Ingevity Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Ingevity makes specialty chemicals and activated carbon products and reports Performance Materials and Performance Chemicals segments. Figures below are in millions of dollars, except per-share data and percentages.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $382.8 | $320.3 | +19.5% |
| Gross profit | $137.8 | $126.2 | +9.2% |
| Gross margin | 36.0% | 39.4% | Down 3.4 percentage points |
| Net income | $60.8 | $48.7 | +24.8% |
| Diluted EPS | $1.55 | $1.20 | +29.2% |
| Adjusted EBITDA | $119.0 | $105.4 | +12.9% |
| Operating cash flow | $24.3 | $51.1 | Down $26.8 |
| Capital expenditures | $27.6 | $17.0 | Up $10.6 |
Sales growth reflected $58.7 of favorable price/mix and $6.6 of volume, partly offset by $2.8 of unfavorable currency. Gross profit benefited from $58.3 of pricing and $2.7 of volume, but higher manufacturing costs of $47.9—principally raw materials and energy—compressed gross margin.
- Performance Materials: Sales of $148.4, up 5.5%; Segment EBITDA of $77.9, up 5.7%. Process purification sales and pricing increased; automotive volumes remained constrained by vehicle production and semiconductor supply issues.
- Performance Chemicals: Sales of $234.4, up 30.5%; Segment EBITDA of $41.1, up 29.7%. Price/mix drove most sales growth; manufacturing costs rose $45.2, partly offsetting the benefit.
Liquidity, debt and capital allocation
Cash and cash equivalents were $222.6 at March 31, 2022, versus $275.4 at year-end 2021. Total debt, including finance leases and net of debt issuance costs, was $1,265.2; $319.6 was classified as current, largely because the company had notified holders it planned to redeem its $300.0 of 4.50% notes due 2026. The revolving credit facility had $497.5 of undrawn capacity. The company reported compliance with debt covenants; trailing-four-quarter gross and net leverage were 2.6x and 2.2x, and interest coverage was 9.9x.
Operating cash flow fell as receivables and inventory increased. Q1 cash uses included $27.6 of capital expenditures and $40.4 of share repurchases. Management said operating cash flow, cash on hand and available revolver capacity should cover planned operations and obligations for at least the next 12 months.
Outlook, commentary and notable items
- Management raised the top end of 2022 guidance: sales of $1,525–$1,650; Adjusted EBITDA of $430–$470; operating cash flow of $305–$325; capital expenditures of $155–$175; and approximate free cash flow of $150.
- Outlook assumes continued inflation in energy, logistics and raw materials, global logistical headwinds, geopolitical uncertainty and automotive semiconductor constraints. Management expects Performance Chemicals growth, while Performance Materials is expected to be similar to 2021.
- On April 27, 2022, after quarter-end, the company redeemed the $300.0 of 2026 Senior Notes, primarily using revolver capacity. It recognized a $3.4 redemption premium and accelerated $2.7 of deferred finance fees.
- A Delaware jury verdict in BASF’s favor on antitrust and related counterclaims was accrued at $85.0, the trebled amount of the jury’s approximately $28.3 award. Ingevity disputes the verdict and intends to seek post-trial relief and appeal; the ultimate liability could differ from the accrual.
- Business transformation and ERP costs were $3.6 in Q1. Management expects total initiative costs of approximately $90–$95, including $45–$50 of non-capitalizable costs, of which $15–$17 is expected in 2022. ERP pilot deployment began in Q1.
- The company reported no direct material adverse effects from the Russia-Ukraine war as of the filing, while noting broader effects were difficult to predict. It reported no material changes to the risk factors in its 2021 Annual Report.
Investor verification points
- Track whether price increases continue to offset inflation and whether gross margins recover.
- Verify cash conversion as receivables and inventory unwind, and assess the planned capital spending and free-cash-flow delivery.
- Review post-redemption borrowing, interest costs and liquidity; the filing does not provide a post-redemption debt balance.
- Follow the BASF litigation, potential additional interest and fees, and any change to the $85.0 accrual.
- Assess progress, costs and control implications of the multi-phase ERP implementation.
- Monitor automotive production, raw-material availability and cost, CTO supply and pricing, and broader supply-chain and geopolitical risks.