OCTEL
EMERGING
[LOGO] OCTEL
Octel Corp.
2000 Annual Report
Octel is a global chemical company specializing in high performance fuel
additives and special and effect chemicals. Our strategy is to manage profitably
and responsibly the decline in world demand for our major product - tetraethyl
lead (TEL) in gasoline - though competitive differentiation and stringent
product stewardship, to expand our Petroleum Specialties and Performance
Chemicals businesses organically through product innovation and focus on
customer needs, and to seek synergistic growth opportunities through joint
ventures, alliances, collaborative arrangements and acquisitions.
Now in its third year of reinvention, Octel is emerging as a powerful player in
the specialty chemical industry. Capitalizing on our company's strong niche
position and excellent technology base, we are maximizing cash flow from the
declining TEL business and growing our two specialty businesses.
This kind of juggling act -- simultaneously shifting our operational focus,
evolving our corporate identity, and building shareholder confidence --requires
a dextrous leadership team and a forward-looking strategic vision.
Octel has all of this.
The proof?
OCTEL IS...
01
[PICTURE]
INNOVATING
For us, the most highly advanced technology is merely a starting point: a
springboard to creating synergies in science, business, and industry. The
initiative and innovation of our people result in better products, more
sophisticated customer solutions, and expanded investment opportunities --
leading ultimately to the development of even more highly advanced technologies.
02
[PICTURE]
CREATING
Octel's central mission is to create customized solutions to customer problems.
With every well-solved customer problem in turn creating a loyal and trusting
customer base, we are increasingly admired for balancing measured risk-taking
with enthusiastic inventiveness.
RESEARCHING
Octel's proprietary technology platforms are the product of cutting-edge
scientific research and our focus on customer needs. Our research of new
molecules based on environmentally friendly backbones, for example, has led to a
promising vista of new market applications for the Octaquest(R) family of
products, most notably in the paper, photography, and personal care sectors.
Dedicated application research capabilities support us in anticipating new
markets, interacting with technological advances, surpassing regulatory demands,
and meeting environmental challenges.
[PICTURE]
03
[PICTURE]
BUILDING
To continue building on our key strengths in technology and our core
competencies in specialty chemicals, we have focused our business strategy,
sharpened our internal organization, grown employee participation, and
consolidated management teams and strategic business units. In leveraging our
"customer" skills in problem-solving and innovating-- bringing them to bear on
the workings of our own business structure -- we are enhancing our market
reputation and increasing shareholder value.
PARTNERING
When technology platforms are as inventive and proprietary as ours, marketing
synergies become easy. Octel technology stands behind our ability to forge
dynamic business partnerships, and supports our creation of diverse custom
solutions for industries around the world. For example, our collaborative
venture with Hi-Mar, our partnership with Valvemaster(R), our marketing alliance
with Ethyl, and our joint venture Octel Starreon, all create valuable "win/win"
situations that increase our visibility and position us for an even longer
global reach.
[PICTURE]
04
[PICTURES]
RESTRUCTURING
Reinventing Octel as a specialty chemical business has required us to
restructure our organization to support new goals. Today, our global Strategic
Business Units (SBUs) encourage accelerated growth in far-flung places around
the world. Asia Pacific initiatives in Singapore, India and China, for example,
anchor our global industry position and expand our company's borders.
[PICTURE]
TARGETING
Octel is all about targeting opportunities. That's why each of our acquisitions
and alliances in both Performance Chemicals and Petroleum Specialties bolsters a
key technology platform or core market. It's why we can extend the global reach
of each of our specifically chosen joint venture partners. And it's why high-
growth, high-margin specialties have become our strategic bull's-eye.
05
[PICTURE]
MINIMIZING
IMPACT
Blending customers' needs for competitive market advantage with a strong sense
of environmental responsibility, we are continuing to develop, manufacture, and
market a broad range of diesel and gasoline performance additives and
biodegradable sequestrants that fuel profit while simultaneously minimizing our
environmental footprint. From decommissioning outdated plants to proactively
improving our Ellesmere Port plant's emissions record, we have systematically
taken charge through our corporate product stewardship program, leveraged core
competencies in chemical cleanup, and made Responsible Care and sustainable
development the creed by which we work and live.
06
[PICTURE]
MAXIMIZING
IMPACT
Maximizing profit and shareholder value are at the heart of our business
strategy. We're realizing these objectives with a steady series of financial and
restructuring decisions. Cash generation has been good, supported by internal
cost controls and rewarded by early debt repayment. Our Ellesmere Port 2001
restructuring plan is helping to maintain margins in the TEL business. And
through our Leadership Program, we are optimizing the key competencies and
attributes of our workforce, aligning all our objectives towards maximum
performance.
07
EMERGING.
Today, halfway through a five-year plan of reinvention, Octel is well on the way
to its goal of becoming a dynamic specialty chemical company. Despite the
accelerating decline in demand for TEL, we are meeting consistently our promise
to deliver performance on track. Our dedicated workforce is growing ever more
focused and inspired. And our inventive products are venturing into new market
landscapes of immeasurable opportunity.
While there is much to do, we are firmly on course.
Octel is, truly, emerging.
08
Dear Shareholders When Octel was first spun off from Great Lakes in May 1998,
we spelled out an ambitious and imaginative five-year strategy. At the heart of
our original goal was the idea of reinventing ourselves as a profitable
specialty chemical company. Today we have passed the halfway point in
implementing this forward-looking plan. As we take stock of our efforts, we look
back with some pride at our accomplishments, and greet the future with
confidence.
Octel's efforts in 2000 clearly demonstrate the benefits of taking early
action to support core objectives. Throughout the year we continued to
profitably manage our decreasing TEL business, even in the face of the TEL
market's rapid and unanticipated decline (~25%). Our company's alliance with
Ethyl and our purchase of OBOAdler have allowed us to strategically manage our
cost base and maintain our margins.
09
[PICTURE]
As the results show, Octel's Specialty Chemicals business continued to meet
and exceed expectations. While our Petroleum Specialties fuel additives business
remained robust and continued vigorously to expand its activities both
geographically and technically, the Performance Chemicals unit had a relatively
quiet year. In this area, we are adopting a more aggressive growth stance in
order to broaden our business base. We are being proactive in addressing this
issue, and expect to make substantial progress in 2001.
Despite encountering inevitable market setbacks, we continue to prosper
even beyond expectations. In terms of cash generation, our steady focus has
again borne fruit: in September 2000, we paid the final portion of original
senior debt -- and made this payment fifteen months early. We are ever aware
that our company's current and prospective success is largely due to the immense
dedication and ability of our employees. To them, we owe a particular debt of
gratitude and appreciation.
/s/ Dennis J. Kerrison /s/ Dr. Robert Bew
Dennis J. Kerrison Dr. Robert E. Bew
President and Chief Executive Officer Chairman
10
Financial Highlights
(dollar amounts in millions except per share figures) 2000 1999 1998 1997 1996
Summary of earnings
Net sales $ 422.4 $ 516.8 $ 465.0 $ 539.1 $ 597.4
Operating income 58.7 92.3 134.9 194.7 226.1
Income before income taxes and minority 39.3 77.2 111.9 198.7 221.7
Minority interest 3.6 1.9 -- 24.3 29.6
Income taxes 17.4 32.7 41.5 56.7 63.8
Net income 18.3 42.6 70.4 117.7 128.3
EBITDA 140.2 167.6 194.1 243.8 262.7
Cash generated by operating activities 134.0 108.7 238.3 167.5 127.8
Financial position at year end
Working capital 87.2 129.0 106.7 179.9 216.1
Total assets 700.8 849.5 806.7 832.9 841.0
Long-term debt (including current portion) 210.0 313.3 300.8 -- --
GLCC investment -- -- -- 652.8 584.6
Stockholders' equity 295.6 313.9 301.1 -- --
Financial ratios
Net income as a percent to sales 4.3 8.2 15.1 21.8 21.5
Effective income tax rate 48.8 43.4 37.1 32.5 33.2
Current ratio 1.4 1.2 1.2 2.7 2.7
Share data
Earnings per share
-- Basic 1.46 3.08 4.85 7.84 8.08
-- Fully diluted 1.41 3.05 4.85 7.84 8.08
EBITDA per share
-- Basic 11.14 12.12 13.37 16.25 16.52
-- Fully diluted 10.78 11.99 13.37 16.25 16.52
Shares outstanding (basic, thousands)
-- At year end 11,907 13,451 13,934 15,000 15,900
-- Average during year 12,581 13,827 14,514 15,000 15,900
Stock price -- High 12.9 15.3 22.7 -- --
-- Low 7.8 9.7 11.6 -- --
-- At year end 11.5 10.4 13.9 -- --
Accounts details prior to the spin-off (May 22, 1998) are derived from GLCC
historic data.
11
2000 Highlights
Corporate
. Continued strong cash generation -- $134 million
. Original bank debt repaid 15 months early and prepayment made on new bank
debt
. 20% of company stock repurchased since spin-off
. New records set for safety at UK and German manufacturing sites
. Achievement of RoSPA Gold Award for Safety at UK site
. Emissions reduction at UK site best in industry -- now 15% of 1990 levels
Lead Alkyls (TEL)
. Successful accomplishment of EP2001 reengineering program reducing
workforce by 40%
. Combined cost reduction measures maintain high margin in difficult market
. Reinforcement of Product Stewardship program and focused development of
Octel Environmental business
Specialty Chemicals
. Continued excellent growth in several key areas to exceed 9% OPROS
. New product sales, including first international Octafoam(TM) sales
. Further five-year contract for Octaquest(R) with major detergent
manufacturer
12
ACCOUNTING
FINANCIAL CONTENTS
14 Management's Discussion and Analysis of 25 Consolidated Statements of Stockholders' Equity
Financial Condition and Results of
Operations 26 Notes on Consolidated Financial Statements
20 Management's Statement of Responsibility 40 Quarterly Summary (Unaudited)
for Financial Statements
41 Board of Directors
21 Report of Independent Accountants
41 Corporate Officers
22 Consolidated Statements of Income
42 Investor Information
23 Consolidated Balance Sheets
24 Consolidated Statements of Cash Flows
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following discussion is based upon the separate financial statements of the
Company, which present the Company's results of operations, financial position
and cash flows. Insofar as they relate to the periods prior to May 22, 1998 when
the spin-off of Octel Corp. from the Great Lakes Chemical Corporation group
(GLCC) was consummated, these financial statements include the assets,
liabilities, income and expenses that related to the Octel businesses as they
were operated as a part of the Petroleum Additives Business Unit of GLCC, and
the Company's statement of income includes all the related costs of doing
business, including charges for the use of facilities and for employee benefits.
The financial information included herein, however, may not necessarily reflect
the results of operations, financial position and cash flows that would have
been achieved if the Company had been an independent company during the periods
presented.
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.
The Company has two businesses -- Lead Alkyls (TEL) and Specialty Chemicals. The
Company's strategy is to maximize cash generation from the declining TEL
business by consolidating the Company's place in the market and by rigorous
management of the cost base. Funds generated by the TEL business will be used to
pay down debt but will also be invested in growing Petroleum Specialties and
Performance Chemicals, which together comprise the Specialty Chemicals business.
Investment in these areas will be to stimulate organic growth in existing areas
or to grow by acquisition of new businesses.
From 1989 to 1995, the Company was able to substantially offset the financial
effects of the declining demand for TEL through higher TEL pricing. The
magnitude of these price increases reflected the cost-effectiveness of TEL as an
octane enhancer as well as the high cost of converting refineries to produce
higher octane grades of fuel. More recently, however, as competition has
intensified due to the decline in demand for TEL, it has been difficult for the
Company to secure general price increases. The Company expects the annual rate
of decline in the TEL market to be 15% from 2001.
As world demand for TEL has declined, the Company has been reducing its cost
base in an attempt to maintain its margins. In 1996, the Company ceased
production at its Italian and French manufacturing facilities. The closure of
the Italian and French facilities reduced the Company's workforce by 252. Until
the acquisition of OBOAdler, all of the Company's current TEL requirements were
produced at its sole remaining TEL manufacturing facility which is located in
Ellesmere Port in the United Kingdom. In December 1998, one of the three TEL
buildings on this site was closed and, in October 2000, a further TEL building
was closed. Since 1996, the Company's cost-reduction efforts and
operating-improvement programs in the UK have reduced the workforce by 1,252
people.
14
As at December 31, 2000, the total UK workforce was reduced by 70% from the
1,800 employed in June 1996. All this has been achieved through voluntary
severance. The Company will continue to downsize its manufacturing and operating
cost base and restructure its operations as the TEL market continues to decline.
Recent Developments
On March 1, 1999, the Company formed a joint venture between its subsidiary,
Octel America Inc., and Starreon Corporation. The joint venture, Octel Starreon
LLC, combines the finished fuel additives businesses of both companies in the
USA and Canada but excludes TEL.
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 already in place between Octel
and Ethyl. An amount of $39 million was received by OBOAdler as a prepayment for
services provided under the marketing agreements.
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, was extended during fiscal 2000 and
completed in December 2000. The total headcount reduction under this phase was
387. In the second quarter 2000, the company began the outsourcing of sodium and
ethyl chloride, intermediates which were formerly manufactured in-house.
Results of Operations -- Fiscal 2000 Compared to Fiscal 1999
The results of operations for fiscal 2000 and 1999 are analyzed by business unit
in the following table:
Increase/
(dollars in millions) 2000 1999 (Decrease)
Net sales:
TEL $ 300.6 71% $ 396.1 77% (24)%
Specialty Chemicals 121.8 29% 120.7 23% 1%
---------------------------------------------------
$ 422.4 100% $ 516.8 100% (18)%
---------------------------------------------------
Gross profit:
TEL $ 129.1 78% $ 155.5 82% (17)%
Specialty Chemicals 35.7 22% 34.5 18% 3%
---------------------------------------------------
$ 164.8 100% $ 190.0 100% (13)%
---------------------------------------------------
Operating income:
TEL $ 58.6 100% $ 91.7 99% (36)%
Specialty Chemicals 11.3 19% 8.8 10% 28%
Corporate (11.2) (19)% (8.2) (9)% (36)%
---------------------------------------------------
$ 58.7 100% $ 92.3 100% (36)%
---------------------------------------------------
Comparatives have been restated to reflect the reallocations described in Note 2
to the financial statements. In fiscal 2000 those costs attributable to the
administration of the Octel group overall have been identified separately to
allow greater clarity in the comparison of the operating income of the TEL and
Specialty Chemicals businesses.
15
TEL sales revenues fell by 24% compared with the prior year. The overall volume
decline in the market was some 25%, but this was offset by the inclusion of a
full year of OBOAdler's trading results compared with two months following its
acquisition in November 1999. Cost-reduction programs continue to be implemented
and gross margin as a percentage of net sales was 43% compared with 39% in the
prior year.
Specialty Chemicals sales were 1% above 1999 levels despite lower prices in the
detergent additive business. Gross margin improved from 28% to 29% of net sales.
Operating income increased by 28% compared with the prior year, and represents
9% of net sales compared with 7% in 1999.
Sales, general and administrative costs reduced by 8% to $41.5 million,
reflecting the impact of cost-cutting programs. Amortization increased by $12.6
million to $61.5 million, mainly because of a full-year charge in 2000 of the
goodwill and intangible asset arising from the OBOAdler acquisition in November
1999. Interest expense fell by $3.0 million to $22.9 million, reflecting the
repayment of $103.3 million of debt during the year.
The effective tax rate for the year was 49% compared with 43% in 1999. The
effect of the OBOAdler acquisition was to reduce the overall tax rate but to
generate disallowable goodwill amortization which more than offset this.
Results of Operations -- Fiscal 1999 Compared to Fiscal 1998
The results of operations for fiscal 1999 and 1998 are analyzed by business unit
in the following table:
Increase/
(dollars in millions) 1999 1998 (Decrease)
Net sales:
TEL $ 396.1 77% $ 383.7 82% 3%
Specialty Chemicals 120.7 23% 81.3 18% 48%
----------------------------------------------------
$ 516.8 100% $ 465.0 100% 11%
----------------------------------------------------
Gross profit:
TEL $ 155.5 82% $ 203.1 92% (23)%
Specialty Chemicals 34.5 18% 17.6 8% 96%
----------------------------------------------------
$ 190.0 100% $ 220.7 100% (14)%
----------------------------------------------------
Operating income:
TEL $ 91.7 99% $ 143.2 106% (36)%
Specialty Chemicals 8.8 10% (3.6) (3)% 344%
Corporate (8.2) (9)% (4.7) (3)% (74)%
----------------------------------------------------
$ 92.3 100% $ 134.9 100% (32)%
----------------------------------------------------
Comparatives have been restated to reflect the reallocations described in Note 2
to the financial statements.
16
The overall decline in the TEL market continued, but the effect on Octel was
offset by the effect of a full-year's operation of the Ethyl marketing agreement
in 1999 (as opposed to 3 months in 1998) and the inclusion of two months of
OBOAdler sales. Total volumes fell by 4,299 metric tonnes (mt) from 64,000 mt to
59,701 mt, a decrease of 7%. Within this overall decrease, however, there was a
favorable sales mix variance. Lower-value wholesale volumes fell by 12,040 mt to
1,360 mt, whereas retail volumes rose by 7,741 mt to 58,340 mt. This, combined
with an average 1% increase in retail prices over 1998 levels, resulted in an
increase of 3% in the overall value of net sales from 1998 to 1999.
TEL gross profit in 1999 was 39% of net sales compared with 53% in 1998. This
partly reflects the full-year's marketing agreement contribution payable to
Ethyl, but cost of goods sold was also increased by rationalisation costs in
connection with the 1999 UK severance program. Total rationalisation charges in
1999 were $24 million compared with $16 million in 1998.
Specialty Chemicals net sales saw growth of 48% over 1998 levels and an increase
in gross profit from 22% to 29% of net sales. Two-thirds of the sales increase
arose from acquisitions in late 1998 and early 1999 (Octel Deutschland and Octel
Starreon) and the remainder was organic growth. This resulted in the operating
loss of $4.7 million in 1998 becoming an operating income of $6.9 million in
1999.
The overall increase in sales, general and administrative costs from $40.1
million to $44.9 million arose due to the inclusion of new acquisitions -- Octel
Deutschland, Octel Starreon and OBOAdler.
Amortization charges rose by $6.3 million (15%) to $48.9 million, due to charges
on goodwill relating to new acquisitions and to the effect of a full-year's
charge on deferred finance costs arising from the spin-off. Other income relates
mainly to exchange gains, $9.2 million in 1999 compared with $2.5 million in
1998.
The effective tax rate has increased from 37.1% to 43.4%, mainly due to
increased amortization on overseas goodwill which is not tax deductible. The tax
charge is net of $3.2 million income arising from a refund of Italian
withholding tax.
Liquidity and Financial Condition
Cash provided by operating activities was $134.0 million compared with $108.7
million in 1999. EBITDA fell from $167.6 million to $140.2 million, but working
capital management reduced the effect of this on cash generation, notably in
accounts receivable, which reduced by $51.9 million, reflecting an improvement
from 104 to 73 days' sales. Expenditure in respect of plant closure provisions
was consistent with prior year, with costs of $27.0 million and $26.3 million,
respectively. A cash inflow of $38.6 million arose from receipt of the
prepayment by Ethyl for services related to the new OBOAdler sales and marketing
agreements.
Total debt repayments in fiscal 2000 were $103.3 million. This included the
repayment of the final installment of the $280 million bank debt incurred at the
spin-off in May 1998, 15 months ahead of schedule, and the prepayment of $10
million of the bank debt incurred on the OBOAdler acquisition.
The company repurchased common stock of $13.6 million, reflecting the completion
of the 1999 buyback program and expenditure of $5.2 million against the 2000
program. The Company has now repurchased 20% of its issued share capital at the
spin-off date.
17
Derivatives and Other Financial Instruments
Over half of the Company's sales are in US dollars. Foreign currency sales,
primarily in UK pounds sterling, offset most of the Company's costs, which are
also in UK pounds sterling. To the extent required by the Company, dollars are
sold forward to cover local currency needs. The instruments utilized by the
Company in its hedging activities are considered risk management tools, and are
not used for trading or speculative purposes. The Company diversifies the
counterparties used and monitors the concentration of risk to limit its
counterparty exposure.
Environmental Matters and Plant Closures
The Company is subject to laws, regulations and legal requirements relating to
the use, storage, handling, generation, transportation, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances and wastes (Environmental Laws) in all of the countries in which it
does business. Under certain Environmental Laws, the Company is responsible for
the remediation of hazardous substances or wastes at currently or formerly owned
or operated properties.
The manufacturing operations of the Company have been conducted outside the
United States and, therefore, any liability of the Company pertaining to the
investigation and remediation of contaminated properties is likely to be
determined under non-US law.
Management believes (based upon its internal review and the review of reports
prepared by independent experts) that the Company is in material compliance with
all applicable Environmental Laws. Such expenditure as is required to maintain
compliance has been and will continue to be made at all sites for which the
Company has responsibilities. The Company has developed estimates for the costs
of compliance, which are set out below. Management believes these to be
reasonable (based upon its internal review and the review of reports prepared by
independent experts). There can be no assurance, however, that these estimates
will prove accurate or that the Company will not incur costs in excess of these
estimates. Further, there can be no assurance that changes in existing laws, or
the discovery of additional environmental liabilities associated with current or
historical operations, will not require the Company to incur material costs or
otherwise adversely affect the Company's business, results of operations or
financial condition.
Management evaluates costs for remediation, decontamination and demolition
projects on a regular basis. Full provision is made for those costs to which the
Company is committed under Environmental Laws. Total estimated future costs at
December 31, 2000 were $61.5 million, of which $29.4 million were deemed to be
either capital (rather than revenue) in nature or at management's discretion.
Full provision has been made for the committed costs of $32.1 million.
Expenditure against provisions was $5.4 million, $9.3 million and $12.9 million
in the years 2000, 1999 and 1998, respectively.
The Company has also incurred personnel severance costs in relation to the
management of the decline in TEL markets. Total severance costs were $21.6
million, $17.0 million and $14.9 million in the years 2000, 1999 and 1998,
respectively. Provision is made for severance costs to which the Company is
committed. The provision at December 31, 2000 was $3.5 million, which related
mainly to UK leavers in January 2001.
18
Inflation
Inflation has not been a significant factor for the Company over the last
several years. Management believes that inflation will continue to be moderate
over the next several years.
Future Outlook
Over the last three years the Company's principal product, TEL, has represented
a high proportion of the Company's net sales, profits and cash flow. The Company
believes that its strong, although declining, cash flow in the foreseeable
future will be adequate to fund the Company's future capital and operating
needs.
World demand for TEL has been in decline since the 1970s, and this trend is
expected to continue. The Company believes that a competitive pricing
environment will continue which may limit the ability of the Company to
partially offset the effects of future declines in TEL volumes with price
increases. The Company is seeking to optimize returns over the remaining life of
TEL, and has and will continue to downsize and restructure its operations
consistent with declining demand.
Raw materials account for a high portion of total manufacturing costs of TEL. Of
these the principal items are lead, sodium, ethyl chloride and dibromoethane,
which are subject to long-term contracts with suppliers.
A strong, although declining, cash flow is expected in future years. The Company
does not anticipate any significant capital expenditures, other than maintenance
and environmental compliance costs, in the foreseeable future.
Although the Company anticipates significant sales growth from the Specialty
Chemicals business in the future, earnings from organic growth in this business
will not be sufficient to fully offset the projected decline in TEL sales and
earnings, at least over the next few years. The Company therefore plans to
accelerate its mergers and acquisitions program to strengthen the Specialty
Chemicals business.
19
Management's Statement of Responsibility for Financial Statements
The management of Octel Corp. is responsible for the preparation and
presentation of the accompanying consolidated financial statements and all
other information in this Annual Report. The financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America and include amounts that are based on management's
informed judgements and estimates.
The Company maintains accounting systems and internal accounting controls
which management believes provide reasonable assurance that the Company's
financial reporting is reliable, that assets are safeguarded, and that
transactions are executed in accordance with proper authorization. This
internal control structure is supported by the selection and training of
qualified personnel and an organizational structure which permits the
delegation of authority and responsibility. The systems are monitored by an
internal audit function that reports its findings to management.
The Company's financial statements have been audited by independent
accountants, in accordance with auditing standards generally accepted in
the United States of America. These standards provide for the review of
internal accounting control systems to plan the audit and determine
auditing procedures and tests of transactions to the extent they deem
appropriate.
The Audit Committee of the Board of Directors, which consists solely of
non-employee directors, is responsible for overseeing the functioning of
the accounting systems and related internal controls and the preparation of
annual financial statements. The Audit Committee periodically meets with
management, internal auditors and the independent auditors to review and
evaluate their accounting, auditing and financial reporting activities and
responsibilities. The independent auditors and internal auditors have full
and free access to the Audit Committee without management's presence to
discuss internal accounting controls, results of their audits and financial
reporting matters.
/s/ Alan G. Jarvis
Alan G. Jarvis
Vice President and Chief
Financial Officer
20
Report of Independent Accountants
To the Board of Directors and Shareholders of Octel Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and stockholders'
equity present fairly, in all material respects, the financial position of
Octel Corp. at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
February 8, 2001
21
Consolidated Statements of Income
(in millions, except per share data)
Years ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Net sales (Note 2) $ 422.4 $ 516.8 $ 465.0
Cost of goods sold 257.6 326.8 244.3
-------- -------- ---------
Gross profit (Note 2) 164.8 190.0 220.7
Operating expenses:
Selling, general and administrative 41.5 44.9 40.1
Research and development 3.1 3.9 3.1
Amortization of intangible assets 61.5 48.9 42.6
-------- -------- ---------
Total 106.1 97.7 85.8
-------- -------- ---------
Operating income (Note 2) 58.7 92.3 134.9
Interest expense 22.9 25.9 25.2
Other expenses 0.1 2.6 3.8
Interest income (2.1) (3.9) (2.7)
Other income (1.5) (9.5) (3.3)
-------- -------- ---------
Income before income taxes and minority interest 39.3 77.2 111.9
Minority interest 3.6 1.9 --
-------- -------- ---------
Income before income taxes (Note 2) 35.7 75.3 111.9
Income taxes (Note 5) 17.4 32.7 41.5
-------- -------- ---------
Net income $ 18.3 $ 42.6 $ 70.4
======== ======== =========
Basic earnings per share $ 1.46 $ 3.08 $ 4.85
======== ======== =========
Diluted earnings per share $ 1.41 $ 3.05 $ 4.85
======== ======== =========
Weighted average shares outstanding (in thousands)-- basic 12,581 13,827 14,514
-- diluted 13,000 13,979 14,514
The accompanying notes are an integral part of these statements.
22
Consolidated Balance Sheets
(in millions)
At December 31 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 37.7 $ 37.2
Accounts receivable (less allowance of $3.6 and $2.2, respectively) 92.2 150.5
Inventories
Finished goods 37.9 34.8
Raw materials and work in progress 17.6 29.5
--------- --------
55.5 64.3
Prepaid expenses 3.1 3.8
--------- --------
Total current assets 188.5 255.8
Property, plant and equipment (Note 10) 83.4 104.5
Goodwill (Note 7) 329.2 379.2
Intangible asset (Note 8) 11.0 22.7
Deferred finance costs (Note 9) 8.4 12.7
Prepaid pension cost (Note 4) 76.5 72.2
Other assets 3.8 2.4
--------- --------
$ 700.8 $ 849.5
========= ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 63.9 $ 78.5
Accrued expenses 15.8 17.0
Accrued income taxes 8.5 31.3
Current portion of long-term debt (Note 12) 30.0 80.0
Current portion of deferred income (Note 13) 13.1 --
--------- --------
Total current liabilities 131.3 206.8
Plant closure provisions (Note 11) 35.6 55.6
Deferred income taxes (Note 5) 40.9 35.8
Deferred income (Note 13) 12.4 --
Long-term debt (Note 12) 180.0 233.3
Other liabilities 0.5 1.7
Minority interest 4.5 2.4
Stockholders' Equity (Note 14)
Common stock, $0.01 par value, authorized
40,000,000 shares, issued 14,777,250 shares 0.1 0.1
Additional paid-in capital 276.1 276.1
Treasury stock (2,870,240 shares at cost) (32.5) (18.9)
Retained earnings 100.8 82.5
Accumulated other comprehensive income (48.9) (25.9)
--------- --------
Total stockholders' equity 295.6 313.9
--------- --------
$ 700.8 $ 849.5
========= ========
The accompanying notes are an integral part of these statements.
23
Consolidated Statements of Cash Flows
(in millions)
Years ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 18.3 $ 42.6 $ 70.4
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 80.2 68.4 59.7
Deferred income taxes 5.2 14.5 1.5
Other 2.0 (1.2) (0.9)
Changes in operating assets and liabilities:
Accounts receivable 51.9 (14.2) 53.6
Inventories 4.7 31.6 (5.7)
Accounts payable and accrued expenses (7.2) (6.1) 35.7
Deferred income received 38.6 -- --
Income taxes and other current liabilities (20.6) (14.0) 45.0
Other non-current assets and liabilities (39.1) (12.9) (21.0)
------- ------- -------
Net cash provided by operating activities 134.0 108.7 238.3
------- ------- -------
Cash Flows from Investing Activities
Capital expenditures (6.6) (8.4) (23.5)
Business combinations, net of cash acquired -- 11.8 (26.4)
Other (4.1) (6.4) 1.0
------- ------- -------
Net cash used in investing activities (10.7) (3.0) (48.9)
------- ------- -------
Cash Flows from Financing Activities
Net cash paid to GLCC -- -- (468.5)
Minority interest 2.0 2.4 --
Receipt of long-term borrowings -- 106.0 441.0
Repayment of long-term borrowings (103.3) (93.5) (140.2)
Repayment of short-term credit -- (90.0) --
Deferred finance costs (Note 9) -- -- (15.2)
Net repurchase of common stock (Note 14) (13.6) (5.7) (13.2)
------- ------- -------
Net cash used in financing activities (114.9) (80.8) (196.1)
Effect of exchange rate changes on cash (7.9) (14.2) 3.5
------- ------- -------
Net change in cash and cash equivalents 0.5 10.7 (3.2)
Cash and cash equivalents at beginning of year 37.2 26.5 29.7
------- ------- -------
Cash and cash equivalents at end of year $ 37.7 $ 37.2 $ 26.5
======= ======= =======
The accompanying notes are an integral part of these statements.
24
Consolidated Statements of Stockholders' Equity
(in millions)
Additional Cumulative Total
GLCC Common Treasury Paid-in Retained Translation Comprehensive
Investment Stock Stock Capital Earnings Adjustment Income
---------- -------- ---------- ---------- ----------- ------------ -------------
Balance at
January 1, 1998 $ 652.8 $ -- $ -- $ -- $ -- $ -- $ --
Net income -- -- -- -- 70.4 -- 70.4
Net CTA* change -- -- -- -- -- (1.8) (1.8)
Spin-off (Note 1) (652.8) 0.1 -- 276.1 (30.5) -- (30.5)
Repurchase of
treasury stock -- -- (14.0) -- -- -- --
Share issue -- -- 0.8 -- -- -- --
------- ------- --------- ---------- ---------- ---------- ---------
Balance at
December 31, 1998 -- 0.1 (13.2) 276.1 39.9 (1.8) 38.1
Net income -- -- -- -- 42.6 -- 42.6
Net CTA* change -- -- -- -- -- (24.1) (24.1)
Repurchase of
treasury stock -- -- (5.7) -- -- -- --
------- ------- --------- ---------- ---------- ---------- ---------
Balance at
December 31, 1999 -- 0.1 (18.9) 276.1 82.5 (25.9) 56.6
Net income -- -- -- -- 18.3 -- 18.3
Net CTA* change -- -- -- -- -- (23.0) (23.0)
Repurchase of
treasury stock -- -- (13.6) -- -- -- --
------- ------- --------- ---------- ---------- ---------- ---------
Balance at
December 31, 2000 $ -- $ 0.1 $ (32.5) $ 276.1 $ 100.8 $ (48.9) $ 51.9
======= ======= ========= ========== ========== ========== =========
* Cumulative Translation Adjustment
The accompanying notes are an integral part of these statements.
25
Notes on Consolidated Financial Statements
NOTE 1. ACCOUNTING POLICIES
Basis of Preparation
Until May 22, 1998, the Company was a wholly-owned subsidiary of 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.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include all subsidiaries of the
Company. All significant intercompany accounts and balances have been
eliminated upon consolidation.
All acquisitions are accounted for as purchases and the results of operations
of the acquired businesses are included in the consolidated financial
statements from the date of acquisition.
Nature of Operations
The Company is a major manufacturer and distributor of TEL and Specialty
Chemicals. Its primary manufacturing operation is located at Ellesmere Port
in the United Kingdom. The Company's products are sold globally, primarily to
oil refineries. Principal product lines are TEL, other petroleum additives
and performance chemicals.
On October 1, 1998, the Company entered into sales and marketing agreements
with Ethyl Corporation (Ethyl) to market and sell TEL in all areas of the
world except North America and the European Economic Area (the Territory) for
the period to December 31, 2009. All marketing and sales effort made under
the arrangement is made in the name of Octel. Octel will continue to produce
all TEL marketed under the agreements and also provide marketing and other
services. Ethyl will continue to provide bulk distribution services,
marketing and other services related to sales made within the Territory. The
net proceeds under the agreements are paid to Octel and Ethyl as compensation
for services and are based on an agreed-upon formula with Octel receiving 68%
of the total compensation for services provided. No separate legal entity or
joint venture has been established as a consequence of the agreement. Sales
and expenses incurred under the agreement are included within Octel's income
statement. These comprise all revenues and costs incurred directly by Octel,
together with costs recharged by Ethyl for distribution and other services
provided under the terms of the agreements. Ethyl's share of the net proceeds
for services is charged as a distribution expense within cost of goods sold.
Effective January 1, 2000, OBOAdler entered into sales and marketing
agreements with Ethyl similar to those already in place with Octel (see Note
13).
Use of Estimates
The preparation of the consolidated financial statements requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition
The Company supplies products to customers from its various manufacturing
sites, and in some instances from containers held on customer sites, under a
variety of standard shipping terms & conditions. In each case revenue is
recognized when the transfer of legal title, which is defined and generally
accepted in the standard shipping terms & conditions, arises between the
Company and the customer.
26
Cash Equivalents
Investment securities with maturities of three months or less when purchased
are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (FIFO method) or market price.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided over the estimated useful lives of the
assets using the straight-line method. The cost of additions and improvements
are capitalized. Maintenance and repairs are charged to expenses when
required.
Goodwill
Goodwill, the excess of investments over the net assets of subsidiaries
acquired, is amortized over periods of up to 35 years. The majority of
goodwill relates to the TEL business and is being amortized over 10 years
from January 1, 1998, the expected remaining life of the business. The
Company regularly evaluates the realizability of goodwill based on projected
undiscounted cash flows and operating income for each business with material
goodwill balances.
Intangible Assets
Intangible assets are capitalized in the balance sheet and are amortized over
the estimated useful lives of the assets on a straight-line basis.
Deferred Finance Costs
The costs related to the debt financing are classified as intangible assets
and separately disclosed in the balance sheets. All are amortized over the
life of the debt.
Impairment of Long-lived Assets
The Company re-evaluates long-lived assets based on undiscounted operating
cash flows whenever significant events or changes occur that might impair
recovery of recorded costs and writes down net recorded costs to fair value
(based on discounted cash flows or market values), if recorded costs, prior
to impairment, are higher.
Derivative Financial Instruments
The Company uses various derivative instruments including forward contracts
and options to manage certain foreign currency exposures. These instruments
are entered into under the Company's corporate risk management policy to
minimize exposure and are not for speculative trading purposes. Management
periodically reviews the effectiveness of the use of the derivative
instruments.
Derivatives used for hedging purposes must be designed as, and effective as,
a hedge of the identified risk exposure at the inception of the contract.
Accordingly, changes in the value of the derivative contract must be highly
correlated with changes in the market value of the underlying hedged item at
the inception of the hedge and over the life of the hedge contract. Any
derivative instrument designated but no longer effective as a hedge would be
reported at market value and the related gains and losses recognised in
earnings.
27
Derivatives that are designated as, and effective as, a hedge of foreign
currency commitments are accounted for using the deferral method. Gains and
losses from instruments that hedge firm commitments are deferred and
recognized as part of the economic basis of the transactions underlying the
commitments when the associated hedged transaction occurs. Gains and losses
from instruments that hedge foreign currency denominated receivables,
payables and debt instruments are reported in earnings and offset the effects
of foreign exchange gains and losses from the associated hedged items.
Environmental Compliance and Remediation
Environmental compliance costs include ongoing maintenance, monitoring and
similar costs. Environmental costs are accrued when environmental assessments
or remedial efforts are probable and the cost can be reasonably estimated.
Such accruals are adjusted as further information develops or circumstances
change. Costs of future obligations are not discounted to their present
values.
Earnings Per Share
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.
Foreign Currencies
The local currency has been used as the functional currency throughout the
group. Exchange differences arising on the retranslation of opening balance
sheets of overseas subsidiaries are taken to a separate equity reserve, the
cumulative translation adjustment. Gains and losses on foreign currency
transactions are included in other expenses in the income statement.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, when the exercise
price of employee stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is recorded. The
Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS
123).
Pension Plans and Other Post-Employment Benefits
Annual costs of pension plans are actuarially determined based on FAS 87,
Employers' Accounting for Pensions. The Company has conformed its pension and
other post-retirement disclosures to comply with FAS 132, Employers'
Disclosures about Pensions and Other Post-Retirement Benefits.
28
NOTE 2. BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA
The Company has adopted FAS 131, Disclosures about Segments of an Enterprise
and Related Information, for its annual financial statements.
The Company's operations consist of one dominant industry segment: petroleum
additives. Within the industry segment, the Company has identified two main
product groups: TEL and Specialty Chemicals. The following table analyzes
sales and other financial information by product group:
Product Group Data
(in millions) 2000 1999 1998
Net sales:
TEL $ 300.6 $ 396.1 $ 383.7
Specialty Chemicals 121.8 120.7 81.3
---------------------------------------
$ 422.4 $ 516.8 $ 465.0
=======================================
Gross profit:
TEL $ 129.1 $ 155.5 $ 203.1
Specialty Chemicals 35.7 34.5 17.6
---------------------------------------
$ 164.8 $ 190.0 $ 220.7
=======================================
Operating income:
TEL $ 58.6 $ 91.7 $ 143.2
Specialty Chemicals 11.3 8.8 (3.6)
Corporate (11.2) (8.2) (4.7)
---------------------------------------
$ 58.7 $ 92.3 $ 134.9
=======================================
Identifiable assets at year end:
TEL $ 560.0 $ 728.6 $ 733.2
Specialty Chemicals 140.8 120.9 73.5
---------------------------------------
$ 700.8 $ 849.5 $ 806.7
=======================================
No segmental analysis was carried out below gross profit level prior to 1999.
Comparative amounts have been analyzed retrospectively, using criteria
adopted in 1999, to provide details of 1998 to operating income level.
Operating income comparatives have been restated to reflect the separate
disclosure of corporate costs.
Sales are reported in the geographic area where the transaction originates,
rather than where the final sale to customers is made. Intercompany sales are
priced to recover cost plus an appropriate mark-up for profit and are
eliminated in the consolidated financial statements.
Identifiable assets are those directly associated with the operations of the
geographical area.
29
Geographical Area Data
(in millions) 2000 1999 1998
Net sales:
United States $ 59.4 $ 73.9 $ 36.1
United Kingdom 305.2 436.9 421.6
Rest of Europe 108.9 97.0 70.1
Other 6.5 -- --
Sales between areas (57.6) (91.0) (62.8)
---------------------------------------
$ 422.4 $ 516.8 $ 465.0
=======================================
Income (loss) before income taxes:
United States $ 2.7 $ 0.8 $ (1.6)
United Kingdom 0.2 64.8 109.4
Rest of Europe 32.7 9.7 4.1
Other 0.1 -- --
---------------------------------------
$ 35.7 $ 75.3 $ 111.9
=======================================
Identifiable assets at year end:
United States $ 44.0 $ 41.5 $ 34.7
United Kingdom 531.5 642.8 725.1
Rest of Europe 115.9 165.2 46.9
Other 9.4 -- --
---------------------------------------
$ 700.8 $ 849.5 $ 806.7
=======================================
NOTE 3. STOCK OPTION PLANS
Prior to the spin-off, certain employees of the Company participated in
GLCC's employee stock option plans which covered officers and key employees
of GLCC.
The Company has six stock option plans which provide for the issuance of
options to key employees and directors of the Company. All grants are at the
sole discretion of the Compensation Committee of the Board of Directors,
which administers the plans.
Grants may be priced at market value or at a premium or discount. Vesting
periods are of up to four years and exercise periods of up to seven years. A
total of 2,075,000 shares have been approved by the shareholders for
allocation to the issue of share options.
The following table summarizes the transactions of the Company's stock option
plans for the three-year period ended December 31, 2000:
30
Number Weighted Average Weighted Average
of Shares Exercise Price Fair Value
Options outstanding December 31, 1997 -- $ --
Granted -- at market value 182,346 14.63 $ 4.99
-- at discount 50,228 -- $ 4.99
Exercised (50,228) --
-------- ---------
Options outstanding December 31, 1998 182,346 14.63
Granted -- at discount 456,426 -- $ 6.83
-- at premium 492,436 13.27 $ 4.71
Exercised (14,944) 13.20
Cancelled (3,159) --
-------- ---------
Options outstanding December 31, 1999 1,113,105 8.09
Granted -- at discount 444,150 7.19 $ 3.75
Exercised (21,098) --
Cancelled (59,953) --
-------- ---------
Options outstanding December 31, 2000 1,476,204 $ 8.26
========= ============
The following table summarizes information about options outstanding at December
31, 2000:
Number Weighted Weighted Number Weighted
Oustanding Average Average Exercisable Average
Range of Exercise Price at 12-31-00 Remaining Life Exercise Price at 12-31-00 Exercise Price
$ 0 - $10 816,456 8.4 years $ 3.91 137,153 $ --
$ 11 - $20 659,748 7.1 years $ 13.65 -- --
The fair value of options granted was estimated using the Black-Scholes model
with the following assumptions: dividend yield 0%, expected life of 4.21
years, volatility 40% and risk free interest rate 6.75%.
Had compensation expense for the Company's stock-based compensation plan been
recorded based on the fair value of the stock options at grant date
consistent with the method prescribed by FAS 123, the effect on the Company's
net income and earnings per share for 2000, 1999 and 1998 would not have been
material.
NOTE 4. PENSION PLANS
The Company maintains three contributory defined benefit pension plans
covering substantially all UK employees. The Projected Benefit Obligation
(PBO) is based on final salary and years of credited service, reduced by
social security benefits according to a plan formula. Normal retirement age
is 65, but provisions are made for early retirement. The Company's funding
policy is to contribute amounts to the plans to cover service costs to date
as recommended by the Company's actuary. Based on this advice, no
contributions were made by the Company in 1999 and 1998. Employee and
employer contributions resumed in April 2000 at 2% and 5%, respectively, of
pensionable pay. The plans' assets are invested by two investment management
companies in funds holding UK and overseas equities, UK and overseas fixed-
interest securities, index-linked securities, property-unit trusts and cash
or cash equivalents.
31
Assumptions for the plans as of the end of the last three years were as follows:
2000 1999 1998
Weighted average discount rate 6.0% 6.25% 7.75%
Rate of increase in compensation levels 4.0% 4.0% 5.5%
Rate of return on plan assets 7.0% 7.0% 8.5%
Movements in PBO and the fair value of plan assets, and the funded status and
prepaid pension cost of the plans are as follows:
(in millions) 2000 1999
Change in PBO
Balance at January 1 $ 524.0 $ 547.5
GLCC transfer -- (19.6)
Interest cost 30.3 31.4
Service cost 8.8 11.2
Contributions by participants 0.3 --
Benefits paid (23.3) (23.1)
Actuarial gains/losses 62.8 (6.3)
Exchange variance (39.9) (17.1)
----------- ----------
Balance at December 31 563.0 524.0
----------- ----------
Fair value of plan assets
Balance at January 1 770.8 700.6
GLCC transfer -- (24.2)
Actual benefits paid (23.5) (23.1)
Actual contributions by employer 0.9 --
Actual contributions by participants 0.3 --
Actual return on assets 53.6 140.0
Exchange variance (56.5) (22.5)
----------- ----------
Balance at December 31 745.6 770.8
----------- ----------
Plan assets excess over PBO 182.6 246.8
Unrecognized net gain (110.2) (179.9)
Unrecognized prior service cost 4.1 5.3
----------- ----------
Prepaid pension cost $ 76.5 $ 72.2
=========== ==========
The GLCC transfer represents prepaid pension cost attributable to employees who
participate in the Octel Pension Plan that remained with GLCC after the spin-
off.
32
Net pension cost for the UK pension plans is as follows:
(in millions) 2000 1999 1998
Service cost $ 8.8 $ 11.1 $ 10.6
Interest cost on PBO 30.3 31.4 37.8
Expected return on plan assets (46.2) (44.3) (5.6)
Net amortization and deferral (2.6) 1.6 (49.9)
------ ------ ------
$ (9.7) $ (0.2) $ (7.1)
====== ====== ======
NOTE 5. INCOME TAXES
Income taxes are accounted for using the asset and liability method pursuant
to Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (FAS 109). Deferred taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory rates applicable to
future years to differences between the financial statements carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. In addition, FAS 109 requires the recognition of
future tax benefits to the extent that realization of such benefits is more
likely than not.
The sources of income/(loss) before income taxes were as follows:
(in millions) 2000 1999 1998
Domestic $ 2.7 $ 0.2 $ (1.6)
Foreign 33.0 75.1 113.5
------ ------ -------
$ 35.7 $ 75.3 $ 111.9
====== ====== =======
The components of income tax charges are summarized as follows:
(in millions) 2000 1999 1998
Current:
Federal $ 0.7 $ (0.2) $ 0.1
Foreign 9.2 18.7 39.8
------ ------ -------
9.9 18.5 39.9
Deferred:
Federal -- -- --
Foreign 7.5 14.2 1.6
------ ------ -------
7.5 14.2 1.6
------ ------ -------
$ 17.4 $32.7 $ 41.5
====== ====== =======
Cash payments/(receipts) for income taxes were $29.8 million, $31.6 million and
$(5.7) million during 2000, 1999, and 1998, respectively. Tax payments in
respect of 1998 were made by GLCC.
33
The effective tax rate varies from the US statutory rate because of the factors
indicated below:
2000 1999 1998
Statutory rate 35.0% 35.0% 35.0%
Foreign tax rate differential (26.1) (4.9) (4.9)
Amortization of intangible assets 49.0 14.8 11.3
Other (9.1) (1.5) (4.3)
----- ----- -----
48.8% 43.4% 37.1%
===== ===== =====
The effect of the OBOAdler acquisition was to reduce the overall tax rate but to
generate disallowable goodwill amortization which more than offset this.
Details of deferred tax assets and liabilities are as follows:
(in millions) 2000 1999
Deferred tax assets:
Closure costs $ 6.0 $ 1.6
----- ------
Deferred tax liabilities:
Pension costs 22.9 22.1
Other 24.0 15.3
----- ------
46.9 37.4
----- ------
Total net provision $40.9 $ 35.8
===== ======
NOTE 6. ACQUISITIONS
The Company's 100% ownership interest in Octel Associates and The Associated
Octel Company Limited was acquired in three transactions. The Company acquired a
51.15% interest in 1989, a further 36.67% interest in 1992 and the balance in
1997. The 1989 agreement provides for profit participation payments to be made
to certain former owners (The Vendor Partners) through 2006. Such payments are
treated as an adjustment to the purchase price. Profit participation payments
for 2000 amounted to $3.4 million (1999 -- $7.8 million).
On December 1, 1998, the Company completed the acquisition of Chemische Betriebe
Pluto GmbH, a petroleum specialties company formerly owned by Veba Oel AG.
On November 9, 1999, Octel completed its acquisition of all the outstanding
shares of OBOAdler Company Limited (OBOAdler) for payment of $94.5 million. The
OBOAdler group includes a sales office in Baar, Switzerland and a TEL
manufacturing plant in Germany.
NOTE 7. GOODWILL
Goodwill comprises the following:
(in millions) 2000 1999
Gross cost $ 575.1 $ 580.0
Accumulated amortization (245.9) (200.8)
------- -------
$ 329.2 $ 379.2
======= =======
Based on its most recent analysis the Company believes that no impairment of
goodwill exists as of December 31, 2000.
Amortization of goodwill was $48.2 million, $42.4 million and $39.9 million in
2000, 1999 and 1998, respectively. This excludes foreign exchange variances
which are recorded in the cumulative translation adjustment.
34
NOTE 8. INTANGIBLE ASSETS
An intangible asset was recognized in the balance sheet on the acquisition of
the OBOAdler group on November 9, 1999. It relates to unexpired customer
contracts and is amortized over 2.25 years, the average of the relevant
contract periods.
(in millions) 2000 1999
Gross cost $ 22.8 $ 24.6
Accumulated amortization (11.8) (1.9)
-------- -------
$ 11.0 $ 22.7
======== =======
Amortization expense was $10.3 million and $1.8 million in 2000 and 1999,
respectively. This excludes foreign exchange variances, which are recorded in
the cumulative translation adjustment.
NOTE 9. DEFERRED FINANCE COSTS
Costs of $16.9 million related to the spin-off from GLCC were incurred during
1998 and a further $2.0 million arose in relation to the acquisition of
OBOAdler. Both are amortized over the related debt profile.
(in millions) 2000 1999
Gross cost $ 17.4 $ 18.7
Accumulated amortization (9.0) (6.0)
------ -------
$ 8.4 $ 12.7
====== =======
Amortization expense was $3.3 million, $4.7 million and $1.2 million in 2000,
1999 and 1998, respectively. This excludes foreign exchange variances, which are
recorded in the cumulative translation adjustment.
NOTE 10. PROPERTY, PLANT AND EQUIPMENT
The estimated useful lives of the major classes of depreciable assets are as
follows:
Buildings 7 to 25 years
Equipment 3 to 10 years
Property, plant and equipment consists of the following:
(in millions) 2000 1999
Land $ 2.3 $ 2.6
Buildings 0.2 2.6
Equipment 103.1 122.9
Work in progress 6.8 15.8
------ -------
112.4 143.9
Less accumulated depreciation 29.0 39.4
------ -------
$ 83.4 $ 104.5
====== =======
Depreciation charges were $18.6 million, $19.6 million and $17.0 million in
2000, 1999 and 1998. The estimated additional cost to complete work in progress
is $3.3 million (1999 -- $5.9 million).
35
NOTE 11. PLANT CLOSURE PROVISIONS
The liability for estimated closure costs of Octel's TEL manufacturing
facilities includes costs for personnel reductions (severance) and
decontamination and environmental remediation activities (remediation) when
demand for TEL diminishes.
The Company has and will continue to downsize and restructure its operation
consistent with declining demand for TEL. Octel ceased production in Italy and
France in 1996. All of the Company's TEL is now produced at its manufacturing
plants at Ellesmere Port in the UK and at Doberitz, in Germany. Two of the three
TEL buildings at the Ellesmere Port site have now been closed.
Movements in the provisions are summarized as follows:
2000 2000 2000 1999
(in millions) Severance Remediation Total Total
Balance at January 1 $ 19.1 $ 36.5 $ 55.6 $ 47.1
Exchange effect (0.7) (1.7) (2.4) 0.1
Charge for the year 6.7 2.7 9.4 23.5
Acquisition -- -- -- 11.2
Expenditure (21.6) (5.4) (27.0) (26.3)
-------- ------ ------ ------
Balance at December 31 $ 3.5 $ 32.1 $ 35.6 $ 55.6
======== ====== ====== ======
Severance:
No provision is made for estimated future costs for severance until the
employees concerned have been notified and the expenditure is committed. In the
fourth quarter 1999 a further voluntary severance program was announced at the
group's Ellesmere Port site and expenditure was committed for 330 employees.
This program was extended during fiscal 2000 by 57 employees. No further
severance programs are planned.
Severance expenditure against provisions in 2000, 1999 and 1998 was $21.6
million, $17.0 million and $14.9 million respectively.
Remediation:
Total costs for remediation are evaluated on a regular basis to take account of
expenditure incurred and to amend the scope of future activities in the light of
findings from projects carried out. Management's estimate at December 31, 2000
is analyzed as follows:
(in millions) Decontamination Remediation Other Total
Total estimated future costs $ 45.5 $ 10.0 $ 6.0 $ 61.5
Operating capital costs -- -- (6.0) (6.0)
Discretionary contingent costs (17.7) (5.7) -- (23.4)
------------- ------- --------- ------
Provision $ 27.8 $ 4.3 $ -- $ 32.1
============= ======= ========= ======
36
Decontamination costs relate to the post-operational cleaning and disposal of
equipment and the demolition of buildings. Remediation costs relate to soil and
groundwater contamination. Other costs include operational compliance with
environmental regulations and project management expenses.
Operational capital costs of $6.0 million are expected to arise during the
useful life of the plant. They will be included in property, plant and equipment
as expenditure is incurred and depreciated over the remaining useful life of the
related plant.
Total costs include $23.4 million, which is the potential cost of vacating the
Ellesmere Port site. Management has no present intention to adopt this course of
action and intends to continue manufacturing other products at Ellesmere Port
when production of TEL ceases. Consequently, management views these costs as a
contingent liability and no provision is made for them.
Remediation expenditure against provisions in 2000, 1999 and 1998 was $5.4
million, $9.3 million and $12.9 million, respectively.
NOTE 12. LONG-TERM DEBT
Long-term debt consists of the following:
(in millions) 2000 1999
Senior term loan -- 1998 $ -- $ 73.3
-- 1999 60.0 90.0
Senior notes 150.0 150.0
------- -------
210.0 313.3
Less current portion (30.0) (80.0)
------- -------
$ 180.0 $ 233.3
======= =======
Payments of interest on long-term debt were $22.7 million and $25.5 million in
2000 and 1999, respectively.
On April 27, 1998, the Company entered into a $300 million secured credit
facility consisting of a $280 million senior secured term loan and a $20 million
revolving credit facility. This was repaid during fiscal 2000. Also on April 27,
1998, the Company issued $150 million of senior notes due 2006. The Company is
required to redeem $37.5 million principal amount of notes in each of the years
2003, 2004 and 2005. The notes bear interest at a fixed rate of 10%.
On June 3, 1999, the Company entered into a further $100 million term loan
repayable in semi-annual installments to December 31, 2002. Total repayments in
each of the four years from 1999 to 2002 are $10 million, $20 million, $30
million and $40 million, respectively. The loan is secured on the Company's UK
assets and bears interest at LIBOR plus 1.5%, reducing to LIBOR plus 1.25% when
the aggregate of outstanding balances is below $140 million.
On December 18, 2000 the Company entered into a $20 million credit facility with
the same security and interest terms as the 1999 loan.
The loan, credit facility and the notes contain substantial restrictions on the
Company's operations, including the ability to pay dividends.
The following table presents the projected maturities for the annual next five
years after 2000:
(in millions)
2001 $ 30.0
2002 30.0
2003 37.5
2004 37.5
2005 37.5
Thereafter 37.5
--------
$ 210.0
========
37
NOTE 13. DEFERRED INCOME
Movements in deferred income are summarized as follows:
(in millions)
Received $ 38.6
Amortized (13.1)
-------
25.5
Less: current portion (13.1)
-------
$ 12.4
=======
Deferred income relates to amounts received from Ethyl relating to a prepayment
for services to be provided under the sales and marketing agreement with
OBOAdler, effective January 1, 2000.
NOTE 14. STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
(in thousands) 2000 1999 2000 1999
At January 1 14,766 14,766 1,315 832
Exercise of options 11 -- (60) --
Stock purchases -- -- 1,615 483
------ ------ ----- -----
At December 31 14,777 14,766 2,870 1,315
====== ====== ===== =====
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and fair values of the
Company's financial instruments at December 31, 2000 and 1999:
2000 1999
Carrying Amount Fair Value Carrying Amount Fair Value
Non-derivatives:
Cash and cash equivalents $ 37.7 $ 37.7 $ 37.2 $ 37.2
Long-term debt 210.0 201.0 313.3 312.7
Derivatives:
Miscellaneous -- (0.1) -- 0.2
The following methods and assumptions were used to estimate the fair values of
financial instruments:
Cash and cash equivalents: The carrying amount approximates fair value because
of the short-term maturities of such instruments.
Long-term debt: The carrying amount of term borrowings at variable interest
rates approximates fair value. The fair value of fixed interest rate debt is
based on the quoted market prices for the same or similar debt.
Derivatives: The fair value of derivatives, including forward exchange contracts
and interest rate swaps, was estimated based on current settlement prices and
comparable contracts using current assumptions.
38
NOTE 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company has limited involvement with derivative financial instruments and
does not trade them. The Company does use derivatives to manage well-defined
interest rate and foreign exchange exposures.
The Company invoices over half of its sales in US dollars, the balance mainly
invoiced in UK pounds sterling to match the Company's sterling costs.
The Company uses interest rate swap, floor and collar and cap agreements to
reduce the impact of changes in interest rates on its floating rate debt. The
swap agreements are contracts to exchange floating rate for fixed interest
payments periodically over the life of the agreements without the exchange of
the underlying notional amounts. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss.
As of December 31, 2000, the Company had the following interest rate instruments
in effect (notional amounts in millions; cap, floor and collar rates based on 3
month LIBOR):
Notional Amount Strike Rate Period
Interest swap $ 22.5 5.87% 12/00-12/01
The Company sells a range of TEL and petroleum additives to major oil refineries
throughout the world. Credit limits, ongoing credit evaluation and account
monitoring procedures are utilised to minimise risk. Collateral is not generally
required.
Approximately 60% of the Company's workforce is represented by trade unions. A
collective bargaining agreement is in place and will expire on December 31,
2003.
NOTE 17. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS 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, the FASB issued FAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
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,
FASB issued FAS 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an amendment of FASB Statement No. 133. FAS 138 amends the
accounting and reporting standards of FAS 133 for certain derivatives and
certain hedging activities. The Company is required to adopt FAS 138
concurrently with FAS 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. Management believes that compliance with FAS 133 (as amended) will not
have a material impact on the financial statements of the Company.
39
Quarterly Summary (Unaudited)
(dollar amounts in millions except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter
2000
Net sales $ 91.0 $ 107.4 $ 105.0 $ 119.0
Operating income 8.4 16.1 15.3 18.9
Net income 3.2 4.2 3.9 7.0
Net cash provided by operating activities 38.8 63.7 13.5 18.0
Per common share:
Earnings-- basic 0.24 0.32 0.32 0.58
-- fully diluted 0.24 0.32 0.31 0.56
Market price
-- high 12.6 10.1 9.7 12.9
-- low 8.2 7.8 7.9 9.6
1999
Net sales $ 128.0 $ 129.8 $ 126.9 $ 132.1
Operating income 24.1 25.5 26.1 16.6
Net income 10.4 11.7 12.2 8.2
Net cash provided by operating activities 22.7 17.3 32.2 36.5
Per common share:
Earnings-- basic 0.74 0.84 0.88 0.60
-- fully diluted 0.73 0.81 0.86 0.58
Market price
-- high 15.3 14.9 13.0 12.7
-- low 12.2 11.9 11.2 9.7
40
Octel Corp.
BOARD OF DIRECTORS
Dr. Robert E. Bew
Chairman and Director
Retired CEO of ICI Chemical & Polymer Division and Chairman of
Phillips Imperial Petroleum Ltd.
Former Chairman of European Process Industries Competitiveness Centre
Dennis J. Kerrison
President and Chief Executive Officer
Previously Executive Vice President, Great Lakes Chemical Corporation
Former CEO of Hickson International PLC
Martin M. Hale
Director
Executive Vice President and Director of Hellman, Jordan Management Co Inc.
Director of Great Lakes Chemical Corporation
Former President and CEO of Marsh & McClennan Asset Management Company
Thomas M. Fulton
Director
Retired President and CEO of Landauer Inc.
Director of Landauer Inc.
Director of Great Lakes Chemical Corporation
James Puckridge
Director
Chairman of Ato Pension Fund Trustee Co UK Ltd.
Director of Thomas Swan & Co Ltd.
Director of LINPAC Group Ltd.
Retired Chairman of Elf Atochem UK Ltd.
Dr. Benito Fiore
Director
Former Chairman and CEO of Enichem UK Ltd.
Charles M. Hale
Director
Managing Director and Vice Chairman of CSFB Europe Ltd.
Former General Partner of Lehman Brothers Kuhn Loeb
Former Managing Director of AG Becker International
CORPORATE OFFICERS
Dennis J. Kerrison
President and Chief Executive Officer
Alan G. Jarvis
Vice President and Chief Financial Officer
John P. Tayler
Corporate Secretary and General Counsel
Dr. Geoffrey J. Hignett
Director of Corporate Development
H. Alan Hanslip
Vice President, Human Resources
Philip J. Boon
Business Director, Petroleum Specialties
Ian A. Watling
Business Director, Performance Chemicals
41
Investor Information
Corporate Offices
Octel Corp.
200 Executive Drive
Newark, DE 19702
USA
Shareholder Inquiries
First Chicago Trust Co of New York--
a Division of Equiserve
P.O. Box 2500
Jersey City, NJ 07303
USA
Tel: (201) 324 1644
TDD: (201) 222 4955
www.equiserve.com
Independent Accountants
PricewaterhouseCoopers, London, UK
Legal Counsel
Kirkland & Ellis, London, UK
Linklaters & Paines, London, UK
Investor Relations Inquiries
Octel Corp.
European Headquarters
Bailey Lane
Manchester M90 4AA
UK
Tel: +44(0)161 498 8889
Octel Corp. Common Stock
New York Stock Exchange
Symbol: OTL
Corporate Website
http://www.octel-corp.com
Form 10-K and Additional Information
Form 10-K is the company's annual report filed with the Securities and Exchange
Commission. Copies of the Form 10-K and other financial information are
available from the Office of Investor Relations.
Environment, Health & Safety Report
For copies of our latest report, contact Investor Relations
42