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 March 31, 2000 Commission file number 1-13879 OCTEL CORP. (Exact name of registrant as specified in its charter) DELAWARE 98-0181725 ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Global House Bailey Lane Manchester United Kingdom M90 4AA (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 011-44-161-498-8889 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X --------- No --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of the period covered by this report. Class Outstanding as of April 30, 2000 Common Stock, par value $0.01 13,151,376 Shares
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31 December 31 2000 1999 (Unaudited) ------------- ------------- (millions of dollars) <S> <C> <C> Assets Current assets Cash and cash equivalents $ 43.0 $ 37.2 Accounts receivable, less allowance of $2.2 (1999 - $2.2) 107.6 150.5 Inventories Finished products 42.7 34.8 Raw materials and work in progress 25.1 29.5 -------- -------- Total inventories 67.8 64.3 Prepaid expenses 2.8 3.8 -------- -------- Total current assets 221.2 255.8 Property, plant and equipment 142.6 143.9 Less accumulated depreciation 42.6 39.4 -------- -------- Net property, plant and equipment 100.0 104.5 Goodwill 367.4 379.2 Intangible asset 19.8 22.7 Deferred finance costs 11.6 12.7 Prepaid pension cost 73.0 72.2 Other assets 2.4 2.4 -------- -------- $ 795.4 $ 849.5 ======== ======== </TABLE> The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. -2-
OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) <TABLE> <CAPTION> March 31 December 31 2000 1999 (Unaudited) -------------- ------------- (millions of dollars) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 61.0 $ 78.5 Accrued expenses 18.0 17.0 Accrued income taxes 27.4 31.3 Current portion of long-term debt 68.3 80.0 ---------- ---------- Total current liabilities 174.7 206.8 Plant closure provisions (note 4) 50.9 55.6 Deferred income taxes 36.3 35.8 Long-term debt 220.0 233.3 Other liabilities 1.8 1.7 Minority interest 2.1 2.4 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) (19.8) (18.9) Retained earnings 85.7 82.5 Accumulated other comprehensive income (32.5) (25.9) ---------- ---------- Total stockholders' equity 309.6 313.9 ---------- ---------- $ 795.4 $ 849.5 ========== ========== </TABLE> The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. -3-
OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31 ------------------------------ 2000 1999 ---- ---- (millions of dollars except ------------------------------ per share data) ---------------- <S> <C> <C> Net sales $ 91.0 $ 128.0 Cost of goods sold 54.7 78.6 -------- --------- Gross profit 36.3 49.4 Operating expenses Selling, general and admin. 11.2 12.2 Research and development 0.9 1.1 Amortization of intangible assets 15.8 12.0 -------- --------- 27.9 25.3 -------- --------- Operating income 8.4 24.1 Interest expense 9.1 7.0 Other expenses/(income) (3.5) (2.1) Interest income (3.2) (0.4) -------- --------- Income before income taxes and minority interest 6.0 19.6 Minority interest 0.6 0.1 -------- --------- Income before income taxes 5.4 19.5 Income taxes (note 3) 2.2 9.1 -------- --------- Net income $ 3.2 $ 10.4 ========= ========= Earnings per share: Basic $ 0.24 $ 0.74 --------- --------- Diluted $ 0.24 $ 0.73 --------- --------- Weighted average shares outstanding (in thousands) Basic (note 2) 13,427 13,934 --------- --------- Diluted (note 2) 13,678 14,109 --------- --------- </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> Three Months Ended ------------------ March 31 ------------------------ 2000 1999 ---- ---- (millions of dollars) <S> <C> <C> Cash Flows from Operating Activities Net income $ 3.2 $ 10.4 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 20.6 16.8 Deferred income taxes 0.6 0.4 Other (0.2) - Changes in operating assets and liabilities: Accounts receivable and prepaid expenses 43.1 (18.0) Inventories (4.2) 3.7 Accounts payable and accrued expenses (15.2) 3.8 Income taxes and other current liabilities (3.7) 9.0 Other non-current assets and liabilities (5.4) (3.4) -------- -------- Net cash provided by operating activities 38.8 22.7 Cash Flows from Investing Activities Capital expenditures (1.7) (3.3) Other (0.8) (2.4) -------- -------- Net cash used in investing activities (2.5) (5.7) Cash Flows from Financing Activities Receipt of long-term borrowings - 6.0 Repayment of long-term borrowings (25.0) (15.0) Repurchase of common stock (0.9) - Minority interest (0.3) 0.7 -------- -------- Net cash used in financing activities (26.2) (8.3) Effect of exchange rate changes on cash (4.3) (3.9) -------- -------- Net change in cash and cash equivalents 5.8 4.8 Cash and cash equivalents at beginning of period 37.2 26.5 -------- -------- Cash and cash equivalents at end of period $ 43.0 $ 31.3 ======== ======== </TABLE> The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements. -5-
OCTEL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (millions of dollars) <TABLE> <CAPTION> Additional Total Common Treasury Paid-in Retained CTA* Comprehensive Stock Stock Capital Earnings Income <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2000 $0.1 $(18.9) $276.1 $82.5 $(25.9) $56.6 Net Income - - - 3.2 - 3.2 Net CTA* change - - - - (6.6) (6.6) Share buy-back - (0.9) - - - - ---------- ---------- ----------- ---------- --------- ------------- Balance at March 31, 2000 $0.1 $(19.8) $276.1 $85.7 $(32.5) 53.2 ---------- ---------- ----------- ---------- ---------- ------------- </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. Until May 22, 1998, the Company was a wholly-owned subsidiary of Great Lakes Chemical Corporation, a Delaware corporation (GLCC). On May 22, 1998, GLCC consummated the spin off of its petroleum additives business by distributing shares in the Company to the stockholders of GLCC in a ratio of one Company share for every four GLCC shares held (the spin off). In connection with the spin off, the Company issued 14,762,417 shares of common stock on May 26, 1998. A further 969 shares were subsequently issued in respect of late notified changes in GLCC stockholders at the record date of the spin off issue. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations. It is management's opinion, however, that all material adjustments (consisting of normal recurring accruals) have been made which are necessary for a fair financial statement presentation. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K filed on March 27, 2000. The results for the interim period are not necessarily indicative of the results to be expected for the full year. -6-
NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME At March 31, 2000, the Company had authorised common stock of 40 million shares (December 31, 1999 - 40 million). Issued shares at March 31, 2000, were 14,777,250 (December 31, 1999 - 14,766,386) and treasury stock amounted to 1,407,574 (December 31, 1999 - 1,314,864). During the first quarter 2000, 10,864 new shares were issued on the exercise of options under the Octel Corp. Time Restricted Stock Option Plan at zero cost. Basic earnings per share is based on the weighted average number of common shares outstanding during the period, while diluted earnings per share includes the effect of options and restricted stock that are dilutive and outstanding during the period. NOTE 3 - INCOME TAXES A reconciliation of the U.S. statutory income tax rate to the effective income tax rate is as follows: <TABLE> <CAPTION> Three Months Ended March 31 2000 1999 ---- ---- <S> <C> <C> Statutory US Federal tax rate 35.0% 35.0% Increase (decrease) resulting from: Foreign tax rate differential (10.7) (4.7) Amortization of goodwill 25.9 15.8 Other (9.8) 0.7 --------- --------- 40.4% 46.8% ========= ========= </TABLE> NOTE 4 - PLANT CLOSURE PROVISIONS <TABLE> <CAPTION> (millions of dollars) 2000 1999 ---- ---- <S> <C> <C> Balance at January 1 $55.6 $47.1 Exchange effect (0.9) (2.6) Charge for the period (0.7) 3.7 Expenditure (3.1) (8.1) --------- --------- Balance at March 31 $50.9 40.1 ========= ========= </TABLE> Expenditure of $2.0 million in the first three months of 2000 related to personnel severance costs incurred as part of the Company's ongoing program of downsizing and restructuring of operations to respond to declining demand for TEL. The balance of $1.1 million related to environmental remediation activities. NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. In June 1999, FASB issued FAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No.133". This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is at present evaluating the impact of SFAS 133 on its operations. -7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE THREE MONTHS ENDED MARCH 31, 2000 ------------------------------------------------------------- Some of the information presented in the following discussion constitutes forward-looking comments within the meaning of the Private Litigation Reform Act of 1995. Although the Company believes its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include, without limitation, the timing of orders received from customers, the gain or loss of significant customers, competition from other manufacturers and changes in the demand for the Company's products, including the rate of decline in demand for TEL. In addition, increases in the cost of product, changes in the market in general and significant changes in new product introduction could result in actual results varying from expectations. RECENT DEVELOPMENTS The Company continues to reduce TEL costs and capacity in line with the market decline in demand. The fourth phase of the UK voluntary severance program, announced in the fourth quarter 1999, will result in a planned headcount reduction of 323 by June 30, 2000. Of this total 108 employees have already left the Company. Further cost savings are expected to result from the outsourcing of sodium and ethyl chloride, intermediates which were formerly manufactured by the Company. On November 9, 1999 the acquisition of the OBOAdler group was completed. Effective January 1, 2000 OBOAdler entered into sales and marketing agreements with Ethyl Corporation similar to those already in place between Octel and Ethyl. On April 19, 2000 an amount of $39 million was received by OBOAdler as a prepayment for services provided under the marketing agreements. RESULTS OF OPERATIONS Operating income for the first quarter of 2000 and 1999 may be analyzed as follows:- (millions of dollars) <TABLE> <CAPTION> 2000 1999 TEL Specialty Total TEL Specialty Total Chemicals Chemicals <S> <C> <C> <C> <C> <C> <C> Net Sales $58.1 $32.9 $91.0 $98.4 $29.6 $128.0 ---------- -------------- ----------- ----------- ------------- ---------- Gross Profit 26.4 9.9 36.3 40.9 8.5 49.4 ---------- -------------- ----------- ----------- ------------- ---------- Operating Income $7.4 $3.8 $ 11.2 $24.9 $1.8 $26.7 ---------- -------------- ----------- ----------- ------------- ---------- </TABLE> Operating income noted above excludes corporate costs of $2.8 million in 2000 and $2.6 million in 1999. Comparatives have been restated for the separate disclosure of corporate costs. -8-
Overall TEL sales for the first quarter, 2000 were $40.3 million (41%) below 1999 levels. Sales volumes were 9,582 metric tons (mt) compared to 14,256 mt in the same period in 1999. The long term decline in demand and increased competition in the TEL market was compounded by short term factors including the timing of bulk deliveries and stocking up by customers in late 1999. Although the 2000 sales included OBOAdler sales, the net adverse volume variance was $32.2 million. Gross profit for the three months was 45.4% of net sales compared to 41.5% for the equivalent period in 1999. The effect of reduced net sales has been mitigated by cost savings, but the increase in margins mainly arose through rationalization costs, with $3.7 million charged in 1999 compared to a credit of $0.7 million in 2000. Specialty Chemicals sales for the first three months of 2000 were $3.3 million (11.1%) above 1999 levels, and gross profit on net sales was 30.0% compared to 28.7% in 1999, continuing the trend in this growth business in line with the company's strategy. Sales, general and administrative costs have decreased by $1.0 million (8.2%) compared to 1999 levels, reflecting the significant headcount reductions and cost reduction initiatives over the year. Amortization costs have increased from $12.0 million to $15.8 million, reflecting the incremental goodwill arising from the OBOAdler acquisition. Interest expense has increased from $7.0 million to $9.1 million reflecting the effect of the additional $100 million debt entered into in respect of the OBOAdler acquisition. LIQUIDITY AND FINANCIAL CONDITION - --------------------------------- Cash inflow from operating activities in the first quarter 2000 was $38.8 million, an increase of $16.1 million (71%) over the equivalent period in 1999. The most significant contribution is the $61.1 million movement in accounts receivable from an outflow of $18.0 million to an inflow of $43.1 million in 2000. Debtors reflected 100 days' sales, an improvement over the 104 days at December 31, 1999. In the first quarter 2000 further senior debt repayments of $25 million were made, bringing total debt repayments to $232 million, 83% of the original $280 million bank debt entered into in May 1998. The Company incurred an additional $100 million of senior debt in 1999 to fund the OBOAdler acquisition. At March 31, 2000 $90 million of this additional debt was outstanding. YEAR 2000 - --------- No significant date discontinuity problems arose during the transition from 1999 to 2000 or as a result of 2000 being a leap year. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------------ There has been no material change in the Company's exposure to market risk as described in the Form 10-K filed on March 27, 2000. -9-
PART II - OTHER INFORMATION - ---------------------------- ITEM 6 - Exhibits and reports on FORM 8-K - ------------------------------------------- (a) Exhibits 27 Consolidated Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K/A was filed on January 20, 2000 which provided audited financial statements and proforma financial statements related to the November 9, 1999 acquisition of OBOAdler Company Limited. -10-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorised. Date: May 10, 2000 By /s/ Dennis J Kerrison ----------------- Dennis J Kerrison President and Chief Executive Officer Date May 10, 2000 By /s/ Alan G Jarvis ------------- Alan G Jarvis Chief Financial Officer EXHIBIT INDEX Exhibit Description Page No. - ------- ----------- -------- 27 Consolidated Financial Data Schedule 12 -11-