Ingevity Corporation (NYSE: NGVT) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Ingevity makes specialty chemicals and activated carbon products. It reports Performance Materials, Performance Chemicals, and Advanced Polymer Technologies. Segment reporting was reorganized in Q1 2023; prior-period segment figures were recast.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $481.8m | $419.9m | $874.4m | $802.7m |
| Gross profit | $153.0m | $150.6m | $283.4m | $288.4m |
| Gross margin | 31.8% | 35.9% | 32.4% | 35.9% |
| Net income | $35.5m | $59.8m | $86.2m | $120.6m |
| Diluted EPS | $0.97 | $1.54 | $2.33 | $3.09 |
| Adjusted EBITDA (non-GAAP) | $120.7m | $121.1m | $224.6m | $240.1m |
- Q2 sales grew 15%, chiefly from favorable price/mix and higher volume; H1 sales rose 9%, with favorable price/mix more than offsetting lower volume and currency impacts.
- Profitability weakened despite higher sales. Management cited higher manufacturing costs, especially crude tall oil (CTO), and increased interest expense. Q2 interest expense was $21.6m, versus $15.1m; H1 was $41.2m, versus $25.8m.
- Q2 segment EBITDA: Performance Materials $64.2m (prior year $55.6m); Performance Chemicals $44.9m ($61.7m); Advanced Polymer Technologies $11.6m ($3.8m). Performance Chemicals’ decline reflected higher costs, lower utilization, and employee costs. Advanced Polymer Technologies benefited from pricing/mix and lower input costs.
- H1 operating cash flow was $53.6m, down from $114.8m. Capital expenditures were $47.1m; investing cash outflow was $21.5m, including $31.4m proceeds from a strategic-investment sale. Financing cash outflow was $40.1m, including $92.1m of share repurchases.
- Cash and cash equivalents were $68.0m at June 30, 2023, versus $76.7m at year-end 2022. Total debt including finance leases was $1,532.4m, versus $1,479.9m; $881.0m was variable-rate borrowings. Revolver availability was $116.7m. The company reported compliance with debt covenants; net leverage was 2.6x and interest coverage 8.1x under the credit agreement.
Outlook, material developments, and risks
- Full-year 2023 guidance remained net sales of $1.6–$1.7bn and Adjusted EBITDA of $390–$420m. Expected support includes automotive carbon, pavement technologies, and targeted Advanced Polymer Technologies markets; CTO cost increases and industrial specialties volume pressure are headwinds. The filing does not provide a GAAP net-income reconciliation for this guidance.
- 2023 capital expenditures were projected at $100–$120m. Management said operating cash flow, cash on hand, and revolver availability should fund planned operations and obligations for at least the next 12 months.
- Restructuring actions are expected to cost $12–$14m and be completed during the remainder of 2023. The Crossett, Arkansas feedstock transition is expected to generate $20–$25m of 2023 expense; production was halted in April. Transitioning services at the North Charleston plant is expected to cost $15–$20m in 2023 after WestRock announced its paper mill closure and termination of shared services effective August 31, 2023.
- Material litigation: BASF obtained a jury verdict of approximately $28.3m, trebled to approximately $85.0m under antitrust law. The court entered judgment in May 2023. Ingevity is challenging the result and has accrued the full $85.0m, plus post-judgment interest as it accrues. Final resolution may take up to 30 months; ultimate liability could differ from the accrual.
- CTO represented approximately 23% of H1 cost of sales; price increases that cannot be passed through may pressure margins. A 100-basis-point rise in variable rates was estimated to increase annual interest expense by approximately $8.8m. Other cited risks include end-market cyclicality, supply-chain and raw-material availability, foreign exchange, and execution of plant transitions.
- The company repurchased $92.1m of stock in H1; $353.4m remained under its $500m authorization at June 30. H1 net income included a $19.2m gain on sale of a strategic investment.
Key facts for investors to verify
- Progress and costs of the Crossett and North Charleston transitions, including continuity of critical utilities and production.
- CTO pricing, availability, pass-through capability, and resulting Performance Chemicals margins.
- Status, interest accrual, and potential final exposure in the BASF litigation.
- Delivery against 2023 sales and Adjusted EBITDA guidance, alongside working-capital needs, cash generation, and debt costs.
- Whether continued buybacks remain consistent with liquidity needs, planned capital spending, transition costs, and leverage.