Ingevity Corporation — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016. Ingevity, a specialty chemicals and activated-carbon manufacturer, separated from WestRock on May 15, 2016; results before separation are presented on a carve-out basis and may not represent results as a standalone company. The two segments are Performance Materials, principally automotive emissions-control carbon, and Performance Chemicals, including pavement, oilfield and industrial specialties.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $908.3 million | $958.3 million |
| Gross profit / gross margin | $274.4 million / 30.2% | $275.4 million / 28.7% |
| Net income attributable to Ingevity stockholders | $35.2 million; $0.83 per diluted share | $79.7 million; $1.89 per diluted share |
| Adjusted EBITDA (non-GAAP) | $202.4 million | $200.9 million |
| Operating cash flow | $127.9 million | $72.2 million |
| Capital expenditures | $56.7 million | $100.9 million |
| Cash and working capital at year-end | $30.5 million; $158.3 million | $32.0 million; $196.5 million |
| Long-term debt, including capital leases, at year-end | $481.3 million | $80.0 million |
2016 income before taxes was $87.0 million and the effective tax rate was 49.0%. Gross profit was nearly flat despite lower sales; lower input costs and sales mix contributed to the improved gross margin. Adjusted EBITDA is a company-defined non-GAAP measure.
Segment results
- Performance Materials: Sales rose 17% to $301.0 million; segment operating profit increased to $106.9 million from $79.7 million. Growth reflected automotive-carbon volume gains, particularly in North America, and increased vehicle content related to regulation.
- Performance Chemicals: Sales fell 13% to $607.3 million; segment operating profit declined to $56.7 million from $86.6 million. Lower volume across product lines and pricing/mix pressure outweighed lower raw-material, energy and CTO costs.
Material changes and notable items
- Consolidated sales decreased 5%, driven by weaker Performance Chemicals volume and pricing/mix; Performance Materials growth partially offset the decline.
- Stockholder net income fell to $35.2 million, principally reflecting lower Performance Chemicals profit and a $32.0 million tax-affected charge associated with the Brazil refinery exit. Results also included $17.5 million of separation costs and $41.2 million of restructuring and other charges, including a $30.2 million non-cash impairment charge.
- Ingevity closed a derivatives operation in Rio de Janeiro and decided to exit its refinery operations in Santa Catarina, Brazil; it also undertook workforce reductions. Additional Brazil exit and disposal costs of $3–$4 million were expected through the first half of 2017.
- Commercial production began at the Zhuhai, China automotive-carbon facility. The company began expanding its Waynesboro, Georgia joint-venture facility, targeting a doubling of honeycomb capacity by year-end 2017.
- Management corrected immaterial prior-period errors, revising 2015 and 2014 statements. The revisions included revenue overstatements of $9.4 million and $5.5 million, respectively, and a $6.0 million 2014 cash-flow classification correction.
- Fourth-quarter 2016 sales were $210.9 million versus $209.1 million a year earlier; gross profit was $56.3 million versus $49.3 million, and stockholder net income was $9.1 million versus $8.6 million.
Cash, debt and liquidity
Operating cash flow increased to $127.9 million, primarily due to working-capital changes. Investing cash outflow was $126.4 million, including $69.7 million placed in a restricted trust to secure an $80.0 million capital-lease payment due in 2027. Financing cash flow was a $3.4 million outflow, including the $448.5 million separation distribution, funded in part by $300 million of term borrowing and $200 million initially drawn on the revolving facility.
At year-end, debt including capital leases totaled $491.9 million before $3.1 million of debt issuance costs; $411.9 million of borrowings had variable rates. The company reported $284.4 million of available revolver capacity and compliance with debt covenants. Management said operating cash flow and cash on hand should meet 2017 working-capital, interest and contractual needs, and intended to use cash flow to reduce separation-related borrowings. No dividends had been declared since separation.
Outlook, risks and contingencies
- 2017 guidance: Net sales of $930–$950 million; Adjusted EBITDA of $215–$225 million, described as high-single- to low-double-digit growth; capital expenditures of $60–$65 million. Management cited expected mix improvement and growth in Performance Materials and pavement technologies, alongside continued pricing pressure in some Performance Chemicals markets. A GAAP net-income reconciliation was not provided because certain components could not be forecast without unreasonable effort.
- Guidance risks include lower U.S. vehicle production or a shift toward smaller vehicles, reduced Chinese tax incentives, weaker oil prices and drilling activity, higher non-CTO input costs, and further industrial-specialties pricing or volume pressure.
- CTO is a constrained, critical input: WestRock supply is expected to cover approximately 45–55% of requirements at maximum operating rates, with other suppliers contracted to cover substantially all remaining expected needs through 2018. Supply disruption, competing biofuel demand, or inability to pass through higher costs could harm results.
- Other material exposures include automotive production and regulatory adoption, government infrastructure spending, volatile oilfield activity, foreign exchange and commodity prices, concentration among large customers, labor negotiations, manufacturing interruptions, environmental and chemical-safety obligations, and reliance on WestRock for certain transition and site services. The company also disclosed tax-related indemnity and separation risks.
- Routine litigation was not considered material; management reported effective internal control over financial reporting, with an unqualified auditor opinion. The board authorized a share-repurchase program of up to $100 million on February 20, 2017; it had no fixed timetable and could be suspended or terminated.
Investor verification priorities
- Separate underlying operating trends from carve-out accounting, separation costs, restructuring charges and the prior-period financial-statement corrections.
- Track whether Performance Chemicals volume and pricing stabilize, and whether Performance Materials growth and China capacity expansion translate into sustained profit.
- Verify CTO availability and pricing, supplier coverage after 2018, and the company’s ability to pass input-cost increases to customers.
- Review debt paydown, floating-rate exposure, covenant headroom, restricted-trust terms and cash generation against 2017 guidance and capital spending.
- Assess the execution and remaining costs of the Brazil exits, and progress on replacing WestRock-provided services and systems.