Ingevity Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Ingevity manufactures specialty chemicals and activated carbon materials, reported in Performance Materials and Performance Chemicals.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $288.2 million | $276.8 million; up 4% |
| Gross profit / gross margin | $114.6 million / 39.8% | $97.1 million / 35.1% |
| Net income | $45.3 million | $22.7 million |
| Diluted earnings per share | $1.08 | $0.54 |
| Segment EBITDA | $92.2 million | $83.5 million |
| Operating cash flow | $60.2 million | $(8.0) million |
| Capital expenditures | $19.5 million | $28.1 million |
Gross margin percentages are calculated from reported sales and gross profit. Sales growth reflected favorable volume and price/mix, partly offset by foreign exchange. Net income benefited substantially from lower acquisition-related costs than in Q1 2019; the prior period also included an $8.4 million inventory fair-value step-up charge. The company reported a 17.9% effective tax rate, versus zero in Q1 2019.
Performance Materials sales rose 11% to $121.1 million and segment EBITDA increased to $61.2 million from $51.2 million. Performance Chemicals sales were $167.1 million versus $167.7 million, and segment EBITDA was $31.0 million versus $32.3 million. On a pro forma basis including the Caprolactone business for the full prior-year quarter, Performance Chemicals sales declined 10% and EBITDA declined from $37.8 million to $31.0 million.
At March 31, 2020, cash and cash equivalents were $302.7 million, total debt including finance leases was $1,495.9 million, and undrawn revolving-credit capacity was $372.9 million. The company drew $250 million on its revolver in March as a precautionary liquidity measure. It reported compliance with debt covenants; leverage was 3.5 against a maximum of 4.0 (potentially 4.5 in specified circumstances), and interest coverage was 8.1 against a 3.0 minimum.
Changes, outlook, and management commentary
- Operating cash flow improved year over year, primarily reflecting higher earnings, improved receivables collections, and a smaller change in accrued payroll and benefits. Investing cash outflow was $20.2 million; financing cash inflow was $203.2 million, mainly reflecting net revolver borrowings and share repurchases.
- Foreign currency translation and hedging effects contributed to a $39.1 million other comprehensive loss; comprehensive income was $6.2 million.
- Revised FY2020 guidance, broadened for COVID-19 uncertainty: net sales of $1.10–$1.20 billion, adjusted EBITDA of $310–$350 million, capital expenditures of approximately $85 million, and operating cash flow of $215–$255 million. Management said the ranges assume the auto market recovers only to 75–85% of 2019 levels at points during the year, with no full recovery expected before 2021 or later.
- Management estimated Q2 2020 sales would decline 25–30% and adjusted EBITDA 35–40% versus Q2 2019, assuming announced North American and European auto-plant restart dates and reduced production rates.
- COVID-19 had not materially affected the quarter’s financial statements as of March 31, but management warned that future impacts could be material. In April, the company reduced production at some U.S. Performance Materials plants in response to weaker projected automotive demand. It cited uncertainty around customer demand, supply chains, operations, and the pandemic’s duration.
- The company suspended its share repurchase program in March after repurchasing 750,000 shares for $32.4 million during the quarter. A new $500 million authorization had $467.6 million remaining at quarter-end.
- A multi-year ERP transformation began in Q1. Management estimated total costs of $60–70 million, including $10–15 million of non-capitalizable costs; $2–3 million of non-capitalizable costs were expected in 2020.
- Management expected cash, operating cash flow, and available credit to cover planned needs for at least 12 months, while noting that a portion of revolver capacity, if fully drawn, might need repayment by June 30 to comply with covenants. Routine legal matters were not considered material.
Important facts for investors to verify
- Whether COVID-19 disruptions, especially automotive demand and production, track the assumptions underlying the revised FY2020 and Q2 outlook.
- Whether liquidity and covenant headroom remain adequate, including the stated potential repayment requirement if revolver capacity is fully drawn.
- Whether Performance Chemicals’ pro forma sales and EBITDA weakness persists, particularly in industrial specialties and engineered polymers.
- Progress, total cost, and control implications of the multi-year ERP implementation.
- Whether the company resumes share repurchases and how capital returns compare with debt, investment, and pandemic-related liquidity needs.
- Potential impairment exposure if market conditions, share price, or operating performance deteriorate; the company reported no Q1 triggering event requiring an interim goodwill or asset impairment test.