Ingevity Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Management’s discussion and analysis of Ingevity Corporation's ( “ Ingevity, ” “ the company, ” “ we, ” “ us, ” or “ our ” ) financial condition and results of operations (“MD&A”) is provided as a supplement to the Condensed Consolidated Financial Statements and related notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. The following discussion should be read in conjunction with Ingevity’s consolidated financial statements as of and for the year ended December 31, 2022 filed on February 28, 2023 with the Securities and Exchange Commission ("SEC") as part of the Company's Annual Reporting on Form 10-K ("2022 Annual Report") and the unaudited interim Condensed Consolidated Financial Statements and notes to the unaudited interim Condensed Consolidated Financial Statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Investors are cautioned that the forward-looking statements contained in this section and other parts of this Quarterly Report on Form 10-Q involve both risk and uncertainty. Several important factors could cause actual results to differ materially from those anticipated by these statements. Many of these statements are macroeconomic in nature and are, therefore, beyond the control of management. See "Cautionary Statements About Forward-Looking Statements" below and at the beginning of our 2022 Annual Report. Cautionary Statements About Forward-Looking Statements This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 that reflect our current expectations, beliefs, plans or forecasts with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by words or phrases such as “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “outlook,” “project,” “intend,” “plan,” “believe,” “target,” “prospects,” “potential” and “forecast,” and other words, terms and phrases of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. We caution readers that a forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. Such risks and uncertainties include, among others, those discussed in Part I, Item 1A. Risk Factors of our 2022 Annual Report, as well as in our unaudited Condensed Consolidated Financial Statements, related notes, and the other information appearing elsewhere in this report and our other filings with the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. In addition to any such risks, uncertainties and other factors discussed elsewhere herein, risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed or implied by the forward-looking statements include, but are not limited to the following: • the anticipated timing, charges and costs of the closure of our DeRidder, Louisiana plant may differ materially from our estimates due to events that may occur as a result of, or in connection with, the plant closure; • we may be adversely affected by general global economic, geopolitical, and financial conditions beyond our control, including inflation and the Russia-Ukraine war and the Israel-Gaza war; • we are exposed to risks related to our international sales and operations; • adverse conditions in the automotive market have and may continue to negatively impact demand for our automotive carbon products; • we face competition from substitute products, new technologies, and new or emerging competitors; • if more stringent air quality standards worldwide are not adopted, our growth could be impacted; • we may be adversely affected by a decrease in government infrastructure spending; • adverse conditions in cyclical end markets may continue to adversely affect demand for our products; • our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply and subject to price increases that have negatively impacted the business and will continue to do so if our ability to pass through such price increases remains limited; 29 • lack of access to raw materials upon which we depend would impact our ability to produce our products; • the inability to make or effectively integrate future acquisitions and other investments may negatively affect our results; • we are dependent upon third parties for the provision of certain critical operating services at several of our facilities; • adverse effects of the novel coronavirus ("COVID-19") pandemic; • we may continue to be adversely affected by disruptions in our supply chain; • the occurrence of natural disasters and extreme weather or other unanticipated problem such as labor difficulties (including work stoppages), equipment failure, or unscheduled maintenance and repair, which could result in operational disruptions of varied duration; • we are dependent upon attracting and retaining key personnel; • we are dependent on certain large customers; • from time to time, we are and may be engaged in legal actions associated with our intellectual property rights; • if we are unable to protect our intellectual property and other proprietary information, we may lose significant competitive advantage; • information technology security breaches and other disruptions; • complications with the design or implementation of our new enterprise resource planning system, including higher than anticipated associated costs; • government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs, and the chemicals industry; and • losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes. Overview Ingevity is a leading global manufacturer of specialty chemicals and high performance activated carbon materials. We provide innovative solutions to meet our customers’ unique and demanding requirements through proprietary formulated products. We report in three reportable segments, Performance Materials, Performance Chemicals, and Advanced Polymer Technologies . Recent Developments Performance Chemicals Repositioning On November 1, 2023, we announced a number of strategic actions designed to further reposition our Performance Chemicals segment to improve the profitability and reduce the cyclicality of the Performance Chemicals business and the Company as a whole. These actions increase our focus on growing our most profitable Performance Chemicals businesses such as Pavement Technologies and accelerate our transition to non-CTO-based fatty acids. The announced actions include the permanent closure of our Performance Chemicals manufacturing plant located in DeRidder, Louisiana (the “DeRidder Plant”) as well as additional corporate and business cost reduction actions. We expect to close the DeRidder Plant by the end of the first half of 2024. We expect to incur aggregate charges of approximately $280.0 million associated with these actions, consisting of approximately $180.0 million in asset-related charges, approximately $15.0 million in severance and other employee-related costs, and approximately $85.0 million in other restructuring costs including decommissioning, dismantling and removal charges, and contract termination costs. We expect approximately $180.0 million of the total charges to be non-cash. The majority of non-cash charges and 50-60 percent of cash charges are expected to be recognized by the end of the first half of 2024. The charges we currently expect to incur in connection with these actions are subject to a number of assumptions and risks, and actual results may differ materially. We may also incur other material charges not currently contemplated due to events that may occur as a result of, or in connection with, these actions. Supply Agreements 30 On November 1, 2023, Ingevity Corporation (the “Company”), and WestRock Shared Services, LLC and WestRock MWV, LLC, on behalf of the affiliates of WestRock Company (“WestRock”), entered into Amendment No.1 (the “Amendment”) to that certain Amended and Restated Crude Tall Oil and Black Liquor Soap Skimmings Agreement, dated as of March 20, 2023, by and between the Company and WestRock. Performance Chemicals Reporting Unit During the third quarter of 2023, continued reduction in demand in industrial end markets has negatively impacted our ability to offset elevated crude tall oil (“CTO”) costs through pricing actions within our Performance Chemicals’ reportable segment, particularly in our industrial specialties product line. CTO is essential to our industrial specialties and some of our pavement technologies product lines within our Performance Chemicals reportable segment. As a result, we concluded that a triggering event occurred for our Performance Chemicals’ reporting unit, and we performed an analysis of the reporting unit’s goodwill, intangibles and long-lived assets as of September 1, 2023. Our analysis included significant assumptions such as: revenue growth rate, Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") margin, and discount rate which are judgmental and variations in any assumptions could result in materially different calculations of fair value. Based on our analysis, the headroom associated with our Performance Chemicals’ reporting unit, which is defined as the percentage difference between the fair value of a reporting unit and its carrying value, is currently 19 percent. Consequently, we concluded that there was no impairment for the quarter ended September 30, 2023. Performance Chemicals Reporting Unit - Headroom Sensitivity Analysis Reporting Unit Fair Value Revenue Growth Rate Declines by 100 Bps EBITDA Margin Declines by 100 Bps Discount Rate increases by 100 Bps Headroom 19% 14% 14% 7% 31 Results of Operations Three Months Ended September 30, Nine Months Ended September 30, In millions 2023 2022 2023 2022 Net sales $ 446.0 $ 482.0 $ 1,320.4 $ 1,284.7 Cost of sales 317.0 305.7 908.0 820.0 Gross profit 129.0 176.3 412.4 464.7 Selling, general, and administrative expenses 40.0 54.2 140.3 142.9 Research and technical expenses 7.8 7.6 24.6 23.1 Restructuring and other (income) charges, net 24.6 3.3 49.4 10.6 Acquisition-related costs 0.1 1.9 3.8 1.9 Other (income) expense, net 1.3 2.0 (13.9) (1.0) Interest expense, net 23.1 11.5 64.3 37.3 Income (loss) before income taxes 32.1 95.8 143.9 249.9 Provision (benefit) for income taxes 6.9 20.4 32.5 53.9 Net income (loss) $ 25.2 $ 75.4 $ 111.4 $ 196.0 Net sales The table below shows the 2023 Net sales and variances from 2022: Change vs. prior year In millions Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales Three months ended September 30, 2023 vs. 2022 $ 482.0 (72.1) 38.3 (2.2) $ 446.0 Nine months ended September 30, 2023 vs. 2022 $ 1,284.7 (97.1) 142.4 (9.6) $ 1,320.4 Three Months Ended September 30, 2023 vs. 2022 The sales decrease of $36.0 million in 2023 was driven by unfavorable volume decline of $72.1 million (15 percent) primarily within our Performance Chemicals and Advanced Polymers Technologies reportable segments and unfavorable foreign currency exchange of $2.2 million (zero percent). These unfavorable impacts to Net sales were partially offset by favorable price/mix of $38.3 million (eight percent) across all segments. Nine Months Ended September 30, 2023 vs. 2022 The sales increase of $35.7 million in 2023 was driven by favorable price/mix of $142.4 million (11 percent) across all segments, partially offset by unfavorable volume decline, particularly in our Performance Chemicals' Industrial Specialties product line and Advanced Polymer Technologies, for a combined impact of $97.1 million (eight percent), and unfavorable foreign currency exchange of $9.6 million (one percent). 32 Gross Profit Three Months Ended September 30, 2023 vs. 2022 Gross profit decrease of $47.3 million was driven by increased manufacturing costs of $42.6 million due to raw material inflationary pressures, primarily CTO within our industrial specialties product line, and unfavorable sales volume of $36.7 million, primarily driven by our Performance Chemicals and Advanced Polymer Technologies reportable segments. The decrease was partially offset by favorable pricing and product mix of $26.9 million, and favorable foreign currency exchange of $5.1 million. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for all segments. Nine Months Ended September 30, 2023 vs. 2022 Gross profit decrease of $52.3 million was driven by increased manufacturing costs of $140.2 million due to raw material inflationary pressures, primarily CTO within our industrial specialties product line in our Performance Chemicals reportable segment, and unfavorable sales volume of $44.3 million. The decrease was partially offset by pricing improvements and favorable mix of $127.4 million primarily driven by our industrial specialties product line, and favorable foreign currency exchange of $4.8 million. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for all segments. Selling, general and administrative expenses Three Months Ended September 30, 2023 vs. 2022 Selling, general and administrative expenses ("SG&A") were $40.0 million (nine percent of Net sales) and $54.2 million (11 percent of Net sales) for the three months ended September 30, 2023 and 2022, respectively. The decrease in SG&A as a percentage of Net sales was driven by lower employee-related costs of $12.0 million, and decreased travel and other miscellaneous costs of $5.1 million, partially offset by increased amortization expense of $2.9 million primarily driven by the Ozark Materials, LLC and Ozark Logistics, LLC (collectively, "Ozark Materials") acquisition. Nine Months Ended September 30, 2023 vs. 2022 Selling, general and administrative expenses ("SG&A") were $140.3 million (11 percent of Net sales) and $142.9 million (11 percent of Net sales) for the nine months ended September 30, 2023 and 2022, respectively. SG&A as a percentage of Net sales was unchanged as the impact of increased amortization costs of $9.2 million, primarily driven by the Ozark Materials acquisition, was offset by decreased employee-related costs of $7.0 million, and decreased travel and other miscellaneous costs of $4.8 million. Research and technical expenses Three Months Ended September 30, 2023 vs. 2022 Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 1.7 percent from 1.6 percent for the three months ended September 30, 2023 and 2022, respectively. Nine Months Ended September 30, 2023 vs. 2022 Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 1.9 percent from 1.8 percent for the nine months ended September 30, 2023 and 2022, respectively. 33 Restructuring and other (income) charges, net Three and Nine Months Ended September 30, 2023 vs. 2022 Restructuring and other (income) charges, net were $24.6 million and $49.4 million for the three and nine months ended September 30, 2023, respectively, and $3.3 million and $10.6 million for the three and nine months ended September 30, 2022, respectively. Severance and other employee-related costs increased $1.5 million and $8.9 million, and other restructuring charges increased zero and $2.7 million, respectively. Additionally, alternative fatty acid transition costs increased $11.8 million and $18.4 million, and costs associated with the North Charleston plant transition increased $9.8 million and $12.7 million, both for the three and nine months ended September 30, 2023, respectively. The increase was partially offset by a $1.8 million and $3.9 million decrease related to our business transformation initiative for the three and nine months ended September 30, 2023, respectively. See Note 11 within the Condensed Consolidated Financial Statements for more information. Acquisition-related costs Three and Nine Months Ended September 30, 2023 vs. 2022 Acquisition-related costs were $0.1 million and $3.8 million for the three and nine months ended September 30, 2023, respectively, and $1.9 million for the three and nine months ended September 30, 2022, respectively. All charges relate 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 and Nine Months Ended September 30, 2023 vs. 2022 Three Months Ended September 30, Nine Months Ended September 30, In millions 2023 2022 2023 2022 Foreign currency exchange (income) loss $ 1.7 $ 1.2 $ 4.4 $ 1.6 Gain on sale of strategic investment (0.1) — (19.3) — Other (income) expense, net (0.3) 0.8 1.0 (2.6) Total Other (income) expense, net $ 1.3 $ 2.0 $ (13.9) $ (1.0) Interest expense, net Three and Nine Months Ended September 30, 2023 vs. 2022 Three Months Ended September 30, Nine Months Ended September 30, In millions 2023 2022 2023 2022 Finance lease obligations $ 1.9 $ 1.8 $ 5.5 $ 5.5 Revolving credit and term loan facilities (1) 15.0 5.4 43.2 11.5 Senior notes (1) 5.6 5.6 16.8 27.5 Litigation related interest expense (2) 1.3 — 1.7 — Other interest (income) expense, net (0.7) (1.3) (2.9) (7.2) Total Interest expense, net $ 23.1 $ 11.5 $ 64.3 $ 37.3 _______________ (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. 34 Provision (benefit) for income taxes Three and Nine Months Ended September 30, 2023 vs. 2022 For the three months ended September 30, 2023 and 2022, our effective tax rate was 21.5 percent and 21.3 percent, respectively. Excluding discrete items, the effective rate was 28.7 percent compared to 21.0 percent in the three months ended September 30, 2023 and 2022, respectively. See Note 12 within the Condensed Consolidated Financial Statements for more information. For the nine months ended September 30, 2023 and 2022, our effective tax rate was 22.6 percent and 21.6 percent, respectively. Excluding discrete items, the effective rate was 24.6 percent compared to 21.1 percent in the nine months ended September 30, 2023 and 2022, respectively. See Note 12 within the Condensed Consolidated Financial Statements for more information. 35 Segment Operating Results In addition to the information discussed above, the following sections discuss the results of operations for all of Ingevity's segments. Our segments are (i) Performance Materials, (ii) Performance Chemicals and (iii) Advanced Polymer Technologies. Segment Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") is the primary measure used by the Company's chief operating decision maker to evaluate the performance of and allocate resources among our operating segments. Segment EBITDA is defined as segment revenue less segment operating expenses (segment operating expenses consist of costs of sales, selling, general and administrative expenses, research and technical expenses, other (income) expense, net, excluding depreciation and amortization). We have excluded the following items from segment EBITDA: interest expense, net associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charges, (losses) and gains from the sale of strategic investments, and pension and postretirement settlement and curtailment (income) charges. In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Annual Consolidated Financial Statements included in our 2022 Annual Report. Performance Materials Performance Summary Sales in our Performance Materials segment increased compared to the prior year quarter, mainly due to increased sales of automotive carbon in North America and Asia Pacific. Segment EBITDA growth was driven primarily by product mix and lower SG&A. In millions Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Total Performance Materials - Net sales $ 147.2 $ 144.9 $ 433.2 $ 415.7 Segment EBITDA $ 74.5 $ 61.2 $ 208.5 $ 194.7 Net Sales Comparison of Three and Nine Months Ended September 30, 2023 and September 30, 2022: Change vs. prior year Performance Materials (In millions) Prior year Net sales Volume Price/Mix Currency effect Current year Net sales Three months ended September 30, 2023 vs. 2022 $ 144.9 (2.4) 8.0 (3.3) $ 147.2 Nine months ended September 30, 2023 vs. 2022 $ 415.7 3.4 23.4 (9.3) $ 433.2 Three Months Ended September 30, 2023 vs. 2022 Segment net sales. The increase of $2.3 million in 2023 was driven by favorable mix of $8.0 million (six percent), partially offset by unfavorable foreign currency exchange of $3.3 million (two percent) and a volume decrease of $2.4 million (two percent). Segment EBITDA. The increase of $13.3 million in 2023 was driven by the increase in sales as noted above, decreased SG&A and research and technical expenses of $6.8 million, favorable mix of $3.4 million, decreased manufacturing costs of $2.8 million, and favorable foreign currency exchange of $1.7 million. The increase was partially offset by a volume decrease of $1.4 million. Nine Months Ended September 30, 2023 vs. 2022 Segment net sales. The increase of $17.5 million in 2023 was driven by favorable mix of $23.4 million (six percent) and a volume increase of $3.4 million (one percent). The increase was partially offset by unfavorable foreign currency exchange of $9.3 million (two percent). Segment EBITDA. The increase of $13.8 million in 2023 was driven by the increase in sales as noted above, favorable mix of $16.3 million, decreased SG&A and research and technical expenses of $7.7 million, and a volume increase of 36 $2.7 million. The increase was partially offset by increased manufacturing costs of $11.7 million, and unfavorable foreign currency exchange of $1.2 million. Performance Chemicals Performance Summary Sales in our Performance Chemicals segment decreased compared to the prior year quarter, primarily due to lower volume in our industrial specialties product line. The segment EBITDA decline is primarily due to higher raw material costs, specifically CTO. Pavement technologies sales increased as a result of higher pricing in legacy pavement applications as well as the acquisition of Ozark Materials. Industrial specialties sales decrease was driven by volume declines attributed primarily to weak demand across end markets, particularly adhesives and printing inks. In addition, we began to see weakness in oilfield with lower drilling activity during the quarter. Three Months Ended September 30, Nine Months Ended September 30, In millions 2023 2022 2023 2022 Total Performance Chemicals - Net sales $ 256.0 $ 267.6 $ 725.6 $ 683.9 Pavement Technologies product line 129.7 88.3 316.4 194.0 Industrial Specialties product line 126.3 179.3 409.2 489.9 Segment EBITDA $ 24.7 $ 65.7 $ 89.9 $ 158.2 Net Sales Comparison of Three and Nine Months Ended September 30, 2023 and September 30, 2022: Change vs. prior year Performance Chemicals (In millions) Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales Three months ended September 30, 2023 vs. 2022 $ 267.6 (38.7) 27.0 0.1 $ 256.0 Nine months ended September 30, 2023 vs. 2022 $ 683.9 (55.0) 97.4 (0.7) $ 725.6 Three Months Ended September 30, 2023 vs. 2022 Segment net sales. The decrease of $11.6 million was driven by a volume decrease of $38.7 million (14 percent), primarily in industrial specialties ($65.1 million), partially offset by an increase in pavement technologies ($26.4 million), primarily due to Ozark Materials. This decrease was partially offset by favorable mix of $27.0 million (10 percent), driven by increases in industrial specialties ($11.9 million) and pavement technologies ($15.1 million), and favorable foreign currency exchange of $0.1 million. Segment EBITDA. The decrease of $41.0 million was driven by higher manufacturing costs of $47.3 million, primarily due to CTO, and a volume decrease of $22.0 million. The decrease was partially offset by favorable mix of $20.2 million, and lower SG&A of $8.1 million. Nine Months Ended September 30, 2023 vs. 2022 Segment net sales. The increase of $41.7 million was driven by favorable mix of $97.4 million (14 percent), attributed to increases in industrial specialties ($70.3 million) and pavement technologies ($27.1 million). This was partially offset by a volume decrease of $55.0 million (eight percent), driven by a decrease in industrial specialties ($150.7 million), partially offset by an increase in pavement technologies ($95.7 million). Segment EBITDA. The decrease of $68.3 million was driven by higher manufacturing costs of $129.0 million, primarily due to CTO, a volume decrease of $28.7 million, and higher SG&A of $0.1 million. The decrease was partially offset by favorable mix of $89.4 million. 37 Advanced Polymer Technologies Performance Summary Our Advanced Polymer Technologies segment sales decreased compared to the prior year quarter due to market weakness across the segment's end markets in all regions, partially offset by higher prices. Segment EBITDA was flat, as lower raw material and energy costs offset decreased volume. In millions Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Total Advanced Polymer Technologies - Net sales $ 42.8 $ 69.5 $ 161.6 $ 185.1 Segment EBITDA $ 11.2 $ 11.3 $ 36.6 $ 25.4 Net Sales Comparison of Three and Nine Months Ended September 30, 2023 and September 30, 2022: Change vs. prior year Advanced Polymer Technologies (In millions) Prior year Net sales Volume Price/Mix Currency effect Current year Net sales Three months ended September 30, 2023 vs. 2022 $ 69.5 (31.0) 3.3 1.0 $ 42.8 Nine months ended September 30, 2023 vs. 2022 $ 185.1 (45.5) 21.6 0.4 $ 161.6 Three Months Ended September 30, 2023 vs. 2022 Segment net sales. The decrease of $26.7 million in 2023 was driven by a volume decline of $31.0 million (45 percent), partially offset by favorable mix of $3.3 million (five percent), and favorable foreign currency exchange of $1.0 million (one percent). Segment EBITDA. The slight decrease of $0.1 million was driven by a volume decline of $13.3 million, and unfavorable foreign currency exchange of $1.0 million, mostly offset by decreased manufacturing costs, primarily energy costs, of $7.3 million, decreased SG&A and research and technical expenses of $3.6 million, and favorable mix of $3.3 million. Nine Months Ended September 30, 2023 vs. 2022 Segment net sales. The decrease of $23.5 million in 2023 was driven by a volume decline of $45.5 million (25 percent), partially offset by favorable mix of $21.6 million (12 percent), and favorable foreign currency exchange of $0.4 million (zero percent). Segment EBITDA. The increase of $11.2 million was driven by favorable mix of $21.7 million, decreased manufacturing costs of $8.3 million, and decreased SG&A and research and technical expenses of $2.9 million, partially offset by a volume decline of $18.3 million and unfavorable foreign currency exchange of $3.4 million. Use of Non-GAAP Financial Measure - Adjusted EBITDA Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with GAAP and has provided a reconciliation to net income, the most directly comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA is not meant to be considered in isolation nor as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA is utilized by management as a measure of profitability. We believe this non-GAAP financial measure provides management as well as investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measure, when viewed together with our financial results computed in accordance with GAAP, provides a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. We believe Adjusted EBITDA is a useful measure because it excludes the effects of financing and investment activities as well as non-operating activities. Adjusted EBITDA is defined as net income (loss) plus provision (benefit) for income taxes, interest expense, net, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charges, (losses) and gains from the sale of strategic investments, and pension and postretirement settlement and curtailment (income) charges, net. 38 This non-GAAP measure is not intended to replace the presentation of financial results in accordance with GAAP and investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another. A reconciliation of Adjusted EBITDA to net income is set forth within this section. Reconciliation of Net Income (Loss) to Adjusted EBITDA Three Months Ended September 30, Nine Months Ended September 30, In millions 2023 2022 2023 2022 Net income (loss) (GAAP) $ 25.2 $ 75.4 $ 111.4 $ 196.0 Interest expense, net 23.1 11.5 64.3 37.3 Provision (benefit) for income taxes 6.9 20.4 32.5 53.9 Depreciation and amortization - Performance Materials 9.5 8.9 28.7 26.7 Depreciation and amortization - Performance Chemicals 17.8 9.7 45.6 29.4 Depreciation and amortization - Advanced Polymer Technologies 7.9 7.1 23.4 22.5 Restructuring and other (income) charges, net (1) 20.0 3.3 43.8 10.6 Gain on sale of strategic investment (0.1) — (19.3) — Acquisition and other-related costs 0.1 1.9 4.6 1.9 Adjusted EBITDA (Non-GAAP) $ 110.4 $ 138.2 $ 335.0 $ 378.3 _______________ (1) Excludes $4.6 million and $5.6 million of Depreciation and amortization for the three and nine months ended September 30, 2023, relating to the alternative feedstock transition and North Charleston plant transition within our Performance Chemicals reportable segment. Refer to Note 11 for more information. Adjusted EBITDA Three and Nine Months Ended September 30, 2023 vs. 2022 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 vs. Prior Year Net sales are expected to be between $1.6 billion and $1.7 billion for the full year 2023. 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 with the inclusion of our Ozark Materials acquisition and continued geographic expansion in our legacy business, 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 the automotive end market, however, we expect pressure in all other end markets. Adjusted EBITDA is expected to be between $375 million to $390 million for the full year 2023. We expect EBITDA growth for our Performance Materials segment as volumes shift to higher margin automotive carbon due to improved global automotive production. For Advanced Polymer Technologies, we anticipate improved margins on a combination of pricing and lower input costs. 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. 39 A reconciliation of net income to adjusted EBITDA as projected for 2023 is not provided. Ingevity does not forecast net income as it cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components, net of tax, include further restructuring and other income (charges), net; additional acquisition and other-related costs; litigation verdict charges; (losses) and gains from the sale of strategic investments; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to legislative tax rate changes. Additionally, discrete tax items could drive variability in our projected effective tax rate. All of these components could significantly impact such financial measures. Further, in the future, other items with similar characteristics to those currently included within adjusted EBITDA, that have a similar impact on the comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA. 40 Liquidity and Capital Resources The primary source of liquidity for our business is the cash flow provided by operating activities. We expect our cash flow provided by operations combined with cash on hand and available capacity under our revolving credit facility to be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months. As of September 30, 2023, our undrawn capacity under our revolving credit facility was $172.7 million. Over the next twelve months, we expect to fund the following: interest payments, capital expenditures, expenditures related to our business transformation initiative, purchases pursuant to our stock repurchase program (and related excise tax payments), income tax payments, and restructuring activities such as our alternative feedstock transition, North Charleston plant transition, and the actions announced in the fourth quarter of 2023 as further described Note 17 within the condensed consolidated financial statements. 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 $84.5 million at September 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 September 30, 2023, included $74.3 million held by our foreign subsidiaries. Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and their capital expenditures. We believe that our foreign holdings of cash will not have a material adverse impact on our U.S. liquidity. If these earnings were distributed, such amounts would be subject to U.S. federal income tax at the statutory rate less the available foreign tax credits, if any, and would potentially be subject to withholding taxes in the various jurisdictions. The potential tax implications of the repatriation of unremitted earnings are driven by facts at the time of distribution, therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such cash and earnings were repatriated to the U.S. Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S. operations. Accounts Receivable Securitization On October 2, 2023, we entered into a $100.0 million accounts receivable securitization program with a global financial institution. The program requires that we establish a bankruptcy-remote special purpose entity (“SPE”), wholly owned and fully consolidated by Ingevity Corporation. Trade receivables will be sold to this SPE and held as secured collateral for the borrowings under the program. The borrowings will be presented on our balance sheet as short-term debt, and cash flows will be presented as financing on our cash flow statement. Other Potential Liquidity Needs Share Repurchases 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 nine months ended September 30, 2023, we repurchased zero and $92.1 million, inclusive of $0.8 million in excise tax, in common stock, representing zero and 1,269,373 shares of our common stock at a weighted average cost per share of zero and $71.93, respectively. At September 30, 2023, $353.4 million remained unused under our Board-authorized repurchase program. During the three and nine months ended September 30, 2022, we repurchased $49.3 million and $139.2 million in common stock, representing 697,523 and 2,027,206 shares of our common stock at a weighted average cost per share of $70.75 and $68.68, respectively. 41 Capital Expenditures Projected 2023 capital expenditures are $95-$105 million. We have no material commitments associated with these projected capital expenditures as of September 30, 2023 . Cash flow comparison of the Nine Months Ended September 30, 2023 and 2022 Nine Months Ended September 30, In millions 2023 2022 Net cash provided by (used in) operating activities $ 160.5 $ 214.9 Net cash provided by (used in) investing activities (56.3) (144.7) Net cash provided by (used in) financing activities (93.4) (264.9) 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 $160.5 million for the nine months ended September 30, 2023. Cash provided by (used in) operating activities for the nine months ended September 30, 2023 was driven by a net increase in overall working capital of $29.5 million, despite a decrease in trade working capital (accounts receivable, inventory, and accounts payable) of $22.1 million. Cash flow from operations was reduced by an increase in cash interest paid of $22.0 million due to rising interest rates and outstanding borrowings during 2023 when compared to 2022, and decreased cash earnings of $17.6 million. This was partially offset by a reduction in tax payments of $14.7 million. Cash flows provided by (used in) investing activities Cash used in investing activities in the nine months ended September 30, 2023 was $56.3 million and was primarily driven by capital expenditures of $80.6 million, partially offset by the proceeds from the sale of a strategic investment for $31.5 million. In the nine months ended September 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 Nine Months Ended September 30, In millions 2023 2022 Maintenance $ 44.7 $ 45.9 Safety, health and environment 9.4 10.7 Growth and cost improvement 26.5 36.7 Total capital expenditures $ 80.6 $ 93.3 Cash flows provided by (used in) financing activities Cash used in financing activities in the nine months ended September 30, 2023, was $93.4 million and was primarily driven by payments on our revolving credit facility of $240.1 million, and the repurchase of common stock of $92.1 million, partially offset by borrowings on our revolving credit facility of $237.1 million. Cash used in financing activities in the nine months ended September 30, 2022 was $264.9 million and was primarily driven by payments on long-term borrowings of $628.1 million, payments on revolving credit facility of $279.0 million, and the repurchase of common stock of $139.2 million, partially offset by borrowings on our revolving credit facility of $788.0 million. 42 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. 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 Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have described our accounting policies in Note 2 to our consolidated financial statements included in our 2022 Annual Report. We have reviewed these accounting policies, identifying those that we believe to be critical to the preparation and understanding of our financial statements. Critical accounting policies are central to our presentation of results of operations and financial condition and require management to make estimates and judgments on certain matters. We base our estimates and judgments on historical experience, current conditions and other reasonable factors. For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our 2022 Annual Report. Our critical accounting policies have not substantially changed from those described in the 2022 Annual Report.