Innospec Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with the three months ended March 31, 2019, except balance-sheet figures, which are compared with December 31, 2019. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $372.3 | $388.3 | Down 4% |
| Gross profit | $113.9 | $117.8 | Down $3.9 |
| Gross margin | 30.6% | 30.3% | Up 0.3 percentage points |
| Operating income | $40.9 | $36.2 | Up $4.7 |
| Net income | $33.1 | $28.7 | Up $4.4 |
| Diluted EPS | $1.34 | $1.17 | Up $0.17 |
| Cash from operating activities | $2.4 | $13.2 | Down $10.8 |
Operating income improved despite lower sales, supported by $8.6 million lower operating expenses, including lower share-based compensation and corporate costs. Net interest expense was $0.6 million versus $1.5 million. The effective tax rate was 25.1%, compared with 26.0%.
Segments
- Fuel Specialties: Sales of $147.0, down 6%; operating income of $32.1, versus $32.9. Lower volumes reflected fuel-additive demand and a supplier disruption that management said had been mitigated with alternative sources.
- Performance Chemicals: Sales of $113.1, down 4%; operating income of $15.6, versus $13.5. Gross margin improved to 24.4% from 22.5%; management cited a richer sales mix and margin-improvement work.
- Oilfield Services: Sales of $112.2, down 2%; operating income of $7.2, versus $7.8. Lower completions activity was partly offset by other product sales and a new Saudi Arabian customer.
- Octane Additives: No sales in either period; operating loss narrowed to $1.2 from $2.8. The remaining refinery customer was nearing its transition to unleaded fuel, and revenue may conclude in 2020.
Financial position and liquidity
- Cash and cash equivalents were $68.1 at March 31, down $7.6 from year-end. Total current assets were $626.7 and current liabilities were $266.1; working capital was $360.6, up from $326.8.
- Adjusted working capital, a company-defined non-GAAP measure, was $317.6, up from $275.3. Accounts payable and accrued liabilities declined $39.7, primarily reflecting supplier-payment timing and lower share-based compensation accruals.
- Debt under the revolving credit facility was $60.0; finance lease obligations were $1.2. The company reported a $250 million revolving credit facility entered into in September 2019 and said it had sufficient access to capital and did not anticipate covenant issues.
- Capital expenditures were $7.8. Operating cash flow less capital expenditures was approximately negative $5.4. Management attributed the lower operating cash flow principally to inventory payments and income-tax payment timing.
- Total assets were $1,455.3 and total equity was $944.3. The UK defined-benefit pension plan asset was $117.3.
Outlook, risks and notable items
- Management said COVID-19 had not materially affected reported Q1 results, but expected an impact for the remainder of 2020. It cited reduced fuel-additive demand and a significant decline in Oilfield Services demand as oil prices and customer activity fell. Performance Chemicals demand was holding up, supported by health, hygiene and cleaning needs.
- Management expected fuel-additive demand to remain adversely affected in Q2 and said the oil-price-related impact on Oilfield Services would continue into Q2. It did not provide numerical full-year guidance or a recovery timetable; duration and scale remained uncertain.
- Facilities continued operating with minor interruption; raw-material sourcing was not significantly affected, though logistics faced some delays. Major capital projects were continuing as planned.
- COVID-19 could adversely affect operations, results, financial position and cash flows, and could amplify other risks. The company said the impact depended on uncertain future developments.
- Plant-closure provisions totaled $49.3, including $43.7 due after one year, principally related to remediation at Ellesmere Port in the UK. Unrecognized tax benefits, interest and penalties totaled $16.4. An Italian tax audit could result in $3.1 of additional tax, interest and penalties, with an indemnification asset recorded for the amount expected to be reimbursed by a prior owner.
- No material pending legal proceedings were reported. Off-balance-sheet guarantees described in the filing totaled $4.6. The company adopted the expected-credit-loss accounting standard on January 1, 2020, with no material allowance change reported.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter sales, margins, cash generation and customer activity, particularly in Fuel Specialties and Oilfield Services.
- Whether working-capital movements and weak Q1 operating cash flow reversed, and how inventory and receivables developed.
- The pace of the remaining Octane Additives customer’s transition to unleaded fuel and the related closure costs.
- Availability and covenant terms of the $250 million revolving facility, and the timing of capital spending and debt repayment.
- Developments in the Italian tax audit, other tax exposures and the $49.3 million plant-closure provision.