##### Table of Contents



UNITED STATES SECURITIES 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 September 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
(State or other jurisdiction of
incorporation or organization)
    
    34-0367600
(I.R.S.Employer
Identification No.)
 
 
  þ o
 þ o
 o þ




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THE LUBRIZOL CORPORATION
 Quarterly Report on Form 10-Q  Quarter Ended September 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
    
    
    29Item 3
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    53Item 4
    Controls and Procedures
    
    
    54PART II. OTHER INFORMATIONItem 1
    Legal Proceedings
    
    
    54Item 2
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 6
    Exhibits
    
    
    55Signatures
    
    
    55EX-31.1 302 Certification for CEOEX-31.2 302 Certification for CFOEX-32.1 906 Certification for CEO and CFO
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##### Table of Contents



PART
I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 THE LUBRIZOL CORPORATION
 
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in millions except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    1,013.4
    
    
    $
    915.9
    
    
    $
    3,035.8
    
    
    $
    2,207.8Royalties and other revenues
    
    
    0.7
    
    
    
    1.2
    
    
    
    2.2
    
    
    
    3.4Total revenues
    
    
    1,014.1
    
    
    
    917.1
    
    
    
    3,038.0
    
    
    
    2,211.2Cost of sales
    
    
    765.4
    
    
    
    688.5
    
    
    
    2,267.6
    
    
    
    1,640.1Selling and administrative expenses
    
    
    93.1
    
    
    
    86.7
    
    
    
    278.7
    
    
    
    207.2Research, testing and development expenses
    
    
    49.9
    
    
    
    51.0
    
    
    
    151.0
    
    
    
    136.9Amortization of intangible assets
    
    
    6.3
    
    
    
    5.0
    
    
    
    18.9
    
    
    
    11.4Write-off of (credit for) acquired in-process
research and development
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    33.5Restructuring and impairment charges
    
    
    7.4
    
    
    
    10.5
    
    
    
    18.9
    
    
    
    17.9Total costs and expenses
    
    
    922.1
    
    
    
    840.2
    
    
    
    2,735.1
    
    
    
    2,047.0Other income
(expense)  net
    
    
    (0.8
    )
    
    
    0.2
    
    
    
    0.9
    
    
    
    2.5Interest income
    
    
    2.3
    
    
    
    1.2
    
    
    
    6.1
    
    
    
    3.0Interest expense
    
    
    (27.4
    )
    
    
    (27.3
    )
    
    
    (80.5
    )
    
    
    (51.5
    )Income from continuing operations
before income taxes
    
    
    66.1
    
    
    
    51.0
    
    
    
    229.4
    
    
    
    118.2Provision for income taxes
    
    
    21.3
    
    
    
    19.6
    
    
    
    77.1
    
    
    
    45.1Income from continuing operations
    
    
    44.8
    
    
    
    31.4
    
    
    
    152.3
    
    
    
    73.1Discontinued operations  net of tax
    
    
    3.8
    
    
    
    0.8
    
    
    
    4.9
    
    
    
    0.5Net income
    
    $
    48.6
    
    
    $
    32.2
    
    
    $
    157.2
    
    
    $
    73.6Basic earnings per shareContinuing operations
    
    $
    0.66
    
    
    $
    0.60
    
    
    $
    2.24
    
    
    $
    1.41Discontinued operations
    
    
    0.05
    
    
    
    0.01
    
    
    
    0.08
    
    
    
    0.01Net income per share, basic
    
    $
    0.71
    
    
    $
    0.61
    
    
    $
    2.32
    
    
    $
    1.42Diluted
earnings per shareContinuing operations
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    2.22
    
    
    $
    1.40Discontinued operations
    
    
    0.05
    
    
    
    0.01
    
    
    
    0.07
    
    
    
    0.01Net income per share, diluted
    
    $
    0.70
    
    
    $
    0.61
    
    
    $
    2.29
    
    
    $
    1.41Dividends per share
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.78
    
    
    $
    0.78Weighted average common shares
oustanding
    
    
    68.1
    
    
    
    52.5
    
    
    
    67.8
    
    
    
    52.0
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THE LUBRIZOL CORPORATION
 
  September 30,
    
    
    December 31,(in millions except share data)
    
    2005
    
    
    2004ASSETSCash and short-term investments
    
    $
    252.9
    
    
    $
    335.9Receivables
 net
    
    
    620.3
    
    
    
    582.8Inventories
    
    
    559.9
    
    
    
    568.7Other current assets
    
    
    112.8
    
    
    
    110.6Total current assets
    
    
    1,545.9
    
    
    
    1,598.0Property and
equipment  at cost
    
    
    2,608.0
    
    
    
    2,731.3Less accumulated depreciation
    
    
    1,422.0
    
    
    
    1,413.4Property and
equipment  net
    
    
    1,186.0
    
    
    
    1,317.9Goodwill
    
    
    1,144.5
    
    
    
    1,153.8Intangible
assets  net
    
    
    412.0
    
    
    
    437.1Investments in non-consolidated companies
    
    
    8.0
    
    
    
    7.4Other assets
    
    
    51.7
    
    
    
    52.1TOTAL
    
    $
    4,348.1
    
    
    $
    4,566.3LIABILITIES
AND SHAREHOLDERS EQUITYShort-term debt and current portion of long-term debt
    
    $
    3.0
    
    
    $
    8.2Accounts payable
    
    
    310.1
    
    
    
    339.6Accrued expenses and other current liabilities
    
    
    346.4
    
    
    
    309.5Total current liabilities
    
    
    659.5
    
    
    
    657.3Long-term debt
    
    
    1,689.6
    
    
    
    1,964.1Postretirement health-care obligations
    
    
    105.9
    
    
    
    106.4Noncurrent liabilities
    
    
    182.4
    
    
    
    170.7Deferred income taxes
    
    
    83.3
    
    
    
    90.7Total liabilities
    
    
    2,720.7
    
    
    
    2,989.2Minority interest in consolidated companies
    
    
    53.0
    
    
    
    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 sharesOutstanding
 67,994,273 shares as of September 30,
2005 after deducting 18,201,621 treasury shares,
66,778,865 shares as of December 31, 2004
after deducting 19,417,029 treasury shares
    
    
    660.3
    
    
    
    610.6Retained earnings
    
    
    1,001.6
    
    
    
    897.4Accumulated other comprehensive (loss) income
    
    
    (87.5
    )
    
    
    15.5Total shareholders equity
    
    
    1,574.4
    
    
    
    1,523.5TOTAL
    
    $
    4,348.1
    
    
    $
    4,566.3
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THE LUBRIZOL CORPORATION
 
  Nine MonthsEnded September 30,(in millions of dollars)
    
    2005
    
    
    2004Cash provided by (used for):Operating activities:Net income
    
    $
    157.2
    
    
    $
    73.6Adjustments to reconcile net income to cash provided
by operating activities:Depreciation and amortization
    
    
    135.6
    
    
    
    108.8Write-off of acquired in-process research and development
    
    
    
    
    
    
    33.5Deferred income taxes
    
    
    (1.5
    )
    
    
    (6.6
    )Restructuring and impairment charges
    
    
    11.1
    
    
    
    2.8Change in current assets and liabilities, net of acquisitions and
divestitures:Receivables
    
    
    (73.3
    )
    
    
    (79.5
    )Inventories
    
    
    (12.1
    )
    
    
    (17.8
    )Accounts payable, accrued expenses and other current liabilities
    
    
    22.4
    
    
    
    55.1Other current assets
    
    
    11.5
    
    
    
    9.4Other items -net
    
    
    32.9
    
    
    
    13.3Total operating activities
    
    
    283.8
    
    
    
    192.6Investing activities:Capital expenditures
    
    
    (91.5
    )
    
    
    (82.4
    )Acquisitions
 net of cash received and liabilities assumed
    
    
    
    
    
    
    (958.2
    )Net proceeds from divestitures and sales of property and equipment
    
    
    17.2
    
    
    
    1.8Other items
 net
    
    
    (0.2
    )
    
    
    (0.3
    )Total investing activities
    
    
    (74.5
    )
    
    
    (1,039.1
    )Financing activities:Changes in
short-term debt  net
    
    
    (4.9
    )
    
    
    (69.7
    )Repayments of long-term debt
    
    
    (475.2
    )
    
    
    (1,118.0
    )Long-term borrowings
    
    
    213.8
    
    
    
    1,743.2Dividends paid
    
    
    (52.7
    )
    
    
    (40.3
    )Proceeds from the sale of common shares
    
    
    
    
    
    
    427.2Payment of debt issuance costs
    
    
    
    
    
    
    (16.8
    )Payment of treasury rate lock settlement
    
    
    
    
    
    
    (73.9
    )Proceeds from the exercise of stock options
    
    
    37.4
    
    
    
    12.8Total financing activities
    
    
    (281.6
    )
    
    
    864.5Effect of exchange rate changes on cash
    
    
    (10.7
    )
    
    
    7.4Net (decrease) increase in cash and short-term
investments
    
    
    (83.0
    )
    
    
    25.4Cash and short-term investments at beginning of period
    
    
    335.9
    
    
    
    258.7Cash and short-term investments at end of period
    
    $
    252.9
    
    
    $
    284.1
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THE LUBRIZOL CORPORATION
 
 Notes to Consolidated Financial Statements
 September 30, 2005
 1. Basis of Presentation
   2. Significant Accounting Policies
 Net Income Per Share
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in millions except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Income from continuing operations
    
    $
    44.8
    
    
    $
    31.4
    
    
    $
    152.3
    
    
    $
    73.1Denominator:Weighted-average common shares
outstanding
    
    
    68.1
    
    
    
    52.5
    
    
    
    67.8
    
    
    
    52.0Dilutive effect of stock options and
awards
    
    
    0.9
    
    
    
    0.5
    
    
    
    0.8
    
    
    
    0.4Denominator for income from continuing
operations per share, diluted
    
    
    69.0
    
    
    
    53.0
    
    
    
    68.6
    
    
    
    52.4Income from continuing operations
per share, basic
    
    $
    0.66
    
    
    $
    0.60
    
    
    $
    2.24
    
    
    $
    1.41Income from continuing operations
per share, diluted
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    2.22
    
    
    $
    1.40
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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 Stock-Based Compensation
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in millions of dollars except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Reported net income
    
    $
    48.6
    
    
    $
    32.2
    
    
    $
    157.2
    
    
    $
    73.6Plus: stock-based employee compensation
(net of tax) included in net income
    
    
    1.6
    
    
    
    0.5
    
    
    
    4.4
    
    
    
    1.4Less: stock-based employee compensation
(net of tax) using the fair value method
    
    
    (1.6
    )
    
    
    (1.4
    )
    
    
    (5.1
    )
    
    
    (3.7
    )Pro forma net income
    
    $
    48.6
    
    
    $
    31.3
    
    
    $
    156.5
    
    
    $
    71.3Reported net income per share, basic
    
    $
    0.71
    
    
    $
    0.61
    
    
    $
    2.32
    
    
    $
    1.42Pro forma net income per share, basic
    
    $
    0.71
    
    
    $
    0.59
    
    
    $
    2.31
    
    
    $
    1.38Reported net income per share, diluted
    
    $
    0.70
    
    
    $
    0.61
    
    
    $
    2.29
    
    
    $
    1.41Pro forma net income per share, diluted
    
    $
    0.70
    
    
    $
    0.59
    
    
    $
    2.28
    
    
    $
    1.37
 New Accounting Standards
    -7-




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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
    Use of Estimates
  Reclassifications
  3. Acquisitions and Pro Forma Financial Information
 ® ® ®
  -8-




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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
    -9-




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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
  Fair Value ofNet Assets(in millions of dollars)
    
    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  September 30, 2005
 Nine MonthsEnded(in millions of dollars except per share data)
    
    September 30, 2004Total revenues
    
    $
    2,748.8Income from continuing operations
    
    $
    96.2Discontinued operations
    
    
    0.4Net income
    
    $
    96.6Basic earnings per share:Continuing operations
    
    $
    1.60Discontinued operations
    
    
    0.01Net income per share, basic
    
    $
    1.61Diluted earnings per share:Continuing operations
    
    $
    1.59Discontinued operations
    
    
    0.01Net income per share, diluted
    
    $
    1.60
 ® ® ®
 4. Divestitures
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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
  5. Inventory
  September 30,
    
    
    December 31,(in millions of dollars)
    
    2005
    
    
    2004Finished products
    
    $
    320.4
    
    
    $
    311.2Products in process
    
    
    79.6
    
    
    
    75.9Raw materials
    
    
    132.0
    
    
    
    153.1Supplies and engine test parts
    
    
    27.9
    
    
    
    28.5Total inventory
    
    $
    559.9
    
    
    $
    568.7
 6. Goodwill and Intangible Assets
  September 30, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulated(in millions of dollars)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Customer lists
    
    $
    152.5
    
    
    $
    13.5
    
    
    $
    157.3
    
    
    $
    6.8Technology
    
    
    144.4
    
    
    
    33.1
    
    
    
    144.4
    
    
    
    25.4Trademarks
    
    
    24.5
    
    
    
    3.8
    
    
    
    24.4
    
    
    
    2.3Patents
    
    
    12.1
    
    
    
    2.2
    
    
    
    13.2
    
    
    
    1.5Land-use rights
    
    
    7.2
    
    
    
    0.9
    
    
    
    7.1
    
    
    
    0.8Non-compete agreements
    
    
    8.9
    
    
    
    5.3
    
    
    
    8.9
    
    
    
    3.8Other
    
    
    5.5
    
    
    
    0.7
    
    
    
    5.9
    
    
    
    0.5Total amortized
intangible assets
    
    
    355.1
    
    
    
    59.5
    
    
    
    361.2
    
    
    
    41.1Non-amortized trademarks
    
    
    116.4
    
    
    
    
    
    
    
    117.0
    
    
    
    Total
    
    $
    471.5
    
    
    $
    59.5
    
    
    $
    478.2
    
    
    $
    41.1
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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
  Lubricant
    
    
    Specialty(in millions of dollars)
    
    Additives
    
    
    Chemicals
    
    
    TotalBalance, January 1, 2005
    
    $
    100.9
    
    
    $
    1,052.9
    
    
    $
    1,153.8Goodwill
adjustments
    
    
    
    
    
    
    32.6
    
    
    
    32.6Translation & other
adjustments
    
    
    (2.2
    )
    
    
    (39.7
    )
    
    
    (41.9
    )Balance, September 30, 2005
    
    $
    98.7
    
    
    $
    1,045.8
    
    
    $
    1,144.5
   7. Comprehensive Income
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    48.6
    
    
    $
    32.2
    
    
    $
    157.2
    
    
    $
    73.6Foreign currency translation adjustment
    
    
    1.0
    
    
    
    8.4
    
    
    
    (106.1
    )
    
    
    0.7Pension plan minimum liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Unrealized gains - natural gas
hedges
    
    
    0.8
    
    
    
    
    
    
    
    1.0
    
    
    
    0.2Unrealized gains - interest rate
swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.1Amortization of treasury rate locks
    
    
    0.7
    
    
    
    (40.0
    )
    
    
    2.1
    
    
    
    (48.0
    )Total comprehensive income
    
    $
    51.1
    
    
    $
    0.6
    
    
    $
    54.2
    
    
    $
    28.9
 8. Segment Reporting
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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 ®
   -14-




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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues from external customers:Lubricant Additives
    
    $
    574.1
    
    
    $
    509.3
    
    
    $
    1,704.9
    
    
    $
    1,517.8Specialty Chemicals
    
    
    440.0
    
    
    
    407.8
    
    
    
    1,333.1
    
    
    
    693.4Total revenues
    
    $
    1,014.1
    
    
    $
    917.1
    
    
    $
    3,038.0
    
    
    $
    2,211.2Segment operating income:Lubricant Additives
    
    $
    68.6
    
    
    $
    66.0
    
    
    $
    220.7
    
    
    $
    201.6Specialty Chemicals
    
    
    47.5
    
    
    
    29.6
    
    
    
    150.5
    
    
    
    46.0Segment operating income
    
    
    116.1
    
    
    
    95.6
    
    
    
    371.2
    
    
    
    247.6Corporate expenses
    
    
    (16.7
    )
    
    
    (10.5
    )
    
    
    (47.4
    )
    
    
    (32.2
    )Corporate other income (expense)
    
    
    (0.8
    )
    
    
    1.0
    
    
    
    (1.1
    )
    
    
    2.7Credit for (write-off of) acquired
IPR&D
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    (33.5
    )Restructuring and impairment
charges
    
    
    (7.4
    )
    
    
    (10.5
    )
    
    
    (18.9
    )
    
    
    (17.9
    )Interest expense  net
    
    
    (25.1
    )
    
    
    (26.1
    )
    
    
    (74.4
    )
    
    
    (48.5
    )Income from continuing operations
before income taxes
    
    $
    66.1
    
    
    $
    51.0
    
    
    $
    229.4
    
    
    $
    118.2
  September 30,
    
    
    December 31,(in millions of dollars)
    
    2005
    
    
    2004Segment total assets:Lubricant Additives
    
    $
    1,322.0
    
    
    $
    1,337.1Specialty Chemicals
    
    
    2,542.7
    
    
    
    2,669.2Total segment assets
    
    
    3,864.7
    
    
    
    4,006.3Corporate assets
    
    
    483.4
    
    
    
    560.0Total consolidated assets
    
    $
    4,348.1
    
    
    $
    4,566.3
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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 9. Pension and Postretirement Benefits
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Pension benefits:Service cost
 benefits earned
during period
    
    $
    7.0
    
    
    $
    7.0
    
    
    $
    21.2
    
    
    $
    15.7Interest cost on projected
benefit obligation
    
    
    7.8
    
    
    
    7.3
    
    
    
    23.8
    
    
    
    20.1Expected return on plan assets
    
    
    (6.7
    )
    
    
    (6.9
    )
    
    
    (20.3
    )
    
    
    (20.1
    )Amortization of prior service costs
    
    
    0.6
    
    
    
    0.5
    
    
    
    1.7
    
    
    
    1.5Amortization of initial net asset
obligation
    
    
    
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.5
    )Settlements loss
    
    
    
    
    
    
    5.7
    
    
    
    
    
    
    
    5.7Recognized net actuarial loss
    
    
    1.3
    
    
    
    0.9
    
    
    
    3.9
    
    
    
    2.6Net periodic benefit cost
    
    $
    10.0
    
    
    $
    14.4
    
    
    $
    30.4
    
    
    $
    25.0Other benefits:Service cost
 benefits earned
during period
    
    $
    0.3
    
    
    $
    0.6
    
    
    $
    1.4
    
    
    $
    1.9Interest cost on projected
benefit obligation
    
    
    1.3
    
    
    
    1.6
    
    
    
    4.5
    
    
    
    5.1Amortization of prior service costs
    
    
    (2.1
    )
    
    
    (1.5
    )
    
    
    (5.5
    )
    
    
    (4.6
    )Recognized net actuarial loss
    
    
    0.5
    
    
    
    0.7
    
    
    
    1.6
    
    
    
    1.9Net periodic benefit cost
    
    $
    
    
    
    $
    1.4
    
    
    $
    2.0
    
    
    $
    4.3
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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
  10. Restructuring and Impairment Charges
   Liability
    
    
    
    
    
    
    
    
    
    
    Restructuring
    
    
    LiabilityDecember 31,
    
    
    Restructuring
    
    
    
    
    
    
    Asset
    
    
    September 30,(in millions of dollars)
    
    2004
    
    
    Charges
    
    
    Cash Paid
    
    
    Impairments
    
    
    2005Coatings plant closures
and workforce reductions
    
    $
    
    
    
    $
    7.6
    
    
    $
    (1.7
    )
    
    $
    (4.2
    )
    
    $
    1.7Bromborough, United Kingdom closure
    
    
    
    
    
    
    4.2
    
    
    
    (1.8
    )
    
    
    (0.7
    )
    
    
    1.7Corporate workforce reductions
    
    
    2.7
    
    
    
    0.7
    
    
    
    (3.0
    )
    
    
    
    
    
    
    0.4Noveon International restructuring
liabilities assumed
    
    
    6.1
    
    
    
    0.2
    
    
    
    (4.6
    )
    
    
    
    
    
    
    1.7$
    8.8
    
    
    $
    12.7
    
    
    $
    (11.1
    )
    
    $
    (4.9
    )
    
    $
    5.5
    -17-




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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
     11. Debt
  
 -18-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 12. 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
    
    
    
    
    
    
    
    
    
    
    157.2
    
    
    
    
    
    
    
    157.2Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103.0
    )
    
    
    (103.0
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54.2Dividends declared
    
    
    
    
    
    
    
    
    
    
    (53.0
    )
    
    
    
    
    
    
    (53.0
    )Deferred stock compensation
    
    
    0.2
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Common shares  treasury:Shares issued upon exercise
of stock options and awards
    
    
    1.0
    
    
    
    41.7
    
    
    
    
    
    
    
    
    
    
    
    41.7Balance, September 30, 2005
    
    
    68.0
    
    
    $
    660.3
    
    
    $
    1,001.6
    
    
    $
    (87.5
    )
    
    $
    1,574.4
 13. Contingencies
  General
   Environmental
  -19-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
      14. Guarantor and Non-Guarantor Subsidiary Information
  -20-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
  Condensed Consolidating Statement of IncomeThree Months Ended September 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    335.5
    
    
    $
    328.7
    
    
    $
    497.0
    
    
    $
    (147.8
    )
    
    $
    1,013.4Royalties and other revenues
    
    
    0.6
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.7Total revenues
    
    
    336.1
    
    
    
    328.8
    
    
    
    497.0
    
    
    
    (147.8
    )
    
    
    1,014.1Cost of sales
    
    
    268.5
    
    
    
    256.4
    
    
    
    388.3
    
    
    
    (147.8
    )
    
    
    765.4Selling and administrative expenses
    
    
    38.2
    
    
    
    29.9
    
    
    
    25.0
    
    
    
    
    
    
    
    93.1Research, testing and development
expenses
    
    
    22.4
    
    
    
    9.6
    
    
    
    17.9
    
    
    
    
    
    
    
    49.9Amortization of intangible assets
    
    
    0.7
    
    
    
    4.0
    
    
    
    1.6
    
    
    
    
    
    
    
    6.3Restructuring and impairment charges
    
    
    
    
    
    
    
    
    
    
    7.4
    
    
    
    
    
    
    
    7.4Total costs and expenses
    
    
    329.8
    
    
    
    299.9
    
    
    
    440.2
    
    
    
    (147.8
    )
    
    
    922.1Other income
(expense)  net
    
    
    5.7
    
    
    
    8.3
    
    
    
    (15.0
    )
    
    
    0.2
    
    
    
    (0.8
    )Interest
(expense) income  net
    
    
    (26.0
    )
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    (25.1
    )Equity in income of subsidiaries
    
    
    60.0
    
    
    
    14.7
    
    
    
    
    
    
    
    (74.7
    )
    
    
    Income from continuing operations
before income taxes
    
    
    46.0
    
    
    
    51.9
    
    
    
    42.7
    
    
    
    (74.5
    )
    
    
    66.1Provision (benefit) for income taxes
    
    
    (2.6
    )
    
    
    11.8
    
    
    
    12.1
    
    
    
    
    
    
    
    21.3Income from continuing operations
    
    
    48.6
    
    
    
    40.1
    
    
    
    30.6
    
    
    
    (74.5
    )
    
    
    44.8Discontinued operations  net of tax
    
    
    
    
    
    
    2.8
    
    
    
    1.0
    
    
    
    
    
    
    
    3.8Net income
    
    $
    48.6
    
    
    $
    42.9
    
    
    $
    31.6
    
    
    $
    (74.5
    )
    
    $
    48.6
 -21-




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THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 Condensed Consolidating Statement of IncomeNine Months Ended September 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    997.4
    
    
    $
    980.5
    
    
    $
    1,500.9
    
    
    $
    (443.0
    )
    
    $
    3,035.8Royalties and other revenues
    
    
    1.9
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    2.2Total revenues
    
    
    999.3
    
    
    
    980.7
    
    
    
    1,501.0
    
    
    
    (443.0
    )
    
    
    3,038.0Cost of sales
    
    
    790.9
    
    
    
    763.3
    
    
    
    1,156.4
    
    
    
    (443.0
    )
    
    
    2,267.6Selling and administrative expenses
    
    
    111.4
    
    
    
    88.2
    
    
    
    79.1
    
    
    
    
    
    
    
    278.7Research, testing and development
expenses
    
    
    68.4
    
    
    
    29.4
    
    
    
    53.2
    
    
    
    
    
    
    
    151.0Amortization of intangible assets
    
    
    2.2
    
    
    
    12.1
    
    
    
    4.6
    
    
    
    
    
    
    
    18.9Restructuring and impairment charges
    
    
    4.7
    
    
    
    2.6
    
    
    
    11.6
    
    
    
    
    
    
    
    18.9Total costs and expenses
    
    
    977.6
    
    
    
    895.6
    
    
    
    1,304.9
    
    
    
    (443.0
    )
    
    
    2,735.1Other income
(expense)  net
    
    
    20.4
    
    
    
    15.1
    
    
    
    (33.3
    )
    
    
    (1.3
    )
    
    
    0.9Interest
(expense) income  net
    
    
    (78.1
    )
    
    
    (1.0
    )
    
    
    4.7
    
    
    
    
    
    
    
    (74.4
    )Equity in income of subsidiaries
    
    
    191.9
    
    
    
    59.9
    
    
    
    
    
    
    
    (251.8
    )
    
    
    Income from continuing operations
before income taxes
    
    
    155.9
    
    
    
    159.1
    
    
    
    167.5
    
    
    
    (253.1
    )
    
    
    229.4Provision (benefit) for income taxes
    
    
    (1.5
    )
    
    
    34.2
    
    
    
    44.4
    
    
    
    
    
    
    
    77.1Income from continuing operations
    
    
    157.4
    
    
    
    124.9
    
    
    
    123.1
    
    
    
    (253.1
    )
    
    
    152.3Discontinued operations  net of tax
    
    
    (0.2
    )
    
    
    3.3
    
    
    
    1.8
    
    
    
    
    
    
    
    4.9Net income
    
    $
    157.2
    
    
    $
    128.2
    
    
    $
    124.9
    
    
    $
    (253.1
    )
    
    $
    157.2
 -22-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 Condensed Consolidating Statement of IncomeThree Months Ended September 30, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    308.6
    
    
    $
    305.7
    
    
    $
    440.8
    
    
    $
    (139.2
    )
    
    $
    915.9Royalties and other revenues
    
    
    0.9
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    1.2Total revenues
    
    
    309.5
    
    
    
    306.0
    
    
    
    440.8
    
    
    
    (139.2
    )
    
    
    917.1Cost of sales
    
    
    236.4
    
    
    
    251.7
    
    
    
    339.6
    
    
    
    (139.2
    )
    
    
    688.5Selling and administrative expenses
    
    
    36.1
    
    
    
    19.9
    
    
    
    30.7
    
    
    
    
    
    
    
    86.7Research, testing and development
expenses
    
    
    24.8
    
    
    
    13.5
    
    
    
    12.7
    
    
    
    
    
    
    
    51.0Amortization of intangible assets
    
    
    0.7
    
    
    
    3.8
    
    
    
    0.5
    
    
    
    
    
    
    
    5.0Credit for acquired
in-process research and development
    
    
    
    
    
    
    (1.5
    )
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Restructuring and impairment charges
    
    
    8.4
    
    
    
    0.2
    
    
    
    1.9
    
    
    
    
    
    
    
    10.5Total costs and expenses
    
    
    306.4
    
    
    
    287.6
    
    
    
    385.4
    
    
    
    (139.2
    )
    
    
    840.2Other income
(expense)  net
    
    
    8.3
    
    
    
    3.3
    
    
    
    (10.9
    )
    
    
    (0.5
    )
    
    
    0.2Interest (expense) income  net
    
    
    (27.4
    )
    
    
    0.8
    
    
    
    0.5
    
    
    
    
    
    
    
    (26.1
    )Equity in income of subsidiaries
    
    
    45.4
    
    
    
    15.3
    
    
    
    
    
    
    
    (60.7
    )
    
    
    Income from continuing operations
before income taxes
    
    
    29.4
    
    
    
    37.8
    
    
    
    45.0
    
    
    
    (61.2
    )
    
    
    51.0Provision (benefit) for income taxes
    
    
    (2.8
    )
    
    
    0.1
    
    
    
    22.3
    
    
    
    
    
    
    
    19.6Income from continuing operations
    
    
    32.2
    
    
    
    37.7
    
    
    
    22.7
    
    
    
    (61.2
    )
    
    
    31.4Discontinued operations  net of tax
    
    
    
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    
    
    
    
    0.8Net income
    
    $
    32.2
    
    
    $
    37.9
    
    
    $
    23.3
    
    
    $
    (61.2
    )
    
    $
    32.2
 -23-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 Condensed Consolidating Statement of IncomeNine Months Ended September 30, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    924.3
    
    
    $
    500.6
    
    
    $
    1,119.7
    
    
    $
    (336.8
    )
    
    $
    2,207.8Royalties and other revenues
    
    
    2.6
    
    
    
    0.7
    
    
    
    0.1
    
    
    
    
    
    
    
    3.4Total revenues
    
    
    926.9
    
    
    
    501.3
    
    
    
    1,119.8
    
    
    
    (336.8
    )
    
    
    2,211.2Cost of sales
    
    
    688.8
    
    
    
    405.7
    
    
    
    882.4
    
    
    
    (336.8
    )
    
    
    1,640.1Selling and administrative expenses
    
    
    108.9
    
    
    
    35.6
    
    
    
    62.7
    
    
    
    
    
    
    
    207.2Research, testing and development
expenses
    
    
    79.9
    
    
    
    20.3
    
    
    
    36.7
    
    
    
    
    
    
    
    136.9Amortization of intangible assets
    
    
    2.2
    
    
    
    7.4
    
    
    
    1.8
    
    
    
    
    
    
    
    11.4Write-off of acquired
in-process research and development
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    
    
    
    
    33.5Restructuring and impairment charges
    
    
    14.1
    
    
    
    0.2
    
    
    
    3.6
    
    
    
    
    
    
    
    17.9Total costs and expenses
    
    
    893.9
    
    
    
    502.7
    
    
    
    987.2
    
    
    
    (336.8
    )
    
    
    2,047.0Other
income (expense)
  net
    
    
    28.1
    
    
    
    10.0
    
    
    
    (33.8
    )
    
    
    (1.8
    )
    
    
    2.5Interest (expense) income  net
    
    
    (47.0
    )
    
    
    (2.5
    )
    
    
    1.0
    
    
    
    
    
    
    
    (48.5
    )Equity in income of subsidiaries
    
    
    66.8
    
    
    
    23.7
    
    
    
    
    
    
    
    (90.5
    )
    
    
    Income from continuing operations
before income taxes
    
    
    80.9
    
    
    
    29.8
    
    
    
    99.8
    
    
    
    (92.3
    )
    
    
    118.2Provision for income taxes
    
    
    7.3
    
    
    
    0.2
    
    
    
    37.6
    
    
    
    
    
    
    
    45.1Income from continuing operations
    
    
    73.6
    
    
    
    29.6
    
    
    
    62.2
    
    
    
    (92.3
    )
    
    
    73.1Discontinued operations  net of tax
    
    
    
    
    
    
    (0.3
    )
    
    
    0.8
    
    
    
    
    
    
    
    0.5Net income
    
    $
    73.6
    
    
    $
    29.3
    
    
    $
    63.0
    
    
    $
    (92.3
    )
    
    $
    73.6
 -24-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 Condensed Consolidating Balance SheetSeptember 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and short-term investments
    
    $
    94.2
    
    
    $
    9.2
    
    
    $
    149.5
    
    
    $
    
    
    
    $
    252.9Receivables
 net
    
    
    137.7
    
    
    
    147.9
    
    
    
    334.7
    
    
    
    
    
    
    
    620.3Inventories
    
    
    99.9
    
    
    
    175.4
    
    
    
    316.2
    
    
    
    (31.6
    )
    
    
    559.9Other current assets
    
    
    73.5
    
    
    
    20.0
    
    
    
    8.7
    
    
    
    10.6
    
    
    
    112.8Total current assets
    
    
    405.3
    
    
    
    352.5
    
    
    
    809.1
    
    
    
    (21.0
    )
    
    
    1,545.9Property and
equipment  net
    
    
    385.7
    
    
    
    451.6
    
    
    
    348.7
    
    
    
    
    
    
    
    1,186.0Goodwill
    
    
    27.1
    
    
    
    676.4
    
    
    
    441.0
    
    
    
    
    
    
    
    1,144.5Intangible assets  net
    
    
    10.2
    
    
    
    273.9
    
    
    
    127.9
    
    
    
    
    
    
    
    412.0Investments in subsidiaries
and intercompany balances
    
    
    2,645.7
    
    
    
    1,849.9
    
    
    
    579.5
    
    
    
    (5,075.1
    )
    
    
    Investments in non-consolidated
companies
    
    
    6.6
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    8.0Other assets
    
    
    33.7
    
    
    
    2.5
    
    
    
    15.5
    
    
    
    
    
    
    
    51.7TOTAL
    
    $
    3,514.3
    
    
    $
    3,608.2
    
    
    $
    2,321.7
    
    
    $
    (5,096.1
    )
    
    $
    4,348.1LIABILITIES AND SHAREHOLDERS
EQUITYShort-term debt and current
portion of long-term debt
    
    $
    
    
    
    $
    0.1
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    3.0Accounts payable
    
    
    111.0
    
    
    
    88.7
    
    
    
    110.4
    
    
    
    
    
    
    
    310.1Accrued expenses and other
current liabilities
    
    
    117.7
    
    
    
    105.8
    
    
    
    122.9
    
    
    
    
    
    
    
    346.4Total current liabilities
    
    
    228.7
    
    
    
    194.6
    
    
    
    236.2
    
    
    
    
    
    
    
    659.5Long-term debt
    
    
    1,472.8
    
    
    
    0.1
    
    
    
    216.7
    
    
    
    
    
    
    
    1,689.6Postretirement health-care
obligations
    
    
    95.0
    
    
    
    4.4
    
    
    
    6.5
    
    
    
    
    
    
    
    105.9Noncurrent liabilities
    
    
    56.7
    
    
    
    44.5
    
    
    
    81.2
    
    
    
    
    
    
    
    182.4Deferred income taxes
    
    
    65.7
    
    
    
    (8.9
    )
    
    
    26.5
    
    
    
    
    
    
    
    83.3Total liabilities
    
    
    1,918.9
    
    
    
    234.7
    
    
    
    567.1
    
    
    
    
    
    
    
    2,720.7Minority interest in consolidated
companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53.0
    
    
    
    53.0Total shareholders equity
    
    
    1,595.4
    
    
    
    3,373.5
    
    
    
    1,754.6
    
    
    
    (5,149.1
    )
    
    
    1,574.4TOTAL
    
    $
    3,514.3
    
    
    $
    3,608.2
    
    
    $
    2,321.7
    
    
    $
    (5,096.1
    )
    
    $
    4,348.1
 -25-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 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
 -26-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 Condensed Consolidating Statement of Cash FlowsNine Months Ended September 30, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIES:Net income
    
    $
    157.2
    
    
    $
    128.2
    
    
    $
    124.9
    
    
    $
    (253.1
    )
    
    $
    157.2Adjustments to reconcile net income to
cash provided by
(used for) operating
activities
    
    
    102.1
    
    
    
    41.9
    
    
    
    (270.5
    )
    
    
    253.1
    
    
    
    126.6Total operating activities
    
    
    259.3
    
    
    
    170.1
    
    
    
    (145.6
    )
    
    
    
    
    
    
    283.8INVESTING ACTIVITIES:Capital expenditures
    
    
    (30.2
    )
    
    
    (27.1
    )
    
    
    (34.2
    )
    
    
    
    
    
    
    (91.5
    )Net proceeds from divestitures and sales
of property and equipment
    
    
    2.1
    
    
    
    10.1
    
    
    
    5.0
    
    
    
    
    
    
    
    17.2Other items  net
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.2
    )Total investing activities
    
    
    (28.3
    )
    
    
    (16.9
    )
    
    
    (29.3
    )
    
    
    
    
    
    
    (74.5
    )FINANCING ACTIVITIES:Changes in short-term debt  net
    
    
    
    
    
    
    
    
    
    
    (4.9
    )
    
    
    
    
    
    
    (4.9
    )Repayments of long-term debt
    
    
    (475.0
    )
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (475.2
    )Long-term borrowings
    
    
    
    
    
    
    (0.4
    )
    
    
    214.2
    
    
    
    
    
    
    
    213.8Dividends paid
    
    
    (52.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52.7
    )Changes in intercompany activities
    
    
    313.2
    
    
    
    (146.1
    )
    
    
    (167.1
    )
    
    
    
    
    
    
    Proceeds from the exercise of stock
options
    
    
    37.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37.4Total financing activities
    
    
    (177.1
    )
    
    
    (146.5
    )
    
    
    42.0
    
    
    
    
    
    
    
    (281.6
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    2.6
    
    
    
    (13.3
    )
    
    
    
    
    
    
    (10.7
    )Net increase (decrease) in cash and
short-term investments
    
    
    53.9
    
    
    
    9.3
    
    
    
    (146.2
    )
    
    
    
    
    
    
    (83.0
    )Cash and short-term investments at
beginning of period
    
    
    40.3
    
    
    
    (0.1
    )
    
    
    295.7
    
    
    
    
    
    
    
    335.9Cash and short-term investments at
end of period
    
    $
    94.2
    
    
    $
    9.2
    
    
    $
    149.5
    
    
    $
    
    
    
    $
    252.9
 -27-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements  September 30, 2005
 Condensed Consolidating Statement of Cash FlowsNine Months Ended September 30, 2004Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    Total(in millions of dollars)
    
    Company
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIES:Net income
    
    $
    73.6
    
    
    $
    29.3
    
    
    $
    63.0
    
    
    $
    (92.3
    )
    
    $
    73.6Adjustments to reconcile net income to
cash provided by (used
for) operating
activities
    
    
    (6.4
    )
    
    
    (33.3
    )
    
    
    66.4
    
    
    
    92.3
    
    
    
    119.0Total operating activities
    
    
    67.2
    
    
    
    (4.0
    )
    
    
    129.4
    
    
    
    
    
    
    
    192.6INVESTING ACTIVITIES:Capital expenditures
    
    
    (39.7
    )
    
    
    (19.5
    )
    
    
    (23.2
    )
    
    
    
    
    
    
    (82.4
    )Acquisitions
 net of cash received
and liabilities assumed
    
    
    (3.6
    )
    
    
    (828.4
    )
    
    
    (126.2
    )
    
    
    
    
    
    
    (958.2
    )Net proceeds
from sale of property and equipment
    
    
    0.6
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.9Other items  net
    
    
    (0.5
    )
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Total investing activities
    
    
    (43.2
    )
    
    
    (847.8
    )
    
    
    (148.1
    )
    
    
    
    
    
    
    (1,039.1
    )FINANCING ACTIVITIES:Changes in short-term debt  net
    
    
    
    
    
    
    (78.3
    )
    
    
    8.6
    
    
    
    
    
    
    
    (69.7
    )Repayments of long-term debt
    
    
    (93.4
    )
    
    
    (1,024.6
    )
    
    
    
    
    
    
    
    
    
    
    (1,118.0
    )Long-term borrowings
    
    
    1,741.7
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1,743.2Dividends paid
    
    
    (40.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40.3
    )Changes in intercompany activities
    
    
    (2,006.9
    )
    
    
    1,966.0
    
    
    
    40.9
    
    
    
    
    
    
    
    Proceeds from sale of common shares
    
    
    427.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    427.2Payment of debt issuance costs
    
    
    (16.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.8
    )Payment of treasury rate lock settlement
    
    
    (73.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73.9
    )Proceeds from the exercise of stock
options
    
    
    12.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.8Total financing activities
    
    
    (49.6
    )
    
    
    863.1
    
    
    
    51.0
    
    
    
    
    
    
    
    864.5Effect of exchange rate changes on cash
    
    
    6.4
    
    
    
    (0.8
    )
    
    
    1.8
    
    
    
    
    
    
    
    7.4Net (decrease) increase in cash and
short-term investments
    
    
    (19.2
    )
    
    
    10.5
    
    
    
    34.1
    
    
    
    
    
    
    
    25.4Cash and short-term investments at
beginning of period
    
    
    56.2
    
    
    
    (1.0
    )
    
    
    203.5
    
    
    
    
    
    
    
    258.7Cash and short-term investments at
end of period
    
    $
    37.0
    
    
    $
    9.5
    
    
    $
    237.6
    
    
    $
    
    
    
    $
    284.1
 -28-




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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
      -29-




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##### Table of Contents



Item 2.
Managements Discussion and Analysis of Financial Condition and
Results of Operations (continued)
      -30-




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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
   -31-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Revenues
  Three Months
EndedSeptember 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    

$ Change
    
    
    % ChangeNet sales
    
    $
    1,013.4
    
    
    $
    915.9
    
    
    $
    97.5
    
    
    
    11
    %Royalties and other
revenues
    
    
    0.7
    
    
    
    1.2
    
    
    
    (0.5
    )
    
    
    (42
    %)Total revenues
    
    $
    1,014.1
    
    
    $
    917.1
    
    
    $
    97.0
    
    
    
    11
    %Nine Months
Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingSeptember 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    

$ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeNet sales
    
    $
    3,035.8
    
    
    $
    2,207.8
    
    
    $
    828.0
    
    
    
    38
    %
    
    $
    236.8
    
    
    
    11
    %Royalties and other
revenues
    
    
    2.2
    
    
    
    3.4
    
    
    
    (1.2
    )
    
    
    (35
    %)
    
    
    (1.1
    )
    
    
    (32
    %)Total revenues
    
    $
    3,038.0
    
    
    $
    2,211.2
    
    
    $
    826.8
    
    
    
    37
    %
    
    $
    235.7
    
    
    
    11
    %
    3rd Quarter
    
    Year-to-Date2005
    
    2005Volume
    
    VolumeNorth America
    
    
    49
    %
    
    
    50
    %Europe
    
    
    26
    %
    
    
    26
    %Asia-Pacific / Middle East
    
    
    20
    %
    
    
    19
    %Latin America
    
    
    5
    %
    
    
    5
    %Total
    
    
    100
    %
    
    
    100
    %
 -32-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  2005 vs. 2004% ChangeThird Quarter:North America
    
    
    (5
    %)Europe
    
    
    (1
    %)AsiaPacific / Middle East
    
    
    7
    %Latin America
    
    
    (2
    %)Total
    
    
    (1
    %)
 ExcludingAcquisitions2005 vs. 2004
    
    2005 vs. 2004% Change
    
    % ChangeYear-to-Date:North America
    
    
    17
    %
    
    
    (7
    %)Europe
    
    
    11
    %
    
    
    2
    %AsiaPacific / Middle East
    
    
    16
    %
    
    
    6
    %Latin America
    
    
    6
    %
    
    
    (6
    %)Total
    
    
    15
    %
    
    
    (2
    %)
  -33-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Costs and Expenses
  Three Months EndedSeptember 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeCost of sales
    
    $
    765.4
    
    
    $
    688.5
    
    
    $
    76.9
    
    
    
    11
    %Selling and
administrative
expenses
    
    
    93.1
    
    
    
    86.7
    
    
    
    6.4
    
    
    
    7
    %Research, testing and
development expenses
    
    
    49.9
    
    
    
    51.0
    
    
    
    (1.1
    )
    
    
    (2
    %)Amortization of
intangible assets
    
    
    6.3
    
    
    
    5.0
    
    
    
    1.3
    
    
    
    *Credit for acquired
IPR&D
    
    
    
    
    
    
    (1.5
    )
    
    
    1.5
    
    
    
    *Restructuring and
impairment charges
    
    
    7.4
    
    
    
    10.5
    
    
    
    (3.1
    )
    
    
    *Total costs and expenses
    
    $
    922.1
    
    
    $
    840.2
    
    
    $
    81.9
    
    
    
    10
    %
 Nine Months Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingSeptember 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeCost of sales
    
    $
    2,267.6
    
    
    $
    1,640.1
    
    
    $
    627.5
    
    
    
    38
    %
    
    $
    198.8
    
    
    
    12
    %Selling and
administrative
expenses
    
    
    278.7
    
    
    
    207.2
    
    
    
    71.5
    
    
    
    35
    %
    
    
    10.8
    
    
    
    5
    %Research, testing and
development expenses
    
    
    151.0
    
    
    
    136.9
    
    
    
    14.1
    
    
    
    10
    %
    
    
    (8.1
    )
    
    
    (6
    %)Amortization of
intangible assets
    
    
    18.9
    
    
    
    11.4
    
    
    
    7.5
    
    
    
    *
    
    
    
    0.3
    
    
    
    *Write-off of acquired
IPR&D
    
    
    
    
    
    
    33.5
    
    
    
    (33.5
    )
    
    
    *
    
    
    
    (33.5
    )
    
    
    *Restructuring and
impairment charges
    
    
    18.9
    
    
    
    17.9
    
    
    
    1.0
    
    
    
    *
    
    
    
    (0.8
    )
    
    
    *Total costs and expenses
    
    $
    2,735.1
    
    
    $
    2,047.0
    
    
    $
    688.1
    
    
    
    34
    %
    
    $
    167.5
    
    
    
    8
    %
 *
    Calculation not meaningful  -34-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
        -35-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Periods Ended September 30, 2005Asset
    
    
    Other Plant(in millions of dollars)
    
    Impairments
    
    
    Exit Costs
    
    
    Severance
    
    
    TotalThree Months:Coatings plant closures
and workforce reductions
    
    $
    
    
    
    $
    
    
    
    $
    0.6
    
    
    $
    0.6Bromborough, UK closure
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    0.8Noveon International restructuring
liabilities assumed
    
    
    
    
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.2
    )$
    
    
    
    $
    
    
    
    $
    1.2
    
    
    $
    1.2Nine Months:Coatings plant closures
and workforce reductions
    
    $
    4.2
    
    
    $
    0.9
    
    
    $
    2.5
    
    
    $
    7.6Bromborough, UK closure
    
    
    0.7
    
    
    
    0.5
    
    
    
    3.0
    
    
    
    4.2Corporate workforce reductions
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    0.7Noveon International restructuring
liabilities assumed
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.2$
    4.9
    
    
    $
    1.4
    
    
    $
    6.4
    
    
    $
    12.7
    -36-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
     -37-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Other Items and Net Income
  Three Months EndedSeptember 30,(in millions of dollars)
    
    2005
    
    2004
    
    $ Change
    
    % ChangeOther income
(expense) 
net
    
    $
    (0.8
    )
    
    $
    0.2
    
    
    $
    (1.0
    )
    
    
    *Interest
expensenet
    
    
    (25.1
    )
    
    
    (26.1
    )
    
    
    1.0
    
    
    
    (4
    %)Income from
continuing
operationsbefore income
taxes
    
    
    66.1
    
    
    
    51.0
    
    
    
    15.1
    
    
    
    30
    %Provision for income
taxes
    
    
    21.3
    
    
    
    19.6
    
    
    
    1.7
    
    
    
    9
    %Income from continuing
operations
    
    
    44.8
    
    
    
    31.4
    
    
    
    13.4
    
    
    
    43
    %Discontinued operations
    
    
    3.8
    
    
    
    0.8
    
    
    
    3.0
    
    
    
    *Net income
    
    
    48.6
    
    
    
    32.2
    
    
    
    16.4
    
    
    
    51
    %Nine Months Ended
    
    
    
    
    
    
    
    
    
    ExcludingSeptember 30,
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    2004
    
    $ Change
    
    % Change
    
    $ Change
    
    % ChangeOther income
(expense) 
net
    
    $
    0.9
    
    
    $
    2.5
    
    
    $
    (1.6
    )
    
    
    *
    
    
    $
    (2.3
    )
    
    
    *Interest
expensenet
    
    
    (74.4
    )
    
    
    (48.5
    )
    
    
    (25.9
    )
    
    
    *
    
    
    
    7.6
    
    
    
    *Income from continuing
operations before income
taxes
    
    
    229.4
    
    
    
    118.2
    
    
    
    111.2
    
    
    
    94
    %
    
    
    73.5
    
    
    
    62
    %Provision for income
taxes
    
    
    77.1
    
    
    
    45.1
    
    
    
    32.0
    
    
    
    71
    %
    
    
    19.1
    
    
    
    42
    %Income from continuing
operations
    
    
    152.3
    
    
    
    73.1
    
    
    
    79.2
    
    
    
    108
    %
    
    
    54.4
    
    
    
    74
    %Discontinued operations
    
    
    4.9
    
    
    
    0.5
    
    
    
    4.4
    
    
    
    *
    
    
    
    4.4
    
    
    
    *Net income
    
    
    157.2
    
    
    
    73.6
    
    
    
    83.6
    
    
    
    114
    %
    
    
    58.8
    
    
    
    80
    %
 *
    Calculation not meaningful  -38-




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




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2005
    
    2004
    
    2005
    
    2004Revenues:Lubricant Additives
    
    
    57
    %
    
    
    56
    %
    
    
    56
    %
    
    
    69
    %Specialty Chemicals
    
    
    43
    %
    
    
    44
    %
    
    
    44
    %
    
    
    31
    %Segment
Operating Income:Lubricant Additives
    
    
    59
    %
    
    
    69
    %
    
    
    59
    %
    
    
    81
    %Specialty Chemicals
    
    
    41
    %
    
    
    31
    %
    
    
    41
    %
    
    
    19
    %
  Three Months EndedSeptember 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeRevenues:Lubricant Additives
    
    $
    574.1
    
    
    $
    509.3
    
    
    $
    64.8
    
    
    
    13
    %Specialty Chemicals
    
    
    440.0
    
    
    
    407.8
    
    
    
    32.2
    
    
    
    8
    %Total
    
    $
    1,014.1
    
    
    $
    917.1
    
    
    $
    97.0
    
    
    
    11
    %Nine Months Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingSeptember 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeRevenues:Lubricant Additives
    
    $
    1,704.9
    
    
    $
    1,517.8
    
    
    $
    187.1
    
    
    
    12
    %
    
    $
    187.1
    
    
    
    12
    %Specialty Chemicals
    
    
    1,333.1
    
    
    
    693.4
    
    
    
    639.7
    
    
    
    92
    %
    
    
    48.6
    
    
    
    7
    %Total
    
    $
    3,038.0
    
    
    $
    2,211.2
    
    
    $
    826.8
    
    
    
    37
    %
    
    $
    235.7
    
    
    
    11
    %
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Three Months EndedSeptember 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeGross
Profit:Lubricant Additives
    
    $
    134.7
    
    
    $
    131.0
    
    
    $
    3.7
    
    
    
    3
    %Specialty Chemicals
    
    
    113.3
    
    
    
    96.4
    
    
    
    16.9
    
    
    
    18
    %Total
    
    $
    248.0
    
    
    $
    227.4
    
    
    $
    20.6
    
    
    
    9
    %Nine Months Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingSeptember 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeGross
Profit:Lubricant Additives
    
    $
    416.3
    
    
    $
    401.5
    
    
    $
    14.8
    
    
    
    4
    %
    
    $
    14.8
    
    
    
    4
    %Specialty Chemicals
    
    
    351.9
    
    
    
    166.2
    
    
    
    185.7
    
    
    
    112
    %
    
    
    23.3
    
    
    
    14
    %Total
    
    $
    768.2
    
    
    $
    567.7
    
    
    $
    200.5
    
    
    
    35
    %
    
    $
    38.1
    
    
    
    7
    %Three Months EndedSeptember 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % ChangeSegmentOperating
Income:Lubricant Additives
    
    $
    68.6
    
    
    $
    66.0
    
    
    $
    2.6
    
    
    
    4
    %Specialty Chemicals
    
    
    47.5
    
    
    
    29.6
    
    
    
    17.9
    
    
    
    60
    %Total
    
    $
    116.1
    
    
    $
    95.6
    
    
    $
    20.5
    
    
    
    21
    %Nine Months Ended
    
    
    
    
    
    
    
    
    
    
    ExcludingSeptember 30,
    
    
    
    
    
    
    
    
    
    
    Acquisitions(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ Change
    
    
    % Change
    
    $ Change
    
    
    % ChangeSegmentOperating
Income:Lubricant Additives
    
    $
    220.7
    
    
    $
    201.6
    
    
    $
    19.1
    
    
    
    9
    %
    
    $
    19.1
    
    
    
    9
    %Specialty Chemicals
    
    
    150.5
    
    
    
    46.0
    
    
    
    104.5
    
    
    
    227
    %
    
    
    31.5
    
    
    
    68
    %Total
    
    $
    371.2
    
    
    $
    247.6
    
    
    $
    123.6
    
    
    
    50
    %
    
    $
    50.6
    
    
    
    20
    %
 -41-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Lubricant Additives Segment
   3rd Quarter
    
    Year-to-Date2005
    
    2005Volume
    
    VolumeNorth America
    
    
    37
    %
    
    
    38
    %Europe
    
    
    32
    %
    
    
    31
    %Asia-Pacific / Middle East
    
    
    25
    %
    
    
    25
    %Latin America
    
    
    6
    %
    
    
    6
    %Total
    
    
    100
    %
    
    
    100
    %
  3rd Quarter
    
    Year-to-Date2005 vs. 2004
    
    2005 vs. 2004% Change
    
    % ChangeNorth America
    
    
    (4
    %)
    
    
    (7
    %)Europe
    
    
    2
    %
    
    
    3
    %Asia-Pacific / Middle East
    
    
    8
    %
    
    
    7
    %Latin America
    
    
    1
    %
    
    
    (6
    %)Total
    
    
    1
    %
    
    
    (1
    %)
  -42-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
      Specialty Chemicals Segment
  -43-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
   3rd Quarter
    
    Year-to-Date2005
    
    2005Volume
    
    VolumeNorth America
    
    
    71
    %
    
    
    71
    %Europe
    
    
    14
    %
    
    
    15
    %Asia-Pacific / Middle East
    
    
    11
    %
    
    
    10
    %Latin America
    
    
    4
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
  2005 vs. 2004% ChangeThird Quarter:North America
    
    
    (5
    %)Europe
    
    
    (11
    %)Asia-Pacific / Middle East
    
    
    1
    %Latin America
    
    
    (7
    %)Total
    
    
    (5
    %)
 ExcludingAcquisitions2005 vs. 2004
    
    2005 vs. 2004% Change
    
    % ChangeYear-to-Date:North America
    
    
    56
    %
    
    
    (7
    %)Europe
    
    
    60
    %
    
    
    (2
    %)Asia-Pacific / Middle East
    
    
    88
    %
    
    
    Latin America
    
    
    56
    %
    
    
    (5
    %)Total
    
    
    59
    %
    
    
    (6
    %)
  -44-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
      -45-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 PRO FORMA ANALYSIS
     -46-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Nine Months EndedSeptember 30,Pro Forma(in millions of dollars)
    
    Actual 2005
    
    
    2004Consolidated DataTotal revenues
    
    $
    3,038.0
    
    
    $
    2,748.8Gross profit
    
    $
    768.2
    
    
    $
    729.1Income before income taxes
    
    $
    229.4
    
    
    $
    150.3Income from continuing operations
    
    $
    152.3
    
    
    $
    96.2Net income
    
    $
    157.2
    
    
    $
    96.6Depreciation expense
    
    $
    116.7
    
    
    $
    122.0Amortization of intangible assets
    
    $
    18.9
    
    
    $
    18.7Capital expenditures
    
    $
    91.5
    
    
    $
    105.5Segment DataLubricant Additives SegmentTotal revenues
    
    $
    1,704.9
    
    
    $
    1,517.8Gross profit
    
    $
    416.3
    
    
    $
    401.5Segment operating income
    
    $
    220.7
    
    
    $
    201.6Depreciation expense
    
    $
    60.0
    
    
    $
    64.2Amortization of intangible assets
    
    $
    2.3
    
    
    $
    2.3Capital expenditures
    
    $
    50.1
    
    
    $
    58.4Specialty Chemicals SegmentTotal revenues
    
    $
    1,333.1
    
    
    $
    1,231.0Gross profit
    
    $
    351.9
    
    
    $
    327.6Segment operating income
    
    $
    150.5
    
    
    $
    117.7Depreciation expense
    
    $
    56.1
    
    
    $
    56.9Amortization of intangible assets
    
    $
    16.6
    
    
    $
    16.4Capital expenditures
    
    $
    41.1
    
    
    $
    46.5Unallocated corporate depreciation
expense
    
    $
    0.6
    
    
    $
    0.9Unallocated corporate capital
expenditures
    
    $
    0.3
    
    
    $
    0.6
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Nine Months EndedSeptember 30,(in millions of dollars)
    
    Actual 2005
    
    
    Pro Forma 2004Reconciliation of Segment Operating
Incometo Income from Continuing
Operations before Income TaxesSegment operating income:Lubricant Additives Segment
    
    $
    220.7
    
    
    $
    201.6Specialty Chemicals Segment
    
    
    150.5
    
    
    
    117.7Total segment operating income
    
    
    371.2
    
    
    
    319.3Corporate expenses
    
    
    (47.4
    )
    
    
    (32.3
    )Corporate other income (expenses)
    
    
    (1.1
    )
    
    
    2.8Write-off of acquired IPR&D
    
    
    
    
    
    
    (34.0
    )Restructuring and impairment charges
    
    
    (18.9
    )
    
    
    (21.2
    )Interest
expense  net
    
    
    (74.4
    )
    
    
    (84.3
    )Income from
continuing operations before income taxes
    
    $
    229.4
    
    
    $
    150.3
 WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
  Nine Months EndedSeptember 30,(in millions of dollars)
    
    2005
    
    
    2004
    
    
    $ ChangeCash provided by (used for):Operating activities
    
    $
    283.8
    
    
    $
    192.6
    
    
    $
    91.2Investing activities
    
    
    (74.5
    )
    
    
    (1,039.1
    )
    
    
    964.6Financing activities
    
    
    (281.6
    )
    
    
    864.5
    
    
    
    (1,146.1
    )Effect of exchange rate changes on cash
    
    
    (10.7
    )
    
    
    7.4
    
    
    
    (18.1
    )Net increase (decrease) in cash and
short-term investments
    
    $
    (83.0
    )
    
    $
    25.4
    
    
    $
    (108.4
    )
 -48-




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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
  
  -49-




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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
  -50-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
      -51-




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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.
 -52-




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
       -53-




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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 July 18, 2005, we issued 62 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 Canadian
subsidiary of the company.On August 1, 2005, we issued 5,120 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 September 1, 2005, we issued 282 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 a deferred
compensation plan for officers.(c)
    
    The following table provides information regarding the companys purchases of
its common shares during the third quarter.
 -54-




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##### Table of Contents



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(July 1, 2005 through
July 31, 2005)
    
    17,941 Shares
    
    $
    43.93
    
    
    N/A
    
    N/AMonth #2(August 1, 2005 through
August 31, 2005)
    
    8,002 Shares
    
    $
    42.54
    
    
    N/A
    
    N/AMonth #3(September 1, 2005
through
September 30, 2005)
    
    10,942 Shares
    
    $
    41.29
    
    
    N/A
    
    N/ATotal
    
    36,885 Shares
 1
    This column represents common shares that were purchased by the company pursuant to: (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 6. Exhibits
 31.1
    
    Rule 13a-14(a) Certification of the Chief Executive
Officer, 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
  THE LUBRIZOL CORPORATION/s/ W. Scott EmerickW. Scott EmerickChief Accounting Officer and Duly Authorized
Signatory of The Lubrizol Corporation  -55-