INNOSPEC INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-13879
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
Registrant’s telephone number, including area code: (303 ) 792 5554
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such file. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2
of the Exchange Act. | ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐ No Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding as of July 26, 2022 | |
| Common Stock, par value $0.01 |
TABLE OF CONTENTS
| PART I |
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| Item 1 |
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| Item 2 |
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| Item 3 |
32 |
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| Item 4 |
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| PART II |
34 |
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| Item 1 |
34 |
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| Item 1A |
34 |
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| Item 2 |
34 |
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| Item 3 |
35 |
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| Item 4 |
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| Item 5 |
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| Item 6 |
35 |
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CAUTIONARY STATEMENT RELATIVE TO FORWARD-LOOKING STATEMENTS
This Form
10-Q
contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Such forward-looking statements include statements (covered by words like “expects,” “estimates,” “anticipates,” “may,” “could,” “believes,” “feels,” “plans,” “intends” or similar words or expressions, for example) which relate to earnings, growth potential, operating performance, events or developments that we expect or anticipate will or may occur in the future. Although forward-looking statements are believed by management to be reasonable when made, they are subject to certain risks, uncertainties and assumptions, including, the effects of the COVID-19
pandemic, such as its duration, its unknown long-term economic impact, measures taken by governmental authorities to address it, the rise of variants, the effectiveness, acceptance and distributions of COVID-19
vaccines and the effects of any sanctions, export restrictions, inflation, supply chain disruptions or increased economic uncertainty related to the ongoing conflict between Russia and Ukraine and the manner in which the pandemic and/or such conflict may precipitate or exacerbate other risks and/or uncertainties, and our actual performance or results may differ materially from these forward-looking statements. Additional information regarding risks, uncertainties and assumptions relating to Innospec and affecting our business operations and prospects are described in Innospec’s Annual Report on Form 10-K
for the year ended December 31, 2021, Innospec’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2022 and other reports filed with the U.S. Securities and Exchange Commission. You are urged to review our discussion of risks and uncertainties that could cause actual results to differ from forward-looking statements under the heading “Risk Factors” in such reports. Innospec undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 1
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months Ended June 30 |
Six Months Ended June 30 |
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| (in millions, except share and per share data) |
2022 |
2021 |
2022 |
2021 |
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| Net sales |
$ | $ | $ | |
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| Cost of goods sold |
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| Gross profit |
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| Operating expenses: |
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| Selling, general and administrative |
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| Research and development |
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| Total operating expenses |
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| Operating income |
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| Other (expense)/income, net |
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| Interest expense, net |
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| Income before income tax expense |
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| Income tax expense |
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| Net income |
$ | $ | $ | |
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| Earnings per share: |
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| Basic |
$ | $ | $ | |
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$ | ||||||||||||
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| Diluted |
$ | $ | $ | |
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| Weighted average shares outstanding (in thousands): |
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| Basic |
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| Diluted |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months Ended June 30 |
Six Months Ended June 30 |
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| (in millions) |
2022 |
2021 |
2022 |
2021 |
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| Net income |
$ | $ | ||||||||||||||
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| Other comprehensive (loss)/income: |
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| Changes in cumulative translation adjustment, net of tax of $ |
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| Amortization of prior service cost, net of tax of $( |
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| Amortization of actuarial net losses, net of tax of $ |
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| Total other comprehensive (loss)/income |
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| Total comprehensive income |
$ | $ | ||||||||||||||
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (in millions, except share and per share data) |
June 30, 2022 |
December 31, 2021 |
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| Assets |
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| Current assets: |
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| Cash and cash equivalents |
$ | $ | ||||||
| Trade and other accounts receivable (less allowances of $ |
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| Inventories (less allowances of $ |
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| Finished goods |
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| Raw materials |
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| Total inventories |
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| Prepaid expenses |
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| Prepaid income taxes |
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| Other current assets |
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| Total current assets |
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| Net property, plant and equipment |
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| Operating lease right-of-use |
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| Goodwill |
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| Other intangible assets |
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| Deferred tax assets |
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| Pension asset |
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| Other non-current assets |
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| Total assets |
$ | $ | ||||||
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)
(Unaudited)
| (in millions, except share and per share data) |
June 30, 2022 |
December 31, 2021 |
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| Liabilities and Equity |
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| Current liabilities: |
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| Accounts payable |
$ | $ | ||||||
| Accrued liabilities |
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| Finance leases |
— | |||||||
| Current portion of operating lease liabilities |
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| Current portion of plant closure provisions |
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| Current portion of accrued income taxes |
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| Total current liabilities |
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| Operating lease liabilities, net of current portion |
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| Plant closure provisions, net of current portion |
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| Accrued income taxes, net of current portion |
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| Unrecognized tax benefits |
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| Deferred tax liabilities |
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| Pension liabilities and post-employment benefits |
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| Other non-current liabilities |
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| Total liabilities |
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| Equity: |
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| Common stock, $ |
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| Additional paid-in capital |
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| Treasury stock ( |
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| Retained earnings |
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| Accumulated other comprehensive loss |
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| Total Innospec stockholders’ equity |
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| Non-controlling interest |
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| Total equity |
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| Total liabilities and equity |
$ | $ | ||||||
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30 |
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| (in millions) |
2022 |
2021 |
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| Cash Flows from Operating Activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization |
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| Deferred taxes |
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| Non-cash movements on defined benefit pension plans |
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| Stock option compensation |
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| Changes in assets and liabilities, net of effects of acquired and divested companies: |
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| Trade and other accounts receivable |
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| Inventories |
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| Prepaid expenses |
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| Accounts payable and accrued liabilities |
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| Plant closure provisions |
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| Accrued income taxes |
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| Unrecognized tax benefits |
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| Net cash (used in)/provided by operating activities |
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| Cash Flows from Investing Activities |
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| Capital expenditures |
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| Proceeds on disposal of property, plant and equipment |
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| Net cash used in investing activities |
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| Cash Flows from Financing Activities |
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| Non-controlling interest |
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| Proceeds from revolving credit facility |
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| Repayments of revolving credit facility |
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| Repayments of finance leases |
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| Dividend paid |
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| Issue of treasury stock |
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| Repurchase of common stock |
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| Net cash used in financing activities |
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| Effect of foreign currency exchange rate changes on cash |
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| Net change in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
6
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(in millions) |
Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Non- Controlling Interest |
Total Equity |
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Balance at December 31, 2021 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
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Dividend paid ($ |
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Changes in cumulative translation adjustment, net of tax |
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Share of net income |
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Treasury stock reissued |
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Treasury stock repurchased |
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Stock option compensation |
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Amortization of prior service cost, net of tax |
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Amortization of actuarial net losses, net of tax |
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Balance at June 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
(in millions) |
Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Non- Controlling Interest |
Total Equity |
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Balance at December 31, 2020 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
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Dividend paid ($ |
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Changes in cumulative translation adjustment, net of tax |
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Share of net income |
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Treasury stock reissued |
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Treasury stock repurchased |
( |
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Stock option compensation |
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Amortization of prior service cost, net of tax |
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Amortization of actuarial net losses, net of tax |
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Balance at June 30, 2021 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
7
INNOSPEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(in millions) |
Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Non- Controlling Interest |
Total Equity |
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Balance at March 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
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Dividend paid ($ |
( |
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Changes in cumulative translation adjustment, net of tax |
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Treasury stock reissued |
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Treasury stock repurchased |
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Stock option compensation |
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Amortization of prior service cost, net of tax |
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Amortization of actuarial net losses, net of tax |
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Balance at June 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
(in millions) |
Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Non- Controlling Interest |
Total Equity |
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Balance at March 31, 2021 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
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Dividend paid ($ |
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Changes in cumulative translation adjustment, net of tax |
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Share of net income |
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Treasury stock reissued |
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Treasury stock repurchased |
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Stock option compensation |
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Amortization of prior service cost, net of tax |
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Amortization of actuarial net losses, net of tax |
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Balance at June 30, 2021 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
8
INNOSPEC INC. AND SUBSIDIARIES
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
under the Securities Exchange Act of 1934. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position, results of operations and cash flows. It is our opinion, however, that all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) have been made which are necessary for the condensed consolidated financial statements to be fairly stated. 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, 2021 filed on February 16, 2022 (the “2021 Form 10-K”).
The results for the interim period covered by this report are not necessarily indicative of the results to be expected for the full year.
When we use the terms “Innospec,” “the Corporation,” “the Company,” “Registrant,” “we,” “us” and “our,” we are referring to Innospec Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.
9
NOTE 2 – SEGMENT REPORTING
The Company reports its financial performance based on three reportable segments, which are Performance Chemicals, Fuel Specialties and Oilfield Services.
Three months Ended June 30 |
Six Months Ended June 30 |
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| (in millions) |
2022 |
2021 |
2022 |
2021 |
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| Net Sales: |
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| Personal Care |
$ |
$ |
$ | $ | ||||||||||||
| Home Care |
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| Other |
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| Performance Chemicals |
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| Refinery and Performance |
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| Other |
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| Fuel Specialties |
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| Oilfield Services |
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| Gross profit/(loss): |
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| Performance Chemicals |
$ |
$ |
$ | $ | ||||||||||||
| Fuel Specialties |
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| Oilfield Services |
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| $ |
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|||||||||
| Operating income/(loss): |
||||||||||||||||
| Performance Chemicals |
$ |
$ |
$ | $ | ||||||||||||
| Fuel Specialties |
||||||||||||||||
| Oilfield Services |
||||||||||||||||
| Corporate costs |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating income |
$ |
$ |
$ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
10
NOTE 3 – EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the effect of options that are dilutive and outstanding during the period under the treasury stock method. Per share amounts are computed as follows:
Three months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Numerator (in millions): |
||||||||||||||||
| Net income available to common stockholders |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Denominator (in thousands): |
||||||||||||||||
| Weighted average common shares outstanding |
||||||||||||||||
| Dilutive effect of stock options and awards |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Denominator for diluted earnings per share |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income per share, basic: |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net income per share, diluted: |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
In the three and six months ended June 30, 2022, the average number of anti-dilutive options excluded from the calculation of diluted earnings per share were 29,600 and 27,094 , respectively (three and six months ended June 30, 2021 – 19,836 and 14,649 , respectively).
NOTE 4 – GOODWILL
The following table summarizes the goodwill movements in the year:
| (in millions) |
Gross Cost |
|||
| Opening balance at January 1, 2022 |
$ | |||
| Exchange effect |
( |
) | ||
| |
|
|||
| Closing balance at June 30, 2022 |
$ | |||
| |
|
|||
11
NOTE 5 – OTHER INTANGIBLE ASSETS
The following table analyzes other intangible assets movements in the year:
| (in millions) |
2022 |
|||
| Gross cost at January 1 |
$ | |||
| Exchange effect |
( |
) | ||
| |
|
|||
| Gross cost at June 30 |
||||
| |
|
|||
| Accumulated amortization at January 1 |
( |
) | ||
| Amortization expense |
( |
) | ||
| Exchange effect |
||||
| |
|
|||
| Accumulated amortization at June 30 |
( |
) | ||
| |
|
|||
| Net book amount at June 30 |
$ | |||
| |
|
|||
The amortization expense for the six months ended June 30, 2022 was $7.8 million (six months ended June 30, 2021 – $8.0 million).
NOTE 6 – PENSION AND POST EMPLOYMENT BENEFITS
The Company maintains a defined benefit pension plan covering certain current and former employees in the United Kingdom (the “UK Plan”). The UK Plan is closed to future service accrual and has a large number of deferred and current pensioners.
The Company also maintains an unfunded defined benefit pension plan covering certain current and former employees in Germany (the “German plan”). The German plan is closed to new entrants and has no assets.
The net periodic benefit of these plans is shown in the following table:
Three months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
| (in millions) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
| Service cost |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Interest cost on projected benefit obligation |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Expected return on plan assets |
||||||||||||||||
| Amortization of prior service cost |
( |
) | ( |
) | ( |
) | ||||||||||
| Amortization of actuarial net losses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net periodic benefit |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
The service cost has been recognized in selling, general and administrative expenses. All other items have been recognized within other income and expense. The amortization of prior service cost and actuarial net losses are a reclassification out of accumulated other comprehensive loss into other income and expense.
In addition, we have obligations for post-employment benefits in some of our other European businesses. As at June 30, 2022, we have recorded a liability of $4.3 million (December 31, 2021 – $4.6 million).
12
In May 2022, the Trustees of the UK Plan entered into an agreement with Legal and General Assurance Society Limited to acquire an insurance policy that operates as an investment asset, with the intent of matching the remaining uninsured part of the UK Plan’s future cash flow arising from the accrued pension liabilities of members. Such an arrangement is commonly termed as a
“buy-in”.
The buy-in
reduces the UK Plan’s value at risk in relation to key risks associated with improved longevity, inflation and interest rate movements whilst improving the security to the UK Plan and its members. The Company consequently benefits from the buy-in
as it reduces the UK Plan’s potential reliance on the Company for future cash funding requirements. In accordance with US GAAP the buy-in
does not trigger a remeasurement at an interim period, so accounting entries to reflect this will be included in Innospec’s Annual Report on Form 10-K
for the year ended December
31, 2022. NOTE 7 – INCOME TAXES
A roll-forward of unrecognized tax benefits and associated accrued interest and penalties is as follows:
| (in millions) |
Unrecognized Tax Benefits |
Interest and Penalties |
Total |
|||||||||
| Opening balance at January 1, 2022 |
$ | $ | $ | |||||||||
| Net change for tax positions of prior periods |
( |
) | ||||||||||
| |
|
|
|
|
|
|||||||
| Closing balance at June 30, 2022 |
||||||||||||
| Current |
||||||||||||
| |
|
|
|
|
|
|||||||
| Non-current |
$ | $ | $ | |||||||||
| |
|
|
|
|
|
|||||||
All of the $16.3 million of unrecognized tax benefits, interest and penalties would impact our effective tax rate if recognized.
In 2021 a 0.9 million may arise during the course of the PDCF review process which is currently ongoing. This includes a reduction for foreign exchange movements of $0.1 million recorded in the six months to June 30, 2022.
non-U.S.
subsidiary, Innospec Limited, entered into a review by the U.K. tax authorities under the U.K.’s Profit Diversion Compliance Facility (“PDCF”). The Company determined that additional tax and interest totaling $A 2011 to 2014 inclusive. The Company has determined that additional tax, interest and penalties totaling $3.1 million may arise as a consequence of the tax audit. This includes an increase in interest accrual of $0.1 million and a reduction for foreign exchange movements of $0.3 million recorded in the six months to June 30, 2022. As any additional tax arising as a consequence of the tax audit would be reimbursed by the previous owner under the terms of the sale and purchase agreement, an indemnification asset of the same amount is recorded in the financial statements to reflect this arrangement.
non-U.S.
subsidiary, Innospec Performance Chemicals Italia Srl, is subject to an ongoing tax audit in relation to the period In 2018 the Company recorded an unrecognized tax benefit in relation to a potential adjustment that could arise as a consequence of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), but for which retrospective adjustment to the filed 2017 U.S. federal income tax returns was not permissible. The Company has determined that additional tax, interest and penalties totaling $12.3 million may arise in relation to this item. This includes an increase in interest accrued of $0.3 million in the six months to June 30, 2022.
13
NOTE 8 – LONG-TERM DEBT
As at June 30, 2022, and December 31, 2021, the Company had no
The Company continues to have available a $250.0 million revolving credit facility until September 25, 2024 . The facility contains an accordion feature whereby the Company may elect to increase the total available borrowings by an aggregate amount of up to $125.0 million.
As at June 30, 2022, the deferred finance costs of $0.8 1.0 million) related to the arrangement of the credit facility, are included within other current and
million (December 31, 2021 -
$non-current
assets at the balance sheet dates. NOTE 9 – PLANT CLOSURE PROVISIONS
The Company has continuing plans to remediate manufacturing facilities at sites around the world as and when those operations are expected to cease
or
we are required to decommission the sites according to local laws and regulations. The liability for estimated plant closure costs includes costs for environmental remediation liabilities and asset retirement obligations. The principal site giving rise to asset retirement obligations is the manufacturing site at Ellesmere Port in the United Kingdom. There are also asset retirement obligations and environmental remediation liabilities on a much smaller scale in respect of other manufacturing sites.
Movements in the provisions are summarized as follows:
| (in millions) |
2022 |
|||
| Total at January 1 |
$ | |||
| Charge for the period |
||||
| Utilized in the period |
( |
) | ||
| Exchange effect |
( |
) | ||
| |
|
|||
| Total at June 30 |
||||
| Due within one year |
( |
) | ||
| |
|
|||
| Due after one year |
$ | |||
| |
|
|||
The charge for the six months ended June 30, 2022 was $1.9 million (six months ended June 30, 2021 – $1.9 million). The current year charge represents the accounting accretion only, with no changes for the expected cost and scope of future remediation activities.
Amounts due within one year refer to provisions where expenditure is expected to arise within one year of the balance sheet date.
14
NOTE 10 – FAIR VALUE MEASUREMENTS
The following table presents the carrying amount and fair values of the Company’s financial assets and liabilities measured on a recurring basis:
June 30, 2022 |
December 31, 2021 |
|||||||||||||||
| (in millions) |
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
| Assets |
||||||||||||||||
| Non-derivatives: |
||||||||||||||||
| Cash and cash equivalents |
$ | $ | $ | $ | ||||||||||||
| Derivatives (Level 1 measurement): |
||||||||||||||||
| Other current and non-current assets: |
||||||||||||||||
| Emissions Trading Scheme credits |
||||||||||||||||
| Liabilities |
||||||||||||||||
| Non-derivatives: |
||||||||||||||||
| Finance leases (including current portion) |
$ | $ | $ | $ | ||||||||||||
| Derivatives (Level 1 measurement): |
||||||||||||||||
| Other current and non-current liabilities: |
||||||||||||||||
| Foreign currency forward exchange contracts |
||||||||||||||||
| Non-financial liabilities (Level 3 measurement): |
||||||||||||||||
| Other current and non-current liabilities: |
||||||||||||||||
| Stock equivalent units |
||||||||||||||||
The following methods and assumptions were used to estimate the fair values:
Cash and cash equivalents:
Emissions Trading Scheme credits:
Derivatives:
Finance leases:
Stock equivalent units:
15
NOTE 11 – DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company enters into various foreign currency forward exchange contracts to minimize currency exchange rate exposure from expected future cash flows. As at June 30, 2022, the contracts have maturity dates of up to twelve months at the date of inception. These foreign currency forward exchange contracts have not been designated as hedging instruments, and their impact on the income statement for the first six months of 2022 was a gain of $2.4 million (first six months of 2021 – a gain of $0.2 million).
NOTE 12 – CONTINGENCIES
Legal matters
While we are involved from time to time in claims and legal proceedings that result from, and are incidental to, the conduct of our business including business and commercial litigation, employee and product liability claims, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their property is subject. It is possible, however, that an adverse resolution of an unexpectedly large number of such individual claims or proceedings could in the aggregate have a material adverse effect on the results of operations for a particular year or quarter.
Guarantees
The Company and certain of the Company’s consolidated subsidiaries are contingently liable for certain obligations of affiliated companies primarily in the form of guarantees of debt and performance under contracts entered into as a normal business practice. This includes guarantees of 6.0 4.6 million). The remaining terms of the fixed maturity guarantees are up to 4 years and one month, with some further guarantees having no fixed expiry date.
non-U.S.
excise taxes and customs duties. As at June 30, 2022, such guarantees which are not recognized as liabilities in the condensed consolidated financial statements amounted to $million (December 31, 2021 -
$Under the terms of the guarantee arrangements, generally the Company would be required to perform should the affiliated company fail to fulfil its obligations under the arrangements. In some cases, the guarantee arrangements have recourse provisions that would enable the Company to recover any payments made under the terms of the guarantees from securities held of the guaranteed parties’ assets.
The Company and its affiliates have numerous long-term sales and purchase commitments in their various business activities, which are expected to be fulfilled with no adverse consequences material to the Company.
16
NOTE 13 – STOCK-BASED COMPENSATION PLANS
The compensation cost recorded for stock options for the three months ended June 30, 2022 and 2021 was $1.5 million and $1.3 million, respectively. The compensation cost recorded for stock equivalent units for the three months ended June 30, 2022 was $7.0 compensation credit recorded for stock equivalent units for the three months ended June 30, 2021 was $1.5 million.
million. The
The compensation cost recorded for stock options for the first six months of 2022 and 2021 was $3.2 million and $2.9 million, respectively. The compensation cost recorded for stock equivalent units for the first six months of 2022 and 2021 was $14.1 million and $2.9 million, respectively.
The following table summarizes the transactions of the Company’s share-based compensation plans for the six months ended June 30, 2022.
Number of shares |
Weighted Average Grant-Date Fair Value |
|||||||
| Nonvested at December 31, 2021 |
$ | |||||||
| Granted |
$ | |||||||
| Vested |
( |
) | $ | |||||
| Forfeited |
( |
) | $ | |||||
| |
|
|
|
|||||
| Nonvested at June 30, 2022 |
$ | |||||||
| |
|
|
|
|||||
New grants in the quarter have similar vesting conditions to those granted in previous periods. The valuation methodologies of the new grants are consistent with previous periods.
As of June 30, 2022, there was $26.8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.98 years.
17
NOTE 14 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS
Reclassifications out of accumulated other comprehensive loss (“AOCL”) for the first six months of 2022 were:
| (in millions) Details about AOCL Components |
Amount Reclassified from AOCL |
Affected Line Item in the Statement where Net Income is Presented | ||||
| Defined benefit pension plan items: |
||||||
| Amortization of prior service cost |
$ | See (1) | ||||
| Amortization of actuarial net losses |
See (1) | |||||
| |
|
|||||
| Total before tax | ||||||
| ( |
) | Income tax expense | ||||
| |
|
|||||
| Total reclassifications |
$ | Net of tax | ||||
| |
|
|||||
| (1) These items are included in other income and expense. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information. | ||||||
Changes in accumulated other comprehensive loss for the first six months of 2022, net of tax, were:
| (in millions) |
Defined Benefit Pension Plan Items |
Cumulative Translation Adjustments |
Total |
|||||||||
| Balance at December 31, 2021 |
$ | $ | ( |
) | $ | ( |
) | |||||
| |
|
|
|
|
|
|||||||
| Other comprehensive income before reclassifications |
( |
) | ( |
) | ||||||||
| Amounts reclassified from AOCL |
||||||||||||
| |
|
|
|
|
|
|||||||
| Total other comprehensive income/(loss) |
( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|||||||
| Balance at June 30, 2022 |
$ | $ | ( |
) | $ | ( |
) | |||||
| |
|
|
|
|
|
|||||||
18
Reclassifications out of accumulated other comprehensive loss for the first six months of 2021 were:
| (in millions) Details about AOCL Components |
Amount Reclassified from AOCL |
Affected Line Item in the Statement where Net Income is Presented | ||||
| Defined benefit pension plan items: |
||||||
| Amortization of prior service cost |
$ | See (1) | ||||
| Amortization of actuarial net losses |
See (1) | |||||
| |
|
|||||
| Total before tax | ||||||
| ( |
) | Income tax expense | ||||
| |
|
|||||
| Total reclassifications |
$ | Net of tax | ||||
| |
|
|||||
(1) |
These items are included in other income and expense. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information. |
Changes in accumulated other comprehensive loss for the first six months of 2021, net of tax, were:
| (in millions) |
Defined Benefit Pension Plan Items |
Cumulative Translation Adjustments |
Total |
|||||||||
| Balance at December 31, 2020 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
| Other comprehensive income before reclassifications |
( |
) | ( |
) | ||||||||
| Amounts reclassified from AOCL |
||||||||||||
| |
|
|
|
|
|
|||||||
| Total other comprehensive income/(loss) |
( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|||||||
| Balance at June 30, 2021 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|||||||
19
NOTE 15 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recently issued accounting pronouncements and concluded there were no matters relevant to the Company’s financial statements.
NOTE 16 – RELATED PARTY TRANSACTIONS
Mr. Patrick S. Williams has been an executive director of the Company since April 2009 and has been a 0.3 million (first six months of 2021 – $0.1 million). As at June 30, 2022, the Company owed $0.0 million to AdvanSix (December 31, 2021 – $0.1 million).
non-executive
director of AdvanSix, a chemicals manufacturer, since February 2020. In the first six months of 2022 the Company purchased product from AdvanSix for $Mr. Robert I. Paller has been a 0.1 million (first six months of 2021 – $0.1 million). As at June 30, 2022, the Company owed $0.0 million to SGR (December 31, 2021 – $0.0 million).
non-executive
director of the Company since November 1, 2009. The Company has retained and continues to retain Smith, Gambrell Russell, LLP (“SGR”), a law firm with which Mr. Paller holds a position. In the first six months of 2022 the Company incurred fees from SGR of $Mr. David F. Landless has been a 0.1 million (first six months of 2021 – $0.4 million). A tendering process is operated periodically to select the best buyer for the sale of scrap metal by the Company. As at June 30, 2022 EMR owed $0.0 million for scrap metal purchased from the Company (December 31, 2021 – $0.0 million).
non-executive
director of the Company since January 1, 2016 and is a non-executive
director of Ausurus Group Limited which owns European Metal Recycling Limited (“EMR”). The Company has sold scrap metal to EMR in the first six months of 2022 for a value of $20
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 discussion should be read in conjunction with our unaudited interim condensed consolidated financial statements and the notes thereto.
CRITICAL ACCOUNTING ESTIMATES
The policies and estimates that the Company considers the most critical in terms of complexity and subjectivity of assessment are those related to environmental liabilities, pensions, income taxes, goodwill, property, plant and equipment and other intangible assets (net of depreciation and amortization) and the impact of the
COVID-19
pandemic (“the pandemic”) and the current economic environment. These policies have been discussed in the Company’s 2021 Form 10-K.
RESULTS OF OPERATIONS
The Company reports its financial performance based on three reportable segments, which are Performance Chemicals, Fuel Specialties and Oilfield Services.
The following table provides operating income by reporting segment:
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
| (in millions) |
2022 |
2021 |
2022 |
2021 |
||||||||||||
| Net sales: |
||||||||||||||||
| Performance Chemicals |
$ | 169.0 | $ | 128.2 | $ | 336.1 | $ | 254.1 | ||||||||
| Fuel Specialties |
176.4 | 143.1 | 368.2 | 282.4 | ||||||||||||
| Oilfield Services |
122.2 | 83.2 | 235.7 | 157.6 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| $ | 467.6 | $ | 354.5 | $ | 940.0 | $ | 694.1 | |||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross profit: |
||||||||||||||||
| Performance Chemicals |
$ | 43.6 | $ | 31.6 | $ | 84.4 | $ | 63.0 | ||||||||
| Fuel Specialties |
56.9 | 50.1 | 117.6 | 95.0 | ||||||||||||
| Oilfield Services |
39.3 | 26.6 | 77.1 | 51.1 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| $ | 139.8 | $ | 108.3 | $ | 279.1 | $ | 209.1 | |||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Operating income/(loss): |
||||||||||||||||
| Performance Chemicals |
$ | 28.8 | $ | 17.9 | $ | 54.1 | $ | 36.2 | ||||||||
| Fuel Specialties |
31.5 | 28.5 | 67.0 | 52.3 | ||||||||||||
| Oilfield Services |
4.5 | 2.2 | 7.0 | 3.4 | ||||||||||||
| Corporate costs |
(18.5 | ) | (11.6 | ) | (37.5 | ) | (26.7 | ) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating income |
$ | 46.3 | $ | 37.0 | $ | 90.6 | $ | 65.2 | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
21
Three months Ended June 30 , 2022
The following table shows the change in components of operating income by reporting segment for the three months ended June 30, 2022 and the three months ended June 30, 2021:
Three Months Ended June 30 |
||||||||||||||||
| (in millions, except ratios) |
2022 |
2021 |
Change |
|||||||||||||
| Net sales: |
||||||||||||||||
| Performance Chemicals |
$ | 169.0 | $ | 128.2 | $ | 40.8 | +32 | % | ||||||||
| Fuel Specialties |
176.4 | 143.1 | 33.3 | +23 | % | |||||||||||
| Oilfield Services |
122.2 | 83.2 | 39.0 | +47 | % | |||||||||||
| |
|
|
|
|
|
|||||||||||
| $ | 467.6 | $ | 354.5 | $ | 113.1 | +32 | % | |||||||||
| |
|
|
|
|
|
|||||||||||
| Gross profit: |
| |||||||||||||||
| Performance Chemicals |
$ | 43.6 | $ | 31.6 | $ | 12.0 | +38 | % | ||||||||
| Fuel Specialties |
56.9 | 50.1 | 6.8 | +14 | % | |||||||||||
| Oilfield Services |
39.3 | 26.6 | 12.7 | +48 | % | |||||||||||
| |
|
|
|
|
|
|||||||||||
| $ | 139.8 | $ | 108.3 | $ | 31.5 | +29 | % | |||||||||
| |
|
|
|
|
|
|||||||||||
| Gross margin (%): |
|
|||||||||||||||
| Performance Chemicals |
25.8 |
24.6 |
+1.2 |
|||||||||||||
| Fuel Specialties |
32.3 |
35.0 |
-2.7 |
|||||||||||||
| Oilfield Services |
32.2 |
32.0 |
+0.2 |
|||||||||||||
| Aggregate |
29.9 |
30.6 |
-0.7 |
|||||||||||||
| Operating expenses: |
||||||||||||||||
| Performance Chemicals |
$ | (14.8 | ) | $ | (13.7 | ) | $ | (1.1 | ) | +8 | % | |||||
| Fuel Specialties |
(25.4 | ) | (21.6 | ) | (3.8 | ) | +18 | % | ||||||||
| Oilfield Services |
(34.8 | ) | (24.4 | ) | (10.4 | ) | +43 | % | ||||||||
| Corporate costs |
(18.5 | ) | (11.6 | ) | (6.9 | ) | +59 | % | ||||||||
| |
|
|
|
|
|
|||||||||||
| $ | (93.5 | ) | $ | (71.3 | ) | $ | (22.2 | ) | +31 | % | ||||||
| |
|
|
|
|
|
|||||||||||
22
Performance Chemicals
Net sales:
Three Months Ended June 30, 2022 |
||||||||||||||||
| Change (%) |
Americas |
EMEA |
ASPAC |
Total |
||||||||||||
| Volume |
+32 | -7 | -19 | +6 | ||||||||||||
| Price and product mix |
+26 | +38 | +34 | +34 | ||||||||||||
| Exchange rates |
— | -13 | -7 | -8 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| +58 | +18 | +8 | +32 | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Higher sales volumes for the Americas were primarily driven by increased demand for our personal care products. Lower sales volumes for EMEA and ASPAC were due to reductions in demand when compared to the strong sales volumes in the prior year. All our regions benefitted from a favorable price and product mix due to increased sales of higher priced products together with the impact of increased raw materials pricing being passed on through higher selling prices. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.
Gross margin:
Operating expenses:
Fuel Specialties
Net sales:
Three Months Ended June 30, 2022 |
||||||||||||||||||||
| Change (%) |
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 | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| +60 | +5 | +39 | -30 | +23 | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
The Americas and ASPAC sales volumes have increased year over year as the global demand for refined fuel products has increased. EMEA sales volumes were lower year over year, primarily due to variations in the timing of demand. Price and product mix was favorable in all our regions due to increased sales of higher margin products and the impact of increased raw materials pricing being passed on through higher selling prices. AvGas volumes were lower than the prior year due to variations in the demand from customers, being partly offset by a favorable price and product mix with a higher proportion of sales to higher margin customers. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.
23
Gross margin
Operating expenses:
Oilfield Services
Net sales:
Gross margin:
Operating expenses:
Other Income Statement Captions
Corporate costs:
Other net (expense)/income:
| (in millions) |
2022 |
2021 |
Change |
|||||||||
| Net pension credit |
$ | 1.2 | $ | 1.4 | (0.2 | ) | ||||||
| Profit on disposal of assets |
— | 0.2 | (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 | ||||||||
| |
|
|
|
|
|
|||||||
| $ | (3.6 | ) | $ | 3.4 | $ | (7.0 | ) | |||||
| |
|
|
|
|
|
|||||||
Interest expense, net:
24
Income taxes:
non-GAAP
financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends. In addition, management uses this non-GAAP
financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods. The following table shows a reconciliation of the GAAP effective tax rate to the adjusted effective tax rate:
Three Months Ended June 30 |
||||||||
| (in millions) |
2022 |
2021 |
||||||
| Income before income taxes |
$ | 42.3 | $ | 40.1 | ||||
| Indemnification asset regarding tax audit |
0.2 | (0.1 | ) | |||||
| Adjustment for stock compensation |
1.5 | 1.2 | ||||||
| Legacy costs of closed operations |
0.8 | 0.9 | ||||||
| |
|
|
|
|||||
| Adjusted income before income taxes |
$ | 44.8 | $ | 42.1 | ||||
| |
|
|
|
|||||
| Income taxes |
$ | 10.0 | $ | 17.7 | ||||
| Tax on stock compensation |
— | 0.2 | ||||||
| Adjustment of income tax provision |
— | (0.3 | ) | |||||
| Tax on legacy cost of closed operations |
0.2 | 0.2 | ||||||
| Tax on foreign exchange on distribution |
— | (0.2 | ) | |||||
| Change in UK statutory tax rate |
— | (7.4 | ) | |||||
| |
|
|
|
|||||
| Adjusted income taxes |
$ | 10.2 | $ | 10.2 | ||||
| |
|
|
|
|||||
| GAAP effective tax rate |
23.6 | % | 44.1 | % | ||||
| Adjusted effective tax rate |
22.8 | % | 24.2 | % | ||||
25
Six months Ended June 30 , 2022
The following table shows the change in components of operating income by reporting segment for the six months ended June 30, 2022 and the six months ended June 30, 2021:
Six Months Ended June 30 |
||||||||||||||||
| (in millions, except ratios) |
2022 |
2021 |
Change |
|||||||||||||
| Net sales: |
||||||||||||||||
| Performance Chemicals |
$ | 336.1 | $ | 254.1 | $ | 82.0 | +32 | % | ||||||||
| Fuel Specialties |
368.2 | 282.4 | 85.8 | +30 | % | |||||||||||
| Oilfield Services |
235.7 | 157.6 | 78.1 | +50 | % | |||||||||||
| |
|
|
|
|
|
|||||||||||
| $ | 940.0 | $ | 694.1 | $ | 245.9 | +35 | % | |||||||||
| |
|
|
|
|
|
|||||||||||
| Gross profit: |
||||||||||||||||
| Performance Chemicals |
$ | 84.4 | $ | 63.0 | $ | 21.4 | +34 | % | ||||||||
| Fuel Specialties |
117.6 | 95.0 | 22.6 | +24 | % | |||||||||||
| Oilfield Services |
77.1 | 51.1 | 26.0 | +51 | % | |||||||||||
| |
|
|
|
|
|
|||||||||||
| $ | 279.1 | $ | 209.1 | $ | 70.0 | +33 | % | |||||||||
| |
|
|
|
|
|
|||||||||||
| Gross margin (%): |
||||||||||||||||
| Performance Chemicals |
25.1 |
24.8 |
+0.3 |
|||||||||||||
| Fuel Specialties |
31.9 |
33.6 |
-1.7 |
|||||||||||||
| Oilfield Services |
32.7 |
32.4 |
+0.3 |
|||||||||||||
| Aggregate |
29.7 |
30.1 |
-0.4 |
|||||||||||||
| Operating expenses: |
||||||||||||||||
| Performance Chemicals |
$ | (30.3 | ) | $ | (26.8 | ) | $ | (3.5 | ) | +13 | % | |||||
| Fuel Specialties |
(50.6 | ) | (42.7 | ) | (7.9 | ) | +19 | % | ||||||||
| Oilfield Services |
(70.1 | ) | (47.7 | ) | (22.4 | ) | +47 | % | ||||||||
| Corporate costs |
(37.5 | ) | (26.7 | ) | (10.8 | ) | +40 | % | ||||||||
| |
|
|
|
|
|
|||||||||||
| $ | (188.5 | ) | $ | (143.9 | ) | $ | (44.6 | ) | +31 | % | ||||||
| |
|
|
|
|
|
|||||||||||
26
Performance Chemicals
Net sales:
Six Months Ended June 30, 2022 |
||||||||||||||||
| Change (%) |
Americas |
EMEA |
ASPAC |
Total |
||||||||||||
| Volume |
+33 | -8 | -9 | +6 | ||||||||||||
| Price and product mix |
+28 | +36 | +26 | +33 | ||||||||||||
| Exchange rates |
— | -11 | -6 | -7 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| +61 | +17 | +11 | +32 | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Higher sales volumes for the Americas were primarily driven by increased demand for our personal care products. Lower sales volumes for EMEA and ASPAC were due to reductions in demand when compared to the strong sales volumes in the prior year. All our regions benefitted from a favorable price and product mix due to increased sales of higher priced products together with the impact of increased raw materials pricing being passed on through higher selling prices. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.
Gross margin:
Operating expenses:
Fuel Specialties
Net sales:
Six Months Ended June 30, 2022 |
||||||||||||||||||||
| Change (%) |
Americas |
EMEA |
ASPAC |
AvGas |
Total |
|||||||||||||||
| Volume |
+34 | — | +15 | +8 | +14 | |||||||||||||||
| Price and product mix |
+30 | +29 | +10 | -21 | +23 | |||||||||||||||
| Exchange rates |
— | -14 | -3 | — | -7 | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| +64 | +15 | +22 | -13 | +30 | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
The Americas and ASPAC sales volumes have increased year over year as the global demand for refined fuel products has increased. Price and product mix was favorable in all our regions due to increased sales of higher margin products and the impact of increased raw materials pricing being passed on through higher selling prices. AvGas volumes were higher than the prior year due to variations in the demand from customers, being offset by an adverse price and product mix with a higher proportion of sales to lower margin customers. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.
27
Gross margin
Operating expenses:
Oilfield Services
Net sales:
Gross margin:
Operating expenses:
Other Income Statement Captions
Corporate costs:
Other net income:
| (in millions) |
2022 |
2021 |
Change |
|||||||||
| Net pension credit |
$ | 2.5 | $ | 2.6 | $ | (0.1 | ) | |||||
| Profit on disposal of assets |
— | 0.2 | (0.2 | ) | ||||||||
| Foreign exchange (losses)/gains on translation |
(4.2 | ) | 3.4 | (7.6 | ) | |||||||
| Foreign currency forward contracts gains |
2.4 | 0.2 | 2.2 | |||||||||
| |
|
|
|
|
|
|||||||
| $ | 0.7 | $ | 6.4 | $ | (5.7 | ) | ||||||
| |
|
|
|
|
|
|||||||
Interest expense, net:
28
Income taxes:
non-GAAP
financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends. In addition, management uses this non-GAAP
financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods. The following table shows a reconciliation of the GAAP effective tax rate to the adjusted effective tax rate:
Six Months Ended June 30 |
||||||||
| (in millions) |
2022 |
2021 |
||||||
| Income before income taxes |
$ | 90.5 | $ | 70.9 | ||||
| Indemnification asset regarding tax audit |
0.2 | — | ||||||
| Adjustment for stock compensation |
3.2 | 2.6 | ||||||
| Acquisition costs |
— | 0.8 | ||||||
| Legacy cost of closed operations |
1.9 | 1.8 | ||||||
| |
|
|
|
|||||
| Adjusted income before income taxes |
$ | 95.8 | $ | 76.1 | ||||
| |
|
|
|
|||||
| Income taxes |
$ | 21.7 | $ | 25.1 | ||||
| Tax on stock compensation |
0.5 | 0.3 | ||||||
| Adjustment of income tax provision |
— | (0.3 | ) | |||||
| Tax on acquisition costs |
— | 0.2 | ||||||
| Tax on legacy cost of closed operations |
0.4 | 0.4 | ||||||
| Tax on foreign exchange on distribution |
— | (0.2 | ) | |||||
| Change in UK statutory tax rate |
— | (7.4 | ) | |||||
| |
|
|
|
|||||
| Adjusted income taxes |
$ | 22.6 | $ | 18.1 | ||||
| |
|
|
|
|||||
| GAAP effective tax rate |
24.0 | % | 35.4 | % | ||||
| Adjusted effective tax rate |
23.6 | % | 23.8 | % | ||||
29
LIQUIDITY AND FINANCIAL CONDITION
Working Capital
In the first six months of 2022 our working capital increased by $38.6 million, while our adjusted working capital increased by $116.0 million. The difference is primarily due to the exclusion of the decrease in our cash and cash equivalents and the exclusion of movements for income taxes prepaid and due within one year.
The Company believes that adjusted working capital, a
non-GAAP
financial measure, (defined by the Company as trade and other accounts receivable, inventories, prepaid expenses, accounts payable and accrued liabilities rather than total current assets less total current liabilities) provides useful information to investors in evaluating the Company’s underlying performance and identifying operating trends. Management uses this non-GAAP
financial measure internally to allocate resources and evaluate the performance of the Company’s operations. Items excluded from working capital in the adjusted working capital calculation are listed in the table below and represent factors which do not fluctuate in line with the day to day working capital needs of the business. | (in millions) |
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 | ||||||
| Less cash and cash equivalents |
(71.4 | ) | (141.8 | ) | ||||
| Less prepaid income taxes |
(13.2 | ) | (5.8 | ) | ||||
| Less other current assets |
(0.4 | ) | (0.4 | ) | ||||
| Add back current portion of accrued income taxes |
15.1 | 3.7 | ||||||
| Add back finance leases |
— | 0.1 | ||||||
| Add back current portion of plant closure provisions |
6.6 | 5.2 | ||||||
| Add back current portion of operating lease liabilities |
14.1 | 12.4 | ||||||
| |
|
|
|
|||||
| Adjusted working capital |
$ | 380.9 | $ | 264.9 | ||||
| |
|
|
|
|||||
We had a $55.4 million increase in trade and other accounts receivable driven by increased trading activity across all our reporting segments. Days’ sales outstanding decreased in our Performance Chemicals segment from 64 days to 59 days; increased from 53 days to 62 days in our Fuel Specialties segment; and increased from 52 days to 64 days in our Oilfield Services segment.
We had a $84.6 million increase in inventories, net of a $0.4 million increase in allowances, in anticipation of further increases in demand in 2022, while managing the risk of further supply chain disruption for certain key raw materials, especially in our Fuel Specialties segment. Days’ sales in inventory increased in our Performance Chemicals segment from 59 days to 66 days; increased from 108 days to 151 days in our Fuel Specialties segment; and were unchanged at 76 days in our Oilfield Services segment.
Prepaid expenses decreased $5.8 million, from $18.0 million to $12.2 million due to the normal expensing of prepaid invoices.
We had a $18.2 million increase in accounts payable and accrued liabilities, which was dependent on the timing of payments for each of our reporting segments. Creditor days (including goods received not invoiced) increased in our Performance Chemicals segment from 47 days to 51 days; increased from 50 days to 54 days in our Fuel Specialties segment; and increased from 48 days to 61 days in our Oilfield Services segment.
30
Operating Cash Flows
We used cash for operating activities of $36.5 million in the first six months of 2022 compared to cash inflows of $21.6 million in the first six months of 2021. The reduction in cash generated from operating activities was principally related to the increase in working capital required to support the growth in sales.
Cash
At June 30, 2022 and December 31, 2021, we had cash and cash equivalents of $71.4 million and $141.8 million, respectively, of which $26.7 million and $55.1 million, respectively, were held by
non-U.S.
subsidiaries principally in the United Kingdom. The decrease in cash and cash equivalents of $70.4 million for the first six months of 2022 was driven by our increased working capital levels to support sales growth, together with our continued investments in capital projects and the payment of our semi-annual dividend.
Debt
At June 30, 2022, we had no debt outstanding under the revolving credit facility and $0.0 million of obligations under finance leases relating to certain fixed assets within our Oilfield Services segment.
At December 31, 2021, we had no debt outstanding under the revolving credit facility and $0.1 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments.
31
Item 3 Quantitative and Qualitative Disclosures about Market Risk
The Company uses floating rate debt to finance its global operations. The Company is subject to business risks inherent in
non-U.S.
activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The political and economic risks are mitigated by the stability of the major countries in which the Company’s largest operations are located. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize bad debt risk. Collateral is not generally required. From time to time, the Company uses derivatives, including interest rate swaps, commodity swaps and foreign currency forward exchange contracts, in the normal course of business to manage market risks. The derivatives used in hedging activities are considered risk management tools and are not used for trading purposes. In addition, the Company enters into derivative instruments with a diversified group of major financial institutions in order to manage the exposure to
non-performance
of such instruments. The Company’s objective in managing the exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flows and to lower overall borrowing costs. The Company’s objective in managing the exposure to changes in foreign currency exchange rates is to reduce volatility on earnings and cash flows associated with such changes. The Company offers fixed prices for some long-term sales contracts. As manufacturing and raw material costs are subject to variability the Company, from time to time, uses commodity swaps to hedge the cost of some raw materials thus reducing volatility on earnings and cash flows. The derivatives are considered risk management tools and are not used for trading purposes. The Company’s objective is to manage its exposure to fluctuating costs of raw materials.
The Company’s exposure to market risk has been discussed in the Company’s 2021 Annual Report on Form
10-K
and there have been no significant changes since that time. 32
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation carried out as of the end of the period covered by this report, under the supervision and with the participation of our management, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s “disclosure controls and procedures” (as defined in Rules
13a-15(e)
and 15d-15(e)
of the Securities Exchange Act of 1934) were effective as of June 30, 2022, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting
The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal control over financial reporting. This is intended to result in refinements to processes throughout the Company.
There were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by paragraph (d) of Rules
13a-15
and 15d-15
under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 33
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Legal matters
While we are involved from time to time in claims and legal proceedings that result from, and are incidental to, the conduct of our business including business and commercial litigation, employee and product liability claims, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their property is subject. It is possible, however, that an adverse resolution of an unexpectedly large number of such individual claims or proceedings could, in the aggregate, have a material adverse effect on results of operations for a particular year or quarter.
Item 1A Risk Factors
Information regarding risk factors that could have a material impact on our results of operations or financial condition are described under “Risk Factors” in Item 1A of Part I of our 2021 Form
10-K
and in Item 1A of Part II of our Form 10-Q
for the quarter ended March 31, 2022. In management’s view, there have been no material changes in the risk factors facing the Company as disclosed in those SEC filings. Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
There have been no unregistered sales of equity securities.
During the quarter ended June 30, 2022, the Company purchased its common stock as part of a recently announced share repurchase program and in connection with the exercising of stock options by employees.
The following table provides information about our repurchases of equity securities in the period.
Issuer Purchases of Equity Securities
| Period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs 1 |
Approximate dollar value of shares that may yet be purchased under the plans or programs |
||||||||||||
| April 1, 2022 through April 30, 2022 |
10,000 | $ | 94.2 | 10,000 | $ | 48.1 million | ||||||||||
| May 1, 2022 through May 31, 2022 |
8,700 | $ | 94.0 | 8,700 | $ | 47.3 million | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
18,700 | $ | 94.1 | 18,700 | $ | 47.3 million | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
1 |
On February 15, 2022 the Company announced a repurchase plan for up to $50 million of the Company’s common stock over a three-year period commencing on February 16, 2022. |
34
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
Not applicable.
Item 5 Other |
Information |
None.
Item 6 Exhibits
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | XBRL Instance Document and Related Item - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |
| 104 | Cover Page Interactive Data File – The cover page XBRL tags are embedded within the inline XBRL document. | |
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INNOSPEC INC. | ||||||
Registrant | ||||||
| Date: August 3, 2022 | By | /s/ PATRICK S. WILLIAMS | ||||
Patrick S. Williams | ||||||
President and Chief Executive Officer | ||||||
| Date: August 3, 2022 | By | /s/ IAN P. CLEMINSON | ||||
Ian P. Cleminson | ||||||
Executive Vice President and Chief Financial Officer | ||||||
TABLE OF CONTENTS
Part I Financial InformationItem 1 Condensed Consolidated Financial StatementsNote 1 Basis Of PresentationNote 2 Segment ReportingNote 3 Earnings Per ShareNote 4 GoodwillNote 5 Other Intangible AssetsNote 6 Pension and Post Employment BenefitsNote 7 Income TaxesNote 8 Long-term DebtNote 9 Plant Closure ProvisionsNote 10 Fair Value MeasurementsNote 11 Derivative Instruments and Risk ManagementNote 12 ContingenciesNote 13 Stock-based Compensation PlansNote 14 Reclassifications Out Of Accumulated Other Comprehensive LossNote 15 Recently Issued Accounting PronouncementsNote 16 Related Party TransactionsItem 3 Quantitative and Qualitative Disclosures About Market RiskItem 4 Controls and ProceduresPart II Other InformationItem 1 Legal ProceedingsItem 1A Risk FactorsItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3 Defaults Upon Senior SecuritiesItem 4 Mine Safety DisclosuresItem 5 Other InformationItem 5 OtherItem 6 Exhibits