INGEVITY CORPORATION Introduction
Management's discussion and analysis of
Financial Statements and Supplementary Data . Investors are cautioned that
the forward-looking statements contained in this section and other parts of this
Annual Report on Form 10-K 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" at the beginning of this Annual Report on Form
10-K for further discussion.
26
--------------------------------------------------------------------------------Overview
Ingevity Corporation 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 manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets. Automotive technologies products are sold into gasoline vapor emission control applications within the automotive industry, while process purification products are sold into the food, water, beverage, and chemical purification industries. Our Performance Chemicals segment consists of our pavement technologies, industrial specialties, and engineered polymers product lines. Performance Chemicals manufactures products derived from crude tall oil ("CTO") and lignin extracted from the kraft pulping process as well as caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including warm mix paving, pavement preservation, and pavement reconstruction and recycling (pavement technologies product line), adhesives, agrochemicals, lubricants, printing inks, industrial intermediates and oilfield (industrial specialties product line), coatings, resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line). 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 . On September. 15, 2021, a jury in the Delaware Proceeding issued a verdict in favor of BASF on the BASF Counterclaims and awarded BASF damages of approximately$28.3 million , which will be trebled underU.S. antitrust law to approximately$85 million when the court enters judgment. In addition, BASF may seek pre- and post-judgment interest and attorneys' fees and costs in amounts that they will have to support at a future date. We disagree with the verdict, including the court's application of the law, and we intend to seek judgment as a matter of law in the Delaware Proceeding post-trial briefing stage and on appeal, if necessary. In addition, we intend to challenge 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 up to eighteen months. As a result of the jury's$85.0 million verdict, we have accrued the full amount as ofDecember 31, 2021 . The amount accrued for this matter is included in Other liabilities on the consolidated balance sheet as ofDecember 31, 2021 , and the charge is included in Other (income) expense, net on the consolidated statement of operations for the year endedDecember 31, 2021 . The amount of any liability we may ultimately incur related to the Delaware Proceeding could be more or less than the amount accrued. 27
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Results of Operations
Years Ended December 31,
In millions 2021 2020 2019
Net sales $ 1,391.5 $ 1,216.1 $ 1,292.9
Cost of sales 878.7 750.6 810.9
Gross profit 512.8 465.5 482.0Selling, general, and administrative expenses 179.3 149.4
163.1
Research and technical expenses 26.3 22.6
19.7
Restructuring and other (income) charges, net 16.2 18.5 1.8 Acquisition-related costs 0.6 1.8 26.9 Other (income) expense, net 79.9 (4.1) (4.3) Interest expense 51.7 47.1 54.6 Interest income (4.0) (4.9) (7.7) Income (loss) before income taxes 162.8 235.1
227.9
Provision (benefit) for income taxes 44.7 53.7 44.2 Net income (loss)$ 118.1 $ 181.4 $ 183.7 Net sales
The table below shows 2021 and 2020 Net sales and variances from 2020 and 2019, respectively.
Change vs. prior year
Prior year Current year
In millions Net sales Volume Price/Mix Currency effect Net sales
Year Ended December 31, 2021 vs. 2020 $ 1,216.1 97.0 74.7 3.7 $ 1,391.5
Year Ended December 31, 2020 vs. 2019 $ 1,292.9 (85.2) 7.6 0.8 $ 1,216.1 Year Ended
The sales increase in 2021 was driven by a volume increase of
Year Ended
The sales decrease in 2020 was driven by a volume decline of$85.2 million (seven percent) primarily related to a volume decline in Performance Chemicals of$89.1 million , offset slightly by a volume increase in Performance Materials of$3.9 million , favorable pricing of$7.6 million (one percent) and favorable foreign exchange impacts of$0.8 million (less than one percent).
Gross Profit
Year Ended
Gross profit increase of$47.3 million was driven by favorable pricing improvement of$73.0 million , favorable sales volume of$30.6 million , and favorable foreign currency exchange of$1.3 million , partially offset by increased manufacturing costs of$57.6 million due to raw material and energy cost inflationary pressures. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for both segments. 28 --------------------------------------------------------------------------------
Year Ended
Gross profit decline of$16.5 million was driven by unfavorable sales volume impacting gross profits by$35.8 million , increased manufacturing costs of$2.3 million due to reduced plant throughput, and unfavorable foreign currency exchange of$0.8 million , which were partially offset by favorable pricing improvement of$14.0 million . Additionally, the prior year was negatively impacted by inventory step-up amortization of$8.4 million related to the Caprolactone Acquisition (see Note 16 within the 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
Selling, general and administrative ("SG&A") expenses were $179.3 million (13
percent of Net sales) and $149.4 million (12 percent of Net sales) for the years
ended December 31, 2021 and 2020, respectively. The increase in SG&A expenses is
primarily due to higher employee-related costs of $27.7 million and increased
travel and other miscellaneous costs of $3.2 million . This was partially offset
by a decrease in litigation defense costs of $1.0 million .
Year Ended
SG&A expenses were$149.4 million (12 percent of Net sales) and$163.1 million (13 percent of Net sales) for the years endedDecember 31, 2020 and 2019, respectively. The decrease in SG&A is primarily due to reduced travel and other miscellaneous costs of$12.8 million , due to the COVID-19 pandemic, decreased intellectual property litigation defense costs of$5.0 million , and lower employee-related incentive costs of$3.0 million . The positive impact was partially offset by an increase in amortization costs associated with intangible assets acquired in the Caprolactone Business ("Caprolactone Acquisition") (see Note 16 within the Consolidated Financial Statements included within Part II. Item 8 of the Form 10-K for more information) and an increase in our credit allowance reserve of a combined$7.1 million , which included impacts from the COVID-19 pandemic.
Research and technical expenses
Years Ended
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, totaling 1.9 percent of sales in the year endedDecember 31, 2021 compared to 1.9 percent and 1.5 percent in the years endedDecember 31, 2020 and 2019, respectively.
Restructuring and other (income) charges, net
Restructuring and other (income) charges, net, were$16.2 million ,$18.5 million , and$1.8 million for the years endedDecember 31, 2021 , 2020, and 2019, respectively, with the decrease in 2021 primarily attributable to certain cost reduction initiatives. See Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information.
Acquisition-related costs
Years Ended
Acquisition costs of$0.6 million ,$1.8 million , and$26.9 million for the years endedDecember 31, 2021 , 2020, and 2019, respectively, were comprised of charges incurred in connection with the Caprolactone Acquisition. See Note 16 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. 29
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Other (income) expense, net
Years Ended
Years Ended December 31,
In millions 2021 2020 2019
Foreign currency exchange (income) loss$ 2.5 $ (5.8)
Litigation verdict charge (1) 85.0 -
-
Other (income) expense, net (7.6) 1.7
(4.5)
Total Other (income) expense, net$ 79.9 $ (4.1)
_______________
(1) See Note 18 within the Consolidated Financial Statements for more information.
Interest expense
Years Ended
Years Ended December 31,
In millions 2021 2020 2019
Finance lease obligations $ 7.4 $ 6.8 $ 6.1
Revolving credit facility and term loan 8.0 22.4 36.2
Senior Notes 36.7 18.1 13.5
Other (0.4) (0.2) (1.2)
Total interest expense $ 51.7 $ 47.1 $ 54.6
Interest income
Years Ended
Years Ended December 31,
In millions 2021 2020 2019
Restricted investment (1) $ 2.0 $ 2.0 $ 2.0
Fixed-to-fixed cross-currency interest rate swap (2) 0.5 1.6 2.3
Other 1.5 1.3 3.4
Total interest income $ 4.0 $ 4.9 $ 7.7
_______________
(1) See Note 5 to the Consolidated Financial Statements included in Part II.
Item 8 of this Form 10-K for more information.
(2) See Note 9 to the Consolidated Financial Statements included in Part II.
Item 8 of this Form 10-K for more information.
Provision (benefit) for income taxes
Years Ended
For the years endedDecember 31, 2021 , 2020, and 2019, our effective tax rate was 27.5 percent, 22.8 percent, and 19.4 percent respectively. An explanation of the change in the effective tax rate is presented in Note 17 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K. 30 --------------------------------------------------------------------------------
Segment Operating Results
In addition to the information discussed above, the following sections discuss the results of operations for each 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 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, net, associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charges, pension and postretirement settlement and curtailment (income) charge, net. In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K. Performance Materials Years Ended December 31, In millions 2021 2020 2019
Total Performance Materials - Net sales (1)
$ 490.6 Segment EBITDA 249.4 249.2 213.4 _______________
(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.
Net Sales Comparison of Years Ended
Change vs. prior year
Prior year Current year
In millions Net sales Volume Price/Mix Currency effect Net sales
Year Ended December 31, 2021 vs 2020 $ 510.0 (13.0) 12.6 7.2 $ 516.8
Year Ended December 31, 2020 vs 2019 $ 490.6 3.9 13.6 1.9 $ 510.0 Year Ended
Segment net sales. The increase in 2021 was driven by favorable pricing of$12.6 million (three percent) and favorable foreign currency exchange impacts of$7.2 million (less than one percent). The increase was offset by$13.0 million (three percent) in volume decline in automotive evaporative emission canister products due to semiconductor shortages in automotive markets. Segment EBITDA. Segment EBITDA increased$0.2 million due to favorable pricing, contributing$11.3 million , and lower manufacturing costs of$2.4 million . The increase was partially offset by unfavorable volume of$11.2 million , primarily in the automotive evaporative emission canister products, and increased SG&A expenses and research and technical costs of$7.4 million , due to increased travel, outside services, and consulting expenses. Favorable foreign currency exchange impacts also contributed$5.1 million to the increase.
Year Ended
Segment net sales. The increase in 2020 was driven primarily by favorable pricing and product mix of$13.6 million (three percent). Additionally, we benefited from$3.9 million (one percent) in volume improvements in automotive evaporative emission canister products due to stricter environmental regulation in the Chinese, North American, and European automotive markets, and favorable foreign currency exchange impacts of$1.9 million (less than one percent). Segment EBITDA. Segment EBITDA increased$35.8 million due to favorable pricing and product mix, which contributed$18.7 million , favorable volume, primarily in the automotive evaporative emission canister products, which contributed$2.8 million , lower manufacturing costs of$5.0 million , and decreased SG&A expenses and research and technical 31
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costs of
Performance Chemicals
Years Ended December 31,
In millions 2021 2020 2019
Net sales
Pavement Technologies product line
391.6 496.9
Engineered Polymers product line 185.8 127.7
122.1
Total Performance Chemicals - Net sales$ 874.7 $ 706.1 $ 802.3 Segment EBITDA 172.8 148.7 183.5 ____________ (1) In 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, the Oilfield Technologies product line has been combined with the Industrial Specialties product line within the Performance Chemicals segment.
Net Sales Comparison of Years Ended
Change vs. prior year
Prior year Current year
In millions Net sales Volume Price/Mix Currency effect Net sales
Year Ended December 31, 2021 vs 2020 $ 706.1 110.0 62.1 (3.5) $ 874.7
Year Ended December 31, 2020 vs 2019 $ 802.3 (89.1) (6.0) (1.1) $ 706.1 Year Ended
Segment net sales. The sales increase was driven by favorable volume of$110.0 million (15 percent), which consisted of volume growth in all business lines: industrial specialties ($64.9 million ), engineered polymers ($43.5 million ) and pavement technologies product lines ($1.6 million ). Also driving the net sales increase was favorable pricing and product mix of$62.1 million (nine percent) in industrial specialties ($35.3 million ), engineered polymers ($20.7 million ), and pavement technologies product lines ($6.1 million ). In addition, unfavorable foreign currency exchange impacted Net sales by$3.5 million (less than one percent). Segment EBITDA. Segment EBITDA increased$24.1 million , mainly due to favorable pricing and product mix of$61.7 million , and an increase in volume of$41.8 million . These increases were partially offset by higher manufacturing costs of$51.6 million due to inflationary raw material and energy inflationary costs, and increased SG&A expenses of$23.6 million due to increased spending on growth initiatives, compensation, and modest travel. Unfavorable foreign currency exchange impacts and other miscellaneous charges of$4.2 million also contributed to increased costs.
Year Ended
Segment net sales. The sales decrease was driven by unfavorable volume of$89.1 million (11 percent), which consisted of volume declines in industrial specialties ($95.9 million ), partially offset by volume growth in engineered polymers ($5.9 million ) and pavement technologies product lines ($0.9 million ). Also driving the net sales decline was unfavorable pricing and product mix of$6.0 million (one percent) in industrial specialties ($8.9 million ), which was partially offset by favorable pricing and product mix in pavement technologies product lines ($2.9 million ). Unfavorable foreign currency exchange of$1.1 million (less than one percent) contributed to the overall decline. Segment EBITDA. Segment EBITDA decreased$34.8 million mainly due to decline in volume of$38.6 million , unfavorable pricing and product mix of$4.7 million , and unfavorable foreign currency exchange impacts and other miscellaneous charges of$2.0 million . Favorable SG&A expenses due to reduced travel and lower employee-related costs of$10.3 million and favorable manufacturing productivity of$0.2 million offset part of the overall decline. 32 --------------------------------------------------------------------------------
Use of Non-GAAP Financial Measures
Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance withU.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 nor as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA is utilized by management as a measure of profitability. We believe this non-GAAP financial measure provides management as well as investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measure, when viewed together with our financial results computed in accordance with GAAP, provides a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. We believe Adjusted EBITDA is a useful measure because it excludes the effects of financing and investment activities as well as non-operating activities. Adjusted EBITDA is defined as net income (loss) plus provision (benefit) for income taxes, interest expense, net, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charges, and pension and postretirement settlement and curtailment (income) charges, net. This non-GAAP measure is not intended to replace the presentation of financial results in accordance with GAAP and investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another. A reconciliation of Adjusted EBITDA to net income is set forth within this section.
Reconciliation of Net Income to Adjusted EBITDA
Years Ended December 31,
In millions 2021 2020 2019
Net income (loss) (GAAP) $ 118.1 $ 181.4 $ 183.7
Interest expense 51.7 47.1 54.6
Interest income (4.0) (4.9) (7.7)
Provision (benefit) for income taxes 44.7 53.7 44.2
Depreciation and amortization - Performance Materials 36.8 31.2 24.2
Depreciation and amortization - Performance Chemicals 73.1 69.0 60.8
Pension and postretirement settlement and curtailment charges (income), net (1)
- 0.1 -
Restructuring and other (income) charges, net 16.2 18.5 1.8
Acquisition and other-related costs (2) 0.6 1.8 35.3
Litigation verdict charge (3) 85.0 - -
Adjusted EBITDA (Non-GAAP) $ 422.2 $ 397.9 $ 396.9
_______________
(1) For the year ended December 31, 2020 , all charges relate to the Performance Materials segment. Our pension
and postretirement settlement and curtailment charges (income) 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 2020. 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.
(2) For the year ended December 31, 2021 , $(0.2) million relate to the acquisition of a strategic investment in
the Performance Materials segment and $(0.4) million relate to the integration of the Caprolactone Acquisition
into our Performance Chemicals segment. For additional information on the charges associated with the
Caprolactone Acquisition see Note 16 within these Consolidated Financial Statements.
(3) For the year ended December 31, 2021 , litigation verdict charge relates to the Performance Materials
segment. Refer to Note 18 for additional information.
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--------------------------------------------------------------------------------Adjusted EBITDA
Year Ended
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 2022 Guidance
In millions 2022 Guidance
Net sales $1,525 - $1,600
Adjusted EBITDA $430 - $460
Operating Cash Flow $305 - $325
Capital Expenditures $155 - 175
Free Cash Flow* ~$150
*Calculated as Operating Cash Flow less Capital Expenditures
For revenue, we expect to capture volume growth in our Performance Chemical
segment specifically within our Engineered Polymers' thermoplastics products. We
also anticipate continued growth in our adhesives, lubricants, and oilfield
products within Industrial Specialties. Pavement technologies will benefit from
the U.S. infrastructure bill and continued Evotherm® warm mix technology
adoption. This expected demand will result in favorable pricing conditions.
Performance Materials will see moderate growth as process purification volumes
and price increases will partially offset muted improvement in automotive due to
the continued constrained semiconductor shortage and the absence of any novel
gasoline vapor emission control regulations.
Adjusted EBITDA is expected to grow versus 2021 mainly driven by our Performance
Chemicals segment, where continued profitable growth in all businesses is
expected to be partially offset by inflationary costs for freight and primary
raw materials. The Performance Materials segment anticipates results similar to
2021 as U.S. , Chinese, Canadian, and European vehicle production continues to be
negatively impacted by global chip supply and general cost inflation. We expect
to deliver fiscal year 2022 Adjusted EBITDA of $430 million to $460 million .
These estimates assume that 2022 will continue to be impacted by global
logistical headwinds, significant cost inflation, and by the microchip shortage,
which is disrupting the global automotive supply chain.
A reconciliation of net income to adjusted EBITDA as projected for 2022 is not
provided. Ingevity does not forecast net income as it cannot, without
unreasonable effort, estimate or predict with certainty various components of
net income. These components, net of tax, include further restructuring and
other income (charges), net; additional acquisition and other-related costs;
litigation verdict charges; additional pension and postretirement settlement and
curtailment (income) charges; and revisions due to legislative tax rate changes.
Additionally, discrete tax items could drive variability in our projected
effective tax rate. All of these components could significantly impact such
financial measures. Further, in the future, other items with similar
characteristics to those currently included in adjusted EBITDA, that have a
similar impact on comparability of periods, and which are not known at this
time, may exist and impact adjusted EBITDA.
34
--------------------------------------------------------------------------------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 ofDecember 31, 2021 , our undrawn capacity under our revolving credit facility was$497.5 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 facility, redeem all or part of our outstanding senior notes, seek additional debt financing, issue equity securities, or some combination thereof.
Cash and cash equivalents totaled
Due to the global nature of our operations, a portion of our cash is held outside theU.S. The cash and cash equivalents balance atDecember 31, 2021 included$89.6 million held by our foreign subsidiaries. Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and their capital expenditures. We believe that our foreign holdings of cash will not have a material adverse impact on ourU.S. liquidity. If these earnings were distributed, such amounts would be subject toU.S. federal income tax at the statutory rate less the available foreign tax credits, if any, and would potentially be subject to withholding taxes in the various jurisdictions. The potential tax implications of the repatriation of unremitted earnings are driven by facts at the time of distribution, therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such cash and earnings were repatriated to theU.S. Management does not currently expect to repatriate cash earnings from our foreign operations in order to fundU.S. operations.
Debt and Finance Lease Obligations
Refer to Note 10 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for a summary of our outstanding debt obligations and revolving credit facility.
Other Potential Liquidity Needs
Share Repurchases
OnFebruary 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. 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, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. In the year endedDecember 31, 2021 , we repurchased$109.4 million in common shares, representing 1,421,379 shares of our common stock at a weighted average cost per share of$76.98 . AtDecember 31, 2021 ,$302.6 million remained unused under our Board-authorized repurchase program.
Capital Expenditures
Projected 2022 capital expenditures are expected to be
35
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Cash flow comparison of Years Ended
Years Ended December 31,
In millions 2021 2020 2019
Net cash provided by (used in) operating activities $ 293.0 $ 352.4 $ 275.7
Net cash provided by (used in) investing activities (140.6) (110.6) (658.3)
Net cash provided by (used in) financing activities (133.1) (50.2) 369.2
Cash flows provided by (used in) operating activities
During the year ended
Current Assets and Liabilities
December 31,
In millions 2021 2020
Cash and cash equivalents $ 275.4 $ 257.7
Accounts receivable, net 161.7 148.0
Inventories, net 241.2 189.0Prepaid and other current assets 46.6 34.0 Total current assets
$ 724.9 $ 628.7 Current assets as ofDecember 31, 2021 , increased$96.2 million compared toDecember 31, 2020 , primarily due to an increase in Inventories, net of$52.2 million to support forecasted sales. Additionally, cash and cash equivalents increased by$17.7 million , Accounts receivable, net increased by$13.7 million , and Prepaid and other current assets increased by$12.6 million in 2021. December 31, In millions 2021 2020 Accounts payable$ 125.8 $ 104.2 Accrued expenses 51.7 46.6 Accrued payroll and employee benefits 48.2
25.1
Current operating lease liabilities 17.4
16.2
Notes payable and current maturities of long-term debt 19.6 26.0 Income taxes payable 6.2 5.3 Total current liabilities$ 268.9 $ 223.4 Current liabilities as ofDecember 31, 2021 increased by$45.5 million compared toDecember 31, 2020 , driven primarily by the increase in sales and business activity with Accrued payroll and employee benefits up$23.1 million , Accounts payable of$21.6 million , Accrued expenses of$5.1 million , Current operating lease liabilities of$1.2 million and Income taxes payable of$0.9 million . These increases were partially offset by a decrease in Notes payable and current portion of long-term debt of$6.4 million .
Cash flows provided by (used in) investing activities
For the year endedDecember 31, 2021 , investing activities was driven by capital spending and strategic investments. 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 15 within the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). Also, during twelve months endedDecember 31, 2021 , we entered into multiple strategic investments (refer to Note 5 within the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). 36 -------------------------------------------------------------------------------- For the year endedDecember 31, 2020 , investing activities were driven by capital spending. Our Performance Materials' facilities, includingCovington, Virginia ,Wickliffe, Kentucky , andWaynesboro, Georgia , incurred expenditures for growth and expansion projects, as well as base maintenance and safety spending. Our Performance Chemicals' facility inWarrington, United Kingdom , completed a large, multi-year growth and cost improvement project, and there was additional spending at all of our Performance Chemicals' facilities for base maintenance and safety spending. Additionally, we had capital expenditures related to our business transformation initiative (see Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information) and our new corporate headquarters. For the year endedDecember 31, 2019 , the cash used in investing activities was primarily driven by the$537.9 million Caprolactone Acquisition (see Note 16 to the Consolidated Financial Statements included within Part II. Item 8 of this form 10-K for more information). The remaining cash used by investing activities was primarily driven by capital expenditures, driven primarily by maintenance and growth spending. OurCovington, Virginia facility incurred expenditures for its expansion project, along with base maintenance and other various equipment purchases. Also, we incurred cost improvement spending at ourDeRidder, Louisiana location related to installation of new CTO tanks as well as base maintenance spending, and ourWaynesboro, Georgia location expended funds primarily for growth and cost improvement. We also invested capital spending in our newest location inWarrington, United Kingdom to enable further growth and cost improvement as well as base maintenance. Capital expenditure categories Years Ended December 31, In millions 2021 2020 2019 Maintenance$ 47.9 $ 49.1 $ 44.6 Safety, health and environment 14.4 14.9 11.2 Growth and cost improvement 41.5 18.1 59.0
Total capital expenditures
Cash flows provided by (used in) financing activities
Cash used in financing activities for the year ended
Cash used in financing activities for the year endedDecember 31, 2020 was$50.2 million , and was driven by proceeds from long-term borrowings from the senior notes that were issued in the fourth quarter of$550.0 million , net of debt issuance costs of$8.8 million . We used these proceeds to repay the outstanding balance on the revolving credit facility of$131.2 million and the 2019 term loan of$375.0 million . We also paid$2.2 million in debt issuance costs for the amendment to our revolving credit facility (refer to Note 10 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). Additionally, we repaid$14.1 million of other long-term borrowings, repurchased$88.0 million of our common stock, and made payments of$3.2 million related to withholding tax on vested equity awards Cash provided by financing activities for the year endedDecember 31, 2019 was$369.2 million , and was driven by proceeds from long-term borrowings from a new term loan in the first quarter of 2019 of$375.0 million and$131.3 million in net borrowings related to our revolving credit facility (refer to Note 10 to the 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 withholding tax on vested equity awards. 37 --------------------------------------------------------------------------------
New Accounting Guidance
Refer to the Note 3 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 and Estimates
Our principal accounting policies are described in Note 2 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 Our revenue is derived from contracts with customers, and substantially all our revenue is recognized when products are either shipped from our manufacturing and warehousing facilities or delivered to the customer. Revenue, net of returns and customer incentives, are based on the sale of manufactured products. Revenues are recognized when performance obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our products. 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. Revenues are presented as Net sales on the consolidated statements of operations to the Consolidated Financial Statements. 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 are 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 statements of operations. Payment terms with our customers are typically in the range of zero to sixty days. 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.
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 conduct a required annual review of goodwill for potential impairment atOctober 1 , or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value. Our reporting units are our operating segments, i.e., Performance Chemicals and Performance 38 -------------------------------------------------------------------------------- Materials. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using both the income approach and market approach, goodwill is considered impaired. The income approach determines fair value based on discounted cash flow model derived from a reporting unit's long-term forecasted cash flows. The market approach determines fair value based on the application of earnings multiples of comparable companies to projected earnings of the reporting unit. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit but is limited to the total amount of goodwill allocated to the reporting unit. In performing the fair value analysis, management makes various judgments, estimates and assumptions, the most significant of which is the assumption related to revenue growth rates. The factors we considered in developing our estimates and projections for cash flows 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 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 estimates and assumptions 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 ofOctober 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 determining 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 value 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 rate, 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 theU.S. and numerous foreign jurisdictions, includingChina and theUnited 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 39
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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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency
We have foreign-based operations, primarily inEurope ,South America andAsia , which accounted for approximately 26 percent of our net sales in 2021. We have designated the local currency as the functional currency of our significant operations outside of theU.S. The primary currencies for which we have exchange rate exposure are theU.S. dollar versus the euro, the Japanese yen, the pound sterling, and the Chinese renminbi. In addition, certain of our domestic operations have sales to foreign customers. In the conduct of our foreign operations, we also make inter-company sales. All of this exposes us to the effect of changes in foreign currency exchange rates. Our earnings are therefore subject to change due to fluctuations in foreign currency exchange rates when the earnings in foreign currencies are translated intoU.S. dollars. In some cases, to minimize the effects of such fluctuations, we use foreign exchange forward contracts to hedge firm and highly anticipated foreign currency cash flows. Our largest exposures are to the Chinese renminbi and the euro. A hypothetical 10 percent adverse change, excluding the impact of any hedging instruments, in the average Chinese renminbi and euro toU.S. dollar exchange rates during the year endedDecember 31, 2021 would have decreased our net sales and income before income taxes for the year endedDecember 31, 2021 by approximately$21.9 million or two percent and$8.9 million or five percent, respectively. Comparatively, a hypothetical 10 percent adverse change in the average Chinese renminbi and euro toU.S. dollar exchange rates during the year endedDecember 31, 2020 would have decreased our net sales and income before income taxes for the year endedDecember 31, 2020 by approximately$19 million or two percent and$6 million or two percent, respectively.
Concentration of credit risk
The financial instruments that potentially subjectIngevity 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$6.6 million and$5.7 million as ofDecember 31, 2021 and 2020, respectively. Sales to this customer, which are included in the Performance Materials segment, were approximately five percent, five percent, and four percent of total net sales for each of the years endedDecember 31, 2021 , 2020, and 2019, respectively. Sales to the automotive industry represented approximately 35 percent ofIngevity's consolidated Net sales and are our largest industry concentration risk. No customer individually accounted for greater than 10 percent ofIngevity's consolidated net sales.
Commodity price risk
A portion of our manufacturing costs include purchased raw materials, which are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with the changes in these commodity prices. The cost of energy is a manufacturing cost that is exposed to commodity pricing. Our energy costs are diversified among electricity, steam and natural gas, with natural gas comprising our largest energy input.
Crude tall oil price risk
Our results of operations are directly affected by the cost of our raw
materials, particularly crude tall oil ("CTO"), which represents approximately
10 percent of consolidated cost of sales and 22 percent of our raw materials
purchases for the year ended December 31, 2021 . Pricing for CTO is driven by the
limited supply elasticity of the product and competing demands for its use, both
of which drive pressure on price. Our gross profit and margins could be
adversely affected by increases in the cost of CTO if we are unable to pass the
increases on to our customers. CTO is a thinly traded commodity with pricing
commonly established for periods ranging from one quarter to one year. We try to
protect against pricing fluctuations through various business strategies. Based
on average pricing during the year ended December 31, 2021 , a hypothetical
unhedged, unfavorable 10 percent increase in the market price for CTO would have
increased our cost of sales for the year ended December 31, 2021 by
approximately $9 million or one percent, which we may or may not have been able
to pass on to
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our customers. Comparatively, based on average pricing during the year ended
December 31, 2020 , a hypothetical unhedged, unfavorable 10 percent increase in
the market price for CTO would have increased our cost of sales for the year
ended December 31, 2020 by approximately $8 million or one percent.
Natural gas price risk
Natural gas, both direct and indirect, is our largest form of utility costs constituting approximately five percent of our cost of goods sold for the year endedDecember 31, 2021 . Increases in natural gas costs, unless passed on to our customers, would adversely affect our results of operations. If natural gas prices increase significantly, our business or results of operations may be adversely affected. We enter into certain derivative financial instruments in order to mitigate expected fluctuations in market prices and the volatility to earnings and cash flow resulting from changes to pricing of natural gas purchases. Refer to the Note 9 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information on our natural gas price risk hedging program. For the year endedDecember 31, 2021 , a hypothetical, unhedged 10 percent increase in natural gas pricing would have resulted in an increase to cost of sales of approximately$4.3 million or 50 basis points. As ofDecember 31, 2021 , we had 1.4 million and 1.0 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. Comparatively, for the year endedDecember 31, 2020 , a hypothetical, unhedged 10 percent increase in natural gas pricing would have resulted in an increase to cost of sales of approximately$2.4 million or 30 basis points. As ofDecember 31, 2021 , open commodity contracts hedge forecasted transactions untilMarch 2023 . The fair value of the outstanding designated natural gas commodity hedge contracts as ofDecember 31, 2021 and 2020 was a net liability of$0.6 million and$0.1 million , respectively.
Interest Rate Risk
As ofDecember 31, 2021 , approximately$328 million of our borrowings include a variable interest rate component. As a result, we are subject to interest rate risk with respect to such floating-rate debt. For the year endedDecember 31, 2021 , a hypothetical 100 basis point increase in the variable interest rate component of our borrowings would increase our annual interest expense by approximately$3 million or seven percent. Comparatively, for the year endedDecember 31, 2020 , a hypothetical 100 basis point increase in the variable interest rate component of our borrowings would have increased our annual interest expense by approximately$4 million or eight percent. As ofDecember 31, 2021 , we have entered into an interest rate swap with a notional amount of$166.2 million to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments, effectively converting$166.2 million of our floating rate debt to a fixed rate. In accordance with the terms of this instrument, we receive floating rate interest payments based upon three-monthU.S. dollar LIBOR and in return are obligated to pay interest at a fixed rate of 3.79 percent untilJuly 2023 . The fair value of the interest rate swap was an asset (liability) of$(4.0) million and$(8.9) million atDecember 31, 2021 and 2020, respectively. 41
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