Ingevity Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results. Ingevity makes specialty chemicals and activated carbon products through Performance Materials and Performance Chemicals.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $311.2M | $264.1M | $855.0M | $742.9M |
| Gross profit | $118.6M | $93.2M | $319.2M | $253.7M |
| Net income | $51.7M | $38.4M | $139.7M | $97.2M |
| Net income attributable to Ingevity stockholders | $49.5M | $33.8M | $127.0M | $84.9M |
| Diluted EPS | $1.16 | $0.79 | $2.98 | $2.00 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $166.4M | $133.6M |
| Capital expenditures | Not provided quarterly | Not provided quarterly | $56.6M | $36.2M |
Gross margin was approximately 38.1% in Q3 2018 versus 35.3% a year earlier; for the first nine months it was approximately 37.3% versus 34.1%. Q3 sales rose 18%, driven mainly by volume (+16%) and price/mix (+2%); nine-month sales increased 15%, primarily on volume (+13%). Management attributed higher gross profit to volume, pricing/mix and manufacturing cost improvements.
Q3 segment operating profit was $36.3M for Performance Materials (up from $29.3M) and $39.7M for Performance Chemicals (up from $33.4M). Nine-month segment operating profit was $109.8M and $95.3M, respectively, compared with $89.5M and $70.2M. Performance Chemicals comparisons include the Pine Chemical Business from its March 8, 2018 acquisition date; the company also provides pro forma comparisons, which are not necessarily indicative of actual or future results.
For the nine months, net cash used in investing was $376.3M, mainly reflecting the $315.5M Pine Chemical Business purchase and capital spending. Financing provided $179.9M, including $300.0M of senior-note proceeds, partly offset by the $80.0M purchase of the remaining Purification Cellutions interest, share repurchases and distributions. Cash and cash equivalents were $57.5M at September 30, 2018, down from $87.9M at December 31, 2017. Working capital included higher receivables and inventories.
Balance sheet, debt and liquidity
Total debt, including capital leases, was $755.7M gross ($748.9M net of issuance costs); long-term debt and capital lease obligations on the balance sheet were $744.0M. Debt included $375.0M of term loans, $300.0M of 4.50% senior notes due 2026 and $80.0M of capital leases. The company had $748.2M available under its revolving facility, with $1.8M of letters of credit outstanding. It reported compliance with debt covenants. Current assets were $420.8M and current liabilities $179.8M.
In August, the revolving commitments were increased by $200.0M, the applicable rate was reduced and the credit facility maturity was extended to August 7, 2023. Management said operating cash flow, cash on hand and available revolver capacity should cover planned operations and obligations for at least the next 12 months.
Material developments, outlook and risks
- Acquisition: Ingevity completed its $315.5M acquisition of Georgia-Pacific’s Pine Chemical Business in March 2018 and entered a 20-year crude tall oil supply contract. The acquisition added $118.7M of goodwill and significant customer-related intangible assets. Integration benefits and synergies remain execution factors.
- Ownership: On August 1, the company acquired the remaining 30% of Purification Cellutions LLC for $80.0M, eliminating the noncontrolling interest.
- 2018 guidance: Net sales of $1.10B–$1.13B and Adjusted EBITDA of $306M–$314M, representing expected Adjusted EBITDA growth of 26%–29%. Management cited acquisition contribution, growth in higher-margin applications and favorable year-over-year crude tall oil costs, partly offset by lower Industrial Specialties volume and higher production-related costs, including freight. The filing does not provide a projected GAAP net-income reconciliation.
- Outlook risks: Management identified vehicle sales and production, vehicle mix, China automotive demand, oil prices and drilling activity, raw-material costs, crude tall oil availability, freight and the integration and synergy realization of the acquisition as factors that could affect the outlook. The company also cited foreign-exchange exposure, competition, regulation, operational disruptions and dependence on third-party services.
- Cost and accounting items: Q3 included a $1.5M impairment charge on an equity investment. Interest expense rose to $7.9M from $3.2M in Q3, largely reflecting the senior notes. The effective tax rate fell to 24.1% from 30.3%, primarily due to U.S. Tax Reform. ASC 606 adoption had a $0.5M favorable effect on nine-month net income, according to the filing’s comparison.
- Capital allocation: The company repurchased $18.1M of shares in the first nine months. On November 1, 2018, after quarter-end, the board authorized an additional $350M share-repurchase program, on top of the remaining prior authorization.
- Contingencies and controls: Management reported no material litigation and no material changes to the previously disclosed risk factors. Disclosure controls were assessed as effective; Pine Chemical Business controls were still being evaluated and integrated.
Most important facts for investors to verify
- Whether the Pine Chemical acquisition is integrated successfully and produces expected growth, margins and synergies; compare reported results with the company’s pro forma figures.
- Whether crude tall oil supply and pricing, freight and other manufacturing costs support the stated 2018 guidance.
- How much cash is ultimately allocated to the expanded buyback versus acquisition integration, capital spending and debt reduction.
- Debt-service capacity and covenant headroom as debt and interest costs rise; the filing quantifies a $3.8M annual interest-cost increase for a 100-basis-point rise in variable rates.
- Whether inventory and receivables growth converts to cash, and whether the planned $90M–$95M of 2018 capital expenditures is achieved.
- Automotive regulatory demand, vehicle-market trends, oilfield activity and Industrial Specialties volumes underlying segment performance and guidance.