Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note 11. Income Taxes

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

(in millions)	Unrecognized Tax Benefits			Interest and Penalties			Total
Opening balance at January 1, 2021	$	13.6		$	2.4		$	16.0
Reductions for tax positions of prior periods		(1.3	)		—			(1.3	)
Additions for tax positions of prior periods		0.9			0.7			1.6
Closing balance at December 31, 2021		13.2			3.1			16.3
Current		—			—			—
Non-current	$	13.2		$	3.1		$	16.3
Opening balance at January 1, 2022	$	13.2		$	3.1		$	16.3
Reductions for tax positions of prior periods		(3.1	)		—			(3.1	)
Additions for tax positions of prior periods		0.1			0.1			0.2
Closing balance at December 31, 2022		10.2			3.2			13.4
Current		—			—			—
Non-current	$	10.2		$	3.2		$	13.4
Opening balance at January 1, 2023	$	10.2		$	3.2		$	13.4
Reductions for tax positions of prior periods		—			—			—
Additions for tax positions of prior periods		0.3			1.1			1.4
Closing balance at December 31, 2023		10.5			4.3			14.8
Current		(1.0	)		(0.2	)		(1.2	)
Non-current	$	9.5		$	4.1		$	13.6

All of the $14.8 million of unrecognized tax benefits would impact our effective tax rate if recognized.

In 2021 a non-U.S. subsidiary, Innospec Limited, entered into a review by the U.K. tax authorities under the U.K.’s Profit Diversion Compliance Facility (“PDCF”) in relation to the period 2017 to 2020 inclusive. The Company has determined that additional tax and interest totaling $1.2 million may arise as a result of the ongoing review. During 2023 the Company recorded an additional interest accrual of $0.1 million and a $0.1 million increase due to foreign exchange movements. The Company believes that it is reasonably possible that there will be a decrease of $1.2 million unrecognized tax benefits within the coming year in relation to this item resulting from effective settlement of the outstanding tax positions with the U.K. tax authorities.

A non-U.S. subsidiary, Innospec Performance Chemicals Italia Srl, is subject to an ongoing tax audit in relation to the period 2011 to 2014 inclusive. The Company has determined that additional tax, interest and penalties totaling $3.4 million may arise as a consequence of the tax audit. This includes additional interest accrued of $0.1 million and $0.1 million for foreign exchange movements recorded during 2023. As any additional tax arising as a consequence of the tax audit would be reimbursed by the previous owner under the terms of the sale and purchase agreement, an indemnification asset of the same amount is recorded in the financial statements to reflect this arrangement.

In 2018 the Company recorded an unrecognized tax benefit in relation to a potential adjustment that could arise as a consequence of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), but for which retrospective adjustment to the filed 2017 U.S. federal income tax returns was not permissible. The Company has

determined that additional tax, interest and penalties totaling $10.2 million may arise in relation to this item. This includes an increase in the unrecognized tax benefit of $0.1 million and additional interest accrued of $0.9 million recorded during 2023. The Company believes that it is reasonably possible that there will be a decrease of $10.2 million unrecognized tax benefits within the coming year in relation to this item due to a lapse of the statute of limitations.

As of December 31, 2023, the Company and its U.S. subsidiaries remain open to examination by the IRS for certain elements of 2017 year and for years 2020 onwards under the statute of limitations. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including Brazil (2019 onwards), Germany (2019 onwards), and the U.K. (2017 onwards).

The sources of income before income taxes were as follows:

(in millions)	2023		2022		2021
Domestic	$	95.2	$	106.3	$	53.2
Foreign		79.2		78.3		81.2
	$	174.4	$	184.6	$	134.4

The components of income tax expense are summarized as follows:

(in millions)	2023			2022			2021
Current:
Federal	$	12.4		$	27.0		$	12.4
State and local		0.2			6.5			2.6
Foreign		18.6			23.1			19.4
		31.2			56.6			34.4
Deferred:
Federal		5.2			(3.7	)		(1.9	)
State and local		0.3			(0.7	)		(0.3	)
Foreign		(1.4	)		(0.6	)		9.1
		4.1			(5.0	)		6.9
	$	35.3		$	51.6		$	41.3

Cash payments for income taxes were $54.3 million, $50.0 million and $36.8 million during 2023, 2022 and 2021, respectively.

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

(in percent)	2023			2022			2021
Statutory rate		21.0	%		21.0	%		21.0	%
Foreign income inclusions		2.1			3.3			1.7
Foreign tax rate differential		0.9			0.9			1.0
Tax charge/(credit) from previous years		(2.6	)		0.2			0.6
Net charge/(credit) from unrecognized tax benefits		0.7			(1.4	)		0.4
Foreign currency transactions		(1.4	)		3.5			0.1
Tax on unremitted earnings		1.4			0.3			0.1
Change in U.K. statutory tax rate		—			—			5.4
State and local taxes		1.0			2.2			1.3
U.S. incentive for foreign derived intangible income		(2.8	)		(2.7	)		(1.5	)
Innovation incentives		(1.3	)		(0.8	)		(1.1	)
Non-deductible officer compensation		1.0			1.4			0.2
Tax on closure of legacy operations		—			—			1.6
Other items and adjustments, net		0.2			0.1			(0.1	)
		20.2	%		28.0	%		30.7	%

Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S. tax regulations. 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 prevent offset. The effective tax rate is negatively impacted by the net impact of foreign inclusions post foreign tax credit usage in 2023.

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

As in the prior year, the level of foreign-derived intangible income benefit that the Company is entitled to has had a positive impact on the effective tax rate. There was also a benefit arising from adjustments to the tax charge for previous years, primarily arising from return to provision adjustments in relation to the federal and state tax returns filed in the U.S. during 2023.

Other items do not have a significant impact on the effective tax rate in either 2023 or 2022.

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

(in millions)	2023			2022
Deferred tax assets:
Stock compensation	$	3.7		$	3.7
Net operating loss carry forwards		9.2			10.9
Other intangible assets		8.7			10.5
Accretion expense		3.2			3.2
Restructuring provision		1.6			1.7
Employee related liabilities		7.3			8.1
Foreign tax credits		1.7			0.8
Operating lease liabilities		12.6			11.8
Inventory provisions		6.5			6.6
Research and experimental expenditure		5.3			2.7
Other		5.3			4.8
Subtotal		65.1			64.8
Less valuation allowance		(0.1	)		(0.7	)
Total net deferred tax assets	$	65.0		$	64.1
Deferred tax liabilities:
Property, plant and equipment	$	(24.8	)	$	(22.5	)
Intangible assets including goodwill		(31.2	)		(30.3	)
Pension asset		(7.6	)		(10.9	)
Customer relationships		(5.1	)		(3.4	)
Unremitted overseas earnings		(4.4	)		(1.9	)
Right-of-use assets		(12.5	)		(11.8	)
Other		(2.5	)		(3.6	)
Total deferred tax liabilities	$	(88.1	)	$	(84.4	)
Net deferred tax liability	$	(23.1	)	$	(20.3	)
Deferred tax assets	$	10.4		$	5.9
Deferred tax liabilities		(33.5	)		(26.2	)
	$	(23.1	)	$	(20.3	)

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Available evidence considered in determining the use of deferred tax assets includes, but is not limited to, cumulative losses arising in recent accounting periods, the Company’s estimate of future taxable income and any applicable tax-planning strategies. Based on such evidence, if it is more likely than not that some portion or all of such deferred tax assets will not be realized, a valuation allowance is recorded to reduce the Company’s deferred tax assets. On the basis of this evaluation, as of December 31, 2023, a valuation allowance of $0.1 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carry forward period are reduced or increased or if other evidence becomes available.

As of December 31, 2023, the Company has approximately $0.3 million of tax-effected state net operating loss carryforwards, net of federal benefit. Some of these loss carryforwards will begin to expire in 2036 if not utilized, while other can be carried forward indefinitely. The Company utilized all remaining federal

net operating loss carryforwards during 2023. The Company also has approximately $8.9 million of tax-effected foreign net operating loss carryforwards, net of valuation allowance, across five of the Company’s foreign subsidiaries, which can also be carried forward indefinitely.