SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
Commission file number 1-13879
OCTEL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 98-0181725
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Global House
Bailey Lane
Manchester
United Kingdom M90 4AA
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 011-44-161-498-8889
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X
-----
No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding as of July 31, 2000
Common Stock, par value $0.01 12,091,957 Shares
PART I - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
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OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30 December 31
2000 1999
(Unaudited)
----------------- -----------------
(millions of dollars)
Assets
Current assets
Cash and cash equivalents $ 57.0 $ 37.2
Accounts receivable, less allowance
of $2.2 (1999 - $2.2) 101.0 150.5
Inventories
Finished products 48.0 34.8
Raw materials and work in progress 20.7 29.5
--------- ----------
Total inventories 68.7 64.3
Prepaid expenses 5.0 3.8
--------- ----------
Total current assets 231.7 255.8
Property, plant and equipment 129.2 143.9
Less accumulated depreciation 38.2 39.4
--------- ----------
Net property, plant and equipment 91.0 104.5
Goodwill 352.2 379.2
Intangible asset 16.2 22.7
Deferred finance costs 10.2 12.7
Prepaid pension cost 71.7 72.2
Other assets 2.5 2.4
--------- ----------
$ 775.5 $ 849.5
========= ==========
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
June 30 December 31
2000 1999
(Unaudited)
----------------- -----------------
(millions of dollars)
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 77.7 $ 78.5
Accrued expenses 19.7 17.0
Accrued income taxes 19.9 31.3
Current portion of deferred income 13.1 -
Current portion of long-term debt 50.0 80.0
---------- ----------
Total current liabilities 180.4 206.8
Plant closure provisions (note 4) 38.3 55.6
Deferred income taxes 38.4 35.8
Deferred income 18.9 -
Long-term debt 205.0 233.3
Other liabilities 1.7 1.7
Minority interest 2.5 2.4
Stockholders' equity
Common stock, $0.01 par value (note 2) 0.1 0.1
Additional paid-in capital 276.2 276.1
Treasury stock (note 2) (30.3) (18.9)
Retained earnings 89.9 82.5
Accumulated other comprehensive income
(45.6) (25.9)
---------- ----------
Total stockholders' equity 290.3 313.9
---------- ----------
$ 775.5 $ 849.5
========== ==========
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(millions of dollars except per share data)
Net sales 107.4 $ 129.8 $ 198.4 $ 257.8
Cost of goods sold 63.4 80.6 118.1 159.2
-------- --------- --------- ---------
Gross profit 44.0 49.2 80.3 98.6
Operating expenses
Selling, general and admin. 11.5 11.9 22.7 24.1
Research and development 0.8 0.9 1.7 2.0
Amortization of intangible assets 15.6 10.9 31.4 22.9
-------- --------- --------- ---------
27.9 23.7 55.8 49.0
-------- --------- --------- ---------
Operating income 16.1 25.5 24.5 49.6
Interest expense 5.7 6.3 12.9 13.3
Other expenses/(income) 1.0 (1.5) (2.5) (3.6)
Interest income (0.6) (1.4) (1.9) (1.8)
-------- --------- --------- ---------
Income before income taxes and minority
interest 10.0 22.1 16.0 41.7
Minority interest 0.6 0.1 1.2 0.2
-------- --------- --------- ---------
Income before income taxes 9.4 22.0 14.8 41.5
Income taxes (note 3) 5.2 10.3 7.4 19.4
-------- --------- ---------- ---------
Net income $ 4.2 $ 11.7 $ 7.4 $ 22.1
======== ========= ========== =========
Earnings per share:
Basic $ 0.32 $ 0.84 $ 0.56 $ 1.59
-------- --------- ---------- ---------
Diluted $ 0.32 $ 0.81 $ 0.55 $ 1.54
-------- --------- ---------- ---------
Weighted average shares
outstanding (in thousands)
Basic (note 2) 12,857 13,889 13,141 13,911
-------- --------- ---------- ---------
Diluted (note 2) 13,312 14,434 13,494 14,291
-------- --------- --------- ---------
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
----------------
June 30
----------------------------------
2000 1999
----- -----
(millions of dollars)
Cash Flows from Operating Activities
Net income $ 7.4 $ 22.1
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 40.9 32.5
Deferred income taxes 2.7 1.2
Other 2.1
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses 42.5 (27.7)
Inventories (8.1) 14.1
Accounts payable and accrued expenses (15.5) (4.2)
Deferred income 38.6 -
Income taxes and other current liabilities (10.0) 13.0
Other non-current assets and liabilities 1.9 (11.0)
------------ -------------
Net cash provided by operating activities 102.5 40.0
Cash Flows from Investing Activities
Capital expenditures (4.1) (5.8)
Business combinations, net of cash acquired - (3.9)
Other (1.4) (6.0)
------------ -------------
Net cash used in investing activities (5.5) (15.7)
Cash Flows from Financing Activities
Receipt of long-term borrowings - 16.0
Repayment of long-term borrowings (58.3) (47.7)
Repurchase of common stock (11.3) (1.0)
Minority interest - 0.9
------------ -------------
Net cash used in financing activities (69.6) (31.8)
Effect of exchange rate changes on cash (7.6) (3.0)
------------ -------------
Net change in cash and cash equivalents 19.8 (10.5)
Cash and cash equivalents at beginning of period 37.2 26.5
------------ -------------
Cash and cash equivalents at end of period $ 57.0 $ 16.0
============ =============
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
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OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
(Unaudited)
(millions of dollars)
Additional Total
Common ---------- -----
------ Treasury Paid-in Retained CTA* Comprehensive
Stock -------- ------- -------- ---- -------------
----- Stock Capital Earnings Income
----- ------- -------- ------
Balance at January 1,
2000 $ 0.1 $ (18.9) $ 276.1 $ 82.5 $ (25.9) $ 56.6
Net Income - - - 7.4 - 7.4
Net CTA* change - - - - (19.7) (19.7)
Share issue - - 0.1 - - -
Share buy-back - (11.4) - - - -
-------- -------- ----------- -------- -------- -------------
Balance at June 30,
2000 $ 0.1 $ (30.3) $ 276.2 $ 89.9 $ (45.6) $ 44.3
-------- -------- ----------- -------- -------- -------------
* Cumulative translation adjustment
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
OCTEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
Octel Corp., a Delaware corporation (the Company) is a major manufacturer and
distributor of fuel additives and other specialty chemicals. Its primary
manufacturing operation is located at Ellesmere Port, Cheshire, United Kingdom.
The Company's products are sold globally, primarily to oil refineries.
Principal product lines are lead alkyl antiknock compounds (TEL) and specialty
chemicals.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position and
results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring accruals) have been made which are necessary for a fair
financial statement presentation. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K filed on March 27, 2000.
The results for the interim period are not necessarily indicative of the results
to be expected for the full year.
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NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
At June 30, 2000, the Company had authorised common stock of 40 million shares
(December 31, 1999 - 40 million). Issued shares at June 30, 2000, were
14,777,250 (December 31, 1999 - 14,766,386) and treasury stock amounted to
2,685,293 (December 31, 1999 - 1,314,864). During the six months ended June 30,
2000, 10,864 new shares were issued on the exercise of options under the Octel
Corp. Time Restricted Stock Option Plan at zero cost.
Movements in stock options in the second quarter, 2000 were as follows:-
No.
---
Outstanding at March 31, 2000 1,113,105
Granted - at zero cost 35,562
at $7.8125 408,588
Lapsed (54,462)
Exercised (17,940)
-----------
Outstanding at June 30, 2000 1,484,853
-----------
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period, while diluted earnings per share includes
the effect of options and restricted stock that are dilutive and outstanding
during the period.
NOTE 3 - INCOME TAXES
A reconciliation of the U.S. statutory income tax rate to the effective income
tax rate is as follows:
Six Months Ended
June 30
2000 1999
----- ----
Statutory US Federal tax rate 35.0% 35.0%
Increase (decrease) resulting from:
Foreign tax rate differential (36.0) (4.7)
Amortization of goodwill 49.9 15.8
Other 1.1 0.7
------- --------
50.0% 46.8%
======= ========
NOTE 4 - PLANT CLOSURE PROVISIONS
(millions of dollars) 2000 1999
---- ----
Balance at January 1 $ 55.6 $ 47.1
Exchange effect (2.2) (4.1)
Charge for the period (2.5) 7.0
Expenditure (12.6) (16.7)
-------- --------
Balance at June 30 $ 38.3 $ 33.3
======== ========
Expenditure of $10.6 million in the first six months of 2000 related to
personnel severance costs incurred as part of the Company's ongoing program of
downsizing and restructuring of operations to respond to declining demand for
TEL. The balance of $2.0 million related to environmental remediation
activities.
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NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. In June 1999, FASB issued FAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
FASB Statement No.133". This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138 ("SFAS No. 138"), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
Statement No. 133". SFAS No. 138 amends the accounting and reporting standards
of SFAS No. 133 for certain derivative instruments and certain hedging
activities. The Company is required to adopt SFAS No. 138 concurrently with
SFAS No. 133. The Company is at present evaluating the impact of SFAS No. 133
on its operations.
On December 3, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". Management believes that compliance with SAB No. 101 will not have
any material impact on the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE SIX MONTHS ENDED JUNE 30, 2000
----------------------------------------------------------
Some of the information presented in the following discussion constitutes
forward-looking comments within the meaning of the Private Litigation Reform Act
of 1995. Although the Company believes its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations. Factors which could cause actual results to differ from
expectations include, without limitation, the timing of orders received from
customers, the gain or loss of significant customers, competition from other
manufacturers and changes in the demand for the Company's products, including
the rate of decline in demand for TEL. In addition, increases in the cost of
product, changes in the market in general and significant changes in new product
introduction could result in actual results varying from expectations.
RECENT DEVELOPMENTS
- -------------------
The Company continues to reduce TEL costs and capacity in line with the market
decline in demand. The fourth phase of the UK voluntary severance program has
been extended. The planned reduction in headcount is 360, of which 222 have
already left. The remainder should leave by the end of the year. In the June
quarter the Company began the outsourcing of sodium and ethyl chloride,
intermediates which were formerly manufactured in-house.
On November 9, 1999 the acquisition of the OBOAdler group was completed.
Effective January 1, 2000 OBOAdler entered into sales and marketing agreements
with Ethyl Corporation (Ethyl) similar to those already in place between Octel
and Ethyl. On April 19, 2000 an amount of $39 million was received by OBOAdler
as a prepayment for services provided under the marketing agreements.
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RESULTS OF OPERATIONS
- ---------------------
Operating income for the first half of 2000 and 1999 may be analyzed as
follows:-
(millions of dollars)
Second Quarter Year to date
2000 1999 2000 1999
Net Sales
TEL $ 77.7 $101.1 $135.7 $199.5
Specialty Chemicals 29.7 28.7 62.7 58.3
-------- -------- -------- --------
Total $107.4 $129.8 $198.4 $257.8
-------- -------- -------- --------
Gross Profit
TEL $ 35.2 $ 41.1 $ 61.1 $ 82.0
Specialty Chemicals 8.8 8.1 18.7 16.6
-------- -------- -------- --------
Total $ 44.0 $ 49.2 $ 80.3 $ 98.6
-------- -------- -------- --------
Operating Income
TEL $ 16.2 $ 27.4 $ 23.6 $ 52.3
Specialty Chemicals 2.5 1.5 6.2 3.3
Corporate Costs (2.6) (3.4) (5.3) (6.0)
-------- -------- -------- --------
Total $ 16.1 $ 25.5 $ 24.5 $ 49.6
-------- -------- -------- --------
Operating income comparatives have been restated to reflect the separate
disclosure of corporate costs.
Overall TEL sales for the six months ended June 30, 2000 were $63.8 million
(32%) below 1999 levels. Sales volumes in the second quarter were down by 18%
compared to the same period in 1999 reflecting the continuing long term decline
in demand and increase in competition in the market. There was an increase over
first quarter, 2000 volumes which were depressed by customer stocking up in late
1999. Gross margin for the six months to June 30, 2000 was 45.4% compared to
41.1% in 1999 reflecting the benefits arising from the Company's cost reduction
initiatives.
Specialty Chemicals sales for the year to date were 8% above 1999 levels and
gross profit was 29.8% compared to 28.4% in 1999, continuing the trend in this
growth business in line with the Company's strategy.
Cost reduction initiatives have impacted on sales, general and administrative
costs which were $22.7 million for the first half, 2000 compared to $24.1
million in 1999. Amortization charges increased from $22.9 million to $31.4
million because of the goodwill arising on the acquisition of OBOAdler in
November 1999. The continuing debt repayment program has resulted in a
reduction in interest costs from $13.3 million in 1999 to $12.9 million in 2000.
The current estimate of the effective tax rate has been reassessed at 50%
compared to 40.4% in March, 2000. This has resulted in a second quarter charge
of $5.2 million, 55.4% of pre-tax income.
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Cash inflow from operating activities in the six months ended June 30, 2000 was
$102.5 million compared to $40.0 million for the same period in 1999. $38.6
million arose from a prepayment by Ethyl for services relating to the OBOAdler
marketing agreement. There was a net inflow of $42.5 million due to a reduction
in accounts receivable, partly because of reduced sales but also reflecting a
reduction from 104 days sales at December 31, 1999 to 83 days at June 30, 2000.
-9-
Debt repayments in the second quarter, 2000 were $33.3 million including a
prepayment of $8.3 million. Of the $280 million bank debt incurred in the 1998
spin a total of $255 million has now been repaid.
Total stock repurchases for the first half, 2000 amounted to $11.3 million. The
1999 stock buy back program was completed in the second quarter, 2000 and a
further 369,000 units have been purchased under the 2000 program.
YEAR 2000
- ---------
No significant date discontinuity problems arose during the transition from 1999
to 2000 or as a result of 2000 being a leap year.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
There has been no material change in the Company's exposure to market risk as
described in the Form 10-K filed on March 27, 2000.
PART II - OTHER INFORMATION
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
27 Consolidated Financial Data Schedule
(b) Reports on Form 8-K
On July 21, 2000 the Company filed a Report on Form 8-K relating to an
amendment to its Rights Plan and a Stand-Still Agreement with the Baupost
Group, LLC.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorised.
Date: August 11, 2000 By /s/ Dennis J Kerrison
-----------------
Dennis J Kerrison
President and
Chief Executive Officer
Date August 11, 2000 By /s/ Alan G Jarvis
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Alan G Jarvis
Chief Financial Officer
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------- --------
27 Consolidated Financial Data Schedule 12
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