10-Q 1 d411458d10q.htm 10-Q 10-Q
Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
 
☐
TRANSITION REPORT 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
INNOSPEC INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
  
98-0181725
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
   
8310 South Valley Highway
    
Suite 350
    
Englewood
    
Colorado
  
80112
(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
Common stock, par value $0.01 per share
  
IOSP
  
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    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 file.    Yes  ☒    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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☒    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 is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
  
Outstanding as of November 2, 2022
Common Stock, par value $0.01
    24,764,872

Table of Contents

TABLE OF CONTENTS

 

PART I

  

FINANCIAL INFORMATION

      2  

Item 1

  

Condensed Consolidated Financial Statements

      2  
 

Condensed Consolidated Statements of Income

      2  
 

Condensed Consolidated Statements of Comprehensive Income

      3  
 

Condensed Consolidated Balance Sheets

      4  
 

Condensed Consolidated Balance Sheets (continued)

      5  
 

Condensed Consolidated Statements of Cash Flows

      6  
 

Condensed Consolidated Statements of Equity

      7  
 

Notes To The Unaudited Interim Condensed Consolidated Financial Statements

      9  

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September 30, 2022

      21  
 

Critical Accounting Estimates

      21  
 

Results of Operations

      21  
 

Liquidity and Financial Condition

      30  

Item 3

  

Quantitative and Qualitative Disclosures about Market Risk

      32  

Item 4

  

Controls and Procedures

      33  

PART II

  

OTHER INFORMATION

      34  

Item 1

  

Legal Proceedings

      34  

Item 1A

  

Risk Factors

      34  

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

      34  

Item 3

  

Defaults Upon Senior Securities

      35  

Item 4

  

Mine Safety Disclosures

      35  

Item 5

  

Other Information

      35  

Item 6

  

Exhibits

      35  

SIGNATURES

      36  

Table of Contents

CAUTIONARY STATEMENT RELATIVE TO FORWARD-LOOKING STATEMENTS

This Form 10-Q 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,” “plans,” “intends” 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, the rise of variants, the effectiveness, acceptance and distributions of COVID-19 vaccines and the effects of any sanctions, export restrictions, inflation, supply chain disruptions or increased economic uncertainty related to the ongoing conflict between Russia and Ukraine and the manner in which the pandemic and/or such conflict may precipitate or exacerbate other risks and/or uncertainties, and our actual performance or results may differ materially from these forward-looking statements. Additional information regarding risks, uncertainties and assumptions relating to Innospec and affecting our business operations and prospects are described in Innospec’s Annual Report on Form 10-K for the year ended December 31, 2021, Innospec’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 and other reports filed with the U.S. Securities and Exchange Commission. 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” in such reports. 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

Table of Contents
PART I    FINANCIAL INFORMATION
Item 1    Condensed Consolidate
d
 Financial Statements
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
    
Three months ended
September 30
    
Nine months ended
September 30
  
(in millions, except share and per share data)
   
2022
    
2021
    
2022
    
2021
  
Net sales
    $ 513.0     $ 376.1     $ 1,453.0     $ 1,070.2  
Cost of goods sold
      (357.0 )      (263.2 )      (1,017.9 )      (748.2 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Gross profit
      156.0       112.9       435.1       322.0  
Operating expenses:
                                 
Selling, general and administrative
      (95.8 )      (71.2 )      (264.1 )      (197.5 ) 
Research and development
      (10.1 )      (10.3 )      (30.3 )      (27.9 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total operating expenses
      (105.9 )      (81.5 )      (294.4 )      (225.4 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Operating income
      50.1       31.4       140.7       96.6  
Other (expense)/income, net
      (0.9 )      (0.2 )      (0.2 )      6.2  
Interest expense, net
      (0.3 )      (0.4 )      (1.1 )      (1.1 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Income before income tax expense
      48.9       30.8       139.4       101.7  
Income tax expense
      (10.2 )      (7.4 )      (31.9 )      (32.5 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net income
    $ 38.7     $ 23.4     $ 107.5     $ 69.2  
    
 
 
    
 
 
    
 
 
    
 
 
  
Earnings per share:
                                 
Basic
    $ 1.56     $ 0.95     $ 4.34     $ 2.81  
    
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
    $ 1.55     $ 0.94     $ 4.30     $ 2.78  
    
 
 
    
 
 
    
 
 
    
 
 
  
Weighted average shares outstanding (in thousands):
                                 
Basic
      24,786       24,643       24,794       24,624  
    
 
 
    
 
 
    
 
 
    
 
 
  
Diluted
      24,965       24,864       24,976       24,872  
    
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
2
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
    
Three months ended
September 30
    
Nine months ended
September 30
  
(in millions)
   
2022
    
2021
    
2022
    
2021
  
Net income
    $ 38.7     $ 23.4       107.5       69.2  
    
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive income/(loss):
                                 
Changes in cumulative translation adjustment, net of tax of $1.0 million, $(0.5) million, $2.2 million and $0.5 million, respectively
      (16.4 )      (7.0 )      (37.1 )      (14.5 ) 
Amortization of prior service cost, net of tax of $0.0 million, $0.0 million, $(0.1) million and $0.0 million, respectively
      0.1       0.1       0.3       0.2  
Amortization of actuarial net losses, net of tax of $0.0 million, $0.0 million, $0.0 million and $(0.1) million, respectively
      0.1       0.5       0.4       1.7  
    
 
 
    
 
 
    
 
 
    
 
 
  
Total other comprehensive loss
      (16.2 )      (6.4 )      (36.4 )      (12.6 ) 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total comprehensive income
    $ 22.5     $ 17.0       71.1       56.6  
    
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
3
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(in millions, except share and per share data)
   
September 30,

2022
     
December 31,
2021
  
Assets
                  
Current assets:
                  
Cash and cash equivalents
    $ 100.5      $ 141.8  
Trade and other accounts receivable (less allowances of $8.9 million and $5.1 million respectively)
      342.5        284.5  
Inventories (less allowances of $26.3 million and $25.4 million respectively):
                  
Finished goods
      266.9        188.3  
Raw materials
      114.9        89.3  
    
 
 
     
 
 
  
Total inventories
      381.8        277.6  
Prepaid expenses
      7.4        18.0  
Prepaid income taxes
      13.8        5.8  
Other current assets
      0.4        0.4  
    
 
 
     
 
 
  
Total current assets
      846.4        728.1  
Net property, plant and equipment
      206.6        214.4  
Operating lease
right-of-use
assets
      45.9        35.4  
Goodwill
      351.7        364.3  
Other intangible assets
      43.6        57.5  
Deferred tax assets
      5.7        6.4  
Pension asset
      162.7        159.8  
Other
non-current
assets
      6.6        5.0  
    
 
 
     
 
 
  
Total assets
    $ 1,669.2      $ 1,570.9  
    
 
 
     
 
 
  
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
4
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)
(Unaudited)
 
(in millions, except share and per share data)
   
September 30,
2022
    
December 31,
2021
  
Liabilities and Equity
                 
Current liabilities:
                 
Accounts payable
    $ 173.6     $ 148.7  
Accrued liabilities
      173.9       166.5  
Finance leases
      —         0.1  
Current portion of operating lease liabilities
      13.6       12.4  
Current portion of plant closure provisions
      5.6       5.2  
Current portion of accrued income taxes
      14.7       3.7  
    
 
 
    
 
 
  
Total current liabilities
      381.4       336.6  
Operating lease liabilities, net of current portion
      32.1       23.1  
Plant closure provisions, net of current portion
      50.0       51.3  
Accrued income taxes, net of current portion
      20.8       30.6  
Unrecognized tax benefits
      16.3       16.3  
Deferred tax liabilities
      59.7       60.8  
Pension liabilities and post-employment benefits
      15.6       17.8  
Other
non-current
liabilities
      1.4       1.4  
    
 
 
    
 
 
  
Total liabilities
      577.3       537.9  
     
Equity:
                 
Common stock, $0.01 par value, authorized 40,000,000 shares, issued 29,554,500 shares
      0.3       0.3  
Additional
paid-in
capital
      352.2       346.7  
Treasury stock (4,781,326 and 4,780,806 shares at cost, respectively)
      (94.6 )      (90.6 ) 
Retained earnings
      914.8       822.9  
Accumulated other comprehensive loss
      (83.3 )      (46.9 ) 
    
 
 
    
 
 
  
Total Innospec stockholders’ equity
      1,089.4       1,032.4  
Non-controlling
interest
      2.5       0.6  
    
 
 
    
 
 
  
Total equity
      1,091.9       1,033.0  
    
 
 
    
 
 
  
Total liabilities and equity
    $ 1,669.2     $ 1,570.9  
    
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
5
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
    
Nine months ended

September 30
  
(in millions)
   
2022
    
2021
  
Cash Flows from Operating Activities
                 
Net income
    $ 107.5     $ 69.2  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Depreciation and amortization
      30.9       30.9  
Deferred taxes
      0.6       8.0  
Non-cash
movements on defined benefit pension plans
      (1.9 )      (2.4 ) 
Stock option compensation
      4.7       4.6  
Changes in assets and liabilities, net of effects of acquired and divested companies:
                 
Trade and other accounts receivable
      (70.1 )      (86.5 ) 
Inventories
      (112.6 )      (57.1 ) 
Prepaid expenses
      11.2       2.4  
Accounts payable and accrued liabilities
      38.9       58.6  
Plant closure provisions
      0.3       (1.5 ) 
Accrued income taxes
      (4.0 )      (3.8 ) 
Unrecognized tax benefits
      —         0.4  
Other assets and liabilities
      (2.2 )      1.6  
    
 
 
    
 
 
  
Net cash provided by operating activities
      3.3       24.4  
     
Cash Flows from Investing Activities
                 
Capital expenditures
      (27.1 )      (27.4 ) 
Proceeds on disposal of property, plant and equipment
      0.1       0.4  
    
 
 
    
 
 
  
Net cash used in investing activities
      (27.0 )      (27.0 ) 
     
Cash Flows from Financing Activities
                 
Non-controlling
interest
      1.9       0.1  
Proceeds from revolving credit facility
      —         —    
Repayments of revolving credit facility
      —         —    
Repayments of finance leases
      (0.1 )      (0.5 ) 
Dividend paid
      (15.6 )      (14.0 ) 
Issue of treasury stock
      2.1       2.0  
Repurchase of common stock
      (5.0 )      (0.8 ) 
    
 
 
    
 
 
  
Net cash used in financing activities
      (16.7 )      (13.2 ) 
Effect of foreign currency exchange rate changes on cash
      (0.9 )      (0.3 ) 
    
 
 
    
 
 
  
Net change in cash and cash equivalents
      (41.3 )      (16.1 ) 
Cash and cash equivalents at beginning of period
      141.8       105.3  
    
 
 
    
 
 
  
Cash and cash equivalents at end of period
    $ 100.5     $ 89.2  
    
 
 
    
 
 
  
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
6
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
(in millions)
   
Common

Stock
     
Additional

Paid-In

Capital
     
Treasury

Stock
    
Retained

Earnings
    
Accumulated
Other

Comprehensive
Loss
    
Non-

Controlling
Interest
     
Total

Equity
  
Balance at December 31, 2021
    $ 0.3      $ 346.7      $ (90.6 )    $ 822.9     $ (46.9 )    $ 0.6      $ 1,033.0  
Net income
                                107.5                        107.5  
Dividend paid ($0.63 per share)
                                (15.6 )                       (15.6 ) 
Changes in cumulative translation adjustment, net of tax
                                        (37.1 )               (37.1 ) 
Non-controlling
interest investment
                                                1.8        1.8  
Share of net income
                                                0.1        0.1  
Treasury stock reissued
               0.8        1.0                                1.8  
Treasury stock repurchased
                        (5.0 )                               (5.0 ) 
Stock option compensation
               4.7                                         4.7  
Amortization of prior service cost, net of tax
                                        0.3                0.3  
Amortization of actuarial net losses, net of tax
                                        0.4                0.4  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Balance at September 30, 2022
    $ 0.3      $ 352.2      $ (94.6 )    $ 914.8     $ (83.3 )    $ 2.5      $ 1,091.9  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
(in millions)
   
Common

Stock
     
Additional
Paid-In

Capital
     
Treasury

Stock
    
Retained

Earnings
    
Accumulated
Other

Comprehensive
Loss
    
Non-

Controlling
Interest
     
Total

Equity
  
Balance at December 31, 2020
    $ 0.3      $ 336.1      $ (93.3 )    $ 758.6     $ (57.3 )    $ 0.5      $ 944.9  
Net income
                                69.2                        69.2  
Dividend paid ($0.57 per share)
                                (14.0 )                       (14.0 ) 
Changes in cumulative translation adjustment, net of tax
                                        (14.5 )               (14.5 ) 
Share of net income
                                                0.1        0.1  
Treasury stock reissued
               0.6        1.1                                1.7  
Treasury stock repurchased
                        (0.8 )                               (0.8 ) 
Stock option compensation
               4.6                                         4.6  
Amortization of prior service cost, net of tax
                                        0.2                0.2  
Amortization of actuarial net losses, net of tax
                                        1.7                1.7  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Balance at September 30, 2021
    $ 0.3      $ 341.3      $ (93.0 )    $ 813.8     $ (69.9 )    $ 0.6      $ 993.1  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
 
7
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
(in millions)
   
Common

Stock
     
Additional
Paid-In

Capital
    
Treasury

Stock
    
Retained

Earnings
     
Accumulated
Other

Comprehensive
Loss
    
Non-

Controlling
Interest
     
Total

Equity
  
Balance at June 30, 2022
    $ 0.3      $ 350.9     $ (92.3 )    $ 876.1      $ (67.1 )    $ 0.7      $ 1,068.6  
Net income
                               38.7                         38.7  
Changes in cumulative translation adjustment, net of tax
                                        (16.4 )               (16.4 ) 
Non-controlling
interest investment
                                                1.8        1.8  
Treasury stock reissued
               (0.2 )                                        (0.2 ) 
Treasury stock repurchased
                       (2.3 )                                (2.3 ) 
Stock option compensation
               1.5                                         1.5  
Amortization of prior service cost, net of tax
                                        0.1                0.1  
Amortization of actuarial net losses, net of tax
                                        0.1                0.1  
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Balance at September 30, 2022
    $ 0.3      $ 352.2     $ (94.6 )    $ 914.8      $ (83.3 )    $ 2.5      $ 1,091.9  
    
 
 
     
 
 
    
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
 
(in millions)
   
Common

Stock
     
Additional
Paid-In

Capital
     
Treasury

Stock
    
Retained

Earnings
     
Accumulated
Other

Comprehensive
Loss
    
Non-

Controlling
Interest
     
Total

Equity
  
Balance at June 30, 2021
    $ 0.3      $ 339.5      $ (93.1 )    $ 790.4      $ (63.5 )    $ 0.6      $ 974.2  
Net income
                                23.4                         23.4  
Changes in cumulative translation adjustment, net of tax
                                         (7.0 )               (7.0 ) 
Treasury stock reissued
               0.1        0.1                                 0.2  
Stock option compensation
               1.7                                          1.7  
Amortization of prior service cost, net of tax
                                         0.1                0.1  
Amortization of actuarial net losses, net of tax
                                         0.5                0.5  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
Balance at September 30, 2021
    $ 0.3      $ 341.3      $ (93.0 )    $ 813.8      $ (69.9 )    $ 0.6      $ 993.1  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
     
 
 
  
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
 
8
INNOSPEC INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X
under the Securities Exchange Act of 1934. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position, results of operations and cash flows.
It is our opinion, however, that all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) have been made which are necessary for the condensed consolidated financial statements to be fairly stated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021 filed on February 16, 2022 (the “2021 Form
10-K”).
The results for the interim period covered by this report are not necessarily indicative of the results to be expected for the full year.
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.
 
9
NOTE 2 – SEGMENT REPORTING
The Company reports its financial performance based on three reportable segments, which are Performance Chemicals, Fuel Specialties and Oilfield Services.
The Company evaluates the performance of its segments based on operating income. The following tables analyze sales and other financial information by the Company’s reportable segments:
 
    
Three months ended

September 30
     
Nine months ended
September 30
  
(in millions)
   
2022
     
2021
     
2022
    
2021
  
Net
sales
:
                                   
Personal Care
    $ 102.4      $ 75.8      $ 311.1     $ 217.8  
Home Care
      22.6        24.4        72.3       68.7  
Other
      34.7        32.6        112.4       100.4  
    
 
 
     
 
 
     
 
 
    
 
 
  
Performance Chemicals
      159.7        132.8        495.8       386.9  
    
 
 
     
 
 
     
 
 
    
 
 
  
Refinery and Performance
      133.2        113.8        405.5       307.9  
Other
      45.5        42.6        141.4       130.9  
    
 
 
     
 
 
     
 
 
    
 
 
  
Fuel Specialties
      178.7        156.4        546.9       438.8  
    
 
 
     
 
 
     
 
 
    
 
 
  
Oilfield Services
      174.6        86.9        410.3       244.5  
    
 
 
     
 
 
     
 
 
    
 
 
  
     $ 513.0      $ 376.1      $ 1,453.0     $ 1,070.2  
    
 
 
     
 
 
     
 
 
    
 
 
  
Gross profit:
                                   
Performance Chemicals
    $ 39.1      $ 32.6      $ 123.5     $ 95.6  
Fuel Specialties
      53.4        49.1        171.0       144.1  
Oilfield Services
      63.5        31.2        140.6       82.3  
    
 
 
     
 
 
     
 
 
    
 
 
  
     $ 156.0      $ 112.9      $ 435.1     $ 322.0  
    
 
 
     
 
 
     
 
 
    
 
 
  
Operating income/(loss):
                                   
Performance Chemicals
    $ 25.4      $ 17.8      $ 79.5     $ 54.0  
Fuel Specialties
      27.9        26.6        94.9       78.9  
Oilfield Services
      14.2        2.7        21.2       6.1  
Corporate costs
      (17.4 )       (15.7 )       (54.9 )      (42.4 ) 
    
 
 
     
 
 
     
 
 
    
 
 
  
Total operating income
    $ 50.1      $ 31.4      $ 140.7     $ 96.6  
    
 
 
     
 
 
     
 
 
    
 
 
  
 
10
NOTE 3 – EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the effect of options that are dilutive and outstanding during the period under the treasury stock method. Per share amounts are computed as follows:
 
    
Three months ended
September 30
     
Nine months ended
September 30
  
    
2022
     
2021
     
2022
     
2021
  
Numerator (in millions):
                                    
Net income available to common stockholders
    $ 38.7      $ 23.4      $ 107.5      $ 69.2  
    
 
 
     
 
 
     
 
 
     
 
 
  
Denominator (in thousands):
                                    
Weighted average common shares outstanding
      24,786        24,643        24,794        24,624  
Dilutive effect of stock options and awards
      179        221        182        248  
    
 
 
     
 
 
     
 
 
     
 
 
  
Denominator for diluted earnings per share
      24,965        24,864        24,976        24,872  
    
 
 
     
 
 
     
 
 
     
 
 
  
Net income per share, basic:
    $ 1.56      $ 0.95      $ 4.34      $ 2.81  
    
 
 
     
 
 
     
 
 
     
 
 
  
Net income per share, diluted:
    $ 1.55      $ 0.94      $ 4.30      $ 2.78  
    
 
 
     
 
 
     
 
 
     
 
 
  
In the three and nine months ended September 30, 2022, the average number of anti-dilutive options excluded from the calculation of diluted earnings per share were 109,377 and 54,522, respectively (three and nine months ended September 30, 2021 – 19,191 and 14,649, respectively).
NOTE 4 – GOODWILL
The following table summarizes the goodwill movements in the year:
 
(in millions)
   
Gross Cost
  
Opening balance at January 1, 2022
    $ 364.3  
Exchange effect
      (12.6 ) 
    
 
 
  
Closing balance at September 30, 2022
    $ 351.7  
    
 
 
  
The exchange effect for the nine months ended September 30, 2022 was $12.4 million relating to our Performance Chemicals segment and $0.2 million relating to our Fuel Specialties segment.
 
11
NOTE 5 – OTHER INTANGIBLE ASSETS
The following table analyzes other intangible assets movements in the year:
 
(in millions)
   
2022
  
Gross cost at January 1
    $ 295.2  
Exchange effect
      (6.3 ) 
    
 
 
  
Gross cost at September 30
      288.9  
    
 
 
  
Accumulated amortization at January 1
      (237.7 ) 
Amortization expense
      (11.4 ) 
Exchange effect
      3.8  
    
 
 
  
Accumulated am
o
rtization at September 30
      (245.3 ) 
    
 
 
  
Net book amount at September 30
    $ 43.6  
    
 
 
  
The amortization expense for the nine months ended September 30, 2022 was $11.4 million (nine months ended September 30, 2021 – $12.0 million).
NOTE 6 – PENSION AND POST EMPLOYMENT BENEFITS
The Company maintains a defined benefit pension plan covering certain current and former employees in the United Kingdom (the “UK Plan”). The UK Plan is closed to future service accrual and has a large number of deferred and current pensioners.
The Company also maintains an unfunded defined benefit pension plan covering certain current and former employees in Germany (the “German plan”). The German plan is closed to new entrants and has no assets.
The net periodic benefit of these plans is shown in the following table:
 
    
Three months ended
September 30
     
Nine months ended
September 30
  
(in millions)
   
2022
     
2021
     
2022
    
2021
  
Service cost
    $ (0.6 )     $ (0.5 )     $ (1.8 )    $ (1.4 ) 
Interest cost on projected benefit obligation
      (2.4 )       (1.9 )       (7.8 )      (5.7 ) 
Expected return on plan assets
      3.8        3.9        12.3       11.7  
Amortization of prior service cost
      (0.1 )       (0.1 )       (0.4 )      (0.2 ) 
Amortization of actuarial net losses
      (0.1 )       (0.6 )       (0.4 )      (1.9 ) 
    
 
 
     
 
 
     
 
 
    
 
 
  
Net periodic benefit
    $ 0.6      $ 0.8      $ 1.9     $ 2.5  
    
 
 
     
 
 
     
 
 
    
 
 
  
The service cost has been recognized in selling, general and administrative expenses. All other items have been recognized within other income and expense. The amortization of prior service cost and actuarial net losses are a reclassification out of accumulated other comprehensive loss into other income and expense.
In addition, we have obligations for post-employment benefits in some of our other European businesses. As at September 30, 2022, we have recorded a liability of $4.1 million (December 31, 2021 – $4.6 million).
 
12
In May 2022, the Trustees of the UK Plan entered into an agreement with Legal and General Assurance Society Limited to acquire an insurance policy that operates as an investment asset, with the intent of matching the remaining uninsured part of the UK Plan’s future cash flow arising from the accrued pension liabilities of members. Such an arrangement is commonly termed as a
“buy-in”.
The
buy-in
reduces the UK Plan’s value at risk in relation to key risks associated with improved longevity, inflation and interest rate movements whilst improving the security to the UK Plan and its members. The Company consequently benefits from the
buy-in
as it reduces the UK Plan’s potential reliance on the Company for future cash funding requirements. In accordance with US GAAP the
buy-in
does not trigger a remeasurement at an interim period, so accounting entries to reflect this will be included in Innospec’s Annual Report on Form
10-K
for the year ended December 31, 2022.​​​​​​​
NOTE 7 – INCOME TAXES
A roll-forward of unrecognized tax benefits and associated accrued interest and penalties is as follows:
 
(in millions)
   
Unrecognized

Tax Benefits
     
Interest and

Penalties
     
Total
  
Opening balance at January 1, 2022
    $ 13.2      $ 3.1      $ 16.3  
Net change for tax positions of prior periods
      (0.5 )       0.5        —    
    
 
 
     
 
 
     
 
 
  
Closing balance at September 30, 2022
      12.7        3.6        16.3  
Current
      —          —          —    
    
 
 
     
 
 
     
 
 
  
Non-current
    $ 12.7      $ 3.6      $ 16.3  
    
 
 
     
 
 
     
 
 
  
All of the $16.3 million of unrecognized tax benefits, interest and penalties would impact our effective tax rate if recognized.
In 2021 a
non-U.S.
subsidiary, Innospec Limited, entered into a review by the U.K. tax authorities under the U.K.’s Profit Diversion Compliance Facility (“PDCF”). The Company determined that additional tax and interest totaling $0.9 million may arise during the course of the PDCF review process which is currently ongoing. This includes a reduction for foreign exchange movements of $0.1 million recorded in the nine months to September 30, 2022.
A
non-U.S.
subsidiary, Innospec Performance Chemicals Italia Srl, is subject to an ongoing tax audit in relation to the period 2011 to 2014 inclusive. The Company has determined that additional tax, interest and penalties totaling $2.9 million may arise as a consequence of the tax audit. This includes an increase in interest accrual of $0.1 million and a reduction for foreign exchange movements of $0.5 million recorded in the nine months to September 30, 2022. As any additional tax arising as a consequence of the tax audit would be reimbursed by the previous owner under the terms of the sale and purchase agreement, an indemnification asset of the same amount is recorded in the financial statements to reflect this arrangement.
In 2018 the Company recorded an unrecognized tax benefit in relation to a potential adjustment that could arise as a consequence of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), but for which retrospective adjustment to the filed 2017 U.S. federal income tax returns was not permissible. The Company has determined that additional tax, interest and penalties totaling $12.5 million may arise in relation to this item. This includes an increase in interest accrued of $0.5 million in the nine months to September 30, 2022.
 
13
The Company and its U.S. subsidiaries remain open to examination by the IRS for certain elements of year 2017 and for years 2018 onwards under the statute of limitations. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including the U.K. (2017 onwards), Germany (2018 onwards), Spain (2018 onwards) and France (2019 onwards).
NOTE 8 – LONG-TERM DEBT​​​​​​​
As at September 30, 2022, and December 31, 2021, the Company had not drawn down on its revolving credit facility.
The Company continues to have available a $250.0 million revolving credit facility until September 25, 2024. The facility contains an accordion feature whereby the Company may elect to increase the total available borrowings by an aggregate amount of up to $125.0 million.
As at September 30, 2022, the deferred finance costs of $0.7 million (December 31, 2021 - $1.0 million) related to the arrangement of the credit facility, are included within other current and
non-current
assets at the balance sheet dates.
NOTE 9 – PLANT CLOSURE PROVISIONS
The Company has continuing plans to remediate manufacturing facilities at sites around the world as and when those operations are expected to cease or we are required to decommission the sites according to local laws and regulations. The liability for estimated plant closure costs includes costs for environmental remediation liabilities and asset retirement obligations.
The principal site giving rise to asset retirement obligations is the manufacturing site at Ellesmere Port in the United Kingdom. There are also asset retirement obligations and environmental remediation liabilities on a much smaller scale in respect of other manufacturing sites.
Movements in the provisions are summarized as follows:
 
(in millions)
   
2022
  
Total at January 1
    $ 56.5  
Charge for the period
      2.7  
Utilized in the period
      (2.5 ) 
Exchange effect
      (1.1 ) 
    
 
 
  
Total at September 30
      55.6  
Due within one year
      (5.6 ) 
    
 
 
  
Due after one year
    $ 50.0  
    
 
 
  
The charge for the nine months ended September 30, 2022 was $2.7 million (nine months ended September 30, 2021 – $2.8 million). The current year charge represents the accounting accretion only, with no changes for the expected cost and scope of future remediation activities.
Amounts due within one year refer to provisions where expenditure is expected to arise within one year of the balance sheet date.
 
14
NOTE 10 – FAIR VALUE MEASUREMENTS
The following table presents the carrying amount and fair values of the Company’s financial assets and liabilities measured on a recurring basis:
 
    
September 30, 2022
     
December 31, 2021
  
(in millions)
   
Carrying

Amount
     
Fair

Value
     
Carrying

Amount
     
Fair

Value
  
Assets
                                    
Non-derivatives:
                                    
Cash and cash equivalents
    $ 100.5      $ 100.5      $ 141.8      $ 141.8  
Derivatives (Level 1 measurement):
                                    
Other current and
non-current
assets:
                                    
Emissions Trading Scheme credits
      2.7        2.7        3.9        3.9  
         
Liabilities
                                    
Non-derivatives:
                                    
Finance leases (including current portion)
    $ —        $ —        $ 0.1      $ 0.1  
Derivatives (Level 1 measurement):
                                    
Other current and
non-current
liabilities:
                                    
Foreign currency forward exchange contracts
      0.8        0.8        1.2        1.2  
Non-financial
liabilities (Level 3 measurement):
                                    
Other current and
non-current
liabilities:
                                    
Stock equivalent units
      24.1        24.1        17.3        17.3  
The following methods and assumptions were used to estimate the fair values:
Cash and cash equivalents:
The carrying amount approximates fair value because of the short-term maturities of such instruments.
Emissions Trading Scheme credits:
The fair value is determined by the open market pricing at the end of the reporting period.
Derivatives:
The fair value of derivatives relating to foreign currency forward exchange contracts are derived from current settlement prices and comparable contracts using current assumptions. Foreign currency forward exchange contracts primarily relate to contracts entered into to hedge future known transactions or hedge balance sheet net cash positions. The movements in the carrying amounts and fair values of these contracts are largely due to changes in exchange rates against the U.S. dollar.
Finance leases:
Finance leases relate to certain fixed assets in our Fuel Specialties and Oilfield Services segments. The carrying amount of finance leases approximates to the fair value.
Stock equivalent units:
The fair values of stock equivalent units are calculated at each balance sheet date using either the Black-Scholes or Monte Carlo method depending on the terms of each grant.
 
15
NOTE 11 – DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company enters into various foreign currency forward exchange contracts to minimize currency exchange rate exposure from expected future cash flows. As at September 30, 2022, the contracts have maturity dates of up to twelve months at the date of inception. These foreign currency forward exchange contracts have not been designated as hedging instruments, and their impact on the income statement for the first nine months of 2022 was a gain of $6.5 million (first nine months of 2021 – a gain of $0.9 million).
NOTE 12 – CONTINGENCIES
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 their 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 the results of operations for a particular year or quarter.
Guarantees
The Company and certain of the Company’s consolidated subsidiaries are contingently liable for certain obligations of affiliated companies primarily in the form of guarantees of debt and performance under contracts entered into as a normal business practice. This includes guarantees of
non-U.S.
excise taxes and customs duties. As at September 30, 2022, such guarantees which are not recognized as liabilities in the condensed consolidated financial statements amounted to $5.9 million (December 31, 2021 - $4.6 million). The remaining terms of the fixed maturity guarantees are up to 4 years, with some further guarantees having no fixed expiry date.
Under the terms of the guarantee arrangements, generally the Company would be required to perform should the affiliated company fail to fulfil its obligations under the arrangements. In some cases, the guarantee arrangements have recourse provisions that would enable the Company to recover any payments made under the terms of the guarantees from securities held of the guaranteed parties’ assets.
The Company and its affiliates have numerous long-term sales and purchase commitments in their various business activities, which are expected to be fulfilled with no adverse consequences material to the Company.
 
16
NOTE 13 – STOCK-BASED COMPENSATION PLANS
The compensation cost recorded for stock options for the three months ended September 30, 2022 and 2021 was $1.5 million and $1.7 million, respectively. The compensation cost recorded for stock equivalent units for the three months ended September 30, 2022 and 2021 was $1.8 million and $0.5 million, respectively.
The compensation cost recorded for stock options for the first nine months of 2022 and 2021 was $4.7 million and $4.6 million, respectively. The compensation cost recorded for stock equivalent units for the first nine months of 2022 and 2021 was $15.9 million and $3.4 million, respectively.
The following table summarizes the transactions of the Company’s share-based compensation plans for the nine months ended September 30, 2022.
 
    
Number of

shares
     
Weighted

Average

Grant-Date

Fair Value
  
Nonvested at December 31, 2021
      680,711      $ 74.6  
Granted
      332,009      $ 60.2  
Vested
      (126,552 )     $ 69.7  
Forfeited
      (57,746 )     $ 69.3  
    
 
 
     
 
 
  
Nonvested at September 30, 2022
      828,422      $ 69.9  
    
 
 
     
 
 
  
New grants in the quarter have similar vesting conditions to those granted in previous periods. The valuation methodologies of the new grants are consistent with previous periods.
As of September 30, 2022, there was $26.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.01 years.
 
17
NOTE 14 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS
Reclassifications out of accumulated other comprehensive loss (“AOCL”) for the first nine months of 2022 were:
 
(in millions)
Details about AOCL Components
   
Amount

Reclassified

from AOCL
     
Affected Line Item in the
Statement where
Net Income is Presented
Defined benefit pension plan items:
              
Amortization of prior service cost
    $ 0.4      See 
(1)
below
Amortization of actuarial net losses
      0.4      See
(1)
below
    
 
 
       
       0.8      Total before tax
       (0.1 )     Income tax expense
    
 
 
       
Total reclassifications
    $ 0.7      Net of tax
    
 
 
       
 
(1)  
These items are included in other income and expense. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information.
Changes in
AOCL
for the first nine months of 2022, net of tax, wer
e
:
 
(in millions)
   
Defined

Benefit

Pension

Plan Items
     
Cumulative

Translation

Adjustments
     
Total
  
Balance at December 31, 2021
    $ 10.7      $ (57.6 )     $ (46.9 ) 
    
 
 
     
 
 
     
 
 
  
Other comprehensive income before reclassifications
      —          (37.1 )       (37.1 ) 
Amounts reclassified from AOCL
      0.7        —          0.7  
    
 
 
     
 
 
     
 
 
  
Total other comprehensive income/(loss)
      0.7        (37.1 )       (36.4 ) 
    
 
 
     
 
 
     
 
 
  
Balance at September 30, 2022
    $ 11.4      $ (94.7 )     $ (83.3 ) 
    
 
 
     
 
 
     
 
 
  
 
18
Reclassifications out of AOCL for the first nine months of 2021 were:
 
(in millions)
Details about AOCL Components
   
Amount

Reclassified

from AOCL
     
Affected Line Item in the
Statement where
Net Income is Presented
Defined benefit pension plan items:
              
Amortization of prior service cost
    $ 0.2      See 
(1)
below
Amortization of actuarial net losses
      1.9      See
(1)
below
    
 
 
       
       2.1      Total before tax
       (0.2 )     Income tax expense
    
 
 
       
Total reclassifications
    $ 1.9      Net of tax
    
 
 
       
 
(1)
These items are included in other inc
o
me and expense. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information.
Changes in AOCL for the first nine months of 2021, net of tax, were:
 
(in millions)
   
Defined

Benefit

Pension

Plan Items
     
Cumulative

Translation

Adjustments
     
Total
  
Balance at December 31, 2020
    $ (19.9 )     $ (37.4 )     $ (57.3 ) 
    
 
 
     
 
 
     
 
 
  
Other comprehensive income before reclassifications
      —          (14.5 )       (14.5 ) 
Amounts reclassified from AOCL
      1.9        —          1.9  
    
 
 
     
 
 
     
 
 
  
Total other comprehensive income
      1.9        (14.5 )       (12.6 ) 
    
 
 
     
 
 
     
 
 
  
Balance at September 30, 2021
    $ (18.0 )     $ (51.9 )     $ (69.9 ) 
    
 
 
     
 
 
     
 
 
  
 
19
NOTE 15 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recently issued accounting pronouncements and concluded there were no matters relevant to the Company’s financial statements.
NOTE 16 – RELATED PARTY TRANSACTIONS
Mr. Patrick S. Williams has been an executive director of the Company since April 2009 and has been a
non-executive
director of AdvanSix, a chemicals manufacturer, since February 2020. In the first nine months of 2022 the Company purchased product from AdvanSix for $0.4 million (first nine months of 2021 – $0.3 million). As at September 30, 2022, the Company owed $0.0 million to AdvanSix (December 31, 2021 – $0.1 million).
Mr. Robert I. Paller has been a
non-executive
director of the Company since November 1, 2009. The Company has retained and continues to retain Smith, Gambrell & Russell, LLP (“SGR”), a law firm with which Mr. Paller holds a position. In the first nine months of 2022 the Company incurred fees from SGR of $0.2 million (first nine months of 2021 – $0.1 million). As at September 30, 2022, the Company owed $0.0 million to SGR (December 31, 2021 – $0.0 million).
Mr. David F. Landless has been a
non-executive
director of the Company since January 1, 2016 and is a
non-executive
director of Ausurus Group Limited which owns European Metal Recycling Limited (“EMR”). The Company has sold scrap metal to EMR in the first nine months of 2022 for a value of $0.1 million (first nine months of 2021 – $0.5 million). A tendering process is operated periodically to select the best buyer for the sale of scrap metal by the Company. As at September 30, 2022 EMR owed $0.0 million for scrap metal purchased from the Company (December 31, 2021 – $0.0 million).
 
20

Table of Contents

Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September 30, 2022

This discussion should be read in conjunction with our unaudited interim condensed consolidated financial statements and the notes thereto.

CRITICAL ACCOUNTING ESTIMATES

The policies and estimates that the Company considers the most critical in terms of complexity and subjectivity of assessment are those related to environmental liabilities, pensions, income taxes, goodwill, property, plant and equipment and other intangible assets (net of depreciation and amortization) and the impact of the COVID-19 pandemic (“the pandemic”) and the current economic environment. These policies have been discussed in the Company’s 2021 Form 10-K.

RESULTS OF OPERATIONS

The Company reports its financial performance based on three reportable segments, which are Performance Chemicals, Fuel Specialties and Oilfield Services.

The following table provides sales, gross profit and operating income by reporting segment:

 

     Three months ended
September 30		      Nine months ended
September 30		  

(in millions)

    2022      2021      2022      2021  

Net sales:

            

Performance Chemicals

    $ 159.7      $ 132.8      $ 495.8      $ 386.9  

Fuel Specialties

      178.7        156.4        546.9        438.8  

Oilfield Services

      174.6        86.9        410.3        244.5  
  

 

 

     

 

 

     

 

 

     

 

 

  
   $ 513.0      $ 376.1      $ 1,453.0      $ 1,070.2  
  

 

 

     

 

 

     

 

 

     

 

 

  

Gross profit:

            

Performance Chemicals

    $ 39.1      $ 32.6      $ 123.5      $ 95.6  

Fuel Specialties

      53.4        49.1        171.0        144.1  

Oilfield Services

      63.5        31.2        140.6        82.3  
  

 

 

     

 

 

     

 

 

     

 

 

  
   $ 156.0      $ 112.9      $ 435.1      $ 322.0  
  

 

 

     

 

 

     

 

 

     

 

 

  

Operating income/(loss):

            

Performance Chemicals

    $ 25.4      $ 17.8      $ 79.5      $ 54.0  

Fuel Specialties

      27.9        26.6        94.9        78.9  

Oilfield Services

      14.2        2.7        21.2        6.1  

Corporate costs

      (17.4 )       (15.7 )       (54.9 )       (42.4 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

Total operating income

    $ 50.1      $ 31.4      $ 140.7      $ 96.6  
  

 

 

     

 

 

     

 

 

     

 

 

  

 

21

Table of Contents

Three Months Ended September 30, 2022

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended September 30, 2022 and the three months ended September 30, 2021:

 

     Three months ended
September 30		               

(in millions, except ratios)

    2022      2021      Change        

Net sales:

           

Performance Chemicals

    $ 159.7      $ 132.8      $ 26.9       +20 % 

Fuel Specialties

      178.7        156.4        22.3       +14 % 

Oilfield Services

      174.6        86.9        87.7       +101 %