**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

Washington, D.C. 20549

 

 

**FORM 10-Q/A**

**Quarterly Report Pursuant to Section 13 or15(d) of**

**the Securities Exchange Act of 1934**

 

**For the Quarter Ended March31, 2001                             CommissionFile No. 1-14501**

**PENNZOIL-QUAKERSTATE COMPANY**

**(Exact name of registrant asspecified in its charter)**

**Delaware                                                                            76-0200625**

**(State or other jurisdictionof incorporation ororganization)                (I.R.S.Employer Identification No.)**

**Pennzoil Place, P.O. Box 2967**

**Houston, Texas 77252-2967**

**(Address of principalexecutive offices)**

 

 

Registrant's telephone number, including areacode: (713) 546-4000

 

            Indicateby check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes X . No . 

Number of shares of stock were outstanding, asof latest practicable date, April 30, 2001:

Common Stock, par value $0.10 per share,79,031,282 shares.

 

 

 

| PART I. FINANCIAL INFORMATION                                    |
|------------------------------------------------------------------|
| Item        1. Financial Statements                              |   |   |   |
| PENNZOIL-QUAKER STATE COMPANY                                    |
| CONDENSED CONSOLIDATED STATEMENT OF        OPERATIONS            |
| AND COMPREHENSIVE INCOME                                         |
| (UNAUDITED)                                                      |
|                                                             |   | Restated |
|                                                             |   | Three Months Ended |
|                                                             |   | March 31 |
|                                                             |   | 2001 |   | 2000 |
|                                                             |   | (Expressed in thousands |
|                                                             |   | except per share amounts) |
| REVENUES                                                         | $ 568,190 |   | $ 584,982 |
| COSTS AND EXPENSES                                               |   |   |   |
|                                                             | Cost        of sales | 389,873 |   | 382,520 |
|                                                             | Selling,        general and administrative | 110,669 |   | 158,522 |
|                                                             | Acquisition        related expenses | - |   | 3,955 |
|                                                             | Depreciation        and amortization | 24,696 |   | 24,969 |
|                                                             | Taxes,        other than income | 3,194 |   | 3,475 |
|                                                             | Interest        charges, net | 24,712 |   | 21,641 |
| INCOME (LOSS) FROM CONTINUING OPERATIONS                         |   |   |   |
|                                                             | BEFORE        INCOME TAX | 15,046 |   | (10,100) |
| Income tax provision (benefit)                                   | 6,756 |   | (8,569) |
| INCOME (LOSS) FROM CONTINUING OPERATIONS                         | 8,290 |   | (1,531) |
| LOSS FROM DISCONTINUED OPERATIONS, net of tax                    | - |   | (6,634) |
| NET INCOME (LOSS)                                                | $ 8,290 |   | $ (8,165) |
| BASIC EARNINGS (LOSS) PER SHARE                                  |   |   |   |
|                                                             | Continuing        operations | $ 0.11 |   | $ (0.02) |
|                                                             | Discontinued        operations | - |   | (0.08) |
|                                                             |   | $ 0.11 |   | $ (0.10) |
| DILUTED EARNINGS (LOSS) PER SHARE                                |   |   |   |
|                                                             | Continuing        operations | $ 0.10 |   | $ (0.02) |
|                                                             | Discontinued        operations | - |   | (0.08) |
|                                                             |   | $ 0.10 |   | $ (0.10) |
| DIVIDENDS PER COMMON SHARE                                       | $ 0.1875 |   | $ 0.1875 |
| AVERAGE SHARES OUTSTANDING:                                      |   |   |   |
|                                                             | BASIC | 78,836 |   | 78,216 |
|                                                             | DILUTED | 80,279 |   | 78,216 |
| END OF PERIOD SHARES OUTSTANDING                                 | 78,970 |   | 78,318 |
| NET INCOME (LOSS)                                                | $ 8,290 |   | $ (8,165) |
| Other comprehensive income (loss) net of tax:                    |   |   |   |
|                                                             | Foreign        currency translation adjustment | (2,476) |   | (63) |
|                                                             | Unrealized        gain on investment in securities and other | 31 |   | 371 |
|                                                             | Total        other comprehensive income (loss) | (2,445) |   | 308 |
| COMPREHENSIVE INCOME (LOSS)                                      | $ 5,845 |   | $ (7,857) |
| See Notes to Condensed Consolidated Financial        Statements. |   |   |   |

 

| PART I. FINANCIAL INFORMATION - continued                        |
|------------------------------------------------------------------|
| PENNZOIL-QUAKER STATE COMPANY                                    |
| CONDENSED CONSOLIDATED        BALANCE SHEET                      |
|                                                             |   | Restated |
|                                                             |   | March 31 |   | December 31 |
|                                                             |   | 2001 |   | 2000 |
|                                                             |   | (Unaudited) |   |   |
|                                                             |   | (Expressed in thousands) |
| ASSETS                                                           |   |   |   |
| Current assets                                                   |   |   |   |
|                                                             | Cash        and cash equivalents | $ 36,261 |   | $ 38,263 |
|                                                             | Receivables | 351,025 |   | 315,710 |
|                                                             | Inventories | 209,636 |   | 186,999 |
|                                                             | Other        current assets | 73,831 |   | 52,775 |
| Total current assets                                             | 670,753 |   | 593,747 |
| Property, plant and equipment, net                               | 463,341 |   | 476,134 |
| Deferred income taxes                                            | 275,505 |   | 282,198 |
| Goodwill and other intangibles                                   | 1,131,555 |   | 1,139,413 |
| Other assets                                                     | 224,001 |   | 212,316 |
| Net assets of discontinued operations                            | 36,367 |   | 97,259 |
| TOTAL ASSETS                                                     | $ 2,801,522 |   | $ 2,801,067 |
| LIABILITIES AND SHAREHOLDERS' EQUITY                             |   |   |   |
| Current liabilities                                              |   |   |   |
|                                                             | Current        maturities of long-term debt | $ 18,195 |   | $ 13,786 |
|                                                             | Accounts        payable | 176,706 |   | 166,056 |
|                                                             | Payroll        accrued | 16,202 |   | 17,215 |
|                                                             | Other        current liabilities | 127,428 |   | 121,515 |
| Total current liabilities                                        | 338,531 |   | 318,572 |
| Total long-term debt, less current maturities                    | 1,195,549 |   | 1,194,426 |
| Capital lease obligations, less current        maturities        | 59,972 |   | 61,861 |
| Other liabilities                                                | 392,796 |   | 405,229 |
| TOTAL LIABILITIES                                                | 1,986,848 |   | 1,980,088 |
| COMMITMENTS AND CONTINGENCIES                                    |   |   |   |
| SHAREHOLDERS' EQUITY                                             | 814,674 |   | 820,979 |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                       | $ 2,801,522 |   | $ 2,801,067 |
| See Notes to Condensed Consolidated Financial        Statements. |   |   |   |

 

 

| PART I. FINANCIAL INFORMATION - continued                        |
|------------------------------------------------------------------|
| PENNZOIL-QUAKER STATE COMPANY                                    |
| CONDENSED CONSOLIDATED        STATEMENT OF CASH FLOWS            |
| (UNAUDITED)                                                      |
|                                                             |   |   |   | Restated |
|                                                             |   |   |   | Three Months Ended |
|                                                             |   |   |   | March 31 |
|                                                             |   |   |   | 2001 |   | 2000 |
|                                                             |   |   |   | (Expressed in thousands) |
| CASH FLOWS FROM OPERATING ACTIVITIES                             |   |   |   |
|                                                             | Net income (loss) | $ 8,290 |   | $ (8,165) |
|                                                             | Adjustments to reconcile net income (loss) to        net cash |   |   |   |
|                                                             |   | used in operating activities: |   |   |   |
|                                                             |   |   | Depreciation        and amortization | 24,696 |   | 24,969 |
|                                                             |   |   | Deferred        income tax | 6,534 |   | (12,554) |
|                                                             |   |   | Earnings        in excess of distributions from |   |   |   |
|                                                             |   |   |      equity        investees | (6,190) |   | (1,581) |
|                                                             |   |   | Other        non-cash items | 1,705 |   | 16,226 |
|                                                             |   |   | Loss        from discontinued operations | - |   | 10,963 |
|                                                             |   |   | Changes        in accounts receivable | (38,797) |   | (50,448) |
|                                                             |   |   | Changes        in inventories | (22,551) |   | (47,814) |
|                                                             |   |   | Changes        in other operating assets and liabilities | (17,499) |   | 5,491 |
|                                                             | Net cash used in operating activities | (43,812) |   | (62,913) |
|                                                             |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                             |   |   |   |
|                                                             | Capital expenditures | (13,689) |   | (10,584) |
|                                                             | Acquisitions, net of cash acquired | (600) |   | (64,941) |
|                                                             | Proceeds from sales of assets | 6,622 |   | 3,707 |
|                                                             | Other investing activities | 1,285 |   | (986) |
|                                                             | Net cash used in investing activities | (6,382) |   | (72,804) |
|                                                             |   |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                             |   |   |   |
|                                                             | Net proceeds from (repayments of) debt | (2,648) |   | 166,137 |
|                                                             | Dividends paid | (14,784) |   | (14,581) |
|                                                             | Net cash provided by (used in) financing        activities | (17,432) |   | 151,556 |
|                                                             |   |   |   |   |   |   |
| NET CASH PROVIDED BY (USED IN)                                   |   |   |   |
|                                                             | DISCONTINUED OPERATIONS | 65,624 |   | (3,804) |
|                                                             |   |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH                                  |   |   |   |
|                                                             | AND CASH EQUIVALENTS | (2,002) |   | 12,035 |
|                                                             |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, beginning of period                   | 38,263 |   | 20,155 |
|                                                             |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, end of period                         | $ 36,261 |   | $ 32,190 |
|                                                             |   |   |   |   |   |   |
| See Notes to Condensed Consolidated Financial        Statements. |   |   |   |

PENNZOIL-QUAKER STATE COMPANY

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(UNAUDITED)

**(1)       General -**

            Thecondensed consolidated financial statements included herein havebeen prepared by Pennzoil-Quaker State Company("Pennzoil-Quaker State" or the "Company")without audit and should be read in conjunction with thefinancial statements and the notes thereto included inPennzoil-Quaker State's latest annual report. The foregoingfinancial statements include only normal recurring accruals andall adjustments which Pennzoil-Quaker State considers necessaryfor a fair presentation. Certain prior period items have beenreclassified in the condensed consolidated financial statementsin order to conform with the current year presentation.

            Duringthe first quarter of 2001, the Company determined that certaincontinuing operations had been included as part of thediscontinued operations presentation that was initially presentedin the Company's December 31, 2000 financial statements.Previously issued financial results have been adjusted herein toappropriately reflect these operations as part of continuingoperations. This adjustment had no effect on previously reportedincome from continuing operations or net income and aninsignificant effect on previously reported revenues, cost ofsales and certain assets and liability accounts.

            TheCompany is restating its financial results for the quarters endedMarch 31, 2001 and 2000. The restatement results from an error inthe consolidated financial statements of Excel Paralubes, inwhich the Company and Conoco Inc. ("Conoco") are equalpartners. Details surrounding the restatement are included inNote 3.

**(2)       DerivativeInstruments -**

           Attimes, the Companyhas utilized swaps andforward contracts to manage certain risks resulting fromfluctuations in interest rates and foreign currency exchangerates. On January 1, 2001, the Company adopted Statement ofFinancial Accounting Standards ("SFAS") No. 133,"Accounting for Derivative Instruments and HedgingActivities" as amended which established accounting andreporting standards requiring that every derivative instrument berecorded in the balance sheet as either an asset or liabilitymeasured at its fair value. The statement requires that changesin the derivative instrument's fair value be recognized currentlyin earnings unless specific hedge accounting criteria are met.The adoption of this standard did not impact the Company'sresults of operations or financial position.

            Inconnection with the issuance of $150.0 million of two-year fixedrate notes in December 2000, Pennzoil-Quaker State entered into afixed to floating interest rate swap to maintain its mix ofvariable rate versus fixed rate debt. The Company designated theswap as a fair value hedge. Under SFAS No. 133, changes in thefair value of the swap are recognized currently in earnings alongwith the offsetting changes in the fair value of the associateddebt. At March 31, 2001, the fair market value of the swap of$6.6 million was recorded in other current assets. In March 2001,the Company purchased $6.8 million of the notes and unwound thecorresponding swaps. No material gain or loss was recognized onthis transaction.

**(3)       SummarizedFinancial Data of Excel Paralubes and Correction of an Error -**

**            **TheCompany and Conoco are equal partners in Excel Paralubes, whichoperates a base oil processing facility located adjacent toConoco's refinery in Lake Charles, Louisiana. The facility iscapable of producing approximately 21,000 barrels per day ofhigh-quality base oils, the base ingredient in finishedlubricants. Conoco operates the plant with support positionsstaffed primarily by Conoco. 

            Undera co-products sale and purchase agreement, certain co-productsproduced at an adjacent Conoco facility are allocated betweenExcel Paralubes and Conoco based upon Excel Paralubes' feedstream flow rates and compositions. Excel Paralubes recentlydetermined that the measurements of the allocation of co-productsbetween Excel Paralubes and Conoco had been in error since thecommencement of Excel Paralubes' operations in 1997. As a resultof this error, pretax income of Excel Paralubes for the quartersended March 31, 2001 and 2000 was overstated by $0.8 million and$0.6 million, respectively. This requires a restatement of theCompany's previously filed financial statements to reduce netincome of the Company for the quarters ended March 30, 2001 and2000 by $0.4 million ($0.00 per share) and $0.4 million ($0.00per share), respectively. There was no impact on cash flow orcash flows from operations. Under the co-products sale andpurchase agreement, no adjustment is required for periods priorto 1999.

            Pennzoil-QuakerState's net investment in Excel Paralubes, accounted for usingthe equity method and carried as a credit balance of $69.0million and $75.2 million at March 31, 2001 and December 31,2000, respectively, is included in other liabilities on thecondensed consolidated balance sheet. Pennzoil-Quaker State'sequity in Excel Paralubes' restated pretax income for the threemonths ended March 31, 2001 and 2000 of $6.2 million and $1.6million, respectively, is included in other income in thecondensed consolidated statement of operations and comprehensiveincome.

           Summarizedfinancial information for Excel Paralubes for the three monthsended March 31, 2001 and 2000 on a 100% basis follows:

 

|                      | Restated                    |
|---------------------------|-----------------------------|
|                      | Three months ended March 31 |
|                      | 2001                        |   | 2000 |
|                      | (Expressed in thousands)    |
|                      | (Unaudited)                 |
| Revenues                  | $        122,188            |   | $        113,654 |
| Operating        earnings | 22,685                      |   | 13,260 |
| Net income                | 12,382                      |   | 3,163 |

 

**(4)       SegmentReporting -**

            Duringthe first quarter of 2001, the Company realigned its businesssegments to report five separate operating segments. Results forthe first three months of 2000 have been restated to conform withthe new presentation. Information with respect to revenues,operating income and other data is presented in the followingtables (expressed in thousands).

|                                                        |                                                                     |       |     |     |     |          |     |       |     |         |      |          |      |      |
|-------------------------------------------------------------|--------------------------------------------------------------------------|------------|----------|----------|----------|---------------|----------|------------|----------|--------------|-----------|---------------|-----------|-----------|
|                                                        | Three months ended March        31, 2001 (Restated)                      |
|                                                        |                                                                     |       |     | Consumer |     |          |     |       |     | Supply Chain |      | Corporate     |      |      |
|                                                        |                                                                     | Lubricants |     | Products |     | International |     | Jiffy Lube |     | Investments  |      | and other (b) |      | Total     |
| Unaffiliated revenues (a)                                   | $ 305,148                                                                |       | $ 79,672 |     | $ 62,563 |          | $ 83,764 |       | $ 38,638 |         | $ (1,595) |          | $ 568,190 |
| Intersegment revenues                                       | 15,983                                                                   |       | 5,267    |     | 709      |          | -        |       | 43,316   |         | (65,275)  |          | -         |
|                                                        | Total        revenues                                                    | $ 321,131  |     | $ 84,939 |     | $ 63,272      |     | $ 83,764   |     | $ 81,954     |      | $ (66,870)    |      | $ 568,190 |
| Income before interest                                      |                                                                     |       |     |     |     |          |     |       |     |         |      |          |      |
|                                                        | and        income taxes                                                  | $ 31,268   |     | $ 4,889  |     | $ 1,158       |     | $ 4,973    |     | $ 9,660      |      | $ (12,190)    |      | $ 39,758  |
|                                                        |                                                                     |       |     |     |     |          |     |       |     |         |      |          |      |      |
|                                                        | Three months ended March        31, 2000 (Restated)                      |
|                                                        |                                                                     |       |     | Consumer |     |          |     |       |     | Supply Chain |      | Corporate     |      |      |
|                                                        |                                                                     | Lubricants |     | Products |     | International |     | Jiffy Lube |     | Investments  |      | and other (b) |      | Total     |
| Unaffiliated revenues (a)                                   | $ 335,517                                                                |       | $ 79,454 |     | $ 58,691 |          | $ 83,831 |       | $ 24,751 |         | $ 2,738   |          | $ 584,982 |
| Intersegment revenues                                       | 14,685                                                                   |       | 4,633    |     | -        |          | -        |       | 42,509   |         | (61,827)  |          | -         |
|                                                        | Total        revenues                                                    | $ 350,202  |     | $ 84,087 |     | $ 58,691      |     | $ 83,831   |     | $ 67,260     |      | $ (59,089)    |      | $ 584,982 |
| Income before interest                                      |                                                                     |       |     |     |     |          |     |       |     |         |      |          |      |
|                                                        | and        income taxes                                                  | $ 34,585   |     | $ 12,018 |     | $ 4,951       |     | $ 3,249    |     | $ 4,895      |      | $ (48,157)    |      | $ 11,541  |
|                                                        |                                                                     |       |     |     |     |          |     |       |     |         |      |          |      |      |
| (a)                                                         | Unaffiliated revenues include sales to        unconsolidated affiliates. |       |     |     |     |          |     |       |     |
| (b)   Includes consolidating        eliminations. |                                                                     |       |     |     |     |          |     |       |     |

**(5)       Debt -**

            Pennzoil-QuakerState has a revolving credit facility with a group of banks thatprovides for up to $450.0 million of committed unsecuredrevolving credit borrowings through December 13, 2001, with anyoutstanding borrowings on such date being converted into a termcredit facility due on December 13, 2002. Outstanding borrowingswere $265.0 million under the revolving credit facility at March31, 2001 and were classified as long-term debt. The averageinterest rate applicable to borrowings under the revolving creditfacility was 6.78% during the first three months of 2001. 

            Pennzoil-QuakerState's Canadian subsidiary also maintains a revolving creditfacility with Canadian banks, which provides for up to $17.1million of committed borrowings through October 28, 2001, withany outstanding borrowings on such date being converted into aterm credit facility due on October 28, 2002. As of March 31,2001 borrowings under the Company's Canadian facility totaled$8.9 million and were classified as long-term debt. 

            AU.K. subsidiary of the Company maintains a revolving creditfacility that provides for borrowings up to $20.1 million throughJuly 26, 2002. Outstanding borrowings under the facility totaled$17.4 million at March 31, 2001 and were classified as long-termdebt.

            InDecember 2000, Pennzoil-Quaker State issued $150.0 million of8.65% Notes due 2002. Net proceeds of $149.1 million were used toreduce the Company's commercial paper borrowings. The terms ofthe notes provide that, in the event a rating on Pennzoil-QuakerState's senior unsecured debt falls and remains below investmentgrade, the coupon on the notes increases 0.75% to 9.4% and eachnoteholder has the option, at any time on or after June 1, 2001,to require the Company to purchase its note at 100% of theprincipal amount thereof plus accrued and unpaid interest on orafter June 1, 2001. On March 2, 2001 Standard and Poor's loweredthe senior unsecured debt rating for the Company's debt belowinvestment grade. The notes are currently trading above 100% facevalue plus accrued interest. During March 2001, the Companypurchased and retired $6.8 million face amount of these notes andno material gain or loss was recognized. In April, the Companypurchased and retired $5.0 million face amount of these notes.

            Asof March 31, 2001, $138.2 million of indebtedness underPennzoil-Quaker State's 8.65% Notes due in 2002 has beenclassified as long-term debt. Such debt classification is basedupon the availability of committed long-term credit facilities torefinance such short - term obligations and the Company's intentto maintain such commitments in excess of one year.

            Debtoutstanding was as follows:

|                                          |                        | March 31                 |      | December 31 |
|-----------------------------------------------|-----------------------------|--------------------------|-----------|-------------|
|                                          |                        | 2001                     |      | 2000        |
|                                          |                        | (Expressed in thousands) |
| 7.375% Debentures due 2029, net of discount   | $ 398,122                   |                     | $ 398,105 |
| 6.750% Notes due 2009, net of discount        | 199,184                     |                     | 199,159   |
| 8.65% Notes due 2002, net of discount         | 143,039                     |                     | 149,746   |
| 6.625 % Notes due 2005, net of discount       | 99,724                      |                     | 99,708    |
| Commercial paper                              | -                           |                     | 57,709    |
| Revolving credit facility                     | 265,000                     |                     | 195,000   |
| Pollution control bonds, net of discount      | 50,556                      |                     | 50,522    |
| International debt facilities                 | 43,768                      |                     | 51,808    |
| Fair Value of Interest Rate Swap              | 6,644                       |                     | 1,271     |
| Other debt                                    | 7,707                       |                     | 5,184     |
|                                          | Total        debt           | 1,213,744                |      | 1,208,212   |
| Less amounts classified as current maturities | (18,195)                    |                     | (13,786)  |
|                                          | Total        long-term debt | $ 1,195,549              |      | $ 1,194,426 |

 

**(6)       Earnings PerShare -**

            Computationsfor basic and diluted earnings (loss) per share for the threemonths ended March 31, 2001 and 2000 consist of the following:

|                                     |    | Restated                    |
|------------------------------------------|---------|-----------------------------|
|                                     |    | Three months ended March 31 |
|                                     |    | 2001                        |   | 2000 |
|                                     |    | (Expressed in thousands     |
|                                     |    | except per share amounts)   |
| Income (loss) from continuing operations | $ 8,290 |                        | $ (1,531) |
| Basic weighted average shares            | 78,836  |                        | 78,216 |
| Effect of dilutive securities (a)        |    |                        |   |
|                                     | Options | 935                         |   | - |
|                                     | Awards  | 508                         |   | - |
| Diluted weighted average shares          | 80,279  |                        | 78,216 |
| Basic earnings (loss) per share          | $ 0.11  |                        | $ (0.02) |
|                                     |    |                        |   |   |
| Diluted earnings (loss) per share        | $ 0.10  |                        | $ (0.02) |

 

 

- A weighted average number of options to        purchase 4.7 million shares of common stock were        outstanding for the three months ended March 31, 2001        that were not included in the computation of diluted        earnings per share because the options' prices were        greater than the average market price of the common        shares. A weighted average number of options to purchase        9.8 million shares of common stock were outstanding for        the three months ended March 31, 2000 and awards of 583.7        thousand shares of common stock were outstanding for the        three months ended March 31, 2000, but were not included        in the computation of diluted earnings per share because        these options and awards would have resulted in an        antidilutive per share amount.

 

**(7)        CashFlow Information -**

            Cashpaid for interest during the three months ended March 31, 2001and 2000 was $11.1 million and $13.7 million, respectively.Income tax payments (refunds) of $0.1 million and $(0.7) millionwere paid (received) during the three months ended March 31, 2001and 2000, respectively. 

**(8)    Discontinued Operations -**

**            **During2000, the Company completed a strategic review of itsmanufacturing assets, including its refining assets and specialtybusiness. During the review, it evaluated the strategic andfinancial advantages and disadvantages it derives from thevertical integration of its manufacturing and marketingcapabilities. Based on the results of the review, the Companybegan to withdraw from the refining business and to dispose ofits refineries and related assets. In 2001 and 2000, the Companysold the wax processing facilities and related assets at theRouseville, Pennsylvania refinery and its interest in the Barecowax marketing partnership, its share of Penreco, a specialtyindustrial products partnership with Conoco and its Shreveportrefinery to Calumet, thus completing the Company's exit from therefinery business. Accordingly, the net assets and results ofoperations of the Company's refining assets and specialtyindustrial products businesses have been combined and reported asdiscontinued operations in the accompanying financial statements.

            Noearnings or loss from discontinued operations was reported forthe quarter ended March 31, 2001. After-tax losses fromdiscontinued operations for the quarter ended March 31, 2000totaled $6.6 million ($10.9 million pretax). Operating revenuesfor discontinued operations for the quarter ended March 31, 2001was $155.2 million compared to $198.3 million for the same periodlast year. Included in net cash provided by discontinuedoperations for the 2001 period are proceeds of $70.0 million fromthe sale of Penreco.

            InApril 2001, Pennzoil-Quaker State completed the sale of itsShreveport, Louisiana, refinery to Calumet Lubricants Company,LP. The Company received $25.2 million from the sale, whichconsisted of $14.2 million in cash proceeds and a note for $11.0million. Results of the Shreveport refinery's operations,including the expected loss on its sale of $40.4 millionafter-tax that was accrued as of December 31, 2000, are includedin Pennzoil-Quaker State's discontinued operations.

Item 2. Management's Discussion and Analysis of FinancialCondition

            andResults of Operations

            Pennzoil-QuakerState's operations are conducted primarily through the followingfive segments: (1) Lubricants, (2) Consumer Products, (3)International, (4) Jiffy Lube and (5) Supply Chain Investments.

           TheCompany and Conoco are equal partners in Excel Paralubes, whichoperates a base oil processing facility located adjacent toConoco's refinery in Lake Charles, Louisiana. Conoco operates theplant with support positions staffed primarily by Conoco.

           Undera co-products sale and purchase agreement, certain co-productsproduced at an adjacent Conoco facility are allocated betweenExcel Paralubes and Conoco based upon Excel Paralubes' feedstream flow rates and compositions. Excel Paralubes recentlydetermined that the measurements of the allocation of co-productsbetween Excel Paralubes and Conoco had been in error since thecommencement of Excel Paralubes' operations in 1997. As a resultof this error, pretax income of Excel Paralubes for the quartersended March 31, 2001 and 2000 was overstated by $0.8 million and$0.6 million, respectively. This requires a restatement of theCompany's previously filed financial statements to reduce netincome of the Company for the quarters ended March 31, 2001 and2000 by $0.4 million ($0.00 per share) and $0.4 million ($0.00per share), respectively. There was no impact on cash flow orcash flows from operations. Under the co-products sale andpurchase agreement, no adjustment is required for periods priorto 1999.

Results of Operations

            Netsales for Pennzoil-Quaker State decreased by $15.6 million fromthe year earlier period, or approximately 2.7% for the quarterended March 31, 2001, to $560.7 million. The decrease in netsales was primarily a result of the disposition of non-strategicoperating assets associated with the Viscosity Oil Divisionduring 2000.

            Incomefrom continuing operations for the quarter ended March 31, 2001was $8.3 million, or 11 cents per basic share. This compares witha loss from continuing operations of $1.5 million, or 2 cents perbasic share for the quarter ended March 31, 2000. The increase inincome for the quarter ended March 31, 2001, compared to the sameperiod in 2000, is primarily due to charges associated with theCompany's general and administrative cost reduction projectrecorded in the first quarter of 2000, improved operating resultsfor the Supply Chain Investments segment due to higher base oilmargins, and higher results in Jiffy Lube primarily due to highercomparable store sales. These improvements were partially offsetby lower results from consumer products, lubricants andinternational and higher interest expense.

Lubricants

            Netsales for the Lubricants segment were $319.5 million for thequarter ended March 31, 2001, compared to $347.9 million for thesame period last year. The decrease in net sales is primarily aresult of the disposition of non-strategic operating assetsassociated with the Viscosity Oil Division during the fourthquarter of 2000. Operating income for this segment was $31.3million for the quarter ended March 31, 2001, compared to $34.6million for the same period last year. The decrease in operatingincome for the quarter ended March 31, 2001 is primarily due tolower volumes partially offset by lower selling, general andadministrative expenses.

Consumer Products

            Netsales for the Consumer Products segment were $84.9 million forthe quarter ended March 31, 2001, compared to $84.0 million forthe same period last year. The increase in net sales is primarilydue to increased automotive seat cover and floor mat revenues asa result of the acquisition of Sagaz Industries in early March2000, partially offset by lower revenues from car washes andcleaners. Operating income for this segment was $4.9 million forthe quarter ended March 31, 2001, compared to $12.0 million forthe same period last year. The decrease in operating income isprimarily due to increased cost of sales.

International

            Netsales for the International segment were $63.1 million for thequarter ended March 31, 2001, compared to $58.5 million for thesame period last year. The increase in net sales for the firstquarter of 2001 compared to the same period last year isprimarily due to acquisitions completed toward the end of thefirst quarter of 2000 and higher lubricating product prices.These increases were partially offset by lower volumes. Operatingincome for this segment was $1.2 million for the quarter endedMarch 31, 2001, compared to $5.0 million for the same period lastyear. The decrease in operating income is primarily due to lowerlubricating product margins resulting from higher base oil costs.

Jiffy Lube

            Netsales for this segment were $82.7 million for the quarter endedMarch 31, 2001. This compares to net sales of $82.1 million forthe same period in 2000. Other income for this segment for thequarter ended March 31, 2001, was $1.1 million compared to $1.7million for the same period in 2000. Operating income from thissegment for the quarter ended March 31, 2001 was $5.0 millioncompared to $3.2 million for the same period in 2000. Theimprovement in operating income was primarily due to highercomparable store sales and lower costs. 

Supply Chain Investments 

            Netsales for this segment, primarily intercompany sales toLubricants, were $75.8 million for the quarter ended March 31,2001. This compares to net sales of $65.7 million for the sameperiod in 2000. Other income for this segment for the quarterended March 31, 2001, was $6.2 million compared to $1.6 millionfor the same period in 2000. Other income represents the equityincome from the 50/50 Excel Paralubes partnership with ConocoInc., which is recorded using the equity method of accounting.The increase in equity income reflects higher base oil margins.Operating income from this segment for the quarter ended March31, 2001 was $9.7 million compared to operating income of $4.9million for the same period in 2000. The increase in operatingincome for the quarter ended March 31, 2001 was primarily due tohigher base oil margins.

Discontinued Operations

              Noearnings or loss from discontinued operations was reported forthe quarter ended March 31, 2001. After-tax loss fromdiscontinued operations for the quarter ended March 31, 2000 was$6.6 million ($10.9 million pretax). Operating revenues fordiscontinued operations for the quarter ended March 31, 2001 was$155.2 million compared to $198.3 million for the same periodlast year.

Corporate Administrative Expense

            Corporateadministrative expense decreased $32.4 million to $14.5 millionfor the quarter ended March 31, 2001, compared to the same periodin 2000. The decrease for the quarter ended March 31, 2001 isprimarily due to charges in 2000 related to a general andadministrative cost reduction project. 

Capital Resources and Liquidity

***            CashFlow*****.********As of March 31, 2001,Pennzoil-Quaker State had cash and cash equivalents of $36.3million. During the quarter ended March 31, 2001, cash and cashequivalents decreased $2.0 million. 

           Cashflow used in operating activities for the first three monthsended March 31, 2001 decreased due to improved operating results.

***            DebtInstruments and Repayments***.   Pennzoil-QuakerState has a revolving credit facility with a group of banks thatprovides for up to $450.0 million of committed unsecuredrevolving credit borrowings through December 13, 2001, with anyoutstanding borrowings on such date being converted into a termcredit facility due on December 13, 2002. Outstanding borrowingswere $265.0 million under the revolving credit facility at March31, 2001 and were classified as long-term debt. The averageinterest rate applicable to borrowings under the revolving creditfacility was 6.78% during the first three months of 2001. 

            Pennzoil-QuakerState's Canadian subsidiary also maintains a revolving creditfacility with Canadian banks, which provides for up to $17.1million of committed borrowings through October 28, 2001, withany outstanding borrowings on such date being converted into aterm credit facility due on October 28, 2002. As of March 31,2001 borrowings under the Company's Canadian facility totaled$8.9 million and were classified as long-term debt. 

           AU.K. subsidiary of the Company maintains a revolving creditfacility that provides for borrowings up to $20.1 million throughJuly 26, 2002. Outstanding borrowings under the facility totaled$17.4 million at March 31, 2001 and were classified as long-termdebt.

            InDecember 2000, Pennzoil-Quaker State issued $150.0 million of8.65% Notes due 2002. Net proceeds of $149.1 million were used toreduce the Company's commercial paper borrowings. The terms ofthe notes provide that, in the event a rating on Pennzoil-QuakerState's senior unsecured debt falls and remains below investmentgrade, the coupon on the notes increases 0.75% to 9.4% and eachnoteholder has the option, at any time on or after June 1, 2001,to require the Company to purchase its note at 100% of theprincipal amount thereof plus accrued and unpaid interest on orafter June 1, 2001. On March 2, 2001 Standard and Poor's loweredthe senior unsecured debt rating for the Company's debt belowinvestment grade. The notes are currently trading above 100% facevalue plus accrued interest. In March 2001, the Company purchasedand retired $6.8 million face amount of these notes.

            Asof March 31, 2001, $138.2 million of indebtedness underPennzoil-Quaker State's 8.65% Notes due in 2002 has beenclassified as long-term debt. Such debt classification is basedupon the availability of committed long-term credit facilities torefinance such short - term obligations and the Company's intentto maintain such commitments in excess of one year.

            **A*****ccountsReceivable***. Pennzoil-Quaker State, through its whollyowned subsidiary Pennzoil Receivables Company ("PRC"),sells certain of its accounts receivable to a third partypurchaser. PRC is a special limited purpose corporation and theassets of PRC are available solely to satisfy the claims of itsown creditors and not those of Pennzoil-Quaker State or itsaffiliates. The Company renewed and increased the receivablesales facility during August 2000. The renewed facility providesfor ongoing sales of up to $170.0 million through August 2001, atwhich time the Company intends to renew the facility. TheCompany's net accounts receivable sold under its receivable salesfacility totaled $139.5 million and $149.1 million at March 31,2001 and December 31, 2000, respectively.

            TheCompany maintains a lube center receivable purchase and saleagreement, which provides for the sale of certain notesreceivable up to $275.0 million, through a wholly ownedsubsidiary, Pennzoil Lube Center Acceptance Corporation("PLCAC"). The assets of PLCAC are available solely tosatisfy the claims of its own creditors and not those ofPennzoil-Quaker State or its affiliates. Through March 31, 2001,the Company sold a total of $223.9 million of notes receivableunder this agreement, of which $152.6 million were outstanding tothe third party purchaser at March 31, 2001. Through December 31,2000, the Company sold a total of $220.8 million of notesreceivable under this agreement, of which $159.0 million wereoutstanding to the third party purchaser at December 31, 2000.

Disclosures about Market Risk

            TheCompany's primary exposure to market risk includes changes ininterest rates, commodity prices and foreign currency exchangerates.

            Inconnection with the issuance of $150.0 million of two-year fixedrate notes in December 2000, Pennzoil-Quaker State entered into afixed to floating interest rate swap to maintain its mix ofvariable rate versus fixed rate debt. The Company designated theswap as a fair value hedge. Under SFAS No. 133, changes in thefair value of the swap are recognized currently in earnings alongwith the offsetting changes in the fair value of the associateddebt. At March 31, 2001, the fair market value of the swap was$6.6 million. In March 2001, the Company purchased $6.8 millionof the notes and unwound the corresponding swaps. No materialgain or loss was recognized on this transaction.

            Pennzoil-QuakerState enters into forward exchange contracts and options to hedgethe impact of foreign currency fluctuations on certain monetaryliabilities and commitments denominated in foreign currencies.The purpose of entering into these hedges is to minimize theimpact of foreign currency fluctuations on the results ofoperations. The unrealized gains and losses on these contractsare deferred and recognized in the results of operations in theperiod in which the hedged transaction is consummated. DuringApril 2001, the Company's Canadian subsidiary entered intoseveral foreign currency forward contracts to reduce the impactof fluctuating foreign exchange rates for a total amount of $6.0million. The contracts will settle over the next four months. Theforward contracts are designated as cash flow hedges offorecasted transactions. The forward contracts will be recordedat fair value as an asset or liability on the Company's balancesheet with the effective portion of the gain or loss reported asa component of other comprehensive income and will bereclassified into earnings in the same period during which thetransactions are settled. 

Forward-Looking Statements - Safe Harbor Provisions

            Thisquarterly report on Form 10-Q of Pennzoil-Quaker State for thequarter ended March 31, 2001 contains certain forward-lookingstatements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, which are intended to becovered by the safe harbors created thereby. To the extent thatsuch statements are not recitations of historical fact, suchstatements constitute forward-looking statements, which, bydefinition, involve risks and uncertainties. Where, in anyforward-looking statements, Pennzoil-Quaker State expresses anexpectation or belief as to future results or events, suchexpectation or belief is expressed in good faith and believed tohave a reasonable basis, but there can be no assurance that thestatement of expectation or belief will result or be achieved oraccomplished.

            Thefollowing are factors that could cause actual results or eventsto differ materially from those anticipated, and include but arenot limited to: general economic, financial and businessconditions; competition in the motor oil and marketing business;base oil margins and supply and demand in the base oil business;the success and cost of advertising and promotional efforts;mechanical failure in refining operations; unanticipatedenvironmental liabilities; changes in and compliance withgovernmental regulations; changes in tax laws; and the cost andeffects of legal proceedings.

**Item 6. Exhibits and Reports on Form 8-K**

(a)     Exhibits - 

-          12    Computation        of Ratio of Earnings to Fixed Charges for the three        months ended 
-                  March        31, 2001 and 2000.

(b)    Reports -

        No reports onForm 8-K were filed during the quarter for which this report wasfiled.

 

 

**SIGNATURE**

 

 

                    Pursuantto the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 

 

-                                                                                    PENNZOIL-QUAKER        STATE COMPANY
-                                                                                    Registrant

 

 

 

-                                                                                      S/N        Michael J. Maratea
-                                                                                     Michael        J. Maratea
-                                                                                     Vice        President and Controller 

 

 

March 8, 2002