Ingevity Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Ingevity became a separate public company on May 15, 2016, following its spin-off from WestRock. Results before separation are presented on a carve-out basis and may not reflect the costs or results of operating independently.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $248.7 million | $262.2 million | $452.6 million | $501.4 million |
| Gross profit | $76.1 million | $85.1 million | $136.1 million | $154.2 million |
| Gross margin | 30.6% | 32.5% | 30.1% | 30.8% |
| Net income attributable to Ingevity | $23.7 million | $25.9 million | $31.9 million | $48.9 million |
| Basic and diluted EPS | $0.56 | $0.62 | $0.76 | $1.16 |
| Adjusted EBITDA (non-GAAP) | $58.4 million | $60.8 million | $103.6 million | $111.0 million |
Q2 sales fell 5% year over year; first-half sales fell 10%. Lower volume and adverse price/mix in Performance Chemicals drove the decline, partly offset by growth in Performance Materials and pavement technologies. Q2 segment operating profit was $22.8 million in Performance Chemicals, down from $30.8 million, and $26.3 million in Performance Materials, up from $21.6 million.
For the six months, operating cash flow was $36.7 million, versus $8.5 million in 2015. Capital expenditures were $22.2 million, versus $37.1 million. Investing cash outflow was $91.3 million, including $69.1 million placed in a restricted trust to secure a capital lease obligation. Cash at June 30 was $55.7 million.
At June 30, total debt including capital leases was $570.0 million ($566.6 million net of debt issuance costs), compared with $80.1 million at December 31, 2015. The debt includes $190.0 million drawn on a $400 million revolving facility and a $300 million term loan; $206.6 million of revolving capacity remained available. Current liabilities were $126.2 million and current assets were $352.7 million. The company reported compliance with debt covenants.
Material changes and unusual items
- Performance Chemicals sales declined 12% in Q2 and 18% in the first half, reflecting weaker oilfield and industrial-specialty demand, competitive pricing pressure, and lower throughput. Lower input costs and cost savings partly cushioned the profit decline.
- Performance Materials sales rose 17% in Q2 and 14% in the first half, supported by North American automotive demand, increased vehicle content, and regulatory adoption. The new activated-carbon facility in Zhuhai, China began commercial manufacturing during Q2; start-up costs weighed on productivity.
- Separation costs were $4.7 million in Q2 and $11.1 million in the first half. First-half restructuring and other charges were $5.6 million, including severance, asset impairment, and exit costs; actions included closing a Brazilian derivatives operation and company-wide workforce reductions.
- Management identified an inventory intercompany-profit elimination error and corrected it in Q1 2016. The correction increased first-half cost of sales by $3.3 million and reduced net income by $2.1 million; management said it was not material to prior periods.
- EPS comparisons use 42.102 million shares distributed at separation for both 2016 and 2015 periods; 2015 EPS is therefore calculated using shares that were not actually outstanding then.
Outlook, risks, and contingencies
For fiscal 2016, management guided to net sales of $880 million to $910 million and Adjusted EBITDA of $180 million to $195 million. It also described full-year Adjusted EBITDA as expected to be flat to slightly negative versus 2015, citing incremental costs of operating as a standalone public company, partly offset by cost reductions and benefits from completed expansion projects. Capital expenditures were projected at $60 million to $70 million.
Management expected growth in Performance Materials and pavement to be more than offset by negative pricing and mix in Performance Chemicals industrial specialties and oilfield technologies. It expected operating cash flow and available borrowings to fund operations and planned capital spending for at least the next 12 months, and intended to use operating cash flow to reduce debt.
Key risks include exposure to automotive and industrial demand, declining printing-inks volumes, limited crude tall oil (CTO) supply and price volatility, foreign-exchange movements, energy and other commodity costs, operational disruptions, and the costs of replacing WestRock-provided services. A 10% adverse CTO price change was estimated to add about $4 million to first-half cost of sales; a 100-basis-point increase in floating rates was estimated to add about $5 million to annual interest expense. The filing reported no material pending litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Performance Chemicals demand, volume, and pricing stabilize, and whether Performance Materials growth and the China facility ramp continue.
- Whether the $880 million–$910 million sales and $180 million–$195 million Adjusted EBITDA guidance remains achievable as standalone costs emerge.
- Debt reduction, covenant headroom, floating-rate exposure, and the terms and availability of the revolving facility.
- The eventual cash requirements and operating effects of separation, restructuring, pension obligations, and WestRock transition-service arrangements.
- The impact of CTO supply and pricing, foreign exchange, and other input costs on gross margins and the company’s ability to pass cost increases through to customers.