Ingevity Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results. Ingevity manufactures specialty chemicals and activated carbon products across Performance Materials and Performance Chemicals.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $308.6 million | $260.3 million | $543.8 million | $478.8 million |
| Gross profit | $115.5 million | $89.8 million | $200.6 million | $160.5 million |
| Gross margin | 37.4% | 34.5% | 36.9% | 33.5% |
| Net income attributable to Ingevity stockholders | $46.7 million | $32.1 million | $77.5 million | $51.1 million |
| Diluted EPS | $1.10 | $0.76 | $1.82 | $1.21 |
| Adjusted EBITDA (non-GAAP) | $89.4 million | $67.2 million | $156.5 million | $117.4 million |
Q2 sales rose 19%; first-half sales rose 14%. Management attributed growth to volume, price and mix, favorable currency, and the March acquisition of Georgia-Pacific’s Pine Chemical Business. That acquisition contributed $25.9 million of sales from closing through June 30; its comparative-period sales contribution was $21.1 million for Q2 and $25.9 million for the first half. Lower effective tax rates also supported earnings: 19.2% in Q2 and 20.1% for the first half, versus 32.5% and 32.4% in 2017, primarily reflecting U.S. tax reform.
Segments
- Performance Materials: Q2 sales were $96.1 million, up 7%, and operating profit was $36.6 million versus $30.7 million. First-half sales were $191.6 million, up 11%, and operating profit was $73.5 million versus $60.2 million. Growth was led by automotive evaporative-emissions products, including higher vehicle content and regulatory adoption.
- Performance Chemicals: Q2 sales were $212.5 million, up 24%, and operating profit was $36.9 million versus $26.4 million. First-half sales were $352.2 million, up 15%, and operating profit was $55.6 million versus $36.8 million. Acquisition contribution, volume, pricing and mix, and favorable currency supported results; higher SG&A partly offset improvement.
Cash flow, debt and liquidity
- First-half operating cash flow was $71.1 million, compared with $52.7 million. Capital expenditures were $30.4 million, giving cash flow after capital expenditures of $40.7 million.
- Investing cash outflow was $348.1 million, principally the $315.0 million Pine Chemical Business purchase. Financing cash inflow was $271.9 million, primarily reflecting proceeds from new senior notes.
- Cash was $83.0 million at June 30, 2018. Current assets were $457.6 million and current liabilities $177.3 million.
- Total debt, including capital leases, was $755.0 million gross ($748.3 million net of issuance costs), versus $455.0 million gross at year-end. This included $375.0 million of term loans, $300.0 million of 4.50% senior notes due 2026, and $80.0 million of capital leases. The revolver had $548.2 million available; the company reported compliance with debt covenants.
- Receivables and inventories increased $48.1 million and $35.1 million, respectively, from year-end. Management cited higher sales, seasonal paving inventory, acquired inventory, and inventory built ahead of China’s new gasoline-vapor standards.
Outlook, commentary and risks
Management reaffirmed 2018 guidance of net sales of $1.10 billion to $1.13 billion and Adjusted EBITDA of $302 million to $314 million, representing expected Adjusted EBITDA growth of 24% to 29%. The outlook assumes acquisition contribution and growth in higher-margin automotive, pavement and oilfield applications, partly offset by weaker Performance Chemicals industrial specialties volume and higher production-related costs, including freight. Projected 2018 capital expenditures were $80 million to $90 million. The filing does not provide a reconciliation of projected Adjusted EBITDA to GAAP net income, citing the inability to estimate certain items without unreasonable effort.
- Key risks to guidance include vehicle sales and production, changing vehicle mix, lower China automotive demand, oil prices and drilling activity, raw-material and freight costs, and successful integration of the Pine Chemical Business and realization of synergies.
- Crude tall oil (CTO) is a constrained, important input: it represented about 16% of first-half cost of sales and 39% of raw-material purchases. A hypothetical 10% CTO price increase would add about $3.6 million to first-half costs before any customer pass-through. A 100-basis-point increase in variable borrowing rates was estimated to add about $3.8 million in annual interest expense.
- The company entered a 20-year market-based CTO supply contract with Georgia-Pacific as part of the acquisition. The purchase-price allocation remained preliminary, and integration and valuation adjustments remained possible.
- On August 1, 2018, after quarter-end, Ingevity acquired the remaining 30% of Purification Cellutions LLC for approximately $80 million.
- Routine litigation was reported as not material; the company said there were no material changes to the risk factors in its 2017 annual report. Disclosure controls were deemed effective, although the acquired Pine Chemical Business was excluded from the controls assessment during the permitted post-acquisition period.
Important facts for investors to verify
- Whether Pine Chemical integration, purchase accounting and expected synergies progress as planned, and how the business performs after the reported partial-period contribution.
- Whether CTO availability and pricing, freight and other raw-material costs affect margins or require price increases.
- Whether organic growth and product mix support the 2018 sales and Adjusted EBITDA guidance, given the stated industrial specialties offset and end-market risks.
- How the $80 million Purification Cellutions purchase was funded and its effect on debt, earnings attributable to shareholders, and future results.
- Whether working-capital investment converts to cash and whether leverage, interest expense and covenant headroom remain manageable.
- How to interpret reported growth across periods: 2018 adopted ASC 606 while 2017 comparatives were not restated; the filing quantifies a modest ASC 606 uplift to first-half 2018 sales and net income.