Ingevity Corp 10-Q

ITEM 1. FINANCIAL STATEMENTS INGEVITY CORPORATION Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, In millions, except per share data 2022 2021 2022 2021 Net sales $ 482.0 $ 376.8 $ 1,284.7 $ 1,055.5 Cost of sales 305.7 235.0 820.0 647.7 Gross profit 176.3 141.8 464.7 407.8 Selling, general, and administrative expenses 54.2 43.5 142.9 131.0 Research and technical expenses 7.6 6.8 23.1 19.3 Restructuring and other (income) charges, net 3.3 4.1 10.6 12.3 Acquisition-related costs 1.9 0.2 1.9 0.9 Other (income) expense, net 2.0 84.6 ( 1.0 ) 81.6 Interest expense, net 11.5 11.6 37.3 36.2 Income (loss) before income taxes 95.8 ( 9.0 ) 249.9 126.5 Provision (benefit) for income taxes 20.4 ( 4.8 ) 53.9 37.7 Net income (loss) $ 75.4 $ ( 4.2 ) $ 196.0 $ 88.8 Per share data Basic earnings (loss) per share $ 1.99 $ ( 0.11 ) $ 5.10 $ 2.22 Diluted earnings (loss) per share 1.98 ( 0.11 ) 5.06 2.21 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 September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Net income (loss) $ 75.4 $ ( 4.2 ) $ 196.0 $ 88.8 Other comprehensive income (loss), net of tax: Foreign currency adjustments: Foreign currency translation adjustment ( 55.3 ) ( 16.7 ) ( 124.9 ) ( 8.5 ) Unrealized gain (loss) on net investment hedges, net of tax provision (benefit) of $ 1.0 , $ 0.9 , $ 3.2 , $ 1.9 3.4 2.9 10.7 6.1 Total foreign currency adjustments, net of tax provision (benefit) of $ 1.0 , $ 0.9 , $ 3.2 , $ 1.9 ( 51.9 ) ( 13.8 ) ( 114.2 ) ( 2.4 ) Derivative instruments: Unrealized gain (loss), net of tax provision (benefit) of $ 0.8 , $ 0.8 , $ 3.5 , $ 1.6 2.7 2.8 11.4 5.3 Reclassifications of deferred derivative instruments (gain) loss, included in net income (loss), net of tax (provision) benefit of $( 0.7 ), $( 0.1 ), $( 1.7 ), $( 0.1 ) ( 2.4 ) ( 0.1 ) ( 5.7 ) ( 0.2 ) Total derivative instruments, net of tax provision (benefit) of $ 0.1 , $ 0.7 , $ 1.8 , $ 1.5 0.3 2.7 5.7 5.1 Pension & other postretirement benefits: Unrealized actuarial gains (losses) and prior service (costs) credits, net of tax of zero for all periods — — — — Reclassifications of net actuarial and other (gain) loss and amortization of prior service cost, included in net income, net of tax of zero for all periods — — 0.1 0.1 Total pension and other postretirement benefits, net of tax of zero for all periods — — 0.1 0.1 Other comprehensive income (loss), net of tax provision (benefit) of $ 1.1 , $ 1.6 , $ 5.0 , $ 3.4 ( 51.6 ) ( 11.1 ) ( 108.4 ) 2.8 Comprehensive income (loss) $ 23.8 $ ( 15.3 ) $ 87.6 $ 91.6 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 September 30, 2022 December 31, 2021 Assets (Unaudited) Cash and cash equivalents $ 72.3 $ 275.4 Accounts receivable , net of allowance for credit losses of $ 2.3 - 2022 and $ 2.0 - 2021 248.4 161.7 Inventories, net 281.8 241.2 Prepaid and other current assets 42.6 46.6 Current assets 645.1 724.9 Property, plant and equipment, net 720.7 719.7 Operating lease assets, net 47.3 52.4 Goodwill 387.6 442.0 Other intangibles, net 272.2 337.6 Deferred income taxes 6.9 6.8 Restricted investment , net of allowance for credit losses of $ 0.6 - 2022 and $ 0.5 - 2021 77.5 76.1 Other assets 178.1 109.5 Total Assets $ 2,335.4 $ 2,469.0 Liabilities Accounts payable $ 164.6 $ 125.8 Accrued expenses 56.9 51.7 Accrued payroll and employee benefits 44.7 48.2 Current operating lease liabilities 16.4 17.4 Notes payable and current maturities of long-term debt 0.9 19.6 Income taxes payable 6.8 6.2 Current liabilities 290.3 268.9 Long-term debt including finance lease obligations 1,153.2 1,250.0 Noncurrent operating lease liabilities 31.8 36.2 Deferred income taxes 106.6 114.6 Other liabilities 119.6 125.5 Total Liabilities 1,701.5 1,795.2 Commitments and contingencies (Note 14) Equity Preferred stock (par value $ 0.01 per share; 50,000,000 shares authorized; zero issued and outstanding - 2022 and 2021) — — Common stock (par value $ 0.01 per share; 300,000,000 shares authorized; issued: 43,212,857 - 2022 and 43,102,011 - 2021; outstanding: 37,358,879 - 2022 and 39,269,399 - 2021) 0.4 0.4 Additional paid-in capital 147.5 136.3 Retained earnings 992.1 796.1 Accumulated other comprehensive income (loss) ( 95.3 ) 13.1 Treasury stock, common stock, at cost ( 5,853,978 shares - 2022 and 3,832,612 shares - 2021) ( 410.8 ) ( 272.1 ) Total Equity 633.9 673.8 Total Liabilities and Equity $ 2,335.4 $ 2,469.0 The accompanying notes are an integral part of these financial statements. 5 INGEVITY CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, In millions 2022 2021 Cash provided by (used in) operating activities: Net income (loss) $ 196.0 $ 88.8 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 78.6 81.7 Non-cash operating lease costs 13.5 12.9 Deferred income taxes ( 2.2 ) ( 2.2 ) LIFO Reserve 10.7 ( 1.9 ) Share-based compensation 11.1 9.8 Other non-cash items 15.2 10.6 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net ( 98.4 ) ( 28.2 ) Inventories, net ( 63.3 ) ( 37.3 ) Prepaid and other current assets ( 2.3 ) ( 7.5 ) Accounts payable 48.2 20.3 Accrued expenses 5.3 ( 0.2 ) Accrued payroll and employee benefits ( 2.7 ) 9.6 Income taxes 10.1 ( 4.6 ) Litigation verdict charge — 85.0 Operating leases ( 15.5 ) ( 15.3 ) Changes in other operating assets and liabilities, net 10.6 ( 4.5 ) Net cash provided by (used in) operating activities $ 214.9 $ 217.0 Cash provided by (used in) investing activities: Capital expenditures $ ( 93.3 ) $ ( 66.4 ) Purchase of strategic investments ( 62.8 ) ( 16.5 ) Net investment hedge settlement 14.7 — Other investing activities, net ( 3.3 ) ( 0.5 ) Net cash provided by (used in) investing activities $ ( 144.7 ) $ ( 83.4 ) Cash provided by (used in) financing activities: Proceeds from revolving credit facility $ 788.0 $ — Payments on revolving credit facility ( 279.0 ) — Payments on long-term borrowings ( 628.1 ) ( 18.8 ) Debt issuance costs ( 3.0 ) — Debt repayment costs ( 3.8 ) — Finance lease obligations, net ( 0.4 ) ( 0.6 ) Borrowings (repayments) of notes payable and other short-term borrowings, net — ( 1.9 ) Tax payments related to withholdings on vested equity awards ( 2.2 ) ( 2.4 ) Proceeds and withholdings from share-based compensation plans, net 2.8 3.7 Repurchases of common stock under publicly announced plan ( 139.2 ) ( 100.3 ) Net cash provided by (used in) financing activities $ ( 264.9 ) $ ( 120.3 ) Increase (decrease) in cash, cash equivalents, and restricted cash ( 194.7 ) 13.3 Effect of exchange rate changes on cash ( 8.6 ) ( 1.8 ) Change in cash, cash equivalents, and restricted cash ( 203.3 ) 11.5 Cash, cash equivalents, and restricted cash at beginning of period 276.1 258.4 Cash, cash equivalents, and restricted cash at end of period (1) $ 72.8 $ 269.9 (1) Includes restricted cash of $ 0.5 million and $ 0.5 million and cash and cash equivalents of $ 72.3 million and $ 269.4 million at September 30, 2022 and 2021, 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 $ 35.9 $ 35.5 Cash paid for income taxes, net of refunds 42.6 43.2 Purchases of property, plant and equipment in accounts payable 5.1 5.9 Leased assets obtained in exchange for new operating lease liabilities 9.2 14.7 The accompanying notes are an integral part of these financial statements. 6 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Note 1: Background Description of Business Ingevity Corporation ("Ingevity," "the Company," "we," "us," or "our") provides products and technologies that purify, protect, and enhance the world around us. Through a team of talented and experienced people, we develop, manufacture, and bring to market solutions that help customers solve complex problems and make the world more sustainable. We report in two business segments, Performance Materials and Performance Chemicals. Our Performance Materials segment manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets. Automotive technologies products are sold into gasoline vapor emission control applications within the automotive industry, while process purification products are sold into the food, water, beverage, and chemical purification industries. Our Performance Chemicals segment consists of our pavement technologies, industrial specialties, and engineered polymers product lines. Performance Chemicals manufactures products derived from crude tall oil ("CTO") and lignin extracted from the kraft pulping process as well as caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including warm mix paving, pavement preservation, and pavement reconstruction and recycling (pavement technologies product line); adhesives, agrochemicals, lubricants, printing inks, industrial intermediates, and oilfield (industrial specialties product line); and coatings, resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line). Basis of Consolidation and 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, 2021, 2020 and 2019, collectively referred to as the “Annual Consolidated Financial Statements,” included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 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 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 7 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance became effective beginning on March 12, 2020, and we may elect to apply the amendments prospectively until December 31, 2022. As of September 30, 2022, 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 September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Performance Materials segment $ 144.9 $ 118.1 $ 415.7 $ 384.8 Performance Chemicals segment Pavement Technologies product line 88.3 73.2 194.0 162.4 Industrial Specialties product line 179.3 132.6 489.9 364.7 Engineered Polymers product line 69.5 52.9 185.1 143.6 Total $ 337.1 $ 258.7 $ 869.0 $ 670.7 Net sales $ 482.0 $ 376.8 $ 1,284.7 $ 1,055.5 The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer. Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 North America $ 291.9 $ 219.3 $ 759.7 $ 580.8 Asia Pacific 113.6 89.6 297.3 285.0 Europe, Middle East, and Africa 62.6 62.3 194.0 172.5 South America 13.9 5.6 33.7 17.2 Net sales $ 482.0 $ 376.8 $ 1,284.7 $ 1,055.5 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. Contract Asset September 30, In millions 2022 2021 Beginning balance $ 5.3 $ 5.7 Contract asset additions 14.3 15.8 Reclassification to accounts receivable, billed to customers ( 13.4 ) ( 15.4 ) Ending balance (1) $ 6.2 $ 6.1 ______________ (1) Included within "Prepaid and other current assets" on the condensed consolidated balance sheets. 8 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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. In millions Level 1 (1) Level 2 (2) Level 3 (3) Total September 30, 2022 Assets: Deferred compensation plan investments (4) $ 0.8 $ — $ — $ 0.8 Total assets $ 0.8 $ — $ — $ 0.8 Liabilities: Deferred compensation arrangement (4) $ 11.3 $ — $ — $ 11.3 Contingent consideration (5) — — 0.8 0.8 Total liabilities $ 11.3 $ — $ 0.8 $ 12.1 December 31, 2021 Assets: Deferred compensation plan investments (4) $ 0.9 $ — $ — $ 0.9 Total assets $ 0.9 $ — $ — $ 0.9 Liabilities: Deferred compensation arrangement (4) $ 13.7 $ — $ — $ 13.7 Contingent consideration (5) — — 0.8 0.8 Total liabilities $ 13.7 $ — $ 0.8 $ 14.5 ______________ (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 $ 12.7 million and $ 14.0 million at September 30, 2022 and December 31, 2021, respectively. (5) Included within "Other liabilities" on the condensed consolidated balance sheets. Nonrecurring Fair Value Measurements There were no nonrecurring fair value measurements in the condensed consolidated balance sheet during the quarters ended September 30, 2022 and December 31, 2021. Strategic Investments During the first and third quarters of 2022, we acquired two strategic investments in privately-held companies for $ 2.0 million and $ 60.0 million respectively, which are accounted for under the measurement alternative method. The aggregate carrying value of all measurement alternative investments where fair value is not readily determinable totaled $ 80.8 million and $ 18.8 million at September 30, 2022 and December 31, 2021, respectively. There were no adjustments to the carrying value of the measurement alternative method investments for impairment or observable price changes for the period ended September 30, 2022. 9 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) During the second quarter of 2021, we acquired a strategic investment in a privately-held company for $ 16.5 million, which is accounted for under the equity method of accounting. The carrying value of our strategic equity investment was $ 14.5 million and $ 16.5 million at September 30, 2022 and December 31, 2021, respectively. During the third quarter of 2022, we entered into an investment with a venture capital fund for $ 0.8 million, which is accounted for under the equity method of accounting. As of September 30, 2022, we had approximately $ 6.8 million of unfunded commitments which we anticipate will be paid over a period of 10 years. The carrying value of our strategic equity investment was $ 0.8 million at September 30, 2022. Restricted Investment At September 30, 2022 and December 31, 2021, the carrying value of our restricted investment, which is accounted for as held-to-maturity ("HTM") and therefore recorded at amortized cost, was $ 77.5 million and $ 76.1 million, net of an allowance for credit losses of $ 0.6 million and $ 0.5 million, and included cash of $ 6.4 million and $ 4.7 million, respectively. The fair value at September 30, 2022 and December 31, 2021 was $ 73.5 million and $ 80.0 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 AA- A A- BBB+ Total September 30, 2022 $ 13.4 — 10.5 13.3 14.1 20.4 $ 71.7 December 31, 2021 $ 13.4 — 10.6 13.3 14.1 20.5 $ 71.9 Debt and Finance Lease Obligations At September 30, 2022 and December 31, 2021, the carrying value of finance lease obligations was $ 101.8 million and $ 102.4 million, respectively, and the fair value was $ 107.1 million and $ 118.6 million, respectively. The fair value of our finance lease obligations is based on the period-end quoted market prices for the obligations, using Level 2 inputs. The fair value of all other finance lease obligations approximates their carrying values. The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt was $ 509.0 million and $ 328.1 million as of September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021, the carrying value of our fixed rate debt was $ 550.0 million and $ 850.0 million, respectively, and the fair value was $ 452.4 million and $ 843.9 million, respectively, based on Level 2 inputs. Contingent Consideration In connection with the acquisition of certain assets in 2020, we are contingently obligated to make an additional payment for such assets of up to an aggregate amount of $ 7.0 million. The contingent consideration is payable if certain sales volume targets are achieved prior to 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 September 30, 2022 and December 31, 2021, 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. 10 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) The following table summarizes the activity for financial liabilities utilizing Level 3 fair value measurements: Contingent Consideration In millions September 30, 2022 December 31, 2021 Beginning balance $ 0.8 $ 0.8 Newly issued — — Change in revaluation of contingent consideration included in earnings — — Exercises/settlements — — Ending balance (1) $ 0.8 $ 0.8 ______________ (1) Included within "Other liabilities" on the condensed consolidated balance sheets. Note 5: Inventories, net In millions September 30, 2022 December 31, 2021 Raw materials $ 71.6 $ 48.8 Production materials, stores and supplies 28.4 26.8 Finished and in-process goods 210.3 183.4 Subtotal $ 310.3 $ 259.0 Less: LIFO reserve ( 28.5 ) ( 17.8 ) Inventories, net $ 281.8 $ 241.2 Note 6: Property, Plant, and Equipment, net In millions September 30, 2022 December 31, 2021 Machinery and equipment $ 1,119.5 $ 1,113.3 Buildings and leasehold improvements 177.4 177.2 Land and land improvements 22.5 20.4 Construction in progress 92.3 64.4 Total cost $ 1,411.7 $ 1,375.3 Less: accumulated depreciation ( 691.0 ) ( 655.6 ) Property, plant, and equipment, net $ 720.7 $ 719.7 Note 7: Goodwill and Other Intangible Assets, net Goodwill Reporting Units In millions Performance Chemicals Performance Materials Total December 31, 2021 $ 437.7 $ 4.3 $ 442.0 Foreign currency translation ( 54.4 ) — ( 54.4 ) September 30, 2022 $ 383.3 $ 4.3 $ 387.6 There were no interim triggering events or circumstances indicating that goodwill might be impaired as of September 30, 2022. 11 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Other Intangible Assets September 30, 2022 December 31, 2021 In millions Gross Accumulated amortization Net Gross Accumulated amortization Net Customer contracts and relationships $ 288.7 $ 105.0 $ 183.7 $ 317.8 $ 95.0 $ 222.8 Brands (1) 69.4 21.5 47.9 81.7 20.3 61.4 Developed technology 60.4 19.8 40.6 72.2 18.8 53.4 Other — — — 0.5 0.5 — Other intangibles, net (2) $ 418.5 $ 146.3 $ 272.2 $ 472.2 $ 134.6 $ 337.6 _______________ (1) Represents trademarks, trade names, and know-how. (2) The majority of our Other intangibles, net are held in British Pound Sterling (GBP) and changes period over period are primarily driven by foreign currency fluctuations between GBP and USD. Intangible assets subject to amortization were allocated among our business segments as follows: In millions September 30, 2022 December 31, 2021 Performance Materials $ 1.7 $ 1.9 Performance Chemicals 270.5 335.7 Other intangibles, net $ 272.2 $ 337.6 Amortization expense related to our intangible assets is included in Selling, general and administrative expenses on the condensed consolidated statement of operations. During the three and nine months ended September 30, 2022, we recognized amortization expense of $ 7.9 million and $ 23.8 million, respectively, and during the three and nine months ended September 30, 2021, we recognized amortization expense of $ 8.3 million and $ 25.1 million, respectively. Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2022 - $ 31.7 million, 2023 - $ 31.7 million, 2024 - $ 31.4 million, 2025 - $ 31.4 million, and 2026 - $ 31.4 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 During the third quarter of 2022, we terminated our fixed-to-fixed cross currency interest rate swaps, accounted for as net investment hedges, and received net proceeds of $ 14.7 million. The proceeds are presented within cash provided by investing activities within the condensed consolidated statement of cash flows. The $ 14.7 million gain is reported as a component of the foreign currency adjustments (“CTA”) within Accumulated other comprehensive income (loss) ("AOCI") on the condensed consolidated balance sheet. The gain on net investment hedges are reclassified to earnings only when the related CTA are required to be reclassified, usually upon sale or liquidation of the investment. The fair value of our net investment hedge was a net asset (liability) of zero and $ 1.0 million at September 30, 2022 and December 31, 2021, respectively. During the three and nine months ended September 30, 2022, we recognized net interest income associated with this financial instrument of $ 0.1 million and $ 2.8 million, respectively, and during the three and nine months ended September 30, 2021, we recognized net interest income associated with this financial instrument of $ 0.1 million and $ 0.3 million, respectively. 12 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 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 condensed consolidated statement of operations when the forecasted transaction occurs. As of September 30, 2022, there were $ 5.6 million open foreign currency derivative contracts. The fair value of the designated foreign currency hedge contracts was an asset (liability) of $ 0.9 million and $ 0.5 million at September 30, 2022 and December 31, 2021, 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 September 30, 2022, we had 1.4 million and 0.4 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 September 30, 2022, open commodity contracts hedge forecasted transactions until December 2023. The fair value of the outstanding designated natural gas commodity hedge contracts as of September 30, 2022 and December 31, 2021 was a net asset (liability) of $ 1.9 million and $( 0.6 ) million, respectively. Interest Rate Risk Management During the year we had floating-to-fixed interest rate swaps with a combined 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. Per the terms of these instruments, we received floating rate interest payments ba sed upon three-month U.S. dollar LIBOR and in return were obligated to pay interest at a fixed rate of 3.79 percent until July 2023. Due to the repayment of our term loan (refer to Note 9 for more information), during the second quarter of 2022, we terminated these interest rate swap instruments. Upon termination of the interest rate swap instruments, we reclassified a $ 1.7 million gain from AOCI into Interest expense, net on the condensed consolidated statement of operations. The fair value of outstanding interest rate instruments at September 30, 2022 and December 31, 2021 was an asset (liability) of zero and $( 4.0 ) million, respectively. 13 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (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 September 30, 2022 2021 2022 2021 Cash flow hedging derivatives Currency exchange contracts $ 0.5 $ 0.1 $ ( 0.8 ) $ ( 0.2 ) Net sales Natural gas contracts 3.0 2.8 ( 2.3 ) — Cost of sales Interest rate swap contracts — 0.7 — — Interest expense, net Total $ 3.5 $ 3.6 $ ( 3.1 ) $ ( 0.2 ) 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 September 30, 2022 2021 2022 2021 Net investment hedging derivative Currency exchange contracts (1) $ 4.4 $ 3.8 $ 0.1 $ — Interest expense, net Total $ 4.4 $ 3.8 $ 0.1 $ — 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 Nine Months Ended September 30, 2022 2021 2022 2021 Cash flow hedging derivatives Currency exchange contracts $ 1.8 $ 0.3 $ ( 1.6 ) $ ( 0.2 ) Net sales Natural gas contracts 7.4 3.7 ( 4.1 ) ( 0.1 ) Cost of sales Interest rate swap contracts 5.7 2.9 ( 1.7 ) — Interest expense, net Total $ 14.9 $ 6.9 $ ( 7.4 ) $ ( 0.3 ) In millions 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) Nine Months Ended September 30, 2022 2021 2022 2021 Net investment hedging derivative Currency exchange contracts (1) $ 13.9 $ 8.0 $ 2.8 $ 0.2 Interest expense, net Total $ 13.9 $ 8.0 $ 2.8 $ 0.2 __________ (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 $ 4.8 million of net gains from AOCI to income, before taxes. 14 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 September 30, 2022 or December 31, 2021. September 30, 2022 In millions Level 1 (1) Level 2 (2) Level 3 (3) Total Assets: Currency exchange contracts (4) $ — $ 0.9 $ — $ 0.9 Natural gas contracts (4) — 2.1 — 2.1 Total assets $ — $ 3.0 $ — $ 3.0 Liabilities: Natural gas contracts (6) $ — $ 0.2 $ — $ 0.2 Total liabilities $ — $ 0.2 $ — $ 0.2 December 31, 2021 In millions Level 1 (1) Level 2 (2) Level 3 (3) Total Assets: Currency exchange contracts (4) $ — $ 0.5 $ — $ 0.5 Net investment hedge (5) — 2.0 — 2.0 Total assets $ — $ 2.5 $ — $ 2.5 Liabilities: Natural gas contracts (6) $ — $ 0.6 $ — $ 0.6 Net investment hedge (7) — 1.0 — 1.0 Interest rate swap contracts (7) — 4.0 — 4.0 Total liabilities $ — $ 5.6 $ — $ 5.6 __________ (1) Quoted prices in active markets for identical assets. (2) Quoted prices for similar assets and liabilities in active markets. (3) Significant unobservable inputs. (4) Included within "Other current assets" on the condensed consolidated balance sheet. (5) Included within "Other assets" on the condensed consolidated balance sheet. (6) Included within "Accrued expenses" on the condensed consolidated balance sheet. (7) Included within "Other liabilities" on the condensed consolidated balance sheet. 15 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Note 9: Debt, including Finance Lease Obligations Current and long-term debt including finance lease obligations consisted of the following: In millions, except percentages September 30, 2022 December 31, 2021 Revolving Credit Facility and other lines of credit (1) $ 509.0 $ — Term Loan — 328.1 3.88 % Senior Notes due 2028 550.0 550.0 4.50 % Senior Notes due 2026 — 300.0 Finance lease obligations 101.8 102.4 Total debt including finance lease obligations $ 1,160.8 $ 1,280.5 Less: debt issuance costs 6.7 10.9 Total debt, including finance lease obligations, net of debt issuance costs $ 1,154.1 $ 1,269.6 Less: debt maturing within one year (2) 0.9 19.6 Long-term debt including finance lease obligations $ 1,153.2 $ 1,250.0 ______________ (1) Letters of credit outstanding under the revolving credit facility were $ 2.3 million and $ 2.5 million and available funds under the facility were $ 488.7 million and $ 497.5 million at September 30, 2022 and December 31, 2021, 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. Senior Notes due 2026 On April 27, 2022, we redeemed the $ 300.0 million outstanding aggregate principal balance of our 4.50 % Senior Notes due in 2026 prior to maturity. The redemption was primarily funded utilizing the outstanding capacity under our revolving credit facility. At redemption, we recognized a $ 3.4 million redemption premium and accelerated the remaining deferred finance fees of $ 2.7 million, both the redemption premium and accelerated deferred finance fees were recorded to Interest Expense, net on the condensed consolidated statements of operations. Legal expenses associated with this redemption have been recorded as incurred. Revolving Credit Facility Amendment On June 23, 2022, we entered into an Amendment and Restatement Agreement (the “Amendment”) together with the other parties named therein, which amends and restates our existing credit agreement, dated as of March 7, 2016, as amended, supplemented or otherwise modified. Among other things, the Amendment (a) extends the maturity date from October 28, 2025 to June 23, 2027 and increases the aggregate principal amount of revolving commitments thereunder from $ 500 million to $ 1 billion, (b) adds Ingevity UK as a borrower under the revolving credit facility, and (c) modifies certain leverage ratio tests and thresholds. Borrowings under the revolving credit facility bear interest at a rate per annum equal to either (a) the applicable term benchmark rate, subject to a zero floor, or (b) a base rate, in each case, plus an applicable margin of 1.00 percent to 1.75 percent for term benchmark loans and 0.00 percent to 0.75 percent for base rate loans. Fees of $ 3.0 million were incurred to secure the Amendment. These fees have been deferred and will be amortized over the term of the facility and recorded to Interest Expense, net on the condensed consolidated statement of operations. Term Loan Repayment On the closing date of the Amendment, we repaid our outstanding term loan in an aggregate principal amount of $ 323.0 million. Upon repayment, we recognized $ 1.3 million in outstanding interest, $ 0.4 million in repayment fees and accelerated the remaining deferred finance fees of $ 0.4 million. The interest, fees, and accelerated deferred finance fees were recorded to Interest Expense, net on the condensed consolidated statements of operations . Legal expenses associated with this repayment have been recorded as incurred. 16 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 Ingevity 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 2028 Senior Notes could result in the acceleration of the note of such series and could cause a cross-default resulting in the acceleration of other indebtedness of Ingevity and its subsidiaries. We were in compliance with all covenants under the indenture as of September 30, 2022. The credit agreements governing our revolving credit facility 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 being terminated. The credit agreement also contains certain customary 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. As calculated per the credit agreement, our net leverage for the four consecutive quarters ended September 30, 2022 was 2.0 , and our interest coverage for the four consecutive quarters ended September 30, 2022 was 10.7 . We were in compliance with all covenants at September 30, 2022. 17 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (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, 2021 43,102 $ 0.4 $ 136.3 $ 796.1 $ 13.1 $ ( 272.1 ) $ 673.8 Net income (loss) — — — 60.8 — — 60.8 Other comprehensive income (loss) — — — — ( 10.1 ) — ( 10.1 ) Common stock issued 42 — — — — — — Exercise of stock options, net 36 — 0.4 — — — 0.4 Tax payments related to vested restricted stock units — — — — — ( 1.8 ) ( 1.8 ) Share repurchase program — — — — — ( 40.4 ) ( 40.4 ) Share-based compensation plans — — 2.9 — — 0.5 3.4 Balance at March 31, 2022 43,180 $ 0.4 $ 139.6 $ 856.9 $ 3.0 $ ( 313.8 ) $ 686.1 Net income (loss) — — — 59.8 — — 59.8 Other comprehensive income (loss) — — — — ( 46.7 ) — ( 46.7 ) Common stock issued 18 — — — — — — Exercise of stock options, net 2 — 0.1 — — — 0.1 Tax payments related to vested restricted stock units — — — — — ( 0.2 ) ( 0.2 ) Share repurchase program — — — — — ( 49.5 ) ( 49.5 ) Noncontrolling interest distributions — — — — — — — Share-based compensation plans — — 3.3 — — 1.4 4.7 Balance at June 30, 2022 43,200 $ 0.4 $ 143.0 $ 916.7 $ ( 43.7 ) $ ( 362.1 ) $ 654.3 Net income (loss) — — — 75.4 — — 75.4 Other comprehensive income (loss) — — — — ( 51.6 ) — ( 51.6 ) Common stock issued 8 — — — — ( 0.2 ) ( 0.2 ) Exercise of stock options, net 5 — 0.3 — — — 0.3 Tax payments related to vested restricted stock units — — — — — — — Share repurchase program — — — — — ( 49.3 ) ( 49.3 ) Share-based compensation plans — — 4.2 — — 0.8 5.0 Balance at September 30, 2022 43,213 $ 0.4 $ 147.5 $ 992.1 $ ( 95.3 ) $ ( 410.8 ) $ 633.9 18 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 Net income (loss) — — — 44.3 — — 44.3 Other comprehensive income (loss) — — — — 5.4 — 5.4 Common stock issued 19 — — — — — — Exercise of stock options, net 32 — 1.5 — — — 1.5 Tax payments related to vested restricted stock units — — — — — — — Share repurchase program — — — — — ( 28.7 ) ( 28.7 ) Share-based compensation plans — — 4.0 — — 0.9 4.9 Balance at June 30, 2021 43,085 $ 0.4 $ 130.3 $ 771.0 $ 18.6 $ ( 231.8 ) $ 688.5 Net income (loss) — — — ( 4.2 ) — — ( 4.2 ) Other comprehensive income (loss) — — — — ( 11.1 ) — ( 11.1 ) Common stock issued 5 — — — — — — Exercise of stock options, net 2 — 0.1 — — — 0.1 Tax payments related to vested restricted stock units — — — — — ( 0.1 ) ( 0.1 ) Share repurchase program — — — — — ( 32.2 ) ( 32.2 ) Share-based compensation plans — — 3.0 — — 0.5 3.5 Balance at September 30, 2021 43,092 $ 0.4 $ 133.4 $ 766.8 $ 7.5 $ ( 263.6 ) $ 644.5 19 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Accumulated other comprehensive income (loss) Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Foreign currency translation Beginning balance $ ( 43.9 ) $ 27.8 $ 18.4 $ 16.4 Net gains (losses) on foreign currency translation ( 55.3 ) ( 16.7 ) ( 124.9 ) ( 8.5 ) Gains (losses) on net investment hedges 4.4 3.8 13.9 8.0 Less: tax provision (benefit) 1.0 0.9 3.2 1.9 Net gains (losses) on net investment hedges 3.4 2.9 10.7 6.1 Other comprehensive income (loss), net of tax ( 51.9 ) ( 13.8 ) ( 114.2 ) ( 2.4 ) Ending balance $ ( 95.8 ) $ 14.0 $ ( 95.8 ) $ 14.0 Derivative instruments Beginning balance $ 3.3 $ ( 4.5 ) $ ( 2.1 ) $ ( 6.9 ) Gains (losses) on derivative instruments 3.5 3.6 14.9 6.9 Less: tax provision (benefit) 0.8 0.8 3.5 1.6 Net gains (losses) on derivative instruments 2.7 2.8 11.4 5.3 (Gains) losses reclassified to net income ( 3.1 ) ( 0.2 ) ( 7.4 ) ( 0.3 ) Less: tax (provision) benefit ( 0.7 ) ( 0.1 ) ( 1.7 ) ( 0.1 ) Net (gains) losses reclassified to net income ( 2.4 ) ( 0.1 ) ( 5.7 ) ( 0.2 ) Other comprehensive income (loss), net of tax 0.3 2.7 5.7 5.1 Ending balance $ 3.6 $ ( 1.8 ) $ 3.6 $ ( 1.8 ) Pension and other postretirement benefits Beginning balance $ ( 3.1 ) $ ( 4.7 ) $ ( 3.2 ) $ ( 4.8 ) Unrealized actuarial gains (losses) and prior service (costs) credits — — — — Less: tax provision (benefit) — — — — Net actuarial gains (losses) and prior service (costs) credits — — — — Amortization of actuarial and other (gains) losses, prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income — — 0.1 0.1 Less: tax (provision) benefit — — — — Net actuarial and other (gains) losses, amortization of prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income — — 0.1 0.1 Other comprehensive income (loss), net of tax — — 0.1 0.1 Ending balance $ ( 3.1 ) $ ( 4.7 ) $ ( 3.1 ) $ ( 4.7 ) Total AOCI ending balance at September 30 $ ( 95.3 ) $ 7.5 $ ( 95.3 ) $ 7.5 20 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Reclassifications of accumulated other comprehensive income (loss) Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Derivative instruments Currency exchange contracts (1) $ 0.8 $ 0.2 $ 1.6 $ 0.2 Natural gas contracts (2) 2.3 — 4.1 0.1 Interest rate swap contracts (3) — — 1.7 — Total before tax 3.1 0.2 7.4 0.3 (Provision) benefit for income taxes ( 0.7 ) ( 0.1 ) ( 1.7 ) ( 0.1 ) Amount included in net income (loss) $ 2.4 $ 0.1 $ 5.7 $ 0.2 Pension and other post retirement benefits Amortization of prior service costs (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. (3) Included within "Interest expense, net" on the condensed consolidated statement of operations. Share Repurchases On July 25, 2022, our Board of Directors authorized the repurchase of up to $ 500.0 million of our common stock (the "2022 Authorization"), and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior authorization. Shares under the 2022 Authorization 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 and nine months ended September 30, 2022, we repurchased $ 49.3 million and $ 139.2 million in common stock, representing 697,523 and 2,027,206 shares of our common stock at a weighted average cost per share of $ 70.75 and $ 68.68 , respectively. At September 30, 2022, $ 450.7 million remained unused under our 2022 Authorization. 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. 21 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 September 30, Pensions Other Benefits In millions 2022 2021 2022 2021 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) ( 0.4 ) ( 0.3 ) — — Amortization of prior service cost (credit) (1) — — — — Amortization of net actuarial and other (gain) loss (2) — — — — Net periodic benefit cost (income) $ 0.3 $ 0.4 $ — $ — Nine Months Ended September 30, Pensions Other Benefits In millions 2022 2021 2022 2021 Components of net periodic benefit cost (income): Service cost (1) $ 1.2 $ 1.3 $ — $ — Interest cost (2) 0.9 0.8 — — Expected return on plan assets (2) ( 1.3 ) ( 1.0 ) — — Amortization of prior service cost (credit) (1) 0.1 0.1 — — Amortization of net actuarial and other (gain) loss (2) — — — — Net periodic benefit cost (income) $ 0.9 $ 1.2 $ — $ — _______________ (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 nine months ended September 30, 2022. There are no required cash contributions to our Union Hourly defined benefit pension plan in 2022, and we currently have no plans to make any voluntary cash contributions in 2022. 22 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Note 12: Restructuring and Other (Income) Charges, net Other (income) charges, net Business transformation costs In 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. The implementation of our new ERP is expected to occur in multiple phases over two years beginning with our pilot deployment which occurred during the first quarter of 2022. This business transformation 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 requires substantial time and attention of management and key employees. Costs incurred, during the three and nine months ended September 30, 2022, of $ 3.3 million and $ 10.6 million, respectively, and during the three and nine months ended September 30, 2021, of $ 4.1 million and $ 12.2 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 $ 90 - 95 million of total costs, which includes $ 45 - 50 million of non-capitalizable costs, $ 12 - 14 million of which we expect to be incurred in 2022. 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 12/31/2021 (1) Reserve Payments Other (2) 9/30/2022 (1) Restructuring Reserves $ 0.5 — — — $ 0.5 _______________ (1) Included in "Accrued Expenses" on the condensed consolidated balance sheets. (2) Primarily foreign currency translation adjustments. Note 13: Income Taxes The effective tax rates, including discrete items, were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Effective tax rate (1) 21.3 % 53.3 % 21.6 % 29.8 % _______________ (1) The decrease in the effective tax rate in the three and nine months ended September 30, 2022 was driven by a one-time legislative tax rate change in 2021. 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. 23 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) The below table provides a reconciliation between our reported effective tax rates and the EAETR. Three Months Ended September 30, 2022 2021 In millions, except percentages Before tax Tax Effective tax rate % impact Before tax Tax Effective tax rate % impact Consolidated operations $ 95.8 $ 20.4 21.3 % $ ( 9.0 ) $ ( 4.8 ) 53.3 % Discrete items: Legislative tax rate changes (1) — — — 0.1 Litigation verdict charge (2) — — 85.0 19.7 Other tax only discrete items — ( 0.3 ) — 0.5 Total discrete items — ( 0.3 ) 85.0 20.3 Consolidated operations, before discrete items $ 95.8 $ 20.1 $ 76.0 $ 15.5 EAETR (3) 21.0 % 20.4 % Nine Months Ended September 30, 2022 2021 In millions, except percentages Before tax Tax Effective tax rate % impact Before tax Tax Effective tax rate % impact Consolidated operations $ 249.9 $ 53.9 21.6 % $ 126.5 $ 37.7 29.8 % Discrete items: Restructuring and other (income) charges, net — — 0.1 — Legislative tax rate changes (1) — — — ( 14.6 ) Litigation verdict charge (2) — — 85.0 19.7 Other tax only discrete items — ( 1.1 ) — 0.7 Total discrete items — ( 1.1 ) 85.1 5.8 Consolidated operations, before discrete items $ 249.9 $ 52.8 $ 211.6 $ 43.5 EAETR (3) 21.1 % 20.6 % _______________ (1) Legislative tax rate changes in 2021, enacted in the United Kingdom ("UK"), resulted in discrete tax expense of $ 14.6 million related to the revaluation of our net deferred tax liability associated with our UK operations. The corporate tax rate in the UK will increase from 19.0% to 25.0% on April 1, 2023. (2) Refer to Note 14 for additional information. (3) Increase in EAETR for the three and nine months ended September 30, 2022, as compared to September 30, 2021, is due to an overall change in the mix of forecasted earnings in various tax jurisdictions with varying rates, as well as an increase in foreign earnings deemed taxable in the U.S. At September 30, 2022 and December 31, 2021, we had deferred tax assets of $ 9.2 million and $ 8.8 million, respectively, resulting from certain historical net operating losses from our Brazilian and Chinese 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 September 30, 2022, 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 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 24 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 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 On July 19, 2018, we 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. Patent No. RE38,844) (the “844 Patent”). On February 14, 2019, BASF asserted counterclaims against us 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 our enforcement of the 844 Patent and our entry into several supply agreements with customers of its fuel vapor canister honeycombs. The U.S. District Court dismissed our patent infringement claims on November 18, 2020, and the case proceeded to trial on the BASF Counterclaims in September 2021. On September 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 $ 85.0 million when the court enters judgment. 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 verdict, 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 up to eighteen months . As of September 30, 2022, there has been no progress in the post-trial proceedings to warrant any change to our conclusions as disclosed within our 2021 Annual Report. As such, no changes to our reserve were made during this quarter. The full amount of the jury's verdict, $ 85.0 million, is accrued in Other liabilities on the C ondensed Consolidated Balance Sheet as of September 30, 2022. The amount of any liability we may ultimately incur related to the Delaware Proceeding could be more or less than the amount accrued. 25 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Note 15: Segment Information Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Net sales Performance Materials $ 144.9 $ 118.1 $ 415.7 $ 384.8 Performance Chemicals 337.1 258.7 869.0 670.7 Total net sales (1) $ 482.0 $ 376.8 $ 1,284.7 $ 1,055.5 Segment EBITDA (2) Performance Materials $ 61.2 $ 56.4 $ 194.7 $ 191.4 Performance Chemicals 77.0 63.1 183.6 151.2 Total Segment EBITDA (2) $ 138.2 $ 119.5 $ 378.3 $ 342.6 Interest expense, net ( 11.5 ) ( 11.6 ) ( 37.3 ) ( 36.2 ) (Provision) benefit for income taxes ( 20.4 ) 4.8 ( 53.9 ) ( 37.7 ) Depreciation and amortization - Performance Materials ( 8.9 ) ( 8.9 ) ( 26.7 ) ( 26.9 ) Depreciation and amortization - Performance Chemicals ( 16.8 ) ( 18.7 ) ( 51.9 ) ( 54.8 ) Restructuring and other income (charges), net (3) ( 3.3 ) ( 4.1 ) ( 10.6 ) ( 12.3 ) Acquisition and other-related costs (4) ( 1.9 ) ( 0.2 ) ( 1.9 ) ( 0.9 ) Litigation verdict charge (5) — ( 85.0 ) — ( 85.0 ) Net income (loss) $ 75.4 $ ( 4.2 ) $ 196.0 $ 88.8 _______________ (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, research and technical 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, litigation verdict charges, 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 and nine months ended September 30, 2022, charges of $ 1.1 million and $ 3.7 million relate to the Performance Materials segment and charges of $ 2.2 million and $ 6.9 million relate to the Performance Chemicals segment, respectively. For the three and nine months ended September 30, 2021, charges of $ 1.1 million and $ 4.5 million relate to the Performance Materials segment and charges of $ 3.0 million and $ 7.8 million relate to the Performance Chemicals segment, respectively. For more detail on the charges incurred see Note 12. (4) For the three and nine months ended September 30, 2022, all acquisition costs relate to the integration of the Ozark Materials business into our Performance Chemicals segment. 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 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. (5) For the three and nine months ended September 30, 2021, litigation verdict charge relates to the Performance Materials segment. Refer to Note 14 for additional information. 26 INGEVITY CORPORATION Notes to the Condensed Consolidated Financial Statements September 30, 2022 (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 September 30, Nine Months Ended September 30, In millions, except share and per share data 2022 2021 2022 2021 Net income (loss) $ 75.4 $ ( 4.2 ) $ 196.0 $ 88.8 Basic and Diluted earnings (loss) per share Basic earnings (loss) per share $ 1.99 $ ( 0.11 ) $ 5.10 $ 2.22 Diluted earnings (loss) per share 1.98 ( 0.11 ) 5.06 2.21 Shares (in thousands) Weighted average number of common shares outstanding - Basic 37,839 39,537 38,451 39,993 Weighted average additional shares assuming conversion of potential common shares (1) 295 — 269 245 Shares - diluted basis (1) 38,134 39,537 38,720 40,238 _______________ (1) For the three months ended September 30, 2021, all potentially dilutive common shares were excluded from the calculation of diluted earnings (loss) per share as we had a net loss for the period. 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 September 30, Nine Months Ended September 30, In thousands 2022 2021 2022 2021 Average number of potential common shares - antidilutive 209 375 204 200 Note 17: Subsequent Events Ozark Materials Acquisition On October 3, 2022, we completed our previously announced acquisition of Ozark Materials, LLC (“OM”), and Ozark Logistics, LLC (“OL” and, together with OM, “Ozark Materials”), pursuant to that certain Equity Purchase Agreement (the “Purchase Agreement”), by and among Ingevity, Ozark Materials and Ozark Holdings, Inc. (“Seller”). In accordance with the Purchase Agreement, we acquired from Seller, all of the issued and outstanding limited liability company membership interests of Ozark Materials for a purchase price of $ 325 million, subject to customary adjustments for working capital, indebtedness and transaction expenses (the "Acquisition"). We funded the Acquisition through a combination of borrowings under our existing credit facilities and cash on hand. Ozark Materials is considered a business under business combinations accounting guidance, and therefore we will apply acquisition accounting to the Acquisition. Acquisition accounting requires, among other things, that acquired assets and assumed liabilities be recognized at their fair values as of the acquisition date. The net assets of the Acquisition will be recorded at the estimated fair values, primarily using Level 2 and Level 3 inputs. Our preliminary purchase price valuation is still in process and we will include the required details in our future filings once complete. 27