The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Amortization of deferred finance costs of $0.2 million (2015 $0.6 million) are included in depreciation and
amortization in the cash flow statement but in interest expense in the income statement.
The accompanying notes are an integral part of
these unaudited interim consolidated financial statements.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The
accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position, results of operations
and cash flows.
It is our opinion, however, that all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) have been made
which are necessary for the financial statements to be fairly stated. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K
filed on February 17, 2016.
The results for the interim period covered by this report are not necessarily indicative of the results to be expected
for the full year.
During the second quarter of 2016, we announced a change in the organization structure of the Group. As a result of these changes,
information that the Companys chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, in the third quarter of 2016, the Company has reported its financial performance
based on the new segments: Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives (See Note 2 of the Notes to the Consolidated Financial Statements for further information).
When we use the terms Innospec, the Corporation, the Company, Registrant, we, us and
our, we are referring to Innospec Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.
10
NOTE 2 SEGMENT REPORTING
In the second quarter of 2016, we finalized changes to our reporting segments to reflect the development of our management structure and strategy. As a result
of these changes, information that the Companys chief operating decision maker regularly reviews for purposes of allocating resources and assessing financial performance has changed. Therefore, in the third quarter of 2016, the Company has
reported its financial performance based on the four reportable segments described below.
|
|
|
Fuel Specialties, including the Polymers business previously reported in Performance Chemicals and excluding Oilfield Services business
|
|
|
|
Performance Chemicals, excluding the Polymers business
|
|
|
|
Oilfield Services, which was previously reported within Fuel Specialties
|
|
|
|
Octane Additives (no change)
|
We have recast certain prior period amounts to conform to the way we internally
manage and monitor segment performance.
The Fuel Specialties, Performance Chemicals and Oilfield Services segments operate in markets where we actively
seek growth opportunities although their ultimate customers are different. The Octane Additives segment is expected to decline in the near future as our one remaining refinery customer transitions to unleaded fuel.
The Company evaluates the performance of its segments based on operating income. The following table analyzes sales and other financial information by
the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
114.4
|
|
|
$
|
121.3
|
|
|
$
|
367.1
|
|
|
$
|
386.6
|
|
Performance Chemicals
|
|
|
36.8
|
|
|
|
33.7
|
|
|
|
106.8
|
|
|
|
124.4
|
|
Oilfield Services
|
|
|
49.7
|
|
|
|
78.9
|
|
|
|
132.4
|
|
|
|
216.3
|
|
Octane Additives
|
|
|
4.6
|
|
|
|
20.3
|
|
|
|
39.3
|
|
|
|
39.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
205.5
|
|
|
$
|
254.2
|
|
|
$
|
645.6
|
|
|
$
|
766.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
43.8
|
|
|
$
|
39.5
|
|
|
$
|
129.5
|
|
|
$
|
125.4
|
|
Performance Chemicals
|
|
|
12.3
|
|
|
|
9.9
|
|
|
|
34.4
|
|
|
|
33.3
|
|
Oilfield Services
|
|
|
20.6
|
|
|
|
32.0
|
|
|
|
52.1
|
|
|
|
82.4
|
|
Octane Additives
|
|
|
2.5
|
|
|
|
9.0
|
|
|
|
24.9
|
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79.2
|
|
|
$
|
90.4
|
|
|
$
|
240.9
|
|
|
$
|
259.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
24.1
|
|
|
$
|
21.6
|
|
|
$
|
72.2
|
|
|
$
|
70.7
|
|
Performance Chemicals
|
|
|
4.2
|
|
|
|
3.6
|
|
|
|
13.3
|
|
|
|
13.1
|
|
Oilfield Services
|
|
|
0.0
|
|
|
|
7.2
|
|
|
|
(7.1
|
)
|
|
|
13.8
|
|
Octane Additives
|
|
|
1.9
|
|
|
|
8.0
|
|
|
|
22.5
|
|
|
|
15.9
|
|
Pension credit
|
|
|
1.6
|
|
|
|
0.0
|
|
|
|
5.1
|
|
|
|
0.1
|
|
Corporate costs
|
|
|
(15.2
|
)
|
|
|
(9.3
|
)
|
|
|
(37.8
|
)
|
|
|
(24.8
|
)
|
Adjustment to fair value of contingent consideration
|
|
|
2.3
|
|
|
|
8.5
|
|
|
|
6.3
|
|
|
|
31.6
|
|
Profit/(loss) on disposal of subsidiary
|
|
|
0.0
|
|
|
|
1.6
|
|
|
|
(1.4
|
)
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
18.9
|
|
|
$
|
41.2
|
|
|
$
|
73.1
|
|
|
$
|
122.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The pension credit relates to the United Kingdom defined benefit pension plan which is closed to future service
accrual. The charges related to our other much smaller pension arrangements in the U.S. and overseas are included in the segment and income statement captions consistent with the related employees costs.
The following table presents a summary of the depreciation and amortization charges incurred by the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
0.9
|
|
|
$
|
0.7
|
|
|
$
|
2.8
|
|
|
$
|
2.3
|
|
Performance Chemicals
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.6
|
|
|
|
1.7
|
|
Oilfield Services
|
|
|
1.7
|
|
|
|
1.4
|
|
|
|
4.6
|
|
|
|
4.1
|
|
Octane Additives
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
0.3
|
|
Corporate
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.5
|
|
|
$
|
3.0
|
|
|
$
|
10.1
|
|
|
$
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
Performance Chemicals
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
3.1
|
|
|
|
3.1
|
|
Oilfield Services
|
|
|
2.9
|
|
|
|
3.0
|
|
|
|
8.9
|
|
|
|
8.9
|
|
Corporate
|
|
|
1.9
|
|
|
|
0.9
|
|
|
|
5.5
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.1
|
|
|
$
|
5.2
|
|
|
$
|
18.2
|
|
|
$
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the
effect of options that are dilutive and outstanding during the period. Per share amounts are computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
11.4
|
|
|
$
|
35.6
|
|
|
$
|
59.2
|
|
|
$
|
88.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
23,977
|
|
|
|
24,121
|
|
|
|
23,989
|
|
|
|
24,162
|
|
Dilutive effect of stock options and awards
|
|
|
499
|
|
|
|
490
|
|
|
|
473
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
24,476
|
|
|
|
24,611
|
|
|
|
24,462
|
|
|
|
24,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic:
|
|
$
|
0.48
|
|
|
$
|
1.48
|
|
|
$
|
2.47
|
|
|
$
|
3.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted:
|
|
$
|
0.47
|
|
|
$
|
1.45
|
|
|
$
|
2.42
|
|
|
$
|
3.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
In the three and nine months ended September 30, 2016, the average number of anti-dilutive options excluded from
the calculation of diluted earnings per share were 0 and 0, respectively (three and nine months ended September 30, 2015 21,959 and 21,959, respectively).
NOTE 4 GOODWILL
The following table
summarizes goodwill at the balance sheet dates:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Gross cost
(1)
|
|
$
|
503.9
|
|
|
$
|
503.9
|
|
Accumulated impairment losses
|
|
|
(236.5
|
)
|
|
|
(236.5
|
)
|
|
|
|
|
|
|
|
|
|
Net book amount
|
|
$
|
267.4
|
|
|
$
|
267.4
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Gross cost for 2016 and 2015 is net of $298.5 million of historical accumulated amortization.
|
NOTE 5
OTHER INTANGIBLE ASSETS
The following table summarizes the other intangible assets movement year on year:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Gross cost at January 1
|
|
$
|
248.6
|
|
|
$
|
247.6
|
|
Capitalization of internally developed software
|
|
|
0.0
|
|
|
|
7.0
|
|
Exchange effect
|
|
|
0.0
|
|
|
|
0.1
|
|
Disposal of subsidiary
|
|
|
0.0
|
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
Gross cost at September 30
|
|
|
248.6
|
|
|
|
247.0
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at January 1
|
|
|
(79.9
|
)
|
|
|
(66.5
|
)
|
Amortization expense
|
|
|
(18.2
|
)
|
|
|
(15.6
|
)
|
Exchange effect
|
|
|
0.0
|
|
|
|
0.0
|
|
Disposal of subsidiary
|
|
|
0.0
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at September 30
|
|
|
(98.1
|
)
|
|
|
(74.4
|
)
|
|
|
|
|
|
|
|
|
|
Net book amount at September 30
|
|
$
|
150.5
|
|
|
$
|
172.6
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Product rights
|
|
$
|
(2.8
|
)
|
|
$
|
(2.8
|
)
|
Brand names
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
Technology
|
|
|
(2.5
|
)
|
|
|
(2.6
|
)
|
Customer relationships
|
|
|
(5.1
|
)
|
|
|
(5.1
|
)
|
Non-compete agreements
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
Marketing related
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
Internally developed software
|
|
|
(5.5
|
)
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(18.2
|
)
|
|
$
|
(15.6
|
)
|
|
|
|
|
|
|
|
|
|
13
NOTE 6 PENSION PLANS
The Company maintains a defined benefit pension plan (the Plan) covering a number of its current and former employees in the United Kingdom,
although it does also have other much smaller pension arrangements in the U.S. and overseas. The Plan is closed to future service accrual but has a large number of deferred and current pensioners.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Plan net pension credit/(charge):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
(0.2
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(1.2
|
)
|
Interest cost on projected benefit obligation
|
|
|
(5.0
|
)
|
|
|
(7.0
|
)
|
|
|
(16.0
|
)
|
|
|
(20.8
|
)
|
Expected return on plan assets
|
|
|
7.2
|
|
|
|
8.5
|
|
|
|
23.0
|
|
|
|
25.1
|
|
Amortization of prior service credit
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
0.9
|
|
Amortization of actuarial net losses
|
|
|
(0.6
|
)
|
|
|
(1.3
|
)
|
|
|
(2.0
|
)
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.6
|
|
|
$
|
0.0
|
|
|
$
|
5.1
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization of prior service credit and actuarial net losses is a reclassification out of accumulated other comprehensive
loss into selling, general and administrative expenses.
The Company also maintains an unfunded defined benefit pension plan covering a number of its
current and former employees in Germany (the German plan). The German plan is closed to new entrants and has no assets. The net pension charge for the German plan for the three and nine months ended September 30, 2016, was $0.2
million and $0.6 million, respectively (three and nine months ended September 30, 2015 - $0.1 million and $0.5 million, respectively).
NOTE 7
INCOME TAXES
A roll-forward of unrecognized tax benefits and associated accrued interest and penalties is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Unrecognized
Tax Benefits
|
|
|
Interest and
Penalties
|
|
|
Total
|
|
Opening balance at January 1, 2016
|
|
$
|
3.6
|
|
|
$
|
0.3
|
|
|
$
|
3.9
|
|
Decrease for prior period tax positions
|
|
|
(0.6
|
)
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
Reductions due to lapsed statute of limitations
|
|
|
(0.8
|
)
|
|
|
(0.1
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance at September 30, 2016
|
|
|
2.2
|
|
|
|
0.1
|
|
|
|
2.3
|
|
Current
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
$
|
2.2
|
|
|
$
|
0.1
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the unrecognized tax benefits, interest and penalties, would impact our effective tax rate if recognized.
We recognize accrued interest and penalties associated with uncertain tax positions as part of income taxes in our consolidated statements of income.
14
The Company or one of its subsidiaries files income tax returns with the U.S. federal government, and various
state and foreign jurisdictions. As previously disclosed, one of the Companys U.S. subsidiaries is currently subject to a state tax examination in respect of 2012 through to 2014 inclusive. The Company currently anticipates that adjustments,
if any, arising out of this tax audit would not result in a material change to the Companys financial position as at September 30, 2016.
As
previously disclosed, the Companys German subsidiaries are subject to a tax audit in respect of 2010 through to 2014 inclusive. The Company currently anticipates that adjustments, if any, arising out of this tax audit would not result in a
material change to the Companys financial position as at September 30, 2016.
The Company and its U.S. subsidiaries remain open to examination by
the IRS for years 2013 onwards. The Companys subsidiaries in foreign tax jurisdictions are open to examination including France (2013 onwards), Germany (2010 onwards), Switzerland (2014 onwards) and the United Kingdom (2014 onwards).
The Company is in a position to control whether or not to repatriate foreign earnings and we currently do not expect to make a repatriation in the foreseeable
future. No taxes have been provided for on the unremitted earnings of our overseas subsidiaries as any tax basis differences relating to investments in these overseas subsidiaries are considered to be permanent in duration. The amount of unremitted
earnings at December 31, 2015 was approximately $775 million. If these earnings are remitted, additional taxes could result after offsetting foreign income taxes paid although the calculation of the additional taxes is not practicable to compute at
this time.
NOTE 8 LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Revolving credit facility
|
|
$
|
143.0
|
|
|
$
|
133.0
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 PLANT CLOSURE PROVISIONS
The liability for estimated closure costs of Innospecs manufacturing facilities includes costs for decontamination and environmental remediation
activities (remediation). The principal site giving rise to remediation liabilities is the manufacturing site at Ellesmere Port in the United Kingdom. There are also remediation liabilities on a much smaller scale in respect of our other
manufacturing sites in the U.S. and Europe.
Movements in the provisions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Total at January 1
|
|
$
|
37.7
|
|
|
$
|
34.1
|
|
Charge for the period
|
|
|
3.5
|
|
|
|
3.1
|
|
Utilized in the period
|
|
|
(2.1
|
)
|
|
|
(1.7
|
)
|
Disposal in the period
|
|
|
0.0
|
|
|
|
(0.3
|
)
|
Exchange effect
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Total at September 30
|
|
|
39.2
|
|
|
|
35.0
|
|
Due within one year
|
|
|
(5.0
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
Due after one year
|
|
$
|
34.2
|
|
|
$
|
31.2
|
|
|
|
|
|
|
|
|
|
|
15
Amounts due within one year refer to provisions where expenditure is expected to arise within one year of the
balance sheet date.
NOTE 10 FAIR VALUE MEASUREMENTS
The following table presents the carrying amount and fair values of the Companys assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
(in millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
167.1
|
|
|
$
|
167.1
|
|
|
$
|
136.9
|
|
|
$
|
136.9
|
|
Short-term investments
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
4.8
|
|
|
|
4.8
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current portion)
|
|
$
|
143.0
|
|
|
$
|
143.0
|
|
|
$
|
133.0
|
|
|
$
|
133.0
|
|
Finance leases (including current portion)
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
3.1
|
|
|
|
3.1
|
|
Derivatives (Level 1 measurement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Non-financial liabilities (Level 3 measurement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
54.6
|
|
|
|
54.6
|
|
Stock equivalent units
|
|
|
9.1
|
|
|
|
9.1
|
|
|
|
7.8
|
|
|
|
7.8
|
|
The following methods and assumptions were used to estimate the fair values of financial instruments:
Cash and cash equivalents and short-term investments:
The carrying amount approximates fair value because of the short-term maturities of such
instruments.
Long-term debt and finance leases:
Long-term debt principally comprises the revolving credit facility. Finance leases relate to
certain fixed assets in our Oilfield Services businesses. The carrying amount of long-term debt and finance leases approximates the fair value.
Derivatives:
The fair value of derivatives relating to foreign currency forward exchange contracts are derived from current settlement prices and
comparable contracts using current assumptions. Foreign currency forward exchange contracts primarily relate to contracts entered into to hedge future known transactions or hedge balance sheet net cash positions. The movements in the carrying
amounts and fair values of these contracts are largely due to changes in exchange rates against the U.S. dollar.
Acquisition-related contingent
consideration:
Contingent consideration payable in cash is discounted to its estimated fair value at each balance sheet date. Where contingent consideration is dependent upon pre-determined financial targets, an estimate of the fair value of the
likely consideration payable is made at each balance sheet date. The carrying value of the contingent consideration at the balance
16
sheet dates is based on the estimated EBITDA (earnings before interest, taxes, depreciation and amortization) and free cash flow generated by Independence Oilfield Chemicals LLC
(Independence) through the period to October 31, 2016. The contingent consideration payable in relation to the acquisition of Independence is based on managements latest forecasts of the business and on the current trading
performance. The results of the Independence business are particularly sensitive to the level of exploration, development and production activity of our customers in the oil and gas sector, which is directly affected by trends in oil prices.
Stock equivalent units:
The fair values of stock equivalent units are calculated at each balance sheet date using either the Black-Scholes or Monte
Carlo method depending on the terms of each grant.
NOTE 11 DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company enters into various foreign currency forward exchange contracts to minimize currency exchange rate exposure from expected future cash
flows. As at September 30, 2016 the contracts have maturity dates of up to twelve months at the date of inception. These foreign currency forward exchange contracts have not been designated as hedging instruments, and their impact on the income
statement for the first nine months of 2016 was a gain of $3.2 million.
NOTE 12 COMMITMENTS AND
CONTINGENCIES
Legal matters
While we are
involved from time to time in claims and legal proceedings that result from, and are incidental to, the conduct of our business including business and commercial litigation, employee and product liability claims, there are no material pending legal
proceedings to which the Company or any of its subsidiaries is a party, or of which any of their property is subject. It is possible, however, that an adverse resolution of an unexpectedly large number of such individual claims or proceedings could
in the aggregate have a material adverse effect on the results of operations for a particular year or quarter.
Guarantees
The Company and certain of the Companys consolidated subsidiaries are contingently liable for certain obligations of affiliated companies primarily in
the form of guarantees of debt and performance under contracts entered into as a normal business practice. This includes guarantees of non-U.S. excise taxes and customs duties. As at September 30, 2016, such guarantees which are not recognized as
liabilities in the consolidated financial statements amounted to $3.7 million.
Under the terms of the guarantee arrangements, generally the Company would
be required to perform should the affiliated company fail to fulfil its obligations under the arrangements. In some cases, the guarantee arrangements have recourse provisions that would enable the Company to recover any payments made under the terms
of the guarantees from securities held of the guaranteed parties assets.
The Company and its affiliates have numerous long-term sales and purchase
commitments in their various business activities, which are expected to be fulfilled with no adverse consequences material to the Company.
17
NOTE 13 STOCK-BASED COMPENSATION PLANS
The Company grants stock options and stock equivalent units (SEUs) from time to time as a long-term performance incentive. In certain cases
the grants are subject to performance conditions such as the Companys stock price. Where performance conditions apply the Monte Carlo simulation model is used to determine the fair values. Otherwise the Black-Scholes model is used to
determine the fair values.
Stock option plans
The
following table summarizes the transactions of the Companys stock option plans for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Outstanding at December 31, 2015
|
|
|
667,439
|
|
|
$
|
19.87
|
|
|
$
|
20.19
|
|
Granted - at discount
|
|
|
67,546
|
|
|
$
|
0.00
|
|
|
$
|
38.13
|
|
- at market value
|
|
|
24,794
|
|
|
$
|
44.34
|
|
|
$
|
9.17
|
|
Exercised
|
|
|
(58,125
|
)
|
|
$
|
5.42
|
|
|
$
|
28.50
|
|
Forfeited
|
|
|
(24,273
|
)
|
|
$
|
21.15
|
|
|
$
|
21.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
677,381
|
|
|
$
|
19.97
|
|
|
$
|
20.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016, there were 112,604 stock options that were exercisable, of which 30,712 had performance conditions
attached.
The stock option compensation cost for the first nine months of 2016 was $2.8 million (2015 $2.7 million). The total intrinsic value
of options exercised in the first nine months of 2016 was $1.8 million (2015 $2.1 million).
The total compensation cost related to non-vested stock
options not yet recognized at September 30, 2016 was $4.3 million and this cost is expected to be recognized over the weighted-average period of 2.08 years.
Stock equivalent units
The following table summarizes
the transactions of the Companys SEUs for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of SEUs
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Outstanding at December 31, 2015
|
|
|
279,750
|
|
|
$
|
3.79
|
|
|
$
|
31.72
|
|
Granted - at discount
|
|
|
70,153
|
|
|
$
|
0.00
|
|
|
$
|
36.56
|
|
- at market value
|
|
|
7,316
|
|
|
$
|
44.18
|
|
|
$
|
9.11
|
|
Exercised
|
|
|
(49,623
|
)
|
|
$
|
1.74
|
|
|
$
|
27.79
|
|
Forfeited
|
|
|
(8,980
|
)
|
|
$
|
4.41
|
|
|
$
|
30.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
298,616
|
|
|
$
|
4.21
|
|
|
$
|
32.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
At September 30, 2016 there were 59,765 SEUs that are exercisable, of which 51,163 had performance conditions
attached.
The charges for SEUs are spread over the life of the award subject to a revaluation to fair value each quarter. The revaluation may result
in a charge or a credit to the income statement in the quarter dependent upon our share price and other performance criteria.
The SEU compensation cost
for the first nine months of 2016 was $3.7 million (2015 - $2.4 million). The total intrinsic value of SEUs exercised in the first nine months of 2016 was $1.5 million (2015 $2.2 million).
The weighted-average remaining vesting period of non-vested SEUs is 1.61 years.
Additional exceptional long-term incentive plan
A
maximum of $3.0 million of our cash-settled long-term incentives is accounted for as share-based compensation and the fair value is calculated on a quarterly basis using a Monte Carlo model. The fair values at each of the balance sheet dates
are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Balance at January 1
|
|
$
|
1.0
|
|
|
$
|
0.1
|
|
Compensation charge for the period
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
1.6
|
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
|
The following assumptions were used in the Monte Carlo model at September 30:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Dividend yield
|
|
|
1.05
|
%
|
|
|
1.25
|
%
|
Volatility of Innospecs share price
|
|
|
25.55
|
%
|
|
|
24.47
|
%
|
Risk free interest rate
|
|
|
0.88
|
%
|
|
|
0.92
|
%
|
NOTE 14 RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS
Reclassifications out of accumulated other comprehensive loss for the first nine months of 2016 were:
|
|
|
|
|
|
|
(in
millions)
|
|
Amount
Reclassified
from AOCL
|
|
|
Affected Line Item in the
Statement where
Net Income is Presented
|
Details about AOCL Components
|
|
|
Defined benefit pension plan items:
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
$
|
(0.8
|
)
|
|
See
(
¹
)
below
|
Amortization of actuarial net losses
|
|
|
2.0
|
|
|
See
(
¹
)
below
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
Total before tax
|
|
|
|
(0.3
|
)
|
|
Income tax expense
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
0.9
|
|
|
Net of tax
|
|
|
|
|
|
|
|
(1)
|
These items are included in the computation of net periodic pension cost. See Note 6 of the Notes to the Consolidated Financial Statements for additional information.
|
19
Changes in accumulated other comprehensive loss for the first nine months of 2016, net of tax, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Defined
Benefit
Pension Plan
Items
|
|
|
Cumulative
Translation
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
(50.9
|
)
|
|
$
|
(60.0
|
)
|
|
$
|
(110.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
|
0.0
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
Amounts reclassified from AOCL
|
|
|
0.9
|
|
|
|
0.0
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
0.9
|
|
|
|
(0.3
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
(50.0
|
)
|
|
$
|
(60.3
|
)
|
|
$
|
(110.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers ASC Topic 606, which amends the existing
accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The original effective date
for ASU 2014-09 was for annual and interim periods within those years beginning after December 15, 2016. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers Deferral of the Effective Date, which defers
the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the
cumulative effect recognized as of the date of adoption. The Company has been evaluating the potential timing and impact of adopting the new revenue standard on its consolidated financial statements and has not yet determined the effect of the
standard on its ongoing financial reporting.
In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Revision to Lease Accounting,
which amends ASC Topic 842, Leases. The ASU requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The new standard is
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain
practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company has not yet determined the effect of the standard on its ongoing financial reporting.
20
In June 2016, the FASB issued a new standard Accounting Standard Update 2016-13 to replace the incurred loss
impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. For trade and other
receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses. The new standard is effective for fiscal periods beginning after
December 15, 2019. Early adoption is permitted. The Company has not yet determined the effect of the standard on its ongoing financial reporting.
NOTE 16 RELATED PARTY TRANSACTIONS
Mr.
Robert I. Paller has been a non-executive director of the Company since November 1, 2009. The Company has retained and continues to retain Smith, Gambrell & Russell, LLP (SGR), a law firm with which Mr. Paller holds a
position. In the first nine months of 2016 the Company incurred fees from SGR of $0.4 million (2015 $0.3 million). As at September 30, 2016, the amount due to SGR from the Company was $0.1 million (December 31, 2015 - $0.1 million).
NOTE 17 SUBSEQUENT EVENT
On July 29,
2016 Innospec International Ltd., a whollyowned subsidiary of Innospec Inc. entered into an Exclusivity and Put Option Agreement with Huntsman Investments B.V. (the Seller). The Put Option Agreement set forth the terms of a
commitment to acquire the European Personal Care and Home Care business of the Seller.
On October 25, 2016, pursuant to the terms of the Put Option
Agreement, the Company entered into a Share and Asset Purchase Agreement (the SAPA). The aggregate purchase price to be paid under the SAPA is approximately $200 million subject to adjustments for certain working capital items, inventory
and certain adjustments related to employee matters.
The Proposed Transaction is expected to close in the Fourth quarter of 2016 subject to customary
closing conditions.
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