Innospec(IOSP) - 2022 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements This section presents the unaudited interim condensed consolidated financial statements, including core financial statements and comprehensive notes on accounting policies and specific financial items Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income (Unaudited) - Three Months Ended June 30 | Metric | 2022 (in millions) | 2021 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net sales | $467.6 | $354.5 | +32% | | Gross profit | $139.8 | $108.3 | +29% | | Operating income | $46.3 | $37.0 | +25% | | Net income | $32.3 | $22.4 | +44% | | Basic EPS | $1.30 | $0.91 | +43% | | Diluted EPS | $1.29 | $0.90 | +43% | Condensed Consolidated Statements of Income (Unaudited) - Six Months Ended June 30 | Metric | 2022 (in millions) | 2021 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net sales | $940.0 | $694.1 | +35% | | Gross profit | $279.1 | $209.1 | +33% | | Operating income | $90.6 | $65.2 | +39% | | Net income | $68.8 | $45.8 | +50% | | Basic EPS | $2.77 | $1.86 | +49% | | Diluted EPS | $2.76 | $1.84 | +50% | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended June 30 | Metric | 2022 (in millions) | 2021 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net income | $32.3 | $22.4 | +44% | | Total other comprehensive (loss)/income | $(16.6) | $4.4 | -477% | | Total comprehensive income | $15.7 | $26.8 | -41% | Condensed Consolidated Statements of Comprehensive Income (Unaudited) - Six Months Ended June 30 | Metric | 2022 (in millions) | 2021 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net income | $68.8 | $45.8 | +50% | | Total other comprehensive (loss)/income | $(20.2) | $(6.2) | +226% | | Total comprehensive income | $48.6 | $39.6 | +23% | - Changes in cumulative translation adjustment significantly impacted other comprehensive income, resulting in a loss of $16.9 million for the three months ended June 30, 2022, compared to a gain of $3.8 million in the prior year[16] Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (Unaudited) - As of June 30, 2022 vs. December 31, 2021 | Metric | June 30, 2022 (in millions) | December 31, 2021 (in millions) | Change | | :--- | :--- | :--- | :--- | | Assets: | | | | | Total current assets | $799.3 | $728.1 | +$71.2 | | Cash and cash equivalents | $71.4 | $141.8 | -$70.4 | | Trade and other accounts receivable | $339.9 | $284.5 | +$55.4 | | Total inventories | $362.2 | $277.6 | +$84.6 | | Total assets | $1,637.9 | $1,570.9 | +$67.0 | | Liabilities & Equity: | | | | | Total current liabilities | $369.2 | $336.6 | +$32.6 | | Accounts payable | $180.9 | $148.7 | +$32.2 | | Total liabilities | $569.3 | $537.9 | +$31.4 | | Total equity | $1,068.6 | $1,033.0 | +$35.6 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30 | Metric | 2022 (in millions) | 2021 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(36.5) | $21.6 | -$58.1 | | Net cash used in investing activities | $(17.4) | $(19.2) | +$1.8 | | Net cash used in financing activities | $(16.3) | $(13.3) | -$3.0 | | Net change in cash and cash equivalents | $(70.4) | $(10.9) | -$59.5 | | Cash and cash equivalents at end of period | $71.4 | $94.4 | -$23.0 | - The significant decrease in cash from operating activities in 2022 was primarily due to an increase in working capital required to support sales growth[25] Condensed Consolidated Statements of Equity Condensed Consolidated Statements of Equity (Unaudited) - Six Months Ended June 30, 2022 | Metric | Balance at Dec 31, 2021 (in millions) | Net Income (in millions) | Dividend Paid (in millions) | Changes in CTA (in millions) | Balance at Jun 30, 2022 (in millions) | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Equity | $1,033.0 | $68.8 | $(15.6) | $(20.7) | $1,068.6 | - Total Innospec stockholders' equity increased from $1,032.4 million at December 31, 2021, to $1,067.9 million at June 30, 2022, driven by net income partially offset by dividends paid and negative cumulative translation adjustments[22][27] Notes To The Unaudited Interim Condensed Consolidated Financial Statements NOTE 1 – BASIS OF PRESENTATION The interim condensed consolidated financial statements are prepared in accordance with US GAAP for interim financial information and Form 10-Q instructions, and should be read in conjunction with the 2021 Annual Report on Form 10-K. All necessary adjustments have been made for fair presentation, and interim results are not necessarily indicative of full-year results - The unaudited interim condensed consolidated financial statements are prepared in accordance with US GAAP for interim financial information and Form 10-Q, and do not include all information necessary for a comprehensive presentation[32] - All adjustments made are normal, recurring adjustments, and the statements should be read with the 2021 Form 10-K[33] NOTE 2 – SEGMENT REPORTING The Company operates in three reportable segments: Performance Chemicals, Fuel Specialties, and Oilfield Services. Segment performance is evaluated based on operating income, with all segments showing increased net sales and gross profit for both the three and six months ended June 30, 2022, compared to the prior year - Innospec reports financial performance across three segments: Performance Chemicals, Fuel Specialties, and Oilfield Services[35] Segment Net Sales (in millions) - Three Months Ended June 30 | Segment | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Performance Chemicals | $169.0 | $128.2 | +32% | | Fuel Specialties | $176.4 | $143.1 | +23% | | Oilfield Services | $122.2 | $83.2 | +47% | | Total Net Sales | $467.6 | $354.5 | +32% | Segment Operating Income (in millions) - Three Months Ended June 30 | Segment | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Performance Chemicals | $28.8 | $17.9 | +61% | | Fuel Specialties | $31.5 | $28.5 | +11% | | Oilfield Services | $4.5 | $2.2 | +105% | | Corporate costs | $(18.5) | $(11.6) | +59% | | Total Operating Income | $46.3 | $37.0 | +25% | NOTE 3 – EARNINGS PER SHARE Basic EPS is calculated based on weighted average common shares outstanding, while diluted EPS includes the effect of dilutive stock options and awards. Both basic and diluted EPS increased significantly for the three and six months ended June 30, 2022, compared to the prior year Earnings Per Share (Unaudited) - Three Months Ended June 30 | Metric | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net income available to common stockholders (in millions) | $32.3 | $22.4 | +44% | | Weighted average common shares outstanding (in thousands) | 24,805 | 24,628 | +0.7% | | Diluted effect of stock options and awards (in thousands) | 166 | 241 | -31% | | Net income per share, basic | $1.30 | $0.91 | +43% | | Net income per share, diluted | $1.29 | $0.90 | +43% | Earnings Per Share (Unaudited) - Six Months Ended June 30 | Metric | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net income available to common stockholders (in millions) | $68.8 | $45.8 | +50% | | Weighted average common shares outstanding (in thousands) | 24,798 | 24,615 | +0.7% | | Diluted effect of stock options and awards (in thousands) | 169 | 241 | -30% | | Net income per share, basic | $2.77 | $1.86 | +49% | | Net income per share, diluted | $2.76 | $1.84 | +50% | NOTE 4 – GOODWILL Goodwill decreased by $7.3 million from January 1, 2022, to June 30, 2022, primarily due to exchange rate effects Goodwill Movements (in millions) | Metric | Amount | | :--- | :--- | | Opening balance at January 1, 2022 | $364.3 | | Exchange effect | $(7.3) | | Closing balance at June 30, 2022 | $357.0 | NOTE 5 – OTHER INTANGIBLE ASSETS Other intangible assets, net of accumulated amortization, decreased to $48.1 million at June 30, 2022, from $295.2 million gross cost at January 1, 2022, primarily due to amortization expense of $7.8 million and negative exchange effects Other Intangible Assets Movements (in millions) - Six Months Ended June 30, 2022 | Metric | Amount | | :--- | :--- | | Gross cost at January 1 | $295.2 | | Exchange effect | $(3.6) | | Gross cost at June 30 | $291.6 | | Accumulated amortization at January 1 | $(237.7) | | Amortization expense | $(7.8) | | Exchange effect | $2.0 | | Accumulated amortization at June 30 | $(243.5) | | Net book amount at June 30 | $48.1 | - Amortization expense for the six months ended June 30, 2022, was $7.8 million, slightly lower than $8.0 million in the prior year[38] NOTE 6 – PENSION AND POST EMPLOYMENT BENEFITS The Company maintains defined benefit pension plans in the UK and Germany, reporting net periodic benefit credits for the periods, and in May 2022, the UK Plan entered a 'buy-in' agreement to mitigate risk - The Company maintains defined benefit pension plans in the United Kingdom (UK Plan) and Germany (German plan), both closed to future accrual or new entrants[39] Net Periodic Benefit (in millions) - Three Months Ended June 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net periodic benefit | $0.6 | $0.9 | Net Periodic Benefit (in millions) - Six Months Ended June 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net periodic benefit | $1.3 | $1.7 | - In May 2022, the UK Plan entered a 'buy-in' agreement with Legal and General Assurance Society Limited to match future cash flows from pension liabilities, reducing the UK Plan's value at risk[42] NOTE 7 – INCOME TAXES Unrecognized tax benefits, including interest and penalties, totaled $16.3 million at June 30, 2022, while the Company is undergoing tax reviews in the UK and Italy and faces a potential adjustment related to the 2017 Tax Act Unrecognized Tax Benefits and Associated Accrued Interest and Penalties (in millions) | Metric | January 1, 2022 | June 30, 2022 | | :--- | :--- | :--- | | Unrecognized Tax Benefits | $13.2 | $12.9 | | Interest and Penalties | $3.1 | $3.4 | | Total | $16.3 | $16.3 | - All $16.3 million of unrecognized tax benefits, interest, and penalties would impact the effective tax rate if recognized[43] - The Company has ongoing tax reviews in the UK (Profit Diversion Compliance Facility) and Italy (tax audit for 2011-2014), and a potential $12.3 million adjustment related to the 2017 Tax Act[44][45][46] NOTE 8 – LONG-TERM DEBT As of June 30, 2022, the Company had no outstanding debt under its $250.0 million revolving credit facility, which remains available until September 25, 2024, and includes an accordion feature for an additional $125.0 million - The Company had not drawn down on its $250.0 million revolving credit facility as of June 30, 2022, which is available until September 25, 2024[49] - The revolving credit facility includes an accordion feature allowing for an increase of up to $125.0 million in total available borrowings[49] NOTE 9 – PLANT CLOSURE PROVISIONS Plant closure provisions, encompassing environmental remediation and asset retirement obligations, totaled $55.8 million at June 30, 2022, with a $1.9 million accounting accretion charge for the six-month period - The Company has continuing plans to remediate manufacturing facilities and decommission sites, incurring liabilities for environmental remediation and asset retirement obligations[51] Plant Closure Provisions Movements (in millions) - Six Months Ended June 30, 2022 | Metric | Amount | | :--- | :--- | | Total at January 1 | $56.5 | | Charge for the period | $1.9 | | Utilized in the period | $(1.9) | | Exchange effect | $(0.7) | | Total at June 30 | $55.8 | | Due within one year | $(6.6) | | Due after one year | $49.2 | NOTE 10 – FAIR VALUE MEASUREMENTS The Company's recurring fair value measurements for financial assets and liabilities, including cash, ETS credits, leases, and derivatives, are determined using market pricing or valuation methods such as Black-Scholes or Monte Carlo Fair Value Measurements (in millions) - June 30, 2022 | Item | Carrying Amount | Fair Value | | :--- | :--- | :--- | | Cash and cash equivalents | $71.4 | $71.4 | | Emissions Trading Scheme credits | $3.3 | $3.3 | | Finance leases | $0.0 | $0.0 | | Foreign currency forward exchange contracts | $1.6 | $1.6 | | Stock equivalent units | $24.4 | $24.4 | - Fair values for Emissions Trading Scheme credits are based on open market pricing, while derivatives use current settlement prices and comparable contracts. Stock equivalent units are valued using Black-Scholes or Monte Carlo methods[57][58][59] NOTE 11 – DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT The Company utilizes foreign currency forward exchange contracts with maturities up to twelve months to mitigate currency exchange rate exposure, which are not designated as hedging instruments and generated a $2.4 million gain for the first six months of 2022 - The Company uses foreign currency forward exchange contracts to minimize currency exchange rate exposure from expected future cash flows, with maturities up to twelve months[61] - These derivative instruments are not designated as hedging instruments and generated a gain of $2.4 million for the first six months of 2022, compared to a gain of $0.2 million in the prior year[61] NOTE 12 – CONTINGENCIES The Company is involved in various claims and legal proceedings incidental to its business, with no material pending cases, and holds $6.0 million in guarantees for affiliated companies' non-U.S. excise taxes and customs duties - There are no material pending legal proceedings to which the Company or its subsidiaries are a party[62] - The Company is contingently liable for $6.0 million in guarantees for affiliated companies' obligations, primarily non-U.S. excise taxes and customs duties, as of June 30, 2022[63] NOTE 13 – STOCK-BASED COMPENSATION PLANS Total unrecognized compensation cost for nonvested share-based arrangements was $26.8 million at June 30, 2022, to be recognized over 1.98 years, with compensation costs for stock options and equivalent units increasing for both the three and six months ended June 30, 2022 Stock-Based Compensation Cost (in millions) - Three Months Ended June 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Stock options | $1.5 | $1.3 | | Stock equivalent units | $7.0 | $(1.5) | Stock-Based Compensation Cost (in millions) - Six Months Ended June 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Stock options | $3.2 | $2.9 | | Stock equivalent units | $14.1 | $2.9 | - As of June 30, 2022, there was $26.8 million of total unrecognized compensation cost related to nonvested share-based compensation, expected to be recognized over a weighted-average period of 1.98 years[70] NOTE 14 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS Reclassifications out of accumulated other comprehensive loss (AOCL) totaled $0.5 million net of tax for the first six months of 2022, primarily from pension items, leading to an AOCL balance of $(67.1) million at June 30, 2022, mainly due to negative cumulative translation adjustments Reclassifications out of AOCL (in millions) - Six Months Ended June 30, 2022 | Details about AOCL Components | Amount Reclassified from AOCL | | :--- | :--- | | Amortization of prior service cost | $0.3 | | Amortization of actuarial net losses | $0.3 | | Total before tax | $0.6 | | Income tax expense | $(0.1) | | Total reclassifications (Net of tax) | $0.5 | Changes in Accumulated Other Comprehensive Loss (in millions) - Six Months Ended June 30, 2022 | Metric | Balance at Dec 31, 2021 | Total Other Comprehensive Income/(Loss) | Balance at Jun 30, 2022 | | :--- | :--- | :--- | :--- | | Total AOCL | $(46.9) | $(20.2) | $(67.1) | NOTE 15 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Company has reviewed recently issued accounting pronouncements and determined that none are relevant to its financial statements - The Company concluded that no recently issued accounting pronouncements were relevant to its financial statements[75] NOTE 16 – RELATED PARTY TRANSACTIONS The Company engaged in transactions with related parties, including purchasing products from AdvanSix ($0.3 million) where Mr. Patrick S. Williams is a director, incurring legal fees from SGR ($0.1 million) where Mr. Robert I. Paller is associated, and selling scrap metal to EMR ($0.1 million) where Mr. David F. Landless is a director - Purchased $0.3 million in products from AdvanSix in the first six months of 2022, a company where Mr. Patrick S. Williams (Innospec's executive director) is a non-executive director[76] - Incurred $0.1 million in fees from Smith, Gambrell & Russell, LLP (SGR) in the first six months of 2022, a law firm with which Mr. Robert I. Paller (Innospec's non-executive director) holds a position[77] - Sold $0.1 million in scrap metal to European Metal Recycling Limited (EMR) in the first six months of 2022, a company where Mr. David F. Landless (Innospec's non-executive director) is a non-executive director[78] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended June 30, 2022 This section provides management's discussion and analysis of the Company's financial condition and results of operations, covering critical accounting estimates, segment performance, and liquidity for the three and six months ended June 30, 2022 Critical Accounting Estimates The Company's most critical accounting estimates, in terms of complexity and subjectivity, relate to environmental liabilities, pensions, income taxes, goodwill, property, plant and equipment, other intangible assets, and the impact of the COVID-19 pandemic and current economic environment - Critical accounting estimates include environmental liabilities, pensions, income taxes, goodwill, property, plant and equipment, other intangible assets, and the impact of the COVID-19 pandemic and current economic environment[81] Results of Operations The Company's results of operations are reported across three segments: Performance Chemicals, Fuel Specialties, and Oilfield Services. All segments experienced significant net sales growth for both the three and six months ended June 30, 2022, driven by favorable price and product mix, and increased volumes in most regions, despite adverse exchange rate movements in EMEA and ASPAC Net Sales by Segment (in millions) - Three Months Ended June 30 | Segment | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Performance Chemicals | $169.0 | $128.2 | +32% | | Fuel Specialties | $176.4 | $143.1 | +23% | | Oilfield Services | $122.2 | $83.2 | +47% | | Total | $467.6 | $354.5 | +32% | Net Sales by Segment (in millions) - Six Months Ended June 30 | Segment | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Performance Chemicals | $336.1 | $254.1 | +32% | | Fuel Specialties | $368.2 | $282.4 | +30% | | Oilfield Services | $235.7 | $157.6 | +50% | | Total | $940.0 | $694.1 | +35% | Three months Ended June 30, 2022 For the three months ended June 30, 2022, net sales increased by 32% to $467.6 million, and gross profit increased by 29% to $139.8 million. Operating income rose by 25% to $46.3 million. All segments contributed to sales growth, primarily driven by favorable price and product mix, and increased volumes in Americas for Performance Chemicals and Fuel Specialties, and overall Oilfield Services demand Operating Income by Segment (in millions) - Three Months Ended June 30 | Segment | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Performance Chemicals | $28.8 | $17.9 | +61% | | Fuel Specialties | $31.5 | $28.5 | +11% | | Oilfield Services | $4.5 | $2.2 | +105% | | Corporate costs | $(18.5) | $(11.6) | +59% | | Total Operating Income | $46.3 | $37.0 | +25% | Performance Chemicals (3 months) Performance Chemicals net sales increased by 32% to $169.0 million, driven by a 6% increase in volume and a 34% increase in price and product mix. Americas saw significant volume growth, while EMEA and ASPAC experienced demand reductions and adverse exchange rate impacts. Gross margin improved by 1.2 percentage points due to a favorable sales mix Performance Chemicals Net Sales Change (%) - Three Months Ended June 30, 2022 | Component | Americas | EMEA | ASPAC | Total | | :--- | :--- | :--- | :--- | :--- | | Volume | +32 | -7 | -19 | +6 | | Price and product mix | +26 | +38 | +34 | +34 | | Exchange rates | — | -13 | -7 | -8 | | Total Change | +58 | +18 | +8 | +32 | - Gross margin for Performance Chemicals increased by 1.2 percentage points, primarily due to a favorable sales mix from higher margin products[86] Fuel Specialties (3 months) Fuel Specialties net sales increased by 23% to $176.4 million, with a 3% volume increase and a 27% favorable price and product mix. Americas and ASPAC volumes grew due to increased global demand, while EMEA volumes were lower. Gross margin decreased by 2.7 percentage points due to the time lag in passing on higher raw material costs Fuel Specialties Net Sales Change (%) - Three Months Ended June 30, 2022 | Component | Americas | EMEA | ASPAC | AvGas | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Volume | +22 | -12 | +35 | -32 | +3 | | Price and product mix | +38 | +32 | +7 | +2 | +27 | | Exchange rates | — | -15 | -3 | — | -7 | | Total Change | +60 | +5 | +39 | -30 | +23 | - Gross margin for Fuel Specialties decreased by 2.7 percentage points, mainly due to the time lag in passing higher raw material costs to selling prices[89] Oilfield Services (3 months) Oilfield Services net sales increased by 47% to $122.2 million, driven by continued increase in customer demand, primarily in the Americas. Gross margin slightly increased by 0.2 percentage points due to a favorable sales mix, despite a competitive market - Oilfield Services net sales increased by $39.0 million, or 47%, driven by increased customer demand, primarily in the Americas region[91] - Gross margin increased by 0.2 percentage points due to a favorable sales mix, with management maintaining prices in a competitive market[91] Other Income Statement Captions (3 months) Corporate costs increased by $6.9 million due to higher personnel expenses, while other net expense was $(3.6) million, a $7.0 million decrease primarily from foreign exchange losses, and the adjusted effective tax rate decreased to 22.8% due to a lower proportion of profits from higher tax jurisdictions - Corporate costs increased by $6.9 million, primarily due to higher personnel-related expenses, including share-based compensation and performance-related remuneration accruals[93] Other Net (Expense)/Income (in millions) - Three Months Ended June 30 | Item | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net pension credit | $1.2 | $1.4 | $(0.2) | | Foreign exchange (losses)/gains on translation | $(6.4) | $2.9 | $(9.3) | | Foreign currency forward contracts gains/(losses) | $1.6 | $(1.1) | $2.7 | | Total | $(3.6) | $3.4 | $(7.0) | Effective Tax Rate - Three Months Ended June 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | GAAP effective tax rate | 23.6% | 44.1% | | Adjusted effective tax rate | 22.8% | 24.2% | Six months Ended June 30, 2022 For the six months ended June 30, 2022, net sales increased by 35% to $940.0 million, and gross profit increased by 33% to $279.1 million. Operating income rose by 39% to $90.6 million. All segments showed strong sales growth, driven by increased volumes and favorable price/product mix, despite negative foreign exchange impacts Operating Income by Segment (in millions) - Six Months Ended June 30 | Segment | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Performance Chemicals | $54.1 | $36.2 | +49% | | Fuel Specialties | $67.0 | $52.3 | +28% | | Oilfield Services | $7.0 | $3.4 | +106% | | Corporate costs | $(37.5) | $(26.7) | +40% | | Total Operating Income | $90.6 | $65.2 | +39% | Performance Chemicals (6 months) Performance Chemicals net sales increased by 32% to $336.1 million, with a 6% volume increase and a 33% favorable price and product mix. Americas experienced higher demand for personal care products, while EMEA and ASPAC saw reduced demand and adverse exchange rate impacts. Gross margin slightly increased by 0.3 percentage points due to a favorable sales mix Performance Chemicals Net Sales Change (%) - Six Months Ended June 30, 2022 | Component | Americas | EMEA | ASPAC | Total | | :--- | :--- | :--- | :--- | :--- | | Volume | +33 | -8 | -9 | +6 | | Price and product mix | +28 | +36 | +26 | +33 | | Exchange rates | — | -11 | -6 | -7 | | Total Change | +61 | +17 | +11 | +32 | - Gross margin for Performance Chemicals increased by 0.3 percentage points, primarily due to a favorable sales mix from higher margin products[100] Fuel Specialties (6 months) Fuel Specialties net sales increased by 30% to $368.2 million, driven by a 14% volume increase and a 23% favorable price and product mix. Americas and ASPAC volumes increased due to global demand for refined fuel products. Gross margin decreased by 1.7 percentage points due to the time lag in passing higher raw material costs to selling prices Fuel Specialties Net Sales Change (%) - Six Months Ended June 30, 2022 | Component | Americas | EMEA | ASPAC | AvGas | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Volume | +34 | — | +15 | +8 | +14 | | Price and product mix | +30 | +29 | +10 | -21 | +23 | | Exchange rates | — | -14 | -3 | — | -7 | | Total Change | +64 | +15 | +22 | -13 | +30 | - Gross margin for Fuel Specialties decreased by 1.7 percentage points, primarily due to the time lag for passing higher raw material costs through to selling prices[103] Oilfield Services (6 months) Oilfield Services net sales increased by 50% to $235.7 million, primarily in the Americas, reflecting increased customer demand. Gross margin increased by 0.3 percentage points due to a favorable sales mix, with management maintaining prices in a competitive market - Oilfield Services net sales increased by $78.1 million, or 50%, driven by increased customer activity, primarily in the Americas region[104] - Gross margin increased by 0.3 percentage points due to a favorable sales mix, while management continued to maintain prices in a competitive market[104] Other Income Statement Captions (6 months) Corporate costs increased by $10.8 million due to higher personnel expenses, while other net income was $0.7 million, a $5.7 million decrease primarily from foreign exchange losses, and the adjusted effective tax rate slightly decreased to 23.6% - Corporate costs increased by $10.8 million, primarily due to higher personnel-related expenses, including share-based compensation and performance-related remuneration accruals[106] Other Net Income (in millions) - Six Months Ended June 30 | Item | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net pension credit | $2.5 | $2.6 | $(0.1) | | Foreign exchange (losses)/gains on translation | $(4.2) | $3.4 | $(7.6) | | Foreign currency forward contracts gains | $2.4 | $0.2 | $2.2 | | Total | $0.7 | $6.4 | $(5.7) | Effective Tax Rate - Six Months Ended June 30 | Metric | 2022 | 2021 | | :--- | :--- | :--- | | GAAP effective tax rate | 24.0% | 35.4% | | Adjusted effective tax rate | 23.6% | 23.8% | Liquidity and Financial Condition The Company's working capital increased by $38.6 million, and adjusted working capital by $116.0 million, driven by higher receivables and inventories, while operating activities used $36.5 million in cash, resulting in a $70.4 million reduction in cash and cash equivalents Working Capital Working capital increased by $38.6 million, and adjusted working capital by $116.0 million, in the first six months of 2022, primarily due to increases in trade receivables and inventories, partially offset by higher accounts payable - Working capital increased by $38.6 million, and adjusted working capital increased by $116.0 million in the first six months of 2022[111] Working Capital Reconciliation (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $799.3 | $728.1 | | Total current liabilities | $(369.2) | $(336.6) | | Working capital | $430.1 | $391.5 | | Adjusted working capital | $380.9 | $264.9 | - Trade and other accounts receivable increased by $55.4 million, and inventories increased by $84.6 million, in anticipation of further demand and to manage supply chain risks[113][114] Operating Cash Flows The Company used $36.5 million in cash for operating activities in the first six months of 2022, a significant reduction from the $21.6 million cash inflow in the prior year, primarily due to increased working capital to support sales growth - Net cash used in operating activities was $36.5 million in the first six months of 2022, compared to cash inflows of $21.6 million in the prior year[117] - The reduction in cash from operating activities was principally related to the increase in working capital required to support sales growth[117] Cash Cash and cash equivalents decreased by $70.4 million to $71.4 million at June 30, 2022, driven by increased working capital, capital investments, and dividend payments Cash and Cash Equivalents (in millions) | Date | Amount | | :--- | :--- | | June 30, 2022 | $71.4 | | December 31, 2021 | $141.8 | | Net Change | $(70.4) | - The decrease in cash was driven by increased working capital levels, continued investments in capital projects, and the payment of semi-annual dividends[119] Debt As of June 30, 2022, the Company had no debt outstanding under its revolving credit facility and no obligations under finance leases, a reduction from $0.1 million at December 31, 2021 - As of June 30, 2022, the Company had no debt outstanding under its revolving credit facility and no obligations under finance leases[120] Item 3 Quantitative and Qualitative Disclosures about Market Risk The Company faces market risks from floating rate debt, non-U.S. operations, and fluctuations in interest and foreign currency exchange rates, which are managed using derivative instruments like interest rate and foreign currency forward exchange contracts, not for trading purposes - The Company is subject to market risks from floating rate debt, non-U.S. activities (political/economic uncertainty, import/export limitations), and changes in interest rates and foreign currency exchange rates[122] - Derivatives, such as interest rate swaps, commodity swaps, and foreign currency forward exchange contracts, are used as risk management tools to manage market risks and are not for trading purposes[123][124] - There have been no significant changes to the Company's exposure to market risk since the 2021 Annual Report on Form 10-K[125] Item 4 Controls and Procedures The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022, ensuring timely and accurate reporting, with no material changes to internal control over financial reporting during the period - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022[126] - No material changes to internal control over financial reporting were identified during the period[128] PART II OTHER INFORMATION Item 1 Legal Proceedings The Company is involved in various claims and legal proceedings incidental to its business, with no material pending cases, though an adverse resolution of numerous individual claims could significantly impact results - The Company is involved in claims and legal proceedings incidental to its business, but there are no material pending legal proceedings[129] Item 1A Risk Factors There have been no material changes in the risk factors facing the Company since those disclosed in the 2021 Form 10-K and the Form 10-Q for the quarter ended March 31, 2022 - No material changes in risk factors have occurred since the 2021 Form 10-K and the Form 10-Q for the quarter ended March 31, 2022[130] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities, and the Company repurchased 18,700 common shares during the quarter ended June 30, 2022, as part of a $50 million program with $47.3 million remaining - No unregistered sales of equity securities occurred during the period[131] Issuer Purchases of Equity Securities - Quarter Ended June 30, 2022 | Period | Total shares purchased | Average price paid per share | | :--- | :--- | :--- | | April 1, 2022 through April 30, 2022 | 10,000 | $94.2 | | May 1, 2022 through May 31, 2022 | 8,700 | $94.0 | | Total | 18,700 | $94.1 | Share Repurchase Program Status | Metric | Amount | | :--- | :--- | | Total announced plan | $50 million | | Approximate dollar value remaining | $47.3 million | Item 3 Defaults Upon Senior Securities There were no defaults upon senior securities - No defaults upon senior securities were reported[136] Item 4 Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[137] Item 5 Other Information No other information was reported under this item - No other information was disclosed under this item[138] Item 6 Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL-related documents - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL instance and cover page interactive data files (101, 104)[141] SIGNATURES - The report was signed on August 3, 2022, by Patrick S. Williams, President and Chief Executive Officer, and Ian P. Cleminson, Executive Vice President and Chief Financial Officer[142]