INNOSPEC INC. 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 and property, plant and equipment and other intangible assets (net of depreciation and amortization). These policies have been discussed in the Company's 2019 Form 10-K. Impact of COVID-19 Pandemic and Current Economic Environment As anticipated in our Form 10-Q for the quarter endingMarch 31, 2020 , there has been a significant impact in the Company's results during the second quarter of 2020, due to the COVID-19 pandemic and global economic environment. Fuel Specialties have been impacted by reduced demand stemming from the reduction in freight transport and passenger miles and the widespread grounding of aircraft for the majority of the quarter. We expect demand will start to improve, to the extent global lockdowns are eased and economic activity recovers. Performance Chemicals have experienced little overall impact from the pandemic as increased demand for certain products linked to health, hygiene and cleaning outweighed some lost revenues linked to the short-term shutdown of some of our customers manufacturing facilities. Oilfield Services have been heavily impacted by the reduction in oil exploration and production as the wider industry reacts to the reduction in demand and low oil price. We have taken the measure of reducing headcount within this business and we have also impaired some intangible assets (see Note 6 of the Notes to the Condensed Consolidated Financial Statements for further information). We do not know how long this downturn will last and the rate of recovery will depend heavily on the rate and extent to which the government restrictions on movement continue to be lifted. Our manufacturing facilities have continued to operate with only some minor interruption, and we expect them to continue to do so. We have implemented flexible working, including working from home for our employees where possible, in line with advice and rules in each of the jurisdictions in which we operate. Raw material sourcing has not been significantly impacted and we do not expect that to change over the remainder of the year. Logistics are operating with some delays but our products are currently being delivered to our customers. Our financial position remains strong. We have sufficient access to capital if needed, including our$250 million revolving credit facility we entered into inSeptember 2019 , and we do not anticipate any issues with meeting the covenants for our debt agreements. Our major capital projects are continuing to progress as planned. As we operate in the chemical industry, we continue to be focused on protecting the health and safety of our employees and have procedures in place at each of our operating facilities to help ensure their well-being. We do not know how long the current economic environment will continue and while we have made estimates as to potential impacts on our financial position and operations, the ultimate impact on our business will depend on many factors which are very difficult to predict with certainty and substantially beyond our control. 22
--------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS The Company currently reports its financial performance based on the following four reportable segments: Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives. The Company expects that the Octane Additives segment will not make any further sales and will cease to be a reporting segment fromJanuary 1, 2021 . The following table provides operating income by reporting segment: Three Months Ended Six Months Ended June 30 June 30 (in millions) 2020 2019 2020 2019 Net sales: Fuel Specialties$ 107.4 $ 133.3 $ 254.4 $ 289.3 Performance Chemicals 95.7 104.7 208.8 222.8 Oilfield Services 41.8 122.5 154.0 236.7 Octane Additives 0.0 1.9 0.0 1.9$ 244.9 $ 362.4 $ 617.2 $ 750.7 Gross profit/(loss): Fuel Specialties$ 25.4 $ 44.7 $ 76.6 $ 100.4 Performance Chemicals 24.9 24.0 52.5 50.6 Oilfield Services 9.9 41.5 46.1 79.2 Octane Additives (1.1 ) 0.9 (2.2 ) (1.3 )$ 59.1 $ 111.1 $ 173.0 $ 228.9 Operating income/(loss): Fuel Specialties$ 4.7 $ 24.1 36.8 57.0 Performance Chemicals 12.2 11.0 27.8 24.5 Oilfield Services (12.4 ) 10.1 (5.2 ) 17.9 Octane Additives (1.6 ) 0.1 (2.8 ) (2.7 ) Corporate costs (15.4 ) (13.6 ) (28.2 ) (28.8 ) Restructuring charge (21.1 ) 0.0 (21.1 ) 0.0
Impairment of intangible assets (19.8 ) 0.0 (19.8 ) 0.0
Total operating (loss)/income$ (53.4 ) $ 31.7 $ (12.5 ) $ 67.9 23
--------------------------------------------------------------------------------
Table of Contents Three Months EndedJune 30, 2020 The following table shows the change in components of operating income by reporting segment for the three months endedJune 30, 2020 and the three months endedJune 30, 2019 : Three Months Ended June 30 (in millions, except ratios) 2020 2019 Change Net sales: Fuel Specialties$ 107.4 $ 133.3 $ (25.9 ) -19 % Performance Chemicals 95.7 104.7 (9.0 ) -9 % Oilfield Services 41.8 122.5 (80.7 ) -66 % Octane Additives 0.0 1.9 (1.9 ) -100 %$ 244.9 $ 362.4 $ (117.5 ) -32 % Gross profit/(loss): Fuel Specialties$ 25.4 $ 44.7 $ (19.3 ) -43 % Performance Chemicals 24.9 24.0 0.9 +4 % Oilfield Services 9.9 41.5 (31.6 ) -76 % Octane Additives (1.1 ) 0.9 (2.0 ) -222 %$ 59.1 $ 111.1 $ (52.0 ) -47 % Gross margin (%): Fuel Specialties 23.6 33.5 -9.9 Performance Chemicals 26.0 22.9 +3.1 Oilfield Services 23.7 33.9 -10.2 Octane Additives n/a 47.4 n/a Aggregate 24.1 30.7 -6.6 Operating expenses: Fuel Specialties$ (20.7 ) $ (20.6 ) $ (0.1 ) 0 % Performance Chemicals (12.7 ) (13.0 ) 0.3 -2 % Oilfield Services (22.3 ) (31.4 ) 9.1 -29 % Octane Additives (0.5 ) (0.8 ) 0.3 -38 % Corporate costs (15.4 ) (13.6 ) (1.8 ) +13 % Restructuring charge (21.1 ) 0.0 (21.1 ) n/a
Impairment of intangible assets (19.8 ) 0.0 (19.8 ) n/a
$ (112.5 ) $ (79.4 ) $ 33.1 +42 % 24
--------------------------------------------------------------------------------
Table of Contents
Fuel Specialties
Net sales:
the table below details the components which comprise the year over year change
in net sales spread across the markets in which we operate:
Three Months Ended June 30, 2020
Change (%) Americas EMEA ASPAC AvTel Total
Volume -21 -9 -23 -16 -15
Price and product mix +3 -4 -10 -4 -3
Exchange rates 0 -3 0 0 -1
-18 -16 -33 -20 -19
Volumes in all our regions suffered from the adverse impact of the global
COVID-19 pandemic, which reduced demand for fuel additive products. We believe
that customer demand will start to recover in the third quarter to the extent
that lockdowns in countries around the world are eased. Price and product mix in
the Americas was favorable due to a richer sales mix, while price and product
mix in the other regions was adverse due to lower sales of higher margin
products. AvTel volumes were lower than the prior year due to variations in the
demand from customers, together with an adverse price and product mix. EMEA was
negatively impacted by exchange rate movements year over year, driven by a
weakening of the British pound sterling and the European Union euro against the
U.S. dollar.
Gross margin
: the year over year decrease of 9.9 percentage points was due to the impact of
the
COVID-19
pandemic reducing the demand for our higher margin products, together with
adverse raw material costs and higher provisions for slow moving inventory.
Operating expenses:
the year over year increase of $0.1 million was driven by a higher provision for
doubtful debts, being partly offset by a reduction in travel and entertainment
expenses as a result of the COVID-19 pandemic.
Performance Chemicals
Net sales:
the table below details the components which comprise the year over year change
in net sales spread across the markets in which we operate:
Three Months Ended June 30, 2020
Change (%) Americas EMEA ASPAC Total
Volume +3 -9 +13 -4
Price and product mix -13 0 +3 -4
Exchange rates 0 -1 -1 -1
-10 -10 +15 -9
Higher volumes in the
25
--------------------------------------------------------------------------------
Table of Contents Gross margin: the year over year increase of 3.1 percentage points was due to a richer sales mix, the continued benefit of margin improvement projects and the timing of pricing movements for certain raw materials. Operating expenses: the year over year decrease of$0.3 million was primarily due to a reduction in travel and entertainment expenses as a result of the COVID-19 pandemic. Oilfield Services Net sales: the year over year decrease of$80.7 million , or 66 percent, was primarily due to a collapse of customer activity in exploration and production for the US onshore market, as a result of the COVID-19 pandemic reducing world-wide demand, together with the depressed price of crude oil. The Company hopes the demand for crude oil will begin to recover in the third quarter. Gross margin: the year over year decrease of 10.2 percentage points was due to increased inventory provisions as a result of the collapse in demand. Operating expenses: the year over year decrease of$9.1 million was driven by the right-sizing of the operations to adjust for the reduction in demand caused by the global COVID-19 pandemic. Octane Additives Net sales: were nil in the second quarter compared to$1.9 million in the second quarter of the prior year. As expected for some time, the production of TEL for use in motor gasoline has now come to an end. The Company expects that the Octane Additives segment will not make any further sales and will cease to be a reporting segment fromJanuary 1, 2021 . Gross loss/profit: was a$1.1 million loss in the second quarter compared to a$0.9 million profit in the second quarter of the prior year. The loss in the current quarter primarily related to the accretion charge on the plant closure provision, being consistent with the first quarter of 2020. Operating expenses: the year over year decrease of$0.3 million was a result of management plans to maintain efficient operational activity in line with the cessation of sales and production. Other Income Statement Captions Corporate costs: the year over year increase of$1.8 million was due to higher accruals for long-term performance-based incentive plans and higher spending on information technology following the network security incident in the second quarter of 2019, being partly offset by a reduction in travel and entertainment expenses as a result of the COVID-19 pandemic. Restructuring charge: was$21.1 million in the second quarter of 2020 related to the cessation of production and sales of TEL for use in motor gasoline. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information. 26
--------------------------------------------------------------------------------
Table of Contents Impairment of intangible assets : was$19.8 million in the second quarter of 2020 related to acquired intangible assets in our Oilfield Services segment. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for further information. Other net income: for the second quarter of 2020 and 2019, included the following: (in millions) 2020 2019 Change . United Kingdom pension credit$ 1.6 $ 1.9 $ (0.3 ) German pension charge (0.3 ) 0.0 (0.3 ) Foreign exchange loss on translation (1.1 ) (2.7 ) 1.6
Foreign currency forward contracts (loss)/gain (0.1 ) 0.8 (0.9 )
$ 0.1 $ 0.0 $ 0.1 Interest expense, net: was$0.5 million for 2020 compared to$1.2 million in the prior year, driven by lower average net debt as the business generated cash inflows. Income taxes: the effective tax rate was 26.2% and 26.9% in the second quarter of 2020 and 2019, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 23.6% in 2020 compared with 25.6% in 2019. The 2.0% decrease in the adjusted effective rate was primarily due to the fact that a higher proportion of the Company's profits are being generated in lower tax jurisdictions. The Company believes that this adjusted effective tax rate, a non-GAAP financial measure, provides useful information to investors and may assist them in evaluating the Company's underlying performance and identifying operating trends. In addition, management uses this non-GAAP financial measure internally to evaluate the performance of the Company's operations and for planning and forecasting in subsequent periods. The following table shows a reconciliation of the GAAP effective tax rate to the adjusted effective tax rate: Three Months Ended June 30 (in millions) 2020 2019 (Loss)/income before income taxes$ (53.8 ) $ 30.5 Indemnification asset regarding tax audit (0.5 ) 0.0 Adjustment for stock compensation (1.4 ) 1.1 Restructuring charge 21.1 0.0 Impairment of acquired intangible assets 19.8 0.0$ (14.8 ) $ 31.6 Income taxes$ (14.1 ) $ 8.2 Tax on stock compensation 0.1 0.3 Adjustment of income tax provision 1.2 (0.4 ) Tax on restructuring charge 4.3 0.0
Tax on impairment of acquired intangible assets 4.6 0.0 Tax on foreign exchange on distribution
0.4 0.0
$ (3.5 ) $ 8.1
GAAP effective tax rate 26.2 % 26.9 %
Adjusted effective tax rate 23.6 % 25.6 %
27--------------------------------------------------------------------------------
Table of Contents Six Months EndedJune 30, 2020 The following table shows the change in components of operating income by reporting segment for the six months endedJune 30, 2020 and the six months endedJune 30, 2019 : Six Months Ended June 30 (in millions, except ratios) 2020 2019 Change Net sales: Fuel Specialties$ 254.4 $ 289.3 $ (34.9 ) -12 % Performance Chemicals 208.8 222.8 (14.0 ) -6 % Oilfield Services 154.0 236.7 (82.7 ) -35 % Octane Additives 0.0 1.9 (1.9 ) -100 %$ 617.2 $ 750.7 $ (133.5 ) -18 % Gross profit/(loss): Fuel Specialties$ 76.6 $ 100.4 $ (23.8 ) -24 % Performance Chemicals 52.5 50.6 1.9 +4 % Oilfield Services 46.1 79.2 (33.1 ) -42 % Octane Additives (2.2 ) (1.3 ) (0.9 ) +69 %$ 173.0 $ 228.9 $ (55.9 ) -24 % Gross margin (%): Fuel Specialties 30.1 34.7 -4.6 Performance Chemicals 25.1 22.7 +2.4 Oilfield Services 29.9 33.5 -3.6 Octane Additives n/a n/a n/a Aggregate 28.0 30.5 -2.5 Operating expenses: Fuel Specialties$ (39.8 ) $ (43.4 ) $ 3.6 -8 % Performance Chemicals (24.7 ) (26.1 ) 1.4 -5 % Oilfield Services (51.3 ) (61.3 ) 10.0 -16 % Octane Additives (0.6 ) (1.4 ) 0.8 -57 % Corporate costs (28.2 ) (28.8 ) 0.6 -2 % Restructuring charge (21.1 ) 0.0 (21.1 ) n/a
Impairment of intangible assets (19.8 ) 0.0 (19.8 ) n/a
$ (185.5 ) $ (161.0 ) $ (24.5 ) -15 % 28
--------------------------------------------------------------------------------
Table of Contents
Fuel Specialties
Net sales:
the table below details the components which comprise the year over year change
in net sales spread across the markets in which we operate:
Six Months Ended June 30, 2020
Change (%) Americas EMEA ASPAC AvTel Total
Volume -10 -9 -19 +16 -9
Price and product mix +1 -2 -3 -9 -2
Exchange rates 0 -3 0 0 -1
-9 -14 -22 +7 -12
Volumes in all our regions suffered from the adverse impact of the global
COVID-19 pandemic, which reduced demand for fuel additive products. We believe
that customer demand will start to recover in the third quarter as lockdowns in
countries around the world are eased. Price and product mix in the Americas was
favorable due to a richer sales mix, while price and product mix in the other
regions was adverse due to lower sales of higher margin products. AvTel volumes
were higher than the prior year due to variations in the demand from customers,
partly offset by an adverse price and product mix. EMEA was negatively impacted
by exchange rate movements year over year, driven by a weakening of the British
pound sterling and the European Union euro against the U.S. dollar.
Gross margin
: the year over year decrease of 4.6 percentage points was due to the impact of
the
COVID-19
pandemic in the second quarter reducing the demand for our higher margin
products, together with adverse raw material costs and higher provisions for
slow moving inventory.
Operating expenses:
the year over year decrease of $3.6 million was driven by lower personnel
related performance-based remuneration due to a decrease in share-based
compensation accruals linked to the Innospec share price, which declined
significantly in the first quarter then partly recovered in the second quarter.
There was also a reduction in travel and entertainment expenses as a result of
the COVID-19 pandemic.
Performance Chemicals
Net sales:
the table below details the components which comprise the year over year change
in net sales spread across the markets in which we operate:
Six Months Ended June 30, 2020
Change (%) Americas EMEA ASPAC Total
Volume +8 -5 +36 +2
Price and product mix -12 -4 -2 -7
Exchange rates 0 -2 -1 -1
-4 -11 +33 -6
Higher volumes in the
29
--------------------------------------------------------------------------------
Table of Contents Gross margin: the year over year increase of 2.4 percentage points was due to a richer sales mix, the continued benefit of margin improvement projects and the timing of pricing movements for certain raw materials. Operating expenses: the year over year decrease of$1.4 million was primarily driven by lower personnel related performance-based remuneration due to a decrease in the share-based compensation accruals linked to theInnospec share price, which declined significantly in the first quarter then partly recovered in the second quarter. Oilfield Services Net sales: the year over year decrease of$82.7 million , or 35 percent, was primarily due to a collapse of customer activity in exploration and production for the US onshore market, as a result of the COVID-19 pandemic reducing world-wide demand together with the depressed price of crude oil. The Company hopes the demand for crude oil will begin to recover in the third quarter. Gross margin: the year over year decrease of 3.6 percentage points was due to significant inventory adjustments as a result of the collapse in demand. Operating expenses: the year over year decrease of$10.0 million was driven by the right-sizing of the operations to adjust for the reduction in demand caused by the global COVID-19 pandemic. Octane Additives Net sales: were nil in the first six months compared to$1.9 million in the first six months of the prior year. As expected for some time, the production of TEL for use in motor gasoline has now come to an end. The Company expects that the Octane Additives segment will not make any further sales and will cease to be a reporting segment fromJanuary 1, 2021 . Gross loss: was a$2.2 million loss in the first six months compared to a$1.3 million loss in the first six months of the prior year. The loss in the current year primarily related to the accretion charge on the plant closure provision. Operating expenses: the year over year decrease of$0.8 million was a result of management plans to maintain efficient operational activity in line with the cessation of sales and production. Other Income Statement Captions Corporate costs: the year over year decrease of$0.6 million was driven by lower personnel related performance-based remuneration, primarily due to a decrease in the share-based compensation accruals linked to theInnospec share price, which declined significantly in the first quarter then partly recovered in the second quarter. The reduction in costs was offset in part by higher spending on information technology following the network security incident in the second quarter of 2019. Restructuring charge: was$21.1 million related to the cessation of production and sales of TEL for use in motor gasoline. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information. 30
--------------------------------------------------------------------------------
Table of Contents Impairment of intangible assets: was$19.8 million related to acquired intangible assets in our Oilfield Services segment. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for further information. Other net income: for the first six months of 2020 and 2019, included the following: (in millions) 2020 2019 Change United Kingdom pension credit$ 3.3 $ 3.8 $ (0.5 ) German pension charge (0.5 ) (0.2 ) (0.3 )
Foreign exchange losses on translation (0.6 ) (0.5 ) (0.1 ) Foreign currency forward contracts gains 1.8 1.0 0.8
$ 4.0 $ 4.1 $ (0.1 ) Interest expense, net: was$1.1 million for 2020 compared to$2.7 million in the prior year, driven by lower average net debt as the business generated cash inflows. Income taxes: the effective tax rate was 31.3% and 26.4% in the first six months of 2020 and 2019, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 25.8% in the first six months of 2020 compared with 26.4% in the first six months of 2019. The 0.6% reduction in the adjusted effective tax rate reflects the impact of a larger proportion of the Company's profits being generated in lower tax jurisdictions. The Company believes that this adjusted effective tax rate, a non-GAAP financial measure, provides useful information to investors and may assist them in evaluating the Company's underlying performance and identifying operating trends. In addition, management uses this non-GAAP financial measure internally to evaluate the performance of the Company's operations and for planning and forecasting in subsequent periods. The following table shows a reconciliation of the GAAP effective tax rate to the adjusted effective tax rate: Six Months Ended June 30 (in millions) 2020 2019 (Loss)/income before income taxes$ (9.6 ) $ 69.3 Indemnification asset regarding tax audit (0.3 ) 0.0 Adjustment for stock compensation 0.0 2.6 Restructuring charge 21.1 0.0 Impairment of acquired intangible assets 19.8 0.0$ 31.0 $ 71.9 Income taxes$ (3.0 ) $ 18.3 Tax on stock compensation 0.5 1.3 Adjustment of income tax provision 1.2 (0.6 ) Tax on restructuring charge 4.3 0.0
Tax on impairment of acquired intangible assets 4.6 0.0 Tax on foreign exchange on distribution
0.4 0.0
$ 8.0 $ 19.0
GAAP effective tax rate 31.3 % 26.4 %
Adjusted effective tax rate 25.8 % 26.4 %
31--------------------------------------------------------------------------------
Table of Contents LIQUIDITY AND FINANCIAL CONDITION Working Capital In the first six months of 2020 our working capital decreased by$13.1 million , while our adjusted working capital decreased by$1.5 million . The difference is primarily due to a reduction in our cash and cash equivalents, being partly offset by an increase for prepaid taxes. The Company believes that adjusted working capital, a non-GAAP financial measure, (defined by the Company as trade and other accounts receivable, inventories, prepaid expenses, accounts payable and accrued liabilities rather than total current assets less total current liabilities) provides useful information to investors in evaluating the Company's underlying performance and identifying operating trends. Management uses this non-GAAP financial measure internally to allocate resources and evaluate the performance of the Company's operations. Items excluded from working capital in the adjusted working capital calculation are listed in the table below and represent factors which do not fluctuate in line with the day to day working capital needs of the business. June 30, December 31, (in millions) 2020 2019 Total current assets$ 532.9 $ 630.3 Total current liabilities (219.2 ) (303.5 ) Working capital 313.7 326.8 Less cash and cash equivalents (58.2 ) (75.7 ) Less prepaid income taxes (8.0 ) (2.5 ) Less other current assets 0.0 (0.8 ) Add back current portion of accrued income taxes 8.4 10.3 Add back current portion of finance leases 0.6 1.0 Add back current portion of plant closure provisions 6.3 5.6 Add back current portion of operating lease liabilities 11.0 10.6 Adjusted working capital$ 273.8 $ 275.3 We had a$78.6 million decrease in trade and other accounts receivable primarily driven by the decline in sales in our Fuel Specialties and Oilfield Services segments as a result of the COVID-19 pandemic. Days' sales outstanding in our Fuel Specialties segment increased from 52 days to 59 days; remained unchanged in our Performance Chemicals segment at 64 days; and increased from 66 days to 112 days in our Oilfield Services segment. We had a$1.0 million decrease in inventories, net of a$2.5 million increase in allowances, as we managed inventory levels to align with the depressed sales in the second quarter resulting from the COVID-19 pandemic. Days' sales in inventory in our Fuel Specialties segment increased from 97 days to 149 days; increased in our Performance Chemicals segment from 66 days to 81 days; and increased from 71 days to 122 days in our Oilfield Services segment. Prepaid expenses decreased$5.0 million , from$14.7 million to$9.7 million due to the normal expensing of prepaid invoices. We had a$83.1 million decrease in accounts payable and accrued liabilities primarily due to lower production activity to align with reduced customer demand, together with lower accruals for share-based payments linked to the decrease in theInnospec share price during the first quarter of the year. Creditor days (including goods received not invoiced) in our Fuel Specialties segment decreased from 52 days to 29 days; decreased in our Performance Chemicals segment from 54 days to 49 days; and decreased in our Oilfield Services segment from 43 days to 33 days. 32
--------------------------------------------------------------------------------
Table of Contents Operating Cash Flows We generated cash from operating activities of$32.2 million in the first six months of 2020 compared to cash inflows of$63.2 million in the first six months of 2019. The reduction in cash generated from operating activities was primarily related to the adverse impact of COVID-19 on customer activity and the timing of payments for income taxes. Cash AtJune 30, 2020 andDecember 31, 2019 , we had cash and cash equivalents of$58.2 million and$75.7 million , respectively, of which$27.3 million and$57.9 million , respectively, were held by non-U.S. subsidiaries principally in theUnited Kingdom . The decrease in cash and cash equivalents in 2020 of$17.5 million was primarily related to the repayment of$20.0 million of our revolving credit facility. Debt AtJune 30, 2020 , we had$40.0 million of debt outstanding under the revolving credit facility and$0.8 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments. AtDecember 31, 2019 , we had$60.0 million of debt outstanding under the revolving credit facility and$1.5 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments. 33
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
