<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 September 30, 2000
Commission file number 1-13879
OCTEL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 98-0181725
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(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, 2000
Common Stock, par value $0.01 11,968,716
<PAGE>
PART I - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
(Unaudited)
------------------ ------------
(millions of dollars)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 41.4 $ 37.2
Accounts receivable, less allowance
of $2.3 (1999 - $2.2) 83.9 150.5
Inventories
Finished products 40.6 34.8
Raw materials and work in progress 18.0 29.5
--------- --------
Total inventories 58.6 64.3
Prepaid expenses 3.5 3.8
--------- --------
Total current assets 187.4 255.8
Property, plant and equipment 111.3 143.9
Less accumulated depreciation 26.1 39.4
--------- --------
Net property, plant and equipment 85.2 104.5
Goodwill 339.8 379.2
Intangible asset 13.3 22.7
Deferred finance costs 9.1 12.7
Prepaid pension cost 72.3 72.2
Other assets 2.7 2.4
========= ========
$ 709.8 $ 849.5
========= ========
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
(Unaudited)
--------------------- -----------
(millions of dollars)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 53.5 $ 78.5
Accrued expenses 23.0 17.0
Accrued income taxes 10.6 31.3
Current portion of deferred income 13.1 -
Current portion of long-term debt 25.0 80.0
-------- --------
Total current liabilities 125.2 206.8
Plant closure provisions (note 4) 33.5 55.6
Deferred income taxes 38.8 35.8
Deferred income 15.7 -
Long-term debt 205.0 233.3
Other liabilities 2.1 1.7
Minority interest 3.0 2.4
Stockholders' equity
Common stock, $0.01 par value (note 2) 0.1 0.1
Additional paid-in capital 276.2 276.1
Treasury stock (note 2) (31.2) (18.9)
Retained earnings 93.8 82.5
Accumulated other comprehensive income (52.4) (25.9)
-------- --------
Total stockholders' equity 286.5 313.9
-------- --------
$ 709.8 $ 849.5
======== ========
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(millions of dollars except per share data)
<S> <C> <C> <C> <C>
Net sales $ 105.0 $ 126.9 $ 303.4 $ 384.7
Cost of goods sold 64.3 79.0 182.4 238.2
-------- --------- --------- ---------
Gross profit 40.7 47.9 121.0 146.5
Operating expenses
Selling, general and admin. 9.5 9.3 32.2 33.4
Research and development 0.6 1.0 2.3 3.0
Amortization of intangible assets 15.3 11.5 46.7 34.4
-------- --------- --------- ---------
25.4 21.8 81.2 70.8
-------- --------- --------- ---------
Operating income 15.3 26.1 39.8 75.7
Interest expense 5.6 5.7 18.5 19.0
Other expenses/(income) 1.8 3.3 (0.7) (0.3)
Interest income (0.8) (0.7) (2.7) (2.5)
-------- --------- --------- ---------
Income before income taxes and
minority interest 8.7 17.8 24.7 59.5
Minority interest 0.9 0.7 2.1 0.9
-------- --------- --------- ---------
Income before income taxes 7.8 17.1 22.6 58.6
Income taxes (note 3) 3.9 4.9 11.3 24.2
-------- --------- --------- ---------
Net income $ 3.9 $ 12.2 $ 11.3 $ 34.4
======== ========= ========= =========
Earnings per share:
Basic $ 0.32 $ 0.88 $ 0.88 $ 2.48
-------- --------- --------- ---------
Diluted $ 0.31 $ 0.86 $ 0.86 $ 2.46
-------- --------- --------- ---------
Weighted average shares
outstanding (in thousands)
Basic (note 2) 12,070 13,863 12,785 13,895
-------- --------- --------- ---------
Diluted (note 2) 12,512 14,199 13,168 13,992
-------- --------- --------- ---------
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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<PAGE>
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30
----------------------------
2000 1999
---- ----
(millions of dollars)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 11.3 $ 34.4
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 60.6 48.3
Deferred income taxes 3.3 2.0
Other 1.9 -
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses 58.3 (34.0)
Inventories 0.9 24.9
Accounts payable and accrued expenses (8.0) 16.0
Deferred income 38.6 -
Income taxes and other current liabilities (18.8) (4.2)
Other non-current assets and liabilities (32.1) (15.2)
----------- -----------
Net cash provided by operating activities 116.0 72.2
Cash Flows from Investing Activities
Capital expenditures (5.1) (6.9)
Other (2.3) (13.9)
----------- -----------
Net cash used in investing activities (7.4) (20.8)
Cash Flows from Financing Activities
Receipt of long-term borrowings - 16.0
Repayment of long-term borrowings (83.3) (62.7)
Repurchase of common stock (12.3) (1.0)
Minority interest 0.6 1.4
----------- -----------
Net cash used in financing activities (95.0) (46.3)
Effect of exchange rate changes on cash (9.4) (5.8)
----------- -----------
Net change in cash and cash equivalents 4.2 (0.7)
Cash and cash equivalents at beginning of period 37.2 26.5
----------- -----------
Cash and cash equivalents at end of period $ 41.4 $ 25.8
=========== ===========
</TABLE>
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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<PAGE>
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 - - - 11.3 - 11.3
Net CTA* change - - - - (26.5) (26.5)
Share issue - - 0.1 - - -
Share buy-back - (12.3) - - - -
----------- ----------- ------------ ---------- ---------- -----------------
Balance at
September 30, 2000 $ 0.1 $ (31.2) $ 276.2 $ 93.8 $ (52.4) $ 41.4
----------- ----------- ------------ ---------- ---------- -----------------
</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 27, 2000.
The results for the interim period are not necessarily indicative of the results
to be expected for the full year.
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<PAGE>
NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
At September 30, 2000, the Company had authorised common stock of 40 million
shares (December 31, 1999 - 40 million). Issued shares at September 30, 2000,
were 14,777,250 (December 31, 1999 - 14,766,386) and treasury stock amounted to
2,754,134 (December 31, 1999 - 1,314,864). In March 2000, 10,864 new shares were
issued on the exercise of options under the Octel Corp. Time Restricted Stock
Option Plan at zero cost.
Movements in stock options in the third quarter, 2000 were as follows:-
<TABLE>
<CAPTION>
No.
---
<S> <C>
Outstanding at June 30, 2000 1,484,853
Lapsed (4,738)
-----------
Outstanding at September 30, 2000 1,480,115
-----------
</TABLE>
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>
Nine Months Ended
September 30
2000 1999
---- ----
<S> <C> <C>
Statutory US Federal tax rate 35.0% 35.0%
Increase (decrease) resulting from:
Foreign tax rate differential (36.0) (4.7)
Amortization of goodwill 49.9 15.8
Other 1.1 (4.8)
------ ------
50.0% 41.3%
====== ======
</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 (3.2) (2.4)
Charge for the period 2.4 9.8
Expenditure (21.3) (23.6)
------ ------
Balance at September 30 $ 33.5 30.9
====== ======
</TABLE>
Expenditure of $17.9 million in the first nine 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 $3.4 million related to environmental remediation
activities.
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<PAGE>
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 SFAS No. 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. In June 2000, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 138 ("SFAS No. 138"), "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment of FASB Statement No. 133". SFAS No.
138 amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. The Company is required
to adopt SFAS No. 138 concurrently with SFAS No. 133.
The Company has limited involvement with derivative financial instruments and
does not trade them. The Company does use derivatives to manage defined
exposures on interest rates, foreign exchange and commodity prices in the metals
market. The Company is at present evaluating the impact of SFAS No. 133 on these
operations and expects to be able to comply with the requirements of SFAS No.
133 by quarter one, 2001.
On December 3, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". Management believes that compliance with SAB No. 101 will not have
any material impact on the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 has
been extended. The planned reduction in headcount is 386, of which 312 have
already left. The remainder should leave by the end of the year. In the June
quarter the Company began the outsourcing of sodium and ethyl chloride,
intermediates which were formerly manufactured in-house.
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 (Ethyl) similar to those
-8-
<PAGE>
already in place between Octel and Ethyl. On April 19, 2000 an amount of $39
million was received by OBOAdler from Ethyl as a prepayment for services
provided under the marketing agreements.
RESULTS OF OPERATIONS
---------------------
Operating income for the third quarter of 2000 and 1999 may be analyzed as
follows:-
(millions of dollars)
<TABLE>
<CAPTION>
Third Quarter Year to date
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net Sales
TEL $ 79.9 $ 98.0 $215.6 $297.5
Specialty Chemicals 25.1 28.9 87.8 87.2
------ ------ ------ ------
Total $105.0 $126.9 $303.4 $384.7
------ ------ ------ ------
Gross Profit
TEL $ 33.0 $ 39.2 $ 94.6 $121.3
Specialty Chemicals 7.7 8.7 26.4 25.2
------ ------ ------ ------
Total $ 40.7 $ 47.9 $121.0 $146.5
------ ------ ------ ------
Operating Income
TEL $ 16.0 $ 24.2 $ 39.6 $ 76.5
Specialty Chemicals 1.7 3.1 7.9 6.4
Corporate Costs (2.4) (1.2) (7.7) (7.2)
------ ------ ------ ------
Total $ 15.3 $ 26.1 $ 39.8 $ 75.7
------ ------ ------ ------
</TABLE>
Operating income comparatives have been restated to reflect the separate
disclosure of corporate costs.
Specialty Chemicals sales of $25.1 million in the third quarter, 2000 were lower
than in the previous two quarters due to the cyclical nature of certain sectors
of the market and to lower sales prices in the detergent additive business.
Third quarter 2000 sales were down by 13% compared with the same period last
year but gross profit improved to 30.6% of sales compared with 30.1% last year.
Sales for the nine months ended September 30, 2000 were 1% above 1999 levels.
Gross profit as a percentage of sales increased from 28.9% to 30.1% and
operating income from 7.3% to 9.0%, reflecting year on year progress in the
Specialty Chemicals business.
TEL sales volumes for the nine months ended September 30, 2000 were 24% below
1999 levels, reflecting the expected decline in the market. Gross profit was
43.9% of sales compared with 40.8% in 1999. This reflects the significant effect
of cost reduction initiatives, offset by a charge of $5 million in the third
quarter, 2000 for the costs of further planned workforce reductions agreed with
the trade unions.
Operating expenses for the nine months ended September 30, 2000 were $81.2
million compared to $70.8 million in 1999. This reflects amortization charges,
which increased by $12.3 million, mainly due to the amortization in 2000 of
goodwill and other intangibles arising on the OBOAdler acquisition in November
1999.
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<PAGE>
LIQUIDITY AND FINANCIAL CONDITION
---------------------------------
Cash generated by operating activities in the third quarter, 2000 was $13.5
million, mainly due to an improvement in receivables. There were 74 days sales
outstanding in receivables at September 30, 2000 compared with 83 days at June
30, 2000. The cumulative operating cash generation of $116.0 million includes a
$38.6 million prepayment received from Ethyl in the second quarter in relation
to the OBOAdler marketing agreements.
In the third quarter, 2000 $25 million of debt was repaid. This was the final
instalment in respect of the $280 million bank debt incurred when the Company
was spun off from Great Lakes Chemical Corporation (NYSE:GLK) in May 1998, the
repayment being completed 15 months ahead of schedule.
The Company's stock buy back program has continued, with the $1 million
expenditure in the third quarter taking the cumulative buy back for the nine
month period to $12.3 million. Under the 2000 buy back program the Company is
authorised to spend a further $10.6 million this year.
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.
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
On July 21, 2000 the Company filed a Report on Form 8-K relating to an
amendment to its Rights Plan and a Stand-Still Agreement with the
Baupost Group, LLC.
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<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: November 9, 2000 By /s/ Dennis J Kerrison
-----------------
Dennis J Kerrison
President and
Chief Executive Officer
Date November 9, 2000 By /s/ Alan G Jarvis
-------------
Alan G Jarvis
Chief Financial Officer
EXHIBIT INDEX
Exhibit Description Page No.
------- ----------- --------
27 Consolidated Financial Data Schedule 12
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