Ingevity Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Ingevity manufactures specialty chemicals and activated-carbon materials and reports Performance Materials and Performance Chemicals segments. Unless noted otherwise, amounts are in millions of U.S. dollars.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $359.9 | $311.2 | $989.5 | $855.0 |
| Gross profit | $139.5 | $118.6 | $371.0 | $319.2 |
| Gross margin | 38.8% | 38.1% | 37.5% | 37.3% |
| Net income attributable to Ingevity stockholders | $59.9 | $49.5 | $139.4 | $127.0 |
| Diluted EPS | $1.41 | $1.16 | $3.30 | $2.98 |
| Segment EBITDA | $114.0 | $90.7 | $305.8 | $247.2 |
Segment EBITDA is a company-defined, non-GAAP measure. Q3 income before tax was $77.4 versus $68.1; nine-month income before tax fell to $172.8 from $178.2. Nine-month consolidated net income was nearly unchanged at $139.4 versus $139.7, while income attributable to Ingevity stockholders rose, in part because the company acquired the remaining noncontrolling interest in Purification Cellutions in 2018.
Operating cash flow for the first nine months was $190.2, up from $166.4. Capital expenditures were $79.8, versus $56.6. Investing cash outflow was $622.4, including $537.9 paid, net of acquired cash, for the Caprolactone Business. Cash and cash equivalents were $75.6 at September 30; cash, cash equivalents and restricted cash totaled $76.6.
Total debt and finance lease obligations were $1,324.2 before $7.2 of debt issuance costs; long-term debt and finance lease obligations on the balance sheet were $1,294.4. Available revolving-credit capacity was $554.9. The company reported four-quarter leverage of 3.1 against a maximum covenant of 4.0 (potentially 4.5 in specified circumstances), interest coverage of 9.2 against a 3.0 minimum, and compliance with covenants.
Material changes and segment performance
- Q3 sales increased 16%, driven by volume growth of 13% and favorable price/mix of 3%; nine-month sales also rose 16%. The Caprolactone acquisition contributed $32.4 of Q3 sales and $90.9 for the nine-month period.
- Performance Materials Q3 sales rose 35% to $130.2 and EBITDA increased to $54.2 from $41.6, supported by automotive emissions-control demand, regulatory changes and improved price/mix.
- Performance Chemicals Q3 reported sales rose 7% to $229.7 and EBITDA increased to $59.8 from $49.1. However, on the company’s pro forma basis including both acquisitions in the prior-year comparison, Q3 sales fell 11% and EBITDA fell $6.0 to $59.8. Nine-month pro forma sales declined 10% and EBITDA fell $15.2 to $156.6, reflecting weaker volumes, especially in industrial specialties and engineered polymers.
- Q3 gross profit increased $20.9, reflecting higher volume and price/mix, partly offset by $11.1 of higher manufacturing costs. Nine-month SG&A rose $25.8, including acquisition-related amortization and $8.4 of additional intellectual-property litigation costs.
Outlook, risks and unusual items
- Management reaffirmed 2019 guidance of net sales of $1.28–$1.30 billion and adjusted EBITDA of $390–$400. It expected operating cash flow of $290–$310 and capital expenditures of $110–$120. The filing does not provide a projected GAAP net-income reconciliation, citing items that cannot be estimated without unreasonable effort.
- Management anticipated Performance Materials growth from regulatory-driven demand, partly offset by softer vehicle demand, higher costs and legal expenses. In Performance Chemicals, it expected acquisition contributions and pavement growth, partly offset by lower industrial-specialties volumes, inflationary costs, planned Warrington outages and transition-service costs.
- Risks cited include weaker vehicle production, crude tall oil supply constraints, raw-material and freight costs, oilfield activity and oil prices, Brexit, trade and tariff developments, acquisition integration and benefits, currency movements, operational disruptions, and environmental, regulatory and litigation matters. Management reported no material change to the risk factors in its 2018 Form 10-K.
- The Caprolactone acquisition closed February 13, 2019; net cash paid was $537.9. Nine-month acquisition and related costs were $33.3, including a $12.7 purchase-price hedge loss and $8.4 inventory fair-value step-up expense. Purchase accounting remained preliminary, including evaluation of uncertain tax positions.
- Q3 restructuring charges were $1.7 for a Performance Chemicals reorganization. Foreign-currency translation and related comprehensive-income effects were significant: nine-month other comprehensive loss was $28.8.
- Management said routine litigation was not material to financial condition, liquidity or results. Disclosure controls were deemed effective; the acquired Caprolactone Business was excluded from the controls assessment during the permitted integration period.
Important facts for investors to verify
- Whether the 2019 sales and adjusted EBITDA guidance was achieved, and how results compare with the stated operating cash-flow and capital-spending outlook.
- Performance Chemicals’ underlying trend: reported growth includes the acquired business, while pro forma sales and EBITDA declined materially.
- Acquisition integration, final purchase-price allocation, expected synergies, and the durability of Caprolactone contributions relative to added debt and amortization.
- Debt, interest expense and covenant headroom, particularly given variable-rate exposure; the filing estimates a 100-basis-point rate increase would add about $9.4 annually before considering hedges.
- Demand and cost assumptions behind guidance, including vehicle markets, industrial-specialties volumes, crude tall oil availability, freight and raw materials, and planned outages.