# Innospec Inc.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Innospec Inc.](/companies/iosp.md) (CIK 1054905)
- Form: 10-Q
- Filed: 2022-11-09
- Accepted by EDGAR: Nov 9, 2022, 12:32 ET
- Period: 2022-09-30
- Accession: 0001193125-22-280942
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1054905/000119312522280942/d411458d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1054905/000119312522280942/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $513.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $1.45bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $357.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $1.02bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $156.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $435.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-07-01 to 2022-09-30 | $10.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-01-01 to 2022-09-30 | $30.3m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $95.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $264.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $50.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $140.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $10.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $31.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $38.7m | us-gaap:ProfitLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $107.5m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $1.55 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $4.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $1.56 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $4.34 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 24,965,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 24,976,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $3.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2022-01-01 to 2022-09-30 | $15.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $5.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $100.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $846.4m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $1.67bn | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $381.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $577.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $1.09bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 23,290 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) 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:

*(in millions)*

| Net sales: | Three months ended September 30 2022 | 2021 | Nine months ended September 30 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| 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

### 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:

*(in millions, except ratios)*

| Net sales: | Three months ended September 30 2022 | 2021 | Change |  |
| --- | ---: | ---: | ---: | --- |
| 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% |
|  | $513.0 | $376.1 | $136.9 | +36% |
| **Gross profit:** |  |  |  |  |
| Performance Chemicals | $39.1 | $32.6 | $6.5 | +20% |
| Fuel Specialties | 53.4 | 49.1 | 4.3 | +9% |
| Oilfield Services | 63.5 | 31.2 | 32.3 | +104% |
|  | $156.0 | $112.9 | $43.1 | +38% |
| **Gross margin (%):** |  |  |  |  |
| Performance Chemicals | 24.5 | 24.5 | +0.0% |  |
| Fuel Specialties | 29.9 | 31.4 | -1.5% |  |
| Oilfield Services | 36.4 | 35.9 | +0.5% |  |
| **Aggregate** | **30.4** | **30.0** | **+0.4%** |  |
| **Operating expenses:** |  |  |  |  |
| Performance Chemicals | $(13.7) | $(14.8) | $1.1 | -7% |
| Fuel Specialties | (25.5) | (22.5) | (3.0) | +13% |
| Oilfield Services | (49.3) | (28.5) | (20.8) | +73% |
| Corporate costs | (17.4) | (15.7) | (1.7) | +11% |
|  | $(105.9) | $(81.5) | $(24.4) | +30% |

22

### 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 September 30, 2022 Americas | EMEA | ASPAC | Total |
| --- | --- | ---: | ---: | --- |
| Volume | +22 | -13 | +55 | +4 |
| Price and product mix | +23 | +32 | -14 | +26 |
| Exchange rates | — | -16 | -10 | -10 |
|  | +45 | +3 | +31 | +20 |

Higher sales volumes for the Americas and ASPAC were primarily driven by increased demand for our personal care products. Lower sales volumes for EMEA were due to reductions in demand for our Home Care products when compared to the strong sales volumes in the prior year. The Americas and EMEA benefitted 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. ASPAC was 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 weakening of the British pound sterling and the European Union euro against the U.S. dollar.

*Gross margin:* was unchanged year over year, primarily due to a favorable sales mix from increased sales of higher margin products being offset by higher raw material costs.

*Operating expenses:* decreased $1.1 million year over year, primarily due to lower provisions for doubtful debts and lower acquired intangibles amortization, partly offset by higher performance-related remuneration accruals.

### 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 September 30, 2022 Americas | EMEA | ASPAC | AvGas | Total |
| --- | ---: | ---: | --- | ---: | ---: |
| Volume | -11 | -13 | +16 | +32 | -6 |
| Price and product mix | +33 | +34 | +32 | -16 | +30 |
| Exchange rates | — | -21 | -6 | — | -10 |
|  | +22 | — | +42 | +16 | +14 |

Sales volumes in the Americas and EMEA have decreased year over year as the global demand for refined fuel products has stabilised following the post COVID-19 pandemic increases in the prior year. ASPAC sales volumes were higher year over year, primarily due to variations in the timing of demand. 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 higher than the prior year due to variations in the demand from customers, being partly offset by an adverse price and product mix with a higher proportion of sales to lower margin customers. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.

*Gross margin*: the year over year decrease of 1.5 percentage points was due to the impact of the time lag for passing higher raw material costs through to selling prices, together with higher manufacturing costs linked to increased energy prices.

*Operating expenses:* the year over year increase of $3.0 million was due to higher selling expenses to support the increased sales, including higher provisions for doubtful debts, together with higher performance-related remuneration accruals.

### Oilfield Services

*Net sales:* have increased year over year by $87.7 million, or 101 percent, with the majority of our customer activity concentrated in the Americas region. Customer demand has increased in the third quarter of 2022 which we expect will continue to drive further sales growth into 2023.

*Gross margin:* the year over year increase of 0.5 percentage points was due to a favorable sales mix, while management continue to maintain prices in a competitive market.

*Operating expenses:* the year over year increase of $20.8 million was driven by higher customer service costs which are necessary to support the increase in demand, together with increased provisions for doubtful debts and higher performance-related remuneration accruals.

### Other Income Statement Captions

*Corporate costs:* the year over year increase of $1.7 million was primarily due to higher performance-related remuneration accruals.

*Other net income/(expense):* for the third quarter of 2022 and 2021, included the following:

*(in millions)*

|  | 2022 | 2021 | Change |
| --- | ---: | ---: | ---: |
| Net pension credit | $1.2 | $1.3 | $(0.1) |
| Foreign exchange gains/(losses) on translation | (6.2) | (2.2) | (4.0) |
| Foreign currency forward contracts gains/(losses) | 4.1 | 0.7 | 3.4 |
|  | $(0.9) | $(0.2) | $(0.7) |

*Interest expense, net:* was $0.3 million in the third quarter of 2022 compared to $0.4 million in the third quarter of 2021. Interest expense includes a commitment fee to retain the Company’s revolving credit facility for the term of the agreement.

*Income taxes:* the effective tax rate was 20.9% and 24.0% in the third quarter of 2022 and 2021, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 20.1% in 2022 compared with 22.3% in 2021. The 2.2% percentage point decrease in the adjusted effective rate was primarily due to the fact that a lower 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 September 30 2022 | 2021 |
| --- | ---: | ---: |
| Income before income taxes | $48.9 | $30.8 |
| Indemnification asset regarding tax audit | 0.2 | 0.1 |
| Adjustment for stock compensation | 1.5 | 1.6 |
| Legacy costs of closed operations | 0.7 | 1.1 |
|  | $51.3 | $33.6 |
| Income taxes | $10.2 | $7.4 |
| Adjustment of income tax provision | — | (0.1) |
| Tax on legacy cost of closed operations | 0.1 | 0.2 |
| Adjusted income taxes | $10.3 | $7.5 |
| GAAP effective tax rate | 20.9% | 24.0% |
| Adjusted effective tax rate | 20.1% | 22.3% |

25

### Nine Months Ended September 30 , 2022

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

*(in millions, except ratios)*

| Net sales: | Nine months ended September 30 2022 | 2021 | Change |  |
| --- | ---: | ---: | ---: | --- |
| Performance Chemicals | $495.8 | $386.9 | $108.9 | +28% |
| Fuel Specialties | 546.9 | 438.8 | 108.1 | +25% |
| Oilfield Services | 410.3 | 244.5 | 165.8 | +68% |
|  | $1,453.0 | $1,070.2 | $382.8 | +36% |
| **Gross profit:** |  |  |  |  |
| Performance Chemicals | $123.5 | $95.6 | $27.9 | +29% |
| Fuel Specialties | 171.0 | 144.1 | 26.9 | +19% |
| Oilfield Services | 140.6 | 82.3 | 58.3 | +71% |
|  | $435.1 | $322.0 | $113.1 | +35% |
| **Gross margin (%):** |  |  |  |  |
| Performance Chemicals | 24.9 | 24.7 | +0.2% |  |
| Fuel Specialties | 31.3 | 32.8 | -1.5% |  |
| Oilfield Services | 34.3 | 33.7 | +0.6% |  |
| **Aggregate** | **29.9** | **30.1** | **-0.2%** |  |
| **Operating expenses:** |  |  |  |  |
| Performance Chemicals | $(44.0) | $(41.6) | $(2.4) | +6% |
| Fuel Specialties | (76.1) | (65.2) | (10.9) | +17% |
| Oilfield Services | (119.4) | (76.2) | (43.2) | +57% |
| Corporate costs | (54.9) | (42.4) | (12.5) | +29% |
|  | $(294.4) | $(225.4) | $(69.0) | +31% |

26

### 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 (%) | Nine months ended September 30, 2022 Americas | EMEA | ASPAC | Total |
| --- | --- | ---: | --- | --- |
| Volume | +29 | -10 | +4 | +5 |
| Price and product mix | +26 | +35 | +20 | +31 |
| Exchange rates | — | -13 | -7 | -8 |
|  | +55 | +12 | +17 | +28 |

Higher sales volumes for the Americas and ASPAC were primarily driven by increased demand for our personal care products. Lower sales volumes for EMEA were due to reductions in demand for our Home Care products when compared to the strong sales volumes in the prior year. All our regions benefitted 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. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.

*Gross margin:* the year over year increase of 0.2 percentage points was primarily due to a favorable sales mix from increased sales of higher margin products.

*Operating expenses:* the year over year increase of $2.4 million was due to higher selling expenses to support our increased sales, higher research and development costs and higher personnel-related expenses, including higher share-based compensation accruals and higher performance-related remuneration accruals; partly offset by lower provisions for doubtful debts.

### 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 (%) | Nine months ended September 30, 2022 Americas | EMEA | ASPAC | AvGas | Total |
| --- | --- | ---: | --- | ---: | --- |
| Volume | +16 | -5 | +16 | +16 | +7 |
| Price and product mix | +32 | +32 | +16 | -19 | +26 |
| Exchange rates | — | -17 | -4 | — | -8 |
|  | +48 | +10 | +28 | -3 | +25 |

The Americas and ASPAC sales volumes have increased year over year as the global demand for refined fuel products has increased. EMEA sales volumes were lower year over year due to the timing of demand from customers. 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 higher than the prior year due to variations in the demand from customers, being offset by an adverse price and product mix with a higher proportion of sales being made to lower margin customers. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.

*Gross margin*: the year over year decrease of 1.5 percentage points was due to the impact of the time lag for passing higher raw material costs through to selling prices, together with higher manufacturing costs linked to increased energy prices.

*Operating expenses:* the year over year increase of $10.9 million was due to higher selling expenses driven by increased sales volumes, including higher provisions for doubtful debts, together with higher research and development costs and higher personnel-related expenses, including higher share-based compensation accruals and higher performance-related remuneration accruals.

### Oilfield Services

*Net sales:* have increased year over year by $165.8 million, or 68 percent, with the majority of our customer activity being concentrated in the Americas region. Customer demand has increased each quarter in 2022, which we believe represents a positive sign for further sales growth for the remainder of 2022 and into 2023.

*Gross margin:* the year over year increase of 0.6 percentage points was due to a favorable sales mix, while management continue to maintain prices in a competitive market.

*Operating expenses:* the year over year increase of $43.2 million was driven by higher customer service costs which are necessary to support the increase in demand, together with higher personnel-related expenses, including higher share-based compensation accruals and higher performance-related remuneration accruals, and increased provisions for doubtful debts.

### Other Income Statement Captions

*Corporate costs:* the year over year increase of $12.5 million was driven by higher personnel-related expenses, including higher share-based compensation accruals and higher performance-related remuneration accruals, together with increased maintenance expenditure for our information technology infrastructure.

*Other net income/(expense):* for the first nine months of 2022 and 2021, included the following:

*(in millions)*

|  | 2022 | 2021 | Change |
| --- | ---: | ---: | ---: |
| Net pension credit | $3.7 | $3.9 | $(0.2) |
| Profit on disposal of assets | — | 0.2 | (0.2) |
| Foreign exchange gains/(losses) on translation | (10.4) | 1.2 | (11.6) |
| Foreign currency forward contracts gains/(losses) | 6.5 | 0.9 | 5.6 |
|  | $(0.2) | $6.2 | $(6.4) |

*Interest expense, net:* was $1.1 million in the first nine months of 2022 compared to $1.1 million in the first nine months of 2021. Interest expense includes a commitment fee to retain the Company’s revolving credit facility for the term of the agreement.

*Income taxes:* the effective tax rate was 22.9% and 32.0% in the first nine months of 2022 and 2021, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 22.4% in the first nine months of 2022 compared with 23.3% in the first nine months of 2021. The 0.9% percentage point decrease in the adjusted effective rate was primarily due to the fact that a lower 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)*

|  | Nine months ended September 30 2022 | 2021 |
| --- | ---: | ---: |
| Income before income taxes | $139.4 | $101.7 |
| Indemnification asset regarding tax audit | 0.4 | 0.1 |
| Adjustment for stock compensation | 4.7 | 4.2 |
| Acquisition costs | — | 0.8 |
| Legacy cost of closed operations | 2.6 | 2.9 |
|  | $147.1 | $109.7 |
| Income taxes | $31.9 | $32.5 |
| Tax on stock compensation | 0.5 | 0.3 |
| Adjustment of income tax provision | — | (0.4) |
| Tax on acquisition costs | — | 0.2 |
| Tax on legacy cost of closed operations | 0.5 | 0.6 |
| Tax on foreign exchange on distribution | — | (0.2) |
| Change in UK statutory tax rate | — | (7.4) |
| Adjusted income taxes | $32.9 | $25.6 |
| GAAP effective tax rate | 22.9% | 32.0% |
| Adjusted effective tax rate | 22.4% | 23.3% |

29

### LIQUIDITY AND FINANCIAL CONDITION

### Working Capital

In the first nine months of 2022 our working capital increased by $73.5 million, while our adjusted working capital increased by $119.3 million. The difference is primarily due to the exclusion of the decrease in our cash and cash equivalents and the exclusion of movements for income taxes prepaid and due within one year.

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)*

|  | September 30, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| Total current assets | $846.4 | $728.1 |
| Total current liabilities | (381.4) | (336.6) |
| Working capital | 465.0 | 391.5 |
| Less cash and cash equivalents | (100.5) | (141.8) |
| Less prepaid income taxes | (13.8) | (5.8) |
| Less other current assets | (0.4) | (0.4) |
| Add back current portion of accrued income taxes | 14.7 | 3.7 |
| Add back finance leases | — | 0.1 |
| Add back current portion of plant closure provisions | 5.6 | 5.2 |
| Add back current portion of operating lease liabilities | 13.6 | 12.4 |
| Adjusted working capital | $384.2 | $264.9 |

We had a $58.0 million increase in trade and other accounts receivable driven by increased trading activity across all our reporting segments. Days’ sales outstanding decreased in our Performance Chemicals segment from 64 days to 57 days; increased from 53 days to 58 days in our Fuel Specialties segment; and increased from 52 days to 57 days in our Oilfield Services segment.

We had a $104.2 million increase in inventories, net of a $0.1 million increase in allowances, in anticipation of further increases in demand in 2022, while managing 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 59 days to 76 days; increased from 108 days to 151 days in our Fuel Specialties segment; and decreased from 76 days to 58 days in our Oilfield Services segment.

Prepaid expenses decreased $10.6 million, from $18.0 million to $7.4 million due to the normal expensing of prepaid invoices.

We had a $32.3 million increase 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 47 days to 44 days; decreased from 50 days to 46 days in our Fuel Specialties segment; and increased from 48 days to 52 days in our Oilfield Services segment.

### Operating Cash Flows

We generated cash from operating activities of $3.3 million in the first nine months of 2022 compared to cash generated of $24.4 million in the first nine months of 2021. The reduction in cash generated from operating activities was principally related to the increase in working capital required to support the growth in sales and secure the supply of raw materials.

### Cash

At September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $100.5 million and $141.8 million, respectively, of which $42.9 million and $55.1 million, respectively, were held by non-U.S. subsidiaries principally in the United Kingdom.

The decrease in cash and cash equivalents of $41.3 million for the first nine months of 2022 was driven by our increased working capital levels to support sales growth, together with our continued investments in capital projects, share repurchases and the payment of our semi-annual dividend.

### Debt

At September 30, 2022, we had no debt outstanding under the revolving credit facility and $0.0 million of obligations under finance leases relating to certain fixed assets within our Oilfield Services segment.

At December 31, 2021, we had no debt outstanding under the revolving credit facility and $0.1 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments.

## Market risk

As filed, 2,100 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 2021 Annual Report on Form 10-K and there have been no significant changes since that time.

## Controls and procedures

As filed, 1,580 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 September 30, 2022, 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, 411 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 2021 Form 10-K and in Item 1A of Part II of our Form 10-Q for the quarter ended March 31, 2022. In management’s view, there have been no material changes in the risk factors facing the Company as disclosed in those SEC filings.

Filed Nov 9, 2022.
Source: SEC EDGAR, the filing index for accession 0001193125-22-280942. Last ingested by Listed: Nov 4, 2026, 09:32 ET. No prices; not investment advice.