Innospec Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; amounts in U.S. dollars unless stated otherwise. Innospec reports Fuel Specialties, Performance Chemicals and Oilfield Services; Octane Additives ceased trading as a segment on July 1, 2020.
Financial results
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $265.1m | $371.9m | $882.3m | $1,122.6m |
| Gross profit | $78.7m | $119.1m | $251.7m | $348.0m |
| Gross margin | 29.7% | 32.0% | 28.5% | 31.0% |
| Operating income | $16.8m | $38.2m | $4.3m | $106.1m |
| Net income | $12.7m | $30.1m | $6.1m | $81.1m |
| Diluted EPS | $0.51 | $1.22 | $0.25 | $3.28 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $87.7m | $103.2m |
- Q3 sales fell 29% year over year. Oilfield Services sales declined 64%, Fuel Specialties 17%; Performance Chemicals sales rose 2%.
- For the first nine months, sales decreased 21%. Oilfield Services fell 45%, Fuel Specialties 14% and Performance Chemicals 4%.
- Nine-month operating income included a $21.1m Octane Additives restructuring charge and $19.8m impairment of acquired Oilfield Services intangible assets. The resulting operating income was $4.3m.
- Q3 segment operating income: Fuel Specialties $22.2m; Performance Chemicals $12.4m; Oilfield Services loss of $4.5m. Performance Chemicals operating income improved year over year despite lower nine-month sales.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $66.6m, compared with $75.7m at year-end 2019. Current assets were $528.8m and current liabilities $229.8m.
- Innospec had no revolving-credit borrowings and $0.6m in finance lease obligations. It repaid $60m of revolving-credit borrowings during the period. The $250m revolving facility was extended to September 2024.
- Nine-month investing cash outflow was $21.7m, primarily capital expenditures. Financing cash outflow was $74.8m, including $12.8m of dividends. The company paid a $0.52-per-share dividend during the nine-month period.
- Adjusted working capital, a company-defined non-GAAP measure, was $246.4m, down from $275.3m at December 31, 2019. The company attributed the decline in receivables largely to lower sales; inventory days increased in all three continuing segments.
- Plant-closure provisions totaled $57.9m, including $52.7m due after one year. Total equity was $926.0m.
Management commentary, outlook and risks
- Management said COVID-19 continued to weigh on Fuel Specialties, reflecting reduced freight and passenger travel, and on Oilfield Services, due to sharply reduced oil exploration and production activity. Demand improved somewhat in Q3, but had not returned to pre-pandemic levels.
- Performance Chemicals was relatively resilient: demand for some health, hygiene and cleaning products offset weakness in certain customer markets. Management said manufacturing continued with only minor interruptions and raw-material sourcing was not significantly affected.
- Management expects demand to improve to the extent global economic activity recovers, but emphasized uncertainty about the pandemic, future restrictions and the pace of recovery. No numerical earnings or revenue guidance is stated in the provided filing text.
- The $21.1m restructuring provision relates to ending TEL production and sales for motor gasoline, while TEL production for aviation use continues. It includes environmental monitoring, facility remediation, a loss-making contract, asset impairment and redundancy costs.
- The $19.8m impairment reflected weaker demand for drilling-related products and reduced Oilfield Services outlook. Management also reported higher inventory provisions in Fuel Specialties and significant Oilfield Services inventory adjustments during Q2.
- The nine-month GAAP effective tax rate was 42.5%, versus 24.3% in 2019; management attributed the increase primarily to the UK enacted tax-rate change affecting deferred tax liabilities. The adjusted effective tax rate was 24.8% for both periods, a non-GAAP measure.
- Other exposures include $15.5m of unrecognized tax benefits, interest and penalties; $9.6m of guarantees not recorded as liabilities; and environmental remediation obligations. The company reported no material pending legal proceedings and no material changes to other risk factors, while highlighting COVID-19 uncertainty.
Most important facts for investors to verify
- Whether demand recovery in Fuel Specialties and Oilfield Services continues, especially if travel restrictions or weak oil-market activity persist.
- The recurring earnings and cash-generation profile after separating the restructuring and impairment charges from operating results.
- Inventory levels, aging and provisions, given higher inventory days and allowances during the period.
- The adequacy and timing of plant-closure and remediation provisions, and any potential exposure from tax matters and guarantees.
- Available liquidity and compliance with the revolving facility’s covenants; management reported no expected covenant issues.