INNOSPEC INC. - FORM 10-Q

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file	filename
EX-32.2 - EX-32.2 - INNOSPEC INC.	d316730dex322.htm
EX-32.1 - EX-32.1 - INNOSPEC INC.	d316730dex321.htm
EX-31.2 - EX-31.2 - INNOSPEC INC.	d316730dex312.htm
EX-31.1 - EX-31.1 - INNOSPEC INC.	d316730dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

☐	TRANSITION REPORT 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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of May 3, 2017
Common Stock, par value $0.01		24,130,761

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	4

Item 1	Financial Statements	4
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Balance Sheets	6
	Consolidated Balance Sheets (continued)	7
	Consolidated Statements of Cash Flows	8
	Consolidated Statement of Equity	9
	Notes To The Unaudited Interim Consolidated Financial Statements	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 2017	22
	Critical Accounting Estimates	22
	Results of Operations	22
	Liquidity and Financial Condition	27
Item 3	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4	Controls and Procedures	29

PART II	OTHER INFORMATION	30

Item 1	Legal Proceedings	30
Item 1A	Risk Factors	30
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3	Defaults Upon Senior Securities	30
Item 4	Mine Safety Disclosures	30
Item 5	Other Information	30
Item 6	Exhibits	31

SIGNATURES		32

CAUTIONARY STATEMENT RELATIVE TO FORWARD-LOOKING STATEMENTS

This Form 10-Q 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,” “believes,” “feels” 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, and our actual performance or results may differ materially from these forward-looking statements. Additional information regarding risks, uncertainties and assumptions relating to Innospec and affecting our business operations and prospects are described in Innospec’s Annual Report on Form 10-K for the year ended December 31, 2016 and other reports filed with the U.S. Securities and Exchange Commission. 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” in such reports. Innospec undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

FINANCIAL INFORMATION

Item 1

Financial Statements

INNOSPEC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended March 31
(in millions, except share and per share data)	2017			2016

Net sales	$	294.3		$	212.1
Cost of goods sold		(203.4	)		(135.9	)

Gross profit		90.9			76.2
Operating expenses:
Selling, general and administrative		(55.3	)		(43.9	)
Research and development		(7.4	)		(6.9	)
Adjustment to fair value of contingent consideration		0.0			1.6
Loss on disposal of subsidiary		0.0			(1.4	)
Foreign exchange loss on liquidation of subsidiary		(1.8	)		0.0

Total operating expenses		(64.5	)		(50.6	)

Operating income		26.4			25.6
Other net expense		(1.0	)		(0.3	)
Interest expense, net		(2.2	)		(0.8	)

Income before income taxes		23.2			24.5
Income taxes		(6.0	)		(5.6	)

Net income	$	17.2		$	18.9


Earnings per share:
Basic	$	0.71		$	0.79

Diluted	$	0.70		$	0.77


Weighted average shares outstanding (in thousands):
Basic		24,087			24,019

Diluted		24,527			24,483

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

INNOSPEC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31
(in millions)	2017			2016
Net income	$	17.2		$	18.9

Other comprehensive income:
Changes in cumulative translation adjustment, net of tax of $(0.1) million and $0.4 million, respectively		3.5			1.6
Changes in unrealized gains on derivative instruments, net of tax of $(0.1) million and $0.0 million, respectively		0.2			0.0
Amortization of prior service credit, net of tax of $0.1 million and $0.1 million, respectively		(0.2	)		(0.2	)
Amortization of actuarial net losses, net of tax of $(0.2) million and $(0.2) million, respectively		1.0			0.5

Total other comprehensive income		4.5			1.9

Total comprehensive income	$	21.7		$	20.8

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

INNOSPEC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(in millions, except share and per share data)	March 31, 2017			December 31, 2016
	(Unaudited)

Assets
Current assets:
Cash and cash equivalents	$	45.4		$	101.9
Trade and other accounts receivable (less allowances of $4.2 million and $4.7 million, respectively)		219.3			154.4
Inventories (less allowances of $9.2 million and $8.6 million, respectively):
Finished goods		140.3			118.1
Raw materials		58.7			55.7

Total inventories		199.0			173.8
Prepaid expenses		7.2			6.2
Prepaid income taxes		5.2			4.8

Total current assets		476.1			441.1
Property, plant and equipment:
Gross cost		278.1			251.8
Less accumulated depreciation		(101.0	)		(94.4	)

Net property, plant and equipment		177.1			157.4
Goodwill		335.4			374.8
Other intangible assets		171.2			144.4
Deferred tax assets		14.3			14.9
Pension asset		50.2			48.0
Other non-current assets		1.1			0.8

Total assets	$	1,225.4		$	1,181.4

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

INNOSPEC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - (Continued)


(in millions, except share and per share data)	March 31, 2017			December 31, 2016
	(Unaudited)

Liabilities and Equity
Current liabilities:
Accounts payable	$	97.5		$	59.6
Accrued liabilities		90.4			94.3
Current portion of long term debt		10.3			10.3
Current portion of finance leases		2.0			1.6
Current portion of plant closure provisions		6.4			6.7
Current portion of accrued income taxes		13.9			9.4
Current portion of acquisition-related contingent consideration		1.1			1.1
Current portion of deferred income		0.1			0.1

Total current liabilities		221.7			183.1
Long-term debt, net of current portion		228.7			258.5
Finance leases, net of current portion		2.7			2.9
Plant closure provisions, net of current portion		34.2			32.8
Unrecognized tax benefits		2.3			2.3
Deferred tax liabilities		43.3			32.3
Pension liability		14.6			14.2
Deferred income, net of current portion		0.5			0.5
Other non-current liabilities		0.9			1.0

Total liabilities		548.9			527.6

Equity:
Common stock, $0.01 par value, authorized 40,000,000 shares, issued 29,554,500 shares		0.3			0.3
Additional paid-in capital		315.7			315.1
Treasury stock (5,423,738 and 5,483,341 shares at cost, respectively)		(97.1	)		(97.5	)
Retained earnings		579.0			561.8
Accumulated other comprehensive loss		(121.7	)		(126.2	)

Total Innospec stockholders’ equity		676.2			653.5
Non-controlling interest		0.3			0.3

Total equity		676.5			653.8

Total liabilities and equity	$	1,225.4		$	1,181.4

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

INNOSPEC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31
(in millions)	2017			2016
Cash Flows from Operating Activities
Net income	$	17.2		$	18.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12.3			9.2
Adjustment to fair value of contingent consideration		0.0			(1.6	)
Deferred taxes		1.0			0.3
Loss on disposal of subsidiary		0.0			1.4
Foreign exchange loss on liquidation of subsidiary		1.8			0.0
Cash contributions to defined benefit pension plans		(0.2	)		(0.3	)
Non-cash movements on defined benefit pension plans		(0.9	)		(1.6	)
Stock option compensation		1.0			0.9
Changes in assets and liabilities, net of effects of acquired and divested companies:
Trade and other accounts receivable		(64.2	)		(9.1	)
Inventories		(22.8	)		7.9
Prepaid expenses		(1.0	)		0.7
Accounts payable and accrued liabilities		31.4			(21.1	)
Accrued income taxes		3.9			0.4
Plant closure provisions		1.1			0.3
Other non-current assets and liabilities		(0.5	)		0.4

Net cash (used in)/provided by operating activities		(19.9	)		6.7

Cash Flows from Investing Activities
Capital expenditures		(6.7	)		(3.1	)
Business combinations, net of cash acquired		0.0			1.8
Sale of short-term investments		0.0			3.1

Net cash (used in)/provided by investing activities		(6.7	)		1.8

Cash Flows from Financing Activities
Proceeds from revolving credit facility		0.0			18.0
Repayments of revolving credit facility		(30.0	)		(5.0	)
Repayments of finance leases		(0.6	)		(0.2	)
Receipt of short-term borrowing		0.0			6.8
Payment for acquisition-related contingent consideration		0.0			(44.0	)
Issue of treasury stock		1.0			0.2
Repurchase of common stock		(0.9	)		(8.2	)

Net cash used in financing activities		(30.5	)		(32.4	)
Effect of foreign currency exchange rate changes on cash		0.6			0.4

Net change in cash and cash equivalents		(56.5	)		(23.5	)
Cash and cash equivalents at beginning of period		101.9			136.9

Cash and cash equivalents at end of period	$	45.4		$	113.4

Amortization of deferred finance costs of $0.2 million (2016 – $0.1 million) are included in depreciation and amortization in the consolidated statement of cash flow but in interest expense in the consolidated statement of income.

As disclosed in Note 15 we have recast certain 2016 amounts to conform to new accounting standards.

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

INNOSPEC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)


(in millions)	Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Loss			Non- controlling Interest		Total Equity

Balance at December 31, 2016	$	0.3	$	315.1		$	(97.5	)	$	561.8	$	(126.2	)	$	0.3	$	653.8
Net income										17.2							17.2
Changes in unrealized gains on derivative instruments, net of tax												0.2					0.2
Changes in cumulative translation adjustment, net of tax												3.5					3.5
Treasury stock reissued				(0.4	)		1.3										0.9
Treasury stock repurchased							(0.9	)									(0.9	)
Stock option compensation				1.0													1.0
Amortization of prior service credit, net of tax												(0.2	)				(0.2	)
Amortization of actuarial net losses, net of tax												1.0					1.0

Balance at March 31, 2017	$	0.3	$	315.7		$	(97.1	)	$	579.0	$	(121.7	)	$	0.3	$	676.5

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

INNOSPEC INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all the information and notes necessary for a comprehensive presentation of financial position, results of operations and cash flows.

It is our opinion, however, that all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) have been made which are necessary for the financial statements to be fairly stated. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed on February 15, 2017.

The results for the interim period covered by this report are not necessarily indicative of the results to be expected for the full year.

The Company reports its financial performance based on the four reportable segments Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives. Our reportable segments were changed in the second quarter of 2016 as explained in our Annual Report on Form 10-K. We have recast certain prior 2016 amounts to conform to the way we now internally manage and monitor segment performance.

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.

NOTE 2 – SEGMENT REPORTING

The Company reports its financial performance based on the four reportable segments Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives.

The Fuel Specialties, Performance Chemicals and Oilfield Services segments operate in markets where we actively seek growth opportunities although their ultimate customers are different. The Octane Additives segment is expected to decline in the near future as our one remaining refinery customer transitions to unleaded fuel.

The Company evaluates the performance of its segments based on operating income. The following tables analyze sales and other financial information by the Company’s reportable segments:


	Three Months Ended March 31
(in millions)	2017			2016
Net Sales:
Refinery and Performance	$	100.4		$	98.2
Other		26.0			25.2

Fuel Specialties		126.4			123.4

Personal Care		47.5			32.3
Home Care		26.9			0.3
Other		20.1			2.1

Performance Chemicals		94.5			34.7
Oilfield Services		66.5			36.2
Octane Additives		6.9			17.8

	$	294.3		$	212.1


	Three Months Ended March 31
(in millions)	2017			2016
Net sales:
Fuel Specialties	$	126.4		$	123.4
Performance Chemicals		94.5			34.7
Oilfield Services		66.5			36.2
Octane Additives		6.9			17.8

	$	294.3		$	212.1


Gross profit:
Fuel Specialties	$	46.1		$	42.0
Performance Chemicals		16.7			10.8
Oilfield Services		25.4			11.6
Octane Additives		2.7			11.8

	$	90.9		$	76.2


Operating income:
Fuel Specialties	$	26.8		$	23.9
Performance Chemicals		6.0			4.4
Oilfield Services		3.0			(5.5	)
Octane Additives		2.0			11.0
Pension credit		1.1			1.8
Corporate costs		(10.7	)		(10.2	)
Adjustment to fair value of contingent consideration		0.0			1.6
Loss on disposal of subsidiary		0.0			(1.4	)
Foreign exchange loss on liquidation of subsidiary		(1.8	)		0.0

Total operating income	$	26.4		$	25.6

The pension credit relates to the United Kingdom defined benefit pension plan which is closed to future service accrual. The charges related to our other much smaller pension arrangements in the U.S. and overseas are included in the segment and income statement captions consistent with the related employees’ costs.

The following table presents a summary of the depreciation and amortization charges incurred by the Company’s reportable segments:


	Three Months Ended March 31
(in millions)	2017		2016
Depreciation:
Fuel Specialties	$	1.0	$	0.9
Performance Chemicals		2.2		0.5
Oilfield Services		1.6		1.4
Octane Additives		0.2		0.1
Corporate		0.2		0.2

	$	5.2	$	3.1


Amortization:
Fuel Specialties	$	0.2	$	0.2
Performance Chemicals		1.9		1.0
Oilfield Services		3.0		3.0
Corporate		1.8		1.8

	$	6.9	$	6.0

NOTE 3 – EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the effect of options that are dilutive and outstanding during the period. Per share amounts are computed as follows:


	Three Months Ended March 31
	2017		2016
Numerator (in millions):
Net income available to common stockholders	$	17.2	$	18.9


Denominator (in thousands):
Weighted average common shares outstanding		24,087		24,019
Dilutive effect of stock options and awards		440		464

Denominator for diluted earnings per share		24,527		24,483


Net income per share, basic:	$	0.71	$	0.79


Net income per share, diluted:	$	0.70	$	0.77

In the three months ended March 31, 2017, the average number of anti-dilutive options excluded from the calculation of diluted earnings per share were 9,422 (three months ended March 31, 2016 – 0).

NOTE 4 – GOODWILL

The following table summarizes goodwill at the balance sheet dates:


(in millions)	December 31, 2016			Movement in the period			March 31, 2017

Gross cost ⁽¹⁾	$	611.3		$	(39.4	)	$	571.9
Accumulated impairment losses		(236.5	)		0.0			(236.5	)

Net book amount	$	374.8		$	(39.4	)	$	335.4

⁽¹⁾	Gross cost for 2017 and 2016 is net of $298.5 million of historical accumulated amortization.

Acquisition of Huntsman European Differentiated Surfactants Business

On December 30, 2016 the Company acquired the European Differentiated Surfactants business (“Huntsman”) from Huntsman Investments (Netherlands) B.V.. We purchased the business for total consideration of $199.2 million subject to working capital adjustments.

The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition dates become available but does not exceed twelve months. During the three months ended March 31, 2017, we have reviewed the fair values of assets acquired and liabilities assumed in the acquisition of Huntsman, resulting in a $39.3 million increase in assets acquired and a corresponding decrease in goodwill. The following table summarizes the calculations of the total purchase price and the estimated allocation of the purchase price to assets and liabilities assumed for the business:


(in millions)	Huntsman
Goodwill	$	68.1
Other intangible assets		33.5
Fixed assets		92.7
Other net assets acquired		4.9

Purchase price, net of cash acquired	$	199.2

The Company has provisionally allocated $33.5 million of the purchase price to other intangible assets which we are amortizing on a straight-line basis to the income statement over an estimated expected life of 10 years. These intangible assets principally relate to customer relationships and an amortization expense of $0.9 million was recognized in selling, general and administrative expenses for the three months ended March 31, 2017 (three months ended March 31, 2016 - $0.0 million).

The Company has recorded measurement period adjustments to increase the fair value of the acquired tangible fixed assets of $16.2 million, a deferred tax liability of $10.3 million related to the fair valuations of intangible and tangible fixed assets and adjustments to other net assets totalling $0.1 million. The final purchase price, including net working capital adjustments, and fair value review of assets and liabilities acquired has not been finalized as at March 31, 2017.

Huntsman, and the associated goodwill and other intangible assets, are included within our Performance Chemicals segment for management and reporting purposes. There is currently no goodwill amortizable for tax purposes.

NOTE 5 – OTHER INTANGIBLE ASSETS

The following table summarizes the other intangible assets movement year on year:


	Three Months Ended March 31
(in millions)	2017			2016
Gross cost at January 1	$	248.6		$	248.6
Acquisitions		33.5			0.0
Exchange effect		0.1			0.0

Gross cost at March 31		282.2			248.6

Accumulated amortization at January 1		(104.2	)		(79.9	)
Amortization expense		(6.9	)		(6.0	)
Exchange effect		0.1			(0.1	)

Accumulated amortization at March 31		(111.0	)		(86.0	)

Net book amount at March 31	$	171.2		$	162.6

Amortization expense


	Three Months Ended March 31
(in millions)	2017			2016
Product rights	$	(0.9	)	$	(0.9	)
Brand names		(0.3	)		(0.3	)
Technology		(0.9	)		(0.9	)
Customer relationships		(2.6	)		(1.7	)
Non-compete agreements		(0.2	)		(0.2	)
Marketing related		(0.2	)		(0.2	)
Internally developed software		(1.8	)		(1.8	)

Total	$	(6.9	)	$	(6.0	)

NOTE 6 – PENSION PLANS

The Company maintains a defined benefit pension plan (the “Plan”) covering a number of its current and former employees in the United Kingdom, although it does also have other much smaller pension arrangements in the U.S. and overseas. The Plan is closed to future service accrual but has a large number of deferred and current pensioners.


	Three Months Ended March 31
(in millions)	2017			2016

Plan net pension credit/(charge):
Service cost	$	(0.2	)	$	(0.2	)
Interest cost on projected benefit obligation		(3.7	)		(5.4	)
Expected return on plan assets		5.9			7.8
Amortization of prior service credit		0.3			0.3
Amortization of actuarial net losses		(1.2	)		(0.7	)

	$	1.1		$	1.8

The amortization of prior service credit and actuarial net losses is a reclassification out of accumulated other comprehensive loss into selling, general and administrative expenses.

The Company also maintains an unfunded defined benefit pension plan covering a number of its current and former employees in Germany (the “German plan”). The German plan is closed to new entrants and has no assets. The net pension charge for the German plan for the three months ended March 31, 2017 was $0.2 million (three months ended March 31, 2016 - $0.2 million).

As at March 31, 2017, our Performance Chemicals segment has pension schemes in its European businesses with a liability of $4.2 million (December 31, 2016 - $4.1 million).

NOTE 7 – INCOME TAXES

A roll-forward of unrecognized tax benefits and associated accrued interest and penalties is as follows:


(in millions)	Unrecognized Tax Benefits		Interest and Penalties		Total

Opening balance at January 1, 2017	$	2.2	$	0.1	$	2.3
Decrease for prior period tax positions		0.0		0.0		0.0

Closing balance at March 31, 2017		2.2		0.1		2.3
Current		0.0		0.0		0.0

Non-current	$	2.2	$	0.1	$	2.3

All of the unrecognized tax benefits, interest and penalties, would impact our effective tax rate if recognized.

We recognize accrued interest and penalties associated with uncertain tax positions as part of income taxes in our consolidated statements of income.

The Company or one of its subsidiaries files income tax returns with the U.S. federal government, and various state and foreign jurisdictions. As previously disclosed, one of the Company’s U.S. subsidiaries is currently subject to a state tax examination in respect of 2012 through to 2014 inclusive. The Company currently anticipates that adjustments, if any, arising out of this tax audit would not result in a material change to the Company’s financial position as at March 31, 2017.

The Company and its U.S. subsidiaries remain open to examination by the IRS for years 2013 onwards. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including France (2013 onwards), Germany (2015 onwards), Switzerland (2015 onwards) and the United Kingdom (2015 onwards).

The Company is in a position to control whether or not to repatriate foreign earnings and we currently do not expect to make a repatriation in the foreseeable future. No taxes have been provided for on the unremitted earnings of our overseas subsidiaries as any tax basis differences relating to investments in these overseas subsidiaries are considered to be indefinite in duration. The amount of unremitted earnings at December 31, 2016 was approximately $788 million. If these earnings are remitted, additional taxes could result after offsetting foreign income taxes paid although the calculation of the additional taxes is not practicable to compute at this time.

NOTE 8 – LONG-TERM DEBT

Long-term debt consists of the following:


(in millions)	March 31, 2017			December 31, 2016
Revolving credit facility	$	131.0		$	161.0
Term loan		110.0			110.0
Deferred finance costs		(2.0	)		(2.2	)

	$	239.0		$	268.8

NOTE 9 – PLANT CLOSURE PROVISIONS

The liability for estimated closure costs of Innospec’s manufacturing facilities includes costs for decontamination and environmental remediation activities (“remediation”). The principal site giving rise to remediation liabilities is the manufacturing site at Ellesmere Port in the United Kingdom. There are also remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe.

Movements in the provisions are summarized as follows:


	Three Months Ended March 31
(in millions)	2017			2016
Total at January 1	$	39.5		$	37.7
Charge for the period		1.5			1.1
Utilized in the period		(0.4	)		(0.8	)
Exchange effect		0.0			0.1

Total at March 31		40.6			38.1
Due within one year		(6.4	)		(5.4	)

Due after one year	$	34.2		$	32.7

Amounts due within one year refer to provisions where expenditure is expected to arise within one year of the balance sheet date.

NOTE 10 – FAIR VALUE MEASUREMENTS

The following table presents the carrying amount and fair values of the Company’s assets and liabilities measured on a recurring basis:


	March 31, 2017				December 31, 2016
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Non-derivatives:
Cash and cash equivalents	$	45.4	$	45.4	$	101.9	$	101.9
Derivatives (Level 1 measurement):
Other non-current assets:
Interest rate swaps		0.7		0.7		0.4		0.4

Liabilities
Non-derivatives:
Long-term debt (including current portion)	$	239.0	$	239.0	$	268.8	$	268.8
Finance leases (including current portion)		4.7		4.7		4.5		4.5
Derivatives (Level 1 measurement):
Other non-current liabilities:
Foreign currency forward exchange contracts		0.5		0.5		0.6		0.6
Non-financial liabilities (Level 3 measurement):
Stock equivalent units		8.9		8.9		9.8		9.8

The following methods and assumptions were used to estimate the fair values of financial instruments:

Cash and cash equivalents: The carrying amount approximates fair value because of the short-term maturities of such instruments.

Long-term debt and finance leases: Long-term debt principally comprises the term loan and revolving credit facility, which are shown net of deferred finance costs that have been capitalized. The fair value of long-term debt approximates to the carrying value, as the discounting to its present value is offset by the payments under the interest rate swaps. Finance leases relate to certain fixed assets in our oilfield services business. The carrying amount of long-term debt and finance leases approximates to the fair value.

Derivatives: The fair value of derivatives relating to interest rate swaps and foreign currency forward exchange contracts are derived from current settlement prices and comparable contracts using current assumptions. Interest rate swaps relate to contracts taken out to hedge interest rate risk on a portion of our credit facilities borrowing. Foreign currency forward exchange contracts primarily relate to contracts entered into to hedge future known transactions or hedge balance sheet net cash positions. The movements in the carrying amounts and fair values of these contracts are largely due to changes in exchange rates against the U.S. dollar and changes in U.S. LIBOR.

Stock equivalent units: The fair values of stock equivalent units are calculated at each balance sheet date using either the Black-Scholes or Monte Carlo method depending on the terms of each grant.

NOTE 11 – DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

The Company enters into various foreign currency forward exchange contracts to minimize currency exchange rate exposure from expected future cash flows. As at March 31, 2017 the contracts have maturity dates of up to eighteen months at the date of inception. These foreign currency forward exchange contracts have not been designated as hedging instruments, and their impact on the income statement for the first three months of 2017 was a loss of $0.5 million (first three months of 2016: gain of $1.5 million).

The Company enters into interest rate swaps to minimize interest rate exposure related to a part of our borrowing requirements. These interest rate swaps have been designated as hedging instruments, and their impact on accumulated other comprehensive loss for the first three months of 2017 was a gain of $0.3 million (first three months of 2016: $0.0 million).

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Legal matters

While we are involved from time to time in claims and legal proceedings that result from, and are incidental to, the conduct of our business including business and commercial litigation, employee and product liability claims, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their property is subject. It is possible, however, that an adverse resolution of an unexpectedly large number of such individual claims or proceedings could in the aggregate have a material adverse effect on the results of operations for a particular year or quarter.

Guarantees

The Company and certain of the Company’s consolidated subsidiaries are contingently liable for certain obligations of affiliated companies primarily in the form of guarantees of debt and performance under contracts entered into as a normal business practice. This includes guarantees of non-U.S. excise taxes and customs duties. As at March 31, 2017, such guarantees which are not recognized as liabilities in the consolidated financial statements amounted to $4.0 million.

Under the terms of the guarantee arrangements, generally the Company would be required to perform should the affiliated company fail to fulfil its obligations under the arrangements. In some cases, the guarantee arrangements have recourse provisions that would enable the Company to recover any payments made under the terms of the guarantees from securities held of the guaranteed parties’ assets.

The Company and its affiliates have numerous long-term sales and purchase commitments in their various business activities, which are expected to be fulfilled with no adverse consequences material to the Company.

NOTE 13 – STOCK-BASED COMPENSATION PLANS

The Company grants stock options and stock equivalent units (“SEUs”) from time to time as a long-term performance incentive. In certain cases the grants are subject to performance conditions such as the Company’s stock price. Where performance conditions apply the Monte Carlo simulation model is used to determine the fair values. Otherwise the Black-Scholes model is used to determine the fair values.

Stock option plans

The following table summarizes the transactions of the Company’s stock option plans for the three months ended March 31, 2017:


	Number of Options			Weighted Average Exercise Price		Weighted Average Grant-Date Fair Value

Outstanding at December 31, 2016		570,994		$	20.38	$	21.68
Granted - at discount		76,664		$	0.00	$	62.22
- at market value		18,843		$	70.60	$	16.84
Exercised		(72,994	)	$	12.92	$	24.77
Forfeited		(2,281	)	$	9.62	$	24.60

Outstanding at March 31, 2017		591,226		$	20.30	$	26.43

At March 31, 2017, there were 51,265 stock options that were exercisable, of which 11,695 had performance conditions attached.

The stock option compensation cost for the first three months of 2017 was $1.0 million (2016 – $0.9 million). The total intrinsic value of options exercised in the first three months of 2017 was $1.8 million (2016 – $1.5 million).

The total compensation cost related to non-vested stock options not yet recognized at March 31, 2017 was $9.1 million and this cost is expected to be recognized over the weighted-average period of 2.40 years.

Stock equivalent units

The following table summarizes the transactions of the Company’s SEUs for the three months ended March 31, 2017:


	Number of SEUs			Weighted Average Exercise Price		Weighted Average Grant-Date Fair Value

Outstanding at December 31, 2016		279,815		$	3.77	$	33.40
Granted - at discount		174,249		$	0.00	$	62.83
- at market value		5,530		$	70.60	$	16.84
Exercised		(29,989	)	$	6.21	$	26.38
Forfeited		(11,775	)	$	0.00	$	32.69

Outstanding at March 31, 2017		417,830		$	3.02	$	45.97

At March 31, 2017 there were 59,624 SEUs that are exercisable, of which 54,256 had performance conditions attached.

The charges for SEUs are spread over the life of the award subject to a revaluation to fair value each quarter. The revaluation may result in a charge or a credit to the income statement in the quarter dependent upon our share price and other performance criteria.

The SEU compensation cost for the first three months of 2017 was $0.9 million (2016 – a credit of $1.0 million). The total intrinsic value of SEUs exercised in the first three months of 2017 was $0.9 million (2016 - $1.1 million).

The weighted-average remaining vesting period of non-vested SEUs is 2.04 years.

NOTE 14 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS

Reclassifications out of accumulated other comprehensive loss for the first three months of 2017 were:


(in millions) Details about AOCL Components	Amount Reclassified from AOCL			Affected Line Item in the Statement where Net Income is Presented

Foreign currency translation items:
Liquidation of subsidiary	$	1.8			Loss on liquidation of subsidiary
Defined benefit pension plan items:
Amortization of prior service credit	$	(0.3	)		See ⁽¹⁾ below
Amortization of actuarial net losses		1.2			See ⁽¹⁾ below

		2.7			Total before tax
		(0.1	)		Income tax expense

Total reclassifications	$	2.6			Net of tax

⁽¹⁾	These items are included in the computation of net periodic pension cost. See Note 6 of the Notes to the Consolidated Financial Statements for additional information.

Changes in accumulated other comprehensive loss for the first three months of 2017, net of tax, were:


(in millions)	Derivative instruments		Defined Benefit Pension Plan Items			Cumulative Translation Adjustments			Total

Balance at December 31, 2016	$	0.3	$	(46.0	)	$	(80.5	)	$	(126.2	)


Other comprehensive income before reclassifications		0.2		0.0			3.5			3.7
Amounts reclassified from AOCL		0.0		0.8			0.0			0.8

Total other comprehensive income		0.2		0.8			3.5			4.5

Balance at March 31, 2017	$	0.5	$	(45.2	)	$	(77.0	)	$	(121.7	)

NOTE 15 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Effective January 2017, we prospectively adopted Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-based Payment Accounting which amends ASC Topic 718, Compensation Stock Compensation. The Standard requires recognition of the excess tax benefits or deficiencies of share-based compensation awards to employees through net income rather than additional

paid in capital. The calculation of excess tax benefits or deficiencies is based on the difference between market value of an award at the vesting or at the time of exercise compared to the grant date fair value recognized as compensation expense in the consolidated statements of income. The Company expects the effective tax rate including stock compensation to vary quarter to quarter depending on the amount of pre-tax net income and on the timing of the stock option exercises. The Company has elected to restate prior period comparatives for cash flow purposes. Additionally, the guidance allows for an election to account for forfeitures related to share based payments either as they occur or an estimation method. We elected to calculate share-based compensation using actual forfeitures. This has not had a significant impact on our financial reporting.

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Revision to Lease Accounting, which amends ASC Topic 842, Leases. The ASU requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers ASC Topic 606, which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. The original effective date for ASU 2014-09 was for annual and interim periods within those years beginning after December 15, 2016. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company has been evaluating the potential timing and impact of adopting the new revenue standard on its consolidated financial statements and has not yet determined the effect of the standard on its ongoing financial reporting.

NOTE 16 – RELATED PARTY TRANSACTIONS

Mr. Robert I. Paller has been a non-executive director of the Company since November 1, 2009. The Company has retained and continues to retain Smith, Gambrell & Russell, LLP (“SGR”), a law firm with which Mr. Paller holds a position. In the first three months of 2017 the Company incurred fees from SGR of $0.1 million (2016 – $0.2 million). As at March 31, 2017, the amount due to SGR from the Company was $0.0 million (December 31, 2016 - $0.0 million).

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 2017

This discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto.

CRITICAL ACCOUNTING ESTIMATES

The policies and estimates that the Company considers the most critical in terms of complexity and subjectivity of assessment are those related to business combinations, environmental liabilities, pensions, deferred tax and uncertain income tax positions, goodwill and property, plant and equipment and other intangible assets (net of amortization). These policies have been discussed in the Company’s 2016 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

The Company reports its financial performance based on the four reportable segments Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives. Our reportable segments were changed in the second quarter of 2016 as explained in our 2016 Annual Report on Form 10-K. We have recast certain prior period amounts to conform to the way we now internally manage and monitor segment performance.

The following table provides operating income by reporting segment:


	Three Months Ended March 31
(in millions)	2017			2016

Net sales:
Fuel Specialties	$	126.4		$	123.4
Performance Chemicals		94.5			34.7
Oilfield Services		66.5			36.2
Octane Additives		6.9			17.8

	$	294.3		$	212.1


Gross profit:
Fuel Specialties	$	46.1		$	42.0
Performance Chemicals		16.7			10.8
Oilfield Services		25.4			11.6
Octane Additives		2.7			11.8

	$	90.9		$	76.2


Operating income:
Fuel Specialties	$	26.8		$	23.9
Performance Chemicals		6.0			4.4
Oilfield Services		3.0			(5.5	)
Octane Additives		2.0			11.0
Pension credit		1.1			1.8
Corporate costs		(10.7	)		(10.2	)
Adjustment to fair value of contingent consideration		0.0			1.6
Loss on disposal of subsidiary		0.0			(1.4	)
Foreign exchange loss on liquidation of subsidiary		(1.8	)		0.0

Total operating income	$	26.4		$	25.6


	Three Months Ended March 31
(in millions, except ratios)	2017			2016			Change

Net sales:
Fuel Specialties	$	126.4		$	123.4		$	3.0		+2	%
Performance Chemicals		94.5			34.7			59.8		+172	%
Oilfield Services		66.5			36.2			30.3		+84	%
Octane Additives		6.9			17.8			(10.9	)	-61	%

	$	294.3		$	212.1		$	82.2		+39	%


Gross profit:
Fuel Specialties	$	46.1		$	42.0		$	4.1		+10	%
Performance Chemicals		16.7			10.8			5.9		+55	%
Oilfield Services		25.4			11.6			13.8		+119	%
Octane Additives		2.7			11.8			(9.1	)	-77	%

	$	90.9		$	76.2		$	14.7		+19	%


Gross margin (%):
Fuel Specialties		36.5			34.0			+2.5
Performance Chemicals		17.7			31.1			-13.4
Oilfield Services		38.2			32.0			+6.2
Octane Additives		39.1			66.3			-27.2
Aggregate		30.9			35.9			-5.0

Operating expenses:
Fuel Specialties	$	(19.3	)	$	(18.1	)	$	(1.2	)	+7	%
Performance Chemicals		(10.7	)		(6.4	)		(4.3	)	+67	%
Oilfield Services		(22.4	)		(17.1	)		(5.3	)	+31	%
Octane Additives		(0.7	)		(0.8	)		0.1		-13	%
Pension credit		1.1			1.8			(0.7	)	-39	%
Corporate costs		(10.7	)		(10.2	)		(0.5	)	+5	%
Adjustment to fair value of contingent consideration		0.0			1.6			(1.6	)	-100	%
Loss on disposal of subsidiary		0.0			(1.4	)		1.4		+100	%
Foreign exchange loss on liquidation of subsidiary		(1.8	)		0.0			(1.8	)	n/a

	$	(64.5	)	$	(50.6	)	$	(13.9	)	+27	%

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:


	Three Months Ended March 31, 2017
Change (%)	Americas		EMEA		ASPAC		AvTel		Total
Volume		+19		-2		0		+58		+8
Price and product mix		-11		+2		+8		-58		-5
Exchange rates		0		-3		0		0		-1

		+8		-3		+8		0		+2

Volumes in the Americas were higher than the first quarter of 2016 as a result of increased demand following a slower than normal end to 2016. Volumes in EMEA decreased slightly due to the phasing of demand between the current and prior quarter. Volumes in ASPAC were unchanged. Price and product mix in the Americas was adversely impacted by the increased sales of lower margin products. Price and product mix in EMEA and ASPAC benefited from increased sales of higher margin products. AvTel volumes were higher than the prior year due to the normal variations in the timing of demand, together with an adverse price and product mix due to a change in customer mix in the first quarter of 2017. EMEA was adversely impacted by exchange rate movements year over year, driven by a weakening of the European Union euro and the British pound sterling against the U.S. dollar.

Gross margin: the year on year increase of 2.5 percentage points was driven by increased sales of higher margin products partly offset by an adverse price and product mix. The effect of weaker exchange rates versus the U.S. dollar did not significantly impact gross margin.

Operating expenses: the year on year increase of $1.2 million was driven by increased accruals for share-based compensation based on the performance of the Innospec share price in the first quarter of 2017 compared to the first quarter of 2016.

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:

Three Months Ended March 31, 2017

Change (%)

Americas

EMEA

ASPAC

Acquisition

Total

Volume

-4

+17

Acquisition

+169

Price and product mix

-1

+13

-5

Exchange rates

-4

-1

+169

+172

Excluding the acquisition of Huntsman, increased Personal Care demand led to higher volumes in the Americas and ASPAC partly offset by pricing pressures which adversely affected the price and product mix. Volumes in EMEA were lower due to a decrease in Personal Care demand which was offset by a strongly favorable price and product mix. EMEA and ASPAC were adversely impacted by exchange rate movements year over year, driven by a weakening of the European Union euro and the British pound sterling against the U.S. dollar. Sales growth from the acquisition of our Huntsman business at the end of 2016 has been excluded from the market analysis above and included as one variance for the segment total.

Gross margin: the year on year decrease of 13.4 percentage points was driven by the dilutive effect of lower margins for our Huntsman business.

Operating expenses: the year on year increase of $4.3 million is principally related to the acquisition of our Huntsman business.

Oilfield Services

Net sales: the year on year increase of $30.3 million was due to an increase in customer demand for all our product lines following the increase in customer activity in the latter part of 2016 as oil prices increased. Overall volumes increased by 115 percent year on year, partly offset by an adverse price and product mix of 31 percent.

Gross margin: the year on year increase of 6.2 percentage points was primarily driven by increased sales of higher margin products in our production business.

Operating expenses: the year on year increase of $5.3 million was driven by higher selling and technical support expenses required to deliver the increase in customer demand.

Octane Additives

Net sales: have decreased by $10.9 million compared to the prior year due to the phasing of orders from our one remaining refinery customer.

Gross margin: the year on year decrease of 27.2 percentage points was due to adverse manufacturing variances in the first quarter of 2017 compared to favorable manufacturing variances in the first quarter of 2016. Lower sales volumes year on year for the quarter generate a higher impact on gross margins than the longer term average.

Operating expenses: the year on year decrease of $0.1 million was partly due to a reduction in the provisions for doubtful debts.

Other Income Statement Captions

Pension credit: is non-cash, and was a $1.1 million net credit in 2017 compared to a $1.8 million net credit in 2016 driven by an increase in the amortization of actuarial net losses.

Corporate costs: the year on year increase of $0.5 million related to $0.7 million higher costs related to corporate activities required to support our Huntsman acquisition; a $0.9 million increase related to higher accruals for share-based compensation based on the performance of the Innospec share price in the first quarter of 2017 compared to the first quarter of 2016; partly offset by the timing of expenditure, efficient cost management and the benefit of the weaker British pound sterling against the U.S. dollar for our Ellesmere Port cost base.

Adjustment to fair value of contingent consideration: there has been no adjustment to the fair value of the contingent consideration payable in the first quarter of 2017. The contingent consideration credit of $1.6 million in the first quarter of 2016 was based on management’s forecasts of the business trading performance at that time.

Foreign exchange loss on liquidation of subsidiary: the $1.8 million loss relates to the reclassification of historic foreign exchange translations of net assets from accumulated other comprehensive losses, for our captive insurance company which was liquidated in the first quarter of 2017.

Loss on disposal of subsidiary: there was a $1.4 million loss in the first quarter of 2016 to account for the finalization of the assets and liabilities disposed of for our Aroma chemicals business.

Other net income/(expense): other net expense of $1.0 million related to $0.5 million of losses on translation of net assets denominated in non-functional currencies in our European businesses, together with losses of $0.5 million on foreign currency forward exchange contracts. In the prior year, other net expense of $0.3 million primarily related to $1.8 million of losses on translation of net assets denominated in non-functional currencies in our European businesses, partly offset by gains of $1.5 million on foreign currency forward exchange contracts.

Interest expense, net: was $2.2 million in 2017 compared to $0.8 million in 2016, driven by the additional term loan related to the acquisition of Huntsman and the recent rise in LIBOR impacting our revolving credit facility borrowing.

Income taxes: The effective tax rate was 25.9% and 22.9% for the first three months of 2017 and 2016, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 24.6% in 2017 compared with 20.1% in 2016. The 4.5% increase in the adjusted effective tax rate was primarily due to the first quarter of 2017 benefiting, to a lesser extent, from the positive impact of taxable profits in different geographical locations as compared to the first quarter of 2016. 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 to evaluate the performance of the Company’s operations and for planning and forecasting in subsequent periods.


	Three Months Ended March 31
(in millions)	2017			2016

Income before income taxes	$	23.2		$	24.5
Adjustment to fair value of contingent consideration		0.0			(2.0	)
Loss on disposal of subsidiary		0.0			1.4
Foreign exchange loss on liquidation of subsidiary		1.8			0.0
Adjustment to fair value acquisition accounting		1.7			0.0
Adjustment for stock compensation		1.8			0.0

	$	28.5		$	23.9


Income taxes	$	6.0		$	5.6
Tax on adjustment to fair value of contingent consideration		0.0			(0.8	)
Tax on adjustment to fair value acquisition accounting		0.3			0.0
Excess tax benefit on stock compensation		0.7			0.0

	$	7.0		$	4.8


GAAP effective tax rate		25.9	%		22.9	%
Adjusted effective tax rate		24.6	%		20.1	%

LIQUIDITY AND FINANCIAL CONDITION

Working Capital

The Company believes that adjusted working capital, a non-GAAP financial measure, (defined by the Company as trade and other accounts receivable, inventories, prepaid expenses, accounts payable and accrued liabilities rather than total current assets less total current liabilities) 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 working capital in 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)	March 31, 2017			December 31, 2016
Total current assets	$	476.1		$	441.1
Total current liabilities		(221.7	)		(183.1	)

Working capital		254.4			258.0
Less cash and cash equivalents		(45.4	)		(101.9	)
Less prepaid income taxes		(5.2	)		(4.8	)
Add back current portion of accrued income taxes		13.9			9.4
Add back current portion of long-term debt		10.3			10.3
Add back current portion of finance leases		2.0			1.6
Add back current portion of plant closure provisions		6.4			6.7
Add back current portion of acquisition-related contingent consideration		1.1			1.1
Add back current portion of deferred income		0.1			0.1

Adjusted working capital	$	237.6		$	180.5

In 2017 our working capital decreased by $3.6 million, while our adjusted working capital has increased by $57.1 million. The acquisition of Huntsman accounted for approximately $29 million of these movements as we completed a one-off working capital funding requirement, with the remainder being driven by increased inventories and accounts receivables across our businesses.

We had a $64.9 million increase in trade and other accounts receivable primarily related to the acquisition of Huntsman in our Performance Chemicals segment and from the increased sales in our Oilfield Services segment. Days’ sales outstanding in our Fuel Specialties segment increased from 45 days to 51 days; increased in our Performance Chemicals segment from 55 days to 66 days; and increased from 54 days to 55 in our Oilfield Services segment.

We had a $25.2 million increase in inventories, which is related to increases in all our segments to align with the timing of demand from customers. Days’ sales in inventory in our Fuel Specialties segment increased from 84 days to 99 days; decreased in our Performance Chemicals segment from 94 days to 61 days; and increased from 72 to 77 days in our Oilfield Services segment.

Prepaid expenses increased by $1.0 million from $6.2 million to $7.2 million due to the timing of invoicing.

We had a $34.0 million increase in accounts payable and accrued liabilities primarily related to the Huntsman acquisition in our Performance Chemicals segment. Creditor days in our Fuel Specialties segment increased from 28 days to 30 days; in our Performance Chemicals segment increased from 32 days to 52 days; and increased from 32 days to 40 days in our Oilfield Services segment.

Operating Cash Flows

We have used cash in operating activities of $19.9 million in the first three months of 2017 compared to generating cash of $6.7 million in the first three months of 2016 primarily due the working capital requirements of our recently acquired Huntsman business partly offset by favorable movements in accrued income taxes.

Cash

At March 31, 2017 and December 31, 2016 we had cash and cash equivalents of $45.4 million and $101.9 million, respectively, of which $42.1 million and $90.2 million, respectively, were held by non-U.S. subsidiaries principally in the United Kingdom. The Company is in a position to control whether or not to repatriate foreign earnings. We currently do not expect to make a repatriation in the foreseeable future and hence have not provided for future income taxes on the cash held by overseas subsidiaries. If circumstances were to change that would cause these earnings to be repatriated, an additional U.S. tax liability could be incurred, and we continue to monitor this position.

Debt

At March 31, 2017, the Company had $131.0 million of debt outstanding under the revolving credit facility, $110.0 million of debt outstanding on our term loan and $4.7 million of obligations under finance leases relating to certain fixed assets within our Oilfield Services segment. Long-term debt at March 31, 2017 is reported net of deferred finance costs of $2.0 million (December 31, 2016 - $2.2 million).

At December 31, 2016, we had $161.0 million of debt outstanding under the revolving credit facility, $110.0 million of debt outstanding on our term loan and $4.5 million of obligations under finance leases relating to certain fixed assets within our Oilfield Services segment.

The Company has a revolving credit facility that provides for borrowing of up to $200.0 million through November 2020 and may be drawn down in full in the U.S..

Item 3

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 major 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, from time to time, uses 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.

The Company’s exposure to market risk has been discussed in the Company’s 2016 Annual Report on Form 10-K and there have been no significant changes since that time.

Item 4

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation carried out as of the end of the period covered by this report, under the supervision and with the participation of our management, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) were effective as of March 31, 2017.

Changes in Internal Control over Financial Reporting

The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal control over financial reporting. This is intended to result in refinements to processes throughout the Company.

On December 30, 2016 we acquired the European Differentiated Surfactants business from Huntsman (“Huntsman”). We excluded the operations of Huntsman from the scope of our Sarbannes-Oxley Section 404 report on internal controls over financial reporting as of December 31, 2016. We are currently in the process of implementing our internal control structure over the acquired operations and expect that this effort will be completed in 2017.

There were no other changes to our internal control over financial reporting, which were identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, that occurred during the first quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1

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 their property is subject. It is possible, however, that an adverse resolution of an unexpectedly large number of such individual claims or proceedings could, in the aggregate, have a material adverse effect on results of operations for a particular year or quarter.

Item 1A

Risk Factors

Information regarding risk factors that could have a material impact on our results of operations or financial condition are described under “Risk Factors” in Item 1A of Part 1 of our 2016 Form 10-K . In management’s view, there have been no material changes in the risk factors facing the Company since that time.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

There have been no unregistered sales of equity securities.

On November 3, 2015 the Company announced that its board of directors has authorized a share repurchase program which targets to repurchase up to $90 million of common stock over the next three years.

During the three months ended March 31, 2017, no shares of our common stock were repurchased by the Company. There was $82.5 million remaining under the 2015 authorization as at March 31, 2017.

Repurchases of common stock are held as treasury shares unless reissued under equity compensation plans.

Item 3

Defaults Upon Senior Securities

None.

Item 4

Mine Safety Disclosures

Not applicable.

Item 5

Other Information

None.

Item 6

Exhibits


31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		XBRL Instance Document and Related Items.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		INNOSPEC INC.
		Registrant

Date: May 10, 2017	By	/s/ PATRICK S. WILLIAMS
		Patrick S. Williams
		President and Chief Executive Officer

Date: May 10, 2017	By	/s/ IAN P. CLEMINSON
		Ian P. Cleminson
		Executive Vice President and Chief Financial Officer

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