Ingevity Corp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO THE FINANCIAL STATEMENTS Description Page No. Management's Report on Internal Control over Financial Reporting 52 Report of Independent Registered Public Accounting Firm 53 Consolidated Statements of Operations 55 Consolidated Statements of Comprehensive Income (Loss) 56 Consolidated Balance Sheets 57 Consolidated Statements of Stockholders' Equity 58 Consolidated Statements of Cash Flows 59 Notes to the Consolidated Financial Statements 61 51 Ingevity Corporation Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company's internal control over financial reporting includes those policies and procedures that: i. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; ii. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2020, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of the Company's internal control over financial reporting as of December 31, 2020, as stated in their report, which is presented on the following page. Date: February 19, 2021 By: /S/ JOHN C. FORTSON John C. Fortson President and Chief Executive Officer and Interim Chief Financial Officer and Treasurer 52 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Ingevity Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Ingevity Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended Decem ber 31, 2020, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)ii (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in N ote 14 to the consolid ated financial statements, the Company changed the manner in which it accounts for leases in 2019. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the 53 company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill Impairment Assessment – Performance Chemicals Reporting Unit As described in Notes 3 and 9 to t he consolidated financial statements, the Company’s consolidated goodwill balance and goodwill balance for the Performance Chemicals reporting unit were $445.3 million and $441.0 million, respectively, as of December 31, 2020. Management conducts a required annual review of goodwill for potential impairment at October 1, or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using both the income approach and market approach, goodwill is considered impaired. The income approach determines fair value based on a discounted cash flow model derived from a reporting unit’s long-term forecasted cash flows. In performing the fair value analysis, management makes various judgments, estimates and assumptions, the most significant of which is the assumption related to revenue growth rates. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit but is limited to the total amount of goodwill allocated to a reporting unit. The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Performance Chemicals reporting unit is a critical audit matter are (i) the significant judgment by management when determining the fair value measurement of the reporting unit , which led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumption related to revenue growth rates used in the income approach. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment for the reporting unit, including controls over the development of the revenue growth rates utilized in the income approach. These procedures also included, among others (i) testing management’s process for determining the fair value measurement; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the reasonableness of the revenue growth rates used by management. Evaluating the revenue growth rates involved evaluating whether the assumption used by management was reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether the assumption was consistent with evidence obtained in other areas of the audit. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina February 19, 2021 We have served as the Company’s auditor since 2015. 54 INGEVITY CORPORATION Consolidated Statements of Operations Years Ended December 31, In millions, except per share data 2020 2019 2018 Net sales $ 1,216.1 $ 1,292.9 $ 1,133.6 Cost of sales 750.6 810.9 716.8 Gross profit 465.5 482.0 416.8 Selling, general, and administrative expenses 149.4 163.1 132.4 Research and technical expenses 22.6 19.7 21.5 Restructuring and other (income) charges, net 18.5 1.8 ( 0.5 ) Acquisition-related costs 1.8 26.9 10.8 Other (income) expense, net ( 4.1 ) ( 4.3 ) 1.0 Interest expense 47.1 54.6 33.2 Interest income ( 4.9 ) ( 7.7 ) ( 3.4 ) Income (loss) before income taxes 235.1 227.9 221.8 Provision (benefit) for income taxes 53.7 44.2 40.0 Net income (loss) 181.4 183.7 181.8 Less: Net income (loss) attributable to noncontrolling interests — — 12.7 Net income (loss) attributable to Ingevity stockholders $ 181.4 $ 183.7 $ 169.1 Per share data Basic earnings (loss) per share attributable to Ingevity stockholders $ 4.39 $ 4.39 $ 4.02 Diluted earnings (loss) per share attributable to Ingevity stockholders 4.37 4.35 3.97 The accompanying notes are an integral part of these financial statements. 55 INGEVITY CORPORATION Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, In millions 2020 2019 2018 Net income (loss) $ 181.4 $ 183.7 $ 181.8 Other comprehensive income (loss), net of tax: Foreign currency adjustments: Foreign currency translation adjustment 23.9 15.6 ( 6.3 ) Unrealized gain (loss) on net investment hedges, net of tax provision (benefit) of $( 2.7 ), $ 0.7 , and zero ( 9.0 ) 2.3 — Total foreign currency adjustments, net of tax provision (benefit) of $( 2.7 ), $ 0.7 , and zero 14.9 17.9 ( 6.3 ) Derivative instruments: Unrealized gain (loss), net of tax provision (benefit) of $( 1.3 ), $( 1.1 ), and $ 0.4 ( 4.3 ) ( 3.7 ) 1.3 Reclassifications of deferred derivative instruments (gain) loss, included in net income (loss), net of tax (provision) benefit of $ 0.3 , $( 0.1 ), and $( 0.3 ) 0.9 ( 0.2 ) ( 0.9 ) Total derivative instruments, net of tax provision (benefit) of $( 1.0 ), $( 1.2 ), and $ 0.1 ( 3.4 ) ( 3.9 ) 0.4 Pension & other postretirement benefits: Unrealized actuarial gains (losses) and prior service (costs) credits, net of tax provision (benefit) of $( 0.6 ), $( 0.4 ), and $( 0.1 ) ( 2.1 ) ( 1.4 ) ( 0.3 ) Reclassifications of net actuarial and other (gain) loss, amortization of prior service cost, and settlement and curtailment (income) charges, included in net income, net of tax (provision) benefit of zero , zero , and $ 0.1 0.3 0.1 0.2 Total pension and other postretirement benefits, net of tax provision (benefit) of $( 0.6 ), $( 0.4 ), and zero ( 1.8 ) ( 1.3 ) ( 0.1 ) Other comprehensive income (loss), net of tax provision (benefit) of $( 4.3 ), $( 0.9 ), and $ 0.1 9.7 12.7 ( 6.0 ) Comprehensive income (loss) 191.1 196.4 175.8 Less: Comprehensive income (loss) attributable to noncontrolling interests — — 12.7 Comprehensive income (loss) attributable to the Ingevity stockholders $ 191.1 $ 196.4 $ 163.1 The accompanying notes are an integral part of these financial statements. 56 INGEVITY CORPORATION Consolidated Balance Sheets December 31, In millions, except share and par value data 2020 2019 Assets Cash and cash equivalents $ 257.7 $ 56.5 Accounts receivable, net of allowance for credit losses of $ 1.9 million - 2020 and $ 0.5 million - 2019 148.0 150.0 Inventories, net 189.0 212.5 Prepaid and other current assets 34.0 44.2 Current assets 628.7 463.2 Property, plant and equipment, net 703.6 664.7 Operating lease assets, net 49.1 53.4 Goodwill 445.3 436.4 Other intangibles, net 373.3 396.2 Deferred income taxes 8.1 5.0 Restricted investment, net of allowance for credit losses of $ 0.9 million - 2020 73.6 72.6 Other assets 52.8 50.2 Total Assets $ 2,334.5 $ 2,141.7 Liabilities Accounts payable $ 104.2 $ 99.1 Accrued expenses 46.6 33.3 Accrued payroll and employee benefits 25.1 28.2 Current operating lease liabilities 16.2 17.1 Notes payable and current maturities of long-term debt 26.0 22.5 Income taxes payable 5.3 15.3 Current liabilities 223.4 215.5 Long-term debt including finance lease obligations 1,267.4 1,228.4 Noncurrent operating lease liabilities 34.7 36.7 Deferred income taxes 117.0 100.3 Other liabilities 49.9 30.0 Total Liabilities 1,692.4 1,610.9 Commitments and contingencies (Note 19) Equity Preferred stock (par value $ 0.01 per share; 50,000,000 shares authorized; zero issued and outstanding at 2020 and 2019) — — Common stock (par value $ 0.01 per share; 300,000,000 shares authorized; 42,912,846 and 42,675,171 issued and 40,509,997 and 41,826,136 outstanding at 2020 and 2019, respectively) 0.4 0.4 Additional paid-in capital 121.3 112.8 Retained earnings 678.0 497.2 Accumulated other comprehensive income (loss) 4.7 ( 5.0 ) Treasury stock, common stock, at cost ( 2,402,849 and 849,035 shares at 2020 and 2019, respectively) ( 162.3 ) ( 74.6 ) Total Equity 642.1 530.8 Total Liabilities and Equity $ 2,334.5 $ 2,141.7 The accompanying notes are an integral part of these financial statements. 57 INGEVITY CORPORATION Consolidated Statements of Stockholders' Equity Ingevity Stockholders' Common Stock In millions, shares in thousands Shares Amount Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Noncontrolling interests Total Equity Balance at December 31, 2017 42,208.9 $ 0.4 $ 140.1 $ 142.8 $ ( 11.7 ) $ ( 7.7 ) $ 14.0 $ 277.9 Net income (loss) — — — 169.1 — — 12.7 181.8 Other comprehensive income (loss) — — — — ( 6.0 ) — — ( 6.0 ) Common stock issued 116.7 — — — — — — — Exercise of stock options, net 6.3 — 0.2 — — — — 0.2 Tax payments related to vested restricted stock units — — — — — ( 2.5 ) — ( 2.5 ) Share repurchase program — — — — — ( 47.4 ) — ( 47.4 ) Noncontrolling interest distributions — — — — — — ( 15.3 ) ( 15.3 ) Share-based compensation plans — — 12.3 — — 1.8 — 14.1 Adoption of accounting standard — — — 1.6 — — — 1.6 Acquisition of noncontrolling interest — — ( 54.3 ) — — — ( 11.4 ) ( 65.7 ) Balance at December 31, 2018 42,331.9 $ 0.4 $ 98.3 $ 313.5 $ ( 17.7 ) $ ( 55.8 ) $ — $ 338.7 Net income (loss) — — — 183.7 — — — 183.7 Other comprehensive income (loss) — — — — 12.7 — — 12.7 Common stock issued 283.3 — — — — — — — Exercise of stock options, net 60.0 — 1.7 — — — — 1.7 Tax payments related to vested restricted stock units — — — — — ( 14.3 ) — ( 14.3 ) Share repurchase program — — — — — ( 6.4 ) — ( 6.4 ) Share-based compensation plans — — 12.8 — — 1.9 — 14.7 Balance at December 31, 2019 42,675.2 $ 0.4 $ 112.8 $ 497.2 $ ( 5.0 ) $ ( 74.6 ) $ — $ 530.8 Net income (loss) — — — 181.4 — — — 181.4 Other comprehensive income (loss) — — — — 9.7 — — 9.7 Common stock issued 174.6 — — — — — — — Exercise of stock options, net 63.0 — 1.9 — — — — 1.9 Tax payments related to vested restricted stock units — — — — — ( 3.2 ) — ( 3.2 ) Share repurchase program — — — — — ( 88.0 ) — ( 88.0 ) Share-based compensation plans — — 6.6 — — 3.5 — 10.1 Adoption of accounting standard — — — ( 0.6 ) — — — ( 0.6 ) Balance at December 31, 2020 42,912.8 $ 0.4 $ 121.3 $ 678.0 $ 4.7 $ ( 162.3 ) $ — $ 642.1 The accompanying notes are an integral part of these financial statements. 58 INGEVITY CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, In millions 2020 2019 2018 Cash provided by (used in) operating activities: Net income (loss) $ 181.4 $ 183.7 $ 181.8 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 100.2 85.0 57.0 Non cash operating lease costs 18.0 19.9 — Deferred income taxes 16.2 14.8 0.9 Disposal/impairment of assets 0.6 1.4 0.9 Restructuring and other (income) charges, net 1.7 2.2 0.1 Share-based compensation 8.4 12.3 12.5 Pension and other postretirement benefit costs 1.9 1.5 2.0 Other non-cash items 15.3 10.1 15.9 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net 2.8 ( 15.3 ) ( 3.0 ) Inventories, net 26.2 0.5 ( 26.9 ) Prepaid and other current assets 2.1 0.1 ( 6.8 ) Planned major maintenance outage ( 7.0 ) ( 8.4 ) ( 7.0 ) Accounts payable 9.4 ( 6.2 ) 5.7 Accrued expenses 13.4 ( 5.9 ) 13.1 Accrued payroll and employee benefits ( 3.3 ) ( 14.4 ) 3.0 Income taxes ( 9.6 ) 14.7 5.0 Operating leases ( 18.5 ) ( 19.8 ) — Pension contribution — — ( 1.6 ) Changes in all other operating assets and liabilities, net ( 6.8 ) ( 0.5 ) ( 0.6 ) Net cash provided by (used in) operating activities $ 352.4 $ 275.7 $ 252.0 Cash provided by (used in) investing activities: Capital expenditures ( 82.1 ) ( 114.8 ) ( 93.9 ) Finance lease expenditures ( 23.8 ) — — Payments for acquired businesses, net of cash acquired — ( 537.9 ) ( 315.5 ) Sale of equity securities — — 1.1 Restricted investment ( 2.0 ) ( 2.0 ) ( 2.0 ) Other investing activities, net ( 2.7 ) ( 3.6 ) ( 4.1 ) Net cash provided by (used in) investing activities $ ( 110.6 ) $ ( 658.3 ) $ ( 414.4 ) The accompanying notes are an integral part of these financial statements. 59 INGEVITY CORPORATION Consolidated Statements of Cash Flows (continued) Years Ended December 31, In millions 2020 2019 2018 Cash provided by (used in) financing activities: Proceeds from revolving credit facility 346.1 797.7 — Proceeds from long-term borrowings 550.0 375.0 300.0 Payments on revolving credit facility ( 477.3 ) ( 666.4 ) — Payments on long-term borrowings ( 389.1 ) ( 122.5 ) — Debt issuance costs ( 11.0 ) ( 2.4 ) ( 7.1 ) Financing lease obligations, net 23.1 — — Borrowings (repayments) of notes payable and other short-term borrowings, net ( 4.4 ) 2.1 3.9 Tax payments related to withholdings on vested equity awards ( 3.2 ) ( 14.3 ) ( 2.5 ) Proceeds and withholdings from share-based compensation plans, net 3.6 4.1 2.1 Repurchases of common stock under publicly announced plan ( 88.0 ) ( 6.4 ) ( 47.4 ) Acquisition of noncontrolling interest — — ( 80.0 ) Noncontrolling interest distributions — — ( 15.3 ) Other financing activities, net — 2.3 — Net cash provided by (used in) financing activities $ ( 50.2 ) $ 369.2 $ 153.7 Increase (decrease) in cash, cash equivalents, and restricted cash 191.6 ( 13.4 ) ( 8.7 ) Effect of exchange rate changes on cash 2.2 0.2 ( 1.4 ) Change in cash, cash equivalents, and restricted cash 193.8 ( 13.2 ) ( 10.1 ) Cash, cash equivalents, and restricted cash at beginning of period 64.6 77.8 87.9 Cash, cash equivalents, and restricted cash at end of period (1) $ 258.4 $ 64.6 $ 77.8 _______________ (1) Includes restricted cash of $ 0.7 million, $ 8.1 million, and $ 0.3 million and cash and cash equivalents of $ 257.7 million, $ 56.5 million, and $ 77.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Restricted cash is included within "Prepaid and other current assets" within the consolidated balance sheets. Supplemental cash flow information: Cash paid for interest, net of capitalized interest $ 39.6 $ 48.0 $ 26.0 Cash paid for income taxes, net of refunds 46.6 14.9 34.8 Purchases of property, plant and equipment in accounts payable 2.7 7.6 8.9 Leased assets obtained in exchange for new finance lease liabilities 23.8 — — Leased assets obtained in exchange for new operating lease liabilities 27.2 5.3 — The accompanying notes are an integral part of these financial statements. 60 Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 INDEX Note Page No. 1 Background 62 2 Coronavirus Pandemic 62 3 Summary of Significant Accounting Policies 63 4 New Accounting Guidance 69 5 Revenues 71 6 Fair Value Measurements 72 7 Inventories, net 74 8 Property, Plant, and Equipment, net 75 9 Goodwill and Other Intangible Assets, net 75 10 Financial Instruments and Risk Management 76 11 Debt, including Fi nance Lease Obligations 80 12 Share-based Compensation 84 13 Equity 87 14 Leases 89 15 Retirement Plans 91 16 Restructuring and Other (Income) Charges, net 96 17 Acquisitions 97 18 Income Taxes 100 19 Commitments and Contingencies 103 20 Segment Information 104 21 Earnings (Loss) per Share 105 22 Supplemental Information 107 23 Quarterly Financial Information (Unaudited) 108 61 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 1: Background Description of Business Ingevity Corporation ("Ingevity," "the company," "we," "us" or "our") provides products and technologies that purify, protect, and enhance the world around us. Through a team of talented and experienced people, we develop, manufacture, and bring to market solutions that help customers solve complex problems and make the world more sustainable. We report in two business segments: Performance Materials and Performance Chemicals. Our Performance Materials segment consists of our automotive technologies and process purification product lines. Performance Materials manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets. Automotive technologies products are sold into the gasoline vapor emission control applications within the automotive industry, while process purification products are sold into the food, water, beverage, and chemical purification industries. Our Performance Chemicals segment consists of our pavement technologies, oilfield technologies, industrial specialties, and engineered polymers product lines. Performance Chemicals manufactures products derived from crude tall oil ("CTO") and lignin extracted from the kraft pulping process as well as caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including warm mix paving, pavement preservation, and pavement reconstruction and recycling (pavement technologies product line), oil well service additives and oil production and downstream application (oilfield technologies product line), adhesives, agrochemicals, lubricants, printing inks, and industrial intermediates (industrial specialties product line), coatings, resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line). Basis of Consolidation and Presentation The accompanying consolidated financial statements of Ingevity were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant accounting policies described in Note 3, together with the other notes that follow, are an integral part of the consolidated financial statements. The consolidated financial statements include the accounts of Ingevity and subsidiaries in which a controlling interest is maintained. If Ingevity's ownership is less than 100 percent, the outside stockholders' interests are shown as noncontrolling interests. In 2018, our noncontrolling interest represented the 30 percent ownership interest held by a third-party U.S. based company in our consolidated Purification Cellutions, LLC legal entity, now known as Ingevity Georgia, LLC. See Note 13 for information regarding our acquisition of the 30 percent interest in Purification Cellutions, LLC on August 1, 2018. The preparation of the consolidated financial statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates. During the year ended December 31, 2020, and subsequent to this date, there have been significant changes to the global economic situation and to public securities markets as a consequence of the novel strain of coronavirus ("COVID-19") pandemic. It is reasonably possible that this could cause changes to estimates as a result of the financial circumstances of the markets in which we operate, the price of our publicly traded equity in comparison to the carrying value, and the health of the global economy. Such changes to estimates could potentially result in impacts that would be material to the consolidated financial statements. While there was not a material impact to our consolidated financial statements as of and for the year ended December 31, 2020, our future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods. Note 2: Coronavirus Pandemic On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has led to adverse impacts on the U.S. and global economies, and created uncertainty regarding potential impacts to our supply chain, operations, and customer demand. We have been classified as an essential business in the jurisdictions that have made this determination to date, allowing us to continue operations. However, our facilities - as well as the operations of our suppliers, customers, and third-party sales agents and distributors - 62 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 have been, and will continue to be, disrupted by governmental and private sector responses to COVID-19. This includes business shutdowns, work-from-home orders and social distancing protocols, travel or health-related restrictions, as well as quarantines, self-isolations, and disruptions to transportation channels. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes modifications to the limitation on business interest expense and net operating loss provisions, and provided a payment delay of the employer's portion of U.S. Social Security taxes during 2020, after the date of enactment. We deferred $ 4.7 million of employer U.S. Social Security taxes due in 2020, with 50 percent due by December 31, 2021 and the remaining 50 percent by December 31, 2022. The CARES Act is not expected to have a material impact on our consolidated financial statements. In order to strengthen our short-term liquidity and to ensure financial flexibility, in March 2020, we drew down $ 250 million from our revolving credit facility as a precautionary measure, all of which was repaid by year end. We also implemented work-from-home policies and protocols for the majority of our global salaried workforce, as well as social distancing practices to ensure the safety of our employees at our manufacturing facilities. During the second quarter, we decreased production at some of our U.S. and China based manufacturing plants due to COVID-19 customer demand impacts and implemented a cost reduction initiative further described in Note 16. During the third quarter of 2020, we resumed normal production at all manufacturing plants as customer demand improved. While the disruptions caused by the pandemic are currently expected to be temporary, there is uncertainty regarding the virus's duration and severity and the effectiveness of vaccines. COVID-19 has impacted, and will continue to impact, our results of operations, financial position, and liquidity. Note 3: Summary of Significant Accounting Policies Estimates and assumptions: We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results are likely to differ from those estimates, but we do not believe such differences will materially affect our financial position, results of operations or cash flows. Cash equivalents: Highly liquid securities with an original maturity of three months or less are considered to be cash equivalents. Accounts receivable and allowance for credit losses: Accounts receivable, net on the consolidated balance sheets are comprised of trade receivables less allowances for credit losses. Trade receivables consist of amounts owed to Ingevity from customer sales and are recorded at the invoiced amounts when revenue is recognized and generally do not bear interest. The allowance for credit losses is our best estimate of the amount of probable loss in the existing accounts receivable. We determine the allowance based on our expected of future credit losses which in part is based on historical write-off experience, current collection trends, and external business factors such as economic factors, including regional bankruptcy rates, and political factors. Past due balances over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered. Allowance for credit losses at December 31, 2020 and 2019, was $ 1.9 million and $ 0.5 million, respectively. Concentration of credit risk: The financial instruments that potentially subject Ingevity to concentrations of credit risk are accounts receivable. We limit our credit risk by performing ongoing credit evaluations and, when necessary, requiring letters of credit, guarantees, or collateral. We had accounts receivable from our largest customer of $ 4.7 million and $ 3.2 million as of December 31, 2020 and 2019, respectively. Sales to this customer, which are included in the Performance Materials segment, were approximately six percent, five percent, and three percent of total net sales for each of the years ended December 31, 2020, 2019, and 2018, respectively. No customers individually accounted for greater than 10 percent of Ingevity's consolidated Net sales. Inventories, net: Inventories held are valued at lower of cost or net realizable value, except for inventories determined using the the last-in, first-out method (“LIFO”), which are valued at the lower of LIFO or market cost. The value of our U.S. inventories is determined using LIFO for substantially all raw materials, finished goods, and production materials. The value of all other inventories, including stores and supplies inventories and inventories of non-U.S. operations, is determined by the first-in, first-out ("FIFO") or average costs methods. Elements of cost in inventories include raw materials, direct labor, and manufacturing overhead. We routinely assess inventory for both potential obsolescence and potential declines in anticipated selling prices, to derive a market value for the inventory on hand. This review also includes an analysis of potentially obsolete, 63 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 unmarketable, slow moving, or overvalued inventory. If necessary, we will impair any inventories by an amount equal to the difference between the value of the held inventory (i.e. cost) and its estimated net realizable value for FIFO and average cost inventories, and market value for LIFO inventories. Property, plant, and equipment: Owned assets are recorded at cost. Also included in the cost of these assets is interest on funds borrowed during the construction period. When assets are sold, retired or disposed of, their cost and related accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected in cost of sales. Repair and maintenance costs that materially add to the value of the asset or prolong its useful life are capitalized and depreciated based on the extension of the useful life; general costs of maintenance and repairs are charged to expense. Repair and maintenance costs: We expense routine repair and maintenance costs as we incur them. We defer expenses incurred during planned major maintenance activities and record these amounts to Other assets on our consolidated balance sheet. Deferred amounts are recognized as expense ratably, over the shorter of the estimated interval until the next major maintenance activity or the life of the deferred item. The cash outflows related to these costs are included in operating activities in the consolidated statement of cash flows. The timing of this maintenance can vary by manufacturing plant and has a significant impact on our results of operations in the period performed primarily due to lost production during the maintenance period. Depreciation: The cost of property, plant and equipment is depreciated, utilizing the straight-line method, over the estimated useful lives of the assets, the majority of which range from 20 to 40 years for buildings and leasehold improvements and 5 to 30 years for machinery and equipment. The following table provides the detail behind the useful lives and proportion of our machinery and equipment (“M&E”) in each useful life category. Percent of M&E Cost Depreciable Life in Years Types of Assets 50 20 Production vessels and kilns, storage tanks, piping 11 15 Control systems, instrumentation, metering equipment 7 25 to 30 Blending equipment, storage tanks, piping, shipping equipment and platforms, safety equipment 20 5 to 10 Production control system equipment and hardware, laboratory testing equipment 3 40 Machinery & equipment support structures and foundations 9 Various Various Leases: We lease a variety of assets for use in our operations that are classified as operating leases. At contract inception, we determine that a lease exists if the contract conveys the right to control an identified asset for a period of time in exchange for consideration. Control is considered to exist when the lessee has the right to obtain substantially all of the economic benefits from the use of an identified asset as well as the right to direct the use of that asset. If a contract is considered to be a lease, we recognize a lease liability based on the present value of the future lease payments, with an offsetting entry to recognize a right-of-use asset. As a majority of our leases do not provide an implicit rate within the lease, an incremental borrowing rate is used which is based on information available at the commencement date. The determination of the incremental borrowing rate for each individual lease was impacted by the following assumptions: lease term, currency, and the economic environment for the physical location of the leased asset. Our operating leases principally relate to the following leased asset classes: Leased Asset Class Remaining Lease Term Administrative offices 1 to 15 years Manufacturing buildings 9 to 28 years Manufacturing and office equipment 1 to 10 years Warehousing and storage facilities 5 to 10 years Vehicles 3 to 6 years Rail cars 1 to 8 years Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the expected lease term. Some of our leases include options to extend the lease term at our sole 64 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 discretion. We account for lease and non-lease components together as a single component for all lease asset classes. The depreciable life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain leases provide for escalation of the lease payments, as well as maintenance costs and taxes increase. Impairment of long-lived assets: We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets, including intangible assets, to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Goodwill and other intangible assets: Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We conduct a required annual review of goodwill for potential impairment at October 1, or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value. Our reporting units are our operating segments, i.e. Performance Chemicals and Performance Materials. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using both the income approach and market approach, goodwill is considered impaired. The income approach determines fair value based on discounted cash flow model derived from a reporting unit’s long-term forecasted cash flows. The market approach determines fair value based on the application of earnings multiples of comparable companies to projected earnings of the reporting unit. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit but is limited to the total amount of goodwill allocated to the reporting unit. In performing the fair value analysis, management makes various judgments, estimates and assumptions, the most significant of which is the assumption related to revenue growth rates. The factors we considered in developing our estimates and projections for cash flows include, but are not limited to, the following: (i) macroeconomic conditions; (ii) industry and market considerations; (iii) costs, such as increases in raw materials, labor, or other costs; (iv) our overall financial performance; and, (v) other relevant entity-specific events that impact our reporting units. The determination of whether goodwill is impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated fair values of our reporting units. We believe that the estimates and assumptions used in our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could result in materially different calculations of fair value. We will continue to evaluate goodwill on an annual basis as of October 1, and whenever events or changes in circumstances, such as significant adverse changes in operating results, market conditions, or changes in management’s business strategy indicate that there may be a probable indicator of impairment. It is possible that the assumptions used by management related to the evaluation may change or that actual results may vary significantly from management’s estimates. Our fiscal year 2020 annual goodwill impairment test was performed as of October 1, 2020. We determined that the fair value of both our reporting units were substantially in excess of their carrying value and therefore concluded that no goodwill impairment existed. There were no events or circumstances indicating that goodwill might be impaired as of December 31, 2020. No impairment charges have been recognized historically. Other intangible assets are comprised of finite-lived intangible assets consisting primarily of brands (representing trademarks, trade names and know-how), customer contracts and relationships, and developed technology. Other intangible assets are amortized over their estimated useful lives which range from 5 to 20 years. See Note 9 for additional information. Capitalized software: Capitalized software for internal use is included in Other assets on the consolidated balance sheets. Amounts capitalized are presented in Capital expenditures on our consolidated statements of cash flow. Capitalized software is amortized using the straight-line over the estimated useful lives ranging from 1 to 10 years. Amortization is recorded to Costs of sales on our consolidated statements of operations for software directly used in the production of inventory and Selling, general, and administrative expenses on our consolidated statements of operations for software used for non-production related activities. 65 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Legal liabilities: We recognize a liability for legal contingencies when a loss is probable and reasonably estimable. Third-party fees for legal services are expensed as incurred. Revenue recognition: Our revenue is derived from contracts with customers, and substantially all our revenue is recognized when products are either shipped from our manufacturing and warehousing facilities or delivered to the customer. Revenue, net of returns and customer incentives, are based on the sale of manufactured products. Revenues are recognized when performance obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our products. For certain limited contracts, where we are producing goods with no alternative use and for which we have an enforceable right to payment for performance completed to date, we are recognizing revenue as goods are manufactured, rather than when they are shipped. Revenues are presented as Net sales on the consolidated statements of operations to the consolidated financial statements. Since Net sales are derived from product sales only, we have disaggregated our Net sales by our product lines within each reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Sales returns and allowances are not a normal practice in the industry and are not significant. Certain customers may receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and included in Net sales. Shipping and handling fees billed to customers are included with Net sales. If we pay for the freight and shipping, we recognize the cost when control of the product has transferred to the customer as an expense in Cost of sales on the consolidated statements of operations. Although very rare, from time to time we incur expenses to obtain a sales contract. In these cases, if these costs are for orders that are fulfilled in one year or less, we expense these costs as they are incurred. Payment terms with our customers are typically in the range of zero to sixty days. Because the period between when we transfer a promised good to a customer and when the customer pays for that good will be one year or less, we elect not to adjust the promised amount of consideration for the effects of any financing component, as it is not significant. Cost of sales: Costs primarily consists of the cost of inventory sold and other production related costs. These costs include raw materials, direct labor, manufacturing overhead, packaging costs and maintenance costs. Shipping and handling costs are also recorded to Cost of sales. Selling, general, and administrative expenses: Costs are expensed as incurred and primarily include employee compensation costs related to sales and office personnel, office expenses, and other expenses not directly related to our manufacturing operations. Costs also include advertising and promotional costs. Research and technical expenses: Cost are expensed as incurred and primarily include employee compensation, technical equipment costs and material testing and innovation related expenses. Royalty expense: Our Performance Materials and Performance Chemicals segments have licensing agreements with third parties requiring us to pay royalties for certain technologies we use in the manufacturing of our products. Royalty expense is recognized as incurred and recorded to Cost of sales on our consolidated statements of operations. Restructuring and other (income) charges, net: We continually perform strategic reviews and assess the return on our operations which sometimes results in a plan to restructure the business. The cost and benefit of these strategic restructuring initiatives are recorded as restructuring and other (income) charges, net recorded within Restructuring and other (income) charges, net on our consolidated statement of operations. These costs are excluded from our operating segment results. We record an accrual for severance and other non-recurring costs under the provisions of the relevant accounting guidance. Additionally, in some restructuring plans write-downs of long-lived assets may occur. Two types of assets are impacted: assets to be disposed of by sale and assets to be abandoned. Assets to be disposed of by sale are measured at the lower of carrying amount or estimated net proceeds from the sale. Assets to be abandoned with no remaining future service potential are written down to amounts expected to be recovered. The useful lives of assets to be abandoned that have a remaining future service potential are adjusted and depreciation is recorded over the adjusted useful life. Income taxes: We are subject to income taxes in the U.S. and numerous foreign jurisdictions, including China and the United Kingdom. The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. We follow the asset and liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes. Under this method, deferred income taxes are recognized based upon the temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled. The ability to realize deferred tax assets 66 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 is evaluated through the forecasting of taxable income, historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies. Valuation allowances are recognized to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will not be realized. We do not provide income taxes on undistributed earnings of consolidated foreign subsidiaries as it is our intention that such earnings will remain invested in those companies. We recognize income tax positions that are more-likely-than-not to be realized and accrue interest related to unrecognized income tax positions, which is included as a component of the income tax provision, on the consolidated statements of operations. Pension and postretirement benefits: We provide both qualified and non-qualified pension and postretirement benefit plans to our employees. The expense related to the current employees of Ingevity as well as the expense related to retirees of Ingevity are included in the consolidated financial statements. The costs (or benefits) and obligations related to these benefits reflect key assumptions related to general economic conditions, including interest (discount) rates, healthcare cost trend rates and expected return on plan assets. The costs (or benefits) and obligations for these benefit programs are also affected by other assumptions, such as average retirement age, mortality, employee turnover, and plan participation. To the extent our plans' actual experience, as influenced by changing economic and financial market conditions or by changes to our own plans' demographics, differs from these assumptions, the costs and obligations for providing these benefits, as well as the plans' funding requirements, could increase or decrease. When actual results differ from our assumptions, the difference is typically recognized over future periods. In addition, the unrealized gains and losses related to our pension and postretirement benefit obligations may also affect periodic benefit costs (or benefits) in future periods. See Note 15 for additional information. Share-based compensation: We recognize compensation expense in our consolidated financial statements for all share-based compensation arrangements. Share-based compensation cost is measured at the date of grant, based on the fair value of the award and expense is recognized over the grantee's requisite service period; forfeitures are recognized as they occur. We calculate the fair value of our stock options using the Black-Scholes option pricing model. The fair value of restricted stock units ("RSU"s), non-employee director deferred stock units ("DSU"s) and performance-based restricted stock units ("PSU"s) is determined using our closing stock price on the day of the grant. Substantially all compensation expense related to share-based awards is recorded as a component of Selling, general and administrative expenses in the consolidated statements of operations. See Note 12 for additional information . Operating segments: Ingevity’s operating segments are Performance Materials and Performance Chemicals. Our operating segments were determined based upon the nature of the products produced, the nature of the production process, the type of customer for the products, the similarity of economic characteristics, and the manner in which management reviews results. Ingevity’s chief operating decision maker evaluates the business at the segment level when making decisions about allocating resources and assessing performance of Ingevity as a whole. We evaluate sales in a format consistent with our reportable segments: (1) Performance Materials, which includes wood-based, chemically activated carbon products and (2) Performance Chemicals, which includes specialty pine-based chemical co-products derived from the kraft pulping process and caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Each segment operates as a portfolio of various end uses for the relevant raw material used in that segment. Business decisions are made and performance is generally measured based upon the total mix of end uses each raw material is being directed at in the segment. See Note 20 for additional information. Fair Value Measurements: We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The carrying value of our financial instruments: cash and cash equivalents, other receivables, other payables and accrued liabilities, approximate their fair values due to the short-term nature of these financial instruments. See Note 6 for more information regarding the fair value measurements of our assets and liabilities, and Note 10 for more information regarding the fair value measurements of our financial instruments and risk management activities. Derivative financial instruments: Ingevity’s operations are exposed to market risks, such as the impact of changes of interest rates on our floating rate debt, changes in foreign currency exchange rates, and commodity prices due to transactions denominated in a variety of foreign currencies and purchases of certain commoditized raw materials and inputs. Changes in these rates and prices may have an impact on Ingevity’s future cash flow and earnings. We formally document all relationships 67 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 between the derivative financial instrument and hedged item, as well as the risk management objective and strategy for undertaking various hedge transactions. We do not hold or issue derivative financial instruments for speculative or trading purposes. We enter into derivative financial instruments which are governed by policies, procedures, and internal processes set forth by our Board of Directors. Our risk management program also addresses counterparty credit risk by selecting only major financial institutions with investment grade ratings. Once the derivative financial instrument is entered into, we continuously monitor the financial institutions’ credit ratings and our credit risk exposure held by the financial institution. When appropriate, we reallocate exposures across multiple financial institutions to limit credit risk. If a counterparty fails to fulfill its performance obligations under the derivative financial instrument, then Ingevity is exposed to credit risk equal to the fair value of the financial instrument. Derivative assets and liabilities are recorded on our consolidated balance sheets at fair value and are presented on a gross basis. Due to our proactive mitigation of these potential credit risks, we anticipate performance by our counterparties to these contracts and therefore no material loss is expected. In order to mitigate the impact of market risks we have entered into both net investment hedges as well as cash flow hedges. Cash Flow Hedges: Cash flow hedges are derivative financial instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative financial instruments that are designated and qualify as a cash flow hedge are recorded on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The gains and losses arising from qualifying hedging instruments are reported as a component of Accumulated other comprehensive income (loss) (“AOCI”) located in the consolidated balance sheets and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The reclassification gain or losses of the hedge from AOCI are recorded in the same financial statement caption on the consolidated statements of operations as the hedged item. For example, designated cash flow hedges entered to minimize foreign currency exchange risk of forecasted revenue transactions are recorded to Net sales on the consolidated statements of operations when the forecasted transaction occurs. Designated commodity cash flow hedges gains or losses recorded in AOCI are recognized in Cost of sales on the consolidated statements of operations when the inventory is sold. See Note 10 for more information regarding our cash flow hedges. Net Investment Hedges: Net investment hedges are defined as derivative or non-derivative instruments designated as and used to hedge the foreign currency exposure of the net investment in certain foreign operations. The net of the change in the hedge instrument and the item being hedged against for qualifying net investment hedges is reported as a component of the foreign currency adjustments ("CTA") within Accumulated other comprehensive income ("AOCI") on the consolidated balance sheet. The gains (losses) on net investment hedges are reclassified to earnings only when the related CTA are required to be reclassified, usually upon sale or liquidation of the investment. See Note 10 for more information regarding our net investment hedges. Noncontrolling interests: When our ownership in a consolidated legal entity is less than 100 percent, the outside stockholders' interests are shown as noncontrolling interests. Our noncontrolling interests for the year ended December 31, 2018, represented the 30 percent ownership interest held by a third-party U.S. based company in our consolidated Purification Cellutions, LLC legal entity, as further discussed in Note 1. Treasury stock: We record shares of common stock repurchased at cost as treasury stock, resulting in a reduction of stockholders’ equity in the consolidated balance sheets. When the treasury shares are contributed under our employee benefit plans or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to or deducted from Additional paid-in capital on the consolidated balance sheets. Translation of foreign currencies: The local currency is the functional currency for all of Ingevity’s significant operations outside the U.S. consisting primarily of the euro, the Japanese yen, the pound sterling and the Chinese renminbi. The assets and liabilities of Ingevity's foreign subsidiaries are translated into U.S. dollars using period-end exchange rates, and adjustments resulting from these financial statement translations are included in Accumulated other comprehensive income (loss) in the consolidated balance sheets. Revenues and expenses are translated at average rates prevailing during each period. Business combinations: We account for business combinations in accordance with ASC 805 “Business Combinations” which requires, among other things, the acquiring entity in a business combination to recognize the fair value of the assets 68 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 acquired and liabilities assumed; the recognition of Acquisition-related costs in the consolidated statements of operations; the recognition of Restructuring and other (income) charges, net in the consolidated statements of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at fair value on the acquisition date with subsequent adjustments recognized in the consolidated statement of operations. We generally use third-party qualified consultants to assist management in determining the fair value of assets acquired and liabilities assumed. This includes, when necessary, assistance with the determination of lives and valuation of tangible property, plant, and equipment and identifiable intangibles, assisting management in determining the fair value of obligations associated with employee related liabilities and assisting management in assessing obligations associated with legal and environmental claims. The fair value assigned to identifiable intangible assets acquired are determined primarily by using an income approach, which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are the attrition rate, growth rate, and the discount rate. These assumptions are based on company specific information and projections, which are not observable in the market and are therefore considered Level 2 and Level 3 measurements. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Based on the acquired business’ end markets and products as well as how the chief operating decision maker will review the business results determines the most appropriate operating segment for which to integrate the acquired business. Goodwill acquired, if any, is allocated to the reporting unit within or at the operating segment for which the acquired business will be integrated. Selection of the appropriate reporting unit is based on the level at which discrete financial information is available and reviewed by business management post integration. Operating results of the acquired entity are reflected in the consolidated financial statements from date of acquisition. Reclassifications: Certain prior year amounts have been reclassified to conform with current year's presentation. Note 4: New Accounting Guidance The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" or "Codification") is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standards Update ("ASU") to communicate changes to the Codification. We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements. Recently Adopted Accounting Pronouncements In August 2018, the FASB issued ASU 2018-15 "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." This ASU requires companies to defer specific implementation costs incurred in a Cloud Computing Arrangement ("CCA") that are often expensed as incurred under current GAAP, and recognize the expense over the noncancelable term of the CCA. We adopted this standard on a prospective basis on January 1, 2020. As a result of the adoption, we anticipate capitalizing certain implementation costs that were previously expensed as incurred, which will be recorded to either prepaid and other current assets or other assets on the consolidated balance sheets, depending on the duration of the agreement. The impact of the adoption did not have a material impact on our consolidated financial statements and related disclosures. In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit losses: Measurement of Credit Losses on Financial Instruments." In 2019 and 2020, the FASB issued several ASUs to amend and clarify the credit loss guidance in the original ASU 2016-13 (ASU 2016-13 and its amendments are herein referred to as “ASC 326” or "CECL"). ASC 326 amends FASB's guidance on the impairment of financial instruments, specifically adding an impairment model to GAAP that is based on expected losses, rather than incurred losses, which is intended to result in more timely recognition of such losses. We adopted this standard on January 1, 2020. We have updated our internal controls and operational processes and procedures, to include certain forward-looking considerations in our current process of developing and recognizing credit losses for our accounts receivable and restricted investment accounted for at amortized cost. Generally, the adoption of ASC 326 did not have a material impact on our consolidated balance sheet, results of operations or cash flows. ASC 326 had an immaterial impact to our allowance for credit losses reported in accounts receivable on our consolidated balance sheet upon adoption. Additionally, upon adoption of ASC 326, we estimated an allowance for credit losses for our restricted investment on our consolidated balance sheet. Our restricted investment, which is accounted for as a held-to-maturity investment, consists of highly rated corporate long-term bonds that mature in 2025 and 2026. To calculate our expected credit loss allowance, we utilized a probability-of-default method (“PDM”) for each bond based on each securities term. This process uses historical credit loss 69 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 experience on similar product types, adjusted for reasonable and supportable forecasts of future default rates. Using a PDM, we calculated an expected credit loss allowance at January 1, 2020 of $ 0.6 million, which was recorded as an adjustment to the opening balance of retained earnings. The following table displays changes in our allowance for credit losses as of December 31, 2020, including the transition impact of adopting the CECL standard. (in millions) Balance at December 31, 2019 (1) Impact from Adoption of ASC 326 Balance at January 1, 2020 Current Period Provision Balance at December 31, 2020 (2) Allowance for credit losses $ 0.5 0.6 1.1 1.7 $ 2.8 ______________ (1) The allowance for credit losses at December 31, 2019 of $ 0.5 million was included in "Accounts receivable, net" on the consolidated balance sheets. (2) The allowance for credit losses at December 31, 2020 of $ 1.9 million and $ 0.9 million was included "Accounts receivable, net" and "Restricted investment" on the consolidated balance sheets, respectively. Our expected credit losses can vary from period to period based on several factors, such as changes in bond ratings, actual observed bond defaults, and overall economic environment. The primary factor that contributed to our provision for expected credit losses in the year ended December 31, 2020 was a pessimistic outlook of the macroeconomic environment due to the COVID-19 pandemic, and related effects on the financial performance of U.S.-based corporations. The increase in the allowance for credit losses of $ 1.7 million in the year ended December 31, 2020 is attributed to $ 0.3 million for Level 1 securities and $ 1.4 million for accounts receivable expected credit losses. In August 2018, the FASB issued ASU 2018-14 "Compensation — Retirement Benefits — Defined Benefit Plans — General (Topic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans." This ASU amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. We adopted this standard on a prospective basis on January 1, 2020, and it had no material impact to our consolidated financial statements and related disclosures. Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU amends ASC 740 to add, remove, and clarify disclosure requirements related to income taxes. The new standard is effective for fiscal years beginning after December 15, 2020. We adopted the new guidance effective January 1, 2021. The adoption of the new guidance did not have a material impact. In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The ASU is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance became effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively until December 31, 2022. As of December 31, 2020, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief, if necessary, as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We do not expect this new standard to have a material impact on our consolidated financial statements. 70 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 5: Revenues Disaggregation of Revenue The following tables present our Net sales disaggregated by product line and geography. Years Ended December 31, In millions 2020 2019 2018 Automotive Technologies product line $ 477.7 $ 454.9 $ 362.0 Process Purification product line 32.3 35.7 38.4 Performance Materials segment $ 510.0 $ 490.6 $ 400.4 Oilfield Technologies product line 75.6 111.4 114.2 Pavement Technologies product line 186.8 183.3 178.5 Industrial Specialties product line 316.0 385.5 440.5 Engineered Polymers product line 127.7 122.1 — Performance Chemicals segment $ 706.1 $ 802.3 $ 733.2 Consolidated Net sales $ 1,216.1 $ 1,292.9 $ 1,133.6 The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer. Years Ended December 31, In millions 2020 2019 2018 North America $ 676.9 $ 795.7 $ 770.4 Asia Pacific 345.4 281.4 171.4 Europe, Middle East, and Africa 174.9 193.6 169.9 South America 18.9 22.2 21.9 Net sales $ 1,216.1 $ 1,292.9 $ 1,133.6 Contract Balances The following table provides information about contract assets and contract liabilities from contracts with customers. The contract assets primarily relate to our rights to consideration for products produced but not billed at the reporting date from contracts with certain customers. The contract assets are recognized as accounts receivables when we have an enforceable right to payment for performance completed to date and the customer has been billed. Contract liabilities represent obligations to transfer goods to a customer for which we have received consideration from our customer. For all periods presented, we had no contract liabilities. Contract Asset Years Ended December 31, In millions 2020 2019 Balance at beginning of period $ 6.2 $ 5.1 Contract asset additions 23.6 29.5 Reclassification to accounts receivable, billed to customers ( 24.1 ) ( 28.4 ) Balance at end of period (1) $ 5.7 $ 6.2 _______________ (1) Included within "Prepaid and other current assets" on the consolidated balance sheet. 71 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 6: Fair Value Measurements Recurring Fair Value Measurements The following information is presented for assets and liabilities that are recorded in the consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that are recorded at fair value between the three-level fair value hierarchy during the periods reported. In millions Level 1 (1) Level 2 (2) Level 3 (3) Total December 31, 2020 Assets: Equity securities (4) $ 0.2 $ — $ — $ 0.2 Deferred compensation plan investments (5) 1.7 — — 1.7 Total assets $ 1.9 $ — $ — $ 1.9 Liabilities: Deferred compensation arrangement (5) $ 11.6 $ — $ — $ 11.6 Contingent consideration (6) — — 0.8 0.8 Total liabilities $ 11.6 $ — $ 0.8 $ 12.4 In millions Level 1 (1) Level 2 (2) Level 3 (3) Total December 31, 2019 Assets: Equity securities (4) $ 0.4 $ — $ — $ 0.4 Deferred compensation plan investments (5) 1.4 — — 1.4 Total assets $ 1.8 $ — $ — $ 1.8 Liabilities: Deferred compensation arrangement (5) $ 10.0 $ — $ — $ 10.0 Separation-related reimbursement awards (7) 0.1 — — 0.1 Total liabilities $ 10.1 $ — $ — $ 10.1 __________ (1) Quoted prices in active markets for identical assets. (2) Quoted prices for similar assets and liabilities in active markets. (3) Significant unobservable inputs. (4) Included within "Prepaid and other current assets" on the consolidated balance sheet. (5) Consists of a deferred compensation arrangement, through which we hold various investment securities recognized on our balance sheets. Both the asset and liability related to investment securities are recorded at fair value, and are included within "Other assets" and "Other liabilities" on the consolidated balance sheets, respectively. In addition to the investment securities, we also had company-owned life insurance related to the deferred compensation arrangement recorded at cash surrender value in "Other assets" of $ 10.8 million and $ 8.4 million at December 31, 2020 and 2019, respectively. (6) Included within "Other liabilities" on the consolidated balance sheet. (7) Included within "Accrued expenses" on the consolidated balance sheet. Nonrecurring Fair Value Measurements The following table presents our fair value hierarchy for those assets measured at fair value on a non-recurring basis in the consolidated balance sheets during the year ended December 31, 2020. There were no nonrecurring fair value measurements in the consolidated balance sheets during the year ended December 31, 2019. 72 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 In millions December 31, 2020 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) (Year Ended December 31, 2020) Assets: Impairment of operating lease assets, net (1) $ — $ — $ — $ — $ ( 1.7 ) Total assets $ — $ — $ — $ — $ ( 1.7 ) ______________ (1) During the year ended December 31, 2020, we exited certain leased assets previously used in our daily operations. These leased assets have remaining lease obligations through 2023. This impairment charge was recorded to adjust their fair value on our consolidated balance sheet to zero. Equity Securities The aggregate carrying value of investments in equity securities where fair value is not readily determinable totaled zero and $ 1.5 million as of December 31, 2020 and 2019, respectively. During the period ended December 31, 2020, we recorded an impairment charge of $ 1.4 million, related to an equity security where fair value is not readily determinable held within our Performance Materials segment. The impairment charge represented the difference between liquidation value of the investment and our carrying value at the time our investment was liquidated. Restricted Investment Our restricted investment is a trust managed in order to secure repayment of the finance lease obligation, associated with Performance Materials' Wickliffe, Kentucky manufacturing site, at maturity. The trust, presented as restricted investment on our consolidated balance sheets, purchased long-term bonds that mature in 2025 and 2026. The principal received at maturity of the bonds along with interest income that is reinvested in the trust are expected to be equal to or more than the $ 80.0 million finance lease obligation that is due in 2027. Because the provisions of the trust provide us the ability, and it is our intent, to hold the investments to maturity, the investments held by the trust are accounted for as held to maturity ("HTM"); therefore, they are held at their amortized cost. The investments held by the trust earn interest at the stated coupon rate of the invested bonds. Interest earned on the investments held by the trust is recognized as interest income and presented within interest income on our consolidated statement of operations. At December 31, 2020 and 2019, the carrying value of our restricted investment, which is accounted for as HTM and therefore held at amortized costs, was $ 73.6 million and $ 72.6 million, net of an allowance for credit losses of $ 0.9 million and zero and included cash of $ 2.4 million and $ 0.2 million, respectively. The fair value at December 31, 2020 and 2019 was $ 81.5 million and $ 74.5 million, respectively, based on Level 1 inputs. The following table shows the total amortized cost of our HTM debt securities by credit rating, excluding the allowance for credit losses and cash. The primary factor in our expected credit loss calculation is the composite bond rating. As the rating decreases, the risk present in holding the bond is inherently increased, leading to an increase in expected credit losses. December 31, 2020 In millions AA+ AA A A- BBB+ Total HTM debt securities $ 13.5 10.6 24.2 13.4 10.4 $ 72.1 Debt Obligations At December 31, 2020 and 2019, the carrying value of finance lease obligations was $ 103.1 million and $ 80.0 million, respectively, and the fair value was $ 127.0 million and $ 100.9 million, respectively. The fair value of our Performance Materials' Wickliffe, Kentucky finance lease obligations is based on the period-end quoted market prices for the obligations, using Level 2 inputs. The fair value of all other finance lease obligations approximates their carrying values. The carrying value, excluding debt issuance fees, of our variable rate debt was $ 353.4 million and $ 877.8 million as of December 31, 2020 and 2019, respectively. The carrying value is a reasonable estimate of the fair value of our outstanding debt as our outstanding debt is variable interest rate debt. 73 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 At December 31, 2020 and 2019, the carrying value of our fixed rate debt was $ 850.0 million and $ 300.0 million, respectively, and the fair value was $ 864.1 million and $ 305.4 million, respectively, based on Level 2 inputs. Contingent Consideration In connection with the acquisition of certain assets in 2020, we are contingently obligated to make an additional payment for such assets of up to an aggregate amount of $ 7.0 million. The contingent consideration is payable if certain sales volume targets are achieved prior to the expiration on December 31, 2024, therein referred to as "Revenue Earn-out." The fair value of the five-year Revenue Earn-out consideration was $ 0.8 million at December 31, 2020 . Any subsequent changes in the fair value of the contingent consideration liability will be recorded in current period earnings as a selling, general, and administrative expense. The following table summarizes the activity for financial liabilities utilizing Level 3 fair value measurements: Contingent Consideration In millions December 31, 2020 Beginning balance $ — Newly issued 1.1 Change in revaluation of contingent consideration included in earnings ( 0.3 ) Exercises/settlements — Ending balance (1) $ 0.8 ______________ (1) Included within "Other liabilities" on the consolidated balance sheets. Note 7: Inventories, net December 31, In millions 2020 2019 Raw materials $ 39.1 $ 42.6 Production materials, stores and supplies 24.6 22.3 Finished and in-process goods 139.6 158.0 Subtotal $ 203.3 $ 222.9 Less: excess of cost over LIFO cost ( 14.3 ) ( 10.4 ) Inventories, net $ 189.0 $ 212.5 As of December 31, 2020, approximately 31 percent, 13 percent, and 56 percent of our inventories were accounted for under the FIFO, average cost, and LIFO methods, respectively. As of December 31, 2019, approximately 31 percent, 11 percent, and 58 percent of our inventories were accounted for under the FIFO, average cost, and LIFO methods, respectively. 74 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 8: Property, Plant, and Equipment, net Property, plant, and equipment, net consist of the following: December 31, In millions 2020 2019 Machinery and equipment $ 1,065.5 $ 964.3 Buildings and leasehold improvements 174.0 116.9 Land and land improvements 20.0 19.0 Construction in progress 43.7 119.1 Total cost $ 1,303.2 $ 1,219.3 Less: accumulated depreciation ( 599.6 ) ( 554.6 ) Property, plant, and equipment, net (1) $ 703.6 $ 664.7 _______________ (1) This includes finance leases related to machinery and equipment at our Wickliffe, Kentucky facility of $ 67.2 million and $ 68.8 million, and net carrying value of $ 5.3 million and $ 6.0 million at December 31, 2020 and 2019, respectively. This also includes finance leases related to our Waynesboro, Georgia manufacturing facility for (a) machinery and equipment of $ 18.8 million and $ 18.4 million and net carrying value of $ 16.0 million and $ 16.8 million, (b) construction in progress of $ 9.2 million and $ 6.4 million and (c) buildings and leasehold improvements of $ 5.2 million and $ 4.2 million, and net carrying value of $ 5.0 million and $ 4.2 million at December 31, 2020 and 2019, respectively. Also included in buildings and leasehold improvements is a finance lease related to our new corporate headquarters of $ 23.8 million and net carrying value of $ 23.0 million at December 31, 2020. Amortization expense associated with these finance leases is included within depreciation expense. The payments remaining under these finance leases obligations are included within Note 14. Depreciation expense was $ 61.2 million, $ 52.3 million, and $ 41.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Note 9: Goodwill and Other Intangible Assets, net Goodwill Operating Segments In millions Performance Chemicals Performance Materials Total December 31, 2018 $ 126.4 $ 4.3 $ 130.7 Foreign currency translation 10.6 — 10.6 Goodwill acquired (1) 295.1 — 295.1 December 31, 2019 $ 432.1 $ 4.3 $ 436.4 Foreign currency translation 8.9 — 8.9 December 31, 2020 $ 441.0 $ 4.3 $ 445.3 _______________ (1) See Note 17 for more information about our acquisitions . 75 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Other Intangible Assets December 31, 2020 December 31, 2019 In millions Gross carrying amount Accumulated amortization Net Gross carrying amount Accumulated amortization Net Customer contracts and relationships $ 319.5 $ 73.6 $ 245.9 $ 314.5 $ 51.6 $ 262.9 Brands (1) 82.4 15.8 66.6 80.3 11.1 69.2 Developed technology 73.0 12.5 60.5 68.6 5.7 62.9 Other 2.7 2.4 0.3 2.7 1.5 1.2 Other intangibles, net (2) $ 477.6 $ 104.3 $ 373.3 $ 466.1 $ 69.9 $ 396.2 _______________ (1) Represents trademarks, trade names, and know-how. (2) See Note 17 for more information about our acquisitions and the related increase in intangible assets. The weighted average amortization period remaining for all intangibles is 13 years, while the weighted average amortization period remaining for customer contracts and relationships, brands, developed technology and other intangibles is 12.4 years, 15.1 years, 13.3 years, and 0.8 years, respectively. Intangible assets subject to amortization were allocated among our business segments as follows: December 31, In millions 2020 2019 Performance Chemicals $ 371.2 $ 396.2 Performance Materials 2.1 — Other intangibles, net $ 373.3 $ 396.2 The amortization expense related to our intangible assets in the table above is shown in the table below. Years Ended December 31, In millions 2020 2019 2018 Cost of sales $ 0.1 $ 0.6 $ 0.7 Selling, general, and administrative expenses 32.5 28.1 11.6 Total amortization expense (1) $ 32.6 $ 28.7 $ 12.3 _______________ (1) See Note 17 for more information about the Caprolactone Acquisition and Pine Chemical Acquisition and the related increase in amortization expense. Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2021 - $ 31.7 million, 2022 - $ 31.5 million, 2023 - $ 31.4 million, 2024 - $ 31.1 million and 2025 - $ 31.1 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency. Note 10: Financial Instruments and Risk Management Net Investment Hedges We have fixed-to-fixed cross-currency interest rate swaps with an aggregate notional amount of $ 166.2 million and a maturity date of July 2023. We designated the swaps to hedge a portion of our net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contract and an exchange of the notional amount at maturity. This effectively converts a portion of our U.S. dollar denominated fixed-rate debt from a weighted average rate of 3.79 percent to euro denominated fixed-rate debt at a rate of 1.71 percent. Any difference between the fixed interest rate between the U.S. dollar denominated debt to euro denominated debt is recorded as interest income on the consolidated statements of operations. 76 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 The fair value of the fixed-to-fixed cross currency interest rate swap was a net asset (liability) of $( 8.6 ) million and $ 3.0 million at December 31, 2020 and 2019, respectively. During the years ended December 31, 2020 and 2019, we recognized net interest income associated with this financial instrument of $ 1.6 million and $ 2.3 million, respectively. Cash Flow Hedges Foreign Currency Exchange Risk Management We manufacture and sell our products in several countries throughout the world and, thus, we are exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, we net the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, from time to time, we utilize forward currency exchange contracts and zero cost collar option contracts to minimize the volatility to earnings and cash flows resulting from the effect of fluctuating foreign currency exchange rates on export sales denominated in foreign currencies (principally the euro). These contracts are generally designated as cash flow hedges. Designated cash flow hedges entered to minimize foreign currency exchange risk of forecasted revenue transactions are recorded to Net sales on the consolidated statement of operations when the forecasted transaction occurs. As of December 31, 2020, there were $ 9.1 million open foreign currency derivative contracts. The fair value of the foreign currency hedge was an asset (liability) of $( 0.1 ) million as of December 31, 2020, and was zero as of December 31, 2019. Commodity Price Risk Management Certain energy sources used in our manufacturing operations are subject to price volatility caused by weather, supply and demand conditions, economic variables, and other unpredictable factors. This volatility is primarily related to the market pricing of natural gas. To mitigate expected fluctuations in market prices and the volatility to earnings and cash flow resulting from changes to pricing of natural gas purchases, from time to time, we enter into swap contracts and zero cost collar option contracts and designate these contracts as cash flow hedges. As of December 31, 2020, we had 0.9 million and 1.2 million mmBTUs (millions of British Thermal Units) in aggregate notional volume of outstanding natural gas commodity swap contracts and zero cost collar option contracts, respectively, designated as cash flow hedges. As of December 31, 2020, open commodity contracts hedge forecasted transactions until February 2022. The fair value of the outstanding designated natural gas commodity hedge contracts was a net asset (liability) of $( 0.1 ) million and $( 0.5 ) million as of December 31, 2020 and 2019, respectively. Interest Rate Risk Management Our policy is to manage interest expense using a mix of fixed and variable rate debt. To manage interest rate risk effectively, from time to time, we may enter into cash flow interest rate derivative instruments, which can consist of forward starting swaps and treasury locks. In all cases, the notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. Designated interest rate cash flow hedge gains or losses recorded in AOCI are recognized in "Interest expense, net" on the consolidated statements of operations on a straight-line basis over the remaining maturity of the underlying debt. These instruments are designated as cash flow hedges. As of December 31, 2020, we a floating-to-fixed interest rate swap with a notional amount of $ 166.2 million to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments, effectively converting $ 166.2 million of our floating rate debt to a fixed rate. In accordance with the terms of this instrument, we receive floating rate interest payments based upon three-month U.S. dollar LIBOR and in return are obligated to pay interest at a fixed rate of 3.79 percent until July 2023. The fair value of the interest rate swap was an asset (liability) of $( 8.9 ) million and $( 3.9 ) million at December 31, 2020 and 2019, respectively. 77 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Effect of Cash Flow and Net Investment Hedge Accounting on AOCI In millions Amount of Gain (Loss) Recognized in AOCI Amount of Gain (Loss) Reclassified from AOCI into Net income Location of Gain (Loss) Reclassified from AOCI into Net income Year Ended December 31, 2020 2019 2020 2019 Cash flow hedging derivatives Currency exchange contracts $ ( 0.1 ) $ — $ 0.1 $ — Net sales Natural gas contracts ( 0.5 ) ( 0.9 ) 1.1 0.3 Cost of sales Interest rate swap contracts ( 5.0 ) ( 3.9 ) — — Interest expense Total $ ( 5.6 ) $ ( 4.8 ) $ 1.2 $ 0.3 Amount of Gain (Loss) Recognized in AOCI Amount of Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Location of Gain or (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Year Ended December 31, 2020 2019 2020 2019 Net investment hedging derivative Currency exchange contracts (1) $ ( 11.7 ) $ 3.0 $ 1.6 $ 2.3 Interest income Total $ ( 11.7 ) $ 3.0 $ 1.6 $ 2.3 __________ (1) Reclassifications from AOCI to Net Income were zero for all periods presented. Gains and losses would be reclassified from AOCI to Other (income) expense, net. Within the next twelve months, we expect to reclassify $ 0.1 million of losses from AOCI to earnings, before taxes. Fair-Value Measurements The following information is presented for derivative assets and liabilities that are recorded in the consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during the periods reported. There were no non-recurring fair value measurements related to derivative assets and liabilities on our consolidated balance sheet during fiscal years ending December 31, 2020, 2019, or 2018, respectively. 78 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 In millions Level 1 (1) Level 2 (2) Level 3 (3) Total December 31, 2020 Assets: Natural gas contracts (4) $ — $ 0.1 $ — $ 0.1 Total assets $ — $ 0.1 $ — 0.1 Liabilities: Natural gas contracts (6) $ — $ 0.2 $ — $ 0.2 Currency exchange contracts (6) — 0.1 — 0.1 Net investment hedge (7) — 8.6 — 8.6 Interest rate swap contracts (7) — 8.9 — 8.9 Total liabilities $ — $ 17.8 $ — $ 17.8 In millions Level 1 (1) Level 2 (2) Level 3 (3) Total December 31, 2019 Assets: Net investment hedge (5) $ — $ 3.0 $ — $ 3.0 Total assets $ — $ 3.0 $ — $ 3.0 Liabilities: Natural gas contracts (6) $ — $ 0.5 $ — $ 0.5 Interest rate swap contracts (7) — 3.9 — 3.9 Total liabilities $ — $ 4.4 $ — $ 4.4 __________ (1) Quoted prices in active markets for identical assets. (2) Quoted prices for similar assets and liabilities in active markets. (3) Significant unobservable inputs. (4) Included within "Other current assets" on the consolidated balance sheet. (5) Included within "Other assets" on the consolidated balance sheet. (6) Included within "Accrued expenses" on the consolidated balance sheet. (7) Included within "Other liabilities" on the consolidated balance sheet. 79 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 11: Debt, including Finance Lease Obligations Current and long-term debt including finance lease obligations consisted of the following: December 31, 2020 December 31, In millions Interest rate Maturity date 2020 2019 Variable Rate Debt: Revolving Credit Facility (1) 1.64 % 2025 $ — $ 131.3 Term Loans 2019 Term Loan — — — 375.0 2017 Term Loan 1.71 % 2023 351.6 365.6 Other notes payable 4.44 % 2021 1.8 5.9 Fixed Rate Debt: Senior Notes 2020 Senior Note 3.88 % 2028 550.0 — 2018 Senior Note 4.50 % 2026 300.0 300.0 Finance lease obligations (2) 7.17 % 2027-2035 103.1 80.0 Total debt including finance lease obligations $ 1,306.5 $ 1,257.8 Less: debt issuance costs 13.1 6.9 Total debt including finance lease obligations, net of debt issuance costs $ 1,293.4 $ 1,250.9 Less: debt maturing within one year (3) 26.0 22.5 Long-term debt including finance lease obligations $ 1,267.4 $ 1,228.4 _______________ (1) Letters of credit outstanding under the revolving credit facility were $ 2.3 million and $ 2.1 million and available funds under the facility were $ 497.7 million and $ 616.6 million at December 31, 2020 and 2019, respectively. (2) Includes finance lease obligations of $ 80.0 million related assets at our Performance Materials' Wickliffe, Kentucky manufacturing site and $ 23.1 million related to our corporate headquarters. (3) Debt maturing within one year is included in "Notes payable and current maturities of long-term debt" on the consolidated balance sheet. Revolving Credit Facility On October 28, 2020, we entered into Amendment No. 5 to our existing credit agreement, dated as of March 7, 2016. Among other things, Amendment No. 5 extended the maturity date with respect to our revolving credit facility from August 7, 2023 to October 28, 2025 and reduced the aggregate principal amount of revolving commitments thereunder from $ 750.0 million to $ 500.0 million. The revolving credit facility bears interest at either (a) an adjusted base rate or (b) an adjusted LIBOR rate (or a comparable or successor rate), in each case, plus an applicable margin, in the case of base rate loans, ranging between zero percent and 0.75 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.00 percent and 1.75 percent. The margin is based on a total leverage based pricing grid. Fees of $ 2.2 million, zero and $ 1.1 million were incurred in 2020, 2019, and 2018, respectively, to secure the various amendments associated with our revolving credit facility. These fees have been deferred and will be amortized over the term of the facility. 80 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Term Loans Our term loans are comprised of two separate term loans: the "2017 Term Loan" and the "2019 Term Loan." During the fourth quarter of 2020, we utilized a portion of the net proceeds from an issuance of senior notes to repay the outstanding principal amount of $ 375 million related to the 2019 Term Loan. 2019 Term Loan: On March 7, 2019, we amended our credit agreement to, among other things, establish a new class of incremental term loan commitments, collectively referred to as the 2019 Term Loan, in the aggregate principal amount of $ 375.0 million. The 2019 Term Loan was not subject to amortization; the full principal balance was originally due and payable at maturity on August 7, 2022. The 2019 Term Loan bore interest at either (a) an adjusted base rate or (b) an adjusted LIBOR rate (or a comparable or successor rate), in each case, plus an applicable margin, in the case of base rate loans, ranging between zero and 0.25 percent, and in the case of adjusted LIBOR rate loans, ranging between 0.75 percent and 1.25 percent. The margin was based on a total leverage based pricing grid. As consideration for the amendments relating to the 2019 Term Loan, we paid to each lender a consent fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans under held by such lender, resulting in aggregate fees of $ 1.8 million. These fees were deferred and amortized over the original term of the loan. During the fourth quarter 2020, with the repayment of the outstanding principal balance, we recorded the remaining deferred finance fees of $ 1.0 million to Interest expense on our consolidated statements of operations. 2017 Term Loan: On August 21, 2017, we amended our credit agreement to among other things, establish incremental term loan commitments in the aggregate principal amount of $ 75.0 million in addition to the existing term loan of $ 300.0 million. The combined borrowings of $ 375.0 million, collectively referred to as the 2017 Term Loan are treated as a single class. On August 7, 2018, we further amended the credit agreement to, among other things, extended the maturity of the 2017 Term Loan to August 7, 2023. The 2017 Term Loan amortized at zero percent per annum through May 9, 2019 and amortizes at 1.25 percent per annum during each year thereafter, with the balance due at maturity. The 2017 Term Loan bears interest at either (a) an adjusted base rate or (b) an adjusted LIBOR rate (or a comparable or successor rate), in each case, plus an applicable margin, in the case of base rate loans, ranging between zero percent and 0.75 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.00 percent and 1.75 percent. The margin is based on a total leverage based pricing grid. As consideration for the amendments related to the 2017 Term Loan, we paid to each lender a consent fee equal to 0.05 percent of the aggregate principal amount of the commitments and outstanding loans held by such lender, resulting in aggregate fees of $ 0.3 million and $ 0.5 million in 2018 and 2017, respectively. These fees have been deferred and will be amortized over the term of the loan. Senior Notes Our senior notes are comprised of two separate series of notes: the "2020 Notes" and the "2018 Notes." 2020 Senior Notes: On October 28, 2020, we issued $ 550.0 million aggregate principal amount of 3.875 percent senior unsecured notes due 2028 (the “2020 Notes”) in a private placement. The 2020 Notes were issued pursuant to an indenture dated as of October 28, 2020, by and among Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The net proceeds from the sale of the 2020 Notes, after deducting deferred financing fees of $ 8.8 million, were used to repay the existing 2019 Term Loan and the outstanding balances under our revolving credit facility. Interest payments on the 2020 Notes are due semiannually in arrears on November 1st and May 1st of each year, beginning on May 1, 2021, at a rate of 3.875 percent per year. The 2020 Notes will mature on November 1, 2028. 81 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 2018 Senior Notes: On January 24, 2018, we issued $ 300.0 million aggregate principal amount of 4.50 percent senior unsecured notes due 2026 (the “2018 Notes”) in a private placement. The 2018 Notes were issued pursuant to an indenture dated as of January 24, 2018, by and among Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The net proceeds from the sale of the 2018 Notes, after deducting deferred financing fees of $ 5.7 million, were used to finance, in part, the Pine Chemical Acquisition (see Note 17 for more information). Interest payments on the 2018 Notes are due semiannually in arrears on February 1st and August 1st of each year, beginning on August 1, 2018, at a rate of 4.50 percent per year. The 2018 Notes will mature on February 1, 2026. Debt Covenants Our indentures contain certain customary covenants (including covenants limiting Ingevity's and its restricted subsidiaries’ ability to grant or permit liens on certain property securing debt, declare or pay dividends, make distributions on or repurchase or redeem capital stock, make investments in unrestricted subsidiaries, engage in sale and lease-back transactions, and engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of the assets of our and our restricted subsidiaries, taken as a whole) and events of default (subject in certain cases to customary exceptions, as well as grace and cure periods). The occurrence of an event of default under the 2018 Notes or 2020 Notes could result in the acceleration of the notes of such series and could cause a cross-default resulting in the acceleration of other indebtedness of Ingevity and its subsidiaries, including the other series. We were in compliance with all covenants under the indentures as of December 31, 2020. The credit agreement governing our revolving credit facility and the 2017 Term Loan contain customary default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-compliance with covenants and cross-defaults to other material indebtedness. The occurrence of an uncured event of default under the credit agreement could result in all loans and other obligations becoming immediately due and payable and our revolving credit facility and term loan facilities being terminated. The credit agreement also contains certain customer covenants, including financial covenants. The revolving credit facility financial covenants require Ingevity to maintain on a consolidated basis a maximum total net leverage ratio of 4.0 to 1.0 (which may be increased to 4.5 to 1.0 under certain circumstances) and a minimum interest coverage ratio of 3.0 to 1.0. Additionally, the 2017 Term Loan financial covenants require Ingevity to maintain on a consolidated basis a maximum total gross leverage ratio of 4.0 to 1.0 (which may be increased to 4.5 to 1.0 under certain circumstances) and a minimum interest coverage ratio of 3.0 to 1.0. Our actual gross and net leverage for the four consecutive quarters ended December 31, 2020 were 3.1 and 2.5 , respectively, and our actual interest coverage for the four consecutive quarters ended December 31, 2020 was 10.0 . We were in compliance with all covenants at December 31, 2020. New Markets Tax Credit On November 14, 2019, we entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) related to a $ 7.0 million capital investment associated with a project to build out our new headquarters located in North Charleston, South Carolina (the "Project"). Wells Fargo made a $ 2.3 million capital contribution to Ingevity Virginia Corporation, a wholly-owned subsidiary of Ingevity (“Ingevity VA”), which in-turn made a $ 5.0 million loan to IH Investment Fund, LLC (the “Investment Fund”) under a qualified New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their federal income taxes for up to 39 percent of qualified investments in the equity of a community development entity (“CDE”). CDEs are conduit lenders through which privately managed investment institutions to make qualified low-income community investments. Ingevity VA's $ 5.0 million loan to the Investment Fund at an interest rate of one percent per annum and matures in 2041. The Investment Fund contributed the $ 5.0 million loan from Ingevity VA and the initial investment of $ 2.3 million (less syndication fees) by Wells Fargo to The Innovate Fund XVI, LLC ("Innovate CDE"), the CDE in this transaction. The Innovate CDE, in turn, loaned the funds (net of fees) at an interest rate of 1.21 percent and a maturity of November 14, 2044 to Ingevity. The proceeds of the loans from the Innovate CDE are to be restricted for use for the Project only. 82 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 The $ 2.3 million contribution to the Investment Fund by Wells Fargo entitles Wells Fargo to substantially all of the tax benefits derived from the NMTC over a seven-year compliance period, while Ingevity effectively receives net loan proceeds equal to Wells Fargo’s contributions to the Investment Fund. This transaction includes a put/call provision whereby Ingevity may be obligated or entitled to repurchase Wells Fargo’s interest in the Investment Fund. The value attributed to the put/call is not significant. We believe that Wells Fargo will exercise the put option in November 2026, subsequent to the seven-year recapture period. Ingevity is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement, which is subject to 100 percent recapture for a period of seven years as provided by the Internal Revenue Code. Non-compliance with applicable requirements could result in the projected tax benefits not being realized and, therefore, could require Ingevity to indemnify Wells Fargo for any loss or recapture of NMTC related to the financing until such time as the obligation to deliver tax benefits is relieved. We do not anticipate any credit recaptures will be required in connection with this arrangement. We have determined that this financing arrangement, with the Investment Fund and Innovate CDE, provides us with a controlling interest in both entities despite not having majority voting rights in either entity. Therefore, we have concluded, both entities represent a variable interest entity (“VIE”). The ongoing activities of the Investment Fund – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the Investment Fund. We have considered: the contractual arrangements that obligate Ingevity to deliver tax benefits and provide various other guarantees to the structure; the Innovate CDE's and Wells Fargo’s overall lack of a material interest in the underlying economics of the Project; and Ingevity's obligation to absorb losses of both the Innovate CDE and Investment Fund. We have concluded that Ingevity is the primary beneficiary of each VIE and we have therefore consolidated both Innovate CDE and Investment Fund, as VIEs, in accordance with ASC 810. Post consolidation, the only material remaining balances presented on Ingevity's consolidated financial statements are the original contribution of $ 2.3 million from Wells Fargo in the Investment Fund, less the third-party debt financing (syndication) fees paid and any remaining restricted proceeds to be used solely for the purpose of the capital investments in the Project. Although ASC 810 would indicate that noncontrolling interest in these VIEs should be presented separately from Ingevity's equity based on our evaluation, we have concluded that the $ 2.3 million (net of syndication fees) should be presented as a liability of Ingevity on our consolidated financial statements as this more accurately reflects the substance of the financing arrangement. As a result of this financing arrangement, we incurred $ 0.6 million in syndication (debt issuance) fees, which are being amortized over the life of the note payable. The proceeds of the loans from the Innovate CDE (including loans representing the capital contribution made by Wells Fargo, net of syndication fees) of $ 2.3 million, were restricted for use on the Project. As of December 31, 2020 and 2019, the balance of the loan liability, net of debt issuance fees of $ 0.5 million and $ 0.6 million, was $ 1.8 million and $ 1.7 million. The loan liability, net of fees is recorded in Other liabilities on our consolidated balance sheets. Additionally, at December 31, 2019, we had $ 7.7 million of cash restricted for use on the Project, this amount is recorded in Prepaid expenses and other current assets in our consolidated balance sheets. As of December 31, 2020 all proceeds from this financing arrangement were used toward the Project and all capital expenditures have been placed in service. 83 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 12: Share-based Compensation Equity Incentive Plan The Ingevity Corporation 2016 Omnibus Incentive Plan, adopted on May 15, 2016, grants certain corporate officers, key employees and non-employee directors of Ingevity and subsidiaries different forms of benefits, including stock options, restricted stock units ("RSU"), director stock units ("DSU"), and performance stock units ("PSU"). The Ingevity Corporation 2016 Omnibus Incentive Plan has a maximum shares reserve of 4,000,000 for the grant of equity awards. As of December 31, 2020, 3,230,193 shares under the Ingevity Corporation 2016 Omnibus Incentive Plan are still available for grants, assuming that Ingevity performs at the target performance level in each year of the three -year performance period for PSU awards. Ingevity's Compensation Committee determines the long-term incentive mix, including stock options, RSUs and PSUs, and may authorize new grants annually. We typically issue new common shares for vesting of awards under our equity incentive plan. Employee Stock Purchase Plan On December 9, 2016, our Compensation Committee and Board of Directors approved the 2017 Ingevity Corporation Employee Stock Purchase Plan ("ESPP"), which was approved by Ingevity’ stockholders on April 27, 2017. The ESPP allows eligible employee participants to purchase no more than 5,000 shares of our common stock at a discount through payroll deductions up to 15 percent of their compensation deducted during the purchase period. However, no participant shall be permitted to purchase common stock with a value greater than $25,000 in any calendar year. The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code. The ESPP consists of a one month enrollment period preceding the three-month purchase period. Employees purchase shares in each purchase period at 85 percent of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. Under the ESPP, a total of 250,000 shares of Ingevity's common stock are reserved and authorized for issuance to participating U.S. employees, as defined by the ESPP, which excludes certain officers of Ingevity. We typically issue treasury shares for issuances under the ESPP. As of December 31, 2020, 130,023 shares under the ESPP are still available for issuance. The initial offering period under the ESPP began on July 1, 2017. During fiscal year 2020, there were 48,487 shares issued under the ESPP at an average price of $ 71.53 . Our share-based compensation and ESPP expense is included in the table below. Years Ended December 31, In millions 2020 2019 2018 Stock option expense $ 0.6 $ 3.0 $ 2.3 ESPP expense 0.5 0.7 0.5 RSU, DSU and PSU expense 7.3 8.6 9.7 Total share-based compensation expense (1) $ 8.4 $ 12.3 $ 12.5 Income tax benefit ( 1.5 ) ( 2.2 ) ( 2.9 ) Total share-based compensation expense, net of tax $ 6.9 $ 10.1 $ 9.6 _______________ (1) Amounts reflected in "Selling, general, and administrative expenses" on the consolidated statements of operations. Stock Options All stock options vest in accordance with vesting conditions set by the compensation committee of Ingevity's Board of Directors. Stock options granted to date have vesting periods of one to three years from the date of grant. Incentive and non-qualified options granted under the Plan expire no later than 10 years from the grant date. Expense related to stock options granted is based on the assumptions shown in the table below: 84 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Years Ended December 31, Weighted-average assumptions used to calculate expense for stock options 2020 2019 2018 Risk-free interest rate 1.0 % 2.6 % 2.7 % Average life of options (years) 6.5 6.5 6.5 Volatility 33.5 % 28.0 % 27.5 % Dividend yield — — — Fair value per stock option $ 15.87 $ 39.29 $ 25.51 The following table summarizes Ingevity's stock option activity. Number of Options (in thousands) Weighted-average exercise price (per share) Weighted-average remaining contractual term (years) Aggregate intrinsic value (in thousands) Outstanding, December 31, 2019 405 $ 58.39 7.4 $ 13,334 Granted 83 45.04 Exercised ( 71 ) 29.47 Forfeited ( 68 ) 77.21 Canceled ( 3 ) 87.74 Outstanding, December 31, 2020 346 $ 57.28 7.2 $ 7,919 Exercisable, December 31, 2020 200 $ 50.39 6.3 $ 5,709 The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between Ingevity's closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options at each year end. The amount changes based on the fair market value of Ingevity's stock. As of December 31, 2020, $ 0.6 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted-average period of one year. Restricted Stock Units, Deferred Stock Units and Performance-based Restricted Stock Units All RSUs, DSUs, and PSUs vest in accordance with vesting conditions set by the Compensation Committee of Ingevity’s Board of Directors. RSUs and DSUs granted to date have vesting periods ranging from less than one year to three years from the date of grant. PSUs granted to date have vesting periods of three years from the date of grant, including grants that have a cumulative three -year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. We periodically assess the probability of achievement of the performance criteria and adjust the amount of compensation expense accordingly. Compensation expense is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria. 85 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 The following table summarizes Ingevity's RSUs, DSUs and PSUs activity. RSUs and DSUs PSUs Number of Units (in thousands) (1) Weighted average grant date fair value (per share) Number of Units (in thousands) (1) Weighted average grant date fair value (per share) Nonvested, December 31, 2019 115 $ 90.65 158 $ 76.11 Granted 131 44.48 92 46.65 Vested ( 54 ) 79.90 ( 64 ) 53.11 Forfeited ( 21 ) 78.78 ( 44 ) 80.43 Nonvested, December 31, 2020 (2) 171 $ 59.75 142 $ 66.22 _______________ (1) The number granted represents the number of shares issuable upon vesting of RSUs and DSUs. For PSUs the number granted represents the number of shares issuable upon vesting assuming that Ingevity performs at the target performance level in each year of the three-year performance period. (2) Excludes 9,191 non-employee director shares that were vested but unissued at December 31, 2020. As of December 31, 2020, $ 7.8 million of unrecognized share-based compensation expense related to RSUs, DSUs and PSUs is expected to be recognized over a weighted-average period of 1.7 years. 86 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 13: Equity Accumulated other comprehensive income (loss) Summarized below is the roll forward of AOCI, net of tax. Years Ended December 31, In millions 2020 2019 2018 Foreign currency translation Beginning Balance $ 1.5 $ ( 16.4 ) $ ( 10.1 ) Net gains (losses) on foreign currency translation 23.9 15.6 ( 6.3 ) Gains (losses) on net investment hedges ( 11.7 ) 3.0 — Less: tax provision (benefit) ( 2.7 ) 0.7 — Net gains (losses) on net investment hedges ( 9.0 ) 2.3 — Other comprehensive income (loss), net of tax 14.9 17.9 ( 6.3 ) Ending Balance $ 16.4 $ 1.5 $ ( 16.4 ) Derivative instruments Beginning Balance $ ( 3.5 ) $ 0.4 $ — Gains (losses) on derivative instruments ( 5.6 ) ( 4.8 ) 1.7 Less: tax provision (benefit) ( 1.3 ) ( 1.1 ) 0.4 Net gains (losses) on derivative instruments ( 4.3 ) ( 3.7 ) 1.3 (Gains) losses reclassified to net income 1.2 ( 0.3 ) ( 1.2 ) Less: tax (provision) benefit 0.3 ( 0.1 ) ( 0.3 ) Net (gains) losses reclassified to net income 0.9 ( 0.2 ) ( 0.9 ) Other comprehensive income (loss), net of tax ( 3.4 ) ( 3.9 ) 0.4 Ending Balance $ ( 6.9 ) $ ( 3.5 ) $ 0.4 Pension and other postretirement benefits Beginning Balance $ ( 3.0 ) $ ( 1.7 ) $ ( 1.6 ) Unrealized actuarial gains (losses) and prior service (costs) credits ( 2.7 ) ( 1.8 ) ( 0.4 ) Less: tax provision (benefit) ( 0.6 ) ( 0.4 ) ( 0.1 ) Net actuarial gains (losses) and prior service (costs) credits ( 2.1 ) ( 1.4 ) ( 0.3 ) Amortization of actuarial and other (gains) losses, prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income 0.3 0.1 0.3 Less: tax (provision) benefit — — 0.1 Net actuarial and other (gains) losses, amortization of prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income 0.3 0.1 0.2 Other comprehensive income (loss), net of tax ( 1.8 ) ( 1.3 ) ( 0.1 ) Ending Balance $ ( 4.8 ) $ ( 3.0 ) $ ( 1.7 ) Total AOCI ending balance at December 31 $ 4.7 $ ( 5.0 ) $ ( 17.7 ) 87 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Reclassifications of accumulated other comprehensive income (loss) The table below provides details about the reclassifications from AOCI and the affected line items in the consolidated statements of income (loss) for each of the periods presented. Years Ended December 31, In millions 2020 2019 2018 Derivative Instruments Currency exchange contracts (1) $ ( 0.1 ) $ — $ 1.0 Natural gas contracts (2) ( 1.1 ) 0.3 0.2 Total before tax ( 1.2 ) 0.3 1.2 (Provision) benefit for income taxes 0.3 ( 0.1 ) ( 0.3 ) Amount included in net income (loss) $ ( 0.9 ) $ 0.2 $ 0.9 Pension and other postretirement benefits Amortization of prior service credit (costs) (2) $ ( 0.1 ) $ — $ — Amortization of unrecognized net actuarial and other gains (losses) (3) ( 0.1 ) ( 0.1 ) ( 0.1 ) Recognized gain (loss) due to curtailment and settlement (2) ( 0.1 ) — ( 0.2 ) Total before tax ( 0.3 ) ( 0.1 ) ( 0.3 ) (Provision) benefit for income taxes — — 0.1 Amount included in net income (loss) $ ( 0.3 ) $ ( 0.1 ) $ ( 0.2 ) _______________ (1) Included within "Net sales" on the consolidated statements of operations. (2) Included within "Cost of sales" on the consolidated statements of operations. (3) Included within "Other (income) expense, net" on the consolidated statements of operations. Noncontrolling interest acquisition On August 1, 2018, we acquired the remaining 30 percent noncontrolling interest in Purification Cellutions, LLC, now known as Ingevity Georgia, LLC, which was treated as a partnership for tax purposes, for a purchase price of $ 80.0 million. The acquisition resulted in the elimination of Noncontrolling interest of $ 11.4 million and the recognition of a Deferred tax asset of $ 14.3 million, with the remainder being recorded against Additional paid in capital of $ 54.3 million in our consolidated financial statements. Share repurchases On February 28, 2020, our Board of Directors authorized the repurchase of up to $ 500.0 million of our common stock, and rescinded the prior two outstanding authorizations. Our repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time. Shares may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors. During the year ended December 31, 2020, we repurchased $ 88.0 million in common stock, representing 1,533,442 shares of our common stock at a weighted average cost per share of $ 57.38 . At December 31, 2020, $ 412.0 million remained unused under our Board-authorized repurchase program. 88 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 14: Leases On January 1, 2019, we adopted ASC 842 utilizing the modified retrospective approach. The modified retrospective approach we selected provides a method of transition allowing for the recognition of existing leases as of the beginning of the period of adoption (i.e. January 1, 2019), and which does not require the adjustment of comparative periods. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 840. Supplemental consolidated balance sheet information related to our leases is as follows: December 31, In millions Financial Statement Caption 2020 2019 Assets Operating lease assets, net (1) Operating lease assets, net $ 49.1 $ 53.4 Finance lease assets, net (2) Property, plant, and equipment, net 58.5 33.4 Finance lease assets, net (2) Other assets, net 0.8 1.2 Total lease assets $ 108.4 $ 88.0 Liabilities Current Operating lease liabilities (3) Current operating lease liabilities $ 16.2 $ 17.1 Finance lease liabilities Notes payable and current maturities of long-term debt 0.7 — Noncurrent Operating lease liabilities Noncurrent operating lease liabilities 34.7 36.7 Finance lease liabilities Long-term debt including finance lease obligations 102.4 80.0 Total lease liabilities $ 154.0 $ 133.8 _______________ (1) Operating lease assets, net are recorded net of accumulated amortization of $ 29.4 million and $ 17.6 million, as of December 31, 2020 and 2019, respectively. (2) Finance lease assets, net are recorded net of accumulated amortization in Property, plant, and equipment, net and Other assets, net of $ 65.8 million and $ 0.8 million, respectively, as of December 31, 2020, and $ 64.3 million and $ 0.3 million, respectively, as of December 31, 2019. (3) Operating lease liabilities include $ 0.2 million and $ 0.2 million of accrued interest, as of December 31, 2020 and 2019, respectively. Finance Leases Our finance lease obligations of $ 103.1 million and $ 80.0 million at December 31, 2020 and 2019, respectively, consisting of two leases. The first obligation of $ 80.0 million is owed to the city of Wickliffe, Kentucky, associated with Performance Materials' Wickliffe, Kentucky manufacturing site, which is due at maturity in 2027. The second obligation of $ 23.1 million is owed to the lessor of our new corporate headquarters in North Charleston, South Carolina. The lease commenced in July 2020, with a term of 15 years. We also have a finance lease obligation due in 2031 for certain assets located at our Performance Materials' Waynesboro, Georgia manufacturing facility. The lease is with the Development Authority of Burke County (“Authority”). The Authority established the sale-leaseback of these assets by issuing an industrial development revenue bond. The bond was purchased by Ingevity and the obligations under the finance lease remain with Ingevity. Accordingly, we offset the finance lease obligation and bond on our consolidated balance sheets. 89 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Components of lease cost are as follows: Years Ended December 31, In millions Financial Statement Caption 2020 2019 Operating lease cost (1) Cost of sales $ 19.4 $ 21.5 Selling, general, and administrative expenses 1.9 2.4 Finance lease cost Amortization of leased assets Cost of sales $ 2.6 $ 1.9 Selling, general, and administrative expenses 0.8 — Interest on lease liabilities Interest expense, net 6.8 6.1 Net lease cost (2) $ 31.5 $ 31.9 _______________ (1) Includes short-term leases and variable lease costs, which are immaterial. (2) Only on the rare occasion do we sublease our leased assets; as a result this amount excludes sublease income which is immaterial. Maturity of Lease Liabilities December 31, 2020 In millions Operating leases Finance leases Total 2021 $ 18.3 $ 8.1 $ 26.4 2022 14.3 8.1 22.4 2023 10.2 8.2 18.4 2024 6.6 8.3 14.9 2025 3.3 8.3 11.6 2026 and thereafter 4.3 113.2 117.5 Total lease payments $ 57.0 $ 154.2 $ 211.2 Less: Interest 6.1 51.1 57.2 Present value of lease liabilities (1) $ 50.9 $ 103.1 $ 154.0 _______________ (1) As of December 31, 2020, we have operating lease commitments that have not yet commenced of approximately $ 0.8 million primarily related to rail car leases. Lease Term and Discount Rate December 31, In millions, except percentages 2020 2019 Weighted-average remaining lease term (years) Operating leases 4.2 4.2 Finance leases 7.9 8.5 Weighted-average discount rate Operating leases 5.43 % 5.67 % Finance leases 7.17 % 7.67 % 90 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Other Information Years Ended December 31, In millions 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 18.5 $ 19.8 Operating cash flows from finance leases 6.8 6.1 Financing cash flows from finance leases 0.7 — Note 15: Retirement Plans Defined Contribution Plans On January 1, 2016, the Ingevity Corporation Retirement Savings Plan ("Plan") was established. The Plan is a qualified salary-reduction plan under Section 401(k) of the U.S. Internal Revenue Code. Eligible U.S. employees may participate by contributing a portion of their compensation. For non-union eligible employees participating in the Plan Ingevity makes matching contributions up to six percent of the employee deferral. In addition to the matching contributions, Ingevity also makes a non-elective contribution of three percent of eligible compensation per payroll for non-union employees. For union eligible employees participating in the Plan Ingevity makes matching contributions up to 100 percent of the first three percent of the employee deferrals and 50 percent on the next two percent of deferrals. U.S. salaried employees who were no longer eligible to participate in our prior parent's defined benefit pension plan were provided an enhanced contribution into the Plan. The enhanced benefits consist of a transition contribution of four or ten percent of the employee’s eligible compensation for employees who were grandfathered into our prior parent's cash balance and final average pay pension plan, respectively. The transition contributions continued until December 31, 2020, unless the grandfathered employee terminated employment sooner. Charges associated with employer contributions to the Plan were $ 10.6 million, $ 10.6 million, and $ 10.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. Defined Benefit Pension and Postretirement Plans On May 16, 2016, Ingevity established qualified and non-qualified benefit plans to provide pension and post-retirement benefits to certain employees and retirees. Our retirement obligations consist of accrued defined benefit obligations earned by Ingevity domestic hourly union employees; accrued obligations from a frozen non-qualified defined benefit pension plan for certain salaried and former salaried employees of Ingevity; and other post-retirement medical and life insurance benefits. We are required to recognize in our consolidated balance sheets the overfunded and underfunded status of our defined benefit postretirement plans. The overfunded and underfunded status is defined as the difference between the fair value of plan assets and the projected benefit obligation. We are also required to recognize, as a component of other comprehensive income, the actuarial gains and losses and the prior service costs and credits that arise during the period. 91 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 The following tables summarize the weighted average assumptions used and components of our defined benefit postretirement plans. Pensions Other Benefits In millions, except percentages 2020 2019 2020 2019 Following are the weighted average assumptions used to determine the benefit obligations at December 31: Discount rate - qualified benefit plans 2.45 % 3.15 % — % — % Discount rate - non-qualified benefit plans 2.30 % 3.10 % 2.20 % 3.05 % Rate of compensation increase N/A N/A N/A N/A Change in projected benefit obligation Project benefit obligation at January 1 $ 36.5 $ 29.4 $ 0.9 $ 0.7 Service cost 1.6 1.2 — — Interest cost 1.2 1.2 — — Actuarial loss (gain) 6.1 5.3 0.1 0.2 Plan amendments 0.3 — — — Benefit payments ( 0.7 ) ( 0.6 ) — — Projected benefit obligation at December 31 (1) 45.0 36.5 1.0 0.9 Change in plan assets Fair value of plan asset at January 1 26.8 22.6 — — Actual return on plan assets 5.0 4.7 — — Company contributions 0.1 0.1 — — Benefit payments ( 0.7 ) ( 0.6 ) — — Fair value of plan assets at December 31 31.2 26.8 — — Funded Status Net Funded Status of the Plan (Liability) $ ( 13.8 ) $ ( 9.7 ) $ ( 1.0 ) $ ( 0.9 ) Pensions Other Benefits December 31, In millions 2020 2019 2020 2019 Amount recognized in the consolidated balance sheets: Pension and other postretirement benefit asset (2) $ — $ — $ — $ — Pension and other postretirement benefit (liability) (2) ( 13.8 ) ( 9.7 ) ( 1.0 ) ( 0.9 ) Total Net Funded Status of the Plan (Liability) $ ( 13.8 ) $ ( 9.7 ) $ ( 1.0 ) $ ( 0.9 ) _______________ (1) The accumulated benefit obligation for all years presented equals the projected benefit obligation for each plan, respectively. (2) Asset balance is included in "Other assets" and liability balances are included in "Other liabilities" on the consolidated balance sheet. 92 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Amounts Recognized in Other Comprehensive Income (Loss) Changes in plan assets and benefit obligations recognized in other comprehensive income (loss) are as follows: Years Ended December 31, Pensions Other Benefits Total In millions 2020 2019 2018 2020 2019 2018 2020 2019 2018 Current year net actuarial loss (gain) $ 2.3 $ 1.7 $ — $ 0.1 $ 0.1 $ ( 0.1 ) $ 2.4 $ 1.8 $ ( 0.1 ) Current year prior service cost (credit) 0.3 — 0.5 — — — 0.3 — 0.5 Amortization of net actuarial (loss) gain and prior service (cost) credit ( 0.2 ) ( 0.1 ) ( 0.1 ) — — — ( 0.2 ) ( 0.1 ) ( 0.1 ) Settlement and curtailment (charges) income, net ( 0.1 ) — ( 0.2 ) — — — ( 0.1 ) — ( 0.2 ) Total recognized in other comprehensive (income) loss, before taxes 2.3 1.6 0.2 0.1 0.1 ( 0.1 ) 2.4 1.7 0.1 Total recognized in other comprehensive (income) loss, after taxes $ 1.7 $ 1.2 $ 0.2 $ 0.1 $ 0.1 $ ( 0.1 ) $ 1.8 $ 1.3 $ 0.1 Amounts Recognized in Accumulated Other Comprehensive Income (Loss) The amounts in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit cost are as follows: December 31, Pensions Other Benefits Total In millions 2020 2019 2020 2019 2020 2019 Net actuarial (gain) loss $ 5.3 $ 3.0 $ 0.1 $ — $ 5.4 $ 3.0 Prior service cost (credit) 0.9 0.9 — — 0.9 0.9 Accumulated other comprehensive (income) loss, before taxes 6.2 3.9 0.1 — 6.3 3.9 Accumulated other comprehensive (income) loss, after taxes $ 4.7 $ 3.0 $ 0.1 $ — $ 4.8 $ 3.0 93 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Net Annual Benefit Costs Assumptions The following table summarizes the weighted-average assumptions used for the components of net annual benefit cost: Years Ended December 31, Pensions Other Benefits In millions, except percentages 2020 2019 2018 2020 2019 2018 Discount rate - qualified benefit plans (1) 3.15 % 4.20 % 3.55 % — % — % — % Discount rate - non-qualified benefit plans (1) 3.10 % 4.15 % 3.55 % 3.05 % 4.10 % 3.45 % Expected return on plan assets 4.50 % 4.50 % 4.00 % N/A N/A N/A Components of net annual benefit cost: Service cost (2) $ 1.6 $ 1.2 $ 1.6 $ — $ — $ — Interest cost (3) 1.2 1.2 1.0 — — — Expected return on plan assets (3) ( 1.2 ) ( 1.0 ) ( 0.9 ) — — — Amortization of prior service cost (2) 0.1 0.1 0.1 — — — Amortization of net actuarial and other (gain) loss (3) 0.1 — — — — — Recognized (gain) loss due to curtailments 0.1 — 0.2 — — — Net annual benefit cost $ 1.9 $ 1.5 $ 2.0 $ — $ — $ — _______________ (1) The discount rate used to calculate pension and other post-retirement obligations was based on a review of available yields on high-quality corporate bonds. In selecting a discount rate, we placed particular emphasis on a discount rate yield-curve provided by our third-party actuary which takes into consideration the projected cash flows that represent the expected timing and amount of our plans' benefit payments. (2) Amounts are recorded to "Cost of sales" on our consolidated statements of operations consistent with the employee compensation costs that participate in the plan. (3) Amounts are recorded to "Other (income) expense, net" on our consolidated statements of operations. Contributions We made no voluntary cash contributions to our domestic hourly union defined benefit pension plan in the years ended December 31, 2020 and 2019. There are no required cash contributions to our domestic hourly union defined benefit pension plan in fiscal 2021, and we currently have no plans to make any voluntary cash contributions in fiscal 2021. Fair Value Hierarchy Following is a description of the valuation methodologies used for the investment measure at fair value. See Note 6 for the definition of fair value and the descriptions of Level 1, 2 and 3 in the fair value hierarchy. Cash and short-term funds — Cash and quoted short-term instruments are valued at the closing price or the amount held on deposit by the custodian bank. Mutual Funds — Mutual funds are valued at the closing price reported on the major market on which the individual securities are traded. Substantially all mutual funds are classified within Level 1 of the valuation hierarchy. Pooled Funds — These investment vehicles are valued using the Net Asset Value (NAV) provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Other — Other assets are represented by investments in a series limited partnership. These assets are not actively traded and classified as Level 2. 94 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 The following table presents our fair value hierarchy for our major categories of pension plan assets by asset class. In millions December 31, 2020 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Investments Measured at Net Asset Value Cash and short-term investments $ 0.1 $ 0.1 $ — $ — $ — Mutual funds 8.1 8.1 — — — Pooled funds 21.4 — — — 21.4 Other 1.6 — 1.6 — — Total assets $ 31.2 $ 8.2 $ 1.6 $ — $ 21.4 In millions December 31, 2019 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Investments Measured at Net Asset Value Cash and short-term investments $ 0.1 $ 0.1 $ — $ — $ — Mutual funds 3.0 3.0 — — — Pooled funds 22.4 — — — 22.4 Other 1.3 — 1.3 — — Total assets $ 26.8 $ 3.1 $ 1.3 $ — $ 22.4 Estimated Future Benefit Payments The following table reflects the estimated future benefit payments for our pension and other postretirement benefit plans. These estimates take into consideration expected future service, as appropriate. In millions Pensions Other Benefits 2021 $ 0.7 $ — 2022 1.0 — 2023 1.1 — 2024 1.2 — 2025 1.4 — 2026-2030 9.0 0.2 Sensitivity Analysis A one-half percent increase in the assumed discount rate would have decreased our qualified pension benefit obligations by $ 3.4 million at December 31, 2020 and decreased our qualified pension benefit costs by $ 0.2 million for 2020. A one-half percent decrease in the assumed discount rate would have increased our qualified pension obligations by $ 3.9 million at December 31, 2020 and increased our qualified pension benefit cost by $ 0.3 million for 2020. A one-half percent increase in the assumed expected long-term rate of return on plan assets would have decreased our qualified pension costs by $ 0.1 million for 2020. A one-half percent decrease in the assumed expected long-term rate of return on plan assets would have increased our qualified pension costs by $ 0.1 million for 2020. 95 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 16: Restructuring and Other (Income) Charges, net Detail on the restructuring charges and other (income) charges, net is provided below. Years Ended December 31, In millions 2020 2019 2018 Gain on sale of assets and businesses $ — $ ( 0.4 ) $ ( 0.6 ) Severance and other employee-related costs (1) 6.4 1.5 0.1 Other (2) 2.1 0.7 — Restructuring charges 8.5 1.8 ( 0.5 ) Business transformation costs 10.0 — — Other (income) charges, net 10.0 — — Total Restructuring and other (income) charges, net $ 18.5 $ 1.8 $ ( 0.5 ) _______________ (1) Represents severance and employee benefit charges. (2) Primarily represents costs associated with an impairment of an operating lease asset that is no longer in use and other miscellaneous exit costs. 2020 activities During the second quarter of 2020, we implemented a cost reduction initiative to realign our cost structure in response to reduced demand for some of our products in response to the COVID-19 pandemic. We recorded $ 6.4 million in severance and other employee-related costs in the year ended December 31, 2020. Additionally, during the year ended December 31, 2020, related to this cost reduction initiative. Additionally, we recorded $ 1.7 million related to an impairment of an operating lease asset that is no longer in use and $ 0.4 million of other miscellaneous exit costs related to our Performance Chemicals derivatives operations in Palmeira, Brazil, which was closed in 2016. 2019 activities During the third quarter of 2019, we initiated a reorganization as part of an effort to improve our Performance Chemical’s workflow and efficiency to best serve our customers’ needs and reduce costs. As a result of this reorganization, we recorded $ 1.5 million in severance and other employee-related costs in the year ended December 31, 2019. In April 2019, we sold assets from the Performance Chemicals derivatives operations in Palmeira, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded $ 0.4 million as a gain on sale of assets, as well as $ 0.7 million charge related to other miscellaneous exit costs, in the year ended December 31, 2019. 2018 activities In February 2018, we sold assets from the Performance Chemicals derivatives operations in Duque De Caxias, Rio de Janeiro, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded $ 0.6 million as a gain on sale of assets offset by other employee related costs of $ 0.1 million for the year ended December 31, 2018. 96 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Roll forward of Restructuring Reserves The following table shows a roll forward of restructuring reserves that will result in cash spending (in millions): Balance at Change in Cash Balance at Change in Cash Balance at 12/31/2018 (1) Reserve (2) Payments 12/31/2019 (1) Reserve (2) Payments 12/31/2020 (1) $ — 2.2 ( 1.8 ) $ 0.4 6.8 ( 6.4 ) $ 0.8 _______________ (1) Included in "Accrued Expenses" on the consolidated balance sheet. (2) Includes severance and other employee-related costs, exited leases, contract terminations and other miscellaneous exit costs. Any asset write-downs including accelerated depreciation and impairment charges are not included in the above table. Other (income) charges, net Business transformation initiative costs In the first quarter of 2020, we embarked upon a business transformation initiative that includes the implementation of an upgraded enterprise resource planning ("ERP") system. This new ERP system will equip our employees with standardized processes and secure integrated technology that enable us to better understand and meet our customers' needs and compete in the marketplace. We expect this business transformation initiative and related ERP implementation to be a complex, multi-year project. It requires the integration of the new ERP system with multiple new and existing information systems and business processes, in order to maintain the accuracy of our books and records and to provide our management team with real-time information important to the operation of our business. Such an implementation initiative is a major financial undertaking and will require substantial time and attention of management and key employees. Costs incurred, during the year ended December 31, 2020, of $ 10.0 million, represent costs directly associated with the business transformation initiative that, in accordance with GAAP, cannot be capitalized. Over the course of this initiative, we anticipate incurring approximately $ 60 - 70 million of total costs, which includes $ 17 - 20 million of non-capitalizable costs. Note 17: Acquisitions Perstorp Holding AB's Caprolactone Business On February 13, 2019, we completed the acquisition of 100 percent of the equity of Perstorp UK Ltd. with Perstorp Holding AB ("Seller"), including the Seller's entire caprolactone business ("Caprolactone Business"), herein referred to as the "Caprolactone Acquisition." The Caprolactone Acquisition was completed for an aggregate purchase price of € 578.9 million ($ 652.5 million), less assumed debt of € 100.4 million ($ 113.1 million). At closing, the assumed debt was settled with an affiliate of the Seller. The Caprolactone Acquisition is being integrated into our Performance Chemicals segment and is included within our engineered polymers product line. Our revolving credit facility was utilized as the primary source of funds, along with available cash on hand, to fund the Caprolactone Acquisition. The Caprolactone Acquisition has been integrated into our Performance Chemicals segment and represented as our engineered polymers product line. As a result, we are not able to separate operating performance of the Caprolactone Acquisition from our existing Performance Chemicals' operating results. Purchase Price Allocation The following table summarizes the consideration paid for the Caprolactone Business, the assets acquired, and liabilities assumed, which was finalized in the fourth quarter of 2019: 97 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Purchase Price Allocation In millions Weighted Average Amortization Period Fair Value Cash and cash equivalents $ 0.7 Accounts receivable, net 15.7 Inventories (1) 21.7 Prepaid and other current assets 1.9 Property, plant and equipment 86.3 Operating lease assets, net 1.8 Intangible assets (2) Customer relationships (5) 17 years 159.0 Developed technology (5) 12 years 64.8 Brands (5) 17 years 67.0 Non-compete agreement 3 years 0.5 Goodwill (3) 295.1 Other assets 1.3 Total fair value of assets acquired $ 715.8 Accounts payable 13.6 Accrued expenses 2.3 Long-term debt 113.1 Operating lease liabilities 1.7 Deferred income taxes 45.7 Total fair value of liabilities assumed $ 176.4 Cash and restricted cash acquired (4) 1.5 Total cash paid, less cash and restricted cash acquired $ 537.9 _______________ (1) Fair value of finished goods inventories acquired included a step-up in the value of $ 8.4 million, all of which was expensed in the three months ended March 31, 2019. The expense is included in "Cost of sales" on the consolidated statement of operations. Inventories are accounted for on a FIFO basis of accounting. (2) The aggregate amortization expense was $ 19.1 million and $ 14.4 million for the years ended December 31, 2020 and 2019, respectively. Estimated amortization expense is as follows: 2021 - $ 19.2 million, 2022 - $ 19.1 million, 2023 - $ 19.0 million, 2024 - $ 19.0 million, and 2025 - $ 19.0 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency. (3) Goodwill consists of estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. This acquired goodwill has been included within our Performance Chemicals reporting unit, see Note 9 for further information regarding our allocation of goodwill among our reportable segments. None of the acquired goodwill will be deductible for income tax purposes. (4) Cash and cash equivalents and restricted cash were $ 0.7 million and $ 0.8 million, respectively, at closing. Restricted cash is included in "Prepaid and other current assets" on the consolidated balance sheet. (5) The fair values assigned to the Customer Relationships intangible asset was determined by using a multi-period excess earnings model ("MP-Model"). Significant assumptions utilized in MP-Model are the attrition rate, revenue growth rates, and the discount rate. The fair values assigned to the Developed Technology and Brands were determined using a relief from royalty model ("RfR-Model"). The RfR-Model's significant assumptions include the revenue growth rates, royalty rate, and discount rate considered in the aggregate. Georgia-Pacific's Pine Chemical Business On March 8, 2018, pursuant to the terms and conditions set forth in the asset purchase agreement with Georgia-Pacific Chemicals LLC, Georgia-Pacific LLC (together with Georgia-Pacific Chemicals LLC, "GP") and Ingevity Arkansas, LLC, a wholly-owned subsidiary of Ingevity, we completed the acquisition (the "Pine Chemical Acquisition") of substantially all the assets primarily used in GP's pine chemical business (the "Pine Chemical Business") for an aggregate purchase price of $ 315.5 98 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 million. The aggregate purchase price was finalized during the third quarter of 2018 with a final payment to GP in the amount of $ 0.5 million to finalize the net working capital acquired on March 8, 2018. The Pine Chemical Business included the assets and facilities related to tall oil fractionation operations and the production or modification of tall oil fatty acids, tall oil rosins, rosin derivatives and formulated products. In addition, on the Pine Chemical Acquisition, the Company and GP entered into a 20 -year, market-based crude tall oil ("CTO") supply contract with certain of Georgia-Pacific’s paper mill operations. The Pine Chemical Business was integrated into our Performance Chemicals segment and has been included within our results of operations since March 8, 2018. Although the integration was not complete, a substantial portion of the Pine Chemical Business was integrated into our existing Performance Chemicals operations as of September 30, 2018, subsequent to which, we were no longer able to separate net sales and operating performance of the Pine Chemical Acquisition from our existing Performance Chemicals' operating results. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information assumes that the Caprolactone Acquisition as well as the Pine Chemical Acquisition occurred at the beginning of the periods presented.. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been if the acquisitions occurred at the beginning of the periods presented, nor are they indicative of future results of operations. The pro forma results include additional interest expense on the debt issued to finance the acquisition, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and tangible assets, and related tax effects. The pro forma results presented below are adjusted for the removal of Acquisition and other-related costs of $ 35.3 million and $ 12.2 million for the years ended December 31, 2019 and 2018. Years Ended December 31, In millions 2019 2018 Net sales $ 1,310.6 $ 1,320.8 Income (loss) before income taxes 262.8 247.0 Diluted earnings (loss) per share attributable to Ingevity stockholders $ 5.01 $ 4.48 Acquisition and other-related costs Costs incurred to complete and integrate the acquisitions noted above into our Performance Chemicals reporting segment are expensed as incurred on our consolidated statement of operations. The following table summarizes the costs incurred associated with these combined activities. Years Ended December 31, In millions 2020 2019 2018 Legal and professional service fees $ 1.8 $ 14.2 $ 6.9 Loss on hedging purchase price — 12.7 3.9 Acquisition-related costs 1.8 26.9 10.8 Inventory fair value step-up amortization (1) — 8.4 1.4 Acquisition and other-related costs $ 1.8 $ 35.3 $ 12.2 _______________ (1) Included within "Cost of sales" on the consolidated statement of operations. 99 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 18: Income Taxes Domestic and foreign components of Income (loss) before income taxes are shown below: Years Ended December 31, In millions 2020 2019 2018 Domestic $ 191.2 $ 203.2 $ 213.3 Foreign 43.9 24.7 8.5 Total $ 235.1 $ 227.9 $ 221.8 The provision (benefit) for income taxes consisted of: Years Ended December 31, In millions 2020 2019 2018 Current Federal $ 22.5 $ 19.9 $ 32.5 State and local 5.1 5.0 6.0 Foreign 9.9 4.5 0.6 Total current $ 37.5 $ 29.4 $ 39.1 Deferred Federal $ 15.3 $ 13.8 $ 1.6 State and local ( 2.7 ) 2.5 ( 1.1 ) Foreign 3.6 ( 1.5 ) 0.4 Total deferred $ 16.2 $ 14.8 $ 0.9 Provision (benefit) for income taxes $ 53.7 $ 44.2 $ 40.0 We recorded $( 4.3 ) million, $( 0.9 ) million, and $ 0.1 million of deferred tax provision (benefit) in components of other comprehensive income during the years ended December 31, 2020, 2019, and 2018, respectively. 100 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 The following table summarizes the major differences between taxes computed at the U.S. federal statutory rate and the actual income tax provision attributable to operations: Years Ended December 31, In millions, except percentage data 2020 2019 2018 Federal statutory tax rate $ 49.4 $ 47.9 $ 46.6 State and local income taxes, net of federal benefit 5.0 6.3 4.4 Foreign income tax rate differential 1.5 1.3 1.0 Changes in valuation allowance ( 1.9 ) ( 1.9 ) ( 2.2 ) Deferred adjustments (including rate change) 3.9 ( 1.4 ) ( 0.1 ) Noncontrolling interest in consolidated partnership — — ( 2.7 ) Excess stock compensation 0.4 ( 5.9 ) ( 0.9 ) Federal and state tax credits ( 3.7 ) ( 1.9 ) ( 2.1 ) U.S. Tax Reform — — ( 1.9 ) Foreign derived intangible income ( 3.1 ) ( 3.8 ) ( 3.2 ) Officers compensation 0.5 3.3 0.6 Other 1.7 0.3 0.5 Provision (benefit) for income taxes $ 53.7 $ 44.2 $ 40.0 Effective tax rate 22.8 % 19.4 % 18.0 % The increase in our effective tax rate from 2019 to 2020 was primarily driven by the reduction in the excess stock compensation benefit derived by declining stock prices in 2020, as well as a rate increase in the United Kingdom ("UK"). This effective tax rate increase was partially offset by a reduction of the officer's compensation limitation due to forfeited equity awards already disallowed for tax purposes, as well as increased benefit due to the generation of additional state tax credits as a result of the new corporate headquarters. The increase in our effective tax rate from 2018 to 2019 was driven by multiple factors. The August 1, 2018 acquisition of the remaining 30 percent noncontrolling interest in Purification Cellutions, LLC (see Note 13 for more information) resulted in an increase to our effective tax rate in 2019 as compared to 2018. We recognized $ 5.0 million of excess tax benefits from the vesting of share-based awards. We incurred nondeductible acquisition-related charges during the year, resulting in a tax impact of $ 1.4 million. Also, as a result of finalized regulations stemming from U.S. Tax Reform, we incurred tax expense relating to an adjustment of our net deferred tax liabilities to account for the future non-deductible portion of our officer's compensation of $ 1.1 million. Additionally, in 2018, we adjusted our net deferred tax liabilities by $ 1.9 million due to further interpretations of U.S. Tax Reform the impact of which did not repeat in 2019. The remaining driver to the change in our effective tax rate from 2018 to 2019 is due to an increase in our earnings recognized in foreign jurisdictions some of which are taxed at higher rates than our U.S. domestic earnings. 101 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 The significant components of deferred tax assets and liabilities are as follows December 31, In millions 2020 2019 Deferred tax assets: Employee benefits $ 13.0 $ 12.0 Net operating losses 10.6 15.4 Leases 15.6 10.3 Other 14.2 7.4 Total deferred tax assets $ 53.4 $ 45.1 Valuation allowance ( 8.4 ) ( 13.0 ) Total deferred tax assets, net of valuation allowance $ 45.0 $ 32.1 Deferred tax liabilities: Fixed assets $ 99.0 $ 83.4 Intangibles 35.8 28.6 Inventory 2.3 3.4 Leases 15.1 10.4 Other 1.7 1.6 Total deferred tax liabilities $ 153.9 $ 127.4 Net deferred tax asset (liability) (1) $ ( 108.9 ) $ ( 95.3 ) _______________ (1) Presentation in the table above is on a gross basis, however due to jurisdictional netting, our net deferred tax asset and liability recorded on our consolidated balance sheets is $ 8.1 million and $ 117.0 million, respectively, as of December 31, 2020 and $ 5.0 million and $ 100.3 million, respectively, as of December 31, 2019 . Our net deferred tax liabilities increased $ 13.6 million at December 31, 2020 as compared to December 31, 2019. Deferred tax liabilities associated with fixed assets increased significantly in 2020 due to an increase in assets placed in service in 2020 versus 2019 resulting in additional bonus depreciation deductions. Additionally, a rise in the UK tax rate caused an increase in our overall deferred tax liability. This increase in the liability was partially offset by increase in miscellaneous new deferred tax assets, including a capital loss carryover and deferred earn out associated with the ANGP asset acquisition. Additionally, as a part of the CARES Act, payments associated with payroll taxes were allowed to be extended into 2021 creating a deferred tax asset. We have deferred tax assets, including net operating loss carryforwards, which are available to offset future taxable income. A valuation allowance has been provided where management has determined that it is more likely than not that the deferred tax assets will not be realized. In 2020, we recognized a tax benefit of $ 2.7 million by releasing a valuation allowance that was associated with our Brazil operations. The decision to release the valuation allowance due to positive evidence supporting future taxable income available to offset these losses. At December 31, 2020, foreign net operating loss carryforwards totaled $ 33.2 million. Of this total, $ 3.3 million will expire in 3 to 10 years and $ 29.9 million has no expiration date. Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalent balance at December 31, 2020 included $ 88.2 million held by our foreign subsidiaries. At December 31, 2020, 2019, and 2018, no deferred income taxes have been provided for our share of undistributed net earnings of foreign operations due to management’s intent to reinvest such amounts indefinitely. The determination of the amount of taxes that may be due if earnings are remitted is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations include the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes, the opportunity to use foreign tax 102 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 credits, and the potential impact of U.S. Tax Reform. Positive undistributed earnings considered to be indefinitely reinvested totaled $ 35.6 million at December 31, 2020. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: December 31, In millions 2020 2019 2018 Balance at beginning of year $ 0.1 $ 0.3 $ 0.3 Additions for tax positions related to current year — — 0.2 Reduction from lapse of statute of limitation — ( 0.2 ) ( 0.2 ) Balance at end of year $ 0.1 $ 0.1 $ 0.3 As of December 31, 2020, 2019, and 2018, $ 0.1 million, $ 0.1 million, and $ 0.3 million, respectively, of unrecognized tax benefit, including penalties and interest, would, if recognized, impact our effective tax rate. We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. Note 19: Commitments and Contingencies Legal Proceedings We are, from time to time, involved in routine litigation incidental to our operations. None of the litigation in which we are currently involved, individually or in the aggregate, is material to our consolidated financial condition, liquidity or results of operations nor are we aware of any material pending or contemplated proceedings. 103 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 20: Segment Information Ingevity’s operating segments are (i) Performance Materials and (ii) Performance Chemicals, a description of both operating segments is included in Note 1. Years Ended December 31, In millions 2020 2019 2018 Net sales Performance Materials $ 510.0 $ 490.6 $ 400.4 Performance Chemicals 706.1 802.3 733.2 Total net sales (1) $ 1,216.1 $ 1,292.9 $ 1,133.6 Segment EBITDA (2) Performance Materials $ 249.2 $ 213.4 $ 169.4 Performance Chemicals 148.7 183.5 151.1 Total Segment EBITDA (2) $ 397.9 $ 396.9 $ 320.5 Interest expense ( 47.1 ) ( 54.6 ) ( 33.2 ) Interest income 4.9 7.7 3.4 (Provision) benefit for income taxes ( 53.7 ) ( 44.2 ) ( 40.0 ) Depreciation and amortization - Performance Materials ( 31.2 ) ( 24.2 ) ( 22.2 ) Depreciation and amortization - Performance Chemicals ( 69.0 ) ( 60.8 ) ( 34.8 ) Pension and postretirement settlement and curtailment charges (income), net (3) ( 0.1 ) — ( 0.2 ) Restructuring and other income (charges), net (4) ( 18.5 ) ( 1.8 ) 0.5 Acquisition and other-related costs (5) ( 1.8 ) ( 35.3 ) ( 12.2 ) Net (income) loss attributable to noncontrolling interests — — ( 12.7 ) Net income (loss) attributable to Ingevity stockholders $ 181.4 $ 183.7 $ 169.1 _______________ (1) Relates to external customers only, all intersegment sales and related profit have been eliminated in consolidation. (2) Segment EBITDA is the primary measure used by our chief operating decision maker to evaluate the performance of and allocate resources among our operating segments. Segment EBITDA is defined as segment revenue less segment operating expenses (segment operating expenses consist of costs of sales, selling, general and administrative expenses, other (income) expense, net, excluding depreciation and amortization). We have excluded the following items from segment EBITDA: interest expense, net associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, acquisition and other-related costs, pension and postretirement settlement and curtailment (income) charge. (3) Our pension and postretirement settlement and curtailment (income) charges are related to the acceleration of prior service costs, as a result of a reduction in the number of participants within the Union Hourly defined benefit pension plan during 2018 and 2020. These are excluded from our segment results because we consider these costs to be outside our operational performance. We continue to include the service cost, amortization of prior service cost, interest costs, expected return on plan assets, and amortized actual gains and losses in our segment EBITDA. (4) For the year ended December, 31, 2020, charges of $ 7.4 million and $ 11.1 million relate to the Performance Materials segment and Performance Chemicals segment, respectively. For the years end December 31, 2019 and 2018, all income (charges) relate to the Performance Chemicals segment. Information about how restructuring and other (income) charges relate to our reporting segments is discussed in Note 16. (5) These charges are associated with the acquisition and integration of the Pine Chemical Business and the acquisition and integration of the Caprolactone Business. For more detail on these charges see Note 17 within these consolidated financial statements. 104 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Depreciation and amortization Capital expenditures Years Ended December 31, Years Ended December 31, In millions 2020 2019 2018 2020 2019 2018 Performance Materials $ 31.2 $ 24.2 $ 22.2 $ 30.6 $ 77.6 $ 65.4 Performance Chemicals 69.0 60.8 34.8 51.5 37.2 28.5 Total $ 100.2 $ 85.0 $ 57.0 $ 82.1 $ 114.8 $ 93.9 Property, plant, and equipment, net December 31, In millions 2020 2019 North America $ 536.6 $ 499.5 Asia Pacific 77.0 75.6 Europe, Middle East, and Africa 89.9 89.5 South America 0.1 0.1 Property, plant, and equipment, net $ 703.6 $ 664.7 Total assets December 31, In millions 2020 2019 Performance Materials $ 751.4 $ 642.9 Performance Chemicals 1,534.0 1,485.4 Total segment assets (1) $ 2,285.4 $ 2,128.3 Corporate and other 49.1 13.4 Total assets $ 2,334.5 $ 2,141.7 _______________ (1) Segment assets exclude assets not specifically managed as part of one specific segment herein referred to as "Corporate and other." Note 21: Earnings (Loss) per Share Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The calculation of diluted net income per share excludes all anti-dilutive common shares. 105 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Years Ended December 31, In millions (except share and per share data) 2020 2019 2018 Net income (loss) attributable to Ingevity stockholders $ 181.4 $ 183.7 $ 169.1 Basic and Diluted earnings (loss) per share (1) Basic earnings (loss) per share $ 4.39 $ 4.39 $ 4.02 Diluted earnings (loss) per share $ 4.37 $ 4.35 $ 3.97 Shares (2) Weighted average number of shares of common stock outstanding - Basic 41,330 41,801 42,037 Weighted average additional shares assuming conversion of potential common shares 217 399 564 Shares - diluted basis 41,547 42,200 42,601 _______________ (1) Diluted earnings (loss) per share is calculated using net income (loss) available to common stockholders divided by diluted weighted-average shares of common shares outstanding during each period, which includes the dilutive effect of outstanding equity awards. (2) Shares are presented in thousands. The following average number of potential common shares were antidilutive and, therefore, were not included in the diluted earnings per share calculation: Years Ended December 31, In thousands 2020 2019 2018 Average number of potential common shares - antidilutive 177 66 84 106 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Note 22: Supplemental Information The following tables include details of prepaid and other current assets, other assets, accrued expenses and other liabilities as presented on the consolidated balance sheets, as well as other (income) expense, net on the consolidated statement of operations: Prepaid and other current assets: December 31, In millions 2020 2019 Income and value added tax receivables $ 9.4 $ 14.6 Prepaid freight and supply agreements 1.7 1.3 Prepaid insurance 3.0 2.1 Non-trade receivables 3.6 4.5 Advances to suppliers 0.6 0.5 Prepaid software as a service 3.2 1.5 Contract asset (Note 5) 5.7 6.2 Restricted cash 0.7 8.1 Other 6.1 5.4 $ 34.0 $ 44.2 Other assets: December 31, In millions 2020 2019 Deferred financing charges $ 3.8 $ 2.5 Capitalized software, net 18.9 16.9 Land-use rights 5.1 5.6 Planned major maintenance activities 2.8 3.5 Deferred software as a service 2.2 0.2 Deferred compensation plan assets (Note 6) 12.5 9.8 Net investment hedge (Note 10) — 3.0 Finance lease assets, net (Note 14) 0.8 1.2 Other 6.7 7.5 $ 52.8 $ 50.2 Accrued expenses: December 31, In millions 2020 2019 Accrued interest $ 13.6 $ 10.8 Accrued taxes 6.2 1.5 Accrued freight 3.9 4.2 Accrued rebates 6.0 3.9 Restructuring reserves (Note 16) 0.8 0.4 Accrued royalties and commissions 2.5 2.0 Currency exchange and natural gas contracts (Note 10) 0.3 0.5 Accrued energy 2.2 2.0 Other 11.1 8.0 $ 46.6 $ 33.3 107 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2020 Other liabilities: December 31, In millions 2020 2019 Deferred compensation arrangements (Note 6) $ 11.6 $ 10.0 Pension & OPEB liabilities (Note 15) 14.8 10.6 Unrecognized tax benefits (Note 18) 0.1 0.1 Net investment hedge (Note 10) 8.6 — Interest rate swaps (Note 10) 8.9 3.9 New market tax credit payable (Note 11) 1.8 1.7 Contingent consideration (Note 6) 0.8 — Other 3.3 3.7 $ 49.9 $ 30.0 Other (income) expense, net: Years Ended December 31, In millions 2020 2019 2018 Foreign currency translation (income)/loss $ ( 5.8 ) $ 0.2 $ 2.0 Royalty and sundry (income)/loss ( 0.4 ) ( 1.9 ) ( 0.8 ) Impairment of equity investment (Note 6) 1.4 — 1.5 Other (income)/expense, net 0.7 ( 2.6 ) ( 1.7 ) $ ( 4.1 ) $ ( 4.3 ) $ 1.0 Note 23: Quarterly Financial Information (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 2020 and 2019. 2020 2019 In millions, except earnings per share amounts 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Net sales $ 288.2 $ 270.6 $ 331.7 $ 325.6 $ 276.8 $ 352.8 $ 359.9 $ 303.4 Gross profit 114.6 83.9 139.6 127.4 97.1 134.4 139.5 111.0 Income (loss) before taxes 55.2 25.4 88.1 66.4 22.7 72.7 77.4 55.1 Net income (loss) 45.3 20.2 69.9 46.0 22.7 56.8 59.9 44.3 Basic earnings (loss) per common share attributable to Ingevity stockholders (1) $ 1.09 $ 0.49 $ 1.69 $ 1.12 $ 0.54 $ 1.36 $ 1.42 $ 1.06 Diluted earnings (loss) per common share attributable to Ingevity stockholders (1) $ 1.08 $ 0.49 $ 1.69 $ 1.11 $ 0.54 $ 1.34 $ 1.41 $ 1.05 Weighted average shares outstanding Basic 41.7 41.2 41.3 41.1 41.7 41.8 42.3 41.8 Diluted 42.0 41.4 41.5 41.4 42.2 42.2 42.6 42.2 _______________ (1) Basic and diluted earnings (loss) per share are calculated using the weighted average number of common shares outstanding for the period. The sum of quarterly earnings per common share may differ from the full-year amount. 108 INGEVITY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR YEARS ENDED DECEMBER 31, 2020, 2019, and 2018 Provision/ (Benefit) (in millions) Balance, Beginning of Year Charged to Costs and Expenses Charged to Other Comprehensive Income Charged to Retained Earnings (1) Write-offs (2) Balance, End of Year December 31, 2020 Accounts receivable credit loss allowance (3) $ 0.5 1.4 — — — $ 1.9 Held-to-maturity debt securities credit loss allowance (4) $ — 0.3 — 0.6 — $ 0.9 Deferred tax valuation allowance $ 13.0 ( 1.9 ) ( 2.7 ) — — $ 8.4 December 31, 2019 Accounts receivable credit loss allowance (3) $ 0.4 0.1 — — — $ 0.5 Deferred tax valuation allowance $ 15.5 ( 1.9 ) ( 0.6 ) — — $ 13.0 December 31, 2018 Accounts receivable credit loss allowance (3) $ 0.4 — — — — $ 0.4 Deferred tax valuation allowance $ 20.4 ( 2.6 ) ( 2.3 ) — — $ 15.5 _______________ (1) See Note 4 within the consolidated financial statements included within Part II. Item 8 of the Form 10-K for more information related to our adoption of the new accounting standard related to credit losses (ASU 2016-13). (2) Write-offs are net of recoveries. (3) Allowance for credit losses on accounts receivable is included within Accounts receivable, net on the consolidated balance sheet. (4) Allowance for credit losses on held-to-maturity debt securities is included within Restricted investment on the consolidated balance sheet. 109 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.