# Innospec Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Innospec Inc.](/companies/iosp.md) (CIK 1054905)
- Form: 10-Q
- Filed: 2024-05-10
- Accepted by EDGAR: May 10, 2024, 09:25 ET
- Period: 2024-03-31
- Accession: 0000950170-24-057487
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1054905/000095017024057487/iosp-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1054905/000095017024057487/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $500.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $344.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $155.7m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-01-01 to 2024-03-31 | $11.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $92.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $50.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $13.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $41.4m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $1.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $1.66 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 25,066,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $80.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $400.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-03-31 | $270.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $912.9m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $1.73bn | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $364.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $546.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $1.18bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 14,456 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 plant closure provisions, pensions, income taxes and goodwill. These policies have been discussed in the Company’s 2023 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, 2024 | 2023 |
| --- | ---: | ---: |
| Performance Chemicals | $160.8 | $151.4 |
| Fuel Specialties | 176.9 | 190.3 |
| Oilfield Services | 162.5 | 167.9 |
|  | $500.2 | $509.6 |
| **Gross profit:** |  |  |
| Performance Chemicals | $37.7 | $24.1 |
| Fuel Specialties | 60.6 | 57.4 |
| Oilfield Services | 57.4 | 66.3 |
|  | $155.7 | $147.8 |
| **Operating income/(loss):** |  |  |
| Performance Chemicals | $21.1 | $10.4 |
| Fuel Specialties | 33.4 | 32.4 |
| Oilfield Services | 16.9 | 15.9 |
| Corporate costs | (20.2) | (17.7) |
| Adjustment to fair value of contingent consideration | (0.8) | — |
| Profit on disposal of property, plant and equipment | 0.1 | — |
| Total operating income | $50.5 | $41.0 |

18

### Three Months Ended March 31, 2024

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended March 31, 2024 and the three months ended March 31, 2023:

*(in millions, except ratios)*

| Net sales: | Three Months Ended March 31, 2024 | 2023 | Change |  |
| --- | ---: | ---: | ---: | --- |
| Performance Chemicals | $160.8 | $151.4 | $9.4 | +6% |
| Fuel Specialties | 176.9 | 190.3 | (13.4) | -7% |
| Oilfield Services | 162.5 | 167.9 | (5.4) | -3% |
|  | $500.2 | $509.6 | $(9.4) | -2% |
| **Gross profit:** |  |  |  |  |
| Performance Chemicals | $37.7 | $24.1 | $13.6 | +56% |
| Fuel Specialties | 60.6 | 57.4 | 3.2 | +6% |
| Oilfield Services | 57.4 | 66.3 | (8.9) | -13% |
|  | $155.7 | $147.8 | $7.9 | +5% |
| **Gross margin (%):** |  |  |  |  |
| Performance Chemicals | 23.4 | 15.9 | +7.5 |  |
| Fuel Specialties | 34.3 | 30.2 | +4.1 |  |
| Oilfield Services | 35.3 | 39.5 | -4.2 |  |
| **Aggregate** | **31.1** | **29.0** | **+2.1** |  |
| **Operating expenses:** |  |  |  |  |
| Performance Chemicals | $(16.6) | $(13.7) | $(2.9) | +21% |
| Fuel Specialties | (27.2) | (25.0) | (2.2) | +9% |
| Oilfield Services | (40.5) | (50.4) | 9.9 | -20% |
| Corporate costs | (20.2) | (17.7) | (2.5) | +14% |
| Adjustment to fair value of contingent consideration | (0.8) | — | (0.8) | n/a |
| Profit on disposal of property, plant and equipment | 0.1 | — | 0.1 | n/a |
|  | $(105.2) | $(106.8) | $1.6 | -1% |

### 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 (%) Volume | Three Months Ended March 31, 2024 Americas +19 | EMEA +9 | ASPAC +14 | Total +13 |
| --- | ---: | ---: | ---: | --- |
| Acquisition | — | — | — | +6 |
| Price and product mix | -12 | -15 | -12 | -14 |
| Exchange rates | — | +2 | +1 | +1 |
|  | +7 | -4 | +3 | +6 |

Higher sales volumes for all our regions was driven by increased demand for our personal care and home care products resulting from higher consumer demand. All our regions were affected by an adverse price and product mix due to lower selling prices driven by lower raw material costs. EMEA and ASPAC benefited from favorable exchange rate movements against the U.S. dollar.

*Gross margin:* the year over year increase of 7.5 percentage points was due to margins returning to a more normalized level when compared to the depressed margins in the prior year. Margins have benefited from raw materials pricing reductions in the current year, combining with the favorable impact for our manufacturing efficiency due to the higher production volumes.

*Operating expenses:* increased $2.9 million year over year, due to higher selling expenses, including commissions and increased provisions for doubtful debts, together with higher performance-related remuneration.

### 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, 2024 Americas | EMEA | ASPAC | AvGas | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Volume | -2 | — | +1 | -24 | -2 |
| Price and product mix | -3 | -10 | -4 | +1 | -6 |
| Exchange rates | — | +2 | — | — | +1 |
|  | -5 | -8 | -3 | -23 | -7 |

Sales volumes were down in the Americas, in part due to a milder winter compared to the prior year which has adversely impacted the sales of our winter related products. ASPAC volumes are slightly up on the prior year due to variations in the timing of demand. Price and product mix was adverse in all our regions due to the decreased sales of higher margin products. AvGas volumes were lower than the prior year due to variations in the demand from customers, being partly offset by a favorable price and product mix from a higher proportion of sales to higher margin customers. EMEA benefited from favorable exchange rate movements year over year against the U.S. dollar.

*Gross margin*: the year over year increase of 4.1 percentage points was primarily due to the adverse impact in the prior year in relation to the inventory misappropriation of $7.4 million in Brazil. The current year margins are more in line with our normal expectations.

*Operating expenses:* the year over year increase of $2.2 million includes increased spending on research and development and higher performance-related remuneration.

### Oilfield Services

*Net sales:* have decreased year over year by $5.4 million, or 2 percent, with the majority of our customer activity continuing to be concentrated in the Americas region. Sequentially quarter on quarter, demand from our production chemicals customers has softened. In the short-term we expect production chemicals activity to remain below previous quarters and will continue to pursue further sales growth and margin improvement in our other oilfield segments.

*Gross margin:* the year over year decrease of 4.2 percentage points was due to an adverse sales mix compared to the prior year comparative.

*Operating expenses:* the year over year decrease of $9.9 million was driven by lower selling expenses, including lower customer service costs which are necessary to support the demand from certain customers, together with lower provisions for doubtful debts.

### Other Income Statement Captions

*Corporate costs:* the year over year increase of $2.5 million was due to the growth and timing of information technology expenditure, higher performance-related remuneration and the adverse revaluation of our United Kingdom Emissions Trading Scheme carbon credits which can be traded on the open market.

*Adjustment to fair value of contingent consideration:* the $0.8 million expense in 2024 represents the accretion charge for the acquisition-related contingent consideration payable in relation to our QGP operation in Brazil which was acquired in December 2023.

*Other net income/(expense):* for the first quarter of 2024 and 2023, included the following:

*(in millions)*

|  | 2024 | 2023 | Change |
| --- | ---: | ---: | ---: |
| Net pension credit | $1.7 | $1.7 | — |
| Foreign exchange gains on translation | — | 2.9 | (2.9) |
| Foreign currency forward contracts gains/(losses) | 1.0 | (0.9) | 1.9 |
|  | $2.7 | $3.7 | $(1.0) |

*Interest income, net:* was income of $2.1 million in the first quarter of 2024 compared to income of $0.3 million in the first quarter of 2023. Interest income from our cash balances has increased over recent periods due to higher central bank interest rates together with the increases in our cash balances.

*Income taxes:* the effective tax rate was 25.1% and 26.2% in the first quarter of 2024 and 2023, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 24.5% in 2024 compared with 25.8% in 2023. The 1.3% percentage point decrease in the adjusted effective rate was primarily due to the fact that a higher proportion of the Company’s profits are being generated in lower 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, 2024 | 2023 |
| --- | ---: | ---: |
| Income before income taxes | $55.3 | $45.0 |
| Indemnification asset regarding tax audit | 0.1 | (0.1) |
| Adjustment for stock compensation | 2.1 | 1.9 |
| Adjustment to fair value of contingent consideration | 0.8 | — |
| Legacy cost of closed operations | 0.8 | 0.8 |
| Adjusted income before income taxes | $59.1 | $47.6 |
| Income taxes | $13.9 | $11.8 |
| Tax on stock compensation | (0.1) | — |
| Adjustment of income tax provision | 0.2 | 0.3 |
| Tax on adjustment to fair value of contingent consideration | 0.3 | — |
| Tax on legacy cost of closed operations | 0.2 | 0.2 |
| Adjusted income taxes | $14.5 | $12.3 |
| GAAP effective tax rate | 25.1% | 26.2% |
| Adjusted effective tax rate | 24.5% | 25.8% |

21

### LIQUIDITY AND FINANCIAL CONDITION

### Working Capital

In the first three months of 2024 our working capital increased by $33.8 million, while our adjusted working capital decreased by $21.6 million. The difference is primarily due to the exclusion of increases in our cash balances from the adjusted working capital.

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, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Total current assets | $912.9 | $885.7 |
| Total current liabilities | (364.9) | (371.5) |
| Working capital | 548.0 | 514.2 |
| Less cash and cash equivalents | (270.1) | (203.7) |
| Less prepaid income taxes | (4.4) | (2.8) |
| Less other current assets | (0.9) | (0.6) |
| Add back current portion of accrued income taxes | 12.2 | 2.6 |
| Add back current portion of unrecognized tax benefits | 4.5 | 1.2 |
| Add back current portion of plant closure provisions | 4.6 | 4.6 |
| Add back current portion of operating lease liabilities | 13.6 | 13.6 |
| Adjusted working capital | $307.5 | $329.1 |

We had a $41.6 million decrease in trade and other accounts receivable, driven primarily by the timing of trading activity in our Oilfield Services segment. Days’ sales outstanding decreased in our Performance Chemicals segment from 64 days to 61 days; increased from 55 days to 56 days in our Fuel Specialties segment; and decreased from 55 days to 48 days in our Oilfield Services segment.

We had a $4.2 million increase in inventories, including a $1.7 million decrease in allowances, primarily due to our continued approach of maintaining higher inventory levels in order to mitigate the risk of supply chain disruption for certain key raw materials, in particular for our Fuel Specialties segment. Days’ sales in inventory decreased in our Performance Chemicals segment from 62 days to 55 days; increased from 121 days to 133 days in our Fuel Specialties segment; and increased from 48 days to 55 days in our Oilfield Services segment.

Prepaid expenses decreased $3.7 million, from $18.7 million to $15.0 million, due to the normal expensing of prepaid invoices.

We had a $19.5 million decrease in accounts payable and accrued liabilities, due to the timing of production to align with customer demand in our Oilfield Services segment, and dependent on the timing of payments for each of our reporting segments. Creditor days (including goods received not invoiced) remained constant in our Performance Chemicals segment at 45 days; increased from 41 days to 45 days in our Fuel Specialties segment; and increased from 48 days to 51 days in our Oilfield Services segment.

### Operating Cash Flows

We generated cash from operating activities of $80.6 million in the first three months of 2024 compared to $21.8 million in the first three months of 2023. The increase in cash generated from operating activities was related to reductions in our working capital for the first three months of 2024, together with the changes for income tax payments and the contribution from higher profitability.

### Cash

At March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $270.1 million and $203.7 million, respectively, of which $72.6 million and $59.8 million, respectively, were held by non-U.S. subsidiaries principally in the United Kingdom.

The increase in cash and cash equivalents of $66.4 million for the first three months of 2024 was driven by the cash generated from operating activities together with decreased working capital requirements, being partly offset by our continued investments in capital projects.

### Debt

At March 31, 2024, and December 31, 2023, 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 2023 Annual Report on Form 10-K and there have been no significant changes since that time.

## Controls and procedures

As filed, 1,798 characters.

### Evaluation of Disclosure Controls and Procedures

On December 8, 2023, the Company acquired QGP Química Geral S.A. (“QGP”). As permitted by related SEC staff interpretive guidance for newly acquired businesses, management has excluded QGP from its assessment of the effectiveness of the Company’s internal control over financial reporting. We are currently in the process of implementing our internal control structure over the acquired operations and expect that this effort will be completed in 2024.

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, 2024, 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

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 2023 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 10, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-057487. Last ingested by Listed: Nov 3, 2026, 19:52 ET. No prices; not investment advice.