Ingevity Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with Q1 2018. Ingevity manufactures specialty chemicals and activated carbon products through its Performance Materials and Performance Chemicals segments. Figures are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $276.8 | $235.2 |
| Gross profit / gross margin | $97.1 / 35.1% | $85.1 / 36.2% |
| Income before taxes | $22.7 | $45.5 |
| Net income attributable to Ingevity stockholders | $22.7 | $30.8 |
| Diluted EPS | $0.54 | $0.72 |
| Adjusted EBITDA (non-GAAP) | $83.5 | $67.1 |
| Cash from operating activities | $(8.0) | $9.7 |
| Capital expenditures | $28.1 | $13.3 |
- Sales rose 18%; reported growth reflected 14% favorable volume and 5% favorable price/mix, partly offset by a 1% currency impact. The Caprolactone acquisition contributed $24.2 of sales.
- Performance Materials sales were $109.1 and segment EBITDA was $51.2, versus $95.5 and $42.2. Performance Chemicals sales were $167.7 and segment EBITDA was $32.3, versus $139.7 and $24.9.
- Reported earnings fell despite higher sales and adjusted EBITDA. Acquisition and related costs were $31.2, including $22.8 of acquisition-related charges and $8.4 of inventory fair-value step-up expense. Interest expense increased to $11.1 from $6.1.
- Q1 2019 reported tax expense was zero, versus $9.7 in Q1 2018; the company attributed tax-rate variability to discrete items. The effective rate before discrete items was 22.3% versus 21.4%.
Financial position and liquidity
- At March 31, cash and cash equivalents were $38.4, total current assets $455.0, and current liabilities $198.3. Operating cash flow was negative, with working-capital needs and accrued expense/payroll movements among the factors discussed.
- Total debt including finance lease obligations was $1,429.3 gross, or $1,421.2 net of debt issuance costs, versus $758.9 gross at year-end 2018. Long-term debt including finance leases was $1,403.2. The increase primarily reflects acquisition financing.
- Revolver availability was $455.0. The company reported compliance with debt covenants; four-quarter leverage was 3.5x against a 4.0x maximum (potentially 4.5x in specified circumstances), and interest coverage was 11.3x against a 3.0x minimum.
- Investing cash outflow was $569.3, including $537.9 paid net of cash acquired for Caprolactone. Financing cash inflow was $539.4, including revolving-facility and term-loan borrowings.
Material developments, outlook, and risks
- Ingevity completed its acquisition of Perstorp’s Caprolactone Business on February 13, 2019, for a stated purchase price of €578.9 ($652.5), less assumed debt of €100.4 ($113.1). The acquired business generated $24.2 in sales and a $2.3 pretax loss through quarter-end. Purchase-price allocation remained preliminary; $295.4 of goodwill was recorded and is not tax deductible.
- Performance Chemicals’ pro forma combined sales, assuming both the Pine Chemical and Caprolactone businesses were owned from the start of each period, fell to $185.4 from $206.4; segment EBITDA fell to $37.8 from $44.8. Management cited lower industrial-specialties and engineered-polymers volumes and higher manufacturing, freight, and warehousing costs, partly offset by pricing/mix.
- For fiscal 2019, management forecast net sales of $1.30–$1.36 billion and adjusted EBITDA of $390–$410, with adjusted EBITDA growth of 22%–28% versus 2018. Operating cash flow was projected at $290–$310 and capital expenditures at $110–$120. These are forward-looking estimates; the company did not provide a reconciliation of projected adjusted EBITDA to GAAP net income.
- Management expects Performance Materials growth from emissions regulations and Performance Chemicals growth from Caprolactone and pavement technologies, partly offset by weaker industrial-specialties volumes, cost inflation, planned outages, and transition costs. Risks include vehicle-market weakness, oil prices and drilling activity, CTO supply and cost, raw-material inflation, Brexit, trade/tariff developments, and acquisition integration and benefit realization.
- A 100-basis-point increase in variable rates was estimated to increase annual interest expense by about $10.4. A hypothetical 10% CTO price increase would add about $2.1 to quarterly cost of sales before any customer pass-through. The company reported no material ongoing legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Caprolactone acquisition integrates as planned and delivers expected earnings and cash flow; assess final purchase-price allocation and goodwill/intangible valuations.
- How much reported growth and EBITDA reflect acquired operations versus underlying organic trends, particularly in Performance Chemicals, where pro forma sales and EBITDA declined.
- Debt repayment capacity, interest-rate exposure, covenant headroom, and cash generation after acquisition-related spending and planned capital expenditures.
- Progress against 2019 sales, adjusted EBITDA, operating cash flow, and capital expenditure guidance, including any changes in assumptions or risks.
- Whether pricing can offset CTO, freight, raw-material, and other manufacturing cost increases, and whether volume weakness in industrial specialties persists.