Octel Corp. Reports 3rd Quarter 2005 Earnings
October 24 2005 - 4:15PM
Business Wire
Octel Corp. (NYSE: OTL) today announced its earnings for the third
quarter ended September 30, 2005. Summary Third Quarter 2005 --
Third quarter 2005 net loss after TEL business goodwill impairment
and restructuring charges was $(9.1) million, or $(0.74) per
diluted share, compared with net income of $9.1 million, or $0.70
per diluted share, for the third quarter 2004. -- TEL business
goodwill impairment was a charge of $(7.4) million, or $(0.60) per
diluted share, for the quarter compared with a charge of $(3.6)
million or $(0.28) per diluted share for the same period in 2004.
-- Restructuring charges were $(10.6) million, or $(0.86) per
diluted share, for the quarter compared with $(1.2) million, or
$(0.09) per diluted share, for the corresponding period in 2004. --
Petroleum Specialties operating income was $5.6 million for the
quarter compared with $1.4 million for the corresponding period in
2004. -- Performance Chemicals operating income was a loss of
$(0.5) million compared with a net income of $0.5 million for the
corresponding period in 2004. -- Cash generation from operating
activities was $19.5 million in the third quarter compared to $0.5
million for the corresponding period in 2004. Nine Months 2005
Results -- The first nine months net loss after TEL business
goodwill impairment and restructuring charges was $(116.3) million,
or $(9.40) per diluted share, compared to a net income of $19.5
million, $(1.50) per diluted share, in the corresponding period
last year. -- TEL business goodwill impairment was a charge of
$(124.1) million, or $(10.03) per diluted share, for the first nine
months, compared with $(23.0) million, or $(1.77) per diluted
share, for the same period last year. -- Restructuring charges were
$(25.1) million, or $(2.03) per diluted share, for the first nine
months compared with $(5.5) million, or $(0.42), for the
corresponding period last year. -- Petroleum Specialties operating
income was $12.4 million in the first nine months of 2005 which
represents a 77% growth over the same period in 2004. --
Performance Chemicals operating income was $1.3 million, $1.1
million better than the first nine months of 2004. -- Cash
generation from operating activities was $15.9 million in the nine
months to September 30, 2005 compared to $36.9 million for the
corresponding period in 2004. Paul Jennings, President and Chief
Executive Officer, commented, "The results for the third quarter
have seen the continuing growth of sales and profitability in the
Petroleum Specialties business. As previously communicated, further
restructuring actions were put into effect in the third quarter to
address the TEL manufacturing cost base as a consequence of the
loss of a major TEL customer in the second quarter. I also
announced the need to realign the size of the executive structure
and the corporate cost base to the challenges faced by a specialty
chemicals company. These initiatives are already delivering results
in the shape of lower corporate costs in the quarter. Performance
Chemicals also demonstrates good sales growth over 2004 resulting
from the recent acquisitions, although difficulties in passing on
recent raw material price increases and the effect of the
hurricanes in the USA held back profitability in the quarter. Octel
is proactively working to address these issues with our customers
and suppliers. Our plan for the remainder of 2005 remains to
establish a fit for purpose cost structure, leverage the growth
potential of the Specialty Chemical businesses and deliver
sustainable performance in all our existing businesses." Global
Earnings and Cash Flow The first nine month net loss of $(116.3),
million or $(9.40) per diluted share, compared with a net profit of
$19.5 million, or $1.50 per diluted share, for the same period last
year. The loss of $(116.3) million incorporated a non cash impact
of $(124.1) million of charges relating to the impairments of TEL
goodwill. Cash flow from operating activities was a $15.9 million
inflow for the first nine months of 2005. This compares to an
inflow of $36.9 million for the comparative period last year. The
primary causes of the decline in cash generation are the lower cash
income, the timing of tax payments and the strategic build up of
TEL inventory to accommodate the accelerated reduction in TEL
manufacturing capacity to ensure an ongoing effective cost base.
Strategic Business Unit Performance (SBU) TEL (tetraethyl lead)
sales for the third quarter were $53.6 million, which represents a
(19)% decline on the same period 2004. The decline over the third
quarter 2004 was mainly due to the loss of a major customer, but
this was offset by higher sales volumes to two other major
accounts. TEL sales for the first nine months of 2005 were $157.9
million, which is also (19)% lower than the corresponding period in
2004. TEL operating income before impairment for the third quarter
was $19.9 million, which represents a (33)% decline from the same
period last year. TEL operating income before impairment for the
first nine months was $61.5 million, which is (29)% lower than the
corresponding period in 2004. Petroleum Specialties reported a 25%
acceleration in sales growth for the third quarter 2005 at $53.4
million and a year to date sales growth of 24% at $151.7 million.
Sales in the EMEA, Americas and Asia Pacific regions were 18%, 30%
and 39% respectively higher than in the third quarter 2004.
Operating income at $5.6 million represents a 300% growth in the
third quarter compared to the same period last year. Operating
income was up 77% over the first nine months of 2004 at $12.4
million, fuelled by a number of initiatives that have started to
bear fruit. These include leveraging our global customer base
through a streamlined organisational structure. The new focused
organisation will enhance the drive for customer intimacy to
further accelerate progress. Performance Chemicals operating profit
for the first nine months of 2005 at $1.3 million represents a $1.1
million improvement from the prior year. Sales at $29.0 million
represented a 49% growth for the third quarter versus the same
period last year. Sales were 150% ahead of 2004 for the first nine
months of 2005 at $92.1 million. This was due to the timing of the
Leuna Polymer, Aroma & Fine Chemicals and Finetex acquisitions.
The operating loss of $(0.5) million in the third quarter resulted
primarily from non cash acquisition amortization expenses of $(0.4)
million, difficulties in passing on recent raw material price
increases to customers in a timely fashion at some of the
businesses and operational delays due to the hurricanes in the USA.
Performance Chemicals results have been reclassified for all
periods to include R&D costs previously reported in corporate
costs. Corporate costs quarter to quarter in 2005 and compared to
the third quarter 2004 are 22% lower at $(6.0) million. The first
nine months of 2005 represents an increase of $(2.1) million (10%)
at $23.4 million. Costs increased due to the switch from a non cash
pension credit to a non cash pension charge, other pension related
costs and the costs of the governance special investigation
undertaken in the first quarter 2005 but these increases have been
partly offset by the savings from the reduction in the executive
structure in 2005. Underlying corporate costs, excluding the FAS 87
pension charge, were down 33% compared to the third quarter 2004
and were down 5% compared to the nine months to September 30, 2004.
Restructuring Charge and Other Expenses A charge of $(10.6) million
was recognized in the third quarter 2005 primarily as a result of
restructuring activity at the Ellesmere Port manufacturing facility
with the associated increase in pension liabilities arising from
restructuring, fixed asset write offs arising from the closure of
the Fuel Technology Centre in the UK and the closure of the
Manchester European Head Office. Provision has also been made to
consolidate manufacturing activity at a subsidiary in the USA. A
charge of $(5.5) million was recognized in the quarter in respect
of the 100% write down of Octel's 40% share in an investment. The
company recognized exchange losses of $(4.2) million in the
quarter. TEL Goodwill Impairment As previously highlighted, a non
cash goodwill impairment charge continues to be a regular feature
of the results. However, in our second quarter 2005 press release
we communicated the loss of a major TEL customer. This has
significantly reduced the expected future cash flows of the TEL
business and as a result we recognized a larger than usual charge
of $(101.9) million in the second quarter 2005. The charge in the
third quarter was $(7.4) million, $3.8 million higher than the
charge in the equivalent period in 2004. Liquidity and Financial
Condition Octel is delighted to confirm that, after constructive
discussions with its senior lenders, it has agreed the terms,
subject to contract, of a new three and half year financing
facility that will enable the Company to pursue its strategic
objectives. The maturity date of the new financing facility will be
May 2009. The Company initiated discussion with its senior lenders
in Quarter 3 to review the bank debt repayment schedule and
covenants to establish appropriate financing facilities that are
aligned to Octel's requirements as a Specialty Chemicals company.
The Company remains in compliance with all financial covenant
arrangements as at September 30, 2005. Octel Corp., a Delaware
corporation, is a global chemical company specializing in high
performance fuel additives and special and effect chemicals. The
company's strategy is to manage profitably and responsibly the
decline in world demand for its major product - tetraethyl lead
(TEL) in gasoline - through competitive differentiation and
stringent product stewardship, to expand its Specialty Chemicals
businesses organically through product innovation and focus on
customer needs, and to seek synergistic growth opportunities
through joint venture, alliances, collaborative arrangements and
acquisitions. Certain of the statements made herein constitute
forward-looking statements. Generally, the words "believe",
"expect", "intend", "estimate", "project", "will" and similar
expressions identify forward-looking statements, which generally
are not historical in nature. All statements which address
operating performance, events or developments that we expect or
anticipate will occur in the future - including statements relating
to volume growth, share of sales or earnings per share growth, and
statements expressing general optimism about future operating
results--are forward-looking statements. Forward-looking statements
are subject to certain risks and uncertainties that could cause
actual results to differ materially from our Company's historical
experience and our present expectations or projections. As and when
made, management believes that these forward-looking statements are
reasonable. However, caution should be taken not to place undue
reliance on such forward-looking statements since such statements
speak only as of the date when made. Although we believe that our
expectations are based on reasonable assumptions within the bounds
of our knowledge of our business and operations, moreover, there
can be no assurance that actual results will not differ materially
from our expectations. Among the risk factors which could cause
actual results to differ materially from expectations are the risks
and uncertainties discussed in the annual report on Form 10-K and
those described from time to time in the Company's other filings
with the SEC. These 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, and business and legal risks inherent in non-US
activities, including political and economic uncertainty, import
and export limitations and market risks related to changes in
interest rates and foreign exchange rates, successful completion of
planned disposals, material fines or other penalties resulting from
its voluntary disclosure to OFAC, and the existence and impact of
any deficiencies or material weaknesses or remedial actions taken
by the Company in respect of a potential violation of the Code of
Ethics by the Chief Executive Officer which may have resulted in a
potential violation of certain laws and regulations by the Chief
Executive Officer and the Company, and compliance with Section 404
of the Sarbanes-Oxley Act of 2002. 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. Should one or more of these risks
materialize (or the consequences if such development worsen), or
should the underlying assumptions prove incorrect, actual results
could differ materially from those expected. The Company undertakes
no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise. -0- *T Schedule 1 OCTEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME Three Months Nine Months Ended
Ended September 30 September 30 ----------------- -----------------
2005 2004 2005 2004 -------- -------- -------- -------- (millions
of dollars except per share data)
----------------------------------- Net sales $ 136.0 $ 128.5 $
401.7 $ 354.4 Cost of goods sold (90.2) (76.7) (258.0) (201.2)
-------- -------- -------- -------- Gross profit 45.8 51.8 143.7
153.2 Selling, general and admin. (20.9) (23.0) (73.4) (66.0)
Research and development (2.7) (2.6) (9.0) (7.6) Restructuring
charge (10.6) (1.2) (25.1) (5.5) Amortization of intangible assets
(3.2) (2.5) (9.5) (7.5) Impairment of TEL business goodwill (7.4)
(3.6) (124.1) (23.0) Other net (expenses) / income (9.8) (3.2)
(9.5) 0.5 Interest expense (net) (1.9) (1.3) (5.5) (3.8) --------
-------- -------- -------- Total (56.5) (37.4) (256.1) (112.9)
-------- -------- -------- -------- (Loss) / income before income
taxes and minority interest (10.7) 14.4 (112.4) 40.3 Minority
interest (0.2) - (0.2) (1.9) Income taxes 1.8 (5.6) (3.7) (18.4)
-------- -------- -------- -------- (Loss) / income from continuing
operations (9.1) 8.8 (116.3) 20.0 Discontinued operations, net of
tax - 0.3 - (0.5) -------- -------- -------- -------- Net (loss) /
income $ (9.1) $ 9.1 $(116.3) $ 19.5 ======== ======== ========
======== (Loss) / earnings per share Basic $(0.74) $ 0.73 $ (9.40)
$ 1.58 Diluted $(0.74) $ 0.70 $ (9.40) $ 1.50 Weighted average
shares Basic 12,359 12,445 12,378 12,342 outstanding in thousands
Diluted 12,359 13,071 12,378 13,009 ANALYSIS OF BUSINESS UNIT
RESULTS 2005 2004 2005 2004 -------- -------- -------- --------
(millions of dollars) ----------------------------------- Net sales
TEL $ 53.6 $ 66.3 $ 157.9 $ 194.8 Petroleum Specialties 53.4 42.8
151.7 122.7 Performance Chemicals 29.0 19.4 92.1 36.9 --------
-------- -------- -------- Total 136.0 128.5 401.7 354.4 --------
-------- -------- -------- Gross profit TEL 25.6 35.3 80.0 104.7
Petroleum Specialties 16.0 12.7 47.2 40.1 Performance Chemicals 4.2
3.8 16.5 8.4 -------- -------- -------- -------- Total 45.8 51.8
143.7 153.2 -------- -------- -------- -------- Operating income
TEL 19.9 29.5 61.5 86.2 Petroleum Specialties 5.6 1.4 12.4 7.0
Performance Chemicals* (0.5) 0.5 1.3 0.2 -------- -------- --------
-------- Total SBU Operating income 25.0 31.4 75.2 93.4 FAS 87
pension (charge) / credit (0.4) 0.7 (1.3) 2.0 Underlying Corporate
costs* (5.6) (8.4) (22.1) (23.3) -------- -------- --------
-------- Total Corporate costs (6.0) (7.7) (23.4) (21.3)
Restructuring charge (10.6) (1.2) (25.1) (5.5) Impairment of TEL
business goodwill (7.4) (3.6) (124.1) (23.0) Other net (expenses) /
income (9.8) (3.2) (9.5) 0.5 Interest expense (net) (1.9) (1.3)
(5.5) (3.8) -------- -------- -------- -------- (Loss) / income
before income taxes and minority interest $ (10.7) $ 14.4 $(112.4)
$ 40.3 -------- -------- -------- -------- * Certain research and
development activities which were previously included within
corporate costs have been reallocated to the Performance Chemicals
strategic business unit. The 2004 comparatives reflect this change.
FAS 87 pension charges included in corporate costs have been
separated from other underlying corporate costs. Schedule 2 OCTEL
CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30
December 31 2005 2004 ---------------------------- Assets (millions
of dollars) Current assets Cash and cash equivalents $ 64.6 $ 33.3
Restricted cash* 4.4 - Accounts receivable, less allowance 75.7
84.4 of $2.8 (2004 - $4.0) Inventories 92.3 76.9 Prepaid expenses
7.4 5.0 -------------- ------------- Total current assets 244.4
199.6 Restricted cash* - 4.8 Net property, plant and equipment 68.5
71.8 Goodwill 211.3 332.2 Intangible assets 46.3 48.6 Prepaid
pension cost 115.5 122.9 Deferred finance costs 0.6 1.4 Other
assets 2.9 9.3 -------------- ------------- $ 689.5 $ 790.6
============== ============= Liabilities and Stockholders' Equity
Short term borrowings $ 34.9 $ 30.2 Current portion of plant
closure provisions 11.3 10.0 Current portion of deferred income 2.0
2.0 Other current liabilities 102.2 127.2 Plant closure provisions
(net of current portion) 20.3 18.6 Deferred income taxes 45.0 44.4
Deferred income (net of current portion) 3.4 4.4 Long-term debt
130.1 94.1 Other liabilities 16.2 13.7 Minority interest 0.2 0.2
Total Stockholders' Equity 323.9 445.8 -------------- -------------
$ 689.5 $ 790.6 ============== ============= * As part of the
consideration for Aroma & Fine Chemicals the Company issued the
vendors with GBP 2.5m ($4.4m) of loan notes. Under the terms of the
agreement the loan notes have been secured by an equal amount of
restricted cash in escrow. The loan notes are due to be paid in two
equal tranches in January and September 2006. Schedule 3 OCTEL
CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine
Months Ended September 30 ----------------- 2005 2004 --------
-------- (millions of dollars) Cash Flows from Operating Activities
Net (loss) / income $(116.3) $ 19.5 Adjustments to reconcile net
income to cash provided by operating activities: Depreciation and
amortization 20.5 16.9 Impairment of TEL business goodwill 124.1
23.0 Deferred income taxes (1.9) 0.6 Changes in working capital
(15.7) (24.6) Income taxes and other current liabilities (15.0) 8.1
Movement in provision for unconsolidated investments 6.2 - Movement
in plant closure provisions 2.5 (1.4) Movement in pension
prepayment 7.4 (5.3) Movements in other non-current liabilities 1.7
(0.1) Other 2.4 0.2 -------- -------- Net cash (used in) / provided
by operating activities 15.9 36.9 Cash Flows from Investing
Activities Capital expenditures (5.0) (5.0) Business combinations,
net of cash acquired (22.3) (75.2) Increase in restricted cash -
(4.5) Other 0.1 (3.1) -------- -------- Net cash used in investing
activities (27.2) (87.8) Cash Flows from Financing Activities Net
increase in borrowings 41.1 38.3 Dividends paid (1.7) (0.7) Issue
of treasury stock 1.3 5.3 Repurchase of common stock (2.0) (2.5)
Minority interest 0.2 (0.5) Refinancing costs - (2.6) --------
-------- Net cash provided by financing activities 38.9 37.3 Effect
of exchange rate changes on cash 3.7 2.3 -------- -------- Net
change in cash and cash equivalents 31.3 (11.3) Cash and cash
equivalents at beginning of period 33.3 46.1 -------- -------- Cash
and cash equivalents at end of period $ 64.6 $ 34.8 ========
======== *T
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