Innospec Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Innospec reports Fuel Specialties, Performance Chemicals and Octane Additives. Management seeks growth in the first two segments; Octane Additives is expected to decline as its sole remaining refinery customer transitions to unleaded fuel.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $254.2 million | $228.2 million | $766.3 million | $670.2 million |
| Gross profit | $90.4 million | $73.6 million | $259.7 million | $207.9 million |
| Gross margin | 35.6% | 32.3% | 33.9% | 31.0% |
| Operating income | $41.2 million | $25.2 million | $122.0 million | $68.5 million |
| Net income | $35.6 million | $20.8 million | $88.0 million | $56.2 million |
| Diluted EPS | $1.45 | $0.83 | $3.57 | $2.26 |
| Operating cash flow | Not separately stated | Not separately stated | $90.6 million | $59.0 million |
Segment performance and material changes
- Fuel Specialties: Sales rose 22% in Q3 and 23% year to date, to $190.3 million and $572.0 million, respectively. Growth reflected the Independence acquisition, stronger volumes in some markets and improved margins; foreign exchange and adverse price/mix offset some growth. Higher acquisition-related operating costs contributed to increased segment expenses.
- Performance Chemicals: Sales fell 24% in Q3 and 10% year to date, to $43.6 million and $155.3 million. The July sale of Aroma Chemicals reduced sales; Personal Care volumes increased, while pricing/mix and currency effects were adverse. Higher-margin Personal Care sales and the disposal of lower-margin Aroma Chemicals supported segment gross margin.
- Octane Additives: Sales rose 34% in Q3 and 21% year to date, principally due to shipment timing with the remaining refinery customer. Management says the segment is expected to decline as that customer transitions away from leaded fuel.
- Company sales increased 11% in Q3 and 14% year to date. Aggregate gross margin improved 3.3 percentage points in Q3 and 2.9 points year to date.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $127.7 million, versus $41.6 million at December 31, 2014; short-term investments were $5.1 million. Cash held by non-U.S. subsidiaries was $118.3 million.
- Operating cash flow was $90.6 million for the first nine months, compared with $59.0 million in 2014. Investing activities provided $22.0 million, including $41.5 million proceeds from the Aroma Chemicals disposal; financing activities used $25.4 million, including $15.4 million for share repurchases and $7.3 million in dividends.
- Debt under the revolving credit facility was $127.0 million; bank overdraft was $7.6 million and finance lease obligations were $3.1 million. The $200 million revolving facility expires December 14, 2016.
- Adjusted working capital, a company-defined non-GAAP measure, was $164.6 million, down from $192.7 million at year-end 2014, primarily reflecting the Aroma Chemicals disposal and lower receivables following collection of prior-period sales.
Unusual items, outlook and risks
- Operating income included a $31.6 million year-to-date credit from remeasurement of acquisition-related contingent consideration ($8.5 million in Q3), and a $1.6 million gain on the Aroma Chemicals disposal. These non-routine items materially contributed to reported earnings growth. The contingent consideration liability was $63.6 million at September 30.
- Innospec sold its Aroma Chemicals business on July 6 for $41.5 million cash after transaction costs; a potential net working-capital adjustment remained to be agreed. The business had generated $2.6 million of pre-tax profit in the first nine months of 2015.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It described growth opportunities in Fuel Specialties and Performance Chemicals and noted the expected decline in Octane Additives. Management attributed higher operating cash flow to increased operating income and lower working-capital needs.
- Risks include foreign-exchange exposure, floating-rate debt, environmental remediation and pension obligations. Plant-closure provisions were $35.0 million, including $31.2 million due after one year. No material pending legal proceedings were reported; guarantees not recognized as liabilities totaled $4.1 million.
- An IRS examination of a U.S. subsidiary for 2013 was underway; the company did not expect any resulting adjustment to materially change its September 30 financial position. Management reported no material changes to previously disclosed risk factors and said disclosure controls were effective.
- After quarter-end, on November 3, the board authorized a new share-repurchase program targeting up to $90 million over three years. The prior $20 million authorization had been fully used by September 30.
Important facts for investors to verify
- How contingent-consideration fair-value assumptions and remaining acquisition payments affect future earnings and cash requirements.
- The final working-capital adjustment for the Aroma Chemicals sale and the ongoing effect of its divestiture on segment comparisons.
- Whether Fuel Specialties growth and Personal Care performance offset currency, pricing and mix pressure, and the increased costs associated with Independence.
- The pace of the sole Octane Additives customer’s transition to unleaded fuel and the resulting effect on the segment.
- Cash availability and foreign-tax consequences: $118.3 million of cash was held by non-U.S. subsidiaries, and the filing says repatriation was not expected in the foreseeable future.
- Execution and funding of the new $90 million repurchase authorization alongside debt, capital spending and pension/environmental obligations.