##### 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 March 31, 2006
 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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
 o þ




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##### 



THE LUBRIZOL CORPORATION  Quarterly Report on Form 10-Q  Quarter Ended March 31, 2006
 Table of Contents
 Page NumberPART I. FINANCIAL INFORMATIONItem 1
    
    Financial Statements (unaudited)
    
    
    3Consolidated Statements of Operations
    
    
    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
    
    
    28Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    41Item 4
    
    Controls and Procedures
    
    
    42PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    42Item 1A
    
    Risk Factors
    
    
    42Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 6
    
    Exhibits
    
    
    43Signatures
    
    
    44EX-31.1 CertificationEX-31.2 CertificationEX-32.1 Certification
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 THE LUBRIZOL CORPORATION
 
  
 Three MonthsEnded March 31,(In Millions of Dollars Except Per Share Data)
    
    2006
    
    
    2005Net sales
    
    $
    983.5
    
    
    $
    847.9Royalties and other revenues
    
    
    0.6
    
    
    
    0.9Total revenues
    
    
    984.1
    
    
    
    848.8Cost of sales
    
    
    738.4
    
    
    
    618.2Selling and administrative expenses
    
    
    93.3
    
    
    
    85.6Research, testing and development expenses
    
    
    49.6
    
    
    
    48.5Amortization of intangible assets
    
    
    5.8
    
    
    
    5.9Restructuring and impairment charges
    
    
    1.8
    
    
    
    6.1Total costs and expenses
    
    
    888.9
    
    
    
    764.3Other (expense) income -net
    
    
    (1.5
    )
    
    
    0.6Interest income
    
    
    2.2
    
    
    
    1.8Interest expense
    
    
    (25.3
    )
    
    
    (26.3
    )Income from continuing operations before income taxes
    
    
    70.6
    
    
    
    60.6Provision for income taxes
    
    
    24.7
    
    
    
    20.5Income from continuing operations
    
    
    45.9
    
    
    
    40.1Discontinued operations -net of tax
    
    
    (60.7
    )
    
    
    8.4Net (loss) income
    
    $
    (14.8
    )
    
    $
    48.5Basic earnings (loss) per share:Continuing operations
    
    $
    0.67
    
    
    $
    0.59Discontinued operations
    
    
    (0.89
    )
    
    
    0.13Net (loss) income per share, basic
    
    $
    (0.22
    )
    
    $
    0.72Diluted earnings (loss) per share:Continuing operations
    
    $
    0.66
    
    
    $
    0.59Discontinued operations
    
    
    (0.88
    )
    
    
    0.12Net (loss) income per share, diluted
    
    $
    (0.22
    )
    
    $
    0.71Dividends per share
    
    $
    0.26
    
    
    $
    0.26
 Amounts
shown are unaudited.

See accompanying notes to the financial statements.
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THE LUBRIZOL CORPORATION
 
  
 March 31,
    
    
    December 31,(In Millions of Dollars)
    
    2006
    
    
    2005ASSETSCash and short-term investments
    
    $
    233.3
    
    
    $
    262.4Receivables -net
    
    
    566.8
    
    
    
    585.6Inventories
    
    
    531.5
    
    
    
    586.0Other current assets
    
    
    127.3
    
    
    
    138.3Assets held for sale
    
    
    286.0
    
    
    
    Total current assets
    
    
    1,744.9
    
    
    
    1,572.3Property and equipment -at cost
    
    
    2,496.4
    
    
    
    2,621.5Less accumulated depreciation
    
    
    1,431.8
    
    
    
    1,437.1Property and equipment -net
    
    
    1,064.6
    
    
    
    1,184.4Goodwill
    
    
    1,055.6
    
    
    
    1,138.8Intangible assets -net
    
    
    379.1
    
    
    
    404.6Investments in non-consolidated companies
    
    
    7.8
    
    
    
    7.6Other assets
    
    
    55.2
    
    
    
    58.6TOTAL
    
    $
    4,307.2
    
    
    $
    4,366.3LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current portion of long-term debt
    
    $
    8.2
    
    
    $
    7.9Accounts payable
    
    
    341.2
    
    
    
    372.2Accrued expenses and other current liabilities
    
    
    273.2
    
    
    
    284.8Liabilities held for sale
    
    
    17.0
    
    
    
    Total current liabilities
    
    
    639.6
    
    
    
    664.9Long-term debt
    
    
    1,637.0
    
    
    
    1,662.9Postretirement health-care obligations
    
    
    101.6
    
    
    
    102.6Noncurrent liabilities
    
    
    196.8
    
    
    
    204.0Deferred income taxes
    
    
    114.3
    
    
    
    113.7Total liabilities
    
    
    2,689.3
    
    
    
    2,748.1Minority interest in consolidated companies
    
    
    48.5
    
    
    
    51.0Contingencies 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 -68,343,245 shares as of March 31, 2006
after deducting 17,852,649 treasury shares,
68,043,241 shares as of December 31, 2005
after deducting 18,152,653 treasury shares
    
    
    674.7
    
    
    
    663.7Retained earnings
    
    
    1,001.2
    
    
    
    1,016.0Accumulated other comprehensive loss
    
    
    (106.5
    )
    
    
    (112.5
    )Total shareholders equity
    
    
    1,569.4
    
    
    
    1,567.2TOTAL
    
    $
    4,307.2
    
    
    $
    4,366.3
 Amounts shown are unaudited.
See accompanying notes to the financial statements.
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THE
LUBRIZOL CORPORATION
 
  
 Three MonthsEnded March 31,(In Millions of Dollars)
    
    2006
    
    
    2005CASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet (loss) income
    
    $
    (14.8
    )
    
    $
    48.5Adjustments to reconcile net (loss) income to cash
provided by operating activities:Depreciation and amortization
    
    
    42.9
    
    
    
    47.3Deferred income taxes
    
    
    8.1
    
    
    
    3.1Restructuring and impairment charges
    
    
    61.0
    
    
    
    4.4Change in current assets and liabilities, net of
acquisitions and divestitures:Receivables
    
    
    (38.1
    )
    
    
    (49.4
    )Inventories
    
    
    (13.2
    )
    
    
    (26.7
    )Accounts payable, accrued expenses and other
current liabilities
    
    
    (32.0
    )
    
    
    (9.6
    )Other current assets
    
    
    0.9
    
    
    
    0.2(82.4
    )
    
    
    (85.5
    )Change in noncurrent liabilities
    
    
    4.1
    
    
    
    14.7Other items -net
    
    
    6.8
    
    
    
    (2.9
    )Total operating activities
    
    
    25.7
    
    
    
    29.6INVESTING ACTIVITIESCapital expenditures
    
    
    (30.3
    )
    
    
    (29.7
    )Net proceeds from divestitures and sales of property
and equipment
    
    
    8.5
    
    
    
    1.6Total investing activities
    
    
    (21.8
    )
    
    
    (28.1
    )FINANCING ACTIVITIESChanges in short-term debt, net
    
    
    0.3
    
    
    
    (4.0
    )Repayments of long-term debt
    
    
    (23.7
    )
    
    
    (0.1
    )Dividends paid
    
    
    (17.7
    )
    
    
    (17.4
    )Proceeds from the exercise of stock options
    
    
    7.3
    
    
    
    30.9Total financing activities
    
    
    (33.8
    )
    
    
    9.4Effect of exchange rate changes on cash
    
    
    0.8
    
    
    
    (7.0
    )Net (decrease) increase in cash and short-term investments
    
    
    (29.1
    )
    
    
    3.9Cash and short-term investments at the beginning of period
    
    
    262.4
    
    
    
    335.9Cash and short-term investments at the end of period
    
    $
    233.3
    
    
    $
    339.8
 Amounts shown are unaudited.
See accompanying notes to the financial statements.
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THE LUBRIZOL CORPORATION
 
 Notes to Consolidated Financial Statements
 March 31, 2006
 1. Basis of Presentation
   2. Significant Accounting Policies
 Net Income Per Share
  Three MonthsEnded March 31,(in millions except per share data)
    
    2006
    
    
    2005Numerator:Income from continuing operations
    
    $
    45.9
    
    
    $
    40.1Denominator:Weighted-average common shares
outstanding
    
    
    68.4
    
    
    
    67.4Dilutive effect of stock options and
awards
    
    
    0.7
    
    
    
    0.8Denominator for income from
continuing
operations per share, diluted
    
    
    69.1
    
    
    
    68.2Income from continuing operations
per share, basic
    
    $
    0.67
    
    
    $
    0.59Income from continuing operations
per share, diluted
    
    $
    0.66
    
    
    $
    0.59
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 New Accounting Standards
   Use of Estimates
  Reclassifications
  3. Stock-Based Compensation
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
    Three Months Ended(in millions of dollars except per share data)
    
    March 31, 2005Reported net income
    
    $
    48.5Plus: stock-based employee compensation
(net of tax) included in net income
    
    
    1.4Less: stock-based employee compensation
(net of tax) using the fair value method
    
    
    (2.2
    )Pro forma net income
    
    $
    47.7Reported net income per share, basic
    
    $
    0.72Pro forma net income per share, basic
    
    $
    0.71Reported net income per share, diluted
    
    $
    0.71Pro forma net income per share, diluted
    
    $
    0.70
 Stock Incentive Plans
  -8-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
        -9-




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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
      Weighted-Average
    
    AggregateWeighted-
    
    
    Remaining
    
    IntrinsicAverage
    
    
    Contractual
    
    ValueShares
    
    
    Exercise Price
    
    
    Term (in years)
    
    (in millions)Outstanding at December 31,
2005
    
    
    4,283,917
    
    
    $
    32.35
    
    
    
    6.0
    
    
    $
    47.5Granted
    
    
    Exercised
    
    
    262,143
    
    
    
    30.40Forfeited
    
    
    1,600
    
    
    
    30.06Outstanding at March 31, 2006
    
    
    4,020,174
    
    
    $
    32.48
    
    
    
    6.0
    
    
    $
    45.1Exercisable at March 31, 2006
    
    
    3,282,537
    
    
    $
    30.93
    
    
    
    5.3
    
    
    $
    39.1
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
     Weighted-AverageShare
    
    
    Grant DateUnits
    
    
    Fair ValueNonvested at December 31, 2005
    
    
    58,689
    
    
    $
    33.03Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    Nonvested at March 31, 2006
    
    
    58,689
    
    
    $
    33.03
 Long-Term Incentive Plan
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
  ExpectedNumber ofShares to be
    
    
    Stock Price onAward
    
    Issued
    
    
    Date of Grant2004  2006 (a)
    
    
    
    
    
    $
    30.652005  2007
    
    
    176,400
    
    
    $
    40.362006  2008
    
    
    154,060
    
    
    $
    43.05
 
 (a)
    
    Per the terms of the agreement, payment of 165,152 units will be in cash, unless
changed to shares at the discretion of the organization and compensation committee of the
board of directors.   Weighted-Average GrantShare
    
    
    Date FairUnits
    
    
    ValueNonvested at December 31, 2005
    
    
    176,400
    
    
    $
    40.36Granted
    
    
    154,060
    
    
    $
    43.05Exercised
    
    
    Forfeited
    
    
    Nonvested at March 31, 2006
    
    
    330,460
    
    
    $
    41.61
 4. Divestitures
 ®
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 March 31,(in millions of dollars)
    
    2006Accounts receivable
    
    $
    57.8Inventory
    
    
    68.0Property and equipment  net
    
    
    115.0Goodwill
    
    
    24.1Intangible assets  net
    
    
    19.9Other assets
    
    
    1.2Total assets held for sale
    
    $
    286.0Accounts payable
    
    $
    1.4Other current liabilities
    
    
    6.1Other long-term liabilities (including
environmental liabilities of $6.4 million)
    
    
    9.5Total liabilities held for sale
    
    $
    17.0
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
  5. Inventories
  March 31,
    
    
    December 31,(in millions of dollars)
    
    2006
    
    
    2005Finished products
    
    $
    285.1
    
    
    $
    319.6Products in process
    
    
    95.4
    
    
    
    86.9Raw materials
    
    
    125.8
    
    
    
    151.2Supplies and engine test parts
    
    
    25.2
    
    
    
    28.3Total inventory
    
    $
    531.5
    
    
    $
    586.0
 6. Goodwill and Intangible Assets
  March 31, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulated(in millions of dollars)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Customer lists
    
    $
    139.4
    
    
    $
    16.6
    
    
    $
    151.5
    
    
    $
    15.8Technology
    
    
    139.8
    
    
    
    37.5
    
    
    
    144.4
    
    
    
    35.6Trademarks
    
    
    19.0
    
    
    
    4.0
    
    
    
    24.5
    
    
    
    4.2Patents
    
    
    12.5
    
    
    
    2.8
    
    
    
    11.8
    
    
    
    2.5Land-use rights
    
    
    7.3
    
    
    
    1.0
    
    
    
    7.3
    
    
    
    1.0Non-compete agreements
    
    
    8.2
    
    
    
    5.8
    
    
    
    9.1
    
    
    
    5.9Other
    
    
    5.3
    
    
    
    0.7
    
    
    
    5.4
    
    
    
    0.7Total amortized intangible
assets
    
    
    331.5
    
    
    
    68.4
    
    
    
    354.0
    
    
    
    65.7Non-amortized trademarks
    
    
    116.0
    
    
    
    
    
    
    
    116.3
    
    
    
    Total
    
    $
    447.5
    
    
    $
    68.4
    
    
    $
    470.3
    
    
    $
    65.7
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
   Lubricant
    
    
    Specialty(in millions of dollars)
    
    Additives
    
    
    Chemicals
    
    
    TotalBalance, January 1, 2006
    
    $
    95.8
    
    
    $
    1,043.0
    
    
    $
    1,138.8Goodwill impairment 
discontinued operations
    
    
    
    
    
    
    (61.0
    )
    
    
    (61.0
    )Goodwill held for sale
    
    
    
    
    
    
    (24.1
    )
    
    
    (24.1
    )Translation & other
adjustments
    
    
    0.3
    
    
    
    1.6
    
    
    
    1.9Balance, March 31, 2006
    
    $
    96.1
    
    
    $
    959.5
    
    
    $
    1,055.6
  7. Comprehensive (Loss) Income
  Three MonthsEnded March 31,(in millions of dollars)
    
    2006
    
    
    2005Net (loss) income
    
    $
    (14.8
    )
    
    $
    48.5Foreign currency translation adjustment
    
    
    6.9
    
    
    
    (48.7
    )Pension plan minimum liability
    
    
    (0.8
    )
    
    
    Unrealized (losses) gains - natural gas
hedges
    
    
    (0.8
    )
    
    
    0.7Unrealized gains - interest rate swaps
    
    
    0.7
    
    
    
    Amortization of treasury rate locks
    
    
    
    
    
    
    0.6Total comprehensive (loss) income
    
    $
    (8.8
    )
    
    $
    1.1
 8. Segment Reporting
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
   ® ®
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
  Three MonthsEnded March 31,(in millions of dollars)
    
    2006
    
    
    2005Revenues from external customers:Lubricant Additives
    
    $
    627.5
    
    
    $
    513.5Specialty Chemicals
    
    
    356.6
    
    
    
    335.3Total revenues
    
    $
    984.1
    
    
    $
    848.8Segment operating income:Lubricant Additives
    
    $
    74.4
    
    
    $
    67.7Specialty Chemicals
    
    
    44.6
    
    
    
    38.9Segment operating income
    
    
    119.0
    
    
    
    106.6Corporate expenses
    
    
    (21.3
    )
    
    
    (14.7
    )Corporate other expense
    
    
    (2.2
    )
    
    
    (0.7
    )Restructuring and impairment
charges
    
    
    (1.8
    )
    
    
    (6.1
    )Interest expense  net
    
    
    (23.1
    )
    
    
    (24.5
    )Income from continuing operations
before income taxes
    
    $
    70.6
    
    
    $
    60.6
   March 31,
    
    
    December 31,(in millions of dollars)
    
    2006
    
    
    2005Segment total assets:Lubricant Additives
    
    $
    1,370.0
    
    
    $
    1,319.1Specialty Chemicals
    
    
    2,197.7
    
    
    
    2,536.8Total segment assets
    
    
    3,567.7
    
    
    
    3,855.9Corporate assets
    
    
    453.5
    
    
    
    510.4Assets held for sale
    
    
    286.0
    
    
    
    Total consolidated assets
    
    $
    4,307.2
    
    
    $
    4,366.3
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 9. Pension and Postretirement Benefits
  Three MonthsEnded March 31,(in millions of dollars)
    
    2006
    
    
    2005Pension benefits:Service cost - benefits earned
during period
    
    $
    7.9
    
    
    $
    7.1Interest cost on projected
benefit obligation
    
    
    8.3
    
    
    
    7.9Expected return on plan assets
    
    
    (7.1
    )
    
    
    (6.8
    )Amortization of prior service costs
    
    
    0.5
    
    
    
    0.5Settlement / curtailment loss
    
    
    3.3
    
    
    
    Recognized net actuarial loss
    
    
    2.1
    
    
    
    1.1Net periodic benefit cost
    
    $
    15.0
    
    
    $
    9.8Other benefits:Service cost - benefits earned
during period
    
    $
    0.4
    
    
    $
    0.7Interest cost on projected
benefit obligation
    
    
    1.3
    
    
    
    1.9Amortization of prior service costs
    
    
    (2.1
    )
    
    
    (1.5
    )Recognized net actuarial loss
    
    
    0.4
    
    
    
    0.6Net periodic benefit cost
    
    $
    
    
    
    $
    1.7
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 10. Restructuring and Impairment Charges
   Liability
    
    
    
    
    
    
    
    
    
    
    LiabilityJanuary 1,
    
    
    Restructuring
    
    
    
    
    
    
    March 31,(in millions of dollars)
    
    2006
    
    
    Charges
    
    
    Cash Paid
    
    
    2006Specialty Chemicals plant closures
and workforce reductions
    
    $
    2.5
    
    
    $
    0.4
    
    
    $
    (0.5
    )
    
    $
    2.4Bromborough, United Kingdom closure
    
    
    2.3
    
    
    
    1.5
    
    
    
    (0.8
    )
    
    
    3.0Corporate / other workforce reductions
    
    
    0.3
    
    
    
    
    
    
    
    (0.2
    )
    
    
    0.1Noveon International restructuring
liabilities assumed
    
    
    1.3
    
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    1.0$
    6.4
    
    
    $
    1.8
    
    
    $
    (1.7
    )
    
    $
    6.5
     11. Debt
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 12. Shareholders Equity
  Shareholders EquityAccumulatedNumber of
    
    
    
    
    
    
    
    
    
    
    OtherShares
    
    
    Common
    
    
    Retained
    
    
    Comprehensive(in millions)
    
    Outstanding
    
    
    Shares
    
    
    Earnings
    
    
    (Loss) Income
    
    
    TotalBalance, January 1, 2006
    
    
    68.0
    
    
    $
    663.7
    
    
    $
    1,016.0
    
    
    $
    (112.5
    )
    
    $
    1,567.2Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (14.8
    )
    
    
    
    
    
    
    (14.8
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.0
    
    
    
    6.0Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.8
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock compensation
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    0.9Common shares  treasury:Shares issued upon exercise
of stock options and awards
    
    
    0.3
    
    
    
    10.1
    
    
    
    
    
    
    
    
    
    
    
    10.1Balance, March 31, 2006
    
    
    68.3
    
    
    $
    674.7
    
    
    $
    1,001.2
    
    
    $
    (106.5
    )
    
    $
    1,569.4
 13. Contingencies
  General
  Environmental
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
     -21-




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##### Table of Contents



THE LUBRIZOL CORPORATION
 Notes to Consolidated Financial Statements
 March 31, 2006
 14. Guarantor and Non-Guarantor Subsidiary Information
  Condensed Consolidating Statement of OperationsFor Three Months Ended March 31, 2006Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    379.0
    
    
    $
    182.2
    
    
    $
    532.5
    
    
    $
    (110.2
    )
    
    $
    983.5Royalties and other revenues
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Total revenues
    
    
    379.6
    
    
    
    182.2
    
    
    
    532.5
    
    
    
    (110.2
    )
    
    
    984.1Cost of sales
    
    
    303.6
    
    
    
    122.8
    
    
    
    422.2
    
    
    
    (110.2
    )
    
    
    738.4Selling and administrative expenses
    
    
    42.0
    
    
    
    25.8
    
    
    
    25.5
    
    
    
    
    
    
    
    93.3Research, testing and development expenses
    
    
    23.1
    
    
    
    9.4
    
    
    
    17.1
    
    
    
    
    
    
    
    49.6Amortization of intangible assets
    
    
    0.6
    
    
    
    3.6
    
    
    
    1.6
    
    
    
    
    
    
    
    5.8Restructuring and impairment charges
    
    
    0.3
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.8Total costs and expenses
    
    
    369.6
    
    
    
    161.6
    
    
    
    467.9
    
    
    
    (110.2
    )
    
    
    888.9Other (expense) income  net
    
    
    5.0
    
    
    
    6.2
    
    
    
    (12.1
    )
    
    
    (0.6
    )
    
    
    (1.5
    )Interest expense  net
    
    
    (22.5
    )
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (23.1
    )Equity in income of subsidiaries
    
    
    3.3
    
    
    
    39.2
    
    
    
    
    
    
    
    (42.5
    )
    
    
    Income (loss) from continuing operations before
income taxes
    
    
    (4.2
    )
    
    
    66.0
    
    
    
    51.9
    
    
    
    (43.1
    )
    
    
    70.6Provision for income taxes
    
    
    8.4
    
    
    
    6.8
    
    
    
    9.5
    
    
    
    
    
    
    
    24.7Income (loss) from continuing operations
    
    
    (12.6
    )
    
    
    59.2
    
    
    
    42.4
    
    
    
    (43.1
    )
    
    
    45.9Discontinued operations  net of tax
    
    
    (2.2
    )
    
    
    (56.2
    )
    
    
    (2.3
    )
    
    
    
    
    
    
    (60.7
    )Net (loss) income
    
    $
    (14.8
    )
    
    $
    3.0
    
    
    $
    40.1
    
    
    $
    (43.1
    )
    
    $
    (14.8
    )
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 Condensed Consolidating Statement of OperationsFor Three Months Ended March 31, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    306.1
    
    
    $
    146.2
    
    
    $
    460.6
    
    
    $
    (65.0
    )
    
    $
    847.9Royalties and other revenues
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.9Total revenues
    
    
    307.0
    
    
    
    146.2
    
    
    
    460.6
    
    
    
    (65.0
    )
    
    
    848.8Cost of sales
    
    
    243.1
    
    
    
    92.2
    
    
    
    347.9
    
    
    
    (65.0
    )
    
    
    618.2Selling and administrative expenses
    
    
    36.5
    
    
    
    21.3
    
    
    
    27.8
    
    
    
    
    
    
    
    85.6Research, testing and development expenses
    
    
    23.4
    
    
    
    8.6
    
    
    
    16.5
    
    
    
    
    
    
    
    48.5Amortization of intangible assets
    
    
    0.7
    
    
    
    3.6
    
    
    
    1.6
    
    
    
    
    
    
    
    5.9Restructuring and impairment charges
    
    
    3.7
    
    
    
    1.6
    
    
    
    0.8
    
    
    
    
    
    
    
    6.1Total costs and expenses
    
    
    307.4
    
    
    
    127.3
    
    
    
    394.6
    
    
    
    (65.0
    )
    
    
    764.3Other (expense) income  net
    
    
    7.7
    
    
    
    4.1
    
    
    
    (11.1
    )
    
    
    (0.1
    )
    
    
    0.6Interest (expense) income  net
    
    
    (26.0
    )
    
    
    0.6
    
    
    
    0.9
    
    
    
    
    
    
    
    (24.5
    )Equity in income of subsidiaries
    
    
    58.1
    
    
    
    17.8
    
    
    
    
    
    
    
    (75.9
    )
    
    
    Income from continuing operations before income taxes
    
    
    39.4
    
    
    
    41.4
    
    
    
    55.8
    
    
    
    (76.0
    )
    
    
    60.6Provision (benefit) for income taxes
    
    
    (9.1
    )
    
    
    15.3
    
    
    
    14.3
    
    
    
    
    
    
    
    20.5Income from continuing operations
    
    
    48.5
    
    
    
    26.1
    
    
    
    41.5
    
    
    
    (76.0
    )
    
    
    40.1Discontinued operations  net of tax
    
    
    
    
    
    
    6.9
    
    
    
    1.5
    
    
    
    
    
    
    
    8.4Net income
    
    $
    48.5
    
    
    $
    33.0
    
    
    $
    43.0
    
    
    $
    (76.0
    )
    
    $
    48.5
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 Condensed Consolidating Balance SheetMarch 31, 2006Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and short-term investments
    
    $
    88.9
    
    
    $
    2.3
    
    
    $
    142.1
    
    
    $
    
    
    
    $
    233.3Receivables
    
    
    148.6
    
    
    
    93.7
    
    
    
    324.5
    
    
    
    
    
    
    
    566.8Inventories
    
    
    124.4
    
    
    
    103.9
    
    
    
    329.3
    
    
    
    (26.1
    )
    
    
    531.5Other current assets
    
    
    74.8
    
    
    
    299.4
    
    
    
    28.2
    
    
    
    10.9
    
    
    
    413.3Total current assets
    
    
    436.7
    
    
    
    499.3
    
    
    
    824.1
    
    
    
    (15.2
    )
    
    
    1,744.9Property and equipment  net
    
    
    381.7
    
    
    
    338.6
    
    
    
    344.3
    
    
    
    
    
    
    
    1,064.6Goodwill
    
    
    27.1
    
    
    
    579.0
    
    
    
    449.5
    
    
    
    
    
    
    
    1,055.6Intangible assets  net
    
    
    9.4
    
    
    
    238.9
    
    
    
    130.8
    
    
    
    
    
    
    
    379.1Investments in subsidiaries and intercompany
balances
    
    
    2,560.2
    
    
    
    3,435.3
    
    
    
    3,262.4
    
    
    
    (9,257.9
    )
    
    
    Investments in non-consolidated companies
    
    
    6.4
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    7.8Other assets
    
    
    33.2
    
    
    
    2.0
    
    
    
    20.0
    
    
    
    
    
    
    
    55.2Total
    
    $
    3,454.7
    
    
    $
    5,094.5
    
    
    $
    5,031.1
    
    
    $
    (9,273.1
    )
    
    $
    4,307.2LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current
portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    8.2
    
    
    $
    
    
    
    $
    8.2Accounts payable
    
    
    113.3
    
    
    
    100.6
    
    
    
    127.3
    
    
    
    
    
    
    
    341.2Accrued expenses and other
current liabilities
    
    
    48.2
    
    
    
    145.2
    
    
    
    96.8
    
    
    
    
    
    
    
    290.2Total current liabilities
    
    
    161.5
    
    
    
    245.8
    
    
    
    232.3
    
    
    
    
    
    
    
    639.6Long-term debt
    
    
    1,440.1
    
    
    
    
    
    
    
    196.9
    
    
    
    
    
    
    
    1,637.0Postretirement health care obligations
    
    
    90.1
    
    
    
    5.0
    
    
    
    6.5
    
    
    
    
    
    
    
    101.6Noncurrent liabilities
    
    
    90.9
    
    
    
    4.6
    
    
    
    101.3
    
    
    
    
    
    
    
    196.8Deferred income taxes
    
    
    87.5
    
    
    
    0.7
    
    
    
    26.1
    
    
    
    
    
    
    
    114.3Total liabilities
    
    
    1,870.1
    
    
    
    256.1
    
    
    
    563.1
    
    
    
    
    
    
    
    2,689.3Minority interest in consolidated
companies
    
    
    
    
    
    
    
    
    
    
    (0.7
    )
    
    
    49.2
    
    
    
    48.5Total shareholders equity
    
    
    1,584.6
    
    
    
    4,838.4
    
    
    
    4,468.7
    
    
    
    (9,322.3
    )
    
    
    1,569.4Total
    
    $
    3,454.7
    
    
    $
    5,094.5
    
    
    $
    5,031.1
    
    
    $
    (9,273.1
    )
    
    $
    4,307.2
 -24-




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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 Condensed Consolidating Balance SheetDecember 31, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and short-term investments
    
    $
    83.2
    
    
    $
    3.6
    
    
    $
    175.6
    
    
    $
    
    
    
    $
    262.4Receivables
    
    
    143.8
    
    
    
    137.0
    
    
    
    304.8
    
    
    
    
    
    
    
    585.6Inventories
    
    
    122.4
    
    
    
    175.1
    
    
    
    316.4
    
    
    
    (27.9
    )
    
    
    586.0Other current assets
    
    
    91.5
    
    
    
    25.9
    
    
    
    11.2
    
    
    
    9.7
    
    
    
    138.3Total current assets
    
    
    440.9
    
    
    
    341.6
    
    
    
    808.0
    
    
    
    (18.2
    )
    
    
    1,572.3Property and equipment  net
    
    
    383.4
    
    
    
    458.2
    
    
    
    342.8
    
    
    
    
    
    
    
    1,184.4Goodwill
    
    
    27.1
    
    
    
    664.1
    
    
    
    447.6
    
    
    
    
    
    
    
    1,138.8Intangible assets  net
    
    
    9.8
    
    
    
    262.8
    
    
    
    132.0
    
    
    
    
    
    
    
    404.6Investments in subsidiaries and intercompany
balances
    
    
    2,554.3
    
    
    
    2,508.2
    
    
    
    1,354.0
    
    
    
    (6,416.5
    )
    
    
    Investments in non-consolidated companies
    
    
    6.2
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    7.6Other assets
    
    
    33.9
    
    
    
    3.4
    
    
    
    21.3
    
    
    
    
    
    
    
    58.6Total
    
    $
    3,455.6
    
    
    $
    4,239.7
    
    
    $
    3,105.7
    
    
    $
    (6,434.7
    )
    
    $
    4,366.3LIABILITIES AND SHAREHOLDERS EQUITYShort-term debt and current
portion of long-term debt
    
    $
    
    
    
    $
    0.1
    
    
    $
    7.8
    
    
    $
    
    
    
    $
    7.9Accounts payable
    
    
    143.5
    
    
    
    142.8
    
    
    
    85.9
    
    
    
    
    
    
    
    372.2Accrued expenses and other
current liabilities
    
    
    38.9
    
    
    
    113.6
    
    
    
    132.3
    
    
    
    
    
    
    
    284.8Total current liabilities
    
    
    182.4
    
    
    
    256.5
    
    
    
    226.0
    
    
    
    
    
    
    
    664.9Long-term debt
    
    
    1,445.2
    
    
    
    
    
    
    
    217.7
    
    
    
    
    
    
    
    1,662.9Postretirement health care obligations
    
    
    91.4
    
    
    
    4.8
    
    
    
    6.4
    
    
    
    
    
    
    
    102.6Noncurrent liabilities
    
    
    63.5
    
    
    
    41.3
    
    
    
    99.2
    
    
    
    
    
    
    
    204.0Deferred income taxes
    
    
    87.6
    
    
    
    1.4
    
    
    
    24.7
    
    
    
    
    
    
    
    113.7Total liabilities
    
    
    1,870.1
    
    
    
    304.0
    
    
    
    574.0
    
    
    
    
    
    
    
    2,748.1Minority interest in consolidated
companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51.0
    
    
    
    51.0Total shareholders equity
    
    
    1,585.5
    
    
    
    3,935.7
    
    
    
    2,531.7
    
    
    
    (6,485.7
    )
    
    
    1,567.2Total
    
    $
    3,455.6
    
    
    $
    4,239.7
    
    
    $
    3,105.7
    
    
    $
    (6,434.7
    )
    
    $
    4,366.3
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##### Table of Contents



THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 Condensed Consolidating Statement of Cash FlowsThree Months Ended March 31, 2006Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet (loss) income
    
    $
    (14.8
    )
    
    $
    3.0
    
    
    $
    40.1
    
    
    $
    (43.1
    )
    
    $
    (14.8
    )Adjustments to reconcile net (loss) income to
cash provided by (used for) operating
activities
    
    
    44.7
    
    
    
    (35.9
    )
    
    
    (11.4
    )
    
    
    43.1
    
    
    
    40.5Total operating activities
    
    
    29.9
    
    
    
    (32.9
    )
    
    
    28.7
    
    
    
    
    
    
    
    25.7INVESTING ACTIVITIESCapital expenditures
    
    
    (11.7
    )
    
    
    (9.4
    )
    
    
    (9.2
    )
    
    
    
    
    
    
    (30.3
    )Proceeds from divestitures and sales of property
and equipment
    
    
    0.8
    
    
    
    7.6
    
    
    
    0.1
    
    
    
    
    
    
    
    8.5Total investing activities
    
    
    (10.9
    )
    
    
    (1.8
    )
    
    
    (9.1
    )
    
    
    
    
    
    
    (21.8
    )FINANCING ACTIVITIESChanges in short-term debt, net
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3Repayments of long-term debt
    
    
    
    
    
    
    
    
    
    
    (23.7
    )
    
    
    
    
    
    
    (23.7
    )Dividends paid
    
    
    (17.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.7
    )Changes in intercompany activities
    
    
    (2.9
    )
    
    
    33.1
    
    
    
    (30.2
    )
    
    
    
    
    
    
    Proceeds from the exercise of stock options
    
    
    7.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.3Total financing activities
    
    
    (13.3
    )
    
    
    33.1
    
    
    
    (53.6
    )
    
    
    
    
    
    
    (33.8
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    
    
    
    
    0.8Net (decrease) increase in cash and short-term
investments
    
    
    5.7
    
    
    
    (1.3
    )
    
    
    (33.5
    )
    
    
    
    
    
    
    (29.1
    )Cash and short-term investments at the
beginning of period
    
    
    83.2
    
    
    
    3.6
    
    
    
    175.6
    
    
    
    
    
    
    
    262.4Cash and short-term investments at the
end of period
    
    $
    88.9
    
    
    $
    2.3
    
    
    $
    142.1
    
    
    $
    
    
    
    $
    233.3
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THE LUBRIZOL CORPORATION  Notes to Consolidated Financial Statements  March 31, 2006
 Condensed Consolidating Statement of Cash FlowsThree Months Ended March 31, 2005Parent
    
    
    Subsidiary
    
    
    Other
    
    
    
    
    
    
    TotalCompany
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCASH PROVIDED BY (USED FOR):OPERATING ACTIVITIESNet income
    
    $
    48.5
    
    
    $
    33.0
    
    
    $
    43.0
    
    
    $
    (76.0
    )
    
    $
    48.5Adjustments to reconcile net income to
cash provided by (used for) operating
activities
    
    
    (50.5
    )
    
    
    43.2
    
    
    
    (87.6
    )
    
    
    76.0
    
    
    
    (18.9
    )Total operating activities
    
    
    (2.0
    )
    
    
    76.2
    
    
    
    (44.6
    )
    
    
    
    
    
    
    29.6INVESTING ACTIVITIESCapital expenditures
    
    
    (10.1
    )
    
    
    (9.0
    )
    
    
    (10.6
    )
    
    
    
    
    
    
    (29.7
    )Proceeds from divestitures and sales of property
and equipment
    
    
    3.4
    
    
    
    1.3
    
    
    
    (3.1
    )
    
    
    
    
    
    
    1.6Total investing activities
    
    
    (6.7
    )
    
    
    (7.7
    )
    
    
    (13.7
    )
    
    
    
    
    
    
    (28.1
    )FINANCING ACTIVITIESChanges in short-term debt, net
    
    
    
    
    
    
    
    
    
    
    (4.0
    )
    
    
    
    
    
    
    (4.0
    )Repayments of long-term debt
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Dividends paid
    
    
    (17.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.4
    )Changes in intercompany activities
    
    
    10.3
    
    
    
    (58.9
    )
    
    
    48.6
    
    
    
    
    
    
    
    Proceeds from the exercise of stock options
    
    
    30.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30.9Total financing activities
    
    
    23.8
    
    
    
    (59.0
    )
    
    
    44.6
    
    
    
    
    
    
    
    9.4Effect of exchange rate changes on cash
    
    
    
    
    
    
    0.2
    
    
    
    (7.2
    )
    
    
    
    
    
    
    (7.0
    )Net increase (decrease) in cash and short-term
investments
    
    
    15.1
    
    
    
    9.7
    
    
    
    (20.9
    )
    
    
    
    
    
    
    3.9Cash and short-term investments at the
beginning of period
    
    
    40.3
    
    
    
    (0.1
    )
    
    
    295.7
    
    
    
    
    
    
    
    335.9Cash and short-term investments at the
end of period
    
    $
    55.4
    
    
    $
    9.6
    
    
    $
    274.8
    
    
    $
    
    
    
    $
    339.8
 
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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
   ®
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  RESULTS OF OPERATIONS
  Revenues
  Three Months EndedMarch 31,(in millions of dollars)
    
    2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeNet sales
    
    $
    983.5
    
    
    $
    847.9
    
    
    $
    135.6
    
    
    
    16%Royalties and other
revenues
    
    
    0.6
    
    
    
    0.9
    
    
    
    (0.3
    )
    
    
    (33%)Total revenues
    
    $
    984.1
    
    
    $
    848.8
    
    
    $
    135.3
    
    
    
    16%
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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  1st Quarter2006
    
    2006 vs. 2005Volume
    
    % ChangeNorth America
    
    
    46
    %
    
    
    4
    %Europe
    
    
    27
    %
    
    
    5
    %Asia-Pacific / Middle East
    
    
    22
    %
    
    
    24
    %Latin America
    
    
    5
    %
    
    
    15
    %Total
    
    
    100
    %
    
    
    8
    %
  Costs and Expenses
  Three Months EndedMarch 31,(in millions of dollars)
    
    2006
    
    2005
    
    $ Change
    
    % ChangeCost of sales
    
    $
    738.4
    
    
    $
    618.2
    
    
    $
    120.2
    
    
    
    19
    %Selling and administrative
expenses
    
    
    93.3
    
    
    
    85.6
    
    
    
    7.7
    
    
    
    9
    %Research, testing and
development expenses
    
    
    49.6
    
    
    
    48.5
    
    
    
    1.1
    
    
    
    2
    %Amortization of
intangible assets
    
    
    5.8
    
    
    
    5.9
    
    
    
    (0.1
    )
    
    
    (2
    %)Restructuring and
impairment charges
    
    
    1.8
    
    
    
    6.1
    
    
    
    (4.3
    )
    
    
    *Total costs and expenses
    
    $
    888.9
    
    
    $
    764.3
    
    
    $
    124.6
    
    
    
    16
    %
 *   Calculation not meaningful   -30-




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
     March 31, 2006Asset
    
    
    Other Plant(in millions of dollars)
    
    Impairments
    
    
    Exit Costs
    
    
    Severance
    
    
    TotalSpecialty Chemicals plant closures
and workforce reductions
    
    $
    
    
    
    $
    
    
    
    $
    0.4
    
    
    $
    0.4Bromborough, United Kingdom closure
    
    
    
    
    
    
    0.9
    
    
    
    0.6
    
    
    
    1.5Noveon International restructuring
liabilities assumed
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )$
    
    
    
    $
    0.9
    
    
    $
    0.9
    
    
    $
    1.8
 March 31, 2005Asset
    
    
    Other PlantImpairments
    
    
    Exit Costs
    
    
    Severance
    
    
    TotalSpecialty Chemicals plant closures
and workforce reductions
    
    $
    4.4
    
    
    $
    0.4
    
    
    $
    0.2
    
    
    $
    5.0Bromborough, United Kingdom closure
    
    
    
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.8Noveon International restructuring
liabilities assumed
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3$
    4.4
    
    
    $
    0.6
    
    
    $
    1.1
    
    
    $
    6.1
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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
      -32-




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
 Other Items and Net (Loss) Income
  Three Months EndedMarch 31,(in millions of dollars)
    
    2006
    
    2005
    
    $ Change
    
    % ChangeOther (expense) income -
net
    
    $
    (1.5
    )
    
    $
    0.6
    
    
    $
    (2.1
    )
    
    
    *Interest
expense - net
    
    
    (23.1
    )
    
    
    (24.5
    )
    
    
    1.4
    
    
    
    6
    %Income from continuing
operations before income
taxes
    
    
    70.6
    
    
    
    60.6
    
    
    
    10.0
    
    
    
    17
    %Provision for income
taxes
    
    
    24.7
    
    
    
    20.5
    
    
    
    4.2
    
    
    
    (20
    %)Income from continuing
operations
    
    
    45.9
    
    
    
    40.1
    
    
    
    5.8
    
    
    
    14
    %Discontinued operations
    
    
    (60.7
    )
    
    
    8.4
    
    
    
    (69.1
    )
    
    
    *Net (loss) income
    
    
    (14.8
    )
    
    
    48.5
    
    
    
    (63.3
    )
    
    
    (131
    %)
 *   Calculation not meaningful   
    -33-




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  SEGMENT ANALYSIS
    Three Months EndedMarch 31,(in millions of dollars)
    
    2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeRevenues:Lubricant Additives
    
    $
    627.5
    
    
    $
    513.5
    
    
    $
    114.0
    
    
    
    22
    %Specialty Chemicals
    
    
    356.6
    
    
    
    335.3
    
    
    
    21.3
    
    
    
    6
    %Total
    
    $
    984.1
    
    
    $
    848.8
    
    
    $
    135.3
    
    
    
    16
    %Gross Profit:Lubricant Additives
    
    $
    141.0
    
    
    $
    130.3
    
    
    $
    10.7
    
    
    
    8
    %Specialty Chemicals
    
    
    104.1
    
    
    
    99.4
    
    
    
    4.7
    
    
    
    5
    %Total
    
    $
    245.1
    
    
    $
    229.7
    
    
    $
    15.4
    
    
    
    7
    %Segment
Operating Income:Lubricant Additives
    
    $
    74.4
    
    
    $
    67.7
    
    
    $
    6.7
    
    
    
    10
    %Specialty Chemicals
    
    
    44.6
    
    
    
    38.9
    
    
    
    5.7
    
    
    
    15
    %Total
    
    $
    119.0
    
    
    $
    106.6
    
    
    $
    12.4
    
    
    
    12
    %
 Lubricant Additives Segment
  -34-




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  1st Quarter
    
    1st Quarter2006
    
    2006 vs. 2005Volume
    
    % ChangeNorth America
    
    
    37
    %
    
    
    6
    %Europe
    
    
    31
    %
    
    
    5
    %Asia-Pacific / Middle East
    
    
    26
    %
    
    
    24
    %Latin America
    
    
    6
    %
    
    
    14
    %Total
    
    
    100
    %
    
    
    10
    %
      -35-




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Specialty Chemicals Segment
   1st Quarter
    
    1st Quarter2006
    
    2006 vs. 2005Volume
    
    % ChangeNorth America
    
    
    67
    %
    
    
    Europe
    
    
    19
    %
    
    
    4
    %Asia-Pacific / Middle East
    
    
    11
    %
    
    
    27
    %Latin America
    
    
    3
    %
    
    
    16
    %Total
    
    
    100
    %
    
    
    4
    %
 ® ®
   -36-




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
   WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
  SUMMARY OF CASH FLOWS
 Three Months Ended March 31,(in millions of dollars)
    
    2006
    
    
    2005
    
    
    $ ChangeCash provided by (used for):Operating activities
    
    $
    25.7
    
    
    $
    29.6
    
    
    $
    (3.9
    )Investing activities
    
    
    (21.8
    )
    
    
    (28.1
    )
    
    
    6.3Financing activities
    
    
    (33.8
    )
    
    
    9.4
    
    
    
    (43.2
    )Effect of exchange-rate changes on cash
    
    
    0.8
    
    
    
    (7.0
    )
    
    
    7.8Net
(decrease) increase in cash and
short-term investments
    
    $
    (29.1
    )
    
    $
    3.9
    
    
    $
    (33.0
    )
 Operating Activities
   Investing Activities
   -37-




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
  Financing Activities
  Capitalization, Liquidity and Credit Facilities
      
 Contractual Cash Obligations
  
 -38-




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




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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;
    
    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.
 -40-




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
       -41-




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Item 4. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    On January 20, 2006, we issued 2,017 common shares in transactions exempt from
registration under the Securities Act of 1933 pursuant to Regulation S. We issued the
common shares to 19 employees of a wholly owned Canadian subsidiary of the company under
an employee benefit plan.On February 1, 2006, we issued 17,244 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 three former officers under a deferred
compensation plan for officers.On March 1, 2006, we issued 194 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 March 14, 2006, we issued 11,137 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 current and two former officers under a
deferred compensation plan for officers.
 -42-




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)
 (c)
    
    The following table provides information regarding the companys purchases of
its common shares during the first quarter.
 Maximum NumberTotal Number
    
    (or Approximate Dollarof Shares (or Units)
    
    Value) of Shares (orTotal Number of
    
    Average Price
    
    Purchased as Part of
    
    Units) that May Yet beShares (or Units)
    
    Paid per Share
    
    Publicly Announced
    
    Purchased Under thePeriod
    
    Purchased1
    
    (or Unit)
    
    Plans or Programs
    
    Plans or ProgramsMonth #1 (January 1, 2006 through
January 31, 2006)
    
    297 Shares
    
    $
    44.43
    
    
    N/A
    
    N/AMonth #2 (February 1, 2006 through
February 28, 2006)
    
    29,833 Shares
    
    $
    44.59
    
    
    N/A
    
    N/AMonth #3 (March 1, 2006 through
March 31, 2006)
    
    22,839 Shares
    
    $
    43.46
    
    
    N/A
    
    N/ATotal
    
    52,969 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
 10.1
    
    Asset Purchase Agreement, dated March 16, 2006, by and among Noveon, Inc.,
Noveon Hilton Davis, Inc., Noveon Kalama, Inc., Noveon Textile Chemicals, Inc.,
Lubrizol Foam Control Additives, Inc, Lubrizol do Brasil Aditivos Ltda., and SPM Group
Holdings, LLC (incorporated by reference to Exhibit 10.1 to The Lubrizol Corporations
Current Report on Form 8-K filed with the SEC on May 5, 2006).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.
 -43-




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Signatures
  THE LUBRIZOL CORPORATION/s/ W. Scott EmerickW. Scott EmerickChief Accounting Officer and Duly AuthorizedSignatory of The Lubrizol Corporation
  -44-