What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 154 added, 103 removed, 200 unchanged (56% of the section changed)

42 unchanged sentences

Recent Developments

Segment Change

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 have separated our engineered polymers product line from the Performance Chemicals reportable segment into its own reportable segment, Advanced Polymer Technologies.

This reportable segment change has also resulted in our Performance Chemicals reporting unit for goodwill being split into two separate reporting units for the purposes of goodwill impairment testing.

This reportable segment change has no impact on our consolidated operating results or the historical operating results of our Performance Materials operating segment.

Equity Method Investment

During the three months ended March 31, 2023, we sold a strategic equity method investment for $31.4 million, resulting in a $19.2 million gain, recorded within "Other (income) expense, net" on the condensed consolidated statement of operations.

Restructuring Charges

During the quarter, we initiated a reorganization to streamline certain functions and reduce ongoing costs.

As a result, we recorded $3.0 million in severance and other employee-related costs for the three months ended March 31, 2023.

Supply Agreements

On March 20, 2023, Ingevity and WestRock Shared Services, LLC and WestRock MWV, LLC, on behalf of the affiliates of WestRock Company (“WestRock”), entered into an amended and restated crude tall oil and black liquor soap skimmings agreement, which amends and restates that certain crude tall oil and black liquor soap skimmings agreement, dated as of January 1, 2016, by and between Ingevity and WestRock, as amended by that Amendment No.1 to Crude Tall Oil And Black Liquor Soap Skimmings Agreement, dated as of March 1, 2017, and Amendment No.2 to Crude Tall Oil And Black Liquor Soap Skimmings Agreement, dated as of November 3, 2020.

On March 21, 2023, Ingevity, Georgia-Pacific LLC, on behalf of itself and its subsidiaries (“Georgia-Pacific”), and GP Pine Chemicals LLC, a direct subsidiary of Georgia-Pacific LLC, entered into a Second Amendment to the Crude Tall Oil Supply Agreement, to amend certain terms of the Crude Tall Oil Supply Agreement, dated as of March 9, 2018, by and between Ingevity and Georgia-Pacific, as amended by that Amendment to the Crude Tall Oil Supply Agreement, dated as of May 1, 2020.

In the first quarter of 2023, we initiated several measures to pursue greater cost efficiency which included a reorganization to streamline certain functions and reduce ongoing costs.

During the second quarter, we took further actions to reorganize our operations.

The combined restructuring program is expected to cost approximately $12-14 million and is expected to be completed over the remainder of 2023.

During the three and six months ended June 30, 2023, we recorded $4.4 million and $7.4 million in severance and other employee-related costs and $2.6 million and $2.7 million in other restructuring charges, including asset write-offs associated with our reorganization.

Alternative Fatty Acid Transition

In April 2023, we began the feedstock transition of our Crossett, Arkansas manufacturing plant.

During the three and six months ended June 30, 2023, we incurred $6.6 million in costs.

We expect to incur approximately $20-25 million of expense in 2023, representing non-capital retooling and stranded costs, with modest levels of capital expenditure.

North Charleston Plant Transition

In May 2023, WestRock announced that it will permanently cease operating its North Charleston paper mill by August 31, 2023 and notified us that it is terminating the shared services in accordance with our operating agreement.

We expect to incur approximately $15-20 million of non-capital transition costs in 2023 as we continue to transition those shared services and minimize disruption to our operations and are continuing to evaluate the future impact.

During the three and six months ended June 30, 2023, we incurred $2.9 million in costs.

Results of Operations

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

In millions 2023 2022 2023 2022

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

Three months ended March 31, 2023 vs.

Three months ended June 30, 2023 vs.

$ 419.9 19.3 45.4 (2.8) $ 481.8

Three Months Ended March 31, 2023 vs.

The sales increase of $9.8 million in 2023 was driven by favorable pricing and sales composition (mix) of $58.8 million (15 percent), partially offset by unfavorable volume decline in all of our segments, particularly in our industrial

specialties product line within Performance Chemicals, for a combined impact of $44.3 million (12 percent) and unfavorable foreign currency exchange of $4.7 million (one percent).

Gross profit decrease of $7.4 million was driven by increased manufacturing costs of $44.1 million due to raw material and energy cost inflationary pressures primarily experienced in our Performance Chemicals reportable segment, unfavorable sales volume of $20.6 million across all of our reportable segments, and unfavorable foreign currency exchange of $1.4 million, offset by favorable pricing and sales composition (mix) of $58.7 million primarily driven by our Performance Chemicals reportable segment.

Six months ended June 30, 2023 vs.

$ 802.7 (25.0) 104.1 (7.4) $ 874.4

Three Months Ended June 30, 2023 vs.

The sales increase of $61.9 million in 2023 was driven by favorable mix of $45.4 million (11 percent) across all segments, favorable volume improvement of $19.3 million (five percent) supported by Performance Materials and the Performance Chemicals' pavement technologies business line, including Ozark Materials, LLC and Ozark Logistics, LLC (collectively, “Ozark Materials”) acquisition completed in the fourth quarter of 2022, more than offset weaker volumes in Performance Chemicals' industrial specialties business line and Advanced Polymer Technologies.

These favorable impacts to Net sales were partially offset by unfavorable foreign currency exchange of $2.8 million (one percent).

Six Months Ended June 30, 2023 vs.

The sales increase of $71.7 million in 2023 was driven by favorable mix of $104.1 million (13 percent) across all segments, partially offset by unfavorable volume decline, particularly in our Performance Chemicals' Industrial Specialties business line, for a combined impact of $25.0 million (three percent), and unfavorable foreign currency exchange of $7.4 million (one percent).

Three Months Ended June 30, 2023 vs.

Gross profit increase of $2.4 million was driven by favorable pricing and product mix of $41.9 million, favorable sales volume of $12.8 million, primarily driven by our Performance Materials and Advanced Polymer Technologies reportable segments and favorable foreign currency exchange of $1.1 million, offset by increased manufacturing costs of $53.4 million due to raw material inflationary pressures, primarily CTO within our industrial specialties product line.

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

Six Months Ended June 30, 2023 vs.

Gross profit decrease of $5.0 million was driven by increased manufacturing costs of $97.4 million due to raw material inflationary pressures, primarily CTO within our industrial specialties product line in our Performance Chemicals reportable segment, unfavorable sales volume of $7.8 million, and unfavorable foreign currency exchange of $0.3 million, offset by pricing improvements and favorable mix of $100.5 million primarily driven by our industrial specialties product line.

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

Selling, general and administrative expenses

Three Months Ended March 31, 2023 vs.

Selling, general and administrative expenses ("SG&A") were $48.6 million (12 percent of Net sales) and $40.0 million (10 percent of Net sales) for the three months ended March 31, 2023 and 2022, respectively.

The increase in SG&A as a percentage of Net sales was driven by higher employee-related costs of $5.4 million, increased amortization costs of $2.0 million primarily driven by the Ozark Materials acquisition, and increased travel and other miscellaneous costs of $1.2 million.

Three Months Ended June 30, 2023 vs.

Selling, general and administrative expenses ("SG&A") were $51.7 million (11 percent of Net sales) and $48.7 million (12 percent of Net sales) for the three months ended June 30, 2023 and 2022, respectively.

The decrease in SG&A as a percentage of Net sales was driven by higher sales, lower employee-related costs of $0.4 million, and decreased travel and other miscellaneous costs of $0.9 million, partially offset by increased amortization expense of $4.3 million primarily driven by the Ozark Materials acquisition.

Six Months Ended June 30, 2023 vs.

Selling, general and administrative expenses ("SG&A") were $100.3 million (11 percent of Net sales) and $88.7 million (11 percent of Net sales) for the six months ended June 30, 2023 and 2022, respectively.

SG&A as a percentage of Net sales was unchanged as the impact of increased amortization costs of $6.3 million, primarily driven by the Ozark Materials acquisition, higher employee-related costs of $5.0 million, and increased travel and other miscellaneous costs of $0.3 million were offset by higher sales.

Research and technical expenses

Three Months Ended March 31, 2023 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 2.2 percent from 1.9 percent for the three months ended March 31, 2023 and 2022, respectively.

Three Months Ended June 30, 2023 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 1.7 percent from 2.0 percent for the three months ended June 30, 2023 and 2022, respectively.

Six Months Ended June 30, 2023 vs.

Research and technical expenses as a percentage of Net sales remained consistent period over period, at 1.9 percent and 1.9 percent for the six months ended June 30, 2023 and 2022, respectively.

Restructuring and other (income) charges, net

Three Months Ended March 31, 2023 vs.

Restructuring and other (income) charges, net were $5.6 million and $3.6 million for the three months ended March 31, 2023 and 2022, respectively.

Severance and other employee-related costs increased $3.0 million and other restructuring charges increased $0.1 million, partially offset by a $1.1 million decrease related to our digital transformation initiative.

Three and Six Months Ended June 30, 2023 vs.

Restructuring and other (income) charges, net were $19.2 million and $24.8 million for the three and six months ended June 30, 2023, respectively, and $3.7 million and $7.3 million for the three and six months ended June 30, 2022, respectively.

Severance and other employee-related costs increased $4.4 million and $7.4 million, and other restructuring charges increased $2.6 million and $2.7 million.

Additionally, alternative fatty acid transition costs increased $6.6 million, and costs associated with the North Charleston plant transition increased $2.9 million, both for the three and six months ended June 30, 2023, respectively.

The increase was partially offset by a $1.0 million and $2.1 million decrease related to our digital transformation initiative for the three and six months ended June 30, 2023, respectively.

See Note 11 within the Condensed Consolidated Financial Statements for more information.

Acquisition-related costs

Three Months Ended March 31, 2023 vs.

Acquisition-related costs were $1.9 million and zero for the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2023, all charges related to the integration of Ozark Materials into our Performance Chemicals segment.

Three and Six Months Ended June 30, 2023 vs.

Acquisition-related costs were $1.8 million and $3.7 million for the three and six months ended June 30, 2023, respectively, and zero for the three and six months ended June 30, 2022, respectively.

For the three and six months ended June 30, 2023, all charges related to the integration of Ozark Materials into our Performance Chemicals segment.

See Note 16 within the Condensed Consolidated Financial Statements for more information.

Other (income) expense, net

Three Months Ended March 31, 2023 vs.

Three Months Ended March 31,

Three and Six Months Ended June 30, 2023 vs.

Three Months Ended June 30, Six Months Ended June 30,

In millions 2023 2022 2023 2022

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Interest expense, net

Three Months Ended March 31, 2023 vs.

Three Months Ended March 31,

Three and Six Months Ended June 30, 2023 vs.

Three Months Ended June 30, Six Months Ended June 30,

In millions 2023 2022 2023 2022

1 unchanged sentence

Revolving credit and term loan facilities (1)

15.0 4.2 28.2 6.1

Senior notes (1)

5.6 12.7 11.2 21.9

Litigation related interest expense (2)

Other interest (income) expense, net (1.2) (3.7) (2.2) (5.9)

2 unchanged sentences

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

(2) See Note 13 within the Condensed Consolidated Financial Statements for more information.

Provision (benefit) for income taxes

Three Months Ended March 31, 2023 vs.

For the three months ended March 31, 2023 and 2022, our effective tax rate was 20.9 percent and 21.6 percent, respectively.

Excluding discrete items, the effective rate was 22.8 percent compared to 20.7 percent in the three months ended March 31, 2023 and 2022, respectively.

Three and Six Months Ended June 30, 2023 vs.

For the three months ended June 30, 2023 and 2022, our effective tax rate was 25.6 percent and 21.8 percent, respectively.

Excluding discrete items, the effective rate was 23.8 percent compared to 21.7 percent in the three months ended June 30, 2023 and 2022, respectively.

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

For the six months ended June 30, 2023 and 2022, our effective tax rate was 22.9 percent and 21.7 percent, respectively.

Excluding discrete items, the effective rate was 23.3 percent compared to 21.2 percent in the six months ended June 30, 2023 and 2022, respectively.

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

Segment Operating Results

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Performance Summary

Sales in our Performance Materials segment were lower this year compared to the previous year, mainly due to a slower-than-anticipated recovery in China which also impacted other parts of Asia-Pacific.

This more than offset a strong performance in North America.

The strengthening of the U.S.

dollar against the Chinese renminbi and the euro also contributed to the pressure on first quarter sales when compared to prior year first quarter.

The lower sales translated to a decrease in first quarter segment EBITDA when compared to the prior year period.

As a result of the slower than expected recovery in China, we had unplanned downtime at our China manufacturing facilities which also negatively impacted segment EBITDA.

In millions Three Months Ended March 31,

Sales in our Performance Materials segment increased compared to the prior year quarter, mainly due to improved automotive carbon volumes in the North America auto market and some improvement in China.

Segment EBITDA growth was driven primarily by the higher sales volume and price, partially offset by lower capacity utilization in an effort to reduce inventory levels.

In millions Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Total Performance Materials - Net sales $ 144.6 $ 122.4 $ 286.0 $ 270.8

Segment EBITDA $ 64.2 $ 55.6 $ 134.0 $ 133.5

Net Sales Comparison of Three Months Ended March 31, 2023 and March 31, 2022:

Net Sales Comparison of Three and Six Months Ended June 30, 2023 and June 30, 2022:

Performance Materials (In millions)

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

Three months ended March 31, 2023 vs.

Three months ended June 30, 2023 vs.

$ 122.4 17.8 7.2 (2.8) $ 144.6

Three Months Ended March 31, 2023 vs.

Six months ended June 30, 2023 vs.

$ 270.8 5.8 15.4 (6.0) $ 286.0

Three Months Ended June 30, 2023 vs.

Segment net sales.

The decrease of $7.0 million in 2023 was driven by volume decline of $12.0 million (eight percent) and unfavorable foreign currency exchange of $3.2 million (two percent).

The decrease was partially offset by favorable sales composition (mix) and pricing of $8.2 million (six percent).

The increase of $22.2 million in 2023 was driven by a volume increase of $17.8 million (15 percent) and favorable mix of $7.2 million (six percent), partially offset by unfavorable foreign currency exchange of $2.8 million (two percent).

Segment EBITDA.

The decrease of $8.1 million in 2023 was driven by the decline in sales as noted above, increased manufacturing costs of $8.9 million, a volume decline of $6.9 million, increased SG&A and research and technical expenses of $0.3 million, and unfavorable foreign currency exchange of $0.2 million.

The decrease was partially offset by favorable sales composition (mix) and pricing of $8.2 million.

The increase of $8.6 million in 2023 was driven by the increase in sales as noted above, a volume increase of $10.8 million, favorable mix of $4.8 million, and decreased SG&A and research and technical expenses of $1.2 million.

The increase was partially offset by increased manufacturing costs of $5.5 million, and unfavorable foreign currency exchange of $2.7 million.

Six Months Ended June 30, 2023 vs.

Segment net sales.

The increase of $15.2 million in 2023 was driven by favorable mix of $15.4 million (six percent) and a volume increase of $5.8 million (two percent).

This was partially offset by unfavorable foreign currency exchange of $6.0 million (two percent).

Segment EBITDA.

The increase of $0.5 million in 2023 was driven by the increase in sales as noted above, favorable mix of $12.9 million, a volume increase of $3.9 million, and decreased SG&A and research and technical expenses of $0.9

The increase was partially offset by increased manufacturing costs of $14.3 million, and unfavorable foreign currency exchange of $2.9 million.

Performance Chemicals

Performance Summary

Sales in our Performance Chemicals segment increased compared to the prior year quarter, mainly due to higher pricing across the segment and the addition of the Ozark Materials road markings business.

This was partially offset by lower volume in our industrial specialties product line.

Segment EBITDA was lower primarily due to higher raw material costs, specifically CTO, lower capacity utilization and higher employee-related costs when compared to the prior year quarter.

Pavement technologies sales increased primarily due to the acquisition of Ozark Materials and growth of the legacy business outside of North America as a result of technology adoption.

Industrial specialties sales decrease was driven by volume declines primarily in adhesives, which were partially offset by price improvement across all end markets.

Three Months Ended March 31,

Sales in our Performance Chemicals segment increased compared to the prior year quarter, primarily due to higher pricing across the segment and the addition of the Ozark Materials road markings business, partially offset by lower volume in our industrial specialties product line.

Segment EBITDA was lower primarily due to higher raw material costs, specifically CTO, lower capacity utilization and higher employee-related costs.

Pavement technologies sales increased due to continued growth of the legacy business as a result of technology adoption as well as the acquisition of Ozark Materials.

Industrial specialties sales decrease was driven by volume declines primarily in adhesives, partially offset by price improvement across all end markets.

Three Months Ended June 30, Six Months Ended June 30,

In millions 2023 2022 2023 2022

3 unchanged sentences

Segment EBITDA $ 44.9 $ 61.7 $ 65.2 $ 92.5

Net Sales Comparison of Three Months Ended March 31, 2023 and March 31, 2022:

Net Sales Comparison of Three and Six Months Ended June 30, 2023 and June 30, 2022:

Performance Chemicals (In millions)

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

Three months ended March 31, 2023 vs.

Three months ended June 30, 2023 vs.

$ 243.7 9.3 31.3 (0.3) $ 284.0

Three Months Ended March 31, 2023 vs.

Six months ended June 30, 2023 vs.

$ 416.3 (16.3) 70.4 (0.8) $ 469.6

Three Months Ended June 30, 2023 vs.

Segment net sales.

The increase of $13.0 million was driven by favorable sales composition (mix) and pricing of $39.1 million (23 percent), driven by increases in industrial specialties ($36.5 million) and pavement technologies ($2.6 million).

This was partially offset by a volume decrease of $25.6 million (fifteen percent) driven primarily by industrial specialties ($41.1 million), and unfavorable foreign currency exchange impacted Net sales by $0.5 million (zero percent).

The increase of $40.3 million was driven by favorable mix of $31.3 million (13 percent), driven by increases in industrial specialties ($21.9 million) and pavement technologies ($9.4 million), and a volume increase of $9.3 million (four percent), driven by an increase in pavement technologies ($53.8 million), primarily due to Ozark Materials, offset by a decrease in industrial specialties ($44.5 million).

Unfavorable foreign currency exchange also negatively impacted net sales by $0.3 million (zero percent).

Segment EBITDA.

The decrease of $10.5 million was driven by higher manufacturing costs of $30.9 million, volume decrease of $11.4 million, higher SG&A expenses of $7.1 million and unfavorable foreign currency exchange of $0.1 million.

The decrease was partially offset by favorable sales composition (mix) and pricing of $39.0 million.

The decrease of $16.8 million was driven by higher manufacturing costs of $50.8 million, and higher SG&A expenses of $1.1 million.

The decrease was partially offset by favorable mix of $30.2 million, a volume increase of $4.7 million, and favorable foreign currency exchange of $0.2 million.

Six Months Ended June 30, 2023 vs.

Segment net sales.

The increase of $53.3 million was driven by favorable mix of $70.4 million (17 percent), driven by increases in industrial specialties ($58.4 million) and pavement technologies ($12.0 million).

This was partially offset by a volume decrease of $16.3 million (four percent), driven by a decrease in industrial specialties ($85.7 million), partially offset by an increase in pavement technologies ($69.4 million), and unfavorable foreign currency exchange of $0.8 million (zero percent).

Segment EBITDA.

The decrease of $27.3 million was driven by higher manufacturing costs of $81.7 million, higher SG&A expenses of $8.2 million, and volume decrease of $6.7 million.

The decrease was partially offset by favorable mix of $69.2 million and favorable foreign currency exchange of $0.1 million.

Advanced Polymer Technologies

Performance Summary

Our Advanced Polymer Technologies segment sales were above prior year first quarter due to higher prices across the segment and increased volume in North America, driven by strong automotive and bioplastics demand.

This was partially offset by lower demand in Europe and customer destocking in Asia.

Segment EBITDA growth was driven primarily by the higher sales pricing, partially offset by higher logistics costs.

In millions Three Months Ended March 31,

Our Advanced Polymer Technologies segment sales were flat compared to the prior year quarter due to market weakness in footwear and industrials, largely offset by volume improvement in automotive and bioplastics and higher prices across the segment.

Segment EBITDA growth was driven primarily by profit recovery initiatives, including pricing actions and product mix management, and lower input costs.

In millions Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Total Advanced Polymer Technologies - Net sales $ 53.2 $ 53.8 $ 118.8 $ 115.6

Segment EBITDA $ 11.6 $ 3.8 $ 25.4 $ 14.1

Net Sales Comparison of Three Months Ended March 31, 2023 and March 31, 2022:

Net Sales Comparison of Three and Six Months Ended June 30, 2023 and June 30, 2022:

Advanced Polymer Technologies (In millions)

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

Three months ended March 31, 2023 vs.

Three months ended June 30, 2023 vs.

$ 53.8 (7.8) 6.9 0.3 $ 53.2

Three Months Ended March 31, 2023 vs.

Six months ended June 30, 2023 vs.

$ 115.6 (14.5) 18.3 (0.6) $ 118.8

Three Months Ended June 30, 2023 vs.

Segment net sales.

The increase of $3.8 million in 2023 was driven by favorable sales composition (mix) and pricing of $11.5 million (19 percent), partially offset by volume decline of $6.7 million (11 percent), and unfavorable foreign currency exchange of $1.0 million (two percent).

The slight decrease of $0.6 million in 2023 was driven by a volume decline of $7.8 million (14 percent), partially offset by favorable mix of $6.9 million (13 percent), and favorable foreign currency exchange of $0.3 million (one percent).

Segment EBITDA.

The increase of $3.5 million was driven by favorable sales composition (mix) and pricing of $11.5 million, partially offset by higher manufacturing costs of $3.6 million, volume decline of $2.3 million, increased SG&A and research and technical expenses of $1.7 million, and unfavorable foreign currency exchange of $0.4 million.

The increase of $7.8 million was driven by favorable pricing and mix of $6.9 million, decreased manufacturing costs, primarily energy costs, of $4.6 million, decreased SG&A and research and technical expenses of $1.0 million, partially offset by volume decline of $2.7 million, and unfavorable foreign currency exchange of $2.0 million.

Six Months Ended June 30, 2023 vs.

Segment net sales.

The increase of $3.2 million in 2023 was driven by favorable mix of $18.3 million (16 percent), partially offset by volume decline of $14.5 million (13 percent), and unfavorable foreign currency exchange of $0.6 million (one percent).

Segment EBITDA.

The increase of $11.3 million was driven by favorable mix of $18.4 million, and decreased manufacturing costs of $1.0 million, partially offset by volume decline of $5.0 million, unfavorable foreign currency exchange of $2.4 million, and increased SG&A and research and technical expenses of $0.7 million.

Use of Non-GAAP Financial Measure - Adjusted EBITDA

4 unchanged sentences

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

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

charges, (losses) and gains from the sale of strategic investments, and pension and postretirement settlement and curtailment (income) charges, net.

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

1 unchanged sentence

Reconciliation of Net Income (Loss) to Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

In millions 2023 2022 2023 2022

7 unchanged sentences

Restructuring and other (income) charges, net (1)

18.2 3.7 23.8 7.3

Gain on sale of strategic investment — — (19.2) —

2 unchanged sentences

$ 120.7 $ 121.1 $ 224.6 $ 240.1

_______________

(1) Excludes $1.0 million of Depreciation and amortization for the three and six months ended June 30, 2023, relating to the alternative feedstock transition within our Performance Chemicals reportable segment.

Refer to Note 11 for more information.

Adjusted EBITDA

Three Months Ended March 31, 2023 vs.

Three and Six Months Ended June 30, 2023 vs.

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

Current Full Year Company Outlook

Current Full Year Company Outlook vs.

Net sales are expected to be between $1.6 billion and $1.7 billion for the full year 2023.

We expect some improvement in global automobile production, which will support growth in Performance Materials.

Growth drivers in our Performance Chemicals segment include our pavement technologies product line as we continue to drive geographic expansion and municipalities take advantage of increased infrastructure spending.

We anticipate strong performance in our oilfield products within our industrial specialties product line but expect continued volume pressure in our adhesive products.

Our Advanced Polymer Technologies segment is expected to continue increasing its presence in key end markets such as automotive, bioplastics, and footwear and apparel.

We expect improvement in global automobile production over prior year, which will support growth in our Performance Materials reportable segment.

In our Performance Chemicals reportable segment we expect growth from the pavement technologies product line as we continue to drive geographic expansion and municipalities take advantage of increased infrastructure spending, partially offset by volume pressure within the industrial specialties product line, primarily in rosin-based products, as well as other industrial end markets.

Our Advanced Polymer Technologies reportable segment is expected to see growth in key end markets such as automotive and bioplastics however we expect pressure in other end markets such as footwear.

Adjusted EBITDA is expected to be between $390 million to $420 million for the full year 2023.

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

In Performance Chemicals, we expect a significant increase in the cost of CTO, a primary raw material, partially offset by higher-value end markets in the industrial specialties product line, as well as continued growth in the pavement technologies product line.

In Advanced Polymer Technologies, we anticipate improved margins on a combination of volume growth in our key end markets and lower input costs.

We expect EBITDA growth for our Performance Materials segment as volumes shift to higher margin automotive carbon due to improved global automotive production.

In Performance Chemicals, we expect a significant increase in the cost of CTO, a primary raw material, partially offset by continued growth in the pavement technologies product line.

In Advanced Polymer Technologies, we anticipate improved margins on a combination of volume growth in strategic end markets and lower input costs.

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

12 unchanged sentences

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

As of March 31, 2023, our undrawn capacity under our revolving credit facility was $139.7 million.

As of June 30, 2023, our undrawn capacity under our revolving credit facility was $116.7 million.

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

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

interest payments, capital expenditures, expenditures related to our business transformation initiative, debt principal repayments, purchases pursuant to our stock repurchase program (and related excise tax payments), income tax payments, and restructuring activities such as our alternative feedstock transition and North Charleston plant transition.

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

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

Cash and cash equivalents totaled $77.9 million at March 31, 2023.

Cash and cash equivalents totaled $68.0 million at June 30, 2023.

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

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

The cash and cash equivalents balance at March 31, 2023, included $69.2 million held by our foreign subsidiaries.

The cash and cash equivalents balance at June 30, 2023, included $58.4 million held by our foreign subsidiaries.

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

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Share Repurchases

On July 25, 2022, our Board of Directors authorized the repurchase of up to $500 million of our common stock (the "2022 Authorization") and rescinded the prior outstanding repurchase authorizations with respect to the shares that remained unused under the prior authorization.

Shares under the 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 three months ended March 31, 2023 and 2022, we repurchased $33.4 million, inclusive of $0.2 million in excise tax, and $40.4 million in common stock, representing 449,475 and 610,447 shares of our common stock at a weighted average cost per share of $73.86 and $66.26, respectively.

At March 31, 2023, $411.5 million remained unused under our Board-authorized repurchase program.

On July 25, 2022, our Board of Directors authorized the repurchase of up to $500 million of our common stock and rescinded the prior outstanding repurchase authorizations with respect to the shares that remained unused under the prior authorization.

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

During the three and six months ended June 30, 2023, we repurchased $58.7 million, inclusive of $0.6 million in excise tax, and $92.1 million, inclusive of $0.8 million in excise tax, in common stock, representing 819,898 and 1,269,373 shares of our common stock at a weighted average cost per share of $70.87 and $71.93, respectively.

At June 30, 2023, $353.4 million remained unused under our Board-authorized repurchase program.

During the three and six months ended June 30, 2022, we repurchased $49.5 million and $89.9 million in common stock, representing 719,236 and 1,329,683 shares of our common stock at a weighted average cost per share of $68.72 and $67.59, respectively.

Capital Expenditures

Projected 2023 capital expenditures are $100 - $120 million.

We have no material commitments associated with these projected capital expenditures as of March 31, 2023 .

Cash flow comparison of the Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31,

We have no material commitments associated with these projected capital expenditures as of June 30, 2023 .

Cash flow comparison of the Six Months Ended June 30, 2023 and 2022

Six Months Ended June 30,

In millions 2023 2022

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Cash flows provided by (used in) operating activities

Cash flows provided by (used in) operating activities, which consists of net income (loss) adjusted for non-cash items including the cash impact from changes in operating assets and liabilities (i.e., working capital), totaled $5.2 million for the three months ended March 31, 2023.

Cash provided by (used in) operating activities for the three months ended March 31, 2023 was driven by decreased cash earnings of $4.6 million, a net increase in overall working capital of $9.0 million despite a decrease in trade working capital (accounts receivable, inventory, and accounts payable) of $5.9 million.

Cash flow from operations was further reduced by an increase in cash interest paid of $4.3 million due to the rising interest rates during 2023 when compared to 2022 as well as $1.2 million of additional tax payments.

Cash flows provided by (used in) operating activities, which consists of net income (loss) adjusted for non-cash items including the cash impact from changes in operating assets and liabilities (i.e., working capital), totaled $53.6 million for the six months ended June 30, 2023.

Cash provided by (used in) operating activities for the six months ended June 30, 2023 was driven by a net increase in overall working capital of $56.3 million including an increase in trade working capital (accounts receivable, inventory, and accounts payable) of $34.9 million.

Cash flow from operations was reduced by an increase in cash interest paid of $11.3 million due to the rising interest rates during 2023 when compared to 2022.

This was partially offset by a reduction in tax payments of $3.3 million and increased cash earnings of $3.1 million.

Cash flows provided by (used in) investing activities

Cash provided by investing activities in the three months ended March 31, 2023 was $1.9 million and was primarily driven by the proceeds from the sale of a strategic investment for $31.4 million, partially offset by capital expenditures of $25.4 million.

In the three months ended March 31, 2023 and 2022, capital spending included the base maintenance capital supporting ongoing operations and growth and cost improvement spending primarily related to our business transformation initiative (see Note 11 within the Condensed Consolidated Financial Statements for more information).

Capital expenditure categories Three Months Ended March 31,

Cash used in investing activities in the six months ended June 30, 2023 was $21.5 million and was primarily driven by capital expenditures of $47.1 million, partially offset by the proceeds from the sale of a strategic investment for $31.4 million.

In the six months ended June 30, 2023 and 2022, capital spending included the base maintenance capital supporting ongoing operations and growth and cost improvement spending primarily related to our business transformation initiative (see Note 11 within the Condensed Consolidated Financial Statements for more information).

Capital expenditure categories Six Months Ended June 30,

In millions 2023 2022

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Cash flows provided by (used in) financing activities

Cash used in financing activities in the three months ended March 31, 2023, was $5.6 million and was primarily driven by borrowings on our revolving credit facility of $90.3 million, partially offset by the repurchase of common stock of $33.4 million, payments on our revolving credit facility of $60.3 million, and tax payments related to withholdings on restricted stock unit vestings of $4.5 million.

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

Cash used in financing activities in the six months ended June 30, 2023, was $40.1 million and was primarily driven by payments on our revolving credit facility of $144.8 million, the repurchase of common stock of $92.1 million, and tax payments related to withholdings on restricted stock unit vestings of $4.5 million, partially offset by borrowings on our revolving credit facility of $197.8 million.

Cash used in financing activities in the six months ended June 30, 2022 was $193.3 million and was primarily driven by payments on long-term borrowings of $628.1 million, payments on revolving credit facility of $256.0 million, the repurchase of common stock of $89.9 million, and tax payments related to withholdings on restricted stock unit vestings of $2.0 million, partially offset by borrowings on our revolving credit facility of $788.0 million.

New Accounting Guidance

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

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.

Recently issued ASUs that are not listed within this Form 10-Q have been assessed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements.

Critical Accounting Policies and Estimates

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis