Ingevity Corporation (NYSE: NGVT) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in millions of dollars unless otherwise noted. Ingevity operates Performance Materials and Performance Chemicals businesses.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $482.0 | $376.8 | $1,284.7 | $1,055.5 |
| Gross profit | $176.3 | $141.8 | $464.7 | $407.8 |
| Gross margin | 36.6% | 37.6% | 36.2% | 38.6% |
| Net income (loss) | $75.4 | $(4.2) | $196.0 | $88.8 |
| Diluted EPS | $1.98 | $(0.11) | $5.06 | $2.21 |
| Adjusted EBITDA (non-GAAP) | $138.2 | $119.5 | $378.3 | $342.6 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $214.9 | $217.0 |
- Q3 sales rose 28%; higher price/mix contributed $87.6 and volume $26.9, partly offset by $9.3 of unfavorable currency effects. Gross profit increased $34.5, as price/mix and volume gains were partly offset by $69.7 of higher manufacturing costs, principally inflation in raw materials and energy.
- Q3 net income improved substantially from the prior-year loss, which included an $85.0 litigation verdict charge. Q3 2022 other expense was $2.0, compared with $84.6 in Q3 2021, largely reflecting that charge’s absence. Nine-month 2022 net income also benefited from the absence of the 2021 charge.
- Segment results: Performance Materials Q3 sales were $144.9 and EBITDA $61.2, versus $118.1 and $56.4. Performance Chemicals sales were $337.1 and EBITDA $77.0, versus $258.7 and $63.1. Chemicals’ sales growth was predominantly price/mix; Materials benefited chiefly from higher volumes.
- Cash and cash equivalents were $72.3 at September 30, 2022, down from $275.4 at year-end 2021. Current assets were $645.1 and current liabilities $290.3. Nine-month investing cash use was $144.7 and financing cash use was $264.9.
- Total debt including finance leases was $1,160.8, net of debt issuance costs $1,154.1; long-term debt including finance leases on the balance sheet was $1,153.2. The company reported $488.7 of undrawn revolving capacity and covenant compliance. Net leverage was 2.0x and interest coverage 10.7x under the credit agreement.
Material changes and developments
- Nine-month sales increased $229.2, driven by $227.9 of favorable price/mix and $20.9 of volume, partly offset by $19.6 of currency effects. Gross profit rose $56.9, but gross margin declined year over year as manufacturing costs increased $179.3.
- Operating cash flow was nearly flat year over year despite higher net income, as working-capital use increased. Receivables rose $86.7 and inventories $40.6 from December 31, 2021, reflecting higher sales, pricing and input costs.
- In 2022, Ingevity redeemed $300.0 of 4.50% Senior Notes due 2026 and repaid a $323.0 term loan. It amended its revolving facility, extending maturity to June 2027 and increasing commitments from $500 to $1 billion. About $509.0 of borrowings had a variable-rate component at quarter-end.
- The company repurchased $139.2 of shares in the first nine months and had $450.7 remaining under its $500.0 authorization at September 30.
- After quarter-end, on October 3, 2022, the company completed its $325.0 acquisition of Ozark Materials, funded with credit-facility borrowings and cash on hand. Purchase-price allocation was preliminary.
Outlook, risks and contingencies
- Management expected 2022 Adjusted EBITDA to grow versus 2021, driven mainly by Performance Chemicals; it expected Performance Materials results to be similar to 2021. The filing provides no specific numerical Adjusted EBITDA or revenue forecast. Management cited inflation, logistics, geopolitical uncertainty and supply-chain disruption as assumptions and risks.
- Management anticipated price improvements in Performance Chemicals, continued volume growth in Pavement Technologies and Engineered Polymers, and moderate Performance Materials growth from some automotive recovery. It projected 2022 capital expenditures of $130–$150.
- The company expects operating cash flow, cash on hand and revolving-facility availability to cover planned operations and obligations for at least the next 12 months. It also expected spending for capital projects, business transformation, taxes, share repurchases and intellectual-property litigation.
- The BASF antitrust counterclaim verdict of approximately $28.3 was trebled to $85.0 and fully accrued in other liabilities. Ingevity disputes the verdict and intends to pursue post-trial and appellate remedies; additional interest, fees and costs may be sought. The ultimate liability could be higher or lower than the accrual.
- Inflation in energy, raw materials and logistics pressured margins; raw-material availability, supply-chain disruption, automotive production, currency movements and floating-rate debt are additional risks. A 100-basis-point increase in variable rates was estimated to raise annualized interest expense by approximately $5.1.
- The business transformation includes a phased ERP implementation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; it noted implementation-related control changes may need consideration as the project progresses.
Investor verification priorities
- Track whether pricing can continue to offset energy, raw-material and logistics inflation, and whether the resulting gross-margin pressure eases.
- Review working-capital conversion, operating cash flow and liquidity after the Ozark acquisition and continued share repurchases.
- Assess post-acquisition debt, integration costs and Ozark’s contribution once disclosed, including final purchase accounting.
- Monitor the BASF litigation appeal, potential additional costs and any change to the $85.0 accrual.
- Check floating-rate exposure, covenant headroom and progress toward management’s qualitative 2022 Adjusted EBITDA outlook.