News Column

INNOSPEC INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 2014

May 7, 2014

This discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto.

CRITICAL ACCOUNTING ESTIMATES

The policies and estimates that the Company considers the most critical in terms of complexity and subjectivity of assessment are those related to contingencies, environmental liabilities, pensions, deferred tax and uncertain income tax positions, goodwill, and other intangible assets (net of amortization) and property, plant and equipment. These policies have been discussed in the Company's 2013 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

The following table provides operating income by reporting segment:

Three Months Ended March 31 (in millions) 2014 2013 Net sales: Fuel Specialties $ 164.2$ 140.0 Performance Chemicals 56.1 47.8 Octane Additives 0.4 11.6 $ 220.7$ 199.4 Gross profit: Fuel Specialties $ 52.0$ 47.0 Performance Chemicals 13.6 10.5 Octane Additives 0.1 6.3 $ 65.7$ 63.8 Operating income: Fuel Specialties $ 25.8$ 24.9 Performance Chemicals 6.5 5.0 Octane Additives (1.2 ) 4.8 Pension credit/(charge) (0.8 ) (0.7 ) Corporate costs (12.1 ) (11.5 ) Restructuring charge (0.2 ) 0.0 Impairment of Octane Additives segment goodwill 0.0 (0.3 ) Total operating income $ 18.0$ 22.2 23



--------------------------------------------------------------------------------

Table of Contents Three Months Ended March 31 (in millions, except ratios) 2014 2013 Change Net sales: Fuel Specialties $ 164.2$ 140.0$ 24.2 +17 % Performance Chemicals 56.1 47.8 8.3 +17 % Octane Additives 0.4 11.6 (11.2 ) -97 % $ 220.7$ 199.4$ 21.3 +11 % Gross profit: Fuel Specialties $ 52.0$ 47.0$ 5.0 +11 % Performance Chemicals 13.6 10.5 3.1 +30 % Octane Additives 0.1 6.3 (6.2 ) -98 % $ 65.7$ 63.8$ 1.9 +3 % Gross margin (%): Fuel Specialties 31.7 33.6 -1.9 Performance Chemicals 24.2 22.0 +2.2 Octane Additives 25.0 54.3 -29.3 Aggregate 29.8 32.0 -2.2 Operating expenses: Fuel Specialties $ (26.2 )$ (22.1 )$ (4.1 ) +19 % Performance Chemicals (7.1 ) (5.5 ) (1.6 ) +29 % Octane Additives (1.3 ) (1.5 ) 0.2 -13 % Pension credit/(charge) (0.8 ) (0.7 ) (0.1 ) +14 % Corporate costs (12.1 ) (11.5 ) (0.6 ) +5 % $ (47.5 )$ (41.3 )$ (6.2 ) +15 % Fuel Specialties



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

Three Months Ended March 31, 2014 Change (%) Americas EMEA ASPAC Avtel Total Volume +11 +3 -1 -13 +4 Price and product mix 0 +3 -16 -4 -1 Exchange rates 0 +4 0 0 +1 Acquisitions +32 0 0 0 +13 +43 +10 -17 -17 +17 24



--------------------------------------------------------------------------------

Table of Contents

Americas saw an increase in volumes in the first quarter of 2014 as a result of higher demand, while acquisitions, relating to Bachman, generated additional sales compared to 2013. EMEA volumes increased from the prior year due to higher demand, while benefiting from an improved price and product mix. EMEA benefited from favorable exchange rates driven primarily by a strengthening of the European Union euro against the U.S. dollar. Volumes were marginally lower in ASPAC combined with an adverse price and product mix as a result of lower sales of higher margin products. Avtel volumes decreased due to the timing of shipments to customers as opposed to any change in the long-term outlook for that market, while the price and product mix was negatively impacted by an adverse customer mix.

Gross margin: the year on year decrease of 1.9% primarily reflected lower sales in our higher margin Avtel business compared to a strong comparative quarter in 2013; and by an adverse price and product mix in ASPAC.

Operating expenses: the year on year increase of 19%, or $4.1 million, was due to $5.3 million of additional costs for the Bachman businesses; offset by a $1.1 million decrease in personnel-related compensation costs, primarily due to lower accruals for share-based compensation expense; and a $0.1 million decrease in other expenses.

Performance Chemicals

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

Three Months Ended March 31, 2014 Change (%) Americas EMEA ASPAC Total Volume -15 +5 +27 -1 Price and product mix 0 +2 -5 0 Exchange rates +1 +4 +2 +2 Acquisitions +35 0 0 +16 +21 +11 +24 +17



Volumes in the Americas were lower, primarily due to lower volumes in Fragrance Ingredients and for an industrial product. Acquisitions in the Americas, relating to Chemsil and Chemtec, generated additional sales compared to 2013. Volumes in EMEA were higher than the prior year, primarily due to higher volumes in Personal Care, combined with an improved price and product mix. EMEA benefited from favorable exchange rates driven primarily by a strengthening of the European Union euro against the U.S. dollar. ASPAC volumes were significantly higher in Personal Care and Fragrance Ingredients although adversely impacted by higher sales of lower margin products. ASPAC benefited from favorable exchange rates against the U.S. dollar.

Gross margin: the year on year increase of 2.2% primarily reflected improved price and product mix in our Personal Care market together with higher margins in our Chemsil business, partly offset by adverse price and product mix in ASPAC.

Operating expenses: the year on year increase of 29%, or $1.6 million, was primarily in respect of $2.1 million of additional costs for our Chemsil and Chemtec businesses, partly offset by a $0.5 million reduction in other costs including lower agents' commission and lower personnel-related compensation driven by lower accruals for share-based compensation expense.

Octane Additives

Net sales: decreased by 97% with decreased volumes (down 94%), due to the timing of shipments and declining demand from major customers, and an adverse customer mix (down 2%), together with reduced revenue from our environmental remediation business (down 1%).

25



--------------------------------------------------------------------------------

Table of Contents

Gross margin: the year on year decrease of 29.3% was principally due to lower manufacturing volumes.

Operating expenses: the year on year decrease of $0.2 million was due to the efficient management of the cost base.

Other Income Statement Captions

Pension credit/(charge): is non-cash, and was a $0.8 million net charge in 2014 compared to $0.7 million net charge in 2013.

Corporate costs: the year on year increase of 5%, or $0.6 million, primarily reflected $0.9 million higher costs for amortization of the new information system platform; $1.5 million provision for insurance claims within the group; $0.4 million higher legal and other professional expenses; partly offset by $2.2 million lower personnel-related compensation costs, primarily due to lower accruals for share-based compensation expense.

Impairment of Octane Additives segment goodwill: was $0.0 million in 2014 and $0.3 million in 2013.

Other net income/(expense): other net income of $1.9 million primarily related to gains of $1.5 million on translation of net assets denominated in non-functional currencies in our European businesses. In 2013, other net income of $1.0 million primarily related to net foreign exchange gains on foreign currency forward exchange contracts.

Interest expense, net: was $0.9 million in 2014 and $0.3 million in 2013 due to the higher level of borrowing during 2014, used primarily to fund our acquisition activity.

Income taxes: the effective tax rate was 11.1% and 21.4% in 2014 and 2013, respectively. The adjusted effective tax rate, once adjusted for non-recurring items relating to the adjustment of income tax provisions, was 22.6% compared to 23.1% in the prior year. The 0.5% reduction was primarily due to the first quarter of 2014 benefiting to a minor extent from the positive impact of taxable profits in different geographical locations as compared to the first quarter of 2013. 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.

Three Months Ended March 31 (in millions) 2014 2013 Income before income taxes $ 19.0$ 22.9 Income taxes $ 2.1$ 4.9 Add back adjustment of income tax positions 2.2 0.4 $ 4.3$ 5.3 GAAP effective tax rate 11.1 % 21.4 % Adjusted effective tax rate 22.6 % 23.1 % 26



--------------------------------------------------------------------------------

Table of Contents

LIQUIDITY AND FINANCIAL CONDITION

Working Capital

The Company believes that adjusted working capital, a non-GAAP financial measure, (defined by the Company as trade and other accounts receivable, inventories, prepaid expenses, accounts payable and accrued liabilities rather than total current assets less total current liabilities) provides useful information to investors in evaluating the Company's underlying performance and identifying operating trends. Management uses this non-GAAP financial measure internally to allocate resources and evaluate the performance of the Company's operations. Items excluded from 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.

March 31, December 31, (in millions) 2014 2013 Total current assets $ 394.6$ 407.4 Total current liabilities (127.0 ) (155.6 ) Working capital 267.6 251.8 Less cash and cash equivalents (90.1 ) (80.2 ) Less short-term investments (5.8 ) (6.6 ) Less current portion of deferred tax assets (8.7 ) (8.7 ) Less prepaid income taxes (3.4 ) (11.4 ) Add back current portion of long-term debt 5.4 5.3 Add back current portion of plant closure provisions 5.4 6.2 Add back current portion of unrecognized tax benefits 0.0 6.8 Add back current portion of deferred tax liabilities 0.2 0.2 Add back current portion of deferred income 0.3 0.3 Adjusted working capital $ 170.9$ 163.7



In 2014 our adjusted working capital increased by $7.2 million, compared to a $1.1 million decrease in the first quarter of 2013, primarily due to higher payments to external suppliers subsequent to the year end.

The $13.8 million decrease in trade and other accounts receivable primarily reflects a decrease in our Octane Additives segment, with sales for the first quarter of 2014 being $25 million lower than the fourth quarter of 2013. Days' sales outstanding in our Fuel Specialties segment decreased from 49 days to 44 days, whilst they increased slightly from 51 days to 52 days in our Performance Chemicals segment.

The $1.3 million increase in inventories is primarily due to increased inventories in our Octane Additives segment due to the timing of shipments expected early in the second quarter. Days' sales in inventory in our Fuel Specialties segment remained unchanged at 79 days, whilst declining in our Performance Chemicals segment over the same period from 96 days to 83 days as the relatively high level of inventories at the year end was sold through.

Prepaid expenses decreased $1.4 million from $5.8 million to $4.4 million, primarily related to the normal expensing of prepaid costs.

27



--------------------------------------------------------------------------------

Table of Contents

The $21.1 million decrease in accounts payable and accrued liabilities was due to reductions across all our segments, primarily reflecting payments to external suppliers subsequent to the year end following our normally high sales in the fourth quarter, together with payments for personnel-related compensation. Creditor days in our Fuel Specialties segment decreased from 32 days to 30 days and in our Performance Chemicals segment decreased from 42 days to 26 days.

Operating Cash Flows

We generated cash from operating activities of $20.9 million in 2014 compared to $17.9 million in 2013. Year over year cash from operating activities has been impacted by lower net income, higher cash outflows for our working capital requirements, and significant movements in taxes. In 2014 our working capital requirements increased by $6.8 million, compared to a $2.0 million increase in 2013.

Cash

At March 31, 2014 and December 31, 2013 we had cash and cash equivalents of $90.1 million and $80.2 million, respectively, of which $84.1 million and $73.3 million, respectively, were held by non-U.S. subsidiaries principally in the United Kingdom. The Company is in a position to control whether or not to repatriate foreign earnings and intends to reinvest earnings to fund overseas subsidiaries. We currently do not expect to make a further repatriation in the foreseeable future and hence have not provided for future income taxes on the cash held by overseas subsidiaries. If circumstances were to change that would cause these earnings to be repatriated an additional U.S. tax liability could be incurred, and we continue to monitor this position.

Short-term investments

At March 31, 2014 and December 31, 2013, we had short-term investments of $5.8 million and $6.6 million, respectively.

Debt

At March 31, 2014, the Company had debt outstanding of $134.0 million under its credit facility, a $5.0 million promissory note and $0.7 million of debt financing within our acquired Bachman businesses. The credit facility provides for borrowings by us of up to $180 million until it expires on December 14, 2016 and may be drawn down in full in the U.S.. In addition, the Company can request an additional amount of up to $20 million to be committed by the lenders.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters