What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-29 compared with 2020-07-30 · 155 added, 137 removed, 309 unchanged (49% 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 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").

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 quarters ended March 31, 2020 and September 30, 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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We report in two business segments, Performance Materials and Performance Chemicals.

Our Performance Materials segment consists of our automotive technologies and process purifications product lines.

Our Performance Materials segment consists of our automotive technologies and process purification product lines.

Performance Materials manufactures products in the form of powder, granular, extruded pellets, extruded honeycombs, and activated carbon sheets.

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Recent Developments

2020 Senior Notes

On October 28, 2020, we issued $550.0 million aggregate principal amount of 3.875 percent senior unsecured notes due 2028 (the “Notes”).

The Notes were issued pursuant to an indenture dated as of October 28, 2020 (the “Indenture”), by and among Ingevity, the subsidiary guarantors party thereto and U.S.

Bank National Association, as trustee.

The Notes were offered and sold only to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and to certain non-U.S.

persons outside the U.S.

pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”).

Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the U.S.

absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.

The net proceeds from the sale of the Notes, after deducting anticipated financing fees of $8 million were approximately $542 million.

We intend to use the net proceeds from the sale of the Notes to repay our existing $375.0 million term loan facility due in August 2022, with the remainder being utilized to repay outstanding balances under our revolving credit facility.

Interest payments on the Notes are due semiannually in arrears on November 1st and May 1st of each year, beginning on May 1, 2021, at a rate of 3.875 percent per year.

The Notes will mature on November 1, 2028.

Revolving Credit Facility

On October 28, 2020, we entered into Amendment no.

5 (the “Amendment no.

5") to our existing credit agreement, dated as of March 7, 2016 (“Credit Agreement”) (as amended, supplemented or otherwise modified prior to the date hereof, including pursuant to Amendment no.

4, dated as of March 7, 2019, Amendment no.

3, dated as of March 7, 2019, the Incremental Facility Agreement and Amendment no.

2, dated as of August 7, 2018, the Incremental Facility Agreement and Amendment No.

1, dated as of August 21, 2017, and the Credit Agreement).

Among other things, Amendment no.

5 extends the maturity date with respect to our revolving credit facility from August 7, 2023 to October 28, 2025 and reduced the aggregate principal amount of revolving commitments thereunder from $750.0 million to $500.0 million.

Coronavirus Pandemic

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However, our facilities - as well as the operations of our suppliers, customers, third-party sales representatives, and distributors - have been, and will continue to be, disrupted by governmental and private sector responses to COVID-19.

This includes

business shutdowns, work-from-home orders and social distancing protocols, travel or health-related restrictions, as well as quarantines, self-isolations, and disruptions to transportation channels.

This includes business shutdowns, work-from-home orders and social distancing protocols, travel or health-related restrictions, as well as quarantines, self-isolations, and disruptions to transportation channels.

On March 27, 2020, the U.S.

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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.

During the three and nine months ended September 30, 2020, we paid back $50 million and $205 million, respectively, 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, 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 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.

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

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

During the third quarter, we resumed normal production at all manufacturing plants as customer demand improved.

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.

On September 1, 2020, John C.

Fortson was named the Company’s President and chief executive officer, and joined the Company’s Board of Directors.

He will continue to serve as the Company’s chief financial officer and treasurer on an interim basis until a permanent replacement is named.

During the first quarter of 2020, at our Wickliffe, Kentucky Performance Materials' manufacturing facility, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO-CLC ratified a three-year collective bargaining agreement ("CBA"), which expires February 1, 2023.

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Results of Operations

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

Three Months Ended September 30, Nine Months Ended September 30,

In millions 2020 2019 2020 2019

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effect Price/Mix Volume

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.

Three months ended September 30, 2020 $ 331.7 (8)% —% 2% (10)%

Nine months ended September 30, 2020 $ 890.5 (10)% —% 1% (11)%

Three Months Ended September 30, 2020 vs.

Net sales decrease of $28.2 million in 2020 was primarily driven by unfavorable volume of $34.3 million due to the impacts of COVID-19, which was slightly offset by favorable pricing and product mix of $5.5 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.

A volume decline in Performance Chemicals, was partially offset by an increase in Performance Materials.

Additionally, favorable foreign currency exchange impacted Net sales by $0.6 million, primarily related to euro and Chinese renminbi denominated sales.

Gross profit increased by $0.1 million driven by favorable pricing and product mix of $10.5 million and decreased manufacturing costs of $0.6 million due to reduced spending, offset by unfavorable sales volume of $10.7 million, mainly related to COVID-19, and unfavorable foreign currency exchange of $0.3 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.

Nine Months Ended September 30, 2020 vs.

Net sales decrease of $99.0 million in 2020 was primarily driven by unfavorable volume declines in both of our segments for a combined impact of $106.2 million due to the impacts of COVID-19, which was slightly offset by favorable pricing and product mix of $10.0 million.

Additionally, favorable foreign currency exchange impacted Net sales by $2.8 million, primarily related to euro and Chinese renminbi denominated sales.

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

Gross profit decline of $32.9 million was driven by unfavorable sales volume of $51.5 million and increased manufacturing costs of $2.3 million due to reduced plant throughput, both related to COVID-19, as well as unfavorable foreign currency exchange of $1.5 million.

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

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Selling, general and administrative expenses

Three Months Ended June 30, 2020 vs.

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

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

Three Months Ended September 30, 2020 vs.

Selling, general and administrative expenses ("SG&A") decreased $5.8 million in 2020 compared to 2019.

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

Additionally, SG&A decreased due to reduced travel and other miscellaneous costs of $2.1 million, due to the COVID-19 pandemic, and decreased legal costs of $2.4 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.

These positive impacts were 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 $1.3 million.

SG&A expenses as a percentage of Net sales decreased to 10.5 percent for the three months ended September 30, 2020 from 11.3 percent in 2019, driven by lower spending due to COVID-19 and decreased employee-related costs.

Nine Months Ended September 30, 2020 vs.

SG&A decreased $14.4 million in 2020 compared to 2019.

The decrease in SG&A is primarily due to a decrease in employee-related incentive costs of $9.4 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), 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.

Additionally, SG&A decreased due to reduced travel and other miscellaneous costs of $8.9 million, due to the COVID-19 pandemic, and decreased legal costs of $2.3 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 $6.2 million.

SG&A expenses as a percentage of Net sales decreased slightly to 12.1 percent for the nine months ended September 30, 2020 from 12.4 percent in 2019, driven by the lower spending due to COVID-19 and decreased employee-related costs.

Research and technical expenses

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.

Three Months Ended September 30, 2020 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 1.6 percent from 1.4 percent for the three months ended September 30, 2020 and 2019, respectively.

Nine Months Ended September 30, 2020 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 1.9 percent from 1.5 percent for the nine months ended September 30, 2020 and 2019, respectively.

Restructuring and other (income) charges, net

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.

Three and Nine Months Ended September 30, 2020 vs.

Restructuring and other (income) charges, net were $5.5 million and $13.3 million for the three and nine months ended September 30, 2020, and $1.7 million and $2.0 million for the three and nine months ended September 30, 2019, respectively.

See Note 14 within the condensed consolidated financial statements for more information.

Acquisition-related costs

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.

Three and Nine Months Ended September 30, 2020 vs.

Acquisition-related costs of zero and $1.7 million for the three and nine months ended September 30, 2020, and $1.3 million and $24.9 million for the three and nine months ended September 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 and Six Months Ended June 30, 2020 vs.

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

Three and Nine Months Ended September 30, 2020 vs.

Three Months Ended September 30, Nine Months Ended September 30,

In millions 2020 2019 2020 2019

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_______________

(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.

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

Interest expense, net

Three and Six Months Ended June 30, 2020 vs.

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

Three and Nine Months Ended September 30, 2020 vs.

Three Months Ended September 30, Nine Months Ended September 30,

In millions 2020 2019 2020 2019

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Provision (benefit) for income taxes

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.

Three and Nine Months Ended September 30, 2020 vs.

For the three months ended September 30, 2020 and 2019, our effective tax rate was 20.7 percent and 22.6 percent, respectively.

Excluding discrete items, the effective rate was 20.3 percent compared to 22.6 percent in the three months ended September 30, 2020 and 2019, respectively.

For the nine months ended September 30, 2020 and 2019, our effective tax rate was 19.7 percent and 19.3 percent, respectively.

Excluding discrete items, the effective rate was 20.4 percent compared to 22.3 percent in the nine months ended September 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.

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Performance Materials

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

In millions Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Segment EBITDA $ 80.4 $ 54.2 $ 164.9 $ 154.7

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

Comparison of Three and Nine Months Ended September 30, 2020 vs.

Percentage change vs.

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effect Price/Mix Volume

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.

Three months ended September 30, 2020 $ 143.8 10 % — % 3 % 7 %

Nine months ended September 30, 2020 $ 349.3 (4) % — % 3 % (7) %

Three Months Ended September 30, 2020 vs.

Segment net sales for the Performance Materials segment were $143.8 million and $130.2 million for the three months ended September 30, 2020 and 2019, respectively.

The sales increase in 2020 was primarily driven by $9.3 million in volume growth in automotive products, as well as favorable pricing and product mix of $3.6 million and foreign currency exchange $0.7 million.

Segment EBITDA for the Performance Materials segment was $80.4 million and $54.2 million for the three months ended September 30, 2020 and 2019, respectively.

Segment EBITDA increased $26.2 million primarily due to favorable volume of $6.5 million, decreased manufacturing costs of $3.9 million, favorable pricing and product mix of $8.6 million and decreased SG&A and research and technical expenses of $3.0 million, primarily due to lower legal costs and employee-related costs.

Favorable foreign currency exchange and other miscellaneous income also contributed to the increase in Segment EBITDA by $4.2 million.

Nine Months Ended September 30, 2020 vs.

Segment net sales for the Performance Materials segment were $349.3 million and $362.4 million for the nine months ended September 30, 2020 and 2019, respectively.

The sales decrease of $13.1 million in 2020 was primarily driven by $24.3 million in volume decline in automotive products related to the COVID-19 pandemic and unfavorable foreign currency exchange of $0.4 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.

These declines were partially offset by favorable pricing and product mix of $11.6 million.

Segment EBITDA for the Performance Materials segment was $164.9 million and $154.7 million for the nine months ended September 30, 2020 and 2019, respectively.

Segment EBITDA increased $10.2 million primarily due to favorable pricing and product mix of $15.1 million, lower manufacturing costs of $4.3 million and decreased SG&A and research and technical expenses of $6.7 million, primarily related to lower employee-related costs.

These increases were partially offset by unfavorable volume of $17.0 million.

Favorable foreign currency exchange, the impairment of an equity investment, and increased other miscellaneous expenses also impacted Segment EBITDA by a net of $1.1 million.

Performance Chemicals

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

Three Months Ended September 30, Nine Months Ended September 30,

In millions 2020 2019 2020 2019

5 unchanged sentences

Segment EBITDA $ 47.2 $ 59.8 $ 122.1 $ 151.1

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

Comparison of Three and Nine Months Ended September 30, 2020 vs.

Percentage change vs.

2 unchanged sentences

effect Price/Mix Volume

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

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

Three months ended September 30, 2020 $ 187.9 (18) % — % 1 % (19) %

Nine months ended September 30, 2020 $ 541.2 (14) % (1) % — % (13) %

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 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.

The information presented below for the nine months ended September 30, 2020 includes the full results of the acquisition as compared to the historical results of the nine months ended September 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 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).

Three Months Ended September 30, 2020 vs.

Segment net sales for the Performance Chemicals segment were $187.9 million and $229.7 million for the three months ended September 30, 2020 and 2019, respectively.

The sales decrease was driven mainly by unfavorable volume of $43.6 million, consisting of declines in industrial specialties ($24.1 million), oilfield technologies ($14.0 million), and engineered polymers ($7.1 million), offset slightly by an increase in pavement technologies ($1.6 million).

This decline in volume was partially offset by favorable pricing and product mix of $1.9 million, driven by increases in pavement technologies ($1.2 million), industrial specialties ($0.3 million) and oilfield technologies ($0.4 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $0.1 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).

Segment EBITDA for the Performance Chemicals segment was $47.2 million and $59.8 million for the three months ended September 30, 2020 and 2019, respectively.

Segment EBITDA decreased by $12.6 million primarily due to a decline in volume of $17.2 million, higher manufacturing costs of $1.7 million due to reduced plant throughput, and unfavorable foreign currency exchange and increased other miscellaneous costs of $0.4 million.

These unfavorable operating results were partially offset by favorable pricing and product mix of $1.9 million and lower SG&A expenses of $4.8 million.

Nine Months Ended September 30, 2020 vs.

Segment net sales for the Performance Chemicals segment were $541.2 million and $627.1 million for the nine months ended September 30, 2020 and 2019, respectively.

The sales decrease of $85.9 million was driven mainly by unfavorable volume of $81.9 million, consisting of volume increases in engineered polymers ($2.7 million) and pavement technologies products ($2.1 million), and volume declines in industrial specialties ($58.4 million) and oilfield technologies

($28.3 million).

Segment net sales were also impacted by unfavorable pricing and product mix of $1.6 million, driven by a decline in industrial specialties ($4.6 million), which was partially offset by favorable pricing and product mix in oilfield technologies ($0.3 million) and pavement technologies ($2.7 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $2.4 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.

Segment EBITDA for the Performance Chemicals segment was $122.1 million and $151.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Segment EBITDA decreased by $29.0 million primarily due to a decline in volume of $34.5 million, unfavorable pricing and product mix of $1.1 million, higher manufacturing costs of $1.0 million due to reduced plant throughput, and unfavorable foreign currency exchange and increased other miscellaneous costs of $4.2 million.

These unfavorable operating results were partially offset by lower SG&A expenses of $11.8 million.

Performance Chemicals Pro Forma Financial Results with the Caprolactone Business

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Performance Chemicals Pro Forma Financial Results Comparison

Six Months Ended June 30,

Nine Months Ended September 30,

In millions 2020 2019

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(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 Net Sales Comparison

Six Months Ended June 30,

Performance Chemicals Pro Forma Net Sales Comparison

Nine Months Ended September 30,

In millions 2020 2019

4 unchanged sentences

Net Sales - Performance Chemicals $ 541.2 $ 644.8

Comparison of Six Months Ended June 30, 2020 vs.

Pro Forma Comparison of Nine Months Ended September 30, 2020 vs.

Percentage change vs.

2 unchanged sentences

effect Price/Mix Volume

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).

Nine months ended September 30, 2020 $ 541.2 (16) % — % — % (16) %

Pro Forma Results Comparison - Nine Months Ended September 30, 2020 vs.

Segment Net Sales for the Performance Chemicals segment were $541.2 million and $644.8 million for the nine months ended September 30, 2020 and 2019, respectively.

The Net sales decrease was driven mainly by unfavorable volume of $99.6 million, which consisted of unfavorable volumes in industrial specialties ($58.4 million), oilfield technologies ($28.3

million), and engineered polymers ($15.0 million), offset partially by a volume increase in pavement technologies ($2.1 million).

Also contributing to the decline was unfavorable pricing and product mix of $1.6 million, driven by unfavorable pricing and product mix in industrial specialties ($4.6 million), offset partially by favorable pricing and product mix in oilfield technologies ($0.3 million) and pavement technologies ($2.7 million).

Unfavorable foreign currency exchange also impacted Net sales by $2.4 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.

Segment EBITDA for the Performance Chemicals segment was $122.1 million and $156.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Segment EBITDA decreased by $34.5 million primarily due to decreased volumes of $39.9 million, increased manufacturing cost stemming from reduced plant throughput of $3.3 million, unfavorable pricing and product mix of $1.1 million, which were partially offset by $13.5 million of lower SG&A expenses.

Unfavorable foreign currency exchange and other miscellaneous income also impacted Segment EBITDA by a net of $3.7 million.

Use of Non-GAAP Financial Measure - Adjusted EBITDA

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Reconciliation of Net Income (Loss) to Adjusted EBITDA

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

Three Months Ended September 30, Nine Months Ended September 30,

In millions 2020 2019 2020 2019

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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 six months ended June 30, 2019.

See below for more detail on the charges incurred.

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

Three Months Ended September 30, Nine Months Ended September 30,

In millions 2020 2019 2020 2019

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Adjusted EBITDA

Three and Six Months Ended June 30, 2020 vs.

Three and Nine Months Ended September 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.

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*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.

While we continue to navigate through uncertainties due to COVID-19, we are increasing and narrowing our prior guidance of sales between $1.15 billion and $1.20 billion and Adjusted EBITDA between $355 million and $365 million.

Additionally, we continue to expect capital expenditures of $85 million, and operating cash flow for the year of approximately $260 million.

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

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The primary source of liquidity for Ingevity’s business is the cash flow provided by operations.

Projected 2020 cash flow provided by operations is expected to be $215 million to $255 million.

We expect our cash flow provided by operations combined with cash on hand and available capacity under our revolving credit facility to be sufficient to meet our working capital needs.

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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.

As of September 30, 2020, our undrawn capacity under our revolving credit facility was $577.6 million.

Refer to the section entitled "Recent Developments" within this Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding our 2020 Senior Notes issuance and amendments to our revolving credit facility both of which occurred subsequent to September 30, 2020.

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 $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.

Cash and cash equivalents totaled $198.2 million at September 30, 2020, which includes the remaining $45 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 June 30, 2020 included $62.9 million held by our foreign subsidiaries.

The cash and cash equivalents balance at September 30, 2020 included $77.5 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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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.

At September 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 June 30, 2020 .

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

Six Months Ended June 30,

Projected 2020 capital expenditures are $85 million.

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

Cash flow comparison of Nine Months Ended September 30, 2020 and 2019

Nine Months Ended September 30,

In millions 2020 2019

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Cash flows provided by (used in) operating activities

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.

During the first nine months of 2020, cash flow provided by operations increased primarily due to increased earnings and improved collection of accounts receivable.

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

current assets and current liabilities).

Current Assets and Liabilities

In millions June 30, 2020 December 31, 2019

In millions September 30, 2020 December 31, 2019

Cash and cash equivalents $ 198.2 $ 56.5

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Total current assets $ 601.0 $ 463.2

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

Current assets as of September 30, 2020, increased $137.8 million compared to December 31, 2019, primarily due to increases in cash.

Cash and cash equivalents increased by $141.7 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 $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 receivable, net as of September 30, 2020, increased $4.3 million due to increased sales during the quarter ended September 30, 2020, compared to the quarter ended December 31, 2019.

These increases were offset by a decrease of $8.5 million in inventories, net due to increased sales in the quarter ended September 30, 2020.

Additionally, prepaid and other current assets decreased $0.3 million.

In millions September 30, 2020 December 31, 2019

Accounts payable $ 84.8 $ 99.1

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Total current liabilities $ 178.9 $ 215.5

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.

Current liabilities as of September 30, 2020, decreased by $36.6 million compared to December 31, 2019, primarily driven by a decrease in Accounts payable, Accrued payroll and employee benefits, Current operating lease liabilities, Notes payable and current maturities of long-term debt, and Income taxes payable.

This decrease was offset partially by an increase in Accrued expenses.

Cash flows provided by (used in) investing activities

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,

Cash used by investing activities in the nine months ended September 30, 2020 was $78.4 million and was primarily driven by capital expenditures.

In the nine months ended September 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 Nine Months Ended September 30,

In millions 2020 2019

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Cash flows provided by (used in) financing activities

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.

Cash provided by financing activities in the nine months ended September 30, 2020 was $14.8 million and was driven by net borrowings of $38.8 million under our revolving credit facility, offset by payments on long-term borrowings of $14.1 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 nine months ended September 30, 2019 was $433.6 million and was primarily driven by net borrowings of $193.0 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 $117.8 million, tax payments related to withholdings on restricted stock unit vestings of $14.3 million, and the repurchase of common stock of $6.4 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.

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

Except as described above, there have been no material changes to our contractual commitments during the nine months ended September 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