INGEVITY CORPORATION Introduction
Management's discussion and analysis ofIngevity's financial condition and results of operations ("MD&A") is provided as a supplement to the condensed consolidated financial statements and related notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. The following discussion should be read in conjunction withIngevity's consolidated financial statements as of and for the year endedDecember 31, 2020 filed onFebruary 19, 2021 with theSecurities and Exchange Commission ("SEC") as part of the Company's Annual Reporting on Form 10-K ("2020 Annual Report") and the unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements, which are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Investors are cautioned that the forward-looking statements contained in this section and other parts of this Quarterly Report involve both risk and uncertainty. Several important factors could cause actual results to differ materially from those anticipated by these statements. Many of these statements are macroeconomic in nature and are, therefore, beyond the control of management. See "Cautionary Statements About Forward-Looking Statements" below and at the beginning of our 2020 Annual Report. Cautionary Statements About Forward-Looking Statements This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995 that reflect our current expectations, beliefs, plans or forecasts with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by words or phrases such as "may," "will," "could," "should," "would," "anticipate," "estimate," "expect," "outlook," "project," "intend," "plan," "believe," "target," "prospects," "potential" and "forecast," and other words, terms and phrases of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. We caution readers that a forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. Such risks and uncertainties include, among others, those risks described in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 and in the section below entitled "Item 1A. Risk Factors," as well as in our unaudited condensed consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with theSEC . We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. In addition to any such risks, uncertainties and other factors discussed elsewhere herein, risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed or implied by the forward-looking statements include, but are not limited, to the following: •adverse effects from the novel coronavirus ("COVID-19") pandemic; •we may be adversely affected by general 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 require us to comply with a number ofU.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; •adverse conditions in the global automotive market or adoption of alternative and 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; •adverse conditions in cyclical end markets may adversely affect demand for our engineered polymers products; •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; 29 -------------------------------------------------------------------------------- •a prolonged period of low energy prices may materially impact our results of operations; •our engineered polymers product line may be adversely affected by theUnited Kingdom's ("UK") withdrawal from theEuropean Union ; •the acquisition (the "Caprolactone Acquisition") ofPerstorp Holding AB's caprolactone division (the "Caprolactone Business") may expose us to unknown or understated liabilities; •we are dependent upon third parties for the provision of certain critical operating services at several of our facilities; •we may be adversely affected by disruptions in our supply chain; •the occurrence of natural disasters, such as hurricanes, winter or tropical storms, earthquakes, tornadoes, floods, fires or other unanticipated problem such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration; •we are dependent upon attracting and retaining key personnel; •from time to time, we are called upon to protect our intellectual property rights and proprietary information through 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; •complications with the design or implementation of our new enterprise resource planning system; •adverse litigation judgments and exposure to significant litigation-related costs; •changes in government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs and the chemicals industry; and •losses due to lawsuits or claims arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes. OverviewIngevity 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. Recent Developments OnJuly 19, 2018 ,Ingevity filed suit againstBASF Corporation ("BASF") in theUnited States District Court for the District of Delaware (the "Delaware Proceeding") alleging BASF infringedIngevity's patent covering canister systems used in the control of automotive gasoline vapor emissions (U.S. Patent No. RE38,844) (the "'844 Patent"). OnFebruary 14, 2019 , BASF asserted counterclaims againstIngevity in the Delaware Proceeding, alleging two claims for violations ofU.S. antitrust law (one for exclusive dealing and the other for tying) as well as a claim for tortious interference with an alleged prospective business relationship between BASF and a BASF customer (the "BASF Counterclaims"). The BASF Counterclaims relate toIngevity's enforcement of the '844 Patent andIngevity's entry into several supply agreements with customers of its fuel vapor canister honeycombs.The U.S. District Court dismissedIngevity's patent infringement claims onNovember 18, 2020 , and the case proceeded to trial on the BASF Counterclaims inSeptember 2021 . OnSept. 15, 2021 , a jury in the Delaware Proceeding issued a verdict in favor of BASF on the BASF Counterclaims and awarded BASF damages of approximately$28.3 million , which will be trebled underU.S. antitrust law to approximately$85 million . In addition, BASF may seek pre- and post-judgment interest and attorneys' fees and costs in amounts that they will have to support at a future date. We disagree with the outcome, including the court's application of the law, and we intend to seek judgment as a matter of law in the Delaware Proceeding post-trial briefing stage and on appeal, if necessary. In addition, we intend to challenge theU.S. District Court's November 2020 dismissal of our patent infringement claims against BASF.Ingevity believes in the strength of its intellectual property and the merits of its position and intends to pursue all legal relief available to challenge these outcomes in the Delaware Proceeding. Final resolution of these matters could take several months up to two years. As ofSeptember 30, 2021 , we have accrued a total of$85 million , the full amount of the jury's verdict. The amount accrued for this matter is included in Other liabilities on the condensed consolidated balance sheet as ofSeptember 30, 2021 , and the charge is included in Other (income) expense, net on the condensed consolidated statement of operations for the three and nine months endedSeptember 30, 2021 . The amount of any liabilityIngevity may ultimately incur related to the Delaware Proceeding could be more or less than the amount accrued. 30 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended September
30, Nine Months Ended September 30,
In millions 2021 2020 2021 2020
Net sales $ 376.8 $ 331.7 $ 1,055.5 $ 890.5
Cost of sales 235.0 192.1 647.7 552.4
Gross profit 141.8 139.6 407.8 338.1
Selling, general, and administrative expenses 43.5 34.9 131.0 107.9
Research and technical expenses 6.8 5.2 19.3 16.8
Restructuring and other (income) charges, net 4.1 5.5 12.3 13.3
Acquisition-related costs 0.2 - 0.9 1.7
Other (income) expense, net 84.6 (3.0) 81.6 (0.1)
Interest expense, net 11.6 8.9 36.2 29.8
Income (loss) before income taxes (9.0) 88.1 126.5 168.7
Provision (benefit) for income taxes (4.8) 18.2 37.7 33.3
Net income (loss) $ (4.2) $ 69.9 $ 88.8 $ 135.4
Net sales and Gross profit
The table below shows the 2021 Net sales and percentage variances from 2020:
Percentage change vs. prior year
Currency
In millions, except percentages Net sales Total change effect Price/Mix Volume
Three months ended September 30, 2021 $ 376.8 14% -% 8% 6%
Nine months ended September 30, 2021 $ 1,055.5 19% 1% 5% 13%
Three Months Ended September 30, 2021 vs. 2020
Net sales increase of $45.1 million in 2021 was primarily driven by favorable
volume growth in our Performance Chemicals segment, offset by volume decline in
our Performance Materials segment, for a combined impact of $20.3 million and
favorable pricing and product mix in both segments of $25.0 million .
Additionally, unfavorable foreign currency exchange impacted Net sales by $0.2
million , primarily related to euro and Chinese renminbi denominated sales.
Gross profit increase of $2.2 million was driven by favorable pricing and
product mix of $24.3 million , largely offset by higher raw material, logistics
and energy costs of $20.1 million , unfavorable sales volume of $1.3 million , and
unfavorable foreign currency exchange of $0.7 million .
Refer to the Segment Operating Results section included within this MD&A for
more information on the drivers to the changes in net sales and operating
results period over period for both segments.
Nine Months Ended September 30, 2021 vs. 2020
Net sales increase of $165.0 million in 2021 was primarily driven by favorable
volume growth in both of our segments for a combined impact of $119.0 million
and favorable pricing and product mix of $40.3 million . Additionally, favorable
foreign currency exchange impacted Net sales by $5.7 million , primarily related
to euro and Chinese renminbi denominated sales.
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Gross profit increase of $69.7 million was driven by favorable sales volume of
$51.1 million , favorable pricing and product mix of $39.2 million , and favorable
foreign currency exchange of $0.9 million . These positive impacts were partially
offset by higher net manufacturing costs of $21.5 million driven by logistics,
raw material price inflation, energy, and depreciation, partially offset by
higher plant throughput as a result of increased volume demand.
Refer to the Segment Operating Results section included within this MD&A for
more information on the drivers to the changes in net sales and operating
results period over period for both segments.
Selling, general, and administrative expenses
Three Months Ended September 30, 2021 vs. 2020
Selling, general and administrative expenses ("SG&A") increased $8.6 million in
2021, compared to the significantly COVID-19 impacted prior year. The change in
SG&A was driven by higher employee-related costs of $5.8 million , increased
legal expense of $1.8 million , and higher travel and other miscellaneous expense
of $1.0 million . SG&A increased year over year as we resumed more normal
commercial operations, including hiring to fill open positions, increased
travel, and investing in growth and innovation resources as compared to the
COVID-19 impacted prior year period.
Nine Months Ended September 30, 2021 vs. 2020
SG&A increased $23.1 million in 2021 compared to 2020. The change in SG&A was
driven by higher employee-related costs of $21.9 million , of which $4.2 million
related to a one-time benefit recorded in 2020, and increased amortization
expense of $1.6 million . The higher employee-related costs and amortization
expense were partially offset by reduced legal, travel and other miscellaneous
costs of $0.4 million . SG&A expenses as a percentage of Net sales increased
slightly to 12.4 percent for the nine months ended September 30, 2021 from 12.1
percent in 2020, driven by the lower spending in 2020 due to COVID-19 and higher
sales in 2021.
Research and technical expenses
Three Months Ended September 30, 2021 vs. 2020
Research and technical expenses as a percentage of Net sales remained relatively
consistent period over period, increasing to 1.8 percent from 1.6 percent for
the three months ended September 30, 2021 and 2020, respectively.
Nine Months Ended September 30, 2021 vs. 2020
Research and technical expenses as a percentage of Net sales remained relatively
consistent period over period, decreasing to 1.8 percent from 1.9 percent for
the nine months ended September 30, 2021 and 2020, respectively.
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Restructuring and other (income) charges, net
Three and Nine Months Ended September 30, 2021 vs. 2020
Restructuring and other (income) charges, net were $4.1 million and $12.3
million for the three and nine months ended September 30, 2021 , respectively,
and $5.5 million and $13.3 million for the three and nine months ended
September 30, 2020 , respectively. Refer to Note 12 within the condensed
consolidated financial statements for more information.
Acquisition-related costs
Three and Nine Months Ended September 30, 2021 vs. 2020
Acquisition-related costs were $0.2 million and $0.9 million for the three and
nine months ended September 30, 2021 , respectively, and zero and $1.7 million
for the three and nine months ended September 30, 2020 , respectively. For the
three and nine months ended September 30, 2021 , charges of zero and $0.2 million
relate to the acquisition of a strategic investment in the Performance Materials
segment, respectively, and charges of $0.2 million and $0.7 million relate to
the integration of the Perstorp Capa business into our Performance Chemicals
segment, respectively. For the three and nine months ended September 30, 2020 ,
all charges relate to the integration of the Perstorp Capa business into our
Performance Chemicals segment.
Other (income) expense, net
Three and Nine Months Ended September 30, 2021 vs. 2020
Three Months Ended September
30, Nine Months Ended September 30,
In millions 2021 2020 2021 2020
Foreign currency exchange (income) loss
Impairment of equity investment (1) - - - 1.4
Litigation expense (2) 85.0 - 85.0 -
Other (income) expense, net (0.6) - (5.5) 0.9
Total Other (income) expense, net $ 84.6 $ (3.0) $ 81.6 $ (0.1) _______________
(1) Represents an impairment charge recorded during the three months endedMarch 31, 2020 related to an equity investment within our Performance Materials segment. (2) Refer to Note 14 within the condensed consolidated financial statements for more information. 33
-------------------------------------------------------------------------------- Interest expense, net Three and Nine Months EndedSeptember 30, 2021 vs. 2020 Three Months Ended September 30, Nine Months Ended September 30, In millions 2021 2020 2021 2020
Interest expense on finance lease obligations
5.5 4.9
Interest expense on revolving credit and term
loan facilities(1) 2.0 4.5 6.2 18.3
Interest expense on senior notes(1) 9.1 3.5 27.5 10.7
Interest income associated with our
Restricted investment (0.5) (0.5) (1.5) (1.5)
Capitalized interest (0.3) (0.2) (0.5) (0.6)
Fixed-to-fixed cross-currency interest rate
swap(2) (0.1) (0.2) (0.3) (1.5)
Other interest (income) expense, net (0.4) (0.1) (0.7) (0.5)
Total Interest expense, net $ 11.6 $ 8.9 $ 36.2 $ 29.8 _______________
(1) Refer to Note 9 within the condensed consolidated financial statements for more information. (2) Refer to Note 8 within the condensed consolidated financial statements for more information. Provision (benefit) for income taxes Three and Nine Months EndedSeptember 30, 2021 vs. 2020 For the three months endedSeptember 30, 2021 and 2020, our effective tax rate was 53.3 percent and 20.7 percent, respectively. Excluding discrete items, the effective rate was 20.4 percent compared to 20.3 percent in the three months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 and 2020, our effective tax rate was 29.8 percent and 19.7 percent, respectively. Excluding discrete items, the effective rate was 20.6 percent compared to 20.4 percent in the nine months endedSeptember 30, 2021 and 2020, respectively. An explanation of the change in the effective tax rate is presented in Note 13 to the condensed consolidated financial statements. 34 -------------------------------------------------------------------------------- Segment Operating Results In addition to the information discussed above, the following sections discuss the results of operations for both ofIngevity'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 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, net, associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, certain litigation expenses, pension and postretirement settlement and curtailment (income) charges, net. In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Annual Consolidated Financial Statements included in our 2020 Annual Report. Performance Materials Three Months Ended September 30, Nine Months Ended September 30, In millions 2021 2020 2021 2020
Total Performance Materials - Net sales(1)
$ 384.8 $ 349.3 Segment EBITDA$ 56.4 $ 80.4 $ 191.4 $ 164.9 ______________
(1) Beginning in Q1 2021, we updated disaggregated revenue disclosures, combining certain product groups to reflect categories that depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors. As a result, Automotive Technologies and Process Purification product lines have been combined within the Performance Materials segment.
The table below shows the Net sales variances 2021 compared to 2020:
Percentage change vs. prior year
Performance Materials (In millions, except Currency
percentages) Net sales Total change effect Price/Mix Volume
Three months ended September 30, 2021 $ 118.1 (18) % 1 % 2 % (21) %
Nine months ended September 30, 2021 $ 384.8 10 % 2 % 2 % 6 %
Three Months Ended September 30, 2021 vs. 2020
Segment net sales decrease of $25.7 million in 2021 was driven by $29.8 million
in volume decline, primarily in automotive activated carbon products, partially
offset by favorable pricing and product mix of $2.4 million and foreign currency
exchange of $1.7 million .
Sales of our Performance Materials' segment were negatively impacted by lower
automotive production as compared to the prior year period, due to the shortage
of microchips that continue to disrupt the automotive industry worldwide.
Additionally, the prior year quarter benefited from robust automotive production
which rebounded sharply from COVID-19 pandemic lows in the first half of 2020.
Segment EBITDA decreased $24.0 million primarily due to unfavorable volume of
$20.5 million , higher manufacturing costs of $1.8 million , increased SG&A and
Research and technical expenses of $0.9 million , and unfavorable foreign
currency exchange of $2.4 million . These impacts were partially offset by
favorable pricing and product mix of $1.6 million . The automotive activated
carbon sales volume declines in the period was the most significant contributor
to the Segment EBITDA decrease year over year.
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Nine Months Ended September 30, 2021 vs. 2020
Segment net sales increase of $35.5 million in 2021 was driven by $21.1 million
in volume growth, primarily in automotive products, favorable pricing and
product mix of $7.7 million , and favorable foreign currency exchange of $6.7
million . Sales for the nine months ended September 30, 2020 were negatively
impacted by COVID-19's impact on automotive production which occurred in the
first half of fiscal year 2020.
Segment EBITDA increased $26.5 million primarily due to favorable volume of
$14.7 million , favorable pricing and product mix of $7.4 million , and lower
manufacturing costs of $6.4 million due to increased plant throughput in 2021
when compared to COVID-19 impacts to production in 2020. These increases were
partially offset by increased SG&A and Research and technical expenses of $6.9
million . Favorable foreign currency exchange and increased other miscellaneous
income positively impacted Segment EBITDA by $4.9 million .
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--------------------------------------------------------------------------------Performance Chemicals
Three Months Ended September
30, Nine Months Ended September 30,
In millions 2021 2020 2021 2020
Net sales
Pavement Technologies product line 73.2 72.5 162.4 157.1
Industrial Specialties product line(1) 132.6 90.1 364.7 290.9
Engineered Polymers product line 52.9 25.3 143.6 93.2
Total Performance Chemicals - Net sales
$ 670.7 $ 541.2 Segment EBITDA$ 63.1 $ 47.2 $ 151.2 $ 122.1 ______________
(1) Beginning in Q1 2021, we updated disaggregated revenue disclosures, combining certain product groups to reflect categories that depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors. As a result, Oilfield Technologies product line has been combined with the Industrial Specialties product line within the Performance Chemicals segment.
The table below shows the Net sales variances 2021 compared to 2020:
Percentage change vs. prior year
Performance Chemicals (In millions, except Currency
percentages) Net sales Total change effect Price/Mix Volume
Three months ended September 30, 2021 $ 258.7 38 % (1) % 12 % 27 %
Nine months ended September 30, 2021 $ 670.7 24 % - % 6 % 18 %
Three Months Ended September 30, 2021 vs. 2020
Segment net sales increase of $70.8 million was driven mainly by favorable
volume of $50.1 million , consisting of volume increases in industrial
specialties products ($29.6 million ), increases in engineered polymers products
($22.2 million ), and decreases in pavement technologies products ($1.7 million ).
Segment net sales were also impacted by favorable pricing implemented during
2021 in response to raw material inflation as well as product sales mix for a
net impact of $22.6 million . The net price/mix impact was driven by increases in
industrial specialties ($12.4 million ), engineered polymers ($7.9 million ), and
pavement technologies ($2.3 million ). Additionally, unfavorable foreign currency
exchange impacted Net sales by $1.9 million .
Sales of our Pavement Technologies product line were up slightly compared to the
previous year quarter, driven by continued adoption of our environmentally
friendly cold recycling technology. Outside of North America , we realized strong
sales growth in Europe but this was offset by a reduction in sales in China ,
which we attribute to temporarily reduced local government budgets, leading to
curtailed paving activity.
Industrial Specialties sales rose 47%. Sales growth was driven by adhesives,
lubricants and oilfield product sales. Adhesive sales growth was robust in both
packaging adhesives and safety road striping. In the three months ended
September 30, 2021 , we saw the benefit of prior quarter price increases.
Sales of our Engineered Polymers product line rose over 100% due to improved
volume for all primary end uses across the globe. We saw strong technology
adoption and sales growth in protective coatings as well as in resins used in
electric vehicle battery pads. In addition to volume growth, we also realized
strong price improvement in Engineered Polymers which has been important to
offset the inflation in raw material costs.
Segment EBITDA increased by $15.9 million primarily due to an increase in volume
of $19.2 million , and favorable pricing and product mix of $22.7 million . These
favorable results were partially offset by higher manufacturing costs of $15.8
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million due to logistics, raw material price inflation, and energy, higher SG&A
and Research and technical expenses of $8.8 million , and unfavorable foreign
currency exchange of $1.4 million .
Nine Months Ended September 30, 2021 vs. 2020
Segment net sales increase of $129.5 million was driven mainly by favorable
volume of $97.9 million , consisting of volume increases in industrial
specialties products ($58.1 million ), increases in engineered polymers products
($40.8 million ), and decreases in pavement technologies products ($1.0 million ).
Segment net sales were also impacted by favorable pricing implemented during
2021 in response to raw material inflation as well as product sales mix for a
net impact of $32.6 million . The net price/mix impact was driven by increases in
industrial specialties ($13.9 million ), engineered polymers ($13.3 million ), and
pavement technologies ($5.4 million ). Additionally, unfavorable foreign currency
exchange impacted Net sales by $1.0 million .
Segment EBITDA increased by $29.1 million primarily due to an increase in volume
of $36.4 million and favorable pricing and product mix of $31.8 million . These
favorable drivers were partially offset by higher manufacturing costs of $21.4
million due to logistics, raw material price inflation, and energy, higher SG&A
and Research and technical expenses of $15.5 million , and unfavorable foreign
currency exchange of $2.2 million .
Use of Non-GAAP Financial Measure - Adjusted EBITDA
Ingevity has presented the financial measure, Adjusted EBITDA, defined below,
which has not been prepared in accordance with GAAP, and has provided a
reconciliation to net income (loss), 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 Net income (loss), 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 interest expense, net,
provision (benefit) for income taxes, depreciation, amortization, restructuring
and other (income) charges, net, acquisition and other-related costs, certain
litigation expenses, pension and postretirement settlement and curtailment
(income) charges, net.
This non-GAAP measure is not intended to replace the presentation of financial
results in accordance with GAAP and investors should consider the limitations
associated with these non-GAAP measures, including the potential lack of
comparability of these measures from one company to another. A reconciliation of
Adjusted EBITDA to net income (loss) is set forth below.
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--------------------------------------------------------------------------------Reconciliation of Net Income (Loss) to Adjusted EBITDA
Three Months Ended September
30, Nine Months Ended September 30,
In millions 2021 2020 2021 2020
Net income (loss) (GAAP) $ (4.2) $ 69.9 $ 88.8 $ 135.4
Interest expense, net 11.6 8.9 36.2 29.8
Provision (benefit) for income taxes (4.8) 18.2 37.7 33.3
Depreciation and amortization - Performance
Materials 8.9 8.0 26.9 22.5
Depreciation and amortization - Performance
Chemicals 18.7 17.1 54.8 51.0
Restructuring and other (income) charges, net 4.1 5.5 12.3 13.3
Acquisition and other-related costs 0.2 - 0.9 1.7
Litigation expense 85.0 - 85.0 -
Adjusted EBITDA (Non-GAAP) $ 119.5 $ 127.6 $ 342.6 $ 287.0
Adjusted EBITDA
Three and Nine Months Ended September 30, 2021 vs. 2020
The factors that impacted adjusted EBITDA period to period are the same factors
that affected earnings discussed in the Results of Operations and Segment
Operating Results sections included within this MD&A.
Current Company Outlook
In millions 2021 Guidance
Net sales $1,320 - $1,360
Adjusted EBITDA $405 - $420
Operating Cash Flow $300 - $315
Capital Expenditures $100 - 115
Free Cash Flow* ~$200
*Calculated as Operating Cash Flow less Capital Expenditures
Our fiscal year 2021 guidance for sales is $1.32 to $1.36 billion and adjusted
EBITDA is $405 to $420 million . Our guidance for the remainder of the year
reflects our lowered expectations for Performance Materials and our confidence
in the continued strong demand for products in Performance Chemicals. For the
remainder of 2021, we expect an ongoing shortage of microchips, continued
logistics headwinds, and raw materials and energy inflation to be challenges. We
continue to monitor supply and demand in the market and will pass through costs
to ensure we extract the optimal value for our products.
A reconciliation of net income to adjusted EBITDA as projected for 2021 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;
certain litigation expenses; additional pension and postretirement settlement
and curtailment (income) charges; and revisions due to legislative tax rate
changes. Additionally, discrete tax items could drive variability in our
projected effective tax rate. All of these components could significantly impact
such financial measures. Further, in the future, other items with similar
characteristics to those currently included in adjusted EBITDA, that have a
similar impact on comparability of periods, and which are not known at this
time, may exist and impact adjusted EBITDA.
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Liquidity and Capital Resources
The primary source of liquidity for our business is the cash flow provided by
operating activities. We expect our cash flow provided by operations combined
with cash on hand and available capacity under our revolving credit facility to
be sufficient to fund our planned operations and meet our interest and other
contractual obligations for at least the next twelve months. As of September 30,
2021 , our undrawn capacity under our revolving credit facility was $497.7
million . Over the next twelve months, we expect to fund the following: interest
payments, capital expenditures, expenditures related to our business
transformation initiative, debt principal repayments, purchases pursuant to our
stock repurchase program, income tax payments, and to incur additional spending
associated with our Performance Materials' intellectual property litigation. In
addition, we may also evaluate and consider strategic acquisitions, joint
ventures, or other transactions to create stockholder value and enhance
financial performance. In connection with such transactions, or to fund other
anticipated uses of cash, we may modify our existing revolving credit and term
loan facilities, seek additional debt financing, issue equity securities, or
some combination thereof.
Cash and cash equivalents totaled $269.4 million at September 30, 2021 . We
continuously monitor deposit concentrations and the credit quality of the
financial institutions that hold our cash and cash equivalents, as well as the
credit quality of our insurance providers, customers, and key suppliers.
Due to the global nature of our operations, a portion of our cash is held
outside the U.S. The cash and cash equivalents balance at September 30, 2021
included $79.2 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. 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. Management does not currently expect to repatriate cash
earnings from our foreign operations in order to fund U.S. operations.
Other Potential Liquidity Needs
Share Repurchases
On February 28, 2020 , our Board of Directors authorized the repurchase of up
to $500.0 million of our common stock and rescinded the prior two outstanding
authorizations. Our 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 three and nine months ended September 30, 2021 , we
repurchased $32.2 million and $100.3 million in common stock, representing
414,501 and 1,298,167 shares of our common stock at a weighted average cost per
share of $77.77 and $77.25 , respectively. At September 30, 2021 , $311.7 million
remained unused under our Board-authorized repurchase program.
Capital Expenditures
Projected 2021 capital expenditures are $100 - $115 million . We have no material
commitments associated with these projected capital expenditures as of
September 30, 2021 .
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Cash flow comparison of Nine Months Ended
Nine Months Ended September 30,
In millions 2021 2020
Net cash provided by (used in) operating activities $ 217.0 $ 199.1
Net cash provided by (used in) investing activities (83.4) (78.4)
Net cash provided by (used in) financing activities (120.3) 14.8
Cash flows provided by (used in) operating activities
During the first nine months of 2021, cash flow provided by operations increased
primarily due to higher earnings driven by the increase in net sales. The
increase in net sales also drove higher accounts receivable and corresponding
plant production that resulted in higher inventory levels, which negatively
impacted the cash flow provided by operations compared to 2020. Below provides a
description of the changes to working capital during the first nine months of
2021 (i.e. current assets and current liabilities).
Current Assets and Liabilities
In millions September 30, 2021 December 31, 2020
Cash and cash equivalents $ 269.4 $ 257.7
Accounts receivable, net 175.8 148.0
Inventories, net 228.3 189.0
Prepaid and other current assets 46.8 34.0
Total current assets $ 720.3 $ 628.7
Current assets as of September 30, 2021 increased $91.6 million compared to
December 31, 2020 , primarily due to increases in Accounts receivable, net and
Inventories, net. Accounts receivable, net as of September 30, 2021 , increased
$27.8 million due to increased sales during the quarter ended September 30,
2021 compared to the quarter ended December 31, 2020 . Inventories increased by
$39.3 million mainly due to the build of inventory to support forecasted sales.
Additionally, Cash and cash equivalents increased by $11.7 million , and Prepaid
and other current assets increased by $12.8 million , primarily related to
prepaid insurance and services.
September 30,
In millions 2021 December 31, 2020
Accounts payable $ 127.4 $ 104.2
Accrued expenses 46.1 46.6
Accrued payroll and employee benefits 34.6 25.1
Current operating lease liabilities 16.4 16.2
Notes payable and current maturities of long-term debt 19.5 26.0
Income taxes payable 3.6 5.3
Total current liabilities $ 247.6 $ 223.4
Current liabilities as of
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Cash flows provided by (used in) investing activities
Cash used by investing activities in the nine months ended September 30, 2021
was $83.4 million and was primarily driven by capital expenditures. In the nine
months ended September 30, 2021 and 2020, capital spending included the base
maintenance capital supporting ongoing operations and growth and cost
improvement spending primarily related to our business transformation initiative
(refer to Note 12 within the condensed consolidated financial statements for
more information). Also, during nine months ended September 30, 2021 , we
acquired a strategic equity investment in a privately-held company for $16.5
million .
Capital expenditure categories Nine Months Ended September 30 ,
In millions 2021 2020
Maintenance $ 29.9 $
31.8
Safety, health and environment 8.7
9.3
Growth and cost improvement 27.8
9.9
Total capital expenditures $ 66.4 $
51.0
Cash flows provided by (used in) financing activities Cash used in financing activities in the nine months endedSeptember 30, 2021 was$120.3 million and was driven by the repurchase of common stock of$100.3 million , payments on long-term borrowings of$18.8 million , and tax payments related to withholdings on restricted stock unit vestings of$2.4 million . Cash provided by financing activities in the nine months endedSeptember 30, 2020 was$14.8 million and was primarily driven by net borrowings of$38.8 million from our revolving credit facility, offset by payments on long-term borrowings of$14.1 million , tax payments related to withholdings on restricted stock unit vestings of$3.0 million , and the repurchase of common stock of$32.4 million . Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows. Contractual Obligations Information related to our contractual commitments atDecember 31, 2020 can be found in a table included within Part II, Item 7 of our 2020 Annual Report. Except as described above, there have been no material changes to our contractual commitments during the nine months endedSeptember 30, 2021 . New Accounting Guidance Refer to the Note 2 to the condensed consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our condensed consolidated financial statements. 42
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Critical Accounting Policies Our condensed consolidated financial statements are prepared in conformity with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have described our accounting policies in Note 3 to our 2020 Annual Report. We have reviewed these accounting policies, identifying those that we believe to be critical to the preparation and understanding of our financial statements. Critical accounting policies are central to our presentation of results of operations and financial condition and require management to make estimates and judgments on certain matters. We base our estimates and judgments on historical experience, current conditions and other reasonable factors. Our critical accounting policies have not substantially changed from those described in the 2020 Annual Report.
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