<PAGE>
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, 1998
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.)
P.O. Box 17
Oil Sites Road
Ellesmere Port
South Wirral
United Kingdom L65 4HF
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 011-44-151-355-3611
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, 1998
1
<PAGE>
Common Stock, par value $0.01 14,762,417 Shares
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 FINANCIAL STATEMENTS
- ----------------------------
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
(Unaudited)
--------------- --------------------
(millions of dollars)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 42.0 $ 29.7
Accounts receivable, less allowance of $0.9
(1997 - $0.9) 132.0 169.8
Inventories
Finished products 48.7 35.7
Work in progress 5.4 10.2
Raw materials and supplies 23.8 32.9
----------- -------------
Total inventories 77.9 78.8
Prepaid expenses 6.2 4.4
----------- ------------
Total current assets 258.1 282.7
Property, plant and equipment 125.5 122.8
Less allowance for depreciation 20.1 16.8
----------- -------------
Net property, plant and equipment 105.4 106.0
Goodwill and other intangible assets 381.4 379.3
Other assets 61.9 64.9
----------- -------------
$806.8 $832.9
=========== =============
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
2
<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
(Unaudited)
-------------- --------------------
(millions of dollars)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 27.7 $ 40.0
Accrued expenses 9.3 9.0
Accrued income taxes 22.7 53.8
---------- ------------
Total current liabilities 59.7 102.8
Other liabilities (plant closure provision) 49.7 57.2
Deferred income taxes 20.1 20.1
Long-term debt 390.0 -
Great Lakes investment - 652.8
Stockholders' equity
Common stock, $0.01 par value,
authorised 40,000,000 shares,
issued 14,762,417 shares as of 6/30/98
(zero shares as of 12/31/97) 0.1 -
Additional paid-in capital 276.1 -
Retained earnings 9.0 -
Cumulative translation adjustment 2.1 -
---------- ------------
Total stockholders' equity 287.3 -
---------- ------------
$ 806.8 $ 832.9
========== ============
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
3
<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
(millions of dollars except per share data)
<S> <C> <C> <C> <C>
Net sales $ 115.6 $ 134.6 $ 238.8 $ 258.1
Cost of goods sold 59.9 69.0 123.7 133.4
--------- --------- --------- ----------
Gross profit 55.7 65.6 115.1 124.7
Operating expenses
Selling, general and admin. 8.8 9.9 17.8 19.9
Research and development 0.8 0.7 1.6 1.7
Amortization of intangible
assets 10.2 6.7 18.8 13.4
--------- --------- --------- ----------
19.8 17.3 38.2 35.0
--------- --------- --------- ----------
Income from operations 35.9 48.3 76.9 89.7
Interest expense 7.5 0.4 9.6 0.8
Interest income (0.7) (1.1) (1.3) (2.0)
Other expense (income) (0.2) (0.1) 1.1 (5.0)
--------- --------- --------- ----------
Income before income taxes
and minority interest 29.3 49.1 67.5 95.9
Minority interest - 7.0 - 13.6
--------- --------- --------- ----------
Income before income taxes 29.3 42.1 67.5 82.3
Income taxes 12.7 14.4 25.3 28.2
--------- --------- --------- ----------
Net income $ 16.6 $ 27.7 $ 42.2 $ 54.1
========= ========= ========= ==========
Basic and diluted earnings per
share $ 1.12 $ 1.88 $ 2.86 $ 3.66
--------- --------- --------- ----------
Shares used to compute basic earnings
per share (based on the number of
shares issued on May 26, 1998 and
still outstanding) 14,762,417 14,762,417 14,762,417 14,762,417
---------- ---------- ---------- ----------
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements.
4
<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30
-------
1998 1997
---- ----
(millions of dollars)
<S> <C> <C>
Operating Activities
Net income $ 42.2 $ 54.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 29.0 22.7
Changes in deferred and other items (0.1) 0.9
-------------- ------------
Cash provided by operations excluding changes
in working capital 71.1 77.7
Changes in working capital other than debt 52.1 49.0
Other noncurrent liabilities (plant closure provision) (8.4) (22.5)
-------------- ------------
Net cash provided by operating activities 114.8 104.2
Investing activities
Plant and equipment additions (8.1) (4.8)
Other (7.3) 6.8
-------------- ------------
Net cash used in investing activities (15.4) 2.0
Financing Activities
Net cash paid to Great Lakes (468.5) (109.1)
Receipt of long-term borrowings 430.0 -
Repayment of long-term borrowings (40.0) -
Fees relating to spin financing (11.0) -
Minority interest - (1.3)
-------------- ------------
Net cash used in financing activities (89.5) (110.4)
Effect of exchange rate changes on cash and cash
equivalents 2.4 (9.8)
-------------- ------------
Increase (decrease) in cash and cash equivalents 12.3 (14.0)
Cash and cash equivalents at beginning of period 29.7 54.9
-------------- ------------
Cash and cash equivalents at end of period $ 42.0 $ 40.9
============== ============
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
financial statements
5
<PAGE>
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 performance 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), other
petroleum additives and performance chemicals.
Until May 22, 1998, the Company was a wholly-owned subsidiary of Great Lakes
Chemical Corporation, a Delaware corporation ("Great Lakes"). On May 22, 1998,
Great Lakes consummated the spin off of its petroleum additives business by
distributing shares of the Company to the stockholders of Great Lakes in a ratio
of one Company share for every four Great Lakes shares (the "Spin Off"). In
connection with the Spin Off, the Company issued 14,762,417 shares of common
stock on May 26, 1998.
On April 27, 1998, the Company entered into a $300 million senior secured credit
facility (the "Credit Facility") and issued $150 million of Senior Notes due
2006 (the "Notes"). The Credit Facility consisted of a $280 million senior
secured term loan and a $20 million senior secured revolving credit facility.
The Credit Facility will mature on December 31, 2001, with the term loan
amortizing in quarterly instalments. The Company made its first repayment of
$40 million on the secured term loan on June 30, 1998. Loans under the Credit
Facility bear interest at LIBOR plus 1.75%. The interest rate will reduce to
LIBOR plus 1.25% when the outstanding balance under the Credit Facility has
reduced to $140 million. The Notes mature in 2006. The Company is required to
redeem $37.5 million principal amount of Notes in each of the years 2003, 2004
and 2005. The Credit Facility and the Notes contain substantial restrictions on
the Company's operations, including the ability to pay dividends. The proceeds
of the borrowings, along with available cash of $52.7 million, were used to
repay a $116.8 million inter-company loan used to purchase a 10.65% interest in
subsidiaries of the Company from Chevron Chemical Company and pay a special
dividend to Great Lakes of $350.9 million and other costs of $15 million related
to the Spin Off.
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
6
<PAGE>
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/A filed on May 6, 1998, in connection with the
Distribution. The results for the interim period are not necessarily indicative
of the results to be expected for the year due to the levels of borrowings
incurred by the Company on spin off.
NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
The following sets forth the Company's comprehensive income for the six months
to June 30, 1998 together with an analysis of the movement in stockholders'
equity during the same period:
(Millions)
Balance at December 31, 1997 $652.8
Comprehensive Income:
Net Income 42.2
Net change in cumulative translation account 9.5
------
Total comprehensive income 51.7
Other movement in stockholders' equity
Transfer of income tax liabilities to Great Lakes 56.0
Net amount paid to Great Lakes including exchange
effect of $4.7 (473.2)
---------
Balance at June 30 1998 $287.3
=========
NOTE 3 - INCOME TAXES
A reconciliation of the U.S. statutory income tax rate to the effective income
tax rate is as follows:
Effective income tax rate reconciliation: Six Months Ended
June 30
1998 1997
----- -----
Statutory US Federal tax rate 35.0% 35.0%
Increase (decrease) resulting from:
Foreign tax rate differential (3.9) (2.9)
Amortization of goodwill 5.9 2.7
Other 0.5 (0.5)
------ ------
37.5% 34.3%
====== ======
7
<PAGE>
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standard No. 128
"Earnings Per Share" for the first six months of 1998. The Statement
establishes standards for computing and presenting earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
The Company intends to adopt Statement of Financial Accounting Standard No. 131
"Disclosures about Segments of an Enterprise and Related Information" beginning
with the fourth quarter of 1998. The Statement establishes standards for
reporting information about operating segments including related disclosure
about products, geographic areas and major customers.
Statement of Financial Accounting Standard No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" was issued in December 1997
and is effective for the Company's 1998 fiscal year. The Statement revises
current disclosure requirements for employers' pension and other retiree
benefits.
Implementation of these standards will not affect the Company's financial
position or results of operations.
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. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is at present
evaluating the impact of SFAS 133 on its operations.
NOTE 5 - RELATED PARTY TRANSACTIONS
Prior to the Spin Off on May 22, 1998, sales of product between the Company and
Great Lakes were reported in the financial statements at estimated market value.
In the current half year and in the first half year of 1997, the value of sales
from the Company to Great Lakes amounted to $3.3 million and $3.8 million
respectively and the value of purchases by the Company from Great Lakes amounted
to $7.1 million and $8.3 million respectively.
Prior to the Spin Off, interest charges from Great Lakes, in respect of funding
provided primarily for acquisitions amounted to $3.4 million and $0.7 million in
the first half year of 1998 and 1997 respectively.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------
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 the decline in demand for TEL. In addition, increases in the cost
of the product, changes in the market in general and significant changes in new
product introduction could result in actual results varying from expectations.
RESULTS OF OPERATIONS
- ---------------------
Second quarter sales of $115.6 million were $19.0 million lower than the $134.6
recorded in 1997.
Six month sales of $238.8 million declined $19.3 million from the $258.1 million
reported in 1997, a reduction of 7% due predominantly to the continued decline
in demand for tetraethyl lead (TEL). Net income for the period was $42.2
million, or $2.86 per share, down $11.9 million from 1997. Comparative sales by
business are shown in the following table (millions):
<TABLE>
<CAPTION>
Second Quarter Year to Date
-------------- ------------
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
TEL $ 92.3 $110.6 (17)% $191.6 $208.0 (8)%
Petroleum Specialties 16.3 15.2 7 % 31.8 32.2 (1)%
Performance Chemicals 7.0 8.8 (20)% 15.4 17.9 (14)%
-------- ------ ------ ------
Total $115.6 $134.6 (14)% $238.8 $258.1 (7)%
======== ====== ====== ======
</TABLE>
9
<PAGE>
TEL sales in the six months ended June 30, 1998, decreased by $16.4 million (8%)
from the same period last year, attributable mainly to a reduction in sales
volumes (particularly wholesale) of $13.2 million and a reduction in average
prices of $3.6 million, partly offset by a foreign exchange gain of $0.4
million. Retail sales volumes in the first half year decreased 1% to 25.6
thousand metric tons from last year with increased sales to the Middle East,
South America and South Africa, offset by reductions in Eastern Europe, Asia,
the rest of Africa and Western Europe. Average retail sales prices of TEL
reduced by 2% from last year, mainly as a result of changes in customer mix.
Sales volumes of TEL on a wholesale basis in the six month period were 33% below
1997, due partly to reduced off-take by Ethyl Corporation and also due to the
phase-out of leaded gasoline in the Mexican market in mid-1997, which DuPont had
supplied with TEL purchased from the Company.
Petroleum Specialties (non-lead fuel additives) net sales at $31.8 million for
the six months to June declined $0.4 million (1%) from the same period in 1997.
Second quarter sales at $16.3 million have improved by 7% from last year
offsetting the first quarter's decline (due to the loss of a major customer in
early 1997).
Performance Chemicals net sales of $15.4 million for the first half year were
$2.5 million below 1997, mainly resulting from reduced sales of Octaquest(R) due
to a maintenance shutdown of the plant in preparation for the expansion of the
plant. Second half year sales are expected to improve to the previous levels.
Gross profit in the first half 1998 of $115.1 million was $9.6 million (8%)
below the same period last year. This reduction reflects the decline in TEL
wholesale sales and average retail sales price. As a percentage of sales, gross
profit in the first half 1998 was maintained at 48.2%, similar to last year's
48.3%. Both periods contained a plant closure charge of approximately $7
million and the second half of 1998 will contain a similar level of charge
consistent with previous years.
Selling, general and administrative expenses were $17.8 million for the first
six months of 1998, a reduction of 10.6% from the same period in 1997. Research
spending was maintained at $1.6 million for the half year. Since the beginning
of the year, the Company has reduced the head count by 115, an 8% reduction of
the workforce, giving annual payroll savings of $6 million.
Amortization of intangible assets at $18.8 million for the half year has
increased by $5.4 million due to an increase in goodwill following the
acquisition of the Chevron minority interest in the Company at the end of 1997.
The increased amortization resulted in income from operations reducing from 35%
of sales to 32% in 1998. Operating income prior to amortization was maintained
at 40% of sales.
10
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Interest expense at $9.6 million for the first half year 1998 is increased from
$0.8 million in 1997. Interest on the senior debt and notes effectively
commenced on May 1 resulting in a charge of $6 million to date. The remainder of
the interest in the first half was paid to Great Lakes on an inter-company loan
to fund the acquisition of the Chevron minority interest.
Interest income in the first half year decreased to $1.3 million from $2.0
million in 1997.
Other expense and income decreased from an income of $5.0 million in 1997 to an
expense of $1.1 million in the first half year 1998. This change was due to the
inclusion of a $4.8 million profit on exchange at the beginning of 1997 and a
$1.1 million loss on exchange in the first quarter 1998. Second quarter 1998 is
similar to 1997.
The minority interest in the Company had been acquired from Chevron during
fourth quarter 1997, resulting in an improvement of $13.6 million in profit
attributable to the Company in the first half year of 1998 compared with last
year.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Cash provided from operating activities during the 1998 first half 1998 amounted
to $114.8 million, $10.6 million more than the prior year amount. This
improvement was mainly due to a lower level of cash spending on rationalization
costs of $14.6 million during the first half year 1998, compared with $23.2
million during the same period last year, due to both personnel and plant
closure costs being lower.
Working capital levels were reduced significantly during the first half year of
1998, particularly accounts receivable, which were $37.8 million lower than
December 1997 due to lower sales in the second quarter and normal fluctuation in
customer sales patterns. Days outstanding of total accounts receivable at June
30, 1998 were reduced to 104 days, compared with 109 days at December 31, 1997,
reflecting these fluctuations. Total inventory levels were virtually unchanged
from the position at December 1997, but the level of raw material inventories
was reduced by $9.1 million (28%) since the year-end. Finished products
inventory levels, which are affected by bulk ships sailing patterns and
fluctuate accordingly, were increased from December 1997.
RECENT DEVELOPMENTS
- -------------------
On May 6, 1998, the Board of Directors of Great Lakes approved the spin-off of
its Petroleum Additives business, establishing the new independently traded
public company - Octel Corp. The Company created by the spin-off consists of
Great Lakes' tetraethyl lead antiknock compound (TEL) business, its non-lead
petroleum additive business and the performance chemical business operated by
the Company.
11
<PAGE>
To effect the spin-off, the Board of Directors of Great Lakes declared a
dividend payable to holders on record of Great Lakes Common Stock at the close
of business on the Record Date of one share of Octel Corp. Common Stock for
every four shares of Great Lakes Common Stock held on the Record Date. The
Distribution was effective on May 22, 1998.
As part of the spin-off, the Company raised $430 million through borrowings in
the public and private sectors which will mature or be repaid over eight years
and of which $40 million was repaid in June 1998.
Further details about the spin-off are contained in the Company's Form 10/A
filed with the Securities and Exchange Commission on May 6, 1998.
On July 21, 1998, the Company agreed in principle to establish a marketing
agreement with Ethyl Corporation for the sale and marketing of TEL anti-knock
compound. Given the increasing complexity and difficulties that the
accelerating decline of the TEL market has created, the Company considers it
essential that its sale and distribution continues to be handled safely and
levels of customer service are maintained. Through this marketing agreement,
the management of both the Company and Ethyl Corporation believe that
significant cost savings can be realised by efficient marketing and selling of
TEL products in certain areas of the world.
In order to diversify and expand its non-TEL product line, on June 30, 1998, the
Company entered into an agreement in principle with Veba Oel AG for the
acquisition of its petroleum specialties subsidiary, Chemische Betriebe Pluto
GmbH ("Pluto") for an undisclosed sum. Based in Herne, Germany, Pluto
manufactures and sells fuel additives mainly based on ferrocene, an iron-based
metal organic product used as a combustion improver and octane enhancer. Pluto
has annual sales of approximately $18 million. The Company and Pluto had
already entered into a joint marketing arrangement in 1997.
Management believes that both the above initiatives are compatible with the
Company's strategy for rationalizing the declining TEL market and diversifying
into specialty chemicals.
The Company's Board of Directors have approved a stock buy-back program,
authorizing the repurchase of up to $15 million of its stock, as allowed under
its debt covenants. Stock repurchase will commence when the Board of Directors
believes that it can return value to shareholders compatible with its initial
plans and obligations.
Part II OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
12
<PAGE>
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: July 31, 1998. By /s/ Dennis J Kerrison
-------------- -----------------
Dennis J Kerrison
President and
Chief Executive Officer
Date: July 31, 1998. By /s/ Alan G Jarvis
-------------- -------------
Alan G Jarvis
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEETS, STATEMENTS OF INCOME, AND STATEMENTS OF CASH FLOWS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 42,000
<SECURITIES> 0
<RECEIVABLES> 132,200
<ALLOWANCES> 900
<INVENTORY> 77,900
<CURRENT-ASSETS> 258,100
<PP&E> 125,500
<DEPRECIATION> 20,100
<TOTAL-ASSETS> 806,800
<CURRENT-LIABILITIES> 59,700
<BONDS> 390,000
0
0
<COMMON> 100
<OTHER-SE> 287,200
<TOTAL-LIABILITY-AND-EQUITY> 806,800
<SALES> 238,800
<TOTAL-REVENUES> 240,600
<CGS> 123,700
<TOTAL-COSTS> 161,900
<OTHER-EXPENSES> 1,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,600
<INCOME-PRETAX> 67,500
<INCOME-TAX> 25,300
<INCOME-CONTINUING> 42,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,200
<EPS-PRIMARY> 2.86
<EPS-DILUTED> 2.86
</TABLE>
