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, 2023, filed on February 22, 2024, with the Securities and Exchange Commission ("SEC") as part of the Company's Annual Reporting on Form 10-K ("2023 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 2023 Annual Report. Cautionary Statements Regarding 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 (the "Exchange Act"), 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 2023 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; • the anticipated timing, charges and costs associated with the repositioning of our Performance Chemicals reportable segment and crude tall oil (“CTO”) resales may differ materially from our estimates due to events that may occur as a result of, or in connection with, such actions; • we may be adversely affected by general global economic, geopolitical, and financial conditions beyond our control, including inflation, 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; • if more stringent air quality standards are not adopted worldwide, our growth could be impacted; • we face competition from substitute products, new technologies, and new or emerging competitors; • 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; 26 • our Performance Chemicals segment is highly dependent on 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; • 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; • we may continue to be adversely affected by disruptions in our supply chain; • the occurrence of natural disasters and extreme weather or other unanticipated problems 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 implementation and operation 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, the chemicals industry and subsidies or incentives that may impact key raw materials or products may adversely affect financial results; and • losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes. Overview 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, oil exploration and production and automotive components. We operate in three reportable segments: Performance Materials, Performance Chemicals and Advanced Polymer Technologies. Recent Developments and Updates Performance Chemicals' Repositioning On November 1, 2023, we announced a number of strategic actions designed to reposition our Performance Chemicals reportable segment to improve 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. This initiative will result in the reduction, and in some cases exit, of certain historical end-use markets of our industrial specialties product line, such as adhesives, publication inks, and oilfield, representing approximately 45 percent of our industrial specialties product line historical annualized net sales. This initiative includes 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 Advanced Polymer Technologies (“APT”) reportable segment. As of March 31, 2024, all production at the DeRidder Plant has ceased with the APT polyol production assets being shuttered in December 2023, and the CTO refinery and other Performance Chemicals’ production assets shuttered in February 2024. The above actions are referred to as the "Performance Chemicals' repositioning." The Performance Chemicals’ repositioning initiative included additional corporate and business cost reduction actions executed in November 2023. The Performance Chemicals' repositioning, when combined with other targeted workforce reduction initiatives during 2023, resulted in the reduction of Ingevity's global workforce by almost 20 percent, 25 percent of these reductions being 27 employees directly associated with commercial sales activities of the soon-to-be exited and/or reduced end-use markets of our industrial specialties product line. Specific to Performance Chemicals, the reduction represented approximately 30 percent of the reportable segment's workforce. Expected Charges We expect to incur aggregate charges of approximately $280 million associated with the Performance Chemicals' repositioning, consisting of approximately $185 million in asset-related charges, approximately $15 million in severance and other employee-related costs, and approximately $80 million in other restructuring costs including decommissioning, dismantling and removal charges, and contract termination costs. Through March 31, 2024, we have incurred $197.6 million associated with these actions, including $180.2 million of non-cash asset-related charges and $17.4 million of charges to be settled in cash. As of March 31, 2024, $13.4 million of the charges to be settled in cash have been paid. We expect approximately $185 million of the total charges to be non-cash and $95 million to be settled in cash. The remainder of the non-cash and 50-60 percent of cash charges are expected to be recognized in 2024. Charges Related to Exited End-Market Inventory The collective actions of workforce, operational, and regional business exits, we believe will hinder our ability to dispose of the associated inventory on hand. As a result, we recorded $19.7 million and $2.5 million of non-cash, lower of cost or market, inventory charges during the three months ended December 31, 2023 and March 31, 2024, respectively, to adjust the carrying value of the impacted inventory to what we expect to realize upon disposal, less disposal costs. These inventory charges are recorded to Cost of sales on the condensed consolidated statement of operations. Since these inventory charges are directly attributable to the Performance Chemicals’ repositioning, that is, they do not represent normal, recurring expenses necessary to operate our business, we have combined these charges with the restructuring charges noted above, and have excluded such impact from the financial results of our Performance Chemicals reportable segment. Please refer to Note 14 within the Condensed Consolidated Financial Statements for more information. CTO Resale Activity Due to the DeRidder Plant closure and the corresponding reduced CTO refining capacity, we may be obligated, under an existing CTO supply contract, to purchase CTO volumes through 2025 at amounts in excess of required CTO volumes needed to support our current business operations. We intend to manage our CTO volumes by reselling excess volumes (herein referred to as "CTO resales") in the open market. Excluded from the estimated $280.0 million of aggregate charges relating to the Performance Chemicals' repositioning are potential costs we may incur associated with the CTO resales which, based on what we believe to be market rates today, may result in $50 million to $80 million of incremental losses in 2024. This is updated from our previously disclosed estimate of $30 million to $80 million based on our current expectations on CTO procurement costs for 2024, which we expect to be offset by spot market CTO resales. For the three months ended March 31, 2024, we have incurred $26.5 million of CTO resale losses, which are recorded as Other (income) expense, net on the condensed consolidated statement of operations. Expected Savings and Impact The Performance Chemicals' repositioning will result in the reduction, and in some cases exit, of certain historical end-use markets of our industrial specialties product line, such as adhesives, publication inks, and oilfield, representing approximately 45 percent of our industrial specialties product line historical annualized net sales. The annualized cash savings we expect to realize from these actions are approximately $65 million to $75 million beginning in 2024. These cash savings will be derived from headcount reductions, plant operating efficiencies, and reduced supply chain costs. In addition to the cash savings, annualized depreciation and intangible amortization expense related to assets charges taken throughout this initiative will decline by approximately $10 million and $12 million, respectively, of which we expect to realize approximately $8 million and $10 million in 2024, respectively. Collectively, these savings are expected to be realized in the following financial statement captions: 70-80 percent in Cost of sales, 15-25 percent in Selling, general, and administrative expenses, and ~5 percent in Research and technical expenses, all presented on our condensed consolidated statement of operations. During the three months ended March 31, 2024, we realized cash savings of approximately $20 million, including $15 million in Cost of sales, $4 million in Selling, general, and administrative expenses, and $1 million in Research and technical expenses. 28 The charges we currently expect to incur and the savings we expect to obtain 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. Measurement Alternative Investments During the period ended March 31, 2024, the company identified a triggering event indicating that an investment being accounted for under the measurement alternative may be impaired. For the three months ended March 31, 2024, the Company recognized an impairment of $4.8 million, recorded in Other (income) expense, net on the condensed consolidated statement of operations. Results of Operations Three Months Ended March 31, In millions 2024 2023 Net sales $ 340.1 $ 392.6 Cost of sales 240.4 262.2 Gross profit 99.7 130.4 Selling, general, and administrative expenses 47.2 48.6 Research and technical expenses 6.8 8.8 Restructuring and other (income) charges, net 62.8 5.6 Acquisition-related costs 0.3 1.9 Other (income) expense, net 32.2 (18.2) Interest expense, net 22.3 19.6 Income (loss) before income taxes (71.9) 64.1 Provision (benefit) for income taxes (15.9) 13.4 Net income (loss) $ (56.0) $ 50.7 Net sales The table below shows the 2024 Net sales and variances from 2023: Change vs. prior year In millions Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales Three months ended March 31, 2024 vs. 2023 $ 392.6 (45.0) (4.0) (3.5) $ 340.1 Three Months Ended March 31, 2024 vs. 2023 The sales decrease of $52.5 million in 2024 was driven primarily by our Performance Chemicals' industrial specialties product line due to repositioning actions which included a manufacturing plant closure and exit from certain low margin end markets. Also contributing to the lower sales were continued weakness in China and certain industrial end markets that negatively impacted sales in our Advanced Polymer Technologies ("APT") reportable segment and industrial specialties product line, slightly offset by a three increase in Performance Materials reportable segment. Volume declines in Performance Chemicals' industrial specialties product line and our APT reportable segment drove the combined volume decline of $45.0 million (11 percent). Unfavorable pricing and sales composition (mix) of $4.0 million (one percent) and unfavorable foreign currency exchange of $3.5 million (one percent) also contributed to the decline in Net sales. 29 Gross Profit Three Months Ended March 31, 2024 vs. 2023 Gross profit decrease of $30.7 million was driven by unfavorable sales volume of $16.1 million, increased manufacturing costs of $7.4 million (which includes the realized savings of $15 million from the Performance Chemicals repositioning actions initiated in 2023) due primarily to significant CTO raw material cost pressure within our Performance Chemicals reportable segment, unfavorable pricing and sales composition (mix) of $4.3 million primarily driven by our APT reportable segment, Performance Chemicals' repositioning actions which lead to inventory charges of $2.5 million, and unfavorable foreign currency exchange of $0.4 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 March 31, 2024 vs. 2023 Selling, general and administrative expenses ("SG&A") were $47.2 million (14 percent of Net sales) and $48.6 million (12 percent of Net sales) for the three months ended March 31, 2024 and 2023, respectively. SG&A as a percentage of Net sales increased due to lower sales. Overall, SG&A decreased by approximately $4 million or 8 percent due to cost savings initiatives implemented last year offset by higher spending of $2.6 million on commercial activities. Research and technical expenses Three Months Ended March 31, 2024 vs. 2023 Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 2.0 percent from 2.2 percent for the three months ended March 31, 2024 and 2023, respectively. Included in the $2.0 million decrease is approximately $1 million realized from cost savings initiatives implemented last year. Restructuring and other (income) charges, net Three Months Ended March 31, 2024 vs. 2023 Restructuring and other (income) charges, net were $62.8 million and $5.6 million for the three months ended March 31, 2024 and 2023, respectively. Asset disposal charges increased $55.0 million, other restructuring charges increased $5.1 million, and costs associated with the North Charleston plant transition were $0.5 million, all for the three months ended March 31, 2024. The increase was partially offset by a $2.5 million decrease related to our business transformation initiative and decreased severance and other employee-related costs of $0.9 million. See Note 11 within the Condensed Consolidated Financial Statements for more information. Acquisition-related costs Three Months Ended March 31, 2024 vs. 2023 Acquisition-related costs were $0.3 million and $1.9 million for the three months ended March 31, 2024 and 2023, respectively. All charges relate to the integration of Ozark Materials into our Performance Chemicals segment. Other (income) expense, net Three Months Ended March 31, 2024 vs. 2023 Three Months Ended March 31, In millions 2024 2023 Foreign currency transaction (gain) loss $ 1.4 $ 0.3 Gain (loss) on strategic investments (1) 4.8 (19.2) Loss on CTO resales (2) 26.5 — Other (income) expense, net (0.5) 0.7 Total Other (income) expense, net $ 32.2 $ (18.2) _______________ (1) See Note 4 within the Condensed Consolidated Financial Statements for more information. 30 (2) See Note 11 and 14 within the Condensed Consolidated Financial Statements for more information. Interest expense, net Three Months Ended March 31, 2024 vs. 2023 Three Months Ended March 31, In millions 2024 2023 Accounts receivable securitization (1) $ 1.4 $ — Finance lease obligations 1.8 1.8 Litigation related interest expense (2) 1.3 — Revolving Credit Facility and other lines of credit (1) 13.2 13.2 Senior notes (1) 5.6 5.6 Other interest (income) expense, net (1.0) (1.0) Total Interest expense, net $ 22.3 $ 19.6 _______________ (1) See Note 9 within the Condensed Consolidated Financial Statements for more information. (2) See Note 13 within the Condensed Consolidated Financial Statements for more information. Provision (benefit) for income taxes Three Months Ended March 31, 2024 vs. 2023 For the three months ended March 31, 2024 and 2023, our effective tax rate was 22.1 percent and 20.9 percent, respectively. Excluding discrete items, the effective rate was 24.2 percent compared to 22.8 percent in the three months ended March 31, 2024 and 2023, respectively. See Note 12 within the Condensed Consolidated Financial Statements for more information. 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 net sales 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 associated with corporate debt facilities, interest income, 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 (loss) on strategic investments, loss on CTO resales, pension and postretirement settlement and curtailment income (charges), net. 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 2023 Annual Report. 31 Performance Materials Performance Summary Net sales in our Performance Materials reportable segment increased three percent compared to the prior year quarter as a result of increased pricing and automotive carbon volumes. Segment EBITDA increased $8.2 million or almost 12 percent primarily due to lower input costs such as energy and certain raw materials as well as a series of operational efficiencies that improved plant throughput. In millions Three Months Ended March 31, 2024 2023 Total Performance Materials - Net sales $ 145.1 $ 141.4 Segment EBITDA $ 78.0 $ 69.8 Net Sales Comparison of Three Months Ended March 31, 2024 and March 31, 2023: Change vs. prior year Performance Materials (In millions) Prior year Net sales Volume Price/Mix Currency effect Current year Net sales Three months ended March 31, 2024 vs. 2023 $ 141.4 2.2 3.9 (2.4) $ 145.1 Three Months Ended March 31, 2024 vs. 2023 Segment net sales. The increase of $3.7 million in 2024 was driven by favorable pricing and sales composition (mix) of $3.9 million (three percent) and a volume increase of $2.2 million (two percent). The increase was partially offset by unfavorable foreign currency exchange of $2.4 million (two percent). Segment EBITDA. The increase of $8.2 million in 2024 was driven by the increase in sales as noted above, decreased manufacturing costs of $7.0 million, favorable pricing and sales composition (mix) of $3.9 million, and a volume increase of $1.4 million. The increase was partially offset by increased SG&A and research and technical expenses of $2.7 million, and unfavorable foreign currency exchange of $1.4 million. 32 Performance Chemicals Performance Summary Net sales in our Performance Chemicals reportable segment decreased 21 percent compared to the prior year quarter. The road technologies product line net sales were flat compared to last year. The industrial specialties product line net sales decrease was primarily driven by lower volume as a result of exiting lower margin end markets as part of the Performance Chemicals' repositioning as well as lower market demand in certain industrial end markets such as lubricants and rubber. Contributing to the decline in Segment EBITDA was higher CTO spend, which nearly doubled from last year, and unfavorable plant throughput due to continued weakness in industrial demand, which negatively impacted utilization rates at both our North Charleston, South Carolina and Crossett, Arkansas manufacturing sites. Slightly offsetting these elevated costs were cost savings realized during the quarter as a result of the Performance Chemicals' repositioning. Three Months Ended March 31, In millions 2024 2023 Total Performance Chemicals - Net sales $ 147.0 $ 185.6 Road Technologies product line 45.7 45.8 Industrial Specialties product line 101.3 139.8 Segment EBITDA $ (10.6) $ 20.3 Net Sales Comparison of Three Months Ended March 31, 2024 and March 31, 2023: Change vs. prior year Performance Chemicals (In millions) Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales Three months ended March 31, 2024 vs. 2023 $ 185.6 (35.5) (2.8) (0.3) $ 147.0 Three Months Ended March 31, 2024 vs. 2023 Segment net sales. The decrease of $38.6 million was driven by a volume decrease of $35.5 million (19 percent), driven by a decrease in industrial specialties ($33.3 million) and road technologies ($2.2 million), unfavorable pricing and sales composition (mix) of $2.8 million (two percent), attributed to a decrease in industrial specialties ($5.0 million), partially offset by an increase in road technologies ($2.2 million), and unfavorable foreign currency exchange of $0.3 million (zero percent). Segment EBITDA. The decrease of $30.9 million was driven by higher manufacturing costs of $20.2 million, primarily due to increased CTO cost, a volume decrease of $12.8 million, unfavorable pricing and sales composition (mix) of $2.8 million, and unfavorable foreign currency exchange of $0.6 million. The decrease was partially offset by lower SG&A of $5.5 million, which benefited from the Performance Chemicals' repositioning and cost saving initiatives implemented in 2023. 33 Advanced Polymer Technologies Performance Summary Net sales in our Advanced Polymer Technologies reportable segment decreased 27 percent compared to the prior year quarter due primarily to lower volumes which we attribute to the continued global demand weakness in many of the segment’s end-markets. Segment EBITDA decreased primarily due to lower volumes and price, partially offset by lower input costs and benefits from the cost savings actions implemented last year. In millions Three Months Ended March 31, 2024 2023 Total Advanced Polymer Technologies - Net sales $ 48.0 $ 65.6 Segment EBITDA $ 9.5 $ 13.8 Net Sales Comparison of Three Months Ended March 31, 2024 and March 31, 2023: 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 March 31, 2024 vs. 2023 $ 65.6 (11.7) (5.1) (0.8) $ 48.0 Three Months Ended March 31, 2024 vs. 2023 Segment net sales. The decrease of $17.6 million in 2024 was driven by a volume decline of $11.7 million (18 percent), unfavorable pricing and sales composition (mix) of $5.1 million (eight percent), and unfavorable foreign currency exchange of $0.8 million (one percent). Segment EBITDA. The decrease of $4.3 million was driven by unfavorable pricing and sales composition (mix) of $5.4 million, a volume decline of $4.7 million and unfavorable foreign currency exchange of $0.4 million. The decrease was partially offset by decreased manufacturing costs of $5.3 million and decreased SG&A expenses of $0.9 million. 34 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 U.S. generally accepted accounting principles (“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 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, (loss) gain on 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. 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 March 31, In millions 2024 2023 Net income (loss) (GAAP) $ (56.0) $ 50.7 Interest expense, net 22.3 19.6 Provision (benefit) for income taxes (15.9) 13.4 Depreciation and amortization - Performance Materials 9.6 10.0 Depreciation and amortization - Performance Chemicals 12.4 13.8 Depreciation and amortization - Advanced Polymer Technologies 7.6 7.3 Restructuring and other (income) charges, net (1) 65.3 5.6 Acquisition and other-related (income) costs, net (2) 0.3 2.7 Loss on CTO resales (3) 26.5 — (Gain) loss on strategic investments (4) 4.8 (19.2) Adjusted EBITDA (Non-GAAP) $ 76.9 $ 103.9 _______________ (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 $2.5 million of inventory charges recorded in cost of sales on our condensed consolidated statement of operations, associated with the repositioning of our Performance Chemicals segment in the three months ended March 31, 2024. Refer to Note 11 within the Condensed Consolidated Financial Statements for more information. (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. 35 (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 three months ended March 31, 2024, the loss on CTO resales relates to the Performance Chemicals segment. Refer to Note 11 to the Condensed Consolidated Financial Statements for more information. (4) We exclude gains and losses from 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 4 to the Condensed Consolidated Financial Statements for more information. Adjusted EBITDA Three Months Ended March 31, 2024 vs. 2023 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 $1.40 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 technologies 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. Adjusted EBITDA is expected to be between $365 million and $390 million for 2024. We expect growth in our Performance Materials segment 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 end markets from our industrial specialties product line due to the repositioning of the segment, and we expect to see continued growth in our road technologies product line which improves the margin profile for the segment. Performance Chemicals will continue to be impacted by elevated CTO costs, which we expect to trend lower in the second half of the year. We anticipate improved Advanced Polymer Technologies segment 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. 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 income (costs); litigation verdict charges; 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 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. 36 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 March 31, 2024, our undrawn capacity under our revolving credit facility was $233.5 million. Over the next twelve months, we expect to fund the following: interest payments, capital expenditures, 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 11 to the Condensed Consolidated Financial Statements included within this Form 10-Q. 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 $88.5 million at March 31, 2024. We continuously monitor deposit concentrations and the credit quality of the financial institutions that hold our cash and cash equivalents, as well as the credit quality of our insurance providers, customers, and key suppliers. Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalents balance at March 31, 2024, included $84.9 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. Debt and Finance Lease Obligations Refer to Note 9 to the Condensed Consolidated Financial Statements included within this Form 10-Q for a summary of our outstanding debt obligations and revolving credit facility. Other Potential Liquidity Needs Share Repurchases On July 25, 2022, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock (the "2022 Authorization"), and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior authorization. Shares under the 2022 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. During the three months ended March 31, 2024 and 2023, we repurchased zero and $33.4 million, inclusive of $0.2 million excise tax, in common stock, representing zero and 449,475 shares of our common stock at a weighted average cost per share of zero and $73.86, respectively. At March 31, 2024, $353.4 million remained unused under the 2022 Authorization. Capital Expenditures Projected 2024 capital expenditures are $90-$110 million. We have no material commitments associated with these projected capital expenditures as of March 31, 2024 . 37 Cash flow comparison of the Three Months Ended March 31, 2024 and 2023 Three Months Ended March 31, In millions 2024 2023 Net cash provided by (used in) operating activities $ (12.1) $ 5.3 Net cash provided by (used in) investing activities (16.3) 2.5 Net cash provided by (used in) financing activities 23.4 (5.6) Cash flows provided by (used in) operating activities Cash flows 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 $12.1 million for the three months ended March 31, 2024. Cash used in operating activities for the three months ended March 31, 2024, when compared to the three months ended March 31, 2023 decreased by $17.4 million. This decrease was driven by reduced cash earnings of $59.8 million, higher spending on restructuring initiatives of $4.4 million and CTO resale spending of $19.8 million and higher cash interest paid of $1.7 million due primarily to rising interest rates when compared to 2023. Partially offsetting these cash outflows was a net reduction in trade working capital of $34.6 million (including accounts receivable, inventory, and accounts payable), reduced employee compensation payments during the first quarter of 2024 of $28.5 million and a reduction in tax payments of $1.8 million as a result of the lower cash earnings. Cash flows provided by (used in) investing activities Cash used in investing activities in the three months ended March 31, 2024 was $16.3 million and was primarily driven by capital expenditures of $16.6 million. In the three months ended March 31, 2024 and 2023, capital spending included the base maintenance capital supporting ongoing operations, and growth and cost improvement spending. The change in Net cash provided by (used in) investing activities when compared to the prior year period is due to the first quarter 2023 sale of a strategic investment that resulted in a cash in flow of $31.4 million. Capital expenditure categories Three Months Ended March 31, In millions 2024 2023 Maintenance $ 9.1 $ 10.8 Safety, health and environment 1.1 2.6 Growth and cost improvement 6.4 12.0 Total capital expenditures $ 16.6 $ 25.4 Cash flows provided by (used in) financing activities Cash provided by financing activities in the three months ended March 31, 2024, was $23.4 million and was primarily driven by borrowings on our revolving credit facility and other borrowings of $81.4 million, partially offset by payments on our revolving credit facility of $55.0 million. Cash used in financing activities in the three months ended March 31, 2023 was $5.6 million and was primarily driven by payments on revolving credit facility of $60.3 million, the repurchase of common stock of $33.4 million, and tax payments related to tax withholdings on restricted stock unit vestings of $4.5 million, partially offset by borrowings on our revolving credit facility of $90.3 million. New Accounting Guidance Refer to Note 2 to the Condensed Consolidated Financial Statements within this Form 10-Q for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Condensed Consolidated Financial Statements. 38 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 2023 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 2023 Annual Report. Our critical accounting policies have not substantially changed from those described in the 2023 Annual Report.