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Income Taxes
 12 Months Ended
Dec. 31, 2024
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, 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

 

Opening balance at January 1, 2024

 

$

10.5

 

 

$

4.3

 

 

$

14.8

 

Reductions for tax positions of prior periods

 

 

(10.5

)

 

 

(5.1

)

 

 

(15.6

)

Additions for tax positions of prior periods

 

 

—

 

 

 

0.8

 

 

 

0.8

 

Closing balance at December 31, 2024

 

 

—

 

 

 

—

 

 

 

—

 

Current

 

 

—

 

 

 

—

 

 

 

—

 

Non-current

 

$

—

 

 

$

—

 

 

$

—

 

 

As at December 31, 2024, the Company has no unrecognized tax benefits.

 

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 had determined that additional tax and interest totaling $1.2 million would arise as a consequence of the review. During the quarter ended September 30, 2024 the Company and the U.K. tax authorities reached agreement on this position, and the liability was settled. The liability which was agreed on ultimate settlement was consistent with the amount recorded as a liability, and this item has been released from unrecognized tax benefits and recognized in income taxes.

 

A non-U.S. subsidiary, Innospec Performance Chemicals Italia Srl, was subject to a tax audit in relation to the period 2011 to 2014 inclusive. The Company had determined that additional tax, interest and penalties totaling $3.4 million would arise as a consequence of the tax audit. As any additional tax arising as a consequence of the tax audit is to be reimbursed by the previous owner under the terms of the sale and purchase agreement, an indemnification asset of the same amount was recorded in the financial statements to reflect this arrangement. During the quarter ended June 30, 2024, the Company submitted documentation to the tax authorities confirming its acceptance of the previously disputed position, and due to imminent settlement, this item was released from unrecognized tax benefits and recognized in accrued income taxes in that quarter.

 

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 determined that additional tax, interest and penalties totaling $11.0 million could arise in relation to this item. This includes an increase in additional interest accrued of $0.8 million recorded during 2024. As the statute of limitations in relation to this item lapsed in the quarter ended December 31, 2024, this item has now been released from unrecognized tax benefits in the final quarter.

 

The Company and its U.S. subsidiaries remain open to examination by the IRS for years 2021 onwards under the statute of limitations. The Company’s subsidiaries in foreign tax jurisdictions are open to examination including Brazil (2020 onwards), Germany (2020 onwards), and the U.K. (2023 onwards).

The sources of income before income taxes were as follows:

(in millions)

 

2024

 

 

2023

 

 

2022

 

Domestic

 

$

90.2

 

 

$

95.2

 

 

$

106.3

 

Foreign

 

 

(49.0

)

 

 

79.2

 

 

 

78.3

 

 

 

$

41.2

 

 

$

174.4

 

 

$

184.6

 

 

The components of income tax expense are summarized as follows:

(in millions)

 

2024

 

 

2023

 

 

2022

 

Current:

 

 

 

 

 

 

 

 

 

Federal

 

$

16.9

 

 

$

12.4

 

 

$

27.0

 

State and local

 

 

2.9

 

 

 

0.2

 

 

 

6.5

 

Foreign

 

 

26.2

 

 

 

18.6

 

 

 

23.1

 

 

 

 

46.0

 

 

 

31.2

 

 

 

56.6

 

Deferred:

 

 

 

 

 

 

 

 

 

Federal

 

 

(4.1

)

 

 

5.2

 

 

 

(3.7

)

State and local

 

 

(0.5

)

 

 

0.3

 

 

 

(0.7

)

Foreign

 

 

(35.8

)

 

 

(1.4

)

 

 

(0.6

)

 

 

 

(40.4

)

 

 

4.1

 

 

 

(5.0

)

 

 

$

5.6

 

 

$

35.3

 

 

$

51.6

 

 

Cash payments for income taxes were $51.7 million, $54.3 million and $50.0 million during 2024, 2023 and 2022, respectively.

The effective tax rate varies from the U.S. federal statutory rate because of the factors indicated below. In considering the items that create variances when compared to the U.S. federal statutory rate, it is worth

noting that the percentage impact of a given item in the table below would be higher in 2024 because income before income taxes in 2024 is significantly lower than in 2023 and prior years.

(in percent)

 

2024

 

 

2023

 

 

2022

 

Statutory rate

 

 

21.0

%

 

 

21.0

%

 

 

21.0

%

Foreign income inclusions

 

 

13.5

 

 

 

2.1

 

 

 

3.3

 

Foreign tax rate differential

 

 

(3.2

)

 

 

0.9

 

 

 

0.9

 

Tax charge/(credit) from previous years

 

 

(1.0

)

 

 

(2.6

)

 

 

0.2

 

Net charge/(credit) from unrecognized tax benefits

 

 

(24.6

)

 

 

0.7

 

 

 

(1.4

)

Foreign currency transactions

 

 

(0.9

)

 

 

(1.4

)

 

 

3.5

 

Tax on unremitted earnings

 

 

1.9

 

 

 

1.4

 

 

 

0.3

 

State and local taxes

 

 

4.6

 

 

 

1.0

 

 

 

2.2

 

U.S. incentive for foreign derived intangible income

 

 

(4.8

)

 

 

(2.8

)

 

 

(2.7

)

Innovation incentives

 

 

(6.9

)

 

 

(1.3

)

 

 

(0.8

)

Non-deductible officer compensation

 

 

4.7

 

 

 

1.0

 

 

 

1.4

 

Adjustment to contingent consideration

 

 

1.8

 

 

 

—

 

 

 

—

 

Movement in unrecognized deferred taxes

 

 

6.6

 

 

 

(0.3

)

 

 

—

 

Impact of internal reorganizations

 

 

1.2

 

 

 

—

 

 

 

—

 

Meals and entertainment

 

 

0.8

 

 

 

0.2

 

 

 

0.1

 

Stock compensation

 

 

(0.9

)

 

 

(0.5

)

 

 

—

 

Other items and adjustments, net

 

 

(0.2

)

 

 

0.8

 

 

 

—

 

 

 

 

13.6

%

 

 

20.2

%

 

 

28.0

%

 

The effective tax rate has been positively impacted by the current year recognition of previously unrecognized tax benefits. This item arose due to the lapse of the statute of limitations associated with the unrecognized tax benefit in the final quarter of 2024. This item had a lesser impact in prior years, with a negative impact on the effective tax rate in 2023 and a positive impact in 2022.

Foreign income inclusions arise each year from certain types of income earned overseas being taxable under U.S. 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 in 2024 and the disclosed prior years has been negatively impacted by these items.

 

The Company is subject to state taxes and local taxes primarily in the U.S. in addition to federal taxes. The effective tax rate in 2024 and the disclosed prior years has been negatively impacted by these taxes. While the absolute amount of such taxes incurred in 2024 is comparable to prior years, as income before income taxes is substantially lower it has a higher overall impact on the effective tax rate.

 

The level of foreign-derived intangible income benefit that the Company is entitled to has had a positive impact on the effective tax rate in both 2024 and the disclosed prior years.

 

The Company benefits from innovation reliefs in relation to relevant research and development expenditure in certain jurisdictions, notably the U.S. and the U.K., which have a positive impact on the effective tax rate. While the absolute amount of such reliefs claimed in 2024 is comparable to prior years, as income before income taxes is substantially lower it has a higher overall impact on the effective tax rate.

 

The Company considers that there is insufficient evidence that sufficient future taxable income will arise in certain territories to allow for the recognition of deferred tax assets. In such cases, a valuation allowance is applied, which results in a permanent adjustment to the tax charge and therefore impacts on the effective tax rate. There is an increase in the valuation allowances in 2024 which have a negative impact on the effective tax rate. The rate was positively impacted by this item in 2023 as an assessment of evidence allowed for the recognition of previously unrecognized deferred taxes.

 

 

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

(in millions)

 

2024

 

 

2023

 

Deferred tax assets:

 

 

 

 

 

 

Stock compensation

 

$

3.7

 

 

$

3.7

 

Net operating loss carry forwards

 

 

8.8

 

 

 

9.2

 

Other intangible assets

 

 

4.8

 

 

 

8.7

 

Accretion expense

 

 

3.2

 

 

 

3.2

 

Restructuring provision

 

 

1.5

 

 

 

1.6

 

Employee related liabilities

 

 

9.2

 

 

 

7.5

 

Foreign tax credits

 

 

2.1

 

 

 

1.7

 

Operating lease liabilities

 

 

11.1

 

 

 

12.6

 

Inventory provisions

 

 

9.0

 

 

 

6.5

 

Pensions

 

 

0.5

 

 

 

—

 

Carried forward interest deductions

 

 

1.4

 

 

 

0.5

 

Bad debt reserves

 

 

1.4

 

 

 

1.6

 

Research and experimental expenditure

 

 

8.3

 

 

 

5.3

 

Other

 

 

3.4

 

 

 

3.0

 

Subtotal

 

 

68.4

 

 

 

65.1

 

Less valuation allowance

 

 

(2.4

)

 

 

(0.1

)

Total net deferred tax assets

 

$

66.0

 

 

$

65.0

 

Deferred tax liabilities:

 

 

 

 

 

 

Property, plant and equipment

 

$

(29.5

)

 

$

(24.8

)

Intangible assets including goodwill

 

 

(31.6

)

 

 

(31.2

)

Pension asset

 

 

—

 

 

 

(7.6

)

Customer relationships

 

 

(1.7

)

 

 

(5.1

)

Unremitted overseas earnings

 

 

(5.1

)

 

 

(4.4

)

Right-of-use assets

 

 

(10.7

)

 

 

(12.5

)

Other

 

 

(1.5

)

 

 

(2.5

)

Total deferred tax liabilities

 

$

(80.1

)

 

$

(88.1

)

Net deferred tax liability

 

$

(14.1

)

 

$

(23.1

)

Deferred tax assets

 

$

9.4

 

 

$

10.4

 

Deferred tax liabilities

 

 

(23.5

)

 

 

(33.5

)

 

$

(14.1

)

 

$

(23.1

)

 

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, 2024, a valuation allowance of $2.4 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, 2024, the Company has approximately $0.2 million of tax-effected state net operating loss carryforwards, net of federal benefit. Some of these loss carryforwards will begin to expire in 2037 if not utilized. The Company also has approximately $7.0 million of tax-effected foreign net operating loss carryforwards, net of valuation allowance, across four of the Company’s foreign subsidiaries, which can also be carried forward indefinitely.