Ingevity Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Ingevity manufactures specialty chemicals and activated carbon products through Performance Materials and Performance Chemicals.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $235.2 million | $218.5 million | +8% |
| Gross profit | $85.1 million | $70.7 million | +$14.4 million |
| Gross margin | 36.2% | 32.4% | +3.8 percentage points |
| Net income | $35.8 million | $23.0 million | +$12.8 million |
| Net income attributable to Ingevity stockholders | $30.8 million | $19.0 million | +$11.8 million |
| Diluted EPS | $0.72 | $0.45 | +$0.27 |
| Operating cash flow | $9.7 million | $6.5 million | +$3.2 million |
| Capital expenditures | $13.3 million | $10.7 million | +$2.6 million |
Sales growth reflected $11.4 million of favorable volume, $1.6 million from price/mix, and $3.7 million from foreign exchange. Performance Materials sales rose 15% to $95.5 million and segment operating profit increased to $36.9 million from $29.5 million, principally on automotive carbon volumes. Performance Chemicals sales increased 3% to $139.7 million, while segment operating profit rose to $18.7 million from $10.4 million, supported by pricing/mix, lower crude tall oil costs, currency, and the acquisition.
Adjusted EBITDA, a non-GAAP measure, was $67.1 million versus $50.2 million. Interest expense increased to $6.1 million from $3.3 million, largely reflecting the new senior notes. The effective tax rate fell to 21.3% from 32.4%, primarily due to U.S. tax reform.
Financial position and liquidity
At March 31, 2018, cash and cash equivalents were $55.0 million, down from $87.9 million at year-end. Current assets were $400.7 million and current liabilities were $150.1 million. Total debt, including capital leases, was $755.0 million gross ($748.0 million net of issuance costs), compared with $455.0 million gross at December 31, 2017. Debt included $300 million of 4.50% senior notes due 2026, a $375 million term loan, and $80 million of capital lease obligations. The company reported $548.2 million of available revolving-credit capacity and compliance with debt covenants.
Operating cash flow was partly offset by working-capital needs, including higher receivables and inventory. Investing cash outflow was $327.4 million, principally the $315 million Pine Chemical Business purchase. Financing cash inflow was $284.9 million, mainly proceeds from the notes. Management said cash, operating cash flow, and available credit should fund needs and obligations for at least the next 12 months.
Material changes and unusual items
- Ingevity completed its $315 million acquisition of Georgia-Pacific’s Pine Chemical Business on March 8, 2018. It contributed $4.8 million in sales and $0.3 million in pretax income through quarter-end. Purchase-price allocation remains preliminary; $117 million of goodwill and $130 million of customer relationships were recorded.
- The acquisition was principally funded by $300 million of senior notes issued in January. A 20-year, market-based crude tall oil supply agreement was also entered into with Georgia-Pacific.
- Acquisition-related costs were $3.8 million, with a further $0.8 million inventory fair-value step-up recorded in cost of sales. A $0.6 million gain on sale of previously closed Brazilian facility assets reduced restructuring charges.
- ASC 606 adoption increased Q1 net income by $0.3 million compared with the prior accounting method; the filing says most sales recognition was unchanged.
- Share repurchases totaled 41,300 shares for approximately $3.1 million; $90.3 million remained under the authorized program.
Guidance, commentary, and risks
For fiscal 2018, management forecast net sales of $1.10–$1.13 billion and Adjusted EBITDA of $293–$307 million, representing expected Adjusted EBITDA growth of 21%–26%. The outlook anticipates acquisition contributions and growth in higher-margin Performance Materials, pavement, and oilfield applications, partly offset by lower Performance Chemicals industrial specialties volumes and higher production-related costs. Planned 2018 capital expenditures were $80–$90 million.
Identified outlook risks include weaker U.S. vehicle sales or a shift toward smaller vehicles, reduced Chinese automotive demand, lower oil prices and oilfield activity, higher non-CTO raw-material costs, and inability to integrate the acquired refinery or achieve expected synergies. Other disclosed exposures include limited crude tall oil supply and price volatility, foreign exchange, natural gas and floating-rate debt costs, international operations, operational disruptions, competition, regulation, and environmental or personal-injury litigation. The filing reported no material pending litigation and no material change to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Whether the acquisition’s integration, final purchase-price adjustments, and expected synergies support the full-year outlook.
- Whether inventory and receivables convert to cash as expected; Q1 operating cash flow was modest relative to net income.
- Debt and interest-rate exposure: management estimated a 100-basis-point increase in floating rates would add about $3.8 million to annual interest expense.
- Crude tall oil exposure: it represented about 16% of cost of sales; a hypothetical 10% price increase would add approximately $1.8 million in quarterly cost of sales before any pass-through.
- Whether demand, raw-material prices, production costs, and foreign exchange develop consistently with management’s 2018 assumptions.