ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management’s discussion and analysis of Ingevity’s financial condition and results of operations (“MD&A”) is provided as a supplement to the Condensed Consolidated Financial Statements and related notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.
Cautionary Statements About Forward-Looking Statements
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995 that reflect our current expectations, beliefs, plans or forecasts with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by words or phrases such as “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “prospects,” “potential” and “forecast,” and other words, terms and phrases of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. We caution readers that a forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. Such risks and uncertainties include, among others, those discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Annual Report") as well as in our unaudited Condensed Consolidated Financial Statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission (the "SEC"). We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. In addition to any such risks, uncertainties and other factors discussed elsewhere herein, risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed or implied by the forward-looking statements include, but are not limited to the following:
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we are exposed to risks that the expected benefits from the acquisitions of Georgia Pacific's pine chemicals business ("Pine Chemical Acquisition") and of Perstorp Holding AB's caprolactone business ("Caprolactone Acquisition") may not be realized or will not be realized within the expected time period, the risk that the acquired businesses will not be integrated successfully, the risk of significant transaction costs and unknown or understated liabilities;
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we may be adversely affected by general economic and financial conditions beyond our control;
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we are exposed to risks related to our international sales and operations;
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our reported results could be adversely affected by currency exchange rates and currency devaluation could impair our competitiveness;
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our operations outside the U.S. require us to comply with a number of U.S. and foreign regulations, violations of which could have a material adverse effect on our financial condition and results of operations;
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our engineered polymers product line may be adversely affected by Brexit;
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we are dependent upon attracting and retaining key personnel;
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adverse conditions in the global automotive market or adoption of alternative or new technologies may adversely affect demand for our automotive carbon products;
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we face competition from producers of alternative products and new technologies, and new or emerging competitors;
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we face competition from infringing intellectual property activity;
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if increasingly more stringent air quality standards worldwide are not adopted, our growth could be impacted;
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we may be adversely affected by a decrease in government infrastructure spending;
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our printing inks business serves customers in a market that is facing declining volumes and downward pricing;
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our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply;
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lack of access to sufficient CTO would impact our ability to produce CTO-based products;
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a prolonged period of low energy prices may materially impact our results of operations;
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we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;
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the occurrence of a natural disaster, such as a hurricane, winter or tropical storm, earthquake, tornado, flood, fire or other matters such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;
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from time to time we are called upon to protect our intellectual property rights and proprietary information though litigation and other means;
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if we are unable to protect our intellectual property and other proprietary information we may lose significant competitive advantage;
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information technology security breaches and other disruptions;
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government policies and regulations, including, but not limited to, those affecting the environment, climate change, tariffs, tax policies and the chemicals industry; and
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losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes.
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Overview
Ingevity 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 consists of our automotive technologies and process purifications product lines. Performance Materials 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, oilfield technologies, industrial specialties, and engineered polymers product lines. Performance Chemicals manufactures products derived from CTO and lignin extracted from the kraft paper making 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 pavement preservation, pavement adhesion promotion, and warm mix paving (pavement technologies product line), oil well service additives, oil production, and downstream application chemicals (oilfield technologies product line), printing inks, adhesives, agrochemicals, lubricants, and industrial intermediates (industrial specialties product line), coatings, resins, elastomers, adhesives, and bio-plastics (engineered polymers product line).
Recent Developments
Perstorp Holding AB's Caprolactone Business
On December 10, 2018, we entered into an agreement for the sale and purchase of Perstorp UK Ltd. (the “Caprolactone Agreement”) with Perstorp Holding AB, a company registered in Sweden that develops, manufactures, and sells specialty chemicals (the “Seller”). Pursuant to the Caprolactone Agreement, we agreed to purchase the shares held by the Seller in Perstorp UK Ltd., including the Seller’s entire caprolactone business (the "Caprolactone Business"), in exchange for
€570.9 million
, less assumed debt and other miscellaneous transaction costs, as further defined in the Caprolactone Agreement (the “Purchase Price”), plus interest accrued on the Purchase Price (herein referred to as the “Caprolactone Acquisition”).
On February 13, 2019, pursuant to the terms and conditions set forth in the Caprolactone Agreement, we completed the Caprolactone Acquisition for an aggregate purchase price of
€578.9 million
(
$652.5 million
), less assumed debt of
€100.4 million
(
$113.1 million
). At closing, the assumed debt was settled with an affiliate of the Seller. The Caprolactone Acquisition is integrated into our Performance Chemicals segment and included within our engineered polymers product line. Our revolving credit facility was utilized as the primary source of funds, along with available cash on hand, to fund the Caprolactone Acquisition. See Note 4 within the Condensed Consolidated Financial Statements for more information.
Results of Operations
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Three Months Ended June 30,
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Six Months Ended June 30,
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In millions
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2019
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2018
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2019
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2018
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Net sales
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$
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352.8
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$
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308.6
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$
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629.6
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$
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543.8
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Cost of sales
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218.4
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193.1
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398.1
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343.2
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Gross profit
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134.4
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115.5
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231.5
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200.6
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Selling, general and administrative expenses
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42.5
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35.9
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81.6
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62.0
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Research and technical expenses
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5.0
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5.3
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10.1
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10.7
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Restructuring and other (income) charges, net
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0.3
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—
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0.3
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(0.6
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)
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Acquisition-related costs
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0.8
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0.5
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23.6
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4.3
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Other (income) expense, net
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—
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1.4
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(3.7
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)
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0.2
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Interest expense, net
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13.1
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7.8
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24.2
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13.9
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Income (loss) before income taxes
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72.7
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64.6
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95.4
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110.1
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Provision (benefit) for income taxes
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15.9
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12.4
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15.9
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22.1
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Net income (loss)
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56.8
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52.2
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79.5
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88.0
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Less: Net income (loss) attributable to noncontrolling interest
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—
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5.5
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—
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10.5
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Net income (loss) attributable to Ingevity stockholders
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$
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56.8
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$
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46.7
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$
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79.5
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$
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77.5
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Net sales and Gross profit
The table below shows the
2019
Net sales and percentage variances from
2018
:
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Percentage change vs. prior year
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In millions, except percentages
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Net sales
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Total change
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Currency
effect
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Price/Mix
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Volume
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Three months ended June 30, 2019
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$
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352.8
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14%
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(1)%
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4%
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11%
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Six months ended June 30, 2019
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$
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629.6
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16%
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(1)%
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5%
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12%
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Three Months Ended
June 30, 2019
vs.
2018
Net sales increase of
$44.2 million
in 2019 was primarily driven by favorable volume gains of
$34.6 million
(
11
percent of sales) and favorable pricing and product mix of
$12.6 million
(
four
percent of sales). Both of our operating segments contributed to the volume and pricing and product mix impacts during the quarter. The Caprolactone Acquisition, completed in the first quarter of this year, contributed
$34.3 million
to the favorable volume growth during the period. Additionally, unfavorable foreign currency exchange impacted Net sales by
$3.0 million
(
one
percent of sales), primarily related to euro and Chinese renminbi denominated sales. For additional information regarding the impact of the Caprolactone Acquisition for the three months ended June 30, 2019, see Performance Chemicals included within this MD&A.
Gross profit improvement of
$18.9 million
was driven by favorable sales volume contributing
$17.7 million
of additional gross profit and pricing and product mix improvement of
$11.6 million
. Additionally, prior year was negatively impacted by inventory step-up amortization related to the Pine Chemical Acquisition of
$0.6 million
. These positive impacts were offset by increased manufacturing costs of
$9.8 million
and unfavorable foreign currency exchange of
$1.2 million
. 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.
Six
Months Ended
June 30, 2019
vs.
2018
Net sales increase of
$85.8 million
in 2019 was primarily driven by favorable volume gains of
$66.9 million
(
12
percent of sales) and favorable pricing and product mix of
$24.3 million
(
five
percent of sales). Both of our operating segments contributed to the volume and pricing and product mix impacts during the first half of the year. The Caprolactone Acquisition contributed
$58.5 million
to the favorable volume growth during the period. Additionally, unfavorable foreign currency exchange impacted Net sales by
$5.4 million
(
one
percent of sales), primarily related to euro and Chinese renminbi denominated sales. For additional information regarding the impact of the Caprolactone Acquisition for the six months ended June 30, 2019, see Performance Chemicals included within this MD&A.
Gross profit improvement of
$30.9 million
was driven by favorable sales volume contributing
$32.8 million
of additional gross profit and pricing and product mix improvement of
$26.8 million
, partially offset by increased manufacturing costs of
$19.4 million
and
$7.0 million
of net inventory step-up amortization related to the Caprolactone Acquisition in the current year less the Pine Chemical Acquisition in 2018 (see Note 4 within the Condensed Consolidated Financial Statements for more information). Unfavorable foreign currency exchange negatively impacted gross profit by
$2.3 million
. 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 each segment.
Selling, general and administrative expenses
Three Months Ended
June 30, 2019
vs.
2018
Selling, general and administrative ("SG&A") increased
$6.6 million
in 2019 compared to 2018. SG&A expenses as a percentage of Net sales increased to
12.0 percent
for the three months ended
June 30, 2019
from
11.6 percent
in 2018. The increase in SG&A is primarily due to $3.8 million of amortization associated with intangible assets acquired as a result of the Caprolactone Acquisition (see Note 4 within the Condensed Consolidated Financial Statements for more information) and increased legal costs associated with litigation of $3.0 million, which were offset slightly by lower employee related costs.
Six
Months Ended
June 30, 2019
vs.
2018
SG&A increased
$19.6 million
in 2019 compared to 2018. SG&A expenses as a percentage of Net sales increased to
13.0 percent
for the six months ended
June 30, 2019
from
11.4 percent
in 2018. The increase in SG&A is primarily due to $7.9 million of amortization associated with intangible assets acquired as a result of the Caprolactone Acquisition and Pine Chemical Acquisition (see Note 4 within the Condensed Consolidated Financial Statements for more information). The remaining increase is related to increased spending associated with the Engineered Polymers product line, company-wide growth, and increased legal costs in our Performance Materials segment.
Research and technical expenses
Three Months Ended
June 30, 2019
vs.
2018
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to
1.4 percent
from
1.7 percent
for the three months ended
June 30, 2019
and
2018
, respectively.
Six
Months Ended
June 30, 2019
vs.
2018
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to
1.6 percent
from
2.0 percent
for the
six
months ended
June 30, 2019
and
2018
, respectively.
Restructuring and other (income) charges, net
Three and Six
Months Ended
June 30, 2019
vs.
2018
Restructuring and other (income) charges, net were
$0.3 million
for both the three and six months ended
June 30, 2019
, and
zero
and
$(0.6) million
for the three and six months ended
June 30, 2018
, respectively.
In April 2019, we sold assets from the Performance Chemicals derivatives operations in Palmeira, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded
$0.4 million
as a gain on sale of assets, which was offset by a
$0.7 million
charge related to other miscellaneous exit costs, in both the
three and six
months ended
June 30, 2019
.
In February 2018, we sold assets from the Performance Chemicals derivatives operations in Duque De Caxias, Rio de Janeiro, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded
$0.6 million
as a gain on sale of assets in the
six
months ended
June 30, 2018
.
Acquisition-related costs
Three Months Ended
June 30, 2019
vs.
2018
Acquisition-related costs of
$0.8 million
and
$0.5 million
for the three months ended
June 30, 2019
and
2018
, respectively, were incurred in connection with the Caprolactone Acquisition and Pine Chemical Acquisition. See Note 4 within the Condensed Consolidated Financial Statements for more information.
Six
Months Ended
June 30, 2019
vs.
2018
Acquisition-related costs of
$23.6 million
and
$4.3 million
for the
six
months ended
June 30, 2019
and
2018
, respectively, were incurred in connection with the the Caprolactone Acquisition and Pine Chemical Acquisition. See Note 4 within the Condensed Consolidated Financial Statements for more information.
Other (income) expense, net
Three and Six
Months Ended
June 30, 2019
vs.
2018
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Three Months Ended June 30,
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Six Months Ended June 30,
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In millions
|
2019
|
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2018
|
|
2019
|
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2018
|
Foreign currency exchange (income) loss
|
$
|
(0.3
|
)
|
|
$
|
1.8
|
|
|
$
|
(2.6
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)
|
|
$
|
1.0
|
|
Royalty and sundry (income) loss
|
(0.1
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.5
|
)
|
Other (income) expense, net
|
0.4
|
|
|
(0.1
|
)
|
|
(0.9
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)
|
|
(0.3
|
)
|
Total Other (income) expense, net
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
(3.7
|
)
|
|
$
|
0.2
|
|
Interest expense, net
Three and Six
Months Ended
June 30, 2019
vs.
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
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Six Months Ended June 30,
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest expense on finance lease obligations
|
$
|
1.6
|
|
|
$
|
1.6
|
|
|
3.1
|
|
|
3.1
|
|
Interest expense on revolving credit and term loan facilities
(1)
|
10.3
|
|
|
3.6
|
|
|
17.5
|
|
|
6.7
|
|
Interest expense on senior notes
(1)
|
3.6
|
|
|
3.6
|
|
|
7.1
|
|
|
6.2
|
|
Interest income associated with our Restricted investment
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(1.0
|
)
|
|
(1.0
|
)
|
Capitalized interest
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.8
|
)
|
|
(0.4
|
)
|
Other interest expense, net
|
(1.5
|
)
|
|
(0.3
|
)
|
|
(1.7
|
)
|
|
(0.7
|
)
|
Total Interest expense, net
|
$
|
13.1
|
|
|
$
|
7.8
|
|
|
$
|
24.2
|
|
|
$
|
13.9
|
|
_______________
|
|
(1)
|
See Note 10 within the Condensed Consolidated Financial Statements for more information.
|
Provision (benefit) for income taxes
Three Months Ended
June 30, 2019
vs.
2018
Our effective tax rate was
21.9 percent
and
19.2 percent
for the
three
months ended
June 30, 2019
and
2018
, respectively. Excluding discrete items, the effective rate was
22.1 percent
compared to
19.8 percent
for the three months ended
June 30, 2019
and
2018
, respectively. See Note 14 to the Condensed Consolidated Financial Statements for more information on the drivers to the change in the effective tax rate.
Six
Months Ended
June 30, 2019
vs.
2018
Our effective tax rate was
16.7 percent
and
20.1 percent
for the
six
months ended
June 30, 2019
and
2018
, respectively. Excluding discrete items, the effective rate was
22.2 percent
compared to
20.4 percent
for the six months ended
June 30, 2019
and
2018
, respectively. The change year over year is primarily due to the costs associated with the Caprolactone Acquisition and excess tax benefit associated with the payout of stock compensation, each of which are treated as discrete tax items during the
six
months ended
June 30, 2019
. See Note 14 to the Condensed Consolidated Financial Statements for more information on the drivers to the change in the effective tax rate.
Net income (loss) attributable to noncontrolling interest
Three and Six Months Ended
June 30, 2019
vs.
2018
Net income (loss) attributable to noncontrolling interest was
zero
and
$5.5 million
for the
three
months ended
June 30, 2019
and
2018
, respectively, and was
zero
and
$10.5 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Prior to August 1, 2018, our noncontrolling interest represented the 30 percent ownership interest held by a third-party U.S.-based company in our consolidated Purification Cellutions LLC legal entity. Purification Cellutions LLC manufactures our structured honeycomb products within our Performance Materials segment. Refer to the Performance Materials’ operating profit discussion below within the Segment Operating Results section for further discussion of the segment’s performance. On August 1, 2018 we purchased the remaining 30 percent interest in Purification Cellutions LLC, see Note 11 to the Condensed Consolidated Financial Statements for more information.
Net income (loss) attributable to Ingevity stockholders
Three Months Ended
June 30, 2019
vs.
2018
Net income (loss) attributable to Ingevity stockholders increased
$10.1 million
in the
three
months ended
June 30, 2019
versus
2018
, primarily driven by higher gross profit of
$18.9 million
and our purchase of our remaining noncontrolling interest in the third quarter of 2018 which contributed to an year over year increase of $5.5 million. This was partially offset by increased interest expense of $5.3 million, higher SG&A costs of $6.6 million, and increase in the provision for income taxes of $3.5 million on the higher earnings. Refer to the Results of Operations for additional details on the drivers to the individual financial statement captions as well as the Segment Operating Results section for a discussion of changes in segment performance both of which are included within this MD&A.
Six
Months Ended
June 30, 2019
vs.
2018
Net income (loss) attributable to Ingevity stockholders increased
$2.0 million
in
six
months ended
June 30, 2019
versus
2018
, primarily driven by higher gross profit of
$30.9 million
, our purchase of our remaining noncontrolling interest in the third quarter of 2018 which contributed to an year over year increase of $10.5 million and a reduction in our income tax provision of $6.2 million as a result of discrete tax benefits recognized in 2019. This was partially offset by increased interest expense of $10.3 million, higher SG&A costs of $19.6 million, and increased acquisition-related costs of $19.3 million related to the Caprolactone Acquisition. Refer to the Results of Operations for additional details on the drivers to the individual financial statement captions as well as the Segment Operating Results section for a discussion of changes in segment performance both of which are included within this MD&A.
Segment Operating Results
In addition to the information discussed above, the following sections discuss the results of operations for each of Ingevity'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 associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, acquisition and other related costs, pension and postretirement settlement and curtailment (income) charge.
In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Annual Consolidated Financial Statements included in our 2018 Annual Report.
Performance Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Automotive Technologies product line
|
$
|
113.9
|
|
|
$
|
86.1
|
|
|
$
|
213.6
|
|
|
$
|
172.0
|
|
Process Purifications product line
|
9.2
|
|
|
10.0
|
|
|
18.6
|
|
|
19.6
|
|
Total Performance Materials - Net sales
|
$
|
123.1
|
|
|
$
|
96.1
|
|
|
$
|
232.2
|
|
|
$
|
191.6
|
|
Segment EBITDA
|
$
|
49.3
|
|
|
$
|
42.7
|
|
|
$
|
100.5
|
|
|
$
|
84.9
|
|
Comparison of
Three and Six
Months Ended
June 30, 2019
vs.
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change vs. prior year
|
Performance Materials
(In millions, except percentages)
|
Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
Three months ended June 30, 2019
|
$
|
123.1
|
|
|
28
|
%
|
|
(1
|
)%
|
|
6
|
%
|
|
23
|
%
|
Six months ended June 30, 2019
|
$
|
232.2
|
|
|
21
|
%
|
|
(1
|
)%
|
|
5
|
%
|
|
17
|
%
|
Three Months Ended
June 30, 2019
vs.
2018
Segment net sales
for the Performance Materials segment were
$123.1 million
and
$96.1 million
for the
three
months ended
June 30, 2019
and
2018
, respectively. The sales increase in 2019 was primarily driven by
$22.5 million
(
23 percent
of sales) in volume improvements in automotive evaporative emission canister products related to stricter environmental regulation in the China, North America, and Europe automotive markets. These gains were further bolstered by favorable pricing and product mix of
$5.8 million
(
six percent
of sales), partially offset by unfavorable foreign currency exchange
$1.3 million
(
one percent
of sales).
Segment EBITDA
for the Performance Materials segment was
$49.3 million
and
$42.7 million
for the
three
months ended
June 30, 2019
and
2018
, respectively. Segment EBITDA increased
$6.6 million
primarily due to favorable volume in the automotive carbon application, which contributed
$13.3 million
and favorable pricing and product mix, which contributed
$4.4 million
. These gains were partially offset by increased manufacturing costs of
$6.7 million
and increased SG&A and research and technical costs of
$4.3 million
, primarily due to increased legal costs and increased spending associated with growth. Unfavorable foreign currency exchange and other miscellaneous income also impacted Segment EBITDA by
$0.1 million
.
Six
Months Ended
June 30, 2019
vs.
2018
Segment net sales
for the Performance Materials segment were
$232.2 million
and
$191.6 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. The sales increase in 2019 was primarily driven by
$32.6 million
(
17 percent
of sales) in volume improvements in automotive evaporative emission canister products related to stricter environmental regulation in the China, North America, and Europe automotive markets. These gains were further bolstered by favorable pricing and product mix of
$10.0 million
(
five percent
of sales), partially offset by unfavorable foreign currency exchange
$2.0 million
(
one percent
of sales).
Segment EBITDA
for the Performance Materials segment was
$100.5 million
and
$84.9 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Segment EBITDA increased
$15.6 million
primarily due to favorable volume in the automotive carbon application, which contributed
$19.3 million
and favorable pricing and product mix, which contributed
$11.7 million
. These gains were partially offset by increased manufacturing costs of
$6.9 million
and increased SG&A and research and technical costs of
$8.5 million
, primarily due to increase legal costs and increased spending associated with growth.
Performance Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Oilfield Technologies product line
|
$
|
29.7
|
|
|
$
|
29.1
|
|
|
$
|
58.9
|
|
|
$
|
51.5
|
|
Pavement Technologies product line
|
64.6
|
|
|
65.6
|
|
|
83.1
|
|
|
84.1
|
|
Industrial Specialties product line
|
101.1
|
|
|
117.8
|
|
|
196.9
|
|
|
216.6
|
|
Engineered Polymers product line
|
$
|
34.3
|
|
|
$
|
—
|
|
|
$
|
58.5
|
|
|
$
|
—
|
|
Total Performance Chemicals - Net sales
|
$
|
229.7
|
|
|
$
|
212.5
|
|
|
$
|
397.4
|
|
|
$
|
352.2
|
|
Segment EBITDA
|
$
|
59.0
|
|
|
$
|
46.7
|
|
|
$
|
91.3
|
|
|
$
|
71.6
|
|
Comparison of
Three and Six
Months Ended
June 30, 2019
vs.
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change vs. prior year
|
Performance Chemicals
(In millions, except percentages)
|
Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
Three months ended June 30, 2019
|
$
|
229.7
|
|
|
8
|
%
|
|
(1
|
)%
|
|
3
|
%
|
|
6
|
%
|
Six months ended June 30, 2019
|
$
|
397.4
|
|
|
13
|
%
|
|
(1
|
)%
|
|
4
|
%
|
|
10
|
%
|
Pine Chemical Business and Caprolactone Business
The Pine Chemical Business has been integrated into our Performance Chemicals segment and has been included within our results of operations since March 8, 2018. The Caprolactone Business is being integrated into our Performance Chemicals segment and has been included within our results of operations since it was acquired on February 13, 2019. The information presented below for the three and six months ended
June 30, 2019
includes the results of these acquisitions as compared to the historical results of the three and six months ended
June 30, 2018
. For a pro forma comparative analysis of 2019 versus 2018 results, refer to the section below titled "Performance Chemicals Pro Forma Financial Results with the Pine Chemical Business and Caprolactone Business."
Three Months Ended
June 30, 2019
vs.
2018
Segment net sales
for the Performance Chemicals segment were
$229.7 million
and
$212.5 million
for the
three
months ended
June 30, 2019
and
2018
, respectively. The sales increase was driven by favorable volume of
$12.1 million
(
six percent
of sales), which consisted of favorable increase in engineered polymers (
$34.3 million
), which was partially offset by volume declines in industrial specialties (
$19.4 million
) and pavement technologies products (
$2.8 million
). Also driving the net sales increase was pricing and product mix of
$6.8 million
(
three percent
of sales) driven by industrial specialties (
$3.9 million
), pavement technologies (
$2.2 million
), and and oilfield technologies (
$0.7 million
). Additionally, unfavorable foreign currency exchange impacted Net sales by
$1.7 million
(
one percent
of sales).
Segment EBITDA
for the Performance Chemicals segment was
$59.0 million
and
$46.7 million
for the
three
months ended
June 30, 2019
and
2018
, respectively. Segment EBITDA increased by
$12.3 million
primarily due to increased volumes of
$4.4 million
and
$7.2 million
of favorable pricing and product mix, as well as favorable SG&A costs of
$1.4 million
. These favorable operating results were partially offset by
$1.3 million
of unfavorable manufacturing productivity, primarily driven by higher freight costs. Additionally, favorable unrealized foreign currency exchange gains and other miscellaneous income impacted Segment EBITDA by
$0.6 million
.
Six
Months Ended
June 30, 2019
vs.
2018
Segment net sales
for the Performance Chemicals segment were
$397.4 million
and
$352.2 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. The sales increase was driven by favorable volume of
$34.3 million
(
10 percent
of sales), which consisted of favorable increase in engineered polymers (
$58.5 million
) and oilfield technologies (
$6.6 million
); these increases were partially offset by volume declines in industrial specialties (
$28.6 million
) and pavement technologies products (
$2.2 million
). Also driving the net sales increase was pricing and product mix of
$14.3 million
(
four percent
of sales) driven by industrial specialties (
$11.2 million
), oilfield technologies (
$1.2 million
), and pavement technologies (
$1.9 million
). Additionally, unfavorable foreign currency exchange impacted Net sales by
$3.4 million
(
one percent
of sales).
Segment EBITDA
for the Performance Chemicals segment was
$91.3 million
and
$71.6 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Segment EBITDA increased by
$19.7 million
primarily due to increased volumes of
$13.5 million
and
$15.1 million
of favorable pricing and product mix. These favorable operating results were partially offset by
$8.6 million
of unfavorable manufacturing productivity, primarily driven by higher freight costs and
$2.9 million
of unfavorable SG&A costs, driven by increased spending associated with the acquisitions. Additionally, favorable unrealized foreign currency exchange gains and other miscellaneous income impacted Segment EBITDA by
$2.6 million
.
Performance Chemicals Pro Forma Financial Results with the Pine Chemical Business and Caprolactone Business
We believe that reviewing our operating results by combining actual and pro forma results for our Performance Chemicals segment is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance. Our pro forma segment information includes adjustments as if the acquisitions had occurred on January 1, 2018. Our pro forma results are adjusted for the effects of acquisition accounting but do not include adjustments for costs related to integration activities, cost savings or synergies that might be achieved by the combined businesses. Pro forma amounts to be presented are not necessarily indicative of what our results would have been had we operated the Pine Chemical Business and Caprolactone Business since January 1, 2018, nor will the pro forma amounts necessarily be indicative of our future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Chemicals Pro Forma Financial Results
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
|
|
|
|
|
|
|
Performance Chemicals, as reported
(1)
|
$
|
229.7
|
|
|
$
|
212.5
|
|
|
$
|
397.4
|
|
|
$
|
352.2
|
|
Pine Chemical Business and Caprolactone Business, pro forma
(2)
|
—
|
|
|
41.4
|
|
|
17.7
|
|
|
108.1
|
|
Pro Forma Combined Net Sales
(3)
|
$
|
229.7
|
|
|
$
|
253.9
|
|
|
$
|
415.1
|
|
|
$
|
460.3
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
|
|
|
|
|
Performance Chemicals, as reported
(1)
|
$
|
59.0
|
|
|
$
|
46.7
|
|
|
$
|
91.3
|
|
|
$
|
71.6
|
|
Pine Chemical Business and Caprolactone Business, pro forma
(2)
|
—
|
|
|
14.5
|
|
|
5.5
|
|
|
34.4
|
|
Pro Forma Combined Segment EBITDA
(3)
|
$
|
59.0
|
|
|
$
|
61.2
|
|
|
$
|
96.8
|
|
|
$
|
106.0
|
|
_______________
|
(1) As reported amounts are the results of operations of Performance Chemicals, including the results of the Pine Chemical Business and Caprolactone Business, post acquisition dates of March 8, 2018 and February 13, 2019, respectively.
|
(2) Pro forma amounts include historical results of the Pine Chemical Business and Caprolactone Business, prior to the acquisition dates of March 8, 2018 and February 13, 2019, respectively. These amounts also include adjustments as if the acquisitions had occurred on January 1, 2018, including the effects of purchase accounting. The pro forma amounts do not include adjustments for expenses related to integration activities, cost savings, or synergies that have been or may have been realized had we acquired the businesses on January 1, 2018.
|
(3) The pro forma combined results are not necessarily indicative of what the results would have been had we acquired the Pine Chemical Business and Caprolactone Business on January 1, 2018, nor are they indicative of future results.
|
Performance Chemicals Pro Forma Combined Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Oilfield Technologies product line
|
$
|
29.7
|
|
|
$
|
29.1
|
|
|
$
|
58.9
|
|
|
$
|
56.1
|
|
Pavement Technologies product line
|
64.6
|
|
|
65.6
|
|
|
83.1
|
|
|
84.3
|
|
Industrial Specialties product line
|
101.1
|
|
|
117.8
|
|
|
196.9
|
|
|
232.0
|
|
Engineered Polymers product line
|
$
|
34.3
|
|
|
$
|
41.4
|
|
|
$
|
76.2
|
|
|
$
|
87.9
|
|
Pro Forma Combined Net Sales - Performance Chemicals
|
$
|
229.7
|
|
|
$
|
253.9
|
|
|
$
|
415.1
|
|
|
$
|
460.3
|
|
Comparison of
Three and Six
Months Ended
June 30, 2019
vs.
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change vs. prior year
|
Performance Chemicals
(In millions, except percentages)
|
Pro Forma Combined Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
Three months ended June 30, 2019
|
$
|
229.7
|
|
|
(10
|
)%
|
|
(1
|
)%
|
|
3
|
%
|
|
(12
|
)%
|
Six months ended June 30, 2019
|
$
|
415.1
|
|
|
(10
|
)%
|
|
(1
|
)%
|
|
3
|
%
|
|
(12
|
)%
|
Pro Forma Combined Results - Three Months Ended
June 30, 2019
vs.
2018
Pro Forma Combined Net Sales
for the Performance Chemicals segment were
$229.7 million
and
$253.9 million
for the three months ended
June 30, 2019
and
2018
, respectively. The Pro Forma Combined Net Sales decrease was driven by unfavorable volume of
$29.2 million
(
12 percent
of sales), which consisted of unfavorable volumes in industrial specialties (
$19.2 million
), engineered polymers (
$7.2 million
) and pavement technologies (
$2.8 million
). The decrease in volume was partially offset by improved pricing and product mix of
$6.7 million
(
three percent
of sales), driven by favorable price and product mix in industrial specialties (
$3.8 million
), oilfield technologies (
$0.7 million
), and pavement technologies (
$2.2 million
). Additionally, unfavorable foreign currency exchange impacted Pro Forma Combined Net Sales by
$1.7 million
(
one percent
of sales).
Pro Forma Combined Segment EBITDA
for the Performance Chemicals segment was
$59.0 million
and
$61.2 million
for the three months ended
June 30, 2019
and
2018
, respectively. Pro Forma Combined Segment EBITDA decreased by
$2.2 million
primarily due to decreased volumes of
$13.9 million
, offset by favorable pricing and product mix of
$7.2 million
,
$0.3 million
of decreased manufacturing, freight and warehousing costs,
$4.1 million
of favorable SG&A costs, and
$0.1 million
due to favorable unrealized foreign currency exchange gains and other miscellaneous income.
Pro Forma Combined Results -
Six
Months Ended
June 30, 2019
vs.
2018
Pro Forma Combined Net Sales
for the Performance Chemicals segment were
$415.1 million
and
$460.3 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. The Pro Forma Combined Net Sales decrease was driven by unfavorable volume of
$56.2 million
(
12 percent
of sales), which consisted of unfavorable volumes in industrial specialties (
$43.9 million
), engineered polymers (
$11.8 million
), pavement technologies (
$2.4 million
), and favorable volumes in oilfield technologies (
$1.9 million
). The decrease in volume was partially offset by improved pricing and product mix of
$14.2 million
(
three percent
of sales), driven by favorable price and product mix in industrial specialties (
$11.1 million
), oilfield technologies (
$1.2 million
), and pavement technologies (
$1.9 million
). Additionally, unfavorable foreign currency exchange impact Pro Forma Combined Sales by
$3.2 million
(
one percent
of sales).
Pro Forma Combined Segment EBITDA
for the Performance Chemicals segment was
$96.8 million
and
$106.0 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. Pro Forma Combined Segment EBITDA decreased by
$9.2 million
primarily due to decreased volumes of
$23.7 million
and
$4.8 million
of increased manufacturing, freight and warehousing costs. These declines were partially offset by favorable pricing and product mix of
$15.1 million
,
$2.3 million
of favorable SG&A costs, and
$1.9 million
due to favorable unrealized foreign currency exchange gains and other miscellaneous income.
Use of Non-GAAP Financial Measure - Adjusted EBITDA
Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with U.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 or 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 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, and pension and postretirement settlement and curtailment (income) charges.
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 (Loss) to Adjusted EBITDA
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
In millions
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income (loss)
(GAAP)
|
$
|
56.8
|
|
|
$
|
52.2
|
|
|
$
|
79.5
|
|
|
$
|
88.0
|
|
Provision (benefit) for income taxes
|
15.9
|
|
|
12.4
|
|
|
15.9
|
|
|
22.1
|
|
Interest expense, net
|
13.1
|
|
|
7.8
|
|
|
24.2
|
|
|
13.9
|
|
Depreciation and amortization
|
21.4
|
|
|
15.9
|
|
|
39.9
|
|
|
27.4
|
|
Restructuring and other (income) charges, net
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
(0.6
|
)
|
Acquisition and other related costs
(1)
|
0.8
|
|
|
1.1
|
|
|
32.0
|
|
|
5.7
|
|
Adjusted EBITDA
(Non-GAAP)
|
$
|
108.3
|
|
|
$
|
89.4
|
|
|
$
|
191.8
|
|
|
$
|
156.5
|
|
_______________