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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report") and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, 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:
•adverse effects from the novel coronavirus ("COVID-19") pandemic;
•we are exposed to risks that the expected benefits from the Caprolactone Acquisition may not be realized or will not be realized in the expected time period, the risk that the acquired business will not be integrated successfully and the risk of significant transaction costs and unknown or understated liabilities;
•we may be adversely affected by general economic and financial conditions beyond our control;
•we are exposed to risks related to our international sales and operations;
•our reported results could be adversely affected by currency exchange rates and currency devaluation could impair our competitiveness;
•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;
•we may be adversely affected by changes in trade policy, including the imposition of tariffs and the resulting consequences;
•our engineered polymers product line may be adversely affected by the United Kingdom’s withdrawal from the European Union;
•we are dependent upon attracting and retaining key personnel;
•adverse conditions in the global automotive market or adoption of alternative and new technologies may adversely affect demand for our automotive carbon products;
•we face competition from producers of alternative products and new technologies, and new or emerging competitors;
•we face competition from infringing intellectual property activity;
•if increasingly more stringent air quality standards worldwide are not adopted, our growth could be impacted;
•we may be adversely affected by a decrease in government infrastructure spending;
•our printing inks business serves customers in a market that is facing declining volumes and downward pricing;
•our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply;
•lack of access to sufficient CTO would impact our ability to produce CTO-based products;
•a prolonged period of low energy prices may materially impact our results of operations;
•we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;
•the occurrence of natural disasters, such as hurricanes, winter or tropical storms, earthquakes, tornadoes, floods, fires or other unanticipated problem such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;
•from time to time, we are called upon to protect our intellectual property rights and proprietary information though litigation and other means;
•if we are unable to protect our intellectual property and other proprietary information, we may lose significant competitive advantage;
•information technology security breaches and other disruptions;
•complications with the design or implementation of our new enterprise resource planning system;
•government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs and the chemicals industry; and
•losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes.
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
Coronavirus Pandemic
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has led to adverse impacts on the U.S. and global economies, and created uncertainty regarding potential impacts to our supply chain, operations, and customer demand. We have been classified as an essential business in the jurisdictions that have made this determination to date, allowing us to continue operations. However, our facilities - as well as the operations of our suppliers, customers, third-party sales representatives, and distributors - have been, and will continue to be, disrupted by governmental and private sector responses to COVID-19. This includes
business shutdowns, work-from-home orders and social distancing protocols, travel or health-related restrictions, as well as quarantines, self-isolations, and disruptions to transportation channels.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. We estimate the payment of approximately $5.3 million of employer payroll taxes otherwise due in 2020 will be delayed with 50 percent due by December 31, 2021 and the remaining 50 percent by December 31, 2022. The CARES Act is not expected to have a material impact on our Condensed Consolidated Financial Statements.
In order to strengthen our short term liquidity and to ensure financial flexibility, in March 2020, we drew down $250 million from our revolving credit facility as a precautionary measure and also suspended our share repurchase program. During the three months ended June 30, 2020 we paid back $155 million of this drawn down amount. We also implemented work-from-home policies and protocols for the majority of our global salaried workforce, as well as social distancing practices to ensure the safety of our employees at our manufacturing facilities. Further, during the second quarter, we decreased production at some of our U.S. and China based manufacturing plants due to COVID-19 impacts to the projected customer demand and implemented a cost reduction initiative further described in Note 14.
As of March 31, 2020 and June 30, 2020, we evaluated, in accordance with ASC 350 - Goodwill and Other and ASC 360 - Property, Plant, and Equipment, whether the economic impacts of the COVID-19 pandemic constitute triggering events requiring impairment or recoverability analysis to be performed. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units and asset groups. Further, we assessed our current market capitalization, forecasts and the amount of excess fair value above book value as calculated in our 2019 impairment test. We determined that a triggering event has not occurred which would require an interim impairment test to be performed. However, a lack of sustained recovery or further deterioration in market conditions related to the general economy and the industries in which we operate, a sustained trend of weaker than anticipated financial performance, or further decline in our share price for a sustained period of time, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.
While the disruptions caused by the pandemic are currently expected to be temporary, there is uncertainty regarding the virus's duration and severity. COVID-19 has impacted, and will continue to impact, our results of operations, financial position, and liquidity.
Employees
During the first quarter of 2020, at our Wickliffe, Kentucky Performance Materials' manufacturing facility, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO-CLC ratified a three-year collective bargaining agreement ("CBA"), which expires February 1, 2023. Additionally, at our Crossett, Arkansas Performance Chemicals' manufacturing facility, the International Association of Machinists and Aerospace Workers agreed to extend the existing CBA by one year until January 15, 2021 in exchange for economic considerations. We have no other CBAs set to expire in 2020.
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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2020
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2019
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2020
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2019
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Net sales
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$
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270.6
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$
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352.8
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$
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558.8
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$
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629.6
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Cost of sales
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186.7
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218.4
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360.3
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398.1
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Gross profit
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83.9
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134.4
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198.5
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231.5
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Selling, general and administrative expenses
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34.5
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42.5
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73.0
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81.6
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Research and technical expenses
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5.4
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5.0
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11.6
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10.1
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Restructuring and other (income) charges, net
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7.3
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0.3
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7.8
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0.3
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Acquisition-related costs
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0.4
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0.8
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1.7
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23.6
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Other (income) expense, net
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0.9
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—
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2.9
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(3.7)
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Interest expense, net
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10.0
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13.1
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20.9
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24.2
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Income (loss) before income taxes
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25.4
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72.7
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80.6
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95.4
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Provision (benefit) for income taxes
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5.2
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15.9
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15.1
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15.9
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Net income (loss)
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$
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20.2
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$
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56.8
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$
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65.5
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$
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79.5
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Net sales and Gross profit
The table below shows the 2020 Net sales and percentage variances from 2019:
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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, 2020
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$
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270.6
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(23)%
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(1)%
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—%
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(22)%
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Six months ended June 30, 2020
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$
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558.8
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(11)%
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(1)%
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1%
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(11)%
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Three Months Ended June 30, 2020 vs. 2019
Net sales decrease of $82.2 million in 2020 was primarily driven by unfavorable volume of $80.0 million due to the impacts of COVID-19, which was slightly offset by favorable pricing and product mix of $0.1 million. Both of our operating segments were impacted by the volume decline during the quarter. Additionally, unfavorable foreign currency exchange impacted Net sales by $2.3 million, primarily related to euro and Chinese renminbi denominated sales.
Gross profit declined by $50.5 million was driven by unfavorable sales volume of $44.3 million, increased manufacturing costs of $6.9 million due to reduced plant throughput, and unfavorable foreign currency exchange of $0.7 million. These negative impacts, mainly related to COVID-19, were slightly offset by favorable pricing and product mix of $1.4 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, 2020 vs. 2019
Net sales decrease of $70.8 million in 2020 was primarily driven by unfavorable volume declines of $71.9 million due to the impacts of COVID-19, which was slightly offset by favorable pricing and product mix of $4.5 million. Both of our
operating segments were impacted by the volume. Offsetting a portion of these volume declines is $9.8 million of favorable volume from the Caprolactone Acquisition completed during the first quarter of 2019. Additionally, unfavorable foreign currency exchange impacted Net sales by $3.4 million, 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, 2020 and 2019, see Segment Operating Results - Performance Chemicals section included within this MD&A.
Gross profit declined by $33.0 million was driven by unfavorable sales volume of $40.8 million and increased manufacturing costs of $2.9 million due to reduced plant throughput, both related to COVID-19, as well as unfavorable foreign currency exchange of $1.2 million. Additionally, the prior year was negatively impacted by inventory step-up amortization related to the Caprolactone Acquisition of $8.4 million. These negative impacts were slightly offset by favorable pricing and product mix of $3.5 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.
Selling, general and administrative expenses
Three Months Ended June 30, 2020 vs. 2019
Selling, general and administrative ("SG&A") decreased $8.0 million in 2020 compared to 2019. The decrease in SG&A is due to a one-time decrease in employee-related incentive costs of $2.6 million. Additionally, SG&A decreased due to reduced travel and other miscellaneous costs of $5.5 million, due to the COVID-19 pandemic, and decreased legal costs of $1.9 million. This positive impact was partially offset by an increase in amortization costs associated with intangible assets acquired from the Caprolactone Acquisition (see Note 4 within the Condensed Consolidated Financial Statements for more information) and an increase in our credit allowance reserve which increased by a combined $2.0 million. SG&A expenses as a percentage of Net sales increased to 12.7 percent for the three months ended June 30, 2020 from 12.0 percent in 2019, driven by the decline in Net sales due to COVID-19.
Six Months Ended June 30, 2020 vs. 2019
Selling, general and administrative ("SG&A") decreased $8.6 million in 2020 compared to 2019. The decrease in SG&A is primarily due to a decrease in employee-related incentive costs of $6.8 million. Additionally, SG&A decreased due to reduced travel and other miscellaneous costs of $6.8 million, due to the COVID-19 pandemic. This positive impact was partially offset by an increase in amortization costs associated with intangible assets acquired from the Caprolactone Acquisition (see Note 4 within the Condensed Consolidated Financial Statements for more information), an increase in our credit allowance reserve, and increased legal costs which increased by a combined $5.0 million. SG&A expenses as a percentage of Net sales increased slightly to 13.1 percent for the six months ended June 30, 2020 from 13.0 percent in 2019, driven by the decline in Net sales due to COVID-19.
Research and technical expenses
Three Months Ended June 30, 2020 vs. 2019
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 2.0 percent from 1.4 percent for the three months ended June 30, 2020 and 2019, respectively.
Six Months Ended June 30, 2020 vs. 2019
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 2.1 percent from 1.6 percent for the six months ended June 30, 2020 and 2019, respectively.
Restructuring and other (income) charges, net
Three and Six Months Ended June 30, 2020 vs. 2019
Restructuring and other (income) charges, net were $7.3 million and $7.8 million for the three and six months ended June 30, 2020, and $0.3 million for both the three and six months ended June 30, 2019, respectively. See Note 14 within the Condensed Consolidated Financial Statements for more information.
Acquisition-related costs
Three and Six Months Ended June 30, 2020 vs. 2019
Acquisition-related costs of $0.4 million and $1.7 million for the three and six months ended June 30, 2020, and $0.8 million and $23.6 million for the three and six months ended June 30, 2019, respectively, were incurred in connection with the Caprolactone Acquisition. See Note 4 within the Condensed Consolidated Financial Statements for more information.
Other (income) expense, net
Three and Six Months Ended June 30, 2020 vs. 2019
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Three Months Ended June 30,
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Six Months Ended June 30,
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In millions
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2020
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2019
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2020
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2019
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Foreign currency exchange (income) loss
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$
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(0.1)
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|
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$
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(0.3)
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|
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$
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0.6
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$
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(2.6)
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Royalty and sundry (income) loss
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(0.1)
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(0.1)
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(0.2)
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(0.2)
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Impairment of equity investment (1)
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0.1
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|
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—
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|
|
1.4
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|
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—
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Other (income) expense, net
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1.0
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|
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0.4
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|
|
1.1
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|
|
(0.9)
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Total Other (income) expense, net
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$
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0.9
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|
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$
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—
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|
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$
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2.9
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|
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$
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(3.7)
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_______________
(1) Represents an impairment charge recorded during the three and six months ended June 30, 2020 related to an equity investment within our Performance Materials segment.
Interest expense, net
Three and Six Months Ended June 30, 2020 vs. 2019
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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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2020
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2019
|
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2020
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2019
|
|
|
|
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|
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Interest expense on finance lease obligations
|
$
|
1.6
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|
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$
|
1.6
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|
|
3.1
|
|
|
3.1
|
|
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Interest expense on revolving credit and term loan facilities(1)
|
6.3
|
|
|
10.3
|
|
|
14.0
|
|
|
17.5
|
|
|
Interest expense on senior notes(1)
|
3.4
|
|
|
3.6
|
|
|
6.9
|
|
|
7.1
|
|
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Interest income associated with our Restricted investment
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(0.5)
|
|
|
(0.5)
|
|
|
(1.0)
|
|
|
(1.0)
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|
|
Capitalized interest
|
(0.1)
|
|
|
(0.4)
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|
|
(0.4)
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(0.8)
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Fixed-to-fixed cross-currency interest rate swap(2)
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(0.5)
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(0.6)
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(1.3)
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(0.6)
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Other interest (income) expense, net
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(0.2)
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(0.9)
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|
|
(0.4)
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|
(1.1)
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Total Interest expense, net
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$
|
10.0
|
|
|
$
|
13.1
|
|
|
$
|
20.9
|
|
|
$
|
24.2
|
|
_______________
(1) See Note 11 within the Condensed Consolidated Financial Statements for more information.
(2) See Note 10 within the Condensed Consolidated Financial Statements for more information.
Provision (benefit) for income taxes
Three and Six Months Ended June 30, 2020 vs. 2019
For the three months ended June 30, 2020 and 2019, our effective tax rate was 20.5 percent and 21.9 percent, respectively. Excluding discrete items, the effective rate was 20.8 percent compared to 22.1 percent in the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, our effective tax rate was 18.7 percent and 16.7 percent, respectively. Excluding discrete items, the effective rate was 20.5 percent compared to 22.2 percent in the six months ended June 30, 2020 and 2019, respectively. An explanation of the change in the effective tax rate is presented in Note 15 to the Condensed Consolidated Financial Statements.
Segment Operating Results
In addition to the information discussed above, the following sections discuss the results of operations for both 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, net associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, pension and postretirement settlement and curtailment (income) charges.
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 2019 Annual Report.
Performance Materials
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In millions
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Three Months Ended June 30,
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Six Months Ended June 30,
|
|
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2020
|
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2019
|
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2020
|
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2019
|
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Automotive Technologies product line
|
$
|
74.7
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|
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$
|
113.9
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|
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$
|
187.6
|
|
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$
|
213.6
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Process Purification product line
|
9.7
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|
|
9.2
|
|
|
17.9
|
|
|
18.6
|
|
|
Total Performance Materials - Net sales
|
$
|
84.4
|
|
|
$
|
123.1
|
|
|
$
|
205.5
|
|
|
$
|
232.2
|
|
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Segment EBITDA
|
$
|
23.3
|
|
|
$
|
49.3
|
|
|
$
|
84.5
|
|
|
$
|
100.5
|
|
Comparison of Three and Six Months Ended June 30, 2020 vs. 2019
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Percentage change vs. prior year
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Performance Materials (In millions, except percentages)
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Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
|
Three months ended June 30, 2020
|
$
|
84.4
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|
(31)
|
%
|
|
—
|
%
|
|
2
|
%
|
|
(33)
|
%
|
|
Six months ended June 30, 2020
|
$
|
205.5
|
|
|
(11)
|
%
|
|
—
|
%
|
|
3
|
%
|
|
(14)
|
%
|
Three Months Ended June 30, 2020 vs. 2019
Segment net sales for the Performance Materials segment were $84.4 million and $123.1 million for the three months ended June 30, 2020 and 2019, respectively. The sales decrease in 2020 was primarily driven by $40.6 million in volume decline in automotive products related to the COVID-19 pandemic and unfavorable foreign currency exchange $1.0 million. These declines were slightly offset by favorable pricing and product mix of $2.9 million.
Segment EBITDA for the Performance Materials segment was $23.3 million and $49.3 million for the three months ended June 30, 2020 and 2019, respectively. Segment EBITDA decreased $26.0 million primarily due to unfavorable volume of $27.3 million and increased manufacturing costs of $5.9 million due to reduced plant throughput. These declines were partially offset by favorable pricing and product mix of $2.6 million and decreased SG&A and research and technical costs of $5.2 million, primarily due to lower legal costs and employee-related costs. Favorable foreign currency exchange, the impairment of an equity investment, and other miscellaneous expenses also negatively impacted Segment EBITDA by a net of $0.6 million.
Six Months Ended June 30, 2020 vs. 2019
Segment net sales for the Performance Materials segment were $205.5 million and $232.2 million for the six months ended June 30, 2020 and 2019, respectively. The sales decrease of $26.7 million in 2020 was primarily driven by $33.6 million in volume decline in automotive products related to the COVID-19 pandemic and unfavorable foreign currency exchange of $1.1 million. These declines were slightly offset by favorable pricing and product mix of $8.0 million.
Segment EBITDA for the Performance Materials segment was $84.5 million and $100.5 million for the six months ended June 30, 2020 and 2019, respectively. Segment EBITDA decreased $16.0 million primarily due to unfavorable volume of $23.5 million. This decline was partially offset by favorable pricing and product mix of $6.5 million, lower manufacturing costs of $0.4 million and decreased SG&A and research and technical costs of $3.7 million, primarily related to lower employee-related costs. Unfavorable foreign currency exchange, the impairment of an equity investment, and increased other miscellaneous expenses also impacted Segment EBITDA by $3.1 million.
Performance Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Oilfield Technologies product line
|
$
|
14.2
|
|
|
$
|
29.7
|
|
|
$
|
44.4
|
|
|
$
|
58.9
|
|
|
Pavement Technologies product line
|
63.9
|
|
|
64.6
|
|
|
84.6
|
|
|
83.1
|
|
|
Industrial Specialties product line
|
76.5
|
|
|
101.1
|
|
|
156.4
|
|
|
196.9
|
|
|
Engineered Polymers product line
|
31.6
|
|
|
34.3
|
|
|
67.9
|
|
|
58.5
|
|
|
Total Performance Chemicals - Net sales
|
$
|
186.2
|
|
|
$
|
229.7
|
|
|
$
|
353.3
|
|
|
$
|
397.4
|
|
|
Segment EBITDA
|
$
|
43.9
|
|
|
$
|
59.0
|
|
|
$
|
74.9
|
|
|
$
|
91.3
|
|
Comparison of Three and Six Months Ended June 30, 2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020
|
$
|
186.2
|
|
|
(19)
|
%
|
|
(1)
|
%
|
|
(1)
|
%
|
|
(17)
|
%
|
|
|
|
Six months ended June 30, 2020
|
$
|
353.3
|
|
|
(11)
|
%
|
|
—
|
%
|
|
(1)
|
%
|
|
(10)
|
%
|
|
|
Caprolactone Business
The Caprolactone Business has been 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, 2020 includes the results of the acquisition as compared to the historical results of the three and six months ended June 30, 2019. For a pro forma comparative analysis of 2020 versus 2019 results, refer to the section below titled "Performance Chemicals Pro Forma Financial Results with the Caprolactone Business."
Three Months Ended June 30, 2020 vs. 2019
Segment net sales for the Performance Chemicals segment were $186.2 million and $229.7 million for the three months ended June 30, 2020 and 2019, respectively. The sales decrease was driven mainly by unfavorable volume of $39.4 million, consisting of declines in industrial specialties ($21.2 million), oilfield technologies ($15.3 million), engineered polymers ($2.6 million), and pavement technologies ($0.3 million). Sales also decreased due to unfavorable pricing and product mix of $2.8 million, driven by declines in industrial specialties ($2.7 million) and oilfield technologies ($0.1 million). Additionally, unfavorable foreign currency exchange impacted Net sales by $1.3 million.
Segment EBITDA for the Performance Chemicals segment was $43.9 million and $59.0 million for the three months ended June 30, 2020 and 2019, respectively. Segment EBITDA decreased by $15.1 million primarily due to a decline in volume of $17.0 million, unfavorable pricing and product mix of $1.2 million, and unfavorable foreign exchange and other miscellaneous costs of $0.5 million. These unfavorable operating results were partially offset by lower manufacturing costs of $0.5 million and lower SG&A costs of $3.1 million.
Six Months Ended June 30, 2020 vs. 2019
Segment net sales for the Performance Chemicals segment were $353.3 million and $397.4 million for the six months ended June 30, 2020 and 2019, respectively. The sales decrease of $44.1 million was driven mainly by unfavorable volume of $38.3 million, consisting of volume increases in engineered polymers ($9.8 million) and pavement technologies products ($0.5 million), and volume declines in industrial specialties ($34.3 million) and oilfield technologies ($14.3 million). Segment net sales were also impacted by unfavorable pricing and product mix of $3.5 million, driven by a decline in industrial specialties ($4.9 million) and oilfield technologies ($0.1 million), which was partially offset by favorable pricing and product mix in pavement technologies ($1.5 million). Additionally, unfavorable foreign currency exchange impacted Net sales by $2.3 million.
Segment EBITDA for the Performance Chemicals segment was $74.9 million and $91.3 million for the six months ended June 30, 2020 and 2019, respectively. Segment EBITDA decreased by $16.4 million primarily due to a decline in volume of $17.3 million, unfavorable pricing and product mix of $3.0 million, and unfavorable foreign exchange and other miscellaneous costs of $3.8 million. These unfavorable operating results were partially offset by lower manufacturing costs of $0.7 million and lower SG&A costs of $7.0 million.
Performance Chemicals Pro Forma Financial Results with the 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, overall operating performance. Our pro forma segment information includes adjustments as if the acquisition had occurred on January 1, 2019. 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 have or might be achieved by the combined businesses. Pro forma amounts presented are not necessarily indicative of what our results would have been had we operated the Caprolactone Business since January 1, 2019, nor are the pro forma amounts necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Chemicals Pro Forma Financial Results Comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
In millions
|
|
|
|
|
2020
|
|
2019
Pro Forma
|
|
Net sales
|
|
|
|
|
|
|
|
|
Performance Chemicals, as reported (1)
|
|
|
|
|
$
|
353.3
|
|
|
$
|
397.4
|
|
|
Caprolactone Business, pro forma (2)
|
|
|
|
|
—
|
|
|
17.7
|
|
|
Net Sales (3)
|
|
|
|
|
$
|
353.3
|
|
|
$
|
415.1
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
|
|
|
|
|
|
Performance Chemicals, as reported (1)
|
|
|
|
|
$
|
74.9
|
|
|
$
|
91.3
|
|
|
Caprolactone Business, pro forma (2)
|
|
|
|
|
—
|
|
|
5.5
|
|
|
Segment EBITDA(3)
|
|
|
|
|
$
|
74.9
|
|
|
$
|
96.8
|
|
_______________
(1) As reported amounts are the results of operations of Performance Chemicals, including the results of the Caprolactone Business, post acquisition date of February 13, 2019.
(2) Pro forma amounts include historical results of the Caprolactone Business, prior to the acquisition date of February 13, 2019. These amounts also include adjustments as if the acquisition had occurred on January 1, 2019, 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 business on January 1, 2019.
(3) The pro forma combined results are not necessarily indicative of what the results would have been had we acquired the Caprolactone Business on January 1, 2019, nor are they indicative of future results.
Performance Chemicals Net Sales Comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
In millions
|
|
|
|
|
2020
|
|
2019
Pro Forma
|
|
Oilfield Technologies product line
|
|
|
|
|
$
|
44.4
|
|
|
$
|
58.9
|
|
|
Pavement Technologies product line
|
|
|
|
|
84.6
|
|
|
83.1
|
|
|
Industrial Specialties product line
|
|
|
|
|
156.4
|
|
|
196.9
|
|
|
Engineered Polymers product line
|
|
|
|
|
67.9
|
|
|
76.2
|
|
|
Net Sales - Performance Chemicals
|
|
|
|
|
$
|
353.3
|
|
|
$
|
415.1
|
|
Comparison of Six Months Ended June 30, 2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change vs. prior year
|
|
|
|
|
|
|
|
|
|
|
|
Performance Chemicals (In millions, except percentages)
|
Net sales
|
|
Total change
|
|
Currency
effect
|
|
Price/Mix
|
|
Volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
$
|
353.3
|
|
|
(15)
|
%
|
|
(1)
|
%
|
|
(1)
|
%
|
|
(13)
|
%
|
|
|
Results Comparison - Six Months Ended June 30, 2020 vs. 2019
Segment Net Sales for the Performance Chemicals segment were $353.3 million and $415.1 million for the six months ended June 30, 2020 and 2019, respectively. The Net sales decrease was driven by unfavorable volume of $56.0 million, which consisted of unfavorable volumes in industrial specialties ($34.3 million), oilfield technologies ($14.3 million),
and engineered polymers ($7.9 million), offset partially by a volume increase in pavement technologies ($0.5 million). Also contributing to the decline was unfavorable pricing and product mix of $3.5 million, driven by unfavorable pricing and product mix in industrial specialties ($4.9 million) and oilfield technologies ($0.1 million), partially offset by favorable pricing and product mix in pavement technologies ($1.5 million). Unfavorable foreign currency exchange also impacted Net sales by $2.3 million.
Segment EBITDA for the Performance Chemicals segment was $74.9 million and $96.8 million for the six months ended June 30, 2020 and 2019, respectively. Segment EBITDA decreased by $21.9 million primarily due to decreased volumes of $22.7 million, increased manufacturing, freight and warehousing costs of $1.6 million, unfavorable pricing and product mix of $3.0 million, which were partially offset by $8.7 million of lower SG&A costs. Unfavorable foreign currency exchange and other miscellaneous income also impacted Segment EBITDA by $3.3 million.
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 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
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net income (loss) (GAAP)
|
$
|
20.2
|
|
|
$
|
56.8
|
|
|
$
|
65.5
|
|
|
$
|
79.5
|
|
|
Interest expense, net
|
10.0
|
|
|
13.1
|
|
|
20.9
|
|
|
24.2
|
|
|
Provision (benefit) for income taxes
|
5.2
|
|
|
15.9
|
|
|
15.1
|
|
|
15.9
|
|
|
Depreciation and amortization - Performance Materials
|
7.3
|
|
|
5.8
|
|
|
14.5
|
|
|
11.6
|
|
|
Depreciation and amortization - Performance Chemicals
|
16.8
|
|
|
15.6
|
|
|
33.9
|
|
|
28.3
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other (income) charges, net
|
7.3
|
|
|
0.3
|
|
|
7.8
|
|
|
0.3
|
|
|
Acquisition and other-related costs (1)
|
0.4
|
|
|
0.8
|
|
|
1.7
|
|
|
32.0
|
|
|
Adjusted EBITDA (Non-GAAP)
|
$
|
67.2
|
|
|
$
|
108.3
|
|
|
$
|
159.4
|
|
|
$
|
191.8
|
|
_______________
(1) These charges are associated with the acquisition and integration of the Caprolactone Business for both periods and also charges associated with the acquisition and integration of Georgia-Pacific's Pine Chemical business during the six months ended June 30, 2019. See below for more detail on the charges incurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Legal and professional service fees
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
$
|
10.9
|
|
|
Loss on hedging purchase price
|
—
|
|
|
—
|
|
|
—
|
|
|
12.7
|
|
|
Acquisition-related costs
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
$
|
23.6
|
|
|
Inventory fair value step-up amortization (i)
|
—
|
|
|
—
|
|
|
—
|
|
|
8.4
|
|
|
Acquisition and other-related costs
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
$
|
32.0
|
|
_______________
(i) Included within "Cost of sales" on the condensed consolidated statements of operations.
Adjusted EBITDA
Three and Six Months Ended June 30, 2020 vs. 2019
The factors that impacted adjusted EBITDA period to period are the same factors that affected earnings discussed in the Results of Operations and Segment Operating Results sections included within this MD&A.
Current Company Outlook
|
|
|
|
|
|
|
|
In millions
|
FY2020 Guidance
|
|
Net sales
|
$1,100 - $1,200
|
|
Adjusted EBITDA
|
$310 - $350
|
|
Operating Cash Flow
|
$215 - $255
|
|
Capital Expenditures
|
~$85
|
|
Free Cash Flow*
|
$130 - $170
|
|
*Calculated as Operating Cash Flow less Capital Expenditures
|
|
While we continue to navigate through uncertainties due to COVID-19, we are reiterating our prior guidance of sales between $1.10 billion and $1.20 billion and Adjusted EBITDA between $310 million and $350 million. Additionally, we
continue to expect capital expenditures of $85 million, and operating cash flow for the year of between $215 million and $255 million.
A reconciliation of net income to adjusted EBITDA as projected for 2020 is not provided. Ingevity does not forecast net income as it cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components, net of tax, include further restructuring and other income (charges), net; additional acquisition and other related costs in connection with the acquisition of the Caprolactone Business; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to future guidance and assessment of U.S. tax reform. Additionally, discrete tax items could drive variability in our projected effective tax rate. All of these components could significantly impact such financial measures. Further, in the future, other items with similar characteristics to those currently included in adjusted EBITDA, that have a similar impact on comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA.
Liquidity and Capital Resources
The primary source of liquidity for Ingevity’s business is the cash flow provided by operations. Projected 2020 cash flow provided by operations is expected to be $215 million to $255 million. We expect our cash flow provided by operations combined with cash on hand and available capacity under our revolving credit facility to be sufficient to meet our working capital needs. Over the next twelve months, we expect to make interest payments, capital expenditures, expenditures related to our business transformation initiative, principal repayments, purchases pursuant to our stock repurchase program, income tax payments, incur additional spending associated with our Performance Materials' intellectual property litigation, and may incur additional acquisition-related cost payments. In addition, from time to time we may repurchase any of our outstanding 4.50 percent senior unsecured notes due in 2026 in open market or privately negotiated transactions or otherwise. We believe our sources of liquidity will be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months. As of June 30, 2020, our undrawn capacity under our revolving credit facility was $527.8 million, however if fully drawn, a portion of this capacity may need to be repaid by September 30, 2020 to comply with existing debt covenants. In addition, we also evaluate and consider strategic acquisitions, and joint ventures, as well as other transactions to create stockholder value and enhance financial performance. Such transactions may require cash expenditures. In connection with such transactions, or to fund other anticipated uses of cash, we may modify our existing revolving credit and term loan facilities, seek additional debt financing, issue equity securities, or some combination thereof.
Cash and cash equivalents totaled $177.6 million at June 30, 2020, which includes the remaining $95 million outstanding of our $250 million draw down from our revolving credit facility during Q1 2020 to strengthen short term liquidity and to ensure financial flexibility in light of the uncertainty caused by the COVID-19 pandemic. Management continuously monitors deposit concentrations and the credit quality of the financial institutions that hold Ingevity's cash and cash equivalents, as well as the credit quality of its insurance providers, customers and key suppliers.
Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalents balance at June 30, 2020 included $62.9 million held by our foreign subsidiaries. Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and capital expenditures. We believe that our foreign holdings of cash will not have a material adverse impact on our U.S. liquidity. Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S. operations. If these earnings were distributed, such amounts would be subject to U.S. federal income tax at the statutory rate less the available foreign tax credits, if any, and potentially subject to withholding taxes in the various jurisdictions. The potential tax implications of the repatriation of unremitted earnings are driven by facts at the time of distribution, therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such cash and earnings were repatriated to the U.S.
Other Potential Liquidity Needs
Share Repurchases
On February 28, 2020, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock, and rescinded the prior two authorizations from 2017 and 2018 of $100.0 million and $350.0 million, respectively. The share repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time. Shares may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors. During March 2020, we suspended share repurchases in light of the uncertainty caused by the COVID-19 pandemic. At June 30, 2020, $467.6 million remained unused under our Board-authorized repurchase program.
Capital Expenditures
Projected 2020 capital expenditures are $85 million. We have no material commitments associated with these projected capital expenditures as of June 30, 2020.
Cash flow comparison of Six Months Ended June 30, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
In millions
|
2020
|
|
2019
|
|
Net cash provided by (used in) operating activities
|
$
|
109.1
|
|
|
$
|
71.5
|
|
|
Net cash provided by (used in) investing activities
|
(37.4)
|
|
|
(599.3)
|
|
|
Net cash provided by (used in) financing activities
|
45.9
|
|
|
504.8
|
|
Cash flows provided by (used in) operating activities
During the first six months of 2020, cash flow provided by operations increased primarily due to lower accounts receivable due sales being lower than expected because of COVID-19 and a decrease in the change in accrued payroll and employee benefits. Below provides a description of the changes to working capital during the first six months of 2020 (i.e. current assets and current liabilities).
Current Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
June 30, 2020
|
|
December 31, 2019
|
|
Cash and cash equivalents
|
$
|
177.6
|
|
|
$
|
56.5
|
|
|
Accounts receivable, net
|
132.1
|
|
|
150.0
|
|
|
Inventories, net
|
223.5
|
|
|
212.5
|
|
|
Prepaid and other current assets
|
46.5
|
|
|
44.2
|
|
|
Total current assets
|
$
|
579.7
|
|
|
$
|
463.2
|
|
Current assets as of June 30, 2020, increased $116.5 million compared to December 31, 2019, primarily due to increases in cash and inventories. Cash and cash equivalents increased by $121.1 million, compared to the balance at December 31, 2019, mainly due to the drawdown of our revolving credit facility to strengthen our short term liquidity in response to the uncertainties caused by the COVID-19 pandemic. Inventories increased by $11.0 million mainly due to lower than expected sales in the quarter ended June 30, 2020. These increases were offset by a decrease of $17.9 million in Accounts receivable, net as of June 30, 2020, related to lower sales during the quarter ended June 30, 2020, compared to the quarter ended December 31, 2019. Additionally, Prepaid and other current assets increased by $2.3 million, primarily related to prepaid services and insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
June 30, 2020
|
|
December 31, 2019
|
|
Accounts payable
|
$
|
78.7
|
|
|
$
|
99.1
|
|
|
Accrued expenses
|
39.4
|
|
|
33.3
|
|
|
Accrued payroll and employee benefits
|
13.1
|
|
|
28.2
|
|
|
Current operating lease liabilities
|
16.5
|
|
|
17.1
|
|
|
Notes payable and current maturities of long-term debt
|
21.7
|
|
|
22.5
|
|
|
Income taxes payable
|
18.5
|
|
|
15.3
|
|
|
Total current liabilities
|
$
|
187.9
|
|
|
$
|
215.5
|
|
Current liabilities as of June 30, 2020, decreased by $27.6 million compared to December 31, 2019, primarily driven by a decrease in Accounts payable, Accrued payroll and employee benefits, Current operating lease liabilities, and Notes payable and current maturities of long-term debt, offset partially by increases in Accrued expenses and Income taxes payable.
Cash flows provided by (used in) investing activities
Cash used by investing activities in the six months ended June 30, 2020 was $37.4 million and was primarily driven by capital expenditures. In the six months ended June 30, 2020 and 2019, capital spending included the base maintenance capital supporting ongoing operations and growth spending primarily related to the construction of Performance Materials activated carbon manufacturing facilities in Waynesboro, Georgia, Wickliffe, Kentucky, and Covington, Virginia as well as expansion at our Performance Chemicals Warrington, United Kingdom facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditure categories
|
Six Months Ended June 30,
|
|
|
|
In millions
|
2020
|
|
2019
|
|
Maintenance
|
$
|
22.2
|
|
|
$
|
18.4
|
|
|
Safety, health and environment
|
6.1
|
|
|
4.9
|
|
|
Growth and cost improvement
|
6.2
|
|
|
34.4
|
|
|
Total capital expenditures
|
$
|
34.5
|
|
|
$
|
57.7
|
|
Cash flows provided by (used in) financing activities
Cash provided by financing activities in the six months ended June 30, 2020 was $45.9 million and was driven by net borrowings of $88.8 million under our revolving credit facility, offset by payments on long-term borrowings of $9.4 million, tax payments related to withholdings on restricted stock unit vestings of $3.0 million, and the repurchase of common stock of $32.4 million. Cash provided by financing activities in the six months ended June 30, 2019 was $504.8 million and was primarily driven by net borrowings of $257.5 million from our revolving credit facility and $375.0 million from the amendment to our term loan facility, offset by payments on long-term borrowings of $113.1 million, tax payments related to withholdings on restricted stock unit vestings of $14.3 million, and the repurchase of common stock of $3.3 million.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows.
Contractual Obligations
Information related to our contractual commitments at December 31, 2019 can be found in a table included within Part II, Item 7 of our 2019 Annual Report. Except as described above, there have been no material changes to our contractual commitments during the six months ended June 30, 2020.
New Accounting Guidance
Refer to the Note 3 to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Condensed Consolidated Financial Statements.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have described our accounting policies in Note 3 to our Annual Consolidated Financial Statements included in our 2019 Annual Report. We have reviewed these accounting policies, identifying those that we believe to be critical to the preparation and understanding of our financial statements. Critical accounting policies are central to our presentation of results of operations and financial condition and require management to make estimates and judgments on certain matters. We base our estimates and judgments on historical experience, current conditions and other reasonable factors. Our critical accounting policies have not substantially changed from those described in the 2019 Form 10-K.