Ingevity Corporation — Q2 2022 Form 10-Q
Business context and reporting period. Ingevity develops specialty chemicals and activated-carbon products through Performance Materials and Performance Chemicals. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $419.9m | $358.4m | $802.7m | $678.7m |
| Gross profit | $150.6m | $139.8m | $288.4m | $266.0m |
| Gross margin | 35.9% | 39.0% | 35.9% | 39.2% |
| Net income | $59.8m | $44.3m | $120.6m | $93.0m |
| Diluted EPS | $1.54 | $1.10 | $3.09 | $2.30 |
| Adjusted EBITDA (non-GAAP) | $121.1m | $117.7m | $240.1m | $223.1m |
- Revenue and margins: Q2 sales rose 17%, led by $81.7m of favorable pricing and mix, partly offset by lower volume ($12.6m) and currency ($7.6m). Six-month sales grew 18%, chiefly from $140.2m of pricing and mix. Higher raw-material and energy costs weighed on gross margin: Q2 manufacturing costs increased $61.9m and six-month costs increased $109.7m.
- Segments: Q2 Performance Chemicals sales increased to $297.5m from $232.4m and EBITDA to $65.5m from $56.4m, as pricing more than offset cost inflation. Performance Materials sales declined to $122.4m from $126.0m and EBITDA to $55.6m from $61.3m, with China COVID-related shutdowns, higher manufacturing costs and currency headwinds. For the first half, Chemicals sales/EBITDA were $531.9m/$106.6m; Materials sales/EBITDA were $270.8m/$133.5m.
- Cash flow and investment: Six-month operating cash flow was $114.8m versus $116.9m. Capital expenditures were $57.2m, yielding approximately $57.6m operating cash flow less capex. Working-capital use increased, particularly from receivables and inventories. Investing cash outflow was $58.6m.
- Liquidity and debt: Cash was $131.3m at June 30, down from $275.4m at year-end 2021. Current assets were $677.7m and current liabilities $267.2m. Debt and finance leases totaled $1,184.1m before $7.0m of issuance costs, including $532.0m drawn on the revolver, $550.0m of 2028 notes and $102.1m of finance leases. Revolver availability was $466.2m. The company repaid its $323m term loan and redeemed $300m of 2026 notes; its amended revolver commitment increased to $1bn and maturity was extended to June 2027. It reported compliance with debt covenants.
Changes, outlook and risks
- Higher pricing drove sales and EBITDA growth, but inflation outpaced pricing sufficiently to reduce gross-margin percentage. Q2 net income benefited from a lower tax provision: the effective tax rate was 21.8%, versus 39.9% in Q2 2021, when a one-time UK tax-rate change affected results.
- 2022 guidance was unchanged: net sales of $1.525bn–$1.650bn; Adjusted EBITDA of $430m–$470m; operating cash flow of $305m–$325m; capital expenditures of $155m–$175m; and free cash flow of approximately $150m. Management expects continued pricing to offset inflation, growth in Pavement Technologies and Engineered Polymers, and moderate Performance Materials growth, while auto production remains constrained. Guidance assumes continued logistical headwinds, geopolitical uncertainty, cost inflation and supply-chain disruption.
- Management said the Ukraine war had not caused, and was not expected to cause, a direct material adverse business effect; energy-price volatility was not expected to be material. Other cited risks include automotive and cyclical end-market weakness, limited and costly crude tall oil and other raw materials, supply disruptions, inflation, foreign-exchange and floating-rate exposure, ERP implementation, and litigation.
- Material contingency: A jury verdict in BASF’s favor in antitrust and related counterclaims was approximately $28.3m, trebled to approximately $85m. Ingevity disputes the verdict and intends to pursue post-trial relief and appeal; it accrued $85m in other liabilities and said the ultimate liability could be higher or lower.
- Unusual and subsequent events: Debt redemption and repayment costs, including a $3.4m redemption premium and accelerated financing fees, were recorded in interest expense. Business transformation costs were $7.3m for the first half; total initiative costs were estimated at $90m–$95m. After quarter-end, the board authorized a new $500m share-repurchase program, and Ingevity agreed to acquire Ozark Materials for $325m, subject to customary adjustments and closing conditions; closing was expected early in Q4 2022.
Key investor verification points
- Track the BASF litigation: post-trial proceedings, appeals, interest and fees, and changes to the $85m accrual.
- Assess whether pricing continues to cover raw-material, energy, logistics and manufacturing cost inflation, and whether volume declines persist.
- Monitor cash conversion and working capital, capital spending, revolver borrowings, variable-rate interest exposure and covenant headroom.
- Verify delivery against full-year guidance and assumptions about auto production, supply-chain conditions and end-market demand.
- Confirm Ozark acquisition approvals, final purchase-price adjustments, financing and integration plans.