What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-30 compared with 2020-04-30 · 168 added, 137 removed, 278 unchanged (52% of the section changed)

6 unchanged sentences

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, 2019 (the "2019 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").

Such risks and uncertainties include, among others, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report") and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, 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.

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• adverse effects from the novel coronavirus ("COVID-19") pandemic;

• we are exposed to risks that the expected benefits from the Caprolactone Acquisition may not be realized or will not be realized within the expected time period, the risk of significant transaction costs and unknown or understated liabilities;

• we are exposed to risks that the expected benefits from the Caprolactone Acquisition may not be realized or will not be realized in the expected time period, the risk that the acquired business will not be integrated successfully and the risk of significant transaction costs and unknown or understated liabilities;

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

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• we are dependent upon attracting and retaining key personnel;

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

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

• we face competition from producers of alternative products and new technologies, and new or emerging competitors;

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

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

• the occurrence of natural disasters, such as hurricanes, winter or tropical storms, earthquakes, tornadoes, floods, fires or other unanticipated problem such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair, which could result in operational disruptions of varied duration;

• from time to time, we are called upon to protect our intellectual property rights and proprietary information though litigation and other means;

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• complications with the design or implementation of our new enterprise resource planning system;

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

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

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

22 unchanged sentences

In order to strengthen our short term liquidity and to ensure financial flexibility, in March 2020, we drew down $250 million from our revolving credit facility as a precautionary measure and also suspended our share repurchase program.

During the three months ended June 30, 2020 we paid back $155 million of this drawn down amount.

We also implemented work-from-home policies and protocols for the majority of our global salaried workforce, as well as social distancing practices to ensure the safety of our employees at our manufacturing facilities.

Further, in April 2020, we decreased production at some of our U.S.

based Performance Materials' manufacturing plants, due to COVID-19 impacts to the projected demand of our U.S.

based automotive customers.

As of March 31, 2020, we evaluated, in accordance with ASC 350 - Goodwill and Other and ASC 360 - Property, Plant, and Equipment, whether the economic impacts of the COVID-19 pandemic constitute triggering events requiring impairment or recoverability analysis to be performed.

Further, during the second quarter, we decreased production at some of our U.S.

and China based manufacturing plants due to COVID-19 impacts to the projected customer demand and implemented a cost reduction initiative further described in Note 14 .

As of March 31, 2020 and June 30, 2020, we evaluated, in accordance with ASC 350 - Goodwill and Other and ASC 360 - Property, Plant, and Equipment, whether the economic impacts of the COVID-19 pandemic constitute triggering events requiring impairment or recoverability analysis to be performed.

We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units and asset groups.

Further, we assessed the current market capitalization, forecasts and the amount of headroom in the 2019 impairment test.

We determined that a triggering event has not occurred which would require an interim impairment test to be performed.However, a lack of recovery or further deterioration in market conditions related to the general economy and the industries in which we operate, a sustained trend of weaker than anticipated financial performance, a lack of recovery or further decline in our share price for a sustained period of time, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.

While the disruptions caused by the pandemic are currently expected to be temporary, there is uncertainty regarding the virus's duration.

Further, we assessed our current market capitalization, forecasts and the amount of excess fair value above book value as calculated in our 2019 impairment test.

We determined that a triggering event has not occurred which would require an interim impairment test to be performed.

However, a lack of sustained recovery or further deterioration in market conditions related to the general economy and the industries in which we operate, a sustained trend of weaker than anticipated financial performance, or further decline in our share price for a sustained period of time, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.

While the disruptions caused by the pandemic are currently expected to be temporary, there is uncertainty regarding the virus's duration and severity.

COVID-19 has impacted, and will continue to impact, our results of operations, financial position, and liquidity.

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Results of Operations

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

In millions 2020 2019 2020 2019

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effect Price/Mix Volume

Three months ended March 31, 2020 $ 288.2 4% (1)% 2% 3%

Three Months Ended March 31, 2020 vs.

Net sales increase of $11.4 million in 2020 was primarily driven by favorable volume gains of $8.1 million (three percent of sales) and favorable pricing and product mix of $4.4 million (two percent of sales).

Both of our operating segments contributed to the volume and pricing and product mix impacts during the quarter.

The Caprolactone Acquisition, completed in the first quarter of 2019, contributed $12.3 million to the favorable volume growth during the period.

Additionally, unfavorable foreign currency exchange impacted Net sales by $1.1 million (one percent of sales), primarily related to euro and Chinese renminbi denominated sales.

For additional information regarding the impact of the Caprolactone Acquisition for the three months ended March 31, 2020 and 2019, see Segment Operating Results - Performance Chemicals section included within this MD&A.

Gross profit improvement of $17.5 million was driven by favorable sales volume contributing $3.6 million of additional gross profit, pricing and product mix improvement of $2.0 million, and decreased manufacturing costs of $4.1 million.

Three months ended June 30, 2020 $ 270.6 (23)% (1)% —% (22)%

Six months ended June 30, 2020 $ 558.8 (11)% (1)% 1% (11)%

Three Months Ended June 30, 2020 vs.

Net sales decrease of $82.2 million in 2020 was primarily driven by unfavorable volume of $80.0 million due to the impacts of COVID-19, which was slightly offset by favorable pricing and product mix of $0.1 million.

Both of our operating segments were impacted by the volume decline during the quarter.

Additionally, unfavorable foreign currency exchange impacted Net sales by $2.3 million, primarily related to euro and Chinese renminbi denominated sales.

Gross profit declined by $50.5 million was driven by unfavorable sales volume of $44.3 million, increased manufacturing costs of $6.9 million due to reduced plant throughput, and unfavorable foreign currency exchange of $0.7 million.

These negative impacts, mainly related to COVID-19, were slightly offset by favorable pricing and product mix of $1.4 million.

Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in gross profit period over period for both segments.

Six Months Ended June 30, 2020 vs.

Net sales decrease of $70.8 million in 2020 was primarily driven by unfavorable volume declines of $71.9 million due to the impacts of COVID-19, which was slightly offset by favorable pricing and product mix of $4.5 million.

operating segments were impacted by the volume.

Offsetting a portion of these volume declines is $9.8 million of favorable volume from the Caprolactone Acquisition completed during the first quarter of 2019.

Additionally, unfavorable foreign currency exchange impacted Net sales by $3.4 million, primarily related to euro and Chinese renminbi denominated sales.

For additional information regarding the impact of the Caprolactone Acquisition for the six months ended June 30, 2020 and 2019, see Segment Operating Results - Performance Chemicals section included within this MD&A.

Gross profit declined by $33.0 million was driven by unfavorable sales volume of $40.8 million and increased manufacturing costs of $2.9 million due to reduced plant throughput, both related to COVID-19, as well as unfavorable foreign currency exchange of $1.2 million.

Additionally, the prior year was negatively impacted by inventory step-up amortization related to the Caprolactone Acquisition of $8.4 million.

These positive impacts were slightly offset by unfavorable foreign currency exchange of $0.6 million.

These negative impacts were slightly offset by favorable pricing and product mix of $3.5 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

Three Months Ended March 31, 2020 vs.

Three Months Ended June 30, 2020 vs.

Selling, general and administrative ("SG&A") decreased $8.0 million in 2020 compared to 2019.

SG&A expenses as a percentage of Net sales decreased to 13.4 percent for the three months ended March 31, 2020 from 14.1 percent in 2019.

The decrease in SG&A is primarily due to a one-time decrease in employee-related incentive costs of $4.2 million.

The decrease in SG&A is due to a one-time decrease in employee-related incentive costs of $2.6 million.

Additionally, SG&A decreased due to reduced travel and other miscellaneous costs of $5.5 million, due to the COVID-19 pandemic, and decreased legal costs of $1.9 million.

This positive impact was partially offset by an increase in amortization costs associated with intangible assets acquired from the Caprolactone Acquisition (see Note 4 within the Condensed Consolidated Financial Statements for more information) and an increase in our credit allowance reserve which increased by a combined $2.0 million.

SG&A expenses as a percentage of Net sales increased to 12.7 percent for the three months ended June 30, 2020 from 12.0 percent in 2019, driven by the decline in Net sales due to COVID-19.

Six Months Ended June 30, 2020 vs.

Selling, general and administrative ("SG&A") decreased $8.6 million in 2020 compared to 2019.

The decrease in SG&A is primarily due to a decrease in employee-related incentive costs of $6.8 million.

Additionally, SG&A decreased due to reduced travel and other miscellaneous costs of $6.8 million, due to the COVID-19 pandemic.

This positive impact was partially offset by an increase in amortization costs associated with intangible assets acquired from the Caprolactone Acquisition (see Note 4 within the Condensed Consolidated Financial Statements for more information) and increased legal costs both of which increased by a combined $4.9 million.

This positive impact was partially offset by an increase in amortization costs associated with intangible assets acquired from the Caprolactone Acquisition (see Note 4 within the Condensed Consolidated Financial Statements for more information), an increase in our credit allowance reserve, and increased legal costs which increased by a combined $5.0 million.

SG&A expenses as a percentage of Net sales increased slightly to 13.1 percent for the six months ended June 30, 2020 from 13.0 percent in 2019, driven by the decline in Net sales due to COVID-19.

Research and technical expenses

Three Months Ended March 31, 2020 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 2.2 percent from 1.8 percent for the three months ended March 31, 2020 and 2019, respectively.

Three Months Ended June 30, 2020 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 2.0 percent from 1.4 percent for the three months ended June 30, 2020 and 2019, respectively.

Six Months Ended June 30, 2020 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 2.1 percent from 1.6 percent for the six months ended June 30, 2020 and 2019, respectively.

Restructuring and other (income) charges, net

Three Months Ended March 31, 2020 vs.

Restructuring and other (income) charges, net were $0.5 million and zero for the three months ended March 31, 2020 and 2019, respectively.

Three and Six Months Ended June 30, 2020 vs.

Restructuring and other (income) charges, net were $7.3 million and $7.8 million for the three and six months ended June 30, 2020, and $0.3 million for both the three and six months ended June 30, 2019, respectively.

See Note 14 within the Condensed Consolidated Financial Statements for more information.

Acquisition-related costs

Three Months Ended March 31, 2020 vs.

Acquisition-related costs of $1.3 million and $22.8 million for the three months ended March 31, 2020 and 2019, respectively, were incurred in connection with the Caprolactone Acquisition.

Three and Six Months Ended June 30, 2020 vs.

Acquisition-related costs of $0.4 million and $1.7 million for the three and six months ended June 30, 2020, and $0.8 million and $23.6 million for the three and six months ended June 30, 2019, respectively, were incurred in connection with the Caprolactone Acquisition.

See Note 4 within the Condensed Consolidated Financial Statements for more information.

Other (income) expense, net

Three Months Ended March 31, 2020 vs.

Three Months Ended March 31,

Three and Six Months Ended June 30, 2020 vs.

Three Months Ended June 30, Six Months Ended June 30,

In millions 2020 2019 2020 2019

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_______________

(1) Represents an impairment charge recorded during the three months ended March 31, 2020 related to an equity investment within our Performance Materials segment.

(1) Represents an impairment charge recorded during the three and six months ended June 30, 2020 related to an equity investment within our Performance Materials segment.

Interest expense, net

Three Months Ended March 31, 2020 vs.

Three Months Ended March 31,

Three and Six Months Ended June 30, 2020 vs.

Three Months Ended June 30, Six Months Ended June 30,

In millions 2020 2019 2020 2019

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Interest expense on revolving credit and term loan facilities (1)

6.3 10.3 14.0 17.5

Interest expense on senior notes (1)

3.4 3.6 6.9 7.1

Interest income associated with our Restricted investment (0.5) (0.5) (1.0) (1.0)

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Fixed-to-fixed cross-currency interest rate swap (2)

(0.5) (0.6) (1.3) (0.6)

Other interest (income) expense, net (0.2) (0.9) (0.4) (1.1)

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Provision (benefit) for income taxes

Three Months Ended March 31, 2020 vs.

Detail explaining the change in the effective tax rate is presented in Note 15 to the Condensed Consolidated Financial Statements.

Three and Six Months Ended June 30, 2020 vs.

For the three months ended June 30, 2020 and 2019, our effective tax rate was 20.5 percent and 21.9 percent, respectively.

Excluding discrete items, the effective rate was 20.8 percent compared to 22.1 percent in the three months ended June 30, 2020 and 2019, respectively.

For the six months ended June 30, 2020 and 2019, our effective tax rate was 18.7 percent and 16.7 percent, respectively.

Excluding discrete items, the effective rate was 20.5 percent compared to 22.2 percent in the six months ended June 30, 2020 and 2019, respectively.

An explanation of the change in the effective tax rate is presented in Note 15 to the Condensed Consolidated Financial Statements.

Segment Operating Results

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Performance Materials

In millions Three Months Ended March 31,

In millions Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Automotive Technologies product line $ 74.7 $ 113.9 $ 187.6 $ 213.6

2 unchanged sentences

Segment EBITDA $ 23.3 $ 49.3 $ 84.5 $ 100.5

Comparison of Three Months Ended March 31, 2020 vs.

Comparison of Three and Six Months Ended June 30, 2020 vs.

Percentage change vs.

2 unchanged sentences

effect Price/Mix Volume

Three months ended March 31, 2020 $ 121.1 11 % — % 5 % 6 %

Three Months Ended March 31, 2020 vs.

Segment net sales for the Performance Materials segment were $121.1 million and $109.1 million for the three months ended March 31, 2020 and 2019, respectively.

The sales increase in 2020 was primarily driven by $7.0 million (six percent of sales) in volume improvements in automotive evaporative emission canister products related to stricter environmental regulation in the Chinese, North American, and European automotive markets.

These gains were further bolstered by favorable pricing and product mix of $5.1 million (five percent of sales), partially offset by unfavorable foreign currency exchange $0.1 million (zero percent of sales).

Segment EBITDA for the Performance Materials segment was $61.2 million and $51.2 million for the three months ended March 31, 2020 and 2019, respectively.

Segment EBITDA increased $10.0 million primarily due to favorable volume, which contributed $3.8 million and favorable pricing and product mix, which contributed $3.9 million, and decreased manufacturing costs of $6.3 million.

These gains were partially offset by increased SG&A and research and technical costs of $1.5 million, primarily due to higher legal costs partially offset by lower employee-related costs.

Unfavorable foreign currency exchange, the impairment of an equity investment, and other miscellaneous expenses also impacted Segment EBITDA by $2.5 million.

Three months ended June 30, 2020 $ 84.4 (31) % — % 2 % (33) %

Six months ended June 30, 2020 $ 205.5 (11) % — % 3 % (14) %

Three Months Ended June 30, 2020 vs.

Segment net sales for the Performance Materials segment were $84.4 million and $123.1 million for the three months ended June 30, 2020 and 2019, respectively.

The sales decrease in 2020 was primarily driven by $40.6 million in volume decline in automotive products related to the COVID-19 pandemic and unfavorable foreign currency exchange $1.0 million.

These declines were slightly offset by favorable pricing and product mix of $2.9 million.

Segment EBITDA for the Performance Materials segment was $23.3 million and $49.3 million for the three months ended June 30, 2020 and 2019, respectively.

Segment EBITDA decreased $26.0 million primarily due to unfavorable volume of $27.3 million and increased manufacturing costs of $5.9 million due to reduced plant throughput.

These declines were partially offset by favorable pricing and product mix of $2.6 million and decreased SG&A and research and technical costs of $5.2 million, primarily due to lower legal costs and employee-related costs.

Favorable foreign currency exchange, the impairment of an equity investment, and other miscellaneous expenses also negatively impacted Segment EBITDA by a net of $0.6 million.

Six Months Ended June 30, 2020 vs.

Segment net sales for the Performance Materials segment were $205.5 million and $232.2 million for the six months ended June 30, 2020 and 2019, respectively.

The sales decrease of $26.7 million in 2020 was primarily driven by $33.6 million in volume decline in automotive products related to the COVID-19 pandemic and unfavorable foreign currency exchange of $1.1 million.

These declines were slightly offset by favorable pricing and product mix of $8.0 million.

Segment EBITDA for the Performance Materials segment was $84.5 million and $100.5 million for the six months ended June 30, 2020 and 2019, respectively.

Segment EBITDA decreased $16.0 million primarily due to unfavorable volume of $23.5 million.

This decline was partially offset by favorable pricing and product mix of $6.5 million, lower manufacturing costs of $0.4 million and decreased SG&A and research and technical costs of $3.7 million, primarily related to lower employee-related costs.

Unfavorable foreign currency exchange, the impairment of an equity investment, and increased other miscellaneous expenses also impacted Segment EBITDA by $3.1 million.

Performance Chemicals

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

In millions 2020 2019 2020 2019

5 unchanged sentences

Segment EBITDA $ 43.9 $ 59.0 $ 74.9 $ 91.3

Comparison of Three Months Ended March 31, 2020 vs.

Comparison of Three and Six Months Ended June 30, 2020 vs.

Percentage change vs.

2 unchanged sentences

effect Price/Mix Volume

Three months ended March 31, 2020 $ 167.1 — % (1) % — % 1 %

Three months ended June 30, 2020 $ 186.2 (19) % (1) % (1) % (17) %

Six months ended June 30, 2020 $ 353.3 (11) % — % (1) % (10) %

Caprolactone Business

The Caprolactone Business has been integrated into our Performance Chemicals segment and has been included within our results of operations since it was acquired on February 13, 2019.

The information presented below for the three months

ended March 31, 2020 includes the results of the acquisition as compared to the historical results of the three months ended March 31, 2019.

The information presented below for the three and six months ended June 30, 2020 includes the results of the acquisition as compared to the historical results of the three and six months ended June 30, 2019.

For a pro forma comparative analysis of 2020 versus 2019 results, refer to the section below titled "Performance Chemicals Pro Forma Financial Results with the Caprolactone Business."

Three Months Ended March 31, 2020 vs.

Segment net sales for the Performance Chemicals segment were $167.1 million and $167.7 million for the three months ended March 31, 2020 and 2019, respectively.

The sales decrease was driven mainly by unfavorable pricing and product mix of $0.7 million (zero percent of sales), driven by a decline in industrial specialties ($2.2 million), which was partially offset by favorable pricing and product mix in pavement technologies ($1.5 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $1.0 million (one percent of sales).

Favorable volume of $1.1 million (one percent of sales), consisting of a favorable increase in engineered polymers ($12.3 million), oilfield technologies ($1.0 million) and pavement technologies products ($0.9 million), and volume declines in industrial specialties ($13.1 million), partially offset the decline from foreign exchange and pricing and product mix.

Segment EBITDA for the Performance Chemicals segment was $31.0 million and $32.3 million for the three months ended March 31, 2020 and 2019, respectively.

Segment EBITDA decreased by $1.3 million primarily due to a decline in pricing and product mix of $1.9 million, unfavorable foreign exchange and other miscellaneous costs of $3.4 million, and decreased volumes of $0.2 million.

These unfavorable operating results were partially offset by lower manufacturing costs of $0.3 million and favorable SG&A costs of $3.9 million.

Three Months Ended June 30, 2020 vs.

Segment net sales for the Performance Chemicals segment were $186.2 million and $229.7 million for the three months ended June 30, 2020 and 2019, respectively.

The sales decrease was driven mainly by unfavorable volume of $39.4 million, consisting of declines in industrial specialties ($21.2 million), oilfield technologies ($15.3 million), engineered polymers ($2.6 million), and pavement technologies ($0.3 million).

Sales also decreased due to unfavorable pricing and product mix of $2.8 million, driven by declines in industrial specialties ($2.7 million) and oilfield technologies ($0.1 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $1.3 million.

Segment EBITDA for the Performance Chemicals segment was $43.9 million and $59.0 million for the three months ended June 30, 2020 and 2019, respectively.

Segment EBITDA decreased by $15.1 million primarily due to a decline in volume of $17.0 million, unfavorable pricing and product mix of $1.2 million, and unfavorable foreign exchange and other miscellaneous costs of $0.5 million.

These unfavorable operating results were partially offset by lower manufacturing costs of $0.5 million and lower SG&A costs of $3.1 million.

Six Months Ended June 30, 2020 vs.

Segment net sales for the Performance Chemicals segment were $353.3 million and $397.4 million for the six months ended June 30, 2020 and 2019, respectively.

The sales decrease of $44.1 million was driven mainly by unfavorable volume of $38.3 million, consisting of volume increases in engineered polymers ($9.8 million) and pavement technologies products ($0.5 million), and volume declines in industrial specialties ($34.3 million) and oilfield technologies ($14.3 million).

Segment net sales were also impacted by unfavorable pricing and product mix of $3.5 million, driven by a decline in industrial specialties ($4.9 million) and oilfield technologies ($0.1 million), which was partially offset by favorable pricing and product mix in pavement technologies ($1.5 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $2.3 million.

Segment EBITDA for the Performance Chemicals segment was $74.9 million and $91.3 million for the six months ended June 30, 2020 and 2019, respectively.

Segment EBITDA decreased by $16.4 million primarily due to a decline in volume of $17.3 million, unfavorable pricing and product mix of $3.0 million, and unfavorable foreign exchange and other miscellaneous costs of $3.8 million.

These unfavorable operating results were partially offset by lower manufacturing costs of $0.7 million and lower SG&A costs of $7.0 million.

Performance Chemicals Pro Forma Financial Results with the Caprolactone Business

We believe that reviewing our operating results by combining actual and pro forma results for our Performance Chemicals segment is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance.

Our pro forma segment information includes adjustments as if the acquisition had occurred on January 1, 2019.

Our pro forma results are adjusted for the effects of acquisition accounting but do not include adjustments for costs related to integration activities, cost savings or synergies that might be achieved by the combined businesses.

Pro forma amounts presented are not necessarily indicative of what our results would have been had we operated the Caprolactone Business since January 1, 2019, nor will the pro forma amounts necessarily be indicative of our future results.

Performance Chemicals Pro Forma Financial Results

Three Months Ended March 31,

Pro forma amounts presented are not necessarily indicative of what our results would have been had we operated the Caprolactone Business since January 1, 2019, nor are the pro forma amounts necessarily indicative of future results.

Performance Chemicals Pro Forma Financial Results Comparison

Six Months Ended June 30,

In millions 2020 2019

2 unchanged sentences

Caprolactone Business, pro forma (2)

Pro Forma Combined Net Sales (3)

Net Sales (3)

$ 353.3 $ 415.1

3 unchanged sentences

Caprolactone Business, pro forma (2)

Pro Forma Combined Segment EBITDA (3)

Segment EBITDA (3)

$ 74.9 $ 96.8

5 unchanged sentences

(3) The pro forma combined results are not necessarily indicative of what the results would have been had we acquired the Caprolactone Business on January 1, 2019, nor are they indicative of future results.

Performance Chemicals Pro Forma Combined Net Sales

Three Months Ended March 31,

Performance Chemicals Net Sales Comparison

Six Months Ended June 30,

In millions 2020 2019

3 unchanged sentences

Engineered Polymers product line 67.9 76.2

Pro Forma Combined Net Sales - Performance Chemicals $ 167.1 $ 185.4

Comparison of Three Months Ended March 31, 2020 vs.

Net Sales - Performance Chemicals $ 353.3 $ 415.1

Comparison of Six Months Ended June 30, 2020 vs.

Percentage change vs.

Performance Chemicals (In millions, except percentages)

Pro Forma Combined Net sales Total change Currency

Net sales Total change Currency

effect Price/Mix Volume

Three months ended March 31, 2020 $ 167.1 (10) % (1) % — % (9) %

Pro Forma Combined Results - Three Months Ended March 31, 2020 vs.

Pro Forma Combined Net Sales for the Performance Chemicals segment were $167.1 million and $185.4 million for the three months ended March 31, 2020 and 2019, respectively.

The Pro Forma Combined Net Sales decrease was driven by unfavorable volume of $16.6 million (nine percent of sales), which consisted of unfavorable volumes in industrial specialties ($13.1 million), engineered polymers ($5.4 million), offset partially by volume increases in pavement technologies ($0.9 million) and oilfield technologies ($1.0 million).

Also contributing to the decline was unfavorable pricing and product mix of $0.7 million (zero percent of sales), driven by unfavorable pricing and product mix in industrial specialties ($2.2 million), partially offset by favorable price and product mix in pavement technologies ($1.5 million).

Unfavorable foreign currency exchange also impacted Pro Forma Combined Net Sales by $1.0 million (one percent of sales).

Pro Forma Combined Segment EBITDA for the Performance Chemicals segment was $31.0 million and $37.8 million for the three months ended March 31, 2020 and 2019, respectively.

Pro Forma Combined Segment EBITDA decreased by $6.8 million primarily due to decreased volumes of $5.6 million, increased manufacturing, freight and warehousing costs of $2.1 million, unfavorable pricing and product mix of $1.9 million, which were partially offset by $5.6 million of favorable SG&A costs.

Unfavorable foreign currency exchange and other miscellaneous income also impacted Pro Forma Combined Segment EBITDA by $2.8 million.

Six months ended June 30, 2020 $ 353.3 (15) % (1) % (1) % (13) %

Results Comparison - Six Months Ended June 30, 2020 vs.

Segment Net Sales for the Performance Chemicals segment were $353.3 million and $415.1 million for the six months ended June 30, 2020 and 2019, respectively.

The Net sales decrease was driven by unfavorable volume of $56.0 million, which consisted of unfavorable volumes in industrial specialties ($34.3 million), oilfield technologies ($14.3 million),

and engineered polymers ($7.9 million), offset partially by a volume increase in pavement technologies ($0.5 million).

Also contributing to the decline was unfavorable pricing and product mix of $3.5 million, driven by unfavorable pricing and product mix in industrial specialties ($4.9 million) and oilfield technologies ($0.1 million), partially offset by favorable pricing and product mix in pavement technologies ($1.5 million).

Unfavorable foreign currency exchange also impacted Net sales by $2.3 million.

Segment EBITDA for the Performance Chemicals segment was $74.9 million and $96.8 million for the six months ended June 30, 2020 and 2019, respectively.

Segment EBITDA decreased by $21.9 million primarily due to decreased volumes of $22.7 million, increased manufacturing, freight and warehousing costs of $1.6 million, unfavorable pricing and product mix of $3.0 million, which were partially offset by $8.7 million of lower SG&A costs.

Unfavorable foreign currency exchange and other miscellaneous income also impacted Segment EBITDA by $3.3 million.

Use of Non-GAAP Financial Measure - Adjusted EBITDA

Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance GAAP and has provided a reconciliation to net income, the most directly comparable financial measure calculated in accordance with GAAP.

Ingevity has presented the financial measure, Adjusted EBITDA, defined below, which has not been prepared in accordance with 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 or as a substitute for the most directly comparable financial measure calculated in accordance with GAAP.

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Reconciliation of Net Income (Loss) to Adjusted EBITDA

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

In millions 2020 2019 2020 2019

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Acquisition and other-related costs (1)

0.4 0.8 1.7 32.0

Adjusted EBITDA (Non-GAAP)

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_______________

(1) These charges are associated with the acquisition and integration of the Caprolactone Business for both periods and also charges associated with the acquisition and integration of Georgia-Pacific's Pine Chemical business during the three months ended March 31, 2019.

See below for more detail on the charges incurred.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

In millions 2020 2019 2020 2019

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Adjusted EBITDA

Three Months Ended March 31, 2020 vs.

Three and Six Months Ended June 30, 2020 vs.

The factors that impacted adjusted EBITDA period to period are the same factors that affected earnings discussed in the Results of Operations and Segment Operating Results sections included within this MD&A.

Total Company Outlook

Current Company Outlook

In millions FY2020 Guidance

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Adjusted EBITDA $310 - $350

Capital Expenditures ~$85

Operating Cash Flow $215 - $255

To account for the uncertainties related to COVID-19, we are revising and broadening our guidance for sales to between $1.10 billion and $1.20 billion and Adjusted EBITDA from between $310 million and $350 million.

We’ll be controlling our capital expenditures and currently plan to spend about $85 million, down from our previous guidance.

As such, we expect operating cash flow for the year to be between $215 million and $255 million.

Our revised guidance range incorporates three potential outcomes for the year.

It is difficult to determine the exact rates at which the auto consumer will return to buying in each region of the world.

China’s current sales represent a rapid recovery from their early Q1 2020 shut-down.

However, it is difficult to know a) if this will be sustained in China, and b) if this template will be followed in other regions of the world.

Therefore, we have developed three scenarios – a low, mid, and high case – each reflective of assumptions around the rate of auto sales in North America, China and Europe for the remainder of the year.

These scenarios represent our best, current thinking on the markets we are facing.

It is important to note a significant assumption in all three scenarios – we do not forecast a full recovery of the auto market to 2019 levels, instead we have estimated a recovery to 75-85 percent of 2019 levels are various points throughout the year.

Our low-end case, most punitive case, assumes that oil prices remain in the high teens/lower $20 per barrel and that the auto market does not recover to the 75-85 percent level until sometime in Q4 2020.

Our mid-range case maintains the same assumptions regarding oil prices, but assumes that the auto market stabilizes at these assumed levels in the middle of Q3 2020.

Our high-end case assumes some stabilization of oil in the mid-$20 range and the auto market reaches the 75-85 percent level in the early part of Q3 2020.

Currently, we do not see a recovery of the auto market to 2019 levels until 2021 or beyond.

We do reserve the right to adjust these ranges, up or down, over the course of the year as we gain more clarity.

In addition, we estimate Q2 2020 net sales will be down 25 to 30 percent and Adjusted EBITDA will be down 35 to 40 percent versus Q2 2019.

This guidance is driven by the shutdown of auto production in Europe and North America, as well as current sales estimates in China for the quarter.

These numbers assume North American and European manufacturers resume production on the dates announced and at reduced rates as estimated by us and other forecasts.

Capital Expenditures ~$85

Free Cash Flow* $130 - $170

*Calculated as Operating Cash Flow less Capital Expenditures

While we continue to navigate through uncertainties due to COVID-19, we are reiterating our prior guidance of sales between $1.10 billion and $1.20 billion and Adjusted EBITDA between $310 million and $350 million.

Additionally, we

continue to expect capital expenditures of $85 million, and operating cash flow for the year of between $215 million and $255 million.

A reconciliation of net income to adjusted EBITDA as projected for 2020 is not provided.

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additional acquisition and other related costs in connection with the acquisition of the Caprolactone Business;

and additional pension and postretirement settlement and curtailment (income) charges.

additional pension and postretirement settlement and curtailment (income) charges;

and revisions due to future guidance and assessment of U.S.

Additionally, discrete tax items could drive variability in our projected effective tax rate.

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In addition, from time to time we may repurchase any of our outstanding 4.50 percent senior unsecured notes due in 2026 in open market or privately negotiated transactions or otherwise.

We believe these sources of liquidity will be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months.

As of March 31, 2020, our undrawn capacity under our revolving credit facility was $372.9 million, however if fully drawn, a portion of this capacity may need to be repaid by June 30, 2020 to comply with existing debt covenants.

We believe our sources of liquidity will be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months.

As of June 30, 2020, our undrawn capacity under our revolving credit facility was $527.8 million, however if fully drawn, a portion of this capacity may need to be repaid by September 30, 2020 to comply with existing debt covenants.

In addition, we also evaluate and consider strategic acquisitions, and joint ventures, as well as other transactions to create stockholder value and enhance financial performance.

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In connection with such transactions, or to fund other anticipated uses of cash, we may modify our existing revolving credit and term loan facilities, seek additional debt financing, issue equity securities, or some combination thereof.

Cash and cash equivalents totaled $302.7 million at March 31, 2020, which includes funds from the $250 million draw down from our revolving credit facility during Q1 2020 to strengthen short term liquidity and to ensure financial flexibility in light of the uncertainty caused by the COVID-19 pandemic.

Management continuously monitors deposit concentrations and the

credit quality of the financial institutions that hold Ingevity's cash and cash equivalents, as well as the credit quality of its insurance providers, customers and key suppliers.

Cash and cash equivalents totaled $177.6 million at June 30, 2020, which includes the remaining $95 million outstanding of our $250 million draw down from our revolving credit facility during Q1 2020 to strengthen short term liquidity and to ensure financial flexibility in light of the uncertainty caused by the COVID-19 pandemic.

Management continuously monitors deposit concentrations and the credit quality of the financial institutions that hold Ingevity's cash and cash equivalents, as well as the credit quality of its insurance providers, customers and key suppliers.

Due to the global nature of our operations, a portion of our cash is held outside the U.S.

The cash and cash equivalents balance at March 31, 2020 included $52.5 million held by our foreign subsidiaries.

The cash and cash equivalents balance at June 30, 2020 included $62.9 million held by our foreign subsidiaries.

Cash and earnings of our foreign subsidiaries are generally used to finance our foreign operations and capital expenditures.

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Share Repurchases

On February 28, 2020, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock, and rescinded the prior two authorizations from 2017 and 2018 of $100.0 million and $350.0 million each, respectively.

The share repurchase program does not include a specific timetable or price targets and may be suspended or terminated at any time.

During March 2020, we did suspend share repurchases in light of the uncertainty caused by the COVID-19 pandemic.

Shares 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.

At March 31, 2020, $467.6 million remained unused under our Board-authorized repurchase program.

During March 2020, we suspended share repurchases in light of the uncertainty caused by the COVID-19 pandemic.

At June 30, 2020, $467.6 million remained unused under our Board-authorized repurchase program.

Capital Expenditures

Projected 2020 capital expenditures are $85 milli on .

We have no material commitments associated with these projected capital expenditures as of March 31, 2020 .

Cash flow comparison of Three Months Ended March 31, 2020 and 2019

Three Months Ended March 31,

We have no material commitments associated with these projected capital expenditures as of June 30, 2020 .

Cash flow comparison of Six Months Ended June 30, 2020 and 2019

Six Months Ended June 30,

In millions 2020 2019

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Cash flows provided by (used in) operating activities

During the first three months of 2020, cash flow provided by operations increased primarily due to higher earnings, improved collection of accounts receivable, and a decrease in the change in accrued payroll and employee benefits.

Below provides a description of the changes to working capital during the first three months of 2020 (i.e.

During the first six months of 2020, cash flow provided by operations increased primarily due to lower accounts receivable due sales being lower than expected because of COVID-19 and a decrease in the change in accrued payroll and employee benefits.

Below provides a description of the changes to working capital during the first six months of 2020 (i.e.

current assets and current liabilities).

Current Assets and Liabilities

In millions March 31, 2020 December 31, 2019

In millions June 30, 2020 December 31, 2019

Cash and cash equivalents $ 177.6 $ 56.5

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Total current assets $ 579.7 $ 463.2

Current assets as of March 31, 2020, increased $261.3 million compared to December 31, 2019, primarily due to increases in cash and inventories.

Current assets as of June 30, 2020, increased $116.5 million compared to December 31, 2019, primarily due to increases in cash and inventories.

Cash and cash equivalents increased by $121.1 million, compared to the balance at December 31, 2019, mainly due to the drawdown of our revolving credit facility to strengthen our short term liquidity in response to the uncertainties caused by the COVID-19 pandemic.

Inventories increased by $23.7 million mainly due to the build of inventory for forecasted sales, as well as lower than expected sales in the quarter ended March 31, 2020.

These increases were offset by a decrease of $9.2 million in Accounts receivable, net as of March 31, 2020, related to improved collections during the quarter ended March 31, 2020, compared to the quarter ended December 31, 2019.

Additionally, Prepaid and other current assets decreased by $0.6 million, primarily related to higher tax receivables.

In millions March 31, 2020 December 31, 2019

Inventories increased by $11.0 million mainly due to lower than expected sales in the quarter ended June 30, 2020.

These increases were offset by a decrease of $17.9 million in Accounts receivable, net as of June 30, 2020, related to lower sales during the quarter ended June 30, 2020, compared to the quarter ended December 31, 2019.

Additionally, Prepaid and other current assets increased by $2.3 million, primarily related to prepaid services and insurance.

In millions June 30, 2020 December 31, 2019

Accounts payable $ 78.7 $ 99.1

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Total current liabilities $ 187.9 $ 215.5

Current liabilities as of March 31, 2020, decreased by $7.8 million compared to December 31, 2019, primarily driven by a decrease in Accrued payroll and employee benefits, Accrued expenses, Current operating lease liabilities, and Notes payable and current maturities of long-term debt, offset partially by increases in Accounts payable and Income taxes payable.

Current liabilities as of June 30, 2020, decreased by $27.6 million compared to December 31, 2019, primarily driven by a decrease in Accounts payable, Accrued payroll and employee benefits, Current operating lease liabilities, and Notes payable and current maturities of long-term debt, offset partially by increases in Accrued expenses and Income taxes payable.

Cash flows provided by (used in) investing activities

Cash used by investing activities in the three months ended March 31, 2020 was $20.2 million and was primarily driven by capital expenditures.

In the three months ended March 31, 2020 and 2019, capital spending included the base maintenance capital supporting ongoing operations and growth spending primarily related to the construction of Performance Materials activated carbon manufacturing facilities in Waynesboro, Georgia, Wickliffe, Kentucky, and Covington, Virginia as well as expansion at our Performance Chemicals Warrington, United Kingdom facility.

Capital expenditure categories Three Months Ended March 31,

Cash used by investing activities in the six months ended June 30, 2020 was $37.4 million and was primarily driven by capital expenditures.

In the six months ended June 30, 2020 and 2019, capital spending included the base maintenance capital supporting ongoing operations and growth spending primarily related to the construction of Performance Materials activated carbon manufacturing facilities in Waynesboro, Georgia, Wickliffe, Kentucky, and Covington, Virginia as well as expansion at our Performance Chemicals Warrington, United Kingdom facility.

Capital expenditure categories Six Months Ended June 30,

In millions 2020 2019

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Cash flows provided by (used in) financing activities

Cash provided by financing activities in the three months ended March 31, 2020 was $203.2 million and was driven by net borrowings of $243.8 million from our revolving credit facility, offset by payments on long-term borrowings of $4.7 million, tax payments related to withholdings on restricted stock unit vestings of $3.1 million, and the repurchase of common stock of $32.4 million.

Cash provided by financing activities in the three months ended March 31, 2019 was $539.4 million and was primarily driven by net borrowings of $293.1 million from our revolving credit facility and $375.0 million from the amendment to our Term Loan Facility, offset by payments on long-term borrowings of $113.1 million, tax payments related to withholdings on restricted stock unit vestings of $14.3 million, and the repurchase of common stock of $3.3 million.

Cash provided by financing activities in the six months ended June 30, 2020 was $45.9 million and was driven by net borrowings of $88.8 million under our revolving credit facility, offset by payments on long-term borrowings of $9.4 million, tax payments related to withholdings on restricted stock unit vestings of $3.0 million, and the repurchase of common stock of $32.4 million.

Cash provided by financing activities in the six months ended June 30, 2019 was $504.8 million and was primarily driven by net borrowings of $257.5 million from our revolving credit facility and $375.0 million from the amendment to our term loan facility, offset by payments on long-term borrowings of $113.1 million, tax payments related to withholdings on restricted stock unit vestings of $14.3 million, and the repurchase of common stock of $3.3 million.

Off-Balance Sheet Arrangements

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Information related to our contractual commitments at December 31, 2019 can be found in a table included within Part II, Item 7 of our 2019 Annual Report.

There have been no material changes to our contractual commitments during the three months ended March 31, 2020.

Except as described above, there have been no material changes to our contractual commitments during the six months ended June 30, 2020.

New Accounting Guidance

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis