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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-29 · 113 added, 263 removed, 201 unchanged (65% of the section changed)

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Management’s discussion and analysis of Ingevity’s financial condition and results of operations (“MD&A”) is provided as a supplement to the condensed consolidated financial statements and related notes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

The following discussion should be read in conjunction with Ingevity’s consolidated financial statements as of and for the year ended December 31, 2020 filed on February 19, 2021 with the Securities and Exchange Commission ("SEC") as part of the Company's Annual Reporting on Form 10-K ("2020 Annual Report") and the unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Investors are cautioned that the forward-looking statements contained in this section and other parts of this Quarterly Report involve both risk and uncertainty.

Several important factors could cause actual results to differ materially from those anticipated by these statements.

Many of these statements are macroeconomic in nature and are, therefore, beyond the control of management.

See "Cautionary Statements About Forward-Looking Statements" below and at the beginning of our 2020 Annual Report.

Cautionary Statements About Forward-Looking Statements

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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 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").

Such risks and uncertainties include, among others, those discussed in Part I, Item 1A of our 2020 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 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 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 may be adversely affected by changes in trade policy, including the imposition of tariffs and the resulting consequences;

• our engineered polymers product line may be adversely affected by the United Kingdom’s withdrawal from the European Union;

• we are dependent upon attracting and retaining key personnel;

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

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

• adverse conditions in cyclical end markets may adversely affect demand for our engineered polymers products;

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

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

• our engineered polymers product line may be adversely affected by the United Kingdom’s ("UK") withdrawal from the European Union;

• the acquisition (the "Caprolactone Acquisition") of Perstorp Holding AB's caprolactone division (the "Caprolactone Business") may expose us to unknown or understated liabilities;

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

• we may be adversely affected by disruptions in our supply chain;

• 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;

• we are dependent upon attracting and retaining key personnel;

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

Ingevity is a leading global manufacturer of specialty chemicals and high performance activated carbon materials.

Ingevity Corporation ("Ingevity," "the company", "we," "us" or "our") is a leading global manufacturer of specialty chemicals and high performance activated carbon materials.

We provide innovative solutions to meet our customers’ unique and demanding requirements through proprietary formulated products.

We report in two business segments, Performance Materials and Performance Chemicals .

Our Performance 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.

Automotive technologies products are sold into gasoline vapor emission control applications within the automotive industry, while process purification products are sold into the food, water, beverage, and chemical purification industries.

Our Performance Chemicals segment consists of our pavement technologies, oilfield technologies, industrial specialties, and engineered polymers product lines.

Performance Chemicals manufactures products derived from CTO and lignin extracted from the kraft paper making process as well as caprolactone monomers and derivatives derived from cyclohexanone and hydrogen peroxide.

Performance Chemicals products serve as critical inputs used in a variety of high performance applications, including pavement preservation, pavement adhesion promotion, and warm mix paving (pavement technologies product line), oil well service additives, oil production, and downstream application chemicals (oilfield technologies product line), printing inks, adhesives, agrochemicals, lubricants, and industrial intermediates (industrial specialties product line), coatings, resins, elastomers, adhesives, and bio-plastics (engineered polymers product line).

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

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide.

COVID-19 has led to adverse impacts on the U.S.

and global economies, and created uncertainty regarding potential impacts to our supply chain, operations, and customer demand.

We have been classified as an essential business in the jurisdictions that have made this determination to date, allowing us to continue operations.

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.

On March 27, 2020, the U.S.

government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment.

We estimate the payment of approximately $5.3 million of employer payroll taxes otherwise due in 2020 will be delayed with 50 percent due by December 31, 2021 and the remaining 50 percent by December 31, 2022.

The CARES Act is not expected to have a material impact on our condensed consolidated financial statements.

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 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.

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.

Additionally, at our Crossett, Arkansas Performance Chemicals' manufacturing facility, the International Association of Machinists and Aerospace Workers agreed to extend the existing CBA by one year until January 15, 2021 in exchange for economic considerations.

We have no other CBAs set to expire in 2020.

During the first quarter of 2021, two collective bargaining unit agreements ("CBA") expired and new contracts were negotiated.

Our Crossett, Arkansas Performance Chemicals' manufacturing facility negotiated a new three year agreement with the International Association of Machinists and Aerospace Workers Union ("IAM") that was ratified on April 13, 2021, with an effective date of March 1, 2021.

Also, at our Covington, Virginia Performance Materials' manufacturing facility, the Company and Covington Local Union 464 of the International Brotherhood of Electrical Workers ("IBEW") negotiated a new four year contract that was ratified on April 8, 2021, with an effective date of January 15, 2021.

In addition, the CBA with Covington Local 675 affiliated with The Association of Western Pulp and Paper Workers ("AWPPW") will expire on December 1, 2021.

Negotiations with the Covington AWPPW are expected to begin in the fourth quarter of 2021.

Results of Operations

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

Three Months Ended March 31,

In millions 2021 2020

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Net income (loss) $ 48.7 $ 45.3

Net sales and Gross profit

The table below shows the 2021 Net sales and percentage variances from 2020:

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effect Price/Mix Volume

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.

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.

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.

Three months ended March 31, 2021 $ 320.3 11% 1% 1% 9%

Three Months Ended March 31, 2021 vs.

Net sales increase of $32.1 million in 2021 was primarily driven by favorable volume growth in both of our segments for a combined impact of $25.6 million and favorable pricing and product mix of $3.5 million.

Additionally, favorable foreign currency exchange impacted Net sales by $3.0 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.

These negative impacts were slightly offset by favorable pricing and product mix of $14.0 million.

Gross profit increase of $11.6 million was driven by favorable sales volume of $13.5 million, favorable pricing and product mix of $4.8 million, and favorable foreign currency exchange of $0.8 million.

These positive impacts were slightly offset by increased manufacturing costs of $7.5 million related to higher freight, raw material inflation, energy, and depreciation expenses.

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 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.

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 $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.

Three Months Ended March 31, 2021 vs.

Selling, general and administrative expenses ("SG&A") increased $1.5 million in 2021 compared to 2020.

The change in SG&A was driven by higher employee-related costs of $5.6 million, of which $4.2 million related to a one-time benefit recorded in 2020.

The higher employee-related costs were partially offset by $1.4 million of decreased legal costs and $2.7 million from reduced travel and other miscellaneous costs, primarily driven by the COVID-19 pandemic.

SG&A expenses as a percentage of Net sales decreased slightly to 12.5 percent for the three months ended March 31, 2021 from 13.4 percent in 2020, driven by the lower spending due to COVID-19 and higher sales.

Research and technical expenses

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.

Three Months Ended March 31, 2021 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 2.1 percent from 2.2 percent for the three months ended March 31, 2021 and 2020, respectively.

Restructuring and other (income) charges, net

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.

Three Months Ended March 31, 2021 vs.

Restructuring and other (income) charges, net were $3.9 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively.

See Note 12 within the condensed consolidated financial statements for more information.

Acquisition-related costs

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.

Three Months Ended March 31, 2021 vs.

Acquisition-related costs of $0.3 million and $1.3 million for the three months ended March 31, 2021 and 2020, respectively, were incurred in connection with the integration of Perstorp's Capa business into our Performance Chemicals segment.

Other (income) expense, net

Three and Nine Months Ended September 30, 2020 vs.

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

Three Months Ended March 31, 2021 vs.

Three Months Ended March 31,

In millions 2021 2020

Foreign currency exchange (income) loss $ 1.7 $ 0.7

Royalty and sundry (income) loss (0.1) (0.1) (0.3) (0.3)

Impairment of equity investment (1)

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

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

Interest expense, net

Three and Nine Months Ended September 30, 2020 vs.

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

Three Months Ended March 31, 2021 vs.

Three Months Ended March 31,

In millions 2021 2020

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

4.5 9.5 18.3 27.0

Interest expense on senior notes (1)

3.5 3.8 10.7 10.9

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

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

(0.2) (0.9) (1.5) (1.5)

Other interest (income) expense, net — (0.2)

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Provision (benefit) for income taxes

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.

Three Months Ended March 31, 2021 vs.

For the three months ended March 31, 2021 and 2020, our effective tax rate was 21.2 percent and 17.9 percent, respectively.

Excluding discrete items, the effective rate was 21.4 percent compared to 20.4 percent in the three months ended March 31, 2021 and 2020, respectively.

An explanation of the change in the effective tax rate is presented in Note 13 to the condensed consolidated financial statements.

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Performance Materials

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

2020 2019 2020 2019

Automotive Technologies product line $ 136.9 $ 120.5 $ 324.5 $ 334.1

Process Purification product line 6.9 9.7 24.8 28.3

In millions Three Months Ended March 31,

Total Performance Materials - Net sales (1)

$ 140.7 $ 121.1

Segment EBITDA $ 73.7 $ 61.2

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

______________

(1) Beginning in Q1 2021, we updated disaggregated revenue disclosures, combining certain product groups to reflect categories that depict how the nature, amount, and uncertainty of revenue and cash flows are affected by economic factors.

As a result, Automotive Technologies and Process Purification product lines have been combined within the Performance Materials segment.

The table below shows the 2021 Net sales and percentage variances from 2020:

Percentage change vs.

2 unchanged sentences

effect Price/Mix Volume

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 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.

Three months ended March 31, 2021 $ 140.7 16 % 2 % 2 % 12 %

Three Months Ended March 31, 2021 vs.

Segment net sales increase of $19.6 million in 2021 was driven by $14.5 million in volume growth, primarily in automotive products, favorable pricing and product mix of $2.9 million, and favorable foreign currency exchange of $2.2 million.

Segment EBITDA increased $12.5 million primarily due to favorable volume of $11.4 million and favorable pricing and product mix of $3.4 million.

These increases were partially offset by higher manufacturing costs of $4.2 million and increased SG&A and research and technical expenses of $0.5 million.

Favorable foreign currency exchange and increased other miscellaneous income positively impacted Segment EBITDA by $2.4 million.

Performance Chemicals

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

Three Months Ended March 31,

In millions 2021 2020

Oilfield Technologies product line $ 14.0 $ 27.6 $ 58.4 $ 86.5

Pavement Technologies product line 21.4 20.7

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Segment EBITDA $ 31.7 $ 31.0

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

Percentage change vs.

Performance Chemicals (In millions, except percentages)

Net sales Total change Currency

effect Price/Mix Volume

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 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 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 $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 $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

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, 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 have or 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 are the pro forma amounts necessarily indicative of future results.

Performance Chemicals Pro Forma Financial Results Comparison

Nine Months Ended September 30,

In millions 2020 2019

Performance Chemicals, as reported (1)

______________

Caprolactone Business, pro forma (2)

Net Sales (3)

$ 541.2 $ 644.8

Segment EBITDA

Performance Chemicals, as reported (1)

$ 122.1 $ 151.1

Caprolactone Business, pro forma (2)

Segment EBITDA (3)

$ 122.1 $ 156.6

_______________

(1) As reported amounts are the results of operations of Performance Chemicals, including the results of the Caprolactone Business, post acquisition date of February 13, 2019.

(2) Pro forma amounts include historical results of the Caprolactone Business, prior to the acquisition date of February 13, 2019.

These amounts also include adjustments as if the acquisition had occurred on January 1, 2019, including the effects of purchase accounting.

The pro forma amounts do not include adjustments for expenses related to integration activities, cost savings, or synergies that have been or may have been realized had we acquired the business on January 1, 2019.

(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 Net Sales Comparison

Nine Months Ended September 30,

In millions 2020 2019

Oilfield Technologies product line $ 58.4 $ 86.5

Pavement Technologies product line 157.1 152.9

Industrial Specialties product line 232.5 296.8

Engineered Polymers product line 93.2 108.6

Net Sales - Performance Chemicals $ 541.2 $ 644.8

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

As a result, Oilfield Technologies product line has been combined with the Industrial Specialties product line within the Performance Chemicals segment.

The table below shows the 2021 Net sales and percentage variances from 2020:

Percentage change vs.

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effect Price/Mix Volume

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 $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.

Three months ended March 31, 2021 $ 179.6 7 % 1 % — % 6 %

Three Months Ended March 31, 2021 vs.

Segment net sales increase of $12.5 million was driven mainly by favorable volume of $11.1 million, consisting of volume increases in engineered polymers ($8.4 million) and industrial specialties ($3.3 million), offset slightly by volume declines in pavement technologies products ($0.6 million).

Segment net sales were also impacted by favorable pricing implemented during the quarter in response to raw material inflation as well as product sales mix for a net impact of $0.6 million.

The net price/mix impact was driven by increases in pavement technologies ($1.2 million) and engineered polymers ($1.2 million), partially offset by a decline in industrial specialties ($1.8 million).

Additionally, favorable foreign currency exchange impacted Net sales by $0.8 million.

Segment EBITDA increased by $0.7 million primarily due to an increase in volume of $2.1 million, favorable pricing and product mix of $1.4 million, and decreased other miscellaneous costs of $0.2 million.

These favorable operating results were offset slightly by higher manufacturing costs of $1.3 million due to higher energy and freight costs, higher SG&A expenses of $0.3 million, and unfavorable foreign currency exchange of $1.4 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 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.

Adjusted EBITDA is not meant to be considered in isolation or as a substitute for Net income, the most directly comparable financial measure calculated in accordance with GAAP.

Adjusted EBITDA is utilized by management as a measure of profitability.

We believe this non-GAAP financial measure provides management as well as investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measure, when viewed together with our financial results computed in accordance with GAAP, provides a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.

together with our financial results computed in accordance with GAAP, provides a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.

We believe Adjusted EBITDA is a useful measure because it excludes the effects of investment activities as well as non-operating activities.

Adjusted EBITDA is defined as net income (loss) plus provision (benefit) for income taxes, interest expense, net, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, and pension and postretirement settlement and curtailment (income) charges.

This non-GAAP measure is not intended to replace the presentation of financial results in accordance with GAAP and investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another.

A reconciliation of Adjusted EBITDA to net income is set forth within this section.

A reconciliation of Adjusted EBITDA to net income is set forth below.

Reconciliation of Net Income (Loss) to Adjusted EBITDA

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

Three Months Ended March 31,

In millions 2021 2020

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Acquisition and other-related costs 0.3 1.3

— 1.3 1.7 33.3

Adjusted EBITDA (Non-GAAP)

$ 105.4 $ 92.2

_______________

(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 nine months ended September 30, 2019.

See below for more detail on the charges incurred.

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

In millions 2020 2019 2020 2019

Legal and professional service fees $ — $ 1.3 $ 1.7 $ 12.2

Loss on hedging purchase price — — — 12.7

Acquisition-related costs $ — $ 1.3 $ 1.7 $ 24.9

Inventory fair value step-up amortization (i)

Acquisition and other-related costs $ — $ 1.3 $ 1.7 $ 33.3

_______________

(i) Included within "Cost of sales" on the condensed consolidated statements of operations.

Adjusted EBITDA

Three and Nine Months Ended September 30, 2020 vs.

Three Months Ended March 31, 2021 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.

Current Company Outlook

In millions FY2020 Guidance

In millions 2021 Guidance

Net sales $1,275 - $1,325

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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 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.

While our performance continues to improve, we are still carefully watching issues related to transportation and logistics, raw material inflation, and automotive material disruptions that could become stronger headwinds throughout the rest of the year.

Based on our strong first quarter and continued optimism, we feel confident raising our guidance for sales to $1.275 billion - $1.325 billion and Adjusted EBITDA to $410 million - $430 million.

Additionally, we continue to expect capital expenditures of $100 million to $120 million and operating cash flow for the year of $300 million to $320 million.

A reconciliation of net income to adjusted EBITDA as projected for 2021 is not provided.

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These components, net of tax, include further restructuring and other income (charges), net;

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

additional acquisition and other related costs;

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

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Liquidity and Capital Resources

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

The primary source of liquidity for our business is the cash flow provided by operating activities.

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

Over the next twelve months, we expect to make interest payments, capital expenditures, expenditures related to our business transformation initiative, principal repayments, purchases pursuant to our stock repurchase program, income tax payments, incur additional spending associated with our Performance Materials' intellectual property litigation, and may incur additional acquisition-related cost payments.

Over the next twelve months, we expect to make interest payments, capital expenditures, expenditures related to our business transformation initiative, principal repayments, purchases pursuant to our stock repurchase program, income tax payments, and to incur additional spending associated with our Performance Materials' intellectual property litigation.

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 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 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.

As of March 31, 2021, our undrawn capacity under our revolving credit facility was $497.7 million.

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 $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.

Cash and cash equivalents totaled $237.8 million at March 31, 2021.

We continuously monitor deposit concentrations and the credit quality of the financial institutions that hold our cash and cash equivalents, as well as the credit quality of our insurance providers, customers, and key suppliers.

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

The cash and cash equivalents balance at September 30, 2020 included $77.5 million held by our foreign subsidiaries.

The cash and cash equivalents balance at March 31, 2021 included $76.0 million held by our foreign subsidiaries.

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

We believe that our foreign holdings of cash will not have a material adverse impact on our U.S.

Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S.

We believe that our foreign holdings

of cash will not have a material adverse impact on our U.S.

If these earnings were distributed, such amounts would be subject to U.S.

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The potential tax implications of the repatriation of unremitted earnings are driven by facts at the time of distribution, therefore, it is not practicable to estimate the income tax liabilities that might be incurred if such cash and earnings were repatriated to the U.S.

Management does not currently expect to repatriate cash earnings from our foreign operations in order to fund U.S.

Other Potential Liquidity Needs

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, respectively.

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

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 outstanding authorizations.

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

Shares may be purchased through open market or privately negotiated transactions at the discretion of management based on its evaluation of market prevailing conditions and other factors.

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

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

During the three months ended March 31, 2021, we repurchased $39.4 million in common stock, representing 527,550 shares of our common stock at a weighted average cost per share of $74.64.

At March 31, 2021, $372.6 million remained unused under our Board-authorized repurchase program.

Capital Expenditures

Projected 2021 capital expenditures are $100 - $120 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,

We have no material commitments associated with these projected capital expenditures as of March 31, 2021 .

Cash flow comparison of Three Months Ended March 31, 2021 and 2020

Three Months Ended March 31,

In millions 2021 2020

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Cash flows provided by (used in) operating activities

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.

During the first three months of 2021, cash flow provided by operations decreased primarily due to increased accounts receivable related to the increase in net sales, offset slightly by a smaller inventory build compared to 2020.

Below provides a description of the changes to working capital during the first three months of 2021 (i.e.

current assets and current liabilities).

Current Assets and Liabilities

In millions September 30, 2020 December 31, 2019

In millions March 31, 2021 December 31, 2020

Cash and cash equivalents $ 237.8 $ 257.7

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Total current assets $ 642.4 $ 628.7

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.

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

Current assets as of March 31, 2021 increased $13.7 million compared to December 31, 2020, primarily due to increases in Accounts receivable, net and Inventories, net.

Accounts receivable, net as of March 31, 2021, increased $20.4 million due to increased sales during the quarter ended March 31, 2021 compared to the quarter ended December 31, 2020.

Inventories increased by $15.2 million mainly due to the build of inventory for forecasted sales.

These increases were offset by

a decrease in Cash and cash equivalents of $19.9 million and in Prepaid and other current assets of $2.0 million compared to the balances at December 31, 2020.

In millions March 31, 2021 December 31, 2020

Accounts payable $ 113.5 $ 104.2

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Total current liabilities $ 224.5 $ 223.4

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.

Current liabilities as of March 31, 2021, increased by $1.1 million compared to December 31, 2020, primarily driven by an increase in Accounts payable and Income taxes payable.

This increase was offset partially by decreases in Accrued payroll and employee benefits, Current operating lease liabilities, Notes payable and current maturities of long-term debt, and Accrued expenses.

Cash flows provided by (used in) investing activities

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,

Cash used by investing activities in the three months ended March 31, 2021 was $17.3 million and was primarily driven by capital expenditures.

In the three months ended March 31, 2021 and 2020, capital spending included the base maintenance capital supporting ongoing operations and growth and cost improvement spending primarily related to our business transformation initiative (see Note 12 within the condensed consolidated financial statements for more information).

Capital expenditure categories Three Months Ended March 31,

In millions 2021 2020

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Cash flows provided by (used in) financing activities

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.

Cash used in financing activities in the three months ended March 31, 2021 was $52.1 million and was driven by the repurchase of common stock of $39.4 million, payments on long-term borrowings of $9.4 million, and tax payments related to withholdings on restricted stock unit vestings of $2.3 million.

Cash provided by financing activities in the three months ended March 31, 2020 was $203.2 million and was primarily 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.

Off-Balance Sheet Arrangements

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Information related to our contractual commitments at December 31, 2020 can be found in a table included within Part II, Item 7 of our 2020 Annual Report.

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

Except as described above, there have been no material changes to our contractual commitments during the three months ended March 31, 2021.

New Accounting Guidance

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The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

We have described our accounting policies in Note 3 to our Annual Consolidated Financial Statements included in our 2019 Annual Report.

We have described our accounting policies in Note 3 to our 2020 Annual Report.

We have reviewed these accounting policies, identifying those that we believe to be critical to the preparation and understanding of our financial statements.

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We base our estimates and judgments on historical experience, current conditions and other reasonable factors.

Our critical accounting policies have not substantially changed from those described in the 2019 Form 10-K.

Our critical accounting policies have not substantially changed from those described in the 2020 Annual Report.

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