Ingevity Corp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO THE FINANCIAL STATEMENTS Description Page No. Management's Report on Internal Control over Financial Reporting 44 Report of Independent Registered Public Accounting Firm (PCAOB ID: 238 ) 45 Consolidated Statements of Operations 47 Consolidated Statements of Comprehensive Income (Loss) 48 Consolidated Balance Sheets 49 Consolidated Statements of Stockholders' Equity 50 Consolidated Statements of Cash Flows 51 Notes to the Consolidated Financial Statements 53 43 Ingevity Corporation Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company's internal control over financial reporting includes those policies and procedures that: i. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; ii. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2022, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2022. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2022 did not include the internal controls at our Ozark Materials, LLC and Ozark Logistics, LLC legal entities (collectively, "Ozark Materials"), as permitted by Securities and Exchange Commission guidelines that allow companies to exclude certain acquisitions from their assessment of internal control over financial reporting during the first year following an acquisition. Ozark Materials owns the acquired net assets of the business that we acquired on October 3, 2022. As of and for the year ended December 31, 2022, Ozark Materials represented four percent and one percent of Ingevity's consolidated total assets and consolidated revenues, respectively, which were excluded from management's assessment of internal control over financial reporting. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the effectiveness of the Company's internal control over financial reporting as of December 31, 2022, as stated in their report, which is presented on the following page. Date: February 28, 2023 By: /S/ JOHN C. FORTSON /S/ MARY DEAN HALL John C. Fortson Mary Dean Hall President and Chief Executive Officer Executive Vice President and Chief Financial Officer 44 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Ingevity Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Ingevity Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Ozark Materials, LLC and Ozark Logistics, LLC from its assessment of internal control over financial reporting as of December 31, 2022 because these entities were acquired by the Company in a purchase business combination during 2022. We have also excluded Ozark Materials, LLC and Ozark Logistics, LLC from our audit of internal control over financial reporting. Ozark Materials, LLC and Ozark Logistics, LLC are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 4% and 1% of the related consolidated financial statement amounts as of and for the year ended December 31, 2022. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 45 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Acquisition of Ozark Materials - Valuation of Customer Relationships As described in Notes 2 and 16 to the consolidated financial statements, on October 3, 2022, the Company completed the acquisition of Ozark Materials, LLC (“OM”) and Ozark Logistics, LLC (“OL” and, together with OM, “Ozark Materials”) for a purchase price of $325.0 million, which resulted in $88.6 million of customer relationships intangible assets being recorded. The fair value assigned to the customer relationships acquired was determined using an income approach, which is based on assumptions and estimates made by management. The significant assumptions utilized in the income approach are the revenue growth rates, attrition rate, EBITDA margins, and discount rate. The principal considerations for our determination that performing procedures relating to the valuation of customer relationships from the acquisition of Ozark Materials is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the customer relationships acquired, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the revenue growth rates, attrition rate, EBITDA margins, and discount rate, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationships acquired. These procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for developing the fair value estimate of the customer relationships, (iii) evaluating the appropriateness of the income approach, (iv) testing the completeness and accuracy of data used in the income approach, and (v) evaluating the reasonableness of the significant assumptions used by management related to the revenue growth rates, attrition rate, EBITDA margins, and discount rate. Evaluating management’s significant assumptions related to the revenue growth rates and EBITDA margins involved evaluating whether the assumptions used by management were reasonable considering (i) the past performance of the acquired businesses; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Evaluating the reasonableness of the attrition rate involved considering (i) the past performance of the acquired businesses and (ii) economic and industry forecasts. The discount rate was evaluated by considering the (i) cost of capital of comparable businesses and (ii) other industry factors. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s income approach and (ii) the reasonableness of the attrition rate and discount rate significant assumptions. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina February 28, 2023 We have served as the Company’s auditor since 2015. 46 INGEVITY CORPORATION Consolidated Statements of Operations Years Ended December 31, In millions, except per share data 2022 2021 2020 Net sales $ 1,668.3 $ 1,391.5 $ 1,216.1 Cost of sales 1,098.2 878.7 750.6 Gross profit 570.1 512.8 465.5 Selling, general, and administrative expenses 198.8 179.3 149.4 Research and technical expenses 30.3 26.3 22.6 Restructuring and other (income) charges, net 13.8 16.2 18.5 Acquisition-related costs 5.0 0.6 1.8 Other (income) expense, net ( 1.7 ) 79.9 ( 4.1 ) Interest expense 61.8 51.7 47.1 Interest income ( 7.5 ) ( 4.0 ) ( 4.9 ) Income (loss) before income taxes 269.6 162.8 235.1 Provision (benefit) for income taxes 58.0 44.7 53.7 Net income (loss) $ 211.6 $ 118.1 $ 181.4 Per share data Basic earnings (loss) per share $ 5.54 $ 2.97 $ 4.39 Diluted earnings (loss) per share 5.50 2.95 4.37 The accompanying notes are an integral part of these financial statements. 47 INGEVITY CORPORATION Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, In millions 2022 2021 2020 Net income (loss) $ 211.6 $ 118.1 $ 181.4 Other comprehensive income (loss), net of tax: Foreign currency adjustments: Foreign currency translation adjustment ( 74.9 ) ( 5.3 ) 23.9 Unrealized gain (loss) on net investment hedges, net of tax provision (benefit) of $ 3.2 , $ 2.3 , and $( 2.7 ) 10.7 7.3 ( 9.0 ) Total foreign currency adjustments, net of tax provision (benefit) of $ 3.2 , $ 2.3 , and $( 2.7 ) ( 64.2 ) 2.0 14.9 Derivative instruments: Unrealized gain (loss), net of tax provision (benefit) of $ 2.6 , $ 1.7 , and $( 1.3 ) 8.5 5.5 ( 4.3 ) Reclassifications of deferred derivative instruments (gain) loss, included within net income (loss), net of tax (provision) benefit of $( 2.4 ), $( 0.3 ), and $ 0.3 ( 7.8 ) ( 0.7 ) 0.9 Total derivative instruments, net of tax provision (benefit) of $ 0.2 , $ 1.4 , and $( 1.0 ) 0.7 4.8 ( 3.4 ) Pension & other postretirement benefits: Unrealized actuarial gains (losses) and prior service (costs) credits, net of tax provision (benefit) of $ 1.0 , $ 0.4 , and $( 0.6 ) 3.4 1.5 ( 2.1 ) Reclassifications of net actuarial and other (gain) loss, amortization of prior service cost, and settlement and curtailment (income) charges, included within net income, net of tax (provision) benefit of $ 0.1 , $ 0.1 , and zero 0.2 0.1 0.3 Total pension and other postretirement benefits, net of tax provision (benefit) of $ 1.1 , $ 0.5 , and $( 0.6 ) 3.6 1.6 ( 1.8 ) Other comprehensive income (loss), net of tax provision (benefit) of $ 4.5 , $ 4.2 , and $( 4.3 ) ( 59.9 ) 8.4 9.7 Comprehensive income (loss) $ 151.7 $ 126.5 $ 191.1 The accompanying notes are an integral part of these financial statements. 48 INGEVITY CORPORATION Consolidated Balance Sheets December 31, In millions, except share and par value data 2022 2021 Assets Cash and cash equivalents $ 76.7 $ 275.4 Accounts receivable, net of allowance for credit losses of $ 0.5 million - 2022 and $ 2.0 million - 2021 224.8 161.7 Inventories, net 335.0 241.2 Prepaid and other current assets 42.5 46.6 Current assets 679.0 724.9 Property, plant, and equipment, net 798.6 719.7 Operating lease assets, net 56.6 52.4 Goodwill 518.5 442.0 Other intangibles, net 404.8 337.6 Deferred income taxes 5.7 6.8 Restricted investment, net of allowance for credit losses of $ 0.6 million - 2022 and $ 0.5 million - 2021 78.0 76.1 Strategic investments 109.8 35.3 Other assets 85.5 74.2 Total Assets $ 2,736.5 $ 2,469.0 Liabilities Accounts payable $ 174.8 $ 125.8 Accrued expenses 54.4 51.7 Accrued payroll and employee benefits 53.3 48.2 Current operating lease liabilities 16.5 17.4 Notes payable and current maturities of long-term debt 0.9 19.6 Income taxes payable 3.6 6.2 Current liabilities 303.5 268.9 Long-term debt including finance lease obligations 1,472.5 1,250.0 Noncurrent operating lease liabilities 40.8 36.2 Deferred income taxes 106.5 114.6 Other liabilities 114.9 125.5 Total Liabilities 2,038.2 1,795.2 Commitments and contingencies (Note 18) Equity Preferred stock (par value $ 0.01 per share; 50,000,000 shares authorized; zero issued and outstanding at 2022 and 2021) — — Common stock (par value $ 0.01 per share; 300,000,000 shares authorized; 43,228,172 and 43,102,011 issued and 37,298,989 and 39,269,399 outstanding at 2022 and 2021, respectively) 0.4 0.4 Additional paid-in capital 153.0 136.3 Retained earnings 1,007.7 796.1 Accumulated other comprehensive income (loss) ( 46.8 ) 13.1 Treasury stock, common stock, at cost ( 5,929,183 and 3,832,612 shares at 2022 and 2021, respectively) ( 416.0 ) ( 272.1 ) Total Equity 698.3 673.8 Total Liabilities and Equity $ 2,736.5 $ 2,469.0 The accompanying notes are an integral part of these financial statements. 49 INGEVITY CORPORATION Consolidated Statements of Stockholders' Equity Ingevity Stockholders' Common Stock In millions, shares in thousands Shares Amount Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total Equity Balance at December 31, 2019 42,675.2 $ 0.4 $ 112.8 $ 497.2 $ ( 5.0 ) $ ( 74.6 ) $ 530.8 Net income (loss) — — — 181.4 — — 181.4 Other comprehensive income (loss) — — — — 9.7 — 9.7 Common stock issued 174.6 — — — — — — Exercise of stock options, net 63.0 — 1.9 — — — 1.9 Tax payments related to vested restricted stock units — — — — — ( 3.2 ) ( 3.2 ) Share repurchase program — — — — — ( 88.0 ) ( 88.0 ) Share-based compensation plans — — 6.6 — — 3.5 10.1 Adoption of accounting standard — — — ( 0.6 ) — — ( 0.6 ) Balance at December 31, 2020 42,912.8 $ 0.4 $ 121.3 $ 678.0 $ 4.7 $ ( 162.3 ) $ 642.1 Net income (loss) — — — 118.1 — — 118.1 Other comprehensive income (loss) — — — — 8.4 — 8.4 Common stock issued 121.4 — — — — — — Exercise of stock options, net 67.8 — 3.0 — — — 3.0 Tax payments related to vested restricted stock units — — — — — ( 2.4 ) ( 2.4 ) Share repurchase program — — — — — ( 109.4 ) ( 109.4 ) Share-based compensation plans — — 12.0 — — 2.0 14.0 Balance at December 31, 2021 43,102.0 $ 0.4 $ 136.3 $ 796.1 $ 13.1 $ ( 272.1 ) $ 673.8 Net income (loss) — — — 211.6 — — 211.6 Other comprehensive income (loss) — — — — ( 59.9 ) — ( 59.9 ) Common stock issued 82.9 — — — — — — Exercise of stock options, net 43.2 — 1.6 — — — 1.6 Tax payments related to vested restricted stock units — — — — — ( 2.2 ) ( 2.2 ) Share repurchase program — — — — — ( 145.2 ) ( 145.2 ) Share-based compensation plans — — 15.1 — — 3.5 18.6 Balance at December 31, 2022 43,228.1 $ 0.4 $ 153.0 $ 1,007.7 $ ( 46.8 ) $ ( 416.0 ) $ 698.3 The accompanying notes are an integral part of these financial statements. 50 INGEVITY CORPORATION Consolidated Statements of Cash Flows Years Ended December 31, In millions 2022 2021 2020 Cash provided by (used in) operating activities: Net income (loss) $ 211.6 $ 118.1 $ 181.4 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 108.8 109.9 100.2 Non cash operating lease costs 16.1 17.3 18.0 Deferred income taxes ( 5.0 ) ( 4.6 ) 16.2 Disposal/impairment of assets 2.5 1.2 0.6 Restructuring and other (income) charges, net — — 1.7 LIFO reserve 10.0 3.5 3.9 Share-based compensation 16.1 12.3 8.4 Pension and other postretirement benefit costs 1.4 1.6 1.9 Other non-cash items 18.4 12.1 15.3 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net ( 42.1 ) ( 13.8 ) 2.8 Inventories, net ( 63.7 ) ( 55.8 ) 22.3 Prepaid and other current assets ( 0.8 ) ( 5.9 ) 2.1 Planned major maintenance outage ( 9.1 ) ( 8.6 ) ( 7.0 ) Accounts payable 42.7 14.8 9.4 Accrued expenses 0.8 4.8 13.4 Accrued payroll and employee benefits 5.4 23.1 ( 3.3 ) Income taxes 4.9 ( 6.2 ) ( 9.6 ) Litigation verdict charge — 85.0 — Operating leases ( 18.8 ) ( 20.5 ) ( 18.5 ) Changes in all other operating assets and liabilities, net 13.9 4.7 ( 6.8 ) Net cash provided by (used in) operating activities $ 313.1 $ 293.0 $ 352.4 Cash provided by (used in) investing activities: Capital expenditures ( 142.5 ) ( 103.8 ) ( 82.1 ) Payments for acquired businesses, net of cash acquired ( 344.5 ) — — Finance lease expenditures — — ( 23.8 ) Net investment hedge settlement 14.7 — — Purchase of strategic investments ( 77.4 ) ( 35.3 ) — Other investing activities, net ( 4.2 ) ( 1.5 ) ( 4.7 ) Net cash provided by (used in) investing activities $ ( 553.9 ) $ ( 140.6 ) $ ( 110.6 ) The accompanying notes are an integral part of these financial statements. 51 INGEVITY CORPORATION Consolidated Statements of Cash Flows (continued) Years Ended December 31, In millions 2022 2021 2020 Cash provided by (used in) financing activities: Proceeds from revolving credit facility 1,164.7 — 346.1 Proceeds from long-term borrowings — — 550.0 Payments on revolving credit facility ( 336.7 ) — ( 477.3 ) Payments on long-term borrowings ( 628.1 ) ( 23.4 ) ( 389.1 ) Debt issuance costs ( 3.0 ) — ( 11.0 ) Debt repayment costs ( 3.8 ) — — Financing lease obligations, net ( 0.9 ) ( 0.7 ) 23.1 Borrowings (repayments) of notes payable and other short-term borrowings, net — ( 1.9 ) ( 4.4 ) Tax payments related to withholdings on vested equity awards ( 2.2 ) ( 2.4 ) ( 3.2 ) Proceeds and withholdings from share-based compensation plans, net 4.1 4.7 3.6 Repurchases of common stock under publicly announced plan ( 145.2 ) ( 109.4 ) ( 88.0 ) Other financing activities, net ( 0.8 ) — — Net cash provided by (used in) financing activities $ 48.1 $ ( 133.1 ) $ ( 50.2 ) Increase (decrease) in cash, cash equivalents, and restricted cash ( 192.7 ) 19.3 191.6 Effect of exchange rate changes on cash ( 6.0 ) ( 1.7 ) 2.2 Change in cash, cash equivalents, and restricted cash ( 198.7 ) 17.6 193.8 Cash, cash equivalents, and restricted cash at beginning of period 276.0 258.4 64.6 Cash, cash equivalents, and restricted cash at end of period (1) $ 77.3 $ 276.0 $ 258.4 _______________ (1) Includes restricted cash of $ 0.6 million, $ 0.6 million, and $ 0.7 million and cash and cash equivalents of $ 76.7 million, $ 275.4 million, and $ 257.7 million for the years ended December 31, 2022, 2021, and 2020, respectively. Restricted cash is included within "Prepaid and other current assets" within the consolidated balance sheets. Supplemental cash flow information: Cash paid for interest, net of capitalized interest $ 54.8 $ 47.5 $ 39.6 Cash paid for income taxes, net of refunds 54.8 53.7 46.6 Purchases of property, plant and equipment in accounts payable 4.9 9.4 2.7 Leased assets obtained in exchange for new finance lease liabilities — — 23.8 Leased assets obtained in exchange for new operating lease liabilities 23.7 20.5 27.2 The accompanying notes are an integral part of these financial statements. 52 Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 INDEX Note Page No. 1 Background 54 2 Summary of Significant Accounting Policies 54 3 New Accounting Guidance 61 4 Revenues 61 5 Fair Value Measurements 62 6 Inventories, net 64 7 Property, Plant, and Equipment, net 65 8 Goodwill and Other Intangible Assets, net 65 9 Financial Instruments and Risk Management 67 10 Debt, including Finance Lease Obligations 70 11 Share-based Compensation 72 12 Equity 75 13 Leases 77 14 Retirement Plans 79 15 Restructuring and Other (Income) Charges, net 84 16 Acquisitions 85 17 Income Taxes 87 18 Commitments and Contingencies 90 19 Segment Information 91 20 Earnings (Loss) per Share 93 21 Supplemental Information 94 22 Subsequent Event 95 53 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 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 the 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), coatings, resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line). Basis of Consolidation and Presentation The accompanying Consolidated Financial Statements of Ingevity were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant accounting policies described in Note 2, together with the other notes that follow, are an integral part of the Consolidated Financial Statements. The Consolidated Financial Statements include the accounts of Ingevity and subsidiaries in which a controlling interest is maintained. Note 2: Summary of Significant Accounting Policies Estimates and assumptions: We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results are likely to differ from those estimates, but we do not believe such differences will materially affect our financial position, results of operations, or cash flows. Cash equivalents: Highly liquid securities with an original maturity of three months or less are considered cash equivalents. Accounts receivable and allowance for credit losses: Accounts receivable, net on the consolidated balance sheets are comprised of trade receivables less allowances for credit losses. Trade receivables consist of amounts owed to Ingevity from customer sales and are recorded at the invoiced amounts when revenue is recognized and generally do not bear interest. The allowance for credit losses is our best estimate of the amount of probable loss in the existing accounts receivable. We determine the allowance based on our expected future credit losses, which is partly based on historical write-off experience, current collection trends, and external business factors such as economic factors, including regional bankruptcy rates and political factors. Past-due balances over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered. Allowance for credit losses at December 31, 2022 and 2021, was $ 0.5 million and $ 2.0 million, respectively. Concentration of credit risk: The financial instruments that potentially subject Ingevity to concentrations of credit risk are accounts receivable. We limit our credit risk by performing ongoing credit evaluations and, when necessary, requiring letters of credit, guarantees, or collateral. Our largest customer as of December 31, 2022 had accounts receivable of $ 9.3 million and $ 5.7 million as of December 31, 2022 and 2021, respectively. Sales to our largest customer, from our Performance Materials segment, were approximately four percent of total net sales for each of the years ended December 31, 2022, 2021, and 2020, respectively. Sales to the automotive industry, which represents our largest industry concentration, were approximately 30 percent of our consolidated Net sales. No customers individually accounted for greater than 10 percent of Ingevity's consolidated Net sales. 54 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Inventories, net: Inventories are valued at lower of cost or net realizable value, except for inventories determined using the last-in, first-out method (“LIFO”), which are valued at the lower of LIFO or market cost. The value of our U.S. inventories is determined using LIFO for the majority of our raw materials, finished goods, and production materials. The value of all other inventories, including stores and supplies inventories and inventories of non-U.S. operations, is determined by the first-in, first-out ("FIFO") or average costs methods. Elements of cost in inventories include raw materials, direct labor, and manufacturing overhead. We routinely assess inventory for both potential obsolescence and potential declines in anticipated selling prices to derive a market value for the inventory on hand. This review also includes an analysis of potentially obsolete, unmarketable, slow-moving, or overvalued inventory. If necessary, we will impair any inventories by an amount equal to the difference between the value of the held inventory (i.e., cost) and its estimated net realizable value for FIFO and average cost inventories and market value for LIFO inventories. Property, plant, and equipment: Owned assets are recorded at cost. Also included in the cost of these assets is interest on funds borrowed during the construction period. When assets are sold, retired or disposed of, their cost and related accumulated depreciation are removed from the consolidated balance sheet, and any resulting gain or loss is reflected within the consolidated statement of operations. Repair and maintenance costs that materially add to the value of the asset or prolong its useful life are capitalized and depreciated based on the extension of the useful life. Repair and maintenance costs: We expense routine repair and maintenance costs as we incur them. We defer expenses incurred during planned major maintenance activities and record these amounts to Other assets on our consolidated balance sheet. Deferred amounts are recognized as expense ratably over the shorter of the estimated interval until the next major maintenance activity or the life of the deferred item. The cash outflows related to these costs are included in operating activities within the consolidated statement of cash flows. The timing of this maintenance can vary by manufacturing plant and has a significant impact on our results of operations in the period performed primarily due to lost production during the maintenance period. Depreciation: The cost of property, plant, and equipment is depreciated, utilizing the straight-line method, over the estimated useful lives of the assets, the majority of which range from 20 to 40 years for buildings and leasehold improvements and 5 to 30 years for machinery and equipment. The following table provides details on the useful lives and proportion of our machinery and equipment (“M&E”) in each useful life category. Percent of M&E Cost Depreciable Life in Years Types of Assets 23 5 to 10 Production control system equipment and hardware, laboratory testing equipment 11 15 Control systems, instrumentation, metering equipment 49 20 Production vessels and kilns, storage tanks, piping 7 25 to 30 Blending equipment, storage tanks, piping, shipping equipment and platforms, safety equipment 3 40 Machinery & equipment support structures and foundations 7 Various Various Leases: We lease various assets for use in our operations that are classified as both operating and financing leases. At contract inception, we determine that a lease exists if the contract conveys the right to control an identified asset for a period of time in exchange for consideration. Control is considered to exist when the lessee has the right to obtain substantially all of the economic benefits from the use of an identified asset as well as the right to direct the use of that asset. If a contract is considered to be a lease, we recognize a lease liability based on the present value of the future lease payments, with an offsetting entry to recognize a right-of-use asset. As a majority of our leases do not provide an explicit rate within the lease, an incremental borrowing rate is used, which is based on information available at the commencement date. The determination of the incremental borrowing rate for each individual lease was impacted by the following assumptions: lease term, currency, and the economic environment for the physical location of the leased asset. 55 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Our operating leases principally relate to the following leased asset classes: Leased Asset Class Remaining Lease Term Administrative offices 1 to 15 years Manufacturing buildings 4 to 28 years Manufacturing and office equipment 1 to 11 years Warehousing and storage facilities 3 to 10 years Vehicles 3 to 6 years Rail cars 0 to 8 years Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the expected lease term. Some of our leases include options to extend the lease term at our sole discretion. We account for lease and non-lease components together as a single component for all lease asset classes. The depreciable life of assets and leasehold improvements is limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise. Certain leases provide for escalation of the lease payments, as well as maintenance costs and taxes increase. Impairment of long-lived assets: We periodically evaluate whether current events or circumstances indicate that the carrying value of our long-lived assets, including intangible assets, to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Goodwill and other intangible assets: Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. 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 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 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. In performing the fair value analysis, management makes various judgments, estimates and assumptions, the most significant of which is the assumption related to revenue growth rates. The factors we considered in developing our estimates and projections for cash flows include, but are not limited to, the following: (i) macroeconomic conditions; (ii) industry and market considerations; (iii) costs, such as increases in raw materials, labor, or other costs; (iv) our overall financial performance; and (v) other relevant entity-specific events that impact our reporting units. The determination of whether goodwill is impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated fair values of our reporting units. We believe that the estimates and assumptions used in our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could result in materially different calculations of fair value. We will continue to evaluate goodwill on an annual basis as of October 1, and whenever events or changes in circumstances, such as significant adverse changes in operating results, market conditions, or changes in management’s business strategy indicate that there may be a probable indicator of impairment. It is possible that the assumptions used by management related to the evaluation may change or that actual results may vary significantly from management’s estimates. 56 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Our fiscal year 2022 annual goodwill impairment test was performed as of October 1, 2022. We determined that the fair value of both our reporting units were substantially in excess of their carrying value and therefore concluded that no goodwill impairment existed. There were no events or circumstances indicating that goodwill might be impaired as of December 31, 2022. No impairment charges have been recognized historically. Other intangible assets are comprised of finite-lived intangible assets consisting primarily of brands (representing trademarks, trade names and know-how), customer contracts and relationships, and developed technology. Other intangible assets are amortized over their estimated useful lives which range from 3 to 20 years. Any potential impairment for definite-lived intangible assets will be calculated in the same manner as disclosed under impairment of property, plant and equipment. Customer relationships are amortized in a manner that reflects the pattern in which the economic benefits of the intangible asset are consumed. Capitalized software: Capitalized software for internal use is included within Other assets on the consolidated balance sheets. Amounts capitalized are presented in Capital expenditures on our consolidated statements of cash flow. Capitalized software is amortized using the straight-line over the estimated useful lives ranging from 3 to 15 years. Amortization is recorded to Costs of sales on our consolidated statements of operations for software directly used in the production of inventory and Selling, general, and administrative expenses on our consolidated statements of operations for software used for non-production related activities. Strategic investments: We have a variety of strategic investments that are classified as long-term assets on the consolidated balance sheets. Our strategic investments are accounted for under either the equity method of accounting or the measurement alternative, where fair value is not readily determinable. We use the equity method of accounting for investments that we do not control, but for which we have the ability to exercise significant influence. For strategic investments that are accounted for under the equity method of accounting, our initial investment is recorded at cost. Subsequently, the carrying value for these investments will be impacted by our proportionate share of undistributed earnings or loss, distributions, amortization or accretion of basis differences, and other-than-temporary impairments. Subsequent adjustments to our initial investment are recorded within Other (income) expense, net on the consolidated statement of operations. Strategic investments accounted for under the measurement alternative, where fair value is not readily determinable, are accounted for at cost. Adjustments for observable changes in prices or impairments are recognized in Other (income) expense, net in our consolidated statements of operations. At each reporting period, we evaluate each investment to determine whether events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Legal liabilities: We recognize a liability for legal contingencies when a loss is probable and reasonably estimable. Third-party fees for legal services are expensed as incurred. If only a range of estimated losses can be determined, we accrue an amount that reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. If an unfavorable outcome is reasonably possible but not probable, we will disclose an estimate of the reasonably possible loss or range of loss. If we cannot estimate the loss or range of losses arising from a legal proceeding, we will disclose that an estimate cannot be made. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs that may require us to change our business practices in a manner that could have a material adverse impact on our business. Revenue recognition: 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, 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; generally, this occurs with the transfer of control of our products. 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. Since Net sales are derived from product sales only, we have disaggregated our Net sales by our product lines within each reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for 57 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. 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 within Net sales. Shipping and handling fees billed to customers are included within 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 . Because the period between when we transfer a promised good to a customer and when the customer pays for that good will be one year or less, we elect not to adjust the promised amount of consideration for the effects of any financing component, as it is not significant. Cost of sales: Costs primarily consist of the cost of inventory sold and other production related costs. These costs include raw materials, direct labor, manufacturing overhead, packaging costs, and maintenance costs. Shipping and handling costs are recorded within Cost of sales on the consolidated statements of operations. Selling, general, and administrative expenses: Costs are expensed as incurred and primarily include employee compensation costs related to sales and office personnel, office expenses, and other expenses not directly related to our manufacturing operations. Costs also include advertising and promotional costs. Research and technical expenses: Costs are expensed as incurred and primarily include employee compensation, technical equipment costs, material testing, and innovation-related expenses. Royalty expense: We have licensing agreements with third parties requiring us to pay royalties for certain technologies we use in the manufacturing of our products. Royalty expense is recognized as incurred and recorded within Cost of sales on the consolidated statements of operations. Restructuring and other (income) charges, net: We continually perform strategic reviews and assess the return on our operations, which sometimes results in a plan to restructure the business. The cost and benefit of these strategic restructuring initiatives are recorded within Restructuring and other (income) charges, net on the consolidated statement of operations. These costs are excluded from our operating segment results. We record an accrual for severance and other non-recurring costs under the provisions of the relevant accounting guidance. Additionally, in some restructuring plans, write-downs of long-lived assets may occur. Two types of assets are impacted: assets to be disposed of by sale and assets to be abandoned. Assets to be disposed of by sale are measured at the lower of carrying amount or estimated net proceeds from the sale. Assets to be abandoned with no remaining future service potential are written down to amounts expected to be recovered. The useful lives of assets to be abandoned that have a remaining future service potential are adjusted and depreciation is recorded over the adjusted useful life. Income taxes: We are subject to income taxes in the U.S. and numerous foreign jurisdictions, including China and the United Kingdom ("UK"). The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. We follow the asset and 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 recognized based on the temporary 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. 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. We recognize income tax positions that are more-likely-than-not to be realized and accrue interest related to unrecognized income tax positions, which is included as a component of the income tax provision, on the consolidated statements of operations. Pension and postretirement benefits: We provide both qualified and non-qualified pension and postretirement benefit plans to our employees. The expense related to the current employees, as well as the expense related to retirees, are included within the Consolidated Financial Statements. The costs (or benefits) and obligations related to these benefits reflect key assumptions related to general economic conditions, including interest (discount) rates, healthcare cost trend rates, and expected return on plan assets. The costs (or benefits) and obligations for these benefit programs are also affected by other assumptions, 58 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 such as average retirement age, mortality rates, employee turnover, and plan participation. To the extent our plans' actual experience, as influenced by changing economic and financial market conditions or by changes to our own plans' demographics, differs from these assumptions, the costs and obligations for providing these benefits, as well as the plans' funding requirements, could increase or decrease. When actual results differ from our assumptions, the difference is typically recognized over future periods. In addition, the unrealized gains and losses related to our pension and postretirement benefit obligations may also affect periodic benefit costs (or benefits) in future periods. Share-based compensation: We recognize compensation expense within our Consolidated Financial Statements for all share-based compensation arrangements. Share-based compensation cost is measured at the date of grant, based on the fair value of the award, and expense is recognized over the grantee's requisite service period; forfeitures are recognized as they occur. We calculate the fair value of our stock options using the Black-Scholes option pricing model. The fair value of restricted stock units ("RSU"s), non-employee director deferred stock units ("DSU"s), and performance-based restricted stock units ("PSU"s) is determined using our closing stock price on the date of the grant. Substantially all compensation expense related to share-based awards is recorded as a component of Selling, general and administrative expenses within the consolidated statements of operations. Operating segments: Our operating segments are Performance Materials and Performance Chemicals. Our operating segments were determined based upon the nature of the products produced, the nature of the production process, the type of customer for the products, the similarity of economic characteristics, and the manner in which management reviews results. Our chief operating decision maker evaluates the business at the segment level when making decisions about allocating resources and assessing the performance of Ingevity as a whole. We evaluate sales in a format consistent with our reportable segments: (1) Performance Materials, which includes wood-based, chemically activated carbon products and (2) Performance Chemicals, which includes specialty pine-based chemical co-products derived from the kraft pulping process and caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide. Each segment operates as a portfolio of various end uses for the relevant raw material used in that segment. Fair value measurements: We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The carrying value of our financial instruments: cash and cash equivalents, other receivables, other payables, and accrued liabilities, approximate their fair values due to the short-term nature of these financial instruments. Derivative financial instruments: We are exposed to market risks, such as the impact of changes in interest rates on our floating rate debt, foreign currency exchange rates due to transactions denominated in a variety of foreign currencies, and commodity prices due to purchases of certain raw materials and inputs. Changes in these rates and prices may have an impact on our future cash flow and earnings. We formally document all relationships between the derivative financial instrument and the hedged item, as well as the risk management objective and strategy for undertaking various hedge transactions. We do not hold or issue derivative financial instruments for speculative or trading purposes. We enter into derivative financial instruments which are governed by policies, procedures, and internal processes set forth by our Board of Directors. Our risk management program also addresses counterparty credit risk by selecting only major financial institutions with investment grade ratings. Once the derivative financial instrument is entered into, we continuously monitor the financial institutions’ credit ratings and our credit risk exposure held by the financial institution. When appropriate, we reallocate exposures across multiple financial institutions to limit credit risk. If a counterparty fails to fulfill its performance obligations under the derivative financial instrument, then Ingevity is exposed to credit risk equal to the fair value of the financial instrument. Derivative assets and liabilities are recorded on our consolidated balance sheets at fair value and are presented on a gross basis. Due to our proactive mitigation of these potential credit risks, we anticipate performance by our counterparties to these contracts, and therefore, no material loss is expected. In order to mitigate the impact of market risks, we have and may enter into both net investment hedges and cash flow hedges. Cash Flow Hedges: Cash flow hedges are derivative financial instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative financial instruments that are designated and qualify as a cash flow hedge are recorded on the balance sheet at fair value, and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows 59 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 of the underlying exposures being hedged. The gains and losses arising from qualifying hedging instruments are reported as a component of Accumulated other comprehensive income (loss) (“AOCI”) located within the consolidated balance sheets and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The reclassification gain or losses of the hedge from AOCI are recorded in the same financial statement caption on the consolidated statements of operations as the hedged item. For example, designated cash flow hedges entered to minimize foreign currency exchange risk of forecasted revenue transactions are recorded to Net sales on the consolidated statements of operations when the forecasted transaction occurs. Designated commodity cash flow hedges gains or losses recorded in AOCI are recognized within Cost of sales on the consolidated statements of operations when the inventory is sold. Net Investment Hedges: Net investment hedges are defined as derivative or non-derivative instruments, which are designated as and used to hedge the foreign currency exposure of the net investment in certain foreign operations. The net of the change in the hedge instrument and the item being hedged against for qualifying net investment hedges is reported as a component of the foreign currency adjustments ("CTA") within AOCI on the consolidated balance sheet. The gains (losses) on net investment hedges are reclassified to earnings only when the related CTA are required to be reclassified, usually upon the sale or liquidation of the investment. Treasury stock: We record shares of common stock repurchased at cost as treasury stock, resulting in a reduction of stockholders’ equity on the consolidated balance sheets. When the treasury shares are contributed under our employee benefit plans or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to or deducted from Additional paid-in capital on the consolidated balance sheets. Translation of foreign currencies: The local currency is the functional currency for all of our significant operations outside the U.S., consisting primarily of the euro, the Japanese yen, the pound sterling, and the Chinese renminbi. The assets and liabilities of our foreign subsidiaries are translated into U.S. dollars using period-end exchange rates, and adjustments resulting from these financial statement translations are included within AOCI on the consolidated balance sheets. Revenues and expenses are translated at average rates prevailing during each period. Business combinations: 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 statement 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 purchase price allocation process allows us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained surrounding facts and circumstances existing at the acquisition date. 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. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Based on the acquired business’ end markets and products, as well as how the chief operating decision maker will review the business results, determines the most appropriate operating segment for which to integrate the acquired business. Goodwill acquired, if any, is allocated to the reporting unit within or at the operating segment for which the acquired business will be integrated. 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. Reclassifications: Certain prior year amounts have been reclassified to conform with the current year's presentation. 60 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 3: 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 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, 2024. As of December 31, 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 4: Revenues Disaggregation of Revenue The following tables present our Net sales disaggregated by product line and geography. Years Ended December 31, In millions 2022 2021 2020 Performance Materials segment $ 548.5 $ 516.8 $ 510.0 Performance Chemicals segment Pavement Technologies product line 241.3 195.4 186.8 Industrial Specialties product line 633.8 493.5 391.6 Engineered Polymers product line 244.7 185.8 127.7 Total $ 1,119.8 $ 874.7 $ 706.1 Net sales $ 1,668.3 $ 1,391.5 $ 1,216.1 The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer. Years Ended December 31, In millions 2022 2021 2020 North America $ 983.2 $ 763.3 $ 676.9 Asia Pacific 398.7 385.5 345.4 Europe, Middle East, and Africa 242.2 219.6 174.9 South America 44.2 23.1 18.9 Net sales $ 1,668.3 $ 1,391.5 $ 1,216.1 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 from contracts with certain customers. The contract assets are recognized as accounts receivables when we have an enforceable right 61 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 to payment for performance completed to date 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. Year Ended December 31, In millions 2022 2021 Contract asset at beginning of period $ 5.3 $ 5.7 Additions 20.7 21.5 Reclassification to accounts receivable, billed to customers ( 19.6 ) ( 21.9 ) Contract asset at end of period (1) $ 6.4 $ 5.3 _______________ (1) Included within "Prepaid and other current assets" on the consolidated balance sheet. Note 5: Fair Value Measurements Recurring Fair Value Measurements The following information is presented for assets and liabilities that are recorded on the 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 the three-level fair value hierarchy during the periods reported. In millions Level 1 (1) Level 2 (2) Level 3 (3) Total December 31, 2022 Assets: Deferred compensation plan investments (4) $ 1.1 $ — $ — $ 1.1 Total assets $ 1.1 $ — $ — $ 1.1 Liabilities: Deferred compensation arrangement (4) $ 12.5 $ — $ — $ 12.5 Total liabilities $ 12.5 $ — $ — $ 12.5 In millions Level 1 (1) Level 2 (2) Level 3 (3) Total 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 recognized on our balance sheets. Both the asset and liability related to investment securities are recorded at fair value and are included within "Other assets" and "Other liabilities" on the consolidated balance sheets, respectively. In addition to the investment securities, we also had company-owned life insurance related to the deferred compensation arrangement recorded at cash surrender value in "Other assets" of $ 13.3 million and $ 14.0 million at December 31, 2022 and 2021, respectively. (5) Included within "Other liabilities" on the consolidated balance sheet. 62 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Nonrecurring Fair Value Measurements There were no nonrecurring fair value measurements on the consolidated balance sheet during the year ended December 31, 2022 and 2021 , respectively. Strategic Investments Equity Method Investments During 2021 and 2022, we acquired two separate strategic investments in privately-held companies for $ 16.5 million and $ 14.6 million, respectively, which are both accounted for under the equity method of accounting. The carrying value of our strategic equity investments was $ 28.2 million at December 31, 2022 and $ 16.5 million at December 31, 2021. There were no adjustments to the carrying value of equity method investments for impairment for the periods ended, December 31, 2022 and 2021 . During 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 December 31, 2022 and 2021, respectively, we had approximately $ 6.7 million and zero of unfunded commitments, which we anticipate will be paid over a period of 10 years. The carrying value of our strategic equity investment was $ 0.7 million and zero at December 31, 2022 and 2021 , respectively . Measurement Alternative Investments During 2022, we invested $ 62.0 million to acquire equity interests in two separate strategic investments, $ 60.0 million of which was our investment in lithium-ion anode materials producer, Nexeon Limited. Both of these investments are accounted for under the measurement alternative method. During 2021, we acquired two strategic investments in privately-held companies for $ 18.8 million. The aggregate carrying value of all measurement alternative investments where fair value is not readily determinable totaled $ 80.9 million and $ 18.8 million at December 31, 2022 and 2021, respectively. There were no adjustments to the carrying value of the measurement alternative method investments for impairment or observable price changes for the periods ended December 31, 2022 or 2021. Restricted Investment Our restricted investment is a trust managed in order to secure repayment of the finance lease obligation associated with Performance Materials' Wickliffe, Kentucky, manufacturing site at maturity. The trust, presented as a restricted investment on our consolidated balance sheets, purchased long-term bonds that mature in 2025 and 2026. The principal received at maturity of the bonds, along with interest income that is reinvested in the trust, are expected to be equal to or more than the $ 80.0 million finance lease obligation that is due in 2027. Because the provisions of the trust provide us the ability, and it is our intent, to hold the investments to maturity, the investments held by the trust are accounted for as held to maturity ("HTM"); therefore, they are held at their amortized cost. The investments held by the trust earn interest at the stated coupon rate of the invested bonds. Interest earned on the investments held by the trust is recognized as interest income and presented within interest income on our consolidated statement of operations. At December 31, 2022 and 2021, the carrying value of our restricted investment, which is accounted for as HTM and therefore held at amortized costs, was $ 78.0 million and $ 76.1 million, net of an allowance for credit losses of $ 0.6 million and $ 0.5 million and included cash of $ 7.0 million and $ 4.7 million, respectively. The fair value at December 31, 2022 and 2021 was $ 74.7 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 December 31, 2022 $ 13.4 — 10.5 13.2 14.1 20.4 $ 71.6 December 31, 2021 $ 13.4 — 10.6 13.3 14.1 20.5 $ 71.9 63 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Debt and Finance Lease Obligations At December 31, 2022 and 2021, the carrying value of finance lease obligations was $ 101.9 million and $ 102.4 million, respectively, and the fair value was $ 106.2 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 value, excluding debt issuance fees, of our variable rate debt was $ 828.0 million and $ 328.1 million as of December 31, 2022 and 2021, respectively. The carrying value is a reasonable estimate of the fair value of our outstanding debt as our outstanding debt is variable interest rate debt. At December 31, 2022 and 2021, the carrying value of our fixed rate debt was $ 550.0 million and $ 850.0 million, respectively, and the fair value was $ 471.8 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 the expiration on December 31, 2024, therein referred to as "Revenue Earn-out." The fair value of the five-year Revenue Earn-out consideration was zero and $ 0.8 million at December 31, 2022 and 2021, respectively . Any changes in the fair value of the contingent consideration liability are recorded in current period earnings as a selling, general, and administrative expense. Note 6: Inventories, net December 31, In millions 2022 2021 Raw materials $ 106.7 $ 48.8 Production materials, stores and supplies 27.9 26.8 Finished and in-process goods 228.2 183.4 Subtotal $ 362.8 $ 259.0 Less: LIFO reserve ( 27.8 ) ( 17.8 ) Inventories, net $ 335.0 $ 241.2 As of December 31, 2022, approximately 47 percent, 8 percent, and 45 percent of our Inventories, net, were accounted for under the FIFO, average cost, and LIFO methods, respectively. As of December 31, 2021, approximately 38 percent, 11 percent, and 51 percent of our Inventories, net, were accounted for under the FIFO, average cost, and LIFO methods, respectively. 64 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 7: Property, Plant, and Equipment, net Property, plant, and equipment, net consist of the following: December 31, In millions 2022 2021 Machinery and equipment $ 1,162.7 $ 1,113.3 Buildings and leasehold improvements 200.9 177.2 Land and land improvements 24.9 20.4 Construction in progress 120.9 64.4 Total cost $ 1,509.4 $ 1,375.3 Less: accumulated depreciation ( 710.8 ) ( 655.6 ) Property, plant, and equipment, net (1) $ 798.6 $ 719.7 _______________ (1) This includes finance leases related to machinery and equipment of $ 94.3 million and $ 94.5 million, and net carrying value of $ 25.2 million and $ 27.7 million; buildings and leasehold improvements of $ 39.6 million and $ 29.0 million, and net carrying value of $ 34.9 million and $ 26.2 million; and construction in progress of zero and zero at December 31, 2022 and 2021, respectively. Amortization expense associated with these finance leases is included within depreciation expense. The payments remaining under these finance lease obligations are included within Note 13. Depreciation expense was $ 70.9 million, $ 70.6 million, and $ 61.2 million for the years ended December 31, 2022, 2021, and 2020, respectively. Note 8: Goodwill and Other Intangible Assets, net Goodwill Reporting Units In millions Performance Chemicals Performance Materials Total December 31, 2020 $ 441.0 $ 4.3 $ 445.3 Foreign currency translation ( 3.3 ) — ( 3.3 ) December 31, 2021 $ 437.7 $ 4.3 $ 442.0 Foreign currency translation ( 33.3 ) — ( 33.3 ) Goodwill acquired (1) 109.8 — 109.8 December 31, 2022 $ 514.2 $ 4.3 $ 518.5 _______________ (1) See Note 16 for more information about our acquisitions. 65 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Other Intangible Assets In millions Customer contracts and relationships Brands (1) Developed Technology Other Total Gross Asset Value December 31, 2020 $ 319.5 $ 82.4 $ 73.0 $ 2.7 $ 477.6 Retirements — — — ( 2.2 ) ( 2.2 ) Foreign currency translation ( 1.7 ) ( 0.7 ) ( 0.8 ) — ( 3.2 ) December 31, 2021 317.8 81.7 72.2 0.5 472.2 Acquisitions (2) 88.6 15.0 23.5 — 127.1 Retirements — — — ( 0.5 ) ( 0.5 ) Foreign currency translation ( 17.9 ) ( 7.5 ) ( 7.2 ) — ( 32.6 ) December 31, 2022 $ 388.5 $ 89.2 $ 88.5 $ — $ 566.2 Accumulated Amortization December 31, 2020 $ ( 73.6 ) $ ( 15.8 ) $ ( 12.5 ) $ ( 2.4 ) $ ( 104.3 ) Amortization ( 21.7 ) ( 4.7 ) ( 6.6 ) ( 0.2 ) ( 33.2 ) Retirements — — — 2.1 2.1 Foreign currency translation 0.3 0.2 0.3 — 0.8 December 31, 2021 ( 95.0 ) ( 20.3 ) ( 18.8 ) ( 0.5 ) ( 134.6 ) Amortization ( 22.2 ) ( 4.6 ) ( 6.8 ) — ( 33.6 ) Retirements — — — 0.5 0.5 Foreign currency translation 3.4 1.0 1.9 — 6.3 December 31, 2022 $ ( 113.8 ) $ ( 23.9 ) $ ( 23.7 ) $ — $ ( 161.4 ) Other intangibles, net (3) $ 274.7 $ 65.3 $ 64.8 $ — $ 404.8 _______________ (1) Represents trademarks, trade names, and know-how. (2) See Note 16 for more information about our acquisitions. (3) The weighted average amortization period remaining for all intangibles is 11.3 years, while the weighted average amortization period remaining for customer contracts and relationships, brands, and developed technology and other intangibles is 11.8 years, 12.3 years, 8.4 years, and zero years , respectively. 66 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Intangible assets subject to amortization were allocated among our business segments as follows: December 31, In millions 2022 2021 Performance Materials $ 1.7 $ 1.9 Performance Chemicals 403.1 335.7 Other intangibles, net $ 404.8 $ 337.6 The amortization expense related to our intangible assets in the table above is shown in the table below. Years Ended December 31, In millions 2022 2021 2020 Cost of sales $ — $ — $ 0.1 Selling, general, and administrative expenses 33.6 33.2 32.5 Total amortization expense $ 33.6 $ 33.2 $ 32.6 Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2023 - $ 41.8 million, 2024 - $ 41.5 million, 2025 - $ 41.2 million, 2026 - $ 40.5 million and 2027 - $ 40.5 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency exchange rates. Note 9: Financial Instruments and Risk Management Net Investment Hedges During 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 consolidated statement of cash flows. The $ 14.7 million gain is reported as a component of the CTA within AOCI on the consolidated balance sheet. Gains on net investment hedges are reclassified to earnings only when the related CTA are required to be reclassified, usually upon the 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 December 31, 2022 and December 31, 2021, respectively. During the years ended December 31, 2022, 2021, and 2020, we recognized net interest income associated with this financial instrument of $ 1.1 million, $ 0.5 million, and $ 1.6 million, respectively. Cash Flow Hedges Foreign Currency Exchange Risk Management We manufacture and sell our products in several countries throughout the world and thus, we are exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, we net the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, from time to time, we utilize forward currency exchange contracts and zero cost collar option contracts to minimize the volatility to earnings and cash flows resulting from the effect of fluctuating foreign currency exchange rates on export sales denominated in foreign currencies (principally the euro). These contracts are generally designated as cash flow hedges. Designated cash flow hedges entered to minimize foreign currency exchange risk of forecasted revenue transactions are recorded to Net sales on the consolidated statement of operations when the forecasted transaction occurs. As of December 31, 2022, there were $ 16.9 million in open foreign currency derivative contracts. The fair value of the designated foreign currency hedge contracts was an asset (liability) of $( 0.5 ) million and $ 0.5 million as of December 31, 2022 and 2021, respectively. 67 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 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 the 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 December 31, 2022, we had 1.4 million and 0.5 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 December 31, 2022, open commodity contracts hedge forecasted transactions until December 2023. The fair value of the outstanding designated natural gas commodity hedge contracts was a net asset (liability) of $( 1.6 ) million and $( 0.6 ) million as of December 31, 2022 and 2021, 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 based upon a 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 10 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 income on the consolidated statement of operations. The fair value of outstanding interest rate instruments at December 31, 2022 and December 31, 2021 was an asset (liability) of zero and $( 4.0 ) million, respectively. 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 into Net income Years Ended December 31, 2022 2021 2020 2022 2021 2020 Cash flow hedging derivatives Currency exchange contracts $ 0.9 $ 0.8 $ ( 0.1 ) $ 2.0 $ 0.3 $ ( 0.1 ) Net sales Natural gas contracts 4.4 1.6 ( 0.5 ) 6.5 0.7 ( 1.1 ) Cost of sales Interest rate swap contracts 5.8 4.8 ( 5.0 ) 1.7 — — Interest income Total $ 11.1 $ 7.2 $ ( 5.6 ) $ 10.2 $ 1.0 $ ( 1.2 ) 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) Years Ended December 31, 2022 2021 2020 2022 2021 2020 Net investment hedging derivative Currency exchange contracts (1) $ 13.9 $ 9.6 $ ( 11.7 ) $ 1.1 $ 0.5 $ 1.6 Interest income Total $ 13.9 $ 9.6 $ ( 11.7 ) $ 1.1 $ 0.5 $ 1.6 __________ (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 $ 1.7 million of losses from AOCI to earnings before taxes. 68 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Fair-Value Measurements The following information is presented for derivative assets and liabilities that are recorded on the 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 Level 1 and Level 2 during the periods reported. There were no non-recurring fair value measurements related to derivative assets and liabilities on our consolidated balance sheet during the fiscal years ending December 31, 2022, 2021, or 2020, respectively. December 31, 2022 In millions Level 1 (1) Level 2 (2) Level 3 (3) Total Liabilities: Natural gas contracts (6) $ — $ 1.6 $ — $ 1.6 Currency exchange contracts (6) — 0.5 — 0.5 Total liabilities $ — $ 2.1 $ — $ 2.1 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 consolidated balance sheet. (5) Included within "Other assets" on the consolidated balance sheet. (6) Included within "Accrued expenses" on the consolidated balance sheet. (7) Included within "Other liabilities" on the consolidated balance sheet. 69 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 10: Debt, including Finance Lease Obligations Current and long-term debt including finance lease obligations consisted of the following: December 31, In millions, except percentages 2022 2021 Revolving Credit Facility and other lines of credit (1) $ 828.0 $ — 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 (2) 101.9 102.4 Total debt including finance lease obligations $ 1,479.9 $ 1,280.5 Less: debt issuance costs 6.5 10.9 Total debt including finance lease obligations, net of debt issuance costs $ 1,473.4 $ 1,269.6 Less: debt maturing within one year (3) 0.9 19.6 Long-term debt including finance lease obligations $ 1,472.5 $ 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 $ 169.7 million and $ 497.5 million at December 31, 2022 and 2021, respectively. (2) Refer to Note 13 for more information. (3) Debt maturing within one year is included within "Notes payable and current maturities of long-term debt" on the consolidated balance sheet. Revolving Credit Facility 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 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, zero , and $ 2.2 million were incurred in 2022, 2021, and 2020, respectively, to secure the various amendments associated with our revolving credit facility. These fees have been deferred and will be amortized over the term of the facility. 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 and $ 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 on the consolidated statements of operations. Legal expenses associated with this repayment have been recorded as incurred. 70 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Senior Notes Senior Note due 2026 On April 27, 2022, we redeemed the $ 300 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 on the consolidated statements of operations. Legal expenses associated with this redemption have been recorded as incurred. Senior Note due 2028 On October 28, 2020, we issued $ 550 million aggregate principal amount of 3.88 % senior unsecured notes due 2028 (the “2028 Notes”). The 2028 Notes were issued pursuant to an indenture dated as of October 28, 2020, by and among Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The net proceeds from the sale of the 2028 Notes, after deducting deferred financing fees of $ 8.8 million, were used to repay the existing term loan and the outstanding balances under our revolving credit facility. Interest payments on the 2028 Notes are due semiannually in arrears on November 1st and May 1st of each year, beginning on May 1, 2021, at a rate of 3.88 percent per year. The 2028 Notes will mature on November 1, 2028. At any time prior to November 1, 2023, the Issuer may, on any one or more occasions, redeem up to 40 percent of the original aggregate principal amount of Notes (calculated after giving effect to any issuance of Additional Notes) issued under the Indenture, upon not less than 10 nor more than 60 days notice to holders of Notes (with a copy to the Trustee), at a redemption price equal to 103.875 percent of the principal amount of the Notes redeemed, plus accrued but unpaid interest. 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 December 31, 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 December 31, 2022 were 2.5 and our actual interest coverage for the four consecutive quarters ended December 31, 2022 was 9.9 . We were in compliance with all covenants at December 31, 2022. 71 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 11: Share-based Compensation Equity Incentive Plan The Ingevity Corporation 2016 Omnibus Incentive Plan, adopted on May 15, 2016, grants certain corporate officers, key employees, and non-employee directors of Ingevity and subsidiaries different forms of benefits, including stock options, RSU, DSU, and PSU. The Ingevity Corporation 2016 Omnibus Incentive Plan has a maximum shares reserve of 4,000,000 for the grant of equity awards. As of December 31, 2022, 2,930,182 shares under the Ingevity Corporation 2016 Omnibus Incentive Plan are still available for grants, assuming that Ingevity performs at the target performance level in each year of the three-year performance period for PSU awards. The Leadership Development and Compensation Committee of Ingevity's Board of Directors ("Compensation Committee") determines the long-term incentive mix, including stock options, RSUs, and PSUs, and may authorize new grants annually. We typically issue new common shares for the vesting of awards under our equity incentive plan. Employee Stock Purchase Plan On December 9, 2016, our Compensation Committee and Board of Directors approved the 2017 Ingevity Corporation Employee Stock Purchase Plan ("ESPP"), which was approved by Ingevity’s stockholders on April 27, 2017. The ESPP allows eligible employee participants to purchase no more than 5,000 shares of our common stock at a discount through payroll deductions up to 15 percent of their compensation deducted during the purchase period. However, no participant shall be permitted to purchase common stock with a value greater than $ 25,000 in any calendar year. The ESPP is a tax-qualified plan under Section 423 of the Internal Revenue Code. The ESPP consists of a one-month enrollment period preceding the three-month purchase period. Employees purchase shares in each purchase period at 85 percent of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. Under the ESPP, a total of 250,000 shares of Ingevity's common stock are reserved and authorized for issuance to participating U.S. employees, as defined by the ESPP, which excludes certain officers of Ingevity. We typically issue treasury shares for issuances under the ESPP. As of December 31, 2022, 56,873 shares under the ESPP are still available for issuance. The initial offering period under the ESPP began on July 1, 2017. During fiscal year 2022, there were 48,389 shares issued under the ESPP at an average price of $ 58.93 . Our share-based compensation and ESPP expense is included in the table below. Years Ended December 31, In millions 2022 2021 2020 Stock option expense $ 1.5 $ 1.7 $ 0.6 ESPP expense 0.7 0.6 0.5 RSU, DSU and PSU expense 13.9 10.0 7.3 Total share-based compensation expense (1) $ 16.1 $ 12.3 $ 8.4 Income tax benefit ( 3.1 ) ( 2.3 ) ( 1.5 ) Total share-based compensation expense, net of tax $ 13.0 $ 10.0 $ 6.9 _______________ (1) Amounts reflected in "Selling, general, and administrative expenses" on the consolidated statements of operations. 72 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Stock Options All stock options vest in accordance with vesting conditions set by the Compensation Committee. Stock options granted to date have vesting periods of one to three years from the date of grant. Incentive and non-qualified options granted under the Plan expire no later than 10 years from the grant date. Expense related to stock options granted is based on the assumptions shown in the table below: Years Ended December 31, Weighted-average assumptions used to calculate expense for stock options 2022 2021 2020 Risk-free interest rate 1.8 % 1.0 % 1.0 % Average life of options (years) 6.0 6.5 6.5 Volatility 40.0 % 46.0 % 33.5 % Dividend yield — — — Fair value per stock option $ 28.80 $ 33.07 $ 15.87 The following table summarizes Ingevity's stock option activity. Number of Options (in thousands) Weighted-average exercise price (per share) Weighted-average remaining contractual term (years) Aggregate intrinsic value (in thousands) Outstanding, December 31, 2021 338 $ 61.34 6.7 $ 5,366 Granted 74 68.23 Exercised ( 33 ) 46.79 Forfeited ( 44 ) 69.94 Cancelled — — Outstanding, December 31, 2022 335 $ 63.18 6.1 $ 4,100 Exercisable, December 31, 2022 224 $ 61.94 4.9 $ 3,568 The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between Ingevity's closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options at each year end. The amount changes based on the fair market value of Ingevity's stock. As of December 31, 2022, $ 1.1 million of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted-average period of one year . Restricted Stock Units, Deferred Stock Units, and Performance-based Restricted Stock Units All RSUs, DSUs, and PSUs vest in accordance with vesting conditions set by the Compensation Committee. RSUs and DSUs granted to date have vesting periods ranging from less than one year to three years from the date of grant. PSUs granted to date have vesting periods of three years from the date of grant, including grants that have a cumulative three-year performance period, subject to the satisfaction of the applicable performance goals established for the respective grant. We periodically assess the probability of achievement of the performance criteria and adjust the amount of compensation expense accordingly. Compensation expense is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria. 73 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 The following table summarizes Ingevity's RSUs, DSUs, and PSUs activity. RSUs and DSUs PSUs Number of Units (in thousands) (1) Weighted average grant date fair value (per share) Number of Units (in thousands) (1) Weighted average grant date fair value (per share) Nonvested, December 31, 2021 243 $ 67.36 166 $ 65.91 Granted 179 66.42 83 68.23 Vested ( 95 ) 71.62 — — Forfeited ( 26 ) 63.32 ( 56 ) 82.96 Nonvested, December 31, 2022 (2) 301 $ 6.04 193 $ 61.88 _______________ (1) The number granted represents the number of shares issuable upon vesting of RSUs and DSUs. For PSUs, the number granted represents the number of shares issuable upon vesting, assuming that Ingevity performs at the target performance level in each year of the three-year performance period. (2) Excludes 5,715 non-employee director shares that were vested but unissued at December 31, 2022. As of December 31, 2022, $ 15.6 million of unrecognized share-based compensation expense related to RSUs, DSUs and PSUs is expected to be recognized over a weighted-average period of 1.2 years. 74 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 12: Equity Accumulated other comprehensive income (loss) Summarized below is the roll forward of AOCI, net of tax. Years Ended December 31, In millions 2022 2021 2020 Foreign currency translation Beginning balance $ 18.4 $ 16.4 $ 1.5 Net gains (losses) on foreign currency translation ( 74.9 ) ( 5.3 ) 23.9 Gains (losses) on net investment hedges 13.9 9.6 ( 11.7 ) Less: tax provision (benefit) 3.2 2.3 ( 2.7 ) Net gains (losses) on net investment hedges 10.7 7.3 ( 9.0 ) Other comprehensive income (loss), net of tax ( 64.2 ) 2.0 14.9 Ending balance $ ( 45.8 ) $ 18.4 $ 16.4 Derivative instruments Beginning balance $ ( 2.1 ) $ ( 6.9 ) $ ( 3.5 ) Gains (losses) on derivative instruments 11.1 7.2 ( 5.6 ) Less: tax provision (benefit) 2.6 1.7 ( 1.3 ) Net gains (losses) on derivative instruments 8.5 5.5 ( 4.3 ) (Gains) losses reclassified to net income ( 10.2 ) ( 1.0 ) 1.2 Less: tax (provision) benefit ( 2.4 ) ( 0.3 ) 0.3 Net (gains) losses reclassified to net income ( 7.8 ) ( 0.7 ) 0.9 Other comprehensive income (loss), net of tax 0.7 4.8 ( 3.4 ) Ending balance $ ( 1.4 ) $ ( 2.1 ) $ ( 6.9 ) Pension and other postretirement benefits Beginning balance $ ( 3.2 ) $ ( 4.8 ) $ ( 3.0 ) Unrealized actuarial gains (losses) and prior service (costs) credits 4.4 1.9 ( 2.7 ) Less: tax provision (benefit) 1.0 0.4 ( 0.6 ) Net actuarial gains (losses) and prior service (costs) credits 3.4 1.5 ( 2.1 ) Amortization of actuarial and other (gains) losses, prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income 0.3 0.2 0.3 Less: tax (provision) benefit 0.1 0.1 — Net actuarial and other (gains) losses, amortization of prior service cost (credits), and settlement and curtailment (income) charge reclassified to net income 0.2 0.1 0.3 Other comprehensive income (loss), net of tax 3.6 1.6 ( 1.8 ) Ending balance $ 0.4 $ ( 3.2 ) $ ( 4.8 ) Total AOCI ending balance at December 31 $ ( 46.8 ) $ 13.1 $ 4.7 75 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Reclassifications of accumulated other comprehensive income (loss) The table below provides details about the reclassifications from AOCI and the affected line items on the consolidated statement of operations for each of the periods presented. Years Ended December 31, In millions 2022 2021 2020 Derivative Instruments Currency exchange contracts (1) $ 2.0 $ 0.3 $ ( 0.1 ) Natural gas contracts (2) 6.5 0.7 ( 1.1 ) Interest rate swaps (4) 1.7 — — Total before tax 10.2 1.0 ( 1.2 ) (Provision) benefit for income taxes ( 2.4 ) ( 0.3 ) 0.3 Amount included within net income (loss) $ 7.8 $ 0.7 $ ( 0.9 ) Pension and other postretirement benefits Amortization of prior service credit (costs) (2) $ ( 0.1 ) $ ( 0.1 ) $ ( 0.1 ) Amortization of unrecognized net actuarial and other gains (losses) (3) — ( 0.1 ) ( 0.1 ) Recognized gain (loss) due to curtailment and settlement (2) ( 0.2 ) — ( 0.1 ) Total before tax ( 0.3 ) ( 0.2 ) ( 0.3 ) (Provision) benefit for income taxes 0.1 0.1 — Amount included within net income (loss) $ ( 0.2 ) $ ( 0.1 ) $ ( 0.3 ) _______________ (1) Included within "Net sales" on the consolidated statements of operations. (2) Included within "Cost of sales" on the consolidated statements of operations. (3) Included within "Other (income) expense, net" on the consolidated statements of operations. (4) Included within "Interest income" on the consolidated statements 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 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 stock, 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 unused under our Board-authorized repurchase program. During the year ended December 31, 2021 and 2020, we repurchased $ 109.4 million and $ 88.0 million in common stock, representing 1,421,379 and 1,533,442 shares of our common stock at a weighted average cost per share of $ 76.98 and $ 57.38 , respectively. 76 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 13: Leases We have both operating and finance leases, with the majority being operating lease agreements related to rail cars, tanks, equipment, and real estate. Supplemental consolidated balance sheet information related to our leases is as follows: December 31, In millions Financial Statement Caption 2022 2021 Assets Operating lease assets, net (1) Operating lease assets, net $ 56.6 $ 52.4 Finance lease assets, net (2) Property, plant, and equipment, net 60.1 53.9 Finance lease assets, net (2) Other assets, net 0.1 0.3 Total lease assets $ 116.8 $ 106.6 Liabilities Current Operating lease liabilities (3) Current operating lease liabilities $ 16.5 $ 17.4 Finance lease liabilities Notes payable and current maturities of long-term debt 0.9 0.8 Noncurrent Operating lease liabilities Noncurrent operating lease liabilities 40.8 36.2 Finance lease liabilities Long-term debt including finance lease obligations 101.0 101.6 Total lease liabilities $ 159.2 $ 156.0 _______________ (1) Operating lease assets, net are recorded net of accumulated amortization of $ 40.8 million, and $ 35.5 million as of December 31, 2022, and 2021, respectively. (2) Finance lease assets, net are recorded net of accumulated amortization in Property, plant, and equipment, net and Other assets, net of $ 73.8 million and $ 1.4 million, as of December 31, 2022, and $ 69.6 million and $ 1.3 million, as of December 31, 2021. (3) Operating lease liabilities include $ 0.2 million, and $ 0.2 million of accrued interest, as of December 31, 2022 and 2021, respectively. Finance Leases Our finance lease obligations of $ 101.9 million, and $ 102.4 million at December 31, 2022 and 2021, respectively, primarily consist of three leases. The first obligation of $ 80.0 million, at December 31, 2022, is owed to the city of Wickliffe, Kentucky, associated with Performance Materials' Wickliffe, Kentucky, manufacturing site, which is due at maturity in 2027. The second obligation of $ 21.6 million, at December 31, 2022, is owed to the lessor of our corporate headquarters in North Charleston, South Carolina. The lease commenced in July 2020, with a term of 15 years. The third obligation of $ 0.3 million, at December 31, 2022, is owed to the Industrial Development Board of the city of Greenville, Alabama, associated with Performance Chemicals' Greenville, Alabama, manufacturing site, which is due to mature in 2028. We also have a finance lease obligation due in 2031 for certain assets located at our Performance Materials' Waynesboro, Georgia, manufacturing facility. The lease is with the Development Authority of Burke County (“Authority”). The Authority established the sale-leaseback of these assets by issuing an industrial development revenue bond. The bond was purchased by Ingevity and the obligations under the finance lease remain with Ingevity. Accordingly, we offset the finance lease obligation and bond on our consolidated balance sheets. 77 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Components of lease cost are as follows: Years Ended December 31, In millions Financial Statement Caption 2022 2021 2020 Operating lease cost (1) Cost of sales $ 19.9 $ 19.5 $ 19.4 Selling, general, and administrative expenses 1.4 1.4 1.9 Finance lease cost Amortization of leased assets Cost of sales $ 3.0 $ 3.3 $ 2.6 Selling, general, and administrative expenses 1.6 1.6 0.8 Interest on lease liabilities Interest expense, net 7.5 7.5 6.8 Net lease cost (2) $ 33.4 $ 33.3 $ 31.5 _______________ (1) Includes short-term leases and variable lease costs, which are immaterial. (2) Only on the rare occasion do we sublease our leased assets; as a result, this amount excludes sublease income which is immaterial. Maturity of Lease Liabilities December 31, 2022 In millions Operating leases Finance leases Total 2023 $ 18.8 $ 8.3 $ 27.1 2024 15.5 8.4 23.9 2025 11.8 8.4 20.2 2026 8.2 8.5 16.7 2027 5.8 85.5 91.3 2028 and thereafter 3.9 19.6 23.5 Total lease payments $ 64.0 $ 138.7 $ 202.7 Less: Interest 6.7 36.8 43.5 Present value of lease liabilities (1) $ 57.3 $ 101.9 $ 159.2 _______________ (1) As of December 31, 2022, we have zero operating lease commitments that have not yet commenced related to manufacturing and office equipment leases. Lease Term and Discount Rate December 31, In millions, except percentages 2022 2021 Weighted-average remaining lease term (years) Operating leases 4.4 4.1 Finance leases 12.4 6.9 Weighted-average discount rate Operating leases 5.16 % 4.97 % Finance leases 7.19 % 7.18 % 78 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Other Information Years Ended December 31, In millions 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 18.8 $ 20.5 $ 18.5 Operating cash flows from finance leases 7.5 7.5 6.8 Financing cash flows from finance leases 0.9 0.7 0.7 Note 14: Retirement Plans Defined Contribution Plans Eligible employees may participate in our retirement savings plan ("Plan"), a qualified salary-reduction plan under Section 401(k) of the U.S. Internal Revenue Code by contributing a portion of their compensation. For non-union eligible employees participating in the Plan, Ingevity makes matching contributions up to six percent of the employee deferral. In addition to the matching contributions, Ingevity also makes a non-elective contribution of three percent of eligible compensation per payroll for non-union employees. For eligible union employees participating in the Plan, Ingevity makes matching contributions up to 100 percent of the first three percent of the employee deferrals and 50 percent on the next two percent of deferrals. Employee contributions, as well as Ingevity’s match contributions, are made to funds designated by the participant, none of which are based on Ingevity’s common stock. Charges associated with employer contributions to the Plan were $ 11.2 million, $ 9.5 million, and $ 10.6 million for the years ended December 31, 2022, 2021, and 2020, respectively. Defined Benefit Pension and Postretirement Plans Ingevity has both established qualified and non-qualified benefit plans to provide pension and post-retirement benefits to certain employees and retirees. Our retirement obligations consist of accrued defined benefit obligations earned by Ingevity domestic hourly union employees; accrued obligations from a frozen non-qualified defined benefit pension plan for certain salaried and former salaried employees of Ingevity; and other post-retirement medical and life insurance benefits. We are required to recognize on our consolidated balance sheets the overfunded and underfunded status of our defined benefit postretirement plans. The overfunded and underfunded status is defined as the difference between the fair value of plan assets and the projected benefit obligation. We are also required to recognize, as a component of other comprehensive income, the actuarial gains and losses and the prior service costs and credits that arise during the period. 79 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 The following tables summarize the weighted average assumptions used and components of our defined benefit postretirement plans at December 31, 2022 and 2021. Pensions Other Benefits December 31, In millions, except percentages 2022 2021 2022 2021 Following are the weighted average assumptions used to determine the benefit obligations at December 31: Discount rate - qualified benefit plans 5.00 % 2.75 % — % — % Discount rate - non-qualified benefit plans 5.00 % 2.65 % 4.90 % 2.60 % Rate of compensation increase N/A N/A N/A N/A Change in projected benefit obligation Projected benefit obligation at January 1 $ 45.0 $ 45.0 $ 0.9 $ 1.0 Service cost 1.5 1.7 — — Interest cost 1.2 1.1 — — Actuarial loss (gain) ( 14.2 ) ( 2.1 ) ( 0.1 ) ( 0.1 ) Plan amendments 0.5 0.3 ( 0.1 ) — Benefit payments ( 1.2 ) ( 1.0 ) — — Projected benefit obligation at December 31 (1) 32.8 45.0 0.7 0.9 Change in plan assets Fair value of plan asset at January 1 31.8 31.2 — — Actual return on plan assets ( 7.8 ) 1.4 — — Company contributions 0.3 0.2 — — Benefit payments ( 1.2 ) ( 1.0 ) — — Fair value of plan assets at December 31 23.1 31.8 — — Funded Status Net Funded Status of the Plan (Liability) $ ( 9.7 ) $ ( 13.2 ) $ ( 0.7 ) $ ( 0.9 ) Pensions Other Benefits December 31, In millions 2022 2021 2022 2021 Amount recognized on the consolidated balance sheets: Pension and other postretirement benefit asset (2) $ — $ — $ — $ — Pension and other postretirement benefit (liability) (2) ( 9.7 ) ( 13.2 ) ( 0.7 ) ( 0.9 ) Total Net Funded Status of the Plan (Liability) $ ( 9.7 ) $ ( 13.2 ) $ ( 0.7 ) $ ( 0.9 ) _______________ (1) The accumulated benefit obligation for all years presented equals the projected benefit obligation for each plan, respectively. (2) Asset balance is included within "Other assets" and liability balances are included within "Other liabilities" on the consolidated balance sheet. 80 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Amounts Recognized in Other Comprehensive Income (Loss) Changes in plan assets and benefit obligations recognized in other comprehensive income (loss) are as follows: Years Ended December 31, Pensions Other Benefits Total In millions 2022 2021 2020 2022 2021 2020 2022 2021 2020 Current year net actuarial loss (gain) $ ( 4.7 ) $ ( 2.1 ) $ 2.3 $ ( 0.1 ) $ ( 0.1 ) $ 0.1 $ ( 4.8 ) $ ( 2.2 ) $ 2.4 Current year prior service cost (credit) 0.5 0.3 0.3 ( 0.1 ) — — 0.4 0.3 0.3 Amortization of net actuarial (loss) gain and prior service (cost) credit ( 0.1 ) ( 0.2 ) ( 0.2 ) — — — ( 0.1 ) ( 0.2 ) ( 0.2 ) Settlement and curtailment (charges) income, net ( 0.2 ) — ( 0.1 ) — — — ( 0.2 ) — ( 0.1 ) Total recognized in other comprehensive (income) loss, before taxes ( 4.5 ) ( 2.0 ) 2.3 ( 0.2 ) ( 0.1 ) 0.1 ( 4.7 ) ( 2.1 ) 2.4 Total recognized in other comprehensive (income) loss, after taxes $ ( 3.4 ) $ ( 1.5 ) $ 1.7 $ ( 0.2 ) $ ( 0.1 ) $ 0.1 $ ( 3.6 ) $ ( 1.6 ) $ 1.8 Amounts Recognized in Accumulated Other Comprehensive Income (Loss) The amounts in accumulated other comprehensive income (loss) that have not yet been recognized as components of net periodic benefit cost are as follows: December 31, Pensions Other Benefits Total In millions 2022 2021 2022 2021 2022 2021 Net actuarial (gain) loss $ ( 1.6 ) $ 3.1 $ ( 0.1 ) $ 0.1 $ ( 1.7 ) $ 3.2 Prior service cost (credit) 1.3 1.0 ( 0.1 ) — 1.2 1.0 Accumulated other comprehensive (income) loss, before taxes ( 0.3 ) 4.1 ( 0.2 ) 0.1 ( 0.5 ) 4.2 Accumulated other comprehensive (income) loss, after taxes $ ( 0.2 ) $ 3.1 $ ( 0.2 ) $ 0.1 $ ( 0.4 ) $ 3.2 81 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Net Annual Benefit Costs Assumptions The following table summarizes the weighted-average assumptions used for the components of net annual benefit cost: Years Ended December 31, Pensions Other Benefits In millions, except percentages 2022 2021 2020 2022 2021 2020 Discount rate - qualified benefit plans (1) 2.75 % 2.45 % 3.15 % — % — % — % Discount rate - non-qualified benefit plans (1) 2.65 % 2.30 % 3.10 % 2.60 % 2.20 % 3.05 % Expected return on plan assets 5.50 % 4.50 % 4.50 % N/A N/A N/A Components of net annual benefit cost: Service cost (2) $ 1.5 $ 1.7 $ 1.6 $ — $ — $ — Interest cost (3) 1.2 1.1 1.2 — — — Expected return on plan assets (3) ( 1.7 ) ( 1.4 ) ( 1.2 ) — — — Amortization of prior service cost (2) 0.2 0.1 0.1 — — — Amortization of net actuarial and other (gain) loss (3) — 0.1 0.1 — — — Recognized (gain) loss due to curtailments (4) 0.2 — 0.1 — — — Net annual benefit cost $ 1.4 $ 1.6 $ 1.9 $ — $ — $ — _______________ (1) The discount rate used to calculate pension and other post-retirement obligations was based on a review of available yields on high-quality corporate bonds. In selecting a discount rate, we placed particular emphasis on a discount rate yield-curve provided by our third-party actuary, which takes into consideration the projected cash flows that represent the expected timing and amount of our plans' benefit payments. (2) Amounts are recorded to "Cost of sales" on our consolidated statements of operations consistent with the employee compensation costs that participate in the plan. (3) Amounts are recorded to "Other (income) expense, net" on our consolidated statements of operations. (4) Our pension and postretirement settlement and curtailment (income) charges 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 2022 and 2020. Contributions We made no voluntary cash contributions to our domestic hourly union defined benefit pension plan in the years ended December 31, 2022, 2021, and 2020. There are no required cash contributions to our domestic hourly union defined benefit pension plan in fiscal 2022, and we currently have no plans to make any voluntary cash contributions in fiscal 2022. Fair Value Hierarchy Following is a description of the valuation methodologies used for the investment measure at fair value. See Note 5 for the definition of fair value and the descriptions of Level 1, 2, and 3 in the fair value hierarchy. • Cash and short-term funds — Cash and quoted short-term instruments are valued at the closing price or the amount held on deposit by the custodian bank. • Mutual Funds — Mutual funds are valued at the closing price reported on the major market on which the individual securities are traded. Substantially all mutual funds are classified within Level 1 of the valuation hierarchy. • Pooled Funds — These investment vehicles are valued using the Net Asset Value (NAV) provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. • Other — Other assets are represented by investments in a series limited partnership. These assets are not actively traded and are classified as Level 2. 82 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 The following table presents our fair value hierarchy for our major categories of pension plan assets by asset class. In millions December 31, 2022 Level 1 Level 2 Level 3 Investments Measured at Net Asset Value Cash and short-term investments $ 0.2 $ 0.2 $ — $ — $ — Mutual funds 6.7 6.7 — — — Pooled funds 14.5 — — — 14.5 Other 1.7 — 1.7 — — Total assets $ 23.1 $ 6.9 $ 1.7 $ — $ 14.5 In millions December 31, 2021 Level 1 Level 2 Level 3 Investments Measured at Net Asset Value Cash and short-term investments $ 0.2 $ 0.2 $ — $ — $ — Mutual funds 9.2 9.2 — — — Pooled funds 20.3 — — — 20.3 Other 2.1 — 2.1 — — Total assets $ 31.8 $ 9.4 $ 2.1 $ — $ 20.3 Estimated Future Benefit Payments The following table reflects the estimated future benefit payments for our pension and other postretirement benefit plans. These estimates take into consideration expected future service, as appropriate. In millions Pensions Other Benefits 2023 $ 1.1 $ — 2024 1.2 — 2025 1.4 — 2026 1.5 — 2027 1.6 — 2028-2032 10.2 0.2 Sensitivity Analysis A one-half percent increase in the assumed discount rate would have decreased our qualified pension benefit obligations by $ 2.0 million at December 31, 2022 and decreased our qualified pension benefit costs by $( 0.1 ) million for 2022. A one-half percent decrease in the assumed discount rate would have increased our qualified pension obligations by $ 2.2 million at December 31, 2022 and increased our qualified pension benefit cost by $ 0.2 million for 2022. A one-half percent increase in the assumed expected long-term rate of return on plan assets would have decreased our qualified pension costs by $ 0.2 million for 2022. A one-half percent decrease in the assumed expected long-term rate of return on plan assets would have increased our qualified pension costs by $ 0.2 million for 2022. 83 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 15: Restructuring and Other (Income) Charges, net Detail on the restructuring charges and other (income) charges, net is provided below. Years Ended December 31, In millions 2022 2021 2020 Severance and other employee-related costs (1) $ — $ 0.1 $ 6.4 Other (2) — — 2.1 Restructuring charges — 0.1 8.5 Business transformation costs 13.8 16.1 10.0 Other (income) charges, net 13.8 16.1 10.0 Total Restructuring and other (income) charges, net $ 13.8 $ 16.2 $ 18.5 _______________ (1) Represents severance and employee benefit charges. (2) Primarily represents costs associated with an impairment of an operating lease asset that is no longer in use and other miscellaneous exit costs. 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 the attention of management and key employees. Costs incurred, during the years ended December 31, 2022, 2021, and 2020, of $ 13.8 million, $ 16.1 million, and $ 10.0 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, which we expect to complete in 2023, we anticipate incurring approximately $ 90 - 95 million of total costs, which includes $ 45 - 50 million of non-capitalizable costs. Restructuring Reserves Restructuring reserves which are included within Accrued expenses on the consolidated balance sheets were $ 0.5 million and $ 0.5 million at December 31, 2022 and 2021, respectively. 84 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 16: Acquisitions Ozark Materials On October 3, 2022, we completed our 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 $ 325.0 million, subject to customary adjustments for working capital, indebtedness and transaction expenses (the "Acquisition"). The Acquisition is being integrated into our Performance Chemicals segment and is included within our Pavement Technologies product line. We funded the Acquisition through a combination of borrowings under our existing credit facilities and cash on hand. The Acquisition is not considered significant to our Consolidated Financial Statements for the year ended December 31, 2022; therefore, proforma results of operations have not been presented. Preliminary Purchase Price Allocation Ozark Materials is considered an acquisition of a business under business combinations accounting guidance, and therefore we applied acquisition accounting. Acquisition accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon outside appraisals for certain assets, including specifically-identified intangible assets. See Note 5 for an additional explanation of Level 2 and Level 3 inputs. The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information and is subject to change within the measurement period (up to one year from the acquisition date) as additional information concerning final asset and liability valuations is obtained. During the measurement period, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date, we will revise the preliminary purchase price allocation. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings. 85 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Preliminary Purchase Price Allocation In millions Weighted Average Amortization Period Fair Value Cash and cash equivalents $ 8.0 Accounts receivable 28.7 Inventories (1) 48.4 Prepaid and other current assets 2.0 Property, plant and equipment 43.1 Intangible assets (2) Brands 10 years 15.0 Customer relationships 15 years 88.6 Developed technology 7 years 23.5 Goodwill (3) 109.8 Other assets, including operating leases 0.1 Total fair value of assets acquired $ 367.2 Accounts payable 13.9 Other liabilities 2.6 Total fair value of liabilities assumed $ 16.5 Less: Cash acquired ( 8.0 ) Plus: Amounts due from Seller 1.8 Total cash paid, less cash and restricted cash acquired $ 344.5 _______________ (1) Fair value of finished goods inventories acquired included a step-up in the value of $ 1.8 million, of which $ 0.9 million was expensed in the year ended December 31, 2022. The expense is included within "Cost of sales" on the consolidated statement of operations. Inventories are accounted for on a LIFO basis of accounting. (2) The aggregate amortization expense was $ 2.7 million for the year ended December 31, 2022. Estimated amortization expense is as follows: 2023 - $ 10.9 million, 2024 - $ 10.9 million, 2025 - $ 10.7 million, 2026 - $ 10.0 million, and 2027 - $ 10.0 million. (3) Goodwill largely consists of expected cost synergies and economies of scale resulting from the business combination. We expect the full amount to be deductible for income tax purposes. This acquired goodwill has been included within our Performance Chemicals reporting unit. See Note 8 for further information regarding our allocation of goodwill among our reporting segments . Acquisition and other-related costs Costs incurred to complete and integrate acquisitions and other strategic investments are expensed as incurred on our consolidated statement of operations. The following table summarizes the costs incurred associated with these combined activities. Years Ended December 31, In millions 2022 2021 2020 Legal and professional service fees $ 5.0 $ 0.6 $ 1.8 Acquisition-related costs 5.0 0.6 1.8 Inventory fair value step-up amortization (1) 0.9 — — Acquisition and other-related costs $ 5.9 $ 0.6 $ 1.8 _______________ (1) Included within "Cost of sales" on the consolidated statement of operations. 86 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 17: Income Taxes Domestic and foreign components of Income (loss) before income taxes are shown below: Years Ended December 31, In millions 2022 2021 2020 Domestic $ 200.0 $ 107.4 $ 191.2 Foreign 69.6 55.4 43.9 Income (loss) before income taxes $ 269.6 $ 162.8 $ 235.1 The provision (benefit) for income taxes consisted of: Years Ended December 31, In millions 2022 2021 2020 Current Federal $ 41.7 $ 31.1 $ 22.5 State and local 6.3 2.7 5.1 Foreign 15.0 15.5 9.9 Total current $ 63.0 $ 49.3 $ 37.5 Deferred Federal $ ( 4.6 ) $ ( 15.3 ) $ 15.3 State and local ( 1.7 ) ( 1.6 ) ( 2.7 ) Foreign 1.3 12.3 3.6 Total deferred $ ( 5.0 ) $ ( 4.6 ) $ 16.2 Provision (benefit) for income taxes $ 58.0 $ 44.7 $ 53.7 We recorded $ 4.5 million, $ 4.2 million, and $( 4.3 ) million of deferred tax provision (benefit) expense within components of other comprehensive income during the years ended December 31, 2022, 2021, and 2020, respectively. The following table summarizes the major differences between taxes computed at the U.S. federal statutory rate and the actual income tax provision attributable to operations: Years Ended December 31, In millions, except percentage data 2022 2021 2020 Federal statutory tax rate $ 56.6 $ 34.2 $ 49.4 State and local income taxes, net of federal benefit 5.6 2.4 5.1 Foreign income tax rate differential 2.2 2.2 1.5 Changes in valuation allowance 0.1 0.8 ( 1.9 ) Deferred adjustments 0.1 0.3 ( 1.4 ) Legislative tax rate change 0.8 13.9 5.3 Excess share-based compensation ( 0.1 ) ( 0.3 ) 0.4 Federal and state tax credits ( 4.8 ) ( 4.9 ) ( 4.0 ) Tax on dividends, deemed dividends, and GILTI 2.7 0.1 0.1 Foreign derived intangible income ( 6.2 ) ( 5.1 ) ( 3.1 ) Officers compensation 0.6 0.3 0.5 Other 0.4 0.8 1.8 Provision (benefit) for income taxes $ 58.0 $ 44.7 $ 53.7 Effective tax rate 21.5 % 27.5 % 22.8 % 87 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 The decrease in our effective tax rate from 2021 to 2022 was primarily driven by the recognition of the United Kingdom's ("UK") six percent legislative rate increase in 2021. During 2022, our effective tax rate benefited from reduced taxes at our China manufacturing plant associated with the purchases of our sustainably sourced raw material feedstock. This reduction was partially offset by an increase in foreign earnings deemed taxable in the U.S. mainly due to final U.S. foreign tax credit regulations modifying the definition of what foreign taxes qualify as creditable taxes, denying Brazilian taxes paid as qualifying taxes. The increase in our effective tax rate from 2020 to 2021 was driven by a six percent legislative tax rate increase in the UK. The impacts of this increase were partially offset by the benefit in excess share-based compensation driven by the rebound of stock prices in 2021 compared to 2020, as well as the increased benefit associated with our foreign derived intangible income ("FDII"). This increased benefit from FDII was driven by higher taxable income as a result of reduced capital spend and deferral of litigation expenses for tax purposes. Additionally, in depth research and development studies conducted, as well as amended state return filing, further increased the rate benefit associated with our federal and state credits in 2021, which also helped to partially offset the negative impacts of the UK rate change. The significant components of deferred tax assets and liabilities are as follows: December 31, In millions 2022 2021 Deferred tax assets: Employee benefits $ 19.1 $ 19.0 Net operating losses 10.5 11.6 Leases 17.2 16.5 Litigation verdict accrual 19.9 19.9 Research and experimental expenses 8.9 — Other 14.4 12.0 Total deferred tax assets $ 90.0 $ 79.0 Valuation allowance ( 9.2 ) ( 8.8 ) Total deferred tax assets, net of valuation allowance $ 80.8 $ 70.2 Deferred tax liabilities: Fixed assets $ 116.7 $ 108.6 Intangibles 34.6 43.7 Inventory 7.3 6.5 Leases 16.9 16.3 Other 6.1 2.9 Total deferred tax liabilities $ 181.6 $ 178.0 Net deferred tax asset (liability) (1) $ ( 100.8 ) $ ( 107.8 ) _______________ (1) Presentation in the table above is on a gross basis, however, due to jurisdictional netting, our net deferred tax asset and liability recorded on the consolidated balance sheets is $ 5.7 million and $ 106.5 million, respectively, as of December 31, 2022, and $ 6.8 million and $ 114.6 million, respectively, as of December 31, 2021. Our net deferred tax liability decreased $ 7.0 million at December 31, 2022 as compared to December 31, 2021. As part of Tax Cuts and Jobs Act ("TCJA") enacted in December 2017 under Internal Revenue Code Section 174, beginning in 2022 we are required to capitalize and amortize research and experimental expenditures, thus creating a new deferred tax asset for 2022. The increase in deferred tax assets was slightly offset by an increase in the deferred fixed asset liability as a result of U.S. bonus depreciation, UK super deduction, as well as the 2022 acquisition of Ozark Materials. Impacts of foreign currency fluctuations, most notably in the UK, decreased the overall deferred tax liability by $ 6.6 million. We have deferred tax assets, including net operating loss and state tax credit carryforwards, which are available to offset future taxable income. A valuation allowance has been provided where management has determined that it is more likely 88 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 than not that the deferred tax assets will not be realized. In 2022, we recognized tax expense of $ 0.1 million due to our expected inability to recognize the benefit associated with state tax credits prior to their expiration. At December 31, 2022, foreign net operating loss carryforwards totaled $ 35.3 million. Of this total, $ 0.1 million will expire in 2 years and $ 35.2 million has no expiration date. Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalent balance at December 31, 2022 included $ 71.7 million held by our foreign subsidiaries. At December 31, 2022, 2021, and 2020, no deferred income taxes have been provided for our share of undistributed net earnings of foreign operations due to management’s intent to reinvest such amounts indefinitely. The determination of the amount of taxes that may be due if earnings are remitted is not practicable because such liability, if any, is dependent on circumstances that exist if and when remittance occurs. The circumstances that would affect the calculations include the source location and amount of the distribution, the underlying tax rate already paid on the earnings, foreign withholding taxes, the opportunity to use foreign tax credits, and the potential impact of U.S. Tax Reform. Positive undistributed earnings considered to be indefinitely reinvested totaled $ 84.5 million at December 31, 2022. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: Years ended December 31, In millions 2022 2021 2020 Balance at beginning of year $ 0.3 $ 0.1 $ 0.1 Additions for tax positions related to prior years 0.5 0.3 — Reduction for lapse of statute of limitation — ( 0.1 ) — Balance at end of year $ 0.8 $ 0.3 $ 0.1 As of December 31, 2022, 2021, and 2020, $ 0.9 million, $ 0.4 million, and $ 0.1 million, respectively, of unrecognized tax benefit, including penalties and interest, would, if recognized, impact our effective tax rate. We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. 89 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 18: 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 a result of the jury's $ 85.0 million verdict, we have accrued the full amount as of December 31, 2022. The amount accrued for this matter is included within Other liabilities on the consolidated balance sheet as of December 31, 2022, and the charge was included within 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. 90 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 19: Segment Information Ingevity’s operating segments are (i) Performance Materials and (ii) Performance Chemicals, a description of both operating segments is included in Note 1. Years Ended December 31, In millions 2022 2021 2020 Net sales Performance Materials $ 548.5 $ 516.8 $ 510.0 Performance Chemicals 1,119.8 874.7 706.1 Total net sales (1) $ 1,668.3 $ 1,391.5 $ 1,216.1 Segment EBITDA (2) Performance Materials $ 252.2 $ 249.4 $ 249.2 Performance Chemicals 200.4 172.8 148.7 Total Segment EBITDA (2) $ 452.6 $ 422.2 $ 397.9 Interest expense ( 61.8 ) ( 51.7 ) ( 47.1 ) Interest income 7.5 4.0 4.9 (Provision) benefit for income taxes ( 58.0 ) ( 44.7 ) ( 53.7 ) Depreciation and amortization - Performance Materials ( 36.1 ) ( 36.8 ) ( 31.2 ) Depreciation and amortization - Performance Chemicals ( 72.7 ) ( 73.1 ) ( 69.0 ) Pension and postretirement settlement and curtailment (charges) income, net (3) ( 0.2 ) — ( 0.1 ) Restructuring and other income (charges), net (4) ( 13.8 ) ( 16.2 ) ( 18.5 ) Acquisition and other-related costs (5) ( 5.9 ) ( 0.6 ) ( 1.8 ) Litigation verdict charge (6) — ( 85.0 ) — Net income (loss) $ 211.6 $ 118.1 $ 181.4 _______________ (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) For all years, the 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. 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. (4) For the year ended December 31, 2022, charges of $ 4.8 million and $ 9.0 million relate to the Performance Materials segment and Performance Chemicals segment, respectively. For the year ended December 31, 2021, charges of $ 6.0 million and $ 10.2 million related to the Performance Materials segment and Performance Chemicals segment, respectively. For the year ended December, 31, 2020, charges of $ 7.4 million and $ 11.1 million relate to the Performance Materials segment and Performance Chemicals segment, respectively. Information about how restructuring and other (income) charges relate to our reporting segments is discussed in Note 15. (5) For the years ended December 31, 2022 and 2021, charges of $ 0.3 million and $ 0.2 million relate to the acquisition of a strategic investment 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 more detail on these charges see Note 16. 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. (6) For the year ended December 31, 2021, litigation verdict charge relates to the Performance Materials segment. Refer to Note 18 for additional information. 91 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Depreciation and amortization Capital expenditures Years Ended December 31, Years Ended December 31, In millions 2022 2021 2020 2022 2021 2020 Performance Materials $ 36.1 $ 36.8 $ 31.2 $ 59.8 $ 46.2 $ 30.6 Performance Chemicals 72.7 73.1 69.0 82.7 57.6 51.5 Total $ 108.8 $ 109.9 $ 100.2 $ 142.5 $ 103.8 $ 82.1 Property, plant, and equipment, net December 31, In millions 2022 2021 North America $ 636.7 $ 551.1 Asia Pacific 70.4 75.0 Europe, Middle East, and Africa 91.4 93.5 South America 0.1 0.1 Property, plant, and equipment, net $ 798.6 $ 719.7 Total assets December 31, In millions 2022 2021 Performance Materials $ 784.6 $ 716.2 Performance Chemicals 1,877.4 1,675.6 Total segment assets (1) $ 2,662.0 $ 2,391.8 Corporate and other 74.5 77.2 Total assets $ 2,736.5 $ 2,469.0 _______________ (1) Segment assets exclude assets not specifically managed as part of one specific segment herein referred to as "Corporate and other." 92 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 20: 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 shares of common stock and potentially dilutive common stock outstanding for the period. The calculation of diluted net income per share excludes all anti-dilutive common shares. Years Ended December 31, In millions (except share and per share data) 2022 2021 2020 Net income (loss) $ 211.6 $ 118.1 $ 181.4 Basic and Diluted earnings (loss) per share (1) Basic earnings (loss) per share $ 5.54 $ 2.97 $ 4.39 Diluted earnings (loss) per share $ 5.50 $ 2.95 $ 4.37 Shares (2) Weighted average number of shares of common stock outstanding - Basic 38,179 39,816 41,330 Weighted average additional shares assuming conversion of potential common shares 292 243 217 Shares - diluted basis 38,471 40,059 41,547 _______________ (1) Diluted earnings (loss) per share is calculated using net income (loss) available to common stockholders divided by diluted weighted average shares of common shares outstanding during each period, which includes the dilutive effect of outstanding equity awards. (2) Shares are presented in thousands. The following average number of potential common shares were antidilutive and, therefore, were not included in the diluted earnings per share calculation: Years Ended December 31, In thousands 2022 2021 2020 Average number of potential common shares - antidilutive 204 98 177 93 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Note 21: Supplemental Information The following tables include details of prepaid and other current assets, other assets, accrued expenses and other liabilities as presented on the consolidated balance sheets, as well as other (income) expense, net on the consolidated statement of operations: Prepaid and other current assets: December 31, In millions 2022 2021 Income and value added tax receivables $ 12.7 $ 21.8 Prepaid freight and supply agreements 2.7 2.2 Prepaid insurance 3.2 3.5 Non-trade receivables 5.4 2.6 Advances to suppliers 1.0 0.7 Prepaid software as a service 2.9 3.4 Contract asset (Note 4) 6.4 5.3 Restricted cash 0.6 0.6 Other 7.6 6.5 $ 42.5 $ 46.6 Other assets: December 31, In millions 2022 2021 Deferred financing charges $ 5.1 $ 3.0 Capitalized software, net 46.4 36.0 Land-use rights 4.6 5.1 Planned major maintenance activities 4.3 3.2 Deferred software as a service 4.0 3.2 Deferred compensation plan assets (Note 5) 14.4 14.9 Net investment hedge (Note 9) — 2.0 Finance lease assets, net (Note 13) 0.1 0.3 Other 6.6 6.5 $ 85.5 $ 74.2 Accrued expenses: December 31, In millions 2022 2021 Accrued interest $ 9.0 $ 13.3 Accrued taxes 5.3 8.2 Accrued freight 3.9 5.5 Accrued rebates 13.7 7.5 Restructuring reserves (Note 15) 0.5 0.5 Accrued royalties and commissions 2.4 1.5 Currency exchange and natural gas contracts (Note 9) 2.1 0.6 Accrued energy 3.2 2.8 Other 14.3 11.8 $ 54.4 $ 51.7 94 Index Ingevity Corporation Notes to the Consolidated Financial Statements December 31, 2022 Other liabilities: December 31, In millions 2022 2021 Deferred compensation arrangements (Note 5) $ 12.5 $ 13.7 Pension & OPEB liabilities (Note 14) 10.4 14.1 Unrecognized tax benefits (Note 17) 0.8 0.3 Net investment hedge (Note 9) — 1.0 Interest rate swaps (Note 9) — 4.0 Contingent consideration (Note 5) — 0.8 Litigation verdict accrual (Note 18) 85.0 85.0 Other 6.2 6.6 $ 114.9 $ 125.5 Other (income) expense, net: Years Ended December 31, In millions 2022 2021 2020 Foreign currency translation (income)/loss $ 2.3 $ 2.5 $ ( 5.8 ) Royalty and sundry (income)/loss ( 0.2 ) ( 0.6 ) ( 0.4 ) Litigation verdict charge (Note 18) — 85.0 — Other (income)/expense, net ( 3.8 ) ( 7.0 ) 2.1 $ ( 1.7 ) $ 79.9 $ ( 4.1 ) Note 22: Subsequent Event During the first quarter of 2023, we realigned our segment reporting structure to increase transparency for our investors and better align with how our chief operating decision maker intends to measure segment operating performance and allocate resources across our operating segments. Effective in the first quarter of 2023, we will separate our engineered polymers product line from the Performance Chemicals reporting segment into its own reporting segment. This reporting segment change will also result in our Performance Chemicals reporting unit for goodwill being split into two separate reporting units for the purposes of goodwill impairment testing. As of and for the year ended December 31, 2022, we continued to review financial information at the Performance Chemicals segment level, and therefore, these changes had no impact on our reporting structure. This segment reporting change will have no impact on our consolidated operating results or the historical operating results for our Performance Materials operating segment. 95 INGEVITY CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR YEARS ENDED DECEMBER 31, 2022, 2021, and 2020 Provision/ (Benefit) In millions Balance, Beginning of Year Charged to Costs and Expenses Charged to Other Comprehensive Income Charged to Retained Earnings Write-offs (1) Balance, End of Year December 31, 2022 Accounts receivable credit loss allowance (2) $ 2.0 0.3 — — ( 1.8 ) $ 0.5 Held-to-maturity debt securities credit loss allowance (3) $ 0.5 0.1 — — — $ 0.6 Deferred tax valuation allowance $ 8.8 0.1 0.3 — — $ 9.2 December 31, 2021 Accounts receivable credit loss allowance (2) $ 1.9 0.1 — — — $ 2.0 Held-to-maturity debt securities credit loss allowance (3) $ 0.9 ( 0.4 ) — — — $ 0.5 Deferred tax valuation allowance $ 8.4 0.8 ( 0.4 ) — — $ 8.8 December 31, 2020 Accounts receivable credit loss allowance (2) $ 0.5 1.4 — — — $ 1.9 Held-to-maturity debt securities credit loss allowance (3) $ — 0.3 — 0.6 — $ 0.9 Deferred tax valuation allowance $ 13.0 ( 1.9 ) ( 2.7 ) — — $ 8.4 _______________ (1) Write-offs are net of recoveries. (2) Allowance for credit losses on accounts receivable is included within Accounts receivable, net on the consolidated balance sheet. (3) Allowance for credit losses on held-to-maturity debt securities is included within Restricted investment on the consolidated balance sheet. 96 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.