Ingevity(US:NGVT)2023-11-02 20:26PART I - FINANCIAL INFORMATION Financial Statements This section presents Ingevity Corporation's unaudited Condensed Consolidated Financial Statements for the period ended September 30, 2023, including key notes on segment reporting changes and the planned DeRidder plant closure Condensed Consolidated Statements of Operations (Unaudited) | In millions, except per share data | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $446.0 | $482.0 | $1,320.4 | $1,284.7 | | Gross profit | $129.0 | $176.3 | $412.4 | $464.7 | | Income (loss) before income taxes | $32.1 | $95.8 | $143.9 | $249.9 | | Net income (loss) | $25.2 | $75.4 | $111.4 | $196.0 | | Diluted earnings (loss) per share | $0.69 | $1.98 | $3.03 | $5.06 | Condensed Consolidated Balance Sheets (Unaudited) | In millions | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current assets | $734.5 | $679.0 | | Total Assets | $2,766.8 | $2,736.5 | | Total Current liabilities | $305.1 | $303.5 | | Total Liabilities | $2,048.1 | $2,038.2 | | Total Equity | $718.7 | $698.3 | Condensed Consolidated Statements of Cash Flows (Unaudited) | In millions | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $160.5 | $214.9 | | Net cash provided by (used in) investing activities | $(56.3) | $(144.7) | | Net cash provided by (used in) financing activities | $(93.4) | $(264.9) | - In Q1 2023, the company realigned its segment reporting, creating the Advanced Polymer Technologies segment from Performance Chemicals and splitting the Performance Chemicals goodwill reporting unit19 - On November 1, 2023, the company announced the permanent closure of its DeRidder, Louisiana manufacturing plant by H1 2024, anticipating approximately $280.0 million in aggregate charges, with about $180.0 million being non-cash138139 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and nine-month 2023 financial results, highlighting a 7.5% Q3 net sales decrease, gross profit impact from CTO inflation, Performance Chemicals repositioning, and full-year 2023 guidance of $1.6-$1.7 billion sales and $375-$390 million Adjusted EBITDA Overview and Recent Developments The company announced strategic actions to reposition its Performance Chemicals segment, including the DeRidder plant closure with $280 million in expected charges, and a goodwill impairment test that concluded no impairment with a 19% headroom - On November 1, 2023, Ingevity announced strategic actions to reposition its Performance Chemicals segment, including the permanent closure of its DeRidder, Louisiana plant by the end of H1 2024147 - The company expects to incur approximately $280.0 million in aggregate charges related to these actions, with about $180.0 million being non-cash asset-related charges148 - A goodwill impairment test for the Performance Chemicals reporting unit concluded no impairment, with the fair value exceeding the carrying value by 19%152 Results of Operations Q3 2023 net sales decreased by $36.0 million (7.5%) due to volume declines, while nine-month net sales increased by $35.7 million (2.8%) due to price/mix improvements, with gross profit negatively impacted by CTO inflation in both periods Net Sales Variance Analysis (vs. Prior Year) | In millions | Prior Year Net Sales | Volume | Price/Mix | Currency Effect | Current Year Net Sales | | :--- | :--- | :--- | :--- | :--- | :--- | | Q3 2023 vs 2022 | $482.0 | $(72.1) | $38.3 | $(2.2) | $446.0 | | 9M 2023 vs 2022 | $1,284.7 | $(97.1) | $142.4 | $(9.6) | $1,320.4 | - Q3 gross profit decreased by $47.3 million, primarily due to $42.6 million in increased manufacturing costs from CTO inflation and a $36.7 million negative impact from lower sales volume160 - Restructuring and other charges increased to $24.6 million in Q3 2023 from $3.3 million in Q3 2022, mainly due to costs from the alternative fatty acid transition at the Crossett plant and the North Charleston plant transition167 Segment Operating Results In Q3 2023, Performance Materials saw sales and EBITDA growth, while Performance Chemicals experienced significant declines due to lower volumes and high CTO costs, and Advanced Polymer Technologies' sales fell but EBITDA remained flat Performance Materials Segment Results (Q3 2023 vs Q3 2022) | In millions | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $147.2 | $144.9 | +1.6% | | Segment EBITDA | $74.5 | $61.2 | +21.7% | Performance Chemicals Segment Results (Q3 2023 vs Q3 2022) | In millions | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $256.0 | $267.6 | -4.3% | | Segment EBITDA | $24.7 | $65.7 | -62.4% | Advanced Polymer Technologies Segment Results (Q3 2023 vs Q3 2022) | In millions | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $42.8 | $69.5 | -38.4% | | Segment EBITDA | $11.2 | $11.3 | -0.9% | Current Full Year Company Outlook For full-year 2023, Ingevity projects net sales between $1.6 billion and $1.7 billion, with Adjusted EBITDA between $375 million and $390 million, reflecting segment-specific trends and CTO cost pressures - Full-year 2023 net sales are expected to be between $1.6 billion and $1.7 billion205 - Full-year 2023 Adjusted EBITDA is expected to be between $375 million and $390 million206 Liquidity and Capital Resources The company maintains sufficient liquidity through operating cash flow, a new $100.0 million accounts receivable securitization program, and available credit, with projected 2023 capital expenditures of $95-$105 million and $353.4 million remaining for share repurchases - On October 2, 2023, the company entered into a $100.0 million accounts receivable securitization program to provide additional liquidity211 - During the first nine months of 2023, the company repurchased $92.1 million of its common stock, with $353.4 million remaining available under the share repurchase program as of September 30, 2023213 - Projected capital expenditures for the full year 2023 are between $95 million and $105 million215 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, interest rate changes on variable-rate debt, and commodity price volatility, with Crude Tall Oil (CTO) representing approximately 25% of consolidated cost of sales in the first nine months of 2023 - A hypothetical 10% adverse change in euro and Chinese renminbi exchange rates would have decreased net sales by approximately $13.2 million for the nine months ended September 30, 2023225 - A hypothetical 100 basis point increase in variable interest rates would have increased annual interest expense by approximately $8.3 million based on debt levels for the nine months ended September 30, 2023226 - Crude Tall Oil (CTO) represented about 25% of consolidated cost of sales for the first nine months of 2023, and a hypothetical 10% increase in its market price would have increased cost of sales by approximately $22 million228 Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2023, following the completion of a new global ERP system implementation in early 2023 that updated processes and internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023231 - The company completed the final phase of its new global ERP system implementation in early 2023, leading to changes in processes and internal controls over financial reporting232 PART II - OTHER INFORMATION Legal Proceedings This section details ongoing litigation with BASF, where a jury awarded approximately $85.0 million (trebled under antitrust law), which Ingevity has accrued but intends to appeal - In the legal proceeding with BASF, a jury awarded damages of approximately $28.3 million, trebled to approximately $85.0 million under U.S. antitrust law116 - The company has accrued the full $85.0 million verdict in 'Other liabilities' but disagrees with the outcome and is actively seeking to have it set aside or overturned on appeal117118 Risk Factors This section introduces new material risk factors, primarily concerning the planned closure of the DeRidder, Louisiana plant and the cessation of critical services from WestRock's North Charleston paper mill, both posing potential operational and financial impacts - A new risk factor is the closure of the DeRidder, Louisiana plant, with potential negative impacts including costs exceeding estimates, adverse legal actions, and financial losses from excess CTO inventory237 - A new risk factor stems from the closure of WestRock's North Charleston paper mill, which provided critical services to Ingevity's plant, potentially causing operational interruptions and significant capital expenditure to replace them238 Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity, noting no repurchases during Q3 2023, with approximately $353.4 million remaining available under the board-authorized program as of September 30, 2023 Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan | | :--- | :--- | :--- | :--- | | July 2023 | — | $ — | $353,384,633 | | August 2023 | — | $ — | $353,384,633 | | September 2023 | — | $ — | $353,384,633 | | Total | — | $ — | $353,384,633 | Defaults Upon Senior Securities This section is not applicable Mine Safety Disclosures This section is not applicable Other Information This section contains no additional information Exhibits This section lists exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer, and the Inline XBRL instance document