Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________ 
FORM 10-Q
_______________________________________________________________________

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
 OR
o
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
__________________________________________________________________________ 
Delaware
 
47-4027764
(State of other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
5255 Virginia Avenue
North Charleston, South Carolina 29406
(Address of principal executive offices) (Zip code)

843-740-2300
(Registrant’s telephone number)

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.  Yes  x No  o

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).  Yes  x No  o

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):
Large Accelerated Filer x
 
Accelerated Filer o
 
 
 
Non-Accelerated Filer o
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o
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.  o
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o No  x
The Registrant had 41,968,680 shares of common stock, $0.01 par value, outstanding at October 31, 2018.



Ingevity Corporation
INDEX

 
Page No.
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INGEVITY CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions, except per share data
2018
 
2017
 
2018
 
2017
Net sales
$
311.2

 
$
264.1

 
$
855.0

 
$
742.9

Cost of sales
192.6

 
170.9

 
535.8

 
489.2

Gross profit
118.6

 
93.2

 
319.2

 
253.7

Selling, general and administrative expenses
34.5

 
26.2

 
96.5

 
78.5

Research and technical expenses
5.6

 
4.8

 
16.3

 
14.6

Separation costs

 
0.2

 

 
0.7

Restructuring and other (income) charges, net

 
0.1

 
(0.6
)
 
3.5

Acquisition-related costs

 
4.1

 
4.3

 
4.1

Other (income) expense, net
2.5

 
(0.5
)
 
2.7

 
0.9

Interest expense, net
7.9

 
3.2

 
21.8

 
9.3

Income (loss) before income taxes
68.1

 
55.1

 
178.2

 
142.1

Provision (benefit) for income taxes
16.4

 
16.7

 
38.5

 
44.9

Net income (loss)
51.7

 
38.4

 
139.7

 
97.2

Less: Net income (loss) attributable to noncontrolling interest
2.2

 
4.6

 
12.7

 
12.3

Net income (loss) attributable to Ingevity stockholders
$
49.5

 
$
33.8

 
$
127.0

 
$
84.9

 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Ingevity stockholders
$
1.18

 
$
0.80

 
$
3.02

 
$
2.01

Diluted earnings (loss) per share attributable to Ingevity stockholders
1.16

 
0.79

 
2.98

 
2.00


The accompanying notes are an integral part of these financial statements.

3


INGEVITY CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
2018
 
2017
 
2018
 
2017
Net income (loss)
$
51.7

 
$
38.4

 
$
139.7

 
$
97.2

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(3.6
)
 
2.4

 
(6.5
)
 
6.2

Derivative instruments:
 
 
 
 
 
 
 
Unrealized gain (loss), net of tax provision (benefit) of $0.1, zero, $0.3, zero
0.1

 
(0.2
)
 
0.8

 
(0.2
)
Reclassifications of deferred derivative instruments (gain) loss, included in net income (loss), net of tax (provision) benefit of ($0.2), zero, ($0.2), zero
(0.3
)
 
0.1

 
(0.5
)
 
0.1

Total derivative instruments, net of tax provision (benefit) of ($0.1), zero, $0.1, zero
(0.2
)
 
(0.1
)
 
0.3

 
(0.1
)
Pension & Other postretirement benefits:
 
 
 
 
 
 
 
Reclassifications of net actuarial and other (gain) loss and amortization of prior service cost, included in net income, net of tax of zero for all periods

 

 
0.1

 

Total pension and other postretirement benefits, net of tax of zero for all periods

 

 
0.1

 

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax provision (benefit) of ($0.1), zero, $0.1, zero
(3.8
)
 
2.3

 
(6.1
)
 
6.1

Comprehensive income (loss)
47.9

 
40.7

 
133.6

 
103.3

Less: Comprehensive income (loss) attributable to
noncontrolling interest
2.2

 
4.6

 
12.7

 
12.3

Comprehensive income (loss) attributable to Ingevity stockholders
$
45.7

 
$
36.1

 
$
120.9

 
$
91.0


The accompanying notes are an integral part of these financial statements.

4


INGEVITY CORPORATION
Condensed Consolidated Balance Sheets
In millions, except share and par value data
September 30, 2018
 
December 31, 2017
Assets
(Unaudited)
 
 
Cash and cash equivalents
$
57.5

 
$
87.9

Accounts receivable, net of allowance of $0.3 million at September 30, 2018 and $0.4 million at December 31, 2017
140.4

 
100.0

Inventories, net
194.3

 
160.0

Prepaid and other current assets
28.6

 
20.8

Current assets
420.8

 
368.7

Property, plant and equipment, net
498.9

 
438.5

Goodwill
130.6

 
12.4

Other intangibles, net
129.2

 
4.9

Deferred income taxes
2.9

 
3.4

Restricted investment
70.7

 
71.3

Other assets
38.8

 
30.4

Total Assets
$
1,291.9

 
$
929.6

Liabilities
 
 
 
Accounts payable
$
108.7

 
$
83.1

Accrued expenses
26.2

 
20.0

Accrued payroll and employee benefits
32.5

 
39.2

Notes payable and current maturities of long-term debt
4.9

 
9.4

Income taxes payable
7.5

 
1.5

Current liabilities
179.8

 
153.2

Long-term debt including capital lease obligations
744.0

 
444.0

Deferred income taxes
31.2

 
41.3

Other liabilities
14.2

 
13.2

Total Liabilities
969.2

 
651.7

Commitments and contingencies (Note 15)


 


Equity
 
 
 
Preferred stock (par value $0.01 per share; 50,000,000 shares authorized; zero issued and outstanding at September 30, 2018 and December 31, 2017)

 

Common stock (par value $0.01 per share; 300,000,000 shares authorized; 42,322,153 and 42,208,973 issued; 41,992,323 and 42,089,103 outstanding at September 30, 2018 and December 31, 2017)
0.4

 
0.4

Additional paid-in capital
95.1

 
140.1

Retained earnings
271.4

 
142.8

Accumulated other comprehensive income (loss)
(17.8
)
 
(11.7
)
Treasury stock, common stock, at cost (329,830 shares at September 30, 2018; 119,870 shares at December 31, 2017)
(26.4
)
 
(7.7
)
Total Ingevity stockholders' equity
322.7

 
263.9

Noncontrolling interest

 
14.0

Total Equity
322.7

 
277.9

Total Liabilities and Equity
$
1,291.9

 
$
929.6

The accompanying notes are an integral part of these financial statements.

5


INGEVITY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended September 30,
In millions
2018
 
2017
Cash provided by (used in) operating activities:
 
 
 
Net income (loss)
139.7

 
$
97.2

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
42.1

 
30.4

Deferred income taxes
3.2

 
(6.0
)
Disposal/impairment of assets

 
1.1

Restructuring and other (income) charges, net
(0.6
)
 
3.5

Share-based compensation
10.1

 
7.4

Pension and other postretirement expense
1.4

 
0.8

Other non-cash items
8.5

 
9.1

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(24.6
)
 
(19.1
)
Inventories, net
(30.3
)
 
(1.4
)
Prepaid and other currents assets
(4.7
)
 
4.1

Planned major maintenance outage
(5.1
)
 
(4.5
)
Accounts payable
21.6

 
2.7

Accrued expenses
6.6

 
1.8

Accrued payroll and employee benefit costs
(6.5
)
 
7.0

Income taxes
7.5

 
3.9

Pension contribution
(1.5
)
 

Restructuring and other spending
(0.1
)
 
(5.2
)
Changes in other operating assets and liabilities, net
(0.9
)
 
0.8

Net cash provided by (used in) operating activities
166.4

 
133.6

Cash provided by (used in) investing activities:
 
 
 
Capital expenditures
(56.6
)
 
(36.2
)
Payments for acquired businesses, net of cash acquired
(315.5
)
 

Purchase of equity securities

 
(2.4
)
Sale of equity securities
1.1

 
0.7

Other investing activities, net
(5.3
)
 
(4.1
)
Net cash provided by (used in) investing activities
(376.3
)
 
(42.0
)
Cash provided by (used in) financing activities:
 
 
 
Net borrowings under our revolving credit facility

 
(111.9
)
Proceeds from long-term borrowings
300.0

 
75.0

Debt issuance costs
(7.1
)
 
(1.3
)
Tax payments related to withholdings on vested restricted stock units
(2.1
)
 
(0.9
)
Proceeds and withholdings from share-based compensation plans, net
1.8

 

Repurchases of common stock under publicly announced plan
(18.1
)
 
(2.6
)
Acquisition of noncontrolling interest
(80.0
)
 

Noncontrolling interest distributions
(15.3
)
 
(8.2
)
Other financing activities, net
0.7

 

Net cash provided by (used in) financing activities
179.9

 
(49.9
)
Increase (decrease) in cash, cash equivalents and restricted cash
(30.0
)
 
41.7

Effect of exchange rate changes on cash
(0.1
)
 
(1.7
)
Change in cash, cash equivalents and restricted cash
(30.1
)
 
40.0

Cash, cash equivalents and restricted cash at beginning of period
87.9

 
30.5

Cash, cash equivalents and restricted cash at end of period (1)
$
57.8

 
$
70.5

(1) Includes restricted cash of $0.3 million and $0.3 million and cash and cash equivalents of $57.5 million and $70.2 million as of September 30, 2018 and 2017, respectively. Restricted cash is included within "Prepaid and Other Current Assets" within the condensed consolidated balance sheets.
Supplemental cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
22.6

 
$
13.9

Cash paid for taxes, net of refunds
$
27.6

 
$
47.5

Purchases of property, plant and equipment in accounts payable
$
8.7

 
$
4.9

The accompanying notes are an integral part of these financial statements.

6


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)


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 or structured honeycombs and activated carbon sheets. Automotive technologies products are sold into the gasoline vapor emission control markets within the automotive industry while process purifications products are sold into the food, water, beverage, air emissions control, corrosion protection, odor reduction and chemical purification industries.
Our Performance Chemicals segment consists of our pavement technologies, oilfield technologies and industrial specialties product lines. Performance Chemicals manufactures products derived from crude tall oil and lignin extracted from the kraft paper making process. Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including asphalt paving (pavement technologies product line), oil exploration and production (oilfield technologies product line), printing inks, adhesives, agrochemicals, and lubricants (industrial specialties product line).
Note 2: Basis of Consolidation and Presentation
In all periods presented within these Condensed Consolidated Financial Statements, all intercompany accounts and transactions have been eliminated. The Condensed 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 interest. In all periods presented, the noncontrolling interest reported within the Condensed Consolidated Financial Statements 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 the technology associated with, and manufactures, our structured honeycomb products within our Performance Materials segment. See Note 11 for information regarding our recent acquisition of the remaining 30 percent interest in Purification Cellutions, LLC on August 1, 2018.
These Condensed Consolidated Financial Statements have not been audited. However, in the opinion of management, all normal recurring adjustments necessary to state fairly the financial position and the results of operations for the interim periods presented have been made. These Condensed Consolidated Financial Statements have been prepared on the basis of accounting principles and practices generally accepted in the United States (“GAAP”) applied consistently with those used in the preparation of the Annual Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015, collectively referred to as the “Annual Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Annual Report").
Certain information and footnote disclosures normally included in our Annual Consolidated Financial Statements presented in accordance with GAAP have been condensed or omitted. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Annual Consolidated Financial Statements and notes thereto included in the 2017 Annual Report.
Certain prior year amounts have been reclassified to conform with the current year's presentation.
Note 3: New accounting guidance
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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

7


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

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 Condensed 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 Condensed Consolidated Financial Statements and related disclosures.
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 Condensed Consolidated Financial Statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02 "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from AOCI." This ASU provides for the reclassification of the effect of remeasuring deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the provisions of the December 22, 2017 U.S. Tax Cuts and Jobs Act (the "U.S. Tax Reform"). We early adopted this new ASU in the fourth quarter of 2017, and as a result, we reclassified $0.3 million from AOCI to retained earnings.
In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" that amends the hedge accounting recognition and presentation requirements under hedge accounting. The new standard will make more financial and non-financial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements, and simplifies how companies assess effectiveness. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. We early adopted this new ASU during the fourth quarter of 2017. The impact of adoption did not have a material effect on our Condensed 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 Condensed 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. We have utilized this new guidance in our accounting for the Georgia Pacific's Pine Chemical Business acquisition; refer to Note 4 for more information.
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,

8


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

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 Condensed 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.  We expect to adopt these provisions on January 1, 2019, including interim periods subsequent to the adoption date, which can be applied using a full retrospective or modified retrospective approach. Since the issuance of ASU 2016-02, the FASB has issued several amendments which clarify certain points in Topic 842, including ASU 2018-01 ("Land Easement Practical Expedient"), ASU 2018-10 ("Codification Improvements"), and ASU 2018-11 ("Targeted Improvements"). We anticipate adopting all of these standards at the same time effective January 1, 2019.  Based upon the results of our initial assessment thus far, we plan to adopt this new standard under the modified retrospective approach, utilizing the practical expedients upon transition that will retain lease classification and initial direct costs for any leases that exist prior to adoption of the standard. We are in the process of cataloging our existing lease contracts and implementing changes to our systems. As a lessee, the majority of our leases under existing guidance are classified as operating leases, and therefore, not recorded on the balance sheet but are recorded in the statement of earnings as expense as incurred. Upon adoption of the new guidance, we will be required to record the vast majority of these operating leases on the balance sheet as a right-of-use asset and a lease liability. The timing of expense recognition and classification in the statement of earnings could change based on the classification of leases as either operating or financing; however, we have not completed our evaluation to determine to what extent.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” which supersedes both the revenue recognition requirement to Accounting Standards Codification ("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 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 Condensed Consolidated Financial Statements.
The majority of our sales revenue remains unchanged by ASC 606 and continues to be 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 as previously done under ASC 605. The cumulative effect of the changes made to our condensed consolidated balance sheet on January 1, 2018, due to the adoption of ASC 606, were as follows:
In millions
Balance at December 31, 2017
 
Adjustments
 
Balance at January 1, 2018
Assets
 
 
 
 
 
Accounts receivable, net of allowance
$
100.0

 
$
0.3

 
$
100.3

Inventories, net
160.0

 
(2.4
)
 
157.6

Prepaid and other current assets
20.8

 
5.1

 
25.9

Liabilities
 
 
 
 
 
Accrued expenses
20.0

 
0.9

 
20.9

Deferred income taxes
41.3

 
0.5

 
41.8

Equity
 
 
 
 
 
Retained earnings
$
142.8

 
$
1.6

 
$
144.4


9


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

In accordance with ASC 606, the impact of adoption on our condensed consolidated statement of operations and balance sheet were as follows:
 
Three Months Ended September 30, 2018
In millions
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Net sales
$
311.2

 
$
311.4

 
$
(0.2
)
Cost of sales
192.6

 
192.8

 
(0.2
)
Provision (benefit) for income taxes
16.4

 
16.4

 

Net income (loss)
$
51.7

 
$
51.7

 
$

 
Nine Months Ended September 30, 2018
In millions
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Net sales
$
855.0

 
$
854.7

 
$
0.3

Cost of sales
535.8

 
536.1

 
(0.3
)
Provision (benefit) for income taxes
38.5

 
38.4

 
0.1

Net income (loss)
$
139.7

 
$
139.2

 
$
0.5

 
September 30, 2018
In millions
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
Assets
 
 
 
 
 
Accounts receivable, net of allowance
$
140.4

 
$
140.0

 
$
0.4

Inventories, net
194.3

 
196.5

 
(2.2
)
Prepaid and other current assets
28.6

 
23.1

 
5.5

Liabilities
 
 
 
 
 
Accrued expenses
26.2

 
25.1

 
1.1

Deferred income taxes
31.2

 
31.1

 
0.1

Equity
 
 
 
 
 
Retained earnings
$
271.4

 
$
268.9

 
$
2.5

All other issued but not yet effective accounting pronouncements are not expected to have a material impact on our Condensed Consolidated Financial Statements.
Note 4: Acquisition
Georgia Pacific's Pine Chemical Business
On August 22, 2017, we entered into an Asset Purchase Agreement (the "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 "Acquisition").
On March 8, 2018 (the "Acquisition Date"), pursuant to the terms and conditions set forth in the Purchase Agreement, we completed the Acquisition. During the three months ended September 30, 2018, we finalized the purchase price which included

10


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

a final adjustment for working capital resulting in an aggregate purchase price of $315.5 million. The 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 Acquisition Date, 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 Acquisition is being integrated into our Performance Chemicals segment and has been included within our results of operations since the 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 Acquisition from our existing Performance Chemicals' operating results is no longer practicable.

Purchase Price Allocation
The 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 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 Acquisition and the amounts of the assets acquired and liabilities assumed as of the Acquisition Date.

11


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Purchase Price Allocation
In millions
Weighted Average Amortization Period
Fair Value
Accounts receivable
 
$
16.2

Inventories (1)
 
9.4

Property, plant and equipment
 
39.3

Intangible assets (2)
 
 
Patents
12 years
1.9

Non-compete agreement
3 years
2.2

Customer relationships
11 years
129.0

Goodwill (3)
 
118.7

Other assets
 
0.1

Total fair value of assets acquired
 
316.8

Accounts payable
 
0.8

Accrued expenses
 
0.5

Total fair value of liabilities assumed
 
$
1.3

Total cash paid
$
315.5

_______________
(1)    Fair value of finished good inventories acquired included a step-up in the value of approximately $1.4 million, of which zero and $1.4 million was expensed in the three and nine months ended September 30, 2018, respectively. The expense is included in "Cost of sales" on the condensed consolidated statement of operations.
(2)    The aggregate amortization expense was $3.2 million and $7.4 million for the three and nine months ended September 30, 2018, respectively. Estimated amortization expense is as follows: 2018 - $10.6 million, 2019 - $12.7 million, 2020 - $12.7 million, 2021 - $12.0 million, and 2022 - $11.8 million.
(3)    Goodwill largely consists of expected cost synergies and economies of scale resulting from the business combination. We expect the full amount to be deductible for income tax purposes.
Unaudited Pro Forma Financial Information
The following unaudited pro forma results of operations assume that the 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 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 zero and $5.7 million for the three and nine months ended September 30, 2018, respectively, and of $4.1 million for both the three and nine months ended September 30, 2017.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
2018
 
2017
 
2018
 
2017
Net sales
$
311.2

 
$
288.1

 
$
875.2

 
$
814.5

Income (loss) before income taxes
68.1

 
58.8

 
184.7

 
141.3

Diluted earnings (loss) per share attributable to Ingevity stockholders
$
1.16

 
$
0.85

 
$
3.10

 
$
1.99



12


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Acquisition-related costs
Costs incurred to complete and integrate the Acquisition into our Performance Chemicals segment are expensed as incurred and recorded to Acquisition-related costs on our condensed consolidated statement of operations. During the three and nine months ended September 30, 2018, zero and $4.3 million, respectively of Acquisition-related costs were recognized. Acquisition-related costs incurred in both the three and nine months ended September 30, 2017 were $4.1 million. These costs represent transaction costs, legal fees and professional third-party service fees.
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 3 for more information on the adoption of ASC 606 and its impact on our Condensed Consolidated Financial Statements.
Ingevity's operating segments are (i) Performance Materials and (ii) 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 or structured honeycombs and activated carbon sheets. Automotive technologies products are sold into the gasoline vapor emission control markets within the automotive industry while process purifications products are sold into the food, water, beverage, air emissions control, corrosion protection, odor reduction and chemical purification industries.
Our Performance Chemicals segment consists of our pavement technologies, oilfield technologies and industrial specialties product lines. Performance Chemicals manufactures products derived from crude tall oil and lignin extracted from the kraft paper making process. Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including asphalt paving (pavement technologies product line), oil exploration and production (oilfield technologies product line), printing inks, adhesives, agrochemicals, and lubricants (industrial specialties product line).
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 condensed 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.

13


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)


Disaggregation of Revenue
The following tables present our Net sales disaggregated by product line and geography.
In millions
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Automotive Technologies product line
$
86.6

 
$
258.6

Process Purification product line
9.7

 
29.3

Performance Materials segment
$
96.3

 
$
287.9

Oilfield Technologies product line
32.5

 
84.0

Pavement Technologies product line
68.1

 
152.2

Industrial Specialties product line
114.3

 
330.9

Performance Chemicals segment
$
214.9

 
$
567.1

Consolidated Net sales
$
311.2

 
$
855.0

The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer.
In millions
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
North America
$
220.6

 
$
587.3

Asia Pacific
45.0

 
121.9

Europe, Middle East and Africa
40.5

 
128.8

South America
5.1

 
17.0

Consolidated Net sales
$
311.2

 
$
855.0


Contract Balances

The following table provides information about contract assets and contract liabilities from contracts with customers. The contract assets primarily relate to our rights to consideration for products produced but not billed at the reporting date 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
Contract Asset
Balance at January 1, 2018
$
4.4

Contract asset additions
12.3

Reclassification to accounts receivable, billed to customers
(11.9
)
Balance at September 30, 2018 (1)
$
4.8

_______________
(1)    Included within "Prepaid and other current assets" on the condensed consolidated balance sheet.

14


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Note 6: Financial Instruments, Risk Management, and Fair Value Measurements
Financial Instruments and Risk Management

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 from time to time, 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 entering into derivative financial instruments with 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 condensed 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 foreign currency exchange forward 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. As of September 30, 2018, open foreign currency derivative contracts hedge forecasted transactions until December 2018. These open derivative contracts hedge the notional U.S. dollar equivalent value of approximately $7.5 million. The fair value of the foreign currency hedge was a $0.5 million asset and zero at September 30, 2018 and December 31, 2017, respectively.

Commodity Price Risk Management
Certain energy sources used by the Company, 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 September 30, 2018, we had 1.3 million and 1.6 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 September 30, 2018, open commodity contracts hedge forecasted transactions until December 2019. The fair value of the outstanding designated natural gas commodity hedge contracts as of September 30, 2018 and December 31, 2017 was $0.1 million asset and less than $0.1 million asset, respectively.

Equity Securities

Our investments in equity securities with a readily determinable fair value totaled $0.5 million at September 30, 2018 and $1.8 million at December 31, 2017. The net realized gain/(loss) and unrealized gain/(loss) recognized during the three months ended September 30, 2018 was zero and zero, respectively. The net realized gain/(loss) and unrealized gain/(loss) recognized during the nine months ended September 30, 2018, was of zero and $(0.1) million, respectively. The aggregate carrying value of investments in equity securities where fair value is not readily determinable totaled $1.5 million as of September 30, 2018 and $3.0 million as of December 31, 2017. During the three months ended September 30, 2018, we recorded an impairment charge of

15


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

$1.5 million to an equity security 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.

16


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

The following information is presented for assets and liabilities that are recorded in the condensed consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during the period reported. There were no non-recurring fair value measurements in the condensed consolidated balance sheets as of September 30, 2018 or December 31, 2017.
In millions
Level 1(1)
 
Level 2(2)
 
Level 3(3)
 
Total
September 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Equity securities (4)
$
0.5

 
$

 
$

 
$
0.5

Foreign currency hedging (4)

 
0.5

 

 
0.5

Commodity hedging (4)

 
0.1

 

 
0.1

Deferred compensation plan investments (5)
2.3

 

 

 
2.3

Total assets
$
2.8

 
$
0.6

 
$

 
$
3.4

Liabilities:
 
 
 
 
 
 
 
Deferred compensation arrangement (5)
$
4.5

 
$

 
$

 
$
4.5

Separation-related reimbursement awards (6)
0.3

 

 

 
0.3

Total liabilities
$
4.8

 
$

 
$

 
$
4.8

December 31, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Equity securities (4)
$
1.8

 
$

 
$

 
$
1.8

Total assets
$
1.8

 
$

 
$

 
$
1.8

Liabilities:
 
 
 
 
 
 
 
Deferred compensation arrangement (5)
$
2.0

 
$

 
$

 
$
2.0

Separation-related reimbursement awards (6)
0.9

 

 

 
0.9

Total liabilities
$
2.9

 
$

 
$

 
$
2.9

______________
(1)
Quoted prices in active markets for identical assets.
(2)
Quoted prices for similar assets and liabilities in active markets.
(3)
Significant unobservable inputs.
(4)
Represents securities with readily determinable fair value. Securities are included within "Prepaid and other current assets" on the condensed consolidated balance sheet.
(5)
Consists of a deferred compensation arrangement, through which we hold various investment securities, recognized on our balance sheets. Both the asset and liability are recorded at fair value, and are included within "Other assets" and "Other liabilities" on the condensed consolidated balance sheets, respectively.
(6)
Included within "Accrued expenses" on the condensed consolidated balance sheet. The expense recognized during the three and nine months ended September 30, 2018, was $0.1 million and zero, and during the three and nine months ended September 30, 2017, was zero and $0.3 million, respectively.


At September 30, 2018, the book value of capital lease obligations was $80.0 million and the fair value was $88.4 million. The fair value of our capital lease obligations is based on the period-end quoted market prices for the obligations, using Level 2 inputs.
The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt is $370.3 million as of September 30, 2018. The carrying value is a reasonable estimate of the fair value of the outstanding debt based on the variable interest rate of the debt.

17


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

At September 30, 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 $286.3 million, based on Level 2 inputs. At September 30, 2018, the book value of our Restricted investment was $70.7 million, and the fair value was $66.4 million, 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
September 30, 2018
 
December 31, 2017
Raw materials
$
40.8

 
$
40.1

Production materials, stores and supplies
16.8

 
13.4

Finished and in-process goods
145.2

 
114.3

Subtotal
202.8

 
167.8

Less: excess of cost over LIFO cost
(8.5
)
 
(7.8
)
Inventories, net
$
194.3

 
$
160.0

Note 8: Property, plant and equipment, net
In millions
September 30, 2018
 
December 31, 2017
Machinery and equipment
$
835.2

 
$
792.5

Buildings and leasehold equipment
112.2

 
115.0

Land and land improvements
19.6

 
18.0

Construction in progress
70.1

 
35.8

Total cost
1,037.1

 
961.3

Less: accumulated depreciation
(538.2
)
 
(522.8
)
Property, plant and equipment, net
$
498.9

 
$
438.5


Note 9: Goodwill and other intangible assets, net
 
Operating Segments
 
 
In millions
Performance Chemicals
 
Performance Materials
 
Total
December 31, 2017
$
8.1

 
$
4.3

 
$
12.4

Acquisitions(1)
118.7

 

 
118.7

Foreign currency translation
(0.5
)
 

 
(0.5
)
September 30, 2018
$
126.3

 
$
4.3

 
$
130.6

_______________
(1)    See Note 4 for more information.

There were no events or circumstances indicating that goodwill might be impaired during the
nine months ended September 30, 2018.


18


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

All of our other intangible assets, net are related to the Performance Chemicals operating segment. The following table summarizes intangible assets:
 
September 30, 2018
 
December 31, 2017
In millions
Gross carrying amount
 
Accumulated amortization
 
Net
 
Gross carrying amount
 
Accumulated amortization
 
Net
Brands (1)
$
13.9

 
$
12.2

 
$
1.7

 
$
13.9

 
$
11.8

 
$
2.1

Patents (2)
1.9

 
0.2

 
1.7

 

 

 

Customer contracts and relationships (2)
157.2

 
33.2

 
124.0

 
28.2

 
25.4

 
2.8

Non-compete agreements (2)
2.2

 
0.4

 
1.8

 

 

 

Other intangibles, net
$
175.2

 
$
46.0

 
$
129.2

 
$
42.1

 
$
37.2

 
$
4.9

_______________
(1)    Represents trademarks, trade names and know-how.
(2)    See Note 4 for more information.

The amortization expense related to our intangible assets in the table above is shown in the table below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
2018
 
2017
 
2018
 
2017
Cost of sales
$
0.2

 
$
0.3

 
$
0.6

 
$
1.0

Selling, general and administrative expenses
3.4

 
0.3

 
8.2

 
0.9

Total amortization expense
$
3.6

 
$
0.6

 
$
8.8

 
$
1.9


Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2018 - $12.3 million, 2019 - $14.3 million, 2020 - $13.2 million, 2021 - $12.3 million and 2022 - $12.2 million.

19


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Note 10: Debt including capital lease obligations
Current and long-term debt including capital lease obligations consisted of the following:
 
September 30, 2018
 
 
 
 
In millions, except percentages
Interest rate
 
Maturity date
 
September 30, 2018
 
December 31, 2017
Revolving credit facility (1)
3.51%
 
2023
 
$

 
$

Term loan facility
3.49%
 
2023
 
375.0

 
375.0

Senior notes
4.50%
 
2026
 
300.0

 

Capital lease obligations
7.67%
 
2027
 
80.0

 
80.0

Other
5.09%
 
2018-2021
 
0.7

 

Total debt including capital lease obligations
 
 
 
 
755.7

 
455.0

Less: debt issuance costs
 
 
 
 
6.8

 
1.6

Total debt including capital lease obligations, net of debt issuance costs
 
 
 
 
748.9

 
453.4

Less: debt maturing within one year (2)
 
 
 
 
4.9

 
9.4

Long-term debt including capital lease obligations
 
 
 
 
$
744.0

 
$
444.0

______________
(1)
Letters of credit outstanding under the revolving credit facility were $1.8 million and available funds under the facility were $748.2 million at September 30, 2018.
(2)
Debt maturing within one year is included in "Notes payable and current maturities of long-term debt" on the condensed consolidated balance sheets.

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”) 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.

20


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

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 qualified institutional buyers pursuant to Rule 144A and to certain non-U.S. persons in transactions outside the United States 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 United States 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 issuance costs 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 chemical 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 September 30, 2018.

21


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Note 11: Equity
Ingevity Stockholders' Equity
 
 
 
 
Common Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated other comprehensive income (loss)
 
Treasury stock
 
Total
In millions, except per share data
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
42,209

 
$
0.4

 
$
140.1

 
$
142.8

 
$
(11.7
)
 
$
(7.7
)
 
$
263.9

Net income (loss)

 

 

 
127.0

 

 

 
127.0

Other comprehensive income (loss)

 

 

 

 
(6.1
)
 

 
(6.1
)
Common stock issued
107

 

 

 

 

 

 

Exercise of stock options, net
6

 

 
0.2

 

 

 

 
0.2

Tax payments related to vested restricted stock units

 

 

 

 

 
(2.1
)
 
(2.1
)
Share repurchase program

 

 

 

 

 
(18.1
)
 
(18.1
)
Share-based compensation plans

 

 
10.0

 

 

 
1.5

 
11.5

Adoption of ASC 606

 

 

 
1.6

 

 

 
1.6

Acquisition of noncontrolling interest

 

 
(55.2
)
 

 

 

 
(55.2
)
Balance at September 30, 2018
42,322

 
$
0.4

 
$
95.1

 
$
271.4

 
$
(17.8
)
 
$
(26.4
)
 
$
322.7


Noncontrolling Interest
 
 
 
 
 
 
 
In millions
2018
 
2017
Balance at December 31,
$
14.0

 
$
7.6

Net income (loss) attributable to noncontrolling interests
12.7

 
12.3

Noncontrolling interest distributions
(15.3
)
 
(8.2
)
Acquisition of noncontrolling interest
$
(11.4
)
 
$

Balance at September 30,
$

 
$
11.7


Ingevity Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated other comprehensive income (loss)
 
Treasury stock
 
Total
In millions, except per share data
Shares
 
Amount
 
 
 
 
 
Balance at June 30, 2018
42,309

 
$
0.4

 
$
146.9

 
$
221.9

 
$
(14.0
)
 
$
(17.2
)
 
$
338.0

Net income (loss)

 

 

 
49.5

 

 

 
49.5

Other comprehensive income (loss)

 

 

 

 
(3.8
)
 

 
(3.8
)
Common stock issued
13

 

 

 

 

 

 

Exercise of stock options, net

 

 

 

 

 

 

Tax payments related to vested restricted stock units

 

 

 

 

 
(0.6
)
 
(0.6
)
Share repurchase program

 

 

 

 

 
(9.0
)
 
(9.0
)
Share-based compensation plans

 

 
3.4

 

 

 
0.4

 
3.8

Adoption of ASC 606

 

 

 

 

 

 

Acquisition of noncontrolling interest

 
$

 
$
(55.2
)
 
$

 
$

 
$

 
$
(55.2
)
Balance at September 30, 2018
42,322

 
$
0.4

 
$
95.1

 
$
271.4

 
$
(17.8
)
 
$
(26.4
)
 
$
322.7


22


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Noncontrolling Interest
 
 
 
 
 
 
 
In millions
2018
 
2017
Balance at June 30,
$
11.3

 
$
10.5

Net income (loss) attributable to noncontrolling interests
2.2

 
4.6

Noncontrolling interest distributions
(2.1
)
 
(3.4
)
Acquisition of noncontrolling interest
$
(11.4
)
 
$

Balance at September 30,
$

 
$
11.7


Noncontrolling interest acquisition
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 ($11.4 million) and the recognition of a Deferred tax asset ($13.4 million), with the remainder being recorded against Additional paid in capital ($55.2 million) in our Condensed Consolidated Financial Statements.
Share Repurchases
On February 20, 2017, our Board of Directors authorized the repurchase of up to $100 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. Share repurchases may be made from time to time in either open market or private transactions. The repurchase program does not require us to acquire any specific number of shares, and the program may be suspended or discontinued at any time. The timing, volume and nature of share repurchases will be at the discretion of management, depending on market conditions, alternative options for the use of cash, applicable securities laws and other factors.
During the three months ended September 30, 2018, we repurchased 93,900 shares of our common stock at a weighted average cost per share of $96.01. During the nine months ended September 30, 2018, we repurchased 211,000 shares of our common stock at a weighed average cost per share of $85.89. At September 30, 2018$75.3 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 condensed 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 additional paid in capital.
On November 1, 2018, our Board of Directors authorized the repurchase of up to $350 million of our common stock, in addition to the remaining authorization from February 20, 2017. The repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time. Share repurchases may be made from time to time in either open market or private transactions. The repurchase program does not require us to acquire any specific number of shares, and the program may be suspended or discontinued at any time. The timing, volume and nature of share repurchases will be at the discretion of management, depending on market conditions, alternative options for the use of cash, applicable securities laws and other factors.

23


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Note 12: Retirement Plans
The following table summarizes the components of net periodic benefit cost (income) for our defined benefit pension plans:
 
Three Months Ended September 30,
 
Pensions
 
Other Benefits
In millions
2018
 
2017
 
2018
 
2017
Components of net periodic benefit cost (income):
 
 
 
 
 
 
 
Service cost (1)
$
0.5

 
$
0.3

 
$

 
$

Interest cost (2)
0.2

 
0.2

 

 

Expected return on plan assets (2)
(0.2
)
 
(0.2
)
 

 

Recognized net actuarial and other (gain) loss (2)

 

 

 

Net periodic benefit cost (income)
$
0.5

 
$
0.3

 
$

 
$

_______________
(1)
Included in "Cost of sales" on the condensed consolidated statements of operations.
(2)
Included in "Other (income) expense, net" on the condensed consolidated statements of operations.

 
Nine Months Ended September 30,
 
Pensions
 
Other Benefits
In millions
2018
 
2017
 
2018
 
2017
Components of net periodic benefit cost (income):
 
 
 
 
 
 
 
Service cost (1)
$
1.3

 
$
0.8

 
$

 
$

Interest cost (2)
0.6

 
0.6

 

 

Expected return on plan assets (2)
(0.6
)
 
(0.6
)
 

 

Recognized net actuarial and other (gain) loss (2)
0.1

 

 

 

Net periodic benefit cost (income)
$
1.4

 
$
0.8

 
$

 
$

_______________
(1)
Included in "Cost of sales" on the condensed consolidated statements of operations.
(2)
Included in "Other (income) expense, net" on the condensed consolidated statements of operations.

We made a voluntary cash contribution of $1.5 million to our Union Hourly defined benefit pension plan in the three and nine months ended September 30, 2018. There are no required cash contributions to our Union Hourly defined benefit pension plan in 2018, and we currently have no plans to make any additional voluntary cash contributions for the remainder of the year.
Note 13: 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 in our condensed consolidated statements 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 life 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.

24


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Detail on the restructuring charges and asset disposal activities is provided below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
2018
 
2017
 
2018
 
2017
Restructuring and other (income) charges, net
 
 
 
 
 
 
 
Gain on sale of assets and businesses
$

 
$

 
$
(0.6
)
 
$

Severance and other employee-related costs (1)

 

 

 
1.3

Other (income) charges, net (2)

 
0.1

 

 
2.2

Total restructuring and other (income) charges, net
$

 
$
0.1

 
$
(0.6
)
 
$
3.5

_______________
(1)
Represents severance and employee benefit charges. Income represents adjustments to previously recorded severance and employee benefits.
(2)
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.

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. As a result of this sale, we recorded zero and $0.6 million as a gain on sale of assets in the three and nine months ended September 30, 2018, respectively.

2017 activities
In January 2017, we initiated a reorganization to streamline our leadership team, flatten the organization and reduce costs. As a result of this reorganization, we recorded zero and $1.3 million, respectively, in severance and other employee-related costs in the three and nine months ended September 30, 2017.
During the three and nine months ended September 30, 2017, we also recorded $0.1 million and $2.2 million, respectively, 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.

Roll forward of Restructuring Reserves
The following table shows a roll forward of restructuring reserves that will result in cash spending.
 
Balance at
 
Change in
 
Cash
 
 
 
Balance at
In millions
12/31/2017(1)
 
Reserve(2)
 
Payments
 
Other(3)
 
9/30/2018(1)
Restructuring Reserves
$
0.2

 

 
(0.1
)
 

 
$
0.1

_______________
(1)
Included in "Accrued expenses" on the condensed consolidated balance sheets.
(2)
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.
(3)
Primarily foreign currency translation adjustments.

25


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Note 14: Income Taxes
For the three and nine months ended September 30, 2018 and 2017, the effective tax rates, including discrete items, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Effective tax rate
24.1
%
 
30.3
%
 
21.6
%
 
31.6
%
We determine our interim tax provision using an Estimated Annual Effective Tax Rate methodology (“EAETR”). The EAETR is applied to the year-to-date ordinary income, exclusive of discrete items. The tax effects of discrete items are then included to arrive at the total reported interim tax provision.
The determination of the EAETR is based upon a number of estimates, including the estimated annual pre-tax ordinary income in each tax jurisdiction in which we operate. As our projections of ordinary income change throughout the year, the EAETR will change period-to-period. The tax effects of discrete items are recognized in the tax provision in the period they occur. Depending on various factors, such as the item’s significance in relation to total income and the rate of tax applicable in the jurisdiction to which it relates, discrete items in any quarter may materially impact the reported effective tax rate. As a global enterprise, our tax expense may be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As such, there may be significant volatility in interim tax provisions.
The below table provides a reconciliation between our reported effective tax rates and the EAETR.
 
Three Months Ended September 30,
 
2018
 
2017
In millions, except percentages
Before tax
Tax
Effective tax rate % impact
 
Before tax
Tax
Effective tax rate % impact
Consolidated operations
$
68.1

$
16.4

24.1
%
 
$
55.1

$
16.7

30.3
%
Discrete items:
 
 
 
 
 
 
 
Separation costs


 
 
0.2

0.1

 
Restructuring and other (income) charges, net


 
 
0.1

0.1

 
Acquisition and other related costs (1)


 
 
4.1

1.5

 
Results of legal entities with full valuation allowances (2)


 
 
0.5


 
Other tax only discrete items

0.2

 
 

0.1

 
Total discrete items

0.2

 
 
4.9

1.8

 
Consolidated operations, before discrete items
$
68.1

$
16.6

 
 
$
60.0

$
18.5

 
Quarterly effect of changes in the EAETR (3)
 
 
24.4
%
 
 
 
30.8
%

26


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

 
Nine Months Ended September 30,
 
2018
 
2017
In millions, except percentages
Before tax
Tax
Effective tax rate % impact
 
Before tax
Tax
Effective tax rate % impact
Consolidated operations
$
178.2

$
38.5

21.6
%
 
$
142.1

$
44.9

31.6
%
Discrete items:
 
 
 
 
 
 
 
Separation costs


 
 
0.7

0.3

 
Restructuring and other (income) charges, net
(0.6
)

 
 
3.5

0.7

 
Acquisition and other related costs (1)
5.7

1.3

 
 
4.1

1.5

 
Results of legal entities with full valuation allowances (2)


 
 
2.0


 
Other tax only discrete items

0.3

 
 

(0.3
)
 
Total discrete items
5.1

1.6

 
 
10.3

2.2

 
Consolidated operations, before discrete items
$
183.3

$
40.1

 
 
$
152.4

$
47.1

 
EAETR (3)
 
 
21.9
%
 
 
 
30.9
%
_______________
(1)
Charges primarily relate to legal and professional fees and inventory step-up amortization incurred associated with the Acquisition. The legal and professional fees of $4.3 million and the inventory step-up amortization of $1.4 million are included in "Acquisition-related costs" and "Cost of sales" on the condensed consolidated statement of operations, respectively.
(2)
Legal entities within the consolidated results of Ingevity with full valuation allowances are treated discretely for income tax purposes.
(3)
Decrease in EAETR for the three and nine months ended September 30, 2018, as compared to September 30, 2017, is primarily due to the effect of U.S. Tax Reform, which was enacted in December 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of 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. In accordance with SAB 118, we determined that the $24.5 million of the provisional deferred tax expense recorded in connection with the re-measurement of certain deferred tax assets and liabilities and current tax expense recorded in connection with any other provisions of U.S. Tax Reform were reasonable estimates at December 31, 2017. In the nine months ended September 30, 2018, no additional adjustments were recorded in relation to the re-measurement of certain deferred tax assets and liabilities and minimal current tax expense was recorded in connection with other provisions of U.S. Tax Reform. Additional work may be necessary as the U.S. Treasury Department, the IRS, or other standard setting bodies interpret or issue new guidance on how the provisions of U.S. Tax Reform should be applied that may be different from our interpretation as of the date of this filing. Any subsequent adjustment to these amounts will be recorded to current tax expense in the period when the analysis is complete.
Note 15: Commitments and contingencies

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.

27


Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)

Note 16: Segment information
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
In millions
2018
 
2017
 
2018
 
2017
Net sales
 
 
 
 
 
 
 
Performance Materials
$
96.3

 
$
85.4

 
$
287.9

 
$
258.3

Automotive Technologies product line
86.6

 
75.6

 
258.6

 
230.1

Process Purifications product line
9.7

 
9.8

 
29.3

 
28.2

Performance Chemicals
$
214.9

 
$
178.7

 
$
567.1

 
$
484.6

Oilfield Technologies product line
32.5

 
20.3

 
84.0

 
58.1

Pavement Technologies product line
68.1

 
64.5

 
152.2

 
137.2

Industrial Specialties product line
114.3

 
93.9

 
330.9

 
289.3

Total net sales (1)
$
311.2

 
$
264.1

 
$
855.0

 
$
742.9

 
 
 
 
 
 
 
 
Segment operating profit (2)
 
 
 
 
 
 
 
Performance Materials
$
36.3

 
$
29.3

 
$
109.8

 
$
89.5

Performance Chemicals
39.7

 
33.4

 
95.3

 
70.2

Total segment operating profit (1)
$
76.0

 
$
62.7

 
$
205.1

 
$
159.7

 
 
 
 
 
 
 
 
Separation costs (3)

 
(0.2
)
 

 
(0.7
)
Restructuring and other income (charges), net (4)

 
(0.1
)
 
0.6

 
(3.5
)
Acquisition and other related costs (5)

 
(4.1
)
 
(5.7
)
 
(4.1
)
Interest expense, net
(7.9
)
 
(3.2
)
 
(21.8
)
 
(9.3
)
(Provision) benefit for income taxes
(16.4
)
 
(16.7
)
 
(38.5
)
 
(44.9
)
Net (income) loss attributable to noncontrolling interest
(2.2
)
 
(4.6
)
 
(12.7
)
 
(12.3
)
Net income (loss) attributable to Ingevity stockholders
$
49.5

 
$
33.8

 
$
127.0

 
$
84.9

_______________
(1)
Relates to external customers only, all intersegment sales and related profit have been eliminated in consolidation.