Innospec(IOSP) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements This section presents the company's unaudited interim condensed consolidated financial statements for Q1 2023 - The financial statements are unaudited and prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, and should be read in conjunction with the 2022 Form 10-K[23][24] - Results for the interim period are not necessarily indicative of the results to be expected for the full year[25] Condensed Consolidated Statements of Income | Metric | 3 Months Ended March 31, 2023 (in millions) | 3 Months Ended March 31, 2022 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net sales | $509.6 | $472.4 | +$37.2 (+7.9%) | | Cost of goods sold | $(361.8) | $(333.1) | $(28.7) (-8.6%) | | Gross profit | $147.8 | $139.3 | +$8.5 (+6.1%) | | Operating income | $41.0 | $44.3 | -$3.3 (-7.4%) | | Net income | $33.2 | $36.5 | -$3.3 (-9.0%) | | Basic EPS | $1.34 | $1.47 | -$0.13 (-8.8%) | | Diluted EPS | $1.33 | $1.46 | -$0.13 (-8.9%) | Condensed Consolidated Statements of Comprehensive Income | Metric | 3 Months Ended March 31, 2023 (in millions) | 3 Months Ended March 31, 2022 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net income | $33.2 | $36.5 | -$3.3 (-9.0%) | | Total other comprehensive income/(loss) | $4.4 | $(3.6) | +$8.0 | | Total comprehensive income | $37.6 | $32.9 | +$4.7 (+14.3%) | Condensed Consolidated Balance Sheets | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :--- | :--- | :--- | :--- | | Total current assets | $875.0 | $872.6 | +$2.4 (+0.3%) | | Total assets | $1,624.1 | $1,603.7 | +$20.4 (+1.3%) | | Total current liabilities | $381.6 | $405.8 | -$24.2 (-6.0%) | | Total liabilities | $543.5 | $563.3 | -$19.8 (-3.5%) | | Total equity | $1,080.6 | $1,040.4 | +$40.2 (+3.9%) | Condensed Consolidated Statements of Cash Flows | Metric | 3 Months Ended March 31, 2023 (in millions) | 3 Months Ended March 31, 2022 (in millions) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by/(used in) operating activities | $21.8 | $(29.0) | +$50.8 | | Net cash used in investing activities | $(22.0) | $(8.4) | -$13.6 | | Net cash provided by/(used in) financing activities | $0.4 | $0.9 | -$0.5 | | Net change in cash and cash equivalents | $0.4 | $(36.2) | +$36.6 | | Cash and cash equivalents at end of period | $147.5 | $105.6 | +$41.9 (+39.7%) | Condensed Consolidated Statements of Equity | Metric | Balance at Dec 31, 2022 (in millions) | Net Income (in millions) | Changes in CTA (in millions) | Treasury Stock Reissued (in millions) | Stock Option Comp (in millions) | Balance at Mar 31, 2023 (in millions) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Innospec stockholders' equity | $1,038.0 | $33.2 | $4.7 | $0.9 | $1.9 | $1,080.6 | Notes To The Unaudited Interim Condensed Consolidated Financial Statements NOTE 1 – BASIS OF PRESENTATION - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X[23] - These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[24] NOTE 2 – SEGMENT REPORTING - The Company reports its financial performance based on three reportable segments: Performance Chemicals, Fuel Specialties, and Oilfield Services[26] - Segment performance is evaluated based on operating income[26] | Segment | Net Sales (3M Ended Mar 31, 2023) | Net Sales (3M Ended Mar 31, 2022) | Operating Income (3M Ended Mar 31, 2023) | Operating Income (3M Ended Mar 31, 2022) | | :--- | :--- | :--- | :--- | :--- | | Performance Chemicals | $151.4 million | $167.1 million | $10.4 million | $25.3 million | | Fuel Specialties | $190.3 million | $191.8 million | $32.4 million | $35.5 million | | Oilfield Services | $167.9 million | $113.5 million | $15.9 million | $2.5 million | | Corporate costs | N/A | N/A | $(17.7) million | $(19.0) million | | Total | $509.6 million | $472.4 million | $41.0 million | $44.3 million | NOTE 3 – EARNINGS PER SHARE | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net income per share, basic | $1.34 | $1.47 | | Net income per share, diluted | $1.33 | $1.46 | | Weighted average common shares outstanding (in thousands) | 24,801 | 24,791 | | Denominator for diluted EPS (in thousands) | 24,962 | 24,956 | NOTE 4 – GOODWILL - The exchange effect for the three months ended March 31, 2023, was $1.4 million, primarily relating to the Performance Chemicals segment[28] | (in millions) | 2023 | | :--- | :--- | | Gross cost at January 1 | $358.8 | | Exchange effect | $1.4 | | Gross cost at March 31 | $360.2 | NOTE 5 – OTHER INTANGIBLE ASSETS - The Company capitalized $4.3 million in Q1 2023 for internally developed software for a new Enterprise Resource Planning ("ERP") system covering EMEA and ASPAC regions[30] - Amortization expense for Q1 2023 was $2.7 million, compared to $4.0 million in Q1 2022[29] | (in millions) | 2023 | | :--- | :--- | | Net book amount at March 31 | $46.9 | | Additions | $4.3 | | Amortization expense | $(2.7) | NOTE 6 – PENSION AND POST EMPLOYMENT BENEFITS - The Company maintains a defined benefit pension plan in the United Kingdom (UK Plan) and an unfunded defined benefit pension plan in Germany (German plan)[31][32] - A liability of $4.2 million for post-employment benefits was recorded as of March 31, 2023[33] | (in millions) | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net periodic benefit | $0.8 | $0.7 | NOTE 7 – INCOME TAXES - All $13.7 million of unrecognized tax benefits, interest, and penalties would impact the effective tax rate if recognized[34] - Potential additional tax liabilities include $1.0 million from a U.K. tax review, $3.3 million from an Italian tax audit (indemnified), and $9.4 million related to the U.S. Tax Cuts and Jobs Act of 2017[35][36][37] | (in millions) | Unrecognized Tax Benefits | Interest and Penalties | Total | | :--- | :--- | :--- | :--- | | Closing balance at March 31, 2023 | $10.3 | $3.4 | $13.7 | NOTE 8 – LONG-TERM DEBT - The Company had not drawn down on its $250.0 million revolving credit facility as of March 31, 2023, or December 31, 2022[40] - The revolving credit facility is available until September 25, 2024, with an accordion feature to increase borrowings by up to $125.0 million[40] NOTE 9 – PLANT CLOSURE PROVISIONS - Plant closure provisions include costs for environmental remediation liabilities and asset retirement obligations, primarily at the Ellesmere Port site in the UK[42][43] - The charge for Q1 2023 was $0.9 million, representing accounting accretion only[44] | (in millions) | 2023 | | :--- | :--- | | Total at January 1 | $57.2 | | Charge for the period | $0.9 | | Utilized in the period | $(1.2) | | Total at March 31 | $57.0 | | Due within one year | $5.0 | | Due after one year | $52.0 | NOTE 10 – FAIR VALUE MEASUREMENTS - Fair values for cash and cash equivalents approximate carrying amounts due to short-term maturities[45] - Emissions Trading Scheme credits are valued at open market pricing, while foreign currency forward exchange contracts and stock equivalent units are valued using current settlement prices/comparable contracts and Black-Scholes/Monte Carlo methods, respectively[46][47][48] | (in millions) | March 31, 2023 Carrying Amount | March 31, 2023 Fair Value | | :--- | :--- | :--- | | Cash and cash equivalents | $147.5 | $147.5 | | Emissions Trading Scheme credits | $2.5 | $2.5 | | Foreign currency forward exchange contracts | $0.8 | $0.8 | | Stock equivalent units | $16.6 | $16.6 | NOTE 11 – DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT - The Company uses foreign currency forward exchange contracts to minimize currency exchange rate exposure from expected future cash flows, with maturity dates up to twelve months[49] - These contracts are not designated as hedging instruments and resulted in a $0.9 million loss in Q1 2023, compared to a $0.8 million gain in Q1 2022[49] NOTE 12 – CONTINGENCIES - The Company has lodged a civil and criminal legal claim related to a $7.4 million misappropriation of inventory in Brazil, which has been written off to cost of goods sold[51] - Guarantees for certain obligations of affiliated companies amounted to $7.1 million as of March 31, 2023[53] NOTE 13 – STOCK-BASED COMPENSATION PLANS - Stock option compensation cost was $1.9 million in Q1 2023 (Q1 2022: $1.7 million)[56] - Stock equivalent units compensation cost was $3.2 million in Q1 2023 (Q1 2022: $7.1 million)[56] - Total unrecognized compensation cost related to nonvested share-based arrangements was $32.5 million, expected to be recognized over a weighted-average period of 2.2 years[58] NOTE 14 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS - Total reclassifications out of accumulated other comprehensive loss (AOCL), net of tax, were $(0.3) million for Q1 2023, primarily from defined benefit pension plan items[59] | (in millions) | Defined Benefit Pension Plan Items | Cumulative Translation Adjustments | Total | | :--- | :--- | :--- | :--- | | Balance at December 31, 2022 | $(58.4) | $(86.8) | $(145.2) | | Total other comprehensive income | $(0.3) | $4.7 | $4.4 | | Balance at March 31, 2023 | $(58.7) | $(82.1) | $(140.8) | NOTE 15 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - The Company reviewed recently issued accounting pronouncements and concluded there were no matters relevant to its financial statements[61] NOTE 16 – RELATED PARTY TRANSACTIONS - Purchases from AdvanSix (where Mr. Patrick S. Williams is a non-executive director) totaled $0.1 million in Q1 2023[62] - Fees incurred from Smith, Gambrell & Russell, LLP (where Mr. Robert I. Paller holds a position) were $0.1 million in Q1 2023[63] - Sales of scrap metal to European Metal Recycling Limited (where Mr. David F. Landless is a non-executive director of the parent company) were $0.0 million in Q1 2023[64] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 2023 Management discusses Q1 2023 financial performance, segment results, accounting estimates, and liquidity Critical Accounting Estimates - Critical accounting estimates include environmental liabilities, pensions, income taxes, goodwill, property, plant and equipment, and other intangible assets, as discussed in the 2022 Form 10-K[66] Results of Operations Net sales grew 8% YoY driven by Oilfield Services, though higher operating expenses led to a 7% drop in operating income | Metric | 3 Months Ended Mar 31, 2023 (in millions) | 3 Months Ended Mar 31, 2022 (in millions) | Change (YoY) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $509.6 | $472.4 | $37.2 | 8% | | Gross profit | $147.8 | $139.3 | $8.5 | 6% | | Operating income | $41.0 | $44.3 | $(3.3) | (7)% | | Total operating expenses | $(106.8) | $(95.0) | $(11.8) | 12% | Performance Chemicals - Net sales decreased by 9% YoY to $151.4 million, primarily due to a 13% drop in sales volumes across all regions, driven by reduced consumer demand and customer destocking[68][69] - Gross margin decreased by 8.5 percentage points due to an adverse sales mix, time lag in passing on higher raw material costs, and lower manufacturing efficiency from reduced production volumes[68][70] - Operating expenses decreased by $1.8 million due to lower selling expenses, performance-related remuneration accruals, and amortization of acquired intangibles[68][71] Fuel Specialties - Net sales decreased by 1% YoY to $190.3 million, with a 20% reduction in sales volumes across all regions, mainly from lower margin, higher volume products[68][73] - Price and product mix was favorable (+22%) due to increased sales of higher margin products and the impact of increased raw materials pricing being passed on through higher selling prices[73] - Gross margin decreased by 1.4 percentage points, impacted by a $7.4 million inventory misappropriation in Brazil, partly offset by a favorable sales mix[68][74] Oilfield Services - Net sales increased significantly by 48% YoY to $167.9 million, driven by increased customer activity primarily in the Americas[68][75] - Gross margin increased by 6.2 percentage points due to a favorable sales mix and improved pricing in a continuously competitive market[68][75] - Operating expenses increased by $15.1 million, driven by higher customer service costs necessary to support the increase in demand[68][76] Other Income Statement Captions - Corporate costs decreased by $1.3 million YoY, primarily due to lower performance-related remuneration accruals[68][77] - Interest income, net, was $0.3 million in Q1 2023 (compared to an expense of $0.4 million in Q1 2022), benefiting from global increases in central bank interest rates[78] - The GAAP effective tax rate increased to 26.2% in Q1 2023 (from 24.3% in Q1 2022), and the adjusted effective tax rate increased to 25.8% (from 24.3%), mainly due to a higher proportion of profits generated in higher tax jurisdictions[79][80] | (in millions) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Other net income/(expense) | $3.7 | $4.3 | $(0.6) | | Net pension credit | $1.7 | $1.3 | $0.4 | | Foreign exchange gains on translation | $2.9 | $2.2 | $0.7 | | Foreign currency forward contracts gains/(losses) | $(0.9) | $0.8 | $(1.7) | Liquidity and Financial Condition Working capital increased, operating cash flow improved significantly, and the company remained debt-free Working Capital - Working capital increased by $26.6 million, and adjusted working capital increased by $28.7 million in Q1 2023[81][83] - Trade and other accounts receivable increased by $7.8 million, driven primarily by increased trading activity in the Oilfield Services segment[83] - Inventories decreased by $7.4 million (net of allowances), primarily due to the misappropriation of $7.4 million of inventory in Brazil[84] | (in millions) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Working capital | $493.4 | $466.8 | | Adjusted working capital | $382.3 | $353.6 | Operating Cash Flows - The Company generated $21.8 million cash from operating activities in Q1 2023, a significant improvement from a $29.0 million cash outflow in Q1 2022[18][87] - The increase in cash generated was principally related to lower increases in working capital in Q1 2023 compared to higher increases in Q1 2022[87] Cash - Cash and cash equivalents were $147.5 million at March 31, 2023, a slight increase of $0.4 million from the beginning of the period[18][88] - $57.3 million of cash was held by non-U.S. subsidiaries, primarily in the United Kingdom[88] Debt - The Company had no debt outstanding under its revolving credit facility or finance leases at March 31, 2023[89] Item 3 Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from interest rates, foreign currency, and commodities using derivatives, with no material change in exposure - The Company is subject to market risks related to changes in interest rates and foreign currency exchange rates, as well as business risks inherent in non-U.S. activities[90] - Derivatives, including interest rate swaps, commodity swaps, and foreign currency forward exchange contracts, are used as risk management tools to manage market risks, not for trading purposes[91][92] - There have been no significant changes in the Company's exposure to market risk since the 2022 Annual Report on Form 10-K[93] Item 4 Controls and Procedures Disclosure controls and procedures were deemed effective with no material changes to internal controls during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[94] - There were no changes to internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the quarter[96] PART II OTHER INFORMATION Item 1 Legal Proceedings The company is involved in a legal claim regarding a $7.4 million inventory misappropriation in Brazil - A civil and criminal legal claim has been lodged related to a $7.4 million misappropriation of inventory in Brazil, which has been written off to cost of goods sold[98] - While the Company is confident the matter will not result in any significant further adverse impact, there is a possibility that additional financial losses will be incurred[98] Item 1A Risk Factors There have been no material changes in the risk factors facing the Company as disclosed in its 2022 Form 10-K - No material changes in the risk factors facing the Company have occurred since those disclosed in Item 1A of Part I of the 2022 Form 10-K[100] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 2,343 shares in February 2023, with $44.2 million remaining under its repurchase plan - There have been no unregistered sales of equity securities during the quarter ended March 31, 2023[101] - The Company announced a repurchase plan for up to $50 million of common stock over a three-year period commencing on February 16, 2022[103] | Period | Total number of shares purchased | Average price paid per share | Approximate dollar value of shares that may yet be purchased under the plans or programs | | :--- | :--- | :--- | :--- | | February 1, 2023 through February 28, 2023 | 2,343 | $110.09 | $44.2 million | Item 3 Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None[104] Item 4 Mine Safety Disclosures This item is not applicable to the Company - Not applicable[105] Item 5 Other Information There is no other information to report under this item - None[106] Item 6 Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications - Exhibits include Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[108] - XBRL Instance Document and Cover Page Interactive Data File are embedded within the inline XBRL document[108] SIGNATURES The report is signed by the CEO and CFO on May 4, 2023 - The report was signed on May 4, 2023, by Patrick S. Williams, President and Chief Executive Officer, and Ian P. Cleminson, Executive Vice President and Chief Financial Officer[110]