ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management’s discussion and analysis of Ingevity’s financial condition and results of operations (“MD&A”) is provided as a supplement to the 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.
Cautionary Statements About Forward-Looking Statements
This section and other parts of this Annual Report on Form 10-K 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,” “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 Item 1A under the heading "Risk Factors" as well as in our 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:
•we are exposed to risks that the expected benefits from the Caprolactone Acquisition may not be realized or will not be realized within the expected time period, the risk of significant transaction costs and unknown or understated liabilities;
•we may be adversely affected by general economic and financial conditions beyond our control;
•we are exposed to risks related to our international sales and operations;
•our reported results could be adversely affected by currency exchange rates and currency devaluation could impair our competitiveness;
•our operations outside the U.S. require us to comply with a number of U.S. and foreign regulations, violations of which could have a material adverse effect on our financial condition and results of operations;
•we may be adversely affected by changes in trade policy, including the imposition of tariffs and the resulting consequences;
•our engineered polymers product line may be adversely affected by the United Kingdom’s withdrawal from the European Union;
•we are dependent upon attracting and retaining key personnel;
•adverse conditions in the global automotive market or adoption of alternative or new technologies may adversely affect demand for our automotive carbon products;
•we face competition from producers of alternative products and new technologies, and new or emerging competitors;
•we face competition from infringing intellectual property activity;
•if increasingly 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;
•our printing inks business serves customers in a market that is facing declining volumes and downward pricing;
•our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply;
•lack of access to sufficient CTO would impact our ability to produce CTO-based products;
•a prolonged period of low energy prices may materially impact our results of operations;
•we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;
•the occurrence of a natural disaster, such as a hurricane, winter or tropical storm, earthquake, tornado, flood, fire or other matters such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;
•the adverse effect of the Coronavirus on our international sales and operations, demand for our automotive carbon products, and our manufacturing facilities and supply chain;
•from time to time we are called upon to protect our intellectual property rights and proprietary information though litigation and other means;
•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;
•government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies 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 Corporation ("Ingevity," "the company", "we," "us" or "our") 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.
Our Performance Materials segment consists of our automotive technologies and process purifications product lines. Performance Materials manufactures products in the form of powder, granules, 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, oilfield technologies, industrial specialties, and engineered polymers product lines. Performance Chemicals manufactures products derived from CTO and lignin extracted from the kraft paper making 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 pavement preservation, pavement adhesion promotion, and warm mix paving (pavement technologies product line), oil well service additives, oil production, and downstream application chemicals (oilfield technologies product line), printing inks, adhesives, agrochemicals, lubricants, and industrial intermediates (industrial specialties product line), coatings, resins, elastomers, adhesives, and bio-plastics (engineered polymers product line).
Recent Developments
Perstorp AB's Caprolactone Business
On February 13, 2019, we completed the acquisition of Perstorp UK Ltd. with Perstorp Holding AB ("Seller"), including the Seller's entire caprolactone business ("Caprolactone Business"), herein referred to as the "Caprolactone Acquisition." The Caprolactone Acquisition was completed for an aggregate purchase price of €578.9 million ($652.5 million), less assumed debt of €100.4 million ($113.1 million). At closing, the assumed debt was settled with an affiliate of the Seller. The Caprolactone Acquisition is being integrated into our Performance Chemicals segment and included within our engineered polymers product line. Our revolving credit facility was utilized as the primary source of funds, along with available cash on hand, to fund the Caprolactone Acquisition.
Revolving Credit and Term Loan Facility Amendment
On March 7, 2019, we entered into an Amendment No. 3 and Amendment No. 4 (the “Amendments”) to our Credit Agreement. Among other things, the Amendments established a new class of incremental term loan commitments, collectively referred to as the 2019 Term Loan, in the aggregate principal amount of $375.0 million. The 2019 Term Loan of $375.0 million is in additional to the existing 2017 Term Loan of $375.0 million.
The 2019 Term Loan is not subject to amortization; the full principal balance is due and payable at maturity on August 7, 2022. The 2019 Term Loan bears interest at either (a) an adjusted base rate or (b) an adjusted LIBOR rate (or a comparable or successor rate), in each case, plus an applicable margin (the “2019 Term Loan Applicable Margin”), in the case of base rate loans, ranging between zero and 0.25 percent, and in the case of adjusted LIBOR rate loans, ranging between 0.75 percent and 1.25 percent. The 2019 Term Loan Applicable Margin is based on a total leverage based pricing grid.
As consideration for Amendments, we paid to each lender party thereto a consent fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans under held by such lender. Fees of $1.8 million were incurred to secure the 2019 Term Loan. These fees have been deferred and will be amortized over the term of the loan.
We used the proceeds of the 2019 Term Loan to repay loans outstanding under our Revolving Credit Facility.
Results of Operations
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|
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Years Ended December 31,
|
|
|
|
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In millions, except per share data
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2019
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2018
|
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2017
|
Net sales
|
$
|
1,292.9
|
|
|
$
|
1,133.6
|
|
|
$
|
972.4
|
|
Cost of sales
|
810.9
|
|
|
716.8
|
|
|
643.4
|
|
Gross profit
|
482.0
|
|
|
416.8
|
|
|
329.0
|
|
Selling, general and administrative expenses
|
163.1
|
|
|
132.4
|
|
|
106.4
|
|
Research and technical expenses
|
19.7
|
|
|
21.5
|
|
|
19.8
|
|
Separation costs
|
—
|
|
|
—
|
|
|
0.9
|
|
Restructuring and other (income) charges, net
|
1.8
|
|
|
(0.5)
|
|
|
3.7
|
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Acquisition-related costs
|
26.9
|
|
|
10.8
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|
|
7.1
|
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Other (income) expense, net
|
(4.3)
|
|
|
1.0
|
|
|
0.5
|
|
Interest expense
|
54.6
|
|
|
33.2
|
|
|
18.1
|
|
Interest income
|
(7.7)
|
|
|
(3.4)
|
|
|
(2.3)
|
|
Income (loss) before income taxes
|
227.9
|
|
|
221.8
|
|
|
174.8
|
|
Provision (benefit) for income taxes
|
44.2
|
|
|
40.0
|
|
|
29.6
|
|
Net income (loss)
|
183.7
|
|
|
181.8
|
|
|
145.2
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
—
|
|
|
12.7
|
|
|
18.7
|
|
Net income (loss) attributable to Ingevity stockholders
|
$
|
183.7
|
|
|
$
|
169.1
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|
|
$
|
126.5
|
|
Net Sales Comparison of Years Ended December 31, 2019, 2018, and 2017
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|
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Percentage change vs. prior year
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|
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|
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In millions, except percentages
|
Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
Year Ended December 31, 2019
|
$
|
1,292.9
|
|
|
14%
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|
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(1)%
|
|
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4%
|
|
|
11%
|
|
Year Ended December 31, 2018
|
1,133.6
|
|
|
17%
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|
|
1%
|
|
|
1%
|
|
|
15%
|
|
Year Ended December 31, 2019 vs. 2018
The sales increase in 2019 was driven primarily by a volume increase of $123.7 million (11 percent of sales). Performance Materials and Performance Chemicals contributed $70.1 million and $53.6 million, respectively, to the volume growth during the year. The Caprolactone Acquisition, completed in the first quarter of 2019, contributed $122.1 million to the favorable volume growth during the period. Additionally, the favorable pricing and product mix of $43.2 million (four percent of sales) across both segments, offset partially by unfavorable foreign exchange impacts of $7.6 million (one percent of sales) resulted in the year over year Net sales increase.
Year Ended December 31, 2018 vs. 2017
The sales increase in 2018 was driven by a volume increase of $142.9 million (15 percent of sales). Performance Materials and Performance Chemicals contributed $44.6 million and $98.3 million, respectively, to the volume impacts during the year. Additionally, the favorable pricing and product mix of $13.5 million (one percent of sales) across both segments, as well as favorable foreign exchange impacts of $4.8 million (one percent of sales) resulted in the year over year Net sales increase.
Gross Profit
Year Ended December 31, 2019 vs. 2018
Gross profit improvement of $65.2 million was driven by favorable sales volume contributing $62.0 million of additional gross profit and pricing and product mix improvement contributing $39.5 million. These positive impacts were offset by increased manufacturing costs of $26.0 million, inventory step-up amortization related to the Pine Chemical Acquisition and Caprolactone Acquisition of $7.0 million (see Note 17 within the Condensed Consolidated Financial Statements included within Part II. Item 8 of the Form 10-K for more information), and unfavorable foreign currency exchange of $3.3 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.
Year Ended December 31, 2018 vs. 2017
Gross profit improvement of $87.8 million was driven by favorable sales volume contributing $67.1 million of additional gross profit, pricing and product mix improvement of $20.6 million, and favorable foreign currency exchange of $1.9 million. These positive impacts were offset by increased manufacturing costs of $0.4 million, inventory step-up amortization related to the Pine Chemical Acquisition of $1.4 million (see Note 17 within the Condensed Consolidated Financial Statements included within Part II. Item 8 of the Form 10-K for more information). 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
Year Ended December 31, 2019 vs. 2018
Selling, general and administrative ("SG&A") expenses were $163.1 million (13 percent of sales) and $132.4 million (12 percent of sales) for the years ended December 31, 2019 and 2018, respectively. The increase in SG&A is primarily due to intangible asset amortization associated with the Caprolactone Acquisition and Pine Chemical Acquisition of $16.5 million and increased legal costs associated with our Performance Materials' intellectual property litigation of $10.2 million, and increased spending related to the new engineered polymers product line.
Year Ended December 31, 2018 vs. 2017
SG&A expenses were $132.4 million (12 percent of sales) and $106.4 million (11 percent of sales) for the years ended December 31, 2018 and 2017, respectively. The increase in SG&A is primarily due to intangible asset amortization of $10.6 million associated with the Pine Chemical Acquisition, litigation expenses of $4.9 million in our Performance Materials segment, and growth related spending in both segments.
Research and technical expenses
Years Ended December 31, 2019, 2018, and 2017
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 1.5 percent in the year ended December 31, 2019 from 1.9 percent and 2.0 percent in the years ended December 31, 2018 and 2017, respectively.
Restructuring and other (income) charges, net
2019 activities
During the third quarter of 2019, we initiated a reorganization as part of an effort to improve our Performance Chemicals segment's workflow and efficiency to best serve our customers’ needs and reduce costs. As a result of this reorganization, we recorded $1.5 million in severance and other employee-related costs in the year ended December 31, 2019.
During the second quarter of 2019, we sold assets from the Performance Chemicals derivatives operations in Palmeira, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded $0.4 million in proceeds from the sales as a gain on sale of assets, which was offset by a $0.7 million charge related to other miscellaneous exit costs in the year ended December 31, 2019.
2018 activities
In February 2018, we sold assets from the Performance Chemicals derivatives operations in Duque De Caxias, Rio de Janeiro, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded $0.6 million as a gain on sale of assets offset by other employee related costs of $0.1 million for the year ended December 31, 2018.
2017 activities
In January 2017, we initiated a reorganization to streamline our leadership team, flatten the organization and reduce costs. Because of this reorganization, we recorded $1.3 million in severance and other employee-related costs for the year ended December 31, 2017.
During the year ended December 31, 2017, we also recorded $2.4 million of additional miscellaneous exit costs primarily associated with the exit of our Performance Chemicals' manufacturing operations in Palmeira, Santa Catarina, Brazil which began in the fourth quarter of 2016.
Detail on these restructuring charges and asset disposal activities is provided below.
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|
|
Years Ended December 31,
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|
|
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In millions
|
2019
|
|
2018
|
|
2017
|
Restructuring and other (income) charges, net
|
|
|
|
|
|
Gain on sale of assets and businesses
|
$
|
(0.4)
|
|
|
$
|
(0.6)
|
|
|
$
|
—
|
|
Severance and other employee-related costs (1)
|
1.5
|
|
|
0.1
|
|
|
1.3
|
|
Other (income) charges, net (2)
|
0.7
|
|
|
—
|
|
|
2.4
|
|
Total restructuring and other (income) charges, net
|
$
|
1.8
|
|
|
$
|
(0.5)
|
|
|
$
|
3.7
|
|
_______________
(1) Represents severance and employee benefit charges.
(2) Primarily represents costs associated with rental payments, contract terminations, and other miscellaneous exit costs. Other Income primarily represents favorable developments on previously recorded exit costs as recoveries associated with restructuring activities.
Acquisition-related costs
Years Ended December 31, 2019, 2018, and 2017
Acquisition costs of $26.9 million, $10.8 million, and $7.1 million for the years ended December 31, 2019, 2018, and 2017, respectively, were comprised of charges incurred in connection with the acquisitions of the Caprolactone Business and Pine Chemical Business. See Note 17 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information.
Other (income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Foreign currency exchange (income) loss
|
$
|
0.2
|
|
|
$
|
2.0
|
|
|
$
|
1.2
|
|
Royalty and sundry (income) loss
|
(1.9)
|
|
|
(0.8)
|
|
|
(0.7)
|
|
Impairment of equity investment (1)
|
—
|
|
|
1.5
|
|
|
—
|
|
Other (income) expense, net
|
(2.6)
|
|
|
(1.7)
|
|
|
—
|
|
Total Other (income) expense, net
|
$
|
(4.3)
|
|
|
$
|
1.0
|
|
|
$
|
0.5
|
|
_______________
(1) Represents an impairment charge related to an equity investment within our Performance Materials segment.
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Interest expense on finance lease obligations
|
$
|
6.1
|
|
|
$
|
6.2
|
|
|
$
|
6.1
|
|
Interest expense on revolving credit facility and term loans
|
36.2
|
|
|
14.9
|
|
|
11.4
|
|
Interest expense on senior notes
|
13.5
|
|
|
13.0
|
|
|
—
|
|
Capitalized interest
|
(1.6)
|
|
|
(1.1)
|
|
|
(0.3)
|
|
Other
|
0.4
|
|
|
0.2
|
|
|
0.9
|
|
Total interest expense
|
$
|
54.6
|
|
|
$
|
33.2
|
|
|
$
|
18.1
|
|
Interest income
Years Ended December 31 2019, 2018, and 2017
Interest income was $7.7 million, $3.4 million, and $2.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. Interest income is primarily related to the interest earned on our restricted investment of $2.0 million and $2.3 million from our fixed-to-fixed cross-currency interest rate swap (see Note 6 and 10 to the Consolidated Financial Statements included in Part II. Item 8 of this Form 10-K for more information).
Provision (benefit) for income taxes
Detail explaining the change in the effective tax rate is presented in Note 18 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K.
Net income (loss) attributable to noncontrolling interests
Year Ended December 31, 2019, 2018, and 2017
Net income (loss) attributable to noncontrolling interests was zero, $12.7 million and $18.7 million for the years ended December 31, 2019, 2018, and 2017, respectively. Our noncontrolling interest represented the 30 percent ownership interest held by a third-party U.S.-based company in our consolidated Purification Cellutions, LLC legal entity, prior to our purchase of this remaining interest on August 1, 2018.
Segment Operating Results
In addition to the information discussed above, the following sections discuss the results of operations for each 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, other (income) expense, net, excluding depreciation and amortization). We have excluded the following items from segment EBITDA: interest expense associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, acquisition and other related costs, pension and postretirement settlement and curtailment (income) charge. In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 3 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K.
Performance Materials
|
|
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|
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|
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In millions
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
Automotive Technologies product line
|
$
|
454.9
|
|
|
$
|
362.0
|
|
|
$
|
312.5
|
|
Process Purification product line
|
35.7
|
|
|
38.4
|
|
|
36.8
|
|
Total Performance Materials - Net sales
|
$
|
490.6
|
|
|
$
|
400.4
|
|
|
$
|
349.3
|
|
Segment EBITDA
|
213.4
|
|
|
169.4
|
|
|
141.8
|
|
Net Sales Comparison of Years Ended December 31, 2019, 2018, and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change vs. prior year
|
|
|
|
|
|
|
In millions, except percentages
|
Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
Year Ended December 31, 2019
|
$
|
490.6
|
|
|
23
|
%
|
|
(1)
|
%
|
|
6
|
%
|
|
18
|
%
|
Year Ended December 31, 2018
|
$
|
400.4
|
|
|
15
|
%
|
|
—
|
%
|
|
2
|
%
|
|
13
|
%
|
Year Ended December 31, 2019 vs. 2018
Segment net sales. The increase in 2019 was driven by $70.1 million (18 percent of sales) in volume improvements in automotive evaporative emission canister products due to stricter environmental regulation in the Chinese, North American, and European automotive markets. These gains were further bolstered by favorable pricing and product mix of $22.9 million (six percent of sales), partially offset by unfavorable foreign currency exchange impacts of $2.8 million (one percent of sales).
Segment EBITDA. Segment EBITDA increased $44.0 million due to favorable volume primarily in the automotive carbon application, which contributed $41.3 million and favorable pricing and product mix, which contributed $18.9 million. These gains were partially offset by increased manufacturing costs of $5.4 million and increased SG&A and research and technical costs of $14.6 million, primarily due to increased intellectual property litigation costs of $10.2 million. Favorable foreign currency exchange impacts and other miscellaneous income of $3.9 million also contributed to the increase.
Year Ended December 31, 2018 vs. 2017
Segment net sales. The increase in 2018 was driven by $44.6 million (13 percent of sales) in volume improvements in the automotive carbon market due to strong growth in high content vehicle production for sale into the North American automotive market and increased vehicle content due to regulatory adoption. Additionally, we had improved price and product mix of $5.2 million (two percent of sales) and favorable foreign currency exchange impacts of $1.3 million (less than one percent of sales).
Segment EBITDA. Segment EBITDA $27.6 million primarily due to $28.6 million in favorable volumes and $8.2 million in favorable pricing and product mix, and lower production and operating costs of $1.8 million . These gains were
partially offset by higher SG&A expenses of $8.9 million, unfavorable foreign currency exchange impacts of $0.6 million, and the impairment of an equity investment of $1.5 million.
Performance Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
Pavement Technologies product line
|
$
|
111.4
|
|
|
$
|
114.2
|
|
|
$
|
77.8
|
|
Oilfield Technologies product line
|
183.3
|
|
|
178.5
|
|
|
163.0
|
|
Industrial Specialties product line
|
385.5
|
|
|
440.5
|
|
|
382.3
|
|
Engineered Polymers product line
|
122.1
|
|
|
—
|
|
|
—
|
|
Total Performance Chemicals - Net sales
|
$
|
802.3
|
|
|
$
|
733.2
|
|
|
$
|
623.1
|
|
Segment EBITDA
|
183.5
|
|
|
151.1
|
|
|
100.9
|
|
Net Sales Comparison of Years Ended December 31, 2019, 2018, and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change vs. prior year
|
|
|
|
|
|
|
In millions, except percentages
|
Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
Year Ended December 31, 2019
|
$
|
802.3
|
|
|
9
|
%
|
|
(1)
|
%
|
|
3
|
%
|
|
7
|
%
|
Year Ended December 31, 2018
|
$
|
733.2
|
|
|
18
|
%
|
|
1
|
%
|
|
1
|
%
|
|
16
|
%
|
Pine Chemical Business and Caprolactone Business
The Pine Chemical Business has been integrated into our Performance Chemicals segment and has been included within our results of operations since March 8, 2018. The Caprolactone Business is being integrated into our Performance Chemicals segment and has been included within our results of operations since it was acquired on February 13, 2019. The information presented below for the years ended December 31, 2019 and 2018, includes the results of these acquisitions as compared to historical results. For a pro forma comparative analysis of 2019 versus 2018 results, refer to the section below titled "Performance Chemicals Pro Forma Financial Results with the Pine Chemical Business and Caprolactone Business."
Year Ended December 31, 2019 vs. 2018
Segment net sales. The sales increase was driven by favorable volume of $53.6 million (seven percent of sales), which consisted of a favorable increase in engineered polymers ($122.1 million), partially offset by volume declines in industrial specialties ($63.9 million), oilfield technologies ($3.3 million) and pavement technologies product lines ($1.3 million). Also driving the net sales increase was pricing and product mix of $20.3 million (three percent of sales) in industrial specialties ($12.3 million), oilfield technologies ($0.8 million), and pavement technologies product lines ($7.2 million), which were partially offset by unfavorable $4.8 million (one percent of sales) of foreign currency exchange impact.
Segment EBITDA. Segment EBITDA increased $32.4 million due to favorable volume of $20.7 million, favorable price and product mix of $20.6 million, as well as favorable SG&A costs of $2.0 million. These favorable operating results were partially offset by $10.4 million of unfavorable manufacturing productivity, primarily driven by higher freight costs, and unfavorable foreign currency exchange impacts and other miscellaneous charges of $0.5 million.
Year Ended December 31, 2018 vs. 2017
Segment net sales. The sales increase was driven by favorable volume of $98.3 million (16 percent of sales) driven by industrial specialties ($52.3 million), oilfield technologies ($33.9 million) and pavement technologies product lines ($12.1 million). Additionally, favorable pricing and product mix of $8.3 million (one percent of sales) in industrial specialties ($3.3 million), oilfield technologies ($2.3 million), and pavement technologies product lines ($2.7 million) markets and favorable $3.5 million (one percent of sales) of foreign currency exchange contributed to results.
Segment EBITDA. Segment EBITDA increased $50.2 million due to favorable volume of $38.5 million, favorable price and product mix of $12.4 million, favorable manufacturing and production costs, net of freight inflation, of $3.5 million, and favorable foreign currency exchange and other miscellaneous income of $4.2 million. These gains were partially offset by unfavorable SG&A expenses of $8.4 million, which was partially due to higher employee-related costs.
Performance Chemical Pro Forma Financial Results with the Pine Chemical Business and Caprolactone Business
We believe that reviewing our operating results by combining actual and pro forma results for our Performance Chemicals segment is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance. Our pro forma segment information includes adjustments as if the acquisitions had occurred on January 1st, in the year preceding the year of acquisition. Our pro forma results are adjusted for the effects of acquisition accounting but do not include adjustments for costs related to integration activities, cost savings or synergies that might be achieved by the combined businesses. Pro forma amounts presented are not necessarily indicative of what our results would have been had we operated the Pine Chemical Business and Caprolactone Business since January 1st in the year preceding the acquisition, nor will the pro forma amounts necessarily be indicative of our future results.
|
|
|
|
|
|
|
|
|
|
|
|
Performance Chemical Pro Forma Financial Results
|
|
|
|
|
Year Ended December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Net sales
|
|
|
|
Performance Chemicals, as reported (1)
|
$
|
802.3
|
|
|
$
|
733.2
|
|
Pine Chemical Business and Caprolactone Business, pro forma (2)
|
17.7
|
|
|
187.2
|
|
Pro Forma Combined Net Sales (3)
|
$
|
820.0
|
|
|
$
|
920.4
|
|
Segment EBITDA
|
|
|
|
Performance Chemicals, as reported (1)
|
$
|
183.5
|
|
|
$
|
151.1
|
|
Pine Chemical Business and Caprolactone Business, pro forma (2)
|
5.5
|
|
|
65.9
|
|
Pro Forma Combined Segment EBITDA (3)
|
$
|
189.0
|
|
|
$
|
217.0
|
|
_______________
(1) As reported amounts are the results of operations of Performance Chemicals, including the results of the Pine Chemical Business and Caprolactone Business, post acquisition dates of March 8, 2018 and February 13, 2019, respectively.
(2) Pro forma amounts include historical results of the Pine Chemical Business and Caprolactone Business, prior to the acquisition dates of March 8, 2018 and February 13, 2019, respectively. These amounts also include adjustments as if the acquisitions had occurred on January 1st in the year preceding the acquisition, including the effects of purchase accounting. The pro forma amounts do not include adjustments for expenses related to integration activities, cost savings, or synergies that have been or may have been realized.
(3) The pro forma combined results are not necessarily indicative of what the results would have been had we acquired the Pine Chemical Business and Caprolactone Business on January 1st in the year preceding the acquisition, nor are they indicative of future results.
Performance Chemical Pro Forma Combined Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Oilfield Technologies product line
|
$
|
111.4
|
|
|
$
|
118.8
|
|
Pavement Technologies product line
|
183.3
|
|
|
178.7
|
|
Industrial Specialties product line
|
385.5
|
|
|
455.9
|
|
Engineered Polymers product line
|
139.8
|
|
|
167.0
|
|
Pro Forma Combined Net Sales - Performance Chemicals
|
$
|
820.0
|
|
|
$
|
920.4
|
|
Pro Forma Comparison of Year Ended December 31, 2019 vs. 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change vs. prior year
|
|
|
|
|
|
|
|
|
|
|
Performance Chemicals (In millions, except percentages)
|
Pro Forma Combined Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
|
|
Year Ended December 31, 2019
|
$
|
820.0
|
|
|
(11)
|
%
|
|
(1)
|
%
|
|
3
|
%
|
|
(13)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Combined Results - Year Ended December 31, 2019 vs. 2018
Pro Forma Combined Net Sales. The decrease was driven by unfavorable volume of $115.4 million (13 percent of sales), which consisted of unfavorable volumes in industrial specialties ($79.2 million), engineered polymers ($26.7 million), pavement technologies ($1.6 million), and oilfield technologies product lines ($7.9 million). This decline was partially offset by pricing and product mix increase of $20.3 million (three percent of sales) driven by favorable price and product mix in oilfield technologies ($0.8 million), pavement technologies ($7.2 million), and industrial specialties product lines ($12.3 million). In addition, unfavorable foreign currency exchange impacted Pro Forma Combined Net Sales by $5.3 million (less than one percent of sales).
Pro Forma Combined Segment EBITDA. Pro Forma Combined Segment EBITDA decreased by $28.0 million primarily due to decreased volumes of $50.3 million, increased manufacturing, freight and warehousing costs of $5.9 million, and unfavorable foreign currency exchange impact of $1.9 million. These declines were partially offset by $19.8 million of favorable pricing and product mix and $10.3 million of favorable SG&A costs.
Use of Non-GAAP Financial Measures
Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with U.S. generally accepted accounting principles (“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 or 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 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, and pension and postretirement settlement and curtailment (income) charges.
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 to Adjusted EBITDA
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Net income (loss) (GAAP)
|
$
|
183.7
|
|
|
$
|
181.8
|
|
|
$
|
145.2
|
|
Interest expense
|
54.6
|
|
|
33.2
|
|
|
18.1
|
|
Interest income
|
(7.7)
|
|
|
(3.4)
|
|
|
(2.3)
|
|
(Provision) benefit for income taxes
|
44.2
|
|
|
40.0
|
|
|
29.6
|
|
Depreciation and amortization - Performance Materials
|
24.2
|
|
|
22.2
|
|
|
19.8
|
|
Depreciation and amortization - Performance Chemicals
|
60.8
|
|
|
34.8
|
|
|
20.6
|
|
Pension and postretirement settlement and curtailment income (charges)
|
—
|
|
|
0.2
|
|
|
—
|
|
Separation costs
|
—
|
|
|
—
|
|
|
0.9
|
|
Restructuring and other (income) charges, net
|
1.8
|
|
|
(0.5)
|
|
|
3.7
|
|
Acquisition and other-related costs (1)
|
35.3
|
|
|
12.2
|
|
|
7.1
|
|
Separation costs
|
—
|
|
|
—
|
|
|
0.9
|
|
Adjusted EBITDA (Non-GAAP)
|
$
|
396.9
|
|
|
$
|
320.5
|
|
|
$
|
242.7
|
|
_______________
|
|
|
|
|
|
|
|
|
(1) These charges are associated with the acquisition and integration of the Pine Chemical Business and the acquisition and integration of the Caprolactone Business. See below for more detail on the charges incurred.
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Legal and professional service fees (i)
|
$
|
14.2
|
|
|
$
|
6.9
|
|
|
$
|
7.1
|
|
Inventory fair value step-up amortization (ii)
|
8.4
|
|
|
1.4
|
|
|
—
|
|
Purchase price hedge adjustment (i)
|
12.7
|
|
|
3.9
|
|
|
—
|
|
Acquisition and other-related costs
|
$
|
35.3
|
|
|
$
|
12.2
|
|
|
$
|
7.1
|
|
_______________
|
|
|
|
|
|
(i) Included within "Acquisition-related costs" on the consolidated statements of operations.
|
|
|
|
|
|
(ii) Included within "Cost of sales" on the consolidated statements of operations.
|
|
|
|
|
|
Adjusted EBITDA
Year Ended December 31, 2019, 2018 and 2017
The factors that impacted Adjusted EBITDA period to period are the same factors that affected earnings discussed in the sections entitled "Results of Operations" and "Segment Operating Results" within MD&A.
Total Company Outlook and 2020 Guidance
For revenue, we expect favorable volume growth in Performance Materials’ automotive technologies product line driven by continued regulatory changes. In Performance Chemicals, we expect volume growth in pavement technologies driven by continued chemistry adoption and global growth, and in engineered polymers as monomer markets stabilize and the use of caprolactone derivatives grow in targeted applications, spurred in part due to new product and innovation products. The Performance Chemicals volume growth is expected to be partially offset by reduced volumes in the industrial specialties and oilfield technologies product lines. We expect that first quarter 2020 revenue will be unfavorably impacted by $20 million to $30 million, due to the impacts of the novel coronavirus (COVID-19), however, we believe we will recover some or all of this impact over the course of the year.
Adjusted EBITDA is expected to grow by one percent to six percent versus 2019. In the Performance Materials segment, growth will be driven by continued volume, price and mix improvements, as the US and Canada continue adoption of
the Tier 3/LEV III standard, as China demand increases with continued adoption of China 6, and European demand increases as they continue implementation of Euro 6d. This growth will be partially offset by marginally lower vehicle demand, maintenance expense associated with a kiln replacement in Covington, and continued legal costs to defend the company’s intellectual property. In the Performance Chemicals segment, continued profitable growth in pavement technologies and a return to growth in engineered polymers is expected to be offset by somewhat lower volumes in industrial specialties and oilfield technologies, modest inflationary costs for freight and CTO, and lower throughput at our refineries. Some risks to the 2020 outlook include lower than anticipated U.S., China, Canadian and European vehicle sales and production, higher non-CTO raw materials costs with higher oil prices, a shift towards smaller vehicles in the U.S. (versus the 2016 to 2019 shift towards light trucks), lower oil prices and a reduction in oil drilling and production in oilfield technologies, Brexit, and ongoing trade and tariff discussions between the U.S. and other countries. We also expect the first quarter 2020 Adjusted EBITDA will be negatively impact by $10 million to $15 million as a result of the novel coronavirus (COVID-19), however, we believe we will recover some, if not all of, this impact over the course of the year. We expect to deliver fiscal year 2020 Adjusted EBITDA of $400 million to $420 million. These estimates assume a slowdown of the 2019 novel coronavirus (COVID-19) public health crisis by the end of the first quarter.
A reconciliation of net income to adjusted EBITDA as projected for 2020 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 in connection with the Perstorp Holding AB’s Capa caprolactone business; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to future guidance and assessment of U.S. tax reform. 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.
Liquidity and Capital Resources
The primary source of liquidity for Ingevity’s 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 meet our working capital needs. We believe these sources will be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months. Over the next twelve months, we expect to make interest payments, capital expenditures, principal repayments, treasury share repurchases, income tax payments, incurred additional spend associated with our Performance Materials' intellectual property litigation, and may incur additional acquisition-related costs. As of December 31, 2019, our available capacity under our revolving credit facility was $616.6 million.
Cash and cash equivalents totaled $56.5 million at December 31, 2019. Management continuously monitors deposit concentrations and the credit quality of the financial institutions that hold our cash and cash equivalents, as well as the credit quality of its 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 December 31, 2019 included $54.0 million held by our foreign subsidiaries. Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and capital expenditures. We believe that our foreign holdings of cash will not have a material adverse impact on our U.S. liquidity. Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S. operations. If these earnings were distributed, such amounts would be subject to U.S. federal income tax at the statutory rate less the available foreign tax credits, if any, and potentially 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.
Revolving Credit Facility and Term Loans
Refer to Note 11 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for a summary of our revolving credit facility and outstanding term loans.
Other Potential Liquidity Needs
Share Repurchases
On February 20, 2017, the Board of Directors authorized the repurchase of up to $100.0 million of our common stock. In addition, on November 1, 2018, the Board of Directors approved the authorization for the repurchase of up to an additional $350.0 million of Ingevity’s outstanding common stock. The repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time. Shares 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.
During the year ended December 31, 2019, we repurchased $6.4 million in common shares, representing 80,300 shares of our common stock at a weighted average cost per share of $80.22. At December 31, 2019, $389.5 million remained unused under our Board-authorized repurchase program. We record shares of common stock repurchased at cost as treasury stock, resulting in a reduction of stockholders’ equity in the consolidated balance sheets. When the treasury shares are contributed under our employee benefit plans or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to or deducted from the related capital in excess of par value of common stock.
Capital Expenditures
Projected 2020 capital expenditures are expected to be $95 million to $105 million. We have no material commitments associated with these projected capital expenditures as of December 31, 2019.
Cash flow comparison of Years Ended December 31, 2019, 2018, and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Net cash provided by (used in) operating activities
|
$
|
275.7
|
|
|
$
|
252.0
|
|
|
$
|
174.3
|
|
Net cash provided by (used in) investing activities
|
(658.3)
|
|
|
(414.4)
|
|
|
(58.6)
|
|
Net cash provided by (used in) financing activities
|
369.2
|
|
|
153.7
|
|
|
(57.8)
|
|
Cash flows provided by (used in) operating activities
During the year ended December 31, 2019, cash flow provided by operations increased primarily due to higher earnings, partially offset by working capital increases compared to 2018. Working capital increases in 2019 when compared to 2018 are further explained below.
Current Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
56.5
|
|
|
$
|
77.5
|
|
Accounts receivable, net
|
150.0
|
|
|
118.9
|
|
Inventories, net
|
212.5
|
|
|
191.4
|
|
Prepaid and other current assets
|
44.2
|
|
|
34.9
|
|
Total current assets
|
$
|
463.2
|
|
|
$
|
422.7
|
|
Current assets as of December 31, 2019, increased $40.5 million compared to December 31, 2018, primarily due to increases in inventories and accounts receivable. Accounts receivable, net as of December 31, 2019, increased $31.1 million, which includes $13.2 million of receivables associated with the Caprolactone Acquisition. The increase to accounts receivables was partially due to the increase in fourth quarter sales year over year and delayed customer receivable collections at the end of 2019. Inventories, net also contributed to the overall increase in total current assets, primarily due to the inclusion of the Caprolactone Business' product inventory of $14.3 million. See Note 17 in the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information on the Caprolactone Acquisition. Additionally, Prepaid and other current assets increased by $9.3 million primarily related to the New Market Tax Credit transaction. See Note 11 in the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Accounts payable
|
$
|
99.1
|
|
|
$
|
92.9
|
|
Accrued expenses
|
33.3
|
|
|
36.7
|
|
Accrued payroll and employee benefits
|
28.2
|
|
|
42.0
|
|
Current operating lease liabilities
|
17.1
|
|
|
—
|
|
Notes payable and current portion of long-term debt
|
22.5
|
|
|
11.2
|
|
Income taxes payable
|
15.3
|
|
|
0.5
|
|
Total current liabilities
|
$
|
215.5
|
|
|
$
|
183.3
|
|
Current liabilities as of December 31, 2019, increased by $32.2 million compared to December 31, 2018, driven primarily by the $17.1 million increase in Current operating lease liabilities associated with adoption of the new lease accounting standard (see Notes 4 and 14 in the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information on the adoption and current lease balances). Also increasing current liabilities was an $11.3 million increase in the current portion of long-term debt (see Note 11 in the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information on our debt balances) as well a $14.8 million increase on our Income taxes payable. See Note 18 in the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information as it relates to income taxes and related balances. Offsetting the increases noted above was a decrease of
$13.8 million in Accrued payroll and employee benefits, primarily related to lower accrued incentive costs in the current year as compared to the year ended December 31, 2018.
Cash flows provided by (used in) investing activities
The cash used in investing activities for the year ended December 31, 2019 was primarily driven by the $537.9 million purchase of the Caprolactone Business (see Note 17 to the Consolidated Financial Statements Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). The remaining cash used by investing activities was primarily driven by capital expenditures. See the table below for the capital expenditure spending by category.
The cash used in investing activities for the year ended December 31, 2018 was primarily driven by the $315.5 million purchase of the Pine Chemical Business. The remaining cash used by investing activities was primarily driven by capital expenditures.
For the year ended December 31, 2019, capital spending was driven primarily by maintenance and growth spending. Our Covington, Virginia facility incurred expenditures for its expansion project, along with base maintenance and other various equipment purchases. Also, we incurred cost improvement spending at our DeRidder, Louisiana location related to installation of new CTO tanks as well as base maintenance spending, and our Waynesboro, Georgia location expended funds primarily for growth and cost improvement. We also invested capital spending in our newest location in Warrington, United Kingdom to enable further growth and cost improvement as well as base maintenance.
For the year ended December 31, 2018, capital spending included both growth and maintenance spending for expansion and specialized equipment at our Covington, Virginia, Waynesboro, Georgia, and Changshu, China facilities, as well as base maintenance spending to support ongoing operations across both segments. In addition, we expended funds for cost improvement related to CTO tanks at our DeRidder, Louisiana facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure categories
|
Years Ended December 31,
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|
|
|
|
In millions
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2019
|
|
2018
|
|
2017
|
Maintenance
|
$
|
44.6
|
|
|
$
|
41.1
|
|
|
$
|
30.3
|
|
Safety, health and environment
|
11.2
|
|
|
9.6
|
|
|
8.2
|
|
Growth and cost improvement
|
59.0
|
|
|
43.2
|
|
|
14.1
|
|
Total capital expenditures
|
$
|
114.8
|
|
|
$
|
93.9
|
|
|
$
|
52.6
|
|
Cash flows provided by (used in) financing activities
Cash provided by financing activities for the year ended December 31, 2019 was $369.2 million, and was driven by proceeds from long-term borrowings from a new term loan in Q1 of 2019 of $375.0 million and $131.3 million in net borrowings related to our revolving credit facility (refer to Note 11 to the Consolidated Financial Statements Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). This was offset by repayments of $122.5 million on our long-term borrowings. Additionally, we made payments of $14.3 million related to tax withholdings on vested equity awards.
Cash provided by financing activities for the year ended December 31, 2018 was $153.7 million, and was driven by proceeds from long-term borrowings from the issuance of $300.0 million Senior Notes (refer to Note 11 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information), offset by our purchase of the remaining portion of our joint venture with Purification Cellutions, LLC of $80.0 million (refer to Note 13 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information), $47.4 million to repurchase shares according the publicly announced share repurchase program (also refer to Note 13 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information), and noncontrolling interest distributions of $15.3 million.
Cash used by financing activities for the year ended December 31, 2017 was $57.8 million, and was driven by net repayments of $111.9 million, noncontrolling interest distributions of $12.3 million, and $6.6 million to repurchase shares according to the publicly announced share repurchase program.
Off-Balance Sheet Arrangements
Ingevity is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on Ingevity's financial condition, results of operations or cash flows.
Contractual Obligations
We enter into various contractual obligations throughout the year. Presented below are the contractual obligations of Ingevity as of December 31, 2019, and the time period in which payments under the obligations are due. Included below are disclosures regarding the amounts due under purchase obligations. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on Ingevity and that specifies all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have included in the below disclosure all normal and recurring purchase orders, take-or-pay contracts and supply arrangements as well as other purchase commitments that management believes meet the above definition of a purchase obligation. See Note 11 and Note 14 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information.
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|
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Payments due in period
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|
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|
|
|
|
|
|
In millions
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Total at
December 31, 2019
|
|
2020
|
|
2021-2022
|
|
2023-2024
|
|
2025 and beyond
|
Contractual obligations
|
|
|
|
|
|
|
|
|
|
Debt maturities
|
$
|
1,177.8
|
|
|
$
|
22.5
|
|
|
$
|
414.6
|
|
|
$
|
440.7
|
|
|
$
|
300.0
|
|
Contractual interest (1)
|
155.9
|
|
|
36.6
|
|
|
65.8
|
|
|
33.2
|
|
|
20.3
|
|
Finance lease obligations (2)
|
125.9
|
|
|
6.1
|
|
|
12.2
|
|
|
12.2
|
|
|
95.4
|
|
Operating lease obligations
|
60.7
|
|
|
19.4
|
|
|
26.0
|
|
|
10.3
|
|
|
5.0
|
|
Purchase obligations
|
191.1
|
|
|
191.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
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$
|
1,711.4
|
|
|
$
|
275.7
|
|
|
$
|
518.6
|
|
|
$
|
496.4
|
|
|
$
|
420.7
|
|
_______________
(1) Contractual interest is the interest we are contracted to pay on our long-term debt obligations. We had $871.9 million of long-term
debt subject to variable interest rates at December 31, 2019 and $305.9 million of debt subject to fixed interest rates. The rate
assumed for the variable interest component of the contractual interest obligation was the rate in effect at December 31, 2019.
Variable rates are determined by the market and will fluctuate over time.
(2) Amounts include the interest payments under the finance lease as well as the principal payment due in 2027.
New Accounting Guidance
Refer to the Note 4 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Consolidated Financial Statements.
Critical Accounting Policies
Our principal accounting policies are described in Note 3 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K. Our 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 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.
The following is a list of those accounting policies that we have deemed most critical to the presentation and understanding of our results of operations and financial condition:
Revenue recognition and Accounts receivables
In May 2014, the Financial Accounting Standard Board ("FASB") issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” which supersedes both the revenue recognition requirement to ASC 605 “Revenue Recognition” and most industry-specific guidance. The core principle of the new standard (ASC 606) is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity must also disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In 2016 and 2017, the FASB issued several ASUs that provided additional clarity on numerous topics as well as providing technical corrections to ASU 2014-09. We adopted this new standard on January 1, 2018, utilizing the modified retrospective method applied to those contracts, which were not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be presented in accordance with our historic accounting under ASC 605.
Substantially all our revenue is recognized when products are shipped from our manufacturing and warehousing facilities, which represents the point at which control is transferred to the customer. For certain limited contracts, where we are producing goods with no alternative use and for which we have an enforceable right to payment for performance completed to date, we are recognizing revenue as goods are manufactured, rather than when they are shipped.
Sales net of returns and customer incentives are based on the sale of manufactured products. Net sales are recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our products. Since net sales are derived from product sales only, we have disaggregated our net sales by our product lines within each reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Sales returns and allowances are not a normal practice in the industry and are not significant. Certain customers may receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and included in Net sales. Shipping and handling fees billed to customers continue to be included with Net sales. If we pay for the freight and shipping, we recognize the cost when control of the product has transferred to the customer as an expense in Cost of sales on the consolidated statement of operations. Although very rare, from time to time we incur expenses to obtain a sales contract. In these cases, if these costs are for orders that are fulfilled in one year or less, we expense these costs as they are incurred. Because the period between when we transfer a promised good to a customer and when the customer pays for that good will be one year or less, we elect not to adjust the promised amount of consideration for the effects of any financing component, as it is not significant.
Accounts receivables consist of amounts owed to Ingevity from customer sales and are recorded at the invoiced amounts when revenue is recognized and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable loss in the existing accounts receivable. We determine the allowance based on historical write-off experience, current collection trends, and external business factors such as economic factors, including regional bankruptcy rates, and political factors. Past due balances over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.
Valuation of tangible and intangible long-lived assets and goodwill
Our long-lived assets primarily include property, plant and equipment and other intangible assets. We periodically evaluate whether current events or circumstances indicate that the carrying value of long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to carrying value to determine whether an impairment exists.
If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.
Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We review the recorded value of goodwill at least annually at October 1, or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value. A reporting unit is the level at which discrete financial information is available and reviewed by business management on a regular basis. An impairment exists when the carrying value of a reporting unit exceeds its fair value. Our reporting units are our operating segments, i.e. Performance Chemicals and Performance Materials. If an indication exists that the fair value of a reporting unit with goodwill is less than its carrying value, a quantitative goodwill impairment test is performed. The fair value of each reporting unit is estimated primarily using an income approach, specifically the discounted cash flow method. The following assumptions are key to the income approach: 1) cash flow and earnings projections; 2) growth rates; 3) discount rates; 4) income tax rates; and, 5) terminal value rates.
The factors we considered in developing our estimates and projections for cash flows and earnings include, but are not limited to, the following: (i) macroeconomic conditions; (ii) industry and market considerations; (iii) costs, such as increases in raw materials, labor, or other costs; (iv) our overall financial performance; and, (v) other relevant entity-specific events that impact our reporting units. The discount rate we used represents the weighted average cost of capital for the reporting units, considering the risks and uncertainty inherent in the cash flows of the reporting units and in our internally-developed forecasts.
The determination of whether goodwill is impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated fair values of our reporting units. We believe that the assumptions and rates used in our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could result in materially different calculations of fair value. We will continue to evaluate goodwill on an annual basis as of October 1, and whenever events or changes in circumstances, such as significant adverse changes in operating results, market conditions, or changes in management’s business strategy indicate that there may be a probable indicator of impairment. It is possible that the assumptions used by management related to the evaluation may change or that actual results may vary significantly from management’s estimates.
Business Combinations
We account for business combinations in accordance with ASC 805 “Business Combinations” which requires, among other things, the acquiring entity in a business combination to recognize the fair value of the assets acquired and liabilities assumed; the recognition of acquisition-related costs in the consolidated results of operations; the recognition of restructuring costs in the consolidated results of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at fair value on the acquisition date with subsequent adjustments recognized in the consolidated results of operations. We generally use third party qualified consultants to assist management in determination of the fair value of assets acquired and liabilities assumed. This includes, when necessary, assistance with the determination of lives and valuation of property and identifiable intangibles, assisting management in determining the fair value of obligations associated with employee related liabilities and assisting management in assessing obligations associated with legal and environmental claims.
The fair values assigned to identifiable intangible assets acquired are determined primarily by using an income approach, which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are the attrition rate, growth rates and discount rate. These assumptions are based on company specific information and projections, which are not observable in the market and are therefore considered Level 2 and Level 3 measurements. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Based on the acquired business’ end markets and products as well as how the chief operating decision maker will review the business results determines the most appropriate operating segment for which to integrate the acquired business. Goodwill acquired, if any, is allocated to the reporting unit within or at the operating segment for which the acquired business will be integrated. Operating results of the acquired entity are reflected in the Consolidated Financial Statements from date of acquisition.
Income taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions, including China and the United Kingdom. The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. We follow the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes. Under this method, deferred income taxes are recorded based upon the differences between the
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income, historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We do not provide income taxes on undistributed earnings of consolidated foreign subsidiaries as it is our intention that such earnings will remain invested in those companies.
We recognize income tax positions that are more likely than not to be realized and accrue interest related to unrecognized income tax positions, which is included as a component of the income tax provision, on the consolidated statements of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO THE FINANCIAL STATEMENTS
Ingevity Corporation
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company's internal control over financial reporting includes those policies and procedures that:
i.pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
ii.provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
iii.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2019 did not include the internal controls at our Ingevity UK Ltd. legal entity, as permitted by Securities and Exchange Commission guidelines that allow companies to exclude certain acquisitions from their assessment of internal control over financial reporting during the first year following an acquisition. Ingevity UK Ltd. is the legal entity that owns the acquired net assets of the Caprolactone Business that we acquired on February 13, 2019. Six percent and nine percent of Ingevity's consolidated total assets and consolidated revenues, associated with Ingevity UK Ltd., as of and for the year ended December 31, 2019, were excluded from management's assessment of internal control over financial reporting.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, as stated in their report, which is presented on the following page.
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Date:
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February 26, 2020
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By:
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/S/ RICHARD B. KELSON
|
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/S/ JOHN C. FORTSON
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Richard B. Kelson
|
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John C. Fortson
|
|
Chairman of the Board, and Interim President and
Chief Executive Officer
|
|
Executive Vice President and Chief Financial Officer
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Ingevity Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ingevity Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and financial statement schedule listed in the index appearing under item 15(a)ii (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and December 31, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 4 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded the Ingevity UK Ltd. legal entity, which holds the net assets acquired from Perstorp Holding AB’s Caprolactone Business, from its assessment of internal control over financial reporting as of December 31, 2019 because the Caprolactone Business was acquired by the Company in a purchase business combination during 2019. We have also excluded Ingevity UK Ltd. from our audit of internal control over financial reporting. Ingevity UK Ltd. is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 6% and 9%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Customer Relationships Intangible Asset – Perstorp Holding AB’s Caprolactone Business Acquisition
As described in Note 17 to the consolidated financial statements, the Company completed the acquisition of Perstorp Holding AB’s Caprolactone Business on February 13, 2019 for an aggregate purchase price of $652.5 million, less assumed debt of $113.1 million. One of the most significant assets recorded was $159 million related to a customer relationships intangible asset. The fair values assigned to the customer relationships intangible asset acquired was determined by using a multi-period excess earnings model. Significant assumptions utilized in the model are the attrition rate, revenue growth rates, and the discount rate.
The principal considerations for our determination that performing procedures relating to the valuation of the customer relationships intangible asset acquired as part of the Perstorp Holdings AB’s Caprolactone Business acquisition is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying our procedures related to the fair value measurement of the customer relationships intangible asset acquired due to the significant judgment by management when developing the estimate; (ii) significant audit effort was required in evaluating the significant assumptions relating to the valuation of the customer relationships intangible asset, including the attrition rate, revenue growth rates, and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationships intangible asset and the development of the assumptions related to the valuation of the customer relationships intangible asset, including the attrition rate, revenue growth rates, and the discount rate. These procedures also included, among others (i) reading the purchase agreement; (ii) testing management’s process for estimating the fair value of customer relationships intangible asset; and (iii) testing the completeness and accuracy of the underlying data used in the model. Testing management’s process included evaluating the appropriateness of the valuation model and the reasonableness of significant assumptions, including the attrition rate, revenue growth rates and the discount rate. Evaluating the reasonableness of the attrition rate and revenue growth rates involved considering the past performance of the acquired Perstorp Holdings AB’s Caprolactone Business and whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating significant assumptions, including the discount rate and the attrition rate. The discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 26, 2020
We have served as the Company’s auditor since 2015.
INGEVITY CORPORATION
Consolidated Statements of Operations
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Years Ended December 31,
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In millions, except per share data
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2019
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2018
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2017
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Net sales
|
$
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1,292.9
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$
|
1,133.6
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$
|
972.4
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Cost of sales
|
810.9
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|
|
716.8
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|
|
643.4
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|
Gross profit
|
482.0
|
|
|
416.8
|
|
|
329.0
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|
Selling, general and administrative expenses
|
163.1
|
|
|
132.4
|
|
|
106.4
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Research and technical expenses
|
19.7
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|
|
21.5
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|
19.8
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Separation costs
|
—
|
|
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—
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0.9
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Restructuring and other (income) charges, net
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1.8
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(0.5)
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3.7
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Acquisition-related costs
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26.9
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10.8
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7.1
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Other (income) expense, net
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(4.3)
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|
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1.0
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|
|
0.5
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Interest expense
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54.6
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|
33.2
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|
18.1
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Interest income
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(7.7)
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(3.4)
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|
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(2.3)
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|
Income (loss) before income taxes
|
227.9
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|
|
221.8
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|
|
174.8
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Provision (benefit) for income taxes
|
44.2
|
|
|
40.0
|
|
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29.6
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Net income (loss)
|
183.7
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|
|
181.8
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|
|
145.2
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|
Less: Net income (loss) attributable to noncontrolling interests
|
—
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12.7
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18.7
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Net income (loss) attributable to Ingevity stockholders
|
$
|
183.7
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$
|
169.1
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$
|
126.5
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Per share data
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Basic earnings (loss) per share attributable to Ingevity stockholders
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$
|
4.39
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$
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4.02
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$
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3.00
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Diluted earnings (loss) per share attributable to Ingevity stockholders
|
4.35
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3.97
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|
2.97
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The accompanying notes are an integral part of these financial statements.
INGEVITY CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Net income (loss)
|
$
|
183.7
|
|
|
$
|
181.8
|
|
|
$
|
145.2
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Foreign currency adjustments:
|
|
|
|
|
|
Foreign currency translation adjustment
|
15.6
|
|
|
(6.3)
|
|
|
8.3
|
|
Unrealized gain (loss) on net investment hedges, net of tax provision (benefit) of $0.7, zero, and zero
|
2.3
|
|
|
—
|
|
|
—
|
|
Total foreign currency adjustments, net of tax provision (benefit) of $0.7, zero, and zero
|
17.9
|
|
|
(6.3)
|
|
|
8.3
|
|
Derivative instruments:
|
|
|
|
|
|
Unrealized gain (loss), net of tax provision (benefit) of ($1.1), $0.4, and zero
|
(3.7)
|
|
|
1.3
|
|
|
(0.1)
|
|
Reclassifications of deferred derivative instruments (gain) loss, included in net income (loss), net of tax (provision) benefit of ($0.1), ($0.3), and zero
|
(0.2)
|
|
|
(0.9)
|
|
|
0.1
|
|
Total derivative instruments, net of tax provision (benefit) of ($1.2), $0.1, and zero
|
(3.9)
|
|
|
0.4
|
|
|
—
|
|
Pension & other postretirement benefits:
|
|
|
|
|
|
Unrealized actuarial gains (losses) and prior service (costs) credits, net of tax provision (benefit) of ($0.4), ($0.1), and ($0.4)
|
(1.4)
|
|
|
(0.3)
|
|
|
(0.7)
|
|
Reclassifications of net actuarial and other (gain) loss, amortization of prior service cost, and settlement and curtailment (income) charges, included in net income, net of tax (provision) benefit of zero, $0.1, and zero
|
0.1
|
|
|
0.2
|
|
|
—
|
|
Total pension and other postretirement benefits, net of tax provision (benefit) of ($0.4), zero, and ($0.4)
|
(1.3)
|
|
|
(0.1)
|
|
|
(0.7)
|
|
Other comprehensive income (loss), net of tax provision (benefit) of ($0.9), $0.1, and ($0.4)
|
12.7
|
|
|
(6.0)
|
|
|
7.6
|
|
Comprehensive income (loss)
|
196.4
|
|
|
175.8
|
|
|
152.8
|
|
Less: Comprehensive income (loss) attributable to noncontrolling interests
|
—
|
|
|
12.7
|
|
|
18.7
|
|
Comprehensive income (loss) attributable to the Ingevity stockholders
|
$
|
196.4
|
|
|
$
|
163.1
|
|
|
$
|
134.1
|
|
The accompanying notes are an integral part of these financial statements.
INGEVITY CORPORATION
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
In millions, except share and par value data
|
|
|
2019
|
|
2018
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
56.5
|
|
|
$
|
77.5
|
|
Accounts receivable, net of allowance of $0.5 at 2019 and $0.4 at 2018
|
|
|
150.0
|
|
|
118.9
|
|
Inventories, net
|
|
|
212.5
|
|
|
191.4
|
|
Prepaid and other current assets
|
|
|
44.2
|
|
|
34.9
|
|
Current assets
|
|
|
463.2
|
|
|
422.7
|
|
Property, plant and equipment, net
|
|
|
664.7
|
|
|
523.8
|
|
Operating lease assets, net
|
|
|
53.4
|
|
|
—
|
|
Goodwill
|
|
|
436.4
|
|
|
130.7
|
|
Other intangibles, net
|
|
|
396.2
|
|
|
125.6
|
|
Deferred income taxes
|
|
|
5.0
|
|
|
2.9
|
|
Restricted investment
|
|
|
72.6
|
|
|
71.2
|
|
Other assets
|
|
|
50.2
|
|
|
38.3
|
|
Total Assets
|
|
|
$
|
2,141.7
|
|
|
$
|
1,315.2
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
|
|
$
|
99.1
|
|
|
$
|
92.9
|
|
Accrued expenses
|
|
|
33.3
|
|
|
36.7
|
|
Accrued payroll and employee benefits
|
|
|
28.2
|
|
|
42.0
|
|
Current operating lease liabilities
|
|
|
17.1
|
|
|
—
|
|
Notes payable and current maturities of long-term debt
|
|
|
22.5
|
|
|
11.2
|
|
Income taxes payable
|
|
|
15.3
|
|
|
0.5
|
|
Current liabilities
|
|
|
215.5
|
|
|
183.3
|
|
Long-term debt including finance lease obligations
|
|
|
1,228.4
|
|
|
741.2
|
|
Noncurrent operating lease liabilities
|
|
|
36.7
|
|
|
—
|
|
Deferred income taxes
|
|
|
100.3
|
|
|
36.9
|
|
Other liabilities
|
|
|
30.0
|
|
|
15.1
|
|
Total Liabilities
|
|
|
1,610.9
|
|
|
976.5
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Preferred stock (par value $0.01 per share; 50,000,000 shares authorized;
zero issued and outstanding at 2019 and 2018)
|
|
|
—
|
|
|
—
|
|
Common stock (par value $0.01 per share; 300,000,000 shares authorized;
42,675,171 and 42,331,913 issued and 41,826,136 and 41,693,261 outstanding at 2019 and 2018, respectively)
|
|
|
0.4
|
|
|
0.4
|
|
Additional paid-in capital
|
|
|
112.8
|
|
|
98.3
|
|
Retained earnings
|
|
|
497.2
|
|
|
313.5
|
|
Accumulated other comprehensive income (loss)
|
|
|
(5.0)
|
|
|
(17.7)
|
|
Treasury stock, common stock, at cost (849,035 and 638,652 shares at 2019 and 2018 respectively)
|
|
|
(74.6)
|
|
|
(55.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
530.8
|
|
|
338.7
|
|
Total Liabilities and Equity
|
|
|
$
|
2,141.7
|
|
|
$
|
1,315.2
|
|
The accompanying notes are an integral part of these financial statements.
INGEVITY CORPORATION
Consolidated Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ingevity Stockholders'
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, shares in thousands
|
Shares
|
|
Amount
|
|
|
|
Additional paid-in capital
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Treasury stock
|
|
Noncontrolling interests
|
|
Total Equity
|
Balance at December 31, 2016
|
42,116.4
|
|
|
$
|
0.4
|
|
|
|
|
$
|
129.9
|
|
|
$
|
16.0
|
|
|
$
|
(19.0)
|
|
|
$
|
(0.3)
|
|
|
$
|
7.6
|
|
|
$
|
134.6
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
126.5
|
|
|
—
|
|
|
—
|
|
|
18.7
|
|
|
145.2
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
Common stock issued
|
85.9
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options, net
|
6.6
|
|
|
—
|
|
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
Tax payments related to vested restricted stock units
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.2)
|
|
|
—
|
|
|
(1.2)
|
|
Share repurchase program
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.6)
|
|
|
—
|
|
|
(6.6)
|
|
Noncontrolling interest distributions
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12.3)
|
|
|
(12.3)
|
|
Share-based compensation plans
|
—
|
|
|
—
|
|
|
|
|
10.0
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
10.4
|
|
Reclassification of certain deferred tax effects
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
0.3
|
|
|
(0.3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2017
|
42,208.9
|
|
|
$
|
0.4
|
|
|
|
|
$
|
140.1
|
|
|
$
|
142.8
|
|
|
$
|
(11.7)
|
|
|
$
|
(7.7)
|
|
|
$
|
14.0
|
|
|
$
|
277.9
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
169.1
|
|
|
—
|
|
|
—
|
|
|
12.7
|
|
|
181.8
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(6.0)
|
|
|
—
|
|
|
—
|
|
|
(6.0)
|
|
Common stock issued
|
116.7
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options, net
|
6.3
|
|
|
—
|
|
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
Tax payments related to vested restricted stock units
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.5)
|
|
|
—
|
|
|
(2.5)
|
|
Share repurchase program
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47.4)
|
|
|
—
|
|
|
(47.4)
|
|
Noncontrolling interest distributions
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15.3)
|
|
|
(15.3)
|
|
Share-based compensation plans
|
—
|
|
|
—
|
|
|
|
|
12.3
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
14.1
|
|
Adoption of accounting standard
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
Acquisition of noncontrolling interest
|
—
|
|
|
—
|
|
|
|
|
(54.3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.4)
|
|
|
(65.7)
|
|
Balance at December 31, 2018
|
42,331.9
|
|
|
$
|
0.4
|
|
|
|
|
$
|
98.3
|
|
|
$
|
313.5
|
|
|
$
|
(17.7)
|
|
|
$
|
(55.8)
|
|
|
$
|
—
|
|
|
$
|
338.7
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
183.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
183.7
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
12.7
|
|
|
—
|
|
|
—
|
|
|
12.7
|
|
Common stock issued
|
283.3
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercise of stock options, net
|
60.0
|
|
|
—
|
|
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Tax payments related to vested restricted stock units
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14.3)
|
|
|
—
|
|
|
(14.3)
|
|
Share repurchase program
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.4)
|
|
|
—
|
|
|
(6.4)
|
|
Noncontrolling interest distributions
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share-based compensation plans
|
—
|
|
|
—
|
|
|
|
|
12.8
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
42,675.2
|
|
|
$
|
0.4
|
|
|
|
|
$
|
112.8
|
|
|
$
|
497.2
|
|
|
$
|
(5.0)
|
|
|
$
|
(74.6)
|
|
|
$
|
—
|
|
|
$
|
530.8
|
|
The accompanying notes are an integral part of these financial statements.
INGEVITY CORPORATION
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Cash provided by (used in) operating activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
183.7
|
|
|
$
|
181.8
|
|
|
$
|
145.2
|
|
Adjustments to reconcile net income (loss) to cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
85.0
|
|
|
57.0
|
|
|
40.4
|
|
Deferred income taxes
|
14.8
|
|
|
0.9
|
|
|
(25.7)
|
|
Disposal/impairment of assets
|
1.4
|
|
|
0.9
|
|
|
2.2
|
|
Restructuring and other (income) charges, net
|
2.2
|
|
|
0.1
|
|
|
3.7
|
|
Share-based compensation
|
12.3
|
|
|
12.5
|
|
|
10.1
|
|
Pension and other postretirement benefit costs
|
1.5
|
|
|
2.0
|
|
|
1.3
|
|
Other non-cash items
|
10.1
|
|
|
15.9
|
|
|
7.3
|
|
Changes in operating assets and liabilities, net of effect of acquisitions:
|
|
|
|
|
|
Accounts receivable, net
|
(15.3)
|
|
|
(3.0)
|
|
|
(9.5)
|
|
Inventories, net
|
0.5
|
|
|
(26.9)
|
|
|
(6.6)
|
|
Prepaid and other current assets
|
0.1
|
|
|
(6.8)
|
|
|
6.5
|
|
Planned major maintenance outage
|
(8.4)
|
|
|
(7.0)
|
|
|
(6.1)
|
|
Accounts payable
|
(6.2)
|
|
|
5.7
|
|
|
1.7
|
|
Accrued expenses
|
(5.9)
|
|
|
13.1
|
|
|
1.6
|
|
Accrued payroll and employee benefits
|
(14.4)
|
|
|
3.0
|
|
|
13.4
|
|
Income taxes
|
14.7
|
|
|
5.0
|
|
|
(7.3)
|
|
Pension contribution
|
—
|
|
|
(1.6)
|
|
|
(1.4)
|
|
|
|
|
|
|
|
Changes in all other operating assets and liabilities, net
|
(0.4)
|
|
|
(0.6)
|
|
|
(2.5)
|
|
Net cash provided by (used in) operating activities
|
$
|
275.7
|
|
|
$
|
252.0
|
|
|
$
|
174.3
|
|
Cash provided by (used in) investing activities:
|
|
|
|
|
|
Capital expenditures
|
(114.8)
|
|
|
(93.9)
|
|
|
(52.6)
|
|
Payments for acquired businesses, net of cash acquired
|
(537.9)
|
|
|
(315.5)
|
|
|
—
|
|
|
|
|
|
|
|
Purchase of equity securities
|
—
|
|
|
—
|
|
|
(2.4)
|
|
Sale of equity securities
|
—
|
|
|
1.1
|
|
|
1.0
|
|
Restricted investment
|
(2.0)
|
|
|
(2.0)
|
|
|
(1.6)
|
|
Other investing activities, net
|
(3.6)
|
|
|
(4.1)
|
|
|
(3.0)
|
|
Net cash provided by (used in) investing activities
|
$
|
(658.3)
|
|
|
$
|
(414.4)
|
|
|
$
|
(58.6)
|
|
The accompanying notes are an integral part of these financial statements.
INGEVITY CORPORATION
Consolidated Statements of Cash Flows (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Cash provided by (used in) financing activities:
|
|
|
|
|
|
Proceeds from revolving credit facility
|
797.7
|
|
|
—
|
|
|
156.4
|
|
Proceeds from long-term borrowings
|
375.0
|
|
|
300.0
|
|
|
75.0
|
|
Payments on revolving credit facility
|
(666.4)
|
|
|
—
|
|
|
(268.3)
|
|
Payments on long-term borrowings
|
(122.5)
|
|
|
—
|
|
|
—
|
|
Debt issuance costs
|
(2.4)
|
|
|
(7.1)
|
|
|
(1.3)
|
|
Borrowings (repayments) of notes payable and other short-term borrowings, net
|
2.1
|
|
|
3.9
|
|
|
—
|
|
Tax payments related to withholdings on vested equity awards
|
(14.3)
|
|
|
(2.5)
|
|
|
(1.2)
|
|
Proceeds and withholdings from share-based compensation plans, net
|
4.1
|
|
|
2.1
|
|
|
0.5
|
|
Repurchases of common stock under publicly announced plan
|
(6.4)
|
|
|
(47.4)
|
|
|
(6.6)
|
|
Acquisition of noncontrolling interest
|
—
|
|
|
(80.0)
|
|
|
—
|
|
Noncontrolling interest distributions
|
—
|
|
|
(15.3)
|
|
|
(12.3)
|
|
Other financing activities, net
|
2.3
|
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
$
|
369.2
|
|
|
$
|
153.7
|
|
|
$
|
(57.8)
|
|
Increase (decrease) in cash, cash equivalents, and restricted cash
|
(13.4)
|
|
|
(8.7)
|
|
|
57.9
|
|
Effect of exchange rate changes on cash
|
0.2
|
|
|
(1.4)
|
|
|
(0.5)
|
|
Change in cash, cash equivalents, and restricted cash
|
(13.2)
|
|
|
(10.1)
|
|
|
57.4
|
|
Cash, cash equivalents, and restricted cash at beginning of period
|
77.8
|
|
|
87.9
|
|
|
30.5
|
|
Cash, cash equivalents, and restricted cash at end of period (1)
|
$
|
64.6
|
|
|
$
|
77.8
|
|
|
$
|
87.9
|
|
_______________
|
|
|
|
|
|
(1) Includes restricted cash of $8.1 million, $0.3 million, and zero and cash and cash equivalents of $56.5 million, $77.5 million, and $87.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. Restricted cash is included within "Prepaid and other current assets" within the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest
|
$
|
48.0
|
|
|
$
|
26.0
|
|
|
$
|
16.0
|
|
Cash paid for income taxes, net of refunds
|
14.9
|
|
|
34.8
|
|
|
61.9
|
|
Purchases of property, plant and equipment in accounts payable
|
7.6
|
|
|
8.9
|
|
|
5.1
|
|
Leased assets obtained in exchange for new finance lease liabilities
|
—
|
|
|
—
|
|
|
—
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
5.3
|
|
|
—
|
|
|
—
|
|
The accompanying notes are an integral part of these financial statements.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
INDEX
|
|
|
|
Note
|
|
|
Page No.
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
|
|
11
|
|
|
|
12
|
|
|
|
13
|
|
|
|
14
|
|
|
|
15
|
|
|
|
16
|
|
|
|
17
|
|
|
|
18
|
|
|
|
19
|
|
|
|
20
|
|
|
|
21
|
|
|
|
22
|
|
|
|
23
|
|
|
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Note 1: Background
Ingevity Corporation ("Ingevity," "the company," "we," "us" or "our") 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.
Our Performance Materials segment consists of our automotive technologies and process purifications product lines. Performance Materials manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets. Automotive technologies products are sold into the gasoline vapor emission control applications within the automotive industry, while process purifications products are sold into the food, water, beverage, and chemical purification industries.
Our Performance Chemicals segment consists of our pavement technologies, oilfield technologies, industrial specialties, and engineered polymers (acquired in 2019; see Note 17 for more information) product lines. Performance Chemicals manufactures products derived from CTO and lignin extracted from the kraft paper making 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 pavement preservation, pavement adhesion promotion, and warm mix paving (pavement technologies product line), oil well service additives, oil production, and downstream application chemicals (oilfield technologies product line), printing inks, adhesives, agrochemicals, lubricants, and industrial intermediates (industrial specialties product line), coatings, resins, elastomers, adhesives, and bio-plastics (engineered polymers product line).
Note 2: Basis of Consolidation and Presentation
The accompanying Consolidated Financial Statements of Ingevity were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant accounting policies described in Note 3, together with the other notes that follow, are an integral part of the Consolidated Financial Statements.
The Consolidated Financial Statements include the accounts of Ingevity and subsidiaries in which a controlling interest is maintained. If Ingevity's ownership is less than 100 percent, the outside stockholders' interests are shown as noncontrolling interests. In 2018 and 2017, our noncontrolling interest represented the 30 percent ownership interest held by a third-party U.S. based company in our consolidated Purification Cellutions, LLC legal entity, now known as Ingevity Georgia, LLC. See Note 13 for information regarding our acquisition of the 30 percent interest in Purification Cellutions, LLC on August 1, 2018.
Note 3: Summary of Significant Accounting Policies
Estimates and assumptions: We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results are likely to differ from those estimates, but we do not believe such differences will materially affect our financial position, results of operations or cash flows.
Cash equivalents: Highly liquid securities with an original maturity of three months or less are considered to be cash equivalents.
Accounts receivable and allowance for doubtful accounts: Accounts receivable, net on the consolidated balance sheets are comprised of trade receivables less allowances for doubtful accounts. Trade receivables consist of amounts owed to Ingevity from customer sales and are recorded at the invoiced amounts when revenue is recognized and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable loss in the existing accounts receivable. We determine the allowance based on historical write-off experience, current collection trends, and external business factors such as economic factors, including regional bankruptcy rates, and political factors. Past due balances over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered. Allowance for doubtful accounts at December 31, 2019 and 2018, was $0.5 million and $0.4 million, respectively.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Concentration of credit risk: The financial instruments that potentially subject Ingevity to concentrations of credit risk are accounts receivable. We limit our credit risk by performing ongoing credit evaluations and, when necessary, requiring letters of credit, guarantees or collateral. We had accounts receivable from our largest customer of $8.3 million and $11.7 million as of December 31, 2019 and 2018, respectively. Sales to this customer, which are included in the Performance Materials segment, were six percent of total net sales for each of the years ended December 31, 2019, 2018, and 2017. No customers individually accounted for greater than 10 percent of Ingevity's consolidated Net sales.
Inventories, net: Inventories held in the U.S. are valued at lower of cost or market. The value of our U.S. inventories is determined using the last-in, first-out method (“LIFO”) for substantially all raw materials, finished goods and production materials. Cost of all other inventories, including stores and supplies inventories and inventories of non-U.S. operations, is determined by the first-in, first-out ("FIFO") or average costs methods and are held at either lower of cost or net realizable value. Elements of cost in inventories include raw materials, direct labor, and manufacturing overhead. We routinely assess inventory for both potential obsolescence and potential declines in anticipated selling prices, to derive a market value for the inventory on hand. This review also includes an analysis of potentially obsolete, unmarketable, slow moving, or overvalued inventory. If necessary, we will impair any inventories by an amount equal to the difference between the value of the held inventory (i.e. cost) and its estimated net realizable value for FIFO and average cost inventories, and market value for LIFO inventories.
Property, plant, and equipment: Owned assets are recorded at cost. Also included in the cost of these assets is interest on funds borrowed during the construction period. When assets are sold, retired or disposed of, their cost and related accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected in cost of sales. Repair and maintenance costs that materially add to the value of the asset or prolong its useful life are capitalized and depreciated based on the extension of the useful life; general costs of maintenance and repairs are charged to expense.
Repair and maintenance costs: We expense routine repair and maintenance costs as we incur them. We defer expenses incurred during planned major maintenance activities and record these amounts to Other assets on our consolidated balance sheet. Deferred amounts are recognized as expense ratably, over the shorter of the estimated interval until the next major maintenance activity or the life of the deferred item. The cash outflows related to these costs are included in operating activities in the consolidated statement of cash flows. The timing of this maintenance can vary by manufacturing plant and has a significant impact on our results of operations in the period performed primarily due to lost production during the maintenance period.
Depreciation: The cost of plant and equipment is depreciated, utilizing the straight-line method, over the estimated useful lives of the assets, the majority of which range from 20 to 40 years for buildings and leasehold improvements and 5 to 30 years for machinery and equipment. The following table provides the detail behind the useful lives and proportion of our machinery and equipment (“M&E”) in each useful life category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
M&E Cost
|
|
Depreciable Life in Years
|
|
Types of Assets
|
55
|
|
|
20
|
|
Production vessels and kilns, storage tanks, piping
|
11
|
|
|
15
|
|
Control systems, instrumentation, metering equipment
|
8
|
|
|
25 to 30
|
|
Blending equipment, storage tanks, piping, shipping equipment and platforms, safety equipment
|
19
|
|
|
5 to 10
|
|
Production control system equipment and hardware, laboratory testing equipment
|
3
|
|
|
40
|
|
Machinery & equipment support structures and foundations
|
4
|
|
|
Various
|
|
Various
|
Impairment of long-lived assets: We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets, including intangible assets, to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to carrying value to determine whether impairment exists.
If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Goodwill and other intangible assets: Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We review the recorded value of goodwill at least annually at October 1, or sooner if events or changes in circumstances, such as significant adverse changes in operating results, market conditions, or changes in management’s business strategy indicate that there may be a probable indicator of impairment. indicate that the fair value of a reporting unit is below its carrying value. A reporting unit is the level at which discrete financial information is available and reviewed by business management on a regular basis. An impairment exists when the carrying value of a reporting unit exceeds its fair value. Our reporting units are our operating segments, i.e. Performance Chemicals and Performance Materials. If an indication exists that the fair value of a reporting unit with goodwill is less than its carrying value, a quantitative goodwill impairment test is performed. The fair value of each reporting unit is estimated primarily using an income approach, specifically the discounted cash flow method. The following assumptions are key to the income approach: 1) cash flow and earnings projections; 2) growth rates; 3) discount rates; 4) income tax rates; and, 5) terminal value rates.
The factors we considered in developing our estimates and projections for cash flows and earnings include, but are not limited to, the following: (i) macroeconomic conditions; (ii) industry and market considerations; (iii) costs, such as increases in raw materials, labor, or other costs; (iv) our overall financial performance; and, (v) other relevant entity-specific events that impact our reporting units. The discount rate we used represents the weighted average cost of capital for the reporting units, considering the risks and uncertainty inherent in the cash flows of the reporting units and in our internally-developed forecasts.
The determination of whether goodwill is impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated fair values of our reporting units. We believe that the assumptions and rates used in our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could result in materially different calculations of fair value. It is possible that the assumptions used by management related to the evaluation may change or that actual results may vary significantly from management’s estimates.
Other intangible assets are comprised of finite-lived intangible assets consisting primarily of brands: representing trademarks, trade names and know-how, customer contracts and relationships, and developed technology. Other intangible assets are amortized over their estimated useful lives which range from 5 to 20 years. See Note 9 for additional information.
Capitalized software: Capitalized software for internal use is included in Other assets on the consolidated balance sheets. Amounts capitalized are presented in Capital expenditures on our consolidated statements of cash flow. Capitalized software is amortized using the straight-line over the estimated useful lives ranging from 1 to 10 years. Amortization is recorded to Costs of sales on our consolidated statements of operations for software directly used in the production of inventory and Selling, general and administrative expenses on our consolidated statements of operations for software used for non-production related activities.
Legal liabilities: We recognize a liability for legal contingencies when a loss is probable and reasonably estimable. Third-party fees for legal services are expensed as incurred.
Revenue recognition: In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” which supersedes both the revenue recognition requirement to ASC 605 “Revenue Recognition” and most industry-specific guidance. The core principle of the new standard (ASC 606) is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity must also disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In 2016 and 2017, the FASB issued several ASUs that provided additional clarity on numerous topics as well as providing technical corrections to ASU 2014-09. We adopted this new standard on January 1, 2018, utilizing the modified retrospective method applied to those contracts, which were not completed as of that date. Results for reporting periods beginning after January 1, 2018, are presented under ASC 606, while prior period amounts are not adjusted and continue to be presented in accordance with our historic accounting under ASC 605.
Substantially all our revenue is recognized when products are shipped from our manufacturing and warehousing facilities, which represents the point at which control is transferred to the customer. For certain limited contracts, where we are
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
producing goods with no alternative use and for which we have an enforceable right to payment for performance completed to date, we are recognizing revenue as goods are manufactured, rather than when they are shipped.
Sales net of returns and customer incentives are based on the sale of manufactured products. Net sales are recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our products. Since Net sales are derived from product sales only, we have disaggregated our net sales by our product lines within each reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Sales returns and allowances are not a normal practice in the industry and are not significant. Certain customers may receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and included in Net sales. Shipping and handling fees billed to customers continue to be included within Net sales. If we pay for the freight and shipping, we recognize the cost when control of the product has transferred to the customer as an expense in Cost of sales in the consolidated statement of operations. Although very rare, from time to time we incur expenses to obtain a sales contract. In these cases, if these costs are for orders that are fulfilled in one year or less, we expense these costs as they are incurred. Because the period between when we transfer a promised good to a customer and when the customer pays for that good will be one year or less, we elect not to adjust the promised amount of consideration for the effects of any financing component, as it is not significant.
Cost of sales: Costs primarily consists of the cost of inventory sold and other production related costs. These costs include raw materials, direct labor, manufacturing overhead, packaging costs and maintenance costs. Shipping and handling costs are also recorded to Cost of sales.
Selling, general and administrative expenses: Costs are expensed as incurred and primarily include employee compensation costs related to sales, and office personnel, office expenses, and other expenses not directly related to our manufacturing operations. Costs also include advertising and promotional costs.
Research and technical expenses: Cost are expensed as incurred and primarily include employee compensation, technical equipment costs and material testing and innovation related expenses.
Royalty expense: Our Performance Materials and Performance Chemicals segments have licensing agreements with third parties requiring us to pay royalties for certain technologies we use in the manufacturing of our products. Royalty expense is recognized as incurred and recorded to Cost of sales on our consolidated statements of operations.
Income taxes: We are subject to income taxes in the U.S. and numerous foreign jurisdictions, including China and the United Kingdom. The Provision (benefit) for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. We follow the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes. Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income, historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We do not provide income taxes on undistributed earnings of consolidated foreign subsidiaries as it is our intention that such earnings will remain invested in those companies. See Note 18 for more information.
We recognize income tax positions that are more likely than not to be realized and accrue interest related to unrecognized income tax positions, which is included as a component of the Provision (benefit) for income taxes on the consolidated statements of operations.
Pension and postretirement benefits: We provide both qualified and non-qualified pension and postretirement benefit plans to our employees. The expense related to the current employees of Ingevity as well as the expense related to retirees of Ingevity are included in the Consolidated Financial Statements. The costs (or benefits) and obligations related to these benefits reflect key assumptions related to general economic conditions, including interest (discount) rates, healthcare cost trend rates and expected return on plan assets. The costs (or benefits) and obligations for these benefit programs are also affected by other assumptions, such as average retirement age, mortality, employee turnover, and plan participation. To the extent our plans' actual experience, as influenced by changing economic and financial market conditions or by changes to our own plans' demographics, differs from these assumptions, the costs and obligations for providing these benefits, as well as the plans'
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
funding requirements, could increase or decrease. When actual results differ from our assumptions, the difference is typically recognized over future periods. In addition, the unrealized gains and losses related to our pension and postretirement benefit obligations may also affect periodic benefit costs (or benefits) in future periods. See Note 15 for additional information.
Share-based compensation: We recognize compensation expense in our Consolidated Financial Statements for all share-based compensation arrangements. Share-based compensation cost is measured at the date of grant, based on the fair value of the award and expense is recognized over the grantee's requisite service period; forfeitures are recognized as they occur. We calculate the fair value of our stock options using the Black-Scholes option pricing model. The fair value of restricted stock units ("RSU"s), non-employee director deferred stock units ("DSU"s) and performance-based restricted stock units ("PSU"s) is determined using our closing stock price on the day of the grant. Substantially all compensation expense related to share-based awards is recorded as a component of Selling, general and administrative expenses in the consolidated statements of operations. See Note 12 for additional information.
Operating segments: Ingevity’s operating segments are Performance Materials and Performance Chemicals. Our operating segments were determined based upon the nature of the products produced, the nature of the production process, the type of customer for the products, the similarity of economic characteristics, and the manner in which management reviews results. Ingevity’s chief operating decision maker evaluates the business at the segment level when making decisions about allocating resources and assessing performance of Ingevity as a whole. We evaluate sales in a format consistent with our reportable segments: (1) Performance Materials, which includes wood-based, chemically activated carbon products and (2) Performance Chemicals, which includes specialty pine-based chemical co-products derived from the kraft pulping process and caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Each segment operates as a portfolio of various end uses for the relevant raw material used in that segment. Business decisions are made and performance is generally measured based upon the total mix of end uses each raw material is being directed at in the segment. See Note 20 for additional information.
Derivative financial instruments: Ingevity’s operations are exposed to market risks, such as the impact of changes of interest rates on our floating rate debt, changes in foreign currency exchange rates, and commodity prices due to transactions denominated in a variety of foreign currencies and purchases of certain commoditized raw materials and inputs. Changes in these rates and prices may have an impact on Ingevity’s future cash flow and earnings. We formally document all relationships between the derivative financial instrument and hedged item, as well as the risk management objective and strategy for undertaking various hedge transactions. We do not hold or issue derivative financial instruments for speculative or trading purposes. We enter into derivative financial instruments which are governed by policies, procedures, and internal processes set forth by our Board of Directors.
Our risk management program also addresses counterparty credit risk by selecting only major financial institutions with investment grade ratings. Once the derivative financial instrument is entered into, we continuously monitor the financial institutions’ credit ratings and our credit risk exposure held by the financial institution. When appropriate, we reallocate exposures across multiple financial institutions to limit credit risk. If a counterparty fails to fulfill its performance obligations under the derivative financial instrument, then Ingevity is exposed to credit risk equal to the fair value of the financial instrument. Derivative assets and liabilities are recorded on our consolidated balance sheets at fair value and are presented on a gross basis. Due to our proactive mitigation of these potential credit risks, we anticipate performance by our counterparties to these contracts and therefore no material loss is expected. In order to mitigate the impact of market risks we have entered into both net investment hedges as well as cash flow hedges.
Cash Flow Hedges: Cash flow hedges are derivative financial instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative financial instruments that are designated and qualify as a cash flow hedge are recorded on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The gains and losses arising from qualifying hedging instruments are reported as a component of Accumulated other comprehensive income (loss) (“AOCI”) located in the consolidated balance sheets and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The reclassification gain or losses of the hedge from AOCI are recorded in the same financial statement caption on the consolidated statements of operations as the hedged item. For example, designated cash flow hedges entered to minimize foreign currency exchange risk of forecasted revenue transactions are recorded to Net sales on the consolidated statements of operations when the forecasted transaction occurs. Designated commodity cash flow hedges gains or losses recorded in AOCI are recognized in
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Cost of sales on the consolidated statements of operations when the inventory is sold. See Note 10 for more information regarding our cash flow hedges.
Net Investment Hedges: Net investment hedges are defined as derivative or non-derivative instruments designated as and used to hedge the foreign currency exposure of the net investment in certain foreign operations. The net of the change in the hedge instrument and the item being hedged against for qualifying net investment hedges is reported as a component of the foreign currency adjustments ("CTA") within Accumulated other comprehensive income ("AOCI") on the condensed consolidated balance sheet. The gains (losses) 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. See Note 10 for more information regarding our net investment hedges.
Noncontrolling interests: When our ownership in a consolidated legal entity is less than 100 percent, the outside stockholders' interests are shown as noncontrolling interests. Our noncontrolling interests for the year ended December 31, 2017, represented the 30 percent ownership interest held by a third-party U.S. based company in our consolidated Purification Cellutions, LLC legal entity, as further discussed in Note 2.
Treasury stock: We record shares of common stock repurchased at cost as treasury stock, resulting in a reduction of stockholders’ equity in the consolidated balance sheets. When the treasury shares are contributed under our employee benefit plans or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to or deducted from Additional paid-in capital on the consolidated balance sheets.
Translation of foreign currencies: The local currency is the functional currency for all of Ingevity’s significant operations outside the U.S. consisting primarily of the euro, the Japanese yen, the pound sterling and the Chinese renminbi. The assets and liabilities of Ingevity's foreign subsidiaries are translated into U.S. dollars using period-end exchange rates, and adjustments resulting from these financial statement translations are included in Accumulated other comprehensive income in the consolidated balance sheets. Revenues and expenses are translated at average rates prevailing during each period.
Business combinations: We account for business combinations in accordance with ASC 805 “Business Combinations” which requires, among other things, the acquiring entity in a business combination to recognize the fair value of the assets acquired and liabilities assumed; the recognition of Acquisition-related costs in the consolidated statement of operations; the recognition of Restructuring and other (income) charges, net in the consolidated statement of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at fair value on the acquisition date with subsequent adjustments recognized in the consolidated statement of operations. We generally use third-party qualified consultants to assist management in determination of the fair value of assets acquired and liabilities assumed. This includes, when necessary, assistance with the determination of lives and valuation of tangible property, plant, and equipment and identifiable intangibles, assisting management in determining the fair value of obligations associated with employee related liabilities and assisting management in assessing obligations associated with legal and environmental claims.
The fair values assigned to identifiable intangible assets acquired are determined primarily by using an income approach, which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are the attrition rate, growth rates, and the discount rate. These assumptions are based on company specific information and projections, which are not observable in the market and are therefore considered Level 2 and Level 3 measurements. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Based on the acquired business’ end markets and products as well as how the chief operating decision maker will review the business results determines the most appropriate operating segment for which to integrate the acquired business. Goodwill acquired, if any, is allocated to the reporting unit within or at the operating segment for which the acquired business will be integrated. Selection of the appropriate reporting unit is based on the level at which discrete financial information is available and reviewed by business management post integration. Operating results of the acquired entity are reflected in the Consolidated Financial Statements from date of acquisition.
Reclassifications: Certain prior year amounts have been reclassified to conform with current year's presentation.
Note 4: New Accounting Guidance
The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" or "Codification") is the sole source of authoritative U.S. GAAP other than Securities and Exchange Commission ("SEC") issued rules and
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
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 our Consolidated Financial Statements.
Recently Adopted Accounting Pronouncement
In August 2018, the FASB issued ASU 2018-13 "Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This ASU eliminates, amends, and adds disclosure requirements for fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this standard on January 1, 2019. The impact of adoption did not have a material impact on our Consolidated Financial Statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07 "Compensation-Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting." This ASU provides for a single accounting model for all share-based payments, with the employee based guidance now applying to nonemployee share-based transactions. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted this standard on January 1, 2019. The impact of adoption did not have a material impact on our Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)." Under the new guidance, lessees are required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Since the issuance of ASU 2016-02, the FASB issued several amendments that clarify certain points in Topic 842, including ASU 2018-20 ("Lease (Topic 842): Narrow-Scope Improvements for Lessors"), ASU 2018-01 ("Land Easement Practical Expedient"), ASU 2018-10 ("Codification Improvements"), ASU 2018-11 ("Targeted Improvements") and ASU 2019-01 (“Codification Improvements”). ASU 2016-02 and all subsequent amendments will herein be referred to as ASC 842. We adopted ASC 842 utilizing the modified retrospective approach as of January 1, 2019. The modified retrospective approach we selected provides a method of transition allowing for the recognition of existing leases as of the beginning of the period of adoption (i.e. January 1, 2019), and which does not require the adjustment of comparative periods.
We have elected the practical expedient package upon transition that does not require reassessment of prior conclusions related to contracts containing a lease, lease classification, and initial direct costs for any leases that existed at the period of adoption of ASC 842. We also adopted the practical expedient to apply hindsight in determining the lease term; we chose to account for lease and non-lease components together as a single component for all lease asset classes; and we elected the practical expedient related to land easements allowing us to carry-forward our current accounting treatment for land easements on existing agreements. We include the option to extend or terminate a lease when it is reasonably certain that we will exercise the option. In addition, we elected the accounting policy to not apply the balance sheet recognition criteria required in ASC 842 to leases with an initial lease term of twelve months or less by class of underlying asset for all lease asset classes. Payments for these leases are recognized on a straight-line basis over the lease term. As a lessee, most of our leases under prior guidance ASC 840 “Leases” were classified as operating leases, and therefore, were not recorded on the consolidated balance sheet but were recorded as expense in the consolidated statement of operations as incurred. We cataloged our existing lease contracts and implemented changes to our systems to perform the lease accounting and reporting under the new guidance going forward.
The adoption of ASC 842 resulted in the recognition of lease assets and liabilities. Our existing capital leases were accounted for as finance leases upon adoption of ASC 842. Additionally, we do not expect a significant impact in the timing of expense recognition based on the classification of leases as either operating or financing.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
In accordance with ASC 842, the impact of adoption on our consolidated balance sheet was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Balance at
December 31, 2018
|
|
Adjustments
|
|
Balance at
January 1, 2019
|
Assets
|
|
|
|
|
|
Prepaid and other current assets
|
$
|
34.9
|
|
|
|
$
|
(0.2)
|
|
(1)
|
$
|
34.7
|
|
Operating lease assets,net
|
—
|
|
|
|
64.6
|
|
(2)
|
64.6
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
—
|
|
|
|
18.4
|
|
(3)
|
18.4
|
|
Noncurrent operating lease liabilities
|
—
|
|
|
|
46.3
|
|
(4)
|
46.3
|
|
Other liabilities
|
15.1
|
|
|
|
(0.3)
|
|
(5)
|
14.8
|
|
_______________
|
|
|
|
|
|
(1) Represents prepaid rent reclassified to operating lease assets.
|
|
|
|
|
|
(2) Represents capitalization of operating lease assets and straight-line rent accrual.
|
|
|
|
|
|
(3) Represents recognition of the current portion of operating lease liabilities.
|
|
|
|
|
|
(4) Represents recognition of the noncurrent operating lease liabilities.
|
|
|
|
|
|
(5) Represents accrued rent reclassified to operating lease liabilities.
|
|
|
|
|
|
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-15 "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." This ASU requires companies to defer specific implementation costs incurred in a Cloud Computing Arrangement ("CCA") that are often expensed as incurred under current GAAP, and recognize the expense over the noncancellable term of the CCA. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Although we are still evaluating the impact of this new standard, we do not believe that the adoption will materially impact our Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14 "Compensation — Retirement Benefits — Defined Benefit Plans — General (Topic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans." This ASU amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The new standard is effective for fiscal years ending after December 15, 2020. Although we are still evaluating the impact of this new standard, we do not believe that the adoption will materially impact our Consolidated Financial Statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326)” (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and will be applied as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period for which the guidance is effective. In April 2019, the FASB issued ASU 2019-04 which addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. In May 2019, the FASB issued ASU 2019-05 “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief” (“ASU 2019-05”), which provides targeted transition relief allowing entities to make an irrevocable one-time election upon adoption of the new credit losses standard to measure financial assets previously measured at amortized cost (except held-to-maturity securities) using the fair value option. The provisions of ASU 2019-04 related to Topic 326 and ASU 2019-05 are effective concurrent with the adoption of ASU 2016-13. We are currently evaluating the impact of these ASUs and do not expect these provisions to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" This ASU amends ASC 740 to add, remove, and clarify disclosure requirements related to income taxes. The new standard is effective for fiscal years ending after December 15, 2020. Although we are still evaluating the impact of this
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
new standard, we do not believe that the adoption of this new standard will materially impact our Consolidated Financial Statements and related disclosures.
Note 5: Revenues
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.
Disaggregation of Revenue
The following tables present our Net sales disaggregated by product line and geography.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Automotive Technologies product line
|
$
|
454.9
|
|
|
$
|
362.0
|
|
|
$
|
312.5
|
|
Process Purification product line
|
35.7
|
|
|
38.4
|
|
|
36.8
|
|
Performance Materials segment
|
$
|
490.6
|
|
|
$
|
400.4
|
|
|
$
|
349.3
|
|
Oilfield Technologies product line
|
111.4
|
|
|
114.2
|
|
|
77.8
|
|
Pavement Technologies product line
|
183.3
|
|
|
178.5
|
|
|
163.0
|
|
Industrial Specialties product line
|
385.5
|
|
|
440.5
|
|
|
382.3
|
|
Engineered Polymers product line
|
122.1
|
|
|
—
|
|
|
—
|
|
Performance Chemicals segment
|
$
|
802.3
|
|
|
$
|
733.2
|
|
|
$
|
623.1
|
|
Consolidated Net sales
|
$
|
1,292.9
|
|
|
$
|
1,133.6
|
|
|
$
|
972.4
|
|
The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
North America
|
$
|
795.7
|
|
|
$
|
770.4
|
|
|
$
|
662.9
|
|
Asia Pacific
|
281.4
|
|
|
171.4
|
|
|
142.5
|
|
Europe, Middle East, and Africa
|
193.6
|
|
|
169.9
|
|
|
149.2
|
|
South America
|
22.2
|
|
|
21.9
|
|
|
17.8
|
|
Net sales
|
$
|
1,292.9
|
|
|
$
|
1,133.6
|
|
|
$
|
972.4
|
|
Contract Balances
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 on contracts with certain customers. 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 no contract liabilities.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Contract Asset
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Balance at beginning of period
|
$
|
5.1
|
|
|
$
|
4.4
|
|
|
|
Contract asset additions
|
29.5
|
|
|
26.6
|
|
|
|
Reclassification to accounts receivable, billed to customers
|
(28.4)
|
|
|
(25.9)
|
|
|
|
Balance at end of period (1)
|
$
|
6.2
|
|
|
$
|
5.1
|
|
|
|
_______________
|
|
|
|
|
|
(1) Included within "Prepaid and other current assets" on the consolidated balance sheet.
|
|
|
|
|
|
Note 6: Fair Value Measurements
Fair Value Measurements
We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair-value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The carrying value of our financial instruments: cash and cash equivalents, restricted cash, other receivables, other payables and accrued liabilities, approximate their fair values due to the short-term nature of these financial instruments.
Recurring Fair Value Measurements
The following information is presented for assets and liabilities that are recorded in the consolidated balance sheets at fair value measured on a recurring basis. See Note 10 for more information regarding the recurring fair value measurements associated with our derivative instruments. 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 non-recurring fair value measurements during fiscal years ending December 31, 2019, 2018, or 2017, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1(1)
|
|
Level 2(2)
|
|
Level 3(3)
|
|
Total
|
December 31, 2019
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Equity securities (4)
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
Deferred compensation plan investments (5)
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
Total assets
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.8
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation arrangement (5)
|
$
|
10.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10.0
|
|
Separation-related reimbursement awards (6)
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Total liabilities
|
$
|
10.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10.1
|
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1(1)
|
|
Level 2(2)
|
|
Level 3(3)
|
|
Total
|
December 31, 2018
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Equity securities (4)
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
Deferred compensation plan investments (5)
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
Total assets
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation arrangement (5)
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.6
|
|
Separation-related reimbursement awards (6)
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Total liabilities
|
$
|
4.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.7
|
|
__________
(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) Included within "Prepaid and other current assets" on the consolidated balance sheet.
(5) Consists of a deferred compensation arrangement, through which we hold various investment securities recognized on our balance sheets. Both the asset and liability related to investment securities are recorded at fair value, and are included within "Other assets" and "Other liabilities" on the consolidated balance sheets, respectively. In addition to the investment securities, we also had company-owned life insurance related to the deferred compensation arrangement recorded at cost in "Other assets" of $8.4 million and $3.1 million at December 31, 2019 and 2018, respectively.
(6) Included within "Accrued expenses" on the consolidated balance sheet. The income and (expense), respectively, recognized during the years ended December 31, 2019, 2018, and 2017 was zero, $0.1 million, and $(0.3) million, respectively.
Equity Securities
Our investments in equity securities with a readily determinable fair value totaled $0.4 million as of both December 31, 2019 and 2018. The net realized gain/(loss) recognized during the years ended December 31, 2019 and 2018 was zero. The net unrealized gain/(loss) during the years ended December 31, 2019 and 2018 was $0.1 million and $(0.3) million, respectively. The aggregate carrying value of investments in equity securities where fair value is not readily determinable totaled $1.5 million as of both December 31, 2019 and 2018, respectively. There were no adjustments to the carrying value of the not readily determinable investments for impairment or observable price changes for the period ended December 31, 2019.
Restricted Investment
At December 31, 2019 and 2018, the book value of our restricted investment was $72.6 million and $71.2 million, respectively, and the fair value was $74.5 million and $66.7 million, respectively, based on Level 1 inputs.
Our restricted investment is a trust managed in order to secure repayment of the finance lease obligation, associated with Performance Materials' Wickliffe, Kentucky manufacturing site, at maturity. The trust, presented as restricted investment on our consolidated balance sheet, purchased long term bonds that mature in 2025 and 2026. The principal received at maturity of the bonds along with interest income that is reinvested in the trust are expected to be equal to or more than the $80.0 million finance lease obligation that is due in 2027. Because the provisions of the trust provide us the ability, and it is our intent, to hold the investments to maturity, the investments held by the trust are accounted for as held to maturity; therefore, they are held at their amortized cost. The investments held by the trust earn interest at the stated coupon rate of the invested bonds. Interest earned on the investments held by the trust is recognized as interest income and presented within Interest income on our consolidated statement of operations.
Debt Obligations
At December 31, 2019 and 2018, the book value of finance lease obligations was $80.0 million, and the fair value was $100.9 million and $90.4 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.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt was $849.4 million and $363.8 million as of December 31, 2019 and 2018, respectively. The carrying value is a reasonable estimate of the fair value of our outstanding debt as our outstanding debt is variable interest rate debt.
At December 31, 2019 and 2018, the book value of our fixed rate debt, the senior notes issued January 24, 2018, was $300.0 million, respectively, and the fair value was $305.4 million and $275.2 million, respectively, based on Level 2 inputs.
Note 7: Inventories, net
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Raw materials
|
$
|
42.6
|
|
|
$
|
36.5
|
|
Production materials, stores and supplies
|
22.3
|
|
|
17.5
|
|
Finished and in-process goods
|
158.0
|
|
|
144.7
|
|
Subtotal
|
$
|
222.9
|
|
|
$
|
198.7
|
|
Less: excess of cost over LIFO cost
|
(10.4)
|
|
|
(7.3)
|
|
Inventories, net
|
$
|
212.5
|
|
|
$
|
191.4
|
|
As of December 31, 2019, approximately 31 percent, 11 percent and 58 percent of our inventories were accounted for under the FIFO, average cost, and LIFO methods, respectively. As of December 31, 2018, approximately 28 percent, 9 percent, and 63 percent of our inventories were accounted for under the FIFO, average cost, and LIFO methods, respectively.
Note 8: Property, Plant and Equipment, net
Property, plant and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Machinery and equipment
|
$
|
964.3
|
|
|
$
|
857.2
|
|
Buildings and leasehold equipment
|
116.9
|
|
|
113.1
|
|
Land and land improvements
|
19.0
|
|
|
19.6
|
|
Construction in progress
|
119.1
|
|
|
71.2
|
|
Total cost
|
$
|
1,219.3
|
|
|
$
|
1,061.1
|
|
Less: accumulated depreciation
|
(554.6)
|
|
|
(537.3)
|
|
Property, plant and equipment, net (1)
|
$
|
664.7
|
|
|
$
|
523.8
|
|
_______________
(1) This includes finance leases related to machinery and equipment at our Wickliffe, Kentucky facility of $68.8 million and $69.2 million, and net book value of $6.0 million and $6.7 million at December 31, 2019 and 2018, respectively. This also includes finance leases related to our Waynesboro, Georgia manufacturing facility for (a) machinery and equipment of $18.4 million and $6.5 million and net book value of $16.8 million and $6.0 million, (b) construction in progress of $6.4 million and $13.7 million and (c) buildings and leasehold improvements of $4.2 million and $0.1 million at December 31, 2019 and 2018, respectively. Amortization expense associated with these finance leases is included within depreciation expense. The payments remaining under these finance leases obligations are included within Note 14.
Depreciation expense was $52.3 million, $41.9 million, and $35.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Note 9: Goodwill and Other Intangible Assets, net
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segments
|
|
|
|
|
In millions
|
Performance Chemicals
|
|
Performance Materials
|
|
Total
|
December 31, 2017
|
$
|
8.1
|
|
|
$
|
4.3
|
|
|
$
|
12.4
|
|
Goodwill acquired (1)
|
118.7
|
|
|
—
|
|
|
118.7
|
|
Foreign currency translation
|
(0.4)
|
|
|
—
|
|
|
(0.4)
|
|
December 31, 2018
|
$
|
126.4
|
|
|
$
|
4.3
|
|
|
$
|
130.7
|
|
Foreign currency translation
|
10.6
|
|
|
—
|
|
|
10.6
|
|
Goodwill acquired (1)
|
295.1
|
|
|
—
|
|
|
295.1
|
|
December 31, 2019
|
$
|
432.1
|
|
|
$
|
4.3
|
|
|
$
|
436.4
|
|
_______________
(1) See Note 17 for more information about our acquisitions.
Our fiscal year 2019 annual goodwill impairment test was performed as of October 1, 2019. We determined no goodwill impairment existed. There were no events or circumstances indicating that goodwill might be impaired as of December 31, 2019. No impairment charges have been recognized historically.
Other Intangible Assets
All of Ingevity's other intangible assets, net are related to the Performance Chemicals operating segment. The following table summarizes our intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
In millions
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net
|
Customer contracts and relationships
|
$
|
314.5
|
|
|
$
|
51.6
|
|
|
$
|
262.9
|
|
|
$
|
151.0
|
|
|
$
|
30.3
|
|
|
$
|
120.7
|
|
Brands (1)
|
80.3
|
|
|
11.1
|
|
|
69.2
|
|
|
11.4
|
|
|
9.8
|
|
|
1.6
|
|
Developed technology
|
68.6
|
|
|
5.7
|
|
|
62.9
|
|
|
1.9
|
|
|
0.2
|
|
|
1.7
|
|
Other
|
2.7
|
|
|
1.5
|
|
|
1.2
|
|
|
2.2
|
|
|
0.6
|
|
|
1.6
|
|
Other intangibles, net (2)
|
$
|
466.1
|
|
|
$
|
69.9
|
|
|
$
|
396.2
|
|
|
$
|
166.5
|
|
|
$
|
40.9
|
|
|
$
|
125.6
|
|
_______________
(1) Represents trademarks, trade names and know-how.
(2) See Note 17 for more information about our acquisitions and the related increase in Intangible assets. The weighted average amortization period remaining for all intangibles is 13.4 years while the weighted average amortization period remaining for customer contracts and relationships, brands, developed technology and other intangibles is 13.3 years, 15.9 years, 11.5 years, and 1.5 years, respectively.
The amortization expense related to our intangible assets in the table above is shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Cost of sales
|
$
|
0.6
|
|
|
$
|
0.7
|
|
|
$
|
1.3
|
|
Selling, general and administrative expenses
|
28.1
|
|
|
11.6
|
|
|
1.1
|
|
Total amortization expense (1)
|
$
|
28.7
|
|
|
$
|
12.3
|
|
|
$
|
2.4
|
|
_______________
(1) See Note 17 for more information about the Caprolactone Acquisition and Pine Chemical Acquisition and the related increase in Amortization expense.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2020 - $32.8 million, 2021 - $31.9 million, 2022 - $31.7 million, 2023 - $31.7 million and 2024 - $31.3 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency.
Note 10: Financial Instruments and Risk Management
Net Investment Hedges
During the second quarter of 2019, we entered into a fixed-to-fixed cross-currency interest rate swap with a notional amount of $141.3 million and a maturity date of July 2023. We designated the swap to hedge a portion of our net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. This contract involves the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contract and an exchange of the notional amount at maturity. This effectively converts a portion of our U.S. dollar denominated fixed-rate debt from a rate of 3.96 percent to euro denominated fixed-rate debt at a rate of 1.41 percent. Any difference between the fixed interest rate between the U.S. dollar denominated debt to euro denominated debt is recorded as interest income on the condensed consolidated statements of operations. The fair value of the fixed-to-fixed cross currency interest rate swap was an asset (liability) of $3.0 million at December 31, 2019. During the year ended December 31, 2019 we recognized net interest income associated with this financial instrument of $2.3 million.
Cash Flow Hedges
Foreign Currency Exchange Risk Management
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 and zero cost collar option 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. We began our foreign currency exchange risk hedging program in July 2017. As of December 31, 2019, there were no open foreign currency derivative contracts. The fair value of the foreign currency hedge was zero as of December 31, 2019, and an asset (liability) of $0.2 million as of December 31, 2018.
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. We began our commodity price risk hedging program in December 2017. As of December 31, 2019, we had 1.1 million and 0.3 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 December 31, 2019, open commodity contracts hedge forecasted transactions until December 2020. The fair value of the outstanding designated natural gas commodity hedge contracts was an asset (liability) of $(0.5) million as of December 31, 2019 and zero as of December 31, 2018.
Interest Rate Risk Management
Our policy is to manage interest expense using a mix of fixed and variable rate debt. To manage interest rate risk effectively, from time to time, we may enter into cash flow interest rate derivative instruments, which can consist of forward starting swaps and treasury locks. In all cases, the notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. Designated interest rate cash flow hedge gains or losses recorded in AOCI are recognized in "Interest expense, net" on the condensed consolidated statements of operations on a straight-line basis over the remaining maturity of the underlying debt. These instruments are designated as cash flow hedges.
During the second quarter of 2019, we entered into an interest rate swap with a notional amount of $141.3 million to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments,
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
effectively converting $141.3 million of our floating rate debt to a fixed rate. In accordance with the terms of this instrument we receive floating rate interest payments based upon three-month U.S. dollar LIBOR and in return are obligated to pay interest at a fixed rate of 3.96% until July 2023. The fair value of the interest rate swap was an asset (liability) of $(3.9) million at December 31, 2019.
Effect of Cash Flow and Net Investment Hedge Accounting on AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Amount of Gain (Loss) Recognized in AOCI
|
|
|
|
Amount of Gain (Loss) Reclassified from AOCI into Net income
|
|
|
|
Location of Gain (Loss) Reclassified from AOCI into Net income
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
Cash flow hedging derivatives
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
Net sales
|
Natural gas contracts
|
(0.9)
|
|
|
0.7
|
|
0.3
|
|
0.2
|
|
Cost of sales
|
Interest rate swap contracts
|
(3.9)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest expense, net
|
Total
|
$
|
(4.8)
|
|
|
$
|
1.7
|
|
|
$
|
0.3
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI
|
|
|
|
Amount of Gain (Loss) Recognized in Income on Derivative
(Amount Excluded from Effectiveness Testing)
|
|
|
|
Location of Gain or (Loss) Recognized in Income on Derivative
(Amount Excluded from Effectiveness Testing)
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
Net investment hedging derivative
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts(1)
|
$
|
3.0
|
|
|
|
$
|
—
|
|
|
|
$
|
2.3
|
|
|
|
$
|
—
|
|
|
Interest expense, net
|
Total
|
$
|
3.0
|
|
|
|
$
|
—
|
|
|
|
$
|
2.3
|
|
|
|
$
|
—
|
|
|
|
__________
(1) Reclassifications from AOCI to Net Income were zero 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 $0.5 million of losses from AOCI to earnings, before taxes.
Fair-Value Measurements
The following information is presented for derivative assets and liabilities that are recorded in the consolidated balance sheets at fair value measured on a recurring basis. See Note 6 for more information on our fair value measurements. 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 non-recurring fair value measurements during fiscal years ending December 31, 2019, 2018, or 2017, respectively.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1(1)
|
|
Level 2(2)
|
|
Level 3(3)
|
|
Total
|
December 31, 2019
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Net investment hedge (4)
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
Total assets
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
3.0
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Natural gas contracts (5)
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Interest rate swap contracts (6)
|
—
|
|
|
3.9
|
|
|
—
|
|
|
3.9
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
4.4
|
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1(1)
|
|
Level 2(2)
|
|
Level 3(3)
|
|
Total
|
December 31, 2018
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Currency exchange contracts(5)
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Natural gas contracts (5)
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Total assets
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
0.3
|
|
Liabilities:
|
|
|
|
|
|
|
—
|
|
Currency exchange contracts(7)
|
$
|
—
|
|
|
$
|
3.9
|
|
|
$
|
—
|
|
|
$
|
3.9
|
|
Natural gas contracts (5)
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
4.0
|
|
|
$
|
—
|
|
|
$
|
4.0
|
|
__________
(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) Included within "Other assets" on the consolidated balance sheet.
(5) Included within "Accrued expenses" on the consolidated balance sheet.
(6) Included within "Other liabilities" on the consolidated balance sheet.
(7) This amount represents a non-designated foreign currency hedge associated with the purchase price of our acquisition of Perstorp AB's caprolactone business. See Note 17 for more information. The expense recognized during the year ended December 31, 2019 and 2018 was $12.7 million and $3.9 million, respectively.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Note 11: Debt, including Finance Lease Obligations
Current and long-term debt including finance lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31,
|
|
|
In millions
|
Interest rate
|
|
Maturity date
|
|
2019
|
|
2018
|
Revolving Credit Facility (1)
|
3.28%
|
|
|
2023
|
|
$
|
131.3
|
|
|
$
|
—
|
|
Term Loans
|
3.11%
|
|
|
2022-2023
|
|
740.6
|
|
|
375.0
|
|
Senior Notes
|
4.50%
|
|
|
2026
|
|
300.0
|
|
|
300.0
|
|
Finance lease obligations (2)
|
7.67%
|
|
|
2027
|
|
80.0
|
|
|
80.0
|
|
Other notes payable
|
4.95%
|
|
|
2020-2021
|
|
5.9
|
|
|
3.9
|
|
Total debt including capital lease obligations
|
|
|
|
|
$
|
1,257.8
|
|
|
$
|
758.9
|
|
Less: debt issuance costs
|
|
|
|
|
6.9
|
|
|
6.5
|
|
Total debt including capital lease obligations, net of debt issuance costs
|
|
|
|
|
$
|
1,250.9
|
|
|
$
|
752.4
|
|
Less: debt maturing within one year (3)
|
|
|
|
|
22.5
|
|
|
11.2
|
|
Long-term debt including capital lease obligations
|
|
|
|
|
$
|
1,228.4
|
|
|
$
|
741.2
|
|
_______________
(1) Letters of credit outstanding under the revolving credit facility were $2.1 million and $1.9 million and available funds under the facility were $616.6 million and $748.1 million at December 31, 2019 and 2018, respectively.
(2) See Note 14 for more information.
(3) Debt maturing within one year is included in "Notes payable and current maturities of long-term debt" on the consolidated balance sheet.
Revolving Credit Facility
Our revolving credit facility has a capacity of $750.0 million with a maturity date on August 7, 2023. The terms and conditions of our revolving credit facility are governed by the Incremental Facility Agreement and Amendment No. 4, dated as of March 7, 2019 (the “Amendment No. 4” to our existing credit agreement, dated as of March 7, 2016 ("Credit Agreement") (as amended, supplemented or otherwise modified prior to the date hereof, including pursuant to Amendment No. 3, dated as of March 7, 2019 (“Amendment No. 3”), the Incremental Facility Agreement and Amendment No. 2, dated as of August 7, 2018 (“Amendment No. 2”), the Incremental Facility Agreement and Amendment No. 1, dated as of August 21, 2017 (“Amendment No.1”), and the Credit Agreement).
The revolving credit facility bears interest at either (a) an adjusted base rate or (b) an adjusted LIBOR rate (or a comparable or successor rate), in each case, plus an applicable margin (the "Revolving Credit Facility Applicable Margin"), in the case of base rate loans, ranging between zero percent and 0.75 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.00 percent and 1.75 percent. The Revolving Credit Facility Applicable Margin is based on a total leverage based pricing grid.
Fees of zero, $1.1 million and $0.8 million were incurred in 2019, 2018, and 2017, respectively, to secure the various amendments associated with our Revolving Credit Facility. These fees have been deferred and will be amortized over the term of the facility.
Term Loans
Our term loans are comprised of two separate term loans: the 2017 Term Loan and the 2019 Term Loan.
2019 Term Loan:
On March 7, 2019, we entered into Amendment No.3 and Amendment No.4 (the “Amendments”) to our Credit Agreement. Among other things, the Amendments established a new class of incremental term loan commitments, collectively
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
referred to as the 2019 Term Loan, in the aggregate principal amount of $375.0 million. The 2019 Term Loan of $375.0 million is in additional to the existing 2017 Term Loan of $375.0 million.
The 2019 Term Loan is not subject to amortization; the full principal balance is due and payable at maturity on August 7, 2022. The 2019 Term Loan bears interest at either (a) an adjusted base rate or (b) an adjusted LIBOR rate (or a comparable or successor rate), in each case, plus an applicable margin (the “2019 Term Loan Applicable Margin”), in the case of base rate loans, ranging between zero and 0.25 percent, and in the case of adjusted LIBOR rate loans, ranging between 0.75 percent and 1.25 percent. The 2019 Term Loan Applicable Margin is based on a total leverage based pricing grid.
As consideration for the Amendments, we paid to each lender party thereto a consent fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans under held by such lender. Fees of $1.8 million were incurred to secure the 2019 Term Loan. These fees have been deferred and will be amortized over the term of the loan.
We used the proceeds of the 2019 Term Loan to repay loans outstanding under our revolving credit facility.
2017 Term Loan:
On August 21, 2017, we entered into Amendment No.1 to our Credit Agreement. Among other things, Amendment No. 1 established incremental term loan commitments in the aggregate principal amount of $75.0 million in addition to the existing term loan of $300.0 million. The combined borrowings, collectively referred to as the 2017 Term Loan, of $375.0 million which are treated as a single class.
On August 7, 2018, we entered into Amendment No.2 which, among other things, extended the maturity of the 2017 Term Loan to August 7, 2023. The 2017 Term Loan amortizes at zero percent per annum during the first, second and third years after the initial funding date of May 9, 2016 and 1.25 percent per annum during each year to maturity, with the balance due at maturity. The 2017 Term Loan bears interest at either (a) an adjusted base rate or (b) an adjusted LIBOR rate (or a comparable or successor rate), in each case, plus an applicable margin (the "2017 Term Loan Applicable Margin"), in the case of base rate loans, ranging between zero percent and 0.75 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.00 percent and 1.75 percent. The 2017 Term Loan Applicable Margin is based on a total leverage based pricing grid.
As consideration for Amendment No.1 and Amendment No.2, we paid to each lender party thereto a consent fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans held by such lender. Fees of $0.3 million and $0.5 million were incurred in 2018 and 2017, respectively to secure the amendments associated with the 2017 Term Loan. These fees have been deferred and will be amortized over the term of the loan.
Senior Notes
On January 24, 2018, we issued $300.0 million aggregate principal amount of 4.50 percent senior unsecured notes due 2026 (the “Notes”). The Notes were issued pursuant to an indenture dated as of January 24, 2018 (the “Indenture”), by and among Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The Notes were offered and sold only to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and to certain non-U.S. persons outside the U.S. pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the U.S. absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.
The net proceeds from the sale of the Notes, after deducting deferred financing fees of $5.7 million, were approximately $294.3 million. We used the net proceeds from the sale of the Notes to finance, in part, our purchase of substantially all the assets primarily used in the pine chemicals business of Georgia-Pacific Chemicals LLC and Georgia-Pacific LLC.
Interest payments on the Notes are due semiannually in arrears on February 1st and August 1st of each year, beginning on August 1, 2018, at a rate of 4.50 percent per year. The Notes will mature on February 1, 2026.
Debt Covenants
Our Indenture contains 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 our and
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
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 Notes could result in the acceleration of the Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Ingevity and its subsidiaries.
The Revolving Credit Facility and Term Loans 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 Revolving Credit Facilities and Term Loans could result in all loans and other obligations becoming immediately due and payable and the facilities being terminated. The Revolving Credit Facility and Term Loans' financial covenants require Ingevity to maintain on a consolidated basis a maximum total leverage ratio of 4.0 to 1.0 (which may be increased to 4.5 to 1.0 under certain circumstances) and a minimum interest coverage ratio of 3.0 to 1.0. Our actual leverage for the four consecutive quarters ended December 31, 2019 was 3.0, and our actual interest coverage for the four consecutive quarters ended December 31, 2019 was 8.4. We were in compliance with all covenants at December 31, 2019.
New Markets Tax Credit
On November 14, 2019, we entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) related to a $7.0 million capital investment associated with a project to build out our new headquarters located in North Charleston, South Carolina (the "Project"). Wells Fargo made a $2.3 million capital contribution to Ingevity Virginia Corporation, a wholly-owned subsidiary of Ingevity (“Ingevity VA”), which in-turn made a $5.0 million loan to IH Investment Fund, LLC (the “Investment Fund”) under a qualified New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of a community development entity (“CDE”). CDEs are conduit lenders through which privately managed investment institutions to make qualified low-income community investments.
Ingevity VA's $5.0 million loan to the Investment Fund at an interest rate of one percent per annum and matures in 2041. The Investment Fund contributed the $5.0 million loan from Ingevity VA and the initial investment of $2.3 million (less syndication fees) by Wells Fargo to The Innovate Fund XVI, LLC ("Innovate CDE"), the CDE in this transaction. The Innovate CDE, in turn, loaned the funds (net of fees) at an interest rate of 1.21 percent and a maturity of November 14, 2044 to Ingevity. The proceeds of the loans from the Innovate CDE are to be restricted for use for the Project only. In addition, in contemplation of this transaction, on November 14, 2019, Ingevity was required to restrict $1.0 million of cash to be used solely for the purpose of this Project.
The $2.3 million contribution to the Investment Fund by Wells Fargo entitles Wells Fargo to substantially all of the tax benefits derived from the NMTC over a seven-year compliance period, while Ingevity effectively receives net loan proceeds equal to Wells Fargo’s contributions to the Investment Fund. This transaction includes a put/call provision whereby Ingevity may be obligated or entitled to repurchase Wells Fargo’s interest in the Investment Fund. The value attributed to the put/call is not significant. We believe that Wells Fargo will exercise the put option in November 2026, subsequent to the seven-year recapture period. Ingevity is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement, which is subject to 100 percent recapture for a period of seven years as provided by the Internal Revenue Code. Non-compliance with applicable requirements could result in the projected tax benefits not being realized and, therefore, could require Ingevity to indemnify Wells Fargo for any loss or recapture of NMTC related to the financing until such time as the obligation to deliver tax benefits is relieved. We do not anticipate any credit recaptures will be required in connection with this arrangement.
We have determined that this financing arrangement, with the Investment Fund and Innovate CDE, provides us with a controlling interest in both entities despite not having majority voting rights in either entity. Therefore, we have concluded, both entities represent a variable interest entity (“VIE”). The ongoing activities of the Investment Fund – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Investment Fund. We have considered: the contractual arrangements that obligate Ingevity to deliver tax benefits and provide various other guarantees to the structure; the Innovate CDE's and Wells Fargo’s overall lack of a material interest in the underlying economics of the Project; and Ingevity's obligation to absorb losses of both the Innovate CDE and Investment Fund. We have concluded that Ingevity is the primary beneficiary of each VIE and we have therefore consolidated both Innovate CDE and Investment Fund, as VIEs, in accordance with ASC 810. Post consolidation, the only material remaining balances presented on Ingevity's Consolidated Financial Statements are the original
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
contribution of $2.3 million from Wells Fargo in the Investment Fund, less the third-party debt financing (syndication) fees paid and any remaining restricted proceeds to be used solely for the purpose of the capital investments in the Project. Although ASC 810 would indicate that noncontrolling interest in these VIEs should be presented separately from Ingevity's equity based on our evaluation, we have concluded that the $2.3 million (net of syndication fees) should be presented as a liability of Ingevity on our Consolidated Financial Statements as this more accurately reflects the substance of the financing arrangement.
As a result of this financing arrangement, we incurred $0.6 million in syndication (debt issuance) fees, which are being amortized over the life of the note payable. The proceeds of the loans from the Innovate CDE (including loans representing the capital contribution made by Wells Fargo, net of syndication fees) of $2.3 million, are restricted for use on the Project. As of December 31, 2019, the balance of the loan liability, net of debt issuance fees of $0.6 million was $1.7 million. The loan liability, net of fees is recorded in Other liabilities on our consolidated balance sheets. Additionally, at December 31, 2019, we had $7.7 million of cash restricted for use on the Project, this amount is recorded in Prepaid expenses and other current assets in our consolidated balance sheets. We are able to request reimbursement of this restricted cash for certain expenditures made in connection with the Project which we expect to occur in the first half of 2020. Expenditures that qualify for reimbursement include leasehold improvements, equipment purchases, and other expenditures tied to the Project.
Note 12: Share-based Compensation
Equity Incentive Plan
The Ingevity Corporation 2016 Omnibus Incentive Plan, adopted on May 15, 2016, grants certain corporate officers, key employees and non-employee directors of Ingevity and subsidiaries different forms of benefits, including stock options, restricted stock units ("RSU"), director stock units ("DSU"), and performance stock units ("PSU"). The Ingevity Corporation 2016 Omnibus Incentive Plan has a maximum shares reserve of 4,000,000 for the grant of equity awards. As of December 31, 2019, 3,025,677 shares under the Ingevity Corporation 2016 Omnibus Incentive Plan are still available for grants, assuming that Ingevity performs at the target performance level in each year of the three-year performance period for PSU awards. Ingevity's Compensation Committee determines the long-term incentive mix, including stock options, RSUs and PSUs, and may authorize new grants annually. We typically issue new common shares for vesting of awards under our equity incentive plan.
Employee Stock Purchase Plan
On December 9, 2016, our Compensation Committee and Board of Directors approved the 2017 Ingevity Corporation Employee Stock Purchase Plan ("ESPP"), which was approved by Ingevity’ stockholders on April 27, 2017. The ESPP allows eligible employee participants to purchase no more than 5,000 shares of our common stock at a discount through payroll deductions up to 15 percent of their compensation deducted during the purchase period. However, no participant shall be permitted to purchase common stock with a value greater than $25,000 in any calendar year. The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code. The ESPP consists of a one month enrollment period preceding the three-month purchase period. Employees purchase shares in each purchase period at 85 percent of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.
Under the ESPP, a total of 250,000 shares of Ingevity's common stock are reserved and authorized for issuance to participating U.S. employees, as defined by the ESPP, which excludes certain officers of Ingevity. We typically issue treasury shares for issuances under the ESPP. As of December 31, 2019, 178,506 shares under the ESPP are still available for issuance. The initial offering period under the ESPP began on July 1, 2017. During fiscal 2019, there were 33,945 shares issued under the ESPP at an average price of $58.95.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Our share-based compensation and ESPP expense is included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Stock option expense
|
$
|
3.0
|
|
|
$
|
2.3
|
|
|
$
|
1.5
|
|
ESPP expense
|
0.7
|
|
|
0.5
|
|
|
0.2
|
|
RSU, DSU and PSU expense
|
8.6
|
|
|
9.7
|
|
|
8.4
|
|
Total share-based compensation expense (1)
|
$
|
12.3
|
|
|
$
|
12.5
|
|
|
$
|
10.1
|
|
Income tax benefit
|
(2.2)
|
|
|
(2.9)
|
|
|
(3.8)
|
|
Total share-based compensation expense, net of tax
|
$
|
10.1
|
|
|
$
|
9.6
|
|
|
$
|
6.3
|
|
_______________
(1) Amounts reflected in "Selling, general and administrative expenses" on the Consolidated Statements of Operations.
Stock Options
All stock options vest in accordance with vesting conditions set by the compensation committee of Ingevity's Board of Directors. Stock options granted to date have vesting periods of one to three years from the date of grant. Incentive and non-qualified options granted under the Plan expire no later than 10 years from the grant date. Expense related to stock options granted is based on the assumptions shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
Weighted-average assumptions used to calculate expense for stock options
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
2.6
|
%
|
|
2.7
|
%
|
|
2.1
|
%
|
Average life of options (years)
|
6.5
|
|
6.5
|
|
6.5
|
Volatility
|
28.0
|
%
|
|
27.5
|
%
|
|
35.0
|
%
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
Fair value per stock option
|
$
|
39.29
|
|
|
$
|
25.51
|
|
|
$
|
20.71
|
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
The following table summarizes Ingevity's stock option activity.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
(in thousands)
|
|
Weighted-average exercise price (per share)
|
|
Weighted-average remaining contractual term (years)
|
|
Aggregate intrinsic value (in thousands)
|
Outstanding, December 31, 2016
|
208
|
|
|
$
|
28.03
|
|
|
9.4
|
|
$
|
5,573
|
|
Granted
|
109
|
|
|
53.11
|
|
|
|
|
|
Exercised
|
(7)
|
|
|
27.38
|
|
|
|
|
|
Forfeited
|
(7)
|
|
|
31.97
|
|
|
|
|
|
Canceled
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding, December 31, 2017
|
303
|
|
|
$
|
36.72
|
|
|
8.7
|
|
$
|
10,022
|
|
Granted
|
110
|
|
|
74.91
|
|
|
|
|
|
Exercised
|
(6)
|
|
|
32.37
|
|
|
|
|
|
Forfeited
|
(4)
|
|
|
51.66
|
|
|
|
|
|
Canceled
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding, December 31, 2018
|
403
|
|
|
$
|
46.98
|
|
|
8.1
|
|
$
|
14,450
|
|
Granted
|
61
|
|
|
115.03
|
|
|
|
|
|
Exercised
|
(52)
|
|
|
32.91
|
|
|
|
|
|
Forfeited
|
(2)
|
|
|
106.25
|
|
|
|
|
|
Canceled
|
(5)
|
|
|
73.73
|
|
|
|
|
|
Outstanding, December 31, 2019
|
405
|
|
|
$
|
58.39
|
|
|
7.4
|
|
$
|
13,334
|
|
Exercisable, December 31, 2019
|
164
|
|
|
$
|
31.52
|
|
|
6.5
|
|
$
|
9,150
|
|
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between Ingevity's closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options at each year end. The amount changes based on the fair market value of Ingevity's stock.
As of December 31, 2019, $1.8 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of one year.
Restricted Stock Units, Deferred Stock Units and Performance-based Restricted Stock Units
All RSUs, DSUs, and PSUs vest in accordance with vesting conditions set by the Compensation Committee of Ingevity’s Board of Directors. RSUs and DSUs granted to date have vesting periods ranging from less than one year to three years from the date of grant. PSUs granted to date have vesting periods of three years from the date of grant, including grants that have a cumulative three-year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. We periodically assess the probability of achievement of the performance criteria and adjust the amount of compensation expense accordingly. Compensation expense is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
The following table summarizes Ingevity's RSUs, DSUs and PSUs activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs and DSUs
|
|
|
|
PSUs
|
|
|
|
Number of Units
(in thousands) (1)
|
|
Weighted average grant date fair value (per share)
|
|
Number of Units
(in thousands) (1)
|
|
Weighted average grant date fair value (per share)
|
Nonvested, December 31, 2016
|
167
|
|
|
$
|
28.08
|
|
|
127
|
|
|
$
|
28.06
|
|
Granted
|
61
|
|
|
57.21
|
|
|
66
|
|
|
53.11
|
|
Vested
|
(75)
|
|
|
28.47
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(4)
|
|
|
31.00
|
|
|
(9)
|
|
|
27.90
|
|
Nonvested, December 31, 2017 (2)
|
149
|
|
|
$
|
39.67
|
|
|
184
|
|
|
$
|
37.01
|
|
Granted
|
56
|
|
|
77.98
|
|
|
56
|
|
|
74.91
|
|
Vested
|
(89)
|
|
|
60.94
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(1)
|
|
|
61.15
|
|
|
(1)
|
|
|
52.18
|
|
Nonvested, December 31, 2018 (2)
|
115
|
|
|
$
|
60.94
|
|
|
239
|
|
|
$
|
45.88
|
|
Granted
|
61
|
|
|
108.17
|
|
|
41
|
|
|
115.22
|
|
Vested
|
(59)
|
|
|
50.58
|
|
|
(118)
|
|
|
28.07
|
|
Forfeited
|
(2)
|
|
|
91.09
|
|
|
(4)
|
|
|
83.63
|
|
Nonvested, December 31, 2019 (2)
|
115
|
|
|
$
|
90.65
|
|
|
158
|
|
|
$
|
76.11
|
|
_______________
(1) The number granted represents the number of shares issuable upon vesting of RSUs and DSUs. For PSUs the number granted represents the number of shares issuable upon vesting assuming that Ingevity performs at the target performance level in each year of the three-year performance period.
(2) The nonvested RSU and DSU number of shares at December 31, 2019, 2018, and 2017 includes 10 thousand, 10 thousand, and eight thousand DSUs, respectively.
As of December 31, 2019, there was $6.2 million of unrecognized share-based compensation expense related to nonvested awards. Those costs are expected to be recognized over a weighted-average period of 1.2 years.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Note 13: Equity
Accumulated other comprehensive income (loss)
Summarized below is the roll forward of accumulated other comprehensive income (loss), net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
$
|
(16.4)
|
|
|
|
$
|
(10.1)
|
|
|
|
$
|
(18.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) on foreign currency translation
|
15.6
|
|
|
|
(6.3)
|
|
|
|
8.3
|
|
Gains (losses) on net investment hedges
|
3.0
|
|
|
|
—
|
|
|
|
—
|
|
Less: tax provision (benefit)
|
0.7
|
|
|
|
—
|
|
|
|
—
|
|
Net gains (losses) on net investment hedges
|
2.3
|
|
|
|
—
|
|
|
|
—
|
|
Other comprehensive income (loss), net of tax
|
17.9
|
|
|
|
(6.3)
|
|
|
|
8.3
|
|
Ending Balance
|
$
|
1.5
|
|
|
|
$
|
(16.4)
|
|
|
|
$
|
(10.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
$
|
0.4
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Gains (losses) on derivative instruments
|
(4.8)
|
|
|
|
1.7
|
|
|
|
(0.1)
|
|
Less: tax provision (benefit)
|
(1.1)
|
|
|
|
0.4
|
|
|
|
—
|
|
Net gains (losses) on derivative instruments
|
(3.7)
|
|
|
|
1.3
|
|
|
|
(0.1)
|
|
(Gains) losses reclassified to net income
|
(0.3)
|
|
|
|
(1.2)
|
|
|
|
0.1
|
|
Less: tax (provision) benefit
|
(0.1)
|
|
|
|
(0.3)
|
|
|
|
—
|
|
Net (gains) losses reclassified to net income
|
(0.2)
|
|
|
|
(0.9)
|
|
|
|
0.1
|
|
Other comprehensive income (loss), net of tax
|
(3.9)
|
|
|
|
0.4
|
|
|
|
—
|
|
Ending Balance
|
$
|
(3.5)
|
|
|
|
$
|
0.4
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
$
|
(1.7)
|
|
|
|
$
|
(1.6)
|
|
|
|
$
|
(0.6)
|
|
Unrealized actuarial gains (losses) and prior service (costs) credits
|
(1.8)
|
|
|
|
(0.4)
|
|
|
|
(1.1)
|
|
Less: tax provision (benefit)
|
(0.4)
|
|
|
|
(0.1)
|
|
|
|
(0.4)
|
|
Net actuarial gains (losses) and prior service (costs) credits
|
(1.4)
|
|
|
|
(0.3)
|
|
|
|
(0.7)
|
|
Amortization of actuarial and other (gains) losses, prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income
|
0.1
|
|
|
|
0.3
|
|
|
|
—
|
|
Less: tax (provision) benefit
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
Net actuarial and other (gains) losses, amortization of prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income
|
0.1
|
|
|
|
0.2
|
|
|
|
—
|
|
Reclassifications of certain deferred tax effects (1)
|
—
|
|
|
|
—
|
|
|
|
(0.3)
|
|
Other comprehensive income (loss), net of tax
|
(1.3)
|
|
|
|
(0.1)
|
|
|
|
(1.0)
|
|
Ending Balance
|
$
|
(3.0)
|
|
|
|
$
|
(1.7)
|
|
|
|
$
|
(1.6)
|
|
|
|
|
|
|
|
|
|
|
Total AOCI ending balance at December 31
|
$
|
(5.0)
|
|
|
$
|
(17.7)
|
|
|
$
|
(11.7)
|
|
_______________
(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Reclassifications of accumulated other comprehensive income (loss)
The table below provides details about the reclassifications from accumulated other comprehensive income (loss) and the affected line items in the consolidated statements of income (loss) for each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts (1)
|
$
|
—
|
|
|
|
$
|
1.0
|
|
|
|
$
|
0.1
|
|
Natural gas contracts (2)
|
0.3
|
|
|
|
0.2
|
|
|
|
—
|
|
Total before tax
|
0.3
|
|
|
|
1.2
|
|
|
|
0.1
|
|
(Provision) benefit for income taxes
|
(0.1)
|
|
|
|
(0.3)
|
|
|
|
—
|
|
Amount included in net income (loss)
|
$
|
0.2
|
|
|
|
$
|
0.9
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs (credits) (2)
|
$
|
—
|
|
|
|
$
|
0.5
|
|
|
|
$
|
—
|
|
Amortization of unrecognized net actuarial and other gains (losses) (3)
|
0.1
|
|
|
|
(0.1)
|
|
|
|
—
|
|
Recognized loss due to curtailment and settlement (2)
|
—
|
|
|
|
(0.2)
|
|
|
|
—
|
|
Total before tax
|
0.1
|
|
|
|
0.2
|
|
|
|
—
|
|
(Provision) benefit for income taxes
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amount included in net income (loss)
|
$
|
0.1
|
|
|
|
$
|
0.2
|
|
|
|
$
|
—
|
|
_______________
|
|
|
|
|
|
(1) Included within "Net sales" on the consolidated statement of operations.
|
|
|
|
|
|
(2) Included within "Cost of sales" on the consolidated statement of operations.
|
|
|
|
|
|
(3) Included within "Other (income) expense, net" on the consolidated statement of operations.
|
|
|
|
|
|
Noncontrolling interest acquisition
On August 1, 2018, we completed the acquisition of the remaining 30 percent noncontrolling interest in Purification Cellutions, LLC, now known as Ingevity Georgia, LLC, which was treated as a partnership for tax purposes, for a purchase price of $80.0 million. The acquisition resulted in the elimination of Noncontrolling interest of $11.4 million and the recognition of a Deferred tax asset of $14.3 million, with the remainder being recorded against Additional paid in capital of $54.3 million in our Consolidated Financial Statements.
Share repurchases
On February 20, 2017, the Board of Directors authorized the repurchase of up to $100.0 million of our common stock. In addition, on November 1, 2018, the Board of Directors approved the authorization for the repurchase of up to an additional $350.0 million of Ingevity’s outstanding common stock. The repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time. Shares 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.
During the year ended December 31, 2019, we repurchased $6.4 million in common stock, representing 80,300 shares of our common stock at a weighted average cost per share of $80.22. At December 31, 2019, $389.5 million remained unused under our Board-authorized repurchase program. We record shares of common stock repurchased at cost as treasury stock, resulting in a reduction of stockholders’ equity in the consolidated balance sheets. When the treasury shares are contributed under our employee benefit plans or issued for option exercises, we use FIFO method for determining cost. The difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to or deducted from Additional paid-in capital on the consolidated balance sheets.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Note 14: Leases
Operating Leases
We lease a variety of assets for use in our operations that are classified as operating leases. At contract inception, we determine that a lease exists if the contract conveys the right to control an identified asset for a period of time in exchange for consideration. Control is considered to exist when the lessee has the right to obtain substantially all of the economic benefits from the use of an identified asset as well as the right to direct the use of that asset. If a contract is considered to be a lease, we recognize a lease liability based on the present value of the future lease payments, with an offsetting entry to recognize a right-of-use asset. As a majority of our leases do not provide an implicit rate within the lease, an incremental borrowing rate is used which is based on information available at the commencement date. Upon adoption of ASC 842, we used the incremental borrowing rate on January 1, 2019, for operating leases that commenced prior to that date. The determination of the incremental borrowing rate for each individual lease was impacted by the following assumptions: lease term, currency, and the economic environment for the physical location of the leased asset.
Our operating leases principally relate to the following leased asset classes:
|
|
|
|
|
|
|
|
|
Leased Asset Class
|
|
Expected Lease Term
|
Administrative offices
|
|
1 to 10 years
|
Manufacturing buildings
|
|
10 to 28 years
|
Manufacturing and office equipment
|
|
2 to 6 years
|
Warehousing and storage facilities
|
|
2 to 10 years
|
Vehicles
|
|
3 to 6 years
|
Rail cars
|
|
2 to 8 years
|
Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the expected lease term. Some of our leases include options to extend the lease term at our sole discretion. We account for lease and non-lease components together as a single component for all lease asset classes. The depreciable life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain leases provide for escalation of the lease payments, as well as maintenance costs and taxes increase.
Finance leases
Our finance lease obligations consist of $80.0 million at December 31, 2019 and 2018, respectively, owed to the city of Wickliffe, Kentucky, associated with Performance Materials' Wickliffe, Kentucky manufacturing site, which is due at maturity in 2027. The interest rate on the $80.0 million finance lease obligation is 7.67%. Interest payments are payable semi-annually.
We have a finance lease obligation due in 2031 for certain assets located at our Performance Materials' Waynesboro, Georgia manufacturing facility. The lease is with the Development Authority of Burke County (“Authority”). The Authority established the sale-leaseback of these assets by issuing an industrial development revenue bond. The bond was purchased by Ingevity and the obligations under the finance lease remain with Ingevity. Accordingly, we offset the finance lease obligation and bond on our consolidated balance sheets.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Financial Statement Caption
|
|
December 31, 2019
|
Assets
|
|
|
|
Operating lease assets, net(1)
|
Operating lease assets, net
|
|
$
|
53.4
|
|
Finance lease assets, net(2)
|
Property, plant, and equipment, net
|
|
33.4
|
|
Finance lease assets, net(2)
|
Other assets, net
|
|
1.2
|
|
Total lease assets
|
|
|
$
|
88.0
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating lease liabilities(3)
|
Current operating lease liabilities
|
|
$
|
17.1
|
|
Finance lease liabilities
|
Notes payable and current maturities of long-term debt
|
|
—
|
|
Noncurrent
|
|
|
|
Operating lease liabilities
|
Noncurrent operating lease liabilities
|
|
36.7
|
|
Finance lease liabilities
|
Long-term debt including finance lease obligations
|
|
80.0
|
|
Total lease liabilities
|
|
|
$
|
133.8
|
|
_______________
(1) Operating lease assets, net are recorded net of accumulated amortization of $17.6 million as of December 31, 2019.
(2) Finance lease assets, net are recorded net of accumulated amortization in Property, plant, and equipment, net and Other assets, net of $64.3 million and $0.3 million, as of December 31, 2019, respectively.
(3) Operating lease liabilities includes $0.2 million of accrued interest.
Lease cost
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Financial Statement Caption
|
|
December 31, 2019
|
Operating lease cost(1)
|
Cost of sales
|
|
$
|
21.5
|
|
|
Selling, general, and administrative expenses
|
|
2.4
|
|
Finance lease cost
|
|
|
|
Amortization of leased assets
|
Cost of sales
|
|
$
|
1.9
|
|
Interest on lease liabilities
|
Interest expense, net
|
|
6.1
|
|
Net lease cost(2)
|
|
|
$
|
31.9
|
|
_______________
(1) Includes short-term leases and variable lease costs, which are immaterial.
(2) Only on the rare occasion do we sublease our leased assets; as a result this amount excludes sublease income which is immaterial.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Maturity of Lease Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
In millions
|
Operating leases
|
|
Finance leases
|
|
Total
|
2020
|
$
|
19.4
|
|
|
$
|
6.1
|
|
|
$
|
25.5
|
|
2021
|
15.1
|
|
6.1
|
|
21.2
|
2022
|
10.9
|
|
6.1
|
|
17.0
|
2023
|
6.9
|
|
6.1
|
|
13.0
|
2024
|
3.4
|
|
6.1
|
|
9.5
|
2025 and thereafter
|
5.0
|
|
95.4
|
|
100.4
|
Total lease payments
|
$
|
60.7
|
|
|
$
|
125.9
|
|
|
$
|
186.6
|
|
Less: Interest
|
6.9
|
|
45.9
|
|
52.8
|
Present value of lease liabilities(1)
|
$
|
53.8
|
|
|
$
|
80.0
|
|
|
$
|
133.8
|
|
_______________
(1) As of December 31, 2019, we have additional operating lease commitments that have not yet commenced of approximately $21.4 million for the relocation of our corporate headquarters. The lease is expected to commence in the first half of 2020 and the lease term is for 15 years with two 5 year extensions. Additionally, we have operating lease commitments that have not yet commenced of approximately $2.3 million primarily related to rail car leases.
Minimum lease payments pursuant to agreements as of December 31, 2018, under operating leases that have non-cancelable lease terms in excess of 12 months and under capital leases presented in accordance with ASC 840 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Operating leases
|
|
Finance leases
|
|
|
2019
|
$
|
21.9
|
|
|
$
|
6.1
|
|
|
|
2020
|
17.2
|
|
|
6.1
|
|
|
|
2021
|
13.3
|
|
|
6.1
|
|
|
|
2022
|
9.7
|
|
|
6.1
|
|
|
|
2023
|
6.0
|
|
|
6.1
|
|
|
|
2024 and thereafter
|
5.9
|
|
|
101.5
|
|
|
|
Minimum lease payments
|
$
|
74.0
|
|
|
$
|
132.0
|
|
|
|
Less: amount representing interest
|
|
|
52.0
|
|
|
|
Finance lease obligations
|
|
|
$
|
80.0
|
|
|
|
Lease Term and Discount Rate
|
|
|
|
|
|
|
December 31, 2019
|
Weighted-average remaining lease term (years)
|
|
Operating leases
|
4.2
|
Finance leases
|
8.5
|
Weighted-average discount rate
|
|
Operating leases
|
5.67
|
%
|
Finance leases
|
7.67
|
%
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Other Information
|
|
|
|
|
|
In millions
|
December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
23.8
|
|
Operating cash flows from finance leases
|
6.1
|
|
Financing cash flows from finance leases
|
—
|
|
Note 15: Retirement Plans
Defined Contribution Plans
On January 1, 2016, the Ingevity Corporation Retirement Savings Plan ("Plan") was established. The Plan is a qualified salary-reduction plan under Section 401(k) of the U.S. Internal Revenue Code. Eligible U.S. employees may participate by contributing a portion of their compensation. For non-union eligible employees participating in the Plan Ingevity makes matching contributions up to six percent of the employee deferral. In addition to the matching contributions, Ingevity also makes a non-elective contribution of three percent of eligible compensation per payroll for non-union employees. For union eligible employees participating in the Plan Ingevity makes matching contributions up to 100 percent of the first three percent of the employee deferrals and 50 percent on the next two percent of deferrals.
U.S. salaried employees who were no longer eligible to participate in our prior parent's defined benefit pension plan were provided an enhanced contribution into the Plan. The enhanced benefits consist of a transition contribution of four or ten percent of the employee’s eligible compensation for employees who were grandfathered into our prior parent's cash balance and final average pay pension plan, respectively. The transition contributions will continue to December 31, 2020, unless the grandfathered employee terminates employment sooner.
Charges associated with employer contributions to the Plan were $10.6 million, $10.2 million, and $9.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Defined Benefit Pension and Postretirement Plans
On May 16, 2016, Ingevity established qualified and non-qualified benefit plans to provide pension and post-retirement benefits to certain employees and retirees. Our retirement obligations consist of accrued defined benefit obligations earned by Ingevity domestic hourly union employees; accrued obligations from a frozen non-qualified defined benefit pension plan for certain salaried and former salaried employees of Ingevity; and other post-retirement medical and life insurance benefits.
We are required to recognize in our consolidated balance sheets the overfunded and underfunded status of our defined benefit postretirement plans. The overfunded and underfunded status is defined as the difference between the fair value of plan assets and the projected benefit obligation. We are also required to recognize, as a component of other comprehensive income, the actuarial gains and losses and the prior service costs and credits that arise during the period.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
The following table summarizes the weighted average assumptions used and components of our defined benefit postretirement plans. The following table also reflects a measurement date of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
|
Other Benefits
|
|
|
|
December 31,
|
|
|
|
|
|
|
In millions, except percentages
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Following are the weighted average assumptions used to determine the benefit obligations at December 31:
|
|
|
|
|
|
|
|
Discount rate - qualified benefit plans
|
3.15
|
%
|
|
4.20
|
%
|
|
—
|
%
|
|
—
|
%
|
Discount rate - non-qualified benefit plans
|
3.10
|
%
|
|
4.15
|
%
|
|
3.05
|
%
|
|
4.10
|
%
|
Rate of compensation increase
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
Project benefit obligation at January 1
|
$
|
29.4
|
|
|
$
|
28.8
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
Service cost
|
1.2
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
Interest cost
|
1.2
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
Actuarial loss (gain)
|
5.3
|
|
|
(2.0)
|
|
|
0.2
|
|
|
(0.1)
|
|
Plan amendments
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
Benefit payments
|
(0.6)
|
|
|
(0.5)
|
|
|
—
|
|
|
—
|
|
Projected benefit obligation at December 31 (1)
|
36.5
|
|
|
29.4
|
|
|
0.9
|
|
|
0.7
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value of plan asset at January 1
|
22.6
|
|
|
22.6
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
4.7
|
|
|
(1.1)
|
|
|
—
|
|
|
—
|
|
Company contributions
|
0.1
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
Benefit payments
|
(0.6)
|
|
|
(0.5)
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at December 31
|
26.8
|
|
|
22.6
|
|
|
—
|
|
|
—
|
|
Funded Status
|
|
|
|
|
|
|
|
Net Funded Status of the Plan (Liability)
|
$
|
(9.7)
|
|
|
$
|
(6.8)
|
|
|
$
|
(0.9)
|
|
|
$
|
(0.7)
|
|
|
|
|
|
|
|
|
|
Amount recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
Pension and other postretirement benefit asset (2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Pension and other postretirement benefit (liability) (2)
|
(9.7)
|
|
|
(6.8)
|
|
|
(0.9)
|
|
|
(0.7)
|
|
Total Net Funded Status of the Plan (Liability)
|
$
|
(9.7)
|
|
|
$
|
(6.8)
|
|
|
$
|
(0.9)
|
|
|
$
|
(0.7)
|
|
_______________
(1) The accumulated benefit obligation for all years presented equals the projected benefit obligation for each plan, respectively.
(2) Asset balance is included in "Other assets" and liability balances are included in "Other liabilities" on the consolidated balance sheet.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Amounts Recognized in Other Comprehensive Income (Loss)
Changes in plan assets and benefit obligations recognized in other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
|
|
|
Other Benefits
|
|
|
|
|
|
Total
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Current year net actuarial loss (gain)
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
0.1
|
|
|
$
|
(0.1)
|
|
|
$
|
0.1
|
|
|
$
|
1.8
|
|
|
$
|
(0.1)
|
|
|
$
|
1.2
|
|
Current year prior service cost (credit)
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Amortization of net actuarial (loss) gain and prior service (cost) credit
|
(0.1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1)
|
|
|
—
|
|
|
—
|
|
Curtailments
|
—
|
|
|
(0.2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2)
|
|
|
—
|
|
Total recognized in other comprehensive (income) loss, before taxes
|
1.6
|
|
|
0.3
|
|
|
1.1
|
|
|
0.1
|
|
|
(0.1)
|
|
|
0.1
|
|
|
1.7
|
|
|
0.2
|
|
|
1.2
|
|
Total recognized in other comprehensive (income) loss, after taxes
|
$
|
1.2
|
|
|
$
|
0.3
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
$
|
(0.1)
|
|
|
$
|
0.1
|
|
|
$
|
1.3
|
|
|
$
|
0.2
|
|
|
$
|
0.8
|
|
Amounts Recognized in Accumulated Other Comprehensive Income (Loss)
The amounts in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
|
Other Benefits
|
|
|
|
Total
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net actuarial (gain) loss
|
$
|
3.0
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
(0.1)
|
|
|
$
|
3.0
|
|
|
$
|
1.2
|
|
Prior service cost (credit)
|
0.9
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
0.9
|
|
Accumulated other comprehensive (income) loss, before taxes
|
3.9
|
|
|
2.2
|
|
|
—
|
|
|
(0.1)
|
|
|
3.9
|
|
|
2.1
|
|
Accumulated other comprehensive (income) loss, after taxes
|
$
|
3.0
|
|
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
(0.1)
|
|
|
$
|
3.0
|
|
|
$
|
1.7
|
|
The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income (loss) into our net annual benefit cost during 2020 are zero and less than $0.1 million, respectively.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Net Annual Benefit Costs Assumptions
The following table summarizes the weighted-average assumptions used for the components of net annual benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
|
|
|
Other Benefits
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
In millions, except percentages
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Discount rate - qualified benefit plans (1)
|
4.20
|
%
|
|
3.55
|
%
|
|
4.10
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Discount rate - non-qualified benefit plans (1)
|
4.15
|
%
|
|
3.55
|
%
|
|
4.15
|
%
|
|
4.10
|
%
|
|
3.45
|
%
|
|
3.95
|
%
|
Expected return on plan assets
|
4.50
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Components of net annual benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost (2)
|
$
|
1.2
|
|
|
$
|
1.6
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost (3)
|
1.2
|
|
|
1.0
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected return on plan assets (3)
|
(1.0)
|
|
|
(0.9)
|
|
|
(0.9)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (2)
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial and other (gain) loss (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized (gain) loss due to curtailments
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net annual benefit cost
|
$
|
1.5
|
|
|
$
|
2.0
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
_______________
(1) The discount rate used to calculate pension and other post-retirement obligations was based on a review of available yields on high-quality corporate bonds. In selecting a discount rate, we placed particular emphasis on a discount rate yield-curve provided by our third-party actuary which takes into consideration the projected cash flows that represent the expected timing and amount of our plans' benefit payments.
(2) Amounts are recorded to "Cost of sales" on our consolidated statements of operations consistent with the employee compensation costs that participate in the plan.
(3) Amounts are recorded to "Other (income) expense, net" on our consolidated statements of operations.
Contributions
We made a voluntary cash contribution of zero and $1.5 million to our Union Hourly defined benefit pension plan in the years ended December 31, 2019 and 2018, respectively. There are no required cash contributions to our Union Hourly defined benefit pension plan in fiscal 2020, and we currently have no plans to make any voluntary cash contributions in fiscal 2020.
Fair Value Hierarchy
Following is a description of the valuation methodologies used for the investment measure at fair value. See Note 6 for the definition of fair value and the descriptions of Level 1, 2 and 3 in the fair value hierarchy.
Cash and short-term funds — Cash and quoted short-term instruments are valued at the closing price or the amount held on deposit by the custodian bank.
Mutual Funds – Mutual funds are valued at the closing price reported on the major market on which the individual securities are traded. Substantially all mutual funds are classified within Level 1 of the valuation hierarchy.
Pooled Funds - These investment vehicles are valued using the Net Asset Value (NAV) provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding.
Other - Other assets are represented by investments in a series limited partnership. These assets are not actively traded and classified as Level 2.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
The following table presents our fair value hierarchy for our major categories of pension plan assets by asset class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
December 31, 2019
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Investments Measured at Net Asset Value
|
Cash and short-term investments
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Mutual funds
|
3.0
|
|
|
3.0
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Pooled funds
|
22.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
22.4
|
|
Other
|
1.3
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
$
|
26.8
|
|
|
$
|
3.1
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
|
$
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
December 31, 2018
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Investments Measured at Net Asset Value
|
Cash and short-term investments
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Mutual funds
|
3.1
|
|
|
3.1
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Pooled funds
|
18.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
18.8
|
|
Other
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
$
|
22.6
|
|
|
$
|
3.2
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
|
$
|
18.8
|
|
Estimated Future Benefit Payments
The following table reflects the estimated future benefit payments for our pension and other postretirement benefit plans. These estimates take into consideration expected future service, as appropriate.
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Pensions
|
|
Other Benefits
|
2020
|
$
|
0.6
|
|
|
$
|
—
|
|
2021
|
0.8
|
|
|
—
|
|
2022
|
1.0
|
|
|
—
|
|
2023
|
1.1
|
|
|
—
|
|
2024
|
1.2
|
|
|
—
|
|
2025-2029
|
8.3
|
|
|
0.2
|
|
Sensitivity Analysis
A one-half percent increase in the assumed discount rate would have decreased our qualified pension benefit obligations by $2.6 million at December 31, 2019 and decreased our qualified pension benefit costs by $0.1 million for 2019. A one-half percent decrease in the assumed discount rate would have increased our qualified pension obligations by $3.0 million at December 31, 2019 and increased our qualified pension benefit cost by $0.2 million for 2019.
A one-half percent increase in the assumed expected long-term rate of return on plan assets would have decreased our qualified pension costs by $0.1 million for 2019. A one-half percent decrease in the assumed expected long-term rate of return on plan assets would have increased our qualified pension costs by $0.1 million for 2019.
Note 16: Restructuring and Other (Income) Charges, net
We continually perform strategic reviews and assess the return on our operations which sometimes results in a plan to restructure the business. The cost and benefit of these strategic restructuring initiatives are recorded as restructuring and other (income) charges, net recorded within Restructuring and other (income) charges, net on our consolidated statement of operations. These costs are excluded from our operating segment results.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
We record an accrual for severance and other non-recurring costs under the provisions of the relevant accounting guidance. Additionally, in some restructuring plans write-downs of long-lived assets may occur. Two types of assets are impacted: assets to be disposed of by sale and assets to be abandoned. Assets to be disposed of by sale are measured at the lower of carrying amount or estimated net proceeds from the sale. Assets to be abandoned with no remaining future service potential are written down to amounts expected to be recovered. The useful lives of assets to be abandoned that have a remaining future service potential are adjusted and depreciation is recorded over the adjusted useful life. Below provides detail of the restructuring and other (income) charges, net incurred.
2019 activities
During the third quarter of 2019, we initiated a reorganization as part of an effort to improve our Performance Chemical’s workflow and efficiency to best serve our customers’ needs and reduce costs. As a result of this reorganization, we recorded $1.5 million in severance and other employee-related costs in the year ended December 31, 2019.
In April 2019, we sold assets from the Performance Chemicals derivatives operations in Palmeira, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded $0.4 million as a gain on sale of assets, as well as $0.7 million charge related to other miscellaneous exit costs, in the year ended December 31, 2019.
2018 activities
In February 2018, we sold assets from the Performance Chemicals derivatives operations in Duque De Caxias, Rio de Janeiro, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded $0.6 million as a gain on sale of assets offset by other employee related costs of $0.1 million for the year ended December 31, 2018.
2017 activities
In January 2017, we initiated a reorganization to streamline our leadership team, flatten the organization and reduce costs. Because of this reorganization, we recorded $1.3 million in severance and other employee-related costs for the year ended December 31, 2017.
During the year ended December 31, 2017, we also recorded $2.4 million of additional miscellaneous exit costs primarily associated with the exit of our Performance Chemicals' manufacturing operations in Palmeira, Santa Catarina, Brazil, which began in the fourth quarter of 2016.
Detail on the restructuring charges and asset disposal activities is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Restructuring and other (income) charges, net
|
|
|
|
|
|
Gain on sale of assets and businesses
|
$
|
(0.4)
|
|
|
$
|
(0.6)
|
|
|
$
|
—
|
|
Severance and other employee-related costs (1)
|
1.5
|
|
|
0.1
|
|
|
1.3
|
|
|
|
|
|
|
|
Other (income) charges, net (2)
|
0.7
|
|
|
—
|
|
|
2.4
|
|
Total restructuring and other (income) charges, net
|
$
|
1.8
|
|
|
$
|
(0.5)
|
|
|
$
|
3.7
|
|
_______________
(1) Represents severance and employee benefit charges.
(2) Primarily represents costs associated with rental payments, contract terminations, and other miscellaneous exit costs. Other income primarily represents favorable developments on previously recorded exit costs as recoveries associated with restructuring activities.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Roll forward of Restructuring Reserves
The following table shows a roll forward of restructuring reserves that will result in cash spending.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Change in
|
|
Cash
|
|
|
|
Balance at
|
|
Change in
|
|
Cash
|
|
|
|
Balance at
|
12/31/2017 (1)
|
|
Reserve (2)
|
|
Payments
|
|
Other (3)
|
|
12/31/2018 (1)
|
|
Reserve (2)
|
|
Payments
|
|
Other (3)
|
|
12/31/2019 (1)
|
$
|
0.2
|
|
|
0.1
|
|
|
(0.3)
|
|
|
—
|
|
|
$
|
—
|
|
|
2.2
|
|
|
(1.8)
|
|
|
—
|
|
|
$
|
0.4
|
|
_______________
(1) Included in "Accrued Expenses" on the consolidated balance sheet.
(2) Includes severance and other employee-related costs, exited leases, contract terminations and other miscellaneous exit costs. Any asset write-downs including accelerated depreciation and impairment charges are not included in the above table.
(3) Primarily non-cash charges and foreign currency translation adjustments.
Note 17: Acquisitions
Perstorp Holding AB's Caprolactone Business
On February 13, 2019, we completed the acquisition of 100 percent of the equity of Perstorp UK Ltd. with Perstorp Holding AB ("Seller"), including the Seller's entire caprolactone business ("Caprolactone Business"), herein referred to as the "Caprolactone Acquisition." The Caprolactone Acquisition was completed for an aggregate purchase price of €578.9 million ($652.5 million), less assumed debt of €100.4 million ($113.1 million). At closing, the assumed debt was settled with an affiliate of the Seller. The Caprolactone Acquisition is being integrated into our Performance Chemicals segment and is included within our engineered polymers product line. Our revolving credit facility was utilized as the primary source of funds, along with available cash on hand, to fund the Caprolactone Acquisition.
The Caprolactone Acquisition contributed Net sales of $122.1 million for the year ended December 31, 2019, to the consolidated operating results. Although the integration is not complete, a substantial portion of the Caprolactone Business was integrated into our existing Performance Chemicals operations during the fourth quarter of 2019. As a result, we were no longer able to separate operating performance of the Caprolactone Acquisition from our existing Performance Chemicals' operating results.
Purchase Price Allocation
The Caprolactone Acquisition is considered an acquisition of a business under business combinations accounting guidance, and therefore we applied acquisition accounting. Acquisition accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon outside appraisals for certain assets, including specifically-identified intangible assets. See Note 6 for additional explanation of Level 2 and Level 3 inputs. We finalized the purchase price allocation in Q4 2019. The following table represents our final purchase price allocation as well as an explanation of changes from the initial preliminary purchase price allocation.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
In millions
|
Weighted Average Amortization Period
|
Fair Value
|
Cash and cash equivalents
|
|
$
|
0.7
|
|
Accounts receivable, net
|
|
15.7
|
|
Inventories (1)
|
|
21.7
|
|
Prepaid and other current assets
|
|
1.9
|
|
Property, plant and equipment (5)
|
|
86.3
|
|
Operating lease assets, net (5)
|
|
1.8
|
|
Intangible assets (2)
|
|
|
Customer relationships (6)
|
17 years
|
159.0
|
|
Developed technology (6)
|
12 years
|
64.8
|
|
Brands (6)
|
17 years
|
67.0
|
|
Non-compete agreement
|
3 years
|
0.5
|
|
Goodwill (3) (5)
|
|
295.1
|
|
Other assets
|
|
1.3
|
|
Total fair value of assets acquired
|
|
$
|
715.8
|
|
Accounts payable
|
|
13.6
|
|
Accrued expenses (5)
|
|
2.3
|
|
Long-term debt
|
|
113.1
|
|
Operating lease liabilities (5)
|
|
1.7
|
|
Deferred income taxes (5)
|
|
45.7
|
|
Total fair value of liabilities assumed
|
|
$
|
176.4
|
|
Cash and restricted cash acquired(4)
|
|
1.5
|
|
Total cash paid, less cash and restricted cash acquired
|
|
$
|
537.9
|
|
_______________
|
|
|
(1) Fair value of finished goods inventories acquired included a step-up in the value of $8.4 million, all of which was expensed in the three months ended March 31, 2019. The expense is included in "Cost of sales" on the consolidated statement of operations. Inventories are accounted for on a FIFO basis of accounting.
|
|
|
(2) The aggregate amortization expense was $14.4 million for the year ended December 31, 2019. Estimated amortization expense is as follows: 2020 - $19.6 million, 2021 - $19.6 million, 2022 - $19.5 million, 2023 - $19.5 million, and 2024 - $19.5 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency.
|
|
|
(3) Goodwill consists of estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. This acquired goodwill has been included within our Performance Chemicals reporting unit, see Note 9 for further information regarding our allocation of goodwill among our reportable segments. None of the acquired goodwill will be deductible for income tax purposes.
|
|
|
(4) Cash and cash equivalents and restricted cash were $0.7 million and $0.8 million, respectively, at closing. Restricted cash is included in "Prepaid and other current assets" on the consolidated balance sheet.
|
|
|
(5) Since the acquisition, we completed a full physical asset inspection and assessment of the property, plant and equipment acquired. We identified $2.5 million of assets, which were included in the original valuation that were no longer in use after the acquisition. Reducing the asset value also required a reduction of the previously established deferred tax liability by $0.4 million. The net adjustment resulted in an increase to Goodwill of $2.1 million. We also obtained all outstanding lease contracts for the Caprolactone Business, and completed our assessment of the leases under ASC 842. The result was the identification of operating lease assets, current lease liabilities, and noncurrent lease liabilities at the date of acquisition in the amounts of $1.8 million, $0.1 million, and $1.7 million, respectively. Finally, we completed the acquired legal entity fiscal year 2018 tax filings, our assessment of potential uncertain tax positions, as well as our of the realizability of acquired deferred taxes at the acquisition date. The result was a decrease to goodwill of $2.3 million and deferred income taxes of $1.7 million and an increase to taxes receivable of $0.6 million from the preliminary purchase price allocation.
|
|
|
(6) The fair values assigned to the Customer Relationships intangible asset was determined by using a multi-period excess earnings model ("MP-Model"). Significant assumptions utilized in MP-Model are the attrition rate, revenue growth rates, and the discount rate. The fair values assigned to the Developed Technology and Brands were determined using a relief from royalty model ("RfR-Model"). The RfR-Model's significant assumptions include the revenue growth rates, royalty rate, and discount rate considered in the aggregate.
|
|
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Georgia-Pacific's Pine Chemical Business
On March 8, 2018, pursuant to the terms and conditions set forth in the asset purchase agreement with Georgia-Pacific Chemicals LLC, Georgia-Pacific LLC (together with Georgia-Pacific Chemicals LLC, "GP") and Ingevity Arkansas, LLC, a wholly-owned subsidiary of Ingevity, we completed the acquisition (the "Pine Chemical Acquisition") of substantially all the assets primarily used in GP's pine chemical business (the "Pine Chemical Business") for an aggregate purchase price of $315.5 million. The aggregate purchase price was finalized during the third quarter of 2018 with a final payment to GP in the amount of $0.5 million to finalize the net working capital acquired on March 8, 2018. The Pine Chemical Business included the assets and facilities related to tall oil fractionation operations and the production or modification of tall oil fatty acids, tall oil rosins, rosin derivatives and formulated products. In addition, on the Pine Chemical Acquisition, the Company and GP entered into a 20-year, market-based crude tall oil ("CTO") supply contract with certain of Georgia-Pacific’s paper mill operations.
The Pine Chemical Business was integrated into our Performance Chemicals segment and has been included within our results of operations since March 8, 2018. Although the integration was not complete, a substantial portion of the Pine Chemical Business was integrated into our existing Performance Chemicals operations as of September 30, 2018. As a result, we were no longer able to separate net sales and operating performance of the Pine Chemical Acquisition from our existing Performance Chemicals' operating results.
Purchase Price Allocation
The following table summarizes the consideration paid for the Pine Chemical Business and the assets acquired and liabilities assumed:
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
In millions
|
Weighted Average Amortization Period
|
Fair Value
|
Accounts receivable
|
|
$
|
16.2
|
|
Inventories (1)
|
|
9.4
|
|
Property, plant and equipment
|
|
39.3
|
|
Intangible assets (2)
|
|
|
Patents
|
12 years
|
|
1.9
|
|
Non-compete agreement
|
3 years
|
|
2.2
|
|
Customer relationships
|
11 years
|
|
129.0
|
|
Goodwill (3)
|
|
118.7
|
|
Other assets
|
|
0.1
|
|
Total fair value of assets acquired
|
|
$
|
316.8
|
|
Accounts payable
|
|
0.8
|
|
Accrued expenses
|
|
0.5
|
|
Total fair value of liabilities assumed
|
|
$
|
1.3
|
|
Total cash paid
|
|
$
|
315.5
|
|
_______________
|
|
|
(1) Fair value of finished goods inventories acquired included a step-up in the value of $1.4 million, which was expensed in the year ended December 31, 2018. The expense is included in "Cost of sales" on the consolidated statement of operations. Inventories are accounted for on a LIFO basis of accounting.
|
|
|
(2) The aggregate amortization expense was $12.7 million and $10.6 million for the years ended December 31, 2019 and 2018, respectively. Estimated amortization expense is as follows: 2020 - $12.7 million, 2021 - $12.0 million, 2022 - $11.8 million, 2023 - $11.8 million, and 2024 - $11.8 million.
|
|
|
(3) Goodwill largely consists of expected cost synergies and economies of scale resulting from the business combination. We expect the full amount to be deductible for income tax purposes. This acquired goodwill has been included within our Performance Chemicals reporting unit, see Note 9 for further information regarding our allocation of goodwill among our reporting segments.
|
|
|
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information assume that the Caprolactone Acquisition as well as the acquisition of the Pine Chemical Business occurred at the beginning of the periods presented. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been if the acquisitions occurred at the beginning of the periods presented, nor are they indicative of future results of operations. The pro forma results include additional interest expense on the debt issued to finance the acquisition, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and tangible assets, and related tax effects. The pro forma results presented below are adjusted for the removal of Acquisition and other related costs of $35.3 million and $12.2 million for the years ended December 31, 2019 and 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Net sales
|
$
|
1,310.6
|
|
|
$
|
1,320.8
|
|
Income (loss) before income taxes
|
262.8
|
|
|
247.0
|
|
Diluted earnings (loss) per share attributable to Ingevity stockholders
|
|
$
|
5.01
|
|
|
$
|
4.48
|
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Acquisition and other-related costs
Costs incurred to complete and integrate the acquisitions noted above into our Performance Chemicals reporting segment are expensed as incurred on our consolidated statement of operations. The following table summarizes the costs incurred associated with these combined activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Legal and professional service fees
|
$
|
14.2
|
|
|
$
|
6.9
|
|
|
$
|
7.1
|
|
Loss on hedging purchase price
|
12.7
|
|
|
3.9
|
|
|
—
|
|
Acquisition-related costs
|
26.9
|
|
|
10.8
|
|
|
7.1
|
|
Inventory fair value step-up amortization (1)
|
8.4
|
|
|
|
1.4
|
|
|
—
|
|
Acquisition and other-related costs
|
$
|
35.3
|
|
|
$
|
12.2
|
|
|
$
|
7.1
|
|
_______________
|
|
|
|
|
|
(1) Included within "Cost of sales" on the consolidated statement of operations.
|
|
|
|
|
|
Note 18: Income Taxes
Domestic and foreign components of Income (loss) before income taxes are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
203.2
|
|
|
$
|
213.3
|
|
|
$
|
180.1
|
|
Foreign
|
24.7
|
|
|
8.5
|
|
|
(5.3)
|
|
Total
|
$
|
227.9
|
|
|
$
|
221.8
|
|
|
$
|
174.8
|
|
The provision (benefit) for income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
19.9
|
|
|
$
|
32.5
|
|
|
$
|
51.6
|
|
State and local
|
5.0
|
|
|
6.0
|
|
|
3.7
|
|
Foreign
|
4.5
|
|
|
0.6
|
|
|
—
|
|
Total current
|
$
|
29.4
|
|
|
$
|
39.1
|
|
|
$
|
55.3
|
|
Deferred
|
|
|
|
|
|
Federal
|
$
|
13.8
|
|
|
$
|
1.6
|
|
|
$
|
(25.3)
|
|
State and local
|
2.5
|
|
|
(1.1)
|
|
|
(1.3)
|
|
Foreign
|
(1.5)
|
|
|
0.4
|
|
|
0.9
|
|
Total deferred
|
$
|
14.8
|
|
|
$
|
0.9
|
|
|
$
|
(25.7)
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
$
|
44.2
|
|
|
$
|
40.0
|
|
|
$
|
29.6
|
|
We recorded $(0.9) million, $0.1 million, and $(0.4) million of deferred tax provision (benefit) in components of other comprehensive income during the years ended December 31, 2019, 2018 and 2017, respectively.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
The following table summarizes the major differences between taxes computed at the U.S. federal statutory rate and the actual income tax provision attributable to operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions, except percentage data
|
2019
|
|
2018
|
|
2017
|
Federal statutory tax rate
|
$
|
47.9
|
|
|
$
|
46.6
|
|
|
$
|
61.2
|
|
State and local income taxes, net of federal benefit
|
6.3
|
|
|
4.4
|
|
|
2.4
|
|
|
|
|
|
|
|
Changes in valuation allowance
|
(1.9)
|
|
|
(2.2)
|
|
|
1.7
|
|
Domestic manufacturing deduction
|
—
|
|
|
—
|
|
|
(5.1)
|
|
Noncontrolling interest in consolidated partnership
|
—
|
|
|
(2.7)
|
|
|
(6.6)
|
|
Excess stock compensation
|
(5.9)
|
|
|
(0.9)
|
|
|
(0.7)
|
|
|
|
|
|
|
|
Federal and state tax credits
|
(1.9)
|
|
|
(2.1)
|
|
|
(0.7)
|
|
|
|
|
|
|
|
U.S. Tax Reform
|
—
|
|
|
(1.9)
|
|
|
(24.5)
|
|
Foreign derived intangible income
|
(3.8)
|
|
|
(3.2)
|
|
|
—
|
|
Officers compensation
|
3.3
|
|
|
0.6
|
|
|
0.2
|
|
Other
|
0.2
|
|
|
1.4
|
|
|
1.7
|
|
Provision (benefit) for income taxes
|
$
|
44.2
|
|
|
$
|
40.0
|
|
|
$
|
29.6
|
|
Effective tax rate
|
19.4
|
%
|
|
18.0
|
%
|
|
16.9
|
%
|
The increase in our effective tax rate from 2018 to 2019 was due to several factors as described below.
The August 1, 2018 acquisition of the remaining 30 percent noncontrolling interest in Purification Cellutions, LLC (see Note 13 for more information) resulted in an increase to our effective tax rate in 2019 as compared to 2018. We recognized $5.0 million of excess tax benefits from the vesting of share-based awards. We incurred nondeductible acquisition-related charges during the year, resulting in a tax impact of $1.4 million. Also, as a result of finalized regulations stemming from U.S. Tax Reform, we incurred tax expense relating to an adjustment of our net deferred tax liabilities to account for the future non-deductible portion of our officer's compensation of $1.1 million. Additionally, in 2018, we adjusted our net deferred tax liabilities by $1.9 million due to further interpretations of U.S. Tax Reform the impact of which did not repeat in 2019. The remaining driver to the change in our effective tax rate from 2018 to 2019 is due to an increase in our earnings recognized in foreign jurisdictions some of which are taxed at higher rates than our U.S. domestic earnings.
The increase in our effective tax rate from 2017 to 2018 is mainly due to the benefit of reducing our net deferred tax liability to the 21.0 percent rate in 2017 and effects of certain provisions under U.S. Tax Reform. Our U.S. net deferred tax liabilities as of December 31, 2017 were remeasured from 35.0 percent to 21.0 percent, resulting in $24.5 million of provisional deferred income tax benefit and a reduction in our effective tax rate of 14.0 percent in 2017. During the year ended December 31, 2018, we further adjusted our net deferred tax liabilities by $1.9 million due to further interpretations of U.S. Tax Reform. The remaining difference in our effective tax rate for the years ended December 31, 2018 and 2017, respectively, is due to the change in certain favorable tax deductions under U.S. Tax Reform, such as the elimination of the domestic manufacturing deduction and the addition of the foreign-derived intangible income deduction. In addition to the impact of U.S. Tax Reform, the change in the effective tax rate period over period was also driven by the acquisition of our noncontrolling interest.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
The significant components of deferred tax assets and liabilities are as follows
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Accrued restructuring
|
$
|
0.1
|
|
|
$
|
7.7
|
|
Employee benefits
|
12.0
|
|
|
14.9
|
|
Intangibles
|
—
|
|
|
17.1
|
|
|
|
|
|
Net operating losses
|
15.4
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
Leases
|
10.3
|
|
|
—
|
|
Other
|
7.3
|
|
|
8.2
|
|
Total deferred tax assets
|
$
|
45.1
|
|
|
$
|
56.0
|
|
Valuation allowance
|
(13.0)
|
|
|
(15.5)
|
|
Total deferred tax assets, net of valuation allowance
|
$
|
32.1
|
|
|
$
|
40.5
|
|
Deferred tax liabilities:
|
|
|
|
Fixed assets
|
$
|
83.4
|
|
|
$
|
68.3
|
|
Intangibles
|
28.6
|
|
|
—
|
|
Inventory
|
3.4
|
|
|
4.8
|
|
Leases
|
10.4
|
|
|
—
|
|
Other
|
1.6
|
|
|
1.4
|
|
Total deferred tax liabilities
|
$
|
127.4
|
|
|
$
|
74.5
|
|
Net deferred tax asset (liability) (1)
|
$
|
(95.3)
|
|
|
$
|
(34.0)
|
|
_______________
(1) Presentation in the table above is on a gross basis, however due to jurisdictional netting, our net deferred tax asset and liability recorded on our consolidated balance sheets is $5.0 million and $100.3 million million, respectively, as of December 31, 2019 and $2.9 million and $36.9 million, respectively, as of December 31, 2018.
Our net deferred tax liabilities increased $61.3 million at December 31, 2019 as compared to December 31, 2018. The Caprolactone Acquisition, completed on February 13, 2019. resulted in the recognition of $45.7 million of net deferred tax liabilities (see Note 17 for more information). In April 2019, we sold assets from the Performance Chemicals derivatives operations in Palmeira, Brazil (see Note 16 for more information) the resulting loss increased our net operating loss deferred tax asset by $6.0 million in 2019. Additionally, deferred tax liabilities associated with fixed assets increased significantly in 2019 due to an increase in assets placed in service in 2019 versus 2018 resulting in additional bonus depreciation deductions. Also, in connection with the adoption of ASC 842 (see Note 14 for more information), we recorded a deferred tax asset and corresponding deferred tax liability, which effectively offset.
We have deferred tax assets, including net operating loss carryforwards, which are available to offset future taxable income. A valuation allowance has been provided where management has determined that it is more likely than not that the deferred tax assets will not be realized. In 2019, we recognized a tax benefit of $2.4 million by releasing a valuation allowance that was associated with our Chinese operations. The decision to release the valuation allowance due to positive evidence supporting future taxable income available to offset these losses.
At December 31, 2019, foreign net operating loss carryforwards totaled $52.0 million. Of this total, $4.0 million will expire in 3 to 10 years and $48.0 million has no expiration date.
Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalent balance at December 31, 2019 included $54.0 million held by our foreign subsidiaries. At December 31, 2019, 2018, and 2017, no deferred income taxes have been provided for our share of undistributed net earnings of foreign operations due to management’s intent to reinvest such amounts indefinitely. The determination of the amount of taxes that may be due if
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
earnings are remitted is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations include the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes, the opportunity to use foreign tax credits, and the potential impact of U.S. Tax Reform. Positive undistributed earnings considered to be indefinitely reinvested totaled $17.5 million at December 31, 2019.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.6
|
|
Additions for tax positions related to current year
|
—
|
|
|
0.2
|
|
|
—
|
|
Additions for tax positions related to prior years
|
—
|
|
|
—
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction from lapse of statute of limitation
|
(0.2)
|
|
|
(0.2)
|
|
|
(0.4)
|
|
Balance at end of year
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
As of December 31, 2019, 2018, and 2017, $0.1 million, $0.3 million, and $0.5 million, respectively, of unrecognized tax benefit, including penalties and interest, would, if recognized, impact our effective tax rate. We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense.
Note 19: Commitments and Contingencies
Legal Proceedings
We are, from time to time, involved in routine litigation incidental to our operations. None of the litigation in which we are currently involved, individually or in the aggregate, is material to our consolidated financial condition, liquidity or results of operations nor are we aware of any material pending or contemplated proceedings.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Note 20: Segment Information
Ingevity’s operating segments are (i) Performance Materials and (ii) Performance Chemicals, a description of both operating segments is included in Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
Performance Materials
|
$
|
490.6
|
|
|
$
|
400.4
|
|
|
$
|
349.3
|
|
Performance Chemicals
|
802.3
|
|
|
733.2
|
|
|
623.1
|
|
Total net sales (1)
|
$
|
1,292.9
|
|
|
$
|
1,133.6
|
|
|
$
|
972.4
|
|
Segment EBITDA (2)
|
|
|
|
|
|
Performance Materials
|
$
|
213.4
|
|
|
$
|
169.4
|
|
|
$
|
141.8
|
|
Performance Chemicals
|
183.5
|
|
|
151.1
|
|
|
100.9
|
|
Total Segment EBITDA (2)
|
$
|
396.9
|
|
|
$
|
320.5
|
|
|
$
|
242.7
|
|
Interest expense
|
$
|
(54.6)
|
|
|
$
|
(33.2)
|
|
|
$
|
(18.1)
|
|
Interest income
|
7.7
|
|
|
3.4
|
|
|
2.3
|
|
(Provision) benefit for income taxes
|
(44.2)
|
|
|
(40.0)
|
|
|
(29.6)
|
|
Depreciation and amortization - Performance Materials
|
(24.2)
|
|
|
(22.2)
|
|
|
(19.8)
|
|
Depreciation and amortization - Performance Chemicals
|
(60.8)
|
|
|
(34.8)
|
|
|
(20.6)
|
|
Pension and postretirement settlement and curtailment charges (income) (3)
|
—
|
|
|
(0.2)
|
|
|
—
|
|
Separation costs
|
—
|
|
|
—
|
|
|
(0.9)
|
|
Restructuring and other income (charges), net (4)
|
(1.8)
|
|
|
0.5
|
|
|
(3.7)
|
|
Acquisition and other-related costs (5)
|
(35.3)
|
|
|
(12.2)
|
|
|
(7.1)
|
|
Net (income) loss attributable to noncontrolling interests
|
—
|
|
|
(12.7)
|
|
|
(18.7)
|
|
Net income (loss) attributable to Ingevity stockholders
|
$
|
183.7
|
|
|
$
|
169.1
|
|
|
$
|
126.5
|
|
_______________
(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, other (income) expense, net, excluding depreciation and amortization). We have excluded the following items from segment EBITDA: interest expense associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, acquisition and other related costs, pension and postretirement settlement and curtailment (income) charge.
(3) Our pension and postretirement settlement and curtailment (income) charges are related to the acceleration of prior service costs, as a result of a reduction in the number of participants within the Union Hourly defined benefit pension plan during 2018. These are excluded from our segment results because we consider these costs to be outside our operational performance. We continue to include the service cost, amortization of prior service cost, interest costs, expected return on plan assets, and amortized actual gains and losses in our segment EBITDA.
(4) Information about how restructuring and other (income) charges relate to our reporting segments is discussed in Note 16.
(5) These charges are associated with the acquisition and integration of the Pine Chemical Business and the acquisition and integration of the Caprolactone Business. For more detail on these charges see Note 17 within these Consolidated Financial Statements.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Performance Materials
|
$
|
24.2
|
|
|
$
|
22.2
|
|
|
$
|
19.8
|
|
|
$
|
77.6
|
|
|
$
|
65.4
|
|
|
$
|
36.9
|
|
Performance Chemicals
|
60.8
|
|
|
34.8
|
|
|
20.6
|
|
|
37.2
|
|
|
28.5
|
|
|
15.7
|
|
Total
|
$
|
85.0
|
|
|
$
|
57.0
|
|
|
$
|
40.4
|
|
|
$
|
114.8
|
|
|
$
|
93.9
|
|
|
$
|
52.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
North America
|
$
|
499.5
|
|
|
$
|
444.4
|
|
Asia Pacific
|
75.6
|
|
|
78.7
|
|
Europe, Middle East, and Africa
|
89.5
|
|
|
0.6
|
|
South America
|
0.1
|
|
|
0.1
|
|
Property, plant, and equipment, net
|
$
|
664.7
|
|
|
$
|
523.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Performance Materials
|
$
|
642.9
|
|
|
$
|
547.8
|
|
Performance Chemicals
|
1,485.4
|
|
|
755.7
|
|
Total segment assets(1)
|
$
|
2,128.3
|
|
|
$
|
1,303.5
|
|
Corporate and other
|
13.4
|
|
|
11.7
|
|
Total assets
|
$
|
2,141.7
|
|
|
$
|
1,315.2
|
|
_______________
(1) Segment assets exclude assets not specifically managed as part of one specific segment herein referred to as "Corporate and other."
Note 21: Earnings (Loss) per Share
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 shares of common stock and potentially dilutive common stock outstanding for the period. The calculation of diluted net income per share excludes all anti-dilutive common shares.
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In millions (except share and per share data)
|
2019
|
|
2018
|
|
2017
|
Net income (loss) attributable to Ingevity stockholders
|
$
|
183.7
|
|
|
$
|
169.1
|
|
|
$
|
126.5
|
|
|
|
|
|
|
|
Basic and Diluted earnings (loss) per share (1)
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
4.39
|
|
|
$
|
4.02
|
|
|
$
|
3.00
|
|
Diluted earnings (loss) per share
|
$
|
4.35
|
|
|
$
|
3.97
|
|
|
$
|
2.97
|
|
|
|
|
|
|
|
Shares (2)
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding - Basic
|
41,801
|
|
|
42,037
|
|
|
42,130
|
|
Weighted average additional shares assuming conversion of potential common shares
|
399
|
|
|
564
|
|
|
399
|
|
Shares - diluted basis
|
42,200
|
|
|
42,601
|
|
|
42,529
|
|
_______________
(1) Diluted earnings (loss) per share is calculated using net income (loss) available to common stockholders divided by diluted weighted-average shares of common shares outstanding during each period, which includes the dilutive effect of outstanding equity awards.
(2) Shares are presented in thousands.
The following average number of potential common shares were antidilutive and, therefore, were not included in the diluted earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
In thousands
|
2019
|
|
2018
|
|
2017
|
Average number of potential common shares - antidilutive
|
66
|
|
|
84
|
|
|
79
|
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
Note 22: Supplemental Information
The following tables include details of prepaid and other current assets, other assets, accrued expenses and other liabilities as presented on the consolidated balance sheets, as well as other (income) expense, net on the consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid and other current assets:
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Income and value added tax receivables
|
$
|
14.6
|
|
|
$
|
15.0
|
|
Prepaid freight and supply agreements
|
1.3
|
|
|
1.1
|
|
Prepaid insurance
|
2.1
|
|
|
1.7
|
|
Non-trade receivables
|
4.5
|
|
|
3.4
|
|
Advances to suppliers
|
0.5
|
|
|
1.5
|
|
Equity securities (Note 6)
|
0.4
|
|
|
0.4
|
|
Contract asset (Note 5)
|
6.2
|
|
|
5.1
|
|
Restricted cash
|
8.1
|
|
|
0.3
|
|
Other
|
6.5
|
|
|
6.4
|
|
|
$
|
44.2
|
|
|
$
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Deferred financing charges
|
$
|
2.5
|
|
|
$
|
3.1
|
|
Capitalized software, net (Note 3)
|
16.9
|
|
|
14.2
|
|
Land-use rights
|
5.6
|
|
|
5.6
|
|
Planned major maintenance activities (Note 3)
|
3.5
|
|
|
3.2
|
|
Deferred compensation plan assets (Note 6)
|
9.8
|
|
|
4.4
|
|
Net investment hedge (Note 10)
|
3.0
|
|
|
—
|
|
Other
|
8.9
|
|
|
7.8
|
|
|
$
|
50.2
|
|
|
$
|
38.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses:
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
Accrued interest
|
$
|
10.8
|
|
|
$
|
8.5
|
|
Accrued taxes
|
1.5
|
|
|
3.0
|
|
Accrued freight
|
4.2
|
|
|
5.1
|
|
Accrued rebates
|
3.9
|
|
|
6.4
|
|
Restructuring reserves (Note 16)
|
0.4
|
|
|
—
|
|
Separation-related reimbursement awards (Notes 6)
|
0.1
|
|
|
0.1
|
|
Accrued royalties and commissions
|
2.0
|
|
|
1.8
|
|
Currency exchange and natural gas contracts (Note 10)
|
0.5
|
|
|
4.0
|
|
Accrued energy
|
2.0
|
|
|
2.1
|
|
Other
|
7.9
|
|
|
5.7
|
|
|
$
|
33.3
|
|
|
$
|
36.7
|
|
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
December 31,
|
|
|
In millions
|
2019
|
|
2018
|
|
|
|
|
Deferred compensation arrangements (Note 6)
|
$
|
10.0
|
|
|
$
|
4.6
|
|
Pension & OPEB liabilities (Note 15)
|
10.7
|
|
|
7.5
|
|
Unrecognized tax benefits (Note 18)
|
0.1
|
|
|
0.3
|
|
Interest rate swaps (Note 10)
|
3.9
|
|
|
—
|
|
New market tax credit payable (Note 11)
|
1.7
|
|
|
—
|
|
Other
|
3.6
|
|
|
2.7
|
|
|
$
|
30.0
|
|
|
$
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net:
|
Years Ended December 31,
|
|
|
|
|
In millions
|
2019
|
|
2018
|
|
2017
|
Foreign currency translation (gain)/loss
|
$
|
0.2
|
|
|
$
|
2.0
|
|
|
$
|
1.2
|
|
Royalty (income)/expense
|
(1.9)
|
|
|
(0.8)
|
|
|
(0.7)
|
|
Impairment of equity investment
|
—
|
|
|
1.5
|
|
|
—
|
|
Other (gain)/loss
|
(2.6)
|
|
|
(1.7)
|
|
|
—
|
|
|
$
|
(4.3)
|
|
|
$
|
1.0
|
|
|
$
|
0.5
|
|
Note 23: Quarterly Financial Information (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
In millions, except earnings per share amounts
|
1Q
|
|
2Q
|
|
3Q
|
|
4Q
|
|
1Q
|
|
2Q
|
|
3Q
|
|
4Q
|
Net sales
|
$
|
276.8
|
|
|
$
|
352.8
|
|
|
$
|
359.9
|
|
|
$
|
303.4
|
|
|
$
|
235.2
|
|
|
$
|
308.6
|
|
|
$
|
311.2
|
|
|
$
|
278.6
|
|
Gross profit
|
97.1
|
|
|
134.4
|
|
|
139.5
|
|
|
111.0
|
|
|
85.1
|
|
|
115.5
|
|
|
118.6
|
|
|
97.6
|
|
Income (loss) before taxes
|
22.7
|
|
|
72.7
|
|
|
77.4
|
|
|
55.1
|
|
|
45.5
|
|
|
64.6
|
|
|
68.1
|
|
|
43.6
|
|
Net income (loss)
|
22.7
|
|
|
56.8
|
|
|
59.9
|
|
|
44.3
|
|
|
35.8
|
|
|
52.2
|
|
|
51.7
|
|
|
42.1
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.0
|
|
|
5.5
|
|
|
2.2
|
|
|
—
|
|
Net income (loss) attributable to Ingevity stockholders
|
$
|
22.7
|
|
|
$
|
56.8
|
|
|
$
|
59.9
|
|
|
$
|
44.3
|
|
|
$
|
30.8
|
|
|
$
|
46.7
|
|
|
$
|
49.5
|
|
|
$
|
42.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share attributable to Ingevity stockholders
|
$
|
0.54
|
|
|
$
|
1.36
|
|
|
$
|
1.42
|
|
|
$
|
1.06
|
|
|
$
|
0.73
|
|
|
$
|
1.11
|
|
|
$
|
1.18
|
|
|
$
|
1.01
|
|
Diluted earnings (loss) per common share attributable to Ingevity stockholders (1)
|
$
|
0.54
|
|
|
$
|
1.34
|
|
|
$
|
1.41
|
|
|
$
|
1.05
|
|
|
$
|
0.72
|
|
|
$
|
1.10
|
|
|
$
|
1.16
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
41.7
|
|
|
41.8
|
|
|
42.3
|
|
|
41.8
|
|
|
42.1
|
|
|
42.1
|
|
|
42.0
|
|
|
41.9
|
|
Diluted
|
42.2
|
|
|
42.2
|
|
|
42.6
|
|
|
42.2
|
|
|
42.6
|
|
|
42.6
|
|
|
42.7
|
|
|
42.5
|
|
_______________
(1) Basic and diluted earnings (loss) per share are calculated using the weighted average number of common shares outstanding for the period. The sum of quarterly earnings per common share may differ from the full-year amount.