Business context and reporting period
Ingevity Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2016. The business makes specialty chemicals and activated-carbon products, reported in Performance Chemicals and Performance Materials. These are pre-spin-off combined financial statements: Ingevity was not yet a standalone company and included costs allocated by WestRock. WestRock distributed Ingevity shares on May 15, 2016; Ingevity began regular-way NYSE trading on May 16.
Financial performance and position
- Revenue: $203.9 million, down 15% from $239.2 million. Performance Chemicals sales fell 24% to $133.1 million, primarily on weaker volumes in oilfield and industrial specialties; Performance Materials sales rose 10% to $70.8 million, supported by automotive demand and pricing.
- Profit and margins: Gross profit was $60.0 million versus $69.1 million; gross margin was approximately 29.4% versus 28.9%. Net income was $9.8 million versus $24.2 million; net income attributable to Ingevity was $8.2 million versus $23.0 million, or $0.19 versus $0.55 per share. The effective tax rate rose to 50.5% from 33.5%, primarily reflecting nondeductible separation costs; excluding discrete items, it was 34.3% versus 32.8%.
- Adjusted EBITDA: $45.2 million, down from $50.2 million. Performance Chemicals EBITDA declined to $14.4 million from $24.9 million, while Performance Materials increased to $30.8 million from $25.3 million. Adjusted EBITDA is a non-GAAP measure.
- Cash flow and investment: Operating cash flow was negative $1.0 million, compared with negative $16.9 million; higher inventory was a key working-capital use. Capital expenditures were $11.3 million versus $18.3 million. Cash ended the quarter at $22.7 million, down from $32.0 million at year-end.
- Debt and liquidity: At March 31, notes payable were $8.9 million and capital lease obligations were $80.0 million; no borrowings had yet been drawn under the new facilities. After quarter-end, Ingevity borrowed $300 million under a term loan and $200 million under a revolving facility, using proceeds and cash on hand to fund a $448.5 million payment to WestRock and a $68.9 million trust securing the lease principal due in 2027. The facilities mature in May 2021 and carry financial covenants. Management said operating cash flow and available borrowings should meet near-term needs and expects to use cash flow to reduce debt.
- Balance sheet: Total assets were $793.5 million and total liabilities were $259.8 million at March 31. Inventory increased to $171.5 million from $151.0 million at December 31.
Material changes and notable items
- Performance Chemicals faced volume declines, unfavorable price/mix, and foreign-exchange pressure; lower input costs and growth in pavement products partly offset these pressures. Performance Materials benefited from automotive demand and regulatory trends, although startup costs and manufacturing productivity weighed on results.
- Separation costs were $6.4 million versus $1.5 million a year earlier. The company also recorded $4.6 million of restructuring and other charges, including workforce reductions and closure of a derivatives operation in Brazil.
- Ingevity identified an inventory intercompany-profit elimination error and corrected it in the quarter: cost of sales increased $3.3 million and net income decreased $2.1 million. Management said the error was not material to prior periods and was not expected to be material to the full year.
- Allocated WestRock costs were $12.4 million versus $9.8 million, including $3.8 million of allocated interest expense. Management cautioned that these historical allocations may differ materially from the costs of operating independently.
Outlook, risks and contingencies
Management forecast 2016 net sales of $870 million to $910 million and adjusted EBITDA of $175 million to $195 million, with revenue expected to decline from 2015 and adjusted EBITDA expected to be flat to slightly lower. Standalone-company costs and pricing/mix pressure in industrial specialties and oilfield markets were expected to be partly offset by cost reductions and growth in Performance Materials and pavement technologies. Planned 2016 capital expenditures were $60 million to $70 million.
Key exposures include weak oil-and-gas activity, constrained crude tall oil supply and pricing, foreign exchange, commodity and energy costs, automotive demand, and regulatory and operational risks. A hypothetical 10% increase in crude tall oil prices would raise quarterly cost of sales by approximately $2 million; a 10% natural-gas price increase would add approximately $0.3 million. At the time of separation, approximately $500 million of borrowings had variable rates; a 100-basis-point rate increase was estimated to raise annual interest expense by about $5 million. Routine litigation was reported, with no material proceedings disclosed. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether post-spin-off standalone costs, transition arrangements with WestRock, and the resulting earnings profile differ from the allocated pre-separation results.
- Actual debt levels, interest expense, covenant headroom, and progress toward management’s stated deleveraging plan after the $500 million facility draw and separation-related payments.
- Whether 2016 sales, adjusted EBITDA, and capital-spending guidance are achieved, particularly given weakness in Performance Chemicals and the dependence on offsets from Performance Materials and pavement markets.
- The implications of the inventory error correction and whether subsequent filings disclose any further effects.
- Inventory conversion, operating cash flow, crude tall oil availability and pricing, and sensitivity to foreign exchange and interest-rate movements.