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, 2001 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, 2001 Common Stock, par value $0.01 11,758,811
PART 1 - FINANCIAL INFORMATION - ------------------------------ ITEM 1 - FINANCIAL STATEMENTS - ----------------------------- OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- June 30 December 31 2001 2000 (Unaudited) ------------- ------------ (millions of dollars) Assets Current assets Cash and cash equivalents $ 31.1 $ 37.7 Accounts receivable, less allowance 82.5 92.2 of $3.6 (2000 - $3.6) Inventories Finished products 25.4 37.9 Raw materials and work in progress 24.9 17.6 ----------- ----------- Total inventories 50.3 55.5 Prepaid expenses 5.5 3.1 ----------- ----------- Total current assets 169.4 188.5 Property, plant and equipment 100.3 112.4 Less accumulated depreciation 21.0 29.0 ----------- ----------- Net property, plant and equipment 79.3 83.4 Goodwill 336.6 329.2 Intangible asset 5.6 11.0 Deferred finance costs 6.6 8.4 Prepaid pension cost 75.4 76.5 Other assets 7.4 3.8 ----------- ----------- $ 680.3 $ 700.8 =========== =========== The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. 2
OCTEL CORP. AND SUBSIDIARIES ---------------------------- CONSOLIDATED BALANCE SHEETS (CONTINUED) --------------------------------------- June 30 December 31 2001 2000 (Unaudited) ------------- ------------ (millions of dollars) Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 58.3 $ 63.9 Accrued expenses 20.4 15.8 Accrued income taxes 14.2 8.5 Current portion of deferred income 7.6 13.1 Current portion of long-term debt 39.1 30.0 ---------- ----------- Total current liabilities 139.6 131.3 Plant closure provisions (note 5) 33.4 35.6 Deferred income taxes 40.5 40.9 Deferred income 13.3 12.4 Long-term debt 167.3 180.0 Other liabilities - 0.5 Minority interest 5.4 4.5 Stockholders' equity Common stock, $0.01 par value (note 2) 0.1 0.1 Additional paid-in capital 276.1 276.1 Treasury stock (note 2) (35.2) (32.5) Retained earnings 110.4 100.8 Accumulated other comprehensive (70.6) (48.9) income ---------- ----------- Total stockholders' equity 280.8 295.6 ---------- ----------- $ 680.3 $ 700.8 ========== =========== 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 Six Months Ended June 30 June 30 ------------------------ ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (millions of dollars except per share) -------------------------------------- <S> <C> <C> <C> <C> Net sales $ 117.5 $ 107.4 $ 204.6 $ 198.4 Cost of goods sold 64.5 63.4 116.0 118.1 ---------- ---------- ---------- ---------- Gross profit 53.0 44.0 88.6 80.3 Operating expenses Selling, general and admin. 13.8 11.5 25.3 22.7 Research and development 1.2 0.8 2.1 1.7 Amortization of intangible assets 14.7 15.6 29.1 31.4 ---------- ---------- ---------- ---------- 29.7 27.9 56.5 55.8 ---------- ---------- ---------- ---------- Operating income 23.3 16.1 32.1 24.5 Interest expense 5.0 5.7 10.0 12.9 Other expenses/(income) (0.1) 1.0 0.6 (2.5) Interest income (0.8) (0.6) (1.6) (1.9) ---------- ---------- ---------- ---------- Income before income taxes and minority interest 19.2 10.0 23.1 16.0 Minority interest 0.8 0.6 1.4 1.2 ---------- ---------- ---------- ---------- Income before income taxes 18.4 9.4 21.7 14.8 Income taxes (note 3) 10.2 5.2 12.1 7.4 ---------- ---------- ---------- ---------- Net income $ 8.2 $ 4.2 $ 9.6 $ 7.4 ========== ========== ========== ========== Earnings per share: Basic $ 0.69 $ 0.32 $ 0.82 $ 0.56 ---------- ---------- ---------- ---------- Diluted $ 0.65 $ 0.32 $ 0.77 $ 0.55 ---------- ---------- ---------- ---------- Weighted average shares outstanding (in thousands) Basic (note 2) 11,809 12,857 11,688 13,141 ---------- ---------- ---------- ---------- Diluted (note 2) 12,525 13,312 12,491 13,494 ---------- ---------- ---------- ---------- </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 --------------------------- 2001 2000 ---- ---- (millions of dollars) <S> <C> <C> Cash Flows from Operating Activities Net income $ 9.6 $ 7.4 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 37.8 40.9 Deferred income taxes (0.4) 2.7 Other - 2.1 Changes in operating assets and liabilities: Accounts receivable and prepaid expenses 11.9 42.5 Inventories 7.5 (8.1) Accounts payable and accrued expenses (10.4) (15.5) Deferred income - 38.6 Income taxes and other current liabilities 6.8 (10.0) Other non-current assets and liabilities (2.6) 1.9 --------- --------- Net cash provided by operating activities 60.2 102.5 Cash Flows from Investing Activities Capital expenditures (3.3) (4.1) Business combinations, net of cash acquired (48.2) - Other - (1.4) --------- --------- Net cash used in investing activities (51.5) (5.5) Cash Flows from Financing Activities Short-term borrowings 9.0 - Repayment of long-term borrowings (15.0) (58.3) Repurchase of common stock (2.7) (11.3) Minority interest 0.1 - --------- --------- Net cash used in financing activities (8.6) (69.6) Effect of exchange rate changes on cash (6.7) (7.6) --------- --------- Net change in cash and cash equivalents (6.6) 19.8 Cash and cash equivalents at beginning of period 37.7 37.2 --------- --------- Cash and cash equivalents at end of period $ 31.1 $ 57.0 ========= ========= </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, 2001 $0.1 $(32.5) $276.1 $100.8 $(48.9) $51.9 Net Income - - - 9.6 - 9.6 Net CTA* change - - - - (21.7) (21.7) Share buy-back - (2.7) - - - - ----------- ----------- ----------- ----------- --------- -------------- Balance at June 30, 2001 $0.1 $(35.2) $276.1 $110.4 $(70.6) $39.8 ----------- ----------- ----------- ----------- --------- -------------- </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 26, 2001. 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 June 30, 2001, the Company had authorized common stock of 40 million shares (December 31, 2000 - 40 million). Issued shares at June 30, 2001, were 14,777,250 (December 31, 2000 - 14,777,250) and treasury stock amounted to 3,038,506 (December 31, 2000 - 2,870,240). Movements in stock options in the second quarter, 2001 were as follows:- No. --- Outstanding at March 31, 2001 1,570,466 Lapsed (60,588) Exercised (19,171) Granted - at zero cost 31,721 at $12.42 4,331 ------------ Outstanding at June 30, 2001 1,526,759 ------------ 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 tax rate to the effective income tax rate is as follows:- Six Months Ended June 30 2001 2000 ---- ---- Statutory US Federal tax rate 35.0% 35.0% Increase (decrease) resulting from: Foreign tax rate differential (29.7%) (36.0%) Amortization of goodwill 50.6% 49.9% Other - 1.1% ----------- ----------- 55.9% 50.0% =========== =========== NOTE 4 - ACQUISITIONS On June 7, 2001 the Company acquired CP Manufacturing BV and CP 3500 International Limited. The CP group, which is headquartered in Holland and manufactures and sells fuel additives for the treatment of heavy oils, has an annual turnover of $4 million. On June 19, 2001 the Company acquired the Bycosin AB Group which is headquartered in Sweden. The Bycosin Group is a supplier of heavy fuel oil additives and has an annual turnover of $14 million. Both acquisitions will form part of the Company's Specialty Chemicals business unit and are expected to have synergies with Octel Gamlen, acquired in Quarter 1, 2001, and Octel Deutschland. A majority stake was taken in Manhoko Limited on May 14, 2001. Manhoko Limited is a supplier of personal care products in Asia Pacific with an annual turnover of $8 million. 7
On April 9, 2001 the Company acquired the remaining 80% of Hi-Mar Specialties Inc., a US company based in Atlanta and Milwaukee. The initial 20% was acquired in December 1999. The business was purchased from the private owner. Hi-Mar Specialties has an annual turnover of $8 million and will form the base for the Company's Performance Chemicals business in the US. NOTE 5 - PLANT CLOSURE PROVISIONS (millions of dollars) 2001 2000 ---- ---- Balance at January 1 $35.6 $55.6 Exchange effect (0.6) (2.2) Charge/(release) for the period 3.1 (2.5) Expenditure (4.7) (12.6) ----------- ------------ Balance at June 30 $33.4 $38.3 =========== ============ Expenditure of $2.2 million in the first six months of 2001 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 $2.5 million related to environmental remediation activities. NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The company adopted SFAS 133, as amended by SFAS 137 and SFAS 138, on January 1, 2001 and the adoption did not have any material impact on the Company's financial position, results of operations or liquidity. In July 2001, the FASB issued SFAS No. 141, "Business Combinations." This statement has eliminated the flexibility to account for some mergers and acquisitions as pooling of interests, and effective as of July 1, 2001, all business combinations are to be accounted for using the purchase method. The Company will adopt SFAS No. 141 as of July 1, 2001, and the impact of such adoption is not anticipated to have a material adverse impact on the Company's financial statements. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." 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 Company will adopt SFAS No. 142 beginning January 1, 2002. The Company has not completed an evaluation of the impact of this new standard. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires recording the fair value of a liability for an asset retirement obligation in the period incurred. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application permitted. The Company has not completed an evaluation of the impact of this new standard. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE SIX MONTHS ENDED JUNE 30, 2001 ---------------------------------------------------------- Some of the information presented in the following discussions 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 - ------------------- On June 7, 2001 the Company acquired CP Manufacturing BV and CP 3500 International Limited. The CP group, which is headquartered in Holland and manufactures and sells fuel additives for the treatment of heavy oils, has an annual turnover of $4 million. On June 19, 2001 the Company acquired the Bycosin AB Group which is headquartered in Sweden. The Bycosin Group is a supplier of heavy fuel oil additives and has an annual turnover of $14 million. Both acquisitions will form part of the Company's Specialty Chemicals business unit and are expected to have synergies with Octel Gamlen, acquired in Quarter 1, 2001, and Octel Deutschland. A majority stake was taken in Manhoko Limited on May 14, 2001. Manhoko Limited is a supplier of personal care products in Asia Pacific with an annual turnover of $8 million. On April 9, 2001 the Company acquired the remaining 80% of Hi-Mar Specialties Inc., a US company based in Atlanta and Milwaukee. The initial 20% was acquired in December 1999. The business was purchased from the private owner. Hi-Mar Specialties has an annual turnover of $8 million and will form the base for the Company's Performance Chemicals business in the US. The Company confirms that it has now entered into a marketing and supply agreement with Veritel BV as outlined in the Form 10-Q for the quarter ended March 31, 2001. 9
RESULTS OF OPERATIONS - --------------------- Operating income for the first half of 2001 and 2000 may be analyzed as follows:- (millions of dollars) <TABLE> <CAPTION> Second Quarter Year to Date 2001 2000 2001 2000 <S> <C> <C> <C> <C> Net Sales TEL $ 85.4 $ 77.7 $ 143.2 $ 135.7 Specialty Chemicals 32.1 29.7 61.4 62.7 ------------ ------------ ------------ ------------ Total $ 117.5 $ 107.4 $ 204.6 $ 198.4 ------------ ------------ ------------ ------------ Gross Profit TEL $ 40.3 $ 35.2 $ 67.5 $ 61.6 Specialty Chemicals 12.7 8.8 21.1 18.7 ------------ ------------ ------------ ------------ Total $ 53.0 $ 44.0 $ 88.6 $ 80.3 ------------ ------------ ------------ ------------ Operating Income TEL $ 24.4 $ 16.2 $ 35.3 $ 23.6 Specialty Chemicals 2.5 2.5 3.9 6.2 Corporate Costs (3.6) (2.6) (7.1) (5.3) ------------ ------------ ------------ ------------ Total $ 23.3 $ 16.1 $ 32.1 $ 24.5 ------------ ------------ ------------ ------------ </TABLE> TEL sales volumes for the six months ended June 30, 2001 were 5% below 2000 levels. However, due to a favorable sales mix resulting in a higher average selling price, net sales for the six months ended June 30, 2001 were $143.2 million, 6% ahead of 2000. Gross margin for the six months to June 30, 2001 was 47% compared to 45% in 2000, reflecting cost reductions implemented in 2000 and the favorable sales mix. Specialty Chemicals sales for the six months to June 30, 2001 at $61.4 million were 2.1% lower than 2000. This reflects the anticipated exit of low margin business and price reduction referred to in March, largely offset by acquisitions in the second quarter, 2001. Gross profit for the year to date is 12.8% higher than last year. LIQUIDITY AND FINANCIAL CONDITION - --------------------------------- Cash inflow from operating activities in the six months ended June 30, 2001 was $60.2 million compared to $102.5 million for the same period in 2000. The difference is due principally to the $39 million payment for services received from Ethyl last year. $48.2 million was spent in the first half year on acquisitions net of cash acquired. The Company repaid $15 million of senior debt and raised $9 million short term debt to partly finance the acquisition of Hi-Mar Specialties Inc. 10
At June 30, 2001 outstanding debt is $45 million bank debt and $150 million high yield bonds. The Company is currently in discussion with its bankers on refinancing on more favorable terms. 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 26, 2001. PART II - OTHER INFORMATION - --------------------------- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits No exhibits are required for the quarter. (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 authorized. Date: August 10, 2001 By /s/ Dennis J Kerrison ----------------- Dennis J Kerrison President and Chief Executive Officer Date: August 10, 2001 By /s/ Alan G Jarvis ------------- Alan G Jarvis Chief Financial Officer 11