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Business

Company Of The Year

Insights: Lubrizol’s results, unusual for a chemical company in 2009, need to be acknowledged

by Alexander H. Tullo
January 4, 2010 | A version of this story appeared in Volume 88, Issue 1

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Credit: Lubrizol
Lubrizol headquarters, Wickliffe, Ohio
Credit: Lubrizol
Lubrizol headquarters, Wickliffe, Ohio

There are two approaches to picking a company of the year. One is to do as Time magazine does for its person of the year and select the firm that was in the thick of the action. The other is to emulate the way Motor Trend chooses its car of the year and select, as objectively as possible, the best among a range of contenders.

If C&EN had taken the Time approach to picking its company of the year, the obvious choice would have been Dow Chemical. Its acquisition of Rohm and Haas was a soap opera that riveted the chemical industry.

History will decide whether or not the deal made sense. It certainly can be criticized. Dow’s $78-per-share offer represented a handsome premium—25 times Rohm and Haas’s prior-year earnings and 25% above its highest stock price over the previous five years. The purchase also came on the eve of the worst banking crisis since the 1930s. Dow Chief Executive Officer Andrew N. Liveris, who sits on Citigroup’s board of directors, should have known better.

In making the $18.8 billion offer, Dow was spending promised money. Amid a collapsing economy, Liveris had to foresee the possibility that his deal to raise $9.5 billion by folding Dow’s commodity chemical businesses into a joint venture with Petrochemical Industries Co. of Kuwait would fall apart. It did, at the end of 2008.

Facing an ironclad agreement with Rohm and Haas, Dow had to finance the deal with a $13 billion short-term loan meant only as an emergency measure. Dow was forced to sell multiple businesses to raise cash. The company also upended one of the longest dividend histories in the corporate world when it reduced its payout for the first time since before World War I.

Liveris told reporters recently that few would remember any of this in five years. Rohm and Haas, he said, is the linchpin of Dow’s transformation from a commodity chemical company to a science-focused specialty materials maker. Furthermore, largely through more than 3,000 layoffs, Dow is well on its way to achieving $1.3 billion in annual cost savings.

Liveris has lofty goals for the combined company. He says he can increase revenues by 10% annually. He also believes that he can increase earnings from the $1.25 per share that he expects for 2009 to $4.50 by 2012 and $10 at some point. If Dow does achieve these goals, then certainly it will be a future company of the year.

But the recession has turned out to be a far bigger event than the actions of any one company. Instead of selecting a company that has been grabbing headlines, better to write about one that has been quietly defying economic circumstances.

C&EN considered several companies of achievement this year, all of them much smaller than Dow. One is Dow Corning, a joint venture between Dow and Corning. Through its Hemlock Semiconductor polycrystalline silicon joint venture, the company is at the epicenter of the boom in photovoltaic power. It earned $367 million through the first nine months of 2009, down 39% versus the previous year but still strong.

Likewise, FMC, which makes specialty inorganic chemicals such as lithium compounds, saw sales and profits decline but managed to maintain its relatively high profit margins through the first three quarters of the year.

The most impressive performance among chemical companies last year was Lubrizol’s. Looking at the firm’s results, one would hardly know a recession was going on. Its earnings for the first three quarters increased 67%, to $385 million, on sales of $3.4 billion. Executives expect earnings to increase 78% for the full year and hit a company record. James L. Hambrick, Lubrizol’s CEO, credits his employees. “It’s not an exaggeration for me to tell you that every single person in our company did more with less this year,” he told analysts in October.

The company has had a particularly strong performance from the business that provides both its name and 70% of its revenues: lubricant additives for transportation and industrial applications. Lubrizol’s personal care additives business also fared well during the year. Businesses that are more sensitive to the bad economy—such as thermoplastic polyurethanes and chlorinated polyvinyl chloride resins—faced more challenges.

The company cut costs during the year, notably R&D spending, which declined by 8%, to $153 million, through the first nine months. And it implemented a restructuring early in the year that reduced employment by 170 positions. However, that figure represents just 2.5% of Lubrizol’s total employment, mild compared with the bloodletting at other large chemical firms.

Lubrizol even made an acquisition during the depths of the financial crisis, buying Dow’s thermoplastic urethane business, which has about $85 million in annual sales. The company says it may use its cash to make more acquisitions costing between $100 million and $500 million.

Overall, stock analysts are positive about Lubrizol’s performance, although they worry about the company’s ability to sustain its profits. Debt analysts are more enthusiastic. Standard & Poor’s put Lubrizol on “credit watch positive” last month. “Given the strengthened financial profile, recent debt reduction, and our expectations for prudent financial policies, we believe the company could sustain its financial profile,” credit analyst Liley Mehta told clients. That’s the kind of assessment we don’t often hear nowadays.

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