[PHOTO OF DENNIS J. KERRISON APPEARS HERE]
Dennis J. Kerrison
President and Chief Executive Officer
Octel Corp.
DEAR SHAREHOLDERS: There are three realities that define Octel. One, our
main business is declining, and it's not coming back. Two, that business
remains profitable. Three, those profits will fund our strategies for
growth. Our mission is very clear.......
A CLEAR PATH
OCTEL CORP. ANNUAL REPORT 1998
1998 HIGHLIGHTS
SPIN-OFF FROM GREAT LAKES CHEMICAL CORPORATION.
ITALIAN PLANT SALE. IMPROVED SAFETY RECORD,
50% IMPROVEMENT OVER 3 YEARS.
PURCHASED FUEL ADDITIVES BUSINESS FROM VEBA OEL.
PLUTO (ESTABLISHED AS OCTEL DEUTSCHLAND GMBH.
EPS MET MARKET EXPECTATIONS.
ESTABLISHED A MARKETING ALLIANCE
WITH ETHYL FOR THE SALE, MARKETING AND DISTRIBUTION OF TEL.
GENERATED $238M CASH FROM OPERATING ACTIVITIES,
50% OF SENIOR DEBT PAID IN FIRST 8 MONTHS.
REPURCHASED $14.0M IN SHARES (5.6%).
TABLE OF CONTENTS
Where We Stand 2
Our Opportunity for Growth 5
Plan in Motion 9
Chairman's Message 12
Financials 13
[BACKGROUND ARTWORK APPEARS HERE]
FINANCIAL HIGHLIGHTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE FIGURES) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS:
NET SALES $ 465.0 $ 539.1 $ 597.4 $ 628.3
OPERATING INCOME 134.9 194.7 226.1 254.6
INCOME BEFORE INCOME TAXES AND MINORITY 111.9 198.7 221.7 249.1
MINORITY INTEREST -- 24.3 29.6 32.3
INCOME TAXES 41.5 56.7 63.8 71.7
NET INCOME 70.4 117.7 128.3 145.1
CASH GENERATED BY OPERATING ACTIVITIES 238.3 167.5 127.8 175.8
FINANCIAL POSITION AT YEAR END:
WORKING CAPITAL 106.7 179.9 216.1 175.8
TOTAL ASSETS 806.7 832.9 841.0 798.4
LONG TERM DEBT (INCLUDING CURRENT PORTION) 300.8 -- -- --
GLCC INVESTMENT -- 652.8 584.6 530.8
STOCKHOLDERS' EQUITY 301.1 -- -- --
FINANCIAL RATIOS:
NET INCOME AS A PERCENT TO SALES 15.1 21.8 21.5 23.1
EFFECTIVE INCOME TAX RATE 37.1 32.5 33.2 33.1
CURRENT RATIO 1.2 2.7 2.7 2.3
SHARE DATA:
EARNINGS -- BASIC 4.85 7.84 8.08 8.88
-- FULLY DILUTED 4.85 7.84 8.08 8.88
SHARES OUTSTANDING (BASIC, THOUSANDS)
-- AT YEAR END 13,934 15,000 15,900 16,300
-- AVERAGE DURING YEAR 14,514 15,000 15,900 16,300
STOCK PRICE
-- HIGH 22.7 -- -- --
-- LOW 11.6 -- -- --
-- AT YEAR END 13.9 -- -- --
. 1995 BALANCE SHEET DATA IS UNAUDITED.
. ACCOUNTS DETAILS PRIOR TO THE SPIN-OFF (MAY 22, 1998) ARE DERIVED FROM GLCC
HISTORIC DATA.
OCTEL IS A GLOBAL CHEMICAL COMPANY SPECIALIZING IN HIGH PERFORMANCE FUEL
ADDITIVES -- PRIMARILY TETRAETHYL LEAD (TEL) ANTI-KNOCK COMPOUND.
We manufacture approximately 80 percent of the global demand for TEL and,
through the recently formed marketing alliance with Ethyl Corporation, market
directly to approximately 75 percent of global customers. The market is
declining roughly 15 percent per year due to the incompatibility of leaded fuel
with catalytic converters and certain health and environmental concerns. We have
pledged to manage this decline safely under our Product Stewardship Program. By
vigorous strategic management of our cost base, we will work to maintain high
margins to pay off debt and generate sufficient cash to grow our two strategic
business units: Petroleum Specialties and Performance Chemicals. The result, we
believe, will be the creation of value for our shareholders.
... We will manage the declining lead business safely and effectively and
maximize cash flow through the decline. We will differentiate ourselves from our
competition and manage costs tightly to drive productivity improvements
throughout the organization. Also, we will look for opportunities for further
industry consolidation. We will accelerate our debt repayment, invest in our
specialties businesses, and return value to our shareholders. Our challenges, of
course, are also very clear. We must reinvent the company. We will create the
infrastructure of people, operations and technology to become a new company on a
new track towards profitable growth.
Our overriding mission is to execute these strategies in a way that creates
value for the shareholders who invest in our business. We can't do that by
tinkering at the margins of change. It takes fundamental redirection. And that,
in turn, takes tough decisions. We faced up to reality early. When you're
looking at a business that is declining by 15 percent a year, you can't waste
energy trying to change the rules. You create new ones. You adapt.
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[PICTURE OF PLANE APPEARS HERE]
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WHERE WE STAND
The first step in rewriting the rules for the new company was the spin-off from
Great Lakes Chemical Corporation. Being on our own allows us to deal positively
with our issues, set our own strategies, focus on our strengths and invest in
our technologies. We can now create our own future.
THREE KEY UNITS As a number of businesses historically managed by Octel were
retained by Great Lakes, we organized the company into three Strategic Business
Units (SBUs) -- Lead Alkyls (TEL), Petroleum Specialties and Performance
Chemicals. We understand the drivers, competitors, challenges and opportunities
for each of these businesses.
While the TEL business is declining, it will remain a viable business for a
considerable number of years. TEL remains the most efficient octane enhancer
available, meaning the transition to lead-free fuel is unlikely to happen
globally all at once. Also, in some uses -- piston-engined aircraft, for example
- -- there is no realistic substitute.
However, we do not have the market to ourselves. There are three
competitors: Ethyl Corporation (U.S.), competing in North America and Western
Europe, Alcor/Novoktan
[PHOTO OF STEVE W. WILLIAMS APPEARS HERE]
[SOUND BITE 3 - SEE PAGE 53]
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[GRAPHIC APPEARS HERE]
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(Switzerland/Eastern Germany) and Sintez(Russia). However, our competitive
advantages are substantial.
A SERVICE ADVANTAGE One advantage is our size. Serving a market that spans the
globe, we are the clear number one player in the TEL market. We supply our
global distribution network from a world-class manufacturing facility in
Ellesmere Port, UK and subsidiaries and offices across the world. We can provide
a range of services that go well beyond the delivery of product. All of this
gives customers compelling reasons to make Octel the supplier of choice.
Our profile is raised further by the fact that, as the industry leader, we have
taken on the role of setting standards. Through our Product Stewardship Program
- -- which focuses on excellence in safety and quality -- and our environmental
services team, we will help the industry work responsibly and safely during the
decline of lead.
OPPORTUNITIES IN CONSOLIDATION Given the rapid decline in TEL, and the high
costs and logistical complexity facing the industry, we decided immediately
after the spin-off to seek opportunities for industry consolidation.
[PICTURE APPEARS HERE]
[SOUND BITE 5 - SEE PAGE 53]
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[PHOTO OF MAN AT CONTROL PANEL APPEARS HERE]
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[GRAPHIC APPEARS HERE]
In October, we forged a marketing alliance with Ethyl Corporation to improve
services to customers outside the U.S. and Western Europe. The cultural
similarities between the companies and our joint commitment to safety, quality
and excellence give us confidence that the alliance will allow us to manage the
decline efficiently and increase our ability to meet the full range of customer
needs. We will continue to seek further opportunities for consolidation,
maintaining our leadership position and ensuring that our global customers
receive the service and support they demand.
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GRAPHIC APPEARS HERE]
[PHOTO OF ALAN G. JARVIS APPEARS HERE]
[SOUND BITE 7 - SEE PAGE 53]
OUR OPPORTUNITY FOR GROWTH
As we generate revenues from our lead business to pay back debt, we are also
building our position in Specialty Chemicals, where we are concentrating on two
main markets: Petroleum Specialties and Performance Chemicals.
The larger of the two is Petroleum Specialties, a performance fuel additives
business built on the TEL operation. Over the last 8 years our global coverage
and extensive customer network has enabled us to build a solid business with
sales of $64M in 1998. We believe that our long experience in fuels and our
broad market presence will be an ongoing advantage.
A NEED FOR CLEANER FUELS Recognizing the opportunity in the demand for cleaner-
burning and more efficient fuels early on, we have used our experience to
develop a range of products and customized performance blends for both diesel
and gasoline engines. We are now one of the largest independent suppliers of
products that enable our petroleum industry customers to improve and
differentiate their products in the marketplace.
Petroleum Specialties' Refinery Services unit supplies a growing list of
products and services that improve operational efficiences and product
performance at the Refinery.
[PHOTO OF CHEMICAL CONTAINERS APPEARS HERE]
[SOUND BITE 8 - SEE PAGE 53]
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[SOUND BITE 9 - SEE PAGE 53]
Also, in December we completed the acquisition of Pluto from Veba Oel. The
company, which now operates as Octel Deutschland GmbH, opens wide new marketing
opportunities to serve customers in more places with an expanded range of
Petroleum Specialty products.
Our second growth opportunity, Performance Chemicals, originally centered on
intermediates and raw materials related to our main businesses. Our focus as we
go forward is to develop high performance, and particularly environmentally
friendly, products from our technology base. The major current product line is
Octaquest(R), which was originally developed for the detergent market. We are
now finding applications in the personal care, paper, photographic and other
markets where biodegradability is a key requirement.
BUILDING ON STRENGTHS We are not the volume leader in these growth industries,
but we do have a strong niche position and an excellent technology base --
footholds we need to become a major factor in the market in the future.
In Petroleum Specialties, we are developing interesting combustion enhancers
for both diesel and gasoline. The acquisition of Pluto has added Ferrocene, an
iron-based
[ARTWORK APPEARS HERE]
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[PHOTO APPEARS HERE]
[SOUND BITE 11 - SEE PAGE 53]
combustion improver, into our family of products, giving us flexibility in
formulating to meet the new, vigorous air standards being introduced. In
Performance Chemicals, the Octaquest technology is the platform for the
development of a family of products, such as Octahib(R), a biodegradable
corrosion inhibitor that protects metal.
BALANCED OPTIONS FOR GROWTH We have a number of ways we can grow the business
beyond organic growth from home-grown R&D. Among the relatively low-cost,
low-risk options for building our business are: licensing, acquisitions, custom
synthesis and developing ways to use existing technologies in product
applications for new markets.
For example, the licensing program we launched in 1998 will allow us to
introduce new technologies into a number of our markets. Many of the industries
that are moving toward outsourcing manufacturing are benefiting from our
infrastructure and experience.
PRODUCTS FOR NEW MARKETS Another clear opportunity is to move products currently
sold by Petroleum Specialties into other market segments without high market
entry and
[DIAGRAM APPEARS HERE]
[SOUND BITE 12 - SEE PAGE 53]
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[BACKGROUND PHOTO APPEARS HERE]
[SOUND BITE 13 - SEE PAGE 54]
development costs. One good example is Stadis(R), an anti-static agent for
fuels that could have many other similar applications in various manufacturing
processes.
Finally, we intend to accelerate the growth of the company over time through
bolt-on acquisitions. These will be companies that are small, affordable and in
areas we know.
They typically will help us fill strategic gaps and move faster in building
shareholder value.
[PHOTO APPEARS HERE]
[SOUND BITE 14 - SEE PAGE 54]
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PLAN IN MOTION
Real change, of course, is more than a strategic course correction. It takes a
rethinking of the basics -- people, costs and operations. It takes rebuilding
around new realities.
THE PEOPLE FACTOR Once a fairly traditional hierarchy, we are recreating our
culture around heavy employee involvement in decision-making and open, two-way
communications. We have asked our people for their ideas and their support. The
response of our employees and their representatives during a difficult period of
downsizing has been outstanding. They have been absolutely key to the
progress we have made, and they are critical to our future.
HOLDING THE MARGINS Rather than pursuing individual cost-improvement programs on
an ad hoc basis, we adopted a strategic cost management program. Continuous cost
improvement is central to all we do: our lines of business, our site operations
and our longer-term investment plans. A key step was to reduce capacity we would
no longer need. In 1996 we closed both our French and Italian manufacturing
operations, consolidating all TEL manufacture at Ellesmere Port.
[PHOTO APPEARS HERE]
[SOUND BITE 15 - SEE PAGE 54]
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[SOUND BITE 16 - SEE PAGE 54]
Also, from May 1996 to the end of 1998, we reduced our employee force by
approximately 50 percent. However, as we continue to rationalise, we will also
continue to create new and better management systems, performance measurements
and training programs.
A MATTER OF RESPONSIBILITY To improve on our past safety and environmental
record, we have adopted Organizational Stewardship as a core value -- which
means we answer not only to our profit statement, but also to the safety of our
employees and neighbors and the well-being of the environment.
We have signed up to the Guiding Principles of the Chemical Industries
Association's Responsible Care Program, and we have set new internal improvement
targets. As a result of these and related efforts, we have improved our safety
record for the third consecutive year. There is still more improvement to be
made, but we are clearly on the right track.
A CLEAR PATH FORWARD The productive year behind us is a first, solid step along
what I see as a five-year horizon. The first years, by necessity, will focus on
managing our current business and paying down our debt ahead of schedule. But,
[SOUND BITE 17 - SEE PAGE 53]
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[SOUND BITE 18 - SEE PAGE 54]
as we manage those situations, we will be moving forward toward a new and
exciting future for Octel and our shareholders.
My thanks to you, our shareholders, for your support, and to our
employees for all you have done in making our future possible.
Sincerely,
/s/ Dennis J. Kerrison
DENNIS J. KERRISON
President and Chief Executive Officer, Octel Corp.
[SOUND BITE 19 - SEE PAGE 53]
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[PHOTO OF DR ROBERT E. BEW APPEARS HERE]
CHAIRMAN'S MESSAGE
I am pleased to have chaired the company through its first eight months as a
public company and to have seen it deliver performance in line with
expectations.
I believe our performance relates directly to the quality of leadership. In
addition to a very experienced management team, we have assembled a first-rate
Board of Directors, giving us a wealth of international experience in the
chemical, petrochemical and financial services industries. Guiding our efforts
is a system of good Corporate Governance practices to meet our shareholders'
expectations.
The most tumultuous period of change is now behind us. Ahead, I believe, is a
time of building on the platform we have created, and of progress in our number
one objective: creating a business that delivers value for our shareholders.
Sincerely,
/s/ Dr Robert E. Bew
DR. ROBERT E. BEW
Chairman, Octel Corp.
[SOUND BITE 20 - SEE PAGE 54]
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FINANCIALS
14. Management's Discussion and Analysis of Financial Condition and Results of
Operations
24. Management's Statement of Responsibility for Financial Statements
25. Report of Independent Accountants
26. Consolidated Statements of Income
27. Consolidated Balance Sheets
28. Consolidated Statements of Cash Flows
29. Consolidated Statements of Stockholders' Equity
30. Notes on Consolidated Financial Statements
47. Quarterly Summary (Unaudited)
48. Board of Directors
48. Corporate Officers
49. Investor Information
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. In so far 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 this Annual Report 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 tetraethyl lead(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 three businesses -- Lead Alkyls (TEL), Petroleum Specialties and
Performance Chemicals. TEL is the Company's principal product, and the Company
is the world's leading manufacturer of TEL. Over the last few years,
approximately 70% of the Company's TEL production has been sold on a retail
basis to oil refineries, and the remaining 30% has been sold to distributors,
principally Ethyl Corporation (Ethyl), under long-term wholesale
contracts.Pricing to distributor customers is substantially below pricing to
retail refinery customers.
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 the optimum TEL levels
in gasoline have been reached, and as competition has
14
intensified due to the decline in demand for TEL, it has been increasingly
difficult for the Company to secure general price increases. The Company expects
that this trend will continue in the foreseeable future.
As world demand for TEL has declined,the Company has been reducing its cost base
in an attempt to maintain its margins. In 1989, the Company closed its German
manufacturing facility. In 1996, the Company ceased production at its Italian
and French manufacturing facilities. The closure of the Italian and French
facilities has reduced the Company's workforce by 193 and will result in a
further reduction of 59 employees upon substantial completion of site
remediation activities in France. All of the Company's current TEL requirements
are now 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. Since 1996, the Company's cost
reduction efforts and operating improvement programs in the UK have reduced the
workforce by 686 people as at December 31, 1998 and by mid 1999 the total UK
workforce will be reduced by 50% from the 1,800 employed in June 1996. All this
has been achieved through voluntary severance programs. 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 September 29, 1998 the Company announced that its UK subsidiary The
Associated Octel Company Limited (Associated Octel) had signed agreements with
Ethyl Corporation and its UK subsidiary to market and sell TEL in areas of the
world excluding North America and the European Union. The agreements, which
became effective October 1, 1998, finalized the memorandum of understanding
between the companies previously announced on July 27, 1998. Under the
agreements, all marketing and sales efforts made to customers are made in the
name of Associated Octel. Ethyl provides bulk transportation services in support
of the agreements while Octel continues to produce all TEL marketed under these
agreements. Depending upon cost, performance and flexibility, one or both
companies provide under the agreements other TEL services. As countries move
increasingly toward lead-free fuel and the demand for TEL continues to decline,
it becomes increasingly more expensive to market, sell, manufacture and
distribute a given quantity of TEL. The Company believes that significant cost
savings can be achieved under these agreements by permitting more efficient
marketing, sales and distribution of TEL products.
In order to diversify and expand its non-TEL product line, in December 1998 the
Company concluded an agreement with Veba Oel AG for the acquisition of its
petroleum specialties subsidiary, Chemische Betriebe Pluto GmbH (Pluto). Based
in Herne, Germany, Pluto manufactures and sells fuel additives mainly based on
ferrocene, an iron-based metal organic product used as a combustion improver and
octane enhancer. Pluto has annual sales of approximately $18 million. The
Company and Pluto had already entered into a joint marketing arrangement in
1997.
The Company continues to reduce TEL costs in line with the market decline and
announced another voluntary severance program in September 1998 which is to be
implemented in early 1999. The Company closed one TEL building at the end of
1998 and has announced a formal review into the economics of manufacturing raw
materials currently produced to support the manufacture of TEL.
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FISCAL 1998 COMPARED TO FISCAL 1997
---------------------------------------------------------------------------
Net sales decreased $74.1 million (or 14%) in 1998 to $465.0 million from $539.1
million in 1997. Net sales by business area are set forth in the following
table:
INCREASE
(DOLLARS IN MILLIONS) 1998 1997 (DECREASE)
---------------------------------------------------------------------------
TEL $ 369.0 79% $ 442.0 82% (16)%
PETROLEUM SPECIALTIES 63.9 14 62.6 12 2
PERFORMANCE CHEMICALS 32.1 7 34.5 6 (7)
---------------------------------------------------------------------------
TOTAL $ 465.0 100% $ 539.1 100% (14)%
---------------------------------------------------------------------------
TEL sales in 1998 were $73 million (16%) lower than 1997, attributable to volume
decreases of $65.5 million and price reductions of $9.1 million offset by
exchange gains of $1.6 million. The reduction is largely due to the decreased
worldwide demand for TEL which reduced volumes and increased surplus capacity
and competition in the marketplace.
Retail TEL volumes decreased by 9% to 50,600 metric tons, and prices fell by 3%.
Sales on a wholesale basis fell in volume terms by 45% to 13,400 metric tons,
principally due to reduced off-take by Ethyl.
Petroleum Specialties net sales in 1998 were $63.9 million, an increase of 2%
over 1997 levels, despite reduced market demand for additives in Asia Pacific.
The acquisition of Pluto (now Octel Deutschland) in December 1998 will add to
sales in 1999 but its results are not included in 1998.
Performance Chemicals net sales in 1998 were $2.4 million (7%) below 1997
levels, mainly as a result of reduced demand for Octaquest(R) and a plant
maintenance shutdown, prior to expansion during the year.
Gross profit of $220.7 million in 1998 was $44.0 million (17%) below 1997
levels. As a percentage of sales, gross profit in 1998 was 47% compared to 49%
in 1997. The reduction reflects the decline in TEL sales but also reflects an
increase in rationalization charge from $13 million to $16 million, including
the settlement of all liabilities relating to the Bussi site (Italy) in return
for a payment of $5 million.
Operating expenses in 1998 were $85.8 million, increased by $15.8 million (23%)
on 1997. The increase is principally due to higher amortization charges on
intangible assets from $27.6 million in 1997 to $42.6 million in 1998, mainly
resulting from the acquisition in late 1997 of the minority interest in the
Company's subsidiaries previously held by Chevron Chemical Company
(Chevron). Sales, general and administrative expenses were $40.1 million
compared to $38.6 million in 1997, but the increase of $1.5 million includes
$3.0 million of public company costs which did not exist in 1997.
Operating income in 1998 was $134.9million, a return of 29% on net sales. The
reduction in the rate of return from 36% in 1997 was mainly the result of lower
gross profit and increased amortization charges.
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Interest expense in 1998 was $25.2 million compared to $2.2 million in 1997.
Interest on the Senior Debt and Notes issued in connection with the spin-off
from GLCC was $21 million for the eight months through December, the balance
being interest paid to GLCC on loans to fund the acquisition of Chevron's
minority interest in November 1997. Interest income decreased from $3.9 million
in 1997 to $2.7 million in 1998.
The decrease in other expenses and other income, compared to 1997, of $1.8
million and $4.6 million, respectively, relates to foreign exchange movement
from an income of $6.8 million to an expense of $2.5 million.
The minority interest in the Company was acquired from Chevron in the fourth
quarter of 1997, resulting in an improvement of $24.3 million in profit
attributable to the Company in 1998.
Income tax charges of $41.5 million in 1998 decreased by $15.2 million from
1997, largely due to the decrease in pre-tax profits but also due to a $3.5
million refund of Italian withholding tax received by the Company.
FISCAL 1997 COMPARED TO FISCAL 1996
----------------------------------------------------------------------
Net sales decreased $58.3 million (or 10%) in 1997 to $539.1 million from
$597.4 million in 1996. Net sales by business are set forth in the
following table:
INCREASE
(DOLLARS IN MILLIONS) 1997 1996 (DECREASE)
----------------------------------------------------------------------
TEL $ 442.0 82% $505.1 85% (12)%
PETROLEUM SPECIALTIES 62.6 12 70.9 12 (12)
PERFORMANCE CHEMICALS 34.5 6 21.4 3 61
----------------------------------------------------------------------
TOTAL $ 539.1 100% $597.4 100% (10)%
----------------------------------------------------------------------
This total decrease was primarily attributable to a decline in sales volume of
$67.9 million which was partly offset by a price increase of $8.7 million and
foreign exchange gains of $0.9 million. In 1997 the retail volume of TEL sold
was 55.8 thousand metric tons as compared with 63.8 thousand metric tons in
1996, a decline of approximately 12%, which was slightly improved from the 13%
annual volume decline experienced in 1996. Reduced sales in Western Europe, the
Middle East and Australia were partly offset by increases in Eastern Europe and
Central America, but the Company believes it maintained its share of the
worldwide retail TEL market during this period. Retail sales prices of TEL
increased by approximately 2% in 1997 as compared to 1996. Product pricing
reflected (i) the Company's strategy to extend the life of TEL by reducing or
foregoing price increases, (ii) changing refinery economics related to achieving
octane ratings by using different production processes, (iii) a changing mix of
customers and regions of the world where TEL is sold (e.g., TEL demand in higher
priced regions declined at a faster rate than in other regions), and (iv)
aggressive pricing by competitors. Sales of TEL on a wholesale basis decreased
by approximately 20% in 1997 as compared to 1996, declining from 30.2 thousand
metric tons in 1996 to 24.2 thousand metric tons in 1997. This higher than
normal rate of decline mainly resulted from a Mexican phase-out of leaded
gasoline, which market had been supplied by E.I. du Pont de Nemours & Company
(DuPont) with TEL purchased from the Company. The ratio of the Company's retail
TEL sales
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to wholesale TEL sales was 70/30 in 1997 as compared to 68/32 in 1996. Net sales
of Petroleum Specialties declined 12% in 1997 as compared to 1996 because of the
loss of a major customer, while net sales of Performance Chemicals increased 61%
in 1997 as compared to 1996 because of increased demand for Octaquest, a
biodegradable chelating agent used in laundry products.
Gross profit decreased $33.9 million (or 11%) in 1997 to $264.7 million from
$298.6 million in 1996 because lower TEL volumes and adverse currency effects
offset selling price gains and cost improvements. As a percentage of net sales,
gross profit decreased to 49.1% in 1997 as compared to 50% in 1996. This
decrease also reflects TEL being a lower percentage of total sales in 1997.
Operating expenses decreased $2.5 million (or 3.4%) in 1997 to $70.0 million
from $72.5 million in 1996 primarily as a result of cost reduction programs,
including a decrease in research and development expenses of $1.8 million, net
of unfavorable currency translations. As a percentage of net sales, operating
expenses increased in 1997 to 13.0% as compared to 12.1% in 1996.
Other income increased $6.7 million to $7.9 million in 1997 from $1.2 million in
1996 mainly due to foreign currency gains of $6.8 million.
LIQUIDITY AND FINANCIAL CONDITION
----------------------------------------------------------------------
Cash provided by operating activities in 1998 amounted to $238.3 million, an
increase of $70.8 million (42%) over 1997. $45 million of the working capital
reduction related to tax because cash flows in respect of 1997 taxation
liabilities were met by GLCC as part of the spin-off. A further $83.6 million
reduction resulted from internally generated working capital reductions, notably
in debtors where reduced sales levels and a reduction in debtor days from 109
days to 98 days combined to create a $53.6 million reduction. Inventory levels
increased overall, with raw material reductions more than offset by $25 million
increases in finished goods due to bulk shipping patterns and the inclusion of
$3 million of Octel Deutschland inventories on acquisition.
Total expenditure on plant closures was $27.8 million compared to $35.3 million
in 1997. Of this $14.9 million related to personnel severance, and a further
payment of $5 million was made in settlement of all remediation liabilities at
the Bussi site in Italy.
Cash outflows in investing activities included capital expenditure of $23.5
million and business combinations of $26.4 million, the latter including $9.4
million relating to the acquisition of Octel Deutschland and $8.7 million paid
to a former partner in the Cetex International joint venture to acquire the
goodwill and customer list of the Cetex diesel fuel additives business.
Payments of $468.5 million were made to GLCC in 1998, principally relating to
the spin-off. External borrowings in the year relate to the Senior Notes of $150
million and the Senior Debt of $280 million and $11 million under the Revolving
Credit Facility which were put in place as part of the spin-off. During the year
$140 million, 50% of the Senior Debt, was repaid.
18
In the period from August to year-end the Company undertook a stock
buyback program and repurchased 882,280 shares at an aggregate cost of
$14.0 million. 53,228 shares were issued at an aggregate cost of $0.8 million,
comprising 3,000 new stock and 50,228 reissued treasury stock.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
----------------------------------------------------------------------
Between 50% and 60% 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.
Total expenditure on remediation, decontamination and demolition projects
related to the closed manufacturing sites in France, Germany and Italy amounted
to $10.6 million, $13.1 million and $2.8 million in the years 1998, 1997 and
1996, respectively. In December 1998 the Bussi site in Italy was transferred to
Ausimont SpA, and in return for a payment of $5 million Ausimont SpA has
accepted full responsibility for remediation and has indemnified
19
the Company against all current and future environmental liabilities. Other
expenditure of $5.6 million in 1998 relates to ongoing projects.
At Ellesmere Port site in the UK remediation, decontamination and demolition
revenue expenditure was $2.3 million, $0.4 million and $0.9 million and capital
expenditure was $2.7 million, $0.6 million and $0.1 million in the years 1998,
1997 and 1996, respectively.
In addition to environmental compliance the Company has also incurred personnel
severance costs in relation to the ongoing management of the decline in TEL
business. Total severance costs group-wide were $14.9 million, $21.8 million and
$16.0 million in the years 1998, 1997 and 1996, respectively.
Management estimates the total future revenue costs of environmental matters to
be as follows:
(MILLIONS OF DOLLARS)
----------------------------------------------------------------------
ENVIRONMENTAL -- OVERSEAS GROSS $10
-- LESS RECOVERIES (6)
----------------------------------------------------------------------
4
-- UK 56
----------------------------------------------------------------------
TOTAL ENVIRONMENTAL 60
SEVERANCE 35
----------------------------------------------------------------------
$95
----------------------------------------------------------------------
Of the total environmental costs some $34 million relates to costs which will
not be incurred unless and until all manufacturing operations at Ellesmere Port
cease and the site is sold to third parties. Capital costs, not included in the
$95 million noted above, are estimated at $18 million. The majority of
expenditure in 1999 is expected to relate to severance costs of some $16
million.
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.
SINGLE EUROPEAN CURRENCY
----------------------------------------------------------------------
In January 1999, certain European countries began the transition to the Euro.
The transition to the Euro has both internal recordkeeping and external
commercial aspects, neither of which are expected to have a material effect on
the Company's business, results of operations or financial condition.
20
YEAR 2000
----------------------------------------------------------------------
Octel is implementing a program of work, the objective of which is to ensure
that the Company is not adversely affected by "Date Discontinuity" problems in
computers, software and embedded processors during the transition from 1999 to
2000 and as a result of 2000 being a leap year.
Date discontinuity occurs when time as expressed by a system or its software
does not move forward successfully in line with true time. The most commonly
known manifestation of this occurs in systems that recognize years as two digits
and, when moving from `99' to `00', recognize `00' as 1900 or fail altogether.
Additionally, some systems fail to recognize 2000 as a leap year, omitting Feb
29th from their calendars.
PROJECT SCOPE
-------------
The project covers Information Technology (IT) systems, embedded processors,
supply chain and business continuity.
IT systems include central and network hardware, business systems and desktop
hardware and software. Octel has very little bespoke software, the majority
being industry standard packages, customized only where necessary.
Embedded processors include, for example, plant instruments, laboratory
equipment, control systems, data acquisition systems, vehicles and
telecommunications.
Supply chain considerations include liaison with suppliers and customers about
our respective states of readiness for the Year 2000.
Business continuity will consider all areas of the business and put in place
contingency plans to mitigate the consequences arising from key risks
identified.
The project covers all Octel Corp. sites.
PROGRAM
-------
Work is divided into the following key stages:
1. Inventory of hardware, software and embedded systems
2. Analysis of compliance
3. Defining and planning of solutions
4. Implementation and testing of solutions
5. Confirmation of major suppliers' and customers' state of readiness
6. Contingency planning
Steps 1 and 2 are substantially complete.
Step 3 is progressing in all areas as compliance analysis information is
generated. This is being produced by business process reviews and impact
assessments.
21
In the UK there are two key IT legacy system replacement programs (Step 4), both
of which are advancing well:
. Replacement of the existing purchasing and sales order processing system.
. Introduction of Windows NT environment, which will result in
substantial replacement of desktop hardware and software.
In Step 5, all current suppliers of goods and services have been approached and
replies have been received from most suppliers. Key suppliers are the subject of
more detailed scrutiny to monitor the progress of their program. Liaison with
key customers is now ongoing.
The risk analysis relevant to the business which feeds into the contingency plan
(Step 6) covers internal processes, resource requirements and supply chain
issues. This program is progressing well.
Octel Corp. expects to be in full Year 2000 readiness for critical systems by
the end of the third quarter 1999 and will then continue to monitor all areas
through January 2000 and beyond.
COSTS
-----
It is estimated that the total cost of achieving Year 2000 compliance will be
approximately $8.0 million of which $6.5 million will be on IT systems and $1.5
million on embedded processors. This figure is subject to ongoing review and
throughout the project life cycle the business benefit of systems is constantly
challenged and redundant systems will be decommissioned prior to the Year 2000.
Approximately $3 million has been spent to date.
RISKS
-----
The most reasonably likely worst case scenario is an event which would shut down
the Sodium manufacturing process. It has been estimated that this would reduce
TEL production for up to six months. During this time the Company would be able
to maintain supplies to its customers but the cost to the business would be
approximately $11 million.
Through its internal and Supplier Year 2000 projects the Company is working to
minimize the probability of such an event occurring and, through its contingency
planning, to mitigate the consequences.
FUTURE OUTLOOK
----------------------------------------------------------------------
The Company is, and for the next several years is likely to remain, highly
dependent on its principal product, TEL. Over the last three years, TEL has
represented more than 80% of the Company's net sales and has provided
essentially all the Company's 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. In addition,
the Company will have access to the $9 million Revolving Credit Facility not
presently drawn down.
World demand for TEL has been in decline since the 1970s, and this trend is
expected to continue. Through the mid-1990s the Company was able, in part, to
offset the effects of declining volumes with selling price increases.
22
More recently, however, the Company has reduced or foregone price increases in
order to extend the life of the product and to remain competitive with other TEL
marketers and alternate methods of achieving higher octane levels in gasoline.
The Company believes that a competitive pricing environment will continue which
will increasingly limit the ability of the Company to partially offset the
effects of future declines in TEL volumes with price increases.
The Company has and will continue to downsize and restructure its operations
consistent with declining demand for TEL. The cessation of TEL production in
France and Italy and the restructuring of the UK operations have reduced the
cost base to maintain operating margins. Notwithstanding the Company's
continuing downsizing and productivity improvement programs, management expects
the fixed cost per ton of TEL to increase gradually in the future as cost
reductions are not expected to keep pace with declining TEL sales volume.
The marketing agreement with Ethyl positions the Company to optimize returns
over the remaining life of TEL, but is not expected to yield significant
benefits during 1999.
Raw materials, particularly lead, ethylene and salt, account for a substantial
portion of the total manufacturing costs of TEL. These materials are commodities
and are subject to significant price fluctuations over time. While the Company
may or may not be able to pass through to its customers the impact of any such
fluctuations in raw material prices in the future, management does not believe
that any such fluctuations will have a material effect on the Company's results
of operations.
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 Petroleum
Specialties business and the Performance Chemicals business in the future,
earnings from these businesses will not be sufficient to fully offset the
projected decline in TEL sales and earnings, at least over the next several
years.
23
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 generally accepted accounting principles 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 generally accepted auditing standards. 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 accountants to review and evaluate their
accounting, auditing and financial reporting activities and responsibilities.
The independent accountants 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
24
REPORT OF
INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheet 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, 1998, and the results of their operations and their cash flows for
the year in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed
above. The financial statements of Octel Corp. as of December 31, 1997 and for
each of the two years ended December 31, 1997 and 1996 were audited by other
independent accountants whose report, dated April 4, 1998, expressed an
unqualified opinion on those statements.
/s/ PricewaterhouseCoopers
PRICEWATERHOUSECOOPERS
February 9, 1999
25
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES(NOTE 2) $ 465.0 $ 539.1 $ 597.4
COST OF GOODS SOLD 244.3 274.4 298.8
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 220.7 264.7 298.6
OPERATING EXPENSES:
SELLING, GENERAL AND ADMINISTRATIVE 40.1 38.6 40.2
RESEARCH AND DEVELOPMENT 3.1 3.8 5.6
AMORTIZATION OF INTANGIBLE ASSETS 42.6 27.6 26.7
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 85.8 70.0 72.5
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 134.9 194.7 226.1
INTEREST EXPENSE 25.2 2.2 1.6
OTHER EXPENSES 3.8 5.6 7.5
INTEREST INCOME (2.7) (3.9) (3.5)
OTHER INCOME (3.3) (7.9) (1.2)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 111.9 198.7 221.7
- ----------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST -- 24.3 29.6
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES (NOTE 2) 111.9 174.4 192.1
INCOME TAXES (NOTE 5) 41.5 56.7 63.8
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 70.4 $ 117.7 $ 128.3
==================================================================================================================================
BASIC AND DILUTED EARNINGS PERSHARE $ 4.85 $ 7.84 $ 8.08
==================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (IN THOUSANDS) 14,514 15,000 15,900
==================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
26
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
AT DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 26.5 $ 29.7
ACCOUNTS RECEIVABLE (LESS ALLOWANCE OF $0.8 AND $0.9, RESPECTIVELY) 120.6 169.8
INVENTORIES
FINISHED GOODS 61.1 35.7
RAW MATERIALS AND WORK IN PROGRESS 27.8 43.1
- -----------------------------------------------------------------------------------------------------------------
88.9 78.8
PREPAID EXPENSES 4.9 4.4
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 240.9 282.7
PROPERTY, PLANT AND EQUIPMENT (NOTE 9) 116.1 106.0
GOODWILL (NOTE 7) 360.5 379.3
PREPAID PENSION COST (NOTE 3) 73.5 63.3
DEFERRED FINANCING COSTS (NOTE 8) 15.7 --
OTHER ASSETS -- 1.6
- -----------------------------------------------------------------------------------------------------------------
$ 806.7 $ 832.9
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 78.6 $ 40.0
ACCRUED EXPENSES 13.0 9.0
ACCRUED INCOME TAXES 42.6 53.8
CURRENT PORTION OF LONG-TERM DEBT (NOTE 11) 71.0 --
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 205.2 102.8
PLANT CLOSURE PROVISIONS (NOTE 10) 47.1 57.2
DEFERRED INCOME TAXES (NOTE 5) 21.6 20.1
LONG-TERM DEBT (NOTE 11) 229.8 --
OTHER LIABILITIES 1.9 --
GLCC INVESTMENT (NOTE 12) -- 652.8
STOCKHOLDERS' EQUITY (NOTE 13)
COMMON STOCK, $0.01 PAR VALUE, AUTHORIZED
40,000,000 SHARES, ISSUED 14,766,386 SHARES
(ZERO AT 12.31.97) 0.1 --
ADDITIONAL PAID-IN CAPITAL 276.1 --
TREASURY STOCK (832,052 SHARES AT COST) (13.2) --
RETAINED EARNINGS 39.9 --
ACCUMULATED OTHER COMPREHENSIVE INCOME (1.8) --
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 301.1 --
- -----------------------------------------------------------------------------------------------------------------
$ 806.7 $ 832.9
- -----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
27
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(IN MILLIONS)
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 70.4 $ 117.7 $ 128.3
ADJUSTMENTS TO RECONCILE NET INCOME TO
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 59.7 46.8 42.9
DEFERRED INCOME TAXES 1.5 13.3 4.0
OTHER (0.9) 0.5 1.3
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 53.6 26.6 9.2
INVENTORIES (5.7) 1.6 (12.4)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 35.7 (2.6) (19.0)
INCOME TAXES AND OTHER CURRENT LIABILITIES 45.0 (11.6) (9.8)
OTHER NON-CURRENT ASSETS AND LIABILITIES (21.0) (24.8) (16.7)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 238.3 167.5 127.8
CASH FLOWS FROM INVESTING ACTIVITIES
CAPITAL EXPENDITURES (23.5) (17.8) (20.6)
BUSINESS COMBINATIONS, NET OF CASH ACQUIRED (26.4) (130.8) (17.0)
OTHER 1.0 1.6 (14.9)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (48.9) (147.0) (52.5)
CASH FLOWS FROM FINANCING ACTIVITIES
NET CASH PAID TO GLCC (468.5) (31.4) (103.0)
MINORITY INTEREST -- 3.3 7.1
RECEIPT OF LONG-TERM BORROWINGS 441.0 -- --
REPAYMENT OF LONG-TERM BORROWINGS (140.2) -- --
DEFERRED FINANCING COSTS (15.2) -- --
NET REPURCHASE OF COMMON STOCK (NOTE 13) (13.2) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (196.1) (28.1) (95.9)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3.5 (17.6) 21.1
- ---------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3.2) (25.2) 0.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29.7 54.9 54.4
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26.5 $ 29.7 $ 54.9
- ---------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
28
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(IN MILLIONS)
CUMULATIVE
TRANS- TOTAL
GREAT ADDITIONAL LATION COMPRE-
LAKES COMMON TREASURY PAID-IN RETAINED ADJUST- HENSIVE
INVESTMENT STOCK STOCK CAPITAL EARNINGS MENT INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1996 $ 530.8 $ -- $ -- $ -- $ -- $ -- $ --
NET INCOME -- -- -- -- 128.3 -- 128.3
PAYMENTS TO GLCC (102.3) -- -- -- -- -- --
NET CTA* CHANGE -- -- -- -- -- 27.8 27.8
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 428.5 -- -- -- 128.3 27.8 156.1
TRANSFER (NOTE 12) 156.1 -- -- -- (128.3) (27.8) (156.1)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 584.6 -- -- -- -- -- --
NET INCOME -- -- -- -- 117.7 -- 117.7
PAYMENTS TO GLCC (31.0) -- -- -- -- -- --
NET CTA* CHANGE -- -- -- -- -- (18.5) (18.5)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 553.6 -- -- -- 117.7 (18.5) 99.2
TRANSFER (NOTE 12) 99.2 -- -- -- (117.7) 18.5 (99.2)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 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 (NOTE 13) -- -- (14.0) -- -- -- --
SHARE ISSUE (NOTE 13) -- -- 0.8 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 -- 0.1 (13.2) 276.1 39.9 (1.8) 38.1
- ----------------------------------------------------------------------------------------------------------------------------------
*Cumulative translation adjustment
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
29
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
----------------------------------------------------------------------
BASIS OF PRESENTATION
---------------------
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 combined financial statements from
the date of acquisition.
The combined financial statements presented herein for the years ended December
31, 1997 and 1996 give effect to the spin-off as a transfer of ownership
interests between entities under common control. Accordingly, the financial
statements reflect the assets, liabilities, revenues and expenses of GLCC's
petroleum additives business, adjusted only for those parts of that business
which remained part of GLCC after the spin-off. The financial statements have
been prepared as if the Company had existed as an independent entity for all
years and include allocations of certain GLCC expenses prior to the spin-off.
Management believes these allocations are reasonable.
The financial information relating to the pre spin-off period may not
necessarily reflect the consolidated financial position, results of operations
or cash flows of the Company that would have been achieved if the Company had
been a separate, independent company.
NATURE OF OPERATIONS
--------------------
The Company is a major manufacturer and distributor of TEL, Petroleum
Specialties and Performance 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
30
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 approximately two-thirds of
the total compensation for services provided. No separate legal entity or joint
venture has been established as a consequence of the agreements. Sales and
expenses incurred under the agreements 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.
USE OF ESTIMATES
-----------------
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the amount reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
REVENUE RECOGNITION
--------------------
Revenue from sales of products is recognized at the time products are shipped to
the customer or, in the case of bulk shipments, at the time of delivery to
the customer.
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, improvements and interest on
construction are capitalized. Maintenance and repairs are charged to expense
when incurred.
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, 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.
31
DEFERRED FINANCING COSTS
------------------------
The costs related to debt financing are classified as intangible assets in the
balance sheets. All are amortized over the life of the debt.
MINORITY INTEREST
------------------
Minority interest represents income before income taxes as earnings are
predominantly from a partnership and taxes are therefore paid by each partner
individually.
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 recognized in earnings.
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
------------------
The Company has adopted Statement of Financial Accounting Standard No. 128
"Earnings Per Share" for 1998.
32
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period, whilst diluted earnings per share includes
the effect of options and restricted stock that are dilutive and outstanding
during the period.
Prior to the spin-off the Company was not a separate operating company with a
capital structure of its own. Weighted average shares outstanding for 1997 and
1996 have been calculated by applying the distribution ratio (one Company share
for every four GLCC shares) to average GLCC shares outstanding.
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.
2. BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA
----------------------------------------------------------------------
The Company has adopted Statement of Financial Accounting Standard No. 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 three main product
groups: TEL, Petroleum Specialties and Performance Chemicals. The following
table analyzes sales and other financial information by product group:
PRODUCT GROUP DATA
(IN MILLIONS) 1998 1997 1996
------------------------------------------------------------------------
NET SALES:
TEL $ 369.0 $ 442.0 $ 505.1
PETROLEUM SPECIALTIES 63.9 62.6 70.9
PERFORMANCE CHEMICALS 32.1 34.5 21.4
------------------------------------------------------------------------
$ 465.0 $ 539.1 $ 597.4
========================================================================
GROSS PROFIT:
TEL $ 203.5 $ 245.5 $ 281.1
PETROLEUM SPECIALTIES 13.8 13.8 15.9
PERFORMANCE CHEMICALS 3.4 5.4 1.6
------------------------------------------------------------------------
$ 220.7 $ 264.7 $ 298.6
========================================================================
No discrete financial information is maintained below gross profit level.
33
IDENTIFIABLE ASSETS AT YEAR END:
--------------------------------
(IN MILLIONS) 1998 1997 1996
------------------------------------------------------------------------
TEL $ 733.2 $ 766.5 $ 772.3
PETROLEUM SPECIALTIES 51.2 44.3 44.4
PERFORMANCE CHEMICALS 22.3 22.1 24.3
------------------------------------------------------------------------
$ 806.7 $ 832.9 $ 841.0
========================================================================
The majority of the Company's operations are conducted by its UK enterprises.
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
geographic area.
GEOGRAPHICAL AREA DATA
----------------------
(IN MILLIONS) 1998 1997 1996
---------------------------------------------------------------------------------------------------------
NET SALES:
UNITED STATES $ 36.1 $ 39.0 $ 43.6
UNITED KINGDOM 421.6 512.2 527.3
WEST OF EUROPE 70.1 103.5 138.5
SALES BETWEEN AREAS (62.8) (115.6) (112.0)
---------------------------------------------------------------------------------------------------------
$ 465.0 $ 539.1 $ 597.4
=========================================================================================================
INCOME (LOSS) BEFORE INCOME TAXES:
UNITED STATES $ (1.6) $ (1.2) $ 1.7
UNITED KINGDOM 109.4 198.1 208.3
WEST OF EUROPE 4.1 1.8 11.7
=========================================================================================================
$ 111.9 $ 198.7 $ 221.7
---------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS AT YEAR END:
UNITED STATES $ 34.7 $ 30.8 $ 34.8
UNITED KINGDOM 725.1 741.2 717.3
WEST OF EUROPE 46.9 60.9 88.9
---------------------------------------------------------------------------------------------------------
$ 806.7 $ 832.9 $ 841.0
=========================================================================================================
34
3. PENSION PLANS
----------------------------------------------------------------------
Statement of Financial Accounting Standard No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" was issued in December 1997
and is effective for the Company's 1998 fiscal year.
The Company maintains a contributory defined benefit pension plan (The Octel
Pension Plan) 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 plan to cover
service costs to date as recommended by the Company's actuary. Based on this
advice, no contributions were made by the Company or by its employees in the
years 1998, 1997 and 1996. The plan's assets are invested by two investment
management companies in funds holding UK and overseas equities, UK and overseas
fixed interest security,index linked securities, property unit trusts and cash
or cash equivalents.
Assumptions for the plan as of the end of the last three years were as follows:
1998 1997 1996
---------------------------------------------------------------------------
WEIGHTED AVERAGE DISCOUNT RATE 6.25% 7.75% 7.75%
RATE OF INCREASE IN COMPENSATION LEVELS 4.0% 5.5% 5.5%
RATE OF RETURN ON PLAN ASSETS 7.0% 8.5% 8.5%
Net pension cost for the UK pension plan is as follows:
(IN MILLIONS) 1998 1997 1996
---------------------------------------------------------------------------
SERVICE COST $ 10.6 $ 13.4 $ 12.0
INTEREST COST ON PBO 37.8 39.7 35.2
ACTUAL RETURN ON PLAN ASSETS (5.6) (103.4) (60.6)
NET AMORTIZATION AND DEFERRAL (49.9) 50.8 14.1
---------------------------------------------------------------------------
$ (7.1) $ 0.5 $ 0.7
---------------------------------------------------------------------------
35
Movements in PBO and the fair value of plan assets, and the funded status and
prepaid pension cost of the plan are as follows:
(IN MILLIONS) 1998 1997
---------------------------------------------------------------------------
CHANGE IN PBO
BALANCE AT JANUARY 1 $ 494.6 $ 495.6
INTEREST COST 37.8 40.8
SERVICE COST 10.6 15.0
BENEFITS PAID (22.2) (16.1)
ACTUARIAL GAINS/LOSSES 20.2 (20.6)
EXCHANGE VARIANCE 6.5 (20.1)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31 547.5 494.6
---------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS
BALANCE AT JANUARY 1 708.2 644.2
ACTUAL BENEFITS PAID (22.2) (21.1)
ACTUAL CONTRIBUTIONS -- 0.7
ACTUAL RETURN ON ASSETS 5.6 110.6
EXCHANGE VARIANCE 9.0 (26.2)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31 700.6 708.2
---------------------------------------------------------------------------
PLAN ASSETS EXCESS OVER PBO 153.1 213.6
UNRECOGNIZED NET GAIN (82.0) (151.3)
UNRECOGNIZED PRIOR SERVICE COST 7.1 8.0
---------------------------------------------------------------------------
PREPAID PENSION COST 78.2 70.3
ESTIMATED TRANSFER (4.7) (7.0)
---------------------------------------------------------------------------
$ 73.5 $ 63.3
===========================================================================
The estimated transfer represents prepaid pension cost attributable to employees
who participate in the Octel Pension Plan that remained with GLCC after the
spin-off. Final determination of the transfer is subject to, among other things,
a final actuarial evaluation and election of the employees.
4. 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 Octel Corp. Savings Related Stock Plan became effective from November 1,
1998. This is a stock purchase plan, open to all employees at the offer date,
whereby employees may save up to $416 per month over a three-
36
year period. Stock options may then be exercised for a period of six months,
after which the options expire. 141,683 options were granted under the scheme at
a price of $13.20 per share, the market price of the shares at the grant date,
and are exercisable from November 2001 through May 2002. The fair value of the
options was $4.99 estimated using the Black-Scholes model with the following
assumptions: dividend yield 0.0%, expected life of 3 years, volatility 50% and
risk free interest rate of 4.33%.
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, because 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). 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 1998 would not have been material.
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) 1998 1997 1996
--------------------------------------------------------------------------
DOMESTIC $ (1.6) $ (1.2) $ 1.7
FOREIGN 113.5 175.6 190.4
--------------------------------------------------------------------------
$ 111.9 $ 174.4 $ 192.1
--------------------------------------------------------------------------
37
The components of income tax provisions are summarized as follows:
(IN MILLIONS) 1998 1997 1996
------------------------------------------------------------------------
CURRENT:
FEDERAL $ 0.1 $ 0.1 $ 0.1
FOREIGN 39.8 43.3 59.6
------------------------------------------------------------------------
39.9 43.4 59.7
DEFERRED:
FEDERAL -- -- 0.4
FOREIGN 1.6 13.3 3.7
------------------------------------------------------------------------
1.6 13.3 4.1
------------------------------------------------------------------------
$ 41.5 $ 56.7 $ 63.8
------------------------------------------------------------------------
Cash payments(receipts) for income taxes were $(5.7) million, $62.0 million and
$58.0 million during 1998, 1997 and 1996, respectively. Tax payments in
respect of 1998 were made by GLCC.
The effective tax rate varies from the US federal statutory rate because of
the factors indicated below:
1998 1997 1996
------------------------------------------------------------------------
STATUTORY RATE 35.0% 35.0% 35.0%
FOREIGN TAX RATE
DIFFERENTIAL (4.9) (3.5) (2.9)
GOODWILL AMORTIZATION 11.3 2.1 1.3
OTHER (4.3) (1.1) (0.2)
------------------------------------------------------------------------
37.1% 32.5% 33.2%
------------------------------------------------------------------------
Details of deferred tax assets and liabilities are as follows:
(IN MILLIONS) 1998 1997
------------------------------------------------------------------------
DEFERRED TAX ASSETS:
CLOSURE COSTS $ 12.9 $ 17.7
------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
PENSION COSTS 22.1 18.6
GOODWILL AMORTIZATION -- 4.1
OTHER 12.4 15.1
------------------------------------------------------------------------
34.5 37.8
------------------------------------------------------------------------
TOTAL NET PROVISION $ 21.6 $ 20.1
------------------------------------------------------------------------
38
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 and for 1998 amounted to $9.0
million.
In 1997 the Company completed the determination of the profit participation
payments for the years 1989 through 1995 resulting in an addition to the
purchase price of approximately $30 million.
On October 31, 1997 the Company acquired certain fractional interests in the
Company's subsidiaries held by the Vendor partners for a nominal amount.
On November 20, 1997 the Company completed the acquisition of the outstanding
minority in the Company's subsidiaries previously owned by Chevron Chemical
Company for $117 million. The excess of purchase price over the value of net
assets was added to goodwill in 1997.
On October 31, 1998 the Company acquired the customer list of the Cetex
International partnership, a diesel additives business in which the Company
previously held a 50% interest, for $8.7 million.
On December 1, 1998 the Company completed the previously announced acquisition
of Chemische Betriebe Pluto GmbH, a petroleum specialties company formerly owned
by Veba Oel AG. The Company, now known as Octel Deutschland GmbH, has
annual sales of approximately $18 million.
7. GOODWILL
-----------------------------------------------
Goodwill comprises the following:
(IN MILLIONS) 1998 1997
-----------------------------------------------------------------------
GROSS COST $ 522.1 $ 496.9
ACCUMULATED AMORTIZATION (161.6) (117.6)
-----------------------------------------------------------------------
$ 360.5 $ 379.3
-----------------------------------------------------------------------
Based on its most recent analysis the Company believes that no impairment of
goodwill exists as of December 31, 1998.
Amortization of goodwill was $39.9 million, $27.6 million and $26.7 million
in 1998, 1997 and 1996, respectively.
39
8. DEFERRED FINANCING COSTS
---------------------------------------
Costs related to the financing of the spin-off from GLCC were incurred
during 1998 and are amortized over the related debt profile.
(IN MILLIONS) 1998 1997
---------------------------------------------------------------------
GROSS COST $ 16.9 $ --
ACCUMULATED AMORTIZATION (1.2) --
---------------------------------------------------------------------
$ 15.7 $ --
---------------------------------------------------------------------
9. 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) 1998 1997
---------------------------------------------------------------
LAND $ 2.9 $ 2.8
BUILDINGS 1.1 0.6
EQUIPMENT 112.0 101.0
CONSTRUCTION IN PROGRESS 31.0 18.4
---------------------------------------------------------------
147.0 122.8
---------------------------------------------------------------
LESS ACCUMULATED DEPRECIATION 30.9 16.8
---------------------------------------------------------------
$ 116.1 $ 106.0
---------------------------------------------------------------
The estimated additional cost to complete construction in progress is $6.1
million (1997, $17.6 million).
10. 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.
40
The Company has and will continue to downsize and restructure its
operation consistent with declining demand for TEL. Octel closed its
German manufacturing facility in 1989 and ceased production in Italy and France
in 1996. All of the Company's TEL is now produced at its manufacturing plant at
Ellesmere Port in the UK. In December 1998 one of the three TEL plants at the
Ellesmere Port site was closed. Since 1996 the UK workforce has been reduced by
686 people in response to the downsizing of the TEL plants.
Total plant closure costs are evaluated on a regular basis. As at December
31, 1997, the range of potential net remediation costs was assessed as $45-$133
million, with a most likely cost of $94 million. At the same date management
estimated the additional related severance costs to be $50 million. Management
has revised these estimates as of December 31, 1998 to take account of
expenditure incurred during 1998. The current estimate is as follows:
(IN MILLIONS) 1998 1997
------------------------------------------------------------
OPERATING EXPENSES -- REMEDIATION $ 60 $ 74
-- SEVERANCE 35 50
------------------------------------------------------------
95 124
CAPITAL COSTS -- REMEDIATION 18 20
------------------------------------------------------------
$113 $144
------------------------------------------------------------
The estimated remediation costs shown above include $34 million which comprises
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 the $34 million as a contingent liability.
No provision is made for estimated future severance costs until the employees
concerned have been notified and the expenditure is committed. As stated above,
at December 31, 1998 estimated total future severance costs were $35 million of
which $17.1 million were committed.
Capital remediation costs will be included in property, plant and equipment as
expenditure is incurred, in accordance with Company policy. The costs will be
depreciated over the remaining useful life of the related plant.
The year-end provision of $47.1 million is held to cover operating remediation
expenses (excluding contingencies) of $30.0 million and committed severance
costs of $17.1 million.
41
Movements in the provision are summarized as follows:
(IN MILLIONS) 1998 1997
-----------------------------------------------------------------------
BALANCE AT JANUARY 1 $ 57.2 $ 90.3
EXCHANGE EFFECT 2.0 (10.4)
CHARGE FOR THE YEAR 15.7 12.6
EXPENDITURE (27.8) (35.3)
-----------------------------------------------------------------------
BALANCE AT DECEMBER 31 $ 47.1 $ 57.2
-----------------------------------------------------------------------
Expenditure against provisions was as follows:
(IN MILLIONS) 1998 1997 1996
-----------------------------------------------------------------------
SEVERANCE $ 14.9 $ 21.8 $ 16.0
REMEDIATION -- UK 2.3 0.4 0.9
-- OTHER 10.6 13.1 2.8
-----------------------------------------------------------------------
$ 27.8 $ 35.3 $ 19.7
-----------------------------------------------------------------------
Capital expenditure relating to environmental matters in 1998, 1997 and 1996 was
$2.7 million, $0.6 million and $1.0 million, respectively.
11. LONG-TERM DEBT
-----------------------------------------------------------------------
Long-term debt consists of the following:
(IN MILLIONS) 1998 1997
-----------------------------------------------------------------------
SENIOR TERM LOAN $ 139.8 $ --
CREDIT FACILITY 11.0 --
SENIOR NOTES 150.0 --
-----------------------------------------------------------------------
300.8 --
-----------------------------------------------------------------------
LESS CURRENT PORTION (71.0) --
-----------------------------------------------------------------------
$ 229.8 $ --
-----------------------------------------------------------------------
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. The credit facility will mature on December 31, 2001
and the term loan is amortized in quarterly installments to December 31, 2001
subject to early repayment conditions. The term loan is secured on the Company's
UK assets. Loans under the credit facility bear
42
interest at LIBOR plus 1.75 per cent, reducing to LIBOR plus 1.25 per cent when
the outstanding balance under the credit facility is below $140 million or 12
months from first drawdown (whichever is the later).
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%.
The proceeds of the credit facility and the notes were used principally to repay
an intercompany loan to GLCC which arose as a result of the acquisition of the
Chevron minority interest as described in note 6 above and to pay a special
dividend to GLCC in connection with the spin-off.
The credit facility and the notes both contain substantial restrictions on the
Company's operations,including the ability to pay dividends.
The following table presents the projected annual maturities for the next
five years after 1998:
(IN MILLIONS)
------------------------------------------------------
1999 $ 71.0
2000 60.0
2001 19.8
2002 --
2003 37.5
THEREAFTER 112.5
------------------------------------------------------
$ 300.8
------------------------------------------------------
12. GLCC INVESTMENT
------------------------------------------------------
GLCC investment comprises all GLCC funding, including intercompany balances and
debt prior to the spin-off (see note 1).
Payments to GLCC included exchange effect of $4.7 million, $0.4 million and $0.7
million in 1998, 1997 and 1996, respectively.
The net payment of $31.0 million in 1997 includes the receipt of a short-term
loan from GLCC of $116.8 million used to fund the acquisition of the Chevron
interest described in note 6 above.
43
13. STOCKHOLDERS' EQUITY
--------------------------------------------------------
On May 26, 1998 the Company issued 14,762,417 shares of common stock with a par
value of $0.01, nil paid, in connection with the spin-off (see note 1).
A further 969 shares were subsequently issued in respect of late notified
changes in GLCC stockholders at the record date of the spin-off issue.
During 1998 the Company's Board of Directors approved a stock buy back program,
authorizing the repurchase of up to $15 million of its stock, as allowed under
its debt covenants. At December 31, 1998 882,280 shares had been repurchased at
an aggregate cost of $14.0 million.
The Company has also issued 53,228 shares to Directors and senior management at
an aggregate cost of $0.8 million, comprising 3,000 new shares and 50,228 issues
from treasury stock.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------
The following table presents the carrying amount and fair values of the
Company's financial instruments at December 31, 1998 and 1997:
1998 1997
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
------------------------------------------------------------------------
NON-DERIVATIVES:
CASH AND CASH EQUIVALENTS $ 26.5 $ 26.5 $ 29.7 $ 29.7
LONG-TERM DEBT 300.8 306.8 -- --
DERIVATIVES:
MISCELLANEOUS -- (1.2) -- --
------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair values of
financial instruments:
Cash and cash equivalents: The carrying amount approximates to 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 to 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.
44
15. 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 between 50% and 60% of its sales in US dollars, the balance
mainly invoiced in pounds sterling to match the Company's sterling costs. Prior
to the spin-off from GLCC foreign exchange contracts were taken out with GLCC
and (until November 1997) Chevron Chemical Company to hedge dollar income and,
thereby, dollar profit distributions to both parties.
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, 1998 the Company had the following interest rate instruments
in effect (notional amounts in millions; cap, floor and collar rates based on
3-month LIBOR):
1998
NOTIONAL STRIKE PERIOD
AMOUNT RATE
-----------------------------------------------------------
INTEREST SWAP $ 100.0 5.87% 12/98-12/01
INTEREST COLLAR 65.7 5.75% 12/98-12/00
5.45%
No such interest rate agreements were in place at December 31, 1997.
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 utilized to minimize risk. Collateral is not generally
required.
Approximately half of the Company's workforce are covered by a collective
bargaining agreement which expires on January 1, 2000.
16. RELATED PARTY TRANSACTIONS
----------------------------------------------------------------
The Company sells significant qualities of TEL to refineries wholly or partly
owned by BP, Texaco and Mobil (The Vendor Partners) and Chevron Chemical
Company, who ceased to be related parties on October 31, 1997 and November 20,
1997, respectively. Sales were made at arm's length and at prices which varied
according to individual customers and the market in which they operated. In the
years 1997 and 1996 such sales amounted
45
to $80.2 million and $94.7 million, respectively, and amounts due in respect of
those sales at December 31, 1997 were $26.3 million.
Until the spin-off GLCC was a related company. Sales to GLCC are included in the
accounts at estimated market value, and in 1998 (to the spin-off date) 1997 and
1996 amounted to $3.3 million, $7.4 million and $6.4 million, respectively.
Purchases from GLCC for the same periods amounted to $7.1 million, $18.5
million and $15.7 million, respectively.
Interest charges from GLCC in respect of funding provided for acquisitions in
1998 (to the spin-off date), 1997 and 1996 amounted to $3.4 million, $2.1
million and $1.5 million, respectively.
17. 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.This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is at present evaluating
the impact of SFAS 133 on its operations.
Statement of Financial Accounting Standard No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" was issued in October 1998. This
Statement relates to entities engaged in mortgage banking activities and so does
not affect the Company.
18. POST BALANCE SHEET EVENTS
-----------------------------------------------------------------
In February 1999 the Company granted zero cost share options to senior
management under the terms of the Octel Corp. Performance Related Stock Option
Plan (PRSOP) and The Octel Corp. Time Restricted Stock Option Plan (TRSOP).The
107,079 options granted under the PRSOP are exercisable from January 1,
2001 through January 1, 2008. The 181,521 options granted under the TRSOP
are exercisable from December 31, 1999 through December 31, 2007.
46
QUARTERLY SUMMARY (UNAUDITED)
FIRST SECOND THIRD FOURTH
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------
1998
NET SALES $ 123.2 $ 115.6 $ 113.4 $ 112.8
OPERATING INCOME 41.0 35.9 28.0 29.9
NET INCOME 25.6 16.6 10.6 17.7
NET CASH PROVIDED BY OPERATING ACTIVITIES 47.9 66.9 70.3 53.2
PER COMMON SHARE:
EARNINGS -- BASIC 1.73 1.12 0.73 1.26
-- FULLY DILUTED 1.73 1.12 0.73 1.26
MARKET PRICE -- HIGH -- 22.7 20.6 16.2
-- LOW -- 18.2 13.7 11.6
1997
NET SALES $ 123.5 $ 134.6 $ 137.5 $ 143.6
OPERATING INCOME 41.5 48.3 53.2 51.7
NET INCOME 26.4 27.7 29.2 34.4
NET CASH PROVIDED BY OPERATING ACTIVITIES 62.8 41.4 62.3 1.0
PER COMMON SHARE:
EARNINGS -- BASIC 1.79 1.88 1.98 2.19
-- FULLY DILUTED 1.79 1.88 1.98 2.19
MARKET PRICE -- HIGH -- -- -- --
-- LOW -- -- -- --
47
OCTEL CORP.
BOARD OF DIRECTORS
- -----------------------------------------------------------
DR. ROBERT E. BEW
Chairman and Director
Chairman of European Process Industries Competitiveness
Centre Ltd and The Teesside Chemical Initiative
Retired CEO of ICI Chemical & Polymer Division and Chairman
of Phillips Imperial Petroleum Ltd.
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.
Chairman of Great Lakes Chemical Corporation
Former President and CEO of Marsh & McClennan Asset
Management Company
THOMAS M. FULTON
Director
Recently Retired Executive Vice President and CEO
of Landauer Inc.
Director of Landauer Inc.
Director of Great Lakes Chemical Corporation
JAMES PUCKRIDGE
Director
Chairman of Ato Findley UK Ltd.
Director of Thomas Swan & Co. Ltd.
Retired Chairman of Elf Atochem UK Ltd.
DR. BENITO FIORE
Director
Former Chairman and CEO of Enichem UK Ltd.
CHARLES M. HALE
Director
Chairman of Donaldson, Lufkin & Jenrette International
Former General Partner of Lehman Brothers Kuhn Loeb
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
GRAHAM DE M. LEATHES
Corporate Secretary and General Counsel
STEVEN W. WILLIAMS
Vice President, Group Operations
H. ALAN HANSLIP
Vice President, Human Resources
DR. GEOFFREY J. HIGNETT
Vice President, Specialty Chemicals
48
INVESTOR INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICES
Octel Corp.
200 Executive Drive
Newark, DE 19702
USA
SHAREHOLDER INQUIRIES
First Chicago Trust Co. of New York
Mail Suite 4691
P.O. Box 2533
Jersey City, NJ 03303-2533
USA
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, London, UK
LEGAL COUNSEL
Kirkland & Ellis, London, UK
Linklaters & Paines, London, UK
INVESTOR RELATIONS INQUIRIES
Octel Corp.
c/o The Associated Octel Co. Ltd.
P.O. Box 17, Oil Sites Road
Ellesmere Port
South Wirral L65 4HF
UK
Tel: +44(0)151 356 6100
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.
[OCTEL LOGO APPEARS HERE]
"I see this as a five-year horizon. The first years, by necessity, will focus on
managing our current business and paying down our debt ahead of schedule. But,
as we manage those situations, we will be moving forward toward a new and
exciting future for Octel and our shareholders."
-- Dennis J. Kerrison, President and Chief Executive Officer, Octel Corp.
SOUND BITES
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SOUND BITE 1
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"We faced up to reality early. When you're looking at a business that is
declining by 15 percent a year, you can't waste energy trying to change the
rules. You create new ones. You adapt."
- Dennis J Kerrison, President and Chief Executive Officer, Octel Corp.
SOUND BITE 2
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While the TEL business will decline, it will not dry up completely. Lead is
still the most powerful octane booster available, and in many markets, change
will take time. In aviation, for example, there is no substitute for leaded fuel
in gasoline engine planes.
SOUND BITE 3
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"The central advantage we have over the short term is that we lead the market.
At 80 percent of worldwide manufacturing volume and, with the Ethyl Corporation
marketing alliance, nearly 75 percent of sales volume, we have the lion's share
of the market and with that comes our responsibility as leader of the pack."
-- Steve W. Williams, Vice President, Group Operations, Octel Corp.
SOUND BITE 4
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Octel is the only manufacturer of TEL that manufactures and distributes on a
global basis, a key advantage in serving global oil companies.
SOUND BITE 5
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The TEL business is declining at 15 percent a year worldwide. But it remains a
business with high margins and excellent cash flow.
SOUND BITE 6
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Octel provides a range of services, such as environmental consulting,
decommissioning and refinery management, that smaller competitors can't match.
This is the foundation of our service differentiation and Product Stewardship
Program.
SOUND BITE 7
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"As we look ahead to the future, we will concentrate on paying down debt and
managing the TEL decline. But our objective, our mission, is to put Octel firmly
on a growth track."
-- Alan G. Jarvis, Vice President and Chief Financial Officer, Octel Corp.
SOUND BITE 8
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Growth in new fuel additives is a logical progression for a company that has
been in the additives business for over 60 years.
SOUND BITE 9
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"When you have a global infrastructure in place like ours, taking new products
through the pipeline is infinitely easier than breaking into a new distribution
system."
-- Steve W. Williams, Vice President, Group Operations, Octel Corp.
SOUND BITE 10
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Petroleum Specialities supplies a broad range of additives -- such as combustion
enhancers for diesel engines, fuel detergents and corrosion inhibitors.
SOUND BITE 11
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Experience, technical excellence and market knowledge allow Octel to blend
additives made to order for its customers. It's a level of service few
competitors can match.
SOUND BITE 12
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The core of the Performance Chemicals business is the Octaquest range of
products, the main one being an environmentally friendly biodegradable detergent
ingredient. It was developed in partnership with a major detergent manufacturer.
SOUND BITE 13
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The Octaquest range also has potential markets in pulp and paper, cosmetics,
photography and personal care.
SOUND BITE 14
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"The future for Specialty Products is very promising. We have many low-cost,
low-risk ways to grow -- including licensing, bolt-on acquisitions, alliances,
custom synthesis and the development of new markets with existing technologies."
-- Dr. Geoff J. Hignett, Vice President, Specialty Chemicals
SOUND BITE 15
"Reducing the employee work force with maximum sensitivity to the human cost and
an aggressive program of retraining have kept union-management relations
positive in a time of difficult change."
-- Alan Hanslip, Vice President, Human Resources, Octel Corp.
SOUND BITE 16
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"We had to get a very clear understanding of our cost base, and then develop and
implement a plan to drive unnecessary costs out of the business."
-- Alan G. Javis, Vice President and Chief Financial Officer, Octel corp.
SOUND BITE 17
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Even as the company changes dramatically some areas remain constant. Octel
continues to be totally committed to safety and environmental responsibility.
Major emissions at the Ellesmere Port plant, for example, have been reduced by
half in three years.
SOUND BITE 18
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A key step in rethinking and redirecting Octel was to assemble a group of
experienced managers who understand both the oil and chemical industries. They
also have a balance of skills and experience to strategically manage the
decline of TEL, and understand how to grow new businesses. The top eight
executives average 25 years of industry experience.
SOUND BITE 19
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"I see this as a five-year horizon. The first years, by necessity, will focus on
managing our current business and paying down our debt ahead of schedule. But,
as we manage those situations, we will be moving forward toward a new and
exciting future for Octel and our shareholders."
-- Dennis J. Kerrison, President and Chief Executive Officer, Octel Corp.
SOUND BITE 20
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"The most tumultuous period of change is now behind us. Ahead, I believe, is a
time of building on the platform we have created."
-- Dr. Robert E. Bew, Chairman, Octel Corp.