Ingevity Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Ingevity makes specialty chemicals and activated carbon, reported in Performance Materials and Performance Chemicals.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $1,292.9 million | $1,133.6 million |
| Gross profit / gross margin | $482.0 million / 37.3% | $416.8 million / 36.8% |
| Income before taxes | $227.9 million | $221.8 million |
| Net income attributable to Ingevity stockholders | $183.7 million | $169.1 million |
| Diluted EPS | $4.35 | $3.97 |
| Adjusted EBITDA (non-GAAP) | $396.9 million | $320.5 million |
| Cash provided by operating activities | $275.7 million | $252.0 million |
| Capital expenditures | $114.8 million | $93.9 million |
Sales grew 14%, driven by 11% volume growth, including $122.1 million from the Caprolactone acquisition, and favorable price/mix; foreign exchange reduced sales by $7.6 million. Gross profit increased $65.2 million, while acquisition costs, higher SG&A, interest expense and amortization also rose. Net income attributable to stockholders increased 9%; Adjusted EBITDA increased 24%.
Performance Materials sales were $490.6 million, up 23%, and segment EBITDA was $213.4 million, up from $169.4 million. Performance Chemicals sales were $802.3 million, up 9%, and segment EBITDA was $183.5 million, up from $151.1 million. On a pro forma basis including both acquired businesses for comparable periods, Performance Chemicals sales fell 11% and segment EBITDA fell $28.0 million, principally because of lower volumes.
Fourth quarter: Sales were $303.4 million versus $278.6 million in Q4 2018; gross profit was $111.0 million versus $97.6 million. Net income attributable to stockholders was $44.3 million versus $42.1 million, and diluted EPS was $1.05 versus $0.99.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $56.5 million, working capital was $247.7 million, and available capacity under the $750 million revolving facility was $616.6 million. Total debt including finance lease obligations was $1,257.8 million, compared with $758.9 million a year earlier. The company reported $1,228.4 million of long-term debt including finance leases. Operating cash flow covered capital expenditures, leaving approximately $160.9 million before acquisitions and other investing uses. Management stated available cash, operating cash flow and revolver capacity should meet needs and obligations for at least 12 months.
The debt increase largely reflected financing for the $652.5 million Caprolactone acquisition, completed in February 2019; net cash paid for acquired businesses was $537.9 million. The company issued a $375 million term loan and ended the year with $131.3 million drawn on its revolver. Actual leverage was 3.0x and interest coverage 8.4x, within covenants. Approximately $872 million of borrowings had variable rates; management estimated a 100-basis-point rate increase would add about $9 million to annual interest expense. 2020 capital expenditures were projected at $95–$105 million.
Material changes and unusual items
- The Caprolactone Business acquisition added $122.1 million of reported 2019 sales. Acquisition-related costs were $26.9 million, and total acquisition and other-related costs, including inventory step-up amortization, were $35.3 million. The acquired business added $295.1 million of goodwill and $159.0 million of customer-relationship intangibles.
- Performance Materials benefited from stronger automotive carbon volumes as North American, Chinese and European emissions regulations tightened. Performance Chemicals’ reported growth included the acquired businesses; comparable pro forma sales and EBITDA declined.
- SG&A rose to $163.1 million, including higher acquisition-related intangible amortization and $10.2 million of increased intellectual-property litigation costs. Interest expense increased to $54.6 million from $33.2 million.
- The company repurchased $6.4 million of shares in 2019; $389.5 million remained under its authorization. No shares were repurchased in Q4.
- The auditor issued unqualified opinions on the financial statements and internal controls. The Caprolactone legal entity, representing 6% of year-end assets and 9% of annual revenue, was excluded from the internal-control assessment during its first year after acquisition.
Outlook, commentary and principal risks
For 2020, management forecast Adjusted EBITDA of $400–$420 million, or growth of 1%–6% versus 2019. It expected growth in automotive technologies and pavement technologies, and a recovery in engineered polymers, partly offset by lower industrial specialties and oilfield volumes, inflation in freight and CTO costs, and lower refinery throughput. The forecast assumed the COVID-19 outbreak slowed by the end of Q1. Management estimated Q1 impacts of $20–$30 million to revenue and $10–$15 million to Adjusted EBITDA, with some or all expected to be recovered over the year. These are forward-looking estimates, not guarantees.
- Supply and input costs: Performance Chemicals depends on limited-supply crude tall oil (CTO), about 10% of 2019 cost of sales and 32% of raw-material purchases. Competing biofuel uses, weather, supplier performance and contract terms may constrain supply or raise costs; passing increases to customers may be difficult.
- Markets and regulation: Automotive carbon demand depends on vehicle production, gasoline vehicle mix and adoption of stricter emissions standards. Oilfield demand is sensitive to oil and gas activity; pavement demand depends partly on government infrastructure spending; printing inks faces declining volumes and pricing pressure.
- Intellectual property: The company is involved in litigation relating to its canister-bleed-emissions patent, including counterclaims. A significant patent expires in March 2022; legal costs and competitive effects warrant monitoring.
- Operations and external risks: Facility or supply-chain disruptions, labor negotiations, reliance on co-located service providers, Brexit, foreign exchange, tariffs, environmental regulation and cyber incidents could affect results. The filing identified the COVID-19 outbreak as a potential risk to Chinese operations, customers and supply chains.
- Leadership: Richard B. Kelson was identified as interim President and CEO in 2020. The filing also lists a separation agreement with former CEO D. Michael Wilson dated February 20, 2020.
Investor facts to verify
- Whether 2020 Adjusted EBITDA guidance was achieved, and how the COVID-19 impacts and recovery compared with management’s assumptions.
- Whether acquired Caprolactone operations deliver expected growth and returns, given the purchase price, added debt, amortization and pro forma 2019 volume declines.
- CTO availability, contract pricing and the company’s ability to pass through raw-material and freight cost increases.
- Progress and outcomes in the automotive patent litigation, and the commercial impact of the March 2022 patent expiry and evolving emissions rules.
- Debt repayment, refinancing and interest-rate exposure, including covenant headroom and liquidity after planned capital spending and other commitments.
- Q4 results are unaudited quarterly information; compare them with the audited annual statements and review the filing’s notes for acquisition accounting and non-GAAP reconciliations.