INNOSPEC INC. - Quarter Report: 2020 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended September 30, 2020

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

For the transition period from to

Commission file number

1-13879

INNOSPEC INC.

(Exact name of registrant as specified in its charter)


DELAWARE		98-0181725
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

8310 South Valley Highway Suite 350 Englewood Colorado		80112
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (303) 792 5554

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	IOSP	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such file.

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes

common stock, as of the latest practicable date.


Class		Outstanding as of October 31, 2020
Common Stock, par value $0.01		24,579,934

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TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION	4

Item 1	Condensed Consolidated Financial Statments	4

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Balance Sheets	6

	Condensed Consolidated Balance Sheets (continued)	7

	Condensed Consolidated Statements of Cash Flows	8

	Condensed Consolidated Statements of Equity	9

	Notes To The Unaudited Interim Condensed Consolidated Financial Statements	11

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September 30, 2020	24

	Critical Accounting Estimates	24

	Results of Operations	26

	Liquidity and Financial Condition	36

Item 3	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4	Controls and Procedures	39

PART II	OTHER INFORMATION	40

Item 1	Legal Proceedings	40

Item 1A	Risk Factors	40

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3	Defaults Upon Senior Securities	41

Item 4	Mine Safety Disclosures	41

Item 5	Other Information	41

Item 6	Exhibits	41

SIGNATURES		42

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CAUTIONARY STATEMENT RELATIVE TO FORWARD-LOOKING STATEMENTS

This Form

10-Q

contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Such forward-looking statements include statements (covered by words like “expects,” “estimates,” “anticipates,” “may,” “believes,” “feel,” “plan,” “intends” or similar words or expressions, for example) which relate to earnings, growth potential, operating performance, events or developments that we expect or anticipate will or may occur in the future. Although forward-looking statements are believed by management to be reasonable when made, they are subject to certain risks, uncertainties and assumptions, including, the effects of the

COVID-19

pandemic, such as its duration, its unknown long-term economic impact, measures taken by governmental authorities to address it and the manner in which the pandemic may precipitate or exacerbate other risks and/or uncertainties, and our actual performance or results may differ materially from these forward-looking statements. Additional information regarding risks, uncertainties and assumptions relating to Innospec and affecting our business operations and prospects are described in Innospec’s Annual Report on Form

10-K

for the year ended December 31, 2019, this Form

10-Q

and other reports filed with the U.S. Securities and Exchange Commission. You are urged to review our discussion of risks and uncertainties that could cause actual results to differ from forward-looking statements under the heading “Risk Factors” in such reports. Innospec undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I FINANCIAL INFORMATION

Item 1 Condensed Consolidated Financial Statements

INNOSPEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended September 30						Nine Months Ended September 30
(in millions, except share and per share data)	2020			2019			2020			2019
Net sales	$	265.1		$	371.9		$	882.3		$	1,122.6
Cost of goods sold		(186.4	)		(252.8	)		(630.6	)		(774.6	)

Gross profit		78.7			119.1			251.7			348.0
Operating expenses:
Selling, general and administrative		(54.2	)		(71.2	)		(182.1	)		(214.9	)
Research and development		(7.7	)		(9.7	)		(24.4	)		(27.0	)
Restructuring charge		0.0			0.0			(21.1	)		0.0
Impairment of intangible assets		0.0			0.0			(19.8	)		0.0

Total operating expenses		(61.9	)		(80.9	)		(247.4	)		(241.9	)

Operating income		16.8			38.2			4.3			106.1
Other income, net		3.8			1.0			7.8			5.1
Interest expense, net		(0.4	)		(1.4	)		(1.5	)		(4.1	)

Income before income tax expense		20.2			37.8			10.6			107.1
Income tax expense		(7.5	)		(7.7	)		(4.5	)		(26.0	)

Net income	$	12.7		$	30.1		$	6.1		$	81.1

Earnings per share:
Basic	$	0.52		$	1.23		$	0.25		$	3.31

Diluted	$	0.51		$	1.22		$	0.25		$	3.28

Weighted average shares outstanding (in thousands):
Basic		24,570			24,491			24,555			24,476

Diluted		24,720			24,715			24,758			24,700

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

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INNOSPEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30						Nine Months Ended September 30
(in millions)	2020			2019			2020			2019
Net income	$	12.7		$	30.1		$	6.1		$	81.1

Other comprehensive income/(loss):
Changes in cumulative translation adjustment, net of tax of $(0.5) million, $1.1 million, $1.0 million and $1.2 million respectively		11.9			(12.4	)		9.5			(14.0	)
Changes in derivative instruments, net of tax of $0.0 million, $0.1 million, $0.0 million and $0.3 million respectively		0.0			(0.3	)		0.0			(1.5	)
Amortization of prior service credit, net of tax of $0.0 million, $0.0 million, $0.1 million and $0.1 million respectively		(0.1	)		(0.1	)		(0.5	)		(0.6	)
Amortization of actuarial net losses, net of tax of $0.0 million, $0.0 million, $(0.1) million and $0.0 million respectively		0.3			0.0			1.1			0.0

Total other comprehensive income/(loss)		12.1			(12.8	)		10.1			(16.1	)

Total comprehensive income	$	24.8		$	17.3		$	16.2		$	65.0

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

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INNOSPEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


(in millions, except share and per share data)	September 30, 2020		December 31, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	66.6	$	75.7
Trade and other accounts receivable (less allowances of $4.7 million and $3.8 million respectively)		206.2		292.0
Inventories (less allowances of $18.3 million and $14.5 million respectively):
Finished goods		171.3		173.9
Raw materials		68.5		70.7

Total inventories		239.8		244.6
Prepaid expenses		7.9		14.7
Prepaid income taxes		8.1		2.5
Other current assets		0.2		0.8

Total current assets		528.8		630.3
Net property, plant and equipment		204.2		198.7
Operating lease right-of-use assets		29.7		32.4
Goodwill		367.2		363.0
Other intangible assets		78.6		113.5
Deferred tax assets		9.4		9.1
Pension asset		120.0		115.9
Other non-current assets		5.8		5.9

Total assets	$	1,343.7	$	1,468.8

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

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INNOSPEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)


(in millions, except share and per share data)	September 30, 2020			December 31, 2019
	(Unaudited)
Liabilities and Equity
Current liabilities:
Accounts payable	$	81.8		$	122.0
Accrued liabilities		125.7			154.0
Current portion of finance leases		0.4			1.0
Current portion of plant closure provisions		5.2			5.6
Current portion of accrued income taxes		5.4			10.3
Current portion of operating lease liabilities		11.3			10.6

Total current liabilities		229.8			303.5
Long-term debt		0.0			58.6
Finance leases, net of current portion		0.2			0.5
Plant closure provisions, net of current portion		52.7			43.7
Accrued income taxes, net of current portion		32.4			36.2
Unrecognized tax benefits		15.5			16.4
Operating lease liabilities, net of current portion		18.5			21.9
Deferred tax liabilities		47.2			49.6
Pension liabilities and post-employment benefits		18.7			17.8
Other non-current liabilities		2.7			1.7
Equity:
Common stock, $0.01 par value, authorized 40,000,000 shares, issued 29,554,500 shares		0.3			0.3
Additional paid-in capital		334.4			330.4
Treasury stock (4,974,805 and 5,047,278 shares at cost, respectively)		(93.7	)		(93.3	)
Retained earnings		748.8			755.5
Accumulated other comprehensive loss		(64.3	)		(74.4	)

Total Innospec stockholders’ equity		925.5			918.5
Non-controlling interest		0.5			0.4

Total equity		926.0			918.9

Total liabilities and equity	$	1,343.7		$	1,468.8

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

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INNOSPEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30
(in millions)	2020			2019
Cash Flows from Operating Activities
Net income	$	6.1		$	81.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		35.3			36.3
Impairment of intangible assets		19.8			0.0
Impairment of tangible assets		2.0			0.0
Deferred tax expense		(3.3	)		(0.1	)
Cash contributions to defined benefit pension plans		0.0			(0.4	)
Non-cash movements on defined benefit pension plans		(3.3	)		(4.7	)
Stock option compensation		4.4			4.9
Changes in assets and liabilities, net of effects of acquired and divested companies:
Trade and other accounts receivable		86.0			(20.8	)
Inventories		3.3			(6.0	)
Prepaid expenses		5.7			2.5
Accounts payable and accrued liabilities		(64.1	)		9.4
Accrued income taxes		(12.9	)		(0.4	)
Plant closure provisions		8.2			0.1
Unrecognized tax benefits		(0.9	)		1.0
Other assets and liabilities		1.4			0.3

Net cash provided by operating activities		87.7			103.2
Cash Flows from Investing Activities
Capital expenditures		(21.7	)		(22.6	)
Internally developed software		0.0			(1.1	)

Net cash used in investing activities		(21.7	)		(23.7	)
Cash Flows from Financing Activities
Non-controlling interest		0.1			0.0
Proceeds from revolving credit facility		15.0			105.5
Repayments of revolving credit facility		(75.0	)		(99.0	)
Repayment of term loan		0.0			(82.5	)
Repayments of finance leases		(0.9	)		(1.3	)
Refinancing costs		(0.3	)		(1.3	)
Dividend paid		(12.8	)		(12.2	)
Issue of treasury stock		1.2			1.2
Repurchase of common stock		(2.1	)		(2.2	)

Net cash used in financing activities		(74.8	)		(91.8	)
Effect of foreign currency exchange rate changes on cash		(0.3	)		(0.5	)

Net change in cash and cash equivalents		(9.1	)		(12.8	)
Cash and cash equivalents at beginning of period		75.7			123.1

Cash and cash equivalents at end of period	$	66.6		$	110.3

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

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INNOSPEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)


(in millions)	Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Non- Controlling Interest		Total Equity
Balance at December 31, 2019	$	0.3	$	330.4		$	(93.3	)	$	755.5		$	(74.4	)	$	0.4	$	918.9
Net income										6.1								6.1
Dividend paid ($0.52 per share)										(12.8	)							(12.8	)
Changes in cumulative translation adjustment, net of tax													9.5					9.5
Share of net income																0.1		0.1
Treasury stock reissued				(0.4	)		1.7											1.3
Treasury stock repurchased							(2.1	)										(2.1	)
Stock option compensation				4.4														4.4
Amortization of prior service credit, net of tax													(0.5	)				(0.5	)
Amortization of actuarial net losses, net of tax													1.1					1.1

Balance at September 30, 2020	$	0.3	$	334.4		$	(93.7	)	$	748.8		$	(64.3	)	$	0.5	$	926.0


(in millions)	Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Non- Controlling Interest			Total Equity
Balance at December 31, 2018	$	0.3	$	324.9		$	(92.8	)	$	668.3		$	(75.7	)	$	0.5		$	825.5
Net income										81.1									81.1
Dividend paid ($0.52 per share)										(12.2	)								(12.2	)
Changes in cumulative translation adjustment, net of tax													(14.0	)					(14.0	)
Changes in derivative instruments, net of tax													(1.5	)					(1.5	)
Share of net income																(0.1	)		(0.1	)
Treasury stock reissued				(0.4	)		1.6												1.2
Treasury stock repurchased							(2.1	)											(2.1	)
Stock option compensation				4.9															4.9
Amortization of prior service credit, net of tax													(0.6	)					(0.6	)

Balance at September 30, 2019	$	0.3	$	329.4		$	(93.3	)	$	737.2		$	(91.8	)	$	0.4		$	882.2

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

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INNOSPEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)


(in millions)	Common Stock		Additional Paid-In Capital			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Loss			Non- Controlling Interest		Total Equity
Balance at June 30, 2020	$	0.3	$	333.0		$	(93.8	)	$	736.1	$	(76.4	)	$	0.5	$	899.7
Net income										12.7							12.7
Changes in cumulative translation adjustment, net of tax												11.9					11.9
Treasury stock reissued				(0.2	)		0.1										(0.1	)
Stock option compensation				1.6													1.6
Amortization of prior service credit, net of tax												(0.1	)				(0.1	)
Amortization of actuarial net losses, net of tax												0.3					0.3

Balance at September 30, 2020	$	0.3	$	334.4		$	(93.7	)	$	748.8	$	(64.3	)	$	0.5	$	926.0


(in millions)	Common Stock		Additional Paid-In Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Loss			Non- Controlling Interest		Total Equity
Balance at June 30, 2019	$	0.3	$	327.7	$	(93.4	)	$	707.1	$	(79.0	)	$	0.4	$	863.1
Net income									30.1							30.1
Changes in cumulative translation adjustment, net of tax											(12.4	)				(12.4	)
Changes in derivative instruments, net of tax											(0.3	)				(0.3	)
Treasury stock reissued						0.1										0.1
Stock option compensation				1.7												1.7
Amortization of prior service credit, net of tax											(0.1	)				(0.1	)

Balance at September 30, 2019	$	0.3	$	329.4	$	(93.3	)	$	737.2	$	(91.8	)	$	0.4	$	882.2

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

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INNOSPEC INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim condensed 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 condensed consolidated financial statements to be fairly stated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2019 filed on February 19, 2020 (the “2019 Form

10-K”).

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 “Innospec,” “the Corporation,” “the Company,” “Registrant,” “we,” “us” and “our,” we are referring to Innospec Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

Credit losses

With an effective date of January 1, 2020, we have applied Accounting Standards Update (ASU)

No. 2016-13,

Financial Instruments – Credit Losses (ASC Topic 326). This replaces the incurred loss impairment methodology under previous GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The standard was adopted using prospective application and principally impacts the allowance for trade and other accounts receivables. Upon adoption, there was no adjustment made to opening retained earnings as at January 1, 2020. As a result of implementing the standard, the Company did not recognize any material change to the allowance within trade and other accounts receivable as at January 1, 2020. Trade and other accounts receivable are shown net of a $4.7 million allowance at September 30, 2020. The allowance remains immaterial to the financial statements.

The Company is exposed to credit losses primarily through sales of products. The Company’s expected loss allowance methodology for trade and other accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers’ receivables. Due to the short-term nature of such receivables, the estimate of accounts receivable amounts that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, a further allowance is included to account for the Company’s historic track record of credit losses, for balances which are not aged sufficiently to be considered under the aging based approach.

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The Company considered the current and expected future economic and market conditions surrounding the

COVID-19

pandemic and determined that the estimate of credit losses was not significantly impacted.

NOTE 2 – SEGMENT REPORTING

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

The Fuel Specialties, Performance Chemicals and Oilfield Services segments operate in markets where we actively seek growth opportunities although their ultimate customers are different. The Octane Additives segment ceased

trading and is no longer

a reporting segment from July 1, 2020, as reported in our Quarterly Report on Form

10-Q

for the quarter ended June 30, 2020 (see Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information).

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


	Three Months Ended September 30								Nine Months Ended September 30
(in millions)	2020				2019				2020				2019
Net Sales:
Refinery and Performance	$	86.8			$	96.5			$	270.3			$	309.0
Other		33.2				47.6				104.1				124.4

Fuel Specialties		120.0				144.1				374.4				433.4

Personal Care		57.1				55.0				169.9				170.9
Home Care		21.6				21.1				64.5				71.2
Other		23.3				23.8				76.4				80.6

Performance Chemicals		102.0				99.9				310.8				322.7

Oilfield Services		43.1				121.4				197.1				358.1
Octane Additives		0.0				6.5				0.0				8.4

	$	265.1		$		371.9		$		882.3		$		1,122.6

Gross profit/(loss):
Fuel Specialties	$	40.3			$	54.1			$	116.9			$	154.5
Performance Chemicals		24.0				22.6				76.5				73.2
Oilfield Services		14.4				41.2				60.5				120.4
Octane Additives		0.0				1.2				(2.2	)			(0.1	)

	$	78.7			$	119.1			$	251.7			$	348.0

Operating income/(loss):
Fuel Specialties	$	22.2			$	31.1			$	59.0			$	88.1
Performance Chemicals		12.4				9.3				40.2				33.8
Oilfield Services		(4.5	)			10.0				(9.7	)			27.9
Octane Additives		0.0				0.8				(2.8	)			(1.9	)
Corporate costs		(13.3	)			(13.0	)			(41.5	)			(41.8	)
Restructuring charge		0.0				0.0				(21.1	)			0.0
Impairment of intangible assets		0.0				0.0				(19.8	)			0.0

Total operating income	$	16.8			$	38.2			$	4.3			$	106.1

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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 under the treasury stock method. Per share amounts are computed as follows:


	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Numerator (in millions):
Net income available to common stockholders	$	12.7	$	30.1	$	6.1	$	81.1

Denominator (in thousands):
Weighted average common shares outstanding		24,570		24,491		24,555		24,476
Dilutive effect of stock options and awards		150		224		203		224

Denominator for diluted earnings per share		24,720		24,715		24,758		24,700

Net income per share, basic:	$	0.52	$	1.23	$	0.25	$	3.31

Net income per share, diluted:	$	0.51	$	1.22	$	0.25	$	3.28

In the three and nine months ended September 30, 2020, the average number of anti-dilutive options excluded from the calculation of diluted earnings per share were 17,980 and 23,420, respectively (three and nine months ended September 30, 2019 – 12,539 and 6,270, respectively).

NOTE 4 – RESTRUCTURING

During the quarter ended June 30, 2020, the Company recorded provisions of $21.1 million for the restructuring of its Octane Additives segment in line with the end of the manufacturing and sale of tetra ethyl lead (“TEL”) for use in motor gasoline. As a result, the Octane Additives segment ceased

trading and is no longer

a reporting segment from July 1, 2020. Production of TEL will continue for sales to the aviation market (“AvTel”), as reported within our Fuel Specialties segment.

The

restructuring

provisions comprise the future committed costs of environmental monitoring of $2.0 million, remediation of facilities of $7.5 million, provision for a loss making contract of $7.2 million, impairment of tangible assets of $2.0 million and costs of redundancy due to the

down-sizing

of the TEL operations of $2.4 million. During the quarter ended September 30, 2020 the utilization of these provisions and the unwinding of the discounting was not material.

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NOTE 5 – GOODWILL

The following table summarizes the goodwill movements:


(in millions)	Gross Cost		Accumulated Impairment Losses			Net Book Amount
Opening balance at January 1	$	599.5	$	(236.5	)	$	363.0
Exchange effect		4.2		0.0			4.2

Closing balance at September 30	$	603.7	$	(236.5	)	$	367.2

NOTE 6 – OTHER INTANGIBLE ASSETS

The following table summarizes the other intangible assets movements:


(in millions)	2020
Gross cost at January 1	$	294.8
Exchange effect		2.0

Gross cost at September 30		296.8

Accumulated amortization at January 1		(181.3	)
Amortization expense		(16.3	)
Impairment		(19.8	)
Exchange effect		(0.8	)

Accumulated amortization at September 30		(218.2	)

Net book amount at September 30	$	78.6

During the quarter ended June 30, 2020, the Company impaired the intangible assets arising from the acquisition of Strata Control Services Inc., which forms part of our Oilfield Services segment. The impairment review was triggered by the reduction in demand for drilling related products. A discounted cash flow analysis was performed to determine the fair value of the assets, linked to the down turn in the results of that segment. The impaired assets relate to technology ($10.0 million) and customer relationships ($9.8 million).

The amortization expense for the nine months ended September 30, 2020 was $16.3 million (nine months ended September 30, 2019 – $17.2 million).

The net book amount by category of other intangible assets is shown in the following table:


(in millions)	September 30 2020		December 31 2019
Product rights	$	7.2	$	10.1
Brand names		2.5		2.9
Technology		20.3		32.6
Customer relationships		45.1		60.8
Internally developed software		3.5		7.1

	$	78.6	$	113.5

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NOTE 7 – PENSION AND POST EMPLOYMENT BENEFITS

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

The net service cost for the three and nine months ended September 30, 2020 was $0.3 million and $0.9 million respectively (three and nine months ended September 30, 2019 – $0.2 million and $0.7 million respectively) and has been recognized in selling, general and administrative expenses within corporate costs. The following table shows the income statement effect recognized within other income, net:


	Three Months Ended September 30						Nine Months Ended September 30
(in millions)	2020			2019			2020			2019
Plan net pension credit/(charge):
Interest cost on projected benefit obligation	$	(2.9	)	$	(3.6	)	$	(8.4	)	$	(11.4	)
Expected return on plan assets		4.5			5.5			13.3			16.5
Amortization of prior service credit		0.2			0.1			0.6			0.7
Amortization of actuarial net losses		(0.2	)		0.0			(0.6	)		0.0

	$	1.6		$	2.0		$	4.9		$	5.8

The amortization of prior service credit and actuarial net losses is a reclassification out of accumulated other comprehensive loss into other income and expense.

The Company also maintains an unfunded defined benefit pension plan covering a number of its current and former employees in Germany (the “German plan”) within our Fuel Specialties segment. The German plan is closed to new entrants and has no assets. The net service cost for the German plan for the three and nine months ended September 30, 2020 was $0.0 million and $0.1 million respectively (three and nine months ended September 30, 2019 – $0.0 million and $0.1 million respectively) and has been recognized in selling, general and administrative expenses. The following table shows the income statement effect recognized within other income and expense:


	Three Months Ended September 30						Nine Months Ended September 30
(in millions)	2020			2019			2020			2019
Plan net pension charge:
Interest cost on projected benefit obligation	$	0.0		$	(0.1	)	$	(0.1	)	$	(0.2	)
Amortization of actuarial net losses		(0.2	)		(0.1	)		(0.6	)		(0.2	)

	$	(0.2	)	$	(0.2	)	$	(0.7	)	$	(0.4	)

As at September 30, 2020, our Performance Chemicals segment has obligations for post-employment benefits in its European businesses with a liability of $4.8 million (December 31, 2019 – $4.5 million).

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NOTE 8 – INCOME TAXES

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


(in millions)	Unrecognized Tax Benefits			Interest and Penalties		Total
Opening balance at January 1	$	14.4		$	2.0	$	16.4
Net change for tax positions of prior periods		(1.1	)		0.2		(0.9	)

Closing balance at September 30		13.3			2.2		15.5
Current		0.0			0.0		0.0

Non-current	$	13.3		$	2.2	$	15.5

All of the $15.5 million of unrecognized tax benefits, interest and penalties would impact our effective tax rate if recognized.

As previously disclosed, a

non-U.S.

subsidiary, Innospec Performance Chemicals Italia Srl, is subject to an ongoing tax audit in relation to the period 2011 to 2014 inclusive. The Company has determined that additional tax, interest and penalties totaling $3.3 million may arise as a consequence of the tax audit. This includes a reduction in interest accrued of $0.1 million and an increase for foreign exchange movements of $0.1 million recorded in the nine months to September 30, 2020. As any additional tax arising as a consequence of the tax audit would be reimbursed by the previous owner under the terms of the sale and purchase agreement, an indemnification asset of the same amount is recorded in the financial statements to reflect this arrangement.

As previously disclosed, in 2018 the Company recorded an unrecognized tax benefit in relation to a potential adjustment that could arise as a consequence of the Tax Cuts and Jobs Act, but for which retrospective adjustment to the filed 2017 U.S. federal income tax returns was not permissible. The Company has determined that additional tax, interest and penalties totaling $12.2 million may arise in relation to this item. This includes an increase in interest accrued of $0.5 million in the nine months to September 30, 2020.

As previously disclosed, in 2015 the Company recorded an unrecognized tax benefit of $1.2 million in relation to additional tax that could have arisen if a historical impairment in value of certain of the Company’s

non-U.S.

subsidiaries was reversed upon challenge by the tax authorities. The Company released the provision of $1.2 million in full, together with accrued interest of $0.2 million thereon, in the three months ended June 30, 2020, following a review of the value of the Company’s investments that confirmed the historical impairment in value undertaken in 2005 was appropriate.

The Company and its U.S. subsidiaries remain open to examination by the IRS for years 2016 onwards under the statute of limitations. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including Germany (2015 onwards), Switzerland (2015 onwards), Spain (2016 onwards), France (2017 onwards) and the United Kingdom (2018 onwards).

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NOTE 9 – LONG-TERM DEBT

Long-term debt consists of the following:


(in millions)	September 30, 2020		December 31, 2019
Revolving credit facility	$	0.0	$	60.0
Deferred finance costs		0.0		(1.4	)

	$	0.0	$	58.6

On September 16, 2020, Innospec and certain of its subsidiaries agreed to extend the term of its revolving credit facility until

September 25, 2024.

The costs of $0.3 million for extending the term have been capitalized on the balance sheet.

As at September 30, 2020, the Company had repaid all of its borrowings under the revolving

credit

facility and as a result, the related deferred finance costs

asset

of $1.4 million

now included within other

non-current

assets at the balance sheet date.

NOTE 10 – PLANT CLOSURE PROVISIONS

The Company has continuing plans to close some of its manufacturing facilities at sites around the world as and when those operations are expected to be decommissioned. The liability for estimated closure costs of Innospec’s manufacturing facilities includes costs for decontamination and environmental remediation activities (“remediation”).

As a result, the principal site giving rise to remediation liabilities is the manufacturing site at Ellesmere Port in the United Kingdom. There are also remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe.

Movements in the provisions are summarized as follows:


(in millions)	2020
Total at January 1	$	49.3
Charge for the period		11.0
Utilized in the period		(2.7	)
Exchange effect		0.3

Total at September 30		57.9
Due within one year		(5.2	)

Due after one year	$	52.7

The charge for the nine months ended September 30, 2020 was $11.0 million (nine months ended September 30, 2019 – $3.2 million). This includes $7.5 million of additional provisions as a result of the restructuring activities following the cessation of sales of TEL for use in motor gasoline (see Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information).

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

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NOTE 11 – FAIR VALUE MEASUREMENTS

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


	September 30, 2020				December 31, 2019
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Non-derivatives:
Cash and cash equivalents	$	66.6	$	66.6	$	75.7	$	75.7
Derivatives (Level 1 measurement):
Other current and non-current assets:
Foreign currency forward exchange contracts		0.2		0.2		0.8		0.8

Liabilities
Non-derivatives:
Long-term debt (including current portion)	$	0.0	$	0.0	$	58.6	$	58.6
Finance leases (including current portion)		0.6		0.6		1.5		1.5
Non-financial liabilities (Level 3 measurement):
Other current and non-current liabilities:
Stock equivalent units		12.3		12.3		24.6		24.6

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

Cash and cash equivalents:

The carrying amount approximates fair value because of the short-term maturities of such instruments.

Derivatives:

The fair value of derivatives relating to foreign currency forward exchange contracts are derived from current settlement prices and comparable contracts using current assumptions. 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.

Long-term debt and finance leases:

Long-term debt comprises the revolving credit facility, which is shown net of deferred finance costs that have been capitalized. Finance leases relate to certain fixed assets in our Fuel Specialties and Oilfield Services segments. The carrying amount of long-term debt and finance leases approximates to the fair value.

Stock equivalent units:

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

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NOTE 12 – DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT

The Company enters into various foreign currency forward exchange contracts to minimize currency exchange rate exposure from expected future cash flows. As at September 30, 2020 the contracts have maturity dates of up to twelve months at the date of inception. These foreign currency forward exchange contracts have not been designated as hedging instruments, and their impact on the income statement for the first nine months of 2020 was a gain of $0.7 million (first nine months of 2019: gain of $2.9 million).

As at September 30, 2020 and December 31, 2019 the Company did not hold any interest rate swaps. In prior years, the Company entered into interest rate swaps to minimize interest rate exposure related to a portion of its borrowing requirements. These interest rate swaps were designated as hedging instruments, and their impact on accumulated other comprehensive loss for the first nine months of 2019 was a loss of $1.8 million.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Legal matters

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

Guarantees

The Company and certain of the Company’s consolidated subsidiaries are contingently liable for certain obligations of affiliated companies primarily in the form of guarantees of debt and performance under contracts entered into as a normal business practice. This includes guarantees of

non-U.S.

excise taxes and customs duties. As at September 30, 2020, such guarantees which are not recognized as liabilities in the condensed consolidated financial statements amounted to $9.6 million (December 31, 2019 - $4.7 million). The remaining terms of the fixed maturity guarantees vary from 1 month to 3 years, with some further guarantees having no fixed expiry date.

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

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

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NOTE 14 – STOCK-BASED COMPENSATION PLANS

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

Stock option plans

The following table summarizes the transactions of the Company’s stock option plans for the nine months ended September 30, 2020:


	Number of Options			Weighted Average Exercise Price		Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2019		504,459		$	33.05	$	41.35
Granted - at discount		63,950		$	1.11	$	76.80
- at market value		10,419		$	95.70	$	18.69
Exercised		(92,551	)	$	12.84	$	48.71
Forfeited		(19,837	)	$	34.07	$	40.65

Outstanding at September 30, 2020		466,440		$	34.04	$	44.27

At September 30, 2020, there were 35,157 stock options that were exercisable, of which 7,611 had performance conditions attached.

The stock option compensation cost for the first nine months of 2020 was $4.4 million (first nine months of 2019 – $4.9 million). The total intrinsic value of options exercised in the first nine months of 2020 was $4.7 million (first nine months of 2019 – $2.7 million).

The total compensation cost related to

non-vested

stock options not yet recognized at September 30, 2020 was $8.4 million and this cost is expected to be recognized over the weighted-average period of 1.75 years.

Stock equivalent units

The following table summarizes the transactions of the Company’s SEUs for the nine months ended September 30, 2020:


	Number of SEUs			Weighted Average Exercise Price		Weighted Average Grant-Date Fair Value
Outstanding at December 31, 2019		390,816		$	3.69	$	59.91
Granted - at discount		113,107		$	0.00	$	76.63
- at market value		3,634		$	95.70	$	18.69
Exercised		(93,057	)	$	0.82	$	60.04
Forfeited		(21,336	)	$	0.68	$	65.62

Outstanding at September 30, 2020		393,164		$	4.32	$	64.00

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At September 30, 2020 there were 53,146 SEUs that are exercisable, of which 46,614 had performance conditions attached.

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

The SEU compensation for the first nine months of 2020 was a $4.9 million credit (first nine months of 2019 – $14.0 million charge). The total intrinsic value of SEUs exercised in the first nine months of 2020 was $6.3 million (first nine months of 2019 – $6.8 million).

The weighted-average remaining vesting period of

non-vested

SEUs is 2.05 years.

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NOTE 15 – RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS

Reclassifications out of accumulated other comprehensive loss for the first nine months of 2020 were:


(in millions) Details about AOCL Components	Amount Reclassified from AOCL			Affected Line Item in the Statement where Net Income is Presented
Defined benefit pension plan items:
Amortization of prior service credit	$	(0.6	)	See (1) below
Amortization of actuarial net losses		1.2		See (1) below

		0.6		Total before tax
		0.0		Income tax expense

Total reclassifications	$	0.6		Net of tax

( 1)	These items are included in other income and expense. See Note 7 of the Notes to the Condensed Consolidated Financial Statements for additional information.

Changes in accumulated other comprehensive loss for the first nine months of 2020, net of tax, were:


(in millions)	Defined Benefit Pension Plan Items			Cumulative Translation Adjustments			Total
Balance at December 31, 2019	$	(9.3	)	$	(65.1	)	$	(74.4	)

Other comprehensive income before reclassifications		0.0			9.5			9.5
Amounts reclassified from AOCL		0.6			0.0			0.6

Total other comprehensive income		0.6			9.5			10.1

Balance at September 30, 2020	$	(8.7	)	$	(55.6	)	$	(64.3	)

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NOTE 16 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (ASU)

No. 2019-12,

Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption will have a material impact on the Company’s disclosures.

NOTE 17 – RELATED PARTY TRANSACTIONS

Mr. Patrick S. Williams has been an executive director of the Company since April 2009 and has been a

non-executive

director of AdvanSix, a chemicals manufacturer, since February 2020. In the first nine months of 2020 the Company purchased product from AdvanSix for $0.2 million. As at September 30, 2020, the Company owed $0.0 million to AdvanSix.

Mr. Robert I. Paller has been a

non-executive

director of the Company since November 1, 2009. The Company has retained and continues to retain Smith, Gambrell & Russell, LLP (“SGR”), a law firm with which Mr. Paller holds a position. In the first nine months of 2020 the Company incurred fees from SGR of $0.6 million (first nine months of 2019 – $0.4 million). As at September 30, 2020, the Company owed $0.1 million to SGR (December 31, 2019 – $0.0 million).

Mr. David F. Landless has been a

non-executive

director of the Company since January 1, 2016 and is a

non-executive

director of Ausurus Group Limited which owns European Metal Recycling Limited (“EMR”). The Company has sold scrap metal to EMR in the first nine months of 2020 for a value of $0.2 million (first nine months of 2019 – $0.4 million). A tendering process is operated periodically to select the best buyer for the sale of scrap metal by the Company. As at September 30, 2020 EMR owed $0.0 million for scrap metal purchased from the Company (December 31, 2019 – $0.0 million).

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Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September 30, 2020

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

CRITICAL ACCOUNTING ESTIMATES

The policies and estimates that the Company considers the most critical in terms of complexity and subjectivity of assessment are those related to environmental liabilities, pensions, income taxes, goodwill and property, plant and equipment and other intangible assets (net of depreciation and amortization). These policies have been discussed in the Company’s 2019 Form

10-K.

Impact of

COVID-19

Pandemic and Current Economic Environment

The Company’s results have continued to be impacted during the third quarter of 2020, due to the

COVID-19

pandemic and the global economic environment. Fuel Specialties have been impacted by reduced demand stemming from the reduction in freight transport and passenger miles and the widespread grounding of aircraft for the majority of the second

and third quarters

. We have seen some improvement in the third quarter as travel has begun to increase, but demand has not returned to the pre

COVID-19

levels. We expect demand will continue to improve, to the extent global economic activity recovers, subject to any future lockdowns or restrictions that are not currently in place. Performance Chemicals have experienced little overall impact from the pandemic as increased demand for certain products linked to health, hygiene and cleaning outweighed some lost revenues linked to the short-term shutdown of some of our customers manufacturing facilities. Oilfield Services have been heavily impacted by the reduction in oil exploration and production as the wider industry reacts to the reduction in demand and low oil price. We have seen some improvement in the third quarter from increasing demand and the benefit from the reduction in headcount that occurred in the second quarter. We do not know how long this downturn will last and the rate of recovery will depend heavily on the rate and extent to which the government restrictions on movement continue to be lifted.

Our manufacturing facilities have continued to operate with only some minor interruption, and we expect them to continue to do so. We have implemented flexible working, including working from home for our employees where possible, in line with advice and rules in each of the jurisdictions in which we operate.

Additional costs have been incurred to ensure our manufacturing and administrative facilities are COVID safe for our employees. While these costs have not been significant to date there may be increased costs in the future, if further safety restrictions are required.

Raw material sourcing has not been significantly impacted and we do not expect that to change over the remainder of the year. Logistics are operating with some delays but our products are currently being delivered to our customers.

We believe that our

financial position remains strong. We have sufficient access to capital if needed, including our $250 million revolving credit facility we entered into in September 2019, and we do not anticipate any issues with meeting the covenants for our debt agreements. We have extended this facility by a further twelve months until September 2024, during the third quarter of 2020. Our major capital projects are continuing to progress as planned.

As we operate in the chemical industry, we continue to be focused on protecting the health and safety of our employees and have procedures in place at each of our operating facilities to help ensure their well-being.

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We do not know how long the current economic environment will continue and while we have made estimates as to potential impacts on our financial position and operations, the ultimate impact on our business will depend on many factors which are very difficult to predict with certainty and substantially beyond our control.

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RESULTS OF OPERATIONS

The Company previously reported its financial performance based on the following four reportable segments: Fuel Specialties, Performance Chemicals, Oilfield Services and Octane Additives. The Octane Additives segment ceased

trading and is no longer

a reporting segment from July 1, 2020 (see Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information) and legacy costs of this segment totaling $1.1 million are now reported in Corporate costs

The following table provides operating income by reporting segment:


	Three Months Ended September 30						Nine Months Ended September 30
(in millions)	2020			2019			2020			2019
Net sales:
Fuel Specialties	$	120.0		$	144.1		$	374.4		$	433.4
Performance Chemicals		102.0			99.9			310.8			322.7
Oilfield Services		43.1			121.4			197.1			358.1
Octane Additives		0.0			6.5			0.0			8.4

	$	265.1		$	371.9		$	882.3		$	1,122.6

Gross profit/(loss):
Fuel Specialties	$	40.3		$	54.1		$	116.9		$	154.5
Performance Chemicals		24.0			22.6			76.5			73.2
Oilfield Services		14.4			41.2			60.5			120.4
Octane Additives		0.0			1.2			(2.2	)		(0.1	)

	$	78.7		$	119.1		$	251.7			$ 348.0

Operating income/(loss):
Fuel Specialties	$	22.2		$	31.1		$	59.0		$	88.1
Performance Chemicals		12.4			9.3			40.2			33.8
Oilfield Services		(4.5	)		10.0			(9.7	)		27.9
Octane Additives		0.0			0.8			(2.8	)		(1.9	)
Corporate costs		(13.3	)		(13.0	)		(41.5	)		(41.8	)
Restructuring charge		0.0			0.0			(21.1	)		0.0
Impairment of intangible assets		0.0			0.0			(19.8	)		0.0

Total operating income	$	16.8		$	38.2		$	4.3		$	106.1

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Three Months Ended September 30, 2020

The following table shows the change in components of operating income by reporting segment for the three months ended September 30, 2020 and the three months ended September 30, 2019:


	Three Months Ended September 30
(in millions, except ratios)	2020			2019			Change
Net sales:
Fuel Specialties	$	120.0		$	144.1		$	(24.1	)	-17	%
Performance Chemicals		102.0			99.9			2.1		+2	%
Oilfield Services		43.1			121.4			(78.3	)	-64	%
Octane Additives		0.0			6.5			(6.5	)	-100	%

	$	265.1		$	371.9		$	(106.8	)	-29	%

Gross profit:
Fuel Specialties	$	40.3		$	54.1		$	(13.8	)	-26	%
Performance Chemicals		24.0			22.6			1.4		+6	%
Oilfield Services		14.4			41.2			(26.8	)	-65	%
Octane Additives		0.0			1.2			(1.2	)	-100	%

	$	78.7		$	119.1		$	(40.4	)	-34	%

Gross margin (%):
Fuel Specialties		33.6			37.5			-3.9
Performance Chemicals		23.5			22.6			+0.9
Oilfield Services		33.4			33.9			-0.5
Octane Additives		0.0			18.5			n/a
Aggregate		29.7			32.0			-2.3

Operating expenses:
Fuel Specialties	$	(18.1	)	$	(23.0	)	$	4.9		-21	%
Performance Chemicals		(11.6	)		(13.3	)		1.7		-13	%
Oilfield Services		(18.9	)		(31.2	)		12.3		-39	%
Octane Additives		0.0			(0.4	)		0.4		-100	%
Corporate costs		(13.3	)		(13.0	)		(0.3	)	+2	%

	$	(61.9	)	$	(80.9	)	$	19.0		-23	%

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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:


	Three Months Ended September 30, 2020
Change (%)	Americas		EMEA		ASPAC		AvTel		Total
Volume		-21		-3		-19		-10		-12
Price and product mix		+13		-8		-14		-28		-5
Exchange rates		0		0		0		0		0

		-8		-11		-33		-38		-17

Volumes in all our regions have continued to suffer from the adverse impact of the

COVID-19

pandemic, which has reduced the global demand for fuel additive products. We believe there are signs that customer demand has started to recover in the third quarter to the extent that lockdowns in countries around the world have been eased. Price and product mix in the Americas was favorable due to a richer sales mix, while price and product mix in EMEA and ASPAC was adverse due to lower sales of higher margin products. AvTel volumes were lower than the prior year due to variations in the demand from customers, together with an adverse price and product mix. There was a negligible foreign exchange impact in the quarter.

Gross margin

: decreased year over year by 3.9 percentage points primarily due to the comparison with a stronger sales mix in the prior year. Gross margin in the third quarter of 2020 was within our expected range as sales of higher margin products have started to recover from the reduced demand in the second quarter.

Operating expenses:

the year on year decrease of $4.9 million was partly due to cost savings as a result of the

COVID-19

pandemic, including lower travel and entertainment costs, together with lower personnel related performance-based remuneration due to a decrease in share-based compensation accruals linked to the Innospec share price.

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:

Three Months Ended September 30, 2020

Change (%)

Americas

EMEA

ASPAC

Total

Volume

+18

-4

+33

Price and product mix

-15

-1

-2

-6

Exchange rates

-1

+33

Higher volumes in the Americas and ASPAC were driven by increased demand for our Personal Care and Home Care products. Volumes were lower in EMEA due to lower demand in Personal Care and for our toll manufacturing products. All our regions suffered an adverse price and product mix driven by increased sales of lower priced products due largely to lower raw materials costs. EMEA and ASPAC benefitted from favorable exchange rate movements year over year, due to a strengthening of the British pound sterling and the European Union euro against the U.S. dollar.

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Gross margin:

the year over year increase of 0.9 percentage points was due to the continued benefit of margin improvement projects and in comparison to adverse manufacturing variances in the prior year related to disruption following the Innospec network security incident at the end of the second quarter of 2019.

Operating expenses:

the year over year decrease of $1.7 million was partly due to cost savings as a result of the

COVID-19

Oilfield Services

Net sales:

the year over year decrease of $78.3 million, or 64 percent, was driven by the continued reduction in customer activity for the U.S. onshore market due to the

COVID-19

pandemic adversely impacting world-wide demand for crude oil. The previously expected recovery in the U.S. completions market has been delayed, however the Company has seen some improvement in the demand for crude oil as prices recovered in the third quarter which led to higher sales for our production and drag reducing agent product lines.

Gross margin:

the year over year decrease of 0.5 percentage points was within our expected range and a significant improvement on the second quarter of 2020, primarily due to a favorable sales mix and management cost control initiatives.

Operating expenses:

the year over year decrease of $12.3 million was driven by the

right-sizing

of the operations to adjust for the reduction in demand caused by the

COVID-19

pandemic, together with lower accruals for long-term performance-based incentive plans due to a decrease in share-based compensation accruals linked to the Innospec share price.

Octane Additives

The Octane Additives business ceased

trading and is no longer

a reporting segment from July 1, 2020 as the production of TEL for use in motor gasoline has finished. Legacy costs related to these operations have now been recorded as operating expenses within Corporate costs.

Other Income Statement Captions

Corporate costs:

the year over year increase of $0.3 million was primarily due to the inclusion of legacy costs related to the now closed Octane Additives segment of $1.1 million, together with higher spending on information technology following the network security incident in the second quarter of 2019. The increase in costs was partly offset by lower accruals for long-term performance-based incentive plans due to a decrease in share-based compensation accruals linked to the Innospec share price, together with a reduction in travel and entertainment expenses as a result of the

COVID-19

pandemic.

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Other net income:

for the third quarter of 2020 and 2019, included the following:


(in millions)	2020			2019			Change
United Kingdom pension credit	$	1.6		$	2.0		$	(0.4	)
German pension charge		(0.2	)		(0.2	)		0.0
Foreign exchange gain/(loss) on translation		3.5			(2.7	)		6.2
Foreign currency forward contracts (loss)/gain		(1.1	)		1.9			(3.0	)

	$	3.8		$	1.0		$	2.8

Interest expense, net:

was $0.4 million for 2020 compared to $1.4 million in the prior year, driven by lower average net debt as the business generated cash inflows.

Income taxes:

the effective tax rate was 37.1% and 20.4% in the third quarter of 2020 and 2019, respectively. The 16.7% increase in the effective rate was primarily due to the effect of an increase in the enacted income tax rate in the UK on the Company’s deferred tax liabilities. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 23.3% in 2020 compared with 21.8% in 2019. The 1.5% 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 September 30
(in millions)	2020			2019
Income before income taxes	$	20.2		$	37.8
Indemnification asset regarding tax audit		0.4			0.0
Adjustment for stock compensation		0.0			1.6

	$	20.6		$	39.4

Income taxes	$	7.5		$	7.7
Tax on stock compensation		0.0			0.4
Adjustment of income tax provision		(0.2	)		(0.3	)
Tax on foreign exchange on distribution		0.1			0.8
Change in UK statutory tax rate		(2.6	)		0.0

	$	(4.8	)	$	8.6

GAAP effective tax rate		37.1	%		20.4	%
Adjusted effective tax rate		23.3	%		21.8	%

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Nine Months Ended September 30, 2020

The following table shows the change in components of operating income by reporting segment for the nine months ended September 30, 2020 and the nine months ended September 30, 2019:


	Nine Months Ended September 30
(in millions, except ratios)	2020			2019			Change
Net sales:
Fuel Specialties	$	374.4		$	433.4		$	(59.0	)	-14	%
Performance Chemicals		310.8			322.7			(11.9	)	-4	%
Oilfield Services		197.1			358.1			(161.0	)	-45	%
Octane Additives		0.0			8.4			(8.4	)	-100	%

	$	882.3		$	1,122.6		$	(240.3	)	-21	%

Gross profit/(loss):
Fuel Specialties	$	116.9		$	154.5		$	(37.6	)	-24	%
Performance Chemicals		76.5			73.2			3.3		+5	%
Oilfield Services		60.5			120.4			(59.9	)	-50	%
Octane Additives		(2.2	)		(0.1	)		(2.1	)	n/a

	$	251.7		$	348.0		$	(96.3	)	-28	%

Gross margin (%):
Fuel Specialties		31.2			35.6			-4.4
Performance Chemicals		24.6			22.7			+1.9
Oilfield Services		30.7			33.6			-2.9
Octane Additives		0.0			-1.2			n/a
Aggregate		28.5			31.0			-2.5

Operating expenses:
Fuel Specialties	$	(57.9	)	$	(66.4	)	$	8.5		-13	%
Performance Chemicals		(36.3	)		(39.4	)		3.1		-8	%
Oilfield Services		(70.2	)		(92.5	)		22.3		-24	%
Octane Additives		(0.6	)		(1.8	)		1.2		-67	%
Corporate costs		(41.5	)		(41.8	)		0.3		-1	%
Restructuring charge		(21.1	)		0.0			(21.1	)	n/a
Impairment of intangible assets		(19.8	)		0.0			(19.8	)	n/a

	$	(247.4	)	$	(241.9	)	$	(5.5	)	+2	%

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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:


	Nine Months Ended September 30, 2020
Change (%)	Americas		EMEA		ASPAC		AvTel		Total
Volume		-14		-7		-19		+5		-10
Price and product mix		+5		-6		-6		-19		-4
Exchange rates		0		0		0		0		0

		-9		-13		-25		-14		-14

Volumes in all our regions have suffered from the adverse impact of the

COVID-19

pandemic, which reduced the global demand for fuel additive products. We believe there are signs that customer demand has started to recover in the third quarter as lockdowns in countries around the world have been eased. Price and product mix in the Americas was favorable due to a richer sales mix, while price and product mix in EMEA and ASPAC was adverse due to lower sales of higher margin products. AvTel volumes were higher than the prior year due to variations in the demand from customers, being offset by an adverse price and product mix. There was a negligible foreign exchange impact year to date.

Gross margin

: the year over year decrease of 4.4 percentage points was driven by the impact of the

COVID-19

pandemic in the second quarter reducing demand for our higher margin products, together with adverse raw material costs and higher provisions for slow moving inventory.

Operating expenses:

the year over year decrease of $8.5 million was partly due to cost savings as a result of the

COVID-19

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:


	Nine Months Ended September 30, 2020
Change (%)	Americas		EMEA		ASPAC		Total
Volume		+11		-5		+35		+2
Price and product mix		-13		-3		-2		-6
Exchange rates		0		0		0		0

		-2		-8		+33		-4

Higher volumes in the Americas and ASPAC were driven by increased demand for our Personal Care and Home Care products. Volumes were lower in EMEA due to lower demand in Personal Care and Home Care products. All our regions suffered an adverse price and product mix due to increased sales of lower priced products due largely to lower raw material costs. There was a negligible foreign exchange impact year to date.

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Gross margin:

the year over year increase of 1.9 percentage points was due to a richer sales mix, the continued benefit of margin improvement projects and the timing of pricing movements for certain raw materials.

Operating expenses:

the year over year decrease of $3.1 million was driven by lower personnel related performance-based remuneration due to a decrease in the share-based compensation accruals linked to the Innospec share price, together with cost savings as a result of the

COVID-19

pandemic, including lower travel and entertainment costs.

Oilfield Services

Net sales:

the year over year decrease of $161.0 million, or 45 percent, was primarily due to a collapse of customer activity for the U.S. onshore market, as a result of the

COVID-19

pandemic reducing world-wide demand together with the depressed price of crude oil. The previously expected recovery in the U.S. completions market has been delayed, however the Company has seen some improvement in the demand for crude oil in the third quarter leading to higher sales for our production and drag reducing agent products.

Gross margin:

the year over year decrease of 2.9 percentage points was primarily due to significant inventory adjustments in the second quarter of 2020 as a result of the collapse in demand, being partly offset by margin improvements in the third quarter due to a favorable sales mix and management cost control initiatives.

Operating expenses:

the year over year decrease of $22.3 million was driven by the

right-sizing

of the operations to adjust for the reduction in demand caused by the

COVID-19

pandemic, together with lower accruals for long-term performance-based incentive plans due to a decrease in share-based compensation accruals linked to the Innospec share price.

Octane Additives

The Octane Additives business ceased

trading and is no longer

Prior to July 1, 2020 net sales were nil in 2020 compared to $8.4 million in the prior year; gross loss was $2.2 million in 2020 compared to $0.1 million in the prior year; operating expenses were $0.6 million in 2020 compared to $1.8 million in the prior year.

Other Income Statement Captions

Corporate costs:

the year over year decrease of $0.3 million was driven by lower accruals for long-term performance-based incentive plans due to a decrease in the share-based compensation accruals linked to the Innospec share price and a reduction in travel and entertainment expenses resulting from the

COVID-19

pandemic. The decrease in costs was partly offset by the inclusion of legacy costs related to the now closed Octane Additives segment of $1.1 million, together with higher spending on information technology following the network security incident in the second quarter of 2019.

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Restructuring charge:

was $21.1 million related to the cessation of production and sales of TEL for use in motor gasoline. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information.

Impairment of intangible assets:

was $19.8 million related to acquired intangible assets in our Oilfield Services segment. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for further information.

Other net income:

for the first nine months of 2020 and 2019, included the following:


(in millions)	2020			2019			Change
United Kingdom pension credit	$	4.9		$	5.8		$	(0.9	)
German pension charge		(0.7	)		(0.4	)		(0.3	)
Foreign exchange gains/(losses) on translation		2.9			(3.2	)		6.1
Foreign currency forward contracts gains		0.7			2.9			(2.2	)

	$	7.8		$	5.1		$	2.7

Interest expense, net:

was $1.5 million for 2020 compared to $4.1 million in the prior year, driven by lower average net debt as the business generated cash inflows.

Income taxes:

the effective tax rate was 42.5% and 24.3% in the first nine months of 2020 and 2019, respectively. The 18.2% increase in the effective rate was primarily due to the effect of an increase in the enacted income tax rate in the UK on the Company’s deferred tax liabilities. The adjusted effective tax rate, once adjusted for the items set out in the following table, was 24.8% in the first nine months of 2020 compared with 24.8% in the first nine months of 2019. The Company believes that this adjusted effective tax rate, a

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:


	Nine Months Ended September 30
(in millions)	2020		2019
Income before income taxes	$	10.6	$	107.1
Indemnification asset regarding tax audit		0.1		0.0
Adjustment for stock compensation		0.0		4.5
Restructuring charge		21.1		0.0
Impairment of acquired intangible assets		19.8		0.0

	$	51.6	$	111.6

Income taxes	$	4.5	$	26.0
Tax on stock compensation		0.5		1.8
Adjustment of income tax provision		1.0		(0.9	)
Tax on restructuring charge		4.3		0.0
Tax on impairment of acquired intangible assets		4.6		0.0

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Tax on foreign exchange on distribution		0.5			0.8
Change in UK statutory tax rate		(2.6	)		0.0

	$	12.8		$	27.7

GAAP effective tax rate		42.5	%		24.3	%
Adjusted effective tax rate		24.8	%		24.8	%

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LIQUIDITY AND FINANCIAL CONDITION

Working Capital

In the first nine months of 2020 our working capital decreased by $27.8 million, while our adjusted working capital decreased by $28.9 million. The difference is primarily due to the exclusion of the net increase for prepaid and current taxes, which was partly offset by a reduction in our cash and cash equivalents.

The Company believes that adjusted working capital, a

non-GAAP

financial measure, (defined by the Company as trade and other accounts receivable, inventories, prepaid expenses, accounts payable and accrued liabilities rather than total current assets less total current liabilities) provides useful information to investors in evaluating the Company’s underlying performance and identifying operating trends. Management uses this

non-GAAP

financial measure internally to allocate resources and evaluate the performance of the Company’s operations. Items excluded from working capital in the adjusted working capital calculation are listed in the table below and represent factors which do not fluctuate in line with the day to day working capital needs of the business.


(in millions)	September 30, 2020			December 31, 2019
Total current assets	$	528.8		$	630.3
Total current liabilities		(229.8	)		(303.5	)

Working capital		299.0			326.8
Less cash and cash equivalents		(66.6	)		(75.7	)
Less prepaid income taxes		(8.1	)		(2.5	)
Less other current assets		(0.2	)		(0.8	)
Add back current portion of accrued income taxes		5.4			10.3
Add back current portion of finance leases		0.4			1.0
Add back current portion of plant closure provisions		5.2			5.6
Add back current portion of operating lease liabilities		11.3			10.6

Adjusted working capital	$	246.4		$	275.3

We had a $85.8 million decrease in trade and other accounts receivable primarily driven by the decline in sales in our Fuel Specialties and Oilfield Services segments as a result of the

COVID-19

pandemic. Days’ sales outstanding in our Fuel Specialties segment increased from 52 days to 56 days; decreased in our Performance Chemicals segment from 64 days to 62 days; and increased from 66 days to 88 days in our Oilfield Services segment.

We had a $4.8 million decrease in inventories, net of a $3.8 million increase in allowances, as we managed inventory levels in anticipation of increased demand that we expect in the fourth quarter. Days’ sales in inventory in our Fuel Specialties segment increased from 97 days to 154 days; increased in our Performance Chemicals segment from 66 days to 71 days; and increased from 71 days to 131 days in our Oilfield Services segment.

Prepaid expenses decreased $6.8 million, from $14.7 million to $7.9 million due to the normal expensing of prepaid invoices.

We had a $68.5 million decrease in accounts payable and accrued liabilities primarily due to lower production activity to align with reduced customer demand, together with lower accruals for share-based payments linked to the decrease in the Innospec share price during the year. Creditor days (including goods received not invoiced) in our Fuel Specialties segment decreased from 52 days to 39 days; decreased in our Performance Chemicals segment from 54 days to 46 days; and remained unchanged in our Oilfield Services segment at 43 days.

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Operating Cash Flows

We generated cash from operating activities of $87.7 million in the first nine months of 2020 compared to cash inflows of $103.2 million in the first nine months of 2019. The reduction in cash generated from operating activities was primarily related to the adverse impact of

COVID-19

on customer activity and the timing of payments for income taxes.

Cash

At September 30, 2020 and December 31, 2019, we had cash and cash equivalents of $66.6 million and $75.7 million, respectively, of which $21.0 million and $57.9 million, respectively, were held by

non-U.S.

subsidiaries principally in the United Kingdom.

The decrease in cash and cash equivalents in 2020 of $9.1 million was primarily driven by the repayment of $60.0 million of our revolving credit facility being partly offset by cash inflows from operating activities and reductions in working capital.

Debt

At September 30, 2020, we had $0.0 million of debt outstanding under the revolving credit facility and $0.6 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments. As noted above, we have extended our revolving credit facility until September 2024.

At December 31, 2019, we had $60.0 million of debt outstanding under the revolving credit facility and $1.5 million of obligations under finance leases relating to certain fixed assets within our Fuel Specialties and Oilfield Services segments.

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Item 3 Quantitative and Qualitative Disclosures about Market Risk

The Company uses floating rate debt to finance its global operations. The Company is subject to business risks inherent in

non-U.S.

activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The political and economic risks are mitigated by the stability of the major countries in which the Company’s largest operations are located. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize bad debt risk. Collateral is not generally required.

From time to time, the Company uses derivatives, including interest rate swaps, commodity swaps and foreign currency forward exchange contracts, in the normal course of business to manage market risks. The derivatives used in hedging activities are considered risk management tools and are not used for trading purposes. In addition, the Company enters into derivative instruments with a diversified group of major financial institutions in order to manage the exposure to

non-performance

of such instruments. The Company’s objective in managing the exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flows and to lower overall borrowing costs. The Company’s objective in managing the exposure to changes in foreign currency exchange rates is to reduce volatility on earnings and cash flows associated with such changes.

The Company offers fixed prices for some long-term sales contracts. As manufacturing and raw material costs are subject to variability the Company, from time to time, uses commodity swaps to hedge the cost of some raw materials thus reducing volatility on earnings and cash flows. The derivatives are considered risk management tools and are not used for trading purposes. The Company’s objective is to manage its exposure to fluctuating costs of raw materials.

The Company’s exposure to market risk has been discussed in the Company’s 2019 Annual Report on Form

10-K

and there have been no significant changes since that time.

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Item 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on an evaluation carried out as of the end of the period covered by this report, under the supervision and with the participation of our management, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s “disclosure controls and procedures” (as defined in Rules

13a-15(e)

and

15d-15(e)

of the Securities Exchange Act of 1934) were effective as of September 30, 2020.

Changes in Internal Control over Financial Reporting

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

There were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by paragraph (d) of Rules

13a-15

and

15d-15

under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION

Item 1 Legal Proceedings

Legal matters

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

Item 1A Risk Factors

Information regarding risk factors that could have a material impact on our results of operations or financial condition are described under “Risk Factors” in Item 1A of Part I of our 2019 Form

10-K.

In management’s view, there have been no material changes in the risk factors facing the Company since that time other than an update to the risk factor first disclosed under “Risk Factors” in Item 1A of Part II of our Form

10-Q

for the quarter ended March 31, 2020 and updated in Item 1A of Part II of our Form

10-Q

for the quarter ended June 30, 2020, as follows:

The

COVID-19

pandemic has had, and is expected to continue to have, an adverse impact on our business, results of operations, financial position and cash flows.

We have been closely monitoring the impact of the

COVID-19

pandemic on all aspects of our business, including how it has and will impact our customers, employees, supply chain, and distribution network. The effects of

COVID-19

on the global economic environment have impacted, and are expected to continue to impact, the results of the Company significantly, particularly with respect to reduced demand within our Fuel Specialties and Oilfield Services segments, and we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. The further extent to which our operations may be impacted by the

COVID-19

pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted. These include, but are not limited to, the availability and productivity of our employees, the duration and severity of the pandemic; government restrictions on businesses and individuals; the impact of the pandemic on our customers’ businesses and the resulting demand for our products; the impact on our suppliers and supply chain network; the impact on global economies, including the possibility of recession and depression, and the timing and rate of economic recovery; the development of treatments and vaccines; and potential adverse effects on the financial markets.

The impact of

COVID-19,

as well as future pandemics or resurgences, may also exacerbate other risks discussed in Item 1A, “Risk Factors” in our Annual Report on Form

10-K

for the fiscal year ended December 31, 2019, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

There have been no unregistered sales of equity securities.

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During the quarter ended September 30, 2020 the Company made no open market repurchases of its common stock.

During the quarter ended September 30, 2020, the Company did not purchase any of its common stock in connection with the exercising of stock options by employees.

Item 3 Defaults Upon Senior Securities

None.

Item 4 Mine Safety Disclosures

Not applicable.

Item 5 Other

Information

None.

Item 6 Exhibits


10.1		Extension Request for Multicurrency Revolving Facility Agreement and Confirmation (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed October 6, 2020)

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

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

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

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

101		XBRL Instance Document and Related Item - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

104		Cover Page Interactive Data File – The cover page XBRL tags are embedded within the inline XBRL document.

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SIGNATURES

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


		INNOSPEC INC.
		Registrant

Date: November 4, 2020	By	/s/ PATRICK S. WILLIAMS
		Patrick S. Williams
		President and Chief Executive Officer

Date: November 4, 2020	By	/s/ IAN P. CLEMINSON
		Ian P. Cleminson
		Executive Vice President and Chief Financial Officer