Note 6. Goodwill

The following table analyzes goodwill for 2013 and 2012.


(in millions)	Fuel Specialties		Performance Chemicals		Octane Additives			Total
At January 1, 2012
Gross cost ⁽¹⁾	$	108.8	$	30.1	$	236.6		$	375.5
Accumulated impairment losses		0.0		0.0		(234.0	)		(234.0	)

Net book amount		108.8		30.1		2.6			141.5

Exchange effect		0.1		0.0		(0.1	)		0.0
Acquisitions		8.7		0.0		0.0			8.7
Impairment losses		0.0		0.0		(1.2	)		(1.2	)

At December 31, 2012
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

(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.

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 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:


(in millions)	Bachman
Net sales	$	9.7
Net income	$	0.3

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:


(in millions)	Bachman
Other intangible assets	$	25.9
Goodwill		22.9
Deferred tax on intangibles		(7.6	)
Other net assets acquired, excluding cash of $2.0m		17.6

Purchase price, net of cash acquired	$	58.8

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.

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:


(in millions)	Chemsil & Chemtec
Net sales	$	11.8
Net income	$	1.0

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:


(in millions)	Chemsil & Chemtec
Other intangible assets	$	34.0
Goodwill		16.7
Other net assets, excluding cash of $1.3m		6.7

Purchase price, net of cash acquired	$	57.4

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.


(in millions, except per share data)	2013		2012
Net sales	$	913.1	$	904.6
Net income	$	85.1	$	77.2
Earnings per share – basic	$	3.42	$	3.33
– diluted	$	3.36	$	3.24

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.