Ingevity Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. Ingevity makes specialty chemicals and activated-carbon materials through Performance Materials and Performance Chemicals.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $1,216.1 million | $1,292.9 million |
| Gross profit / gross margin | $465.5 million / 38.3% | $482.0 million / 37.3% |
| Income before taxes | $235.1 million | $227.9 million |
| Net income attributable to Ingevity stockholders | $181.4 million | $183.7 million |
| Diluted EPS | $4.37 | $4.35 |
| Adjusted EBITDA (non-GAAP) | $397.9 million | $396.9 million |
| Cash from operating activities | $352.4 million | $275.7 million |
| Capital expenditures | $82.1 million | $114.8 million |
- Cash from operations less capital expenditures was $270.3 million, compared with $160.9 million in 2019.
- At year-end, cash and cash equivalents were $257.7 million; working capital was $405.3 million. Current assets were $628.7 million and current liabilities $223.4 million.
- Year-end debt including finance leases was $1,306.5 million before debt issuance costs ($1,293.4 million net of those costs); long-term debt including finance leases, as presented on the balance sheet, was $1,267.4 million. Cash less debt net of issuance costs implies approximately $1,035.7 million of net debt.
- Gross margin improved despite lower sales. Net income was slightly lower, while Adjusted EBITDA was nearly unchanged.
Segments and material changes
- Performance Materials: Sales rose 4% to $510.0 million; segment EBITDA increased to $249.2 million from $213.4 million. Automotive technologies sales grew on favorable price/mix and modest volume gains, including demand associated with emissions regulations. Process purification sales declined.
- Performance Chemicals: Sales fell 12% to $706.1 million; segment EBITDA declined to $148.7 million from $183.5 million. Industrial specialties and oilfield technologies were the main sources of lower volume; pavement technologies and engineered polymers sales increased as reported.
- Consolidated sales fell 6%, primarily because of an $85.2 million volume decline, concentrated in Performance Chemicals. Favorable price/mix partly offset the decline. The 2019 comparison included the acquired caprolactone business for only part of that year.
- Fourth-quarter 2020 sales were $325.6 million, gross profit $127.4 million, net income $46.0 million, and diluted EPS $1.11. In fourth-quarter 2019, these were $303.4 million, $111.0 million, $44.3 million, and $1.05, respectively.
Outlook, liquidity, risks and unusual items
- Management expected 2021 Adjusted EBITDA of $400–$420 million, or growth of 1%–6% versus 2020. The outlook assumed continued COVID-19 effects in the first half and improving conditions in the second half. Management did not provide a GAAP net-income reconciliation because it could not forecast certain items without unreasonable effort.
- Management anticipated growth in automotive technologies, pavement technologies and engineered polymers, with softness in oilfield chemicals and publication inks. It cited the global automotive microchip shortage and pandemic disruption as near-term constraints. Projected 2021 capital expenditures were $100–$120 million.
- Liquidity included $497.7 million of undrawn revolving-credit capacity at year-end. Management said cash, operating cash flow and available borrowing capacity should meet expected needs for at least the next 12 months. The revolving facility was amended to mature in 2025 and reduced from $750 million to $500 million.
- In October 2020, the company issued $550 million of 3.875% senior notes due 2028, using proceeds principally to repay a $375 million term loan and revolving-credit borrowings. The company reported compliance with debt covenants at year-end.
- COVID-19 reduced demand, particularly in automotive during the second quarter, and led to temporary production reductions and cost actions. Production returned to normal at all plants in the third quarter as demand improved. The company drew $250 million on its revolver as a precaution in March and repaid it by year-end.
- Restructuring and other charges were $18.5 million, including $10.0 million of non-capitalizable business-transformation costs and $6.4 million of severance and employee-related costs. Management estimated total transformation costs of $60–$70 million, including $17–$20 million that would not be capitalized.
- Key risks include limited crude tall oil supply and pricing, dependence on third parties and single-site production for some products, cyclical automotive and oilfield markets, COVID-19 and supply-chain disruption, foreign exchange, regulatory changes, and environmental and chemical-manufacturing exposures. CTO represented about 11% of cost of sales in 2020.
- Some claims in the company’s canister-bleed-emissions patent were found invalid in November 2020; Ingevity said it intended to challenge the decision and expected limited near-term commercial or financial impact through patent expiry in March 2022. The filing describes related intellectual-property litigation and counterclaims. It reports no litigation material to consolidated financial condition or results of operations.
- The annual goodwill impairment test found reporting-unit fair values substantially above carrying values, with no impairment recorded. Performance Chemicals goodwill was $441.0 million; the auditor identified its impairment assessment as a critical audit matter because of management’s revenue-growth assumptions.
- PwC gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The new global ERP implementation is a complex, multi-year project and could create execution or control risks.
Important facts for investors to verify
- Whether 2021 EBITDA guidance was achieved, including the assumptions for automotive production, microchip availability and recovery from pandemic impacts.
- Whether Performance Chemicals volumes and margins stabilized, particularly in industrial specialties and oilfield technologies, and whether pavement and engineered polymers growth offset weakness.
- CTO supply coverage, contract terms and pricing exposure, including the ability to pass higher raw-material costs through to customers.
- Debt maturities, leverage and interest-rate exposure; the filing reported gross and net leverage ratios of 3.1 and 2.5, respectively, and interest coverage of 10.0 at year-end.
- Actual costs and benefits of the business transformation and ERP program, and any resulting changes to internal controls.
- Developments in the patent litigation, other contingencies, and the assumptions supporting goodwill valuation.