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"). All references to notes (herein referred to as "Note") in this section refer to the notes accompanying the Condensed Consolidated Financial Statements included in Item 1 within this Form 10-Q. 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 Performance Chemicals manufacturing consolidation and closures of our Crossett, Arkansas and DeRidder, Louisiana plants may differ materially from our estimates due to events that may occur as a result of, or in connection with, such consolidation or plant closures; • 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 conflict in the Middle East; • 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; 29 • we may be adversely affected by a decrease in government infrastructure spending; • adverse conditions in cyclical end markets may continue to adversely affect demand for our products; • our Performance Chemicals segment is highly dependent on 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 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; • adverse weather conditions may impact demand for certain of our road technologies products; • 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 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 production, and automotive components. We operate in three reportable segments: Performance Materials, Performance Chemicals and Advanced Polymer Technologies. Recent Developments and Updates Interest Rate Risk Management During the three months ended September 30, 2024, we entered into a floating-to-fixed interest rate swap with a notional amount of $200.0 million to manage the variability of cash flows in the interest rate payments associated with our existing Secured Overnight Financing Rate ("SOFR") based interest payments, effectively converting $200.0 million of our floating rate debt to a fixed rate. In accordance with the terms of this instrument, we receive floating rate interest payments based upon one-month U.S. dollar SOFR and in return are obligated to pay interest at a fixed rate of 3.84 percent until August 2026. The fair value of the interest rate swap was an asset (liability) of $(1.7) million and zero at September 30, 2024 and December 31, 2023, respectively. Measurement Alternative Investments During the first and third quarters of 2024, the company identified triggering events indicating that investments being accounted for under the measurement alternative may be impaired. For the three and nine months ended September 30, 2024, the company recognized an impairment of $6.7 million and $11.5 million, respectively, recorded in Other (income) expense, net on the condensed consolidated statements of operations. 30 Annual Goodwill Test We conduct a required annual review of goodwill for potential impairment at October 1st, 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 Materials, Performance Chemicals, and Advanced Polymer Technologies ("APT"). 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. During the second quarter of 2024, we recorded a full impairment of our Performance Chemicals reporting unit goodwill. The remaining balance of our goodwill, is primarily related to our APT reporting unit. There have been no events or changes in circumstances during the third quarter that have required interim testing of our goodwill for impairment. We are currently testing our remaining goodwill balance as part of our required annual October 1st goodwill impairment testing. The preliminary results have calculated that our APT reporting unit headroom, defined as the percentage difference between the fair value of a reporting unit and its carrying value, is between 10 and 15 percent. Since the fair value of our APT reporting unit is higher than the carrying value, we have concluded that no impairment to goodwill is necessary. Our analysis includes 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. The below table shows how changes in certain significant assumptions utilized in our preliminary annual goodwill testing, specific to our APT reporting unit, impacts the calculated headroom. Advanced Polymer Technologies Reporting Unit - Headroom Sensitivity Analysis Reporting Unit Fair Value Revenue Growth Rate declines by 100 Bps EBITDA Margin declines by 100 Bps Discount Rate increases by 100 Bps Preliminary Headroom 10 - 15% 3 - 8% 3 - 8% (3) - 2% 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 increased our focus on growing our most profitable Performance Chemicals' product lines, such as road technologies, and accelerate our transition to non-CTO based fatty acids. This initiative focused on reducing exposure to lower margin 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 included 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 APT reportable segment. All production at the DeRidder Plant ceased in the first quarter of 2024. The Performance Chemicals’ repositioning initiative included additional corporate and business cost reduction actions executed in November 2023. Additionally, in July 2024, we announced plans to transition the refining of oleo-based products manufactured for our Performance Chemicals reportable segment from our Crossett, Arkansas manufacturing plant (the “Crossett Facility”) to our North Charleston, South Carolina manufacturing plant. This action included the closure of the Crossett Facility, as well as additional corporate and business cost reduction actions. We ceased production at the Crossett Facility in the third quarter of 2024. The actions referenced above, when combined with other targeted workforce reduction initiatives during 2023 and 2024, resulted in the reduction of Ingevity's global workforce by 23 percent. Specific to Performance Chemicals, the reduction represented approximately 40 percent of the reportable segment's workforce. Expected Charges We expect to incur aggregate charges of approximately $350 million associated with the Performance Chemicals' repositioning. This is an increase of approximately $100 million from prior expectations due to the closure of the Crossett Facility. Total expected charges now consist of approximately $250 million in asset-related charges, approximately $25 million in severance and other employee-related costs, and approximately $75 million in other restructuring costs, including 31 decommissioning, dismantling and removal charges, and CTO supply contract termination costs. Through September 30, 2024, we have incurred $297.0 million associated with these actions, including $250.8 million of non-cash asset-related charges and $46.2 million of charges to be settled in cash. As of September 30, 2024, $41.0 million of the charges to be settled in cash have been paid and all non-cash charges have been incurred. In total, we expect approximately $100 million of cash charges, including approximately $10-$15 million during the fourth quarter of 2024 and approximately $20-$25 million during 2025. Inventory Charges The company believes the collective actions of workforce, operational, and regional business exits will hinder our ability to dispose of the associated inventory on hand. As a result, we recorded $3.8 million and $6.3 million of non-cash, lower of cost or market, inventory charges during the three and nine months ended September 30, 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 statements of operations. CTO Resale Activity The DeRidder Plant closure, and the corresponding reduction in CTO refining capacity, significantly reduced our CTO volume requirements. However, we were obligated under an existing CTO supply contract to purchase CTO volumes through 2025 at amounts in excess of the CTO volumes needed to support our business operations. To manage this excess inventory, we sold CTO volumes (herein referred to as "CTO resales") in the open market. For the three and nine months ended September 30, 2024, we have incurred $0.8 million and $50.8 million, respectively, of CTO resale losses, which are recorded as Other (income) expense, net on the condensed consolidated statements of operations. As of July 1, 2024, we terminated the CTO supply contract that resulted in these excess CTO volumes. As consideration for the termination of the CTO supply contract, we made a cash payment in the amount of $50.0 million on July 1, 2024 and an additional cash payment in the amount of $50.0 million. The total charge of $100.0 million was recorded within Other (income) expense, net on the condensed consolidated statements of operations for the nine months ended September 30, 2024. As a result of the termination of this supply contract, the purchases under the CTO supply contract ended effective June 30, 2024. Therefore, we are no longer required to purchase this excess CTO volume through 2025, and as such, we expect to end our CTO resale activity by the end of 2024 and to incur no more than $5.0 million in additional costs as we liquidate the excess CTO resale volumes on hand as of September 30, 2024. Expected Savings and Impact The Performance Chemicals' repositioning is focused on reducing exposure to lower margin 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, and as such, we expect annualized net sales to decrease accordingly. The annualized cash savings we expect to realize from these actions are approximately $95 million to $110 million of which $65 million to $75 million we expect to realize 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 asset charges taken through this initiative will decline by approximately $15 million and $17 million, respectively, of which we expect to realize approximately $10 million and $12 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 statements of operations. During the three and nine months ended September 30, 2024, we realized cash savings of approximately $18 million and $60 million, including $14 million and $46 million in Cost of sales, $3 million and $11 million in Selling, general, and administrative expenses, and $1 million and $3 million in Research and technical expenses, respectively. 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. 32 Results of Operations Three Months Ended September 30, Nine Months Ended September 30, In millions 2024 2023 2024 2023 Net sales $ 376.9 $ 446.0 $ 1,107.6 $ 1,320.4 Cost of sales 247.0 317.0 754.8 908.0 Gross profit 129.9 129.0 352.8 412.4 Selling, general, and administrative expenses 38.7 40.0 127.3 140.3 Research and technical expenses 6.7 7.8 20.8 24.6 Restructuring and other (income) charges, net 86.9 24.6 162.8 49.4 Goodwill impairment charge — — 349.1 — Acquisition-related costs (0.1) 0.1 — 3.8 Other (income) expense, net 111.8 1.3 167.9 (13.9) Interest expense, net 23.8 23.1 69.3 64.3 Income (loss) before income taxes (137.9) 32.1 (544.4) 143.9 Provision (benefit) for income taxes (30.7) 6.9 (97.5) 32.5 Net income (loss) $ (107.2) $ 25.2 $ (446.9) $ 111.4 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 September 30, 2024 vs. 2023 $ 446.0 (68.7) 0.4 (0.8) $ 376.9 Nine months ended September 30, 2024 vs. 2023 $ 1,320.4 (199.9) (5.2) (7.7) $ 1,107.6 Q3 2024 Performance Summary The Net sales decrease was driven primarily by the Performance Chemicals' industrial specialties product line due to repositioning actions which included the focus on reducing exposure to lower margin end-use markets and therefore reduced sales during the quarter by approximately $51 million. Also contributing to the lower sales was unfavorable weather in key North American regions impacting our road technologies product line and continued weakness in certain industrial end markets that negatively impacted sales in our industrial specialties product line, slightly offset by an increase in our Advanced Polymer Technologies and Performance Materials reportable segments. Three Months Ended September 30, 2024 vs. 2023 The Net sales decrease of $69.1 million in 2024 was driven by volume declines of $68.7 million (15 percent), primarily in our Performance Chemicals reportable segment, and unfavorable foreign currency exchange of $0.8 million (zero percent). This was partially offset by favorable pricing and sales composition (mix) of $0.4 million (zero percent). Nine Months Ended September 30, 2024 vs. 2023 The Net sales decrease of $212.8 million in 2024 was driven by volume declines of $199.9 million (15 percent), primarily in our Performance Chemicals reportable segment. Unfavorable pricing and sales composition (mix) of $5.2 million (zero percent) and unfavorable foreign currency exchange of $7.7 million (one percent) also contributed to the decline in Net sales. 33 Gross Profit Three Months Ended September 30, 2024 vs. 2023 Gross profit increase of $0.9 million was driven primarily by decreased manufacturing costs of $2.8 million, driven by lower input costs in Performance Materials and higher throughput in APT, partially offset by higher CTO costs in Performance Chemicals. The increase was partially offset by unfavorable sales volume of $0.5 million in our Performance Chemicals industrial specialties product line, unfavorable pricing and sales composition (mix) of $0.5 million, primarily in our APT reportable segment, and unfavorable foreign currency exchange of $0.9 million. Gross profit includes the realized savings of $14.0 million from the Performance Chemicals repositioning actions initiated in 2023. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for all segments. Nine Months Ended September 30, 2024 vs. 2023 Gross profit decrease of $59.6 million was driven primarily by unfavorable sales volume of $27.7 million in our Performance Chemicals industrial specialties product line, and increased manufacturing costs of $22.5 million, mainly driven by higher CTO costs in Performance Chemicals which were partially offset by lower input costs in Performance Materials and higher throughput in APT. The decrease was further driven by unfavorable pricing and sales composition (mix) of $7.9 million primarily within our APT reportable segment, and unfavorable foreign currency exchange of $1.5 million. Gross profit includes the realized savings of $46.0 million from the Performance Chemicals repositioning actions initiated in 2023. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for all segments. Selling, general and administrative expenses Three Months Ended September 30, 2024 vs. 2023 Selling, general and administrative expenses ("SG&A") were $38.7 million (10 percent of Net sales) and $40.0 million (nine percent of Net sales) for the three months ended September 30, 2024 and 2023, respectively. Overall, SG&A decreased by approximately $1.3 million or three percent. Our Performance Chemicals' repositioning actions resulted in non-cash reduction of intangible amortization expense of $3.5 million and $3.0 million in cash savings. These combined savings were partially offset by increased spending on commercial activities of $0.4 million and $4.8 million of higher variable incentive compensation, driven by adjustments recognized in the three months ended September 30, 2023, that did not repeat in 2024. Nine Months Ended September 30, 2024 vs. 2023 SG&A was $127.3 million (11 percent of Net sales) and $140.3 million (11 percent of Net sales) for the nine months ended September 30, 2024 and 2023, respectively. Overall, SG&A decreased by $13.0 million or nine percent driven by our Performance Chemicals' repositioning actions that reduced non-cash intangible amortization expense by $8.6 million and included $11.0 million in cash savings. These combined savings were partially offset by increased spending on commercial activities of $1.1 million and $5.5 million of higher variable incentive compensation, driven by adjustments recognized in 2023 that did not repeat in 2024. Research and technical expenses Three Months Ended September 30, 2024 vs. 2023 Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 1.8 percent from 1.7 percent for the three months ended September 30, 2024 and 2023, respectively. Research and technical expenses as a percentage of Net sales increased due to lower sales. Overall, Research and technical expense decreased by $1.1 million, which included approximately $1.0 million realized from the Performance Chemicals repositioning actions initiated in 2023. Nine Months Ended September 30, 2024 vs. 2023 Research and technical expenses as a percentage of Net sales remained consistent period over period, at 1.9 percent and 1.9 percent for the nine months ended September 30, 2024 and 2023, respectively. Included in the overall $3.8 million decrease is approximately $3.0 million realized from the Performance Chemicals repositioning actions initiated in 2023. 34 Restructuring and other (income) charges, net Three and Nine Months Ended September 30, 2024 vs. 2023 Three Months Ended September 30, Nine Months Ended September 30, In millions 2024 2023 2024 2023 Work force reductions and other $ — $ 1.5 $ — $ 11.6 Performance Chemicals' repositioning 85.6 — 157.9 — Restructuring charges $ 85.6 $ 1.5 $ 157.9 $ 11.6 Alternative feedstock transition — 11.8 — 18.4 North Charleston plant transition 1.3 9.8 4.9 12.7 Business transformation costs — 1.5 — 6.7 Other (income) charges, net $ 1.3 $ 23.1 $ 4.9 $ 37.8 Restructuring and other (income) charges, net (1) $ 86.9 $ 24.6 $ 162.8 $ 49.4 _______________ (1) See Note 11 for more information. Goodwill impairment charge Three and Nine Months Ended September 30, 2024 vs. 2023 Goodwill impairment charge of zero and $349.1 million for the three and nine months ended September 30, 2024 within our Performance Chemicals reporting unit. See Note 7 for more information. Acquisition-related costs Three and Nine Months Ended September 30, 2024 vs. 2023 Acquisition-related (income) costs were $(0.1) million and zero for the three and nine months ended September 30, 2024, and $0.1 million and $3.8 million for the three and nine months ended September 30, 2023, respectively. All charges relate to the integration of Ozark Materials into our Performance Chemicals reportable segment. Other (income) expense, net Three and Nine Months Ended September 30, 2024 vs. 2023 Three Months Ended September 30, Nine Months Ended September 30, In millions 2024 2023 2024 2023 Foreign currency transaction (gain) loss $ 1.0 $ 1.7 $ 3.1 $ 4.4 Loss on CTO resales (1) 0.8 — 50.8 — CTO supply contract termination charges (1) 100.0 — 100.0 — (Gain) loss on strategic investments (2) 6.7 (0.1) 11.4 (19.3) CEO severance charges 4.8 — 4.8 — Other (income) expense, net (1.5) (0.3) (2.2) 1.0 Total Other (income) expense, net $ 111.8 $ 1.3 $ 167.9 $ (13.9) _______________ (1) See Notes 11 and 14 for more information. (2) See Note 4 for more information. 35 Interest expense, net Three and Nine Months Ended September 30, 2024 vs. 2023 Three Months Ended September 30, Nine Months Ended September 30, In millions 2024 2023 2024 2023 Accounts receivable securitization (1) $ 1.7 $ — $ 4.5 $ — Finance lease obligations (1) 1.8 1.9 5.4 5.5 Interest rate swap (2) (0.4) — (0.4) — Litigation related interest expense (3) 1.3 1.3 3.9 1.7 Revolving Credit Facility and other lines of credit (1) 14.5 15.0 41.7 43.2 Senior notes (1) 5.6 5.6 16.8 16.8 Other interest (income) expense, net (0.7) (0.7) (2.6) (2.9) Total Interest expense, net $ 23.8 $ 23.1 $ 69.3 $ 64.3 _______________ (1) See Note 9 for more information. (2) See Note 8 for more information. (3) See Note 13 for more information. Provision (benefit) for income taxes Three and Nine Months Ended September 30, 2024 vs. 2023 For the three months ended September 30, 2024 and 2023, our effective tax rate was 22.3 percent and 21.5 percent, respectively. Excluding discrete items, the effective rate was 2.6 percent compared to 28.7 percent in the three months ended September 30, 2024 and 2023, respectively. See Note 12 for more information. For the nine months ended September 30, 2024 and 2023, our effective tax rate was 17.9 percent and 22.6 percent, respectively. Excluding discrete items, the effective rate was (33.0) percent compared to 24.6 percent in the nine months ended September 30, 2024 and 2023, respectively. See Note 12 for more information. Segment Operating Results In addition to the information discussed above, the following sections discuss the results of operations for Ingevity's reportable 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, goodwill impairment charge, acquisition and other-related income (costs), litigation verdict charges, gain (loss) on strategic investments, loss on CTO resales, CTO supply contract termination charges, and 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. 36 Performance Materials Q3 2024 Performance Summary Net sales in our Performance Materials reportable segment increased three percent compared to the prior year quarter as the segment benefited from increased pricing on select products. Segment EBITDA increased $6.1 million or eight percent primarily driven by improved operational efficiencies that contributed to lower input costs. In millions Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total Performance Materials - Net sales $ 151.1 $ 147.2 $ 453.4 $ 433.2 Segment EBITDA $ 80.6 $ 74.5 $ 240.8 $ 208.5 Net Sales Comparison of Three and Nine Months Ended September 30, 2024 and September 30, 2023: Change vs. prior year In millions Prior year Net sales Volume Price/Mix Currency effect Current year Net sales Three months ended September 30, 2024 vs. 2023 $ 147.2 (0.3) 3.9 0.3 $ 151.1 Nine months ended September 30, 2024 vs. 2023 $ 433.2 10.2 14.1 (4.1) $ 453.4 Three Months Ended September 30, 2024 vs. 2023 Segment net sales. The increase of $3.9 million in 2024 was driven primarily by increased pricing on selected products of $3.9 million (three percent) and favorable foreign currency exchange of $0.3 million (zero percent). The increase was partially offset by a volume decrease of $0.3 million (zero percent). Segment EBITDA. The increase of $6.1 million in 2024 was driven by the increase in sales as noted above, decreased manufacturing costs of $7.7 million, favorable pricing and sales composition (mix) of $3.0 million, and decreased foreign currency exchange and other charges of $0.1 million. The increase was partially offset by increased SG&A and research and technical expenses of $4.5 million, and a volume decrease of $0.2 million. Nine Months Ended September 30, 2024 vs. 2023 Segment net sales. The increase of $20.2 million in 2024 was driven by favorable pricing and sales composition (mix) of $14.1 million (three percent), and a volume increase of $10.2 million (two percent). The increase was partially offset by unfavorable foreign currency exchange of $4.1 million (one percent). Segment EBITDA. The increase of $32.3 million in 2024 was driven by the increase in sales as noted above, decreased manufacturing costs of $21.8 million, favorable pricing and sales composition (mix) of $11.7 million, a volume increase of $5.7 million, and decreased foreign currency exchange and other charges of $0.4 million. The increase was partially offset by increased SG&A and research and technical expenses of $7.3 million. 37 Performance Chemicals Q3 2024 Performance Summary Net sales in our Performance Chemicals reportable segment decreased 31 percent compared to the prior year quarter, primarily the result of our Performance Chemicals' repositioning actions that are focused on exiting lower-margin end markets for our Industrial Specialties product line. The road technologies product line net sales decrease of $10.7 million was primarily driven by unfavorable weather conditions in key North American regions. The industrial specialties product line net sales decrease of $68.3 million was primarily driven by lower volumes as a result of our repositioning actions resulting in reduced sales of approximately $51 million, as well as continued weakness in certain industrial end markets. Contributing to the decline in Segment EBITDA was higher CTO costs and unfavorable plant throughput due to continued weakness in industrial demand associated with our industrial specialties product line. Additionally, unfavorable weather conditions in key North American regions impacted our road technologies product line. Slightly offsetting these elevated costs were cost savings realized during the quarter due to the Performance Chemicals' repositioning. Three Months Ended September 30, Nine Months Ended September 30, In millions 2024 2023 2024 2023 Total Performance Chemicals - Net sales $ 177.0 $ 256.0 $ 509.5 $ 725.6 Road Technologies product line 119.0 129.7 293.8 316.4 Industrial Specialties product line 58.0 126.3 215.7 409.2 Segment EBITDA $ 19.8 $ 24.7 $ 18.5 $ 89.9 Net Sales Comparison of Three and Nine Months Ended September 30, 2024 and September 30, 2023: Change vs. prior year In millions Prior year Net sales Volume Price/Mix Currency effect Current year Net Sales Three months ended September 30, 2024 vs. 2023 $ 256.0 (80.2) 1.5 (0.3) $ 177.0 Road Technologies product line 129.7 (8.6) (2.0) (0.1) 119.0 Industrial Specialties product line 126.3 (71.6) 3.5 (0.2) 58.0 Nine months ended September 30, 2024 vs. 2023 $ 725.6 (212.6) (2.6) (0.9) $ 509.5 Road Technologies product line 316.4 (26.7) 4.4 (0.3) 293.8 Industrial Specialties product line 409.2 (185.9) (7.0) (0.6) 215.7 Three Months Ended September 30, 2024 vs. 2023 Segment net sales. The decrease of $79.0 million was driven by a volume decrease of $80.2 million (31 percent), as a result of a decrease in industrial specialties ($71.6 million) and road technologies ($8.6 million), and unfavorable foreign currency exchange of $0.3 million (zero percent). This decrease was partially offset by favorable pricing and sales composition (mix) of $1.5 million (one percent), attributable to an increase in industrial specialties ($3.5 million), partially offset by a decrease in road technologies ($2.0 million). Segment EBITDA. The decrease of $4.9 million was driven by a volume decrease of $4.9 million, higher manufacturing costs of $3.5 million, primarily due to higher cost CTO, and increased foreign currency exchange and other charges of $1.8 million. The decrease was partially offset by lower SG&A of $3.8 million, which benefited from the Performance Chemicals' repositioning and cost saving initiatives implemented in 2023, and favorable pricing and sales composition (mix) of $1.5 million. Nine Months Ended September 30, 2024 vs. 2023 Segment net sales. The decrease of $216.1 million was driven by a volume decrease of $212.6 million (29 percent), as a result of a decrease in industrial specialties ($185.9 million) and road technologies ($26.7 million), unfavorable pricing and 38 sales composition (mix) of $2.6 million (zero percent), attributable to a decrease in industrial specialties ($7.0 million), partially offset by an increase in road technologies ($4.4 million), and unfavorable foreign currency exchange of $0.9 million (zero percent). Segment EBITDA. The decrease of $71.4 million was driven by higher manufacturing costs of $47.5 million, primarily due to higher cost CTO, a volume decrease of $34.3 million, increased foreign currency exchange and other charges of $2.8 million, and unfavorable pricing and sales composition (mix) of $2.6 million. The decrease was partially offset by lower SG&A of $15.8 million, which benefited from the Performance Chemicals' repositioning and cost saving initiatives implemented in 2023. Advanced Polymer Technologies Q3 2024 Performance Summary Net sales in our Advanced Polymer Technologies reportable segment increased 14 percent compared to the prior year quarter as volumes recovered from last year's lows. Segment EBITDA decreased by 12.5 percent as pricing pressure, unfavorable product mix and adverse impacts from foreign currency exchange more than offset the higher sales volumes that drove improved plant utilization rates in the current quarter. In millions Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Total Advanced Polymer Technologies - Net sales $ 48.8 $ 42.8 $ 144.7 $ 161.6 Segment EBITDA $ 9.8 $ 11.2 $ 29.1 $ 36.6 Net Sales Comparison of Three and Nine Months Ended September 30, 2024 and September 30, 2023: Change vs. prior year In millions Prior year Net sales Volume Price/Mix Currency effect Current year Net sales Three months ended September 30, 2024 vs. 2023 $ 42.8 11.8 (5.0) (0.8) $ 48.8 Nine months ended September 30, 2024 vs. 2023 $ 161.6 2.5 (16.7) (2.7) $ 144.7 Three Months Ended September 30, 2024 vs. 2023 Segment net sales. The increase of $6.0 million in 2024 was driven by a volume increase of $11.8 million (28 percent), partially offset by unfavorable pricing and sales composition (mix) of $5.0 million (12 percent), and unfavorable foreign currency exchange of $0.8 million (two percent). Segment EBITDA. The decrease of $1.4 million was driven by unfavorable pricing and sales composition (mix) of $5.0 million, increased foreign currency exchange and other charges of $2.2 million, and increased SG&A of $0.6 million. The decrease was partially offset by a volume increase of $4.6 million, and decreased manufacturing costs of $1.8 million. Nine Months Ended September 30, 2024 vs. 2023 Segment net sales. The decrease of $16.9 million in 2024 was driven by unfavorable pricing and sales composition (mix) of $16.7 million (10 percent), and unfavorable foreign currency exchange of $2.7 million (two percent), partially offset by a volume increase of $2.5 million (two percent). Segment EBITDA. The decrease of $7.5 million was driven by unfavorable pricing and sales composition (mix) of $17.0 million, and increased foreign currency exchange and other charges of $2.5 million. The decrease was partially offset by decreased manufacturing costs of $10.1 million, decreased SG&A of $1.0 million, and a volume increase of $0.9 million. 39 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, goodwill impairment charge, acquisition and other-related (income) costs, litigation verdict charges, (loss) gain on strategic investments, loss on CTO resales, CTO supply contract termination charges, 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 September 30, Nine Months Ended September 30, In millions 2024 2023 2024 2023 Net income (loss) (GAAP) $ (107.2) $ 25.2 $ (446.9) $ 111.4 Interest expense, net 23.8 23.1 69.3 64.3 Provision (benefit) for income taxes (30.7) 6.9 (97.5) 32.5 Depreciation and amortization - Performance Materials 9.7 9.5 29.0 28.7 Depreciation and amortization - Performance Chemicals 8.6 13.2 31.1 40.0 Depreciation and amortization - Advanced Polymer Technologies 7.9 7.9 23.0 23.4 Restructuring and other (income) charges, net (1) 86.9 24.6 162.8 49.4 Goodwill impairment charge (2) — — 349.1 — Acquisition and other-related (income) costs, net (3) (0.1) 0.1 — 4.6 Loss on CTO resales (4) 0.8 — 50.8 — CTO supply contract termination charges (5) 100.0 — 100.0 — (Gain) loss on strategic investments (6) 6.7 (0.1) 11.4 (19.3) Adjusted EBITDA (Non-GAAP) $ 106.4 $ 110.4 $ 282.1 $ 335.0 _______________ (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. Refer to Note 11 for more information. (2) Refer to Note 7 for more information. (3) 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. 40 (4) Due to the DeRidder Plant closure, and the corresponding reduced CTO refining capacity, we were obligated, under an existing CTO supply contract, to purchase CTO through 2025 at amounts in excess of required CTO volumes. As of July 1, 2024, we have terminated the CTO supply contract that resulted in these excess CTO volumes. As a result of the termination of this contract the purchases under the CTO supply contract ended, effective June 30, 2024. Therefore, we are no longer required to purchase this excess CTO volume through 2025, and as such, we expect to end our CTO resale activity by the end of 2024. 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 and nine months ended September 30, 2024, the loss on CTO resales relates to the Performance Chemicals segment. Refer to Note 11 for more information. (5) As consideration for the termination of the CTO supply contract, we made a cash payment in the amount of $50.0 million on July 1, 2024 and an additional cash payment in the amount of $50.0 million on October 8, 2024. Since this contract termination is directly attributable to the Performance Chemicals’ repositioning, that is, it does not represent normal, recurring expenses necessary to operate our business, we have excluded the CTO supply contract termination charges for the purposes of calculating our non-GAAP financial performance measures. Refer to Note 11 for more information. (6) 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 for more information. Adjusted EBITDA Three and Nine Months Ended September 30, 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 $1.50 billion for 2024. We expect growth in our Performance Materials reportable segment due to increased pricing on select products that benefited from improved global hybrid automotive production and lower than anticipated battery electric vehicle penetration. The Performance Chemicals reportable segment revenue will reflect the impact of our repositioning to improve profitability by focusing on higher margin end markets, as well as continued weak industrial demand. We expect our road technologies product line revenue to decline when compared to the prior year due to unfavorable weather conditions experienced in North America during 2024. Our Advanced Polymer Technologies reportable segment anticipates revenues flat to the prior year; market improvements in Europe are mostly expected to be more than offset by a challenging China economy and weak industrial demand. Adjusted EBITDA is expected to be between $350 million and $360 million for 2024. We expect growth in our Performance Materials segment EBITDA, primarily due to improved operational efficiency resulting in lower input costs. Performance Chemicals will continue to be impacted by elevated CTO costs and the slow industrial market recovery. We anticipate that our Advanced Polymer Technologies segment EBITDA will be down versus prior year as pricing strategy is expected to drive volume growth resulting in improved utilization rates, which we expect will be more than offset by unfavorable mix and adverse foreign currency impacts. 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); 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. 41 Liquidity and Capital Resources The primary source of liquidity for our business is the cash flow provided by operating activities. We expect our cash flow provided by operations combined with cash on hand and available capacity under our revolving credit facility to be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months. As of September 30, 2024, our undrawn capacity under our revolving credit facility was $244.4 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, restructuring activities such as the repositioning of our Performance Chemicals reportable segment as further described within Note 11, and consideration for the termination of the CTO supply contract further described within Note 11. 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 $135.5 million at September 30, 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 September 30, 2024, included $128.5 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 could be subject to U.S. federal income tax at the statutory rate less the available foreign tax credits, if any, and could 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 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 and nine months ended September 30, 2024, we repurchased no common stock. At September 30, 2024, $353.4 million remained unused under the 2022 Authorization. During the three and nine months ended September 30, 2023, we repurchased zero and $92.1 million, inclusive of $0.8 million excise tax, in common stock, representing zero and 1,269,373 shares of our common stock at a weighted average cost per share of zero and $71.93, respectively. Capital Expenditures Projected 2024 capital expenditures are $90-$100 million. We have no material commitments associated with these projected capital expenditures as of September 30, 2024 . 42 Cash flow comparison of the Nine Months Ended September 30, 2024 and 2023 Nine Months Ended September 30, In millions 2024 2023 Net cash provided by (used in) operating activities $ 64.1 $ 158.9 Net cash provided by (used in) investing activities (51.5) (52.6) Net cash provided by (used in) financing activities 27.4 (93.4) Cash flows provided by (used in) operating activities Cash provided by 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 $64.1 million for the nine months ended September 30, 2024. Cash provided by operating activities for the nine months ended September 30, 2024, when compared to the nine months ended September 30, 2023, decreased by $94.8 million. This decrease was driven by reduced cash earnings of $123.8 million, CTO supply contract termination payment of $50.0 million, CTO resale cash outflows of $45.0 million, and higher cash interest paid of $3.1 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 $79.8 million (including accounts receivable, inventory, and accounts payable), reduced employee compensation payments of $40.6 million, reduced spending on restructuring initiatives of $2.8 million, and a reduction in tax payments of $3.9 million as a result of the lower cash earnings. Cash flows provided by (used in) investing activities Cash used in investing activities in the nine months ended September 30, 2024 was $51.5 million and was primarily driven by capital expenditures of $52.7 million. In the nine months ended September 30, 2024 and 2023, capital spending included the base maintenance capital supporting ongoing operations, and growth and cost improvement spending. The decrease in Net cash provided by (used in) investing activities when compared to the prior year period is primarily due to the first quarter 2023 sale of a strategic investment that resulted in a cash inflow of $31.5 million, offset by reduced capital expenditures of $27.9 million. Capital expenditure categories Nine Months Ended September 30, In millions 2024 2023 Maintenance $ 33.8 $ 44.7 Safety, health and environment 2.4 9.4 Growth and cost improvement 16.5 26.5 Total capital expenditures $ 52.7 $ 80.6 Cash flows provided by (used in) financing activities Cash provided by financing activities in the nine months ended September 30, 2024, was $27.4 million and was primarily driven by borrowings on our revolving credit facility and other borrowings of $150.5 million, partially offset by payments on our revolving credit facility of $119.3 million. Cash used in financing activities in the nine months ended September 30, 2023 was $93.4 million and was primarily driven by payments on our revolving credit facility and other borrowings of $240.1 million, and the repurchase of common stock of $92.1 million, partially offset by borrowings on our revolving credit facility of $239.5 million. New Accounting Guidance Refer to Note 2 for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Condensed Consolidated Financial Statements. 43 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.