Innospec(IOSP) - 2022 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the company's unaudited interim financial statements, management's analysis, market risk disclosures, and internal controls Condensed Consolidated Financial Statements The company reported significant year-over-year growth in net sales and net income for Q1 2022, with total assets increasing to $1.62 billion, despite negative operating cash flow due to working capital increases Condensed Consolidated Statements of Income (Q1 2022 vs Q1 2021) | (in millions, except per share data) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net sales | $472.4 | $339.6 | | Gross profit | $139.3 | $100.8 | | Operating income | $44.3 | $28.2 | | Net income | $36.5 | $23.4 | | Diluted EPS | $1.46 | $0.94 | Condensed Consolidated Balance Sheet Highlights | (in millions) | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $778.6 | $728.1 | | Total assets | $1,623.8 | $1,570.9 | | Total current liabilities | $352.3 | $336.6 | | Total liabilities | $554.9 | $537.9 | | Total equity | $1,068.9 | $1,033.0 | Condensed Consolidated Statements of Cash Flows (Q1 2022 vs Q1 2021) | (in millions) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(29.0) | $22.7 | | Net cash used in investing activities | $(8.4) | $(10.3) | | Net cash provided by/(used in) financing activities | $0.9 | $(0.3) | | Net change in cash and cash equivalents | $(36.2) | $11.7 | Notes To The Unaudited Interim Condensed Consolidated Financial Statements Detailed notes reveal strong segment revenue growth, an undrawn $250 million credit facility, $16.3 million in unrecognized tax benefits, and $8.8 million in share-based compensation costs Segment Net Sales and Operating Income (Q1 2022 vs Q1 2021) | (in millions) | Net Sales 2022 | Net Sales 2021 | Operating Income 2022 | Operating Income 2021 | | :--- | :--- | :--- | :--- | :--- | | Performance Chemicals | $167.1 | $125.9 | $25.3 | $18.3 | | Fuel Specialties | $191.8 | $139.3 | $35.5 | $23.8 | | Oilfield Services | $113.5 | $74.4 | $2.5 | $1.2 | | Corporate costs | - | - | $(19.0) | $(15.1) | - The company has an available $250.0 million revolving credit facility expiring in September 2024, which was undrawn as of March 31, 2022[46] - Total unrecognized tax benefits, including interest and penalties, amounted to $16.3 million as of March 31, 2022, covering potential liabilities from a UK PDCF review, an Italian tax audit, and a 2017 U.S. Tax Act adjustment[41][42][43] - Share-based compensation costs for Q1 2022 totaled $8.8 million, consisting of $1.7 million for stock options and $7.1 million for stock equivalent units[62] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 39% revenue growth to strong segment performance and favorable pricing, with increased working capital leading to negative operating cash flow, while maintaining strong liquidity Overall Performance Change (Q1 2022 vs Q1 2021) | (in millions) | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $472.4 | $339.6 | $132.8 | 39% | | Gross profit | $139.3 | $100.8 | $38.5 | 38% | | Operating income | $44.3 | $28.2 | $16.1 | 57% | - Adjusted working capital increased by $79.9 million in Q1 2022, primarily due to a $53.2 million increase in trade receivables and a $30.6 million increase in inventories to support higher sales and mitigate supply chain risks[92][94][95] - Operating activities used $29.0 million in cash in Q1 2022, a significant decrease from the $22.7 million generated in Q1 2021, mainly due to the increase in working capital needed to support sales growth[98] Results of Operations All segments achieved substantial year-over-year net sales growth driven by volume and price/mix, with gross margins stable and operating expenses rising in line with business activity - Performance Chemicals sales grew 33% YoY, driven by a 7% volume increase (led by the Americas) and a 32% improvement in price/mix, partially offset by a 6% negative currency impact[79][80] - Fuel Specialties sales increased 38% YoY, fueled by a 23% volume growth as global fuel demand recovered and a 21% positive price/mix effect, partially offset by a 6% negative currency impact[79][82] - Oilfield Services sales surged 53% YoY to $113.5 million, driven by increased customer demand in the Americas amid high crude oil prices[79][85] - The adjusted effective tax rate for Q1 2022 was 24.3%, up from 23.2% in Q1 2021, primarily because a higher proportion of profits were generated in higher tax jurisdictions[90][91] Liquidity and Financial Condition Despite a decrease in cash to $105.6 million due to increased working capital for sales support, the company maintains a solid liquidity position with no outstanding debt on its revolving credit facility Working Capital Analysis | (in millions) | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Working capital | $426.3 | $391.5 | | Adjusted working capital | $344.8 | $264.9 | - Cash and cash equivalents decreased by $36.2 million during the quarter to $105.6 million, primarily due to increased working capital levels[99] - As of March 31, 2022, the company had no debt outstanding under its revolving credit facility[100] Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from interest rates, foreign currency, and commodity prices using derivatives for hedging, with no significant changes in exposure since the 2021 Form 10-K - The company uses derivatives, including interest rate swaps, commodity swaps, and foreign currency forward contracts, to manage market risks in the normal course of business[102] - The objective of managing foreign currency exchange rate exposure is to reduce earnings and cash flow volatility[102] - There have been no significant changes in the company's market risk exposure since the 2021 Form 10-K[104] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2022, 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, 2022[105] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[107] PART II OTHER INFORMATION This section covers legal proceedings, updated risk factors, equity security sales, and required exhibits Legal Proceedings The company is involved in various incidental legal claims, but there are no material pending legal proceedings against the company or its subsidiaries - There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party[108] Risk Factors New material risks from the Russian invasion of Ukraine, impacting raw materials, sales, distribution, and energy costs, have emerged, with no other significant changes since the 2021 Form 10-K - A new material risk factor has emerged from the Russian invasion of Ukraine, which could potentially affect raw material imports, product sales, and distribution costs[109] - Wider implications of the conflict include higher energy and utility costs, especially in Europe, and other negative impacts such as supply chain disruptions, currency volatility, and heightened cybersecurity threats[109] Unregistered Sales of Equity Securities and Use of Proceeds The company had no unregistered equity sales but repurchased 10,237 shares under a new $50 million program, with $49.1 million remaining for future repurchases - On February 15, 2022, the Company announced a new share repurchase plan for up to $50 million of its common stock over a three-year period[113] Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Shares Purchased | Average Price Paid | Approx. Dollar Value Remaining | | :--- | :--- | :--- | :--- | | Total | 10,237 | $93.27 | $49.1 million | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906[120]