Ingevity(NGVT) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Ingevity Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents Ingevity Corporation's unaudited condensed consolidated financial statements for periods ended June 30, 2023, and December 31, 2022, including statements of operations, comprehensive income, balance sheets, cash flows, and detailed notes Condensed Consolidated Statements of Operations This statement details Ingevity's financial performance, including net sales, gross profit, and net income, for the three and six months ended June 30, 2023 and 2022 Three Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Net sales | $481.8 | $419.9 | $61.9 | 14.7% | | Gross profit | $153.0 | $150.6 | $2.4 | 1.6% | | Income (loss) before income taxes | $47.7 | $76.5 | $(28.8) | -37.6% | | Net income (loss) | $35.5 | $59.8 | $(24.3) | -40.6% | | Basic earnings (loss) per share | $0.98 | $1.55 | $(0.57) | -36.8% | | Diluted earnings (loss) per share | $0.97 | $1.54 | $(0.57) | -37.0% | Six Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Net sales | $874.4 | $802.7 | $71.7 | 8.9% | | Gross profit | $283.4 | $288.4 | $(5.0) | -1.7% | | Income (loss) before income taxes | $111.8 | $154.1 | $(42.3) | -27.4% | | Net income (loss) | $86.2 | $120.6 | $(34.4) | -28.5% | | Basic earnings (loss) per share | $2.34 | $3.11 | $(0.77) | -24.8% | | Diluted earnings (loss) per share | $2.33 | $3.09 | $(0.76) | -24.6% | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents Ingevity's net income and other comprehensive income components for the three and six months ended June 30, 2023 and 2022 Three Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | | :-------------------------------- | :----- | :----- | :----- | | Net income (loss) | $35.5 | $59.8 | $(24.3) | | Other comprehensive income (loss), net of tax | $5.3 | $(46.7) | $52.0 | | Comprehensive income (loss) | $40.8 | $13.1 | $27.7 | Six Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | | :-------------------------------- | :----- | :----- | :----- | | Net income (loss) | $86.2 | $120.6 | $(34.4) | | Other comprehensive income (loss), net of tax | $13.3 | $(56.8) | $70.1 | | Comprehensive income (loss) | $99.5 | $63.8 | $35.7 | Condensed Consolidated Balance Sheets This statement provides a snapshot of Ingevity's assets, liabilities, and equity as of June 30, 2023, and December 31, 2022 As of June 30, 2023 vs. December 31, 2022 (in millions) | Metric | June 30, 2023 | Dec 31, 2022 | Change | | :-------------------------------- | :------------ | :----------- | :----- | | Total Assets | $2,828.3 | $2,736.5 | $91.8 | | Current assets | $764.4 | $679.0 | $85.4 | | Total Liabilities | $2,114.2 | $2,038.2 | $76.0 | | Current liabilities | $311.1 | $303.5 | $7.6 | | Total Equity | $714.1 | $698.3 | $15.8 | Condensed Consolidated Statements of Cash Flows This statement summarizes Ingevity's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 Six Months Ended June 30, 2023 vs. 2022 (in millions) | Metric | 2023 | 2022 | Change | | :-------------------------------- | :----- | :----- | :----- | | Net cash provided by (used in) operating activities | $53.6 | $114.8 | $(61.2) | | Net cash provided by (used in) investing activities | $(21.5) | $(58.6) | $37.1 | | Net cash provided by (used in) financing activities | $(40.1) | $(193.3) | $153.2 | | Increase (decrease) in cash, cash equivalents, and restricted cash | $(8.0) | $(137.1) | $129.1 | | Cash, cash equivalents, and restricted cash at end of period | $68.6 | $131.8 | $(63.2) | Notes to the Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1: Background This note outlines Ingevity's business, product offerings, and the realignment of its segment reporting structure in Q1 2023 - Ingevity Corporation provides products and technologies for purification, protection, and enhancement, focusing on sustainability[18] - Effective Q1 2023, the company realigned its segment reporting structure, separating the engineered polymers product line from Performance Chemicals into a new segment: Advanced Polymer Technologies[18] - The company now operates in three reportable segments: Performance Chemicals (specialty chemicals, pavement technologies), Advanced Polymer Technologies (biodegradable plastics, polyurethane materials), and Performance Materials (activated carbon)[19] Note 2: New Accounting Guidance This note discusses the company's assessment of new accounting standards and their expected impact on financial statements - The company assesses the applicability and impact of all FASB Accounting Standards Updates (ASUs), determining that recently issued ASUs not listed in this 10-Q are either not applicable or not expected to materially impact the consolidated financial statements[23] Note 3: Revenues This note disaggregates Ingevity's net sales by reportable segment and geography, and details contract assets and liabilities Net Sales by Reportable Segment (in millions) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Performance Materials | $144.6 | $122.4 | $286.0 | $270.8 | | Performance Chemicals | $284.0 | $243.7 | $469.6 | $416.3 | | Advanced Polymer Technologies | $53.2 | $53.8 | $118.8 | $115.6 | | Total Net Sales | $481.8 | $419.9 | $874.4 | $802.7 | Net Sales by Geography (in millions) | Geography | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $327.2 | $255.2 | $561.9 | $467.8 | | Asia Pacific | $86.2 | $86.1 | $171.9 | $183.7 | | Europe, Middle East, and Africa | $56.3 | $68.7 | $119.0 | $131.4 | | South America | $12.1 | $9.9 | $21.6 | $19.8 | | Total Net Sales | $481.8 | $419.9 | $874.4 | $802.7 | - Contract assets, primarily related to unbilled consideration for products, increased to $7.3 million at June 30, 2023, from $6.6 million at June 30, 2022[28][29] - The company had no contract liabilities for all periods presented[29] Note 4: Fair Value Measurements This note provides information on recurring fair value measurements and changes in strategic equity method investments Recurring Fair Value Measurements (in millions) | Item | June 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :------------ | :----------- | | Deferred compensation plan investments (Level 1) | $1.8 | $1.1 | | Deferred compensation arrangement (Level 1) | $15.4 | $12.5 | | Company-owned life insurance (COLI) (cash surrender value) | $14.3 | $13.3 | - The aggregate carrying value of strategic equity method investments decreased to $16.2 million at June 30, 2023, from $28.2 million at December 31, 2022[36] - This change was primarily due to the sale of a strategic equity method investment for $31.4 million in Q1 2023, resulting in a $19.2 million gain[36] - The carrying value of restricted investment (held-to-maturity) increased to $79.5 million at June 30, 2023, from $78.0 million at December 31, 2022[39] - Its fair value was $76.1 million and $74.7 million, respectively, based on Level 1 inputs[39] Note 5: Inventories, net This note details the composition of Ingevity's inventories and explains changes in inventory values Inventories, net (in millions) | Category | June 30, 2023 | Dec 31, 2022 | | :-------------------------- | :------------ | :----------- | | Raw materials | $146.3 | $106.7 | | Production materials, stores, and supplies | $29.5 | $27.9 | | Finished and in-process goods | $279.8 | $228.2 | | Subtotal | $455.6 | $362.8 | | Less: LIFO reserve | $(68.5) | $(27.8) | | Inventories, net | $387.1 | $335.0 | - Net inventories increased by $52.1 million from December 31, 2022, to June 30, 2023, primarily due to increases in raw materials and finished/in-process goods, and a significant increase in the LIFO reserve[45] Note 6: Property, Plant, and Equipment, net This note presents the breakdown of Ingevity's property, plant, and equipment, net of accumulated depreciation Property, Plant, and Equipment, net (in millions) | Category | June 30, 2023 | Dec 31, 2022 | | :-------------------------- | :------------ | :----------- | | Machinery and equipment | $1,218.3 | $1,162.7 | | Buildings and leasehold improvements | $210.7 | $200.9 | | Land and land improvements | $26.1 | $24.9 | | Construction in progress | $92.9 | $120.9 | | Total cost | $1,548.0 | $1,509.4 | | Less: accumulated depreciation | $(747.4) | $(710.8) | | Property, plant, and equipment, net | $800.6 | $798.6 | - Net property, plant, and equipment remained relatively stable, increasing slightly by $2.0 million from December 31, 2022, to June 30, 2023[46] - Construction in progress decreased by $28.0 million, while machinery and equipment increased by $55.6 million[46] Note 7: Goodwill and Other Intangible Assets, net This note details goodwill reallocation due to segment reorganization and the composition of other intangible assets - In Q1 2023, Ingevity reorganized its segment reporting structure, reallocating goodwill as of January 1, 2023, to align with the new Performance Chemicals and Advanced Polymer Technologies reporting units[48][49] - No impairment was identified[49] Goodwill by Reporting Unit (in millions) | Reporting Unit | Dec 31, 2022 | Segment Change Reallocation | Foreign Currency Translation | June 30, 2023 | | :-------------------------- | :----------- | :-------------------------- | :--------------------------- | :------------ | | Performance Materials | $4.3 | $0.0 | $0.0 | $4.3 | | Performance Chemicals | $514.2 | $(165.0) | $0.1 | $349.3 | | Advanced Polymer Technologies | $0.0 | $165.0 | $8.5 | $173.5 | | Total | $518.5 | $0.0 | $8.6 | $527.1 | Other Intangibles, net (in millions) | Category | June 30, 2023 | Dec 31, 2022 | | :-------------------------- | :------------ | :----------- | | Customer contracts and relationships | $267.2 | $274.7 | | Brands | $65.0 | $65.3 | | Developed Technology | $62.0 | $64.8 | | Total Other Intangibles, net | $394.2 | $404.8 | - Amortization expense for intangible assets was $10.5 million for Q2 2023 (up from $7.8 million in Q2 2022) and $20.9 million for the six months ended June 30, 2023 (up from $15.9 million in the prior year period)[54] Note 8: Financial Instruments and Risk Management This note describes Ingevity's financial instruments, including derivative contracts, and risk management strategies - The company terminated its fixed-to-fixed cross-currency interest rate swaps (net investment hedges) in Q3 2022, resulting in zero net interest income from these instruments in 2023, compared to $2.5 million in Q2 2022 and $2.7 million in H1 2022[56] - As of June 30, 2023, the company had $11.7 million in open foreign currency derivative contracts with a net asset (liability) fair value of $(0.3) million[57] - Natural gas commodity swap and zero cost collar option contracts hedging forecasted transactions until March 2024 had a net asset (liability) fair value of $(1.4) million[58] - Within the next twelve months, Ingevity expects to reclassify $3.4 million of net gains from Accumulated Other Comprehensive Income (AOCI) to income, before taxes[63] Note 9: Debt, including Finance Lease Obligations This note provides a breakdown of Ingevity's debt, including finance lease obligations, and compliance with covenants Debt, including Finance Lease Obligations (in millions) | Category | June 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :------------ | :----------- | | Revolving Credit Facility and other lines of credit | $881.0 | $828.0 | | 3.88% Senior Notes due 2028 | $550.0 | $550.0 | | Finance lease obligations | $101.4 | $101.9 | | Total debt including finance lease obligations | $1,532.4 | $1,479.9 | | Less: debt issuance costs | $6.0 | $6.5 | | Total debt, including finance lease obligations, net of debt issuance costs | $1,526.4 | $1,473.4 | | Less: debt maturing within one year | $0.9 | $0.9 | | Long-term debt including finance lease obligations | $1,525.5 | $1,472.5 | - The company was in compliance with all covenants under its Senior Notes indenture and revolving credit facility at June 30, 2023[72] - The net leverage ratio was 2.6 (vs. max 4.0) and interest coverage ratio was 8.1 (vs. min 3.0)[73] - Available funds under the revolving credit facility decreased to $116.7 million at June 30, 2023, from $169.7 million at December 31, 2022[70] Note 10: Equity This note details changes in Ingevity's equity, including net income, other comprehensive income, and share repurchase activities Equity Roll Forward (in millions) | Metric | Dec 31, 2022 | March 31, 2023 | June 30, 2023 | | :-------------------------------- | :----------- | :------------- | :------------ | | Total Equity | $698.3 | $725.7 | $714.1 | | Net income (loss) | $1,007.7 (Retained Earnings) | $50.7 (Retained Earnings) | $35.5 (Retained Earnings) | | Other comprehensive income (loss) | $(46.8) (AOCI) | $8.0 (AOCI) | $5.3 (AOCI) | | Share repurchase program | $(416.0) (Treasury Stock) | $(33.4) (Treasury Stock) | $(58.7) (Treasury Stock) | - The company repurchased $58.7 million (819,898 shares) of common stock in Q2 2023 and $92.1 million (1,269,373 shares) in H1 2023, at weighted average costs of $70.87 and $71.93 per share, respectively[86] - $353.4 million remained unused under the repurchase program at June 30, 2023[86] Note 11: Restructuring and Other (Income) Charges, net This note outlines charges related to Ingevity's restructuring program, feedstock transition, and plant closure impacts Restructuring and Other (Income) Charges, net (in millions) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Severance and other employee-related costs | $4.4 | $0.0 | $7.4 | $0.0 | | Other restructuring charges | $2.6 | $0.0 | $2.7 | $0.0 | | Alternative Feedstock Transition | $6.6 | $0.0 | $6.6 | $0.0 | | North Charleston Plant Transition | $2.9 | $0.0 | $2.9 | $0.0 | | Business transformation costs | $2.7 | $3.7 | $5.2 | $7.3 | | Total | $19.2 | $3.7 | $24.8 | $7.3 | - The company initiated a restructuring program in Q1 2023 to streamline functions and reduce costs, expected to cost $12-14 million and be completed by year-end 2023[93] - $7.0 million in restructuring charges were recorded in Q2 2023 and $10.1 million in H1 2023[93] - In April 2023, the Crossett plant began a feedstock transition, incurring $6.6 million in costs in H1 2023, with an expected total of $20-25 million in non-capital retooling and stranded costs for 2023[95][96] - WestRock's North Charleston paper mill closure by August 31, 2023, will terminate shared services, leading to an expected $15-20 million in non-capital transition costs for Ingevity in 2023[97][99] - $2.9 million was incurred in H1 2023[99] Note 12: Income Taxes This note presents Ingevity's effective tax rates and discusses factors influencing income tax provisions Effective Tax Rates | Period | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Three Months Ended June 30 | 25.6% | 21.8% | | Six Months Ended June 30 | 22.9% | 21.7% | - The increase in the Estimated Annual Effective Tax Rate (EAETR) for H1 2023 (23.3% vs. 21.2% in H1 2022) is due to a change in the mix of forecasted earnings across tax jurisdictions, an increase in foreign earnings deemed taxable in the U.S., and the UK corporate tax rate increasing from 19% to 25% on April 1, 2023[106] - The company maintains a valuation allowance against deferred tax assets from Brazilian and Chinese net operating losses and U.S. state tax credits, as their realization is not yet objectively asserted as more likely than not[107] - In Q2 2023, the company determined that current year's earnings of its China subsidiaries are no longer permanently reinvested, though no deferred tax liability was recorded as impacts will be captured upon distribution[109] Note 13: Commitments and Contingencies This note details Ingevity's legal commitments and contingencies, including a significant antitrust judgment - On May 18, 2023, a judgment was entered in the Delaware Proceeding, affirming a jury verdict against Ingevity in favor of BASF for approximately $85.0 million (trebled damages) related to antitrust counterclaims[111][112] - Ingevity disagrees with the verdict and intends to pursue all legal relief, including appeal[112] - The full $85.0 million verdict is accrued in Other liabilities on the condensed consolidated balance sheet as of June 30, 2023, and post-judgment interest has begun accruing[113] Note 14: Segment Information This note provides financial information by Ingevity's reportable segments, including net sales and EBITDA - Effective Q1 2023, Ingevity separated its engineered polymers product line into a new reportable segment, Advanced Polymer Technologies, from the Performance Chemicals segment[114] Segment EBITDA (in millions) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Performance Materials | $64.2 | $55.6 | $134.0 | $133.5 | | Performance Chemicals | $44.9 | $61.7 | $65.2 | $92.5 | | Advanced Polymer Technologies | $11.6 | $3.8 | $25.4 | $14.1 | | Total Segment EBITDA | $120.7 | $121.1 | $224.6 | $240.1 | Note 15: Earnings (Loss) per Share This note details the calculation of Ingevity's basic and diluted earnings per share Earnings (Loss) per Share | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) (in millions) | $35.5 | $59.8 | $86.2 | $120.6 | | Basic earnings (loss) per share | $0.98 | $1.55 | $2.34 | $3.11 | | Diluted earnings (loss) per share | $0.97 | $1.54 | $2.33 | $3.09 | | Weighted average common shares outstanding - Basic (in thousands) | 36,373 | 38,515 | 36,768 | 38,762 | | Shares - diluted basis (in thousands) | 36,598 | 38,748 | 37,071 | 39,012 | - The average number of potential common shares that were antidilutive and excluded from diluted EPS calculation increased to 473 thousand for Q2 2023 (from 217 thousand in Q2 2022) and to 346 thousand for H1 2023 (from 201 thousand in H1 2022)[124] Note 16: Acquisitions This note provides details on Ingevity's acquisition of Ozark Materials, including purchase price allocation and related costs - Ingevity completed the acquisition of Ozark Materials (OM and OL) on October 3, 2022, for $325.0 million[125] - The acquisition is being integrated into the Performance Chemicals segment, specifically the pavement technologies product line[125] - The acquisition is not considered significant enough to require proforma results of operations for the three and six months ended June 30, 2023[126] Preliminary Purchase Price Allocation for Ozark Materials (in millions) | Category | Fair Value | | :-------------------------- | :--------- | | Cash and cash equivalents | $8.0 | | Accounts receivable | $28.7 | | Inventories | $48.4 | | Property, plant and equipment | $43.1 | | Intangible assets (Brands, Customer relationships, Developed technology) | $127.1 | | Goodwill | $109.8 | | Total fair value of assets acquired | $367.2 | | Total fair value of liabilities assumed | $16.5 | | Total cash paid, less cash and restricted cash acquired | $344.5 | - Acquisition-related costs, including legal and professional service fees, were $1.8 million for Q2 2023 and $3.7 million for H1 2023[137] - Inventory fair value step-up amortization was $0.8 million for H1 2023[137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Ingevity's financial condition and operational results, covering recent developments, detailed analysis of performance, and liquidity Introduction This introduction outlines the purpose and scope of management's discussion and analysis of financial results - Management's Discussion and Analysis (MD&A) supplements the Condensed Consolidated Financial Statements, providing insights into Ingevity's financial condition and results of operations[140] Cautionary Statements About Forward-Looking Statements This section highlights the inherent risks and uncertainties associated with forward-looking statements in the report - The report contains forward-looking statements subject to risks and uncertainties, including global economic conditions, international sales, automotive market demand, competition, government regulations, raw material supply (especially CTO), supply chain disruptions, natural disasters, key personnel retention, customer dependence, intellectual property disputes, IT security, ERP system implementation, and environmental lawsuits[142][143] Overview This overview describes Ingevity's business as a global manufacturer of specialty chemicals and activated carbon materials - Ingevity is a global manufacturer of specialty chemicals and high-performance activated carbon materials, operating in three segments: Performance Materials, Performance Chemicals, and Advanced Polymer Technologies[144] Recent Developments This section summarizes key recent events impacting Ingevity, including restructuring, feedstock transition, and plant closure - In Q1 2023, Ingevity initiated a restructuring program to enhance cost efficiency, incurring $7.0 million in Q2 2023 and $10.1 million in H1 2023, with an expected total cost of $12-14 million for 2023[145] - The Crossett, Arkansas plant began an alternative fatty acid feedstock transition in April 2023, incurring $6.6 million in costs in H1 2023, with an estimated $20-25 million in non-capital expenses for 2023[146] - WestRock's North Charleston paper mill closure by August 31, 2023, will terminate shared services, leading to an estimated $15-20 million in non-capital transition costs for Ingevity in 2023, with $2.9 million incurred in H1 2023[147] Results of Operations This section analyzes Ingevity's financial performance, including net sales, gross profit, and various expenses, for the periods presented Net Sales Variance (in millions) | Period | Prior Year Net Sales | Volume | Price/Mix | Currency Effect | Current Year Net Sales | | :-------------------------------- | :------------------- | :----- | :-------- | :-------------- | :--------------------- | | Three months ended June 30, 2023 vs. 2022 | $419.9 | $19.3 | $45.4 | $(2.8) | $481.8 | | Six months ended June 30, 2023 vs. 2022 | $802.7 | $(25.0) | $104.1 | $(7.4) | $874.4 | - Q2 2023 net sales increased by $61.9 million (14.7%) YoY, driven by favorable mix ($45.4 million) and volume improvement ($19.3 million), partially offset by unfavorable foreign currency ($2.8 million)[150] - Volume growth was supported by Performance Materials and Performance Chemicals' pavement technologies (including Ozark Materials acquisition), offsetting weaker volumes in industrial specialties and Advanced Polymer Technologies[150] - H1 2023 net sales increased by $71.7 million (8.9%) YoY, primarily due to favorable mix ($104.1 million), partially offset by unfavorable volume decline ($25.0 million) in Performance Chemicals' Industrial Specialties and unfavorable foreign currency ($7.4 million)[151] - Q2 2023 gross profit increased by $2.4 million, driven by favorable pricing/mix ($41.9 million), sales volume ($12.8 million), and foreign currency ($1.1 million), but significantly offset by increased manufacturing costs ($53.4 million) due to raw material inflation (primarily CTO)[153] - H1 2023 gross profit decreased by $5.0 million, primarily due to increased manufacturing costs ($97.4 million) from raw material inflation (CTO) and unfavorable sales volume ($7.8 million), partially offset by pricing improvements and favorable mix ($100.5 million)[154] - Selling, general, and administrative (SG&A) expenses increased by $3.0 million in Q2 2023 and $11.6 million in H1 2023, primarily due to increased amortization expense from the Ozark Materials acquisition and higher employee-related costs[155][156] - Restructuring and other (income) charges, net, significantly increased to $19.2 million in Q2 2023 and $24.8 million in H1 2023, driven by severance, other restructuring charges, alternative fatty acid transition costs, and North Charleston plant transition costs[160] - Acquisition-related costs were $1.8 million in Q2 2023 and $3.7 million in H1 2023, entirely related to the integration of Ozark Materials[161] Interest Expense, Net (in millions) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revolving credit and term loan facilities | $15.0 | $4.2 | $28.2 | $6.1 | | Senior notes | $5.6 | $12.7 | $11.2 | $21.9 | | Litigation related interest expense | $0.4 | $0.0 | $0.4 | $0.0 | | Total Interest expense, net | $21.6 | $15.1 | $41.2 | $25.8 | Segment Operating Results This section details the financial performance of Ingevity's individual operating segments: Performance Materials, Performance Chemicals, and Advanced Polymer Technologies - Segment EBITDA is the primary measure used by the chief operating decision maker to evaluate performance and allocate resources[168] Performance Materials This section analyzes the net sales and EBITDA performance of Ingevity's Performance Materials segment - Q2 2023 net sales increased by $22.2 million (18.1%) YoY, driven by a 15% volume increase (improved automotive carbon in North America and China) and 6% favorable mix, partially offset by 2% unfavorable foreign currency[172] - Q2 2023 Segment EBITDA increased by $8.6 million, driven by higher sales volume and favorable mix, partially offset by increased manufacturing costs and unfavorable foreign currency exchange[173] - H1 2023 net sales increased by $15.2 million (5.6%) YoY, driven by 6% favorable mix and 2% volume increase, partially offset by 2% unfavorable foreign currency[174] - H1 2023 Segment EBITDA increased by $0.5 million, driven by favorable mix and volume, partially offset by increased manufacturing costs and unfavorable foreign currency exchange[175][176] Performance Chemicals This section analyzes the net sales and EBITDA performance of Ingevity's Performance Chemicals segment - Q2 2023 net sales increased by $40.3 million (16.5%) YoY, driven by 13% favorable mix (industrial specialties and pavement technologies) and 4% volume increase (pavement technologies, including Ozark Materials, offsetting industrial specialties decline)[180] - Q2 2023 Segment EBITDA decreased by $16.8 million, primarily due to higher manufacturing costs ($50.8 million), especially from crude tall oil (CTO) inflation, and higher SG&A, partially offset by favorable mix and volume[177][181] - H1 2023 net sales increased by $53.3 million (12.8%) YoY, driven by 17% favorable mix (industrial specialties and pavement technologies), partially offset by 4% volume decrease (industrial specialties, partially offset by pavement technologies)[182] - H1 2023 Segment EBITDA decreased by $27.3 million, primarily due to higher manufacturing costs ($81.7 million) from CTO inflation, higher SG&A, and volume decrease, partially offset by favorable mix[183] Advanced Polymer Technologies This section analyzes the net sales and EBITDA performance of Ingevity's Advanced Polymer Technologies segment - Q2 2023 net sales were flat YoY, with a slight decrease of $0.6 million, driven by a 14% volume decline (market weakness in footwear and industrials) largely offset by 13% favorable mix and volume improvement in automotive and bioplastics[184][187] - Q2 2023 Segment EBITDA increased by $7.8 million, driven by profit recovery initiatives including pricing actions, product mix management, and lower input costs (primarily energy costs), partially offset by volume decline and unfavorable foreign currency[184][188] - H1 2023 net sales increased by $3.2 million (2.8%) YoY, driven by 16% favorable mix, partially offset by 13% volume decline and 1% unfavorable foreign currency[189] - H1 2023 Segment EBITDA increased by $11.3 million, driven by favorable mix and decreased manufacturing costs, partially offset by volume decline, unfavorable foreign currency, and increased SG&A and research and technical expenses[190] Use of Non-GAAP Financial Measure - Adjusted EBITDA This section explains the use of Adjusted EBITDA as a non-GAAP financial measure and provides its reconciliation - Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate business profitability, excluding financing, investment, and non-operating activities[191][192] Reconciliation of Net Income (Loss) to Adjusted EBITDA (in millions) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) (GAAP) | $35.5 | $59.8 | $86.2 | $120.6 | | Interest expense, net | $21.6 | $15.1 | $41.2 | $25.8 | | Provision (benefit) for income taxes | $12.2 | $16.7 | $25.6 | $33.5 | | Depreciation and amortization | $31.4 | $25.8 | $62.5 | $52.9 | | Restructuring and other (income) charges, net | $18.2 | $3.7 | $23.8 | $7.3 | | Gain on sale of strategic investment | $0.0 | $0.0 | $(19.2) | $0.0 | | Acquisition and other-related costs | $1.8 | $0.0 | $4.5 | $0.0 | | Adjusted EBITDA (Non-GAAP) | $120.7 | $121.1 | $224.6 | $240.1 | Current Full Year Company Outlook vs. Prior Year This section provides Ingevity's full-year 2023 outlook for net sales and Adjusted EBITDA, along with key drivers - Full-year 2023 net sales are expected to be between $1.6 billion and $1.7 billion, driven by improved global automobile production (Performance Materials), growth in pavement technologies (Performance Chemicals), and growth in automotive and bioplastics (Advanced Polymer Technologies), partially offset by volume pressure in industrial specialties and footwear[199] - Full-year 2023 Adjusted EBITDA is projected to be between $390 million and $420 million[200] - This includes expected EBITDA growth for Performance Materials (higher margin automotive carbon), a significant increase in CTO costs for Performance Chemicals (partially offset by pavement technologies growth), and improved margins for Advanced Polymer Technologies (volume growth and lower input costs)[200] - A reconciliation of net income to adjusted EBITDA for 2023 is not provided due to the inability to estimate or predict certain components of net income without unreasonable effort[201] Liquidity and Capital Resources This section discusses Ingevity's sources and uses of liquidity, capital expenditures, and cash flow activities - The company's primary liquidity sources are cash flow from operations, cash on hand ($68.0 million at June 30, 2023), and available capacity under its revolving credit facility ($116.7 million at June 30, 2023)[203][204] - These are expected to fund operations and contractual obligations for at least the next twelve months[204] - Planned uses of cash for the next twelve months include interest payments, capital expenditures, business transformation initiatives, debt principal repayments, stock repurchases, income tax payments, and restructuring activities[203] - Foreign subsidiaries held $58.4 million in cash and cash equivalents at June 30, 2023, generally used to finance foreign operations and capital expenditures[205] - Management does not currently expect to repatriate these earnings to fund U.S. operations[205] - Projected 2023 capital expenditures are $100 - $120 million, with no material commitments as of June 30, 2023[209] Cash Flow Summary (in millions) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by (used in) operating activities | $53.6 | $114.8 | | Net cash provided by (used in) investing activities | $(21.5) | $(58.6) | | Net cash provided by (used in) financing activities | $(40.1) | $(193.3) | - Cash flows from operating activities decreased to $53.6 million in H1 2023 (from $114.8 million in H1 2022), primarily due to a $56.3 million net increase in overall working capital, including a $34.9 million increase in trade working capital, and an $11.3 million increase in cash interest paid[211][212] - Cash used in investing activities decreased to $21.5 million in H1 2023 (from $58.6 million in H1 2022), driven by capital expenditures of $47.1 million, partially offset by $31.4 million from the sale of a strategic investment[213] - Cash used in financing activities decreased to $40.1 million in H1 2023 (from $193.3 million in H1 2022), primarily due to lower net payments on revolving credit facilities and no long-term debt payments, partially offset by common stock repurchases[215] New Accounting Guidance This section reiterates the company's assessment of new accounting standards and their expected impact - The company assesses new ASUs and has determined that those not listed in this 10-Q are either not applicable or not expected to have a material impact on the consolidated financial statements[216] Critical Accounting Policies and Estimates This section confirms that Ingevity's critical accounting policies and estimates remain consistent with prior disclosures - Ingevity's critical accounting policies and estimates, which involve management judgments and estimates, have not substantially changed from those described in the 2022 Annual Report[217] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines Ingevity's exposure to various market risks, including foreign currency, interest rate, and commodity price risks, quantifying potential impacts - Foreign currency exchange rate risk: A hypothetical 10% adverse change in the average Chinese renminbi and euro to U.S. dollar exchange rates for H1 2023 would have decreased net sales by approximately $7.9 million (2%) and income before income taxes by $2.1 million (3%)[218] - Interest rate risk: Approximately $881.0 million of borrowings had a variable interest rate component as of June 30, 2023[219] - A hypothetical 100 basis point increase in this rate for H1 2023 would have increased annual interest expense by approximately $8.8 million (10%)[219] - Commodity price risk: Crude tall oil (CTO) represented approximately 23% of consolidated cost of sales for H1 2023[220][221] - Increases in CTO cost could adversely affect gross profit and margins if not passed on to customers[221] Item 4. Controls and Procedures This section details the evaluation of Ingevity's disclosure controls and procedures, confirming their effectiveness and noting ERP system changes - As of June 30, 2023, the CEO and CFO concluded that Ingevity's disclosure controls and procedures are effective at a reasonable assurance level[224] - The company implemented a new global enterprise resource planning (ERP) system in multiple phases, concluding in Q1 2023, which led to updates and changes in processes and related control activities[225] PART II - OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings This section refers to the legal proceedings detailed in Note 13 of the financial statements, specifically regarding the ongoing litigation with BASF Corporation - Information on legal proceedings is detailed in Note 13, which includes the $85.0 million jury verdict against Ingevity in the BASF antitrust counterclaim[229] Item 1A. Risk Factors This section updates the risk factors, highlighting a new material risk related to the permanent closure of WestRock's North Charleston paper mill - No material changes to risk factors were disclosed, except for a new risk related to WestRock's permanent closure of its North Charleston paper mill by August 31, 2023[230][231] - The WestRock closure terminates critical operating services (steam, water, wastewater, brine disposal) provided to Ingevity, potentially requiring significant capital expenditure to replace these services and causing operational disruptions[231] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes the company's common stock repurchase activities during the three months ended June 30, 2023, detailing shares purchased and remaining authorization Issuer Purchases of Equity Securities (Three Months Ended June 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | | :----------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------- | | April 1-30, 2023 | 667,440 | $71.07 | 667,440 | $364,052,723 | | May 1-31, 2023 | 152,458 | $69.97 | 152,458 | $353,384,633 | | June 1-30, 2023 | — | — | — | $353,384,633 | | Total | 819,898 | | 819,898 | | - The Board authorized a $500.0 million common stock repurchase program on July 25, 2022[233] - As of June 30, 2023, $353.4 million remained unused under this program[233] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company Item 5. Other Information This section states that there is no other information to report Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various agreements, certifications, and XBRL-related documents - Exhibits include a Performance Chemicals Transformation Restricted Stock Unit Award, an Amended and Restated 2017 Employee Stock Purchase Plan, CEO/CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and Inline XBRL documents[238] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the report - The report was signed on behalf of Ingevity Corporation by Mary Dean Hall, Executive Vice President and Chief Financial Officer, on August 3, 2023[243]