# INNOSPEC INC. (IOSP) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from INNOSPEC INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1054905/000095017025022803/iosp-20241231.htm
Accession: 0000950170-25-022803
Filing date: 2025-02-19
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/IOSP/
All MD&A years: /company/IOSP/mda/
Previous year: /company/IOSP/mda/fy2023/ (FY 2023)
Next year: /company/IOSP/mda/fy2025/ (FY 2025)

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

In 2024 Innospec achieved another good set of results. Strength in Performance Chemicals and Fuel Specialties offset lower results in Oilfield Services.

In Performance Chemicals, full year revenues were up 16 percent and operating income increased by 52 percent. We have a balanced pipeline of growth opportunities across our global personal care, home care, agriculture, construction and other industrial markets. In addition, the integration and performance of our recent QGP acquisition in Brazil is proceeding to plan and is supporting not only Performance Chemicals but also Fuel Specialties growth opportunities in the region. Moving into 2025, we continue to target operating income and margin improvement to levels consistent with the full year 2022.

In Fuel Specialties, revenues were up 1 percent and operating income increased 18 percent. Operating margin improved to just below our target of 19 to 21 percent. We remain focused on further margin improvement in parallel with topline growth. With our industry-leading innovation and customer service capabilities, we are well positioned to continue advancing our global customers’ initiatives. Our technology will continue to focus on cleaner fuels, lowering emissions and improving efficiency in traditional, renewable and non-fuel applications.

In Oilfield Services, revenues were down 29 percent from last year and operating income decreased 51 percent on lower Latin America production activity. Excluding this Latin America activity, our core business sales and operating income grew year over year. Our expectation for 2025 is that we will see further sequential improvement in the core Oilfield business including U.S. completions and production, DRA and the Middle East. We currently do not expect the Latin America production activity to resume in the near term.

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.

Plant Closure Provisions

We are subject to environmental laws in the countries in which we conduct business. Ellesmere Port in the U.K. is our principal site giving rise to asset retirement obligations, associated with the production of TEL. There are also asset retirement obligations and environmental remediation liabilities on a much smaller scale in respect of other manufacturing sites. At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed.

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Plant closure provisions at December 31, 2024 amounted to $60.3 million and relate principally to our Ellesmere Port site in the U.K.. We recognize environmental remediation liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal requirement, including those arising from a Company promise, and the costs can be reasonably estimated. The Company must 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 plant closure provisions are reasonable, they are subjective good faith estimates 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., and a number of 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 unfavorable 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.

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 step zero assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) 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

30

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, 2024 we had $382.5 million of goodwill relating to our Performance Chemicals, Fuel Specialties and Oilfield Services segments. Our step zero impairment review at December 31, 2024 indicated the fair value of each segment is, more likely than not, higher than the carrying value, meaning no step one impairment review was required to be performed.

RESULTS OF OPERATIONS

The following table provides sales, gross profit and operating income by reporting segment:

[[GREPCENT_TABLE]]
[["(in millions)","","2024","","","2023","","","2022"],["Net sales:"],["Performance Chemicals","","$","653.7","","","$","561.6","","","$","639.7"],["Fuel Specialties","","","701.1","","","","695.9","","","","730.2"],["Oilfield Services","","","490.6","","","","691.3","","","","593.8"],["Total net sales","","$","1,845.4","","","$","1,948.8","","","$","1,963.7"],["Gross profit:"],["Performance Chemicals","","$","148.4","","","$","105.6","","","$","150.0"],["Fuel Specialties","","","239.9","","","","215.1","","","","221.9"],["Oilfield Services","","","154.6","","","","270.4","","","","214.8"],["Total gross profit","","$","542.9","","","$","591.1","","","$","586.7"],["Operating income:"],["Performance Chemicals","","$","82.9","","","$","54.5","","","$","95.3"],["Fuel Specialties","","","129.6","","","","109.7","","","","121.7"],["Oilfield Services","","","38.8","","","","78.6","","","","41.7"],["Corporate costs","","","(70.2",")","","","(81.2",")","","","(71.4",")"],["Adjustment to fair value of contingent consideration","","","(3.4",")","","","\u2014","","","","\u2014"],["Profit on disposal","","","0.2","","","","\u2014","","","","\u2014"],["Total operating income","","$","177.9","","","$","161.6","","","$","187.3"],["Other income/(expense), net","","$","9.6","","","$","10.5","","","$","(1.6",")"],["Pension scheme settlement charge","","","(155.6",")","","","\u2014","","","","\u2014"],["Interest income/(expense), net","","","9.3","","","","2.3","","","","(1.1",")"],["Income before income taxes","","","41.2","","","","174.4","","","","184.6"],["Income taxes","","","(5.6",")","","","(35.3",")","","","(51.6",")"],["Net income","","$","35.6","","","$","139.1","","","$","133.0"]]
[[/GREPCENT_TABLE]]

31

Results of Operations – Fiscal 2024 compared to Fiscal 2023:

[[GREPCENT_TABLE]]
[["(in millions, except ratios)","","2024","","","2023","","","Change"],["Net sales:"],["Performance Chemicals","","$","653.7","","","$","561.6","","","$","92.1","","","16%"],["Fuel Specialties","","","701.1","","","","695.9","","","","5.2","","","1%"],["Oilfield Services","","","490.6","","","","691.3","","","","(200.7",")","","-29%"],["Total net sales","","$","1,845.4","","","$","1,948.8","","","$","(103.4",")","","-5%"],["Gross profit:"],["Performance Chemicals","","$","148.4","","","$","105.6","","","$","42.8","","","41%"],["Fuel Specialties","","","239.9","","","","215.1","","","","24.8","","","12%"],["Oilfield Services","","","154.6","","","","270.4","","","","(115.8",")","","-43%"],["Total gross profit","","$","542.9","","","$","591.1","","","$","(48.2",")","","-8%"],["Gross margin (%):"],["Performance Chemicals","","","22.7","","","","18.8","","","","+3.9"],["Fuel Specialties","","","34.2","","","","30.9","","","","+3.3"],["Oilfield Services","","","31.5","","","","39.1","","","","-7.6"],["Aggregate","","","29.4","","","","30.3","","","","-0.9"],["Operating expenses:"],["Performance Chemicals","","$","(65.5",")","","$","(51.1",")","","$","(14.4",")","","28%"],["Fuel Specialties","","","(110.3",")","","","(105.4",")","","","(4.9",")","","5%"],["Oilfield Services","","","(115.8",")","","","(191.8",")","","","76.0","","","-40%"],["Corporate costs","","","(70.2",")","","","(81.2",")","","","11.0","","","-14%"],["Adjustment to fair value of contingent consideration","","","(3.4",")","","","\u2014","","","","(3.4",")","","n/a"],["Profit on disposal","","","0.2","","","","\u2014","","","","0.2","","","n/a"],["Total operating expenses","","$","(365.0",")","","$","(429.5",")","","$","64.5","","","-15%"]]
[[/GREPCENT_TABLE]]

Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.

Performance Chemicals

Net sales: the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

[[GREPCENT_TABLE]]
[["Change (%)","","Americas","","","EMEA","","","ASPAC","","","Total"],["Volume","","","+24","","","","+10","","","","+26","","","","+17"],["Acquisition","","","\u2014","","","","\u2014","","","","\u2014","","","","+7"],["Price and product mix","","","-11","","","","-6","","","","-5","","","","-8"],["Exchange rates","","","\u2014","","","","+1","","","","+1","","","","\u2014"],["","","","+13","","","","+5","","","","+22","","","","+16"]]
[[/GREPCENT_TABLE]]

Higher sales volumes for all our regions were driven by increased demand for our personal care and home care products resulting from higher consumer demand, in particular for lower priced higher volume products. The acquisition of the QGP business has also delivered increased volumes year over year. All our regions recorded an adverse price and product mix due to lower selling prices, driven by lower raw material costs, together with the greater demand from consumers for lower priced products.

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Gross margin: the year over year increase of 3.9 percentage points was due to margins returning to a more normalized level when compared to the depressed margins in the prior year. Margins have benefited from raw materials pricing reductions in the current year, combining with the favorable impact arising from our manufacturing efficiency due to the higher production volumes.

Operating expenses: increased $14.4 million year over year due to higher selling expenses, increased amortization for the acquired intangible assets relating to our QGP acquisition, increased spending on research and development and higher performance-related remuneration accruals.

Fuel Specialties

Net sales: the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

[[GREPCENT_TABLE]]
[["Change (%)","","Americas","","","EMEA","","","ASPAC","","","AvGas","","","Total"],["Volume","","","+8","","","","+5","","","","+4","","","","+13","","","","+7"],["Price and product mix","","","-11","","","","-4","","","","-4","","","","+12","","","","-6"],["Exchange rates","","","\u2014","","","","+1","","","","\u2014","","","","\u2014","","","","\u2014"],["","","","-3","","","","+2","","","","\u2014","","","","+25","","","","+1"]]
[[/GREPCENT_TABLE]]

Sales volumes in all our regions have increased year over year due to increased demand from customers. Price and product mix was adverse in all our regions, with a favorable sales mix being offset by lower pricing resulting from lower raw material costs. AvGas volumes were higher than the prior year due to variations in the demand from customers, together with a favorable price and product mix due to a higher proportion of sales being made to higher margin customers.

Gross margin: the year over year increase of 3.3 percentage points was driven by an improved sales mix from increased sales of higher margin products, together with the easing of raw material and other inflationary pressures, combined with the prior year adverse impact of the Brazil inventory misappropriation and the associated costs of exiting the related trading relationship. Excluding this prior year item, gross margin has increased 1.0 percentage points.

Operating expenses: the year over year increase of $4.9 million is due to higher research and development expenditure and higher performance-related remuneration accruals, being partly offset by lower provisions for doubtful debts.

Oilfield Services

Net sales: have decreased year over year by $200.7 million, or 29 percent, with the majority of our customer activity concentrated in the Americas region. Sales volumes were adversely impacted by significantly lower production chemical activity in 2024 in Latin America. Management expects to see lower sales volumes continuing for production chemicals in the coming quarters, while believing the growth opportunities for our other oilfield markets will drive sequential quarterly improvements.

Gross margin: the year over year decrease of 7.6 percentage points was due to an unfavorable sales mix as Latin America customer demand has weakened.

Operating expenses: the year over year decrease of $76.0 million was driven by the lower customer service costs and commissions related to the reduced demand from certain customers, together with lower performance related remuneration accruals.

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Other Income Statement Captions

Corporate costs: the year over year decrease of $11.0 million was primarily driven by the $8.4 million recovery of historical costs which the Company incurred relating to our defined benefit pension scheme in the U.K., together with a reduction for acquisition related costs, being partly offset by higher information technology investment and the adverse impact of inflationary increases year over year.

Adjustment to fair value of contingent consideration: the charge in 2024 of $3.4 million (2023 - $0.0 million) relates to the accretion of the contingent consideration relating to the acquisition of QGP. See Note 5 of the Notes to the Consolidated Financial Statements for further information.

Pension scheme settlement charge: the charge in 2024 of $155.6 million (2023 - $0.0 million) relates to the buy-out of our U.K. defined benefit pension scheme. See Note 10 of the Notes to the Consolidated Financial Statements for further information.

Other net income/(expense): for 2024 and 2023, includes the following:

[[GREPCENT_TABLE]]
[["(in millions)","","2024","","","2023","","","Change"],["Net pensions credit","","$","7.2","","","$","6.9","","","$","0.3"],["Profit attributable to non-controlling interests","","","(2.4",")","","","\u2014","","","","(2.4",")"],["Sundry expense","","","(0.1",")","","","\u2014","","","","(0.1",")"],["Foreign exchange gains/(losses) on translation","","","(0.4",")","","","7.6","","","","(8.0",")"],["Foreign currency forward contracts gains/(losses)","","","5.3","","","","(4.0",")","","","9.3"],["","","$","9.6","","","$","10.5","","","$","(0.9",")"]]
[[/GREPCENT_TABLE]]

Interest income/(expense), net: in 2024 was $9.3 million of income, compared to $2.3 million of income in 2023. Interest income from our cash balances has increased due to higher central bank interest rates together with the benefit from our increasing cash balances.

34

Income taxes: The effective tax rate was 13.6% and 20.2% in 2024 and 2023, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 26.4% in 2024 compared with 23.0% in 2023. The Company believes 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.

[[GREPCENT_TABLE]]
[["(in millions, except ratios)","","2024","","","2023"],["Income before income taxes","","$","41.2","","","$","174.4"],["Adjustment for stock compensation","","","8.5","","","","8.0"],["Indemnification asset regarding tax audit","","","(0.2",")","","","(0.1",")"],["Legacy cost of closed operations","","","4.0","","","","6.1"],["Adjustment to fair value of contingent consideration","","","3.4","","","","\u2014"],["Pension scheme settlement charge","","","155.6","","","","\u2014"],["Recovery of historical pension costs","","","(8.4",")","","","\u2014"],["Acquisition costs","","","\u2014","","","","3.1"],["Adjusted income before income taxes","","$","204.1","","","$","191.5"],["Income taxes","","$","5.6","","","$","35.3"],["Adjustment of income tax provisions","","","10.1","","","","1.4"],["Tax on stock compensation","","","\u2014","","","","0.4"],["Tax loss / (gain) on distribution","","","\u2014","","","","0.4"],["Tax on legacy cost of closed operations","","","1.0","","","","1.4"],["Tax on acquisition costs","","","\u2014","","","","0.7"],["Tax on pension scheme settlement charge","","","38.9","","","","\u2014"],["Tax on recovery of historical pension costs","","","(2.1",")","","","\u2014"],["Other discrete items","","","0.4","","","","4.5"],["Adjusted income taxes","","$","53.9","","","$","44.1"],["GAAP effective tax rate","","","13.6","%","","","20.2","%"],["Adjusted effective tax rate","","","26.4","%","","","23.0","%"]]
[[/GREPCENT_TABLE]]

The adjusted effective tax rate is higher in 2024 than the GAAP effective tax rate, primarily due to the current year recognition of previously unrecognized tax benefits being eliminated in determining the adjusted effective tax rate. This item arose due to the lapse of the statute of limitations associated with the unrecognized tax benefit in the final quarter of 2024.

The adjusted effective tax rate was higher in 2023 than the GAAP effective tax rate, primarily due to the elimination of the impact of other discrete items in determining the adjusted effective tax rate. This mainly represented the benefit arising from adjustments to the tax charge for previous years arising from return to provision adjustments in relation to the federal and state tax returns filed in the U.S. during 2023.

For additional information on items which impact both the GAAP effective tax rate and the adjusted effective tax rate see Note 11 of the Notes to the Consolidated Financial Statements.

35

Results of Operations – Fiscal 2023 compared to Fiscal 2022:

[[GREPCENT_TABLE]]
[["(in millions, except ratios)","","2023","","","2022","","","Change"],["Net sales:"],["Performance Chemicals","","$","561.6","","","$","639.7","","","$","(78.1",")","","-12%"],["Fuel Specialties","","","695.9","","","","730.2","","","","(34.3",")","","-5%"],["Oilfield Services","","","691.3","","","","593.8","","","","97.5","","","16%"],["Total net sales","","$","1,948.8","","","$","1,963.7","","","$","(14.9",")","","-1%"],["Gross profit:"],["Performance Chemicals","","$","105.6","","","$","150.0","","","$","(44.4",")","","-30%"],["Fuel Specialties","","","215.1","","","","221.9","","","","(6.8",")","","-3%"],["Oilfield Services","","","270.4","","","","214.8","","","","55.6","","","26%"],["Total gross profit","","$","591.1","","","$","586.7","","","$","4.4","","","1%"],["Gross margin (%):"],["Performance Chemicals","","","18.8","","","","23.4","","","","-4.6","","","-20%"],["Fuel Specialties","","","30.9","","","","30.4","","","","+0.5","","","2%"],["Oilfield Services","","","39.1","","","","36.2","","","","+2.9","","","8%"],["Aggregate","","","30.3","","","","29.9","","","","+0.4","","","1%"],["Operating expenses:"],["Performance Chemicals","","$","(51.1",")","","$","(54.7",")","","$","3.6","","","-7%"],["Fuel Specialties","","","(105.4",")","","","(100.2",")","","","(5.2",")","","5%"],["Oilfield Services","","","(191.8",")","","","(173.1",")","","","(18.7",")","","11%"],["Corporate costs","","","(81.2",")","","","(71.4",")","","","(9.8",")","","14%"],["Total operating expenses","","$","(429.5",")","","$","(399.4",")","","$","(30.1",")","","8%"]]
[[/GREPCENT_TABLE]]

Financial information with respect to our domestic and foreign operations is contained in Note 3 of the Notes to the Consolidated Financial Statements.

Performance Chemicals

Net sales: the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

[[GREPCENT_TABLE]]
[["Change (%)","","Americas","","","EMEA","","","ASPAC","","","Total"],["Volume","","","-4","","","","-4","","","","-18","","","","-4"],["Price and product mix","","","-12","","","","-7","","","","+1","","","","-9"],["Exchange rates","","","\u2014","","","","+2","","","","+1","","","","+1"],["","","","-16","","","","-9","","","","-16","","","","-12"]]
[[/GREPCENT_TABLE]]

Lower sales volumes for all of our regions were primarily driven by reduced demand for our personal care products resulting from cautious consumer sentiment, together with the impact of destocking by our customers. The Americas and EMEA were impacted by an adverse price and product mix due to a higher proportion of lower priced products being sold. ASPAC benefited from a favorable price and product mix due to a higher proportion of higher priced products being sold.

Gross margin: the year over year decrease of 4.6 percentage points was due to an adverse sales mix from reduced sales of higher margin products and the adverse impact of reduced manufacturing efficiency resulting from lower production volumes.

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Operating expenses: decreased $3.6 million year over year, due to lower selling expenses including commissions, lower performance-related remuneration accruals and lower acquired intangibles amortization following the end of the expected life of the assets.

Fuel Specialties

Net sales: the table below details the components which comprise the year over year change in net sales spread across the markets in which we operate:

[[GREPCENT_TABLE]]
[["Change (%)","","Americas","","","EMEA","","","ASPAC","","","AvGas","","","Total"],["Volume","","","-10","","","","-12","","","","-22","","","","-1","","","","-12"],["Price and product mix","","","+8","","","","+4","","","","+10","","","","-6","","","","+6"],["Exchange rates","","","\u2014","","","","+3","","","","\u2014","","","","\u2014","","","","+1"],["","","","-2","","","","-5","","","","-12","","","","-7","","","","-5"]]
[[/GREPCENT_TABLE]]

Sales volumes in all of our regions have decreased year over year, primarily due to a reduction in the sales of lower margin higher volume products. Price and product mix was favorable in all our regions due to an increased proportion of higher margin products being sold. AvGas volumes were lower than the prior year due to variations in the demand from customers, together with an adverse price and product mix due to a higher proportion of sales to lower margin customers.

Gross margin: the year over year increase of 0.5 percentage points was primarily due to a favorable sales mix from increased sales of higher margin products, being partly offset by the impact of the Brazil inventory misappropriation and the ending of that trading relationship.

Operating expenses: the year over year increase of $5.2 million includes increased research and development expenditure and higher provisions for doubtful debts which are primarily related to the ending of the Brazilian trading relationship, being partly offset by lower performance-related remuneration accruals.

Oilfield Services

Net sales: have increased year over year by $97.5 million, or 16%, with the majority of our customer activity concentrated in the Americas region. We believe that customer demand remains strong despite operating income growth moderating, as expected, through the second half of the 2023.

Gross margin: the year over year increase of 2.9 percentage points was due to a favorable sales mix and the benefit of improved pricing.

Operating expenses: the year over year increase of $18.7 million was driven by higher customer service costs which are necessary to support the increase in demand with certain customers, together with higher provisions for doubtful debts, while being partly offset by lower performance-related remuneration accruals.

Other Income Statement Captions

Corporate costs: the year over year increase of $9.8 million was primarily due to acquisition related costs, additional environmental remediation provisions, increased spending on our information technology infrastructure and some legal costs related to the Brazil inventory misappropriation, being partly offset by lower performance-related remuneration accruals.

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Other net income/(expense): for 2023 and 2022, includes the following:

[[GREPCENT_TABLE]]
[["(in millions)","","2023","","","2022","","","Change"],["Net pensions credit","","$","6.9","","","$","4.8","","","$","2.1"],["Foreign exchange gains/(losses) on translation","","","7.6","","","","(7.1",")","","","14.7"],["Foreign currency forward contracts gains/(losses)","","","(4.0",")","","","0.7","","","","(4.7",")"],["","","$","10.5","","","$","(1.6",")","","$","12.1"]]
[[/GREPCENT_TABLE]]

Interest income/(expense), net: was income of $2.3 million in 2023 primarily due to the interest earned on the Company's cash balances, compared to a $1.1 million expense in 2022 primarily due to the commitment fee which the Company paid to retain its revolving credit facility for the term of the agreement.

Income taxes: The effective tax rate was 20.2% and 28.0% in 2023 and 2022, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 23.0% in 2023 compared with 27.0% in 2022. 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.

[[GREPCENT_TABLE]]
[["(in millions, except ratios)","","2023","","","2022"],["Income before income taxes","","$","174.4","","","","184.6"],["Adjustment for stock compensation","","","8.0","","","","6.7"],["Indemnification asset regarding tax audit","","","(0.1",")","","","0.1"],["Legacy cost of closed operations","","","6.1","","","","3.5"],["Acquisition costs","","","3.1","","","","\u2014"],["Adjusted income before income taxes","","$","191.5","","","","194.9"],["Income taxes","","$","35.3","","","","51.6"],["Adjustment of income tax provisions","","","1.4","","","","\u2014"],["Tax on stock compensation","","","0.4","","","","0.6"],["Tax loss / (gain) on distribution","","","0.4","","","","\u2014"],["Tax on legacy cost of closed operations","","","1.4","","","","0.7"],["Tax on acquisition costs","","","0.7","","","","\u2014"],["Other discrete items","","","4.5","","","","(0.3",")"],["Adjusted income taxes","","$","44.1","","","","52.6"],["GAAP effective tax rate","","","20.2","%","","","28.0","%"],["Adjusted effective tax rate","","","23.0","%","","","27.0","%"]]
[[/GREPCENT_TABLE]]

The adjusted effective tax rate is higher in 2023 than the GAAP effective tax rate, primarily due to elimination of the impact of other discrete items. This mainly represents the benefit arising from adjustments to the tax charge for previous years arising from return to provision adjustments in relation to the federal and state tax returns filed in the U.S. during 2023.

Our adjusted effective tax rate was lower in 2022 than the GAAP effective tax rate primarily due to the elimination of stock compensation activity.

Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S. regulations. Foreign tax credits can fully or partially offset these incremental U.S. taxes from

38

foreign income inclusions. The utilization of foreign tax credits varies year on year as this is dependent on a number of variable factors which are difficult to predict and may prevent offset. The GAAP effective tax rate and the adjusted effective tax rate in both 2023 and 2022 have been negatively impacted by these items.

As a consequence of the Company having operations outside of the U.S., it is exposed to foreign currency fluctuations. These have had a positive impact on the GAAP effective tax rate and adjusted effective tax rate in 2023, and a negative impact in 2022.

The level of foreign-derived intangible income benefit that the Company is entitled to has also had a positive impact on the GAAP effective tax rate and the adjusted effective tax rate in both 2023 and 2022.

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LIQUIDITY AND FINANCIAL CONDITION

Working Capital

In 2024 our working capital increased by $71.0 million, while our adjusted working capital decreased by $1.7 million. The difference between these measures is primarily due to the exclusion of the increase in our cash and cash equivalents, together with the movements for income taxes.

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.

[[GREPCENT_TABLE]]
[["(in millions)","","2024","","","2023"],["Total current assets","","$","956.6","","","$","885.7"],["Total current liabilities","","","(371.4",")","","","(371.5",")"],["Working capital","","","585.2","","","","514.2"],["Less cash and cash equivalents","","","(289.2",")","","","(203.7",")"],["Less prepaid income taxes","","","(3.1",")","","","(2.8",")"],["Less other current assets","","","(0.6",")","","","(0.6",")"],["Add back current portion of accrued income taxes","","","19.6","","","","2.6"],["Add back current portion of plant closure provisions","","","5.0","","","","4.6"],["Add back current portion of operating lease liabilities","","","13.9","","","","13.6"],["Add back current portion of unrecognized tax benefits","","","\u2014","","","","1.2"],["Adjusted working capital","","$","330.8","","","$","329.1"]]
[[/GREPCENT_TABLE]]

The movements in our adjusted working capital are explained as follows:

We had an $18.1 million decrease in trade and other accounts receivable primarily driven by the timing of sales across our reporting segments and the mix of customer payment terms. Days’ sales outstanding in our Performance Chemicals segment decreased from 64 days to 61 days; increased in our Fuel Specialties segment from 55 days to 57 days; and increased from 55 days to 83 days in our Oilfield Services segment.

We had a $0.9 million increase in inventories, net of a $6.5 million increase in allowances, as we manage inventory levels necessary to support future demand, while mitigating the risk of potential supply chain disruption for certain key raw materials. Days’ sales in inventory in our Performance Chemicals segment increased from 62 days to 63 days; decreased in our Fuel Specialties segment from 121 days to 113 days; and increased from 48 days to 76 days in our Oilfield Services segment.

Prepaid expenses increased $2.3 million, from $18.7 million to $21.0 million due to the impact of inflationary increases and the timing of some prepayments.

We had a $16.6 million decrease in accounts payable and accrued liabilities primarily due to the timing of supplier payments. Creditor days (including goods received not invoiced) increased in our Performance Chemicals segment from 45 days to 46 days; increased in our Fuel Specialties segment from 41 days to 44 days; and increased from 48 days to 68 days in our Oilfield Services segment.

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Operating Cash Flows

We generated cash from operating activities of $184.5 million in 2024 compared to $207.3 million in 2023. The decrease in cash is primarily related to our increased working capital, being partly offset by the improvements to our earnings before depreciation, amortization and excluding the one off non-cash impact relating to the U.K. defined benefit pension scheme buy-out.

Cash

As at December 31, 2024 and 2023, we had cash and cash equivalents of $289.2 million and $203.7 million, respectively, of which $133.9 million and $59.8 million, respectively, were held by non-U.S. subsidiaries principally in the U.K..

The $85.5 million increase in cash and cash equivalents in 2024 was driven by the cash inflows from operating activities, partly offset by higher working capital needs, our continued investments in capital projects including the development of our new ERP platform, payments for income taxes and the payment of our semi-annual dividends.

Debt

As at December 31, 2024 and 2023, the Company had no borrowings under the revolving credit facility and as a result, the related deferred finance costs of $1.1 million (December 31, 2023 – $1.2 million) are now included within other current and non-current assets at the balance sheet date. During 2024 and 2023, the Company did not draw down or repay any borrowing on its revolving credit facility.

On May 31, 2023, Innospec Inc. and certain subsidiaries of the Company entered into a Multicurrency Revolving Facility Agreement with various lenders, providing for a $250,000,000 four-year multicurrency revolving loan facility. The Agreement also contains an accordion feature whereby the Company may elect to increase the total available borrowings by an aggregate amount of up to $125,000,000. The termination date of the facility is May 30, 2027, but the Agreement includes an option for the Company to request an extension of the facility for a further year. The agreement replaced the Company’s credit facility agreement dated September 26, 2019. See Note 12 to the Notes to the Consolidated Financial Statements for additional details.

Effective as of May 20, 2024, the termination date of the Facility was extended from May 30, 2027 to May 31, 2028 in accordance with the terms of the Company’s multicurrency revolving facility agreement (the “Facility Agreement”). No other terms of the Facility Agreement or the Facility were modified. The Company paid a customary extension fee in connection with the extension of the Facility as contemplated by the Facility Agreement. As a consequence, the Company has capitalized a further $0.3 million of costs relating to the new Agreement which are to be amortized over the period to May 31, 2028.

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 3.5:1.0 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 as well as 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

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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, 2024, the Company had no obligations under finance leases.

Contractual Commitments

The following represents contractual commitments at December 31, 2024 and the effect of those obligations on future cash flows:

[[GREPCENT_TABLE]]
[["(in millions)","","Total","","","2025","","","2026-27","","","2028-29","","","Thereafter"],["Operating activities"],["Operating lease liabilities","","","44.9","","","","13.9","","","","14.0","","","","7.3","","","","9.7"],["Operating lease future commitments","","","0.3","","","","0.1","","","","0.2"],["Interest payments on debt","","","3.8","","","","1.1","","","","2.2","","","","0.5"],["Investing activities"],["Capital commitments","","","35.4","","","","35.4"],["Internally developed software","","","29.5","","","","23.8","","","","5.7"],["Total","","$","113.9","","","$","74.3","","","$","22.1","","","$","7.8","","","$","9.7"]]
[[/GREPCENT_TABLE]]

Operating activities

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.

The interest payments on debt are the commitment fees for our $250.0 million revolving credit facility. Any interest income has been excluded.

Investing activities

Capital commitments relate to certain capital projects that the Company has committed to undertake.

Internally developed software relates to the planned completion costs for the implementation of our new Enterprise Resource Planning system for EMEA and ASPAC, including the acquisition costs for the software as well as the external and internal costs of the development.

Outlook

Our 2025 outlook remains for continued growth in Performance Chemicals and Fuel Specialties and sequential quarterly recovery in Oilfield Services. In all our businesses we share a common focus to deliver best-in-class surface active chemistry technologies and service to our global customers. Our opportunity pipeline continues to center on technologies that lower emissions, enable cleaner formulations and increase operating efficiency. We view these as long-term customer priorities in all our markets.

Operating cash generation is expected to remain positive and we continue to have significant flexibility and balance sheet strength for further M&A, dividend growth, share repurchases and organic investment.

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Environmental Matters and Plant Closures

Under certain environmental laws the Company is responsible for the environmental 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 environmental remediation of contaminated properties is likely to be determined under non-U.S. law.

We evaluate costs for environmental remediation, decontamination and demolition projects on a regular basis. Full provision is made for those costs amounting to $60.3 million at December 31, 2024. See Note 13 of the Notes to the Consolidated Financial Statements for further details. Expenditure utilizing these provisions was $3.8 million, $4.9 million and $4.2 million in the years 2024, 2023 and 2022, respectively.

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