Business context and reporting period
Ingevity Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. It reports three segments: Performance Materials, Performance Chemicals, and Advanced Polymer Technologies. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $446.0 | $482.0 | $1,320.4 | $1,284.7 |
| Gross profit | $129.0 | $176.3 | $412.4 | $464.7 |
| Net income | $25.2 | $75.4 | $111.4 | $196.0 |
| Diluted EPS | $0.69 | $1.98 | $3.03 | $5.06 |
| Adjusted EBITDA (non-GAAP) | $110.4 | $138.2 | $335.0 | $378.3 |
Q3 gross margin was approximately 28.9%, compared with 36.6% a year earlier; nine-month gross margin was approximately 31.2%, versus 36.2%. Net margin was approximately 5.7% in Q3 and 8.4% for the nine months, compared with 15.6% and 15.3%, respectively, in 2022.
- Cash flow: Nine-month operating cash flow was $160.5, down from $214.9. Investing cash outflow was $56.3, including $80.6 of capital expenditures; financing cash outflow was $93.4. Cash and cash equivalents were $84.5 at September 30.
- Debt and liquidity: Debt including finance leases, net of issuance costs, was $1,472.7. Revolver availability was $172.7. The company reported compliance with debt covenants; credit-agreement net leverage was 2.5x against a 4.0x maximum and interest coverage was 6.8x against a 3.0x minimum.
- Capital returns and investment: The company repurchased $92.1 of shares in the first nine months; $353.4 remained under its authorization. Projected 2023 capital expenditures were $95–105.
Material changes versus the prior comparable period
- Q3 sales fell $36.0 (7%), as a $72.1 volume decline outweighed $38.3 of favorable price and mix. Nine-month sales rose $35.7 (3%), as $142.4 of pricing and mix more than offset lower volume and unfavorable currency.
- Q3 gross profit decreased $47.3. Management attributed the decline mainly to $42.6 of higher manufacturing costs, chiefly crude tall oil (CTO), and lower sales volume; pricing/mix partly offset these pressures. Nine-month gross profit fell $52.3, with $140.2 of higher manufacturing costs only partly offset by $127.4 of pricing and mix improvements.
- Interest expense rose to $23.1 in Q3 from $11.5 and to $64.3 for nine months from $37.3, largely reflecting higher borrowing costs. Net income and diluted EPS declined substantially in both periods.
- Performance Materials Q3 sales were $147.2 and segment EBITDA $74.5, up from $144.9 and $61.2. Performance Chemicals sales were $256.0 and EBITDA $24.7, versus $267.6 and $65.7, with CTO costs and weaker Industrial Specialties demand weighing on results. Advanced Polymer Technologies sales fell to $42.8 from $69.5, while EBITDA was essentially flat at $11.2.
Outlook, management commentary, risks and unusual items
- 2023 outlook: Management maintained full-year net sales guidance of $1.6–1.7 billion and adjusted EBITDA guidance of $375–390. It expected improved global auto production to support Performance Materials, growth in pavement technologies, and continued CTO cost pressure in Performance Chemicals. The filing does not provide a reconciliation of projected adjusted EBITDA to GAAP net income.
- Post-quarter repositioning: On November 1, 2023, the company announced the planned closure of its DeRidder, Louisiana plant by the end of the first half of 2024 and further cost reductions. It estimated aggregate charges of approximately $280, including $180 of asset-related charges, $15 of severance and $85 of other restructuring costs; about $180 is expected to be non-cash. These estimates are subject to assumptions and risks.
- The company warned that existing CTO supply contracts could leave excess volumes through October 2025; resale of excess CTO at market rates then prevailing could result in $30–80 of incremental losses in 2024.
- In Q3, the company recorded $24.6 of restructuring and other charges, including costs for the alternative-feedstock transition at Crossett and the transition of services after WestRock’s North Charleston mill closure. It estimated 2023 non-capital costs of $20–25 for the Crossett transition and $15–20 for the North Charleston transition.
- Ingevity accrued the full $85.0 trebled jury verdict in BASF antitrust counterclaims, plus began accruing post-judgment interest. It is challenging the verdict and judgment; the ultimate liability could differ from the accrual.
- Performance Chemicals goodwill headroom was 19% after a triggering event tied to weak industrial demand and elevated CTO costs; management reported no impairment. A 100-basis-point increase in the discount rate would reduce headroom to 7%, according to its sensitivity analysis.
- CTO represented approximately 25% of consolidated cost of sales in the first nine months, compared with 13% in 2022. A hypothetical unhedged 10% increase in CTO prices would have increased nine-month cost of sales by approximately $22.
- The company cited risks including cyclical end-market weakness, raw-material availability and pricing, WestRock service replacement and potential operational disruption, interest-rate exposure, foreign currency movements, and litigation. A hypothetical 100-basis-point increase in variable rates would increase annual interest expense by approximately $8.3.
- An October 2, 2023 accounts-receivable securitization program provides up to $100 of financing, with borrowings presented as short-term debt.
Important facts for investors to verify
- Whether the volume and margin pressures in Performance Chemicals and Advanced Polymer Technologies persist, and whether price increases can offset CTO inflation.
- Execution, timing, cash costs and non-cash charges associated with the DeRidder closure, restructuring actions, and CTO contract exposures.
- Replacement of critical North Charleston services after WestRock’s mill closure and any resulting capital needs or production disruption.
- Progress and outcomes in the BASF litigation, including post-judgment interest, appeals and the adequacy of the recorded accrual.
- Performance Chemicals goodwill valuation assumptions and headroom as market conditions evolve.
- Delivery against 2023 guidance, cash-flow needs, revolving-credit availability, and the effects of variable interest rates.