Innospec Inc.: Form 10-Q for the period ended Mar 31, 2026

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, goodwill, other intangible assets and property, plant and equipment. These policies have been discussed in the Company’s 2025 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)

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Three Months Ended March 31, 2026

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended March 31, 2026, and the three months ended March 31, 2025:

(in millions, except ratios)

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:

Volumes for the Americas were lower due to reduced demand for our personal care products, partly offset by a favorable price and product mix due to pricing improvements. Volumes in EMEA were lower, combined with an adverse price and product mix driven by higher demand for lower priced products. ASPAC volumes were lower driven by decreased demand for our personal care products, slightly offset by a favorable price and product mix. EMEA and ASPAC benefited from favorable foreign currency exchange rate movements.

Gross margin: the year over year decrease of 4.2 percentage points was primarily due to an adverse sales mix, together with the negative manufacturing variances in North America due to lower production volumes following severe weather conditions at the start of the quarter.

Operating expenses: the year over year increase of $2.2 million year over year was primarily due to adverse movements to the provisions for doubtful debts driven by our aged debtor accounting policy, together with increased research and development expenses.

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:

Sales volumes in all our regions increased year over year due to increased demand from customers. All our regions were impacted by an adverse price and product mix due to higher sales of lower priced products. AvGas volumes were lower than the prior year due to variations in the demand from customers, being offset by a favorable customer mix. EMEA and ASPAC benefited from favorable foreign currency exchange rate movements.

Gross margin: the year over year decrease of 0.3 percentage points was due to an adverse sales mix from increased sales of lower margin products.

Operating expenses: the year over year increase of $2.6 million was primarily due to adverse movements to the provisions for doubtful debts driven by our aged debtor accounting policy, together with increased administrative expenses.

Oilfield Services

Net sales: have increased year over year by $0.1 million. Sales in the Americas were higher year over year, being partly outweighed by lower sales in EMEA. The majority of our customer activity is concentrated in the Americas region.

Gross margin: the year over year increase of 1.7 percentage points was due to a favorable sales mix.

Operating expenses: the year over year increase of $0.3 million was primarily due to higher selling expenses.

Other Income Statement Captions

Corporate costs: the year over year increase of $4.6 million was primarily due to higher legacy costs of closed operations, an adverse revaluation for the U.K. emissions trading scheme carbon credits, higher legal and compliance expenses and additional amortization for the new ERP system.

Adjustment to fair value of contingent consideration: is a credit in the current year of $4.7 million compared to an expense in the prior year of $0.7 million. The adjustment relates to the acquisition of QGP within our Performance Chemicals segment. See Note 10 of the Notes to the Condensed Consolidated Financial Statements for additional information.

Other net income/(expense): for the three months ended March 31, 2026 and 2025, included the following:

(in millions)

Interest income/(expense), net: in the three months ended March 31, 2026 was $0.8 million of income compared to $2.4 million of income in the three months ended March 31, 2025, driven by lower interest rates and lower cash balances in the current year.

Income taxes: the effective tax rate was 22.8% and 25.7% in the first quarter of 2026 and 2025, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 22.9% in 2026 compared with 24.0% in 2025. The 1.1% 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)

20

LIQUIDITY AND FINANCIAL CONDITION

Working Capital

In the three months ended March 31, 2026 our working capital increased by $19.8 million, while our adjusted working capital increased by $20.1 million. The difference is primarily due to the exclusion of the movements for cash and cash equivalents together with the changes for taxes, being partly offset by the change in the value of acquisition-related contingent consideration.

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)

We had a $11.9 million increase in trade and other accounts receivable, including a $2.4 million increase in allowances, which was primarily due to increased sales for our Fuel Specialties and Oilfield Services segments. Days’ sales outstanding decreased in our Performance Chemicals segment from 72 days to 66 days; increased from 57 days to 59 days in our Fuel Specialties segment; and increased from 64 days to 68 days in our Oilfield Services segment.

We had a $7.8 million decrease in inventories, including a $1.0 million decrease in allowances, which was driven by lower levels of raw materials in our Performance Chemicals and Fuel Specialties segments. The Company continues to maintain inventory levels necessary to manage the risk of potential supply chain disruption for certain key raw materials, especially in our Fuel Specialties segment. Days’ sales in inventory in our Performance Chemicals segment decreased from 65 days to 58 days; decreased from 184 days to 132 days in our Fuel Specialties segment; and decreased from 83 days to 64 days in our Oilfield Services segment.

Prepaid expenses decreased $3.2 million, from $20.1 million to $16.9 million, primarily due to the cyclical expensing of prepaid invoices.

We had a $19.2 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) have decreased in our Performance Chemicals segment from 50 days to 47 days; decreased from 58 days to 52 days in our Fuel Specialties segment; and increased from 46 days to 47 days in our Oilfield Services segment. The changes for creditor days are impacted by the timing of sales and cost of sales in the quarter, when using a countback methodology.

Operating Cash Flows

We generated cash from operating activities of $17.6 million in the three months ended March 31, 2026 compared to $28.3 million in the three months ended March 31, 2025. The decrease in cash generated from operating activities was primarily related to decreased operating income after adjusting for the changes to the fair value of contingent consideration, together with the timing of income tax payments.

Cash

At March 31, 2026 and December 31, 2025, we had cash and cash equivalents of $289.1 million and $292.5 million, respectively, of which $120.6 million and $145.4 million, respectively, were held by non-U.S. subsidiaries principally in the United Kingdom.

The decrease in cash and cash equivalents of $3.4 million for the three months ended March 31, 2026 was primarily driven by our continued investments in capital projects, payments for our new ERP system implementation and the repurchases of our common stock, being partly offset by the cash generated from operating activities.

Debt

We continue to have available a $250.0 million multicurrency revolving credit facility.

At March 31, 2026, and December 31, 2025, we had no debt outstanding under the revolving credit facility and no obligations were outstanding under finance leases. See Note 8 of the Notes to the Condensed Consolidated Financial Statements for additional information.

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 2025 Form 10-K and there have been no significant changes since that time.

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, 2026, 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.

As previously disclosed, we have been developing a new information system platform which began in 2022. The new platform provider is well established in the market. The implementation has been a phased, risk-managed, site deployment following a multistage user acceptance program and the implementation is now substantially complete. In connection with this implementation, the Company has updated its internal controls over financial reporting, as necessary, to accommodate modifications to its business processes and accounting procedures.

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.

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 2025 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.