Edgar Filing: Ingevity Corp

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________

FORM 10-Q

_______________________________________________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-37586

__________________________________________________________________________

INGEVITY CORPORATION

(Exact name of registrant as specified in its charter

__________________________________________________________________________



Delaware		47-4027764
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5255 Virginia Avenue
North Charleston, South Carolina 29406
(Address of principal executive offices) (Zip code)

843-740-2300

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files). Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer x		Accelerated Filer o

Non-Accelerated Filer o		Smaller reporting company o

		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

The Registrant had 42,046,646 shares of common stock, $0.01 par value, outstanding at August 1, 2018.

Ingevity Corporation

INDEX



		Page No.
Part I - FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	4
	Condensed Consolidated Balance Sheets at June 30, 2018 (Unaudited) and December 31, 2017	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3. Quantitative and Qualitative Disclosures About Market Risk		45
Item 4. Controls and Procedures		46
Part II - OTHER INFORMATION		47
Item 1. Legal Proceedings		47
Item 1A. Risk Factors		47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3. Defaults Upon Senior Securities		47
Item 4. Mine Safety Disclosures		47
Item 5. Other Information		47
Item 6. Exhibits		48
Signatures		49

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INGEVITY CORPORATION

Condensed Consolidated Statements of Operations (Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
In millions, except per share data	2018		2017		2018			2017
Net sales	$	308.6	$	260.3	$	543.8		$	478.8
Cost of sales	193.1		170.5		343.2			318.3
Gross profit	115.5		89.8		200.6			160.5
Selling, general and administrative expenses	35.9		26.3		62.0			52.3
Research and technical expenses	5.3		4.7		10.7			9.8
Separation costs	—		0.2		—			0.5
Restructuring and other (income) charges, net	—		1.1		(0.6		)	3.4
Acquisition-related costs	0.5		—		4.3			—
Other (income) expense, net	1.4		1.7		0.2			1.4
Interest expense, net	7.8		2.8		13.9			6.1
Income (loss) before income taxes	64.6		53.0		110.1			87.0
Provision (benefit) for income taxes	12.4		17.2		22.1			28.2
Net income (loss)	52.2		35.8		88.0			58.8
Less: Net income (loss) attributable to noncontrolling interest	5.5		3.7		10.5			7.7
Net income (loss) attributable to Ingevity stockholders	$	46.7	$	32.1	$	77.5		$	51.1

Per share data
Basic earnings (loss) per share attributable to Ingevity stockholders	$	1.11	$	0.76	$	1.84		$	1.21
Diluted earnings (loss) per share attributable to Ingevity stockholders	1.10		0.76		1.82			1.21

The accompanying notes are an integral part of these financial statements.

INGEVITY CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
In millions	2018			2017		2018			2017
Net income (loss)	$	52.2		$	35.8	$	88.0		$	58.8
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(6.8		)	1.9		(2.9		)	3.8
Derivative instruments:
Unrealized gain (loss), net of tax of $0.2, zero, $0.2, zero	0.6			—		0.7			—
Reclassifications of deferred derivative instruments (gain) loss, included in net income (loss), net of tax of zero for all periods	(0.2		)	—		(0.2		)	—
Total derivative instruments, net of tax of $0.2, zero, $0.2, zero	0.4			—		0.5			—
Pension & Other postretirement benefits:
Reclassifications of net actuarial and other (gain) loss and amortization of prior service cost, included in net income, net of tax of zero for all periods	0.1			—		0.1			—
Total pension and other postretirement benefits, net of tax of zero for all periods	0.1			—		0.1			—

Other comprehensive income (loss), net of tax of $0.2, zero, $0.2, zero	(6.3		)	1.9		(2.3		)	3.8
Comprehensive income (loss)	45.9			37.7		85.7			62.6
Less: Comprehensive income (loss) attributable to noncontrolling interest	5.5			3.7		10.5			7.7
Comprehensive income (loss) attributable to Ingevity stockholders	$	40.4		$	34.0	$	75.2		$	54.9

The accompanying notes are an integral part of these financial statements.

INGEVITY CORPORATION

Condensed Consolidated Balance Sheets



In millions, except share and par value data	June 30, 2018			December 31, 2017
Assets	(Unaudited)
Cash and cash equivalents	$	83.0		$	87.9
Accounts receivable, net of allowance of $0.4 million at June 30, 2018 and $0.4 million at December 31, 2017	148.1			100.0
Inventories, net	195.1			160.0
Prepaid and other current assets	31.4			20.8
Current assets	457.6			368.7
Property, plant and equipment, net	484.1			438.5
Goodwill	130.2			12.4
Other intangibles, net	132.8			4.9
Deferred income taxes	4.1			3.4
Restricted investment	71.8			71.3
Other assets	34.0			30.4
Total Assets	$	1,314.6		$	929.6
Liabilities
Accounts payable	$	105.8		$	83.1
Accrued expenses	28.3			20.0
Accrued payroll and employee benefits	24.4			39.2
Current maturities of long-term debt	18.8			9.4
Income taxes payable	—			1.5
Current liabilities	177.3			153.2
Long-term debt including capital lease obligations	729.5			444.0
Deferred income taxes	43.8			41.3
Other liabilities	14.7			13.2
Total Liabilities	965.3			651.7
Commitments and contingencies (Note 15)
Equity
Preferred stock (par value $0.01 per share; 50,000,000 shares authorized; zero issued and outstanding at June 30, 2018 and December 31, 2017)	—			—
Common stock (par value $0.01 per share; 300,000,000 shares authorized; 42,308,767 and 42,208,973 issued; 42,072,157 and 42,089,103 outstanding at June 30, 2018 and December 31, 2017)	0.4			0.4
Additional paid-in capital	146.9			140.1
Retained earnings	221.9			142.8
Accumulated other comprehensive income (loss)	(14.0		)	(11.7		)
Treasury stock, common stock, at cost (236,610 shares at June 30, 2018; 119,870 shares at December 31, 2017)	(17.2		)	(7.7		)
Total Ingevity stockholders' equity	338.0			263.9
Noncontrolling interest	11.3			14.0
Total Equity	349.3			277.9
Total Liabilities and Equity	$	1,314.6		$	929.6

The accompanying notes are an integral part of these financial statements.

INGEVITY CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended June 30,
In millions	2018			2017
Cash provided by (used in) operating activities:
Net income (loss)	$	88.0		$	58.8
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	27.4			20.4
Deferred income taxes	1.1			(0.6		)
Disposal/impairment of assets	—			0.4
Restructuring and other (income) charges, net	(0.6		)	3.4
Share-based compensation	6.5			4.9
Pension and other postretirement expense	0.9			0.6
Other non-cash items	3.2			3.8
Changes in operating assets and liabilities:
Accounts receivable, net	(31.8		)	(22.9		)
Inventories, net	(29.0		)	(2.4		)
Prepaid and other currents assets	(7.4		)	2.3
Accounts payable	21.0			(2.2		)
Accrued expenses	6.7			0.2
Accrued payroll and employee benefit costs	(14.7		)	(2.1		)
Income taxes	(1.0		)	(4.8		)
Restructuring and other spending	(0.1		)	(5.0		)
Changes in other operating assets and liabilities, net	0.9			(2.1		)
Net cash provided by operating activities	71.1			52.7
Cash provided by (used in) investing activities:
Capital expenditures	(30.4		)	(21.8		)
Payments for acquired businesses, net of cash acquired	(315.0		)	—
Purchase of equity securities	—			(2.4		)
Sale of equity securities	1.1			0.4
Other investing activities, net	(3.8		)	(3.7		)
Net cash provided by (used in) investing activities	(348.1		)	(27.5		)
Cash provided by (used in) financing activities:
Net borrowings under our revolving credit facility	—			(9.1		)
Proceeds from long-term borrowings	300.0			—
Debt issuance costs	(5.7		)	—
Tax payments related to withholdings on vested restricted stock units	(1.5		)	(0.5		)
Proceeds and withholdings from share-based compensation plans, net	1.4			—
Repurchases of common stock under publicly announced plan	(9.1		)	(0.7		)
Noncontrolling interest distributions	(13.2		)	(4.8		)
Net cash provided by (used in) financing activities	271.9			(15.1		)
Increase (decrease) in cash, cash equivalents and restricted cash	(5.1		)	10.1
Effect of exchange rate changes on cash	0.2			0.5
Change in cash, cash equivalents and restricted cash	(4.9		)	10.6
Cash, cash equivalents and restricted cash at beginning of period	87.9			30.5
Cash, cash equivalents and restricted cash at end of period ⁽¹⁾	$	83.0		$	41.1
⁽¹⁾ Includes restricted cash of zero and $0.5 million and cash and cash equivalents of $83.0 million and $40.6 million as of June 30, 2018 and 2017, respectively. The restricted cash balance in 2017 is associated with foreign government grants to be used for specific capital projects as governed by the grant provisions. Restricted cash is included within "Prepaid and Other Current Assets" within the condensed consolidated balance sheets.

Supplemental cash flow information:
Cash paid for interest, net of capitalized interest	$	9.2		$	7.9
Cash paid for taxes, net of refunds	$	21.2		$	33.8
Purchases of property, plant and equipment in accounts payable	$	6.2		$	2.3

The accompanying notes are an integral part of these financial statements.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 1: Background

Ingevity Corporation ("Ingevity," "the Company," "we," "us" or "our") is a leading global manufacturer of specialty chemicals and high performance activated carbon materials. We provide innovative solutions to meet our customers’ unique and demanding requirements through proprietary formulated products. We report in two business segments, Performance Materials and Performance Chemicals.

Our Performance Chemicals segment consists of our pavement technologies, oilfield technologies and industrial specialties product families. Ingevity’s Performance Chemical products serve as critical inputs used in a variety of high performance applications, including asphalt paving, oil exploration and production, printing inks, adhesives, agrochemicals, and lubricants.

Note 2: Basis of Consolidation and Presentation

In all periods presented within these Condensed Consolidated Financial Statements, all intercompany accounts and transactions have been eliminated. The Condensed Consolidated Financial Statements include the accounts of Ingevity and subsidiaries in which a controlling interest is maintained. If Ingevity's ownership is less than 100 percent, the outside stockholders' interests are shown as noncontrolling interest. In all periods presented, the noncontrolling interest reported within the Condensed Consolidated Financial Statements represents the 30 percent ownership interest held by a third party U.S.-based company in our consolidated Purification Cellutions LLC legal entity. Purification Cellutions LLC is the legal entity that owns the technology associated with, and manufactures, our structured honeycomb products within our Performance Materials segment. See Note 18 - Subsequent Event for information on our recent announcement about our agreement to acquire the remaining 30 percent interest in Purification Cellutions, LLC.

These Condensed Consolidated Financial Statements have not been audited. However, in the opinion of management, all normal recurring adjustments necessary to state fairly the financial position and the results of operations for the interim periods presented have been made. These Condensed Consolidated Financial Statements have been prepared on the basis of accounting principles and practices generally accepted in the United States (“GAAP”) applied consistently with those used in the preparation of the Annual Consolidated Financial Statements for the years ended December 31, 2017, 2016 and 2015, collectively referred to as the “Annual Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Annual Report").

Certain information and footnote disclosures normally included in our Annual Consolidated Financial Statements presented in accordance with GAAP have been condensed or omitted. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Annual Consolidated Financial Statements and notes thereto included in the 2017 Annual Report.

Certain prior year amounts have been reclassified to conform with the current year's presentation.

Note 3: New accounting guidance

In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-07 "Compensation-Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting." This ASU provides for a single accounting model for all share-based payments, with the employee based guidance now applying to nonemployee share-based transactions. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Although we are still evaluating the impact of this new standard, we do not believe that the adoption will materially impact our Condensed Consolidated Financial Statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02 "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from AOCI." This ASU provides for the reclassification of the effect of remeasuring

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the provisions of the December 22, 2017 U.S. Tax Cuts and Jobs Act (the "U.S. Tax Reform"). We early adopted this new ASU in the fourth quarter of 2017, and as a result, we reclassified $0.3 million from AOCI to retained earnings.

In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" that amends the hedge accounting recognition and presentation requirements under hedge accounting. The new standard will make more financial and non-financial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements, and simplifies how companies assess effectiveness. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, and early adoption is permitted. We early adopted this new ASU during the fourth quarter of 2017. The impact of adoption did not have a material effect on our Condensed Consolidated Financial Statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09 "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which provided clarity on which changes to the terms or conditions of share-based payment awards require an entity to apply the modification accounting provisions required in Topic 718. We have early adopted this new standard during our second quarter of 2017. The impact of adoption did not have a material effect on our Condensed Consolidated Financial Statements and related disclosures.

In March 2017, the FASB issued ASU 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendment in this new standard requires the service cost component to be presented separate from the other components of net benefit cost. Service cost will be presented with other employee compensation costs within operations. The other components of net benefit cost, such as interest cost, amortization of prior service cost, and gains or losses, are required to be separately presented outside of operations, if income or loss from operations is presented. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. We have early adopted this new standard during our first quarter of 2017 on a retrospective basis. The adoption of this new guidance had no impact on our Condensed Consolidated Financial Statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04 "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which amends and simplifies the accounting standard for goodwill impairment. The new standard removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount a reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019, and early adoption is permitted for any impairment tests performed after January 1, 2017. The Company adopted this standard on January 1, 2018. This new guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business." The new guidance narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the "set") is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs, as defined by the ASU. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and should be applied prospectively. We adopted this standard on January 1, 2018. We have utilized this new guidance in our accounting for the Georgia Pacific's Pine Chemical Business acquisition; refer to Note 4 for more information. The adoption of this new guidance had no impact on our Condensed Consolidated Financial Statements.

In August 2016, the FASB issued final amendments to clarify how entities should classify certain cash receipts and cash payments in ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." The new guidance clarifies the classification on the statement of cash flows of certain cash receipts and disbursements such as distributions received from equity method investees, proceeds from settlement of insurance claims, and proceeds from the settlement of corporate-owned life insurance policies. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted this standard on January 1, 2018. This new guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)." Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact of this guidance on our Condensed Consolidated Financial Statements and related disclosures, including identifying and analyzing all contracts that contain a lease. As a lessee, the majority of our leases under existing guidance are classified as operating leases and therefore not recorded on the balance sheet but are recorded in the statement of earnings as expense as incurred. Upon adoption of the new guidance, we may be required to record the vast majority of these operating leases on the balance sheet as a right-of-use asset and a lease liability. The timing of expense recognition and classification in the statement of earnings could change based on the classification of leases as either operating or financing; however, we have not completed our evaluation to determine to what extent.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” which supersedes both the revenue recognition requirement to ASC 605 “Revenue Recognition” and most industry-specific guidance. The core principle of the new standard (ASC 606) is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity must also disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In 2016 and 2017, the FASB issued several ASUs that provided additional clarity on numerous topics as well as providing technical corrections to the original ASU 2014-09. We adopted this new standard on January 1, 2018, utilizing the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. See below for the effect of this adoption on our Condensed Consolidated Financial Statements.

The majority of our sales revenue remains unchanged by ASC 606 and continues to be recognized when products are shipped from our manufacturing and warehousing facilities, which represents the point at which control is transferred to the customer. For certain limited contracts, where we are producing goods with no alternative use and for which we have an enforceable right to payment for performance completed to date, we are recognizing revenue as goods are manufactured, rather than when they are shipped as previously done under ASC 605. The cumulative effect of the changes made to our condensed consolidated balance sheet on January 1, 2018, due to the adoption of ASC 606, were as follows:



In millions	Balance at December 31, 2017		Adjustments			Balance at January 1, 2018
Assets
Accounts receivable, net of allowance	$	100.0	$	0.3		$	100.3
Inventories, net	160.0		(2.4		)	157.6
Prepaid and other current assets	20.8		5.1			25.9
Liabilities
Accrued expenses	20.0		0.9			20.9
Deferred income taxes	41.3		0.5			41.8
Equity
Retained earnings	$	142.8	$	1.6		$	144.4

In accordance with ASC 606, the impact of adoption on our condensed consolidated statement of operations and balance sheet were as follows:

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)



	Three Months Ended June 30, 2018
In millions	As reported		Balances without Adoption of ASC 606		Effect of Change Higher/(Lower)
Net sales	$	308.6	$	307.8	$	0.8
Cost of sales	193.1		192.5		0.6
Provision (benefit) for income taxes	12.4		12.4		—
Net income (loss)	$	52.2	52.0		$	0.2



	Six Months Ended June 30, 2018
In millions	As reported		Balances without Adoption of ASC 606		Effect of Change Higher/(Lower)
Net sales	$	543.8	$	543.1	$	0.7
Cost of sales	343.2		343.1		0.1
Provision (benefit) for income taxes	22.1		22.0		0.1
Net income (loss)	$	88.0	87.5		$	0.5



	June 30, 2018
In millions	As reported		Balances without Adoption of ASC 606		Effect of Change Higher/(Lower)
Assets
Accounts receivable, net of allowance	$	148.1	$	147.6	$	0.5
Inventories, net	195.1		197.6		(2.5		)
Prepaid and other current assets	31.4		25.6		5.8
Liabilities
Accrued expenses	28.3		27.1		1.2
Deferred income taxes	43.8		43.7		0.1
Equity
Retained earnings	$	221.9	$	219.4	$	2.5

All other issued but not yet effective accounting pronouncements are not expected to have a material impact on our Condensed Consolidated Financial Statements.

Note 4: Acquisition

Georgia Pacific's Pine Chemical Business

On August 22, 2017, we entered into an Asset Purchase Agreement (the "Purchase Agreement") with Georgia-Pacific Chemicals LLC, Georgia-Pacific LLC (together with Georgia-Pacific Chemicals LLC, "GP") and Ingevity Arkansas, LLC, a wholly-owned subsidiary of Ingevity, to purchase substantially all the assets primarily used in GP's pine chemical business (the "Pine Chemical Business"), including assets and facilities related to tall oil fractionation operations and the production or modification of tall oil fatty acids, tall oil rosins, rosin derivatives and formulated products (the "Acquisition").

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

working capital. This is subject to further adjustments based on a final assessment of working capital and other items as of the closing date. The Acquisition was primarily funded with the net proceeds from the $300.0 million senior notes issued on January 24, 2018. The Acquisition is being integrated into our Performance Chemicals segment and has been included within our results of operations since the Acquisition Date. In addition, on the Acquisition Date, the Company and GP entered into a 20-year, market-based crude tall oil ("CTO") supply contract with certain of Georgia-Pacific’s paper mill operations.

For the period from March 8, 2018 through June 30, 2018 the Acquisition impacted Net sales by $25.9 million and Income (loss) before income taxes by $(1.0) million including the interest incurred on the debt required to complete the Acquisition of $4.4 million and the amortization of inventory step up of $1.4 million.

Preliminary Purchase Price Allocation

The Acquisition has been accounted for under the business combinations accounting guidance, and as such we have applied acquisition accounting. Acquisition accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The aggregate preliminary purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the Acquisition Date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon outside appraisals for certain assets, including specifically-identified intangible assets.

The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information and is subject to change within the measurement period (up to one year from the Acquisition Date) as additional information concerning final asset and liability valuations is obtained. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of inventories, property, plant and equipment, and intangible assets. During the measurement period, if new information is obtained about facts and circumstances that existed as of the Acquisition Date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date, we will revise the preliminary purchase price allocation. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the Acquisition Date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.

The following table summarizes the consideration paid for the Acquisition and the amounts of the assets acquired and liabilities assumed as of the Acquisition Date, which have been allocated on a preliminary basis.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)



Preliminary Purchase Price Allocation
In millions	Weighted Average Amortization Period	Fair Value
Accounts receivable		$	16.2
Inventories ⁽¹⁾		9.4
Property, plant and equipment		39.3
Intangible assets ⁽²⁾
Patents	12 years	1.9
Non-compete agreement	3 years	2.2
Customer relationships	11 years	129.0
Goodwill ⁽³⁾		118.2
Other assets		0.1
Total fair value of assets acquired		316.3
Accounts payable		0.8
Accrued expenses		0.5
Total fair value of liabilities assumed		$	1.3
Total cash paid		$	315.0
_______________
(1) Fair value of finished good inventories acquired included a step-up in the value of approximately $1.4 million, of which $0.6 million and $1.4 million was expensed in the three and six months ended June 30, 2018, respectively. The expense is included in "Cost of sales" on the condensed consolidated statement of operations.
(2) The aggregate amortization expense was approximately $3.5 million and $4.2 million for the three and six months ended June 30, 2018, respectively. Estimated amortization expense is as follows: 2018 - $10.6 million, 2019 - $12.7 million, 2020 - $12.7 million, 2021 - $12.0 million, and 2022 - $11.8 million.
(3) Goodwill largely consists of expected cost synergies and economies of scale resulting from the business combination. We expect the full amount to be deductible for income tax purposes.

Unaudited Pro Forma Financial Information

The following unaudited pro forma results of operations assume that the Acquisition occurred at the beginning of the periods presented. These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been if the Acquisition had occurred at the beginning of the periods presented, nor are they indicative of future results of operations. The pro forma results presented below are adjusted for the removal of acquisition and other related costs of $1.1 million and $5.7 million for the three and six months ended June 30, 2018, respectively. No acquisition and other related costs were incurred in the three and six months ended 2017.



	Three months ended June 30,				Six months ended June 30,
In millions	2018		2017		2018		2017
Net sales	$	308.6	$	283.6	$	564.0	$	526.4
Income (loss) before income taxes	65.7		50.5		116.6		82.6
Diluted earnings (loss) per share attributable to Ingevity stockholders	$	1.12	$	0.72	$	1.94	$	1.14

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Acquisition-related costs

Costs incurred to complete and integrate the Acquisition into our Performance Chemicals segment are expensed as incurred and recorded to Acquisition-related costs on our condensed consolidated statement of operations. During the three and six months ended June 30, 2018, $0.5 million and $4.3 million, respectively of Acquisition-related costs were recognized. No Acquisition-related costs were incurred in the three and six months ended June 30, 2017. These costs represent transaction costs, legal fees and professional third-party service fees.

Note 5: Revenues

On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. See Note 3 for more information on the adoption of ASC 606 and its impact on our Condensed Consolidated Financial Statements.

Ingevity's operating segments are (i) Performance Materials and (ii) Performance Chemicals.

Our Performance Materials segment consists of our automotive technologies and process purifications product lines. Performance Materials manufactures products in the form of powder, granular, extruded pellets or structured honeycombs and activated carbon sheets. Automotive technologies products are sold into the gasoline vapor emission control markets within the automotive industry while process purifications products are sold into the food, water, beverage, air emissions control, corrosion protection, odor reduction and chemical purification industries.

Our Performance Chemicals segment consists of our pavement technologies, oilfield technologies and industrial specialties product lines. Performance Chemicals manufactures products derived from crude tall oil and lignin extracted from the kraft paper making process. Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including asphalt paving (pavement technologies product line), oil exploration and production (oilfield technologies product line), printing inks, adhesives, agrochemicals, and lubricants (industrial specialties product line).

Net sales in both of our reportable segments are based on the sale of manufactured products. Net sales are recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our products. Since net sales are derived from product sales only, we have disaggregated our net sales by our product lines within each reportable segment. Net sales are measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Sales returns and allowances are not a normal practice in the industry and are not significant. Shipping and handling fees billed to customers continue to be included with Net sales. Certain customers may receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and included in Net sales. Incidental items immaterial in the context of the contract are recognized as expense. If we pay for the freight and shipping, we recognize the cost when control of the product has transferred to the customer as an expense in Cost of sales on the condensed consolidated statement of operations. Although very rare, from time to time we incur expenses to obtain a sales contract. In these cases, if these costs are for orders that are fulfilled in one year or less, we expense these costs as they are incurred. Because the period between when we transfer a promised good to a customer and when the customer pays for that good will be one year or less, we elect not to adjust the promised amount of consideration for the effects of any significant financing component.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Disaggregation of Revenue

The following tables present our Net sales disaggregated by product line and geography.



In millions	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Automotive Technologies product line	$	86.1	$	172.0
Process Purification product line	10.0		19.6
Performance Materials segment	$	96.1	$	191.6
Oilfield Technologies product line	29.1		51.5
Industrial Specialties product line	117.8		216.6
Pavement Technologies product line	65.6		84.1
Performance Chemicals segment	$	212.5	$	352.2
Consolidated Net sales	$	308.6	$	543.8

The following table presents our Net sales disaggregated by geography, based on the delivery address of our customer.



In millions	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
North America	$	212.0	$	366.7
Asia Pacific	42.9		76.9
Europe, Middle East and Africa	47.9		88.3
South America	5.8		11.9
Consolidated Net sales	$	308.6	$	543.8

Contract Balances

The following table provides information about contract assets and contract liabilities from contracts with customers. The contract assets primarily relate to our rights to consideration for products produced but not billed at the reporting date on contracts with certain customers. The contract assets are recognized as accounts receivables when the rights become unconditional and the customer has been billed. Contract liabilities represent obligations to transfer goods to a customer for which we have received consideration from our customer. For all periods presented we had no contract liabilities.



In millions	Contract Asset
Balance at January 1, 2018	$	4.4
Reclassification to accounts receivable, billed to customers	(7.2		)
Contract asset additions	7.9
Balance at June 30, 2018 ⁽¹⁾	$	5.1
_______________
(1) Included within "Prepaid and other current assets" on the condensed consolidated balance sheet.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 6: Financial Instruments, Risk Management, and Fair Value Measurements

Financial Instruments and Risk Management

Ingevity’s operations are exposed to market risks, such as changes in foreign currency exchange rates and commodity prices due to transactions denominated in a variety of foreign currencies and purchases of certain commoditized raw materials and inputs. Changes in these rates and prices may have an impact on Ingevity’s future cash flow and earnings. To mitigate these market risks and their effects, we enter into derivative financial instruments which are governed by policies, procedures and internal processes set forth by our Board of Directors.

Our risk management program also addresses counterparty credit risk by selecting only major financial institutions with investment grade ratings. Once the derivative financial instrument is entered into, we continuously monitor the financial institutions’ credit ratings and our credit risk exposure held by the financial institution. When appropriate, we reallocate exposures across multiple financial institutions to limit credit risk. If a counterparty fails to fulfill its performance obligations under the derivative financial instrument, then Ingevity is exposed to credit risk equal to the fair value of the financial instrument. Derivative assets and liabilities are reported on a net basis by counterparty, to the extent governed by master netting agreements, in the condensed consolidated balance sheets. Due to our proactive mitigation of these potential credit risk we anticipate performance by our counterparties to these contracts and therefore no material loss is expected.

Foreign Currency Exchange Risk Management

We manufacture and sell our products in several countries throughout the world and, thus, we are exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, we net the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, from time to time, we utilize foreign currency exchange forward contracts to minimize the volatility to earnings and cash flows resulting from the effect of fluctuating foreign currency exchange rates on export sales denominated in foreign currencies (principally the euro). These contracts are generally designated as cash flow hedges. We began our foreign currency exchange risk hedging program in July 2017. As of June 30, 2018, open foreign currency derivative contracts hedge forecasted transactions until January 2019. These open derivative contracts hedge the notional U.S. dollar equivalent value of approximately $13.1 million. The fair value of the foreign currency hedge was a $0.7 million asset and zero at June 30, 2018 and December 31, 2017, respectively.

Commodity Price Risk Management

Certain energy sources used by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. This volatility is primarily related to the market pricing of natural gas. To mitigate expected fluctuations in market prices and the volatility to earnings and cash flow resulting from changes to pricing of natural gas purchases, from time to time, we will enter into swap contracts and zero cost collar option contracts and designate these contracts as cash flow hedges. We began our commodity price risk hedging program in December 2017 and therefore prior to this date we had no derivative financial instruments designated to hedge commodity price risk. As of June 30, 2018, we had 1.6 million and 2.0 million mmBTUS (millions of British Thermal Units) in aggregate notional volume of outstanding natural gas commodity swap contracts and zero cost collar option contracts, respectively, designated as cash flow hedges. As of June 30, 2018, open commodity contracts hedge forecasted transactions until November 2019. The fair value of the outstanding designated natural gas commodity hedge contracts as of June 30, 2018 and December 31, 2017 was $0.1 million asset and less than $0.1 million asset, respectively.

Fair-Value Measurements

We have categorized our assets and liabilities that are recorded at fair value, based on the priority of the inputs to the valuation technique, into a three-level fair-value hierarchy. The fair-value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair-value measurement of the instrument.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

The following information is presented for assets and liabilities that are recorded in the condensed consolidated balance sheets at fair value measured on a recurring basis. There were no transfers of assets and liabilities that are recorded at fair value between Level 1 and Level 2 during the period reported. There were no non-recurring fair value measurements in the condensed consolidated balance sheets as of June 30, 2018 or December 31, 2017.



In millions	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Total
June 30, 2018
Assets:
Equity securities ⁽⁴⁾	$	0.6	$	—	$	—	$	0.6
Foreign currency hedging ⁽⁴⁾	—		0.7		—		0.7
Commodity hedging ⁽⁴⁾	—		0.1		—		0.1
Deferred compensation plan investments ⁽⁵⁾	1.8		—		—		1.8
Total assets	$	2.4	$	0.8	$	—	$	3.2
Liabilities:
Deferred compensation arrangement ⁽⁵⁾	$	4.0	$	—	$	—	$	4.0
Separation-related reimbursement awards ⁽⁶⁾	0.3		—		—		0.3
Total liabilities	$	4.3	$	—	$	—	$	4.3
December 31, 2017
Assets:
Equity securities ⁽⁴⁾	$	1.8	$	—	$	—	$	1.8
Total assets	$	1.8	$	—	$	—	$	1.8
Liabilities:
Deferred compensation arrangement ⁽⁵⁾	$	2.0	$	—	$	—	$	2.0
Separation-related reimbursement awards ⁽⁶⁾	0.9		—		—		0.9
Total liabilities	$	2.9	$	—	$	—	$	2.9

______________


(1)	Quoted prices in active markets for identical assets.


(2)	Quoted prices for similar assets and liabilities in active markets.


(3)	Significant unobservable inputs.


(4)	Included within "Prepaid and other current assets" on the condensed consolidated balance sheet.


(5)	Consists of a deferred compensation arrangement, through which we hold various investment securities, recognized on our balance sheets. Both the asset and liability are recorded at fair value, and are included within "Other assets" and "Other liabilities" on the condensed consolidated balance sheets, respectively.


(6)	Included within "Accrued expenses" on the condensed consolidated balance sheet. The expense recognized during the three and six months ended June 30, 2018, was zero and $0.1 million, and during the three and six months ended June 30, 2017, was $0.1 million and $0.3 million, respectively.

At June 30, 2018, the book value of capital lease obligations was $80.0 million and the fair value was $89.8 million. The fair value of our capital lease obligations is based on the period-end quoted market prices for the obligations, using Level 2 inputs.

The carrying amount, excluding debt issuance fees, of our variable interest rate long-term debt is $356.2 million as of June 30, 2018. The carrying value is a reasonable estimate of the fair value of the outstanding debt based on the variable interest rate of the debt.

At June 30, 2018, the book value of our fixed rate debt, the Senior Notes, was $300.0 million, and the fair value was $283.6 million, based on Level 2 inputs. At June 30, 2018, the book value of our Restricted investment was $71.8 million, and the fair value was $67.3 million, based on Level 1 inputs.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

The carrying value of our financial instruments: cash and cash equivalents, other receivables, other payables and accrued liabilities approximate their fair values due to the short-term nature of these financial instruments.

Note 7: Inventories, net



In millions	June 30, 2018			December 31, 2017
Raw materials	$	40.8		$	40.1
Production materials, stores and supplies	16.4			13.4
Finished and in-process goods	145.8			114.3
Subtotal	203.0			167.8
Less: excess of cost over LIFO cost	(7.9		)	(7.8		)
Inventories, net	$	195.1		$	160.0

Note 8: Property, plant and equipment, net



In millions	June 30, 2018			December 31, 2017
Machinery and equipment	$	830.4		$	792.5
Buildings and leasehold equipment	116.5			115.0
Land and land improvements	19.6			18.0
Construction in progress	48.2			35.8
Total cost	1,014.7			961.3
Less: accumulated depreciation	(530.6		)	(522.8		)
Property, plant and equipment, net	$	484.1		$	438.5

Note 9: Goodwill and other intangible assets, net



	Operating Segments
In millions	Performance Chemicals			Performance Materials		Total
December 31, 2017	$	8.1		$	4.3	$	12.4
Acquisitions⁽¹⁾	118.2			—		118.2
Foreign currency translation	(0.4		)	—		(0.4		)
June 30, 2018	$	125.9		$	4.3	$	130.2

_______________

(1) See Note 4 for more information.

There were no events or circumstances indicating that goodwill might be impaired as of June 30, 2018.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

All of our other intangible assets, net are related to the Performance Chemicals operating segment. The following table summarizes intangible assets:



	June 30, 2018						December 31, 2017
In millions	Gross carrying amount		Accumulated amortization		Net		Gross carrying amount		Accumulated amortization		Net
Brands ⁽¹⁾	$	13.9	$	12.1	$	1.8	$	13.9	$	11.8	$	2.1
Patents ⁽²⁾	1.9		0.1		1.8		—		—		—
Customer contracts and relationships ⁽²⁾	157.2		30.0		127.2		28.2		25.4		2.8
Non-compete agreements ⁽²⁾	2.2		0.2		2.0		—		—		—
Other intangibles, net	$	175.2	$	42.4	$	132.8	$	42.1	$	37.2	$	4.9

_______________

(1) Represents trademarks, trade names and know-how.

(2) See Note 4 for more information.

The amortization expense related to our intangible assets in the table above is shown in the table below.



	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2018		2017		2018		2017
Cost of sales	$	0.1	$	0.4	$	0.4	$	0.7
Selling, general and administrative expenses	3.8		0.3		4.8		0.6
Total amortization expense	$	3.9	$	0.7	$	5.2	$	1.3

Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2018 - $12.3 million, 2019 - $14.3 million, 2020 - $13.2 million, 2021 - $12.3 million and 2022 - $12.2 million.

Note 10: Debt including capital lease obligations

Current and long-term debt including capital lease obligations consisted of the following:



	June 30, 2018
In millions, except percentages	Interest rate	Maturity date	June 30, 2018		December 31, 2017
Revolving credit facility ⁽¹⁾	3.59%	2022	$	—	$	—
Term loan facility	3.59%	2022	375.0		375.0
Senior notes	4.50%	2026	300.0		—
Capital lease obligations	7.67%	2027	80.0		80.0
Total debt including capital lease obligations			755.0		455.0
Less: debt issuance costs			6.7		1.6
Total debt including capital lease obligations, net of debt issuance costs			748.3		453.4
Less: debt maturing within one year ⁽²⁾			18.8		9.4
Long-term debt including capital lease obligations			$	729.5	$	444.0

______________


(1)	Letters of credit outstanding under the revolving credit facility were $1.8 million and available funds under the facility were $548.2 million at June 30, 2018.


(2)	Debt maturing within one year is included in "Current maturities of long-term debt" on the condensed consolidated balance sheets.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

2018 Senior Notes

On January 24, 2018, we issued $300.0 million aggregate principal amount of 4.50 percent senior unsecured notes due 2026 (the “Notes”). The Notes were issued pursuant to an indenture dated as of January 24, 2018 (the “Indenture”), by and among Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.

The net proceeds from the sale of the Notes, after deducting deferred issuance costs of $5.7 million, were approximately $294.3 million.

Interest payments on the Notes are due semiannually in arrears on February 1st and August 1st of each year, beginning on August 1, 2018, at a rate of 4.50 percent per year. The Notes will mature on February 1, 2026.

Financial Covenants

The Indenture contains certain customary covenants (including covenants limiting Ingevity's and its restricted subsidiaries’ ability to grant or permit liens on certain property securing debt, declare or pay dividends, make distributions on or repurchase or redeem capital stock, make investments in unrestricted subsidiaries, engage in sale and lease-back transactions, and engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of the assets of our and our restricted subsidiaries, taken as a whole) and events of default (subject in certain cases to customary exceptions, as well as grace and cure periods). The occurrence of an event of default under the Indenture could result in the acceleration of the Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Ingevity and its subsidiaries.

The revolving credit facility and term loan facility include financial covenants requiring Ingevity to maintain on a consolidated basis a maximum total leverage ratio of 4.00 to 1.00 (which may be increased to 4.50 to 1.00 under certain circumstances) and a minimum interest coverage ratio of 3.00 to 1.00. We were in compliance with all covenants at June 30, 2018.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 11: Equity



	Ingevity Stockholders'
	Common Stock
In millions, except per share data	Shares	Amount		Additional paid in capital		Retained earnings		Accumulated other comprehensive income (loss)			Treasury stock			Noncontrolling interest			Total
Balance at December 31, 2017	42,209	$	0.4	$	140.1	$	142.8	$	(11.7	)	$	(7.7	)	$	14.0		$	277.9
Net income (loss)	—	—		—		77.5		—			—			10.5			88.0
Other comprehensive income (loss)	—	—		—		—		(2.3		)	—			—			(2.3		)
Common stock issued	94	—		—		—		—			—			—			—
Exercise of stock options, net	6	—		0.2		—		—			—			—			0.2
Tax payments related to vested restricted stock units	—	—		—		—		—			(1.5		)	—			(1.5		)
Share repurchase program	—	—		—		—		—			(9.1		)	—			(9.1		)
Noncontrolling interest distributions	—	—		—		—		—			—			(13.2		)	(13.2		)
Share-based compensation plans	—	—		6.6		—		—			1.1			—			7.7
Adoption of ASC 606	—	—		—		1.6		—			—			—			1.6
Balance at June 30, 2018	42,309	$	0.4	$	146.9	$	221.9	$	(14.0	)	$	(17.2	)	$	11.3		$	349.3

Noncontrolling interest



In millions	2018			2017
Balance at beginning of period	$	14.0		$	7.6
Net income (loss) attributable to noncontrolling interest	10.5			7.7
Noncontrolling interest distributions	(13.2		)	(4.8		)
Balance at end of period	$	11.3		$	10.5

On August 1, 2018, we completed the acquisition of the remaining 30 percent Noncontrolling interest in Purification Cellutions LLC. See Footnote 18 for more information.

Share Repurchases

On February 20, 2017, our Board of Directors authorized the repurchase of up to $100 million of our common stock. The repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time. Shares may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of prevailing market conditions and other factors.

During the three months ended June 30, 2018, we repurchased 75,800 shares of our common stock at a weighted average cost per share of $79.28. At June 30, 2018, $84.3 million remained unused under our Board-authorized repurchase program. We record shares of common stock repurchased at cost as treasury stock, resulting in a reduction of stockholders’ equity in the condensed consolidated balance sheets. When the treasury shares are contributed under our employee benefit plans or issued for option exercises, we use a first-in, first-out (“FIFO”) method for determining cost. The difference between the cost of the shares and the market price at the time of contribution to an employee benefit plan is added to or deducted from the related capital in excess of par value of common stock.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 12: Retirement Plans

The following table summarizes the components of net periodic benefit cost (income) for our defined benefit pension plans:



	Three Months Ended June 30,
	Pensions						Other Benefits
(in millions)	2018			2017			2018		2017
Components of net periodic benefit cost (income):
Service cost ⁽¹⁾	$	0.4		$	0.3		$	—	$	—
Interest cost ⁽²⁾	0.2			0.2			—		—
Expected return on plan assets ⁽²⁾	(0.2		)	(0.2		)	—		—
Recognized net actuarial and other (gain) loss ⁽²⁾	0.1			—			—		—
Net periodic benefit cost (income)	$	0.5		$	0.3		$	—	$	—



	Six Months Ended June 30,
	Pensions						Other Benefits
	2018			2017			2018		2017
Components of net periodic benefit cost (income):
Service cost ⁽¹⁾	$	0.8		$	0.6		$	—	$	—
Interest cost ⁽²⁾	0.4			0.4			—		—
Expected return on plan assets ⁽²⁾	(0.4		)	(0.4		)	—		—
Recognized net actuarial and other (gain) loss ⁽²⁾	0.1			—			—		—
Net periodic benefit cost (income)	$	0.9		$	0.6		$	—	$	—

_______________


(1)	Included in "Cost of sales" on the condensed consolidated statements of operations.


(2)	Included in "Other (income) expense, net" on the condensed consolidated statements of operations.

We did not make any voluntary cash contributions to our Union Hourly defined benefit pension plan in the three or six months ended June 30, 2018. There are no required cash contributions to our Union Hourly defined benefit pension plan in 2018, and we currently have no plans to make any voluntary cash contributions in 2018.

Note 13: Restructuring and other (income) charges, net

We continually perform strategic reviews and assess the return on our operations which sometimes results in a plan to restructure the business. The cost and benefit of these strategic restructuring initiatives are recorded as restructuring and other (income) charges, net in our condensed consolidated statements of operations. These costs are excluded from our operating segment results.

We record an accrual for severance and other non-recurring costs under the provisions of the relevant accounting guidance. Additionally, in some restructuring plans write-downs of long-lived assets may occur. Two types of assets are impacted: assets to be disposed of by sale and assets to be abandoned. Assets to be disposed of by sale are measured at the lower of carrying amount or estimated net proceeds from the sale. Assets to be abandoned with no remaining future service potential are written down to amounts expected to be recovered. The useful life of assets to be abandoned that have a remaining future service potential are adjusted and depreciation is recorded over the adjusted useful life. Below provides detail of the Restructuring and other (income) charges, net incurred.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Detail on the restructuring charges and asset disposal activities is provided below.



	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2018		2017		2018			2017
Restructuring and other (income) charges, net
Gain on sale of assets and businesses	$	—	$	—	$	(0.6	)	$	—
Severance and other employee-related costs ⁽¹⁾	—		—		—			1.3
Other (income) charges, net ⁽²⁾	—		1.1		—			2.1
Total restructuring and other (income) charges, net	$	—	$	1.1	$	(0.6	)	$	3.4

_______________


(1)	Represents severance and employee benefit charges. Income represents adjustments to previously recorded severance and employee benefits.


(2)	Primarily represents costs associated with rental payments, contract terminations, and other miscellaneous exit costs. Other Income primarily represents favorable developments on previously recorded exit costs as recoveries associated with restructuring activities.

2018 activities

In February 2018, we sold assets from the Performance Chemicals derivatives operations in Duque De Caxias, Rio de Janeiro, Brazil. These assets were part of a facility that was closed as a result of a restructuring event in 2016. As a result of this sale, we recorded zero and $0.6 million as a gain on sale of assets in the three and six months ended June 30, 2018, respectively.

2017 activities

In January 2017, we initiated a reorganization to streamline our leadership team, flatten the organization and reduce costs. As a result of this reorganization, we recorded zero and $1.3 million, respectively, in severance and other employee-related costs in the three and six months ended June 30, 2017.

During the three and six months ended June 30, 2017, we also recorded $1.1 million and $2.1 million, respectively, of additional miscellaneous exit costs primarily associated with the exit of our Performance Chemicals' manufacturing operations in Palmeira, Santa Catarina, Brazil which began in the fourth quarter of 2016.

Roll forward of Restructuring Reserves

The following table shows a roll forward of restructuring reserves that will result in cash spending.



	Balance at		Change in	Cash			Balance at
In millions	12/31/2017⁽¹⁾		Reserve⁽²⁾	Payments		Other⁽³⁾	6/30/2018⁽¹⁾
Restructuring Reserves	$	0.2	—	(0.1	)	—	$	0.1

_______________


(1)	Included in "Accrued Expenses" on the condensed consolidated balance sheets.


(2)	Includes severance and other employee-related costs, exited leases, contract terminations and other miscellaneous exit costs. Any asset write-downs including accelerated depreciation and impairment charges are not included in the above table.


(3)	Primarily foreign currency translation adjustments.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 14: Income Taxes

For the three and six months ended June 30, 2018 and 2017, the effective tax rates, including discrete items, were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Effective tax rate	19.2	%	32.5	%	20.1	%	32.4	%

We determine our interim tax provision using an Estimated Annual Effective Tax Rate methodology (“EAETR”). The EAETR is applied to the year-to-date ordinary income, exclusive of discrete items. The tax effects of discrete items are then included to arrive at the total reported interim tax provision.

The determination of the EAETR is based upon a number of estimates, including the estimated annual pre-tax ordinary income in each tax jurisdiction in which we operate. As our projections of ordinary income change throughout the year, the EAETR will change period-to-period. The tax effects of discrete items are recognized in the tax provision in the period they occur. Depending on various factors, such as the item’s significance in relation to total income and the rate of tax applicable in the jurisdiction to which it relates, discrete items in any quarter may materially impact the reported effective tax rate. As a global enterprise, our tax expense may be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As such, there may be significant volatility in interim tax provisions.

The below table provides a reconciliation between our reported effective tax rates and the EAETR.



	Three Months Ended June 30,
	2018						2017
In millions, except percentages	Before tax		Tax		Effective tax rate % impact		Before tax			Tax			Effective tax rate % impact
Consolidated operations	$	64.6	$	12.4	19.2	%	$	53.0		$	17.2		32.5	%
Discrete items:
Separation costs	—		—				0.2			0.1
Restructuring and other (income) charges, net	—		—				1.1			—
Acquisition and other related costs ⁽¹⁾	1.1		0.3				—			—
Results of legal entities with full valuation allowances⁽²⁾	—		—				(0.3		)	—
Other tax only discrete items	—		0.3				—			(0.6		)
Total discrete items	1.1		0.6				1.0			(0.5		)
Consolidated operations, before discrete items	$	65.7	$	13.0			$	54.0		$	16.7
Quarterly effect of changes in the EAETR ⁽³⁾					19.8	%							30.9	%

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)



	Six Months Ended June 30,
	2018							2017
In millions, except percentages	Before tax			Tax		Effective tax rate % impact		Before tax		Tax			Effective tax rate % impact
Consolidated operations	$	110.1		$	22.1	20.1	%	$	87.0	$	28.2		32.4	%
Discrete items:
Separation costs	—			—				0.5		0.2
Restructuring and other (income) charges, net	(0.6		)	—				3.4		0.6
Acquisition and other related costs ⁽¹⁾	5.7			1.3				—		—
Results of legal entities with full valuation allowances⁽²⁾	—			—				1.5		—
Other tax only discrete items	—			0.1				—		(0.4		)
Total discrete items	5.1			1.4				5.4		0.4
Consolidated operations, before discrete items	$	115.2		$	23.5			$	92.4	$	28.6
EAETR ⁽³⁾						20.4	%						31.0	%

_______________


(1)	Charges primarily relate to legal and professional fees and inventory step-up amortization incurred associated with the acquisition of the Pine Chemical Business. The legal and professional fees of $4.3 million and the inventory step-up amortization of $1.4 million are included in "Acquisition-related costs" and "Cost of sales" on the condensed consolidated statement of operations, respectively.


(2)	Legal entities within the consolidated results of Ingevity with full valuation allowances are treated discretely for income tax purposes.


(3)	Decrease in EAETR for the three and six months ended June 30, 2018, as compared to June 30, 2017, is primarily due to the effect of U.S. Tax Reform, which was enacted in December 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of U.S. Tax Reform. In accordance with SAB 118, we determined that the $24.5 million of the provisional deferred tax expense recorded in connection with the re-measurement of certain deferred tax assets and liabilities and current tax expense recorded in connection with any other provisions of U.S. Tax Reform were reasonable estimates at December 31, 2017. In the six months ended June 30, 2018, no additional adjustments were recorded in relation to the re-measurement of certain deferred tax assets and liabilities and minimal current tax expense was recorded in connection with other provisions of U.S. Tax Reform. Additional work may be necessary as the U.S. Treasury Department, the IRS, or other standard setting bodies interpret or issue new guidance on how the provisions of U.S. Tax Reform should be applied that may be different from our interpretation as of the date of this filing. Any subsequent adjustment to these amounts will be recorded to current tax expense in the period when the analysis is complete.

Note 15: Commitments and contingencies

Legal Proceedings

We are, from time to time, involved in routine litigation incidental to our operations. None of the litigation in which we are currently involved, individually or in the aggregate, is material to our consolidated financial condition, liquidity or results of operations nor are we aware of any material pending or contemplated proceedings.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 16: Segment information



	Three Months Ended June 30,						Six Months Ended June 30,
In millions	2018			2017			2018			2017
Net sales
Performance Materials	$	96.1		$	89.5		$	191.6		$	172.9
Automotive Technologies product line	86.1			79.9			172.0			154.5
Process Purifications product line	10.0			9.6			19.6			18.4
Performance Chemicals	$	212.5		$	170.8		$	352.2		$	305.9
Oilfield Technologies product line	29.1			19.5			51.5			37.8
Industrial Specialties product line	117.8			95.6			216.6			195.4
Pavement Technologies product line	65.6			55.7			84.1			72.7
Total net sales ⁽¹⁾	$	308.6		$	260.3		$	543.8		$	478.8

Segment operating profit ⁽²⁾
Performance Materials	$	36.6		$	30.7		$	73.5		$	60.2
Performance Chemicals	36.9			26.4			55.6			36.8
Total segment operating profit ⁽¹⁾	$	73.5		$	57.1		$	129.1		$	97.0

Separation costs ⁽³⁾	—			(0.2		)	—			(0.5		)
Restructuring and other income (charges), net ⁽⁴⁾	—			(1.1		)	0.6			(3.4		)
Acquisition and other related costs ⁽⁵⁾	(1.1		)	—			(5.7		)	—
Interest expense, net	(7.8		)	(2.8		)	(13.9		)	(6.1		)
(Provision) benefit for income taxes	(12.4		)	(17.2		)	(22.1		)	(28.2		)
Net (income) loss attributable to noncontrolling interest	(5.5		)	(3.7		)	(10.5		)	(7.7		)
Net income (loss) attributable to Ingevity stockholders	$	46.7		$	32.1		$	77.5		$	51.1

_______________


(1)	Relates to external customers only, all intersegment sales and related profit have been eliminated in consolidation.

(2)

Segment operating profit is defined as segment revenue less segment operating expenses (segment operating expenses consist of costs of sales, selling, general and administrative expenses and other (income) expense, net). We have excluded the following items from segment operating profit: interest expense associated with corporate debt facilities, income taxes, gains (or losses) on divestitures of businesses, restructuring and other (income) charges, separation costs, acquisition and other related costs and net income (loss) attributable to noncontrolling interest.


(3)	Represents transaction costs associated with separation of Ingevity from Westrock. These costs are primarily related to professional fees associated with separation activities within the finance, tax, and legal functions.


(4)	Income (charges) for all periods presented related to our Performance Chemicals segment.

(5) Charges associated with the acquisition and integration of the Pine Chemical Business. See below for more detail on the charges incurred and Note 4 within these Condensed Consolidated Financial Statements for more information.



	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2018		2017		2018		2017
Legal and professional service fees ⁽¹⁾	$	0.5	$	—	$	4.3	$	—
Inventory fair value step-up amortization ⁽²⁾	0.6		—		1.4		—
Acquisition and other related costs	$	1.1	$	—	$	5.7	$	—
_______________
(1) Included within "Acquisition and other related costs" on the condensed consolidated statement of operations.
(2) Included within "Cost of sales" on the condensed consolidated statement of operations.

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 17: Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to Ingevity stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to Ingevity stockholders for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The calculation of diluted net income per share excludes all anti-dilutive common shares.



	Three Months Ended June 30,				Six Months Ended June 30,
In millions (except share and per share data)	2018		2017		2018		2017
Net income (loss) attributable to Ingevity stockholders	$	46.7	$	32.1	$	77.5	$	51.1

Basic and Diluted earnings (loss) per share
Basic earnings (loss) per share attributable to Ingevity stockholders	$	1.11	$	0.76	$	1.84	$	1.21
Diluted earnings (loss) per share attributable to Ingevity stockholders	1.10		0.76		1.82		1.21

Shares (in thousands)
Weighted average number of common stock outstanding - Basic	42,084		42,145		42,088		42,136
Weighted average additional shares assuming conversion of potential common stock	528		282		515		258
Shares - diluted basis	42,612		42,427		42,603		42,394

The following average number of potential common shares were antidilutive and, therefore, were not included in the diluted earnings per share calculation:



	Three Months Ended June 30,		Six Months Ended June 30,
In thousands	2018	2017	2018	2017
Average number of potential common shares - antidilutive	98	94	67	132

Ingevity Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

Note 18: Subsequent event

On July 24, 2018, we signed an agreement to acquire the remaining 30 percent interest in Purification Cellutions LLC, held by Applied Technology Limited Partnership, Doraville, Georgia. Purification Cellutions LLC manufactures our structured honeycomb products within our Performance Materials segment. On August 1, 2018, pursuant to the terms and conditions set forth in the membership interest purchase agreement, we completed the acquisition of the remaining 30 percent interest in Purification Cellutions LLC for an aggregate purchase price of approximately $80 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Introduction

Management’s discussion and analysis of Ingevity’s 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.

Cautionary Statements About Forward-Looking Statements

This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (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,” “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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 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 Securities and Exchange Commission (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:


•	we are exposed to risks that the expected benefits from the acquisition of Georgia Pacific's pine chemical business will not be realized or will not be realized within the expected time period, the risk that the businesses will not be integrated successfully, and the risk of significant transaction costs and unknown or understated liabilities;


•	we may be adversely affected by general economic and financial conditions beyond our control;


•	we are exposed to risks related to our international sales and operations;


•	our reported results could be adversely affected by currency exchange rates and currency devaluation could impair our competitiveness;


•	our operations outside the U.S. require us to comply with a number of U.S. and foreign regulations, violations of which could have a material adverse effect on our financial condition and results of operations;


•	we are dependent upon attracting and retaining key personnel;


•	adverse conditions in the global automotive market or adoption of alternative or competitive technologies may adversely affect demand for our automotive carbon products;


•	we face competition from producers of alternative products and new technologies;


•	if increasingly more stringent air quality standards worldwide are not adopted, our growth could be impacted;


•	we may be adversely affected by a decrease in government infrastructure spending;


•	our printing inks business serves customers in a market that is facing declining volumes;


•	our Performance Chemicals segment is highly dependent on crude tall oil ("CTO") which is limited in supply;


•	lack of access to sufficient CTO would impact our ability to produce CTO-based products;


•	a prolonged period of low energy prices may materially impact our results of operations;


•	we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;


•	the occurrence of a natural disaster, such as a hurricane, winter or tropical storm, earthquake, tornado, flood, fire or other matters such as labor difficulties, equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;


•	if we are unable to protect our intellectual property and other proprietary information we may lose significant competitive advantage;


•	information technology security risks;


•	government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs, and the chemicals industry; and


•	losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes.

Overview

Ingevity is a leading global manufacturer of specialty chemicals and high performance activated carbon materials. We provide innovative solutions to meet our customers’ unique and demanding requirements through proprietary formulated products. We report in two business segments: Performance Materials and Performance Chemicals.

Our Performance Materials segment consists of our automotive technologies and process purifications product families. Automotive technologies produces automotive carbon products used in gasoline vapor emission control systems in cars, trucks, motorcycles and boats. Process purifications produces a number of activated carbon products for food, water, beverage and chemical purification applications. Our Performance Chemicals segment primarily addresses applications in three product families: pavement technologies, oilfield technologies and industrial specialties. Ingevity’s Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including asphalt paving, oil exploration and production, printing inks, adhesives, agrochemicals, and lubricants.

Recent Developments

2018 Senior Notes

On January 24, 2018, we issued $300.0 million aggregate principal amount of 4.50 percent senior unsecured notes due 2026 (the “Notes”). The Notes were issued pursuant to an indenture dated as of January 24, 2018 (the “Indenture”), by and among Ingevity, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee. The Notes were offered and sold to qualified institutional buyers pursuant to Rule 144A and in transactions to certain non-U.S. persons outside the U.S. pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the U.S. absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.

The net proceeds from the sale of the Notes, after deducting deferred financing fees and expenses of $5.7 million, were approximately $294.3 million. We used the net proceeds from the sale of the Notes to finance, in part, our purchase of substantially all the assets primarily used in the pine chemical business of Georgia-Pacific Chemicals LLC and Georgia-Pacific LLC.

The Indenture contains certain customary covenants (including covenants limiting Ingevity and our restricted subsidiaries’ ability to grant or permit liens on certain property securing debt, declare or pay dividends, make distributions on or repurchase or redeem capital stock, make investments in unrestricted subsidiaries, engage in sale and lease-back transactions, and engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of the assets of our and our restricted subsidiaries, taken as a whole) and events of default (subject in certain cases to customary exceptions, as well as grace and cure

periods). The occurrence of an event of default under the Indenture could result in the acceleration of the Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Ingevity and our subsidiaries.

Georgia Pacific's Pine Chemical Business Acquisition

On March 8, 2018 (the "Acquisition Date"), pursuant to the terms and conditions set forth in the Purchase Agreement, we completed the Acquisition for an aggregate preliminary purchase price of $315.0 million, which includes an adjustment for working capital. This is subject to further adjustments based on a final assessment of working capital and other items as of the closing date. The Acquisition was primarily funded with the sale of the Notes. The Acquisition is being integrated into our Performance Chemicals segment and has been included within our results of operations since the Acquisition Date. In addition, at the closing of the Acquisition, the Company and GP entered into a 20-year, market-based CTO supply contract with certain of Georgia-Pacific’s paper mill operations.

We believe the Acquisition will provide a stronger platform from which we will accelerate the profitable growth of our Performance Chemicals segment. With the addition of broader technologies and product platforms, we will add scale and competitiveness to this segment, and create value for our shareholders.

Results of Operations



	Three Months Ended June 30,		Six Months Ended June 30,
In millions	2018	2017	2018	2017
Net sales