Ingevity Corporation — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2016. Ingevity makes specialty chemicals and high-performance carbon materials, reported in Performance Materials and Performance Chemicals. WestRock completed the spin-off on May 15, 2016; pre-spin-off results are presented on a carve-out basis, so comparisons with 2015 and across 2016 may not reflect a fully standalone company.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $252.0 million | $256.5 million | $704.6 million | $757.9 million |
| Gross profit / margin | $81.0 million / 32.1% | $77.6 million / 30.2% | $217.1 million / 30.8% | $231.8 million / 30.6% |
| Net income (loss) attributable to Ingevity stockholders | $(7.1) million | $23.4 million | $24.8 million | $72.3 million |
| Diluted EPS | $(0.17) | $0.56 | $0.59 | $1.72 |
| Adjusted EBITDA (non-GAAP) | $59.6 million | $59.4 million | $163.2 million | $170.4 million |
- Revenue and segments: Q3 sales declined 2%; nine-month sales declined 7%. Performance Materials sales rose 24% in Q3 and 17% for nine months, supported by automotive carbon demand, while Performance Chemicals sales fell 10% and 15%, respectively, amid lower volumes and pricing pressure.
- Profitability: Q3 Performance Materials operating profit increased to $27.6 million from $20.3 million; Performance Chemicals operating profit decreased to $21.9 million from $30.4 million. For nine months, segment operating profit was $81.5 million and $53.3 million, respectively, versus $64.5 million and $80.3 million in 2015.
- Cash flow: Nine-month operating cash flow was $74.6 million, up from $35.1 million. Investing cash outflow was $106.7 million, including the restricted trust investment and $37.3 million of capital expenditures; financing cash inflow was $28.0 million. Cash at September 30 was $27.1 million.
- Debt and liquidity: Gross debt, including capital leases, was $520.5 million; reported debt net of issuance costs was $517.3 million. The company had $255.8 million of available revolving-credit capacity and was in compliance with debt covenants. A $69.4 million restricted investment secures an $80.0 million capital lease obligation due in 2027 and is not ordinary available cash. Management said operating cash flow and borrowing availability should cover needs for at least 12 months.
- Other metrics: Nine-month capital expenditures were $37.3 million, versus $63.6 million in 2015. Current-year projected capital expenditures were $60–$65 million.
Material changes and unusual items
- Q3 net loss included $32.7 million of restructuring and other charges, principally a $30.2 million non-cash impairment and $2.0 million severance related to exiting the Palmeira, Brazil refinery. The Board approved the exit plan on October 31, after quarter-end; production was expected to cease by year-end, with decommissioning by mid-2017 and a further $2–$3 million of exit costs through the first half of 2017. Investors should note the filing’s timing of this charge relative to the approval date.
- The company also recorded nine-month separation costs of $13.6 million, compared with $11.8 million in 2015. A separate closure of a Brazilian derivatives operation and workforce reductions contributed additional restructuring costs.
- The Q3 effective tax rate was 145.7%, primarily reflecting the Brazil exit charge in entities with full valuation allowances. The nine-month rate was 55.2%; management reported rates excluding discrete items of 33.1% for both 2016 periods.
- Ingevity identified an inventory intercompany-profit elimination error and corrected it in Q1 2016: nine-month cost of sales increased $3.3 million and net income decreased $2.1 million. Management said the error was not material to prior periods.
- The balance sheet reflects the spin-off financing and distribution: the company borrowed $300 million under a term loan and $200 million under its revolver, and distributed $448.5 million to WestRock. It also funded the restricted trust connected with the capital lease.
Outlook, commentary, and risks
- For fiscal 2016, management projected net sales of $895–$905 million and Adjusted EBITDA of $192–$197 million, with Adjusted EBITDA expected to be flat to slightly higher than 2015. It cited Performance Materials and pavement-technology strength, offset by continued volume and pricing pressure in Performance Chemicals industrial specialties and oilfield technologies. The filing does not provide a reconciliation of projected Adjusted EBITDA to net income, citing forecasting uncertainty.
- Management expects cost-reduction initiatives and benefits from completed expansion projects to help offset incremental standalone public-company costs. It expects to use operating cash flow to reduce borrowing associated with the spin-off.
- Key exposures include limited crude tall oil (CTO) supply and price volatility, foreign exchange, commodity and energy prices, automotive demand, weaker printing-ink markets, international operations, and potential manufacturing disruptions. A hypothetical 10% increase in CTO prices would add approximately $6 million to nine-month cost of sales; a 100-basis-point increase in floating rates would add approximately $4 million of annual interest expense.
- The company reported no material pending litigation, no material change to previously disclosed risk factors, and effective disclosure controls. It was evaluating the impact of new lease and revenue-recognition standards.
Important facts for investors to verify
- Whether Performance Chemicals volumes, pricing, and operating profit stabilize, and how the Brazil refinery exit affects results and cash spending.
- Progress toward the 2016 sales, Adjusted EBITDA, and capital-spending outlook, including standalone costs and the assumptions behind non-GAAP guidance.
- Debt repayment, available revolver capacity, covenant headroom, and sensitivity to floating interest rates; distinguish restricted trust assets from available liquidity.
- CTO supply and pricing, foreign-exchange exposure, and the durability of Performance Materials’ automotive growth.
- Effects of the carve-out reporting basis and the corrected inventory error when assessing year-over-year and quarter-to-quarter trends.