Ingevity Corp 10-Q

ITEM 1. FINANCIAL STATEMENTS INGEVITY CORPORATION Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, In millions, except per share data 2021 2020 Net sales $ 320.3 $ 288.2 Cost of sales 194.1 173.6 Gross profit 126.2 114.6 Selling, general, and administrative expenses 40.0 38.5 Research and technical expenses 6.6 6.2 Restructuring and other (income) charges, net 3.9 0.5 Acquisition-related costs 0.3 1.3 Other (income) expense, net 1.2 2.0 Interest expense, net 12.4 10.9 Income (loss) before income taxes 61.8 55.2 Provision (benefit) for income taxes 13.1 9.9 Net income (loss) $ 48.7 $ 45.3 Per share data Basic earnings (loss) per share $ 1.21 $ 1.09 Diluted earnings (loss) per share 1.20 1.08 The accompanying notes are an integral part of these financial statements. 3 INGEVITY CORPORATION Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended March 31, In millions 2021 2020 Net income (loss) $ 48.7 $ 45.3 Other comprehensive income (loss), net of tax: Foreign currency adjustments: Foreign currency translation adjustment 2.4 ( 40.1 ) Unrealized gain (loss) on net investment hedges, net of tax provision (benefit) of $ 1.5 and $ 1.7 4.9 5.7 Total foreign currency adjustments, net of tax provision (benefit) of $ 1.5 and $ 1.7 7.3 ( 34.4 ) Derivative instruments: Unrealized gain (loss), net of tax provision (benefit) of $ 0.4 and $( 1.4 ) 1.3 ( 4.8 ) Reclassifications of deferred derivative instruments (gain) loss, included in net income (loss), net of tax (provision) benefit of zero and zero ( 0.1 ) 0.1 Total derivative instruments, net of tax provision (benefit) of $ 0.4 and $( 1.4 ) 1.2 ( 4.7 ) Other comprehensive income (loss), net of tax provision (benefit) of $ 1.9 and $ 0.3 8.5 ( 39.1 ) Comprehensive income (loss) $ 57.2 $ 6.2 The accompanying notes are an integral part of these financial statements. 4 INGEVITY CORPORATION Condensed Consolidated Balance Sheets In millions, except share and par value data March 31, 2021 December 31, 2020 Assets (Unaudited) Cash and cash equivalents $ 237.8 $ 257.7 Accounts receivable , net of allowance for credit losses of $ 1.9 million - 2021 and $ 1.9 million - 2020 168.4 148.0 Inventories, net 204.2 189.0 Prepaid and other current assets 32.0 34.0 Current assets 642.4 628.7 Property, plant and equipment, net 697.9 703.6 Operating lease assets, net 47.0 49.1 Goodwill 447.7 445.3 Other intangibles, net 367.1 373.3 Deferred income taxes 7.9 8.1 Restricted investment , net of allowance for credit losses of $ 0.6 million - 2021 and $ 0.9 million - 2020 74.4 73.6 Other assets 58.1 52.8 Total Assets $ 2,342.5 $ 2,334.5 Liabilities Accounts payable $ 113.5 $ 104.2 Accrued expenses 44.1 46.6 Accrued payroll and employee benefits 16.7 25.1 Current operating lease liabilities 15.5 16.2 Notes payable and current maturities of long-term debt 19.5 26.0 Income taxes payable 15.2 5.3 Current liabilities 224.5 223.4 Long-term debt including finance lease obligations 1,263.1 1,267.4 Noncurrent operating lease liabilities 33.2 34.7 Deferred income taxes 118.8 117.0 Other liabilities 41.8 49.9 Total Liabilities 1,681.4 1,692.4 Commitments and contingencies (Note 14) Equity Preferred stock (par value $ 0.01 per share; 50,000,000 shares authorized; zero issued and outstanding - 2021 and 2020) — — Common stock (par value $ 0.01 per share; 300,000,000 shares authorized; issued: 43,034,421 - 2021 and 42,912,846 - 2020; outstanding: 40,069,851 - 2021 and 40,509,997 - 2020) 0.4 0.4 Additional paid-in capital 124.8 121.3 Retained earnings 726.7 678.0 Accumulated other comprehensive income (loss) 13.2 4.7 Treasury stock, common stock, at cost ( 2,964,570 shares - 2021 and 2,402,849 shares - 2020) ( 204.0 ) ( 162.3 ) Total Equity 661.1 642.1 Total Liabilities and Equity $ 2,342.5 $ 2,334.5 The accompanying notes are an integral part of these financial statements. 5 INGEVITY CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, In millions 2021 2020 Cash provided by (used in) operating activities: Net income (loss) $ 48.7 $ 45.3 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 27.0 24.3 Non cash operating lease costs 4.4 4.9 Deferred income taxes ( 0.6 ) 6.5 Share-based compensation 2.5 0.8 Pension and other postretirement benefit costs — — Other non-cash items 2.9 5.4 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net ( 20.8 ) 7.7 Inventories, net ( 15.7 ) ( 25.9 ) Prepaid and other current assets 0.5 ( 0.2 ) Accounts payable 8.4 9.4 Accrued expenses ( 2.2 ) ( 3.2 ) Accrued payroll and employee benefits ( 8.6 ) ( 12.4 ) Income taxes 11.3 2.0 Operating leases ( 5.2 ) ( 5.6 ) Changes in other operating assets and liabilities, net ( 1.5 ) 1.2 Net cash provided by (used in) operating activities $ 51.1 $ 60.2 Cash provided by (used in) investing activities: Capital expenditures $ ( 17.0 ) $ ( 19.5 ) Other investing activities, net ( 0.3 ) ( 0.7 ) Net cash provided by (used in) investing activities $ ( 17.3 ) $ ( 20.2 ) Cash provided by (used in) financing activities: Proceeds from revolving credit facility $ — $ 346.1 Payments on revolving credit facility — ( 102.3 ) Payments on long-term borrowings ( 9.4 ) ( 4.7 ) Finance lease obligations, net ( 0.1 ) — Borrowings (repayments) of notes payable and other short-term borrowings, net ( 1.9 ) ( 0.8 ) Tax payments related to withholdings on vested equity awards ( 2.3 ) ( 3.1 ) Proceeds and withholdings from share-based compensation plans, net 1.0 0.4 Repurchases of common stock under publicly announced plan ( 39.4 ) ( 32.4 ) Net cash provided by (used in) financing activities $ ( 52.1 ) $ 203.2 Increase (decrease) in cash, cash equivalents, and restricted cash ( 18.3 ) 243.2 Effect of exchange rate changes on cash ( 1.7 ) 2.9 Change in cash, cash equivalents, and restricted cash ( 20.0 ) 246.1 Cash, cash equivalents, and restricted cash at beginning of period 258.4 64.6 Cash, cash equivalents, and restricted cash at end of period (1) $ 238.4 $ 310.7 (1) Includes restricted cash of $ 0.6 million and $ 8.0 million and cash and cash equivalents of $ 237.8 million and $ 302.7 million at March 31, 2021 and 2020, respectively. Restricted cash is included within "Prepaid and other current assets" within the condensed consolidated balance sheets. Supplemental cash flow information: Cash paid for interest, net of capitalized interest $ 11.5 $ 16.9 Cash paid for income taxes, net of refunds 2.5 1.4 Purchases of property, plant and equipment in accounts payable 3.5 5.1 Leased assets obtained in exchange for new finance lease liabilities — — Leased assets obtained in exchange for new operating lease liabilities 2.4 4.2 The accompanying notes are an integral part of these financial statements. 6 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 1: Description of Business and Basis of Presentation Description of Business Ingevity Corporation ("Ingevity," "the Company," "we," "us," or "our") is a leading global manufacturer of specialty chemicals and high performance activated carbon materials. We provide innovative solutions to meet our customers’ unique and demanding requirements through proprietary formulated products. We report in two business segments, Performance Materials and Performance Chemicals. Performance Materials manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets. Performance Chemicals manufactures products derived from crude tall oil ("CTO") and lignin extracted from the kraft paper making process as well as caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Basis of Presentation These unaudited condensed consolidated financial statements reflect the consolidated operations of the Company and have been prepared in accordance with United States Securities and Exchange Commission ("SEC") interim reporting requirements. Accordingly, the accompanying condensed consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP") for full financial statements and should be read in conjunction with the Annual Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018, collectively referred to as the “Annual Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Annual Report"). In the opinion of management, the condensed consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary to fairly state the condensed consolidated results for the interim periods presented. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The preparation of the condensed 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. Certain prior year amounts have been reclassified to conform with the current year's presentation. Note 2: 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 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. Recently Issued Accounting Pronouncements 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 7 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) prospectively until December 31, 2022. As of March 31, 2021, 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. Note 3: Revenues Disaggregation of Revenue The following table presents our Net sales disaggregated by product line. Three Months Ended March 31, In millions 2021 2020 Performance Materials segment (1) $ 140.7 $ 121.1 Performance Chemicals segment Pavement Technologies product line 21.4 20.7 Industrial Specialties product line (1) 112.1 110.1 Engineered Polymers product line 46.1 36.3 Total $ 179.6 $ 167.1 Net sales $ 320.3 $ 288.2 ______________ (1) Beginning in Q1 2021, we updated disaggregated revenue disclosures, combining certain product groups to reflect categories that depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors. As a result, Automotive Technologies and Process Purification product lines have been combined within the Performance Materials segment. Similarly, the Oilfield Technologies product line has been combined with the Industrial Specialties product line within the Performance Chemicals segment. The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer. Three Months Ended March 31, In millions 2021 2020 North America $ 163.1 $ 171.1 Asia Pacific 100.7 67.9 Europe, Middle East, and Africa 51.1 43.4 South America 5.4 5.8 Net sales $ 320.3 $ 288.2 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. The contract assets are recognized as accounts receivables when the rights become unconditional 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. 8 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Contract Asset March 31, In millions 2021 2020 Beginning balance $ 5.7 $ 6.2 Contract asset additions 4.7 4.6 Reclassification to accounts receivable, billed to customers ( 4.3 ) ( 3.9 ) Ending balance (1) $ 6.1 $ 6.9 ______________ (1) Included within "Prepaid and other current assets" on the condensed consolidated balance sheets. Note 4: Fair Value Measurements Fair Value Measurements Recurring Fair Value Measurements The following information is presented for assets and liabilities that are recorded in the condensed consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that were recorded at fair value between the three-level fair value hierarchy during the periods reported. 9 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) In millions Level 1 (1) Level 2 (2) Level 3 (3) Total March 31, 2021 Assets: Deferred compensation plan investments (4) $ 1.8 $ — $ — $ 1.8 Total assets $ 1.8 $ — $ — $ 1.8 Liabilities: Deferred compensation arrangement (4) $ 10.6 $ — $ — $ 10.6 Contingent consideration (5) — — 0.8 0.8 Total liabilities $ 10.6 $ — $ 0.8 $ 11.4 December 31, 2020 Assets: Equity securities (6) $ 0.2 $ — $ — $ 0.2 Deferred compensation plan investments (4) 1.7 — — 1.7 Total assets $ 1.9 $ — $ — $ 1.9 Liabilities: Deferred compensation arrangement (4) $ 11.6 $ — $ — $ 11.6 Contingent consideration (5) — — 0.8 0.8 Total liabilities $ 11.6 $ — $ 0.8 $ 12.4 ______________ (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) Consists of a deferred compensation arrangement, through which we hold various investment securities. Both the asset and liability are recorded at fair value, and are included within "Other assets" and "Other liabilities" on the condensed consolidated balance sheets, respectively. In addition to the investment securities, we also have company-owned life insurance ("COLI") related to the deferred compensation arrangement. COLI is recorded at cash surrender value and included in "Other assets" on the condensed consolidated balance sheets in the amount of $ 10.9 million and $ 10.8 million at March 31, 2021 and December 31, 2020 respectively. (5) Included within "Other liabilities" on the condensed consolidated balance sheets. (6) Included within "Prepaid and other current assets" on the condensed consolidated balance sheets. Nonrecurring Fair Value Measurements Restricted Investment At March 31, 2021 and December 31, 2020, the carrying value of our restricted investment, which is accounted for as held-to-maturity ("HTM") and therefore recorded at amortized costs, was $ 74.4 million and $ 73.6 million, net of an allowance for credit losses of $ 0.6 million and $ 0.9 million, and included cash of $ 2.9 million and $ 2.4 million, respectively. The fair value at March 31, 2021 and December 31, 2020 was $ 79.8 million and $ 81.5 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. HTM Debt Securities In millions AA+ AA A A- BBB+ Total March 31, 2021 $ 13.5 10.6 24.2 13.4 10.4 $ 72.1 December 31, 2020 $ 13.5 10.6 24.2 13.4 10.4 $ 72.1 10 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Debt Obligations At March 31, 2021 and December 31, 2020, the carrying value of finance lease obligations was $ 103.0 million and $ 103.1 million, respectively, and the fair value was $ 121.4 million and $ 127.0 million, respectively. The fair value of all other finance lease obligations approximates their carrying values. The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt was $ 342.2 million and $ 353.4 million as of March 31, 2021 and December 31, 2020, respectively. The carrying value is a reasonable estimate of the fair value of the outstanding debt based on the variable interest rate of the debt. At March 31, 2021 and December 31, 2020, the carrying value of our fixed rate debt was $ 850.0 million and the fair value was $ 839.0 million and $ 864.1 million, respectively, based on Level 2 inputs. Contingent Consideration In connection with the acquisition of certain assets in May 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 December 31, 2024, herein referred to as "Revenue Earn-out." The fair value of the five-year Revenue Earn-out consideration was $ 0.8 million at March 31, 2021 and December 31, 2020, respectively. 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 on the condensed consolidated statements of operations. The following table summarizes the activity for financial liabilities utilizing Level 3 fair value measurements: Contingent Consideration In millions March 31, 2021 Beginning balance $ 0.8 Newly issued — Change in revaluation of contingent consideration included in earnings — Exercises/settlements — Ending balance (1) $ 0.8 ______________ (1) Included within "Other liabilities" on the condensed consolidated balance sheets. Note 5: Inventories, net In millions March 31, 2021 December 31, 2020 Raw materials $ 39.7 $ 39.1 Production materials, stores and supplies 24.8 24.6 Finished and in-process goods 155.7 139.6 Subtotal 220.2 203.3 Less: LIFO reserve ( 16.0 ) ( 14.3 ) Inventories, net $ 204.2 $ 189.0 11 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 6: Property, Plant, and Equipment, net In millions March 31, 2021 December 31, 2020 Machinery and equipment $ 1,084.9 $ 1,065.5 Buildings and leasehold improvements 171.9 174.0 Land and land improvements 20.0 20.0 Construction in progress 36.8 43.7 Total cost 1,313.6 1,303.2 Less: accumulated depreciation ( 615.7 ) ( 599.6 ) Property, plant, and equipment, net $ 697.9 $ 703.6 Note 7: Goodwill and Other Intangible Assets, net Goodwill Reporting Units In millions Performance Chemicals Performance Materials Total December 31, 2020 $ 441.0 $ 4.3 $ 445.3 Foreign currency translation 2.4 — 2.4 March 31, 2021 $ 443.4 $ 4.3 $ 447.7 There were no interim triggering events or circumstances indicating that goodwill might be impaired as of March 31, 2021. Other Intangible Assets March 31, 2021 December 31, 2020 In millions Gross Accumulated amortization Net Gross Accumulated amortization Net Customer contracts and relationships $ 320.9 $ 79.2 $ 241.7 $ 319.5 $ 73.6 $ 245.9 Brands (1) 83.0 17.0 66.0 82.4 15.8 66.6 Developed technology 73.5 14.2 59.3 73.0 12.5 60.5 Other 2.7 2.6 0.1 2.7 2.4 0.3 Other intangibles, net $ 480.1 $ 113.0 $ 367.1 $ 477.6 $ 104.3 $ 373.3 _______________ (1) Represents trademarks, trade names, and know-how. Intangible assets subject to amortization were allocated among our business segments as follows: In millions March 31, 2021 December 31, 2020 Performance Materials $ 2.1 $ 2.1 Performance Chemicals 365.0 371.2 Other intangibles, net $ 367.1 $ 373.3 12 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Amortization expense related to our intangible assets in the table above is shown in the table below. Three Months Ended March 31, In millions 2021 2020 Cost of sales $ — $ 0.1 Selling, general, and administrative expenses 8.4 8.2 Total amortization expense $ 8.4 $ 8.3 Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2021 - $ 33.3 million, 2022 - $ 33.0 million, 2023 - $ 33.0 million, 2024 - $ 32.6 million, and 2025 - $ 32.6 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency exchange rates. Note 8: 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 a euro denominated weighted average fixed rate of 1.71 percent. The difference between the fixed interest rate on the U.S. dollar denominated debt compared to euro denominated debt is recorded as interest income on the condensed consolidated statements of operations. The fair value of the fixed-to-fixed cross currency interest rate swap was a net asset (liability) of $( 2.2 ) million and $( 8.6 ) million at March 31, 2021 and December 31, 2020 , respectively. During the three months ended March 31, 2021 and 2020, we recognized net interest income associated with this financial instrument of $ 0.1 million and $ 0.8 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 March 31, 2021, there were $ 6.5 million open foreign currency derivative contracts. The fair value of the designated foreign currency hedge contracts was an asset (liability) of $ 0.2 million and $( 0.1 ) at March 31, 2021 and December 31, 2020, respectively. 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 will enter into swap contracts and zero cost collar option contracts and designate these contracts as cash flow hedges. As of March 31, 2021, we had 0.7 million and 1.0 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 March 31, 2021, open 13 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) commodity contracts hedge forecasted transactions until February 2022. The fair value of the outstanding designated natural gas commodity hedge contracts as of March 31, 2021 and December 31, 2020 was a net asset (liability) of zero and $( 0.1 ) million, 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 interest rate derivative instruments, which can consist of forward starting swaps. In all cases, the notional amount of the interest rate swap agreements is equal to or less than the designated debt being hedged. These instruments are designated as cash flow hedges. Designated interest rate cash flow hedge gains or losses are recorded in Accumulated other comprehensive income (loss) ("AOCI") and are recognized in "Interest expense, net" on the condensed consolidated statements of operations on a straight-line basis over the remaining maturity of the underlying debt. As of March 31, 2021, we have floating-to-fixed interest rate swaps 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 $( 7.5 ) million and $( 8.9 ) million at March 31, 2021 and December 31, 2020, respectively. 14 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) 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 in Net income Three Months Ended March 31, 2021 2020 2021 2020 Cash flow hedging derivatives Currency exchange contracts $ 0.3 $ 0.3 $ — $ — Net sales Natural gas contracts 0.1 ( 0.4 ) 0.1 ( 0.1 ) Cost of sales Interest rate swap contracts 1.4 ( 6.1 ) — — Interest expense, net Total $ 1.8 $ ( 6.2 ) $ 0.1 $ ( 0.1 ) 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) Three Months Ended March 31, 2021 2020 2021 2020 Net investment hedging derivative Currency exchange contracts (1) $ 6.4 $ 7.4 $ 0.1 $ 0.8 Interest expense, net Total $ 6.4 $ 7.4 $ 0.1 $ 0.8 __________ (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 net gains from AOCI to income, before taxes. Fair Value Measurements The following information is presented for derivative assets and liabilities that are recorded in the condensed 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 nonrecurring fair value measurements related to derivative assets and liabilities on the condensed consolidated balance sheets as of March 31, 2021 or December 31, 2020. 15 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) In millions Level 1 (1) Level 2 (2) Level 3 (3) Total March 31, 2021 Assets: Currency exchange contracts (4) $ — $ 0.2 $ — $ 0.2 Natural gas contracts (4) — 0.1 — 0.1 Total assets $ — $ 0.3 $ — $ 0.3 Liabilities: Currency exchange contracts (5) — — — — Natural gas contracts (5) $ — $ 0.1 $ — $ 0.1 Net investment hedge (6) — 2.2 — 2.2 Interest rate swap contracts (6) — 7.5 — 7.5 Total liabilities $ — $ 9.8 $ — $ 9.8 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 (5) — 0.2 — 0.2 Currency exchange contracts (5) $ — $ 0.1 $ — $ 0.1 Net investment hedge (6) — 8.6 — 8.6 Interest rate swap contracts (6) — 8.9 — 8.9 Total liabilities $ — $ 17.8 $ — $ 17.8 __________ (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 condensed consolidated balance sheet. (5) Included within "Accrued expenses" on the condensed consolidated balance sheet. (6) Included within "Other liabilities" on the condensed consolidated balance sheet. 16 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 9: Debt including Finance Lease Obligations Current and long-term debt including finance lease obligations consisted of the following: March 31, 2021 In millions, except percentages Interest rate Maturity date March 31, 2021 December 31, 2020 Variable Rate Debt: Revolving Credit Facility (1) 1.36 % 2025 $ — $ — Term Loan 1.71 % 2023 342.2 351.6 Other notes payable — % 2021 — 1.8 Fixed Rate Debt: Senior Notes 2020 Senior Note 3.88 % 2028 550.0 550.0 2018 Senior Note 4.50 % 2026 300.0 300.0 Finance lease obligations 7.17 % 2027-2035 103.0 103.1 Total debt including finance lease obligations 1,295.2 1,306.5 Less: debt issuance costs 12.6 13.1 Total debt, including finance lease obligations, net of debt issuance costs 1,282.6 1,293.4 Less: debt maturing within one year (2) 19.5 26.0 Long-term debt including finance lease obligations $ 1,263.1 $ 1,267.4 ______________ (1) Letters of credit outstanding under the revolving credit facility were $ 2.3 million and undrawn capacity under the facility was $ 497.7 million at March 31, 2021 and December 31, 2020, respectively. (2) Debt maturing within one year is included in "Notes payable and current maturities of long-term debt" on the condensed consolidated balance sheets. 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 March 31, 2021. The credit agreement governing our revolving credit facility and 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 March 31, 2021 were 2.9 and 2.4 , respectively, and our actual interest coverage for the four consecutive quarters ended March 31, 2021 was 12.2 . We were in compliance with all covenants at March 31, 2021. 17 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 10: Equity The tables below provide a roll forward of equity. Common Stock In millions, except per share data in thousands Shares Amount Additional paid in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total Equity Balance at December 31, 2020 42,913 $ 0.4 $ 121.3 $ 678.0 $ 4.7 $ ( 162.3 ) $ 642.1 Net income (loss) — — — 48.7 — — 48.7 Other comprehensive income (loss) — — — — 8.5 — 8.5 Common stock issued 97 — — — — — — Exercise of stock options, net 24 — 0.9 — — — 0.9 Tax payments related to vested restricted stock units — — — — — ( 2.3 ) ( 2.3 ) Share repurchase program — — — — — ( 39.4 ) ( 39.4 ) Share-based compensation plans — — 2.6 — — — 2.6 Balance at March 31, 2021 43,034 $ 0.4 $ 124.8 $ 726.7 $ 13.2 $ ( 204.0 ) $ 661.1 Common Stock In millions, except per share data in thousands Shares Amount Additional paid in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total Equity Balance at December 31, 2019 42,675 $ 0.4 $ 112.8 $ 497.2 $ ( 5.0 ) $ ( 74.6 ) $ 530.8 Net income (loss) — — — 45.3 — — 45.3 Other comprehensive income (loss) — — — — ( 39.1 ) — ( 39.1 ) Common stock issued 161 — — — — — — Tax payments related to vested restricted stock units — — — — — ( 3.1 ) ( 3.1 ) Share repurchase program — — — — — ( 32.4 ) ( 32.4 ) Share-based compensation plans — — 0.8 — — 0.4 1.2 Adoption of accounting standard — — — ( 0.6 ) — — ( 0.6 ) Balance at March 31, 2020 42,836 $ 0.4 $ 113.6 $ 541.9 $ ( 44.1 ) $ ( 109.7 ) $ 502.1 18 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Accumulated other comprehensive income (loss) Three Months Ended March 31, In millions 2021 2020 Foreign currency translation Beginning balance $ 16.4 $ 1.5 Net gains (losses) on foreign currency translation 2.4 ( 40.1 ) Gains (losses) on net investment hedges 6.4 7.4 Less: tax provision (benefit) 1.5 1.7 Net gains (losses) on net investment hedges 4.9 5.7 Other comprehensive income (loss), net of tax 7.3 ( 34.4 ) Ending balance $ 23.7 $ ( 32.9 ) Derivative instruments Beginning balance $ ( 6.9 ) $ ( 3.5 ) Gains (losses) on derivative instruments 1.7 ( 6.2 ) Less: tax provision (benefit) 0.4 ( 1.4 ) Net gains (losses) on derivative instruments 1.3 ( 4.8 ) (Gains) losses reclassified to net income ( 0.1 ) 0.1 Less: tax (provision) benefit — — Net (gains) losses reclassified to net income ( 0.1 ) 0.1 Other comprehensive income (loss), net of tax 1.2 ( 4.7 ) Ending balance $ ( 5.7 ) $ ( 8.2 ) Pension and other postretirement benefits Beginning balance $ ( 4.8 ) $ ( 3.0 ) Other comprehensive income (loss), net of tax — — Ending balance $ ( 4.8 ) $ ( 3.0 ) Total AOCI ending balance at March 31 $ 13.2 $ ( 44.1 ) Reclassifications of accumulated other comprehensive income (loss) Three Months Ended March 31, In millions 2021 2020 Derivative instruments Currency exchange contracts (1) $ — $ — Natural gas contracts (2) 0.1 ( 0.1 ) Total before tax 0.1 ( 0.1 ) (Provision) benefit for income taxes — — Amount included in net income (loss) $ 0.1 $ ( 0.1 ) ______________ (1) Included within "Net sales" on the condensed consolidated statement of operations. (2) Included within "Cost of sales" on the condensed consolidated statement of operations. 19 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Share Repurchases At March 31, 2021, $ 372.6 million remained unused under our Board-authorized repurchase program. During the three months ended March 31, 2021, we repurchased $ 39.4 million in common stock, representing 527,550 shares of our common stock at a weighted average cost per share of $ 74.64 . 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. Note 11: Retirement Plans The following table summarizes the components of net periodic benefit cost (income) for our defined benefit pension plans: Three Months Ended March 31, Pensions Other Benefits In millions 2021 2020 2021 2020 Components of net periodic benefit cost (income): Service cost (1) $ 0.4 $ 0.4 $ — $ — Interest cost (2) 0.3 0.3 — — Expected return on plan assets (2) ( 0.3 ) ( 0.3 ) — — Amortization of prior service cost (credit) (1) — — — — Amortization of net actuarial and other (gain) loss (2) — — — — Net periodic benefit cost (income) $ 0.4 $ 0.4 $ — $ — _______________ (1) Amounts are recorded to "Cost of sales" on our condensed consolidated statements of operations consistent with the employee compensation costs that participate in the plan. (2) Amounts are recorded to "Other (income) expense, net" on our condensed consolidated statements of operations. Contributions We did no t make any voluntary cash contributions to our Union Hourly defined benefit pension plan in the three months ended March 31, 2021. There are no required cash contributions to our Union Hourly defined benefit pension plan in 2021, and we currently have no plans to make any voluntary cash contributions in 2021. 20 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 12: Restructuring and Other (Income) Charges, net Detail on the restructuring charges and other (income) charges, net, is provided below. Three Months Ended March 31, In millions 2021 2020 Severance and other employee-related costs 0.1 0.2 Other — — Restructuring charges 0.1 0.2 Business transformation costs 3.8 0.3 Other (income) charges, net 3.8 0.3 Total restructuring and other (income) charges, net $ 3.9 $ 0.5 Restructuring charges 2020-2021 activities During the three months ended March 31, 2021, we recorded $ 0.1 million in severance and other employee-related costs related to the cost reduction initiative announced in the second quarter of 2020 to realign our cost structure in response to reduced demand for some of our products in response to the COVID-19 pandemic. During the three months ended March 31, 2020, we recorded $ 0.2 million in severance and other employee-related costs related to the reorganization announced in the third quarter of 2019 as part of an effort to improve our Performance Chemical’s workflow and efficiency to best serve our customers’ needs and reduce costs. Rollforward of Restructuring Reserves The following table shows a roll forward of restructuring reserves that will result in cash spending. Balance at Change in Cash Balance at In millions 12/31/2020 (1) Reserve (2) Payments Other 3/31/21 (1) Restructuring Reserves $ 0.8 0.1 ( 0.3 ) — $ 0.6 _______________ (1) Included in "Accrued Expenses" on the condensed consolidated balance sheets. (2) Includes severance and other employee-related costs. 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 three months ended March 31, 2021 and 2020, of $ 3.8 million and $ 0.3 million, respectively, 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 $ 30 - 35 million of non-capitalizable costs, $ 18 - 20 million of which we expect to be incurred in 2021. 21 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 13: Income Taxes The effective tax rates, including discrete items, were as follows: Three Months Ended March 31, 2021 2020 Effective tax rate 21.2 % 17.9 % We determine our interim tax provision using an Estimated Annual Effective Tax Rate methodology (“EAETR”). The EAETR is applied to the year-to-date ordinary income, exclusive of discrete items. The tax effects of discrete items are then included to arrive at the total reported interim tax provision. The determination of the EAETR is based upon a number of estimates, including the estimated annual pre-tax ordinary income in each tax jurisdiction in which we operate. As our projections of ordinary income change throughout the year, the EAETR will change period-to-period. The tax effects of discrete items are recognized in the tax provision in the period they occur. Depending on various factors, such as the item’s significance in relation to total income and the rate of tax applicable in the jurisdiction to which it relates, discrete items in any quarter may materially impact the reported effective tax rate. As a global enterprise, our tax expense may be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As such, there may be significant volatility in interim tax provisions. The below table provides a reconciliation between our reported effective tax rates and the EAETR. Three Months Ended March 31, 2021 2020 In millions, except percentages Before tax Tax Effective tax rate % impact Before tax Tax Effective tax rate % impact Consolidated operations $ 61.8 $ 13.1 21.2 % $ 55.2 $ 9.9 17.9 % Discrete items: Restructuring and other (income) charges, net (1) — — 0.5 0.1 Acquisition and other-related costs (2) — — 1.3 0.3 Other tax only discrete items — 0.1 — 1.3 Total discrete items — 0.1 1.8 1.7 Consolidated operations, before discrete items $ 61.8 $ 13.2 $ 57.0 $ 11.6 EAETR (3) 21.4 % 20.4 % _______________ (1) See Note 12 for more information on our restructuring and other (income) charges, net. (2) Costs incurred to integrate the Perstorp Capa business into our Performance Chemicals segment. (3) Increase in EAETR for the three months ended March 31, 2021, as compared to March 31, 2020, is due to an overall increase and a change in the mix of forecasted earnings in various tax jurisdictions with varying rates. This increase in earnings was partially offset by an increased benefit associated with foreign-derived intangible income deduction. Increase limitation associated with the officer’s compensation as well as a reduced benefit associated with the generation of state tax credits further contributed to the higher rate. At March 31, 2021 and December 31, 2020, we had deferred tax assets of $ 8.0 million and $ 8.4 million, respectively, resulting from certain historical net operating losses from our Brazilian operations and U.S. state tax credits for which a valuation allowance has been established. The ultimate realization of these deferred tax assets depends on the generation of future taxable income during the periods in which these net operating losses and tax credits are available to be used. In evaluating the realizability of these deferred tax assets, we consider projected future taxable income and tax planning strategies in making our assessment. As of March 31, 2021, we cannot objectively assert that these deferred tax assets are more likely than not to be realized and therefore we have maintained a valuation allowance. We intend to continue maintaining a valuation allowance on these deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. A release of all or a portion of the valuation allowance could be possible, if we determine that sufficient positive 22 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) evidence becomes available to allow us to reach a conclusion that the valuation allowance will no longer be needed. A release of the valuation allowance would result in the recognition of certain deferred tax assets and a reduction to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability that we are able to actually achieve. Note 14: Commitments and Contingencies Legal Proceedings We are from time to time, involved in routine litigation and other legal matters incidental to our operations. None of the litigation or other legal matters 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. 23 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 15: Segment Information Three Months Ended March 31, In millions 2021 2020 Net sales Performance Materials $ 140.7 $ 121.1 Performance Chemicals 179.6 167.1 Total net sales (1) $ 320.3 $ 288.2 Segment EBITDA (2) Performance Materials $ 73.7 $ 61.2 Performance Chemicals 31.7 31.0 Total segment EBITDA (2) $ 105.4 $ 92.2 Interest expense, net ( 12.4 ) ( 10.9 ) (Provision) benefit for income taxes ( 13.1 ) ( 9.9 ) Depreciation and amortization - Performance Materials ( 9.1 ) ( 7.2 ) Depreciation and amortization - Performance Chemicals ( 17.9 ) ( 17.1 ) Restructuring and other income (charges), net (3) ( 3.9 ) ( 0.5 ) Acquisition and other-related costs (4) ( 0.3 ) ( 1.3 ) Net income (loss) $ 48.7 $ 45.3 _______________ (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, net, acquisition and other-related costs, pension and postretirement settlement and curtailment (income) charges, net. (3) Income (charges) for all periods presented relate to restructuring activity and costs associated with the business transformation initiative. For the three months ended March 31, 2021, charges of $ 1.7 million relate to the Performance Materials segment and charges of $ 2.2 million relate to the Performance Chemicals segment. For the three months ended March 31, 2020, charges of $ 0.1 million relate to the Performance Materials segment and charges of $ 0.4 million relate to the Performance Chemicals segment. For more detail on the charges incurred see Note 12. (4) Costs incurred to integrate the Perstorp Capa business into our Performance Chemicals segment. 24 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements March 31, 2021 (Unaudited) Note 16: 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 common shares and potentially dilutive common shares outstanding for the period. The calculation of diluted net income per share excludes all antidilutive common shares. Three Months Ended March 31, In millions, except share and per share data 2021 2020 Net income (loss) $ 48.7 $ 45.3 Basic and Diluted earnings (loss) per share Basic earnings (loss) per share $ 1.21 $ 1.09 Diluted earnings (loss) per share 1.20 1.08 Shares (in thousands) Weighted average number of common shares outstanding - Basic 40,424 41,692 Weighted average additional shares assuming conversion of potential common shares 276 270 Shares - diluted basis 40,700 41,962 The following average number of potential common shares were antidilutive, and therefore, were not included in the diluted earnings per share calculation: Three Months Ended March 31, In thousands 2021 2020 Average number of potential common shares - antidilutive 135 210 25