INNOSPEC INC

RESULTS OF OPERATIONS

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

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

Three Months Ended September 30, 2024

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the three months ended September 30, 2024, and the three months ended September 30, 2023:

Performance Chemicals

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.

Gross margin: the year over year increase of 1.2 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 for our manufacturing efficiency due to the higher production volumes.

Operating expenses: increased $2.7 million year over year due to higher selling expenses, increased amortization for the acquired intangible assets relating to our QGP acquisition and higher performance-related remuneration accruals.

Fuel Specialties

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 lower than the prior year due to variations in the demand from customers.

Gross margin: the year over year increase of 2.3 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.

Operating expenses: the year over year decrease of $0.6 million was primarily due to lower provisions for doubtful debts.

Oilfield Services

Net sales: have decreased year over year by $35.6 million, or 24 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. Management expects to see lower sales volumes continuing in production chemicals for the remainder of 2024, with the potential for demand to recover over the near-term, combined with the potential for growth opportunities for our other oilfield markets.

Gross margin: the year over year decrease of 7.7 percentage points was due to an unfavorable sales mix as customer demand has weakened.

Operating expenses: the year over year decrease of $12.3 million was driven by the lower customer service costs and commissions related to the reduced demand from certain customers.

Other Income Statement Captions

Corporate costs: the year over year decrease of $7.2 million was primarily due to the $8.4 million recovery of historical costs which the Company incurred relating to our defined benefit pension scheme in the U.K., being partly offset by higher performance-related remuneration accruals.

Other net income/(expense): for the third quarter of 2024 and 2023, included the following:

Interest income/(expense), net: in the third quarter of 2024 was $2.7 million of income compared to $0.8 million of income in the third quarter of 2023, driven by the higher interest income being earned in 2024 for our increasing cash balances.

Income taxes: the effective tax rate was 25.4% and 17.5% in the third quarter of 2024 and 2023, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 24.6% in 2024 compared with 17.6% in 2023. The 7.0 percentage points increase in the adjusted effective rate was primarily due to the geographical mix of profits and the prior year comparatives being significantly impacted by foreign currency fluctuations. 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 charge to the adjusted effective tax charge:

Nine Months Ended September 30, 2024

The following table shows the changes in sales, gross profit and operating expenses by reporting segment for the nine months ended September 30, 2024, and the nine months ended September 30, 2023:

Performance Chemicals

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.

Gross margin: the year over year increase of 4.7 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 for our manufacturing efficiency due to the higher production volumes.

Operating expenses: increased $7.8 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

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 3.9 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 and the adverse impact of the Brazil inventory misappropriation and associated costs of exiting the trading relationship in the prior year.

Operating expenses: the year over year increase of $1.1 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 $131.1 million, or 25 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. Management expects to see lower sales volumes continuing in production chemicals for the remainder of 2024, with the potential for demand to recover over the near-term, combined with the potential for growth opportunities for our other oilfield markets.

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

Operating expenses: the year over year decrease of $52.0 million was driven by the lower customer service costs and commissions related to the reduced demand from certain customers, together with lower provisions for doubtful debts and lower performance related remuneration accruals.

Other Income Statement Captions

Corporate costs: the year over year decrease of $7.2 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.

Other net income/(expense): for the first nine months of 2024 and 2023, included the following:

Interest income/(expense), net: in the first nine months of 2024 was $6.9 million of income, compared to $0.8 million of income in the first nine months of 2023. Interest income from our cash balances has increased over recent periods due to higher central bank interest rates together with the increases in our cash balances.

Income taxes: the effective tax rate was 26.3% and 21.5% in the first nine months of 2024 and 2023, respectively. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 25.7% in 2024 compared with 21.4% in 2023. The 4.3 percentage points increase in the adjusted effective rate was primarily due to the geographical mix of profits and the prior year comparatives being significantly impacted by foreign currency fluctuations. 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 charge to the adjusted effective tax charge: