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Item 7. Management’s Discussion and Analysis

2024-02-14 compared with 2023-02-22 · 119 added, 140 removed, 249 unchanged (51% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with our Consolidated Financial Statements and the Notes thereto.

EXECUTIVE OVERVIEW

In 2022 Innospec delivered double-digit sales and operating income growth with expanded margins, and each of our businesses contributed meaningfully to our results.

We benefited from our balanced end-market exposure in late 2022 as the negative impact of year-end customer destocking in Performance Chemicals was offset by continued growth in Oilfield Services and Fuel Specialties.

In Performance Chemicals, despite aggressive customer destocking which drove lower volumes and margins in the fourth quarter, full-year operating income increased by 34 percent, and operating margin improved for the fifth consecutive year.

Our industry-leading personal care technologies drove the majority of operating income growth in 2022.

Fuel Specialties delivered double-digit operating income growth for the full year.

Gross margins remained below our expected range, but improvement continues to be a key focus and opportunity for our business in 2023.

We believe there is potential for gross margin expansion once inflation normalizes and demand for our higher margin jet fuel additives recovers.

Oilfield Services achieved significant sales and operating income growth over the prior year.

In 2023, we anticipate that a portion of our sales will moderate versus the extremely strong third and fourth quarters of 2022.

However, we expect potential for further improvement in the other markets within our oilfield business.

In 2023 Innospec delivered strong results.

We again benefited from our balanced end-market exposure as the negative impact of customer destocking in Performance Chemicals was offset by significant growth in Oilfield Services, and steady results in Fuel Specialties.

In Performance Chemicals, full year sales and operating income declined, but we believe that destocking pressure peaked in the third quarter of 2023.

This combined with new contract awards contributed to significant sequential improvement in operating income and margins in the second half of 2023.

While the economic environment remains a challenge, we expect further improvement in this business in 2024 as activity levels return.

In addition, we acquired QGP which we believe will further strengthen our Performance Chemicals segment and add a manufacturing base in South America to compliment all of our end markets.

In Fuel Specialties, after adjusting for the non-recurring Brazil inventory charges in the first half of 2023, full-year operating income grew and operating margins improved to 18%.

Our target for operating margins continues to be 19-21%.

Sales growth combined with further margin improvement is a key focus and opportunity for the global Fuel Specialties team in 2024.

Oilfield Services had another excellent full year.

Operating income approximately doubled and operating margins improved above our 10% target.

While we expect production chemicals activity to remain at moderate levels in 2024, we continue to pursue further sales growth and margin improvement in our other segments.

CRITICAL ACCOUNTING ESTIMATES

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We are subject to environmental laws in the countries in which we conduct business.

Ellesmere Port in the United Kingdom is our principal site giving rise to asset retirement obligations, associated with the production of TEL.

Ellesmere Port in the U.K.

is our principal site giving rise to asset retirement obligations, associated with the production of TEL.

There are also asset retirement obligations and environmental remediation liabilities on a much smaller scale in respect of other manufacturing sites.

At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed.

Plant closure provisions at December 31, 2022 amounted to $57.2 million and relate principally to our Ellesmere Port site in the United Kingdom.

We recognize environmental

remediation liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal requirement, including those arising from a Company promise, and the costs can be reasonably estimated.

Plant closure provisions at December 31, 2023 amounted to $61.6 million and relate principally to our Ellesmere Port site in the U.K..

We recognize environmental remediation liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal requirement, including those arising from a Company promise, and the costs can be reasonably estimated.

The Company has to anticipate the program of work required and the associated future expected costs, and comply with environmental legislation in the countries in which it operates or has operated in.

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While we believe our assumptions for plant closure provisions are reasonable, they are subjective estimates and it is possible that variations in any of the assumptions will result in materially different calculations to the liabilities we have reported.

We are subject to income and other taxes in the U.S., the U.K., and a number of other jurisdictions.

We are subject to income and other taxes in the U.S., the U.K.

and a number of other jurisdictions.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied.

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We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained, based on technical merits of the position, when challenged by the taxing authorities.

To the extent that we prevail in matters for which liabilities have been established or are required to pay amounts in excess of the liabilities recorded in our financial statements, our effective tax rate in a given period may be materially affected.

To the extent that we prevail in matters for which liabilities have been established or are required to pay amounts in excess of the liabilities recorded in our Consolidated Financial Statements, our effective tax rate in a given period may be materially affected.

An unfavorable tax settlement may require cash payments and result in an increase in our effective tax rate in the year of resolution.

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The benefit obligation was not transferred to the insurer, and the Company remains responsible for paying pension benefits.

The initial value of the asset associated with this contract was equal to the premium paid to secure the contract and is

adjusted each reporting period to reflect the estimated fair value of the premium that would be paid for such a contract at that time.

The initial value of the asset associated with this contract was equal to the premium paid to secure the contract and is adjusted each reporting period to reflect the estimated fair value of the premium that would be paid for such a contract at that time.

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 while improving the security to the UK Plan and its members.

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The components in each segment (including products, markets and competitors) have similar economic characteristics and the segments, therefore, reflect the lowest level at which operations and cash flows can be sufficiently distinguished, operationally and for financial reporting purposes, from the rest of the Company.

To test for impairment the Company performs a qualitative step zero assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a segment is less than the carrying amount prior to performing the quantitative goodwill impairment test.

To test for impairment the Company performs a qualitative step zero assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a segment is less than the carrying amount prior to performing the quantitative goodwill impairment test.

Factors utilized in the qualitative assessment process include macroeconomic conditions;

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Our step zero impairment review at December 31, 2023 indicated the fair value of each segment is, more likely than not, higher than the carrying value, meaning no step one impairment review was required to be performed.

Property, Plant and Equipment and Other Intangible Assets (Net of Depreciation and Amortization, respectively)

As at December 31, 2022 we had $220.9 million of property, plant and equipment and $45.0 million of other intangible assets (net of depreciation and amortization, respectively), that are discussed in Notes 6 and 9 of the Notes to the Consolidated Financial Statements, respectively.

These long-lived assets relate to all of our reporting segments and are being amortized or depreciated straight-line over periods of up to 17 years in respect of the other intangible assets and up to 25 years in respect of the property, plant and equipment.

We continually assess the markets and products related to these long-lived assets, as well as their specific carrying values, and have concluded that these carrying values, and amortization and depreciation periods, remain appropriate.

RESULTS OF OPERATIONS

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Oilfield Services

Octane Additives

Operating income:

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Oilfield Services

Octane Additives

Corporate costs

Restructuring charge

Impairment of intangible assets

Profit on disposal

1 unchanged sentence

Other income/(expense), net

Interest expense, net

Interest income/(expense), net

Income before income taxes

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Corporate costs

Profit on disposal

Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.

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Exchange rates

Higher sales volumes for the Americas and ASPAC were primarily driven by increased demand for our personal care products.

Lower sales volumes for EMEA were due to

reductions in demand for our home care products when compared to strong sales volumes in the prior year.

All our regions benefited 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 strengthening of the U.S.

dollar against the British pound sterling and the European Union euro.

Lower sales volumes for all of our regions were primarily driven by reduced demand for our personal care products resulting from cautious consumer sentiment, together with the impact of destocking by our customers.

The Americas and EMEA were impacted by an adverse price and product mix due to a higher proportion of lower priced products being sold.

ASPAC benefited from a favorable price and product mix due to a higher proportion of higher priced products being sold.

Gross margin:

the year over year decrease of 0.4 percentage points was primarily due to adverse manufacturing variances and higher raw materials costs in the fourth quarter of 2022, being partly offset by a favorable sales mix from increased sales of higher margin products.

the year over year decrease of 4.6 percentage points was due to an adverse sales mix from reduced sales of higher margin products and the adverse impact of reduced manufacturing efficiency resulting from lower production volumes.

Operating expenses:

the year over year increase of $0.4 million was due to higher selling expenses to support our increased sales and higher personnel-related expenses, including higher share-based compensation accruals and higher performance-related remuneration accruals;

being partly offset by lower provisions for doubtful debts.

decreased $3.6 million year over year, due to lower selling expenses including commissions, lower performance-related remuneration accruals and lower acquired intangibles amortization following the end of the expected life of the assets.

Fuel Specialties

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Exchange rates

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 a reduction for the sales of higher volume lower margin products.

Price and product mix was favorable in all our regions due to a favorable sales mix with an increased proportion of sales of higher margin products, together with 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 being made to lower margin customers.

EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a strengthening of the U.S.

dollar against the British pound sterling and the European Union euro.

Sales volumes in all of our regions have decreased year over year, primarily due to a reduction in the sales of lower margin higher volume products.

Price and product mix was favorable in all our regions due to an increased proportion of higher margin products being sold.

AvGas volumes were lower than the prior year due to variations in the demand from customers, together with an adverse price and product mix due to a higher proportion of sales to lower margin customers.

Gross margin:

the year over year decrease of 0.8 percentage points was due to the impact of the time lag for passing higher raw material costs through to selling prices.

the year over year increase of 0.5 percentage points was primarily due to a favorable sales mix from increased sales of higher margin products, being partly offset by the impact of the Brazil inventory misappropriation and the ending of that trading relationship.

Operating expenses:

the year over year increase of $11.6 million was due to higher personnel-related expenses, including higher share-based compensation accruals, higher travel expenses, increased sales promotions and increased provisions for doubtful debts.

the year over year increase of $5.2 million includes increased research and development expenditure and higher provisions for doubtful debts which are primarily related to the ending of the Brazilian trading relationship, being partly offset by lower performance-related remuneration accruals.

Oilfield Services

have increased year over year by $254.0 million, or 75 percent, with the majority of our customer activity being concentrated in the Americas region.

Customer demand has increased through each quarter in 2022, which we believe represents a positive sign for further sales growth going into 2023.

have increased year over year by $97.5 million, or 16%, with the majority of our customer activity concentrated in the Americas region.

We believe that customer demand remains strong despite operating income growth moderating, as expected, through the second half of the 2023.

Gross margin:

the year over year increase of 1.9 percentage points was due to a favorable sales mix, while management are continuing to maintain prices in a competitive market.

the year over year increase of 2.9 percentage points was due to a favorable sales mix and the benefit of improved pricing.

Operating expenses:

the year over year increase of $67.0 million was driven by higher customer service costs which are necessary to support the increase in demand, together with higher personnel-related expenses, including higher share-based compensation accruals and higher performance-related remuneration accruals, and increased provisions for doubtful debts.

the year over year increase of $18.7 million was driven by higher customer service costs which are necessary to support the increase in demand with certain customers, together with higher provisions for doubtful debts, while being partly offset by lower performance-related remuneration accruals.

Other Income Statement Captions

Corporate costs:

the year over year increase of $15.8 million was driven by higher personnel-related expenses, including higher share-based compensation accruals and higher performance-related remuneration accruals, together with increased maintenance expenditure for our information technology infrastructure.

Profit on disposal:

in the prior year there was a profit on disposal of $1.8 million, which principally related to the sale of land within our oilfield services business in the U.S..

the year over year increase of $9.8 million was primarily due to acquisition related costs, additional environmental remediation provisions, increased spending on our information technology infrastructure and some legal costs related to the Brazil inventory misappropriation, being partly offset by lower performance-related remuneration accruals.

Other net income/(expense):

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Foreign currency forward contracts gains/(losses)

Interest expense, net:

was $1.1 million in 2022 compared to $1.5 million in 2021.

Interest expense includes a commitment fee to retain the Company’s revolving credit facility for the term of the agreement.

Interest income/(expense), net:

was income of $2.3 million in 2023 primarily due to the interest earned on the Company's cash balances, compared to a $1.1 million expense in 2022 primarily due to the commitment fee which the Company paid to retain its revolving credit facility for the term of the agreement.

Income taxes:

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Tax loss / (gain) on distribution

Change in UK statutory tax rate

Tax on legacy cost of closed operations

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Adjusted effective tax rate

The GAAP effective tax rate and adjusted effective tax rate in 2022 have been negatively impacted by foreign income inclusions, net of foreign tax credits, which arise each year from certain types of income earned overseas being taxable under U.S.

tax regulations.

The adjusted effective tax rate is higher in 2023 than the GAAP effective tax rate, primarily due to elimination of the impact of other discrete items.

This mainly represents the benefit arising from adjustments to the tax charge for previous years arising from return to provision adjustments in relation to the federal and state tax returns filed in the U.S.

Our adjusted effective tax rate was lower in 2022 than the GAAP effective tax rate primarily due to the elimination of stock compensation activity.

Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S.

Foreign tax credits can fully or partially offset these incremental U.S.

foreign income inclusions.

The utilization of foreign tax credits varies year on year as this is dependent on a number of variable factors which are difficult to predict and may prevent offset.

The GAAP effective tax rate and the adjusted effective tax rate in both 2023 and 2022 have been negatively impacted by these items.

As a consequence of the Company having operations outside of the U.S., it is exposed to foreign currency fluctuations.

These have also had a negative impact on the GAAP effective tax rate and adjusted effective tax rate in 2022.

The adjusted effective tax rate is lower than the GAAP effective tax rate, primarily due to elimination of stock compensation activity to better reflect the Company’s underlying business performance.

The most significant factor impacting our adjusted effective tax rate in 2021 is the elimination of the impact of the increase in the U.K.

statutory income tax rate.

These have had a positive impact on the GAAP effective tax rate and adjusted effective tax rate in 2023, and a negative impact in 2022.

As in the prior year, the level of foreign-derived intangible income benefit that the Company is entitled to has also had a positive impact on the GAAP effective tax rate and the adjusted effective tax rate.

For additional information regarding the GAAP effective tax rate in 2023 see Note 11 of the Notes to the Consolidated Financial Statements.

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Oilfield Services

Octane Additives

Gross margin (%):

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Oilfield Services

Octane Additives

Corporate costs

Restructuring charge

Impairment of intangible assets

Profit on disposal

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Performance Chemicals

the table below details the components which comprise the year on year change in net sales spread across the markets in which we operate:

the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

Price and product mix

Exchange rates

Higher volumes for the Americas were driven by increased demand for our personal care products.

Volumes in EMEA were favorable including the continued recovery of demand across several markets which have been adversely impacted by the pandemic.

Lower volumes in ASPAC were primarily driven by a reduction in demand for our personal care products.

All our regions benefited from a favorable price and product mix due to increased sales of higher priced products and increased raw materials pricing being passed on through higher selling prices.

EMEA and ASPAC benefited from favorable exchange rate movements year over year, due to a strengthening of the British pound sterling and the European Union euro against the U.S.

Higher sales volumes for the Americas and ASPAC were primarily driven by increased demand for our personal care products.

Lower sales volumes for EMEA were due to reductions in demand for our home care products when compared to strong sales volumes in the prior year.

EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a strengthening of the U.S.

dollar against the British pound sterling and the European Union euro.

Gross margin:

the year over year decrease of 0.6 percentage points was due to adverse manufacturing variances as activity slowed over the holiday season in the fourth quarter, together with some one-off provisions.

Operating expenses:

the year over year increase of $5.3 million was due to increased spending on research and development, an increase in the allowance for doubtful debts and higher personnel-related expenses including higher share-based compensation accruals and higher performance related remuneration accruals.

being partly offset by lower provisions for doubtful debts.

Fuel Specialties

the table below details the components which comprise the year on year change in net sales spread across the markets in which we operate:

the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

Price and product mix

Exchange rates

Volumes in all our regions have increased year over year, as the global demand for refined fuel products has returned to near the pre-pandemic levels.

Price and product mix was favorable in all our regions due to increased sales of higher margin products and 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 offset by a favorable price and product mix with a higher proportion of sales to higher margin customers.

EMEA and ASPAC benefited from favorable exchange rate movements year over year, due to a strengthening of the British pound sterling and the European Union euro against the U.S.

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 a reduction for the sales of higher volume lower margin products.

EMEA and ASPAC were adversely impacted by exchange rate movements year over year, due to a strengthening of the U.S.

dollar against the British pound sterling and the European Union euro.

Gross margin:

the year over year decrease of 0.1 percentage points was impacted by the time lag for passing higher raw material costs through to selling prices in the second half of the year.

the year over year decrease of 0.8 percentage points was due to the impact of the time lag for passing higher raw material costs through to selling prices.

Operating expenses:

the year over year increase of $12.8 million was due to higher selling expenses to support the increased sales, together with higher research and development costs

and higher personnel-related expenses including higher share-based compensation accruals and higher performance related remuneration accruals.

Oilfield Services

have increased year over year by $84.8 million, or 33 percent, with the majority of our customer activity continuing to be in the Americas region.

Customer demand has increased throughout the year as the pandemic recovery has continued.

We expect to see continued growth in customer demand into 2022.

have increased year over year by $254.0 million, or 75%, with the majority of our customer activity being concentrated in the Americas region.

Customer demand has increased through each quarter in 2022.

Gross margin:

the year over year increase of 2.6 percentage points was due to a favorable sales mix compared to a prior year comparative which was adversely impacted by the pandemic, while management have successfully maintained prices in a competitive market.

the year over year increase of 1.9 percentage points was due to a favorable sales mix, while management are continuing to maintain prices in a competitive market.

Operating expenses:

the year over year increase of $15.8 million was driven by our continuing customer service flexibility which allows us to support the increase in demand as the pandemic recovery has continued, together with higher personnel-related expenses including higher share-based compensation accruals and higher performance related remuneration accruals.

Octane Additives

The Octane Additives business ceased trading and is no longer a reporting segment from July 1, 2020 as the production of TEL for use in motor gasoline has finished.

Legacy costs related to these operations have now been recorded as operating expenses within corporate costs.

Prior to the business ceasing trade there were no sales in 2020, together with a gross loss of $2.2 million and operating expenses of $0.6 million.

Other Income Statement Captions

Corporate costs:

the year over year increase of $3.4 million was driven by higher personnel-related expenses including higher share-based compensation accruals and higher performance related remuneration accruals, together with the adverse impact of the foreign currency translation of our costs at Ellesmere Port in the United Kingdom due to a strengthening of the British pound sterling against the U.S.

Profit on disposal:

there has been a profit on disposal of assets for $1.8 million in 2021, which principally relates to the sale of land within our oilfield services business in the U.S..

in the prior year there was a profit on disposal of $1.8 million, which principally related to the sale of land within our oilfield services business in the U.S..

Other net income/(expense):

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(in millions)

United Kingdom pension credit

German pension charge

Net pensions credit

Foreign exchange gains/(losses) on translation

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Interest expense, net:

was $1.5 million in 2021 compared to $1.8 million in 2020, driven by the repayment in full of our revolving credit facility in the second half of 2020.

was $1.1 million in 2022 compared to $1.5 million in 2021.

Interest expense includes a commitment fee to retain the Company’s revolving credit facility for the term of the agreement.

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Indemnification asset regarding tax audit

Restructuring charge

Impairment of acquired intangible assets

Legacy cost of closed operations

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Tax on stock compensation

Tax on restructuring charge

Tax on impairment of acquired intangible asset

Tax loss / (gain) on distribution

Change in U.K.

statutory tax rate

Change in UK statutory tax rate

Tax on legacy cost of closed operations

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Adjusted effective tax rate

The most significant factor impacting our adjusted effective tax rate in 2021 is the elimination of the impact of the increase in the statutory income tax rate in the U.K..

The most significant factors impacting our adjusted effective tax rate in 2020 are the restructuring charge relating to the cessation of production and sales of TEL for use in motor gasoline, the impairment of acquired intangible assets in our Oilfield Services segment, and the elimination of the impact of the increase in the statutory income tax rate in the U.K..

The GAAP effective tax rate and adjusted effective tax rate in 2022 were negatively impacted by foreign income inclusions, net of foreign tax credits, which arise each year from certain types of income earned overseas being taxable under U.S.

tax regulations.

As a consequence of the Company having operations outside of the U.S., it is exposed to foreign currency fluctuations.

These also had a negative impact on the GAAP effective tax rate and adjusted effective tax rate in 2022.

The most significant factor impacting our adjusted effective tax rate in 2021 was elimination of the impact of the increase in the U.K.

statutory income tax rate.

LIQUIDITY AND FINANCIAL CONDITION

Working Capital

In 2022 our working capital increased by $75.3 million, while our adjusted working capital increased by $88.7 million.

The difference is primarily due to the exclusion of the increase in our cash and cash equivalents, together with the movements for income taxes.

In 2023 our working capital increased by $47.4 million, while our adjusted working capital decreased by $24.5 million.

The difference between these measures is primarily due to the exclusion of the increase in our cash and cash equivalents, together with the movements for income taxes.

The Company believes that adjusted working capital, a non-GAAP financial measure, 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 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.

Items excluded from 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)

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Add back current portion of accrued income taxes

Add back current portion of finance leases

Add back current portion of plant closure provisions

Add back current portion of operating lease liabilities

Add back current portion of unrecognized tax benefits

Adjusted working capital

The movements in our adjusted working capital are explained as follows:

We had a $50.1 million increase in trade and other accounts receivable primarily driven by increased trading activity across our reporting segments.

Days’ sales outstanding in our Performance Chemicals segment decreased from 64 days to 60 days;

We had a $25.2 million increase in trade and other accounts receivable primarily driven by increased trading activity and timing of sales across our reporting segments.

Days’ sales outstanding in our Performance Chemicals segment increased from 60 days to 62 days;

increased in our Fuel Specialties segment from 54 days to 55 days;

and increased from 54 days to 72 days in our Oilfield Services segment.

We had a $95.5 million increase in inventories, net of a $1.7 million increase in allowances, as we managed inventory levels to support future demand, with the intention of mitigating the risk of potential supply chain disruption for certain key raw materials.

Days’ sales in inventory in our Performance Chemicals segment increased from 59 days to 78 days;

increased in our Fuel Specialties segment from 108 days to 138 days;

We had a $73.0 million decrease in inventories, net of a $1.0 million increase in allowances, as we manage inventory levels necessary to support future demand, whilst mitigating the risk of potential supply chain disruption for certain key raw materials.

Days’ sales in inventory in our Performance Chemicals segment decreased from 78 days to 61 days;

decreased in our Fuel Specialties segment from 138 days to 121 days;

and decreased from 58 days to 53 days in our Oilfield Services segment.

Prepaid expenses decreased $3.9 million, from $18.0 million to $14.1 million principally due to the reduction in prepaid customer marketing arrangements.

We had a $53.0 million increase in accounts payable and accrued liabilities primarily due to increased activity across all our reporting segments.

Creditor days (including goods received not invoiced) decreased in our Performance Chemicals segment from 47 days to 42 days;

Prepaid expenses increased $4.6 million, from $14.1 million to $18.7 million principally due to the timing of prepaid invoices.

We had a $18.7 million decrease in accounts payable and accrued liabilities primarily due to the timing of supplier payments.

Creditor days (including goods received not invoiced) remained unchanged in our Performance Chemicals segment at 42 days;

decreased in our Fuel Specialties segment from 45 days to 41 days;

and increased from 48 days to 54 days in our Oilfield Services segment.

and decreased from 54 days to 53 days in our Oilfield Services segment.

Operating Cash Flows

We generated cash from operating activities of $81.7 million in 2022 compared to cash inflows of $93.2 million in 2021.

The reduction in cash generated from operating activities

was primarily related to the increases for our working capital being partly offset by the improvements in our earnings before depreciation and amortization.

At December 31, 2022 and 2021, we had cash and cash equivalents of $147.1 million and $141.8 million, respectively, of which $76.4 million and $55.1 million, respectively, were held by non-U.S.

subsidiaries principally in the United Kingdom.

The $5.3 million increase in cash and cash equivalents in 2022 was driven by the cash inflows from operating activities, while being partly offset by increased working capital levels, continued investments in capital projects and the payment of our semi-annual dividends.

As at December 31, 2022 and December 31, 2021 the Company had repaid all of its borrowings under the revolving credit facility and as a result, the related deferred finance costs of $0.6 million (December 31, 2021 – $1.0 million) are now included within other current and non-current assets at the balance sheet date.

On September 16, 2020, Innospec and certain of its subsidiaries agreed to extend the term of its revolving credit facility, as described below, until September 25, 2024.

The costs of $0.3 million for extending the term have been capitalized on the balance sheet, which are being amortized over the expected life of the facility.

On September 30, 2019 the Company repaid its pre-existing term loan and revolving credit facility that had been amended and restated on December 14, 2016, and replaced this borrowing with the new credit facility.

As a result, refinancing costs of $1.5 million were capitalized which are being amortized over the expected life of the facility.

On September 26, 2019, Innospec and certain of its subsidiaries entered into a new agreement for a $250.0 million revolving credit facility until September 25, 2023 with an option to request an extension to the facility for a further year.

The facility also 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.

We generated cash from operating activities of $207.3 million in 2023 compared to $81.7 million in 2022.

The increase is primarily related to the decrease in our working capital together with the improvements in our earnings before depreciation and amortization, being partly offset by income tax payments.

As at December 31, 2023 and 2022, we had cash and cash equivalents of $203.7 million and $147.1 million, respectively, of which $59.8 million and $76.4 million, respectively, were held by non-U.S.

subsidiaries principally in the U.K..

The $56.6 million increase in cash and cash equivalents in 2023 was driven by the cash inflows from operating activities and lower working capital needs, partly offset by the acquisition payment for a business in Brazil, continued investments in capital projects, payments for income taxes and the payment of our semi-annual dividends.

As at December 31, 2023 and 2022, the Company had repaid all of its borrowings under the revolving credit facility and as a result, the related deferred finance costs of $1.2 million (December 31, 2022 – $0.6 million) are now included within other current and non-current assets at the balance sheet date.

On May 31, 2023, Innospec Inc.

and certain subsidiaries of the Company entered into a Multicurrency Revolving Facility Agreement with various lenders, providing for a $250,000,000 four-year multicurrency revolving loan facility.

The Agreement also contains an accordion feature whereby the Company may elect to increase the total available borrowings by an aggregate amount of up to $125,000,000.

The termination date of the facility is May 30, 2027, but the Company has an option to request an extension of the facility for a further year.

The agreement replaced the Company’s credit facility agreement dated September 26, 2019.

See Note 12 to the Notes to the Consolidated Financial Statements for additional details.

The revolving credit facility contains terms which, if breached, would result in it becoming repayable on demand.

It requires, among other matters, compliance with the following financial covenant ratios measured on a quarterly basis:

(1) our ratio of net debt to EBITDA must not be greater than 3.0:1.0 and (2) our ratio of EBITDA to net interest must not be less than 4.0:1.0 Management has determined that the Company has not breached these covenants and does not expect to breach these covenants for the next 12 months.

(1) our ratio of net debt to EBITDA must not be greater than 3.5:1.0 and (2) our ratio of EBITDA to net interest must not be less than 4.0:1.0.

Management has determined that

the Company has not breached these covenants and does not expect to breach these covenants for the next 12 months.

The revolving credit facility contains restrictions which may limit our activities as well as operational and financial flexibility.

We may not be able to borrow if an event of default is outstanding, which includes a material adverse change to our assets, operations or financial

We may not be able to borrow if an event of default is outstanding, which includes a material adverse change to our assets, operations or financial condition.

The credit facility contains a number of restrictions that limit our ability, among other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guarantee obligations of third parties, make investments, effect a merger or consolidation, dispose of assets, or materially change our line of business.

19 unchanged sentences

Internally developed software relates to the planned completion costs for the implementation of our new Enterprise Resource Planning system for EMEA and ASPAC, including the acquisition costs for the software as well as the external and internal costs of the development.

Despite the general recessionary outlook for 2023, we continue to anticipate technology-based organic growth opportunities across all our businesses.

Our business teams delivered a strong overall 2023 result.

Despite our expectation for continued economic headwinds in the coming quarters, we enter 2024 with optimism.

Our growing pipeline of technology-based organic opportunities will continue to advance in parallel with the integration of our recent acquisition of QGP.

Over the medium to long-term, we do not expect any change in our customers’ drive towards cleaner formulations, lower carbon footprint and operational efficiency.

We plan to continue our investment in R&D to improve our products and technology.

Our innovative chemistries and highly-responsive technical service directly support our customers’ priorities.

Our strong balance sheet gives us the flexibility to move in parallel on all of our capital allocation priorities.

In 2023, we expect to substantially complete our $70 million Performance Chemicals expansion while continuing dividend growth and, based on our assessment of market conditions, share repurchases.

In parallel, we intend to continue to pursue potential acquisitions that complement and expand our geographic, technology and end-market footprint.

We believe our innovative chemistries and highly responsive technical service directly support our customers’ priorities.

Cash generation was excellent in 2023, and our debt-free, net cash position remained at over $200 million after funding the QGP acquisition.

Entering 2024 we expect to have significant flexibility and balance sheet strength for further M&A, dividend growth, and organic investment.

Environmental Matters and Plant Closures

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis