Note 6. Goodwill

The following table analyzes goodwill for 2014 and 2013.


(in millions)	Fuel Specialties			Performance Chemicals			Octane Additives			Total
At January 1, 2013
Gross cost ⁽¹⁾	$	117.6		$	30.1		$	236.5		$	384.2
Accumulated impairment losses		0.0			0.0			(235.2	)		(235.2	)

Net book amount		117.6			30.1			1.3			149.0

Exchange effect		0.0			0.0			0.0			0.0
Acquisitions		22.9			16.7			0.0			39.6
Adjustments to purchase price allocation		0.6			0.0			0.0			0.6
Impairment losses		0.0			0.0			(1.3	)		(1.3	)

At December 31, 2013
Gross cost ⁽¹⁾		141.1			46.8			236.5			424.4
Accumulated impairment losses		0.0			0.0			(236.5	)		(236.5	)

Net book amount		141.1			46.8			0.0			187.9

Exchange effect		(0.3	)		(0.1	)		0.0			(0.4	)
Acquisitions		88.1			0.0			0.0			88.1
Adjustments to purchase price allocation		0.5			0.0			0.0			0.5
Impairment losses		0.0			0.0			0.0			0.0

At December 31, 2014
Gross cost ⁽¹⁾		229.4			46.7			236.5			512.6
Accumulated impairment losses		0.0			0.0			(236.5	)		(236.5	)

Net book amount	$	229.4		$	46.7		$	0.0		$	276.1

(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, 2014, the fair value of our Fuel Specialties and Performance Chemicals segments substantially exceeds the carrying value.

To determine the fair value of each of our segments we utilize a discounted cash flow methodology based on the forecast 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 forecast 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 2014 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, 2014 we had $229.4 million and $46.7 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.

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.

Independence Acquisition

On October 27, 2014, the Company acquired 100% of the membership interests in Independence Oilfield Chemicals LLC (“Independence”). Independence, based in Houston Texas, services the oil and gas industry, with a focus on completion, stimulation and production chemicals. We purchased Independence for a total discounted consideration of $191.8 million, with an initial payment at closing of $99.0 million funded from existing cash and debt facilities. As Independence has been in a phase of very rapid growth, the remaining payments are performance related and contingently payable over the next two years based on a multiple of Independence’s annualized earnings before interest, taxes, depreciation and amortization plus a percentage of free cash flow. Based on the current forecasts for Independence’s performance, Innospec will make two deferred consideration payments, with the first one being $45.7 million payable approximately one year after closing, and the second one being $49.5 million payable approximately two years after closing, with a portion of such deferred payments payable, at Innospec’s election, in shares of Innospec’s common stock. We acquired the business in order to move forward our strategy of building a new market leader 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 Independence, including an accretion charge of $2.4 million:


(in millions)	Independence
Net sales	$	35.0
Net income	$	0.2

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 Independence. 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:


(in millions)	Independence
Goodwill	$	88.1
Other intangible assets		63.8
Fixed assets		18.6
Other net assets acquired		21.3

Purchase price, net of cash acquired	$	191.8

Independence, and the associated goodwill, are included within our Fuel Specialties segment for management and reporting purposes (see Note 7 of the Notes to the Consolidated Financial Statements for further information on the other intangible assets). There is currently no goodwill amortizable for tax purposes.

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 all the Company’s acquisitions including Independence been completed as of January 1, 2013. 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.


(in millions, except per share data)	2014		2013
Net sales	$	1,046.2	$	991.2
Net income	$	77.0	$	72.3
Earnings per share – basic	$	3.16	$	3.06
– diluted	$	3.10	$	2.99

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.