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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
 
  
ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
  
For the fiscal year ended December 31, 2020
   
 
  
or
   
  
TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
Commission file number
1-13879
INNOSPEC INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
  
98-0181725
State or other jurisdiction of
incorporation or organization
  
(I.R.S. Employer
Identification No.)
   
8310 South Valley Highway
Suite 350
Englewood
Colorado
  
80112
(Address of principal executive offices)
  
(Zip Code)
Registrant’s telephone number, including area code:
(303) 792 5554
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
 
Title of each class
 
Trading Symbol(s)
 
Name 
of each exchange on which registered
Common stock, par value $0.01 per share
 
IOSP
 
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
 
Title of each class
  
Name of each exchange on which registered
N/A
  
N/A
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  
    No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  
    No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated
filer
 
  
Smaller reporting company
 
Emerging growth company
 
  
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act.
    ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).
Yes  ☐    No  
The aggregate market value of the voting and
non-voting
common equity held by
non-affiliates
of the registrant as of the most recently completed second fiscal quarter (June 30, 2020) was approximately $1,061 million, based on the closing price of the common shares on the NASDAQ on June 30, 2020. Shares of common stock held by each officer and director and by each beneficial owner who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of February 10, 2021, 24,598,689 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Innospec Inc.’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 5, 2021 are incorporated by reference into Part III of this Form
10-K.

TABLE OF CONTENTS
 
  
 
2
 
     
Item 1
  
  
 
2
 
Item 1A
  
  
 
9
 
Item 1B
  
  
 
21
 
Item 2
  
  
 
22
 
Item 3
  
  
 
23
 
Item 4
  
  
 
23
 
   
  
 
24
 
     
Item 5
  
  
 
24
 
Item 6
  
  
 
26
 
Item 7
  
  
 
28
 
Item 7A
  
  
 
48
 
Item 8
  
  
 
51
 
Item 9
  
  
 
101
 
Item 9A
  
  
 
101
 
Item 9B
  
  
 
102
 
   
  
 
102
 
     
Item 10
  
  
 
102
 
Item 11
  
  
 
103
 
Item 12
  
  
 
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Item 13
  
  
 
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Item 14
  
  
 
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Item 15
  
  
 
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Item 16
  
  
 
108
 
   
  
 
109
 

CAUTIONARY STATEMENT RELATIVE TO FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
This Form
10-K
contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Such forward-looking statements include statements (covered by words like “expects,” “estimates,” “anticipates,” “may,” “could,” “believes,” “feels,” “plan,” “intend” or similar words or expressions, for example) which relate to earnings, growth potential, operating performance, events or developments that we expect or anticipate will or may occur in the future. Although forward-looking statements are believed by management to be reasonable when made, they are subject to certain risks, uncertainties and assumptions, including, the effects of the
COVID-19
pandemic, such as its duration, its unknown long-term economic impact, measures taken by governmental authorities to address it and the manner in which the pandemic may precipitate or exacerbate other risks and/or uncertainties, and our actual performance or results may differ materially from these forward-looking statements. You are urged to review our discussion of risks and uncertainties that could cause actual results to differ from forward-looking statements under the heading “Risk Factors.” Innospec undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
1

PART I
 
Item 1
Business
When we use the terms “Innospec,” “the Corporation,” “the Company,” “Registrant,” “we,” “us” and “our,” we are referring to Innospec Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.
General
Innospec develops, manufactures, blends, markets and supplies specialty chemicals for use as fuel additives, ingredients for personal care, home care, agrochemical, metal extraction and other applications and oilfield chemicals. Our products are sold primarily to oil and gas exploration and production companies, oil refiners, fuel manufacturers and users, formulators of personal care, home care, agrochemical and metal extraction formulations, and other chemical and industrial companies throughout the world. Our Fuel Specialties business offers fuel additives to help improve fuel efficiency, boost engine performance and reduce harmful emissions. Our Performance Chemicals business provides effective technology-based solutions for our customers’ processes or products focused in the Personal Care, Home Care, Agrochemical and Metal Extraction markets. Our Oilfield Services business supplies drilling, completion and production chemicals which make exploration and production more effective, cost-efficient and environmentally friendly. Our Octane Additives business previously manufactured a fuel additive for use in automotive gasoline until it ceased trading on June 30, 2020.
Segment Information
The Company reports its financial performance based on the four reportable segments described as follows:
 
   
Fuel Specialties
 
   
Performance Chemicals
 
   
Oilfield Services
 
   
Octane Additives (ceased trading June 30, 2020)
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 has ceased trading and is no longer a reporting segment from July 1, 2020, as reported in our Quarterly Report on Form
10-Q
for the quarter ended June 30, 2020.
For financial information about each of our segments, see Note 3 of the Notes to the Consolidated Financial Statements.
 
2

Fuel Specialties
Our Fuel Specialties segment develops, manufactures, blends, markets and supplies a range of specialty chemical products used as additives to a wide range of fuels. These fuel additive products help improve fuel efficiency, boost engine performance and reduce harmful emissions; and are used in the efficient operation of automotive, marine and aviation engines, power station generators, and heating oil.
The segment has grown organically through our development of new products to address what we believe are the key drivers in demand for fuel additives. These drivers include increased demand for fuel, focus on fuel economy, changing engine technology and legislative developments. We have also devoted substantial resources towards the development of new and improved products that may be used to improve combustion efficiency.
Our customers in this segment include national oil companies, multinational oil companies and fuel retailers.
Performance Chemicals
Our Performance Chemicals segment provides effective technology-based solutions for our customers’ processes or products focused in the Personal Care, Home Care, Agrochemical and Metal Extraction markets.
This segment has grown through acquisitions, and the development and marketing of innovative products. The focus for our Performance Chemicals segment is to develop high performance products from its technology base in a number of targeted markets.
Our customers in this segment include large multinational companies, manufacturers of personal care and household products and specialty chemical manufacturers operating in agrochemical, metal extraction and other industrial applications.
Oilfield Services
Our Oilfield Services segment develops and markets chemical solutions for fracturing, stimulation and completion operations, products for oil and gas production which aid flow assurance and maintain asset integrity and products to prevent loss of mud in drilling operations.
This segment had been growing strongly in recent years until the
COVID-19
pandemic adversely impacted customer demand in 2020. We expect increased customer activity to return as the global demand for fuel increases and oil prices return to the
pre-pandemic
levels.
Our customers in this segment include multinational public and independent companies operating currently principally in the Americas.
 
3

Octane Additives
The Octane Additives segment has ceased trading and is no longer a reporting segment from July 1, 2020. Previously our Octane Additives segment produced tetra ethyl lead (“TEL”) for use in automotive gasoline and provided services in respect of environmental remediation to manage the cleanup of redundant TEL facilities as refineries completed the transition to unleaded gasoline. The expected activities to clean up redundant TEL facilities have been provided for in the second quarter of 2020.
Legacy costs related to these operations are now being recorded as operating expenses within corporate costs.
Strategy
Our strategy is to develop new and improved products and technologies to continue to strengthen and increase our market positions within our Fuel Specialties, Performance Chemicals and Oilfield Services segments. We also actively continue to assess potential strategic acquisitions, partnerships and other opportunities that would enhance and expand our customer offering. We focus on opportunities that would extend our technology base, geographical coverage or product portfolio. We believe that focusing on the Fuel Specialties, Performance Chemicals and Oilfield Services segments, in which the Company has existing experience, expertise and knowledge, provides opportunities for positive returns on investment with reduced operating risk. We also continue to develop our geographical footprint, consistent with the development of global markets.
Geographical Area Information
Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.
Working Capital
The nature of our customers’ businesses generally requires us to hold appropriate amounts of inventory in order to be able to respond quickly to customers’ needs. We therefore require corresponding amounts of working capital for normal operations. We do not believe that this is materially different to our competitors, with the exception of cetane number improvers, in which case we maintain high enough levels of inventory, as required, to retain our position as market leader in sales of these products.
The purchase of large amounts of certain raw materials across all our segments can create some variations in working capital requirements, but these are planned and managed by the business.
We do not believe that our terms of sale, or purchase, differ markedly from those of our competitors.
 
4

Raw Materials and Product Supply
We use a variety of raw materials and chemicals in our manufacturing and blending processes and believe that sources for these are adequate for our current operations. Our major purchases are oleochemicals and derivatives, cetane number improvers, ethylene, various solvents, amines, alcohols, olefin and polyacrylamides.
These purchases account for a substantial portion of the Company’s variable manufacturing costs. These materials are, with the exception of ethylene for our operations in Germany, readily available from more than one source. Although ethylene is, in theory, available from several sources, it is not permissible to transport ethylene by road in Germany. As a result, we source ethylene for our German operations via a direct pipeline from a neighboring site, making it effectively a single source. Ethylene is used as a primary raw material for our German operations in products representing approximately 4% of Innospec’s sales.
We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. From time to time, for some raw materials, the risk of cost increases is managed with commodity swaps.
We continue to monitor the situation and adjust our procurement strategies as we deem appropriate. The Company forecasts its raw material requirements substantially in advance, and seeks to build long-term relationships and contractual positions with supply partners to safeguard its raw material positions. In addition, the Company operates an extensive risk management program which seeks to source key raw materials from multiple sources and to develop suitable contingency plans.
Intellectual Property
Our intellectual property, including trademarks, patents and licenses, forms a significant part of the Company’s competitive advantage, particularly in the Fuel Specialties, Oilfield Services and Performance Chemicals segments. The Company does not, however, consider its business as a whole to be dependent on any one trademark, patent or license.
The Company has a portfolio of trademarks and patents, both granted and in the application stage, covering products and processes in several jurisdictions. The majority of these patents were developed by the Company and, subject to maintenance obligations including the payment of renewal fees, have at least 10 years life remaining.
The trademark “Innospec and the Innospec device” in Classes 1, 2 and 4 of the “International Classification of Goods and Services for the Purposes of the Registration of Marks” are registered in all jurisdictions in which the Company has a significant market presence. The Company also has trademark registrations for certain product names in all jurisdictions in which it has a significant
market presence.
 
5

We actively protect our inventions, new technologies, and product developments by filing patent applications and maintaining trade secrets. In addition, we vigorously participate in patent opposition proceedings around the world where necessary to secure a technology base free from infringement of intellectual property.
Competition
Certain markets in which the Company operates are subject to significant competition. The Company competes on the basis of a number of factors including, but not limited to, product quality and performance, specialized product lines, customer relationships and service, and regulatory expertize.
Fuel Specialties:
Fuel Specialties is generally characterized by a small number of competitors, none of which hold a dominant position. We consider our competitive edge to be our proven technical development capacity, independence from major oil companies and strong long-term customer relationships. We believe we remain the world’s only producer of TEL for use in aviation gasoline, which we market as our AvTel product line.
Performance Chemicals:
Within the Performance Chemicals segment we operate in the Personal Care, Home Care, Agrochemical and Metal Extraction markets which are highly fragmented, and the Company experiences substantial competition from a large number of multinational and specialty chemical suppliers in each geographical market. Our competitive position in these markets is based on us supplying a superior, diverse product portfolio which solves particular customer problems or enhances the performance of new or existing products. In a number of specialty chemicals markets, we also supply niche product lines, where we enjoy market-leading positions.
Oilfield Services:
Our Oilfield Services segment is very fragmented and although there are a small number of very large competitors, there are also a large number of smaller players focused on specific technologies or regions. Our competitive strength is our proven technology, broad regional coverage and strong customer relationships.
Octane Additives:
Production and sales of TEL for use in automotive gasoline have ceased and therefore Octane Additives is no longer a reporting segment from July 1, 2020.
Research, Development, Testing and Technical Support
Research, product/application development and technical support (“R&D”) provide the basis for the growth of our Fuel Specialties, Performance Chemicals and Oilfield Services segments. Accordingly, the Company’s R&D activity has been, and will continue to be, focused on the development of new products and formulations. Our R&D department provides technical support for all of our reporting segments. Expenditures to support R&D services were $30.9 million, $35.4 million and $33.4 million in 2020, 2019 and 2018, respectively.
We believe that our proven technical capabilities provide us with a significant competitive advantage. Our Performance Chemicals business has launched significant new mild surfactants
 
6

based on isethionate and taurate chemistry which are well aligned with developing customer needs. In addition, the business has developed further formulations in emollients, silicones and surfactants for the personal care, homecare, agrochemical and metal extraction markets. Fuel Specialties has continued to innovate focused on bringing new technologies to market which reduce pollution and improve fuel economy, including detergents and cold flow improvers. In Oilfield Services, new technologies have been introduced to improve the hydrocarbon yield from customers’ operations and to protect assets, including friction modifiers, biocide formulations and additives to improve drilling muds.
Health, Safety and Environmental Matters
We are subject to environmental laws in the countries in which we operate and conduct business. Management believes that the Company is in material compliance with applicable environmental laws and has made the necessary provisions for the continued costs of compliance with environmental laws.
Our principal site giving rise to environmental remediation liabilities is our Ellesmere Port manufacturing site in the United Kingdom. There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe. At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed.
We recognize environmental remediation 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. This involves anticipating the program of work and the associated future expected costs, and so involves the exercise of judgment by management. We regularly review the future expected costs of remediation and the current estimate is reflected in Note 13 of the Notes to the Consolidated Financial Statements.
The European Union (“E.U.”) legislation known as the Registration, Evaluation and Authorization of Chemical Substances Regulations (“REACH”) requires most of the substances in the Company’s products to be registered with the European Chemicals Agency. Under this legislation the Company has to demonstrate that the substances it uses in its products are safe for use and appropriate for their intended purposes in the E.U.. During this registration and continual evaluation process, the Company incurs expense to test and register substances it manufactures or imports in the E.U..
Following the end of the Brexit transition process, on January 11, 2021 the United Kingdom (“U.K.”) government introduced U.K. REACH with the same registration requirements for substances produced in or imported into the U.K.. Furthermore, globally, similar regulatory regimes to the E.U. and U.K. REACH are also entering into force or are being proposed in several other countries. These registration based regulatory regimes will result in increasing test expenses and registration fees to ensure Innospec products remain compliant with the appropriate regulations and can continue to be sold in these markets.
 
7

Employees and Human Capital Management
 
The Company had approximately 1900 employees in 24 countries as at December 31, 2020.
Human capital management is critical to Innospec’s ongoing business success, which requires investing in our people. Our aim is to create a highly engaged and motivated workforce where employees are inspired by leadership, engaged in purpose-driven, meaningful work and have opportunities for growth and development.
An effective approach to human capital management requires that we invest in talent, development, culture and employee engagement. We aim to create an environment where our employees are encouraged to make positive contributions and fulfill their potential.
Diversity and Inclusion
Innospec aims to attract and retain the best people by ensuring that employment decisions are based on merit, performance and contribution to the Company. As part of our Global HR Policy, our diversity and equal opportunities policy ensures that current and prospective employees receive equal opportunities irrespective of gender, sexual orientation, race, color, ethnic or national origin, marital status, age, disability, religion or belief.
 
Available Information
Our corporate web site is
www.innospec.com
. We make available, free of charge, on or through this web site our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the U.S. Securities and Exchange Commission (“SEC”). In addition, the SEC maintains an internet site at
www.sec.gov
that contains reports, proxy and information statements, and other information that we file electronically with the SEC and state the address of that site.
The Company routinely posts important information for investors on its web site (under Investors). The Company uses this web site as a means of disclosing material,
non-public
information and for complying with its disclosure obligations under SEC Regulation FD (“Fair Disclosure”). Accordingly, investors should monitor the Investors portion of the Company’s web site, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.
 
8

Item 1A
Risk Factors
The factors described below represent the principal risks associated with our business.
Global Conditions
The
COVID-19
pandemic has had, and is expected to continue to have, an adverse impact on our business, results of operations, financial position and cash flows.
We have been closely monitoring the impact of the
COVID-19
pandemic on all aspects of our business, including how it has and will impact our customers, employees, supply chain, and distribution network. The effects of
COVID-19
on the global economic environment have impacted, and are expected to continue to impact, the results of the Company significantly, particularly with respect to reduced demand within our Fuel Specialties and Oilfield Services segments, and we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. The further extent to which our operations may be impacted by the
COVID-19
pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted. These include, but are not limited to, the availability and productivity of our employees, the duration and severity of the pandemic; government restrictions on businesses and individuals; the impact of the pandemic on our customers’ businesses and the resulting demand for our products; the impact on our suppliers and supply chain network; the impact on global economies, including the possibility of recession and depression, and the timing and rate of economic recovery; the development of treatments and vaccines; and potential adverse effects on the financial markets.
The impact of
COVID-19,
as well as future pandemics or resurgences, may also exacerbate other risks discussed herein, any of which could have a material effect on us. This situation is changing rapidly and additional impacts that may occur are currently unknown.
Competition and market conditions may adversely affect our operating results.
In certain markets, our competitors are larger than us and may have greater access to financial, technological and other resources. As a result, competitors may be better able to adapt to changes in conditions in our industries, fluctuations in the costs of raw materials or changes in global economic conditions. Competitors may also be able to introduce new products with enhanced features that may cause a decline in the demand and sales of our products. Consolidation of customers or competitors, or economic problems of customers in our markets could cause a loss of market share for our products, place downward pressure on prices, result in payment delays or
non-payment,
or declining plant utilization rates. These risks could adversely impact our results of operations, financial position and cash flows.
Economic, political and operational developments related to the departure of the United Kingdom from the European Union may adversely affect our business.
The U.K. ceased to be a member of the E.U. on January 31, 2020 (“Brexit”). During a prescribed period, certain transitional arrangements were in effect, such that the U.K. continued to be treated,
 
9

in most respects, as if it were still a member of the E.U., and generally remained subject to E.U. law. On December 24, 2020, the E.U. and the U.K. reached an agreement in principle on the terms of certain agreements and declarations governing the ongoing relationship between the E.U. and the U.K., including the
E.U.-U.K.
Trade and Cooperation Agreement (the “Agreement”). The Agreement itself is limited in its scope to primarily the trade of goods, transport, energy links and fishing, and uncertainties remain relating to certain aspects of the U.K.’s future economic, trading and legal relationships with the E.U. and with other countries. The departure of the U.K. from the E.U. Single Market and Customs Union (as well as all E.U. policies and international agreements) has ended free movement of goods between the U.K. and the E.U., creating
non-tariff
and quota barriers (such as customs checks at the borders between the E.U. and the U.K.) to trade in goods, resulting in increased disruption and cost to businesses and requiring adjustments to integrated E.U.- U.K. supply chains. Moreover, the free movement of persons, services and capital between the U.K. and the E.U. ended on January 1, 2021, which has meant the loss for U.K. suppliers of services of their automatic right to offer such services across the E.U..
The actual or potential consequences of the Agreement, and the associated uncertainty, could adversely affect economic and market conditions in the U.K., in the E.U. and its member states and elsewhere, and could contribute to instability in global financial markets. Until the level of disruption and additional cost to trading in goods and services and to the movement of persons and capital between the U.K. and the E.U. can be properly evaluated, it is not possible for us to determine the impact that the departure of the U.K. from the E.U. Single Market and Customs Union may have on us.
These developments may adversely impact our results of operations, financial position and cash flows.
Continuing adverse global economic conditions could materially affect our current and future businesses.
Global economic factors affecting our business include, but are not limited to, geopolitical instability in some markets, miles driven by passenger and commercial vehicles, legislation to control fuel quality, impact of alternative propulsion systems, consumer demand for premium personal care and cosmetic products, and oil and gas drilling and production rates. The availability, cost and terms of credit have been, and may continue to be, adversely affected by the foregoing factors and these circumstances have produced, and may in the future result in, illiquid markets and wider credit spreads, which may make it difficult or more expensive for us to obtain credit.
Demand for all of our products may be adversely impacted by the continuing impact of the
COVID-19
pandemic which will continue to create uncertainty in the markets in 2021 and possibly beyond.
Continuing uncertainties in the U.S. and international markets and economies leading to a decline in business and consumer spending could adversely impact our results of operations, financial position and cash flows.
 
10

Domestic or international natural disasters, pandemics or terrorist attacks may disrupt our operations, decrease the demand for our products or otherwise have an adverse impact on our business.
Chemical related assets, and U.S. corporations such as us, may be at greater risk of future terrorist attacks than other possible targets in the U.S., the United Kingdom and throughout the world. Extraordinary events such as natural disasters and pandemics may negatively affect local economies, including those of our customers or suppliers. The occurrence and consequences of such events cannot be predicted, but they can adversely impact economic conditions in general and in our specific markets. The resulting damage from such events could include loss of life, severe injury and property damage or site closure. Any of these matters could adversely impact our results of operations, financial position and cash flows.
While Innospec maintains business continuity plans that are intended to allow it to continue operations or mitigate the effects of events that could disrupt its business, Innospec cannot provide assurances that its plans would fully protect it from all such events. In addition, insurance maintained by Innospec to protect against property damage, loss of business and other related consequences resulting from catastrophic events is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of Innospec’s damages or damages to others in the event of a catastrophe. In addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.
Business Operations
We face risks related to our foreign operations that may adversely affect our business.
We serve global markets and operate in certain countries with political and economic instability, including the Middle East, Northern Africa, Asia-Pacific, Eastern Europe and South American regions. Our international operations are subject to numerous international business risks including, but not limited to, geopolitical and economic conditions, risk of expropriation, import and export restrictions, trade wars, exchange controls, national and regional labor strikes, high or unexpected taxes, government royalties and restrictions on repatriation of earnings or proceeds from liquidated assets of overseas subsidiaries. Any of these could have a material adverse impact on our results of operations, financial position and cash flows.
We may not be able to consummate, finance or successfully integrate future acquisitions, partnerships or other opportunities into our business, which could hinder our strategy or result in unanticipated expenses and losses.
Part of our strategy is to pursue strategic acquisitions, partnerships and other opportunities to complement and expand our existing business. The success of these transactions depends on our ability to efficiently complete transactions, integrate assets and personnel acquired in these transactions and apply our internal control processes to these acquired businesses. Consummating acquisitions, partnerships or other opportunities and integrating acquisitions
 
11

involves considerable expense, resources and management time commitments, and our failure to manage these as intended could result in unanticipated expenses and losses. Post-acquisition integration may result in unforeseen difficulties and may deplete significant financial and management resources that could otherwise be available for the ongoing development or expansion of existing operations. Furthermore, we may not realize the benefits of an acquisition in the way we anticipated when we first entered the transaction. Any of these risks could adversely impact our results of operations, financial position and cash flows.
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
Our future success will depend in substantial part on the continued services of our senior management. The loss of the services of one or more of our key executive personnel could affect the implementation of our business plan and result in reduced profitability. Our future success also depends on the continued ability to attract, develop, retain and motivate highly-qualified technical, sales and support staff. We cannot guarantee that we will be able to retain our key personnel or attract or retain qualified personnel in the future. If we are unsuccessful in our efforts in this regard, this could adversely impact our results of operations, financial position and cash flows.
An information technology system failure may adversely affect our business.
We rely on information technology systems to transact our business. Like other global companies, we have, from time to time, experienced threats to our data and systems. Although we have implemented administrative and technical controls and take protective actions to reduce the risk of cyber incidents and breaches of our information technology, and we endeavor to modify such procedures as circumstances warrant, such measures may be insufficient to prevent physical and electronic
break-ins,
cyber-attacks or other security breaches to our computer systems.
Our systems, processes, software and network may be vulnerable to internal or external security breaches, computer viruses, malware or other malicious code or cyber-attack, catastrophic events, power interruptions, hardware failures, fire, natural disasters, human error, system failures and disruptions, and other events that could have security consequences. An information technology failure or disruption could prevent us from being able to process transactions with our customers, operate our manufacturing facilities, and properly report those transactions in a timely manner. Our information technology costs may increase to ensure the appropriate level of cyber security as we continuously adapt to the changing technological environment.
Whilst we have limited insurance coverage in place that may, subject to policy terms and conditions, cover certain aspects of cyber risks, this insurance coverage is subject to certain limitations and may not be applicable to a particular incident or otherwise be sufficient to cover all our losses beyond any coverage limitations. Furthermore, a significant or protracted information technology system failure may result in a material adverse effect on our results of operations, financial position and cash flows.
 
12

Decline in our TEL business
The Octane Additives business has ceased trading and is no longer a reporting segment from July 1, 2020 as the production of TEL for use in motor gasoline has finished. Legacy costs related to these operations are now being recorded as operating expenses within corporate costs.
The continued sales of TEL for use in aviation fuel (“AvTel”) are recorded within our Fuel Specialties business. The piston aviation industry has been, and is currently, researching a safe replacement fuel to replace leaded fuel. The Federal Aviation Administration program (Piston Aviation Fuels Initiative) has been established to identify a replacement and candidate fuels are at an early
pre-screening
stage. This process is currently suspended and anticipated to restart in 2021. The timescale beyond this stage is unclear, but the full testing program will, of necessity, be long and comprehensive.
While we expect that at some point in the future a replacement fuel will be identified, trialed and supplied to the industry, there is no currently available alternative. In addition, there is no clear timescale on the legislation of a replacement product. If a suitable product is identified and the use of leaded fuel is prohibited in piston aviation the Company’s future operating income and cash flows from operating activities would be adversely impacted.
Failure to protect our intellectual property rights could adversely affect our future performance and cash flows.
Failure to maintain or protect our intellectual property rights may result in the loss of valuable technologies, or us having to pay other companies for infringing on their intellectual property rights. Measures taken by us to protect our intellectual property may be challenged, invalidated, circumvented or rendered unenforceable. In addition, international intellectual property laws may be more restrictive or may offer lower levels of protection than under U.S. law. We may also face patent infringement claims from our competitors which may result in substantial litigation costs, claims for damages or a tarnishing of our reputation even if we are successful in defending against these claims, which may cause our customers to switch to our competitors. Any of these events could adversely impact our results of operations, financial position and cash flows.
Industry Matters
Trends in oil and gas prices affect the level of exploration, development and production activity of our customers, and the demand for our services and products, which could have a material adverse impact on our business.
Demand for our services and products in our Oilfield Services business is particularly sensitive to the level of exploration, development and production activity of, and the corresponding capital spending by, oil and gas companies. The level of exploration, development and production activity is directly affected by trends in demand for and prices of oil and gas, which historically have been volatile and are likely to continue to be volatile.
 
13

Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty, and a variety of other economic and political factors that are beyond our control. Even the perception of longer-term lower oil and gas prices by oil and gas companies can similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects. Factors affecting the prices of oil and gas include the level of supply and demand for oil and gas, governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and gas reserves, weather conditions and natural disasters, worldwide political, military, and economic conditions, the level of oil and gas production by
non-OPEC
(“Organization of the Petroleum Exporting Countries”) countries and the available excess production capacity within OPEC, the cost of producing and delivering oil and gas and potential acceleration of the development of alternative power generation, fuels and engine technologies. Any prolonged reduction in oil and gas prices will depress the immediate levels of exploration, development, and production activity which could have a material adverse impact on our results of operations, financial position and cash flows.
We could be adversely affected by technological changes in our industry.
Our ability to maintain or enhance our technological capabilities, develop and market products and applications that meet changing customer requirements, and successfully anticipate or respond to technological changes in a cost effective and timely manner will likely impact our future business success. We compete on a number of fronts including, but not limited to, product quality and performance. In the case of some of our products, our competitors are larger than us and may have greater access to financial, technological and other resources. Technological changes include, but are not limited to, the development of electric and hybrid vehicles, and the subsequent impact on the demand for gasoline and diesel. Our inability to maintain a technological edge, innovate and improve our products could cause a decline in the demand and sales of our products, and adversely impact our results of operations, financial position and cash flows.
Sharp and unexpected fluctuations in the cost of our raw materials and energy could adversely affect our profit margins.
We use a variety of raw materials, chemicals and energy in our manufacturing and blending processes. Many of these raw materials are derived from petrochemical-based and vegetable-based feedstocks which can be subject to periods of rapid and significant cost instability. These fluctuations in cost can be caused by political instability in oil producing nations and elsewhere, weather conditions or other factors influencing global supply and demand of these materials, over which we have little or no control. We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. From time to time, we have entered into hedging arrangements for certain utilities and raw materials, but do not typically enter into hedging arrangements for all raw materials, chemicals or energy costs. If the costs of raw materials, chemicals or energy increase, and we are not able to pass on these cost
 
14

increases to our customers, then profit margins and cash flows from operating activities would be adversely impacted. If raw material costs increase significantly, then our need for working capital could increase. Any of these risks could adversely impact our results of operations, financial position and cash flows.
Our business is subject to the risk of manufacturing disruptions, the occurrence of which would adversely affect our results of operations.
We are subject to hazards which are common to chemical manufacturing, blending, storage, handling and transportation. These hazards include fires, explosions, remediation, chemical spills and the release or discharge of toxic or hazardous substances together with the more generic risks of labor strikes or slowdowns, mechanical failure in scheduled downtime, extreme weather or transportation interruptions. These hazards could result in loss of life, severe injury, property damage, environmental contamination and temporary or permanent manufacturing cessation. Any of these factors could adversely impact our results of operations, financial position and cash flows.
Legal, Regulatory and Tax Matters
We are subject to extensive regulation of our international operations that could adversely affect our business and results of operations.
Due to our global operations, we are subject to many laws governing international commercial activity, conduct and relations, including those that prohibit improper payments to government officials, restrict where and with whom we can do business, and limit the products, software and technology that we can supply to certain countries and customers. These laws include, but are not limited to, the U.S. Foreign Corrupt Practices Act and United Kingdom Bribery Act, sanctions and assets control programs administered by the U.S. Department of the Treasury and/or the European Union from time to time, and the U.S. export control laws such as the regulations under the U.S. Export Administration Act, as well as similar laws and regulations in other countries relevant to our business operations. Violations of any of these laws or regulations, which are often complex in their application, may result in criminal or civil penalties that could have a material adverse effect on our results of operations, financial position and cash flows.
Our United Kingdom defined benefit pension plan could adversely impact our financial condition, results of operations and cash flows.
Movements in the underlying plan asset value and Projected Benefit Obligation (“PBO”) of our United Kingdom defined benefit pension plan are dependent on actual return on investments as well as our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation. A change in any one of these assumptions could impact the plan asset value, PBO and pension credit recognized in the income statement. If future plan investment returns prove insufficient to meet future obligations, or should future obligations increase due to actuarial factors or changes in pension legislation, then we may be required to make additional cash contributions. These events could adversely impact our results of operations, financial position and cash flows.
 
15

We may have additional tax liabilities.
We are subject to income and other taxes in the U.S., the U.K., the E.U. and other jurisdictions. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. Significant judgment is required in estimating our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any final determination pursuant to tax audits and any related litigation could be materially different to the amounts reflected in our consolidated financial statements. Should any tax authority disagree with our estimates and determine any additional tax liabilities, including interest and penalties for us, this could adversely impact our results of operations, financial position and cash flows.
Our products are subject to extensive government scrutiny and regulation.
We are subject to regulation by federal, state, local and foreign government authorities. In some cases, we need government approval of our products, manufacturing processes and facilities before we may sell certain products. Many products are required to be registered with the U.S. Environmental Protection Agency (EPA), with the European Chemicals Agency (ECHA) and with comparable government agencies elsewhere. We are also subject to ongoing reviews of our products, manufacturing processes and facilities by government authorities, and must also produce product data and comply with detailed regulatory requirements.
In order to obtain regulatory approval of certain new products we must, among other things, demonstrate that the product is appropriate and effective for its intended uses, that the product has been appropriately tested for safety and that we are capable of manufacturing the product in accordance with applicable regulations. This approval process can be costly, time consuming, and subject to unanticipated and significant delays. We cannot be sure that necessary approvals will be granted on a timely basis or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate income from those products. New or stricter laws and regulations may be introduced that could result in additional compliance costs and prevent or inhibit the development, manufacture, distribution and sale of our products. Such outcomes could adversely impact our results of operations, financial position and cash flows.
Diverse chemical regulatory processes in different countries around the world might create complexity and additional cost. U.K. REACH, which was precipitated by the U.K.’s exit from the European Union is one such example.
Legal proceedings and other claims could impose substantial costs on us.
We are from time to time involved in legal proceedings that result from, and are incidental to, the conduct of our business, including employee and product liability claims. Although we maintain insurance to protect us against a variety of claims, if our insurance coverage is not adequate to cover such claims, then we may be required to pay directly for such liabilities. Such outcomes could adversely impact our results of operations, financial position and cash flows.
 
16

Environmental liabilities and compliance costs could have a substantial adverse impact on our results of operations.
We operate a number of manufacturing sites and are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations, including those relating to emissions to the air, discharges to land and water, and the generation, handling, treatment and disposal of hazardous waste and other materials on these sites. We operate under numerous environmental permits and licenses, many of which require periodic notification and renewal, which is not automatic. New or stricter laws and regulations could increase our compliance burden or costs and adversely affect our ability to develop, manufacture, blend, market and supply products.
Our operations, and the operations of prior owners of our sites, pose the risk of environmental contamination which may result in fines or criminal sanctions being imposed or require significant amounts in remediation payments.
We anticipate that certain manufacturing sites may cease production over time and on closure, will require safely decommissioning and some environmental remediation. The extent of our obligations will depend on the future use of the sites that are affected and the environmental laws in effect at the time. We currently have made a decommissioning and remediation provision in our consolidated financial statements based on current known obligations, anticipated plans for sites and existing environmental laws. If there were to be unexpected or unknown contamination at these sites, or future plans for the sites or environmental laws change, then current provisions may prove inadequate, which could adversely impact our results of operations, financial position and cash flows.
We may be exposed to certain regulatory and financial risks related to climate change
The outcome of new or potential legislation or regulation in the U.S. and other jurisdictions in which we operate may result in new or additional requirements, additional charges to fund energy efficiency activities, fees or restrictions on certain activities. Compliance with these initiatives may also result in additional costs to us, including, among other things, increased production costs, additional taxes, reduced emission allowances or additional restrictions on production or operations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Even without such regulation, increased public awareness and adverse publicity about potential impacts on climate change emanating from us or our industry could harm us. We may not be able to recover the cost of compliance with new or more stringent laws and regulations, which could adversely affect our business and negatively impact our growth. Furthermore, the potential impacts of climate change and related regulation on our customers are highly uncertain and may adversely affect us.
 
17

Key Third Party Relationships
Having a small number of significant customers may have a material adverse impact on our results of operations.
Our principal customers are oil and gas exploration and production companies, oil refiners, personal care companies, and other chemical and industrial companies. These industries are characterized by a concentration of a few large participants. The loss of a significant customer, a material reduction in demand by a significant customer or termination or
non-renewal
of a significant customer contract could adversely impact our results of operations, financial position and cash flows.
A disruption in the supply of raw materials or transportation services would have a material adverse impact on our results of operations.
Although we try to anticipate problems with supplies of raw materials or transportation services by building certain inventories of strategic importance, transport operations are exposed to various risks such as extreme weather conditions, natural disasters, technological problems, work stoppages as well as transportation regulations. If the Company experiences transportation problems, or if there are significant changes in the cost of these services, the Company may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship finished products, which could adversely impact our results of operations, financial position and cash flows.
The inability of counterparties to meet their contractual obligations could have a substantial adverse impact on our results of operations.
We sell products to oil companies, oil and gas exploration and production companies and chemical companies throughout the world. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize bad debt risk. Collateral is not generally required. We have in place a credit facility with a syndicate of banks. From time to time, we use derivatives, including interest rate swaps, commodity swaps and foreign currency forward exchange contracts, in the normal course of business to manage market risks. We enter into derivative instruments with a diversified group of major financial institutions in order to manage the exposure to
non-performance
of such instruments.
We remain subject to market and credit risks including the ability of counterparties to meet their contractual obligations and the potential
non-performance
of counterparties to deliver contracted commodities or services at the contracted price. The inability of counterparties to meet their contractual obligations could have an adverse impact on our results of operations, financial position and cash flows.
 
18

Finance and Investment
We are exposed to fluctuations in foreign currency exchange rates, which may adversely affect our results of operations.
We generate a portion of our revenues and incur some operating costs in currencies other than the U.S. dollar. In addition, the financial position and results of operations of some of our overseas subsidiaries are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rates for inclusion in our consolidated financial statements. Fluctuations in these currency exchange rates affect the recorded levels of our assets and liabilities, results of operations and cash flows.
The primary exchange rate fluctuation exposures we have are with the European Union euro, British pound sterling and Brazilian real. Exchange rates between these currencies and the U.S. dollar have fluctuated in recent years and may continue to do so. We cannot accurately predict future exchange rate variability among these currencies or relative to the U.S. dollar. While we take steps to manage currency exchange rate exposure, including entering into hedging transactions, we cannot eliminate all exposure to future exchange rate variability. These exchange risks could adversely impact our results of operations, financial position and cash flows.
A high concentration of significant stockholders may have a material adverse impact on our stock price.
Approximately 51% of our common stock is held by five stockholders. A decision by any of these, or other substantial, stockholders to sell all or a significant part of its holding, or a sudden or unexpected disposition of our stock, could result in a significant decline in our stock price which could in turn adversely impact our ability to access equity markets which in turn could adversely impact our results of operations, financial position and cash flows.
Our amended and restated
by-laws
designate specific Delaware courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated
by-laws
(the
“By-laws”)
provide that, unless we consent in writing to the selection of an alternative forum, the appropriate court within the State of Delaware is the sole and exclusive forum, to the fullest extent provided by law, for the following types of actions or proceedings:
 
   
any derivative action or proceeding brought on behalf of the Corporation,
 
   
any action asserting a claim of breach of a fiduciary duty owed by any director, officer, other employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders,
 
19

   
any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”), the Certificate of Incorporation, the
By-laws,
or as to which the DGCL confers jurisdiction upon the Court of Chancery of the State of Delaware,
 
   
any action asserting a claim governed by the internal affairs doctrine, or
 
   
any other internal corporate claim as defined in Section 115 of the DGCL.
This includes, to the extent permitted by the federal securities laws, lawsuits asserting both state law claims and claims under the federal securities laws.
This forum selection provision in the
By-laws
may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding the forum selection clause included in the
By-laws,
a court could rule that such a provision is inapplicable or unenforceable.
Application of the choice of forum provision may be limited in some instances by law. Section 27 of the Securities Exchange Act of 1934 (“Exchange Act”) provides for exclusive federal court jurisdiction over Exchange Act claims. Accordingly, to the extent the exclusive forum provision is held to cover a shareholder derivative action asserting claims under the Exchange Act, such claims could not be brought in the Delaware Court of Chancery and would instead be within the jurisdiction of the federal district court for the District of Delaware. Section 22 of the Securities Act of 1933 (“Securities Act”) creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Our stockholders will not be deemed by operation of our choice of forum provision to have waived our compliance with the federal securities laws and the regulations promulgated thereunder. The selection of legal jurisdiction for litigation claims may impact the outcome of legal proceedings which could impact our results of operations, financial position and cash flows.
The provisions of our revolving credit facility may restrict our ability to incur additional indebtedness or to otherwise expand our business.
Our revolving credit facility contains restrictive clauses which may limit our activities, and operational and financial flexibility. We may not be able to borrow under the revolving credit facility if an event of default under the terms of the facility occurs. An event of default under the credit facility includes a material adverse change to our assets, operations or financial condition, and certain other events. The revolving credit facility also contains a number of restrictions that limit our ability, among 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 revolving credit facility requires us to meet certain financial ratios, including ratios based on net debt to earnings before income tax, depreciation and amortization
 
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(“EBITDA”) and net interest expense to EBITDA. Net debt, net interest expense and EBITDA are
non-GAAP
measures of liquidity defined in the credit facility. Our ability to meet these financial covenants depends upon the future successful operating performance of the business. If we fail to comply with financial covenants, we would be in default under the revolving credit facility and the maturity of our outstanding debt could be accelerated unless we were able to obtain waivers from our lenders. If we were found to be in default under the revolving credit facility, it could adversely impact our results of operations, financial position and cash flows.
 
Item 1B
Unresolved Staff Comments
None.
 
21

Item 2
Properties
A summary of the Company’s principal properties is shown in the following table. Each of these properties is owned by the Company except where otherwise noted:
 
Location
 
Reporting Segment
 
Operations
Englewood, Colorado
(1)
  Fuel Specialties and Performance Chemicals  
Corporate Headquarters
Business Teams
Sales/Administration
Newark, Delaware
(1)
  Fuel Specialties   Research & Development
Herne, Germany   Fuel Specialties  
Sales/Manufacturing/Administration
Research & Development
Vernon, France   Fuel Specialties  
Sales/Manufacturing/Administration
Research & Development
Moscow, Russia
(1)
  Fuel Specialties   Sales/Administration
Leuna, Germany   Fuel Specialties  
Sales/Manufacturing/Administration
Research & Development
Ellesmere Port, United Kingdom   Fuel Specialties, Performance Chemicals and Octane Additives  
European Headquarters
Business Teams
Sales/Manufacturing/Administration
Research & Development
Fuel Technology Center
Beijing, China
(1)
  Fuel Specialties and Performance Chemicals   Sales/Administration
Singapore
(1)
  Fuel Specialties and Performance Chemicals  
Asia-Pacific Headquarters
Business Teams
Sales/Administration
Milan, Italy
(1)
  Fuel Specialties and Performance Chemicals   Sales/Administration
Rio de Janeiro, Brazil
(1)
  Fuel Specialties, Performance Chemicals and Oilfield Services   Sales/Administration
High Point, North Carolina   Performance Chemicals  
Manufacturing/Administration
Research & Development
Salisbury, North Carolina   Performance Chemicals  
Manufacturing/Administration
Research & Development
Chatsworth, California
(1)
  Performance Chemicals   Sales/Manufacturing/Administration
Saint Mihiel, France   Performance Chemicals   Manufacturing/Administration/Research & Development
Castiglione, Italy   Performance Chemicals   Manufacturing/Administration/Research & Development
Barcelona, Spain
(1)
  Performance Chemicals   Manufacturing/Administration/Research & Development
 
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Location
 
Reporting Segment
 
Operations
Oklahoma City, Oklahoma
 
Oilfield Services
 
Sales/Manufacturing/Administration
Midland, Texas   Oilfield Services   Sales/Manufacturing/Administration
Pleasanton, Texas   Oilfield Services   Sales/Manufacturing/Administration
Sugar Land, Texas
(1)
  Oilfield Services   Sales/Administration/Research & Development
The Woodlands, Houston, Texas
(1)
  Oilfield Services   Sales/Administration/Research & Development
Williston, North Dakota   Oilfield Services   Sales/Warehouse
Casper, Wyoming
(1)
  Oilfield Services   Warehouse
 
(1)
Leased property
Manufacturing Capacity
We believe that our plants and supply agreements are sufficient to meet current sales levels. Operating rates of the plants are generally flexible and varied with product mix and normal sales demand swings. We believe that all of our facilities are maintained to appropriate levels and in sufficient operating condition though there remains an ongoing need for maintenance and capital investment.
 
Item 3
Legal Proceedings
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 the Company’s property is subject. It is possible, however, that an adverse resolution of an unexpectedly large number of such individual claims or proceedings could in the aggregate have a material adverse effect on results of operations for a particular year or quarter.
 
Item 4
Mine Safety Disclosures
Not applicable.
 
23

PART II
 
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
The Company’s common stock is listed on the NASDAQ under the symbol “IOSP.” As of February 10, 2021 there were 758 registered holders of the common stock.
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the fourth quarter of 2020.
Issuer Purchases of Equity Securities
During 2020 the Company made no open market repurchases of our common stock.
On November 6, 2018 the Company announced that its board of directors had approved a share repurchase program for the repurchase of up to $100 million of Innospec’s common stock over the following three years. During the year ended December 31, 2020, no shares of our common stock were repurchased by the Company under this share repurchase program.
During the quarter ended December 31, 2020 the company did not purchase any of its common stock in connection with the exercising of stock options by employees.
Stock Price Performance Graph
The graph below compares the cumulative total return to stockholders on the common stock of the Corporation, S&P 500 Index, NASDAQ Composite Index and Russell 2000 Index since December 31, 2015, assuming a $100 investment and the
re-investment
of any dividends thereafter. Historical stock price performance should not be relied upon as an indication of future stock price performance.
 
24


Value of $100 Investment made December 31, 2015*
 
    
2015
    
2016
    
2017
    
2018
    
2019
    
2020
 
Innospec Inc.
   $ 100.00      $ 127.36      $ 132.70      $ 117.76      $ 199.17      $ 176.70  
S&P 500 Index
     100.00        111.96        136.40        130.42        171.49        203.04  
NASDAQ Composite Index
     100.00        108.09        140.12        135.09        186.79        269.70  
Russell 2000 Index
   $ 100.00      $ 121.31      $ 139.08      $ 123.76      $ 155.35      $ 186.36  
* Excludes purchase commissions.
 
25

Item 6
Selected Financial Data
FINANCIAL HIGHLIGHTS
 
(in millions, except financial ratios, share and per
share data)
  
2020
   
2019
   
2018
   
2017
   
2016
 
Summary of performance:
          
Net sales
   $ 1,193.1     $ 1,513.3     $ 1,476.9     $ 1,306.8     $ 883.4  
Operating income
     33.7       149.9       133.5       125.0       98.2  
Income before income taxes
     39.7       150.4       131.6       128.1       103.1  
Income taxes
     (11.0     (38.2     (46.6     (66.3     (21.8
Net income
     28.7       112.2       85.0       61.8       81.3  
Net income attributable to Innospec Inc.
     28.7       112.2       85.0       61.8       81.3  
Net cash provided by operating activities
   $ 145.9     $ 161.6     $ 104.9     $ 82.7     $ 105.5  
Financial position at year end:
          
Total assets
   $ 1,397.4     $ 1,468.8     $ 1,473.4     $ 1,410.2     $ 1,181.4  
Long-term debt including finance leases (including current portion)
     0.6       60.1       210.9       224.3       273.3  
Cash, cash equivalents, and short-term investments
     105.3       75.7       123.1       90.2       101.9  
Total equity
   $ 944.9     $ 918.9     $ 825.5     $ 794.3     $ 653.8  
Financial ratios:
          
Net income attributable to Innospec Inc. as a percentage of net sales
     2.4       7.4       5.8       4.7       9.2  
Effective tax rate as a percentage
(1)
     27.7       25.4       35.4       51.8       21.1  
Current ratio
(2)
     2.3       2.1       2.2       2.1       2.4  
Share data:
          
Earnings per share attributable to Innospec Inc.
          
– Basic
   $ 1.17     $ 4.58     $ 3.48     $ 2.56     $ 3.39  
– Diluted
   $ 1.16     $ 4.54     $ 3.45     $ 2.52     $ 3.33  
Dividend paid per share
   $ 1.04     $ 1.02     $ 0.89     $ 0.77     $ 0.67  
Shares outstanding (basic, thousands)
          
– At year end
     24,596       24,507       24,434       24,350       24,071  
– Average during year
     24,563       24,482       24,401       24,148       23,998  
 
(1)
The effective tax rate is calculated as income taxes as a percentage of income before income taxes. Income taxes are impacted in 2017 by the provisional estimates recorded in respect of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), and in 2018 by the finalization and recording of additional taxes due as a consequence of the Tax Act. Income taxes in 2019 and 2020 are calculated under the new legislation of the Tax Act.
 
(2)
 
Current ratio is defined as current assets divided by current liabilities.
 
26

QUARTERLY SUMMARY
 
(in millions, except per share data)
  
First

Quarter
    
Second

Quarter
   
Third

Quarter
    
Fourth

Quarter
 
2020
          
Net sales
   $ 372.3      $ 244.9     $ 265.1      $ 310.8  
Gross profit
     113.9        59.1       78.7        91.0  
Operating income
     40.9        (53.4     16.8        29.4  
Net income
     33.1        (39.7     12.7        22.6  
Net cash provided by operating activities
   $ 2.4      $ 29.8     $ 55.5      $ 58.2  
Per common share:
          
Earnings – basic
   $ 1.35      $ (1.62   $ 0.52      $ 0.92  
– diluted
   $ 1.34      $ (1.62   $ 0.51      $ 0.91  
2019
          
Net sales
   $ 388.3      $ 362.4     $ 371.9      $ 390.7  
Gross profit
     117.8        111.1       119.1        118.2  
Operating income
     36.2        31.7       38.2        43.8  
Net income
     28.7        22.3       30.1        31.1  
Net cash provided by operating activities
   $ 13.2      $ 50.0     $ 40.0      $ 58.4  
Per common share:
          
Earnings – basic
   $ 1.17      $ 0.91     $ 1.23      $ 1.27  
– diluted
   $ 1.17      $ 0.90     $ 1.22      $ 1.26  
 
27

Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with our consolidated financial statements and the notes thereto.
EXECUTIVE OVERVIEW
For much of 2020, customer demand was adversely impacted by the
COVID-19
pandemic and the unprecedented collapse in demand for crude oil. The low point of the year for the decline in customer demand was the second quarter and all of our businesses have been showing some recovery since that time, although they have not yet returned to
pre-pandemic
levels.
We also successfully navigated a number of world trade disputes which threatened to have a negative impact on our business.
Performance Chemicals continued its organic growth driven by new product development and the development of new customers in the personal care, home care, agrochemical and metal extraction markets.
Both Fuel Specialties and Oilfield Services suffered from the dramatic drop in demand. In Oilfield Services, we responded by making substantial cuts in costs to reflect the reduced customer activity levels. We believe that both markets were showing signs of good recovery by the end of the year.
The Octane Additives business concluded its trading with its last customer for motor gasoline during the year, as its sole customer completed their transition to unleaded fuel.
CRITICAL ACCOUNTING ESTIMATES
Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Environmental Liabilities
We are subject to environmental laws in the countries in which we conduct business. Ellesmere Port in the United Kingdom is our principal site giving rise to environmental remediation liabilities associated with the production 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. At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed.
Remediation provisions at December 31, 2020 amounted to $58.5 million and relate principally to our Ellesmere Port site in the United Kingdom. We recognize environmental liabilities when they are probable and costs can be reasonably estimated, and asset retirement
 
28

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 which it operates or has operated in. We develop these assumptions utilizing the latest information available together with recent costs. While we believe our assumptions for environmental liabilities are reasonable, they are subjective judgements and it is possible that variations in any of the assumptions will result in materially different calculations to the liabilities we have reported.
Income Taxes
We are subject to income and other taxes in the U.S., the U.K., the E.U. and other jurisdictions. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied.
The calculation of our tax liabilities involves evaluating uncertainties in the application of accounting principles and complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be required. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary.
We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained, based on technical merits of the position, when challenged by the taxing authorities. To the extent that we prevail in matters for which liabilities have been established or are required to pay amounts in excess of the liabilities recorded in our financial statements, our effective tax rate in a given period may be materially affected. An unfavourable tax settlement may require cash payments and result in an increase in our effective tax rate in the year of resolution. We report interest and penalties related to uncertain tax positions as income taxes. For additional information regarding uncertain income tax positions, see Note 11 of the Notes to the Consolidated Financial Statements.
Pensions
The Company maintains a defined benefit pension plan covering a number of its current and former employees in the United Kingdom. The Company also has other smaller pension arrangements in the U.S. and overseas as disclosed in Note10 of the Notes to the Consolidated Financial Statements. The United Kingdom plan is closed to future service accrual, but has a large number of deferred and current pensioners.
Movements in the United Kingdom’s underlying plan asset value and Projected Benefit Obligation (“PBO”) are dependent on actual return on investments as well as our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation. A change in any one of these assumptions could impact the plan asset value, PBO and pension charge recognized in the income statement. Such changes could adversely impact our results of operations and financial position. For example, a 0.25% change in the
 
29

discount rate assumption would change the PBO by approximately $26 million while the net pension credit for 2020 would change by approximately $0.4 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 2021 would change by approximately $1.2 million.
Further information is provided in Note 10 of the Notes to the Consolidated Financial Statements.
Goodwill
The Company’s reporting units, the level at which goodwill is assessed for potential impairment, are consistent with the reportable segments. The components in each segment (including products, markets and competitors) have similar economic characteristics and the segments, therefore, reflect the lowest level at which operations and cash flows can be sufficiently distinguished, operationally and for financial reporting purposes, from the rest of the Company.
To test for impairment the Company performs a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a segment is less than the carrying amount prior to performing the quantitative goodwill impairment test. Factors utilized in the qualitative assessment process include macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and Company specific events.
If a quantitative test is required, we assess the fair value based on projected
post-tax
cash flows discounted at the Company’s weighted average cost of capital. These fair value techniques require management judgment and estimates including revenue growth rates, projected operating margins, changes in working capital and discount rates. We would develop these assumptions by considering recent financial performance and trends and industry growth estimates. While we believe our assumptions for impairment assessments are reasonable, they are subjective judgments, and it is possible that variations in any of the assumptions will result in materially different calculations of any potential impairment charges.
At December 31, 2020 we had $371.2 million of goodwill relating to our Fuel Specialties, Performance Chemicals and Oilfield Services segments. Due to the triggering events of the
COVID-19
pandemic and the reduction in oil prices and their impact on our business, we performed a step one impairment review at June 30, 2020. The impairment assessment indicated the fair values substantially exceeded the carrying values for all operating segments. Despite this, due to a significant downturn in one of the entities, we performed a further assessment of the intangible assets of that entity, which resulted in an impairment of $19.8 million at June 30, 2020.
Property, Plant and Equipment and Other Intangible Assets (Net of Depreciation and Amortization, respectively)
As at December 31, 2020 we had $210.8 million of property, plant and equipment and $75.3 million of other intangible assets (net of depreciation and amortization, respectively),
 
30

that are discussed in Notes 6 and 8 of the Notes to the Consolidated Financial Statements, respectively. These long-lived assets relate to all of our reporting segments and are being amortized or depreciated straight-line over periods of up to 17 years in respect of the other intangible assets and up to 25 years in respect of the property, plant and equipment.
We continually assess the markets and products related to these long-lived assets, as well as their specific carrying values, and have concluded that these carrying values, and amortization and depreciation periods, remain appropriate.
Impact of
COVID-19
Pandemic and Current Economic Environment
The Company’s results have been adversely impacted in 2020, due to the
COVID-19
pandemic and the global economic environment.
Fuel Specialties have been impacted by reduced demand stemming from the reduction in freight transport and passenger miles and the widespread grounding of aircraft for a large part of the year. We have seen some improvement in the fourth quarter as travel has begun to increase, but demand has not returned to the
pre-COVID-19
levels. We expect demand will continue to improve in 2021, to the extent global economic activity recovers, subject to the continuation of the current lockdowns in Europe in particular and the potential for future lockdowns or restrictions around the world related to the spread of new COVID variants.
Performance Chemicals have experienced little overall impact from the pandemic as increased demand for certain products linked to health, hygiene and cleaning outweighed some lost revenues linked to the short-term shutdown of some of our customers manufacturing facilities.
Oilfield Services have been heavily impacted by the reduction in oil exploration and production as the wider industry reacts to the reduction in demand and low oil price. We have seen some improvement in the second half of the year from increasing demand and the benefit from the reduction in headcount that occurred in the second quarter. We do not know how long this downturn will last and the rate of recovery will depend heavily on the rate and extent to which the government restrictions on movement are lifted and not
re-imposed.
Our manufacturing facilities have continued to operate with only some minor interruption, and we expect them to continue to do so. We have implemented flexible working, including working from home for our employees where possible, in line with advice and rules in each of the jurisdictions in which we operate. Additional costs have been incurred to ensure our manufacturing and administrative facilities are COVID safe for our employees. While these costs have not been significant to date there may be increased costs in the future, if further safety restrictions are required. Raw material sourcing has not been significantly impacted and we do not expect that to change over the remainder of the year. Logistics are operating with some delays but our products are currently being delivered to our customers.
We believe that our financial position remains strong. We expect to have sufficient access to capital if needed, including our $250 million revolving credit facility we entered into in September 2019, and we do not anticipate any issues with meeting the covenants for our debt agreements. We have extended this facility by a further twelve months until September 2024, during the third quarter of 2020. Our major capital projects are continuing to progress as planned.
 
31

As we operate in the chemical industry, we continue to be focused on protecting the health and safety of our employees and have procedures in place at each of our operating facilities to help ensure their well-being.
We do not know how long the pandemic and current economic environment will continue and while we have made estimates as to potential impacts on our financial position and operations, the ultimate impact on our business will depend on many factors which are very difficult to predict with certainty and substantially beyond our control.
RESULTS OF OPERATIONS
The following table provides operating income by reporting segment:
 
(in millions)
  
    2020    
   
    2019    
   
    2018    
 
Net sales:
      
Fuel Specialties
   $ 512.7     $ 583.7     $ 574.5  
Performance Chemicals
     425.4       428.7       468.1  
Oilfield Services
     255.0       479.9       400.6  
Octane Additives
     0.0       21.0       33.7  
  
 
 
   
 
 
   
 
 
 
   $ 1.193.1     $ 1,513.3     $ 1,476.9  
  
 
 
   
 
 
   
 
 
 
Gross profit:
      
Fuel Specialties
   $ 160.3     $ 204.5     $ 195.0  
Performance Chemicals
     103.8       100.1       97.5  
Oilfield Services
     80.8       159.9       130.4  
Octane Additives
     (2.2     1.7       12.1  
  
 
 
   
 
 
   
 
 
 
   $ 342.7     $ 466.2     $ 435.0  
  
 
 
   
 
 
   
 
 
 
Operating income:
      
Fuel Specialties
   $ 84.5     $ 116.6     $ 116.3  
Performance Chemicals
     54.8       48.7       44.7  
Oilfield Services
     (9.5     39.7       22.1  
Octane Additives
     (2.8     (0.7     9.9  
Corporate costs
     (52.2     (54.4     (52.4
Restructuring charge
     (21.3     0.0       (7.1
Impairment of intangible assets
     (19.8     0.0       0.0  
  
 
 
   
 
 
   
 
 
 
Total operating income
   $ 33.7     $ 149.9     $ 133.5  
  
 
 
   
 
 
   
 
 
 
Other income, net
   $ 7.8     $ 5.3     $ 5.0  
Interest expense, net
     (1.8     (4.8     (6.9
  
 
 
   
 
 
   
 
 
 
Income before income taxes
     39.7       150.4       131.6  
Income taxes
     (11.0     (38.2     (46.6
  
 
 
   
 
 
   
 
 
 
Net income
   $ 28.7     $ 112.2     $ 85.0  
  
 
 
   
 
 
   
 
 
 
 
32

Results of Operations – Fiscal 2020 compared to Fiscal 2019:
 
(in millions, except ratios)
  
2020
   
2019
   
Change
       
Net sales:
        
Fuel Specialties
   $ 512.7     $ 583.7     $ (71.0     -12
Performance Chemicals
     425.4       428.7       (3.3     -1
Oilfield Services
     255.0       479.9       (224.9     -47
Octane Additives
     0.0       21.0       (21.0     -100
  
 
 
   
 
 
   
 
 
   
   $ 1,193.1     $ 1,513.3     $ (320.2     -21
  
 
 
   
 
 
   
 
 
   
Gross profit:
        
Fuel Specialties
   $ 160.3     $ 204.5       (44.2     -22
Performance Chemicals
     103.8       100.1       3.7       +4
Oilfield Services
     80.8       159.9       (79.1     -49
Octane Additives
     (2.2     1.7       (3.9     -229
  
 
 
   
 
 
   
 
 
   
   $ 342.7     $ 466.2       (123.5     -26
  
 
 
   
 
 
   
 
 
   
Gross margin (%):
        
Fuel Specialties
  
 
31.3
 
 
 
35.0
 
 
 
-3.7
 
 
Performance Chemicals
  
 
24.4
 
 
 
23.3
 
 
 
1.1
 
 
Oilfield Services
  
 
31.7
 
 
 
33.3
 
 
 
-1.6
 
 
Octane Additives
  
 
0.0
 
 
 
8.1
 
 
 
-8.1
 
 
Aggregate
  
 
28.7
 
 
 
30.8
 
 
 
-2.1
 
 
Operating expenses:
        
Fuel Specialties
   $ (75.8   $ (87.9   $ 12.1       -14
Performance Chemicals
     (49.0     (51.4     2.4       -5
Oilfield Services
     (90.3     (120.2     29.9       -25
Octane Additives
     (0.6     (2.4     1.8       -75
Corporate costs
     (52.2     (54.4     2.2       -4
Restructuring charge
     (21.3     0.0       (21.3     n/a  
Impairment of intangible assets
     (19.8     0.0       (19.8     n/a  
  
 
 
   
 
 
   
 
 
   
   $ (309.0   $ (316.3   $ 7.3       -2
  
 
 
   
 
 
   
 
 
   
Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.
 
33

Fuel Specialties
Net sales:
the table below details the components which comprise the year on year change in net sales spread across the markets in which we operate:
 
Change (%)
  
Americas
    
EMEA
    
ASPAC
    
AvTel
    
Total
 
Volume
     -7        -8        -11        +11        -7  
Price and product mix
     -1        -7        -10        -19        -6  
Exchange rates
     0        +2        0        0        +1  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
     -8        -13        -21        -8        -12  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Volumes in all our regions have suffered from the adverse impact of the
COVID-19
pandemic, which has reduced the global demand for fuel additive products. During the second half of 2020, we have seen customer demand recovering steadily as lockdowns in countries around the world have been eased. However, the reintroduction of lockdowns for European countries in January 2021 could slow the return of customer demand to the
pre-pandemic
level. Price and product mix in all our regions was adverse due to lower sales of our higher margin products. AvTel volumes were higher than the prior year due to variations in the demand from customers, being offset by an adverse price and product mix. EMEA benefitted from favorable exchange rate movements year over year, due to a strengthening of the British pound sterling and the European Union euro against the U.S. dollar.
Gross margin:
the year over year decrease of 3.7 percentage points was driven by the impact of the
COVID-19
pandemic reducing demand for our higher margin products, together with adverse raw material costs and higher provisions for slow moving inventory.
Operating expenses:
the year over year decrease of $12.1 million was due to cost savings as a result of the
COVID-19
pandemic, including lower travel and entertainment costs, together with lower personnel related performance-based remuneration due to a decrease in share-based compensation accruals linked to the Innospec share price.
Performance Chemicals
Net sales:
the table below details the components which comprise the year on year change in net sales spread across the markets in which we operate:
 
Change (%)
  
Americas
    
EMEA
    
ASPAC
    
Total
 
Volume
     +13        -1        +14        +4  
Price and product mix
     -12        -4        +3        -6  
Exchange rates
     0        +2        +1        +1  
  
 
 
    
 
 
    
 
 
    
 
 
 
     +1        -3        +18        -1  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
 
34

Higher volumes in the Americas and ASPAC were driven by increased demand for our Personal Care and Home Care products. Volumes were lower in EMEA primarily due to lower demand for Home Care products. The Americas and EMEA suffered an adverse price and product mix due to increased sales of lower priced products due largely to lower raw material costs. ASPAC benefitted from a favorable price and product mix due to increased sales of higher priced products. EMEA and ASPAC benefitted from favorable exchange rate movements year over year, due to a strengthening of the British pound sterling and the European Union euro against the U.S. dollar.
Gross margin:
the year over year increase of 1.1 percentage points was due to a richer sales mix, the continued benefit of margin improvement projects and the timing of pricing movements for certain raw materials.
Operating expenses:
the year over year decrease of $2.4 million was driven by lower personnel related performance-based remuneration due to a decrease in the share-based compensation accruals linked to the Innospec share price, together with cost savings as a result of the
COVID-19
pandemic, including lower travel and entertainment costs.
Oilfield Services
Net sales:
the year over year decrease of $224.9 million, or 47 percent, was primarily due to a collapse of customer activity for the U.S. onshore market, as a result of the
COVID-19
pandemic reducing world-wide demand together with the depressed price of crude oil. The previously expected recovery in the U.S. completions market has been delayed, however the Company has seen an improvement in the demand for crude oil in the second half of 2020 leading to higher sales for our production and drag reducing agent products.
Gross margin:
the year over year decrease of 1.6 percentage points was primarily due to significant inventory adjustments in the second quarter of 2020 as a result of the collapse in demand, being partly offset by margin improvements in the second half of the year due to a favorable sales mix and management cost control initiatives.
Operating expenses:
the year over year decrease of $29.9 million was driven by the
right-sizing
of the operations to adjust for the reduction in demand caused by the
COVID-19
pandemic, together with lower accruals for long-term performance-based incentive plans due to a decrease in share-based compensation accruals linked to the Innospec share price.
Octane Additives
The Octane Additives business ceased trading and is no longer a reporting segment from July 1, 2020 as the production of TEL for use in motor gasoline has finished. Legacy costs related to these operations have now been recorded as operating expenses within corporate costs.
 
35

Prior to July 1, 2020 net sales were nil in 2020 compared to $21.0 million in the prior year; the gross loss was $2.2 million in 2020 compared to a $1.7 million gross profit in the prior year; operating expenses were $0.6 million in 2020 compared to $2.4 million in the prior year.
Other Income Statement Captions
Corporate costs:
the year over year decrease of $2.2 million was driven by lower accruals for long-term performance-based incentive plans due to the impact of the
COVID-19
pandemic on the group’s profit performance together with a decrease in the share-based compensation accruals linked to the Innospec share price. There has also been a reduction in travel and entertainment expenses resulting from the
COVID-19
pandemic restrictions on local and international travel. The decrease in costs was partly offset by $4.2 million of acquisition related costs in 2020; the inclusion of legacy costs related to the now closed Octane Additives segment of $2.5 million; and higher spending on information technology following the network security incident in the second quarter of 2019.
Restructuring charge:
was $21.3 million related to the cessation of production and sales of TEL for use in motor gasoline. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for further information.
Impairment of intangible assets:
was $19.8 million related to acquired intangible assets in our Oilfield Services segment. See Note 9 of the Notes to the Condensed Consolidated Financial Statements for further information.
Other net income/(expense):
for 2020 and 2019, includes the following:
 
    
2020
   
2019
   
Change
 
United Kingdom pension credit
   $ 6.2     $ 7.7     $ (1.5
German pension charge
     (0.9     (0.5     (0.4
Foreign exchange gains/(losses) on translation
     4.0       (1.3     5.3  
Foreign currency forward contracts losses
     (1.5     (0.6     (0.9
  
 
 
   
 
 
   
 
 
 
   $ 7.8     $ 5.3     $ 2.5  
  
 
 
   
 
 
   
 
 
 
Interest expense, net:
was $1.8 million for 2020 compared to $4.8 million in the prior year, driven by lower average net debt as the business generated cash inflows.
Income taxes:
The effective tax rate was 27.7% and 25.4% in 2020 and 2019, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 23.5% in 2020 compared with 22.6% in 2019. The Company believes that this adjusted effective tax rate, a
non-GAAP
financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends. In addition, management uses this
non-GAAP
financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.
 
36

(in millions, except ratios)
  
2020
   
2019
 
Income before income taxes
   $ 39.7     $ 150.4  
Adjustment for stock compensation
     5.8       6.6  
Indemnification asset regarding tax audit
     0.2       (1.6
Restructuring charge
     21.3       0.0  
Impairment of acquired intangible assets
     19.8       0.0  
Legacy cost of closed operations
     2.5       0.0  
Acquisition costs
     4.2       0.0  
  
 
 
   
 
 
 
Adjusted income before income taxes
   $ 93.5     $ 155.4  
  
 
 
   
 
 
 
Income taxes
   $ 11.0     $ 38.2  
Adjustment of income tax provisions
     0.7       (2.5
Tax on stock compensation
     1.7       0.9  
Tax on restructuring charge
     4.3       0.0  
Tax on impairment of acquired intangible asset
     4.6       0.0  
Tax on site closure provision
     0.0       (0.7
Tax loss on distribution
     0.4       1.2  
Change in UK statutory tax rate
     (2.7     0.0  
Tax on legacy cost of closed operations
     0.5       0.0  
Tax on acquisition costs
     0.9       0.0  
Other discrete items
     0.6       (2.0
  
 
 
   
 
 
 
Adjusted income taxes
   $ 22.0     $ 35.1  
  
 
 
   
 
 
 
GAAP effective tax rate
     27.7     25.4
  
 
 
   
 
 
 
Adjusted effective tax rate
     23.5     22.6
  
 
 
   
 
 
 
The most significant factors impacting on our effective tax rate in 2020 are explained in Note 11 of the Notes to the Consolidated Financial Statements.
 
37

Results of Operations – Fiscal 2019 compared to Fiscal 2018:
 
(in millions, except ratios)
  
2019
   
2018
   
Change
       
Net sales:
        
Fuel Specialties
   $ 583.7     $ 574.5     $ 9.2       +2
Performance Chemicals
     428.7       468.1       (39.4     -8
Oilfield Services
     479.9       400.6       79.3       +20
Octane Additives
     21.0       33.7       (12.7     -38
  
 
 
   
 
 
   
 
 
   
   $ 1,513.3     $ 1,476.9     $ 36.4       +2
  
 
 
   
 
 
   
 
 
   
Gross profit:
        
Fuel Specialties
   $ 204.5     $ 195.0     $ 9.5       +5
Performance Chemicals
     100.1       97.5       2.6       +3
Oilfield Services
     159.9       130.4       29.5       +23
Octane Additives
     1.7       12.1       (10.4     -86
  
 
 
   
 
 
   
 
 
   
   $ 466.2     $ 435.0     $ 31.2       +7
  
 
 
   
 
 
   
 
 
   
Gross margin (%):
        
Fuel Specialties
  
 
35.0
 
 
 
33.9
 
 
 
+1.1
 
 
Performance Chemicals
  
 
23.3
 
 
 
20.8
 
 
 
+2.5
 
 
Oilfield Services
  
 
33.3
 
 
 
32.6
 
 
 
+0.7
 
 
Octane Additives
  
 
8.1
 
 
 
35.9
 
 
 
-27.8
 
 
Aggregate
  
 
30.8
 
 
 
29.5
 
 
 
+1.3
 
 
Operating expenses:
        
Fuel Specialties
   $ (87.9   $ (78.7   $ (9.2     +12
Performance Chemicals
     (51.4     (52.8     1.4       -3
Oilfield Services
     (120.2     (108.3     (11.9     +11
Octane Additives
     (2.4     (2.2     (0.2     +9
Corporate costs
     (54.4     (52.4     (2.0     +4
Restructuring charge
     0.0       (7.1     7.1       -100
  
 
 
   
 
 
   
 
 
   
   $ (316.3   $ (301.5   $ (14.8     +5
  
 
 
   
 
 
   
 
 
   
Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.
Fuel Specialties
Net sales:
the table below details the components which comprise the year on year change in net sales spread across the markets in which we operate:
 
Change (%)
  
Americas
    
EMEA
    
ASPAC
    
AvTel
    
Total
 
Volume
     -8        +4        +3        +52        +3  
Price and product mix
     +6        +4        +8        -37        +3  
Exchange rates
     0        -8        -1        0        -4  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
     -2        0        +10        +15        +2  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
38

Lower volumes in the Americas were primarily driven by a specific issue in the second half of 2019 related to disruption from one supplier. Volumes in EMEA and ASPAC were higher, driven by increased demand for our products and technology. Price and product mix in the Americas, EMEA and ASPAC benefited from increased sales of higher margin products. AvTel volumes were higher than the prior year due to variations in the demand from customers, partly offset by an adverse price and product mix. EMEA and ASPAC were negatively impacted by exchange rate movements year over year, driven by a weakening of the British pound sterling and the European Union euro against the U.S. dollar.
Gross margin:
the year on year increase of 1.1 percentage points benefitted from an improvement in the mix of product sales.
Operating expenses:
the year on year increase of $9.2 million was driven by increased selling expenses including higher agents’ commissions and higher personnel related performance-based remuneration due to increased share-based compensation accruals.
Performance Chemicals
Net sales:
the table below details the components which comprise the year on year change in net sales spread across the markets in which we operate:
 
Change (%)
  
Americas
    
EMEA
    
ASPAC
    
Total
 
Volume
     -3        -4        +16        -3  
Price and product mix
     +4        -4        -9        -2  
Exchange rates
     0        -5        -3        -3  
  
 
 
    
 
 
    
 
 
    
 
 
 
     +1        -13        +4        -8  
  
 
 
    
 
 
    
 
 
    
 
 
 
Lower volumes in the Americas and EMEA were driven by a customer taking some volume
in-house.
Higher volumes in ASPAC were driven by increased demand for our Personal Care products, partly offset by an adverse price and product mix. Price and product mix in the Americas benefitted from increased sales of higher margin products, while EMEA was adversely impacted by lower raw material prices driving lower selling prices for certain products. EMEA and ASPAC were negatively impacted by exchange rate movements year over year, due to a weakening of the British pound sterling and the European Union euro against the U.S. dollar.
Gross margin:
the year on year increase of 2.5 percentage points was driven by an improved sales mix, lower raw material prices and the continued benefit of several improvement projects.
Operating expenses:
the year on year decrease of $1.4 million was primarily due to the benefit of a weaker European Union euro against the U.S. dollar and lower costs as a result of the closure of our operation in Belgium in the prior year.
 
39

Oilfield Services
Net sales:
the year on year increase of $79.3 million, or 20 percent, was due to improved customer activity in stimulation and production driving increased demand for our technology and customer service. Sales of higher margin products have benefited the price and product mix.
Gross margin:
the year on year increase of 0.7 percentage points was due to an improved customer and product mix leading to increased sales of higher margin products.
Operating expenses:
the year on year increase of $11.9 million was driven by higher selling and technical support expenses required to deliver the increase in customer demand.
Octane Additives
Net sales:
were $21.0 million for 2019 compared to $33.7 million in 2018. Reduced sales are in line with our expectations as the one remaining customer moves closer to completing their transition to unleaded fuel.
Gross margin:
the year on year decrease of 27.8 percentage points was due to lower production volumes spread over the predominantly fixed cost of manufacturing operations.
Operating expenses:
the year on year increase of $0.2 million was principally due to higher
year-end
provisions for personnel related performance-based remuneration.
Other Income Statement Captions
Corporate costs:
the year on year increase of $2.0 million primarily relates to higher personnel related performance-based remuneration including higher share-based compensation accruals; partly offset by a reduction for the amortization of our internally developed software following the completed amortization of our first deployment to the Americas which ended in the third quarter of 2018, together with the benefit of a weakening of the British pound sterling against the U.S. dollar for our United Kingdom cost base.
Restructuring charge:
there was no charge in 2019 compared to a charge of $7.1 million in the prior year related to the closure costs, including redundancies and onerous leases, for our operation in Belgium.
Other net income/(expense):
for 2019 and 2018, includes the following:
 
    
2019
   
2018
   
Change
 
United Kingdom pension credit
   $ 7.7     $ 6.3     $ 1.4  
German pension charge
     (0.5     (0.6     0.1  
Foreign exchange losses on translation
     (1.3     (5.9     4.6  
Foreign currency forward contracts (losses)/gains
     (0.6     5.2       (5.8
  
 
 
   
 
 
   
 
 
 
   $ 5.3     $ 5.0     $ 0.3  
  
 
 
   
 
 
   
 
 
 
 
40

Interest expense, net:
was $4.8 million for 2019 compared to $6.9 million in the prior year, driven by lower average net debt as the business generated cash inflows.
Income taxes:
The effective tax rate was 25.4% and 35.4% in 2019 and 2018, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 22.6% in 2019 compared with 23.7% in 2018. The Company believes that this adjusted effective tax rate, a
non-GAAP
financial measure, provides useful information to investors and may assist them in evaluating the Company’s underlying performance and identifying operating trends. In addition, management uses this
non-GAAP
financial measure internally to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.
 
(in millions, except ratios)
  
2019
   
2018
 
Income before income taxes
   $ 150.4     $ 131.6  
Adjustment for stock compensation
     6.6       4.8  
Indemnification asset regarding tax audit
     (1.6     (1.2
Site closure provision
     0.0       6.8  
    
 
 
   
 
 
 
Adjusted income before income taxes
   $ 155.4     $ 142.0  
    
 
 
   
 
 
 
Income taxes
   $ 38.2     $ 46.6  
Adjustment of income tax provisions
     (2.5     (1.8
Tax on stock compensation
     0.9       0.2  
Tax Cuts & Jobs Act 2017 impact
     0.0       (12.3
Tax on site closure provision
     (0.7     1.9  
Tax loss on distribution
     1.2       0.0  
Other discrete items
     (2.0     (0.9
    
 
 
   
 
 
 
Adjusted income taxes
   $ 35.1     $ 33.7  
    
 
 
   
 
 
 
GAAP effective tax rate
     25.4     35.4
    
 
 
   
 
 
 
Adjusted effective tax rate
     22.6     23.7
    
 
 
   
 
 
 
The most significant factor impacting our adjusted effective tax rate in 2019 relates to the adjustment of income tax provisions. During 2019, the Company recorded additional tax and interest arising as a consequence of the tax audit into Innospec Performance Chemicals Italia Srl. This item had a negative impact on the effective tax rate, which has been subsequently excluded in determining the adjusted effective tax rate. We note that any finally determined tax liabilities would be reimbursed by the previous owner under the terms of the sale and purchase agreement.
The most significant factor impacting our adjusted effective tax rate in 2018 is the recognized implications of the Tax Act.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, being the Tax Act. On the same date, SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a
 
41

measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete their accounting under ASC 740, Income Taxes. Our accounting for the impact of the Tax Act under SAB 118 was completed in 2018.
The deemed repatriation transition tax (“Transition Tax”) is a tax on certain previously untaxed accumulated earnings and profits (“E&P”) of the Company’s
non-U.S.
subsidiaries. At December 31, 2017, we were able to reasonably estimate the Transition Tax and recorded a provisional Transition Tax obligation of $47.7 million. On the basis of revised E&P computations that were completed in 2018, we adjusted our Transition Tax estimate to $61.1 million. Net of related consequential impacts recorded in our 2017 U.S. federal income tax return, we recorded an additional $12.3 million income tax expense in the fourth quarter of 2018.
LIQUIDITY AND FINANCIAL CONDITION
Working Capital
In 2020 our working capital decreased by $13.0 million, while our adjusted working capital decreased by $47.5 million. The difference is primarily due to the exclusion of the increase in our cash and cash equivalents, together with the exclusion of the decrease for the current portion of our income taxes liability.
The Company believes that adjusted working capital, a
non-GAAP
financial measure, provides useful information to investors in evaluating the Company’s underlying performance and identifying operating trends. Management uses this
non-GAAP
financial measure internally to allocate resources and evaluate the performance of the Company’s operations. Items excluded from the adjusted working capital calculation are listed in the table below and represent factors which do not fluctuate in line with the day to day working capital needs of the business.
 
(in millions)
  
2020
   
2019
 
Total current assets
   $ 566.2     $ 630.3  
Total current liabilities
     (252.4     (303.5
    
 
 
   
 
 
 
Working capital
     313.8       326.8  
Less cash and cash equivalents
     (105.3     (75.7
Less prepaid income taxes
     (4.2     (2.5
Less other current assets
     (0.4     (0.8
Add back current portion of accrued income taxes
     5.5       10.3  
Add back current portion of finance leases
     0.5       1.0  
Add back current portion of plant closure provisions
     6.6       5.6  
Add back current portion of operating lease liabilities
     11.3       10.6  
    
 
 
   
 
 
 
Adjusted working capital
   $ 227.8     $ 275.3  
    
 
 
   
 
 
 
We had a $70.6 million decrease in trade and other accounts receivable primarily driven by the decline in sales in our Fuel Specialties and Oilfield Services segments as a result of the
 
42

COVID-19
pandemic. Days’ sales outstanding in our Fuel Specialties segment remained unchanged at 52 days; decreased in our Performance Chemicals segment from 64 days to 60 days; and decreased from 66 days to 63 days in our Oilfield Services segment.
We had a $24.6 million decrease in inventories, net of a $4.9 million increase in allowances, as we managed inventory levels in anticipation of increased demand that we expect in 2021. Days’ sales in inventory in our Fuel Specialties segment increased from 97 days to 117 days; decreased in our Performance Chemicals segment from 66 days to 58 days; and increased from 71 days to 95 days in our Oilfield Services segment.
Prepaid expenses increased $0.2 million, from $14.7 million to $14.9 million.
We had a $47.5 million decrease in accounts payable and accrued liabilities primarily due to lower production activity to align with reduced customer demand, together with lower accruals for share-based payments linked to the decrease in the Innospec share price during the year. Creditor days (including goods received not invoiced) in our Fuel Specialties segment decreased from 52 days to 34 days; decreased in our Performance Chemicals segment from 54 days to 48 days; and increased from 43 days to 49 days in our Oilfield Services segment.
Operating Cash Flows
We generated cash from operating activities of $145.9 million in 2020 compared to cash inflows of $161.6 million in 2019. The reduction in cash generated from operating activities was primarily related to the adverse impact of
COVID-19
and the fall in oil prices on customer activity and the timing of payments for income taxes.
Cash
At December 31, 2020 and 2019, we had cash and cash equivalents of $105.3 million and $75.7 million, respectively, of which $52.5 million and $57.9 million, respectively, were held by
non-U.S.
subsidiaries principally in the United Kingdom.
The increase in cash and cash equivalents in 2020 of $29.6 million was primarily driven by the cash inflows from operating activities including our reductions in working capital, being partly offset by the repayment of $60.0 million of our revolving credit facility together with the normal investments in capital projects and the payment of our semi-annual dividends.
Debt
As at December 31, 2020, the Company had repaid all of its borrowings under the revolving credit facility and as a result, the related deferred finance costs of $1.3 million are now included within other current and 
non-current
assets at the balance sheet date.
On September 16, 2020, Innospec and certain of its subsidiaries agreed to extend the term of its revolving credit facility, as described below, until September 25, 2024. The costs of $0.3 million for extending the term have been capitalized on the balance sheet, which are being amortized over the expected life of the facility.
 
43

On September 30, 2019 the Company repaid its
pre-existing
term loan and revolving credit facility that had been amended and restated on December 14, 2016, and replaced this borrowing with the new credit facility. As a result, refinancing costs of $1.5 million were capitalized which are being amortized over the expected life of the facility.
On September 26, 2019, Innospec and certain of its subsidiaries entered into a new agreement for a $250.0 million revolving credit facility until September 25, 2023 with an option to request an extension to the facility for a further year. The facility also contains an accordion feature whereby the Company may elect to increase the total available borrowings by an aggregate amount of up to $125.0 million.
The revolving credit facility contains 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) our ratio of net debt to EBITDA must not be greater than 3.0:1.0 and (2) our ratio of EBITDA to net interest must not be less than 4.0:1.0 Management has determined that the Company has not breached these covenants and does not expect to breach these covenants for the next 12 months.
The revolving credit facility contains restrictions which may limit our activities, and operational and financial flexibility. We may not be able to borrow if an event of default is outstanding, which includes a material adverse change to our assets, operations or financial condition. The credit facility contains a number of restrictions that limit our ability, among other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guarantee obligations of third parties, make investments, effect a merger or consolidation, dispose of assets, or materially change our line of business.
At December 31, 2020, we had no debt outstanding under the revolving credit facility and $0.6 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments.
At December 31, 2020, our maturity profile of long-term debt and finance leases is set out below:
 
(in millions)
      
2021
   $ 0.5  
2022
     0.1  
2023
     0.0  
2024
     0.0  
    
 
 
 
Total debt
     0.6  
Current portion of long-term debt and finance leases
     (0.1
    
 
 
 
Long-term debt and finance leases, net of current portion
   $ 0.5  
    
 
 
 
 
44

Outlook
During the early part of 2020, we focused on growing our business and on developing a strong pipeline of what we believe to be promising organic growth projects to support future growth.
For the rest of the year, while we have continued this strategy, we have also had to deal with the impacts of the
COVID-19
pandemic and the collapse in crude oil prices. These events created unprecedented demand destruction.
However, our financial performance in this difficult environment, combined with our strong balance sheet and financial prudence have been the solid foundation on which we have been able to weather this storm. Indeed, we ended the year with a very strong net cash position and we had no requirement to call on additional financial support from our banks during the pandemic. We believe this financial strength means that we are well-placed to resource growth projects – both organic and acquisitive.
We believe that our long-term strategy remains valid and this has been supported by the recovery in markets towards the end of 2020.
While we are optimistic for prospects in 2021 and beyond, we are also cautious given the current circumstances. The global pandemic is not yet under control and has the potential to adversely impact demand in the near term.
We will continue our strategy of investing in R&D to continuously improve our products and technology. When these innovations are combined with high quality customer service, we are confident that we have a solid foundation of future organic growth.
We also remain active in corporate development, and we enter 2021 with balance sheet strength which gives us the ability to participate in appropriate acquisition opportunities as they arise.
 
45

Contractual Commitments
The following represents contractual commitments at December 31, 2020 and the effect of those obligations on future cash flows:
 
(in millions)
  
Total
    
2021
    
2022-23
    
2024-25
    
Thereafter
 
Operating activities
              
Remediation payments
     58.5        6.6        9.4        7.1        35.4  
Operating lease commitments
     40.2        11.3        17.3        8.9        2.7  
Raw material purchase obligations
     19.7        3.8        7.8        8.1        0.0  
Interest payments on debt
     3.4        0.9        1.8        0.7        0.0  
Investing activities
              
Capital commitments
     14.7        14.7        0.0        0.0        0.0  
Financing activities
              
Long-term debt obligations
     0.0        0.0        0.0        0.0        0.0  
Finance leases
     0.6        0.5        0.1        0.0        0.0  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 137.1      $ 37.8      $ 36.4      $ 24.8      $ 38.1  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Operating activities
Remediation payments represent those cash flows that the Company is currently obligated to pay in respect of environmental remediation of current and former facilities. It does not include any discretionary remediation costs that the Company may choose to incur.
Operating lease commitments relate primarily to
right-of-use
assets at third party manufacturing facilities, office space, motor vehicles and various items of computer and office equipment which are expected to be renewed and replaced in the normal course of business.
Raw material purchase obligations relate to certain long-term raw material contracts which stipulate fixed or minimum quantities to be purchased; fixed, minimum or variable cost provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancellable without penalty.
The estimated payments included in the table above reflect the variable interest charge on long-term debt obligations. Estimated commitment fees are also included and interest income is excluded.
Due to the uncertainty regarding the nature of tax audits, particularly those which are not currently underway, it is not meaningful to predict the outcome of obligations related to unrecognized tax benefits. Further disclosure is provided in Note 11 of the Notes to the Consolidated Financial Statements.
 
46

Investing activities
Capital commitments relate to certain capital projects that the Company has committed to undertake.
Financing activities
On September 16, 2020, Innospec and certain of its subsidiaries agreed to extend the term of its revolving credit facility, as described below, until September 25, 2024.
On September 30, 2019 the Company repaid its
pre-existing
term loan and revolving credit facility that had been amended and restated on December 14, 2016, and replaced this borrowing with the new credit facility.
On September 26, 2019, Innospec and certain of its subsidiaries entered into a new agreement for a $250.0 million revolving credit facility until September 25, 2023 with an option to request an extension to the facility for a further year. The facility also contains an accordion feature whereby the Company may elect to increase the total available borrowings by an aggregate amount of up to $125.0 million.
Finance leases relate to the financing of certain fixed assets in our Fuel Specialties and Oilfield Services segments.
Environmental Matters and Plant Closures
Under certain environmental laws the Company is responsible for the remediation of hazardous substances or wastes at currently or formerly owned or operated properties.
As most of our manufacturing operations have been conducted outside the U.S., we expect that liability pertaining to the investigation and remediation of contaminated properties is likely to be determined under
non-U.S.
law.
We evaluate costs for remediation, decontamination and demolition projects on a regular basis. Full provision is made for those costs to which we are committed under environmental laws amounting to $58.5 million at December 31, 2020. Remediation expenditure utilizing these provisions was $4.1 million, $4.4 million and $3.1 million in the years 2020, 2019 and 2018, respectively.
 
47

Item 7A
Quantitative and Qualitative Disclosures about Market Risk
The Company uses floating rate debt to finance its global operations. The Company is subject to business risks inherent in
non-U.S.
activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The political and economic risks are mitigated by the stability of the countries in which the Company’s largest operations are located. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize bad debt risk. Collateral is not generally required.
From time to time, the Company uses derivatives, including interest rate swaps, commodity swaps and foreign currency forward exchange contracts, in the normal course of business to manage market risks. The derivatives used in hedging activities are considered risk management tools and are not used for trading purposes. In addition, the Company enters into derivative instruments with a diversified group of major financial institutions in order to manage the exposure to
non-performance
of such instruments. The Company’s objective in managing the exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flows and to lower overall borrowing costs. The Company’s objective in managing the exposure to changes in foreign currency exchange rates is to reduce volatility on earnings and cash flows associated with such changes.
The Company offers fixed prices for some long-term sales contracts. As manufacturing and raw material costs are subject to variability the Company may use commodity swaps to hedge the cost of some raw materials thus reducing volatility on earnings and cash flows. The derivatives are considered risk management tools and are not used for trading purposes. The Company’s objective is to manage its exposure to fluctuating costs of raw materials.
Interest Rate Risk
From time to time, the Company uses interest rate swaps to manage interest rate exposure. As at December 31, 2020 the Company had cash and cash equivalents of $105.3 million, and long-term debt and finance leases of $0.6 million (including current portion). Long-term debt comprises a $250.0 million revolving credit facility available to the Company. The credit facilities carry an interest rate based on U.S. dollar LIBOR plus a margin of between 1.05% and 2.30% which is dependent on the Company’s ratio of net debt to EBITDA. Net debt and EBITDA are
non-GAAP
measures of liquidity defined in the credit facility.
At December 31, 2020, $0.0 million was drawn under the revolving credit facility.
The Company previously entered into interest rate swap contracts to reduce interest rate risk on its core debt. As at December 31, 2020 and December 31, 2019, there were no interest rate swaps in place with all swaps having been settled during the year. As at December 31, 2018, there were interest rate swaps with a notional value of $132.5 million in place. Interest rate swaps were in place to hedge interest rate risk on the term loan for a notional value that matched the repayment profile of the term loan.
 
48

The Company has $0.6 million long-term debt and finance leases (including the current portion) which is offset by $105.3 million cash and cash equivalents. The interest payable on long-term debt (excluding the margin) exceeds the interest receivable on positive cash balances. On a gross basis, assuming no additional interest on the cash balances and after deducting interest rate hedging, a hypothetical absolute change of 1% in U.S. base interest rates for a
one-year
period would impact net income and cash flows by approximately $0.0 million before tax. On a net basis, assuming additional interest on the cash balances, a hypothetical absolute change of 1% in U.S. base interest rates for a
one-year
period would impact net income and cash flows by approximately $1.1 million before tax.
The above does not consider the effect of interest or exchange rate changes on overall activity nor management action to mitigate such changes. As at December 31, 2020, Innospec did not have any interest rate swaps to mitigate the risk identified above.
Exchange Rate Risk
The Company generates an element of its revenues and incurs some operating costs in currencies other than the U.S. dollar. The reporting currency of the Company is the U.S. dollar.
The Company evaluates the functional currency of each reporting unit according to the economic environment in which it operates. Several major subsidiaries of the Company operating outside of the U.S. have the U.S. dollar as their functional currency due to the nature of the markets in which they operate. In addition, the financial position and results of operations of some of our overseas subsidiaries are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements.
The primary foreign currencies in which we have exchange rate fluctuation exposure are the European Union euro, British pound sterling and Brazilian Real. Changes in exchange rates between these foreign currencies and the U.S. dollar will affect the recorded levels of our assets and liabilities, to the extent that such figures reflect the inclusion of foreign assets and liabilities which are translated into U.S. dollars for presentation in our consolidated financial statements, as well as our results of operations.
The Company’s objective in managing the exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency exchange rate changes. Accordingly, the Company enters into various contracts that change in value as foreign currency exchange rates change to protect the U.S. dollar value of its existing foreign currency denominated assets, liabilities, commitments, and cash flows. The Company also uses foreign currency forward exchange contracts to offset a portion of the Company’s exposure to certain foreign currency denominated revenues so that gains and losses on these contracts offset changes in the U.S. dollar value of the related foreign currency denominated revenues. The objective of the hedging program is to reduce earnings and cash flow volatility related to changes in foreign currency exchange rates.
 
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The trading of our Fuel Specialties, Performance Chemicals and Oilfield Services segments is inherently naturally hedged and accordingly changes in exchange rates would not be material to our earnings or financial position. The cost base of our corporate costs, however, are largely denominated in British pound sterling. A 5% strengthening in the U.S. dollar against British pound sterling would increase reported operating income by approximately $1.4 million for a
one-year
period excluding the impact of any foreign currency forward exchange contracts. Where a 5% strengthening of the U.S. dollar has been used as an illustration, a 5% weakening would be expected to have the opposite effect on operating income.
Raw Material Cost Risk
We use a variety of raw materials, chemicals and energy in our manufacturing and blending processes. Many of the raw materials that we use are derived from petrochemical-based and vegetable-based feedstocks which can be subject to periods of rapid and significant cost instability. These fluctuations in cost can be caused by political instability in oil producing nations and elsewhere, or other factors influencing global supply and demand of these materials, over which we have no or little control. We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. From time to time we enter into hedging arrangements for certain raw materials, but do not typically enter into hedging arrangements for all raw materials, chemicals or energy costs. Should the costs of raw materials, chemicals or energy increase, and should we not be able to pass on these cost increases to our customers, then operating margins and cash flows from operating activities would be adversely impacted. Should raw material costs increase significantly, then the Company’s need for working capital could similarly increase. Any of these risks could adversely impact our results of operations, financial position and cash flows.
 
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Item 8
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Innospec Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Innospec Inc. and its subsidiaries
(the “Company”) as of December 31, 2020 and 2019,
and the related consolidated statements of income, comprehensive income, equity
and cash flows for each of the two years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).
We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019
,
and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
 
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consolidated
financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
 
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in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Plant Closure Provision
As described in Notes 2 and 13 to the consolidated financial statements, at December 31, 2020 there is a provision in place for $58.5 million relating to the Company’s legal responsibility for the remediation of hazardous substances or wastes at currently or formerly owned or operated properties, with the principal site giving rise to environmental remediation liabilities being the manufacturing site at Ellesmere Port in the United Kingdom. The Company must comply with environmental legislation in the countries in which it operates or has operated and annually reassesses the program of work required. This included management developing estimates and assumptions relating to the cost and timing of performing the remediation work. Management used specialists to develop these estimates. Costs of future obligations are discounted to their present values using the Company’s credit-adjusted risk-free rate.
The principal considerations for our determination that performing procedures relating to the plant closure provision is a critical audit matter are that there were significant estimates and assumptions made by management over the valuation of the plant closure provision. This, in turn led to a high degree of auditor judgment, subjectivity and effort in evaluating management’s assumptions including (i) the program of work required and the costs of performing that work; (ii) the timing of performing the remediation work; and (iii) the credit-adjusted risk-free rate used to discount the future obligations. Professionals with specialized skill and knowledge were used to assist in performing procedures (i) and (ii) and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of the plant closure provision.
These procedures also included, among others, (i) the use of professionals with specialized skill and knowledge to assist                in testing management’s process for determining the plant closure provision. This included evaluating the appropriateness of the valuation method and the reasonableness of significant assumptions, including the assessment of the program of work required, cost, and timing assumptions developed by management’s specialists; (ii) evaluating the scope, competency, and objectivity of management’s specialists based on the work they were engaged to perform; and (iii) evaluating the credit-adjusted risk-free rate applied to calculate the present value of the future obligations.
PricewaterhouseCoopers LLP (signed)
Manchester, United Kingdom
February 17, 2021. 
We have served as the Company’s auditor since 2019
.
 
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Innospec Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, cash flows and equity of Innospec, Inc. and subsidiaries (the Company) for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
KPMG LLP
We served as the Company’s auditor from 2011 to 2019.
Manchester, United Kingdom
February 20, 2019
 
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CONSOLIDATED STATEMENTS OF INCOME
(
in millions, except share and per share data
)
 
    
Years ended December 31
 
    
2020
   
2019
   
2018
 
Net sales
   $