Ingevity Corporation (NYSE: NGVT) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless noted.
Business context
Ingevity makes specialty chemicals and activated-carbon materials through two segments: Performance Materials, including automotive fuel-vapor emissions products, and Performance Chemicals, including pavement technologies, industrial specialties, and engineered polymers. The company completed its acquisition of Ozark Materials on October 3, 2022, adding road-marking products to Performance Chemicals.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $1,668.3 million | $1,391.5 million | +19.9% |
| Gross profit | $570.1 million | $512.8 million | +11.2% |
| Gross margin | 34.2% | 36.9% | Down 2.7 percentage points |
| Net income | $211.6 million | $118.1 million | +79.2% |
| Diluted EPS | $5.50 | $2.95 | +86.4% |
| Adjusted EBITDA | $452.6 million | $422.2 million | +7.2% |
| Operating cash flow | $313.1 million | $293.0 million | +6.9% |
| Capital expenditures | $142.5 million | $103.8 million | +$38.7 million |
| Operating cash flow less capex | $170.6 million | $189.2 million | Down $18.6 million |
Adjusted EBITDA is a non-GAAP measure. Sales growth was driven mainly by $294.2 million of favorable pricing and product mix; volume contributed $9.4 million, while foreign exchange reduced sales by $26.8 million. Higher raw-material and energy costs increased manufacturing costs by $238.0 million. Net income also reflects the comparison with 2021, when an $85.0 million BASF litigation charge was recorded.
Segments and material changes
- Performance Materials: Sales rose 6.1% to $548.5 million; segment EBITDA increased 1.1% to $252.2 million. Improved automotive and purification volumes and higher pricing were substantially offset by manufacturing-cost inflation and unfavorable currency effects.
- Performance Chemicals: Sales rose 28.0% to $1,119.8 million; segment EBITDA increased 16.0% to $200.4 million. Pricing and mix gains outweighed higher input costs and lower volume. Product-line sales increased 23.5% in pavement technologies, 28.4% in industrial specialties, and 31.7% in engineered polymers.
- The October Ozark Materials acquisition had a $325.0 million purchase price. Ingevity reported $344.5 million of acquisition cash outflow, net of cash acquired, and $5.9 million of acquisition and related costs, including inventory fair-value step-up expense.
- Ingevity invested $77.4 million in strategic investments during 2022, including $60.0 million in lithium-ion anode materials producer Nexeon Limited.
Cash, debt, and liquidity
- Cash and cash equivalents were $76.7 million at year-end, down from $275.4 million; $71.7 million was held by foreign subsidiaries.
- Total debt and finance lease obligations were $1,479.9 million before $6.5 million of debt issuance costs, versus $1,280.5 million a year earlier. Components included $828.0 million outstanding on the revolving credit facility, $550.0 million of 3.88% notes due 2028, and $101.9 million of finance leases.
- The amended revolving facility was increased to $1.0 billion and extended to June 2027. Undrawn capacity was $169.7 million at year-end. The company reported compliance with debt covenants; net leverage was 2.5 and interest coverage 9.9 under the facility’s definitions.
- In 2022, the company redeemed $300.0 million of 4.50% notes due 2026 and repaid its $323.0 million term loan. It also repurchased $145.2 million of shares; $444.7 million remained available under the $500 million authorization.
- Management expects operating cash flow, cash on hand, and available revolver capacity to fund planned operations and obligations for at least the next 12 months.
Guidance, management commentary, and risks
- 2023 guidance: Net sales of $1.9–$2.1 billion; Adjusted EBITDA of $495–$515 million; operating cash flow of $300–$320 million; capital expenditures of $140–$160 million; and free cash flow of approximately $160 million. Guidance is management’s outlook, not a guarantee; a GAAP net-income reconciliation was not provided because certain components could not be estimated without unreasonable effort.
- Management cited infrastructure spending, continued adoption of Evotherm warm-mix asphalt and road-marking products, growth in agrochemicals and oilfield, and improved global auto production as expected growth drivers. It expects CTO cost pressure, partly offset by lower energy costs in engineered polymers and growth in higher-value markets.
- CTO supply and pricing: Crude tall oil represented approximately 14% of consolidated cost of sales and 22% of raw-material purchases. Ingevity sourced about 75% of CTO and CTO-equivalent volumes from WestRock and Georgia-Pacific combined. Management expects supply pressure and elevated prices; passing costs through to customers is uncertain.
- BASF litigation: The company accrued $85.0 million for the jury verdict, including treble damages, in BASF’s antitrust counterclaims. Ingevity is challenging the verdict and prior dismissal of its patent claims; final resolution could take up to 18 months, and interest, fees, or costs could add to the exposure.
- Other material risks include automotive production and semiconductor availability, long-term decline in internal-combustion vehicle demand, infrastructure spending, inflation and energy costs, supply-chain disruptions, foreign exchange, customer concentration, environmental regulation, and operational interruptions. The ten largest customers represented 30% of total sales; no single customer exceeded 10%.
- The company continued a multi-year ERP transformation, expected to finish in 2023. Total initiative costs were estimated at $90–$95 million, including $45–$50 million of non-capitalizable costs. Management and the auditor reported effective internal control over financial reporting, excluding the recently acquired Ozark entities from the 2022 assessment.
- Effective in the first quarter of 2023, engineered polymers will be reported as a separate segment; the change does not affect consolidated results or historical Performance Materials results.
Key facts for investors to verify
- Whether 2023 sales, EBITDA, cash-flow, and capital-spending guidance is achieved, and how much growth comes from pricing versus volume.
- CTO contract volumes, supplier concentration, market prices, and the company’s ability to pass higher input costs through to customers.
- Developments in the BASF appeal and any change to the $85.0 million accrual or additional legal exposure.
- Net debt, revolver availability, variable-rate exposure, covenant headroom, and cash conversion after acquisition and investment spending.
- Ozark integration results and returns on the acquisition and strategic investments, alongside ERP completion costs and execution.