Innospec(IOSP) - 2020 Q4 - Annual Report

Part I Business Innospec develops and supplies specialty chemicals across three core segments, focusing on organic growth and strategic acquisitions, with its Octane Additives segment ceasing operations in 2020 * Innospec develops, manufactures, and supplies specialty chemicals for three main business segments: Fuel Specialties, Performance Chemicals, and Oilfield Services, with the Octane Additives segment ceasing trading on June 30, 2020[10][11][13] * The company's strategy focuses on developing new products and technologies to grow its three active segments, actively pursuing strategic acquisitions and partnerships[23] * Key raw materials include oleochemicals and ethylene, with ethylene for German operations being a single-source supply for products representing approximately 4% of total sales[27][28] Research & Development Expenditures (2018-2020) | Year | Expenditure (in millions) | | :--- | :--- | | 2020 | $30.9 | | 2019 | $35.4 | | 2018 | $33.4 | * The company is subject to significant environmental regulations, including REACH in the E.U. and U.K. REACH, requiring substance registration and increasing expenses[45][46] * As of December 31, 2020, the company had approximately 1,900 employees across 24 countries[48] Risk Factors The company faces significant risks from global conditions, including the COVID-19 pandemic, Brexit, volatile oil prices, and operational challenges, alongside regulatory compliance and financial market fluctuations * The COVID-19 pandemic has adversely impacted business, particularly reducing demand in the Fuel Specialties and Oilfield Services segments[55] * Brexit has created trade barriers and uncertainties, potentially disrupting supply chains and adversely affecting economic conditions[58][59] * The Octane Additives business for motor gasoline has ceased, and the development of a lead-free replacement fuel for AvTel poses a significant future risk[74][75][76] * Demand for Oilfield Services products is highly sensitive to volatile oil and gas prices affecting customer exploration and production activities[78] * The company's revolving credit facility contains restrictive covenants, including financial ratios, which if breached, could lead to default and debt acceleration[110][111][112] * Environmental liabilities, particularly for the Ellesmere Port site, and compliance with complex regulations like U.K. REACH, could impose substantial costs[91][94][96] Unresolved Staff Comments The company reports that there are no unresolved staff comments * None[113] Properties The company's principal properties, including headquarters and manufacturing facilities in the U.S., U.K., Germany, and France, are believed to have sufficient capacity to meet current sales levels * The company's principal properties include corporate headquarters in Englewood, Colorado, and major facilities in the U.S., U.K., Germany, and France[114] * Management believes current plant capacity and supply agreements are sufficient to meet sales levels[116] Legal Proceedings The company is not a party to any material pending legal proceedings, though incidental claims could collectively have a material adverse effect * There are no material pending legal proceedings to which the Company or its subsidiaries are a party[117] Mine Safety Disclosures This item is not applicable to the company * Not applicable[118] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Innospec's common stock trades on NASDAQ under 'IOSP', with no repurchases in 2020, and its five-year cumulative return underperformed major indices except the Russell 2000 * The Company's common stock is listed on NASDAQ under the symbol 'IOSP'[119] * No open market repurchases of common stock were made during 2020 under the $100 million share repurchase program[121] Stock Performance Comparison (Value of $100 Investment) | Index | 2015 | 2020 | | :--- | :--- | :--- | | Innospec Inc. | $100.00 | $176.70 | | S&P 500 Index | $100.00 | $203.04 | | NASDAQ Composite Index | $100.00 | $269.70 | | Russell 2000 Index | $100.00 | $186.36 | Selected Financial Data This section summarizes key financial data from 2016 to 2020, highlighting a significant decrease in 2020 net sales to $1,193.1 million and net income to $28.7 million from 2019 Financial Highlights (2019 vs 2020) | Metric (in millions, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $1,193.1 | $1,513.3 | | Operating income | $33.7 | $149.9 | | Net income | $28.7 | $112.2 | | Diluted EPS | $1.16 | $4.54 | | Net cash provided by operating activities | $145.9 | $161.6 | | Total assets at year end | $1,397.4 | $1,468.8 | | Long-term debt at year end | $0.6 | $60.1 | Quarterly Net Sales 2020 (in millions) | Quarter | Net Sales | | :--- | :--- | | Q1 | $372.3 | | Q2 | $244.9 | | Q3 | $265.1 | | Q4 | $310.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the adverse impact of COVID-19 and crude oil demand collapse on 2020 performance, leading to a 21% revenue decline, but notes a recovery trend, strong cash flow, and a net cash position after debt repayment Critical Accounting Estimates Management identifies critical accounting estimates including environmental liabilities of $58.5 million, income taxes, pension obligations, and a $19.8 million impairment of Oilfield Services intangible assets in 2020 * Environmental remediation provisions amounted to $58.5 million as of December 31, 2020, principally for the Ellesmere Port site[136] * A 0.25% change in the discount rate for the U.K. pension plan would change the Projected Benefit Obligation (PBO) by approximately $26 million[142][144] * A $19.8 million impairment of intangible assets was recorded in the Oilfield Services segment at June 30, 2020, due to COVID-19 and reduced oil prices[148] Results of Operations In 2020, total net sales decreased 21% to $1.2 billion and operating income fell to $33.7 million, driven by declines in Oilfield Services and Fuel Specialties, alongside $21.3 million restructuring and $19.8 million impairment charges Segment Performance: 2020 vs. 2019 (in millions) | Segment | Net Sales 2020 | Net Sales 2019 | Change | Operating Income 2020 | Operating Income 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Fuel Specialties | $512.7 | $583.7 | -12% | $84.5 | $116.6 | | Performance Chemicals | $425.4 | $428.7 | -1% | $54.8 | $48.7 | | Oilfield Services | $255.0 | $479.9 | -47% | $(9.5) | $39.7 | | Octane Additives | $0.0 | $21.0 | -100% | $(2.8) | $(0.7) | * A $21.3 million restructuring charge was recorded in 2020 related to the cessation of the Octane Additives business[178] * An impairment charge of $19.8 million was recorded in 2020 related to acquired intangible assets in the Oilfield Services segment[178] * The effective tax rate was 27.7% in 2020, up from 25.4% in 2019, with the adjusted rate at 23.5% in 2020[180][182] Liquidity and Financial Condition The company maintained strong liquidity in 2020, generating $145.9 million in operating cash flow, increasing cash to $105.3 million, and fully repaying its $250 million revolving credit facility, with total contractual commitments at $137.1 million * Net cash provided by operating activities was $145.9 million in 2020, compared to $161.6 million in 2019[208] * Cash and cash equivalents increased by $29.6 million during 2020, ending the year at $105.3 million[209][210] * The company repaid all borrowings under its $250 million revolving credit facility during 2020, extending the facility until September 2024[211][212] Contractual Commitments at Dec 31, 2020 (in millions) | Commitment Type | Total | 2021 | 2022-23 | 2024-25 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Remediation payments | $58.5 | $6.6 | $9.4 | $7.1 | $35.4 | | Operating lease commitments | $40.2 | $11.3 | $17.3 | $8.9 | $2.7 | | Raw material purchase obligations | $19.7 | $3.8 | $7.8 | $8.1 | $0.0 | | Capital commitments | $14.7 | $14.7 | $0.0 | $0.0 | $0.0 | | Total | $137.1 | $37.8 | $36.4 | $24.8 | $38.1 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency exchange rates (Euro, GBP, BRL), and volatile raw material costs, managed through debt structure, forward contracts, and long-term purchase agreements * The company had no outstanding borrowings under its $250.0 million revolving credit facility as of December 31, 2020[237][238] * Primary foreign currency exposures are to the Euro, British pound sterling, and Brazilian Real, mitigated with foreign currency forward contracts[245][246] * A hypothetical 5% strengthening of the U.S. dollar against the British pound sterling would increase operating income by approximately $1.4 million annually, excluding hedging[248] * The company manages volatile raw material costs through long-term contracts and advance bulk purchases, rather than extensive hedging[249] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018-2020, including auditor reports, with a critical audit matter identified as the valuation of the Plant Closure Provision requiring significant estimates * PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2020[254] * A critical audit matter was the Plant Closure Provision of $58.5 million, due to significant estimates for future remediation work, particularly at the Ellesmere Port site[264][265] Consolidated Income Statement Summary (in millions) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $1,193.1 | $1,513.3 | $1,476.9 | | Gross profit | $342.7 | $466.2 | $435.0 | | Operating income | $33.7 | $149.9 | $133.5 | | Net income | $28.7 | $112.2 | $85.0 | | Diluted EPS | $1.16 | $4.54 | $3.45 | * Note 5 details a $21.3 million restructuring charge in 2020 for the cessation of the Octane Additives segment's motor gasoline TEL production[343][344][345] * Note 9 discloses a $19.8 million impairment charge in 2020 on intangible assets within the Oilfield Services segment[360][362] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure * None[457] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes identified * Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2020[458] * Management concluded the Company maintained effective internal control over financial reporting as of December 31, 2020, based on the COSO framework (2013)[462] Other Information The company reports no other information for this item * None[466] Part III Part III incorporates information by reference from the company's 2021 Proxy Statement, covering directors, executive officers, compensation, security ownership, related party transactions, and principal accountant fees Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, corporate governance, the code of conduct, and the audit committee is incorporated by reference from the company's 2021 Proxy Statement * Information for this item is incorporated by reference from the 2021 Proxy Statement[466] Executive Compensation Information regarding executive compensation, compensation committee interlocks, and the compensation committee report is incorporated by reference from the company's 2021 Proxy Statement * Information for this item is incorporated by reference from the 2021 Proxy Statement[471] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as matters related to equity compensation plans, is incorporated by reference from the company's 2021 Proxy Statement * Information for this item is incorporated by reference from the 2021 Proxy Statement[472][473] Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's 2021 Proxy Statement * Information for this item is incorporated by reference from the 2021 Proxy Statement[474] Principal Accountant Fees and Services Information regarding fees paid to the company's independent registered public accounting firms and the Audit Committee's pre-approval policies is incorporated by reference from the company's 2021 Proxy Statement * Information for this item is incorporated by reference from the 2021 Proxy Statement[475] Part IV Part IV lists exhibits filed with the Form 10-K, including financial statements, accountant consents, and CEO/CFO certifications, along with officer and director signatures Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the annual report * This section lists all exhibits filed with the Form 10-K, including governance documents, material agreements, and required certifications[479] Form 10-K Summary This item is not applicable * Not applicable[486]