What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-16 · 151 added, 220 removed, 238 unchanged (61% of the section changed)

2 unchanged sentences

EXECUTIVE OVERVIEW

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.

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.

CRITICAL ACCOUNTING ESTIMATES

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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 or Company promise, and the costs

can be reasonably estimated.

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., the E.U.

and 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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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.

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

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

We report interest and penalties related to uncertain tax positions as income taxes.

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 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 maintains a defined benefit pension plan covering certain current and former employees in the United Kingdom (“UK Plan”).

The UK 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.

In May 2022, the Trustees of the UK Plan entered into an agreement with Legal and General Assurance Society Limited to acquire an insurance policy that operates as an investment asset, with the intent of matching the remaining uninsured part of the UK Plan’s future cash outflow arising from the accrued pension liabilities of members.

Such an arrangement is commonly termed as a “buy-in”.

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 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.

The Company consequently benefits from the buy-in as it reduces the UK Plan’s potential reliance on the Company for future cash funding requirements.

Movements in the UK Plan’s Projected Benefit Obligation (“PBO”) are dependent on our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation.

A change in any one of these assumptions could impact the plan asset value, PBO and pension charge recognized in the income statement.

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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 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 percent) 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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and Company specific events.

If a quantitative test is required, we assess the fair value based on projected post-tax

cash flows discounted at the Company’s weighted average cost of capital.

If a quantitative test is required, we assess the fair value based on projected post-tax cash flows discounted at the Company’s weighted average cost of capital.

These fair value techniques require management judgment and estimates including revenue growth rates, projected operating margins, changes in working capital and discount rates.

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While we believe our assumptions for impairment assessments are reasonable, they are subjective judgments, and it is possible that variations in any of the assumptions will result in materially different calculations of any potential impairment charges.

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

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.

At December 31, 2022 we had $358.8 million of goodwill relating to our Performance Chemicals, Fuel Specialties and Oilfield Services segments.

Our step zero impairment review at December 31, 2022 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)

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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.

Impact of COVID-19

Pandemic and Current Economic Environment

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

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 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.

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.

Our manufacturing facilities have continued to operate with only some minor interruption, and we expect them to continue to do so.

We have implemented flexible working, including working from home for our employees where possible, in line with advice and rules in each of the jurisdictions in which we operate.

Additional costs have been incurred to ensure our manufacturing and administrative facilities are COVID-safe for our employees.

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 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.

We believe that our financial position remains strong.

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 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.

As we operate in the chemical industry, we continue to be focused on protecting the health and safety of our employees and have procedures in place at each of our operating facilities to help ensure their well-being.

We do not know how long the pandemic and current economic environment will continue and while we have made estimates as to potential impacts on our financial position and operations, the ultimate impact on our business will depend on many factors which are very difficult to predict with certainty and substantially beyond our control.

RESULTS OF OPERATIONS

The following table provides operating income by reporting segment:

The following table provides sales, gross profit and operating income by reporting segment:

(in millions)

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

Octane Additives

Gross profit:

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

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Operating income:

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

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Total operating income

Other income, net

Other income/(expense), net

Interest expense, net

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(in millions, except ratios)

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

Octane Additives

Gross profit:

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

Octane Additives

Gross margin (%):

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

Operating expenses:

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

Octane Additives

Corporate costs

Restructuring charge

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.

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:

Performance Chemicals

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

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.

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.

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 0.4 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.

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.

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 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.

Fuel Specialties

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 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.

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.

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

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 $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.

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.

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 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.

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.

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.

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.

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:

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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The adjusted effective tax rate, once adjusted for the items set out in the following table, was 27.0% in 2022 compared with 22.7% in 2021.

The Company believes that this adjusted effective tax rate, a non-GAAP

financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends.

In addition, management uses this non-GAAP

financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.

The Company believes that this adjusted effective tax rate, a non-GAAP financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends.

In addition, management uses this non-GAAP financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.

(in millions, except ratios)

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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 factors impacting on our effective tax rate in 2021 are explained in Note 11 of the Notes to the Consolidated Financial Statements.

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.

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.

For additional information regarding the GAAP effective tax rate in 2022, see Note 11 of the Notes to the Consolidated Financial Statements.

Results of Operations – Fiscal 2021 compared to Fiscal 2020:

(in millions, except ratios)

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

Octane Additives

Gross profit:

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

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Gross margin (%):

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

Octane Additives

Operating expenses:

Fuel Specialties

Performance Chemicals

Fuel Specialties

Oilfield Services

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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.

Fuel Specialties

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:

1 unchanged sentence

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.

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.

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.

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 0.6 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 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.

Performance Chemicals

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:

1 unchanged sentence

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.

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.

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.

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.

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 0.1 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 $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 $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

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.

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.

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):

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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:

1 unchanged sentence

The adjusted effective tax rate, once adjusted for the items set out in the following table, was 22.7% in 2021 compared with 23.5% in 2020.

The Company believes that this adjusted effective tax rate, a non-GAAP

financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends.

In addition, management uses this non-GAAP

financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.

In addition, management uses this non-GAAP financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.

(in millions, except ratios)

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Tax on impairment of acquired intangible asset

Tax on site closure provision

Tax loss on distribution

Tax loss / (gain) on distribution

Change in U.K.

3 unchanged sentences

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 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 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..

LIQUIDITY AND FINANCIAL CONDITION

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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 timing of prepaid 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.

The difference 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.

(in millions)

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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 $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;

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;

increased in our Fuel Specialties segment from 53 days to 54 days;

and increased from 52 days to 54 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;

and decreased from 76 days to 58 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;

decreased in our Fuel Specialties segment from 50 days to 45 days;

and increased from 48 days to 54 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 increase in working capital as the pandemic recovery has continued, partly offset by the timing of payments for income taxes.

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 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.

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.

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.

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(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.

The revolving credit facility contains restrictions which may limit our activities, and 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 condition.

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

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.

At December 31, 2021, we had no debt outstanding under the revolving credit facility and $0.1 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments.

At December 31, 2021, our maturity profile of long-term debt and finance leases is set out below:

(in millions)

Current portion of long-term debt and finance leases

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

At December 31, 2022, we had no debt outstanding under the revolving credit facility and no obligations under finance leases.

Contractual Commitments

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Operating activities

Plant closure provisions

Operating lease liabilities

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Capital commitments

Financing activities

Finance leases

Internally developed software

Operating activities

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.

Estimated commitment fees are also included and interest income is excluded.

The estimated payments on debt are the commitment fees for our $250.0 million revolving credit facility.

Any interest income has been excluded.

Due to the uncertainty regarding the nature of tax audits, particularly those which are not currently underway, it is not meaningful to predict the outcome of obligations related to unrecognized tax benefits.

2 unchanged sentences

Capital commitments relate to certain capital projects that the Company has committed to undertake.

Financing activities

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.

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.

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 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.

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.

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