Innospec Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless stated otherwise. Innospec operates in Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives. Figures are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $360.7 million | $294.3 million |
| Gross profit / gross margin | $104.5 million / 29.0% | $90.9 million / 30.9% |
| Operating income | $28.9 million | $25.3 million |
| Income before income taxes | $29.7 million | $23.2 million |
| Net income | $22.2 million | $17.2 million |
| Diluted earnings per share | $0.90 | $0.70 |
| Net cash used in operating activities | $2.0 million | $19.9 million |
Sales rose 23% year over year, while gross profit rose 15%; the aggregate gross margin declined 1.9 percentage points. Operating expenses increased to $75.6 million from $65.6 million. The effective tax rate was 25.3%, versus 25.9%; adjusted effective tax rates were 24.7% and 24.6%, respectively.
Segments and material changes
- Fuel Specialties: Sales increased 13% to $143.4 million and operating income rose to $28.2 million from $27.0 million. Gross margin fell to 33.8% from 36.5%, reflecting a lag in passing higher raw-material costs into selling prices. Sales benefited from demand, product mix and favorable exchange rates.
- Performance Chemicals: Sales increased 31% to $124.0 million and operating income doubled to $12.1 million. Gross margin improved to 20.5% from 17.7%, aided by improvement projects and manufacturing variances. Higher personnel, systems-amortization and currency costs increased operating expenses.
- Oilfield Services: Sales increased 40% to $92.9 million as higher oil prices supported customer activity; volumes rose 33%. Operating income was flat at $3.0 million. Gross margin declined to 33.8% from 38.2% amid customer mix, raw-material pricing and transportation pressures.
- Octane Additives: Sales fell 94% to $0.4 million, and the segment recorded a $1.4 million operating loss, compared with $2.0 million operating income. The segment depends on one remaining refinery customer that is transitioning to unleaded fuel; management expects the business to decline in the near future.
Liquidity, debt and cash flow
Cash was $78.1 million at March 31, down from $90.2 million at December 31, 2017. First-quarter operating cash outflow was $2.0 million, improved from $19.9 million a year earlier; receivables and inventory increases absorbed cash. Capital expenditures were $3.8 million, and net cash used in investing activities was $4.6 million. Financing activities used $5.8 million, including $5.0 million of revolving-credit-facility repayments. Cash at quarter end was $78.1 million, compared with $45.4 million at March 31, 2017.
Working capital was $330.1 million and adjusted working capital, a company-defined non-GAAP measure, was $282.4 million, up from $300.0 million and $245.4 million, respectively, at year-end. Total debt, net of deferred finance costs, was $213.6 million, including $116.0 million drawn on the revolving facility and a $99.0 million term loan; finance lease obligations were $5.2 million. Cash held by non-U.S. subsidiaries was $66.7 million. The company said it did not expect to repatriate foreign earnings in the foreseeable future.
Outlook, commentary and risks
- No quantified company-wide earnings or sales guidance was provided. Management said inventory increases reflected expected higher second-quarter sales across segments.
- The Tax Cuts and Jobs Act transition-tax estimate was $47.7 million at December 31, 2017; the company intends to pay it over eight years. Accounting for the transition tax and GILTI provisions remained under evaluation, with completion expected within the applicable measurement period.
- Plant-closure provisions totaled $46.9 million, principally for remediation at Ellesmere Port. The company reported no material pending legal proceedings and $5.2 million of guarantees not recognized as liabilities.
- Foreign-exchange movements, interest rates, raw-material costs, customer demand and credit risk are among the disclosed market exposures. The company uses derivatives for risk management, not trading. Management reported no material change in risk factors from its 2017 Form 10-K.
- Other income, net, was $2.5 million versus $0.1 million, including $2.2 million of foreign-exchange translation gains; foreign-currency forward contracts recorded losses. The prior-year period included a $1.8 million liquidation-related foreign-exchange loss that did not recur.
Important facts for investors to verify
- Whether revenue growth translates into sustained margins, particularly given lower gross margins in Fuel Specialties and Oilfield Services.
- Whether working-capital investment—especially higher receivables and inventories—converts to operating cash as anticipated.
- Progress on debt repayment, liquidity and the planned eight-year transition-tax payments.
- Performance Chemicals and Oilfield Services demand and profitability, and the ongoing decline of Octane Additives.
- Final tax accounting, including the transition-tax estimate and GILTI treatment, and the assumptions behind environmental remediation provisions.