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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-10-28 · 148 added, 223 removed, 155 unchanged (71% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of Ingevity’s financial condition and results of operations (“MD&A”) is provided as a supplement to the condensed consolidated financial statements and related notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

Management’s discussion and analysis of Ingevity Corporation's ( “ Ingevity, ” “ the company, ” “ we, ” “ us, ” or “ our ” ) financial condition and results of operations (“MD&A”) is provided as a supplement to the Condensed Consolidated Financial Statements and related notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

The following discussion should be read in conjunction with Ingevity’s consolidated financial statements as of and for the year ended December 31, 2021 filed on February 24, 2022 with the Securities and Exchange Commission ("SEC") as part of the Company's Annual Reporting on Form 10-K ("2021 Annual Report") and the unaudited interim Condensed Consolidated Financial Statements and notes to the unaudited interim Condensed Consolidated Financial Statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Investors are cautioned that the forward-looking statements contained in this section and other parts of this Quarterly Report involve both risk and uncertainty.

Investors are cautioned that the forward-looking statements contained in this section and other parts of this Quarterly Report on Form 10-Q involve both risk and uncertainty.

Several important factors could cause actual results to differ materially from those anticipated by these statements.

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We caution readers that a forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement.

Such risks and uncertainties include, among others, those risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in the section below entitled “Item 1A.

Risk Factors,” as well as in our unaudited condensed consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the SEC.

Such risks and uncertainties include, among others, those discussed in Part I, Item 1A.

Risk Factors of our 2021 Annual Report, as well as in our unaudited Condensed Consolidated Financial Statements, related notes, and the other information appearing elsewhere in this report and our other filings with the SEC.

We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances.

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• adverse effects from the novel coronavirus ("COVID-19") pandemic;

• we may be adversely affected by general economic and financial conditions beyond our control;

• we may be adversely affected by general global economic, geopolitical and financial conditions beyond our control, including inflation and war in Ukraine;

• we are exposed to risks related to our international sales and operations;

• our reported results could be adversely affected by currency exchange rates and currency devaluation could impair our competitiveness;

• our operations require us to comply with a number of U.S.

and foreign regulations, violations of which could have a material adverse effect on our financial condition and results of operations;

• we may be adversely affected by changes in trade policy, including the imposition of tariffs and the resulting consequences;

• adverse conditions in the global automotive market or adoption of alternative and new technologies may adversely affect demand for our automotive carbon products;

• we face competition from producers of alternative products and new technologies, and new or emerging competitors;

• we face competition from infringing intellectual property activity;

• if increasingly more stringent air quality standards worldwide are not adopted, our growth could be impacted;

• adverse conditions in the automotive market have and may continue to negatively impact demand for our automotive carbon products;

• we face competition from substitute products, new technologies and new or emerging competitors;

• if more stringent air quality standards worldwide are not adopted, our growth could be impacted;

• we may be adversely affected by a decrease in government infrastructure spending;

• adverse conditions in cyclical end markets may adversely affect demand for our engineered polymers products;

• our printing inks business serves customers in a market that is facing declining volumes and downward pricing;

• our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply;

• a prolonged period of low energy prices may materially impact our results of operations;

• our engineered polymers product line may be adversely affected by the United Kingdom’s ("UK") withdrawal from the European Union;

• the acquisition (the "Caprolactone Acquisition") of Perstorp Holding AB's caprolactone division (the "Caprolactone Business") may expose us to unknown or understated liabilities;

• adverse conditions in cyclical end markets may adversely affect demand for our products;

• our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply and subject to price increases that we may be unable to pass through;

• lack of access to sufficient CTO and other raw materials upon which we depend would impact our ability to produce our products;

• the inability to make or effectively integrate future acquisitions may negatively affect our results;

• we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;

• we may be adversely affected by disruptions in our supply chain;

• the occurrence of natural disasters, such as hurricanes, winter or tropical storms, earthquakes, tornadoes, floods, fires or other unanticipated problem such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;

• we may continue to be adversely affected by disruptions in our supply chain;

• the occurrence of natural disasters and extreme weather or other unanticipated problem such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;

• we are dependent upon attracting and retaining key personnel;

• from time to time, we are called upon to protect our intellectual property rights and proprietary information through litigation and other means;

• we are dependent on certain large customers;

• from time to time, we may be engaged in legal actions associated with our intellectual property rights;

• if we are unable to protect our intellectual property and other proprietary information, we may lose significant competitive advantage;

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• complications with the design or implementation of our new enterprise resource planning system;

• adverse litigation judgments and exposure to significant litigation-related costs;

• changes in government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs and the chemicals industry;

• losses due to lawsuits or claims arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes.

Ingevity Corporation ("Ingevity," "the company", "we," "us" or "our") is a leading global manufacturer of specialty chemicals and high performance activated carbon materials.

• government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs and the chemicals industry;

• losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes.

Ingevity 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.

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Recent Developments

On July 19, 2018, Ingevity filed suit against BASF Corporation (“BASF”) in the United States District Court for the District of Delaware (the “Delaware Proceeding”) alleging BASF infringed Ingevity’s patent covering canister systems used in the control of automotive gasoline vapor emissions (U.S.

RE38,844) (the “’844 Patent”).

On February 14, 2019, BASF asserted counterclaims against Ingevity in the Delaware Proceeding, alleging two claims for violations of U.S.

antitrust law (one for exclusive dealing and the other for tying) as well as a claim for tortious interference with an alleged prospective business relationship between BASF and a BASF customer (the “BASF Counterclaims”).

The BASF Counterclaims relate to Ingevity’s enforcement of the ‘844 Patent and Ingevity’s entry into several supply agreements with customers of its fuel vapor canister honeycombs.

District Court dismissed Ingevity’s patent infringement claims on November 18, 2020, and the case proceeded to trial on the BASF Counterclaims in September 2021.

15, 2021, a jury in the Delaware Proceeding issued a verdict in favor of BASF on the BASF Counterclaims and awarded BASF damages of approximately $28.3 million, which will be trebled under U.S.

antitrust law to approximately $85 million.

In addition, BASF may seek pre- and post-judgment interest and attorneys’ fees and costs in amounts that they will have to support at a future date.

We disagree with the outcome, including the court’s application of the law, and we intend to seek judgment as a matter of law in the Delaware Proceeding post-trial briefing stage and on appeal, if necessary.

In addition, we intend to challenge the U.S.

District Court’s November 2020 dismissal of our patent infringement claims against BASF.

Ingevity believes in the strength of its intellectual property and the merits of its position and intends to pursue all legal relief available to challenge these outcomes in the Delaware Proceeding.

Final resolution of these matters could take several months up to two years.

As of September 30, 2021, we have accrued a total of $85 million, the full amount of the jury’s verdict.

The amount accrued for this matter is included in Other liabilities on the condensed consolidated balance sheet as of September 30, 2021, and the charge is included in Other (income) expense, net on the condensed consolidated statement of operations for the three and nine months ended September 30, 2021.

The amount of any liability Ingevity may ultimately incur related to the Delaware Proceeding could be more or less than the amount accrued.

2026 Senior Notes

In March 2022, we provided notice to the holders and trustee of our 4.50% Senior Notes due in 2026, indicating our intent to redeem the $300.0 million outstanding aggregate principal balance prior to maturity.

As a result of this notice, we classified these outstanding notes as current on our March 31, 2022 condensed consolidated balance sheet.

The redemption occurred on April 27, 2022 and was primarily funded utilizing the outstanding capacity under our revolving credit facility.

At redemption, we recognized the $3.4 million redemption premium and accelerated the remaining deferred finance fees of $2.7 million.

Legal expenses associated with this redemption have been recorded as incurred.

War in Ukraine

We are monitoring the ongoing war between Russia and Ukraine including the related sanctions imposed on Russia and Belarus by the U.S.

and other countries.

Currently, we do not foresee any direct material adverse effects on our business, however, the global implications of the Russia/Ukraine war are difficult to predict at this time and we will continue to monitor the situation.

Results of Operations

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

In millions 2022 2021

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Net income (loss) $ 60.8 $ 48.7

Net sales and Gross profit

The table below shows the 2021 Net sales and percentage variances from 2020:

Percentage change vs.

In millions, except percentages Net sales Total change Currency

effect Price/Mix Volume

Three months ended September 30, 2021 $ 376.8 14% —% 8% 6%

Nine months ended September 30, 2021 $ 1,055.5 19% 1% 5% 13%

Three Months Ended September 30, 2021 vs.

Net sales increase of $45.1 million in 2021 was primarily driven by favorable volume growth in our Performance Chemicals segment, offset by volume decline in our Performance Materials segment, for a combined impact of $20.3 million and favorable pricing and product mix in both segments of $25.0 million.

Additionally, unfavorable foreign currency exchange impacted Net sales by $0.2 million, primarily related to euro and Chinese renminbi denominated sales.

Gross profit increase of $2.2 million was driven by favorable pricing and product mix of $24.3 million, largely offset by higher raw material, logistics and energy costs of $20.1 million, unfavorable sales volume of $1.3 million, and unfavorable foreign currency exchange of $0.7 million.

Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in net sales and operating results period over period for both segments.

Nine Months Ended September 30, 2021 vs.

Net sales increase of $165.0 million in 2021 was primarily driven by favorable volume growth in both of our segments for a combined impact of $119.0 million and favorable pricing and product mix of $40.3 million.

Additionally, favorable foreign currency exchange impacted Net sales by $5.7 million, primarily related to euro and Chinese renminbi denominated sales.

Gross profit increase of $69.7 million was driven by favorable sales volume of $51.1 million, favorable pricing and product mix of $39.2 million, and favorable foreign currency exchange of $0.9 million.

These positive impacts were partially offset by higher net manufacturing costs of $21.5 million driven by logistics, raw material price inflation, energy, and depreciation, partially offset by higher plant throughput as a result of increased volume demand.

Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in net sales and operating results period over period for both segments.

The table below shows the 2022 Net sales and variances from 2021:

In millions Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales

Three months ended March 31, 2022 vs.

2021 $ 320.3 6.6 58.7 (2.8) $ 382.8

Three Months Ended March 31, 2022 vs.

The sales increase of $62.5 million in 2022 was driven by favorable pricing of $58.7 million (eighteen percent) and favorable volume growth in both of our segments for a combined impact of $6.6 million (two percent), partially offset by unfavorable foreign currency exchange of $2.8 million (one percent).

Gross profit increase of $11.6 million was driven by favorable pricing improvement of $58.3 million and favorable sales volume of $2.7 million, partially offset by unfavorable foreign currency exchange of $1.5 million and increased manufacturing costs of $47.9 million due to raw material and energy cost inflationary pressures.

Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for both segments.

Selling, general and administrative expenses

Three Months Ended September 30, 2021 vs.

Selling, general and administrative expenses ("SG&A") increased $8.6 million in 2021, compared to the significantly COVID-19 impacted prior year.

The change in SG&A was driven by higher employee-related costs of $5.8 million, increased legal expense of $1.8 million, and higher travel and other miscellaneous expense of $1.0 million.

SG&A increased year over year as we resumed more normal commercial operations, including hiring to fill open positions, increased travel, and investing in growth and innovation resources as compared to the COVID-19 impacted prior year period.

Nine Months Ended September 30, 2021 vs.

SG&A increased $23.1 million in 2021 compared to 2020.

The change in SG&A was driven by higher employee-related costs of $21.9 million, of which $4.2 million related to a one-time benefit recorded in 2020, and increased amortization expense of $1.6 million.

The higher employee-related costs and amortization expense were partially offset by reduced legal, travel and other miscellaneous costs of $0.4 million.

SG&A expenses as a percentage of Net sales increased slightly to 12.4 percent for the nine months ended September 30, 2021 from 12.1 percent in 2020, driven by the lower spending in 2020 due to COVID-19 and higher sales in 2021.

Three Months Ended March 31, 2022 vs.

Selling, general and administrative expenses ("SG&A") were $40.0 million (10.4 percent of Net sales) and $40.0 million (12.5 percent of Net sales) for the three months ended March 31, 2022 and 2021, respectively.

The decrease in SG&A as a percentage of Net sales was driven by higher sales and reduced travel and other miscellaneous costs of $3.2 million.

The positive impact was partially offset by higher employee-related costs of $1.4 million and increased legal costs of $1.8 million.

Research and technical expenses

Three Months Ended September 30, 2021 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 1.8 percent from 1.6 percent for the three months ended September 30, 2021 and 2020, respectively.

Nine Months Ended September 30, 2021 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 1.8 percent from 1.9 percent for the nine months ended September 30, 2021 and 2020, respectively.

Three Months Ended March 31, 2022 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 1.9 percent from 2.1 percent for the three months ended March 31, 2022 and 2021, respectively.

Restructuring and other (income) charges, net

Three and Nine Months Ended September 30, 2021 vs.

Restructuring and other (income) charges, net were $4.1 million and $12.3 million for the three and nine months ended September 30, 2021, respectively, and $5.5 million and $13.3 million for the three and nine months ended September 30, 2020, respectively.

Refer to Note 12 within the condensed consolidated financial statements for more information.

Three Months Ended March 31, 2022 vs.

Restructuring and other (income) charges, net were $3.6 million and $3.9 million for the three months ended March 31, 2022 and 2021, respectively.

See Note 12 within the Condensed Consolidated Financial Statements for more information.

Acquisition-related costs

Three and Nine Months Ended September 30, 2021 vs.

Acquisition-related costs were $0.2 million and $0.9 million for the three and nine months ended September 30, 2021, respectively, and zero and $1.7 million for the three and nine months ended September 30, 2020, respectively.

For the three and nine months ended September 30, 2021, charges of zero and $0.2 million relate to the acquisition of a strategic investment in the Performance Materials segment, respectively, and charges of $0.2 million and $0.7 million relate to the integration of the Perstorp Capa business into our Performance Chemicals segment, respectively.

For the three and nine months ended September 30, 2020, all charges relate to the integration of the Perstorp Capa business into our Performance Chemicals segment.

Three Months Ended March 31, 2022 vs.

Acquisition-related costs were zero and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

The 2021 costs were incurred in connection with the integration of Perstorp Holding AB's caprolactone business into our Performance Chemicals segment.

Other (income) expense, net

Three and Nine Months Ended September 30, 2021 vs.

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31, 2022 vs.

Three Months Ended March 31,

In millions 2022 2021

Foreign currency exchange (income) loss $ 0.3 $ 1.7

Impairment of equity investment (1)

Litigation expense (2)

85.0 — 85.0 —

Other (income) expense, net (1.7) (0.5)

Total Other (income) expense, net $ (1.4) $ 1.2

_______________

(1) Represents an impairment charge recorded during the three months ended March 31, 2020 related to an equity investment within our Performance Materials segment.

(2) Refer to Note 14 within the condensed consolidated financial statements for more information.

Interest expense, net

Three and Nine Months Ended September 30, 2021 vs.

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31, 2022 vs.

Three Months Ended March 31,

In millions 2022 2021

Interest expense on finance lease obligations $ 1.8 $ 1.9 5.5 4.9

Interest expense on revolving credit and term loan facilities (1)

2.0 4.5 6.2 18.3

Interest expense on senior notes (1)

9.1 3.5 27.5 10.7

Interest income associated with our Restricted investment (0.5) (0.5) (1.5) (1.5)

Capitalized interest (0.3) (0.2) (0.5) (0.6)

Fixed-to-fixed cross-currency interest rate swap (2)

(0.1) (0.2) (0.3) (1.5)

Finance lease obligations 1.8 1.8

Revolving credit and term loan facilities (1)

Senior notes (1)

Other interest (income) expense, net (2.2) (0.8)

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_______________

(1) Refer to Note 9 within the condensed consolidated financial statements for more information.

(2) Refer to Note 8 within the condensed consolidated financial statements for more information.

(1) See Note 9 within the Condensed Consolidated Financial Statements for more information.

Provision (benefit) for income taxes

Three and Nine Months Ended September 30, 2021 vs.

For the three months ended September 30, 2021 and 2020, our effective tax rate was 53.3 percent and 20.7 percent, respectively.

Excluding discrete items, the effective rate was 20.4 percent compared to 20.3 percent in the three months ended September 30, 2021 and 2020, respectively.

For the nine months ended September 30, 2021 and 2020, our effective tax rate was 29.8 percent and 19.7 percent, respectively.

Excluding discrete items, the effective rate was 20.6 percent compared to 20.4 percent in the nine months ended September 30, 2021 and 2020, respectively.

Three Months Ended March 31, 2022 vs.

For the three months ended March 31, 2022 and 2021, our effective tax rate was 21.6 percent and 21.2 percent, respectively.

Excluding discrete items, the effective rate was 20.7 percent compared to 21.4 percent in the three months ended March 31, 2022 and 2021, respectively.

An explanation of the change in the effective tax rate is presented in Note 13 to the Condensed Consolidated Financial Statements.

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Our segments are (i) Performance Materials and (ii) Performance Chemicals.

Segment Earnings before Interest, Taxes, Depreciation and Amortization ("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 Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") is the primary measure used by the Company's 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, certain litigation expenses, pension and postretirement settlement and curtailment (income) charges, net.

interest expense, net associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charges, and pension and postretirement settlement and curtailment (income) charges.

In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Annual Consolidated Financial Statements included in our 2021 Annual Report.

Performance Materials

In millions Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

In millions Three Months Ended March 31,

Total Performance Materials - Net sales $ 148.4 $ 140.7

$ 118.1 $ 143.8 $ 384.8 $ 349.3

Segment EBITDA $ 77.9 $ 73.7

Net Sales Comparison of Three Months Ended March 31, 2022 and March 31, 2021:

Performance Materials (In millions)

Prior year Net sales Volume Price/Mix Currency effect Current year Net sales

Three months ended March 31, 2022 vs.

2021 $ 140.7 3.7 4.0 — $ 148.4

(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.

The table below shows the Net sales variances 2021 compared to 2020:

Percentage change vs.

Performance Materials (In millions, except percentages)

Net sales Total change Currency

effect Price/Mix Volume

Three months ended September 30, 2021 $ 118.1 (18) % 1 % 2 % (21) %

Nine months ended September 30, 2021 $ 384.8 10 % 2 % 2 % 6 %

Three Months Ended September 30, 2021 vs.

Segment net sales decrease of $25.7 million in 2021 was driven by $29.8 million in volume decline, primarily in automotive activated carbon products, partially offset by favorable pricing and product mix of $2.4 million and foreign currency exchange of $1.7 million.

Sales of our Performance Materials' segment were negatively impacted by lower automotive production as compared to the prior year period, due to the shortage of microchips that continue to disrupt the automotive industry worldwide.

Additionally, the prior year quarter benefited from robust automotive production which rebounded sharply from COVID-19 pandemic lows in the first half of 2020.

Segment EBITDA decreased $24.0 million primarily due to unfavorable volume of $20.5 million, higher manufacturing costs of $1.8 million, increased SG&A and Research and technical expenses of $0.9 million, and unfavorable foreign currency exchange of $2.4 million.

These impacts were partially offset by favorable pricing and product mix of $1.6 million.

The automotive activated carbon sales volume declines in the period was the most significant contributor to the Segment EBITDA decrease year over year.

Nine Months Ended September 30, 2021 vs.

Segment net sales increase of $35.5 million in 2021 was driven by $21.1 million in volume growth, primarily in automotive products, favorable pricing and product mix of $7.7 million, and favorable foreign currency exchange of $6.7 million.

Sales for the nine months ended September 30, 2020 were negatively impacted by COVID-19's impact on automotive production which occurred in the first half of fiscal year 2020.

Segment EBITDA increased $26.5 million primarily due to favorable volume of $14.7 million, favorable pricing and product mix of $7.4 million, and lower manufacturing costs of $6.4 million due to increased plant throughput in 2021 when compared to COVID-19 impacts to production in 2020.

These increases were partially offset by increased SG&A and Research and technical expenses of $6.9 million.

Favorable foreign currency exchange and increased other miscellaneous income positively impacted Segment EBITDA by $4.9 million.

Three Months Ended March 31, 2022 vs.

Segment net sales increase of $7.7 million in 2022 was driven by favorable pricing of $4.0 million (three percent) and volume growth of $3.7 million (three percent).

Volume growth was driven by increased sales of our process purification products.

Favorable pricing recognized in the first quarter was driven by process purification product sales as well as continued strong demand for our automotive gasoline vapor emission control products.

Automotive volumes were however muted by lower vehicle production globally, driven by ongoing supply chain challenges and the global microchip shortage.

North American sales of automotive gasoline vapor emission control products offset lower volumes in Asia-Pacific due to COVID-related customer shutdowns.

Brazil's implementation of their new new emissions regulation standard, Proconve L-7, began in the first quarter of 2022 driving volume growth in South America automotive gasoline vapor emission control products.

Segment EBITDA increased $4.2 million due to decreased SG&A and research and technical expenses of $2.5 million, favorable pricing of $2.1 million, favorable volume of $1.2 million and favorable foreign currency exchange of $0.7 million, offset by higher manufacturing costs of $2.3 million.

Performance Chemicals

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

In millions 2022 2021

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Industrial Specialties product line 144.7 112.1

132.6 90.1 364.7 290.9

Engineered Polymers product line 61.8 46.1

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Segment EBITDA $ 41.1 $ 31.7

Net Sales Comparison of Three Months Ended March 31, 2022 and March 31, 2021:

Performance Chemicals (In millions)

Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales

Three months ended March 31, 2022 vs.

2021 $ 179.6 2.9 54.7 (2.8) $ 234.4

As a result, Oilfield Technologies product line has been combined with the Industrial Specialties product line within the Performance Chemicals segment.

The table below shows the Net sales variances 2021 compared to 2020:

Percentage change vs.

Performance Chemicals (In millions, except percentages)

Net sales Total change Currency

effect Price/Mix Volume

Three months ended September 30, 2021 $ 258.7 38 % (1) % 12 % 27 %

Nine months ended September 30, 2021 $ 670.7 24 % — % 6 % 18 %

Three Months Ended September 30, 2021 vs.

Segment net sales increase of $70.8 million was driven mainly by favorable volume of $50.1 million, consisting of volume increases in industrial specialties products ($29.6 million), increases in engineered polymers products ($22.2 million), and decreases in pavement technologies products ($1.7 million).

Segment net sales were also impacted by favorable pricing implemented during 2021 in response to raw material inflation as well as product sales mix for a net impact of $22.6 million.

The net price/mix impact was driven by increases in industrial specialties ($12.4 million), engineered polymers ($7.9 million), and pavement technologies ($2.3 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $1.9 million.

Sales of our Pavement Technologies product line were up slightly compared to the previous year quarter, driven by continued adoption of our environmentally friendly cold recycling technology.

Outside of North America, we realized strong sales growth in Europe but this was offset by a reduction in sales in China, which we attribute to temporarily reduced local government budgets, leading to curtailed paving activity.

Industrial Specialties sales rose 47%.

Sales growth was driven by adhesives, lubricants and oilfield product sales.

Adhesive sales growth was robust in both packaging adhesives and safety road striping.

In the three months ended September 30, 2021, we saw the benefit of prior quarter price increases.

Sales of our Engineered Polymers product line rose over 100% due to improved volume for all primary end uses across the globe.

We saw strong technology adoption and sales growth in protective coatings as well as in resins used in electric vehicle battery pads.

In addition to volume growth, we also realized strong price improvement in Engineered Polymers which has been important to offset the inflation in raw material costs.

Segment EBITDA increased by $15.9 million primarily due to an increase in volume of $19.2 million, and favorable pricing and product mix of $22.7 million.

These favorable results were partially offset by higher manufacturing costs of $15.8

million due to logistics, raw material price inflation, and energy, higher SG&A and Research and technical expenses of $8.8 million, and unfavorable foreign currency exchange of $1.4 million.

Nine Months Ended September 30, 2021 vs.

Segment net sales increase of $129.5 million was driven mainly by favorable volume of $97.9 million, consisting of volume increases in industrial specialties products ($58.1 million), increases in engineered polymers products ($40.8 million), and decreases in pavement technologies products ($1.0 million).

Segment net sales were also impacted by favorable pricing implemented during 2021 in response to raw material inflation as well as product sales mix for a net impact of $32.6 million.

The net price/mix impact was driven by increases in industrial specialties ($13.9 million), engineered polymers ($13.3 million), and pavement technologies ($5.4 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $1.0 million.

Segment EBITDA increased by $29.1 million primarily due to an increase in volume of $36.4 million and favorable pricing and product mix of $31.8 million.

These favorable drivers were partially offset by higher manufacturing costs of $21.4 million due to logistics, raw material price inflation, and energy, higher SG&A and Research and technical expenses of $15.5 million, and unfavorable foreign currency exchange of $2.2 million.

Three Months Ended March 31, 2022 vs.

Segment net sales increase of $54.8 million was driven by favorable pricing and product mix of $54.7 million (30 percent), driven by increases in industrial specialties ($39.7 million), engineered polymers ($14.9 million), and pavement technologies ($0.1 million).

Also driving the segment net sales increase was favorable volume of $2.9 million (two percent), consisting of volume increases in pavement technologies ($6.6 million) and engineered polymers ($3.0 million), offset partially by volume decreases in industrial specialties ($6.7 million).

Unfavorable foreign currency exchange impacted Net sales by $2.8 million (two percent).

Our Performance Chemicals segment saw strong revenue growth versus the prior year’s quarter on solid end-market demand and continued price improvement.

These price increases were necessary to keep pace with the dramatic increases we are experiencing related to energy, raw material, and shipping costs.

Our Engineered Polymers business grew 34.1 percent as the business increased pricing to offset inflationary costs for raw materials, logistics, and energy that spiked in the fourth quarter of 2021 and has remained at elevated levels.

From a regional perspective, sales in Asia for our products were robust in the quarter due to demand in automotive and UV coatings applications.

This was offset by a decline in the Americas where some polyurethane customers experienced availability issues with key raw materials.

Industrial Specialties sales increased 29.1 percent versus the prior-year quarter with strong performance across all markets, particularly in oilfield and adhesives primary end-use markets.

The sales improvements were supplemented by an improved mix shift to higher-value derivative products as growth in higher-end additives to oilfield and adhesives primary end-use markets outpaced growth in industrial intermediate’s merchant tall oil fatty acid sales.

Pavement Technologies sales increased 30.4 percent versus the prior-year quarter.

While price increases contributed to the sales improvement, most of this growth was driven by improved volumes, primarily in the Americas and Europe.

Segment EBITDA increased by $9.4 million due to favorable pricing and product mix of $56.2 million, an increase in volume of $1.5 million, and favorable foreign currency exchange of $0.8 million, offset by higher manufacturing costs of $45.2 million, and higher SG&A expenses of $3.9 million.

Use of Non-GAAP Financial Measure - Adjusted EBITDA

Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with GAAP, and has provided a reconciliation to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Adjusted EBITDA is not meant to be considered in isolation or as a substitute for Net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with GAAP and has provided a reconciliation to net income, the most directly comparable financial measure calculated in accordance with GAAP.

Adjusted EBITDA is not meant to be considered in isolation nor as a substitute for the

most directly comparable financial measure calculated in accordance with GAAP.

Adjusted EBITDA is utilized by management as a measure of profitability.

We believe this non-GAAP financial measure provides management as well as investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measure, when viewed together with our financial results computed in accordance with GAAP, provides a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.

We believe Adjusted EBITDA is a useful measure because it excludes the effects of investment activities as well as non-operating activities.

Adjusted EBITDA is defined as net income (loss) plus interest expense, net, provision (benefit) for income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, certain litigation expenses, pension and postretirement settlement and curtailment (income) charges, net.

We believe Adjusted EBITDA is a useful measure because it excludes the effects of financing and investment activities as well as non-operating activities.

Adjusted EBITDA is defined as net income (loss) plus provision (benefit) for income taxes, interest expense, net, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charges, and pension and postretirement settlement and curtailment (income) charges, net.

This non-GAAP measure is not intended to replace the presentation of financial results in accordance with GAAP and investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another.

A reconciliation of Adjusted EBITDA to net income (loss) is set forth below.

A reconciliation of Adjusted EBITDA to net income is set forth within this section.

Reconciliation of Net Income (Loss) to Adjusted EBITDA

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

In millions 2022 2021

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Acquisition and other-related costs — 0.3

Litigation expense 85.0 — 85.0 —

Adjusted EBITDA (Non-GAAP)

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Adjusted EBITDA

Three and Nine Months Ended September 30, 2021 vs.

Three Months Ended March 31, 2022 vs.

The factors that impacted adjusted EBITDA period to period are the same factors that affected earnings discussed in the Results of Operations and Segment Operating Results sections included within this MD&A.

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*Calculated as Operating Cash Flow less Capital Expenditures

Our fiscal year 2021 guidance for sales is $1.32 to $1.36 billion and adjusted EBITDA is $405 to $420 million.

Our guidance for the remainder of the year reflects our lowered expectations for Performance Materials and our confidence in the continued strong demand for products in Performance Chemicals.

For the remainder of 2021, we expect an ongoing shortage of microchips, continued logistics headwinds, and raw materials and energy inflation to be challenges.

We continue to monitor supply and demand in the market and will pass through costs to ensure we extract the optimal value for our products.

Ingevity raised the top end of its 2022 guidance to sales between $1.525 billion to $1.65 billion and adjusted EBITDA between $430 million to $470 million.

For revenue, we expect to capture volume growth in our Performance Chemical segment specifically within our Engineered Polymers’ business.

We also anticipate continued growth in our adhesives and oilfield products within Industrial Specialties.

Pavement technologies will benefit from the U.S.

infrastructure bill and continued Evotherm® warm mix technology adoption.

This expected demand will result in favorable pricing conditions.

Performance Materials will see moderate growth as process purification volumes and price increases will partially offset muted improvement in automotive due to the continued constrained semiconductor shortage and the absence of any novel gasoline vapor emission control regulations.

Adjusted EBITDA is expected to grow versus 2021 mainly driven by our Performance Chemicals segment, where continued profitable growth in all businesses is expected to be partially offset by inflationary costs of energy, logistics and primary raw materials.

The Performance Materials segment anticipates results similar to 2021 as U.S., Chinese, Canadian, and European vehicle production continues to be negatively impacted by global chip supply and general cost inflation.

We expect to deliver fiscal year 2022 Adjusted EBITDA of $430 million to $470 million.

These estimates assume that 2022 will continue to be impacted by global logistical headwinds, geopolitical uncertainty, significant cost inflation, and the microchip shortage which is disrupting the global automotive supply chain.

A reconciliation of net income to adjusted EBITDA as projected for 2022 is not provided.

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additional acquisition and other-related costs;

certain litigation expenses;

litigation verdict charges;

additional pension and postretirement settlement and curtailment (income) charges;

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We expect our cash flow provided by operations combined with cash on hand and available capacity under our revolving credit facility to be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months.

As of September 30, 2021, our undrawn capacity under our revolving credit facility was $497.7 million.

As of March 31, 2022, our undrawn capacity under our revolving credit facility was $497.5 million.

Over the next twelve months, we expect to fund the following:

interest payments, capital expenditures, expenditures related to our business transformation initiative, debt principal repayments, purchases pursuant to our stock repurchase program, income tax payments, and to incur additional spending associated with our Performance Materials' intellectual property litigation.

redemption of our 4.50% Senior Notes due in 2026 (see Note 17 within the Condensed Consolidated Financial Statements for more information), interest payments, capital expenditures, expenditures related to our business transformation initiative, debt principal repayments, purchases pursuant to our stock repurchase program, income tax payments, and to incur additional spending associated with our Performance Materials' intellectual property litigation.

In addition, we may also evaluate and consider strategic acquisitions, joint ventures, or other transactions to create stockholder value and enhance financial performance.

In connection with such transactions, or to fund other anticipated uses of cash, we may modify our existing revolving credit and term loan facilities, seek additional debt financing, issue equity securities, or some combination thereof.

Cash and cash equivalents totaled $269.4 million at September 30, 2021.

In connection with such transactions, or to fund other anticipated uses of cash, we may modify our existing revolving credit and term loan facility, redeem all or part of our outstanding senior notes, seek additional debt financing, issue equity securities, or some combination thereof.

Cash and cash equivalents totaled $222.6 million at March 31, 2022.

We continuously monitor deposit concentrations and the credit quality of the financial institutions that hold our cash and cash equivalents, as well as the credit quality of our insurance providers, customers, and key suppliers.

Due to the global nature of our operations, a portion of our cash is held outside the U.S.

The cash and cash equivalents balance at September 30, 2021 included $79.2 million held by our foreign subsidiaries.

Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and capital expenditures.

The cash and cash equivalents balance at March 31, 2022, included $95.8 million held by our foreign subsidiaries.

Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and their capital expenditures.

We believe that our foreign holdings of cash will not have a material adverse impact on our U.S.

If these earnings were distributed, such amounts would be subject to U.S.

federal income tax at the statutory rate less the available foreign tax credits, if any, and potentially subject to withholding taxes in the various jurisdictions.

federal income tax at the statutory rate less the available foreign tax credits, if any, and would potentially be subject to withholding taxes in the various jurisdictions.

The potential tax implications of the repatriation of unremitted earnings are driven by facts at the time of distribution, therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such cash and earnings were repatriated to the U.S.

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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 three and nine months ended September 30, 2021, we repurchased $32.2 million and $100.3 million in common stock, representing 414,501 and 1,298,167 shares of our common stock at a weighted average cost per share of $77.77 and $77.25, respectively.

At September 30, 2021, $311.7 million remained unused under our Board-authorized repurchase program.

On March 2, 2020, our Board of Directors authorized the repurchase of up to $500 million of our common stock and rescinded the prior two outstanding repurchase authorizations.

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, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

During the three months ended March 31, 2022 and March 31, 2021, we repurchased $40.4 million and $39.4 million in common stock, representing 610,447 and 527,550 shares of our common stock at a weighted average cost per share of $66.26 and $74.64, respectively.

At March 31, 2022 and March 31, 2021, $262.2 million and $372.6 million remained unused under our Board-authorized repurchase programs, respectively.

Capital Expenditures

Projected 2022 capital expenditures are $155 - $175 million.

We have no material commitments associated with these projected capital expenditures as of September 30, 2021 .

Cash flow comparison of Nine Months Ended September 30, 2021 and 2020

Nine Months Ended September 30,

We have no material commitments associated with these projected capital expenditures as of March 31, 2022 .

Cash flow comparison of the Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

In millions 2022 2021

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Cash flows provided by (used in) operating activities

During the first nine months of 2021, cash flow provided by operations increased primarily due to higher earnings driven by the increase in net sales.

The increase in net sales also drove higher accounts receivable and corresponding plant production that resulted in higher inventory levels, which negatively impacted the cash flow provided by operations compared to 2020.

Below provides a description of the changes to working capital during the first nine months of 2021 (i.e.

During the first three months of 2022, cash flow provided by operations decreased due to increased accounts receivable related to the increase in net sales and a larger inventory build compared to 2021.

Below provides a description of the changes to working capital during the first three months of 2022 (i.e.

current assets and current liabilities).

Current Assets and Liabilities

In millions September 30, 2021 December 31, 2020

In millions March 31, 2022 December 31, 2021

Cash and cash equivalents $ 222.6 $ 275.4

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Total current assets $ 732.8 $ 724.9

Current assets as of September 30, 2021 increased $91.6 million compared to December 31, 2020, primarily due to increases in Accounts receivable, net and Inventories, net.

Accounts receivable, net as of September 30, 2021, increased $27.8 million due to increased sales during the quarter ended September 30, 2021 compared to the quarter ended December 31, 2020.

Inventories increased by $39.3 million mainly due to the build of inventory to support forecasted sales.

Additionally, Cash and cash equivalents increased by $11.7 million, and Prepaid and other current assets increased by $12.8 million, primarily related to prepaid insurance and services.

In millions September 30, 2021 December 31, 2020

Current assets as of March 31, 2022, increased $7.9 million compared to December 31, 2021, primarily due to increases in Accounts receivable, net and Inventories, net.

Accounts receivable, net as of March 31, 2022, increased $45.2 million due to increased sales during the quarter ended March 31, 2022.

Inventories increased by $19.0 million due to the build of inventory for forecasted sales.

These increases were offset by a decrease in Cash and cash equivalents of $52.8 million and a decrease in Prepaid and other current assets of $3.5 million compared to the balances at December 31, 2021.

In millions March 31, 2022 December 31, 2021

Accounts payable $ 128.9 $ 125.8

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Total current liabilities $ 551.7 $ 268.9

Current liabilities as of September 30, 2021, increased by $24.2 million compared to December 31, 2020, primarily driven by an increase in Accounts payable and Accrued payroll and employee benefits.

This increase was offset partially by decreases in Notes payable and current maturities of long-term debt, and Accrued expenses.

Current liabilities as of March 31, 2022, increased by $282.8 million compared to December 31, 2021, driven primarily by an increase in Notes payable and current maturities of long-term debt of $300.0 million due to the redemption of our 4.5% Senior Notes due in 2026 (see Note 17 within the Condensed Consolidated Financial Statements for more information), Income taxes payable of $3.6 million, Accounts payable of $3.1 million, and Accrued expenses of $2.1 million.

This increase was offset partially by decreases in Accrued payroll and employee benefits of $25.8 million, and Current operating lease liabilities of $0.2 million.

Cash flows provided by (used in) investing activities

Cash used by investing activities in the nine months ended September 30, 2021 was $83.4 million and was primarily driven by capital expenditures.

In the nine months ended September 30, 2021 and 2020, capital spending included the base maintenance capital supporting ongoing operations and growth and cost improvement spending primarily related to our business transformation initiative (refer to Note 12 within the condensed consolidated financial statements for more information).

Also, during nine months ended September 30, 2021, we acquired a strategic equity investment in a privately-held company for $16.5 million.

Capital expenditure categories Nine Months Ended September 30,

Cash used by investing activities in the three months ended March 31, 2022 was $30.2 million and was primarily driven by capital expenditures.

In the three months ended March 31, 2022 and 2021, capital spending included the base maintenance capital supporting ongoing operations and growth and cost improvement spending primarily related to our business transformation initiative (see Note 12 within the Condensed Consolidated Financial Statements for more information).

Capital expenditure categories Three Months Ended March 31,

In millions 2022 2021

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Cash flows provided by (used in) financing activities

Cash used in financing activities in the nine months ended September 30, 2021 was $120.3 million and was driven by the repurchase of common stock of $100.3 million, payments on long-term borrowings of $18.8 million, and tax payments related to withholdings on restricted stock unit vestings of $2.4 million.

Cash provided by financing activities in the nine months ended September 30, 2020 was $14.8 million and was primarily driven by net borrowings of $38.8 million from our revolving credit facility, offset by payments on long-term borrowings of $14.1 million, tax payments related to withholdings on restricted stock unit vestings of $3.0 million, and the repurchase of common stock of $32.4 million.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows.

Contractual Obligations

Information related to our contractual commitments at December 31, 2020 can be found in a table included within Part II, Item 7 of our 2020 Annual Report.

Except as described above, there have been no material changes to our contractual commitments during the nine months ended September 30, 2021.

Cash used in financing activities in the three months ended March 31, 2022, was $46.3 million and was primarily driven by the repurchase of common stock of $40.4 million, payments on long-term borrowings of $4.7 million, and tax payments related to withholdings on restricted stock unit vestings of $1.8 million.

Cash used in financing activities in the three months ended March 31, 2021 was $52.1 million and was primarily driven by the repurchase of common stock of $39.4 million, payments on long-term borrowings of $9.4 million, and tax payments related to withholdings on restricted stock unit vestings of $2.3 million.

New Accounting Guidance

Refer to the Note 2 to the condensed consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our condensed consolidated financial statements.

Critical Accounting Policies

Refer to Note 2 to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP.

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

We have described our accounting policies in Note 3 to our 2020 Annual Report.

We have described our accounting policies in Note 2 to our consolidated financial statements included in our 2021 Annual Report.

We have reviewed these accounting policies, identifying those that we believe to be critical to the preparation and understanding of our financial statements.

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We base our estimates and judgments on historical experience, current conditions and other reasonable factors.

For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our 2021 Annual Report.

Our critical accounting policies have not substantially changed from those described in the 2021 Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis