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, 2001 Commission file number 1-13879 OCTEL CORP. (Exact name of registrant as specified in its charter) 98-0181725 DELAWARE ---------- (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, 2001 Common Stock, par value $0.01 11,733,193
PART 1 - FINANCIAL INFORMATION - ------------------------------ ITEM 1 - FINANCIAL STATEMENTS - ----------------------------- OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- <TABLE> <CAPTION> September 30 December 31 2001 2000 (Unaudited) -------------- ------------ (millions of dollars) <S> <C> <C> Assets Current assets Cash and cash equivalents $ 43.8 $ 37.7 Accounts receivable, less allowance 84.3 92.2 of $3.5 (2000 - $3.6) Inventories Finished products 23.5 37.9 Raw materials and work in progress 26.9 17.6 ---------- ---------- Total inventories 50.4 55.5 Prepaid expenses 3.9 3.1 ---------- ---------- Total current assets 182.4 188.5 Property, plant and equipment 109.4 112.4 Less accumulated depreciation 27.3 29.0 ---------- ---------- Net property, plant and equipment 82.1 83.4 Goodwill 343.8 329.2 Intangible asset 2.3 11.0 Deferred finance costs 7.5 8.4 Prepaid pension cost 80.4 76.5 Other assets 5.4 3.8 ---------- ---------- $ 703.9 $ 700.8 ========== ========== </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 2001 2000 (Unaudited) -------------------- --------------- (millions of dollars) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 58.2 $ 63.9 Accrued expenses 22.6 15.8 Accrued income taxes 14.4 8.5 Current portion of deferred income 4.8 13.1 Current portion of long-term debt 45.1 30.0 ---------- --------- Total current liabilities 145.1 131.3 Plant closure provisions (note 5) 34.6 35.6 Deferred income taxes 40.2 40.9 Deferred income 10.9 12.4 Long-term debt 166.8 180.0 Other liabilities 2.3 0.5 Minority interest 4.8 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) (35.6) (32.5) Retained earnings 113.8 100.8 Accumulated other comprehensive income (55.2) (48.9) ---------- --------- Total stockholders' equity 299.2 295.6 ---------- --------- $ 703.9 $ 700.8 ========== ========= </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 ------------------------------------------------------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- (millions of dollars except per share) -------------------------------------- <S> <C> <C> <C> <C> Net sales $ 104.9 $ 105.0 $ 309.5 $ 303.4 Cost of goods sold 58.6 64.3 174.6 182.4 --------- --------- ---------- -------- Gross profit 46.3 40.7 134.9 121.0 Operating expenses Selling, general and admin. 15.0 9.5 40.3 32.2 Research and development 1.4 0.6 3.5 2.3 Amortization of intangible assets 14.8 15.3 43.9 46.7 --------- --------- ---------- -------- 31.2 25.4 87.7 81.2 --------- --------- ---------- -------- Operating income 15.1 15.3 47.2 39.8 Interest expense 5.8 5.6 15.7 18.5 Other expenses/(income) 0.7 1.8 1.3 (0.7) Interest income (0.4) (0.8) (1.9) (2.7) --------- --------- ---------- -------- Income before income taxes and minority interest 9.0 8.7 32.1 24.7 Minority interest 1.3 0.9 2.7 2.1 --------- --------- ---------- -------- Income before income taxes 7.7 7.8 29.4 22.6 Income taxes (note 3) 4.3 3.9 16.4 11.3 --------- --------- ---------- -------- Net income $ 3.4 $ 3.9 $ 13.0 $ 11.3 ========= ========= ========== ======== Earnings per share: Basic $ 0.29 $ 0.32 $ 1.10 $ 0.88 --------- --------- ---------- -------- Diluted $ 0.27 $ 0.31 $ 1.04 $ 0.86 --------- --------- ---------- -------- EBITDA $ 33.1 $ 33.2 $ 102.4 $ 101.1 --------- --------- ---------- -------- EBITDA per share $ 2.63 $ 2.65 $ 8.19 $ 7.68 --------- --------- ---------- -------- Weighted average shares outstanding Basic (note 2) (Thousands) 11,739 12,070 11,769 12,785 --------- --------- ---------- -------- Diluted (note 2) (Thousands) 12,563 12,512 12,515 13,168 --------- --------- ---------- -------- </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 ---------------------------- 2001 2000 ---- ---- (millions of dollars) <S> <C> <C> Cash Flows from Operating Activities Net income $ 13.0 $ 11.3 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 56.5 60.6 Deferred income taxes (1.1) 3.3 Other - 1.9 Changes in operating assets and liabilities: Accounts receivable and prepaid expenses 17.6 58.3 Inventories 14.1 0.9 Accounts payable and accrued expenses (16.2) (8.0) Deferred Income - 38.6 Income taxes and other current liabilities 6.9 (18.8) Other non-current assets and liabilities (5.4) (32.1) -------- --------- Net cash provided by operating activities 85.4 116.0 Cash Flows from Investing Activities Capital expenditures (3.6) (5.1) Business combinations, net of cash acquired (63.9) - Other - (2.3) -------- --------- Net cash used in investing activities (67.5) (7.4) Cash Flows from Financing Activities Short-term borrowings 14.5 - Repayment of long-term borrowings (15.0) (83.3) Repurchase of common stock (3.1) (12.3) Minority interest (0.7) 0.6 -------- --------- Net cash used in financing activities (4.3) (95.0) Effect of exchange rate changes on cash (7.5) (9.4) -------- --------- Net change in cash and cash equivalents 6.1 4.2 Cash and cash equivalents at beginning of period 37.7 37.2 -------- --------- Cash and cash equivalents at end of period $ 43.8 $ 41.4 ======== ========= </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 - - - $ 13.0 - $ 13.0 Net CTA* change - - - - $ (6.3) $ (6.3) Share buy-back - $ (3.1) - - - - ------ -------- -------- -------- ------ ---------- Balance at September 30, 2001 $ 0.1 $ (35.6) $ 276.1 $ 113.8 $(55.2) $ 58.6 ------ -------- -------- -------- ------ ---------- </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 September 30, 2001, the Company had authorised common stock of 40 million shares (December 31, 2000 - 40 million). Issued shares at September 30, 2001, were 14,777,250 (December 31, 2000 - 14,777,250) and treasury stock amounted to 3,043,620 (December 31, 2000 - 2,870,240). Movements in stock options in the third quarter, 2001 were as follows:- No. -- Outstanding at June 30, 2001 1,526,759 Granted - at zero cost 8,121 Lapsed (1,450) Exercised (5,200) --------- Outstanding at September 30, 2001 1,528,230 --------- 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:- Nine Months Ended September 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 March 5, 2001 the Company acquired the Gamlen group of companies from the MacDermid Group. The Gamlen group is headquartered in France with operations in Spain and Italy. The group manufactures and sells fuel additives and industrial cleaning products and has an annual turnover of $12 million. The business has become part of the Company's Petroleum Specialties business. 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 a turnover of $8 million and has formed the base for the Company's Performance Chemical business in the US. 7
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 additives for the treatment of heavy fuel 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 a turnover of $14 million. The CP Group and Bycosin AB Group acquisitions will form part of the Company's Petroleum Specialty business and are expected to have synergies with Octel Gamlen 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 a turnover of $8 million. The business has become part of the Company's Performance Chemicals business. On August 15, 2001 the Company acquired ProChem Chemicals Inc which is based in High Point, North Carolina. ProChem Chemicals Inc brings a wide range of process capability into new markets and has an annual turnover of $11 million. The business has become part of the Company's Performance Chemicals business. NOTE 5 - PLANT CLOSURE PROVISIONS (millions of dollars) 2001 2000 ---- ---- Balance at January 1 $35.6 $ 55.6 Exchange effect (1.0) (3.2) Acquired 1.4 - Charge for the period 5.7 2.4 Expenditure (7.1) (21.3) ----- ------ Balance at September 30 $34.6 $ 33.5 ===== ====== Expenditure of $3.2 million in the first nine 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 $3.9 million related to environmental remediation activities. The $1.4 million provision acquired relates to the Bycosin AB Group. NOTE 6 - LONG TERM MARKETING, SUPPLY, AND SERVICE AGREEMENT The Company through its wholly-owned Swiss subsidiary, Noofot GmbH, entered into a long-term marketing, supply and service agreement with Veritel Chemicals BV for the exclusive right to market and sell TEL sourced from Veritel in certain areas of the world, excluding primarily the United States and Russian Federation. Veritel is party to supply agreements pursuant to which it has the exclusive right to distribute outside of the Russian Federation TEL manufactured by Sintez. 8
The agreement is effective for an initial period from June 13, 2001 to December 31, 2010 but may be terminated at any time by the mutual written agreement of both the Company and Veritel. Under the agreement the Company may purchase specified volumes of TEL at specified purchase prices, and pay a quarterly marketing fee to Veritel amounting in aggregate to $90 million over the initial period of the agreement. The agreement will become fully operable on January 1, 2002. Until December 31, 2001 Octel will act on behalf of Veritel. Under this arrangement the Company will receive a commission on sales during this period which is disclosed within other income in the income statement. NOTE 7 - 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 adopted SFAS No. 141 as of July 1, 2001, and the impact of adoption did not 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. 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. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The standard is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact these three standards will have on its consolidated financial position and results of operations and is preparing a plan for implementation. 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE NINE MONTHS ENDED SEPTEMBER 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 August 15, 2001 the Company acquired ProChem Chemicals Inc which is based in High Point, North Carolina. ProChem Chemicals Inc brings a wide range of process capability into new markets. On October 29, 2001 the Company agreed a fully underwritten $250 million refinancing which will replace existing debt. Notice has been given to existing bondholders that the Company will be redeeming the existing bonds in December 2001. It is anticipated that this will reduce the Company's annual interest charge significantly. RESULTS OF OPERATIONS - --------------------- Operating income for the first nine months of 2001 and 2000 may be analyzed as follows:- (millions of dollars) Third Quarter Year to Date 2001 2000 2001 2000 Net Sales TEL $ 59.1 $ 79.9 $ 202.3 $ 215.6 Specialty Chemicals 45.8 25.1 107.2 87.8 -------- ------- -------- -------- Total $ 104.9 $ 105.0 $ 309.5 $ 303.4 -------- ------- -------- -------- Gross Profit TEL $ 30.2 $ 33.0 $ 97.7 $ 94.6 Specialty Chemicals 16.1 7.7 37.2 26.4 -------- ------- -------- -------- Total $ 46.3 $ 40.7 $ 134.9 $ 121.0 -------- ------- -------- -------- Operating Income TEL $ 14.5 $ 16.0 $ 49.8 $ 39.6 Specialty Chemicals 4.2 1.7 8.1 7.9 Corporate Costs (3.6) (2.4) (10.7) (7.7) -------- ------- -------- -------- Total $ 15.1 $ 15.3 $ 47.2 $ 39.8 -------- ------- -------- -------- 10
TEL sales in the third quarter 2001 were low following unusually high second quarter shipments. Total revenues were $59 million compared with $80 million in 2000. Gross profit in the quarter was 51% compared with 41% in 2000. TEL revenues for the nine months ended September 30, 2001 were $202 million compared with $216 million in 2000. Gross profit was 48% compared with 44% last year. Specialty Chemicals sales for the September quarter were $46 million compared with $25 million in 2000. Sales from companies acquired in 2001 contributed $14 million of the $21 million increase in sales. Specialty Chemicals gross profit in the quarter was 35% compared with 31% last year and operating income was $4.2 million compared with $1.7 million. LIQUIDITY AND FINANCIAL CONDITION - --------------------------------- Cash inflow from operating activities in the nine months ended September 30, 2001 was $85.4 million compared with $116.0 million for the same period in 2000. Excluding the one time $39 million receipt from Ethyl Corporation last year, cash generation for the nine months ended 30 September, 2001 has improved by $8 million. $63.9 million was spent in the nine months ended September 30, 2001 on acquisitions. The Company repaid $15 million of senior debt and raised $14.5 million short term debt to partly finance the acquisition of ProChem Chemicals Inc. At September 30, 2001 the Company's outstanding debt is $45 million bank debt and $150 million high yield bonds. 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. 11
PART II - OTHER INFORMATION - --------------------------- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits 20 Other Documents or Statements to Security Holders Officer's Certificate Notice of Redemption (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: November 13, 2001 By /s/ Dennis J Kerrison ----------------- Dennis J Kerrison President and Chief Executive Officer Date: November 13, 2001 By /s/ Alan G Jarvis ------------- Alan G Jarvis Chief Financial Officer EXHIBIT INDEX - ------------- Description - ----------- 20 Other Documents or Statements to Security Holders Officer's Certificate Notice of Redemption 12