Exhibit 13.1
[GRAPHIC APPEARS HERE]
OCTEL CORP. 2002 ANNUAL REPORT
STRAIGHT... FORWARD.
TALK.
[PHOTO OF DENNIS J. KERRISON]
Dennis J. Kerrison
president and
chief executive officer
[PHOTO OF DR. ROBERT E. BEW]
Dr. Robert E. Bew
chairman
LETTER TO SHAREHOLDERS
dear shareholders,
In 1998, in Octel Corp.'s first annual report, we presented a vision of our
company's future and outlined a focused business strategy for executing our
goals. Since then our mission has remained the same: to turn a declining
tetraethyl lead (TEL) business into a growing, profitable, global specialty
chemicals company.
Over the past five years we have accomplished a wide array of notable
achievements. By strengthening and broadening our senior management team--adding
resources, skills, and experience as necessary--we have become increasingly well
equipped to meet the challenges of managing and expanding our specialty
chemicals business.
/ MAJOR MILESTONES /
Central to our original strategy was to manage the TEL business end game. We are
proud to have brought this to fruition. Our winning tactic began with setting up
a marketing alliance with Ethyl Corporation, followed by the purchase of Alcor
Chemie. Finally, in the midst of negotiating a global marketing agreement with
Veritel, their Russian suppliers ceased manufacture due to economic and
environmental considerations.
Throughout this time we focused on improving margins and generating the cash we
needed to pay back debt and fund our growth program. Product stewardship also
remained a high priority for us, as evidenced by our expanded investment in
Octel Environmental, our global environmental protection business.
We have also been consistently active in the Specialties area, embarking on a
highly delineated growth strategy and remaining aggressive in following through.
Since 1998 we have made eight acquisitions, established four joint ventures, and
formed two new companies in the specialties market.
In terms of liability management, we have paid back our initial senior debt
fifteen months early, thus creating an impressive saving on the substantial debt
sum of $280 million. We then refinanced the company on improved terms--despite
the uncertain prevailing financial market conditions in the fourth quarter of
2001--and we have succeeded in remaining ahead of our debt repayment schedule.
Other important aspects of our business have also been addressed, such as
further extending our efforts into the areas of safety and training. Over the
last four years we have enjoyed public recognition for achieving major
improvements in our safety record. In fact, the training program developed at
our UK site is being used as a best practice model both in our own industry and
beyond. Remarkably, these accomplishments have taken place against the daunting
backdrop of a series of major downsizing programs at the site.
FINANCIAL HIGHLIGHTS
dollar amounts in millions except per share figures 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF EARNINGS
Net Sales $ 451.5 $ 420.9 $ 422.4 $ 516.8 $ 465.0
Operating income 89.2 58.1 58.7 92.3 134.9
Income before income taxes and minority 77.0 40.9 39.3 77.2 111.9
Minority interest 3.0 4.2 3.6 1.9 -
Income taxes 23.0 19.8 17.4 32.7 41.5
Net Income 52.1 5.6 18.3 42.6 70.4
EBITDA 119.6 145.6 140.2 167.6 194.1
Cash generated by operating activities 100.0 90.0 134.0 108.7 238.3
FINANCIAL POSITION AT YEAR END
Working capital 41.0 68.1 87.2 129.0 106.7
Total assets 747.8 788.7 700.8 849.5 806.7
Long-term debt (Including current portion) 159.2 231.0 210.0 313.3 300.8
Stockholders' equity 362.5 290.4 295.6 313.9 301.1
FINANCIAL RATIOS
Net Income as a percent to sales 11.5 1.3 4.3 8.2 15.1
Effective income tax rate 31.0 54.0 48.8 43.4 37.1
Current ratio 0.9 1.0 1.4 1.2 1.2
SHARE DATA
Earnings per share
-- Basic 4.41 0.47 1.46 3.08 4.85
-- Fully diluted 4.15 0.44 1.41 3.05 4.85
EBITDA per share
-- Basic 10.12 12.38 11.14 12.12 13.37
-- Fully diluted 9.52 11.65 10.78 11.99 13.37
Shares outstanding (basic, thousands)
-- At year end 11,843 11,750 11,907 13,451 13,934
-- Average during year 11,817 11,764 12,581 13,827 14,514
Stock price -- High 26.09 19.2 12.9 15.3 22.7
-- Low 15.80 11.4 7.8 9.7 11.6
-- At year end 15.80 18.0 11.5 10.4 13.9
Accounts details prior to the "spin-off" (May 22, 1998) are derived
from GLCC historic data.
2002 results include the effect of FAS 142 "Goodwill and Other Intangible
Assets" (see Note 1).
2001 net income and earnings per share are stated after charging an
extraordinary item, net of tax, of $11.3 million.
[PHOTO OF PAUL JENNINGS]
Paul Jennings
vice president
and chief financial officer
/ OCTEL TODAY /
In 1998, our stated goal was to achieve our business transition in five years;
today we look to be on target to do this. At Octel we have always faced our
challenges squarely, choosing to see them as opportunities for solving problems
and advancing our position. From our company's earliest days, our stance has
been one of reinvention and transformation.
But in order to sustain this approach over time, we realized early on that we
must create a strong infrastructure of people, operations, and technology that
would act as a springboard for future growth. By every measure, our strategy has
worked. So even as our TEL revenues are greatly reduced, and although the market
has shrunk at a faster rate than predicted, we have continued to grow and
maintain excellent gross margins. Furthermore, as demand for TEL continues to
decline, we are continuing to maximize margins through tight cost control,
customer focus, and economic pricing.
In 2001 and 2002 we reduced the capacity of our TEL plants to keep in line with
world demand, closing the German plant in 2001, and at the end of 2002 we closed
our chlorine plant. It is clear to us that those systems and processes that
supported us well as a leader in TEL were in some respects inadequate as a
platform for our specialties business. So we will be continuing the process of
optimizing our Ellesmere Port site infrastructure to match the changing business
environment. As we reduce and eliminate some of the historic processes that have
stood us in good stead, we are at the same time defining, clarifying, and
building what we need to equip us for market leadership in Specialty Chemicals.
And indeed, both Petroleum Specialties and Performance Chemicals have made
steady progress. Petroleum Specialties has grown significantly from a
loss-making position in 1996. Now a major player in its markets, it offers what
is probably the broadest product range in the sector.
While we still need to develop a more meaningful position in Performance
Chemicals, it, too, is becoming an established business, one that will have a
strong focus on the personal care and coatings markets. We are pleased to be
increasingly recognized, both for the performance of our specialty products and
for our ability to bring novel solutions to our customers. We will continue to
seek opportunities to grow Performance Chemicals.
Our efforts in 2002 were significant: establishing a corporate technology group,
putting in place a corporate manufacturing program, realigning market and
customer focus through the new acquisitions, and strengthening our corporate
development capability. At this time we are carefully evaluating what more we
will need for the future.
/ LOOKING AHEAD /
As we enter into the next phase, we continue to be focused on the way ahead. The
final aspect of our transformation is our global restructuring project, begun in
2002. This involves a thorough re-evaluation of our infrastructure; completing
the integration of our acquisitions to date; and ensuring the company's
operations are optimized.
What does 2003 hold for us? Having already proven our willingness to meet a
challenge head-on and to deliver on promises, we will continue to review and
reinvent our systems, processes, and operations, which in turn will allow us to
build our future on a robust, flexible, and strategic foundation. Our forward
mission is to aim for leadership positions in the niche specialty markets in
which we operate. Our actions in 2002 and 2003 should produce bottom line
benefits in 2004.
As we stand poised to leave our traditional TEL business behind us, we are ready
to fully engage the dynamic world of specialty chemicals. This has been a
radical change, requiring us to take stock, and plan and optimize operations
before moving forward.
We have every reason to believe that 2003 will be a pivotal year for Octel. To
those of our shareholders who have been with us from the start of the
journey--and to those of you who have joined us on the road since then--we wish
to extend our thanks for your patience, support, and companionship along the
way. We give you our commitment that we will do our best to build on
opportunities; continue to pursue our stated mission; and strive to enhance the
value of your investment in Octel.
sincerely,
/s/ Dennis J. Kerrison /s/ Dr. Robert E. Bew
Dennis J. Kerrison Dr. Robert E. Bew
president and chief executive officer chairman
Today, as we review our accomplishments of the past five years, it is clear we
are well on the way to meeting our ambitious goals.
GROWTH
8
ACQUISITIONS.
4
JOINT VENTURES.
2
NEW COMPANIES.
================================================================================
Rapid expansion -- combined with thoughtful restructuring -- has allowed us to
exceed growth expectations and infuse our business with greater vitality. We
have made eight acquisitions, completed four joint ventures, launched two new
companies -- Octel Innovations and Octel Exhaust Systems -- and further
developed Octel Environmental.
FINANCE
$468
MILLION PAID BACK.
================================================================================
To ensure our ability to repay our debt, we have generated cash consistently.
Surpassing our financial projections, we paid back $280 million of spin debt 15
months early and have now repaid $468 million senior debt since 1998. Our
successful refinancing has supported our growth program, allowing us to meet
stock market and shareholder expectations.
TEL
3
STEPS TO WINNING.
================================================================================
Our strategy was to win the endgame for TEL. We set up a marketing alliance with
Ethyl Corporation, and purchased Alcor Chemie. The Russian TEL plant ceased
manufacture at the end of 2001.
HEALTH AND SAFETY
7x
IMPROVEMENT IN OPERATIONS SAFETY.
================================================================================
Since 1998, we have achieved major improvements in both our safety record and
our public recognition during three major change and restructuring programs. Our
safety record has improved almost sevenfold since 1998.
1998-2002
5
GREAT YEARS.
================================================================================
The past is prologue. So as we review and reflect upon our previous five years
of operations and aspirations, we not only take pride in how we've stayed the
course and accomplished our goals, but we set our minds to the next great things
we will do.
[GRAPHIC APPEARS HERE]
octel will be different going... FORWARD.
[GRAPHIC APPEARS HERE]
GLOBALIZATION
broadening our international reach means pushing the limits of our cultural
horizons.
[GRAPHIC APPEARS HERE]
MARKET LEADERSHIP
we're making our mark on the market with a competitive strategy and a will to
win.
[GRAPHIC APPEARS HERE]
INNOVATION
inventing tomorrow means inventing today.
[GRAPHIC APPEARS HERE]
CUSTOMER FOCUS
all eyes are on our prize customers.
[GRAPHIC APPEARS HERE]
ADDING VALUE
shareholders respect value. we respect shareholders.
FINANCIAL REPORT
management's discussion and analysis
of financial condition and results of operations 18
management's statement of responsibility
for financial statements 24
report of independent accountants 25
consolidated statements of income 26
consolidated balance sheets 27
consolidated statements of cash flows 28
consolidated statements of stockholders' equity 29
notes on consolidated financial statements 30
quarterly summary (unaudited) 46
board of directors and corporate officers 47
investor information 48
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The Company has three businesses for management purposes-Lead Alkyls (TEL),
Petroleum Specialties and Performance Chemicals. Because of operational
similarities, Petroleum Specialties and Performance Chemicals have been
aggregated for reporting purposes as the Specialty Chemicals business segment.
The Company's strategy is to maximise cash generation from the declining TEL
business by consolidating the Company's place in the market and by rigorous
management of the cost base. Funds generated by the TEL business will be used to
pay down debt but will also be invested in growing the Specialty Chemicals
business. Investment in these areas will be to stimulate organic growth in
existing areas and/or to grow by acquisition of new businesses.
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 their supplier. 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, 2001. A further total of $50 million has been paid
in 2002 and Ethyl's contribution to all payments to date has been received. The
final $10 million is expected to be paid in the first half of 2003.
Following our adoption of FAS 142, Goodwill and Other Intangible Assets, we
have now ceased to amortize goodwill in our income statement. This has a
significant impact on our net income and earnings per share. We have completed
the transitional impairment tests as required under FAS 142. We have determined
that the fair value of our reporting units exceeded their recorded value, so
there is no requirement to recognize an impairment loss at this time. We will
continue to review the cash flows expected to be generated by our TEL business
segment on a quarterly basis, since the decline of this business will mean that,
at some point in the future, its forecast future cash flows will not be
sufficient to recover the goodwill in respect of the TEL business. Based on
current projections, we expect to start to impair goodwill in 2004.
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 demand for TEL. All related
severance and remediation costs were provided at December 31, 2001, and
environmental remediation activities will continue at the site.
In the third and fourth quarters of 2002, we have recorded a $19.5 million
restructuring charge as part of a group-wide program to reduce the TEL asset and
cost base in line with declining demand and to ensure that the correct
infrastructure and systems exist to globalize the Specialty Chemicals business.
Additional restructuring charges of up to $20 million in aggregate are expected
in 2003 and 2004 across both businesses.
The closure of the UK Chlorine plant, announced in 2001, took place
effective December 31, 2002.
Results of Operations -- Fiscal 2002 Compared to Fiscal 2001
Specialty Chemicals sales at $180.8 million showed growth of 16.0% on 2001
levels. Gross profit was $59.7 million or 33.0% on net sales, an increase in
absolute terms of $5.3 million but slightly below the 2001 percentage of 34.9%.
The increase in sales was principally due to the inclusion for a full year of
the acquisitions made during the course of 2001. The movement in gross profit
also results largely from the increased volume of trade and the change in sales
mix due to the acquisitions, but it has also been impacted by the softness which
has characterized the market for much of the year.
TEL net sales for the year at $256.7 million were $8.3 million (3.1%) below
2001 levels. Fourth quarter volumes were hit by the political situation in
Venezuela, and the global market decline continued. However, this was largely
offset by good management of selling prices. Price increases and a continued
focus on cost control in the UK plant resulted in a gross profit of $136.3
million
18
or 53.1% of net sales, compared with a 2001 gross profit of $134.6 million or
50.8%. This, together with comparable operating expenses, resulted in a 4.5%
increase in operating income (after adjusting for FAS 142 by adding back $43.9
million of goodwill amortization in 2001).
Sales, general and administrative costs at $70.0 million increased by 21%.
An increase of 14% was due to the inclusion for the full year of the 2001
acquisitions, but the higher level of cost also reflects our stated intention to
invest in global infrastructure to support growth.
We have identified restructuring charges separately in this report, and to
allow a consistent comparison we have also reclassified similar items which
arose in 2001. The 2002 charge was $19.5 million in total, of which $13.0
million related to non-cash items. Key components of the overall charge were:
1) Specialty Chemicals asset impairments of $11.2 million arising from
strategic changes in product range or manufacturing processes.
2) TEL asset writedowns of $1.1 million related to operational changes at the
UK plant.
3) Chlorine severance costs of $1.6 million for 26 employees on the closure of
the plant in December, 2002.
4) Severance costs of $0.9 million for 11 Specialty Chemicals employees in the
UK in quarter 3, 2002.
The 2001 restructuring charge of $9.4 million relates mainly to Chlorine
plant severance costs and asset impairment charges of $1.3 million and $6.8
million, respectively. There have been significant severance costs in prior
years relating to plant closures and downsizing as a response to the market
decline in TEL over the years. These have been discussed in this and prior year
reports as they were incurred, but we have not retrospectively re-analyzed these
to restructuring because we believe that there would be no value added to the
exercise by including costs which are, in effect, a fact of life in a declining
market.
Our amortization charge has changed substantially. Following our adoption
of FAS 142 we no longer amortize goodwill. The equivalent charge in 2001 was
$46.6 million. The 2002 charge of $9.5 million relates to the intangible asset
arising from the permanent source interruption payments to Veritel (see Note 8).
The reduction in interest expense from $19.6 million to $13.1 million is
due to the benefits of our refinancing in the fourth quarter of 2001.
Minority interest has decreased by 29% to $3.0 million, reflecting market
softness experienced by our 50% owned US subsidiary, Octel Starreon.
Our effective tax rate fell from 54% in 2001 to 31% in 2002, but after
adjusting for the effect of FAS 142 in removing non-deductible amortization of
$46.6 million in 2001 there is an increase from 24% to 31%, caused by a change
in the disposition of taxable profits between the various geographical areas in
which the group operates.
Results of Operations -- Fiscal 2001 Compared to Fiscal 2000
Annual TEL sales revenues fell by 12% compared with the prior year, mainly due
to volume reductions of 17% reflecting the continuing decline in the world
market. Gross profit was 51% of net sales compared with 43% in fiscal 2000. This
reflected the benefits accruing from prior year cost reduction exercises as well
as selective sales price increases. Cost of goods sold in 2001 included
severance and remediation charges of $10.8 million (2000-$9.4 million).
Specialty Chemicals sales showed an increase of 28% over the prior year,
and gross profit was 35% of net sales compared with 29% in fiscal 2000. Whilst
there was organic growth in this area, the new acquisitions made during the year
had a significant impact on both sales and margins.
Sales, general and administrative costs increased by $16.2 million to $57.7
million. Over 70% of this increase arose from costs in the newly acquired
companies.
Restructuring charges were $9.4 million, including an asset write-down of
$6.8 million related to the UK Chlorine plant.
19
Amortization costs decreased from $61.5 million to $58.7 million, the
charge on new acquisitions being more than offset by a reduction due to assets
becoming fully written down at the end of fiscal 2000. Interest expense reduced
by $3.3 million due to the debt repayment profile.
The effective tax rate for 2001 was 54% of pre-tax income compared with 49%
in fiscal 2000, the net effect of a higher average foreign tax rate and lower
amortization.
An extraordinary expense of $11.3 million was recorded in 2001 in relation
to the early redemption of debt as part of the refinancing exercise. The expense
comprised:
(dollars in millions)
- --------------------------------------------------------
Make-whole premium on Senior Notes $ 10.6
Write-off of unamortized finance costs 6.5
-------
17.1
Less attributable taxation (5.8)
-------
$ 11.3
=======
Liquidity and Financial Condition
Cash generated by operating activities was $100.0 million compared with $90.0
million in 2001. EBITDA, which we use as a measure of liquidity, decreased from
$145.6 million to $119.6 million due to lower operating income. The most
significant movement in operating assets was in accounts receivable, where an
outflow of $33.3 million in 2001 was more than reversed by an inflow of $39.7
million in 2002. Net operating assets increased by $13.0 million in 2002 due to
a decrease in accounts payable and accrued expenses, and an increase of $21.5
million arose from non-current assets and liabilities including a $11.8 million
increase in the pension asset. Capital expenditure in the year was $11.4
million, mainly on UK plant.
During 2002 we incurred expenditure of $50.0 million in permanent source
interruption payments to Veritel. We recovered $16.0 million from Ethyl's 32%
contribution to these payments, and a further $3.2 million for its share of the
$10 million paid in December, 2001. Our share of the outstanding payments is
$6.8 million and we expect to make this payment in the first half of 2003.
The only individually significant item in business combination expenditure
was the deferred consideration payment of $3.6 million made in respect of the
2001 acquisitions, representing 75% of the maximum amounts payable. Any final
settlement will be made in the first half of 2003.
Our net debt repayment for 2002 was $72.0 million. The analysis between
long-term and short-term debt has been restated to reflect the reclassification
of revolving credit. We have drawn down $25.0 million of revolving credit
facilities (2001-$20 million), and repaid scheduled debt installments amounting
to $65.0 million plus an accelerated payment of $23.0 million based on our
surplus cash flow for 2001. Octel Starreon, our 50% owned US subsidiary,
replaced intercompany financing with third party long-term debt of $10 million,
of which $1.7 million is due within one year.
Following our announcement in August of a semi-annual dividend of 5 cents
per share, the first such payment was made on September 30, 2002.
Critical Accounting Policies
The policies that we consider the most critical in terms of complexity and
subjectivity of assessment are those related to environmental liabilities,
impairment of goodwill and intangible assets, pension accounting, restructuring
costs and our marketing agreements with Ethyl. Any adverse variance between
actual results and our projections in these areas may impact on results of
operations and financial condition.
We record environmental liabilities when they are probable and costs can be
estimated reasonably. Remediation provisions at December 31, 2002 amounted to
$30.7 million and relate principally to our sites in the UK and Germany. We have
to anticipate the program of work required and the associated future costs, and
we have to comply with environmental legislation in the relevant countries. We
also view the costs of vacating our main UK site ($27.6 million at 2002 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 $352.8 million and $50.9 million, respectively, at December
31, 2002. These are accounted for in accordance with FAS 142. We regularly
review carrying values by reference to future income and cash flows as set out
in the group's strategic long-term plan, but this involves anticipating trading
20
circumstances that will apply in future years. We do expect, based on current
projections, to begin to impair goodwill for our TEL business segment in 2004.
We account for pensions in accordance with FAS 87 and the disclosure
requirements of FAS 132. The prepaid pension cost is material to our balance
sheet, the net prepayment being $105.2 million at December 31, 2002. The
underlying plan asset value and Projected Benefit Obligation were $580.7 million
and $583.3 million, respectively, at the end of 2002. Movements in these are
dependent on actual return on investments and pay awards, as well as our
assumptions as to future trends in these areas. The continuation of the
prepayment depends on the carrying value of the plan assets exceeding the
Accumulated Benefit Obligation. This surplus at December 31, 2002 was $8.9
million. In the event of a deficit, a balance sheet creditor would be created
equal to the sum of the prepayment and the deficit, and the related charge would
be written off to accumulated other income. We will continue to monitor the
status of the plan on a quarterly basis.
We have commenced a major program of restructuring during the latter half
of 2002. This will be accounted for in accordance with FAS 146. Restructuring
provisions at December 31, 2002 were $5.1 million. We have restated comparative
amounts linked to ongoing projects, mainly the closure of the UK Chlorine plant
which was announced in 2001 but occurred at 2002 year end. Over recent years
there has been an ongoing program of severance and other costs as the decline in
the TEL market caused plant closures and downsizing of operations. We have
considered whether these should be separated for disclosure, and concluded that
there would be no value added to the exercise by including costs which are, in
effect, a fact of life in a declining market. We have not, therefore, included
any further retrospective analysis of restructuring activity, but have focused
on clear disclosure of the activities presently in hand.
We have entered into a number of sales and marketing agreements with Ethyl
for the sale of TEL in all areas of the world except North America through
December 31, 2009. Under these agreements we produce the TEL and all marketing
and sales effort is in the Octel name. Ethyl provides bulk distribution,
marketing and other services. The net proceeds are paid to Ethyl and Octel on an
agreed formula with Octel receiving 68% of the total. The net proceeds are in
the main calculated and settled on a monthly basis, but there is an element
receivable by us from Ethyl which is computed annually in arrears. In prior
years the amounts involved were not significant, but because of increases in the
value of this retrospective element we have decided that it is more appropriate
to recognize a prudent accrual during the year, based on best current estimates
of the expected outcome.
Market Risk
We operate manufacturing and blending facilities, offices and laboratories
around the world, though the largest manufacturing facility is located in the
UK. We sell a range of TEL and Specialty Chemicals to customers around the
world. We use floating rate debt to finance these global operations.
Consequently, we are subject to business risks inherent in non-US activities,
including political and economic uncertainty, import and export limitations, and
market risk related to changes in interest rates and foreign exchange rates. Our
political and economic risks are mitigated by the stability of the countries in
which our largest operations are located. Credit limits, ongoing credit
evaluation and account monitoring procedures are used to minimize bad debt risk.
Collateral is not generally required.
Over half of our sales are in US dollars. Foreign currency sales, primarily
in UK pounds sterling, offset most of our costs, which are also in UK pounds
sterling. To the extent required, US dollars are sold forward to cover local
currency needs. Considering our operating profile, a hypothetical 5% change in
the value of the US dollar relative to every currency in which our sales are
denominated would change net income and cash flows by approximately $5.8 million
and $4.7 million, respectively.
We use derivatives, including interest rate swaps and foreign currency
forward exchange contracts, in the normal course of business to manage market
risks. The derivatives used in hedging activities are considered risk management
tools and are not used for trading purposes. In addition, we enter into
derivative instruments with a diversified group of major financial institutions
in order to monitor the exposure to non-performance of such instruments. Our
objective in managing exposure to changes in interest rates is to limit the
impact of such changes on earnings and cash flow and to lower overall borrowing
costs. Our objective in managing the exposure to changes in foreign exchange
rates is to reduce volatility on earnings and cash flow associated with such
changes.
We use interest swaps to manage interest rate exposure and, under the terms
of the 2001 refinancing agreements, half of the
21
Senior term loan became the subject of swap agreements. As of December 31, 2002
we had cash and cash equivalents of $26.7 million, a bank overdraft of $4.0
million and long-term debt of $159.2 million. A hypothetical absolute change of
1% in interest rates on these balances for a one-year period would change net
income and cash flows by $0.4 million.
The above does not consider the effect of interest or exchange rate changes
on overall activity, nor management action to mitigate such changes.
Contractual Commitments
The following represents contractual commitments at December 31, 2002 and the
effect of those obligations on future cash flows:
Less than 1 to 3 4 to 5 Over 5
(in millions) Total 1 year years years years
- -------------------------------------------------------------------
Long-term debt $ 159.2 $ 56.8 $ 98.1 $ 3.4 $ 0.9
Veritel (gross) 10.0 10.0 - - -
Severance
payments 4.3 4.3 - - -
---------------------------------------------
$ 173.5 $ 71.1 $ 98.1 $ 3.4 $ 0.9
=============================================
Environmental Matters and Plant Closures
The Company is subject to environmental laws in all of the countries in which it
does business. Under certain environmental laws, Octel is responsible for the
remediation of hazardous substances or wastes at currently or formerly owned or
operated properties.
Most of our manufacturing operations have been conducted outside the United
States and, therefore, any liability pertaining to the investigation and
remediation of contaminated properties is likely to be determined under non-US
law.
We evaluate costs for remediation, decontamination and demolition projects
on a regular basis. Full provision is made for those costs to which we are
committed under environmental laws. Total estimated future costs at December 31,
2002 were $59.8 million of which $29.1 million were deemed to be either capital
(rather than revenue) in nature or at management's discretion. Full provision
has been made for the committed costs of $30.7 million. Expenditure against
provisions was $6.6 million, $5.9 million and $5.4 million in the years 2002,
2001 and 2000, respectively.
We have also incurred personnel severance costs in relation to the
management of the decline in the TEL market. Total severance expenditure was
$4.8 million, $3.5 million and $21.6 million in the years 2002, 2001 and 2000,
respectively. Provision is made for severance costs to which the Company is
committed. The provision at December 31, 2002 was $0.6 million. Severance
charges in 2002 related to the restructuring program were $4.5 million, and
expenditure was $1.9 million. The severance element of the restructuring
provision at December 31, 2002 was $3.7 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.
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.
Controls and Procedures
Within 90 days of the filing of this report, we carried out an evaluation under
the supervision and with the participation of our management, including the
Chief Executive Officer and the Chief
22
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that our disclosure
controls and procedures are effective in alerting them, on a timely basis, to
material information that is required to be included in the periodic reports
that we must file with the Securities and Exchange Commission. There have been
no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of that evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses. The certificates pursuant to the Securities Exchange Act
1934 rule 13a-14 and 15d-14, and 18 USC Section 1350 (as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002) are filed with our December 31,
2002 Form 10-K.
Future Outlook
The future outlook reflects the dichotomy between the growing Specialty
Chemicals and the declining TEL business segments. In the last four years,
Specialty Chemicals net sales have increased from 18% to 40% of the Company
total, and its share of gross profit has grown from 8% to 31%. We expect
Specialty Chemicals to continue to grow in importance in the overall Company
results.
The TEL market has been in decline since the 1970's, and this trend is
expected to continue. Given specific uncertainties in the Middle East and South
America, world market decline in 2003 is likely to be between 15% and 25%. Cost
control initiatives in prior years have delivered benefits in the current year,
and the Company will continue to focus on this. We have met $60 million of the
$70 million liability to Veritel, and will clear the outstanding balance in
early 2003. We expect the declining TEL business to continue to be cash
generative.
The Specialty Chemicals business grew significantly in 2001 through
acquisitions. The restructuring charge taken in 2002 will allow us to operate
this business effectively both to provide acceptable returns and to build a base
from which we expect to grow. The benefits from this restructuring will start to
impact results in the second half of 2003 and, more fully, in 2004.
Restructuring activities will continue, and we expect that a further $20
million in aggregate will be incurred in 2003 and 2004. This program is an
integral part of our overall business improvement process, allowing us to
respond effectively to TEL market decline and to provide a sustainable base for
our growth business.
Following our adoption of FAS 142, the annual amortization charge on
goodwill has been replaced by an impairment review process. No impairment charge
is expected to arise in the Specialty Chemicals business. However, the decline
in the TEL market will inevitably result in impairment charges in future years.
Our latest review has revealed no need to recognize an impairment in 2003, but
beyond this the likelihood is that TEL goodwill will be impaired, based on our
current projections, starting in 2004.
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 accounting principles generally accepted in the United States of
America and include amounts that are based on management's informed judgements
and estimates.
The Company maintains accounting systems and internal accounting controls
that 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 that permits the delegation of
authority and responsibility. The systems are monitored by an internal audit
function that reports its findings to management.
The Company's financial statements have been audited by independent
accountants, in accordance with auditing standards generally accepted in the
United States of America. These standards provide for the review of internal
accounting control systems to plan the audit and determine auditing procedures
and tests of transactions to the extent they deem appropriate.
The Audit Committee of the Board of Directors, which consists solely of
non-employee directors, is responsible to the Board of Directors for overseeing
the functioning of the accounting systems and related internal controls and the
preparation of annual financial statements. The Audit Committee periodically
meets with management, internal auditors and the independent auditors to review
and evaluate their accounting, auditing and financial reporting activities and
responsibilities. The independent auditors and internal auditors have full and
free access to the Audit Committee without management's presence to discuss
internal accounting controls, results of their audits and financial reporting
matters.
/s/ Paul W. Jennings
Paul W. Jennings
Vice President and
Chief Financial Officer
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Octel Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Octel Corp. and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the Consolidated Financial Statements effective
January 1, 2002, Octel Corp. ceased amortizing goodwill on adoption of Statement
of Financial Accounting Standard No.142, Goodwill and Other Intangible Assets.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London, United Kingdom
February 10, 2003
25
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
Years ended December 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
Net sales (Note 2) $ 451.5 $ 420.9 $ 422.4
Cost of goods sold 257.3 231.9 257.6
--------------------------------
Gross profit (Note 2) 194.2 189.0 164.8
Operating expenses:
Selling, general and administrative 70.0 57.7 41.5
Research and development 6.0 5.1 3.1
Restructuring charge 19.5 9.4 -
Amortization of goodwill and intangible assets 9.5 58.7 61.5
--------------------------------
Total 105.0 130.9 106.1
--------------------------------
Operating income (Note 2) 89.2 58.1 58.7
Interest expense 13.1 19.6 22.9
Other expenses 0.9 0.3 0.1
Interest income (0.7) (2.1) (2.1)
Other income (1.1) (0.6) (1.5)
--------------------------------
Income before income taxes and minority interest 77.0 40.9 39.3
Minority interest 3.0 4.2 3.6
--------------------------------
Income before income taxes (Note 2) 74.0 36.7 35.7
Income taxes (Note 5) 23.0 19.8 17.4
--------------------------------
Income after income taxes 51.0 16.9 18.3
--------------------------------
Share of affiliated company earnings 1.1 - -
Extraordinary item, net of income taxes (Note 12) - 11.3 -
--------------------------------
Net income $ 52.1 $ 5.6 $ 18.3
================================
Basic earnings per share (before extraordinary item) $ 4.41 $ 1.43 $ 1.46
================================
Basic earnings per share (after extraordinary item) $ 4.41 $ 0.47 $ 1.46
================================
Diluted earnings per share (before extraordinary item) $ 4.15 $ 1.35 $ 1.41
================================
Diluted earnings per share (after extraordinary item) $ 4.15 $ 0.44 $ 1.41
================================
Weighted average shares outstanding (in thousands) -- basic 11,817 11,764 12,581
-- diluted 12,557 12,501 13,000
The accompanying notes are an integral part of these statements.
26
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
At December 31 2002 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 26.7 $ 43.0
Accounts receivable (less allowance of $3.1 and $3.2, respectively) 80.7 114.9
Other receivable -- Veritel (Note 8) 3.2 22.4
Inventories
Finished goods 25.3 32.2
Raw materials and work-in-progress 30.4 22.8
--------------------------
55.7 55.0
Prepaid expenses 5.5 3.0
--------------------------
Total current assets 171.8 238.3
Property, plant and equipment (Note 10) 56.8 66.9
Goodwill (Note 7) 352.8 341.7
Intangible assets (Note 8) 50.9 50.5
Deferred finance costs (Note 9) 4.4 5.9
Prepaid pension cost (Note 4) 105.2 82.4
Other assets 5.9 3.0
--------------------------
$ 747.8 $ 788.7
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 4.0 $ -
Accounts payable 55.2 61.9
Other payable -- Veritel (Note 8) 10.0 60.0
Accrued expenses 45.9 38.8
Accrued income taxes 13.7 7.5
Current portion of long-term debt (Note 12) 56.8 65.1
Current portion of deferred income (Note 13) 2.0 2.0
--------------------------
Total current liabilities 187.6 235.3
Plant closure provisions (Note 11) 36.4 39.5
Deferred income taxes (Note 5) 41.7 40.3
Deferred income (Note 13) 8.4 11.4
Long-term debt (Note 12) 102.4 165.9
Other liabilities 4.2 -
Minority interest 4.6 5.9
STOCKHOLDERS' EQUITY (Note 14)
Common stock, $0.01 par value, authorized 40,000,000 shares, issued 14,777,250
shares 0.1 0.1
Additional paid-in capital 276.7 276.5
Treasury stock (2,934,420 and 3,026,775 shares at cost, respectively) (34.5) (35.5)
Retained earnings 157.9 106.4
Accumulated other comprehensive income (37.7) (57.1)
--------------------------
Total stockholders' equity 362.5 290.4
--------------------------
$ 747.8 $ 788.7
==========================
The accompanying notes are an integral part of these statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years ended December 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 52.1 $ 5.6 $ 18.3
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 32.4 87.2 80.2
Deferred income taxes 1.6 (0.8) 5.2
Extraordinary item (gross) - 17.1 -
Loss on disposal of equipment 5.7 1.1 2.0
Unremitted earnings of affiliated companies (1.1) - -
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses 39.7 (33.3) 51.9
Inventories 3.5 4.3 4.7
Accounts payable and accrued expenses (13.0) 15.3 (7.2)
Deferred income received - - 38.6
Income taxes and other current liabilities 0.6 0.4 (20.6)
Other non-current assets and liabilities (21.5) (6.9) (39.1)
-------------------------------------------
Net cash provided by operating activities 100.0 90.0 134.0
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (11.4) (8.4) (6.6)
Business combinations, net of cash acquired (5.8) (59.1) -
Veritel (Note 8) (30.8) (9.5) -
Other (3.8) (1.0) (4.1)
-------------------------------------------
Net cash used in investing activities (51.8) (78.0) (10.7)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Minority interest (1.4) 0.3 2.0
Receipt of long-term borrowings 16.6 210.0 -
Repayment of long-term borrowings (88.6) (191.7) (103.3)
Refinancing costs (Note 12) - (16.7) -
Dividends paid (0.6) - -
Other - 0.5 -
Issue of treasury stock 0.2 1.0 -
Repurchase of common stock (Note 14) (0.2) (4.0) (13.6)
-------------------------------------------
Net cash used in financing activities (74.0) (0.6) (114.9)
Effect of exchange rate changes on cash and cash equivalents 5.5 (6.1) (7.9)
-------------------------------------------
Net change in cash and cash equivalents (20.3) 5.3 0.5
Cash and cash equivalents at beginning of year 43.0 37.7 37.2
-------------------------------------------
Cash and cash equivalents at end of year $ 22.7 $ 43.0 $ 37.7
===========================================
The accompanying notes are an integral part of these statements.
28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
Accumulated
Additional Other Total
Common Treasury Paid-in Retained Comprehensive Stockholders
Stock Stock Capital Earnings Income Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $ 0.1 $ (18.9) $ 276.1 $ 82.5 $ (25.9) $ 313.9
Net income - - - 18.3 - 18.3
Net CTA/1/ change - - - - (23.0) (23.0)
Repurchase of treasury stock - (13.6) - - - (13.6)
--------------------------------------------------------------------------------
Balance at December 31, 2000 0.1 (32.5) 276.1 100.8 (48.9) 295.6
Net income - - - 5.6 - 5.6
Net CTA/1/ change - - - - (8.2) (8.2)
Repurchase of treasury stock - (4.0) - - - (4.0)
Issue of treasury stock - 1.0 0.4 - - 1.4
--------------------------------------------------------------------------------
Balance at December 31, 2001 0.1 (35.5) 276.5 106.4 (57.1) 290.4
Net income - - - 52.1 - 52.1
Dividend ($0.05 per share) - - - (0.6) - (0.6)
Derivatives/2/ - - - - (1.8) (1.8)
Net CTA/1/ change - - - - 21.2 21.2
Repurchase of treasury stock - (0.2) - - - (0.2)
Issue of treasury stock - 1.2 0.2 - - 1.4
--------------------------------------------------------------------------------
Balance at December 31, 2002 $ 0.1 $ (34.5) $ 276.7 $ 157.9 $ (37.7) $ 362.5
================================================================================
/1/ Cumulative Translation Adjustment
/2/ Unrealized exchange gains/(losses) on derivative instruments
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Total comprehensive income for the year ended December 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Net income for the year $ 52.1 $ 5.6 $ 18.3
Changes in foreign currency translation adjustment 21.2 (8.2) (23.0)
Unrealized exchange gains/(losses) on derivative instruments (1.8) - -
-------------------------------------------
Total comprehensive income $ 71.5 $ (2.6) $ (4.7)
===========================================
The accompanying notes are an integral part of these statements.
29
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
basis of preparation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America and
include all subsidiaries of the Company where ownership is 50% or greater and
the Company has effective management control. All significant intercompany
accounts and balances have been eliminated upon consolidation.
All acquisitions are accounted for as purchases and the results of
operations of the acquired businesses are included in the consolidated financial
statements from the date of acquisition.
The Company has adopted Statement of Financial Accounting Standards (FAS)
142, Goodwill and Other Intangible Assets. Accordingly, the income statement now
excludes goodwill amortization charges.
No adjustment of comparatives on the face of the income statement is
required under FAS 142, but the effects on amounts reported for the years ended
December 31, 2001 and 2000 would be as follows:
(in millions, except per share) Reported FAS 142 Adjusted
- ------------------------------------------------------------------------------------------------------
2001
Operating income $ 59.3 $ 46.6 $ 105.9
Income before income taxes 36.7 46.6 83.3
Net income (before extraordinary item) 16.9 46.6 63.5
Net income (after extraordinary item) $ 5.6 $ 46.6 $ 52.2
------------------------------------------
Basic earnings per share (before extraordinary item) $ 1.43 $ 3.97 $ 5.40
------------------------------------------
Basic earnings per share (after extraordinary item) $ 0.47 $ 3.97 $ 4.44
------------------------------------------
Diluted earnings per share (before extraordinary item) $ 1.35 $ 3.73 $ 5.08
------------------------------------------
Diluted earnings per share (after extraordinary item) $ 0.44 $ 3.73 $ 4.17
------------------------------------------
2000
Operating income $ 58.7 $ 48.2 $ 106.9
Income before income taxes 35.7 48.2 83.9
Net income $ 18.3 $ 48.2 $ 66.5
------------------------------------------
Basic earnings per share $ 1.46 $ 3.83 $ 5.29
------------------------------------------
Diluted earnings per share $ 1.41 $ 3.71 $ 5.12
------------------------------------------
30
The Company has reviewed certain disclosures:
1) Restructuring charges have been identified separately in the income
statement. Prior year charges of $9.4 million have been reclassified from
cost of goods sold ($8.3 million), sales, general and administrative costs
($(0.1) million) and other expenses ($1.2 million) to restructuring charges
to allow consistent comparison.
2) Certain purchase accruals have been reclassified from accounts payable to
accrued expenses, which management feels is more appropriate. The balance
sheet at December 31, 2001 has been restated by a transfer of $14.3 million
to allow consistent comparison.
3) The revolving bank credit facility has been reclassified from current portion
to the long-term element of debt. The balance sheet and cash flow statement
at December 31, 2001 have been restated by a transfer of $20.0 million to
allow consistent comparison.
Nature of Operations
The Company is a major international manufacturer and distributor of TEL and
Specialty Chemicals, operating in 23 countries worldwide. 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 for the period to December
31, 2009. All marketing and sales effort made under the arrangement is made in
the name of Octel. Octel will continue to produce all TEL marketed under the
agreements and also provide marketing and other services. Ethyl will continue to
provide bulk distribution services, marketing and other services. The net
proceeds under the agreements are paid to Octel and Ethyl as compensation for
services and are based on an agreed-upon formula, with Octel receiving 68% of
the total compensation for services provided. No separate legal entity or joint
venture has been established as a consequence of the agreement. Sales and
expenses incurred under the agreement are included within Octel's income
statement. These comprise all revenues and costs incurred directly by Octel,
together with costs recharged by Ethyl for distribution and other services
provided under the terms of the agreements. Ethyl's share of the net proceeds
for services is charged within cost of goods sold. This relationship was
extended effective January 1, 2000 when OBOAdler entered into a similar
agreement. Effective July 1, 2001 Ethyl agreed to participate in the Veritel
agreement (Note 8) and the scope of the agreements was extended to cover the
European Economic Area.
Use of Estimates
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes, principally in the
area of remediation provisions (Note 11), goodwill (Note 7) and intangible
assets (Note 8). Actual results could differ from those estimates.
Revenue Recognition
The Company supplies products to customers from its various manufacturing sites,
and in some instances from containers held on customer sites, under a variety of
standard shipping terms and conditions. In each case revenue is recognized when
the transfer of legal title, which is defined and generally accepted in the
standard terms and conditions, arises between the Company and the customer.
A component of Ethyl's share of net proceeds (see Nature of Operations
above) is an amount recoverable from Ethyl that is agreed annually in arrears.
The Company recognizes this quarterly, based on best current estimates of the
expected outcome.
Cash Equivalents
Investment securities with maturities of three months or less when purchased are
considered to be cash equivalents.
31
Inventories
Inventories are stated at the lower of cost (FIFO method) or market price.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line method. The cost of additions and improvements are capitalized.
Maintenance and repairs are charged to expenses.
Goodwill and other Intangible Assets
Effective January 1, 2002, the Company adopted FAS 142, Goodwill and Other
Intangible Assets. Under FAS 142, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized, but are subject to an annual
impairment test. Other intangible assets continue to be amortized over their
useful lives. In the second quarter of 2002, the Company completed the
transitional impairment tests of goodwill as of January 1, 2002. Additionally,
the Company performed its annual impairment test in the fourth quarter of 2002.
No impairment was present upon performing either of the 2002 impairment tests.
At December 31, 2002, goodwill associated with the Company's reportable
business segments was $270.0 million for TEL and $82.8 million for Speciality
Chemicals. The intangible asset with a finite life associated with TEL was $50.9
million at December 31, 2002 and is being amortized on a straight-line basis to
December 31, 2007 (see Note 8).
Prior to adoption of FAS 142 goodwill, the excess of investments over the
net assets of subsidiaries acquired, was amortized on a straight-line basis for
periods of up to 35 years. The majority of goodwill relates to the TEL business
and was being amortized over ten years from January 1, 1998, which was then the
expected remaining life of the business. Adoption of FAS 142 has not impacted
the method of amortizing the intangible asset.
The Company regularly evaluates the realizability of goodwill and the
intangible asset based on projected undiscounted cash flows, net of the carrying
amount of the tangible net assets, and operating income for each business.
Deferred Finance Costs
The costs related to debt financing are classified as intangible assets and
separately disclosed in the balance sheets. All are amortized over the profile
of the debt.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets based on
undiscounted operating cash flows whenever significant events or changes occur
which might impair recovery of recorded costs and writes down net recorded costs
to fair value (based on discounted cash flows or market values) if recorded
costs, prior to impairment, are higher.
Derivative Financial Instruments
The Company uses various derivative instruments, including forward currency
contracts and options and interest rate swaps, to manage certain 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.
FAS 133, Accounting for Derivative Instruments and Hedging Activities, was
adopted by the Company effective January 1, 2001. FAS 133 establishes accounting
and reporting standards for derivative instruments, and requires that an entity
recognize all derivatives as either assets or liabilities in the consolidated
balance sheet and measure those instruments at fair value. FAS 133 prescribes
requirements for designation and documentation of hedging relationships and
ongoing assessments of effectiveness in order to qualify for hedge accounting.
Changes in the fair value of derivatives that are not designated as hedges, or
do not meet the requirements for hedge accounting under FAS 133, are recognized
in earnings.
Prior to the adoption of FAS 133, derivatives that were designed as, and
effective as, a foreign currency hedge were accounted for using the deferral
method.
Environmental Compliance and Remediation
Environmental compliance costs include ongoing maintenance, monitoring and
similar costs. Environmental costs are accrued when
32
environmental assessments or remedial efforts are probable and the cost can be
reasonably estimated. Such accruals are adjusted as further information develops
or circumstances change. Costs of future obligations are not discounted to their
present values.
Earnings Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period, while diluted earnings per share includes
the effect of options and restricted stock that are dilutive and outstanding
during the period.
Foreign Currencies
The local currency has been used as the functional currency throughout the
group. Exchange differences arising on the retranslation of opening balance
sheets of overseas subsidiaries are taken to a separate equity reserve, the
cumulative translation adjustment. Gains and losses on foreign currency
transactions are included in other expenses in the income statement.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, when the exercise price
of employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recorded. The Company has adopted
the disclosure-only provisions of FAS 123, Accounting for Stock-Based
Compensation and FAS 148, Accounting for Stock-Based Compensation -- Transition
and Disclosure.
Pension Plans and Other Post-Employment Benefits
Annual costs of pension plans are actuarially determined based on FAS 87,
Employers' Accounting for Pensions. The Company has conformed its pension and
other post-retirement disclosures to comply with FAS 132, Employers' Disclosures
about Pensions and Other Post-Retirement Benefits.
NOTE 2. BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA
The Company's operations consist of one dominant industry segment: petroleum
additives.
The Company has three businesses for management purposes -- TEL, Petroleum
Specialties and Performance Chemicals. Because of operational similarities,
Petroleum Specialties and Performance Chemicals have been aggregated for
reporting purposes as the Specialty Chemicals business segment. Chlorine is not
a reportable segment, but has been disclosed separately within TEL to give
greater comparability. Prior to 2002, it operated on a cost recovery contractual
basis and had no sales. The following table analyzes sales and other financial
information by product group:
Product Group Data
(in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
NET SALES:
TEL-Ongoing $ 256.7 $ 265.0 $ 300.6
TEL-Chlorine 14.0 - -
------------------------------------------
270.7 265.0 300.6
Specialty Chemicals 180.8 155.9 121.8
------------------------------------------
$ 451.5 $ 420.9 $ 422.4
------------------------------------------
GROSS PROFIT:
TEL-Ongoing $ 136.3 $ 134.6 $ 129.1
TEL-Chlorine (1.8) - -
------------------------------------------
134.5 134.6 129.1
Specialty Chemicals 59.7 54.4 35.7
------------------------------------------
$ 194.2 $ 189.0 $ 164.8
------------------------------------------
OPERATING INCOME:
TEL-Ongoing $ 117.9 $ 68.9 $ 58.6
TEL-Chlorine (1.8) - -
------------------------------------------
116.1 68.9 58.6
Specialty Chemicals 9.7 13.1 11.3
Corporate (17.1) (14.5) (11.2)
Restructuring (19.5) (9.4) -
------------------------------------------
$ 89.2 $ 58.1 $ 58.7
------------------------------------------
IDENTIFIABLE ASSETS AT YEAR END:
TEL $ 535.7 $ 593.6 $ 560.0
Specialty Chemicals 212.1 195.1 140.8
------------------------------------------
$ 747.8 $ 788.7 $ 700.8
------------------------------------------
33
Sales by geographic area are reported by source (where the transaction
originates) and by destination (where the final sale to customers is made).
Intercompany sales are priced to recover cost plus an appropriate mark-up for
profit and are eliminated in the consolidated financial statements.
Identifiable assets are those directly associated with the operations of
the geographical area.
Geographical Area Data
(in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
NET SALES BY SOURCE:
United States $ 72.7 $ 63.7 $ 59.4
United Kingdom 278.9 271.2 305.2
Rest of Europe 146.8 134.9 108.9
Other 25.3 22.2 6.5
Sales between areas (72.2) (71.1) (57.6)
-----------------------------------------
$ 451.5 $ 420.9 $ 422.4
=========================================
NET SALES BY DESTINATION:
United States $ 80.1 $ 74.1 $ 51.7
United Kingdom 36.8 24.2 29.4
Rest of Europe 63.1 46.6 36.9
Other 271.5 276.0 304.4
-----------------------------------------
$ 451.5 $ 420.9 $ 422.4
=========================================
INCOME /(LOSS)
BEFORE INCOME TAXES:
United States $ (3.2) $ (4.5) $ (0.9)
United Kingdom 63.6 (4.5) 3.8
Rest of Europe 9.2 48.5 32.7
Other 4.4 (2.8) 0.1
-----------------------------------------
$ 74.0 $ 36.7 $ 35.7
=========================================
IDENTIFIABLE ASSETS
AT YEAR END:
United States $ 66.6 $ 74.6 $ 44.0
United Kingdom 531.1 561.0 531.5
Rest of Europe 144.2 145.0 115.9
Other 5.9 8.1 9.4
-----------------------------------------
$ 747.8 $ 788.7 $ 700.8
=========================================
NOTE 3. STOCK OPTION PLANS
The Company has six stock option plans which provide for the issuance of options
to key employees and directors of the Company. All grants are at the sole
discretion of the Compensation Committee of the Board of Directors, which
administers the plans. Grants may be priced at market value or at a premium or
discount. Vesting periods are up to four years and exercise periods of up to
seven years. A total of 2,075,000 shares have been approved by the shareholders
for allocation to the issue of share options.
The following table summarizes the transactions of the Company's stock
option plans for the three year period ended December 31, 2002:
Weighted Weighted
Number of Average Average
Shares Exercise Price Fair Value
- -------------------------------------------------------------------------------
Options outstanding
December 31, 1999 1,113,105 $ 8.09
Granted -- at discount 444,150 $ 7.19 $ 3.75
Exercised (21,098) -
Cancelled (59,953) -
------------------------------------------
Options outstanding
December 31, 2000 1,476,204 $ 8.26
Granted -- at discount 97,177 $ - $ 13.58
-- at premium 149,679 $ 13.09 $ 4.87
Exercised (87,986) $ 10.26
Cancelled (153,617) $ 11.32
Cancelled for payment (130,146) -
------------------------------------------
Options outstanding
December 31, 2001 1,351,311 $ 8.52
Granted -- at discount 123,406 $ 14.97 $ 5.93
-- at premium 174,813 $ 16.41 $ 4.46
Exercised (105,855) $ 1.54
Cancelled (33,043) $ 6.41
Cancelled for payment (32,909) $ 1.86
------------------------------------------
Options outstanding
December 31, 2002 1,477,723 $ 10.69
==========================================
34
The following table summarizes information about options outstanding at December
31, 2002:
Number Weighted Weighted Number Weighted
Oustanding Average Average Exercisable Average
Range of Exercise Price at 12-31-02 Remaining Life Exercise Price at 12-31-02 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
$0-$10 593,331 7.2 years $ 5.15 88,552 $ -
$11-$20 884,392 6.7 years $ 14.40 98,470 $ 15.89
The fair value of options granted was estimated using the Black-Scholes model
with the following assumptions:
2002 2001 2000
- -------------------------------------------------------------
Dividend yield 3% 0% 0%
Expected life 4 years 4 years 4.21 years
Volatility 35% 40% 40%
Risk free interest rate 3.59% 4.66% 6.75%
The following table summarizes the effect on net income and earnings per share
had the Company recorded its compensation expense consistently with the method
prescribed by FAS 123:
Earnings per share
(in millions, except per share data) Net income Basic Diluted
- ----------------------------------------------------------------------
2002
As disclosed $ 52.1 $ 4.41 $ 4.15
Compensation, net of tax, included 0.5
Compensation, net of tax,
that would have been included
had FAS 123 been adopted (1.6)
----------
Proforma net income $ 51.0 $ 4.31 $ 4.06
==========
2001
As disclosed $ 5.6 $ 0.47 $ 0.44
Compensation, net of tax, included 1.0
Compensation, net of tax,
that would have been included
had FAS 123 been adopted (1.4)
----------
Proforma net income $ 5.2 $ 0.44 $ 0.42
==========
2000
As disclosed $ 18.3 $ 1.46 $ 1.41
Compensation, net of tax, included 1.9
Compensation, net of tax,
that would have been included
had FAS 123 been adopted (2.5)
----------
Proforma net income $ 17.7 $ 1.41 $ 1.36
==========
NOTE 4. PENSION PLANS
The Company maintains a contributory defined benefit 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 plans to cover
service costs to date as recommended by the Company's actuary. Employee and
employer contributions since April 2000 were at 2% and 5%, respectively, of
pensionable pay. The plans' assets are invested by six investment management
companies in funds holding UK and overseas equities, UK and overseas fixed
interest securities, index linked securities, property unit trusts and cash or
cash equivalents.
Assumptions for the plans as of the end of the last three years were as
follows:
2002 2001 2000
- --------------------------------------------------------------------
Weighted average discount rate 5.60% 5.75% 6.0%
Rate of increase in
compensation levels 3.00% 4.0% 4.0%
Rate of return on plan assets 6.75% 6.75% 7.0%
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) 2002 2001
- ----------------------------------------------------------------
Change in PBO
Balance at January 1 $ 529.9 $ 563.0
Interest cost 30.5 31.9
Service cost 5.4 7.1
Contributions by participants 0.4 0.4
Benefits paid (33.2) (26.2)
Actuarial gains/(losses) (5.8) (31.6)
Exchange variance 56.1 (14.7)
--------------------------
Balance at December 31 583.3 529.9
==========================
Fair value of plan assets
Balance at January 1 626.8 745.6
Actual benefits paid (33.2) (26.2)
Actual contributions by employer 1.2 1.0
Actual contributions by participants 0.4 0.4
Actual return on assets (73.2) (73.8)
Exchange variance 58.7 (20.2)
--------------------------
Balance at December 31 580.7 626.8
==========================
Plan assets (deficit)/excess over PBO (2.6) 96.9
Unrecognized net loss/(gain) 105.1 (17.8)
Unrecognized prior service cost 2.7 3.3
--------------------------
Prepaid pension cost $ 105.2 $ 82.4
==========================
Net pension cost for the UK pension plans is as follows:
(in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
Service cost $ 5.4 $ 7.1 $ 8.8
Interest cost on PBO 30.5 31.9 30.3
Expected return on plan assets (47.4) (46.6) (46.2)
Net amortization and deferral (0.3) 0.8 (2.6)
------------------------------------------
$ (11.8) $ (6.8) $ (9.7)
==========================================
The plan is accounted for in UK pounds sterling. The US dollar rate at December
31, 2002 was 1.6099 (2001-1.4554). A full actuarial valuation of the pension
plan will be carried out as of April, 2003 and the Company will review the
outcome of the valuation and any accounting implications when reported later in
the year.
36
NOTE 5. INCOME TAXES
Income taxes are accounted for using the asset and liability method pursuant to
FAS 109, Accounting for Income Taxes. 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) 2002 2001 2000
- -------------------------------------------------------------------------------
Domestic $ (3.2) $ (4.5) $ 2.7
Foreign 77.2 41.2 33.0
------------------------------------------
$ 74.0 $ 36.7 $ 35.7
==========================================
The components of income tax charges are summarized as follows:
(in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
CURRENT:
Federal $ 1.3 $ (2.4) $ 0.7
Foreign 24.9 21.8 9.2
------------------------------------------
26.2 19.4 9.9
==========================================
DEFERRED:
Federal - 0.1 -
Foreign (3.2) 0.3 7.5
------------------------------------------
(3.2) 0.4 7.5
------------------------------------------
$ 23.0 $ 19.8 $ 17.4
==========================================
Cash payments for income taxes were $21.3 million, $14.5 million and $29.8
million during 2002, 2001, and 2000, respectively.
The effective tax rate varies from the US federal statutory rate because of the
factors indicated below:
2002 2001 2000
- -------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Foreign tax rate differential (6.1) (21.5) (26.1)
Amortization 0.2 41.9 49.0
Other 1.9 (1.4) (9.1)
------------------------------------------
31.0% 54.0% 48.8%
==========================================
The net change in the effective tax rate arises from a decrease due to the
effect of FAS 142 in removing disallowable goodwill amortization, and an
increase caused by a change in the disposition of group profits between the
various geographical areas in which the group operates.
Details of deferred tax assets and liabilities are as follows:
(in millions) 2002 2001
- ----------------------------------------------------------------
DEFERRED TAX ASSETS:
Closure costs $ - $ -
Other 13.2 4.7
--------------------------
13.2 4.7
==========================
DEFERRED TAX LIABILITIES:
Pension costs 31.2 24.7
Other 23.7 20.3
--------------------------
54.9 45.0
--------------------------
Total net provision $ 41.7 $ 40.3
==========================
37
NOTE 6. ACQUISITIONS
On March 5, 2001 the Company acquired the Gamlen group of companies from the
MacDermid group. The Gamlen group is headquartered in Vernon, France with
operations in Spain and Italy. The group manufactures and sells fuel additives
and industrial cleaning products.
On April 9, 2001 the Company acquired the remaining 80% of Hi-Mar
Specialties Inc, a US company based in Atlanta and Milwaukee. The initial 20%
was acquired in December 1999. The business was purchased from the private
owner.
On May 14, 2001 the Company acquired a majority stake in Manhoko Limited.
Manhoko is a supplier of personal care products in Asia Pacific.
On June 7, 2001 the Company acquired CP Manufacturing BV and CP3500
International Limited. The CP group is headquartered in Holland and manufactures
and sells fuel additives for the treatment of heavy oils.
On June 19, 2001 the Company acquired the Bycosin AB group which is
headquartered in Sweden. The Bycosin group is a supplier of heavy fuel oil
additives.
On August 15, 2001 the Company acquired ProChem Chemicals Inc, a toll
processor which is based in High Point, North Carolina.
The following unaudited information illustrates the results of operations
for the years ended 31 December, 2001 and 2000 as if all the 2001 acquisitions
had occurred on January 1 of each year. They have been adjusted to reflect
amortization of goodwill on acquisitions and financing transactions and the
related interest expense. This information is for illustrative purposes only and
is not meant to be indicative of actual results that might have been achieved or
results that might be attained in the future.
Unaudited Proforma Information
(in millions except per share data) 2001 2000
- ----------------------------------------------------------------
Net sales $ 440.2 $ 475.8
Net income $ 15.8 $ 15.3
Earnings per share -- basic $ 1.34 $ 1.22
-- diluted $ 1.26 $ 1.18
NOTE 7. GOODWILL
Goodwill comprises the following:
(in millions) TEL Specialty Total
- -------------------------------------------------------------------------------
Gross cost
-- at January 1, 2002 $ 548.0 $ 85.0 $ 633.0
Acquisitions 0.8 0.7 1.5
Exchange effect 10.6 5.8 16.4
------------------------------------------
Gross cost
-- at December 31, 2002 559.4 91.5 650.9
==========================================
Amortization
-- at January 1, 2002 (284.0) (7.3) (291.3)
Exchange effect (5.4) (1.4) (6.8)
------------------------------------------
Amortization
-- at December 31, 2002 (289.4) (8.7) (298.1)
==========================================
Net book amount $ 270.0 $ 82.8 $ 352.8
==========================================
Based on its most recent analysis, the Company believes that no impairment of
goodwill exists as of December 31, 2002.
Amortization expense was $nil, $46.6 million and $48.2 million in 2002,
2001 and 2000, respectively. This excludes foreign exchange variances which are
recorded in the cumulative translation adjustment.
38
NOTE 8. INTANGIBLE ASSETS
Intangible assets comprise the following:
(in millions) 2002 2001
- ----------------------------------------------------------------
Gross cost
-- OBOAdler $ 23.3 $ 21.1
-- Veritel 60.6 50.5
-- Other 0.4 -
--------------------------
84.3 71.6
--------------------------
Accumulated amortization
-- OBOAdler (23.3) (21.1)
-- Veritel (10.1) -
-- Other - -
--------------------------
(33.4) (21.1)
--------------------------
$ 50.9 $ 50.5
==========================
OBOAdler
An intangible asset was recognized in the balance sheet on the acquisition of
the OBOAdler group on November 9, 1999. It relates to unexpired customer
contracts and has been amortized over the average of the relevant contract
periods.
Veritel
An intangible asset was recognized in 2001 in relation to amounts payable to
Veritel Chemicals BV pursuant to a marketing agreement effective July 1, 2001.
An initial signing fee of $5 million was paid on entering into the agreement. In
December 2001, notice was given of a permanent source interruption which
triggered further payments due to Veritel of $70 million. Under the terms of a
separate marketing agreement with Ethyl $24.5 million were recoverable from
Ethyl, and the Company's share of $50.5 million was capitalized. The asset is
being amortized on a straight-line basis over the six years ending December 31,
2007.
Intangible asset amortization expense was $9.5 million, $9.5 million and
$10.3 million in 2002, 2001 and 2000, respectively. This excludes foreign
exchange variances which are recorded in the cumulative translation adjustment.
Future estimated amortization expense is $10.2 million per annum for 2003
through 2006 and $10.1 million in 2007.
NOTE 9. DEFERRED FINANCE COSTS
During fiscal 2001 the Company agreed a refinancing which replaced the previous
debt. The net book amount of the deferred finance costs, some $6.5 million, was
written off as an extraordinary item at this point. Refinancing costs of $6.1
million have been capitalized and will be amortized over the new debt profile.
(in millions) 2002 2001
- ----------------------------------------------------------------
Gross cost $ 6.9 $ 6.1
Accumulated amortization (2.5) (0.2)
--------------------------
$ 4.4 $ 5.9
==========================
Amortization expense was $2.2 million, $2.6 million and $3.3 million in 2002,
2001 and 2000, respectively. This excludes foreign exchange variances which are
recorded in the cumulative translation adjustment.
39
NOTE 10. PROPERTY, PLANT AND EQUIPMENT
The estimated useful lives of the major classes of depreciable assets are as
follows:
Buildings 7 to 25 years
Equipment 3 to 10 years
Property, plant and equipment consists of the following:
(in millions) 2002 2001
- ----------------------------------------------------------------
Land $ 3.0 $ 2.8
Buildings 4.9 9.7
Equipment 74.2 56.4
Work in progress 6.8 7.6
--------------------------
88.9 76.5
Less accumulated depreciation 32.1 9.6
--------------------------
$ 56.8 $ 66.9
==========================
Depreciation charges were $20.7 million, $28.5 million and $18.6 million in
2002, 2001 and 2000, respectively. Over 90% of the group's assets are in foreign
currencies, mainly UK pounds sterling, and are subject to variations in the US
dollar rate, which was 1.6099 and 1.4554 at 2002 and 2001 year ends,
respectively.
The estimated additional cost to complete work in progress is $1.9 million
(2001- $5.0 million).
The estimated life of the EDDS plant at Ellesmere Port was re-evaluated in
2001 to reflect its ongoing value to the Specialty Chemicals business. The
extension of its life, effective July 1, 2001, increased the Company's net
income and earnings per share for 2001 by $0.6 million and $0.05 million,
respectively. Due to market changes in 2002 the Company has re-evaluated this
plant and has recognized an impairment charge that is included in the
restructuring program (see below).
Accelerated depreciation of $6.8 million was provided in 2001 in respect of
the UK Chlorine plant following the decision to cease production at the end of
2002.
In 2002, as part of the restructuring program, asset impairment charges of
$13.0 million in aggregate have been recorded, mainly relating to UK plants (see
Note 11).
NOTE 11. PLANT CLOSURE PROVISIONS
The liability for estimated closure costs of Octel's TEL manufacturing
facilities includes costs for personnel reductions (severance) and
decontamination and environmental remediation activities (remediation) when
demand for TEL diminishes. In 2002 costs associated with restructuring programs
have been identified separately, and the analysis of provisions has been
restated to reflect this.
Movements in the provisions are summarized as follows:
2002 2002 2002 2002 2001
(in millions) Restructuring Severance Remediation Total Total
- --------------------------------------------------------------------------------------------------------------
Balance at January 1 $ - $ 7.1 $ 32.4 $ 39.5 $ 35.6
Transfer 1.3 (1.3) - - -
Exchange effect 0.1 0.6 3.9 4.6 (0.4)
Charge for the year 6.5 (1.0) 1.0 6.5 12.3
Acquisition - - - - 1.4
Expenditure (2.8) (4.8) (6.6) (14.2) (9.4)
---------------------------------------------------------------------------------
Balance at December 31 $ 5.1 $ 0.6 $ 30.7 $ 36.4 $ 39.5
=================================================================================
40
Severance
The Company has and will continue to downsize and restructure its operations
consistent with declining demand for TEL. Octel ceased production in Italy and
France in 1996 and the production plant in Germany closed in March, 2002. Two of
the three TEL buildings at the Ellesmere Port site have already been closed.
No provision is made for estimated future costs for severance until the
employees concerned have been notified and the expenditure is committed.
Expenditure in the year related mainly to the closure of the German plant in
March, 2002. Severance costs at January 1, 2002 of $1.3 million related to
restructuring activities have been reclassified and are addressed further below.
Severance expenditure against provisions in 2002, 2001, and 2000 was $4.8
million, $3.5 million and $21.6 million, respectively. Amounts provided at
December 31, 2002 will mostly be paid during 2003.
Remediation
Total costs for remediation are evaluated on a regular basis to take account of
expenditure incurred and to amend the scope of future activities in the light of
findings from projects carried out. Management's estimate at December 31, 2002
is analyzed as follows:
(in millions) Decontamination Remediation Other Total
- ---------------------------------------------------------------------------------------------
Total estimated
future costs $ 45.6 $ 12.7 $ 1.5 $ 59.8
Operating capital costs - - (1.5) (1.5)
Discretionary
contingent costs (19.4) (8.2) - (27.6)
-------------------------------------------------------------------
Provision $ 26.2 $ 4.5 $ - $ 30.7
===================================================================
Decontamination costs relate to the post-operational cleaning and disposal of
equipment and the demolition of buildings. Remediation costs relate to soil and
groundwater contamination. Other costs include operational compliance with
environmental regulations and project management expenses.
Operational capital costs of $1.5 million are expected to arise during the
useful life of the plant. They will be included in property, plant and equipment
as expenditure is incurred and depreciated over the remaining useful life of the
related plant.
Total costs include $27.6 million, which comprise the potential cost of
vacating the Ellesmere Port site. Management has no present intention to adopt
this course of action and intends to continue manufacturing other products at
Ellesmere Port when production of TEL ceases. Consequently management views
these costs as a contingent liability and no provision is made for them.
Remediation expenditure against provisions in 2002, 2001, and 2000 was $6.6
million, $5.9 million and $5.4 million, respectively.
Restructuring
Movements in the restructuring provisions may be analyzed as follows:
(in millions) Severance Other Total
- ----------------------------------------------------------------------------
Transfer in at January 1 $ 1.3 $ - $ 1.3
Exchange effect (0.2) 0.3 0.1
Provided in the year 4.5 2.0 6.5
Expenditure (1.9) (0.9) (2.8)
Released in the year - - -
--------------------------------------------------
Balance at December 31 $ 3.7 $ 1.4 $ 5.1
==================================================
Severance provisions at January 1 related to the closure of the UK Chlorine
plant. The charge of $4.5 million relates mainly to items reported in September
- -- a further 26 Chlorine plant employees ($1.6 million), 11 UK Specialty
Chemicals employees ($0.9 million) and 2 TEL employees ($0.6 million). In the
fourth quarter the main charge has been $1.4 million related to 13 Specialty
Chemicals employees across Europe. All unpaid severance provisions are expected
to be paid over in 2003. Other costs relate to a variety of items, the most
significant being professional fees.
The total charge noted above was $6.5 million. Asset impairment charges of
$13.0 million were also made, but these have not been recorded through the
provisions. The total of the two elements is $19.5 million, the amount included
in the income statement as a restructuring charge.
41
NOTE 12. LONG-TERM DEBT
Long-term debt consists of the following:
(in millions) 2002 2001
- ---------------------------------------------------------------
Senior term loan $ 122.0 $ 210.0
Revolving credit 25.0 20.0
Other 12.2 1.0
-------------------------
159.2 231.0
Less current portion (56.8) (65.1)
-------------------------
$ 102.4 $ 165.9
=========================
Payments of interest on long-term debt were $8.1 million, $19.0 million and
$22.7 million in 2002, 2001 and 2000 respectively.
On April 27, 1998 the Company issued $150 million of Senior Notes due 2006
bearing interest at a fixed rate of 10%. On June 3, 1999 the Company entered
into a further $100 million term loan repayable in semi-annual installments to
December 31, 2002.
On October 29, 2001 the Company agreed a $250 million refinancing package.
It repaid the $45 million outstanding under the 1999 term loan, and on December
6, 2001 it redeemed the $150 million Senior Notes.
The make-whole premium of $10.6 million payable to the bondholders, and
the write-off of the net book amount of deferred finance costs relating to the
old debt of $6.5 million were expensed in the income statement as an
extraordinary item, net of attributable taxation of $5.8 million. New
refinancing costs of $6.1 million have been capitalized (see Note 9).
The new credit facility comprises a term loan of $210 million and a
revolving credit facility of $40 million. The term loan is repayable in
semi-annual installments over three years. The revolving facility is available
throughout the loan period until October 2004. The facility is collateralized on
the group's assets and bears interest at LIBOR plus 2.625%, the premium reducing
as certain leverage ratios are met. There are terms in the facility which, if
breached, would result in the loan becoming repayable on demand. These terms
contain certain restrictions on the Company's operations, including the ability
to pay dividends and buy back shares.
At December 31, 2002 $25 million had been drawn down against the revolving
facility.
The following table presents the projected annual maturities for the next five
years after 2002:
(in millions)
- -----------------------------------------------------------
2003 $ 56.8
2004 96.4
2005 1.7
2006 1.7
2007 1.7
Thereafter 0.9
--------------
$ 159.2
==============
NOTE 13. DEFERRED INCOME
Movements in deferred income are summarized as follows:
(in millions) 2002 2001
- -----------------------------------------------------------
Received $ 38.6 $ 38.6
Amortized (28.2) (25.2)
---------------------------------
10.4 13.4
Less: current portion (2.0) (2.0)
---------------------------------
$ 8.4 $ 11.4
=================================
Deferred income relates to amounts received from Ethyl relating to a prepayment
for services to be provided under the sales and marketing agreement with
OBOAdler, effective January 1, 2000.
42
NOTE 14. STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
(in thousands) 2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
At January 1 14,777 14,777 14,766 3,027 2,870 1,315
Exercise of options - - 11 (106) (88) (60)
Stock purchases - - - 13 245 1,615
---------------------------------------------------------------------------------------------
At December 31 14,777 14,777 14,777 2,934 3,027 2,870
=============================================================================================
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and fair values of the
Company's financial instruments at December 31, 2002 and 2001:
2002 2001
Carrying Carrying
(in millions) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------
NON-DERIVATIVES:
Cash and cash equivalents $ 26.7 $ 26.7 $ 43.0 $ 43.0
Bank overdraft 4.0 4.0 - -
Long-term debt 159.2 159.2 231.0 231.0
DERIVATIVES:
Interest rate swaps $ (1.8) $ (1.8) $ 0.2 $ 0.2
The following methods and assumptions were used to estimate the fair values of
financial instruments:
Cash and cash equivalents: The carrying amount approximates fair value because
of the short-term maturities of such instruments.
Long-term debt: The carrying amount of long-term borrowings at variable interest
rates approximates fair value. The fair value of fixed interest rate debt is
based on the quoted market prices for the same or similar debt.
Derivatives: The fair value of derivatives, including forward exchange contracts
and interest rate swaps, was estimated based on current settlement prices and
comparable contracts using current assumptions.
43
NOTE 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company has limited involvement with derivative financial instruments and
does not trade them. The Company does use derivatives to manage well defined
interest rate and foreign exchange exposures.
The Company invoices over half of its sales in US dollars, with the balance
mainly invoiced in UK pounds sterling to match the Company's sterling costs.
The Company uses interest rate swap, floor and collar and cap agreements to
reduce the impact of changes in interest rates on its floating rate debt. The
terms of the refinancing agreement oblige the Company to take out interest
hedges for half of the Senior term loan. 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, 2002 the Company had the following interest rate instruments
in effect (notional amounts in millions):
Notional Amount Strike Rate Period
- -----------------------------------------------------------------
Interest swap $ 72.5 3.625% 10/04
The Company sells a range of TEL and petroleum additives to major oil refineries
throughout the world. Credit limits, ongoing credit evaluation and account
monitoring procedures are utilised to minimize risk. Collateral is not generally
required.
NOTE 17. 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 Company adopted FAS 142 effective
January 1, 2002 (see Note 1) and accordingly no longer records goodwill
amortization of approximately $46 million per year on unamortized goodwill at
December 31, 2001 of $342 million. The Company completed the transitional
goodwill impairment tests required under FAS 142 as at June 30, 2002 and
re-performed the tests as at December 31, 2002. The Company has continued to
amortize intangible assets of approximately $51 million at December 31, 2001,
with an expected finite life, resulting in an annual charge of approximately $10
million.
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 Company will adopt FAS 143 effective
January 1, 2003. Based on the Company's evaluation to date, adoption is not
expected to result in a significant net after-tax gain or charge.
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 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.
In April 2002, FAS 145, Rescission of FAS 4, 44 and 64, Amendment to FAS
13, and Technical Corrections, was issued. This standard updates, clarifies and
simplifies existing accounting pronouncements. It rescinds FAS 4, which required
all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related taxes. Upon
adoption, the criteria in APB 30 will be used to classify such gains and losses.
Gains or losses on extinguishment of debt that were classified as extraordinary
in prior periods presented that do not meet APB 30 criteria for classification
as extraordinary must be reclassified into earnings from operations. FAS 145
also
44
rescinds FAS 64, which amended FAS 4 and FAS 44, which established accounting
requirements for the transition of the Motor Carrier Act of 1980. FAS 145 amends
FAS 13 to require that certain lease modifications that have economic effects
similar to saleleaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company will adopt FAS 145 effective January 1,
2003 and it will not have a material impact on its financial position, results
of operations or liquidity.
In July 2002, FAS 146, Accounting for Costs Associated with Exit or
Disposal Activities was issued. This addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and that an entity's commitment to a plan, by
itself, does not create a present obligation to others that meets the definition
of a liability. FAS 146 is effective prospectively for exit or disposal
activities initiated after December 31, 2002. The Company will adopt FAS 146
effective January 1, 2003 and believes it will not have a material impact on its
financial position, results of operations or liquidity. FAS 146 may change the
timing of liability and expense recognition but not the ultimate amount of those
expenses.
In December 2002, FAS 148, Accounting for Stock-Based Compensation --
Transition and Disclosure was issued which amends FAS 123, Accounting for
Stock-Based Compensation. FAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also requires more prominent and more frequent
disclosure in the financial statements about the effects of stock-based
compensation. As described in Note 1 the Company has continued to follow the
accounting provisions of APB 25, Accounting for Stock Issued to Employees, for
stock-based compensation but has provided the pro-forma disclosures required
under FAS 148 (see Note 3).
In January 2003, FIN 46, Consolidation of Variable Interest Entities was
issued. FIN 46 requires that companies that control another entity through
interests other than voting interests should consolidate the controlled entity.
FIN 46 applies to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an interest after
that date. The related disclosure requirements are effective immediately. The
Company is currently evaluating the effect FIN 46 will have on its financial
position, results of operations and liquidity.
45
QUARTERLY SUMMARY
(Unaudited)
First Second Third Fourth
(in millions, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
2002
Net sales $ 114.5 $ 99.5 $ 116.3 $ 121.2
Gross profit 49.3 48.2 48.2 48.5
Operating income/2/ 29.9 28.5 25.4 5.4
Net income/(loss)/4/ 18.4 17.7 18.3 (2.3)
Net cash provided by operating activities 44.0 22.2 18.1 15.7
Per common share:
Earnings -- basic 1.56 1.50 1.54 (0.19)
-- fully diluted 1.47 1.40 1.44 (0.19)
Market price -- high 18.95 25.94 26.09 19.71
-- low 16.14 18.60 18.35 15.80
2001
Net sales $ 87.2 $ 117.5 $ 104.9 $ 111.4
Gross profit 35.6 53.0 46.3 45.8
Operating income/3/ 8.9 23.3 15.1 12.1
Net income (before extraordinary item) 1.5 8.2 3.4 3.9/1/
Net cash provided by operating activities 40.8 19.4 25.2 4.6
Per common share:
Earnings -- basic (before extraordinary item) 0.12 0.69 0.29 0.33
-- diluted (before extraordinary item) 0.12 0.65 0.27 0.31
Market price -- high 14.2 18.1 18.6 19.2
-- low 11.6 11.4 16.4 15.9
/1/ Extraordinary item, in the fourth quarter, 2001 only, of $11.3 million (net
of tax).
/2/ Restructuring charges reduced income in quarter 3 and 4 of 2002 by $3.1
million ($0.26 per share) and $16.4 million ($1.39 per share),
respectively.
/3/ Restructuring charges reduced income in quarter 2, 3 and 4 of 2001 by $1.3
million ($0.11 per share), $0.2 million ($0.02 per share) and $7.8 million
($0.66 per share), respectively.
/4/ The effective tax rate for fiscal 2002 was 31.0%. However, the estimated
rate used in quarter 1 was 25.2%, and in quarters 2 and 3 it was 23.0%. Had
the full year rate been used on a quarterly basis, the effect would have
been to reduce net income in the first, second and third quarters by $1.4
million, $2.3 million and $2.0 million, respectively. As a result net
income in the fourth quarter would have increased by $5.7 million.
46
OCTEL CORP.
BOARD OF DIRECTORS
Dr. Robert E. Bew
chairman and director
Retired CEO of ICI Chemical & Polymer Division
and Chairman of Phillips Imperial Petroleum Ltd.
Former Chairman of European Process Industries
Competitiveness Centre
Dennis J. Kerrison
president and chief executive officer
Previously Executive Vice President,
Great Lakes Chemical Corporation
Former CEO of Hickson International PLC
Martin M. Hale
director
Director of Great Lakes Chemical Corporation
Former President and CEO of Marsh & McClennan
Asset Management Company
Dr. Benito Fiore
director
Former Chairman and CEO of Enichem UK Ltd.
James Puckridge
director
Director of Thomas Swan & Co Ltd.
Director of LINPAC Group Ltd.
Retired Chairman of Elf Atochem UK Ltd.
Charles M. Hale
director
Executive Chairman of Polar Capital Partners
Former Managing Director and Vice Chairman
of CSFB Europe Ltd.
Former General Partner of Lehman Brothers
Kuhn Loeb
Former Managing Director of AG Becker International
Samuel A. Haubold
director
Partner in the law firm of Kirkland & Ellis
Member of the Advisory Council of the Institute of
United States Studies, University of London
CORPORATE OFFICERS
Dennis J. Kerrison
president and chief executive officer
Philip J. Boon
business director, petroleum specialties
H. Alan Hanslip
vice president, human resources
Dr. Geoffrey J. Hignett
director of corporate leadership
Alan G. Jarvis
business director, lead alkyls
Paul W. Jennings
vice president and chief financial officer
Ian M. McRobbie
chief technology officer
Richard T. Shone
director of safety, health & environment
John P. Tayler
corporate secretary and general counsel
Sharon E. Todd
director of corporate development
47
INVESTOR INFORMATION
corporate offices
Octel Corp.
220 Continental Drive
Newark, DE 19713
USA
shareholder inquiries
Equiserve Trust Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
USA
Tel: (781) 575 2726
TDD: 1 800 952 9245
www.equiserve.com
independent accountants
PricewaterhouseCoopers LLP,
London, UK
legal counsel
Kirkland & Ellis, London, UK
investor relations inquiries
Octel Corp.
Global House
Bailey Lane
Manchester M90 4AA
UK
Tel: +44(0)161 498 8889
octel corp. common stock
New York Stock Exchange
Symbol: OTL
corporate website
http://www.octel-corp.com
form 10-K and additional information
Form 10-K is the company's annual report filed with the Securities and Exchange
Commission.
Copies of the Form 10-K and other financial information are available from the
office of Investor Relations.
environment, health and safety report
For copies of our latest report, contact Investor Relations.
48
www.octel-corp.com
Concept & Design: Ideas On Purpose, New York www.ideasonpurpose.com Portrait
photography: Paul Tozer, UK
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