Ingevity Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Ingevity manufactures specialty chemicals and activated carbon products through Performance Materials and Performance Chemicals. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $331.7 | $359.9 | $890.5 | $989.5 |
| Gross profit | $139.6 | $139.5 | $338.1 | $371.0 |
| Gross margin | 42.1% | 38.8% | 38.0% | 37.5% |
| Net income | $69.9 | $59.9 | $135.4 | $139.4 |
| Diluted EPS | $1.69 | $1.41 | $3.26 | $3.30 |
| Adjusted EBITDA (non-GAAP) | $127.6 | $114.0 | $287.0 | $305.8 |
Q3 revenue fell 8% year over year, mainly from lower volume associated with COVID-19, partly offset by pricing and mix. Gross profit was essentially flat as favorable pricing/mix and lower manufacturing costs offset volume pressure. Net income rose, supported in part by lower SG&A and interest expense and a $3.0 million foreign-exchange gain recorded in other income. For the first nine months, revenue declined 10%, net income declined 3%, and Adjusted EBITDA declined 6% year over year.
- Performance Materials: Q3 sales rose 10% to $143.8; segment EBITDA rose to $80.4 from $54.2. Automotive product volume recovered in the quarter. Nine-month sales fell 4% to $349.3, while segment EBITDA increased to $164.9 from $154.7.
- Performance Chemicals: Q3 sales fell 18% to $187.9 and segment EBITDA fell to $47.2 from $59.8, principally due to lower industrial specialties and oilfield volumes. Nine-month sales fell 14% to $541.2 and EBITDA fell to $122.1 from $151.1. On a pro forma basis including the full prior-year Caprolactone Business period, nine-month sales fell 16% and EBITDA fell to $122.1 from $156.6.
Cash flow and liquidity: Nine-month operating cash flow was $199.1, versus $190.2 in 2019. Capital expenditures were $51.0, versus $79.8; cash flow after capital expenditures was approximately $148.1. Cash and cash equivalents were $198.2 at September 30, up from $56.5 at year-end 2019; the increase was partly attributable to precautionary revolver borrowing. Current assets were $601.0 and current liabilities $178.9.
Debt: Total debt including finance leases was $1,305.1 gross ($1,299.4 net of issuance costs), including $170.0 drawn on the revolver and $103.3 of finance lease obligations. Undrawn revolver capacity was $577.6. The company reported covenant compliance; trailing leverage was 3.3x against a maximum of 4.0x (potentially 4.5x in specified circumstances), and interest coverage was 8.3x against a 3.0x minimum.
Changes, outlook and notable items
- Management said Q3 customer demand improved and normal production resumed at all manufacturing plants after reduced production at some U.S. and China facilities in Q2. COVID-19 effects on demand, operations, supply chains and liquidity remain uncertain.
- FY2020 guidance: net sales of $1.15–$1.20 billion; Adjusted EBITDA of $355–$365 million; operating cash flow of approximately $260 million; capital expenditures of approximately $85 million; and free cash flow of approximately $175 million. Management described the sales and EBITDA ranges as increased and narrowed versus prior guidance. A GAAP reconciliation for projected Adjusted EBITDA was not provided because certain components could not be forecast without unreasonable effort.
- On October 28, 2020, after quarter-end, the company issued $550 million of 3.875% senior notes due 2028, with approximately $542 million net proceeds intended to repay a $375 million term loan due 2022 and reduce revolver borrowings. The revolver amendment extended maturity to October 2025 and reduced commitments from $750 million to $500 million.
- The company recorded $13.3 million of restructuring and other charges in the first nine months, including severance and business transformation costs. Its multi-year ERP/business transformation initiative is expected to cost $60–$70 million overall, including $13–$16 million of costs that cannot be capitalized; $7–$8 million of non-capitalizable costs were expected in 2020.
- Share repurchases were suspended amid pandemic uncertainty; $467.6 million remained under the authorized program at quarter-end. No shares were repurchased in Q3.
- CEO John C. Fortson was appointed September 1, 2020, and was also serving as interim CFO and treasurer pending a permanent replacement.
- Principal risks include COVID-19 uncertainty, automotive and oilfield market demand, crude tall oil availability, international and currency exposure, supply-chain and facility disruptions, and execution of the multi-year ERP implementation. The filing reported no material pending or contemplated legal proceedings.
Important facts for investors to verify
- Whether revenue and volume recover sustainably, particularly in Performance Chemicals’ industrial specialties and oilfield businesses.
- Whether the company meets FY2020 sales, Adjusted EBITDA, operating cash flow and capital expenditure guidance, and how much of cash generation is affected by working capital and borrowing.
- How the October 2020 notes issuance and revolver amendment affect debt balances, interest expense, maturities and available liquidity after the planned repayments.
- Progress, total spending and expected benefits of the ERP/business transformation initiative, including potential implementation or control risks.
- COVID-19’s continuing effects on customer demand, operations, supply chains and estimates, as well as the risks from variable-rate debt, CTO supply and oilfield market conditions.