Annual Report
and Form 10-K 2018
PURIFY | PROTECT | ENHANCE
About
Ingevity
Purify | Protect | Enhance
Ingevity provides specialty
chemicals and high-
performance carbon materials
and technologies that purify,
protect and enhance the
world around us. Through
a team of talented and
experienced people, Ingevity
develops, manufactures and
brings to market products
and processes that help
customers solve complex
problems. These products
are used in a variety of
demanding applications,
including asphalt paving, oil
exploration and production,
agrochemicals, adhesives,
lubricants, publication inks
and automotive components
that reduce gasoline vapor
emissions. Headquartered
in North Charleston, South
Carolina, Ingevity operates
from more than 25 locations
around the world and
employs approximately 1,750
people. The company is
traded on the New York Stock
Exchange (NYSE: NGVT).
1,750
Employees
9
Manufacturing Sites
6
Technical Centers
9
Principal Offices
Financial Highlights
Total Shareholder Return (January 1, 2018 to December 31, 2018)
NGVT
S&P Small Cap 600
DJ U.S. Specialty Chemicals
60%
40%
20%
0%
- 20%
8
1
-
n
a
J
8
1
-
b
e
F
8
1
-
r
a
M
8
1
-
r
p
A
8
1
-
y
a
M
8
1
-
n
u
J
8
1
-
l
u
J
8
1
-
g
u
A
8
1
-
p
e
S
8
1
-
t
c
O
8
1
-
v
o
N
8
1
-
c
e
D
Total Revenue in Millions (U.S. $)
Performance Materials Performance Chemicals
301.0
607.3
6
1
0
2
7
1
0
2
8
1
0
2
349.3
623.1
400.4
733.2
908.3 M
972.4 M
1,133.6 M
Total Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
in Millions (U.S. $)1
Performance Materials Performance Chemicals
123.3
79.1
202.4 M
242.7 M
141.8
100.9
169.4
151.1
320.5 M
6
1
0
2
7
1
0
2
8
1
0
2
Adjusted EBITDA as a Percentage of Sales1
Net Debt Ratio1
22.3 25.0
28.3
1.90x
2016
2017
2018
Adjusted Earnings per Share1
$4.13
1See page 129 for the reconciliation of this non-GAAP financial measure to the nearest GAAP financial measure.
A message from
the CEO.
Dear Shareholders,
Early in 2018, we outlined a six-point strategy for our company. I am pleased to report that Ingevity is “firing on all six
cylinders.” The result was very strong financial results and cash generation which enabled us to reinvest in our business,
drive profitable growth and reward shareholders.
At our first Investor Day last February, we laid out our Target 2022 goals: to become a $1.5 billion company with adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA) of $500 million and an adjusted EBITDA margin of
more than 30 percent.
We expect to reach these targets by:
• Capturing value for shareholders by creating value for our customers
• Expanding our geographic reach
• Accelerating innovation
• Driving continuous improvement in execution
• Pursuing strategic, value-creating acquisitions, and
• Maintaining a returns-oriented financial focus.
In 2018, we did what we do best, which is to build collaborative, technology-based partnerships with our customers that
create value for them, and for us. This was evident in the performance of our businesses. In Performance Chemicals, we
continued driving the turnaround and delivered strong growth in oilfield and pavement applications and built business in
niche industrial specialties applications. The segment focused on the most profitable end-uses, leveraged market conditions
to capture price improvement, and contained costs. In addition, the segment quickly integrated Georgia-Pacific’s pine
chemicals business and exceeded our synergy expectations in both amount and schedule. As a result, the Performance
Chemicals segment achieved revenues that were up 18 percent and segment EBITDA that were up 50 percent versus
the prior year.
In Performance Materials, our team worked to meet the growth challenge in automotive applications as sales
of activated carbon products accelerated due to increasingly stringent regulations in gasoline vapor
emissions control. Specifically, sales rose sharply for our “honeycomb” scrubbers used to comply with U.S.
Environmental Protection Agency (EPA) Tier 3 and California LEV III standards. Thus, despite flat light
vehicle production in North America, the Performance Materials segment achieved revenues that
were up 15 percent and segment EBITDA that were up 19 percent. Notably, the team worked hard
to continue to advocate for air-purifying gasoline vapor emissions control and prepared for
adoption of similar standards in China, the European Union, Brazil and other parts of the
world.
As the need for our products is either mandated or preferred in emerging markets,
we are expanding geographically in both sales and manufacturing. In 2018, we
continued to drive adoption of our innovative Evotherm® warm mix asphalt products
and are now doing business in eight new countries. In addition, we constructed and
launched a new state-of-the art, activated carbon extrusion plant in Changshu, China.
Long an Ingevity hallmark, innovation continues to be a critical pathway for growth. Last year,
we built on our broad technology platform, launched 20 new products, and filed five new patent
applications in Performance Chemicals. We filed additional new low-purge patent applications
in Performance Materials. We made progress in developing and promoting our
D. Michael WilsonPresident, Chief Executive Officerand Directoradsorbed natural gas (ANG) technology for bi-fuel vehicles. And, while we sought to accelerate innovation, we also took difficult steps to defend it by bringing legal action against two companies that we believe are infringing our intellectual property related to gasoline vapor emission control.Ingevity aims to operate its businesses superbly and always with an eye to continuous improvement. Our operations teams performed extremely well in 2018. Capital plan execution was on-point and included several significant projects: continued ramp-up of the Zhuhai, China, facility; construction of the Changshu, China, plant; kiln replacement and capacity expansion at the Covington, Virginia, site; and continued expansion at the Waynesboro, Georgia, “honeycomb” scrubber facility.While by many measures our manufacturing improved productivity and efficiency, one key metric that reflects operational excellence is safety. Though many of our sites worked injury free in 2018, our total employee and contractor recordable safety incidents increased by four. We experienced the same number of process safety incidents as last year. As always, our goal for 2019 will be to work injury and incident free.Our growth is being accelerated through strategic, value-creating acquisitions. In 2018, we completed the G-P pine chemicals acquisition; acquired the remaining interest in Purification Cellutions; and announced our intent to acquire the CapaTM caprolactone division of Perstorp Holding AB. With Capa, Ingevity will have a new strategic platform for organic and inorganic growth and value creation. In addition to the significant capital we have invested into our existing businesses, we have invested approximately $1 billion of capital into new businesses in order to provide superior returns to our shareholders.As a result of our efforts, for the full year, net sales were $1.134 billion, up 17 percent versus the prior year. Adjusted EBITDA of $320.5 million were up 32 percent versus 2017. And, Ingevity’s 2018 adjusted EBITDA margin of 28.3 percent was up 330 basis points from the prior year’s adjusted EBITDA margin of 25.0 percent.Lastly, our valuation in the market has reflected the growing understanding and appreciation of our potential; our total return to shareholders was 19 percent in the year.2019 will certainly pose challenges and uncertainty. Yet, our long-term prospects are promising due to the soundness of our strategy, attractiveness of our markets, and the quality and dedication of our people. As we continue to work to fulfill our vision of purifying, protecting and enhancing the world around us, we are equally as focused on executing growth and operational strategies that will reward shareholders now and well into the future.Best regards,8 M40days of extra corrosion inhibition using Diacid® 1550 as a metalworking fluid additivepercent reductionin CO2 emissions byusing Evotherm®warm mix asphaltgallons of gasoline recovered globally by our activated carbon every daycontinents with drilling sites that rely on Ingevity's emulsifiers364Ingevity by the Numbers5 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________
FORM 10-K
_______________________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 001-37586
__________________________________________________________________________
INGEVITY CORPORATION
(Exact name of registrant as specified in its charter)
__________________________________________________________________________
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Delaware
47-4027764
5255 Virginia Avenue
North Charleston, South Carolina 29406
(Address of principal executive offices) (Zip code)
843-740-2300
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Name of Each Exchange on Which Registered:
Common Stock ($0.01 par value)
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required
to submit such files.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K of any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in
Rule 12b-2 of the Exchange Act. (Check one)
Yes
No
Large Accelerated Filer
Non-Accelerated Filer
Accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes
No
At June 30, 2018, the aggregate market value of common stock held by non-affiliates of the Registrant was $3,395,178,951. The market value held by non-
affiliates excludes the value of those shares held by executive officers and directors of the Registrant.
The Registrant had 41,618,887 shares of common stock, $0.01 par value, outstanding at February 19, 2019.
Portions of the Company's definitive 2019 Annual Meeting Proxy Statement are incorporated by reference into Part III of this report.
Documents Incorporated by Reference
Ingevity Corporation
Form 10-K
INDEX
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
SIGNATURES
Page No.
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2
Item 1. Business
General
PART I
Ingevity’s business originated as part of the operations of its initial parent company, Westvaco Corporation, a paper and
packaging company, using co-products of the kraft pulping process, primarily crude tall oil ("CTO"), and lignin, as well as hardwood
sawdust from lumber manufacturing. Ingevity operated as a division of Westvaco Corporation and its corporate successors, including
MeadWestvaco Corporation and WestRock Company, since 1964.
On May 15, 2016, we completed the separation of Ingevity from WestRock Company (“WestRock”) (herein referred to
as the "Separation"). The Separation was completed by way of a distribution of all of the then outstanding shares of common stock
of Ingevity through a dividend in kind of Ingevity's common stock (par value $0.01) to holders of record of WestRock common
stock (par value $0.01) as of the close of business on May 4, 2016 (the "Record Date"). Ingevity's common stock began "regular-
way" trading on the New York Stock Exchange ("NYSE") on May 16, 2016 under the symbol "NGVT."
Ingevity Corporation was incorporated in Delaware on March 27, 2015. The address of Ingevity’s principal executive
offices is 5255 Virginia Avenue, North Charleston, South Carolina 29406. Ingevity maintains a website at www.ingevity.com.
Ingevity’s website and the information contained in or connected to the website will not be deemed to be incorporated in this
document.
Throughout this Annual Report on Form 10-K, except where otherwise stated or indicated by the context, "Ingevity", the
"Company", "we", "us", or "our" means Ingevity Corporation and its consolidated subsidiaries and their predecessors. Copies of
the annual, quarterly, and current reports we file with the Securities and Exchange Commission ("SEC"), and any amendments to
those reports, are available on our website at www.ingevity.com as soon as practicable after we furnish such materials to the SEC.
Apart from SEC filings, we also use our website to publish information, which may be important to investors, such as presentations
to analysts. Reports filed with the SEC may be viewed at www.sec.gov.
Ingevity
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).
Our global engineering, technical, sales, and application support teams closely collaborate with our customers, and,
importantly, with their customers. With our deep technical expertise and experience in our customers’ applications and end markets,
we have the capacity and flexibility to anticipate and respond to changing market conditions and customer demands and to develop
proactive solutions that provide our customers, and therefore us, with a distinct competitive advantage. Additionally, the quality
and diversity of our product portfolio, and the flexibility of our manufacturing assets, gives us the capability to direct our resources
towards their most profitable and attractive uses and geographies in response to changing market conditions.
The charts below illustrate our revenue by segment, product line and geography in 2018 for all product lines except
3
engineered polymers, which was acquired on February 13, 2019. For more information about the Caprolactone acquisition, see
Note 17, and for more information on our U.S. and foreign operations, see Notes 5 and 20, to the Consolidated Financial Statements
included within Part II. Item 8 of this Form 10-K.
Performance Materials
Performance Chemicals
Product
Lines
Carbon Technologies
Pavement
Technologies
Oilfield
Technologies
Industrial
Specialties
Engineered
Polymers
Automotive gasoline vapor
emissions control
Pavement
preservation
Process purification
Adhesion promotion
Warm mix asphalt
technology
Primary End
Uses
Well service
additives
Production and
downstream
chemicals
Adhesives
Coatings
Agrochemicals
Resins
Lubricants
Elastomers
Publication inks
Adhesives
Industrial
intermediates
Bio-plastics
Revenue
$400.4 million
$733.2 million
Sales are assigned to geographic areas based on location to which product was shipped to a third-party.
Our Core Strengths
Ingevity is committed to continued value creation by focusing on its core strengths:
Leading Global Market Positions
We are a leader in the global pine chemicals industry, further distinguished by our focus on target markets that offer the
potential for profitable growth, supported by long-term secular growth trends such as infrastructure preservation and development,
innovation in unconventional oil drilling and production, and increasing global food production demands. Our products serve as
critical inputs used in a variety of high performance applications, including pavement preservation, pavement adhesion promotion,
warm mix asphalt, oil well service additives, oil production, downstream applications chemicals, printing inks, adhesives,
agrochemicals, and lubricants. The quality and diversity of our product portfolio, and the flexibility of our manufacturing assets,
gives us the capability to direct our differentiated products towards their most profitable and attractive uses and geographies.
We are the global leader in caprolactone technologies, as shown by our invested capital base that represents approximately
60 percent of the global manufacturing capacity. Caprolactone is a critical input to many high-growth end-use applications such
as thermoplastic additives for biodegradables and polyols in coatings, as well as other coatings, resins, elastomers, adhesives, and
bioplastics. Our manufacturing footprint allows us to both produce caprolactone monomer as well as derivatize it into the more
profitable and faster growing market segments and geographies.
4
We are the leading global manufacturer of activated carbon used in gasoline vapor emission control systems in cars,
trucks, motorcycles, and boats. This business is expected to benefit from increasingly stringent vehicle emission standards
worldwide that our products are designed and qualified to meet. The annual global sales of light duty vehicles (i.e., passenger and
light commercial vehicles) that are powered with gasoline are forecasted to grow from approximately 76 million to approximately
92 million vehicles, an increase of 21 percent from 2017 to 2027. Most of this growth is expected to occur outside of the U.S.,
Canada, and China in countries and regions where gasoline vapor emission standards significantly lag the new modern, highly
effective standards that are currently being implemented in the U.S., Canada, and China. This provides significant upside potential
in addition to the already favorable macroeconomic growth trends of the global automotive industry.
Flexible Manufacturing Capabilities Optimize Asset Utilization
The quality and diversity of our product portfolio, and the flexibility of our manufacturing assets, gives us the capability
to direct our resources to their most profitable uses and geographies. Our Performance Materials assets, which primarily produce
automotive grade carbon, are also capable of producing a number of other activated carbon products for food, water, beverage,
and chemical purification applications, maximizing the productivity of these assets.
Our Performance Chemical assets include multipurpose chemical reactors that are capable of manufacturing products
of varying chemistries that can serve multiple markets. For example, in our South Carolina facility, the newest reactor that was
commissioned in 2015 is capable of producing products for pavement, oilfield, and adhesives applications, while our Louisiana
assets can be redirected with relative ease among various applications including printing inks, adhesives, oilfield, and asphalt. In
our Warrington facility, we have reactors for thermoplastic and polyol applications. Both of those sets of reactors can produce
products for a variety of applications: adhesives, bioplastics, and medical devices in thermoplastics and adhesives, coatings, and
elastomers in polyols.
Deep Technical Expertise and Product Innovation Capability and Experience
We have deep technical expertise and market knowledge and insights, derived from customer relationships and research
and development capabilities, that enable our ability to innovate. Innovation efforts are led and supported by our teams of technical
experts and industry veterans, many of whom are considered the foremost experts in their fields, spread throughout our organization
in key positions from product development to manufacturing to sales. Each of our business units has its own development and
application laboratories that work in partnership with our customers to refine existing products and develop new innovative products
that will drive value for Ingevity and our customers.
With our technical expertise and product innovation capability and experience, and by working closely with our customers,
our technical experts offer application solutions that address our customers’ most difficult challenges. For example, when our road
contractor customers vary the aggregate and/or asphalt to be used in a particular job mix, they call on our expertise to quickly
reformulate the Ingevity additive chemistry needed for the revised mix, so that they can meet the original job specifications on
time, regardless of the change. Our ability to swiftly understand and address our customers’ performance needs allows Ingevity
to maintain and grow its partnerships with its customer base.
Unique Decades-Long Track Record of Automotive Carbon Products Meeting Emission Compliance Standards
Current U.S. Federal, California, and Canadian regulatory standards and the China 6 national standard, promulgated in
December 2016, require that gasoline vapor control devices remain effective for the entire life of the vehicles on which they are
installed. Ingevity has a substantial, decades-long track record of providing life-of-vehicle product performance in a properly
designed gasoline vapor control system. Our capability to engineer very specific mesoporous carbons on a large commercial scale
allows the system designers to minimize the system’s size based on our carbon’s ability to remain highly effective over a vehicle’s
lifetime. Given the imperative for automotive manufacturers to produce vehicles capable of meeting these long-term requirements,
or potentially face expensive recalls and unfavorable publicity, there is a potential risk to use the products of other producers who
do not have a comparable, proven history and technical capability, particularly given the significant costs associated with non-
compliance should a product fail to maintain its effectiveness over a vehicle's lifetime.
Global Manufacturing and Supply Chain Reach
We have a global reach that allows us to effectively service multinational customers through a combination of our
manufacturing facilities located in the U.S., China, and the United Kingdom as well as local talent strategically placed around the
globe. In addition, our technology centers located in the U.S., China, the United Kingdom, Europe, and India give us the ability
to service our customers throughout these regions, and provide us with market insights that allow us to develop customized solutions
for local and regional markets. Our global engineering, technical, sales, and application support teams serve customers in
approximately 75 countries.
This capability also allows us to take advantage of future market trends. For example, our global reach allows us to
pursue growth opportunities in oil and gas producing regions outside of the U.S., particularly in the Middle East.
5
Collaborative Customer and End User Relationships Drive Profitable Growth Opportunities
We take a partnership approach with our customers, investing resources to deeply understand their customers’ needs so
that we can provide technologically advanced, tailored solutions that allow our customers to maintain a competitive advantage in
the markets they serve. Our knowledge of our customers’ end markets provides us with insights that enable us to develop solutions
that address opportunities or challenges and create value for our customers. For example, through our relationships with several
automobile Original Equipment Manufacturers, or "OEMs" (often, our customers’ customer), we learned that certain vehicles were
having trouble passing emissions certification tests based on a small amount of volatile organic compounds ("VOCs") migrating
from the engine via the vehicles’ air intake systems. To address this issue, we developed several generations of activated carbon-
based solutions, including activated carbon extruded honeycombs and engineered activated carbon sheets, that manage these
emissions while minimizing pressure drop in the air intake system-a key performance advantage to the OEMs. This drove demand
for our product by addressing the needs of our customers’ customer. We believe this approach-driving demand for our products
by developing solutions for our customers’ end markets-has been, and will continue to be, a significant driver of profitable growth.
Education of Government and Regulatory Bodies on Scientifically Based Policies and Specifications
Many of our customers are subject to increasing regulatory standards and mandates. For example, more stringent air
quality standards drive reductions in automotive emissions or the use of recycled materials in the case of pavement technologies.
With our technical expertise and experience, our teams are a valued resource and work directly with government and regulatory
bodies, in support of our customers, as experts in their field to educate regulators about existing and innovative technologies that
support their objectives or solve specific challenges. As the trend continues in mature and emerging markets towards more advanced
solutions, we believe the ability to leverage our expertise to educate, advocate and promote sensible regulatory solutions will
benefit our customers while driving incremental value within those markets. For example, Ingevity has globally recognized expertise
in the highly specialized field of automotive gasoline vapor emissions. While tailpipe emissions on vehicles are well recognized,
understood and regulated, gasoline vapor emissions from vehicles have been lightly regulated in many countries outside the U.S.,
Canada, Brazil, and China. Our experts have educated authorities in other countries to help them understand and quantify the
magnitude of these emissions and evaluate the highly effective solutions currently being adopted in the U.S., Canada, and China
that can significantly reduce these gasoline vapor emissions at a relatively low cost per vehicle.
Our engagement with regulators allows us to then work with our customers in order to help them respond and adapt to
evolving and varying regulatory standards. For example, because of the stringent and differing regulatory compliance standards
applicable to the global oilfield industry, our oilfield customers often turn to us instead of smaller, less sophisticated suppliers in
order to help them manage the complexities of compliance risk in chemical distribution and use throughout the world.
Highly Engaged, Performance and Safety-Driven Culture
We have assembled a highly talented, collaborative, committed, and creative team which drives the success of our
business. Our collective ambition is keenly focused on creating value for today and tomorrow. Further, we are committed to
protecting human health and the environment while using resources in a responsible and sustainable manner. As a long-standing
member of the American Chemistry Council ("ACC"), we subscribe to the Guiding Principles of the Responsible Care program-
a global chemical industry performance initiative that is implemented in the U.S. through the ACC. Our ISO 9001, IATF 16949
and Responsible Care Certifications are internationally recognized measures of consistent superior performance and responsibility
to health, safety, security, and the environment.
Long-term Secured Raw Material Supply
Of relevance to our Performance Chemicals segment, at the time of the Separation, we entered into a long-term supply
agreement with WestRock pursuant to which we purchase all of the CTO output from WestRock’s existing (at the time of separation)
kraft mills, subject to certain exceptions. In 2018, we entered into a 20-year supply agreement with Georgia-Pacific LLC (“Georgia-
Pacific”), pursuant to which we purchase the lesser of 125,000 tons of CTO and the aggregate output of CTO produced and
originating at certain of Georgia-Pacific’s paper mills.
These relationships with WestRock and Georgia-Pacific are strategically important to our Performance Chemicals
business due to the limited supply of CTO globally, of which we believe a significant portion is already under long-term supply
agreements with other consumers of CTO. Under these agreements, we currently expect to source approximately 60 to 70 percent
of our CTO requirements through 2025 based on the maximum operating rates of our three Performance Chemicals' pine chemicals
facilities.
We believe this supply from Georgia-Pacific, WestRock, and with our other contracted sources of CTO, will allow us to
serve expected customer demand.
6
Our Plans for Additional Growth
We have a demonstrated history of profitable growth. Looking ahead, we believe we will continue to deliver
profitable growth by taking the following steps:
Expand Sales to Existing Customers and into New Geographies
We believe we are well positioned to organically expand our sales through a combination of continued global market
growth, leveraging our significant application knowledge to apply our existing products to new applications and capitalizing on
the investments we have made in our global manufacturing, sales, technical centers, and distribution network. Our global reach
allows us to effectively compete in new geographies, delivering proven innovative solutions where opportunities to apply our
technologies exist. We continue to leverage our significant application knowledge and intimate customer relationships to target
opportunities where we know our products perform and to create demand for our products by driving value for our customers.
We intend to continue to strengthen our position in emerging markets where there are significant opportunities for growth.
Opportunities include the expansion of sales of our pavement products into areas increasingly in need of newly paved roads and
increased sales of activated carbon solutions driven by anticipated regulatory changes in global automotive gasoline emissions
control standards.
Increase Our Offering of Specialized, Higher Margin Products
We employ a world-class team of engineering, technical, sales, and application specialists, along with experienced
industry professionals, which provide us with deep technical knowledge and the ability to be a leading provider of specialty products
in the markets we serve. We have the experience and capability to further develop and expand upon the products we currently
produce, further differentiating them into higher value, increasingly specialized products, or developing new applications and end
uses.
We have a history of success in product development and differentiation. For example, our oilfield technologies business
focuses on development and marketing of specialized tall oil based emulsifiers and corrosion inhibitors as well as marketing the
base tall oil fatty acid ("TOFA") refinery products.
We believe that there is significant upside in further developing and expanding upon products produced from TOFA,
displacing some of our lower margin business where we sell TOFA directly to certain customers. This will have the added benefit
of improved insulation from the cyclical nature of the direct natural fats and oils market of which TOFA is a part. Our goal is to
increase the portion of our sales of specialized, higher value products derived from TOFA, including addressing new markets or
opportunities to upgrade TOFA into product categories where we might not participate today.
Additionally, we search to supply the right chemistry for the applications within our market segments regardless of the
raw materials required. Applying our unique insights into the end use applications of our products, our team searches to find novel
solutions, outside of our current CTO-based materials, to problems and our team also works to create the supply chain needed to
provide those products to our customers. As an example, we have developed and now manufacture and sell product solutions in
our pavement technologies business that are TOFA and hydrocarbon based.
We also believe that there is significant upside in further developing and expanding caprolactone-based products and
derivatives. The end-markets in which we are expanding have favorable trends that we believe will support growth rates higher
than global GDP. For example, caprolactone’s performance properties give it superior performance in biodegradable plastics,
medical devices, and 3-D printing, among others.
Innovate to Enable Our Customers to Adapt to Increasingly Stringent Regulatory Standards
We are a valued resource to government and regulatory agencies around the world, from California to China, including
national, regional, and local environmental regulatory bodies. We work directly with such bodies, in support of our customers, to
help them develop sensible standards based on the availability of technological solutions that make such standards commercially
achievable. As standards are adopted and become increasingly demanding, the products that can be used to achieve compliance
with such standards become increasingly technologically complex to design and manufacture on a commercial level. Our ability
to meet these complexities provides Ingevity with a distinctive commercial edge-as our customers in many applications depend
on us to help them meet their compliance standards. We also work closely with automotive companies and their suppliers to ensure
that they understand and can meet increasingly stringent vehicle emission standards.
Invest Organically and Selectively Pursue Acquisitions that Further Strengthen Our Product Portfolio
We plan to continue to invest capital organically in attractive cost reduction projects and in capacity expansions as
necessary to meet demand growth. For example, in 2016, to meet the growing demand for our activated extruded honeycomb
products that help meet the U.S. and Canadian Low Emission Vehicle, or LEV III, and Tier 3 regulations, we began a capital
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expansion at our Waynesboro, Georgia honeycomb extrusion facility that effectively doubled the capacity output by the end of
2017. To support future demand for the China 6 regulation, we have invested in new activated carbon pellet extrusion capacity in
Changshu, China which came online in late 2018. In 2018, we also commenced a brownfield expansion at our Covington, Virginia
activated carbon facility in order to meet the growing activated carbon demand for the China 6 regulation. In 2019, we will be
continuing growth expansion work at our Warrington, U.K. caprolactone facility that includes debottlenecking and replacement
of monomer production equipment that is more modern and efficient. As demand for our products grows, we will continue to
evaluate additional capacity expansion as needed.
In addition, we intend to pursue value-creating acquisitions, such as the acquisition (the "Pine Chemicals Acquisition")
of Georgia-Pacific's Pine Chemicals business ("Pine Chemicals Business") and the acquisition of the remaining 30 percent
ownership interest of our Purification Cellutions, LLC joint venture (now known as Ingevity Georgia, LLC), both of which
represented attractive opportunities in our target markets as well as in high-value niche applications that complemented our product
portfolio and capabilities. We continue to seek to add product lines and portfolios, such as the acquisition (the "Caprolactone
Acquisition") of Perstorp Holding AB’s caprolactone division (the "Caprolactone Business"), which we believe serves end-markets
with growth rates significantly greater than global GDP, as well as having the potential to be a platform for additional bolt on
acquisitions. We will continue to seek to add product lines and portfolios, as well as marketing and manufacturing alliances, that
will play an important role in strengthening our leadership positions. We are evaluating acquisitions both domestically and globally.
Segments
Performance Materials
We engineer, manufacture, and sell hardwood-based, chemically activated carbon products, produced through a highly
technical and specialized process primarily for use in gasoline vapor emission control systems in cars, trucks, motorcycles, and
boats. We are a global leader in this automotive application. We also produce a number of other activated carbon products for food,
water, beverage, and chemical purification applications, to maximize the productivity of our manufacturing assets.
Our automotive carbon products capture gasoline vapor emissions that would otherwise be released into the atmosphere
as VOCs, which contain hazardous air pollutants and can photochemically react to form ozone and secondary organic aerosols.
These gasoline vapor emissions (which are distinct from tailpipe emissions) are released primarily (i) during refueling, (ii) when
a vehicle is parked during the daytime, as a result of evaporation and expansion of vapors in the fuel tank in warmer daytime
temperatures and (iii) as “running loss,” as a result of evaporation and expansion of vapors in the fuel tank from increased
temperatures as a result of operation of the vehicle.
Our automotive carbon products are typically part of vehicle-based gasoline vapor emissions control systems which can
range from systems equipped with an approximately one liter carbon canister that captures one day of diurnal parking emissions,
to more sophisticated Onboard Refueling Vapor Recovery (“ORVR”), running loss and multi-day diurnal parking systems with a
two to three-liter carbon canister that is over 98 percent efficient. The captured gasoline vapors are largely purged from the carbon
and directed to the engine where they are used as supplemental power for the vehicle. In this way, our automotive carbon products
are part of a system that provides for both environmental control and energy recovery. We estimate that in 2016 our products
collectively prevented over 20,000 metric tons of VOC emissions each day from being lost to the atmosphere and returned the
equivalent of 8 million gallons of gasoline each day to power vehicles.
Environmental standards drive the implementation of gasoline vapor emission control systems by automotive
manufacturers. While tailpipe emissions on vehicles are well recognized, understood, and regulated, gasoline vapor emissions
from vehicles have been lightly regulated in many countries outside the U.S., Canada, Brazil, and China. For those countries that
have not significantly regulated gasoline vapor emissions, enacting more stringent regulations represents a low-cost, high-return
opportunity to address their air quality issues. The annual global sales of light duty vehicles (i.e., passenger and light commercial
vehicles) that are powered with gasoline are forecast to grow from approximately 76 million to approximately 92 million vehicles,
an increase of 21percent from 2017 to 2027. Most of this growth is expected to occur outside of the U.S., Canada, and China in
countries and regions where gasoline vapor emission standards significantly lag the new modern, highly effective standards that
are currently being implemented in the U.S., Canada, and China. Adoption of modern gasoline vapor emission standards in these
regions would have significant, positive environmental and energy efficiency impacts and provide significant upside growth
potential for our automotive carbon business.
The U.S. and Canada have led the world in recognizing and addressing the harm to air quality caused by gasoline vapor
emissions, and in early 2014 enacted regulatory standards that will further reduce these emissions to “near zero” levels by phasing
in Tier 3 and LEV III evaporative emission standards through 2022, which will result in significant increases in the use of our
“canister bleed emissions” system patent over that same period. The Tier 3 and LEV III phase in schedule requires compliance
with the standard as follows: 40 percent of model year 2017’s vehicles, 60 percent of model year 2018’s vehicles, 80 percent of
model year 2020’s vehicles and 100 percent of model year 2022’s vehicles. The most commonly applied embodiment of the patent
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uses our activated carbon in the main part of the canister and our activated carbon extruded honeycomb(s) as a “scrubber” on the
outlet side of the canister to reduce the canister’s emissions to “near zero.” One of our significant “canister bleed emissions” patents
expires in March 2022. The extruded honeycombs are manufactured through an activated carbon ceramic extrusion process at our
Waynesboro, Georgia extrusion facility. We have a 100 percent controlling ownership and operating responsibility at this facility,
after having purchased the remaining 30 percent ownership interest in Purification Cellutions, LLC joint venture (now known as
Ingevity Georgia, LLC) from our partner in August of 2018.
Most countries outside the U.S., Canada, China, and Brazil have significantly lagged in the adoption of regulatory
standards that would reduce these gasoline vapor emissions, focusing instead on regulating the more “visible” tailpipe emissions.
These countries are using a gasoline vapor emission standard that is functionally equivalent to a 1981 U.S. regulatory standard.
As a result, in Europe, Asia, and Latin America, gasoline vapor emissions are the primary source of automotive VOC emissions.
China has begun implementation of a new national standard, China 6, that is functionally equivalent to the 2009 alignment of U.S.
Tier 2 with California LEV II. This new national standard, containing ORVR and multi-day diurnal parking emission controls, is
scheduled to be fully phased in by July 2020 with the announced early implementation in several large, provincial, and municipal
regions beginning in 2019.
As recognized experts in the field of gasoline vapor emission control, Ingevity has been working with regulatory
bodies and relevant third parties in Brazil, China, Japan, Mexico, and the European Union to help them understand and
move towards more effective regulatory standards similar to those in place in the U.S. and Canada. Regulatory indications
of adoption and implementation of more stringent vapor emissions standards outside of the U.S. and Canada include the
following:
• The European Commission has adopted more stringent gasoline vapor emission regulations with its Euro 6d
standard, which requires full implementation by September 2019. This new standard is more stringent than the
current standards and includes a 2-day diurnal parking emission test that will generally result in a 30 - 70 percent
increase in canister capacities and a shift in some volumes to pellets and higher activity carbon.
• In its November 2007 session, the World Forum for Harmonization of Vehicles Regulations (WP 29) established
an Informal Working Group (IWG) under the Working Party on Pollution and Energy (GRPE) to prepare a road
map for Worldwide Harmonized Light Vehicle Test Procedures (WLTP), including those for evaporative
emissions as part of Phase 2 of the effort. Global Technical Regulation (GTR) No. 19 established a 48-hour test
procedure, based upon the European 48-hour procedure, that can be adopted by contracting parties (i.e.
participating countries) across the globe.
• On December 23, 2016, the China Ministry of Environmental Protection and the China State Administration
of Quality Supervision, Inspection, and Quarantine released its China 6 National Standard on the Limits and
Measurement Methods for Emissions from Light-Duty Vehicles (GB 18352 6-2016). In the new standard, diurnal
control is increased to 48 hours, running loss conditions are simulated, and ORVR is added. Emissions limits
are also reduced and will be similar to those in U.S. Tier 2. As a result, canister volumes are expected to increase
by 2 to 3 times and the majority of the canisters are expected to shift to high activity carbons and pellets. This
new standard implements nationally on July 1, 2020 but a number of cities and provinces – including Beijing,
Hainan, Hebei, Henan, Guangzhou, Shenzhen, Tianjin – have announced early implementation dates ranging
from July 1, 2019 to January 1, 2020.
• South Korea is currently phasing in some U.S. Tier 2 diurnal parking emission standards, which generally
require activated carbon canister volumes greater than 1.3 liters and an increased use of pelletized carbon. In
2018, South Korea began phasing in portions of the U.S. Tier 3 “near zero” full vehicle diurnal parking emission
standards that will favor the use of low emission and air induction system diurnal parking emission activated
carbon technologies.
• In November 2018, Brazil’s National Council for the Environment ("CONAMA") plenary finalized the
Program for the Control of Air Pollution by Motor Vehicles ("PROCONVE") L7 regulations that included a hot-
soak and 48-hour diurnal requirement - with an emission limit similar to US Tier 2 - that must be fully implemented
by January 2022. An ORVR requirement was also passed that will be implemented in stages in 2023 (20 percent
of new vehicles), 2024 (60 percent of new vehicles), and 2025 (100 percent of new vehicles).
See also “Risk Factors-Risks Related to Ingevity’s Business-Adverse conditions in the automotive market may adversely
affect demand for our automotive carbon products” and “Risk Factors-Risks Related to Ingevity’s Business-If increasingly more
stringent air quality standards worldwide are not adopted, our growth could be impacted.”
Current regulatory standards in the U.S. and Canada require that gasoline vapor control devices remain effective for the
entire life of the vehicles on which installed. The end of lifetime requirements for most vehicles is 10 years or 120,000 miles, but
will increase to 15 years or 150,000 miles for a large segment of these vehicles. China 6 standards also include a lifetime requirement
of 12 years or 160,000 kilometers. Ingevity has a substantial, decades long track record of providing life-of-vehicle product
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performance based on our unique capability to engineer a very specific mesoporous carbon on a large commercial scale. Given
the imperative for automotive manufacturers to produce vehicles capable of meeting these long term requirements, or potentially
face expensive recalls and unfavorable publicity, there is an increased risk to using other producers who do not have a comparable,
proven history, particularly given the significant costs associated with non-compliance should an offering fail to maintain
effectiveness over vehicle lifetimes. Additionally, because these gasoline vapor control systems are certified as “environmental
devices” for models currently in production, it is time consuming and costly to replace our products within the vehicle’s control
system with a competitive product during the vehicle’s model platform production life due to the high cost of recertification.
As a result of decades of innovation and production, Ingevity is able to produce products that are effective in smaller
amounts than competitors’ offerings, meaning less product is required-which results in savings through the use of a smaller and
less costly canister in the overall emissions control system. Continued innovation and manufacturing know-how may allow this
advantage to continue even as competitors improve their product offerings.
Ingevity is further uniquely positioned to capitalize on the opportunity afforded by the adoption of these modern vapor
emission regulatory standards, which will, as a practical matter (given current technology), require manufacturers of light duty
vehicles in countries adopting these standards to incrementally install advanced gasoline vapor control technology with carbon
capable of meeting the new regulatory standards. Based on the regulatory trends and expected growth in vehicles, Ingevity
management estimates that the revenue for its automotive emissions products could double within five to seven years from 2015.
Ingevity, through its proprietary technology, trade secrets and confidential manufacturing know-how, has unparalleled capability
and expertise to manufacture the high performance activated carbon products required to meet these regulatory standards, as well
as more stringent standards likely to be imposed in the years to come. These same capabilities and expertise will help Ingevity to
maintain its position in the U.S. and Canada automotive markets as they implement the adoption of “near zero” gasoline vapor
emission levels.
Additionally, as automotive engine technology continues to evolve and engines become more efficient, the amount of
engine airflow available to purge the gasoline vapors from the activated carbon products is expected to decline (“low-purge”). We
believe that the pore structure characteristics of our activated carbon products additionally advantages us versus competitors’
offerings in low purge conditions. Ingevity is actively investing in product and process development, and has received patents
designed to deal with low-purge engines.
We also produce a number of other activated carbon products for food, water, beverage, and chemical purification
applications to maximize the productivity of our manufacturing assets.
Raw Materials and Production
The primary raw material (by volume) used in the manufacture of our activated carbon is hardwood sawdust. Sawdust
is readily available, and is sourced through multiple suppliers to protect against supply disruptions and to maintain competitive
pricing.
We also consume phosphoric acid, which is used to chemically activate the hardwood sawdust. This phosphoric acid is
sourced through multiple suppliers to protect against supply disruptions and to maintain competitive pricing. The market price of
phosphoric acid is affected by the global agriculture market as the majority of global phosphate rock production is used for fertilizer
production and only a portion of that production is used to manufacture purified phosphoric acid. In the recent past, there have
been price run-ups in phosphoric acid due to increased phosphate rock demands in global agriculture, which have in turn negatively
affected our business.
Activated carbon is an amorphous form of carbon characterized by a high volume of nanoscale pores. “Activation” refers
to the process of developing these pores. The size, shape, and volume of the pore structure and the surface chemistry of the pore
are critical for driving performance in various applications.
Activated carbons are typically produced from either a thermal or chemical process utilizing a wide variety of
carbonaceous raw materials. The thermal process, the most widely used activation process, uses rotary kilns or multi-hearth furnaces
to carbonize and activate the raw material. This process operates at a much higher temperature and at a lower yield than the chemical
activation process. Typical raw materials include bituminous coal, lignite, and coconut husks. Thermally activated carbons are
usually used for “catch and dispose” applications, whereby the carbon is used to capture certain compounds and the carbon product
is then disposed of or thermally regenerated.
Ingevity employs a more specialized activation process, whereby chemical catalyst - phosphoric acid - and various
heating methods are used to facilitate the development of porosity. This process operates at a lower temperature and typically has
higher yields than a thermal process. Carbons produced by this method typically have larger pores than thermally activated carbons
and can be used in both “catch and dispose” applications and “catch and release” applications, whereby the carbon is used to
capture and temporarily hold on to certain compounds which are then released in a controlled manner under specific operating
conditions.
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We use hardwood sawdust to produce chemically activated carbon, which, because of its larger pore volume, pore structure
and high surface area, is well-matched for a variety of applications and ideally suited for the “catch and release” automotive
application of capturing and reusing gasoline vapor emissions.
We further process activated carbon after it is activated into different forms using a variety of extrusion processes. One
of our extrusion processes is to use activated carbon and various binders to make a formed pellet. Pelleted carbon is typically used
in gasoline emission control canister applications where a low pressure drop system is required such as ORVR.
Another extrusion process we employ is with our honeycomb “scrubber.” We utilize an activated carbon infused ceramic
extrusion process. These extruded honeycomb “scrubbers” are a component of the our patented system to reduce the canister’s
emissions to “near zero” and are manufactured at our extrusion facility in Waynesboro, Georgia.
Customers
We sell our automotive products to over 60 customers around the globe. In 2018, our ten largest customers accounted
for 80 percent of the segment's sales. We are the trusted source of these products for many of the world’s largest automotive parts
manufacturers, including Aisan Industry, Delphi Technologies, MAHLE, and many other large and small component manufacturers
throughout the global automotive supply chain. Our relationship with many of our customers and their customers-the vehicle
manufacturers themselves-have been in place for most of our history in this application. Ingevity also produces activated carbon
products for food, water, beverage and chemical purification applications, which are sold to approximately 80 customers throughout
the world.
We operate primarily through a direct sales force in North America and our other major markets and also have a smaller,
focused network of agents and distributors that have established a strong direct sales and marketing presence.
Competition
In automotive carbon, Ingevity has a unique decades-long track record of providing life-of-vehicle performance. Given
the imperative for automotive manufacturers to produce vehicles for the U.S., Canadian, and Chinese markets capable of meeting
life-of-vehicle emission standards, or potentially face expensive recalls and unfavorable publicity, our automotive carbon products
provide our customers the low-risk choice in this high performance application. Our competitors in automotive carbon include
Cabot Corp., Kuraray, and several Chinese manufacturers. Our process purification business competes mainly in the U.S. in the
food, beverage, chemical, and water purification applications. Competitors in our process purification product line include Cabot
Corp., Kuraray, Jacobi Carbons, and several domestic U.S. manufacturers and distributors of imported products. Refer to Item 1A
- "Risk Factors- We face competition from producers of substitute products and new technologies, and new or emerging
competitors." and "Risk Factors-We face competition from infringing intellectual property activity.”
Performance Chemicals
Ingevity’s Performance Chemicals segment, which is comprised of four application areas (pavement technologies, oilfield
technologies, industrial specialties, and engineered polymers), develops, manufactures, and sells a wide range of specialty chemicals
primarily derived from co-products of the kraft pulping process and caprolactone. Pine chemicals-based products are utilized in
pavement preservation, pavement adhesion promotion, warm mix asphalt, oil well service additives, oil production, and
downstream, printing inks, adhesives, agrochemical dispersants, lubricants, coatings, resins, elastomers, bioplastics, and other
diverse industrial uses. Our application expertise is often called upon to provide unique solutions to our customers that maximize
resource efficiency. We have a broad and diverse customer base in this segment. In 2018, our top ten customers accounted for
approximately 33 percent of our segment revenue; the next 100 customers made up approximately 45 percent of our segment
revenue.
Raw Materials and Production
Our Performance Chemicals business serves customers globally from three manufacturing locations in the U.S. and one
in the United Kingdom. Most of our pavement technologies, oilfield technologies, and industrial specialties products are derived
from CTO, a co-product of the kraft pulping process, where pine is used as the source of the pulp. CTO is produced by acidulating
black liquor soap skimmings ("BLSS"), which are recovered during the kraft pulping process. Consumers of CTO can purchase
BLSS from pulping mills that do not have acidulation capacity (in which case the BLSS will need to be acidulated into CTO), and
purchase CTO from pulping mills that do have acidulation capacity. The CTO is further separated by distillation into tall oil rosin
("TOR"), TOFA and other biofractions. As such products are further refined or chemically modified, higher value derivative
products are created, making their way into a wide variety of industrial and consumer goods. We also produce performance
chemicals derived from lignin, extracted from black liquor, a co-product of the kraft pulping process. TOR, TOFA and caprolactone
are sold directly to customers in some instances, or, along with lignin, further refined or chemically modified into higher value
derivative products. Our differentiated performance chemicals are engineered to meet specific industry standards and customer
11
requirements. Our engineered polymers are caprolactone based, which is derived from cyclohexanone, a benzene derivative, and
hydrogen peroxide, both of which are readily available in the market.
The availability of CTO is directly linked to the production output of kraft mills using pine as their source of pulp, which
is the predominant fiber source for packaging grades of paper as well as fluff pulp for personal care products. As a result, there is
a finite global supply of CTO, with global demand for softwood kraft pulp driving the global supply of CTO, rather than demand
for CTO itself. Most of the CTO made available for sale by its producers is covered by long-term supply agreements, further
constraining availability.
At the time of the Separation, we entered into a long-term supply agreement with WestRock pursuant to which we
purchase all of the CTO output from WestRock’s existing (at the time of separation) kraft mills, subject to certain exceptions.
Beginning in 2025, either party may provide a notice to the other party terminating the agreement five years from the date of such
notice. Beginning one year after such notice, the quantity of products provided by WestRock under the agreement will be gradually
reduced over a four-year period based on the schedule set forth in the agreement. In addition, from 2022 until 2025, either party
may provide one-year notice to remove a kraft mill as a supply source. The two largest kraft mills under the agreement currently
are expected to supply approximately 19 to 20 percent and 17 to 18 percent, respectively, of the total amount of products expected
to be supplied under our agreement with WestRock. In the event that WestRock exercises its right to terminate our supply agreement
with them or remove a kraft mill as a supply source, we may be able to obtain substitute supplies of CTO from other suppliers,
spot purchases or a new contract with WestRock. The agreement with WestRock includes pricing terms based on market prices.
Under this agreement, based on WestRock’s current output, we currently expect to source approximately 30 to 40 percent of our
CTO requirements through 2025 based on the maximum operating rates of our three Performance Chemicals' facilities.
In 2018, we entered into a 20-year supply agreement with Georgia-Pacific pursuant to which we will purchase the lesser
of 125,000 tons or 100 percent of the CTO production from select Georgia-Pacific kraft mills during each contract year, subject
to certain exceptions. The agreement with Georgia-Pacific includes a market pricing formula which is subject to quarterly
adjustments. Under this agreement, we currently expect to source approximately 30 percent of our CTO requirements through
2025 based on the maximum operating rates of our three Performance Chemicals' facilities.
We have agreements with other suppliers to satisfy substantially all of the balance of our expected requirements of CTO
through 2019.
We believe that we are well positioned to have sufficient CTO required for our operations. However, if any of our suppliers
(including WestRock or Georgia-Pacific) fail to meet their respective obligations under our supply agreements or we are otherwise
unable to procure an adequate supply of CTO, we would be unable to maintain our current levels of production. In addition, if
WestRock exercises its rights to terminate the agreement or remove a kraft mill as a supply source, and we are unable to arrange
a substitute supply of CTO, we would be unable to maintain our current levels of production. Additionally, there are other pressures
on the availability of CTO. Some kraft pulp mills may choose to consume their production of CTO to meet their energy needs
rather than sell the CTO to third parties. Furthermore, weather conditions have in the past and may in the future affect the availability
and quality of pine trees used in the kraft pulping process and therefore the availability of CTO meeting our quality standards. See
“Risk Factors-Risks Related to Ingevity’s Business-Our Performance Chemicals segment is highly dependent on CTO which is
limited in supply; lack of access to sufficient CTO would impact our ability to produce CTO-based products.”
Also, regulatory mandates in Europe for the use of biofuel have placed additional pressure on CTO availability. See
“Risk Factors-Risks Related to Ingevity’s Business-The European Union’s Directive 2009/28 on the promotion of the use of energy
from renewable resources (“Renewable Energy Directive” or “RED”) and similar legislation in the U.S. and elsewhere may
incentivize the use of CTO as a feedstock for production of alternative fuels."
Finally, CTO as a raw material may be subject to significant pricing pressures. See “Risk Factors- Risks Related to
Ingevity’s Business-Pricing for CTO is subject to particular pricing pressures by reason of limited supply and competing demands
for end use, and we may be limited in our ability to pass on increased costs to our customers” and “Risk Factors-Risks Related to
Ingevity’s Business-The Company’s oilfield technologies business is significantly affected by trends in oil and natural gas prices
that affect the level of exploration, development and production activity.”
The key raw materials in our Performance Chemicals caprolactone manufacturing are cyclohexanone and hydrogen
peroxide. Cyclohexanone is derived from benzene and is widely available. We maintain multiple suppliers to protect against supply
disruptions and to maintain competitive pricing. Hydrogen peroxide is also widely available and is currently supplied by a co-
located supplier under a long-term supply agreement. However, Brexit may pose some risk to the supply chain for our Warrington,
UK Performance Chemicals facility. See See “Risk Factors- General Business and Economic Risk- Our Engineered Polymers
product line may be adversely affected by Brexit.”
The other key raw materials used in the Performance Chemicals business are nonylphenol, pentaerythritol, and ethylene
amines. These are sourced where possible through multiple suppliers to protect against supply disruptions and to maintain
competitive pricing.
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Markets Served
Pavement Technologies
Our pavement technologies group supplies a broad line of innovative additives, systems and technologies for road
construction, resurfacing, preservation, maintenance, and recycling globally. As a specialty asphalt additive supplier, we have a
long history of work with transportation agencies, university research consortiums, paving contractors, and asphalt refiners around
the world to design, develop, and implement innovative additives and novel paving systems that protect existing roadways and
enhance the performance of new road construction.
Our pavement technologies team combines broad downstream technical, application, and construction experience with
a strong direct sales and marketing presence. Our combined expertise in the disciplines of chemistry and civil engineering provides
a comprehensive understanding of the relationship between molecular structure of our chemistries and their impact on the
performance of pavement systems. This allows us to develop products customized to local markets and consistently deliver cost-
effective solutions for our clients. We also introduce and commercialize new technologies globally through consulting relationships
with ministries and departments of transportation to stimulate customer demand for our products.
Customers
We supply asphalt products and technologies to approximately 500 customers through the use of Ingevity sales
representatives and distributors. In 2018, our ten largest customers accounted for 35 percent of the product line's sales. Technology
centers located in the U.S., China, Europe, and India create market insights for product development customized to local and
regional markets.
Competition
We compete on the basis of deep knowledge of our customers’ business and extensive insights into road building
technologies and trends globally. We use these strengths to develop consulting relationships with government departments of
transportation, facilitating new technology introduction into key markets around the world. Our combined expertise in the disciplines
of chemistry and civil engineering provides a comprehensive understanding of the relationship between molecular structure of our
chemistries and their impact on the performance of pavement systems. This allows us to develop products customized to local
markets and to consistently deliver cost-effective solutions for our customers. Our primary competitors in pavement technologies
are Nouryon, Arkema, and ArrMaz.
Oilfield Technologies
Our oilfield technologies group produces and sells a wide range of innovative specialty chemical products for the global
oilfield industry, including well service additives and chemical solutions for production and downstream applications.
Well Service Additives. Our well service additive products are formulated to increase emulsion stability and aid in fluid
loss control for oil-based drilling fluids. Other additives include rheology modifiers, which are used to improve the viscosity
properties of oil-based fluids, and are typically used in deep water applications and wetting agents, which provide improved wetting
of solids and aid in the efficiency of the drilling process. This family of products aids in accessing difficult to reach oil and gas
reserves, both on and offshore around the globe.
Production and Downstream. Our production and downstream products serve as corrosion inhibitors or their components.
Crude oil and natural gas production is characterized by variable production rates and unpredictable changes due to the nature of
the produced fluids including but not limited to water and salt content. Our corrosion inhibitors maximize production rates by
reducing equipment downtime from corrosion of key equipment and pipe.
Customers
We sell our oilfield technologies to approximately 70 customers around the globe through the use of Ingevity sales
representatives and distributors. In 2018, our ten largest customers accounted for 81 percent of product line.
Competition
We compete on the basis of our ability to understand our customers’ applications and deliver solutions that aid in their
improvement of the exploration and production of oil and gas for the end users. Additionally, this application expertise coupled
with our strong understanding of CTO-based chemistry allows for rapid development of solutions to challenges in the field. Our
scale and flexibility of manufacturing are the final piece that helps deliver the creativity, expedience, and confidence the customers
in oilfield technologies require from their best suppliers. Our competitors in this field include Lamberti, Kraton, and several others.
Industrial Specialties
Our industrial specialties group manufactures specialty chemicals-including: adhesive tackifiers, agrochemical
dispersants, lubricant additives, printing inks, and industrial intermediates. Our technical expertise and formulation capabilities
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allow us to develop innovative products to meet our customers’ various needs.
Adhesives. We are a leading global supplier of tackifier resins which provide superior adhesion to difficult-to-bond
materials to the adhesives industry. Adhesive applications for our products include construction, product assembly, packaging,
pressure sensitive labels and tapes, hygiene products, and road markings.
Agrochemicals. We produce dispersants for crop protection products as well as other naturally derived products for
agrochemicals. Crop protection formulations are highly engineered, specifically formulated and cover a range of different
formulation types, from liquids to solids. We deliver a wide range of dispersants that are high performing and consistent. In addition,
our crop protection products are approved for use as inert ingredients in agrochemicals by regulatory agencies throughout the
world.
Lubricants. We supply lubricant additives and corrosion inhibitors for the metalworking and fuel additives markets. Our
lubricant products are multi-functional additives that contribute to lubricity, wetting, corrosion inhibition, emulsification, and
general performance improvement. Our products are valued because of their ease in handling, robust performance, and improved
formulation stability.
Printing Inks. We are a leading supplier of ink resins from renewable resources to the global graphic arts industry for
the preparation of printing inks. Our products improve gloss, drying speed, viscosity, adhesion, and rub resistance of the finished
ink to the substrate. We produce a wide array of resins, typically specifically tailored to a customer’s use, which can vary by
application, pigment type, end use, formulation and manufacturing, and printing process.
Industrial Intermediates. Our functional chemistries are sold across a diverse range of industrial markets including,
among others, paper chemicals, textile dyes, rubber, cleaners, mining, and nutraceuticals.
Customers
We sell our industrial specialty chemicals to over 500 customers around the globe through the use of Ingevity sales
representatives and distributors. We have an over twenty-year relationship with many of our significant customers in this business.
In 2018, our ten largest customers accounted for 45 percent of the product line's sales.
Competition
In industrial specialties, our customers select the product that provides the best balance of performance, consistency, and
price. Reputation and commitment to our customer’s industry are also valued by our customers and allow us to win business when
other factors are equal. In our adhesives business, our products compete against other tackifiers, including other TOR-based
tackifiers as well as tackifiers produced from gum rosin and hydrocarbon starting materials. In addition, the choice of polymer
used in an adhesive formulation drives the selection of tackifier. In agrochemicals, the selection of a dispersant is made early in
the product development cycle and the formulator has a choice among Ingevity’s sulfonated lignin products, lower quality
lignosulfonates and other surfactants such as naphthalene sulfonates. In lubricants, we compete against other producers of distilled
tall oil and additives. In printing inks, our products compete against other resins that can be derived from TOR, gum rosin and, to
a lesser extent, hydrocarbon sources. In our industrial intermediates business, our TOFA competes against widely available fats
and oils derived from soy, rapeseed, palm, cotton, and tallow sources.
Competitors are different depending on the product, application, and region and include Kraton, Eastman Chemical,
ExxonMobil, Borregaard, Lawter, Respol/Forchem, DRT, as well as several others.
Perstorp AB's Caprolactone Business
On December 10, 2018, we entered into an agreement for the Sale and Purchase of Perstorp UK Ltd. (the “Caprolactone
Agreement”) with Perstorp Holding AB, a company registered in Sweden, that develops, manufactures, and sells specialty chemicals
(the “Seller”). Pursuant to the Caprolactone Agreement, we agreed to purchase the shares held by the Seller in Perstorp UK Ltd.,
including the Seller’s entire caprolactone business, in exchange for €570.9 million, less assumed debt and other miscellaneous
transaction costs, as further defined in the Caprolactone Agreement (the “Purchase Price”), plus interest accrued on the Purchase
Price (herein referred to as the “Caprolactone Acquisition”).
On February 13, 2019, pursuant to the terms and conditions set forth in the Caprolactone Agreement, we completed the
Caprolactone Acquisition for an aggregate preliminary purchase price of €578.9 million ($652.5 million) excluding net debt to be
assumed of €100.4 million ($113.1 million). At closing, the assumed net debt was settled with an affiliate of the counterparty,
Perstorp Holding AB. Beginning in the first quarter of 2019, the Caprolactone Acquisition will be integrated into our Performance
Chemicals segment and included within our Engineered Polymers product line. Our revolving credit facility was utilized as the
primary source of funds, along with available cash on hand, to close our Caprolactone Acquisition. Our available capacity under
our revolving credit facility immediately following this drawdown was $113.1 million.
The Caprolactone Acquisition is considered a business under business combinations accounting guidance, and therefore
we will apply acquisition accounting. Acquisition accounting requires, among other things, that assets and liabilities assumed be
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recognized at their fair values as of the acquisition date. The net assets of the Caprolactone Acquisition will be recorded at the
estimated fair values using primarily Level 2 and Level 3 inputs (see Note 17 for an explanation of Level 2 and 3 inputs).
We have performed a preliminary valuation of the fair value of the acquired assets and liabilities assumed. Based on this
preliminary allocation of the purchase price, we believe the primary assets acquired and their estimated values are; goodwill of
approximately $310 million and tangible and intangible assets of approximately $220 million. This preliminary assessment of fair
value is based on draft reports from our valuation experts and is subject to change based on its preliminary nature. Once our detailed
preliminary purchase price valuation is completed, we will include the required additional details in our future filings. We have
not completed the detailed analysis to present the pro forma financial information for the combined companies. Thus, the pro
forma financial information will be included in our future filings as well.
Engineered Polymers
Our engineered polymers group produces caprolactone and caprolactone based specialty chemicals for use in coatings,
resins, elastomers, adhesives, and bioplastics. Our technical expertise and formulation capabilities allow us to develop innovative
products to meet our customers’ various needs.
Coatings. We supply coating products that are used in automobile refinishing, sports floors, and marine applications.
Our products enhance end product performance by providing abrasion resistance, long durability, high quality finish, and enhanced
performance in resin modification. Our products are often preferred when they provide a combination of traits which allow customers
to displace several combinations of other products.
Resins. We supply resin products that are used in acrylic resins, polyurethane, and inks. Our products enhance end product
performance due to their protective properties, all weather performance and reduction or elimination of the need for solvents in
formulations. Our products tend to be preferred where superior or particular performance levels are required by our customers.
Elastomers. We supply products that are used in wheel seals, mining screens, and polyurethane films. Our products
enhance end product performance due to their resistance to wear and tear, the ability to maintain form and function under pressure
and temperature and provide excellent UV resistance. Our products are often used in highly demanding applications where
competitive products do not reach required performance levels.
Adhesives. We supply products that are used in hot-melts, fabric lamination, and miscellaneous footwear components.
Our products enhance end product performance through their durability and substrate compatibility. Our products tend to be
preferred because they are found to be easier to process and apply compared to competitive offerings.
Bioplastics. We supply products that are used in films, paper coatings, disposable cups, utensils, and packaging. Our
products enhance end product performance due to the combination of their biodegradability and stability, strength properties, and
food friendliness (some products EU food contact approved). Our products tend to improve processing of existing bioplastic
solutions.
Other. We supply additives that are used in medical devices, 3-D printing, and miscellaneous footwear components. Our
additives enhance end product performance due to their low melting point and ability to be thermoformed. Our products improve
process conditions and improve the surface finish of the end product compared to competitive offerings.
Customers
We sell our engineered polymers chemicals to approximately 400 customers around the globe through the use of Ingevity
sales representatives and distributors. We have a 40-year history in the business and have some customers with relationships greater
than ten years.
Competition
In engineered polymers, we face competition from not only other producers of caprolactone, but other competing
technologies. We compete on the basis of performance as compared to the other materials. In coatings, we compete against PTMEG,
polycarbonates, and polyols. In resins, we also compete against hydroxy monomers, oxitanes, allyl ethers and hydroxy acrylates.
In elastomers, we compete against PTMEG, HDO adipates, polycarbonates and polyesters. In adhesives, we compete against
TPU, surlyn, polyesters, EVA, and polyamids. In bioplastics, we compete against PBAT, PBS, polylactide, and starch-based
polymers.
The primary caprolactone competitors are Daicel and BASF.
Energy
Our manufacturing processes require a significant amount of energy. We are dependent on natural gas to fuel the processes
in our chemical refineries and activated carbon plants. Although we believe that we currently have a stable natural gas supply and
infrastructure for our operations, we are subject to volatility in the market price of natural gas. All of our manufacturing processes
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also consume a significant amount of electricity. All of our facilities are located in regulated service areas that have stable rate
structures with reliable electricity supply.
Environment
Our operations are subject to extensive regulation by federal, state, and local authorities, as well as regulatory authorities
with jurisdiction over the foreign operations of Ingevity, including relating to the discharge of materials into the environment and
the handling, disposal, and clean-up of waste materials, and otherwise relating to the protection of the environment. It is not possible
to quantify with certainty the material effects that compliance with these regulations may have upon the capital expenditures,
earnings or competitive position of Ingevity, but it is anticipated that such compliance will not have a material adverse effect on
any of the foregoing. For a further discussion, see “Risk Factors-Risks Related to Ingevity’s Business-Our business involves
hazards associated with chemical manufacturing, storage, transportation and disposal” and “Risk Factors-Risks Related to Ingevity’s
Business-The Company’s operations are subject to a wide range of general and industry specific environmental laws and
regulations.” Environmental regulation and legal proceedings have the potential for involving significant costs and liability for
Ingevity.
Backlog
In general, we do not manufacture our products against a backlog of orders and do not consider backlog to be a significant
indicator of the level of future sales activity. Production and inventory levels are based on the level of incoming orders as well as
projections of future demand. Therefore, we believe that backlog information is not material to understanding our overall business
and should not be considered a reliable indicator of our ability to achieve any particular level of revenue or financial performance.
Intellectual Property
Intellectual property, including patents, closely guarded trade secrets and highly proprietary manufacturing know-how,
as well as other proprietary rights, is a critical part of maintaining our technology leadership and competitive edge. Our business
strategy includes filing patent and trademark applications where appropriate for proprietary developments, as well as protecting
our trade secrets. We actively create, protect, and enforce our intellectual property rights. The protection afforded by our patents
and trademarks varies based on country, scope, and coverage, as well as the availability of legal remedies. Although our intellectual
property taken as a whole is material to the business, other than our “canister bleed emissions” patent, which is part of our automotive
business and expires in March 2022, there is no individual patent or trademark the loss of which could have a material adverse
effect on the business. The most commonly applied embodiment of the “canister bleed emissions” patent uses our activated carbon
in the main part of the canister and our activated carbon extruded honeycomb(s) as a “scrubber” on the outlet side of the canister
to reduce the canister’s emissions to “near zero.” We are filing for and being granted patents for product and process developments
for our Performance Materials business that we believe are both novel and consistent with trends in the technological development
of engines. Our Evotherm Warm Mix Asphalt technology is supported by numerous global patents. Additionally, our Caprolactone
Business and related technologies are supported by numerous global patents and trademarks, as well as proprietary manufacturing
and technical know-how. See “Risk Factors-Risks Related to Ingevity’s Business-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 successfully
protect our rights we may be negatively impacted from a financial as well as competitive advantage standpoint,” “Risk Factors-
Risks Related to Ingevity’s Business-As we rely on information technologies to conduct our business, security breaches and other
disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer.”,
and "Risk Factors-We face competition from infringing intellectual property activity."
Seasonality
There are a variety of seasonal dynamics, including global climate and weather conditions, that impact our businesses,
though none materially affect financial results, except in the case of the pavement technologies business, where roughly 70 to 75
percent of its revenue is generated between April and September. From a supply perspective, this seasonality is effectively managed
through pre-season inventory build then active inventory management throughout the year.
Employees
We currently employ approximately 1,750 employees, of whom approximately 80 percent are employed in the U.S.
Approximately 20 percent are represented by domestic (i.e. U.S.) labor unions under various collective bargaining agreements.
We engage in negotiations with labor unions for new collective bargaining agreements from time to time based upon expiration
dates of agreements and statutory requirements. We consider our relationships with all salaried, union hourly and non-hourly
employees to be positive and collaborative.
During 2018, Ingevity ratified new labor agreements with United Steel Workers ("USW") and International Association
of Machinists and Aerospace Workers ("IAM") at our Charleston, South Carolina location. The International Brotherhood of
Electrical Workers ("IBEW") at our Charleston, South Carolina location ratified our contract offer made December 17, 2018 in
January 2019. No collective bargaining agreements are scheduled to expire in 2019.
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See “Risk Factors-Risks Related to Ingevity’s Business-Work stoppages and other labor relations matters may have an
adverse effect on our financial condition and results of operations."
For further information on measures of profitability used by managers of the business and its segments, refer to “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Item 1A. Risk Factors
Based on the information currently known to us, we believe that the following information identifies the most significant
risk factors affecting our company. However, the risks and uncertainties our company faces are not limited to those set forth in
the risk factors described below. Additional risks and uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business. In addition, past financial performance may not be a reliable indicator of future
performance, and historical trends should not be used to anticipate results or trends in future periods.
If any of the following risks and uncertainties develops into actual events, these events could have a material adverse
effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could
decline.
General Business and Economic Risks
We may be adversely affected by general global economic and financial conditions beyond our control.
Our businesses may be affected by a number of factors that are beyond our control such as general economic and business
conditions, changes in tax laws or tax rates and conditions in the financial services markets including counterparty risk, insurance
carrier risk, rising interest rates, inflation, deflation, fluctuations in the value of local currency versus the U.S. dollar or the impact
of a stronger U.S. dollar which may negatively impact our ability to compete. Macro-economic challenges, including conditions
in financial and capital markets and levels of unemployment, and the ability of the U.S. and other countries to deal with their rising
debt levels may continue to put pressure on the economy or lead to changes in tax laws or tax rates. There can be no assurance
that changes in tax laws or tax rates will not have a material impact on our future cash taxes, effective tax rate or deferred tax
assets and liabilities. Adverse developments in global or regional economies could drive an increase or decrease in the demand
for our products that could increase or decrease our revenues, increase or decrease our manufacturing costs and ultimately increase
or decrease our results of operations, financial condition and cash flows. As a result of negative changes in the economy, customers,
vendors or counterparties may experience significant cash flow problems or cause consumers of our products to postpone or refrain
from spending in response to adverse economic events or conditions. If customers are not successful in generating sufficient
revenue or cash flows or are precluded from securing financing, they may not be able to pay or may delay payment of accounts
receivable that are owed to us or we may experience lower sales volumes. Our financial condition and results of operations could
be materially and adversely affected by any of the foregoing.
We are exposed to the risks inherent in international sales and operations.
In 2018, export sales from the U.S. made up approximately one third of our total sales, and we sell our products to
customers in approximately 75 countries. We have exposure to risks of operating in many foreign countries, including:
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fluctuations in foreign currency exchange rates, including the euro, pound sterling, Japanese yen and Chinese
renminbi;
restrictions on, or difficulties and costs associated with, the repatriation of cash from foreign countries to the U.S.;
difficulties and costs associated with complying with a wide variety of complex laws, treaties and regulations;
unexpected changes in political or regulatory environments;
earnings and cash flows that may be subject to tax withholding requirements or the imposition of tariffs, exchange
controls or other restrictions;
political and economic instability;
import and export restrictions, tariffs, and other trade barriers or retaliatory actions;
difficulties in maintaining overseas subsidiaries and international operations;
difficulties in obtaining approval for significant transactions;
government limitations on foreign ownership;
government takeover or nationalization of business; and
government mandated price controls.
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Any one or more of the above factors could adversely affect our international operations and could significantly affect
our financial condition and results of operations. We have also expanded our participation in certain markets. As our international
operations and activities expand, we inevitably have greater exposure to the risks of operating in many foreign countries.
Additionally, the U.S. has recently imposed tariffs on certain U.S. imports. China and other countries have responded
with retaliatory tariffs on certain U.S. exports. If tariffs or other restrictions or retaliatory actions increase our operating costs in
the future, and we are not able to recapture those costs from our customers, or if such tariffs or other restrictions make it more
difficult for us to compete in overseas markets, our business, financial condition and results of operations could be adversely
impacted.
Our reported results could be adversely affected by currency exchange rates and currency devaluation could impair our
competitiveness.
Due to our international operations, we transact in many foreign currencies, including but not limited to the euro, pound
sterling, Japanese yen and Chinese renminbi. As a result, we are subject to the effects of changes in foreign currency exchange
rates. During times of a strengthening U.S. dollar, our reported net revenues and operating income will be reduced because the
local currency will be translated into fewer U.S. dollars. During periods of local economic crisis, local currencies may be devalued
significantly against the U.S. dollar, potentially reducing our margin. Ingevity may enter forward exchange contracts and other
financial contracts in an attempt to mitigate the impact of currency rate fluctuations. However, there can be no assurance that such
actions will eliminate any adverse impact from variation in currency rates. Also, actions to recover margins may result in lower
volume and a weaker competitive position, which may have an adverse effect on our profitability.
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.
Our operations outside the U.S. require us to comply with a number of U.S. and international regulations. For example,
our operations in countries outside the U.S. are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits U.S.
companies and their agents and employees from providing anything of value to a foreign official for the purposes of influencing
any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or
corporate entity, or obtain any unfair advantage. Our activities may create the risk of unauthorized payments or offers of payments
by our employees, agents or joint venture partners that could be in violation of anti-corruption laws, even though these parties are
not subject to our control. We have internal control policies and procedures and training and compliance programs for our employees
and agents with respect to the FCPA and other applicable anti-corruption laws. However, we cannot assure that our policies,
procedures and programs always will protect us from reckless or criminal acts committed by our employees or agents. Allegations
of violations of applicable anti-corruption laws may result in internal, independent or government investigations. Violations of
anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have
a material adverse effect on our financial condition and results of operations.
In addition, the shipment of goods, services and technology across international borders subjects us to extensive trade
laws and regulations. Our import activities are governed by the unique customs laws and regulations in each of the countries where
we operate. Moreover, many countries, including the U.S., control the export and re-export of certain goods, services and technology
and impose related export record-keeping and reporting obligations. Governments may also impose economic sanctions against
certain countries, persons and entities that may restrict or prohibit transactions involving such countries, persons and entities,
which may limit or prevent our conduct of business in certain jurisdictions. We are also required to comply with similar laws and
regulations in other countries where we do business, with the same associated risks.
The laws and regulations concerning import activity, export record-keeping and reporting, export control and economic
sanctions are complex and constantly changing. These laws and regulations can cause delays in shipments and unscheduled
operational downtime. Moreover, any failure to comply with applicable legal and regulatory trading obligations could result in
criminal and civil penalties and sanctions, such as fines, imprisonment, debarment from governmental contracts, seizure of
shipments and loss of import and export privileges. In addition, investigations by governmental authorities as well as legal, social,
economic and political issues in these countries could have a material adverse effect on our business, results of operations and
financial condition. We are also subject to the risks that our employees, joint venture partners and agents outside of the U.S. may
fail to comply with other applicable laws.
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Our Engineered Polymers product line may be adversely affected by Brexit.
On June 23, 2016, voters in the United Kingdom (“UK”) approved an advisory referendum to withdraw from the
European Union (“EU”), commonly referred to as “Brexit.” Thereafter, on March 29, 2017, the UK formally notified the EU of
its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The withdrawal of the UK from the EU will take effect either
on the effective date of the withdrawal agreement or, in the absence of agreement, March 29, 2019, although this period can be
extended with the unanimous agreement of the European Council. The long-term nature of the UK’s relationship with the EU is
unclear and there is considerable uncertainty if and when any withdrawal agreement will be agreed upon and implemented.
Brexit creates an uncertain political and economic environment in the UK and potentially across other EU member states
for the foreseeable future, including during any period while the terms of Brexit are being negotiated and such uncertainties could
impair or limit our ability to transact business in the UK and member EU states. The effects of Brexit will depend on any
agreements the UK makes to retain access to EU markets either during a transitional period or more permanently. Brexit could
adversely affect the UK, EU and worldwide economic or market conditions and could contribute to instability in global financial
markets, and the value of the pound sterling or other currencies, including the Euro. Furthermore, Brexit could also have the
effect of disrupting the free movement of goods, services, and people between the UK, the EU, and elsewhere.
Additionally, a significant portion of the regulatory regime that applies to us in the UK is derived from EU directives
and regulations. For so long as the UK remains a member of the EU, these directives and regulations will (unless otherwise
repealed or amended) remain in effect. However, Brexit could change the legal and regulatory framework within the UK and is
likely to lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws
to replace or replicate.
Depending on the Brexit outcome, it is possible that there may be adverse practical and/or operational implications on
our business. Prior to the Caprolactone Acquisition we had no material suppliers located in the UK and during 2018 less than one
percent of our sales were sold to customer locations within the UK. On February 13, 2019 we closed the Caprolactone Acquisition.
The manufacturing operations of the Caprolactone Acquisition are located in Warrington, UK. The Warrington facility management
team has been proactively planning for various Brexit contingencies since prior to the Caprolactone Acquisition. Such planning
includes positioning additional raw materials in the UK, as well as storing addition inventories of products in the EU, in order to
minimize the impact of any short term Brexit related supply chain disruptions. We do not have a significant number of UK or
EU based employees that will need to change or clarify their immigration status as a result of Brexit. Additionally, we are planning
for the impact of Brexit on REACH by working with our REACH only representative on a plan to ensure REACH registrations
are in place in the UK and EU, for substances sold into the UK and EU as appropriate. While we believe we are taking appropriate
steps to plan for Brexit, due to the uncertainties of how Brexit will be resolved and its accompanying impacts, there can be no
assurance that Brexit will not adversely affect our business operations, results of operations and financial condition.
Risks Related to Ingevity’s Business
We are dependent on attracting and retaining key personnel.
The Company is dependent upon its senior management, as well as upon engineering, technical, sales and application
specialists, together with experienced industry professionals. Our success depends, in part, on our ability to attract, retain and
motivate these key performers. Our failure to attract and retain those making significant contributions could adversely affect our
financial condition and results of operations.
If increasingly more stringent air quality standards worldwide are not adopted, our growth could be impacted.
Environmental standards drive the implementation of gasoline vapor emission control systems by automotive
manufacturers. Given increasing societal concern over global warming and health hazards associated with poor air quality, there
is growing pressure on regulators across the globe to take meaningful action. For those countries that have not significantly regulated
gasoline vapor emissions, enacting more stringent regulations governing gasoline vapor emissions represents a significant upside
to the Company’s automotive carbon business. However, regulators may react to a variety of considerations, including economic
and political, that may mean that any such more stringent regulations are delayed or shelved entirely, in one or more countries or
regions. As the adoption of more stringent regulations governing gasoline vapor emissions is expected to drive significant growth
in our automotive carbon applications, the failure to enact such regulations will have a significant impact on the growth prospects
for these products.
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Adverse conditions in the automotive market may adversely affect demand for our automotive carbon products.
Sales of our automotive activated carbon products are tied to global automobile production levels. Automotive production
in the markets we serve can be affected by macro-economic factors such as interest rates, fuel prices, shifts in vehicle mix (including
shifts toward alternative energy vehicles), consumer confidence, employment trends, regulatory and legislative oversight
requirements and trade agreements. For example, the global economic downturn in 2008/2009 led to a drastic reduction in vehicle
sales and an even greater reduction in vehicle production as OEMs right-sized their inventories to meet the lower sales volumes.
Regional disruptions such as those caused by the Japan earthquake and resulting tsunami in March 2011 and Hurricane Sandy in
October 2012 can also significantly impact vehicle production and therefore demand for our automotive carbon.
The Company’s printing inks business serves customers in a market that is facing declining volumes and downward pricing.
In recent years, the use of inks in which our printing ink resins are used, such as those made for magazines and catalogues,
has significantly decreased, as the printing industry has experienced a reduction in demand due to various factors including the
global economic downturn of 2008 and 2009, which severely impacted volumes, and competition from alternative sources of
communication, including email, the Web, electronic readers, interactive television and electronic retailing. The impacts of these
changes have led to continued intense competition and downward pricing pressures on printing inks, and therefore, our ink products.
The Company’s pavement technologies business is heavily dependent on government infrastructure spending.
A significant portion of our customers’ revenues in our pavement technologies business is derived from contracts with
various foreign and U.S. governmental agencies, and therefore, when government spending is reduced, our customers’ need for
our products is similarly reduced. While we do not do business directly with governmental agencies, our customers provide paving
services to, for example, the governments of various jurisdictions within North America, Europe, China, Brazil and India, and
revenue either directly or indirectly attributable to such government spending continues to remain a significant portion of our
revenues. Government business is, in general, subject to special risks and challenges, including: delays in funding and uncertainty
regarding the allocation of funds to federal, state and local agencies, delays in the expenditures and delays or reductions in other
state and local funding dedicated for transportation projects; other government budgetary constraints, cutbacks, delays or
reallocation of government funding; long purchase cycles or approval processes; our customers’ competitive bidding and
qualification requirements; changes in government policies and political agendas; and international conflicts or other military
operations that could cause the temporary or permanent diversion of government funding from transportation or other infrastructure
projects.
The Company’s oilfield technologies business is significantly affected by trends in oil and natural gas prices that affect the
level of exploration, development and production activity.
Demand for our oilfield technologies services and products is particularly sensitive to the level of exploration,
development and production activity of, and the corresponding capital spending by, oil and natural gas companies, including
national oil companies. The level of exploration, development and production activity is directly affected by trends in oil and
natural gas prices, which historically have been volatile. Crude oil prices have declined significantly since 2014, with West Texas
Intermediate oil spot prices declining from a high of $108 per barrel in June 2014 to a low of $27 per barrel in February 2016, a
level which had not been experienced since 2003. Pricing has climbed to a trading range of $43 to $64 per barrel in the November
2018 to January 2019 time frame. Pricing is not currently forecasted to change significantly from these levels during 2019. While
these pricing levels are significantly above the February 2016 levels, they remain off their highs seen in the last decade.
Any prolonged low pricing environment for oil and natural gas is likely to result in reduced demand for our oilfield
technology products, which may have a material adverse effect on our results of operations.
In order to compete successfully, we must develop new products and technologies meeting evolving market and customer needs;
disruptive technologies could reduce the demand for the Company’s products.
Our industries and the end-use markets into which we sell our products experience periodic technological change and
product improvement. Our future growth will depend on our ability to gauge the direction of commercial and technological progress
in key end-use markets and on our ability to fund and successfully develop, manufacture and market products in such changing
end-use markets. If we fail to keep pace with the evolving technological innovations in our end-use markets on a competitive basis,
including with respect to innovation with regard to the development of alternative uses for, or application of, products developed
that utilize such end-use products, our financial condition and results of operations could be adversely affected. Similarly, we face
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competition in our applications. Disruptive technology involving new or superior solutions could reduce the demand for the
Company’s products.
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 successfully protect our rights we may be negatively impacted from a financial as well as
competitive advantage standpoint.
Intellectual property rights, including patents, trade secrets, confidential information, trademarks, trade names and trade
dress, are important to our business. See "Intellectual Property" included within Part I. Item 1 of this Form 10-K for more information
on our “canister bleed emissions” patent. We will endeavor to protect our intellectual property rights in key jurisdictions in which
our products are produced or used, in jurisdictions into which our products are imported, and in jurisdictions where our competitors
have significant manufacturing capabilities. Our success will depend to a significant degree upon our ability to protect and preserve
our intellectual property rights. However, we may be unable to obtain or maintain protection for our intellectual property in key
jurisdictions. Although we own and have applied for numerous patents and trademarks throughout the world, we may have to rely
on judicial enforcement of our patents and other proprietary rights. Our patents and other intellectual property rights may be
challenged, invalidated, circumvented and rendered unenforceable or otherwise compromised. A failure to protect, defend or
enforce our intellectual property could have an adverse effect on our financial condition and results of operations. Similarly, third
parties may assert claims against us and our customers and distributors alleging our products infringe upon third-party intellectual
property rights.
We also rely materially upon unpatented proprietary technology, know-how and other trade secrets to maintain our
competitive position. While we maintain policies to enter into confidentiality agreements with our employees and third parties to
protect our proprietary expertise and other trade secrets, these agreements may not be enforceable or, even if legally enforceable,
we may not have adequate remedies for breaches of such agreements. We also may not be able to readily detect breaches of such
agreements. The failure of our patents or confidentiality agreements to protect our proprietary technology, know-how or trade
secrets could result in significantly lower revenues, reduced profit margins or loss of market share.
We are currently involved in several legal actions relative to intellectual property associated with our "canister bleed
emissions" patent. These and other legal actions to protect, defend or enforce our intellectual property rights could result in
significant costs and diversion of our resources and our management’s attention, and we may not prevail in any such suits or
proceedings. A failure to protect, defend or enforce our intellectual property rights, or the loss of patent rights due to adverse
findings in any claims or proceedings could have an adverse effect on our financial condition and results of operations.
Our Performance Chemicals segment is highly dependent on CTO, which is limited in supply; lack of access to sufficient CTO
would impact our ability to produce CTO-based products.
The availability of CTO is essential to the Company’s Performance Chemicals segment. Availability of CTO is directly
linked to the production output of kraft mills using pine as their source of pulp, which is the predominant fiber source for packaging
grades of paper as well as fluff pulp for personal care products. As a result, there is a finite global supply of CTO-with global
demand for kraft board driving the global supply of CTO, rather than demand for CTO itself. Most of the CTO made available for
sale by its producers in North America is covered by long-term supply agreements, further constraining availability.
At the time of the Separation, we entered into a long-term supply agreement with WestRock pursuant to which we
purchase all of the CTO output from WestRock’s existing (at the time of separation) kraft mills, subject to certain exceptions. This
agreement includes pricing terms based on market prices.
Pricing for the products in our agreement with WestRock is based on the prevailing market prices of products at the time
of purchase. The pricing formulas are subject to certain pricing floors as set forth in the agreement with WestRock. Given the take-
or-pay requirements of the agreement with WestRock, in adverse market conditions we could be required to purchase CTO from
WestRock at prices where our results of operations could be materially and adversely affected.
In 2018, we entered into a 20 year CTO supply agreement with Georgia-Pacific, pursuant to which we purchase the
lesser of 125,000 tons of CTO and the aggregate output of CTO produced and originating at certain of Georgia-Pacific’s paper
mills.
Pricing for the CTO in our agreement with Georgia-Pacific is a market-based price, subject to ongoing adjustments.
Given the take-or-pay requirements of the agreement with Georgia-Pacific, in adverse market conditions we could be required to
purchase CTO from Georgia-Pacific at prices where our results of operations could be materially and adversely affected.
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If any of our suppliers (including WestRock or Georgia-Pacific) fail to meet their respective obligations under our supply
agreements or we are otherwise unable to procure an adequate supply of CTO, we would be unable to maintain our current level
of production and our results of operations would be materially and adversely affected.
Beginning in 2025, either party to the WestRock agreement may provide a notice to the other party terminating the
WestRock agreement five years from the date of such notice. Beginning one year after such notice, the quantity of products provided
by WestRock under the agreement will be gradually reduced over a four-year period based on the schedule set forth in the agreement.
In addition, from 2022 until 2025, either party may provide a one-year notice to remove a kraft mill as a supply source. The two
largest kraft mills under the WestRock agreement currently supply approximately 19 to 20 percent and 17 to 18 percent, respectively,
of the total amount of products supplied under our agreement with WestRock. If WestRock exercises its rights to terminate the
agreement or remove a kraft mill as a supply source, and we are unable to arrange for a substitute supply of CTO, we would be
unable to continue to produce the same quantity of products and our results of operations could be materially and adversely affected.
There are other pressures on the availability of CTO. Some pulp or paper mills may choose to consume their production
of CTO to meet their energy needs rather than sell the CTO to third parties. Also, as described below, there are regulatory pressures
that may incentivize suppliers of CTO to sell CTO into alternative fuel markets rather than to historical end users such as Ingevity.
Furthermore, weather conditions have in the past and may in the future affect the availability and quality of pine trees used in the
kraft pulping process and therefore the availability of CTO meeting Ingevity’s quality standards. For example, the combined impact
of Hurricane Katrina in August 2005 and Hurricane Rita in September 2005 caused significant damage to forests throughout the
southern U.S.. This significantly affected the availability and quality of the supply of CTO during late 2005 and into 2006. In
addition, Hurricanes Florence and Michael in 2018 disrupted vendor operations and reduced availability of CTO supply.
We may not realize the growth opportunities that are anticipated from the Caprolactone Acquisition.
The benefits that are expected to result from the Caprolactone Acquisition will depend, in part, on our ability to realize
the anticipated growth opportunities. Our success in realizing these growth opportunities, and the timing of this realization, depends
on the successful integration of the Caprolactone Business. There is a significant degree of difficulty and management distraction
inherent in the process of integrating an acquisition as sizable as the Caprolactone Business. The process of integrating operations
could cause an interruption of, or loss of momentum in, our and the Caprolactone Business’ activities. Members of our senior
management may be required to devote considerable amounts of time to this integration process, which will decrease the time
they will have to manage other aspects of our business, service existing customers, attract new customers and develop new products
or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities
are interrupted as a result of the integration process, our business could suffer. There can be no assurance that we will successfully
or cost-effectively integrate the Caprolactone Business. The failure to do so could have a material adverse effect on our business,
financial condition or results of operations.
Even if we are able to integrate the Caprolactone Business successfully, this integration may not result in the realization
of the full benefits of the growth opportunities that we currently expect from this integration, and we cannot guarantee that this
benefit will be achieved within anticipated time frames or at all. For example, the associated costs of the Caprolactone Acquisition
may be greater than we expect. Any of these would offset the anticipated benefit from the Caprolactone Acquisition.
The Caprolactone Acquisition may expose us to unknown liabilities.
On February 13, 2019, we acquired all the shares of Perstorp UK Ltd. and, as a result, we will generally be subject to
all of its liabilities, subject to a warranty and indemnity insurance policy and remedies in the Caprolactone Agreement. We may
learn additional information about the Caprolactone Business that adversely affects us, such as unknown liabilities, including
liabilities under environmental or tax laws, or issues that could affect our ability to comply with other applicable laws. If previously
unknown liabilities or other obligations of the Caprolactone Business emerge in the future, and available remedies are not sufficient,
our business could be materially affected.
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The European Union’s Directive 2009/28 on the promotion of the use of energy from renewable resources (“Renewable
Energy Directive” or “RED”) and similar legislation in the U.S. and elsewhere may incentivize the use of CTO as a
feedstock for production of alternative fuels.
In December 2008, the European Union (“EU”) adopted the Renewable Energy Directive, which established a 20 percent
EU-wide target for energy consumed from renewable sources relative to the EU’s gross final consumption of energy, as well as a
10 percent target for energy consumed from renewable sources in the transport section. In order to reach these targets, the RED
established mandatory targets for each Member State and required each Member State to adopt a national renewable energy action
plan setting forth measures to achieve its national targets. The RED also established sustainability criteria for biofuels, which must
be satisfied in order for the consumption of a fuel to count toward a Member State’s national targets. CTO-based biofuel currently
satisfies the RED’s biofuel sustainability criteria.
In spring 2015, the EU adopted amendments to the Renewable Energy Directive. RED now expressly lists CTO as a
residue-type feedstock whose use in biofuel would make that biofuel eligible for double counting towards national targets of the
Member States, and at least two Member States additionally have or plan fiscal incentives for the domestic marketing of CTO-
based and other qualifying biofuels. In 2018, the EU adopted RED II (effective 2021-2030) which increased the target for energy
consumed from renewable sources in the transport section to 14 percent and established minimum use levels for certain feedstocks
that may promote the use of CTO for the production of alternative fuels.
In addition to these developments in the European Union, various pieces of legislation regarding the use of alternative
fuels have been introduced in the U.S. Currently, none of the U.S. legislation mandates or provides incentives for the use of CTO
as a transportation fuel. Some regional cap and trade programs may incentivize the use of CTO in stationary sources. Future
legislation in the U.S. and elsewhere may promote the use of CTO as a feedstock for production of alternative fuels.
Because the supply of CTO is inherently constrained by the volume of kraft pulp processing, any diversion of CTO for
production of alternative fuels would reduce the available supply of CTO as the principal raw material of the pine chemicals
industry. As described above, the Company is highly dependent on CTO as an essential raw material, and if the Company is unable
to procure an adequate supply of CTO due to competing new uses such as for biofuel production, the Company’s results of operations
would be materially and adversely affected.
Pricing for CTO is subject to particular pricing pressures by reason of limited supply and competing demands for end use, and
we may be limited in our ability to pass on increased costs to our customers.
Pricing for CTO (which accounted for approximately 12 percent of all of our cost of sales and 34 percent of our raw
materials purchases for 2018) is subject to particular pricing pressures by reason of the limited supply elasticity of the product and
competing demands for its use, all of which drive pressure on price:
• CTO is a product of the kraft pulping process, and the global supply of CTO is inherently constrained by the volume of
kraft pulping processing;
• CTO can be burned as alternative fuels, either in support of the originating pulp mill operations, by energy companies
or biofuel companies; and
• Regulations or other incentives mandate or encourage the consumption of biofuels as alternatives, including CTO.
We may not have the ability to pass through any increases in our cost of CTO to our customers in the form of price
increases or other adjustments, with a resulting material adverse effect on our results of operations. Additionally, we may be placed
at a competitive disadvantage relative to our competitors who rely on different primary raw materials or who have more favorable
terms with their suppliers.
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We are also dependent on other raw materials, and these are also subject to pricing pressures; lack of access to these raw
materials and inability to pass on price increases could adversely affect our financial condition and results of operations.
The Company is dependent on other raw materials, including, but not limited to, hardwood sawdust, phosphoric acid,
ethylene amines, lignin, nonylphenol, hydrogen peroxide, cyclohexanone, and pentaerythritol. Raw material costs are a significant
operating expense of the Company. The cost of raw materials can be volatile and subject to increases as a result of, among other
things, changing economic conditions, political or policy considerations, supply and demand levels, instability in energy producing
nations, and natural events such as extreme weather events or even insect infestations. Any interruption in the supply of the raw
materials on which we depend, and any increases in the cost of raw materials that we are not able to pass on to customers in the
form of price increases or other adjustments, may materially impact our financial condition and results of operations.
A prolonged period of low energy prices may materially impact our results of operations.
The price of energy may directly or indirectly impact demand, pricing or the profitability for certain Ingevity products.
As petroleum oil prices fall or change rapidly, Ingevity products may be disadvantaged due to the fact that CTO and BLSS are
thinly traded commodities with pricing commonly established for periods ranging from one quarter to one year periods of time.
Due to this, alternative technologies which compete with product offerings provided by Ingevity may be advantaged from time to
time in the market place. Protracted periods of high volatility or sustained oversupply of petroleum oil may also translate into
increased competition from petroleum-based alternatives which would otherwise be consumed in petroleum transportation fuel
blends. In addition, pricing for competing naturally derived oils such as palm or soybean is likely to provide further pressure on
pricing of the Company’s products during periods of depressed petroleum prices.
We face competition from producers of substitute products and new technologies, and new or emerging competitors.
In the Performance Materials segment, there is competition from various other activated carbon manufacturers. These
competitors are actively trying to develop more advanced and alternative activated carbon products that would more effectively
compete with our products in the automotive applications. There is also competition in the automotive applications from non-
activated carbon competitors or product offerings. For example, at least one OEM is using sealed tanks in certain subsets of its
vehicles to comply with the LEV III/Tier 3 regulations. While the sealed tank fuel systems generally require a similarly sized
pelleted activated carbon canister to deal with refueling emissions, in most cases, they do not use a extruded honeycomb to meet
current U.S. and California regulations. There is also emerging competition in the "honeycomb" space, which may impact sales
of the Company's products. If a competitor were to succeed in developing products that are better suited for automotive evaporative
emissions capture applications and/or a competitive technology, such as, but not limited to, sealed gas tanks, were to be implemented
across a material number of vehicle platforms, our financial results could be negatively impacted.
In addition, growth in alternative vehicles, such as all-electric vehicles and hydrogen fuel cell vehicles, which do not
use gasoline, may also adversely affect the demand for our products.
In the Performance Chemicals segment, hydrocarbon resins and gum rosin-based products compete with TOR-based
resins in the adhesives and printing inks markets. The price of gum rosin has a significant impact on the market price for TOR and
rosin derivatives and the price of gum rosin is driven by labor rates, land leasing costs and various other factors that are not within
our control. Hydrocarbon resins, for example, C5 resins, are co-products from isoprene (synthetic rubber). Availability and pricing
are determined by the supply and demand for synthetic rubber as well as crude oil prices as the feedstock for isoprene and various
other factors that are not within our control. Animal and vegetable-based fatty acids compete with TOFA products in lubricant and
industrial specialties. The market price for TOFA products is impacted by the prices of other fats and oils and the prices for other
fats and oils is driven by actual and expected harvest rates, crude oil prices and the biofuel market. Other monomers, thermoplastics
and polyols compete with our caprolactone based products. The price for our products is impacted by the prices of competitive
substitutes which are influenced by petroleum prices as well as other supply and demand factors. Additionally, the Company faces
competition from competitors that are actively developing new technologies and competing products across the segment. A
significant investment by a competitor in a competitive technology or product line could negatively impact our financial results.
We face competition from infringing intellectual property activity.
The Company is currently involved in several legal actions relative to intellectual property associated with our
“canister bleed emissions” patent. These infringing activities also represent a competitive threat. The Company is vigorously
addressing infringing activity through legal actions and other available means. While the Company believes its legal action
claims are meritorious, there can be no assurances that the Company will prevail in such actions.
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Disruptions at any of our manufacturing facilities or within our supply chain could negatively impact our production, financial
condition and results of operations.
An operational disruption in any of our facilities could negatively impact production and our financial results. The
occurrence of a natural disaster, such as a hurricane, tropical storm, earthquake, tornado, severe weather, flood, fire or other
unanticipated problems such as labor difficulties, equipment failure, capacity expansion difficulties or unscheduled maintenance
could cause operational disruptions of varied duration. These types of disruptions could materially adversely affect our financial
condition and results of operations to varying degrees dependent upon the facility, the duration of the disruption, our ability to
shift business to another facility or find alternative sources of materials or energy. In certain cases, we have some products that
are only made at one facility. For example, in the case of our Waynesboro, Georgia facility, while we have some redundancies
within the facility, we only have one facility that makes our extruded honeycomb products. In the case of our Warrington, UK
facility, while we have some redundancies within the facility, we only have one facility that makes our caprolactone products. As
other examples, in our Charleston SC facility, we source black liquor from an adjacent papermill to isolate and subsequently modify
lignin to serve our agriculture customers while we make the vast majority of our ink resin products in our DeRidder, Louisiana
facility. While we have redundancies within these facilities, we have limited ability to make these products at other facilities. Any
losses due to these events may not be covered by our existing insurance policies or may be subject to certain deductibles.
We could be similarly adversely affected by disruptions within our supply chain and transportation network. Our products
are transported by truck, rail, barge or ship by third-party providers. The costs of transporting our products could be negatively
affected by factors outside of our control, including rail service interruptions or rate increases, extreme weather events, tariffs,
rising fuel costs and capacity constraints. Significant delays or increased costs affecting these transportation methods could
materially affect our financial condition and results of operations. Disruptions at our suppliers could lead to short term or longer
rises in raw material or energy costs and/or reduced availability of materials or energy, potentially affecting our financial condition
and results of operations. For example Solvay Interox Limited (“Solvay”) is our primary provider of hydrogen peroxide to our
Warrington, UK Performance Chemicals facility, which is co-located with the Solvay Warrington, UK chemical plant (“Solvay
Plant”). Disruptions at the Solvay Plant impacting Solvay’s ability to supply hydrogen peroxide could adversely affect our financial
condition and results of operations. See also "Our Engineered Polymers product line may be adversely affected by Brexit" risk
factor.
We are dependent upon third parties for the provision of certain critical operating services at several of our facilities.
We are dependent upon third parties for the provision of certain critical operating services at our Covington, Virginia
Performance Materials facility and at the following Performance Chemicals facilities: Crossett, Arkansas; North Charleston, South
Carolina; and Warrington, UK.
We are dependent on: (i) the WestRock Covington, Virginia paper mill (“WestRock VA Paper Mill”) for the provision
of electricity, water, compressed air, steam and wastewater treatment to our Covington Performance Materials facility; (ii) the
WestRock North Charleston, South Carolina paper mill (“WestRock SC Paper Mill”) for the provision of water, compressed air,
steam and wastewater treatment at our North Charleston Performance Chemicals facility; (iii) the Georgia-Pacific Crossett,
Arkansas paper mill and chemicals plant (collectively, “Georgia-Pacific Mill”) for the provision of natural gas, water, compressed
air and wastewater treatment to our Crossett Performance Chemicals facility; and (iv) Solvay Plant for the provision of water,
compressed air, nitrogen, natural gas, electricity, steam, and wastewater treatment and waste management at our Warrington
Performance Chemicals facility. We have existing long-term contractual arrangements covering these services for our Covington,
Crossett, North Charleston and Warrington facilities. The provision of these services would be at risk if any of the counterparties
were to idle or permanently shut down the associated mill, or if operations at the associated mill were disrupted due to natural or
other disaster, or by reason of strikes or other labor disruptions, or if there were a significant contractual dispute between the
parties.
In the event that WestRock VA Paper Mill, WestRock SC Paper Mill, Georgia-Pacific Mill or Solvay Plant were to fail
to provide the contracted services, we would be required to obtain these services from other third parties at an increased cost or
to expend capital to provide these services ourselves. The expenses associated with obtaining or providing these services, as well
as any interruption in our operations as a result of the failure of the counterparty to provide these services, may be significant and
may adversely affect our financial condition and results of operations.
Furthermore, in the event that WestRock VA Paper Mill wastewater treatment operations do not comply with permits or
applicable law and the WestRock VA Paper Mill is unable to determine the cause of such compliance, then we will be responsible
for between 10 percent and 50 percent of the costs and expenses of such noncompliance (increasing in 10 percent increments per
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violation during each twelve month period) despite representing less than 3 percent of the total wastewater volume. These costs
and expenses may be significant and may adversely affect our financial condition and results of operations.
Additionally, (i) our Covington Performance Materials facility is located on real property leased from WestRock pursuant
to a long-term lease agreement, and is surrounded by the WestRock VA Paper Mill, (ii) a portion of our North Charleston Performance
Chemicals facility is located on real property leased from WestRock and is adjacent to the WestRock SC Paper Mill; (iii) our
Crossett Performance Chemicals facility is located on real property leased from Georgia-Pacific pursuant to a long-term lease
agreement, and is surrounded by the Georgia-Pacific Paper Mill and (iv) our Warrington, UK Performance Chemicals facility is
located on real property leased from Solvay pursuant to multiple long-term lease agreements, and is surrounded by the Solvay
Plant. In the event we were to have a dispute with WestRock, Georgia-Pacific or Solvay regarding the terms of the relevant lease
agreements, or we were otherwise unable to fully access or utilize the leased property, the associated business disruption may be
significant and may adversely affect our financial condition and results of operations.
We are also dependent on third parties for the disposal of brine, which results from our own conversion of BLSS into
CTO. If these service providers do not perform under their contracts, the costs of disposing of brine ourselves, including, for
example, the transportation costs, could be significant.
Work stoppages and other labor relations matters may have an adverse effect on our financial condition and results of operations.
Many of our production employees are governed by collective bargaining agreements (“CBAs”). From time to time the
Company engages in negotiations to renew CBAs as those contracts are scheduled to expire. At our North Charleston, SC facility,
the Company ratified a new CBA with the USW and IAM in 2018 and with the IBEW in January 2019.
While the Company has generally positive relations with its labor unions, there is no guarantee the Company will be
able to successfully negotiate new union contracts without work stoppages, labor difficulties or unfavorable terms. If we were to
experience any extended interruption of operations at any of our facilities because of strikes or other work stoppages, our results
of operations and financial condition could be materially and adversely affected. In addition, due to the co-location of our Covington,
Crossett, North Charleston, and Warrington facilities within the WestRock VA Paper Mill, Georgia-Pacific Mill, WestRock SC
Paper Mill and Solvay Plant facilities, a strike or work stoppage at any of these facilities could cause disruptions at our facilities,
and our results of operations could be materially and adversely affected.
Our business involves hazards associated with chemical manufacturing, storage, transportation and disposal.
There are hazards associated with the chemicals we manufacture and the related storage and transportation of our raw
materials, including common solvents, such as toluene and methanol, and reactive chemicals, such as acrylic acid, all of which
fall under the OSHA Process Safety Management Code. These hazards could lead to an interruption or suspension of operations
and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on us as a whole. While
we endeavor to provide adequate protection for the safe handling of these materials, issues could be created by various events,
including natural disasters, severe weather events, acts of sabotage and performance by third parties, and as a result we could face
the following potential hazards: piping and storage tank leaks and ruptures; mechanical failure; employee exposure to hazardous
substances; and chemical spills and other discharges or releases of toxic or hazardous substances or gases.
These hazards may cause personal injury and loss of life, damage to property and contamination of the environment,
which could lead to government fines, work stoppage injunctions, lawsuits by injured persons, damage to our public reputation
and brand and diminished product acceptance. If such actions are determined adversely to us or there is an associated economic
impact to our business, we may have inadequate insurance or cash flow to offset any associated costs. Such outcomes could
adversely affect our financial condition and results of operations.
26
Regulation of exposure to certain process chemicals could require expenditures or changes to our product formulations.
Certain regulations applicable to our operations, including the Occupational Safety and Health Act and the Toxic
Substances Control Act in the U.S. and the Registration, Evaluation and Authorization of Chemicals, or REACH, directive in
Europe, prescribe limits restricting exposure to a number of chemicals used in our operations, including certain forms of
formaldehyde, a raw material used in the manufacture of phenolic modified rosin-based ink resins and some lignin-based
dispersants. Future studies on the health effects of chemicals used in our operations, including alkylphenols, such as bisphenol
A, which are used in our TOR-based ink resins, may result in additional regulation or new requirements in the U.S., Europe and
elsewhere, which might further restrict or prohibit the use of, and exposure to, these chemicals. Additional regulation of or
requirements for these or other chemicals could require us to change our operations, and these changes could affect the quality or
types of products we manufacture and/or materially increase our costs.
The Company’s operations are subject to a wide range of general and industry-specific environmental laws and regulations.
The Company’s operations are subject to a wide range of general and industry-specific environmental laws and
regulations, including, for example, related to bisphenol A, formaldehyde and air emissions. Changes in environmental laws and
regulations, or their application, could subject the Company to significant additional capital expenditures and operating expenses
in future years. However, any such changes are uncertain and, therefore, it is not possible for the Company to predict with certainty
the amount of additional capital expenditures or operating expenses that could be necessary for compliance with respect to any
such changes.
As we rely on information technologies to conduct our business, security breaches and other disruptions could compromise
our information and expose us to liability, which could cause our business and reputation to suffer.
We rely on information technologies, some of which are managed by third parties, to manage the day-to-day operations
and activities of our business, operate elements of our manufacturing facilities, manage our customer and vendor transactions, and
maintain our financial, accounting and business records. In addition, we collect and store certain data, including proprietary business
information, and may have access to confidential or personal information that is subject to privacy and security laws and regulations.
The secure processing, maintenance and transmission of sensitive, confidential and personal data is critical to our
operations and business strategy. We follow industry best practices and have instituted a system of security policies, procedures,
capabilities, and internal controls designed to protect this information. Additionally, we engage third-party threat detection and
monitoring services which includes a global cyber security incident response team. Despite our security design and controls, and
those of our third-party providers, we may be vulnerable to cyber-attacks, computer viruses, security breaches, inadvertent or
intentional employee actions, system failures and other risks that could potentially lead to the compromising of sensitive,
confidential or personal data, improper use of our, or our third-party provider systems, solutions or networks, unauthorized access,
use, disclosure, modification or destruction of information, and operational disruptions. In addition, the global regulatory
environment pertaining to information security and privacy is increasingly demanding, with new and changing requirements, such
as the European Union’s General Protection Regulation (“GDPR”) and the China Cybersecurity Law. GDPR, which applies to the
collection, use, retention, security, processing, and transfer of personally identifiable information of residents of EU countries,
mandates new compliance obligations, and imposes significant fines and sanctions for violations. Such breaches, cyber incidents
and disruptions, or failure to comply with laws and regulations related to information security or privacy, could result in legal
claims or proceedings against us by governmental entities or individuals, significant fines, penalties or judgements, disruption of
our operations, remediation requirements, changes to our business practices, and damage to our reputation, which could adversely
affect our business, financial condition or results of operations.
We are dependent on certain customers.
We have certain large customers in particular businesses, the loss of which could have a material adverse effect on the
applicable segment’s sales and, depending on the significance of the loss, our results of operations, financial condition or cash
flows. Sales to the Company’s ten largest customers (across both segments) accounted for 36 percent of total sales for 2018. No
customer accounted for more than 10 percent of total sales for 2018. With some exceptions, our business with those large customers
is based primarily upon individual purchase orders. As such, our customers could cease buying our products from us at any time,
for any reason, with little or no recourse. If a major customer or multiple smaller customers elected not to purchase products from
us, our financial condition and results of operations would be materially adversely affected.
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Challenges in the commercial and credit environment may materially adversely affect Ingevity’s future access to capital.
Ingevity’s ability to issue debt or enter into other financing arrangements on acceptable terms could be materially adversely
affected if there is a material decline in the demand for Ingevity’s products or in the solvency of its customers or suppliers or if
other significantly unfavorable changes in economic conditions occur. Volatility in the world financial markets could increase
borrowing costs or affect Ingevity’s ability to gain access to the capital markets, which could have a material adverse effect on
Ingevity’s competitive position, business, financial condition, results of operations and cash flows.
Our current level of debt could adversely affect our financial health and prevent us from fulfilling our debt obligations.
Our debt requires significant interest and principal payments. Our ability to make scheduled payments on or to refinance
our debt obligations and to fund working capital, planned capital expenditures and expansion efforts and any strategic alliances
or acquisitions we may make in the future depends on our ability to generate cash in the future and our financial condition and
operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business,
regulatory and other factors beyond our control. There can be no assurance that we will maintain a level of cash flows from
operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce
or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our debt, including
the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity
problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may
not be able to consummate those dispositions or to obtain the proceeds sought from them, and these proceeds may not be adequate
to meet any debt service obligations then due. Further, we may need to refinance all or a portion of our debt on or before maturity,
and there can be no assurances we will be able to refinance any of our debt on commercially reasonable terms or at all. Any
inability to generate sufficient cash flow or refinance our indebtedness on favorable terms could have a material adverse effect on
our business, results of operations, and financial condition.
The inability to make or effectively integrate future acquisitions may affect our results.
As part of our growth strategy, we may pursue acquisitions of complementary businesses and product lines or invest in
joint ventures. The ability to grow through acquisitions or other investments depends upon our ability to identify, negotiate, complete
and integrate suitable acquisitions or joint venture arrangements. If we fail to successfully integrate acquisitions into our existing
business, our financial condition and results of operations could be adversely affected.
We are subject to continuing contingent tax-related liabilities of WestRock.
Under the U.S. Internal Revenue Code of 1986, as amended (the “Code”), each corporation that was a member of
WestRock’s consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the
effective time of the distribution is severally liable for the U.S. federal income tax liability of the entire consolidated tax reporting
group for such taxable period. In connection with the Separation, we entered into the tax matters agreement with WestRock (the
"Tax Matters Agreement") that allocates the responsibility for prior period taxes of WestRock’s consolidated tax reporting group
between Ingevity and WestRock. If WestRock were unable to pay any prior period taxes for which it is responsible, however, we
could be required to pay the entire amount of such taxes, and such amounts could be significant. The Tax Matters Agreement
generally gives WestRock discretion to handle consolidated tax returns and audits for pre-distribution periods in a manner which
may be unfavorable to us and which may result in additional tax costs to us.
Our tax rate is dependent upon a number of factors; a change in any of which could impact our future tax rates and net income.
Our future tax rates may be adversely affected by a number of factors, including: future changes in the jurisdictions in
which our profits are determined to be earned and taxed; changes in estimated realization of our deferred tax assets; the repatriation
of non-U.S. earnings for which we have not previously provided U.S. income and non-U.S. withholding taxes; adjustments to
estimated taxes upon finalization of various tax returns; increases in expenses that are non-deductible for tax purposes; changes
in available tax credits; the resolution of issues arising from tax audits with various tax authorities; and changes in tax laws or
interpretation of such tax laws. Losses for which no tax benefits can be recorded could materially impact our tax rate and its
volatility from one quarter to another.
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Risks Relating to Ingevity’s Common Stock
The price of Ingevity’s common stock may fluctuate significantly.
The market price of Ingevity common stock may fluctuate significantly due to a number of factors, some of which may
be beyond Ingevity’s control, including:
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actual or anticipated fluctuations in Ingevity’s operating results;
changes in earnings estimated by securities analysts or Ingevity’s ability to meet those estimates;
the operating and stock price performance of comparable companies;
changes to the regulatory and legal environment under which Ingevity operates; and
domestic and worldwide economic conditions.
We cannot guarantee the timing, amount or payment of any dividends on our common stock in the future.
The payment and amount of any dividend is subject to the sole discretion of our board of directors and will depend upon
many factors, including our financial condition and prospects, our capital requirements and access to capital markets, covenants
associated with certain of our debt obligations, legal requirements and other factors that our board of directors may deem relevant,
and there can be no assurances that we will pay a dividend.
Your percentage of ownership in Ingevity may be diluted in the future.
A stockholder's percentage ownership in Ingevity may be diluted because of equity issuances for acquisitions, capital
market transactions or otherwise, including, without limitation, equity awards that we may be granting to our directors, officers
and employees. Such awards will have a dilutive effect on Ingevity’s earnings per share, which could adversely affect the market
price of Ingevity’s common stock. From time to time, Ingevity will issue additional options or other stock-based awards to certain
employees under Ingevity’s employee benefits plans.
In addition, Ingevity’s amended and restated certificate of incorporation authorizes Ingevity to issue, without the approval
of Ingevity’s stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and
relative, participating, optional and other special rights, including preferences over Ingevity’s common stock respecting dividends
and distributions, as Ingevity’s board of directors generally may determine. The terms of one or more classes or series of preferred
stock could dilute the voting power or reduce the value of Ingevity’s common stock. For example, Ingevity could grant the holders
of preferred stock the right to elect some number of Ingevity’s directors in all events or on the happening of specified events or
the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences Ingevity could
assign to holders of preferred stock could affect the residual value of the common stock.
Certain provisions in Ingevity’s amended and restated certificate of incorporation and amended and restated bylaws, and of
Delaware law, may prevent or delay an acquisition of Ingevity, which could depress the trading price of Ingevity’s common
stock.
Ingevity’s amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law
contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices
or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Ingevity’s board of directors
rather than to attempt a hostile takeover. These provisions include, among others:
•
•
•
•
•
•
the inability of Ingevity’s stockholders to act by written consent;
rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
the right of Ingevity’s board to issue preferred stock without stockholder approval;
the ability of Ingevity’s remaining directors to fill vacancies on Ingevity’s board of directors;
the inability of Ingevity’s stockholders to remove directors other than for cause while the board is classified; and
the requirement that the affirmative vote of holders of at least 75 percent of Ingevity’s outstanding voting stock is
required to amend certain provisions of Ingevity’s amended and restated certificate of incorporation and amended and
restated bylaws (Supermajority Amendment Provisions").
29
On November 1, 2018, the Board of Directors approved amendments to Ingevity’s amended and restated certificate of
incorporation and amended and restated bylaws to remove the Supermajority Amendment Provisions and submitted the charter
amendment for approval at the Company’s 2019 Annual Meeting of Stockholders. To pass, 75 percent of Ingevity's outstanding
voting stock must vote in favor of the amendment.
In addition, because Ingevity has not chosen to be exempt from Section 203 of the Delaware General Corporation Law
(the “DGCL”), this provision could also delay or prevent a change of control that you may favor. Section 203 provides that, subject
to limited exceptions, persons that acquire, or are affiliated with persons that acquire, more than 15 percent of the outstanding
voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger,
consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates
becomes the holder of more than 15 percent of the corporation’s outstanding voting stock.
Ingevity believes these provisions will protect its stockholders from coercive or otherwise unfair takeover tactics by
requiring potential acquirers to negotiate with Ingevity’s board of directors and by providing Ingevity’s board of directors with
more time to assess any acquisition proposal. These provisions are not intended to make Ingevity immune from takeovers. However,
these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an
acquisition that Ingevity’s board of directors determines is not in the best interests of Ingevity and Ingevity’s stockholders. These
provisions may also prevent or discourage attempts to remove and replace incumbent directors.
There could be significant liability if the Separation were determined to be a taxable transaction.
In connection with the Separation, our former parent received an opinion from outside tax counsel to the effect that the
requirements for tax-free treatment under Section 355 of the Code would be satisfied. The opinion relied on certain facts,
assumptions, representations and undertakings from our former parent and us regarding the past and future conduct of the companies’
respective businesses and other matters. If any of these facts, assumptions, representations or undertakings were incorrect or not
satisfied, we and our stockholders may not be able to rely on the opinion of tax counsel and could be subject to significant tax
liabilities.
Notwithstanding the opinion of tax counsel, the IRS could determine upon audit that the Separation is taxable if it
determines that any of these facts, assumptions, representations or undertakings were incorrect or violated or if it disagrees with
the conclusions in the opinion, or for other reasons, including as a result of certain significant changes in the share ownership of
our company or our former parent after the Separation. If the Separation were determined to be taxable for U.S. federal income
tax purposes, our former parent and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal
income tax liabilities, and we could incur significant liabilities.
Ingevity’s amended and restated bylaws designate the state courts within the State of Delaware as the sole and exclusive forum
for certain types of actions and proceedings that may be initiated by Ingevity’s stockholders, which could discourage lawsuits
against Ingevity and Ingevity’s directors and officers.
Ingevity’s amended and restated bylaws provide that unless the board of directors otherwise determines, a state court
within the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of
Ingevity, any action asserting a claim of breach of a fiduciary duty owed by any director of officer of Ingevity to Ingevity or
Ingevity’s stockholders, creditors or other constituents, any action asserting a claim against Ingevity or any director or officer of
Ingevity arising pursuant to any provision of the DGCL, or Ingevity’s amended and restated certificate of incorporation or bylaws,
or any action asserting a claim against Ingevity or any director or officer of Ingevity governed by the internal affairs doctrine.
However, if no state court located within the State of Delaware has jurisdiction, the action may be brought in the federal district
court for the District of Delaware. Although Ingevity’s amended and restated bylaws include this exclusive forum provision, it is
possible that a court could rule that this provision is inapplicable or unenforceable. This exclusive forum provision may limit the
ability of Ingevity’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with Ingevity
or Ingevity’s directors or officers, which may discourage such lawsuits against Ingevity and Ingevity’s directors and officers.
Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more
of the specified types of actions or proceedings described above, Ingevity may incur additional costs associated with resolving
such matters in other jurisdictions, which could adversely affect Ingevity’s business, financial condition or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
30
ITEM 2.
PROPERTIES
We are headquartered in North Charleston, South Carolina and operate manufacturing facilities in the U.S., United
Kingdom, and People's Republic of China and warehouse and distribution facilities globally. The following locations represent
the principal properties of Ingevity. We believe these facilities are adequate and suitable for our current operations, and that the
production capacity of our facilities is sufficient to meet current demand. In the case of the properties identified as “Leased”,
we nevertheless own the manufacturing assets themselves.
Own / Lease
Functional Use
North Charleston, South Carolina
Own / Lease (1)
Covington, Virginia
Crossett, Arkansas
DeRidder, Louisiana
Waynesboro, Georgia
Wickliffe, Kentucky
Changshu, People’s Republic of China
Warrington, United Kingdom (3)
Zhuhai, People’s Republic of China
Lease
Lease
Own
Own(2)
Lease
Lease
Lease
Lease
Corporate Headquarters;
Application Labs;
Performance Chemicals: Manufacturing
Performance Materials: Manufacturing
Performance Chemicals: Manufacturing
Performance Chemicals: Manufacturing
Performance Materials: Manufacturing
Performance Materials: Manufacturing
Performance Materials: Manufacturing
Performance Chemicals: Manufacturing, Application Lab
Performance Materials: Manufacturing, Application Lab
________________________
(1)
(2)
Portions of the manufacturing operations are on leased land.
Certain manufacturing assets are subject to a capital lease with the Development Authority of Burke County (the county in which
Waynesboro, Georgia is located).
Acquired on February 13, 2019 as part of the Caprolactone Acquisition.
(3)
ITEM 3.
LEGAL PROCEEDINGS
We are from time to time, involved in routine litigation incidental to our operations. None of the litigation in which we
are currently involved, individually or in the aggregate, is material to our combined financial condition or results of operations
nor are we aware of any material pending or contemplated proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
31
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Ingevity Corporation, the offices they currently hold, their business experience over the past
five years and their ages are as follows:
Name
D. Michael Wilson
Age (1)
56
John C. Fortson
51
Present Position and Business Experience
President, Chief Executive Officer and Director (2015-present); Executive Vice President
& President of Performance Chemicals of Albemarle (2015); President of Albemarle's
Catalyst Solutions business (2013-2014); President of FMC's Specialty Chemicals group
(2011-2013)
Executive Vice President, Chief Financial Officer & Treasurer (2015-present); Vice
President, Chief Financial Officer and Treasurer of AAR Corporation (2013-2015);
Managing Director in the Investment Banking Department of Bank of America Merrill
Lynch (2007-2013)
Katherine P. Burgeson
61
Executive Vice President, General Counsel & Secretary (2015-present); Associate General
Counsel of WestRock (2015); Deputy General Counsel of MeadWestvaco (2006-2015)
Michael P. Smith
58
S. Edward Woodcock
53
_______________
(1)
As of December 31, 2018.
Executive Vice President & President of Performance Chemicals, Strategy and Business
Development (2017-present); Senior Vice President Strategy and Business Development
(2016-2017), Vice President of Health and Nutrition at FMC Corporation (2013-2015);
Division General Manager of BioPolymer at FMC Corporation (2006-2013)
Executive Vice President & President of Performance Materials (2015-present); Vice
President of MeadWestvaco's Carbon Technologies business (2010-2015)
All officers are elected to hold office for one year or until their successors are elected and qualified. No family relationships
exist among any of our executive officers or directors, and there are no arrangements or understandings between any of the above-
listed officers and any other person pursuant to which they serve as an officer.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS MATTER AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant's Common Equity and Related Stockholder Matters
Ingevity's common stock ($0.01 par value) is listed on the New York Stock Exchange, Inc. ("NYSE") under the symbol "NGVT."
There were approximately 6,100 record holders of our common stock as of February 19, 2019.
Unregistered Sales of Equity Securities
Not Applicable.
Issuer Purchases of Equity Securities
The following table summarizes information with respect to the purchase of our common stock during the three months ended
December 31, 2018.
Publicly Announced Program (1)
Period
October 1-31, 2018
November 1-30, 2018
December 1-31, 2018
Total Q4 2018
Total Number
of Shares
Purchased
Average Price
Paid Per Share
Total Number of
Shares
Repurchased
Total Dollar
Amount
Purchased
Maximum Dollar
Value of Shares
that May Yet be
Purchased
34,500
$
31,500
284,000
350,000
$
91.65
96.50
81.46
83.81
34,500
$
3,162,065
$
72,153,679
31,500
284,000
3,039,631
23,133,354
419,114,048
395,980,693
350,000
$
29,335,050
$
395,980,693
_______________
(1) On February 20, 2017, our Board of Directors authorized the repurchase of up to $100 million of our common stock. On November 1, 2018, our Board of
Directors approved the authorization for the repurchase of up to an additional $350 million of Ingevity’s outstanding common stock. The approval of this $350
million is in addition to the $100 million share repurchase program approved in February 2017. The 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.
Stock Performance Graph
The following table and graph present the cumulative total stockholder return for Ingevity's common stock compared with the
Standard & Poor's (S&P) SmallCap 600 Index and the Dow Jones (DJ) U.S. Specialty Chemicals Index since the Separation.
The graph assumes the investment of $100 in each of Ingevity's common stock, the S&P SmallCap 600 Index, and DJ U.S. Specialty
Chemicals Index on May 16, 2016, the date that Ingevity's common stock began "regular-way" trading on NYSE, and that all
dividends, if any, were reinvested.
Ingevity Corporation
S&P SmallCap 600 Index
Dow Jones US Specialty Chemicals Index
$
$
May 16, 2016
2016
December 31,
2017
204.24
123.53
105.60
$
$
262.36
139.77
129.24
$
$
100.00
100.00
100.00
$
$
33
2018
311.58
127.87
120.40
The graph and related information set forth above are not deemed to be "filed" with the SEC for purposes of Section 18 of the
Exchange Act or incorporated by reference into any future filing made by us with the SEC, except to the extent that we specifically
incorporate it by reference into any such filing. The stock price performance included in the graph above is not necessarily indicative
of future stock performance.
34
ITEM 6.
SELECTED FINANCIAL DATA
Ingevity did not operate as a separate, stand-alone entity for all five years listed below. Our consolidated balance sheets
as of December 31, 2018, 2017, and 2016, respectively, and our consolidated statement of operations, comprehensive income
(loss), and cash flows for the years ended December 31, 2018 and 2017, respectively, consist of the consolidated balances of
Ingevity as prepared on a stand-alone basis. Our consolidated balance sheets as of December 31, 2015 and 2014, respectively, our
consolidated statements of operations, comprehensive income (loss), and cash flows for the years ended December 31, 2016, 2015
and 2014, respectively, have been prepared on a “carve out” basis for the periods and dates prior to the spin-off on May 15, 2016.
The selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements included within
Part II. Item 8 of this Form 10-K.
In millions, except per share and share data
Statement of Operations Data:
Net sales
Gross profit
Income before income taxes
Net income (loss) attributable to Ingevity stockholders
Per Share Data attributable to Ingevity stockholders (1)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Balance Sheet Data (at period end):
Working capital (2)
Property, plant and equipment, net
Total assets
Long-term debt including capital lease obligations
Total equity
Other Data:
Capital expenditures
Depreciation and amortization expense
Weighted average common stock outstanding (in
thousands) (1):
Basic shares
Diluted shares
Years Ended December 31,
2018
2017
2016
2015
2014
$ 1,133.6
$
972.4
$
908.3
$
958.3
$ 1,035.5
416.8
221.8
169.1
329.0
174.8
126.5
274.4
87.0
35.2
275.4
136.5
79.7
318.5
202.1
129.0
$
$
$
$
4.02
3.97
$
$
3.00
2.97
$
$
0.83
0.83
$
$
1.89
1.89
$
$
3.06
3.06
239.4
$
215.5
$
158.3
$
196.5
$
523.8
1,315.2
741.2
338.7
438.5
929.6
444.0
277.9
422.8
832.8
481.3
134.6
437.5
778.7
80.0
517.4
128.7
410.1
715.1
85.8
416.6
$
93.9
57.0
$
52.6
40.4
56.7
38.8
$
100.9
$
101.8
34.6
32.3
42,037
42,601
42,130
42,529
42,108
42,271
42,102
42,102
42,102
42,102
_______________
(1)
On May 15, 2016, WestRock distributed 42.1 million shares of Ingevity's common stock to holders of its common stock. Basic and diluted earnings
(loss) per share for the years ended December 31, 2015 and 2014 are calculated using the number of common shares distributed on May 15, 2016.
Basic and diluted earnings (loss) per share for the year ended December 31, 2016 is calculated using the weighted average number of common shares
outstanding for the period beginning after the distribution date.
Defined as current assets less current liabilities.
(2)
35
ITEM 7. 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 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 Annual Report on Form 10-K contain forward-looking statements, within the meaning
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of
1995 that reflect our current expectations, beliefs, plans or forecasts with respect to, among other things, future events and financial
performance. Forward-looking statements are often characterized by words or phrases such as “may,” “will,” “could,” “should,”
“would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “prospects,” “potential” and “forecast,”
and other words, terms and phrases of similar meaning. Forward-looking statements involve estimates, expectations, projections,
goals, forecasts, assumptions, risks and uncertainties. We caution readers that a forward-looking statement is not a guarantee of
future performance and that actual results could differ materially from those contained in the forward-looking statement. Such
risks and uncertainties include, among others, those discussed in Item 1A under the heading "Risk Factors" as well as in our
consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings
with 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:
• we are exposed to risks that the expected benefits from the Pine Chemicals Acquisition and the Caprolactone Acquisition
may not be realized or will not be realized within the expected time period, 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;
•
our engineered polymers product line may be adversely affected by Brexit;
• we are dependent upon attracting and retaining key personnel;
•
adverse conditions in the global automotive market or adoption of alternative or 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;
36
• we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;
•
•
•
•
•
•
the occurrence of a natural disaster, such as a hurricane, winter or tropical storm, earthquake, tornado, flood, fire or other
matters such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair,
which could result in operational disruptions of varied duration;
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 distruptions;
government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax
policies 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
Perstorp AB's Caprolactone Business
On December 10, 2018, we entered into an agreement for the Sale and Purchase of Perstorp UK Ltd. (the “Caprolactone
Agreement”) with Perstorp Holding AB, a company registered in Sweden, that develops, manufactures, and sells specialty chemicals
(the “Seller”). Pursuant to the Caprolactone Agreement, we agreed to purchase the shares held by the Seller in Perstorp UK Ltd.,
including the Seller’s entire caprolactone business, in exchange for €570.9 million, less assumed debt and other miscellaneous
transaction costs, as further defined in the Caprolactone Agreement (the “Purchase Price”), plus interest accrued on the Purchase
Price (herein referred to as the “Caprolactone Acquisition”).
On February 13, 2019, pursuant to the terms and conditions set forth in the Caprolactone Agreement, we completed the
Caprolactone Acquisition for an aggregate preliminary purchase price of €578.9 million ($652.5 million) excluding net debt to be
assumed of €100.4 million ($113.1 million). At closing, the assumed net debt was settled with an affiliate of the counterparty,
Perstorp Holding AB. Beginning in the first quarter of 2019, the Caprolactone Acquisition will be integrated into our Performance
Chemicals segment and included within our Engineered Polymers product line. Our revolving credit facility was utilized as the
37
primary source of funds, along with available cash on hand, to close our Caprolactone Acquisition. Our available capacity under
our revolving credit facility immediately following this drawdown was $113.1 million.
Caprolactone Acquisition is considered a business under business combinations accounting guidance, and therefore we
will apply acquisition accounting. Acquisition accounting requires, among other things, that assets and liabilities assumed be
recognized at their fair values as of the acquisition date. The net assets of the Caprolactone Acquisition will be recorded at the
estimated fair values using primarily Level 2 and Level 3 inputs (see Note 6 to the Consolidated Financial Statements included
within Part II. Item 8 of this Form 10-K for an explanation of Level 2 and 3 inputs).
We have performed a preliminary valuation of the fair value of the acquired assets and liabilities assumed. Based on this
preliminary allocation of the purchase price, we believe the primary assets acquired and their estimated values are; goodwill of
approximately $310 million and tangible and intangible assets of approximately $220 million. This preliminary assessment of fair
value is based on draft reports from our valuation experts and is subject to change based on its preliminary nature. Once our detailed
preliminary purchase price valuation is completed, we will include the required additional details in our future filings. We have
not completed the detailed analysis to present the pro forma financial information for the combined companies. Thus, the pro
forma financial information will be included in our future filings as well.
Revolving Credit and Term Loan Facility Amendment
On August 7, 2018, we entered into an Incremental Facility Agreement and Amendment No. 2 (the “Amendment”) to the
Credit Agreement, dated as of March 7, 2016 (the “Existing Credit Agreement”, and as amended, supplemented or otherwise
modified from time to time, including pursuant to the Incremental Facility Agreement and Amendment No. 1, dated as of August
21, 2017, and the Amendment, the “Amended Credit Agreement”). Among other things, the Amendment (i) increased the revolving
commitments under the Existing Credit Agreement by $200.0 million (the “Incremental Revolving Commitments”) to $750 million
and (ii) reduced the Applicable Rate (as defined in the Amended Credit Agreement). The Amendment also extended the maturity
date for the loans and commitments under the Existing Credit Agreement to August 7, 2023.
The Incremental Revolving Commitments have terms identical to those of the Revolving Commitments under the Existing
Credit Agreement and will be treated as a single class with such existing commitments under the Amended Credit Agreement.
Loans under the Amended Credit Agreement bear interest at either (a) an adjusted base rate or (b) an adjusted LIBOR
rate, in each case, plus an applicable margin (the “Applicable Margin”), in the case of base rate loans, ranging between zero percent
and 0.75 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.00 percent and 1.75 percent. The Applicable
Margin is based on a total leverage based pricing grid. Fees to revolving lenders under the Amended Credit Agreement, including
fees in respect of the Incremental Revolving Commitments, include (i) commitment fees, based on a percentage of the daily unused
portions of the facility, ranging from 0.15 percent to 0.30 percent and (ii) customary letter of credit fees.
As consideration for the Amendment, the Company paid to each lender under the Existing Credit Agreement a consent
fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans held by such lender
immediately prior to the Closing Date. Fees of $1.4 million were incurred to secure the Amended Credit Agreement. These fees
have been deferred and will be amortized over the term of the arrangement.
The credit facilities under the Amended Credit Agreement will mature on August 7, 2023. The Initial Term Loans and
the Incremental Term A Loans (each, as defined in the Amended Credit Agreement) will amortize at a rate equal to 1.25 percent
per quarter starting in September 2019, with the balance due at maturity.
Acquisition of Noncontrolling Interest
On August 1, 2018, we acquired the remaining 30 percent ownership interest in our joint venture Purification Cellutions,
LLC, now known as Ingevity Georgia, LLC, for an aggregate purchase price of $80.0 million. Ingevity Georgia, LLC manufactures
our extruded honeycomb products within our Performance Materials segment.
2018 Senior Notes
On January 24, 2018, we issued $300.0 million aggregate principal amount of 4.50 percent senior unsecured notes due
2026 (the “Notes”). The Notes were issued pursuant to an indenture dated as of January 24, 2018 (the “Indenture”), by and among
Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The Notes were offered and sold
only to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and to certain non-U.S. persons
38
outside the U.S. pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not
been registered under the Securities Act or any state securities laws and may not be offered or sold in the U.S. absent registration
or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.
The net proceeds from the sale of the Notes, after deducting deferred financing fees of $5.7 million, were $294.3 million.
We used the net proceeds from the sale of the Notes to finance, in part, our purchase of substantially all the assets primarily used
in the pine chemicals business of Georgia-Pacific Chemicals LLC and Georgia-Pacific LLC.
Interest payments on the Notes are due semiannually in arrears on February 1st and August 1st of each year, beginning
on August 1, 2018, at a rate of 4.50 percent per year. The Notes will mature on February 1, 2026.
The Indenture contains certain customary covenants (including covenants limiting Ingevity and our 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 our 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 Indenture could result in the acceleration of the Notes and could cause
a cross-default that could result in the acceleration of other indebtedness of Ingevity and our subsidiaries.
Georgia-Pacific's Pine Chemical Business Acquisition
On August 22, 2017, we entered into an Asset Purchase Agreement (the "Pine Chemicals Purchase Agreement") with
Georgia-Pacific Chemicals LLC, Georgia-Pacific LLC (together with Georgia-Pacific Chemicals LLC, "GP") and Ingevity
Arkansas, LLC, a wholly-owned subsidiary of Ingevity, to purchase substantially all the assets primarily used in GP's pine chemical
business (the "Pine Chemical Business"), including assets and facilities related to tall oil fractionation operations and the production
or modification of tall oil fatty acids, tall oil rosins, rosin derivatives and formulated products (the "Pine Chemicals Acquisition").
On March 8, 2018 (the "Pine Chemicals Acquisition Date"), pursuant to the terms and conditions set forth in the Pine
Chemicals Purchase Agreement, we completed the Pine Chemicals Acquisition. During the three months ended September 30,
2018, we finalized the purchase price which included a final adjustment for working capital resulting in an aggregate purchase
price of $315.5 million. The Pine Chemicals Acquisition was primarily funded with the net proceeds from the Notes. In addition,
on the Pine Chemicals Acquisition Date, the Company and GP entered into a 20-year, market-based CTO supply contract with
certain of Georgia-Pacific’s paper mill operations.
We believe the Pine Chemicals Acquisition will provide a stronger platform from which we will accelerate the profitable
growth of our Performance Chemicals segment. With the addition of broader technologies and product platforms, we will add
scale and competitiveness to this segment, and create value for our shareholders.
Separation and Distribution
On May 15, 2016 (the "Distribution Date"), Ingevity separated from WestRock Company (“WestRock”) (herein referred
to as the "Separation"). The Separation was completed pursuant to a Separation and Distribution Agreement and other agreements
with WestRock related to the Separation, including an Employee Matters Agreement ("EMA"), a Tax Matters Agreement ("TMA"),
a Transition Services Agreement and an Intellectual Property Agreement (collectively, the "Separation Agreements"). The
Separation was completed by way of a distribution of all of the then outstanding shares of common stock of Ingevity through a
dividend in kind of Ingevity's common stock (par value $0.01) to holders of record of WestRock common stock (par value $0.01)
as of the close of business of May 4, 2016 (the "Record Date"). Ingevity's common stock began "regular-way" trading on the New
York Stock Exchange ("NYSE") on May 16, 2016 under the symbol "NGVT".
39
Results of Operations
In millions, except per share data
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Research and technical expenses
Separation costs
Restructuring and other (income) charges, net
Acquisition and other related costs
Other (income) expense, net
Interest expense
Interest income
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Years Ended December 31,
2018
2017
2016
$
1,133.6
$
972.4
$
716.8
416.8
132.4
21.5
—
(0.5)
10.8
1.0
33.2
(3.4)
221.8
40.0
181.8
12.7
643.4
329.0
106.4
19.8
0.9
3.7
7.1
0.5
18.1
(2.3)
174.8
29.6
145.2
18.7
908.3
633.9
274.4
96.4
17.6
17.5
41.2
—
(3.2)
19.3
(1.4)
87.0
42.6
44.4
9.2
35.2
Net income (loss) attributable to Ingevity stockholders
$
169.1
$
126.5
$
Net Sales Comparison of Years Ended December 31, 2018, 2017 and 2016
In millions, except percentages
Year Ended December 31, 2018
Year Ended December 31, 2017
Year Ended December 31, 2018 vs. 2017
Percentage change vs. prior year
Net sales
$ 1,133.6
972.4
Total
change
17%
7%
Currency
effect
1%
Price/Mix
1%
—%
(1)%
Volume
15%
8%
Net sales were $1,133.6 million and $972.4 million for the years ended December 31, 2018 and 2017, respectively. The
sales increase in 2018 was driven by a volume increase of $142.9 million (15 percent). Performance Materials and Performance
Chemicals contributed $44.6 million and $98.3 million, respectively, to the volume impacts during the year. Additionally, the
favorable pricing and product mix of $13.5 million (one percent) across both segments, as well as favorable foreign exchange
impacts of $4.8 million (one percent) resulted in the year over year Net sales increase.
Year Ended December 31, 2017 vs. 2016
Net sales were $972.4 million and $908.3 million for the years ended December 31, 2017 and 2016, respectively. The
sales increase in 2017 was driven by favorable volume of $72.7 million (eight percent of sales). Performance Materials and
Performance Chemicals contributed $54.5 million and $18.2 million, respectively, to the volume impacts during the year. The
sales increase was tempered by unfavorable pricing and product mix of $7.6 million (one percent of sales) across both segments,
as well as unfavorable foreign exchange impacts of $1.0 million.
40
Cost of sales
Year Ended December 31, 2018 vs. 2017
Cost of sales were $716.8 million (63 percent of sales) and $643.4 million (66 percent of sales) for the years ended
December 31, 2018 and 2017, respectively. Increased cost of sales was driven by the sales volume increase resulting in a $75.7
million increase to cost of sales and depreciation and amortization of $5.7 million. These increases were partially offset by lower
input costs related to petroleum-based raw materials, energy, and CTO and manufacturing related spending impacting cost of sales
by $5.2 million, and reduced cost of sales in foreign locations stemming from the strength of the U.S. dollar of $2.8 million.
Year Ended December 31, 2017 vs. 2016
Cost of sales were $643.4 million (66 percent of sales) and $633.9 million (70 percent of sales) for the years ended
December 31, 2017 and 2016, respectively. Increased cost of sales was driven by the sales volume increase resulting in a $31.2
million increase to cost of sales and depreciation and amortization of $0.5 million. These increases were partially offset by lower
input costs related to petroleum-based raw materials, energy, and CTO impacting cost of sales by $14.1 million, manufacturing-
related spending of $8.0 million due to favorable productivity costs and reduced cost of sales in foreign locations stemming from
the strength of the U.S. dollar of $0.1 million.
Selling, general and administrative expenses
Year Ended December 31, 2018 vs. 2017
Selling, general and administrative ("SG&A") expenses were $132.4 million (12 percent of sales) and $106.4 million (11
percent of sales) for the years ended December 31, 2018 and 2017, respectively. The increase in SG&A is primarily due to
amortization associated with the Pine Chemicals Acquisition, increase legal costs, partially due to litigation expenses in our
Performance Materials segment, and growth related spending in both segments. SG&A expenses as a percentage of sales were
relatively flat year over year.
Year Ended December 31, 2017 vs. 2016
SG&A expenses were $106.4 million (11 percent of sales) and $96.4 million (11 percent of sales) for the years ended
December 31, 2017 and 2016, respectively. The increase in SG&A is primarily due to higher incentive compensation costs driven
by the improvements in gross profit as compared to the prior period. Increased gross profit translates into higher Adjusted EBITDA
which is our primary metric for incentive-based compensation. Adjusted EBITDA is defined under the section entitled "Use of
Non-GAAP Financial Measures" within this MD&A.
Separation costs
Year Ended December 31, 2018, 2017, and 2016
Separation costs of zero and $0.9 million for the years ended December 31, 2018 and 2017, respectively, were expenses
related to the Separation. Separation costs of $0.9 million and $17.5 million for the years ended December 31, 2017 and 2016,
respectively, were expenses related to the Separation. See Note 15 to the Consolidated Financial Statements included within Part
II. Item 8 of this Form 10-K for more information.
Restructuring and other (income) charges, net
2018 activities
In February 2018, we sold assets from the Performance Chemicals derivatives operations in Duque De Caxias, Rio de
Janeiro, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016 (see 2016
activities below). As a result of this sale, we recorded $0.6 million as a gain on sale of assets offset by other employee related
costs of $0.1 million for the year ended December 31, 2018.
2017 activities
In January 2017, we initiated a reorganization to streamline our leadership team, flatten the organization and reduce costs.
Because of this reorganization, we recorded $1.3 million in severance and other employee-related costs for the year ended December
31, 2017.
41
During the year ended December 31, 2017, we also recorded $2.4 million of additional miscellaneous exit costs
primarily associated with the exit of our Performance Chemicals' manufacturing operations in Palmeira, Santa Catarina, Brazil
which began in the fourth quarter of 2016 (see 2016 activities below).
2016 activities
As a result of continued deteriorating market conditions within the South America region, on October 31, 2016, our Board
of Directors approved a plan to exit our Performance Chemicals' manufacturing operations in Palmeira, Santa Catarina, Brazil.
As a result, we recorded a non-cash pre-tax impairment charge to property, plant and equipment in the amount of $30.2 million
and recorded severance costs of $1.8 million. The severance costs began to be paid in the fourth quarter of 2016. Refinery production
ceased before year end, and the facility was decommissioned in 2017. We recorded $2.6 million of additional miscellaneous exit
costs during the year ended December 31, 2016.
During the first quarter of 2016, we announced the closure of the Performance Chemicals' derivatives operation in Duque
de Caxias, Rio de Janeiro, Brazil. As a result of this closure, we recorded $0.1 million impairment charge on fixed assets, $1.8
million in severance and other employee-related costs and $1.7 million of additional miscellaneous exit costs during year ended
December 31, 2016.
During the first quarter of 2016, we also announced a company-wide restructuring to better align our workforce in light
of changing macroeconomic and market realities. The restructuring decision resulted in workforce reductions at several of our
locations. As a result, during the year ended December 31, 2016, we recorded severance and other employee-related charges of
$2.7 million ($1.9 million related to Performance Chemicals segment and $0.8 million related to Performance Materials segment).
We also recorded an impairment charge on fixed assets of $0.3 million in the year ended December 31, 2016 (related to the
Performance Chemicals segment).
Detail on the restructuring charges and asset disposal activities is provided below.
In millions
Restructuring and other (income) charges, net
Gain on sale of assets and businesses
Severance and other employee-related costs (1)
Asset write-downs (2)
Other (income) charges, net (3)
Total restructuring and other (income) charges, net
_______________
Years Ended December 31,
2018
2017
2016
$
$
(0.6) $
0.1
—
—
(0.5) $
— $
1.3
—
2.4
3.7
$
—
6.3
30.6
4.3
41.2
(1)
(2)
(3)
Represents severance and employee benefit charges.
Primarily represents accelerated depreciation and impairment charges on long-lived assets, which were or are to be abandoned. To the
extent incurred the acceleration effect of re-estimating settlement dates and revised cost estimates associated with asset retirement
obligations due to facility shutdowns are also included within the asset write-downs.
Primarily represents costs associated with rental payments, contract terminations, and other miscellaneous exit costs. Other Income
primarily represents favorable developments on previously recorded exit costs as recoveries associated with restructuring activities.
Acquisition and other related costs
Years Ended December 31, 2018, 2017, and 2016
Acquisition costs of $10.8 million, $7.1 million, and zero for the years ended December 31, 2018, 2017, and 2016,
respectively, were charges incurred in connection with the acquisitions of the Caprolactone Business and Pine Chemical Business.
See Note 17 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information.
42
Interest expense
Interest expense was as follows for the years ended December 31, 2018, 2017, and 2016.
In millions
Interest expense
Allocated interest expense from WestRock
Interest expense on capital lease obligations
Interest expense on revolving credit and term loan facility
Interest expense on senior notes
Capitalized interest
Other
Total interest expense, net
Interest income
Years Ended December 31 2017, 2016 and 2015
Years Ended December 31,
2018
2017
2016
$
— $
— $
6.2
14.9
13.0
(1.1)
0.2
6.1
11.4
—
(0.3)
0.9
$
33.2
$
18.1
$
7.2
6.2
5.9
—
(1.7)
1.7
19.3
Interest income was $3.4 million, $2.3 million, and $1.4 million for the years ended December 31, 2018, 2017 and 2016,
respectively. Interest income is primarily related to the interest earned on our restricted investment.
Provision (benefit) for income taxes
Additional detail explaining the change in the effective tax rate is presented in Note 18 to the Consolidated Financial
Statements included within Part II. Item 8 of this Form 10-K.
Year Ended December 31, 2018 vs. 2017
Our effective tax rate was 18.0 percent and 16.9 percent for the years ended December 31, 2018 and 2017, respectively.
The increase in our effective tax rate from 2017 to 2018 is mainly due to the one time benefit of reducing our net deferred tax
liability to the 21.0 percent rate in 2017 and effects of certain provisions under U.S. Tax Reform. Our U.S. net deferred tax liabilities
as of December 31, 2017 were remeasured from 35.0 percent to 21.0 percent, resulting in $24.5 million of provisional deferred
income tax benefit and a reduction in our effective tax rate of 14.0 percent in 2017. During the year ended December 31, 2018,
we further adjusted our net deferred tax liabilities by $1.9 million due to further interpretations of U.S. Tax Reform. The remaining
difference in our effective tax rate for the years ended December 31, 2018 and 2017, respectively, is due to the change in certain
favorable tax deductions under U.S. Tax Reform, such as the elimination of the domestic manufacturing deduction and the addition
of the foreign-derived intangible income deduction. In addition to the impact of U.S. Tax Reform, the change in the effective tax
rate period over period was also driven by the acquisition of our noncontrolling interest.
Year Ended December 31, 2017 vs. 2016
The Company’s effective tax rate was 16.9 percent and 49.0 percent for the years ended December 31, 2017 and 2016,
respectively. The decrease in our effective tax rate from 2016 to 2017 is mainly due to the impact of U.S. Tax Reform. Our U.S.
net deferred tax liabilities as of December 31, 2017 were remeasured from 35.0 percent to 21.0 percent, resulting in $24.5 million
of provisional deferred income tax benefit and a reduction in our effective tax rate of 14.0 percent. The remaining difference in
our effective tax rate for the years ended December 31, 2017 and 2016, respectively, is due to non-deductible transaction costs
associated with the Separation in 2016, acquisition-related charges, restructuring and other (income charges) and the unfavorable
results of legal entities with full valuation allowances. Excluding the impact of U.S. Tax Reform, acquisition-related charges,
restructuring and other (income charges), separation costs and losses from legal entities with full valuation allowances the change
in the effective tax rate period over period was primarily due to a shift in earnings mix as it relates to domestic versus foreign
income earned. See Note 18 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more
information.
43
Net income (loss) attributable to noncontrolling interests
Year Ended December 31, 2018, 2017, and 2016
Net income (loss) attributable to noncontrolling interests was $12.7 million, $18.7 million and $9.2 million for the years
ended December 31, 2018, 2017, and 2016, respectively. Our noncontrolling interest represents the 30 percent ownership interest
held by a third-party U.S.-based company in our consolidated Purification Cellutions, LLC legal entity, prior to our purchase of
this remaining interest on August 1, 2018.
On August 1, 2018, we completed the acquisition of the remaining 30 percent noncontrolling interest in Purification
Cellutions, LLC, which was treated as a partnership for tax purposes, for a purchase price of $80.0 million. The acquisition resulted
in the elimination of Noncontrolling interest of $11.4 million and the recognition of a Deferred tax asset of $14.3 million, with
the remainder being recorded against Additional paid in capital of $54.3 million in our Consolidated Financial Statements.
Purification Cellutions, LLC, now known as Ingevity Georgia, LLC, is the legal entity that manufactures our extruded
honeycomb products within our Performance Materials segment. Refer to the Performance Materials’ operating profit discussion
below within the Segment Operating Results section for further discussion of the segment’s performance for the years ended
December 31, 2018, 2017, and 2016.
Net income (loss) attributable to Ingevity stockholders
Year Ended December 31, 2018 vs. 2017
Net income (loss) attributable to Ingevity stockholders was $169.1 million and $126.5 million for the years ended
December 31, 2018 and 2017, respectively. Net income attributable to Ingevity stockholders in 2018 compared to 2017 was
unfavorably impacted by the U.S. Tax Reform benefit recorded in 2017, resulting in a year over year impact of $22.6 million.
Excluding this impact, Net income (loss) attributable to Ingevity stockholders in 2018 increased by $65.2 million. This increase
was primarily driven by strong segment operating profits from both segments of $36.0 million in Performance Chemicals and
$25.2 million in Performance Materials. Also contributing to the increase year over year was a reduction in non-controlling interest
of $6.0 million and restructuring and other charges of $4.2 million. These favorable results were slightly offset by an increase in
acquisition and other related costs of $5.1 million.
Year Ended December 31, 2017 vs. 2016
Net income (loss) attributable to Ingevity stockholders was $126.5 million and $35.2 million for the years ended December
31, 2017 and 2016, respectively. The year over year impact was primarily driven by a reduction in separation and restructuring
and other charges of $54.1 million, slightly offset by acquisition-related charges of $7.1 million. The favorable impact of U.S. Tax
Reform for 2017, compared to 2016, was a tax benefit of $24.5 million. Excluding these changes, Net income (loss) attributable
to Ingevity stockholders increased by $22.1 million. This increase was primarily driven by strong segment operating profits from
both segments, including an increase of $23.6 million in Performance Chemicals and $15.1 million in Performance Materials,
offset by an increase in non-controlling interest of $9.5 million.
44
Segment Operating Results
In addition to the information discussed above, the following sections discuss the results of operations for each of our
segments. Our segments are (i) Performance Materials and (ii) Performance Chemicals. In general, the accounting policies of the
segments are the same as those described in the Summary of Significant Accounting Policies in Note 3 to the Consolidated Financial
Statements included within Part II. Item 8 of this Form 10-K.
Performance Materials
In millions
Net sales
Automotive Technologies product line
Process Purification product line
Total Performance Materials - Net sales
Segment operating profit
Years Ended December 31,
2018
2017
2016
362.0
38.4
400.4
147.2
$
312.5
36.8
349.3
122.0
$
263.5
37.5
301.0
106.9
$
Net Sales Comparison of Years Ended December 31, 2018, 2017, and 2016
In millions, except percentages
Year Ended December 31, 2018
Year Ended December 31, 2017
Year Ended December 31, 2018 vs. 2017
Percentage change vs. prior year
Net sales
$ 400.4
$ 349.3
Total
change
Currency
effect
15%
16%
— %
(1)%
Price/Mix
2 %
(1)%
Volume
13%
18%
Segment net sales for the Performance Materials segment were $400.4 million and $349.3 million for the years ended
December 31, 2018 and 2017, respectively. The sales increase in 2018 was driven by $44.6 million (13 percent) in volume
improvements in the automotive carbon market due to strong growth in high content vehicle production for sale into the North
American automotive market and increased vehicle content due to regulatory adoption. Additionally, we had improved price and
product mix of $5.2 million (two percent) and favorable foreign currency exchange impacts of $1.3 million (zero percent).
Segment operating profit for the Performance Materials segment was $147.2 million and $122.0 million for the years
ended December 31, 2018 and 2017, respectively. Segment operating profit increased $25.2 million primarily due to $28.6 million
in favorable volumes and $8.2 million in favorable pricing and product mix. These gains were partially offset by higher SG&A
expenses of $9.2 million, higher production, freight inflation, and operating costs associated with increased production of $1.8
million, and foreign currency exchange impacts of $0.6 million.
Year Ended December 31, 2017 vs. 2016
Segment net sales for the Performance Materials segment were $349.3 million and $301.0 million for the years ended
December 31, 2017 and 2016, respectively. The sales increase in 2017 was driven by $54.5 million (18 percent) in volume
improvements in the automotive carbon market due to strong growth in high content vehicle production for sale into the North
American automotive market and increased vehicle content due to regulatory adoption. These gains were partially offset by $3.8
million (one percent) in pricing and product mix and unfavorable foreign currency exchange impacts of $2.4 million (one percent).
Segment operating profit for the Performance Materials segment was $122.0 million and $106.9 million for the years
ended December 31, 2017 and 2016, respectively. Segment operating profit increased $15.1 million primarily due to $27.1 million
in favorable volumes and $0.4 million in favorable pricing and product mix. These gains were partially offset by higher SG&A
expenses of $8.5 million, higher production and operating costs associated with increased production of $3.2 million, and foreign
currency exchange impacts of $0.7 million.
45
Performance Chemicals
In millions
Net sales
Pavement Technologies product line
Oilfield Technologies product line
Industrial Specialties product line
Total Performance Chemicals - Net sales
Segment operating profit
Years Ended December 31,
2018
2017
2016
$
178.5
$
163.0
$
114.2
440.5
733.2
116.3
$
77.8
382.3
623.1
80.3
$
$
148.8
58.5
400.0
607.3
56.7
Net Sales Comparison of Years Ended December 31, 2018, 2017, and 2016
In millions, except percentages
Year Ended December 31, 2018
Year Ended December 31, 2017
Pine Chemical Business Acquisition
Percentage change vs. prior year
Total
change
Currency
effect
Price/
Mix
Volume
18%
3%
1%
—%
1%
—%
16%
3%
Net sales
$ 733.2
$ 623.1
The Pine Chemical Business has been integrated into our Performance Chemicals segment and has been included within
our results of operations since the Pine Chemicals Acquisition Date. Although not yet complete, a substantial portion of the Pine
Chemicals Business has been integrated into our existing Performance Chemicals operations. As a result, our ability to separate
net sales and operating performance of the Pine Chemicals Acquisition from our existing Performance Chemicals operating results
is no longer practical. The information presented below for the year ended December 31, 2018, includes the results of the Pine
Chemicals Acquisition as compared to the historical results of the year ended ended December 31, 2017. For a pro forma comparative
analysis of 2018 versus 2017 results, refer to the section below titled "Performance Chemical Pro Forma Financial Results with
the Pine Chemical Business."
Year Ended December 31, 2018 vs. 2017
Segment net sales for the Performance Chemicals segment were $733.2 million and $623.1 million for the years ended
December 31, 2018 and 2017, respectively. The sales increase was driven by favorable volume of $98.3 million (16 percent) driven
by industrial specialties ($52.3 million), oilfield technologies ($33.9 million) and pavement technologies ($12.1 million).
Additionally, favorable pricing and product mix of $8.3 million in certain industrial specialties ($3.3 million), oilfield technologies
($2.3 million), and and pavement technologies ($2.7 million) markets and favorable $3.5 million of foreign currency exchange
contributed to results.
Segment operating profit for the Performance Chemicals segment was $116.3 million and $80.3 million for the years
ended December 31, 2018 and 2017, respectively. Segment operating profit increased $36.0 million due to favorable volume of
$38.5 million, favorable price and product mix of $12.4 million, favorable manufacturing and production costs, net of freight
inflation, of $1.1 million, and favorable foreign currency exchange of $2.6 million. These gains were partially offset by unfavorable
SG&A expenses of $18.6 million, which was partially due to amortization associated with the Pine Chemicals Acquisition.
Year Ended December 31, 2017 vs. 2016
Segment net sales for the Performance Chemicals segment were $623.1 million and $607.3 million for the years ended
December 31, 2017 and 2016, respectively. The sales increase was driven by favorable volume of $18.2 million (three percent)
driven by oilfield technologies ($24.6 million) and pavement technologies ($9.8 million), partially offset by unfavorable volume
in industrial specialties ($16.2 million). The favorable volume was partially offset by unfavorable pricing and product mix of $3.8
million in certain industrial specialties ($2.5 million) and oilfield technologies ($5.5 million) markets, partially offset by favorable
pricing and product mix in pavement technologies ($4.2 million). The sales increase was also driven by $1.4 million of favorable
foreign currency exchange.
46
Segment operating profit for the Performance Chemicals segment was $80.3 million and $56.7 million for the years
ended December 31, 2017 and 2016, respectively. Segment operating profit increased $23.6 million due to favorable manufacturing
productivity of $27.3 million, as well as favorable volume of $7.5 million. These gains were offset by unfavorable foreign currency
exchange impacts of $5.3 million, unfavorable SG&A expenses of $3.8 million, and unfavorable pricing and product mix of $2.1
million.
Performance Chemical Pro Forma Financial Results with the Pine Chemical Business
We believe that reviewing our operating results by combining actual and pro forma results for our Performance Chemicals
segment is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance. Our pro forma
segment information includes adjustments as if the Pine Chemicals Acquisition had occurred on January 1, 2017. Our pro forma
results are adjusted for the effects of acquisition accounting but do not include adjustments for costs related to integration activities,
cost savings or synergies that might be achieved by the combined businesses. Pro forma amounts to be presented are not necessarily
indicative of what our results would have been had we operated the Pine Chemical Business since January 1, 2017, nor will the
pro forma amounts necessarily be indicative of our future results.
Performance Chemical Pro Forma Financial Results
In millions
Net sales
Performance Chemicals, as reported (1)
Pine Chemical Business, pro forma (2)
Segment Operating Profit
Performance Chemicals, as reported (1)
Pine Chemical Business, pro forma (2)
Pro Forma Combined Net Sales (3)
Pro Forma Combined Segment Operating Profit (3)
Year Ended December 31,
2018
2017
$
$
$
$
733.2
20.2
753.4
116.3
1.7
118.0
$
$
$
$
623.1
100.6
723.7
80.3
9.2
89.5
_______________
(1)
(2)
(3)
As reported amounts are the results of operations of Performance Chemicals, including the results of the Pine Chemical Business, post Pine Chemical
Acquisition Date.
Pro forma amounts include historical results of the Pine Chemical Business, prior to the Pine Chemical Acquisition Date. These amounts also include
adjustments as if the Pine Chemicals Acquisition had occurred on January 1, 2017, 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 Pine Chemical Business on January 1, 2017.
The pro forma combined results are not necessarily indicative of what the results would have been had we acquired the Pine Chemical Business on
January 1, 2017, nor indicative of future results.
Performance Chemical Pro Forma Combined Net Sales
In millions
Oilfield Technologies product line
Pavement Technologies product line
Industrial Specialties product line
Pro Forma Combined Net Sales - Performance Chemicals
Year Ended December 31,
2018
2017
$
$
118.8
$
178.7
455.9
753.4
$
101.9
164.2
457.6
723.7
47
Pro Forma Comparison of Year Ended December 31, 2018 vs. 2017
Performance Chemicals (In millions, except percentages)
Year Ended December 31, 2018
Percentage change vs. prior year
Pro Forma
Combined
Net sales
$
753.4
Total
change
Currency
effect
Price/Mix
Volume
4%
—%
2%
2%
Pro Forma Combined Results - Year Ended December 31, 2018 vs. 2017
Pro Forma Combined Net Sales for the Performance Chemicals segment were $753.4 million and $723.7 million for
the year ended December 31, 2018 and 2017, respectively. The Pro Forma Combined Net Sales increase was driven by favorable
volume of $10.9 million (two percent), which consisted of favorable volumes in pavement technologies products ($9.3 million),
oilfield technologies ($10.9 million), offset by unfavorable volumes in industrial specialties ($9.3 million). Also driving the sales
increase was pricing and product mix of $15.3 million (two percent) driven by favorable price and product mix in oilfield
technologies ($5.8 million), pavement technologies products ($4.5 million), and industrial specialties ($5.0 million). In addition,
$3.5 million of favorable foreign currency exchange (less than one percent) helped drive the sales increase.
Pro Forma Combined Segment Operating Profit for the Performance Chemicals segment was $118.0 million and
$89.5 million for the year ended December 31, 2018 and 2017, respectively. Pro Forma Combined Segment Operating Profit
increased by $28.5 million primarily due to increased volumes of $6.1 million, $14.9 million of favorable pricing and product
mix, $7.3 million of favorable manufacturing productivity primarily driven by lower raw material pricing, specifically CTO, offset
partially by freight inflation, and $2.6 million due to favorable foreign currency exchange. These favorable operating results were
partially offset by $2.4 million of unfavorable SG&A costs, driven by growth-related spending.
Use of Non-GAAP Financial Measures
Ingevity has presented certain financial measures, defined below, which have not been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) and has provided a reconciliation to the most directly comparable financial
measure calculated in accordance with GAAP. These financial measures are not meant to be considered in isolation or as a substitute
for the most directly comparable financial measure calculated in accordance with GAAP. The company believes these non-GAAP
measures provide investors, potential investors, securities analysts and others with useful information to evaluate the performance
of the business, because such measures, when viewed together with our financial results computed in accordance with GAAP,
provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future
results.
Ingevity uses the following non-GAAP measures:
Adjusted earnings (loss) is defined as net income (loss) attributable to Ingevity stockholders plus restructuring and other
(income) charges, separation costs, acquisition and other related costs, pension and postretirement settlement and
curtailment (income) charges and the income tax expense (benefit) on those items, less the benefit from U.S. Tax Reform.
Diluted adjusted earnings (loss) per share is defined as diluted earnings (loss) per common share attributable to Ingevity
stockholders plus restructuring and other (income) charges, net per share, separation costs per share, acquisition and other
related costs per share, pension and postretirement settlement and curtailment (income) charges per share and the income
tax expense (benefit) per share on those items, less the per share tax benefit from U.S. Tax Reform.
Adjusted EBITDA is defined as net income (loss) plus provision for income taxes, interest expense, net, depreciation
and amortization, restructuring and other (income) charges, separation costs and acquisition and other related costs,
pension and postretirement settlement and curtailment (income) charges.
Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Net Sales.
Segment EBITDA is defined as segment operating profit plus depreciation and amortization.
Segment EBITDA Margin is defined as Segment EBITDA divided by Net Segment Sales.
48
We use the above financial measures as the primary measures of profitability used by managers of the business and its
segments. In addition, we believe Adjusted EBITDA and Segment EBITDA are useful measures because they exclude the effects
of financing and investment activities as well as non-operating activities. These non-GAAP financial measures are 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.
Reconciliations of these non-GAAP financial measures are set forth within this section.
Reconciliation of Net Income to Adjusted EBITDA
In millions
Net income (loss) (GAAP)
Provision (benefit) for income taxes
Interest expense
Interest income
Depreciation and amortization
Separation costs
Restructuring and other (income) charges, net
Pension and postretirement settlement and curtailment income (charges)
Acquisition and other related costs
Adjusted EBITDA (Non-GAAP)
Adjusted EBITDA
Year Ended December 31, 2018 vs. 2017
Years Ended December 31,
2018
2017
2016
$
181.8
$
145.2
$
40.0
33.2
(3.4)
57.0
—
(0.5)
0.2
12.2
29.6
18.1
(2.3)
40.4
0.9
3.7
—
7.1
44.4
42.6
19.3
(1.4)
38.8
17.5
41.2
—
—
$
320.5
$
242.7
$
202.4
Adjusted EBITDA was $320.5 million and $242.7 million for years ended December 31, 2018 and 2017, respectively.
The factors that impacted Adjusted EBITDA period to period are the same factors that affected earnings discussed in the sections
entitled "Results of Operations" and "Segment Operating Results" within MD&A.
Year Ended December 31, 2017 vs. 2016
Adjusted EBITDA was $242.7 million and $202.4 million for years ended December 31, 2017 and 2016, respectively.
The factors that impacted Adjusted EBITDA period to period are the same factors that affected earnings discussed in the sections
entitled "Results of Operations" and "Segment Operating Results" within MD&A.
49
Reconciliation of Segment Operating Profit to Segment EBITDA
Performance Materials
In millions
Segment operating profit (GAAP)
Depreciation and amortization
Segment EBITDA (Non-GAAP)
Performance Chemicals
In millions
Segment operating profit (GAAP)
Depreciation and amortization
Segment EBITDA (Non-GAAP)
Performance Materials
Years Ended December 31,
2018
2017
2016
147.2
22.2
169.4
$
$
122.0
19.8
141.8
$
$
106.9
16.4
123.3
Years Ended December 31,
2018
2017
2016
116.3
34.8
151.1
$
$
80.3
20.6
100.9
$
$
56.7
22.4
79.1
$
$
$
$
Year Ended December 31, 2018 vs. 2017
Segment EBITDA for the Performance Materials segment was $169.4 million and $141.8 million for the years ended
December 31, 2018 and 2017, respectively. The factors that impacted Segment EBITDA period to period are the same factors that
affected segment operating profit discussed in the section entitled "Segment Operating Results" within the MD&A, excluding the
depreciation and amortization expense.
Year Ended December 31, 2017 vs. 2016
Segment EBITDA for the Performance Materials segment was $141.8 million and $123.3 million for the years ended
December 31, 2017 and 2016, respectively. The factors that impacted Segment EBITDA period to period are the same factors that
affected segment operating profit discussed in the section entitled "Segment Operating Results" within the MD&A, excluding the
depreciation and amortization expense.
Performance Chemicals
Year Ended December 31, 2018 vs. 2017
Segment EBITDA for the Performance Chemicals segment was $151.1 million and $100.9 million for the years ended
December 31, 2018 and 2017, respectively. The factors that impacted Segment EBITDA period to period are the same factors
that affected segment operating profit discussed in the section entitled "Segment Operating Results" within the MD&A, excluding
the depreciation and amortization expense.
Year Ended December 31, 2017 vs. 2016
Segment EBITDA for the Performance Chemicals segment was $100.9 million and $79.1 million for the years ended
December 31, 2017 and 2016, respectively. The factors that impacted Segment EBITDA period to period are the same factors that
affected segment operating profit discussed in the section entitled "Segment Operating Results" within the MD&A, excluding the
depreciation and amortization expense.
Total Company Outlook and 2019 Guidance
For revenue, favorable volume in Performance Materials driven by continued regulatory changes and favorable volume
in Performance Chemicals pavement technologies driven by continued chemistry adoption and global growth are expected to be
partially offset by lower volume in Performance Chemicals industrial specialties applications as we continue to focus on improving
price and mix in those product lines. We expect flat volumes in Performance Chemicals oilfield technologies and are assuming
that the price of oil remains stable in the mid $50’s per barrel for West Texas Intermediate during 2019. Adding in the Caprolactone
50
Acquisition as of February 13, 2019, we expect to deliver fiscal year 2019 Net Sales of $1.30 billion to $1.36 billion, up 17 percent
at the midpoint versus 2018.
Adjusted EBITDA is expected to grow by 22 percent to 28 percent versus 2018. In the Performance Materials segment,
growth will be driven by continued volume, price and mix improvements as the US and Canada continue adoption of the Tier 3/
LEV III standard, China demand increases with early adoption of China 6 and European demand increases as they implement Euro
6d. This growth will be partially offset by marginally lower vehicle demand in the US & Europe, higher costs as we cycle through
the higher cost inventory produced during the Zhuhai, China, facility ramp-up and increased legal costs to defend the company’s
intellectual property. In the Performance Chemicals segment, the addition of the Caprolactone Acquisition will be complemented
by continued profitable growth in pavement technologies and mix improvements in industrial specialties. We expect these benefits
to be partially offset by somewhat lower volumes in industrial specialties, modest inflationary costs in freight, raw materials, and
CTO, as well as higher outage costs at the Warrington facility due to planned outages and higher transition service agreement costs
as we separate Warrington from Perstorp. Some risks to the 2019 outlook include lower than anticipated U.S., China, Canadian
and European vehicle sales and production, higher non-CTO raw materials costs with higher oil prices, a shift towards smaller
vehicles in the U.S. (versus the 2016 to 2018 shift towards light-trucks), lower oil prices and a reduction in oil drilling and production
in oilfield technologies, Brexit and ongoing trade and tariff discussions between the U.S. and other countries. We expect to deliver
fiscal year 2019 Adjusted EBITDA of $390 million to $410 million.
A reconciliation of net income to adjusted EBITDA as projected for 2019 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 additional separation costs associated with the separation from WestRock; further restructuring
and other income (charges), net; additional acquisition and other related costs in connection with the acquisition of Georgia-
Pacific’s pine chemical business and Perstorp Holding AB’s Capa 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.
51
Liquidity and Capital Resources
The primary source of liquidity for Ingevity’s business is the cash flow provided by operating activities. 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. We believe these sources will be sufficient to fund our planned operations and
meet our interest and other contractual obligations for at least the next twelve months. Over the next twelve months, we expect
to make interest payments, capital expenditures, principal repayments, treasury share repurchases, income tax payments, close
the pending Caprolactone Acquisition, and incur additional acquisition-related costs. As of December 31, 2018, our available
capacity under our revolving credit facility was $748.1 million. On February 13, 2019, our revolving credit facility was utilized
as the primary source of funds, along with available cash on hand, to close our Caprolactone Acquisition. Our available
capacity under our revolving credit facility immediately following this drawdown was $113.1 million.
Cash and cash equivalents totaled $77.5 million at December 31, 2018. 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 December 31, 2018 included $27.0 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.
Revolving Credit and Term Loan Facility Amendment
On August 7, 2018, we entered into an Incremental Facility Agreement and Amendment No. 2 (the “Amendment”) to the
Credit Agreement, dated as of March 7, 2016 (the “Existing Credit Agreement”, and as amended, supplemented or otherwise
modified from time to time, including pursuant to the Incremental Facility Agreement and Amendment No. 1, dated as of August
21, 2017, and the Amendment, the “Amended Credit Agreement”). Among other things, the Amendment (i) increased the revolving
commitments under the Existing Credit Agreement by $200.0 million (the “Incremental Revolving Commitments”) to $750 million
and (ii) reduced the Applicable Rate (as defined in the Amended Credit Agreement). The Amendment also extended the maturity
date for the loans and commitments under the Existing Credit Agreement to August 7, 2023.
The Incremental Revolving Commitments have terms identical to those of the Revolving Commitments under the Existing
Credit Agreement and will be treated as a single class with such existing commitments under the Amended Credit Agreement.
Loans under the Amended Credit Agreement bear interest at either (a) an adjusted base rate or (b) an adjusted LIBOR
rate, in each case, plus an applicable margin (the “Applicable Margin”), in the case of base rate loans, ranging between 0.00 percent
and 0.75 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.00 percent and 1.75 percent. The Applicable
Margin is based on a total leverage based pricing grid. Fees to revolving lenders under the Amended Credit Agreement, including
fees in respect of the Incremental Revolving Commitments, include (i) commitment fees, based on a percentage of the daily unused
portions of the facility, ranging from 0.15 percent to 0.30 percent and (ii) customary letter of credit fees.
As consideration for the Amendment, the Company paid to each lender under the Existing Credit Agreement a consent
fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans held by such lender
immediately prior to the Closing Date. Fees of $1.4 million were incurred to secure the Amended Credit Agreement. These fees
have been deferred and will be amortized over the term of the arrangement.
The credit facilities under the Amended Credit Agreement will mature on August 7, 2023. The Initial Term Loans and
the Incremental Term A Loans (each, as defined in the Amended Credit Agreement) will amortize at a rate equal to 1.25 percent
per quarter starting in September 2019, with the balance due at maturity.
52
2018 Senior Notes
On January 24, 2018, we issued $300.0 million aggregate principal amount of 4.50 percent senior unsecured notes due
2026 (the “Notes”). The Notes were issued pursuant to an indenture dated as of January 24, 2018 (the “Indenture”), by and among
Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The Notes were offered and sold
only to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and to certain non-U.S. persons
outside the U.S. pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not
been registered under the Securities Act or any state securities laws and may not be offered or sold in the U.S. absent registration
or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.
The net proceeds from the sale of the Notes, after deducting deferred financing fees of $5.7 million were approximately
$294.3 million. We used the net proceeds from the sale of the Notes to finance, in part, our purchase of substantially all the assets
primarily used in the pine chemicals business of Georgia-Pacific Chemicals LLC and Georgia-Pacific LLC.
Interest payments on the Notes are due semiannually in arrears on February 1st and August 1st of each year, beginning
on August 1, 2018, at a rate of 4.50 percent per year. The Notes will mature on February 1, 2026.
The Indenture contains certain customary covenants (including covenants limiting Ingevity and our 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 our 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 Indenture could result in the acceleration of the Notes and could cause
a cross-default that could result in the acceleration of other indebtedness of Ingevity and our subsidiaries.
Other Potential Liquidity Needs
Share Repurchases
On February 20, 2017, the Board of Directors authorized the repurchase of up to $100.0 million of our common stock.
The repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time. In
addition, on November 1, 2018, the Board of Directors approved the authorization for the repurchase of up to an additional $350.0
million of Ingevity’s outstanding common stock. The approval of this $350.0 million is in addition to the $100.0 million share
repurchase program approved in February 2017. 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 the year ended December 31, 2018, we repurchased $47.4 million in common shares, representing 561,000 shares
of our common stock at a weighted average cost per share of $84.59. At December 31, 2018, $396.0 million remained unused
under our Board-authorized repurchase program. We record shares of common stock repurchased at cost as treasury stock, resulting
in a reduction of stockholders’ equity in the consolidated balance sheets. When the treasury shares are contributed under our
employee benefit plans or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The
difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to
or deducted from the related capital in excess of par value of common stock.
Capital Expenditures
Projected 2019 capital expenditures are expected to be $110 million to $120 million. We have no material commitments associated
with these projected capital expenditures as of December 31, 2018.
Cash flow comparison of Years Ended December 31, 2018, 2017, and 2016
In millions
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Years Ended December 31,
2018
2017
2016
$
$
252.0
(414.4)
153.7
$
174.3
(58.6)
(57.8)
127.9
(126.4)
(3.4)
53
Cash flows provided by (used in) operating activities
During the year ended December 31, 2018, cash flow provided by operations increased primarily due to higher earnings,
partially offset by working capital increases compared to 2017. Working capital increases in 2018 when compared to 2017 are
further explained below.
Current Assets and Liabilities
In millions
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid and other current assets
Total current assets
December 31,
2018
2017
77.5
$
118.9
191.4
34.9
422.7
$
87.9
100.0
160.0
20.8
368.7
$
$
Current assets as of December 31, 2018, increased $54.0 million compared to December 31, 2017, primarily due to
increases in inventories and accounts receivable. Inventories increased $31.4 million, as did Prepaid and other current assets by
$14.1 million to support anticipated customer demand in Q1 2019 versus Q1 2018. Increased Accounts receivable, net of $18.9
million was a result of increased sales volume in 2018 as compared to December 31, 2017. These increases were partially offset
by a decrease in Cash and cash equivalents of $10.4 million.
In millions
Accounts payable
Accrued expenses
Accrued payroll and employee benefits
Current portion of long-term debt
Income taxes payable
Total current liabilities
December 31,
2018
2017
$
92.9
36.7
42.0
11.2
0.5
83.1
20.0
39.2
9.4
1.5
183.3
$
153.2
$
$
Current liabilities as of December 31, 2018, increased by $30.1 million compared to December 31, 2017, driven by
increases in all of the categories displayed above, except for Income taxes payable. Increases in accounts payable and accrued
expenses are consistent with the increases in inventory and prepaids noted above.
Cash flows provided by (used in) investing activities
The cash used in investing activities for the year ended December 31, 2018 was primarily driven by the $315.5 million
purchase of the Pine Chemical Business (see Note 17 to the Consolidated Financial Statements included within Part II. Item 8 of
this Form 10-K for more information). The remaining cash used by investing activities was primarily driven by capital expenditures.
For the year ended December 31, 2018, capital spending included both growth and maintenance spending for expansion
and specialized equipment at our Covington, Virginia, Waynesboro, Georgia, and Changshu, China facilities, as well as base
maintenance spending to support ongoing operations across both segments. In addition, we expended funds for cost improvement
related to CTO tanks at our DeRidder, Louisiana facility.
For the years ended December 31, 2017 and 2016, capital spending included base maintenance capital supporting ongoing
operations and growth spending, primarily related to the construction of an activated carbon manufacturing facility in China and
new Performance Chemicals derivative equipment in North Charleston, South Carolina supporting the adhesives, pavement and
oilfield markets. For the year ended December 31, 2016, cash used in investing activities was primarily related to $69.7 million
invested in a trust. In accordance with the Separation Agreements, we used a portion of the proceeds from our debt borrowing to
be held in a restricted trust. The trust, presented as restricted investment on our consolidated balance sheet, was to secure the
principal payment under our $80.0 million capital lease obligation which is payable upon maturity in 2027.
54
Capital expenditure categories
In millions
Maintenance
Safety, health and environment
Growth and cost improvement
Total capital expenditures
Years Ended December 31,
2018
2017
2016
$
$
41.1
$
30.3
$
9.6
43.2
93.9
$
8.2
14.1
52.6
$
32.3
7.4
17.0
56.7
Cash flows provided by (used in) financing activities
Cash provided by financing activities for the year ended December 31, 2018 was $153.7 million, and was driven by
proceeds from long-term borrowings from the issuance of $300.0 million Senior Notes (refer to Note 10 to the Consolidated
Financial Statements included within Part II. Item 8 of this Form 10-K for more information), offset by our purchase of the remaining
portion of our joint venture with Purification Cellutions, LLC of $80.0 million (refer to Note 12 to the Consolidated Financial
Statements included within Part II. Item 8 of this Form 10-K for more information), $47.4 million to repurchase shares according
the publicly announced share repurchase program (also refer to Note 12 to the Consolidated Financial Statements included within
Part II. Item 8 of this Form 10-K for more information), and noncontrolling interest distributions of $15.3 million.
Cash used by financing activities for the year ended December 31, 2017 was $57.8 million, and was driven by net
repayments of $111.9 million (refer to Note 10 to the Consolidated Financial Statements included within Part II. Item 8 of this
Form 10-K for more information on our Revolving Credit and Term Loan Facility Amendment), noncontrolling interest distributions
of $12.3 million, and $6.6 million to repurchase shares according to the publicly announced share repurchase program.
Cash used by financing activities in the year ended December 31, 2016 was $3.4 million, and was driven by net borrowings
of $402.5 million (refer to Note 9 in the Consolidated Financial Statements for more information) and an inflow from transactions
with WestRock of $51.9 million offset by a distribution to WestRock at Separation of $448.5 million.
As WestRock managed the Company’s cash and financing arrangements before the Separation, all excess cash generated
through earnings was remitted to WestRock and all sources of cash were funded by WestRock prior to May 15, 2016.
Off-Balance Sheet Arrangements
Ingevity is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future
material effect on Ingevity's financial condition, results of operations or cash flows.
Contractual Obligations
We enter into various contractual obligations throughout the year. Presented below are the contractual obligations of
Ingevity as of December 31, 2018, and the time period in which payments under the obligations are due. Included below are
disclosures regarding the amounts due under purchase obligations. A purchase obligation is defined as an agreement to purchase
goods or services that is enforceable and legally binding on Ingevity and that specifies all significant terms, including fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
We have included in the below disclosure all normal and recurring purchase orders, take-or-pay contracts and supply arrangements
as well as other purchase commitments that management believes meet the above definition of a purchase obligation. See Note
19 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information.
55
Payments due in period
In millions
Contractual obligations
Debt maturities
Contractual interest (1)
Capital lease obligations (2)(3)
Operating lease obligations(3)
Purchase obligations
Pending Acquisition (4)
Total at
December 31, 2018
$
678.9
$
156.6
132.0
74.0
166.4
652.5
2019
2020-2021
2022-2023
2024 and beyond
$
13.3
27.4
6.1
21.9
166.1
652.5
46.9
52.5
12.2
30.5
0.3
—
$
318.7
$
43.0
12.2
15.7
—
—
300.0
33.7
101.5
5.9
—
—
Total
$
1,860.4
$
887.3
$
142.4
$
389.6
$
441.1
_______________
(1) Contractual interest is the interest we are contracted to pay on our long-term debt obligations. We had $375.0 million of long-term debt
subject to variable interest rates at December 31, 2018 and $303.9 million of debt subject to fixed interest rates. The rate assumed for the
variable interest component of the contractual interest obligation was the rate in effect at December 31, 2018. Variable rates are determined
by the market and will fluctuate over time.
(2) Amounts include the interest payments under the capital lease as well as the principal payment due in 2027.
(3) Capital and operating lease obligations are presented in accordance with ASC 840 "Leases". We adopted ASC 842 "Leases" effective
January 1, 2019. See Note 4 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information
on the adoption and the impact to our Consolidated Financial Statements.
(40 Amount includes the purchase price of the Caprolactone Acquisition, which closed on February 13, 2019. See Note 24 to the Consolidated
Financial Statements included within Part II. Item 8 of this Form 10-K for more information on the acquisition.
New Accounting Guidance
Refer to the Note 4 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for a full
description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our
Consolidated Financial Statements.
Critical Accounting Policies
Our principal accounting policies are described in Note 3 to the Consolidated Financial Statements included within Part
II. Item 8 of this Form 10-K. The preparation of financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management
believes the accounting policies discussed below represent those accounting policies requiring the exercise of judgment where a
different set of judgments could result in the greatest changes to reported results.
Revenue recognition: Substantially all our revenue is recognized when products are shipped from our manufacturing and
warehousing facilities, which represents the point at which control is transferred to the customer. For certain limited contracts,
where we are producing goods with no alternative use and for which we have an enforceable right to payment for performance
completed to date, we are recognizing revenue as goods are manufactured, rather than when they are shipped.
Sales net of returns and customer incentives are based on the sale of manufactured products. Net sales are recognized when
obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our
products. Since net sales are derived from product sales only, we have disaggregated our net sales by our product lines within each
reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for transferring goods.
Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Sales returns
and allowances are not a normal practice in the industry and are not significant. Certain customers may receive cash-based incentives,
including discounts and volume rebates, which are accounted for as variable consideration and included in Net sales. Shipping
and handling fees billed to customers continue to be included with Net sales. If we pay for the freight and shipping, we recognize
the cost when control of the product has transferred to the customer as an expense in Cost of sales on the consolidated statement
of operations. Although very rare, from time to time we incur expenses to obtain a sales contract. In these cases, if these costs are
for orders that are fulfilled in one year or less, we expense these costs as they are incurred. Because the period between when we
56
transfer a promised good to a customer and when the customer pays for that good will be one year or less, we elect not to adjust
the promised amount of consideration for the effects of any financing component, as it is not significant.
Accounts receivable and allowance for doubtful accounts: Accounts receivable, net on the consolidated balance sheets are
comprised of trade receivable less allowances for doubtful accounts. Trade receivables consist of amounts owed to Ingevity from
customer sales and are recorded at the invoiced amounts when revenue is recognized and generally do not bear interest. The
allowance for doubtful accounts is our best estimate of the amount of probable loss in the existing accounts receivable. We determine
the allowance based on historical write-off experience, current collection trends, and external business factors such as economic
factors, including regional bankruptcy rates, and political factors. Past due balances over a specified amount are reviewed
individually for collectability. Account balances are charged off against the allowance when it is probable that the receivable will
not be recovered. Allowance for doubtful accounts at December 31, 2018 and 2017, were $0.4 million and $0.4 million, respectively.
Concentration of credit risk: The financial instruments that potentially subject Ingevity to concentrations of credit risk are
accounts receivable. We limit our credit risk by performing ongoing credit evaluations and, when necessary, requiring letters of
credit, guarantees or collateral. We had accounts receivable from our largest customer of $7.1 million and $16.4 million as of
December 31, 2018 and 2017, respectively. Sales to this customer, which are included in the Performance Chemicals segment,
were five percent, eight percent, and nine percent of total net sales for the years ended December 31, 2018, 2017 and 2016,
respectively. No other customers individually accounted for greater than 10 percent of the Ingevity's consolidated net sales.
Impairment of long-lived assets: We periodically evaluate whether current events or circumstances indicate that the carrying
value of our long-lived assets, including intangible assets, to be held and used may not be recoverable. If such circumstances are
determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping
of assets, is compared to carrying value to determine whether impairment exists.
If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available.
If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted
value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net
realizable value.
Income taxes: The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions, including China. The
provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. We follow the liability
method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes.
Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities
are recovered or settled. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income, historical
and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies.
Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be
realized. We do not provide income taxes on undistributed earnings of consolidated foreign subsidiaries as it is our intention that
such earnings will remain invested in those companies. Please see Note 18 to the Consolidated Financial Statements included
within Part II. Item 8 of this Form 10-K for more information.
The Company recognizes income tax positions that are more likely than not to be realized and accrues interest related to
unrecognized income tax positions, which is included as a component of the income tax provision on the Consolidated Statements
of Operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency
We have foreign-based operations, primarily in Europe, South America and Asia, which accounted for approximately 10
percent of our net sales in 2018. Ingevity's significant operations outside the U.S. have designated the local currency as their
functional currency. The primary currencies for which we have exchange rate exposure are the U.S. dollar versus the euro, the
Japanese yen and the Chinese renminbi. In addition, certain of our domestic operations have sales to foreign customers. In the
conduct of our foreign operations, we also make inter-company sales. All of this exposes us to the effect of changes in foreign
currency exchange rates. Our earnings are therefore subject to change due to fluctuations in foreign currency exchange rates when
the earnings in foreign currencies are translated into U.S. dollars. During 2017, we began hedging this foreign currency exchange
rate risk. Foreign exchange forward contracts are used to hedge firm and highly anticipated foreign currency cash flows. The U.S.
57
dollar versus the euro is our most significant foreign currency exposure. A hypothetical 10 percent change in the average euro to
U.S. dollar exchange rate during the year ended December 31, 2018, would have changed our net sales and income before income
taxes by approximately $8 million or one percent and $5 million or two percent, respectively.
Concentration of credit risk
Concentration of credit risk: The financial instruments that potentially subject Ingevity to concentrations of credit risk are
accounts receivable. We limit our credit risk by performing ongoing credit evaluations and, when necessary, requiring letters of
credit, guarantees or collateral. We had accounts receivable from our largest customer of $7.1 million and $16.4 million as of
December 31, 2018 and 2017, respectively. Sales to this customer, which are included in the Performance Chemicals segment,
were five percent, eight percent, and nine percent of total net sales for the years ended December 31, 2018, 2017 and 2016,
respectively. No other customers individually accounted for greater than 10 percent of the Ingevity's consolidated net sales.
Commodity price risk
A portion of our manufacturing costs include purchased raw materials, which are commodities whose prices fluctuate as
market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate
with the changes in these commodity prices. The cost of energy is a manufacturing cost that is exposed to commodity pricing. Our
energy costs are diversified among electricity, steam and natural gas, with natural gas comprising our largest energy input.
Crude tall oil price risk
Our results of operations are directly affected by the cost of our raw materials, particularly CTO, which is approximately
12 percent of all of our cost of sales and 34 percent of our raw materials purchases for the year ended December 31, 2018. Pricing
for CTO is subject to particular pricing pressures by reasons of the limited supply elasticity of the product and competing demands
for its use, both of which drive pressure on price. Our gross profit and margins could be adversely affected by changes in the cost
of CTO if we are unable to pass the increases on to our customers. CTO is a thinly traded commodity with pricing commonly
established for periods ranging from one quarter to one year periods of time. We try to protect against such pricing fluctuations
through various business strategies. Based on average pricing during the year ended December 31, 2018, a hypothetical unhedged,
unfavorable 10 percent change in the market price for CTO would have resulted in additional costs of sales of approximately $8
million or one percent, which we may or may not have been able to pass on to our customers.
Natural gas price risk
Natural gas is our largest form of energy purchases constituting approximately two percent of our cost of goods sold for
the year ended December 31, 2018. Increases in natural gas costs, unless passed on to our customers, would adversely affect our
results of operations. If natural gas prices increase significantly, our business or results of operations may be adversely affected.
In December 2017, we entered into certain derivative financial instruments in order to mitigate expected fluctuations in market
prices and the volatility to earnings and cash flow resulting from changes to pricing of natural gas purchases. Refer to the Note 5
to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information on our natural
gas price risk hedging program. For the year ended December 31, 2018, a hypothetical, unhedged 10 percent increase in natural
gas pricing would have resulted in an increase to cost of sales of approximately $1.7 million. As of December 31, 2018, we had
1.8 million and 1.4 million mmBTUS (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 December 31,
2018, open commodity contracts hedge forecasted transactions until May 2020. The fair value of the outstanding designated natural
gas commodity hedge contracts as of December 31, 2018 was $0.1 million.
Interest Rate Risk
As of December 31, 2018, approximately $375 million of our borrowings include a variable interest rate component. As
a result, we are subject to interest rate risk with respect to such floating-rate debt. A 100 basis point increase in the variable interest
rate component of our borrowings would increase our annual interest expense by approximately $4 million or 11 percent.
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO THE FINANCIAL STATEMENTS
Description
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Page No.
60
61
63
64
65
66
67
69
59
Ingevity Corporation
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP. The Company's internal control over financial reporting includes those
policies and procedures that:
i.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
ii. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being
made only in accordance with authorization of management and directors of the Company; and
iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition
of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, based
on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013). Based on its assessment and those criteria, management concluded that the Company maintained
effective internal control over financial reporting as of December 31, 2018. Our assessment of the effectiveness of internal control
over financial reporting as of December 31, 2018 did not include the internal controls at our Ingevity Arkansas, LLC legal entity,
as permitted by Securities and Exchange Commission guidelines that allow companies to exclude certain acquisitions from their
assessment of internal control over financial reporting during the first year following an acquisition. Ingevity Arkansas, LLC is
the legal entity that owns the net assets acquired in the Pine Chemicals Acquisition. We acquired these assets on March 8, 2018
and they represented 22 percent and zero percent of Ingevity's consolidated total assets and consolidated revenues as of and for
the year ended December 31, 2018.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of the Company's
internal control over financial reporting as of December 31, 2018, as stated in their report, which is presented on the following
page.
Date: February 20, 2019
By:
/S/ D. MICHAEL WILSON
D. Michael Wilson
/S/ JOHN C. FORTSON
John C. Fortson
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
60
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Ingevity Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ingevity Corporation and its subsidiaries (the “Company”) as
of December 31, 2018 and December 31, 2017, and the related consolidated statements of operations, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes
and financial statement schedule listed in the index appearing under Item 15(a)2 (collectively referred to as the “consolidated
financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and December 31, 2017 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018 based on criteria established in Internal Control - Integrated Framework (2013) issued by the
COSO.
Change in Accounting Principle
As discussed in Note 4 and Note 5 to the consolidated financial statements, the Company changed the manner in which it accounts
for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on
the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded the Georgia-Pacific
pine chemicals business from its assessment of internal control over financial reporting as of December 31, 2018 because they
were acquired by the Company in a purchase business combination during 2018. We have also excluded the Georgia-Pacific pine
chemicals business from our audit of internal control over financial reporting. The Georgia-Pacific pine chemicals business
(Ingevity Arkansas, LLC) is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s
assessment and our audit of internal control over financial reporting represent 22 percent and zero percent, respectively, of the
related consolidated financial statement amounts as of and for the year ended December 31, 2018.
61
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 20, 2019
We have served as the Company’s auditor since 2015.
62
INGEVITY CORPORATION
Consolidated Statements of Operations
Years Ended December 31,
In millions, except per share data
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Research and technical expenses
Separation costs
Restructuring and other (income) charges, net
Acquisition-related costs
Other (income) expense, net
Interest expense
Interest income
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Ingevity stockholders
Per share data
Basic earnings (loss) per share attributable to Ingevity stockholders
Diluted earnings (loss) per share attributable to Ingevity stockholders
2017
2016
2018
1,133.6
$
716.8
416.8
132.4
21.5
—
(0.5)
10.8
1.0
33.2
(3.4)
221.8
40.0
181.8
12.7
$
972.4
$
643.4
329.0
106.4
19.8
0.9
3.7
7.1
0.5
18.1
(2.3)
174.8
29.6
145.2
18.7
169.1
$
126.5
$
908.3
633.9
274.4
96.4
17.6
17.5
41.2
—
(3.2)
19.3
(1.4)
87.0
42.6
44.4
9.2
35.2
4.02
3.97
$
$
3.00
2.97
$
$
0.83
0.83
$
$
$
The accompanying notes are an integral part of these financial statements.
63
INGEVITY CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
In millions
Net income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
Derivative instruments:
Years Ended December 31,
2018
2017
2016
$
181.8
$
145.2
$
44.4
(6.3)
8.3
(2.9)
Unrealized gain (loss), net of tax provision (benefit) of $0.4, zero, and zero
Reclassifications of deferred derivative instruments (gain) loss, included in net
income (loss), net of tax (provision) benefit of ($0.3), zero, and $0.6
Total derivative instruments, net of tax provision (benefit) of $0.1, zero, and
($0.6)
1.3
(0.9)
0.4
(0.1)
0.1
—
—
1.0
1.0
Pension & other postretirement benefits
Unrealized actuarial gains (losses) and prior service (costs) credits, net of tax
provision (benefit) of $(0.1), $0.4, and $0.3
Reclassification included in net income (loss):
Reclassifications of net actuarial and other (gain) loss, amortization of prior
service cost, and settlement and curtailment (income) charges, included in net
income, net of tax (provision) benefit of ($0.1), zero, and zero
(0.3)
(0.7)
(0.6)
0.2
—
—
Total pension and other postretirement benefits, net of tax provision (benefit) of
zero, $0.4, and $0.3
(0.1)
(0.7)
(0.6)
Other comprehensive income (loss), net of tax provision (benefit) of $0.1, $0.4, and
($0.3)
Comprehensive income (loss)
Less: Comprehensive income (loss) attributable to noncontrolling interests
(6.0)
175.8
12.7
7.6
152.8
18.7
Comprehensive income (loss) attributable to the Ingevity stockholders
$
163.1
$
134.1
$
(2.5)
41.9
9.2
32.7
The accompanying notes are an integral part of these financial statements.
64
INGEVITY CORPORATION
Consolidated Balance Sheets
In millions, except share and par value data
Assets
Cash and cash equivalents
Accounts receivable, net of allowance of $0.4 at 2018 and $0.4 at 2017
Inventories, net
Prepaid and other current assets
Current assets
Property, plant and equipment, net
Goodwill
Other intangibles, net
Deferred income taxes
Restricted investment
Other assets
Total Assets
Liabilities
Accounts payable
Accrued expenses
Accrued payroll and employee benefits
Current maturities of long-term debt
Income taxes payable
Current liabilities
Long-term debt including capital lease obligations
Deferred income taxes
Other liabilities
Total Liabilities
Commitments and contingencies (Note 19)
Equity
December 31,
2018
2017
$
77.5
$
118.9
191.4
34.9
422.7
523.8
130.7
125.6
2.9
71.2
38.3
1,315.2
92.9
36.7
42.0
11.2
0.5
183.3
741.2
36.9
15.1
976.5
$
$
$
$
87.9
100.0
160.0
20.8
368.7
438.5
12.4
4.9
3.4
71.3
30.4
929.6
83.1
20.0
39.2
9.4
1.5
153.2
444.0
41.3
13.2
651.7
Preferred stock (par value $0.01 per share; 50,000,000 shares authorized;
zero issued and outstanding at 2018 and 2017)
Common stock (par value $0.01 per share; 300,000,000 shares authorized;
42,331,913 and 42,208,973 issued and 41,693,261 and 42,089,103 outstanding at 2018 and 2017,
respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (income) loss
Treasury stock, common stock, at cost (638,652 and 119,870 shares at 2018 and 2017,
respectively)
Total Ingevity stockholders' equity
Noncontrolling interests
Total Equity
Total Liabilities and Equity
—
—
0.4
98.3
313.5
(17.7)
(55.8)
338.7
—
338.7
$
1,315.2
$
0.4
140.1
142.8
(11.7)
(7.7)
263.9
14.0
277.9
929.6
The accompanying notes are an integral part of these financial statements.
65
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66
INGEVITY CORPORATION
Consolidated Statements of Cash Flows
In millions
Cash provided by (used in) operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Years Ended December 31,
2018
2017
2016
$
181.8
$
145.2
$
44.4
Depreciation and amortization
Deferred income taxes
Disposal/impairment of assets
Restructuring and other (income) charges, net
Share-based compensation
Pension and other postretirement benefit costs
Other non-cash items
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories, net
Prepaid and other current assets
Planned major maintenance outage
Accounts payable
Accrued expenses
Accrued payroll and employee benefit costs
Income taxes
Pension contribution
Restructuring and other spending
Changes in all other operating assets and liabilities, net
57.0
0.9
0.9
(0.5)
12.5
2.0
15.9
(3.0)
(26.9)
(6.8)
(7.0)
5.7
13.1
3.0
5.0
(1.6)
(0.2)
0.2
40.4
(25.7)
2.2
3.7
10.1
1.3
7.3
(9.5)
(6.6)
6.5
(6.1)
1.7
1.6
13.4
(7.3)
(1.4)
(5.5)
3.0
38.8
(7.9)
1.5
41.2
4.7
0.7
4.8
5.7
(2.2)
(3.9)
(5.9)
(1.5)
(1.9)
15.0
4.5
(1.0)
(8.3)
(0.8)
Net cash provided by (used in) operating activities
$
252.0
$
174.3
$
127.9
Cash provided by (used in) investing activities:
Capital expenditures
Payments for acquired businesses, net of cash acquired
Proceeds from disposition of assets
Purchase of equity securities
Sale of equity securities
Restricted investment
Other investing activities, net
(93.9)
(315.5)
0.6
—
1.1
(2.0)
(4.7)
(52.6)
(56.7)
—
—
(2.4)
1.0
(1.6)
(3.0)
—
—
—
—
(69.7)
—
(126.4)
Net cash provided by (used in) investing activities
$
(414.4) $
(58.6) $
The accompanying notes are an integral part of these financial statements.
67
INGEVITY CORPORATION
Consolidated Statements of Cash Flows (continued)
In millions
Cash provided by (used in) financing activities:
Net borrowings under our revolving credit facility
Proceeds from long-term borrowings
Debt issuance costs
Borrowings (repayments) of notes payable and other short-term borrowings, net
Tax payments related to withholdings on vested restricted stock units
Proceeds and withholdings from share-based compensation plans, net
Repurchases of common stock under publicly announced plan
Acquisition of noncontrolling interest
Noncontrolling interest distributions
Cash distributed to WestRock at separation
Transactions with WestRock, net
Other financing activities, net
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents, and restricted cash
Effect of exchange rate changes on cash
Change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period (1)
Cash, cash equivalents, and restricted cash at end of period (1)
_______________
Years Ended December 31,
2018
2017
2016
—
300.0
(7.1)
3.9
(2.5)
2.1
(47.4)
(80.0)
(15.3)
—
—
— $
153.7
$
(8.7)
(1.4)
(10.1)
87.9
77.8
$
(111.9)
75.0
(1.3)
—
(1.2)
0.5
(6.6)
—
(12.3)
—
—
— $
(57.8) $
57.9
(0.5)
57.4
30.5
87.9
$
111.9
300.0
(3.6)
(9.4)
(0.3)
—
—
—
(5.4)
(448.5)
51.9
—
(3.4)
(1.9)
0.4
(1.5)
32.0
30.5
$
$
$
(1) Includes restricted cash of $0.3 million, zero, and zero and cash and cash equivalents of $77.5 million, $87.9 million, and $30.5 million for the periods
ended December 31, 2018, 2017, and 2016, respectively. Restricted cash is included within "Prepaid and Other Current Assets" within the onsolidated balance
sheets.
Supplemental cash flow information:
Cash paid for interest, net of capitalized interest
Cash paid for income taxes, net of refunds
Purchases of property, plant and equipment in accounts payable
$
$
$
26.0
34.8
8.9
$
$
$
16.0
61.9
5.1
$
$
$
15.1
22.4
3.7
The accompanying notes are an integral part of these financial statements.
68
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
INDEX
Page No.
70
70
71
77
80
81
83
84
84
85
87
91
92
92
98
98
100
102
105
107
109
111
112
113
Note
1
2
3
4
5
6
7
8
9
Background
Basis of Consolidation and Presentation
Summary of Significant Accounting Policies
New Accounting Guidance
Revenues
Financial Instruments, Risk Management and Fair Value Measurements
Inventories, net
Property, Plant, and Equipment, net
Goodwill and Other Intangible Assets
10 Debt, including Capital Lease Obligations
11
12
13
Share-based Compensation
Equity
Transactions with WestRock and Related Parties
14 Retirement Plans
15 Business Separation
16 Restructuring and Other (Income) Charges, net
17 Acquisitions
18
Income Taxes
19 Commitments and Contingencies
20
21
22
Segment Information
Earnings (Loss) per Share
Supplemental Information
23 Quarterly Financial Information (Unaudited)
24
Subsequent Event
69
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 1: Background
Ingevity Corporation ("Ingevity," "the company", "we," "us" or "our") 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 the gasoline vapor emission control applications within
the automotive industry, while process purifications 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 (acquired in 2019; see Note 17 for more information) 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).
Separation and Distribution
On May 15, 2016 (the "Distribution Date"), Ingevity separated from WestRock Company (“WestRock”) (herein referred
to as the "Separation"). The Separation was completed pursuant to a Separation and Distribution Agreement and other agreements
with WestRock related to the Separation, including an Employee Matters Agreement ("EMA"), a Tax Matters Agreement ("TMA"),
a Transition Services Agreement and an Intellectual Property Agreement (collectively, the "Separation Agreements"). The
Separation was completed by way of a distribution of all of the then outstanding shares of common stock of Ingevity through a
dividend in kind of Ingevity's common stock (par value $0.01) to holders of record of WestRock common stock (par value $0.01)
as of the close of business of May 4, 2016 (the "Record Date"). Ingevity's common stock began "regular-way" trading on the New
York Stock Exchange ("NYSE") on May 16, 2016 under the symbol "NGVT".
Note 2: Basis of Consolidation and Presentation
The accompanying Consolidated Financial Statements of Ingevity were prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). The significant accounting policies described in Note 3,
together with the other notes that follow, are an integral part of the Consolidated Financial Statements.
Ingevity did not operate as a separate, stand-alone entity for the full period covered by these Consolidated Financial
Statements. Our consolidated balance sheet as of December 31, 2018 and 2017, respectively, and our consolidated statement of
operations, comprehensive income (loss), and cash flows for the years ended December 31, 2018 and 2017, consists of the
consolidated balances of Ingevity as prepared on a stand-alone basis. Our consolidated statements of operations, comprehensive
income (loss), and cash flows for the year ended December 31, 2016, have been prepared on a “carve out” basis for the period
prior to the Separation.
70
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Prior to the Separation, Ingevity's operations were included in WestRock's financial results and were comprised of certain
WestRock wholly owned legal entities for which Ingevity was the sole business and components of legal entities in which Ingevity
operated in conjunction with other WestRock businesses. For periods prior to May 15, 2016, the accompanying Consolidated
Financial Statements were prepared from WestRock's historical accounting records and are presented on a stand-alone basis as if
the business operations had been conducted independently from WestRock. Prior to May 15, 2016, WestRock's net investments
in these operations is shown in lieu of Ingevity stockholder's equity in the Consolidated Financial Statements. The Consolidated
Financial Statements include the historical operations, assets and liabilities of the legal entities that are considered to comprise the
Ingevity business. In all periods presented within these Consolidated Financial Statements all intercompany accounts and
transactions have been eliminated. The Consolidated Financial Statements include the accounts of Ingevity and subsidiaries in
which a controlling interest is maintained. If Ingevity's ownership is less than 100 percent, the outside stockholders' interests are
shown as noncontrolling interests. In all periods presented within the Consolidated Financial Statements, our noncontrolling interest
represents the 30 percent ownership interest held by a third-party U.S. based company in our consolidated Purification Cellutions,
LLC legal entity. Purification Cellutions, LLC is the legal entity that owns technology associated with, and manufactures, our
extruded honeycomb products within our Performance Materials segment. See Note 12 for information regarding our recent
acquisition of the remaining 30 percent interest in Purification Cellutions, LLC on August 1, 2018.
For purposes of these Consolidated Financial Statements, the term “WestRock” herein refers to the legacy operations of
MeadWestvaco Corporation (“MWV”) and its subsidiaries prior to the July 1, 2015 merger of MWV and Rock-Tenn Company
("Rock-Tenn") (the "Merger") and the combined operations of Rock-Tenn and MWV subsequent to the Merger. References to
Ingevity’s historical business and operations refer to the business and operations of the Specialty Chemicals Business of WestRock,
or prior to the Merger, MWV, that were transferred to Ingevity in connection with the Separation.
All of the allocations and estimates in the Consolidated Financial Statements prior to May 15, 2016 are based on
assumptions that management believes are reasonable. The December 31, 2016 Consolidated Financial Statements included herein
may not be indicative of the financial position, results of operations and cash flows of Ingevity in the future or if Ingevity had been
a separate, stand-alone entity during this period.
Note 3: Summary of Significant Accounting Policies
Estimates and assumptions: We are required to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results are likely to differ from those estimates, but we do not believe
such differences will materially affect our financial position, results of operations or cash flows.
Cash equivalents: Highly liquid securities with an original maturity of three months or less are considered to be cash
equivalents.
Accounts receivable and allowance for doubtful accounts: Accounts receivable, net on the consolidated balance sheets
are comprised of trade receivable less allowances for doubtful accounts. Trade receivables consist of amounts owed to Ingevity
from customer sales and are recorded at the invoiced amounts when revenue is recognized and generally do not bear interest. The
allowance for doubtful accounts is our best estimate of the amount of probable loss in the existing accounts receivable. We determine
the allowance based on historical write-off experience, current collection trends, and external business factors such as economic
factors, including regional bankruptcy rates, and political factors. Past due balances over a specified amount are reviewed
individually for collectability. Account balances are charged off against the allowance when it is probable that the receivable will
not be recovered. Allowance for doubtful accounts at December 31, 2018 and 2017, were $0.4 million and $0.4 million, respectively.
Concentration of credit risk: The financial instruments that potentially subject Ingevity to concentrations of credit risk
are accounts receivable. We limit our credit risk by performing ongoing credit evaluations and, when necessary, requiring letters
of credit, guarantees or collateral. We had accounts receivable from our largest customer of $7.1 million and $16.4 million as of
December 31, 2018 and 2017, respectively. Sales to this customer, which are included in the Performance Chemicals segment,
were five percent, eight percent, and nine percent of total net sales for the years ended December 31, 2018, 2017, and 2016,
respectively. No other customers individually accounted for greater than 10 percent of Ingevity's consolidated net sales.
Inventories, net: Inventories are valued at net realizable value. Cost is determined using the last-in, first-out method
(“LIFO”) for substantially all raw materials, finished goods and production materials of U.S. manufacturing operations. Cost of
all other inventories, including stores and supplies inventories and inventories of non-U.S. manufacturing operations, is determined
by the first-in, first-out ("FIFO") or average cost methods. As of December 31, 2018, approximately 28 percent, 9 percent and 63
71
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
percent of our inventories were accounted for under the FIFO, average cost, and LIFO methods, respectively. Elements of cost in
inventories include raw materials, direct labor, and manufacturing overhead.
Property, plant, and equipment: Owned assets are recorded at cost. Also included in the cost of these assets is interest
on funds borrowed during the construction period. When assets are sold, retired or disposed of, their cost and related accumulated
depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected in cost of sales. Repair
and maintenance costs that materially add to the value of the asset or prolong its useful life are capitalized and depreciated based
on the extension of the useful life; general costs of maintenance and repairs are charged to expense.
Repair and Maintenance Costs: We expense routine repair and maintenance costs as we incur them. We defer expenses
incurred during planned major maintenance activities and record these amounts to “Other assets” on our consolidated balance
sheet. Deferred amounts are recognized as expense ratably, over the shorter of the estimated interval until the next major maintenance
activity or the life of the deferred item. The cash outflows related to these costs are included in operating activities in the consolidated
statement of cash flows. The timing of this maintenance can vary by manufacturing plant and has a significant impact on our results
of operations in the period performed primarily due to lost production during the maintenance period.
Depreciation: The cost of plant and equipment is depreciated, utilizing the straight-line method, over the estimated useful
lives of the assets, the majority of which range from 20 to 40 years for buildings and leasehold improvements and 5 to 30 years
for machinery and equipment. The following table provides the detail behind the useful lives and proportion of our machinery and
equipment (“M&E”) in each useful life category.
Percent of
M&E Cost
Depreciable
Life in Years
Types of Assets
56
11
7
19
3
4
20
15
Production vessels and kilns, storage tanks, piping
Control systems, instrumentation, metering equipment
25 to 30
Blending equipment, storage tanks, piping, shipping equipment and platforms, safety equipment
5 to 10
Production control system equipment and hardware, laboratory testing equipment
40
Machinery & equipment support structures and foundations
Various
Various
Impairment of long-lived assets: We periodically evaluate whether current events or circumstances indicate that the
carrying value of our long-lived assets, including intangible assets, to be held and used may not be recoverable. If such circumstances
are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping
of assets, is compared to carrying value to determine whether impairment exists.
If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available.
If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted
value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net
realizable value.
Goodwill and other intangible assets: Goodwill represents the excess of cost of an acquired business over the fair value
of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We review the recorded
value of goodwill at least annually at October 1, or sooner if events or changes in circumstances indicate that the fair value of a
reporting unit is below its carrying value. A reporting unit is the level at which discrete financial information is available and
reviewed by business management on a regular basis. An impairment exists when the carrying value of a reporting unit exceeds
its fair value. Our reporting units are our operating segments, i.e. Performance Chemicals and Performance Materials. If an
indication exists that the fair value of a reporting unit with goodwill is less than its carrying value, a quantitative goodwill impairment
test is performed. The fair value of each reporting unit is estimated primarily using an income approach, specifically the discounted
cash flow method. The following assumptions are key to the income approach: 1) cash flow and earnings projections; 2) growth
rates; 3) discount rates; 4) income tax rates; and, 5) terminal value rates.
The factors we considered in developing our estimates and projections for cash flows and earnings include, but are not
limited to, the following: (i) macroeconomic conditions; (ii) industry and market considerations; (iii) costs, such as increases in
raw materials, labor, or other costs; (iv) our overall financial performance; and, (v) other relevant entity-specific events that impact
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Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
our reporting units. The discount rate we used represents the weighted average cost of capital for the reporting units, considering
the risks and uncertainty inherent in the cash flows of the reporting units and in our internally-developed forecasts.
The determination of whether goodwill is impaired involves a significant level of judgment in the assumptions underlying
the approach used to determine the estimated fair values of our reporting units. We believe that the assumptions and rates used in
our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could
result in materially different calculations of fair value. We will continue to evaluate goodwill on an annual basis as of October 1,
and whenever events or changes in circumstances, such as significant adverse changes in operating results, market conditions, or
changes in management’s business strategy indicate that there may be a probable indicator of impairment. It is possible that the
assumptions used by management related to the evaluation may change or that actual results may vary significantly from
management’s estimates.
Other intangible assets are comprised of finite-lived intangible assets consisting primarily of brands: representing
trademarks, trade names and know-how, and customer contracts and relationships. Other intangible assets are amortized over their
estimated useful lives which range from 5 to 20 years. See Note 9 for additional information.
Capitalized software: Capitalized software for internal use is included in "Other assets" on the consolidated balance
sheets. Amounts capitalized are presented in "Capital expenditures" on our consolidated statements of cash flow. Capitalized
software is amortized using the straight-line over the estimated useful lives ranging from 1 to 10 years. Amortization is recorded
to "Costs of sales" on our consolidated statements of operations for software directly used in the production of inventory and
"Selling, general and administrative expenses" on our consolidated statements of operations for software used for non-production
related activities.
Environmental and legal liabilities: Environmental expenditures that increase useful lives of assets are capitalized, while
other environmental expenditures are expensed. Liabilities are recorded when remedial efforts are probable and the costs can be
reasonably estimated. We recognize a liability for other legal contingencies when a loss is probable and reasonably estimable.
Liabilities recorded for claims are limited to pending cases based on Ingevity’s historical experience, consultation with outside
counsel and consultation with an actuarial specialist concerning the feasibility of reasonably estimating liabilities associated with
claims that may arise in the future. We recognized insurance recoveries when collection is reasonably assured. Third-party fees
for legal services are expensed as incurred.
Revenue recognition: In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic
606),” which supersedes both the revenue recognition requirement to ASC 605 “Revenue Recognition” and most industry-specific
guidance. The core principle of the new standard (ASC 606) is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. An entity must also disclose sufficient information to enable users of financial statements
to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including
qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and
assets recognized from the costs to obtain or fulfill a contract. In 2016 and 2017, the FASB issued several ASUs that provided
additional clarity on numerous topics as well as providing technical corrections to ASU 2014-09. We adopted this new standard
on January 1, 2018, utilizing the modified retrospective method applied to those contracts, which were not completed as of that
date. Results for reporting periods beginning after January 1, 2018, are presented under ASC 606, while prior period amounts are
not adjusted and continue to be presented in accordance with our historic accounting under ASC 605.
Substantially all our revenue is recognized when products are shipped from our manufacturing and warehousing facilities,
which represents the point at which control is transferred to the customer. For certain limited contracts, where we are producing
goods with no alternative use and for which we have an enforceable right to payment for performance completed to date, we are
recognizing revenue as goods are manufactured, rather than when they are shipped.
Sales net of returns and customer incentives are based on the sale of manufactured products. Net sales are recognized
when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control
of our products. Since Net sales are derived from product sales only, we have disaggregated our net sales by our product lines
within each reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for
transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from
revenue. Sales returns and allowances are not a normal practice in the industry and are not significant. Certain customers may
receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and
included in Net sales. Shipping and handling fees billed to customers continue to be included with Net sales. If we pay for the
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Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
freight and shipping, we recognize the cost when control of the product has transferred to the customer as an expense in Cost of
sales in the consolidated statement of operations. Although very rare, from time to time we incur expenses to obtain a sales contract.
In these cases, if these costs are for orders that are fulfilled in one year or less, we expense these costs as they are incurred. Because
the period between when we transfer a promised good to a customer and when the customer pays for that good will be one year
or less, we elect not to adjust the promised amount of consideration for the effects of any financing component, as it is not significant.
Cost of sales: Costs primarily consists of the cost of inventory sold and other production related costs. These costs include
raw materials, direct labor, manufacturing overhead, packaging costs and maintenance costs. Shipping and handling costs are also
recorded to cost of sales.
Selling, general and administrative expenses: Costs are expensed as incurred and primarily include employee
compensation costs related to sales, and office personnel, office expenses, and other expenses not directly related to our
manufacturing operations. Costs also include advertising and promotional costs.
Research and technical expenses: Cost are expensed as incurred and primarily include employee compensation, technical
equipment costs and material testing and innovation related expenses.
Royalty expense: Our Performance Materials and Performance Chemicals segments have licensing agreements with third
parties requiring us to pay royalties for certain technologies we use in the manufacturing of our products. Royalty expense is
recognized as incurred and recorded to "Cost of sales" on our consolidated statements of operations.
Income taxes: We are subject to income taxes in the U.S. and numerous foreign jurisdictions, including China. The
provision (benefit) for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. We follow
the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for
income taxes. Under this method, deferred income taxes are recorded based upon the differences between the financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying
assets or liabilities are recovered or settled. The ability to realize deferred tax assets is evaluated through the forecasting of taxable
income, historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax
planning strategies. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax
benefit will not be realized. We do not provide income taxes on undistributed earnings of consolidated foreign subsidiaries as it
is our intention that such earnings will remain invested in those companies. See Note 18 for more information.
We recognize income tax positions that are more likely than not to be realized and accrue interest related to unrecognized
income tax positions, which is included as a component of the provision (benefit) for income taxes on the consolidated statements
of operations.
Prior to the Separation, activity of our U.S. operations were reported in WestRock’s U.S. consolidated income tax return
and certain foreign activity was reported in WestRock tax paying entities in those jurisdictions. Under the TMA, WestRock is
responsible for the income tax liabilities associated with all U.S. operations prior to Separation and for the historic operations of
certain foreign legal entities retained by WestRock after the Separation. For periods prior to the Separation, the provision (benefit)
for income taxes included in the Consolidated Financial Statements, related to domestic and certain foreign operations, was
calculated on a separate return basis, as if Ingevity was a separate taxpayer and the resulting current tax receivable or liability,
including any liabilities related to uncertain tax positions, was settled with WestRock through equity at Separation. In other foreign
taxing jurisdictions, the operations of Ingevity were always conducted in discrete legal entities, each of which files separate tax
returns, and all resulting income tax assets and liabilities, including any liabilities related to uncertain tax positions, are reflected
in the consolidated balance sheets of Ingevity.
Pension and postretirement benefits: Prior to the Separation, the employees of Ingevity were participants in various
defined benefit pension and postretirement benefit plans (“the Plans”) sponsored by WestRock and the related assets and liabilities
were combined with those related to other WestRock businesses. Expense allocated under the Plans was reported within Cost of
sales and Selling, general and administrative expenses in the consolidated statements of operation. Prior to the Separation, the
Plans were considered to be part of a multi-employer plan with the other businesses of WestRock.
In conjunction with the Separation, the employees of Ingevity stopped participating in WestRock pension and post-
retirement benefit plans. We assumed certain domestic and international pension and other post retirement benefit obligations from
WestRock on the date of Separation. We established new qualified and non-qualified benefit plans to continue the pension and
postretirement benefits provided to its employees and retirees based on the obligations assumed from WestRock. The expense
related to the current employees of Ingevity as well as the expense related to retirees of Ingevity are included in the Consolidated
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Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Financial Statements. The costs (or benefits) and obligations related to these benefits reflect key assumptions related to general
economic conditions, including interest (discount) rates, healthcare cost trend rates and expected return on plan assets. The costs
(or benefits) and obligations for these benefit programs are also affected by other assumptions, such as average retirement age,
mortality, employee turnover, and plan participation. To the extent our plans' actual experience, as influenced by changing economic
and financial market conditions or by changes to our own plans' demographics, differs from these assumptions, the costs and
obligations for providing these benefits, as well as the plans' funding requirements, could increase or decrease. When actual results
differ from our assumptions, the difference is typically recognized over future periods. In addition, the unrealized gains and losses
related to our pension and postretirement benefit obligations may also affect periodic benefit costs (or benefits) in future periods.
See Note 14 for additional information.
Share-based compensation: We recognize compensation expense in our Consolidated Financial Statements for all share-
based compensation arrangements. Share-based compensation cost is measured at the date of grant, based on the fair value of the
award and expense is recognized over the grantee's requisite service period; forfeitures are recognized as they occur. We calculate
the fair value of our stock options using the Black-Scholes option pricing model. The fair value of restricted stock units ("RSU"s),
non-employee director deferred stock units ("DSU"s) and performance-based restricted stock units ("PSU"s) is determined using
our closing stock price on the day of the grant. Substantially all compensation expense related to share-based awards is recorded
as a component of Selling, general and administrative expenses in the Consolidated Statements of Operations. See Note 11 for
additional information.
Operating segments: Ingevity’s operating segments are Performance Materials and Performance Chemicals. Our
operating segments were determined based upon the nature of the products produced, the nature of the production process, the
type of customer for the products, the similarity of economic characteristics, and the manner in which management reviews results.
Ingevity’s chief operating decision maker evaluates the business at the segment level when making decisions about allocating
resources and assessing performance of Ingevity as a whole. We evaluate sales in a format consistent with our reportable segments:
(1) Performance Materials, which includes wood-based, chemically activated carbon products and (2) Performance Chemicals,
which includes specialty pine-based chemical co-products derived from the kraft pulping process and caprolactone monomers and
derivatives derived from cyclohexanone and hydrogen peroxide. Each segment operates as a portfolio of various end uses for the
relevant raw material used in that segment. Business decisions are made and performance is generally measured based upon the
total mix of end uses each raw material is being directed at in the segment. See Note 20 for additional information.
Derivative financial instruments: We mitigate certain financial exposures, including currency risk and commodity price
exposures, through a controlled program of risk management that includes the use of derivative financial instruments. We formally
document all relationships between the derivative financial instrument and hedged item, as well as the risk management objective
and strategy for undertaking various hedge transactions. This process includes relating derivative financial instruments that are
designated as cash flow hedges to specific forecasted transactions. We do not hold or issue derivative financial instruments for
speculative or trading purposes. We enter into derivative financial instruments which are governed by policies, procedures and
internal processes set forth by our Board of Directors.
On the date the derivative financial instrument is entered into, we generally designate the derivative as a hedge of the
variability of cash flows to be received or paid related to a forecasted transaction (cash flow hedge). Cash flow hedges are derivative
financial instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable
to a particular risk. The derivative financial instruments that are designated and qualify as a cash flow hedge are recorded on the
balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding
changes in the anticipated cash flows of the underlying exposures being hedged. Where we have a legal right to offset derivative
settlements under a master netting agreement with a counterparty, derivatives with that counterparty are presented on a net basis.
The gains and losses arising from qualifying hedging instruments are reported as a component of accumulated other comprehensive
income (loss) (“AOCI”) located in the consolidated balance sheets and reclassified into earnings in the same period or periods
during which the hedged transaction affects earnings. The reclassification gain or losses of the hedge from AOCI are recorded in
the same financial statement caption on the consolidated statements of operations as the hedged item. For example, designated
cash flow hedges entered to minimize foreign currency exchange risk of forecasted revenue transactions are recorded to "Net sales"
on the consolidated statement of operations when the forecasted transaction occurs. Designated commodity cash flow hedges gains
or losses recorded in AOCI are recognized in "Cost of sales" on the consolidated statements of operations when the inventory is
sold. See Note 6 for more information regarding our derivative financial instruments.
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Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Noncontrolling interests: When our ownership in a consolidated legal entity is less than 100 percent, the outside
stockholders' interests are shown as noncontrolling interests. Our noncontrolling interests for the years ended December 31, 2018,
2017 and 2016, represents the 30 percent ownership interest held by a third-party U.S. based company in our consolidated
Purification Cellutions, LLC legal entity. Purification Cellutions, LLC is the legal entity that owns technology associated with,
and manufactures, our extruded honeycomb scrubber products within our Performance Materials segment. Net income (loss)
attributable to noncontrolling interest, as presented on our consolidated statement of operations represents 30 percent of the pre-
tax earnings from Purification Cellutions, LLC owned by the third-party. Purification Cellutions, LLC is a limited liability company
which is treated as a "pass-through" entity for tax purposes. Although we consolidated 100 percent of Purification Cellutions, LLC,
only 70 percent of Purification Cellutions, LLC's earnings are included in the calculation of Ingevity's provision for income taxes
as presented on the consolidated statement of operations. See Note 12 for information regarding our recent acquisition of the
remaining 30 percent interest in Purification Cellutions, LLC on August 1, 2018.
Treasury Stock: We record shares of common stock repurchased at cost as treasury stock, resulting in a reduction of
stockholders’ equity in the consolidated balance sheets. When the treasury shares are contributed under our employee benefit plans
or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The difference between the cost
of the shares and the market price at the time of contribution to an employee benefit plan is added to or deducted from the related
capital in excess of par value of common stock.
Translation of foreign currencies: The local currency is the functional currency for all of Ingevity’s significant operations
outside the U.S. The assets and liabilities of Ingevity's foreign subsidiaries are translated into U.S. dollars using period-end exchange
rates, and adjustments resulting from these financial statement translations are included in accumulated other comprehensive
income in the consolidated balance sheets. Revenues and expenses are translated at average rates prevailing during each period.
Business Combinations: We account for business combinations in accordance with ASC 805 “Business Combinations”
which requires, among other things, the acquiring entity in a business combination to recognize the fair value of the assets acquired
and liabilities assumed; the recognition of acquisition-related costs in the consolidated results of operations; the recognition of
restructuring costs in the consolidated results of operations for which the acquirer becomes obligated after the acquisition date;
and contingent purchase consideration to be recognized at fair value on the acquisition date with subsequent adjustments recognized
in the consolidated results of operations. We generally use third-party qualified consultants to assist management in determination
of the fair value of assets acquired and liabilities assumed. This includes, when necessary, assistance with the determination of
lives and valuation of property and identifiable intangibles, assisting management in determining the fair value of obligations
associated with employee related liabilities and assisting management in assessing obligations associated with legal and
environmental claims.
The fair values assigned to identifiable intangible assets acquired are determined primarily by using an income approach,
which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are
the attrition rate, growth rates and discount rate. These assumptions are based on company specific information and projections,
which are not observable in the market and are therefore considered Level 2 and Level 3 measurements. The excess of the purchase
price over the fair value of the identified assets and liabilities is recorded as goodwill. Based on the acquired business’ end markets
and products as well as how the chief operating decision maker will review the business results determines the most appropriate
operating segment for which to integrate the acquired business. Goodwill acquired, if any, is allocated to the reporting unit within
or at the operating segment for which the acquired business will be integrated. Operating results of the acquired entity are reflected
in the consolidated financial statements from date of acquisition.
Relationship with WestRock: Prior to the Separation, the December 31, 2016 Consolidated Financial Statements included
allocated expenses associated with centralized WestRock support functions including legal, accounting, tax, treasury, internal audit,
information technology, human resources, and other services. The costs associated with these functions generally include all payroll
and benefit costs as well as related overhead costs. Prior to the Separation, the Consolidated Financial Statements also include
allocated costs associated with WestRock’s office facilities, corporate insurance coverage and medical, pension, post-retirement
and other health plan costs attributed to Ingevity’s employees participating in WestRock’s sponsored plans. Allocations are generally
based on a number of utilization measures including employee count and proportionate effort. In situations in which determinations
based on utilization are impracticable, WestRock and Ingevity used other methods and criteria such as net sales which are believed
to result in reasonable estimates of costs attributable to Ingevity. Such allocated expenses are components of net income in the
consolidated statement of operations and are therefore included as a component of net cash provided by (or used in) operating
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Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
activities in the consolidated statement of cash flows. All such amounts have been assumed to have been immediately settled by
Ingevity to WestRock in the period in which the costs were recorded in the Consolidated Financial Statements.
We believe the related-party allocations included in the Consolidated Financial Statements for periods prior to the
Separation have been made on a reasonable basis. However, these Consolidated Financial Statements may not necessarily be
indicative of the results of operations that would have been obtained if Ingevity had operated as a separate entity during the periods
presented prior to May 15, 2016. Actual costs that may have been incurred if Ingevity had been a stand-alone business would
depend on a number of factors, including organizational structure and what functions were outsourced or performed by employees,
as well as strategic decisions made in areas such as information technology and infrastructure. Consequently, Ingevity’s future
earnings while operated as an independent business could include items of income and expense that are materially different from
what is included in the consolidated statements of operations prior to the Separation. Accordingly, the Consolidated Financial
Statements for the periods presented prior to the Separation are not necessarily indicative of Ingevity’s future results of operations,
financial position and cash flows.
Reclassifications: Certain prior year amounts have been reclassified to conform with current year's presentation.
Note 4: New Accounting Guidance
In November 2018, the FASB issued ASU 2018-18 "Collaborative Arrangements (Topic 808): Clarifying the Interaction
between Topic 808 and Topic 606." This ASU provides guidance on whether certain transactions between collaborative arrangement
participants should be accounted for with revenue under Topic 606. In addition, the amendments in this ASU provide more
comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The new
standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The
amendments should be applied retrospectively to the date of initial application of Topic 606. Although we are still evaluating the
impact of this new standard, we do not believe that the adoption will materially impact our Consolidated Financial Statements and
related disclosures.
In October 2018, the FASB issued ASU 2018-16 "Derivatives and Hedging (Topic 815): Inclusion of Secured Overnight
Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The
amendments in this ASU permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes
under Topic 815 in addition to the UST, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA
Municipal Swap Rate. For entities that have not already adopted Update 2017-12, the amendments in this ASU are required to be
adopted concurrently with the amendments in ASU 2017-12. This new standard will be effective for Ingevity for fiscal years
beginning after December 15, 2018, since we adopted ASU 2017-12 prior to this guidance. Although we are still evaluating the
impact of this new standard, we do not believe that the adoption will materially impact our Consolidated Financial Statements and
related disclosures.
In August 2018, the FASB issued ASU 2018-15 "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." This
ASU requires companies to defer specific implementation costs incurred in a Cloud Computing Arrangement ("CCA") that are
often expensed as incurred under current GAAP, and recognize the expense over the noncancellable term of the CCA. The new
standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Although we are still evaluating the impact of this new standard, we do not believe that the adoption will materially impact our
Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14 "Compensation-Retirement Benefits-Defined Benefit Plans-General
(Subtopic 715-20) Disclosure Framework-Changes to the Disclosure Requirements for the Defined Benefit Plans." This ASU
modifies and clarifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
The new standard is effective for fiscal years ending after December 15, 2020. An entity should apply the amendments in this
ASU on a retrospective basis to all periods presented. Although we are still evaluating the impact of this new standard, we do not
believe that the adoption will materially impact our Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13 "Fair Value Measurement (Topic 820) Disclosure Framework - Changes
to the Disclosure Requirements for Fair Value Measurement." This ASU eliminates, amends, and adds disclosure requirements
for fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Although we are still evaluating the impact of this new standard, we do not believe that the
adoption will materially impact our Consolidated Financial Statements and related disclosures.
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Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
In June 2018, the FASB issued ASU 2018-07 "Compensation-Stock Compensation (Topic 718) - Improvements to
Nonemployee Share-Based Payment Accounting." This ASU provides for a single accounting model for all share-based payments,
with the employee based guidance now applying to nonemployee share-based transactions. The new standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. Although we are still evaluating the
impact of this new standard, we do not believe that the adoption will materially impact our Consolidated Financial Statements and
related disclosures.
In January 2017, the FASB issued ASU 2017-04 "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment," which amends and simplifies the accounting standard for goodwill impairment. The new standard removes
Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now
be the amount a reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill allocated to that
reporting unit. The new standard is effective for annual and any interim impairment tests for periods beginning after December
15, 2019. The Company early adopted this standard on January 1, 2018. The impact of adoption did not have a material impact
on our Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of
a Business." The new guidance narrows the existing definition of a business and provides a framework for evaluating whether a
transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to
evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of
similar identifiable assets; if so, the set of transferred assets and activities (collectively, the "set") is not a business. To be considered
a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to
create outputs, as defined by the ASU. The guidance is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within those annual reporting periods, and should be applied prospectively. We adopted this standard on
January 1, 2018.
In August 2016, the FASB issued final amendments to clarify how entities should classify certain cash receipts and cash
payments in ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments."
The new guidance clarifies the classification on the statement of cash flows of certain cash receipts and disbursements such as
distributions received from equity method investees, proceeds from settlement of insurance claims, and proceeds from the settlement
of corporate-owned life insurance policies. The new standard is effective for fiscal years beginning after December 15, 2017,
including interim periods within those years. The Company adopted this standard on January 1, 2018. The impact of adoption did
not have a material impact on our Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)." Under the new guidance, lessees will be required
to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee's obligation to make lease
payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified asset for the lease term. Since the issuance of ASU 2016-02, the FASB has issued
several amendments which clarify certain points in Topic 842, including ASU 2018-20 ("Lease (Topic 842): Narrow-Scope
Improvements for Lessors"), ASU 2018-01 ("Land Easement Practical Expedient"), ASU 2018-10 ("Codification Improvements"),
and ASU 2018-11 ("Targeted Improvements"). We adopted all of these standards at the same time effective January 1, 2019 under
the modified retrospective approach. We utilized the practical expedients upon transition that will retain lease classification and
initial direct costs for any leases that existed prior to adoption of the standard; we adopted the practical expedient to apply hindsight
in determining lease term; we have chosen to account for lease and nonlease components together as a single lease component;
we have elected the practical expedient related to land easements allowing us to carryforward our current accounting treatment
for land easements on existing agreements; and we have elected not to restate the comparative financial statements upon adoption.
As a lessee, the majority of our leases under existing guidance are classified as operating leases, and therefore, are not recorded
on the balance sheet but are recorded in the statement of earnings as expense as incurred. We have catalogued our existing lease
contracts and implemented changes to our systems in order to perform the lease accounting and reporting under the new guidance
going forward. The adoption of the standard will result in the recognition of additional net lease assets of approximately $60 million
to $70 million, with the offset recorded to lease liabilities, as of January 1, 2019. The capital leases discussed in Note 8 to the
Consolidated Financial Statements are expected to be accounted for as finance leases upon adoption of Topic 842. There will not
be a significant impact in the timing of expense recognition based on the classification of leases as either operating or financing.
In May 2014, the FASB issued ASU 2014-09 which is codified in ASC 606 “Revenue from Contracts with Customers”
and supersedes both the revenue recognition requirement to ASC 605 “Revenue Recognition” and most industry-specific guidance
("ASC 606"). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods
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Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. An entity must also disclose sufficient information to enable users of financial statements to understand the
nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and
quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized
from the costs to obtain or fulfill a contract. In 2016 and 2017, the FASB issued several ASUs that provided additional clarity on
numerous topics as well as providing technical corrections to the original ASU 2014-09. We adopted this new standard on January
1, 2018, utilizing the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. See
below for the effect of this adoption on our Consolidated Financial Statements.
In millions
Assets
Balance at
December 31, 2017
Adjustments
Balance at
January 1, 2018
Accounts receivable, net of allowance
$
100.0
$
Inventories, net
Prepaid and other current assets
Liabilities
Accrued expenses
Deferred income taxes
Equity
Retained earnings
160.0
20.8
20.0
41.3
$
0.3
(2.4)
5.1
0.9
0.5
100.3
157.6
25.9
20.9
41.8
$
142.8
$
1.6
$
144.4
In accordance with ASC 606, the impact of adoption on our consolidated statement of operations and balance sheet
were as follows:
In millions
Net sales
Cost of sales
Provision (benefit) for income taxes
Net income (loss)
In millions
Assets
Year Ended December 31, 2018
As reported
1,133.6
716.8
40.0
Balances without
Adoption of ASC 606
1,133.0
$
717.1
39.8
Effect of Change
Higher/(Lower)
0.6
$
(0.3)
0.2
169.1
$
168.4
$
0.7
$
$
December 31, 2018
As reported
Balances without
Adoption of ASC 606
Effect of Change
Higher/(Lower)
Accounts receivable, net of allowance
$
118.9
$
118.5
$
Inventories, net
Prepaid and other current assets
Liabilities
Accrued expenses
Deferred income taxes
Equity
Retained earnings
191.4
34.9
36.7
36.9
193.6
29.2
35.7
36.7
$
313.5
$
310.8
$
0.4
(2.2)
5.7
—
1.0
0.2
2.7
All other issued but not yet effective accounting pronouncements are not expected to have a material impact on our
Consolidated Financial Statements.
79
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 5: Revenues
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to contracts not completed
as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. See Note
4 for more information on the adoption of ASC 606 and its impact on our Consolidated Financial Statements.
Ingevity's operating segments are (i) Performance Materials and (ii) Performance Chemicals. A description of both
operating segments is included in Note 1.
Net sales in both of our reportable segments are based on the sale of manufactured products. Net sales are recognized
when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control
of our products. Since net sales are derived from product sales only, we have disaggregated our net sales by our product lines
within each reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for
transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from
revenue. Sales returns and allowances are not a normal practice in the industry and are not significant. Shipping and handling fees
billed to customers continue to be included with Net sales. Certain customers may receive cash-based incentives, including discounts
and volume rebates, which are accounted for as variable consideration and included in Net sales. Incidental items immaterial in
the context of the contract are recognized as expense. If we pay for the freight and shipping, we recognize the cost when control
of the product has transferred to the customer as an expense in Cost of sales on the consolidated statement of operations. Although
very rare, from time to time we incur expenses to obtain a sales contract. In these cases, if these costs are for orders that are fulfilled
in one year or less, we expense these costs as they are incurred. Because the period between when we transfer a contracted good
to a customer and when the customer pays for that good will be one year or less, we elect not to adjust the contracted amount of
consideration for the effects of any significant financing component.
Disaggregation of Revenue
The following tables present our Net sales disaggregated by product line and geography.
In millions
Automotive Technologies product line
Process Purification product line
Performance Materials segment
Pavement Technologies product line
Oilfield Technologies product line
Industrial Specialties product line
Performance Chemicals segment
Consolidated Net sales
Years Ended December 31,
2018
2017
2016
$
$
$
$
362.0
38.4
400.4
178.5
114.2
440.5
733.2
1,133.6
$
$
$
$
312.5
36.8
349.3
163.0
77.8
382.3
623.1
972.4
$
$
$
$
263.5
37.5
301.0
148.8
58.5
400.0
607.3
908.3
The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer.
80
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
In millions
North America
Asia Pacific
Europe, Middle East and Africa
South America
Net sales
Contract Balances
Years Ended December 31,
2018
2017
2016
$
770.4
$
662.9
$
171.4
169.9
21.9
142.5
149.2
17.8
$
1,133.6
$
972.4
$
597.8
138.8
151.1
20.6
908.3
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 on
contracts with certain customers. 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.
In millions
Balance at January 1, 2018
Contract asset additions
Reclassification to accounts receivable, billed to customers
Balance at December 31, 2018 (1)
_______________
(1)
Included within "Prepaid and other current assets" on the consolidated balance sheet.
Note 6: Financial Instruments, Risk Management, and Fair Value Measurements
Financial Instruments and Risk Management
Contract Asset
4.4
26.6
(25.9)
5.1
$
$
Ingevity’s operations are exposed to market risks, such as changes in foreign currency exchange rates and commodity
prices due to transactions denominated in a variety of foreign currencies and purchases of certain commoditized raw materials and
inputs. Changes in these rates and prices may have an impact on Ingevity’s future cash flow and earnings. To mitigate these market
risks and their effects, we enter into derivative financial instruments which are governed by policies, procedures and internal
processes set forth by our Board of Directors.
Our risk management program also addresses counterparty credit risk by selecting only major financial institutions with
investment grade ratings. Once the derivative financial instrument is entered into, we continuously monitor the financial institutions’
credit ratings and our credit risk exposure held by the financial institution. When appropriate, we reallocate exposures across
multiple financial institutions to limit credit risk. If a counterparty fails to fulfill its performance obligations under the derivative
financial instrument, then Ingevity is exposed to credit risk equal to the fair value of the financial instrument. Derivative assets
and liabilities are reported on a net basis by counterparty, to the extent governed by master netting agreements, in the consolidated
balance sheets. Due to our proactive mitigation of these potential credit risks, we anticipate performance by our counterparties to
these contracts and therefore no material loss is expected.
Foreign Currency Exchange Risk Management
We manufacture and sell our products in several countries throughout the world and, thus, we are exposed to changes in
foreign currency exchange rates. To manage the volatility relating to these exposures, we net the exposures on a consolidated basis
to take advantage of natural offsets. To manage the remaining exposure, from time to time, we utilize forward currency exchange
contracts and zero cost collar option contracts to minimize the volatility to earnings and cash flows resulting from the effect of
fluctuating foreign currency exchange rates on export sales denominated in foreign currencies (principally the euro). These contracts
are generally designated as cash flow hedges. We began our foreign currency exchange risk hedging program in July 2017 and
therefore prior to this date we had no derivative financial instruments designated to foreign currency exchange risk. As of
December 31, 2018, open foreign currency derivative contracts hedge forecasted transactions until January 2019. These open
81
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
derivative contracts hedge the notional U.S. dollar equivalent value of approximately $1.9 million. The fair value of the foreign
currency hedge was a $0.2 million asset and zero at December 31, 2018 and December 31, 2017, respectively.
Commodity Price Risk Management
Certain energy sources used in our manufacturing operations are subject to price volatility caused by weather, supply and
demand conditions, economic variables, and other unpredictable factors. This volatility is primarily related to the market pricing
of natural gas. To mitigate expected fluctuations in market prices and the volatility to earnings and cash flow resulting from changes
to pricing of natural gas purchases, from time to time, we will enter into swap contracts and zero cost collar option contracts and
designate these contracts as cash flow hedges. We began our commodity price risk hedging program in December 2017 and therefore
prior to this date we had no derivative financial instruments designated to hedge commodity price risk. As of December 31, 2018,
we had 1.8 million and 1.4 million mmBTUS (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
December 31, 2018, open commodity contracts hedge forecasted transactions until May 2020. The fair value of the outstanding
designated natural gas commodity hedge contracts was zero as of December 31, 2018 and December 31, 2017, respectively.
Equity Securities
Our investments in equity securities with a readily determinable fair value totaled $0.4 million and $1.8
million at December 31, 2018 and December 31, 2017, respectively. The net realized gain/(loss) recognized during the twelve
months ended December 31, 2018 and 2017 was zero. The net unrealized gain/(loss) as of December 31, 2018 and 2017 was $(0.3)
million and $0.3 million, respectively. The aggregate carrying value of investments in equity securities where fair value is not
readily determinable totaled $1.5 million as of December 31, 2018 and $3.0 million as of December 31, 2017. During the twelve
months ended December 31, 2018, we recorded an impairment charge of $1.5 million to an equity security, with an original value
of $3.0 million, where fair value is not readily determinable held within our Performance Materials segment. The charge was based
on recently updated expected future cash flow projections for the investment.
Fair-Value Measurements
We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the
valuation technique, into a three-level fair-value hierarchy. The fair-value hierarchy gives the highest priority to quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs
used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level
input that is significant to the fair-value measurement of the instrument.
The following information is presented for assets and liabilities that are recorded in the consolidated balance sheets at
fair value measured on a recurring basis. There were no significant transfers of assets and liabilities that are recorded at fair value
between Level 1 and Level 2 during the period reported.
In millions
December 31, 2018
Assets:
Equity securities (4)
Foreign currency hedging (4)
Commodity hedging (4)
Deferred compensation plan investments (5)
Total assets
Liabilities:
Deferred compensation arrangement (5)
Separation-related reimbursement awards (6)(7)
Foreign currency hedging (6)
Commodity hedging (6)
Total liabilities
Level 1(1)
Level 2(2)
Level 3(3)
Total
0.4
$
— $
— $
—
—
1.3
1.7
4.6
0.1
—
—
$
$
4.7
$
0.2
0.1
—
0.3
$
—
—
—
—
— $
— $
—
3.9
0.1
4.0
—
—
—
$
— $
0.4
0.2
0.1
1.3
2.0
—
4.6
0.1
3.9
0.1
8.7
$
$
$
$
82
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
In millions
December 31, 2017
Assets:
Equity securities (4)
Total assets
Liabilities:
Deferred compensation arrangement (5)(8)
Separation-related reimbursement awards (6)(7)
Total liabilities
Level 1(1)
Level 2(2)
Level 3(3)
Total
$
$
$
$
1.8
1.8
2.0
0.9
2.9
$
$
$
$
— $
— $
— $
—
— $
— $
—
— $
—
— $
1.8
1.8
—
2.0
0.9
2.9
__________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Quoted prices in active markets for identical assets.
Quoted prices for similar assets and liabilities in active markets.
Significant unobservable inputs.
Included within "Prepaid and other current assets" on the consolidated balance sheet.
Included within "Other liabilities" on the consolidated balance sheet.
Included within "Accrued expenses" on the consolidated balance sheet.
This amount represents an amount due to WestRock associated with WestRock equity awards held by Ingevity employees post
Separation. In accordance with the EMA between Ingevity and WestRock entered into in connection with the Separation, we are
required to reimburse WestRock the fair market value of awards on the day Ingevity employees exercise their awards. The income and
expense, respectively, recognized during the years ended December 31, 2018, 2017, and 2016 was $0.1 million, $0.3 million, and $1.6
million, respectively.
This amount represents a non-designated foreign currency hedge associated with the purchase price of our acquisition of Perstorp AB's
caprolactone business. See Note 24 for more information. The expense recognized during the year ended December 31, 2018 was $3.9
million.
At December 31, 2018 and 2017, the book value of capital lease obligations was $80.0 million and $80.0 million,
respectively, and the fair value was $90.4 million and $92.9 million, respectively. The fair value of our capital lease obligations
is based on the period-end quoted market prices for the obligations, using Level 1 inputs.
The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt, not including long-term
debt due within one year, was $366.2 million and $365.6 million as of December 31, 2018 and 2017, respectively. The carrying
value is a reasonable estimate of the fair value of our outstanding debt as our outstanding debt is variable interest rate debt.
At December 31, 2018, the book value of our fixed rate debt, the senior notes issued January 24, 2018, was $300.0 million,
and the fair value was $275.2 million, based on Level 2 inputs.
At December 31, 2018 and 2017, the book value of our restricted investment was $71.2 million and $71.3 million,
respectively, and the fair value was $66.7 million and $69.6 million, respectively, based on Level 1 inputs.
The carrying value of our financial instruments: cash and cash equivalents, other receivables, other payables and accrued
liabilities approximate their fair values due to the short-term nature of these financial instruments.
Note 7: Inventories, net
In millions
Raw materials
Production materials, stores and supplies
Finished and in-process goods
Less: excess of cost over LIFO cost
$
Subtotal
Inventories, net $
December 31,
2018
2017
36.5
17.5
144.7
198.7
(7.3)
191.4
$
$
40.1
13.4
114.3
167.8
(7.8)
160.0
83
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Approximately 63 percent and 66 percent of Inventories, net at December 31, 2018 and 2017, respectively, are valued
using the LIFO method. During fiscal 2016, inventory quantities carried on a LIFO basis, primarily in our Performance Chemicals'
domestic inventory, were reduced which led to liquidations of LIFO inventory quantities. These reductions resulted in a pre-tax
decrease of $3.6 million, recorded to "Cost of sales" on our consolidated statement of operations. No such reductions occurred in
fiscal 2018 or 2017.
Note 8: Property, Plant and Equipment, net
Property, plant and equipment, net consist of the following:
In millions
Machinery and equipment
Buildings and leasehold equipment
Land and land improvements
Construction in progress
Less: accumulated depreciation
December 31,
2018
2017
$
857.2
$
Total cost
Property, plant and equipment, net (1) $
113.1
19.6
71.2
1,061.1
(537.3)
523.8
$
792.5
115.0
18.0
35.8
961.3
(522.8)
438.5
_______________
(1)
This includes capital leases related to machinery and equipment at our Wickliffe, Kentucky facility of $69.2 million and $70.0 million,
and net book value of $6.7 million and $7.6 million at December 31, 2018 and 2017, respectively. This also includes capital leases
related to our Waynesboro, Georgia manufacturing facility for (a) machinery and equipment of $6.5 million and $5.9 million and net
book value of $6.0 million and $5.7 million, (b) construction in progress of $13.7 million and $2.1 million and (c) buildings and
leasehold improvements of $0.1 million and zero at December 31, 2018 and 2017, respectively. Amortization expense associated
with these capital leases is included within depreciation expense. The payments remaining under these capital leases obligations are
included within Note 19.
Depreciation expense was $41.9 million, $35.5 million, and $33.2 million for the years ended December 31, 2018,
2017 and 2016, respectively.
Note 9: Goodwill and Other Intangible Assets, net
The changes in the carrying amount of goodwill by operating segment are as follows:
In millions
December 31, 2016
Foreign currency translation
December 31, 2017
Foreign currency translation
Goodwill acquired (1)
December 31, 2018
Operating Segments
Performance
Chemicals
Performance
Materials
Total
$
$
$
$
$
8.1
—
8.1
(0.4)
118.7
$
$
4.3
—
4.3
—
—
126.4
$
4.3
$
12.4
—
12.4
(0.4)
118.7
130.7
_______________
(1)
See Footnote 17 for more information about the Pine Chemicals Acquisition.
Our fiscal year 2018 annual goodwill impairment test was performed as of October 1, 2018. We determined no goodwill
impairment existed. There were no events or circumstances indicating that goodwill might be impaired as of December 31, 2018.
84
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
All of Ingevity's other intangible assets, net are related to the Performance Chemicals operating segment. The following
table summarizes intangible assets:
December 31, 2018
December 31, 2017
In millions
Brands (1)
Customer contracts and relationships
Other
Other intangibles, net (2)
Net
Gross carrying
amount
Gross carrying
amount
Accumulated
amortization
9.8
$
11.4
151.0
4.1
$
1.6
$
30.3
0.8
120.7
3.3
Accumulated
amortization
11.8
$
$
Net
25.4
—
13.9
28.2
—
166.5
$
40.9
$ 125.6
$
42.1
$
37.2
$
$
$
2.1
2.8
—
4.9
_______________
(1)
(2)
Represents trademarks, trade names and know-how.
See Footnote 17 for more information about the Pine Chemicals Acquisition and the related increase in Intangible assets.
The amortization expense related to our intangible assets in the table above for the years ended December 31, 2018, 2017
and 2016 is shown in the table below. Amortization expense is included within "Cost of sales" and "Selling, general and
administrative expenses" on our consolidated statements of operations.
In millions
Amortization expense (1)
Years Ended December 31,
2018
2017
2016
$
12.3
$
2.4
$
2.7
_______________
(1)
See Footnote 17 for more information about the Pine Chemicals Acquisition and the related increase in Amortization expense.
Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years
is as follows: 2019 - $14.3 million, 2020 - $13.2 million, 2021 - $12.3 million, 2022 - $12.2 million and 2023 - $12.2 million. The
estimated pre-tax amortization expense may fluctuate due to changes in foreign currency.
Note 10: Debt, including Capital Lease Obligations
Revolving Credit and Term Loan Facility Amendments
On August 7, 2018, we entered into an Incremental Facility Agreement and Amendment No. 2 (the “Amendment”) to the
Credit Agreement, dated as of March 7, 2016 (the “Existing Credit Agreement”, and as amended, supplemented or otherwise
modified from time to time, including pursuant to the Incremental Facility Agreement and Amendment No. 1, dated as of August
21, 2017, and the Amendment, the “Amended Credit Agreement”). Among other things, the Amendment (i) increased the revolving
commitments under the Existing Credit Agreement by $200.0 million (the “Incremental Revolving Commitments”) to $750 million
and (ii) reduced the Applicable Rate (as defined in the Amended Credit Agreement). The Amendment also extended the maturity
date for the loans and commitments under the Existing Credit Agreement to August 7, 2023.
The Incremental Revolving Commitments have terms identical to those of the Revolving Commitments under the Existing
Credit Agreement and will be treated as a single class with such existing commitments under the Amended Credit Agreement.
Loans under the Amended Credit Agreement bear interest at either (a) an adjusted base rate or (b) an adjusted LIBOR
rate, in each case, plus an applicable margin (the “Applicable Margin”), in the case of base rate loans, ranging between zero percent
and 0.75 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.00 percent and 1.75 percent. The Applicable
Margin is based on a total leverage based pricing grid. Fees to revolving lenders under the Amended Credit Agreement, including
fees in respect of the Incremental Revolving Commitments, include (i) commitment fees, based on a percentage of the daily unused
portions of the facility, ranging from 0.15 percent to 0.30 percent and (ii) customary letter of credit fees.
As consideration for the Amendment, the Company paid to each lender under the Existing Credit Agreement a consent
fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans held by such lender
85
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
immediately prior to the Closing Date. Fees of $1.4 million were incurred to secure the Amended Credit Agreement. These fees
have been deferred and will be amortized over the term of the arrangement.
The credit facilities under the Amended Credit Agreement will mature on August 7, 2023. The Initial Term Loans and
the Incremental Term A Loans (each, as defined in the Amended Credit Agreement) will amortize at a rate equal to 1.25 percent
per quarter starting in September 2019, with the balance due at maturity.
2018 Senior Notes
On January 24, 2018, we issued $300.0 million aggregate principal amount of 4.50 percent senior unsecured notes due
2026 (the “Notes”). The Notes were issued pursuant to an indenture dated as of January 24, 2018 (the “Indenture”), by and among
Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The Notes were offered and sold
only to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and to certain non-U.S. persons
outside the U.S. pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not
been registered under the Securities Act or any state securities laws and may not be offered or sold in the U.S. absent registration
or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.
The net proceeds from the sale of the Notes, after deducting deferred financing fees of $5.7 million were approximately
$294.3 million. We used the net proceeds from the sale of the Notes to finance, in part, our purchase of substantially all the assets
primarily used in the pine chemicals business of Georgia-Pacific Chemicals LLC and Georgia-Pacific LLC.
Interest payments on the Notes are due semiannually in arrears on February 1st and August 1st of each year, beginning
on August 1, 2018, at a rate of 4.50 percent per year. The Notes will mature on February 1, 2026.
Financial Covenants
The Indenture contains 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 our 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 Indenture could result in the acceleration of the Notes and could cause
a cross-default that could result in the acceleration of other indebtedness of Ingevity and its subsidiaries.
The revolving credit facility and term loan facility include financial covenants requiring Ingevity to maintain on a
consolidated basis a maximum total leverage ratio of 4.00 to 1.00 (which may be increased to 4.50 to 1.00 under certain
circumstances) and a minimum interest coverage ratio of 3.00 to 1.00. We were in compliance with all covenants at December 31,
2018.
As part of the Separation, WestRock required Ingevity to contribute $68.9 million in a trust managed in order to secure
repayment of the capital lease obligation at maturity. The trust, presented as restricted investment on our consolidated balance
sheet, purchased long term bonds that mature in 2025 and 2026. The principal received at maturity of the bonds along with interest
income that is reinvested in the trust are expected to be equal to or more than the $80.0 million capital lease obligation that is due
in 2027. Because the provisions of the trust provide us the ability, and it is our intent, to hold the investments to maturity, the
investments held by the trust are accounted for as held to maturity; therefore, they are held at their amortized cost. The fair value
of the investments within the trust was $66.7 million and $69.6 million as of December 31, 2018 and 2017, respectively (see Note
6 for more information). The investments held by the trust earn interest at the stated coupon rate of the invested bonds. Interest
earned on the investments held by the trust is recognized as interest income and presented within Interest income on our consolidated
statement of operations.
86
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Current and long-term debt including capital lease obligations consisted of the following:
In millions
Revolving Credit Facility (1)
Term Loan Facility
Senior Notes
Capital lease obligations
Other notes payable
Total debt including capital lease obligations
Less: debt issuance costs
Total debt including capital lease obligations, net of debt
issuance costs
Less: debt maturing within one year (2)
Long-term debt including capital lease obligations
December 31, 2018
December 31,
Interest rate Maturity date
2018
2017
3.77%
3.77%
4.50%
7.67%
5.02%
2023
2023
2026
2027
2018-2019
$
$
$
$
— $
375.0
300.0
80.0
3.9
758.9
$
6.5
752.4
11.2
741.2
$
$
—
375.0
—
80.0
—
455.0
1.6
453.4
9.4
444.0
_______________
(1)
Letters of credit outstanding under the revolving credit facility were $1.9 million and $1.8 million and available funds under the facility
were $748.1 million and $548.2 million at December 31, 2018 and December 31, 2017, respectively. On February 13, 2019, the
revolving credit facility was utilized as the primary source of funds (along with available cash on hand) to close our Caprolactone
Acquisition. Our available capacity under our revolving credit facility immediately following this drawdown was $113.1 million. See
Note 24 for more information of the Caprolactone Acquisition.
Debt maturing within one year is included in "Current maturities of long-term debt" on the consolidated balance sheet.
(2)
Note 11: Share-based Compensation
Prior to the Separation, share-based compensation expense was allocated to Ingevity based on the portion of WestRock's
incentive share-based compensation program in which Ingevity employees participated. Share-based compensation expense
allocated by WestRock to Ingevity was zero, zero, and $0.5 million for the years ended December 31, 2018, 2017 and 2016,
respectively. This allocated share-based compensation expense is included in the overall allocations from WestRock discussed
further in Note 13.
Equity Incentive Plan
Adopted at Separation, the Ingevity Corporation 2016 Omnibus Incentive Plan grants certain corporate officers, key
employees and non-employee directors of Ingevity and subsidiaries different forms of benefits, including stock options, RSUs,
DSUs and PSUs. The Ingevity Corporation 2016 Omnibus Incentive Plan has a maximum shares reserve of 4,000,000 for the grant
of equity awards. As of December 31, 2018, 3,258,944 shares under the Ingevity Corporation 2016 Omnibus Incentive Plan are
still available for grants, assuming that Ingevity performs at the target performance level in each year of the three-year performance
period for PSU awards. Ingevity's Compensation Committee determines the long-term incentive mix, including stock options,
RSUs and PSUs, and may authorize new grants annually.
Employee Stock Purchase Plan
On December 9, 2016, our Compensation Committee and Board of Directors approved the 2017 Ingevity Corporation
Employee Stock Purchase Plan ("ESPP"), which was approved by Ingevity’ stockholders on April 27, 2017. The ESPP allows
eligible employee participants to purchase no more than 5,000 shares of our common stock at a discount through payroll deductions
up to 15 percent of their compensation deducted during the purchase period. However, no participant shall be permitted to purchase
common stock with a value greater than $25,000 in any calendar year. The ESPP is a tax-qualified plan under Section 423 of the
Internal Revenue Code. The ESPP consists of a one month enrollment period preceding the three-month purchase period.
Employees purchase shares in each purchase period at 85 percent of the market value of our common stock at either the beginning
of the offering period or the end of the purchase period, whichever price is lower.
Under the ESPP, a total of 250,000 shares of Ingevity's common stock are reserved and authorized for issuance to
participating U.S. employees, as defined by the ESPP, which excludes certain officers of Ingevity. As of December 31, 2018,
87
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
206,255 shares under the ESPP are still available for issuance. The initial offering period under the ESPP began on July 1, 2017.
During fiscal 2018, there were 31,862 shares issued under the ESPP at an average price of $57.81.
Our share-based compensation expense recognized post Separation associated with Ingevity's incentive plan and the ESPP
is included in the table below.
In millions
Stock option expense
ESPP expense
RSU, DSU and PSU expense
Total share-based compensation expense (1)
Income tax benefit
Total share-based compensation expense, net of tax
Years Ended December 31,
2018
2017
2016
$
$
2.3
0.5
9.7
12.5
(2.9)
9.6
$
$
1.5
0.2
8.4
10.1
(3.8)
6.3
$
$
0.7
—
4.0
4.7
(1.9)
2.8
_______________
(1)
Amounts reflected in "Selling, general and administrative expenses" on the Consolidated Statements of Operations.
Stock Options
All stock options vest in accordance with vesting conditions set by the compensation committee of Ingevity's Board of
Directors. Stock options granted to date have vesting periods of one to three years from the date of grant. Incentive and non-
qualified options granted under the Plan expire no later than 10 years from the grant date. Expense related to stock options granted
from the Separation through December 31, 2018 was based on the assumptions shown in the table below:
Weighted-average assumptions used to calculate expense for stock options
Risk-free interest rate
Average life of options (years)
Volatility
Dividend yield
Fair value per stock option
Years Ended December 31,
2018
2.7%
6.5
27.5%
2017
2.1%
6.5
35.0%
2016
1.6%
6.5
35.0%
—
—
$
25.51
$
20.71
$
—
10.61
88
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
The following table summarizes Ingevity's stock option activity for the period from the Separation through December
31, 2018, as there was no Ingevity stock option activity prior to Separation.
Number of
Options
(in thousands)
Weighted-average
exercise price
(per share)
Weighted-
average
remaining
contractual term
(years)
Aggregate
intrinsic value (in
thousands)
Outstanding, May 16, 2016
Granted
Exercised
Forfeited
Canceled
Outstanding, December 31, 2016
Granted
Exercised
Forfeited
Canceled
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Canceled
Outstanding, December 31, 2018
Exercisable, December 31, 2018
— $
208
—
—
—
208
$
109
(7)
(7)
—
303
$
110
(6)
(4)
—
403
9
$
$
—
28.03
—
—
—
28.03
53.11
27.38
31.97
—
36.72
74.91
32.37
51.66
—
46.98
46.14
9.4
$
5,573
8.7
$
10,022
8.1
8.0
$
$
14,450
352
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between Ingevity's
closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders exercised their in-the-money options at each year end.
The amount changes based on the fair market value of Ingevity's stock.
As of December 31, 2018, $4.6 million of total unrecognized compensation cost related to stock options is expected to
be recognized over a weighted-average period of 1.0 year.
Restricted Stock Units, Deferred Stock Units and Performance-based Restricted Stock Units
All RSUs, DSUs and PSUs vest in accordance with vesting conditions set by the Compensation Committee of Ingevity’s
Board of Directors. RSUs and DSUs granted to date have vesting periods ranging from less than one year to three years from the
date of grant. PSUs granted to date have vesting periods of three years from the date of grant, including grants that have a cumulative
three-year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. We
periodically assess the probability of achievement of the performance criteria and adjust the amount of compensation expense
accordingly. Compensation expense is recognized over the vesting period and adjusted for the probability of achievement of the
performance criteria.
89
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
The following table summarizes Ingevity's RSUs, DSUs and PSUs activity for the period from the Separation through
December 31, 2018, as there was no Ingevity stock option activity prior to Separation.
RSUs and DSUs
PSUs
Number of Units
(in thousands) (1)
Weighted
average grant
date fair value
(per share)
Number of Units
(in thousands) (1)
Weighted
average grant
date fair value
(per share)
— $
190
(23)
—
167
$
61
(75)
(4)
149
$
56
(89)
(1)
115
$
—
28.08
27.90
—
28.08
57.21
28.47
31.00
39.67
77.98
60.94
61.15
60.94
— $
127
—
—
127
$
66
—
(9)
184
$
56
—
(1)
239
$
—
28.06
—
—
28.06
53.11
—
27.90
37.01
74.91
—
52.18
45.88
Nonvested, May 15, 2016
Granted
Vested
Forfeited
Nonvested, December 31, 2016
Granted
Vested
Forfeited
Nonvested, December 31, 2017 (2)
Granted
Vested
Forfeited
Nonvested, December 31, 2018 (2)
_______________
(1)
The number granted represents the number of shares issuable upon vesting of RSUs and DSUs. For PSUs the number granted represents
the number of shares issuable upon vesting assuming that Ingevity performs at the target performance level in each year of the three-
year performance period.
The nonvested RSU and DSU number of shares at December 31, 2018, 2017, and 2016 includes 10 thousand, 8 thousand, and zero
DSUs, respectively.
(2)
As of December 31, 2018 and December 31, 2017, there was $22.0 million and $12.6 million, respectively, of
unrecognized share-based compensation expense related to nonvested awards. Those costs are expected to be recognized over a
weighted-average period of one year.
90
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 12: Equity
Summarized below is the roll forward of accumulated other comprehensive income (loss), net of tax.
In millions
Accumulated other comprehensive income (loss), net of tax at
December 31, 2015
2016 Activity
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss)
Accumulated other comprehensive income (loss), net of tax at
December 31, 2016
2017 Activity
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss)(1)
Reclassification of certain deferred tax effects (3)
Accumulated other comprehensive income (loss), net of tax at
December 31, 2017
2018 Activity
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss)(1)
Accumulated other comprehensive income (loss), net of tax at
December 31, 2018
Foreign
currency
adjustments
Derivative
Instruments
Pension and
other
postretirement
benefits
Total
$
(15.5) $
(1.0) $
— $
(16.5)
(2.9)
—
—
1.0
(0.6)
—
(3.5)
1.0
$
(18.4) $
— $
(0.6) $
(19.0)
8.3
—
—
(0.1)
0.1
—
(0.7)
—
(0.3)
7.5
0.1
(0.3)
$
(10.1) $
— $
(1.6) $
(11.7)
(6.3)
—
1.3
(0.9)
(0.3)
0.2
(5.3)
(0.7)
$
(16.4) $
0.4
$
(1.7) $
(17.7)
_______________
(1)
Amounts relate to derivative instruments entered to hedge foreign currency exchange risks on revenue transactions and price risk on
natural gas purchases, and therefore were reclassified to "Net sales" and "Cost of sales", respectively. Amounts were reclassified when
the hedged items are recognized in the consolidated statements of operations.
Amounts reclassified to retained earnings due to early adoption of ASU 2018-02.
(2)
Noncontrolling interest acquisition
On August 1, 2018, we completed the acquisition of the remaining 30 percent noncontrolling interest in Purification
Cellutions, LLC, now known as Ingevity Georgia, LLC, which was treated as a partnership for tax purposes, for a purchase price
of $80.0 million. The acquisition resulted in the elimination of Noncontrolling interest of $11.4 million and the recognition of a
Deferred tax asset of $14.3 million, with the remainder being recorded against Additional paid in capital of $54.3 million in our
Consolidated Financial Statements.
Share repurchases
On February 20, 2017, the Board of Directors authorized the repurchase of up to $100.0 million of our common stock.
In addition, on November 1, 2018, the Board of Directors approved the authorization for the repurchase of up to an additional
$350.0 million of Ingevity’s outstanding common stock. The approval of this $350.0 million is in addition to the $100.0 million
share repurchase program approved in February 2017. The 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.
91
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
During the year ended December 31, 2018, we repurchased $47.4 million in common shares, representing 561,000 shares
of our common stock at a weighted average cost per share of $84.59. At December 31, 2018, $396.0 million remained unused
under our Board-authorized repurchase program. We record shares of common stock repurchased at cost as treasury stock, resulting
in a reduction of stockholders’ equity in the consolidated balance sheets. When the treasury shares are contributed under our
employee benefit plans or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The
difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to
or deducted from the related capital in excess of par value of common stock.
Note 13: Transactions with WestRock and Related Parties
The consolidated statements of operations prior to May 15, 2016, include allocations from WestRock as summarized
below:
In millions
Cost of sales
Selling, general and administrative expenses
Interest expense, net
Total allocated cost (1)
Years Ended December 31,
2018
2017
2016
$
$
— $
—
—
— $
— $
—
—
5.7
6.5
7.2
— $
19.4
_______________
(1)
Allocated costs represent costs necessary to support Ingevity's operations which include governance and corporate functions such as
information technology, accounting, human resources, accounts payable and other direct services including the interest on WestRock
debt incurred to provide such services.
Prior to the Separation, we purchased certain raw materials from WestRock that were included in cost of sales. Purchases
for the year ended December 31, 2016 were $20.1 million. At Separation, we entered into a long-term supply agreement with
WestRock pursuant to which we purchase all of the CTO output from WestRock’s existing kraft mills at the time of separation,
subject to certain exceptions. Beginning in 2025, either party may provide a notice to the other party terminating the agreement
five years from the date of such notice. Beginning one year after such notice, the quantity of products provided by WestRock under
the WestRock agreement will be gradually reduced over a four-year period based on the schedule set forth in the WestRock
agreement. In addition, from 2022 until 2025, either party may provide one-year notice to remove a kraft mill as a supply source.
The two largest kraft mills under the WestRock agreement currently are expected to supply approximately 19% to 20% and 17%
to 18%, respectively, of the total amount of products expected to be supplied under our agreement with WestRock. In the event
that WestRock exercises its right to terminate our supply agreement with them or remove a kraft mill as a supply source, we may
be able to obtain substitute supplies of CTO from other suppliers, spot purchases or a new contract with WestRock. The agreement
with WestRock includes pricing terms based on market prices. Under this agreement, based on WestRock’s current output, we
currently expect to source approximately 30% to 40% of our CTO requirements through 2025 based on the maximum operating
rates of our three Performance Chemicals' facilities. As further described in Note 1, the Separation Agreements govern the
relationship among Ingevity and WestRock following the Separation and provide for the allocation of various assets, liabilities,
rights and obligations and include arrangements for transition services to be provided by WestRock to Ingevity.
Note 14: Retirement Plans
Prior to the Separation, WestRock offered various long-term benefits to its employees, including Ingevity employees. In
these cases, the participation of our employees in these plans is reflected in the Consolidated Financial Statements as though
Ingevity participated in a multi-employer plan with the other businesses of WestRock. For periods prior to the Separation, assets
and liabilities of such plans were retained by WestRock. Net periodic benefit costs allocated to Ingevity associated with these
pension plans, for the year ended December 31, 2016 were $3.2 million. This allocated net periodic benefit cost is included in the
overall allocations from WestRock, discussed further in Note 13.
92
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Defined Contribution Plans
U.S. Ingevity employees ceased participating in the WestRock 401(k) plan on December 31, 2015 preceding the Separation.
Effective January 1, 2016, the Ingevity Corporation Retirement Savings Plan ("Plan") was established. The Plan is a qualified
salary-reduction plan under Section 401(k) of the U.S. Internal Revenue Code. Eligible U.S. employees may participate by
contributing a portion of their compensation. For non-union eligible employees participating in the Plan Ingevity makes matching
contributions up to six percent of the employee deferral. In addition to the matching contributions, Ingevity also makes a non-
elective contribution of three percent of eligible compensation per payroll for non-union employees. For union eligible employees
participating in the Plan Ingevity makes matching contributions up to 100 percent of the first three percent of the employee deferrals
and 50 percent on the next two percent of deferrals.
U.S. salaried employees who were no longer eligible to participate in the WestRock defined benefit pension plan, as of
the date of Separation, were provided an enhanced contribution into the Plan. The enhanced benefits consist of a transition
contribution of four or ten percent of the employee’s eligible compensation for employees who were grandfathered in the WestRock
cash balance and final average pay pension plan, respectively. The transition contributions will continue to December 31, 2020,
unless the grandfathered employee terminates employment sooner.
Charges associated with employer contributions to the Plan were $10.2 million, $9.3 million, and $7.7 million for the
years ended December 31, 2018, 2017, and 2016, respectively.
Defined Benefit Pension and Postretirement Plans
In conjunction with the Separation, Ingevity employees stopped participating in WestRock pension and post-retirement
benefit plans. On May 16, 2016, Ingevity established new qualified and non-qualified benefit plans, similar in design to the
WestRock plans, to continue the pension and post-retirement benefits provided to our employees and retirees based on the obligations
assumed from WestRock. As further defined by the EMA, Ingevity assumed certain domestic and international pension and other
post-retirement benefit obligations from WestRock on the date of Separation. The assumed retirement obligations consisted of
accrued defined benefit obligations earned by Ingevity domestic hourly union employees, as of the day of Separation, net of
contributed assets; accrued obligations from a frozen non-qualified defined benefit pension plan for certain salaried and former
salaried employees of Ingevity; and other post-retirement medical and life insurance benefits.
We are required to recognize in our consolidated balance sheets the overfunded and underfunded status of our defined
benefit postretirement plans. The overfunded and underfunded status is defined as the difference between the fair value of plan
assets and the projected benefit obligation. We are also required to recognize, as a component of other comprehensive income, the
actuarial gains and losses and the prior service costs and credits that arise during the period.
93
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
The following table summarizes the weighted average assumptions used and components of our defined benefit
postretirement plans. The following tables also reflect a measurement date of December 31:
In millions, except percentages
Following are the weighted average assumptions used to determine the
benefit obligations at December 31:
Discount rate - qualified benefit plans
Discount rate - non-qualified benefit plans
Rate of compensation increase
Change in projected benefit obligation
Project benefit obligation at January 1
Service cost
Interest cost
Actuarial loss (gain)
Plan amendments
Benefit payments
Projected benefit obligation at December 31 (1)
Change in plan assets
Fair value of plan asset at January 1
Actual return on plan assets
Company contributions
Benefit payments
Fair value of plan assets at December 31
Funded Status
Net Funded Status of the Plan (Liability)
Amount recognized in the consolidated balance sheets:
Pension and other postretirement benefit asset (2)
Pension and other postretirement benefit (liability) (2)
Total Net Funded Status of the Plan (Liability)
Pensions
Other Benefits
December 31,
2018
2017
2018
2017
4.20%
4.15%
3.55%
3.55%
—%
4.10%
—%
3.45%
N/A
N/A
N/A
N/A
$
$
$
$
$
28.8
1.6
1.0
(2.0)
0.5
(0.5)
29.4
22.6
(1.1)
1.6
(0.5)
22.6
$
24.4
1.2
1.0
2.0
0.6
(0.4)
28.8
19.2
2.4
1.4
(0.4)
22.6
$
0.8
—
—
(0.1)
—
—
0.7
—
—
—
—
—
0.7
—
—
0.1
—
—
0.8
—
—
—
—
—
(6.8)
$
(6.2)
$
(0.7)
$
(0.8)
— $
— $
— $
(6.8)
(6.8)
$
(6.2)
(6.2)
$
(0.7)
(0.7)
$
—
(0.8)
(0.8)
_______________
(1)
(2)
The accumulated benefit obligation for all years presented equals the projected benefit obligation, for each plan respectively.
Asset balance is included in "Other assets" and liability balances are included in "Other liabilities" on the consolidated balance sheet.
94
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Amounts Recognized in Other Comprehensive Income (Loss)
Changes in plan assets and benefit obligations recognized in other comprehensive income (loss) are as follows:
In millions
Current year net actuarial loss (gain)
Current year prior service cost (credit)
Curtailments
Total recognized in other comprehensive (income) loss,
before taxes
Total recognized in other comprehensive (income) loss,
after taxes
Pensions
Other Benefits
Years Ended December 31,
2018
2017
2016
2018
2017
2016
$ — $
1.1
$
0.5
(0.2)
0.3
—
—
1.1
$
0.9
0.1
—
1.0
(0.1) $
—
—
(0.1)
0.1
$
—
—
0.1
(0.1)
—
—
(0.1)
$
0.3
$
0.7
$
0.5
$
(0.1) $
— $
0.1
Amounts Recognized in Accumulated Other Comprehensive Income (Loss)
The amounts in accumulated other comprehensive income (loss) that have not yet been recognized as components of net
periodic benefit cost are as follows:
In millions
Net actuarial (gain) loss
Prior service cost (credit)
Accumulated other comprehensive (income) loss, before taxes
Accumulated other comprehensive (income) loss, after taxes
Pensions
Other Benefits
December 31,
2018
2017
2018
2017
$
$
1.3
0.9
2.2
1.7
$
$
1.4
0.7
2.1
1.7
$
$
(0.1) $
—
(0.1)
(0.1) $
(0.1)
—
(0.1)
(0.1)
The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive
income (loss) into our net annual benefit cost during 2019 are zero and less than $0.1 million, respectively.
95
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Net Annual Benefit Costs Assumptions
The following table summarizes the weighted-average assumptions used for the components of net annual benefit cost:
In millions, except percentages
Discount rate - qualified benefit plans (1)
Discount rate - non-qualified benefit plans (1)
Expected return on plan assets
Components of net annual benefit cost:
Service cost(2)
Interest cost(3)
Expected return on plan assets(3)
Amortization of prior service cost(3)
Amortization of net actuarial and other (gain) loss(3)
Recognized (gain) loss due to curtailments
Net annual benefit cost
Pensions
Other Benefits
Years Ended December 31,
2018
3.55%
3.55%
4.00%
2017
4.10%
4.15%
4.50%
2016
4.00%
3.75%
2018
2017
2016
—%
—%
—%
3.45%
3.95%
3.75%
4.50% N/A
N/A
N/A
$
1.6
$
1.2
$
0.7
$ — $ — $ —
1.0
(0.9)
0.1
—
0.2
2.0
$
1.0
(0.9)
—
—
—
0.6
(0.6)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
1.3
$
0.7
$ — $ — $ —
_______________
(1)
The discount rate used to calculate pension and other post-retirement obligations was based on a review of available yields on high-
quality corporate bonds. In selecting a discount rate, we placed particular emphasis on a discount rate yield-curve provided by our
third-party actuary which takes into consideration the projected cash flows that represent the expected timing and amount of our plans'
benefit payments.
Amounts are recorded to "Cost of sales" on our consolidated statements of operations consistent with the employee compensation costs
that participate in the plan.
Amounts are recorded to "Other (income) expense, net" on our consolidated statements of operations.
(2)
(3)
Contributions
We made a voluntary cash contribution of $1.5 million and $1.2 million to our Union Hourly defined benefit pension
plan in the years ended December 31, 2018 and 2017, respectively. There are no required cash contributions to our Union Hourly
defined benefit pension plan in fiscal 2019, and we currently have no plans to make any voluntary cash contributions in fiscal
2019.
96
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Fair Value Hierarchy
The following table presents our fair value hierarchy for our major categories of pension plan assets by asset class. See
Note 6 for the definition of fair value and the descriptions of Level 1, 2 and 3 in the fair value hierarchy.
In millions
Cash and short-term investments
Equity funds and other investments
Fixed income mutual funds
Total assets
In millions
Cash and short-term investments
Equity funds and other investments
Fixed income mutual funds
Total assets
Estimated Future Benefit Payments
December 31, 2018
0.1
$
3.6
18.9
22.6
$
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
0.1
3.6
1.4
5.1
$
$
— $
—
17.5
17.5
$
—
—
—
—
December 31, 2017
0.5
$
2.7
19.4
22.6
$
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
0.5
2.7
1.4
4.6
$
$
— $
—
18.0
18.0
$
—
—
—
—
The following table reflects the estimated future benefit payments for our pension and other postretirement benefit plans.
These estimates take into consideration expected future service, as appropriate.
In millions
2019
2020
2021
2022
2023
2024-2028
Sensitivity Analysis
Pensions
Other Benefits
$
$
0.5
0.6
0.8
1.0
1.1
7.7
$
$
—
—
—
—
—
0.2
A one-half percent increase in the assumed discount rate would have decreased pension benefit obligations by $2.0 million
at December 31, 2018 and decreased pension benefit costs by $0.1 million for 2018. A one-half percent decrease in the assumed
discount rate would have increased pension obligations by $2.3 million at December 31, 2018 and increased pension benefit cost
by $0.3 million for 2018.
A one-half percent increase in the assumed expected long-term rate of return on plan assets would have decreased pension
costs by $0.1 million for 2018. A one-half percent decrease in the assumed long-term rate of return on plan assets would have
increased pension costs by $0.1 million for 2018.
97
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 15: Business Separation
In connection with the Separation as further described in Note 1 and Note 2, we have incurred pre-tax separation costs
as shown in the table below. Prior to the Separation, these costs were primarily related to third-party professional fees associated
with separation activities and one-time costs of new hires specifically required to separate and stand up Ingevity. Post-Separation,
these costs represent legal, information technology and other advisory fees to transition from a division of WestRock to a stand-
alone public company.
In millions
Separation costs
Years Ended December 31,
2018
2017
2016
$
— $
0.9
$
17.5
Note 16: Restructuring and Other (Income) Charges, net
We continually perform strategic reviews and assess the return on our operations which sometimes results in a plan to
restructure the business. The cost and benefit of these strategic restructuring initiatives are recorded as restructuring and other
(income) charges, net recorded within Restructuring and other (income) charges, net on our consolidated statement of operations.
These costs are excluded from our operating segment results.
We record an accrual for severance and other non-recurring costs under the provisions of the relevant accounting guidance.
Additionally, in some restructuring plans write-downs of long-lived assets may occur. Two types of assets are impacted: assets to
be disposed of by sale and assets to be abandoned. Assets to be disposed of by sale are measured at the lower of carrying amount
or estimated net proceeds from the sale. Assets to be abandoned with no remaining future service potential are written down to
amounts expected to be recovered. The useful lives of assets to be abandoned that have a remaining future service potential are
adjusted and depreciation is recorded over the adjusted useful life. Below provides detail of the restructuring and other (income)
charges, net incurred.
2018 activities
In February 2018, we sold assets from the Performance Chemicals derivatives operations in Duque De Caxias, Rio de
Janeiro, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016 (see 2016
activities below). As a result of this sale, we recorded $0.6 million as a gain on sale of assets offset by other employee related
costs of $0.1 million for the year ended December 31, 2018.
2017 activities
In January 2017, we initiated a reorganization to streamline our leadership team, flatten the organization and reduce costs.
Because of this reorganization, we recorded $1.3 million in severance and other employee-related costs for the year ended December
31, 2017.
During the year ended December 31, 2017 we also recorded $2.4 million of additional miscellaneous exit costs
primarily associated with the exit of our Performance Chemicals' manufacturing operations in Palmeira, Santa Catarina, Brazil
which began in the fourth quarter of 2016 (see 2016 activities below).
2016 activities
As a result of continued deteriorating market conditions within the South America region, on October 31, 2016, our Board
of Directors approved a plan to exit our Performance Chemicals' manufacturing operations in Palmeira, Santa Catarina, Brazil.
As a result, we recorded a non-cash pre-tax impairment charge to property, plant and equipment in the amount of $30.2 million
and recorded severance costs of $1.8 million. The severance costs began to be paid in the fourth quarter of 2016. Refinery production
ceased before year end, and the facility was decommissioned in 2017. We recorded $2.6 million of additional miscellaneous exit
costs during the year ended December 31, 2016.
During the first quarter of 2016, we announced the closure of the Performance Chemicals' derivatives operation in Duque
de Caxias, Rio de Janeiro, Brazil. As a result of this closure, we recorded $0.1 million impairment charge on fixed assets, $1.8
million in severance and other employee-related costs and $1.7 million of additional miscellaneous exit costs during year ended
December 31, 2016.
98
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
During the first quarter of 2016, we also announced a company-wide restructuring to better align our workforce in light
of changing macroeconomic and market realities. The restructuring decision resulted in workforce reductions at several of our
locations. As a result, during the year ended December 31, 2016, we recorded severance and other employee-related charges of
$2.7 million ($1.9 million related to Performance Chemicals segment and $0.8 million related to Performance Materials segment).
We also recorded an impairment charge on fixed assets of $0.3 million in the year ended December 31, 2016 (related to the
Performance Chemicals segment).
Detail on the restructuring charges and asset disposal activities is provided below.
In millions
Restructuring and other (income) charges, net
Gain on sale of assets and businesses
Severance and other employee-related costs (1)
Asset write-downs (2)
Other (income) charges, net (3)
Total restructuring and other (income) charges, net
Years Ended December 31,
2018
2017
2016
$
$
(0.6) $
0.1
—
—
(0.5) $
— $
1.3
—
2.4
3.7
$
—
6.3
30.6
4.3
41.2
_______________
(1)
(2)
(3)
Represents severance and employee benefit charges.
Primarily represents accelerated depreciation and impairment charges on long-lived assets, which were or are to be abandoned. To the
extent incurred the acceleration effect of re-estimating settlement dates and revised cost estimates associated with asset retirement
obligations due to facility shutdowns are also included within the asset write-downs.
Primarily represents costs associated with rental payments, contract terminations, and other miscellaneous exit costs. Other Income
primarily represents favorable developments on previously recorded exit costs as recoveries associated with restructuring activities.
Roll forward of Restructuring Reserves
The following table shows a roll forward of restructuring reserves that will result in cash spending.
Balance at
12/31/2016 (1)
$
2.2
Change in
Reserve (2)
Cash
Payments
Other (3)
Balance at
12/31/2017 (1)
Change in
Reserve (2)
Cash
Payments
Other (3)
Balance at
12/31/2018 (1)
3.7
(5.5)
(0.2) $
0.2
—
(0.2)
— $
—
_______________
(1)
(2)
Included in "Accrued Expenses" on the consolidated balance sheet.
Includes severance and other employee-related costs, exited leases, contract terminations and other miscellaneous exit costs. Any asset
write-downs including accelerated depreciation and impairment charges are not included in the above table.
Primarily non-cash charges and foreign currency translation adjustments.
(3)
99
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 17: Acquisitions
Georgia-Pacific's Pine Chemical Business
On August 22, 2017, we entered into an Asset Purchase Agreement (the "Pine Chemicals Purchase Agreement") with
Georgia-Pacific Chemicals LLC, Georgia-Pacific LLC (together with Georgia-Pacific Chemicals LLC, "GP") and Ingevity
Arkansas, LLC, a wholly-owned subsidiary of Ingevity, to purchase substantially all the assets primarily used in GP's pine chemical
business (the "Pine Chemical Business"), including assets and facilities related to tall oil fractionation operations and the production
or modification of tall oil fatty acids, tall oil rosins, rosin derivatives and formulated products (the "Pine Chemicals Acquisition").
On March 8, 2018 (the "Pine Chemicals Acquisition Date"), pursuant to the terms and conditions set forth in the Purchase
Agreement, we completed the Pine Chemicals Acquisition. During the third quarter of 2018, we finalized the purchase price which
included a final adjustment for working capital resulting in an aggregate purchase price of $315.5 million. The Pine Chemicals
Acquisition was primarily funded with the net proceeds from the $300.0 million senior notes issued on January 24, 2018. See Note
10 for more information on the senior notes. In addition, on the Pine Chemicals Acquisition, the Company and GP entered into a
20-year, market-based crude tall oil ("CTO") supply contract with certain of Georgia-Pacific’s paper mill operations.
The Pine Chemicals Acquisition is being integrated into our Performance Chemicals segment and has been included within
our results of operations since the Pine Chemicals Acquisition Date. Although not yet complete, a substantial portion of the Pine
Chemical Business has been integrated into our existing Performance Chemicals operations. As a result, our ability to separate net
sales and operating performance of the Pine Chemicals Acquisition from our existing Performance Chemicals' operating results
is no longer practicable.
Purchase Price Allocation
The Pine Chemicals Acquisition has been accounted for under the business combinations accounting guidance, and as
such we have 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 Pine Chemicals
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.
The following table summarizes the consideration paid for the Pine Chemicals Acquisition and the amounts of the assets
acquired and liabilities assumed as of the Pine Chemicals Acquisition Date.
100
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
In millions
Accounts receivable
Inventories (1)
Property, plant and equipment
Intangible assets (2)
Patents
Non-compete agreement
Customer relationships
Goodwill (3)
Other assets
Total fair value of assets acquired
Accounts payable
Accrued expenses
Total fair value of liabilities assumed
Purchase Price Allocation
Weighted Average
Amortization Period
Fair Value
12 years
3 years
11 years
$
$
16.2
9.4
39.3
1.9
2.2
129.0
118.7
0.1
316.8
0.8
0.5
1.3
_______________
(1)
Fair value of finished good inventories acquired included a step-up in the value of approximately $1.4 million, of which $1.4 million
was expensed in the year ended December 31, 2018. The expense is included in "Cost of sales" on the consolidated statement of
operations.
(2)
(3)
The aggregate amortization expense was for the year ended December 31, 2018. Estimated amortization expense is as follows: 2019
- $12.7 million, 2020 - $12.7 million, 2021 - $12.0 million, 2022 - $11.8 million, and 2023 - $11.8 million.
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.
Total cash paid $
315.5
Unaudited Pro Forma Financial Information
The following unaudited pro forma results of operations assume that the Pine Chemicals Acquisition occurred at the
beginning of the periods presented. These unaudited pro forma results are presented for informational purposes only and are not
necessarily indicative of what the actual results of operations would have been if the Pine Chemicals Acquisition had occurred at
the beginning of the periods presented, nor are they indicative of future results of operations. The pro forma results presented
below are adjusted for the removal of Acquisition and other related costs of $6.0 million and $7.1 million for the years ended
December 31, 2018 and 2017, respectively.
In millions
Net sales
Income (loss) before income taxes
Diluted earnings (loss) per share attributable to Ingevity stockholders
Years Ended December 31,
2018
2017
$
$
1,153.8
229.3
4.12
$
$
1,073.0
176.9
3.01
Perstorp AB's Caprolactone Business
See Note 24 for more information on the acquisition of Perstorp AB's caprolactone business completed on February 13,
2019.
101
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Acquisition-related costs
Costs incurred to complete and integrate the acquisitions described above into our Performance Chemicals segment are
expensed as incurred and recorded to Acquisition-related costs on our consolidated statement of operations. During the years
ended December 31, 2018, 2017 and 2016 we recognized $10.8 million, $7.1 million and zero, respectively. These costs
represent transaction costs, legal fees, professional third-party service fees, and in 2018 include the unrealized loss of $3.9
million from the purchase price hedge associated with the Caprolactone Acquisition.
Note 18: Income Taxes
Domestic and foreign components of Income (loss) before income taxes are shown below:
In millions
Domestic
Foreign
Total
The provision (benefit) for income taxes consisted of:
In millions
Current
Federal
State and local
Foreign
Total current
Deferred
Federal
State and local
Foreign
Total deferred
Provision (benefit) for income taxes
Years Ended December 31,
2018
2017
2016
213.3
8.5
221.8
$
$
180.1
(5.3)
174.8
$
$
118.3
(31.3)
87.0
Years Ended December 31,
2018
2017
2016
32.5
$
51.6
$
6.0
0.6
39.1
1.6
(1.1)
0.4
0.9
40.0
$
$
$
$
3.7
—
55.3
$
(25.3) $
(1.3)
0.9
(25.7) $
29.6
$
37.4
5.0
2.1
44.5
(2.4)
(0.5)
1.0
(1.9)
42.6
$
$
$
$
$
$
$
We recorded $0.1 million, $0.4 million and $(0.3) million of deferred tax provision (benefit) in components of other
comprehensive income during the years ended December 31, 2018, 2017 and 2016, respectively.
102
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
The following table summarizes the major differences between taxes computed at the U.S. federal statutory rate and the
actual income tax provision attributable to operations:
In millions, except percentage data
Federal statutory tax rate
State and local income taxes, net of federal benefit
Foreign income tax rate differential
Changes in valuation allowance
Domestic manufacturing deduction
Noncontrolling interest in consolidated partnership
Nondeductible separation costs
Nondeductible restructuring costs
Federal and state tax credits
Deferred rate change
U.S. Tax Reform
Foreign derived intangible income
Other
Provision (benefit) for income taxes
Effective tax rate
Years Ended December 31,
2018
2017
2016
$
61.2
$
$
46.6
4.4
1.0
(2.2)
—
(2.7)
—
—
(2.1)
(0.1)
(1.9)
(3.2)
0.2
2.4
0.5
1.7
(5.1)
(6.6)
—
—
(0.7)
(0.4)
(24.5)
—
1.1
29.6
$
30.5
2.8
0.8
13.2
(4.0)
(3.1)
1.5
2.2
(0.6)
(0.6)
—
—
(0.1)
42.6
$
40.0
$
18.0%
16.9%
49.0%
Our effective tax rate was 18.0 percent, 16.9 percent, and 49.0 percent for the years ended December 31, 2018, 2017, and
2016, respectively. The increase in our effective tax rate from 2017 to 2018 is mainly due to the one time benefit of reducing our
net deferred tax liability to the 21.0 percent rate in 2017 and effects of certain provisions under U.S. Tax Reform. Our U.S. net
deferred tax liabilities as of December 31, 2017 were remeasured from 35.0 percent to 21.0 percent, resulting in $24.5 million of
provisional deferred income tax benefit and a reduction in our effective tax rate of 14.0 percent in 2017. During the year ended
December 31, 2018, we further adjusted our net deferred tax liabilities by $1.9 million due to further interpretations of U.S. Tax
Reform. The remaining difference in our effective tax rate for the years ended December 31, 2018 and 2017, respectively, is due
to the change in certain favorable tax deductions under U.S. Tax Reform, such as the elimination of the domestic manufacturing
deduction and the addition of the foreign-derived intangible income deduction. In addition to the impact of U.S. Tax Reform, the
change in the effective tax rate period over period was also driven by the acquisition of our noncontrolling interest.
The decrease in our effective tax rate from 2016 to 2017 is mainly due to the impact of U.S. Tax Reform. Our U.S. net
deferred tax liabilities as of December 31, 2017 were remeasured from 35.0 percent to 21.0 percent, resulting in $24.5 million of
provisional deferred income tax benefit and a reduction in our effective tax rate of 14.0 percent. The remaining difference in our
effective tax rate for the years ended December 31, 2017 and 2016, respectively, is due to non-deductible transaction costs associated
with the Separation in 2016, acquisition-related charges, restructuring and other (income charges) and the unfavorable results of
legal entities with full valuation allowances. Excluding the impact of U.S. Tax Reform, acquisition-related charges, restructuring
and other (income charges), separation costs and losses from legal entities with full valuation allowances the change in the effective
tax rate period over period was primarily due to a shift in earnings mix as it relates to domestic versus foreign income earned.
103
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
The significant components of deferred tax assets and liabilities are as follows:
In millions
Deferred tax assets:
Accrued restructuring
Employee benefits
Intangibles
Investment in partnership
Net operating losses
Start-up costs
Inventory
Other
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Fixed assets
Inventory
Other
Total deferred tax liabilities
Net deferred tax asset (liability)
December 31,
2018
2017
$
7.7
$
11.4
14.9
17.1
—
8.1
0.8
—
7.4
56.0
(15.5)
40.5
68.3
4.8
1.4
$
$
$
74.5
$
(34.0) $
8.0
3.0
1.8
9.0
0.8
1.2
5.0
40.2
(20.4)
19.8
57.1
—
0.6
57.7
(37.9)
$
$
$
$
$
On December 22, 2017, U.S. Tax Reform was signed into law making significant changes to the U.S. Internal Revenue
Code ("IRC"). Changes include, but are not limited to, a corporate tax rate decrease from 35.0 percent to 21.0 percent effective
for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a
territorial system, and implementation of tax on deemed repatriation of cumulative earnings of foreign subsidiaries. We recognized
the tax effects of U.S. Tax Reform in the year ended December 31, 2017 and recorded a tax benefit of $24.5 million. This benefit
pertains to the re-measurement of our deferred tax liabilities to the 21.0 percent tax rate.
Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of
U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of U.S. Tax Reform. We applied the
guidance of SAB 118 when accounting for the enactment date effects of U.S. Tax Reform in 2017 and throughout 2018. At
December 31, 2018, we have now completed our accounting for all of the enactment date income tax effects of U.S. Tax Reform.
We further reduced our net deferred tax liability by an additional $1.9 million, primarily related to re-measurement of deferred
taxes to the 21.0 percent rate.
U.S. Tax Reform subjects a U.S. shareholder to tax on Global Intangible Low Tax Income ("GILTI") earned by certain
foreign subsidiaries. The FASB Staff Q&A Topic 740, No. 5 "Accounting for Global Intangible Low-Taxed Income," states that
an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to
reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense
only. We have elected to account for GILTI as a current period expense when incurred.
We have deferred tax assets, including net operating loss carryforwards, which are available to offset future taxable
income. A valuation allowance has been provided where management has determined that it is more likely than not that the deferred
tax assets will not be realized.
At December 31, 2018, foreign net operating loss carryforwards totaled $22.5 million. Of this total, $3.5 million will
expire in 3 to 10 years and $19.0 million has no expiration date.
104
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalent
balance at December 31, 2018 included $27.0 million held by our foreign subsidiaries. At December 31, 2018, 2017, and 2016,
no deferred income taxes have been provided for our share of undistributed net earnings of foreign operations due to management’s
intent to reinvest such amounts indefinitely. The determination of the amount of taxes that may be due if earnings are remitted is
not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The
circumstances that would affect the calculations include the source location and amount of the distribution, the underlying tax rate
already paid on the earnings, foreign withholding taxes, the opportunity to use foreign tax credits, and the potential impact of U.S.
Tax Reform. Positive undistributed earnings considered to be indefinitely reinvested totaled less than $1.0 million at December 31,
2018.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
In millions
Balance at beginning of year
Additions for tax positions related to current year
Additions for tax positions related to prior years
Reductions for tax positions related to prior years
Reduction from lapse of statute of limitation
Balance at end of year
December 31,
2018
2017
2016
$
$
0.3
0.2
—
—
(0.2)
0.3
$
$
0.6
—
0.1
—
(0.4)
0.3
$
$
0.7
—
0.1
(0.2)
—
0.6
As of December 31, 2018, 2017, and 2016, $0.3 million, $0.5 million, and $1.0 million, respectively, of unrecognized
tax benefit, including penalties and interest, would, if recognized, impact our effective tax rate. We recognize interest accrued
related to unrecognized tax benefits and penalties as income tax expense. We expect to release approximately $0.2 million in
unrecognized tax benefit in the first quarter of 2019.
Note 19: Commitments and Contingencies
Lease commitments
Capital leases
The capital lease obligations consist of $80.0 million at December 31, 2018 and 2017, respectively, owed to the city of
Wickliffe, Kentucky, associated with Performance Materials' Wickliffe, Kentucky site, which is due at maturity in 2027. The
interest rate on the $80.0 million capital lease obligation is 7.67%. Interest payments are payable semi-annually.
We have a capital lease obligation due in 2031, for certain assets located at our Performance Materials' Waynesboro,
Georgia manufacturing facility. The lease is with the Development Authority of Burke County (“Authority”). The Authority
established the sale-leaseback of these assets by issuing an industrial development revenue bond. The bond was purchased by
Ingevity and the obligations under the capital lease remain with Ingevity. Accordingly, we offset the capital lease obligation and
bond on our consolidated balance sheets. Our DeRidder, Louisiana facility also had certain assets subject to a capital lease under
a similar arrangement at our Waynesboro, Georgia manufacturing facility. During the fourth quarter of 2017 the capital lease
associated with the assets at our DeRidder, Louisiana facility subject to the lease was terminated. Thus, as of December 31, 2017,
the assets are legally owned by Ingevity and no longer subject to a lease. The leased assets are presented within "Property, plant,
and equipment, net" on the consolidated balance sheets, see Note 8 for more information.
Operating Leases
We lease a variety of assets for use in our operations that are classified as operating leases. Our operating leases principally
relate to leases for administrative offices, manufacturing equipment and buildings, warehousing and storage facilities, vehicles
and rail cars. Certain leases provide for escalation of the lease payments as maintenance costs and taxes increase. Rental expense
is recognized on a straight-line basis over the minimum lease term. Rental expense pursuant to operating leases was $18.4 million,
$16.8 million and $17.4 million for the years ended December 31, 2018, 2017, and 2016, respectively.
105
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Minimum rental payments pursuant to agreements as of December 31, 2018, under operating leases that have non-
cancelable lease terms in excess of 12 months and under capital leases are as follows:
In millions
2019
2020
2021
2022
2023
Later years
Minimum lease payments
Less: amount representing interest
Capital lease obligations
Operating leases (1)
21.9
$
$
17.2
13.3
9.7
6.0
5.9
74.0
$
$
$
Capital leases (1)
6.1
6.1
6.1
6.1
6.1
101.5
132.0
52.0
80.0
_______________
(1)
Capital and operating lease obligations are presented in accordance with ASC 840. Effective January 1, 2019, we will adopt ASC 842.
See Note 4 for information on the adoption and the impact to our Consolidated Financial Statements.
Legal Proceedings
We are, from time to time, involved in routine litigation incidental to our operations. None of the litigation in which we
are currently involved, individually or in the aggregate, is material to our consolidated financial condition, liquidity or results of
operations nor are we aware of any material pending or contemplated proceedings.
106
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 20: Segment Information
Ingevity’s operating segments are (i) Performance Materials and (ii) Performance Chemicals, a description of both
operating segments is included in Note 1.
In millions
Net sales
Performance Materials
Performance Chemicals
Total net sales (1)
Segment operating profit (2)
Performance Materials
Performance Chemicals
Total segment operating profit (1)
Separation costs (3)
Restructuring and other income (charges), net (4)
Acquisition and other related costs(5)
Pension and postretirement settlement and curtailment income (charges) (6)
Interest expense
Interest income
(Provision) benefit for income taxes
Net (income) loss attributable to noncontrolling interests
Net income (loss) attributable to Ingevity stockholders
$
Years Ended December 31,
2018
2017
2016
$
400.4
$
349.3
$
733.2
1,133.6
147.2
116.3
263.5
—
0.5
(12.2)
(0.2)
(33.2)
3.4
(40.0)
(12.7)
169.1
$
623.1
972.4
122.0
80.3
202.3
(0.9)
(3.7)
(7.1)
—
(18.1)
2.3
(29.6)
(18.7)
126.5
$
301.0
607.3
908.3
106.9
56.7
163.6
(17.5)
(41.2)
—
—
(19.3)
1.4
(42.6)
(9.2)
35.2
_______________
(1)
(2)
Relates to external customers only, all intersegment sales and related profit have been eliminated in consolidation.
Segment operating profit is defined as segment revenue less segment operating expenses (segment operating expenses consist of costs
of sales, selling, general and administrative expenses and other (income) expense, net). We have excluded the following items from
segment operating profit: interest expense, net associated with corporate debt facilities, income taxes, gains (or losses) on divestitures
of businesses, restructuring and other (income) charges, separation costs, acquisition costs, pension and postretirement settlement and
curtailment income (charges), and net income (loss) attributable to noncontrolling interest.
See Note 15 for more information on separation costs.
Information about how restructuring and other (income) charges relate to our businesses at the segment level is discussed in Note 16.
These charges are associated with the acquisition and integration of the Pine Chemical Business and the acquisition of the Caprolactone
Business. See below for more detail on the charges incurred and Note 17 within these Consolidated Financial Statements for more
information.
(3)
(4)
(5)
In millions
Legal and professional service fees (1)
Inventory fair value step-up amortization (2)
Purchase price hedge adjustment (1)
Years Ended December 31,
2018
2017
2016
$
6.9
1.4
3.9
$
7.1
$
—
—
Acquisition and other related costs $
12.2
$
7.1
$
_______________
(1)
(2)
Included within "Acquisition and other related costs" on the consolidated statement of operations.
Included within "Cost of sales" on the consolidated statement of operations.
—
—
—
—
107
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
(6)
Our pension and postretirement settlement and curtailment (income) charges are related to the acceleration of prior service costs, as a
result of a reduction in the number of participants within the Union Hourly defined benefit pension plan during 2018. These are excluded
from our segment results because we consider these costs to be outside our operational performance. We continue to include the service
cost, amortization of prior service cost, interest costs, expected return on plan assets, and amortized actual gains and losses in our
segment operating profit.
Net sales to external customers for each of our product line is presented below.
In millions
Performance Materials Net sales
Automotive Technologies product line
Process Purification product line
Total Performance Materials Net sales (1)
Years Ended December 31,
2018
2017
2016
$
$
362.0
38.4
400.4
$
$
312.5
36.8
349.3
$
$
263.5
37.5
301.0
_______________
(1)
Sales are assigned to geographic areas based on location to which product was shipped to a third-party. Relates to external customers
only, all intersegment sales and related profit have been eliminated in consolidation.
In millions
Performance Chemicals Net sales
Pavement Technologies product line
Oilfield Technologies product line
Industrial Specialties product line
Total Performance Chemicals Net sales (1)
Years Ended December 31,
2018
2017
2016
$
$
178.5
$
163.0
$
114.2
440.5
77.8
382.3
733.2
$
623.1
$
148.8
58.5
400.0
607.3
_______________
(1)
Sales are assigned to geographic areas based on location to which product was shipped to a third-party. Relates to external customers
only, all intersegment sales and related profit have been eliminated in consolidation.
In millions
Performance Materials
Performance Chemicals
Total
Property, plant, and equipment, net
In millions
North America
Asia Pacific
Europe, Middle East and Africa
South America
Property, plant, and equipment, net
Depreciation and amortization
Capital expenditures
Years Ended December 31,
Years Ended December 31,
2018
2017
2016
2018
2017
2016
$
$
22.2
34.8
57.0
$
$
19.8
20.6
40.4
$
$
16.4
22.4
38.8
$
$
65.4
28.5
93.9
$
$
36.9
15.7
52.6
$
$
39.6
17.1
56.7
December 31,
2018
2017
444.4
$
78.7
0.6
0.1
358.4
79.3
0.7
0.1
523.8
$
438.5
$
$
108
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Total assets
In millions
Performance Materials
Performance Chemicals
Total segment assets(1)
Corporate and other
Total assets
December 31,
2018
2017
$
$
$
547.8
755.7
1,303.5
11.7
1,315.2
$
$
$
438.9
479.8
918.7
10.9
929.6
_______________
(1)
Segment assets exclude assets not specifically managed as part of one specific segment herein referred to as "Corporate and other."
Note 21: 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. The weighted average number of common shares outstanding for basic and
diluted earnings (loss) per share for the year ended December 31, 2016 was based on the weighted average number of common
shares outstanding for the period beginning after the Distribution Date. On May 15, 2016, the Distribution Date, each holder of
WestRock's common stock received one share of Ingevity's common stock for every six shares of WestRock's common stock held
on the Record Date. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted
average number of shares of common stock and potentially dilutive common stock outstanding for the period. The calculation of
diluted net income per share excludes all anti-dilutive common shares.
109
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
In millions (except share and per share data)
Net income (loss) attributable to Ingevity stockholders
Basic and Diluted earnings (loss) per share (1)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Shares (2)
Years Ended December 31,
2018
2017
2016
169.1
$
126.5
$
35.2
4.02
3.97
$
$
3.00
2.97
$
$
0.83
0.83
$
$
$
Weighted average number of shares of common stock outstanding - Basic
42,037
42,130
42,108
Weighted average additional shares assuming conversion of potential common
shares
Shares - diluted basis
564
42,601
399
42,529
163
42,271
_______________
(1)
Diluted earnings (loss) per share is calculated using net income (loss) available to common stockholders divided by diluted
weighted-average shares of common shares outstanding during each period, which includes the dilutive effect of outstanding equity
awards. Basic and diluted earnings (loss) per share for the year ended December 31, 2016 is calculated using the weighted average
number of common shares outstanding for the period beginning after the Distribution Date.
Shares are presented in thousands.
(2)
The following average number of potential common shares were antidilutive and, therefore, were not included in the diluted
earnings per share calculation:
In thousands
Average number of potential common shares - antidilutive
Years Ended December 31,
2018
2017
2016
84
79
4
110
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 22: Supplemental Information
The following tables include details of prepaid and other current assets, other assets, accrued expenses and other liabilities
as presented on the consolidated balance sheets, as well as other (income) expense, net on the consolidated statement of operations:
Prepaid and other current assets:
In millions
Income and value added tax receivables
Prepaid freight and supply agreements
Prepaid insurance
Non-trade receivables
Advances to suppliers
Equity securities, foreign currency, commodity hedging (Note 6)
Contract asset (Note 5)
Other
Other assets:
In millions
Deferred financing charges
Capitalized software, net (Note 3)
Land-use rights
Planned major maintenance activities (Note 3)
Deferred compensation plan assets
Other
Accrued expenses:
In millions
Accrued interest
Accrued taxes
Accrued freight
Accrued rebates
Restructuring reserves (Note 16)
Separation-related reimbursement awards (Notes 6)
Accrued royalties and commissions
Foreign currency hedging (Note 6)
Other
111
December 31,
2018
2017
$
15.0
$
1.1
1.7
3.4
1.5
0.7
5.1
6.4
8.2
0.8
1.3
2.4
0.8
1.8
—
5.5
$
$
$
$
34.9
$
20.8
December 31,
2018
2017
$
3.1
9.5
5.6
3.2
4.4
12.5
38.3
$
December 31,
2018
2017
$
8.5
3.0
5.1
6.4
—
0.1
1.8
3.9
7.9
2.7
12.5
6.0
2.1
—
7.1
30.4
3.1
1.7
1.9
4.9
0.2
0.9
1.7
—
5.6
$
36.7
$
20.0
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Other liabilities:
In millions
Deferred compensation arrangements (Note 6)
Pension & OPEB liabilities (Note 14)
Unrecognized tax benefits (Note 18)
Other
Other (income) expense, net:
In millions
Foreign currency translation (gain)/loss
Royalty (income)/expense
Other (gain)/loss
December 31,
2018
2017
$
$
$
4.6
7.5
0.3
2.7
15.1
$
Years Ended December 31,
2018
2017
2016
$
$
2.0
(0.8)
(0.2)
1.0
$
$
$
1.2
(0.7)
—
0.5
$
2.0
7.0
0.3
3.9
13.2
(2.9)
(1.0)
0.7
(3.2)
Note 23: Quarterly Financial Information (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2018, and 2017.
In millions, except earnings per share amounts
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2018
2017
Net sales
Gross profit
Income (loss) before taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interests
Net income (loss) attributable to Ingevity
stockholders
Basic earnings (loss) per common share attributable to
Ingevity stockholders
Diluted earnings (loss) per common share attributable
to Ingevity stockholders (1)
Weighted average shares outstanding
$ 235.2
$ 308.6
$ 311.2
$ 278.6
$ 218.5
$ 260.3
$ 264.1
$ 229.5
85.1
45.5
35.8
115.5
118.6
64.6
52.2
68.1
51.7
97.6
43.6
42.1
70.7
34.0
23.0
89.8
53.0
35.8
93.2
55.1
38.4
75.3
32.7
48.0
5.0
5.5
2.2
—
4.0
3.7
4.6
6.4
$ 30.8
$ 46.7
$ 49.5
$ 42.1
$ 19.0
$ 32.1
$ 33.8
$ 41.6
$ 0.73
$ 1.11
$ 1.18
$ 1.01
$ 0.45
$ 0.76
$ 0.80
$ 0.98
$ 0.72
$ 1.10
$ 1.16
$ 0.99
$ 0.45
$ 0.76
$ 0.79
$ 0.97
Basic
Diluted
42.1
42.6
42.1
42.6
42.0
42.7
41.9
42.5
42.1
42.4
42.1
42.4
42.1
42.5
42.1
42.6
_______________
(1)
Basic and diluted earnings (loss) per share are calculated using the weighted average number of common shares outstanding for the
period. The sum of quarterly earnings per common share may differ from the full-year amount.
112
Ingevity Corporation
Notes to the Consolidated Financial Statements
December 31, 2018
Note 24: Subsequent Event
Perstorp AB's Caprolactone Business
On December 10, 2018, we entered into an agreement for the Sale and Purchase of Perstorp UK Ltd. (the “Caprolactone
Agreement”) with Perstorp Holding AB, a company registered in Sweden, that develops, manufactures, and sells specialty chemicals
(the “Seller”). Pursuant to the Caprolactone Agreement, we agreed to purchase the shares held by the Seller in Perstorp UK Ltd.,
including the Seller’s entire caprolactone business, in exchange for €570.9 million, less assumed debt and other miscellaneous
transaction costs, as further defined in the Caprolactone Agreement (the “Purchase Price”), plus interest accrued on the Purchase
Price (herein referred to as the “Caprolactone Acquisition”).
On February 13, 2019, pursuant to the terms and conditions set forth in the Caprolactone Agreement, we completed the
Caprolactone Acquisition for an aggregate preliminary purchase price of €578.9 million ($652.5 million) excluding net debt to be
assumed of €100.4 million ($113.1 million). At closing, the assumed net debt was settled with an affiliate of the counterparty,
Perstorp Holding AB. Beginning in the first quarter of 2019, the Caprolactone Acquisition will be integrated into our Performance
Chemicals segment and included within our Engineered Polymers product line. Our revolving credit facility was utilized as the
primary source of funds, along with available cash on hand, to close our Caprolactone Acquisition. Our available capacity under
our revolving credit facility immediately following this drawdown was $113.1 million.
Caprolactone Acquisition is considered a business under business combinations accounting guidance, and therefore we
will apply acquisition accounting. Acquisition accounting requires, among other things, that assets and liabilities assumed be
recognized at their fair values as of the acquisition date. The net assets of the Caprolactone Acquisition will be recorded at the
estimated fair values using primarily Level 2 and Level 3 inputs (see Note 17 for an explanation of Level 2 and 3 inputs).
We have performed a preliminary valuation of the fair value of the acquired assets and liabilities assumed. Based on this
preliminary allocation of the purchase price, we believe the primary assets acquired and their estimated values are; goodwill of
approximately $310 million and tangible and intangible assets of approximately $220 million. This preliminary assessment of fair
value is based on draft reports from our valuation experts and is subject to change based on its preliminary nature. Once our detailed
preliminary purchase price valuation is completed, we will include the required additional details in our future filings. We have
not completed the detailed analysis to present the pro forma financial information for the combined companies. Thus, the pro
forma financial information will be included in our future filings as well.
113
INGEVITY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR YEARS ENDED DECEMBER 31, 2018, 2017, and 2016
(in millions)
December 31, 2018
Reserve for doubtful accounts (2)
Deferred tax valuation allowance
December 31, 2017
Reserve for doubtful accounts (2)
Deferred tax valuation allowance
December 31, 2016
Reserve for doubtful accounts (2)
Deferred tax valuation allowance
Provision/ (Benefit)
Balance,
Beginning of
Year
Charged to
Costs and
Expenses
Charged to Other
Comprehensive
Income
Write-offs (1)
Balance, End
of Year
$
$
$
$
$
$
0.4
20.4
0.3
18.8
0.1
6.6
—
(2.6)
0.1
1.7
0.2
13.2
—
(2.3)
—
(0.1)
—
(1.0)
— $
— $
— $
— $
— $
— $
0.4
15.5
0.4
20.4
0.3
18.8
_______________
(1)
(2)
Write-offs are net of recoveries.
Reserve for doubtful accounts is included within Accounts receivable, net on the consolidated balance sheet.
114
ITEM 9.
DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures designed to provide reasonable assurance that
information required to be disclosed in the Company's reports filed or submitted under the Securities Exchange Act of 1934, as
amended ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC. These controls and procedures also provide reasonable assurance that information required to be disclosed in
such reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required
disclosures.
As of December 31, 2018, the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), together
with management, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to
Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure
controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
As a result of our acquisition of the Pine Chemical Business on March 8, 2018, Ingevity's internal control over financial
reporting, subsequent to the date of acquisition, includes certain additional internal controls relating to Pine Chemicals Business.
Except as described above, there have been no changes in the Company's internal control over financial reporting that occurred
during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Management's Report on Internal Control of Financial Reporting
Refer to Management’s Report on Internal Control Over Financial Reporting, which is included within Part II. Item 8 of
this Form 10-K and is incorporated by reference to this Item 9A.
Report of Independent Registered Public Accounting Firm
Refer to the Report of Independent Registered Public Accounting Firm, which is included within Part II. Item 8 of this
Form 10-K and is incorporated by reference to this Item 9A.
ITEM 9B. OTHER INFORMATION
None.
115
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning directors, appearing under the caption “Proposal No. 1 - Election of Directors” in our Proxy
Statement to be filed with the SEC in connection with the Annual Meeting of Stockholders scheduled to be held on April 25, 2019
(the “Proxy Statement”), information concerning executive officers, appearing under the caption “Executive Officers of the
Registrant” in Part I of this Form 10-K, information concerning the Audit Committee, appearing under the caption “Corporate
Governance - Committees of our Board - Audit Committee” in the Proxy Statement, information concerning the Code of Ethics,
appearing under the caption “Corporate Governance - Codes of Business Conduct and Ethics” in the Proxy Statement, and
information about compliance with Section 16(a) of the Exchange Act appearing under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement, is incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement in the section titled “Compensation of Executive Officers” with respect
to executive compensation, in the section titled “Director Compensation,” in the section titled "Compensation Committee Report"
and in the section titled “Corporate Governance—Compensation Committee Interlocks and Insider Participation” is incorporated
herein by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMENT AND RELATED
STOCKHOLDER MATTERS
The information contained in the section titled “Common Stock Ownership of Executive Officers and Directors” in the
Proxy Statement, with respect to security ownership of certain beneficial owners and management, is incorporated herein by
reference in response to this Item 12.
Equity Compensation Plan Information
The table below sets forth information with respect to compensation plans under which equity securities of Ingevity are
authorized for issuance as of December 31, 2018. All of the equity compensation plans pursuant to which we are currently granting
equity awards have been approved by stockholders.
Number of Securities to
be issued upon exercise of
outstanding options and
restricted stock awards
(A) (2)
Weighted-
average
exercise price of
outstanding
options and
restricted stock
awards
(B) (3)
Number of Securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (A))
(C) (4)
757,681
$
46.98
3,258,944
Plan Category
Equity Compensation Plans approved by
stockholders (1)
(1)
(2)
Plans approved by WestRock as sole stockholder prior to the Separation while the Company was a wholly owned subsidiary.
Includes 403,193 stock options, 105,284 restricted stock units (RSUs) and 239,012 performance-based restricted stock units (PSUs)
granted to employees and 10,192 RSUs held by directors. The number of shares to be issued for performance based stock unit awards
has been calculated based on the assumption that the maximum performance level applicable to these awards will be achieved. The
target payout of the performance based vesting restricted stock unit awards is 238,389 shares.
Represents the weighted-average exercise price of the outstanding stock options only. The outstanding RSUs and PSUs are not included
in this calculation.
Includes 206,255 shares available for future issuance under the 2018 Ingevity Corporation Employee Stock Purchase Plan.
(3)
(4)
116
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information contained in the Proxy Statement concerning our independent directors under the caption “Corporate
Governance - Director Independence” and the information contained in the Proxy Statement concerning related party transactions
and our review, approval or ratification thereof appearing under the caption “Related Party Transactions” is incorporated herein
by reference in response to this Item 13.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in the Proxy Statement in the section titled “Proposal No. 3 - To Ratify Appointment of
Independent Registered Public Accounting Firm” is incorporated herein by reference in response to this Item 14.
117
ITEM 15. EXHIBITS
(a) Documents filed with this Report
PART IV
1. Consolidated financial statements of Ingevity Corporation and its subsidiaries are incorporated under Item 8 of
this Form 10-K.
2. The following supplementary financial information is filed in this Form 10-K:
Financial Statements Schedule II – Valuation and qualifying accounts and reserves for the years ended
December 31, 2018, 2017, and 2016
Page
114
The schedules not included herein are omitted because they are not applicable or the required information is presented
in the financial statements or related notes.
3. Exhibits: See attached Index of Exhibits
(b) Exhibits
Exhibit No.
2.1*
2.2*
2.3*
2.4*
3.1*
3.2*
4.1*
Separation and Distribution Agreement between Ingevity Corporation and WestRock Company (incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, as filed with the U.S. Securities and
Exchange Commission on May 16, 2016).
Exhibit Description
Asset Purchase Agreement, by and among Georgia-Pacific Chemicals, LLC, Georgia-Pacific LLC, Ingevity
Arkansas, LLC, and Ingevity Corporation, dated as of August 22, 2017 (incorporated by reference to Exhibit
2.1 to Form 8-K (File No. 001-37586) filed August 22, 2017).
First Amendment to Asset Purchase Agreement among Ingevity Corporation, Ingevity Arkansas, LLC, Georgia-
Pacific Chemicals LLC and Georgia-Pacific LLC, dated as of March 8, 2018 (incorporated by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K, as filed with the U.S. Securities and Exchange
Commission on March 8, 2018).
Agreement for the Sale and Purchase of Perstorp UK Ltd., dated as of December 10, 2018, by and amount
Perstorp AB and Ingevity Corporation (incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission on December 10, 2018).
Ingevity Corporation Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit
3.1 to the Company's Current Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission
on May 16, 2016).
Ingevity Corporation Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission on May
16, 2016).
Indenture, dated as of January 24, 2018, among Ingevity Corporation, the Guarantors, and U.S. Bank National
Association, a national banking association (incorporated by reference to Exhibit 4.1 to Form 8-K filed January
24, 2018).
10.1*
Tax Matters Agreement between Ingevity Corporation and WestRock Company (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K, as filed with the U.S. Securities and Exchange
Commission on May 16, 2016).
118
Exhibit No.
10.2*
Transition Services Agreement between Ingevity Corporation and WestRock Company (incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, as filed with the U.S. Securities and
Exchange Commission on May 16, 2016).
Exhibit Description
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*+
10.13*+
10.14*+
Employee Matters Agreement between Ingevity Corporation and WestRock Company (incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, as filed with the U.S. Securities and
Exchange Commission on May 16, 2016).
Covington Plant Services Agreement between Ingevity Virginia Corporation and WestRock Virginia, LLC
(incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, as filed with the U.S.
Securities and Exchange Commission on May 11, 2016).
Covington Plant Ground Lease Agreement between Ingevity Virginia Corporation and WestRock Virginia, LLC
(incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, as filed with the U.S.
Securities and Exchange Commission on May 11, 2016).
Crude Tall Oil and Black Liquor Soap Skimmings Agreement by and between Ingevity Corporation, WestRock
Shared Services, LLC and WestRock MWV, LLC (incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission on May 16, 2016).
Amendment No. 1 dated March 1, 2017, to Crude Tall Oil and Black Liquor Soap Skimming Agreement by and
between WestRock Shared Services, LLC, WestRock MWV, LLC, on behalf of the affiliates of WestRock
Company, and Ingevity Corporation. (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly
Report on Form 10-Q, as filed with the U.S. Securities and Exchange Commission on May 4, 2017).
Credit Agreement, dated as of March 7, 2016, among Ingevity Corporation, as U.S. borrower, the lenders from
time to time party thereto and Wells Fargo Bank, N.A., as administrative agent (incorporated by reference to
Exhibit 10.8 to the Company's Amendment No. 2 to Form 10, as filed with the U.S. Securities and Exchange
Commission on March 7, 2016).
Incremental Facility Agreement and Amendment No. 1, by and among Ingevity Corporation, Ingevity Holdings
SPRL, the other loan parties party thereto, the lenders party thereto and Wells Fargo Bank, N.A., as
administrative agent, dated as of August 21, 2017 (incorporated by reference to Exhibit 10.1 to Form 8-K (File
No. 001-37586) filed August 22, 2017).
Incremental Facility Agreement 2nd Amendment No. 2, by and among Ingevity Corporation, Ingevity Holdings
SPRL, the other loan parties party thereto, the lenders party thereto and Wells Fargo Bank, N.A., as
administrative agent, dated as of August 7, 2018 (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission on August 9, 2018).
Intellectual Property Agreement by and between WestRock Company and Ingevity Corporation (incorporated
by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K, as filed with the U.S. Securities
and Exchange Commission on May 16, 2016).
Employment Letter, dated September 18, 2015, between WestRock Company, Ingevity Corporation and John
Fortson (incorporated by reference to Exhibit 10.10 to the Company's Amendment No. 3 to Form 10, as filed
with the U.S. Securities and Exchange Commission on April 4, 2016).
Employment Letter, dated October 2, 2015, between WestRock Company, Ingevity Corporation and Katherine
P. Burgeson (incorporated by reference to Exhibit 10.11 to the Company's Amendment No. 3 to Form 10, as
filed with the U.S. Securities and Exchange Commission on April 4, 2016).
Employment Letter, dated July 24, 2015, between WestRock Company, Ingevity Corporation and Michael
Wilson (incorporated by reference to Exhibit 10.12 to the Company's Amendment No. 3 to Form 10, as filed
with the U.S. Securities and Exchange Commission on April 4, 2016).
119
Exhibit No.
10.15*+
10.16*
10.17a*+
10.17b*+
10.17c*+
10.17d*+
10.17e*+
10.17f*+
Exhibit Description
Ingevity Corporation 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K, as filed with the U.S. Securities and Exchange Commission on May
16, 2016).
Trust Agreement, between Ingevity Corporation, The Bank of New York Mellon Trust Company, N.A. and
WestRock Company (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K,
as filed with the U.S. Securities and Exchange Commission on May 11, 2016).
Form of Option Award Term under the Ingevity Corporation 2016 Omnibus Incentive Plan (incorporated by
reference to Exhibit 10.13a to the company’s Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2016).
Form of Performance-based Restricted Stock Unit Terms under the Ingevity Corporation 2016 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.13b to the company’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2016).
Form of Replacement Cash Awards under the Ingevity Corporation 2016 Omnibus Incentive Plan (incorporated
by reference to Exhibit 10.13c to the company’s Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2016).
Form of Restricted Stock Unit Terms (three year vesting) under the Ingevity Corporation 2016 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.13d to the company’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2016).
Form of Restricted Stock Unit Terms (cliff vesting) under the Ingevity Corporation 2016 Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.13e to the company’s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2016).
Form of Restricted Stock Unit Terms (D. Michael Wilson) under the Ingevity Corporation 2016 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.13f to the company’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2016).
10.17g*+ Non-Employee Director Terms and Conditions for Restricted Stock Units under the Ingevity Corporation 2016
Omnibus Incentive Plan (incorporated by reference to Exhibit 10.14g to the company’s Annual Report on Form
10-K for the year ended December 31, 2016).
10.17h*+ Non-Employee Director Terms and Conditions for Deferred Stock Units in lieu of Restricted Stock Units under
the Ingevity Corporation 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.14h to the
company’s Annual Report on Form 10-K for the year ended December 31, 2016).
10.17i*+
10.18*+
10.19*+
10.20*+
Non-Employee Director Terms and Conditions for Deferred Stock Units in lieu of Annual Cash Retainer under
the Ingevity Corporation 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.14i to the
company’s Annual Report on Form 10-K for the year ended December 31, 2016).
Ingevity Corporation Deferred Compensation Plan, effective January 1, 2016. (incorporated by reference to
Exhibit 10.15 to the company’s Annual Report on Form 10-K for the year ended December 31, 2016).
Ingevity Corporation Non-Employee Director Deferred Compensation Plan (incorporated by reference to
Exhibit 10.16 to the company’s Annual Report on Form 10-K for the year ended December 31, 2016).
Ingevity Corporation Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.17
to the company’s Annual Report on Form 10-K for the year ended December 31, 2016).
120
Exhibit No.
10.21*+
Change in control and severance agreement between Ingevity Corporation and D. Michael Wilson dated March
1, 2017 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, as filed with
the U.S. Securities and Exchange Commission on March 7, 2017).
Exhibit Description
10.22*+
10.23*+
10.24*+
10.25*
10.26*
21.1
23.1
31.1
31.2
32.1
32.2
Change in control and severance agreement between Ingevity Corporation and John C. Fortson dated March 1,
2017 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, as filed with
the U.S. Securities and Exchange Commission on March 7, 2017).
Change in control and severance agreement between Ingevity Corporation and Katherine P. Burgeson dated
March 1, 2017 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, as
filed with the U.S. Securities and Exchange Commission on March 7, 2017).
Change in control and severance agreement between Ingevity Corporation and S. Edward Woodcock, Jr. dated
March 1, 2017 (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K, as
filed with the U.S. Securities and Exchange Commission on March 7, 2017).
2017 Ingevity Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the
Company's Form S-8, as filed with the U.S. Securities and Exchange Commission on May 23, 2017).
Crude Tall Oil Supply Agreement between Ingevity Corporation and Georgia-Pacific LLC, dated as of March 8,
2018 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, as filed with
the U.S. Securities and Exchange Commission on March 8, 2018).
Ingevity Corporation List of Significant Subsidiaries
Consent of PricewaterhouseCoopers LLP
Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Financial Officer.
Section 1350 Certification of the company’s Principal Executive Officer. The information contained in this
Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference
in any registration statement filed by the registrant under the Securities Act of 1933, as amended.
Section 1350 Certification of the company’s Principal Financial Officer. The information contained in this
Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference
in any registration statement filed by the registrant under the Securities Act of 1933, as amended.
101
Interactive Data File
* Incorporated by reference
+ Management contract or compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
121
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
INGEVITY CORPORATION
(Registrant)
By:
/S/ JOHN C. FORTSON
John C. Fortson
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Duly Authorized Officer)
Date: February 20, 2019
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ D. Michael Wilson
D. Michael Wilson
/s/ John C. Fortson
John C. Fortson
/s/ Phillip J. Platt
Phillip J. Platt
/s/ Richard B. Kelson
Richard B. Kelson
/s/ Jean S. Blackwell
Jean S. Blackwell
/s/ Luis Fernandez-Moreno
Luis Fernandez-Moreno
/s/ J. Michael Fitzpatrick
J. Michael Fitzpatrick
/s/ Frederick J. Lynch
Frederick J. Lynch
/s/ Daniel F. Sansone
Daniel F. Sansone
Title
President,
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Chief Accounting Officer and
Corporate Controller
(Principal Accounting Officer)
Date
February 20, 2019
February 20, 2019
February 20, 2019
Chairman of the Board
February 20, 2019
Director
February 20, 2019
Director
February 20, 2019
Director
February 20, 2019
Director
February 20, 2019
Director
February 20, 2019
122
Exhibit 21.1
INGEVITY CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
Ingevity Corporation
Ingevity South Carolina, LLC
Ingevity Virginia Corporation
Ingevity Arkansas, LLC
Ingevity Services, Inc.
Ingevity Georgia, LLC
Ingevity Mexico S.A. de C.V.
Ingevity Holdings Sprl
Ingevity Quimica Ltda
Ingevity India Private Limited
Ingevity Japan, GK
Sustain Trading (Shanghai) Co., Ltd.
Ingevity Performance Materials (Zhuhai) Co., Ltd.
Ingevity Performance Materials (Suzhou) Co., Ltd.
Ingevity Hong Kong Limited
Ingevity Holding Co., Ltd.
Ingevity Performance Materials (Changshu) Co., Ltd.
Jurisdiction of Organization
Delaware, United States of America
Delaware, United States of America
Virginia, United States of America
Delaware, United States of America
Delaware, United States of America
Delaware, United States of America
Mexico
Belgium
Brazil
India
Japan
China
China
China
Hong Kong
China
China
123 Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-211430 and
333-218185) of Ingevity Corporation of our report dated February 20, 2019 relating to the financial statements, financial
statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Charlotte, NC
February 20, 2019
124 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 31.1
I, D. Michael Wilson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Ingevity Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 20, 2019
By:
/S/ D. MICHAEL WILSON
D. Michael Wilson
President, Chief Executive Officer and Director
125 CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 31.2
I, John C. Fortson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Ingevity Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 20, 2019
By:
/S/ JOHN C. FORTSON
John C. Fortson
Executive Vice President, Chief Financial Officer and Treasurer
126 Exhibit 32.1
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Ingevity Corporation (the “Company”) on Form 10-K for the period ending December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), D. Michael Wilson, as President,
Chief Executive Officer and Director of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: February 20, 2019
/S/ D. MICHAEL WILSON
D. Michael Wilson
President, Chief Executive Officer and Director
127 Exhibit 32.2
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Ingevity Corporation (the “Company”) on Form 10-K for the period ending December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John C. Fortson, as Executive Vice
President, Chief Financial Officer and Treasurer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: February 20, 2019
/S/ JOHN C. FORTSON
John C. Fortson
Executive Vice President, Chief Financial Officer and Treasurer
128 Non-GAAP Financial Measures Reconciliation
Ingevity has presented certain financial measures, defined below, which have not been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) and has provided a reconciliation to the most directly comparable financial measure
calculated in accordance with GAAP. These financial measures are not meant to be considered in isolation or as a substitute for
the most directly comparable financial measure calculated in accordance with GAAP. The company believes these non-GAAP
measures provide investors, potential investors, securities analysts and others with useful information to evaluate the performance
of the business, because such measures, when viewed together with our financial results computed in accordance with GAAP,
provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future
results.
Ingevity also uses the above financial measures as the primary measures of profitability used by managers of the business and its
segments. In addition, Ingevity believes Adjusted EBITDA, Adjusted EBITDA Margin and Segment EBITDA are useful measures
because they exclude the effects of financing and investment activities as well as non-operating activities. These non-GAAP
financial measures are 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. Reconciliations of these non-GAAP financial measures are set forth within the following pages.
Adjusted earnings (loss) per share is defined as diluted earnings (loss) per common share attributable to Ingevity stockholders
plus restructuring and other (income) charges, net per share, separation costs per share, acquisition and other related costs per
share, pension and postretirement settlement and curtailment (income) charges per share and the income tax expense (benefit) per
share on those items, less the per share tax benefit from U.S. Tax Reform.
In millions, except per share amounts (unaudited)
Reconciliation Net Income (Loss) (GAAP) to Adjusted Earnings (Loss) (Non-GAAP)
2017
2016
Net income (loss)
$
44.4
$
145.2
$
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Ingevity stockholders (GAAP)
Restructuring and other (income) charges, net
Separation costs
Acquisition and other related costs
Pension and postretirement settlement and curtailment (income) charges
Tax effect on items above
Tax impact from U.S. Tax Reform
Adjusted earnings (loss) (Non-GAAP)
Diluted earnings (loss) per common share (GAAP)
Restructuring and other (income) charges, net
Separation costs
Acquisition and other related costs
Pension and postretirement settlement and curtailment charges (income)
Tax effect on items above
Tax impact from U.S. Tax Reform
9.2
35.2
41.2
17.5
—
—
(5.9)
—
88.0
0.83
0.98
0.41
—
—
(0.14)
—
$
$
18.7
126.5
3.7
0.9
7.1
—
(3.6)
(24.5)
110.1
2.97
0.09
0.02
0.17
—
(0.09)
(0.58)
$
$
$
$
Diluted adjusted earnings (loss) per share (Non-GAAP)
$
2.08
$
2.58
$
129
2018
181.8
12.7
169.1
(0.5)
—
12.2
0.2
(3.0)
(1.9)
176.1
3.97
(0.01)
—
0.28
0.01
(0.07)
(0.05)
4.13
Adjusted EBITDA is defined as net income (loss) plus provision for income taxes, interest expense, net, depreciation and
amortization, restructuring and other (income) charges, separation costs and acquisition and other related costs, pension and
postretirement settlement and curtailment (income) charges. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided
by Net sales. Segment EBITDA is defined as segment operating profit plus depreciation and amortization. The sum of both
Segment EBITDA numbers equals Adjusted EBITDA.
Reconciliation Net Income (Loss) (GAAP) to Adjusted EBITDA (Non-GAAP)
In millions (unaudited)
Net income (loss) (GAAP)
Provision for income taxes
Interest expense
Interest income
Depreciation and amortization
Separation costs
Restructuring and other (income) charges, net
Acquisition and other related costs
Pension and postretirement settlement and curtailment charges (income)
Adjusted EBITDA (Non-GAAP)
Performance Chemicals Segment EBITDA
Performance Materials Segment EBITDA
Net sales
Net income (loss) margin
Adjusted EBITDA Margin (Non-GAAP)
2016
2017
2018
$
145.2
$
181.8
44.4
42.6
19.3
(1.4)
38.8
17.5
41.2
—
$
$
$
$
29.6
18.1
(2.3)
40.4
0.9
3.7
7.1
40.0
33.2
(3.4)
57.0
—
(0.5)
12.2
0.2
— $
— $
202.4
79.1
123.3
$
$
242.7
100.9
141.8
$
$
320.5
151.1
169.4
$
908.3
$
972.4
$ 1,133.6
4.9%
22.3%
14.9%
25.0%
16.0%
28.3%
Calculation of Net Debt Ratio (Non-GAAP)
In millions (unaudited)
Short-term debt
Current maturities of long-term debt
Long-term debt including capital lease obligations
Cash and cash equivalents
Restricted investment
Net Debt
Adjusted EBITDA
Net Debt Ratio (Net Debt/Adjusted EBITDA) (Non-GAAP)
$
$
$
2018
—
11.2
747.7
(77.5)
(71.2)
610.2
320.5
1.90x
130
Board of
Directors
(standing, left to right)
•Diane Gulyas, former President,
DuPont Performance Polymers at E.I.
du Pont de Nemours and Company;
Michael Wilson, President and CEO
at Ingevity; •••Jean Blackwell,
former Exec. Vice President and
CFO, Cummins Inc.; •••Rick Kelson,
Chairman of the Board at Ingevity
and President and CEO at ServCo
LLC; ••• Mike Fitzpatrick, Exec.
Advisor Partner at Wind Point
Partners, Inc.; •• Dan Sansone,
former Exec. Vice President, Strategy
at Vulcan Materials Company;
•Karen Narwold, Executive Vice
President at Albemarle Corporation;
(seated, left to right)
•••Fred Lynch, CEO and
President at Masonite International
Corporation;
••Luis Fernandez-Moreno, Sole
Manager and Member at Strat and
Praxis LLC.
Leadership
Team
(standing, left to right)
Kathy Burgeson, Exec. Vice
President, General Counsel and
Secretary; Mike Smith, Exec.
Vice President and President,
Performance Chemicals, Strategy
and Business Development;
Michael Wilson, President and CEO;
Ed Woodcock, Exec. Vice President
and President, Performance
Materials; Cindy Cartmell Burns,
Sr. Vice President, Human
Resources;
(seated, left to right)
John Fortson, Exec. Vice President,
CFO and Treasurer; Marty Heyne,
Sr. Vice President, Operations.
• Audit Committee
• Compensation Committee
• Executive Committee
• Nominating and Corporate Governance Committee
Ingevity Corporation
5255 Virginia Avenue
North Charleston, SC
29406
844 643 8489
ingevity.com