Ingevity Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Ingevity makes specialty chemicals and activated carbon products through Performance Materials and Performance Chemicals. The 2016 comparative results are not fully like-for-like: Ingevity separated from WestRock on May 15, 2016, and earlier-period results include carve-out accounting and allocated costs.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Net sales | $260.3m | $245.4m | $478.8m | $445.0m |
| Gross profit | $89.8m | $74.7m | $160.5m | $137.7m |
| Gross margin | 34.5% | 30.4% | 33.5% | 31.0% |
| Net income attributable to Ingevity stockholders | $32.1m | $24.1m | $51.1m | $33.3m |
| Diluted EPS | $0.76 | $0.57 | $1.21 | $0.79 |
| Adjusted EBITDA (non-GAAP) | $67.2m | $58.5m | $117.4m | $106.8m |
| Operating cash flow | Not presented quarterly | $52.7m | $36.2m |
- Q2 sales rose 6%; H1 sales rose 8%. Reported growth was led by higher volumes, partly offset by unfavorable price/mix and foreign exchange.
- Q2 segment operating profit was $30.7m in Performance Materials and $26.4m in Performance Chemicals, versus $26.2m and $23.0m, respectively. H1 segment operating profit was $60.2m and $36.8m, versus $56.9m and $31.6m.
- Management attributed profit improvement to volume growth and manufacturing productivity. Performance Chemicals benefited particularly from lower raw-material costs and prior cost-reduction initiatives; pricing pressure offset some gains.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $40.6m; current assets were $332.3m and current liabilities $133.5m. The balance sheet reports total debt including capital leases of $481.2m before debt issuance costs, with $15.0m current maturities.
- Revolving-credit availability was $297.0m, including the effect of $1.8m in letters of credit. The company reported compliance with its financial covenants.
- H1 investing cash outflow was $27.5m, including $21.8m of capital expenditures. Financing cash outflow was $15.1m, primarily reflecting $9.1m of net revolving-credit repayments and $4.8m of distributions to noncontrolling interests.
- Cash, cash equivalents and restricted cash ended H1 at $41.1m; cash and cash equivalents alone were $40.6m. Working-capital use included a $22.9m cash outflow from accounts receivable.
Changes, outlook and risks
- Q2 gross profit increased $15.1m year over year; H1 gross profit increased $22.8m. Lower separation costs and interest expense also contributed to higher stockholder net income. H1 separation costs fell to $0.5m from $11.1m; net interest expense fell to $6.1m from $10.4m.
- 2017 guidance: net sales of $940m–$955m and Adjusted EBITDA of $220m–$230m, with Adjusted EBITDA growth expected in the high-single- to low-double-digit range. The filing does not provide a reconciliation of projected Adjusted EBITDA to GAAP net income.
- Management cited expected volume and mix benefits, including growth in Performance Materials and selected Performance Chemicals applications, partly offset by continued pricing pressure in oilfield technologies and industrial specialties. Planned 2017 capital expenditures were $55m–$60m.
- Outlook risks include lower U.S. light-vehicle sales, a shift toward smaller vehicles, reduced China tax incentives, oil-price-related changes in raw-material costs and oilfield activity, and increased industrial-specialties volume or pricing pressure. Other disclosed exposures include limited crude tall oil supply, currency movements, commodity prices and floating-rate debt.
- The company expects less than $1m of additional exit and disposal costs in H2 2017 related primarily to the Palmeira, Brazil site shutdown. Routine litigation was not considered material; the filing reported no material change to previously disclosed risk factors.
- Ingevity disclosed corrections to previously issued financial statements, including errors involving inventory intercompany profit, accruals, revenue timing and cash-flow classification. Management deemed the errors immaterial to previously issued statements and revised the affected comparative figures.
Investor verification priorities
- Assess the sustainability of volume growth and manufacturing productivity, particularly against Performance Chemicals pricing and mix pressure.
- Track delivery against the $940m–$955m sales and $220m–$230m Adjusted EBITDA guidance, and review the non-GAAP measure alongside GAAP results.
- Monitor working capital and cash conversion, capital-spending execution, debt repayment and covenant headroom.
- Evaluate sensitivity to crude tall oil availability and pricing, automotive demand, oilfield activity, foreign exchange and variable interest rates.
- Consider the comparability limitations of 2016 carve-out results and review the disclosed prior-period corrections and their revised amounts.