Feb 22, 2017

Ingevity Reports Preliminary Fourth Quarter and Full Year 2016 Financial Results

PRESS RELEASE

FOURTH QUARTER

• Net sales of $210.9 million and net income of $11.7 million resulted in net income as a percentage of sales of 5.5 percent, compared to net sales of $209.1 million and net income of $9.9 million which resulted in net income as a percentage of sales of 4.7 percent in the prior year quarter
• Diluted earnings per share were $0.22; diluted adjusted earnings per share were $0.34
• Adjusted EBITDA of $36.0 million were up 18.0 percent versus fourth quarter 2015 pro forma adjusted EBITDA of $30.5 million
• Adjusted EBITDA margin of 17.1 percent improved 250 basis points versus pro forma fourth quarter 2015

FULL YEAR

• Net sales of $908.3 million and net income of $44.4 million resulted in net income as a percentage of sales of 4.9 percent, compared to net sales of $958.3 million and net income of $84.3 million which resulted in net income as a percentage of sales of 8.8 percent in the prior year
• Diluted earnings per share were $0.83 and reflect the previously disclosed closure of two manufacturing facilities in Brazil; diluted adjusted earnings per share were $2.08
• Adjusted EBITDA of $202.4 million were up 6.4 percent versus 2015 pro forma adjusted EBITDA of $190.3 million
• Adjusted EBITDA margin of 22.3 percent improved 240 basis points versus pro forma 2015

2017 OUTLOOK

• Company announces fiscal year 2017 guidance of sales between $930 million and $950 million and adjusted EBITDA between $215 million and $225 million
• Board of directors authorizes $100 million share repurchase program

The results and guidance in this release include Non-GAAP financial measures. Refer to the section entitled “Use of Non-GAAP Financial Measures” within this release.

Additionally, this release includes revisions to prior year periods’ financial results. Refer to the section entitled “Correction to Previously Issued Financial Statements.”

NORTH CHARLESTON, S.C.–(BUSINESS WIRE)–Ingevity Corporation (NYSE: NGVT) today reported preliminary fourth quarter net sales of $210.9 million and net income of $11.7 million, representing 5.5 percent of sales. Sales were essentially level with $209.1 million in the prior year’s fourth quarter and net income increased 18.2 percent versus $9.9 million last year. The fourth quarter diluted earnings per share were $0.22. Excluding, net of tax, separation costs of $0.05 per share and restructuring and other costs of $0.07 per share, diluted adjusted earnings per share were $0.34. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $36.0 million were up 18.0 percent versus fourth quarter 2015 pro forma adjusted EBITDA of $30.5 million. Ingevity’s fourth quarter adjusted EBITDA margin of 17.1 percent was up 250 basis points from the prior year’s fourth quarter pro forma adjusted EBITDA margin of 14.6 percent.

For the full year, net sales were $908.3 million and net income was $44.4 million, representing 4.9 percent of sales. Sales were down 5.2 percent versus $958.3 million in the prior year and net income decreased 47.3 percent versus $84.3 million last year. The diluted earnings per share for 2016 were $0.83. Excluding, net of tax, restructuring and other costs of $0.95 per share and separation costs of $0.30 per share, diluted adjusted earnings per share were $2.08. Adjusted EBITDA of $202.4 million were up 6.4 percent versus 2015 pro forma adjusted EBITDA of $190.3 million. Ingevity’s 2016 adjusted EBITDA margin of 22.3 percent was up 240 basis points from the prior year’s pro forma adjusted EBITDA margin of 19.9 percent.

“In what is seasonally a slower quarter, Ingevity’s revenues were in line with our expectations,” said Michael Wilson, Ingevity’s president and CEO. “Despite sales that were essentially level with the prior year’s quarter, we delivered an 18.0 percent increase in adjusted EBITDA. This was driven by improved product mix, lower raw material and energy costs, and the benefits from our cost reduction efforts.” He said that the company exceeded its 12-month company-wide cost reduction target and decreased costs by more than $30 million in the year.

Wilson said the company’s Performance Materials segment saw strong volume growth in sales of its activated carbon products for use in automotive gasoline vapor emission control. “Strong demand drove an 18.7 percent increase in Performance Materials revenues, and coupled with higher productivity, resulted in a 39.9 percent increase in segment EBITDA on a pro forma basis,” Wilson said.

He added that challenging market conditions impacted the company’s Performance Chemicals segment in the quarter. “Revenues for our pavement technologies products were up versus the prior year’s fourth quarter. However, our industrial specialties and oilfield applications businesses were again negatively affected by continued pricing pressure.”

Looking at the full year 2016, Wilson said that it was a “remarkable” year for the company. “We successfully executed the spinoff from WestRock and delivered solid financial results increasing both adjusted EBITDA and adjusted EBITDA margins despite revenues that were down more than 5 percent. We ramped up capacity to meet rapidly growing demand in Performance Materials. We won new business to combat volume and pricing pressure in Performance Chemicals. And we benefitted from superb execution of our cost reduction program. We expect to leverage this new cost structure for enhanced earnings as market conditions improve in our Performance Chemicals segment.”

The company generated $71.2 million of free cash flow and ended the year with a strong balance sheet. Excluding the effects of the Wickliffe IDB trust and associated restricted cash, the company ended the year with a net debt to adjusted EBITDA ratio of less than 2x.

Fourth Quarter 2016 Reportable Segment Financial Results

Performance Materials: Segment sales in the fourth quarter 2016 were $77.3 million, up $12.2 million, or 18.7 percent, versus the fourth quarter 2015. Segment operating profit was $22.2 million, up $6.0 million, or 37.0 percent, versus the prior year quarter pro forma segment operating profit. Segment EBITDA were $27.0 million, up $7.7 million, or 39.9 percent, versus the prior year pro forma segment EBITDA. Volumes, particularly in automotive applications, combined with increased plant efficiency, were the primary drivers to the strong revenue and earnings growth.

For the full year 2016, segment sales were $301.0 million, up $44.6 million, or 17.4 percent, versus 2015. Segment operating profit was $106.9 million, up $29.9 million, or 38.8 percent, versus the prior year pro forma segment operating profit. Segment EBITDA were $123.3 million, up $35.1 million, or 39.8 percent, versus the prior year pro forma segment EBITDA.

Performance Chemicals: Segment sales in the fourth quarter 2016 were $133.6 million, down $10.4 million, or 7.2 percent, versus the fourth quarter 2015. Segment operating profit was $3.4 million, down $1.9 million, or 35.8 percent, versus the prior year quarter pro forma segment operating profit. Segment EBITDA were $9.0 million, down $2.2 million, or 19.6 percent, versus the prior year quarter pro forma segment EBITDA. Higher volumes and raw materials and energy savings were more than offset by product price and mix weakness in the company’s industrial specialties applications.

For the full year 2016, segment sales were $607.3 million, down $94.6 million, or 13.5 percent, versus 2015. Segment operating profit was $56.7 million, down $22.0 million, or 28.0 percent, versus the prior year pro forma segment operating profit. Segment EBITDA were $79.1 million, down $23.0 million, or 22.5 percent, versus the prior year pro forma segment EBITDA.

Outlook

Ingevity announced its fiscal year 2017 guidance for sales between $930 million and $950 million and adjusted EBITDA between $215 million and $225 million.

The company expects that continued adoption of more stringent gasoline vapor emission regulations – particularly in North America – will drive strong revenue growth in the Performance Materials segment. In Performance Chemicals, the company expects continued price pressure in industrial specialties applications, offset partially by modest volume growth. Increased drilling, along with growth in new products, is anticipated to begin to improve sales to the oilfield industry. Sales to pavement technologies customers is also expected to grow, primarily driven by continued adoption of Evotherm® warm mix asphalt technology in the U.S. The company expects lower raw material costs, especially for crude tall oil, or CTO.

In addition, Ingevity’s board of directors authorized the company’s management to repurchase up to $100 million of the company’s outstanding common stock. “Our first share repurchase authorization reflects our belief not only in the cash generation prospects for the future, but also in the need to deliver value to our shareholders,” said John Fortson, Ingevity’s executive vice president, chief financial officer and treasurer. “At a minimum, we intend to more than offset dilution from equity compensation awards.”

Ingevity: Purify, Protect and Enhance

Ingevity provides specialty chemicals and high-performance carbon materials and technologies 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, printing inks and automotive components that reduce gasoline vapor emissions. Through a team of talented and experienced people, Ingevity develops, manufactures and brings to market products and processes that purify, protect and enhance the world around us. Headquartered in North Charleston, S.C., Ingevity operates from 25 locations around the world and employs approximately 1,500 people. The company is traded on the New York Stock Exchange (NYSE: NGVT). For more information, visit www.ingevity.com.

Additional Information

The company will host a conference call on Thursday, Feb. 23, 2017, at 10 a.m. (Eastern Time) to discuss fourth quarter fiscal results. Those who wish to participate in this event should dial 800-230-1059 (inside the U.S.) or 612-234-9959 (outside the U.S.), at least 15 minutes prior to the start of the call. In addition, a slide deck for use during the conference call will be posted on the investors section of Ingevity’s website shortly before the call begins. Replays will be available through March 23, 2017, and can be accessed at 800-475-6701 (inside the U.S.) or 320-365-3844 (outside the U.S.), with access code 414403.

Correction to Previously Issued Financial Statements

During the quarters and year ended December 31, 2016, Ingevity identified various errors related to its previously issued annual and interim Combined Financial Statements. Specifically, in the first quarter of 2016, the company determined that $3.3 million of cumulative intercompany profit in inventory had not been eliminated in prior years. During the fourth quarter, the company also identified errors related to a $1.8 million understatement of accruals for services rendered in prior years, as well as errors related to the timing for which revenue has been previously recognized.

The cumulative impact of the errors identified in 2016 had resulted in the overstatement of pre-tax and net income of $1.6 million and $1.0 million in 2015 and $1.0 million and $0.6 million in 2014, and a cumulative impact to net parent investment of $2.0 million as of January 1, 2014. In addition, such errors resulted in the $9.4 million and $5.5 million overstatement of revenue in 2015 and 2014, respectively. Although Ingevity’s management has determined that the impact of such errors is immaterial to all previously issued financial statements, the company will revise the previously issued financial statements for the periods ended December 31, 2015 and 2014 in connection with the filing of its 2016 Form 10-K and those corrections will also be reflected in the company’s future Form 10-Q filings. Additionally, the company is still evaluating the control deficiencies resulting from these errors. The impact of the revision to the previously issued financial statements for the quarter and year ended December 31, 2015 is reflected in the schedules to this press release.

Use of Non-GAAP Financial Measures

Ingevity has presented certain financial measures which have not been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Definitions of our non-GAAP financial measures and a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP are included in the financial schedules accompanying this news release, under the section entitled “Non-GAAP Financial Measures.”

A reconciliation of net income to adjusted EBITDA as projected for 2017 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 include additional costs associated with the separation from WestRock, further restructuring and other income or charges incurred in 2017 as well as the related tax impacts of these items. 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.

Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements generally include the words “may,” “could,” “should,” “believes,” “plans,” “intends,” “targets,” “will,” “expects,” “suggests,” “anticipates,” “outlook,” “continues,” “forecast,” “prospect,” “potential” or similar expressions. Forward-looking statements may include, without limitation, expected financial positions, results of operations and cash flows; financing plans; business strategies and expectations; operating plans; capital and other expenditures; competitive positions; growth opportunities for existing products; benefits from new technology and cost-reduction initiatives, plans and objectives; and markets for securities. Like other businesses, Ingevity is subject to risks and uncertainties that could cause its actual results to differ materially from its expectations or that could cause other forward-looking statements to prove incorrect. Factors that could cause actual results to materially differ from those contained in the forward-looking statements, or that could cause other forward-looking statements to prove incorrect, include, without limitation, general economic and financial conditions; international sales and operations; currency exchange rates and currency devaluation; compliance with U.S. and foreign regulations; attracting and retaining key personnel; conditions in the automotive market; worldwide air quality standards; government infrastructure spending; declining volumes in the printing inks market; the limited supply of crude tall oil (“CTO”); lack of access to sufficient CTO; access to and pricing of raw materials; competition from producers of substitute products; a prolonged period of low energy prices; the provision of services by third parties at several facilities; natural disasters, such as hurricanes, winter or tropical storms, earthquakes, floods, fires; other unanticipated problems such as labor difficulties including renewal of collective bargaining agreements, equipment failure or unscheduled maintenance and repair; protection of intellectual property and proprietary information; information technology security risks; government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies and the chemicals industry; and lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes. These and other important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements that may have been made in this document are and will be more particularly described in our filings with the U.S. Securities and Exchange Commission, including our Form 10 Registration Statement and periodic filings. Readers are cautioned not to place undue reliance on Ingevity’s projections and forward-looking statements, which speak only as the date thereof. Ingevity undertakes no obligation to publicly release any revision to the projections and forward-looking statements contained in this announcement, or to update them to reflect events or circumstances occurring after the date of this announcement.

Ingevity Corporation

During the quarters and year ended December 31, 2016, Ingevity identified various errors related to its previously issued annual and interim Combined Financial Statements. Specifically, in the first quarter of 2016, the company determined that $3.3 million of cumulative intercompany profit in inventory had not been eliminated in prior years. During the fourth quarter, the company also identified errors related to a $1.8 million understatement of accruals for services rendered in prior years, as well as errors related to the timing for which revenue has been previously recognized.Correction to Previously Issued Financial Statements

The cumulative impact of the errors identified in 2016 had resulted in the overstatement of pre-tax and net income of $1.6 million and $1.0 million in 2015 and $1.0 million and $0.6 million in 2014, and a cumulative impact to net parent investment of $2.0 million as of January 1, 2014. In addition, such errors resulted in the $9.4 million and $5.5 million overstatement of revenue in 2015 and 2014, respectively. Although Ingevity’s management has determined that the impact of such errors is immaterial to all previously issued financial statements, the company will revise the previously issued financial statements for the periods ended December 31, 2015 and 2014 in connection with the filing of its 2016 Form 10-K and those corrections will also be reflected in the company’s future Form 10-Q filings. Additionally, the company is still evaluating the control deficiencies resulting from these errors. The impact of the revision to the previously issued financial statements for the quarter and year ended December 31, 2015 is reflected in the tables below.

 Ingevity Corporation
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, inclusive of pro forma adjustments:

Adjusted earnings (loss) is defined as net income (loss) attributable to Ingevity stockholders plus restructuring and other (income) charges, separation costs, and the income tax expense (benefit) on those items.

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 per share, separation costs per share, and the income tax expense (benefit) per share on those items.

Adjusted EBITDA is defined as net income (loss) plus provision for income taxes, interest expense, depreciation and amortization, separation costs and restructuring and other (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 Sales.

The Company also uses the above financial measures as the primary measures of profitability used by managers of the business and its segments. In addition, the Company believes Adjusted EBITDA, Adjusted EBITDA Margin, Segment EBITDA and Segment EBITDA Margin 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.

Unaudited Pro Forma Adjustments

The non-GAAP financial measures noted above, adjusted for the Unaudited Pro Forma Adjustments, apply only to our quarterly periods within and fiscal year ended December 31, 2015. The Unaudited Pro Forma Adjustments are from the Unaudited Pro Forma Combined Financial Statements which were derived from the historical Combined Financial Statements of Ingevity, prepared in accordance with U.S. generally accepted accounting principles. These Unaudited Pro Forma Combined Financial Statements include adjustments required by SEC Staff Accounting Bulletin Topic 1:B-3 and Article 11 of SEC Regulation S-X. For more information on the pro forma adjustments see the section entitled: “Notes to the Unaudited Pro Forma Adjustments” included within this Exhibit.

A reconciliation of net income to adjusted EBITDA as projected for 2017 is not provided. Ingevity does not forecast net income as we cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components include additional costs associated with the separation from WestRock, further restructuring and other income or charges incurred in 2017 as well as the related tax impacts of these items. 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.

INGEVITY CORPORATION
Reconciliation of Non-GAAP Financial Measures
Notes to the Unaudited Pro Forma Adjustments

For more information regarding the Ingevity’s unaudited pro forma combined statements of operations for the year ended December 31, 2015, see “Unaudited Pro Forma Combined Financial Statements” in the Ingevity’s registration statement on Form 10 and amendments thereto (the “Form 10”), copies of which may be obtained by visiting the web site of the Securities and Exchange Commission, or the SEC, at www.sec.gov. The “Unaudited Pro Forma Combined Statement of Operations” included within Ingevity’s registration statement on Form 10 is presented for the fiscal year ended December 31, 2015 and gives effect as if the pro forma adjustments had occurred on January 1, the first day of fiscal year 2015. Presented below is a quarterly impact of each respective pro forma adjustments for the fiscal year ended December 31, 2015.

(A) We have entered into agreements to obtain audit and certain compliance functions as a stand-alone public company as well as compensation agreements with certain members of our executive team. Prior to the completion of the separation, we estimated that we would also enter into agreements to obtain insurance coverage according to quotations we had received based on our individual loss history, credit profile and selected insurance coverage. These expenses represent recurring costs in excess of the amounts historically allocated to Ingevity.

In addition, at the completion of the separation we entered into a new raw material supply agreement with WestRock for the purchase of black liquor soap skimmings (“BLSS”) and crude tall oil (“CTO”). We historically obtained BLSS and CTO from WestRock under previously existing supply agreements. We evaluated the new agreement and its impact on our pro forma income statement. The pro forma adjustment also included incremental costs of less than $1 million for the full year 2015 associated with this new agreement calculated by applying the new agreement’s pricing terms to the actual purchased volumes in 2015.

The 2015 pro forma adjustment by segment by quarter is included in the below table:

(B) Represents the tax effect of proforma adjustments for each respective period.

(C) Represents adjustments to interest expense and amortization of debt issuance costs related to our target pro forma long-term indebtedness. The 2015 pro forma adjustment by quarter is included in the below table:

(D) Represents the elimination of expenses directly related to transaction costs incurred during 2015 in connection with the separation from WestRock, primarily related to professional fees associated with separation activities within the finance, tax and legal functions. The 2015 pro forma adjustment by quarter is included in the below table:

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