INNOSPEC INC. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto. EXECUTIVE OVERVIEW In 2019, we continued to focus on the organic growth of our portfolio and this delivered in line with our expectations. Sales revenue growth across the group has been driven by new product development and customer adoption of the strong product portfolio in our strategic businesses. Octane Additives continued to supply the one remaining customer in motor gasoline, albeit at reduced levels, consistent with the customer's transition to unleaded fuel. 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 We are subject to environmental laws in the countries in which we conduct business. Our principal site giving rise to environmental remediation liabilities is the Octane Additives manufacturing site at Ellesmere Port in theUnited Kingdom . There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in theU.S. andEurope . At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed. Remediation provisions atDecember 31, 2019 amounted to$49.3 million and relate principally to our Ellesmere Port site in theUnited 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. 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. Income Taxes We are subject to income and other taxes in theU.S. and 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. 24 -------------------------------------------------------------------------------- Table of Contents The calculation of our tax liabilities involves evaluating uncertainties in the application of accounting principles and complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be required. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained, based on technical merits of the position, when challenged by the taxing authorities. To the extent that we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, 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. We report interest and penalties related to uncertain tax positions as income taxes. For additional information regarding uncertain income tax positions, see Note 10 of the Notes to the Consolidated Financial Statements. Pensions The Company maintains a defined benefit pension plan covering a number of its current and former employees in theUnited Kingdom . The Company also has other smaller pension arrangements in theU.S. and overseas as disclosed in Note 9 of the Notes to the Consolidated Financial Statements. TheUnited Kingdom plan is closed to future service accrual, but has a large number of deferred and current pensioners. Movements in the 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. A change in any one of these assumptions could impact the plan asset value, PBO and pension charge recognized in the income statement. 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$24 million while the net pension credit for 2020 would change by approximately$0.1 million . A 0.25% change in the level of price inflation assumption would change the PBO by approximately$18 million and the net pension credit for 2020 would change by approximately$1.1 million . Further information is provided in Note 9 of the Notes to the Consolidated Financial Statements.Goodwill The Company's reporting units, the level at which goodwill is assessed for potential impairment, are consistent with the reportable segments. 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. 25 -------------------------------------------------------------------------------- Table of Contents 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. Factors utilized in the qualitative assessment process include macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; 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. These fair value techniques require management judgment and estimates including revenue growth rates, projected operating margins, changes in working capital and discount rates. We would develop these assumptions by considering recent financial performance and trends and industry growth estimates. 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. AtDecember 31, 2019 we had$363.0 million of goodwill relating to our Fuel Specialties, Performance Chemicals and Oilfield Services segments. Our impairment assessment concluded that there had been no impairment of goodwill in respect of those reporting segments. Property, Plant and Equipment and Other Intangible Assets (Net of Depreciation and Amortization, respectively) As atDecember 31, 2019 we had$198.7 million of property, plant and equipment and$113.5 million of other intangible assets (net of depreciation and amortization, respectively), that are discussed in Notes 5 and 8 of the Notes to the Consolidated Financial Statements, respectively. These long-lived assets relate to all of our reporting segments and are being amortized or depreciated straight-line over periods of up to 17 years in respect of the other intangible assets and up to 25 years in respect of the property, plant and equipment. We continually assess the markets and products related to these long-lived assets, as well as their specific carrying values, and have concluded that these carrying values, and amortization and depreciation periods, remain appropriate. 26
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RESULTS OF OPERATIONS The following table provides operating income by reporting segment: ( in millions ) 2019 2018 2017 Net sales: Fuel Specialties$ 583.7 $ 574.5 $ 523.8 Performance Chemicals 428.7 468.1 419.5 Oilfield Services 479.9 400.6 304.4 Octane Additives 21.0 33.7 59.1$ 1,513.3 $ 1,476.9 $ 1,306.8 Gross profit: Fuel Specialties$ 204.5 $ 195.0 $ 188.2 Performance Chemicals 100.1 97.5 75.8 Oilfield Services 159.9 130.4 109.3 Octane Additives 1.7 12.1 30.0$ 466.2 $ 435.0 $ 403.3 Operating income: Fuel Specialties$ 116.6 $ 116.3 $ 107.7 Performance Chemicals 48.7 44.7 32.6 Oilfield Services 39.7 22.1 9.5 Octane Additives (0.7 ) 9.9 26.7 Corporate costs (54.4 ) (52.4 ) (48.8 ) Restructuring charge 0.0 (7.1 ) 0.0 Loss on disposal of subsidiary 0.0 0.0 (0.9 ) Foreign exchange loss on liquidation of subsidiary 0.0 0.0 (1.8 ) Total operating income$ 149.9 $ 133.5 $ 125.0 Other income, net$ 5.3 $ 5.0 $ 11.3 Interest expense, net (4.8 ) (6.9 ) (8.2 ) Income before income taxes 150.4 131.6 128.1 Income taxes (38.2 ) (46.6 ) (66.3 ) Net income$ 112.2 $ 85.0 $ 61.8 27
-------------------------------------------------------------------------------- Table of Contents Results of Operations - Fiscal 2019 compared to Fiscal 2018: ( in millions, except ratios ) 2019 2018 Change Net sales: Fuel Specialties$ 583.7 $ 574.5 $ 9.2 +2 % Performance Chemicals 428.7 468.1 (39.4 ) -8 % Oilfield Services 479.9 400.6 79.3 +20 % Octane Additives 21.0 33.7 (12.7 ) -38 %$ 1,513.3 $ 1,476.9 $ 36.4 +2 % Gross profit: Fuel Specialties$ 204.5 $ 195.0 $ 9.5 +5 % Performance Chemicals 100.1 97.5 2.6 +3 % Oilfield Services 159.9 130.4 29.5 +23 % Octane Additives 1.7 12.1 (10.4 ) -86 %$ 466.2 $ 435.0 $ 31.2 +7 % Gross margin (%): Fuel Specialties 35.0 33.9 +1.1 Performance Chemicals 23.3 20.8 +2.5 Oilfield Services 33.3 32.6 +0.7 Octane Additives 8.1 35.9 -27.8 Aggregate 30.8 29.5 +1.3 Operating expenses: Fuel Specialties$ (87.9 ) $ (78.7 ) $ (9.2 ) +12 % Performance Chemicals (51.4 ) (52.8 ) 1.4 -3 % Oilfield Services (120.2 ) (108.3 ) (11.9 ) +11 % Octane Additives (2.4 ) (2.2 ) (0.2 ) +9 % Corporate costs (54.4 ) (52.4 ) (2.0 ) +4 % Restructuring charge 0.0 (7.1 ) 7.1 -100 %$ (316.3 ) $ (301.5 ) $ (14.8 ) +5 %
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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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:
Change (%) Americas EMEA ASPAC AvTel Total
Volume -8 +4 +3 +52 +3
Price and product mix +6 +4 +8 -37 +3
Exchange rates 0 -8 -1 0 -4
-2 0 +10 +15 +2
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. dollar.
Gross margin:
the year on year increase of 1.1 percentage points benefitted from an
improvement in the mix of product sales.
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.
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:
Change (%) Americas EMEA ASPAC Total
Volume -3 -4 +16 -3
Price and product mix +4 -4 -9 -2
Exchange rates 0 -5 -3 -3
+1 -13 +4 -8
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
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over year, due to a weakening of the British pound sterling and the European
Union euro against the U.S. dollar.
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.
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.
Oilfield Services
Net sales:
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.
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.
Octane Additives
Net sales:
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.
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.
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 .
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Other net income/(expense):
for 2019 and 2018, includes the following:
(in millions) 2019 2018 Change
United Kingdom pension credit $ 7.7 $ 6.3 $ 1.4
German pension charge (0.5 ) (0.6 ) 0.1
Foreign exchange losses on translation (1.3 ) (5.9 ) 4.6
Foreign currency forward contracts (losses)/gains (0.6 ) 5.2
(5.8 )
$ 5.3 $ 5.0 $ 0.3
Interest expense, net:
was $4.8 million for 2019 compared to $6.9 million in the prior year, driven by
lower average net debt as the business generated cash inflows.
Income taxes:
The effective tax rate was 25.4% and 35.4% in 2019 and 2018, respectively. The
adjusted effective tax rate, once adjusted for the items set out in the
following table, was 22.6% in 2019 compared with 23.7% in 2018. 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 Company's operations and for
planning and forecasting in subsequent periods.
(
in millions, except ratios
) 2019 2018
Income before income taxes $ 150.4 $ 131.6
Adjustment for stock compensation 6.6 4.8
Indemnification asset regarding tax audit (1.6 ) (1.2 )
Site closure provision 0.0 6.8
$ 155.4 $ 142.0
Income taxes $ 38.2 $ 46.6
Adjustment of income tax provisions (2.5 ) (1.8 )
Tax on stock compensation 0.9 0.2
Tax Cuts & Jobs Act 2017 impact 0.0 (12.3 )
Tax on site closure provision (0.7 ) 1.9
Tax loss on distribution 1.2 0.0
Other discrete items (2.0 ) (0.9 )
$ 35.1 $ 33.7
GAAP effective tax rate 25.4 % 35.4 %
Adjusted effective tax rate 22.6 % 23.7 %
The most significant factors impacting on our effective tax rate in 2019 are explained in Note 10 of the Notes to the Consolidated Financial Statements.
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Results of Operations - Fiscal 2018 compared to Fiscal 2017:
(
in millions, except ratios
) 2018 2017 Change
Net sales:
Fuel Specialties $ 574.5 $ 523.8 $ 50.7 +10 %
Performance Chemicals 468.1 419.5 48.6 +12 %
Oilfield Services 400.6 304.4 96.2 +32 %
Octane Additives 33.7 59.1 (25.4 ) -43 %
$ 1,476.9 $ 1,306.8 $ 170.1 +13 %
Gross profit:
Fuel Specialties $ 195.0 $ 188.2 $ 6.8 +4 %
Performance Chemicals 97.5 75.8 21.7 +29 %
Oilfield Services 130.4 109.3 21.1 +19 %
Octane Additives 12.1 30.0 (17.9 ) -60 %
$ 435.0 $ 403.3 $ 31.7 +8 %
Gross margin (%):
Fuel Specialties 33.9 35.9 -2.0
Performance Chemicals 20.8 18.1 +2.7
Oilfield Services 32.6 35.9 -3.3
Octane Additives 35.9 50.8 -14.9
Aggregate 29.5 30.9 -1.4
Operating expenses:
Fuel Specialties $ (78.7 ) $ (80.5 ) $ 1.8 -2 %
Performance Chemicals (52.8 ) (43.2 ) (9.6 ) +22 %
Oilfield Services (108.3 ) (99.8 ) (8.5 ) +9 %
Octane Additives (2.2 ) (3.3 ) 1.1 -33 %
Corporate costs (52.4 ) (48.8 ) (3.6 ) +7 %
Restructuring charge (7.1 ) 0.0 (7.1 ) n/a
Loss on disposal of subsidiary 0.0 (0.9 ) 0.9 -100 %
Foreign exchange loss on liquidation of subsidiary 0.0 (1.8 ) 1.8 -100 %
$ (301.5 ) $ (278.3 ) $ (23.2 ) -8 %
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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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:
Change (%) Americas EMEA ASPAC AvTel Total
Volume +15 +3 +1 +1 +7
Price and product mix +1 0 0 0 0
Exchange rates 0 +6 +1 0 +3
+16 +9 +2 +1 +10
Volumes in all our regions were higher, driven by increased demand for our
product technology and customer service. Price and product mix in the Americas
benefited from increased sales of higher margin products. AvTel volumes were
higher than the prior year due to variations in the timing and level of demand
from customers. EMEA and ASPAC benefited from favorable exchange rate movements
year over year, driven by a strengthening of the British pound sterling and the
European Union euro against the U.S. dollar.
Gross margin:
the year on year decrease of 2.0 percentage points was adversely affected by the
mix of product sales when compared to a strong prior year comparative.
Operating expenses:
the year on year decrease of $1.8 million was driven by a reduction in the
provisions for doubtful debts and lower accruals for agents' commissions, partly
offset by increased other expenses to support the business growth.
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:
Change (%) Americas EMEA ASPAC Total
Volume +14 +4 +9 +7
Price and product mix +4 0 -1 +1
Exchange rates 0 +5 +2 +4
+18 +9 +10 +12
Increased demand for Personal Care led to significantly higher volumes in the
Americas , together with a favorable price and product mix from increased sales
of higher margin products. EMEA benefited from higher volumes in both Personal
Care and Home Care, while ASPAC volumes were higher due to increased demand for
Personal Care being partly offset by lower demand for Home Care. ASPAC was
impacted by adverse price and product mix due to lower sales of higher margin
products. EMEA and ASPAC benefited from favorable exchange rate movements year
over year, driven by a strengthening of the British pound sterling and the
European Union euro against the U.S. dollar.
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Gross margin:
the year on year increase of 2.7 percentage points was driven by the benefit of
several improvement projects and favorable manufacturing variances due to higher
production volumes.
Operating expenses:
the year on year increase of $9.6 million is due to additional personnel-related
expenses to support the business growth, including increased performance-related
compensation accruals, together with additional amortization for our new
information system platform and the adverse impact of exchange rate movements
year over year.
Oilfield Services
Net sales:
the year on year increase of $96.2 million was due to increased customer
activity in stimulation and completion, following the rise in crude oil prices
in the first nine months of the year. Overall volumes increased by 26 percent
year on year, together with a favorable price and product mix of 6 percent.
Gross margin:
the year on year decrease of 3.3 percentage points, was due to the mix of
customer activity, adverse raw material pricing and higher transportation and
labor costs.
Operating expenses:
the year on year increase of $8.5 million was due to higher selling and
technical support expenses required to deliver the increase in customer demand
partly offset by a reduction in other expenses. The reduction in other expenses
is driven by lower general and administration costs due to effective cost
control, together with lower amortization of acquisition related intangible
assets as some of the acquired assets have become fully amortized.
Octane Additives
Net sales:
decreased by $25.4 million compared to the prior year, due to the expected
reduction in the demand from our one remaining refinery customer.
Gross margin:
the year on year decrease of 14.9 percentage points was due to higher
manufacturing costs as a result of lower production volumes to align with
reduced customer demand.
Operating expenses:
the year on year decrease of $1.1 million was driven by the release of historic
provisions which are no longer required, either due to the settlement of
disputed liabilities or to the passing of the relevant time limit under statute
of limitations.
Other Income Statement Captions
Corporate costs:
the year on year increase of $3.6 million relates to higher personnel-related
compensation accruals including a new long-term incentive plan and higher costs
for the additional corporate services required to support our enlarged group
following our growth through acquisitions in recent years. There has also been
the adverse effect of a stronger British pound sterling against the U.S. dollar
for our United Kingdom cost base.
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Restructuring charge:
a charge of $7.1 million primarily relates to the closure costs including
redundancies and onerous leases for our operation in Belgium .
Loss on disposal of subsidiary:
there was a loss in the prior year of $0.9 million for an indemnity claim in
relation to residual testing in the Aroma Chemicals business which was sold in
2015.
Foreign exchange loss on liquidation of subsidiary:
the $1.8 million loss in the prior year related to the reclassification of
historic foreign exchange translations of net assets from accumulated other
comprehensive losses, for our captive insurance company which was liquidated.
There has been no corresponding charge in the current year.
Other net income/(expense):
for 2018 and 2017, includes the following:
(in millions) 2018 2017 Change
United Kingdom pension credit $ 6.3 $ 5.3 $ 1.0
German pension charge (0.6 ) (0.6 ) 0.0Foreign exchange (losses)/gains on translation (5.9 ) 7.5 (13.4 ) Foreign currency forward contracts gains/(losses) 5.2 (0.9 )
6.1
$ 5.0 $ 11.3 $ (6.3 )
Interest expense, net:
was $6.9 million in 2018 compared to $8.2 million in 2017 driven by lower
average net debt as the business generated cash inflows.
Income taxes:
The effective tax rate was 35.4% and 51.8% in 2018 and 2017, respectively. The
adjusted effective tax rate, once adjusted for the items set out in the
following table, was 23.7% in 2018 compared with 20.2% in 2017. 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 Company's operations and for
planning and forecasting in subsequent periods.
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Table of Contents ( in millions, except ratios ) 2018 2017 Income before income taxes $
131.6
1.7
Loss on disposal of subsidiary 0.0 0.9
Foreign exchange loss on liquidation of subsidiary 0.0 1.8
Adjustment for stock compensation 4.8 4.0
Indemnification asset regarding tax audit (1.2 ) 0.0
Site closure provision 6.8 0.0
$ 142.0 $ 136.5
Income taxes $ 46.6 $ 66.3
Adjustment of income tax provisions (1.8 ) 0.5
Tax on stock compensation 0.2 3.1
Tax on adjustment to fair value accounting 0.0 0.3
Tax Cuts & Jobs Act 2017 impact (12.3 ) (40.6 )
Tax on site closure provision 1.9 0.0
Other discrete items (0.9 ) (2.0 )
$ 33.7 $ 27.6
GAAP effective tax rate 35.4 % 51.8 %
Adjusted effective tax rate 23.7 % 20.2 %
The most significant factor impacting our effective tax rate in 2018 and 2017 is
the recognized implications of the Tax Act.
On December 22, 2017 , the same date the Tax Act was enacted, 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 is now complete.
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
during the reporting period, 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. Our accounting in relation to the
Transition Tax is now complete.
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LIQUIDITY AND FINANCIAL CONDITION
Working Capital
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
) 2019 2018
Total current assets $ 630.3 $ 663.9
Total current liabilities (303.5 ) (296.6 )
Working capital 326.8 367.3
Less cash and cash equivalents (75.7 ) (123.1 )
Less prepaid income taxes (2.5 ) (1.5 )
Less other current assets (0.8 ) 0.0
Add back current portion of accrued income taxes 10.3 8.6
Add back current portion of long-term debt 0.0
21.4
Add back current portion of finance leases 1.0
1.8
Add back current portion of plant closure provisions 5.6
5.9
Add back current portion of operating lease liabilities 10.6 0.0 Adjusted working capital$ 275.3 $ 280.4 In 2019 our working capital decreased by$40.5 million , while our adjusted working capital decreased by$5.1 million . The difference is primarily due to changes in cash and cash equivalents and long-term debt, together with the exclusion of the current portion of operating lease liabilities from our adjusted working capital. We had a$12.3 million increase in trade and other accounts receivable driven by higher sales in our Oilfield Services segment. Days' sales outstanding in our Fuel Specialties segment remained unchanged at 52 days; decreased in our Performance Chemicals segment from 65 days to 64 days; and increased from 56 days to 66 days in our Oilfield Services segment. We had a$3.4 million decrease in inventories following the expected high demand in the fourth quarter, in particular for our Oilfield Services segment. Days' sales in inventory in our Fuel Specialties segment increased from 90 days to 97 days; increased in our Performance Chemicals segment from 59 days to 66 days; and decreased from 82 days to 71 days in our Oilfield Services segment. Prepaid expenses increased$3.1 million , from$11.6 million to$14.7 million due to the timing of invoices received for new prepayments. 37 -------------------------------------------------------------------------------- Table of Contents We had a$17.1 million increase in accounts payable and accrued liabilities due to the timing of supplier payments and higher accruals for share-based payments linked to the increase in theInnospec share price during the year. Creditor days (including GRNI) in our Fuel Specialties segment increased from 43 days to 52 days; increased in our Performance Chemicals segment from 52 days to 54 days; and decreased in our Oilfield Services segment from 49 days to 43 days. Operating Cash Flows We generated cash from operating activities of$161.6 million in 2019 compared to cash inflows of$104.9 million in 2018. Year over year cash from operating activities has benefitted from our effective control of working capital across our business, in particular our Oilfield Services segment has controlled inventory levels while sales have significantly increased year over year. There has also been a favorable cash flow from the timing of income tax payments. Cash AtDecember 31, 2019 and 2018, we had cash and cash equivalents of$75.7 million and$123.1 million , respectively, of which$57.9 million and$101.4 million , respectively, were held by non-U.S. subsidiaries principally in theUnited Kingdom . The decrease in cash and cash equivalents in 2019 of$47.4 million was driven by the repayment of$66.0 million of our revolving credit facility and the$82.5 million repayment of our term loan, being partly offset by our strong operating cash flows including the effective control of working capital, net of capital investment and dividend payments. Debt OnSeptember 26, 2019 ,Innospec and certain of its subsidiaries entered into a new agreement for a$250.0 million revolving credit facility untilSeptember 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 . OnSeptember 30, 2019 the Company repaid its pre-existing term loan and revolving credit facility that had been amended and restated onDecember 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. The new revolving credit facility contains terms which, if breached, would result in it becoming repayable on demand. It requires, among other matters, compliance with the following financial covenant ratios measured on a quarterly basis: (1) our ratio of net debt to EBITDA must not be greater than 3.0:1.0 and (2) our ratio of EBITDA to net interest must not be less than 4.0:1.0 Management has determined that the Company has not breached these covenants and does not expect to breach these covenants for the next 12 months. 38 -------------------------------------------------------------------------------- Table of Contents The current 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 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. AtDecember 31, 2019 , we had$60.0 million of debt outstanding under the revolving credit facility and$1.5 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments. AtDecember 31, 2019 , our maturity profile of long-term debt and finance leases is set out below (net of deferred finance costs capitalized of$1.4 million): ( in millions ) 2020$ 1.0 2021 0.4 2022 0.1 2023 58.6 Total debt 60.1
Current portion of long-term debt and finance leases (1.0 )
Long-term debt and finance leases, net of current portion
Outlook
During 2019, we have focused on consolidating and strengthening our enlarged
business and on several very promising organic growth projects which will
support future growth.
We have continued to deliver a strong financial performance and we believe our
long-term strategy is very much in line with our expectations. The current year
was successful financially and, notably, we ended the year in a net cash
position on our balance sheet.
Organic growth through new product development was a key feature of 2019 and we
intend this to continue to be a key focus in the coming years.
While we have had a successful year, there are issues of global trade disputes
which are beyond our control and give us some cause for caution when we consider
the prospects for 2020. We plan on maintaining our existing strategy to grow the
business based on our twin competencies of technology and customer service and
our continued investment in R&D, which will require continued investment in new
product development.
The latter part of 2019 suggested that market conditions will be challenging in
2020 in all our strategic businesses. However, we feel confident that our
organic growth projects and potential further acquisitions will support
continued growth.
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We expect the possible conclusion of revenues from our Octane Additives segment
in the early part of 2020.
Contractual Commitments
The following represents contractual commitments at December 31, 2019 and the
effect of those obligations on future cash flows:
(
in millions
) Total 2020 2021-22 2023-24 Thereafter
Operating activities
Remediation payments 49.3 5.6 7.8 4.2 31.7
Operating lease commitments 32.5 10.6 14.1 5.9 1.9
Raw material purchase obligations 21.3 6.3 7.3 7.7 0.0
Interest payments on debt 9.0 2.4 4.8 1.8 0.0
Investing activities
Capital commitments 4.0 4.0 0.0 0.0 0.0
Financing activities
Long-term debt obligations 58.6 0.0 0.0 58.6 0.0
Finance leases 1.5 1.0 0.5 0.0 0.0
Total $ 176.2 $ 29.9 $ 34.5 $ 78.2 $ 33.6
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.
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.
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. Further disclosure is provided
in Note 10 of the Notes to the Consolidated Financial Statements.
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Investing activities
Capital commitments relate to certain capital projects that the Company has
committed to undertake.
Financing activities
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 .
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.
Finance leases relate to the financing of certain fixed assets in our Fuel
Specialties and Oilfield Services segments.
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.
law.
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 $49.3 million at December 31, 2019 .
Remediation expenditure utilizing these provisions was $4.4 million ,
$3.1 million and $2.4 million in the years 2019, 2018 and 2017, respectively.
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