##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission File Number 1-5263


THE LUBRIZOL CORPORATION




Ohio
    
    34-0367600(State or other jurisdiction of
    
    (I.R.S.Employerincorporation or organization)
    
    Identification No.)










þ o


þ o












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##### Table of Contents



THE LUBRIZOL CORPORATION  Quarterly Report on Form 10-Q  Quarter Ended June 30, 2005
 Table of Contents
  
 Page NumberPART I. FINANCIAL INFORMATIONItem 1
    
    Financial Statements (unaudited)
    
    
    3Consolidated Statements of Income
    
    
    3Consolidated Balance Sheets
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 4
    
    Controls and Procedures
    
    
    50PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    50Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    52Item 6
    
    Exhibits
    
    
    53Signatures
    
    
    53EX-31.1 CertificationEX-31.2 CertificationEX-32.1 Certification
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 THE LUBRIZOL CORPORATION
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,(in millions except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    1,066.0
    
    
    $
    720.2
    
    
    $
    2,036.1
    
    
    $
    1,298.1Royalties and other revenues
    
    
    0.6
    
    
    
    1.3
    
    
    
    1.6
    
    
    
    2.1Total revenues
    
    
    1,066.6
    
    
    
    721.5
    
    
    
    2,037.7
    
    
    
    1,300.2Cost of sales
    
    
    795.1
    
    
    
    529.5
    
    
    
    1,512.2
    
    
    
    955.8Selling and administrative expenses
    
    
    94.3
    
    
    
    70.2
    
    
    
    187.3
    
    
    
    122.0Research, testing and development expenses
    
    
    50.9
    
    
    
    45.5
    
    
    
    101.4
    
    
    
    86.3Amortization of intangible assets
    
    
    6.1
    
    
    
    4.5
    
    
    
    12.7
    
    
    
    6.4Write-off of acquired in-process
research and development
    
    
    
    
    
    
    35.0
    
    
    
    
    
    
    
    35.0Restructuring charges
    
    
    5.4
    
    
    
    8.0
    
    
    
    11.5
    
    
    
    8.0Total costs and expenses
    
    
    951.8
    
    
    
    692.7
    
    
    
    1,825.1
    
    
    
    1,213.5Other income (expense)  net
    
    
    0.7
    
    
    
    (1.9
    )
    
    
    1.4
    
    
    
    2.4Interest income
    
    
    1.9
    
    
    
    1.0
    
    
    
    3.7
    
    
    
    1.9Interest expense
    
    
    (26.8
    )
    
    
    (18.1
    )
    
    
    (53.1
    )
    
    
    (24.3
    )Income before income taxes
    
    
    90.6
    
    
    
    9.8
    
    
    
    164.6
    
    
    
    66.7Provision for income taxes
    
    
    30.5
    
    
    
    5.9
    
    
    
    56.0
    
    
    
    25.2Net income
    
    $
    60.1
    
    
    $
    3.9
    
    
    $
    108.6
    
    
    $
    41.5Net income per share, basic
    
    $
    0.88
    
    
    $
    0.08
    
    
    $
    1.60
    
    
    $
    0.80Net income per share, diluted
    
    $
    0.87
    
    
    $
    0.08
    
    
    $
    1.59
    
    
    $
    0.80Dividends per share
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.52
    
    
    $
    0.52Weighted-average common shares outstanding
    
    
    68.0
    
    
    
    51.9
    
    
    
    67.7
    
    
    
    51.8
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THE LUBRIZOL CORPORATION
 June 30,
    
    
    December 31,(in millions except per share data)
    
    2005
    
    
    2004ASSETSCash and short-term investments
    
    $
    279.0
    
    
    $
    335.9Receivables  net
    
    
    641.1
    
    
    
    582.8Inventories
    
    
    559.1
    
    
    
    568.7Other current assets
    
    
    106.8
    
    
    
    110.6Total current assets
    
    
    1,586.0
    
    
    
    1,598.0Property and equipment  at cost
    
    
    2,596.0
    
    
    
    2,731.3Less accumulated depreciation
    
    
    1,391.9
    
    
    
    1,413.4Property and equipment  net
    
    
    1,204.1
    
    
    
    1,317.9Goodwill
    
    
    1,147.9
    
    
    
    1,153.8Intangible assets  net
    
    
    419.3
    
    
    
    437.1Investments in non-consolidated companies
    
    
    7.3
    
    
    
    7.4Other assets
    
    
    48.4
    
    
    
    52.1TOTAL
    
    $
    4,413.0
    
    
    $
    4,566.3LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current portion of long-term debt
    
    $
    4.3
    
    
    $
    8.2Accounts payable
    
    
    302.9
    
    
    
    339.6Accrued expenses and other current liabilities
    
    
    299.9
    
    
    
    309.5Total current liabilities
    
    
    607.1
    
    
    
    657.3Long-term debt
    
    
    1,836.5
    
    
    
    1,964.1Postretirement health-care obligations
    
    
    106.5
    
    
    
    106.4Noncurrent liabilities
    
    
    185.1
    
    
    
    170.7Deferred income taxes
    
    
    75.5
    
    
    
    90.7Total liabilities
    
    
    2,810.7
    
    
    
    2,989.2Minority interest in consolidated companies
    
    
    52.3
    
    
    
    53.6Contingencies and commitmentsShareholders equity:Preferred stock without par value  authorized
and unissued:Serial preferred stock  2,000,000 shares
    
    
    
    
    
    
    Serial preference shares  25,000,000 shares
    
    
    
    
    
    
    Common shares without par value:Authorized 120,000,000 shares
Outstanding - 67,819,761 shares as of June 30, 2005
after deducting 18,376,133 treasury shares,
66,778,865 shares as of December 31, 2004
after deducting 19,417,029 treasury shares
    
    
    651.6
    
    
    
    610.6Retained earnings
    
    
    988.4
    
    
    
    897.4Accumulated other comprehensive (loss) income
    
    
    (90.0
    )
    
    
    15.5Total shareholders equity
    
    
    1,550.0
    
    
    
    1,523.5TOTAL
    
    $
    4,413.0
    
    
    $
    4,566.3
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THE LUBRIZOL CORPORATION
 Six MonthsEnded June 30,(in millions of dollars)
    
    2005
    
    
    2004Cash provided by (used for):Operating activities:Net income
    
    $
    108.6
    
    
    $
    41.5Adjustments to reconcile net income to cash provided
by operating activities:Depreciation and amortization
    
    
    91.7
    
    
    
    60.9Write-off of acquired in-process research and development
    
    
    
    
    
    
    35.0Deferred income taxes
    
    
    3.9
    
    
    
    1.2Restructuring charges
    
    
    5.1
    
    
    
    1.6Change in current assets and liabilities, net of acquisitions:Receivables
    
    
    (88.0
    )
    
    
    (77.0
    )Inventories
    
    
    (8.4
    )
    
    
    (1.8
    )Accounts payable, accrued expenses and other current liabilities
    
    
    (3.5
    )
    
    
    19.9Other current assets
    
    
    7.4
    
    
    
    (2.1
    )Other items  net
    
    
    23.8
    
    
    
    17.0Total operating activities
    
    
    140.6
    
    
    
    96.2Investing activities:Capital expenditures
    
    
    (58.6
    )
    
    
    (42.2
    )Acquisitions  net of cash received and liabilities assumed
    
    
    
    
    
    
    (960.7
    )Other items  net
    
    
    3.2
    
    
    
    Total investing activities
    
    
    (55.4
    )
    
    
    (1,002.9
    )Financing activities:Changes in short-term debt  net
    
    
    (3.7
    )
    
    
    1,800.1Repayments of long-term debt
    
    
    (125.0
    )
    
    
    (934.9
    )Long-term borrowings
    
    
    
    
    
    
    25.0Dividends paid
    
    
    (35.0
    )
    
    
    (26.8
    )Proceeds from the exercise of stock options
    
    
    37.4
    
    
    
    5.5Total financing activities
    
    
    (126.3
    )
    
    
    868.9Effect of exchange rate changes on cash
    
    
    (15.8
    )
    
    
    6.4Net decrease in cash and short-term
investments
    
    
    (56.9
    )
    
    
    (31.4
    )Cash and short-term investments at beginning of period
    
    
    335.9
    
    
    
    258.7Cash and short-term investments at end of period
    
    $
    279.0
    
    
    $
    227.3
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 1. Basis of Presentation
   2. Significant Accounting Policies
 Net Income Per Share
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,(in millions except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income
    
    $
    60.1
    
    
    $
    3.9
    
    
    $
    108.6
    
    
    $
    41.5Denominator:Weighted-average common shares
outstanding
    
    
    68.0
    
    
    
    51.9
    
    
    
    67.7
    
    
    
    51.8Dilutive effect of stock options and
awards
    
    
    0.7
    
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.3Denominator for net income per share,
diluted
    
    
    68.7
    
    
    
    52.2
    
    
    
    68.5
    
    
    
    52.1Net income per share, basic
    
    $
    0.88
    
    
    $
    0.08
    
    
    $
    1.60
    
    
    $
    0.80Net income per share, diluted
    
    $
    0.87
    
    
    $
    0.08
    
    
    $
    1.59
    
    
    $
    0.80
  Stock-Based Compensation
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,(in millions of dollars except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Reported net income
    
    $
    60.1
    
    
    $
    3.9
    
    
    $
    108.6
    
    
    $
    41.5Plus: stock-based employee compensation (net
of tax) included in net income
    
    
    1.4
    
    
    
    0.8
    
    
    
    2.8
    
    
    
    0.9Less: stock-based employee compensation (net
of tax) using the fair value method
    
    
    (1.3
    )
    
    
    (1.6
    )
    
    
    (3.5
    )
    
    
    (2.6
    )Pro forma net income
    
    $
    60.2
    
    
    $
    3.1
    
    
    $
    107.9
    
    
    $
    39.8Reported net income per share, basic
    
    $
    0.88
    
    
    $
    0.08
    
    
    $
    1.60
    
    
    $
    0.80Pro forma net income per share, basic
    
    $
    0.88
    
    
    $
    0.06
    
    
    $
    1.59
    
    
    $
    0.77Reported net income per share, diluted
    
    $
    0.87
    
    
    $
    0.08
    
    
    $
    1.59
    
    
    $
    0.80Pro forma net income per share, diluted
    
    $
    0.87
    
    
    $
    0.06
    
    
    $
    1.58
    
    
    $
    0.77
 New Accounting Standards
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
   Use of Estimates
  3. Acquisitions and Pro Forma Financial Information
 ® ® ®
   -8-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
    Fair Value of Net(in millions of dollars)
    
    Assets AcquiredReceivables
    
    $
    191.5Inventories
    
    
    180.5Other current assets
    
    
    47.4Property and equipment
    
    
    559.6Goodwill
    
    
    863.8Intangible assets
    
    
    379.1Other non-current assets
    
    
    18.2Total assets
    
    
    2,240.1Accounts payable
    
    
    129.4Accrued expenses
    
    
    107.2Current and long-term debt
    
    
    1,103.1Noncurrent liabilities
    
    
    71.8Total liabilities
    
    
    1,411.5Increase in net assets from acquisition
    
    $
    828.6
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
   Three Months
    
    
    Six MonthsEnded
    
    
    Ended(in millions of dollars except per share data)
    
    June 30, 2004
    
    
    June 30, 2004Total revenues
    
    $
    939.0
    
    
    $
    1,837.8Net income
    
    $
    15.0
    
    
    $
    59.7Net income per share, basic
    
    $
    0.29
    
    
    $
    1.06Net income per share, diluted
    
    $
    0.29
    
    
    $
    1.05
 ® ® ®
 4. Inventory
  June 30,
    
    
    December 31,(in millions of dollars)
    
    2005
    
    
    2004Finished products
    
    $
    305.9
    
    
    $
    311.2Products in process
    
    
    86.6
    
    
    
    75.9Raw materials
    
    
    138.3
    
    
    
    153.1Supplies and engine test parts
    
    
    28.3
    
    
    
    28.5Total inventory
    
    $
    559.1
    
    
    $
    568.7
 5. Goodwill and Intangible Assets
  -10-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
  June 30, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulated(in millions of dollars)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Customer lists
    
    $
    153.2
    
    
    $
    11.3
    
    
    $
    151.9
    
    
    $
    6.4Technology
    
    
    144.4
    
    
    
    30.5
    
    
    
    144.4
    
    
    
    25.4Trademarks
    
    
    24.5
    
    
    
    3.3
    
    
    
    24.4
    
    
    
    2.3Patents
    
    
    12.4
    
    
    
    2.0
    
    
    
    13.2
    
    
    
    1.5Land-use rights
    
    
    7.1
    
    
    
    0.9
    
    
    
    7.1
    
    
    
    0.8Non-compete agreements
    
    
    8.9
    
    
    
    4.8
    
    
    
    8.9
    
    
    
    3.8Other
    
    
    5.6
    
    
    
    0.6
    
    
    
    11.3
    
    
    
    0.9Total amortized
intangible assets
    
    
    356.1
    
    
    
    53.4
    
    
    
    361.2
    
    
    
    41.1Non-amortized trademarks
    
    
    116.6
    
    
    
    
    
    
    
    117.0
    
    
    
    Total
    
    $
    472.7
    
    
    $
    53.4
    
    
    $
    478.2
    
    
    $
    41.1
   Lubricant
    
    
    Specialty(in millions of dollars)
    
    Additives
    
    
    Chemicals
    
    
    TotalBalance, January 1, 2005
    
    $
    100.9
    
    
    $
    1,052.9
    
    
    $
    1,153.8Goodwill adjustments
    
    
    
    
    
    
    33.7
    
    
    
    33.7Foreign currency
translation
adjustments
    
    
    (2.2
    )
    
    
    (37.4
    )
    
    
    (39.6
    )Balance, June 30, 2005
    
    $
    98.7
    
    
    $
    1,049.2
    
    
    $
    1,147.9
   6. Comprehensive Income
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    60.1
    
    
    $
    3.9
    
    
    $
    108.6
    
    
    $
    41.5Foreign currency translation adjustment
    
    
    (58.4
    )
    
    
    (5.0
    )
    
    
    (107.1
    )
    
    
    (7.8
    )Pension plan minimum liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Unrealized gains (losses) - natural
gas hedges
    
    
    (0.5
    )
    
    
    
    
    
    
    0.2
    
    
    
    0.2Unrealized gains - interest rate swaps
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    2.1Amortization of treasury rate locks
    
    
    0.8
    
    
    
    (8.0
    )
    
    
    1.4
    
    
    
    (8.0
    )Total comprehensive income (loss)
    
    $
    2.0
    
    
    $
    (7.4
    )
    
    $
    3.1
    
    
    $
    28.3
 7. Segment Reporting
  ®
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
    Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues from external customers:Lubricant Additives
    
    $
    619.9
    
    
    $
    522.8
    
    
    $
    1,144.5
    
    
    $
    1,014.7Specialty Chemicals
    
    
    446.7
    
    
    
    198.7
    
    
    
    893.2
    
    
    
    285.5Total revenues
    
    $
    1,066.6
    
    
    $
    721.5
    
    
    $
    2,037.7
    
    
    $
    1,300.2Segment operating income:Lubricant Additives
    
    $
    85.2
    
    
    $
    72.8
    
    
    $
    154.0
    
    
    $
    135.5Specialty Chemicals
    
    
    51.4
    
    
    
    11.4
    
    
    
    103.0
    
    
    
    16.4Segment operating income
    
    
    136.6
    
    
    
    84.2
    
    
    
    257.0
    
    
    
    151.9Corporate expenses
    
    
    (15.8
    )
    
    
    (12.3
    )
    
    
    (30.8
    )
    
    
    (21.6
    )Corporate other income (expense)
    
    
    0.1
    
    
    
    (2.0
    )
    
    
    (0.7
    )
    
    
    1.8Write-off of acquired IPR&D
    
    
    
    
    
    
    (35.0
    )
    
    
    
    
    
    
    (35.0
    )Restructuring charges
    
    
    (5.4
    )
    
    
    (8.0
    )
    
    
    (11.5
    )
    
    
    (8.0
    )Interest expense  net
    
    
    (24.9
    )
    
    
    (17.1
    )
    
    
    (49.4
    )
    
    
    (22.4
    )Income before income taxes
    
    $
    90.6
    
    
    $
    9.8
    
    
    $
    164.6
    
    
    $
    66.7
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
  June 30,
    
    
    December 31,(in millions of dollars)
    
    2005
    
    
    2004Segment total assets:Lubricant Additives
    
    $
    1,223.8
    
    
    $
    1,337.1Specialty Chemicals
    
    
    2,749.2
    
    
    
    2,733.3Total segment assets
    
    
    3,973.0
    
    
    
    4,070.4Corporate assets
    
    
    440.0
    
    
    
    495.9Total consolidated assets
    
    $
    4,413.0
    
    
    $
    4,566.3
 8. Pension and Postretirement Benefits
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Pension benefits:Service cost - benefits earned
during period
    
    $
    7.2
    
    
    $
    5.2
    
    
    $
    14.2
    
    
    $
    8.7Interest cost on projected
benefit obligation
    
    
    8.1
    
    
    
    8.1
    
    
    
    15.9
    
    
    
    12.9Expected return on plan assets
    
    
    (6.7
    )
    
    
    (7.9
    )
    
    
    (13.5
    )
    
    
    (13.2
    )Amortization of prior service costs
    
    
    0.6
    
    
    
    0.6
    
    
    
    1.1
    
    
    
    1.0Amortization of initial net asset
obligation
    
    
    
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.4
    )Recognized net actuarial loss
    
    
    1.5
    
    
    
    1.5
    
    
    
    2.7
    
    
    
    1.8Net periodic benefit cost
    
    $
    10.7
    
    
    $
    7.3
    
    
    $
    20.5
    
    
    $
    10.8Other benefits:Service cost - benefits earned
during period
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.9
    
    
    $
    1.3Interest cost on projected
benefit obligation
    
    
    1.1
    
    
    
    1.8
    
    
    
    2.9
    
    
    
    3.5Amortization of prior service costs
    
    
    (2.2
    )
    
    
    (1.5
    )
    
    
    (3.8
    )
    
    
    (3.1
    )Recognized net actuarial loss
    
    
    0.4
    
    
    
    0.6
    
    
    
    1.0
    
    
    
    1.3Net periodic benefit (income) cost
    
    $
    (0.5
    )
    
    $
    1.6
    
    
    $
    1.0
    
    
    $
    3.0
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
   9. Restructuring Charges
   Liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    LiabilityDecember 31,
    
    
    Restructuring
    
    
    
    
    
    
    Asset
    
    
    June 30,(in millions of dollars)
    
    2004
    
    
    Charges
    
    
    Cash Paid
    
    
    Impairments
    
    
    2005Performance coatings plant closures
and workforce reductions
    
    $
    
    
    
    $
    7.1
    
    
    $
    (1.0
    )
    
    $
    (4.4
    )
    
    $
    1.7Bromborough, United Kingdom closure
    
    
    
    
    
    
    3.4
    
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    2.1Corporate workforce reductions
    
    
    2.7
    
    
    
    0.7
    
    
    
    (2.7
    )
    
    
    
    
    
    
    0.7Noveon International restructuring
liabilities assumed
    
    
    6.1
    
    
    
    0.3
    
    
    
    (4.3
    )
    
    
    
    
    
    
    2.1$
    8.8
    
    
    $
    11.5
    
    
    $
    (8.6
    )
    
    $
    (5.1
    )
    
    $
    6.6
 -15-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
     -16-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
   10. Debt
   11. Shareholders Equity
  Shareholders EquityAccumulatedNumber of
    
    
    
    
    
    
    
    
    
    
    OtherShares
    
    
    Common
    
    
    Retained
    
    
    ComprehensiveOutstanding
    
    
    Shares
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Total(in millions)Balance, January 1, 2005
    
    
    66.8
    
    
    $
    610.6
    
    
    $
    897.4
    
    
    $
    15.5
    
    
    $
    1,523.5Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    108.6
    
    
    
    
    
    
    
    108.6Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105.5
    )
    
    
    (105.5
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.1Dividends declared
    
    
    
    
    
    
    
    
    
    
    (17.6
    )
    
    
    
    
    
    
    (17.6
    )Deferred stock compensation
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    
    4.7Common shares  treasury:Shares issued upon exercise
of stock options and awards
    
    
    1.0
    
    
    
    36.3
    
    
    
    
    
    
    
    
    
    
    
    36.3Balance, June 30, 2005
    
    
    67.8
    
    
    $
    651.6
    
    
    
    988.4
    
    
    $
    (90.0
    )
    
    $
    1,550.0
 12. Contingencies
  -17-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 General
   Environmental
     -18-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
    13. Guarantor and Non-Guarantor Subsidiary Information
  Condensed Consolidating Statement of IncomeThree Months Ended June 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    355.8
    
    
    $
    329.7
    
    
    $
    531.2
    
    
    $
    (150.7
    )
    
    $
    1,066.0Royalties and other revenues
    
    
    0.5
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.6Total revenues
    
    
    356.3
    
    
    
    329.8
    
    
    
    531.2
    
    
    
    (150.7
    )
    
    
    1,066.6Cost of sales
    
    
    279.4
    
    
    
    254.0
    
    
    
    412.4
    
    
    
    (150.7
    )
    
    
    795.1Selling and administrative expenses
    
    
    36.7
    
    
    
    33.4
    
    
    
    24.2
    
    
    
    
    
    
    
    94.3Research, testing and development
expenses
    
    
    22.8
    
    
    
    10.3
    
    
    
    17.8
    
    
    
    
    
    
    
    50.9Amortization of intangible assets
    
    
    0.8
    
    
    
    4.1
    
    
    
    1.2
    
    
    
    
    
    
    
    6.1Restructuring charges
    
    
    1.0
    
    
    
    1.0
    
    
    
    3.4
    
    
    
    
    
    
    
    5.4Total costs and expenses
    
    
    340.7
    
    
    
    302.8
    
    
    
    459.0
    
    
    
    (150.7
    )
    
    
    951.8Other income (expense) - net
    
    
    6.6
    
    
    
    2.9
    
    
    
    (7.4
    )
    
    
    (1.4
    )
    
    
    0.7Interest income (expense) - net
    
    
    (26.0
    )
    
    
    (1.5
    )
    
    
    2.6
    
    
    
    
    
    
    
    (24.9
    )Equity in income of subsidiaries
    
    
    71.8
    
    
    
    27.3
    
    
    
    
    
    
    
    (99.1
    )
    
    
    Income before income taxes
    
    
    68.0
    
    
    
    55.7
    
    
    
    67.4
    
    
    
    (100.5
    )
    
    
    90.6Provision for income taxes
    
    
    7.9
    
    
    
    11.1
    
    
    
    11.5
    
    
    
    
    
    
    
    30.5Net income
    
    $
    60.1
    
    
    $
    44.6
    
    
    $
    55.9
    
    
    $
    (100.5
    )
    
    $
    60.1
 -19-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Condensed Consolidating Statement of IncomeSix Months Ended June 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    661.8
    
    
    $
    660.1
    
    
    $
    1,009.4
    
    
    $
    (295.2
    )
    
    $
    2,036.1Royalties and other revenues
    
    
    1.3
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    1.6Total revenues
    
    
    663.1
    
    
    
    660.3
    
    
    
    1,009.5
    
    
    
    (295.2
    )
    
    
    2,037.7Cost of sales
    
    
    522.3
    
    
    
    513.1
    
    
    
    772.0
    
    
    
    (295.2
    )
    
    
    1,512.2Selling and administrative expenses
    
    
    73.2
    
    
    
    59.3
    
    
    
    54.8
    
    
    
    
    
    
    
    187.3Research, testing and development
expenses
    
    
    46.1
    
    
    
    20.1
    
    
    
    35.2
    
    
    
    
    
    
    
    101.4Amortization of intangible assets
    
    
    1.5
    
    
    
    8.1
    
    
    
    3.1
    
    
    
    
    
    
    
    12.7Restructuring charges
    
    
    4.7
    
    
    
    2.6
    
    
    
    4.2
    
    
    
    
    
    
    
    11.5Total costs and expenses
    
    
    647.8
    
    
    
    603.2
    
    
    
    869.3
    
    
    
    (295.2
    )
    
    
    1,825.1Other income (expense)  net
    
    
    14.4
    
    
    
    6.8
    
    
    
    (18.3
    )
    
    
    (1.5
    )
    
    
    1.4Interest income (expense) - net
    
    
    (52.1
    )
    
    
    (0.9
    )
    
    
    3.6
    
    
    
    
    
    
    
    (49.4
    )Equity in income of subsidiaries
    
    
    131.9
    
    
    
    45.2
    
    
    
    
    
    
    
    (177.1
    )
    
    
    Income before income taxes
    
    
    109.5
    
    
    
    108.2
    
    
    
    125.5
    
    
    
    (178.6
    )
    
    
    164.6Provision for income
taxes
    
    
    0.9
    
    
    
    22.7
    
    
    
    32.4
    
    
    
    
    
    
    
    56.0Net income
    
    $
    108.6
    
    
    $
    85.5
    
    
    $
    93.1
    
    
    $
    (178.6
    )
    
    $
    108.6
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Condensed Consolidating Statement of IncomeThree Months Ended June 30, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    319.0
    
    
    $
    135.8
    
    
    $
    368.7
    
    
    $
    (103.3
    )
    
    $
    720.2Royalties and other revenues
    
    
    0.9
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    1.3Total revenues
    
    
    319.9
    
    
    
    136.2
    
    
    
    368.7
    
    
    
    (103.3
    )
    
    
    721.5Cost of sales
    
    
    234.9
    
    
    
    108.7
    
    
    
    289.2
    
    
    
    (103.3
    )
    
    
    529.5Selling and administrative expenses
    
    
    40.2
    
    
    
    10.8
    
    
    
    19.2
    
    
    
    
    
    
    
    70.2Research, testing and development
expenses
    
    
    27.7
    
    
    
    5.6
    
    
    
    12.2
    
    
    
    
    
    
    
    45.5Amortization of intangible assets
    
    
    0.5
    
    
    
    3.0
    
    
    
    1.0
    
    
    
    
    
    
    
    4.5Write-off of acquired in-process
research and
development
    
    
    
    
    
    
    35.0
    
    
    
    
    
    
    
    
    
    
    
    35.0Restructuring charges
    
    
    5.7
    
    
    
    0.6
    
    
    
    1.7
    
    
    
    
    
    
    
    8.0Total costs and expenses
    
    
    309.0
    
    
    
    163.7
    
    
    
    323.3
    
    
    
    (103.3
    )
    
    
    692.7Other income (expense)  net
    
    
    7.0
    
    
    
    3.7
    
    
    
    (11.7
    )
    
    
    (0.9
    )
    
    
    (1.9
    )Interest income (expense)  net
    
    
    (14.0
    )
    
    
    (3.3
    )
    
    
    0.2
    
    
    
    
    
    
    
    (17.1
    )Equity in income of subsidiaries
    
    
    1.4
    
    
    
    6.8
    
    
    
    
    
    
    
    (8.2
    )
    
    
    Income (loss) before income taxes
    
    
    5.3
    
    
    
    (20.3
    )
    
    
    33.9
    
    
    
    (9.1
    )
    
    
    9.8Provision for (benefit from)
income taxes
    
    
    1.5
    
    
    
    (3.8
    )
    
    
    8.2
    
    
    
    
    
    
    
    5.9Net income (loss)
    
    $
    3.8
    
    
    $
    (16.5
    )
    
    $
    25.7
    
    
    $
    (9.1
    )
    
    $
    3.9
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Condensed Consolidating Statement of IncomeSix Months Ended June 30, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    615.8
    
    
    $
    198.4
    
    
    $
    682.1
    
    
    $
    (198.2
    )
    
    $
    1,298.1Royalties and other revenues
    
    
    1.6
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    
    
    
    
    2.1Total revenues
    
    
    617.4
    
    
    
    198.8
    
    
    
    682.2
    
    
    
    (198.2
    )
    
    
    1,300.2Cost of sales
    
    
    452.4
    
    
    
    156.5
    
    
    
    545.1
    
    
    
    (198.2
    )
    
    
    955.8Selling and administrative expenses
    
    
    72.8
    
    
    
    16.6
    
    
    
    32.6
    
    
    
    
    
    
    
    122.0Research, testing and development
expenses
    
    
    55.2
    
    
    
    7.1
    
    
    
    24.0
    
    
    
    
    
    
    
    86.3Amortization of intangible assets
    
    
    1.5
    
    
    
    3.6
    
    
    
    1.3
    
    
    
    
    
    
    
    6.4Write-off of acquired in-process
research and
development
    
    
    
    
    
    
    35.0
    
    
    
    
    
    
    
    
    
    
    
    35.0Restructuring charges
    
    
    5.7
    
    
    
    0.6
    
    
    
    1.7
    
    
    
    
    
    
    
    8.0Total costs and expenses
    
    
    587.6
    
    
    
    219.4
    
    
    
    604.7
    
    
    
    (198.2
    )
    
    
    1,213.5Other income (expense)  net
    
    
    19.9
    
    
    
    6.8
    
    
    
    (23.0
    )
    
    
    (1.3
    )
    
    
    2.4Interest income (expense)  net
    
    
    (19.6
    )
    
    
    (3.3
    )
    
    
    0.5
    
    
    
    
    
    
    
    (22.4
    )Equity in income of subsidiaries
    
    
    21.4
    
    
    
    8.4
    
    
    
    
    
    
    
    (29.8
    )
    
    
    Income (loss) before income taxes
    
    
    51.5
    
    
    
    (8.7
    )
    
    
    55.0
    
    
    
    (31.1
    )
    
    
    66.7Provision for (benifit from) income taxes
    
    
    10.0
    
    
    
    (0.2
    )
    
    
    15.4
    
    
    
    
    
    
    
    25.2Net income (loss)
    
    $
    41.5
    
    
    $
    (8.5
    )
    
    $
    39.6
    
    
    $
    (31.1
    )
    
    $
    41.5
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Condensed Consolidating Balance SheetJune 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and short-term investments
    
    $
    64.2
    
    
    $
    7.8
    
    
    $
    207.0
    
    
    $
    
    
    
    $
    279.0Receivables - net
    
    
    145.0
    
    
    
    155.1
    
    
    
    341.0
    
    
    
    
    
    
    
    641.1Inventories
    
    
    88.2
    
    
    
    181.2
    
    
    
    319.4
    
    
    
    (29.7
    )
    
    
    559.1Other current assets
    
    
    65.8
    
    
    
    20.0
    
    
    
    10.7
    
    
    
    10.3
    
    
    
    106.8Total current assets
    
    
    363.2
    
    
    
    364.1
    
    
    
    878.1
    
    
    
    (19.4
    )
    
    
    1,586.0Property and equipment - net
    
    
    391.8
    
    
    
    456.1
    
    
    
    356.2
    
    
    
    
    
    
    
    1,204.1Goodwill
    
    
    27.1
    
    
    
    677.3
    
    
    
    443.5
    
    
    
    
    
    
    
    1,147.9Intangible assets  net
    
    
    10.7
    
    
    
    277.9
    
    
    
    130.7
    
    
    
    
    
    
    
    419.3Investments in subsidiaries
and intercompany balances
    
    
    2,966.6
    
    
    
    1,772.9
    
    
    
    (249.6
    )
    
    
    (4,489.9
    )
    
    
    Investments in non-consolidated
companies
    
    
    5.9
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    7.3Other assets
    
    
    29.8
    
    
    
    3.1
    
    
    
    15.5
    
    
    
    
    
    
    
    48.4TOTAL
    
    $
    3,795.1
    
    
    $
    3,552.8
    
    
    $
    1,574.4
    
    
    $
    (4,509.3
    )
    
    $
    4,413.0LIABILITIES AND SHAREHOLDERS
EQUITYShort-term debt and current
portion of long-term debt
    
    $
    
    
    
    $
    0.1
    
    
    $
    4.2
    
    
    $
    
    
    
    $
    4.3Accounts payable
    
    
    94.4
    
    
    
    87.9
    
    
    
    120.6
    
    
    
    
    
    
    
    302.9Accrued expenses and other
current liabilities
    
    
    115.1
    
    
    
    74.4
    
    
    
    110.4
    
    
    
    
    
    
    
    299.9Total current liabilities
    
    
    209.5
    
    
    
    162.4
    
    
    
    235.2
    
    
    
    
    
    
    
    607.1Long-term debt
    
    
    1,830.2
    
    
    
    
    
    
    
    6.3
    
    
    
    
    
    
    
    1,836.5Postretirement health-care
obligations
    
    
    96.3
    
    
    
    4.1
    
    
    
    6.1
    
    
    
    
    
    
    
    106.5Noncurrent liabilities
    
    
    58.3
    
    
    
    44.3
    
    
    
    82.5
    
    
    
    
    
    
    
    185.1Deferred income taxes
    
    
    31.3
    
    
    
    16.0
    
    
    
    28.2
    
    
    
    
    
    
    
    75.5Total liabilities
    
    
    2,225.6
    
    
    
    226.8
    
    
    
    358.3
    
    
    
    
    
    
    
    2,810.7Minority interest in consolidated
companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52.3
    
    
    
    52.3Total shareholders equity
    
    
    1,569.5
    
    
    
    3,326.0
    
    
    
    1,216.1
    
    
    
    (4,561.6
    )
    
    
    1,550.0TOTAL
    
    $
    3,795.1
    
    
    $
    3,552.8
    
    
    $
    1,574.4
    
    
    $
    (4,509.3
    )
    
    $
    4,413.0
 -23-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Condensed Consolidating Balance SheetDecember 31, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and short-term investments
    
    $
    40.3
    
    
    $
    (0.1
    )
    
    $
    295.7
    
    
    $
    
    
    
    $
    335.9Receivables - net
    
    
    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
 -24-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Condensed Consolidating Statement of Cash FlowsSix Months Ended June 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIES:Net income
    
    $
    108.6
    
    
    $
    85.5
    
    
    $
    93.1
    
    
    $
    (178.6
    )
    
    $
    108.6Adjustments to reconcile net income to
cash provided by
(used for) operating
activities
    
    
    16.5
    
    
    
    38.7
    
    
    
    (201.8
    )
    
    
    178.6
    
    
    
    32.0Total operating activities
    
    
    125.1
    
    
    
    124.2
    
    
    
    (108.7
    )
    
    
    
    
    
    
    140.6INVESTING ACTIVITIES:Capital expenditures
    
    
    (21.2
    )
    
    
    (16.3
    )
    
    
    (21.1
    )
    
    
    
    
    
    
    (58.6
    )Other items  net
    
    
    (0.4
    )
    
    
    3.4
    
    
    
    0.2
    
    
    
    
    
    
    
    3.2Total investing activities
    
    
    (21.6
    )
    
    
    (12.9
    )
    
    
    (20.9
    )
    
    
    
    
    
    
    (55.4
    )FINANCING ACTIVITIES:Changes in short-term debt  net
    
    
    
    
    
    
    
    
    
    
    (3.7
    )
    
    
    
    
    
    
    (3.7
    )Repayments of long-term debt
    
    
    (125.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125.0
    )Dividends paid
    
    
    (35.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35.0
    )Changes in intercompany activities
    
    
    42.9
    
    
    
    (100.9
    )
    
    
    58.0
    
    
    
    
    
    
    
    Proceeds from the exercise of stock
options
    
    
    37.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37.4Total financing activities
    
    
    (79.7
    )
    
    
    (100.9
    )
    
    
    54.3
    
    
    
    
    
    
    
    (126.3
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    (2.4
    )
    
    
    (13.4
    )
    
    
    
    
    
    
    (15.8
    )Net increase (decrease) in cash and
short-term investments
    
    
    23.8
    
    
    
    8.0
    
    
    
    (88.7
    )
    
    
    
    
    
    
    (56.9
    )Cash and short-term investments at
beginning of period
    
    
    40.4
    
    
    
    (0.2
    )
    
    
    295.7
    
    
    
    
    
    
    
    335.9Cash and short-term investments at
end of period
    
    $
    64.2
    
    
    $
    7.8
    
    
    $
    207.0
    
    
    $
    
    
    
    $
    279.0
 -25-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  June 30, 2005
 Condensed Consolidating Statement of Cash FlowsSix Months Ended June 30, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIES:Net income
    
    $
    41.5
    
    
    $
    (8.5
    )
    
    $
    39.6
    
    
    $
    (31.1
    )
    
    $
    41.5Adjustments to reconcile net income to
cash provided by (used
for) operating
activities
    
    
    13.2
    
    
    
    (26.5
    )
    
    
    36.9
    
    
    
    31.1
    
    
    
    54.7Total operating activities
    
    
    54.7
    
    
    
    (35.0
    )
    
    
    76.5
    
    
    
    
    
    
    
    96.2INVESTING ACTIVITIES:Capital expenditures
    
    
    (23.8
    )
    
    
    (6.2
    )
    
    
    (12.2
    )
    
    
    
    
    
    
    (42.2
    )Acquisitions - net of cash received and
liabilities assumed
    
    
    (20.3
    )
    
    
    (827.7
    )
    
    
    (112.7
    )
    
    
    
    
    
    
    (960.7
    )Other items  net
    
    
    (0.1
    )
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Total investing activities
    
    
    (44.2
    )
    
    
    (833.9
    )
    
    
    (124.8
    )
    
    
    
    
    
    
    (1,002.9
    )FINANCING ACTIVITIES:Changes in short-term debt  net
    
    
    1,797.0
    
    
    
    9.8
    
    
    
    (6.7
    )
    
    
    
    
    
    
    1,800.1Repayments of long-term debt
    
    
    (18.4
    )
    
    
    (908.5
    )
    
    
    (8.0
    )
    
    
    
    
    
    
    (934.9
    )Long-term borrowings
    
    
    25.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25.0Dividends paid
    
    
    (26.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26.8
    )Changes in intercompany activities
    
    
    (1,821.0
    )
    
    
    1,774.6
    
    
    
    46.4
    
    
    
    
    
    
    
    Proceeds from the exercise of stock
options
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.5Total financing activities
    
    
    (38.7
    )
    
    
    875.9
    
    
    
    31.7
    
    
    
    
    
    
    
    868.9Effect of exchange rate changes on cash
    
    
    6.4
    
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    
    
    
    
    6.4Net
(decrease) increase in cash and short-term
investments
    
    
    (21.8
    )
    
    
    7.2
    
    
    
    (16.8
    )
    
    
    
    
    
    
    (31.4
    )Cash and short-term investments at
beginning of period
    
    
    56.2
    
    
    
    (1.0
    )
    
    
    203.5
    
    
    
    
    
    
    
    258.7Cash and short-term investments at
end of period
    
    $
    34.4
    
    
    $
    6.2
    
    
    $
    186.7
    
    
    $
    
    
    
    $
    227.3
 -26-




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##### Table of Contents



Item 2. 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 unaudited consolidated financial statements and the notes
thereto appearing elsewhere in this quarterly report on Form 10-Q. 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 risk 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 quarterly report on Form 10-Q.
 OVERVIEW
   ® ® ®
   -27-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
     -28-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 RESULTS OF OPERATIONS
  Revenues
  Periods Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingJune 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeThree Months:Net sales
    
    $
    1,066.0
    
    
    $
    720.2
    
    
    $
    345.8
    
    
    
    48
    %
    
    $
    110.4
    
    
    
    15
    %Royalties and other
revenues
    
    
    0.6
    
    
    
    1.3
    
    
    
    (0.7
    )
    
    
    (54
    %)
    
    
    (0.7
    )
    
    
    (54
    %)Total revenues
    
    $
    1,066.6
    
    
    $
    721.5
    
    
    $
    345.1
    
    
    
    48
    %
    
    $
    109.7
    
    
    
    15
    %Six Months:Net sales
    
    $
    2,036.1
    
    
    $
    1,298.1
    
    
    $
    738.0
    
    
    
    57
    %
    
    $
    146.9
    
    
    
    11
    %Royalties and other
revenues
    
    
    1.6
    
    
    
    2.1
    
    
    
    (0.5
    )
    
    
    (24
    %)
    
    
    (0.6
    )
    
    
    (28
    %)Total revenues
    
    $
    2,037.7
    
    
    $
    1,300.2
    
    
    $
    737.5
    
    
    
    57
    %
    
    $
    146.3
    
    
    
    11
    %
   -29-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  2nd Quarter
    
    Year-to-Date2005
    
    2005Volume
    
    VolumeNorth America
    
    
    49
    %
    
    
    50
    %Europe
    
    
    25
    %
    
    
    26
    %Asia-Pacific / Middle East
    
    
    21
    %
    
    
    19
    %Latin America
    
    
    5
    %
    
    
    5
    %Total
    
    
    100
    %
    
    
    100
    %
  ExcludingAcquisitions2005 vs. 2004
    
    2005 vs. 2004% Change
    
    % ChangeSecond Quarter:North America
    
    
    23
    %
    
    
    (7
    %)Europe
    
    
    14
    %
    
    
    4
    %Asia-Pacific / Middle East
    
    
    25
    %
    
    
    13
    %Latin America
    
    
    14
    %
    
    
    (2
    %)Total
    
    
    20
    %
    
    
    Year-to-Date:North America
    
    
    31
    %
    
    
    (9
    %)Europe
    
    
    18
    %
    
    
    4
    %Asia-Pacific / Middle East
    
    
    21
    %
    
    
    6
    %Latin America
    
    
    11
    %
    
    
    (8
    %)Total
    
    
    25
    %
    
    
    (3
    %)
  Costs and Expenses
  -30-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Periods Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingJune 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeThree Months:Cost of sales
    
    $
    795.1
    
    
    $
    529.5
    
    
    $
    265.6
    
    
    
    50
    %
    
    $
    94.1
    
    
    
    18
    %Selling and administrative
expenses
    
    
    94.3
    
    
    
    70.2
    
    
    
    24.1
    
    
    
    34
    %
    
    
    (0.1
    )
    
    
    Research, testing and
development expenses
    
    
    50.9
    
    
    
    45.5
    
    
    
    5.4
    
    
    
    12
    %
    
    
    (3.5
    )
    
    
    (8
    %)Amortization of
intangible assets
    
    
    6.1
    
    
    
    4.5
    
    
    
    1.6
    
    
    
    *
    
    
    
    (1.0
    )
    
    
    *Write-off of acquired
IPR&D
    
    
    
    
    
    
    35.0
    
    
    
    (35.0
    )
    
    
    *
    
    
    
    (35.0
    )
    
    
    *Restructuring charges
    
    
    5.4
    
    
    
    8.0
    
    
    
    (2.6
    )
    
    
    *
    
    
    
    (3.7
    )
    
    
    *Total costs and expenses
    
    $
    951.8
    
    
    $
    692.7
    
    
    $
    259.1
    
    
    
    37
    %
    
    $
    50.8
    
    
    
    7
    %Six Months:Cost of sales
    
    $
    1,512.2
    
    
    $
    955.8
    
    
    $
    556.4
    
    
    
    58
    %
    
    $
    127.6
    
    
    
    13
    %Selling and administrative
expenses
    
    
    187.3
    
    
    
    122.0
    
    
    
    65.3
    
    
    
    54
    %
    
    
    4.6
    
    
    
    4
    %Research, testing and
development expenses
    
    
    101.4
    
    
    
    86.3
    
    
    
    15.1
    
    
    
    17
    %
    
    
    (7.0
    )
    
    
    (8
    %)Amortization of
intangible assets
    
    
    12.7
    
    
    
    6.4
    
    
    
    6.3
    
    
    
    *
    
    
    
    (1.0
    )
    
    
    *Write-off of acquired
IPR&D
    
    
    
    
    
    
    35.0
    
    
    
    (35.0
    )
    
    
    *
    
    
    
    (35.0
    )
    
    
    *Restructuring charges
    
    
    11.5
    
    
    
    8.0
    
    
    
    3.5
    
    
    
    *
    
    
    
    1.7
    
    
    
    *Total costs and expenses
    
    $
    1,825.1
    
    
    $
    1,213.5
    
    
    $
    611.6
    
    
    
    50
    %
    
    $
    90.9
    
    
    
    7
    %
  Excluding acquisitions, the increase in cost of sales for the three and six months ended June
30, 2005 compared with the same periods in 2004 primarily was due to higher average raw material
cost and higher manufacturing expenses. Excluding acquisitions, average raw material cost
increased 19% and 18% in the three and six months ended June 30, 2005 compared with the same
periods in 2004, primarily due to higher unit raw material cost along with unfavorable currency
effects. In June 2004, we also recorded a purchase accounting adjustment associated with the
increased valuation of Noveon International-acquired inventory of $4.9 million. We expect higher
raw material costs in the third quarter of 2005 as compared to the second quarter of 2005.
 -31-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
       -32-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Periods Ended June 30, 2005Asset
    
    
    Other Plant Exit(in millions of dollars)
    
    Impairments
    
    
    Costs
    
    
    Severance
    
    
    TotalThree Months:Coatings plant closures
and workforce reductions
    
    $
    
    
    
    $
    0.5
    
    
    $
    1.7
    
    
    $
    2.2Bromborough, United Kingdom closure
    
    
    0.7
    
    
    
    0.3
    
    
    
    1.5
    
    
    
    2.5Corporate workforce reductions
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    0.7$
    0.7
    
    
    $
    0.8
    
    
    $
    3.9
    
    
    $
    5.4Six Months:Coatings plant closures
and workforce reductions
    
    $
    4.4
    
    
    $
    0.9
    
    
    $
    1.8
    
    
    $
    7.1Bromborough, United Kingdom closure
    
    
    0.7
    
    
    
    0.5
    
    
    
    2.2
    
    
    
    3.4Corporate workforce reductions
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    0.7Noveon International restructuring
liabilities
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3$
    5.1
    
    
    $
    1.4
    
    
    $
    5.0
    
    
    $
    11.5
    -33-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
    -34-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Other Items and Net Income
  Periods Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingJune 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeThree Months:Other income (expense) -
net
    
    $
    0.7
    
    
    $
    (1.9
    )
    
    $
    2.6
    
    
    
    *
    
    
    $
    2.1
    
    
    
    *Interest expense - net
    
    
    (24.9
    )
    
    
    (17.1
    )
    
    
    (7.8
    )
    
    
    *
    
    
    
    (5.7
    )
    
    
    *Income before income
taxes
    
    
    90.6
    
    
    
    9.8
    
    
    
    80.8
    
    
    
    *
    
    
    
    66.7
    
    
    
    *Provision for income
taxes
    
    
    30.5
    
    
    
    5.9
    
    
    
    24.6
    
    
    
    *
    
    
    
    20.1
    
    
    
    *Net income
    
    
    60.1
    
    
    
    3.9
    
    
    
    56.2
    
    
    
    *
    
    
    
    46.6
    
    
    
    *Six Months:Other income (expense) -
net
    
    $
    1.4
    
    
    $
    2.4
    
    
    $
    (1.0
    )
    
    
    *
    
    
    $
    (1.7
    )
    
    
    *Interest expense - net
    
    
    (49.4
    )
    
    
    (22.4
    )
    
    
    (27.0
    )
    
    
    *
    
    
    
    (6.6
    )
    
    
    *Income before income
taxes
    
    
    164.6
    
    
    
    66.7
    
    
    
    97.9
    
    
    
    147
    %
    
    
    60.3
    
    
    
    90
    %Provision for income
taxes
    
    
    56.0
    
    
    
    25.2
    
    
    
    30.8
    
    
    
    122
    %
    
    
    18.0
    
    
    
    71
    %Net income
    
    
    108.6
    
    
    
    41.5
    
    
    
    67.1
    
    
    
    162
    %
    
    
    42.3
    
    
    
    102
    %
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
   SEGMENT ANALYSIS
   Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Lubricant Additives
    
    
    58
    %
    
    
    72
    %
    
    
    56
    %
    
    
    78
    %Specialty Chemicals
    
    
    42
    %
    
    
    28
    %
    
    
    44
    %
    
    
    22
    %Segment Operating Income:Lubricant Additives
    
    
    62
    %
    
    
    86
    %
    
    
    60
    %
    
    
    89
    %Specialty Chemicals
    
    
    38
    %
    
    
    14
    %
    
    
    40
    %
    
    
    11
    %
 -36-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Periods Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingJune 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeRevenuesThree Months:Lubricant Additives
    
    $
    619.9
    
    
    $
    522.8
    
    
    $
    97.1
    
    
    
    19
    %
    
    $
    97.1
    
    
    
    19
    %Specialty Chemicals
    
    
    446.7
    
    
    
    198.7
    
    
    
    248.0
    
    
    
    125
    %
    
    
    12.6
    
    
    
    6
    %Total
    
    $
    1,066.6
    
    
    $
    721.5
    
    
    $
    345.1
    
    
    
    48
    %
    
    $
    109.7
    
    
    
    15
    %Six Months:Lubricant Additives
    
    $
    1,144.5
    
    
    $
    1,014.7
    
    
    $
    129.8
    
    
    
    13
    %
    
    $
    129.8
    
    
    
    13
    %Specialty Chemicals
    
    
    893.2
    
    
    
    285.5
    
    
    
    607.7
    
    
    
    213
    %
    
    
    16.5
    
    
    
    6
    %Total
    
    $
    2,037.7
    
    
    $
    1,300.2
    
    
    $
    737.5
    
    
    
    57
    %
    
    $
    146.3
    
    
    
    11
    %Gross ProfitThree Months:Lubricant Additives
    
    $
    152.0
    
    
    $
    143.5
    
    
    $
    8.5
    
    
    
    6
    %
    
    $
    8.5
    
    
    
    6
    %Specialty Chemicals
    
    
    118.9
    
    
    
    47.1
    
    
    
    71.8
    
    
    
    152
    %
    
    
    7.8
    
    
    
    17
    %Total
    
    $
    270.9
    
    
    $
    190.6
    
    
    $
    80.3
    
    
    
    42
    %
    
    $
    16.3
    
    
    
    9
    %Six Months:Lubricant Additives
    
    $
    285.4
    
    
    $
    272.3
    
    
    $
    13.1
    
    
    
    5
    %
    
    $
    13.1
    
    
    
    5
    %Specialty Chemicals
    
    
    238.5
    
    
    
    69.9
    
    
    
    168.6
    
    
    
    241
    %
    
    
    6.2
    
    
    
    9
    %Total
    
    $
    523.9
    
    
    $
    342.2
    
    
    $
    181.7
    
    
    
    53
    %
    
    $
    19.3
    
    
    
    6
    %Segment
Operating IncomeThree Months:Lubricant Additives
    
    $
    85.2
    
    
    $
    72.8
    
    
    $
    12.4
    
    
    
    17
    %
    
    $
    12.4
    
    
    
    17
    %Specialty Chemicals
    
    
    51.4
    
    
    
    11.4
    
    
    
    40.0
    
    
    
    351
    %
    
    
    11.3
    
    
    
    99
    %Total
    
    $
    136.6
    
    
    $
    84.2
    
    
    $
    52.4
    
    
    
    62
    %
    
    $
    23.7
    
    
    
    28
    %Six Months:Lubricant Additives
    
    $
    154.0
    
    
    $
    135.5
    
    
    $
    18.5
    
    
    
    14
    %
    
    $
    18.5
    
    
    
    14
    %Specialty Chemicals
    
    
    103.0
    
    
    
    16.4
    
    
    
    86.6
    
    
    
    528
    %
    
    
    13.6
    
    
    
    83
    %Total
    
    $
    257.0
    
    
    $
    151.9
    
    
    $
    105.1
    
    
    
    69
    %
    
    $
    32.1
    
    
    
    21
    %
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Lubricant Additives Segment
   2nd Quarter
    
    Year-to-Date2005
    
    2005Volume
    
    VolumeNorth America
    
    
    38
    %
    
    
    39
    %Europe
    
    
    30
    %
    
    
    31
    %Asia-Pacific / Middle East
    
    
    26
    %
    
    
    25
    %Latin America
    
    
    6
    %
    
    
    5
    %Total
    
    
    100
    %
    
    
    100
    %
  2nd Quarter
    
    Year-to-Date2005 vs. 2004
    
    2005 vs. 2004% Change
    
    % ChangeNorth America
    
    
    (4
    %)
    
    
    (9
    %)Europe
    
    
    2
    %
    
    
    3
    %Asia-Pacific / Middle East
    
    
    14
    %
    
    
    6
    %Latin America
    
    
    (2
    %)
    
    
    (9
    %)Total
    
    
    2
    %
    
    
    (2
    %)
  -38-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
       -39-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Specialty Chemicals Segment
 .
  2nd Quarter

    
    Year-to-Date2005
    
    2005Volume
    
    VolumeNorth America
    
    
    70
    %
    
    
    71
    %Europe
    
    
    16
    %
    
    
    16
    %Asia-Pacific / Middle East
    
    
    10
    %
    
    
    9
    %Latin America
    
    
    4
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
  ExcludingAcquisitions2005 vs. 2004
    
    2005 vs. 2004% Change
    
    % ChangeSecond Quarter:North America
    
    
    74
    %
    
    
    (12
    %)Europe
    
    
    92
    %
    
    
    13
    %Asia-Pacific / Middle East
    
    
    150
    %
    
    
    3
    %Latin America
    
    
    83
    %
    
    
    (2
    %)Total
    
    
    82
    %
    
    
    (7
    %)Year-to-Date:North America
    
    
    128
    %
    
    
    (10
    %)Europe
    
    
    152
    %
    
    
    11
    %Asia-Pacific / Middle East
    
    
    265
    %
    
    
    Latin America
    
    
    138
    %
    
    
    (1
    %)Total
    
    
    140
    %
    
    
    (6
    %)
 -40-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
      -41-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 PRO FORMA ANALYSIS
     -42-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in millions of dollars)
    
    Actual 2005
    
    
    Pro Forma 2004
    
    
    Actual 2005
    
    
    Pro Forma 2004Consolidated DataTotal revenues
    
    $
    1,066.6
    
    
    $
    939.0
    
    
    $
    2,037.7
    
    
    $
    1,837.8Gross profit
    
    $
    270.9
    
    
    $
    253.6
    
    
    $
    523.9
    
    
    $
    496.0Income before income taxes
    
    $
    90.6
    
    
    $
    23.4
    
    
    $
    164.6
    
    
    $
    93.3Net income
    
    $
    60.1
    
    
    $
    15.0
    
    
    $
    108.6
    
    
    $
    59.7Depreciation expense
    
    $
    38.4
    
    
    $
    40.3
    
    
    $
    79.0
    
    
    $
    81.9Amortization of intangible assets
    
    $
    6.1
    
    
    $
    6.3
    
    
    $
    12.7
    
    
    $
    12.3Capital expenditures
    
    $
    28.9
    
    
    $
    33.6
    
    
    $
    58.6
    
    
    $
    65.3Segment DataLubricant Additives SegmentTotal revenues
    
    $
    619.9
    
    
    $
    522.8
    
    
    $
    1,144.5
    
    
    $
    1,014.7Gross profit
    
    $
    152.0
    
    
    $
    143.5
    
    
    $
    285.4
    
    
    $
    272.3Segment operating income
    
    $
    85.2
    
    
    $
    72.8
    
    
    $
    154.0
    
    
    $
    135.5Depreciation expense
    
    $
    19.7
    
    
    $
    21.0
    
    
    $
    41.2
    
    
    $
    42.9Amortization of intangible assets
    
    $
    0.8
    
    
    $
    0.8
    
    
    $
    1.5
    
    
    $
    1.5Capital expenditures
    
    $
    17.4
    
    
    $
    17.3
    
    
    $
    33.0
    
    
    $
    35.6Specialty Chemicals SegmentTotal revenues
    
    $
    446.7
    
    
    $
    416.2
    
    
    $
    893.2
    
    
    $
    823.1Gross profit
    
    $
    118.9
    
    
    $
    110.1
    
    
    $
    238.5
    
    
    $
    223.7Segment operating income
    
    $
    51.4
    
    
    $
    38.2
    
    
    $
    103.0
    
    
    $
    81.8Depreciation expense
    
    $
    18.5
    
    
    $
    19.0
    
    
    $
    37.4
    
    
    $
    38.4Amortization of intangible assets
    
    $
    5.3
    
    
    $
    5.5
    
    
    $
    11.2
    
    
    $
    10.8Capital expenditures
    
    $
    11.3
    
    
    $
    16.3
    
    
    $
    25.4
    
    
    $
    29.7Unallocated corporate depreciation
expense
    
    $
    0.2
    
    
    $
    0.3
    
    
    $
    0.4
    
    
    $
    0.6Unallocated corporate capital
expenditures
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.2
    
    
    $
    
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(in millions of dollars)
    
    Actual 2005
    
    
    Pro Forma 2004
    
    
    Actual 2005
    
    
    Pro Forma 2004Reconciliation of Segment OperatingIncome to Income before Income
TaxesSegment operating income:Lubricant Additives Segment
    
    $
    85.2
    
    
    $
    72.8
    
    
    $
    154.0
    
    
    $
    135.5Specialty Chemicals Segment
    
    
    51.4
    
    
    
    38.2
    
    
    
    103.0
    
    
    
    81.8Total segment operating income
    
    
    136.6
    
    
    
    111.0
    
    
    
    257.0
    
    
    
    217.3Corporate expenses
    
    
    (15.8
    )
    
    
    (12.3
    )
    
    
    (30.8
    )
    
    
    (21.6
    )Corporate other income (expense)
    
    
    0.1
    
    
    
    (2.0
    )
    
    
    (0.7
    )
    
    
    1.8Write-off of acquired IPR&D
    
    
    
    
    
    
    (34.0
    )
    
    
    
    
    
    
    (34.0
    )Restructuring charges
    
    
    (5.4
    )
    
    
    (8.5
    )
    
    
    (11.5
    )
    
    
    (11.3
    )Interest expense - net
    
    
    (24.9
    )
    
    
    (30.8
    )
    
    
    (49.4
    )
    
    
    (58.9
    )Income before income taxes
    
    $
    90.6
    
    
    $
    23.4
    
    
    $
    164.6
    
    
    $
    93.3
 WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
  Six Months Ended June 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ ChangeCash provided by (used for):Operating activities
    
    $
    140.6
    
    
    $
    96.2
    
    
    $
    44.4Investing activities
    
    
    (55.4
    )
    
    
    (1,002.9
    )
    
    
    947.5Financing activities
    
    
    (126.3
    )
    
    
    868.9
    
    
    
    (995.2
    )Effect of exchange-rate changes on cash
    
    
    (15.8
    )
    
    
    6.4
    
    
    
    (22.2
    )Net decrease in cash and
short-term investments
    
    $
    (56.9
    )
    
    $
    (31.4
    )
    
    $
    (25.5
    )
 -44-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Operating Activities
   Investing Activities
   Financing Activities
  Capitalization, Liquidity and Credit Facilities
    -45-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
     Contractual Cash Obligations
   NEW ACCOUNTING STANDARDS
   -46-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
    -47-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 CAUTIONARY STATEMENTS FOR SAFE HARBOR PURPOSES
   
    
    the cost, availability and quality of raw materials, including petroleum-based products;
    
    our ability to increase the prices of our products in a competitive environment;
    
    the effect of required principal and interest payments on our ability to fund capital expenditures and acquisitions and
to meet operating needs;
    
    the overall global economic environment and the overall demand for our products on a worldwide basis;
    
    technology developments that affect longer-term trends for our products;
    
    the extent to which we are successful in expanding our business in new and existing markets;
    
    our ability to identify, complete and integrate acquisitions for profitable growth and operating efficiencies,
especially our ability to integrate the acquisition of Noveon International;
    
    our success at continuing to develop proprietary technology to meet or exceed new industry performance standards and
individual customer expectations;
    
    our ability to continue to reduce complexities and conversion costs and modify our cost structure to maintain and
enhance our competitiveness;
    
    our success in retaining and growing the business that we have with our largest customers;
    
    the cost and availability of energy, including natural gas and electricity;
    
    the effect of interest rate fluctuations on our interest expense;
    
    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;
    
    the extent to which we achieve market acceptance of our commercial development programs;
    
    significant changes in government regulations affecting environmental compliance;
    
    the ability to identify, understand and manage risks inherent in new markets in which we choose to expand; and
    
    our ability to maintain operating continuity for those businesses identified as divestiture candidates.
 -48-




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
       -49-




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##### Table of Contents



Item 4. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    On April 8, 2005, we issued 941 common shares in a transaction exempt from
registration under the Securities Act of 1933 pursuant to Regulation S. We issued the
common shares under an employee benefit plan to one employee of a wholly owned United
Kingdom subsidiary of the company.On April 20, 2005, we issued 1,021 common shares in a private placement transaction
exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of
that Act. We issued the common shares to one former officer under a deferred
compensation plan for officers.On April 22, 2005, we issued 1,790 common shares in transactions exempt from
registration under the Securities Act of 1933 pursuant to Regulation S. We issued
the common shares under an employee benefit plan to three employees of a wholly owned
United Kingdom subsidiary of the company.On May 1, 2005, we issued 119 common shares in a private placement transaction exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2) of that
Act. We issued the common shares to one former officer under a deferred compensation
plan for officers.On May 1, 2005, we issued 217 common shares in a private placement transaction exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2) of that
Act. We issued the common shares to one former director under a deferred
compensation plan for directors.
 -50-




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)
 On May 4, 2005, we issued 608 common shares in transactions exempt from registration
under the Securities Act of 1939 pursuant to Regulation S. We issued the common
shares under an employee benefit plan to two employees of a wholly owned United
Kingdom subsidiary of the company.On May 16, 2005, we issued 229 common shares in transactions exempt from registration
under the Securities Act of 1933 pursuant to Regulation S. We issued the common
shares under an employee benefit plan to two employees of a wholly owned United
Kingdom subsidiary of the company.On May 18, 2005, we issued 45,242 common shares in transactions exempt from
registration under the Securities Act of 1933 pursuant to Regulation S. We issued
the common shares under an employee benefit plan to 145 employees of a wholly owned
United Kingdom subsidiary of the company.On May 19, 2005, we issued 1,627 common shares in transactions exempt from
registration under the Securities Act of 1933 pursuant to Regulation S. We issued
the common shares under an employee benefit plan to four employees of a wholly owned
United Kingdom subsidiary of the company.On May 23, 2005, we issued 556 common shares in transactions exempt from registration
under the Securities Act of 1933 pursuant to Regulation S. We issued the common
shares under an employee benefit plan to four employees of a wholly owned United
Kingdom subsidiary of the company.On June 1, 2005, we issued 280 common shares in private placement transactions exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2) of that
Act. We issued the common shares to two former officers under deferred compensation
plans for officers.On June 22, 2005, we issued 44 common shares in a transaction exempt from
registration under the Securities Act of 1939 pursuant to Regulation S. We issued
the common shares under an employee benefit plan to one employee of a wholly owned
United Kingdom subsidiary of the company.(c)
    
    The following table provides information regarding the companys purchases of
its common shares during the second quarter.
 -51-




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)
 (d) Maximum Number(c) Total Number
    
    
    (or Approximate Dollarof Shares (or Units)
    
    
    Value) of Shares (or(a) Total Number of
    
    (b) Average Price
    
    
    Purchased as Part of
    
    
    Units) that May YetShares (or Units)
    
    Paid per Share
    
    
    Publicly Announced
    
    
    be Purchased Under thePeriod
    
    Purchased1
    
    (or Unit)
    
    
    Plans or Programs
    
    
    Plans or ProgramsMonth #1
(April 1, 2005 through
April 30, 2005)
    
    
    291
    Shares
    
    $
    40.64
    
    
    
    N/A
    
    
    
    N/AMonth #2
(May 1, 2005 through
May 31, 2005)
    
    
    30
    Shares

    
    $
    38.77
    
    
    
    N/A
    
    
    
    N/AMonth #3
(June 1, 2005 through
June 30, 2005)
    
    
    80
    Shares

    
    $
    39.37
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    401
    Shares
 1
 (a)
    
    our option plan, whereby participants exchange already
owned shares to us to pay for the exercise price of an option or whereby we
withhold shares upon the exercise of an option to pay the withholding taxes
on behalf of the employee.(b)
    
    our deferred compensation plans, whereby we withhold shares
upon a distribution to pay the withholding taxes on behalf of the employee.
 
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    Election of Directors
 a.
    
    Peggy Gordon Miller. The vote was 60,845,190 shares for and
1,832,176 shares to withhold authority.b.
    
    Dominic J. Pileggi. The vote was 61,580,891shares for and
1,096,475 shares to withhold authority.
 2.
    
    A proposal to adopt The Lubrizol Corporation 2005 Stock Incentive Plan. The
vote was 45,959,061 shares for; 8,290,650 shares against; and 1,586,655 abstaining.3.
    
    A proposal to confirm the appointment of Deloitte & Touche LLP as the
independent registered public accountant. The vote was 61,722,399 shares for; 840,288
shares against; and 64,678 shares abstaining.
 -52-




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##### Table of Contents



Item 6. Exhibits
 31.1
    
    Rule 13a-14(a) Certification of the Chief Executive Office, as created by Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Rule 13a-14(a) Certification of the Chief Financial Officer, as created by
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief Financial Officer of The
Lubrizol Corporation pursuant to 18 U.S.C. Section 1350, as created by Section 906 of
the Sarbanes-Oxley Act.
 
 Signatures
   /s/ W. Scott Emerick
  -53-