Ingevity Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction 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 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. Many of these statements are macroeconomic in nature and are, therefore, beyond the control of management. See "Cautionary Statements About Forward-Looking Statements" below and at the beginning of our 2021 Annual Report. Cautionary Statements About Forward-Looking Statements This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995 that reflect our current expectations, beliefs, plans or forecasts with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by words or phrases such as “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “outlook,” “project,” “intend,” “plan,” “believe,” “target,” “prospects,” “potential” and “forecast,” and other words, terms and phrases of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. 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 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. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. In addition to any such risks, uncertainties and other factors discussed elsewhere herein, risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed or implied by the forward-looking statements include, but are not limited to the following: • adverse effects from the novel coronavirus ("COVID-19") pandemic; • 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; • 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 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; 28 • 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 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; • 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; • information technology security breaches and other disruptions; • complications with the design or implementation of our new enterprise resource planning system; • government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs and the chemicals industry; and • losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes. Overview 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. We report in two business segments, Performance Materials and Performance Chemicals . Recent Developments 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. We have not seen and do not foresee any direct material adverse effects on our business. However, as a result of the geopolitical disruption, we have experienced volatility in energy prices, specifically natural gas, but the impact has not been and is not expected to be material to our results. Ozark Materials 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”). Refer to Note 17 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information. Strategic Investment During the third quarter of 2022, we acquired a strategic investment in a privately-held company for $60.0 million, which is accounted for under the measurement alternative method. There were no adjustments to the carrying value of the measurement alternative method investment for impairment or observable price changes for the period ended September 30, 2022. Refer to Note 4 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information. Net Investment Hedge 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 proceeds of $14.7 million. Refer to Note 8 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information. 29 Results of Operations Three Months Ended September 30, Nine Months Ended September 30, In millions 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 Net sales and Gross profit The table below shows the 2022 Net sales and variances from 2021: Change vs. prior year In millions Prior year Net sales Volume Price/Mix Currency effect Current year Net sales Three months ended September 30, 2022 vs. 2021 $ 376.8 26.9 87.6 (9.3) $ 482.0 Nine months ended September 30, 2022 vs. 2021 $ 1,055.5 20.9 227.9 (19.6) $ 1,284.7 Three Months Ended September 30, 2022 vs. 2021 The sales increase of $105.2 million in 2022 was driven by favorable pricing and sales composition (mix) of $87.6 million (23 percent) and favorable volume of $26.9 million (seven percent), partially offset by unfavorable foreign currency exchange of $9.3 million (two percent), driven by the strengthening of the U.S. dollar against the euro, Chinese renminbi and GBP. Gross profit increase of $34.5 million was driven by favorable price/mix of $87.2 million, favorable sales volume of $16.2 million and favorable foreign currency exchange of $0.8 million, partially offset by increased manufacturing costs of $69.7 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. Nine Months Ended September 30, 2022 vs. 2021 The sales increase of $229.2 million in 2022 was driven by favorable price/mix of $227.9 million (22 percent) and higher sales volumes of $20.9 million (two percent), partially offset by unfavorable foreign currency exchange of $19.6 million (two percent), driven by the strengthening of the U.S. dollar against the euro, Chinese renminbi and GBP. Gross profit increase of $56.9 million was driven by favorable price/mix improvement of $225.6 million and favorable sales volume of $13.2 million, partially offset by increased manufacturing costs of $179.3 million due to raw material and energy cost inflationary pressures and unfavorable foreign currency exchange of $2.6 million. 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. 30 Selling, general and administrative expenses Three Months Ended September 30, 2022 vs. 2021 Selling, general and administrative expenses ("SG&A") were $54.2 million (11.2 percent of Net sales) and $43.5 million (11.5 percent of Net sales) for the three months ended September 30, 2022 and 2021, respectively. The year over year increase of $10.7 million was primarily driven by increased travel and other miscellaneous costs of $5.8 million and increased employee-related costs of $8.8 million, slightly reduced by lower legal spending of $3.9 million. The decrease in SG&A as a percentage of Net sales was driven by higher sales. Nine Months Ended September 30, 2022 vs. 2021 SG&A was $142.9 million (11.1 percent of Net sales) and $131.0 million (12.4 percent of Net sales) for the nine months ended September 30, 2022 and 2021, respectively. The year over year increase of $11.9 million was driven by increased employee-related costs of $7.6 million and increased travel and other miscellaneous costs of $11.7 million, slightly offset by reduced legal costs of $7.4 million. The decrease in SG&A as a percentage of Net sales was driven by higher sales. Research and technical expenses Three Months Ended September 30, 2022 vs. 2021 Research and technical expenses as a percentage of Net sales decreased to 1.6 percent from 1.8 percent for the three months ended September 30, 2022 and 2021, respectively. Nine Months Ended September 30, 2022 vs. 2021 Research and technical expenses as a percentage of Net sales remained consistent period over period, at 1.8 percent and 1.8 percent for the nine months ended September 30, 2022 and 2021, respectively. Restructuring and other (income) charges, net Three and Nine Months Ended September 30, 2022 vs. 2021 Restructuring and other (income) charges, net were $3.3 million and $10.6 million for the three and nine months ended September 30, 2022, respectively, and $4.1 million and $12.3 million for the three and nine months ended September 30, 2021, respectively. See Note 12 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q for more information. Acquisition-related costs Three and Nine Months Ended September 30, 2022 vs. 2021 Acquisition-related costs were $1.9 million for the three and nine months ended September 30, 2022, respectively, and $0.2 million and $0.9 million for the three and nine months ended September 30, 2021, respectively. For the three and nine months ended September 30, 2022, all charges 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, respectively, and charges of $0.2 million and $0.7 million relate to the integration of Perstorp Holding AB's caprolactone business into our Performance Chemicals segment, respectively. 31 Other (income) expense, net Three and Nine Months Ended September 30, 2022 vs. 2021 Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Foreign currency exchange (income) loss $ 1.2 $ 0.2 $ 1.6 $ 2.1 Litigation verdict charge (1) — 85.0 — 85.0 Other (income) expense, net 0.8 (0.6) (2.6) (5.5) Total Other (income) expense, net $ 2.0 $ 84.6 $ (1.0) $ 81.6 _______________ (1) Refer to Note 14 within the Condensed Consolidated Financial Statements for more information. Interest expense, net Three and Nine Months Ended September 30, 2022 vs. 2021 Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Finance lease obligations $ 1.8 $ 1.8 $ 5.5 $ 5.5 Revolving credit and term loan facilities (1) 5.4 2.0 11.5 6.2 Senior note (1) 5.6 9.1 27.5 27.5 Other interest (income) expense, net (1.3) (1.3) (7.2) (3.0) Total Interest expense, net $ 11.5 $ 11.6 $ 37.3 $ 36.2 _______________ (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, 2022 vs. 2021 For the three months ended September 30, 2022 and 2021, our effective tax rate was 21.3 percent and 53.3 percent, respectively. Excluding discrete items, the effective tax rate was 21.0 percent and 20.4 percent, respectively. An explanation of the change in the effective tax rate is presented in Note 13 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q. For the nine months ended September 30, 2022 and 2021, our effective tax rate was 21.6 percent and 29.8 percent, respectively. Excluding discrete items, the effective rate was 21.1 percent and 20.6 percent, respectively. An explanation of the change in the effective tax rate is presented in Note 13 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q. 32 Segment Operating Results In addition to the information discussed above, the following sections discuss the results of operations for both of Ingevity's segments. 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 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, 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, 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, 2022 2021 2022 2021 Total Performance Materials - Net sales $ 144.9 $ 118.1 $ 415.7 $ 384.8 Segment EBITDA $ 61.2 $ 56.4 $ 194.7 $ 191.4 Quarterly Performance Summary Our Performance Materials segment experienced robust automotive volume growth from improved semiconductor chip availability across all regions and China automobile production stimulus. Additionally, the segment also recognized volume improvement in process purification products and we were able to increase prices to capture more of the value of our highly differentiated carbon. Slightly offsetting these top line improvements was continued pressure on manufacturing costs from higher raw material input costs and higher logistic costs driven by inflation. The strengthening of the U.S. dollar against the Chinese renminbi and the euro created some headwinds when compared to the prior year quarter. Net Sales Comparison of Three and Nine Months Ended September 30, 2022 and September 30, 2021: Change vs. prior year Performance Materials (In millions) Prior year Net sales Volume Price/Mix Currency effect Current year Net sales Three months ended September 30, 2022 vs. 2021 $ 118.1 27.6 3.6 (4.4) $ 144.9 Nine months ended September 30, 2022 vs. 2021 $ 384.8 26.6 10.8 (6.5) $ 415.7 Three Months Ended September 30, 2022 vs. 2021 Segment net sales increase of $26.8 million in 2022 was driven by higher sales volumes of $27.6 million (23 percent) and favorable price/mix of $3.6 million (three percent), partially offset by unfavorable foreign currency exchange of $4.4 million (four percent). Segment EBITDA increased $4.8 million due to higher sales volume of $16.6 million and favorable price/mix of $4.4 million, partially offset by higher manufacturing costs of $11.1 million, unfavorable foreign currency impacts of $2.7 million, and higher spending on SG&A and research and technical expenses of $2.4 million. Nine Months Ended September 30, 2022 vs. 2021 Segment net sales increase of $30.9 million in 2022 was driven by higher sales volumes of $26.6 million (seven percent) and favorable price/mix of $10.8 million (three percent), partially offset by unfavorable foreign currency exchange of $6.5 million (two percent). Segment EBITDA increased $3.3 million due to higher sales volumes of $14.4 million, favorable price/mix of $10.3 million, and lowering SG&A and research and technical expenses of $1.2 million, partially offset by higher manufacturing costs of $18.4 million and unfavorable foreign currency impacts of $4.2 million. 33 Performance Chemicals Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Net Sales 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 Performance Chemicals - Net sales $ 337.1 $ 258.7 $ 869.0 $ 670.7 Segment EBITDA $ 77.0 $ 63.1 $ 183.6 $ 151.2 Quarterly Performance Summary Our Performance Chemicals segment saw strong revenue growth versus the prior year’s quarter on continued price improvement and favorable mix upgrade to higher margin products. These price increases were necessary to keep pace with the increases related to energy, raw material, and logistic costs. The strengthening of the U.S. dollar against the euro and GBP created some headwinds on top line growth when compared to the prior year quarter. Our Engineered Polymers business grew 31.4 percent as the business increased pricing to offset inflationary costs for raw materials, logistics, and particularly energy which has continued to rise throughout 2022. Volume improvement was driven by stronger sales in automotive applications and footwear and apparel, mainly in Asia and Europe. These positive volume improvements were slightly offset by a decline in the Americas where some polyurethane customers experienced availability issues with key raw materials. Industrial Specialties sales increased 35.2 percent driven by price improvements with strong performance across all markets, particularly in oilfield and adhesives primary end-use markets. Price improvements were supplemented by a favorable mix shift to higher-value derivative products as volumes were negatively impacted by raw material availability. Pavement Technologies sales increased 20.6 percent due primarily to improved volumes and price increases. Volume growth was driven by technology adoption and highway funding in the United States. Net Sales Comparison of Three and Nine Months Ended September 30, 2022 and September 30, 2021: Change vs. prior year Performance Chemicals (In millions) Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales Three months ended September 30, 2022 vs. 2021 $ 258.7 (0.7) 84.0 (4.9) $ 337.1 Nine months ended September 30, 2022 vs. 2021 $ 670.7 (5.7) 217.1 (13.1) $ 869.0 Three Months Ended September 30, 2022 vs. 2021 Segment net sales increase of $78.4 million reflects favorable pricing and product mix of $84.0 million (32 percent), driven by increases in Industrial Specialties ($62.9 million), Engineered Polymers ($16.3 million), and Pavement Technologies ($4.8 million). Unfavorable volume impacted Net sales by $0.7 million (zero percent), reflecting volume decreases in Industrial Specialties ($15.3 million), partially offset by increases in Pavement Technologies ($10.9 million) and Engineered Polymers ($3.7 million). Unfavorable foreign currency exchange impacted Net sales by $4.9 million (two percent). Segment EBITDA increased by $13.9 million due to favorable pricing and product mix of $82.8 million and favorable foreign currency exchange of $2.9 million due to foreign currency denominated manufacturing costs, partially offset by higher manufacturing costs of $59.7 million, higher SG&A expenses of $11.7 million and a decrease in volume of $0.4 million. Nine Months Ended September 30, 2022 vs. 2021 Segment net sales increase of $198.3 million was driven by favorable pricing and product mix of $217.1 million (32 percent), driven by increases in Industrial Specialties ($157.7 million), Engineered Polymers ($46.5 million), and Pavement Technologies ($12.9 million). Unfavorable volume impacted Net sales by $5.7 million (one percent), reflecting decreases in 34 Industrial Specialties ($30.2 million), offset partially by increases in Pavement Technologies ($20.2 million) and Engineered Polymers ($4.3 million). Unfavorable foreign currency exchange impacted Net sales by $13.1 million (two percent). Segment EBITDA increased by $32.4 million due to favorable pricing and product mix of $215.3 million and favorable foreign currency exchange of $2.6 million, partially offset by higher manufacturing costs of $162.2 million, higher SG&A of $22.1 million and a decrease in volume of $1.2 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, 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 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 is set forth within this section. Reconciliation of Net Income (Loss) to Adjusted EBITDA Three Months Ended September 30, Nine Months Ended September 30, In millions 2022 2021 2022 2021 Net income (loss) (GAAP) $ 75.4 $ (4.2) $ 196.0 $ 88.8 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 4.1 10.6 12.3 Acquisition and other-related costs 1.9 0.2 1.9 0.9 Litigation verdict charge — 85.0 — 85.0 Adjusted EBITDA (Non-GAAP) $ 138.2 $ 119.5 $ 378.3 $ 342.6 Adjusted EBITDA Three and Nine Months Ended September 30, 2022 vs. 2021 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. 35 Current Company Outlook For Performance Chemicals revenue, we expect to recognize favorable price improvements across the segment as we work to offset inflation in energy, raw material, and logistic costs. We expect continued volume growth in the Pavement Technologies and Engineered Polymers’ business. Performance Materials will see moderate growth as we expect to benefit from some recovery of auto production. 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. Additionally, we expect our Performance Materials segment results to be similar to 2021 as U.S., Chinese, Canadian, and European vehicle production continues to be negatively impacted by global supply chain disruption. These assumptions assume that 2022 will continue to be impacted by global logistical headwinds, geopolitical uncertainty, significant cost inflation, and supply chain disruptions. A reconciliation of net income to adjusted EBITDA as projected for 2022 is not provided. Ingevity does not forecast net income as it cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components, net of tax, include further restructuring and other income (charges), net; additional acquisition and other-related costs; litigation verdict charges; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to legislative tax rate changes. Additionally, discrete tax items could drive variability in our projected effective tax rate. All of these components could significantly impact such financial measures. Further, in the future, other items with similar characteristics to those currently included in adjusted EBITDA, that have a similar impact on comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA. 36 Liquidity and Capital Resources The primary source of liquidity for our business is the cash flow provided by operating activities. 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, 2022, our undrawn capacity under our revolving credit facility was $488.7 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. 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, redeem all or part of our outstanding senior note, seek additional debt financing, issue equity securities, or some combination thereof. Cash and cash equivalents totaled $72.3 million at September 30, 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, 2022, included $57.9 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. liquidity. If these earnings were distributed, such amounts would be subject to U.S. federal and state 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. Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S. operations. Other Potential Liquidity Needs 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. Capital Expenditures Projected 2022 capital expenditures are $130 - $150 million. We have no material commitments associated with these projected capital expenditures as of September 30, 2022 . 37 Cash flow comparison of the Nine Months Ended September 30, 2022 and 2021 Nine Months Ended September 30, In millions 2022 2021 Net cash provided by (used in) operating activities $ 214.9 $ 217.0 Net cash provided by (used in) investing activities (144.7) (83.4) Net cash provided by (used in) financing activities (264.9) (120.3) Cash flows provided by (used in) operating activities During the nine months ended September 30, 2022, cash flow provided by operations remained relatively consistent when compared to the prior year period. Although net income increased more than $107 million in 2022 when compared to the prior year period, this increase was offset by an increase in trade working capital, less cash and cash equivalent of almost $102 million. Below provides a description of the changes to trade working capital during the first nine months of 2022 (i.e. current assets and current liabilities). Current Assets and Liabilities In millions September 30, 2022 December 31, 2021 Cash and cash equivalents $ 72.3 $ 275.4 Accounts receivable, net 248.4 161.7 Inventories, net 281.8 241.2 Prepaid and other current assets 42.6 46.6 Total current assets $ 645.1 $ 724.9 Current assets, less cash and cash equivalents as of September 30, 2022, increased $123.3 million compared to December 31, 2021. Accounts receivable, net increased $86.7 million due to strong sales and higher selling prices and Inventories, net increased $40.6 million driven by inflationary cost pressures on both input logistic costs as well as higher pricing on raw materials purchases. In millions September 30, 2022 December 31, 2021 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 Total current liabilities $ 290.3 $ 268.9 Current liabilities as of September 30, 2022, increased by $21.4 million compared to December 31, 2021, due to higher Accounts payable of $38.8 million driven primarily from inflationary cost pressures which resulted in higher input costs and therefore large payable balances. The larger Accounts payable balance was partially offset by decreases in Notes payable and current maturities of long-term debt of $18.7 million and Accrued payroll and employee benefits of $3.5 million. Cash flows provided by (used in) investing activities Cash used by investing activities in the nine months ended September 30, 2022 and September 30, 2021 was $144.7 million and $83.4 million, primarily driven by capital expenditures. In the nine months ended September 30, 2022 and 2021, we acquired strategic investments in privately-held companies for $62.8 million and $16.5 million, respectively. 38 Capital expenditure categories Nine Months Ended September 30, In millions 2022 2021 Maintenance $ 45.9 $ 29.9 Safety, health and environment 10.7 8.7 Growth and cost improvement 36.7 27.8 Total capital expenditures $ 93.3 $ 66.4 Cash flows provided by (used in) financing activities Cash used in financing activities in the nine months ended September 30, 2022, was $264.9 million. Utilizing excess cash provided by operations we paid down outstanding debt in the amount of $119.1 million and were opportunistic with our share repurchases during the year repurchasing over 2 million shares for a total of $139.2 million. Cash used in financing activities in the nine months ended September 30, 2021 was $120.3 million and was primarily driven by the repurchase of common stock of $100.3 million, and payments on long-term borrowings of $18.8 million. New Accounting Guidance Refer to Note 2 to the Condensed Consolidated Financial Statements included within Part I. Item 1 of this Form 10-Q 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 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. Critical accounting policies are central to our presentation of results of operations and financial condition and require management to make estimates and judgments on certain matters. 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.