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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-28 · 203 added, 131 removed, 301 unchanged (53% of the section changed)

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Financial Statements and Supplementary Data .

Investors are cautioned that the forward-looking statements contained in this section and other parts of this Annual Report on Form 10-K involve both risk and uncertainty.

Investors are cautioned that the forward-looking statements contained in this section and other parts of this Annual Report on Form 10-K involve both risk and

Several important factors could cause actual results to differ materially from those anticipated by these statements.

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See "Cautionary Statements about Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K for further discussion.

Ingevity Corporation is a leading global manufacturer of specialty chemicals and high-performance activated carbon materials.

We provide innovative solutions to meet our customers’ unique and demanding requirements through proprietary formulated products.

We report in two business segments, Performance Materials and Performance Chemicals.

Ingevity Corporation ("Ingevity," "the company," "we," "us," or "our") provides products and technologies that purify, protect, and enhance the world around us.

Through a diverse team of talented and experienced people, we develop, manufacture, and bring to market solutions that are largely renewably sourced and help customers solve complex problems while making the world more sustainable.

Our products are used in a variety of demanding applications, including adhesives, agrochemicals, asphalt paving, bioplastics, coatings, elastomers, lubricants, pavement markings, publication inks, oil exploration and production, and automotive components.

We operate in three reporting segments:

Performance Materials, Performance Chemicals, and Advanced Polymer Technologies.

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 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, pavement reconstruction and recycling, and road striping thermoplastics and paint (pavement technologies product line), adhesives, agrochemicals, lubricants, printing inks, industrial intermediates and oilfield (industrial specialties product line), coatings, resins, elastomers, adhesives, bio-plastics, and medical devices (engineered polymers product line).

Performance Materials engineers, manufactures, and sells hardwood-based, chemically activated carbon products which are produced through a highly technical and specialized process primarily for use in gasoline vapor emission control systems in internal combustion engines and hybrid electric vehicles including cars, trucks, motorcycles, and boats.

To maximize the productivity of our manufacturing assets, we also produce several other activated carbon products for food, water, beverage, and chemical purification applications.

Our Performance Chemicals segment consists of our road technologies (previously named pavement technologies) and industrial specialties product lines.

Performance Chemicals products serve as critical inputs used in a variety of high-performance applications, including pavement construction, pavement preservation, pavement reconstruction and recycling, road markings (road technologies product line), as well as agrochemical dispersants, paper chemicals, and other diverse industrial uses (industrial specialties product line).

Our Advanced Polymer Technologies segment produces caprolactone and caprolactone-based specialty polymers for use in coatings, resins, elastomers, adhesives, bioplastics, and medical devices.

Recent Developments

Ozark Materials

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

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

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

Strategic Investments

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

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

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

Net Investment Hedge

In 2022, we terminated our fixed-to-fixed cross-currency interest rate swaps, accounted for as net investment hedges, and received proceeds of $14.7 million.

Refer to Note 9 to the Consolidated Financial Statements included within Part II.

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

Financing Activities

On April 27, 2022, we redeemed the $300.0 million outstanding aggregate principal balance of our 4.50% Senior Notes due in 2026 prior to maturity.

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

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

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

Restructuring Charges

Performance Chemicals Repositioning

Throughout 2023 we initiated several measures across the organization to pursue greater cost efficiency which included a reorganization to streamline certain functions and reduce ongoing costs.

On November 1, 2023, we announced a number of strategic actions designed to further reposition our Performance Chemicals operating segment to improve the profitability and reduce the cyclicality of the Company as a whole.

These actions increase our focus on growing our most profitable Performance Chemicals product lines such as road technologies and accelerate our transition to non-crude tall oil (“CTO”)-based fatty acids.

The announced actions include the permanent closure of our Performance Chemicals' CTO refinery and the closure of our manufacturing plant located in DeRidder, Louisiana (the “DeRidder Plant”), including the polyol production assets associated with the Advance Polymer Technologies reportable segment, 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 in 2024.

Excluded from the $280.0 million of estimated aggregate charges are potential costs we may incur associated with excess volumes of CTO that we may be obligated to purchase through October 2025 under an existing CTO supply contract.

We intend to manage our CTO inventories by reselling excess volumes in the open market which, based on what we believe to be market rates today, may result in $30.0 million to $80.0 million of incremental losses in 2024.

During the year ended December 31, 2023, we incurred $5.1 million in cash charges and $127.7 million in non-cash charges related to the strategic actions initiated during the fourth quarter of 2023.

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.

Alternative Fatty Acid Transition

In April 2023, we implemented the feedstock transition of our Crossett, Arkansas manufacturing plant (“Crossett”).

To execute this transition, we halted all CTO-based production at Crossett in April.

This transition converted Crossett from a CTO-based feedstock production facility to produce fatty acids from non-CTO plant-based feedstocks.

During the year ended December 31, 2023, we incurred $22.1 million in costs that, in accordance with GAAP, could not be capitalized.

North Charleston Plant Transition

Our North Charleston, South Carolina Performance Chemicals manufacturing plant has historically been co-located with a WestRock Company (“WestRock”) paper mill.

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

WestRock ceased production at their North Charleston paper mill in June 2023.

During 2023, we executed a transition plan to separate certain critical operating services WestRock had historically provided to us such as steam, water and wastewater treatment.

During the year ended December 31, 2023, we incurred $14.8 million of expense.

We expect to incur an additional $3-5 million of costs as we complete this transition in the first half of 2024.

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 November 1, 2023, Ingevity Corporation and WestRock entered into Amendment No.1 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.

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.

Performance Chemicals Reporting Unit

During the third quarter of 2023, continued reduction in demand in industrial end markets had negatively impacted our ability to offset elevated 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 road 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.

We concluded that there was no impairment for the quarter ended September 30, 2023.

Our fiscal year 2023 annual goodwill impairment test was performed as of October 1, 2023.

We determined that the fair value of our reporting units were 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, 2023.

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

This reportable segment change 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 first quarter of 2023, we sold a strategic equity method investment for $31.5 million, resulting in a $19.3 million gain, recorded within "Other (income) expense, net" on the consolidated statement of operations.

Results of Operations

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Year Ended December 31, 2023 vs.

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

The sales increase in 2023 was driven by favorable pricing and sales composition (mix) of $142.3 million (nine percent), primarily attributed to an increase in Performance Chemicals of $93.1 million, partially offset by volume decline of $106.3 million (six percent), and unfavorable foreign exchange impacts of $12.2 million (one percent).

Year Ended December 31, 2022 vs.

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

The sales increase in 2022 was driven by favorable pricing and sales composition (mix) of $294.2 million (21 percent), primarily attributed to an increase in Performance Chemicals of $216.9 million, and a volume increase of $9.4 million (one percent), offset slightly by unfavorable foreign exchange impacts of $26.8 million (two percent).

Year Ended December 31, 2023 vs.

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

Gross profit decrease of $98.2 million was driven by increased manufacturing costs of $158.6 million due primarily to significant CTO raw material cost pressure within our industrial specialties product line in our Performance Chemicals reportable segment, unfavorable sales volume of $46.9 million, inventory charges of $19.7 million and unfavorable foreign exchange impacts of $0.9 million, partially offset by favorable pricing and sales composition (mix) of $127.9 million.

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

Year Ended December 31, 2022 vs.

Gross profit increase of $47.3 million was driven by favorable pricing improvement of $73.0 million, favorable sales volume of $30.6 million, and favorable foreign currency exchange of $1.3 million, partially offset by increased manufacturing costs of $57.6 million due to raw material and energy cost inflationary pressure.

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

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

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Selling, general, and administrative ("SG&A") expenses were $183.7 million (11 percent of Net sales) and $198.8 million (12 percent of Net sales) for the years ended December 31, 2023 and 2022, respectively.

The increase in SG&A expenses is primarily due to higher employee-related costs of $11.3 million and increased travel and other miscellaneous costs of $10.6 million.

This was partially offset by a decrease in litigation defense costs of $2.4 million.

The decrease in SG&A expenses is primarily due to lower employee-related costs of $18.4 million, and decreased travel and other miscellaneous costs of $6.9 million, partially offset by increased amortization expense of $10.2 million due to the Ozark Materials acquisition.

Year Ended December 31, 2022 vs.

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Years Ended December 31, 2023, 2022, and 2021

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

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, totaling 1.9 percent of sales in the year ended December 31, 2023, compared to 1.8 percent in the year ended December 31, 2022, and 1.9 percent in the year ended December 31, 2021.

Restructuring and other (income) charges, net

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Restructuring and other (income) charges, net, were $170.2 million, $13.8 million, and $16.2 million for the years ended December 31, 2023, 2022, and 2021, respectively.

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

For the year ended December 31, 2023, asset disposal charges were $105.6 million, severance and other employee-related costs were $18.4 million, and other restructuring charges were $1.6 million.

Additionally, alternative fatty acid transition costs were $22.1 million, costs associated with the North Charleston plant transition were $14.8 million, and costs related to our digital transformation initiative were $7.7 million.

For the years ended December 31, 2022 and 2021, the majority of the charges were related to our digital transformation initiative.

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

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Acquisition costs were $3.6 million, $5.0 million, and $0.6 million for the years ended December 31, 2023, 2022, and 2021, respectively.

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

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

For the twelve months ended December 31, 2023 and 2022, all charges related to the integration of Ozark Materials into our Performance Chemicals segment.

For the twelve months ended December 31, 2021, all charges incurred were in connection with the Caprolactone acquisition into our Advanced Polymer Technologies segment.

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

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In millions 2023 2022 2021

Foreign currency exchange (income) loss $ 2.3 $ 2.5 $ (5.8)

Gain (loss) on sale of strategic investment (1)

$ (19.3) $ — $ —

Foreign currency transaction (gain) loss 3.7 2.3 2.5

Loss on CTO resales (2)

Litigation verdict charge (3)

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_______________

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

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

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

(2) See Note 2 and Note 15 to the Consolidated Financial Statements included within Part II.

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

(3) See Note 18 to the Consolidated Financial Statements included within Part II.

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

Interest expense

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Revolving credit facility and term loan (1)

59.1 21.2 7.6

Senior Notes 22.4 33.1 36.7

Accounts receivable securitization (2)

Litigation related interest expense (3)

Total interest expense $ 93.3 $ 61.8 $ 51.7

_______________

(1) The increase in interest expense was driven by higher average debt levels during 2023 due to the October 2022, $325.0 million acquisition of Ozark Materials, as well as higher average interest rates in 2023 compared to prior years.

(2) See Note 10 to the Consolidated Financial Statements included within Part II.

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

(3) See Note 18 to the Consolidated Financial Statements included within Part II.

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

Interest income

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In addition to the information discussed above, the following sections discuss the results of operations for each of Ingevity's segments.

Our segments are (i) Performance Materials and (ii) Performance Chemicals.

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, other (income) expense, net, excluding depreciation and amortization).

Segment EBITDA is defined as segment net sales less segment operating expenses (segment operating expenses consist of costs of sales, selling, general and administrative 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) charge, net.

interest expense, net, associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, including inventory lower of cost or market charges associated with restructuring actions, acquisition and other-related (income) costs, litigation verdict charges, (losses) gains from the sale of strategic investments, (losses) gains on CTO resales, and pension and postretirement settlement and curtailment (income) charge, net.

In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2 to the Consolidated Financial Statements included within Part II.

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Our Performance Materials segment experienced solid automotive volume growth from improved semiconductor chip availability and China automobile production stimulus.

Additionally, the segment also recognized volume improvement in process purification products and we were able to increase prices to capture more of the value from our highly differentiated carbon.

The segment also recognized volume improvement in food, water, beverage, and chemical purification products and we were able to increase prices to capture more of the value from our highly differentiated carbon.

These top-line improvements were largely offset by continued pressure from higher raw material input costs and higher logistic costs driven by inflation.

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Segment net sales.

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

The increase in 2023 was driven by favorable pricing and sales composition (mix) of $32.2 million (six percent), and a volume increase of $17.3 million (three percent), partially offset by unfavorable foreign currency exchange impacts of $12.0 million (two percent).

Segment EBITDA.

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

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

Segment EBITDA increased by $34.4 million due to pricing and sales composition (mix) of $21.1 million, decreased SG&A expenses and research and technical costs of $11.6 million, and favorable volume of $10.9 million.

The increase was partially offset by higher manufacturing costs of $8.8 million, and unfavorable foreign currency exchange impacts of $0.4 million.

Year Ended December 31, 2022 vs.

Segment net sales.

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

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

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

Segment EBITDA.

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

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

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

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

Performance Chemicals

Performance Summary

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

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

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

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

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

Road Technologies sales increased by 53.3 percent due primarily to improved volumes and price increases.

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

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

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

Our Engineered Polymers business grew 31.7 percent as the business increased pricing to offset inflationary costs for raw materials, logistics, and particularly energy costs which continued to rise throughout 2022.

Volume improvement was driven by stronger sales in automotive applications and footwear and apparel, mainly in Asia and Europe.

These positive volume improvements were slightly offset by a decline in the Americas where some polyurethane customers experienced availability issues with key raw materials.

Industrial Specialties sales decreased by 16.0 percent driven by volume declines attributed primarily to weak demand across all end markets, particularly adhesives and printing inks.

Years Ended December 31,

In millions 2023 2022 2021

Pavement Technologies product line $ 241.3 $ 195.4 $ 186.8

Road Technologies product line $ 369.8 $ 241.3 $ 195.4

Industrial Specialties product line 532.3 633.8 493.5

Engineered Polymers product line 244.7 185.8 127.7

Total Performance Chemicals - Net sales $ 902.1 $ 875.1 $ 688.9

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Segment net sales.

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

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

The sales increase was driven by favorable pricing and sales composition (mix) of $93.1 million (11 percent), comprised of industrial specialties ($62.7 million) and road technologies product lines ($30.4 million), respectively.

The increase was partially offset by a volume decrease of $65.3 million (seven percent), driven by a decline in industrial specialties ($167.7 million), partially offset by growth in road technologies ($102.4 million).

Unfavorable foreign currency exchange also impacted Net sales by $0.8 million (zero percent).

Segment EBITDA.

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

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

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

Segment EBITDA decreased $94.7 million, mainly due to higher manufacturing costs of $157.8 million primarily due to increased CTO cost, a volume decline of $34.1 million, and unfavorable foreign currency exchange of $0.1 million.

These increases were partially offset by favorable pricing and sales composition (mix) of $89.7 million and decreased SG&A expenses of $7.6 million.

Year Ended December 31, 2022 vs.

Segment net sales.

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

industrial specialties ($64.9 million), engineered polymers ($43.5 million), and pavement technologies product lines ($1.6 million).

Also driving the net sales increase was favorable pricing and product mix of $62.1 million (nine percent) in industrial specialties ($35.3 million), engineered polymers ($20.7 million), and pavement technologies product lines ($6.1 million).

In addition, unfavorable foreign currency exchange impacted Net sales by $3.5 million (less than one percent).

The sales increase was driven by favorable pricing and product mix of $216.9 million (31 percent) in industrial specialties ($201.8 million) and road technologies product lines ($15.1 million), partially offset by a volume decline of $26.1 million (four percent), and unfavorable foreign currency exchange impacting Net sales by $4.6 million (one percent).

Segment EBITDA.

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

Segment EBITDA increased $19.9 million, mainly due to favorable pricing and product mix of $217.8 million, and favorable foreign currency exchange impacts and other miscellaneous charges of $1.6 million.

These increases were partially offset by higher manufacturing costs of $167.5 million due to inflationary raw material and energy costs, increased SG&A expenses of $20.0 million due to increased spending on growth initiatives, compensation, and travel, and volume decline of $12.0 million.

Advanced Polymer Technologies

Performance Summary

Our Advanced Polymer Technologies segment sales decreased compared to the prior year due to market weakness across the segment's end markets in all regions, partially offset by higher prices.

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

In millions Years Ended December 31,

2023 2022 2021

Advanced Polymer Technologies - Net sales $ 204.0 $ 244.7 $ 185.8

Segment EBITDA 44.5 40.0 32.3

Net Sales Comparison of Years Ended December 31, 2023, 2022, and 2021

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

Year Ended December 31, 2023 vs 2022

$ 244.7 (58.3) 17.0 0.6 $ 204.0

Year Ended December 31, 2022 vs 2021

$ 185.8 6.9 62.4 (10.4) $ 244.7

Year Ended December 31, 2023 vs.

Segment net sales.

The sales decrease was driven by a volume decline of $58.3 million (24 percent), partially offset by favorable pricing and sales composition (mix) of $17.0 million (seven percent), and favorable foreign currency exchange of $0.6 million (zero percent).

Segment EBITDA.

Segment EBITDA increased $4.5 million, mainly due to favorable pricing and sales composition (mix) of $17.1 million, decreased manufacturing costs of $9.9 million, and decreased SG&A expenses of $5.9 million.

These increases were partially offset by volume declines of $23.7 million, and unfavorable foreign currency exchange impacts and other miscellaneous charges of $4.7 million.

Year Ended December 31, 2022 vs.

Segment net sales.

The sales increase was driven by favorable pricing and product mix of $62.4 million (34 percent), and favorable volume of $6.9 million (four percent), partially offset by unfavorable foreign currency exchange of $10.4 million (six percent).

Segment EBITDA.

Segment EBITDA increased $7.7 million, mainly due to favorable pricing and product mix of $60.1 million, favorable foreign currency exchange impacts and other miscellaneous charges of $4.8 million, and an increase in volume of $2.7 million.

These increases were partially offset by higher manufacturing costs of $50.9 million due to inflationary raw material and energy costs, and increased SG&A expenses of $9.0 million due to increased spending on growth initiatives, compensation, and travel.

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

Use of Non-GAAP Financial Measures

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

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

Adjusted EBITDA is defined as net income (loss) plus interest expense, net, provision (benefit) for income taxes, depreciation, amortization, restructuring and other (income) charges, net, including inventory lower of cost or market charges associated with restructuring actions, acquisition and other-related (income) costs, litigation verdict charges, gain on sale of strategic investments, loss on CTO resales, 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.

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Depreciation and amortization - Performance Chemicals 53.2 43.1 40.0

Pension and postretirement settlement and curtailment charges (income), net (1)

Depreciation and amortization - Advanced Polymer Technologies 31.3 29.6 33.1

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

189.9 13.8 16.2

Acquisition and other-related costs (2)

Loss on CTO resales (3)

Gain on sale of strategic investment (4)

Litigation verdict charge (5)

Pension and postretirement settlement and curtailment charges (income), net (6)

Adjusted EBITDA (Non-GAAP)

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_______________

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

(1) We regularly perform strategic reviews and assess the return on our operations, which sometimes results in a plan to restructure the business.

These costs are excluded from our reportable segment results and for the purposes of calculating our non-GAAP financial performance measures.

Additionally, this adjustment includes $19.7 million of inventory charges recorded in Cost of sales on our consolidated statement of operations, associated with the repositioning of our Performance Chemicals segment in the year ended December 31, 2023.

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

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

(2) Charges represent costs incurred to complete and integrate acquisitions and other strategic investments and include the expensing of the inventory fair value step-up resulting from the application of purchase accounting for acquisitions and certain legal and professional fees

associated with the completion of acquisitions and strategic investments.

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

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

(3) Due to the DeRidder Plant closure, as noted in footnote 1 above, and the corresponding reduced CTO refining capacity, we may be obligated, under an existing CTO supply contract, to purchase CTO through 2025 at amounts in excess of required CTO volumes.

We intend to manage our CTO volumes by reselling excess volumes (herein referred to as "CTO resales") in the open market.

Since these CTO resale activities are directly attributable to the Performance Chemicals’ repositioning, that is, they do not represent normal, recurring expenses necessary to operate our business, we have excluded the CTO resale (income) charges for the purposes of calculating our non-GAAP financial performance measures.

For the year ended December 31, 2023, the loss on CTO resales relates to the Performance Chemicals segment.

Refer to Note 2 and Note 15 to the Consolidated Financial Statements included within Part II.

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

(4) We exclude gains and losses from sales of strategic investments from our segment results, as well as our non-GAAP financial measures, because we do not consider such gains or losses to be directly associated with the operational performance of the segment.

We believe that the inclusion of such gains or losses, would impair the factors and trends affecting the historical financial performance of our reportable segments.

We continue to include undistributed earnings or loss, distributions, amortization or accretion of basis differences, and other-than-temporary impairments for equity method investments that we believe are directly attributable to the operational performance of such investments, in our reportable segment results.

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

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

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

Refer to Note 18 to the Consolidated Financial Statements included within Part II.

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

(6) 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.

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

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

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

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

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

Refer to Note 14 to the Consolidated Financial Statements included within Part II.

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

Adjusted EBITDA

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

Total Company Outlook and 2023 Guidance

In millions 2023 Guidance

Net sales $1,900 - $2,100

Adjusted EBITDA $495 - $515

Operating Cash Flow $300 - $320

Capital Expenditures $140 - $160

Free Cash Flow* ~$160

*Calculated as Operating Cash Flow less Capital Expenditures

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

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

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

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

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

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

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

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

Current Full Year Company Outlook vs.

Net sales are expected to be between $1.40 billion and $1.55 billion for 2024.

We expect growth in our Performance Materials reportable segment on improved global automotive production over the prior year.

While our Performance Chemicals reportable segment revenue will reflect the impact of our Performance Chemicals repositioning, including the exit of certain low-margin businesses in our Industrial Specialties product line, we expect continued growth from our Road Technology product line due to technology adoption and continued geographic expansion.

Our Advanced Polymer Technologies reportable segment is expected to see demand rebound in industrial markets in the second half of the year as well as growth from their sustainable products in the consumer packing, agriculture chemicals, and apparel end-use markets.

Adjusted EBITDA is expected to be between $365 million and $390 million for 2024.

We expect growth in our Performance Materials EBITDA, as volumes shift to higher-margin automotive carbon due to improved global automotive production and ongoing hybrid vehicle adoption.

In Performance Chemicals, we will have less exposure to certain lower-margin businesses in the Industrial Specialties product line due to the repositioning of the segment, and we expect to see continued growth in our Road Technologies product line.

Performance Chemicals will continue to be impacted by elevated CTO costs, which we expect to abate in the second half of the year.

We anticipate improved Advanced Polymer Technologies EBITDA on a combination of increased volumes and favorable manufacturing throughput.

A reconciliation of net income to adjusted EBITDA as projected for 2024 is not provided.

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These components, net of tax, include further restructuring and other income (charges), net;

additional acquisition and other-related costs;

additional acquisition and other-related income (costs);

litigation verdict charges;

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All of these components could significantly impact such financial measures.

Further, in the future, other items with similar characteristics to those currently included 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.

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

Liquidity and Capital Resources

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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, income tax payments, purchases pursuant to our stock repurchase program (and related excise tax payments), income tax payments, additional spending associated with our Performance Materials' intellectual property litigation, and restructuring activities such as the North Charleston plant transition, and the repositioning of our Performance Chemicals operating segment as further described within Note 15 to the Consolidated Financial Statements included within Part II.

Item 8 of this Form 10-K.

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

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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.

On July 25, 2022, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior authorization.

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

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

During the year ended December 31, 2023, we repurchased $92.1 million in common shares (inclusive of $0.8 million in excise tax), representing 1,269,373 shares of our common stock at a weighted average cost per share of $71.93.

At December 31, 2023, $353.4 million remained available for purchase under our Board-authorized repurchase program.

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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 $313.1 million for the year ended December 31, 2022.

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

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

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

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

Cash provided by (used in) operating activities, 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 $205.1 million for the year ended December 31, 2023.

Cash provided by (used in) operating activities for 2023 was driven by lower cash earnings of $57.2 million and a net increase in overall working capital of $48.3 million, despite a decrease in trade working capital (accounts receivable, inventory, and accounts payable) of $15.6 million, compared to 2022.

Cash flow from operations was further reduced by an increase in cash interest paid of $27.9 million due to higher average debt levels resulting from the October 2022 acquisition of Ozark Materials and rising interest rates during 2023.

This was partially offset by a reduction in tax payments of $25.1 million.

Cash provided by (used in) operating activities for 2022 was driven by higher cash earnings of $41.4 million offset by a net increase in overall working capital of $12.9 million which includes an increase in trade working capital (accounts receivable, inventory, and accounts payable) of $8.3 million.

The build in trade working capital was due primarily to higher end of year accounts receivable on higher sales and higher inventory value due to inflation experienced during 2022 compared to 2021.

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

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

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

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

Cash flows provided by (used in) investing activities

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

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

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

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

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

For the year ended December 31, 2023, investing activities were driven by capital spending, offset partially by the proceeds from the sale of a strategic investment.

Capital spending included the base maintenance capital supporting ongoing operations and cost improvement and growth spending in our Advanced Polymer Technologies segment.

Also, during the year ended December 31, 2023, we sold a strategic investment (refer to Note 5 to the Consolidated Financial Statements included within Part II.

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

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

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

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

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

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

Also, during twelve months ended December 31, 2021, we entered into multiple strategic investments (refer to Note 5 within the Consolidated Financial Statements included within Part II.

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

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

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

For the year ended December 31, 2020, investing activities were driven by capital spending.

Our Performance Materials' facilities, including Covington, Virginia, Wickliffe, Kentucky, and Waynesboro, Georgia, incurred expenditures for growth and expansion projects, as well as base maintenance and safety spending.

Our Performance Chemicals' facility in Warrington, United Kingdom, completed a large, multi-year growth and cost improvement project, and there was additional spending at all of our Performance Chemicals' facilities for base maintenance and safety spending.

Additionally, we had capital expenditures related to our business transformation initiative (see Note 15 to the Consolidated Financial Statements included within Part II.

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

Capital expenditure categories Years Ended December 31,

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Cash flows provided by (used in) financing activities

Cash used in financing activities for the year ended December 31, 2023, was $99.9 million and was driven by share repurchases of $92.1 million, net payments on the revolving credit facility of $87.9 million, and offset by proceeds from our accounts receivable securitization facility of $81.3 million.

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

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

Cash used in financing activities for the year ended December 31, 2020, was $50.2 million, and was driven by proceeds from long-term borrowings from the senior notes that were issued in the fourth quarter of $550.0 million, net of debt issuance costs of $8.8 million.

We used these proceeds to repay the outstanding balance on the revolving credit facility of $131.2 million and the 2019 term loan of $375.0 million.

We also paid $2.2 million in debt issuance costs for the amendment to our revolving credit facility (refer to Note 10 to the Consolidated Financial Statements included within Part II.

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

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

New Accounting Guidance

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

Certain customers may

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

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

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

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

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

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

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.

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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.

In performing the fair value analysis, management makes various judgments, estimates, and assumptions, the most significant of which are the assumptions related to revenue growth rates, Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") margin, and discount rate.

The factors we considered in developing our estimates and projections for cash flows include, but are not limited to, the following:

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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.

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

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

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

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.

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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis