Innospec Inc.: Form 10-Q for the period ended Jun 30, 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)

16

Three Months Ended June 30, 2026

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended June 30, 2026, and the three months ended June 30, 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:

The Americas volumes were lower due to some supply constraints and reduced demand for our personal care products, offset by a favorable price and product mix due to pricing improvements. Volumes in EMEA were higher due to increased demand for our personal care products, combined with a favorable price and product mix, driven by higher demand for our higher priced products. ASPAC volumes were lower due to some supply constraints and decreased demand for certain products, being offset by a favorable price and product mix, driven by higher demand for our higher priced products. EMEA and ASPAC benefited from favorable foreign currency exchange rate movements.

Gross margin: the year over year decrease of 0.2 percentage points was primarily due to negative manufacturing variances due to lower production volumes in North America, as we continue to advance our plant repairs, process improvements and upgrades following severe weather conditions in the first quarter.

Operating expenses: the year over year increase of $0.4 million was primarily due to higher provisions for 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:

Sales volumes in the Americas increased year over year due to increased demand from customers, being partly offset by an adverse price and product mix. Sales volumes in EMEA increased year over year due to increased demand from customers, combining with a favorable price and product mix. Sales volumes in ASPAC decreased year over year due to decreased demand from customers, being offset by a favorable price and product mix. AvGas volumes were lower than the prior year due to variations in the demand from customers, combined with an adverse customer mix. All our regions benefited from favorable foreign currency exchange rate movements.

Gross margin: the year over year decrease of 1.5 percentage points was due to an adverse sales mix in the Americas from increased sales of lower margin products, being partly offset by sales in EMEA of higher margin products.

Operating expenses: the year over year increase of $4.2 million was primarily due to adverse movements to the provisions for doubtful debts, together with increased employee-related costs, including higher provisions for performance-related remuneration accruals.

Oilfield Services

Net sales: have increased year over year by $14.6 million, driven by our DRA plant expansion and associated demand. The majority of the segment's sales are concentrated in the Americas region.

Gross margin: the year over year increase of 2.7 percentage points was due to a favorable sales mix.

Operating expenses: the year over year increase of $5.0 million was primarily due to adverse movements to the provisions for doubtful debts, together with increased operating expenses and increased employee-related costs, including higher provisions for performance-related remuneration accruals.

Other Income Statement Captions

Corporate costs: the year over year increase of $0.7 million was primarily due to higher legal and compliance expenses, together with higher information technology costs including additional amortization for our new ERP system, and higher provisions for performance-related remuneration accruals, being partly offset by lower legacy costs of closed operations and a favorable revaluation for our U.K. emissions trading scheme credits.

Adjustment to fair value of contingent consideration: is an expense in the current year of $0.1 million compared to an expense in the prior year of $0.8 million. The adjustment relates to the acquisition of QGP within our Performance Chemicals segment. The year over year decrease relates to reduced accretion, due to the reduction in the overall expected payable compared to the prior year. See Note 10 of the Notes to the Condensed Consolidated Financial Statements for additional information.

Other net income/(expense): for the three months ended June 30, 2026 was $1.1 million income compared to a $4.7 million expense in the three months ended June 30, 2025, primarily driven by the revaluation of foreign currency forward contracts, and the foreign currency translation of non-USD balances in the group.

Interest income/(expense), net: in the three months ended June 30, 2026 was $0.8 million of income compared to $2.7 million of income in the three months ended June 30, 2025, driven by lower interest rates and lower cash balances in the current year.

Income taxes: the effective tax rate was 25.0% and 26.0% in the second quarter of 2026 and 2025, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 23.1% in 2026 compared with 23.3% in 2025. The 0.2% 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)

19

Six months ended June 30, 2026

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the six months ended June 30, 2026, and the six months ended June 30, 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:

The Americas volumes were lower due to some supply constraints and reduced demand for our personal care products, partly offset by a favorable price and product mix due to continuing pricing improvements. Volumes in EMEA were higher, being partly offset by an adverse price and product mix driven by higher demand for our lower priced products. ASPAC volumes were lower driven by some supply constraints and decreased demand for certain products, being partly 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 2.1 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 in the first quarter.

Operating expenses: the year over year increase of $2.6 million was primarily due to adverse movements to the provisions for doubtful debts, together with increased research and development expenses and higher provisions for performance-related remuneration accruals, being partly offset by reductions for other 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. The Americas and ASPAC were impacted by an adverse price and product mix due to higher sales of lower priced products. EMEA benefited from a favorable price and product mix due to higher sales of higher priced products. AvGas volumes were lower than the prior year due to variations in the demand from customers, being partly offset by a favorable customer mix. All our regions benefited from favorable foreign currency exchange rate movements.

Gross margin: the year over year decrease of 0.9 percentage points was due to an adverse sales mix in the Americas from increased sales of lower margin products, being partly offset by sales in EMEA of higher margin products.

Operating expenses: the year over year increase of $6.8 million was primarily due to adverse movements to the provisions for doubtful debts, together with increased operating expenses and increased employee-related costs, including higher provisions for performance-related remuneration accruals.

Oilfield Services

Net sales: have increased year over year by $14.7 million, driven by our DRA plant expansion and associated demand. The majority of the segment's sales are concentrated in the Americas region.

Gross margin: the year over year increase of 2.3 percentage points was due to a favorable sales mix.

Operating expenses: the year over year increase of $5.3 million was primarily due to adverse movements to the provisions for doubtful debts, together with increased operating expenses and increased employee-related costs, including higher provisions for performance-related remuneration accruals.

Other Income Statement Captions

Corporate costs: the year over year increase of $5.3 million was primarily due to higher legal and compliance expenses, together with higher information technology costs including additional amortization for our new ERP system, and higher provisions for performance-related remuneration accruals, being partly offset by lower legacy costs of closed operations and a favorable revaluation for our U.K. emissions trading scheme credits.

Adjustment to fair value of contingent consideration: is a credit in the current year of $4.6 million compared to an expense in the prior year of $1.5 million. The adjustment relates to the acquisition of QGP within our Performance Chemicals segment. The credit in the current year relates to a reduction in the expected payable, together with the lower accretion charge calculated on the lower expected payable. See Note 10 of the Notes to the Condensed Consolidated Financial Statements for additional information.

Other net income/(expense): for the six months ended June 30, 2026 was $3.7 million income compared to a $4.4 million expense in the three months ended June 30, 2025, primarily driven by the revaluation of foreign currency forward contracts, and the foreign currency translation of non-USD balances in the group.

Interest income/(expense), net: in the six months ended June 30, 2026 was $1.6 million of income compared to $5.1 million of income in the six months ended June 30, 2025, driven by lower interest rates and lower cash balances in the current year.

Income taxes: the effective tax rate was 23.9% and 25.8% in the first six months of 2026 and 2025, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 23.0% in 2026 compared with 23.7% in 2025. The 0.7% 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)

22

LIQUIDITY AND FINANCIAL CONDITION

Working Capital

In the six months ended June 30, 2026 our working capital increased by $12.1 million, while our adjusted working capital increased by $55.1 million. The difference is primarily due to the exclusion of the movements for cash and cash equivalents and the movements for income taxes, being partly offset by the other movements shown in the table below.

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 $66.3 million increase in trade and other accounts receivable, including a $3.6 million increase in allowances, which was primarily due to increased sales for all our segments. Days’ sales outstanding decreased in our Performance Chemicals segment from 72 days to 66 days; increased from 57 days to 62 days in our Fuel Specialties segment; and increased from 64 days to 80 days in our Oilfield Services segment.

We had a $8.0 million increase in inventories, including a $2.1 million increase in allowances, which was primarily driven by higher levels of finished goods for our Fuel Specialties segment due to the timing of production. 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 53 days; increased from 133 days to 144 days in our Fuel Specialties segment; and decreased from 83 days to 61 days in our Oilfield Services segment.

Prepaid expenses decreased $6.8 million, from $20.1 million to $13.3 million, primarily due to the cyclical expensing of prepaid invoices.

We had a $12.4 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) have decreased in our Performance Chemicals segment from 50 days to 49 days; decreased from 58 days to 54 days in our Fuel Specialties segment; and increased from 46 days to 59 days in our Oilfield Services segment.

Operating Cash Flows

We generated cash from operating activities of $24.8 million in the six months ended June 30, 2026 compared to $38.8 million in the six months ended June 30, 2025. The decrease in cash generated from operating activities compared to the prior year was primarily related to higher increases in working capital, being partly offset by the timing of income tax payments.

Cash

At June 30, 2026 and December 31, 2025, we had cash and cash equivalents of $250.2 million and $292.5 million, respectively, of which $131.4 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 $42.3 million for the six months ended June 30, 2026 was primarily driven by our continued investments in capital projects, payments for our new ERP system implementation, payment of our semi-annual dividend 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 June 30, 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 June 30, 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 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.