Innospec - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

DELAWARE		98-0181725
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
Global House Bailey Lane Manchester United Kingdom		M90 4AA
(Address of principal executive offices)		(Zip Code)

 

 

 

 

 

Class		Outstanding as of October 31, 2002
Common Stock, par value $0.01		11,842,744

 

 

 

 

 

		September 30 2002			December 31 2001
		(Unaudited)
		(millions of dollars)
ASSETS
Current assets
Cash and cash equivalents		$	31.0		$	43.0
Accounts receivable, less allowance of $2.4 (2001—$3.2)			79.8			114.9
Other receivable—Veritel			9.6			22.4
Inventories
Finished goods			35.6			32.2
Raw materials and work-in-progress			23.5			22.8
Total inventories			59.1			55.0
Prepaid expenses			3.9			3.0
Total current assets			183.4			238.3
Property, plant and equipment			103.0			76.5
Less accumulated depreciation			32.6			9.6
Net property, plant and equipment			70.4			66.9
Goodwill			349.5			341.7
Intangible asset			50.0			50.5
Deferred finance costs			4.9			5.9
Prepaid pension cost			96.7			82.4
Other assets			4.3			3.0
		$	759.2		$	788.7

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

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		September 30 2002				December 31 2001
		(Unaudited)
		(millions of dollars)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable (note 1)		$	63.6			$	61.9
Other payable—Veritel			30.0				60.0
Accrued expenses (note 1)			36.5				38.8
Accrued income taxes			9.3				7.5
Current portion of long-term debt (note 1)			56.8				65.1
Current portion of deferred income			2.0				2.0
Total current liabilities			198.2				235.3
Plant closure provisions (note 6)			33.0				39.5
Deferred income taxes			41.6				40.3
Long-term debt (note 1)			112.7				165.9
Deferred income			8.9				11.4
Minority interest			5.2				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)			(34.3	)			(35.5	)
Retained earnings			160.2				106.4
Accumulated other comprehensive Income			(43.1	)			(57.1	)
Total stockholders’ equity			359.6				290.4
		$	759.2			$	788.7

 

 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

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		Three Months Ended September 30								Nine Months Ended September 30
		2002				2001				2002				2001
		(millions of dollars except per share)
Net sales		$	116.3			$	104.9			$	330.3			$	309.5
Cost of goods sold (note 1)			68.1				58.3				184.6				173.0
Gross profit			48.2				46.6				145.7				136.5
Operating expenses
Selling, general and administrative			15.9				15.0				47.8				40.3
Research and development			1.4				1.4				4.3				3.5
Restructuring charge (note 1)			3.1				0.3				3.1				1.6
Amortization of goodwill			—				11.6				—				34.6
Amortization of intangible assets			2.4				3.2				6.7				9.3
			22.8				31.5				61.9				89.3
Operating income			25.4				15.1				83.8				47.2
Interest expense			2.1				5.8				10.9				15.7
Other expenses/(income)			(0.8	)			0.7				0.7				1.3
Interest income			(0.1	)			(0.4	)			(0.5	)			(1.9	)
Income before income taxes and Minority interest			24.2				9.0				72.7				32.1
Minority interest			0.5				1.3				2.1				2.7
Income before income taxes			23.7				7.7				70.6				29.4
Income taxes (note 5)			5.4				4.3				16.2				16.4
Net income		$	18.3			$	3.4			$	54.4			$	13.0
Earnings per share:
Basic			1.54				0.29				4.60				1.10
Diluted			1.44				0.27				4.32				1.04
Weighted average shares outstanding (in thousands)
Basic (note 3)			11,851				11,739				11,809				11,769
Diluted (note 3)			12,651				12,563				12,587				12,515

 

 

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

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		Nine Months Ended September 30
		2002				2001
		(millions of dollars)
Cash Flows from Operating Activities
Net income		$	54.4			$	13.0
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			19.8				56.5
Deferred income taxes			2.6				(1.1	)
Other			1.6				—
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses			41.0				17.6
Inventories			(0.8	)			14.1
Accounts payable and accrued expenses			(16.0	)			(16.2	)
Income taxes and other current liabilities			0.7				6.9
Other non-current assets and liabilities			(19.0	)			(5.4	)
Net cash provided by operating activities			84.3				85.4
Cash Flows from Investing Activities
Capital expenditures			(8.2	)			(3.6	)
Business combinations, net of cash acquired			(5.0	)			(63.9	)
Veritel			(17.2	)			—
Other			(0.7	)			—
Net cash used in investing activities			(31.1	)			(67.5	)
Cash Flows from Financing Activities
Receipt of long-term borrowings			24.7				—
Repayment of long-term borrowings			(87.9	)			(0.5	)
Receipt of short-term credit			1.4				—
Repurchase of common stock			—				(3.1	)
Dividends paid			(0.6	)			—
Proceeds on exercise of stock options			0.2				—
Minority interest			(0.7	)			(0.7	)
Net cash used in financing activities			(62.9	)			(4.3	)
Effect of exchange rate changes on cash			(2.3	)			(7.5	)
Net change in cash and cash equivalents			(12.0	)			6.1
Cash and cash equivalents at beginning of period			43.0				37.7
Cash and cash equivalents at end of period		$	31.0			$	43.8

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

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		Common Stock			Treasury Stock				Additional Paid-In Capital			Retained Earnings				Other Comprehensive Income				Total Comprehensive Income
		(millions of dollars)
Balance at December 31, 2001		$	0.1		$	(35.5	)		$	276.5		$	106.4			$	(57.1	)		$	49.3
Net income			—			—				—			54.4				—				54.4
Dividend ($0.05 per share)			—			—				—			(0.6	)			—				(0.6	)
Derivatives(1)			—			—				—			—				(1.8	)			(1.8	)
Net CTA(2) change			—			—				—			—				15.8				15.8
Treasury stock issue			—			1.2				0.2			—				—				—
Balance at September 30, 2002		$	0.1		$	(34.3	)		$	276.7		$	160.2			$	(43.1	)		$	117.1

 

The accompanying footnotes are an integral part of these unaudited condensed 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.

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No adjustment of comparatives on the face of the income statement is required under FAS 142, but the effects on amounts reported for the nine months ended September 30, 2001 would be as follows:

 

		Reported			FAS 142			Adjusted
		(Millions of dollars except per share)
Operating income		$	47.2		$	35.7		$	82.9
Income before taxes			29.4			34.6			64.0
Net income			13.0			34.6			47.6
Basic earnings per share		$	1.10		$	2.94		$	4.04
Diluted earnings per share		$	1.04		$	2.76		$	3.80

 

The Company has reviewed certain disclosures:

 

 

 

 

NOTE 2—STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

At September 30, 2002, the Company had authorised common stock of 40 million shares (December 31, 2001—40 million). Issued shares at September 30, 2002, were 14,777,250 (December 31, 2001—14,777,250) and treasury stock amounted to 2,921,006 (December 31, 2001—3,026,775).

 

Movements in stock options in the third quarter, 2002 were as follows:-

 

		No.
Outstanding at June 30, 2002		1,539,253
Exercised		(7,248	)
Cancelled for payment		(32,909	)
Cancelled		(21,009	)
Outstanding at September 30, 2002		1,478,087

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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:

 

		Three Months Ended September 30							Nine Months Ended September 30
		2002			2001				2002				2001
Numerator:
Net income available to common shares		$	18.3		$	3.4			$	54.4			$	13.0
Denominator:
Weighted average common shares outstanding			11,851			11,739				11,809				11,769
Dilutive effect of stock options and awards			800			824				778				746
Denominator for diluted earnings per share			12,651			12,563				12,587				12,515
Net income per share		$	1.54		$	0.29			$	4.60			$	1.10
Net income per share, diluted		$	1.44		$	0.27			$	4.32			$	1.04
Earnings before interest, tax, depreciation and amortization (EBITDA) is computed as follows:
Operating income		$	25.4		$	15.1			$	83.8			$	47.2
Less other expenses			0.8			(0.7	)			(0.7	)			(1.3	)
Add depreciation and amortization			6.4			18.4				19.8				56.5
		$	32.6		$	32.8			$	102.9			$	102.4

 

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, Performance Chemicals has been combined 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.

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The following table presents a summary of the Company’s reportable segments for the three and nine months ended September 30, 2002 and 2001:

 

		Three Months Ended September 30								Nine Months Ended September 30
		2002				2001				2002				2001
		(millions of dollars)
Net Sales
TEL—Ongoing		$	66.3			$	59.1			$	188.8			$	202.3
TEL—Chlorine			3.4				—				10.9				—
			69.7				59.1				199.7				202.3
Specialty Chemicals			46.6				45.8				130.6				107.2
Total		$	116.3			$	104.9			$	330.3			$	309.5
Gross Profit
TEL—Ongoing		$	34.3			$	30.5			$	102.2			$	99.3
TEL—Chlorine			(0.5	)			—				(0.8	)			—
			33.8				30.5				101.4				99.3
Specialty Chemicals			14.4				16.1				44.3				37.2
Total		$	48.2			$	46.6			$	145.7			$	136.5
Operating Income
TEL—Ongoing		$	29.8			$	14.8			$	89.5			$	51.4
TEL—Chlorine			(0.5	)			—				(0.8	)			—
			29.3				14.8				88.7				51.4
Specialty Chemicals			3.0				4.2				8.6				8.1
Corporate Costs			(3.8	)			(3.6	)			(10.4	)			(10.7	)
Restructuring Charge:
TEL—Ongoing			(0.6	)			(0.3	)			(0.6	)			(1.6	)
TEL—Chlorine			(1.6	)			—				(1.6	)			—
Specialty Chemicals			(0.9	)			—				(0.9	)			—
Total		$	25.4			$	15.1			$	83.8			$	47.2

 

NOTE 5—INCOME TAXES

 

A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:-

 

		Nine Months Ended September 30
		2002			2001
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	%

 

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.

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		2002				2001
		(millions of dollars)
Balance at January 1		$	39.5			$	35.6
Exchange effect			1.0				(1.0	)
Acquired			—				1.4
Charge for the period			3.1				5.7
Expenditure			(10.6	)			(7.1	)
Balance at September 30			33.0			$	34.6

 

Expenditure of $7.2 million in the first nine 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 $3.4 million related to environmental remediation activities.

 

 

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 third quarter, 2001 net income by $11.6 million after tax, or $0.92 per share (diluted) and $34.6 million after tax, or $2.76 per share (diluted), for the first nine months of 2001. All comparisons of operating and net income are made on a post FAS 142 basis.

 

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

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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.

 

 

The Company’s principal credit facility comprises a term loan of $122 million and a revolving credit facility of $40 million of which $35 million had been drawn down at September 30, 2002. This credit facility requires, among other matters, compliance with certain financial ratio covenants, specifically an operating cash/net finance charge ratio, EBITDA/net interest ratio and net debt/EBITDA ratio, on a rolling twelve month basis calculated quarterly.

 

The Company was not in compliance with the operating cash/net finance charge ratio covenant under the credit facility as at September 30, 2002. However, the Company has requested and received a waiver through December 31, 2002 of this breach. Subsequent breaches of the financial covenants under the credit facility could result in acceleration of the Company’s indebtedness in which case the debt would become immediately due and payable. However, management fully expects to be in compliance with the operating cash/net finance charge ratio and other financial covenant when they are required to be calculated again as at December 31, 2002 and also for the foreseeable future.

 

 

 

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 their supplier. 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,

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2001. A further total of $30 million has been paid in 2002 and Ethyl’s contribution to all payments to date has been received.

 

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 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.

 

In the third quarter, 2002 we have recorded a $3.1 million restructuring charge as part of a group-wide program to reduce the TEL asset and cost base in line with declining demand and to ensure that the correct infrastructure and systems exist to globalize the Specialty Chemicals business. Further restructuring will arise from this program. We have presently identified a possible $8 million of costs which may be eligible for provision in the fourth quarter, but work is ongoing to quantify these charges.

 

 

Our results for the nine months to September 30, 2002 were satisfactory overall. Sales increased by 7% and operating income increased by approximately 1% (adjusted for FAS 142) over 2001 levels. Through effective tax planning we have been able to reduce our effective tax rate to 23% compared with 26% (adjusted for FAS 142) last year. As a result our earnings per share are 14% higher than last year (adjusted for FAS 142) and in line with market expectations.

 

Specialty Chemicals sales for the third quarter were $46.6 million, an increase of 2% over the third quarter of 2001, and gross profit was 31% of net sales compared with 35% in 2001. This reflects the change in sales mix, the temporary loss of our detergent additives business, and the continuing softness in the market as customers attempt to economize on the use of performance fuel additives. Year to date Specialty Chemicals sales were 22% ahead of last year mainly due to the 2001 acquisitions, and gross profit at 34% of sales is consistent with 2001 levels.

 

TEL has completed a successful nine months to the end of September 30, 2002 which has seen ongoing operating income (adjusted for FAS 142) increase by $4.6 million to $89.5 million in spite of a 7% reduction in sales revenue. Sales volumes were 9% down on 2001, offset by improved pricing. Cost of goods sold was reduced by $1.5 million, reflecting the recognition of amounts recoverable from Ethyl under the Marketing Alliance related to the nine months to September 30, 2002. In prior years these amounts, computed retrospectively on an annual basis, were not significant 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.

 

Sales, general and administrative costs for the first nine months increased from $40.3 million in 2001 to $47.8 million. A significant portion of this $7.5 million increase relates to costs in the newly acquired Specialty Chemicals companies. We are continuing to reduce overall costs through the exploitation of operational synergies and we expect the benefit of this to be seen in the second half of 2003.

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We have identified restructuring charges separately in this report for the first time, and to allow a consistent comparison we have reclassified similar 2001 items from cost of goods sold. Charges for the first nine months of 2002 were $3.1 million compared with a 2001 charge of $1.6 million. All 2001 charges related to the TEL business, but the 2002 total comprises:

 

Movements in the restructuring provision in the nine-month period are as follows:

 

		At January 1			Exchange Effect			Charge			Expenditure				At September 30
		(millions of dollars)
TEL severance		$	7.1		$	0.1		$	0.6		$	(7.0	)		$	0.8
Chlorine severance			—			—			1.6							1.6
Specialty severance			—			—			0.9			(0.2	)			0.7
		$	7.1		$	0.1		$	3.1		$	(7.2	)		$	3.1

 

The TEL provision at 1 January related mainly to the closure of our German manufacturing plant, which ceased production in March, 2002. Most of the severance costs provided have now been paid.

 

Our amortization charge has changed substantially. Following our adoption of FAS 142 we no longer amortize goodwill. The equivalent charge for the nine months to September 30, 2001 was $34.6 million. Further, amortization of $1.6 million (2001—$1.1 million) relating to deferred finance costs has been reclassified as an interest expense to reflect its direct relationship with financing activities. Amortization charged of $6.7 million for the year to September 30, 2002 relates to the intangible asset arising from permanent source interruption payments to Veritel.

 

Interest expense for the nine-month period has reduced from $15.7 million in 2001 to $10.9 million, reflecting the benefits of our refinancing in December, 2001. Our effective tax rate is 23% compared with 26% 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.

 

 

Cash generated from operating activities was $18.1 million for the third quarter, 2002 and $84.3 million for the year to September 30, 2002, compared with $85.4 million in the year to September 30, 2001. EBITDA at $102.9 million was comparable to $102.4 million in 2001. The most significant change in operating assets and liabilities was a reduction of $41.0 million in accounts receivable, which arose mainly because of the timing of TEL bulk deliveries.

 

In the quarter ended September 30, 2002, no permanent source interruption payments were made to Veritel. The net Veritel payment of $17.2 million for the year to date 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. Our share of the outstanding payments is $20.4 million and we expect to make payments of $13.6 million in the fourth quarter and $6.8 million in the first quarter, 2003.

 

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 nine months to September 30, 2002 was $61.8 million. The analysis between long-term and short-term has been restated to reflect the reclassification of revolving credit

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(see Note 1). We have drawn down $15.0 million of revolving credit facilities, and repaid scheduled debt instalments amounting to $65.0 million plus an accelerated payment of $23.4 million based on our surplus cash flow for 2001. No further debt repayments are scheduled for 2002. Octel Starreon replaced intercompany financing with third party long-term debt of $10 million, of which $1.7 million is due within one year.

 

Following our announcement in August of a semi-annual dividend of 5 cents per share, the first payment was made on September 30, 2002.

 

As discussed in Note 8, we were not in compliance at September 30, 2002 with one of the financial covenants required by the credit facility. However, we have requested and received a waiver through December 31, 2002 of this breach and we fully expect to be in compliance with all the financial covenants when they are required to be calculated again as at December 31, 2002 and also for the foreseeable future.

 

 

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 $349.5 million and $50.0 million, respectively, at September 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.

 

 

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.

 

 

We operate manufacturing and blending facilities, offices and laboratories around the world, with the largest facility 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

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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.

 

 

Within 90 days of the filing date of this 10-Q Report, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them, on a timely basis, to material information that is required to be included in the periodic reports that we must file with the Securities and Exchange Commission. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of that evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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(a)  Exhibits
99.2		Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002—Dennis Kerrison
99.3		Certificationpursuant 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
On August 13, 2002 the Company filed a Form 8-K regarding the adoption of a semi-annual dividend policy.

 

 

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 13, 2002		By  /s/  Dennis J Kerrison
		Dennis J Kerrison
		President and
		Chief Executive Officer
Date:  November 13, 2002		By  /s/  Alan G Jarvis
		Alan G Jarvis
		Vice President and
		Chief Financial Officer

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I, Dennis J Kerrison, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

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I, Alan G Jarvis, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

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