Ingevity Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Ingevity manufactures specialty chemicals and activated carbon, reported through Performance Materials and Performance Chemicals. Amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $376.8 | $331.7 | $1,055.5 | $890.5 |
| Gross profit | $141.8 | $139.6 | $407.8 | $338.1 |
| Gross margin | 37.6% | 42.1% | 38.6% | 38.0% |
| Net income (loss) | $(4.2) | $69.9 | $88.8 | $135.4 |
| Diluted EPS | $(0.11) | $1.69 | $2.21 | $3.26 |
| Adjusted EBITDA (non-GAAP) | $119.5 | $127.6 | $342.6 | $287.0 |
- Q3 sales rose 14% year over year, reflecting 8% favorable price/mix and 6% volume growth. Nine-month sales grew 19%, driven mainly by volume growth and price/mix.
- Q3 gross profit increased only $2.2 despite higher sales: favorable price/mix was largely offset by higher raw material, logistics and energy costs. Nine-month gross profit increased $69.7.
- Performance Chemicals drove growth: Q3 sales were $258.7, up 38%, and segment EBITDA was $63.1 versus $47.2. Performance Materials Q3 sales fell 18% to $118.1 and segment EBITDA declined to $56.4 from $80.4.
- The company recorded an $85.0 litigation charge in Q3, driving the quarterly net loss. Adjusted EBITDA excludes this litigation expense; it should not be confused with GAAP earnings.
- Nine-month operating cash flow was $217.0 versus $199.1; investing cash outflow was $83.4 and financing cash outflow was $120.3. Capital expenditures were $66.4. The cash flow statement includes an $85.0 litigation-related adjustment; the accrued verdict had not been paid as of quarter-end.
- Cash and cash equivalents were $269.4 at September 30, 2021. Debt including finance leases totaled $1,285.4 before debt issuance costs, with $497.7 of undrawn revolving-credit capacity. The company reported covenant compliance; trailing gross and net leverage ratios were 2.6x and 2.1x, respectively.
Material changes and management commentary
- Performance Materials was hurt by lower automotive production amid the global microchip shortage; management expected the impact to continue through 2022. Performance Chemicals benefited from volume growth and price increases, particularly in Industrial Specialties and Engineered Polymers.
- Management cited continuing logistics constraints and raw material and energy inflation, and said it would continue passing through costs. Q3 gross margin declined year over year despite improved sales.
- 2021 guidance: net sales of $1.32–$1.36 billion; adjusted EBITDA of $405–$420; operating cash flow of $300–$315; capital expenditures of $100–$115; and free cash flow of approximately $200. Guidance reflected lower expectations for Performance Materials and confidence in Performance Chemicals demand. Adjusted EBITDA guidance is non-GAAP; the company did not provide a reconciliation to projected net income.
- In the BASF antitrust counterclaims, a jury awarded approximately $28.3 in damages, trebled to about $85. Ingevity accrued the full $85 and intends to seek post-trial relief and appeal if necessary. BASF may also seek interest, attorneys’ fees and costs; ultimate liability could differ from the accrual, and resolution could take months to two years.
- The UK tax-rate change resulted in a $14.6 discrete tax expense for the nine-month period. Business transformation and ERP implementation costs were $12.2 year to date; total initiative costs were estimated at $60–$70, including $30–$35 of non-capitalizable costs, with approximately $18 expected in 2021. ERP implementation was expected to begin in phases in fiscal 2022.
- Ingevity repurchased $100.3 of shares during the first nine months, with $311.7 remaining under its authorization at quarter-end. Management said cash, operating cash flow and available credit were expected to fund planned operations and obligations for at least the next 12 months.
Investor facts to verify
- Track the BASF post-trial motions, any appeal, and possible interest, fees or costs beyond the $85 accrued amount.
- Assess the duration and financial effect of automotive microchip-related production weakness, including management’s expectation that impacts could continue through 2022.
- Monitor whether price increases offset continued input, energy and logistics inflation without further margin pressure.
- Compare full-year performance with sales, adjusted EBITDA, operating cash flow and capital expenditure guidance; review the non-GAAP exclusions and reconciliation limitations.
- Evaluate cash conversion and working-capital needs, alongside debt, covenant headroom, share repurchases and planned ERP spending.