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 Companys Annual Report on Form 10-K filed on February 17, 2012.
The results for the interim period covered by this report are not necessarily indicative of the results to be expected for the full
year.
When we use the terms the Corporation, Company, Registrant, we, us and
our, we are referring to Innospec Inc. and its consolidated subsidiaries (Innospec) unless otherwise indicated or the context otherwise requires.
Prior to the three months ended September 30, 2012, unrecognized actuarial net losses within accumulated other comprehensive loss were adjusted for any change in the associated corporation tax rate.
Prospectively, no adjustment will be made to these amounts within accumulated other comprehensive loss for any change in the associated corporation tax rate.
NOTE 2 SEGMENTAL REPORTING
Innospec divides its business into three segments for management and reporting purposes: Fuel Specialties, Performance Chemicals and
Octane Additives. On September 20, 2012, the Company announced its Active Chemicals segment would be renamed Performance Chemicals, effective October 1, 2012, to make the purpose of our products clearer to the customers we serve. The Fuel
Specialties and Performance Chemicals segments operate in markets where we actively seek growth opportunities but their end customers are different. The Octane Additives segment is generally characterized by volatile and declining demand.
10
The Company evaluates the performance of its segments based on operating income. The following table
analyzes sales and other financial information by the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
127.0
|
|
|
$
|
136.1
|
|
|
$
|
372.2
|
|
|
$
|
376.5
|
|
Performance Chemicals
|
|
|
46.8
|
|
|
|
43.9
|
|
|
|
138.2
|
|
|
|
139.1
|
|
Octane Additives
|
|
|
9.6
|
|
|
|
22.1
|
|
|
|
52.3
|
|
|
|
58.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
183.4
|
|
|
$
|
202.1
|
|
|
$
|
562.7
|
|
|
$
|
573.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
36.8
|
|
|
$
|
38.1
|
|
|
$
|
110.2
|
|
|
$
|
105.6
|
|
Performance Chemicals
|
|
|
10.4
|
|
|
|
9.6
|
|
|
|
33.6
|
|
|
|
35.0
|
|
Octane Additives
|
|
|
3.5
|
|
|
|
10.0
|
|
|
|
27.6
|
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50.7
|
|
|
$
|
57.7
|
|
|
$
|
171.4
|
|
|
$
|
168.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
19.6
|
|
|
$
|
19.9
|
|
|
$
|
58.2
|
|
|
$
|
54.5
|
|
Performance Chemicals
|
|
|
5.6
|
|
|
|
5.0
|
|
|
|
18.8
|
|
|
|
21.7
|
|
Octane Additives
|
|
|
1.5
|
|
|
|
(38.1
|
)
|
|
|
21.9
|
|
|
|
(27.8
|
)
|
Pension credit/(charge)
|
|
|
0.0
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
(0.3
|
)
|
Corporate costs
|
|
|
(9.1
|
)
|
|
|
(6.3
|
)
|
|
|
(25.5
|
)
|
|
|
(20.3
|
)
|
Restructuring charge
|
|
|
(0.1
|
)
|
|
|
0.0
|
|
|
|
(0.2
|
)
|
|
|
0.0
|
|
Impairment of Octane Additives segment goodwill
|
|
|
(0.3
|
)
|
|
|
(0.6
|
)
|
|
|
(0.9
|
)
|
|
|
(1.7
|
)
|
Profit on disposal
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income/(loss)
|
|
$
|
17.3
|
|
|
$
|
(20.2
|
)
|
|
$
|
72.6
|
|
|
$
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pension credit/(charge) relates to the United Kingdom defined benefit pension plan which is closed to future service accrual. The
charges related to our other much smaller pension arrangements in the U.S. and overseas are included in the segment and income statement captions consistent with the related employees costs.
The following table presents a summary of the depreciation and amortization charges incurred by the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
0.4
|
|
|
$
|
0.6
|
|
|
$
|
1.4
|
|
|
$
|
1.8
|
|
Performance Chemicals
|
|
|
0.6
|
|
|
|
1.2
|
|
|
|
1.8
|
|
|
|
3.5
|
|
Octane Additives
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.6
|
|
Corporate
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.6
|
|
|
$
|
2.4
|
|
|
$
|
4.9
|
|
|
$
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
$
|
1.6
|
|
|
$
|
1.6
|
|
Performance Chemicals
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Octane Additives
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
3.1
|
|
|
$
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
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
September 30
|
|
|
Nine Months Ended
September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Numerator (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) available to common stockholders
|
|
$
|
15.5
|
|
|
$
|
(16.8
|
)
|
|
$
|
55.6
|
|
|
$
|
29.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
23,240
|
|
|
|
23,711
|
|
|
|
23,148
|
|
|
|
23,698
|
|
Dilutive effect of stock options and awards
|
|
|
683
|
|
|
|
0
|
|
|
|
724
|
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
23,923
|
|
|
|
23,711
|
|
|
|
23,872
|
|
|
|
24,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share, basic
|
|
$
|
0.67
|
|
|
$
|
(0.71
|
)
|
|
$
|
2.40
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share, diluted
|
|
$
|
0.65
|
|
|
$
|
(0.71
|
)
|
|
$
|
2.33
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three and nine months ended September 30, 2012, the average number of anti-dilutive options excluded from the calculation
of diluted earnings per share were 1,380 and 1,380, respectively (2011 - 1,380 and 690, respectively).
NOTE 4 GOODWILL
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2012
|
|
|
2011
|
|
At January 1
|
|
|
|
|
|
|
|
|
Gross cost
|
|
$
|
674.0
|
|
|
$
|
674.1
|
|
Accumulated Octane Additives segment goodwill impairment losses
|
|
|
(234.0
|
)
|
|
|
(232.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
440.0
|
|
|
|
442.1
|
|
Exchange effect
|
|
|
0.1
|
|
|
|
0.2
|
|
Impairment of Octane Additives segment goodwill
|
|
|
(0.9
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
At September 30
|
|
|
439.2
|
|
|
|
440.6
|
|
|
|
|
|
|
|
|
|
|
Gross cost
|
|
|
674.1
|
|
|
|
674.3
|
|
Accumulated Octane Additives segment goodwill impairment losses
|
|
|
(234.9
|
)
|
|
|
(233.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
439.2
|
|
|
|
440.6
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at January 1
|
|
|
(298.5
|
)
|
|
|
(298.5
|
)
|
Exchange effect
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at September 30
|
|
|
(298.7
|
)
|
|
|
(298.7
|
)
|
|
|
|
|
|
|
|
|
|
Net book amount at September 30
|
|
$
|
140.5
|
|
|
$
|
141.9
|
|
|
|
|
|
|
|
|
|
|
Fuel Specialties and Performance Chemicals segments goodwill
|
|
$
|
139.0
|
|
|
$
|
139.0
|
|
Octane Additives segment goodwill
|
|
|
1.5
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
140.5
|
|
|
$
|
141.9
|
|
|
|
|
|
|
|
|
|
|
12
NOTE 5 INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2012
|
|
|
2011
|
|
Gross cost at January 1
|
|
$
|
51.2
|
|
|
$
|
48.1
|
|
Capitalization of internally developed software and other costs
|
|
|
6.4
|
|
|
|
0.0
|
|
Exchange effect
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Gross cost at September 30
|
|
|
57.8
|
|
|
|
48.3
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at January 1
|
|
|
(33.5
|
)
|
|
|
(29.1
|
)
|
Amortization expense
|
|
|
(3.1
|
)
|
|
|
(3.4
|
)
|
Exchange effect
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at September 30
|
|
|
(36.8
|
)
|
|
|
(32.7
|
)
|
|
|
|
|
|
|
|
|
|
Net book amount at September 30
|
|
$
|
21.0
|
|
|
$
|
15.6
|
|
|
|
|
|
|
|
|
|
|
Ethyl
An intangible
asset of $22.1 million was previously recognized in respect of Ethyl foregoing their entitlement to a share of the future income stream under the sales and marketing agreements to market and sell TEL. The amount attributed to the Octane Additives
reporting segment is being amortized straight-line to December 31, 2013 and the amount attributed to the Fuel Specialties reporting segment is being amortized straight-line to December 31, 2017. An amortization expense of $1.2 million
was recognized in the first nine months of 2012 (2011 $1.5 million) in cost of goods sold.
Internally developed software and other
costs
We are continuing with the implementation of a new, company-wide, information system platform. The platform provider is well
established in the market. The implementation will be a phased, risk-managed, site deployment and follow a multistage user acceptance program with the existing platform providing a fallback position. Internally developed software and other
costs capitalized at September 30, 2012 were $9.5 million (2011 $0.0 million). No amortization expense was recognized in the first nine months of 2012 (2011 $0.0 million).
Others
The remaining intangible assets of $26.2 million relate to those recognized in the
acquisition accounting in respect of technology, customer relationships and patents. These assets are being amortized straight-line over periods of up to 13 years. In the first nine months of 2012 amortization expenses of $0.8 million and $1.1
million were recognized in cost of goods sold and selling, general and administrative expenses, respectively (2011 - $0.8 million and $1.1 million, respectively).
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.
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
(in millions)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Plan net pension credit/(charge):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
(0.4
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(1.2
|
)
|
Interest cost on projected benefit obligation
|
|
|
(8.0
|
)
|
|
|
(9.2
|
)
|
|
|
(24.0
|
)
|
|
|
(27.5
|
)
|
Expected return on plan assets
|
|
|
8.4
|
|
|
|
9.3
|
|
|
|
25.4
|
|
|
|
27.7
|
|
Amortization of prior service credit
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
1.0
|
|
Amortization of actuarial net losses
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.0
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.2
|
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Plan is closed to future service accrual but has a large number of deferred and current pensioners. A full triennial actuarial
valuation of the Plan was performed as at December 31, 2008 and an update performed as at December 31, 2011. Since April 2010 the Company has been contributing £5.8 million (approximately $9 million) per calendar year to the
Plan in accordance with a 10-year actuarial deficit recovery plan agreed with the trustees. Accordingly, the Company expects its annual cash contribution for 2012 to be approximately $9 million.
NOTE 7 INCOME TAXES
A roll-forward of unrecognized tax benefits and associated accrued interest and penalties is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Interest and
Penalties
|
|
|
Unrecognized
Tax Benefits
|
|
|
Total
|
|
Opening balance at January 1, 2012
|
|
$
|
0.4
|
|
|
$
|
12.2
|
|
|
$
|
12.6
|
|
Additions for tax positions of prior periods
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.1
|
|
Reductions for tax positions of prior periods
|
|
|
0.0
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance at September 30, 2012
|
|
|
0.5
|
|
|
|
12.0
|
|
|
|
12.5
|
|
Current
|
|
|
(0.3
|
)
|
|
|
(2.7
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
$
|
0.2
|
|
|
$
|
9.3
|
|
|
$
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the $12.5 million of unrecognized tax benefits, and interest and penalties, would impact our effective tax rate if recognized.
We recognize accrued interest and penalties associated with 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 in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. As at September 30, 2012, the Companys subsidiaries in the U.S. were subject to state tax audits in various states and the Companys German subsidiaries were subject to tax audits in Germany. The Company does not
currently anticipate that adjustments, if any, arising out of these tax audits would result in a material change to its financial position as at September 30, 2012.
The Company and its U.S. subsidiaries remain open to federal income tax examination by the IRS for years 1998 to 2004 and 2007 onwards due to the net operating losses in the period 1998 to 2002, although
no examination is currently underway. The Companys subsidiaries in foreign tax jurisdictions are open to examination including France (2009 onwards), Germany (2006 onwards), Switzerland (2010 onwards) and the United Kingdom (2010 onwards).
14
The Company is in a position to control whether or not to repatriate foreign earnings. No taxes have been
provided for the unremitted earnings of our overseas subsidiaries as any tax basis differences relating to investments in these overseas subsidiaries are considered to be permanent in duration.
NOTE 8 LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Revolving credit
|
|
$
|
24.0
|
|
|
$
|
20.0
|
|
Promissory note
|
|
|
10.0
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.0
|
|
|
|
35.0
|
|
Less current portion
|
|
|
(5.0
|
)
|
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29.0
|
|
|
$
|
30.0
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2012 the Company repaid $5.0 million of the $15.0 million promissory note.
NOTE 9 PLANT CLOSURE PROVISIONS
The principal site giving rise to environmental remediation liabilities is the Octane Additives manufacturing site at Ellesmere Port in
the United Kingdom. There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe. The liability for estimated closure costs of Innospecs Octane Additives
manufacturing facilities includes costs for decontamination and environmental remediation activities (remediation) as demand for TEL diminishes.
Movements in the provisions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
(in millions)
|
|
Severance
|
|
|
Remediation
|
|
|
Total
|
|
|
Total
|
|
Total at January 1
|
|
$
|
1.5
|
|
|
$
|
27.1
|
|
|
$
|
28.6
|
|
|
$
|
27.5
|
|
Charge
|
|
|
0.2
|
|
|
|
1.9
|
|
|
|
2.1
|
|
|
|
2.1
|
|
Expenditure
|
|
|
(0.6
|
)
|
|
|
(1.6
|
)
|
|
|
(2.2
|
)
|
|
|
(2.8
|
)
|
Exchange effect
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at September 30
|
|
|
1.1
|
|
|
|
27.4
|
|
|
|
28.5
|
|
|
|
27.0
|
|
Due within one year
|
|
|
(0.1
|
)
|
|
|
(3.5
|
)
|
|
|
(3.6
|
)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
1.0
|
|
|
$
|
23.9
|
|
|
$
|
24.9
|
|
|
$
|
23.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due within one year refer to provisions where expenditure is expected to arise within one year of the balance sheet date.
Severance charges are recognized in the income statement as restructuring costs along with other restructuring costs. Remediation costs are recognized in cost of goods sold.
Remediation
The remediation provision represents the fair value of the Companys
liability for environmental liabilities and asset retirement obligations. The accretion expense recognized in the first nine months of 2012 was $1.9 million.
15
We recognize, at fair value, environmental liabilities when they are probable and costs can be reasonably
estimated, and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated. The Company has to anticipate the program of work required and the associated future expected costs, and has to comply with
environmental legislation in the relevant countries in which it operates or has operated in. The Company views the costs of vacating our Ellesmere Port site as a contingent liability because there is no present intention to exit the site. The
Company has further determined that, due to the uncertain product life of TEL, particularly in the market for aviation gasoline, there exists such uncertainty as to the probability and timing of such cash flows that it is not possible to estimate
them sufficiently reliably to recognize a provision.
NOTE 10 FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). The Company utilizes a mid-market pricing convention for valuing the majority of its assets and liabilities measured and reported at fair value. The Company utilizes market data or
assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or
generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The Company gives the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to
the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair
value hierarchy levels. In the first nine months ended September 30, 2012, the Company evaluated the fair value hierarchy levels assigned to its assets and liabilities, and concluded that there should be no transfers into or out of Levels 1, 2
and 3.
The following table presents the carrying amount and fair values of the Companys assets and liabilities measured on a recurring
basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
(in millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
129.6
|
|
|
$
|
129.6
|
|
|
$
|
76.2
|
|
|
$
|
76.2
|
|
Short-term investments
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.8
|
|
|
|
4.8
|
|
Non-financial assets (Level 3 measurement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill Octane Additives
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
2.6
|
|
|
|
2.6
|
|
Derivatives (Level 1 measurement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Foreign currency forward exchange contracts
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current portion)
|
|
|
34.0
|
|
|
|
34.0
|
|
|
|
35.0
|
|
|
|
35.0
|
|
Non-financial liabilities (Level 3 measurement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant closure provisions remediation
|
|
|
27.4
|
|
|
|
27.4
|
|
|
|
27.1
|
|
|
|
27.1
|
|
Derivatives (Level 1 measurement):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Foreign currency forward exchange contracts
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
16
The cumulative gains and losses on the interest rate swaps and commodity swaps are summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
0.1
|
|
|
$
|
1.2
|
|
Change in fair value
|
|
|
0.0
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
The commodity swaps are used to manage the Companys cash flow exposure to raw material cost volatility. They were designated as
cash flow hedges and qualified for hedge accounting as at December 31, 2011. At March 31, 2012, the commodity hedges were determined to be ineffective and consequently a gain of $0.1 million was recognized in earnings. The commodity hedges
will likely remain ineffective for the remainder of their term and accordingly all subsequent changes in their fair value are being recognized in earnings.
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.
NOTE 11 DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Company has limited involvement with derivative instruments and does not trade them. The Company does use derivatives to manage
certain foreign currency exchange rate and raw material cost exposures.
The Company has hedged the cost of certain raw materials with
commodity swaps which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
(in millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Notional quantity 2,075 tonnes
|
|
|
|
|
|
|
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Notional quantity 525 tonnes
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
The impact on the income statement for the first nine months of 2012 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Gain/(Loss)
Recognized in
OCI on
Derivative
|
|
|
Location of Gain/(Loss)
Reclassified from
Accumulated OCI into
Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI into
Income
|
|
Commodity contracts
|
|
$
|
0.1
|
|
|
Cost of goods sold
|
|
$
|
0.3
|
|
Taxation
|
|
|
0.0
|
|
|
Income taxes
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.1
|
|
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
17
We enter into various foreign currency forward exchange contracts to minimize currency exposure from
expected future cash flows. The contracts have maturity dates of up to four years 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 nine months ended September 30, 2012 is summarized below:
|
|
|
|
|
|
|
(in millions)
|
|
Location of Gain/(Loss)
Recognized in Income
|
|
Amount of Gain/(Loss)
Recognized in Income
|
|
Foreign currency forward exchange contracts
|
|
Other income/(expense)
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
The Company sells a range of Fuel Specialties, Performance Chemicals and Octane Additives to major oil refineries and chemical
companies throughout the world. Credit limits, ongoing credit evaluation and account monitoring procedures are intended to minimize bad debt risk. Collateral is not generally required.
NOTE 12 COMMITMENTS AND CONTINGENCIES
Resolution of certain government investigations and other matters
As we have previously disclosed, the Company reached a $40.2 million settlement to resolve all matters in respect of investigations by U.S. and United Kingdom government authorities into certain legacy
transactions conducted by the Company and its subsidiaries under the United Nations Oil for Food Program, the U.S. Foreign Corrupt Practices Act, the U.S. Cuban Assets Control Regulations and United Kingdom anti-bribery laws. The settlement consists
of fines, penalties and disgorgements which are payable over a period of four years commencing 2010. As at September 30, 2012, the expected schedule of payments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Government
Authorities
|
|
|
Compliance
Monitor
|
|
|
Total
|
|
Fines, penalties and disgorgements
|
|
$
|
40.2
|
|
|
$
|
0.0
|
|
|
$
|
40.2
|
|
Fees and associated expenses
|
|
|
0.0
|
|
|
|
3.9
|
|
|
|
3.9
|
|
Less discounting to net present value
|
|
|
(0.2
|
)
|
|
|
0.0
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.0
|
|
|
|
3.9
|
|
|
|
43.9
|
|
Amounts paid
|
|
|
(28.2
|
)
|
|
|
(2.2
|
)
|
|
|
(30.4
|
)
|
Exchange effect
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
|
|
1.7
|
|
|
|
13.8
|
|
Due within one year
|
|
|
(8.4
|
)
|
|
|
(1.3
|
)
|
|
|
(9.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.7
|
|
|
$
|
0.4
|
|
|
$
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For accounting purposes only we are required under GAAP, in accordance with our accounting policy, to discount elements of the fines,
penalties and disgorgements to their net present value.
Other 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 other material pending legal proceedings to which the Company or
18
any of its subsidiaries is a party, or of which any of their property is subject, although an adverse resolution of an unexpectedly large number of these individual items could in the aggregate
have a material adverse effect on results of operations for a particular year or quarter.
Guarantees
The Company and certain of the Companys consolidated subsidiaries are contingently liable for certain obligations of affiliated companies primarily
in the form of guarantees of debt and performance under contracts entered into as a normal business practice. This includes guarantees of non-U.S. excise taxes and customs duties. As at September 30, 2012, such contingent liabilities amounted
to $7.3 million.
Under the terms of the guarantee arrangements, generally the Company would be required to perform (or be liable for
non-performance) should the affiliated company fail to satisfy 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 security interests over 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 satisfied with no adverse consequences material to the Company.
NOTE 13 STOCKHOLDERS EQUITY AND SHARE BASED COMPENSATION PLANS
At September 30, 2012, the Company had authorized common stock of 40,000,000 shares (December 31, 2011 40,000,000). Issued
shares at September 30, 2012, were 29,554,500 (December 31, 2011 29,554,500) and treasury stock amounted to 6,274,766 shares (December 31, 2011 6,507,081).
The Company has five active stock option plans, two of which provide for the grant of stock options to employees, one provides for the grant of stock options to non-employee directors, and another
provides for the grant of stock options to key executives on a matching basis provided they use a proportion of their annual bonus to purchase common stock in the Company on the open market or from the Company. The fifth plan is a savings plan which
provides for the grant of stock options to all Company employees provided they commit to make regular savings over a pre-defined period which can then be used to purchase common stock upon vesting of the options. The stock options have vesting
periods ranging from 24 months to 6 years and in all cases stock options granted expire within 10 years of the date of grant. All grants are at the sole discretion of the Compensation Committee of the Board of Directors. Grants may be priced at
market value or at a premium or discount. The aggregate number of shares of common stock reserved for issuance which can be granted under the plans is 2,640,000.
The fair value of the options above is calculated using the Black-Scholes model. In some cases certain performance related options are dependent upon external factors such as the Companys stock
price. The fair value of these options is calculated using a Monte Carlo model. The following assumptions were used to determine the fair value of options calculated using the Black-Scholes model:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
Expected life
|
|
|
5 years
|
|
|
|
5 years
|
|
Volatility
|
|
|
60.1
|
%
|
|
|
78.3
|
%
|
Risk free interest rate
|
|
|
0.43
|
%
|
|
|
1.22
|
%
|
19
The following table summarizes the transactions of the Companys stock option plans for the three and
nine months ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair Value
|
|
Outstanding at June 30, 2012
|
|
|
1,116,642
|
|
|
$
|
6.10
|
|
|
|
|
|
Granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
At discount
|
|
|
4,800
|
|
|
$
|
0.00
|
|
|
$
|
30.78
|
|
Exercised
|
|
|
(64,780
|
)
|
|
$
|
1.01
|
|
|
|
|
|
Forfeited
|
|
|
(1,648
|
)
|
|
$
|
8.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
1,055,014
|
|
|
$
|
6.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair Value
|
|
Outstanding at December 31, 2011
|
|
|
1,229,220
|
|
|
$
|
5.44
|
|
|
|
|
|
Granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
At discount
|
|
|
75,932
|
|
|
$
|
0.00
|
|
|
$
|
21.98
|
|
At market value
|
|
|
31,012
|
|
|
$
|
29.56
|
|
|
$
|
16.70
|
|
Exercised
|
|
|
(273,189
|
)
|
|
$
|
2.92
|
|
|
|
|
|
Forfeited
|
|
|
(7,961
|
)
|
|
$
|
9.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
1,055,014
|
|
|
$
|
6.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options outstanding at September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Life in
Years
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
and Fully
Vested
|
|
|
Weighted
Average
Remaining
Life
in
Years
|
|
|
Weighted
Average
Exercise
Price
|
|
$0-$5
|
|
|
583,119
|
|
|
|
7.24
|
|
|
$
|
0.60
|
|
|
|
139,825
|
|
|
|
6.29
|
|
|
$
|
0.74
|
|
$5-$10
|
|
|
22,654
|
|
|
|
2.75
|
|
|
$
|
9.66
|
|
|
|
22,654
|
|
|
|
2.75
|
|
|
$
|
9.66
|
|
$10-$15
|
|
|
385,698
|
|
|
|
2.26
|
|
|
$
|
11.48
|
|
|
|
0
|
|
|
|
0.00
|
|
|
$
|
0.00
|
|
$20-$25
|
|
|
11,185
|
|
|
|
5.43
|
|
|
$
|
20.57
|
|
|
|
11,185
|
|
|
|
5.43
|
|
|
$
|
20.57
|
|
$25-$30
|
|
|
50,978
|
|
|
|
8.09
|
|
|
$
|
28.59
|
|
|
|
11,666
|
|
|
|
4.39
|
|
|
$
|
27.09
|
|
$30-$35
|
|
|
1,380
|
|
|
|
8.62
|
|
|
$
|
32.60
|
|
|
|
0
|
|
|
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,055,014
|
|
|
|
|
|
|
|
|
|
|
|
185,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of fully vested stock options was $1.3 million. Of the 185,330 stock options that were exercisable,
102,393 had performance conditions attached. The total compensation cost for the first nine months of 2012 was $2.4 million (2011 $2.3 million). The total compensation cost related to non-vested stock options not yet recognized at
September 30, 2012 was $3.4 million and this cost is expected to be recognized over the weighted-average period of 1.48 years.
The total
intrinsic value of options exercised in the first nine months of 2012 was $1.3 million (2011 $2.1 million). The amount of cash received from the exercise of stock option awards in the first nine
20
months of 2012 was $0.8 million (2011 $0.7 million). The Companys policy is to issue shares from treasury stock to holders of stock options who exercise those options. During the
first nine months of 2012 the new total fair value of shares vested was $1.3 million (2011 $2.9 million).
The total options vested in
the first nine months of 2012 were 342,880 (2011 290,363).
An additional long-term incentive plan is in place to reward selected
executives for delivering exceptional performance. Under this plan a discretionary bonus will be payable to eligible executives if the Innospec share performance out-performs that of competitors, as measured by the Russell 2000 Index, by a minimum
of 10% over the five years from January 2008 to December 2012. The amount of bonus which can be earned will be a set cash amount for each one percentage point of out-performance. The maximum bonus under this plan will be payable for an
out-performance versus the Russell 2000 Index of 30%. The maximum bonus under this plan, in respect of the current participants, is $8 million (2011 - $8 million). No bonus is payable under this plan if the Innospec stock price does not out-perform
the Russell 2000 Index by more than 10% over the five year period, or the Russell 2000 Index falls in value over the same period. The fair value of these liability cash-settled stock appreciation rights is calculated on a quarterly basis using
a Monte Carlo model and summarized as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
2.2
|
|
|
$
|
0.8
|
|
Compensation charge
|
|
|
5.2
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
7.4
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
The following assumptions were used in the Monte Carlo model:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
Volatility
|
|
|
27.4
|
%
|
|
|
48.2
|
%
|
Risk free interest rate
|
|
|
0.34
|
%
|
|
|
0.43
|
%
|
NOTE 14 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2012, the FASB issued ASU 2012-02,
Intangibles Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment
. ASU 2012-02 simplifies how entities test indefinite-lived intangible assets, other than goodwill, for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not
that the indefinite-lived intangible asset is impaired. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption is
permitted). The implementation of the amended accounting guidance is not expected to have a material impact on our consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11,
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
. The objective of ASU 2011-11 is to facilitate convergence of
U.S. GAAP and International Financial Reporting Standards and improve the comparability of statements of financial position. Entities are required to disclose both gross information and net information about both instruments and transactions
eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements, and securities
borrowing and securities lending arrangements. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Entities should
21
provide the disclosures required by these amendments retrospectively for all comparative periods presented. The Company is currently evaluating the potential impact that the adoption of this
statement will have on its consolidated financial statements.
NOTE 15 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 is Of Counsel. In the first nine months of 2012 the Company incurred fees payable to SGR of $0.4 million (2011 full year
$6.5 million). As at September 30, 2012, the amount due to SGR from the Company was $0.1 million.
NOTE 16 SUBSEQUENT EVENTS
On October 5, 2012, the Company submitted a preliminary, non-binding proposal to acquire all outstanding shares of TPC Group, Inc.
common stock for an all-cash price of $44 to $46 per share. Our proposal is subject to certain conditions, including completion of our due diligence, obtaining all necessary internal approvals, and negotiation of definitive documentation. The
Company expects to fund the potential acquisition with a combination of debt financing and a preferred equity investment in the Company by investment funds affiliated with Blackstone Capital Partners VI, L.P..
22