Ingevity(NGVT) - 2018 Q4 - Annual Report

Part I Business Ingevity Corporation manufactures specialty chemicals and activated carbon through its Performance Materials and Performance Chemicals segments, emphasizing innovation and strategic acquisitions - Ingevity operates in two segments: Performance Materials (automotive and purification carbons) and Performance Chemicals (pavement, oilfield, industrial, and engineered polymers)[15][16][17] 2018 Revenue by Segment | Segment | Revenue (in millions) | | :--- | :--- | | Performance Materials | $400.4 | | Performance Chemicals | $733.2 | - The company has long-term crude tall oil (CTO) supply agreements with WestRock and Georgia-Pacific, expected to source approximately 60-70% of CTO requirements through 2025[38][39][91] - Ingevity is expanding manufacturing capacity, including new activated carbon pellet capacity in China (online late 2018) and expansions in Covington, VA, and Warrington, U.K[52] - The company acquired Perstorp Holding AB's caprolactone business on February 13, 2019, for a preliminary purchase price of €578.9 million ($652.5 million), integrating it into the Performance Chemicals segment as Engineered Polymers[115][116] - As of year-end 2018, the company employed approximately 1,750 people, with about 20% represented by U.S. labor unions[136] Risk Factors The company faces significant risks including dependency on key markets and raw materials, integration challenges from acquisitions, intellectual property issues, and anti-takeover provisions - The Performance Chemicals segment is highly dependent on Crude Tall Oil (CTO), a raw material with finite global supply, where supplier failures or diversion to biofuels could materially impact production[166][171][177] - Successful integration of the newly acquired Caprolactone business is critical, as failure to realize anticipated growth or unknown liabilities could materially affect financial results[174][175][176] - Demand for automotive carbon products is tied to global auto production, sensitive to macroeconomic factors, shifts to electric vehicles, and competition from alternative emission control technologies[156][185][186] - The company faces competition from infringing intellectual property activity related to its "canister bleed emissions" patent and is involved in legal actions to protect its rights[188] - Certain facilities depend on third parties for critical operating services, and disruptions from these providers could negatively impact operations[191][192] - Anti-takeover provisions in the company's certificate of incorporation, bylaws, and Delaware law (Section 203) could prevent or delay an acquisition, potentially depressing the stock price[217][222][223] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[227] Properties Ingevity's headquarters are in North Charleston, SC, with manufacturing facilities across the U.S., UK, and China, deemed adequate for current demand Principal Properties | Location | Functional Use | Ownership | | :--- | :--- | :--- | | North Charleston, SC | Corporate HQ; Application Labs; Performance Chemicals Mfg. | Own / Lease | | Covington, VA | Performance Materials Mfg. | Lease | | Crossett, AR | Performance Chemicals Mfg. | Lease | | DeRidder, LA | Performance Chemicals Mfg. | Own | | Waynesboro, GA | Performance Materials Mfg. | Own (some assets under capital lease) | | Changshu, China | Performance Materials Mfg. | Lease | | Warrington, UK | Performance Chemicals Mfg., Application Lab | Lease | Legal Proceedings The company is involved in routine litigation, none of which is material to its financial condition or results of operations - The company is not involved in any legal proceedings considered material to its financial condition or results of operations[231] Mine Safety Disclosures This item is not applicable to the company - Not applicable[232] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ingevity's common stock trades on the NYSE under "NGVT", with an active $450 million share repurchase program and strong stock performance since its 2016 spin-off - The Board of Directors has authorized a total of $450 million for share repurchases ($100 million in Feb 2017 and an additional $350 million in Nov 2018)[241] Share Repurchases - Q4 2018 | Period | Total Shares Purchased | Average Price Paid Per Share | Total Dollar Amount Purchased | | :--- | :--- | :--- | :--- | | Oct 2018 | 34,500 | $91.65 | $3,162,065 | | Nov 2018 | 31,500 | $96.50 | $3,039,631 | | Dec 2018 | 284,000 | $81.46 | $23,133,354 | | Total Q4 2018 | 350,000 | $83.81 | $29,335,050 | - As of December 31, 2018, $396.0 million remained available for future repurchases under the authorized program[241][363] Selected Financial Data This section provides a five-year summary of Ingevity's key financial data, highlighting 2018 net sales of $1,133.6 million and net income of $169.1 million Selected Financial Data (in millions, except per share data) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Statement of Operations Data: | | | | | Net sales | $1,133.6 | $972.4 | $908.3 | | Gross profit | $416.8 | $329.0 | $274.4 | | Net income attributable to Ingevity | $169.1 | $126.5 | $35.2 | | Diluted earnings per share | $3.97 | $2.97 | $0.83 | | Balance Sheet Data (at period end): | | | | | Total assets | $1,315.2 | $929.6 | $832.8 | | Long-term debt | $741.2 | $444.0 | $481.3 | | Total equity | $338.7 | $277.9 | $134.6 | | Other Data: | | | | | Capital expenditures | $93.9 | $52.6 | $56.7 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses a 17% increase in 2018 net sales to $1.13 billion and Adjusted EBITDA growth to $320.5 million, detailing strategic acquisitions and a positive 2019 outlook Results of Operations (in millions) | | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,133.6 | $972.4 | 17% | | Gross profit | $416.8 | $329.0 | 27% | | Net income attributable to Ingevity | $169.1 | $126.5 | 34% | | Adjusted EBITDA (Non-GAAP) | $320.5 | $242.7 | 32% | - The 17% increase in 2018 net sales was primarily driven by a 15% increase in volume, with contributions from both Performance Materials and Performance Chemicals segments[278] - The company completed the acquisition of Georgia-Pacific's Pine Chemical business on March 8, 2018, for an aggregate purchase price of $315.5 million[274] - On February 13, 2019, Ingevity completed the acquisition of Perstorp's Caprolactone business for a preliminary price of €578.9 million ($652.5 million), funded primarily by its revolving credit facility[258][720] - For fiscal year 2019, the company projects Net Sales of $1.30 billion to $1.36 billion and Adjusted EBITDA of $390 million to $410 million[346][347] - Net cash provided by operating activities increased to $252.0 million in 2018 from $174.3 million in 2017, primarily due to higher earnings[365][366] Contractual Obligations as of December 31, 2018 (in millions) | | Total | 2019 | 2020-2021 | 2022-2023 | 2024 and beyond | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt maturities | $678.9 | $13.3 | $46.9 | $318.7 | $300.0 | | Capital lease obligations | $132.0 | $6.1 | $12.2 | $12.2 | $101.5 | | Operating lease obligations | $74.0 | $21.9 | $30.5 | $15.7 | $5.9 | | Pending Acquisition | $652.5 | $652.5 | - | - | - | | Total | $1,860.4 | $887.3 | $142.4 | $389.6 | $441.1 | Quantitative and Qualitative Disclosures about Market Risk Ingevity is exposed to market risks including foreign currency fluctuations, commodity price volatility (especially CTO), and interest rate changes, which it partially hedges with derivatives - A hypothetical 10% change in the euro to U.S. dollar exchange rate would have impacted 2018 net sales by approximately $8 million and income before taxes by $5 million[395] - Crude Tall Oil (CTO) represents a significant commodity price risk, accounting for 34% of raw material purchases in 2018, where a hypothetical 10% unfavorable price change would have increased cost of sales by approximately $8 million[398] - The company has approximately $375 million in variable-rate debt, where a 100 basis point (1%) increase in the variable interest rate would increase annual interest expense by about $4 million[400] - The company's largest customer accounted for 5% of total net sales in 2018, down from 8% in 2017 and 9% in 2016[396] Financial Statements and Supplementary Data This section presents Ingevity's audited consolidated financial statements for fiscal year 2018, including the independent auditor's report and detailed notes on accounting policies and financial matters - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting, excluding the recently acquired Georgia-Pacific pine chemicals business from the internal controls audit[411][412][417] Consolidated Statement of Operations (in millions) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net sales | $1,133.6 | $972.4 | $908.3 | | Gross profit | $416.8 | $329.0 | $274.4 | | Income before income taxes | $221.8 | $174.8 | $87.0 | | Net income attributable to Ingevity | $169.1 | $126.5 | $35.2 | | Diluted EPS | $3.97 | $2.97 | $0.83 | Consolidated Balance Sheet (in millions) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Current assets | $422.7 | $368.7 | | Total Assets | $1,315.2 | $929.6 | | Liabilities & Equity | | | | Current liabilities | $183.3 | $153.2 | | Long-term debt | $741.2 | $444.0 | | Total Liabilities | $976.5 | $651.7 | | Total Equity | $338.7 | $277.9 | Consolidated Statement of Cash Flows (in millions) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $252.0 | $174.3 | $127.9 | | Net cash from investing activities | $(414.4) | $(58.6) | $(126.4) | | Net cash from financing activities | $153.7 | $(57.8) | $(3.4) | - Subsequent to year-end, on February 13, 2019, the company completed the acquisition of Perstorp's Caprolactone business for a preliminary purchase price of €578.9 million ($652.5 million)[720] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting principles, practices, or financial disclosure - None[730] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of December 31, 2018, with internal controls updated for the Pine Chemical Business acquisition - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018[732] - The company's internal control over financial reporting was updated to include controls related to the Pine Chemical Business acquired on March 8, 2018[733] Other Information The company reports no other information for this item - None[736] Part III Directors, Executive Officers and Corporate Governance This section incorporates by reference information from the 2019 Proxy Statement regarding directors, executive officers, and corporate governance - Information regarding directors, executive officers, corporate governance, and Section 16(a) compliance is incorporated by reference from the company's 2019 Proxy Statement[739] Executive Compensation This section incorporates by reference information from the 2019 Proxy Statement concerning executive and director compensation - Information regarding executive and director compensation is incorporated by reference from the company's 2019 Proxy Statement[740] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information from the 2019 Proxy Statement regarding security ownership and details securities authorized under equity compensation plans Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Number of Securities to be issued upon exercise (A) | Weighted-average exercise price of outstanding options (B) | Number of Securities remaining available for future issuance (C) | | :--- | :--- | :--- | :--- | | Equity Compensation Plans approved by stockholders | 757,681 | $46.98 | 3,258,944 | - The number of securities to be issued includes 403,193 stock options, 115,476 RSUs/DSUs, and 239,012 PSUs (at maximum performance)[744] - The number of securities available for future issuance includes 206,255 shares under the Employee Stock Purchase Plan[745] Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information from the 2019 Proxy Statement regarding director independence and related party transactions - Information regarding director independence and related party transactions is incorporated by reference from the company's 2019 Proxy Statement[746] Principal Accounting Fees and Services This section incorporates by reference information from the 2019 Proxy Statement concerning principal accounting fees and services - Information regarding principal accounting fees and services is incorporated by reference from the company's 2019 Proxy Statement[747] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, Schedule II, and all exhibits filed as part of the Form 10-K report, including key acquisition and debt agreements - The report includes Financial Statement Schedule II – Valuation and qualifying accounts and reserves[750] - Key exhibits filed include the Separation and Distribution Agreement with WestRock, the Asset Purchase Agreement with Georgia-Pacific, the Sale and Purchase Agreement with Perstorp AB, and the Indenture for the 2018 Senior Notes[751] Form 10-K Summary The company reports no summary for this item - None[758]