Ingevity Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Ingevity manufactures activated carbon and specialty chemicals through Performance Materials and Performance Chemicals. Certain 2016 and 2015 comparisons are on a carve-out basis because the company separated from WestRock in May 2016.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $972.4 million | $908.3 million |
| Gross profit | $329.0 million | $274.4 million |
| Gross margin | 33.8% | 30.2% |
| Income before taxes | $174.8 million | $87.0 million |
| Net income attributable to Ingevity stockholders | $126.5 million | $35.2 million |
| Diluted EPS | $2.97 | $0.83 |
| Operating cash flow | $174.3 million | $127.9 million |
| Capital expenditures | $52.6 million | $56.7 million |
FY2017 sales rose 7%, driven by 8% higher volume, partly offset by unfavorable price/mix and foreign exchange. Adjusted EBITDA, a non-GAAP measure, increased to $242.7 million from $202.4 million. Year-end cash was $87.9 million; working capital was $215.5 million. Debt including capital leases totaled $455.0 million before debt issuance costs, comprising a $375.0 million term loan and $80.0 million capital lease obligation. The company reported $548.2 million of available revolving-facility funds and was in compliance with debt covenants.
Fourth quarter: Sales were $229.5 million versus $210.9 million in Q4 2016; gross profit was $75.3 million versus $56.3 million; and net income attributable to Ingevity stockholders was $41.6 million versus $9.1 million.
Segments and changes versus prior year
- Performance Materials: FY2017 sales grew 16% to $349.3 million and segment operating profit rose to $122.0 million from $106.9 million. Automotive carbon volumes benefited from higher vehicle production and increased product content associated with emissions regulations.
- Performance Chemicals: Sales increased 3% to $623.1 million and segment operating profit rose to $80.3 million from $56.7 million. Improved manufacturing productivity and higher oilfield and pavement volumes helped; industrial specialties volumes declined.
- Consolidated sales growth and profit improvement followed a weaker 2016. FY2016 net income had been burdened by separation costs and substantial restructuring charges, including a $30.2 million impairment tied to the Brazil facility exit.
Outlook, material events and risks
- Management forecast FY2018 sales of $1.07–$1.13 billion and Adjusted EBITDA of $285–$305 million, with the EBITDA outlook including the expected acquisition of Georgia-Pacific’s pine chemicals business. Projected capital expenditures were $80–$90 million.
- The planned acquisition was for $315 million, subject to working-capital adjustment and regulatory and other closing conditions. The FTC had issued a second request; management anticipated a first-quarter 2018 closing if clearance was obtained. In January 2018, Ingevity issued $300 million of 4.50% senior unsecured notes due 2026, intending to use proceeds primarily to finance the acquisition.
- Key risks include limited crude tall oil (CTO) supply and price volatility, and potential difficulty passing higher input costs to customers. CTO represented approximately 13% of cost of sales and 35% of raw-material purchases in 2017. WestRock was expected to supply about 45%–55% of CTO requirements under its agreement.
- Other material exposures include automotive production and regulatory adoption, oil and gas activity, government infrastructure spending, foreign exchange, customer concentration, operational interruptions, and dependence on third parties for certain facility services. The company’s significant canister-bleed emissions patent expires in April 2022.
- FY2017 tax expense included a provisional $24.5 million benefit from U.S. tax reform and remeasurement of deferred taxes. Management noted that further interpretation or guidance could change the estimate.
- No dividends had been declared since the separation, and no foreseeable dividend plan was stated. The company repurchased $6.6 million of shares in FY2017 under a $100 million authorization.
- The filing reports no material pending litigation. Management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2017.
Important facts for investors to verify
- Whether the Georgia-Pacific acquisition closed, received regulatory clearance, and delivered the expected growth and synergies.
- Actual FY2018 sales and Adjusted EBITDA versus guidance, including the contribution from the acquired business.
- CTO supply availability, market pricing, contract terms, and the company’s ability to pass cost increases through to customers.
- Progress in automotive emissions standards and product demand, including the implications of the April 2022 patent expiration.
- Post-acquisition debt, liquidity, interest expense, capital spending, and compliance with debt covenants.
- The final tax effects of U.S. tax reform and any changes to the provisional deferred-tax benefit.