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11: R1 Cover page HTML 76K
12: R2 Condensed Consolidated Statements of Operations HTML 89K
(Unaudited)
13: R3 Condensed Consolidated Statements of Comprehensive HTML 74K
Income (Loss) (Unaudited)
14: R4 Condensed Consolidated Statements of Comprehensive HTML 50K
Income (Loss) (Unaudited) (Parenthetical)
15: R5 Condensed Consolidated Balance Sheets HTML 139K
16: R6 Condensed Consolidated Balance Sheets HTML 49K
(Parentheticals)
17: R7 Condensed Consolidated Statements of Cash Flows HTML 140K
(Unaudited)
18: R8 Condensed Consolidated Statements of Cash Flows HTML 29K
(Unaudited) (Parenthetical)
19: R9 Background HTML 32K
20: R10 New Accounting Guidance HTML 37K
21: R11 Revenues HTML 70K
22: R12 Fair Value Measurements HTML 92K
23: R13 Inventories, net HTML 34K
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26: R16 Financial Instruments and Risk Management HTML 127K
27: R17 Debt including Finance Lease Obligations HTML 54K
28: R18 Equity HTML 299K
29: R19 Retirement Plans HTML 64K
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31: R21 Income Taxes HTML 80K
32: R22 Commitments and Contingencies HTML 30K
33: R23 Segment Information HTML 68K
34: R24 Earnings (Loss) per Share HTML 49K
35: R25 Subsequent Events HTML 27K
36: R26 Background (Policies) HTML 43K
37: R27 Revenues (Tables) HTML 69K
38: R28 Fair Value Measurements (Tables) HTML 89K
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55: R45 Fair Value Measurements - Narrative (Details) HTML 93K
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Carrying Amount (Details)
61: R51 Goodwill and Other Intangible Assets, net - HTML 42K
Intangible Assets (Details)
62: R52 Goodwill and Other Intangible Assets, net - HTML 30K
Intangible Assets by Segments (Details)
63: R53 Goodwill and Other Intangible Assets, net - HTML 38K
Maturity (Details)
64: R54 Financial Instruments and Risk Management - HTML 67K
Narrative (Details)
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Value of Hedging Contracts (Details)
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Long-term Debt (Details)
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Narrative (Details)
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(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i4920 O'Hear Avenue Suite 400
iNorth
Charleston
iSouth Carolina
i29405
(Address
of principal executive offices)
(Zip code)
i843-i740-2300
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock ($0.01 par value)
iNGVT
iNew
York Stock Exchange
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. iYesx
No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files). iYesx No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the
Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ix
Condensed Consolidated Statements of Operations (Unaudited)
Three
Months Ended September 30,
Nine Months Ended September 30,
In millions, except per share data
2022
2021
2022
2021
Net sales
$
i482.0
$
i376.8
$
i1,284.7
$
i1,055.5
Cost
of sales
i305.7
i235.0
i820.0
i647.7
Gross
profit
i176.3
i141.8
i464.7
i407.8
Selling,
general, and administrative expenses
i54.2
i43.5
i142.9
i131.0
Research
and technical expenses
i7.6
i6.8
i23.1
i19.3
Restructuring
and other (income) charges, net
i3.3
i4.1
i10.6
i12.3
Acquisition-related
costs
i1.9
i0.2
i1.9
i0.9
Other
(income) expense, net
i2.0
i84.6
(i1.0)
i81.6
Interest
expense, net
i11.5
i11.6
i37.3
i36.2
Income
(loss) before income taxes
i95.8
(i9.0)
i249.9
i126.5
Provision
(benefit) for income taxes
i20.4
(i4.8)
i53.9
i37.7
Net
income (loss)
$
i75.4
$
(i4.2)
$
i196.0
$
i88.8
Per
share data
Basic earnings (loss) per share
$
i1.99
$
(i0.11)
$
i5.10
$
i2.22
Diluted
earnings (loss) per share
i1.98
(i0.11)
i5.06
i2.21
The
accompanying notes are an integral part of these financial statements.
3
INGEVITY CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three
Months Ended September 30,
Nine Months Ended September 30,
In millions
2022
2021
2022
2021
Net income (loss)
$
i75.4
$
(i4.2)
$
i196.0
$
i88.8
Other
comprehensive income (loss), net of tax:
Foreign currency adjustments:
Foreign currency translation adjustment
(i55.3)
(i16.7)
(i124.9)
(i8.5)
Unrealized
gain (loss) on net investment hedges, net of tax provision (benefit) of $i1.0, $i0.9,
$i3.2, $i1.9
i3.4
i2.9
i10.7
i6.1
Total
foreign currency adjustments, net of tax provision (benefit) of $i1.0, $i0.9,
$i3.2, $i1.9
(i51.9)
(i13.8)
(i114.2)
(i2.4)
Derivative
instruments:
Unrealized gain (loss), net of tax provision (benefit) of $i0.8, $i0.8,
$i3.5, $i1.6
i2.7
i2.8
i11.4
i5.3
Reclassifications
of deferred derivative instruments (gain) loss, included in net income (loss), net of tax (provision) benefit of $(i0.7), $(i0.1),
$(i1.7), $(i0.1)
(i2.4)
(i0.1)
(i5.7)
(i0.2)
Total
derivative instruments, net of tax provision (benefit) of $i0.1, $i0.7,
$i1.8, $i1.5
i0.3
i2.7
i5.7
i5.1
Pension
& other postretirement benefits:
Unrealized actuarial gains (losses) and prior service (costs) credits, net of tax of iiiizero///
for all periods
i—
i—
i—
i—
Reclassifications
of net actuarial and other (gain) loss and amortization of prior service cost, included in net income, net of tax of iiiizero///
for all periods
i—
i—
i0.1
i0.1
Total
pension and other postretirement benefits, net of tax of iiiizero///
for all periods
i—
i—
i0.1
i0.1
Other
comprehensive income (loss), net of tax provision (benefit) of $i1.1, $i1.6, $i5.0,
$i3.4
(i51.6)
(i11.1)
(i108.4)
i2.8
Comprehensive
income (loss)
$
i23.8
$
(i15.3)
$
i87.6
$
i91.6
The
accompanying notes are an integral part of these financial statements.
Accounts
receivable, net of allowance for credit losses of $i2.3 - 2022 and $i2.0 - 2021
i248.4
i161.7
Inventories,
net
i281.8
i241.2
Prepaid and other current assets
i42.6
i46.6
Current
assets
i645.1
i724.9
Property, plant and equipment, net
i720.7
i719.7
Operating
lease assets, net
i47.3
i52.4
Goodwill
i387.6
i442.0
Other
intangibles, net
i272.2
i337.6
Deferred
income taxes
i6.9
i6.8
Restricted
investment, net of allowance for credit losses of $i0.6 - 2022 and $i0.5 - 2021
i77.5
i76.1
Other
assets
i178.1
i109.5
Total Assets
$
i2,335.4
$
i2,469.0
Liabilities
Accounts
payable
$
i164.6
$
i125.8
Accrued
expenses
i56.9
i51.7
Accrued
payroll and employee benefits
i44.7
i48.2
Current
operating lease liabilities
i16.4
i17.4
Notes
payable and current maturities of long-term debt
i0.9
i19.6
Income
taxes payable
i6.8
i6.2
Current liabilities
i290.3
i268.9
Long-term
debt including finance lease obligations
i1,153.2
i1,250.0
Noncurrent
operating lease liabilities
i31.8
i36.2
Deferred
income taxes
i106.6
i114.6
Other
liabilities
i119.6
i125.5
Total
Liabilities
i1,701.5
i1,795.2
Commitments
and contingencies (Note 14)
i
i
Equity
Preferred
stock (par value $ii0.01/
per share; ii50,000,000/ shares
authorized; iiiizero///
issued and outstanding - 2022 and 2021)
i—
i—
Common
stock (par value $ii0.01/ per
share; ii300,000,000/ shares authorized; issued:
i43,212,857 - 2022 and i43,102,011 - 2021; outstanding: i37,358,879
- 2022 and i39,269,399 - 2021)
i0.4
i0.4
Additional
paid-in capital
i147.5
i136.3
Retained
earnings
i992.1
i796.1
Accumulated
other comprehensive income (loss)
(i95.3)
i13.1
Treasury
stock, common stock, at cost (i5,853,978 shares - 2022 and i3,832,612 shares - 2021)
(i410.8)
(i272.1)
Total
Equity
i633.9
i673.8
Total Liabilities and Equity
$
i2,335.4
$
i2,469.0
The
accompanying notes are an integral part of these financial statements.
5
INGEVITY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine
Months Ended September 30,
In millions
2022
2021
Cash provided by (used in) operating activities:
Net income (loss)
$
i196.0
$
i88.8
Adjustments
to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization
i78.6
i81.7
Non-cash
operating lease costs
i13.5
i12.9
Deferred
income taxes
(i2.2)
(i2.2)
LIFO
Reserve
i10.7
(i1.9)
Share-based
compensation
i11.1
i9.8
Other
non-cash items
i15.2
i10.6
Changes
in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
(i98.4)
(i28.2)
Inventories,
net
(i63.3)
(i37.3)
Prepaid
and other current assets
(i2.3)
(i7.5)
Accounts
payable
i48.2
i20.3
Accrued
expenses
i5.3
(i0.2)
Accrued
payroll and employee benefits
(i2.7)
i9.6
Income
taxes
i10.1
(i4.6)
Litigation
verdict charge
i—
i85.0
Operating
leases
(i15.5)
(i15.3)
Changes
in other operating assets and liabilities, net
i10.6
(i4.5)
Net
cash provided by (used in) operating activities
$
i214.9
$
i217.0
Cash
provided by (used in) investing activities:
Capital expenditures
$
(i93.3)
$
(i66.4)
Purchase
of strategic investments
(i62.8)
(i16.5)
Net
investment hedge settlement
i14.7
i—
Other
investing activities, net
(i3.3)
(i0.5)
Net
cash provided by (used in) investing activities
$
(i144.7)
$
(i83.4)
Cash
provided by (used in) financing activities:
Proceeds from revolving credit facility
$
i788.0
$
i—
Payments
on revolving credit facility
(i279.0)
i—
Payments
on long-term borrowings
(i628.1)
(i18.8)
Debt
issuance costs
(i3.0)
i—
Debt
repayment costs
(i3.8)
i—
Finance
lease obligations, net
(i0.4)
(i0.6)
Borrowings
(repayments) of notes payable and other short-term borrowings, net
i—
(i1.9)
Tax
payments related to withholdings on vested equity awards
(i2.2)
(i2.4)
Proceeds
and withholdings from share-based compensation plans, net
i2.8
i3.7
Repurchases
of common stock under publicly announced plan
(i139.2)
(i100.3)
Net
cash provided by (used in) financing activities
$
(i264.9)
$
(i120.3)
Increase
(decrease) in cash, cash equivalents, and restricted cash
(i194.7)
i13.3
Effect
of exchange rate changes on cash
(i8.6)
(i1.8)
Change
in cash, cash equivalents, and restricted cash
(i203.3)
i11.5
Cash,
cash equivalents, and restricted cash at beginning of period
i276.1
i258.4
Cash,
cash equivalents, and restricted cash at end of period(1)
$
i72.8
$
i269.9
(1)
Includes restricted cash of $i0.5 million and $i0.5 million and cash and cash equivalents of $i72.3
million and $i269.4 million at September 30, 2022 and 2021, respectively. Restricted cash is included within "Prepaid and other current assets" within the condensed consolidated balance sheets.
Supplemental cash flow information:
Cash
paid for interest, net of capitalized interest
$
i35.9
$
i35.5
Cash
paid for income taxes, net of refunds
i42.6
i43.2
Purchases
of property, plant and equipment in accounts payable
i5.1
i5.9
Leased
assets obtained in exchange for new operating lease liabilities
i9.2
i14.7
The
accompanying notes are an integral part of these financial statements.
6
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
Ingevity Corporation ("Ingevity,""the Company,""we,""us," or "our") provides products and technologies that purify, protect, and enhance the
world around us. Through a team of talented and experienced people, we develop, manufacture, and bring to market solutions that help customers solve complex problems and make the world more sustainable. We report in itwo business segments, Performance Materials and Performance Chemicals.
Our Performance Materials segment manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets. Automotive technologies products are sold into gasoline
vapor emission control applications within the automotive industry, while process purification products are sold into the food, water, beverage, and chemical purification industries.
Our Performance Chemicals segment consists of our pavement technologies, industrial specialties, and engineered polymers product lines. Performance Chemicals manufactures products derived from crude tall oil ("CTO") and lignin extracted from the kraft pulping process as well as caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including warm mix paving, pavement preservation, and pavement reconstruction and recycling (pavement technologies product line); adhesives, agrochemicals, lubricants, printing inks, industrial intermediates, and oilfield (industrial specialties product line); and coatings,
resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line).
ii
Basis of Consolidation and Presentation
These unaudited Condensed Consolidated Financial Statements reflect the consolidated
operations of the Company and have been prepared in accordance with United States Securities and Exchange Commission ("SEC") interim reporting requirements. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for full financial statements and should be read in conjunction with the Annual Consolidated Financial Statements for the years ended December 31, 2021, 2020 and 2019, collectively referred to as the “Annual Consolidated Financial Statements,” included in our Annual Report on Form 10-K for the year ended December 31, 2021
(the "2021 Annual Report").
In the opinion of management, the Condensed Consolidated Financial Statements contain all adjustments, which include only normal recurring adjustments, necessary to fairly state the condensed consolidated results for the interim periods presented. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
The preparation of the Condensed Consolidated Financial Statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform with the current year's presentation.
/
Note
2: iNew Accounting Guidance
The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" or "Codification") is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update ("ASU") to communicate changes to the Codification. We consider the applicability and impact of all ASUs. ASUs not listed below
were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.
i
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The ASU is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract
modifications and hedge accounting to ease the financial reporting burdens related to the
7
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance
became effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively until December 31, 2022. As of September 30, 2022, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief, if necessary, as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We do not expect this new standard to have a material impact on our consolidated financial statements.
Note 3: iRevenues
Disaggregation
of Revenue
i
The following table presents our Net sales disaggregated by product line.
Three
Months Ended September 30,
Nine Months Ended September 30,
In millions
2022
2021
2022
2021
Performance
Materials segment
$
i144.9
$
i118.1
$
i415.7
$
i384.8
Performance
Chemicals segment
Pavement Technologies product line
i88.3
i73.2
i194.0
i162.4
Industrial
Specialties product line
i179.3
i132.6
i489.9
i364.7
Engineered
Polymers product line
i69.5
i52.9
i185.1
i143.6
Total
$
i337.1
$
i258.7
$
i869.0
$
i670.7
Net
sales
$
i482.0
$
i376.8
$
i1,284.7
$
i1,055.5
The
following table presents our Net sales disaggregated by geography, based on the delivery address of our customer.
The following table provides information about contract assets and contract liabilities from contracts with customers. The contract assets primarily relate to our rights to consideration
for products produced but not billed at the reporting date. The contract assets are recognized as accounts receivables when the rights become unconditional and the customer has been billed. Contract liabilities represent obligations to transfer goods to a customer for which we have received consideration from our customer. For all periods presented we had iino/contract liabilities.
The
following information is presented for assets and liabilities that are recorded in the condensed consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that were recorded at fair value between the three-level fair value hierarchy during the periods reported.
(1)
Quoted prices in active markets for identical assets.
(2) Quoted prices for similar assets and liabilities in active markets.
(3) Significant unobservable inputs.
(4) Consists of a deferred compensation arrangement, through which we hold various investment securities. Both the asset and liability are recorded at fair value and are included within "Other assets" and "Other liabilities" on the condensed consolidated balance sheets, respectively. In addition to the investment securities, we also have company-owned life insurance ("COLI") related to the deferred compensation arrangement. COLI is recorded at cash surrender value and included in "Other assets" on the condensed consolidated balance sheets in the amount of $i12.7
million and $i14.0 million at September 30, 2022 and December 31, 2021, respectively.
(5) Included within "Other liabilities" on the condensed consolidated balance sheets.
/
Nonrecurring
Fair Value Measurements
There were no nonrecurring fair value measurements in the condensed consolidated balance sheet during the quarters ended September 30, 2022 and December 31, 2021.
Strategic Investments
During the first and third quarters of 2022, we acquired itwo strategic investments in privately-held companies
for $i2.0 million and $i60.0 million respectively, which are accounted for under the measurement alternative
method. The aggregate carrying value of all measurement alternative investments where fair value is not readily determinable totaled $i80.8 million and $i18.8
million at September 30, 2022 and December 31, 2021, respectively. There were no adjustments to the carrying value of the measurement alternative method investments for impairment or observable price changes for the period ended September 30, 2022.
9
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
During the second quarter of 2021, we acquired a strategic investment in a privately-held company for $i16.5 million, which is accounted for under the equity method of accounting. The carrying value of our strategic equity investment was $i14.5
million and $i16.5 million at September 30, 2022 and December 31, 2021, respectively.
During the third quarter of 2022, we entered into an investment with a venture capital fund for $i0.8
million, which is accounted for under the equity method of accounting. As of September 30, 2022, we had approximately $i6.8 million of unfunded commitments which we anticipate will be paid over a period of i10
years. The carrying value of our strategic equity investment was $i0.8 million at September 30, 2022.
Restricted Investment
At September 30, 2022 and December 31, 2021, the carrying value of our restricted investment, which is accounted for as held-to-maturity ("HTM")
and therefore recorded at amortized cost, was $i77.5 million and $i76.1 million, net of an allowance for credit losses of $i0.6
million and $i0.5 million, and included cash of $i6.4 million and $i4.7
million, respectively. The fair value at September 30, 2022 and December 31, 2021 was $i73.5 million and $i80.0
million, respectively, based on Level 1 inputs.
i
The following table shows the total amortized cost of our HTM debt securities by credit rating, excluding the allowance for credit losses and cash. The primary factor in our expected credit loss calculation is the composite bond rating. As the rating decreases, the risk present in holding the bond is inherently increased, leading to an increase in expected credit losses.
At September 30, 2022 and December 31, 2021, the carrying value of finance lease obligations was $i101.8 million and $i102.4
million, respectively, and the fair value was $i107.1 million and $i118.6 million, respectively. The fair value of our finance lease obligations is based on the period-end quoted market prices for the obligations,
using Level 2 inputs. The fair value of all other finance lease obligations approximates their carrying values.
The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt was $i509.0 million and $i328.1
million as of September 30, 2022 and December 31, 2021, respectively. The carrying value is a reasonable estimate of the fair value of the outstanding debt based on the variable interest rate of the debt.
At September 30, 2022 and December 31, 2021, the carrying value of our fixed rate debt was $i550.0 million and $i850.0
million, respectively, and the fair value was $i452.4 million and $i843.9 million, respectively, based on Level 2 inputs.
Contingent Consideration
In connection with the acquisition of certain assets in 2020, we are contingently obligated to make an additional payment for such assets of up to an aggregate amount of $i7.0 million. The contingent consideration is payable if certain sales volume targets are achieved prior to December 31, 2024, herein referred to as "Revenue Earn-out."
The fair value of
the iifive-year/ Revenue Earn-out consideration was $ii0.8/ million
at September 30, 2022 and December 31, 2021, respectively. Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a selling, general, and administrative expense.
10
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
(1)
Represents trademarks, trade names, and know-how.
(2) The majority of our Other intangibles, net are held in British Pound Sterling (GBP) and changes period over period are primarily driven by foreign currency fluctuations between GBP and USD.
Intangible assets subject to amortization were allocated among our business segments as follows:
Amortization
expense related to our intangible assets is included in Selling, general and administrative expenses on the condensed consolidated statement of operations. During the three and nine months ended September 30, 2022, we recognized amortization expense of $i7.9 million and $i23.8
million, respectively, and during the three and nine months ended September 30, 2021, we recognized amortization expense of $i8.3 million and $i25.1
million, respectively.
Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2022 - $i31.7 million, 2023 - $i31.7
million, 2024 - $i31.4 million, 2025 - $i31.4 million,
and 2026 - $i31.4 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency exchange rates.
Note 8: iFinancial
Instruments and Risk Management
Net Investment Hedges
During the third quarter of 2022, we terminated our fixed-to-fixed cross currency interest rate swaps, accounted for as net investment hedges, and received net proceeds of $i14.7 million. The proceeds are presented within cash provided by investing activities within the condensed consolidated statement of cash flows. The $i14.7 million
gain is reported as a component of the foreign currency adjustments (“CTA”) within Accumulated other comprehensive income (loss) ("AOCI") on the condensed consolidated balance sheet. The gain on net investment hedges are reclassified to earnings only when the related CTA are required to be reclassified, usually upon sale or liquidation of the investment.
The fair value of our net investment hedge was a net asset (liability) of izero and $i1.0
million at September 30, 2022 and December 31, 2021, respectively. During the three and nine months ended September 30, 2022, we recognized net interest income associated with this financial instrument of $i0.1 million and $i2.8
million, respectively, and during the three and nine months ended September 30, 2021, we recognized net interest income associated with this financial instrument of $i0.1 million and $i0.3
million, respectively.
12
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
We manufacture and sell
our products in several countries throughout the world and, thus, we are exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, we net the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, from time to time, we utilize forward currency exchange contracts to minimize the volatility to earnings and cash flows resulting from the effect of fluctuating foreign currency exchange rates on export sales denominated in foreign currencies (principally the euro). These contracts are generally designated as cash flow hedges. Designated cash flow hedges entered to minimize foreign currency exchange risk of forecasted revenue transactions are recorded to Net sales on the condensed consolidated
statement of operations when the forecasted transaction occurs. As of September 30, 2022, there were $i5.6 million open foreign currency derivative contracts. The fair value of the designated foreign currency hedge contracts was an asset (liability) of $i0.9
million and $i0.5 million at September 30, 2022 and December 31, 2021, respectively.
Commodity Price Risk Management
Certain energy sources used in our manufacturing operations are subject to price volatility caused by weather, supply and demand conditions, economic variables, and other unpredictable factors. This volatility is primarily related to the market pricing of
natural gas. To mitigate expected fluctuations in market prices and the volatility to earnings and cash flow resulting from changes to pricing of natural gas purchases, from time to time, we will enter into swap contracts and zero cost collar option contracts and designate these contracts as cash flow hedges. As of September 30, 2022, we had i1.4
million and i0.4 million mmBTUS (millions of British Thermal Units) in aggregate notional volume of outstanding natural gas commodity swap contracts and zero cost collar option contracts, respectively, designated as cash flow hedges. As of September 30, 2022, open commodity contracts
hedge forecasted transactions until December 2023. The fair value of the outstanding designated natural gas commodity hedge contracts as of September 30, 2022 and December 31, 2021 was a net asset (liability) of $i1.9 million and $(i0.6)
million, respectively.
Interest Rate Risk Management
During the year we had floating-to-fixed interest rate swaps with a combined notional amount of $i166.2 million to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments, effectively converting $i166.2
million of our floating rate debt to a fixed rate. Per the terms of these instruments, we received floating rate interest payments based upon three-month U.S. dollar LIBOR and in return were obligated to pay interest at a fixed rate of i3.79 percent until July 2023. Due to the repayment of our term loan (refer to Note 9 for more information), during the second quarter of 2022, we terminated these interest rate swap instruments. Upon termination of the interest rate swap instruments, we reclassified a $i1.7
million gain from AOCI into Interest expense, net on the condensed consolidated statement of operations. The fair value of outstanding interest rate instruments at September 30, 2022 and December 31, 2021 was an asset (liability) of izero and $(i4.0) million,
respectively.
13
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
(1)
Reclassifications from AOCI to Net Income were iiiizero///
for all periods presented. Gains and losses would be reclassified from AOCI to Other (income) expense, net.
Within the next twelve months, we expect to reclassify $i4.8 million of net gains from AOCI to income, before taxes.
14
INGEVITY
CORPORATION
Notes to the Condensed Consolidated Financial Statements
The following information is presented for derivative assets and liabilities that are recorded in the condensed
consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during the periods reported. There were no nonrecurring fair value measurements related to derivative assets and liabilities on the condensed consolidated balance sheets as of September 30, 2022 or December 31, 2021.
Revolving Credit Facility and other lines of credit (1)
$
i509.0
$
i—
Term
Loan
i—
i328.1
i3.88%
Senior Notes due 2028
i550.0
i550.0
i4.50%
Senior Notes due 2026
i—
i300.0
Finance
lease obligations
i101.8
i102.4
Total
debt including finance lease obligations
$
i1,160.8
$
i1,280.5
Less:
debt issuance costs
i6.7
i10.9
Total
debt, including finance lease obligations, net of debt issuance costs
$
i1,154.1
$
i1,269.6
Less:
debt maturing within one year (2)
i0.9
i19.6
Long-term
debt including finance lease obligations
$
i1,153.2
$
i1,250.0
______________
(1)
Letters of credit outstanding under the revolving credit facility were $i2.3 million and $i2.5 million and available funds under the facility were $i488.7
million and $i497.5 million at September 30, 2022 and December 31, 2021, respectively.
(2) Debt maturing within one year is included in "Notes payable and current maturities of long-term debt" on the condensed consolidated balance sheets.
/
Senior
Notes due 2026
On April 27, 2022, we redeemed the $i300.0 million outstanding aggregate principal balance of our i4.50%
Senior Notes due in 2026 prior to maturity. The redemption was primarily funded utilizing the outstanding capacity under our revolving credit facility. At redemption, we recognized a $i3.4 million redemption premium and accelerated the remaining deferred finance fees of $i2.7 million,
both the redemption premium and accelerated deferred finance fees were recorded to Interest Expense, net on the condensed consolidated statements of operations. Legal expenses associated with this redemption have been recorded as incurred.
Revolving Credit Facility Amendment
On June 23, 2022, we entered into an Amendment and Restatement Agreement (the “Amendment”) together with the other parties named therein, which amends and restates our existing credit agreement, dated as of March 7, 2016, as amended, supplemented or otherwise modified.
Among other things, the Amendment (a) extends the maturity date from October 28, 2025 to June 23,
2027 and increases the aggregate principal amount of revolving commitments thereunder from $i500 million to $i1 billion, (b) adds Ingevity UK as a borrower under the revolving credit
facility, and (c) modifies certain leverage ratio tests and thresholds.
Borrowings under the revolving credit facility bear interest at a rate per annum equal to either (a) the applicable term benchmark rate, subject to a izero floor, or (b) a base rate, in each case, plus an applicable margin of i1.00
percent to i1.75 percent for term benchmark loans and i0.00 percent to i0.75
percent for base rate loans.
Fees of $i3.0 million were incurred to secure the Amendment. These fees have been deferred and will be amortized over the term of the facility and recorded to Interest Expense, net on the condensed consolidated statement of operations.
Term Loan Repayment
On the closing date of the Amendment, we repaid our outstanding term loan in an aggregate principal amount of $i323.0 million.
Upon repayment, we recognized $i1.3 million in outstanding interest, $i0.4 million in repayment fees and accelerated the remaining deferred finance fees of $i0.4 million.
The interest, fees, and accelerated deferred finance fees were recorded to Interest Expense, net on the condensed consolidated statements of operations. Legal expenses associated with this repayment have been recorded as incurred.
16
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
Our indentures contain certain customary covenants (including covenants limiting Ingevity's and its restricted subsidiaries’ ability to grant or permit liens on certain property securing debt, declare or pay dividends, make distributions on or repurchase or redeem capital stock, make investments in unrestricted subsidiaries, engage in sale and lease-back transactions, and engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of the assets of Ingevity and our restricted subsidiaries, taken as a whole) and events
of default (subject in certain cases to customary exceptions, as well as grace and cure periods). The occurrence of an event of default under the 2028 Senior Notes could result in the acceleration of the note of such series and could cause a cross-default resulting in the acceleration of other indebtedness of Ingevity and its subsidiaries. We were in compliance with all covenants under the indenture as of September 30, 2022.
The credit agreements governing our revolving credit facility contain customary default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-compliance with covenants and cross-defaults to other material indebtedness. The
occurrence of an uncured event of default under the credit agreement could result in all loans and other obligations becoming immediately due and payable and our revolving credit facility being terminated. The credit agreement also contains certain customary covenants, including financial covenants. The revolving credit facility financial covenants require Ingevity to maintain on a consolidated basis a maximum total net leverage ratio of i4.0 to 1.0 (which may be increased to i4.5
to 1.0 under certain circumstances) and a minimum interest coverage ratio of i3.0 to 1.0. As calculated per the credit agreement, our net leverage for the four consecutive quarters ended September 30, 2022 was i2.0,
and our interest coverage for the four consecutive quarters ended September 30, 2022 was i10.7. We were in compliance with all covenants at September 30, 2022.
17
INGEVITY
CORPORATION
Notes to the Condensed Consolidated Financial Statements
Net
gains (losses) on foreign currency translation
(i55.3)
(i16.7)
(i124.9)
(i8.5)
Gains
(losses) on net investment hedges
i4.4
i3.8
i13.9
i8.0
Less:
tax provision (benefit)
i1.0
i0.9
i3.2
i1.9
Net
gains (losses) on net investment hedges
i3.4
i2.9
i10.7
i6.1
Other
comprehensive income (loss), net of tax
(i51.9)
(i13.8)
(i114.2)
(i2.4)
Ending
balance
$
(i95.8)
$
i14.0
$
(i95.8)
$
i14.0
Derivative
instruments
Beginning balance
$
i3.3
$
(i4.5)
$
(i2.1)
$
(i6.9)
Gains
(losses) on derivative instruments
i3.5
i3.6
i14.9
i6.9
Less:
tax provision (benefit)
i0.8
i0.8
i3.5
i1.6
Net
gains (losses) on derivative instruments
i2.7
i2.8
i11.4
i5.3
(Gains)
losses reclassified to net income
(i3.1)
(i0.2)
(i7.4)
(i0.3)
Less:
tax (provision) benefit
(i0.7)
(i0.1)
(i1.7)
(i0.1)
Net
(gains) losses reclassified to net income
(i2.4)
(i0.1)
(i5.7)
(i0.2)
Other
comprehensive income (loss), net of tax
i0.3
i2.7
i5.7
i5.1
Ending
balance
$
i3.6
$
(i1.8)
$
i3.6
$
(i1.8)
Pension
and other postretirement benefits
Beginning balance
$
(i3.1)
$
(i4.7)
$
(i3.2)
$
(i4.8)
Unrealized
actuarial gains (losses) and prior service (costs) credits
i—
i—
i—
i—
Less:
tax provision (benefit)
i—
i—
i—
i—
Net
actuarial gains (losses) and prior service (costs) credits
i—
i—
i—
i—
Amortization
of actuarial and other (gains) losses, prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income
i—
i—
i0.1
i0.1
Less:
tax (provision) benefit
i—
i—
i—
i—
Net
actuarial and other (gains) losses, amortization of prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income
i—
i—
i0.1
i0.1
Other
comprehensive income (loss), net of tax
i—
i—
i0.1
i0.1
Ending
balance
$
(i3.1)
$
(i4.7)
$
(i3.1)
$
(i4.7)
Total
AOCI ending balance at September 30
$
(i95.3)
$
i7.5
$
(i95.3)
$
i7.5
/
20
INGEVITY
CORPORATION
Notes to the Condensed Consolidated Financial Statements
(1)
Included within "Net sales" on the condensed consolidated statement of operations.
(2) Included within "Cost of sales" on the condensed consolidated statement of operations.
(3) Included within "Interest expense, net" on the condensed consolidated statement of operations.
Share Repurchases
On July 25, 2022, our Board of Directors authorized the repurchase of up to $i500.0
million of our common stock (the "2022 Authorization"), and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior authorization. Shares under the 2022 Authorization may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
During the three and nine months ended September 30, 2022, we repurchased $i49.3
million and $i139.2 million in common stock, representing i697,523 and i2,027,206
shares of our common stock at a weighted average cost per share of $i70.75 and $i68.68, respectively. At September 30,
2022, $i450.7 million remained unused under our 2022 Authorization.
During the three and nine months ended September 30, 2021, we repurchased $i32.2
million and $i100.3 million in common stock, representing i414,501 and i1,298,167
shares of our common stock at a weighted average cost per share of $i77.77 and $i77.25, respectively.
21
INGEVITY
CORPORATION
Notes to the Condensed Consolidated Financial Statements
The
following table summarizes the components of net periodic benefit cost (income) for our defined benefit pension plans:
Three Months Ended September 30,
Pensions
Other Benefits
In
millions
2022
2021
2022
2021
Components of net periodic benefit cost (income):
Service cost (1)
$
i0.4
$
i0.4
$
i—
$
i—
Interest
cost (2)
i0.3
i0.3
i—
i—
Expected
return on plan assets (2)
(i0.4)
(i0.3)
i—
i—
Amortization
of prior service cost (credit) (1)
i—
i—
i—
i—
Amortization
of net actuarial and other (gain) loss (2)
i—
i—
i—
i—
Net
periodic benefit cost (income)
$
i0.3
$
i0.4
$
i—
$
i—
Nine
Months Ended September 30,
Pensions
Other Benefits
In millions
2022
2021
2022
2021
Components of net periodic benefit cost (income):
Service
cost (1)
$
i1.2
$
i1.3
$
i—
$
i—
Interest
cost (2)
i0.9
i0.8
i—
i—
Expected
return on plan assets (2)
(i1.3)
(i1.0)
i—
i—
Amortization
of prior service cost (credit) (1)
i0.1
i0.1
i—
i—
Amortization
of net actuarial and other (gain) loss (2)
i—
i—
i—
i—
Net
periodic benefit cost (income)
$
i0.9
$
i1.2
$
i—
$
i—
_______________
(1)
Amounts are recorded to "Cost of sales" on our condensed consolidated statements of operations consistent with the employee compensation costs that participate in the plan.
/
(2) Amounts are recorded to "Other (income) expense, net" on our condensed consolidated statements of operations.
Contributions
We did inot
make any voluntary cash contributions to our Union Hourly defined benefit pension plan in the nine months ended September 30, 2022. There are no required cash contributions to our Union Hourly defined benefit pension plan in 2022, and we currently have no plans to make any voluntary cash contributions in 2022.
22
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
Note 12: iRestructuring and Other (Income) Charges, net
Other (income) charges, net
Business transformation costs
In 2020, we embarked upon a business transformation initiative that includes the implementation of an upgraded enterprise resource planning ("ERP")
system. This new ERP system will equip our employees with standardized processes and secure integrated technology that enable us to better understand and meet our customers' needs and compete in the marketplace. The implementation of our new ERP is expected to occur in multiple phases over itwo years beginning with our pilot deployment which occurred during the first quarter of 2022. This business transformation requires the integration of the new ERP system with multiple new and existing information systems and business processes in order to maintain the accuracy of our books and records and to provide our management team with real-time
information important to the operation of our business. Such an implementation initiative is a major financial undertaking and requires substantial time and attention of management and key employees. Costs incurred, during the three and nine months ended September 30, 2022, of $i3.3 million and $i10.6
million, respectively, and during the three and nine months ended September 30, 2021, of $i4.1 million and $i12.2 million, respectively,
represent costs directly associated with the business transformation initiative that, in accordance with GAAP, cannot be capitalized. Over the course of this initiative, we anticipate incurring approximately $i90-i95 million
of total costs, which includes $i45-i50 million of non-capitalizable costs, $i12-i14 million
of which we expect to be incurred in 2022.
Rollforward of Restructuring Reserves
i
The following table shows a roll forward of restructuring reserves that will result in cash spending.
Balance
at
Change in
Cash
Balance at
In millions
12/31/2021(1)
Reserve
Payments
Other(2)
9/30/2022(1)
Restructuring
Reserves
$
i0.5
i—
i—
i—
$
i0.5
_______________
(1)
Included in "Accrued Expenses" on the condensed consolidated balance sheets.
(1)
The decrease in the effective tax rate in the three and nine months ended September 30, 2022 was driven by a one-time legislative tax rate change in 2021.
/i
We determine our interim tax provision using an Estimated Annual Effective Tax Rate methodology (“EAETR”). The EAETR is applied to the year-to-date ordinary income, exclusive of discrete items. The tax effects of discrete items are then included
to arrive at the total reported interim tax provision.
The determination of the EAETR is based upon a number of estimates, including the estimated annual pre-tax ordinary income in each tax jurisdiction in which we operate. As our projections of ordinary income change throughout the year, the EAETR will change period-to-period. The tax effects of discrete items are recognized in the tax provision in the period they occur. Depending on various factors, such as the item’s significance in relation to total income and the rate of tax applicable in the jurisdiction to which it relates, discrete items in any quarter may materially impact the reported effective tax rate. As a global enterprise, our tax expense may be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As such, there may be significant volatility in interim tax provisions.
23
INGEVITY
CORPORATION
Notes to the Condensed Consolidated Financial Statements
(1)
Legislative tax rate changes in 2021, enacted in the United Kingdom ("UK"), resulted in discrete tax expense of $i14.6 million related to the revaluation of our net deferred tax liability associated with our UK operations. The corporate tax rate in the UK will increase from 19.0% to 25.0% on April 1, 2023.
(2) Refer to Note 14 for additional information.
(3) Increase in EAETR for the three and nine months ended
September 30, 2022, as compared to September 30, 2021, is due to an overall change in the mix of forecasted earnings in various tax jurisdictions with varying rates, as well as an increase in foreign earnings deemed taxable in the U.S.
At September 30, 2022 and December 31, 2021, we had deferred tax assets of $i9.2 million
and $i8.8 million, respectively, resulting from certain historical net operating losses from our Brazilian and Chinese operations and U.S. state tax credits for which a valuation allowance has been established. The ultimate realization of these deferred tax assets depends on the generation of future taxable income during the periods in which these net operating losses and tax credits are available to be used. In evaluating the realizability of these deferred tax assets, we consider projected future taxable income and tax planning strategies in making our assessment.
As of September 30, 2022, we cannot objectively assert that these deferred tax assets are more likely than not to be realized and therefore we have maintained a valuation allowance. We intend to continue maintaining a valuation allowance on these deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A release of all or a portion of the valuation allowance could be possible, if we determine that sufficient positive evidence becomes available to allow us to reach a conclusion that the valuation allowance will no longer be needed. A release of the valuation allowance would result in the recognition of certain deferred tax assets and a reduction to income tax
24
INGEVITY
CORPORATION
Notes to the Condensed Consolidated Financial Statements
expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability that we are able to actually achieve.
Note 14: iCommitments
and Contingencies
Legal Proceedings
On July 19, 2018, we filed suit against BASF Corporation (“BASF”) in the United States District Court for the District of Delaware (the “Delaware Proceeding”) alleging BASF infringed Ingevity’s patent covering canister systems used in the control of automotive gasoline vapor emissions (U.S. Patent No. RE38,844) (the “844 Patent”). On February 14, 2019, BASF asserted counterclaims against us in the Delaware Proceeding, alleging itwo
claims for violations of U.S. antitrust law (one for exclusive dealing and the other for tying) as well as a claim for tortious interference with an alleged prospective business relationship between BASF and a BASF customer (the “BASF Counterclaims”). The BASF Counterclaims relate to our enforcement of the 844 Patent and our entry into several supply agreements with customers of its fuel vapor canister honeycombs. The U.S. District Court dismissed our patent infringement claims on November 18, 2020, and the case proceeded to trial on the BASF Counterclaims in September 2021.
On September 15, 2021, a jury in the Delaware Proceeding issued a verdict in favor of BASF on the BASF Counterclaims and awarded BASF damages of approximately $i28.3 million,
which will be trebled under U.S. antitrust law to approximately $i85.0 million when the court enters judgment. In addition, BASF may seek pre- and post-judgment interest and attorneys’ fees and costs in amounts that they will have to support at a future date.
We disagree with the verdict, including the court’s application of the law, and we intend to seek judgment as a matter of law in the Delaware Proceeding post-trial briefing stage and on appeal, if necessary. In addition, we
intend to challenge the U.S. District Court’s November 2020 dismissal of our patent infringement claims against BASF. Ingevity believes in the strength of its intellectual property and the merits of its position and intends to pursue all legal relief available to challenge these outcomes in the Delaware Proceeding. Final resolution of these matters could take up to ieighteen months.
As of September 30, 2022, there has been no progress in the post-trial proceedings to warrant any change
to our conclusions as disclosed within our 2021 Annual Report. As such, no changes to our reserve were made during this quarter. The full amount of the jury's verdict, $i85.0 million, is accrued in Other liabilities on the Condensed Consolidated Balance Sheet as of September 30, 2022. The amount of any liability we may ultimately incur related to the Delaware Proceeding could be more or less than the amount accrued.
25
INGEVITY
CORPORATION
Notes to the Condensed Consolidated Financial Statements
Depreciation
and amortization - Performance Materials
(i8.9)
(i8.9)
(i26.7)
(i26.9)
Depreciation
and amortization - Performance Chemicals
(i16.8)
(i18.7)
(i51.9)
(i54.8)
Restructuring
and other income (charges), net (3)
(i3.3)
(i4.1)
(i10.6)
(i12.3)
Acquisition
and other-related costs (4)
(i1.9)
(i0.2)
(i1.9)
(i0.9)
Litigation
verdict charge (5)
i—
(i85.0)
i—
(i85.0)
Net
income (loss)
$
i75.4
$
(i4.2)
$
i196.0
$
i88.8
/
_______________
(1)
Relates to external customers only, all intersegment sales and related profit have been eliminated in consolidation.
(2) Segment EBITDA is the primary measure used by our chief operating decision maker to evaluate the performance of and allocate
resources among our operating segments. Segment EBITDA is defined as segment revenue less segment operating expenses (segment operating expenses consist of costs of sales, selling, general and administrative expenses, research and technical expenses, other (income) expense, net, excluding depreciation and amortization). We have excluded the following items from segment EBITDA: interest expense, net, associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other related costs, litigation verdict charges, pension and postretirement settlement and curtailment
(income) charges, net.
(3) Income (charges) for all periods presented relate to restructuring activity and costs associated with the business transformation initiative. For the three and nine months ended September 30, 2022, charges of $i1.1 million and $i3.7
million relate to the Performance Materials segment and charges of $i2.2 million and $i6.9 million relate to the Performance Chemicals segment, respectively.
For the three and nine months ended September 30, 2021, charges of $i1.1 million and $i4.5 million
relate to the Performance Materials segment and charges of $i3.0 million and $i7.8 million relate to the Performance Chemicals segment, respectively.
For more detail on the charges incurred see Note 12.
(4) For the three and nine months ended September 30, 2022, all acquisition costs relate to the integration of the Ozark Materials business into our Performance Chemicals segment. For the three and nine months ended September 30, 2021, charges of izero and $i0.2 million
relate to the acquisition of a strategic investment in the Performance Materials segment and charges of $i0.2 million and $i0.7 million relate to the integration
of the Perstorp Capa business into our Performance Chemicals segment, respectively.
(5) For the three and nine months ended September 30, 2021, litigation verdict charge relates to the Performance Materials segment. Refer to Note 14 for additional information.
26
INGEVITY CORPORATION
Notes to
the Condensed Consolidated Financial Statements
Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing
net income (loss) for the period by the weighted average number of common shares and potentially dilutive common shares outstanding for the period. The calculation of diluted net income per share excludes all antidilutive common shares.
i
Three
Months Ended September 30,
Nine Months Ended September 30,
In millions, except share and per share data
2022
2021
2022
2021
Net income (loss)
$
i75.4
$
(i4.2)
$
i196.0
$
i88.8
Basic
and Diluted earnings (loss) per share
Basic earnings (loss) per share
$
i1.99
$
(i0.11)
$
i5.10
$
i2.22
Diluted
earnings (loss) per share
i1.98
(i0.11)
i5.06
i2.21
Shares
(in thousands)
Weighted average number of common shares outstanding - Basic
i37,839
i39,537
i38,451
i39,993
Weighted
average additional shares assuming conversion of potential common shares (1)
i295
i—
i269
i245
Shares
- diluted basis (1)
i38,134
i39,537
i38,720
i40,238
_______________
(1)
For the three months ended September 30, 2021, all potentially dilutive common shares were excluded from the calculation of diluted earnings (loss) per share as we had a net loss for the period.
/
iThe following average number of potential common shares were antidilutive, and
therefore, were not included in the diluted earnings per share calculation:
Three Months Ended September 30,
Nine Months Ended September 30,
In thousands
2022
2021
2022
2021
Average
number of potential common shares - antidilutive
i209
i375
i204
i200
/
Note
17: iSubsequent Events
Ozark Materials Acquisition
On October 3, 2022, we completed our previously announced acquisition of Ozark Materials, LLC (“OM”), and Ozark Logistics, LLC (“OL” and, together with OM, “Ozark Materials”), pursuant to that certain Equity Purchase Agreement (the “Purchase Agreement”), by and among Ingevity, Ozark Materials and Ozark Holdings, Inc. (“Seller”). In accordance with the Purchase Agreement, we
acquired from Seller, all of the issued and outstanding limited liability company membership interests of Ozark Materials for a purchase price of $i325 million, subject to customary adjustments for working capital, indebtedness and transaction expenses (the "Acquisition"). We funded the Acquisition through a combination of borrowings under our existing credit facilities and cash on hand.
Ozark Materials is considered a business under business combinations accounting guidance, and
therefore we will apply acquisition accounting to the Acquisition. Acquisition accounting requires, among other things, that acquired assets and assumed liabilities be recognized at their fair values as of the acquisition date. The net assets of the Acquisition will be recorded at the estimated fair values, primarily using Level 2 and Level 3 inputs. Our preliminary purchase price valuation is still in process and we will include the required details in our future filings once complete.
27
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
Introduction
Management’s discussion and analysis of Ingevity Corporation's (“Ingevity,”“the company,”“we,”“us,” or “our”) financial condition and results of operations (“MD&A”) is provided as a supplement
to the Condensed Consolidated Financial Statements and related notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. The following discussion should be read in conjunction with Ingevity’s consolidated financial statements as of and for the year ended December 31, 2021 filed on February 24, 2022 with the Securities and Exchange Commission ("SEC") as part of the Company's Annual Reporting on Form 10-K ("2021 Annual Report") and the unaudited interim Condensed Consolidated Financial Statements and notes to the unaudited interim Condensed Consolidated Financial Statements, which are prepared in accordance
with accounting principles generally accepted in the United States of America ("GAAP").
Investors are cautioned that the forward-looking statements contained in this section and other parts of this Quarterly Report on Form 10-Q involve both risk and uncertainty. Several important factors could cause actual results to differ materially from those anticipated by these statements. Many of these statements are macroeconomic in nature and are, therefore, beyond the control of management. See "Cautionary Statements About Forward-Looking Statements" below and at the beginning of our 2021 Annual Report.
Cautionary Statements About Forward-Looking Statements
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the Private Securities Litigation Reform Act of 1995 that reflect our current expectations, beliefs, plans or forecasts with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by words or phrases such as “may,”“will,”“could,”“should,”“would,”“anticipate,”“estimate,”“expect,”“outlook,”“project,”“intend,”“plan,”“believe,”“target,”“prospects,”“potential” and “forecast,” and other words, terms and phrases of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. We caution readers that a forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement.
Such risks and uncertainties include, among others, those discussed in Part I, Item 1A. Risk Factors of our 2021 Annual Report, as well as in our unaudited Condensed Consolidated Financial Statements, related notes, and the other information appearing elsewhere in this report and our other filings with the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. In addition to any such risks, uncertainties and other factors discussed elsewhere herein, risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed or implied by the forward-looking statements include, but are not limited to the following:
•adverse
effects from the novel coronavirus ("COVID-19") pandemic;
•we may be adversely affected by general global economic, geopolitical and financial conditions beyond our control, including inflation and war in Ukraine;
•we are exposed to risks related to our international sales and operations;
•adverse conditions in the automotive market have and may continue to negatively impact demand for our automotive carbon products;
•we face competition from substitute products, new technologies and new or emerging competitors;
•if more stringent air quality standards worldwide are not adopted, our growth could be impacted;
•we
may be adversely affected by a decrease in government infrastructure spending;
•adverse conditions in cyclical end markets may adversely affect demand for our products;
•our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply and subject to price increases that we may be unable to pass through;
28
•lack of access to sufficient CTO and other raw materials upon which we depend would impact our ability to
produce our products;
•the inability to make or effectively integrate future acquisitions may negatively affect our results;
•we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;
•we may continue to be adversely affected by disruptions in our supply chain;
•the occurrence of natural disasters and extreme weather or other unanticipated problem such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;
•we are dependent
upon attracting and retaining key personnel;
•we are dependent on certain large customers;
•from time to time, we may be engaged in legal actions associated with our intellectual property rights;
•if we are unable to protect our intellectual property and other proprietary information, we may lose significant competitive advantage;
•information technology security breaches and other disruptions;
•complications with the design or implementation of our new enterprise resource planning system;
•government policies and regulations, including, but not limited to, those
affecting the environment, climate change, tax policies, tariffs and the chemicals industry; and
•losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes.
Overview
Ingevity is a leading global manufacturer of specialty chemicals and high performance activated carbon materials. We provide innovative solutions to meet our customers’ unique and demanding requirements through proprietary formulated products. We report in two business segments, Performance Materials and Performance Chemicals.
Recent Developments
War in Ukraine
We are monitoring the ongoing war between Russia and Ukraine,
including the related sanctions imposed on Russia and Belarus by the U.S. and other countries. We have not seen and do not foresee any direct material adverse effects on our business. However, as a result of the geopolitical disruption, we have experienced volatility in energy prices, specifically natural gas, but the impact has not been and is not expected to be material to our results.
Ozark Materials
On October 3, 2022, we completed our previously announced acquisition of Ozark Materials, LLC (“OM”), and Ozark Logistics, LLC (“OL” and, together with OM, “Ozark Materials”), pursuant to that certain Equity Purchase Agreement (the “Purchase Agreement”), by and among Ingevity, Ozark Materials and Ozark Holdings, Inc. (“Seller”). Refer to Note 17 to the Condensed Consolidated Financial Statements
included within Part I. Item 1 of this Form 10-Q for more information.
Strategic Investment
During the third quarter of 2022, we acquired a strategic investment in a privately-held company for $60.0 million, which is accounted for under the measurement alternative method. There were no adjustments to the carrying value of the measurement alternative method investment for impairment or observable price changes for the period ended September 30, 2022. Refer to Note 4 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information.
Net Investment Hedge
During the third quarter of 2022, we terminated our fixed-to-fixed cross currency interest rate swaps, accounted for as net investment hedges,
and received proceeds of $14.7 million. Refer to Note 8 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information.
29
Results of Operations
Three
Months Ended September 30,
Nine Months Ended September 30,
In millions
2022
2021
2022
2021
Net sales
$
482.0
$
376.8
$
1,284.7
$
1,055.5
Cost
of sales
305.7
235.0
820.0
647.7
Gross profit
176.3
141.8
464.7
407.8
Selling,
general, and administrative expenses
54.2
43.5
142.9
131.0
Research and technical expenses
7.6
6.8
23.1
19.3
Restructuring
and other (income) charges, net
3.3
4.1
10.6
12.3
Acquisition-related costs
1.9
0.2
1.9
0.9
Other
(income) expense, net
2.0
84.6
(1.0)
81.6
Interest expense, net
11.5
11.6
37.3
36.2
Income
(loss) before income taxes
95.8
(9.0)
249.9
126.5
Provision (benefit) for income taxes
20.4
(4.8)
53.9
37.7
Net
income (loss)
$
75.4
$
(4.2)
$
196.0
$
88.8
Net
sales and Gross profit
The table below shows the 2022 Net sales and variances from 2021:
The sales increase of $105.2 million in 2022 was driven by favorable pricing and sales
composition (mix) of $87.6 million (23 percent) and favorable volume of $26.9 million (seven percent), partially offset by unfavorable foreign currency exchange of $9.3 million (two percent), driven by the strengthening of the U.S. dollar against the euro, Chinese renminbi and GBP.
Gross profit increase of $34.5 million was driven by favorable price/mix of $87.2 million, favorable sales volume of $16.2 million and favorable foreign currency exchange of $0.8 million, partially offset by increased manufacturing costs of $69.7 million due to raw material and energy cost inflationary pressures. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for both segments.
The
sales increase of $229.2 million in 2022 was driven by favorable price/mix of $227.9 million (22 percent) and higher sales volumes of $20.9 million (two percent), partially offset by unfavorable foreign currency exchange of $19.6 million (two percent), driven by the strengthening of the U.S. dollar against the euro, Chinese renminbi and GBP.
Gross profit increase of $56.9 million was driven by favorable price/mix improvement of $225.6 million and favorable sales volume of $13.2 million, partially offset by increased manufacturing costs of $179.3 million due to raw material and energy cost inflationary pressures and unfavorable foreign currency exchange of $2.6 million. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for both segments.
Selling, general and administrative expenses ("SG&A") were $54.2 million (11.2 percent of Net sales) and $43.5 million (11.5 percent of Net sales) for the three months ended September 30, 2022 and 2021, respectively. The year over year increase of $10.7 million was primarily driven by increased travel and other miscellaneous costs of $5.8 million and increased employee-related costs of $8.8 million, slightly reduced by lower legal spending of $3.9 million. The decrease in SG&A as a percentage of Net sales was driven by higher sales.
SG&A was $142.9 million (11.1 percent of Net sales) and $131.0 million (12.4 percent of Net sales) for the nine months ended September 30, 2022 and 2021, respectively. The year over year increase of $11.9 million was driven by increased employee-related costs of $7.6 million and increased travel and other miscellaneous costs of $11.7 million, slightly offset by reduced legal costs of $7.4 million. The decrease in SG&A as a percentage of Net sales was driven by higher sales.
Research and technical expenses as a percentage of Net sales decreased
to 1.6 percent from 1.8 percent for the three months ended September 30, 2022 and 2021, respectively.
Research and technical expenses as a percentage of Net sales remained consistent period over period, at 1.8 percent and 1.8 percent for the nine months ended September 30, 2022 and 2021, respectively.
Restructuring
and other (income) charges, net were $3.3 million and $10.6 million for the three and nine months ended September 30, 2022, respectively, and $4.1 million and $12.3 million for the three and nine months ended September 30, 2021, respectively. See Note 12 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information.
Acquisition-related costs were $1.9 million for the three and nine months ended September 30, 2022, respectively, and $0.2 million and $0.9 million for the three and nine months ended September 30,
2021, respectively. For the three and nine months ended September 30, 2022, all charges relate to the integration of the Ozark Materials business into our Performance Chemicals segment. For the three and nine months ended September 30, 2021, charges of zero and $0.2 million relate to the acquisition of a strategic investment in the Performance Materials segment, respectively, and charges of $0.2 million and $0.7 million relate to the integration of Perstorp Holding AB's caprolactone business into our Performance Chemicals segment, respectively.
For the three months ended September 30, 2022 and 2021, our effective tax rate was 21.3 percent and 53.3 percent, respectively. Excluding discrete items, the effective tax rate was 21.0 percent and 20.4 percent, respectively. An explanation of the change in the effective tax rate is presented in Note 13 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q.
For the nine months ended September 30,
2022 and 2021, our effective tax rate was 21.6 percent and 29.8 percent, respectively. Excluding discrete items, the effective rate was 21.1 percent and 20.6 percent, respectively. An explanation of the change in the effective tax rate is presented in Note 13 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q.
32
Segment Operating Results
In addition to the information discussed above, the following sections discuss the results of operations
for both of Ingevity's segments. Our segments are (i) Performance Materials and (ii) Performance Chemicals. Segment Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") is the primary measure used by the Company's chief operating decision maker to evaluate the performance of and allocate resources among our operating segments. Segment EBITDA is defined as segment revenue less segment operating expenses (segment operating expenses consist of costs of sales, selling, general and administrative expenses, research and technical expenses, other (income) expense, net, excluding depreciation and amortization). We have excluded the following items from segment EBITDA: interest expense, net associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation
verdict charges, and pension and postretirement settlement and curtailment (income) charges.
In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Annual Consolidated Financial Statements included in our 2021 Annual Report.
Our Performance Materials segment experienced robust automotive volume growth from improved semiconductor chip availability across all regions and China automobile production stimulus. Additionally, the segment also recognized volume improvement in process purification products and we were able to increase prices to capture more of the value of our highly differentiated carbon. Slightly offsetting these top line improvements was continued pressure on manufacturing costs from higher raw material input costs and higher logistic costs driven by inflation. The strengthening of the U.S. dollar against the Chinese renminbi and the euro created some headwinds when compared to the prior year quarter.
Segment net sales increase of $26.8 million in 2022 was driven by higher sales volumes of $27.6 million (23 percent) and favorable price/mix of $3.6
million (three percent), partially offset by unfavorable foreign currency exchange of $4.4 million (four percent).
Segment EBITDA increased $4.8 million due to higher sales volume of $16.6 million and favorable price/mix of $4.4 million, partially offset by higher manufacturing costs of $11.1 million, unfavorable foreign currency impacts of $2.7 million, and higher spending on SG&A and research and technical expenses of $2.4 million.
Segment net sales increase of $30.9 million in 2022 was driven by higher sales volumes of $26.6 million (seven percent) and favorable price/mix of $10.8 million (three percent), partially offset by unfavorable foreign currency exchange of $6.5 million (two percent).
Segment EBITDA increased $3.3 million due to higher sales volumes of $14.4 million, favorable price/mix of $10.3 million, and lowering SG&A and research and technical expenses of $1.2 million, partially offset by higher manufacturing costs of $18.4 million and unfavorable foreign currency impacts of $4.2 million.
33
Performance Chemicals
Three
Months Ended September 30,
Nine Months Ended September 30,
In millions
2022
2021
2022
2021
Net Sales
Pavement
Technologies product line
$
88.3
$
73.2
$
194.0
$
162.4
Industrial Specialties product line
179.3
132.6
489.9
364.7
Engineered
Polymers product line
69.5
52.9
185.1
143.6
Total Performance Chemicals - Net sales
$
337.1
$
258.7
$
869.0
$
670.7
Segment
EBITDA
$
77.0
$
63.1
$
183.6
$
151.2
Quarterly Performance Summary
Our Performance Chemicals segment saw strong revenue growth versus the prior year’s quarter on continued price improvement and favorable mix upgrade to higher margin products. These price increases were necessary to keep pace with the increases related to energy, raw material, and logistic
costs. The strengthening of the U.S. dollar against the euro and GBP created some headwinds on top line growth when compared to the prior year quarter.
Our Engineered Polymers business grew 31.4 percent as the business increased pricing to offset inflationary costs for raw materials, logistics, and particularly energy which has continued to rise throughout 2022. Volume improvement was driven by stronger sales in automotive applications and footwear and apparel, mainly in Asia and Europe. These positive volume improvements were slightly offset by a decline in the Americas where some polyurethane customers experienced availability issues with key raw materials.
Industrial Specialties sales increased 35.2 percent driven by price improvements with strong performance across all markets, particularly in oilfield and adhesives primary end-use markets. Price improvements were supplemented
by a favorable mix shift to higher-value derivative products as volumes were negatively impacted by raw material availability.
Pavement Technologies sales increased 20.6 percent due primarily to improved volumes and price increases. Volume growth was driven by technology adoption and highway funding in the United States.
Segment net sales
increase of $78.4 million reflects favorable pricing and product mix of $84.0 million (32 percent), driven by increases in Industrial Specialties ($62.9 million), Engineered Polymers ($16.3 million), and Pavement Technologies ($4.8 million). Unfavorable volume impacted Net sales by $0.7 million (zero percent), reflecting volume decreases in Industrial Specialties ($15.3 million), partially offset by increases in Pavement Technologies ($10.9 million) and Engineered Polymers ($3.7 million). Unfavorable foreign currency exchange impacted Net sales by $4.9 million (two percent).
Segment EBITDA increased by $13.9 million due to favorable pricing and product mix of $82.8 million and favorable foreign currency exchange of $2.9 million due to foreign currency denominated manufacturing costs, partially offset by higher manufacturing costs of $59.7 million, higher SG&A expenses of $11.7 million and a decrease
in volume of $0.4 million.
Segment net sales increase of $198.3 million was driven by favorable pricing and product mix of $217.1 million (32 percent), driven by increases in Industrial Specialties ($157.7 million), Engineered Polymers ($46.5 million), and Pavement Technologies ($12.9 million). Unfavorable volume impacted Net sales by $5.7 million (one percent), reflecting decreases in
34
Industrial Specialties ($30.2
million), offset partially by increases in Pavement Technologies ($20.2 million) and Engineered Polymers ($4.3 million). Unfavorable foreign currency exchange impacted Net sales by $13.1 million (two percent).
Segment EBITDA increased by $32.4 million due to favorable pricing and product mix of $215.3 million and favorable foreign currency exchange of $2.6 million, partially offset by higher manufacturing costs of $162.2 million, higher SG&A of $22.1 million and a decrease in volume of $1.2 million.
Use of Non-GAAP Financial Measure - Adjusted EBITDA
Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with GAAP and has provided a reconciliation to net income, the most directly comparable financial measure calculated in accordance with GAAP. Adjusted
EBITDA is not meant to be considered in isolation nor as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA is utilized by management as a measure of profitability.
We believe this non-GAAP financial measure provides management as well as investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measure, when viewed together with our financial results computed in accordance with GAAP, provides a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. We believe Adjusted EBITDA is a useful measure because it excludes the effects of financing and investment activities as well as non-operating activities.
Adjusted EBITDA is defined as net income (loss) plus provision
(benefit) for income taxes, interest expense, net, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charges, and pension and postretirement settlement and curtailment (income) charges, net.
This non-GAAP measure is not intended to replace the presentation of financial results in accordance with GAAP and investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another. A reconciliation of Adjusted EBITDA to net income is set forth within this section.
Reconciliation
of Net Income (Loss) to Adjusted EBITDA
Three Months Ended September 30,
Nine Months Ended September 30,
In millions
2022
2021
2022
2021
Net income (loss) (GAAP)
$
75.4
$
(4.2)
$
196.0
$
88.8
Interest
expense, net
11.5
11.6
37.3
36.2
Provision (benefit) for income taxes
20.4
(4.8)
53.9
37.7
Depreciation
and amortization - Performance Materials
8.9
8.9
26.7
26.9
Depreciation and amortization - Performance Chemicals
The factors that impacted adjusted EBITDA period to period are the same factors that affected earnings discussed in the Results of Operations and Segment Operating Results sections included within this MD&A.
35
Current Company Outlook
For Performance Chemicals revenue, we expect to recognize favorable price improvements across the segment as we work to offset inflation in
energy, raw material, and logistic costs. We expect continued volume growth in the Pavement Technologies and Engineered Polymers’ business. Performance Materials will see moderate growth as we expect to benefit from some recovery of auto production.
Adjusted EBITDA is expected to grow versus 2021 mainly driven by our Performance Chemicals segment, where continued profitable growth in all businesses is expected to be partially offset by inflationary costs of energy, logistics, and primary raw materials. Additionally, we expect our Performance Materials segment results to be similar to 2021 as U.S., Chinese, Canadian, and European vehicle production continues to be negatively impacted by global supply chain disruption. These assumptions assume that 2022 will continue to be impacted by global logistical headwinds, geopolitical uncertainty, significant cost inflation, and supply chain disruptions.
A
reconciliation of net income to adjusted EBITDA as projected for 2022 is not provided. Ingevity does not forecast net income as it cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components, net of tax, include further restructuring and other income (charges), net; additional acquisition and other-related costs; litigation verdict charges; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to legislative tax rate changes. Additionally, discrete tax items could drive variability in our projected effective tax rate. All of these components could significantly impact such financial measures. Further, in the future, other items with similar characteristics to those currently included in adjusted EBITDA, that have a similar impact on comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA.
36
Liquidity
and Capital Resources
The primary source of liquidity for our business is the cash flow provided by operating activities. We expect our cash flow provided by operations combined with cash on hand and available capacity under our revolving credit facility to be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months. As of September 30, 2022, our undrawn capacity under our revolving credit facility was $488.7 million. Over the next twelve months, we expect to fund the following: interest payments, capital expenditures, expenditures related to our business transformation initiative, debt principal repayments, purchases pursuant to our stock repurchase program, income tax payments, and to incur additional spending associated with our Performance Materials' intellectual property litigation. In addition,
we may also evaluate and consider strategic acquisitions, joint ventures, or other transactions to create stockholder value and enhance financial performance. In connection with such transactions, or to fund other anticipated uses of cash, we may modify our existing revolving credit, redeem all or part of our outstanding senior note, seek additional debt financing, issue equity securities, or some combination thereof.
Cash and cash equivalents totaled $72.3 million at September 30, 2022. We continuously monitor deposit concentrations and the credit quality of the financial institutions that hold our cash and cash equivalents, as well as the credit quality of our insurance providers, customers, and key suppliers.
Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalents
balance at September 30, 2022, included $57.9 million held by our foreign subsidiaries. Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and their capital expenditures. We believe that our foreign holdings of cash will not have a material adverse impact on our U.S. liquidity. If these earnings were distributed, such amounts would be subject to U.S. federal and state income tax at the statutory rate less the available foreign tax credits, if any, and would potentially be subject to withholding taxes in the various jurisdictions. The potential tax implications of the repatriation of unremitted earnings are driven by facts at the time of distribution, therefore, it is not practicable to estimate
the income tax liabilities that might be incurred if such cash and earnings were repatriated to the U.S. Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S. operations.
Other Potential Liquidity Needs
Share Repurchases
On July 25, 2022, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock (the "2022 Authorization"), and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior authorization. Shares under the 2022 Authorization may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors, including through
the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
During the three and nine months ended September 30, 2022, we repurchased $49.3 million and $139.2 million in common stock, representing 697,523 and 2,027,206 shares of our common stock at a weighted average cost per share of $70.75 and $68.68, respectively. At September 30, 2022, $450.7 million remained unused under our 2022 Authorization.
During the three and nine months ended September 30, 2021, we repurchased $32.2 million and $100.3 million in common stock, representing 414,501 and 1,298,167 shares of our common stock at a weighted average cost per share of $77.77 and $77.25, respectively.
Capital
Expenditures
Projected 2022 capital expenditures are $130 - $150 million. We have no material commitments associated with these projected capital expenditures as of September 30, 2022.
Net cash provided by (used in) operating activities
$
214.9
$
217.0
Net cash provided by (used in) investing activities
(144.7)
(83.4)
Net
cash provided by (used in) financing activities
(264.9)
(120.3)
Cash flows provided by (used in) operating activities
During the nine months ended September 30, 2022, cash flow provided by operations remained relatively consistent when compared to the prior year period. Although net income increased more than $107 million in 2022 when compared to the prior year period, this increase was offset by an increase in trade working capital, less cash and cash equivalent of almost $102 million. Below provides a description of the changes to trade working capital during the first nine months of 2022 (i.e. current assets and current liabilities).
Current
assets, less cash and cash equivalents as of September 30, 2022, increased $123.3 million compared to December 31, 2021. Accounts receivable, net increased $86.7 million due to strong sales and higher selling prices and Inventories, net increased $40.6 million driven by inflationary cost pressures on both input logistic costs as well as higher pricing on raw materials purchases.
Notes payable and current maturities of long-term debt
0.9
19.6
Income taxes payable
6.8
6.2
Total current liabilities
$
290.3
$
268.9
Current
liabilities as of September 30, 2022, increased by $21.4 million compared to December 31, 2021, due to higher Accounts payable of $38.8 million driven primarily from inflationary cost pressures which resulted in higher input costs and therefore large payable balances. The larger Accounts payable balance was partially offset by decreases in Notes payable and current maturities of long-term debt of $18.7 million andAccrued payroll and employee benefits of $3.5 million.
Cash flows provided by (used in) investing activities
Cash used by investing activities in the nine months ended September 30, 2022 and September 30, 2021 was $144.7 million
and $83.4 million, primarily driven by capital expenditures. In the nine months ended September 30, 2022 and 2021, we acquired strategic investments in privately-held companies for $62.8 million and $16.5 million, respectively.
38
Capital
expenditure categories
Nine Months Ended September 30,
In millions
2022
2021
Maintenance
$
45.9
$
29.9
Safety, health and environment
10.7
8.7
Growth
and cost improvement
36.7
27.8
Total capital expenditures
$
93.3
$
66.4
Cash flows provided by (used in) financing activities
Cash used in financing activities in the nine months ended September 30, 2022, was $264.9 million. Utilizing excess cash provided by operations we paid down outstanding debt in the amount of$119.1 million and were opportunistic with our share repurchases during the year repurchasing over 2 million shares for a total of $139.2 million.
Cash used in financing activities in the nine months ended September 30, 2021 was $120.3 million and was primarily driven by the repurchase of common stock of $100.3 million, and payments on long-term borrowings of $18.8 million.
New Accounting Guidance
Refer to Note 2 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Condensed Consolidated Financial Statements.
Critical Accounting Policies
and Estimates
Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have described our accounting policies in Note 2 to our consolidated financial statements included in our 2021 Annual Report. We have reviewed these accounting policies, identifying those that we believe to be critical to the preparation and understanding of our financial statements. Critical accounting policies are central to our presentation of results of operations and financial condition and require management to make estimates and judgments on certain matters. We base our estimates and judgments on historical experience, current conditions and other reasonable factors. For a description of our critical accounting policies and estimates, refer to
Part II, Item 7, Critical Accounting Policies and Estimates in our 2021 Annual Report. Our critical accounting policies have not substantially changed from those described in the 2021 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency exchange rate risk
We have foreign-based operations, primarily in Europe, South America and Asia, which accounted for approximately 23 percent of our net sales in the first nine months of 2022. We have designated the local currency as the functional currency of our significant operations outside of the U.S. The primary currencies for which we have exchange rate exposure are the U.S. dollar versus the euro, the Japanese yen, the pound sterling,
and the Chinese renminbi. In addition, certain of our domestic operations have sales to foreign customers. In the conduct of our foreign operations, we also make inter-company sales. All of this exposes us to the effect of changes in foreign currency exchange rates. Our earnings are therefore subject to change due to fluctuations in foreign currency exchange rates when the earnings in foreign currencies are translated into U.S. dollars. In some cases, to minimize the effects of such fluctuations, we use foreign exchange forward contracts to hedge firm and highly anticipated foreign currency cash flows. Our largest exposures are to the Chinese renminbi and the euro. A hypothetical 10 percent adverse change, excluding the impact of any hedging instruments, in the average Chinese renminbi and euro to U.S. dollar exchange rates during the nine months ended September 30,
2022, would have decreased our net sales and income before interest and income taxes by approximately $15.0 million or one percent, and $5.9 million or two percent, respectively. Comparatively, a hypothetical 10 percent adverse change in the average Chinese renminbi and euro to U.S. dollar exchange rates during the nine months ended September 30, 2021, would have decreased our net sales and income before interest and income taxes by approximately $15.6 million or two percent, and $6.9 million or five percent, respectively.
39
Interest rate risk
As
of September 30, 2022, approximately $509 million of our borrowings include a variable interest rate component. As a result, we are subject to interest rate risk with respect to such floating-rate debt. A hypothetical 100 basis point increase in the variable interest rate component of our borrowings as of September 30, 2022 would have increased our interest expense by approximately $5.1 million or 10 percent. Comparatively, a 100 basis point increase in the variable interest rate component of our borrowings as of September 30, 2021 would have increased our interest expense by approximately $3.3 million or seven percent.
During the year, we had floating-to-fixed interest rate swaps with a combined notional amount of $166.2 million
to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments, effectively converting $166.2 million of our floating rate debt to a fixed rate. Per the terms of these instruments, we received floating rate interest payments based upon three-month U.S. dollar LIBOR and in return were obligated to pay interest at a fixed rate of 3.79 percent until July 2023. Due to the repayment of our term loan (refer to Note 9 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information), during the second quarter of 2022, we terminated these interest rate swap instruments. Upon termination of the interest rate swap instruments, we reclassified a $1.7 million gain from AOCI into Interest expense, net on the condensed
consolidated statement of operations. The fair value of outstanding interest rate instruments at September 30, 2022 and December 31, 2021 was an asset (liability) of zero and $(4.0) million, respectively.
Other market risks
Information about our other remaining market risks for the period ended September 30, 2022 does not differ materially from that discussed under Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our 2021 Annual Report.
ITEM 4. CONTROLS
AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Ingevity maintains a system of disclosure controls and procedures designed to give reasonable assurance that information required to be disclosed in Ingevity's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of September 30, 2022, Ingevity's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), together with management, conducted an evaluation of the effectiveness
of Ingevity's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective at the reasonable assurance level described above.
b) Changes in Internal Control over Financial Reporting
There has been no change in Ingevity's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, Ingevity's internal control over financial reporting.
We are implementing a new global enterprise resource planning (“ERP”) system, which will replace our existing operating
and financial systems. The implementation began with our pilot deployment in the first quarter of 2022 and is expected to occur in multiple phases over the next year. Currently, we have had no changes in our internal controls over financial reporting with respect to this implementation, however, as the implementation progresses, we will give appropriate consideration to whether any process changes necessitate changes in the design of and testing for effectiveness of internal controls over financial reporting.
40
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding certain of these matters is set forth below and in Note 14 – Commitments and Contingencies to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q.
ITEM 1A. RISK FACTORS
Part I, Item 1A, Risk Factors of our 2021 Annual Report sets forth information relating to important risks and uncertainties that could materially adversely affect the Company’s business, financial
condition and operating results.
There have been no material changes in Ingevity's risk factors disclosed in Part I, Item 1A, Risk Factors of our 2021 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table summarizes information with respect to the purchase of our common stock during the three months ended September 30, 2022.
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)
July 1-31, 2022
—
$
—
—
$
500,000,000
August
1-31, 2022
304,064
$
72.81
304,064
$
477,860,691
September 1-30, 2022
393,459
$
69.16
393,459
$
450,648,949
Total
697,523
697,523
_______________
(1) On
July 25, 2022, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock, and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior Authorization. Shares under the 2022 Authorization may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
Equity Purchase Agreement, dated July 31, 2022, by and among Ingevity Corporation, Ozark Holdings, Inc., Ozark Materials, LLC and Ozark Logistics, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission on August 2, 2022).
Transaction
Support Agreement, dated July 31, 2022, by and among Ingevity Corporation, William H. Carr, Jerry N. Carr, Leon M. Gross, III, Ozark Holdings, Inc. and each of the other entities that are signatories thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission on August 2, 2022).
Section 1350
Certification of the Company’s Principal Executive Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended.
Section 1350 Certification of the
Company’s Principal Financial Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended.
101
Inline XBRL Instance Document and Related Items - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104
The
cover page from the Company’s Quarterly Report on Form 10-Q formatted in Inline XBRL (included in Exhibit 101).
† Indicates that certain information has been omitted pursuant to Item 601(b)(2) of Regulation S-K.
42
SIGNATURES
Pursuant to the requirements 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.
