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, 2017
 OR
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 o
 
Accelerated Filer o
 
 
 
Non-Accelerated Filer x
 
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 42,140,146 shares of common stock, $0.01 par value, outstanding at August 2, 2017.


Ingevity Corporation
INDEX

 
Page No.
 
 
 
 
 

2

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
2017
 
2016
 
2017
 
2016
Net sales
$
260.3

 
$
245.4

 
$
478.8

 
$
445.0

Cost of sales
170.5

 
170.7

 
318.3

 
307.3

Gross profit
89.8

 
74.7

 
160.5

 
137.7

Selling, general and administrative expenses
26.3

 
22.8

 
52.3

 
45.6

Research and technical expenses
4.7

 
4.6

 
9.8

 
9.3

Separation costs
0.2

 
4.7

 
0.5

 
11.1

Restructuring and other (income) charges, net
1.1

 
1.0

 
3.4

 
5.6

Other (income) expense, net
1.7

 
(1.9
)
 
1.4

 
(5.7
)
Interest expense, net
2.8

 
5.0

 
6.1

 
10.4

Income before income taxes
53.0

 
38.5

 
87.0

 
61.4

Provision for income taxes
17.2

 
12.6

 
28.2

 
23.8

Net income (loss)
35.8

 
25.9

 
58.8

 
37.6

Less: Net income (loss) attributable to noncontrolling interest
3.7

 
1.8

 
7.7

 
4.3

Net income (loss) attributable to Ingevity stockholders
$
32.1

 
$
24.1

 
$
51.1

 
$
33.3

 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Ingevity stockholders(1)
$
0.76

 
$
0.57

 
$
1.21

 
$
0.79

Diluted earnings (loss) per share attributable to Ingevity stockholders (1)
0.76

 
0.57

 
1.21

 
0.79

_______________
(1)
On May 15, 2016, WestRock distributed 42,102 thousand shares of Ingevity's common stock to holders of its common stock. Basic and diluted earnings (loss) per share for the three and six months ended June 30, 2016 is calculated using the weighted average number of common shares outstanding for the period beginning after the Distribution Date. Basic and diluted earnings (loss) per share for the three and six months ended June 30, 2017 is calculated using the weighted average number of common shares outstanding for the period.

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

3

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Net income (loss)
$
35.8

 
$
25.9

 
$
58.8

 
$
37.6

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment (1)
1.9

 
4.1

 
3.8

 
3.0

 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Reclassifications of deferred derivative instruments (gain) loss, included in net income (2)
—

 
0.6

 
—

 
1.0

Net derivative instruments
—

 
0.6

 
—

 
1.0

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
1.9

 
4.7

 
3.8

 
4.0

 
 
 
 
 
 
 
 
Comprehensive income (loss)
37.7

 
30.6

 
62.6

 
41.6

Less: Comprehensive income (loss) attributable to
noncontrolling interest
3.7

 
1.8

 
7.7

 
4.3

Comprehensive income (loss) attributable to Ingevity stockholders
$
34.0

 
$
28.8

 
$
54.9

 
$
37.3

_______________
(1)
Amounts of other comprehensive income (loss) are presented net of applicable taxes. However, income taxes are not provided on the equity in undistributed earnings of our foreign subsidiaries or affiliates since it is our intention that such earnings will remain invested in those affiliates permanently.
(2)
Amounts reflected in "Cost of sales" on the Consolidated Statements of Operations.

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

4

INGEVITY CORPORATION
Condensed Consolidated Balance Sheets
In millions, except share and par value data
June 30, 2017
 
December 31, 2016
Assets
(Unaudited)
 
 
Cash and cash equivalents
$
40.6

 
$
30.5

Accounts receivable, net of allowance of $0.4 million in 2017 and $0.3 million in 2016
113.1

 
89.8

Inventories, net
154.6

 
151.2

Prepaid and other current assets
24.0

 
23.7

Current assets
332.3

 
295.2

Property, plant and equipment, net
424.1

 
422.8

Goodwill
12.4

 
12.4

Other intangibles, net
6.1

 
7.3

Deferred income taxes
3.8

 
3.4

Restricted investment
70.4

 
69.7

Other assets
25.0

 
22.0

Total Assets
$
874.1

 
$
832.8

Liabilities and equity
 
 
 
Accounts payable
$
75.9

 
$
79.2

Accrued expenses
18.5

 
19.3

Accrued payroll and employee benefits
23.6

 
25.6

Current maturities of long-term debt
15.0

 
7.5

Income taxes payable
0.5

 
5.3

Current liabilities
133.5

 
136.9

Long-term debt including capital lease obligations
463.5

 
481.3

Deferred income taxes
69.6

 
69.8

Other liabilities
11.4

 
10.2

Total Liabilities
678.0

 
698.2

Commitments and contingencies (Note 16)


 


Equity
 
 
 
Preferred stock (par value $0.01 per share; 50,000,000 shares authorized; zero issued and outstanding at June 30, 2017 and December 31, 2016)
—

 
—

Common stock (par value $0.01 per share; 300,000,000 shares authorized; 42,177,357 and 42,116,430 issued; 42,148,524 and 42,115,824 outstanding at June 30, 2017 and December 31, 2016)
0.4

 
0.4

Additional paid-in capital
134.8

 
129.9

Retained earnings
67.1

 
16.0

Accumulated other comprehensive loss
(15.2
)
 
(19.0
)
Treasury stock, common stock, at cost (28,833 shares at 2017; 606 shares at 2016)
(1.5
)
 
(0.3
)
Total Ingevity stockholders' equity
185.6

 
127.0

Noncontrolling interest
10.5

 
7.6

Total Equity
196.1

 
134.6

Total Liabilities and equity
$
874.1

 
$
832.8

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

5

INGEVITY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended June 30,
In millions
2017
 
2016
Cash provided by (used in) operating activities:
 
 
 
Net income (loss)
$
58.8

 
$
37.6

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
20.4

 
18.3

Deferred income taxes
(0.6
)
 
(9.5
)
Disposal/impairment of assets
0.4

 
—

Restructuring and other (income) charges, net
3.4

 
5.6

Share-based compensation
4.9

 
0.8

Pension and other postretirement benefit costs
0.6

 
—

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(22.9
)
 
(16.2
)
Inventories, net
(2.4
)
 
(9.1
)
Prepaid and other current assets
2.3

 
(4.1
)
Accounts payable
(2.2
)
 
9.1

Accrued expenses
0.2

 
(2.4
)
Accrued payroll and employee benefit costs
(2.1
)
 
4.0

Income taxes payable
(4.8
)
 
6.7

Restructuring and other spending
(5.0
)
 
(3.6
)
Changes in other operating assets and liabilities, net
1.7

 
(1.0
)
Net cash provided by (used in) operating activities
52.7

 
36.2

Cash provided by (used in) investing activities:
 
 
 
Capital expenditures
(21.8
)
 
(22.2
)
Restricted investment
(0.7
)
 
(69.1
)
Net investment in equity securities
(2.0
)
 
—

Other investing activities, net
(3.0
)
 
—

Net cash provided by (used in) investing activities
(27.5
)
 
(91.3
)
Cash provided by (used in) financing activities:
 
 
 
Net borrowings under our revolving credit facility
(9.1
)
 
190.0

Proceeds from long-term borrowings
—

 
300.0

Debt issuance costs
—

 
(3.5
)
Borrowings (repayments) of notes payable and other short-term borrowings, net
—

 
(9.4
)
Taxes withheld for employee equity award vesting
(0.5
)
 
—

Treasury share repurchases
(0.7
)
 
—

Noncontrolling interest distributions
(4.8
)
 
(1.7
)
Cash distributed to WestRock at Separation
—

 
(448.5
)
Transactions with WestRock, net
—

 
51.9

Net cash provided by (used in) financing activities
(15.1
)
 
78.8

Increase (decrease) in cash, cash equivalents and restricted cash
10.1

 
23.7

Effect of exchange rate changes on cash
0.5

 
—

 
 
 
 
Change in cash, cash equivalents and restricted cash
10.6

 
23.7

Cash, cash equivalents and restricted cash at beginning of period
30.5

 
32.0

Cash, cash equivalents and restricted cash at end of period (1)
$
41.1

 
$
55.7

(1) Includes restricted cash of $0.5 million and zero and cash and cash equivalents of $40.6 million and $55.7 million as of June 30, 2017 and 2016, 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 Consolidated Balance Sheets.
 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
7.9

 
$
4.7

Cash paid for taxes
$
33.8

 
$
2.2

Purchases of property, plant and equipment in accounts payable
$
2.3

 
$
1.7

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

6
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)


Note 1: Background
Ingevity Corporation ("Ingevity," "we," "us" or "our") is a leading global manufacturer of specialty chemicals and high performance activated carbon materials. Ingevity participates in attractive, higher growth sectors of the global specialty chemicals industry. Our specialty chemicals products serve as critical inputs used in a variety of high performance applications, primarily in three product families: pavement technologies, oilfield technologies and industrial specialties. We are also the leading global manufacturer of activated carbon used in gasoline vapor emission control systems in cars, trucks, motorcycles and boats, with over 750 million units installed globally over the 30-year history of this business. We report in two business segments, Performance Materials and Performance Chemicals.
The Performance Materials segment primarily produces automotive activated carbon products used in gasoline vapor emission control systems in cars, trucks, motorcycles and boats. The carbon products capture and store gasoline vapor emissions that would otherwise be released into the atmosphere as volatile organic compounds which contain hazardous air pollutants. The stored vapors are then largely purged from the carbon and directed to the engine where they are used as supplemental power for the vehicle. The segment also produces a number of other carbon products for food, water, beverage and chemical purification. The Performance Materials segment serves customers globally from its manufacturing operations in the United States and China.
The Performance Chemicals segment develops, manufactures and sells a wide range of specialty chemicals primarily derived from co-products of the kraft pulping process. Products include performance chemicals derived from pine chemicals used in asphalt paving, oilfield technologies and other diverse industrial specialty applications such as adhesives, agrochemical dispersants, publication inks, lubricants and petroleum. The Performance Chemicals segment serves customers globally from its manufacturing operations in the United States.

Separation and Distribution
On May 15, 2016 (the "Distribution Date"), we completed the previously announced separation of Ingevity from WestRock Company (“WestRock”) (herein referred to as the "Separation"). The Separation was completed by way of a distribution of all of the then outstanding shares of common stock of Ingevity through a dividend in kind of Ingevity's common stock (par value $0.01) to holders of record of WestRock common stock (par value $0.01) as of the close of business on May 4, 2016 (the "Record Date"). Ingevity's common stock began "regular-way" trading on the New York Stock Exchange ("NYSE") on May 16, 2016 under the symbol "NGVT".
Note 2: Basis of Consolidation and Presentation
Ingevity did not operate as a separate, stand-alone entity for the full three and six month periods ended June 30, 2016. Our Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2016 as well as our Statements of Cash Flows for the six months ended June 30, 2016 have been prepared on a “carve out” basis for the periods and dates prior to the Separation on May 15, 2016.
Prior to the Separation, Ingevity's operations were included in WestRock's financial results and were comprised of certain WestRock wholly owned legal entities for which Ingevity was the sole business and components of legal entities in which Ingevity operated in conjunction with other WestRock businesses. For periods prior to May 15, 2016, the accompanying Condensed Consolidated Financial Statements were prepared from WestRock's historical accounting records and are presented on a stand-alone basis as if Ingevity's business operations had been conducted independently from WestRock. The Condensed Consolidated Financial Statements include the historical operations, assets and liabilities of the legal entities that comprised the Ingevity business.
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 interests. 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.

7
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

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, 2016, 2015 and 2014, collectively referred to as the “Annual Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 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 2016 Annual Report.
Certain prior year amounts have been reclassified to conform with the current year's presentation.
Note 3: Correction to previously issued financial statements
During 2016, we identified various errors related to our previously issued annual and interim Consolidated Financial Statements. Specifically, in the first quarter of 2016, we determined that $3.3 million of cumulative intercompany profit in inventory had not been eliminated in prior years. During the fourth quarter of 2016, we also identified errors related to the understatement of accruals for services rendered in prior years, as well as errors related to the timing for which revenue has been previously recognized. A cash flow reclassification error decreased 2014 cash flow from operating activities and increased cash flow from investing activities by $6.0 million and was also corrected as part of this revision.
The cumulative impact of the errors identified in 2016 had resulted in the overstatement of pre-tax and net income of $1.6 million and $1.0 million in 2015 and $0.9 million and $0.6 million in 2014, and a cumulative impact to net parent investment of $2.5 million as of January 1, 2014. In addition, such errors resulted in the $9.4 million and $5.5 million overstatement of revenue in 2015 and 2014, respectively. Although Ingevity’s management has determined that the impact of such errors is immaterial to all previously issued financial statements, we revised the previously issued financial statements for the periods ended December 31, 2015 and 2014, as shown in our 2016 Annual Report, and those corrections are also reflected for the three and six months ended June 30, 2016 in the tables below.
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
In millions
As reported
 
Increase/(decrease)
 
Revised
 
As reported
 
Increase/(decrease)
 
Revised
Statement of Operations
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
248.7

 
(3.3
)
 
$
245.4

 
$
452.6

 
(7.6
)
 
$
445.0

Cost of sales
172.6

 
(1.9
)
 
170.7

 
316.5

 
(9.2
)
 
307.3

Gross profit
76.1

 
(1.4
)
 
74.7

 
136.1

 
1.6

 
137.7

Selling, general and administrative costs
24.3

 
(1.5
)
 
22.8

 
47.2

 
(1.6
)
 
45.6

Income before income taxes
38.4

 
0.1

 
38.5

 
58.2

 
3.2

 
61.4

Provision for income taxes
12.6

 
—

 
12.6

 
22.6

 
1.2

 
23.8

Net income (loss)
25.8

 
0.1

 
25.9

 
35.6

 
2.0

 
37.6

Less: Net income (loss) attributable to noncontrolling interest
2.1

 
(0.3
)
 
1.8

 
3.7

 
0.6

 
4.3

Net income (loss) attributable to Ingevity stockholders
$
23.7

 
0.4

 
$
24.1

 
$
31.9

 
1.4

 
$
33.3


8
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

In millions
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
Segment Information
As reported
 
Increase/(decrease)
 
Revised
 
As reported
 
Increase/(decrease)
 
Revised
Net sales
 
 
 
 
 
 
 
 
 
 
 
Performance Materials
$
74.5

 
(0.3
)
 
$
74.2

 
$
145.3

 
(1.0
)
 
$
144.3

Performance Chemicals
174.2

 
(3.0
)
 
171.2

 
307.3

 
(6.6
)
 
300.7

Total net sales
$
248.7

 
(3.3
)
 
$
245.4

 
$
452.6

 
(7.6
)
 
$
445.0

 
 
 
 
 
 
 
 
 
 
 
 
Segment operating profit
 
 
 
 
 
 
 
 
 
 
 
Performance Materials
$
26.3

 
(0.1
)
 
$
26.2

 
$
53.9

 
3.0

 
$
56.9

Performance Chemicals
22.8

 
0.2

 
23.0

 
31.4

 
0.2

 
31.6

Total segment operating profit
$
49.1

 
0.1

 
$
49.2

 
$
85.3

 
3.2

 
$
88.5

In millions
Six Months Ended June 30, 2016
Statement of Cash Flows
As reported
 
Increase/(decrease)
 
Revised
Net income (loss)
$
35.6

 
2.0

 
$
37.6

Deferred income taxes
(10.6
)
 
1.1

 
(9.5
)
Accounts receivable, net
(18.3
)
 
2.1

 
(16.2
)
Inventories
(4.0
)
 
(5.1
)
 
(9.1
)
Accrued expenses
(1.9
)
 
(0.5
)
 
(2.4
)
Income taxes payable
6.5

 
0.2

 
6.7

Changes in all other operating assets and liabilities, net
(0.7
)
 
(0.3
)
 
(1.0
)
Net cash provided by (used in) operating activities
36.7

 
(0.5
)
 
36.2

Transactions with WestRock, net
51.4

 
0.5

 
51.9

Net cash provided by (used in) financing activities
$
78.3

 
0.5

 
$
78.8


Note 4: New accounting guidance
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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.
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 impact of adoption did not have a material effect on our Condensed Consolidated Financial Statements.

9
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

In November 2016, the FASB issued new guidance on restricted cash in ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash." The new guidance clarifies the guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. We have early adopted this new standard during our first quarter of 2017. The impact of adoption did not have a material effect on our Condensed Consolidated Financial Statements.
In October 2016, the FASB issued new guidance on tax accounting for intra-entity transfers of assets in ASU 2016-16 "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to an outside party. We have early adopted this new standard during our first quarter of 2017. The impact of adoption did not have a material effect on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued its new lease accounting guidance in ASU 2016-02 "Leases."  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 currently evaluating the impact of these provisions.
In May 2014, the FASB issued ASU 2014-09 which is codified in ASC 606 “Revenue from Contracts with Customers” and supersedes both the revenue recognition requirement to ASC 605 “Revenue Recognition” and most industry-specific guidance. The core principle of 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. To achieve that core principle, an entity should apply the five steps set forth in ASC 606. 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. We expect to adopt these provisions on January 1, 2018, including interim periods subsequent to the adoption date, which can be applied using a full retrospective or modified retrospective approach. Since the issuance of ASU 2014-09, the FASB has issued several amendments which clarify certain points in the new Topic 606-Revenue from Contracts with Customers, including ASU 2016-08 ("Principal versus Agent Considerations - Reporting Revenue Gross versus Net"), ASU 2016-10 ("Identifying Performance Obligations and Licensing"), ASU 2016-11 ("Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting"), ASU 2016-12 ("Narrow Scope Improvements and Practical Expedients") and ASU 2016-20 ("Technical Corrections and Improvements to Topic 606.") We anticipate adopting all of these standards at the same time effective January 1, 2018. We have begun our initial assessment of the impact that ASU 2014-09 and subsequent amendments will have on our Consolidated Financial Statements and related disclosures. Based upon the results of our initial assessment thus far, we have tentatively decided to adopt this new standard under the modified retrospective approach which results in the recognition of the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity. We are still evaluating the impact to our financial statements and disclosures.
All other issued but not yet effective accounting pronouncements are not expected to have a material impact on our Condensed Consolidated Financial Statements.
Note 5: Fair value measurements
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 assets recorded at fair value measured on a recurring basis as of December 31, 2016. 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, 2017 or December 31, 2016.

10
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

In millions
Level 1(1)
 
Level 2(2)
 
Level 3(3)
 
Total
June 30, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Equity investments (4)
$
2.2

 
$
—

 
$
—

 
$
2.2

Liabilities:
 
 
 
 
 
 
 
Deferred compensation arrangement (5)
1.5

 
—

 
—

 
1.5

Separation-related Reimbursement Awards (6)
0.9

 
—

 
—

 
0.9

Total liabilities
$
2.4

 
$
—

 
$
—

 
$
2.4

December 31, 2016
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation arrangement (5)
$
0.7

 
$
—

 
$
—

 
$
0.7

Separation-related Reimbursement Awards (6)
2.1

 
—

 
—

 
2.1

Total liabilities
$
2.8

 
$
—

 
$
—

 
$
2.8

______________
(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)
Included within "Other liabilities" on the Condensed Consolidated Balance Sheet.
(6)
Included within "Accrued expenses" on the Condensed Consolidated Balance Sheet. This amount represents an amount due to WestRock associated with WestRock equity awards held by Ingevity employees post Separation. In accordance with the Employee Matters Agreement between Ingevity and WestRock entered into in connection with the Separation, we are required to reimburse WestRock the fair market value of awards on the day Ingevity employees exercise their awards. The expense recognized during the three and six months ended June 30, 2017 was $0.1 million and $0.3 million, respectively.
At June 30, 2017, the book value of capital lease obligations was $80.0 million and the fair value was $90.3 million. The fair value of our capital lease obligations is based on the period-end quoted market prices for the obligations, using Level 1 inputs. The carrying amount of our long-term debt is $383.5 million as of June 30, 2017. 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, 2017, the book value of our restricted investment was $70.4 million, and the fair value was $68.1 million, based on Level 1 inputs. The carrying value of our financial instruments: cash and cash equivalents, accounts receivable, other receivables, other payables and accrued liabilities approximate their fair values due to the short-term nature of these financial instruments.
Note 6: Inventories, net
Inventories, net are comprised of:
In millions
June 30, 2017
 
December 31, 2016
Raw materials
$
41.4

 
$
50.8

Production materials, stores and supplies
12.4

 
12.0

Finished and in-process goods
110.8

 
109.8

Subtotal
164.6

 
172.6

Less: excess of cost over LIFO cost
(10.0
)
 
(21.4
)
Inventories, net
$
154.6

 
$
151.2


11
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

Note 7: Property, plant and equipment, net
Property, plant and equipment, net consist of the following:
In millions
June 30, 2017
 
December 31, 2016
Machinery and equipment
$
774.2

 
$
764.0

Buildings and leasehold equipment
113.2

 
111.2

Land and land improvements
18.0

 
17.9

Construction in progress
31.7

 
26.3

Total cost
937.1

 
919.4

Less: accumulated depreciation
(513.0
)
 
(496.6
)
Property, plant and equipment, net
$
424.1

 
$
422.8


Note 8: Goodwill and other intangible assets, net
The changes in the carrying amount of goodwill by operating segment are as follows:
 
Operating Segments
 
 
In millions
Performance Chemicals
 
Performance Materials
 
Total
December 31, 2016
$
8.1

 
$
4.3

 
$
12.4

Foreign currency translation
—

 
—

 
—

June 30, 2017
$
8.1

 
$
4.3

 
$
12.4


There were no events or circumstances indicating that goodwill might be impaired as of June 30, 2017.

All of our other intangible assets, net are related to the Performance Chemicals operating segment. The following table summarizes intangible assets:
 
June 30, 2017
 
December 31, 2016
In millions
Gross carrying amount
 
Accumulated amortization
 
Net
 
Gross carrying amount
 
Accumulated amortization
 
Net
Brands (1)
$
13.9

 
$
11.6

 
$
2.3

 
$
13.9

 
$
11.3

 
$
2.6

Customer contracts and relationships
28.2

 
24.4

 
3.8

 
28.2

 
23.5

 
4.7

Other intangibles, net
$
42.1

 
$
36.0

 
$
6.1

 
$
42.1

 
$
34.8

 
$
7.3

_______________
(1)    Represents trademarks, trade names and know-how.
The amortization expense related to our intangible assets in the table above is shown in the table below. Amortization expense is included within Cost of sales and Selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
 
Three Months Ended June 30,
 
Six months ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Amortization expense
$
0.7

 
$
0.8

 
$
1.3

 
$
1.6



12
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

Based on the current carrying values of intangible assets, estimated pre-tax amortization expense for the next five years is as follows: 2017 - $2.5 million, 2018 - $1.8 million, 2019 - $1.6 million, 2020 - $0.5 million and 2021 - $0.3 million. The estimated pre-tax amortization expense may fluctuate due to changes in foreign currency.
Note 9: Debt including capital lease obligations
Debt maturing within one year consisted of the following:
In millions
June 30, 2017
 
December 31, 2016
Current maturities of long-term debt
$
15.0

 
$
7.5

Long-term debt including capital lease obligations consisted of the following:
 
June 30, 2017
 
 
 
 
In millions
Interest rate
 
Maturity date
 
June 30, 2017
 
December 31, 2016
The Facilities:
 
 
 
 
 
 
 
Revolving Credit Facility (1)
2.23%
 
2021
 
$
101.2

 
$
111.9

Term Loan Facility
2.59%
 
2021
 
300.0

 
300.0

Capital lease obligations
7.67%
 
2027
 
80.0

 
80.0

Total debt including capital lease obligations
 
 
 
 
481.2

 
491.9

Less: debt issuance costs
 
 
 
 
(2.7
)
 
(3.1
)
Total debt including capital lease obligations, net of debt issuance costs
 
 
 
 
478.5

 
488.8

Less: debt maturing within one year
 
 
 
 
15.0

 
7.5

Long-term debt including capital lease obligations
 
 
 
 
$
463.5

 
$
481.3

_______________
(1)
Letters of credit outstanding under the revolving credit facility were $1.8 million and available funds under the facility was $297.0 million at June 30, 2017.
Financial Covenants
The Facilities include financial covenants requiring Ingevity to maintain on a consolidated basis a maximum total leverage ratio (as defined in the credit agreement) of 3.75 to 1.00 and a minimum interest coverage ratio (as defined in the credit agreement) of 3.00 to 1.00. We were in compliance with all covenants at June 30, 2017.


13
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

Note 10: Equity
The changes in equity are as follows:
 
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, 2016
42.1

 
$
0.4

 
$
129.9

 
$
16.0

 
$
(19.0
)
 
$
(0.3
)
 
$
7.6

 
$
134.6

Net income (loss)
—

 
—

 
—

 
51.1

 
—

 
—

 
7.7

 
58.8

Other comprehensive income (1)
—

 
—

 
—

 
—

 
3.8

 
—

 
—

 
3.8

Common stock issued - compensation plans
0.1

 
—

 
—

 
—

 
—

 
(0.5
)
 
—

 
(0.5
)
Noncontrolling interest distributions
—

 
—

 
—

 
—

 
—

 
—

 
(4.8
)
 
(4.8
)
Stock-based compensation expense
—

 
—

 
4.9

 
—

 
—

 
—

 
—

 
4.9

Repurchases of Common Stock
—

 
—

 
—

 
—

 
—

 
(0.7
)
 
—

 
(0.7
)
Balance at June 30, 2017
42.2

 
$
0.4

 
$
134.8

 
$
67.1

 
$
(15.2
)
 
$
(1.5
)
 
$
10.5

 
$
196.1

_______________
(1)
See Condensed Consolidated Statements of Comprehensive Income (Loss)

Noncontrolling interest
The following table illustrates the noncontrolling interest activity for the periods presented:
In millions
Noncontrolling interest
Balance at December 31, 2016 and 2015, respectively
$
7.6

 
$
3.8

Net income (loss) attributable to noncontrolling interest
7.7

 
4.3

Noncontrolling interest distributions
(4.8
)
 
(1.7
)
Balance at June 30, 2017 and 2016, respectively
$
10.5

 
$
6.4


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, 2017, we repurchased 12,400 shares of our common stock at a weighted average cost per share of $57.88. At June 30, 2017, $99.3 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.
Note 11: Transactions with WestRock and related-parties
For periods prior to May 15, 2016, these Condensed Consolidated Financial Statements include allocated expenses associated with centralized WestRock support functions including legal, accounting, tax, treasury, internal audit, information

14
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

technology, human resources and other services. The costs associated with these functions generally include all payroll and benefit costs as well as related overhead costs. For periods prior to May 15, 2016, these Condensed Consolidated Financial Statements also include allocated costs associated with WestRock’s office facilities, corporate insurance coverage and medical, pension, post-retirement and other health plan costs attributed to Ingevity’s employees participating in WestRock’s sponsored plans. Allocations are generally based on a number of utilization measures including employee count and proportionate effort. In situations in which determinations based on utilization are impracticable, WestRock and Ingevity used other methods and criteria such as net sales which are believed to result in reasonable estimates of costs attributable to Ingevity. All such amounts have been assumed to have been immediately settled by Ingevity to WestRock in the period in which the costs were recorded in the Condensed Consolidated Financial Statements. Such amounts are included in Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
We believe the related-party allocations for periods included in these Condensed Consolidated Financial Statements for periods prior to May 15, 2016 have been made on a reasonable basis. However, these Condensed Consolidated Financial Statements may not necessarily be indicative of the results of operations that would have been obtained if Ingevity had operated as a separate entity during the periods presented. Actual costs that may have been incurred if Ingevity had been a stand-alone business would depend on a number of factors, including organizational structure and what functions were outsourced or performed by employees, as well as strategic decisions made in areas such as information technology and infrastructure. Consequently, Ingevity’s future earnings may include items of income and expense that are materially different from what is included in these Condensed Consolidated Statements of Operations for periods prior to May 15, 2016. Accordingly, the Condensed Consolidated Financial Statements for the periods presented are not necessarily indicative of Ingevity’s future results of operations, financial position and cash flows.
The Condensed Consolidated Statements of Operations prior to May 15, 2016, include allocations from WestRock as summarized below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Cost of sales
$
—

 
$
1.4

 
$
—

 
$
5.7

Selling, general and administrative expenses
—

 
2.2

 
—

 
6.5

Interest expense, net
—

 
3.4

 
—

 
7.2

Total allocated cost (1)
$
—

 
$
7.0

 
$
—

 
$
19.4

_______________
(1)
Allocated costs represent costs necessary to support Ingevity's operations which include governance and corporate functions such as information technology, accounting, human resources, accounts payable and other direct services including the interest on WestRock debt incurred to provide such services.

Prior to the Separation on May 15, 2016, we purchased certain raw materials from WestRock that were included in cost of sales. Purchases for the three and six months ended June 30, 2016 were $7.5 million and $20.1 million, respectively.
Subsequent to May 15, 2016, Ingevity was no longer a related-party of WestRock. Accordingly, beginning May 16, 2016, sales to WestRock businesses are reflected in net sales in our Condensed Consolidated Statement of Operations. Purchases of products from WestRock businesses are reflected as inventory in our Condensed Consolidated Balance Sheet and prior to payment reflected as accounts payable in our Condensed Consolidated Balance Sheet. Our ongoing relationship with WestRock is governed by the Separation Agreements, as discussed within Part I, Item 1 of our 2016 Annual Report, including the long-term supply agreement for crude tall oil ("CTO"). Under this agreement, based on WestRock’s current output, we will source approximately 45 percent to 55 percent of our CTO requirements for the maximum operating rates of our facilities. As further described in Note 1, the Separation Agreements govern the relationship between Ingevity and WestRock following the Separation and provide for the allocation of various assets, liabilities, rights and obligations and include arrangements for transition services to be provided by WestRock to Ingevity. In accordance with the Separation Agreements at the day of Separation, we recorded a payable to WestRock in the amount of $16.5 million primarily representing certain trade liabilities previously classified as related-party. This amount was paid to WestRock in 2016.

15
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

Note 12: Pension and post-retirement benefits
Prior to the Separation, WestRock offered various long-term benefits to its employees, including Ingevity employees. In these cases, the participation of our employees in these plans is reflected in the Condensed Consolidated Financial Statements as though Ingevity participated in a multi-employer plan with the other businesses of WestRock. For periods prior to the Separation, assets and liabilities of such plans were retained by WestRock. Net periodic benefit costs allocated to Ingevity associated with these pension plans for the three and six months ended June 30, 2016 were $1.1 million and $3.2 million, respectively.
 In conjunction with the Separation, Ingevity assumed retirement obligations, net of contributed assets, consisting of accrued defined benefit obligations earned by Ingevity domestic hourly union employees (referred to as the "Union Hourly defined benefit pension plan"); accrued obligations from a frozen non-qualified defined benefit pension plan for certain salaried and former salaried employees of Ingevity; and other post-retirement medical and life insurance benefits.
The following table summarizes the components of net periodic benefit cost (income):
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
(in millions)
Pensions
 
Other Benefits
 
Pensions
 
Other Benefits
Components of net periodic benefit cost (income):
 
 
 
 
 
 
 
Service cost (1)
$
0.3

 
$
—

 
$
0.6

 
$
—

Interest cost (2)
0.2

 
—

 
0.4

 
—

Expected return on plan assets (2)
(0.2
)
 
—

 
(0.4
)
 
—

Net periodic benefit cost (income)
$
0.3

 
$
—

 
$
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 six months ended June 30, 2017. There are no required cash contributions to our Union Hourly defined benefit pension plan in 2017, and we currently have no plans to make any voluntary cash contributions in 2017.
Note 13: Separation costs
In connection with the Separation as further described in Note 1 and Note 2, we have incurred pre-tax separation costs as shown in the table below. Prior to the Separation, these costs were primarily related to third-party professional fees associated with separation activities and one-time costs of new hires specifically required to separate and stand up Ingevity. Post-Separation, these costs represent legal, information technology and other advisory fees to transition from a division of WestRock to a stand-alone public company.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Separation costs
$
0.2

 
$
4.7

 
$
0.5

 
$
11.1

Note 14: 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 our Condensed Consolidated Statement of Operations. These costs are excluded from our operating segment results.

16
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

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.
Detail on the restructuring charges and asset disposal activities is provided below.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Restructuring and other (income) charges, net
 
 
 
 
 
 
 
Severance and other employee-related costs (1)
$
—

 
$
—

 
$
1.3

 
$
4.5

Asset write-downs (2)
—

 
0.3

 
—

 
0.4

Other (income) charges, net (3)
1.1

 
0.7

 
2.1

 
0.7

Total restructuring and other (income) charges, net
$
1.1

 
$
1.0

 
$
3.4

 
$
5.6

_______________
(1)
Represents severance and employee benefit charges. Income represents adjustments to previously recorded severance and employee benefits.
(2)
Primarily represents accelerated depreciation and impairment charges on long-lived assets, which were or are to be abandoned. To the extent incurred the acceleration effect of re-estimating settlement dates and revised cost estimates associated with asset retirement obligations due to facility shutdowns are also included within the asset write-downs.
(3)
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.

2017 activities
In January 2017, we initiated a reorganization as part of an effort to streamline our leadership team, flatten the organization and reduce costs. As a result of this reorganization, we recorded $1.3 million, in severance and other employee-related costs in the 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. We expect less than $1 million of additional exit and disposal costs associated with the Palmeira site shutdown during the second half of 2017.
2016 activities
In 2016, the Company announced two restructuring events. The first event was the closure of the Performance Chemicals' derivatives operation in Duque De Caxias, Rio de Janeiro, Brazil. As a result of this closure, the Company recorded $0.7 million of additional miscellaneous exit costs during the three months ended June 30, 2016. Additionally, during the six months ended June 30, 2016, the Company recorded a $0.1 million impairment charge on fixed assets and $1.8 million in severance and other employee-related costs.
We also announced a company-wide restructuring to better align our workforce in light of changing macroeconomic and market realities. The restructuring decision resulted in workforce reductions at several of our locations. As a result, during the three and six months ended June 30, 2016, we recorded severance and other employee-related charges of zero and $2.7 million ($1.9 million related to the Performance Chemicals segment and $0.8 million related to the Performance Materials segment). The Company also recorded a $0.3 million impairment charge on fixed assets in the three and six months ended June 30, 2016 (related to the Performance Chemicals segment).


17
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

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
12/31/2016 (1)
 
Reserve (2)
 
Payments
 
Other (3)
 
6/30/2017 (1)
Restructuring Reserves
$
2.2

 
3.4

 
(5.0
)
 
(0.3
)
 
$
0.3

_______________
(1)
Included in "Accrued Expenses" on the Condensed Consolidated Balance Sheet.
(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.
Note 15: Income Taxes
For the three and six months ended June 30, 2017 and 2016, the effective tax rates, including discrete items, were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Effective tax rate
32.5
%
 
32.7
%
 
32.4
%
 
38.8
%
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.
As a result of a lapse in statute of limitations, management anticipates a decrease in the accrual for unrecognized tax benefit of $0.4 million in the next twelve months.

18
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

The below tables provide a reconciliation between our reported effective tax rates and the EAETR.
 
Three Months Ended June 30,
 
2017
 
2016
In millions, except percentages
Before tax
Tax
Effective tax rate % impact
 
Before tax
Tax
Effective tax rate % impact
Consolidated operations
$
53.0

$
17.2

32.5
%
 
$
38.5

$
12.6

32.7
%
 
 
 
 
 
 
 
 
Discrete items:
 
 
 
 
 
 
 
Separation costs (1)
0.2

0.1

 
 
4.7

1.3

 
Restructuring & other (income) charges
1.1

—

 
 
1.0

0.2

 
Results of legal entities with full valuation allowances (2)
(0.3
)
—

 
 
(0.9
)
—

 
Other tax only discrete items
—

(0.6
)
 
 
—

(0.1
)
 
Total discrete items
1.0

(0.5
)
 
 
4.8

1.4

 
 
 
 
 
 
 
 
 
Consolidated operations, before discrete items
$
54.0

$
16.7

 
 
$
43.3

$
14.0

 
Quarterly effect of changes in the EAETR
 
 
30.9
%
 
 
 
32.3
%
_______________
(1)
Separation costs are classified as deductible or non-deductible for income tax purposes and are primarily taxed at domestic tax rates, see Note 13 for more information on the costs incurred.
(2)
Legal entities within the consolidated results of Ingevity with full valuation allowances are treated discretely for income tax purposes.

 
Six Months Ended June 30,
 
2017
 
2016
In millions, except percentages
Before tax
Tax
Effective tax rate % impact
 
Before tax
Tax
Effective tax rate % impact
Consolidated operations
$
87.0

$
28.2

32.4
%
 
$
61.4

$
23.8

38.8
%
 
 
 
 
 
 
 
 
Discrete items:
 
 
 
 
 
 
 
Separation costs (1)
0.5

0.2

 
 
11.1

2.3

 
Restructuring & other (income) charges
3.4

0.6

 
 
5.6

1.1

 
Results of legal entities with full valuation allowances (2)
1.5

—

 
 
2.8

—

 
Other tax only discrete items
—

(0.4
)
 
 
—

(0.2
)
 
Total discrete items
5.4

0.4

 
 
19.5

3.2

 
 
 
 
 
 
 
 
 
Consolidated operations, before discrete items
$
92.4

$
28.6

 
 
$
80.9

$
27.0

 
EAETR (3)
 
 
31.0
%
 
 
 
33.4
%
_______________
(1)
Separation costs are classified as deductible or non-deductible for income tax purposes and are primarily taxed at domestic tax rates, see Note 13 for more information on the costs incurred.
(2)
Legal entities within the consolidated results of Ingevity with full valuation allowances are treated discretely for income tax purposes.
(3)
The decrease in the EAETR for the six months ended June 30, 2017, as compared to June 30, 2016 is primarily due to an increase in forecasted profits from our 70 percent owned joint venture and income mix between domestic and foreign subsidiaries. Our 70 percent owned joint venture is a limited liability company which is treated as a "pass through" entity for tax purposes. Although we consolidate 100 percent of the joint venture, only 70 percent of the earnings are included in the calculation of Ingevity's provision for income taxes.

19
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

Note 16: 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.
Note 17: Segment information
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Net sales
 
 
 
 
 
 
 
Performance Materials
$
89.5

 
$
74.2

 
$
172.9

 
$
144.3

Performance Chemicals
170.8

 
171.2

 
305.9

 
300.7

Total net sales (1)
260.3

 
245.4

 
478.8

 
445.0

 
 
 
 
 
 
 
 
Segment operating profit (2)
 
 
 
 
 
 
 
Performance Materials
30.7

 
26.2

 
60.2

 
56.9

Performance Chemicals
26.4

 
23.0

 
36.8

 
31.6

Total segment operating profit (1)
57.1

 
49.2

 
97.0

 
88.5

 
 
 
 
 
 
 
 
Separation costs (3)
(0.2
)
 
(4.7
)
 
(0.5
)
 
(11.1
)
Restructuring and other income (charges) (4)
(1.1
)
 
(1.0
)
 
(3.4
)
 
(5.6
)
Interest expense, net
(2.8
)
 
(5.0
)
 
(6.1
)
 
(10.4
)
Provision for income taxes
(17.2
)
 
(12.6
)
 
(28.2
)
 
(23.8
)
Net income (loss) attributable to noncontrolling interest
(3.7
)
 
(1.8
)
 
(7.7
)
 
(4.3
)
Net income (loss) attributable to Ingevity stockholders
$
32.1

 
$
24.1

 
$
51.1

 
$
33.3

_______________
(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 and separation costs, and net income (loss) attributable to noncontrolling interest.
(3)
See Note 13 for more information on separation costs.
(4)
For the three and six months ended June 30, 2017, the charges related to Performance Chemicals were: $1.1 million and $3.4 million, respectively. For the three and six months ended June 30, 2016, the charges related to Performance Chemicals were $1.0 million and $4.8 million, respectively, and Performance Materials were zero and $0.8 million, respectively.
Note 18: Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding for basic and diluted earnings (loss) per share for the three and six months ended June 30, 2017 was based on the weighted average number of common shares outstanding for the period. The weighted average number of common shares outstanding for basic and diluted earnings per share for the three and six months ended June 30, 2016 was based on the weighted average number of common shares outstanding for the period beginning after the Distribution Date. On May 15, 2016, the Distribution Date, each holder of WestRock's common stock received one share of Ingevity's common stock for every six shares of WestRock's common stock held on the Record Date. Diluted earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number

20
Ingevity Corporation
Notes to the Condensed Consolidated Financial Statements
June 30, 2017
(Unaudited)

of shares of common stock and potentially dilutive common stock outstanding for the period beginning after the Distribution Date. 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)
2017
 
2016
 
2017
 
2016
Net income (loss) attributable to Ingevity stockholders
$
32.1

 
$
24.1

 
$
51.1

 
$
33.3

 
 
 
 
 
 
 
 
Basic and Diluted earnings (loss) per share (1)
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.76

 
$
0.57

 
$
1.21

 
$
0.79

Diluted earnings (loss) per share
0.76

 
0.57

 
1.21

 
0.79

 
 
 
 
 
 
 
 
Shares: (2)
 
 
 
 
 
 
 
Weighted average number of shares of common stock outstanding - Basic
42,145

 
42,102

 
42,136

 
42,102

Weighted average additional shares assuming conversion of potential common shares
282

 
24

 
258

 
24

Shares - diluted basis
42,427

 
42,126

 
42,394

 
42,126

_______________
(1)
Diluted earnings (loss) per share is calculated using net income (loss) available to common stockholders divided by diluted weighted-average shares of common shares outstanding during each period, which includes the dilutive effect of outstanding equity awards. Basic and diluted earnings (loss) per share for the three and six months ended June 30, 2017 is calculated using the weighted average number of common shares outstanding for the period. Basic and diluted earnings (loss) per share for the three and six months ended June 30, 2016 is calculated using the weighted average number of common shares outstanding for the period beginning after the Distribution Date.
(2)
Shares are presented in thousands.

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
2017
 
2016
 
2017
 
2016
Average number of potential common shares - antidilutive
94

 
157

 
132

 
157




21

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management’s discussion and analysis of Ingevity’s results of operations and financial condition (“MD&A”) is provided as a supplement to the Condensed Consolidated Financial Statements and 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, 2016 (the "2016 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 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 United States 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 technologies may adversely affect demand for our automotive carbon products;
•
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 face competition from producers of substitute products and new technologies;
•
we are dependent upon third parties for the provision of certain critical operating services at several of our facilities;

22

•
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;
•
our ability to protect our intellectual property and other proprietary information;
•
information technology security risks;
•
government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies 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 Corporation ("Ingevity," "we," "us" or "our") is a leading global manufacturer of specialty chemicals and high performance activated carbon materials. Ingevity participates in attractive, higher growth sectors of the global specialty chemicals industry. Our specialty chemicals products serve as critical inputs used in a variety of high performance applications, primarily in three product families: pavement technologies, oilfield technologies and industrial specialties. We are also the leading global manufacturer of activated carbon used in gasoline vapor emission control systems in cars, trucks, motorcycles and boats, with over 750 million units installed globally over the 30-year history of this business. We report in two business segments, Performance Materials and Performance Chemicals.
The Performance Materials segment primarily produces automotive activated carbon products used in gasoline vapor emission control systems in cars, trucks, motorcycles and boats. The carbon products capture and store gasoline vapor emissions that would otherwise be released into the atmosphere as volatile organic compounds which contain hazardous air pollutants. The stored vapors are then largely purged from the carbon and directed to the engine where they are used as supplemental power for the vehicle. The segment also produces a number of other carbon products for food, water, beverage and chemical purification. The Performance Materials segment serves customers globally from its manufacturing operations in the United States and China.
The Performance Chemicals segment develops, manufactures and sells a wide range of specialty chemicals primarily derived from co-products of the kraft pulping process. Products include performance chemicals derived from pine chemicals used in asphalt paving, oilfield technologies and other diverse industrial specialty applications such as adhesives, agrochemical dispersants, publication inks, lubricants and petroleum. The Performance Chemicals segment serves customers globally from its manufacturing operations in the United States.
Separation and Distribution
On May 15, 2016 (the "Distribution Date"), we completed the previously announced separation of Ingevity from WestRock Company (“WestRock”) (herein referred to as the "Separation"). The Separation was completed by way of a distribution of all of the then outstanding shares of common stock of Ingevity through a dividend in kind of Ingevity's common stock (par value $0.01) to holders of record of WestRock common stock (par value $0.01) as of the close of business on May 4, 2016 (the "Record Date"). Ingevity's common stock began "regular-way" trading on the New York Stock Exchange ("NYSE") on May 16, 2016 under the symbol "NGVT".


23

Results of Operations
For the Three and Six Months Ended June 30, 2017 and 2016
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Net sales
$
260.3

 
$
245.4

 
$
478.8

 
$
445.0

Cost of sales
170.5

 
170.7

 
318.3

 
307.3

Gross profit
89.8

 
74.7

 
160.5

 
137.7

Selling, general and administrative expenses
26.3

 
22.8

 
52.3

 
45.6

Research and technical expenses
4.7

 
4.6

 
9.8

 
9.3

Separation costs
0.2

 
4.7

 
0.5

 
11.1

Restructuring and other (income) charges, net
1.1

 
1.0

 
3.4

 
5.6

Other (income) expense, net
1.7

 
(1.9
)
 
1.4

 
(5.7
)
Interest expense, net
2.8

 
5.0

 
6.1

 
10.4

Income before income taxes
53.0

 
38.5

 
87.0

 
61.4

Provision for income taxes
17.2

 
12.6

 
28.2

 
23.8

Net income (loss)
35.8

 
25.9

 
58.8

 
37.6

Less: Net income (loss) attributable to noncontrolling interest
3.7

 
1.8

 
7.7

 
4.3

Net income (loss) attributable to Ingevity stockholders
$
32.1

 
$
24.1

 
$
51.1

 
$
33.3

Net sales and Gross profit
The table below shows the 2017 net sales and percentage variances from 2016:
In millions
2017
 
Percentage
change vs.
prior year
 
Currency
effect
 
Price/Mix
 
Volume
Net sales - three months ended June 30
$
260.3

 
6%
 
(1)%
 
(1)%
 
8%
Net sales - six months ended June 30
$
478.8

 
8%
 
(1)%
 
(3)%
 
12%
Three Months Ended June 30, 2017 vs. 2016
Net sales increase of $14.9 million in 2017 was primarily driven by favorable volume gains of $20.2 million (eight percent of sales) offset by unfavorable pricing and product mix of $3.7 million (one percent of sales). Both of our operating segments contributed to the volume and pricing and product mix impacts during the quarter. Additionally, unfavorable foreign currency exchange primarily impacting our Performance Materials operating segment negatively impacted Net sales by $1.6 million (one percent of sales).
Increased gross profit of $15.1 million was driven primarily by favorable sales volume contributing $9.2 million of additional gross profit and manufacturing productivity of $9.4 million. These favorable operating results were partially offset by a decrease of $2.5 million due to unfavorable pricing and product mix and $1.0 million of foreign currency exchange.

24

Six Months Ended June 30, 2017 vs. 2016
Net sales increased $33.8 million in 2017 driven by favorable volume of $51.4 million (12 percent of sales) partially offset by unfavorable pricing and product mix of $15.1 million (three percent of sales) in addition to unfavorable foreign currency exchange of $2.5 million (one percent of sales), all of which were driven by both operating segments.
Increased gross profit of $22.8 million was driven primarily by favorable sales volume contributing $18.9 million of additional gross profit and favorable manufacturing productivity of $17.9 million. Manufacturing productivity was primarily driven by lower raw material pricing in Performance Chemicals. These favorable operating results were partially offset by a decrease of $11.4 million due to unfavorable pricing and product mix and $2.6 million of unfavorable foreign currency exchange.
Selling, general and administrative expenses
Three Months Ended June 30, 2017 vs. 2016
Selling, general and administrative expenses increased $3.5 million in 2017 compared to 2016. Selling, general, and administrative expenses as a percentage of Net sales increased from 9.3 percent to 10.1 percent. The increase in Selling, general, and administrative expenses is primarily due to higher incentive compensation costs driven by the improvements in gross profit as compared to prior period. Increased gross profit translates into higher Adjusted EBITDA which is our primary metric for incentive-based compensation. Adjusted EBITDA is defined under the section entitled "Use of Non-GAAP Financial Measures" within this Management's Discussion and Analysis.
Six Months Ended June 30, 2017 vs. 2016
Selling, general and administrative expenses increased $6.7 million in 2017 compared to 2016. Selling, general, and administrative expenses as a percentage of Net sales increased from 10.2 percent to 10.9 percent.  The increase in the six months ended June 30, 2017 is consistent with the description above for the three month period.
Research and technical expenses
Three Months Ended June 30, 2017 vs. 2016
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing $0.1 million in 2017 compared to 2016.
Six Months Ended June 30, 2017 vs. 2016
Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing $0.5 million in 2017 compared to 2016.
Separation costs
Three Months Ended June 30, 2017 vs. 2016
Separation costs of $0.2 million and $4.7 million for the three months ended June 30, 2017 and 2016, respectively, were expenses related to the Separation. See Note 13 within the Condensed Consolidated Financial Statements for more information.
Six Months Ended June 30, 2017 vs. 2016
Separation costs of $0.5 million and $11.1 million for the six months ended June 30, 2017 and 2016, respectively, were expenses related to the Separation. See Note 13 within the Condensed Consolidated Financial Statements for more information.

25

Restructuring and other (income) charges, net
Three and Six Months Ended June 30, 2017 vs. 2016
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Restructuring and other (income) charges, net
 
 
 
 
 
 
 
Severance and other employee-related costs (1)
$
—

 
$
—

 
$
1.3

 
$
4.5

Asset write-downs (2)
—

 
0.3

 
—

 
0.4

Other (income) charges, net (3)
1.1

 
0.7

 
2.1

 
0.7

Total restructuring and other (income) charges, net
$
1.1

 
$
1.0

 
$
3.4

 
$
5.6

_______________
(1)
Represents severance and employee benefit charges. Income represents adjustments to previously recorded severance and employee benefits.
(2)
Primarily represents accelerated depreciation and impairment charges on long-lived assets, which were or are to be abandoned. To the extent incurred the acceleration effect of re-estimating settlement dates and revised cost estimates associated with asset retirement obligations due to facility shutdowns are also included within the asset write-downs.
(3)
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.

2017 activities
In January 2017, we initiated a reorganization as part of an effort to streamline our leadership team, flatten the organization and reduce costs. As a result of this reorganization we recorded $1.3 million in severance and other employee-related costs in the 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. We expect less than $1 million of additional exit and disposal costs associated with the Palmeira site shutdown during the second half of 2017.
2016 activities
In 2016, the Company announced two restructuring events. The first event was the closure of the Performance Chemicals' derivatives operation in Duque De Caxias, Rio de Janeiro, Brazil. As a result of this closure, the Company recorded $0.7 million of additional miscellaneous exit costs during the three months ended June 30, 2016. Additionally, during the six months ended June 30, 2016, the Company recorded a $0.1 million impairment charge on fixed assets and $1.8 million in severance and other employee-related costs.
We also announced a company-wide restructuring to better align our workforce in light of changing macroeconomic and market realities. The restructuring decision resulted in workforce reductions at several of our locations. As a result, during the three and six months ended June 30, 2016, we recorded severance and other employee-related charges of zero and $2.7 million ($1.9 million related to the Performance Chemicals segment and $0.8 million related to the Performance Materials segment). The Company also recorded a $0.3 million impairment charge on fixed assets in the three and six months ended June 30, 2016 (related to the Performance Chemicals segment).



26

Other (income) expense, net
Three and Six Months Ended June 30, 2017 vs. 2016
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Foreign currency exchange (income) loss (1)
$
1.7

 
$
(1.1
)
 
$
1.6

 
$
(4.8
)
Royalty and sundry (income) loss (2)
—

 
(0.8
)
 
(0.4
)
 
(0.9
)
Other (income) expense, net
—

 
—

 
0.2

 
—

Total Other (income) expense, net
$
1.7

 
$
(1.9
)
 
$
1.4

 
$
(5.7
)
_______________
(1)
Income in the six months ended June 30, 2016 was primarily due to unrealized foreign currency exchange gains associated with intercompany loans (Performance Materials: $1.1 million and Performance Chemicals: $2.6 million).
(2)
Primarily represents royalty income for technology licensing.

Interest expense, net
Three and Six Months Ended June 30, 2017 vs. 2016
 
Three Months Ended June 30,
 
Six Months Ended June 30,
In millions
2017
 
2016
 
2017
 
2016
Allocated interest expense from WestRock
$
—

 
$
2.5

 
$
—

 
$
7.2

Interest expense on capital lease obligations
1.6

 
1.5

 
3.1

 
3.1

Interest expense associated with our Facilities (1)
2.9

 
1.9

 
5.6

 
1.9

Interest income associated with our Restricted investment
(0.6
)
 
(0.3
)
 
(1.1
)
 
(0.3
)
Capitalized interest
(1.4
)
 
(0.6
)
 
(1.8
)