Ingevity Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Ingevity manufactures specialty chemicals and activated carbon through Performance Materials and Performance Chemicals. The unaudited 2016 nine-month comparison includes pre-May 15 carve-out results from WestRock and is not fully comparable to standalone 2017 results.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $264.1m | $252.4m | $742.9m | $697.4m |
| Gross profit | $93.2m | $80.4m | $253.7m | $218.1m |
| Net income attributable to Ingevity stockholders | $33.8m | $(7.2)m | $84.9m | $26.1m |
| Diluted EPS | $0.79 | $(0.17) | $2.00 | $0.62 |
| Adjusted EBITDA (non-GAAP) | $72.7m | $59.6m | $190.1m | $166.4m |
Gross margin was approximately 35.3% in Q3 versus 31.9% a year earlier, and 34.1% for the nine-month period versus 31.3%. Q3 revenue grew 5%, driven by volume and price/mix; year-to-date revenue grew 7%, as volume gains more than offset adverse price/mix and currency. Q3 stockholder earnings improved mainly because restructuring charges fell by $32.6m and gross profit increased. The prior-year quarter included $30.2m of noncash asset write-downs associated with the planned Brazil facility exit.
Performance Materials Q3 sales were $85.4m (+8%) and segment operating profit was $29.3m, up from $27.8m. Performance Chemicals sales were $178.7m (+3%) and segment operating profit was $33.4m, up from $21.7m. Chemicals’ profit improvement reflected lower raw-material costs and cost reductions; industrial specialties volumes remained weak. Nine-month segment operating profit was $89.5m for Materials and $70.2m for Chemicals.
Cash flow, debt and liquidity
Nine-month operating cash flow was $133.6m, versus $74.1m; investing cash outflow was $42.0m, versus $106.7m; and financing cash outflow was $49.9m, versus financing inflow of $28.5m. Cash and cash equivalents were $70.2m at September 30, 2017, including $47.6m held by foreign subsidiaries. Current assets were $356.8m and current liabilities $150.9m.
Debt principal was $455.0m, including $375.0m of term loans, $80.0m of capital leases, and no revolving-credit borrowings; available revolver capacity was $548.2m. The credit amendment added $75m of term loans, increased revolving commitments by $150m and extended maturity to May 2022. The company reported covenant compliance. A 100-basis-point increase in variable rates would raise annual interest expense by approximately $3.8m. Nine-month cash capital expenditures were $36.2m; management’s expected full-year expenditure range was $55m–$60m.
Outlook, developments and risks
Management’s fiscal 2017 guidance was net sales of $945m–$955m and Adjusted EBITDA of $227m–$232m, with low-double-digit EBITDA growth expected year over year. It cited stronger volume in higher-margin automotive carbon, pavement and oilfield applications and favorable crude tall oil (CTO) costs, partly offset by pricing pressure in industrial specialties and oilfield technologies. The filing does not provide a GAAP net-income forecast or reconciliation to projected Adjusted EBITDA.
In August, Ingevity agreed to acquire substantially all assets of Georgia-Pacific’s pine chemical business for $315m, subject to working-capital adjustment and assumed liabilities. The deal remained subject to regulatory clearance and other closing conditions and was expected to close in late 2017. The company planned to finance it through the amended credit facility; the agreement also contemplated a 20-year market-priced CTO supply arrangement. Acquisition costs of $4.1m were expensed in the first nine months.
Key stated risks include acquisition approval, integration and synergy execution; limited CTO supply and cost increases; automotive demand and regulatory trends; pricing competition, particularly in industrial specialties and oilfield products; currency, energy and interest-rate movements; and operational or regulatory disruptions. A hypothetical 10% increase in CTO prices would add about $7m to nine-month cost of sales, if not passed through. Management reported no material pending litigation and effective disclosure controls. It expected less than $0.1m of additional Palmeira exit costs during the remainder of 2017.
Important facts for investors to verify
- Whether the Georgia-Pacific transaction closed on expected terms, its final purchase price and liabilities assumed, financing cost, and realized integration benefits.
- Whether 2017 sales and Adjusted EBITDA guidance was achieved, including the assumptions for CTO costs, pricing and automotive demand.
- Whether Performance Chemicals’ cost-productivity gains persist and pricing or volume pressures in industrial specialties and oilfield technologies worsen.
- CTO sourcing and pricing exposure, including the effect of the planned long-term supply agreement and any ability to pass through higher input costs.
- Cash conversion, working-capital trends, debt levels, covenant headroom and interest-rate exposure as acquisition financing is deployed.
- The filing notes prior-period financial-statement errors were judged immaterial but prior statements were revised; investors should review the disclosed adjustments when comparing periods.