Innospec Earnings 2020-12-31
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended | ||
or | ||
TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from to
Commission file number
1-13879
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code:
(303 ) 792 5554
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered pursuant to Section 12(g) of the Act:
Title of each class | Name of each exchange on which registered | |
N/A | N/A |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒
No
☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
☐
☒
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.
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2
of the Exchange Act. ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act). Yes ☐ No ☒
The aggregate market value of the voting and
1,061 million, based on the closing price of the common shares on the NASDAQ on June 30, 2020. Shares of common stock held by each officer and director and by each beneficial owner who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
non-voting
common equity held by
non-affiliates
of the registrant as of the most recently completed second fiscal quarter (June 30, 2020) was approximately $As of February 10, 2021, 24,598,689 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Innospec Inc.’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 5, 2021 are incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
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Item 9 | 101 | |||||
Item 9A | 101 | |||||
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CAUTIONARY STATEMENT RELATIVE TO FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
This Form
10-K
contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Such forward-looking statements include statements (covered by words like “expects,” “estimates,” “anticipates,” “may,” “could,” “believes,” “feels,” “plan,” “intend” or similar words or expressions, for example) which relate to earnings, growth potential, operating performance, events or developments that we expect or anticipate will or may occur in the future. Although forward-looking statements are believed by management to be reasonable when made, they are subject to certain risks, uncertainties and assumptions, including, the effects of the
COVID-19
pandemic, such as its duration, its unknown long-term economic impact, measures taken by governmental authorities to address it and the manner in which the pandemic may precipitate or exacerbate other risks and/or uncertainties, and our actual performance or results may differ materially from these forward-looking statements. You are urged to review our discussion of risks and uncertainties that could cause actual results to differ from forward-looking statements under the heading “Risk Factors.” Innospec undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 1
PART I
Item 1 | Business |
When we use the terms “Innospec,” “the Corporation,” “the Company,” “Registrant,” “we,” “us” and “our,” we are referring to Innospec Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.
General
Innospec develops, manufactures, blends, markets and supplies specialty chemicals for use as fuel additives, ingredients for personal care, home care, agrochemical, metal extraction and other applications and oilfield chemicals. Our products are sold primarily to oil and gas exploration and production companies, oil refiners, fuel manufacturers and users, formulators of personal care, home care, agrochemical and metal extraction formulations, and other chemical and industrial companies throughout the world. Our Fuel Specialties business offers fuel additives to help improve fuel efficiency, boost engine performance and reduce harmful emissions. Our Performance Chemicals business provides effective technology-based solutions for our customers’ processes or products focused in the Personal Care, Home Care, Agrochemical and Metal Extraction markets. Our Oilfield Services business supplies drilling, completion and production chemicals which make exploration and production more effective, cost-efficient and environmentally friendly. Our Octane Additives business previously manufactured a fuel additive for use in automotive gasoline until it ceased trading on June 30, 2020.
Segment Information
The Company reports its financial performance based on the four reportable segments described as follows:
| • | Fuel Specialties |
| • | Performance Chemicals |
| • | Oilfield Services |
| • | Octane Additives (ceased trading June 30, 2020) |
The Fuel Specialties, Performance Chemicals and Oilfield Services segments operate in markets where we actively seek growth opportunities although their ultimate customers are different. The Octane Additives segment has ceased trading and is no longer a reporting segment from July 1, 2020, as reported in our Quarterly Report on Form
10-Q
for the quarter ended June 30, 2020. For financial information about each of our segments, see Note 3 of the Notes to the Consolidated Financial Statements.
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Fuel Specialties
Our Fuel Specialties segment develops, manufactures, blends, markets and supplies a range of specialty chemical products used as additives to a wide range of fuels. These fuel additive products help improve fuel efficiency, boost engine performance and reduce harmful emissions; and are used in the efficient operation of automotive, marine and aviation engines, power station generators, and heating oil.
The segment has grown organically through our development of new products to address what we believe are the key drivers in demand for fuel additives. These drivers include increased demand for fuel, focus on fuel economy, changing engine technology and legislative developments. We have also devoted substantial resources towards the development of new and improved products that may be used to improve combustion efficiency.
Our customers in this segment include national oil companies, multinational oil companies and fuel retailers.
Performance Chemicals
Our Performance Chemicals segment provides effective technology-based solutions for our customers’ processes or products focused in the Personal Care, Home Care, Agrochemical and Metal Extraction markets.
This segment has grown through acquisitions, and the development and marketing of innovative products. The focus for our Performance Chemicals segment is to develop high performance products from its technology base in a number of targeted markets.
Our customers in this segment include large multinational companies, manufacturers of personal care and household products and specialty chemical manufacturers operating in agrochemical, metal extraction and other industrial applications.
Oilfield Services
Our Oilfield Services segment develops and markets chemical solutions for fracturing, stimulation and completion operations, products for oil and gas production which aid flow assurance and maintain asset integrity and products to prevent loss of mud in drilling operations.
This segment had been growing strongly in recent years until the
COVID-19
pandemic adversely impacted customer demand in 2020. We expect increased customer activity to return as the global demand for fuel increases and oil prices return to the
pre-pandemic
levels. Our customers in this segment include multinational public and independent companies operating currently principally in the Americas.
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Octane Additives
The Octane Additives segment has ceased trading and is no longer a reporting segment from July 1, 2020. Previously our Octane Additives segment produced tetra ethyl lead (“TEL”) for use in automotive gasoline and provided services in respect of environmental remediation to manage the cleanup of redundant TEL facilities as refineries completed the transition to unleaded gasoline. The expected activities to clean up redundant TEL facilities have been provided for in the second quarter of 2020.
Legacy costs related to these operations are now being recorded as operating expenses within corporate costs.
Strategy
Our strategy is to develop new and improved products and technologies to continue to strengthen and increase our market positions within our Fuel Specialties, Performance Chemicals and Oilfield Services segments. We also actively continue to assess potential strategic acquisitions, partnerships and other opportunities that would enhance and expand our customer offering. We focus on opportunities that would extend our technology base, geographical coverage or product portfolio. We believe that focusing on the Fuel Specialties, Performance Chemicals and Oilfield Services segments, in which the Company has existing experience, expertise and knowledge, provides opportunities for positive returns on investment with reduced operating risk. We also continue to develop our geographical footprint, consistent with the development of global markets.
Geographical Area Information
Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.
Working Capital
The nature of our customers’ businesses generally requires us to hold appropriate amounts of inventory in order to be able to respond quickly to customers’ needs. We therefore require corresponding amounts of working capital for normal operations. We do not believe that this is materially different to our competitors, with the exception of cetane number improvers, in which case we maintain high enough levels of inventory, as required, to retain our position as market leader in sales of these products.
The purchase of large amounts of certain raw materials across all our segments can create some variations in working capital requirements, but these are planned and managed by the business.
We do not believe that our terms of sale, or purchase, differ markedly from those of our competitors.
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Raw Materials and Product Supply
We use a variety of raw materials and chemicals in our manufacturing and blending processes and believe that sources for these are adequate for our current operations. Our major purchases are oleochemicals and derivatives, cetane number improvers, ethylene, various solvents, amines, alcohols, olefin and polyacrylamides.
These purchases account for a substantial portion of the Company’s variable manufacturing costs. These materials are, with the exception of ethylene for our operations in Germany, readily available from more than one source. Although ethylene is, in theory, available from several sources, it is not permissible to transport ethylene by road in Germany. As a result, we source ethylene for our German operations via a direct pipeline from a neighboring site, making it effectively a single source. Ethylene is used as a primary raw material for our German operations in products representing approximately 4% of Innospec’s sales.
We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. From time to time, for some raw materials, the risk of cost increases is managed with commodity swaps.
We continue to monitor the situation and adjust our procurement strategies as we deem appropriate. The Company forecasts its raw material requirements substantially in advance, and seeks to build long-term relationships and contractual positions with supply partners to safeguard its raw material positions. In addition, the Company operates an extensive risk management program which seeks to source key raw materials from multiple sources and to develop suitable contingency plans.
Intellectual Property
Our intellectual property, including trademarks, patents and licenses, forms a significant part of the Company’s competitive advantage, particularly in the Fuel Specialties, Oilfield Services and Performance Chemicals segments. The Company does not, however, consider its business as a whole to be dependent on any one trademark, patent or license.
The Company has a portfolio of trademarks and patents, both granted and in the application stage, covering products and processes in several jurisdictions. The majority of these patents were developed by the Company and, subject to maintenance obligations including the payment of renewal fees, have at least 10 years life remaining.
The trademark “Innospec and the Innospec device” in Classes 1, 2 and 4 of the “International Classification of Goods and Services for the Purposes of the Registration of Marks” are registered in all jurisdictions in which the Company has a significant market presence. The Company also has trademark registrations for certain product names in all jurisdictions in which it has a significant
market presence.
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We actively protect our inventions, new technologies, and product developments by filing patent applications and maintaining trade secrets. In addition, we vigorously participate in patent opposition proceedings around the world where necessary to secure a technology base free from infringement of intellectual property.
Competition
Certain markets in which the Company operates are subject to significant competition. The Company competes on the basis of a number of factors including, but not limited to, product quality and performance, specialized product lines, customer relationships and service, and regulatory expertize.
Fuel Specialties:
Performance Chemicals:
Oilfield Services:
Octane Additives:
Research, Development, Testing and Technical Support
Research, product/application development and technical support (“R&D”) provide the basis for the growth of our Fuel Specialties, Performance Chemicals and Oilfield Services segments. Accordingly, the Company’s R&D activity has been, and will continue to be, focused on the development of new products and formulations. Our R&D department provides technical support for all of our reporting segments. Expenditures to support R&D services were $30.9 million, $35.4 million and $33.4 million in 2020, 2019 and 2018, respectively.
We believe that our proven technical capabilities provide us with a significant competitive advantage. Our Performance Chemicals business has launched significant new mild surfactants
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based on isethionate and taurate chemistry which are well aligned with developing customer needs. In addition, the business has developed further formulations in emollients, silicones and surfactants for the personal care, homecare, agrochemical and metal extraction markets. Fuel Specialties has continued to innovate focused on bringing new technologies to market which reduce pollution and improve fuel economy, including detergents and cold flow improvers. In Oilfield Services, new technologies have been introduced to improve the hydrocarbon yield from customers’ operations and to protect assets, including friction modifiers, biocide formulations and additives to improve drilling muds.
Health, Safety and Environmental Matters
We are subject to environmental laws in the countries in which we operate and conduct business. Management believes that the Company is in material compliance with applicable environmental laws and has made the necessary provisions for the continued costs of compliance with environmental laws.
Our principal site giving rise to environmental remediation liabilities is our Ellesmere Port manufacturing site in the United Kingdom. There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe. At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed.
We recognize environmental remediation liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated. This involves anticipating the program of work and the associated future expected costs, and so involves the exercise of judgment by management. We regularly review the future expected costs of remediation and the current estimate is reflected in Note 13 of the Notes to the Consolidated Financial Statements.
The European Union (“E.U.”) legislation known as the Registration, Evaluation and Authorization of Chemical Substances Regulations (“REACH”) requires most of the substances in the Company’s products to be registered with the European Chemicals Agency. Under this legislation the Company has to demonstrate that the substances it uses in its products are safe for use and appropriate for their intended purposes in the E.U.. During this registration and continual evaluation process, the Company incurs expense to test and register substances it manufactures or imports in the E.U..
Following the end of the Brexit transition process, on January 11, 2021 the United Kingdom (“U.K.”) government introduced U.K. REACH with the same registration requirements for substances produced in or imported into the U.K.. Furthermore, globally, similar regulatory regimes to the E.U. and U.K. REACH are also entering into force or are being proposed in several other countries. These registration based regulatory regimes will result in increasing test expenses and registration fees to ensure Innospec products remain compliant with the appropriate regulations and can continue to be sold in these markets.
7
Employees and Human Capital Management
The Company had approximately 1900 employees in 24 countries as at December 31, 2020.
Human capital management is critical to Innospec’s ongoing business success, which requires investing in our people. Our aim is to create a highly engaged and motivated workforce where employees are inspired by leadership, engaged in purpose-driven, meaningful work and have opportunities for growth and development.
An effective approach to human capital management requires that we invest in talent, development, culture and employee engagement. We aim to create an environment where our employees are encouraged to make positive contributions and fulfill their potential.
Diversity and Inclusion
Innospec aims to attract and retain the best people by ensuring that employment decisions are based on merit, performance and contribution to the Company. As part of our Global HR Policy, our diversity and equal opportunities policy ensures that current and prospective employees receive equal opportunities irrespective of gender, sexual orientation, race, color, ethnic or national origin, marital status, age, disability, religion or belief.
Available Information
Our corporate web site is
www.innospec.com
. We make available, free of charge, on or through this web site our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the U.S. Securities and Exchange Commission (“SEC”). In addition, the SEC maintains an internet site at
www.sec.gov
that contains reports, proxy and information statements, and other information that we file electronically with the SEC and state the address of that site. The Company routinely posts important information for investors on its web site (under Investors). The Company uses this web site as a means of disclosing material,
non-public
information and for complying with its disclosure obligations under SEC Regulation FD (“Fair Disclosure”). Accordingly, investors should monitor the Investors portion of the Company’s web site, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts. 8
Item 1A | Risk Factors |
The factors described below represent the principal risks associated with our business.
Global Conditions
The
COVID-19
pandemic has had, and is expected to continue to have, an adverse impact on our business, results of operations, financial position and cash flows. We have been closely monitoring the impact of the
COVID-19
pandemic on all aspects of our business, including how it has and will impact our customers, employees, supply chain, and distribution network. The effects of
COVID-19
on the global economic environment have impacted, and are expected to continue to impact, the results of the Company significantly, particularly with respect to reduced demand within our Fuel Specialties and Oilfield Services segments, and we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. The further extent to which our operations may be impacted by the
COVID-19
pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted. These include, but are not limited to, the availability and productivity of our employees, the duration and severity of the pandemic; government restrictions on businesses and individuals; the impact of the pandemic on our customers’ businesses and the resulting demand for our products; the impact on our suppliers and supply chain network; the impact on global economies, including the possibility of recession and depression, and the timing and rate of economic recovery; the development of treatments and vaccines; and potential adverse effects on the financial markets. The impact of
COVID-19,
as well as future pandemics or resurgences, may also exacerbate other risks discussed herein, any of which could have a material effect on us. This situation is changing rapidly and additional impacts that may occur are currently unknown. Competition and market conditions may adversely affect our operating results.
In certain markets, our competitors are larger than us and may have greater access to financial, technological and other resources. As a result, competitors may be better able to adapt to changes in conditions in our industries, fluctuations in the costs of raw materials or changes in global economic conditions. Competitors may also be able to introduce new products with enhanced features that may cause a decline in the demand and sales of our products. Consolidation of customers or competitors, or economic problems of customers in our markets could cause a loss of market share for our products, place downward pressure on prices, result in payment delays or
non-payment,
or declining plant utilization rates. These risks could adversely impact our results of operations, financial position and cash flows. Economic, political and operational developments related to the departure of the United Kingdom from the European Union may adversely affect our business.
The U.K. ceased to be a member of the E.U. on January 31, 2020 (“Brexit”). During a prescribed period, certain transitional arrangements were in effect, such that the U.K. continued to be treated,
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in most respects, as if it were still a member of the E.U., and generally remained subject to E.U. law. On December 24, 2020, the E.U. and the U.K. reached an agreement in principle on the terms of certain agreements and declarations governing the ongoing relationship between the E.U. and the U.K., including the
E.U.-U.K.
Trade and Cooperation Agreement (the “Agreement”). The Agreement itself is limited in its scope to primarily the trade of goods, transport, energy links and fishing, and uncertainties remain relating to certain aspects of the U.K.’s future economic, trading and legal relationships with the E.U. and with other countries. The departure of the U.K. from the E.U. Single Market and Customs Union (as well as all E.U. policies and international agreements) has ended free movement of goods between the U.K. and the E.U., creating
non-tariff
and quota barriers (such as customs checks at the borders between the E.U. and the U.K.) to trade in goods, resulting in increased disruption and cost to businesses and requiring adjustments to integrated E.U.- U.K. supply chains. Moreover, the free movement of persons, services and capital between the U.K. and the E.U. ended on January 1, 2021, which has meant the loss for U.K. suppliers of services of their automatic right to offer such services across the E.U.. The actual or potential consequences of the Agreement, and the associated uncertainty, could adversely affect economic and market conditions in the U.K., in the E.U. and its member states and elsewhere, and could contribute to instability in global financial markets. Until the level of disruption and additional cost to trading in goods and services and to the movement of persons and capital between the U.K. and the E.U. can be properly evaluated, it is not possible for us to determine the impact that the departure of the U.K. from the E.U. Single Market and Customs Union may have on us.
These developments may adversely impact our results of operations, financial position and cash flows.
Continuing adverse global economic conditions could materially affect our current and future businesses.
Global economic factors affecting our business include, but are not limited to, geopolitical instability in some markets, miles driven by passenger and commercial vehicles, legislation to control fuel quality, impact of alternative propulsion systems, consumer demand for premium personal care and cosmetic products, and oil and gas drilling and production rates. The availability, cost and terms of credit have been, and may continue to be, adversely affected by the foregoing factors and these circumstances have produced, and may in the future result in, illiquid markets and wider credit spreads, which may make it difficult or more expensive for us to obtain credit.
Demand for all of our products may be adversely impacted by the continuing impact of the
COVID-19
pandemic which will continue to create uncertainty in the markets in 2021 and possibly beyond. Continuing uncertainties in the U.S. and international markets and economies leading to a decline in business and consumer spending could adversely impact our results of operations, financial position and cash flows.
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Domestic or international natural disasters, pandemics or terrorist attacks may disrupt our operations, decrease the demand for our products or otherwise have an adverse impact on our business.
Chemical related assets, and U.S. corporations such as us, may be at greater risk of future terrorist attacks than other possible targets in the U.S., the United Kingdom and throughout the world. Extraordinary events such as natural disasters and pandemics may negatively affect local economies, including those of our customers or suppliers. The occurrence and consequences of such events cannot be predicted, but they can adversely impact economic conditions in general and in our specific markets. The resulting damage from such events could include loss of life, severe injury and property damage or site closure. Any of these matters could adversely impact our results of operations, financial position and cash flows.
While Innospec maintains business continuity plans that are intended to allow it to continue operations or mitigate the effects of events that could disrupt its business, Innospec cannot provide assurances that its plans would fully protect it from all such events. In addition, insurance maintained by Innospec to protect against property damage, loss of business and other related consequences resulting from catastrophic events is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of Innospec’s damages or damages to others in the event of a catastrophe. In addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.
Business Operations
We face risks related to our foreign operations that may adversely affect our business.
We serve global markets and operate in certain countries with political and economic instability, including the Middle East, Northern Africa, Asia-Pacific, Eastern Europe and South American regions. Our international operations are subject to numerous international business risks including, but not limited to, geopolitical and economic conditions, risk of expropriation, import and export restrictions, trade wars, exchange controls, national and regional labor strikes, high or unexpected taxes, government royalties and restrictions on repatriation of earnings or proceeds from liquidated assets of overseas subsidiaries. Any of these could have a material adverse impact on our results of operations, financial position and cash flows.
We may not be able to consummate, finance or successfully integrate future acquisitions, partnerships or other opportunities into our business, which could hinder our strategy or result in unanticipated expenses and losses.
Part of our strategy is to pursue strategic acquisitions, partnerships and other opportunities to complement and expand our existing business. The success of these transactions depends on our ability to efficiently complete transactions, integrate assets and personnel acquired in these transactions and apply our internal control processes to these acquired businesses. Consummating acquisitions, partnerships or other opportunities and integrating acquisitions
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involves considerable expense, resources and management time commitments, and our failure to manage these as intended could result in unanticipated expenses and losses. Post-acquisition integration may result in unforeseen difficulties and may deplete significant financial and management resources that could otherwise be available for the ongoing development or expansion of existing operations. Furthermore, we may not realize the benefits of an acquisition in the way we anticipated when we first entered the transaction. Any of these risks could adversely impact our results of operations, financial position and cash flows.
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
Our future success will depend in substantial part on the continued services of our senior management. The loss of the services of one or more of our key executive personnel could affect the implementation of our business plan and result in reduced profitability. Our future success also depends on the continued ability to attract, develop, retain and motivate highly-qualified technical, sales and support staff. We cannot guarantee that we will be able to retain our key personnel or attract or retain qualified personnel in the future. If we are unsuccessful in our efforts in this regard, this could adversely impact our results of operations, financial position and cash flows.
An information technology system failure may adversely affect our business.
We rely on information technology systems to transact our business. Like other global companies, we have, from time to time, experienced threats to our data and systems. Although we have implemented administrative and technical controls and take protective actions to reduce the risk of cyber incidents and breaches of our information technology, and we endeavor to modify such procedures as circumstances warrant, such measures may be insufficient to prevent physical and electronic
break-ins,
cyber-attacks or other security breaches to our computer systems. Our systems, processes, software and network may be vulnerable to internal or external security breaches, computer viruses, malware or other malicious code or cyber-attack, catastrophic events, power interruptions, hardware failures, fire, natural disasters, human error, system failures and disruptions, and other events that could have security consequences. An information technology failure or disruption could prevent us from being able to process transactions with our customers, operate our manufacturing facilities, and properly report those transactions in a timely manner. Our information technology costs may increase to ensure the appropriate level of cyber security as we continuously adapt to the changing technological environment.
Whilst we have limited insurance coverage in place that may, subject to policy terms and conditions, cover certain aspects of cyber risks, this insurance coverage is subject to certain limitations and may not be applicable to a particular incident or otherwise be sufficient to cover all our losses beyond any coverage limitations. Furthermore, a significant or protracted information technology system failure may result in a material adverse effect on our results of operations, financial position and cash flows.
12
Decline in our TEL business
The Octane Additives business has ceased trading and is no longer a reporting segment from July 1, 2020 as the production of TEL for use in motor gasoline has finished. Legacy costs related to these operations are now being recorded as operating expenses within corporate costs.
The continued sales of TEL for use in aviation fuel (“AvTel”) are recorded within our Fuel Specialties business. The piston aviation industry has been, and is currently, researching a safe replacement fuel to replace leaded fuel. The Federal Aviation Administration program (Piston Aviation Fuels Initiative) has been established to identify a replacement and candidate fuels are at an early
pre-screening
stage. This process is currently suspended and anticipated to restart in 2021. The timescale beyond this stage is unclear, but the full testing program will, of necessity, be long and comprehensive. While we expect that at some point in the future a replacement fuel will be identified, trialed and supplied to the industry, there is no currently available alternative. In addition, there is no clear timescale on the legislation of a replacement product. If a suitable product is identified and the use of leaded fuel is prohibited in piston aviation the Company’s future operating income and cash flows from operating activities would be adversely impacted.
Failure to protect our intellectual property rights could adversely affect our future performance and cash flows.
Failure to maintain or protect our intellectual property rights may result in the loss of valuable technologies, or us having to pay other companies for infringing on their intellectual property rights. Measures taken by us to protect our intellectual property may be challenged, invalidated, circumvented or rendered unenforceable. In addition, international intellectual property laws may be more restrictive or may offer lower levels of protection than under U.S. law. We may also face patent infringement claims from our competitors which may result in substantial litigation costs, claims for damages or a tarnishing of our reputation even if we are successful in defending against these claims, which may cause our customers to switch to our competitors. Any of these events could adversely impact our results of operations, financial position and cash flows.
Industry Matters
Trends in oil and gas prices affect the level of exploration, development and production activity of our customers, and the demand for our services and products, which could have a material adverse impact on our business.
Demand for our services and products in our Oilfield Services business is particularly sensitive to the level of exploration, development and production activity of, and the corresponding capital spending by, oil and gas companies. The level of exploration, development and production activity is directly affected by trends in demand for and prices of oil and gas, which historically have been volatile and are likely to continue to be volatile.
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Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty, and a variety of other economic and political factors that are beyond our control. Even the perception of longer-term lower oil and gas prices by oil and gas companies can similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects. Factors affecting the prices of oil and gas include the level of supply and demand for oil and gas, governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and gas reserves, weather conditions and natural disasters, worldwide political, military, and economic conditions, the level of oil and gas production by
non-OPEC
(“Organization of the Petroleum Exporting Countries”) countries and the available excess production capacity within OPEC, the cost of producing and delivering oil and gas and potential acceleration of the development of alternative power generation, fuels and engine technologies. Any prolonged reduction in oil and gas prices will depress the immediate levels of exploration, development, and production activity which could have a material adverse impact on our results of operations, financial position and cash flows. We could be adversely affected by technological changes in our industry.
Our ability to maintain or enhance our technological capabilities, develop and market products and applications that meet changing customer requirements, and successfully anticipate or respond to technological changes in a cost effective and timely manner will likely impact our future business success. We compete on a number of fronts including, but not limited to, product quality and performance. In the case of some of our products, our competitors are larger than us and may have greater access to financial, technological and other resources. Technological changes include, but are not limited to, the development of electric and hybrid vehicles, and the subsequent impact on the demand for gasoline and diesel. Our inability to maintain a technological edge, innovate and improve our products could cause a decline in the demand and sales of our products, and adversely impact our results of operations, financial position and cash flows.
Sharp and unexpected fluctuations in the cost of our raw materials and energy could adversely affect our profit margins.
We use a variety of raw materials, chemicals and energy in our manufacturing and blending processes. Many of these raw materials are derived from petrochemical-based and vegetable-based feedstocks which can be subject to periods of rapid and significant cost instability. These fluctuations in cost can be caused by political instability in oil producing nations and elsewhere, weather conditions or other factors influencing global supply and demand of these materials, over which we have little or no control. We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. From time to time, we have entered into hedging arrangements for certain utilities and raw materials, but do not typically enter into hedging arrangements for all raw materials, chemicals or energy costs. If the costs of raw materials, chemicals or energy increase, and we are not able to pass on these cost
14
increases to our customers, then profit margins and cash flows from operating activities would be adversely impacted. If raw material costs increase significantly, then our need for working capital could increase. Any of these risks could adversely impact our results of operations, financial position and cash flows.
Our business is subject to the risk of manufacturing disruptions, the occurrence of which would adversely affect our results of operations.
We are subject to hazards which are common to chemical manufacturing, blending, storage, handling and transportation. These hazards include fires, explosions, remediation, chemical spills and the release or discharge of toxic or hazardous substances together with the more generic risks of labor strikes or slowdowns, mechanical failure in scheduled downtime, extreme weather or transportation interruptions. These hazards could result in loss of life, severe injury, property damage, environmental contamination and temporary or permanent manufacturing cessation. Any of these factors could adversely impact our results of operations, financial position and cash flows.
Legal, Regulatory and Tax Matters
We are subject to extensive regulation of our international operations that could adversely affect our business and results of operations.
Due to our global operations, we are subject to many laws governing international commercial activity, conduct and relations, including those that prohibit improper payments to government officials, restrict where and with whom we can do business, and limit the products, software and technology that we can supply to certain countries and customers. These laws include, but are not limited to, the U.S. Foreign Corrupt Practices Act and United Kingdom Bribery Act, sanctions and assets control programs administered by the U.S. Department of the Treasury and/or the European Union from time to time, and the U.S. export control laws such as the regulations under the U.S. Export Administration Act, as well as similar laws and regulations in other countries relevant to our business operations. Violations of any of these laws or regulations, which are often complex in their application, may result in criminal or civil penalties that could have a material adverse effect on our results of operations, financial position and cash flows.
Our United Kingdom defined benefit pension plan could adversely impact our financial condition, results of operations and cash flows.
Movements in the underlying plan asset value and Projected Benefit Obligation (“PBO”) of our United Kingdom defined benefit pension plan are dependent on actual return on investments as well as our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation. A change in any one of these assumptions could impact the plan asset value, PBO and pension credit recognized in the income statement. If future plan investment returns prove insufficient to meet future obligations, or should future obligations increase due to actuarial factors or changes in pension legislation, then we may be required to make additional cash contributions. These events could adversely impact our results of operations, financial position and cash flows.
15
We may have additional tax liabilities.
We are subject to income and other taxes in the U.S., the U.K., the E.U. and other jurisdictions. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. Significant judgment is required in estimating our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any final determination pursuant to tax audits and any related litigation could be materially different to the amounts reflected in our consolidated financial statements. Should any tax authority disagree with our estimates and determine any additional tax liabilities, including interest and penalties for us, this could adversely impact our results of operations, financial position and cash flows.
Our products are subject to extensive government scrutiny and regulation.
We are subject to regulation by federal, state, local and foreign government authorities. In some cases, we need government approval of our products, manufacturing processes and facilities before we may sell certain products. Many products are required to be registered with the U.S. Environmental Protection Agency (EPA), with the European Chemicals Agency (ECHA) and with comparable government agencies elsewhere. We are also subject to ongoing reviews of our products, manufacturing processes and facilities by government authorities, and must also produce product data and comply with detailed regulatory requirements.
In order to obtain regulatory approval of certain new products we must, among other things, demonstrate that the product is appropriate and effective for its intended uses, that the product has been appropriately tested for safety and that we are capable of manufacturing the product in accordance with applicable regulations. This approval process can be costly, time consuming, and subject to unanticipated and significant delays. We cannot be sure that necessary approvals will be granted on a timely basis or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate income from those products. New or stricter laws and regulations may be introduced that could result in additional compliance costs and prevent or inhibit the development, manufacture, distribution and sale of our products. Such outcomes could adversely impact our results of operations, financial position and cash flows.
Diverse chemical regulatory processes in different countries around the world might create complexity and additional cost. U.K. REACH, which was precipitated by the U.K.’s exit from the European Union is one such example.
Legal proceedings and other claims could impose substantial costs on us.
We are from time to time involved in legal proceedings that result from, and are incidental to, the conduct of our business, including employee and product liability claims. Although we maintain insurance to protect us against a variety of claims, if our insurance coverage is not adequate to cover such claims, then we may be required to pay directly for such liabilities. Such outcomes could adversely impact our results of operations, financial position and cash flows.
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Environmental liabilities and compliance costs could have a substantial adverse impact on our results of operations.
We operate a number of manufacturing sites and are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations, including those relating to emissions to the air, discharges to land and water, and the generation, handling, treatment and disposal of hazardous waste and other materials on these sites. We operate under numerous environmental permits and licenses, many of which require periodic notification and renewal, which is not automatic. New or stricter laws and regulations could increase our compliance burden or costs and adversely affect our ability to develop, manufacture, blend, market and supply products.
Our operations, and the operations of prior owners of our sites, pose the risk of environmental contamination which may result in fines or criminal sanctions being imposed or require significant amounts in remediation payments.
We anticipate that certain manufacturing sites may cease production over time and on closure, will require safely decommissioning and some environmental remediation. The extent of our obligations will depend on the future use of the sites that are affected and the environmental laws in effect at the time. We currently have made a decommissioning and remediation provision in our consolidated financial statements based on current known obligations, anticipated plans for sites and existing environmental laws. If there were to be unexpected or unknown contamination at these sites, or future plans for the sites or environmental laws change, then current provisions may prove inadequate, which could adversely impact our results of operations, financial position and cash flows.
We may be exposed to certain regulatory and financial risks related to climate change
The outcome of new or potential legislation or regulation in the U.S. and other jurisdictions in which we operate may result in new or additional requirements, additional charges to fund energy efficiency activities, fees or restrictions on certain activities. Compliance with these initiatives may also result in additional costs to us, including, among other things, increased production costs, additional taxes, reduced emission allowances or additional restrictions on production or operations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Even without such regulation, increased public awareness and adverse publicity about potential impacts on climate change emanating from us or our industry could harm us. We may not be able to recover the cost of compliance with new or more stringent laws and regulations, which could adversely affect our business and negatively impact our growth. Furthermore, the potential impacts of climate change and related regulation on our customers are highly uncertain and may adversely affect us.
17
Key Third Party Relationships
Having a small number of significant customers may have a material adverse impact on our results of operations.
Our principal customers are oil and gas exploration and production companies, oil refiners, personal care companies, and other chemical and industrial companies. These industries are characterized by a concentration of a few large participants. The loss of a significant customer, a material reduction in demand by a significant customer or termination or
non-renewal
of a significant customer contract could adversely impact our results of operations, financial position and cash flows. A disruption in the supply of raw materials or transportation services would have a material adverse impact on our results of operations.
Although we try to anticipate problems with supplies of raw materials or transportation services by building certain inventories of strategic importance, transport operations are exposed to various risks such as extreme weather conditions, natural disasters, technological problems, work stoppages as well as transportation regulations. If the Company experiences transportation problems, or if there are significant changes in the cost of these services, the Company may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship finished products, which could adversely impact our results of operations, financial position and cash flows.
The inability of counterparties to meet their contractual obligations could have a substantial adverse impact on our results of operations.
We sell products to oil companies, oil and gas exploration and production companies and chemical companies throughout the world. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize bad debt risk. Collateral is not generally required. We have in place a credit facility with a syndicate of banks. From time to time, we use derivatives, including interest rate swaps, commodity swaps and foreign currency forward exchange contracts, in the normal course of business to manage market risks. We enter into derivative instruments with a diversified group of major financial institutions in order to manage the exposure to
non-performance
of such instruments. We remain subject to market and credit risks including the ability of counterparties to meet their contractual obligations and the potential
non-performance
of counterparties to deliver contracted commodities or services at the contracted price. The inability of counterparties to meet their contractual obligations could have an adverse impact on our results of operations, financial position and cash flows. 18
Finance and Investment
We are exposed to fluctuations in foreign currency exchange rates, which may adversely affect our results of operations.
We generate a portion of our revenues and incur some operating costs in currencies other than the U.S. dollar. In addition, the financial position and results of operations of some of our overseas subsidiaries are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rates for inclusion in our consolidated financial statements. Fluctuations in these currency exchange rates affect the recorded levels of our assets and liabilities, results of operations and cash flows.
The primary exchange rate fluctuation exposures we have are with the European Union euro, British pound sterling and Brazilian real. Exchange rates between these currencies and the U.S. dollar have fluctuated in recent years and may continue to do so. We cannot accurately predict future exchange rate variability among these currencies or relative to the U.S. dollar. While we take steps to manage currency exchange rate exposure, including entering into hedging transactions, we cannot eliminate all exposure to future exchange rate variability. These exchange risks could adversely impact our results of operations, financial position and cash flows.
A high concentration of significant stockholders may have a material adverse impact on our stock price.
Approximately 51% of our common stock is held by five stockholders. A decision by any of these, or other substantial, stockholders to sell all or a significant part of its holding, or a sudden or unexpected disposition of our stock, could result in a significant decline in our stock price which could in turn adversely impact our ability to access equity markets which in turn could adversely impact our results of operations, financial position and cash flows.
Our amended and restated
by-laws
designate specific Delaware courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated
by-laws
(the
“By-laws”)
provide that, unless we consent in writing to the selection of an alternative forum, the appropriate court within the State of Delaware is the sole and exclusive forum, to the fullest extent provided by law, for the following types of actions or proceedings: | • | any derivative action or proceeding brought on behalf of the Corporation, |
| • | any action asserting a claim of breach of a fiduciary duty owed by any director, officer, other employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders, |
19
| • | any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”), the Certificate of Incorporation, the By-laws, or as to which the DGCL confers jurisdiction upon the Court of Chancery of the State of Delaware, |
| • | any action asserting a claim governed by the internal affairs doctrine, or |
| • | any other internal corporate claim as defined in Section 115 of the DGCL. |
This includes, to the extent permitted by the federal securities laws, lawsuits asserting both state law claims and claims under the federal securities laws.
This forum selection provision in the
By-laws
may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding the forum selection clause included in the
By-laws,
a court could rule that such a provision is inapplicable or unenforceable. Application of the choice of forum provision may be limited in some instances by law. Section 27 of the Securities Exchange Act of 1934 (“Exchange Act”) provides for exclusive federal court jurisdiction over Exchange Act claims. Accordingly, to the extent the exclusive forum provision is held to cover a shareholder derivative action asserting claims under the Exchange Act, such claims could not be brought in the Delaware Court of Chancery and would instead be within the jurisdiction of the federal district court for the District of Delaware. Section 22 of the Securities Act of 1933 (“Securities Act”) creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Our stockholders will not be deemed by operation of our choice of forum provision to have waived our compliance with the federal securities laws and the regulations promulgated thereunder. The selection of legal jurisdiction for litigation claims may impact the outcome of legal proceedings which could impact our results of operations, financial position and cash flows.
The provisions of our revolving credit facility may restrict our ability to incur additional indebtedness or to otherwise expand our business.
Our revolving credit facility contains restrictive clauses which may limit our activities, and operational and financial flexibility. We may not be able to borrow under the revolving credit facility if an event of default under the terms of the facility occurs. An event of default under the credit facility includes a material adverse change to our assets, operations or financial condition, and certain other events. The revolving credit facility also contains a number of restrictions that limit our ability, among other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guarantee obligations of third parties, make investments, undergo a merger or consolidation, dispose of assets or materially change our line of business.
In addition, the revolving credit facility requires us to meet certain financial ratios, including ratios based on net debt to earnings before income tax, depreciation and amortization
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(“EBITDA”) and net interest expense to EBITDA. Net debt, net interest expense and EBITDA are
non-GAAP
measures of liquidity defined in the credit facility. Our ability to meet these financial covenants depends upon the future successful operating performance of the business. If we fail to comply with financial covenants, we would be in default under the revolving credit facility and the maturity of our outstanding debt could be accelerated unless we were able to obtain waivers from our lenders. If we were found to be in default under the revolving credit facility, it could adversely impact our results of operations, financial position and cash flows. Item 1B | Unresolved Staff Comments |
None.
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Item 2 | Properties |
A summary of the Company’s principal properties is shown in the following table. Each of these properties is owned by the Company except where otherwise noted:
Location | Reporting Segment | Operations | ||
| Englewood, Colorado (1) | Fuel Specialties and Performance Chemicals | Corporate Headquarters Business Teams Sales/Administration | ||
| Newark, Delaware (1) | Fuel Specialties | Research & Development | ||
| Herne, Germany | Fuel Specialties | Sales/Manufacturing/Administration Research & Development | ||
| Vernon, France | Fuel Specialties | Sales/Manufacturing/Administration Research & Development | ||
| Moscow, Russia (1) | Fuel Specialties | Sales/Administration | ||
| Leuna, Germany | Fuel Specialties | Sales/Manufacturing/Administration Research & Development | ||
| Ellesmere Port, United Kingdom | Fuel Specialties, Performance Chemicals and Octane Additives | European Headquarters Business Teams Sales/Manufacturing/Administration Research & Development Fuel Technology Center | ||
| Beijing, China (1) | Fuel Specialties and Performance Chemicals | Sales/Administration | ||
| Singapore (1) | Fuel Specialties and Performance Chemicals | Asia-Pacific Headquarters Business Teams Sales/Administration | ||
| Milan, Italy (1) | Fuel Specialties and Performance Chemicals | Sales/Administration | ||
| Rio de Janeiro, Brazil (1) | Fuel Specialties, Performance Chemicals and Oilfield Services | Sales/Administration | ||
| High Point, North Carolina | Performance Chemicals | Manufacturing/Administration Research & Development | ||
| Salisbury, North Carolina | Performance Chemicals | Manufacturing/Administration Research & Development | ||
| Chatsworth, California (1) | Performance Chemicals | Sales/Manufacturing/Administration | ||
| Saint Mihiel, France | Performance Chemicals | Manufacturing/Administration/Research & Development | ||
| Castiglione, Italy | Performance Chemicals | Manufacturing/Administration/Research & Development | ||
| Barcelona, Spain (1) | Performance Chemicals | Manufacturing/Administration/Research & Development | ||
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Location | Reporting Segment | Operations | ||
| Oklahoma City, Oklahoma | Oilfield Services | Sales/Manufacturing/Administration | ||
| Midland, Texas | Oilfield Services | Sales/Manufacturing/Administration | ||
| Pleasanton, Texas | Oilfield Services | Sales/Manufacturing/Administration | ||
| Sugar Land, Texas (1) | Oilfield Services | Sales/Administration/Research & Development | ||
| The Woodlands, Houston, Texas (1) | Oilfield Services | Sales/Administration/Research & Development | ||
| Williston, North Dakota | Oilfield Services | Sales/Warehouse | ||
| Casper, Wyoming (1) | Oilfield Services | Warehouse | ||
(1) | Leased property |
Manufacturing Capacity
We believe that our plants and supply agreements are sufficient to meet current sales levels. Operating rates of the plants are generally flexible and varied with product mix and normal sales demand swings. We believe that all of our facilities are maintained to appropriate levels and in sufficient operating condition though there remains an ongoing need for maintenance and capital investment.
Item 3 | Legal Proceedings |
Legal matters
While we are involved from time to time in claims and legal proceedings that result from, and are incidental to, the conduct of our business including business and commercial litigation, employee and product liability claims, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of the Company’s property is subject. It is possible, however, that an adverse resolution of an unexpectedly large number of such individual claims or proceedings could in the aggregate have a material adverse effect on results of operations for a particular year or quarter.
Item 4 | Mine Safety Disclosures |
Not applicable.
23
PART II
Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information and Holders
The Company’s common stock is listed on the NASDAQ under the symbol “IOSP.” As of February 10, 2021 there were 758 registered holders of the common stock.
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the fourth quarter of 2020.
Issuer Purchases of Equity Securities
During 2020 the Company made no open market repurchases of our common stock.
On November 6, 2018 the Company announced that its board of directors had approved a share repurchase program for the repurchase of up to $100 million of Innospec’s common stock over the following three years. During the year ended December 31, 2020, no shares of our common stock were repurchased by the Company under this share repurchase program.
During the quarter ended December 31, 2020 the company did not purchase any of its common stock in connection with the exercising of stock options by employees.
Stock Price Performance Graph
The graph below compares the cumulative total return to stockholders on the common stock of the Corporation, S&P 500 Index, NASDAQ Composite Index and Russell 2000 Index since December 31, 2015, assuming a $100 investment and the
re-investment
of any dividends thereafter. Historical stock price performance should not be relied upon as an indication of future stock price performance. 24
Value of $100 Investment made December 31, 2015*
2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||
| Innospec Inc. | $ | 100.00 | $ | 127.36 | $ | 132.70 | $ | 117.76 | $ | 199.17 | $ | 176.70 | ||||||||||||
| S&P 500 Index | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | ||||||||||||||||||
| NASDAQ Composite Index | 100.00 | 108.09 | 140.12 | 135.09 | 186.79 | 269.70 | ||||||||||||||||||
| Russell 2000 Index | $ | 100.00 | $ | 121.31 | $ | 139.08 | $ | 123.76 | $ | 155.35 | $ | 186.36 | ||||||||||||
* Excludes purchase commissions.
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Item 6 | Selected Financial Data |
FINANCIAL HIGHLIGHTS
| (in millions, except financial ratios, share and per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||
| Summary of performance: | ||||||||||||||||||||
| Net sales | $ | 1,193.1 | $ | 1,513.3 | $ | 1,476.9 | $ | 1,306.8 | $ | 883.4 | ||||||||||
| Operating income | 33.7 | 149.9 | 133.5 | 125.0 | 98.2 | |||||||||||||||
| Income before income taxes | 39.7 | 150.4 | 131.6 | 128.1 | 103.1 | |||||||||||||||
| Income taxes | (11.0 | ) | (38.2 | ) | (46.6 | ) | (66.3 | ) | (21.8 | ) | ||||||||||
| Net income | 28.7 | 112.2 | 85.0 | 61.8 | 81.3 | |||||||||||||||
| Net income attributable to Innospec Inc. | 28.7 | 112.2 | 85.0 | 61.8 | 81.3 | |||||||||||||||
| Net cash provided by operating activities | $ | 145.9 | $ | 161.6 | $ | 104.9 | $ | 82.7 | $ | 105.5 | ||||||||||
| Financial position at year end: | ||||||||||||||||||||
| Total assets | $ | 1,397.4 | $ | 1,468.8 | $ | 1,473.4 | $ | 1,410.2 | $ | 1,181.4 | ||||||||||
| Long-term debt including finance leases (including current portion) | 0.6 | 60.1 | 210.9 | 224.3 | 273.3 | |||||||||||||||
| Cash, cash equivalents, and short-term investments | 105.3 | 75.7 | 123.1 | 90.2 | 101.9 | |||||||||||||||
| Total equity | $ | 944.9 | $ | 918.9 | $ | 825.5 | $ | 794.3 | $ | 653.8 | ||||||||||
| Financial ratios: | ||||||||||||||||||||
| Net income attributable to Innospec Inc. as a percentage of net sales | 2.4 | 7.4 | 5.8 | 4.7 | 9.2 | |||||||||||||||
| Effective tax rate as a percentage (1) | 27.7 | 25.4 | 35.4 | 51.8 | 21.1 | |||||||||||||||
| Current ratio (2) | 2.3 | 2.1 | 2.2 | 2.1 | 2.4 | |||||||||||||||
| Share data: | ||||||||||||||||||||
| Earnings per share attributable to Innospec Inc. | ||||||||||||||||||||
| – Basic | $ | 1.17 | $ | 4.58 | $ | 3.48 | $ | 2.56 | $ | 3.39 | ||||||||||
| – Diluted | $ | 1.16 | $ | 4.54 | $ | 3.45 | $ | 2.52 | $ | 3.33 | ||||||||||
| Dividend paid per share | $ | 1.04 | $ | 1.02 | $ | 0.89 | $ | 0.77 | $ | 0.67 | ||||||||||
| Shares outstanding (basic, thousands) | ||||||||||||||||||||
| – At year end | 24,596 | 24,507 | 24,434 | 24,350 | 24,071 | |||||||||||||||
| – Average during year | 24,563 | 24,482 | 24,401 | 24,148 | 23,998 | |||||||||||||||
(1) | The effective tax rate is calculated as income taxes as a percentage of income before income taxes. Income taxes are impacted in 2017 by the provisional estimates recorded in respect of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), and in 2018 by the finalization and recording of additional taxes due as a consequence of the Tax Act. Income taxes in 2019 and 2020 are calculated under the new legislation of the Tax Act. |
(2) | Current ratio is defined as current assets divided by current liabilities. |
26
QUARTERLY SUMMARY
| (in millions, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| 2020 | ||||||||||||||||
| Net sales | $ | 372.3 | $ | 244.9 | $ | 265.1 | $ | 310.8 | ||||||||
| Gross profit | 113.9 | 59.1 | 78.7 | 91.0 | ||||||||||||
| Operating income | 40.9 | (53.4 | ) | 16.8 | 29.4 | |||||||||||
| Net income | 33.1 | (39.7 | ) | 12.7 | 22.6 | |||||||||||
| Net cash provided by operating activities | $ | 2.4 | $ | 29.8 | $ | 55.5 | $ | 58.2 | ||||||||
| Per common share: | ||||||||||||||||
| Earnings – basic | $ | 1.35 | $ | (1.62 | ) | $ | 0.52 | $ | 0.92 | |||||||
| – diluted | $ | 1.34 | $ | (1.62 | ) | $ | 0.51 | $ | 0.91 | |||||||
| 2019 | ||||||||||||||||
| Net sales | $ | 388.3 | $ | 362.4 | $ | 371.9 | $ | 390.7 | ||||||||
| Gross profit | 117.8 | 111.1 | 119.1 | 118.2 | ||||||||||||
| Operating income | 36.2 | 31.7 | 38.2 | 43.8 | ||||||||||||
| Net income | 28.7 | 22.3 | 30.1 | 31.1 | ||||||||||||
| Net cash provided by operating activities | $ | 13.2 | $ | 50.0 | $ | 40.0 | $ | 58.4 | ||||||||
| Per common share: | ||||||||||||||||
| Earnings – basic | $ | 1.17 | $ | 0.91 | $ | 1.23 | $ | 1.27 | ||||||||
| – diluted | $ | 1.17 | $ | 0.90 | $ | 1.22 | $ | 1.26 | ||||||||
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Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion should be read in conjunction with our consolidated financial statements and the notes thereto.
EXECUTIVE OVERVIEW
For much of 2020, customer demand was adversely impacted by the
COVID-19
pandemic and the unprecedented collapse in demand for crude oil. The low point of the year for the decline in customer demand was the second quarter and all of our businesses have been showing some recovery since that time, although they have not yet returned to
pre-pandemic
levels. We also successfully navigated a number of world trade disputes which threatened to have a negative impact on our business.
Performance Chemicals continued its organic growth driven by new product development and the development of new customers in the personal care, home care, agrochemical and metal extraction markets.
Both Fuel Specialties and Oilfield Services suffered from the dramatic drop in demand. In Oilfield Services, we responded by making substantial cuts in costs to reflect the reduced customer activity levels. We believe that both markets were showing signs of good recovery by the end of the year.
The Octane Additives business concluded its trading with its last customer for motor gasoline during the year, as its sole customer completed their transition to unleaded fuel.
CRITICAL ACCOUNTING ESTIMATES
Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Environmental Liabilities
We are subject to environmental laws in the countries in which we conduct business. Ellesmere Port in the United Kingdom is our principal site giving rise to environmental remediation liabilities associated with the production of TEL. There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe. At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed.
Remediation provisions at December 31, 2020 amounted to $58.5 million and relate principally to our Ellesmere Port site in the United Kingdom. We recognize environmental liabilities when they are probable and costs can be reasonably estimated, and asset retirement
28
obligations when there is a legal obligation and costs can be reasonably estimated. The Company has to anticipate the program of work required and the associated future expected costs, and comply with environmental legislation in the countries in which it operates or has operated in. We develop these assumptions utilizing the latest information available together with recent costs. While we believe our assumptions for environmental liabilities are reasonable, they are subjective judgements and it is possible that variations in any of the assumptions will result in materially different calculations to the liabilities we have reported.
Income Taxes
We are subject to income and other taxes in the U.S., the U.K., the E.U. and other jurisdictions. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied.
The calculation of our tax liabilities involves evaluating uncertainties in the application of accounting principles and complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be required. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary.
We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained, based on technical merits of the position, when challenged by the taxing authorities. To the extent that we prevail in matters for which liabilities have been established or are required to pay amounts in excess of the liabilities recorded in our financial statements, our effective tax rate in a given period may be materially affected. An unfavourable tax settlement may require cash payments and result in an increase in our effective tax rate in the year of resolution. We report interest and penalties related to uncertain tax positions as income taxes. For additional information regarding uncertain income tax positions, see Note 11 of the Notes to the Consolidated Financial Statements.
Pensions
The Company maintains a defined benefit pension plan covering a number of its current and former employees in the United Kingdom. The Company also has other smaller pension arrangements in the U.S. and overseas as disclosed in Note10 of the Notes to the Consolidated Financial Statements. The United Kingdom plan is closed to future service accrual, but has a large number of deferred and current pensioners.
Movements in the United Kingdom’s underlying plan asset value and Projected Benefit Obligation (“PBO”) are dependent on actual return on investments as well as our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation. A change in any one of these assumptions could impact the plan asset value, PBO and pension charge recognized in the income statement. Such changes could adversely impact our results of operations and financial position. For example, a 0.25% change in the
29
discount rate assumption would change the PBO by approximately $26 million while the net pension credit for 2020 would change by approximately $0.4 million. A 0.25% change in the level of price inflation assumption would change the PBO by approximately $19 million and the net pension credit for 2021 would change by approximately $1.2 million.
Further information is provided in Note 10 of the Notes to the Consolidated Financial Statements.
Goodwill
The Company’s reporting units, the level at which goodwill is assessed for potential impairment, are consistent with the reportable segments. The components in each segment (including products, markets and competitors) have similar economic characteristics and the segments, therefore, reflect the lowest level at which operations and cash flows can be sufficiently distinguished, operationally and for financial reporting purposes, from the rest of the Company.
To test for impairment the Company performs a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a segment is less than the carrying amount prior to performing the quantitative goodwill impairment test. Factors utilized in the qualitative assessment process include macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and Company specific events.
If a quantitative test is required, we assess the fair value based on projected
post-tax
cash flows discounted at the Company’s weighted average cost of capital. These fair value techniques require management judgment and estimates including revenue growth rates, projected operating margins, changes in working capital and discount rates. We would develop these assumptions by considering recent financial performance and trends and industry growth estimates. While we believe our assumptions for impairment assessments are reasonable, they are subjective judgments, and it is possible that variations in any of the assumptions will result in materially different calculations of any potential impairment charges. At December 31, 2020 we had $371.2 million of goodwill relating to our Fuel Specialties, Performance Chemicals and Oilfield Services segments. Due to the triggering events of the
COVID-19
pandemic and the reduction in oil prices and their impact on our business, we performed a step one impairment review at June 30, 2020. The impairment assessment indicated the fair values substantially exceeded the carrying values for all operating segments. Despite this, due to a significant downturn in one of the entities, we performed a further assessment of the intangible assets of that entity, which resulted in an impairment of $19.8 million at June 30, 2020. Property, Plant and Equipment and Other Intangible Assets (Net of Depreciation and Amortization, respectively)
As at December 31, 2020 we had $210.8 million of property, plant and equipment and $75.3 million of other intangible assets (net of depreciation and amortization, respectively),
30
that are discussed in Notes 6 and 8 of the Notes to the Consolidated Financial Statements, respectively. These long-lived assets relate to all of our reporting segments and are being amortized or depreciated straight-line over periods of up to 17 years in respect of the other intangible assets and up to 25 years in respect of the property, plant and equipment.
We continually assess the markets and products related to these long-lived assets, as well as their specific carrying values, and have concluded that these carrying values, and amortization and depreciation periods, remain appropriate.
Impact of
COVID-19
Pandemic and Current Economic Environment The Company’s results have been adversely impacted in 2020, due to the
COVID-19
pandemic and the global economic environment. Fuel Specialties have been impacted by reduced demand stemming from the reduction in freight transport and passenger miles and the widespread grounding of aircraft for a large part of the year. We have seen some improvement in the fourth quarter as travel has begun to increase, but demand has not returned to the
levels. We expect demand will continue to improve in 2021, to the extent global economic activity recovers, subject to the continuation of the current lockdowns in Europe in particular and the potential for future lockdowns or restrictions around the world related to the spread of new COVID variants.
pre-COVID-19
Performance Chemicals have experienced little overall impact from the pandemic as increased demand for certain products linked to health, hygiene and cleaning outweighed some lost revenues linked to the short-term shutdown of some of our customers manufacturing facilities.
Oilfield Services have been heavily impacted by the reduction in oil exploration and production as the wider industry reacts to the reduction in demand and low oil price. We have seen some improvement in the second half of the year from increasing demand and the benefit from the reduction in headcount that occurred in the second quarter. We do not know how long this downturn will last and the rate of recovery will depend heavily on the rate and extent to which the government restrictions on movement are lifted and not
re-imposed.
Our manufacturing facilities have continued to operate with only some minor interruption, and we expect them to continue to do so. We have implemented flexible working, including working from home for our employees where possible, in line with advice and rules in each of the jurisdictions in which we operate. Additional costs have been incurred to ensure our manufacturing and administrative facilities are COVID safe for our employees. While these costs have not been significant to date there may be increased costs in the future, if further safety restrictions are required. Raw material sourcing has not been significantly impacted and we do not expect that to change over the remainder of the year. Logistics are operating with some delays but our products are currently being delivered to our customers.
We believe that our financial position remains strong. We expect to have sufficient access to capital if needed, including our $250 million revolving credit facility we entered into in September 2019, and we do not anticipate any issues with meeting the covenants for our debt agreements. We have extended this facility by a further twelve months until September 2024, during the third quarter of 2020. Our major capital projects are continuing to progress as planned.
31
As we operate in the chemical industry, we continue to be focused on protecting the health and safety of our employees and have procedures in place at each of our operating facilities to help ensure their well-being.
We do not know how long the pandemic and current economic environment will continue and while we have made estimates as to potential impacts on our financial position and operations, the ultimate impact on our business will depend on many factors which are very difficult to predict with certainty and substantially beyond our control.
RESULTS OF OPERATIONS
The following table provides operating income by reporting segment:
| (in millions) | 2020 | 2019 | 2018 | |||||||||
| Net sales: | ||||||||||||
| Fuel Specialties | $ | 512.7 | $ | 583.7 | $ | 574.5 | ||||||
| Performance Chemicals | 425.4 | 428.7 | 468.1 | |||||||||
| Oilfield Services | 255.0 | 479.9 | 400.6 | |||||||||
| Octane Additives | 0.0 | 21.0 | 33.7 | |||||||||
| | | | | | | |||||||
| $ | 1.193.1 | $ | 1,513.3 | $ | 1,476.9 | |||||||
| | | | | | | |||||||
| Gross profit: | ||||||||||||
| Fuel Specialties | $ | 160.3 | $ | 204.5 | $ | 195.0 | ||||||
| Performance Chemicals | 103.8 | 100.1 | 97.5 | |||||||||
| Oilfield Services | 80.8 | 159.9 | 130.4 | |||||||||
| Octane Additives | (2.2 | ) | 1.7 | 12.1 | ||||||||
| | | | | | | |||||||
| $ | 342.7 | $ | 466.2 | $ | 435.0 | |||||||
| | | | | | | |||||||
| Operating income: | ||||||||||||
| Fuel Specialties | $ | 84.5 | $ | 116.6 | $ | 116.3 | ||||||
| Performance Chemicals | 54.8 | 48.7 | 44.7 | |||||||||
| Oilfield Services | (9.5 | ) | 39.7 | 22.1 | ||||||||
| Octane Additives | (2.8 | ) | (0.7 | ) | 9.9 | |||||||
| Corporate costs | (52.2 | ) | (54.4 | ) | (52.4 | ) | ||||||
| Restructuring charge | (21.3 | ) | 0.0 | (7.1 | ) | |||||||
| Impairment of intangible assets | (19.8 | ) | 0.0 | 0.0 | ||||||||
| | | | | | | |||||||
| Total operating income | $ | 33.7 | $ | 149.9 | $ | 133.5 | ||||||
| | | | | | | |||||||
| Other income, net | $ | 7.8 | $ | 5.3 | $ | 5.0 | ||||||
| Interest expense, net | (1.8 | ) | (4.8 | ) | (6.9 | ) | ||||||
| | | | | | | |||||||
| Income before income taxes | 39.7 | 150.4 | 131.6 | |||||||||
| Income taxes | (11.0 | ) | (38.2 | ) | (46.6 | ) | ||||||
| | | | | | | |||||||
| Net income | $ | 28.7 | $ | 112.2 | $ | 85.0 | ||||||
| | | | | | | |||||||
32
Results of Operations – Fiscal 2020 compared to Fiscal 2019:
| (in millions, except ratios) | 2020 | 2019 | Change | |||||||||||||
| Net sales: | ||||||||||||||||
| Fuel Specialties | $ | 512.7 | $ | 583.7 | $ | (71.0 | ) | -12 | % | |||||||
| Performance Chemicals | 425.4 | 428.7 | (3.3 | ) | -1 | % | ||||||||||
| Oilfield Services | 255.0 | 479.9 | (224.9 | ) | -47 | % | ||||||||||
| Octane Additives | 0.0 | 21.0 | (21.0 | ) | -100 | % | ||||||||||
| | | | | | | |||||||||||
| $ | 1,193.1 | $ | 1,513.3 | $ | (320.2 | ) | -21 | % | ||||||||
| | | | | | | |||||||||||
| Gross profit: | ||||||||||||||||
| Fuel Specialties | $ | 160.3 | $ | 204.5 | (44.2 | ) | -22 | % | ||||||||
| Performance Chemicals | 103.8 | 100.1 | 3.7 | +4 | % | |||||||||||
| Oilfield Services | 80.8 | 159.9 | (79.1 | ) | -49 | % | ||||||||||
| Octane Additives | (2.2 | ) | 1.7 | (3.9 | ) | -229 | % | |||||||||
| | | | | | | |||||||||||
| $ | 342.7 | $ | 466.2 | (123.5 | ) | -26 | % | |||||||||
| | | | | | | |||||||||||
| Gross margin (%): | ||||||||||||||||
| Fuel Specialties | 31.3 | 35.0 | -3.7 | |||||||||||||
| Performance Chemicals | 24.4 | 23.3 | 1.1 | |||||||||||||
| Oilfield Services | 31.7 | 33.3 | -1.6 | |||||||||||||
| Octane Additives | 0.0 | 8.1 | -8.1 | |||||||||||||
| Aggregate | 28.7 | 30.8 | -2.1 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Fuel Specialties | $ | (75.8 | ) | $ | (87.9 | ) | $ | 12.1 | -14 | % | ||||||
| Performance Chemicals | (49.0 | ) | (51.4 | ) | 2.4 | -5 | % | |||||||||
| Oilfield Services | (90.3 | ) | (120.2 | ) | 29.9 | -25 | % | |||||||||
| Octane Additives | (0.6 | ) | (2.4 | ) | 1.8 | -75 | % | |||||||||
| Corporate costs | (52.2 | ) | (54.4 | ) | 2.2 | -4 | % | |||||||||
| Restructuring charge | (21.3 | ) | 0.0 | (21.3 | ) | n/a | ||||||||||
| Impairment of intangible assets | (19.8 | ) | 0.0 | (19.8 | ) | n/a | ||||||||||
| | | | | | | |||||||||||
| $ | (309.0 | ) | $ | (316.3 | ) | $ | 7.3 | -2 | % | |||||||
| | | | | | | |||||||||||
Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.
33
Fuel Specialties
Net sales:
| Change (%) | Americas | EMEA | ASPAC | AvTel | Total | |||||||||||||||
| Volume | -7 | -8 | -11 | +11 | -7 | |||||||||||||||
| Price and product mix | -1 | -7 | -10 | -19 | -6 | |||||||||||||||
| Exchange rates | 0 | +2 | 0 | 0 | +1 | |||||||||||||||
| | | | | | | | | | | |||||||||||
| -8 | -13 | -21 | -8 | -12 | ||||||||||||||||
| | | | | | | | | | | |||||||||||
Volumes in all our regions have suffered from the adverse impact of the
COVID-19
pandemic, which has reduced the global demand for fuel additive products. During the second half of 2020, we have seen customer demand recovering steadily as lockdowns in countries around the world have been eased. However, the reintroduction of lockdowns for European countries in January 2021 could slow the return of customer demand to the
pre-pandemic
level. Price and product mix in all our regions was adverse due to lower sales of our higher margin products. AvTel volumes were higher than the prior year due to variations in the demand from customers, being offset by an adverse price and product mix. EMEA benefitted from favorable exchange rate movements year over year, due to a strengthening of the British pound sterling and the European Union euro against the U.S. dollar. Gross margin:
COVID-19
pandemic reducing demand for our higher margin products, together with adverse raw material costs and higher provisions for slow moving inventory. Operating expenses:
COVID-19
pandemic, including lower travel and entertainment costs, together with lower personnel related performance-based remuneration due to a decrease in share-based compensation accruals linked to the Innospec share price. Performance Chemicals
Net sales:
| Change (%) | Americas | EMEA | ASPAC | Total | ||||||||||||
| Volume | +13 | -1 | +14 | +4 | ||||||||||||
| Price and product mix | -12 | -4 | +3 | -6 | ||||||||||||
| Exchange rates | 0 | +2 | +1 | +1 | ||||||||||||
| | | | | | | | | |||||||||
| +1 | -3 | +18 | -1 | |||||||||||||
| | | | | | | | | |||||||||
34
Higher volumes in the Americas and ASPAC were driven by increased demand for our Personal Care and Home Care products. Volumes were lower in EMEA primarily due to lower demand for Home Care products. The Americas and EMEA suffered an adverse price and product mix due to increased sales of lower priced products due largely to lower raw material costs. ASPAC benefitted from a favorable price and product mix due to increased sales of higher priced products. EMEA and ASPAC benefitted from favorable exchange rate movements year over year, due to a strengthening of the British pound sterling and the European Union euro against the U.S. dollar.
Gross margin:
Operating expenses:
COVID-19
pandemic, including lower travel and entertainment costs. Oilfield Services
Net sales:
COVID-19
pandemic reducing world-wide demand together with the depressed price of crude oil. The previously expected recovery in the U.S. completions market has been delayed, however the Company has seen an improvement in the demand for crude oil in the second half of 2020 leading to higher sales for our production and drag reducing agent products. Gross margin:
Operating expenses:
right-sizing
of the operations to adjust for the reduction in demand caused by the
COVID-19
pandemic, together with lower accruals for long-term performance-based incentive plans due to a decrease in share-based compensation accruals linked to the Innospec share price. Octane Additives
The Octane Additives business ceased trading and is no longer a reporting segment from July 1, 2020 as the production of TEL for use in motor gasoline has finished. Legacy costs related to these operations have now been recorded as operating expenses within corporate costs.
35
Prior to July 1, 2020 net sales were nil in 2020 compared to $21.0 million in the prior year; the gross loss was $2.2 million in 2020 compared to a $1.7 million gross profit in the prior year; operating expenses were $0.6 million in 2020 compared to $2.4 million in the prior year.
Other Income Statement Captions
Corporate costs:
COVID-19
pandemic on the group’s profit performance together with a decrease in the share-based compensation accruals linked to the Innospec share price. There has also been a reduction in travel and entertainment expenses resulting from the
COVID-19
pandemic restrictions on local and international travel. The decrease in costs was partly offset by $4.2 million of acquisition related costs in 2020; the inclusion of legacy costs related to the now closed Octane Additives segment of $2.5 million; and higher spending on information technology following the network security incident in the second quarter of 2019. Restructuring charge:
Impairment of intangible assets:
Other net income/(expense):
2020 | 2019 | Change | ||||||||||
| United Kingdom pension credit | $ | 6.2 | $ | 7.7 | $ | (1.5 | ) | |||||
| German pension charge | (0.9 | ) | (0.5 | ) | (0.4 | ) | ||||||
| Foreign exchange gains/(losses) on translation | 4.0 | (1.3 | ) | 5.3 | ||||||||
| Foreign currency forward contracts losses | (1.5 | ) | (0.6 | ) | (0.9 | ) | ||||||
| | | | | | | |||||||
| $ | 7.8 | $ | 5.3 | $ | 2.5 | |||||||
| | | | | | | |||||||
Interest expense, net:
Income taxes:
non-GAAP
financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends. In addition, management uses this
non-GAAP
financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods. 36
| (in millions, except ratios) | 2020 | 2019 | ||||||
| Income before income taxes | $ | 39.7 | $ | 150.4 | ||||
| Adjustment for stock compensation | 5.8 | 6.6 | ||||||
| Indemnification asset regarding tax audit | 0.2 | (1.6 | ) | |||||
| Restructuring charge | 21.3 | 0.0 | ||||||
| Impairment of acquired intangible assets | 19.8 | 0.0 | ||||||
| Legacy cost of closed operations | 2.5 | 0.0 | ||||||
| Acquisition costs | 4.2 | 0.0 | ||||||
| | | | | |||||
| Adjusted income before income taxes | $ | 93.5 | $ | 155.4 | ||||
| | | | | |||||
| Income taxes | $ | 11.0 | $ | 38.2 | ||||
| Adjustment of income tax provisions | 0.7 | (2.5 | ) | |||||
| Tax on stock compensation | 1.7 | 0.9 | ||||||
| Tax on restructuring charge | 4.3 | 0.0 | ||||||
| Tax on impairment of acquired intangible asset | 4.6 | 0.0 | ||||||
| Tax on site closure provision | 0.0 | (0.7 | ) | |||||
| Tax loss on distribution | 0.4 | 1.2 | ||||||
| Change in UK statutory tax rate | (2.7 | ) | 0.0 | |||||
| Tax on legacy cost of closed operations | 0.5 | 0.0 | ||||||
| Tax on acquisition costs | 0.9 | 0.0 | ||||||
| Other discrete items | 0.6 | (2.0 | ) | |||||
| | | | | |||||
| Adjusted income taxes | $ | 22.0 | $ | 35.1 | ||||
| | | | | |||||
| GAAP effective tax rate | 27.7 | % | 25.4 | % | ||||
| | | | | |||||
| Adjusted effective tax rate | 23.5 | % | 22.6 | % | ||||
| | | | | |||||
The most significant factors impacting on our effective tax rate in 2020 are explained in Note 11 of the Notes to the Consolidated Financial Statements.
37
Results of Operations – Fiscal 2019 compared to Fiscal 2018:
| (in millions, except ratios) | 2019 | 2018 | Change | |||||||||||||
| Net sales: | ||||||||||||||||
| Fuel Specialties | $ | 583.7 | $ | 574.5 | $ | 9.2 | +2 | % | ||||||||
| Performance Chemicals | 428.7 | 468.1 | (39.4 | ) | -8 | % | ||||||||||
| Oilfield Services | 479.9 | 400.6 | 79.3 | +20 | % | |||||||||||
| Octane Additives | 21.0 | 33.7 | (12.7 | ) | -38 | % | ||||||||||
| | | | | | | |||||||||||
| $ | 1,513.3 | $ | 1,476.9 | $ | 36.4 | +2 | % | |||||||||
| | | | | | | |||||||||||
| Gross profit: | ||||||||||||||||
| Fuel Specialties | $ | 204.5 | $ | 195.0 | $ | 9.5 | +5 | % | ||||||||
| Performance Chemicals | 100.1 | 97.5 | 2.6 | +3 | % | |||||||||||
| Oilfield Services | 159.9 | 130.4 | 29.5 | +23 | % | |||||||||||
| Octane Additives | 1.7 | 12.1 | (10.4 | ) | -86 | % | ||||||||||
| | | | | | | |||||||||||
| $ | 466.2 | $ | 435.0 | $ | 31.2 | +7 | % | |||||||||
| | | | | | | |||||||||||
| Gross margin (%): | ||||||||||||||||
| Fuel Specialties | 35.0 | 33.9 | +1.1 | |||||||||||||
| Performance Chemicals | 23.3 | 20.8 | +2.5 | |||||||||||||
| Oilfield Services | 33.3 | 32.6 | +0.7 | |||||||||||||
| Octane Additives | 8.1 | 35.9 | -27.8 | |||||||||||||
| Aggregate | 30.8 | 29.5 | +1.3 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Fuel Specialties | $ | (87.9 | ) | $ | (78.7 | ) | $ | (9.2 | ) | +12 | % | |||||
| Performance Chemicals | (51.4 | ) | (52.8 | ) | 1.4 | -3 | % | |||||||||
| Oilfield Services | (120.2 | ) | (108.3 | ) | (11.9 | ) | +11 | % | ||||||||
| Octane Additives | (2.4 | ) | (2.2 | ) | (0.2 | ) | +9 | % | ||||||||
| Corporate costs | (54.4 | ) | (52.4 | ) | (2.0 | ) | +4 | % | ||||||||
| Restructuring charge | 0.0 | (7.1 | ) | 7.1 | -100 | % | ||||||||||
| | | | | | | |||||||||||
| $ | (316.3 | ) | $ | (301.5 | ) | $ | (14.8 | ) | +5 | % | ||||||
| | | | | | | |||||||||||
Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.
Fuel Specialties
Net sales:
| Change (%) | Americas | EMEA | ASPAC | AvTel | Total | |||||||||||||||
| Volume | -8 | +4 | +3 | +52 | +3 | |||||||||||||||
| Price and product mix | +6 | +4 | +8 | -37 | +3 | |||||||||||||||
| Exchange rates | 0 | -8 | -1 | 0 | -4 | |||||||||||||||
| | | | | | | | | | | |||||||||||
| -2 | 0 | +10 | +15 | +2 | ||||||||||||||||
| | | | | | | | | | ||||||||||||