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 March 31, 2002
Commission file number 1-13879
OCTEL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 98-0181725
----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 April 30, 2002
Common Stock, par value $0.01 11,787,181
PART 1 - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31 December 31
2002 2001
(Unaudited)
----------- -----------
(millions of dollars)
Assets
Current assets
Cash and cash equivalents $ 25.4 $ 43.0
Accounts receivable, less allowance
of $3.2 (2001 - $3.2) 100.4 114.9
Other receivable - Veritel 19.2 22.4
Inventories
Finished goods 26.1 32.2
Raw materials and work-in-progress 24.8 22.8
----------- -----------
Total inventories 50.9 55.0
Prepaid expenses 2.0 3.0
----------- -----------
Total current assets 197.9 238.3
Property, plant and equipment 78.0 76.5
Less accumulated depreciation 13.2 9.6
----------- -----------
Net property, plant and equipment 64.8 66.9
Goodwill 339.5 341.7
Intangible asset 48.4 50.5
Deferred finance costs 5.3 5.9
Prepaid pension cost 83.4 82.4
Other assets 1.8 3.0
----------- -----------
$ 741.1 $ 788.7
=========== ===========
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
2
OCTEL CORP. AND SUBSIDIARIES
----------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
March 31 December 31
2002 2001
(Unaudited)
----------- -----------
(millions of dollars)
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 73.1 $ 76.2
Other payable - Veritel 45.0 60.0
Accrued expenses 30.5 24.5
Accrued income taxes 7.5 7.5
Current portion of long-term debt 90.2 85.1
Current portion of deferred income 2.0 2.0
----------- -----------
Total current liabilities 248.3 255.3
Plant closure provisions (note 6) 36.9 39.5
Deferred income taxes 42.0 40.3
Deferred income 8.8 11.4
Long-term debt 98.0 145.9
Minority interest 6.6 5.9
Stockholders' Equity
Common stock, $0.01 par value (note 2) 0.1 0.1
Additional paid-in capital 276.7 276.5
Treasury stock (note 2) (35.1) (35.5)
Retained earnings 124.8 106.4
Accumulated other comprehensive income (66.0) (57.1)
----------- -----------
Total stockholders' equity 300.5 290.4
----------- -----------
$ 741.1 $ 788.7
=========== ===========
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
3
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(millions of dollars except per share) Three Months Ended
-------------------------------------- March 31
2002 2001 2001
---- ---- ----
Adjusted As
(note 1) reported
Net sales $ 114.5 $ 87.2 $ 87.2
Cost of goods sold 65.2 51.6 51.6
---------- ---------- ----------
Gross profit 49.3 35.6 35.6
Operating expenses
Selling, general and administrative 15.9 11.3 11.3
Research and development 1.4 1.0 1.0
Amortization of goodwill - - 11.4
Amortization of intangible assets 2.1 2.5 3.0
---------- ---------- ----------
19.4 14.8 26.7
---------- ---------- ----------
Operating income 29.9 20.8 8.9
Interest expense 4.0 5.4 4.9
Other expenses 0.7 0.7 0.7
Interest income (0.2) (0.7) (0.7)
---------- ---------- ----------
Income before income taxes and
minority interest 25.4 15.4 4.0
Minority interest 0.8 0.7 0.7
---------- ---------- ----------
Income before income taxes 24.6 14.7 3.3
Income taxes (note 5) 6.2 1.8 1.8
---------- ---------- ----------
Net income $ 18.4 $ 12.9 $ 1.5
========== ========== ==========
Earnings per share:
Basic $ 1.56 $ 1.09 $ 0.12
---------- ---------- ----------
Diluted $ 1.47 $ 1.04 $ 0.12
---------- ---------- ----------
Weighted average shares
outstanding (in thousands)
Basic (note 3) 11,566 11,872 11,872
---------- ---------- ----------
Diluted (note 3) 12,454 12,461 12,461
---------- ---------- ----------
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
4
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
March 31
---------------------
2002 2001
---- ----
(millions of dollars)
Cash Flows from Operating Activities
Net income $ 18.4 $ 1.5
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 5.4 18.6
Deferred income taxes 1.7 (0.3)
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses 15.0 19.0
Inventories 3.2 8.4
Accounts payable and accrued expenses 1.4 (4.2)
Income taxes and other current liabilities 0.2 2.0
Other non-current assets and liabilities (1.3) (4.2)
------- -------
Net cash provided by operating activities 44.0 40.8
Cash Flows from Investing Activities
Capital expenditures (1.6) (2.7)
Business combinations, net of cash acquired - (7.1)
Veritel (11.8) -
Other (0.5) (0.6)
------- -------
Net cash used in investing activities (13.9) (10.4)
Cash Flows from Financing Activities
Repayment of long-term borrowings (62.9) -
Receipt of short- term credit 20.0 -
Repurchase of common stock - (0.6)
Minority interest 0.7 0.8
------- -------
Net cash used in financing activities (42.2) 0.2
Effect of exchange rate changes on cash (5.5) (2.3)
------- -------
Net change in cash and cash equivalents (17.6) 28.3
Cash and cash equivalents at beginning of period 43.0 37.7
------- -------
Cash and cash equivalents at end of period $ 25.4 $ 66.0
======= =======
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
5
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
December 31, 2001 $ 0.1 $ (35.5) $ 276.5 $ 106.4 $ (57.1) $ 49.3
Net income - - - 18.4 - 18.4
Net CTA* change - - - - (8.9) (8.9)
Treasury stock issue - 0.4 0.2 - - -
--------- --------- -------- -------- --------- --------
Balance at
March 31, 2002 $ 0.1 $ (35.1) $ 276.7 $ 124.8 $ (66.0) $ 58.8
--------- --------- -------- -------- --------- --------
* 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 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America 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, results of operations and cash flows.
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 25, 2002.
The results for the interim period are not necessarily indicative of the results
to be expected for the full year.
The Company has adopted Statement of Financial Accounting Standards (FAS) 142,
Goodwill and Other Intangible Assets. Accordingly, the statements of income
include comparatives adjusted to reflect the elimination of the $11.4 million
amortization charge related to goodwill. Amortization of deferred finance costs
has been reclassified as an interest expense, and therefore the adjusted
comparatives also reflect the transfer of $0.5 million from amortization of
intangible assets to interest expense.
6
NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
At March 31, 2002, the Company had authorised common stock of 40 million shares
(December 31, 2001 - 40 million). Issued shares at March 31, 2002, were
14,777,250 (December 31, 2001 - 14,777,250) and treasury stock amounted to
2,993,511 (December 31, 2001 - 3,026,775).
Movements in stock options in the first quarter, 2002 were as follows:-
No.
---
Outstanding at December 31, 2001 1,351,311
Granted at $17.13 121,000
Granted at $15.25 121,178
Granted at zero cost 21,000
Exercised (33,264)
Cancelled (12,024)
----------------
Outstanding at March 31, 2002 1,569,201
----------------
The 121,178 options issued at $15.25 relate to the UK Savings Related Share
Option Scheme. The weighted average prices of options exercised and cancelled in
the quarter were $0.04 and $4.80, respectively.
NOTE 3 - EARNINGS PER SHARE AND EBITDA
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. Per share amounts are computed as follows:
2002 2001 2001
---- ----- ----
Adjusted As reported
-------- -----------
Numerator:
Net income available to common shares $ 18.4 $ 12.9 $ 1.5
========= ========== ============
Denominator:
Weighted average common shares outstanding 11,566 11,872 11,872
Dilutive effect of stock options and awards 888 589 589
--------- ---------- ------------
Denominator for diluted earnings per share 12,454 12,461 12,461
========= ========== ============
Net income per share $ 1.56 $ 1.09 $ 0.12
========= ========== ============
Net income per share, diluted $ 1.47 $ 1.04 $ 0.12
========= ========== ============
7
Earnings before interest, tax, depreciation and amortization (EBITDA) is
computed as follows:
Operating income $ 29.9 $ 20.8 $ 8.9
Less other expenses (0.7) (0.7) (0.7)
Add depreciation and amortization 5.4 6.7 18.6
------ ------- -------
$ 3.46 $ 26.8 $ 26.8
====== ======= =======
NOTE 4 - SEGMENTAL REPORTING
The Company has three businesses for management purposes - Lead Alkyls (TEL),
Petroleum Specialties and Performance Chemicals. Because of operational
similarities, Performance Chemicals has been included with Petroleum Specialties
for reporting purposes to create the Specialty Chemicals business segment. This
segmentation basis is consistent with the 2001 Annual Report. There has been no
material change in total assets or liabilities by segment since December 31,
2001. The following table presents a summary of the Company's reportable
segments for the three months ended March 31, 2002 and 2001:
(millions of dollars)
Three months ended March 31
2002 2001 2001
Adjusted As
Reported
Net Sales
TEL $ 68.3 $ 57.8 $ 57.8
Specialty Chemicals 46.2 29.4 29.4
-------- -------- --------
Total $ 114.5 $ 87.2 $ 87.2
-------- -------- --------
Gross Profit
TEL $ 32.6 $ 27.0 $ 27.0
Specialty Chemicals 16.7 8.6 8.6
-------- -------- --------
Total $ 49.3 $ 35.6 $ 35.6
-------- -------- --------
Operating Income
TEL $ 28.0 $ 22.7 $ 10.9
Specialty Chemicals 4.5 1.5 1.4
Corporate Costs (2.6) (3.4) (3.4)
-------- -------- --------
Total $ 29.9 $ 20.8 $ 8.9
-------- -------- --------
8
NOTE 5 - INCOME TAXES
A reconciliation of the U.S. federal statutory tax rate to the effective income
tax rate is as follows:-
Three Months Ended
March 31
2002 2001
---- ----
Statutory rate 35.0% 35.0%
Increase (decrease) resulting from:
Foreign tax rate differential (9.8%) (10.7%)
Amortization of goodwill - 25.9%
Other - (9.8%)
----- ------
25.2% 40.4%
===== ======
NOTE 6 - PLANT CLOSURE PROVISIONS
(millions of dollars) 2002 2001
---- ----
Balance at January 1 $39.5 $ 35.6
Exchange effect (0.8) (0.6)
Charge for the period - -
Expenditure (1.8) (2.5)
----- ------
Balance at March 31 $36.9 $ 32.5
===== ======
Expenditure of $0.7 million in the first three months of 2002 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 $1.1 million related to environmental remediation
activities.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July, 2001 FAS 142, Goodwill and Other Intangible Assets, was issued.
According to this statement, goodwill and intangible assets with indefinite
lives are no longer subject to amortization, but rather an annual assessment of
impairment by applying a fair-value-based test. The statement requires a test
for impairment to be performed annually, or immediately if conditions indicate
that such an impairment could exist. The statement is effective January 1, 2002.
The Company adopted the statement effective January 1, 2002. As a result of
adopting FAS 142 the Company will no longer record goodwill amortization of
approximately $46 million per year on unamortized goodwill at December 31, 2001
of $342 million. The initial impairment test required by the statement must be
completed by June 30, 2002. The Company has not determined the impact, if any,
that this goodwill impairment test will have on the Company's financial position
or results of operations. While the Company does not presently anticipate any
significant impairment in respect of goodwill relating to the Specialty
Chemicals business, the declining TEL market is likely to cause impairment
charges before December 31, 2007, the date upon which the assets would formerly
have become fully amortized. The annual goodwill impairment test will require us
to make a number of
9
assumptions and estimates concerning future levels of earnings and cash flow and
any impairment of goodwill will reduce earnings. Any impairment as a result of
adoption of FAS 142 will be recorded as a change in accounting principle.
The Company will continue to amortize intangible assets of approximately $51
million at December 31, 2001, with an expected finite life, resulting in an
annual charge of approximately $8 million.
A column has been included in the statements of income to show the effect of FAS
142 adjustments on all comparative amounts. Amortization expense of $11.4
million is no longer charged, and because the amortization was not allowable for
taxation the net income increased by the full $11.4 million to $12.9 million.
Basic earnings per share increased from $0.12 to $1.09, and diluted earnings per
share from $0.12 to $1.04 (see note 3).
In July, 2001 FAS 143, Accounting for Asset Retirement Obligations, was issued.
This requires recording the fair value of a liability for an asset retirement
obligation in the period incurred. The amount recorded as a liability is
capitalized by increasing the carrying amount of the related long-lived asset,
which is then depreciated over its useful life. If the liability is settled for
an amount other than the recorded balance, either a gain or loss will be
recognized at settlement. The standard is effective for fiscal years beginning
after June 15, 2002, with earlier application permitted. The Company is
presently evaluating the impact of this standard on its financial position and
results of operations and is preparing an implementation plan.
In August, 2001 FAS 144, Accounting for the Impairment or Disposal of Long-lived
Assets, was issued. FAS 144 establishes a single accounting model, based on the
framework established in FAS 121, for the disposal by sale of long-lived assets.
The standard is effective for fiscal years beginning after December 15, 2001.
The Company adopted FAS 144 effective January 1, 2002 and it did not have a
material effect on the Company's financial position, results of operations or
liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------
RECENT DEVELOPMENTS
- -------------------
At the end of December, 2001, we were notified, under the terms of our
marketing, supply and service agreement with Veritel Chemicals BV, of a
permanent source interruption in the supply of TEL from Russia. This triggered
phased payments to Veritel of $70 million, of which 32% is recoverable under a
separate agreement from Ethyl Corporation. The first payment of $10 million was
made in December, and a further $15 million has been paid in the first quarter,
2002.
Following our adoption of FAS 142 we have now ceased to amortize goodwill in our
income statement. This has a significant impact on our net income and earnings
per share, and to give better comparability we have included a column in the
statements of income adjusting our 2001 results to the same basis. A formal
impairment review is needed before June 30, 2002 and we will meet this
requirement.
Our German manufacturing plant ceased operations in March, 2002. This was as
expected and is part of our ongoing program to restructure operations and reduce
costs in response to the declining market
10
demand for TEL. All related severance and remediation costs were provided at
December 31, 2001, and remediation activities will continue at the site.
RESULTS OF OPERATIONS
- ---------------------
We made an excellent start to fiscal 2002, with net sales and gross profit up
31% and 38%, respectively, compared with the first quarter, 2001.
Specialty Chemicals results reflect both organic growth in our established
business and the effect of the seven companies acquired during the course of
fiscal 2001. Net sales increased $16.8 million to $46.2 million, and $12.7
million of this increase relates to the companies acquired after the first
quarter, 2001.The $4.1 million balance of the increase reflects an organic
growth rate of 14% compared with first quarter, 2001. Overall gross margins were
36.1% of net sales compared with 29.2% in the first quarter, 2001.
Our TEL business had an encouraging first quarter. The overall results include
those of the Chlorine plant, which had net sales of $3.1 million at a breakeven
gross margin. This operated on a cost recovery basis in 2001 under the previous
contractual terms, and so had no net sales in the prior year. Actual TEL net
sales were $65.2 million, an increase of 12.8% over the same period last year.
While we still expect the trend of annual decline in the market to continue in
the long term, volumes in the first three months of 2002 were consistent with
2001 levels because of delivery phasing and new business arising from our
permanent source interruption payments. The increase in sales value arose from a
combination of sales mix and selective price increases. Gross profit was 50.0%
of net sales compared with 46.7% in the first quarter, 2001, reflecting the
results of our continuing program of cost control measures. The German TEL
manufacturing plant was closed in March, 2002 as planned.
Sales, general and administrative costs increased from $11.3 million to $15.9
million. Of the total $4.6 million increase, $3.3 million relates to costs in
the newly acquired companies. We are continuing to explore opportunities to
reduce overall costs through operational synergies.
Our amortization charge has changed substantially. Following our adoption of FAS
142 we no longer amortize goodwill. The equivalent charge in 2001 was $11.4
million. Further, amortization of $0.5 million (2001 - $0.5 million) relating to
deferred finance costs has been reclassified as an interest expense to reflect
its direct relationship with financing activities. Amortization charged of $2.1
million relates to the intangible asset arising from permanent source
interruption payments to Veritel, while the restated comparative amount of $2.5
million predated the Veritel agreement and is mainly in respect of the OBOAdler
customer list which was acquired in November, 1999 and became fully written down
during 2001.
Our interest expense has reduced by $1.4 million due mainly to lower interest
rates following our refinancing and the redemption of 10% Senior Notes in
December, 2001. Our effective tax rate at 25.2% is lower than the reported 2001
rate of 40.4% because amortization is not included in profit before tax in 2002,
but the restated comparative at 12.2% reflects the benefit of one-time tax
refund of $5 million in 2001.
11
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Cash provided by operating activities in the first quarter, 2002 was $44.0
million compared with $40.8 million in 2001, reflecting a strong EBITDA at $34.6
million compared with $26.8 for the first quarter, 2001.
We made the second permanent source interruption payment of $15 million to
Veritel in March, and in January we received $3.2 million from Ethyl
representing its 32% share of the first payment made in December, 2001.We
received Ethyl's share of the March payment to Veritel, $4.8 million, in April.
Our net debt repayment in quarter one, 2002 was $42.9 million. We drew down $20
million on short-term facilities, and repaid the scheduled debt instalment of
$40 million plus an accelerated payment of $23 million based on our surplus cash
flow for fiscal 2001.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our view on critical accounting policies is unchanged since December 31,
2001.The two policies that we consider the most critical in terms of complexity
and subjectivity of assessment are those related to environmental liabilities
and to impairment of goodwill and intangible assets. Any adverse variance
between actual results and our projections in these areas will impact results of
operations and financial condition.
We record environmental liabilities when they are probable and costs can be
estimated reasonably. We have to anticipate the program of work required and the
associated future costs. We also view the costs of vacating our main UK site
($24.9 million at 2001 year end) as a contingent liability because we have no
present intention to exit the site.
We have significant goodwill and intangible assets in our balance sheet, with
net amounts of $340 million and $48 million, respectively, at March 31, 2002. We
regularly review carrying values by reference to future income and cash flows,
but this involves anticipating trading circumstances that will apply in future
years.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
- ---------------------------------------------
Some of the information presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitutes forward-looking
comments within the meaning of the Private Litigation Reform Act of 1995.
Although we believe that our expectations are based on reasonable assumptions
within the bounds of our knowledge of our business and operations, there can be
no assurance that actual results will not differ materially from our
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 our 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.
12
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
We operate manufacturing and blending facilities, offices and laboratories
around the world, although the largest facility is based in the UK, and use
floating rate debt to finance our global operations. We are, therefore, subject
to business risks inherent in non-US activities, including political and
economic uncertainties, import and export limitations, and market risk related
to changes in interest rates and foreign currency exchange rates. We believe
that the political and economic risks are mitigated due to the stability of the
countries in which our largest operations are based.
We use derivative financial instruments, including interest rate swaps and
foreign currency forward exchange contracts, to manage market risks in the
normal course of our business. We do this to manage our exposure to interest and
exchange rate fluctuations and to minimize our borrowing costs. We do not use
derivatives for trading purposes.
There has been no material change in our exposure to market risk as described in
the Form 10-K filed on March 25, 2002.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorised.
Date: May 10, 2002 By /s/ Dennis J Kerrison
-----------------
Dennis J Kerrison
President and
Chief Executive Officer
Date: May 10, 2002 By /s/ Alan G Jarvis
-------------
Alan G Jarvis
Vice President and
Chief Financial Officer
13