Ingevity Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. Ingevity develops and manufactures specialty chemicals and activated-carbon products through its Performance Materials and Performance Chemicals segments.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $1,391.5 million | $1,216.1 million |
| Gross profit; gross margin | $512.8 million; 36.9% | $465.5 million; 38.3% |
| Net income; diluted EPS | $118.1 million; $2.95 | $181.4 million; $4.37 |
| Adjusted EBITDA (non-GAAP) | $422.2 million | $397.9 million |
| Cash from operating activities | $293.0 million | $352.4 million |
| Capital expenditures | $103.8 million | $82.1 million |
| Cash and cash equivalents at year-end | $275.4 million | $257.7 million |
Sales increased 14% year over year, driven by higher Performance Chemicals volume and pricing. Gross profit rose, but manufacturing costs increased $57.6 million amid raw-material and energy inflation. Net income declined primarily because of an $85.0 million BASF litigation accrual, higher SG&A, and a higher effective tax rate. The 2021 effective tax rate was 27.5%, versus 22.8% in 2020. Adjusted EBITDA is a non-GAAP measure and excludes specified items, including the litigation charge.
Segment results
- Performance Materials: Sales were $516.8 million, up from $510.0 million; Segment EBITDA was $249.4 million, essentially flat. Automotive carbon volumes were hurt by semiconductor-related vehicle production cuts; pricing and foreign exchange partly offset the decline.
- Performance Chemicals: Sales were $874.7 million, up from $706.1 million; Segment EBITDA was $172.8 million, versus $148.7 million. Volume and pricing improved across product lines, partly offset by inflationary manufacturing costs and higher SG&A.
Liquidity, debt and cash flow
Operating cash flow fell $59.4 million, mainly reflecting working-capital investment, including a $55.8 million cash outflow from inventory. Investing cash outflow was $140.6 million, including $103.8 million of capital expenditures and $35.3 million for strategic investments. Financing cash outflow was $133.1 million, including $109.4 million of share repurchases.
Year-end total debt and finance lease obligations were $1,280.5 million before $10.9 million of debt issuance costs; $19.6 million was classified as current. The revolving facility had $497.5 million of available capacity. Management said cash, operating cash flow and facility availability were expected to cover planned operations and obligations for at least the next 12 months. The company reported covenant compliance; four-quarter gross and net leverage ratios were 2.8x and 2.2x, respectively, and interest coverage was 9.2x.
Material changes, outlook and risks
- 2022 guidance: Net sales of $1.525–$1.600 billion; Adjusted EBITDA of $430–$460 million; operating cash flow of $305–$325 million; capital expenditures of $155–$175 million; and approximate free cash flow of $150 million. Free cash flow is defined as operating cash flow less capital expenditures. Management did not provide a reconciliation of projected Adjusted EBITDA to GAAP net income, citing inability to estimate certain components without unreasonable effort.
- Management outlook: Expected Performance Chemicals growth, including engineered polymers and industrial specialties, with pavement technologies supported by infrastructure spending and adoption of warm-mix technology. Performance Materials was expected to see moderate growth, while automotive demand remained constrained by semiconductor shortages. Guidance assumed continued logistics headwinds and significant cost inflation.
- BASF litigation: A jury ruled for BASF on antitrust and related counterclaims and awarded approximately $28.3 million in damages, subject to trebling to about $85.0 million. Ingevity accrued $85.0 million, intends to challenge the verdict and dismissal of its patent claims, and noted that interest, legal fees and costs could add to the amount. Final resolution could take up to 18 months.
- Supply and cost exposure: Crude tall oil (CTO) is a limited, important Performance Chemicals input. Ingevity estimated long-term agreements covered 60–70% of CTO requirements through 2025; WestRock notified the company that it would remove a mill supplying approximately 28,500 tons annually effective January 1, 2022. Inflation, energy prices, freight and the ability to pass through costs could pressure margins.
- Demand and execution risks: Automotive production and COVID-19-related disruption, evolving vehicle technologies and electrification, infrastructure spending, cyclical end markets, supply-chain reliability, foreign exchange, regulation and the multiyear ERP implementation could affect results. About 50% of sales were to customers outside the U.S.; the automotive industry represented approximately 35% of sales.
Key facts for investors to verify
- Track post-trial motions and appeal in the BASF matter, including any final judgment, additional fees or business-practice changes.
- Check whether management achieves 2022 sales, Adjusted EBITDA, cash-flow and capital-spending guidance, and review the assumptions behind its non-GAAP outlook.
- Monitor CTO replacement supply and pricing following the WestRock mill removal, and the company’s ability to pass through raw-material, energy and freight inflation.
- Assess whether inventory and other working-capital investment converts into cash, given lower 2021 operating cash flow.
- Review automotive production and semiconductor constraints, as well as progress and costs in implementing the ERP system.