Ingevity Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Dollar amounts are in millions unless stated otherwise. Ingevity manufactures specialty chemicals and activated carbon materials. It reports three segments: Performance Materials, Performance Chemicals, and Advanced Polymer Technologies.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $392.6 | $382.8 |
| Gross profit | $130.4 | $137.8 |
| Gross margin | 33.2% | 36.0% |
| Net income | $50.7 | $60.8 |
| Diluted EPS | $1.35 | $1.55 |
| Adjusted EBITDA (non-GAAP) | $103.9 | $119.0 |
| Operating cash flow | $5.2 | $24.3 |
Sales rose 2.6%, as favorable pricing and mix contributed $58.8, offset by lower volume of $44.3 and unfavorable currency of $4.7. Gross profit fell $7.4; gross margin declined about 2.8 percentage points. Management cited higher manufacturing costs, including raw-material and energy inflation, and lower volumes. Net income also reflected higher interest expense ($19.6 versus $10.7), partly offset by a $19.2 gain on sale of a strategic investment. The gain is a notable nonrecurring contributor to reported earnings.
Segment results: Performance Materials sales were $141.4 (down from $148.4) and EBITDA was $69.8 (down from $77.9), with weaker China demand, unplanned downtime, and higher costs. Performance Chemicals sales were $185.6 (up from $172.6), but EBITDA declined to $20.3 from $30.8 amid higher crude tall oil costs, lower utilization, and lower industrial specialties volume; sales also benefited from Ozark Materials. Advanced Polymer Technologies sales increased to $65.6 from $61.8 and EBITDA to $13.8 from $10.3, supported by pricing and North American demand.
Liquidity, debt, and cash flow
Cash and cash equivalents were $77.9 at March 31, 2023. Current assets were $716.3 and current liabilities $278.8. Debt including finance leases totaled $1,509.6 before $6.2 of debt issuance costs; $1,502.5 was reported as long-term debt including finance lease obligations, with $0.9 due within one year. Variable-rate borrowings were $858.0. The revolving facility had $139.7 of available capacity.
Operating cash flow declined to $5.2, with cash uses from inventory, receivables, and payroll-related items; cash interest paid increased to $15.3 from $11.0. Investing cash flow was positive $1.9, including $31.4 proceeds from the strategic investment sale and $25.4 of capital expenditures. Financing cash flow was negative $5.6, including $33.4 of share repurchases. Management said cash, operating cash flow, and available revolver capacity are expected to fund operations and obligations for at least the next 12 months. The company was in compliance with debt covenants; its reported net leverage ratio was 2.6 against a maximum of 4.0 (potentially 4.5), and interest coverage was 8.9 against a 3.0 minimum.
Outlook, risks, and notable items
- 2023 outlook: Net sales of $1.75–$1.95 billion and adjusted EBITDA of $450–$480 million. Management expects some improvement in global auto production; pavement technology growth; continued pressure in adhesives; and significant crude tall oil cost increases, partly offset by pricing and mix. It expects improved Advanced Polymer Technologies margins from volume growth and lower input costs.
- Capital spending and transformation: Projected 2023 capital expenditures are $120–$140 million. The ERP/business transformation initiative is expected to finish in 2023; total costs are estimated at $90–$95 million, including $5–$6 million during the remainder of 2023.
- WestRock facility risk: After quarter-end, WestRock announced closure of its North Charleston paper mill and termination effective August 31, 2023, of an agreement providing Ingevity with steam, water, wastewater, and other services. Replacement costs could be significant, and delays could disrupt operations.
- Litigation: An $85.0 million liability is accrued for the trebled BASF antitrust jury verdict. Ingevity disputes the verdict and intends to pursue post-trial relief and appeal; the ultimate liability could differ from the accrual.
- Other items: The company repurchased $33.4 million of shares during the quarter, with $411.5 million remaining under its authorization. It initiated a reorganization and recorded $3.0 million of severance and related costs. The segment reporting structure was realigned, with engineered polymers now reported as Advanced Polymer Technologies; prior-period segment data was recast.
- Key exposures: Management identifies economic and end-market weakness, automotive demand, crude tall oil availability and pricing, supply-chain disruption, foreign currency, floating-rate debt, customer concentration, environmental and legal matters, and dependence on third-party operating services as risks. A 100-basis-point increase in variable rates was estimated to increase annual interest expense by about $8.6 million.
Investor verification points
- Assess whether the 2023 sales and adjusted EBITDA ranges remain achievable given Q1 volume declines, input-cost inflation, and the expected crude tall oil cost increase.
- Track replacement arrangements, cost, and operational continuity for services affected by the WestRock mill closure, particularly before the August 31, 2023 termination date.
- Monitor the BASF proceedings, potential interest and legal costs, and whether the $85.0 million accrual remains adequate.
- Review cash conversion, working capital and inventory, variable-rate debt costs, and available revolver capacity.
- Separate recurring operating performance from the $19.2 million investment-sale gain and evaluate segment trends, especially Performance Chemicals profitability.