What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-16 compared with 2021-02-17 · 164 added, 185 removed, 294 unchanged (54% of the section changed)

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EXECUTIVE OVERVIEW

For much of 2020, customer demand was adversely impacted by the COVID-19

pandemic and the unprecedented collapse in demand for crude oil.

The low point of the year for the decline in customer demand was the second quarter and all of our businesses have been showing some recovery since that time, although they have not yet returned to pre-pandemic

We also successfully navigated a number of world trade disputes which threatened to have a negative impact on our business.

Performance Chemicals continued its organic growth driven by new product development and the development of new customers in the personal care, home care, agrochemical and metal extraction markets.

Both Fuel Specialties and Oilfield Services suffered from the dramatic drop in demand.

In Oilfield Services, we responded by making substantial cuts in costs to reflect the reduced customer activity levels.

We believe that both markets were showing signs of good recovery by the end of the year.

The Octane Additives business concluded its trading with its last customer for motor gasoline during the year, as its sole customer completed their transition to unleaded fuel.

Our recovery during 2021 following a COVID-19

impacted 2020 was strong with all businesses achieving significant sales growth.

Our business teams navigated tight supply-chain, labor and inflationary challenges to deliver record sales in the final quarter and the full year for Performance Chemicals and Fuel Specialties.

Performance Chemicals was extremely resilient during the pandemic, and performance has accelerated in 2021.

We believe that the long-term sustainability and consumer trends driving this business have strengthened, and we are allocating additional organic growth capital to support the anticipated increase in demand from our customers.

Fuel Specialties recovered in-line

with our expectations during 2021, although as anticipated, there currently remain some demand gaps versus 2019.

As demand continues to recover towards the pre-pandemic

levels, and cost inflation moderates, we expect both continued revenue growth and the return of gross margins to our target range.

In Oilfield Services, which has been our most impacted business during the pandemic, our sales, operating income and gross margins have grown for each sequential quarter during 2021.

Overall activity levels and market conditions continued to improve in all the markets of our oilfield business in 2021.

We anticipate opportunities for significant additional operating leverage, operating income growth and gross margin expansion into 2022.

CRITICAL ACCOUNTING ESTIMATES

Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Environmental Liabilities

Plant Closure Provisions

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 environmental remediation liabilities associated with the production of TEL.

There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S.

Ellesmere Port in the United Kingdom 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.

Remediation provisions at December 31, 2020 amounted to $58.5 million and relate principally to our Ellesmere Port site in the United Kingdom.

We recognize environmental liabilities when they are probable and costs can be reasonably estimated, and asset retirement

obligations when there is a legal obligation and costs can be reasonably estimated.

Plant closure provisions at December 31, 2021 amounted to $56.5 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 or 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.

We develop these assumptions utilizing the latest information available together with recent costs.

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

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., the E.U.

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For additional information regarding uncertain income tax positions, see Note 11 of the Notes to the Consolidated Financial Statements.

The Company maintains a defined benefit pension plan covering a number of its current and former employees in the United Kingdom.

The Company also has other smaller pension arrangements in the U.S.

and overseas as disclosed in Note10 of the Notes to the Consolidated Financial Statements.

The Company maintains a defined benefit pension plan covering certain current and former employees in the United Kingdom.

The United Kingdom plan is closed to future service accrual but has a large number of deferred and current pensioners.

The Company also has other smaller pension arrangements in the U.S.

and overseas.

Movements in the United Kingdom’s underlying plan asset value and Projected Benefit Obligation (“PBO”) are dependent on actual return on investments as well as our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation.

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Such changes could adversely impact our results of operations and financial position.

For example, a 0.25% change in the

discount rate assumption would change the PBO by approximately $26 million while the net pension credit for 2020 would change by approximately $0.4 million.

A 0.25% change in the level of price inflation assumption would change the PBO by approximately $19 million and the net pension credit for 2021 would change by approximately $1.2 million.

For example, a 0.25% change in the discount rate assumption would change the PBO at December 31, 2021 by approximately $22 million and the net pension credit for 2022 would change by approximately $1.4 million.

A 0.25% change in the level of price inflation assumption would change the PBO at December 31, 2021 by approximately $14 million and the net pension credit for 2022 by approximately $0.3 million.

Further information is provided in Note 10 of the Notes to the Consolidated Financial Statements.

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At December 31, 2021 we had $364.3 million of goodwill relating to our Fuel Specialties, Performance Chemicals and Oilfield Services segments.

Due to the triggering events of the COVID-19

pandemic and the reduction in oil prices and their impact on our business, we performed a step one impairment review at June 30, 2020.

The impairment assessment indicated the fair values substantially exceeded the carrying values for all operating segments.

Despite this, due to a significant downturn in one of the entities, we performed a further assessment of the intangible assets of that entity, which resulted in an impairment of $19.8 million at June 30, 2020.

Our step zero impairment review at December 31, 2021 indicated the fair value of the reporting unit is, more likely than not, higher than the carrying value, 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, 2020 we had $210.8 million of property, plant and equipment and $75.3 million of other intangible assets (net of depreciation and amortization, respectively),

that are discussed in Notes 6 and 8 of the Notes to the Consolidated Financial Statements, respectively.

As at December 31, 2021 we had $214.4 million of property, plant and equipment and $57.5 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.

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The Company’s results have been adversely impacted in 2021, due to the COVID-19

pandemic and the global economic environment.

pandemic and the global economic environment, although results have improved throughout the year.

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 a large part of the year.

We have seen some improvement in the fourth quarter as travel has begun to increase, but demand has not returned to the pre-COVID-19

We expect demand will continue to improve in 2021, to the extent global economic activity recovers, subject to the continuation of the current lockdowns in Europe in particular and the potential for future lockdowns or restrictions around the world related to the spread of new COVID variants.

We have seen some improvement through 2021 as travel has begun to increase, and demand has largely returned to the pre-COVID-19

We expect demand will continue to improve in 2022, to the extent global economic activity recovers, subject to the potential for future lockdowns or restrictions around the world related to the spread of new COVID variants.

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 seen some improvement in the second half of the year from increasing demand and the benefit from the reduction in headcount that occurred in the second quarter.

Oilfield Services have been heavily impacted by the reduction in oil exploration and production as the wider industry reacts to the reduction in demand.

We have seen some improvement in 2021 from increasing demand for production products but demand remains below expected levels for oil exploration products and customers have reduced their capital expenditure on exploration.

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 are lifted and not re-imposed.

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While these costs have not been significant to date there may be increased costs in the future, if further safety restrictions are required.

Raw material sourcing has not been significantly impacted and we do not expect that to change over the remainder of the year.

Raw material sourcing has been impacted and we expect that may continue into 2022.

Logistics are operating with some delays but our products are currently being delivered to our customers.

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We expect to have sufficient access to capital if needed, including our $250 million revolving credit facility we entered into in September 2019, and we do not anticipate any issues with meeting the covenants for our debt agreements.

We have extended this facility by a further twelve months until September 2024, during the third quarter of 2020.

We have previously extended this facility by a further twelve months until September 2024, during the third quarter of 2020.

Our major capital projects are continuing to progress as planned.

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Impairment of intangible assets

Profit on disposal

Total operating income

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Oilfield Services

Octane Additives

Operating expenses:

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Impairment of intangible assets

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

Volumes in all our regions have suffered from the adverse impact of the COVID-19

pandemic, which has reduced the global demand for fuel additive products.

During the second half of 2020, we have seen customer demand recovering steadily as lockdowns in countries around the world have been eased.

However, the reintroduction of lockdowns for European countries in January 2021 could slow the return of customer demand to the pre-pandemic

Price and product mix in all our regions was adverse due to lower sales of our higher margin products.

AvTel volumes were higher than the prior year due to variations in the demand from customers, being offset by an adverse price and product mix.

EMEA benefitted 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.

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

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 benefitted 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.

Gross margin:

the year over year decrease of 3.7 percentage points was driven by the impact of the COVID-19

pandemic reducing demand for our higher margin products, together with adverse raw material costs and higher provisions for slow moving inventory.

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.

Operating expenses:

the year over year decrease of $12.1 million was due to cost savings as a result of the COVID-19

pandemic, including lower travel and entertainment costs, together with lower personnel related performance-based remuneration due to a decrease in share-based compensation accruals linked to the Innospec share price.

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.

Performance Chemicals

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Exchange rates

Higher volumes in the Americas and ASPAC were driven by increased demand for our Personal Care and Home Care products.

Volumes were lower in EMEA primarily due to lower demand for Home Care products.

The Americas and EMEA suffered an adverse price and product mix due to increased sales of lower priced products due largely to lower raw material costs.

ASPAC benefitted from a favorable price and product mix due to increased sales of higher priced products.

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 benefitted 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 benefitted 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.

Gross margin:

the year over year increase of 1.1 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.

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

Operating expenses:

the year over year decrease of $2.4 million was driven by lower personnel related performance-based remuneration due to a decrease in the share-based compensation accruals linked to the Innospec share price, together with cost savings as a result of the COVID-19

pandemic, including lower travel and entertainment costs.

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.

Oilfield Services

the year over year decrease of $224.9 million, or 47 percent, was primarily due to a collapse of customer activity for the U.S.

onshore market, as a result of the COVID-19

pandemic reducing world-wide demand together with the depressed price of crude oil.

The previously expected recovery in the U.S.

completions market has been delayed, however the Company has seen an improvement in the demand for crude oil in the second half of 2020 leading to higher sales for our production and drag reducing agent products.

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.

Gross margin:

the year over year decrease of 1.6 percentage points was primarily due to significant inventory adjustments in the second quarter of 2020 as a result of the collapse in demand, being partly offset by margin improvements in the second half of the year due to a favorable sales mix and management cost control initiatives.

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.

Operating expenses:

the year over year decrease of $29.9 million was driven by the right-sizing

of the operations to adjust for the reduction in demand caused by the COVID-19

pandemic, together with lower accruals for long-term performance-based incentive plans due to a decrease in share-based compensation accruals linked to the Innospec share price.

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

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

Prior to July 1, 2020 net sales were nil in 2020 compared to $21.0 million in the prior year;

the gross loss was $2.2 million in 2020 compared to a $1.7 million gross profit in the prior year;

operating expenses were $0.6 million in 2020 compared to $2.4 million in the prior year.

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 decrease of $2.2 million was driven by lower accruals for long-term performance-based incentive plans due to the impact of the COVID-19

pandemic on the group’s profit performance together with a decrease in the share-based compensation accruals linked to the Innospec share price.

There has also been a reduction in travel and entertainment expenses resulting from the COVID-19

pandemic restrictions on local and international travel.

The decrease in costs was partly offset by $4.2 million of acquisition related costs in 2020;

the inclusion of legacy costs related to the now closed Octane Additives segment of $2.5 million;

and higher spending on information technology following the network security incident in the second quarter of 2019.

Restructuring charge:

was $21.3 million related to the cessation of production and sales of TEL for use in motor gasoline.

See Note 5 of the Notes to the Condensed Consolidated Financial Statements for further information.

Impairment of intangible assets:

was $19.8 million related to acquired intangible assets in our Oilfield Services segment.

See Note 9 of the Notes to the Condensed Consolidated Financial Statements for further information.

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..

Other net income/(expense):

for 2021 and 2020, includes the following:

(in millions)

United Kingdom pension credit

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Foreign exchange gains/(losses) on translation

Foreign currency forward contracts losses

Foreign currency forward contracts gains/(losses)

Interest expense, net:

was $1.8 million for 2020 compared to $4.8 million in the prior year, driven by lower average net debt as the business generated cash inflows.

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.

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

Income taxes:

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Tax on impairment of acquired intangible asset

Tax on site closure provision

Tax loss on distribution

Change in UK statutory tax rate

Tax loss / (gain) on distribution

Change in U.K.

statutory tax rate

Tax on legacy cost of closed operations

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Restructuring charge

Impairment of intangible assets

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

Lower volumes in the Americas were primarily driven by a specific issue in the second half of 2019 related to disruption from one supplier.

Volumes in EMEA and ASPAC were higher, driven by increased demand for our products and technology.

Price and product mix in the Americas, EMEA and ASPAC benefited from increased 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 and ASPAC were 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.

Volumes in all our regions have suffered from the adverse impact of the COVID-19

pandemic, which has reduced the global demand for fuel additive products.

During the second half of 2020, we have seen customer demand recovering steadily as lockdowns in countries around the world have been eased.

However, the reintroduction of lockdowns for European countries in January 2021 could slow the return of customer demand to the pre-pandemic

Price and product mix in all our regions was adverse due to lower sales of our higher margin products.

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.

EMEA benefitted 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.

Gross margin:

the year on year increase of 1.1 percentage points benefitted from an improvement in the mix of product sales.

the year over year decrease of 3.7 percentage points was driven by the impact of the COVID-19

pandemic reducing demand for our higher margin products, together with adverse raw material costs and higher provisions for slow moving inventory.

Operating expenses:

the year on year increase of $9.2 million was driven by increased selling expenses including higher agents’ commissions and higher personnel related performance-based remuneration due to increased share-based compensation accruals.

the year over year decrease of $12.1 million was due to cost savings as a result of the COVID-19

Performance Chemicals

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Exchange rates

Lower volumes in the Americas and EMEA were driven by a customer taking some volume in-house.

Higher volumes in ASPAC were driven by increased demand for our Personal Care products, partly offset by an adverse price and product mix.

Price and product mix in the Americas benefitted from increased sales of higher margin products, while EMEA was adversely impacted by lower raw material prices driving lower selling prices for certain products.

EMEA and ASPAC were negatively 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.

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

Volumes were lower in EMEA primarily due to lower

demand for home care products.

The Americas and EMEA suffered an adverse price and product mix due to increased sales of lower priced products due largely to lower raw material costs.

ASPAC benefitted from a favorable price and product mix due to increased sales of higher priced products.

EMEA and ASPAC benefitted 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.

Gross margin:

the year on year increase of 2.5 percentage points was driven by an improved sales mix, lower raw material prices and the continued benefit of several improvement projects.

the year over year increase of 1.1 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 on year decrease of $1.4 million was primarily due to the benefit of a weaker European Union euro against the U.S.

dollar and lower costs as a result of the closure of our operation in Belgium in the prior year.

pandemic, including lower travel and entertainment costs.

Oilfield Services

the year on year increase of $79.3 million, or 20 percent, was due to improved customer activity in stimulation and production driving increased demand for our technology and customer service.

Sales of higher margin products have benefited the price and product mix.

the year over year decrease of $224.9 million, or 47 percent, was primarily due to a collapse of customer activity for the U.S.

onshore market, as a result of the COVID-19

pandemic reducing world-wide demand together with the depressed price of crude oil.

The previously expected recovery in the U.S.

Gross margin:

the year on year increase of 0.7 percentage points was due to an improved customer and product mix leading to increased sales of higher margin products.

Operating expenses:

the year on year increase of $11.9 million was driven by higher selling and technical support expenses required to deliver the increase in customer demand.

the year over year decrease of $29.9 million was driven by the right-sizing

of the operations to adjust for the reduction in demand caused by the COVID-19

pandemic, together with lower accruals for long-term performance-based incentive plans due to a decrease in share-based compensation accruals linked to the Innospec share price.

Octane Additives

were $21.0 million for 2019 compared to $33.7 million in 2018.

Reduced sales are in line with our expectations as the one remaining customer moves closer to completing their transition to unleaded fuel.

Gross margin:

the year on year decrease of 27.8 percentage points was due to lower production volumes spread over the predominantly fixed cost of manufacturing operations.

Operating expenses:

the year on year increase of $0.2 million was principally due to higher year-end

provisions for personnel related performance-based remuneration.

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 July 1, 2020 net sales were nil in 2020 compared to $21.0 million in the prior year;

the gross loss was $2.2 million in 2020 compared to a $1.7 million gross profit in the prior year;

operating expenses were $0.6 million in 2020 compared to $2.4 million in the prior year.

Other Income Statement Captions

Corporate costs:

the year on year increase of $2.0 million primarily relates to higher personnel related performance-based remuneration including higher share-based compensation accruals;

partly offset by a reduction for the amortization of our internally developed software following the completed amortization of our first deployment to the Americas which ended in the third quarter of 2018, together with the benefit of a weakening of the British pound sterling against the U.S.

dollar for our United Kingdom cost base.

the year over year decrease of $2.2 million was driven by lower accruals for long-term performance-based incentive plans due to the impact of the COVID-19

pandemic on the group’s profit performance together with a decrease in the share-based compensation accruals linked to the Innospec share price.

There has also been a reduction in travel and entertainment expenses resulting from the COVID-19

pandemic restrictions on local and international travel.

The decrease in costs was partly offset by $4.2 million of acquisition related costs in 2020;

the inclusion of legacy costs related to the now closed Octane Additives segment of $2.5 million;

and higher spending on information technology following the network security incident in the second quarter of 2019.

Restructuring charge:

there was no charge in 2019 compared to a charge of $7.1 million in the prior year related to the closure costs, including redundancies and onerous leases, for our operation in Belgium.

was $21.3 million related to the cessation of production and sales of TEL for use in motor gasoline.

See Note 5 of the Notes to the Condensed Consolidated Financial Statements for further information.

Impairment of intangible assets:

was $19.8 million related to acquired intangible assets in our Oilfield Services segment.

See Note 9 of the Notes to the Condensed Consolidated Financial Statements for further information.

Other net income/(expense):

for 2020 and 2019, includes the following:

(in millions)

United Kingdom pension credit

German pension charge

Foreign exchange losses on translation

Foreign currency forward contracts (losses)/gains

Foreign exchange gains/(losses) on translation

Foreign currency forward contracts losses

Interest expense, net:

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Indemnification asset regarding tax audit

Site closure provision

Restructuring charge

Impairment of acquired intangible assets

Legacy cost of closed operations

Acquisition costs

Adjusted income before income taxes

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Tax on stock compensation

Tax Cuts & Jobs Act 2017 impact

Tax on restructuring charge

Tax on impairment of acquired intangible asset

Tax on site closure provision

Tax loss on distribution

Change in U.K.

statutory tax rate

Tax on legacy cost of closed operations

Tax on acquisition costs

Other discrete items

Adjusted income taxes

GAAP effective tax rate

Adjusted effective tax rate

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 an increase in the statutory income tax rate in the U.K..

The most significant factor impacting our adjusted effective tax rate in 2019 relates to the adjustment of income tax provisions.

During 2019, the Company recorded additional tax and interest arising as a consequence of the tax audit into Innospec Performance Chemicals Italia Srl.

This item had a negative impact on the effective tax rate, which has been subsequently excluded in determining the adjusted effective tax rate.

This item had a negative impact on the effective tax rate, which has been subsequently reversed in determining the adjusted effective tax rate.

We note that any finally determined tax liabilities would be reimbursed by the previous owner under the terms of the sale and purchase agreement.

The most significant factor impacting our adjusted effective tax rate in 2018 is the recognized implications of the Tax Act.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation, being the Tax Act.

On the same date, SEC staff issued Staff Accounting Bulletin No.

118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act.

SAB 118 provides a

measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting under ASC 740, Income Taxes.

Our accounting for the impact of the Tax Act under SAB 118 was completed in 2018.

The deemed repatriation transition tax (“Transition Tax”) is a tax on certain previously untaxed accumulated earnings and profits (“E&P”) of the Company’s non-U.S.

subsidiaries.

At December 31, 2017, we were able to reasonably estimate the Transition Tax and recorded a provisional Transition Tax obligation of $47.7 million.

On the basis of revised E&P computations that were completed in 2018, we adjusted our Transition Tax estimate to $61.1 million.

Net of related consequential impacts recorded in our 2017 U.S.

federal income tax return, we recorded an additional $12.3 million income tax expense in the fourth quarter of 2018.

LIQUIDITY AND FINANCIAL CONDITION

Working Capital

In 2020 our working capital decreased by $13.0 million, while our adjusted working capital decreased by $47.5 million.

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

In 2021 our working capital increased by $77.7 million, while our adjusted working capital increased by $37.1 million.

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

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

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Adjusted working capital

We had a $70.6 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

Days’ sales outstanding in our Fuel Specialties segment remained unchanged at 52 days;

decreased in our Performance Chemicals segment from 64 days to 60 days;

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

We had a $63.1 million increase in trade and other accounts receivable primarily driven by increased trading activity across our reporting segments, partly offset by improved debtor collections in our oilfield business.

Days’ sales outstanding in our Fuel Specialties segment increased from 52 days to 53 days;

increased in our Performance Chemicals segment from 60 days to 64 days;

and decreased from 64 days to 52 days in our Oilfield Services segment.

We had a $24.6 million decrease in inventories, net of a $4.9 million increase in allowances, as we managed inventory levels in anticipation of increased demand that we expect in 2021.

Days’ sales in inventory in our Fuel Specialties segment increased from 97 days to 117 days;

decreased in our Performance Chemicals segment from 66 days to 58 days;

and increased from 71 days to 95 days in our Oilfield Services segment.

Prepaid expenses increased $0.2 million, from $14.7 million to $14.9 million.

We had a $47.5 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 the Innospec share price during the year.

Creditor days (including goods received not invoiced) in our Fuel Specialties segment decreased from 52 days to 34 days;

We had a $57.6 million increase in inventories, net of a $6.0 million increase in allowances, as we managed inventory levels in anticipation of the increase in demand which we are expecting in 2022, while managing the risk of potential supply chain disruption for certain key raw materials.

Days’ sales in inventory in our Fuel Specialties segment decreased from 116 days to 108 days;

increased in our Performance Chemicals segment from 58 days to 59 days;

and decreased from 95 days to 76 days in our Oilfield Services segment.

Prepaid expenses increased $3.1 million, from $14.9 million to $18.0 million due to the timing of certain invoicing and higher annual insurance prepayments.

We had a $86.7 million increase in accounts payable and accrued liabilities primarily due to increased activity across all our reporting segments as the pandemic recovery has continued.

Creditor days (including goods received not invoiced) in our Fuel Specialties segment increased from 34 days to 50 days;

decreased in our Performance Chemicals segment from 48 days to 47 days;

and increased from 43 days to 49 days in our Oilfield Services segment.

and decreased from 53 days to 48 days in our Oilfield Services segment.

Operating Cash Flows

We generated cash from operating activities of $93.2 million in 2021 compared to cash inflows of $145.9 million in 2020.

The reduction in cash generated from operating activities was primarily related to the adverse impact of COVID-19

and the fall in oil prices on customer activity and the timing of payments for income taxes.

The reduction in cash generated from operating activities was primarily related to the increase in working capital as the pandemic recovery has continued, partly offset by the timing of payments for income taxes.

At December 31, 2021 and 2020, we had cash and cash equivalents of $141.8 million and $105.3 million, respectively, of which $55.1 million and $52.5 million, respectively, were held by non-U.S.

subsidiaries principally in the United Kingdom.

The increase in cash and cash equivalents in 2020 of $29.6 million was primarily driven by the cash inflows from operating activities including our reductions in working capital, being partly offset by the repayment of $60.0 million of our revolving credit facility together with the normal investments in capital projects and the payment of our semi-annual dividends.

As at December 31, 2020, the Company had repaid all of its borrowings under the revolving credit facility and as a result, the related deferred finance costs of $1.3 million are now included within other current and non-current

The increase in cash and cash equivalents in 2021 of $36.5 million was primarily driven by the cash inflows from operating activities, including the impact of our increased working capital levels, being partly offset by our investments in capital projects and the payment of our semi-annual dividends.

As at December 31, 2021 and December 31, 2020 the Company had repaid all of its borrowings under the revolving credit facility and as a result, the related deferred finance costs of $1.0 million (December 31, 2020 – $1.3 million) are now included within other current and non-current

assets at the balance sheet date.

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Long-term debt and finance leases, net of current portion

During the early part of 2020, we focused on growing our business and on developing a strong pipeline of what we believe to be promising organic growth projects to support future growth.

For the rest of the year, while we have continued this strategy, we have also had to deal with the impacts of the COVID-19

pandemic and the collapse in crude oil prices.

These events created unprecedented demand destruction.

However, our financial performance in this difficult environment, combined with our strong balance sheet and financial prudence have been the solid foundation on which we have been able to weather this storm.

Indeed, we ended the year with a very strong net cash position and we had no requirement to call on additional financial support from our banks during the pandemic.

We believe this financial strength means that we are well-placed to resource growth projects – both organic and acquisitive.

We believe that our long-term strategy remains valid and this has been supported by the recovery in markets towards the end of 2020.

While we are optimistic for prospects in 2021 and beyond, we are also cautious given the current circumstances.

The global pandemic is not yet under control and has the potential to adversely impact demand in the near term.

We will continue our strategy of investing in R&D to continuously improve our products and technology.

When these innovations are combined with high quality customer service, we are confident that we have a solid foundation of future organic growth.

We also remain active in corporate development, and we enter 2021 with balance sheet strength which gives us the ability to participate in appropriate acquisition opportunities as they arise.

Contractual Commitments

2 unchanged sentences

Operating activities

Remediation payments

Operating lease commitments

Raw material purchase obligations

Plant closure provisions

Operating lease liabilities

Operating lease future commitments

Interest payments on debt

2 unchanged sentences

Financing activities

Long-term debt obligations

Finance leases

Operating activities

Remediation payments represent those cash flows that the Company is currently obligated to pay in respect of environmental remediation of current and former facilities.

It does not include any discretionary remediation costs that the Company may choose to incur.

Operating lease commitments relate primarily to right-of-use

assets at third party manufacturing facilities, office space, motor vehicles and various items of computer and office equipment which are expected to be renewed and replaced in the normal course of business.

Raw material purchase obligations relate to certain long-term raw material contracts which stipulate fixed or minimum quantities to be purchased;

fixed, minimum or variable cost provisions;

and the approximate timing of the transaction.

Purchase obligations exclude agreements that are cancellable without penalty.

Plant closure provisions represent those cash flows that the Company is currently obligated to pay or is expected to pay in respect of decontamination and environmental remediation activities, principally relating to asset retirement obligations at current and former facilities.

Operating lease commitments relate primarily to right-of-use assets at third party manufacturing facilities, office space, motor vehicles and various items of computer and office equipment which are expected to be renewed and replaced in the normal course of business.

The estimated payments included in the table above reflect the variable interest charge on long-term debt obligations.

5 unchanged sentences

Financing activities

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.

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.

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.

Finance leases relate to the financing of certain fixed assets in our Fuel Specialties and Oilfield Services segments.

Entering into 2022, we expect tight supply chains and elevated cost inflation to persist.

We believe these conditions continue to be near-term risks which have the potential to adversely impact our businesses.

Technology, customer service, pricing and gross margin management are in sharp focus, and we are cautiously optimistic that the supply-chain and inflation conditions which have dominated recent quarters will moderate in 2022, and we feel well positioned for continued growth in all our businesses.

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

Our leading chemistries and formulation expertise combined with our culture of highly responsive customer service make us a unique and nimble partner to our customers.

We believe that we have a solid foundation for future technology-led,

organic growth.

Our strong balance sheet gives us the flexibility to move in parallel on all of our capital allocation priorities which include funding our $70 million growth investment plan in Performance Chemicals, pursuing complimentary acquisitions that may arise and continuing

our track-record of increasing capital returns to shareholders through dividends and our newly announced $50 million share repurchase program.

Environmental Matters and Plant Closures

Under certain environmental laws the Company is responsible for the remediation of hazardous substances or wastes at currently or formerly owned or operated properties.

As most of our manufacturing operations have been conducted outside the U.S., we expect that liability pertaining to the investigation and remediation of contaminated properties is likely to be determined under non-U.S.

We evaluate costs for remediation, decontamination and demolition projects on a regular basis.

Full provision is made for those costs to which we are committed under environmental laws amounting to $58.5 million at December 31, 2020.

Remediation expenditure utilizing these provisions was $4.1 million, $4.4 million and $3.1 million in the years 2020, 2019 and 2018, respectively.

Under certain environmental laws the Company is responsible for the environmental remediation of hazardous substances or wastes at currently or formerly owned or operated properties.

As most of our manufacturing operations have been conducted outside the U.S., we expect that liability pertaining to the investigation and environmental remediation of contaminated properties is likely to be determined under non-U.S.

We evaluate costs for environmental remediation, decontamination and demolition projects on a regular basis.

Full provision is made for those costs amounting to $56.5 million at December 31, 2021.

See Note 13 of the Notes to the Consolidated Financial Statements for further details.

Expenditure utilizing these provisions was $5.3 million, $4.1 million and $4.4 million in the years 2021, 2020 and 2019, respectively.

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