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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-24 · 128 added, 134 removed, 304 unchanged (46% of the section changed)

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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), coatings, resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line).

Performance Chemicals products serve as critical inputs used in a variety of high-performance applications, including warm mix paving, pavement preservation, pavement reconstruction and recycling, and road striping thermoplastics and paint (pavement technologies product line), adhesives, agrochemicals, lubricants, printing inks, industrial intermediates and oilfield (industrial specialties product line), coatings, resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line).

Recent Developments

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

RE38,844) (the “844 Patent”).

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

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

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

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

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 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 a result of the jury's $85.0 million verdict, we have accrued the full amount as of December 31, 2021.

The amount accrued for this matter is included in Other liabilities on the consolidated balance sheet as of December 31, 2021, and the charge is included in Other (income) expense, net on the consolidated statement of operations for the year ended December 31, 2021.

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

Ozark Materials

On October 3, 2022, we completed our acquisition of Ozark Materials, LLC and Ozark Logistics, LLC (collectively, “Ozark Materials”).

Refer to Note 16 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information.

Strategic Investments

During 2022, we continued to invest in inorganic strategic investments by obtaining equity positions in four separate privately-held companies for a total of $77.4 million.

Refer to Note 5 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information.

Net Investment Hedge

In 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 9 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information.

Financing Activities

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.

On June 23, 2022, we repaid our outstanding Term Loan in an aggregate principal amount of $323.0 million and we amended and restated our revolving credit facility.

Refer to Note 10 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information.

Results of Operations

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Year Ended December 31, 2022 vs.

The sales increase in 2021 was driven by a volume increase of $97.0 million (eight percent), primarily related to a volume increase in Performance Chemicals of $110.0 million, favorable pricing of $74.7 million (six percent) and favorable foreign exchange impacts of $3.7 million (less than one percent), offset slightly by a volume decrease in Performance Materials of $13.0 million.

The sales increase in 2022 was driven by favorable pricing and sales composition (mix) of $294.2 million (21 percent), primarily driven by an increase in Performance Chemicals of $279.3 million, and a volume increase of $9.4 million (one percent), offset slightly by unfavorable foreign exchange impacts of $26.8 million (two percent).

Year Ended December 31, 2021 vs.

The sales decrease in 2020 was driven by a volume decline of $85.2 million (seven percent) primarily related to a volume decline in Performance Chemicals of $89.1 million, offset slightly by a volume increase in Performance Materials of $3.9 million, favorable pricing of $7.6 million (one percent) and favorable foreign exchange impacts of $0.8 million (less than one percent).

The sales increase in 2021 was driven by a volume increase of $97.0 million (eight percent) primarily related to a volume increase in Performance Chemicals of $110.0 million, favorable pricing of $74.7 million (six percent) and favorable foreign exchange impacts of $3.7 million (less than one percent), offset slightly by a volume decrease in Performance Materials of $13.0 million.

Year Ended December 31, 2022 vs.

Gross profit increase of $47.3 million was driven by favorable pricing improvement of $73.0 million, favorable sales volume of $30.6 million, and favorable foreign currency exchange of $1.3 million, partially offset by increased manufacturing costs of $57.6 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.

Gross profit increase of $57.3 million was driven by favorable pricing and sales composition (mix) of $291.5 million and favorable sales volume of $6.3 million, partially offset by increased manufacturing costs of $238.0 million primarily due to raw material and energy cost inflationary pressure, and unfavorable foreign exchange impacts of $2.5 million.

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

Year Ended December 31, 2021 vs.

Gross profit decline of $16.5 million was driven by unfavorable sales volume impacting gross profits by $35.8 million, increased manufacturing costs of $2.3 million due to reduced plant throughput, and unfavorable foreign currency exchange of $0.8 million, which were partially offset by favorable pricing improvement of $14.0 million.

Additionally, the prior year was negatively impacted by inventory step-up amortization of $8.4 million related to the Caprolactone Acquisition (see Note 16 within the Consolidated Financial Statements included within Part II.

Item 8 of the Form 10-K for more information).

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.

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SG&A expenses were $179.3 million (13 percent of Net sales) and $149.4 million (12 percent of Net sales) for the years ended December 31, 2021 and 2020, respectively.

The decrease in SG&A is primarily due to reduced travel and other miscellaneous costs of $12.8 million, due to the COVID-19 pandemic, decreased intellectual property litigation defense costs of $5.0 million, and lower employee-related incentive costs of $3.0 million.

The positive impact was partially offset by an increase in amortization costs associated with intangible assets acquired in the Caprolactone Business ("Caprolactone Acquisition") (see Note 16 within the Consolidated Financial Statements included within Part II.

Item 8 of the Form 10-K for more information) and an increase in our credit allowance reserve of a combined $7.1 million, which included impacts from the COVID-19 pandemic.

The increase in SG&A expenses is primarily due to higher employee-related costs of $27.7 million and increased travel and other miscellaneous costs of $3.2 million.

This was partially offset by a decrease in litigation defense costs of $1.0 million.

Research and technical expenses

Years Ended December 31, 2022, 2021, and 2020

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, totaling 1.9 percent of sales in the year ended December 31, 2021 compared to 1.9 percent and 1.5 percent in the years ended December 31, 2020 and 2019, respectively.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, totaling 1.8 percent of sales in the year ended December 31, 2022 compared to 1.9 percent in the years ended December 31, 2021 and 2020, respectively.

Restructuring and other (income) charges, net

Restructuring and other (income) charges, net, were $16.2 million, $18.5 million, and $1.8 million for the years ended December 31, 2021, 2020, and 2019, respectively, with the decrease in 2021 primarily attributable to certain cost reduction initiatives.

Years Ended December 31, 2022, 2021, and 2020

Restructuring and other (income) charges, net, were $13.8 million, $16.2 million, and $18.5 million for the years ended December 31, 2022, 2021, and 2020, respectively.

For all years presented the majority of the charges were related to our digital transformation initiative.

See Note 15 to the Consolidated Financial Statements included within Part II.

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Years Ended December 31, 2022, 2021, and 2020

Acquisition costs of $0.6 million, $1.8 million, and $26.9 million for the years ended December 31, 2021, 2020, and 2019, respectively, were comprised of charges incurred in connection with the Caprolactone Acquisition.

Acquisition costs were $5.0 million, $0.6 million, and $1.8 million for the years ended December 31, 2022, 2021, and 2020, respectively.

For the twelve months ended December 31, 2022, all charges related to the integration of Ozark Materials into our Performance Chemicals segment.

For the twelve months ended December 31 2021 and 2020, all charges incurred were in connection with the Caprolactone Acquisition.

See Note 16 to the Consolidated Financial Statements included within Part II.

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(1) See Note 18 within the Consolidated Financial Statements for more information.

(1) See Note 18 t o the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information.

Interest expense

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Senior Notes 33.1 36.7 18.1

Other (0.4) (0.2) (1.2)

Total interest expense $ 61.8 $ 51.7 $ 47.1

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

Floating-to-fixed interest rate swaps (2)

Other 2.6 1.5 1.3

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_______________

(1) See Note 5 to the Consolidated Financial Statements included in Part II.

(1) See Note 5 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information.

(2) See Note 9 to the Consolidated Financial Statements included in Part II.

(2) See Note 9 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information.

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Performance Materials

Performance Summary

Our Performance Materials segment experienced solid automotive volume growth from improved semiconductor chip availability 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 from our highly differentiated carbon.

These top-line improvements were largely offset by continued pressure 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 also contributed to the pressure on EBITDA when compared to the prior year.

In millions Years Ended December 31,

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Total Performance Materials - Net sales $ 548.5 $ 516.8 $ 510.0

$ 516.8 $ 510.0 $ 490.6

Segment EBITDA 252.2 249.4 249.2

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(1) Beginning in Q1 2021, we updated disaggregated revenue disclosures, combining certain product groups to reflect categories that depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors.

As a result, Automotive Technologies and Process Purification product lines have been combined within the Performance Materials segment.

Net Sales Comparison of Years Ended December 31, 2022, 2021, and 2020

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Segment net sales.

The increase in 2021 was driven by favorable pricing of $12.6 million (three percent) and favorable foreign currency exchange impacts of $7.2 million (less than one percent).

The increase was offset by $13.0 million (three percent) in volume decline in automotive evaporative emission canister products due to semiconductor shortages in automotive markets.

The increase in 2022 was driven by a volume increase of $28.6 million (six percent) and favorable pricing and sales composition (mix) of $14.9 million (three percent), partially offset by unfavorable foreign currency exchange impacts of $11.8 million.

Segment EBITDA.

Segment EBITDA increased $0.2 million due to favorable pricing, contributing $11.3 million, and lower manufacturing costs of $2.4 million.

The increase was partially offset by unfavorable volume of $11.2 million, primarily in the automotive evaporative emission canister products, and increased SG&A expenses and research and technical costs of $7.4 million, due to increased travel, outside services, and consulting expenses.

Favorable foreign currency exchange impacts also contributed $5.1 million to the increase.

Segment EBITDA increased by $2.8 million due to favorable volume of $15.6 million, pricing and sales composition (mix) of $13.8 million, and decreased SG&A expenses and research and technical costs of $0.5 million.

The increase was largely offset by higher manufacturing costs of $21.5 million and unfavorable foreign currency exchange impacts of $5.6 million.

Year Ended December 31, 2021 vs.

Segment net sales.

The increase in 2020 was driven primarily by favorable pricing and product mix of $13.6 million (three percent).

Additionally, we benefited from $3.9 million (one percent) in volume improvements in automotive evaporative emission canister products due to stricter environmental regulation in the Chinese, North American, and European automotive markets, and favorable foreign currency exchange impacts of $1.9 million (less than one percent).

The increase in 2021 was driven by favorable pricing of $12.6 million (three percent) and favorable foreign currency exchange impacts of $7.2 million (less than one percent).

The increase was partially offset by $13.0 million (three percent) in volume decline in automotive evaporative emission canister products due to semiconductor shortages in automotive markets.

Segment EBITDA.

Segment EBITDA increased $35.8 million due to favorable pricing and product mix, which contributed $18.7 million, favorable volume, primarily in the automotive evaporative emission canister products, which contributed $2.8 million, lower manufacturing costs of $5.0 million, and decreased SG&A expenses and research and technical

costs of $8.0 million, primarily due to reduced travel and decreased intellectual property litigation defense costs.

Favorable foreign currency exchange impacts, offset slightly by other miscellaneous charges, also contributed $1.3 million to the increase.

Segment EBITDA increased by $0.2 million due to favorable pricing contributing $11.3 million, and lower manufacturing costs of $2.4 million.

Favorable foreign currency exchange impacts also contributed $5.1 million to the increase.

Performance Chemicals

Performance Summary

Our Performance Chemicals segment saw strong revenue growth versus the prior year on continued price improvement and favorable mix upgrade to higher margin products.

These price increases were necessary to keep pace with the inflationary increases related to energy, raw material, and logistic costs.

Pavement Technologies sales increased by 23.5 percent due primarily to improved volumes and price increases.

Volume growth was driven by technology adoption and highway funding in the United States, as well as the acquisition of Ozark Materials.

Industrial Specialties sales increased by 28.4 percent driven by price improvements with strong performance across all markets, particularly in oilfield and adhesive end markets.

Price improvements were supplemented by a favorable mix shift to higher-value derivative products as volumes were negatively impacted by raw material availability.

Our Engineered Polymers business grew 31.7 percent as the business increased pricing to offset inflationary costs for raw materials, logistics, and particularly energy costs which 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.

Years Ended December 31,

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Industrial Specialties product line 633.8 493.5 391.6

493.5 391.6 496.9

Engineered Polymers product line 244.7 185.8 127.7

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Segment EBITDA 200.4 172.8 148.7

(1) In 2021, we updated disaggregated revenue disclosures, combining certain product groups to reflect categories that depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors.

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

Net Sales Comparison of Years Ended December 31, 2022, 2021, and 2020

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Segment net sales.

The sales increase was driven by favorable pricing and sales composition (mix) of $279.3 million (32 percent) in industrial specialties ($201.8 million), engineered polymers ($62.4 million), and pavement technologies product

lines ($15.1 million), partially offset by a volume decrease of $19.2 million (two percent) and unfavorable foreign currency exchange impacting Net sales by $15.0 million (two percent).

Segment EBITDA.

Segment EBITDA increased $27.6 million, mainly due to favorable pricing and sales composition (mix) of $277.7 million, favorable foreign currency exchange impacts and other miscellaneous charges of $6.4 million.

These increases were partially offset by higher manufacturing costs of $218.1 million due to inflationary raw material and energy costs and increased SG&A expenses of $29.1 million due to increased spending on growth initiatives, compensation, and travel.

Volume declines further offset the overall increase by $9.3 million.

Year Ended December 31, 2021 vs.

Segment net sales.

The sales increase was driven by favorable volume of $110.0 million (15 percent), which consisted of volume growth in all business lines:

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Segment EBITDA increased $24.1 million, mainly due to favorable pricing and product mix of $61.7 million, and an increase in volume of $41.8 million.

These increases were partially offset by higher manufacturing costs of $51.6 million due to inflationary raw material and energy inflationary costs, and increased SG&A expenses of $23.6 million due to increased spending on growth initiatives, compensation, and modest travel.

These increases were partially offset by higher manufacturing costs of $51.6 million due to inflationary raw material and energy costs and increased SG&A expenses of $23.6 million due to increased spending on growth initiatives, compensation, and travel.

Unfavorable foreign currency exchange impacts and other miscellaneous charges of $4.2 million also contributed to increased costs.

Year Ended December 31, 2020 vs.

Segment net sales.

The sales decrease was driven by unfavorable volume of $89.1 million (11 percent), which consisted of volume declines in industrial specialties ($95.9 million), partially offset by volume growth in engineered polymers ($5.9 million) and pavement technologies product lines ($0.9 million).

Also driving the net sales decline was unfavorable pricing and product mix of $6.0 million (one percent) in industrial specialties ($8.9 million), which was partially offset by favorable pricing and product mix in pavement technologies product lines ($2.9 million).

Unfavorable foreign currency exchange of $1.1 million (less than one percent) contributed to the overall decline.

Segment EBITDA.

Segment EBITDA decreased $34.8 million mainly due to decline in volume of $38.6 million, unfavorable pricing and product mix of $4.7 million, and unfavorable foreign currency exchange impacts and other miscellaneous charges of $2.0 million.

Favorable SG&A expenses due to reduced travel and lower employee-related costs of $10.3 million and favorable manufacturing productivity of $0.2 million offset part of the overall decline.

Use of Non-GAAP Financial Measures

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(1) For the year ended December 31, 2020, all charges relate to the Performance Materials segment.

Our pension and postretirement settlement and curtailment charges (income) are related to the acceleration of prior service costs, as a result of a reduction in the number of participants within the Union Hourly defined benefit pension plan during 2020.

(1) For all years, the charges relate to the Performance Materials segment.

These are excluded from our segment results because we consider these costs to be outside our operational performance.

We continue to include the service cost, amortization of prior service cost, interest costs, expected return on plan assets, and amortized actual gains and losses in our segment EBITDA.

(2) For the year ended December 31, 2021, $(0.2) million relate to the acquisition of a strategic investment in the Performance Materials segment and $(0.4) million relate to the integration of the Caprolactone Acquisition into our Performance Chemicals segment.

For additional information on the charges associated with the Caprolactone Acquisition see Note 16 within these Consolidated Financial Statements.

(2) For the years ended December 31, 2022 and 2021, charges of $0.3 million and $0.2 million relate to the acquisitions of strategic investments in the Performance Materials segment.

For the year ended December 31, 2022, charges of $5.6 million relate to the acquisition and integration of Ozark Materials into the Performance Chemicals segment.

For the years ended December 31, 2021 and 2020, charges of $0.4 million and $1.8 million relate to the integration of the Caprolactone business, now referred to as our engineered polymers product line, into our Performance Chemicals segment.

(3) For the year ended December 31, 2021, litigation verdict charge relates to the Performance Materials segment.

Refer to Note 18 for additional information.

Adjusted EBITDA

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*Calculated as Operating Cash Flow less Capital Expenditures

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

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

Pavement technologies will benefit from the U.S.

infrastructure bill and continued Evotherm® warm mix technology adoption.

This expected demand will result in favorable pricing conditions.

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

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

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

We expect to deliver fiscal year 2022 Adjusted EBITDA of $430 million to $460 million.

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

Net sales are expected to be between $1.9 billion and $2.1 billion.

Growth drivers in our Performance Chemicals segment include our pavement technologies product line as municipalities take advantage of increased infrastructure spending and continue to adopt our Evotherm® warm mix technology and new road markings products.

We also anticipate growth in our agrochemicals and oilfield products within our industrial specialties product line.

Our engineered polymers product line is expected to continue increasing its presence in key end markets like automotive, consumer packaging, and footwear and apparel.

We expect global automobile production to improve, which will support growth in Performance Materials.

Adjusted EBITDA is expected to grow to between $495 million to $515 million.

In Performance Chemicals, we anticipate lower energy costs will benefit our engineered polymers product line, and a focus on higher-value end markets in the industrial specialties product line, as well as continued growth in the pavement technologies product line, will help offset what we expect to be an increase in the cost of a primary raw material, CTO.

We expect EBITDA growth for our Performance Materials segment as volumes shift throughout 2023 to higher margin automotive carbon and automotive production supply chain dynamics improve.

A reconciliation of net income to adjusted EBITDA as projected for 2023 is not provided.

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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.

Further, in the future, other items with similar characteristics to those currently included within adjusted EBITDA, that have a similar impact on the comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA.

Liquidity and Capital Resources

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

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

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

Cash and cash equivalents totaled $76.7 million at December 31, 2022.

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Share Repurchases

On February 28, 2020, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock, and rescinded the prior two outstanding authorizations.

Shares may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

In the year ended December 31, 2021, we repurchased $109.4 million in common shares, representing 1,421,379 shares of our common stock at a weighted average cost per share of $76.98.

At December 31, 2021, $302.6 million remained unused under our Board-authorized repurchase program.

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 current repurchase 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 year ended December 31, 2022, we repurchased $145.2 million in common shares, representing 2,112,463 shares of our common stock at a weighted average cost per share of $68.73.

At December 31, 2022, $444.7 million remained available for purchase under our Board-authorized repurchase program.

Capital Expenditures

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Cash flows provided by (used in) operating activities

During the year ended December 31, 2021, cash flow provided by operations decreased primarily due to working capital increases compared to 2020, which are further explained below.

Current Assets and Liabilities

In millions 2021 2020

Cash and cash equivalents $ 275.4 $ 257.7

Accounts receivable, net 161.7 148.0

Inventories, net 241.2 189.0

Prepaid and other current assets 46.6 34.0

Total current assets $ 724.9 $ 628.7

Current assets as of December 31, 2021, increased $96.2 million compared to December 31, 2020, primarily due to an increase in Inventories, net of $52.2 million to support forecasted sales.

Additionally, cash and cash equivalents increased by $17.7 million, Accounts receivable, net increased by $13.7 million, and Prepaid and other current assets increased by $12.6 million in 2021.

In millions 2021 2020

Accounts payable $ 125.8 $ 104.2

Accrued expenses 51.7 46.6

Accrued payroll and employee benefits 48.2 25.1

Current operating lease liabilities 17.4 16.2

Notes payable and current maturities of long-term debt 19.6 26.0

Income taxes payable 6.2 5.3

Total current liabilities $ 268.9 $ 223.4

Current liabilities as of December 31, 2021 increased by $45.5 million compared to December 31, 2020, driven primarily by the increase in sales and business activity with Accrued payroll and employee benefits up $23.1 million, Accounts payable of $21.6 million, Accrued expenses of $5.1 million, Current operating lease liabilities of $1.2 million and Income taxes payable of $0.9 million.

These increases were partially offset by a decrease in Notes payable and current portion of long-term debt of $6.4 million.

Cash flows provided by (used in) operating activities, which consists of net income (loss) adjusted for non-cash items including the cash impact from changes in operating assets and liabilities (i.e., working capital), totaled $313.1 million for the year ended December 31, 2022.

Cash provided by (used in) operating activities for 2022 was driven by higher cash earnings of $43.8 million offset by a net increase in overall working capital of $15.3 million which includes an increase in trade working capital (accounts receivable, inventory, and accounts payable) of $8.3 million.

The build in trade working capital was due primarily to higher end of year accounts receivable on higher sales and higher inventory value due to continued inflation experienced during 2022.

Cash flow from operations was further reduced by an increase in cash interest paid of $7.3 million due to the rising interest rates during 2022 when compared to 2021 as well as $1.1 million of additional tax payments.

The higher tax payments were driven by the higher year over year earnings offset by refunds received in 2022 on prior years' earnings.

Cash provided by (used in) operating activities for 2021 was driven by higher cash earnings of $26.1 million offset by a net increase in overall working capital of $70.5 million which includes an increase in trade working capital (accounts receivable, inventory, and accounts payable) of $89.3 million.

The build in trade working capital was due primarily to higher end of year accounts receivable on higher sales and higher inventory value due to inflation experienced during 2021 compared to 2020.

Cash flow from operations was further reduced by an increase in cash interest paid of $7.9 million primarily due to a full year of interest on our 3.88% Senior Notes due 2028 as well as an increase in cash tax payments of $7.1 million.

Higher earnings in 2021 compared to 2020 contributed to the increase in tax payments in 2021 further compounded by the depletion of net operating losses in prior years.

Cash flows provided by (used in) investing activities

For the year ended December 31, 2021, investing activities was driven by capital spending and strategic investments.

For the year ended December 31, 2022, investing activities were driven by capital spending, the Ozark Materials acquisition, and the purchase of strategic investments.

Capital spending included the base maintenance capital supporting ongoing operations and cost improvement and growth spending primarily related to our business transformation initiative (refer to Note 15 within the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information).

Also, during the year ended December 31, 2022, we acquired Ozark Materials (refer to Note 16 within the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information) and we entered into multiple strategic investments (refer to Note 5 within the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information).

For the year ended December 31, 2021, investing activities were driven by capital spending and strategic investments.

Capital spending included the base maintenance capital supporting ongoing operations and growth and cost improvement spending primarily related to our business transformation initiative (refer to Note 15 within the Consolidated Financial Statements included within Part II.

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Item 8 of this Form 10-K for more information) and our new corporate headquarters.

For the year ended December 31, 2019, the cash used in investing activities was primarily driven by the $537.9 million Caprolactone Acquisition (see Note 16 to the Consolidated Financial Statements included within Part II.

Item 8 of this form 10-K for more information).

The remaining cash used by investing activities was primarily driven by capital expenditures, driven primarily by maintenance and growth spending.

Our Covington, Virginia facility incurred expenditures for its expansion project, along with base maintenance and other various equipment purchases.

Also, we incurred cost improvement spending at our DeRidder, Louisiana location related to installation of new CTO tanks as well as base maintenance spending, and our Waynesboro, Georgia location expended funds primarily for growth and cost improvement.

We also invested capital spending in our newest location in Warrington, United Kingdom to enable further growth and cost improvement as well as base maintenance.

Capital expenditure categories Years Ended December 31,

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Cash flows provided by (used in) financing activities

Cash provided by financing activities for the year ended December 31, 2022, was $48.1 million and was driven by net proceeds from the revolving credit facility of $828.0 million, offset by payments on long-term borrowings of $628.1 million, payments, and share repurchases of $145.2 million.

Cash used in financing activities for the year ended December 31, 2021, was $133.1 million, and was driven by the repurchase of common stock of $109.4 million, payments on long-term borrowings of $23.4 million, and tax payments related to withholding tax on vested equity awards of $2.4 million.

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Additionally, we repaid $14.1 million of other long-term borrowings, repurchased $88.0 million of our common stock, and made payments of $3.2 million related to withholding tax on vested equity awards.

Cash provided by financing activities for the year ended December 31, 2019 was $369.2 million, and was driven by proceeds from long-term borrowings from a new term loan in the first quarter of 2019 of $375.0 million and $131.3 million in net borrowings related to our revolving credit facility (refer to Note 10 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for more information).

This was offset by repayments of $122.5 million on our long-term borrowings.

Additionally, we made payments of $14.3 million related to withholding tax on vested equity awards.

New Accounting Guidance

Refer to the Note 3 to the Consolidated Financial Statements included within Part II.

Refer to Note 3 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Consolidated Financial Statements.

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Our revenue is derived from contracts with customers, and substantially all our revenue is recognized when products are either shipped from our manufacturing and warehousing facilities or delivered to the customer.

Revenue, net of returns and customer incentives, are based on the sale of manufactured products.

Revenue, net of returns and customer incentives, is based on the sale of manufactured products.

Revenues are recognized when performance obligations under the terms of a contract with our customer are satisfied;

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For certain limited contracts, where we are producing goods with no alternative use and for which we have an enforceable right to payment for performance completed to date, we are recognizing revenue as goods are manufactured, rather than when they are shipped.

Revenues are presented as Net sales on the consolidated statements of operations to the Consolidated Financial Statements.

Revenues are presented as Net sales on the consolidated statements of operations.

Since Net sales are derived from product sales only, we have disaggregated our Net sales by our product lines within each reportable segment.

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Sales returns and allowances are not a normal practice in the industry and are not significant.

Certain customers may receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and included in Net sales.

Shipping and handling fees billed to customers are included with Net sales.

If we pay for the freight and shipping, we recognize the cost when control of the product has transferred to the customer as an expense in Cost of sales on the consolidated statements of operations.

Certain customers may

receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and included within Net sales.

Shipping and handling fees billed to customers are included in Net sales.

If we pay for the freight and shipping, we recognize the cost when control of the product has transferred to the customer as an expense within Cost of sales on the consolidated statements of operations.

Payment terms with our customers are typically in the range of zero to sixty days.

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We conduct a required annual review of goodwill for potential impairment at October 1, or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value.

Our reporting units are our operating segments, i.e., Performance Chemicals and Performance

Our reporting units are our operating segments, i.e., Performance Chemicals and Performance Materials.

If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using both the income approach and market approach, goodwill is considered impaired.

The income approach determines fair value based on discounted cash flow model derived from a reporting unit’s long-term forecasted cash flows.

The market approach determines fair value based on the application of earnings multiples of comparable companies to projected earnings of the reporting unit.

The market approach determines fair value based on the application of earnings multiples of comparable companies to the projected earnings of the reporting unit.

The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit but is limited to the total amount of goodwill allocated to the reporting unit.

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Business Combinations

We account for business combinations in accordance with ASC 805 “Business Combinations” which requires, among other things, the acquiring entity in a business combination to recognize the fair value of the assets acquired and liabilities assumed;

the recognition of acquisition-related costs in the consolidated results of operations;

the recognition of restructuring costs in the consolidated results of operations for which the acquirer becomes obligated after the acquisition date;

and contingent purchase consideration to be recognized at fair value on the acquisition date with subsequent adjustments recognized in the consolidated results of operations.

We generally use third-party qualified consultants to assist management in determining the fair value of assets acquired and liabilities assumed.

This includes, when necessary, assistance with the determination of lives and valuation of property and identifiable intangibles, assisting management in determining the fair value of obligations associated with employee related liabilities and assisting management in assessing obligations associated with legal and environmental claims.

The fair value assigned to identifiable intangible assets acquired are determined primarily by using an income approach, which is based on assumptions and estimates made by management.

Significant assumptions utilized in the income approach are the attrition rate, growth rate, and discount rate.

Accounting for business combinations, which requires, among other things, the acquiring entity in a business combination to recognize the fair value of the assets acquired and liabilities assumed;

the recognition of acquisition-related costs within the consolidated results of operations;

the recognition of restructuring costs within the consolidated results of operations for which the acquirer becomes obligated after the acquisition date;

and contingent purchase consideration to be recognized at fair value on the acquisition date with subsequent adjustments recognized on the consolidated statements of operations.

We generally use qualified third-party consultants to assist management in determining the fair value of assets acquired and liabilities assumed.

This includes, when necessary, assistance with the determination of lives and valuation of

tangible property, plant, and equipment and identifiable intangibles, assisting management in determining the fair value of obligations associated with employee-related liabilities and assisting management in assessing obligations associated with legal and environmental claims.

The fair value assigned to identifiable intangible assets acquired is determined primarily by using an income approach, which is based on assumptions and estimates made by management.

Significant assumptions utilized in the income approach are the attrition rate, revenue growth rates, EBITDA margins, royalty rates, and the discount rate.

These assumptions are based on company-specific information and projections, which are not observable in the market and are therefore considered Level 2 and Level 3 measurements.

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Goodwill acquired, if any, is allocated to the reporting unit within or at the operating segment for which the acquired business will be integrated.

Operating results of the acquired entity are reflected in the Consolidated Financial Statements from date of acquisition.

Selection of the appropriate reporting unit is based on the level at which discrete financial information is available and reviewed by business management post-integration.

Operating results of the acquired entity are reflected within the Consolidated Financial Statements from the date of acquisition.

We are subject to income taxes in the U.S.

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We follow the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes.

Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled.

Under this method, deferred income taxes are recorded based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled.

The ability to realize deferred tax assets is evaluated through the forecasting of taxable income, historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies.

Valuation allowances are recognized to reduce deferred tax assets when it is more

likely than not that a tax benefit will not be realized.

Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

We do not provide income taxes on undistributed earnings of consolidated foreign subsidiaries as it is our intention that such earnings will remain invested in those companies.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis