Innospec(IOSP) - 2020 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements The company presents its unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2020 Condensed Consolidated Statements of Income Net income and diluted EPS significantly decreased for the three and nine months ended September 30, 2020, due to lower sales Key Income Metrics | Metric (in millions, except per share) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $265.1 | $371.9 | -28.7% | $882.3 | $1,122.6 | -21.4% | | Gross profit | $78.7 | $119.1 | -33.9% | $251.7 | $348.0 | -27.7% | | Operating income | $16.8 | $38.2 | -56.0% | $4.3 | $106.1 | -95.9% | | Net income | $12.7 | $30.1 | -57.8% | $6.1 | $81.1 | -92.5% | | Diluted EPS | $0.51 | $1.22 | -58.1% | $0.25 | $3.28 | -92.4% | Condensed Consolidated Statements of Comprehensive Income Total comprehensive income increased for the third quarter but significantly decreased for the nine-month period Key Comprehensive Income Metrics | Metric (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net income | $12.7 | $30.1 | -57.8% | $6.1 | $81.1 | -92.5% | | Total other comprehensive income/(loss) | $12.1 | $(12.8) | +194.5% | $10.1 | $(16.1) | +162.7% | | Total comprehensive income | $24.8 | $17.3 | +43.4% | $16.2 | $65.0 | -75.1% | Condensed Consolidated Balance Sheets Total assets and liabilities decreased as of September 30, 2020, primarily due to lower current assets and debt reduction Key Balance Sheet Metrics | Metric (in millions) | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total current assets | $528.8 | $630.3 | -16.1% | | Total assets | $1,343.7 | $1,468.8 | -8.6% | | Total current liabilities | $229.8 | $303.5 | -24.3% | | Long-term debt | $0.0 | $58.6 | -100% | | Total liabilities and equity | $1,343.7 | $1,468.8 | -8.6% | | Total equity | $926.0 | $918.9 | +0.8% | Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased for the nine months ended September 30, 2020, alongside reduced financing activities Key Cash Flow Metrics | Metric (in millions) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $87.7 | $103.2 | -15.0% | | Net cash used in investing activities | $(21.7) | $(23.7) | -8.4% | | Net cash used in financing activities | $(74.8) | $(91.8) | -18.5% | | Net change in cash and cash equivalents | $(9.1) | $(12.8) | -28.9% | | Cash and cash equivalents at end of period | $66.6 | $110.3 | -39.6% | Condensed Consolidated Statements of Equity Total equity slightly increased as of September 30, 2020, driven by translation adjustments and stock compensation Key Equity Metrics | Metric (in millions) | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Innospec stockholders' equity | $925.5 | $918.5 | +0.8% | | Total equity | $926.0 | $918.9 | +0.8% | Notes To The Unaudited Interim Condensed Consolidated Financial Statements The notes detail accounting policies, segment performance, restructuring, impairments, and the impact of the COVID-19 pandemic NOTE 1 – BASIS OF PRESENTATION The interim statements follow GAAP and reflect the adoption of ASU No 2016-13 for credit losses without material impact - The company adopted ASU No 2016-13 (ASC Topic 326) for credit losses, effective January 1, 2020, with no material adjustment to opening retained earnings or the allowance for trade and other accounts receivable upon adoption[38][39] - Trade and other accounts receivable are shown net of a $4.7 million allowance at September 30, 2020, which remains immaterial to the financial statements[39] NOTE 2 – SEGMENT REPORTING The company reports on four segments, with the Octane Additives segment ceasing trading from July 1, 2020 - The Octane Additives segment ceased trading and is no longer a reporting segment from July 1, 2020, due to the end of manufacturing and sale of tetra ethyl lead (TEL) for motor gasoline[44] Three-Month Segment Performance | Segment (in millions) | Net Sales (3M Sep 2020) | Net Sales (3M Sep 2019) | Gross Profit (3M Sep 2020) | Gross Profit (3M Sep 2019) | Operating Income (3M Sep 2020) | Operating Income (3M Sep 2019) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Fuel Specialties | $120.0 | $144.1 | $40.3 | $54.1 | $22.2 | $31.1 | | Performance Chemicals | $102.0 | $99.9 | $24.0 | $22.6 | $12.4 | $9.3 | | Oilfield Services | $43.1 | $121.4 | $14.4 | $41.2 | $(4.5) | $10.0 | | Octane Additives | $0.0 | $6.5 | $0.0 | $1.2 | $0.0 | $0.8 | | Total | $265.1 | $371.9 | $78.7 | $119.1 | $16.8 | $38.2 | Nine-Month Segment Performance | Segment (in millions) | Net Sales (9M Sep 2020) | Net Sales (9M Sep 2019) | Gross Profit (9M Sep 2020) | Gross Profit (9M Sep 2019) | Operating Income (9M Sep 2020) | Operating Income (9M Sep 2019) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Fuel Specialties | $374.4 | $433.4 | $116.9 | $154.5 | $59.0 | $88.1 | | Performance Chemicals | $310.8 | $322.7 | $76.5 | $73.2 | $40.2 | $33.8 | | Oilfield Services | $197.1 | $358.1 | $60.5 | $120.4 | $(9.7) | $27.9 | | Octane Additives | $0.0 | $8.4 | $(2.2) | $(0.1) | $(2.8) | $(1.9) | | Total | $882.3 | $1,122.6 | $251.7 | $348.0 | $4.3 | $106.1 | NOTE 3 – EARNINGS PER SHARE Basic and diluted earnings per share significantly decreased for both reporting periods, reflecting lower net income - Anti-dilutive options excluded from diluted EPS calculation were 17,980 for the three months and 23,420 for the nine months ended Sep 30, 2020[46] EPS Calculation | Metric (in millions, except per share) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income available to common stockholders | $12.7 | $30.1 | $6.1 | $81.1 | | Weighted average common shares outstanding (in thousands) | 24,570 | 24,491 | 24,555 | 24,476 | | Diluted EPS | $0.51 | $1.22 | $0.25 | $3.28 | NOTE 4 – RESTRUCTURING A $21.1 million restructuring provision was recorded in Q2 2020 for the Octane Additives segment following the cessation of TEL manufacturing - A restructuring charge of $21.1 million was recorded in Q2 2020 for the Octane Additives segment due to the end of TEL production for motor gasoline[47] - Provisions include environmental monitoring ($2.0 million), facility remediation ($7.5 million), a loss-making contract ($7.2 million), tangible asset impairment ($2.0 million), and redundancy costs ($2.4 million)[48] NOTE 5 – GOODWILL Goodwill increased slightly to $367.2 million as of September 30, 2020, primarily due to exchange rate effects - The increase in goodwill was primarily due to a $4.2 million exchange effect[50] Goodwill Balance | Metric (in millions) | Jan 1, 2020 | Sep 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Net Book Amount | $363.0 | $367.2 | +1.2% | NOTE 6 – OTHER INTANGIBLE ASSETS Other intangible assets decreased significantly due to impairment charges in the Oilfield Services segment and amortization expense - Impairment of intangible assets totaling $19.8 million occurred in Q2 2020, specifically for technology ($10.0 million) and customer relationships ($9.8 million) within the Oilfield Services segment[51] - Amortization expense for the nine months ended September 30, 2020, was $16.3 million, a decrease from $17.2 million in the prior year[52] Other Intangible Assets Balance | Metric (in millions) | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Net Book Amount | $78.6 | $113.5 | -30.7% | NOTE 7 – PENSION AND POST EMPLOYMENT BENEFITS The company's UK defined benefit pension plan generated a net credit, while the German plan incurred a net charge - Net service cost for the UK plan was $0.9 million for the nine months ended September 30, 2020, recognized in SG&A expenses[55] - Post-employment benefit obligations in the Performance Chemicals segment's European businesses increased to $4.8 million at September 30, 2020[56] Net Pension Credit/(Charge) | Metric (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | UK Plan net pension credit/(charge) | $1.6 | $2.0 | $4.9 | $5.8 | | German Plan net pension charge | $(0.2) | $(0.2) | $(0.7) | $(0.4) | NOTE 8 – INCOME TAXES Unrecognized tax benefits totaled $15.5 million at September 30, 2020, including potential liabilities from audits and tax law changes - All $15.5 million of unrecognized tax benefits, interest, and penalties would impact the effective tax rate if recognized[58] - A $1.2 million unrecognized tax benefit (plus $0.2 million accrued interest) related to a historical impairment was released in Q2 2020[61] Unrecognized Tax Benefits | Metric (in millions) | Jan 1, 2020 | Sep 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Unrecognized Tax Benefits | $14.4 | $13.3 | -7.6% | | Interest and Penalties | $2.0 | $2.2 | +10.0% | | Total | $16.4 | $15.5 | -5.5% | NOTE 9 – LONG-TERM DEBT The company had no outstanding debt under its revolving credit facility as of September 30, 2020, after extending the facility to 2024 - The revolving credit facility was extended until September 25, 2024, with $0.3 million in capitalization costs[63] Long-Term Debt Balance | Metric (in millions) | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Revolving credit facility | $0.0 | $60.0 | -100% | | Total Long-term debt | $0.0 | $58.6 | -100% | NOTE 10 – PLANT CLOSURE PROVISIONS Plant closure provisions increased to $57.9 million, including an additional $7.5 million for the Octane Additives segment restructuring - The charge for the nine months ended September 30, 2020, was $11.0 million, including $7.5 million for Octane Additives restructuring[67] Plant Closure Provisions | Metric (in millions) | Jan 1, 2020 | Sep 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Total Provisions | $49.3 | $57.9 | +17.4% | | Due within one year | | $(5.2) | | | Due after one year | | $52.7 | | NOTE 11 – FAIR VALUE MEASUREMENTS The company's financial assets and liabilities are measured at fair value, with most carrying amounts approximating fair value Fair Value of Financial Instruments | Asset/Liability (in millions) | Sep 30, 2020 Carrying Amount | Sep 30, 2020 Fair Value | Dec 31, 2019 Carrying Amount | Dec 31, 2019 Fair Value | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $66.6 | $66.6 | $75.7 | $75.7 | | Foreign currency forward exchange contracts | $0.2 | $0.2 | $0.8 | $0.8 | | Long-term debt | $0.0 | $0.0 | $58.6 | $58.6 | | Finance leases | $0.6 | $0.6 | $1.5 | $1.5 | | Stock equivalent units | $12.3 | $12.3 | $24.6 | $24.6 | NOTE 12 – DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT The company uses foreign currency forward exchange contracts to manage currency exposure, resulting in a gain in the first nine months of 2020 - Foreign currency forward exchange contracts, not designated as hedging instruments, resulted in a gain of $0.7 million for the first nine months of 2020[73] - The Company did not hold any interest rate swaps as of September 30, 2020[74] NOTE 13 – COMMITMENTS AND CONTINGENCIES The company reports no material pending legal proceedings, while contingent liabilities for guarantees increased - There are no material pending legal proceedings to which the Company or its subsidiaries are a party[75] - Contingent liabilities for guarantees of affiliated companies' obligations totaled $9.6 million at September 30, 2020, up from $4.7 million at December 31, 2019[76] NOTE 14 – STOCK-BASED COMPENSATION PLANS Stock option compensation cost was $4.4 million, while stock equivalent unit compensation resulted in a credit due to revaluation - Stock option compensation cost for the first nine months of 2020 was $4.4 million, down from $4.9 million in 2019[82] - SEU compensation for the first nine months of 2020 was a $4.9 million credit, compared to a $14.0 million charge in 2019, influenced by share price and performance criteria revaluation[85] Stock Option Activity | Stock Option Metric | Dec 31, 2019 | Sep 30, 2020 | | :--- | :--- | :--- | | Options Outstanding | 504,459 | 466,440 | | Weighted Average Exercise Price | $33.05 | $34.04 | | Weighted Average Grant-Date Fair Value | $41.35 | $44.27 | NOTE 15 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS Reclassifications out of accumulated other comprehensive loss totaled $0.6 million, primarily from defined benefit pension plan items Reclassifications from AOCL | AOCL Component (in millions) | Amount Reclassified from AOCL (9M 2020) | | :--- | :--- | | Amortization of prior service credit | $(0.6) | | Amortization of actuarial net losses | $1.2 | | Total before tax | $0.6 | AOCL Balance | AOCL Balance (in millions) | Dec 31, 2019 | Sep 30, 2020 | | :--- | :--- | :--- | | Total | $(74.4) | $(64.3) | NOTE 16 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The company is evaluating ASU No 2019-12 and does not expect a material impact on its disclosures - The Company is evaluating ASU No 2019-12, 'Simplifying the Accounting for Income Taxes,' effective for fiscal years beginning after December 15, 2020, with no material impact on disclosures expected[89] NOTE 17 – RELATED PARTY TRANSACTIONS Related party transactions included product purchases, legal fees, and scrap metal sales totaling $1.0 million - Purchased $0.2 million of product from AdvanSix in the first nine months of 2020[90] - Incurred $0.6 million in legal fees from Smith, Gambrell & Russell, LLP in the first nine months of 2020[91] - Sold $0.2 million of scrap metal to European Metal Recycling Limited in the first nine months of 2020[92] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September 30, 2020 The company discusses financial performance, highlighting the adverse impact of COVID-19 on key segments and liquidity changes Critical Accounting Estimates Key estimates involve environmental liabilities, pensions, income taxes, goodwill, and other intangible assets - Critical accounting estimates include environmental liabilities, pensions, income taxes, goodwill, and property, plant and equipment and other intangible assets[95] Impact of COVID-19 Pandemic and Current Economic Environment The pandemic adversely impacted Fuel Specialties and Oilfield Services, while Performance Chemicals showed resilience - Fuel Specialties was impacted by reduced demand from lower freight transport and passenger miles, with some recovery in Q3 but not to pre-COVID levels[96] - Performance Chemicals experienced little overall impact, with increased demand for health, hygiene, and cleaning products offsetting some lost revenues[96] - Oilfield Services was heavily impacted by reduced oil exploration and production due to lower demand and low oil prices[96] - The company's financial position remains strong with sufficient capital access, including a $250 million revolving credit facility extended to September 2024[98] Results of Operations Operating income significantly decreased for both the three and nine-month periods due to segment declines and one-off charges Overall Performance Summary | Metric (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Net sales | $265.1 | $371.9 | -28.7% | $882.3 | $1,122.6 | -21.4% | | Total Gross profit | $78.7 | $119.1 | -33.9% | $251.7 | $348.0 | -27.7% | | Total Operating income | $16.8 | $38.2 | -56.0% | $4.3 | $106.1 | -95.9% | Three Months Ended September 30, 2020 Third-quarter net sales and gross profit declined by 29% and 34% respectively, driven by Oilfield Services and Fuel Specialties Net Sales by Segment | Segment (in millions) | Net Sales (2020) | Net Sales (2019) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Fuel Specialties | $120.0 | $144.1 | $(24.1) | -17% | | Performance Chemicals | $102.0 | $99.9 | $2.1 | +2% | | Oilfield Services | $43.1 | $121.4 | $(78.3) | -64% | | Octane Additives | $0.0 | $6.5 | $(6.5) | -100% | | Total | $265.1 | $371.9 | $(106.8) | -29% | Gross Margin by Segment | Segment Gross Margin (%) | 2020 | 2019 | Change (pp) | | :--- | :--- | :--- | :--- | | Fuel Specialties | 33.6 | 37.5 | -3.9 | | Performance Chemicals | 23.5 | 22.6 | +0.9 | | Oilfield Services | 33.4 | 33.9 | -0.5 | | Aggregate | 29.7 | 32.0 | -2.3 | Nine Months Ended September 30, 2020 Nine-month net sales and gross profit fell 21% and 28% respectively, led by declines in Oilfield Services and Fuel Specialties - Restructuring charge of $21.1 million and impairment of intangible assets of $19.8 million significantly impacted operating expenses for the nine months ended September 30, 2020[136] Net Sales by Segment | Segment (in millions) | Net Sales (2020) | Net Sales (2019) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Fuel Specialties | $374.4 | $433.4 | $(59.0) | -14% | | Performance Chemicals | $310.8 | $322.7 | $(11.9) | -4% | | Oilfield Services | $197.1 | $358.1 | $(161.0) | -45% | | Octane Additives | $0.0 | $8.4 | $(8.4) | -100% | | Total | $882.3 | $1,122.6 | $(240.3) | -21% | Gross Margin by Segment | Segment Gross Margin (%) | 2020 | 2019 | Change (pp) | | :--- | :--- | :--- | :--- | | Fuel Specialties | 31.2 | 35.6 | -4.4 | | Performance Chemicals | 24.6 | 22.7 | +1.9 | | Oilfield Services | 30.7 | 33.6 | -2.9 | | Aggregate | 28.5 | 31.0 | -2.5 | Liquidity and Financial Condition Working capital and operating cash flow decreased, while the company fully repaid its revolving credit facility - Net cash provided by operating activities decreased to $87.7 million in the first nine months of 2020 from $103.2 million in 2019[148] - The Company repaid all $60.0 million of its revolving credit facility borrowings, resulting in $0.0 million debt outstanding as of September 30, 2020[149][150] Key Liquidity Metrics | Metric (in millions) | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Working capital | $299.0 | $326.8 | -8.6% | | Adjusted working capital | $246.4 | $275.3 | -10.6% | | Trade and other accounts receivable | $206.2 | $292.0 | -29.4% | | Accounts payable and accrued liabilities | $207.5 | $276.0 | -24.8% | Item 3 Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from debt, foreign operations, and currency rates, which it manages with derivatives - The Company uses floating rate debt and is exposed to risks from non-U.S. activities, interest rates, and foreign currency exchange rates[153] - Derivatives (foreign currency forward exchange contracts, commodity swaps) are used as risk management tools to manage market risks and reduce volatility, not for trading[154][155] - There were no significant changes in market risk exposure since the 2019 Annual Report on Form 10-K[156] Item 4 Controls and Procedures Disclosure controls and procedures were deemed effective as of September 30, 2020, with no material changes to internal controls - Disclosure controls and procedures were effective as of September 30, 2020[157] - No material changes to internal control over financial reporting were identified[159] PART II OTHER INFORMATION Item 1 Legal Proceedings The company reports no material pending legal proceedings but acknowledges risks from the aggregation of smaller claims - There are no material pending legal proceedings to which the Company or its subsidiaries are a party[160] Item 1A Risk Factors Risk factors are materially unchanged, except for an updated emphasis on the adverse and uncertain impact of the COVID-19 pandemic - There are no material changes in risk factors since the 2019 Form 10-K, other than an updated risk factor regarding the COVID-19 pandemic[161] - The COVID-19 pandemic has had, and is expected to continue to have, an adverse impact on business, results of operations, financial position, and cash flows[162] - The extent of the pandemic's impact is highly uncertain and depends on factors like duration, government restrictions, and customer demand[162] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or stock repurchases occurred during the third quarter of 2020 - No unregistered sales of equity securities occurred[164] - No open market repurchases of common stock were made during the quarter ended September 30, 2020[165] Item 3 Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[166] Item 4 Mine Safety Disclosures This item is not applicable to the company - Not applicable[167] Item 5 Other Information No other information was reported under this item - No other information[168] Item 6 Exhibits This section lists exhibits filed with the Form 10-Q, including certifications, credit agreements, and XBRL data - Exhibits include the Extension Request for Multicurrency Revolving Facility Agreement and Confirmation, CEO and CFO certifications, and XBRL documents[170]