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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
Commission file number 1-13879
OCTEL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 98-0181725
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Global House
Bailey Lane
Manchester
United Kingdom M90 4AA
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 011-44-161-498-8889
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X
-------
No _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding as of July 31, 2002
Common Stock, par value $0.01 11,848,996
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2002 2001
(Unaudited)
----------- -----------
(millions of dollars)
Assets
Current assets
Cash and cash equivalents $ 27.0 $ 43.0
Accounts receivable, less allowance
of $2.7 (2001 - $3.2) 83.4 114.9
Other receivable - Veritel 9.6 22.4
Inventories
Finished goods 32.2 32.2
Raw materials and work-in-progress 28.0 22.8
-------- --------
Total inventories 60.2 55.0
Prepaid expenses 4.9 3.0
-------- --------
Total current assets 185.1 238.3
Property, plant and equipment 91.9 76.5
Less accumulated depreciation 27.1 9.6
-------- --------
Net property, plant and equipment 64.8 66.9
Goodwill 345.8 341.7
Intangible asset 51.9 50.5
Deferred finance costs 5.3 5.9
Prepaid pension cost 92.3 82.4
Other assets 1.4 3.0
-------- --------
$ 746.6 $ 788.7
======== ========
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
2
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30 December 31
2002 2001
(Unaudited)
----------- -----------
(millions of dollars)
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable (Note 1) $ 40.5 $ 61.9
Other payable - Veritel 30.0 60.0
Accrued expenses (Note 1) 57.9 38.8
Accrued income taxes 9.3 7.5
Current portion of long-term debt 80.3 85.1
Current portion of deferred income 2.0 2.0
-------- --------
Total current liabilities 220.0 255.3
Plant closure provisions (note 6) 35.0 39.5
Deferred income taxes 41.3 40.3
Long term debt 98.0 145.9
Deferred income 9.4 11.4
Minority interest 6.1 5.9
Stockholders' Equity
Common stock, $0.01 par value (note 2) 0.1 0.1
Additional paid-in capital 276.7 276.5
Treasury stock (note 2) (34.4) (35.5)
Retained earnings 142.5 106.4
Accumulated other comprehensive
Income (48.1) (57.1)
-------- --------
Total stockholders' equity 336.8 290.4
-------- --------
$ 746.6 $ 788.7
======== ========
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
3
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(millions of dollars except per share) Three Months Ended Six Months Ended
--------------------------------------
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 99.5 $ 117.5 $ 214.0 $ 204.6
Cost of goods sold 51.3 64.5 116.5 116.0
--------- ---------- ---------- ----------
Gross profit 48.2 53.0 97.5 88.6
Operating expenses
Selling, general and administrative 16.0 13.8 31.9 25.3
Research and development 1.5 1.2 2.9 2.1
Amortization of goodwill - 11.6 - 23.0
Amortization of intangible assets 2.2 3.1 4.3 6.1
--------- ---------- ---------- ----------
19.7 29.7 39.1 56.5
--------- ---------- ---------- ----------
Operating income 28.5 23.3 58.4 32.1
Interest expense 4.8 5.0 8.8 10.0
Other expenses/(income) 0.8 (0.1) 1.5 0.6
Interest income (0.2) (0.8) (0.4) (1.6)
--------- ---------- ---------- ----------
Income before income taxes and
minority interest 23.1 19.2 48.5 23.1
Minority interest 0.8 0.8 1.6 1.4
--------- ---------- ---------- ----------
Income before income taxes 22.3 18.4 46.9 21.7
Income taxes (note 5) 4.6 10.2 10.8 12.1
--------- ---------- ---------- ----------
Net income $ 17.7 $ 8.2 $ 36.1 $ 9.6
========= ========== ========== ==========
Earnings per share:
Basic $ 1.50 $ 0.69 $ 3.06 $ 0.82
--------- ---------- ---------- ----------
Diluted $ 1.40 $ 0.65 $ 2.88 $ 0.77
--------- ---------- ---------- ----------
Weighted average shares
outstanding (in thousands)
Basic (note 3) 11,823 11,809 11,789 11,688
--------- ---------- ---------- ----------
Diluted (note 3) 12,660 12,525 12,557 12,491
--------- ---------- ---------- ----------
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
4
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
-------------------------
2002 2001
---- ----
(millions of dollars)
Cash Flows from Operating Activities
Net income $ 36.1 $ 9.6
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 13.4 37.8
Deferred income taxes 2.6 (0.4)
Other 2.5 -
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses 32.8 11.9
Inventories (3.2) 7.5
Accounts payable and accrued expenses (9.5) (10.4)
Income taxes and other current liabilities 0.4 6.8
Other non-current assets and liabilities (8.9) (2.6)
---------- ----------
Net cash provided by operating activities 66.2 60.2
Cash Flows from Investing Activities
Capital expenditures (4.3) (3.3)
Business combinations, net of cash acquired (3.6) (48.2)
Veritel (17.2) -
Other (0.3) -
---------- ----------
Net cash used in investing activities (25.4) (51.5)
Cash Flows from Financing Activities
Repayment of long-term borrowings (62.9) (15.0)
Receipt of short- term credit 10.0 9.0
Repurchase of common stock - (2.7)
Minority interest 0.4 0.1
---------- ----------
Net cash used in financing activities (52.5) (8.6)
Effect of exchange rate changes on cash (4.3) (6.7)
---------- ----------
Net change in cash and cash equivalents (16.0) (6.6)
Cash and cash equivalents at beginning of period 43.0 37.7
---------- ----------
Cash and cash equivalents at end of period $ 27.0 $ 31.1
========== ==========
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
5
OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(millions of dollars)
Additional Total
---------- -----
Common Treasury Paid-In Retained CTA* Comprehensive
------ -------- ------- -------- ---- -------------
Stock Stock Capital Earnings Income
----- ----- ------- -------- ------
Balance at
December 31, 2001 $ 0.1 $(35.5) $276.5 $106.4 $(57.1) $49.3
Net income - - - 36.1 - 36.1
Net CTA* change - - - - 9.0 9.0
Treasury stock issue - 1.1 0.2 - - -
------ ------ ------ ------ ------ -----
Balance at
June 30, 2002 $ 0.1 $(34.4) $276.7 $142.5 $(48.1) $94.4
------ ------ ------ ------ ------ -----
* Cumulative translation adjustment
The accompanying footnotes are an integral part of these unaudited condensed
consolidated financial statements.
OCTEL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes necessary for a comprehensive
presentation of financial position, results of operations and cash flows.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring accruals) have been made which are necessary for a fair
financial statement presentation. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K filed on March 25, 2002.
The results for the interim period are not necessarily indicative of the results
to be expected for the full year.
The Company has adopted Statement of Financial Accounting Standards (FAS) 142,
Goodwill and Other Intangible Assets. Accordingly, the income statement now
excludes goodwill amortization charges. Amortization of deferred finance costs
has been reclassified as an interest expense.
6
No adjustment of comparatives on the face of the income statement is required
under FAS 142, but the effects on amounts reported for the six months ended 30
June, 2001 would be as follows:
(Millions of dollars except per share)
Reported FAS 142 Adjusted
Operating income $32.1 $23.8 $55.9
Income before taxes 21.7 23.0 44.7
Net income 9.6 23.0 32.6
-----------------------------------
Basic earnings per share 0.82 1.97 2.79
-----------------------------------
Diluted earnings per share $0.77 $1.84 $2.61
-----------------------------------
The Company has reviewed its disclosure of trade payables. 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.
NOTE 2 - STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
At June 30, 2002, the Company had authorised common stock of 40 million shares
(December 31, 2001 - 40 million). Issued shares at June 30, 2002, were
14,777,250 (December 31, 2001 - 14,777,250) and treasury stock amounted to
2,928,254 (December 31, 2001 - 3,026,775).
Movements in stock options in the second quarter, 2002 were as follows:-
No.
---
Outstanding at March 31, 2002 1,569,201
Granted at zero cost 2,228
Granted at $17.13 200
Exercised (27,778)
Cancelled (4,598)
----------
Outstanding at June 30, 2002 1,539,253
----------
7
NOTE 3 - EARNINGS PER SHARE AND EBITDA
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period, while diluted earnings per share includes
the effect of options and restricted stock that are dilutive and outstanding
during the period. Per share amounts are computed as follows:
2002 2001
---- ----
Numerator:
Net income available to common shares $ 36.1 $ 9.6
=========== ==========
Denominator:
Weighted average common shares outstanding 11,789 11,688
Dilutive effect of stock options and awards 768 803
----------- ----------
Denominator for diluted earnings per share 12,557 12,491
=========== ==========
Net income per share $ 3.06 $ 0.82
=========== ==========
Net income per share, diluted $ 2.88 $ 0.77
=========== ==========
Earnings before interest, tax, depreciation and amortization (EBITDA) is
computed as follows:
Operating income $ 58.4 $ 32.1
Less other expenses (1.5) (0.6)
Add depreciation and amortization 13.4 37.8
----------- ----------
$ 70.3 $ 58.4
=========== ==========
8
NOTE 4 - SEGMENTAL REPORTING
The Company has three businesses for management purposes - Lead Alkyls (TEL),
Petroleum Specialties and Performance Chemicals. Chlorine is not a reportable
segment, but has been disclosed separately within TEL to give greater
comparability with prior year amounts. The operation is to be closed at the end
of 2002. To December 31, 2001 it operated on a cost recovery basis under the
previous contractual terms, and so had no net sales in the prior year. Because
of operational similarities and shared services, Performance Chemicals has been
included with Petroleum Specialties for reporting purposes to create the
Specialty Chemicals business segment. This segmentation basis is consistent with
the 2001 Annual Report. There has been no material change in total assets or
liabilities by segment since December 31, 2001. The following table presents a
summary of the Company's reportable segments for the three and six months ended
June 30, 2002 and 2001:
(millions of dollars)
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
Net Sales
TEL - Ongoing $ 57.8 $ 85.4 $ 122.5 $ 143.2
TEL - Chlorine 3.9 - 7.5 -
-------------- -------------- ------------- -------------
61.7 85.4 130.0 143.2
Specialty Chemicals 37.8 32.1 84.0 61.4
-------------- -------------- ------------- -------------
Total $ 99.5 $ 117.5 $ 214.0 $ 204.6
-------------- -------------- ------------- -------------
Gross Profit
TEL - Ongoing $ 35.2 $ 40.3 $ 67.9 $ 67.5
TEL - Chlorine (0.3) - (0.3) -
-------------- -------------- ------------- -------------
34.9 40.3 67.6 67.5
Specialty Chemicals 13.3 12.7 29.9 21.1
-------------- -------------- ------------- -------------
Total $ 48.2 $ 53.0 $ 97.5 $ 88.6
-------------- -------------- ------------- -------------
Operating Income
TEL - Ongoing $ 31.6 $ 24.4 $ 59.7 $ 35.3
TEL - Chlorine (0.3) - (0.3) -
-------------- -------------- ------------- -------------
31.3 24.4 59.4 35.3
Specialty Chemicals 1.2 2.5 5.6 3.9
Corporate Costs (4.0) (3.6) (6.6) (7.1)
-------------- -------------- ------------- -------------
Total $ 28.5 $ 23.3 $ 58.4 $ 32.1
-------------- -------------- ------------- -------------
9
NOTE 5 - INCOME TAXES
A reconciliation of the U.S. federal statutory tax rate to the effective income
tax rate is as follows:-
Six Months Ended
June 30
2002 2001
---- ----
Statutory rate 35.0% 35.0%
Increase (decrease) resulting from:
Foreign tax rate differential (12.0%) (29.7%)
Amortization of goodwill - 50.6%
----------- -----------
23.0% 55.9%
=========== ===========
The reduction in the effective tax rate is mostly due to the effect of FAS 142
(note 1) which has removed non-deductible amortization expense in 2002.
NOTE 6 - PLANT CLOSURE PROVISIONS
(millions of dollars) 2002 2001
---- ----
Balance at January 1 $ 39.5 $ 35.6
Exchange effect (0.5) (0.6)
Charge for the period - 3.1
Expenditure (4.0) (4.7)
----------- -----------
Balance at June 30 $ 35.0 $ 33.4
=========== ===========
Expenditure of $2.1 million in the first six months of 2002 related to personnel
severance costs incurred as part of the Company's ongoing program of downsizing
and restructuring of operations to respond to declining demand for TEL. The
balance of $1.9 million related to environmental remediation activities.
NOTE 7 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July, 2001 FAS 142, Goodwill and Other Intangible Assets, was issued.
According to this statement, goodwill and intangible assets with indefinite
lives are no longer subject to amortization, but rather an annual assessment of
impairment by applying a fair-value-based test. The statement requires a test
for impairment to be performed annually, or immediately if conditions indicate
that such an impairment could exist. The statement is effective January 1, 2002.
The Company adopted the statement effective January 1, 2002. As a result of
adopting FAS 142 the Company will no longer record goodwill amortization of
approximately $46 million per year on unamortized goodwill at December 31, 2001
of $342 million. The company has completed the transitional goodwill impairment
tests as required under FAS 142. While the Company does not presently anticipate
any impairment in respect of goodwill relating to the Specialty Chemicals
business, the declining TEL market is likely to cause impairment charges before
December 31, 2007, the date upon which the assets would formerly have become
fully amortized. Another review will be performed within the next year.
The Company will continue to amortize intangible assets of approximately $51
million at December 31, 2001, with an expected finite life, resulting in an
annual charge of approximately $8 million.
Amortization of goodwill reduced the second quarter, 2001 net income by $11.6
million after tax, or $0.93 per share (diluted) and $23.0 million after tax, or
$1.84 per share (diluted), for the first six months of 2001. All comparisons of
operating and net income are made on a post FAS 142 basis.
10
In July, 2001 FAS 143, Accounting for Asset Retirement Obligations, was issued.
This requires recording the fair value of a liability for an asset retirement
obligation in the period incurred. The amount recorded as a liability is
capitalized by increasing the carrying amount of the related long-lived asset,
which is then depreciated over its useful life. If the liability is settled for
an amount other than the recorded balance, either a gain or loss will be
recognized at settlement. The standard is effective for fiscal years beginning
after June 15, 2002, with earlier application permitted. The Company is
presently evaluating the impact of this standard on its financial position and
results of operations and is preparing an implementation plan.
In August, 2001 FAS 144, Accounting for the Impairment or Disposal of Long-lived
Assets, was issued. FAS 144 establishes a single accounting model, based on the
framework established in FAS 121, for the disposal by sale of long-lived assets.
The standard is effective for fiscal years beginning after December 15, 2001.
The Company adopted FAS 144 effective January 1, 2002 and it did not have a
material effect on the Company's financial position, results of operations or
liquidity.
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 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 sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The Company must adopt this standard by
fiscal 2003. The Company believes that this standard will not have a material
impact on its financial position and results of operations.
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. The
Company must adopt this standard for exit or disposal activities that are
initiated after December 31, 2002. The Company is currently evaluating the
effect that this standard will have on its financial position and results of
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE SIX MONTHS ENDED JUNE 30, 2002
RECENT DEVELOPMENTS
At the end of December, 2001, we were notified, under the terms of our
marketing, supply and service agreement with Veritel Chemicals BV, of a
permanent source interruption in the supply of TEL from Russia. This triggered
phased payments to Veritel of $70 million, of which 32% is recoverable under a
separate agreement from Ethyl Corporation. The first payment of $10 million was
made in December, 2001. A further total of $30 million has been paid in 2002 and
Ethyl's contribution to all payments to date has been received.
11
Following our adoption of FAS 142 we have now ceased to amortize goodwill in our
income statement. This has a significant impact on our net income and earnings
per share. 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.
Our German TEL 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 remediation
activities will continue at the site.
RESULTS OF OPERATIONS
Our results for the six months to June 30, 2002 were good overall. Sales and
operating income both increased by approximately 5%, and following some good tax
planning we have been able to reduce our tax rate to 23% compared with 27%
(adjusted for FAS 142) last year. As a result our earnings per share are 10%
higher than last year (adjusted for FAS 142) and just over half of market
expectations for the full year 2002.
Specialty Chemicals sales for the second quarter were $38 million, an increase
of 18% over the second quarter of 2001. Specialty Chemicals SG&A costs in the
second quarter included $0.4 million of costs relating to the first quarter.
Adjusting for these, Specialty Chemicals operating income for the quarter was
$1.6 million, compared with $3.0 million in 2001 (Adjusted for FAS 142).
Specialty Chemicals sales for the six months to June 2002 were $84 million, an
increase of $22.6 million or 37% over last year. Excluding the effects of
acquisitions, Specialty Chemicals sales increased by $3.6 million or 6% compared
with the first half of 2001. Gross profit, including acquisitions, improved to
36% of sales but increased SG&A costs have meant that operating income is only
maintained at 7% of sales (Adjusted for FAS 142).
Ongoing TEL sales for the quarter ended June 30, 2002 were $57.8 million, a
decrease of 32% on the unusually high sales in the second quarter, 2001. TEL
cost of goods sold in the second quarter was reduced by $1.1 million, reflecting
the recognition of amounts recoverable from Ethyl under the Marketing Alliance
related to the first half of 2002. In prior years these amounts, computed
retrospectively on an annual basis, were not material and we recognized them on
receipt. Because of increases in the amounts involved we have decided that it is
now more appropriate to make a prudent accrual on an ongoing basis. TEL gross
profit in the second quarter, excluding the benefit of this adjustment, was 59%
of sales compared with 47% last year. TEL sales for the six months to June 30,
2002 were $122.5 million, a decrease of 14% on last year. In spite of the
reduced sales, TEL gross profit was maintained at $67.9 million or 55% of sales.
Sales, general and administrative costs for the first six months increased from
$25.3 million in 2001 to $31.9 million. Of the total $6.6 million increase, a
significant portion relates to costs in the newly acquired Specialty Chemicals
companies. We are continuing to explore opportunities to reduce overall costs
through operational synergies.
Our amortization charge has changed substantially. Following our adoption of FAS
142 we no longer amortize goodwill. The equivalent charge for the half year
ended June 30, 2001 was $23.0 million. Further, amortization of $1.0 million
(2001 - $0.8 million) relating to deferred finance costs has been reclassified
as an interest expense to reflect its direct relationship with financing
activities. Amortization charged of $4.3 million for the half year to June 30,
2002 relates to the intangible asset arising from permanent source interruption
payments to Veritel.
12
Interest expense for the six month period has reduced from $10.0 million in 2001
to $8.8 million, reflecting the benefits of our refinancing in December, 2001.
Our effective tax rate is 23% compared with 27% in 2001, after adjusting for the
effects of FAS 142. The prior year rate includes a one-time tax refund of $5
million. The reduction in the rate is due to our continuing tax planning
efforts.
LIQUIDITY AND FINANCIAL CONDITION
Cash generated from operating activities was $22.2 million for the second
quarter, 2002 and $66.2 million for the half year to June 30, 2002, compared
with $60.2 million in the half year to June 30, 2001. EBITDA at $70.3 million
was comparable to $69.3 million in 2001. The most significant change in
operating assets and liabilities was a reduction of $32.8 million in accounts
receivable, which arose mainly because of the timing of TEL bulk deliveries.
In the quarter ended June 30, 2002 the third permanent source interruption
payment of $15.0 million was made and 32% of this was recovered from Ethyl
Corporation. The net Veritel payment of $17.2 million for the half year includes
$30.0 million paid to Veritel and $12.8 million received from Ethyl's 32%
contribution for those payments and the $10.0 million paid in December, 2001.
Deferred consideration payments of $3.6 million were made in respect of the 2001
acquisitions, representing 75% of the maximum amounts payable. The amounts were
included in accruals at December 31, 2001.
Our net debt repayment for the half year to June 30, 2002 was $52.9 million. We
drew down $10.0 million on short-term facilities, and repaid the scheduled debt
instalment of $40.0 million plus an accelerated payment of $23.4 million based
on our surplus cash flow for fiscal 2001. In the quarter ended June 30, 2002 we
repaid $10.0 million of our revolving credit borrowings.
CRITICAL ACCOUNTING POLICIES
Our view on critical accounting policies is unchanged since December 31, 2001.
The two policies that we consider the most critical in terms of complexity and
subjectivity of assessment are those related to environmental liabilities and to
impairment of goodwill and intangible assets. Any adverse variance between
actual results and our projections in these areas will impact on results of
operations and financial condition.
We record environmental liabilities when they are probable and costs can be
estimated reasonably. We have to anticipate the program of work required and the
associated future costs. We also view the costs of vacating our main UK site
($24.9 million at 2001 year end) as a contingent liability because we have no
present intention to exit the site.
We have significant goodwill and intangible assets in our balance sheet, with
net amounts of $345.8 million and $51.9 million, respectively, at June 30, 2002.
We regularly review carrying values by reference to future income and cash
flows, but this involves anticipating trading circumstances that will apply in
future years.
13
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We operate manufacturing and blending facilities, offices and laboratories
around the world, although the largest facility is based in the UK, and use
floating rate debt to finance our global operations. We are, therefore, subject
to business risks inherent in non-US activities, including political and
economic uncertainties, import and export limitations, and market risk related
to changes in interest rates and foreign currency exchange rates. We believe
that the political and economic risks are mitigated due to the stability of the
countries in which our largest operations are based.
We use derivative financial instruments, including interest rate swaps and
foreign currency forward exchange contracts, to manage market risks in the
normal course of our business. We do this to manage our exposure to interest and
exchange rate fluctuations and to minimize our borrowing costs. We do not use
derivatives for trading purposes.
There has been no material change in our exposure to market risk as described in
the Form 10-K filed on March 25, 2002.
14
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 - Dennis Kerrison
99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 - Alan Jarvis
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorised.
Date: August 12, 2002 By /s/ Dennis J Kerrison
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Dennis J Kerrison
President and
Chief Executive Officer
Date: August 12, 2002 By /s/ Alan G Jarvis
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Alan G Jarvis
Vice President and
Chief Financial Officer
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