# Ingevity Corp (NGVT) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from Ingevity Corp's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1653477/000165347724000009/ngvt-20231231.htm Accession: 0001653477-24-000009 Filing date: 2024-02-22 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/NGVT/ All MD&A years: /company/NGVT/mda/ Previous year: /company/NGVT/mda/fy2022/ (FY 2022) Next year: /company/NGVT/mda/fy2024/ (FY 2024) ITEM 7.     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”) should be read in conjunction with Item 8. Financial Statements and Supplementary Data. Investors are cautioned that the forward-looking statements contained in this section and other parts of this Annual Report on Form 10-K involve both risk and 27 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" at the beginning of this Annual Report on Form 10-K for further discussion. Overview Ingevity Corporation ("Ingevity," "the company," "we," "us," or "our") provides products and technologies that purify, protect, and enhance the world around us. Through a diverse team of talented and experienced people, we develop, manufacture, and bring to market solutions that are largely renewably sourced and help customers solve complex problems while making the world more sustainable. Our products are used in a variety of demanding applications, including adhesives, agrochemicals, asphalt paving, bioplastics, coatings, elastomers, lubricants, pavement markings, publication inks, oil exploration and production, and automotive components. We operate in three reporting segments: Performance Materials, Performance Chemicals, and Advanced Polymer Technologies. Our Performance Materials segment manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets. Performance Materials engineers, manufactures, and sells hardwood-based, chemically activated carbon products which are produced through a highly technical and specialized process primarily for use in gasoline vapor emission control systems in internal combustion engines and hybrid electric vehicles including cars, trucks, motorcycles, and boats. To maximize the productivity of our manufacturing assets, we also produce several other activated carbon products for food, water, beverage, and chemical purification applications. Our Performance Chemicals segment consists of our road technologies (previously named pavement technologies) and industrial specialties product lines. Performance Chemicals products serve as critical inputs used in a variety of high-performance applications, including pavement construction, pavement preservation, pavement reconstruction and recycling, road markings (road technologies product line), as well as agrochemical dispersants, paper chemicals, and other diverse industrial uses (industrial specialties product line). Our Advanced Polymer Technologies segment produces caprolactone and caprolactone-based specialty polymers for use in coatings, resins, elastomers, adhesives, bioplastics, and medical devices. Recent Developments Restructuring Charges Performance Chemicals Repositioning Throughout 2023 we initiated several measures across the organization to pursue greater cost efficiency which included a reorganization to streamline certain functions and reduce ongoing costs. On November 1, 2023, we announced a number of strategic actions designed to further reposition our Performance Chemicals operating segment to improve the profitability and reduce the cyclicality of the Company as a whole. These actions increase our focus on growing our most profitable Performance Chemicals product lines such as road technologies and accelerate our transition to non-crude tall oil (“CTO”)-based fatty acids. The announced actions include the permanent closure of our Performance Chemicals' CTO refinery and the closure of our manufacturing plant located in DeRidder, Louisiana (the “DeRidder Plant”), including the polyol production assets associated with the Advance Polymer Technologies reportable segment, as well as additional corporate and business cost reduction actions. We expect to close the DeRidder Plant by the end of the first half of 2024. We expect to incur aggregate charges of approximately $280.0 million associated with these actions, consisting of approximately $180.0 million in asset-related charges, approximately $15.0 million in severance and other employee-related costs, and approximately $85.0 million in other restructuring costs including decommissioning, dismantling and removal charges, and contract termination costs. We expect approximately $180.0 million of the total charges to be non-cash. The majority of non-cash charges and 50-60 percent of cash charges are expected to be recognized in 2024. Excluded from the $280.0 million of estimated aggregate charges are potential costs we may incur associated with excess volumes of CTO that we may be obligated to purchase through October 2025 under an existing CTO supply contract. We intend to manage our CTO inventories by reselling excess volumes in the open market which, based on what we believe to be market rates today, may result in $30.0 million to $80.0 million of incremental losses in 2024. During the year ended December 31, 2023, we incurred $5.1 million in cash charges and $127.7 million in non-cash charges related to the strategic actions initiated during the fourth quarter of 2023. 28 The charges we currently expect to incur in connection with these actions are subject to a number of assumptions and risks, and actual results may differ materially. We may also incur other material charges not currently contemplated due to events that may occur as a result of, or in connection with, these actions. Alternative Fatty Acid Transition In April 2023, we implemented the feedstock transition of our Crossett, Arkansas manufacturing plant (“Crossett”). To execute this transition, we halted all CTO-based production at Crossett in April. This transition converted Crossett from a CTO-based feedstock production facility to produce fatty acids from non-CTO plant-based feedstocks. During the year ended December 31, 2023, we incurred $22.1 million in costs that, in accordance with GAAP, could not be capitalized. North Charleston Plant Transition Our North Charleston, South Carolina Performance Chemicals manufacturing plant has historically been co-located with a WestRock Company (“WestRock”) paper mill. In May 2023, WestRock announced that it would permanently cease operating its North Charleston paper mill by August 31, 2023 and notified us that it was terminating the shared services in accordance with our operating agreement. WestRock ceased production at their North Charleston paper mill in June 2023. During 2023, we executed a transition plan to separate certain critical operating services WestRock had historically provided to us such as steam, water and wastewater treatment. During the year ended December 31, 2023, we incurred $14.8 million of expense. We expect to incur an additional $3-5 million of costs as we complete this transition in the first half of 2024. Supply Agreements On March 20, 2023, Ingevity and WestRock Shared Services, LLC and WestRock MWV, LLC, on behalf of the affiliates of WestRock Company (“WestRock”), entered into an amended and restated crude tall oil and black liquor soap skimmings agreement, which amends and restates that certain crude tall oil and black liquor soap skimmings agreement, dated as of January 1, 2016, by and between Ingevity and WestRock, as amended by that Amendment No.1 to Crude Tall Oil And Black Liquor Soap Skimmings Agreement, dated as of March 1, 2017, and Amendment No.2 to Crude Tall Oil And Black Liquor Soap Skimmings Agreement, dated as of November 3, 2020. On November 1, 2023, Ingevity Corporation and WestRock entered into Amendment No.1 to that certain Amended and Restated Crude Tall Oil and Black Liquor Soap Skimmings Agreement, dated as of March 20, 2023, by and between the Company and WestRock. On March 21, 2023, Ingevity, Georgia-Pacific LLC, on behalf of itself and its subsidiaries (“Georgia-Pacific”), and GP Pine Chemicals LLC, a direct subsidiary of Georgia-Pacific LLC, entered into a Second Amendment to the Crude Tall Oil Supply Agreement, to amend certain terms of the Crude Tall Oil Supply Agreement, dated as of March 9, 2018, by and between Ingevity and Georgia-Pacific, as amended by that Amendment to the Crude Tall Oil Supply Agreement, dated as of May 1, 2020. Performance Chemicals Reporting Unit During the third quarter of 2023, continued reduction in demand in industrial end markets had negatively impacted our ability to offset elevated CTO costs through pricing actions within our Performance Chemicals’ reportable segment, particularly in our industrial specialties product line. CTO is essential to our industrial specialties and some of our road technologies product lines within our Performance Chemicals reportable segment. As a result, we concluded that a triggering event occurred for our Performance Chemicals’ reporting unit, and we performed an analysis of the reporting unit’s goodwill, intangibles and long-lived assets as of September 1, 2023. Our analysis included significant assumptions such as: revenue growth rate, Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") margin, and discount rate which are judgmental and variations in any assumptions could result in materially different calculations of fair value. We concluded that there was no impairment for the quarter ended September 30, 2023. Our fiscal year 2023 annual goodwill impairment test was performed as of October 1, 2023. We determined that the fair value of our reporting units were in excess of their carrying value and therefore concluded that no goodwill impairment existed. There were no events or circumstances indicating that goodwill might be impaired as of December 31, 2023. 29 Segment Change During the first quarter of 2023, we realigned our segment reporting structure to increase transparency for our investors and better align with how our chief operating decision maker intends to measure segment operating performance and allocate resources across our operating segments. Effective in the first quarter of 2023, we separated our engineered polymers product line from the Performance Chemicals reportable segment into its own reportable segment, Advanced Polymer Technologies. This reportable segment change also resulted in our Performance Chemicals reporting unit for goodwill being split into two separate reporting units for the purposes of goodwill impairment testing. This reportable segment change has no impact on our consolidated operating results or the historical operating results of our Performance Materials operating segment. Equity Method Investment During the first quarter of 2023, we sold a strategic equity method investment for $31.5 million, resulting in a $19.3 million gain, recorded within "Other (income) expense, net" on the consolidated statement of operations. Results of Operations [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Net sales","$","1,692.1","","","$","1,668.3","","","$","1,391.5"],["Cost of sales","1,220.2","","","1,098.2","","","878.7"],["Gross profit","471.9","","","570.1","","","512.8"],["Selling, general, and administrative expenses","183.7","","","198.8","","","179.3"],["Research and technical expenses","31.8","","","30.3","","","26.3"],["Restructuring and other (income) charges, net","170.2","","","13.8","","","16.2"],["Acquisition-related costs","3.6","","","5.0","","","0.6"],["Other (income) expense, net","5.7","","","(1.7)","","","79.9"],["Interest expense","93.3","","","61.8","","","51.7"],["Interest income","(6.3)","","","(7.5)","","","(4.0)"],["Income (loss) before income taxes","(10.1)","","","269.6","","","162.8"],["Provision (benefit) for income taxes","(4.7)","","","58.0","","","44.7"],["Net income (loss)","$","(5.4)","","","$","211.6","","","$","118.1"]] [[/GREPCENT_TABLE]] Net sales The table below shows 2023 and 2022 Net sales and variances from 2022 and 2021, respectively. [[GREPCENT_TABLE]] [["","","","Change vs. prior year"],["In millions","Prior year Net sales","","Volume","","Price/Mix","","Currency effect","","Current year Net sales"],["Year Ended December 31, 2023 vs. 2022","$","1,668.3","","","(106.3)","","","142.3","","","(12.2)","","","$","1,692.1"],["Year Ended December 31, 2022 vs. 2021","$","1,391.5","","","9.4","","","294.2","","","(26.8)","","","$","1,668.3"]] [[/GREPCENT_TABLE]] Year Ended December 31, 2023 vs. 2022 The sales increase in 2023 was driven by favorable pricing and sales composition (mix) of $142.3 million (nine percent), primarily attributed to an increase in Performance Chemicals of $93.1 million, partially offset by volume decline of $106.3 million (six percent), and unfavorable foreign exchange impacts of $12.2 million (one percent). 30 Year Ended December 31, 2022 vs. 2021 The sales increase in 2022 was driven by favorable pricing and sales composition (mix) of $294.2 million (21 percent), primarily attributed to an increase in Performance Chemicals of $216.9 million, and a volume increase of $9.4 million (one percent), offset slightly by unfavorable foreign exchange impacts of $26.8 million (two percent). Gross profit Year Ended December 31, 2023 vs. 2022 Gross profit decrease of $98.2 million was driven by increased manufacturing costs of $158.6 million due primarily to significant CTO raw material cost pressure within our industrial specialties product line in our Performance Chemicals reportable segment, unfavorable sales volume of $46.9 million, inventory charges of $19.7 million and unfavorable foreign exchange impacts of $0.9 million, partially offset by favorable pricing and sales composition (mix) of $127.9 million. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers of the changes in gross profit period over period for both segments. Year Ended December 31, 2022 vs. 2021 Gross profit increase of $57.3 million was driven by favorable pricing and sales composition (mix) of $291.5 million, and favorable sales volume of $6.3 million, partially offset by increased manufacturing costs of $238.0 million primarily due to raw material and energy cost inflationary pressure, and unfavorable foreign currency exchange of $2.5 million. Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for both segments. Selling, general, and administrative expenses Year Ended December 31, 2023 vs. 2022 Selling, general, and administrative ("SG&A") expenses were $183.7 million (11 percent of Net sales) and $198.8 million (12 percent of Net sales) for the years ended December 31, 2023 and 2022, respectively. The decrease in SG&A expenses is primarily due to lower employee-related costs of $18.4 million, and decreased travel and other miscellaneous costs of $6.9 million, partially offset by increased amortization expense of $10.2 million due to the Ozark Materials acquisition. Year Ended December 31, 2022 vs. 2021 SG&A expenses were $198.8 million (12 percent of Net sales) and $179.3 million (13 percent of Net sales) for the years ended December 31, 2022 and 2021, respectively. The increase in SG&A expenses is primarily due to higher employee-related costs of $11.3 million and increased travel and other miscellaneous costs of $10.6 million. This was partially offset by a decrease in litigation defense costs of $2.4 million. Research and technical expenses Years Ended December 31, 2023, 2022, and 2021 Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, totaling 1.9 percent of sales in the year ended December 31, 2023, compared to 1.8 percent in the year ended December 31, 2022, and 1.9 percent in the year ended December 31, 2021. Restructuring and other (income) charges, net Years Ended December 31, 2023, 2022, and 2021 Restructuring and other (income) charges, net, were $170.2 million, $13.8 million, and $16.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. For the year ended December 31, 2023, asset disposal charges were $105.6 million, severance and other employee-related costs were $18.4 million, and other restructuring charges were $1.6 million. Additionally, alternative fatty acid transition costs were $22.1 million, costs associated with the North Charleston plant transition were $14.8 million, and costs related to our digital transformation initiative were $7.7 million. For the years ended December 31, 2022 and 2021, the majority of the charges were related to our digital transformation initiative. See Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. 31 Acquisition-related costs Years Ended December 31, 2023, 2022, and 2021 Acquisition costs were $3.6 million, $5.0 million, and $0.6 million for the years ended December 31, 2023, 2022, and 2021, respectively. For the twelve months ended December 31, 2023 and 2022, all charges related to the integration of Ozark Materials into our Performance Chemicals segment. For the twelve months ended December 31, 2021, all charges incurred were in connection with the Caprolactone acquisition into our Advanced Polymer Technologies segment. See Note 16 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. Other (income) expense, net Years Ended December 31, 2023, 2022, and 2021 [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Gain (loss) on sale of strategic investment (1)","$","(19.3)","","","$","\u2014","","","$","\u2014"],["Foreign currency transaction (gain) loss","3.7","","","2.3","","","2.5"],["Loss on CTO resales (2)","22.0","","","\u2014","","","\u2014"],["Litigation verdict charge (3)","\u2014","","","\u2014","","","85.0"],["Other (income) expense, net","(0.7)","","","(4.0)","","","(7.6)"],["Total Other (income) expense, net","$","5.7","","","$","(1.7)","","","$","79.9"]] [[/GREPCENT_TABLE]] _______________ (1) See Note 5 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (2) See Note 2 and Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (3) See Note 18 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. Interest expense Years Ended December 31, 2023, 2022, and 2021 [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Finance lease obligations","$","7.3","","","$","7.5","","","$","7.4"],["Revolving credit facility and term loan (1)","59.1","","","21.2","","","7.6"],["Senior Notes","22.4","","","33.1","","","36.7"],["Accounts receivable securitization (2)","1.5","","","\u2014","","","\u2014"],["Litigation related interest expense (3)","3.0","","","\u2014","","","\u2014"],["Total interest expense","$","93.3","","","$","61.8","","","$","51.7"]] [[/GREPCENT_TABLE]] _______________ (1) The increase in interest expense was driven by higher average debt levels during 2023 due to the October 2022, $325.0 million acquisition of Ozark Materials, as well as higher average interest rates in 2023 compared to prior years. (2) See Note 10 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (3) See Note 18 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. 32 Interest income Years Ended December 31 2023, 2022, and 2021 [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Restricted investment (1)","$","2.4","","","$","2.1","","","$","2.0"],["Fixed-to-fixed cross-currency interest rate swap (2)","\u2014","","","1.1","","","0.5"],["Floating-to-fixed interest rate swaps (2)","\u2014","","","1.7","","","\u2014"],["Other","3.9","","","2.6","","","1.5"],["Total interest income","$","6.3","","","$","7.5","","","$","4.0"]] [[/GREPCENT_TABLE]] _______________ (1) See Note 5 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (2) See Note 9 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. Provision (benefit) for income taxes Years Ended December 31, 2023, 2022, and 2021 For the years ended December 31, 2023, 2022, and 2021, our effective tax rate was 46.5 percent, 21.5 percent, and 27.5 percent respectively. An explanation of the change in the effective tax rate is presented in Note 17 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K. 33 Segment Operating Results In addition to the information discussed above, the following sections discuss the results of operations for each of Ingevity's segments. Our segments are (i) Performance Materials, (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, other (income) expense, net, excluding depreciation and amortization). We have excluded the following items from segment EBITDA: interest expense, net, associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, including inventory lower of cost or market charges associated with restructuring actions, acquisition and other-related (income) costs, litigation verdict charges, (losses) gains from the sale of strategic investments, (losses) gains on CTO resales, and pension and postretirement settlement and curtailment (income) charge, net. In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K. Performance Materials Performance Summary Our Performance Materials segment experienced solid automotive volume growth from improved semiconductor chip availability and China automobile production stimulus. The segment also recognized volume improvement in food, water, beverage, and chemical purification products and we were able to increase prices to capture more of the value from our highly differentiated carbon. These top-line improvements were largely offset by continued pressure from higher raw material input costs and higher logistic costs driven by inflation. The strengthening of the U.S. dollar against the Chinese renminbi and the euro also contributed to the pressure on EBITDA when compared to the prior year. [[GREPCENT_TABLE]] [["In millions","Years Ended December 31,"],["2023","","2022","","2021"],["Total Performance Materials - Net sales","$","586.0","","","$","548.5","","","$","516.8"],["Segment EBITDA","286.6","","","252.2","","","249.4"]] [[/GREPCENT_TABLE]] Net Sales Comparison of Years Ended December 31, 2023, 2022, and 2021 [[GREPCENT_TABLE]] [["","","","Change vs. prior year"],["In millions","Prior year Net sales","","Volume","","Price/Mix","","Currency effect","","Current year Net sales"],["Year Ended December 31, 2023 vs 2022","$","548.5","","","17.3","","","32.2","","","(12.0)","","","$","586.0"],["Year Ended December 31, 2022 vs 2021","$","516.8","","","28.6","","","14.9","","","(11.8)","","","$","548.5"]] [[/GREPCENT_TABLE]] Year Ended December 31, 2023 vs. 2022 Segment net sales. The increase in 2023 was driven by favorable pricing and sales composition (mix) of $32.2 million (six percent), and a volume increase of $17.3 million (three percent), partially offset by unfavorable foreign currency exchange impacts of $12.0 million (two percent). Segment EBITDA. Segment EBITDA increased by $34.4 million due to pricing and sales composition (mix) of $21.1 million, decreased SG&A expenses and research and technical costs of $11.6 million, and favorable volume of $10.9 million. The increase was partially offset by higher manufacturing costs of $8.8 million, and unfavorable foreign currency exchange impacts of $0.4 million. 34 Year Ended December 31, 2022 vs. 2021 Segment net sales. The increase in 2022 was driven by a volume increase of $28.6 million (six percent) and favorable pricing of $14.9 million (three percent), partially offset by unfavorable foreign currency exchange impacts of $11.8 million (two percent). Segment EBITDA. Segment EBITDA increased by $2.8 million due to favorable volume of $15.6 million, pricing and sales composition (mix) of $13.8 million, and decreased SG&A expenses and research and technical costs of $0.5 million. The increase was largely offset by higher manufacturing costs of $21.5 million, and unfavorable foreign currency exchange impacts of $5.6 million. Performance Chemicals Performance Summary Our Performance Chemicals segment grew revenue versus the prior year on continued price improvement and favorable mix upgrade to higher margin products. These price increases were necessary to keep pace with the inflationary increases related to raw material, energy, and logistic costs. Road Technologies sales increased by 53.3 percent due primarily to improved volumes and price increases. Volume growth was driven by technology adoption and highway funding in the United States, as well as the acquisition of Ozark Materials. Industrial Specialties sales decreased by 16.0 percent driven by volume declines attributed primarily to weak demand across all end markets, particularly adhesives and printing inks. [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Net sales"],["Road Technologies product line","$","369.8","","","$","241.3","","","$","195.4"],["Industrial Specialties product line","532.3","","","633.8","","","493.5"],["Total Performance Chemicals - Net sales","$","902.1","","","$","875.1","","","$","688.9"],["Segment EBITDA","65.7","","","160.4","","","140.5"]] [[/GREPCENT_TABLE]] Net Sales Comparison of Years Ended December 31, 2023, 2022, and 2021 [[GREPCENT_TABLE]] [["","","","Change vs. prior year"],["In millions","Prior year Net sales","","Volume","","Price/Mix","","Currency effect","","Current year Net sales"],["Year Ended December 31, 2023 vs 2022","$","875.1","","","(65.3)","","","93.1","","","(0.8)","","","$","902.1"],["Year Ended December 31, 2022 vs 2021","$","688.9","","","(26.1)","","","216.9","","","(4.6)","","","$","875.1"]] [[/GREPCENT_TABLE]] Year Ended December 31, 2023 vs. 2022 Segment net sales. The sales increase was driven by favorable pricing and sales composition (mix) of $93.1 million (11 percent), comprised of industrial specialties ($62.7 million) and road technologies product lines ($30.4 million), respectively. The increase was partially offset by a volume decrease of $65.3 million (seven percent), driven by a decline in industrial specialties ($167.7 million), partially offset by growth in road technologies ($102.4 million). Unfavorable foreign currency exchange also impacted Net sales by $0.8 million (zero percent). Segment EBITDA. Segment EBITDA decreased $94.7 million, mainly due to higher manufacturing costs of $157.8 million primarily due to increased CTO cost, a volume decline of $34.1 million, and unfavorable foreign currency exchange of $0.1 million. These increases were partially offset by favorable pricing and sales composition (mix) of $89.7 million and decreased SG&A expenses of $7.6 million. 35 Year Ended December 31, 2022 vs. 2021 Segment net sales. The sales increase was driven by favorable pricing and product mix of $216.9 million (31 percent) in industrial specialties ($201.8 million) and road technologies product lines ($15.1 million), partially offset by a volume decline of $26.1 million (four percent), and unfavorable foreign currency exchange impacting Net sales by $4.6 million (one percent). Segment EBITDA. Segment EBITDA increased $19.9 million, mainly due to favorable pricing and product mix of $217.8 million, and favorable foreign currency exchange impacts and other miscellaneous charges of $1.6 million. These increases were partially offset by higher manufacturing costs of $167.5 million due to inflationary raw material and energy costs, increased SG&A expenses of $20.0 million due to increased spending on growth initiatives, compensation, and travel, and volume decline of $12.0 million. Advanced Polymer Technologies Performance Summary Our Advanced Polymer Technologies segment sales decreased compared to the prior year due to market weakness across the segment's end markets in all regions, partially offset by higher prices. Segment EBITDA increase was driven primarily by profit recovery initiatives, including pricing actions and product mix management, and lower input costs. [[GREPCENT_TABLE]] [["In millions","Years Ended December 31,"],["2023","","2022","","2021"],["Advanced Polymer Technologies - Net sales","$","204.0","","","$","244.7","","","$","185.8"],["Segment EBITDA","44.5","","","40.0","","","32.3"]] [[/GREPCENT_TABLE]] Net Sales Comparison of Years Ended December 31, 2023, 2022, and 2021 [[GREPCENT_TABLE]] [["","","","Change vs. prior year"],["In millions","Prior year Net sales","","Volume","","Price/Mix","","Currency effect","","Current year Net sales"],["Year Ended December 31, 2023 vs 2022","$","244.7","","","(58.3)","","","17.0","","","0.6","","","$","204.0"],["Year Ended December 31, 2022 vs 2021","$","185.8","","","6.9","","","62.4","","","(10.4)","","","$","244.7"]] [[/GREPCENT_TABLE]] Year Ended December 31, 2023 vs. 2022 Segment net sales. The sales decrease was driven by a volume decline of $58.3 million (24 percent), partially offset by favorable pricing and sales composition (mix) of $17.0 million (seven percent), and favorable foreign currency exchange of $0.6 million (zero percent). Segment EBITDA. Segment EBITDA increased $4.5 million, mainly due to favorable pricing and sales composition (mix) of $17.1 million, decreased manufacturing costs of $9.9 million, and decreased SG&A expenses of $5.9 million. These increases were partially offset by volume declines of $23.7 million, and unfavorable foreign currency exchange impacts and other miscellaneous charges of $4.7 million. Year Ended December 31, 2022 vs. 2021 Segment net sales. The sales increase was driven by favorable pricing and product mix of $62.4 million (34 percent), and favorable volume of $6.9 million (four percent), partially offset by unfavorable foreign currency exchange of $10.4 million (six percent). Segment EBITDA. Segment EBITDA increased $7.7 million, mainly due to favorable pricing and product mix of $60.1 million, favorable foreign currency exchange impacts and other miscellaneous charges of $4.8 million, and an increase in volume of $2.7 million. These increases were partially offset by higher manufacturing costs of $50.9 million due to inflationary raw material and energy costs, and increased SG&A expenses of $9.0 million due to increased spending on growth initiatives, compensation, and travel. 36 Use of Non-GAAP Financial Measures Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and has provided a reconciliation to net income, the most directly comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA is not meant to be considered in isolation nor as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA is utilized by management as a measure of profitability. We believe this non-GAAP financial measure provides management as well as investors, potential investors, securities analysts, and others with useful information to evaluate the performance of the business, because such measure, when viewed together with our financial results computed in accordance with GAAP, provides a more complete understanding of the factors and trends affecting our historical financial performance and projected future results. We believe Adjusted EBITDA is a useful measure because it excludes the effects of financing and investment activities as well as non-operating activities. Adjusted EBITDA is defined as net income (loss) plus interest expense, net, provision (benefit) for income taxes, depreciation, amortization, restructuring and other (income) charges, net, including inventory lower of cost or market charges associated with restructuring actions, acquisition and other-related (income) costs, litigation verdict charges, gain on sale of strategic investments, loss on CTO resales, and pension and postretirement settlement and curtailment (income) charges, net. This non-GAAP measure is not intended to replace the presentation of financial results in accordance with GAAP and investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another. A reconciliation of Adjusted EBITDA to net income is set forth within this section. [[GREPCENT_TABLE]] [["Reconciliation of Net Income to Adjusted EBITDA"],["","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Net income (loss) (GAAP)","$","(5.4)","","","$","211.6","","","$","118.1"],["Interest expense","93.3","","","61.8","","","51.7"],["Interest income","(6.3)","","","(7.5)","","","(4.0)"],["Provision (benefit) for income taxes","(4.7)","","","58.0","","","44.7"],["Depreciation and amortization - Performance Materials","38.3","","","36.1","","","36.8"],["Depreciation and amortization - Performance Chemicals","53.2","","","43.1","","","40.0"],["Depreciation and amortization - Advanced Polymer Technologies","31.3","","","29.6","","","33.1"],["Restructuring and other (income) charges, net (1)","189.9","","","13.8","","","16.2"],["Acquisition and other-related costs (2)","4.5","","","5.9","","","0.6"],["Loss on CTO resales (3)","22.0","","","\u2014","","","\u2014"],["Gain on sale of strategic investment (4)","(19.3)","","","\u2014","","","\u2014"],["Litigation verdict charge (5)","\u2014","","","\u2014","","","85.0"],["Pension and postretirement settlement and curtailment charges (income), net (6)","\u2014","","","0.2","","","\u2014"],["Adjusted EBITDA (Non-GAAP)","$","396.8","","","$","452.6","","","$","422.2"]] [[/GREPCENT_TABLE]] _______________ (1) We regularly perform strategic reviews and assess the return on our operations, which sometimes results in a plan to restructure the business. These costs are excluded from our reportable segment results and for the purposes of calculating our non-GAAP financial performance measures. Additionally, this adjustment includes $19.7 million of inventory charges recorded in Cost of sales on our consolidated statement of operations, associated with the repositioning of our Performance Chemicals segment in the year ended December 31, 2023. Refer to Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information on the charges. (2) Charges represent costs incurred to complete and integrate acquisitions and other strategic investments and include the expensing of the inventory fair value step-up resulting from the application of purchase accounting for acquisitions and certain legal and professional fees 37 associated with the completion of acquisitions and strategic investments. Refer to Note 16 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (3) Due to the DeRidder Plant closure, as noted in footnote 1 above, and the corresponding reduced CTO refining capacity, we may be obligated, under an existing CTO supply contract, to purchase CTO through 2025 at amounts in excess of required CTO volumes. We intend to manage our CTO volumes by reselling excess volumes (herein referred to as "CTO resales") in the open market. Since these CTO resale activities are directly attributable to the Performance Chemicals’ repositioning, that is, they do not represent normal, recurring expenses necessary to operate our business, we have excluded the CTO resale (income) charges for the purposes of calculating our non-GAAP financial performance measures. For the year ended December 31, 2023, the loss on CTO resales relates to the Performance Chemicals segment. Refer to Note 2 and Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (4) We exclude gains and losses from sales of strategic investments from our segment results, as well as our non-GAAP financial measures, because we do not consider such gains or losses to be directly associated with the operational performance of the segment. We believe that the inclusion of such gains or losses, would impair the factors and trends affecting the historical financial performance of our reportable segments. We continue to include undistributed earnings or loss, distributions, amortization or accretion of basis differences, and other-than-temporary impairments for equity method investments that we believe are directly attributable to the operational performance of such investments, in our reportable segment results. Refer to Note 5 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (5) For the year ended December 31, 2021, litigation verdict charge relates to the Performance Materials segment. Refer to Note 18 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. (6) Our pension and postretirement settlement and curtailment charges (income) are related to the acceleration of prior service costs, as a result of a reduction in the number of participants within the Union Hourly defined benefit pension plan. These are excluded from our segment results because we consider these costs to be outside our operational performance. We continue to include the service cost, amortization of prior service cost, interest costs, expected return on plan assets, and amortized actual gains and losses in our segment EBITDA. Refer to Note 14 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information. Adjusted EBITDA Year Ended December 31, 2023, 2022 and 2021 The factors that impacted Adjusted EBITDA period to period are the same factors that affected earnings discussed in the sections entitled "Results of Operations" and "Segment Operating Results" within MD&A. Current Full Year Company Outlook vs. Prior Year Net sales are expected to be between $1.40 billion and $1.55 billion for 2024. We expect growth in our Performance Materials reportable segment on improved global automotive production over the prior year. While our Performance Chemicals reportable segment revenue will reflect the impact of our Performance Chemicals repositioning, including the exit of certain low-margin businesses in our Industrial Specialties product line, we expect continued growth from our Road Technology product line due to technology adoption and continued geographic expansion. Our Advanced Polymer Technologies reportable segment is expected to see demand rebound in industrial markets in the second half of the year as well as growth from their sustainable products in the consumer packing, agriculture chemicals, and apparel end-use markets. Adjusted EBITDA is expected to be between $365 million and $390 million for 2024. We expect growth in our Performance Materials EBITDA, as volumes shift to higher-margin automotive carbon due to improved global automotive production and ongoing hybrid vehicle adoption. In Performance Chemicals, we will have less exposure to certain lower-margin businesses in the Industrial Specialties product line due to the repositioning of the segment, and we expect to see continued growth in our Road Technologies product line. Performance Chemicals will continue to be impacted by elevated CTO costs, which we expect to abate in the second half of the year. We anticipate improved Advanced Polymer Technologies EBITDA on a combination of increased volumes and favorable manufacturing throughput. A reconciliation of net income to adjusted EBITDA as projected for 2024 is not provided. Ingevity does not forecast net income as it cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components, net of tax, include further restructuring and other income (charges), net; additional acquisition and other-related income (costs); litigation verdict charges; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to legislative tax rate changes. Additionally, discrete tax items could drive variability in our projected effective tax rate. All of these components could significantly impact such financial measures. Further, in the future, other items with similar characteristics to those currently included in adjusted EBITDA, that have a similar impact on comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA. 38 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 December 31, 2023, our undrawn capacity under our revolving credit facility was $259.5 million. Over the next twelve months, we expect to fund the following: interest payments, capital expenditures, expenditures related to our business transformation initiative, debt principal repayments, income tax payments, purchases pursuant to our stock repurchase program (and related excise tax payments), income tax payments, additional spending associated with our Performance Materials' intellectual property litigation, and restructuring activities such as the North Charleston plant transition, and the repositioning of our Performance Chemicals operating segment as further described within Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K. In addition, we may also evaluate and consider strategic acquisitions, joint ventures, or other transactions to create stockholder value and enhance financial performance. 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 $95.9 million at December 31, 2023. We continuously monitor deposit concentrations and the credit quality of the financial institutions that hold our cash and cash equivalents, as well as the credit quality of our insurance providers, customers, and key suppliers. Due to the global nature of our operations, a portion of our cash is held outside the U.S. The cash and cash equivalents balance at December 31, 2023, included $90.7 million held by our foreign subsidiaries. Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and their capital expenditures. We believe that our foreign holdings of cash will not have a material adverse impact on our U.S. liquidity. If these earnings were distributed, such amounts would be subject to U.S. federal income tax at the statutory rate less the available foreign tax credits, if any, and would potentially be subject to withholding taxes in the various jurisdictions. The potential tax implications of the repatriation of unremitted earnings are driven by facts at the time of distribution, therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such cash and earnings were repatriated to the U.S.. Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S. operations. Debt and Finance Lease Obligations Refer to Note 10 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K 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 and rescinded the prior outstanding repurchase authorization with respect to the shares that remained unused under the prior authorization. Shares under the current repurchase authorization may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the year ended December 31, 2023, we repurchased $92.1 million in common shares (inclusive of $0.8 million in excise tax), representing 1,269,373 shares of our common stock at a weighted average cost per share of $71.93. At December 31, 2023, $353.4 million remained available for purchase under our Board-authorized repurchase program. Capital Expenditures Projected 2024 capital expenditures are expected to be $90 million to $110 million. We have no material commitments associated with these projected capital expenditures as of December 31, 2023. 39 Cash flow comparison of Years Ended December 31, 2023, 2022, and 2021 [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Net cash provided by (used in) operating activities","$","205.1","","","$","313.4","","","$","293.3"],["Net cash provided by (used in) investing activities","(77.3)","","","(551.9)","","","(138.6)"],["Net cash provided by (used in) financing activities","(99.9)","","","48.1","","","(133.1)"]] [[/GREPCENT_TABLE]] Cash flows provided by (used in) operating activities Cash provided by (used in) operating activities, which consists of net income (loss) adjusted for non-cash items including the cash impact from changes in operating assets and liabilities (i.e., working capital), totaled $205.1 million for the year ended December 31, 2023. Cash provided by (used in) operating activities for 2023 was driven by lower cash earnings of $57.2 million and a net increase in overall working capital of $48.3 million, despite a decrease in trade working capital (accounts receivable, inventory, and accounts payable) of $15.6 million, compared to 2022. Cash flow from operations was further reduced by an increase in cash interest paid of $27.9 million due to higher average debt levels resulting from the October 2022 acquisition of Ozark Materials and rising interest rates during 2023. This was partially offset by a reduction in tax payments of $25.1 million. Cash provided by (used in) operating activities for 2022 was driven by higher cash earnings of $41.4 million offset by a net increase in overall working capital of $12.9 million which includes an increase in trade working capital (accounts receivable, inventory, and accounts payable) of $8.3 million. The build in trade working capital was due primarily to higher end of year accounts receivable on higher sales and higher inventory value due to inflation experienced during 2022 compared to 2021. Cash flow from operations was further reduced by an increase in cash interest paid of $7.3 million primarily due to rising interest rates during 2022 compared to 2021, as well as an increase in cash tax payments of $1.1 million. The higher tax payments were driven by the higher year over year earnings offset by refunds received in 2022 on prior years' earnings. Cash flows provided by (used in) investing activities For the year ended December 31, 2023, investing activities were driven by capital spending, offset partially by the proceeds from the sale of a strategic investment. Capital spending included the base maintenance capital supporting ongoing operations and cost improvement and growth spending in our Advanced Polymer Technologies segment. Also, during the year ended December 31, 2023, we sold a strategic investment (refer to Note 5 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). For the year ended December 31, 2022, investing activities were driven by capital spending, the Ozark Materials acquisition, and the purchase of strategic investments. Capital spending included the base maintenance capital supporting ongoing operations and cost improvement and growth spending primarily related to our business transformation initiative (refer to Note 15 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). Also, during the year ended December 31, 2022, we acquired Ozark Materials (refer to Note 16 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information) and we entered into multiple strategic investments (refer to Note 5 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for more information). [[GREPCENT_TABLE]] [["Capital expenditure categories","Years Ended December 31,"],["In millions","2023","","2022","","2021"],["Maintenance","$","65.5","","","$","57.4","","","$","47.9"],["Safety, health and environment","11.3","","","19.7","","","14.4"],["Growth and cost improvement","33.0","","","65.4","","","41.5"],["Total capital expenditures","$","109.8","","","$","142.5","","","$","103.8"]] [[/GREPCENT_TABLE]] 40 Cash flows provided by (used in) financing activities Cash used in financing activities for the year ended December 31, 2023, was $99.9 million and was driven by share repurchases of $92.1 million, net payments on the revolving credit facility of $87.9 million, and offset by proceeds from our accounts receivable securitization facility of $81.3 million. Cash provided by financing activities for the year ended December 31, 2022, was $48.1 million and was driven by net proceeds from the revolving credit facility of $828.0 million, offset by payments on long-term borrowings of $628.1 million, payments, and share repurchases of $145.2 million. New Accounting Guidance Refer to Note 3 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on our Consolidated Financial Statements. Critical Accounting Policies and Estimates Our principal accounting policies are described in Note 2 to the Consolidated Financial Statements included within Part II. Item 8 of this Form 10-K. Our 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 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. The following is a list of those accounting policies that we have deemed most critical to the presentation and understanding of our results of operations and financial condition: Revenue recognition Our revenue is derived from contracts with customers, and substantially all our revenue is recognized when products are either shipped from our manufacturing and warehousing facilities or delivered to the customer. Revenue, net of returns and customer incentives, is based on the sale of manufactured products. Revenues are recognized when performance obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the transfer of control of our products. 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. Revenues are presented as Net sales on the consolidated statements of operations. 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. Certain customers may receive cash-based incentives, including discounts and volume rebates, which are accounted for as variable consideration and included within Net sales. Shipping and handling fees billed to customers are included in Net sales. 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 within Cost of sales on the consolidated statements of operations. Payment terms with our customers are typically in the range of zero to sixty days. 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 financing component, as it is not significant. Valuation of tangible and intangible long-lived assets and goodwill Our long-lived assets primarily include property, plant, and equipment, and other intangible assets. We periodically evaluate whether current events or circumstances indicate that the carrying value of long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to carrying value to determine whether an impairment exists. 41 If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We conduct a required annual review of goodwill for potential impairment at October 1, or sooner if events or changes in circumstances indicate that the fair value of a reporting unit is below its carrying value. Our reporting units are our operating segments, i.e., Performance Materials, Performance Chemicals and Advanced Polymer Technologies. If the carrying value of a reporting unit that includes goodwill exceeds its fair value, which is determined using both the income approach and market approach, goodwill is considered impaired. The income approach determines fair value based on discounted cash flow model derived from a reporting unit’s long-term forecasted cash flows. The market approach determines fair value based on the application of earnings multiples of comparable companies to the projected earnings of the reporting unit. The amount of impairment loss is measured as the difference between the carrying value and the fair value of a reporting unit but is limited to the total amount of goodwill allocated to the reporting unit. In performing the fair value analysis, management makes various judgments, estimates, and assumptions, the most significant of which are the assumptions related to revenue growth rates, Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") margin, and discount rate. The factors we considered in developing our estimates and projections for cash flows include, but are not limited to, the following: (i) macroeconomic conditions; (ii) industry and market considerations; (iii) costs, such as increases in raw materials, labor, or other costs; (iv) our overall financial performance; and (v) other relevant entity-specific events that impact our reporting units. The determination of whether goodwill is impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated fair values of our reporting units. We believe that the estimates and assumptions used in our impairment assessment are reasonable; however, these assumptions are judgmental and variations in any assumptions could result in materially different calculations of fair value. We will continue to evaluate goodwill on an annual basis as of October 1, and whenever events or changes in circumstances, such as significant adverse changes in operating results, market conditions, or changes in management’s business strategy indicate that there may be a probable indicator of impairment. It is possible that the assumptions used by management related to the evaluation may change or that actual results may vary significantly from management’s estimates. Business Combinations Accounting for business combinations, which requires, among other things, the acquiring entity in a business combination to recognize the fair value of the assets acquired and liabilities assumed; the recognition of acquisition-related costs within the consolidated results of operations; the recognition of restructuring costs within the consolidated results of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at fair value on the acquisition date with subsequent adjustments recognized on the consolidated statements of operations. We generally use qualified third-party consultants to assist management in determining the fair value of assets acquired and liabilities assumed. This includes, when necessary, assistance with the determination of lives and valuation of tangible property, plant, and equipment and identifiable intangibles, assisting management in determining the fair value of obligations associated with employee-related liabilities and assisting management in assessing obligations associated with legal and environmental claims. The fair value assigned to identifiable intangible assets acquired is determined primarily by using an income approach, which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are the attrition rate, revenue growth rates, EBITDA margins, royalty rates, and the discount rate. These assumptions are based on company-specific information and projections, which are not observable in the market and are therefore considered Level 2 and Level 3 measurements. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Based on the acquired business’ end markets and products, as well as how the chief operating decision maker will review the business results, determines the most appropriate operating segment for which to integrate the acquired business. Goodwill acquired, if any, is allocated to the reporting unit within or at the operating segment for which the acquired business will be integrated. Selection of the appropriate reporting unit is based on the level at which discrete financial information is 42 available and reviewed by business management post-integration. Operating results of the acquired entity are reflected within the Consolidated Financial Statements from the date of acquisition. Income taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions, including China and the United Kingdom. The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. We follow the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes. Under this method, deferred income taxes are recorded based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income, historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. We do not provide income taxes on undistributed earnings of consolidated foreign subsidiaries as it is our intention that such earnings will remain invested in those companies. We recognize income tax positions that are more likely than not to be realized and accrue interest related to unrecognized income tax positions, which is included as a component of the income tax provision, on the consolidated statements of operations.