INGEVITY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited) | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
In millions | 2023 | | 2022 |
Cash provided by (used in) operating activities: | | | |
Net income (loss) | $ | 50.7 | | | $ | 60.8 | |
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 31.1 | | | 27.1 | |
Non cash operating lease costs | 4.3 | | | 4.6 | |
Deferred income taxes | (0.9) | | | 1.4 | |
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LIFO reserve | 22.3 | | | 10.7 | |
Share-based compensation | 4.0 | | | 3.0 | |
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Gain on sale of strategic investment | (19.2) | | | — | |
Other non-cash items | 4.7 | | | 1.8 | |
Changes in operating assets and liabilities, net of effect of acquisitions: | | | |
Accounts receivable, net | (14.0) | | | (46.1) | |
Inventories, net | (48.1) | | | (30.4) | |
Prepaid and other current assets | 5.2 | | | (1.0) | |
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Accounts payable | (0.8) | | | 7.7 | |
Accrued expenses | (2.7) | | | 3.3 | |
Accrued payroll and employee benefits | (31.7) | | | (25.8) | |
Income taxes | 9.5 | | | 11.2 | |
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Operating leases | (5.2) | | | (5.4) | |
Changes in other operating assets and liabilities, net | (4.0) | | | 1.4 | |
Net cash provided by (used in) operating activities | $ | 5.2 | | | $ | 24.3 | |
Cash provided by (used in) investing activities: | | | |
Capital expenditures | $ | (25.4) | | | $ | (27.6) | |
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Proceeds from sale of strategic investment | 31.4 | | | — | |
Other investing activities, net | (4.1) | | | (2.6) | |
Net cash provided by (used in) investing activities | $ | 1.9 | | | $ | (30.2) | |
Cash provided by (used in) financing activities: | | | |
Proceeds from revolving credit facility | $ | 90.3 | | | $ | — | |
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Payments on revolving credit facility | (60.3) | | | — | |
Payments on long-term borrowings | — | | | (4.7) | |
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Finance lease obligations, net | (0.3) | | | (0.2) | |
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Tax payments related to withholdings on vested equity awards | (4.5) | | | (1.8) | |
Proceeds and withholdings from share-based compensation plans, net | 2.6 | | | 0.8 | |
Repurchases of common stock under publicly announced plan | (33.4) | | | (40.4) | |
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Net cash provided by (used in) financing activities | $ | (5.6) | | | $ | (46.3) | |
Increase (decrease) in cash, cash equivalents, and restricted cash | 1.5 | | | (52.2) | |
Effect of exchange rate changes on cash | (0.4) | | | (0.7) | |
Change in cash, cash equivalents, and restricted cash | 1.1 | | | (52.9) | |
Cash, cash equivalents, and restricted cash at beginning of period | 77.3 | | | 276.1 | |
Cash, cash equivalents, and restricted cash at end of period(1) | $ | 78.4 | | | $ | 223.2 | |
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(1) | Includes restricted cash of $0.5 million and $0.6 million and cash and cash equivalents of $77.9 million and $222.6 million at March 31, 2023 and 2022, respectively. Restricted cash is included within "Prepaid and other current assets" within the condensed consolidated balance sheets. |
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Supplemental cash flow information: | | | |
Cash paid for interest, net of capitalized interest | $ | 15.3 | | | $ | 11.0 | |
Cash paid for income taxes, net of refunds | 4.7 | | | 3.5 | |
Purchases of property, plant, and equipment in accounts payable | 4.3 | | | 5.3 | |
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Leased assets obtained in exchange for new operating lease liabilities | 3.9 | | | 2.9 | |
The accompanying notes are an integral part of these financial statements.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Note 1: Background
Description of Business
Ingevity Corporation ("Ingevity," "the Company," "we," "us," or "our") provides products and technologies that purify, protect, and enhance the world around us. Through a team of talented and experienced people, we develop, manufacture, and bring to market solutions that help customers solve complex problems and make the world more sustainable. During the first quarter of 2023, we realigned our segment reporting structure to increase transparency for our investors and better align with how our chief operating decision maker intends to measure segment operating performance and allocate resources across our operating segments. We separated our February 2019 acquisition, engineered polymers, from the Performance Chemicals reportable segment into its own reportable segment, Advanced Polymer Technologies. This reportable segment change also resulted in our Performance Chemicals reporting unit for goodwill being split into two separate reporting units for the purposes of goodwill impairment testing.
We operate in three reportable segments: Performance Chemicals, which includes specialty chemicals and pavement technologies; Advanced Polymer Technologies, which includes biodegradable plastics and polyurethane materials; and Performance Materials, which includes activated carbon. Our products are used in a variety of demanding applications, including adhesives, agrochemicals, asphalt paving, bioplastics, coatings, elastomers, lubricants, pavement markings, publication inks, oil exploration and production and automotive components that reduce gasoline vapor emissions.
Basis of Consolidation and Presentation
These unaudited Condensed Consolidated Financial Statements reflect the consolidated operations of the Company and have been prepared in accordance with United States Securities and Exchange Commission ("SEC") interim reporting requirements. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for full financial statements and should be read in conjunction with the Annual Consolidated Financial Statements for the years ended December 31, 2022, 2021 and 2020, collectively referred to as the “Annual Consolidated Financial Statements,” included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report").
In the opinion of management, the Condensed Consolidated Financial Statements contain all adjustments, which include only normal recurring adjustments, necessary to fairly state the condensed consolidated results for the interim periods presented. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
The preparation of the Condensed Consolidated Financial Statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenue, and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform with the current year's presentation.
Note 2: New Accounting Guidance
The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" or "Codification") is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update ("ASU") to communicate changes to the Codification. We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Note 3: Revenues
Disaggregation of Revenue
The following table presents our Net sales disaggregated by reportable segment and product line. | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
In millions | | | | | 2023 | | 2022 |
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Performance Materials segment | | | | | $ | 141.4 | | | $ | 148.4 | |
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Performance Chemicals segment | | | | | $ | 185.6 | | | $ | 172.6 | |
Pavement Technologies product line | | | | | 45.8 | | | 27.9 | |
Industrial Specialties product line | | | | | 139.8 | | | 144.7 | |
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Advanced Polymer Technologies segment | | | | | $ | 65.6 | | | $ | 61.8 | |
Net sales | | | | | $ | 392.6 | | | $ | 382.8 | |
The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer.
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| | | Three Months Ended March 31, |
In millions | | | | | 2023 | | 2022 |
North America | | | | | $ | 234.7 | | | $ | 212.6 | |
Asia Pacific | | | | | 85.7 | | | 97.6 | |
Europe, Middle East, and Africa | | | | | 62.7 | | | 62.7 | |
South America | | | | | 9.5 | | | 9.9 | |
Net sales | | | | | $ | 392.6 | | | $ | 382.8 | |
Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers. The contract assets primarily relate to our rights to consideration for products produced but not billed at the reporting date. The contract assets are recognized as accounts receivables when the rights become unconditional and the customer has been billed. Contract liabilities represent obligations to transfer goods to a customer for which we have received consideration from our customer. For all periods presented, we had no contract liabilities.
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| Contract Asset | | |
| March 31, | | |
In millions | 2023 | | 2022 | | |
Beginning balance | $ | 6.4 | | | $ | 5.3 | | | |
Contract asset additions | 3.9 | | | 3.8 | | | |
Reclassification to accounts receivable, billed to customers | (4.1) | | | (3.1) | | | |
Ending balance (1) | $ | 6.2 | | | $ | 6.0 | | | |
______________
(1) Included within "Prepaid and other current assets" on the condensed consolidated balance sheets.
Note 4: Fair Value Measurements
Fair Value Measurements
Recurring Fair Value Measurements
The following information is presented for assets and liabilities that are recorded in the condensed consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that were recorded at
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
fair value between the three-level fair value hierarchy during the periods reported.
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In millions | Level 1(1) | | Level 2(2) | | Level 3(3) | | Total |
March 31, 2023 | | | | | | | |
Assets: | | | | | | | |
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Deferred compensation plan investments (4) | $ | 1.5 | | | $ | — | | | $ | — | | | $ | 1.5 | |
Total assets | $ | 1.5 | | | $ | — | | | $ | — | | | $ | 1.5 | |
Liabilities: | | | | | | | |
Deferred compensation arrangement (4) | $ | 14.6 | | | $ | — | | | $ | — | | | $ | 14.6 | |
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Total liabilities | $ | 14.6 | | | $ | — | | | $ | — | | | $ | 14.6 | |
December 31, 2022 | | | | | | | |
Assets: | | | | | | | |
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Deferred compensation plan investments (4) | $ | 1.1 | | | $ | — | | | $ | — | | | $ | 1.1 | |
Total assets | $ | 1.1 | | | $ | — | | | $ | — | | | $ | 1.1 | |
Liabilities: | | | | | | | |
Deferred compensation arrangement (4) | $ | 12.5 | | | $ | — | | | $ | — | | | $ | 12.5 | |
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Total liabilities | $ | 12.5 | | | $ | — | | | $ | — | | | $ | 12.5 | |
______________
(1) Quoted prices in active markets for identical assets.
(2) Quoted prices for similar assets and liabilities in active markets.
(3) Significant unobservable inputs.
(4) Consists of a deferred compensation arrangement, through which we hold various investment securities. Both the asset and liability are recorded at fair value, and are included within "Other assets" and "Other liabilities" on the condensed consolidated balance sheets, respectively. In addition to the investment securities, we also have company-owned life insurance ("COLI") related to the deferred compensation arrangement. COLI is recorded at cash surrender value and included in "Other assets" on the condensed consolidated balance sheets in the amount of $13.8 million and $13.3 million at March 31, 2023 and December 31, 2022, respectively.
Nonrecurring Fair Value Measurements
There were no nonrecurring fair value measurements in the condensed consolidated balance sheet during the quarters ended March 31, 2023, and December 31, 2022.
Strategic Investments
Equity Method Investments
The aggregate carrying value of all strategic equity method investments totaled $15.7 million and $28.2 million at March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023, we sold a strategic equity method investment for $31.4 million, resulting in a $19.2 million gain, recorded within "Other (income) expense, net" on the condensed consolidated statement of operations. There were no adjustments to the carrying value of equity method investments for impairment for the periods ended March 31, 2023 and December 31, 2022.
Measurement Alternative Investments
The aggregate carrying value of all measurement alternative investments where fair value is not readily determinable totaled $83.2 million and $80.8 million at March 31, 2023 and December 31, 2022, respectively. There were no adjustments to the carrying value of the measurement alternative method investments for impairment or observable price changes for the periods ended March 31, 2023 and December 31, 2022.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Restricted Investment
At March 31, 2023 and December 31, 2022, the carrying value of our restricted investment, which is accounted for as held-to-maturity ("HTM") and therefore recorded at amortized costs, was $78.8 million and $78.0 million, net of an allowance for credit losses of $0.4 million and $0.6 million, and included cash of $7.7 million and $7.0 million, respectively. The fair value at March 31, 2023 and December 31, 2022 was $76.4 million and $74.7 million, respectively, based on Level 1 inputs.
The following table shows the total amortized cost of our HTM debt securities by credit rating, excluding the allowance for credit losses and cash. The primary factor in our expected credit loss calculation is the composite bond rating. As the rating decreases, the risk present in holding the bond is inherently increased, leading to an increase in expected credit losses.
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| HTM Debt Securities |
In millions | AA+ | | AA | | AA- | | A | | A- | | BBB+ | | Total |
March 31, 2023 | $ | 13.4 | | | — | | | 10.4 | | | 13.2 | | | 14.1 | | | 20.4 | | | $ | 71.5 | |
December 31, 2022 | $ | 13.4 | | | — | | | 10.5 | | | 13.2 | | | 14.1 | | | 20.4 | | | $ | 71.6 | |
Debt and Finance Lease Obligations
At March 31, 2023 and December 31, 2022, the carrying value of finance lease obligations was $101.6 million and $101.9 million, respectively, and the fair value was $106.8 million and $106.2 million, respectively. The fair value of our finance lease obligations is based on the period-end quoted market prices for the obligations, using Level 2 inputs. The fair value of all other finance lease obligations approximates their carrying values.
The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt was $858.0 million and $828.0 million as of March 31, 2023 and December 31, 2022, respectively. The carrying value is a reasonable estimate of the fair value of the outstanding debt based on the variable interest rate of the debt.
At March 31, 2023 and December 31, 2022, the carrying value of our fixed rate debt was $550.0 million and $550.0 million, respectively, and the fair value was $478.9 million and $471.8 million, respectively, based on Level 2 inputs.
Note 5: Inventories, net | | | | | | | | | | | |
In millions | March 31, 2023 | | December 31, 2022 |
Raw materials | $ | 111.8 | | | $ | 106.7 | |
Production materials, stores, and supplies | 28.9 | | | 27.9 | |
Finished and in-process goods | 270.8 | | | 228.2 | |
Subtotal | $ | 411.5 | | | $ | 362.8 | |
Less: LIFO reserve | (50.1) | | | (27.8) | |
Inventories, net | $ | 361.4 | | | $ | 335.0 | |
Note 6: Property, Plant, and Equipment, net | | | | | | | | | | | |
In millions | March 31, 2023 | | December 31, 2022 |
Machinery and equipment | $ | 1,177.9 | | | $ | 1,162.7 | |
Buildings and leasehold improvements | 204.2 | | | 200.9 | |
Land and land improvements | 25.2 | | | 24.9 | |
Construction in progress | 127.7 | | | 120.9 | |
Total cost | $ | 1,535.0 | | | $ | 1,509.4 | |
Less: accumulated depreciation | (730.4) | | | (710.8) | |
Property, plant, and equipment, net | $ | 804.6 | | | $ | 798.6 | |
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Note 7: Goodwill and Other Intangible Assets, net
Goodwill
As described in Note 1, we reorganized our segment reporting structure to increase transparency for our investors and better align with the markets and customers we serve through each of our segments. This structure is also consistent with the manner in which information is presently used internally by our chief operating decision maker to evaluate performance and make resource allocation decisions. This reportable segment change impacted the identification of reporting units, which are at the level of operating segment or lower, resulting in two reporting units (Performance Chemicals and Advanced Polymer Technologies).
We have reallocated goodwill as of January 1, 2023 to align to our new reporting unit structure by using a relative fair value approach and tested goodwill for impairment immediately before and after the realignment; no impairment was identified.
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| Reporting Units | | |
In millions | Performance Materials | | Performance Chemicals | | Advanced Polymer Technologies | | Total |
December 31, 2022 | $ | 4.3 | | | $ | 514.2 | | | $ | — | | | $ | 518.5 | |
Segment change reallocation | — | | | (165.0) | | | 165.0 | | | — | |
Foreign currency translation | — | | | — | | | 3.5 | | | 3.5 | |
March 31, 2023 | $ | 4.3 | | | $ | 349.2 | | | $ | 168.5 | | | $ | 522.0 | |
Other Intangible Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
In millions | Customer contracts and relationships | | Brands (1) | | Developed Technology | | | | Total |
Gross Asset Value | | | | | | | | | |
December 31, 2022 | $ | 388.5 | | | $ | 89.2 | | | $ | 88.5 | | | | | $ | 566.2 | |
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Foreign currency translation | 3.1 | | | 1.3 | | | 1.3 | | | | | 5.7 | |
March 31, 2023 | $ | 391.6 | | | $ | 90.5 | | | $ | 89.8 | | | | | $ | 571.9 | |
Accumulated Amortization | | | | | | | | | |
December 31, 2022 | $ | (113.8) | | | $ | (23.9) | | | $ | (23.7) | | | | | $ | (161.4) | |
Amortization | (6.6) | | | (1.4) | | | (2.3) | | | | | (10.3) | |
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Foreign currency translation | (0.7) | | | (0.3) | | | (0.5) | | | | | (1.5) | |
March 31, 2023 | $ | (121.1) | | | $ | (25.6) | | | $ | (26.5) | | | | | $ | (173.2) | |
Other intangibles, net | $ | 270.5 | | | $ | 64.9 | | | $ | 63.3 | | | | | $ | 398.7 | |
_______________
(1) Represents trademarks, trade names, and know-how.
Intangible assets subject to amortization were attributed to our business segments as follows:
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In millions | March 31, 2023 | | December 31, 2022 |
Performance Materials | $ | 1.6 | | | $ | 1.7 | |
Performance Chemicals | 192.2 | | | 198.0 |
Advanced Polymer Technologies | 204.9 | | | 205.1 | |
Other intangibles, net | $ | 398.7 | | | $ | 404.8 | |
Amortization expense related to our intangible assets is included in Selling, general and administrative expenses on the condensed consolidated statement of operations. During the three months ended March 31, 2023 and 2022, we recognized amortization expense of $10.3 million and $8.1 million, respectively.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: $31.2 million for the remainder of 2023, 2024 - $41.1 million, 2025 - $40.9 million, 2026 - $40.2 million, and 2027 - $40.2 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency exchange rates.
Note 8: Financial Instruments and Risk Management
Net Investment Hedges
In the third quarter of 2022, we terminated our fixed-to-fixed cross-currency interest rate swaps, accounted for as net investment hedges. During the three months ended March 31, 2023 and 2022, we recognized net interest income associated with this financial instrument of zero and $0.2 million, respectively.
Cash Flow Hedges
Foreign Currency Exchange Risk Management
As of March 31, 2023, there were $14.1 million open foreign currency derivative contracts. The fair value of the designated foreign currency hedge contracts was an asset (liability) of $(0.7) million and $(0.5) million at March 31, 2023 and December 31, 2022, respectively.
Commodity Price Risk Management
As of March 31, 2023, we had 1.6 million and 0.4 million mm BTUS (millions of British Thermal Units) in aggregate notional volume of outstanding natural gas commodity swap contracts and zero cost collar option contracts, respectively, designated as cash flow hedges. As of March 31, 2023, open commodity contracts hedge forecasted transactions until March 2024. The fair value of the outstanding designated natural gas commodity hedge contracts as of March 31, 2023 and December 31, 2022, was a net asset (liability) of $(2.8) million and $(1.6) million, respectively.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Interest Rate Risk Management
During 2022, we had floating-to-fixed interest rate swaps effectively converting a portion of our floating rate debt to a fixed rate. In the second quarter of 2022, we terminated the interest rate swap instruments.
Effect of Cash Flow and Net Investment Hedge Accounting on AOCI
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In millions | Amount of Gain (Loss) Recognized in AOCI | | Amount of Gain (Loss) Reclassified from AOCI into Net income | | Location of Gain (Loss) Reclassified from AOCI in Net income |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | 2023 | | 2022 | | |
Cash flow hedging derivatives | | | | | | | | | |
Currency exchange contracts | $ | (0.1) | | | $ | 0.5 | | | $ | (0.2) | | | $ | 0.2 | | | Net sales |
Natural gas contracts | (2.9) | | | 4.1 | | | 0.5 | | | 1.3 | | | Cost of sales |
Interest rate swap contracts | — | | | 3.7 | | | — | | | — | | | Interest expense, net |
Total | $ | (3.0) | | | $ | 8.3 | | | $ | 0.3 | | | $ | 1.5 | | | |
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In millions | Amount of Gain (Loss) Recognized in AOCI | | Amount of Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) | | Location of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | 2023 | | 2022 | | |
Net investment hedging derivative | | | | | | | | | |
Currency exchange contracts (1) | $ | — | | | $ | 1.7 | | | $ | — | | | $ | — | | | Interest expense, net |
Total | $ | — | | | $ | 1.7 | | | $ | — | | | $ | — | | | |
__________
(1) Reclassifications from AOCI to Net Income were zero for all periods presented. Gains and losses would be reclassified from AOCI to Other (income) expense, net.
Within the next twelve months, we expect to reclassify $5.0 million of net gains from AOCI to income, before taxes.
Fair Value Measurements
The following information is presented for derivative assets and liabilities that are recorded in the condensed consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during the periods reported. There were no nonrecurring fair value measurements related to derivative assets and liabilities on the condensed consolidated balance sheets as of March 31, 2023, or December 31, 2022.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
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| March 31, 2023 |
In millions | Level 1(1) | | Level 2(2) | | Level 3(3) | | Total |
Assets: | | | | | | | |
Currency exchange contracts (4) | $ | — | | | $ | 0.9 | | | $ | — | | | $ | 0.9 | |
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Total assets | $ | — | | | $ | 0.9 | | | $ | — | | | $ | 0.9 | |
Liabilities: | | | | | | | |
Currency exchange contracts(5) | $ | — | | | $ | 1.6 | | | $ | — | | | $ | 1.6 | |
Natural gas contracts (5) | — | | | 2.8 | | | — | | | 2.8 | |
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Total liabilities | $ | — | | | $ | 4.4 | | | $ | — | | | $ | 4.4 | |
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| December 31, 2022 |
In millions | Level 1(1) | | Level 2(2) | | Level 3(3) | | Total |
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Liabilities: | | | | | | | |
Natural gas contracts (5) | $ | — | | | $ | 1.6 | | | $ | — | | | $ | 1.6 | |
Currency exchange contracts (5) | — | | | 0.5 | | | — | | | 0.5 | |
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Total liabilities | $ | — | | | $ | 2.1 | | | $ | — | | | $ | 2.1 | |
__________
(1) Quoted prices in active markets for identical assets.
(2) Quoted prices for similar assets and liabilities in active markets.
(3) Significant unobservable inputs.
(4) Included within "Other current assets" on the condensed consolidated balance sheet.
(5) Included within "Accrued expenses" on the condensed consolidated balance sheet.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Note 9: Debt, including Finance Lease Obligations
Current and long-term debt including finance lease obligations consisted of the following: | | | | | | | | | | | | | | | | | |
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In millions, except percentages | | | | | March 31, 2023 | | December 31, 2022 |
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Revolving Credit Facility and other lines of credit (1) | | | | | $ | 858.0 | | | $ | 828.0 | |
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3.88% Senior Notes due 2028 | | | | | 550.0 | | | 550.0 | |
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Finance lease obligations | | | | | 101.6 | | | 101.9 | |
Total debt including finance lease obligations | | | | | $ | 1,509.6 | | | $ | 1,479.9 | |
Less: debt issuance costs | | | | | 6.2 | | | 6.5 | |
Total debt, including finance lease obligations, net of debt issuance costs | | | | | $ | 1,503.4 | | | $ | 1,473.4 | |
Less: debt maturing within one year (2) | | | | | 0.9 | | | 0.9 | |
Long-term debt including finance lease obligations | | | | | $ | 1,502.5 | | | $ | 1,472.5 | |
______________
(1) Letters of credit outstanding under the revolving credit facility were $2.3 million and $2.3 million and available funds under the facility were $139.7 million and $169.7 million at March 31, 2023 and December 31, 2022, respectively.
(2) Debt maturing within one year is included in "Notes payable and current maturities of long-term debt" on the condensed consolidated balance sheets.
Debt Covenants
Our indentures contain certain customary covenants (including covenants limiting Ingevity's and its restricted subsidiaries’ ability to grant or permit liens on certain property securing debt, declare or pay dividends, make distributions on or repurchase or redeem capital stock, make investments in unrestricted subsidiaries, engage in sale and lease-back transactions, and engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of the assets of Ingevity and our restricted subsidiaries, taken as a whole) and events of default (subject in certain cases to customary exceptions, as well as grace and cure periods). The occurrence of an event of default under the 2028 Senior Notes could result in the acceleration of the notes of such series and could cause a cross-default resulting in the acceleration of other indebtedness of Ingevity and its subsidiaries. We were in compliance with all covenants under the indenture as of March 31, 2023.
The credit agreements governing our revolving credit facility contain customary default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-compliance with covenants and cross-defaults to other material indebtedness. The occurrence of an uncured event of default under the credit agreement could result in all loans and other obligations becoming immediately due and payable and our revolving credit facility being terminated. The credit agreement also contains certain customary covenants, including financial covenants. The revolving credit facility financial covenants require Ingevity to maintain on a consolidated basis a maximum total net leverage ratio of 4.0 to 1.0 (which may be increased to 4.5 to 1.0 under certain circumstances) and a minimum interest coverage ratio of 3.0 to 1.0. As calculated per the credit agreement, our net leverage for the four consecutive quarters ended March 31, 2023 was 2.6, and our actual interest coverage for the four consecutive quarters ended March 31, 2023 was 8.9. We were in compliance with all covenants under the credit agreement at March 31, 2023.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Note 10: Equity
The tables below provide a roll forward of equity. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Common Stock | | | | | | | | | | | | |
In millions, shares in thousands | Shares | | Amount | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | | | Total Equity |
Balance at December 31, 2022 | 43,228 | | | $ | 0.4 | | | $ | 153.0 | | | $ | 1,007.7 | | | $ | (46.8) | | | $ | (416.0) | | | | | $ | 698.3 | |
Net income (loss) | — | | | — | | | — | | | 50.7 | | | — | | | — | | | | | 50.7 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 8.0 | | | — | | | | | 8.0 | |
Common stock issued | 139 | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Exercise of stock options, net | 41 | | | — | | | 2.2 | | | — | | | — | | | — | | | | | 2.2 | |
Tax payments related to vested restricted stock units | — | | | — | | | — | | | — | | | — | | | (4.5) | | | | | (4.5) | |
Share repurchase program | — | | | — | | | — | | | — | | | — | | | (33.4) | | | | | (33.4) | |
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Share-based compensation plans | — | | | — | | | 3.7 | | | — | | | — | | | 0.7 | | | | | 4.4 | |
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Balance at March 31, 2023 | 43,408 | | | $ | 0.4 | | | $ | 158.9 | | | $ | 1,058.4 | | | $ | (38.8) | | | $ | (453.2) | | | | | $ | 725.7 | |
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In millions, shares in thousands | Shares | | Amount | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | | | Total Equity |
Balance at December 31, 2021 | 43,102 | | | $ | 0.4 | | | $ | 136.3 | | | $ | 796.1 | | | $ | 13.1 | | | $ | (272.1) | | | | | $ | 673.8 | |
Net income (loss) | — | | | — | | | — | | | 60.8 | | | — | | | — | | | | | 60.8 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (10.1) | | | — | | | | | (10.1) | |
Common stock issued | 42 | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Exercise of stock options, net | 36 | | | — | | | 0.4 | | | — | | | — | | | — | | | | | 0.4 | |
Tax payments related to vested restricted stock units | — | | | — | | | — | | | — | | | — | | | (1.8) | | | | | (1.8) | |
Share repurchase program | — | | | — | | | — | | | — | | | — | | | (40.4) | | | | | (40.4) | |
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Share-based compensation plans | — | | | — | | | 2.9 | | | — | | | — | | | 0.5 | | | | | 3.4 | |
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Balance at March 31, 2022 | 43,180 | | | $ | 0.4 | | | $ | 139.6 | | | $ | 856.9 | | | $ | 3.0 | | | $ | (313.8) | | | | | $ | 686.1 | |
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INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
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Accumulated other comprehensive income (loss) | | | | | | | |
| | | Three Months Ended March 31, |
In millions | | | | | 2023 | | 2022 |
Foreign currency translation | | | | | | | |
Beginning balance | | | | | $ | (45.8) | | | $ | 18.4 | |
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Net gains (losses) on foreign currency translation | | | | | 10.5 | | | (16.6) | |
Gains (losses) on net investment hedges | | | | | — | | | 1.7 | |
Less: tax provision (benefit) | | | | | — | | | 0.4 | |
Net gains (losses) on net investment hedges | | | | | — | | | 1.3 | |
Other comprehensive income (loss), net of tax | | | | | 10.5 | | | (15.3) | |
Ending balance | | | | | $ | (35.3) | | | $ | 3.1 | |
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Derivative instruments | | | | | | | |
Beginning balance | | | | | $ | (1.4) | | | $ | (2.1) | |
Gains (losses) on derivative instruments | | | | | (3.0) | | | 8.3 | |
Less: tax provision (benefit) | | | | | (0.7) | | | 2.0 | |
Net gains (losses) on derivative instruments | | | | | (2.3) | | | 6.3 | |
(Gains) losses reclassified to net income | | | | | (0.3) | | | (1.5) | |
Less: tax (provision) benefit | | | | | (0.1) | | | (0.4) | |
Net (gains) losses reclassified to net income | | | | | (0.2) | | | (1.1) | |
Other comprehensive income (loss), net of tax | | | | | (2.5) | | | 5.2 | |
Ending balance | | | | | $ | (3.9) | | | $ | 3.1 | |
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Pension and other postretirement benefits | | | | | | | |
Beginning balance | | | | | $ | 0.4 | | | $ | (3.2) | |
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Other comprehensive income (loss), net of tax | | | | | — | | | — | |
Ending balance | | | | | $ | 0.4 | | | $ | (3.2) | |
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Total AOCI ending balance at March 31 | | | | | $ | (38.8) | | | $ | 3.0 | |
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Reclassifications of accumulated other comprehensive income (loss) | | | | | | | |
| | | Three Months Ended March 31, |
In millions | | | | | 2023 | | 2022 |
Derivative instruments | | | | | | | |
Currency exchange contracts (1) | | | | | $ | (0.2) | | | $ | 0.2 | |
Natural gas contracts (2) | | | | | 0.5 | | | 1.3 | |
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Total before tax | | | | | 0.3 | | | 1.5 | |
(Provision) benefit for income taxes | | | | | (0.1) | | | (0.4) | |
Amount included in net income (loss) | | | | | $ | 0.2 | | | $ | 1.1 | |
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______________
(1) Included within "Net sales" on the condensed consolidated statement of operations.
(2) Included within "Cost of sales" on the condensed consolidated statement of operations.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Share Repurchases
On July 25, 2022, our Board of Directors authorized the repurchase of up to $500 million of our common stock, and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior authorization. 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, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
During the three months ended March 31, 2023 and 2022, we repurchased $33.4 million, inclusive of $0.2 million in excise tax, and $40.4 million in common stock, representing 449,475 and 610,447 shares of our common stock at a weighted average cost per share of $73.86 and $66.26, respectively. At March 31, 2023, $411.5 million remained unused under our Board-authorized repurchase program.
Note 11: Restructuring and Other (Income) Charges, net
Detail on the restructuring charges and other (income) charges, net, is provided below.
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| | | Three Months Ended March 31, |
In millions | | | | | 2023 | | 2022 |
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Severance and other employee-related costs(1) | | | | | $ | 3.0 | | | $ | — | |
Other(2) | | | | | 0.1 | | | — | |
Restructuring charges | | | | | 3.1 | | | — | |
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Business transformation costs | | | | | 2.5 | | | 3.6 | |
Other (income) charges, net | | | | | 2.5 | | | 3.6 | |
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Total restructuring and other (income) charges, net | | | | | $ | 5.6 | | | $ | 3.6 | |
_______________(1) Represents severance and employee benefit charges.
(2) Primarily represents other miscellaneous exit costs.
Restructuring Charges
During the quarter, we initiated a reorganization to streamline certain functions and reduce ongoing costs. As a result, we recorded $3.0 million in severance and other employee-related costs for the three months ended March 31, 2023.
Restructuring Reserves
Restructuring reserves which are included within Accrued expenses on the consolidated balance sheets were $0.6 million and $0.5 million at March 31, 2023 and December 31, 2022, respectively.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Other (income) charges, net
Business transformation costs
In 2020, we embarked upon a business transformation initiative that includes the implementation of an upgraded enterprise resource planning ("ERP") system. This new ERP system will equip our employees with standardized processes and secure integrated technology that enable us to better understand and meet our customers' needs and compete in the marketplace. The implementation of our new ERP occurred in multiple phases beginning with our pilot deployment which occurred during the first quarter of 2022 and concluded with our final deployment in the first quarter of 2023. Costs incurred, during the three months ended March 31, 2023 and 2022, of $2.5 million and $3.6 million, respectively, represent costs directly associated with the business transformation initiative that, in accordance with GAAP, cannot be capitalized. Over the course of this initiative, which we expect to complete in 2023, we anticipate incurring approximately $90-95 million of total costs, including $5-6 million during the remainder of 2023, and $45-50 million of non-capitalizable costs.
Note 12: Income Taxes
The effective tax rates, including discrete items, were as follows: | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Effective tax rate | | | | | 20.9 | % | | 21.6 | % |
We determine our interim tax provision using an Estimated Annual Effective Tax Rate methodology (“EAETR”). The EAETR is applied to the year-to-date ordinary income, exclusive of discrete items. The tax effects of discrete items are then included to arrive at the total reported interim tax provision.
The determination of the EAETR is based upon a number of estimates, including the estimated annual pre-tax ordinary income in each tax jurisdiction in which we operate. As our projections of ordinary income change throughout the year, the EAETR will change period-to-period. The tax effects of discrete items are recognized in the tax provision in the period they occur. Depending on various factors, such as the item’s significance in relation to total income and the rate of tax applicable in the jurisdiction to which it relates, discrete items in any quarter may materially impact the reported effective tax rate. As a global enterprise, our tax expense may be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As such, there may be significant volatility in interim tax provisions.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
The below table provides a reconciliation between our reported effective tax rates and the EAETR. | | | | | | | | | | | | | | | | | | | | | | | |
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| Three Months Ended March 31, |
| 2023 | | 2022 |
In millions, except percentages | Before tax | Tax | Effective tax rate % impact | | Before tax | Tax | Effective tax rate % impact |
Consolidated operations | $ | 64.1 | | $ | 13.4 | | 20.9 | % | | $ | 77.6 | | $ | 16.8 | | 21.6 | % |
Discrete items: | | | | | | | |
Restructuring and other (income) charges, net (1) | 3.0 | | 0.7 | | | | — | | — | | |
Sale of strategic investment (2) | (19.2) | | (4.5) | | | | — | | — | | |
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Other tax only discrete items | — | | 1.3 | | | | — | | (0.7) | | |
Total discrete items | (16.2) | | (2.5) | | | | — | | (0.7) | | |
Consolidated operations, before discrete items | $ | 47.9 | | $ | 10.9 | | | | $ | 77.6 | | $ | 16.1 | | |
EAETR (3) | | | 22.8 | % | | | | 20.7 | % |
_______________
(1) See Note 11 for further information.
(2) See Note 4 for further information.
(3) Increase in EAETR for the three months ended March 31, 2023, as compared to March 31, 2022, is due to an overall change in the mix of forecasted earnings in various tax jurisdictions with varying rates, an increase in the foreign earnings deemed taxable in the U.S., and the corporate tax rate in the UK increasing from 19% to 25% on April 1, 2023.
At March 31, 2023 and December 31, 2022, we had deferred tax assets of $9.5 million and $9.2 million, respectively, resulting from certain historical net operating losses from our Brazilian and Chinese operations and U.S. state tax credits for which a valuation allowance has been established. The ultimate realization of these deferred tax assets depends on the generation of future taxable income during the periods in which these net operating losses and tax credits are available to be used. In evaluating the realizability of these deferred tax assets, we consider projected future taxable income and tax planning strategies in making our assessment. As of March 31, 2023, we cannot objectively assert that these deferred tax assets are more likely than not to be realized and therefore we have maintained a valuation allowance. We intend to continue maintaining a valuation allowance on these deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A release of all or a portion of the valuation allowance could be possible, if we determine that sufficient positive evidence becomes available to allow us to reach a conclusion that the valuation allowance will no longer be needed. A release of the valuation allowance would result in the recognition of certain deferred tax assets and a reduction to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability that we are able to actually achieve.
Note 13: Commitments and Contingencies
Legal Proceedings
On July 19, 2018, we filed suit against BASF Corporation (“BASF”) in the United States District Court for the District of Delaware (the “Delaware Proceeding”) alleging BASF infringed Ingevity’s patent covering canister systems used in the control of automotive gasoline vapor emissions (U.S. Patent No. RE38,844) (the “844 Patent”). On February 14, 2019, BASF asserted counterclaims against us in the Delaware Proceeding, alleging two claims for violations of U.S. antitrust law (one for exclusive dealing and the other for tying) as well as a claim for tortious interference with an alleged prospective business relationship between BASF and a BASF customer (the “BASF Counterclaims”). The BASF Counterclaims relate to our enforcement of the 844 Patent and our entry into several supply agreements with customers of its fuel vapor canister honeycombs. The U.S. District Court dismissed our patent infringement claims on November 18, 2020, and the case proceeded to trial on the BASF Counterclaims in September 2021.
On September 15, 2021, a jury in the Delaware Proceeding issued a verdict in favor of BASF on the BASF Counterclaims and awarded BASF damages of approximately $28.3 million, which trebled under U.S. antitrust law to approximately $85.0 million when the court enters judgment. In addition, BASF may seek pre- and post-judgment interest and attorneys’ fees and costs in amounts that they will have to support at a future date.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
We disagree with the verdict, including the court’s application of the law, and we intend to seek judgment as a matter of law in the Delaware Proceeding post-trial briefing stage and on appeal, if necessary. In addition, we intend to challenge the U.S. District Court’s November 2020 dismissal of our patent infringement claims against BASF. Ingevity believes in the strength of its intellectual property and the merits of its position and intends to pursue all legal relief available to challenge these outcomes in the Delaware Proceeding. Final resolution of these matters could take up to 30 months.
As of March 31, 2023, there has been no progress in the post-trial proceedings to warrant any change to our conclusions as disclosed within our 2022 Annual Report. As such, no changes to our reserve were made during this quarter. The full amount of the trebled jury's verdict, $85.0 million, is accrued in Other liabilities on the condensed consolidated balance sheet as of March 31, 2023. The amount of any liability we may ultimately incur related to the Delaware Proceeding could be more or less than the amount accrued.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Note 14: Segment Information
Segment change
As described in Note 1, effective in the first quarter of 2023, we separated our engineered polymers product line from the Performance Chemicals reportable segment into its own reportable segment, Advanced Polymer Technologies. We have recast the data below to reflect the changes in our reportable segments to conform to the current year presentation.
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| | | Three Months Ended March 31, |
In millions | | | | | 2023 | | 2022 |
Net sales | | | | | | | |
Performance Materials | | | | | $ | 141.4 | | | $ | 148.4 | |
Performance Chemicals | | | | | 185.6 | | | 172.6 | |
Advanced Polymer Technologies | | | | | 65.6 | | | 61.8 | |
Total net sales (1) | | | | | $ | 392.6 | | | $ | 382.8 | |
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Segment EBITDA (2) | | | | | | | |
Performance Materials | | | | | $ | 69.8 | | | $ | 77.9 | |
Performance Chemicals | | | | | 20.3 | | | 30.8 | |
Advanced Polymer Technologies | | | | | 13.8 | | | 10.3 | |
Total Segment EBITDA (2) | | | | | $ | 103.9 | | | $ | 119.0 | |
Interest expense, net | | | | | (19.6) | | | (10.7) | |
(Provision) benefit for income taxes | | | | | (13.4) | | | (16.8) | |
Depreciation and amortization - Performance Materials | | | | | (10.0) | | | (9.0) | |
Depreciation and amortization - Performance Chemicals | | | | | (13.8) | | | (10.2) | |
Depreciation and amortization - Advanced Polymer Technologies | | | | | (7.3) | | | (7.9) | |
Restructuring and other income (charges), net (3) | | | | | (5.6) | | | (3.6) | |
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Acquisition and other-related costs (4) | | | | | (2.7) | | | — | |
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Gain on sale of strategic investment (5) | | | | | 19.2 | | | — | |
Net income (loss) | | | | | $ | 50.7 | | | $ | 60.8 | |
_______________
(1) Relates to external customers only, all intersegment sales and related profit have been eliminated in consolidation.
(2) Segment EBITDA is the primary measure used by our 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, research and technical 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, litigation verdict charges, (losses) and gains from the sale of strategic investments, and pension and postretirement settlement and curtailment (income) charges, net.
(3) For the three months ended March 31, 2023, charges of $1.7 million relate to the Performance Materials segment, charges of $3.1 million relate to the Performance Chemicals segment, and charges of $0.8 million relate to the Advanced Polymer Technologies segment. For the three months ended March 31, 2022, charges of $1.3 million relate to the Performance Materials segment, charges of $1.8 million relate to the Performance Chemicals segment, and charges of $0.5 million relate to the Advanced Polymer Technologies segment. For more detail on the charges incurred see Note 11.
(4) For the three months ended March 31, 2023, all charges relate to the acquisition and integration of Ozark Materials into the Performance Chemicals segment. For more detail see Note 16.
(5) For the three months ended March 31, 2023, gain on sale of strategic investment relates to the Performance Materials segment. For more detail see Note 4.
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
Note 15: Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares and potentially dilutive common shares outstanding for the period. The calculation of diluted net income per share excludes all antidilutive common shares.
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| | | Three Months Ended March 31, |
In millions, except share and per share data | | | | | 2023 | | 2022 |
Net income (loss) | | | | | $ | 50.7 | | | $ | 60.8 | |
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Basic and Diluted earnings (loss) per share | | | | | | | |
Basic earnings (loss) per share | | | | | $ | 1.36 | | | $ | 1.56 | |
Diluted earnings (loss) per share | | | | | 1.35 | | | 1.55 | |
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Shares (in thousands) | | | | | | | |
Weighted average number of common shares outstanding - Basic | | | | | 37,169 | | | 39,010 | |
Weighted average additional shares assuming conversion of potential common shares | | | | | 377 | | | 254 | |
Shares - diluted basis | | | | | 37,546 | | | 39,264 | |
The following average number of potential common shares were antidilutive, and therefore, were not included in the diluted earnings per share calculation: | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
In thousands | | | | | 2023 | | 2022 |
Average number of potential common shares - antidilutive | | | | | 182 | | | 255 | |
Note 16: Acquisitions
Ozark Materials
On October 3, 2022, we completed our acquisition of Ozark Materials, LLC (“OM”), and Ozark Logistics, LLC (“OL” and, together with OM, “Ozark Materials”), pursuant to that certain Equity Purchase Agreement (the “Purchase Agreement”), by and among Ingevity, Ozark Materials and Ozark Holdings, Inc. (“Seller”). In accordance with the Purchase Agreement, we acquired from Seller, all of the issued and outstanding limited liability company membership interests of Ozark Materials for a purchase price of $325.0 million, subject to customary adjustments for working capital, indebtedness and transaction expenses (the "Acquisition"). The Acquisition is being integrated into our Performance Chemicals segment and is included within our pavement technologies product line. We funded the Acquisition through a combination of borrowings under our existing credit facilities and cash on hand.
The Acquisition is not considered significant to our condensed consolidated financial statements for the three months March 31, 2023; therefore, proforma results of operations have not been presented.
Preliminary Purchase Price Allocation
Ozark Materials is considered an acquisition of a business under business combinations accounting guidance, and therefore we applied acquisition accounting. Acquisition accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon outside appraisals for certain assets, including specifically-identified intangible assets. See Note 4 for an additional explanation of Level 2 and Level 3 inputs.
The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information and is subject to change within the measurement period (up to one year from the acquisition date) as additional information concerning final asset and liability valuations is obtained. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if
INGEVITY CORPORATION
Notes to the Condensed Consolidated Financial Statements
March 31, 2023
(Unaudited)
known, would have resulted in revised estimated values of those assets or liabilities as of that date, we will revise the preliminary purchase price allocation. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.
| | | | | | | | | | | |
Preliminary Purchase Price Allocation |
In millions | Weighted Average Amortization Period | | Fair Value |
Cash and cash equivalents | | | $ | 8.0 | |
Accounts receivable | | | 28.7 | |
Inventories (1) | | | 48.4 | |
Prepaid and other current assets | | | 2.0 | |
Property, plant and equipment | | | 43.1 | |
Intangible assets (2) | | | |
Brands | 10 years | | 15.0 | |
Customer relationships | 15 years | | 88.6 | |
Developed technology | 7 years | | 23.5 | |
Goodwill (3) | | | 109.8 | |
Other assets, including operating leases | | | 0.1 | |
Total fair value of assets acquired | | | $ | 367.2 | |
Accounts payable | | | 13.9 | |
Other liabilities | | | 2.6 | |
Total fair value of liabilities assumed | | | $ | 16.5 | |
Less: Cash acquired | | | (8.0) | |
Plus: Amounts due from Seller | | | 1.8 | |
Total cash paid, less cash and restricted cash acquired | | $ | 344.5 | |
_______________
(1) Fair value of finished goods inventories acquired included a step-up in the value of $1.8 million, of which $0.9 million was expensed in the three months ended March 31, 2023. The expense is included within "Cost of sales" on the consolidated statement of operations. Inventories are accounted for on a FIFO basis of accounting.
(2) The aggregate amortization expense was $2.7 million for the three months ended March 31, 2023. Estimated amortization expense is as follows: $8.2 million for the remainder of 2023, 2024 - $10.9 million, 2025 - $10.7 million, 2026 - $10.0 million, and 2027 - $10.0 million.
(3) Goodwill largely consists of expected cost synergies and economies of scale resulting from the business combination. We expect the full amount to be deductible for income tax purposes. This acquired goodwill has been included within our Performance Chemicals reporting unit. See Note 7 for further information regarding our allocation of goodwill among our reporting units.
Acquisition and other-related costs
Costs incurred to complete and integrate acquisitions and other strategic investments are expensed as incurred on our consolidated statement of operations. The following table summarizes the costs incurred associated with these combined activities.
| | | | | | | | | | | |
| Three Months Ended March 31, |
In millions | 2023 | | 2022 |
Legal and professional service fees | $ | 1.9 | | | $ | — | |
| | | |
Acquisition-related costs | 1.9 | | | — | |
Inventory fair value step-up amortization (1) | 0.8 | | | — | |
Acquisition and other-related costs | $ | 2.7 | | | $ | — | |
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(1) Included within "Cost of sales" on the consolidated statement of operations.