Pennzoil-Quaker State Reports Strong Second Quarter 1999 Results
5 August 1999
Pennzoil-Quaker State Company Reports Strong Second Quarter 1999 Results as Post Merger Integration Progresses
HOUSTON, Aug. 5 -- Pennzoil-Quaker State Company
today announced second quarter 1999 net income of $16.1 million before
nonrecurring charges, a 164 percent increase compared to $6.1 million for the
same period in 1998. On a per share basis, net income before nonrecurring
charges was 21 cents per basic share compared to 13 cents per basic share last
year.
Nonrecurring after-tax charges in the second quarter of 1999 totaled
$9.8 million, or 13 cents per basic share, and were primarily associated with
the company's merger with Quaker State Corporation on December 30, 1998.
Including the nonrecurring charges, Pennzoil-Quaker State Company reported
net income of $6.3 million, or 8 cents per basic share, compared to net income
of $6.1 million, or 13 cents per basic share, in the second quarter of 1998.
Second quarter 1999 total revenues were $774.6 million, a 55 percent
increase compared to last year's $499.0 million. The increase in revenues
primarily resulted from the acquisition of Quaker State Corporation.
For the first six months of 1999, net income was $23.7 million before
nonrecurring charges, a 254 percent increase compared to $6.7 million for the
same period last year. On a per share basis, earnings before nonrecurring
charges were 31 cents per basic share compared with 14 cents per basic share
for the first six months of 1998. Including nonrecurring charges, net income
was $4.1 million, or 5 cents per basic share, compared to net income of
$6.7 million, or 14 cents per basic share, for the first six months of last
year. The year-on-year improvement in second quarter and first half recurring
earnings reflects the impact of last year's acquisition of Quaker State, the
initial benefits of merger-related synergies and efficiencies, increased
lubricants sales, lower costs and increased other income.
"Today's results indicate that we're making solid progress with the
integration of Pennzoil and Quaker State into a powerful automotive consumer
products company," said James L. Pate, chairman and chief executive officer.
"Our financial performance has been good, and we're ahead of schedule on our
cost savings goals of $90 to $125 million by the end of the year 2000."
James J. Postl, chief operating officer, said, "Our progress and operating
results to date have been encouraging despite very weak refining margins. We
are on our way to achieving our vision which is to be consumers' first choice
for automotive products and services that enhance the car and the driving
experience."
Formation of Pennzoil-Quaker State Company
Pennzoil-Quaker State Company includes the marketing, fast lube and
manufacturing operations of Pennzoil Company spun off on December 30, 1998 in
a tax-free distribution. Immediately following the distribution, Quaker State
Corporation, the second largest domestic marketer of motor oil and a leading
marketer of automotive consumer products, was acquired by Pennzoil-Quaker
State Company. Results from operations of Quaker State Corporation are not
included in Pennzoil-Quaker State Company's 1998 results, but are included in
1999 results.
Lubricants and Consumer Products
Lubricants and consumer products reported second quarter operating income
of $56.1 million before nonrecurring charges, a 122 percent increase compared
to $25.3 million last year. Including nonrecurring charges resulting from
one-time merger costs, reported operating income totaled $51.6 million.
Second quarter total revenue for lubricants and consumer products increased
106 percent compared to 1998, from $254.7 million to $524.1 million.
Second quarter 1999 operating income increased compared to last year
primarily because of the acquisition of Quaker State Corporation. Higher
lubricants revenues, lower expenses and higher international earnings also
contributed to the improvement.
For the first half of 1999, lubricants and consumer products had operating
income of $102.7 million before nonrecurring charges, a 125 percent increase
from $45.7 million a year ago. Revenues exceeded $1 billion for the first
half, up 110 percent from $486.9 million in 1998.
First half of 1999 operating income increased compared to last year
primarily because of the acquisition of Quaker State Corporation. Lower
expenses and higher international earnings also contributed to the year-on-
year improvement.
Postl said, "Lubricants and consumer products provided a solid and healthy
foundation for the company's improvement during the second quarter. This
business will be our growth engine as we pursue our consumer products
strategy. The merger process is progressing well, and we are realizing the
synergies that we had anticipated."
Pennzoil(R) motor oil is in its 14th consecutive year as America's number
one selling motor oil. Quaker State(R) motor oil is firmly established as the
number two selling motor oil in the United States.
Fast Lube Operations
Fast lube operations had $4.1 million of operating income before
nonrecurring charges on revenues of $110.1 million during the second quarter
of 1999. Operating income during the second quarter last year was
$6.9 million on revenues of $87.1 million. Year-on-year, revenues increased
26 percent primarily reflecting the addition of Quaker State's Q Lube
operations.
Second quarter 1999 nonrecurring charges of $5.1 million primarily
resulted from one-time merger costs and losses on the sales of company
operated stores. Including nonrecurring charges, fast lube operations had an
operating loss of $1.0 million for the second quarter of 1999.
Fast lube operations' results were impacted by lower company store
earnings resulting from sales of company operated centers. As part of
Pennzoil-Quaker State's plan to integrate Jiffy Lube and Q Lube, certain
company operated centers have been sold to franchisees, causing a year-to-year
decline in results from company operated stores.
A revitalization effort is underway that includes programs designed to
increase car counts, utilize the fast lube service center retail platform to
expand Pennzoil-Quaker State Company car care product sales and identify and
capitalize on future trends in the growing do-it-for-me automotive service
market. In addition, the company continues to move forward with the
conversion of Q Lubes to Jiffy Lubes, effectively expanding the regional scope
of fast lube operations.
"We made progress in fast lube operations during the second quarter. The
conversion of Q Lubes to Jiffy Lubes is proceeding according to plan, and we
appointed a new head of our fast lube operations," said Postl.
On July 14, Pennzoil-Quaker State Company announced that Marc C. Graham
had been named president of Jiffy Lube International, Inc. Graham has
29 years of automotive and business development experience, most recently as
president and general manager of Paccar Automotive, where he was the architect
of a significant corporate turnaround. "Marc knows the automotive aftermarket
business inside and out, and his leadership will be key to the continued
growth and revitalization of Pennzoil-Quaker State Company's fast lube
operations," said Postl.
For the first half of 1999, fast lube operations had $7.0 million of
operating income before nonrecurring charges on revenues of $231.2 million.
Operating income for the first half of last year was $11.6 million before
nonrecurring charges on revenues of $167.8 million. Year-on-year, revenues
increased 38 percent primarily reflecting the addition of Quaker State's Q
Lube operations.
First half 1999 nonrecurring charges of $7.9 million primarily resulted
from one-time merger costs and losses on the sales of company operated stores.
Base Oil and Specialty Products
Base oil and specialty products reported an operating loss of $2.2 million
compared to recurring operating income of $7.0 million in 1998. Total revenue
for the quarter was $195.4 million, a four percent decrease from
$203.3 million for second quarter of 1998. Base oil and specialty products
results were impacted primarily by very weak refining margins.
Nonrecurring restructuring charges totaled $1.4 million for the second
quarter of 1999. Including these nonrecurring charges, base oil and specialty
products reported an operating loss of $3.6 million for the second quarter of
1999.
For the first half of 1999, base oil and specialty products had a
recurring operating loss of $6.6 million compared to recurring operating
income of $11.4 million last year. First half revenues were $351.4 million,
an 11 percent decline compared to $395.0 million last year.
For the second quarter and first half of 1999, base oil and specialty
products' operating expenses declined compared to the same periods last year.
However, these improvements were more than offset by very weak refining
margins.
Strategic Review of Manufacturing Assets
In June, Pennzoil-Quaker State Company completed a strategic review of its
manufacturing assets and businesses, including:
-- the Shreveport refinery with capacity of 46,200 barrels-per-day;
-- the Rouseville refinery with capacity of 16,500 barrels-per-day;
-- Excel Paralubes, a 21,000 barrel-per-day state-of-the-art base oil
manufacturing joint venture with Conoco Inc.;
-- Penreco, a $200 million per year specialty products manufacturing and
marketing joint venture with Conoco; and
-- Bareco, a wax marketing joint venture with Baker Petrolite.
The review evaluated the strategic and financial benefits the company
derives from the vertical integration of its manufacturing and marketing
capabilities.
"While Pennzoil-Quaker State has excellent manufacturing facilities and
people, we undertook this strategic review to determine whether these assets
and businesses contribute to our primary corporate goal, which is to be the
world's leading automotive consumer products company," said Pate.
The company is now evaluating its options, which include disposition,
restructuring, formation of joint ventures or other actions affecting some or
all of these operations.
Pennzoil-Quaker State Company is a leading worldwide automotive consumer
products company that markets Pennzoil(R) and Quaker State(R) brand motor
oils, the number one and number two selling motor oils in the United States.
Jiffy Lube, a wholly owned subsidiary of Pennzoil-Quaker State Company, is the
world's largest fast lube operator and franchiser. Pennzoil-Quaker State
Company also markets a complete line of automotive car care products including
Axius(TM) auto accessories, Blue Coral(R) and Classic(R) waxes and washes,
Black Magic(R) and Westley's(R) tire and wheel care products, Fix-A-Flat(R)
tire sealants, Medo(R) air fresheners, Rain-X(R) glass treatments, Gumout(R),
Snap(R) and The Outlaw(R) maintenance chemicals and Slick 50(R) engine
treatments.
The following are the unaudited results of operations for the quarter and
six months ended June 30, 1999 compared with the same periods in 1998.
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 (A) 1999 1998 (A)
(Expressed in thousands except per share amounts)
REVENUES
Lubricants and
Consumer Products $524,074 $254,693 $1,023,021 $486,940
Base Oil and Specialty
Products 195,366 203,304 351,399 394,954
Fast Lube Operations 110,107 87,136 231,206 167,846
Other (668) (1,270) (1,574) (2,739)
Intersegment sales (54,293) (44,894) (105,585) (104,590)
Total revenues $774,586 $498,969 $1,498,467 $942,411
OPERATING INCOME
Lubricants and
Consumer Products $51,568 $25,299 $93,646 $45,704
Base Oil and Specialty
Products (3,628) 7,041 (9,606) 11,476
Fast Lube Operations (978) 6,912 (866) 11,562
Other 7,251 (792) 10,780 (1,534)
Total operating income 54,213 38,460 93,954 67,208
Corporate administrative
expenses 18,728 10,106 40,540 19,573
Interest charges, net 21,081 17,411 38,822 34,157
Income before income tax 14,404 10,943 14,592 13,478
Income tax provision 8,102 4,893 10,509 6,829
NET INCOME $6,302 $6,050 $4,083 $6,649
BASIC AND DILUTED
EARNINGS PER SHARE $0.08 $0.13 $0.05 $0.14
AVERAGE SHARES OUTSTANDING
BASIC 77,757 47,847 77,703 47,847
DILUTED 78,053 47,847 78,006 47,847
END OF PERIOD SHARES
OUTSTANDING - BASIC 77,823 47,847 77,823 47,847
(A) Excludes Quaker State Corporation results.
PENNZOIL - QUAKER STATE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
1999 1998
(Unaudited)
(Expressed in Thousands)
ASSETS
Current assets
Cash and cash equivalents $37,088 $14,899
Receivables 341,211 291,997
Inventories
Crude Oil 7,749 6,911
Petroleum Products 288,207 299,601
Materials and Supplies 13,348 12,422
Deferred income taxes 47,413 47,413
Other current assets 63,647 63,328
Total current assets 798,663 736,571
Net, property, plant, and equipment 990,981 1,032,076
Deferred income taxes 21,025 36,614
Goodwill 1,108,648 1,104,353
Other assets 211,971 235,380
TOTAL ASSETS $3,131,288 $3,144,994
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $1,080 $1,283
Accounts payable 243,988 245,721
Payroll accrued 28,618 18,734
Other current liabilities 149,768 147,609
Total current liabilities 423,454 413,347
Other long-term debt less
current maturities 1,039,547 1,026,054
Capital lease obligations 71,346 74,464
Other liabilities 271,334 280,922
TOTAL LIABILITIES 1,805,681 1,794,787
SHAREHOLDERS' EQUITY 1,325,607 1,350,207
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,131,288 $3,144,994
PENNZOIL - QUAKER STATE COMPANY
CASH FLOW FROM OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 (A) 1999 1998 (A)
(Expressed in thousands)
Description
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,302 $6,050 $4,083 $6,649
Adjustments to net income
Depreciation and
amortization 30,356 18,912 63,870 36,676
Deferred income tax 5,917 5,970 7,732 11,810
Partnership distributions
in excess of (less than)
earnings (3,154) 3,872 (4,134) 4,926
Non-cash items and other
non-operating items 1,655 7,645 4,618 14,393
Changes in assets and
liabilities 20,622 (25,382) (66,642) (70,723)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 61,698 17,067 9,527 3,731
CASH FLOW FROM INVESTING
AND FINANCING ACTIVITIES:
Capital expenditures (19,582) (12,658) (30,925) (29,028)
Net debt increase
(decrease) (241,864) (9,853) 11,650 2,243
Proceeds from the
sales of assets 42,627 2,588 73,106 13,788
Dividends paid (14,583) --- (29,143) ---
Other (10,551) 1,032 (12,026) 8,299
Total Cash Flow (182,255) (1,824) 22,189 (967)
Beginning Balance 219,343 9,989 14,899 9,132
Ending Balance $37,088 $8,165 $37,088 $8,165
(A) Excludes Quaker State Corporation results.
PENNZOIL - QUAKER STATE COMPANY
OPERATING HIGHLIGHTS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 (A) 1999 1998 (A)
OPERATING DATA
LUBRICANTS AND CONSUMER PRODUCTS
Total revenues (in thousands):
Lubricants $376,037 $207,884 $730,645 $399,048
Consumer Products 90,149 16,134 184,515 29,113
International 58,071 31,070 108,019 58,730
Eliminations & Other (183) (395) (158) 49
Total revenues $524,074 $254,693 $1,023,021 $486,940
Operating income (excludes unallocated division overhead) (in thousands):
Lubricants $36,323 $27,704 $72,861 $52,391
Consumer Products 13,925 2,361 24,311 4,912
International 4,028 (1,449) 5,661 (3,101)
Total operating income $54,276 $28,616 $102,833 $54,202
FAST LUBE OPERATIONS
Domestic systemwide
sales(in thousands) $278,895 $208,594 $555,807 $400,441
Same center sales
Jiffy Lube (in
thousands) $210,020 $206,623 $403,354 $396,919
Centers open 2,147 1,556 2,147 1,556
(A) Excludes Quaker State Corporation statistics.
PENNZOIL - QUAKER STATE COMPANY
OPERATING HIGHLIGHTS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 (A) 1999 1998 (A)
OPERATING DATA
BASE OIL AND SPECIALTY PRODUCTS (B)
Raw materials
processed (barrels
per day) 75,815 69,600 68,400 70,367
Refining capacity
(barrels per day) 76,000 76,000 76,000 76,000
Refiner's margin
($ per barrel) $4.92 $7.57 $6.19 $7.79
Operating costs
($ per barrel) $3.50 $6.15 $4.53 $5.97
Depreciation
($ per barrel) $1.08 $1.14 $1.20 $1.13
Refinery Feedstocks:
Paraffinic Crude Oil 66% 69% 68% 71%
Naphthenic Crude Oil 6% 7% 7% 7%
Other Feedstocks and
Blendstocks 28% 24% 25% 22%
Refinery Yields:
Gasolines 27% 31% 27% 30%
Distillates 33% 32% 32% 32%
Lube Base Stocks 27% 26% 27% 24%
Waxes 3% 3% 3% 3%
Other Products 10% 8% 11% 11%
Market Data:
WTI Crude Oil $17.66 $14.69 $15.35 $15.32
3-2-1 crack spread
($ per barrel) (C) $1.62 $3.89 $1.50 $3.23
Base oil gross margin
($ per barrel) (D) $16.38 $19.87 $17.77 $20.08
(A) Excludes Quaker State Corporation statistics.
(B) Includes Pennzoil-Quaker State's 50% ownership in Excel Paralubes.
(C) Regular unleaded gasoline and low sulphur diesel vs. WTI crude oil.
(D) Exxon 100N posting vs. WTI crude oil.