Ingevity Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Ingevity manufactures specialty chemicals and activated carbon products through Performance Materials and Performance Chemicals.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $270.6 million | $352.8 million | $558.8 million | $629.6 million |
| Gross profit | $83.9 million | $134.4 million | $198.5 million | $231.5 million |
| Net income | $20.2 million | $56.8 million | $65.5 million | $79.5 million |
| Diluted EPS | $0.49 | $1.34 | $1.57 | $1.88 |
| Adjusted EBITDA | $67.2 million | $108.3 million | $159.4 million | $191.8 million |
- Q2 gross margin was approximately 31.0%, versus 38.1% a year earlier; Q2 adjusted EBITDA margin was approximately 24.8%, versus 30.7%.
- Operating cash flow for the first half was $109.1 million, up from $71.5 million. Capital expenditures were $34.5 million, compared with $57.7 million; reported free cash flow was not provided for the half-year period.
- Cash and cash equivalents were $177.6 million at June 30, up from $56.5 million at year-end 2019. Total debt including finance leases was $1,336.3 million gross ($1,330.2 million net of debt issuance costs); long-term debt including finance leases was $1,308.5 million.
- Revolver availability was $527.8 million. The company reported leverage of 3.5x and interest coverage of 7.2x, and compliance with debt covenants. A fully drawn revolver could require repayment of some capacity by September 30 to comply with covenants.
Changes versus the prior comparable periods
- Q2 sales fell 23%, primarily from COVID-19-related lower volumes; gross profit declined $50.5 million, reflecting lower volume and $6.9 million of higher manufacturing costs from reduced plant throughput. Q2 net income fell 64%.
- For the first half, sales declined 11% and net income declined 18%. Sales volume reductions were partly offset by favorable price and mix; the prior-year period also included $32.0 million of acquisition-related and other costs, including an $8.4 million inventory step-up charge.
- Both segments weakened in Q2. Performance Materials sales fell 31% and segment EBITDA fell to $23.3 million from $49.3 million, largely due to lower automotive demand. Performance Chemicals sales fell 19% and EBITDA to $43.9 million from $59.0 million, with volume declines in industrial specialties and oilfield technologies.
- First-half operating cash flow improved in part because lower sales reduced receivables. Investing cash outflow was much lower than in 2019, when the Caprolactone acquisition drove $537.9 million of acquisition payments.
Outlook, commentary, and risks
- Management reiterated 2020 guidance: net sales of $1.10–$1.20 billion, adjusted EBITDA of $310–$350 million, operating cash flow of $215–$255 million, capital expenditures of approximately $85 million, and free cash flow of $130–$170 million.
- COVID-19 disrupted customer demand, supply chains, operations, and transportation. The company reduced production at some U.S. and China facilities, implemented cost reductions, and said the pandemic will continue to affect results, financial position, and liquidity. Management cautioned that further deterioration could lead to impairment charges; no triggering event requiring an interim impairment test was identified as of June 30.
- In March, the company drew $250 million on its revolver as a precaution and repaid $155 million during Q2; $95 million of the draw remained outstanding. Share repurchases were suspended in March. The company repurchased $32.4 million of shares in the first half, with none in Q2.
- Restructuring and other charges were $7.3 million in Q2, including $5.8 million of severance and $1.5 million of business-transformation costs. The multi-year ERP/business transformation initiative is expected to cost $60–$70 million overall, including $10–$15 million of non-capitalizable costs.
- Other exposures include floating-rate debt (a 100-basis-point increase was estimated to add about $10.3 million to annual interest expense), foreign exchange, dependence on crude tall oil, automotive and energy-market conditions, and execution risks for the ERP implementation. The company disclosed no material pending legal proceedings and no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether COVID-19 demand and production impacts, especially in automotive and industrial specialties, persist or recover as assumed in guidance.
- Progress against 2020 sales, adjusted EBITDA, operating cash flow, and capital expenditure targets.
- Debt covenant headroom, revolver availability, and the potential repayment requirement if the revolver is fully drawn.
- Cash generation after capital spending and planned needs, including transformation costs, litigation spending, debt service, and any resumption of share repurchases.
- Whether weaker performance or market conditions prompt impairment testing or charges, and whether the ERP project stays within its disclosed cost and execution expectations.