Innospec(IOSP) - 2019 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the company's condensed consolidated financial statements and management's discussion and analysis for the first quarter of 2019 Condensed Consolidated Financial Statements The company's Q1 2019 financial statements reflect increased net sales and income, asset growth due to new lease accounting, and improved operating cash flow Condensed Consolidated Statements of Income Q1 2019 saw a 7.6% increase in net sales and a 29.3% rise in net income year-over-year - For the three months ended March 31, 2019, the company reported a 7.6% increase in net sales and a 29.3% increase in net income compared to the same period in 2018 Diluted earnings per share rose to $1.17 from $0.90 year-over-year[13] Condensed Consolidated Statements of Income (Q1 2019 vs Q1 2018, in millions USD, except per share data) | (in millions USD, except per share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net sales | $388.3 | $360.7 | | Gross profit | 117.8 | 104.5 | | Operating income | 36.2 | 28.9 | | Net income | $28.7 | $22.2 | | Diluted EPS (USD) | $1.17 | $0.90 | Condensed Consolidated Statements of Comprehensive Income Total comprehensive income for Q1 2019 decreased due to a foreign currency translation loss - Total comprehensive income for Q1 2019 was $23.0 million, a decrease from $29.7 million in Q1 2018, primarily due to a $5.0 million loss from changes in cumulative translation adjustment[15] Condensed Consolidated Balance Sheets Total assets and equity increased as of March 31, 2019, partly due to the adoption of the new lease accounting standard - As of March 31, 2019, total assets increased to $1,526.6 million from $1,473.4 million at year-end 2018, partly due to the recognition of $37.4 million in Operating lease right-of-use assets[18] Condensed Consolidated Balance Sheet Highlights (in millions USD) | (in millions USD) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $123.5 | $123.1 | | Total current assets | $683.6 | $663.9 | | Total assets | $1,526.6 | $1,473.4 | | Total current liabilities | $300.0 | $296.6 | | Long-term debt, net of current portion | $186.3 | $186.2 | | Total liabilities | $677.7 | $647.9 | | Total equity | $848.9 | $825.5 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved in Q1 2019 due to better working capital management - Net cash provided by operating activities was $13.2 million in Q1 2019, a significant improvement from a $2.0 million use of cash in Q1 2018, mainly due to better working capital management[24] Condensed Consolidated Statements of Cash Flows (Q1 2019 vs Q1 2018, in millions USD) | (in millions USD) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $13.2 | $(2.0) | | Net cash used in investing activities | $(11.2) | $(4.6) | | Net cash used in financing activities | $(1.5) | $(5.8) | | Net change in cash and cash equivalents | $0.4 | $(12.1) | | Cash and cash equivalents at end of period | $123.5 | $78.1 | Notes To The Unaudited Interim Condensed Consolidated Financial Statements Notes detail the adoption of the new lease standard, segment reporting, tax benefits, and market risk management through derivatives - Effective January 1, 2019, the company adopted the new lease accounting standard (ASU 2016-02, ASC Topic 842), recognizing $37.4 million in right-of-use (ROU) assets and corresponding lease liabilities[32][34][35] - The company operates four reportable segments: Fuel Specialties, Performance Chemicals, Oilfield Services, and Octane Additives, with performance evaluated based on operating income[40] - In Q4 2018, the company recorded an unrecognized tax benefit of $10.8 million related to a potential adjustment from the Tax Cuts and Jobs Act[58] - The company uses foreign currency forward exchange contracts and interest rate swaps to manage market risks, resulting in a $0.2 million gain from foreign currency contracts and a $0.7 million loss from interest rate swaps in Q1 2019[68][69] Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2019 saw an 8% increase in net sales and a 25% rise in operating income, driven by strong Oilfield Services and Fuel Specialties performance Results of Operations Segment performance in Q1 2019 was strong in Oilfield Services and Fuel Specialties, while Performance Chemicals declined and Octane Additives had no sales Segment Performance (Q1 2019 vs Q1 2018, in millions USD) | (in millions USD) | Net Sales 2019 | Net Sales 2018 | % Change (%) | Operating Income 2019 | Operating Income 2018 | % Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Fuel Specialties | $156.0 | $143.4 | +9% | $32.9 | $28.2 | +17% | | Performance Chemicals | $118.1 | $124.0 | -5% | $13.5 | $12.1 | +12% | | Oilfield Services | $114.2 | $92.9 | +23% | $7.8 | $3.0 | +160% | | Octane Additives | $0.0 | $0.4 | -100% | $(2.8) | $(1.4) | -100% | | Total | $388.3 | $360.7 | +8% | $36.2 | $28.9 | +25% | - Fuel Specialties sales grew 9% YoY, driven by higher volumes in EMEA (+8%) and ASPAC (+52%) and favorable price/mix in the Americas (+4%) and EMEA (+7%)[93] - Performance Chemicals sales decreased 5% YoY due to negative foreign exchange impacts (-5%) and pricing pressure, though gross margin improved by 2.0 percentage points[95][96] - Oilfield Services sales surged 23% YoY, driven by increased customer activity, with a 6% volume increase and a 17% favorable price/product mix[98] - Octane Additives recorded no sales in the quarter and incurred a gross loss of $2.2 million due to fixed manufacturing costs[100][101] Liquidity and Financial Condition Working capital increased due to higher receivables, while operating cash flow improved significantly, and the company maintained a healthy cash and debt position - Adjusted working capital increased by $29.4 million to $309.8 million, primarily due to a $17.0 million increase in trade receivables from higher sales[109][110] - Operating cash flow was a source of $13.2 million in Q1 2019, compared to a use of $2.0 million in Q1 2018, benefiting from effective working capital control[113] - As of March 31, 2019, the company had cash and cash equivalents of $123.5 million and total debt outstanding of $211.1 million[114][115] Quantitative and Qualitative Disclosures about Market Risk The company's market risk profile remains consistent with 2018, managing interest rate, foreign currency, and commodity price risks with derivatives - The company is exposed to market risks from changes in interest rates, foreign currency exchange rates, and commodity prices[117] - Derivative instruments, including interest rate swaps, commodity swaps, and foreign currency forward contracts, are used to manage these risks and are not for trading purposes[118][119] - There have been no significant changes to the company's market risk exposure since the 2018 Form 10-K[121] Controls and Procedures Management confirmed effective disclosure controls as of March 31, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[122] - Internal controls were updated to evaluate the new lease standard's impact, but this did not result in significant changes to overall internal control over financial reporting[124] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and exhibits, noting no material changes or pending issues Legal Proceedings The company reports no material pending legal proceedings, only routine claims incidental to its business - There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party[126] Risk Factors No material changes to risk factors were reported since the 2018 Form 10-K, despite the extended Brexit deadline - The deadline for the U.K.'s exit from the E.U. was extended to October 31, 2019, but this has not changed the related risk factors disclosed in the 2018 Form 10-K[127] - Management confirms there have been no other material changes in the company's risk factors since the 2018 Form 10-K was filed[128] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, and no shares were repurchased under the program, though shares were bought for employee stock option exercises - No shares were repurchased under the $100 million share repurchase program announced in November 2018[129] - The company purchased 24,533 shares of its common stock at an average price of $78.75 per share in connection with employee stock option exercises[130][132] Exhibits This section lists the exhibits filed with the Form 10-Q, including XBRL documents and CEO/CFO certifications - Exhibits filed include the XBRL Instance Document and CEO/CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[136][138]