# Innospec Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Innospec Inc.](/companies/iosp.md) (CIK 1054905)
- Form: 10-Q
- Filed: 2023-05-04
- Accepted by EDGAR: May 4, 2023, 13:40 ET
- Period: 2023-03-31
- Accession: 0000950170-23-017517
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1054905/000095017023017517/iosp-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1054905/000095017023017517/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $509.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $361.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $147.8m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $10.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $96.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $41.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $11.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $33.2m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $1.33 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $1.34 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 24,962,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $21.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $300.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-03-31 | $147.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $875.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $1.62bn | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $381.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $543.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $1.08bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 14,087 characters.

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). These policies have been discussed in the Company’s 2022 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:

*(in millions)*

| Net sales: | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Performance Chemicals | $151.4 | $167.1 |
| Fuel Specialties | 190.3 | 191.8 |
| Oilfield Services | 167.9 | 113.5 |
|  | $509.6 | $472.4 |
| **Gross profit:** |  |  |
| Performance Chemicals | $24.1 | $40.8 |
| Fuel Specialties | 57.4 | 60.7 |
| Oilfield Services | 66.3 | 37.8 |
|  | $147.8 | $139.3 |
| **Operating income/(loss):** |  |  |
| Performance Chemicals | $10.4 | $25.3 |
| Fuel Specialties | 32.4 | 35.5 |
| Oilfield Services | 15.9 | 2.5 |
| Corporate costs | (17.7) | (19.0) |
| Total operating income | $41.0 | $44.3 |

16

### Three Months Ended March 31, 2023

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended March 31, 2023 and the three months ended March 31, 2022:

*(in millions, except ratios)*

| Net sales: | Three Months Ended March 31, 2023 | 2022 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Performance Chemicals | $151.4 | $167.1 | $(15.7) | (9)% |
| Fuel Specialties | 190.3 | 191.8 | (1.5) | (1)% |
| Oilfield Services | 167.9 | 113.5 | 54.4 | 48% |
|  | $509.6 | $472.4 | $37.2 | 8% |
| **Gross profit:** |  |  |  |  |
| Performance Chemicals | $24.1 | $40.8 | $(16.7) | (41)% |
| Fuel Specialties | 57.4 | 60.7 | (3.3) | (5)% |
| Oilfield Services | 66.3 | 37.8 | 28.5 | 75% |
|  | $147.8 | $139.3 | $8.5 | 6% |
| **Gross margin (%):** |  |  |  |  |
| Performance Chemicals | 15.9 | 24.4 | (8.5) |  |
| Fuel Specialties | 30.2 | 31.6 | (1.4) |  |
| Oilfield Services | 39.5 | 33.3 | 6.2 |  |
| **Aggregate** | **29.0** | **29.5** | **(0.5)** |  |
| **Operating expenses:** |  |  |  |  |
| Performance Chemicals | $(13.7) | $(15.5) | $1.8 | (12)% |
| Fuel Specialties | (25.0) | (25.2) | 0.2 | (1)% |
| Oilfield Services | (50.4) | (35.3) | (15.1) | 43% |
| Corporate costs | (17.7) | (19.0) | 1.3 | (7)% |
|  | $(106.8) | $(95.0) | $(11.8) | 12% |

### Performance Chemicals

*Net sales:* the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

| Change (%) | Three Months Ended March 31, 2023 Americas | EMEA | ASPAC | Total |
| --- | ---: | ---: | ---: | ---: |
| Volume | -16 | -8 | -29 | -13 |
| Price and product mix | -1 | +11 | +13 | +6 |
| Exchange rates | — | -5 | -2 | -2 |
|  | -17 | -2 | -18 | -9 |

Lower sales volumes for all our regions were primarily driven by reduced demand for our personal care products resulting from lower consumer demand together with the impact of destocking by our customers. EMEA and ASPAC benefited from a favorable price and product mix due to increased sales of higher priced products together with the impact of increased raw materials pricing being passed on through higher selling prices. The Americas were impacted by an adverse price and product mix due to increased sales of lower priced products. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a strengthening of the U.S. dollar against the British pound sterling and the European Union euro.

*Gross margin:* the year over year decrease of 8.5 percentage points was due to an adverse sales mix from reduced sales of higher margin products, the time lag for higher raw material costs passing through to higher selling prices and the adverse impact for manufacturing efficiency of lower production volumes.

*Operating expenses:* decreased $1.8 million year over year, due to lower selling expenses including commissions, lower performance-related remuneration accruals and lower acquired intangibles amortization following the end of the expected life of the assets.

### Fuel Specialties

*Net sales:* the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

| Change (%) | Three Months Ended March 31, 2023 Americas | EMEA | ASPAC | AvGas | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Volume | -23 | -19 | -9 | -8 | -20 |
| Price and product mix | +21 | +25 | +14 | +14 | +22 |
| Exchange rates | — | -8 | -1 | — | -3 |
|  | -2 | -2 | +4 | +6 | -1 |

Sales volumes in all our regions have decreased year over year, primarily due to a reduction in the sale of lower margin higher volume products. Price and product mix was favorable in all our regions due to increased sales of higher margin products and the impact of increased raw materials pricing being passed on through higher selling prices. AvGas volumes were lower than the prior year due to variations in the demand from customers, being offset by a favorable price and product mix with a higher proportion of sales to higher margin customers. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a strengthening of the U.S. dollar against the British pound sterling and the European Union euro.

*Gross margin*: the year over year decrease of 1.4 percentage points was due to the impact of the misappropriation of $7.4 million of inventory in Brazil being partly offset by a favorable sales mix from increased sales of higher margin products.

*Operating expenses:* the year over year decrease of $0.2 million including lower provisions for doubtful debts and lower performance-related remuneration accruals.

### Oilfield Services

*Net sales:* have increased year over year by $54.4 million, or 48 percent, with the majority of our customer activity concentrated in the Americas region. Sequentially quarter on quarter, customer demand has stabilized however we feel optimistic of sales growth through 2023.

*Gross margin:* the year over year increase of 6.2 percentage points was due to a favorable sales mix and the benefit of improved pricing in a continuously competitive market.

*Operating expenses:* the year over year increase of $15.1 million was driven by higher customer service costs which are necessary to support the increase in demand with certain customers.

### Other Income Statement Captions

*Corporate costs:* the year over year decrease of $1.3 million was primarily due to lower performance-related remuneration accruals.

*Other net income/(expense):* for the first quarter of 2023 and 2022, included the following:

*(in millions)*

|  | 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net pension credit | $1.7 | $1.3 | 0.4 |
| Foreign exchange gains on translation | 2.9 | 2.2 | 0.7 |
| Foreign currency forward contracts gains/(losses) | (0.9) | 0.8 | (1.7) |
|  | $3.7 | $4.3 | $(0.6) |

18

*Interest income/(expense), net:* was income of $0.3 million in the first quarter of 2023 compared to an expense of $0.4 million in the first quarter of 2022. Interest income on our cash balances has increased in recent periods due to the global increases for central bank interest rates. Interest expense in the prior year is due to a commitment fee to retain the Company’s revolving credit facility for the term of the agreement.

*Income taxes:* the effective tax rate was 26.2% and 24.3% in the first quarter of 2023 and 2022, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 25.8% in 2023 compared with 24.3% in 2022. The 1.5% increase in the adjusted effective rate was primarily due to the fact that a higher proportion of the Company’s profits are being generated in higher tax jurisdictions. The Company believes that this adjusted effective tax rate, a 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.

The following table shows a reconciliation of the GAAP effective tax charge to the adjusted effective tax charge:

*(in millions)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Income before income taxes | $45.0 | $48.2 |
| Indemnification asset regarding tax audit | (0.1) | — |
| Adjustment for stock compensation | 1.9 | 1.7 |
| Legacy cost of closed operations | 0.8 | 1.1 |
| Adjusted income before income taxes | $47.6 | $51.0 |
| Income taxes | $11.8 | $11.7 |
| Tax on stock compensation | — | 0.5 |
| Adjustment of income tax provision | 0.3 | — |
| Tax on legacy cost of closed operations | 0.2 | 0.2 |
| Adjusted income taxes | $12.3 | $12.4 |
| GAAP effective tax rate | 26.2% | 24.3% |
| Adjusted effective tax rate | 25.8% | 24.3% |

19

### LIQUIDITY AND FINANCIAL CONDITION

### Working Capital

In the first three months of 2023 our working capital increased by $26.6 million, while our adjusted working capital increased by $28.7 million. The difference is primarily due to the exclusion of increases for the current portion of accrued income taxes, partly offset by a reduction in the current portion of operating leases.

The Company believes that adjusted working capital, a non-GAAP financial measure (defined by the Company as trade and other accounts receivable, inventories, prepaid expenses, accounts payable and accrued liabilities rather than total current assets less total current liabilities) provides useful information to investors in evaluating the Company’s underlying performance and identifying operating trends. Management uses this non-GAAP financial measure internally to allocate resources and evaluate the performance of the Company’s operations. Items excluded from working capital in the adjusted working capital calculation are listed in the table below and represent factors which do not fluctuate in line with the day to day working capital needs of the business.

*(in millions)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Total current assets | $875.0 | $872.6 |
| Total current liabilities | (381.6) | (405.8) |
| Working capital | 493.4 | 466.8 |
| Less cash and cash equivalents | (147.5) | (147.1) |
| Less prepaid income taxes | (3.6) | (3.3) |
| Less other current assets | (0.4) | (0.4) |
| Add back current portion of accrued income taxes | 20.2 | 18.4 |
| Add back current portion of plant closure provisions | 5.0 | 5.3 |
| Add back current portion of operating lease liabilities | 15.2 | 13.9 |
| Adjusted working capital | $382.3 | $353.6 |

We had a $7.8 million increase in trade and other accounts receivable driven primarily by increased trading activity in our Oilfield Services segment. Days’ sales outstanding decreased in our Performance Chemicals segment from 63 days to 60 days; decreased from 59 days to 50 days in our Fuel Specialties segment; and increased from 57 days to 62 days in our Oilfield Services segment.

We had a $7.4 million decrease in inventories, net of a $1.8 million increase in allowances, primarily due to the misappropriation of $7.4 million of inventory in Brazil, while maintaining inventory levels to manage the risk of further supply chain disruption for certain key raw materials, especially in our Fuel Specialties segment. Days’ sales in inventory increased in our Performance Chemicals segment from 56 days to 73 days; increased from 121 days to 132 days in our Fuel Specialties segment; and decreased from 65 days to 61 days in our Oilfield Services segment.

Prepaid expenses increased $1.3 million, from $14.1 million to $15.4 million, due to the timing of invoices being prepaid, including the payment in advance for certain inventory supply, being partly offset by the normal expensing of prepaid invoices.

We had a $27.0 million decrease in accounts payable and accrued liabilities, which was dependent on the timing of payments for each of our reporting segments. Creditor days (including goods received not invoiced) decreased in our Performance Chemicals segment from 51 days to 46 days; decreased from 43 days to 39 days in our Fuel Specialties segment; and remained unchanged at 54 days in our Oilfield Services segment.

### Operating Cash Flows

We generated cash from operating activities of $21.8 million in the first three months of 2023 compared to cash outflows of $29.0 million in the first three months of 2022. The increase in cash generated from operating activities was principally related to lower increases in working capital in the first three months of 2023 compared to higher increases in the first three months of 2022 which were driven by increases in trade receivables linked with the revenue growth, together with the need to secure the supply of raw materials at that time.

### Cash

At March 31, 2023 and December 31, 2022, we had cash and cash equivalents of $147.5 million and $147.1 million, respectively, of which $57.3 million and $76.4 million, respectively, were held by non-U.S. subsidiaries principally in the United Kingdom.

The increase in cash and cash equivalents of $0.4 million for the first three months of 2023 was driven by our operating income being partly offset by increased working capital and our continued investments in capital projects.

### Debt

At March 31, 2023, and December 31, 2022, we had no debt outstanding under the revolving credit facility and no obligations were outstanding under finance leases.

## Market risk

As filed, 2,101 characters.

The Company uses floating rate debt to finance its global operations. The Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The political and economic risks are mitigated by the stability of the major countries in which the Company’s largest operations are located. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize bad debt risk. Collateral is not generally required.

From time to time, the Company uses derivatives, including interest rate swaps, commodity swaps and foreign currency forward exchange contracts, in the normal course of business to manage market risks. The derivatives used in hedging activities are considered risk management tools and are not used for trading purposes. In addition, the Company enters into derivative instruments with a diversified group of major financial institutions in order to manage the exposure to non-performance of such instruments. The Company’s objective in managing the exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flows and to lower overall borrowing costs. The Company’s objective in managing the exposure to changes in foreign currency exchange rates is to reduce volatility on earnings and cash flows associated with such changes.

The Company offers fixed prices for some long-term sales contracts. As manufacturing and raw material costs are subject to variability, the Company, from time to time, uses commodity swaps to hedge the cost of some raw materials thus reducing volatility on earnings and cash flows. The derivatives are considered risk management tools and are not used for trading purposes. The Company’s objective is to manage its exposure to fluctuating costs of raw materials.

The Company’s exposure to market risk has been discussed in the Company’s 2022 Annual Report on Form 10-K and there have been no significant changes since that time.

## Controls and procedures

As filed, 1,576 characters.

### Evaluation of Disclosure Controls and Procedures

Based on an evaluation carried out as of the end of the period covered by this report, under the supervision and with the participation of our management, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) were effective as of March 31, 2023, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal control over financial reporting. This is intended to result in refinements to processes throughout the Company.

There were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 331 characters.

Information regarding risk factors that could have a material impact on our results of operations or financial condition are described under “Risk Factors” in Item 1A of Part I of our 2022 Form 10-K. In management’s view, there have been no material changes in the risk factors facing the Company as disclosed in those SEC filings.

Filed May 4, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-017517. Last ingested by Listed: Oct 24, 2026, 15:03 ET. No prices; not investment advice.