Innospec Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Innospec reports four segments: Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives. Amounts are in U.S. dollars; financial figures below are in millions unless noted.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $388.3 | $360.7 | +7.7% |
| Gross profit / margin | $117.8 / 30.3% | $104.5 / 29.0% | +12.7%; +1.3 percentage points |
| Operating income / margin | $36.2 / 9.3% | $28.9 / 8.0% | +25.3% |
| Net income | $28.7 | $22.2 | +29.3% |
| Diluted EPS | $1.17 | $0.90 | +$0.27 |
| Operating cash flow | $13.2 | $(2.0) | Improved by $15.2 |
Interest expense, net, was $1.5 versus $1.7; income tax expense was $10.1 versus $7.5. The effective tax rate was 26.0%, compared with 25.3%; the company’s adjusted, non-GAAP rate was 26.8% versus 24.7%.
Cash and cash equivalents were $123.5 at March 31, 2019, versus $123.1 at December 31, 2018. Total current assets were $683.6 and current liabilities $300.0. Long-term debt, including its current portion, was $207.8; finance lease liabilities were $2.6. Cash exceeded reported debt by $84.3, before finance leases. Capital expenditures were $10.7 and internally developed software spending was $0.5; operating cash flow less these outlays was approximately $2.0.
Segment performance and material changes
- Fuel Specialties: Sales rose 9% to $156.0; operating income increased to $32.9 from $28.2. Higher EMEA and ASPAC volumes and improved product mix supported results; foreign exchange partly offset growth.
- Performance Chemicals: Sales fell 5% to $118.1, while operating income rose to $13.5 from $12.1. Improved mix, raw material prices and improvement projects lifted gross margin; currency and weaker EMEA sales weighed on revenue.
- Oilfield Services: Sales increased 23% to $114.2 and operating income to $7.8 from $3.0, reflecting stronger stimulation and completion activity, higher volumes and improved pricing. Gross margin declined 0.8 percentage points on product and customer mix.
- Octane Additives: No sales were recorded, versus $0.4 in Q1 2018; operating loss widened to $2.8 from $1.4. Management noted a possible final order from its remaining refinery customer later in 2019. The segment is expected to decline as that customer transitions to unleaded fuel.
Corporate costs increased $2.2 to $15.2, primarily due to higher personnel and share-based compensation expenses. Stock-equivalent-unit compensation was $7.5 versus $1.2 in Q1 2018. Other income, net, increased to $4.1 from $2.5, including a $1.3 year-over-year improvement in foreign currency forward contract results.
Liquidity, outlook and risks
- Operating cash flow improved from an outflow of $2.0 in Q1 2018. Management cited working-capital control, particularly Oilfield Services inventory, and favorable timing of tax payments. Adjusted working capital, a company-defined non-GAAP measure, rose $29.4 from year-end to $309.8.
- Debt balances were broadly unchanged from December 31, 2018: $126.0 outstanding under the revolving credit facility and $82.5 under the term loan. The filing provides no quantified full-year earnings or revenue guidance.
- Effective January 1, 2019, the company adopted lease accounting standard ASC 842. It recognized $37.4 of operating lease right-of-use assets and matching liabilities; the company stated adoption materially affected the balance sheet but not the income statement, and operating lease liabilities are not considered debt.
- Plant closure and remediation provisions totaled $49.7, including $5.3 current. Unrecognized tax benefits, interest and penalties totaled $14.2; the company described tax audits and tax-position uncertainty, including a potential Tax Cuts and Jobs Act adjustment. Guarantees not recorded as liabilities totaled $4.6.
- The company reported no material pending legal proceedings, while noting that numerous adverse resolutions of individual claims could collectively affect results. It reported no material change in risk factors, including those relating to the U.K.’s planned exit from the E.U.; the exit deadline had been extended to October 31, 2019.
- Management said disclosure controls were effective as of March 31, 2019, and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether Oilfield Services demand, pricing and margins remain strong, and whether Performance Chemicals revenue stabilizes.
- The timing and financial impact of the remaining Octane Additives customer’s final order and the segment’s ongoing fixed costs.
- Working-capital conversion and operating cash flow, given higher receivables and changes in supplier-payment timing.
- Developments in the $14.2 of unrecognized tax benefits and the $49.7 of plant closure and remediation provisions.
- Effects of currency movements, raw material costs, and the U.K.-E.U. situation on future results; the filing provides no quantified outlook.