NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Innospec develops, manufactures, blends, markets and supplies fuel additives,
oilfield chemicals, personal care products and other specialty chemicals. Our products are sold primarily to oil and gas exploration and production companies, oil refineries, personal care companies, and other chemical and industrial companies
throughout the world. Our fuel additives help improve fuel efficiency, boost engine performance and reduce harmful emissions. Our oilfield services business supplies drilling and production chemicals which make exploration and production more
cost-efficient, and more environmentally-friendly. Our other specialty chemicals provide effective technology-based solutions for our customers processes or products focused in the Personal Care and Polymers markets. Our Octane Additives
business manufactures a fuel additive for use in automotive gasoline and provides services in respect of environmental remediation. Our principal product lines and reportable segments are Fuel Specialties, Performance Chemicals, Oilfield Services
and Octane Additives.
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, 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 the 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.
See Note 3 of the Notes to the Consolidated Financial
Statements for financial information on the Companys reportable segments.
Note 2. Accounting Policies
Basis of preparation:
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America on a
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
going concern basis and include all subsidiaries of the Company where the Company has a controlling financial interest. All significant intercompany accounts and balances have been eliminated
upon consolidation. All acquisitions and disposals are accounted for in accordance with GAAP. The results of operations of an acquired or disposed business are included or excluded from the consolidated financial statements from the date of
acquisition or disposal.
Use of estimates:
The preparation
of the consolidated financial statements, in accordance with GAAP in the United States of America, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash
equivalents:
Investment securities with maturities of three months or less when purchased are considered to be cash equivalents.
Short-term investments:
Investment securities with maturities of more than 3 months and less than 12 months when purchased are considered to be
short-term investments.
Trade and other accounts
receivable:
The Company records trade and other accounts receivable at net realizable value and maintains allowances for customers not making required payments. The Company determines the adequacy of allowances by periodically evaluating each
customer receivable considering our customers financial condition, credit history and current economic conditions.
Inventories:
Inventories are stated at the lower of cost (FIFO method) or market value. Cost includes materials, labor and an appropriate
proportion of plant overheads. The Company accrues volume discounts where it is probable that the required volume will be attained and the amount can be reasonably estimated. The discounts are recorded as a reduction in the cost of materials based
on projected purchases over the period of the agreement. Inventories are adjusted for estimated obsolescence and written down to market value based on estimates of future demand and market conditions.
Property, plant and equipment:
Property, plant and equipment are
stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using the straight-line method and is allocated between cost of goods sold and operating expenses. The cost of additions and
improvements are capitalized. Maintenance and repairs are charged to expenses. When assets are sold or retired the associated cost and accumulated depreciation are removed from the consolidated financial statements and any related gain or loss is
included in earnings. The estimated useful lives of the major classes of depreciable assets are as follows:
|
|
|
|
|
Buildings
|
|
|
7 to 25 years
|
|
Equipment
|
|
|
3 to 10 years
|
|
Goodwill and other intangible assets:
Goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to at least annual impairment assessments.
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Initially we perform a qualitative assessment to determine whether it is more likely than not that the fair value of a segment is less than the carrying amount prior to performing the
two-step
goodwill impairment test. If a
two-step
test is required we assess the fair value based on projected
post-tax
cash flows
discounted at the Companys weighted average cost of capital. The annual measurement date for impairment assessment of the goodwill relating to the Fuel Specialties, Performance Chemicals and Oilfield Services segments is December 31 each
year. The Company capitalizes software development costs, including licenses, subsequent to the establishment of technological feasibility. Other intangible assets deemed to have finite lives, including software development costs and licenses, are
amortized using the straight-line method over their estimated useful lives and tested for any potential impairment when events occur or circumstances change which suggest that an impairment may have occurred.
Deferred finance costs:
The costs relating to debt financing are
capitalized, offset against long-term debt in the consolidated balance sheets and amortized using the effective interest method over the expected life of the debt financing facility. The offsetting of deferred finance costs against long-term debt is
a requirement of a recently issued accounting standard and has resulted in the
re-statement
of the prior year comparatives, see note 11 of the Notes to the Consolidated Financial Statements.
Impairment of long-lived assets:
The Company reviews the carrying
value of its long-lived assets, including buildings and equipment, whenever changes in circumstances suggest that the carrying values may be impaired. In order to facilitate this test the Company groups together assets at the lowest possible level
for which cash flow information is available. Undiscounted future cash flows expected to result from the assets are compared with the carrying value of the assets and if they are lower an impairment loss may be recognized. The amount of the
impairment loss is the difference between the fair value and the carrying value of the assets. Fair values are determined using
post-tax
cash flows discounted at the Companys weighted average cost of
capital.
Derivative instruments:
From time to time, the
Company uses various derivative instruments including forward currency contracts, options, interest rate swaps and commodity swaps to manage certain exposures. These instruments are entered into under the Companys corporate risk management
policy to minimize exposure and are not for speculative trading purposes. The Company recognizes all derivatives as either
non-current
assets or liabilities in the consolidated balance sheet and measures those
instruments at fair value. Changes in the fair value of derivatives that are not designated as hedges, or do not meet the requirements for hedge accounting, are recognized in earnings. Derivatives which are designated as hedges are tested for
effectiveness on a quarterly basis, and marked to market. The ineffective portion of the derivatives change in value is recognized in earnings. The effective portion is recognized in other comprehensive income until the hedged item is
recognized in earnings.
Environmental compliance and
remediation:
Environmental compliance costs include ongoing maintenance, monitoring and similar costs. We recognize environmental liabilities
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
when they are probable and the costs can be reasonably estimated, and asset retirement obligations when there is a legal obligation and the costs can be reasonably estimated. Such accruals are
adjusted as further information develops or circumstances change. Costs of future obligations are discounted to their present values using the Companys historic credit-adjusted risk-free rate.
Acquisition-related contingent consideration:
Contingent consideration
payable in cash is discounted to its 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. Adjustments to the fair value of contingent consideration are recognized in operating income in the reporting period and within the associated liability at the balance sheet date to reflect the passage of time accretion expense and any
revisions to the amount or timing of the initial measurement.
Revenue recognition:
The Company supplies products to customers from its various manufacturing sites and in some instances from containers held on
customer sites, under a variety of standard shipping terms and conditions. In each case revenue is recognized when legal title, which is defined and generally accepted in the standard terms and conditions, and the risk of loss transfers between the
Company and the customer. Provisions for sales discounts and rebates to customers are based upon the terms of sales contracts and are recorded in the same period as the related sales as a deduction from revenue. The Company estimates the provision
for sales discounts and rebates based on the terms of each agreement at the time of delivery.
Components of net sales:
All amounts billed to customers relating to shipping and handling are classified as net sales. Shipping and handling costs incurred by the Company are classified as
cost of goods sold.
Components of cost of goods sold:
Cost
of goods sold is comprised of raw material costs including inbound freight, duty and
non-recoverable
taxes, inbound handling costs associated with the receipt of raw materials, packaging materials,
manufacturing costs including labor costs, maintenance and utility costs, plant and engineering overheads, amortization expense for certain other intangible assets, warehousing and outbound shipping costs and handling costs. Inventory losses and
provisions and the costs of customer claims are also recognized in the cost of goods line item.
Components of selling, general and administrative expenses:
Selling expenses comprise the costs of the direct sales force, and the sales management and customer service departments required to
support them. It also comprises commission charges, the costs of sales conferences and trade shows, the cost of advertising and promotions, amortization expense for certain other intangible assets, and the cost of bad and doubtful debts. General and
administrative expenses comprise the cost of support functions including accounting, human resources, information technology and the cost of group functions including corporate management,
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
finance, tax, treasury, investor relations and legal departments. Provision of managements best estimate of legal and settlement costs for litigation in which the Company is involved is
made and reported in the administrative expense line item.
Research and development expenses:
Research, development and testing costs are expensed to the income statement as incurred.
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.
Foreign currencies:
The Companys policy is that foreign exchange
differences arising on the translation of the balance sheets of entities that have functional currencies other than the U.S. dollar are taken to a separate equity reserve, the cumulative translation adjustment. In entities where the U.S. dollar
is the functional currency no gains or losses on translation occur, and gains or losses on monetary assets relating to currencies other than the U.S. dollar are taken to the income statement in other net income/(expense). Gains and losses on
intercompany foreign currency loans which are long-term in nature, which the Company does not intend to settle in the foreseeable future, are also recorded in accumulated other comprehensive loss. Other foreign exchange gains or losses are also
included in other net income/(expense) in the income statement.
Stock-based compensation plans:
The Company accounts for employee stock options and stock equivalent units under the fair value method. Stock
options are fair valued at the grant date and the fair value is recognized straight-line over the vesting period of the option. Stock equivalent units are fair valued at each balance sheet date and the fair value is spread over the remaining vesting
period of the unit.
Pension plans and other post-employment
benefits:
The Company recognizes the funded status of defined benefit post-retirement plans on the consolidated balance sheets and changes in the funded status in comprehensive income. The measurement date of the plans funded status is the
same as the Companys fiscal
year-end.
The service costs are recognized as employees render the services necessary to earn the post-employment benefits. Prior service costs and credits and actuarial gains
and losses are amortized over the average remaining life expectancy of the inactive participants using the corridor method.
Income taxes:
The Company provides for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the relevant tax bases of the assets and liabilities. Then the Company evaluates the need for a valuation allowance to reduce deferred tax assets to the amount more likely
than not to be realized. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. The Company recognizes the tax benefit from a tax position only if it is more likely than not the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being
realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes accrued interest and penalties associated with unrecognized tax benefits as part of income
taxes in our consolidated statements of income.
Note
3. Segment Reporting and Geographical Area Data
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, 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 the 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.
Our Fuel Specialties segment develops, manufactures,
blends, markets and supplies a range of specialty chemicals products used as additives to a wide range of fuels.
Our Performance Chemicals segment provides effective technology-based solutions for our customers processes or products focused in the Personal Care, Home Care, Agrochemical and Mining markets.
Our Oilfield Services segment develops and markets products to
prevent loss of mud in drilling operations, chemical solutions for fracturing and stimulation operations and products for oil and gas production which aid flow assurance and asset integrity.
Our Octane Additives segment, which we believe is the worlds only producer of tetra ethyl lead (TEL),
comprises sales of TEL for use in automotive gasoline and provides services in respect of environmental remediation.
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
There are no significant customers with sales greater than 10% of our net group sales in the last three
financial years.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery and Performance
|
|
$
|
388.9
|
|
|
$
|
408.0
|
|
|
$
|
440.2
|
|
Other
|
|
|
120.7
|
|
|
|
124.8
|
|
|
|
126.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
|
509.6
|
|
|
|
532.8
|
|
|
|
566.8
|
|
Personal Care
|
|
|
126.8
|
|
|
|
119.6
|
|
|
|
106.1
|
|
Fragrances
|
|
|
0.1
|
|
|
|
23.0
|
|
|
|
56.2
|
|
Other
|
|
|
11.8
|
|
|
|
12.4
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Chemicals
|
|
|
138.7
|
|
|
|
155.0
|
|
|
|
177.6
|
|
Oilfield Services
|
|
|
191.7
|
|
|
|
265.0
|
|
|
|
161.3
|
|
Octane Additives
|
|
|
43.4
|
|
|
|
59.5
|
|
|
|
55.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
883.4
|
|
|
$
|
1,012.3
|
|
|
$
|
960.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
186.4
|
|
|
$
|
176.0
|
|
|
$
|
170.8
|
|
Performance Chemicals
|
|
|
43.4
|
|
|
|
42.4
|
|
|
|
43.7
|
|
Oilfield Services
|
|
|
76.4
|
|
|
|
99.1
|
|
|
|
58.9
|
|
Octane Additives
|
|
|
26.1
|
|
|
|
28.5
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
332.3
|
|
|
$
|
346.0
|
|
|
$
|
302.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
110.6
|
|
|
$
|
102.1
|
|
|
$
|
94.2
|
|
Performance Chemicals
|
|
|
16.0
|
|
|
|
16.3
|
|
|
|
17.8
|
|
Oilfield Services
|
|
|
(4.7
|
)
|
|
|
9.0
|
|
|
|
18.0
|
|
Octane Additives
|
|
|
22.7
|
|
|
|
24.7
|
|
|
|
22.6
|
|
Pension credit/(charge)
|
|
|
6.7
|
|
|
|
0.2
|
|
|
|
(3.3
|
)
|
Corporate costs
|
|
|
(53.9
|
)
|
|
|
(38.3
|
)
|
|
|
(38.7
|
)
|
Adjustment to fair value of contingent consideration
|
|
|
9.4
|
|
|
|
40.7
|
|
|
|
1.9
|
|
(Loss)/profit on disposal of subsidiary
|
|
|
(1.4
|
)
|
|
|
1.6
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
105.4
|
|
|
$
|
156.3
|
|
|
$
|
112.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
397.2
|
|
|
$
|
408.9
|
|
|
$
|
408.2
|
|
Performance Chemicals
|
|
|
340.0
|
|
|
|
120.2
|
|
|
|
156.6
|
|
Oilfield Services
|
|
|
240.0
|
|
|
|
240.9
|
|
|
|
293.1
|
|
Octane Additives
|
|
|
38.1
|
|
|
|
28.7
|
|
|
|
29.2
|
|
Corporate
|
|
|
166.1
|
|
|
|
229.9
|
|
|
|
112.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,181.4
|
|
|
$
|
1,028.6
|
|
|
$
|
999.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pension credit/(charge) 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 Company includes
within the corporate costs line item the costs of:
|
|
|
managing the Group as a company with securities listed on the NASDAQ and registered with the SEC;
|
|
|
|
the President/CEOs office, group finance, group human resources, group legal and compliance counsel, and investor relations;
|
|
|
|
running the corporate offices in the U.S. and Europe;
|
|
|
|
the corporate development function since they do not relate to the current trading activities of our other reporting segments; and
|
|
|
|
the corporate share of the information technology, accounting and human resources departments.
|
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Sales by geographical area are reported by source, being where the transactions originated. Intercompany
sales are priced using an appropriate pricing methodology and are eliminated in the consolidated financial statements.
Identifiable assets are those directly associated with the operations of the geographical area.
Goodwill has not been allocated by geographical location on the grounds that it would be impracticable to do so.
The following tables analyze sales and other financial information by
location:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
474.4
|
|
|
$
|
571.9
|
|
|
$
|
468.6
|
|
United Kingdom
|
|
|
428.2
|
|
|
|
445.2
|
|
|
|
486.1
|
|
Rest of Europe
|
|
|
118.5
|
|
|
|
133.3
|
|
|
|
146.9
|
|
Rest of World
|
|
|
31.1
|
|
|
|
22.1
|
|
|
|
21.4
|
|
Sales between areas
|
|
|
(168.8
|
)
|
|
|
(160.2
|
)
|
|
|
(162.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
883.4
|
|
|
$
|
1,012.3
|
|
|
$
|
960.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
16.8
|
|
|
$
|
52.7
|
|
|
$
|
15.2
|
|
United Kingdom
|
|
|
42.6
|
|
|
|
60.6
|
|
|
|
57.8
|
|
Rest of Europe
|
|
|
39.2
|
|
|
|
42.0
|
|
|
|
39.3
|
|
Rest of World
|
|
|
4.5
|
|
|
|
(3.0
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103.1
|
|
|
$
|
152.3
|
|
|
$
|
110.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
155.3
|
|
|
$
|
185.8
|
|
|
$
|
197.9
|
|
United Kingdom
|
|
|
45.9
|
|
|
|
49.3
|
|
|
|
54.1
|
|
Rest of Europe
|
|
|
207.5
|
|
|
|
10.6
|
|
|
|
10.4
|
|
Rest of World
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
409.2
|
|
|
$
|
246.1
|
|
|
$
|
263.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
377.3
|
|
|
$
|
410.9
|
|
|
$
|
449.3
|
|
United Kingdom
|
|
|
257.6
|
|
|
|
303.4
|
|
|
|
216.4
|
|
Rest of Europe
|
|
|
156.0
|
|
|
|
30.9
|
|
|
|
39.0
|
|
Rest of World
|
|
|
15.7
|
|
|
|
16.0
|
|
|
|
19.1
|
|
Goodwill
|
|
|
374.8
|
|
|
|
267.4
|
|
|
|
276.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,181.4
|
|
|
$
|
1,028.6
|
|
|
$
|
999.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 4. Acquisition of European Differentiated Surfactants business
On December 30, 2016, the Company acquired the European
Differentiated Surfactants business (Huntsman) from Huntsman Investments (Netherlands) B.V.. We purchased the business for a total consideration of $199.2 million subject to working capital adjustments. We acquired the business in
order to continue our strategy of building our presence in the Personal Care and Home Care markets which forms part of our Performance Chemicals segment.
There were no Huntsman revenue or earnings included in the consolidated income statement of the Company since the acquisition date.
The following table summarizes the calculations of the total purchase price
and the estimated allocation of the purchase price to the assets acquired and liabilities assumed for the business:
|
|
|
|
|
(in millions)
|
|
Huntsman
|
|
Goodwill and other intangible assets
|
|
$
|
107.4
|
|
Fixed assets
|
|
|
76.5
|
|
Other net assets acquired
|
|
|
15.3
|
|
|
|
|
|
|
Purchase price, net of cash acquired
|
|
$
|
199.2
|
|
|
|
|
|
|
The measurement periods for the valuation of
assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but does not exceed twelve months. We have reviewed the acquired intangibles associated
with the acquisition and concluded that the main identifiable asset is in relation to customer lists. The fair value of the acquired customers lists and acquired fixed assets has not been finalized and accordingly the excess of the purchase
consideration over net assets acquired has been classified as goodwill.
Huntsman, and the associated goodwill, are included within our Performance Chemicals segment for management and reporting purposes. There is currently no goodwill amortizable for tax purposes.
Supplemental unaudited pro forma information
For illustrative purposes only pro forma information of the enlarged group is
provided below but is not necessarily indicative of what the financial position or results of operations would have been had the Huntsman acquisition been completed as part of the Company from January 1, 2015. In addition, the unaudited pro
forma financial information is not indicative of, nor does it purport to project, the future financial position of operating results of the enlarged group.
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
1,008.0
|
|
|
$
|
1,269.8
|
|
Net income
|
|
$
|
88.5
|
|
|
$
|
121.8
|
|
Earnings per share basic
|
|
$
|
3.69
|
|
|
$
|
5.06
|
|
diluted
|
|
$
|
3.62
|
|
|
$
|
4.95
|
|
Adjustments to the unaudited pro forma
financial information includes amortization in respect of the acquired other intangible assets, and the acquisition-related costs incurred in respect of all these transactions.
Note 5. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
81.3
|
|
|
$
|
119.5
|
|
|
$
|
84.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
23,998
|
|
|
|
24,107
|
|
|
|
24,391
|
|
Dilutive effect of stock options and awards
|
|
|
444
|
|
|
|
505
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
24,442
|
|
|
|
24,612
|
|
|
|
24,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic:
|
|
$
|
3.39
|
|
|
$
|
4.96
|
|
|
$
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted:
|
|
$
|
3.33
|
|
|
$
|
4.86
|
|
|
$
|
3.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2016, 2015 and 2014 the average number of
anti-dilutive options excluded from the calculation of diluted earnings per share were 0, 0 and 36,775 respectively.
Note 6. Property, Plant and Equipment
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
7.2
|
|
|
$
|
6.2
|
|
Buildings
|
|
|
37.8
|
|
|
|
21.6
|
|
Equipment
|
|
|
192.6
|
|
|
|
128.0
|
|
Work in progress
|
|
|
14.2
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251.8
|
|
|
|
161.0
|
|
Less accumulated depreciation
|
|
|
(94.4
|
)
|
|
|
(85.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157.4
|
|
|
$
|
76.0
|
|
|
|
|
|
|
|
|
|
|
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Of the total net book value of equipment at December 31, 2016 $4.4 million
(2015 $3.0 million) are in respect of assets held under finance leases.
Depreciation charges were $13.5 million, $13.0 million and $10.6 million in 2016, 2015 and 2014, respectively.
The estimated additional cost to complete work in progress is
$9.5 million (2015 $2.4 million).
Note 7. Goodwill
The following table analyzes goodwill for 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Fuel
Specialties
|
|
|
Performance
Chemicals
|
|
|
Oilfield
Services
|
|
|
Octane
Additives
|
|
|
Total
|
|
At December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cost
(1)
|
|
$
|
209.0
|
|
|
$
|
29.8
|
|
|
$
|
37.3
|
|
|
$
|
236.5
|
|
|
$
|
512.6
|
|
Accumulated impairment losses
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(236.5
|
)
|
|
|
(236.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book amount
|
|
$
|
209.0
|
|
|
$
|
29.8
|
|
|
$
|
37.3
|
|
|
$
|
0.0
|
|
|
$
|
276.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange effect
|
|
|
(0.2
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.2
|
)
|
Adjustment
|
|
|
(0.9
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
Disposals
|
|
|
0.0
|
|
|
|
(7.6
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(7.6
|
)
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cost
(1)
|
|
$
|
207.9
|
|
|
$
|
22.2
|
|
|
$
|
37.3
|
|
|
$
|
236.5
|
|
|
$
|
503.9
|
|
Accumulated impairment losses
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(236.5
|
)
|
|
|
(236.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book amount
|
|
$
|
207.9
|
|
|
$
|
22.2
|
|
|
$
|
37.3
|
|
|
$
|
0.0
|
|
|
$
|
267.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
0.0
|
|
|
|
107.4
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
107.4
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cost
(1)
|
|
$
|
207.9
|
|
|
$
|
129.6
|
|
|
$
|
37.3
|
|
|
$
|
236.5
|
|
|
$
|
611.3
|
|
Accumulated impairment losses
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(236.5
|
)
|
|
|
(236.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book amount
|
|
$
|
207.9
|
|
|
$
|
129.6
|
|
|
$
|
37.3
|
|
|
$
|
0.0
|
|
|
$
|
374.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Gross cost is net of $8.7
million, $0.3
million and $289.5
million of historical accumulated amortization in
respect of the Fuel Specialties, Performance Chemicals and Octane Additives reporting segments, respectively
.
|
The Companys reporting units, the level at which goodwill is tested for impairment, are consistent with the reportable segments: Fuel Specialties,
Performance Chemicals, Oilfield Services and Octane Additives. The components in each segment (including products, markets and competitors) have similar economic characteristics and the segments, therefore, reflect the
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
lowest level at which operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company.
The Company assesses goodwill for impairment on at least an annual basis,
initially based on a qualitative assessment to determine whether it is more likely than not that the fair value of a segment is less than the carrying amount. If a potential impairment is identified then a
two-step
impairment test is followed.
The Company performed its annual impairment assessment in respect of goodwill as at December 31, 2016, 2015 and 2014. Our impairment assessment concluded that there had been no impairment of
goodwill in respect of those reporting segments.
We believe that
where appropriate the assumptions used in our impairment assessments are reasonable, but that they are judgmental, and variations in any of the assumptions may result in materially different calculations of any potential impairment charges.
Note 8. Other Intangible Assets
Other intangible assets comprise the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Gross cost:
|
|
|
|
|
|
|
|
|
Product rights
|
|
$
|
34.0
|
|
|
$
|
34.0
|
|
Brand names
|
|
|
8.9
|
|
|
|
8.9
|
|
Technology
|
|
|
55.1
|
|
|
|
55.1
|
|
Customer relationships
|
|
|
85.1
|
|
|
|
85.1
|
|
Patents
|
|
|
2.9
|
|
|
|
2.9
|
|
Non-compete agreements
|
|
|
4.1
|
|
|
|
4.1
|
|
Marketing related
|
|
|
22.1
|
|
|
|
22.1
|
|
Internally developed software
|
|
|
36.4
|
|
|
|
36.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248.6
|
|
|
|
248.6
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Product rights
|
|
|
(12.6
|
)
|
|
|
(8.8
|
)
|
Brand names
|
|
|
(3.2
|
)
|
|
|
(2.0
|
)
|
Technology
|
|
|
(12.3
|
)
|
|
|
(8.9
|
)
|
Customer relationships
|
|
|
(32.5
|
)
|
|
|
(25.7
|
)
|
Patents
|
|
|
(2.9
|
)
|
|
|
(2.9
|
)
|
Non-compete agreements
|
|
|
(3.4
|
)
|
|
|
(2.5
|
)
|
Marketing related
|
|
|
(21.2
|
)
|
|
|
(20.3
|
)
|
Internally developed software
|
|
|
(16.1
|
)
|
|
|
(8.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(104.2
|
)
|
|
|
(79.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144.4
|
|
|
$
|
168.7
|
|
|
|
|
|
|
|
|
|
|
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Product rights
Following the acquisition of Chemsil on August 30, 2013, the Company
recognized an intangible asset of $34.0 million in respect of Chemsils product rights portfolio. This asset has an expected life of 9 years and is being amortized on a straight-line basis over this period. No residual value is
anticipated.
An amortization expense of $3.8 million was
recognized in 2016 (2015 $3.8 million) in selling, general and administrative expenses.
Brand names
Following the acquisition of Independence on October 27, 2014, the Company recognized an intangible asset of $6.0 million in respect of
Independences brand name. This asset has an expected life of 10 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.
Following the acquisition of Bachman on November 4, 2013, the Company
recognized an intangible asset of $2.9 million in respect of Bachmans brand names. This asset has an expected life of 5 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.
An amortization expense of $1.2 million was recognized in 2016 (2015
$1.2 million) in selling, general and administrative expenses.
Technology
Following the acquisition of Independence on October 27, 2014, the Company recognized an intangible asset of $26.0 million in respect of
Independences product formulations. This asset has an expected life of 15 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.
Following the acquisition of Bachman on November 4, 2013, the Company
recognized an intangible asset of $8.5 million in respect of Bachmans core chemistry
know-how
of oilfield chemicals. This asset has an expected life of 15 years and is being amortized on a
straight-line basis over this period. No residual value is anticipated.
Following the acquisition of Strata on December 24, 2012, the Company recognized an intangible asset of $18.3 million in respect of technological
know-how
of the mixing and manufacturing process, patents which protect the technology and the associated product branding. This asset has an expected life of 16.5 years and is being amortized on a straight-line basis over this period. No residual value is
anticipated.
An amortization expense of $3.4 million was
recognized in 2016 (2015 $3.4 million) in cost of goods sold.
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Customer relationships
Following the acquisition of Independence on October 27, 2014, the
Company recognized an intangible asset of $29.2 million in respect of Independences long-term customer relationships. This asset has a weighted average expected life of 10 years and is being amortized on a straight-line basis over this
period. No residual value is anticipated.
Following the
acquisition of Bachman on November 4, 2013, the Company recognized an intangible asset of $14.5 million in respect of Bachmans long-term customer relationships. This asset has a weighted average expected life of 14.5 years and is
being amortized on a straight-line basis over this period. No residual value is anticipated.
Following the acquisition of Strata on December 24, 2012, the Company recognized an intangible asset of $28.2 million in respect of long-term customer relationships. This asset has an expected
life of 11.5 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.
Following the acquisition of Finetex (now merged into Innospec Active Chemicals LLC) in January 2005, the Company recognized an intangible asset of
$4.2 million in relation to customer lists acquired. This asset has an expected life of 13 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.
An amortization expense of $6.8 million was recognized in 2016 (2015
$6.7 million) in selling, general and administrative expenses.
Non-compete
agreements
Following the acquisition of Independence on October 27, 2014, the Company recognized an intangible asset of $2.6 million in respect of a
non-compete
agreement. This asset has an expected life of 3 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.
Following the acquisition of Strata on December 24, 2012, the Company recognized an intangible asset of $1.5 million in respect of a
non-compete
agreement. This asset had an expected life of 2 years and is now fully amortized.
An amortization expense of $0.9 million was recognized in 2016 (2015 $0.9 million) in selling, general and administrative expenses.
Marketing related
An intangible asset of $28.4 million was recognized in
the second quarter of 2007 in respect of Ethyl Corporation foregoing their entitlement effective April 1, 2007 to a share of the future income stream under the sales and marketing agreements to market and sell TEL. In 2008, contract provisions
no longer deemed necessary of $6.3 million were offset against the
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
intangible asset. The amount attributed to the Octane Additives reporting segment was amortized straight-line to December 31, 2013 and the amount attributed to the Fuel Specialties reporting
segment is being amortized straight-line to December 31, 2017. An amortization expense of $0.9 million was recognized in 2016 (2015 - $1.0 million) in cost of goods sold.
Internally developed software
In November 2015 we completed the implementation of our new
information system platform at the majority of reporting units across the group. At December 31, 2016 we had capitalized $36.4 million (2015 $36.4 million) in relation to this internally developed software. This asset has an
expected life of 5 years from the point in time each deployment is completed and is being amortized on a straight-line basis over these periods. No residual value is anticipated.
An amortization expense of $7.3 million was recognized in 2016 (2015
$4.0 million) in selling, general and administrative expenses.
Amortization expense
The aggregate of other intangible asset amortization expense was $24.2 million, $21.0 million and $17.8 million in 2016, 2015 and 2014, respectively, of which $4.3 million,
$4.4 million and $3.7 million, respectively, was recognized in cost of goods sold, and the remainder was recognized in selling, general and administrative expenses.
Future amortization expense is estimated to be as follows for the next five
years:
|
|
|
|
|
(in millions)
|
|
|
|
2017
|
|
$
|
24.1
|
|
2018
|
|
$
|
21.1
|
|
2019
|
|
$
|
17.7
|
|
2020
|
|
$
|
17.4
|
|
2021
|
|
$
|
14.2
|
|
Note 9. Pension
Plans
United Kingdom plan
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. The Projected Benefit Obligation (PBO) is based on final salary and years of credited service reduced by social security benefits according to a plan formula. Normal retirement age is 65 but
provisions are made for early retirement. The Plans assets are invested by several investment management
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
companies in funds holding United Kingdom and overseas equities, United Kingdom and overseas fixed interest securities, index linked securities, property unit trusts and cash or cash equivalents.
The trustees investment policy is to seek to achieve specified objectives through investing in a suitable mixture of real and monetary assets. The trustees recognize that the returns on real assets, while expected to be greater over the
long-term than those on monetary assets, are likely to be more volatile. A mixture across asset classes should nevertheless provide the level of returns required by the Plan to meet its liabilities at an acceptable level of risk for the trustees and
an acceptable level of cost to the Company.
In 2016, the Company
contributed $1.1 million in cash to the Plan in accordance with an agreement with the trustees.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Plan net pension (credit)/charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1.0
|
|
|
$
|
1.5
|
|
|
$
|
1.7
|
|
Interest cost on PBO
|
|
|
20.7
|
|
|
|
27.7
|
|
|
|
34.7
|
|
Expected return on plan assets
|
|
|
(29.9
|
)
|
|
|
(33.4
|
)
|
|
|
(37.2
|
)
|
Amortization of prior service credit
|
|
|
(1.1
|
)
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
Amortization of actuarial net losses
|
|
|
2.6
|
|
|
|
5.2
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6.7
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assumptions at December 31, (%):
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.48
|
|
|
|
3.69
|
|
|
|
3.55
|
|
Inflation rate
|
|
|
2.25
|
|
|
|
2.15
|
|
|
|
2.15
|
|
Rate of return on plan assets overall on
bid-value
|
|
|
3.20
|
|
|
|
4.20
|
|
|
|
4.05
|
|
Rate of return on plan assets equity securities
|
|
|
5.80
|
|
|
|
6.65
|
|
|
|
6.50
|
|
Rate of return on plan assets debt securities
|
|
|
2.05
|
|
|
|
2.85
|
|
|
|
2.75
|
|
|
|
|
|
Plan asset allocation by category (%):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
25
|
|
|
|
34
|
|
|
|
32
|
|
Debt securities
|
|
|
66
|
|
|
|
62
|
|
|
|
63
|
|
Cash
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The discount rate used represents the
annualized yield based on a cash flow matched methodology with reference to an AA corporate bond spot curve and having regard to the duration of the Plans liabilities. The inflation rate is derived using a similar cash flow matched methodology
as used for the discount rate but having regard to the difference between yields on fixed interest and index linked United Kingdom government gilts. A 0.25% change in the discount rate assumption would change the PBO by approximately
$26 million and the net pension credit for 2017 would change by approximately $0.2 million. A 0.25% change in the level of price inflation assumption would change the PBO by approximately $19 million and the net pension credit for
2016 by approximately $0.2 million.
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The current investment strategy of the Plan is to obtain an asset allocation of 65% debt securities and
35% equity securities in order to achieve a more predictable return on assets. As at December 31, 2016, approximately 37% (December 31, 2015 35%) of the Plans assets were held in index-tracking funds with one investment management
company. Approximately 18% (December 31, 2015 16%) of the Plans assets were invested in United Kingdom government gilts. No more than 5% of the Plans assets were invested in any one individual companys investment funds.
Movements in PBO and fair value of Plan assets are as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Change in PBO:
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
739.7
|
|
|
$
|
817.1
|
|
Interest cost
|
|
|
20.7
|
|
|
|
27.7
|
|
Service cost
|
|
|
1.0
|
|
|
|
1.5
|
|
Benefits paid
|
|
|
(39.7
|
)
|
|
|
(42.9
|
)
|
Actuarial losses/(gains)
|
|
|
119.8
|
|
|
|
(21.8
|
)
|
Exchange effect
|
|
|
(131.3
|
)
|
|
|
(41.9
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
710.2
|
|
|
$
|
739.7
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets:
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
795.2
|
|
|
$
|
862.3
|
|
Actual benefits paid
|
|
|
(39.7
|
)
|
|
|
(42.9
|
)
|
Actual contributions by employer
|
|
|
1.1
|
|
|
|
9.0
|
|
Actual return on assets
|
|
|
142.2
|
|
|
|
11.5
|
|
Exchange effect
|
|
|
(140.6
|
)
|
|
|
(44.7
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
758.2
|
|
|
$
|
795.2
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the
Plan was $710.2 million and $739.7 million at December 31, 2016 and 2015, respectively.
For the vast majority of assets, a market approach is adopted to assess the fair value of the assets, with the inputs being the quoted market prices for the actual securities held in the relevant fund.
Equity securities
Common and preferred stock for which market prices are
readily available at the measurement date are valued at the last reported sale price or official closing price on the primary market or exchange on which they are actively traded and are classified in Level 1.
Fixed income securities
Fixed income securities are valued based on quotations received from
independent pricing services or from dealers who make markets in such securities and are classified as Level 1.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Insurance contracts
The Company has invested in insurance contracts, known as
buy-in
contracts. The value of the insurance contract used significant unobservable inputs including plan participant medical data, in addition to observable inputs which includes expected return on assets and
estimated value premium. Therefore we have classified the contracts as Level 3 investments. Fair value estimates are provided by the external parties and are subsequently reviewed and approved by management.
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The fair values of pension assets by level of input were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by U.S. government and government agencies
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.2
|
|
Debt securities issued by
non-U.S.
governments and government agencies
|
|
|
139.3
|
|
|
|
|
|
|
|
|
|
|
|
139.3
|
|
Corporate debt securities
|
|
|
180.8
|
|
|
|
|
|
|
|
|
|
|
|
180.8
|
|
Other asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities held for proprietary investment purposes
|
|
|
84.2
|
|
|
|
|
|
|
|
|
|
|
|
84.2
|
|
Real estate
|
|
|
57.1
|
|
|
|
|
|
|
|
|
|
|
|
57.1
|
|
Insurance contracts
|
|
|
|
|
|
|
|
|
|
|
152.9
|
|
|
|
152.9
|
|
Investments measured at net asset value
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51.7
|
|
Other assets
|
|
|
|
|
|
|
26.2
|
|
|
|
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
461.6
|
|
|
|
26.2
|
|
|
|
152.9
|
|
|
|
692.4
|
|
Cash
|
|
|
65.8
|
|
|
|
|
|
|
|
|
|
|
|
65.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total plan assets
|
|
$
|
527.4
|
|
|
$
|
26.2
|
|
|
$
|
152.9
|
|
|
$
|
758.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities issued by U.S. government and government agencies
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.4
|
|
Debt securities issued by
non-U.S.
governments and government agencies
|
|
|
132.1
|
|
|
|
|
|
|
|
|
|
|
|
132.1
|
|
Corporate debt securities
|
|
|
189.7
|
|
|
|
|
|
|
|
|
|
|
|
189.7
|
|
Other asset-backed securities
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities held for proprietary investment purposes
|
|
|
125.0
|
|
|
|
|
|
|
|
|
|
|
|
125.0
|
|
Real estate
|
|
|
64.7
|
|
|
|
|
|
|
|
|
|
|
|
64.7
|
|
Insurance contracts
|
|
|
|
|
|
|
|
|
|
|
171.9
|
|
|
|
171.9
|
|
Investments measured at net asset value
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47.6
|
|
Other assets
|
|
|
|
|
|
|
31.6
|
|
|
|
|
|
|
|
31.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
|
512.1
|
|
|
|
31.6
|
|
|
|
171.9
|
|
|
|
763.2
|
|
Cash
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total plan assets
|
|
$
|
544.1
|
|
|
$
|
31.6
|
|
|
$
|
171.9
|
|
|
$
|
795.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) have not been categorized in the fair value hierarchy. The
fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
|
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The reconciliation of the fair value of the Plan assets measured using significant unobservable inputs
was as follows:
|
|
|
|
|
(in millions)
|
|
Other
Assets
|
|
Balance at December 31, 2014
|
|
$
|
0.0
|
|
Realized/unrealized gains/(losses):
|
|
|
|
|
Relating to assets still held at the reporting date
|
|
|
0.0
|
|
Relating to assets sold during the period
|
|
|
0.0
|
|
Purchases, issuances and settlements
|
|
|
171.9
|
|
Exchange effect
|
|
|
0.0
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
171.9
|
|
|
|
|
|
|
Realized/unrealized gains/(losses):
|
|
|
|
|
Relating to assets still held at the reporting date
|
|
|
16.8
|
|
Relating to assets sold during the period
|
|
|
0.0
|
|
Purchases, issuances and settlements
|
|
|
(6.7
|
)
|
Exchange effect
|
|
|
(29.1
|
)
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
152.9
|
|
|
|
|
|
|
The projected net pension credit for the year
ending December 31, 2017 is as follows:
|
|
|
|
|
(in millions)
|
|
|
|
Service cost
|
|
$
|
0.9
|
|
Interest cost on PBO
|
|
|
14.6
|
|
Expected return on plan assets
|
|
|
(23.4
|
)
|
Amortization of prior service credit
|
|
|
(1.0
|
)
|
Amortization of actuarial net losses
|
|
|
4.8
|
|
|
|
|
|
|
|
|
$
|
(4.1
|
)
|
|
|
|
|
|
The following benefit payments are expected
to be made:
|
|
|
|
|
(in millions)
|
|
|
|
2017
|
|
$
|
34.9
|
|
2018
|
|
$
|
35.4
|
|
2019
|
|
$
|
35.9
|
|
2020
|
|
$
|
36.4
|
|
2021
|
|
$
|
36.9
|
|
2022-2026
|
|
$
|
192.1
|
|
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
German plan
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Plan net pension charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost on PBO
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Amortization of actuarial net loss
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.6
|
|
|
$
|
0.7
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assumptions at December 31, (%):
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
1.80
|
|
|
|
2.40
|
|
|
|
2.10
|
|
Inflation rate
|
|
|
1.75
|
|
|
|
1.75
|
|
|
|
1.75
|
|
Rate of increase in compensation levels
|
|
|
2.75
|
|
|
|
2.75
|
|
|
|
2.75
|
|
Movements in PBO of the German plan are as
follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Change in PBO:
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
9.2
|
|
|
$
|
10.4
|
|
Service cost
|
|
|
0.2
|
|
|
|
0.2
|
|
Interest cost
|
|
|
0.2
|
|
|
|
0.2
|
|
Benefits paid
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Actuarial losses/(gains)
|
|
|
1.0
|
|
|
|
(0.3
|
)
|
Exchange effect
|
|
|
(0.3
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
10.1
|
|
|
$
|
9.2
|
|
|
|
|
|
|
|
|
|
|
The amount of unrecognized actuarial net
losses in other comprehensive loss in respect of the German plan is $2.5 million, net of tax of $0.7 million.
Other plans
Company contributions to defined contribution schemes during 2016 were $7.9 million (2015 $8.5 million).
The Huntsman acquisition has pension plans with a liability at
December 31, 2016 of $4.1 million.
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 10. Income Taxes
A roll-forward of unrecognized tax benefits and associated accrued interest
and penalties is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Interest and
Penalties
|
|
|
Unrecognized
Tax Benefits
|
|
|
Total
|
|
Opening balance at January 1, 2014
|
|
$
|
1.1
|
|
|
$
|
11.9
|
|
|
$
|
13.0
|
|
Reductions for tax positions of prior periods
|
|
|
(0.4
|
)
|
|
|
(3.6
|
)
|
|
|
(4.0
|
)
|
Additions for tax positions of prior periods
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Additions for current year tax positions
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Reductions due to lapsed statutes of limitations
|
|
|
(0.2
|
)
|
|
|
(2.9
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance at December 31, 2014
|
|
|
0.5
|
|
|
|
5.7
|
|
|
|
6.2
|
|
Current
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
$
|
0.5
|
|
|
$
|
5.7
|
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance at January 1, 2015
|
|
$
|
0.5
|
|
|
$
|
5.7
|
|
|
$
|
6.2
|
|
Reductions for tax positions of prior periods
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Additions for tax positions of prior periods
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.4
|
|
Additions for current year tax positions
|
|
|
0.0
|
|
|
|
1.2
|
|
|
|
1.2
|
|
Reductions due to lapsed statutes of limitations
|
|
|
(0.3
|
)
|
|
|
(3.6
|
)
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance at December 31, 2015
|
|
|
0.3
|
|
|
|
3.6
|
|
|
|
3.9
|
|
Current
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
$
|
0.3
|
|
|
$
|
3.6
|
|
|
$
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance at January 1, 2016
|
|
$
|
0.3
|
|
|
$
|
3.6
|
|
|
$
|
3.9
|
|
Reductions for tax positions of prior periods
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
|
|
(0.7
|
)
|
Additions for tax positions of prior periods
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Additions for current year tax positions
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Reductions due to lapsed statutes of limitations
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance at December 31, 2016
|
|
|
0.1
|
|
|
|
2.2
|
|
|
|
2.3
|
|
Current
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
$
|
0.1
|
|
|
$
|
2.2
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the $2.3 million of unrecognized tax
benefits, and interest and penalties, would impact our effective tax rate if recognized.
We recognize accrued interest and penalties associated with unrecognized tax benefits as part of income taxes in our consolidated statements of income.
During 2016, the Company recorded a net reduction of $1.6 million in
unrecognized tax benefits and associated interest and penalties.
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 December 31, 2016.
As previously disclosed the Companys German subsidiaries received a tax audit notification in October 2015 in respect of 2010 2014 inclusive.
The examination was effectively settled in the fourth quarter of 2016. The additional cost to the Company was not material.
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 (2015 onwards), Switzerland (2015 onwards) and the United Kingdom (2015 onwards).
The sources of income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
16.8
|
|
|
$
|
52.7
|
|
|
$
|
15.2
|
|
Foreign
|
|
|
86.3
|
|
|
|
99.6
|
|
|
|
95.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103.1
|
|
|
$
|
152.3
|
|
|
$
|
110.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income tax expense are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4.4
|
|
|
$
|
5.2
|
|
|
$
|
4.5
|
|
State and local
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
2.1
|
|
Foreign
|
|
|
15.3
|
|
|
|
14.3
|
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.8
|
|
|
|
20.8
|
|
|
|
21.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(0.7
|
)
|
|
|
12.8
|
|
|
|
3.3
|
|
State and local
|
|
|
(0.3
|
)
|
|
|
0.5
|
|
|
|
0.3
|
|
Foreign
|
|
|
2.0
|
|
|
|
(1.3
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
12.0
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21.8
|
|
|
$
|
32.8
|
|
|
$
|
26.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes were
$23.1 million, $22.5 million and $11.6 million during 2016, 2015 and 2014, respectively.
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The effective tax rate varies from the U.S. federal statutory rate because of the factors indicated
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Foreign income inclusions
|
|
|
1.0
|
|
|
|
1.8
|
|
|
|
5.5
|
|
Foreign tax rate differential
|
|
|
(16.6
|
)
|
|
|
(9.6
|
)
|
|
|
(14.6
|
)
|
Tax (credit)/charge from previous years
|
|
|
(0.7
|
)
|
|
|
(0.5
|
)
|
|
|
4.7
|
|
Net (credit) from unrecognized tax benefits
|
|
|
(1.6
|
)
|
|
|
(1.5
|
)
|
|
|
(6.2
|
)
|
Foreign currency transactions
|
|
|
2.4
|
|
|
|
(1.9
|
)
|
|
|
1.0
|
|
United Kingdom income tax rate reduction
|
|
|
(0.6
|
)
|
|
|
(0.7
|
)
|
|
|
0.0
|
|
Other items and adjustments, net
|
|
|
2.2
|
|
|
|
(1.1
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
%
|
|
|
21.5
|
%
|
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The most significant factor is the mix of
taxable profits generated in the different geographical jurisdictions in which the Group operates, which continues to have a significant positive impact on the effective rate.
Foreign income inclusions arise each year from certain types of income earned
overseas being taxable under the U.S. tax regulations. These types of income include Subpart F income, principally from foreign based company sales in the United Kingdom, including the associated Section 78 tax gross up, and also from the
income earned by certain overseas subsidiaries taxable under the U.S. tax regime. Foreign income inclusions have a negative impact on the effective tax rate.
Foreign tax credits can fully or partially offset these incremental U.S. taxes from foreign income inclusions. The utilization of foreign tax credits
varies year on year as this is dependent on a number of variable factors which are difficult to predict and may in certain years prevent any offset of foreign tax credits. The effective rate is favorably impacted by the generation of foreign tax
credits against foreign income inclusions in 2016.
As a
consequence of the Group having operations outside of the U.S., it is exposed to foreign currency fluctuations. These have had a negative impact on the effective rate in 2016.
Other items do not have a material impact on the effective tax rate.
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Details of deferred tax assets and liabilities are analyzed as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
5.5
|
|
|
$
|
5.2
|
|
Net operating loss carry forwards
|
|
|
18.2
|
|
|
|
2.7
|
|
Intangible assets
|
|
|
3.7
|
|
|
|
3.3
|
|
Accretion expense
|
|
|
5.1
|
|
|
|
4.8
|
|
Other
|
|
|
9.5
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
42.0
|
|
|
|
22.0
|
|
Less valuation allowance
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
42.0
|
|
|
$
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Excess of book over tax basis in property, plant and equipment
|
|
$
|
(13.0
|
)
|
|
$
|
(4.1
|
)
|
Goodwill amortization
|
|
|
(11.3
|
)
|
|
|
(11.3
|
)
|
Intangible amortization
|
|
|
(26.7
|
)
|
|
|
(23.4
|
)
|
Pension liabilities
|
|
|
(8.2
|
)
|
|
|
(10.0
|
)
|
Other
|
|
|
(0.2
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(59.4
|
)
|
|
$
|
(49.5
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(17.4
|
)
|
|
$
|
(27.5
|
)
|
|
|
|
|
|
|
|
|
|
Current portion of deferred tax assets
|
|
$
|
0.0
|
|
|
$
|
8.8
|
|
Deferred tax assets, net of current portion
|
|
|
14.9
|
|
|
|
1.4
|
|
Current portion of deferred tax liabilities
|
|
|
0.0
|
|
|
|
0.0
|
|
Deferred tax liabilities, net of current portion
|
|
|
(32.3
|
)
|
|
|
(37.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17.4
|
)
|
|
$
|
(27.5
|
)
|
|
|
|
|
|
|
|
|
|
The Company evaluates deferred tax assets to
determine whether it is more likely than not that they will be realized. Deferred tax assets are reviewed each period on a tax jurisdiction by tax jurisdiction basis to analyze whether there is sufficient positive or negative evidence to support
realizability. As a result of the Companys assessment of its deferred tax assets at December 31, 2016, the Company considers it more likely than not that it will recover the full benefit of its deferred tax assets and no valuation
allowance is required.
Should it be determined in the future that
it is no longer more likely than not that these assets will be realized, a valuation allowance would be required, and the Companys operating results would be adversely affected during the period in which such a determination would be made.
Gross net operating loss carry forwards of $75.3 million
result in a deferred tax asset of $18.2 million. The net operating loss carry forwards arose in the U.S. and in four of the Companys foreign subsidiaries. Net operating loss carry forwards of $17.2 million arose from
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
state and federal tax losses in prior and current periods in certain of the Companys U.S. subsidiaries. It is expected that sufficient taxable profits will be generated in the U.S. against
which the federal net operating loss carry forwards of $10.2 million can be relieved prior to their expiration in the period 2035 to 2036, and the state net operating loss carry forwards of $7.0 million can be relieved before their
expiration in the period 2022 to 2036. The net operating loss carry forwards in two of the Companys foreign subsidiaries totaling $58.1 million arose in prior periods and it is expected that sufficient taxable profits will be generated
against which these net operating loss carry forwards can be relieved. These losses can be carried forward indefinitely without expiration.
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 indefinite in duration. The amount
of unremitted earnings at December 31, 2016 was approximately $788 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
11. Long-Term Debt
Long-term debt
consists of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Revolving credit facility
|
|
$
|
161.0
|
|
|
$
|
133.0
|
|
Term loan
|
|
|
110.0
|
|
|
|
0.0
|
|
Deferred finance costs
|
|
|
(2.2
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
268.8
|
|
|
|
131.6
|
|
Less current portion
|
|
|
(10.3
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
258.5
|
|
|
$
|
131.6
|
|
|
|
|
|
|
|
|
|
|
On December 14, 2016, Innospec and
certain subsidiaries of the Company entered into a Third Amendment and Restatement Agreement with various lenders which amends and restates the Companys credit facility agreement dated December 14, 2011, as amended and restated on
August 28, 2013 and November 6, 2015 (the
Pre-Existing
Credit Agreement; the
Pre-Existing
Credit Agreement, as amended and restated pursuant to the
Third Amendment and Restatement Agreement, being the Amended Credit Agreement.)
The Amended Credit Agreement retains the $200,000,000 revolving credit facility available to the Company and adds a term loan facility of $110,000,000. The termination date of the revolving facility
remains November 6, 2020. The term loan has an $11,000,000 repayment installment due December 28, 2017, a $16,500,000 installment due December 28, 2018 and a $22,000,000 installment due December 28, 2019, with the outstanding
balance due on November 6, 2020.
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As a result, the Company capitalized $1.2 million of refinancing costs in 2016 and
$1.5 million in 2015, which are being amortized over the expected life of the facility, as shown here:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
Gross cost at January 1
|
|
$
|
1.5
|
|
|
$
|
2.6
|
|
Capitalized in the year
|
|
|
1.2
|
|
|
|
1.5
|
|
Written down in the year
|
|
|
0.0
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.7
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at January 1
|
|
$
|
(0.1
|
)
|
|
$
|
(1.5
|
)
|
Amortization in the year
|
|
|
(0.4
|
)
|
|
|
(1.2
|
)
|
Amortization written down in the year
|
|
|
0.0
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.5
|
)
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
Net book value at December 31
|
|
$
|
2.2
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $0.4 million,
$1.2 million and $0.7 million in 2016, 2015 and 2014, respectively. The charge is included in interest expense, see Note 2 of the Notes to the Consolidated Financial Statements.
The obligations of the Company under the credit facilities are secured obligations and guaranteed by certain subsidiaries of
the Company. Amounts available under the revolving facility may be borrowed in U.S. dollars, Euros, British pounds and other freely convertible currencies.
The Companys credit facilities contain restrictive clauses which may constrain our activities and limit our operational and financial flexibility.
The facility obliges the lenders to comply with a request for utilization of finance unless there is an event of default outstanding. Events of default are defined in the credit facility and include a material adverse change to our assets,
operations or financial condition. The facility contains a number of restrictions that limit our ability, amongst other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guarantee
obligations of third parties, make investments, undergo a merger or consolidation, dispose of assets, or materially change our line of business.
In addition, the credit facilities contain terms which, if breached, would result in it becoming repayable on demand. It requires, among other matters,
compliance with the following financial covenant ratios measured on a quarterly basis: (1) the ratio of net debt to EBITDA shall not be greater than 3.0:1 and (2) the ratio of EBITDA to net interest shall not be less than 4.0:1. Management
has determined that the Company has not breached these covenants throughout the period to December 31, 2016 and does not expect to breach these covenants for the next 12 months. The credit facility is secured by a number of fixed and floating
charges over certain assets which include key operating sites of the Company and its subsidiaries.
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The weighted average rate of interest on borrowings was 1.72% at December 31, 2016 and 1.67% at
December 31, 2015. Payments of interest on long-term debt were $2.6 million, $2.3 million and $2.3 million in 2016, 2015 and 2014, respectively.
The net cash outflows in respect of refinancing costs were $1.2 million,
$1.5 million and $0.1 million in 2016, 2015 and 2014, respectively.
Note 12. Plant Closure Provisions
The principal site giving rise to environmental remediation liabilities is the manufacturing site at Ellesmere Port in the United Kingdom, which management believes is the last ongoing manufacturer of
TEL. There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe. The liability for estimated closure costs of Innospecs manufacturing facilities includes
costs for decontamination and environmental remediation activities (remediation) when demand for TEL diminishes.
Movements in the provisions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total at January 1
|
|
$
|
37.7
|
|
|
$
|
34.1
|
|
|
$
|
32.4
|
|
Charge for the period
|
|
|
4.7
|
|
|
|
6.8
|
|
|
|
5.0
|
|
Utilized in the period
|
|
|
(2.7
|
)
|
|
|
(2.6
|
)
|
|
|
(2.0
|
)
|
Released in the period
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
(1.0
|
)
|
Disposal in the period
|
|
|
0.0
|
|
|
|
(0.3
|
)
|
|
|
0.0
|
|
Exchange effect
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31
|
|
|
39.5
|
|
|
|
37.7
|
|
|
|
34.1
|
|
Due within one year
|
|
|
(6.7
|
)
|
|
|
(6.4
|
)
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year
|
|
$
|
32.8
|
|
|
$
|
31.3
|
|
|
$
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due within one year refer to
provisions where expenditure is expected to arise within one year of the balance sheet date. Remediation costs are recognized in cost of goods sold.
The provisions for remediation represent the Companys liability for environmental liabilities and asset retirement obligations. The charge for the
period in 2016 represents the accretion expense recognized of $3.4 million and a further $1.3 million primarily in respect of changes in the expected cost and scope of future remediation activities. A discount rate of 8.92% was used in
valuing the remediation provision.
We recognize environmental
liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated. The Company has to anticipate the program of work required and the
associated future expected costs, and comply with environmental legislation in the countries in
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
which it operates or has operated in. The Company views the costs of vacating our Ellesmere Port site as contingent upon if and when it vacates the site because there is no present intention to
do so.
Remediation expenditure utilized provisions of
$2.7 million, $2.6
million and $2.0 million in 2016, 2015 and 2014, respectively.
Note 13. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company
utilizes a
mid-market
pricing convention for valuing the majority of its assets and liabilities measured and reported at fair value. The Company utilizes market data or assumptions that market participants
would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company
primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The Company gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The
Companys assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy Levels. In
2016, the Company evaluated the fair value hierarchy levels assigned to its assets and liabilities, and concluded that there should be no transfers into or out of Levels 1, 2 and 3.
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table presents the carrying amount and fair values of the Companys assets and
liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
(in millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
101.9
|
|
|
$
|
101.9
|
|
|
$
|
136.9
|
|
|
$
|
136.9
|
|
Short-term investments
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
4.8
|
|
|
|
4.8
|
|
Derivatives (Level 1 measurement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
non-current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current portion)
|
|
$
|
268.8
|
|
|
$
|
268.8
|
|
|
$
|
131.6
|
|
|
$
|
131.6
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock equivalent units
|
|
|
9.8
|
|
|
|
9.8
|
|
|
|
7.8
|
|
|
|
7.8
|
|
Acquisition-related contingent consideration
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
54.6
|
|
|
|
54.6
|
|
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 term loan and revolving credit facility, which are shown net of deferred finance costs that have been capitalized. The fair value of long-term debt approximates to the carrying value, as the discounting to its present
value is offset by the payments under the interest rate swaps. Finance leases relate to certain fixed assets in our oilfield services business. The carrying amount of long-term debt and finance leases approximates to the fair value.
Acquisition-related contingent consideration:
Contingent consideration
payable in cash is discounted to its fair value at each balance sheet date. Where contingent consideration is
86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
contingent consideration payable at December 31, 2016 has been calculated based on the actual trading results although the amount to be paid is subject to final agreement with the previous owners.
Derivatives:
The fair value of derivatives relating to interest rate
swaps, foreign currency forward exchange contracts and commodity swaps are derived from current settlement prices and comparable contracts using current assumptions. Interest rate swaps relate to contracts taken out to hedge interest rate risk on a
portion of our credit facilities borrowing. 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.
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.
Note 14. Derivative Instruments and Risk Management
The Company has limited involvement with derivative
instruments and does not trade them. The Company does use derivatives to manage certain interest rate, foreign currency exchange rate and raw material cost exposures, as the need arises.
The Company enters into interest rate swap contracts to reduce interest rate risk on its core debt. As at 31 December
2016, interest rate swaps with a notional value of $160,000,000 were in place. Fixed interest rates payable under the interest rate swaps vary from 1.41% to 1.67%. Interest rate swaps in place to hedge interest rate risk on the term loan are for a
notional value that matches the repayment profile of the term loan. These interest rate swap contracts have been designated as hedging instruments, and their impact on other comprehensive loss for 2016 was a gain of $0.4 million.
The Company enters into various foreign currency forward exchange contracts
to minimize currency exchange rate exposure from expected future cash flows. As at December 31, 2016 the contracts have maturity dates of up to one year from 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 2016 was a gain of $4.4 million.
As at December 31, 2016 and December 31, 2015 the Company did not hold any raw material derivatives.
The Company sells a range of specialty chemicals to major oil refineries and
chemical companies throughout the world. Credit limits, ongoing credit evaluation and account monitoring procedures are intended to minimize bad debt risk. Collateral is not generally required.
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 15. Commitments and Contingencies
Operating leases
The Company has commitments under operating leases primarily for office
space, motor vehicles and various items of computer and office equipment. The leases are expected to be renewed and replaced in the normal course of business. Rental expense was $5.2 million in 2016, $4.5 million in 2015 and
$3.7 million in 2014. Future commitments under
non-cancelable
operating leases are as follows:
|
|
|
|
|
(in millions)
|
|
|
|
2017
|
|
$
|
4.5
|
|
2018
|
|
|
3.6
|
|
2019
|
|
|
2.2
|
|
2020
|
|
|
1.5
|
|
2021
|
|
|
1.0
|
|
Thereafter
|
|
|
4.5
|
|
|
|
|
|
|
|
|
$
|
17.3
|
|
|
|
|
|
|
Environmental remediation obligations
Commitments in respect of environmental remediation obligations are disclosed
in Note 12 of the Notes to the Consolidated Financial Statements.
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 items could in the aggregate have a material adverse effect on 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 December 31, 2016, such guarantees which are not recognized as liabilities in the consolidated financial statements amounted to $4.7 million.
88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Under the terms of the guarantee arrangements, generally the Company would be required to perform should
the affiliated company fail to fulfill 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.
Note 16. Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
(number of shares in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
At January 1
|
|
|
29,555
|
|
|
|
29,555
|
|
|
|
29,555
|
|
|
|
5,453
|
|
|
|
5,263
|
|
|
|
5,208
|
|
Exercise of options
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(152
|
)
|
|
|
(152
|
)
|
|
|
(105
|
)
|
Stock purchases
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
182
|
|
|
|
342
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31
|
|
|
29,555
|
|
|
|
29,555
|
|
|
|
29,555
|
|
|
|
5,483
|
|
|
|
5,453
|
|
|
|
5,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, the Company had
authorized common stock of 40,000,000 shares (2015 40,000,000). Issued shares at December 31, 2016, were 29,554,500 (2015 29,554,500) and treasury stock amounted to 5,483,341 shares (2015 5,453,078).
Note 17. Stock-Based Compensation Plans
Stock option plans
The Company has five active stock option plans, two of which
provide for the grant of stock options to employees, one provides for the grant of stock options to
non-employee
directors, and another provides for the grant of stock options to key executives on a matching
basis provided they use a proportion of their annual bonus to purchase common stock in the Company on the open market or from the Company. The fifth plan is a savings plan which provides for the grant of stock options to all Company employees
provided they commit to make regular savings over a
pre-defined
period which can then be used to purchase common stock upon vesting of the options. The stock options have vesting periods ranging from
24 months to 6 years and in all cases stock options granted expire within 10 years of the date of grant. All grants are at the sole discretion of the Compensation Committee of the Board of Directors. Grants may be priced at market value or at a
premium or discount. The aggregate number of shares of common stock reserved for issuance which can be granted under the plans is 2,640,000.
The fair value of stock options is measured on the grant date using either the Black-Scholes model, or in cases where performance criteria are dependent
upon external factors such as the
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Companys stock price, using a Monte Carlo model. The following weighted average assumptions were used to determine the grant-date fair value of options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Dividend yield
|
|
|
1.38
|
%
|
|
|
1.03
|
%
|
|
|
1.34
|
%
|
Expected life
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
Volatility
|
|
|
25.11
|
%
|
|
|
25.5
|
%
|
|
|
30.7
|
%
|
Risk free interest rate
|
|
|
0.91
|
%
|
|
|
1.05
|
%
|
|
|
0.97
|
%
|
The following table summarizes the
transactions of the Companys stock option plans for the year ended December 31, 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
|
|
|
(151,164
|
)
|
|
$
|
14.38
|
|
|
$
|
19.63
|
|
Forfeited
|
|
|
(37,621
|
)
|
|
$
|
14.49
|
|
|
$
|
24.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
570,994
|
|
|
$
|
20.38
|
|
|
$
|
21.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, there were 68,796
stock options that were exercisable, 20,417 had performance conditions attached.
The Companys policy is to issue shares from treasury stock to holders of stock options who exercise those options, but if sufficient treasury stock is not available, the Company will issue
previously unissued shares of stock to holders of stock options who exercise options.
The stock option compensation cost for 2016, 2015 and 2014 was $3.3 million, $3.7 million and $2.6 million, respectively. The total intrinsic value of options exercised in 2016, 2015 and
2014 was $2.8 million, $2.4 million and $0.9 million, respectively.
The total compensation cost related to
non-vested
stock options not yet recognized at December 31, 2016 was $3.6 million and this cost is expected to be
recognized over the weighted-average period of 1.92 years.
The
cash tax benefit realized from stock option exercises totaled $0.9 million, $1.3 million and $0.9 million in 2016, 2015 and 2014, respectively. The excess tax benefit classified in financing activities was $1.0 million,
$0.5 million and $0.4 million in 2016, 2015 and 2014, respectively.
No stock options awards were modified in 2016, 2015 or 2014.
90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Stock equivalent units
The Company awards Stock Equivalent Units (SEUs) from time to
time as a long-term performance incentive. SEUs are cash settled equity instruments conditional on certain performance criteria and linked to the Innospec Inc. share price. SEUs have vesting periods ranging from 11 months to 4 years and in all cases
SEUs granted expire within 10 years of the date of grant. Grants may be priced at market value or at a premium or discount. There is no limit to the number of SEUs that can be granted. As at December 31, 2016 the liability for SEUs of
$9.8 million is located in accrued liabilities in the consolidated balance sheets until they are cash settled.
The fair value of SEUs is measured at the balance sheet date using either the Black-Scholes model, or in cases where performance criteria are dependent upon external factors such as the Companys
stock price, using a Monte Carlo model. The following assumptions were used to determine the fair value of SEUs at the balance sheet dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Dividend yield
|
|
|
0.98
|
%
|
|
|
1.12
|
%
|
|
|
1.29
|
%
|
Volatility
|
|
|
25.2
|
%
|
|
|
24.6
|
%
|
|
|
26.0
|
%
|
Risk free interest rate
|
|
|
1.47
|
%
|
|
|
1.31
|
%
|
|
|
1.10
|
%
|
The following table summarizes the
transactions of the Companys SEUs for the year ended December 31, 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
|
|
|
$
|
36.05
|
|
at market value
|
|
|
7,316
|
|
|
$
|
44.18
|
|
|
$
|
9.11
|
|
Exercised
|
|
|
(66,424
|
)
|
|
$
|
4.32
|
|
|
$
|
27.28
|
|
Forfeited
|
|
|
(10,980
|
)
|
|
$
|
3.61
|
|
|
$
|
31.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
279,815
|
|
|
$
|
3.77
|
|
|
$
|
33.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, there were 48,964
SEUs that were exercisable, 46,260 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 2016, 2015 and 2014 was $4.7 million, $4.9 million and $2.0 million, respectively. The total intrinsic value
of SEUs exercised in 2016, 2015 and 2014 was $1.8 million, $2.4 million and $3.7 million, respectively.
The weighted-average remaining vesting period of
non-vested
SEUs is 1.40 years.
91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Additional exceptional long-term incentive plan
In the first quarter of 2014, Innospec implemented an additional exceptional
long-term incentive plan to reward selected executives with a cash bonus for delivering exceptional performance. One of the elements of the plan is payable only if the Innospec share performance matches or
out-performs
that of competitors, as measured by the Russell 2000 Total Return Index, over the performance period January 1, 2014 to December 31, 2016. The maximum cash bonus payable under this
element of the plan is $3.0 million and is accounted for as share-based compensation. The fair value of these liability cash-settled long-term incentives was calculated to be $3.0 million as at December 31, 2016. Payment of the
liability is expected in the first quarter of 2017.
Note
18. Reclassifications out of Accumulated Other Comprehensive Loss
Reclassifications out of accumulated other comprehensive loss for 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
|
|
$
|
(1.1
|
)
|
|
See
(1)
below
|
Amortization of actuarial net losses
|
|
|
2.6
|
|
|
See
(1)
below
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
Total before tax
|
|
|
|
(0.3
|
)
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
1.2
|
|
|
Net of tax
|
|
|
|
|
|
|
|
(1)
|
These items are included in the computation of net periodic pension cost. See Note 9 of the Notes to the Consolidated Financial Statements for additional information.
|
Changes in accumulated other comprehensive loss for
2016, net of tax, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Derivative
Instruments
|
|
|
Defined
Benefit
Pension
Plan Items
|
|
|
Cumulative
Translation
Adjustments
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
0.0
|
|
|
$
|
(50.9
|
)
|
|
$
|
(60.0
|
)
|
|
$
|
(110.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) before reclassifications
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
(20.5
|
)
|
|
|
(20.2
|
)
|
Amounts reclassified from AOCL
|
|
|
0.0
|
|
|
|
1.2
|
|
|
|
0.0
|
|
|
|
1.2
|
|
Actuarial net gains arising during the year
|
|
|
0.0
|
|
|
|
3.7
|
|
|
|
0.0
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income/(loss)
|
|
|
0.3
|
|
|
|
4.9
|
|
|
|
(20.5
|
)
|
|
|
(15.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
0.3
|
|
|
$
|
(46.0
|
)
|
|
$
|
(80.5
|
)
|
|
$
|
(126.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 19. Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers (Topic 606) (ASU
2014-09),
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
2015-09
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 (Topic 606) 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 is currently
evaluating the timing of its adoption and the impact of adopting the new revenue standard on its consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update (ASU)
No. 2015-17,
Balance Sheet
Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. ASU
2015-17
requires that deferred tax assets and liabilities be classified as noncurrent in a classified
balance sheet ASU
2015-17
is effective for financial statements issued for fiscal years beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. ASU
2015-17
may be either applied prospectively or retrospectively to all periods presented. We have elected to early adopt ASU
2015-17
prospectively in the fourth quarter
of 2016 as it provides for a more simplified presentation of deferred tax balances. As a result, we have presented all deferred tax assets and liabilities as non-current on our consolidated balance sheet as of December 31, 2016, but have not
reclassified current deferred tax assets and liabilities on our consolidated balance sheet as of December 31, 2015.
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.
In
March 2016, the FASB issued Accounting Standards Update (ASU)
2016-09,
Improvements to Employee Share-based Payment Accounting, which amends ASC Topic 718, Compensation Stock Compensation. The ASU
includes provisions intended to simplify various aspects related to how Share-based payments are accounted for and presented in the
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
financial statements. ASU
2016-09
is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that
reporting period. Early adoption is permitted. The Company has determined that the new standard will not have a significant effect on its ongoing financial reporting and will adopt the new standard for the year ended December 31, 2017.
In October 2016, the FASB issued Accounting Standards Update
(ASU)
2016-16,
Accounting for Income Taxes: Intra-Entity Asset Transfers other than Inventory. The ASU is intended to simplify the taxation of certain intra-entity sales of assets. ASU
2016-16
is effective for financial statements issued for fiscal years beginning after December 15, 2017 (and interim periods within those fiscal years) with early adoption permitted. The Company has not chosen
early adoption of ASU
2016-16
and has determined that the new standard will not have a significant effect on its ongoing financial reporting.
Note 20. 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 2016, 2015 and 2014 the Company incurred fees payable to
SGR of $0.5 million, $0.3 million and $1.1 million, respectively. As at December 31, 2016, the amount due to SGR from the Company was $0.0 million (December 31, 2015 $0.1 million).
Note 21. Subsequent Events
The Company has evaluated subsequent events through the date that the
consolidated financial statements were issued, and has concluded that no additional disclosures are required in relation to events subsequent to the balance sheet date.
94