Ingevity Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Ingevity makes specialty chemicals and activated carbon products through its Performance Chemicals and Performance Materials segments. The comparison with Q1 2016 is not fully like-for-like: 2016 results are carve-out financials from before the May 2016 separation from WestRock, and the company revised certain 2016 figures for previously identified errors.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $218.5 million | $199.6 million |
| Gross profit / gross margin | $70.7 million / 32.4% | $63.0 million / 31.6% |
| Income before taxes | $34.0 million | $22.9 million |
| Net income attributable to Ingevity stockholders | $19.0 million; $0.45 diluted EPS | $9.2 million; $0.22 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $50.2 million | $48.3 million |
| Cash from operations | $6.5 million | $3.1 million |
Sales increased 9%, driven by 15% higher volume, partly offset by unfavorable price and mix (6%) and currency effects. Gross profit rose $7.7 million, supported by volume and manufacturing productivity, partly offset by pricing, mix and foreign exchange. Interest expense was $3.3 million versus $5.4 million; the effective tax rate was 32.4% versus 48.9%.
Performance Materials sales rose to $83.4 million from $70.1 million, primarily on automotive-carbon volume growth, while segment operating profit declined to $29.5 million from $30.7 million. Performance Chemicals sales increased to $135.1 million from $129.5 million and segment operating profit rose to $10.4 million from $8.6 million, helped by volume and lower raw-material costs; price and mix remained adverse.
Operating cash flow was partly offset by working-capital needs. Investing used $16.3 million, including $10.7 million of capital expenditures; financing provided $10.0 million, principally from $13.1 million of revolving-credit borrowings. Cash and cash equivalents were $29.7 million at quarter-end. Debt including capital leases was $505.0 million gross ($502.1 million net of issuance costs); $424.9 million of borrowings had variable rates. Revolver availability was $271.3 million, and the company reported compliance with its debt covenants. Total assets were $861.5 million and total liabilities $702.7 million.
Outlook, commentary and risks
Management forecast 2017 net sales of $930 million to $950 million and Adjusted EBITDA of $215 million to $225 million, described as high-single- to low-double-digit EBITDA growth. It expected favorable volume and mix to be partly offset by pricing pressure, especially in Performance Chemicals industrial specialties and oilfield technologies. Planned 2017 capital expenditures were $60 million to $65 million. The filing does not provide a reconciliation of projected Adjusted EBITDA to GAAP net income, citing inability to estimate certain items without unreasonable effort.
Management cited risks including weaker U.S. vehicle sales or a shift toward smaller vehicles, reduced Chinese automotive demand, lower oil prices and oilfield activity, pricing and volume pressure, higher non-CTO raw-material costs, and limited crude tall oil (CTO) supply. CTO accounted for about 13% of cost of sales; a hypothetical 10% price increase would add about $2 million in quarterly costs, which might not be passed on. A 100-basis-point increase in variable rates was estimated to add about $4 million of annual interest expense.
Unusual items included $2.3 million of restructuring and other charges, including reorganization severance and costs associated with the Palmeira, Brazil site exit; management expected less than $1 million of additional Palmeira exit and disposal costs through the first half of 2017. A $100 million share-repurchase program was authorized in February; no shares had been repurchased through the reported period. The company reported no material litigation and no material changes to annual-report risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Assess the comparability of Q1 2016 carve-out results and the effect of the corrections to previously reported 2016 figures; the filing describes those errors as immaterial to previously issued statements.
- Track whether volume growth can offset continuing price and mix pressure, particularly in Performance Chemicals, and whether management achieves its 2017 sales and Adjusted EBITDA guidance.
- Monitor working-capital consumption, capital spending, borrowings, and variable-rate exposure against the company’s liquidity and covenant position.
- Verify CTO availability and cost trends, along with progress and remaining costs for the Palmeira site shutdown and other restructuring actions.
- Consider the limitations of non-GAAP Adjusted EBITDA and the absence of a projected GAAP reconciliation.