SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2000 Commission file number 1-13879 OCTEL CORP. (Exact name of registrant as specified in its charter) DELAWARE 98-0181725 ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Global House Bailey Lane Manchester United Kingdom M90 4AA (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 011-44-161-498-8889 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ------ No ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of the period covered by this report. Class Outstanding as of October 31, 2000 Common Stock, par value $0.01 11,968,716
PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1 - FINANCIAL STATEMENTS - ----------------------------- OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- <TABLE> <CAPTION> September 30 December 31 2000 1999 (Unaudited) ------------------ ------------ (millions of dollars) <S> <C> <C> Assets Current assets Cash and cash equivalents $ 41.4 $ 37.2 Accounts receivable, less allowance of $2.3 (1999 - $2.2) 83.9 150.5 Inventories Finished products 40.6 34.8 Raw materials and work in progress 18.0 29.5 --------- -------- Total inventories 58.6 64.3 Prepaid expenses 3.5 3.8 --------- -------- Total current assets 187.4 255.8 Property, plant and equipment 111.3 143.9 Less accumulated depreciation 26.1 39.4 --------- -------- Net property, plant and equipment 85.2 104.5 Goodwill 339.8 379.2 Intangible asset 13.3 22.7 Deferred finance costs 9.1 12.7 Prepaid pension cost 72.3 72.2 Other assets 2.7 2.4 ========= ======== $ 709.8 $ 849.5 ========= ======== </TABLE> The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. -2-
OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) --------------------------------------- <TABLE> <CAPTION> September 30 December 31 2000 1999 (Unaudited) --------------------- ----------- (millions of dollars) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 53.5 $ 78.5 Accrued expenses 23.0 17.0 Accrued income taxes 10.6 31.3 Current portion of deferred income 13.1 - Current portion of long-term debt 25.0 80.0 -------- -------- Total current liabilities 125.2 206.8 Plant closure provisions (note 4) 33.5 55.6 Deferred income taxes 38.8 35.8 Deferred income 15.7 - Long-term debt 205.0 233.3 Other liabilities 2.1 1.7 Minority interest 3.0 2.4 Stockholders' equity Common stock, $0.01 par value (note 2) 0.1 0.1 Additional paid-in capital 276.2 276.1 Treasury stock (note 2) (31.2) (18.9) Retained earnings 93.8 82.5 Accumulated other comprehensive income (52.4) (25.9) -------- -------- Total stockholders' equity 286.5 313.9 -------- -------- $ 709.8 $ 849.5 ======== ======== </TABLE> The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. -3-
OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 --------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (millions of dollars except per share data) <S> <C> <C> <C> <C> Net sales $ 105.0 $ 126.9 $ 303.4 $ 384.7 Cost of goods sold 64.3 79.0 182.4 238.2 -------- --------- --------- --------- Gross profit 40.7 47.9 121.0 146.5 Operating expenses Selling, general and admin. 9.5 9.3 32.2 33.4 Research and development 0.6 1.0 2.3 3.0 Amortization of intangible assets 15.3 11.5 46.7 34.4 -------- --------- --------- --------- 25.4 21.8 81.2 70.8 -------- --------- --------- --------- Operating income 15.3 26.1 39.8 75.7 Interest expense 5.6 5.7 18.5 19.0 Other expenses/(income) 1.8 3.3 (0.7) (0.3) Interest income (0.8) (0.7) (2.7) (2.5) -------- --------- --------- --------- Income before income taxes and minority interest 8.7 17.8 24.7 59.5 Minority interest 0.9 0.7 2.1 0.9 -------- --------- --------- --------- Income before income taxes 7.8 17.1 22.6 58.6 Income taxes (note 3) 3.9 4.9 11.3 24.2 -------- --------- --------- --------- Net income $ 3.9 $ 12.2 $ 11.3 $ 34.4 ======== ========= ========= ========= Earnings per share: Basic $ 0.32 $ 0.88 $ 0.88 $ 2.48 -------- --------- --------- --------- Diluted $ 0.31 $ 0.86 $ 0.86 $ 2.46 -------- --------- --------- --------- Weighted average shares outstanding (in thousands) Basic (note 2) 12,070 13,863 12,785 13,895 -------- --------- --------- --------- Diluted (note 2) 12,512 14,199 13,168 13,992 -------- --------- --------- --------- </TABLE> The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. -4-
OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited) <TABLE> <CAPTION> Nine Months Ended ----------------- September 30 ---------------------------- 2000 1999 ---- ---- (millions of dollars) <S> <C> <C> Cash Flows from Operating Activities Net income $ 11.3 $ 34.4 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 60.6 48.3 Deferred income taxes 3.3 2.0 Other 1.9 - Changes in operating assets and liabilities: Accounts receivable and prepaid expenses 58.3 (34.0) Inventories 0.9 24.9 Accounts payable and accrued expenses (8.0) 16.0 Deferred income 38.6 - Income taxes and other current liabilities (18.8) (4.2) Other non-current assets and liabilities (32.1) (15.2) ----------- ----------- Net cash provided by operating activities 116.0 72.2 Cash Flows from Investing Activities Capital expenditures (5.1) (6.9) Other (2.3) (13.9) ----------- ----------- Net cash used in investing activities (7.4) (20.8) Cash Flows from Financing Activities Receipt of long-term borrowings - 16.0 Repayment of long-term borrowings (83.3) (62.7) Repurchase of common stock (12.3) (1.0) Minority interest 0.6 1.4 ----------- ----------- Net cash used in financing activities (95.0) (46.3) Effect of exchange rate changes on cash (9.4) (5.8) ----------- ----------- Net change in cash and cash equivalents 4.2 (0.7) Cash and cash equivalents at beginning of period 37.2 26.5 ----------- ----------- Cash and cash equivalents at end of period $ 41.4 $ 25.8 =========== =========== </TABLE> The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. -5-
OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ---------------------------------------------- (Unaudited) (millions of dollars) <TABLE> <CAPTION> Additional Total ------------- ------------------- Common Treasury Paid-in Retained CTA* Comprehensive ----------- ------------ ------------- ----------- ------------ ------------------- Stock Stock Capital Earnings Income ----------- ------------ ------------- ----------- ------------------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2000 $ 0.1 $ (18.9) $ 276.1 $ 82.5 $ (25.9) $ 56.6 Net Income - - - 11.3 - 11.3 Net CTA* change - - - - (26.5) (26.5) Share issue - - 0.1 - - - Share buy-back - (12.3) - - - - ----------- ----------- ------------ ---------- ---------- ----------------- Balance at September 30, 2000 $ 0.1 $ (31.2) $ 276.2 $ 93.8 $ (52.4) $ 41.4 ----------- ----------- ------------ ---------- ---------- ----------------- </TABLE> * Cumulative translation adjustment The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. OCTEL CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------- NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION Octel Corp., a Delaware corporation (the Company) is a major manufacturer and distributor of fuel additives and other specialty chemicals. Its primary manufacturing operation is located at Ellesmere Port, Cheshire, United Kingdom. The Company's products are sold globally, primarily to oil refineries. Principal product lines are lead alkyl antiknock compounds (TEL) and specialty chemicals. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations. It is management's opinion, however, that all material adjustments (consisting of normal recurring accruals) have been made which are necessary for a fair financial statement presentation. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K filed on March 27, 2000. The results for the interim period are not necessarily indicative of the results to be expected for the full year. -6-
NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME At September 30, 2000, the Company had authorised common stock of 40 million shares (December 31, 1999 - 40 million). Issued shares at September 30, 2000, were 14,777,250 (December 31, 1999 - 14,766,386) and treasury stock amounted to 2,754,134 (December 31, 1999 - 1,314,864). In March 2000, 10,864 new shares were issued on the exercise of options under the Octel Corp. Time Restricted Stock Option Plan at zero cost. Movements in stock options in the third quarter, 2000 were as follows:- <TABLE> <CAPTION> No. --- <S> <C> Outstanding at June 30, 2000 1,484,853 Lapsed (4,738) ----------- Outstanding at September 30, 2000 1,480,115 ----------- </TABLE> Basic earnings per share is based on the weighted average number of common shares outstanding during the period, while diluted earnings per share includes the effect of options and restricted stock that are dilutive and outstanding during the period. NOTE 3 - INCOME TAXES A reconciliation of the U.S. statutory income tax rate to the effective income tax rate is as follows: <TABLE> <CAPTION> Nine Months Ended September 30 2000 1999 ---- ---- <S> <C> <C> Statutory US Federal tax rate 35.0% 35.0% Increase (decrease) resulting from: Foreign tax rate differential (36.0) (4.7) Amortization of goodwill 49.9 15.8 Other 1.1 (4.8) ------ ------ 50.0% 41.3% ====== ====== </TABLE> NOTE 4 - PLANT CLOSURE PROVISIONS <TABLE> <CAPTION> (millions of dollars) 2000 1999 ---- ---- <S> <C> <C> Balance at January 1 $ 55.6 $ 47.1 Exchange effect (3.2) (2.4) Charge for the period 2.4 9.8 Expenditure (21.3) (23.6) ------ ------ Balance at September 30 $ 33.5 30.9 ====== ====== </TABLE> Expenditure of $17.9 million in the first nine months of 2000 related to personnel severance costs incurred as part of the Company's ongoing program of downsizing and restructuring of operations to respond to declining demand for TEL. The balance of $3.4 million related to environmental remediation activities. -7-
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. In June 1999, FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133". This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138 ("SFAS No. 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133". SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. The Company is required to adopt SFAS No. 138 concurrently with SFAS No. 133. The Company has limited involvement with derivative financial instruments and does not trade them. The Company does use derivatives to manage defined exposures on interest rates, foreign exchange and commodity prices in the metals market. The Company is at present evaluating the impact of SFAS No. 133 on these operations and expects to be able to comply with the requirements of SFAS No. 133 by quarter one, 2001. On December 3, 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". Management believes that compliance with SAB No. 101 will not have any material impact on the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ---------------------------------------------------------------- Some of the information presented in the following discussion constitutes forward-looking comments within the meaning of the Private Litigation Reform Act of 1995. Although the Company believes its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include, without limitation, the timing of orders received from customers, the gain or loss of significant customers, competition from other manufacturers and changes in the demand for the Company's products, including the rate of decline in demand for TEL. In addition, increases in the cost of product, changes in the market in general and significant changes in new product introduction could result in actual results varying from expectations. RECENT DEVELOPMENTS - ------------------- The Company continues to reduce TEL costs and capacity in line with the market decline in demand. The fourth phase of the UK voluntary severance program has been extended. The planned reduction in headcount is 386, of which 312 have already left. The remainder should leave by the end of the year. In the June quarter the Company began the outsourcing of sodium and ethyl chloride, intermediates which were formerly manufactured in-house. On November 9, 1999 the acquisition of the OBOAdler group was completed. Effective January 1, 2000 OBOAdler entered into sales and marketing agreements with Ethyl Corporation (Ethyl) similar to those -8-
already in place between Octel and Ethyl. On April 19, 2000 an amount of $39 million was received by OBOAdler from Ethyl as a prepayment for services provided under the marketing agreements. RESULTS OF OPERATIONS - --------------------- Operating income for the third quarter of 2000 and 1999 may be analyzed as follows:- (millions of dollars) <TABLE> <CAPTION> Third Quarter Year to date 2000 1999 2000 1999 <S> <C> <C> <C> <C> Net Sales TEL $ 79.9 $ 98.0 $215.6 $297.5 Specialty Chemicals 25.1 28.9 87.8 87.2 ------ ------ ------ ------ Total $105.0 $126.9 $303.4 $384.7 ------ ------ ------ ------ Gross Profit TEL $ 33.0 $ 39.2 $ 94.6 $121.3 Specialty Chemicals 7.7 8.7 26.4 25.2 ------ ------ ------ ------ Total $ 40.7 $ 47.9 $121.0 $146.5 ------ ------ ------ ------ Operating Income TEL $ 16.0 $ 24.2 $ 39.6 $ 76.5 Specialty Chemicals 1.7 3.1 7.9 6.4 Corporate Costs (2.4) (1.2) (7.7) (7.2) ------ ------ ------ ------ Total $ 15.3 $ 26.1 $ 39.8 $ 75.7 ------ ------ ------ ------ </TABLE> Operating income comparatives have been restated to reflect the separate disclosure of corporate costs. Specialty Chemicals sales of $25.1 million in the third quarter, 2000 were lower than in the previous two quarters due to the cyclical nature of certain sectors of the market and to lower sales prices in the detergent additive business. Third quarter 2000 sales were down by 13% compared with the same period last year but gross profit improved to 30.6% of sales compared with 30.1% last year. Sales for the nine months ended September 30, 2000 were 1% above 1999 levels. Gross profit as a percentage of sales increased from 28.9% to 30.1% and operating income from 7.3% to 9.0%, reflecting year on year progress in the Specialty Chemicals business. TEL sales volumes for the nine months ended September 30, 2000 were 24% below 1999 levels, reflecting the expected decline in the market. Gross profit was 43.9% of sales compared with 40.8% in 1999. This reflects the significant effect of cost reduction initiatives, offset by a charge of $5 million in the third quarter, 2000 for the costs of further planned workforce reductions agreed with the trade unions. Operating expenses for the nine months ended September 30, 2000 were $81.2 million compared to $70.8 million in 1999. This reflects amortization charges, which increased by $12.3 million, mainly due to the amortization in 2000 of goodwill and other intangibles arising on the OBOAdler acquisition in November 1999. -9-
LIQUIDITY AND FINANCIAL CONDITION - --------------------------------- Cash generated by operating activities in the third quarter, 2000 was $13.5 million, mainly due to an improvement in receivables. There were 74 days sales outstanding in receivables at September 30, 2000 compared with 83 days at June 30, 2000. The cumulative operating cash generation of $116.0 million includes a $38.6 million prepayment received from Ethyl in the second quarter in relation to the OBOAdler marketing agreements. In the third quarter, 2000 $25 million of debt was repaid. This was the final instalment in respect of the $280 million bank debt incurred when the Company was spun off from Great Lakes Chemical Corporation (NYSE:GLK) in May 1998, the repayment being completed 15 months ahead of schedule. The Company's stock buy back program has continued, with the $1 million expenditure in the third quarter taking the cumulative buy back for the nine month period to $12.3 million. Under the 2000 buy back program the Company is authorised to spend a further $10.6 million this year. YEAR 2000 - --------- No significant date discontinuity problems arose during the transition from 1999 to 2000 or as a result of 2000 being a leap year. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- There has been no material change in the Company's exposure to market risk as described in the Form 10-K filed on March 27, 2000. PART II - OTHER INFORMATION - ---------------------------- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------ (a) Exhibits 27 Consolidated Financial Data Schedule (b) Reports on Form 8-K On July 21, 2000 the Company filed a Report on Form 8-K relating to an amendment to its Rights Plan and a Stand-Still Agreement with the Baupost Group, LLC. -10-
SIGNATURES ----------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorised. Date: November 9, 2000 By /s/ Dennis J Kerrison ----------------- Dennis J Kerrison President and Chief Executive Officer Date November 9, 2000 By /s/ Alan G Jarvis ------------- Alan G Jarvis Chief Financial Officer EXHIBIT INDEX Exhibit Description Page No. - ------- ----------- -------- 27 Consolidated Financial Data Schedule 12 -11-