Innospec Inc. (IOSP, NASDAQ)
Industry: Specialty Chemicals
Annual report, fiscal year 2013


INNOSPEC INC.

FORM 10-K
(Annual Report)

# Filed 02/13/14 for the Period Ending 12/31/13

Address 8310 SOUTH VALLEY HIGHWAY

SUITE 350

ENGLEWOOD, CO, 80112

Telephone 7203556451

CIK 0001054905

Symbol IOSP

SIC Code 2800 - Chemicals and Allied Products

Industry Specialty Chemicals

Sector Basic Materials

Fiscal Year 12/31



# UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 205495

# FORM 10-K

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

# For the fiscal year ended December 31, 2013

or

# ☐ 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
State or other jurisdiction of
incorporation or organization

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

98-0181725
(I.R.S. Employer Identification No.)

80112
(Zip Code)

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

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

Title of each class
N/A

Name of each exchange on which registered
N/A

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Accelerated filer ☒
Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the most recently completed second fiscal quarter (June 30, 2013) was approximately $515 million, based on the closing price of the common shares on the NASDAQ on June 30, 2013. Shares of common stock held by each officer and director and by each beneficial owner who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

As of February 6, 2014, 24,346,553 shares of the registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Innospec Inc.'s Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 2014 are incorporated by reference into Part III of this Form 10-K.



## Table of Contents

## TABLE OF CONTENTS

TABLE OF CONTENTS 2

PART I 4

Item 1 Business 4
Item 1A Risk Factors 10
Item 1B Unresolved Staff Comments 17
Item 2 Properties 18
Item 3 Legal Proceedings 19
Item 4 Mine Safety Disclosures 19

PART II 20

Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 20
Item 6 Selected Financial Data 23
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk 47
Item 8 Financial Statements and Supplementary Data 50
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 101
Item 9A Controls and Procedures 101
Item 9B Other Information 102

PART III 103

Item 10 Directors, Executive Officers and Corporate Governance 103
Item 11 Executive Compensation 103
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 103
Item 13 Certain Relationships and Related Transactions, and Director Independence 104
Item 14 Principal Accountant Fees and Services 104

PART IV 105

Item 15 Exhibits and Financial Statement Schedules 105

SIGNATURES 108



## CAUTIONARY STATEMENT RELATIVE TO FORWARD-LOOKING STATEMENTS

## FORWARD-LOOKING STATEMENTS

This Form 10-K 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” or similar words or expressions), for example, which relate to operating performance, events or developments that we expect or anticipate will or may occur in the future (including, without limitation, any of the Company’s guidance in respect of sales, gross margins, pension liabilities and charges, net income, growth potential and other measures of financial performance). Although forward-looking statements are believed by management to be reasonable when made, they are subject to certain risks, uncertainties and assumptions, and our actual performance or results may differ materially from these forward-looking statements. 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.” The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



## Table of Contents

## PART I

## Item 1 Business

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

## General

Innospec develops, manufactures, blends, markets and supplies fuel additives, oilfield chemicals, personal care and fragrance ingredients and other specialty chemicals. Our products are sold primarily to oil refineries, personal care and fragrance companies, and other chemical and industrial companies throughout the world. Our fuel additives help improve fuel efficiency, boost engine performance and reduce harmful emissions. Our oilfield specialties business supplies drilling and production chemicals which make exploration and production more cost-efficient and more environmentally-friendly. Our other specialty chemicals provide effective technology-based solutions for our customers' processes or products focused in the Personal Care; Polymers; and Fragrance Ingredients markets.

Our principal executive offices are in Englewood, Colorado. We became an independent company on May 22, 1998, when we were spun off from our then parent company Great Lakes Chemical Corporation (which subsequently became Chemtura Corporation). We changed our name from Octel Corp. to Innospec Inc. on January 30, 2006. Our common stock is listed on the NASDAQ under the symbol “IOSP.”

## Segmental Information

Innospec divides its business into three segments for management and reporting purposes:

• Fuel Specialties (including Oilfield Specialties)

• Performance Chemicals

• Octane Additives

The Fuel Specialties and Performance Chemicals segments operate in markets where we actively seek growth opportunities although their ultimate customers are different. The Octane Additives segment is generally characterized by volatile and declining demand. For financial information about each of our segments, see Note 3 of the Notes to the Consolidated Financial Statements.

## Fuel Specialties

Our Fuel Specialties segment develops, manufactures, blends, markets and supplies a range of specialty chemical products used as additives to a wide range of fuels. These fuel additive products help improve fuel efficiency, boost engine performance and reduce harmful emissions; and are used in the efficient operation of automotive, marine and aviation engines, power station generators, and heating and diesel particulate filter systems. Our Fuel Specialties segment also includes our activities in Oilfield Specialties.



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During 2013, we completed the acquisition of Bachman Services, Inc., Specialty Intermediates, Inc., Bachman Production Specialties, Inc. and Bachman Drilling & Production Specialties, Inc. (collectively “Bachman”) to add to our 2012 acquisition of Strata Control Services, Inc. (“Strata”) to further build-out our presence in Oilfield Specialties.

In addition to these acquisitions, the segment has grown organically through our development of new products to address what we believe are the key drivers in demand for fuel additives. These drivers include increased focus on fuel economy, changing engine technology and legislative developments. We have devoted substantial resources towards the development of new and improved products that may be used to improve fuel efficiency.

Our customers in this segment include national oil companies, multinational oil companies, oil and gas exploration companies and fuel retailers.

## Performance Chemicals

Our Performance Chemicals segment provides effective technology-based solutions for our customers' processes or products focused in the Personal Care; Polymers; and Fragrance Ingredients markets.

In 2013, we acquired Chemsil Silicones, Inc. (“Chemsil”) and Chemtec Chemical Co. (“Chemtec”). These acquisitions have added new products and technology to the Personal Care business within our Performance Chemicals segment, as well as providing an enhanced sales infrastructure to serve the important West Coast U.S. market.

This segment has also grown organically, through the development and marketing of innovative products to the personal care industry. The focus for our Performance Chemicals segment is to develop high performance products from its technology base in a number of targeted markets.

Our customers in this segment include large multinational companies, manufacturers of personal care and household products and specialty chemical manufacturers operating in niche industries.

## Octane Additives

Our Octane Additives segment, which we believe is the world’s only producer of tetra ethyl lead (“TEL”), comprises sales of TEL for use in automotive gasoline and trading in respect of our environmental remediation business. We are continuing to responsibly manage the decrease in the sales of TEL for use in automotive gasoline in line with the remaining countries’ transition plans to unleaded gasoline. Cost improvement measures continue to be taken to respond to declining market demand.

Sales of TEL for use in automotive gasoline are made principally to state-owned refineries located in the Middle East and Northern Africa. Our environmental remediation business serves these customers to manage the cleanup of redundant plants as refineries complete the move away from leaded gasoline.



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## Strategy

Our strategy is to develop new and improved products and technologies to continue to strengthen and increase our market positions within our Fuel Specialties (including Oilfield Specialties) and Performance Chemicals segments. The segments together have had average organic revenue growth of 5% per annum, and average operating income growth of 9% per annum, since 2008. We also actively continue to assess potential strategic acquisitions, partnerships and other opportunities that would enhance and expand our customer offering. We focus on opportunities that would extend our technology base, geographical coverage or product portfolio. We believe that focusing on the Fuel Specialties (including Oilfield Specialties) and Performance Chemicals segments, in which the Company has existing experience, expertise and knowledge, provides opportunities for positive returns on investment with reduced operating risk.

## Geographical Area Information

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

## Working Capital

The nature of our customers’ businesses generally requires us to hold appropriate amounts of inventory in order to be able to respond quickly to customers’ needs. We therefore require corresponding amounts of working capital for normal operations. We do not, however, believe that this is materially different to what our competitors do (with the exception of cetane number improvers, in which case we maintain high enough levels of inventory, as required, to retain our position as market leader in sales of these products).

The purchase of large amounts of some raw materials for our Fuel Specialties and Octane Additives segments can create some variations in working capital requirements, but these are planned and well managed by the business.

We do not believe that our terms of sale, or terms of purchase, differ markedly from those of our competitors.

## Raw Materials and Product Supply

We use a variety of raw materials and chemicals in our manufacturing and blending processes and believe that sources for these are adequate for our current operations. Our major purchases are cetane number improvers, Octane enhancer, various solvents and ethylene.

These purchases account for a substantial portion of the Company’s variable manufacturing costs. These materials are, with the exception of ethylene in Germany, readily available from more than one source. Although ethylene is, in theory, available from several sources, it is not permissible to transport ethylene by road in Germany. As a result, we source ethylene for our German operations via a direct pipeline from a neighboring site, making it effectively a single source. Ethylene is used as a primary raw material in products representing approximately 7% of the Company’s sales.



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We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. For some raw materials the risk of cost increases is managed with commodity swaps.

We continue to monitor the situation and adjust our procurement strategies as we deem appropriate. The Company forecasts its raw material requirements substantially in advance, and seeks to build long-term relationships and contractual positions with supply partners to safeguard its raw material positions. In addition, the Company operates an extensive risk management program which seeks to source key raw materials from multiple sources and to develop suitable contingency plans.

## Intellectual Property

Our intellectual property, including trademarks, patents and licenses, forms a significant part of the Company’s competitive edge, particularly in the Fuel Specialties and Performance Chemicals segments. The Company does not, however, consider its business as a whole to be dependent on any one trademark, patent or license.

The Company has a portfolio of trademarks and patents, both granted and in the application stage, covering products and processes in several jurisdictions. The majority of these patents were developed by the Company and, subject to maintenance obligations including the payment of renewal fees, have at least 10 years life remaining.

The trademark “Innopsec and the Innopsec device” in Classes 1, 2 and 4 of the “International Classification of Goods and Services for the Purposes of the Registration of Marks” are registered in all jurisdictions in which the Company has a significant market presence. The Company also has trademark registrations for certain product names in all jurisdictions in which it has a significant market presence.

We actively protect our inventions, new technologies, and product developments by filing patent applications and maintaining trade secrets. In addition, we vigorously participate in patent opposition proceedings around the world where necessary to secure a technology base free from infringement of our intellectual property.

## Customers

In 2013, the Company had a significant customer in the Fuel Specialties segment, Royal Dutch Shell plc and its affiliates (“Shell”), which accounted for $83.1 million (10%) of our net group sales. In 2012 and 2011, Shell accounted for $82.9 million (11%) and $78.7 million (10%) of our net group sales, respectively.

We have sales contracts with customers using fixed or formula-based prices, as appropriate, to maintain our gross profits.



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## Competition

Certain markets in which the Company operates are subject to significant competition. The Company competes on the basis of a number of factors including, but not limited to, product quality and performance, specialized product lines, customer relationships and service, and regulatory and toxicological expertise.

Fuel Specialties: The Fuel Specialties market is generally fragmented and characterized by a small number of competitors in each submarket. The competitors in each submarket differ with no one company holding a dominant position in the Fuel Specialties market. Within the Fuel Specialties market, the Oilfield Specialties sub-market is very fragmented – although there are a small number of very large competitors, there are also a large number of smaller players focused on specific technologies or regions. We consider our competitive edge to be our proven technical development capacity, independence from major oil companies and strong long-term relationships with refinery customers.

Performance Chemicals: We operate in three principal markets within Performance Chemicals – Personal Care; Polymers; and Fragrance Ingredients. The Personal Care market is highly fragmented, and the Company experiences substantial competition from a large number of multinational and specialty chemical suppliers in each geographical market. The Fragrance Ingredients and Polymers markets are more concentrated, with a small number of principal competitors. Our competitive position in all three markets is based on us supplying a superior, diverse product portfolio which solves particular customer problems or enhances the performance of new or existing products. In a number of specialty chemicals markets, we also supply niche product lines, where we enjoy market-leading positions.

Octane Additives: We believe our Octane Additives segment is the world’s only producer of TEL and accordingly is the only supplier of TEL for use in automotive gasoline. The segment therefore competes with marketers of products and processes that provide alternative ways of enhancing octane performance in automotive gasoline.

## Research, Development, Testing and Technical Support

Research, product/application development and technical support (“R&D”) provide the basis for the growth of our Fuel Specialties (including Oilfield Specialties) and Performance Chemicals segments. Accordingly, the Company’s R&D activity has been, and will continue to be, focused on the development of new products and formulations. Our R&D department provides technical support for all of our reporting segments. Expenditures to support R&D services were $21.2 million, $19.6 million and $18.3 million in 2013, 2012 and 2011, respectively.

We believe that our proven technical capabilities provide us with a significant competitive edge. In the last three years, the Fuel Specialties segment has developed new detergent, cold flow, stabilizers, anti-foulants, lubricity and combustion improver products, in addition to the introduction of many new cost effective fuel additive packages. This proven technical capability has also been instrumental in enabling us to produce innovative new products within our Performance Chemicals segment including Iselux \( ^{™} \)  and Stasafe \( ^{®} \) .



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## Health, Safety and Environmental Matters

We are subject to environmental laws in the majority of the countries in which we conduct business. Management believes that the Company is in material compliance with applicable environmental laws and has made the necessary provisions for the continued costs of compliance with environmental laws, including where appropriate asset retirement obligations.

Our principal site giving rise to environmental remediation liabilities is the Octane Additives manufacturing site at Ellesmere Port in the United Kingdom, which management believes is the last ongoing manufacturer of TEL. There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe. At Ellesmere Port there is a continuing asset retirement program related to certain manufacturing units that have been closed. We regularly review the future expected costs of remediation and the current estimate is reflected in Note 12 of the Notes to the Consolidated Financial Statements.

We recognize environmental liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated. This involves anticipating the program of work and the associated future expected costs, and so involves the exercise of judgment by management.

The European Union legislation known as the Registration, Evaluation and Authorization of Chemical Substances Regulations (“REACH”) requires most of the Company’s products to be registered with the European Chemicals Agency. Under this legislation the Company has to demonstrate that its products are appropriate for their intended purposes. During this registration process, the Company incurs expense to test and register its products. The Company estimates that the cost of complying with REACH will be approximately $2 million over the next three years.

## Employees

The Company had approximately 1100 employees in 20 countries as at December 31, 2013.

## Available Information

Our corporate web site is www.innospecinc.com. We make available, free of charge, on or through this web site our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC.

The Company routinely posts important information for investors on its web site (under Investor Relations). The Company uses this web site as a means of disclosing material, non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Relations portion of the Company’s web site, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.



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## Item 1A Risk Factors

The factors described below represent the principal risks associated with our business.

We are subject to extensive regulation of our international operations that could adversely affect our business and results of operations.

Due to our global operations, we are subject to many laws governing international commercial activity, conduct and relations, including those that prohibit improper payments to government officials, restrict where and with whom we can do business, and limit the products, software and technology that we can supply to certain countries and customers. These laws include but are not limited to, the U.S. Foreign Corrupt Practices Act and United Kingdom Bribery Act, U.S. sanctions and assets control programs administered by the U.S. Department of the Treasury, and the U.S. export control laws such as the regulations under the U.S. Export Administration Act, as well as similar laws and regulations in other countries relevant to our business operations. Violations of any of these laws or regulations, which are often complex in their application, may result in criminal or civil penalties that could have a material adverse effect on our results of operations, financial position and cash flows.

We may not be able to consummate, finance or successfully integrate future acquisitions, partnerships or other opportunities into our business, which could hinder our strategy or result in unanticipated expenses and losses.

Part of our strategy is to pursue strategic acquisitions, partnerships and other opportunities to complement and expand our existing business. The success of these transactions depends on our ability to efficiently complete transactions, integrate assets and personnel acquired in these transactions and apply our internal control processes to these acquired businesses. Consuming acquisitions, partnerships or other opportunities and integrating an acquisition involves considerable expenses, resources and management time commitments, and our failure to effect these as intended could result in unanticipated expenses and losses. Post-acquisition integration may result in unforeseen difficulties and may deplete significant financial resources that could otherwise be available for the ongoing development or expansion of existing operations. Furthermore, we may not realize the benefits of an acquisition in the way we anticipated when we first entered the transaction. Any of these risks could adversely impact our results of operations, financial position and cash flows.

## Competition and market conditions may adversely affect our operating results.

In certain markets, our competitors are larger than us and may have greater access to financial, technological and other resources. As a result, competitors may be better able to adapt to changes in conditions in our industries, fluctuations in the costs of raw materials or changes in global economic conditions. Competitors may also be able to introduce new products with enhanced features that may cause a decline in the demand and sales of our products. Consolidation of customers or competitors, or economic problems of customers in our markets could cause a loss of market share for our products, place downward pressure on prices, result in payment delays or non-payment, or declining plant utilization rates. These risks could adversely impact our results of operations, financial position and cash flows.



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## We could be adversely affected by technological changes in our industry.

Our ability to maintain or enhance our technological capabilities, develop and market products and applications that meet changing customer requirements, and successfully anticipate or respond to technological changes in a cost effective and timely manner will likely impact our future business success. We compete on a number of fronts including, but not limited to, product quality and performance. In the case of some of our products, our competitors are larger than us and may have greater access to financial, technological and other resources. Our inability to maintain a technological edge, innovate and improve our products could cause a decline in the demand and sales of our products, and adversely impact our results of operations, financial position and cash flows.

## Our reliance on a small number of significant customers may have a material adverse impact on our results of operations.

Our principal customers are major multinational and state-owned oil companies, and large multinational manufacturers of personal care and household products. These industries are characterized by a concentration of a few large participants. The loss of a significant customer, a material reduction in demand by a significant customer or termination or non-renewal of a significant customer contract could adversely impact our results of operations, financial position and cash flows.

## We may be required to make additional cash contributions to our United Kingdom defined benefit pension plan and recognize greater pension charges.

Movements in the underlying plan asset value and Projected Benefit Obligation (“PBO”) of our United Kingdom defined benefit pension plan are dependent on actual return on investments as well as our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation. A change in any one of these assumptions could impact the plan asset value, PBO and pension charge recognized in the income statement. If future plan investment returns prove insufficient to meet future obligations, or should future obligations increase due to actuarial factors or changes in pension legislation, then we may be required to make additional cash contributions. These events could adversely impact our results of operations, financial position and cash flows.

## Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.

Our future success will depend in substantial part on the continued services of our senior management. The loss of the services of one or more of our key executive personnel could affect implementation of our business plan and result in reduced profitability. Our future success also depends on the continued ability to attract, retain and motivate highly-qualified technical, sales and support staff. We cannot guarantee that we will be able to retain our key personnel or attract or retain qualified personnel in the future. If we are unsuccessful in our efforts in this regard, this could adversely impact our results of operations, financial position and cash flows.



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## Continuing adverse global economic conditions could materially affect our current and future businesses.

The ongoing concern about the stability of global markets generally and the strength of counterparties in particular has led many lenders and institutional investors to reduce, or cease to provide, credit to businesses and consumers. These factors have led to a substantial and continuing decrease in spending by businesses and consumers, and a corresponding decrease in global infrastructure spending which could affect our business. Global economic factors affecting our business include, but are not limited to, miles driven by passenger and commercial vehicles, legislation to control fuel quality, impact of alternative propulsion systems, consumer demand for premium personal care and cosmetic products, and oil and gas drilling and production rates. The availability, cost and terms of credit have been, and may continue to be, adversely affected by the foregoing factors and these circumstances have produced, and may in the future result in, illiquid markets and wider credit spreads, which may make it difficult or more expensive for us to obtain credit. Continued turbulence in the U.S. and international markets and economies, the generally restricted environment for credit, and prolonged declines in business and consumer spending could adversely impact our results of operations, financial position and cash flows.

## An information technology system failure may adversely affect our business.

We rely on information technology systems to transact our business. Like other global companies, we have, from time to time, experienced threats to our data and systems. Although we have implemented administrative and technical controls and take protective actions to reduce the risk of cyber incidents and protect our information technology, and we endeavor to modify such procedures as circumstances warrant, such measures may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems. While to date we have not experienced a material cyber security breach, our systems, processes, software and network still may be vulnerable to internal or external security breaches, computer viruses, malware or other malicious code or cyber-attack, catastrophic events, power interruptions, hardware failures, fire, natural disasters, human error, system failures and disruptions, and other events that could have security consequences. Such an information technology failure or disruption could prevent us from being able to process transactions with our customers, operate our manufacturing facilities, and properly report those transactions in a timely manner. A significant, protracted information technology system failure may result in a material adverse effect on our results of operations, financial position and cash flows.

We are also continuing with the process of implementing our new, company-wide, information system platform. We have implemented the new platform at the majority of our U.S. sites in the third quarter of 2013. Further deployments of the new information system platform, outside of the U.S., may cost more than projected or may not perform as expected, either of which could adversely impact our results of operations, financial position and cash flows.



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## We may have additional tax liabilities.

We are subject to income and other taxes in the U.S. and other jurisdictions. Significant judgment is required in estimating our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any final determination pursuant to tax audits and any related litigation could be materially different to what is reflected in our consolidated financial statements. Should any tax authority disagree with our estimates and determine additional tax liability for us, this could adversely impact our results of operations, financial position and cash flows.

## We are exposed to fluctuations in foreign currency exchange rates, which may adversely affect our results of operations.

We generate a portion of our revenues and incur some operating costs in currencies other than the U.S. dollar. In addition, the financial position and results of operations of some of our overseas subsidiaries are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Fluctuations in these currency exchange rates affect the recorded levels of our assets and liabilities, and our results of operations.

The primary exchange rate fluctuation exposures we have are with the European Union euro, British pound sterling and Swiss franc. Exchange rates between these currencies and the U.S. dollar have fluctuated significantly in recent years and may continue to do so. We cannot accurately predict future exchange rate variability among these currencies or relative to the U.S. dollar. While we take steps to manage currency exchange rate exposure, including entering into hedging transactions, we cannot eliminate all exposure to future exchange rate variability. These exchange risks could adversely impact our results of operations, financial position and cash flows.

## Sharp and unexpected fluctuations in the cost of our raw materials and energy could adversely affect our profit margins.

We use a variety of raw materials, chemicals and energy in our manufacturing and blending processes. Many of these raw materials are derived from petrochemical-based feedstock which can be subject to periods of rapid and significant cost instability. These fluctuations in cost can be caused by political instability in oil producing nations and elsewhere, or other factors influencing global supply and demand of these materials, over which we have little or no control. We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. We have entered into hedging arrangements for certain utilities and raw materials, but do not typically enter into hedging arrangements for all raw materials, chemicals or energy costs. If the costs of raw materials, chemicals or energy increase, and we are not able to pass on these cost increases to our customers, then profit margins and cash flows from operating activities would be adversely impacted. If raw material costs increase significantly, then our need for working capital could increase. Any of these risks could adversely impact our results of operations, financial position and cash flows.



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A disruption in the supply of raw materials or transportation services would have a material adverse impact on our results of operations.

Although we try to anticipate problems with supplies of raw materials or transportation services by building certain inventories of strategic importance, any significant disruption in either area could affect our ability to obtain raw materials or transportation services at affordable costs, if at all, which could adversely impact our results of operations, financial position and cash flows.

Our reliance on a small number of significant stockholders may have a material adverse impact on our stock price.

Approximately 49% of our common stock is held by five stockholders. A decision by any of these stockholders to sell all or a significant part of its holding, or a sudden or unexpected disposition of our stock, could result in a significant decline in our stock price which could in turn adversely impact our ability to access equity markets which in turn could adversely impact our results of operations, financial position and cash flows.

We face risks related to our foreign operations that may adversely affect our business.

We serve global markets and operate in certain countries with political and economic instability, including the Middle East, Northern Africa, Asia-Pacific, Eastern Europe and South America regions. Our international operations are subject to numerous international business risks including, but not limited to, unsettled political conditions, risk of expropriation, import and export restrictions, exchange controls, national and regional labor strikes, high or unexpected taxes, government royalties and restrictions on repatriation of earnings or proceeds from liquidated assets of overseas subsidiaries. Any of these could adversely impact our results of operations, financial position and cash flows.

Failure to protect our intellectual property rights could adversely affect our future performance and cash flows.

Failure to maintain or protect our intellectual property rights may result in the loss of valuable technologies, or us having to pay other companies for infringing on their intellectual property rights. Measures taken by us to protect our intellectual property may be challenged, invalidated, circumvented or rendered unenforceable. We may also face patent infringement claims from our competitors which may result in substantial litigation costs, claims for damages or a tarnishing of our reputation even if we are successful in defending against these claims, which may cause our customers to switch to our competitors. Any of these events could adversely impact our results of operations, financial position and cash flows.

Our products are subject to extensive government scrutiny and regulation.

We are subject to regulation by federal, state, local and foreign government authorities. In some cases, we need government approval of our products, manufacturing processes and facilities before we may sell certain products. Many products are required to be registered



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with the U.S. Environmental Protection Agency and with comparable government agencies in the European Union and elsewhere. We are also subject to ongoing reviews of our products, manufacturing processes and facilities by government authorities, and must also produce product data and comply with detailed regulatory requirements.

In order to obtain regulatory approval of certain new products we must, among other things, demonstrate that the product is appropriate and effective for its intended uses, and that we are capable of manufacturing the product in accordance with applicable regulations. This approval process can be costly, time consuming, and subject to unanticipated and significant delays. We cannot be sure that necessary approvals will be granted on a timely basis or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate income from those products. New or stricter laws and regulations may be introduced that could result in additional compliance costs and prevent or inhibit the development, manufacture, distribution and sale of our products. Such outcomes could adversely impact our results of operations, financial position and cash flows.

## Legal proceedings and other claims could impose substantial costs on us.

We are from time to time involved in legal proceedings that result from, and are incidental to, the conduct of our business, including employee and product liability claims. Although we maintain insurance to protect us against a variety of claims, if our insurance coverage is not adequate to cover such claims, then our results of operations, financial position and cash flows could be adversely affected.

## Environmental liabilities and compliance costs could have a substantial adverse impact on our results of operations.

We operate a number of manufacturing sites and are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations, including those relating to emissions to the air, discharges to land and water, and the generation, handling, treatment and disposal of hazardous waste and other materials on these sites. We operate under numerous environmental permits and licenses, many of which require periodic notification and renewal, which is not automatic. New or stricter laws and regulations could increase our compliance burden or costs and adversely affect our ability to develop, manufacture, blend, market and supply products.

Our operations, and the operations of prior owners of our sites, pose the risk of environmental contamination which may result in fines or criminal sanctions being imposed or require significant amounts in remediation payments.

We anticipate that certain manufacturing sites may cease production over the medium to long-term and on closure, will require safely decommissioning and some environmental remediation. The extent of our obligations will depend on the future use of the sites that are affected and the environmental laws in effect at the time. We currently have made a decommissioning and remediation provision in our consolidated financial statements based on current known obligations, anticipated plans for sites and existing environmental laws. If there



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were to be unexpected or unknown contamination at these sites, or future plans for the sites or environmental laws change, then current provisions may prove inadequate, which could adversely impact our results of operations, financial position and cash flows.

The inability of counterparties to meet their contractual obligations could have a substantial adverse impact on our results of operations.

We sell products to oil refineries and chemical companies throughout the world. Credit limits, ongoing credit evaluation and account monitoring procedures are used to minimize bad debt risk. Collateral is not generally required. We have in place a credit facility with a syndicate of banks. We use derivatives, including interest rate swaps, commodity swaps and foreign currency forward exchange contracts, in the normal course of business to manage market risks. We enter into derivative instruments with a diversified group of major financial institutions in order to manage the exposure to non-performance of such instruments.

We remain subject to market and credit risks including the ability of counterparties to meet their contractual obligations and the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. The inability of counterparties to meet their contractual obligations could have an adverse impact on our results of operations, financial position and cash flows.

The terms of our credit facility may restrict our ability to incur additional indebtedness or to otherwise expand our business.

Our revolving credit facility contains restrictive clauses which may limit our activities, and operational and financial flexibility. We may not be able to borrow under the credit facility if an event of default under the terms of the facility occurs. An event of default under the credit facility includes a material adverse change to our assets, operations or financial condition, and certain other events. The credit facility also contains a number of restrictions that limit our ability, among other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guarantee obligations of third parties, make investments, undergo a merger or consolidation, dispose of assets or materially change our line of business.

In addition, the credit facility requires us to meet certain financial ratios, including ratios based on net debt to EBITDA and net interest expense to EBITDA. Net debt, net interest expense and EBITDA are non-GAAP measures of liquidity defined in the credit facility. Our ability to meet these financial covenants depends upon the future successful operating performance of the business. If we fail to comply with financial covenants, we would be in default under the credit facility and the maturity of our outstanding debt could be accelerated unless we were able to obtain waivers from our lenders. If we were found to be in default under the credit facility, it could adversely impact our results of operations, financial position and cash flows.

Our business is subject to the risk of manufacturing disruptions, the occurrence of which would adversely affect our results of operations.

We are subject to hazards common to chemical manufacturing, blending, storage, handling and transportation including fires, labor strikes or slowdowns, explosions, mechanical failure,



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extreme weather, transportation interruptions, remediation, chemical spills and the release or discharge of toxic or hazardous substances. These hazards could result in loss of life, property damage, environmental contamination and temporary or permanent manufacturing cessation. Any of these factors could adversely impact our results of operations, financial position and cash flows.

Domestic or international natural disasters or terrorist attacks may disrupt our operations, decrease the demand for our products or otherwise have an adverse impact on our business.

Chemical related assets, and U.S. corporations such as us, may be at greater risk of future terrorist attacks than other possible targets in the U.S., the United Kingdom and throughout the world. Extraordinary events such as natural disasters may negatively affect local economies, including those of our customers or suppliers. The occurrence of such events cannot be predicted, but they can adversely impact economic conditions in general and in our specific markets. The resulting damage from such events could include loss of life, property damage or site closure. Any of these matters could adversely impact our results of operations, financial position and cash flows.

## Item 1B Unresolved Staff Comments

None.



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## Item 2 Properties

A summary of the Company’s principal properties is shown in the following table. Each of these properties is owned by the Company except where otherwise noted:

<table><tr><td>Location</td><td>Reporting Segment</td><td>Operations</td></tr><tr><td>Englewood, Colorado (1)</td><td>Fuel Specialties and Performance Chemicals</td><td>Corporate Headquarters
Business Teams
Sales/Administration
Research &amp; Development
Manufacturing/Administration
Research &amp; Development</td></tr><tr><td>Newark, Delaware (1)</td><td>Fuel Specialties</td><td>Manufacturing/Administration</td></tr><tr><td>High Point, North Carolina</td><td>Performance Chemicals</td><td>Research &amp; Development</td></tr><tr><td>Salisbury, North Carolina</td><td>Performance Chemicals</td><td>Manufacturing/Administration
Research &amp; Development</td></tr><tr><td>Crowley, Louisiana (1)</td><td>Fuel Specialties</td><td>Sales/Manufacturing/Administration</td></tr><tr><td>Chatsworth, California</td><td>Performance Chemicals</td><td>Sales/Manufacturing/Administration</td></tr><tr><td>Oklahoma City, Oklahoma</td><td>Fuel Specialties</td><td>Sales/Manufacturing/Administration</td></tr><tr><td>Ellesmere Port, United Kingdom</td><td>Fuel Specialties, Performance Chemicals and Octane Additives</td><td>European Headquarters
Business Teams
Sales/Manufacturing/Administration
Research &amp; Development
Fuel Technology Center</td></tr><tr><td>Singapore, Singapore (1)</td><td>Fuel Specialties and Performance Chemicals</td><td>Asia-Pacific Headquarters
Business Teams
Sales/Administration</td></tr><tr><td>Widnes, United Kingdom</td><td>Performance Chemicals</td><td>Manufacturing/Administration
Research &amp; Development</td></tr><tr><td>Herne, Germany (1)</td><td>Fuel Specialties</td><td>Sales/Manufacturing/Administration
Research &amp; Development</td></tr><tr><td>Leuna, Germany</td><td>Fuel Specialties and Performance Chemicals</td><td>Sales/Manufacturing/Administration
Research &amp; Development</td></tr><tr><td>Vernon, France</td><td>Fuel Specialties</td><td>Sales/Manufacturing/Administration
Research &amp; Development</td></tr><tr><td>Milan, Italy (1)</td><td>Fuel Specialties and Performance Chemicals</td><td>Sales/Administration</td></tr><tr><td>Zug, Switzerland (1)</td><td>Octane Additives</td><td>Sales/Administration</td></tr><tr><td>Moscow, Russia (1)</td><td>Fuel Specialties</td><td>Sales/Administration</td></tr><tr><td>Itajai, Brazil (1)</td><td>Fuel Specialties and Performance Chemicals</td><td>Sales/Administration</td></tr></table>

(1) Leased property



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## Manufacturing Capacity

We believe that our plants and supply agreements are sufficient to meet current sales levels. Operating rates of the plants are generally flexible and varied with product mix and normal sales swings. We believe that all of our facilities are maintained to appropriate levels and in good operating condition though there remains an ongoing need for capital investment.

## Item 3 Legal Proceedings

## Jalal Bezee Mejel Al-Gaood & Partner litigation

On September 19, 2012, a claim was filed in the High Court of Justice in the United Kingdom by Jalal Bezee Mejel Al-Gaood & Partner and Future Agencies Company Limited (collectively “JAG”) against the Company, Innospec Limited and a former employee of Innospec Limited. The Company believes JAG was the former Iraq distributor for Afton Chemicals Limited, a subsidiary of NewMarket Corporation, from at least 2005 until termination of that relationship in 2010. The stated claim, inclusive of costs and expenses, is for up to $42.3 million and relates to alleged loss of profits for JAG’s business in Iraq between 2004 and 2010. The Company believes that the allegations in the JAG claim are without merit and intends to defend vigorously its interests.

## Other legal matters

While we are involved from time to time in claims and legal proceedings that result from, and are incidental to, the conduct of our business including business and commercial litigation, employee and product liability claims, there are no other material pending legal proceedings to which the Company or 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 4 Mine Safety Disclosures

Not applicable.



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## PART II

## Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

## Market Information and Holders

The Company’s common stock is listed on the NASDAQ under the symbol “IOSP.” As of February 6, 2014 there were 1,097 registered holders of the common stock. The following table shows the closing high and low prices of our common stock for each of the last eight quarters:

<table><tr><td></td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td></tr><tr><td>High</td><td>$ 44.28</td><td>$ 44.01</td><td>$ 46.66</td><td>$ 48.71</td></tr><tr><td>Low</td><td>$ 35.27</td><td>$ 39.93</td><td>$ 40.61</td><td>$ 42.58</td></tr><tr><td>2012</td><td></td><td></td><td></td><td></td></tr><tr><td>High</td><td>$ 32.81</td><td>$ 31.80</td><td>$ 33.92</td><td>$ 34.49</td></tr><tr><td>Low</td><td>$ 28.27</td><td>$ 25.56</td><td>$ 29.65</td><td>$ 29.57</td></tr></table>

## Dividends

The Company declared the following cash dividend for the year ended December 31, 2013:

<table><tr><td>Date declared</td><td>Stockholders of Record</td><td>Date Paid</td><td>Amount per share</td></tr><tr><td>November 4, 2013</td><td>November 18, 2013</td><td>November 27, 2013</td><td>$ 0.50</td></tr></table>

The Company declared the following cash dividend for the year ended December 31, 2012:

<table><tr><td>Date declared</td><td>Stockholders of Record</td><td>Date Paid</td><td>Amount per share</td></tr><tr><td>December 3, 2012</td><td>December 14, 2012</td><td>December 21, 2012</td><td>$ 2.00</td></tr></table>

On December 14, 2011, we entered into a five-year revolving credit facility which contains no restrictions on our ability to declare dividends and the Company is allowed to repurchase its own common stock as long as we are in compliance with the financial covenants in the credit facility.

## Unregistered Sales of Equity Securities

As part of the consideration in the acquisition of Chemsil on August 30, 2013, we issued 150,943 of Innospec Inc. common stock to the previous owner on that date.

As part of the consideration in the acquisition of Bachman on November 4, 2013, we issued 319,953 of Innospec Inc. common stock to the previous owners on that date.



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## Issuer Purchases of Equity Securities

No purchases of equity securities by the issuer or affiliated purchasers were made during the fourth quarter of 2013.

Repurchased common stock is held as treasury stock unless re-issued under equity compensation plans.

The Company’s most recent Rule 10b5-1 and/or 10b-18 repurchase plan ended on December 31, 2011 and therefore the Company made no repurchases under such plans in 2013. The Company may approve further share repurchase programs in the future but there are currently no active repurchase plans in place.

The Company has authorized securities for issuance under equity compensation plans. The information contained in the table under the heading “Equity Compensation Plans” in the Proxy Statement is incorporated herein by reference. The current limit for the total amount of shares which can be issued or awarded under the Company’s five stock option plans is 2,640,000.



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## Stock Price Performance Graph

The graph below compares the cumulative total return to stockholders on the common stock of the Corporation, S&P 500 Index, NASDAQ Composite Index and Russell 2000 Index since December 31, 2008, assuming a $100 investment and the re-investment of any dividends thereafter.



Value of $100 Investment made December 31, 2008 \( ^{*} \) 

<table><tr><td></td><td>2008</td><td>2009</td><td>2010</td><td>2011</td><td>2012</td><td>2013</td></tr><tr><td>Innospec Inc.</td><td>100.00</td><td>174.83</td><td>353.47</td><td>486.36</td><td>632.26</td><td>856.45</td></tr><tr><td>S&amp;P 500 Index</td><td>100.00</td><td>123.45</td><td>139.23</td><td>139.23</td><td>157.90</td><td>204.63</td></tr><tr><td>NASDAQ Composite Index</td><td>100.00</td><td>143.89</td><td>168.22</td><td>165.19</td><td>191.47</td><td>264.84</td></tr><tr><td>Russell 2000 Index</td><td>100.00</td><td>125.22</td><td>156.90</td><td>148.35</td><td>170.06</td><td>232.98</td></tr></table>

* Excludes purchase commissions



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## Item 6 Selected Financial Data

## FINANCIAL HIGHLIGHTS

<table><tr><td colspan="6">(in millions, except financial ratios, share and per share data)</td></tr><tr><td>Summary of performance:</td><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td>2009</td></tr><tr><td>Net sales</td><td>$ 818.8</td><td>$ 776.4</td><td>$ 774.4</td><td>$ 683.2</td><td>$ 598.5</td></tr><tr><td>Impairment of Octane Additives segment goodwill</td><td>(1.3)</td><td>(1.2)</td><td>(2.0)</td><td>(2.2)</td><td>(2.2)</td></tr><tr><td>Operating income (3)</td><td>90.6</td><td>96.5</td><td>47.2</td><td>67.1</td><td>20.7</td></tr><tr><td>Income before income taxes (3)</td><td>92.8</td><td>93.3</td><td>50.2</td><td>65.6</td><td>18.3</td></tr><tr><td>Income taxes (3)</td><td>(15.0)</td><td>(26.4)</td><td>(3.1)</td><td>4.3</td><td>(11.9)</td></tr><tr><td>Net income (3)</td><td>77.8</td><td>66.9</td><td>47.1</td><td>69.9</td><td>6.4</td></tr><tr><td>Net income attributable to the non-controlling interest</td><td>0.0</td><td>0.0</td><td>0.0</td><td>0.0</td><td>0.00</td></tr><tr><td>Net income attributable to Innospec Inc. (3)</td><td>77.8</td><td>66.9</td><td>47.1</td><td>69.9</td><td>6.4</td></tr><tr><td>Net cash provided by operating activities</td><td>61.3</td><td>61.3</td><td>34.7</td><td>58.2</td><td>87.4</td></tr><tr><td colspan="6">Financial position at year end:</td></tr><tr><td>Total assets</td><td>794.7</td><td>579.4</td><td>568.8</td><td>549.4</td><td>543.1</td></tr><tr><td>Long-term debt (including current portion)</td><td>148.0</td><td>30.0</td><td>35.0</td><td>47.0</td><td>51.0</td></tr><tr><td>Cash and cash equivalents, and short-term investments</td><td>86.8</td><td>27.5</td><td>81.0</td><td>111.3</td><td>68.6</td></tr><tr><td>Stockholders&#x27; equity</td><td>$ 409.4</td><td>$ 317.0</td><td>$ 343.1</td><td>$ 300.7</td><td>$ 157.6</td></tr><tr><td colspan="6">Financial ratios:</td></tr><tr><td>Net income attributable to Innospec Inc. as a percentage of sales (3)</td><td>9.5</td><td>8.6</td><td>6.1</td><td>10.2</td><td>1.1</td></tr><tr><td>Effective tax rate as a percentage (1)(3)</td><td>16.2</td><td>28.3</td><td>6.2</td><td>(6.6)</td><td>65.0</td></tr><tr><td>Current ratio (2)</td><td>2.6</td><td>2.0</td><td>2.2</td><td>2.0</td><td>1.6</td></tr><tr><td colspan="6">Share data:</td></tr><tr><td>Earnings per share attributable to Innospec Inc.</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>- Basic (3)</td><td>$ 3.29</td><td>$ 2.89</td><td>$ 2.00</td><td>$ 2.94</td><td>$ 0.27</td></tr><tr><td>- Diluted (3)</td><td>$ 3.22</td><td>$ 2.81</td><td>$ 1.92</td><td>$ 2.82</td><td>$ 0.26</td></tr><tr><td>Dividend paid per share</td><td>$ 0.50</td><td>$ 2.00</td><td>$ 0.00</td><td>$ 0.00</td><td>$ 0.05</td></tr><tr><td>Shares outstanding (basic, thousands)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>- At year end</td><td>24,347</td><td>23,332</td><td>23,047</td><td>23,703</td><td>23,664</td></tr><tr><td>- Average during year</td><td>23,651</td><td>23,187</td><td>23,568</td><td>23,756</td><td>23,642</td></tr><tr><td>Closing stock price</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>- High</td><td>$ 48.71</td><td>$ 34.49</td><td>$ 37.66</td><td>$ 22.40</td><td>$ 15.63</td></tr><tr><td>- Low</td><td>$ 35.27</td><td>$ 25.56</td><td>$ 19.16</td><td>$ 8.68</td><td>$ 2.79</td></tr><tr><td>- At year end</td><td>$ 46.22</td><td>$ 34.49</td><td>$ 28.07</td><td>$ 20.40</td><td>$ 10.09</td></tr></table>

(1) The effective tax rate is calculated as a percentage of income before income taxes.

(2) Current ratio is defined as current assets divided by current liabilities.

(3) Prior year comparatives have been revised as explained in Note 2 to the financial statements.



## Table of Contents

## QUARTERLY SUMMARY

<table><tr><td>(in millions, except per share data)</td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 199.4</td><td>$ 185.0</td><td>$ 192.8</td><td>$ 241.6</td></tr><tr><td>Gross profit</td><td>63.8</td><td>59.4</td><td>57.4</td><td>74.6</td></tr><tr><td>Operating income</td><td>22.2</td><td>22.3</td><td>19.5</td><td>26.6</td></tr><tr><td>Net income (1)</td><td>18.0</td><td>17.1</td><td>14.0</td><td>28.7</td></tr><tr><td>Net cash provided by operating activities</td><td>$ 17.9</td><td>$ 19.7</td><td>$ (5.8)</td><td>$ 29.5</td></tr><tr><td>Per common share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Earnings - basic</td><td>$ 0.77</td><td>$ 0.73</td><td>$ 0.59</td><td>$ 1.19</td></tr><tr><td>- diluted</td><td>$ 0.75</td><td>$ 0.71</td><td>$ 0.58</td><td>$ 1.17</td></tr><tr><td>2012 (3)</td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 200.8</td><td>$ 178.5</td><td>$ 183.4</td><td>$ 213.7</td></tr><tr><td>Gross profit</td><td>64.0</td><td>56.7</td><td>50.7</td><td>65.0</td></tr><tr><td>Operating income</td><td>31.2</td><td>24.1</td><td>17.3</td><td>23.9</td></tr><tr><td>Net income (2)</td><td>24.6</td><td>15.5</td><td>15.5</td><td>11.3</td></tr><tr><td>Net cash provided by operating activities</td><td>$ 18.0</td><td>$ 12.3</td><td>$ 28.7</td><td>$ 2.3</td></tr><tr><td>Per common share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Earnings - basic</td><td>$ 1.07</td><td>$ 0.67</td><td>$ 0.67</td><td>$ 0.48</td></tr><tr><td>- diluted</td><td>$ 1.03</td><td>$ 0.65</td><td>$ 0.65</td><td>$ 0.47</td></tr></table>

## NOTES

(1) Special items, before tax, during the year ended December 31, 2013 comprised the following:

<table><tr><td>(in millions)</td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td></tr><tr><td>75 \( ^{\text{th}} \)  anniversary employee recognition</td><td>$ 0.0</td><td>$ 0.0</td><td>$ 0.0</td><td>$ (1.6)</td></tr><tr><td>Foreign currency exchange gains/(losses)</td><td>1.0</td><td>(1.0)</td><td>(0.8)</td><td>4.9</td></tr><tr><td>Adjustment of income tax provisions</td><td>0.0</td><td>0.0</td><td>(0.1)</td><td>(0.1)</td></tr><tr><td>Acquisition-related costs</td><td>$ 0.0</td><td>$ (0.2)</td><td>$ (1.3)</td><td>$ (0.3)</td></tr></table>

(2) Special items, before tax, during the year ended December 31, 2012 comprised the following:

<table><tr><td>(in millions)</td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>2012</td><td></td><td></td><td></td><td></td></tr><tr><td>Tax impact of acquisition-related funding</td><td>$ 0.0</td><td>$ 0.0</td><td>$ 0.0</td><td>$ (7.4)</td></tr><tr><td>Foreign currency exchange gains/(losses)</td><td>1.1</td><td>(4.3)</td><td>(0.1)</td><td>1.3</td></tr><tr><td>Adjustment of income tax provisions</td><td>0.0</td><td>0.0</td><td>0.2</td><td>(0.3)</td></tr><tr><td>Acquisition-related costs</td><td>$ 0.0</td><td>$ 0.0</td><td>$ (0.3)</td><td>$ (2.5)</td></tr></table>

(3) In 2012, an adjustment to the non-cash pension expense (see Note 2 to the financial statements) has been reflected in the fourth quarter as the impact on the individual quarters is not considered to be material.



## Table of Contents

## Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

## EXECUTIVE OVERVIEW

Our business performance in 2013 was close to our expectations, demonstrating our commitment to our strategy. Sales in our growth businesses reflected our strong technological position in these markets, while the decline in Octane Additives was in line with the transition to unleaded gasoline.

We have managed our investments in capital equipment, working capital and recruitment of additional skilled personnel in line with these market factors. Our capital program and expenses during 2013 included investment in a new information system platform, which we expect to add value to our business in 2014. During 2013, we completed the acquisition of Bachman to further build-out our presence in oilfield specialties. In 2013, we also acquired Chemsil and Chemtec in order to add technology and products to our Personal Care business within our Performance Chemicals segment, as well as providing an enhanced sales infrastructure to serve the West Coast U.S. market.

## CRITICAL ACCOUNTING ESTIMATES

Note 2 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements.

## Revision of Prior Period Financial Statements

During the fourth quarter of 2013, the Company identified an error in calculating the Market Related Value of Assets (“MRVA”) for Innospec Limited’s United Kingdom Pension Plan which has been overstated each year since 2003. MRVA is either the fair value of the plan assets if the employer does not defer gains or losses on plan assets, or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years, when the expected long-term rate of return is used to determine net periodic postretirement benefit cost. The overstated MRVA is used to determine the size of “the corridor” under GAAP which has resulted in an understatement of amortization of actuarial net losses within the pension expense each year since 2004. The Company has revised prior period financial statements to correct the immaterial non-cash errors for the years ended December 31, 2012 and 2011, see Note 2 Accounting Policies – Revision of Prior Years for further details. The discussion and analysis included herein is based on the financial results for the year ended December 31, 2013 and the revised financial statements for the years ended December 31, 2012 and 2011 as corrected to reflect the immaterial non-cash errors.

## Contingencies

We are subject to legal, regulatory and other proceedings and claims. The Company discloses information concerning contingent liabilities in respect of these claims and proceedings for



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which an unfavorable outcome is more than remote and the potential loss could materially impact our results of operations, financial position and cash flows. We recognize within selling, general and administrative expenses liabilities for these claims and proceedings when it is probable that the Company has incurred a loss based on an unfavorable outcome and the amount of the loss can be reasonably estimated and we endeavor to fairly present, in conjunction with the disclosures of these matters in our consolidated financial statements, management’s view of our exposure. We review outstanding claims and proceedings with external counsel as appropriate to assess probability and estimates of loss. When the reasonable estimate is a range, the recognized liability will be the best estimate within the range. If no amount in the range is a better estimate than any other amount then the minimum amount of the range will be recognized.

We re-evaluate our assessments each quarter or as new and significant information becomes available. The actual cost of ultimately resolving a claim or proceeding may be significantly different from the amount of the recognized liability. In addition, because it is not permissible to recognize a liability until the loss is both probable and estimable, in some cases there may be insufficient time to recognize a liability prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement).

## Environmental Liabilities

Remediation provisions at December 31, 2013 amounted to $31.4 million and relate principally to our Ellesmere Port site in the United Kingdom. We recognize environmental liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated. The Company has to anticipate the program of work required and the associated future expected costs, and comply with environmental legislation in the countries in which it operates or has operated in. The Company views the costs of vacating our Ellesmere Port site as contingent upon if and when it vacates the site because there is no present intention to do so. The Company has further determined that, due to the uncertain product life of TEL particularly in the market for aviation gasoline and other products being manufactured on site, there are uncertainties as to the probability and timing of the expected costs. Such uncertainties have been considered in estimating the provision.

## Pensions

The Company maintains a defined benefit pension plan covering a number of its current and former employees in the United Kingdom. The Company also has other much smaller pension arrangements in the U.S. and overseas, but the obligations under those plans are not material. The United Kingdom plan is closed to future service accrual, but has a large number of deferred and current pensioners.

Movements in the underlying plan asset value and Projected Benefit Obligation (“PBO”) are dependent on actual return on investments as well as our assumptions in respect of the discount rate, annual member mortality rates, future return on assets and future inflation. A change in any one of these assumptions could impact the plan asset value, PBO and pension



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charge recognized in the income statement. Such changes could adversely impact our results of operations and financial position. For example, a 0.25% change in the discount rate assumption would change the PBO by approximately $28 million and the net pension charge for 2013 by approximately $0.5 million. A 0.25% change in the level of price inflation assumption would change the PBO by approximately $22 million and the net pension charge for 2013 by approximately $1.7 million.

Further information is provided in Note 9 of the Notes to the Consolidated Financial Statements.

## Deferred Tax and Uncertain Income Tax Positions

At December 31, 2013, no valuation allowance is required against our foreign tax credit carry forwards within deferred tax as management believes that all the foreign tax credit carry forwards can be utilized in future periods prior to their expiration.

No deferred taxes have been provided for on the unremitted earnings of our overseas subsidiaries as any tax basis differences relating to investments in these overseas subsidiaries are considered to be permanent in duration. We have no current intention to repatriate past or future earnings of our overseas subsidiaries and consider that these earnings have been reinvested overseas. If circumstances were to change that would cause these earnings to be repatriated an additional U.S. tax liability could be incurred, and we continue to monitor this position.

The calculation of our tax liabilities involves evaluating uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be required. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary.

We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained, based on technical merits, when challenged by the taxing authorities. To the extent that we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period may be materially affected. An unfavorable tax settlement may require cash payments and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement may be recognized as a reduction in our effective tax rate in the year of resolution. We report interest and penalties related to uncertain income tax positions as income taxes. For additional information regarding uncertain income tax positions see Note 10 of the Notes to the Consolidated Financial Statements.

## Business combinations

The acquisition method of accounting requires that we recognize the assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of consideration transferred over the acquisition date net fair values of the assets acquired and the liabilities assumed.



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The measurement of the fair values of assets acquired and liabilities assumed requires considerable judgment. Although independent appraisals may be used to assist in the determination of the fair values of certain assets and liabilities, those determinations are usually based on significant estimates provided by management, such as forecasted revenue or profit. In determining the fair value of intangible assets, an income approach is generally used and may incorporate the use of a discounted cash flow method. In applying the discounted cash flow method, the estimated future cash flows and residual values for each intangible asset are discounted to a present value using a discount rate appropriate to the business being acquired. These cash flow projections are based on management’s estimates of economic and market conditions including revenue growth rates, operating margins, capital expenditures and working capital requirements.

While we use our best estimates and assumptions as part of the process to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. During the measurement period, which occurs before finalization of the purchase price allocation, changes in assumptions and estimates that result in adjustments to the fair values of assets acquired and liabilities assumed will have a corresponding offset to goodwill. Subsequent adjustments will impact our consolidated statements of income.

## Goodwill

The Company’s reporting units, the level at which goodwill is tested for impairment, are consistent with the reportable segments: Fuel Specialties, Performance Chemicals and Octane Additives. The components in each segment (including products, markets and competitors) have similar economic characteristics and the segments, therefore, reflect the lowest level at which operations and cash flows can be sufficiently distinguished, operationally and for financial reporting purposes, from the rest of the Company. The Company tests goodwill annually for impairment, or between years if events occur or circumstances change which suggest that an impairment may have occurred.

The Company performs its annual goodwill tests in respect of Fuel Specialties and Performance Chemicals as at December 31 each year. In reviewing for any impairment charge the fair values of the reporting segments are estimated using an after-tax cash flow methodology based on management’s best available estimates at that time. The key assumptions underpinning these calculations include future revenue growth, gross margins and the Company’s weighted average cost of capital. At December 31, 2013 we had $141.1 million and $46.8 million of goodwill relating to our Fuel Specialties and Performance Chemicals segments, respectively. Our annual impairment tests as of such date indicated no impairment because the estimated fair values of those reporting segments substantially exceeded the carrying values.

As a result of the Octane Additives impairment tests performed during 2013, 2012 and 2011 impairment charges of $1.3 million, $1.2 million and $2.0 million, respectively, have been recognized. These charges are non-cash in nature and have no impact on taxation. In 2012 some of the assumptions and estimates relating to the Octane Additives segment discounted



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cash flows were revised as part of our planning processes (although the overall methodology was unchanged). These revisions had no material impact on the reporting of goodwill. At December 31, 2013 there was no goodwill remaining for the Octane Additives segment. Remaining sales are concentrated around a relatively small number of customers with a risk that future demand could dramatically decline.

While we believe our assumptions for impairment tests are reasonable, they are subjective judgments, and it is possible that variations in any of the assumptions may result in materially different calculations of impairment charges, if any.

## Other Intangible Assets (Net of Amortization) and Property, Plant and Equipment

At December 31, 2013 we had $126.8 million of other intangible assets (net of amortization), and $60.4 million of property, plant and equipment, that are discussed in Notes 7 and 5 of the Notes to the Consolidated Financial Statements, respectively. These long-lived assets relate to all of our reporting segments and are being amortized or depreciated straight-line over periods of up to 16 years in respect of the other intangible assets and up to 25 years in respect of the property, plant and equipment.

We continually assess the markets and products related to these long-lived assets, as well as their specific carrying values, and have concluded that these carrying values, and amortization and depreciation periods, remain appropriate.

We also test these long-lived assets for any potential impairment when events occur or circumstances change which suggest that an impairment may have occurred. These types of events or changes in circumstances could include, but are not limited to:

• introduction of new products with enhanced features by our competitors;

• loss of, material reduction in purchases by, or non-renewal of a contract by, a significant customer;

• prolonged decline in business or consumer spending;

• sharp and unexpected rise in raw material, chemical or energy costs; and

• new laws or regulations inhibiting the development, manufacture, distribution or sale of our products.

In order to facilitate this testing the Company groups together assets at the lowest possible level for which cash flow information is available. Undiscounted future cash flows expected to result from the asset groups are compared with the carrying value of the assets and, if such cash flows are lower, an impairment loss may be recognized. The amount of the impairment loss is the difference between the fair value and the carrying value of the assets. Fair values are determined using post-tax cash flows discounted at the Company’s weighted average cost of capital. If events occur or circumstances change it may cause a reduction in periods over which these long-lived assets are amortized or depreciated, or result in a non-cash impairment of a portion of their carrying value. A reduction in amortization or depreciation periods would have no effect on cash flows.



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We are continuing with the implementation of a new, company-wide, information system platform. The platform provider is well established in the market. The implementation is a phased, risk-managed, site deployment and follows a multistage user acceptance program with the existing platform providing a fallback position. We have implemented the new platform at the majority of our U.S. sites in the third quarter of 2013. Internally developed software and other costs capitalized at December 31, 2013 were $19.5 million (2012 – $10.1 million). An amortization expense of $1.0 million was recognized in 2013 (2012 – $0.0 million) in selling, general and administrative expenses.

## RESULTS OF OPERATIONS

The following table provides operating income by reporting segment:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales:</td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 567.4</td><td>$ 527.2</td><td>$ 521.2</td></tr><tr><td>Performance Chemicals</td><td>192.4</td><td>179.6</td><td>177.0</td></tr><tr><td>Octane Additives</td><td>59.0</td><td>69.6</td><td>76.2</td></tr><tr><td></td><td>$ 818.8</td><td>$ 776.4</td><td>$ 774.4</td></tr><tr><td>Gross profit:</td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 181.1</td><td>$ 158.7</td><td>$ 149.3</td></tr><tr><td>Performance Chemicals</td><td>46.3</td><td>43.8</td><td>40.6</td></tr><tr><td>Octane Additives</td><td>27.8</td><td>33.9</td><td>36.5</td></tr><tr><td></td><td>$ 255.2</td><td>$ 236.4</td><td>$ 226.4</td></tr><tr><td>Operating income:</td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 92.7</td><td>$ 87.6</td><td>$ 81.7</td></tr><tr><td>Performance Chemicals</td><td>23.6</td><td>24.3</td><td>22.6</td></tr><tr><td>Octane Additives</td><td>21.5</td><td>26.0</td><td>(22.4)</td></tr><tr><td>Pension credit/(charge)</td><td>(2.3)</td><td>(1.6)</td><td>(2.9)</td></tr><tr><td>Corporate costs</td><td>(43.4)</td><td>(38.5)</td><td>(29.2)</td></tr><tr><td>Restructuring charge</td><td>(0.2)</td><td>(0.2)</td><td>(0.6)</td></tr><tr><td>Impairment of Octane Additives segment goodwill</td><td>(1.3)</td><td>(1.2)</td><td>(2.0)</td></tr><tr><td>Profit on disposal, net</td><td>0.0</td><td>0.1</td><td>0.0</td></tr><tr><td>Total operating income</td><td>$ 90.6</td><td>$ 96.5</td><td>$ 47.2</td></tr></table>



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Results of Operations – Fiscal 2013 compared to Fiscal 2012:

<table><tr><td>(in millions, except ratios)</td><td>2013</td><td>2012</td><td>Change</td><td></td></tr><tr><td>Net sales:</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 567.4</td><td>$ 527.2</td><td>$ 40.2</td><td>+8%</td></tr><tr><td>Performance Chemicals</td><td>192.4</td><td>179.6</td><td>12.8</td><td>+7%</td></tr><tr><td>Octane Additives</td><td>59.0</td><td>69.6</td><td>(10.6)</td><td>-15%</td></tr><tr><td></td><td>$ 818.8</td><td>$ 776.4</td><td>$ 42.4</td><td>+5%</td></tr><tr><td>Gross profit:</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 181.1</td><td>$ 158.7</td><td>$ 22.4</td><td>+14%</td></tr><tr><td>Performance Chemicals</td><td>46.3</td><td>43.8</td><td>2.5</td><td>+6%</td></tr><tr><td>Octane Additives</td><td>27.8</td><td>33.9</td><td>(6.1)</td><td>-18%</td></tr><tr><td></td><td>$ 255.2</td><td>$ 236.4</td><td>$ 18.8</td><td>+8%</td></tr><tr><td>Gross margin (%):</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>31.9</td><td>30.1</td><td>+1.8</td><td></td></tr><tr><td>Performance Chemicals</td><td>24.1</td><td>24.4</td><td>-0.3</td><td></td></tr><tr><td>Octane Additives</td><td>47.1</td><td>48.7</td><td>-1.6</td><td></td></tr><tr><td>Aggregate</td><td>31.2</td><td>30.4</td><td>+0.8</td><td></td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ (88.4)</td><td>$ (71.1)</td><td>$ (17.3)</td><td>+24%</td></tr><tr><td>Performance Chemicals</td><td>(22.7)</td><td>(19.5)</td><td>(3.2)</td><td>+16%</td></tr><tr><td>Octane Additives</td><td>(6.3)</td><td>(7.9)</td><td>1.6</td><td>-20%</td></tr><tr><td>Pension credit/(charge)</td><td>(2.3)</td><td>(1.6)</td><td>(0.7)</td><td>+44%</td></tr><tr><td>Corporate costs</td><td>(43.4)</td><td>(38.5)</td><td>(4.9)</td><td>+13%</td></tr><tr><td></td><td>$ (163.1)</td><td>$ (138.6)</td><td>$ (24.5)</td><td>+18%</td></tr></table>

## Fuel Specialties

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

<table><tr><td>Change (%)</td><td>Americas</td><td>EMEA</td><td>ASPAC</td><td>Avtel</td><td>Total</td></tr><tr><td>Volume</td><td>+4</td><td>-1</td><td>+4</td><td>+20</td><td>+3</td></tr><tr><td>Price and product mix</td><td>-4</td><td>+3</td><td>-3</td><td>+4</td><td>0</td></tr><tr><td>Exchange rates</td><td>0</td><td>+3</td><td>0</td><td>0</td><td>+1</td></tr><tr><td>Acquisitions</td><td>+10</td><td>0</td><td>0</td><td>0</td><td>+4</td></tr><tr><td></td><td>+10</td><td>+5</td><td>+1</td><td>+24</td><td>+8</td></tr></table>

Americas saw an increase in volumes in 2013 as a result of higher demand, offset by an adverse price and product mix as a result of lower sales of high margin products. Acquisitions in the Americas, relating to Strata and Bachman, generated additional sales compared to 2012. EMEA volumes remained on par with the prior year, while benefiting from an improved price



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and product mix. EMEA benefited from favorable exchange rates driven primarily by a strengthening of the European Union euro against the U.S. dollar. Volumes were higher in ASPAC with an adverse price and product mix as a result of lower sales of higher margin products. Avtel volumes increased due to the timing of shipments to customers as opposed to any change in the long-term outlook for that market with the price and product mix benefiting from a favorable customer mix.

Gross margin: the year on year increase of 1.8 percentage points reflected a richer price and product mix in EMEA; the continued benefit from higher margin sales in the Strata business; and a favorable customer mix in our higher margin Avtel business; which were offset by adverse price and product mix in the Americas and ASPAC.

Operating expenses: the year on year increase of 24%, or $17.3 million, was due to $6.7 million of additional costs for the Strata business; $3.4 million of additional costs for the Bachman businesses; $2.4 million of increased personnel-related compensation costs, partly due to the higher accruals for share based compensation expense driven by the rise in our stock price compared to the same period in the prior year; $2.9 million of additional research, development and new product testing costs; $1.4 million of additional commissions; and a $0.5 million increase in other expenses.

## Performance Chemicals

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

<table><tr><td>Change (%)</td><td>Americas</td><td>EMEA</td><td>ASPAC</td><td>Total</td></tr><tr><td>Volume</td><td>-3</td><td>0</td><td>+17</td><td>+1</td></tr><tr><td>Price and product mix</td><td>+1</td><td>-1</td><td>-7</td><td>0</td></tr><tr><td>Exchange rates</td><td>0</td><td>+1</td><td>0</td><td>0</td></tr><tr><td>Acquisitions</td><td>+15</td><td>0</td><td>0</td><td>+6</td></tr><tr><td></td><td>+13</td><td>0</td><td>+10</td><td>+7</td></tr></table>

In the Americas volumes were lower in Fragrance Ingredients, partly offset by an improved price and product mix resulting from a retrospective price adjustment with a customer. Acquisitions in the Americas, relating to Chemsil and Chemtec, generated additional sales compared to 2012. Volumes in EMEA are on a par with the prior year, combined with a marginally weaker price and product mix in Fragrance Ingredients partially offset by improved sales mix in Personal Care. ASPAC volumes moved higher but were impacted by higher sales of lower margin products.

Gross margin: the year on year decrease of 0.3 percentage points reflected the competitive pricing pressures for Fragrance Ingredients, partly offset by a richer price and product mix in our Personal Care market; together with a retrospective price adjustment with a customer in the Americas and EMEA; and higher margins in our Chemsil business.



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Operating expenses: the year on year increase of 16%, or $3.2 million, reflected $3.1 million of additional costs for our recently acquired Chemsil and Chemtec businesses; $0.3 million higher personnel-related compensation costs driven by the rise in our stock price compared to the same period in the prior year; and a $0.2 million decrease in other expenses.

## Octane Additives

Net sales: decreased by 15% with decreased volumes (down 18 percentage points), due to the timing of shipments and declining demand from major customers, and an improved customer mix (up 4 percentage points), together with reduced revenue from our environmental remediation business (down 1 percentage points). In both 2013 and 2012, sales were focused in the Middle East and Northern Africa.

Gross margin: decreased by 1.6 percentage points from 48.7% to 47.1%, due to lower manufacturing volumes, partly offset by favorable customer mix and non-recurring freight storage costs in the prior year.

Operating expenses: decreased by $1.6 million from $7.9 million to $6.3 million, due to the efficient management of the cost base.

## Other Income Statement Captions

Pension credit/(charge): this non-cash charge increased to a $2.3 million net charge in 2013 compared to a $1.6 million net charge in 2012, after revising the amortization of actuarial losses in 2012 (see Note 2 to the financial statements). The increase in the net charge in 2013 primarily relates to increased actuarial net losses being amortized to the income statement.

Corporate costs: the year on year increase of 13%, or $4.9 million, reflected $8.2 million higher legal, compliance, professional and other expenses, including acquisition-related costs of $1.8 million in 2013 compared to $2.8 million in 2012; $1.8 million higher personnel-related compensation costs, primarily due to higher accruals for share based compensation expense, driven by the rise in our stock price compared to the same period in the prior year; $0.7 million higher information technology service platform costs; offset by a $5.8 million reduction in the charge for the long-term incentive plan which completed at the end of 2012.

Restructuring charge: was $0.2 million in 2013 and 2012.

Impairment of Octane Additives segment goodwill: was $1.3 million in 2013 and $1.2 million in 2012.

Other net income/(expense): other net income of $4.1 million primarily related to gains of $5.8 million on translation of net assets denominated in non-functional currencies in our European businesses, partly offset by net foreign exchange losses on foreign currency forward exchange contracts of $1.6 million. In 2012, other net expense of $2.0 million primarily related to losses on translation of net assets denominated in non-functional currencies in our European businesses offset by net foreign exchange gains on foreign currency forward exchange contracts.



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Interest expense, net: increased to $1.9 million in 2013 from $1.2 million in 2012 due to the higher level of borrowing during 2013, used primarily to fund our acquisition activity.

Income taxes: the effective tax rate was 16.2% and 28.3% in 2013 and 2012, respectively. The effective tax rate, once adjusted for income tax provisions and for the tax impact of acquisition-related funding, was 15.9% in 2013 compared with 20.2% in 2012. 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.

<table><tr><td>(in millions, except ratios)</td><td>2013</td><td>2012</td></tr><tr><td>Income before income taxes</td><td>$92.8</td><td>$93.3</td></tr><tr><td>Income taxes</td><td>$15.0</td><td>$26.4</td></tr><tr><td>Add back adjustment of income tax provisions</td><td>(0.2)</td><td>(0.2)</td></tr><tr><td>Add back tax impact of acquisition-related funding</td><td>0.0</td><td>(7.4)</td></tr><tr><td></td><td>$14.8</td><td>$18.8</td></tr><tr><td>GAAP effective tax rate</td><td>16.2%</td><td>28.3%</td></tr><tr><td>Adjusted effective tax rate</td><td>15.9%</td><td>20.2%</td></tr></table>

In addition to those mentioned above, the following factors had a significant impact on the Company’s effective tax rate as compared to the U.S. federal income tax rate of 35%:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Foreign tax rate differential</td><td>$ (13.6)</td><td>$ (15.6)</td></tr><tr><td>Foreign income inclusions</td><td>5.7</td><td>46.5</td></tr><tr><td>Foreign tax credits</td><td>(1.8)</td><td>(36.5)</td></tr><tr><td>Deferred tax charge/(credit) from United Kingdom income tax rate reduction on pensions</td><td>0.9</td><td>(0.5)</td></tr><tr><td>Prior year adjustments</td><td>$ (2.7)</td><td>$ (0.6)</td></tr></table>

The impact on the effective tax rate from profits earned in foreign jurisdictions with lower tax rates varies as the geographical mix of the Company’s profits changes year on year. In 2013, the Company’s income tax expense benefited to a lesser degree from a proportion of its overall profits arising in Switzerland than in 2012. This resulted in a $9.3 million benefit in Switzerland (2012 – $12.0 million). In addition, there was a $3.9 million benefit in relation to the United Kingdom (2012 – $3.3 million) and a $0.3 million benefit in relation to Germany (2012 – $0.7 million).

Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S. tax regulations. These types of income include Subpart F income, principally from foreign based company sales in the United Kingdom, including the associated Section 78 tax gross up, and also from the income earned by certain overseas subsidiaries



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taxable under the U.S. tax regime. In 2013, the amount of Subpart F income and the associated Section 78 gross up amounted to $4.3 million (2012 – $4.3 million). The income earned by certain overseas subsidiaries taxable under the U.S. tax regime decreased to $1.2 million from $2.5 million in 2012. A dividend from an overseas subsidiary, remitted to the U.S., increased foreign income inclusions by $39.0 million during 2012. In 2013 no dividends were remitted to the U.S.

Foreign tax credits can fully or partially offset these incremental U.S. taxes from foreign income inclusions. The utilization of foreign tax credits varies year on year as this is dependent on a number of variable factors which are difficult to predict and may in certain years prevent any offset of foreign tax credits. In total, $4.2 million of foreign tax credits were utilized during 2013 to partially offset the incremental U.S. taxes arising from foreign income inclusions in the year (2012 – an overseas dividend was remitted to the U.S. to provide funding for the Company’s acquisition program and $42.8 million of foreign tax credits were utilized during 2012). Of this balance, $2.4 million of foreign tax credit carry forwards from earlier years was utilized (2012 – $14.2 million). This resulted in a decrease in the recognition of foreign tax credit carry forwards of $2.4 million during the year (2012 – a $6.6 million decrease).

The United Kingdom’s 3% reduction in the corporation tax rate from 23% to 20% in April 2015, enacted in July 2013, resulted in a net deferred tax charge of $0.9 million (2012 – a net deferred tax credit of $0.5 million) in the third quarter of 2013 primarily in relation to the deferred tax position of the United Kingdom defined benefit pension plan.

Further details are given in Note 10 of the Notes to the Consolidated Financial Statements.



## Table of Contents

Results of Operations – Fiscal 2012 compared to Fiscal 2011:

<table><tr><td>(in millions, except ratios)</td><td>2012</td><td>2011</td><td>Change</td><td></td></tr><tr><td>Net sales:</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 527.2</td><td>$ 521.2</td><td>$ 6.0</td><td>+1%</td></tr><tr><td>Performance Chemicals</td><td>179.6</td><td>177.0</td><td>2.6</td><td>+1%</td></tr><tr><td>Octane Additives</td><td>69.6</td><td>76.2</td><td>(6.6)</td><td>-9%</td></tr><tr><td></td><td>$ 776.4</td><td>$ 774.4</td><td>$ 2.0</td><td>0%</td></tr><tr><td>Gross profit:</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 158.7</td><td>$ 149.3</td><td>$ 9.4</td><td>+6%</td></tr><tr><td>Performance Chemicals</td><td>43.8</td><td>40.6</td><td>3.2</td><td>+8%</td></tr><tr><td>Octane Additives</td><td>33.9</td><td>36.5</td><td>(2.6)</td><td>-7%</td></tr><tr><td></td><td>$ 236.4</td><td>$ 226.4</td><td>$ 10.0</td><td>+4%</td></tr><tr><td>Gross margin (%):</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>30.1</td><td>28.6</td><td>+1.5</td><td></td></tr><tr><td>Performance Chemicals</td><td>24.4</td><td>22.9</td><td>+1.5</td><td></td></tr><tr><td>Octane Additives</td><td>48.7</td><td>47.9</td><td>+0.8</td><td></td></tr><tr><td>Aggregate</td><td>30.4</td><td>29.2</td><td>+1.2</td><td></td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ (71.1)</td><td>$ (67.6)</td><td>$ (3.5)</td><td>+5%</td></tr><tr><td>Performance Chemicals</td><td>(19.5)</td><td>(18.0)</td><td>(1.5)</td><td>+8%</td></tr><tr><td>Octane Additives</td><td>(7.9)</td><td>(58.9)</td><td>51.0</td><td>-87%</td></tr><tr><td>Pension credit/(charge)</td><td>(1.6)</td><td>(2.9)</td><td>1.3</td><td>-45%</td></tr><tr><td>Corporate costs</td><td>(38.5)</td><td>(29.2)</td><td>(9.3)</td><td>+32%</td></tr><tr><td></td><td>$ (138.6)</td><td>$ (176.6)</td><td>$ 38.0</td><td>-22%</td></tr></table>

## Fuel Specialties

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

<table><tr><td>Change (%)</td><td>Americas</td><td>EMEA</td><td>ASPAC</td><td>Avtel</td><td>Total</td></tr><tr><td>Volume</td><td>-4</td><td>+3</td><td>-5</td><td>-24</td><td>-3</td></tr><tr><td>Price and product mix</td><td>+7</td><td>+6</td><td>+12</td><td>+6</td><td>+7</td></tr><tr><td>Exchange rates</td><td>0</td><td>-8</td><td>-1</td><td>0</td><td>-3</td></tr><tr><td></td><td>+3</td><td>+1</td><td>+6</td><td>-18</td><td>+1</td></tr></table>

Sales volumes in both the Americas and ASPAC declined for the second year running primarily due to lower sales of high volume but low margin products, offset by higher sales of more added value products, resulting in an improved price and product mix in both these markets. Sales volumes, and price and product mix, in EMEA continued to benefit in 2012 from new contracts and contract amendments entered into in 2011, partially offset by a



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weakening of the European Union euro and British pound sterling against the U.S. dollar. Avtel volumes declined 24% in 2012, compared to a 13% increase in 2011, due to the timing of shipments to customers as opposed to any change in the long-term outlook for that market. This Avtel sales volume decline was partially offset by an improved customer mix.

Gross margin: the year on year increase of 1.5 percentage points primarily reflected a lower proportion of sales of lower margin products, specifically in the Americas and ASPAC markets, and the continued benefit in 2012 of the new contracts and contract amendments entered into in 2011. Many of the raw materials that we use are derived from petrochemical-based feedstocks and their costs were less volatile due to the stable crude oil prices experienced in 2012.

Operating expenses: the year on year increase of 5%, or $3.5 million, was primarily due to the release of a $3.7 million accrual in respect of an old customer claim in the first quarter of 2011 which did not recur in 2012. This increase was partially offset by the $0.5 million favorable impact of foreign currency exchange rates on our European cost base denominated in European Union euro and British pound sterling.

## Performance Chemicals

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

<table><tr><td>Change (%)</td><td>Americas</td><td>EMEA</td><td>ASPAC</td><td>Total</td></tr><tr><td>Volume</td><td>+19</td><td>-8</td><td>+1</td><td>+4</td></tr><tr><td>Price and product mix</td><td>+1</td><td>+1</td><td>+5</td><td>+1</td></tr><tr><td>Exchange rates</td><td>-1</td><td>-6</td><td>-2</td><td>-4</td></tr><tr><td></td><td>+19</td><td>-13</td><td>+4</td><td>+1</td></tr></table>

Overall sales volumes increased in this segment despite the competitive pressures faced in all the markets we serve. Improved sales volumes within the Personal Care market focused in the Americas and the global Fragrance Ingredients market, were partially offset by lower volumes due to weaker demand in our Polymers market which is focused in EMEA. Price and product mix was substantially unchanged in our larger Americas and EMEA markets, and benefitted in ASPAC due to the higher proportion of more added value products sold in 2012. Sales in all our markets, but notably EMEA, suffered from a weakening of the European Union euro and British pound sterling against the U.S. dollar.

Gross margin: the year on year increase of 1.5 percentage points reflected the continued improvement in demand across the markets despite the competitive pressures on margins, with the exception of our Polymers market. Weaker demand in our Polymers market resulted in lower sales volumes and sales prices with a consequential adverse impact on gross margin. Many of the raw materials that we use are derived from petrochemical-based feedstocks and we benefitted from the fact that their costs were less volatile due to the stable crude oil prices experienced in 2012.



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Operating expenses: the year on year increase of 8%, or $1.5 million, was primarily in respect of $1.2 million higher personnel-related compensation costs, partially offset by the $0.5 million favorable impact of foreign currency exchange rates on our European cost base denominated in European Union euro and British pound sterling.

## Octane Additives

Net sales: decreased by 9% entirely in respect of lower volumes since sales mix and revenue from our environmental remediation business were unchanged. In both 2012 and 2011, sales were focused in the Middle East and Northern Africa.

Gross margin: increased marginally by 0.8 percentage points from 47.9% to 48.7%.

Operating expenses: decreased by $51.0 million primarily due to the fact that the impact of the $45.0 million NewMarket Corporation civil complaint settlement and associated $5.5 million legal and other professional expenses in 2011 did not recur in 2012.

## Other Income Statement Captions

Pension credit/(charge): this non-cash charge decreased to a $1.6 million net charge in 2012 compared to a $2.9 million net charge in 2011, primarily as a result of lower interest costs partly offset by a lower expected return on assets. Both the 2012 and 2011 charges are after revising the amortization of actuarial losses (see Note 2 to the financial statements).

Corporate costs: the year on year increase of 32%, or $9.3 million, primarily reflected $4.7 million higher accruals for share based compensation expense, driven by the year on year rise in our stock price, including a $3.9 million higher charge in respect of the long-term incentive plan. The remainder of the increase was due to $2.7 million higher legal and other professional expenses and $2.1 million higher information technology service platform costs. Acquisition-related costs were $2.8 million and $3.0 million in 2012 and 2011, respectively.

Restructuring charge: comprised the following:

<table><tr><td>(in millions)</td><td>2012</td><td>2011</td></tr><tr><td>Reduction in EMEA headcount</td><td>$0.2</td><td>$ 0.7</td></tr><tr><td>Release of an accrual in respect of the relocation of a U.S. sales and administration facility</td><td>0.0</td><td>(0.1)</td></tr><tr><td></td><td>$0.2</td><td>$ 0.6</td></tr></table>

Impairment of Octane Additives segment goodwill: was $1.2 million and $2.0 million in 2012 and 2011, respectively. Effective October 1, 2011, we updated the estimates used in the detailed forecast model to calculate impairment charges to reflect the Company’s extended estimate for the future life of our Octane Additives segment from December 31, 2012 to December 31, 2013, resulting in a lower charge. The Octane Additives segment goodwill charge for the year ending December 31, 2013 was $1.3 million.



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Profit on disposal, net: in 2012 the Company recognized $0.1 million profit following the disposal of surplus real estate.

Other net income/(expense): other net expense of $2.0 million primarily related to losses on translation of net assets denominated in non-functional currencies in our European businesses offset by net foreign exchange gains on foreign currency forward exchange contracts. In 2011, other net income of $6.3 million was comprised of $6.5 million of net foreign currency exchange gains and gains on translation of net assets denominated in non-functional currencies in our European businesses, and $0.2 million sundry other expenses.

Interest expense, net: decreased from $3.3 million to $1.2 million due to the lower average level of debt in 2012 and losses on interest rate swaps in 2011.

Income taxes : the effective tax rate was 28.3% and 6.2% in 2012 and 2011, respectively. The effective tax rate, once adjusted for the NewMarket Corporation civil complaint settlement, adjustment of income tax provisions and for the tax impact of acquisition-related funding, was 20.2% in 2012 compared with 15.5% in 2011. 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.

<table><tr><td>(in millions, except ratios)</td><td>2012</td><td>2011</td></tr><tr><td>Income before income taxes</td><td>$93.3</td><td>$50.2</td></tr><tr><td>Add back NewMarket Corporation civil complaint settlement</td><td>0.0</td><td>45.0</td></tr><tr><td></td><td>$93.3</td><td>$95.2</td></tr><tr><td>Income taxes</td><td>$26.4</td><td>$ 3.1</td></tr><tr><td>Add back tax on NewMarket Corporation civil complaint settlement</td><td>0.0</td><td>15.7</td></tr><tr><td>Add back adjustment of income tax provisions</td><td>(0.2)</td><td>(4.0)</td></tr><tr><td>Add back tax impact of acquisition-related funding</td><td>(7.4)</td><td>0.0</td></tr><tr><td></td><td>$18.8</td><td>$14.8</td></tr><tr><td>GAAP effective tax rate</td><td>28.3%</td><td>6.2%</td></tr><tr><td>Adjusted effective tax rate</td><td>20.2%</td><td>15.5%</td></tr></table>

In addition to those mentioned above, the following factors had a significant impact on the Company’s effective tax rate as compared to the U.S. federal income tax rate of 35%:

<table><tr><td>(in millions)</td><td>2012</td><td>2011</td></tr><tr><td>Foreign tax rate differential</td><td>$ (15.6)</td><td>$ (9.9)</td></tr><tr><td>Foreign income inclusions</td><td>46.5</td><td>10.7</td></tr><tr><td>Foreign tax credits</td><td>(36.5)</td><td>(13.5)</td></tr><tr><td>Deferred tax credit from United Kingdom income tax rate reduction</td><td>$ (0.5)</td><td>$ (2.5)</td></tr></table>



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The impact on the effective tax rate from profits earned in foreign jurisdictions with lower tax rates varies as the geographical mix of the Company’s profits changes year on year. In 2012, the Company’s income tax expense benefited from a greater proportion of its overall profits arising in Switzerland than in 2011. This resulted in a $12.0 million benefit in Switzerland (2011 – $8.9 million). In addition, there was a $3.3 million benefit in relation to the United Kingdom (2011 – $0.1 million) and a $0.7 million benefit in relation to Germany (2011 – $0.9 million).

Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S. tax regulations. These types of income include Subpart F income, principally from foreign based company sales in the United Kingdom, including the associated Section 78 tax gross up, and also from the income earned by certain overseas subsidiaries taxable under the U.S. tax regime. In 2012, the amount of Subpart F income and the associated Section 78 gross up amounted to $4.3 million (2011 – $3.0 million). The income earned by certain overseas subsidiaries taxable under the U.S. tax regime increased to $2.5 million from $2.0 million in 2011. In addition, a dividend from an overseas subsidiary, remitted to the U.S., increased foreign income inclusions by $39.0 million during 2012 (2011 – $5.5 million).

Foreign tax credits can fully or partially offset these incremental U.S. taxes from foreign income inclusions. The utilization of foreign tax credits varies year on year as this is dependent on a number of variable factors which are difficult to predict and may in certain years prevent any offset of foreign tax credits. During 2012, an overseas dividend was remitted to the U.S. to provide funding for the Company’s acquisition program. In total, $42.8 million of foreign tax credits were utilized during 2012 to partially offset the incremental U.S. taxes arising from foreign income inclusions in the year. Of this balance, $14.2 million of foreign tax credit carry forwards from earlier years was utilized. This resulted in a decrease in the recognition of foreign tax credit carry forwards of $6.6 million during the year (2011 – a $9.4 million increase). The total tax cost of funding the Company’s acquisition program was $7.4 million.

Following the United Kingdom’s 2% reduction in the corporation tax rate from 25% to 23% in April 2013, enacted in July 2012, the Company benefitted from a net deferred tax credit of $0.5 million (2011 – $2.5 million) in the third quarter of 2012 primarily in relation to the deferred tax position of the United Kingdom defined benefit pension plan.

Further details are given in Note 10 of the Notes to the Consolidated Financial Statements.

## LIQUIDITY AND FINANCIAL CONDITION

## Working Capital

The Company believes that adjusted working capital, a non-GAAP financial measure, provides useful information to investors in evaluating the Company’s underlying performance and identifying operating trends. Management uses this non-GAAP financial measure internally to allocate resources and evaluate the performance of the Company’s operations.



## Table of Contents

Items excluded from the adjusted working capital calculation are listed in the table below and represent factors which do not fluctuate in line with the day to day working capital needs of the business.

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Total current assets</td><td>$ 407.4</td><td>$ 296.6</td></tr><tr><td>Total current liabilities</td><td>(155.6)</td><td>(147.3)</td></tr><tr><td>Working capital</td><td>251.8</td><td>149.3</td></tr><tr><td>Less cash and cash equivalents</td><td>(80.2)</td><td>(22.4)</td></tr><tr><td>Less short-term investments</td><td>(6.6)</td><td>(5.1)</td></tr><tr><td>Less current portion of deferred tax assets</td><td>(8.7)</td><td>(11.0)</td></tr><tr><td>Less prepaid income taxes</td><td>(11.4)</td><td>0.0</td></tr><tr><td>Add back accrued income taxes</td><td>0.0</td><td>3.2</td></tr><tr><td>Add back current portion of long-term debt</td><td>5.3</td><td>5.0</td></tr><tr><td>Add back current portion of plant closure provisions</td><td>6.2</td><td>5.1</td></tr><tr><td>Add back current portion of unrecognized tax benefits</td><td>6.8</td><td>3.0</td></tr><tr><td>Add back current portion of deferred tax liabilities</td><td>0.2</td><td>0.2</td></tr><tr><td>Add back current portion of deferred income</td><td>0.3</td><td>1.4</td></tr><tr><td>Adjusted working capital</td><td>$ 163.7</td><td>$ 128.7</td></tr></table>

In 2013 our adjusted working capital (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) increased by $35.0 million. In total our acquisitions of Chemsil, Chemtec and Bachman accounted for $15.3 million of the increase at December 31, 2013.

The $20.1 million increase in trade and other accounts receivable reflects increases in our Fuel Specialties and Performance Chemicals segments, with fourth quarter sales being $8.8 million and $10.8 million higher, respectively, than the fourth quarter of 2012, while the acquisitions of Chemsil, Chemtec and Bachman accounted for $13.0 million of the increase. Days' sales outstanding increased from 44 days to 49 days in our Fuel Specialties segment, whilst they increased from 43 days to 51 days in our Performance Chemicals segment. Octane Additives trade and other accounts receivable was in line with 2012 due to the timing of shipments to major customers, and the associated sales terms of those shipments.

The $20.6 million increase in inventories is focused in our Fuel Specialties and Performance Chemicals segments following decisions to build certain product inventories of strategic importance in anticipation of future sales growth, together with a $10.7 million increase due to our acquisitions of Chemsil, Chemtec and Bachman. Days’ sales in inventory increased from 69 days to 79 days in our Fuel Specialties segment, whilst declining in our Performance Chemicals segment over the same period from 101 days to 96 days being a relatively normalized year end level. Inventory in our Octane Additives segment decreased $2.5 million due to the timing of significant shipments just prior to the year end.



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Prepaid expenses increased $1.7 million from $4.1 million to $5.8 million, primarily due to the timing of insurance invoices and additional prepayments in our acquired businesses of $1.0 million.

The $7.4 million increase in accounts payable and accrued liabilities was primarily due to increases in our Fuel Specialties and Performance Chemicals segments as a result of the acquisitions of Chemsil, Chemtec and Bachman reflecting a $9.4 million increase year over year. Creditor days in our Fuel Specialties segment increased from 29 days to 32 days and in our Performance Chemicals segment increased from 41 days to 42 days.

## Operating Cash Flows

We generated cash from operating activities of $61.3 million in both 2013 and 2012. Year over year cash from operating activities has been impacted by higher net income, lower cash outflows for our working capital requirements, and significant movements in taxes. In 2013 our working capital requirements increased by $16.4 million, compared to a $20.5 million increase in 2012.

## Cash

At December 31, 2013 and 2012 we had cash and cash equivalents of $80.2 million and $22.4 million, respectively, of which $73.3 million and $17.5 million, respectively, were held by non-U.S. subsidiaries principally in the United Kingdom. The Company is in a position to control whether or not to repatriate foreign earnings and intends to reinvest earnings to fund overseas subsidiaries. We currently do not expect to make a further repatriation in the foreseeable future and hence have not provided for future income taxes on the cash held by overseas subsidiaries. If circumstances were to change that would cause these earnings to be repatriated an additional U.S. tax liability could be incurred, and we continue to monitor this position.

## Short-term Investments

At December 31, 2013 and 2012 we had short-term investments of $6.6 million and $5.1 million, respectively.

## Debt

On August 28, 2013, we amended our five-year revolving credit facility (“the facility”). The amendment provides for an increase in the facility available to the Company and certain subsidiaries of the Company from $100 million to $150 million and retains the term of the facility through to December 2016. In addition, the amendment allowed the Company to request an additional amount of up to $50 million to be committed by the lenders, of which $30 million was committed in the fourth quarter of 2013.

The current credit facility contains restrictions which may limit our activities, and operational and financial flexibility. We may not be able to borrow if an event of default is outstanding,



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which includes a material adverse change to our assets, operations or financial condition. The credit facility contains a number of restrictions that limit our ability, among other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guarantee obligations of third parties, make investments, effect a merger or consolidation, dispose of assets, or materially change our line of business.

In addition, the credit facility contains terms which, if breached, would result in it becoming repayable on demand. It requires, among other matters, compliance with the following financial covenant ratios measured on a quarterly basis: (1) our ratio of net debt to EBITDA must not be greater than 2.5:1 and (2) our ratio of EBITDA to net interest must not be less than 4.0:1. Management has determined that the Company has not breached these covenants throughout the period to December 31, 2013 and expects to not breach these covenants for the next 12 months. The credit facility is secured by a number of fixed and floating charges over certain assets which include key operating sites of the Company and its subsidiaries.

As at December 31, 2013, we had $142.0 million of debt outstanding under the revolving credit facility and $1.0 million of debt financing within our acquired Bachman businesses.

Under the terms of our September 13, 2011 settlement with NewMarket Corporation, we issued a $15.0 million promissory note to NewMarket Corporation payable in three equal annual installments (carrying simple interest at 1% per annum). The first installment was paid on September 7, 2012, and the second installment paid on September 9, 2013.

The debt maturity profile as at December 31, 2013 is set out below:

<table><tr><td>(in millions)</td><td></td></tr><tr><td>2014</td><td>$ 5.3</td></tr><tr><td>2015</td><td>0.6</td></tr><tr><td>2016</td><td>142.1</td></tr><tr><td>2017</td><td>0.0</td></tr><tr><td></td><td>148.0</td></tr><tr><td>Current portion of long-term debt</td><td>(5.3)</td></tr><tr><td>Long-term debt, net of current portion</td><td>$142.7</td></tr></table>

## Outlook

At December 31, 2013, the Company had cash, cash equivalents and short-term investments of $86.8 million and debt of $148.0 million resulting in net debt of $61.2 million.

The Company expects to fund its operations over at least the next 12 months from a combination of operating cash flows and its revolving credit facility. Under the credit facility we have the ability to draw down up to $180 million, with a further $20 million to be committed by lenders. As at December 31, 2013, $142.0 million was drawn down.



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## Contractual Commitments

The following represents contractual commitments at December 31, 2013 and the effect of those obligations on future cash flows:

<table><tr><td>(in millions)</td><td>Total</td><td>2014</td><td>2015-16</td><td>2017-18</td><td>Thereafter</td></tr><tr><td>Operating activities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Compliance monitor</td><td>0.3</td><td>0.3</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td>NewMarket promissory note</td><td>5.0</td><td>5.0</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td>Planned funding of pension obligations</td><td>50.6</td><td>11.4</td><td>19.5</td><td>13.9</td><td>5.8</td></tr><tr><td>Remediation payments</td><td>31.4</td><td>6.2</td><td>6.0</td><td>2.5</td><td>16.7</td></tr><tr><td>Severance payments</td><td>1.0</td><td>0.0</td><td>1.0</td><td>0.0</td><td>0.0</td></tr><tr><td>Operating lease commitments</td><td>9.5</td><td>2.7</td><td>2.6</td><td>2.3</td><td>1.9</td></tr><tr><td>Raw material purchase obligations</td><td>3.2</td><td>3.2</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td>Interest payments on debt</td><td>3.4</td><td>1.1</td><td>2.3</td><td>0.0</td><td>0.0</td></tr><tr><td>Investing activities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Capital commitments</td><td>2.6</td><td>2.6</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td>Financing activities</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Long-term debt obligations</td><td>148.0</td><td>5.3</td><td>142.7</td><td>0.0</td><td>0.0</td></tr><tr><td>Acquisition-related contingent consideration</td><td>5.0</td><td>0.0</td><td>5.0</td><td>0.0</td><td>0.0</td></tr><tr><td>Total</td><td>$260.0</td><td>$37.8</td><td>$179.1</td><td>$ 18.7</td><td>$ 24.4</td></tr></table>

## Operating activities

Following the previously-disclosed resolution of certain government investigations and other matters, further details of which are given in Note 17 of the Notes to the Consolidated Financial Statements, the Company is committed to paying associated future compliance monitor expenses.

On September 13, 2011, the Company settled the NewMarket Corporation civil complaint. The settlement agreement included the Company issuing a $15.0 million promissory note to NewMarket Corporation payable in three equal annual installments (carrying simple interest at 1% per annum), the last installment of which is scheduled to be paid in September, 2014.

The amounts related to pension obligations refer to the likely levels of funding of our United Kingdom defined benefit pension plan (the “Plan”). The Plan is closed to future service accrual, but has a large number of deferred and current pensioners. The Company expects its annual cash contribution to be $11.4 million in 2014-15, $8.1 million in 2016-17 and $5.8 million in 2018-19. It is not considered meaningful to predict amounts beyond 2020 since there are too many uncertainties including future returns on assets, pension increases and inflation which are evaluated when the plan undertakes an actuarial valuation every three years.



## Table of Contents

Remediation payments represent those cash flows that the Company is currently obligated to pay in respect of environmental remediation of current and former facilities. It does not include any discretionary remediation costs that the Company may choose to incur.

Severance payments represent those cash flows that the Company is currently obligated to pay in respect of severance costs associated with exit or disposal activities and post-employment benefits.

Operating lease commitments relate primarily to office space, motor vehicles and various items of computer and office equipment which are expected to be renewed and replaced in the normal course of business.

Raw material purchase obligations relate to certain long-term raw material contracts which stipulate fixed or minimum quantities to be purchased; fixed, minimum or variable cost provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

The estimated payments included in the table above reflect the variable interest charge on long-term debt obligations. Estimated commitment fees are also included and interest income is excluded.

Due to the uncertainty regarding the nature of tax audits, particularly those which are not currently underway, it is not meaningful to predict the outcome of obligations related to unrecognized tax benefits. Further disclosure is provided in Note 10 of the Notes to the Consolidated Financial Statements.

## Investing activities

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

## Financing activities

On December 14, 2011, we entered into a five-year revolving credit facility (“the facility”) which provides for borrowings of up to $100.0 million. The credit facility can be drawn down until it expires on December 14, 2016.

On August 28, 2013, we amended the facility to increase the amount available to the Company and certain subsidiaries of the Company from $100 million to $150 million retaining the term and conditions of the facility through to December 2016. In addition, an amendment allowed the Company to request an additional amount of $50 million to be committed by the lenders, of which $30 million was committed in the fourth quarter of 2013.

On December 24, 2012, the Company acquired 100% of the voting equity interests in Strata Control Services, Inc. for a consideration of approximately $60 million. Of this consideration,



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$5.0 million is payable in cash in 2015 contingent upon the achievement of certain pre-determined financial targets which we currently expect to be achieved. For accounting purposes only, we are required under GAAP, in accordance with our accounting policy, to discount this acquisition-related contingent consideration to its fair value of $4.6 million.

## Environmental Matters and Plant Closures

Under certain environmental laws the Company is responsible for the remediation of hazardous substances or wastes at currently or formerly owned or operated properties.

As most of our manufacturing operations have been conducted outside the U.S., we expect that liability pertaining to the investigation and remediation of contaminated properties is likely to be determined under non-U.S. law.

We evaluate costs for remediation, decontamination and demolition projects on a regular basis. Full provision is made for those costs to which we are committed under environmental laws amounting to $31.4 million at December 31, 2013. Remediation expenditure utilizing these provisions was $1.9 million, $2.1 million and $3.1 million in the years 2013, 2012 and 2011, respectively.

Total severance expenditure was $0.1 million, $0.6 million and $0.7 million in the years 2013, 2012 and 2011, respectively.



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## Item 7A 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 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.

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 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.

## Interest Rate Risk

The Company uses interest rate swaps to manage interest rate exposure. As at December 31, 2013 the Company had cash, cash equivalents and short-term investments of $86.8 million, no bank overdraft and long-term debt of $148.0 million (including current portion). Long-term debt comprises a revolving credit facility which provides for borrowings by us of up to $200.0 million and a $5.0 million promissory note to NewMarket Corporation. The credit facility carries an interest rate based on U.S. dollar LIBOR plus a margin of between 1.50% and 2.25% which is dependent on the Company’s ratio of net debt to EBITDA. Net debt and EBITDA are non-GAAP measures of liquidity defined in the credit facility. The promissory note carries simple interest at 1% per annum. At December 31, 2013, $142.0 million was drawn under the revolving credit facility. As management does not expect the credit facility to be drawn down in the long-term, the Company has not entered into interest rate swap agreements in relation to this.

On the basis that interest on $5.0 million of the $148.0 million long-term debt (including current portion) is fixed and that the Company would receive interest on the $86.8 million positive cash balances and short-term investments, then the interest payable on variable debt



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(excluding the margin) exceeds the interest receivable on positive cash balances and short-term investments. On a gross basis, assuming no additional interest on the cash balances and short-term investments, a hypothetical absolute change of 1% in U.S. base interest rates on the variable debt of $143.0 million for a one-year period would impact net income and cash flows by approximately $1.4 million before tax. On a net basis, assuming additional interest on the cash balances and short-term investments, a hypothetical absolute change of 1% in U.S. base interest rates for a one-year period would impact net income and cash flows by approximately $0.6 million before tax.

The above does not consider the effect of interest or exchange rate changes on overall activity nor management action to mitigate such changes.

## Exchange Rate Risk

The Company generates an element of its revenues and incurs some operating costs in currencies other than the U.S. dollar. The reporting currency of the Company is the U.S. dollar.

The Company evaluates the functional currency of each reporting unit according to the economic environment in which it operates. Several major subsidiaries of the Company operating outside of the U.S. have the U.S. dollar as their functional currency due to the nature of the markets in which they operate. In addition, the financial position and results of operations of some of our overseas subsidiaries are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements.

The primary foreign currencies in which we have exchange rate fluctuation exposure are the European Union euro, British pound sterling and Swiss franc. Changes in exchange rates between these foreign currencies and the U.S. dollar will affect the recorded levels of our assets and liabilities, to the extent that such figures reflect the inclusion of foreign assets and liabilities which are translated into U.S. dollars for presentation in our consolidated financial statements, as well as our results of operations.

The Company’s objective in managing the exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency exchange rate changes. Accordingly, the Company enters into various contracts that change in value as foreign currency exchange rates change to protect the U.S. dollar value of its existing foreign currency denominated assets, liabilities, commitments, and cash flows. The Company also uses foreign currency forward exchange contracts to offset a portion of the Company’s exposure to certain foreign currency denominated revenues so that gains and losses on these contracts offset changes in the U.S. dollar value of the related foreign currency denominated revenues. The objective of the hedging program is to reduce earnings and cash flow volatility related to changes in foreign currency exchange rates.

The trading of our Fuel Specialties and Performance Chemicals reporting segments is inherently naturally hedged and accordingly changes in exchange rates would not be material



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to our earnings or financial position. The cost base of our Octane Additives reporting segment and corporate costs, however, are largely denominated in British pound sterling. A 5% strengthening in the U.S. dollar against British pound sterling would increase reported operating income by approximately $2.6 million for a one-year period excluding the impact of any foreign currency forward exchange contracts.

Where a 5% strengthening of the U.S. dollar has been used as an illustration, a 5% weakening would be expected to have the opposite effect on operating income.

## Raw Material Cost Risk

We use a variety of raw materials, chemicals and energy in our manufacturing and blending processes. Many of the raw materials that we use are derived from petrochemical-based feedstocks which can be subject to periods of rapid and significant cost instability. These fluctuations in cost can be caused by political instability in oil producing nations and elsewhere, or other factors influencing global supply and demand of these materials, over which we have no or little control. We use long-term contracts (generally with fixed or formula-based costs) and advance bulk purchases to help ensure availability and continuity of supply, and to manage the risk of cost increases. We have entered into hedging arrangements for certain raw materials, but do not typically enter into hedging arrangements for all raw materials, chemicals or energy costs. Should the costs of raw materials, chemicals or energy increase, and should we not be able to pass on these cost increases to our customers, then operating margins and cash flows from operating activities would be adversely impacted. Should raw material costs increase significantly, then the Company’s need for working capital could similarly increase. Any of these risks could adversely impact our results of operations, financial position and cash flows.



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## Item 8

## Financial Statements and Supplementary Data

## Report of Independent Registered Public Accounting Firm

## To the Board of Directors and Stockholders of Innospec Inc.:

We have audited the accompanying consolidated balance sheets of Innospec Inc. and its subsidiaries (“Innospec”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income and accumulated other comprehensive loss, cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2013. We also have audited Innospec’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Innospec’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting” appearing in item 9A of the Form 10-K. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Innospec’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable



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assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innospec as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Innospec maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Innospec acquired Chemsil Silicones Inc. (“Chemsil”) and Chemtec Chemical Co. (“Chemtec”) on August 30, 2013, and acquired Bachman Services Inc., Specialty Intermediaries Inc., Bachman Production Specialties Inc. and Bachman Drilling & Production Specialties Inc. (collectively “Bachman”) on November 4, 2013, and management excluded from its assessment of the effectiveness of Innospec’s internal control over financial reporting as of December 31, 2013, Chemsil’s, Chemtec’s and Bachman’s internal control over financial reporting associated with total assets of $126.0 million and total revenues of $21.5 million included in the consolidated financial statements of Innospec as of and for the year ended December 31, 2013. Our audit of internal control over financial reporting of Innospec also excluded an evaluation of the internal control over financial reporting of Chemsil, Chemtec and Bachman.

## /s/ KPMG Audit Plc

Manchester, United Kingdom

February 13, 2014



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## CONSOLIDATED STATEMENTS OF INCOME (in millions, except share and per share data)

<table><tr><td rowspan="2"></td><td colspan="3">Years ended December 31</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales</td><td>$ 818.8</td><td>$ 776.4</td><td>$ 774.4</td></tr><tr><td>Cost of goods sold</td><td>(563.6)</td><td>(540.0)</td><td>(548.0)</td></tr><tr><td>Gross profit</td><td>255.2</td><td>236.4</td><td>226.4</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td></tr><tr><td>Selling, general and administrative</td><td>(141.9)</td><td>(119.0)</td><td>(158.3)</td></tr><tr><td>Research and development</td><td>(21.2)</td><td>(19.6)</td><td>(18.3)</td></tr><tr><td>Restructuring charge</td><td>(0.2)</td><td>(0.2)</td><td>(0.6)</td></tr><tr><td>Impairment of Octane Additives segment goodwill</td><td>(1.3)</td><td>(1.2)</td><td>(2.0)</td></tr><tr><td>Profit on disposal, net</td><td>0.0</td><td>0.1</td><td>0.0</td></tr><tr><td>Total operating expenses</td><td>(164.6)</td><td>(139.9)</td><td>(179.2)</td></tr><tr><td>Operating income</td><td>90.6</td><td>96.5</td><td>47.2</td></tr><tr><td>Other net income/(expense)</td><td>4.1</td><td>(2.0)</td><td>6.3</td></tr><tr><td>Interest expense</td><td>(2.3)</td><td>(1.8)</td><td>(3.9)</td></tr><tr><td>Interest income</td><td>0.4</td><td>0.6</td><td>0.6</td></tr><tr><td>Income before income taxes</td><td>92.8</td><td>93.3</td><td>50.2</td></tr><tr><td>Income taxes</td><td>(15.0)</td><td>(26.4)</td><td>(3.1)</td></tr><tr><td>Net income</td><td>$ 77.8</td><td>$ 66.9</td><td>$ 47.1</td></tr><tr><td>Earnings per share:</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 3.29</td><td>$ 2.89</td><td>$ 2.00</td></tr><tr><td>Diluted</td><td>$ 3.22</td><td>$ 2.81</td><td>$ 1.92</td></tr><tr><td>Weighted average shares outstanding (in thousands):</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>23,651</td><td>23,187</td><td>23,568</td></tr><tr><td>Diluted</td><td>24,156</td><td>23,850</td><td>24,520</td></tr><tr><td>Dividend declared per common share</td><td>$ 0.50</td><td>$ 2.00</td><td>$ 0.00</td></tr></table>

The accompanying notes are an integral part of these statements.



## Table of Contents

## CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions)

<table><tr><td>Total comprehensive income for the years ended December 31</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net income</td><td>$ 77.8</td><td>$ 66.9</td><td>$ 47.1</td></tr><tr><td>Changes in cumulative translation adjustment</td><td>1.2</td><td>7.2</td><td>(3.9)</td></tr><tr><td>Changes in unrealized gains/(losses) on derivative instruments, net of tax of $0.0 million, $0.0 million and $0.3 million, respectively</td><td>(0.1)</td><td>(0.1)</td><td>(0.7)</td></tr><tr><td>Deferred taxes (1)</td><td>0.0</td><td>0.0</td><td>(2.6)</td></tr><tr><td>Amortization of prior service credit, net of tax of $0.3 million, $0.3 million and $0.4 million, respectively</td><td>(1.0)</td><td>(1.0)</td><td>(0.9)</td></tr><tr><td>Amortization of actuarial net losses, net of tax of (1.4) million, (0.8) million and (0.7) million, respectively</td><td>4.8</td><td>2.4</td><td>2.0</td></tr><tr><td>Actuarial net (losses)/gains arising during the year, net of tax of $1.8 million, $17.8 million and (6.6) million, respectively</td><td>(6.7)</td><td>(58.5)</td><td>19.5</td></tr><tr><td>Total comprehensive income</td><td>$ 76.0</td><td>$ 16.9</td><td>$ 60.5</td></tr></table>

## ACCUMULATED OTHER COMPREHENSIVE LOSS (in millions)

<table><tr><td colspan="4">Accumulated other comprehensive loss for the years ended</td></tr><tr><td>December 31</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Cumulative translation adjustment</td><td>$ (33.7)</td><td>$ (34.9)</td><td>$ (42.1)</td></tr><tr><td>Unrealized gains on derivative instruments, net of tax of $0.0 million, $0.0 million and $0.0 million, respectively</td><td>0.0</td><td>0.1</td><td>0.2</td></tr><tr><td>Unrecognized actuarial net losses, net of tax of $36.9 million, $36.2 million and $18.9 million, respectively</td><td>(120.2)</td><td>(117.3)</td><td>(60.2)</td></tr><tr><td>Accumulated other comprehensive loss</td><td>$(153.9)</td><td>$ (152.1)</td><td>$(102.1)</td></tr></table>

(1) Impact on deferred taxes during the year ended December 31, 2011 of a change in the associated tax rate on the unrecognized actuarial net losses.

The accompanying notes are an integral part of these statements.



## Table of Contents

## CONSOLIDATED BALANCE SHEETS
( in millions, except share and per share data )

<table><tr><td rowspan="2">Assets</td><td colspan="2">At December 31</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Current assets:</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 80.2</td><td>$ 22.4</td></tr><tr><td>Short-term investments</td><td>6.6</td><td>5.1</td></tr><tr><td>Trade and other accounts receivable (less allowances of $2.0 and $1.9, respectively)</td><td>135.8</td><td>115.7</td></tr><tr><td>Inventories (less allowances of $9.5 and $8.9, respectively):</td><td></td><td></td></tr><tr><td>Finished goods</td><td>95.3</td><td>75.2</td></tr><tr><td>Work in progress</td><td>1.9</td><td>1.5</td></tr><tr><td>Raw materials</td><td>61.7</td><td>61.6</td></tr><tr><td>Total inventories</td><td>158.9</td><td>138.3</td></tr><tr><td>Current portion of deferred tax assets</td><td>8.7</td><td>11.0</td></tr><tr><td>Prepaid expenses</td><td>5.8</td><td>4.1</td></tr><tr><td>Prepaid income taxes</td><td>11.4</td><td>0.0</td></tr><tr><td>Total current assets</td><td>407.4</td><td>296.6</td></tr><tr><td>Property, plant and equipment</td><td>60.4</td><td>49.8</td></tr><tr><td>Goodwill</td><td>187.9</td><td>149.0</td></tr><tr><td>Other intangible assets</td><td>126.8</td><td>68.6</td></tr><tr><td>Deferred finance costs</td><td>1.8</td><td>1.3</td></tr><tr><td>Deferred tax assets, net of current portion</td><td>8.6</td><td>12.7</td></tr><tr><td>Other non-current assets</td><td>1.8</td><td>1.4</td></tr><tr><td>Total assets</td><td>$ 794.7</td><td>$ 579.4</td></tr><tr><td>Liabilities and Stockholders&#x27; Equity</td><td></td><td></td></tr><tr><td>Current liabilities:</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 63.3</td><td>$ 57.3</td></tr><tr><td>Accrued liabilities</td><td>73.5</td><td>72.1</td></tr><tr><td>Accrued income taxes</td><td>0.0</td><td>3.2</td></tr><tr><td>Current portion of long-term debt</td><td>5.3</td><td>5.0</td></tr><tr><td>Current portion of plant closure provisions</td><td>6.2</td><td>5.1</td></tr><tr><td>Current portion of unrecognized tax benefits</td><td>6.8</td><td>3.0</td></tr><tr><td>Current portion of deferred tax liabilities</td><td>0.2</td><td>0.2</td></tr><tr><td>Current portion of deferred income</td><td>0.3</td><td>1.4</td></tr><tr><td>Total current liabilities</td><td>155.6</td><td>147.3</td></tr><tr><td>Long-term debt, net of current portion</td><td>142.7</td><td>25.0</td></tr><tr><td>Plant closure provisions, net of current portion</td><td>26.2</td><td>25.3</td></tr><tr><td>Unrecognized tax benefits, net of current portion</td><td>6.2</td><td>9.8</td></tr><tr><td>Deferred tax liabilities, net of current portion</td><td>9.5</td><td>3.6</td></tr><tr><td>Pension liabilities</td><td>39.0</td><td>46.0</td></tr><tr><td>Acquisition-related contingent consideration</td><td>4.6</td><td>4.3</td></tr><tr><td>Other non-current liabilities</td><td>0.3</td><td>0.2</td></tr><tr><td>Deferred income, net of current portion</td><td>1.2</td><td>0.9</td></tr><tr><td>Stockholders&#x27; equity:</td><td></td><td></td></tr><tr><td>Common stock, $0.01 par value, authorized 40,000,000 shares, issued 29,554,500 shares</td><td>0.3</td><td>0.3</td></tr><tr><td>Additional paid-in capital</td><td>308.8</td><td>292.1</td></tr><tr><td>Treasury stock (5,207,947 and 6,222,076 shares at cost, respectively)</td><td>(73.3)</td><td>(85.0)</td></tr><tr><td>Retained earnings</td><td>327.5</td><td>261.7</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(153.9)</td><td>(152.1)</td></tr><tr><td>Total stockholders&#x27; equity</td><td>409.4</td><td>317.0</td></tr><tr><td>Total liabilities and stockholders&#x27; equity</td><td>$ 794.7</td><td>$ 579.4</td></tr></table>

The accompanying notes are an integral part of these statements.



## CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)

<table><tr><td rowspan="2">Cash Flows from Operating Activities</td><td colspan="4">Years ended December 31</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td></td></tr><tr><td>Net income</td><td>$ 77.8</td><td>$ 66.9</td><td>$ 47.1</td><td></td></tr><tr><td>Adjustments to reconcile net income to net cash provided by operating activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>20.4</td><td>11.5</td><td>14.4</td><td></td></tr><tr><td>Impairment of Octane Additives segment goodwill</td><td>1.3</td><td>1.2</td><td>2.0</td><td></td></tr><tr><td>Deferred taxes</td><td>5.8</td><td>12.1</td><td>(4.6)</td><td></td></tr><tr><td>Excess tax benefit from stock based payment arrangements</td><td>(3.8)</td><td>(2.2)</td><td>(1.1)</td><td></td></tr><tr><td>Profit on disposal of property, plant and equipment, net</td><td>0.0</td><td>(0.1)</td><td>0.0</td><td></td></tr><tr><td>Cash contributions to defined benefit pension plans</td><td>(11.0)</td><td>(9.4)</td><td>(9.5)</td><td></td></tr><tr><td>Non-cash expense of defined benefit pension plans</td><td>3.0</td><td>2.0</td><td>3.4</td><td></td></tr><tr><td>Stock option compensation</td><td>2.5</td><td>3.1</td><td>3.1</td><td></td></tr><tr><td>(Repayment)/issue of promissory note in civil complaint settlement</td><td>(5.0)</td><td>(5.0)</td><td>15.0</td><td></td></tr><tr><td>Non-cash issue of treasury stock in civil complaint settlement</td><td>0.0</td><td>0.0</td><td>5.0</td><td></td></tr><tr><td>Changes in assets and liabilities, net of effects of acquired and divested companies:</td><td></td><td></td><td></td><td></td></tr><tr><td>Trade and other accounts receivable</td><td>(1.4)</td><td>(14.1)</td><td>(15.3)</td><td></td></tr><tr><td>Inventories</td><td>(10.1)</td><td>(1.0)</td><td>(14.3)</td><td></td></tr><tr><td>Prepaid expenses</td><td>(0.5)</td><td>0.1</td><td>0.0</td><td></td></tr><tr><td>Accounts payable and accrued liabilities</td><td>(4.4)</td><td>(5.5)</td><td>(13.7)</td><td></td></tr><tr><td>Accrued income taxes</td><td>(14.7)</td><td>1.0</td><td>(4.1)</td><td></td></tr><tr><td>Plant closure provisions</td><td>1.9</td><td>1.8</td><td>1.1</td><td></td></tr><tr><td>Unrecognized tax benefits</td><td>0.2</td><td>0.2</td><td>4.0</td><td></td></tr><tr><td>Other non-current assets and liabilities</td><td>(0.7)</td><td>(1.3)</td><td>2.2</td><td></td></tr><tr><td>Net cash provided by/(used in) operating activities</td><td>61.3</td><td>61.3</td><td>34.7</td><td></td></tr><tr><td>Cash Flows from Investing Activities</td><td></td><td></td><td></td><td></td></tr><tr><td>Capital expenditures</td><td>(11.1)</td><td>(8.8)</td><td>(7.0)</td><td></td></tr><tr><td>Business combinations, net of cash acquired</td><td>(94.4)</td><td>(53.1)</td><td>0.0</td><td></td></tr><tr><td>Internally developed software and other costs</td><td>(9.4)</td><td>(8.5)</td><td>(3.1)</td><td></td></tr><tr><td>Proceeds on disposal of property, plant and equipment</td><td>0.1</td><td>0.2</td><td>0.0</td><td></td></tr><tr><td>Purchase of short-term investments</td><td>(7.0)</td><td>(5.0)</td><td>(5.0)</td><td></td></tr><tr><td>Sale of short-term investments</td><td>5.7</td><td>4.9</td><td>4.4</td><td></td></tr><tr><td>Net cash provided by/(used in) investing activities</td><td>(116.1)</td><td>(70.3)</td><td>(10.7)</td><td></td></tr><tr><td>Cash Flows from Financing Activities</td><td></td><td></td><td></td><td></td></tr><tr><td>Proceeds from revolving credit facility</td><td>145.0</td><td>18.0</td><td>51.0</td><td></td></tr><tr><td>Repayments of revolving credit facility</td><td>(23.0)</td><td>(18.0)</td><td>(38.0)</td><td></td></tr><tr><td>Repayment of term loans</td><td>(0.2)</td><td>0.0</td><td>(40.0)</td><td></td></tr><tr><td>Refinancing costs</td><td>(0.9)</td><td>0.0</td><td>(1.7)</td><td></td></tr><tr><td>Excess tax benefit from stock based payment arrangements</td><td>3.8</td><td>2.2</td><td>1.1</td><td></td></tr><tr><td>Dividend paid</td><td>(12.0)</td><td>(46.7)</td><td>0.0</td><td></td></tr><tr><td>Issue of treasury stock</td><td>3.8</td><td>1.2</td><td>0.7</td><td></td></tr><tr><td>Repurchase of common stock</td><td>(3.7)</td><td>(1.4)</td><td>(28.1)</td><td></td></tr><tr><td>Net cash provided by/(used in) financing activities</td><td>112.8</td><td>(44.7)</td><td>(55.0)</td><td></td></tr><tr><td>Effect of foreign currency exchange rate changes on cash</td><td>(0.2)</td><td>(0.1)</td><td>0.1</td><td></td></tr><tr><td>Net change in cash and cash equivalents</td><td>57.8</td><td>(53.8)</td><td>(30.9)</td><td></td></tr><tr><td>Cash and cash equivalents at beginning of year</td><td>22.4</td><td>76.2</td><td>107.1</td><td></td></tr><tr><td>Cash and cash equivalents at end of year</td><td>$ 80.2</td><td>$ 22.4</td><td>$ 76.2</td><td></td></tr></table>

Amortization of deferred finance costs of $0.4 million (2012 – $0.4 million, 2011 – $0.5 million) for the year are included in depreciation and amortization in the cash flow statement but in interest expense in the income statement. Cash payments/receipts in respect of income taxes and interest are disclosed in Note 10 and Note 11, respectively.

The accompanying notes are an integral part of these statements.



## CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in millions)

<table><tr><td rowspan="2"></td><td rowspan="2">Common Stock</td><td rowspan="2">Additional Paid-In Capital</td><td rowspan="2">Treasury Stock</td><td rowspan="2">Retained Earnings</td><td rowspan="2">Accumulated Other Comprehensive Loss</td><td rowspan="2">Total Stockholders&#x27; Equity</td></tr><tr></tr><tr><td>Balance at December 31, 2010</td><td>$ 0.3</td><td>$ 286.3</td><td>$ (64.8)</td><td>$ 210.5</td><td>$ (131.6)</td><td>$ 300.7</td></tr><tr><td>Revision of prior period (Note 2)</td><td></td><td></td><td></td><td>(16.1)</td><td>16.1</td><td>0.0</td></tr><tr><td>Revised beginning balance</td><td>0.3</td><td>286.3</td><td>(64.8)</td><td>194.4</td><td>(115.5)</td><td>300.7</td></tr><tr><td>Net income</td><td></td><td></td><td></td><td>47.1</td><td></td><td>47.1</td></tr><tr><td>Changes in cumulative translation adjustment</td><td></td><td></td><td></td><td></td><td>(3.9)</td><td>(3.9)</td></tr><tr><td>Changes in unrealized gains/(losses) on derivative instruments, net of tax</td><td></td><td></td><td></td><td></td><td>(0.7)</td><td>(0.7)</td></tr><tr><td>Treasury stock re-issued</td><td></td><td>0.9</td><td>4.8</td><td></td><td></td><td>5.7</td></tr><tr><td>Treasury stock repurchased</td><td></td><td></td><td>(28.1)</td><td></td><td></td><td>(28.1)</td></tr><tr><td>Stock option compensation</td><td></td><td>4.3</td><td></td><td></td><td></td><td>4.3</td></tr><tr><td>Deferred taxes (1)</td><td></td><td></td><td></td><td></td><td>(2.6)</td><td>(2.6)</td></tr><tr><td>Amortization of prior service credit, net of tax</td><td></td><td></td><td></td><td></td><td>(0.9)</td><td>(0.9)</td></tr><tr><td>Amortization of actuarial net losses, net of tax</td><td></td><td></td><td></td><td></td><td>2.0</td><td>2.0</td></tr><tr><td>Actuarial net gains arising during the year, net of tax</td><td></td><td></td><td></td><td></td><td>19.5</td><td>19.5</td></tr><tr><td>Balance at December 31, 2011</td><td>$ 0.3</td><td>$ 291.5</td><td>$ (88.1)</td><td>$ 241.5</td><td>$ (102.1)</td><td>$ 343.1</td></tr><tr><td>Net income</td><td></td><td></td><td></td><td>66.9</td><td></td><td>66.9</td></tr><tr><td>Dividend paid ($2.00 per share)</td><td></td><td></td><td></td><td>(46.7)</td><td></td><td>(46.7)</td></tr><tr><td>Changes in cumulative translation adjustment</td><td></td><td></td><td></td><td></td><td>7.2</td><td>7.2</td></tr><tr><td>Changes in unrealized gains/(losses) on derivative instruments, net of tax</td><td></td><td></td><td></td><td></td><td>(0.1)</td><td>(0.1)</td></tr><tr><td>Treasury stock re-issued</td><td></td><td>(3.5)</td><td>4.5</td><td></td><td></td><td>1.0</td></tr><tr><td>Treasury stock repurchased</td><td></td><td></td><td>(1.4)</td><td></td><td></td><td>(1.4)</td></tr><tr><td>Stock option compensation</td><td></td><td>2.1</td><td></td><td></td><td></td><td>2.1</td></tr><tr><td>Fair value of Strata acquisition-related contingently issuable shares</td><td></td><td></td><td>2.0</td><td></td><td></td><td>2.0</td></tr><tr><td>Amortization of prior service credit, net of tax</td><td></td><td></td><td></td><td></td><td>(1.0)</td><td>(1.0)</td></tr><tr><td>Amortization of actuarial net losses, net of tax</td><td></td><td></td><td></td><td></td><td>2.4</td><td>2.4</td></tr><tr><td>Actuarial net losses arising during the year, net of tax</td><td></td><td></td><td></td><td></td><td>(58.5)</td><td>(58.5)</td></tr><tr><td>Balance at December 31, 2012</td><td>$ 0.3</td><td>$ 292.1</td><td>$ (85.0)</td><td>$ 261.7</td><td>$ (152.1)</td><td>$ 317.0</td></tr><tr><td>Net income</td><td></td><td></td><td></td><td>77.8</td><td></td><td>77.8</td></tr><tr><td>Dividend paid ($0.50 per share)</td><td></td><td></td><td></td><td>(12.0)</td><td></td><td>(12.0)</td></tr><tr><td>Changes in cumulative translation adjustment</td><td></td><td></td><td></td><td></td><td>1.2</td><td>1.2</td></tr><tr><td>Changes in unrealized gains/(losses) on derivative instruments, net of tax</td><td></td><td></td><td></td><td></td><td>(0.1)</td><td>(0.1)</td></tr><tr><td>Treasury stock re-issued</td><td></td><td>(4.2)</td><td>8.8</td><td></td><td></td><td>4.6</td></tr><tr><td>Treasury stock repurchased</td><td></td><td></td><td>(3.7)</td><td></td><td></td><td>(3.7)</td></tr><tr><td>Excess tax benefit from stock based payment arrangements</td><td></td><td>3.8</td><td></td><td></td><td></td><td>3.8</td></tr><tr><td>Stock option compensation</td><td></td><td>2.5</td><td></td><td></td><td></td><td>2.5</td></tr><tr><td>Fair value of Bachman acquisition-related consideration</td><td></td><td>10.5</td><td>4.5</td><td></td><td></td><td>15.0</td></tr><tr><td>Fair value of Chemsil acquisition-related consideration</td><td></td><td>4.1</td><td>2.1</td><td></td><td></td><td>6.2</td></tr><tr><td>Amortization of prior service credit, net of tax</td><td></td><td></td><td></td><td></td><td>(1.0)</td><td>(1.0)</td></tr><tr><td>Amortization of actuarial net losses, net of</td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>



<table><tr><td>tax</td><td></td><td></td><td></td><td></td><td></td><td>4.8</td><td></td><td>4.8</td></tr><tr><td>Actuarial net losses arising during the year, net of tax</td><td></td><td></td><td></td><td></td><td></td><td>(6.7)</td><td></td><td>(6.7)</td></tr><tr><td>Balance at December 31, 2013</td><td>$ 0.3</td><td>$ 308.8</td><td>$ (73.3)</td><td>$ 327.5</td><td>$ (153.9)</td><td>$ 409.4</td><td></td><td></td></tr></table>

(1) Impact on deferred taxes of a change in the associated tax rate on the unrecognized actuarial net losses.

The accompanying notes are an integral part of these statements.



# NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

## Note 1. Nature of Operations

Innospec develops, manufactures, blends, markets and supplies fuel additives, personal care and fragrance products and other specialty chemicals. Our products are sold primarily to oil refineries, personal care and fragrance companies, and other chemical and industrial companies throughout the world. Our fuel additives help improve fuel efficiency, boost engine performance and reduce harmful emissions. Our oilfield specialties business supplies drilling and production chemicals which make exploration and production more cost-efficient, and more environmentally-friendly. Our other specialty chemicals provide effective technology-based solutions for our customers' processes or products focused in the Personal Care; Polymers; and Fragrance Ingredients markets. Our principal product lines and reportable segments are Fuel Specialties, Performance Chemicals and Octane Additives.

See Note 3 for financial information on the Company’s reportable segments.

## Note 2. Accounting Policies

## Revision of Prior Years

In connection with the preparation of the consolidated financial statements for the fourth quarter of 2013, the Company identified an error in the treatment of the amortization of actuarial net losses. The Company determined that the Market Related Value of Assets (“MRVA”) for Innospec Limited’s United Kingdom Pension Plan has been overstated each year since 2003. The market-related value of plan assets is either fair value if the employer does not defer gains or losses on plan assets, or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years, when the expected long-term rate of return is used to determine net periodic postretirement benefit cost. The overstated MRVA is used to determine the size of “the corridor” under GAAP which has resulted in an understatement of amortization of actuarial net losses within the pension expense each year since 2004. This error affects the non-cash pension expenses in the financial statements for the years ended 2012 and 2011 as reported in this 2013 Form 10-K. For quarterly reporting purposes the whole annual non-cash pension expense adjustment has been reflected in the fourth quarter for each year as the impact on the individual quarters is not considered to be material.

The Company has applied SEC Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 states that registrants must quantify the impact of correcting all misstatements, including both the carryover (iron curtain method) and reversing (rollover method) effects of prior-year misstatements on the current-year financial statements, and by evaluating the error measured under each method in light of quantitative and qualitative factors.

Under SAB No. 108, prior-year misstatements which, if corrected in the current year would be material to the current year, must be corrected by adjusting prior year financial statements, even though such correction previously was and continues to be immaterial to the prior-year financial statements. Correcting prior-year financial statements for such “immaterial errors” does not require previously filed reports to be amended.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In accordance with accounting guidance presented in ASC 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), the Company assessed the materiality of the error and concluded that it was not material to any of the Company’s previously issued financial statements taken as a whole.

Innospec has calculated the understatement of the non-cash pension expense, net of tax, to be $16.1 million as at 1 January 2011, $1.8 million in 2011 and $1.4 million in 2012. Adjustments have been made as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December 31, 2012</td></tr><tr><td>As Previously</td><td></td><td></td></tr><tr><td>(in millions)</td><td>Reported</td><td>Adjustment</td><td>As Revised</td></tr><tr><td>Selling, general and administrative expenses</td><td>$ (117.1)</td><td>$ (1.9)</td><td>$ (119.0)</td></tr><tr><td>Operating income</td><td>98.4</td><td>(1.9)</td><td>96.5</td></tr><tr><td>Income before income taxes</td><td>95.2</td><td>(1.9)</td><td>93.3</td></tr><tr><td>Income taxes</td><td>(26.9)</td><td>0.5</td><td>(26.4)</td></tr><tr><td>Net income</td><td>68.3</td><td>(1.4)</td><td>66.9</td></tr><tr><td>Retained earnings</td><td>281.0</td><td>(19.3)</td><td>261.7</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(171.4)</td><td>19.3</td><td>(152.1)</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="3">Year Ended December 31, 2011</td></tr><tr><td>As Previously</td><td></td><td></td></tr><tr><td>(in millions)</td><td>Reported</td><td>Adjustment</td><td>As Revised</td></tr><tr><td>Selling, general and administrative expenses</td><td>$ (155.9)</td><td>$ (2.4)</td><td>$ (158.3)</td></tr><tr><td>Operating income</td><td>49.6</td><td>(2.4)</td><td>47.2</td></tr><tr><td>Income before income taxes</td><td>52.6</td><td>(2.4)</td><td>50.2</td></tr><tr><td>Income taxes</td><td>(3.7)</td><td>0.6</td><td>(3.1)</td></tr><tr><td>Net income</td><td>48.9</td><td>(1.8)</td><td>47.1</td></tr><tr><td>Retained earnings</td><td>259.4</td><td>(17.9)</td><td>241.5</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(120.0)</td><td>17.9</td><td>(102.1)</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="3">As at January 1, 2011</td></tr><tr><td>As Previously</td><td></td><td></td></tr><tr><td>(in millions)</td><td>Reported</td><td>Adjustment</td><td>As Revised</td></tr><tr><td>Retained earnings</td><td>$ 210.5</td><td>$ (16.1)</td><td>$ 194.4</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(131.6)</td><td>16.1</td><td>(115.5)</td></tr></table>

Basis of preparation: The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and include all



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

subsidiaries of the Company where the Company has a controlling financial interest. All significant intercompany accounts and balances have been eliminated upon consolidation. All acquisitions are accounted for as purchases and the results of operations of the acquired businesses are included in the consolidated financial statements from the date of acquisition.

Use of estimates: The preparation of the consolidated financial statements, in accordance with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash equivalents: Investment securities with maturities of three months or less when purchased are considered to be cash equivalents.

Short-term investments: Investment securities with maturities of more than 3 months and less than 12 months when purchased are considered to be short-term investments.

Trade and other accounts receivable: The Company records trade and other accounts receivable at net realizable value and maintains allowances for customers not making required payments. The Company determines the adequacy of allowances by periodically evaluating each customer receivable considering our customer’s financial condition, credit history and current economic conditions.

Inventories: Inventories are stated at the lower of cost (FIFO method) or market value. Cost includes materials, labor and an appropriate proportion of plant overheads. The Company accrues volume discounts where it is probable that the required volume will be attained and the amount can be reasonably estimated. The discounts are recorded as a reduction in the cost of materials based on projected purchases over the period of the agreement. Inventories are adjusted for estimated obsolescence and written down to market value based on estimates of future demand and market conditions.

Property, plant and equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets using the straight-line method and is allocated between cost of goods sold and operating expenses. The cost of additions and improvements are capitalized. Maintenance and repairs are charged to expenses. When assets are sold or retired the associated cost and accumulated depreciation are removed from the consolidated financial statements and any related gain or loss is included in earnings. The estimated useful lives of the major classes of depreciable assets are as follows:

<table><tr><td>Buildings</td><td>7 to 25 years</td></tr><tr><td>Equipment</td><td>3 to 10 years</td></tr></table>

Goodwill and other intangible assets: Goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to at least annual impairment tests based on



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

projected post-tax cash flows discounted at the Company’s weighted average cost of capital. The annual measurement date for impairment testing of the goodwill relating to the Fuel Specialties and Performance Chemicals segments is December 31. At this date we performed annual impairment tests and concluded that there had been no impairment of goodwill in respect of those reporting segments. The Company capitalizes software development costs, including licenses, subsequent to the establishment of technological feasibility. Other intangible assets deemed to have finite lives, including software development costs and licenses, are amortized using the straight-line method over their estimated useful lives and tested for any potential impairment when events occur or circumstances change which suggest that an impairment may have occurred.

Deferred finance costs: The costs relating to debt financing are capitalized, separately disclosed in the consolidated balance sheets and amortized using the effective interest method over the expected life of the debt financing facility.

Impairment of long-lived assets: The Company reviews the carrying value of its long-lived assets, including buildings and equipment, whenever changes in circumstances suggest that the carrying values may be impaired. In order to facilitate this test the Company groups together assets at the lowest possible level for which cash flow information is available. Undiscounted future cash flows expected to result from the assets are compared with the carrying value of the assets and if they are lower an impairment loss may be recognized. The amount of the impairment loss is the difference between the fair value and the carrying value of the assets. Fair values are determined using post-tax cash flows discounted at the Company’s weighted average cost of capital.

Derivative instruments: The Company uses various derivative instruments including forward currency contracts, options, interest rate swaps and commodity swaps to manage certain exposures. These instruments are entered into under the Company’s corporate risk management policy to minimize exposure and are not for speculative trading purposes. The Company recognizes all derivatives as either non-current assets or liabilities in the consolidated balance sheet and measures those instruments at fair value. Changes in the fair value of derivatives that are not designated as hedges, or do not meet the requirements for hedge accounting, are recognized in earnings. Derivatives which are designated as hedges are tested for effectiveness on a quarterly basis, and marked to market. The ineffective portion of the derivative’s change in value is recognized in earnings. The effective portion is recognized in other comprehensive income until the hedged item is recognized in earnings.

Environmental compliance and remediation: Environmental compliance costs include ongoing maintenance, monitoring and similar costs. We recognize environmental liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated. Such accruals are adjusted as further information develops or circumstances change. Costs of future obligations are discounted to their present values using the Company’s credit-adjusted risk-free rate.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Acquisition-related contingent and deferred consideration: Deferred consideration payable in cash is discounted to its fair value. Where deferred consideration is contingent upon pre-determined financial targets, an estimate of the fair value of the likely consideration payable is made. This contingent deferred consideration is re-assessed annually and a corresponding adjustment is recognized in operating income, and the associated liability, to reflect the passage of time accretion expense and any revisions to the amount or timing of the initial measurement.

Revenue recognition: The Company supplies products to customers from its various manufacturing sites, and in some instances from containers held on customer sites, under a variety of standard shipping terms and conditions. In each case revenue is recognized when legal title, which is defined and generally accepted in the standard terms and conditions, and risk of loss transfers between the Company and the customer. Provisions for sales discounts and rebates to customers are based upon the terms of sales contracts and are recorded in the same period as the related sales as a deduction from revenue. The Company estimates the provision for sales discounts and rebates based on the terms of each agreement at the time of shipping.

Components of net sales: All amounts billed to customers relating to shipping and handling are classified as net sales. Shipping and handling costs incurred by the Company are classified as cost of goods sold.

Components of cost of goods sold: Cost of goods sold is comprised of raw material costs including inbound freight, duty and non-recoverable taxes, inbound handling costs associated with the receipt of raw materials, packaging materials, manufacturing costs including labor costs, maintenance and utility costs, plant and engineering overheads, amortization expense for certain other intangible assets, warehousing and outbound shipping costs and handling costs. Inventory losses and provisions and the costs of customer claims are also recognized in the cost of goods line item.

Components of selling, general and administrative expenses: Selling expenses comprise the costs of the direct sales force, and the sales management and customer service departments required to support them. It also comprises commission charges, the costs of sales conferences and trade shows, the cost of advertising and promotions, amortization expense for certain other intangible assets, and the cost of bad and doubtful debts. General and administrative expenses comprise the cost of support functions including accounting, human resources, information technology and the cost of group functions including corporate management, finance, tax, treasury, investor relations and legal departments. Provision of management’s best estimate of legal and settlement costs for litigation in which the Company is involved is made and reported in the administrative expense line item.

Research and development expenses: Research, development and testing costs are expensed to the income statement as incurred.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Foreign currencies: The Company’s policy is that foreign exchange differences arising on the translation of the balance sheets of entities that have functional currencies other than the U.S. dollar are taken to a separate equity reserve, the cumulative translation adjustment. In entities where the U.S. dollar is the functional currency no gains or losses on translation occur, and gains or losses on monetary assets relating to currencies other than the U.S. dollar are taken to the income statement in other net income/(expense). Other foreign exchange gains or losses are also included in other net income/(expense) in the income statement.

Share based compensation plans: The Company accounts for employee stock options and stock equivalent units under the fair value method. Stock options are fair valued at the grant date and the fair value is recognized straight-line over the vesting period of the option. Stock equivalent units are fair valued at each balance sheet date and the fair value is spread over the remaining vesting period of the unit.

Pension plans and other post-employment benefits: The Company recognizes the funded status of defined benefit post-retirement plans on the consolidated balance sheets and changes in the funded status in comprehensive income. The measurement date of the plan’s funded status is the same as the Company’s fiscal year-end. Prior service costs and credits and actuarial gains and losses are amortized over the average remaining life expectancy of the inactive participants using the corridor method.

Income taxes: The Company provides for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the relevant tax bases of the assets and liabilities. When appropriate, the Company evaluates the need for a valuation allowance to reduce deferred tax assets. The Company recognizes future tax benefits to the extent that realization of such benefits is more likely than not. The effect on deferred taxes of a change in tax rates is recognized in the period that includes the enactment date. Income tax positions must meet a more likely than not recognition criteria to be recognized. The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of income taxes in our consolidated statements of income.

## Note 3. Segmental Reporting and Geographical Area Data

Innopsec divides its business into three segments for management and reporting purposes: Fuel Specialties, Performance Chemicals and Octane Additives. The Fuel Specialties and Performance Chemicals segments operate in markets where we actively seek growth opportunities although their ultimate customers are different. The Octane Additives segment is generally characterized by volatile and declining demand.



## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In 2013, the Company had a significant customer in the Fuel Specialties segment, Royal Dutch Shell plc and its affiliates (“Shell”), which accounted for $83.1 million (10%) of our net group sales. In 2012 and 2011, Shell accounted for $82.9 million (11%) and $78.7 million (10%) of our net group sales, respectively.

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

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales:</td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$567.4</td><td>$527.2</td><td>$521.2</td></tr><tr><td>Performance Chemicals</td><td>192.4</td><td>179.6</td><td>177.0</td></tr><tr><td>Octane Additives</td><td>59.0</td><td>69.6</td><td>76.2</td></tr><tr><td></td><td>$818.8</td><td>$776.4</td><td>$774.4</td></tr><tr><td>Gross profit:</td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$181.1</td><td>$158.7</td><td>$149.3</td></tr><tr><td>Performance Chemicals</td><td>46.3</td><td>43.8</td><td>40.6</td></tr><tr><td>Octane Additives</td><td>27.8</td><td>33.9</td><td>36.5</td></tr><tr><td></td><td>$255.2</td><td>$236.4</td><td>$226.4</td></tr><tr><td>Operating income:</td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$ 92.7</td><td>$ 87.6</td><td>$ 81.7</td></tr><tr><td>Performance Chemicals</td><td>23.6</td><td>24.3</td><td>22.6</td></tr><tr><td>Octane Additives</td><td>21.5</td><td>26.0</td><td>(22.4)</td></tr><tr><td>Pension credit/(charge)</td><td>(2.3)</td><td>(1.6)</td><td>(2.9)</td></tr><tr><td>Corporate costs</td><td>(43.4)</td><td>(38.5)</td><td>(29.2)</td></tr><tr><td>Restructuring charge</td><td>(0.2)</td><td>(0.2)</td><td>(0.6)</td></tr><tr><td>Impairment of Octane Additives segment goodwill</td><td>(1.3)</td><td>(1.2)</td><td>(2.0)</td></tr><tr><td>Profit on disposal, net</td><td>0.0</td><td>0.1</td><td>0.0</td></tr><tr><td>Total operating income</td><td>$ 90.6</td><td>$ 96.5</td><td>$ 47.2</td></tr><tr><td>Identifiable assets at year end:</td><td></td><td></td><td></td></tr><tr><td>Fuel Specialties</td><td>$446.4</td><td>$356.6</td><td>$281.5</td></tr><tr><td>Performance Chemicals</td><td>176.8</td><td>113.4</td><td>106.7</td></tr><tr><td>Octane Additives</td><td>42.0</td><td>48.9</td><td>51.5</td></tr><tr><td>Corporate</td><td>128.8</td><td>60.5</td><td>129.1</td></tr><tr><td></td><td>$794.0</td><td>$579.4</td><td>$568.8</td></tr></table>

The pension charge relates to the United Kingdom defined benefit pension plan which is closed to future service accrual. The charges related to our other much smaller pension arrangements in the U.S. and overseas are included in the segment and income statement captions consistent with the related employees' costs.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company includes within the corporate costs line item the costs of:

• managing the Group as a company with securities listed on the NASDAQ and registered with the SEC;

- the President/CEO’s office, group finance, group human resources, group legal and compliance counsel, and investor relations;

• running the corporate offices in the U.S. and Europe;

- the corporate development function since they do not relate to the current trading activities of our other reporting segments; and

• the corporate share of the information technology, accounting and human resources departments.

Sales by geographical area are reported by source (where the transactions originate) and by destination (where the final sales to customers are made). Intercompany sales are priced to recover cost plus an appropriate mark-up for profit and are eliminated in the consolidated financial statements.

Identifiable assets are those directly associated with the operations of the geographical area.

Goodwill has not been allocated by geographical location on the grounds that it would be impracticable to do so.

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales by source:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$276.1</td><td>$ 274.1</td><td>$ 265.6</td></tr><tr><td>United Kingdom</td><td>502.4</td><td>475.1</td><td>482.8</td></tr><tr><td>Rest of Europe</td><td>129.1</td><td>142.8</td><td>151.7</td></tr><tr><td>Other</td><td>0.2</td><td>0.5</td><td>0.9</td></tr><tr><td>Sales between areas</td><td>(89.0)</td><td>(116.1)</td><td>(126.6)</td></tr><tr><td></td><td>$818.8</td><td>$ 776.4</td><td>$ 774.4</td></tr><tr><td>Net sales by destination:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$278.7</td><td>$ 272.4</td><td>$ 248.2</td></tr><tr><td>United Kingdom</td><td>30.0</td><td>38.8</td><td>48.5</td></tr><tr><td>Rest of Europe</td><td>325.5</td><td>331.0</td><td>304.2</td></tr><tr><td>Other</td><td>184.6</td><td>134.2</td><td>173.5</td></tr><tr><td></td><td>$818.8</td><td>$ 776.4</td><td>$ 774.4</td></tr></table>



## Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Income before income taxes:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 10.0</td><td>$ 5.6</td><td>$ (42.6)</td></tr><tr><td>United Kingdom</td><td>43.7</td><td>36.3</td><td>36.6</td></tr><tr><td>Rest of Europe</td><td>40.4</td><td>52.6</td><td>58.2</td></tr><tr><td>Impairment of Octane Additives segment goodwill</td><td>(1.3)</td><td>(1.2)</td><td>(2.0)</td></tr><tr><td></td><td>$ 92.8</td><td>$ 93.3</td><td>$ 50.2</td></tr><tr><td>Long-lived assets at year end:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$148.2</td><td>$ 31.5</td><td>$ 22.0</td></tr><tr><td>United Kingdom</td><td>29.4</td><td>28.7</td><td>32.4</td></tr><tr><td>Rest of Europe</td><td>11.5</td><td>11.5</td><td>10.9</td></tr><tr><td></td><td>$189.1</td><td>$ 71.7</td><td>$ 65.3</td></tr><tr><td>Identifiable assets at year end:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$291.0</td><td>$174.1</td><td>$123.2</td></tr><tr><td>United Kingdom</td><td>261.5</td><td>192.1</td><td>253.8</td></tr><tr><td>Rest of Europe</td><td>53.2</td><td>63.8</td><td>49.8</td></tr><tr><td>Other</td><td>0.4</td><td>0.4</td><td>0.5</td></tr><tr><td>Goodwill</td><td>187.9</td><td>149.0</td><td>141.5</td></tr><tr><td></td><td>$794.0</td><td>$579.4</td><td>$568.8</td></tr></table>

## Note 4. Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the effect of options that are dilutive and outstanding during the period. Per share amounts are computed as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Numerator (in millions):</td><td></td><td></td><td></td></tr><tr><td>Net income available to common stockholders</td><td>$ 77.8</td><td>$ 66.9</td><td>$ 47.1</td></tr><tr><td>Denominator (in thousands):</td><td></td><td></td><td></td></tr><tr><td>Weighted average common shares outstanding</td><td>23,651</td><td>23,187</td><td>23,568</td></tr><tr><td>Dilutive effect of stock options and awards</td><td>505</td><td>663</td><td>952</td></tr><tr><td>Denominator for diluted earnings per share</td><td>24,156</td><td>23,850</td><td>24,520</td></tr><tr><td>Net income per share, basic:</td><td>$ 3.29</td><td>$ 2.89</td><td>$ 2.00</td></tr><tr><td>Net income per share, diluted:</td><td>$ 3.22</td><td>$ 2.81</td><td>$ 1.92</td></tr></table>

In 2013, 2012 and 2011 the average number of anti-dilutive options excluded from the calculation of diluted earnings per share were nil, 1,380 and 690 respectively.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

## Note 5. Property, Plant and Equipment

Property, plant and equipment consists of the following:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Land</td><td>$ 7.5</td><td>$ 7.2</td></tr><tr><td>Buildings</td><td>10.8</td><td>6.5</td></tr><tr><td>Equipment</td><td>152.9</td><td>129.0</td></tr><tr><td>Work in progress</td><td>3.9</td><td>3.5</td></tr><tr><td></td><td>175.1</td><td>146.2</td></tr><tr><td>Less accumulated depreciation</td><td>(114.7)</td><td>(96.4)</td></tr><tr><td></td><td>$ 60.4</td><td>$ 49.8</td></tr></table>

Of the total net book value of equipment at December 31, 2013 and 2012 no amounts are in respect of assets held under capital leases.

Depreciation charges were $8.9 million, $7.0 million and $9.2 million in 2013, 2012 and 2011, respectively.

The estimated additional cost to complete work in progress is $2.2 million (2012 – $2.7 million).



## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

## Note 6. Goodwill

The following table analyzes goodwill for 2013 and 2012.

<table><tr><td rowspan="2">(in millions)</td><td rowspan="2">Fuel Specialties</td><td colspan="2">Performance</td><td rowspan="2">Octane Additives</td><td rowspan="2">Total</td></tr><tr><td>Chemicals</td><td></td></tr><tr><td>At January 1, 2012</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Gross cost (1)</td><td>$ 108.8</td><td>$ 30.1</td><td>$ 236.6</td><td>$ 375.5</td><td></td></tr><tr><td>Accumulated impairment losses</td><td>0.0</td><td>0.0</td><td>(234.0)</td><td>(234.0)</td><td></td></tr><tr><td>Net book amount</td><td>108.8</td><td>30.1</td><td>2.6</td><td>141.5</td><td></td></tr><tr><td>Exchange effect</td><td>0.1</td><td>0.0</td><td>(0.1)</td><td>0.0</td><td></td></tr><tr><td>Acquisitions</td><td>8.7</td><td>0.0</td><td>0.0</td><td>8.7</td><td></td></tr><tr><td>Impairment losses</td><td>0.0</td><td>0.0</td><td>(1.2)</td><td>(1.2)</td><td></td></tr><tr><td>At December 31, 2012</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Gross cost (1)</td><td>117.6</td><td>30.1</td><td>236.5</td><td>384.2</td><td></td></tr><tr><td>Accumulated impairment losses</td><td>0.0</td><td>0.0</td><td>(235.2)</td><td>(235.2)</td><td></td></tr><tr><td>Net book amount</td><td>117.6</td><td>30.1</td><td>1.3</td><td>149.0</td><td></td></tr><tr><td>Exchange effect</td><td>0.0</td><td>0.0</td><td>0.0</td><td>0.0</td><td></td></tr><tr><td>Acquisitions</td><td>22.9</td><td>16.7</td><td>0.0</td><td>39.6</td><td></td></tr><tr><td>Adjustments to purchase price allocation</td><td>0.6</td><td>0.0</td><td>0.0</td><td>0.6</td><td></td></tr><tr><td>Impairment losses</td><td>0.0</td><td>0.0</td><td>(1.3)</td><td>(1.3)</td><td></td></tr><tr><td>At December 31, 2013</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Gross cost (1)</td><td>141.1</td><td>46.8</td><td>236.5</td><td>424.4</td><td></td></tr><tr><td>Accumulated impairment losses</td><td>0.0</td><td>0.0</td><td>(236.5)</td><td>(236.5)</td><td></td></tr><tr><td>Net book amount</td><td>$ 141.1</td><td>$ 46.8</td><td>$ 0.0</td><td>$ 187.9</td><td></td></tr></table>

(1) Gross cost is net of $8.7 million, $0.3 million and $289.5 million of historical accumulated amortization in respect of the Fuel Specialties, Performance Chemicals and Octane Additives reporting segments, respectively.

The Company’s reporting units, the level at which goodwill is tested for impairment, are consistent with the reportable segments: Fuel Specialties, Performance Chemicals and Octane Additives. The components in each segment (including products, markets and competitors) have similar economic characteristics and the segments, therefore, reflect the lowest level at which operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company.

The Company tests goodwill annually for impairment, or between years if events occur or circumstances change which suggests impairment may have occurred. At December 31, 2013, the fair value of our Fuel Specialties and Performance Chemicals segments substantially exceeds the carrying value.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

To determine the fair value of each of our segments we utilize a discounted cash flow methodology based on the forecasted future after-tax cash flows from operations for each since we believe this provides the best approximation of fair value. This methodology requires us to make assumptions and estimates including those in respect of future revenue growth and gross margins, which are based upon our long range plans, and the Company’s weighted average cost of capital. Our long range plans are regularly updated as part of our planning processes and are reviewed and approved by management and our Board of Directors. We assume terminal values for the Fuel Specialties and Performance Chemicals reporting units which are added to the present value of the relevant forecasted future cash flows. We assume no terminal value for the Octane Additives reporting unit beyond its estimated future life. The discounted cash flow methodology does not assume a control premium. We use a discount rate equivalent to the Company’s weighted average cost of capital which is estimated by reference to the overall after-tax rate of return required by equity and debt market participants in the Company. We assign assets and liabilities, including deferred taxes and goodwill, to our reporting units if the asset or liability relates to the operations of that reporting unit and is included in determining the fair value of the reporting unit. Cash and debt obligations are excluded from the carrying value of our reporting units.

In 2013 some of the assumptions and estimates underpinning our discounted cash flows were revised as part of our planning processes although the methodology was unchanged. The most significant revisions were that the Company’s weighted average cost of capital was changed to reflect the changing proportion of debt to equity funding of the Company.

The Company elected to perform its annual tests in respect of Fuel Specialties and Performance Chemicals goodwill as at December 31 each year. At December 31, 2013 we had $141.1 million and $46.8 million of goodwill relating to our Fuel Specialties and Performance Chemicals segments, respectively. At this date we performed annual impairment tests and concluded that there had been no impairment of goodwill in respect of those reporting segments.

As a result of the Octane Additives impairment tests performed during 2013, 2012 and 2011 impairment charges of $1.3 million, $1.2 million and $2.0 million, respectively, have been recognized. These charges are non-cash in nature and have no impact on taxation. At December 31, 2013 to the goodwill in the Octane Additives segment was fully impaired. Remaining sales are concentrated around a relatively small number of customers with a risk that future demand could dramatically decline.

We believe that the assumptions used in our annual and quarterly impairment tests are reasonable, but that they are judgmental, and variations in any of the assumptions may result in materially different calculations of impairment charges, if any.

## The Bachman Group Companies Acquisition

On November 4, 2013, the Company acquired 100% of the voting equity interests in Bachman Services, Inc., Specialty Intermediates, Inc., Bachman Production Specialties, Inc. and



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Bachman Drilling & Production Specialties, Inc. (collectively “Bachman”). Bachman provide chemicals and services to the oil and gas industry and are based in Oklahoma City, Oklahoma. We purchased Bachman for a cash consideration of $45.8 million and by the issuance of 319,953 shares of unregistered Innospec Inc. common stock to the previous owners with a fair value of approximately $15 million, based on the Innospec share price on the closing date. We acquired the businesses in order to move us towards critical mass, and bring both good technology and market positioning in the oilfield specialties sector which forms part of our Fuel Specialties segment.

Included in the consolidated income statement of the Company since the acquisition date, are the following revenue and earnings for Bachman combined:

<table><tr><td>(in millions)</td><td>Bachman</td></tr><tr><td>Net sales</td><td>$ 9.7</td></tr><tr><td>Net income</td><td>$ 0.3</td></tr></table>

The following table summarizes the calculations of the total purchase price and the estimated allocation of the purchase price to the assets acquired and liabilities assumed for Bachman. The purchase price allocation is not yet complete as we are in the process of finalising the valuation of the assets acquired. Final determination of the fair values may result in adjustments to the amounts presented below:

<table><tr><td>(in millions)</td><td>Bachman</td></tr><tr><td>Other intangible assets</td><td>$ 25.9</td></tr><tr><td>Goodwill</td><td>22.9</td></tr><tr><td>Deferred tax on intangibles</td><td>(7.6)</td></tr><tr><td>Other net assets acquired, excluding cash of $2.0m</td><td>17.6</td></tr><tr><td>Purchase price, net of cash acquired</td><td>$ 58.8</td></tr></table>

Bachman, and the associated goodwill, are included within our Fuel Specialties segment for management and reporting purposes (see Note 7 for further information on the other intangible assets).

## Chemsil and Chemtec Acquisitions

On August 30, 2013, the Company acquired 100% of the voting equity interests in Chemsil Silicones, Inc. (“Chemsil”) and Chemtec Chemical Co. (“Chemtec”), both of which are based at Chatsworth in Los Angeles, California. Chemsil develops and markets silicone-based formulations to the personal care industry and Chemtec distributes a wide range of personal care ingredients. We acquired these businesses in order to add to both the technology base and the geographical footprint of our Personal Care business within our Performance Chemicals segment.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The purchase price for Chemsil and Chemtec, net of cash acquired, comprised $51.2 million in cash and $6.2 million of Innospec Inc. common stock transferred to the previous owner on the acquisition date.

Included in the consolidated income statement of the Company since the acquisition date, are the following revenue and earnings for Chemsil and Chemtec combined:

<table><tr><td></td><td>Chemsil & Chemtec</td></tr><tr><td>(in millions)</td><td>$ 11.8</td></tr><tr><td>Net sales</td><td>$ 1.0</td></tr><tr><td>Net income</td><td></td></tr></table>

The following table summarizes the calculations of the total purchase price and the allocation of the purchase price to the assets acquired and liabilities assumed for Chemsil and Chemtec, which is now complete:

<table><tr><td></td><td>Chemsil & Chemtec</td></tr><tr><td>(in millions)</td><td>$ 34.0</td></tr><tr><td>Other intangible assets</td><td>16.7</td></tr><tr><td>Goodwill</td><td>6.7</td></tr><tr><td>Other net assets, excluding cash of $1.3m</td><td>$ 57.4</td></tr><tr><td>Purchase price, net of cash acquired</td><td>$ 57.4</td></tr></table>

Chemsil and Chemtec, and the associated goodwill, are included within our Performance Chemicals segment for management and reporting purposes (see Note 7 for further information on the other intangible assets).

## Supplemental unaudited pro forma information

For illustrative purposes only pro forma information of the enlarged group is provided below but is not necessarily indicative of what the financial position or results of operations would have been had the acquisitions of Strata, Chemsil, Chemtec and Bachman been completed as of January 1, 2012. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position of operating results of the enlarged group.

<table><tr><td>(in millions, except per share data)</td><td>2013</td><td>2012</td></tr><tr><td>Net sales</td><td>$913.1</td><td>$904.6</td></tr><tr><td>Net income</td><td>$ 85.1</td><td>$ 77.2</td></tr><tr><td>Earnings per share - basic</td><td>$ 3.42</td><td>$ 3.33</td></tr><tr><td>- diluted</td><td>$ 3.36</td><td>$ 3.24</td></tr></table>



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Adjustments to the unaudited pro forma financial information includes amortization in respect of the acquired other intangible assets for all acquisitions, and the acquisition-related costs incurred in respect of all these transactions.

## Adjustments to Strata purchase price allocation

During 2013, we finalized our calculations of the fair values of assets acquired and liabilities assumed in the acquisition of Strata, resulting in a $0.6 million reduction in other net assets acquired and a corresponding increase in goodwill.

## Note 7. Other Intangible Assets

Other intangible assets comprise the following:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Gross cost:</td><td></td><td></td></tr><tr><td>- Product rights</td><td>$ 34.0</td><td>$ 0.0</td></tr><tr><td>- Brand names</td><td>2.9</td><td>0.0</td></tr><tr><td>- Technology</td><td>33.9</td><td>25.4</td></tr><tr><td>- Customer relationships</td><td>58.7</td><td>44.2</td></tr><tr><td>- Patents</td><td>2.9</td><td>2.9</td></tr><tr><td>- Internally developed software and other costs</td><td>19.5</td><td>10.1</td></tr><tr><td>- Non-compete agreements</td><td>1.5</td><td>1.5</td></tr><tr><td>- Marketing related</td><td>22.1</td><td>22.1</td></tr><tr><td></td><td>175.5</td><td>106.2</td></tr><tr><td>Accumulated amortization:</td><td></td><td></td></tr><tr><td>- Product rights</td><td>(1.3)</td><td>0.0</td></tr><tr><td>- Brand names</td><td>(0.1)</td><td>0.0</td></tr><tr><td>- Technology</td><td>(7.9)</td><td>(6.0)</td></tr><tr><td>- Customer relationships</td><td>(16.8)</td><td>(12.7)</td></tr><tr><td>- Patents</td><td>(2.6)</td><td>(2.3)</td></tr><tr><td>- Internally developed software and other costs</td><td>(1.0)</td><td>0.0</td></tr><tr><td>- Non-compete agreements</td><td>(0.7)</td><td>0.0</td></tr><tr><td>- Marketing related</td><td>(18.3)</td><td>(16.6)</td></tr><tr><td></td><td>(48.7)</td><td>(37.6)</td></tr><tr><td></td><td>$126.8</td><td>$ 68.6</td></tr></table>

## Product rights

Following the acquisition of Chemsil on August 30, 2013, the Company has recognized an intangible asset of $34.0 million in respect of Chemsil’s product rights portfolio. This asset has an expected life of 9 years and is being amortized on a straight-line basis over this period.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

An amortization expense of $1.3 million was recognized in 2013 (2012 – $0.0 million) in cost of goods sold. No residual value is anticipated.

## Brand names

Following the acquisition of Bachman on November 4, 2013, the Company recognized an intangible asset of $2.9 million in respect of Bachman’s brand names. This asset has an expected life of 5 years and is being amortized on a straight-line basis over this period. An amortization expense of $0.1 million was recognized in 2013 (2012 – $0.0 million) in selling, general and administrative expenses. No residual value is anticipated.

## Technology

Following the acquisition of Bachman on November 4, 2013, the Company recognized an intangible asset of $8.5 million in respect of Bachman’s core chemistry know-how of oilfield chemicals. This asset has an expected life of 15 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.

Following the acquisition of Strata on December 24, 2012, the Company recognized an intangible asset of $18.3 million in respect of technological know-how of the mixing and manufacturing process, patents which protect the technology and the associated product branding. This asset has an expected life of 16.5 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.

Following the acquisition of the remaining 50% of Innospec Fuel Specialties LLC on July 8, 2004, the Company recognized an intangible asset of $2.3 million in respect of various technological approvals the business has received from certain military and civilian authorities. The approvals act as a barrier to entry to any potential competitor in the market who would wish to supply these products. This asset has an expected life of 10 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.

An intangible asset of $4.8 million was recognized in respect of a number of specialized manufacturing processes carried out by Innospec Widnes Limited following the acquisition of that entity in August 2004. This asset has an expected life of 10 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.

An amortization expense of $1.9 million was recognized in 2013 (2012 – $0.7 million) in cost of goods sold.

## Customer relationships

Following the acquisition of Bachman on November 4, 2013, the Company recognized an intangible asset of $14.5 million in respect of Bachman’s long-term customer relationships.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

This asset has a weighted average expected life of 14.5 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.

Following the acquisition of Strata on December 24, 2012, the Company recognized an intangible asset of $28.2 million in respect of long-term customer relationships. This asset has an expected life of 11.5 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.

Following the acquisition of Finetex (now merged into Innospec Active Chemicals LLC) in January 2005, the Company recognized an intangible asset totaling $7.1 million, $4.2 million of which was in relation to customer lists acquired. This asset has an expected life of 13 years and is being amortized on a straight-line basis over this period. No residual value is anticipated.

Intangible assets were recognized in 2004 in respect of both the Innospec Fuel Specialties LLC ($9.0 million) and Innospec Widnes Limited ($2.8 million) acquisitions, and relate to ongoing customer relationships. These assets have an expected life of 10 years and are being amortized on a straight-line basis over this period. No residual value is anticipated.

An amortization expense of $4.1 million was recognized in 2013 (2012 – $1.5 million) in selling, general and administrative expenses.

## Patents

Following the acquisition of Finetex, the Company recognized an intangible asset of $2.9 million in respect of patents and trademarks. These have an expected life of 10 years and are being amortized on a straight-line basis over this period. No residual value is anticipated. An amortization expense of $0.3 million was recognized in 2013 (2012 – $0.3 million) in cost of goods sold.

## Internally developed software and other costs

We are continuing with the implementation of our new, company-wide, information system platform, following the successful deployment at the majority of our U.S. sites in the third quarter of 2013. At December 31, 2013 we had capitalized $19.5 million (2012 – $10.1 million) in relation to this internally developed software. This asset has an expected life of 5 years and is being amortized on a straight-line basis over this period. No residual value is anticipated. An amortization expense of $1.0 million was recognized in 2013 (2012 – $0.0 million) in selling, general and administrative expenses.

## Non-compete agreements

Following the acquisition of Strata on December 24, 2012, the Company recognized an intangible asset of $1.5 million in respect of a non-compete agreement. This asset has an



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

expected life of 2 years and is being amortized on a straight-line basis over this period. No residual value is anticipated. An amortization expense of $0.7 million was recognized in 2013 (2012 – $0.0 million) in selling, general and administrative expenses.

## Marketing related (formerly Ethyl)

An intangible asset of $28.4 million was recognized in the second quarter of 2007 in respect of Ethyl Corporation foregoing their entitlement effective April 1, 2007 to a share of the future income stream under the sales and marketing agreements to market and sell TEL. In 2008, contract provisions no longer deemed necessary of $6.3 million were offset against the intangible asset. The amount attributed to the Octane Additives reporting segment was being amortized straight-line to December 31, 2012 and the amount attributed to the Fuel Specialties reporting segment is being amortized straight-line to December 31, 2017. Effective October 1, 2011, the Company extended its estimate for the future life of the Octane Additives segment from December 31, 2012 to December 31, 2013 and therefore prospectively adjusted the amortization period for the amount attributed to the Octane Additives segment. An amortization expense of $1.7 million was recognized in 2013 (2012 – $1.6 million) in cost of goods sold.

## Amortization expense

The aggregate of other intangible asset amortization expense was $11.1 million, $4.1 million and $4.4 million in 2013, 2012 and 2011, respectively, of which $3.8 million, $2.6 million and $2.9 million, respectively, was recognized in cost of goods sold, and the remainder was recognized in selling, general and administrative expenses.

Future amortization expense is estimated to be as follows for the next five years:

<table><tr><td>(in millions)</td><td></td></tr><tr><td>2014</td><td>$16.6</td></tr><tr><td>2015</td><td>$16.6</td></tr><tr><td>2016</td><td>$16.6</td></tr><tr><td>2017</td><td>$16.6</td></tr><tr><td>2018</td><td>$14.3</td></tr></table>

## Note 8. Deferred Finance Costs

On August 28, 2013, we amended our five-year revolving credit facility (“the facility”). The amendment provides for an increase in the facility available to the Company and certain subsidiaries of the Company from $100 million to $150 million and retains the term of the facility through to December 2016. In addition, the amendment allows the Company to request an additional amount of up to $50 million to be committed by the lenders, of which $30 million was committed in the fourth quarter of 2013. As a result $0.9 million of refinancing costs have been capitalized in 2013 and are being amortized over the expected life of the facility using the effective interest method, in line with the costs capitalized for the original facility in December 2011.



## Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Gross cost</td><td>$ 2.6</td><td>$ 1.7</td></tr><tr><td>Accumulated amortization</td><td>(0.8)</td><td>(0.4)</td></tr><tr><td></td><td>$ 1.8</td><td>$ 1.3</td></tr></table>

Amortization expense was $0.4 million, $0.4 million and $0.5 million in 2013, 2012 and 2011, respectively. The charge is included in interest expense (see Note 2).

## Note 9. Pension Plans

## United Kingdom plan

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 Projected Benefit Obligation (“PBO”) is based on final salary and years of credited service reduced by social security benefits according to a plan formula. Normal retirement age is 65 but provisions are made for early retirement. The Plan’s assets are invested by several investment management companies in funds holding United Kingdom and overseas equities, United Kingdom and overseas fixed interest securities, index linked securities, property unit trusts and cash or cash equivalents. The trustees’ investment policy is to seek to achieve specified objectives through investing in a suitable mixture of real and monetary assets. The trustees recognize that the returns on real assets, while expected to be greater over the long-term than those on monetary assets, are likely to be more volatile. A mixture across asset classes should nevertheless provide the level of returns required by the Plan to meet its liabilities at an acceptable level of risk for the trustees and an acceptable level of cost to the Company.

During the second quarter of 2010 the Company implemented a pension increase exchange (“PIE”) program for current pensioners, effective April 1, 2010, which reduced the PBO by $17.1 million. This reduction in PBO resulted in a prior service credit which is being amortized using the straight-line method over the remaining life expectancy of Plan pensioners of 15 years commencing April 1, 2010.

When the plan closed to future accrual in 2010 all employees became inactive and GAAP requires that the average remaining life expectancy of the inactive participants is used, instead of the average remaining service, to spread future amortization of actuarial net losses. The average remaining life expectancy of the inactive participants has been approximately 24 years since the plan closed in 2010.

In 2013, the Company contributed approximately $11 million in cash to the Plan in accordance with an actuarial deficit recovery plan agreed with the trustees.



## Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Plan net pension charge/(credit):</td><td></td><td></td><td></td></tr><tr><td>Service cost</td><td>$ 1.6</td><td>$ 1.6</td><td>$ 1.6</td></tr><tr><td>Interest cost on PBO</td><td>31.3</td><td>32.2</td><td>36.6</td></tr><tr><td>Expected return on plan assets</td><td>(35.5)</td><td>(34.1)</td><td>(36.7)</td></tr><tr><td>Amortization of prior service credit</td><td>(1.3)</td><td>(1.3)</td><td>(1.3)</td></tr><tr><td>Amortization of actuarial net losses</td><td>6.2</td><td>3.2</td><td>2.7</td></tr><tr><td></td><td>$ 2.3</td><td>$ 1.6</td><td>$ 2.9</td></tr><tr><td>Plan assumptions at December 31, (%):</td><td></td><td></td><td></td></tr><tr><td>Discount rate</td><td>4.40</td><td>4.15</td><td>4.75</td></tr><tr><td>Inflation rate</td><td>2.55</td><td>2.20</td><td>2.15</td></tr><tr><td>Rate of return on plan assets - overall on bid-value</td><td>4.85</td><td>4.90</td><td>4.85</td></tr><tr><td>Rate of return on plan assets - equity securities</td><td>7.50</td><td>7.25</td><td>7.70</td></tr><tr><td>Rate of return on plan assets - debt securities</td><td>3.40</td><td>3.65</td><td>3.60</td></tr><tr><td>Plan asset allocation by category (%):</td><td></td><td></td><td></td></tr><tr><td>Equity securities</td><td>35</td><td>33</td><td>29</td></tr><tr><td>Debt securities</td><td>61</td><td>61</td><td>66</td></tr><tr><td>Cash</td><td>4</td><td>6</td><td>5</td></tr><tr><td></td><td>100</td><td>100</td><td>100</td></tr></table>

The discount rate used represents the annualized yield based on a cash flow matched methodology with reference to an AA corporate bond spot curve and having regard to the duration of the Plan’s liabilities. The inflation rate is derived using a similar cash flow matched methodology as used for the discount rate but having regard to the difference between yields on fixed interest and index linked United Kingdom government gilts. The rate of increase in compensation levels is no longer relevant since the Company closed the Plan to future service accrual with effect from March 31, 2010. A 0.25% change in the discount rate assumption would change the PBO by approximately $28 million and the net pension charge for 2014 by approximately $0.5 million. A 0.25% change in the level of price inflation assumption would change the PBO by approximately $22 million and the net pension charge for 2014 by approximately $1.7 million.

The current investment strategy of the Plan is to obtain an asset allocation of 65% debt securities and 35% equity securities in order to achieve a more predictable return on assets. As at December 31, 2013 and 2012, approximately 55% of the Plan’s assets were held in index-tracking funds with one investment management company. Approximately 25% of the Plan’s assets were invested in United Kingdom government gilts. No more than 5% of the Plan’s assets were invested in any one individual company’s investment funds.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Movements in PBO and fair value of Plan assets are as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Change in PBO:</td><td></td><td></td></tr><tr><td>Opening balance</td><td>$805.3</td><td>$687.4</td></tr><tr><td>Interest cost</td><td>31.3</td><td>32.2</td></tr><tr><td>Service cost</td><td>1.6</td><td>1.6</td></tr><tr><td>Benefits paid</td><td>(39.4)</td><td>(43.9)</td></tr><tr><td>Actuarial losses/(gains)</td><td>5.9</td><td>94.4</td></tr><tr><td>Exchange effect</td><td>15.1</td><td>33.6</td></tr><tr><td>Closing balance</td><td>$819.8</td><td>$805.3</td></tr><tr><td>Fair value of plan assets:</td><td></td><td></td></tr><tr><td>Opening balance</td><td>$768.6</td><td>$708.8</td></tr><tr><td>Actual benefits paid</td><td>(39.4)</td><td>(43.9)</td></tr><tr><td>Actual contributions by employer</td><td>10.8</td><td>9.2</td></tr><tr><td>Actual return on assets</td><td>35.5</td><td>61.2</td></tr><tr><td>Exchange effect</td><td>14.8</td><td>33.3</td></tr><tr><td>Closing balance</td><td>$790.3</td><td>$768.6</td></tr></table>

The accumulated benefit obligation for the Plan was $819.8 million and $805.3 million at December 31, 2013 and 2012, respectively.



## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the vast majority of assets, a market approach is adopted to assess the fair value of the assets, with the inputs being the quoted market prices for the actual securities held in the relevant fund. For Level 3 assets where there is no ready market and for which no indicative dealer prices are available, fund assets are independently evaluated, with the use of agreed upon procedures conducted by an audit firm to provide independent confirmation that proper valuation procedures are being followed. The fair values of pension assets by level of input were as follows:

<table><tr><td>(in millions)</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td><td>Total</td></tr><tr><td>At December 31, 2013</td><td></td><td></td><td></td><td></td></tr><tr><td>Fixed income securities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Debt securities issued by U.S. government and government agencies</td><td>$ 1.3</td><td>$</td><td>$</td><td>$ 1.3</td></tr><tr><td>Debt securities issued by non-U.S. governments and government agencies</td><td>198.7</td><td></td><td></td><td>198.7</td></tr><tr><td>Corporate debt securities</td><td>275.5</td><td></td><td></td><td>275.5</td></tr><tr><td>Residential mortgage-backed securities</td><td>0.2</td><td></td><td></td><td>0.2</td></tr><tr><td>Other asset-backed securities</td><td>3.8</td><td></td><td></td><td>3.8</td></tr><tr><td>Equity securities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Equity securities held for proprietary investment purposes</td><td>156.7</td><td></td><td></td><td>156.7</td></tr><tr><td>Real estate</td><td>61.4</td><td></td><td></td><td>61.4</td></tr><tr><td>Other assets</td><td></td><td>25.3</td><td>38.3</td><td>63.6</td></tr><tr><td>Total assets at fair value</td><td>697.6</td><td>25.3</td><td>38.3</td><td>761.2</td></tr><tr><td>Cash</td><td>29.1</td><td></td><td></td><td>29.1</td></tr><tr><td>Total plan assets</td><td>$ 726.7</td><td>$ 25.3</td><td>$ 38.3</td><td>$790.3</td></tr><tr><td>At December 31, 2012</td><td></td><td></td><td></td><td></td></tr><tr><td>Fixed income securities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Debt securities issued by U.S. government and government agencies</td><td>$ 1.6</td><td>$</td><td>$</td><td>$ 1.6</td></tr><tr><td>Debt securities issued by non-U.S. governments and government agencies</td><td>191.3</td><td></td><td></td><td>191.3</td></tr><tr><td>Corporate debt securities</td><td>284.6</td><td></td><td></td><td>284.6</td></tr><tr><td>Residential mortgage-backed securities</td><td>0.2</td><td></td><td></td><td>0.2</td></tr><tr><td>Other asset-backed securities</td><td>3.1</td><td></td><td></td><td>3.1</td></tr><tr><td>Equity securities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Equity securities held for proprietary investment purposes</td><td>134.8</td><td></td><td></td><td>134.8</td></tr><tr><td>Real estate</td><td>33.2</td><td></td><td></td><td>33.2</td></tr><tr><td>Other assets</td><td></td><td>39.0</td><td>31.0</td><td>70.0</td></tr><tr><td>Total assets at fair value</td><td>648.8</td><td>39.0</td><td>31.0</td><td>718.8</td></tr><tr><td>Cash</td><td>49.8</td><td></td><td></td><td>49.8</td></tr><tr><td>Total plan assets</td><td>$ 698.6</td><td>$ 39.0</td><td>$ 31.0</td><td>$768.6</td></tr></table>



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The reconciliation of the fair value of the Plan assets using significant unobservable inputs (Level 3) was as follows:

<table><tr><td></td><td>Other</td></tr><tr><td>(in millions)</td><td>Assets</td></tr><tr><td>Balance at December 31, 2011</td><td>$28.1</td></tr><tr><td>Realized/unrealized gains/(losses):</td><td></td></tr><tr><td>Relating to assets still held at the reporting date</td><td>1.3</td></tr><tr><td>Relating to assets sold during the period</td><td>0.0</td></tr><tr><td>Purchases, issuances and settlements</td><td>0.5</td></tr><tr><td>Exchange effect</td><td>1.1</td></tr><tr><td>Balance at December 31, 2012</td><td>31.0</td></tr><tr><td>Realized/unrealized gains/(losses):</td><td></td></tr><tr><td>Relating to assets still held at the reporting date</td><td>3.5</td></tr><tr><td>Relating to assets sold during the period</td><td>0.0</td></tr><tr><td>Purchases, issuances and settlements</td><td>3.6</td></tr><tr><td>Exchange effect</td><td>0.2</td></tr><tr><td>Balance at December 31, 2013</td><td>$38.3</td></tr></table>

The projected net pension charge for the year ending December 31, 2014 is as follows:

<table><tr><td>(in millions)</td><td></td></tr><tr><td>Service cost</td><td>$ 1.7</td></tr><tr><td>Interest cost on PBO</td><td>34.7</td></tr><tr><td>Expected return on plan assets</td><td>(37.3)</td></tr><tr><td>Amortization of prior service credit</td><td>(1.3)</td></tr><tr><td>Amortization of actuarial net losses</td><td>5.5</td></tr><tr><td></td><td>$ 3.3</td></tr></table>

The following benefit payments are expected to be made:

<table><tr><td>(in millions)</td><td></td></tr><tr><td>2014</td><td>$ 49.7</td></tr><tr><td>2015</td><td>$ 47.0</td></tr><tr><td>2016</td><td>$ 47.9</td></tr><tr><td>2017</td><td>$ 48.5</td></tr><tr><td>2018</td><td>$ 49.2</td></tr><tr><td>2019 - 2023</td><td>$258.0</td></tr></table>

## German plan

The Company also maintains an unfunded defined benefit pension plan covering a number of its current and former employees in Germany (the “German plan”). The German plan is closed to new entrants and has no assets.



## Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>German plan net pension charge:</td><td></td><td></td><td></td></tr><tr><td>Service cost</td><td>$ 0.2</td><td>$ 0.1</td><td>$ 0.2</td></tr><tr><td>Interest cost on PBO</td><td>0.3</td><td>0.3</td><td>0.3</td></tr><tr><td>Amortization of prior service cost/(credit)</td><td>(0.1)</td><td>0.0</td><td>0.0</td></tr><tr><td>Amortization of actuarial net loss/(gain)</td><td>0.2</td><td>0.0</td><td>0.0</td></tr><tr><td></td><td>$ 0.6</td><td>$ 0.4</td><td>$ 0.5</td></tr><tr><td>German plan assumptions (%):</td><td></td><td></td><td></td></tr><tr><td>Discount rate</td><td>3.50</td><td>3.25</td><td>5.00</td></tr><tr><td>Inflation rate</td><td>2.00</td><td>2.00</td><td>2.00</td></tr><tr><td>Rate of increase in compensation levels</td><td>2.75</td><td>2.75</td><td>2.75</td></tr></table>

Movements in PBO of the German plan are as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Change in PBO:</td><td></td><td></td></tr><tr><td>Opening balance</td><td>$ 9.3</td><td>$ 6.3</td></tr><tr><td>Service cost</td><td>0.2</td><td>0.1</td></tr><tr><td>Interest cost</td><td>0.3</td><td>0.3</td></tr><tr><td>Amortization of prior service cost/(credit)</td><td>(0.1)</td><td>0.0</td></tr><tr><td>Benefits paid</td><td>(0.2)</td><td>(0.2)</td></tr><tr><td>Actuarial losses/(gains)</td><td>(0.4)</td><td>2.6</td></tr><tr><td>Exchange effect</td><td>0.5</td><td>0.2</td></tr><tr><td>Closing balance</td><td>$ 9.6</td><td>$ 9.3</td></tr></table>

The amount of unrecognized actuarial net losses in other comprehensive loss in respect of the German plan is $1.6 million, net of tax of $0.6 million.

## Other plans

Company contributions to defined contribution schemes during 2013 were $7.7 million (2012 – $7.4 million).



## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

## Note 10. Income Taxes

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

<table><tr><td></td><td colspan="2">Interest and</td><td colspan="2">Unrecognized</td></tr><tr><td>(in millions)</td><td colspan="2">Penalties</td><td colspan="2">Tax Benefits</td></tr><tr><td>Opening balance at January 1, 2011</td><td>$     0.3</td><td>$     8.3</td><td>$     8.6</td><td></td></tr><tr><td>Additions related to tax positions taken in the current period</td><td>0.0</td><td>5.2</td><td>5.2</td><td></td></tr><tr><td>Additions for tax positions of prior periods</td><td>0.2</td><td>0.5</td><td>0.7</td><td></td></tr><tr><td>Reductions for tax positions of prior periods</td><td>(0.1)</td><td>(1.8)</td><td>(1.9)</td><td></td></tr><tr><td>Closing balance at December 31, 2011</td><td>0.4</td><td>12.2</td><td>12.6</td><td></td></tr><tr><td>Current</td><td>(0.3)</td><td>(2.9)</td><td>(3.2)</td><td></td></tr><tr><td>Non-current</td><td>$     0.1</td><td>$     9.3</td><td>$     9.4</td><td></td></tr><tr><td>Opening balance at January 1, 2012</td><td>$     0.4</td><td>$     12.2</td><td>$12.6</td><td></td></tr><tr><td>Additions related to tax positions taken in the current period</td><td>0.0</td><td>0.2</td><td>0.2</td><td></td></tr><tr><td>Additions for tax positions of prior periods</td><td>0.2</td><td>0.0</td><td>0.2</td><td></td></tr><tr><td>Reductions due to lapsed statutes of limitations</td><td>0.0</td><td>(0.2)</td><td>(0.2)</td><td></td></tr><tr><td>Closing balance at December 31, 2012</td><td>0.6</td><td>12.2</td><td>12.8</td><td></td></tr><tr><td>Current</td><td>(0.3)</td><td>(2.7)</td><td>(3.0)</td><td></td></tr><tr><td>Non-current</td><td>$     0.3</td><td>$     9.5</td><td>$     9.8</td><td></td></tr><tr><td>Opening balance at January 1, 2013</td><td>$     0.6</td><td>$     12.2</td><td>$12.8</td><td></td></tr><tr><td>Additions for tax positions of prior periods</td><td>0.6</td><td>0.2</td><td>0.8</td><td></td></tr><tr><td>Reductions due to lapsed statutes of limitations</td><td>(0.1)</td><td>(0.5)</td><td>(0.6)</td><td></td></tr><tr><td>Closing balance at December 31, 2013</td><td>1.1</td><td>11.9</td><td>13.0</td><td></td></tr><tr><td>Current</td><td>(0.6)</td><td>(6.2)</td><td>(6.8)</td><td></td></tr><tr><td>Non-current</td><td>$     0.5</td><td>$     5.7</td><td>$     6.2</td><td></td></tr></table>

All of the $13.0 million of unrecognized tax benefits, and interest and penalties, would impact our effective tax rate if recognized.

We recognize accrued interest and penalties associated with uncertain tax positions as part of income taxes in our consolidated statements of income.

During the fourth quarter of 2013, the Company recorded a $0.2 million addition to unrecognized tax benefits and there was a $0.5 million reduction in unrecognized tax benefits due to the expiration of applicable statutes of limitations during the first quarter of 2013.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company or one of its subsidiaries files income tax returns with the U.S. federal government, and various state and foreign jurisdictions. As at December 31, 2013 the Company and its U.S. subsidiaries were subject to a federal income tax examination by the IRS for 2009 and an employment tax examination for 2010 and 2011. The Company and its U.S. subsidiaries remain open to federal income tax examination by the IRS for years 2009 onwards. The Company does not currently anticipate that adjustments, if any, arising out of this tax audit would result in a material change to its financial position as at December 31, 2013. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including France (2012 onwards), Germany (2010 onwards), Switzerland (2012 onwards) and the United Kingdom (2011 onwards).

The sources of income before income taxes were as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Domestic</td><td>$10.0</td><td>$ 5.6</td><td>$(42.6)</td></tr><tr><td>Foreign</td><td>82.8</td><td>87.7</td><td>92.8</td></tr><tr><td></td><td>$92.8</td><td>$93.3</td><td>$ 50.2</td></tr></table>

The components of income tax charges are summarized as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Current:</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ 1.6</td><td>$ 2.9</td><td>$ 5.4</td></tr><tr><td>Foreign</td><td>6.8</td><td>11.8</td><td>13.6</td></tr><tr><td></td><td>8.4</td><td>14.7</td><td>19.0</td></tr><tr><td>Deferred:</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>1.8</td><td>12.3</td><td>(12.8)</td></tr><tr><td>Foreign</td><td>4.8</td><td>(0.6)</td><td>(3.1)</td></tr><tr><td></td><td>6.6</td><td>11.7</td><td>(15.9)</td></tr><tr><td></td><td>$15.0</td><td>$26.4</td><td>$ 3.1</td></tr></table>

Cash payments for income taxes were $21.1 million, $13.1 million and $18.1 million during 2013, 2012 and 2011, respectively.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The effective tax rate varies from the U.S. federal statutory rate because of the factors indicated below:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Statutory rate</td><td>35.0%</td><td>35.0%</td><td>35.0%</td></tr><tr><td>Foreign income inclusions</td><td>6.1</td><td>48.9</td><td>20.5</td></tr><tr><td>Impairment of Octane Additives segment goodwill</td><td>0.5</td><td>0.5</td><td>1.3</td></tr><tr><td>Foreign tax credits</td><td>(1.9)</td><td>(38.3)</td><td>(25.8)</td></tr><tr><td>Pension (credit)/charge</td><td>(0.3)</td><td>(0.3)</td><td>(9.7)</td></tr><tr><td>Foreign tax rate differential</td><td>(14.6)</td><td>(16.4)</td><td>(19.1)</td></tr><tr><td>Permanent tax adjustments</td><td>(2.5)</td><td>(0.2)</td><td>0.3</td></tr><tr><td>Amortization</td><td>1.1</td><td>0.5</td><td>0.7</td></tr><tr><td>Tax (credit)/charge from previous years</td><td>(2.9)</td><td>(0.6)</td><td>(1.9)</td></tr><tr><td>Net charge/(credit) from unrecognized tax benefits</td><td>0.2</td><td>0.3</td><td>7.7</td></tr><tr><td>United Kingdom income tax rate reduction</td><td>0.9</td><td>(0.6)</td><td>(4.8)</td></tr><tr><td>Other items and adjustments, net</td><td>(5.4)</td><td>(0.5)</td><td>2.0</td></tr><tr><td></td><td>16.2%</td><td>28.3%</td><td>6.2%</td></tr></table>

Significant factors affecting the variation to statutory rate are set out above and include foreign income inclusions net of foreign tax credits. The mix of taxable profits generated in the different geographical localities in which the Group operates had a significant positive impact on the effective tax rate in 2013.



## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Details of deferred tax assets and liabilities are analyzed as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Deferred tax assets:</td><td></td><td></td></tr><tr><td>Foreign tax credits</td><td>$ 4.5</td><td>$ 5.5</td></tr><tr><td>Accrued expenses</td><td>3.4</td><td>4.6</td></tr><tr><td>Stock options</td><td>5.2</td><td>5.5</td></tr><tr><td>Excess of tax over book basis in property, plant and equipment</td><td>0.9</td><td>1.1</td></tr><tr><td>Net operating loss carry forwards</td><td>0.3</td><td>0.3</td></tr><tr><td>Pension liabilities</td><td>6.5</td><td>9.2</td></tr><tr><td>Other intangible assets</td><td>1.0</td><td>0.0</td></tr><tr><td>Other</td><td>3.9</td><td>4.7</td></tr><tr><td>Valuation allowance</td><td>0.0</td><td>0.0</td></tr><tr><td>Deferred tax liabilities:</td><td></td><td></td></tr><tr><td>Goodwill amortization</td><td>(7.2)</td><td>(6.9)</td></tr><tr><td>Other intangible assets</td><td>(0.3)</td><td>(0.9)</td></tr><tr><td>Excess of book over tax basis in tax deductible goodwill</td><td>(0.2)</td><td>0.0</td></tr><tr><td>Excess of book over tax basis in intangible assets</td><td>(7.5)</td><td>0.0</td></tr><tr><td>Other</td><td>(2.9)</td><td>(3.2)</td></tr><tr><td>Total net deferred tax asset</td><td>$ 7.6</td><td>$19.9</td></tr><tr><td>Deferred taxes are included within the consolidated balance sheets as follows:</td><td></td><td></td></tr><tr><td>Deferred tax assets</td><td>$17.3</td><td>$23.7</td></tr><tr><td>Deferred tax liabilities</td><td>(9.7)</td><td>(3.8)</td></tr><tr><td></td><td>$ 7.6</td><td>$19.9</td></tr><tr><td>Current portion of deferred tax assets</td><td>$ 8.7</td><td>$11.0</td></tr><tr><td>Deferred tax assets, net of current portion</td><td>8.6</td><td>12.7</td></tr><tr><td>Current portion of deferred tax liabilities</td><td>(0.2)</td><td>(0.2)</td></tr><tr><td>Deferred tax liabilities, net of current portion</td><td>(9.5)</td><td>(3.6)</td></tr><tr><td></td><td>$ 7.6</td><td>$19.9</td></tr></table>

Details of the deferred tax asset valuation allowance are as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>At January 1</td><td>$0.0</td><td>$(7.5)</td><td>$ (10.8)</td></tr><tr><td>Change in foreign tax credits</td><td>0.0</td><td>7.5</td><td>3.3</td></tr><tr><td>At December 31</td><td>$0.0</td><td>$ 0.0</td><td>$ (7.5)</td></tr></table>



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As a result of the Company’s assessment of its net deferred tax assets at December 31, 2013, the Company considers it more likely than not that no valuation allowance is required for $0.3 million (2012 – $0.3 million) of its net operating loss carry forwards and that no valuation allowance is required against its foreign tax credit carry forwards (2012 – $0.0 million).

The net operating loss carry forwards arose in the U.S. in the prior periods as a result of state tax losses. It is expected that sufficient taxable profits will be generated against which these net operating loss carry forwards can be relieved prior to their expiration in 2021. The foreign tax credit carry forwards arose in the U.S. in prior periods. The Company has determined that future foreign income inclusions will be sufficient to utilize all of the $4.5 million (2012 – $5.5 million) of the foreign tax credit carry forwards prior to their expiration in 2017 and 2021 and therefore no valuation allowance is required.

Should it be determined in the future that it is no longer more likely than not that these assets will be realized, a valuation allowance would be required, and the Company’s operating results would be adversely affected during the period in which such a determination would be made.

The Company is in a position to control whether or not to repatriate foreign earnings and we intend to permanently reinvest earnings overseas to fund overseas subsidiaries. No taxes have been provided for the unremitted earnings of our overseas subsidiaries as any tax basis differences relating to investments in these overseas subsidiaries are considered to be permanent in duration. The amount of unremitted earnings at December 31, 2013 and 2012 was approximately $605 million and $717 million, respectively. If these earnings are remitted, additional taxes could result after offsetting foreign income taxes paid although the calculation of the additional taxes is not practical at this time.

## Note 11. Long-Term Debt

Long-term debt consists of the following:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Revolving credit facility</td><td>$142.0</td><td>$20.0</td></tr><tr><td>Promissory note</td><td>5.0</td><td>10.0</td></tr><tr><td>Other long-term debt</td><td>1.0</td><td>0.0</td></tr><tr><td></td><td>148.0</td><td>30.0</td></tr><tr><td>Less current portion</td><td>(5.3)</td><td>(5.0)</td></tr><tr><td></td><td>$142.7</td><td>$25.0</td></tr></table>

On December 14, 2011, we entered into a five-year revolving credit facility which provides for borrowings by us of up to $100 million. The facility carries an interest rate based on U.S. dollar LIBOR plus a margin of between 1.50% and 2.25% which is dependent on the Company’s ratio of net debt to EBITDA. EBITDA is a non-GAAP measure of liquidity



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## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

defined in the credit facility. The facility can be drawn down until it expires on December 14, 2016. We repaid the previous finance facility, which was due to expire on February 6, 2012, upon entering into the new credit facility.

On August 28, 2013, we amended our existing five-year revolving credit facility (“the facility”). The amendment provides for an increase in the facility available to the Company and certain subsidiaries of the Company from $100 million to $150 million and retains the term and conditions of the original facility through to December 2016. In addition, an amendment allowed the Company to request an additional amount of $50 million to be committed by the lenders, of which $30 million was committed in the fourth quarter of 2013.

The Company’s credit facility contains restrictive clauses which may constrain our activities and limit our operational and financial flexibility. The facility obliges the lenders to comply with a request for utilization of finance unless there is an event of default outstanding. Events of default are defined in the credit facility and include a material adverse change to our assets, operations or financial condition. The facility contains a number of restrictions that limit our ability, amongst other things, and subject to certain limited exceptions, to incur additional indebtedness, pledge our assets as security, guarantee obligations of third parties, make investments, undergo a merger or consolidation, dispose of assets, or materially change our line of business.

In addition, the credit facility contains terms which, if breached, would result in it becoming repayable on demand. It requires, among other matters, compliance with the following financial covenant ratios measured on a quarterly basis: (1) the ratio of net debt to EBITDA shall not be greater than 2.5:1 and (2) the ratio of EBITDA to net interest shall not be less than 4.0:1. Management has determined that the Company has not breached these covenants throughout the period to December 31, 2013 and expects to not breach these covenants for the next 12 months. The credit facility is secured by a number of fixed and floating charges over certain assets which include key operating sites of the Company and its subsidiaries.

On September 13, 2011, the Company settled the NewMarket Corporation civil complaint. The settlement agreement included the Company issuing a $15.0 million promissory note to NewMarket Corporation payable in three equal annual installments (carrying simple interest at 1% per annum), the first installment of which was paid on September 7, 2012.

The weighted average rate of interest on borrowings was 1.6% at December 31, 2013 and 1.6% at December 31, 2012. Payments of interest on long-term debt were $1.0 million, $0.5 million and $1.8 million in 2013, 2012 and 2011, respectively.

The net cash outflows in respect of refinancing costs were $0.9 million, $0.0 million and $1.7 million in 2013, 2012 and 2011, respectively.

## Note 12. Plant Closure Provisions

The principal site giving rise to environmental remediation liabilities is the manufacturing site at Ellesmere Port in the United Kingdom, which management believes is the last ongoing



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## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

manufacturer of TEL. There are also environmental remediation liabilities on a much smaller scale in respect of our other manufacturing sites in the U.S. and Europe. The liability for estimated closure costs of Innospec’s manufacturing facilities includes costs for decontamination and environmental remediation activities (remediation) when demand for TEL diminishes. Severance provisions have been made in relation to Corporate personnel and personnel in each of the three reporting segments.

Movements in the provisions are summarized as follows:

<table><tr><td>(in millions)</td><td>Severance</td><td>Other Restructuring</td><td>Remediation</td><td>Total</td></tr><tr><td>Total at January 1, 2011</td><td>$ 1.5</td><td>$ 0.1</td><td>$ 25.9</td><td>$27.5</td></tr><tr><td>Charge for the period</td><td>0.7</td><td>(0.1)</td><td>4.5</td><td>5.1</td></tr><tr><td>Utilized in the period</td><td>(0.7)</td><td>0.0</td><td>(3.1)</td><td>(3.8)</td></tr><tr><td>Exchange effect</td><td>0.0</td><td>0.0</td><td>(0.2)</td><td>(0.2)</td></tr><tr><td>Total at December 31, 2011</td><td>1.5</td><td>0.0</td><td>27.1</td><td>28.6</td></tr><tr><td>Due within one year</td><td>(0.5)</td><td>0.0</td><td>(3.6)</td><td>(4.1)</td></tr><tr><td>Due after one year</td><td>$ 1.0</td><td>$ 0.0</td><td>$ 23.5</td><td>$24.5</td></tr><tr><td>Total at January 1, 2012</td><td>$ 1.5</td><td>$ 0.0</td><td>$ 27.1</td><td>$28.6</td></tr><tr><td>Charge for the period</td><td>0.2</td><td>0.0</td><td>4.0</td><td>4.2</td></tr><tr><td>Utilized in the period</td><td>(0.6)</td><td>0.0</td><td>(2.1)</td><td>(2.7)</td></tr><tr><td>Exchange effect</td><td>0.0</td><td>0.0</td><td>0.3</td><td>0.3</td></tr><tr><td>Total at December 31, 2012</td><td>1.1</td><td>0.0</td><td>29.3</td><td>30.4</td></tr><tr><td>Due within one year</td><td>(0.1)</td><td>0.0</td><td>(5.0)</td><td>(5.1)</td></tr><tr><td>Due after one year</td><td>$ 1.0</td><td>$ 0.0</td><td>$ 24.3</td><td>$25.3</td></tr><tr><td>Total at January 1, 2013</td><td>$ 1.1</td><td>0.0</td><td>29.3</td><td>30.4</td></tr><tr><td>Charge for the period</td><td>0.0</td><td>0.0</td><td>3.9</td><td>3.9</td></tr><tr><td>Utilized in the period</td><td>(0.1)</td><td>0.0</td><td>(1.9)</td><td>(2.0)</td></tr><tr><td>Exchange effect</td><td>0.0</td><td>0.0</td><td>0.1</td><td>0.1</td></tr><tr><td>Total at December 31, 2013</td><td>1.0</td><td>0.0</td><td>31.4</td><td>32.4</td></tr><tr><td>Due within one year</td><td>0.0</td><td>0.0</td><td>(6.2)</td><td>(6.2)</td></tr><tr><td>Due after one year</td><td>$ 1.0</td><td>$ 0.0</td><td>$ 25.2</td><td>$26.2</td></tr></table>

Amounts due within one year refer to provisions where expenditure is expected to arise within one year of the balance sheet date. Severance charges are recognized in the income statement as restructuring costs along with other restructuring costs. Remediation costs are recognized in cost of goods sold.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

## Remediation

The remediation provision represents the Company’s liability for environmental liabilities and asset retirement obligations. The charge for the period in 2013 represents the accretion expense recognized of $2.6 million and a further $1.3 million primarily in respect of changes in the expected cost and scope of future remediation activities. A discount rate of 8.92% was used in valuing the remediation provision.

We recognize environmental liabilities when they are probable and costs can be reasonably estimated, and asset retirement obligations when there is a legal obligation and costs can be reasonably estimated. The Company has to anticipate the program of work required and the associated future expected costs, and comply with environmental legislation in the countries in which it operates or has operated in. The Company views the costs of vacating our Ellesmere Port site as contingent upon if and when it vacates the site because there is no present intention to do so. The Company has further determined that, due to the uncertain product life of TEL particularly in the market for aviation gasoline and other products being manufactured on the site, there are uncertainties as to the probability and timing of the expected costs. Such uncertainties have been considered in estimating the provision.

Remediation expenditure utilized provisions of $1.9 million, $2.1 million and $3.1 million in 2013, 2012 and 2011, respectively.

## Note 13. Deferred Income

Deferred income consists of:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Deferred income</td><td>$ 1.5</td><td>$ 2.3</td></tr><tr><td>Less current portion</td><td>(0.3)</td><td>(1.4)</td></tr><tr><td>Non-current deferred income</td><td>$ 1.2</td><td>$ 0.9</td></tr></table>

Non-current deferred income of $1.2 million relates to post acquisition government grants received by Innospec Leuna GmbH.

## Note 14. Profit on Disposal, net

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Profit on disposal of surplus United Kingdom real estate</td><td>$0.0</td><td>$0.1</td><td>$0.0</td></tr><tr><td>Loss on disposal of surplus U.S. real estate</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td></td><td>$0.0</td><td>$0.1</td><td>$0.0</td></tr></table>

In the third quarter of 2012, the Company recognized a $0.1 million profit following the disposal of surplus real estate.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

## Note 15. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes a mid-market pricing convention for valuing the majority of its assets and liabilities measured and reported at fair value. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The Company gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy Levels. In 2013, the Company evaluated the fair value hierarchy levels assigned to its assets and liabilities, and concluded that there should be no transfers into or out of Levels 1, 2 and 3.



## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

<table><tr><td rowspan="2"></td><td colspan="2">December 31, 2013</td><td colspan="2">December 31, 2012</td></tr><tr><td>Carrying Amount</td><td>Fair Value</td><td>Carrying Amount</td><td>Fair Value</td></tr><tr><td>(in millions)</td><td></td><td></td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Non-derivatives:</td><td></td><td></td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 80.2</td><td>$ 80.2</td><td>$ 22.4</td><td>$22.4</td></tr><tr><td>Short-term investments</td><td>6.6</td><td>6.6</td><td>5.1</td><td>5.1</td></tr><tr><td>Non-financial assets (Level 3 measurement):</td><td></td><td></td><td></td><td></td></tr><tr><td>Goodwill - Octane Additives</td><td>0.0</td><td>0.0</td><td>1.3</td><td>1.3</td></tr><tr><td>Derivatives (Level 1 measurement):</td><td></td><td></td><td></td><td></td></tr><tr><td>Other non-current assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>Commodity swaps</td><td>0.0</td><td>0.0</td><td>0.1</td><td>0.1</td></tr><tr><td>Foreign currency forward exchange contracts</td><td>1.0</td><td>1.0</td><td>0.8</td><td>0.8</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Non-derivatives:</td><td></td><td></td><td></td><td></td></tr><tr><td>Long-term debt (including current portion)</td><td>$ 148.0</td><td>$148.0</td><td>$ 30.0</td><td>$30.0</td></tr><tr><td>Non-financial liabilities (Level 3 measurement):</td><td></td><td></td><td></td><td></td></tr><tr><td>Stock equivalent units</td><td>12.1</td><td>12.1</td><td>12.6</td><td>12.6</td></tr><tr><td>Acquisition-related contingent consideration</td><td>4.6</td><td>4.6</td><td>4.3</td><td>4.3</td></tr></table>

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

Cash and cash equivalents, and short-term investments: The carrying amount approximates fair value because of the short-term maturities of such instruments.

Long-term debt: Long-term debt principally comprises the revolving credit facility and the promissory note, which were entered into in December 2011 and September 2011, respectively. The carrying amount of long-term debt approximates to the fair value.

Acquisition-related contingent consideration: Deferred consideration payable in cash is discounted to its fair value. Where deferred consideration is contingent upon pre-determined financial targets, an estimate of the fair value of the likely consideration payable is made.

Derivatives: The fair value of derivatives relating to interest rate swaps, foreign currency forward exchange contracts and commodity swaps are derived from current settlement prices and comparable contracts using current assumptions.

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.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The cumulative gains and losses on the interest rate swaps and commodity swaps are summarized as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td></tr><tr><td>Balance at January 1</td><td>$ 0.1</td><td>$0.1</td></tr><tr><td>Change in fair value</td><td>(0.1)</td><td>0.0</td></tr><tr><td>Balance at December 31</td><td>$ 0.0</td><td>$0.1</td></tr></table>

The commodity swaps are used to manage the Company’s cash flow exposure to raw material cost volatility. They were designated as cash flow hedges and qualified for hedge accounting throughout the year ended December 31, 2011. At March 31, 2012, the commodity hedges were determined to be ineffective and consequently a gain of $0.1 million was recognized in earnings. At December 31, 2011, the commodity hedges were determined to be effective and consequently an unrealized gain of $0.2 million was recorded in other comprehensive income.

Foreign currency forward exchange contracts primarily relate to contracts entered into to hedge future known transactions or hedge balance sheet net cash positions. The movements in the carrying amounts and fair values of these contracts are largely due to changes in exchange rates against the U.S. dollar.

## Note 16. Derivative Instruments and Risk Management

The Company has limited involvement with derivative instruments and does not trade them. The Company does use derivatives to manage certain interest rate, foreign currency exchange rate and raw material cost exposures.

As at December 31, 2013 and 2012 the Company had no interest rate instruments designated as effective hedges. The interest rate swaps which expired on February 6, 2012 were ineffective at December 31, 2011 because the Company’s previous finance facility, which carried the corresponding floating rate debt obligations, had been repaid. Accordingly, a loss of $0.1 million was recognized in earnings in 2011.

The Company has hedged the cost of certain raw materials with commodity swaps which are summarized as follows:

<table><tr><td rowspan="3">(in millions)</td><td colspan="2">December 31, 2013</td><td colspan="2">December 31, 2012</td></tr><tr><td>Carrying</td><td rowspan="2">Fair Value</td><td>Carrying</td><td rowspan="2">Fair Value</td></tr><tr><td>Amount</td><td>Amount</td></tr><tr><td>Notional quantity - 275 tonnes</td><td></td><td></td><td>$ 0.1</td><td>$ 0.1</td></tr><tr><td>Notional quantity - 0 tonnes</td><td>$ 0.0</td><td>$ 0.0</td><td></td><td></td></tr></table>

We enter into various foreign currency forward exchange contracts which are intended to minimize currency exchange rate exposure from expected future cash flows. The contracts have maturity dates of up to four years at the date of inception. These foreign currency



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

forward exchange contracts have not been designated as hedging instruments, and their impact on the income statement in 2013, 2012 and 2011 is summarized below:

<table><tr><td rowspan="2">(in millions)</td><td rowspan="2">Location of Gain/(Loss) Recognized in Income</td><td colspan="3">Amount of Gain/(Loss) Recognized in Income</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Foreign currency forward exchange contracts</td><td>Other income/(expense)</td><td>$ (1.5)</td><td>$ 1.2</td><td>$ 1.3</td></tr></table>

The Company sells a range of Fuel Specialties, Performance Chemicals and Octane Additives to major oil refineries and chemical companies throughout the world. Credit limits, ongoing credit evaluation and account monitoring procedures are intended to minimize bad debt risk. Collateral is not generally required.

## Note 17. Commitments and Contingencies

## Operating leases

The Company has commitments under operating leases primarily for office space, motor vehicles and various items of computer and office equipment. The leases are expected to be renewed and replaced in the normal course of business. Rental expense was $3.1 million in 2013, $2.9 million in 2012 and $2.6 million in 2011. Future commitments under non-cancelable operating leases are as follows:

<table><tr><td>(in millions)</td><td></td></tr><tr><td>2014</td><td>$ 2.7</td></tr><tr><td>2015</td><td>2.6</td></tr><tr><td>2016</td><td>2.3</td></tr><tr><td>2017</td><td>1.9</td></tr><tr><td>2018</td><td>1.7</td></tr><tr><td>Thereafter</td><td>2.9</td></tr><tr><td></td><td>$14.1</td></tr></table>

Environmental remediation obligations

Commitments in respect of environmental remediation obligations are disclosed in Note 12.

## Contingencies

## Resolution of certain government investigations and other matters

As we have previously disclosed, in the first quarter of 2010, the Company reached a $40.2 million settlement to resolve all matters in respect of investigations by U.S. and United Kingdom government authorities into certain legacy transactions conducted by the Company



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and its subsidiaries under the United Nations Oil for Food Program (“OFFP”), the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.S. Cuban Assets Control Regulations (“CACR”) and United Kingdom anti-bribery laws. The settlement consists of fines, penalties and disgorgements which are payable over a period of four years commencing 2010. As at December 31, 2013, the expected schedule of payments was as follows:

<table><tr><td></td><td>Government</td><td>Compliance</td><td></td></tr><tr><td>(in millions)</td><td>Authorities</td><td>Monitor</td><td>Total</td></tr><tr><td>Fines, penalties and disgorgements</td><td>$ 40.2</td><td>$ 0.0</td><td>$ 40.2</td></tr><tr><td>Fees and associated expenses</td><td>0.0</td><td>3.9</td><td>3.9</td></tr><tr><td>Less discounting to fair value</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td></td><td>40.2</td><td>3.9</td><td>44.1</td></tr><tr><td>Amounts paid</td><td>(40.2)</td><td>(3.6)</td><td>(43.8)</td></tr><tr><td>Exchange effect</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td></td><td>0.0</td><td>0.3</td><td>0.3</td></tr><tr><td>Due within one year</td><td>0.0</td><td>(0.3)</td><td>(0.3)</td></tr><tr><td></td><td>$ 0.0</td><td>$ 0.0</td><td>$ 0.0</td></tr></table>

For accounting purposes only, we are required under GAAP, in accordance with our accounting policy, to discount elements of the fines, penalties and disgorgements to their fair value.

Jalal Bezee Mejel Al-Gaood & Partner litigation

On September 19, 2012, a claim was filed in the High Court of Justice in the United Kingdom by Jalal Bezee Mejel Al-Gaood & Partner and Future Agencies Company Limited (collectively “JAG”) against the Company, Innospec Limited and a former employee of Innospec Limited. The Company believes JAG was the former Iraq distributor for Afton Chemicals Limited, a subsidiary of NewMarket Corporation, from at least 2005 until termination of that relationship in 2010. The stated claim, inclusive of costs and expenses, is for up to $42.3 million and relates to alleged loss of profits for JAG’s business in Iraq between 2004 and 2010. The Company believes that the allegations in the JAG claim are without merit and intends to defend vigorously its interests.

## Settlement of NewMarket Corporation civil complaint

As we have previously disclosed, the Company and its subsidiaries, Alcor Chemie Vertriebs GmbH and Innospec Limited, were the subject of two civil actions brought by NewMarket Corporation and its subsidiary, Afton Chemical Corporation (collectively, “NewMarket”). NewMarket and the Company agreed to settle these actions pursuant to the terms of a settlement agreement between them signed on September 13, 2011 which provided for mutual releases of the parties and dismissal of the actions with prejudice. Under the settlement agreement, the Company will pay NewMarket an aggregate amount of



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

approximately $45.0 million, payable in a combination of cash, a promissory note and stock, of which $25.0 million was paid in cash in September 2011, $15.0 million is payable in three equal annual installments under the promissory note (carrying simple interest at 1% per annum) and approximately $5.0 million was paid in the form of 195,313 shares of the Company’s common stock transferred to NewMarket in September 2011. The first installment of the promissory note was paid on September 7, 2012 and the second installment was paid on September 9, 2013.

## Other legal matters

While we are involved from time to time in claims and legal proceedings that result from, and are incidental to, the conduct of our business including business and commercial litigation, employee and product liability claims, there are no other material pending legal proceedings to which the Company or 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 items could in the aggregate have a material adverse effect on results of operations for a particular year or quarter.

## Guarantees

The Company and certain of the 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 December 31, 2013, such contingent liabilities which are not recognized as liabilities in the consolidated financial statements amounted to $3.8 million.

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.



## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

## Note 18. Stockholders' Equity

<table><tr><td rowspan="2">(number of shares in thousands)</td><td colspan="3">Common Stock</td><td colspan="3">Treasury Stock</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>At January 1</td><td>29,555</td><td>29,555</td><td>29,555</td><td>6,222</td><td>6,507</td><td>5,851</td></tr><tr><td>Exercise of options</td><td>0</td><td>0</td><td>0</td><td>(632)</td><td>(333)</td><td>(236)</td></tr><tr><td>Acquisition-related stock issued</td><td>0</td><td>0</td><td>0</td><td>(471)</td><td>0</td><td>0</td></tr><tr><td>Stock purchases</td><td>0</td><td>0</td><td>0</td><td>89</td><td>48</td><td>1,087</td></tr><tr><td>Settlement of NewMarket</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Corporation civil complaint</td><td>0</td><td>0</td><td>0</td><td>0</td><td>0</td><td>(195)</td></tr><tr><td>At December 31</td><td>29,555</td><td>29,555</td><td>29,555</td><td>5,208</td><td>6,222</td><td>6,507</td></tr></table>

At December 31, 2013, the Company had authorized common stock of 40,000,000 shares (2012 – 40,000,000). Issued shares at December 31, 2013, were 29,554,500 (2012 – 29,554,500) and treasury stock amounted to 5,207,947 shares (2012 – 6,222,076).

## Note 19. Stock-Based Compensation Plans

## Stock option plans

The Company has five active stock option plans, two of which provide for the grant of stock options to employees, one provides for the grant of stock options to non-employee directors, and another provides for the grant of stock options to key executives on a matching basis provided they use a proportion of their annual bonus to purchase common stock in the Company on the open market or from the Company. The fifth plan is a savings plan which provides for the grant of stock options to all Company employees provided they commit to make regular savings over a pre-defined period which can then be used to purchase common stock upon vesting of the options. The stock options have vesting periods ranging from 24 months to 6 years and in all cases stock options granted expire within 10 years of the date of grant. All grants are at the sole discretion of the Compensation Committee of the Board of Directors. Grants may be priced at market value or at a premium or discount. The aggregate number of shares of common stock reserved for issuance which can be granted under the plans is 2,640,000.

The fair value of stock options is measured on the grant date using either the Black-Scholes model, or in cases where performance criteria are dependent upon external factors such as the Company’s stock price, using a Monte Carlo model. The following weighted average assumptions were used to determine the grant-date fair value of options:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Dividend yield</td><td>0.11%</td><td>0.0%</td><td>0.2%</td></tr><tr><td>Expected life</td><td>5 years</td><td>5 years</td><td>5 years</td></tr><tr><td>Volatility</td><td>41.1%</td><td>60.1%</td><td>78.3%</td></tr><tr><td>Risk free interest rate</td><td>0.46%</td><td>0.43%</td><td>1.22%</td></tr></table>



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the transactions of the Company’s stock option plans for the year ended December 31, 2013:

<table><tr><td></td><td>Number of Options</td><td>Weighted Average Exercise Price</td><td>Weighted Average Grant-Date Fair Value</td></tr><tr><td>Outstanding at December 31, 2012</td><td>1,001,241</td><td>$ 6.27</td><td></td></tr><tr><td>Granted - at discount</td><td>78,828</td><td>$ 0.00</td><td>$ 36.30</td></tr><tr><td>- at market value</td><td>22,161</td><td>$ 41.27</td><td>$ 16.09</td></tr><tr><td>Exercised</td><td>(629,152)</td><td>$ 5.96</td><td></td></tr><tr><td>Forfeited</td><td>(25,688)</td><td>$ 6.21</td><td></td></tr><tr><td>Outstanding at December 31, 2013</td><td>447,390</td><td>$ 7.33</td><td></td></tr></table>

At December 31, 2013, there were 186,741 stock options that were exercisable, 77,001 had performance conditions attached.

The Company’s policy is to issue shares from treasury stock to holders of stock options who exercise those options, but if sufficient treasury stock is not available, the Company will issue previously unissued shares of stock to holders of stock options who exercise options.

The total compensation cost for 2013, 2012 and 2011 was $2.5 million, $3.1 million and $3.1 million, respectively. The total intrinsic value of options exercised in 2013, 2012 and 2011 was $4.7 million, $1.5 million and $2.2 million, respectively.

The total compensation cost related to non-vested stock options not yet recognized at December 31, 2013 was $2.7 million and this cost is expected to be recognized over the weighted-average period of 2.07 years.

The cash tax benefit realized from stock option exercises totaled $5.7 million, $2.7 million and $1.7 million in 2013, 2012 and 2011, respectively. The excess tax benefit classified in financing activities was $3.8 million, $2.2 million and $1.1 million in 2013, 2012 and 2011, respectively.

No stock options awards were modified in 2013, 2012 or 2011.

## Stock equivalent units

The Company awards Stock Equivalent Units (“SEUs”) from time to time as a long-term performance incentive. SEUs are cash settled equity instruments conditional on certain performance criteria and linked to the Innospec Inc. share price. SEUs have vesting periods ranging from 11 months to 4 years and in all cases SEUs granted expire within 10 years of the date of grant. Grants may be priced at market value or at a premium or discount. There is no limit to the number of SEUs that can be granted. As at December 31, 2013 the liability for SEUs of $12.1 million is located in accrued liabilities in the consolidated balance sheets until they are cash settled.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The fair value of SEUs is measured at the balance sheet date using either the Black-Scholes model, or in cases where performance criteria are dependent upon external factors such as the Company’s stock price, using a Monte Carlo model. The following assumptions were used to determine the fair value of SEUs at the balance sheet dates:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Dividend yield</td><td>1.08%</td><td>0.0%</td><td>0.0%</td></tr><tr><td>Volatility</td><td>37.61%</td><td>43.8%</td><td>64.2%</td></tr><tr><td>Risk free interest rate</td><td>0.78%</td><td>0.36%</td><td>0.36%</td></tr></table>

The following table summarizes the transactions of the Company’s SEUs for the year ended December 31, 2013:

<table><tr><td></td><td>Number of SEUs</td><td>Weighted Average Exercise Price</td><td>Weighted Average Grant-Date Fair Value</td></tr><tr><td>Outstanding at December 31, 2012</td><td>623,828</td><td>$ 2.95</td><td></td></tr><tr><td>Granted - at discount</td><td>59,028</td><td>$ 0.00</td><td>$ 35.29</td></tr><tr><td>- at market value</td><td>6,970</td><td>$ 41.31</td><td>$ 16.09</td></tr><tr><td>Exercised</td><td>(281,703)</td><td>$ 2.25</td><td></td></tr><tr><td>Forfeited</td><td>(4,861)</td><td>$ 5.04</td><td></td></tr><tr><td>Outstanding at December 31, 2013</td><td>403,262</td><td>$ 3.64</td><td></td></tr></table>

At December 31, 2013, there were 64,019 SEUs that were exercisable, 57,677 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 total compensation cost for 2013, 2012 and 2011 was $7.1 million, $6.8 million and $5.9 million, respectively. The total intrinsic value of SEUs exercised in 2013, 2012 and 2011 was $2.2 million, $1.3 million and $0.4 million, respectively.

The weighted-average remaining vesting period of non-vested SEUs is 0.80 years.

## Long-term incentive plan

An additional long-term incentive plan was in place to reward selected executives for delivering exceptional performance. Under this plan a discretionary bonus was payable to eligible executives if the Innospec share performance out-performed that of competitors, as measured by the Russell 2000 Index, by a minimum of 10% over the five years from January 2008 to December 2012. The maximum bonus under this plan was $8 million and was



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ultimately earned by the participants. The fair value of these liability cash-settled stock appreciation rights was calculated on a quarterly basis using a Monte Carlo model and is summarized as follows:

<table><tr><td>(in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Balance at January 1</td><td>$ 1.3</td><td>$ 2.2</td><td>$ 0.8</td></tr><tr><td>Compensation charge</td><td>0.0</td><td>5.8</td><td>1.4</td></tr><tr><td>Cash paid</td><td>(1.3)</td><td>(6.7)</td><td>0.0</td></tr><tr><td>Balance at December 31</td><td>$ 0.0</td><td>$ 1.3</td><td>$ 2.2</td></tr></table>

The following assumptions were used in the Monte Carlo model:

<table><tr><td></td><td>2012</td><td>2011</td></tr><tr><td>Dividend yield</td><td>0.0%</td><td>0.0%</td></tr><tr><td>Volatility</td><td>0.0%</td><td>53.5%</td></tr><tr><td>Risk free interest rate</td><td>0.36%</td><td>0.36%</td></tr></table>

## Note 20. Reclassifications out of Accumulated Other Comprehensive Income/(Loss)

Reclassifications out of accumulated other comprehensive loss for 2013 were:

<table><tr><td>(in millions)</td><td>Amount Reclassified from AOCL</td><td>Affected Line Item in the Statement where Net Income is Presented</td></tr><tr><td>Details about AOCL Components</td><td></td><td></td></tr><tr><td>Derivative instruments:</td><td></td><td></td></tr><tr><td>Realized gain/(loss) on derivative instruments</td><td>$ (0.1)</td><td>Cost of goods sold</td></tr><tr><td></td><td>(0.1)</td><td>Total before tax</td></tr><tr><td></td><td>0.0</td><td>Income tax expense</td></tr><tr><td></td><td>$ (0.1)</td><td>Net of tax</td></tr><tr><td>Defined benefit pension plan items:</td><td></td><td></td></tr><tr><td>Amortization of prior service credit</td><td>$ (1.3)</td><td>See (1) below</td></tr><tr><td>Amortization of actuarial net losses</td><td>6.2</td><td>See (1) below</td></tr><tr><td></td><td>4.9</td><td>Total before tax</td></tr><tr><td></td><td>(1.1)</td><td>Income tax expense</td></tr><tr><td></td><td>3.8</td><td>Net of tax</td></tr><tr><td>Total reclassifications</td><td>$ 3.7</td><td>Net of tax</td></tr></table>

(1) These items are included in the computation of net periodic pension cost. See Note 9 for additional information.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Changes in accumulated other comprehensive loss for 2013, net of tax, were:

<table><tr><td>(in millions)</td><td>Unrealized Gains/ (Losses) on Derivative Instruments</td><td>Defined Benefit Pension Plan Items</td><td>Cumulative Translation Adjustments</td><td>Total</td></tr><tr><td>Balance at December 31, 2012</td><td>$ 0.1</td><td>$ (117.3)</td><td>$ (34.9)</td><td>$(152.1)</td></tr><tr><td>Other comprehensive income/(loss) before reclassifications</td><td>0.0</td><td>0.0</td><td>1.2</td><td>1.2</td></tr><tr><td>Actuarial net losses arising during the year</td><td></td><td>(6.7)</td><td></td><td>(6.7)</td></tr><tr><td>Amounts reclassified from AOCL</td><td>(0.1)</td><td>3.8</td><td>0.0</td><td>3.7</td></tr><tr><td>Net current period other comprehensive income/ (loss)</td><td>(0.1)</td><td>(2.9)</td><td>1.2</td><td>(1.8)</td></tr><tr><td>Balance at December 31, 2013</td><td>$ 0.0</td><td>$ (120.2)</td><td>$ (33.7)</td><td>$(153.9)</td></tr></table>

## Note 21. Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), which requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for annual periods, and interim periods within those years, beginning after December 15, 2013. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. We do not expect a material impact from the adoption of this guidance on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in ASU 2013-02 require the Company to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income, either on the face of the income statement or in the notes, if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts not required by GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures which provide additional information about the amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. As this guidance provides only presentation requirements, the adoption of this standard did not impact the Company’s results of operations, financial position or cash flows.



## Table of Contents

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 simplifies how entities test indefinite-lived intangible assets, other than goodwill, for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption is permitted). The implementation of the amended accounting guidance has not had a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The objective of ASU 2011-11 is to facilitate convergence of U.S. GAAP and International Financial Reporting Standards and improve the comparability of statements of financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements, and securities borrowing and securities lending arrangements. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Entities should provide the disclosures required by these amendments retrospectively for all comparative periods presented. The implementation of the amended accounting guidance has not had a material impact on our consolidated financial statements.

## Note 22. Related Party Transactions

Mr. Robert I. Paller has been a non-executive director of the Company since November 1, 2009. The Company has retained and continues to retain Smith, Gambrell & Russell, LLP (“SGR”), a law firm with which Mr. Paller holds a position. In 2013, 2012 and 2011 the Company incurred fees payable to SGR of $1.0 million, $0.8 million and $6.5 million, respectively. As at December 31, 2013, the amount due to SGR from the Company was $0.2 million.

## Note 23. Subsequent Events

The Company has evaluated subsequent events through the date that the consolidated financial statements were issued, and has concluded that no additional disclosures are required in relation to events subsequent to the balance sheet date.



## Table of Contents

## Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

## Item 9A 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 December 31, 2013.

## Management’s Report on Internal Control Over Financial Reporting

Our management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (within the meaning of Rule 13a-15(f) under the Securities Exchange Act of 1934). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Internal control over financial reporting includes those policies and procedures that:

- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Due to its inherent limitations, management does not believe that internal control over financial reporting will prevent or detect all errors or fraud. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of



## Table of Contents

December 31, 2013. In making this assessment, management used the criteria in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

As of December 31, 2013, management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, Chemtec’s and Bachman’s internal control over financial reporting associated with total assets of $126.0 million and total revenues of $21.5 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2013.

Based on the evaluation our management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company maintained effective internal control over financial reporting as of December 31, 2013, based on criteria in Internal Control – Integrated Framework (1992) issued by the COSO.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by KPMG Audit Plc, an independent registered public accounting firm, as stated in their report which is included in Item 8 of this Annual Report on Form 10-K.

## Changes in Internal Controls over Financial Reporting

The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal controls. This is intended to result in refinements to processes throughout the Company. As previously disclosed, we are continuing with the implementation of a new, company-wide, information system platform which began in 2011. The platform provider is well established in the market. The implementation is a phased, risk-managed, site deployment following a multistage user acceptance program with the existing platform providing a fallback position. We implemented the new platform at the majority of our U.S. sites in the third quarter of 2013. In connection with this implementation, the Company has updated its internal controls over financial reporting, as necessary, to accommodate modifications to its business processes and accounting procedures. As a consequence, none of the changes 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, have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Item 9B Other Information

None.



## Table of Contents

## PART III

## Item 10 Directors, Executive Officers and Corporate Governance

The information set forth under the headings “Re-Election of Two Class III Directors”, “Election of One Class III Director”, “Information about the Board of Directors,” “Information about the Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 2014 (“the Proxy Statement”) is incorporated herein by reference.

The Board of Directors has adopted a Code of Ethics that applies to the Company’s directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. Any stockholder who would like to receive a copy of our Code of Ethics, our Corporate Governance Guidelines or any charters of our Board’s committees may obtain them without charge by writing to the General Counsel and Chief Compliance Officer, Innospec Inc., 8310 South Valley Highway, Suite 350, Englewood, Colorado, 80112, e-mail investor@innospecinc.com. These and other documents can also be accessed via the Company’s web site, www.innospecinc.com.

The Company intends to disclose on its website any amendments to, or waivers from, its Code of Ethics that are required to be publicly disclosed pursuant to the rules of the SEC or NASDAQ.

Information regarding the Audit Committee of the Board of Directors, including membership and requisite financial expertise, set forth under the headings “Corporate Governance – Board Committees – Audit Committee” and “Audit Committee Report” in the 2014 Proxy Statement is incorporated herein by reference.

Information regarding the procedures by which stockholders may recommend nominees to the Board of Directors set forth under the heading “Corporate Governance – Board Committees – Nominating and Governance Committee” in the 2014 Proxy Statement is incorporated herein by reference.

## Item 11 Executive Compensation

The information set forth under the headings “Executive Compensation,” “Corporate Governance – Board Committees – Compensation Committee – Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.

## Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information set forth under the heading “Information About our Common Stock Ownership” in the Proxy Statement is incorporated herein by reference.



## Table of Contents

## Shares Authorized for Issuance Under Equity Compensation Plans

The information set forth in the table under the heading “Equity Compensation Plans” in the Proxy Statement is incorporated herein by reference.

## Item 13 Certain Relationships and Related Transactions, and Director Independence

The information set forth under the headings “Certain Other Transactions and Relationships”, “Certain Other Transactions Approval Policy” and “Corporate Governance – Director Independence” in the Proxy Statement is incorporated herein by reference.

## Item 14 Principal Accountant Fees and Services

Information regarding fees and services related to the Company’s independent registered public accounting firm, KPMG Audit Plc, is provided under the heading “Principal Accountant Fees and Services” in the Proxy Statement and is incorporated herein by reference. Information regarding the Audit Committee’s pre-approval policies and procedures is provided under the heading “Audit Committee Pre-approval Policies and Procedures” in the Proxy Statement and is incorporated herein by reference.



## PART IV

## Item 15

## (a) (1) Financial Statements

The Consolidated Financial Statements (including notes) of Innospec Inc. and its subsidiaries, together with the report of KPMG Audit Plc dated February 13, 2014, are set forth in Item 8.

## (2) Financial Statement Schedules

Financial statement schedules have been omitted since they are either included in the financial statements, not applicable or not required.

## (3) Exhibits

3.1 Amended and Restated Certificate of Incorporation of the Company. (1)

3.2 Amended and Restated By-laws of the Company. (2)

10.1 Executive Service Agreement of Mr. PJ Boon dated June 1, 2009. (3) *

10.2 Contract of Employment, Ian McRobbie. (4) *

10.3 Contract of Employment, Dr. Catherine Hessner. (5) *

10.4 Contract of Employment, Patrick Williams, dated October 11, 2005, (6) and Executive Service Agreement dated April 2, 2009. (7) *

10.5 Contract of Employment, Ian Cleminson, dated June 30, 2006. (8) *

10.6 Innospec Inc. Performance Related Stock Option Plan 2008. (9) *

10.7 Innospec Inc. Company Share Option Plan 2008. (9) *

10.8 Innospec Inc. Non Employee Directors' Stock Option Plan 2008. (9) *

10.9 Innospec Inc. Sharesave Plan 2008. (10) *

10.10 Innospec Inc. Executive Co-Investment Stock Plan 2004, as amended by the First Amendment. (11) *

10.11 $100,000,000 Multicurrency Revolving Facility Agreement dated December 14, 2011 with Lloyds TSB Bank plc as agent and security agent. (12)

10.12 Contract of Employment, David E. Williams, dated September 17, 2009. (13) *

10.13 Letters dated December 1, 2010 from the Board of Directors to the following officers regarding one off bonus payments: Patrick Williams, Ian P Cleminson, Philip J Boon, Ian McRobbie and Brian Watt. (14) *

10.14 Reward for Exceptional Performance One off Bonus Plan: January 2008 – December 2012. (15) *



10.15 Supplemental Agreement, dated August 28, 2013, among the Company, certain subsidiaries of the Company, and various lenders, including Lloyds TSB Bank Plc, as agent and security agent. (17)

12.1 Computation of Financial Ratios (filed herewith).

14 The Innospec Inc. Code of Ethics (as updated). (11)

16 Letter regarding change in certifying accountant dated June 17, 2011. (16)

21.1 Principal Subsidiaries of the Registrant (filed herewith).

23.1 Consent of Independent Registered Public Accounting Firm, KPMG Audit Plc (filed herewith).

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2 Certification of the Chief Financial Officer to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101 XBRL Instance Document and Related Items.

## Notes

(1) Filed with the Company’s Form 10-K on March 16, 2006.

(2) Filed with the Company’s Form 10-Q on May 10, 2011.

(3) Filed with the Company’s Form 8-K on May 27, 2009.

(4) Filed with the Company’s Form 10-K on March 28, 2003.

(5) Filed with the Company’s Form 10-K on March 31, 2005.

(6) Filed with the Company’s Form 8-K on October 12, 2005.

(7) Filed with the Company’s Form 8-K on April 3, 2009.

(8) Filed with the Company’s Form 8-K on June 30, 2006.

(9) Filed with the Company’s Proxy Statement on April 1, 2011.

(10) Filed with the Company’s Proxy Statement on March 31, 2008.

(11) Filed with the Company’s Form 10-K on February 17, 2012.



## Table of Contents

(12) Filed with the Company’s Form 8-K on December 19, 2011.

(13) Filed with the Company’s Form 8-K on September 14, 2009.

(14) Filed with the Company’s Form 10-K on February 18, 2011.

(15) Filed with the Company’s Form 10-Q on November 1, 2012.

(16) Filed with the Company’s Form 8-K on June 17, 2011.

(17) Filed with the Company’s Form 8-K on August 29, 2013.

* Denotes a management contract or compensatory plan.



## SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:

February 13, 2014

By: /s/ PATRICK S. WILLIAMS
Patrick S. Williams
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 13, 2014:

<table><tr><td>/s/ MILTON C. BLACKMORE</td><td>Chairman and Director</td></tr><tr><td>Milton C. Blackmore</td><td></td></tr><tr><td>/s/ IAN P. CLEMINSON</td><td>Executive Vice President and Chief Financial Officer</td></tr><tr><td>Ian P. Cleminson</td><td></td></tr><tr><td>/s/ PHILIP A. CURRAN</td><td>Group Financial Controller (Principal Accounting Officer)</td></tr><tr><td>Philip A. Curran</td><td></td></tr><tr><td>/s/ HUGH G. C. ALDOUS</td><td>Director</td></tr><tr><td>Hugh G. C. Aldous</td><td></td></tr><tr><td>/s/ MARTIN M. HALE</td><td>Director</td></tr><tr><td>Martin M. Hale</td><td></td></tr><tr><td>/s/ LAWRENCE J. PADFIELD</td><td>Director</td></tr><tr><td>Lawrence J. Padfield</td><td></td></tr><tr><td>/s/ ROBERT I. PALLER</td><td>Director</td></tr><tr><td>Robert I. Paller</td><td></td></tr><tr><td>/s/ JOACHIM ROESER</td><td>Director</td></tr><tr><td>Joachim Roeser</td><td></td></tr></table>



## EXHIBIT 12.1 – STATEMENT REGARDING COMPUTATION OF FINANCIAL RATIOS (in millions except financial ratios, share and per share data)

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td>2009</td></tr><tr><td>1. NET INCOME ATTRIBUTABLE TO INNOSPEC INC. AS A PERCENTAGE OF SALES</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>A</td><td>Net income attributable to Innospec Inc.</td><td>$ 77.8</td><td>66.9</td><td>$ 47.1</td><td>$ 69.9</td></tr><tr><td>B</td><td>Net sales</td><td>$ 818.8</td><td>776.4</td><td>$ 774.4</td><td>$ 683.2</td></tr><tr><td>A % of B</td><td>9.5%</td><td>8.6%</td><td>6.1%</td><td>10.2%</td><td>1.1%</td></tr><tr><td>2. EFFECTIVE TAX RATE AS A PERCENTAGE</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>C</td><td>Income taxes</td><td>$ 15.0</td><td>26.4</td><td>$ 3.1</td><td>$ (4.3)</td></tr><tr><td>D</td><td>Income before income taxes</td><td>$ 92.8</td><td>93.3</td><td>$ 50.2</td><td>$ 65.6</td></tr><tr><td>C % of D</td><td>16.2%</td><td>28.3%</td><td>6.2%</td><td>-6.6%</td><td>65.0%</td></tr><tr><td>3. CURRENT RATIO</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>E</td><td>Current assets</td><td>$ 407.4</td><td>296.6</td><td>$ 320.3</td><td>$ 321.9</td></tr><tr><td>F</td><td>Current liabilities</td><td>$ 155.6</td><td>147.3</td><td>$ 146.0</td><td>$ 158.9</td></tr><tr><td>Ratio of E to F</td><td>2.6</td><td>2.0</td><td>2.2</td><td>2.0</td><td>1.6</td></tr><tr><td>4. EARNINGS PER SHARE ATTRIBUTABLE TO INNOSPEC INC.</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>G</td><td>Net income attributable to Innospec Inc.</td><td>$ 77.8</td><td>66.9</td><td>$ 47.1</td><td>$ 69.9</td></tr><tr><td>H</td><td>Basic shares outstanding</td><td>23,651</td><td>23,187</td><td>23,568</td><td>23,756</td></tr><tr><td>I</td><td>Diluted shares outstanding</td><td>24,156</td><td>23,850</td><td>24,520</td><td>24,814</td></tr><tr><td>G/H</td><td>Basicearnings per share attributable to Innospec Inc.</td><td>$ 3.29</td><td>2.89</td><td>$ 2.00</td><td>$ 2.94</td></tr><tr><td>G/I</td><td>Dilutedearnings per share attributable to Innospec Inc.</td><td>$ 3.22</td><td>2.81</td><td>$ 1.92</td><td>$ 2.82</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td>$ 0.26</td></tr></table>

Shares in thousands, earnings per share attributable to Innospec Inc. in dollars.



## EXHIBIT 21.1 PRINCIPAL SUBSIDIARIES OF THE REGISTRANT

Alcor Chemie Vertriebs GmbH (Switzerland)
Innospec Active Chemicals LLC (USA)
Innospec Active Chemicals Limited (U.K.)
Innospec Deutschland GmbH (Germany)
Innospec Developments Limited (U.K.)
Innospec Environmental Limited (U.K.)
Innospec Finance Limited (U.K.)
Innospec France SA (France)
Innospec Fuel Specialties LLC (USA)
Innospec Fuel Specialties Limited (U.K.)
Innospec Holdings Limited (U.K.)
Innospec International Limited (U.K.)
Innospec Leuna GmbH (Germany)
Innospec Limited (U.K.)
Innospec Spain SL (Spain)
Innospec Trading Limited (U.K.)
Innospec Widnes Limited (U.K.)
Novoktan GmbH (Germany)
OBOAdler Company Limited (U.K.)
Societa Italiana Additivi Per Carburanti S.r.l. (Italy)
Innospec Oil Field Chemicals LLC (USA)



# Consent of Independent Registered Public Accounting Firm

The Board of Directors
Innospec Inc.:

We consent to the incorporation by reference, in the registration statements (Nos. 333-131687, 333-124139, 333-174050 and 333-174439) on Form S-8 of Innospec Inc., of our report dated February 13, 2014, with respect to the consolidated balance sheets of Innospec Inc. and its subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income and accumulated other comprehensive loss, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 2013, and the effectiveness of internal control over financial reporting as of December 31, 2013, which report appears in the December 31, 2013 annual report on Form 10-K of Innospec Inc..

Our report dated February 13, 2014, on the effectiveness of internal control over financial reporting as of December 31, 2013, contains an explanatory paragraph that states that our audit of internal control over financial reporting of Innospec Inc. excluded an evaluation of the internal control over financial reporting of Chemsil Silicones Inc. and Chemtec Chemical Co. which were acquired on August 30, 2013, and of Bachman Services Inc., Specialty Intermediaries Inc., Bachman Production Specialties Inc. and Bachman Drilling & Production Specialties Inc. which were acquired on November 4, 2013.

KPMG Audit Plc
Manchester, United Kingdom
February 13, 2014



## CERTIFICATION OF PATRICK S. WILLIAMS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Patrick S. Williams, certify that:

1. I have reviewed this annual report on Form 10-K of Innospec Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ PATRICK S. WILLIAMS



# CERTIFICATION OF IAN P. CLEMINSON PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ian P. Cleminson, certify that:

1. I have reviewed this annual report on Form 10-K of Innospec Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ IAN P. CLEMINSON

Ian P. Cleminson

Executive Vice President and Chief Financial Officer

February 13, 2014



# CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Innospec Inc. (the “Company”) for the period ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick S. Williams, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ PATRICK S. WILLIAMS

Patrick S. Williams
President and Chief Executive Officer

February 13, 2014

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of this Report or as a separate disclosure document.

A signed original of this written statement required by 18 U.S.C. §1350 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request.



# CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Innospec Inc. (the “Company”) for the period ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ian P. Cleminson, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ IAN P. CLEMINSON

Ian P. Cleminson
Executive Vice President and Chief Financial Officer

February 13, 2014

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of this Report or as a separate disclosure document.

A signed original of this written statement required by 18 U.S.C. §1350 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request.