Ingevity Corporation — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual 10-K; fourth-quarter figures below are unaudited quarterly data included in the filing. The company makes specialty chemicals and activated carbon products through Performance Materials and Performance Chemicals.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $1,133.6 million | $972.4 million |
| Gross profit | $416.8 million | $329.0 million |
| Income before taxes | $221.8 million | $174.8 million |
| Net income attributable to Ingevity shareholders | $169.1 million | $126.5 million |
| Diluted EPS | $3.97 | $2.97 |
| Adjusted EBITDA (non-GAAP) | $320.5 million | $242.7 million |
| Cash from operating activities | $252.0 million | $174.3 million |
| Capital expenditures | $93.9 million | $52.6 million |
- Sales rose 17%, driven primarily by 15% volume growth; price/mix and foreign exchange each contributed about 1%. Gross margin increased to approximately 36.8% from 33.8%.
- Performance Materials sales were $400.4 million, up 15%; segment operating profit was $147.2 million, up $25.2 million. Growth reflected automotive carbon volumes, regulatory adoption, and improved price/mix.
- Performance Chemicals sales were $733.2 million, up 18%; segment operating profit was $116.3 million, up $36.0 million. The comparison includes the Georgia-Pacific pine chemicals business acquired in March 2018. On the company’s pro forma combined basis, segment sales increased 4% and segment operating profit increased to $118.0 million from $89.5 million.
- Adjusted EBITDA margin was approximately 28.3%, versus 25.0%. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results.
- Fourth-quarter sales were $278.6 million versus $229.5 million; gross profit was $97.6 million versus $75.3 million. Net income attributable to shareholders was $42.1 million versus $41.6 million, and diluted EPS was $0.99 versus $0.97.
- Operating cash flow increased by $77.7 million, primarily reflecting higher earnings; working-capital investment, including inventory growth, partly offset the increase.
Debt, liquidity, and capital allocation
- At year-end, cash and cash equivalents were $77.5 million; current assets were $422.7 million and current liabilities $183.3 million. Working capital was $239.4 million.
- Year-end debt, including capital leases, was $758.9 million gross ($752.4 million net of debt issuance costs); long-term debt including capital leases was $741.2 million. The company had $748.1 million of available revolving-credit capacity at December 31, 2018.
- Ingevity issued $300 million of 4.50% senior notes due 2026 and amended its credit facility, increasing commitments to $750 million and extending maturity to August 2023. It reported compliance with debt covenants at year-end.
- Investing cash outflow was $414.4 million, including $315.5 million for the Georgia-Pacific pine chemicals acquisition. Financing cash inflow was $153.7 million, including note proceeds, partly offset by the $80 million buyout of the remaining honeycomb joint-venture interest and $47.4 million of share repurchases.
- Projected 2019 capital expenditures were $110–$120 million. Management said operating cash flow, cash on hand, and revolver availability should cover expected needs and obligations for at least the next 12 months, as assessed before the subsequent acquisition.
Outlook, notable items, and risks
- Management’s 2019 guidance was net sales of $1.30–$1.36 billion and Adjusted EBITDA of $390–$410 million, including the Caprolactone acquisition from February 13, 2019. The company did not provide a reconciliation of projected Adjusted EBITDA to GAAP net income, citing inability to estimate certain items without unreasonable effort.
- Management expected growth in automotive materials from emissions standards and pavement technologies, with industrial specialties volumes expected to be lower and oilfield volumes flat. Assumptions included WTI oil prices in the mid-$50s per barrel.
- Ingevity acquired Georgia-Pacific’s pine chemicals business for $315.5 million in March 2018 and entered a 20-year CTO supply agreement with Georgia-Pacific. In August 2018, it purchased the remaining 30% of its honeycomb joint venture for $80 million.
- The Caprolactone business acquisition closed after year-end for a preliminary purchase price of $652.5 million, excluding $113.1 million of net debt, and was funded primarily with the revolver and cash. Immediately after the draw, remaining revolver capacity was $113.1 million. Purchase accounting and pro forma information were preliminary or not yet completed in this filing.
- Key risks include constrained crude tall oil (CTO) supply and price volatility, dependence on long-term suppliers, inability to pass raw-material cost increases through to customers, automotive production and regulatory adoption, oilfield demand sensitivity to oil prices, competition and patent litigation, and operational or supply-chain disruptions. The company’s significant canister-bleed patent expires in March 2022.
- Management disclosed no material pending or contemplated litigation proceedings and no material off-balance-sheet arrangements. PwC gave an unqualified opinion on the financial statements and internal controls; the acquired pine chemicals business was excluded from the 2018 internal-control assessment under the acquisition-year allowance.
Important facts for investors to verify
- How much of reported Performance Chemicals growth came from the March 2018 acquisition versus comparable underlying demand; review the pro forma figures and their stated limitations.
- Whether CTO supply, including the WestRock and Georgia-Pacific contracts, remains adequate and affordable, and the extent to which higher costs can be passed through.
- The Caprolactone acquisition’s final purchase-price allocation, pro forma contribution, integration costs, and effect on leverage and revolver availability.
- Whether 2019 sales and Adjusted EBITDA guidance was achieved, including assumptions for vehicle production, emissions regulation, oil prices, and industrial-specialties volumes.
- Debt service, covenant headroom, floating-rate exposure, and the company’s planned share repurchases relative to acquisition funding and capital spending.