This discussion should be read in conjunction with our unaudited interim
condensed 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 environmental
liabilities, pensions, income taxes, goodwill and property, plant and equipment
and other intangible assets (net of depreciation and amortization). These
policies have been discussed in the Company's 2019 Form 10-K.
Impact of COVID-19 Pandemic and Current Economic Environment
In the first quarter of 2020, we did not experience a significant impact on our
business resulting from government restrictions on the movement of people,
goods, and services. While there was some slowdown of operations in our Fuel
Specialties business, we experienced limited impact to our operations and
financial position during the quarter. We are expecting to see our operations
for the remainder of the year impacted by the current economic environment. We
are experiencing what we believe will be a short-term decrease in demand for
fuel additives due to the reduced demand for fuel. Our Oilfield Services
business is experiencing a significant decline in the demand for our goods and
services as customer activity has declined sharply due to the fall in oil price.
In Performance Chemicals demand is currently holding up well which is a
reflection of the integral role our products play in meeting the daily health,
hygiene and cleaning needs of consumers around the world. 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.
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.
Raw material sourcing has not been significantly impacted and we do not expect
that to change over the remainder of the year. Logistics are operating with some
delays but our products are currently being delivered to our customers.
Our financial position remains strong. We have sufficient access to capital if
needed, including our $250 million revolving credit facility we entered into in
September 2019 and do not anticipate any issues with meeting the covenants for
our debt agreements. 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 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.



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RESULTS OF OPERATIONS
The Company reports its financial performance based on the following four
reportable segments: Fuel Specialties, Performance Chemicals, Oilfield Services
and Octane Additives.
The following table provides operating income by reporting segment:

                             Three Months Ended
                                  March 31
(in millions)                 2020          2019
Net sales:
Fuel Specialties           $    147.0      $ 156.0
Performance Chemicals           113.1        118.1
Oilfield Services               112.2        114.2

                           $    372.3      $ 388.3

Gross profit/(loss):
Fuel Specialties           $     51.2      $  55.7
Performance Chemicals            27.6         26.6
Oilfield Services                36.2         37.7
Octane Additives                 (1.1 )       (2.2 )

                           $    113.9      $ 117.8

Operating income/(loss):
Fuel Specialties           $     32.1      $  32.9
Performance Chemicals            15.6         13.5
Oilfield Services                 7.2          7.8
Octane Additives                 (1.2 )       (2.8 )
Corporate costs                 (12.8 )      (15.2 )

Total operating income     $     40.9      $  36.2




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Three Months Ended March 31, 2020
The following table shows the change in components of operating income by
reporting segment for the three months ended March 31, 2020 and the three months
ended March 31, 2019:

                                     Three Months Ended
                                          March 31
(in millions, except ratios)    2020        2019       Change
Net sales:
Fuel Specialties               $ 147.0     $ 156.0     $  (9.0 )      -6 %
Performance Chemicals            113.1       118.1        (5.0 )      -4 %
Oilfield Services                112.2       114.2        (2.0 )      -2 %

                               $ 372.3     $ 388.3     $ (16.0 )      -4 %


Gross profit/(loss):
Fuel Specialties               $  51.2     $  55.7     $  (4.5 )      -8 %
Performance Chemicals             27.6        26.6         1.0        +4 %
Oilfield Services                 36.2        37.7        (1.5 )      -4 %
Octane Additives                  (1.1 )      (2.2 )       1.1       +50 %

                               $ 113.9     $ 117.8     $  (3.9 )      -3 %


Gross margin (%):
Fuel Specialties                  34.8        35.7        -0.9
Performance Chemicals             24.4        22.5        +1.9
Oilfield Services                 32.3        33.0        -0.7
Octane Additives                   n/a         n/a         n/a
Aggregate                         30.6        30.3        +0.3

Operating expenses:
Fuel Specialties               $ (19.1 )   $ (22.8 )   $   3.7       -16 %
Performance Chemicals            (12.0 )     (13.1 )       1.1        -8 %
Oilfield Services                (29.0 )     (29.9 )       0.9        -3 %
Octane Additives                  (0.1 )      (0.6 )       0.5       -83 %
Corporate costs                  (12.8 )     (15.2 )       2.4       -16 %

                               $ (73.0 )   $ (81.6 )   $   8.6       -11 %




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

                                     Three Months Ended March 31, 2020
Change (%)               Americas         EMEA        ASPAC      AvTel       Total
Volume                          -7           -11         -12        +88          -5
Price and product mix           +5            +2          +1        -42          +1
Exchange rates                   0            -3           0          0          -2

                                -2           -12         -11        +46          -6



Volumes in the Americas were lower, in part due to the continuation of a
specific issue from the latter part of 2019 related to disruption from one
supplier. Innospec now have alternative sources of supply which minimises the
future impact. Volumes in all our regions suffered from the adverse impact of
the global COVID-19 pandemic towards the end of the quarter which reduced demand
for fuel additive products. Although the future market demand for fuel additive
products is uncertain due to the COVID-19 pandemic, we believe that customer
demand will continue to be adversely impacted in the second quarter. Price and
product mix in all our regions was favorable due to a richer sales mix. 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 was
negatively impacted by exchange rate movements year over year, driven by a
weakening of the European Union euro against the U.S. dollar.
Gross margin
: the year over year decrease of 0.9 percentage points was in comparison to a
strong product mix for the prior year comparative.
Operating expenses:
the year over year decrease of $3.7 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 which declined in the
quarter.
Performance Chemicals
Net sales:
the table below details the components which comprise the year over year change
in net sales spread across the markets in which we operate:

                                 Three Months Ended March 31, 2020
Change (%)              Americas          EMEA          ASPAC        Total
Volume                        +13             -1            +60          +7
Price and product mix         -11             -8             -6          -9
Exchange rates                  0             -3             -2          -2

                               +2            -12            +52          -4



Higher volumes in the Americas and ASPAC were driven by increased demand for our
Personal Care products. Volumes were slightly reduced in EMEA due to lower
demand in Personal Care and Home Care products. All our regions suffered an
adverse price and product mix, including the adverse impact of lower raw
material prices driving lower selling prices for certain products. EMEA and
ASPAC were negatively impacted by exchange rate movements year over year, due to
a weakening of the European Union euro against the U.S. dollar during the
quarter.
Gross margin:
the year over year increase of 1.9 percentage points was driven by a richer
sales mix and the continued focus on margin improvement projects.
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Operating expenses:
the year over year decrease of $1.1 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 which declined in the
quarter.
Oilfield Services
Net sales:
the year over year decrease of $2.0 million, or 2 percent, was due to reduced
customer activity in completions as a result of the decline in the price of
crude oil, which was partly offset by increases in revenue from production
chemicals, drag reducing agents and sales to a new customer into Saudi Arabia.
The Company expects the adverse impact from the decline in the price of crude
oil to continue into the second quarter.
Gross margin:
the year over year decrease of 0.7 percentage points was due to lower sales of
higher margin products in the completions market.
Operating expenses:
the year over year decrease of $0.9 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 which declined in the
quarter.
Octane Additives
Net sales:
were nil in the current quarter and the prior year, which is in line with our
expectations as the one remaining customer is nearing the completion of their
transition to unleaded fuel.
Gross loss
:
was $1.1 million in the current year compared to $2.2 million in the prior year.
The reduction in losses was a result of the halt in production, in line with the
expectation of nil demand for the quarter. The cost primarily relates to the
accretion charge on the plant closure provision.
Operating expenses:
the year over year decrease of $0.5 million was a result of management plans to
maintain efficient operational activity in line with the lower production
volumes.
Other Income Statement Captions
Corporate costs:
the year over year decrease of $2.4 million was driven by lower personnel
related performance-based remuneration, primarily due to a decrease in the
share-based compensation accruals linked to the Innospec share price, which
declined in the quarter. The reduction in costs was partly offset by higher
spending on information technology following the network security incident in
the second quarter of 2019.
Other net income:
for the first quarter of 2020 and 2019, included the following:

(in millions)                               2020       2019      Change
.
United Kingdom pension credit              $  1.7     $  1.9     $  (0.2 )
German pension charge                        (0.2 )     (0.2 )       0.0

Foreign exchange gains on translation 0.5 2.2 (1.7 ) Foreign currency forward contracts gains 1.9 0.2 1.7

$  3.9     $  4.1     $  (0.2 )



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Interest expense, net: was $0.6 million for 2020 compared to $1.5 million in the
prior year, driven by lower average net debt as the business generated cash
inflows.
Income taxes:
the effective tax rate was 25.1% and 26.0% in the first quarter of 2020 and
2019, respectively. The adjusted effective tax rate, once adjusted for the items
set out in the following table, was 25.1% in 2020 compared with 26.8% in 2019.
The 1.7% decrease in the adjusted effective rate was primarily due to the fact
that a higher proportion of the Company's profits are being generated in lower
tax jurisdictions.
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 following table shows a reconciliation of the GAAP effective tax rate to the
adjusted effective tax rate:

                                              Three Months
                                                  Ended
                                                March 31
(in millions)                                2020       2019
Income before income taxes                  $ 44.2     $ 38.8

Indemnification asset regarding tax audit 0.2 0.0 Adjustment for stock compensation

              1.4        1.5

                                            $ 45.8     $ 40.3

Income taxes                                $ 11.1     $ 10.1
Tax on stock compensation                      0.4        0.9
Adjustment of income tax provision            (0.0 )     (0.2 )

                                            $ 11.5     $ 10.8

GAAP effective tax rate                       25.1 %     26.0 %
Adjusted effective tax rate                   25.1 %     26.8 %


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LIQUIDITY AND FINANCIAL CONDITION
Working Capital
In the first quarter of 2020 our working capital increased by $33.8 million,
while our adjusted working capital increased by $42.3 million. The difference is
primarily due to a reduction in our cash and cash equivalents.
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 working capital in 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)                                                   2020                 2019
Total current assets                                         $     626.7        $        630.3
Total current liabilities                                         (266.1 )              (303.5 )

Working capital                                                    360.6                 326.8
Less cash and cash equivalents                                     (68.1 )               (75.7 )
Less prepaid income taxes                                           (4.7 )                (2.5 )
Less other current assets                                            0.0                  (0.8 )
Add back current portion of accrued income taxes                    12.3                  10.3
Add back current portion of finance leases                           0.8                   1.0
Add back current portion of plant closure provisions                 5.6                   5.6
Add back current portion of operating lease liabilities             11.1                  10.6

Adjusted working capital                                     $     317.6        $        275.3

We had a $4.3 million increase in trade and other accounts receivable primarily driven by the timing of sales in our Fuel Specialties segment. Days' sales outstanding in our Fuel Specialties segment increased from 52 days to 56 days; decreased in our Performance Chemicals segment from 64 days to 61 days; and increased from 66 days to 83 days in our Oilfield Services segment. We had a $1.4 million increase in inventories as the COVID-19 pandemic began to delay some sales towards the end of the first quarter. Days' sales in inventory in our Fuel Specialties segment increased from 97 days to 123 days; decreased in our Performance Chemicals segment from 66 days to 59 days; and remained unchanged at 71 days in our Oilfield Services segment. Prepaid expenses decreased $3.1 million, from $14.7 million to $11.6 million due to the normal expensing of prepaid invoices. We had a $39.7 million decrease in accounts payable and accrued liabilities due to an increase in supplier payments and lower accruals for share-based payments linked to the decrease in the Innospec share price during the quarter. Creditor days (including goods received not invoiced) in our Fuel Specialties segment decreased from 52 days to 49 days; decreased in our Performance Chemicals segment from 54 days to 45 days; and increased in our Oilfield Services segment from 43 days to 45 days.


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Operating Cash Flows
We generated cash from operating activities of $2.4 million in the first three
months of 2020 compared to cash inflows of $13.2 million in the first three
months of 2019. The reduction in cash generated from operating activities was
primarily related to additional payments for inventory and the timing of
payments for income taxes.
Cash
At March 31, 2020 and December 31, 2019, we had cash and cash equivalents of
$68.1 million and $75.7 million, respectively, of which $54.4 million and $57.9
million, respectively, were held by non-U.S. subsidiaries principally in the
United Kingdom.
The decrease in cash and cash equivalents in 2020 of $7.6 million was primarily
related to the Company's investment in property, plant and equipment.
Debt
At March 31, 2020, we had $60.0 million of debt outstanding under our revolving
credit facility and $1.2 million of obligations under finance leases relating to
certain fixed assets within our Fuel Specialties and Oilfield Services segments.
At December 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 segment.
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