Ingevity Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Ingevity manufactures specialty chemicals and activated carbon materials through its Performance Materials and Performance Chemicals segments. Amounts are in U.S. dollars; financial statement figures are unaudited.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $320.3 million | $288.2 million |
| Gross profit / gross margin | $126.2 million / 39.4% | $114.6 million / 39.8% |
| Net income | $48.7 million | $45.3 million |
| Diluted EPS | $1.20 | $1.08 |
| Segment EBITDA | $105.4 million | $92.2 million |
| Operating cash flow | $51.1 million | $60.2 million |
| Capital expenditures | $17.0 million | $19.5 million |
Sales increased 11% year over year, driven principally by higher volume ($25.6 million), with favorable price/mix ($3.5 million) and currency ($3.0 million) also contributing. Segment EBITDA rose 14%; Performance Materials EBITDA increased to $73.7 million from $61.2 million, while Performance Chemicals EBITDA rose to $31.7 million from $31.0 million. Net income increased 8%. Gross margin declined modestly as higher manufacturing costs partly offset sales gains.
At March 31, cash and cash equivalents were $237.8 million, versus $257.7 million at year-end 2020. Current assets were $642.4 million and current liabilities $224.5 million. Debt including finance lease obligations was $1,295.2 million before $12.6 million of debt issuance costs; the balance-sheet carrying amount, net of those costs, was $1,282.6 million. The company had $497.7 million of undrawn revolver capacity. It reported gross and net leverage ratios of 2.9x and 2.4x, respectively, and interest coverage of 12.2x; it was in compliance with debt covenants.
Cash from operations fell $9.1 million year over year, primarily reflecting increased receivables associated with higher sales. Financing cash use included $39.4 million of share repurchases and $9.4 million of long-term debt repayments. The filing reports no material off-balance-sheet arrangements.
Material changes and notable items
- Revenue increased in both segments. Performance Materials sales grew 16%, led by automotive product volume; Performance Chemicals sales grew 7%, with growth in engineered polymers and industrial specialties.
- Higher freight, raw-material inflation, energy and depreciation contributed to a $7.5 million increase in manufacturing costs. Management cited transportation and logistics issues, raw-material inflation and automotive material disruptions as potential headwinds.
- Restructuring and other charges increased to $3.9 million from $0.5 million, including $3.8 million of business-transformation costs. The multi-year ERP initiative is expected to cost approximately $60–70 million in total, including $30–35 million of non-capitalizable costs; $18–20 million of those costs are expected in 2021.
- Q1 2021 share repurchases totaled $39.4 million for 527,550 shares at a weighted-average $74.64 per share; $372.6 million remained under the authorization.
- The effective tax rate was 21.2%, compared with 17.9% in Q1 2020. The filing attributes the increase in the estimated annual rate principally to the mix and level of forecast earnings across tax jurisdictions, partly offset by tax benefits.
Outlook, risks and contingencies
Management raised its 2021 guidance after a strong first quarter and continued optimism. Guidance is net sales of $1.275–$1.325 billion, Adjusted EBITDA of $410–$430 million, operating cash flow of $300–$320 million, capital expenditures of $100–$120 million, and approximately $200 million of free cash flow. The filing does not provide the prior guidance ranges. Adjusted EBITDA is a non-GAAP measure; management did not provide a projected reconciliation to GAAP net income, citing components it cannot predict without unreasonable effort.
Management expects cash on hand, operating cash flow and available revolver capacity to meet needs for at least the next 12 months. Planned cash uses include capital spending, ERP costs, debt service, repurchases, taxes and additional spending related to Performance Materials intellectual-property litigation. The company said current litigation was not material to its financial condition, liquidity or results.
Risks highlighted include automotive production disruption from 2021 microchip shortages, which management anticipated could continue into the second half of 2021; COVID-19 and broader economic conditions; supply-chain and logistics disruption; raw-material and energy price changes; foreign-exchange and interest-rate exposure; and ERP implementation complexity. A 100-basis-point increase in variable rates was estimated to increase annual interest expense by about $3.4 million. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether automotive chip shortages, logistics constraints and input-cost inflation affect subsequent sales, margins and the 2021 guidance ranges.
- Progress and total spending on the ERP transformation, including the expected 2021 non-capitalizable costs.
- Operating cash conversion and working-capital trends, particularly receivables and inventory, alongside planned capital expenditures and repurchases.
- Debt, covenant headroom and interest-rate exposure, including the effect of variable-rate borrowings not covered by swaps.
- Performance Materials intellectual-property litigation spending and any material developments; the filing does not provide a clear quantified estimate of the future spending.