Innospec Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the same 2014 periods. Innospec reports Fuel Specialties, Performance Chemicals and Octane Additives.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $242.9m | $221.3m | $512.1m | $442.0m |
| Gross profit | $87.5m | $68.6m | $169.3m | $134.3m |
| Gross margin | 36.0% | 31.0% | 33.1% | 30.4% |
| Operating income | $57.4m | $25.3m | $80.8m | $43.3m |
| Net income | $34.5m | $18.5m | $52.4m | $35.4m |
| Diluted EPS | $1.40 | $0.75 | $2.12 | $1.44 |
- Operating income included a $26.6m Q2 credit ($23.1m for the first half) from remeasurement of acquisition-related contingent consideration, tied to the Independence acquisition. Excluding that credit arithmetically, operating income was $30.8m for Q2 and $57.7m for the first half; these are not company-reported non-GAAP measures.
- Operating cash flow was $55.1m for the first half, versus $33.8m in 2014. Investing used $13.1m and financing used $17.3m; cash increased to $64.3m from $41.6m at year-end 2014. Capital expenditures were $7.3m and internally developed software spending was $5.1m.
- At June 30, cash and short-term investments totaled $69.8m. Debt under the revolving credit facility was $139.0m, with $3.0m in finance leases. The facility has a $200m stated borrowing limit and expires December 14, 2016. Adjusted working capital, a company-defined non-GAAP measure, was $167.2m, down from $192.7m at year-end.
- Total assets were $998.4m and total liabilities $448.7m. Plant closure provisions were $35.0m, including $29.9m classified as non-current.
Changes and operating trends
- Q2 sales increased 10%; first-half sales rose 16%. Fuel Specialties led growth: sales increased 26% in Q2 and 23% for the first half, including contributions from the Independence acquisition. Fuel Specialties gross margin rose to 37.8% in Q2 from 30.3%.
- Performance Chemicals sales declined 9% in Q2 and 3% for the first half. Management cited pricing and product-mix pressure and unfavorable currency effects, partly offset by volume growth and Personal Care sales mix.
- Octane Additives sales fell 61% in Q2 but increased 9% for the first half, primarily reflecting shipment timing with its sole remaining refinery customer. The company expects this segment to decline as that customer transitions to unleaded fuel.
- Reported earnings also reflect higher taxes: the effective tax rate was 33.4% in Q2 and 30.8% for the first half. Management’s adjusted rates were 26.9% and 25.8%, respectively, reflecting its adjustments for the contingent-consideration change and, for the first half, tax-position adjustments.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management says interim results are not necessarily indicative of full-year results.
- On July 6, 2015, after quarter-end, Innospec completed the sale of Aroma Chemicals business Innospec Widnes Limited for $41.5m cash after transaction costs, subject to a potential working-capital adjustment. The filing reports a $1.9m net gain. The business generated $2.6m of pretax profit in the first half, versus $6.0m a year earlier; its assets and liabilities were classified as held for sale at June 30.
- Currency movements affected sales and earnings; first-half foreign currency forward contracts produced a $1.1m loss. Debt is floating-rate, exposing the company to interest-rate changes. Management reported no material change in risk factors from its 2014 Form 10-K.
- Environmental remediation and pension obligations remain relevant liabilities. No material pending legal proceedings were reported; guarantees not recorded as liabilities totaled $2.7m. An IRS examination of a U.S. subsidiary for 2013 was not expected to materially affect financial position, according to management.
- Disclosure controls were assessed as effective at June 30, 2015, with no material second-quarter change in internal control over financial reporting reported.
Important facts for investors to verify
- How the Independence contingent-consideration remeasurement was calculated and whether subsequent estimates or payments differ.
- Final working-capital adjustment and realized proceeds or other costs from the Aroma Chemicals divestiture.
- Whether Fuel Specialties growth and margins persist after separating acquisition effects, currency movements and organic trends.
- Cash conversion, inventory levels and foreign-exchange exposure, including the effect of the floating-rate facility and its 2016 expiry.
- Progress in Octane Additives as the remaining refinery customer transitions to unleaded fuel, and the assumptions behind continuing remediation and pension provisions.