Ingevity Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Ingevity manufactures specialty chemicals and activated carbon products through its Performance Materials and Performance Chemicals segments. Unless otherwise noted, amounts are in millions of U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $358.4 | $270.6 | $678.7 | $558.8 |
| Gross profit | $139.8 | $83.9 | $266.0 | $198.5 |
| Gross margin | 39.0% | 31.0% | 39.2% | 35.5% |
| Net income | $44.3 | $20.2 | $93.0 | $65.5 |
| Diluted EPS | $1.10 | $0.49 | $2.30 | $1.57 |
| Adjusted EBITDA (non-GAAP) | $117.7 | $67.2 | $223.1 | $159.4 |
Q2 sales rose 32%; management attributed the increase chiefly to higher volumes, with favorable price and mix and currency also contributing. Gross profit increased $55.9, reflecting volume, pricing/mix and lower manufacturing costs from improved plant throughput. First-half sales increased 21% and gross profit increased $67.5.
- Performance Materials: Q2 sales were $126.0, up 49%, and segment EBITDA was $61.3 versus $23.3. Growth was led by automotive product volumes and improved plant throughput.
- Performance Chemicals: Q2 sales were $232.4, up 25%, and segment EBITDA was $56.4 versus $43.9. Volume and pricing/mix improved results, partly offset by energy, freight and SG&A costs.
Q2 net income margin was approximately 12.4%, versus 7.5% a year earlier. The reported effective tax rate was 39.9% in Q2 and 31.4% for the first half, versus 20.5% and 18.7%, respectively, in 2020. The increase included a $14.7 expense from UK tax-law changes that revalued deferred tax liabilities; excluding discrete items, the effective rates were 20.1% for Q2 and 20.6% for the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $116.9, compared with $109.1 in 2020. Capital expenditures were $40.9, making operating cash flow less capital expenditures $76.0; this is a simple calculation, not company-reported full-year free cash flow.
- First-half investing cash outflow was $57.2, including $40.9 of capital expenditures and a $16.5 strategic equity investment. Financing cash outflow was $83.6, including $68.1 of share repurchases.
- At June 30, cash and cash equivalents were $233.3, total current assets $669.6 and current liabilities $232.8. Total debt including finance leases was $1,290.3 before $12.1 of debt issuance costs; $19.5 was classified as current. The revolving facility had $497.3 of undrawn capacity.
- Cash declined $24.4 from year-end 2020. Receivables and inventories increased $29.3 and $25.5, respectively, primarily reflecting higher sales and inventory built to support forecast demand.
- The company reported covenant compliance. Four-quarter gross and net leverage ratios were 2.6x and 2.2x, respectively, and interest coverage was 11.7x.
Outlook, management commentary and notable items
- Management raised 2021 guidance to net sales of $1.32–$1.36 billion and adjusted EBITDA of $425–$440. It forecast operating cash flow of $300–$320, capital expenditures of $100–$120 and approximate free cash flow of $200, defined as operating cash flow less capital expenditures.
- Management cited robust product demand and expected automotive production recovery to support Performance Materials in 2022 and beyond. It anticipated ongoing headwinds from logistics availability and costs, raw-material inflation and automotive-sector input disruptions, and said it would pursue pricing to offset costs.
- The company expects total business-transformation and ERP initiative costs of approximately $60–$70 over the project, including $30–$35 of non-capitalizable costs; $18–$20 of non-capitalizable costs were expected in 2021. ERP implementation is planned in phases over two years.
- Ingevity invested $16.5 in a privately held company during Q2. It repurchased $68.1 of shares in the first half; $344.0 remained under its authorization at quarter-end.
- Management stated that cash, operating cash flow and available revolver capacity should fund planned operations and obligations for at least the next 12 months. It also noted anticipated spending on intellectual-property litigation during that period.
- Routine legal matters were not considered material, and the filing reported no material changes to previously disclosed risk factors. Risks identified include COVID-19 and general economic conditions, supply-chain disruption, foreign exchange, end-market demand, crude tall oil supply, regulation and ERP implementation.
Most important facts for investors to verify
- Whether volume growth and price increases continue to offset logistics, raw-material, energy and freight cost pressures.
- Progress against raised full-year guidance, including cash conversion and planned capital spending.
- The impact of the UK tax-rate change and any further discrete tax items on reported earnings.
- Execution, cost and control risks associated with the multi-year ERP transformation.
- Debt, share-repurchase pace and liquidity needs, including expected litigation and other planned expenditures.