INNOSPEC INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 2022 (Form 10-Q)

This analysis should be read in conjunction with our unaudited condensed interim consolidated financial statements and accompanying notes.

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 plant closure
provisions, income taxes, pensions, goodwill, property, plant and equipment and
other intangible assets (net of depreciation and amortization) and the impact of
the
COVID-19
pandemic ("the pandemic") and the current economic environment. These policies
have been discussed in the Company's 2021 Form
10-K.

RESULTS OF OPERATIONS

The Company reports its financial performance based on the following three reportable segments: Performance Chemicals, Fuel Specialties and Oilfield Services.

The following table presents operating income by reporting segment:

                             Three Months Ended

                                  March 31
(in millions)                2022           2021
Net sales:
Performance Chemicals      $   167.1       $ 125.9
Fuel Specialties               191.8         139.3
Oilfield Services              113.5          74.4

                           $   472.4       $ 339.6

Gross profit:
Performance Chemicals      $    40.8       $  31.4
Fuel Specialties                60.7          44.9
Oilfield Services               37.8          24.5

                           $   139.3       $ 100.8

Operating income/(loss):
Performance Chemicals      $    25.3       $  18.3
Fuel Specialties                35.5          23.8
Oilfield Services                2.5           1.2
Corporate costs                (19.0 )       (15.1 )

Total operating income     $    44.3       $  28.2




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Three months completed March, 31st 2022

The following table shows the change in components of operating income by
reporting segment for the three months ended March 31, 2022 and the three months
ended March 31, 2021:

                                 Three Months Ended
                                      March 31
(in millions, except ratios)     2022           2021        Change
Net sales:
Performance Chemicals          $   167.1       $ 125.9      $  41.2        33 %
Fuel Specialties                   191.8         139.3         52.5        38 %
Oilfield Services                  113.5          74.4         39.1        53 %

                               $   472.4       $ 339.6      $ 132.8        39 %

Gross profit:
Performance Chemicals          $    40.8       $  31.4      $   9.4        30 %
Fuel Specialties                    60.7          44.9         15.8        35 %
Oilfield Services                   37.8          24.5         13.3        54 %

                               $   139.3       $ 100.8      $  38.5        38 %

Gross margin (%):
Performance Chemicals               24.4          24.9         -0.5
Fuel Specialties                    31.6          32.2         -0.6
Oilfield Services                   33.3          32.9         +0.4
Aggregate                           29.5          29.7         -0.2

Operating expenses:
Performance Chemicals          $   (15.5 )     $ (13.1 )    $  (2.4 )      18 %
Fuel Specialties                   (25.2 )       (21.1 )       (4.1 )      19 %
Oilfield Services                  (35.3 )       (23.3 )      (12.0 )      52 %
Corporate costs                    (19.0 )       (15.1 )       (3.9 )      26 %

                               $   (95.0 )     $ (72.6 )    $ (22.4 )      31 %




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  Table of Contents

Performance Chemicals

Net sales: the table below details the components that make up the year-over-year change in net sales allocated to the markets in which we operate:

                               Three Months Ended March 31, 2022
Change (%)              Americas          EMEA         ASPAC      Total
Volume                        +34             -8           +1         +7
Price and product mix         +31            +34          +16        +32
Exchange rates                 -              -9           -4         -6

                              +65            +17          +13        +33


Higher sales volumes for the Americas were primarily driven by increased demand for our personal care products. The decline in sales volumes for the EMEA region is explained by reductions in demand compared to a strong comparison base the previous year. ASPAC recorded slightly higher sales volumes in a number of our markets. All of our regions benefited from a favorable price and product mix due to increased sales of higher priced products as well as the impact of higher raw material prices which impacted higher selling prices. EMEA and ASPAC were negatively impacted by year-on-year exchange rate fluctuations, due to the weakening of the British pound and the European Union the euro against the WE
dollar.

Gross margin: The year-over-year decline of 0.5 percentage points was mainly due to additional inventory provisions during the quarter.

Operating expenses: the year-over-year increase of $2.4 million was due to higher selling expenses to support our increased sales, higher research and development costs, and higher personnel-related expenses, including higher performance-related accrued liabilities.

Fuel Specialties

Net sales: the table below details the components that make up the year-over-year change in net sales allocated to the markets in which we operate:

                                   Three Months Ended March 31, 2022
Change (%)               Americas        EMEA      ASPAC      AvGas      Total
Volume                         +47          +7         -4       +113        +23
Price and product mix          +20         +31        +11        -76        +21
Exchange rates                  -          -13         -2         -          -6

                               +67         +25         +5        +37        +38


the Americas and sales volumes in EMEA increased year-over-year as global demand for refined petroleum products increased. ASPAC’s sales volumes were slightly lower year over year, primarily due to variations in the timing of demand. Pricing and product mix were favorable in all of our regions due to increased sales of higher margin products and the impact of higher raw material prices which impacted higher sales. AvGas volumes were higher than the prior year due to changes in customer demand, partially offset by an unfavorable price and product mix with a higher proportion of sales to low-margin customers. EMEA and ASPAC were negatively impacted by year-on-year exchange rate fluctuations, due to the weakening of the British pound and the European Union the euro against the WE dollar.

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Gross margin: The year-over-year decline of 0.6 percentage points was primarily due to the continued impact of the timing of passing on higher raw material costs to selling prices.

Operating expenses: the year-over-year increase of $4.1 million was due to higher selling expenses due to increased sales, including higher bad debt provisions, higher research and development costs and higher personnel expenses, including pay higher on stock-based compensation.

Oil Services

Net sales: increased year over year by $39.1 millionor 53%, with the majority of our client business continuing to be in the Americas Region. Customer demand has increased for the first quarter of 2022, which is expected to continue as the price of crude oil remains high.

Gross Margin: The 0.4 percentage point year-over-year increase was driven by a favorable year-over-year sales mix as management continues to hold pricing in a market competitive.

Operating expenses: the year-over-year increase of $12.0 million was driven by flexibility in our customer service costs that are needed to support increased demand, as well as higher personnel costs, including higher accruals for compensation based on actions.

Other captions of the income statement

General costs: the year-over-year increase of $3.9 million mainly due to higher staff-related expenses, including higher stock-based compensation accruals and higher performance-related accrued liabilities.

Other net income:
for the first quarter of 2022 and 2021, included the following:

(in millions)                                2022      2021      Change

Net pension credit                           $ 1.3     $ 1.2         0.1

Exchange gains on translation 2.2 0.5 1.7 Gains on forward exchange contracts 0.8 1.3 (0.5 )

                                             $ 4.3     $ 3.0     $   1.3


Interest expense, net: $0.4 million in the first three months of 2022 compared to $0.4 million during the first three months of 2021. Interest expense includes a commitment fee to maintain the Company’s revolving credit facility for the term of the agreement.

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Income taxes:
the effective tax rate was 24.3% and 24.0% in the first quarter of 2022 and
2021, respectively. The adjusted effective tax rate, once adjusted for the items
set out in the following table, was 24.3% in 2022 compared with 23.2% in 2021.
The 1.1% increase in the adjusted effective rate was primarily due to the fact
that a higher proportion of the Company's profits are being generated in higher
tax jurisdictions. 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.

The following table shows a reconciliation of the GAAP effective tax rate to the
adjusted effective tax rate:

                                              Three Months Ended
                                                   March 31
(in millions)                                 2022            2021
Income before income taxes                  $    48.2        $ 30.8
Indemnification asset regarding tax audit          -            0.1
Adjustment for stock compensation                 1.7           1.4
Acquisition costs                                  -            0.8
Legacy cost of closed operations                  1.1           0.9

Adjusted profit before income taxes $51.0 $34.0

Income taxes                                $    11.7        $  7.4
Tax on stock compensation                         0.5           0.1
Adjustment of income tax provision                 -             -
Tax on acquisition costs                           -            0.2
Tax on legacy cost of closed operations           0.2           0.2

Adjusted income taxes                       $    12.4        $  7.9

GAAP effective tax rate                          24.3 %        24.0 %
Adjusted effective tax rate                      24.3 %        23.2 %



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LIQUIDITY AND FINANCIAL SITUATION

Working capital

In the first three months of 2022, our working capital increased by
$34.8 millionwhile our adjusted working capital increased by $79.9 million. The difference is mainly due to the exclusion of the decrease in our cash and cash equivalents and changes in prepaid and accrued income taxes.

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.

                                                         March 31,
                                                                             December 31,
(in millions)                                              2022                  2021
Total current assets                                    $     778.6         $        728.1
Total current liabilities                                    (352.3 )               (336.6 )

Working capital                                               426.3                  391.5
Less cash and cash equivalents                               (105.6 )               (141.8 )
Less prepaid income taxes                                      (9.5 )                 (5.8 )
Less other current assets                                      (0.4 )                 (0.4 )
Add back current portion of accrued income taxes               13.7                    3.7
Add back current portion of finance leases                       -                     0.1
Add back current portion of plant closure
provisions                                                      6.2                    5.2
Add back current portion of operating lease
liabilities                                                    14.1                   12.4

Adjusted working capital                                $     344.8         $        264.9


We had a $53.2 million increase in trade and other receivables due to increased trading activity across all of our businesses. Days of outstanding sales decreased in our Performance Chemicals segment from 64 days to 63 days; increased from 53 days to 59 days in our Fuel Specialties segment; and went from 52 days to 57 days in our Oilfield Services segment.

We had a $30.6 million increase in inventories, net of a $1.1 million increased quotas, in anticipation of further increases in demand in 2022, while managing the risk of further supply chain disruptions for some key raw materials. Inventory days sales decreased in our Performance Chemicals segment from 59 days to 56 days; increased from 108 days to 121 days in our Fuel Specialties segment; and went from 76 days to 65 days in our Oilfield Services segment.

Prepaid expenses decreased $0.8 millionfrom $18.0 million for $17.2 million due to the normal charge of prepaid invoices.

We had a $3.1 million increase in accounts payable and accrued liabilities, which depended on the timing of payments for each of our business segments. Days payable (including goods received but not invoiced) increased in our Performance Chemicals segment from 47 days to 51 days; decreased from 50 days to 43 days in our Fuel Specialties segment; and went from 48 days to 54 days in our Oilfield Services segment.

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Operating cash flow

We used cash for operating activities of $29.0 million in the first three months of 2022 compared to cash inflows of $22.7 million in the first three months of 2021. The reduction in cash generated from operating activities is mainly related to the increase in working capital required to support sales growth.

Species

At March 31, 2022 and December 31, 2021, we had cash and cash equivalents of
$105.6 million and $141.8 million, respectively, of which $32.7 million and
$55.1 million, respectively, were held by
non-U.S.
subsidiaries principally in the United Kingdom.

The decrease in cash and cash equivalents in the first three months of 2022 of
$36.2 million was driven by increasing our working capital levels to support sales growth, as well as our continued investment in capital projects.

Debt

To March 31, 2022we had no debt outstanding under the revolving credit facility and $0.0 million obligations under finance leases.

To December 31, 2021we had no debt outstanding under the revolving credit facility and $0.1 million obligations under finance leases relating to certain fixed assets of our Fuel Specialties and Oilfield Services segments.

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