.10Weighted-average fair value of options
granted during the year
    
    
    
    
    
    
    $
    8.99
 Information regarding the performance share stock awards follows: SharesOutstanding, January 1, 2003
    
    
    
    60,750Granted
    
    
    
    Forfeited
    
    
    
    Common shares issued/deferred
    
    
    
    (60,750
    )Outstanding, December 31, 2003
    
    
    
    Outstanding, January 1, 2002
    
    
    
    66,250Granted
    
    
    
    500Forfeited
    
    
    
    (918
    )Common shares issued
    
    
    
    (5,082
    )Outstanding, December 31, 2002
    
    
    
    60,750
 The weighted-average fair value per share was
$32.16 in 2002. Accounting principles generally accepted in the
United States encourage the fair-value method of
accounting for stock compensation plans under which
the value of stock-based compensation is estimated at the
date of grant using valuation formulas, but permit the
use of intrinsic-value accounting. The company accounts
for its stock compensation plans using the
intrinsic-value accounting method (measured as the
difference between the exercise price and the market
value of the stock at the measurement date). THE LUBRIZOL CORPORATION
nn 49




---



##### 



Notes To Financial Statements(In
Millions Except Per-Share Data)
 Disclosures under the fair-value method are
estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for
grants of stock options in the following years: 2004
    
    
    
    2003
    
    
    20021991 Plan:Risk-free interest rate
    
    
    
    3.7
    %
    
    
    
    3.9
    %
    
    
    5.2
    %Dividend yield
    
    
    
    3.5
    %
    
    
    
    3.4
    %
    
    
    3.1
    %Volatility
    
    
    
    24.0
    %
    
    
    
    24.0
    %
    
    
    24.0
    %Expected life (years)
    
    
    
    10.0
    
    
    
    
    10.0
    
    
    
    8.4Performance Share Plan:Risk-free interest rate
    
    
    
    n/a
    
    
    
    
    n/a
    
    
    
    2.4
    %Dividend yield
    
    
    
    n/a
    
    
    
    
    n/a
    
    
    
    3.1
    %Volatility
    
    
    
    n/a
    
    
    
    
    n/a
    
    
    
    24.0
    %Expected life (years)
    
    
    
    n/a
    
    
    
    
    n/a
    
    
    
    1.0Restricted Share Plan:Risk-free interest rate
    
    
    
    n/a
    
    
    
    
    2.7
    %
    
    
    n/aDividend yield
    
    
    
    n/a
    
    
    
    
    3.3
    %
    
    
    n/aVolatility
    
    
    
    n/a
    
    
    
    
    24.0
    %
    
    
    n/aExpected life (years)
    
    
    
    n/a
    
    
    
    
    5.0
    
    
    
    n/a
 If the fair-value method to measure compensation
cost for all of the above mentioned plans and awards
had been used, the compensation cost, which is required
to be charged against income would have been $6.0
million in 2004, $4.4 million in 2003 and $6.1 million
in 2002. See Note 2 for the pro forma presentation. The following table summarizes information about
stock options outstanding, excluding the performance
share stock awards, restricted share stock awards and
long-term incentive plan awards at December 31, 2004: Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Range of
    
    
    Number
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageExercise
    
    
    Outstanding
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable
    
    
    ExercisePrices
    
    
    at 12/31/04
    
    
    Life
    
    
    Price
    
    
    at 12/31/04
    
    
    Price$
    19 - $25
    
    
    
    216,411
    
    
    3.8
    years
    
    $
    21.35
    
    
    
    216,411
    
    
    $
    21.3525 -   31
    
    
    
    3,177,445
    
    
    
    6.0
    
    
    
    29.82
    
    
    
    2,494,670
    
    
    
    29.7031 -   38
    
    
    
    1,625,292
    
    
    
    4.3
    
    
    
    34.84
    
    
    
    1,453,533
    
    
    
    34.9438 -   45
    
    
    
    6,000
    
    
    
    3.2
    
    
    
    38.25
    
    
    
    6,000
    
    
    
    38.255,025,148
    
    
    
    5.4
    
    
    
    31.09
    
    
    
    4,170,614
    
    
    
    31.10
 Note 16 
RESTRUCTURING CHARGES In 2004, the company recorded aggregate restructuring
charges of $38.6 million primarily related to asset
impairments and workforce reductions. In December 2004, management made the decision to
close the Lubricant Additives manufacturing facility in
Bromborough, United Kingdom to lower further the
companys cost structure while simultaneously improving
its service capabilities to customers. The company
announced this decision in January 2005. The company
determined, as of December 31, 2004, that an impairment
of certain of the facilitys long-lived assets had been
triggered by this decision.
As a result, a $17.0 million impairment charge was
recorded in December 2004 to reflect the related
assets at their estimated fair values. The estimated
fair value of the asset was determined using a
discounted cash flow model. Production phase-out of
this site is planned to begin in the second quarter of
2005 and is expected to be completed by late 2006.
During this phase-out, United Kingdom production will
be transferred to facilities in France and United
States. Approximately 69 employees will be impacted by
this closure. There were no cash expenditures in 2004
relating to this restructuring. Further, there is no
related liability recorded at December 31, 2004. In 2004, the company eliminated more than 100
positions, primarily affecting technical and commercial
employees located at the Wickliffe, Ohio headquarters.
Most of these workforce reductions were related to our
restructuring following our acquisition of Noveon
International. The aggregate restructuring charge
recorded for these reductions was $21.6 million. In
addition to the employee severance costs, the company
incurred a $7.7 million non-cash pension benefit
settlement charge and an asset impairment charge of
$2.8 million relating to PuriNOxTMassets.
These reductions were completed by December 31, 2004.
Cash expenditures through December 31, 2004 were $8.7
million with a remaining accrued liability of $2.7
million at December 31, 2004. In 2003, the company recorded restructuring
charges of $22.5 million related to the separation of
252 employees in the United States, Europe and India,
comprising 5% of the then-current worldwide workforce. In February 2003, the company initiated a
restructuring at its Bromborough, United Kingdom
facility by consolidating various operational
activities. There was a workforce reduction of 45
employees by the end of January 2004. As a result of
these changes, the company recorded a restructuring
charge of $7.0 million in 2003 comprised of $3.5
million in severance costs, $3.3 million in asset
impairments and $0.2 million in other miscellaneous
costs. Cash expenditures in 2004 and 2003 were $0.2
million and $3.5 million, respectively. At December
31, 2003, there was an accrued liability of $0.2
million relating to employee severance costs, which
were subsequently paid in 2004. The 2003 restructuring charges also included $1.5
million for a voluntary separation program for
approximately 55 employees at the companys India joint
venture, Lubrizol India Private Limited. This joint
venture is consolidated by the company. The workforce
reduction
occurred primarily in the second quarter of 2003.
Cash expenditures for India were $0.1 million and $1.4
million in 2004 and 2003, respectively. At December 31,
2003, there was an accrued liability of $0.1 million
relating to employee severance costs, which were
subsequently paid in 2004. In November 2003, the company announced workforce
reductions of approximately 150 employees at its
headquarters in Wickliffe, Ohio, its Deer Park and
Bayport, Texas manufacturing facilities and its
Hazelwood, United Kingdom technical facility. All of
the workforce reductions occurred prior to December 31,
2003. This resulted in a restructuring charge in the
United States of $12.8 million, comprised of $11.2
million in severance costs and $1.6 million in
outplacement and other miscellaneous costs, and a
restructuring charge in Europe for $1.2 million,
primarily for employee severance costs. The 50nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED
 charge for Europe included $0.8 million for the
Hazelwood, United Kingdom testing facility and $0.4
million for the closing of a sales office in
Scandinavia. Cash expenditures in 2003 were $0.7
million in the United States and $1.2 million in

Europe. At December 31, 2003, there was an accrued
liability of $12.1 million relating to employee
severance costs, which were subsequently paid in 2004. The charges for these cost reduction initiatives
are reported as a separate line item in the
consolidated income statements, entitled Restructuring
charges and are included in the Total cost and
expenses subtotal on the consolidated income
statements. Other than the June 2004 reduction in
force, the charges primarily related to the Lubricant
Additives segment. The following table shows the reconciliation of
the liability balance at December 31, 2004 and 2003: Balance, January 1, 2003
    
    
    $
    Restructuring charges
    
    
    
    22.5Less cash paid
    
    
    
    (6.8
    )Less asset impairments
    
    
    
    (3.3
    )Balance, December 31, 2003
    
    
    
    12.4Restructuring charges
    
    
    
    38.6Restructuring liabilities assumed with acquisitions
    
    
    
    7.2Less cash paid
    
    
    
    (21.9
    )Less asset impairments
    
    
    
    (19.8
    )Less pension settlement charge
    
    
    
    (7.7
    )Balance, December 31, 2004
    
    
    $
    8.8
 Note 17 
CONTINGENCIES The company has numerous purchase commitments for
materials, supplies and energy in the ordinary course
of business. The company has numerous sales commitments
for product supply contracts in the ordinary course of
business. GeneralThere are pending or threatened claims,
lawsuits and administrative proceedings against the
company or its subsidiaries, all arising from the
ordinary course of business with respect to commercial,
product liability and environmental matters, which seek
remedies or damages. The company believes that any
liability that may finally be determined with respect
to commercial and product liability claims should not
have a material adverse effect on the companys
consolidated financial position, results of operations
or cash flows. From time to time, the company is also
involved in legal proceedings as a plaintiff involving
contract, patent protection, environmental and other
matters. Gain contingencies, if any, are recognized
when they are realized. EnvironmentalThe company and
its subsidiaries are generators of both hazardous and
non-hazardous wastes, the treatment, storage,
transportation and off-site disposal of which are
regulated by various laws and governmental regulations.
These laws and regulations, including the Comprehensive
Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 (collectively known as
Superfund), and the Resource Conservation and Recovery
Act of 1976 (RCRA) and other state laws, generally
impose liability for costs to investigate and remediate
contamination without regard to fault and under
certain circumstances liability may be joint and
several resulting in one party being held responsible
for the entire obligation. Liability may also include
damages to natural resources. Although the company
believes past operations were in substantial compliance
with the then-applicable regulations, either the
company or the predecessor of Noveon International, the
Performance Materials Segment of Goodrich Corporation
(Goodrich), has been designated as a potentially
responsible party (PRP) under Superfund or an
owner/operator under RCRA or other statutory definition that may apply by the U.S. Environmental
Protection Agency (EPA), or similar state agencies, in
connection with several sites including both third
party and/or current operating facilities. The company initiates corrective and/or preventive
environmental projects to ensure environmental
compliance and safe and lawful activities at its
current operations. The company also conducts
compliance and management systems audits. The companys environmental engineers and
consultants review and monitor environmental issues at
operating facilities, as well as off-site disposal
sites at which the company has been identified as a
PRP. This process includes investigation, remedial
action selection and implementation, as well as
negotiations with other parties, which primarily
include PRPs, past owners and operators and
governmental agencies. The estimates of environmental
liabilities are based on the results of this process.
Inherent uncertainties exist in these estimates
primarily due to unknown conditions, changing
governmental regulations
and legal standards regarding liability,
remediation standards and evolving technologies for
managing investigations and remediations. The company
revises its estimates accordingly as events in this
process occur and additional information is obtained. The companys environmental reserves, measured on
an undiscounted basis, totaled $26.4 million at
December 31, 2004 and $9.8 million at December 31,
2003. Of these amounts, $4.5 million and $1.2 million
were included in accrued expenses and other current
liabilities at December 31, 2004 and December 31, 2003,
respectively. The increase in the companys
environmental reserves at December 31, 2004 compared
with December 31, 2003 was primarily due to the Noveon
International acquisition. The companys December 31,
2004 balance sheet includes liabilities, measured on an
undiscounted basis, of $14.5 million to cover future
environmental expenditures for Noveon International
sites either payable by Noveon International or
indemnifiable by Goodrich. Accordingly, the current
portion of the Noveon International environmental
obligations of $0.5 million is recorded in accrued
expenses and other current liabilities and $1.1 million
of the recovery due from Goodrich is recorded in
receivables. Non-current Noveon International
liabilities include $14.0 million and other assets
include $2.6 million reflecting the recovery due from
Goodrich. Goodrich provided Noveon International with an
indemnity for various environmental liabilities. The
company estimates Goodrichs share of such currently
identified liabilities under the indemnity, which
extends through February 2011, to be approximately $3.7
million. There are specific environmental
contingencies for company-owned sites for which third
parties such as past owners and/or operators are the
named PRPs and also for which the company is in- THE LUBRIZOL CORPORATION
nn 51




---



##### 





Notes
To Financial Statements(In
Millions Except Per-Share Data)


demnified by Goodrich. Goodrich is currently
indemnifying Noveon International for several
environmental remediation projects. Goodrichs share
of all of these liabilities may increase to the extent
such third parties fail to honor their obligations
through February 2011.

The company believes that its environmental
accruals are adequate based on currently available
information. The company believes that it is reasonably
possible that $2.6 million in additional costs may be
incurred at certain locations beyond the amounts
accrued as a result of new information, newly
discovered conditions, changes in remediation standards
or technologies or a change in the law. Additionally,
as the indemnification from Goodrich extends through
February 2011, changes in
assumptions regarding when costs will be incurred
may result in additional expenses to the company.
Additional costs in excess of $2.6 million cannot
currently be estimated.

Note 18  GUARANTOR AND NON-GUARANTOR SUBSIDIARY
INFORMATION

The repayment of the unsecured senior notes, debentures
and bank term loans is unconditionally guaranteed on a
joint and several basis by the company and its direct
and indirect, wholly owned, domestic subsidiaries. The
following supplemental condensed consolidating financial information presents the balance sheets of the
company as of December 31, 2004 and 2003 and its
statements of income for the years ended December 31,
2004, 2003 and 2002 and its statements of cash flows
for the years ended December 31, 2004, 2003 and 2002.

Condensed Consolidating Statement of Income

Year Ended December 31, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    
    $
    1,213.1
    
    
    $
    821.5
    
    
    $
    1,579.4
    
    
    $
    (458.4
    )
    
    $
    3,155.6Royalties and other revenues
    
    
    
    3.0
    
    
    
    0.8
    
    
    
    0.1
    
    
    
    
    
    
    
    3.9Total revenues
    
    
    
    1,216.1
    
    
    
    822.3
    
    
    
    1,579.5
    
    
    
    (458.4
    )
    
    
    3,159.5Cost of sales
    
    
    
    915.6
    
    
    
    653.7
    
    
    
    1,248.6
    
    
    
    (458.4
    )
    
    
    2,359.5Selling and administrative expenses
    
    
    
    149.7
    
    
    
    59.6
    
    
    
    95.3
    
    
    
    
    
    
    
    304.6Research, testing and development expenses
    
    
    
    105.7
    
    
    
    34.8
    
    
    
    50.3
    
    
    
    
    
    
    
    190.8Amortization of intangible assets

    
    
    
    2.9
    
    
    
    10.4
    
    
    
    4.7
    
    
    
    
    
    
    
    18.0Write-off of acquired in-process research
and development
    
    
    
    
    
    
    
    34.0
    
    
    
    
    
    
    
    
    
    
    
    34.0Restructuring charges
    
    
    
    16.3
    
    
    
    1.3
    
    
    
    21.0
    
    
    
    
    
    
    
    38.6Total costs and expenses
    
    
    
    1,190.2
    
    
    
    793.8
    
    
    
    1,419.9
    
    
    
    (458.4
    )
    
    
    2,945.5Other income (expense)  net
    
    
    
    37.2
    
    
    
    15.7
    
    
    
    (46.4
    )
    
    
    (1.6
    )
    
    
    4.9Interest (expense) income  net
    
    
    
    (86.9
    )
    
    
    12.7
    
    
    
    1.9
    
    
    
    
    
    
    
    (72.3
    )Equity in income of subsidiaries
    
    
    
    116.7
    
    
    
    36.0
    
    
    
    
    
    
    
    (152.7
    )
    
    
    Income before income taxes
    
    
    
    92.9
    
    
    
    92.9
    
    
    
    115.1
    
    
    
    (154.3
    )
    
    
    146.6Provision (benefit) for income taxes
    
    
    
    (0.6
    )
    
    
    13.4
    
    
    
    40.3
    
    
    
    
    
    
    
    53.1Net income
    
    
    $
    93.5
    
    
    $
    79.5
    
    
    $
    74.8
    
    
    $
    (154.3
    )
    
    $
    93.5


Condensed Consolidating Statement of Income Year Ended December 31, 2003Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    
    $
    1,044.3
    
    
    $
    212.1
    
    
    $
    1,110.7
    
    
    $
    (318.0
    )
    
    $
    2,049.1Royalties and other revenues
    
    
    
    2.7
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    3.0Total revenues
    
    
    
    1,047.0
    
    
    
    212.4
    
    
    
    1,110.7
    
    
    
    (318.0
    )
    
    
    2,052.1Cost of sales
    
    
    
    768.4
    
    
    
    167.8
    
    
    
    893.9
    
    
    
    (322.3
    )
    
    
    1,507.8Selling and administrative expenses
    
    
    
    135.3
    
    
    
    23.1
    
    
    
    44.5
    
    
    
    
    
    
    
    202.9Research, testing and development expenses
    
    
    
    114.0
    
    
    
    6.8
    
    
    
    46.1
    
    
    
    
    
    
    
    166.9Amortization of intangible assets
    
    
    
    2.8
    
    
    
    1.9
    
    
    
    0.2
    
    
    
    
    
    
    
    4.9Restructuring charges
    
    
    
    12.5
    
    
    
    0.2
    
    
    
    9.8
    
    
    
    
    
    
    
    22.5Total costs and expenses
    
    
    
    1,033.0
    
    
    
    199.8
    
    
    
    994.5
    
    
    
    (322.3
    )
    
    
    1,905.0Other income (expense)  net
    
    
    
    16.2
    
    
    
    16.5
    
    
    
    (28.4
    )
    
    
    (1.0
    )
    
    
    3.3Interest (expense) income  net
    
    
    
    (32.0
    )
    
    
    9.8
    
    
    
    0.9
    
    
    
    
    
    
    
    (21.3
    )Equity in income of subsidiaries
    
    
    
    84.5
    
    
    
    8.9
    
    
    
    
    
    
    
    (93.4
    )
    
    
    Income before income taxes
    
    
    
    82.7
    
    
    
    47.8
    
    
    
    88.7
    
    
    
    (90.1
    )
    
    
    129.1Provision (benefit) for income taxes
    
    
    
    (5.3
    )
    
    
    14.5
    
    
    
    27.6
    
    
    
    1.5
    
    
    
    38.3Net income
    
    
    $
    88.0
    
    
    $
    33.3
    
    
    $
    61.1
    
    
    $
    (91.6
    )
    
    $
    90.8
 52nn THE LUBRIZOL CORPORATION




---



##### 



Notes
To Financial Statements CONTINUEDCondensed
Consolidating Statement of Income
 Year Ended December 31, 2002Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    
    $
    1,080.2
    
    
    $
    171.7
    
    
    $
    1,067.5
    
    
    $
    (339.1
    )
    
    $
    1,980.3Royalties and other revenues
    
    
    
    2.4
    
    
    
    0.2
    
    
    
    1.0
    
    
    
    
    
    
    
    3.6Total revenues
    
    
    
    1,082.6
    
    
    
    171.9
    
    
    
    1,068.5
    
    
    
    (339.1
    )
    
    
    1,983.9Cost of sales
    
    
    
    757.2
    
    
    
    128.5
    
    
    
    866.1
    
    
    
    (335.5
    )
    
    
    1,416.3Selling and administrative expenses
    
    
    
    132.7
    
    
    
    22.3
    
    
    
    41.9
    
    
    
    
    
    
    
    196.9Research, testing and development expenses
    
    
    
    119.3
    
    
    
    5.4
    
    
    
    43.6
    
    
    
    
    
    
    
    168.3Amortization of intangible assets
    
    
    
    2.8
    
    
    
    1.2
    
    
    
    0.2
    
    
    
    
    
    
    
    4.2Total costs and expenses
    
    
    
    1,012.0
    
    
    
    157.4
    
    
    
    951.8
    
    
    
    (335.5
    )
    
    
    1,785.7Other income (expense)  net
    
    
    
    29.2
    
    
    
    5.3
    
    
    
    (35.4
    )
    
    
    (0.3
    )
    
    
    (1.2
    )Interest (expense) income  net
    
    
    
    (29.0
    )
    
    
    10.7
    
    
    
    1.7
    
    
    
    
    
    
    
    (16.6
    )Equity in income of subsidiaries
    
    
    
    57.1
    
    
    
    3.2
    
    
    
    
    
    
    
    (60.3
    )
    
    
    Income before income taxes and cumulative effect of change
in accounting principle
    
    
    
    127.9
    
    
    
    33.7
    
    
    
    83.0
    
    
    
    (64.2
    )
    
    
    180.4Provision for income taxes
    
    
    
    6.9
    
    
    
    12.3
    
    
    
    36.1
    
    
    
    (1.2
    )
    
    
    54.1Income before cumulative effect of change in accounting principle
    
    
    
    121.0
    
    
    
    21.4
    
    
    
    46.9
    
    
    
    (63.0
    )
    
    
    126.3Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    (2.1
    )
    
    
    (5.7
    )
    
    
    
    
    
    
    (7.8
    )Net income
    
    
    $
    121.0
    
    
    $
    19.3
    
    
    $
    41.2
    
    
    $
    (63.0
    )
    
    $
    118.5
 Condensed Consolidating Balance Sheet December 31, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and short-term investments
    
    
    $
    40.3
    
    
    $
    (0.1
    )
    
    $
    295.7
    
    
    $
    
    
    
    $
    335.9Receivables
    
    
    
    128.3
    
    
    
    158.9
    
    
    
    295.6
    
    
    
    
    
    
    
    582.8Inventories
    
    
    
    115.7
    
    
    
    174.3
    
    
    
    309.6
    
    
    
    (30.9
    )
    
    
    568.7Other current assets
    
    
    
    67.7
    
    
    
    20.7
    
    
    
    11.6
    
    
    
    10.6
    
    
    
    110.6Total current assets
    
    
    
    352.0
    
    
    
    353.8
    
    
    
    912.5
    
    
    
    (20.3
    )
    
    
    1,598.0Property and
equipment  net
    
    
    
    401.0
    
    
    
    498.3
    
    
    
    418.6
    
    
    
    
    
    
    
    1,317.9Goodwill
    
    
    
    27.1
    
    
    
    633.1
    
    
    
    493.6
    
    
    
    
    
    
    
    1,153.8Intangible
assets  net
    
    
    
    11.4
    
    
    
    286.1
    
    
    
    139.6
    
    
    
    
    
    
    
    437.1Investments in subsidiaries and intercompany
balances
    
    
    
    3,087.0
    
    
    
    1,625.9
    
    
    
    (238.0
    )
    
    
    (4,474.9
    )
    
    
    Investments in non-consolidated companies
    
    
    
    5.7
    
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    7.4Other assets
    
    
    
    33.6
    
    
    
    5.5
    
    
    
    13.0
    
    
    
    
    
    
    
    52.1Total
    
    
    $
    3,917.8
    
    
    $
    3,404.4
    
    
    $
    1,739.3
    
    
    $
    (4,495.2
    )
    
    $
    4,566.3LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current portion of
long-term debt
    
    
    $
    
    
    
    $
    
    
    
    $
    8.2
    
    
    $
    
    
    
    $
    8.2Accounts payable
    
    
    
    118.3
    
    
    
    99.4
    
    
    
    121.9
    
    
    
    
    
    
    
    339.6Accrued expenses and other current liabilities
    
    
    
    145.0
    
    
    
    54.8
    
    
    
    109.7
    
    
    
    
    
    
    
    309.5Total current liabilities
    
    
    
    263.3
    
    
    
    154.2
    
    
    
    239.8
    
    
    
    
    
    
    
    657.3Long-term debt
    
    
    
    1,957.2
    
    
    
    
    
    
    
    6.9
    
    
    
    
    
    
    
    1,964.1Postretirement health care obligations
    
    
    
    96.3
    
    
    
    3.9
    
    
    
    6.2
    
    
    
    
    
    
    
    106.4Noncurrent liabilities
    
    
    
    47.5
    
    
    
    40.5
    
    
    
    82.7
    
    
    
    
    
    
    
    170.7Deferred income taxes
    
    
    
    16.0
    
    
    
    41.7
    
    
    
    33.0
    
    
    
    
    
    
    
    90.7Total liabilities
    
    
    
    2,380.3
    
    
    
    240.3
    
    
    
    368.6
    
    
    
    
    
    
    
    2,989.2Minority interest in consolidated companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53.6
    
    
    
    53.6Total shareholders equity
    
    
    
    1,537.5
    
    
    
    3,164.1
    
    
    
    1,370.7
    
    
    
    (4,548.8
    )
    
    
    1,523.5Total
    
    
    $
    3,917.8
    
    
    $
    3,404.4
    
    
    $
    1,739.3
    
    
    $
    (4,495.2
    )
    
    $
    4,566.3
 THE LUBRIZOL CORPORATION
nn 53




---



##### 



Notes
To Financial Statements(In
Millions Except Per-Share Data)
 Condensed Consolidating Balance Sheet December 31, 2003Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and short-term investments
    
    
    $
    56.3
    
    
    $
    (1.0
    )
    
    $
    203.4
    
    
    $
    
    
    
    $
    258.7Receivables
    
    
    
    100.9
    
    
    
    39.2
    
    
    
    184.5
    
    
    
    
    
    
    
    324.6Inventories
    
    
    
    76.8
    
    
    
    44.3
    
    
    
    216.6
    
    
    
    (25.8
    )
    
    
    311.9Other current assets
    
    
    
    26.4
    
    
    
    0.7
    
    
    
    6.5
    
    
    
    9.0
    
    
    
    42.6Total current assets
    
    
    
    260.4
    
    
    
    83.2
    
    
    
    611.0
    
    
    
    (16.8
    )
    
    
    937.8Property and equipment  net
    
    
    
    399.6
    
    
    
    57.3
    
    
    
    233.1
    
    
    
    
    
    
    
    690.0Goodwill
    
    
    
    24.9
    
    
    
    124.8
    
    
    
    59.0
    
    
    
    
    
    
    
    208.7Intangible assets  net
    
    
    
    12.2
    
    
    
    32.8
    
    
    
    17.4
    
    
    
    
    
    
    
    62.4Investments in subsidiaries and intercompany
balances
    
    
    
    934.2
    
    
    
    811.0
    
    
    
    (96.9
    )
    
    
    (1,648.3
    )
    
    
    Investments in non-consolidated companies
    
    
    
    5.6
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    6.3Other assets
    
    
    
    20.5
    
    
    
    3.4
    
    
    
    13.2
    
    
    
    
    
    
    
    37.1Total
    
    
    $
    1,657.4
    
    
    $
    1,113.2
    
    
    $
    836.8
    
    
    $
    (1,665.1
    )
    
    $
    1,942.3LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current portion of
long-term debt
    
    
    $
    
    
    
    $
    
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    2.9Accounts payable
    
    
    
    64.0
    
    
    
    17.4
    
    
    
    61.7
    
    
    
    
    
    
    
    143.1Accrued expenses and other current liabilities
    
    
    
    79.9
    
    
    
    20.7
    
    
    
    52.9
    
    
    
    
    
    
    
    153.5Total current liabilities
    
    
    
    143.9
    
    
    
    38.1
    
    
    
    117.5
    
    
    
    
    
    
    
    299.5Long-term debt
    
    
    
    381.8
    
    
    
    
    
    
    
    4.9
    
    
    
    
    
    
    
    386.7Postretirement health care obligations
    
    
    
    92.9
    
    
    
    
    
    
    
    5.5
    
    
    
    
    
    
    
    98.4Noncurrent liabilities
    
    
    
    44.7
    
    
    
    
    
    
    
    55.6
    
    
    
    
    
    
    
    100.3Deferred income taxes
    
    
    
    24.0
    
    
    
    6.9
    
    
    
    21.9
    
    
    
    
    
    
    
    52.8Total liabilities
    
    
    
    687.3
    
    
    
    45.0
    
    
    
    205.4
    
    
    
    
    
    
    
    937.7Minority interest in consolidated companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51.3
    
    
    
    51.3Total shareholders equity
    
    
    
    970.1
    
    
    
    1,068.2
    
    
    
    631.4
    
    
    
    (1,716.4
    )
    
    
    953.3Total
    
    
    $
    1,657.4
    
    
    $
    1,113.2
    
    
    $
    836.8
    
    
    $
    (1,665.1
    )
    
    $
    1,942.3
 54nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED
  Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet income
    
    
    $
    93.5
    
    
    $
    79.5
    
    
    $
    74.8
    
    
    $
    (154.3
    )
    
    $
    93.5Adjustments to reconcile net income to cash provided by operating activities
    
    
    
    8.7
    
    
    
    (54.6
    )
    
    
    126.3
    
    
    
    154.3
    
    
    
    234.7Total operating activities
    
    
    
    102.2
    
    
    
    24.9
    
    
    
    201.1
    
    
    
    
    
    
    
    328.2INVESTING ACTIVITIESCapital expenditures
    
    
    
    (54.4
    )
    
    
    (31.4
    )
    
    
    (47.4
    )
    
    
    
    
    
    
    (133.2
    )Acquisitions  net of cash received and liabilities assumed
    
    
    
    (3.7
    )
    
    
    (829.1
    )
    
    
    (125.6
    )
    
    
    
    
    
    
    (958.4
    )Other items  net
    
    
    
    0.6
    
    
    
    0.2
    
    
    
    2.0
    
    
    
    
    
    
    
    2.8Total investing activities
    
    
    
    (57.5
    )
    
    
    (860.3
    )
    
    
    (171.0
    )
    
    
    
    
    
    
    (1,088.8
    )FINANCING ACTIVITIESChanges in short-term debt, net
    
    
    
    
    
    
    
    (78.2
    )
    
    
    5.6
    
    
    
    
    
    
    
    (72.6
    )Repayment of long-term debt
    
    
    
    (168.4
    )
    
    
    (1,024.6
    )
    
    
    
    
    
    
    
    
    
    
    (1,193.0
    )Proceeds from the issuance of long-term debt
    
    
    
    1,741.7
    
    
    
    0.1
    
    
    
    1.5
    
    
    
    
    
    
    
    1,743.3Dividends paid
    
    
    
    (57.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57.6
    )Changes in intercompany activities
    
    
    
    (1,974.6
    )
    
    
    1,936.3
    
    
    
    38.3
    
    
    
    
    
    
    
    Proceeds from sale of common shares
    
    
    
    470.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470.0Payment of debt issuance costs
    
    
    
    (16.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.8
    )Payment of Treasury rate lock upon settlement
    
    
    
    (73.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73.9
    )Payment on termination of interest rate swaps
    
    
    
    (2.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.9
    )Proceeds from the exercise of stock options
    
    
    
    15.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.4Total financing activities
    
    
    
    (67.1
    )
    
    
    833.6
    
    
    
    45.4
    
    
    
    
    
    
    
    811.9Effect of exchange rate changes on cash
    
    
    
    6.4
    
    
    
    2.7
    
    
    
    16.8
    
    
    
    
    
    
    
    25.9Net increase (decrease) in cash and short-term investments
    
    
    
    (16.0
    )
    
    
    0.9
    
    
    
    92.3
    
    
    
    
    
    
    
    77.2Cash and short-term investments at the beginning of year
    
    
    
    56.3
    
    
    
    (1.0
    )
    
    
    203.4
    
    
    
    
    
    
    
    258.7Cash and short-term investments at the end of year
    
    
    $
    40.3
    
    
    $
    (0.1
    )
    
    $
    295.7
    
    
    $
    
    
    
    $
    335.9
 THE LUBRIZOL CORPORATION
nn 55




---



##### 



Notes To Financial
Statements  (In Millions Except Per-Share Data)
 Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2003Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet income
    
    
    $
    88.0
    
    
    $
    33.3
    
    
    $
    61.1
    
    
    $
    (91.6
    )
    
    $
    90.8Adjustments to reconcile net income to cash provided by (used for)
operating activities
    
    
    
    10.6
    
    
    
    92.2
    
    
    
    (90.4
    )
    
    
    91.6
    
    
    
    104.0Total operating activities
    
    
    
    98.6
    
    
    
    125.5
    
    
    
    (29.3
    )
    
    
    
    
    
    
    194.8INVESTING ACTIVITIESCapital expenditures
    
    
    
    (45.8
    )
    
    
    (12.3
    )
    
    
    (30.4
    )
    
    
    
    
    
    
    (88.5
    )Acquisitions  net of cash received and liabilities assumed
    
    
    
    (4.2
    )
    
    
    (62.8
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    (68.6
    )Other items  net
    
    
    
    0.9
    
    
    
    (0.3
    )
    
    
    0.6
    
    
    
    
    
    
    
    1.2Total investing activities
    
    
    
    (49.1
    )
    
    
    (75.4
    )
    
    
    (31.4
    )
    
    
    
    
    
    
    (155.9
    )FINANCING ACTIVITIESChanges in short-term debt, net
    
    
    
    
    
    
    
    (0.2
    )
    
    
    (5.6
    )
    
    
    
    
    
    
    (5.8
    )Repayment of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    (9.2
    )
    
    
    
    
    
    
    (9.2
    )Proceeds from the issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    4.5Dividends paid
    
    
    
    (53.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53.6
    )Changes in intercompany activities
    
    
    
    (60.7
    )
    
    
    (49.3
    )
    
    
    110.0
    
    
    
    
    
    
    
    Proceeds from the exercise of stock options
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.6Total financing activities
    
    
    
    (109.7
    )
    
    
    (49.5
    )
    
    
    99.7
    
    
    
    
    
    
    
    (59.5
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    0.3
    
    
    
    12.6
    
    
    
    
    
    
    
    12.9Net increase (decrease) in cash and short-term investments
    
    
    
    (60.2
    )
    
    
    0.9
    
    
    
    51.6
    
    
    
    
    
    
    
    (7.7
    )Cash and short-term investments at the beginning of year
    
    
    
    116.5
    
    
    
    (1.9
    )
    
    
    151.8
    
    
    
    
    
    
    
    266.4Cash and short-term investments at the end of year
    
    
    $
    56.3
    
    
    $
    (1.0
    )
    
    $
    203.4
    
    
    $
    
    
    
    $
    258.7
 Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2002Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet income
    
    
    $
    121.0
    
    
    $
    19.3
    
    
    $
    41.2
    
    
    $
    (63.0
    )
    
    $
    118.5Adjustments to reconcile net income to cash provided by (used for)
operating activities
    
    
    
    41.9
    
    
    
    95.4
    
    
    
    (73.9
    )
    
    
    63.0
    
    
    
    126.4Total operating activities
    
    
    
    162.9
    
    
    
    114.7
    
    
    
    (32.7
    )
    
    
    
    
    
    
    244.9INVESTING ACTIVITIESCapital expenditures
    
    
    
    (35.5
    )
    
    
    (6.3
    )
    
    
    (23.5
    )
    
    
    
    
    
    
    (65.3
    )Acquisitions  net of cash received and liabilities assumed
    
    
    
    (0.3
    )
    
    
    (86.4
    )
    
    
    
    
    
    
    
    
    
    
    (86.7
    )Other items  net
    
    
    
    0.6
    
    
    
    
    
    
    
    2.9
    
    
    
    
    
    
    
    3.5Total investing activities
    
    
    
    (35.2
    )
    
    
    (92.7
    )
    
    
    (20.6
    )
    
    
    
    
    
    
    (148.5
    )FINANCING ACTIVITIESChanges in short-term debt, net
    
    
    
    
    
    
    
    (0.8
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    (1.4
    )Repayment of long-term debt
    
    
    
    
    
    
    
    (1.2
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (2.3
    )Dividends paid
    
    
    
    (53.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53.4
    )Changes in intercompany activities
    
    
    
    (71.6
    )
    
    
    (24.5
    )
    
    
    96.1
    
    
    
    
    
    
    
    Proceeds on termination of interest rate swaps
    
    
    
    18.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18.1Proceeds from the exercise of stock options
    
    
    
    8.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.6Total financing activities
    
    
    
    (98.3
    )
    
    
    (26.5
    )
    
    
    94.4
    
    
    
    
    
    
    
    (30.4
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    
    11.3
    
    
    
    
    
    
    
    11.3Net increase (decrease) in cash and short-term investments
    
    
    
    29.4
    
    
    
    (4.5
    )
    
    
    52.4
    
    
    
    
    
    
    
    77.3Cash and short-term investments at the beginning of year
    
    
    
    87.1
    
    
    
    2.6
    
    
    
    99.4
    
    
    
    
    
    
    
    189.1Cash and short-term investments at the end of year
    
    
    $
    116.5
    
    
    $
    (1.9
    )
    
    $
    151.8
    
    
    $
    
    
    
    $
    266.4
 56nn THE LUBRIZOL CORPORATION




---



##### 



Notes To Financial Statements CONTINUED 
 Note 19  QUARTERLY
FINANCIAL DATA (UNAUDITED) The following table sets forth the quarterly results of operations for the years ended December 31,
2004 and 2003: 2004First(1)
    
    
    Second(2)(3)(4)
    
    
    Third(2)(3)(4)
    
    
    Fourth(2)(3)(5)
    
    
    Full YearNet sales
    
    
    $
    577.9
    
    
    $
    720.2
    
    
    $
    921.3
    
    
    $
    936.2
    
    
    $
    3,155.6Gross profit
    
    
    $
    151.6
    
    
    $
    190.6
    
    
    $
    229.2
    
    
    $
    224.7
    
    
    $
    796.1Net income
    
    
    $
    37.5
    
    
    $
    3.9
    
    
    $
    32.2
    
    
    $
    19.9
    
    
    $
    93.5Net income per share, basic
    
    
    $
    0.72
    
    
    $
    0.08
    
    
    $
    0.61
    
    
    $
    0.30
    
    
    $
    1.68Net income per share, diluted
    
    
    $
    0.72
    
    
    $
    0.08
    
    
    $
    0.61
    
    
    $
    0.30
    
    
    $
    1.67
 2003First(6)
    
    
    Second(6)
    
    
    Third(6)
    
    
    Fourth(6)
    
    
    Full YearNet sales
    
    
    $
    507.0
    
    
    $
    514.3
    
    
    $
    509.1
    
    
    $
    518.7
    
    
    $
    2,049.1Gross profit
    
    
    $
    138.7
    
    
    $
    141.7
    
    
    $
    131.6
    
    
    $
    129.3
    
    
    $
    541.3Net income
    
    
    $
    26.0
    
    
    $
    29.4
    
    
    $
    24.3
    
    
    $
    11.1
    
    
    $
    90.8Net income per share, basic
    
    
    $
    0.50
    
    
    $
    0.57
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    1.76Net income per share, diluted
    
    
    $
    0.50
    
    
    $
    0.57
    
    
    $
    0.47
    
    
    $
    0.21
    
    
    $
    1.75
  (1)
    
    The company recorded a gain of $6.4 million on a currency forward contract relating to the
hyperdispersants acquisition in the first quarter of 2004.(2)
    
    The company recorded the write-off of acquired IPR&D relating to the Noveon International
acquisition of $35.0 million, ($1.5) million and $0.5 million in the second, third and fourth
quarters of 2004, respectively.(3)
    
    The company recorded restructuring charges of $8.0 million, $10.5 million and $20.1 million in
the second, third and fourth quarters of 2004, respectively.(4)
    
    The company recorded a charge to cost of sales for $4.9 million in both the second and third
quarters of 2004 relating to the inventory step-up recorded in connection with the Noveon
International acquisition.(5)
    
    The company recognized a reduction in depreciation expense of $4.4 million in the fourth
quarter of 2004 for the change in estimates of fair values and asset lives for the long-lived
assets of Noveon International.(6)
    
    The company recorded restructuring charges of $3.5 million, $3.5 million, $0.4 million and
$15.1 million in the first, second, third and fourth quarters of 2003, respectively. The sum of the quarterly earnings per-share amounts does not equal the annual amount reported
since per-share amounts are computed independently for each quarter and for the full year based
upon respective weighted-average common shares outstanding and other diluted potential shares. THE LUBRIZOL CORPORATION
nn 57




---



##### 



Historical Summary  (In Millions, Except Shareholders, Employees and Per-Share Data)
    
    
    
    2004*
    
    
    
    2003
    
    
    2002OPERATING RESULTS:Revenues
    
    
    $
    3,159.5
    
    
    
    $
    2,052.1
    
    
    $
    1,983.9Total cost and expenses**
    
    
    
    2,945.5
    
    
    
    
    1,905.0
    
    
    
    1,785.7Gain on litigation settlements and investments
    
    
    
    
    
    
    
    
    
    
    
    
    Net interest expense and other income
    
    
    
    (67.4
    )
    
    
    
    (18.0
    )
    
    
    (17.8
    )Income before cumulative effect of change in accounting principle
    
    
    
    93.5
    
    
    
    
    90.8
    
    
    
    126.3Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    (7.8
    )Net income
    
    
    
    93.5
    
    
    
    
    90.8
    
    
    
    118.5Basic earnings per share before cumulative effect of change
in accounting principle
    
    
    
    1.68
    
    
    
    
    1.76
    
    
    
    2.45Cumulative effect of change in accounting principle per share
    
    
    
    
    
    
    
    
    
    
    
    
    (0.15
    )Basic earnings per share
    
    
    
    1.68
    
    
    
    
    1.76
    
    
    
    2.30FINANCIAL RATIOS:Gross profit percentage
    
    
    
    25.2
    
    
    
    
    26.4
    
    
    
    28.5Percent of revenues:Selling and administrative expenses
    
    
    
    9.6
    
    
    
    
    9.9
    
    
    
    9.9Research and testing expenses
    
    
    
    6.0
    
    
    
    
    8.1
    
    
    
    8.5Return on average shareholders equity (%)
    
    
    
    7.6
    
    
    
    
    10.0
    
    
    
    14.4Debt to capitalization (%)
    
    
    
    56.2
    
    
    
    
    29.0
    
    
    
    31.6Current ratio
    
    
    
    2.4
    
    
    
    
    3.1
    
    
    
    3.0OTHER INFORMATION:Dividends declared per share
    
    
    $
    1.04
    
    
    
    $
    1.04
    
    
    $
    1.04Average common shares outstanding
    
    
    
    55.7
    
    
    
    
    51.7
    
    
    
    51.5Capital expenditures
    
    
    $
    133.2
    
    
    
    $
    88.5
    
    
    $
    65.3Depreciation expense
    
    
    
    136.7
    
    
    
    
    95.5
    
    
    
    91.6At Year End:Total assets
    
    
    $
    4,566.3
    
    
    
    $
    1,942.3
    
    
    $
    1,860.1Total debt
    
    
    
    1,972.3
    
    
    
    
    389.6
    
    
    
    401.9Total shareholders equity
    
    
    
    1,523.5
    
    
    
    
    953.3
    
    
    
    869.3Shareholders equity per share
    
    
    
    22.81
    
    
    
    
    18.48
    
    
    
    16.89Common share price
    
    
    
    36.86
    
    
    
    
    32.52
    
    
    
    30.50Number of shareholders
    
    
    
    3,698
    
    
    
    
    3,903
    
    
    
    4,081Number of employees
    
    
    
    7,779
    
    
    
    
    5,032
    
    
    
    5,231
  *
    
    The 2004 results include the revenues and expenses of Noveon International, Inc. since June
3, 2004, the date of acquisition.**
    
    Includes restructuring and impairment charges of $38.6 million in 2004, $22.5 million in
2003, $19.6 million in 1999, $23.3 million in 1998, $9.4 million in 1997 and $86.3 million in 1993 and
a restructuring credit of $4.5 million in 2000. Also includes the write-off of acquired
in-process research and development of $34.0 million in 2004 and $13.6 million in 1998. 58nn THE LUBRIZOL CORPORATION




---



##### 



Historical Summary CONTINUED  2001
    
    
    2000
    
    
    1999
    
    
    1998
    
    
    1997
    
    
    1996
    
    
    1995$
    1,844.6
    
    
    $
    1,775.8
    
    
    $
    1,780.3
    
    
    $
    1,650.2
    
    
    $
    1,706.9
    
    
    $
    1,629.2
    
    
    $
    1,663.61,685.5
    
    
    
    1,605.3
    
    
    
    1,585.5
    
    
    
    1,540.7
    
    
    
    1,478.4
    
    
    
    1,436.2
    
    
    
    1,479.5
    
    
    
    19.4
    
    
    
    17.6
    
    
    
    16.2
    
    
    
    
    
    
    
    53.3
    
    
    
    38.5(19.2
    )
    
    
    (19.5
    )
    
    
    (17.0
    )
    
    
    (6.9
    )
    
    
    2.7
    
    
    
    4.4
    
    
    
    3.094.1
    
    
    
    118.0
    
    
    
    123.0
    
    
    
    71.2
    
    
    
    154.9
    
    
    
    169.8
    
    
    
    151.6    
    
    
        
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94.1
    
    
    
    118.0
    
    
    
    123.0
    
    
    
    71.2
    
    
    
    154.9
    
    
    
    169.8
    
    
    
    151.61.84
    
    
    
    2.22
    
    
    
    2.25
    
    
    
    1.27
    
    
    
    2.68
    
    
    
    2.80
    
    
    
    2.37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.84
    
    
    
    2.22
    
    
    
    2.25
    
    
    
    1.27
    
    
    
    2.68
    
    
    
    2.80
    
    
    
    2.3727.4
    
    
    
    27.8
    
    
    
    30.9
    
    
    
    29.2
    
    
    
    32.1
    
    
    
    31.4
    
    
    
    31.59.6
    
    
    
    9.5
    
    
    
    10.2
    
    
    
    10.9
    
    
    
    10.0
    
    
    
    9.7
    
    
    
    9.88.6
    
    
    
    8.5
    
    
    
    8.2
    
    
    
    9.1
    
    
    
    8.6
    
    
    
    9.9
    
    
    
    10.812.3
    
    
    
    15.3
    
    
    
    15.8
    
    
    
    9.0
    
    
    
    19.0
    
    
    
    20.4
    
    
    
    18.033.9
    
    
    
    34.5
    
    
    
    33.8
    
    
    
    35.8
    
    
    
    21.3
    
    
    
    19.5
    
    
    
    22.52.9
    
    
    
    2.6
    
    
    
    2.5
    
    
    
    2.5
    
    
    
    2.5
    
    
    
    2.6
    
    
    
    2.4$
    1.04
    
    
    $
    1.04
    
    
    $
    1.04
    
    
    $
    1.04
    
    
    $
    1.01
    
    
    $
    0.97
    
    
    $
    0.9351.2
    
    
    
    53.1
    
    
    
    54.6
    
    
    
    55.9
    
    
    
    57.8
    
    
    
    60.7
    
    
    
    63.8$
    66.3
    
    
    $
    85.8
    
    
    $
    64.9
    
    
    $
    93.4
    
    
    $
    100.7
    
    
    $
    94.3
    
    
    $
    189.384.7
    
    
    
    88.0
    
    
    
    88.3
    
    
    
    79.7
    
    
    
    82.7
    
    
    
    78.7
    
    
    
    71.8$
    1,662.3
    
    
    $
    1,659.5
    
    
    $
    1,682.4
    
    
    $
    1,643.2
    
    
    $
    1,462.3
    
    
    $
    1,402.1
    
    
    $
    1,492.0397.2
    
    
    
    395.9
    
    
    
    403.0
    
    
    
    429.3
    
    
    
    220.3
    
    
    
    198.5
    
    
    
    247.1773.2
    
    
    
    752.3
    
    
    
    790.1
    
    
    
    769.1
    
    
    
    815.4
    
    
    
    819.4
    
    
    
    849.015.12
    
    
    
    14.66
    
    
    
    14.50
    
    
    
    14.10
    
    
    
    14.31
    
    
    
    14.00
    
    
    
    13.4835.09
    
    
    
    25.75
    
    
    
    30.88
    
    
    
    25.69
    
    
    
    36.88
    
    
    
    31.00
    
    
    
    27.754,335
    
    
    
    4,681
    
    
    
    5,126
    
    
    
    5,609
    
    
    
    5,661
    
    
    
    5,764
    
    
    
    6,3044,530
    
    
    
    4,390
    
    
    
    4,074
    
    
    
    4,324
    
    
    
    4,291
    
    
    
    4,358
    
    
    
    4,601
 THE LUBRIZOL CORPORATION
nn 59