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 June 30, 2002 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 July 31, 2002 Common Stock, par value $0.01 11,848,996
PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30 December 31 2002 2001 (Unaudited) ----------- ----------- (millions of dollars) <S> <C> <C> Assets Current assets Cash and cash equivalents $ 27.0 $ 43.0 Accounts receivable, less allowance of $2.7 (2001 - $3.2) 83.4 114.9 Other receivable - Veritel 9.6 22.4 Inventories Finished goods 32.2 32.2 Raw materials and work-in-progress 28.0 22.8 -------- -------- Total inventories 60.2 55.0 Prepaid expenses 4.9 3.0 -------- -------- Total current assets 185.1 238.3 Property, plant and equipment 91.9 76.5 Less accumulated depreciation 27.1 9.6 -------- -------- Net property, plant and equipment 64.8 66.9 Goodwill 345.8 341.7 Intangible asset 51.9 50.5 Deferred finance costs 5.3 5.9 Prepaid pension cost 92.3 82.4 Other assets 1.4 3.0 -------- -------- $ 746.6 $ 788.7 ======== ======== </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> June 30 December 31 2002 2001 (Unaudited) ----------- ----------- (millions of dollars) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities Accounts payable (Note 1) $ 40.5 $ 61.9 Other payable - Veritel 30.0 60.0 Accrued expenses (Note 1) 57.9 38.8 Accrued income taxes 9.3 7.5 Current portion of long-term debt 80.3 85.1 Current portion of deferred income 2.0 2.0 -------- -------- Total current liabilities 220.0 255.3 Plant closure provisions (note 6) 35.0 39.5 Deferred income taxes 41.3 40.3 Long term debt 98.0 145.9 Deferred income 9.4 11.4 Minority interest 6.1 5.9 Stockholders' Equity Common stock, $0.01 par value (note 2) 0.1 0.1 Additional paid-in capital 276.7 276.5 Treasury stock (note 2) (34.4) (35.5) Retained earnings 142.5 106.4 Accumulated other comprehensive Income (48.1) (57.1) -------- -------- Total stockholders' equity 336.8 290.4 -------- -------- $ 746.6 $ 788.7 ======== ======== </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> (millions of dollars except per share) Three Months Ended Six Months Ended -------------------------------------- June 30 June 30 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 99.5 $ 117.5 $ 214.0 $ 204.6 Cost of goods sold 51.3 64.5 116.5 116.0 --------- ---------- ---------- ---------- Gross profit 48.2 53.0 97.5 88.6 Operating expenses Selling, general and administrative 16.0 13.8 31.9 25.3 Research and development 1.5 1.2 2.9 2.1 Amortization of goodwill - 11.6 - 23.0 Amortization of intangible assets 2.2 3.1 4.3 6.1 --------- ---------- ---------- ---------- 19.7 29.7 39.1 56.5 --------- ---------- ---------- ---------- Operating income 28.5 23.3 58.4 32.1 Interest expense 4.8 5.0 8.8 10.0 Other expenses/(income) 0.8 (0.1) 1.5 0.6 Interest income (0.2) (0.8) (0.4) (1.6) --------- ---------- ---------- ---------- Income before income taxes and minority interest 23.1 19.2 48.5 23.1 Minority interest 0.8 0.8 1.6 1.4 --------- ---------- ---------- ---------- Income before income taxes 22.3 18.4 46.9 21.7 Income taxes (note 5) 4.6 10.2 10.8 12.1 --------- ---------- ---------- ---------- Net income $ 17.7 $ 8.2 $ 36.1 $ 9.6 ========= ========== ========== ========== Earnings per share: Basic $ 1.50 $ 0.69 $ 3.06 $ 0.82 --------- ---------- ---------- ---------- Diluted $ 1.40 $ 0.65 $ 2.88 $ 0.77 --------- ---------- ---------- ---------- Weighted average shares outstanding (in thousands) Basic (note 3) 11,823 11,809 11,789 11,688 --------- ---------- ---------- ---------- Diluted (note 3) 12,660 12,525 12,557 12,491 --------- ---------- ---------- ---------- </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> Six Months Ended June 30 ------------------------- 2002 2001 ---- ---- (millions of dollars) <S> <C> <C> Cash Flows from Operating Activities Net income $ 36.1 $ 9.6 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 13.4 37.8 Deferred income taxes 2.6 (0.4) Other 2.5 - Changes in operating assets and liabilities: Accounts receivable and prepaid expenses 32.8 11.9 Inventories (3.2) 7.5 Accounts payable and accrued expenses (9.5) (10.4) Income taxes and other current liabilities 0.4 6.8 Other non-current assets and liabilities (8.9) (2.6) ---------- ---------- Net cash provided by operating activities 66.2 60.2 Cash Flows from Investing Activities Capital expenditures (4.3) (3.3) Business combinations, net of cash acquired (3.6) (48.2) Veritel (17.2) - Other (0.3) - ---------- ---------- Net cash used in investing activities (25.4) (51.5) Cash Flows from Financing Activities Repayment of long-term borrowings (62.9) (15.0) Receipt of short- term credit 10.0 9.0 Repurchase of common stock - (2.7) Minority interest 0.4 0.1 ---------- ---------- Net cash used in financing activities (52.5) (8.6) Effect of exchange rate changes on cash (4.3) (6.7) ---------- ---------- Net change in cash and cash equivalents (16.0) (6.6) Cash and cash equivalents at beginning of period 43.0 37.7 ---------- ---------- Cash and cash equivalents at end of period $ 27.0 $ 31.1 ========== ========== </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) <TABLE> <CAPTION> (millions of dollars) Additional Total ---------- ----- Common Treasury Paid-In Retained CTA* Comprehensive ------ -------- ------- -------- ---- ------------- Stock Stock Capital Earnings Income ----- ----- ------- -------- ------ <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 2001 $ 0.1 $(35.5) $276.5 $106.4 $(57.1) $49.3 Net income - - - 36.1 - 36.1 Net CTA* change - - - - 9.0 9.0 Treasury stock issue - 1.1 0.2 - - - ------ ------ ------ ------ ------ ----- Balance at June 30, 2002 $ 0.1 $(34.4) $276.7 $142.5 $(48.1) $94.4 ------ ------ ------ ------ ------ ----- </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 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America 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, results of operations and cash flows. 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 25, 2002. The results for the interim period are not necessarily indicative of the results to be expected for the full year. The Company has adopted Statement of Financial Accounting Standards (FAS) 142, Goodwill and Other Intangible Assets. Accordingly, the income statement now excludes goodwill amortization charges. Amortization of deferred finance costs has been reclassified as an interest expense. 6
No adjustment of comparatives on the face of the income statement is required under FAS 142, but the effects on amounts reported for the six months ended 30 June, 2001 would be as follows: <TABLE> (Millions of dollars except per share) Reported FAS 142 Adjusted <S> <C> <C> <C> Operating income $32.1 $23.8 $55.9 Income before taxes 21.7 23.0 44.7 Net income 9.6 23.0 32.6 ----------------------------------- Basic earnings per share 0.82 1.97 2.79 ----------------------------------- Diluted earnings per share $0.77 $1.84 $2.61 ----------------------------------- </TABLE> The Company has reviewed its disclosure of trade payables. Certain purchase accruals have been reclassified from accounts payable to accrued expenses, which management feels is more appropriate. The balance sheet at December 31, 2001 has been restated by a transfer of $14.3 million to allow consistent comparison. NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME At June 30, 2002, the Company had authorised common stock of 40 million shares (December 31, 2001 - 40 million). Issued shares at June 30, 2002, were 14,777,250 (December 31, 2001 - 14,777,250) and treasury stock amounted to 2,928,254 (December 31, 2001 - 3,026,775). Movements in stock options in the second quarter, 2002 were as follows:- <TABLE> No. --- <S> <C> Outstanding at March 31, 2002 1,569,201 Granted at zero cost 2,228 Granted at $17.13 200 Exercised (27,778) Cancelled (4,598) ---------- Outstanding at June 30, 2002 1,539,253 ---------- </TABLE> 7
NOTE 3 - EARNINGS PER SHARE AND EBITDA 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. Per share amounts are computed as follows: <TABLE> <CAPTION> 2002 2001 ---- ---- <S> <C> <C> Numerator: Net income available to common shares $ 36.1 $ 9.6 =========== ========== Denominator: Weighted average common shares outstanding 11,789 11,688 Dilutive effect of stock options and awards 768 803 ----------- ---------- Denominator for diluted earnings per share 12,557 12,491 =========== ========== Net income per share $ 3.06 $ 0.82 =========== ========== Net income per share, diluted $ 2.88 $ 0.77 =========== ========== </TABLE> Earnings before interest, tax, depreciation and amortization (EBITDA) is computed as follows: <TABLE> <S> <C> <C> Operating income $ 58.4 $ 32.1 Less other expenses (1.5) (0.6) Add depreciation and amortization 13.4 37.8 ----------- ---------- $ 70.3 $ 58.4 =========== ========== </TABLE> 8
NOTE 4 - SEGMENTAL REPORTING The Company has three businesses for management purposes - Lead Alkyls (TEL), Petroleum Specialties and Performance Chemicals. Chlorine is not a reportable segment, but has been disclosed separately within TEL to give greater comparability with prior year amounts. The operation is to be closed at the end of 2002. To December 31, 2001 it operated on a cost recovery basis under the previous contractual terms, and so had no net sales in the prior year. Because of operational similarities and shared services, Performance Chemicals has been included with Petroleum Specialties for reporting purposes to create the Specialty Chemicals business segment. This segmentation basis is consistent with the 2001 Annual Report. There has been no material change in total assets or liabilities by segment since December 31, 2001. The following table presents a summary of the Company's reportable segments for the three and six months ended June 30, 2002 and 2001: <TABLE> <CAPTION> (millions of dollars) Three Months Ended June 30 Six Months Ended June 30 2002 2001 2002 2001 <S> <C> <C> <C> <C> Net Sales TEL - Ongoing $ 57.8 $ 85.4 $ 122.5 $ 143.2 TEL - Chlorine 3.9 - 7.5 - -------------- -------------- ------------- ------------- 61.7 85.4 130.0 143.2 Specialty Chemicals 37.8 32.1 84.0 61.4 -------------- -------------- ------------- ------------- Total $ 99.5 $ 117.5 $ 214.0 $ 204.6 -------------- -------------- ------------- ------------- Gross Profit TEL - Ongoing $ 35.2 $ 40.3 $ 67.9 $ 67.5 TEL - Chlorine (0.3) - (0.3) - -------------- -------------- ------------- ------------- 34.9 40.3 67.6 67.5 Specialty Chemicals 13.3 12.7 29.9 21.1 -------------- -------------- ------------- ------------- Total $ 48.2 $ 53.0 $ 97.5 $ 88.6 -------------- -------------- ------------- ------------- Operating Income TEL - Ongoing $ 31.6 $ 24.4 $ 59.7 $ 35.3 TEL - Chlorine (0.3) - (0.3) - -------------- -------------- ------------- ------------- 31.3 24.4 59.4 35.3 Specialty Chemicals 1.2 2.5 5.6 3.9 Corporate Costs (4.0) (3.6) (6.6) (7.1) -------------- -------------- ------------- ------------- Total $ 28.5 $ 23.3 $ 58.4 $ 32.1 -------------- -------------- ------------- ------------- </TABLE> 9
NOTE 5 - INCOME TAXES A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:- <TABLE> <CAPTION> Six Months Ended June 30 2002 2001 ---- ---- <S> <C> <C> Statutory rate 35.0% 35.0% Increase (decrease) resulting from: Foreign tax rate differential (12.0%) (29.7%) Amortization of goodwill - 50.6% ----------- ----------- 23.0% 55.9% =========== =========== </TABLE> The reduction in the effective tax rate is mostly due to the effect of FAS 142 (note 1) which has removed non-deductible amortization expense in 2002. NOTE 6 - PLANT CLOSURE PROVISIONS <TABLE> <CAPTION> (millions of dollars) 2002 2001 ---- ---- <S> <C> <C> Balance at January 1 $ 39.5 $ 35.6 Exchange effect (0.5) (0.6) Charge for the period - 3.1 Expenditure (4.0) (4.7) ----------- ----------- Balance at June 30 $ 35.0 $ 33.4 =========== =========== </TABLE> Expenditure of $2.1 million in the first six months of 2002 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 $1.9 million related to environmental remediation activities. NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July, 2001 FAS 142, Goodwill and Other Intangible Assets, was issued. According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an annual assessment of impairment by applying a fair-value-based test. The statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. The statement is effective January 1, 2002. The Company adopted the statement effective January 1, 2002. As a result of adopting FAS 142 the Company will no longer record goodwill amortization of approximately $46 million per year on unamortized goodwill at December 31, 2001 of $342 million. The company has completed the transitional goodwill impairment tests as required under FAS 142. While the Company does not presently anticipate any impairment in respect of goodwill relating to the Specialty Chemicals business, the declining TEL market is likely to cause impairment charges before December 31, 2007, the date upon which the assets would formerly have become fully amortized. Another review will be performed within the next year. The Company will continue to amortize intangible assets of approximately $51 million at December 31, 2001, with an expected finite life, resulting in an annual charge of approximately $8 million. Amortization of goodwill reduced the second quarter, 2001 net income by $11.6 million after tax, or $0.93 per share (diluted) and $23.0 million after tax, or $1.84 per share (diluted), for the first six months of 2001. All comparisons of operating and net income are made on a post FAS 142 basis. 10
In July, 2001 FAS 143, Accounting for Asset Retirement Obligations, was issued. This requires recording the fair value of a liability for an asset retirement obligation in the period incurred. The amount recorded as a liability is capitalized by increasing the carrying amount of the related long-lived asset, which is then depreciated over its useful life. If the liability is settled for an amount other than the recorded balance, either a gain or loss will be recognized at settlement. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application permitted. The Company is presently evaluating the impact of this standard on its financial position and results of operations and is preparing an implementation plan. In August, 2001 FAS 144, Accounting for the Impairment or Disposal of Long-lived Assets, was issued. FAS 144 establishes a single accounting model, based on the framework established in FAS 121, for the disposal by sale of long-lived assets. The standard is effective for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 effective January 1, 2002 and it did not have a material effect on the Company's financial position, results of operations or liquidity. In April 2002, FAS 145, Rescission of FAS 4, 44 and 64, Amendment to FAS 13, and Technical Corrections, was issued. This standard updates, clarifies and simplifies existing accounting pronouncements. It rescinds FAS 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related taxes. Upon adoption, the criteria in APB 30 will be used to classify such gains and losses. Gains or losses on extinguishment of debt that were classified as extraordinary in prior periods presented that do not meet APB 30 criteria for classification as extraordinary must be reclassified into earnings from operations. FAS 145 also rescinds FAS 64, which amended FAS 4 and FAS 44, which established accounting requirements for the transition of the Motor Carrier Act of 1980. FAS 145 amends FAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Company must adopt this standard by fiscal 2003. The Company believes that this standard will not have a material impact on its financial position and results of operations. In July 2002, FAS 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. This addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. The Company must adopt this standard for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the effect that this standard will have on its financial position and results of operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE SIX MONTHS ENDED JUNE 30, 2002 RECENT DEVELOPMENTS At the end of December, 2001, we were notified, under the terms of our marketing, supply and service agreement with Veritel Chemicals BV, of a permanent source interruption in the supply of TEL from Russia. This triggered phased payments to Veritel of $70 million, of which 32% is recoverable under a separate agreement from Ethyl Corporation. The first payment of $10 million was made in December, 2001. A further total of $30 million has been paid in 2002 and Ethyl's contribution to all payments to date has been received. 11
Following our adoption of FAS 142 we have now ceased to amortize goodwill in our income statement. This has a significant impact on our net income and earnings per share. We have completed the transitional impairment tests as required under FAS 142. We have determined that the fair value of our reporting units exceeded their recorded value, so there is no requirement to recognize an impairment loss at this time. Our German TEL manufacturing plant ceased operations in March, 2002. This was as expected and is part of our ongoing program to restructure operations and reduce costs in response to the declining market demand for TEL. All related severance and remediation costs were provided at December 31, 2001, and remediation activities will continue at the site. RESULTS OF OPERATIONS Our results for the six months to June 30, 2002 were good overall. Sales and operating income both increased by approximately 5%, and following some good tax planning we have been able to reduce our tax rate to 23% compared with 27% (adjusted for FAS 142) last year. As a result our earnings per share are 10% higher than last year (adjusted for FAS 142) and just over half of market expectations for the full year 2002. Specialty Chemicals sales for the second quarter were $38 million, an increase of 18% over the second quarter of 2001. Specialty Chemicals SG&A costs in the second quarter included $0.4 million of costs relating to the first quarter. Adjusting for these, Specialty Chemicals operating income for the quarter was $1.6 million, compared with $3.0 million in 2001 (Adjusted for FAS 142). Specialty Chemicals sales for the six months to June 2002 were $84 million, an increase of $22.6 million or 37% over last year. Excluding the effects of acquisitions, Specialty Chemicals sales increased by $3.6 million or 6% compared with the first half of 2001. Gross profit, including acquisitions, improved to 36% of sales but increased SG&A costs have meant that operating income is only maintained at 7% of sales (Adjusted for FAS 142). Ongoing TEL sales for the quarter ended June 30, 2002 were $57.8 million, a decrease of 32% on the unusually high sales in the second quarter, 2001. TEL cost of goods sold in the second quarter was reduced by $1.1 million, reflecting the recognition of amounts recoverable from Ethyl under the Marketing Alliance related to the first half of 2002. In prior years these amounts, computed retrospectively on an annual basis, were not material and we recognized them on receipt. Because of increases in the amounts involved we have decided that it is now more appropriate to make a prudent accrual on an ongoing basis. TEL gross profit in the second quarter, excluding the benefit of this adjustment, was 59% of sales compared with 47% last year. TEL sales for the six months to June 30, 2002 were $122.5 million, a decrease of 14% on last year. In spite of the reduced sales, TEL gross profit was maintained at $67.9 million or 55% of sales. Sales, general and administrative costs for the first six months increased from $25.3 million in 2001 to $31.9 million. Of the total $6.6 million increase, a significant portion relates to costs in the newly acquired Specialty Chemicals companies. We are continuing to explore opportunities to reduce overall costs through operational synergies. Our amortization charge has changed substantially. Following our adoption of FAS 142 we no longer amortize goodwill. The equivalent charge for the half year ended June 30, 2001 was $23.0 million. Further, amortization of $1.0 million (2001 - $0.8 million) relating to deferred finance costs has been reclassified as an interest expense to reflect its direct relationship with financing activities. Amortization charged of $4.3 million for the half year to June 30, 2002 relates to the intangible asset arising from permanent source interruption payments to Veritel. 12
Interest expense for the six month period has reduced from $10.0 million in 2001 to $8.8 million, reflecting the benefits of our refinancing in December, 2001. Our effective tax rate is 23% compared with 27% in 2001, after adjusting for the effects of FAS 142. The prior year rate includes a one-time tax refund of $5 million. The reduction in the rate is due to our continuing tax planning efforts. LIQUIDITY AND FINANCIAL CONDITION Cash generated from operating activities was $22.2 million for the second quarter, 2002 and $66.2 million for the half year to June 30, 2002, compared with $60.2 million in the half year to June 30, 2001. EBITDA at $70.3 million was comparable to $69.3 million in 2001. The most significant change in operating assets and liabilities was a reduction of $32.8 million in accounts receivable, which arose mainly because of the timing of TEL bulk deliveries. In the quarter ended June 30, 2002 the third permanent source interruption payment of $15.0 million was made and 32% of this was recovered from Ethyl Corporation. The net Veritel payment of $17.2 million for the half year includes $30.0 million paid to Veritel and $12.8 million received from Ethyl's 32% contribution for those payments and the $10.0 million paid in December, 2001. Deferred consideration payments of $3.6 million were made in respect of the 2001 acquisitions, representing 75% of the maximum amounts payable. The amounts were included in accruals at December 31, 2001. Our net debt repayment for the half year to June 30, 2002 was $52.9 million. We drew down $10.0 million on short-term facilities, and repaid the scheduled debt instalment of $40.0 million plus an accelerated payment of $23.4 million based on our surplus cash flow for fiscal 2001. In the quarter ended June 30, 2002 we repaid $10.0 million of our revolving credit borrowings. CRITICAL ACCOUNTING POLICIES Our view on critical accounting policies is unchanged since December 31, 2001. The two policies that we consider the most critical in terms of complexity and subjectivity of assessment are those related to environmental liabilities and to impairment of goodwill and intangible assets. Any adverse variance between actual results and our projections in these areas will impact on results of operations and financial condition. We record environmental liabilities when they are probable and costs can be estimated reasonably. We have to anticipate the program of work required and the associated future costs. We also view the costs of vacating our main UK site ($24.9 million at 2001 year end) as a contingent liability because we have no present intention to exit the site. We have significant goodwill and intangible assets in our balance sheet, with net amounts of $345.8 million and $51.9 million, respectively, at June 30, 2002. We regularly review carrying values by reference to future income and cash flows, but this involves anticipating trading circumstances that will apply in future years. 13
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES Some of the information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations constitutes forward-looking comments within the meaning of the Private Litigation Reform Act of 1995. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our 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 our 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. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We operate manufacturing and blending facilities, offices and laboratories around the world, although the largest facility is based in the UK, and use floating rate debt to finance our global operations. We are, therefore, subject to business risks inherent in non-US activities, including political and economic uncertainties, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. We believe that the political and economic risks are mitigated due to the stability of the countries in which our largest operations are based. We use derivative financial instruments, including interest rate swaps and foreign currency forward exchange contracts, to manage market risks in the normal course of our business. We do this to manage our exposure to interest and exchange rate fluctuations and to minimize our borrowing costs. We do not use derivatives for trading purposes. There has been no material change in our exposure to market risk as described in the Form 10-K filed on March 25, 2002. 14
PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Dennis Kerrison 99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Alan Jarvis (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter. 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: August 12, 2002 By /s/ Dennis J Kerrison ----------------- Dennis J Kerrison President and Chief Executive Officer Date: August 12, 2002 By /s/ Alan G Jarvis ------------- Alan G Jarvis Vice President and Chief Financial Officer 15