What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-29 · 143 added, 117 removed, 235 unchanged (53% of the section changed)

8 unchanged sentences

This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995 that reflect our current expectations, beliefs, plans or forecasts with respect to, among other things, future events and financial performance.

Forward-looking statements are often characterized by words or phrases such as “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “prospects,” “potential” and “forecast,” and other words, terms and phrases of similar meaning.

Forward-looking statements are often characterized by words or phrases such as “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “outlook,” “project,” “intend,” “plan,” “believe,” “target,” “prospects,” “potential” and “forecast,” and other words, terms and phrases of similar meaning.

Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties.

We caution readers that a forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement.

Such risks and uncertainties include, among others, those discussed in Part I, Item 1A of our 2020 Annual Report and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, 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.

Such risks and uncertainties include, among others, those risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in the section below entitled “Item 1A.

Risk Factors,” 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.

27 unchanged sentences

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

• adverse litigation judgments and exposure to significant litigation-related costs;

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

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

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

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

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Recent Developments

Strategic Investment

During the three months ended June 30, 2021, our Performance Materials segment acquired a strategic equity investment in a privately-held company for $16.5 million.

Our strategic equity investment is accounted for under the equity method of accounting, which requires us to record our initial investment at cost.

Subsequently, we will recognize, through the condensed consolidated statements of operations (Other (income) expense, net) and as an adjustment to the investment balance (Other assets), our proportionate share of undistributed earnings or loss and the amortization of basis differences.

At each reporting period, we will evaluate our investment to determine whether events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable.

The carrying value of our strategic equity investment was $16.5 million at June 30, 2021 and zero at December 31, 2020.

There were no adjustments to the carrying value of our strategic equity investment for impairment or observable price changes during the three months ended June 30, 2021.

On July 19, 2018, Ingevity filed suit against BASF Corporation (“BASF”) in the United States District Court for the District of Delaware (the “Delaware Proceeding”) alleging BASF infringed Ingevity’s patent covering canister systems used in the control of automotive gasoline vapor emissions (U.S.

RE38,844) (the “’844 Patent”).

On February 14, 2019, BASF asserted counterclaims against Ingevity in the Delaware Proceeding, alleging two claims for violations of U.S.

antitrust law (one for exclusive dealing and the other for tying) as well as a claim for tortious interference with an alleged prospective business relationship between BASF and a BASF customer (the “BASF Counterclaims”).

The BASF Counterclaims relate to Ingevity’s enforcement of the ‘844 Patent and Ingevity’s entry into several supply agreements with customers of its fuel vapor canister honeycombs.

District Court dismissed Ingevity’s patent infringement claims on November 18, 2020, and the case proceeded to trial on the BASF Counterclaims in September 2021.

15, 2021, a jury in the Delaware Proceeding issued a verdict in favor of BASF on the BASF Counterclaims and awarded BASF damages of approximately $28.3 million, which will be trebled under U.S.

antitrust law to approximately $85 million.

In addition, BASF may seek pre- and post-judgment interest and attorneys’ fees and costs in amounts that they will have to support at a future date.

We disagree with the outcome, including the court’s application of the law, and we intend to seek judgment as a matter of law in the Delaware Proceeding post-trial briefing stage and on appeal, if necessary.

In addition, we intend to challenge the U.S.

District Court’s November 2020 dismissal of our patent infringement claims against BASF.

Ingevity believes in the strength of its intellectual property and the merits of its position and intends to pursue all legal relief available to challenge these outcomes in the Delaware Proceeding.

Final resolution of these matters could take several months up to two years.

As of September 30, 2021, we have accrued a total of $85 million, the full amount of the jury’s verdict.

The amount accrued for this matter is included in Other liabilities on the condensed consolidated balance sheet as of September 30, 2021, and the charge is included in Other (income) expense, net on the condensed consolidated statement of operations for the three and nine months ended September 30, 2021.

The amount of any liability Ingevity may ultimately incur related to the Delaware Proceeding could be more or less than the amount accrued.

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 2021 2020 2021 2020

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effect Price/Mix Volume

Three months ended June 30, 2021 $ 358.4 32% 1% 4% 27%

Six months ended June 30, 2021 $ 678.7 21% 1% 3% 17%

Three Months Ended June 30, 2021 vs.

Net sales increase of $87.8 million in 2021 was primarily driven by favorable volume growth in both of our segments for a combined impact of $73.1 million and favorable pricing and product mix of $12.0 million.

Additionally, favorable foreign currency exchange impacted Net sales by $2.7 million, primarily related to euro and Chinese renminbi denominated sales.

Gross profit increase of $55.9 million was driven by favorable sales volume of $38.9 million and favorable pricing and product mix of $10.1 million.

Also contributing to the increase was lower manufacturing costs of $6.0 million, driven by higher plant throughput, offset slightly by increased freight and warehousing costs, as a result of increased volume demand, and favorable foreign currency exchange of $0.9 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, 2021 vs.

Three months ended September 30, 2021 $ 376.8 14% —% 8% 6%

Nine months ended September 30, 2021 $ 1,055.5 19% 1% 5% 13%

Three Months Ended September 30, 2021 vs.

Net sales increase of $45.1 million in 2021 was primarily driven by favorable volume growth in our Performance Chemicals segment, offset by volume decline in our Performance Materials segment, for a combined impact of $20.3 million and favorable pricing and product mix in both segments of $25.0 million.

Additionally, unfavorable foreign currency exchange impacted Net sales by $0.2 million, primarily related to euro and Chinese renminbi denominated sales.

Gross profit increase of $2.2 million was driven by favorable pricing and product mix of $24.3 million, largely offset by higher raw material, logistics and energy costs of $20.1 million, unfavorable sales volume of $1.3 million, and unfavorable foreign currency exchange of $0.7 million.

Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in net sales and operating results period over period for both segments.

Nine Months Ended September 30, 2021 vs.

Net sales increase of $165.0 million in 2021 was primarily driven by favorable volume growth in both of our segments for a combined impact of $119.0 million and favorable pricing and product mix of $40.3 million.

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Gross profit increase of $69.7 million was driven by favorable sales volume of $51.1 million, favorable pricing and product mix of $39.2 million, and favorable foreign currency exchange of $0.9 million.

These positive impacts were slightly offset by higher net manufacturing costs of $1.5 million driven by freight, raw material price inflation, energy costs, and depreciation expenses, partially offset by higher plant throughput as a result of increased volume demand.

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.

These positive impacts were partially offset by higher net manufacturing costs of $21.5 million driven by logistics, raw material price inflation, energy, and depreciation, partially offset by higher plant throughput as a result of increased volume demand.

Refer to the Segment Operating Results section included within this MD&A for more information on the drivers to the changes in net sales and operating results period over period for both segments.

Selling, general, and administrative expenses

Three Months Ended June 30, 2021 vs.

Three Months Ended September 30, 2021 vs.

Selling, general and administrative expenses ("SG&A") increased $8.6 million in 2021, compared to the significantly COVID-19 impacted prior year.

The change in SG&A was driven by higher employee-related costs of $10.5 million, increased amortization expense of $1.3 million, and higher travel and other miscellaneous expense of $1.2 million.

SG&A expenses as a percentage of Net sales increased slightly to 13.3 percent for the three months ended June 30, 2021 from 12.7 percent in 2020, driven by lower employee-related and travel costs in 2020 due to the impact of COVID-19.

Six Months Ended June 30, 2021 vs.

The change in SG&A was driven by higher employee-related costs of $5.8 million, increased legal expense of $1.8 million, and higher travel and other miscellaneous expense of $1.0 million.

SG&A increased year over year as we resumed more normal commercial operations, including hiring to fill open positions, increased travel, and investing in growth and innovation resources as compared to the COVID-19 impacted prior year period.

Nine Months Ended September 30, 2021 vs.

SG&A increased $23.1 million in 2021 compared to 2020.

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The higher employee-related costs and amortization expense were partially offset by reduced legal, travel and other miscellaneous costs of $0.4 million.

SG&A expenses as a percentage of Net sales decreased slightly to 12.9 percent for the six months ended June 30, 2021 from 13.1 percent in 2020, driven by the lower spending in 2020 due to COVID-19 and higher sales in 2021.

SG&A expenses as a percentage of Net sales increased slightly to 12.4 percent for the nine months ended September 30, 2021 from 12.1 percent in 2020, driven by the lower spending in 2020 due to COVID-19 and higher sales in 2021.

Research and technical expenses

Three Months Ended June 30, 2021 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 1.6 percent from 2.0 percent for the three months ended June 30, 2021 and 2020, respectively.

Six Months Ended June 30, 2021 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 1.8 percent from 2.1 percent for the six months ended June 30, 2021 and 2020, respectively.

Three Months Ended September 30, 2021 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, increasing to 1.8 percent from 1.6 percent for the three months ended September 30, 2021 and 2020, respectively.

Nine Months Ended September 30, 2021 vs.

Research and technical expenses as a percentage of Net sales remained relatively consistent period over period, decreasing to 1.8 percent from 1.9 percent for the nine months ended September 30, 2021 and 2020, respectively.

Restructuring and other (income) charges, net

Three and Six Months Ended June 30, 2021 vs.

Restructuring and other (income) charges, net were $4.3 million and $8.2 million for the three and six months ended June 30, 2021, respectively, and $7.3 million and $7.8 million for the three and six months ended June 30, 2020, respectively.

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

Three and Nine Months Ended September 30, 2021 vs.

Restructuring and other (income) charges, net were $4.1 million and $12.3 million for the three and nine months ended September 30, 2021, respectively, and $5.5 million and $13.3 million for the three and nine months ended September 30, 2020, respectively.

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

Acquisition-related costs

Three and Six Months Ended June 30, 2021 vs.

Acquisition-related costs were $0.4 million and $0.7 million for the three and six months ended June 30, 2021, respectively, and $0.4 million and $1.7 million for the three and six months ended June 30, 2020, respectively.

For the three and six months ended June 30, 2021, charges of $0.2 million and $0.2 million relate to the acquisition of a strategic investment in the Performance Materials segment, respectively, and charges of $0.2 million and $0.5 million relate to the integration of the Perstorp Capa business into our Performance Chemicals segment, respectively.

For the three and six months ended June 30, 2020, all charges relate to the integration of the Perstorp Capa business into our Performance Chemicals segment.

Three and Nine Months Ended September 30, 2021 vs.

Acquisition-related costs were $0.2 million and $0.9 million for the three and nine months ended September 30, 2021, respectively, and zero and $1.7 million for the three and nine months ended September 30, 2020, respectively.

For the three and nine months ended September 30, 2021, charges of zero and $0.2 million relate to the acquisition of a strategic investment in the Performance Materials segment, respectively, and charges of $0.2 million and $0.7 million relate to the integration of the Perstorp Capa business into our Performance Chemicals segment, respectively.

For the three and nine months ended September 30, 2020, all charges relate to the integration of the Perstorp Capa business into our Performance Chemicals segment.

Other (income) expense, net

Three and Six Months Ended June 30, 2021 vs.

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

Three and Nine Months Ended September 30, 2021 vs.

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

In millions 2021 2020 2021 2020

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Impairment of equity investment (1)

Litigation expense (2)

85.0 — 85.0 —

Other (income) expense, net (0.6) — (5.5) 0.9

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

(2) Refer to Note 14 within the condensed consolidated financial statements for more information.

Interest expense, net

Three and Six Months Ended June 30, 2021 vs.

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

Three and Nine Months Ended September 30, 2021 vs.

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

In millions 2021 2020 2021 2020

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_______________

(1) See Note 9 within the condensed consolidated financial statements for more information.

(2) See Note 8 within the condensed consolidated financial statements for more information.

(1) Refer to Note 9 within the condensed consolidated financial statements for more information.

(2) Refer to Note 8 within the condensed consolidated financial statements for more information.

Provision (benefit) for income taxes

Three and Six Months Ended June 30, 2021 vs.

For the three months ended June 30, 2021 and 2020, our effective tax rate was 39.9 percent and 20.5 percent, respectively.

Excluding discrete items, the effective rate was 20.1 percent compared to 20.8 percent in the three months ended June 30, 2021 and 2020, respectively.

For the six months ended June 30, 2021 and 2020, our effective tax rate was 31.4 percent and 18.7 percent, respectively.

Excluding discrete items, the effective rate was 20.6 percent compared to 20.5 percent in the six months ended June 30, 2021 and 2020, respectively.

Three and Nine Months Ended September 30, 2021 vs.

For the three months ended September 30, 2021 and 2020, our effective tax rate was 53.3 percent and 20.7 percent, respectively.

Excluding discrete items, the effective rate was 20.4 percent compared to 20.3 percent in the three months ended September 30, 2021 and 2020, respectively.

For the nine months ended September 30, 2021 and 2020, our effective tax rate was 29.8 percent and 19.7 percent, respectively.

Excluding discrete items, the effective rate was 20.6 percent compared to 20.4 percent in the nine months ended September 30, 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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Our segments are (i) Performance Materials and (ii) Performance Chemicals.

Segment Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") is the primary measure used by the Company's chief operating decision maker to evaluate the performance of and allocate resources among our operating segments.

Segment Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") is the primary measure used by our chief operating decision maker to evaluate the performance of and allocate resources among our operating segments.

Segment EBITDA is defined as segment revenue less segment operating expenses (segment operating expenses consist of costs of sales, selling, general and administrative expenses, other (income) expense, net, excluding depreciation and amortization).

We have excluded the following items from segment EBITDA:

interest expense, net associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, pension and postretirement settlement and curtailment (income) charges.

interest expense, net, associated with corporate debt facilities, income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, certain litigation expenses, pension and postretirement settlement and curtailment (income) charges, net.

In general, the accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Annual Consolidated Financial Statements included in our 2020 Annual Report.

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,

2021 2020 2021 2020

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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:

The table below shows the Net sales variances 2021 compared to 2020:

Percentage change vs.

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effect Price/Mix Volume

Three months ended June 30, 2021 $ 126.0 49 % 3 % 3 % 43 %

Six months ended June 30, 2021 $ 266.7 30 % 2 % 3 % 25 %

Three Months Ended June 30, 2021 vs.

Segment net sales increase of $41.6 million in 2021 was driven by $36.4 million in volume growth, primarily in automotive products, favorable pricing and product mix of $2.4 million, and favorable foreign currency exchange of $2.8 million.

Segment EBITDA increased $38.0 million primarily due to favorable volume of $23.8 million, favorable pricing and product mix of $2.4 million, and lower manufacturing costs of $12.4 million due to increased plant throughput.

These increases were partially offset by increased SG&A and research and technical expenses of $5.5 million.

Favorable foreign currency exchange and increased other miscellaneous income positively impacted Segment EBITDA by $4.9 million.

Six Months Ended June 30, 2021 vs.

Three months ended September 30, 2021 $ 118.1 (18) % 1 % 2 % (21) %

Nine months ended September 30, 2021 $ 384.8 10 % 2 % 2 % 6 %

Three Months Ended September 30, 2021 vs.

Segment net sales decrease of $25.7 million in 2021 was driven by $29.8 million in volume decline, primarily in automotive activated carbon products, partially offset by favorable pricing and product mix of $2.4 million and foreign currency exchange of $1.7 million.

Sales of our Performance Materials' segment were negatively impacted by lower automotive production as compared to the prior year period, due to the shortage of microchips that continue to disrupt the automotive industry worldwide.

Additionally, the prior year quarter benefited from robust automotive production which rebounded sharply from COVID-19 pandemic lows in the first half of 2020.

Segment EBITDA decreased $24.0 million primarily due to unfavorable volume of $20.5 million, higher manufacturing costs of $1.8 million, increased SG&A and Research and technical expenses of $0.9 million, and unfavorable foreign currency exchange of $2.4 million.

These impacts were partially offset by favorable pricing and product mix of $1.6 million.

The automotive activated carbon sales volume declines in the period was the most significant contributor to the Segment EBITDA decrease year over year.

Nine Months Ended September 30, 2021 vs.

Segment net sales increase of $35.5 million in 2021 was driven by $21.1 million in volume growth, primarily in automotive products, favorable pricing and product mix of $7.7 million, and favorable foreign currency exchange of $6.7 million.

Segment EBITDA increased $50.5 million primarily due to favorable volume of $35.2 million, favorable pricing and product mix of $5.8 million, and lower manufacturing costs of $8.2 million due to increased plant throughput.

Sales for the nine months ended September 30, 2020 were negatively impacted by COVID-19's impact on automotive production which occurred in the first half of fiscal year 2020.

Segment EBITDA increased $26.5 million primarily due to favorable volume of $14.7 million, favorable pricing and product mix of $7.4 million, and lower manufacturing costs of $6.4 million due to increased plant throughput in 2021 when compared to COVID-19 impacts to production in 2020.

These increases were partially offset by increased SG&A and Research and technical expenses of $6.9 million.

1 unchanged sentence

Performance Chemicals

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

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

In millions 2021 2020 2021 2020

8 unchanged sentences

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:

The table below shows the Net sales variances 2021 compared to 2020:

Percentage change vs.

2 unchanged sentences

effect Price/Mix Volume

Three months ended June 30, 2021 $ 232.4 25 % — % 5 % 20 %

Six months ended June 30, 2021 $ 412.0 17 % — % 3 % 14 %

Three Months Ended June 30, 2021 vs.

Segment net sales increase of $46.2 million was driven mainly by favorable volume of $36.7 million, consisting of volume increases in industrial specialties products ($25.2 million), engineered polymers products ($10.2 million), and pavement technologies products ($1.3 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 $9.6 million.

The net price/mix impact was driven by increases in engineered polymers ($4.4 million), industrial specialties ($3.3 million), and pavement technologies ($1.9 million).

Three months ended September 30, 2021 $ 258.7 38 % (1) % 12 % 27 %

Nine months ended September 30, 2021 $ 670.7 24 % — % 6 % 18 %

Three Months Ended September 30, 2021 vs.

Segment net sales increase of $70.8 million was driven mainly by favorable volume of $50.1 million, consisting of volume increases in industrial specialties products ($29.6 million), increases in engineered polymers products ($22.2 million), and decreases in pavement technologies products ($1.7 million).

Segment net sales were also impacted by favorable pricing implemented during 2021 in response to raw material inflation as well as product sales mix for a net impact of $22.6 million.

The net price/mix impact was driven by increases in industrial specialties ($12.4 million), engineered polymers ($7.9 million), and pavement technologies ($2.3 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $1.9 million.

Segment EBITDA increased by $12.5 million primarily due to an increase in volume of $15.1 million, favorable pricing and product mix of $7.7 million, and increased other miscellaneous income of $1.8 million.

These favorable operating results were offset slightly by higher manufacturing costs of $4.4 million due to higher energy and freight costs, higher SG&A expenses of $6.4 million, and unfavorable foreign currency exchange of $1.3 million.

Six Months Ended June 30, 2021 vs.

Segment net sales increase of $58.7 million was driven mainly by favorable volume of $47.8 million, consisting of volume increases in industrial specialties products ($28.5 million), engineered polymers products ($18.6 million), and pavement technologies products ($0.7 million).

Segment net sales were also impacted by favorable pricing implemented during the first half of 2021 in response to raw material inflation as well as product sales mix for a net impact of $10.0 million.

The net price/mix impact was driven by increases in engineered polymers ($5.6 million), pavement technologies ($3.1 million), and industrial specialties ($1.3 million).

Additionally, favorable foreign currency exchange impacted Net sales by $0.9 million.

Sales of our Pavement Technologies product line were up slightly compared to the previous year quarter, driven by continued adoption of our environmentally friendly cold recycling technology.

Outside of North America, we realized strong sales growth in Europe but this was offset by a reduction in sales in China, which we attribute to temporarily reduced local government budgets, leading to curtailed paving activity.

Industrial Specialties sales rose 47%.

Sales growth was driven by adhesives, lubricants and oilfield product sales.

Adhesive sales growth was robust in both packaging adhesives and safety road striping.

In the three months ended September 30, 2021, we saw the benefit of prior quarter price increases.

Sales of our Engineered Polymers product line rose over 100% due to improved volume for all primary end uses across the globe.

We saw strong technology adoption and sales growth in protective coatings as well as in resins used in electric vehicle battery pads.

In addition to volume growth, we also realized strong price improvement in Engineered Polymers which has been important to offset the inflation in raw material costs.

Segment EBITDA increased by $15.9 million primarily due to an increase in volume of $19.2 million, and favorable pricing and product mix of $22.7 million.

These favorable operating results were offset slightly by higher manufacturing costs of $5.7 million due to higher energy and freight costs, higher SG&A expenses of $6.7 million, and unfavorable foreign currency exchange of $0.7 million.

These favorable results were partially offset by higher manufacturing costs of $15.8

million due to logistics, raw material price inflation, and energy, higher SG&A and Research and technical expenses of $8.8 million, and unfavorable foreign currency exchange of $1.4 million.

Nine Months Ended September 30, 2021 vs.

Segment net sales increase of $129.5 million was driven mainly by favorable volume of $97.9 million, consisting of volume increases in industrial specialties products ($58.1 million), increases in engineered polymers products ($40.8 million), and decreases in pavement technologies products ($1.0 million).

Segment net sales were also impacted by favorable pricing implemented during 2021 in response to raw material inflation as well as product sales mix for a net impact of $32.6 million.

The net price/mix impact was driven by increases in industrial specialties ($13.9 million), engineered polymers ($13.3 million), and pavement technologies ($5.4 million).

Additionally, unfavorable foreign currency exchange impacted Net sales by $1.0 million.

Segment EBITDA increased by $29.1 million primarily due to an increase in volume of $36.4 million and favorable pricing and product mix of $31.8 million.

These favorable drivers were partially offset by higher manufacturing costs of $21.4 million due to logistics, raw material price inflation, and energy, higher SG&A and Research and technical expenses of $15.5 million, and unfavorable foreign currency exchange of $2.2 million.

Use of Non-GAAP Financial Measure - Adjusted EBITDA

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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 interest expense, net, provision (benefit) for income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, and pension and postretirement settlement and curtailment (income) charges, net.

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

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

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

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

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 2021 2020 2021 2020

7 unchanged sentences

Acquisition and other-related costs 0.2 — 0.9 1.7

Litigation expense 85.0 — 85.0 —

Adjusted EBITDA (Non-GAAP)

1 unchanged sentence

Adjusted EBITDA

Three and Six Months Ended June 30, 2021 vs.

Three and Nine Months Ended September 30, 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.

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*Calculated as Operating Cash Flow less Capital Expenditures

Based on our solid performance in the second quarter and first half of the year and the continued robust demand for our products, we are increasing our fiscal year 2021 guidance for sales to be between $1.32 and $1.36 billion and adjusted EBITDA to between $425 and $440 million.

We expect issues related to the availability and rising costs of logistics, raw materials inflation and automotive sector input disruptions to be ongoing headwinds throughout the rest of the year.

We are paying close attention to supply and demand in the market and will pass through costs to ensure we extract the optimal value for our products.

Despite these macro headwinds, we see reason for optimism.

We believe Performance Materials will benefit in 2022 and beyond from the expected rebound in automotive production as a result of pent-up vehicle demand.

We also expect continued robust demand for our Performance Chemicals products and will pursue further improved pricing to offset higher raw materials costs.

Our fiscal year 2021 guidance for sales is $1.32 to $1.36 billion and adjusted EBITDA is $405 to $420 million.

Our guidance for the remainder of the year reflects our lowered expectations for Performance Materials and our confidence in the continued strong demand for products in Performance Chemicals.

For the remainder of 2021, we expect an ongoing shortage of microchips, continued logistics headwinds, and raw materials and energy inflation to be challenges.

We continue to monitor supply and demand in the market and will pass through costs to ensure we extract the optimal value for our products.

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

2 unchanged sentences

additional acquisition and other-related costs;

certain litigation expenses;

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

5 unchanged sentences

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 to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months.

As of June 30, 2021, our undrawn capacity under our revolving credit facility was $497.3 million.

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.

We expect our cash flow provided by operations combined with cash on hand and available capacity under our revolving credit facility to be sufficient to fund our planned operations and meet our interest and other contractual obligations for at least the next twelve months.

As of September 30, 2021, our undrawn capacity under our revolving credit facility was $497.7 million.

Over the next twelve months, we expect to fund the following:

interest payments, capital expenditures, expenditures related to our business transformation initiative, debt principal repayments, 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, we may also evaluate and consider strategic acquisitions, joint ventures, or other transactions to create stockholder value and enhance financial performance.

In connection with such transactions, or to fund other anticipated uses of cash, we may modify our

existing revolving credit and term loan facilities, seek additional debt financing, issue equity securities, or some combination thereof.

Cash and cash equivalents totaled $233.3 million at June 30, 2021.

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 $269.4 million at September 30, 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 June 30, 2021 included $86.0 million held by our foreign subsidiaries.

The cash and cash equivalents balance at September 30, 2021 included $79.2 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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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 the three and six months ended June 30, 2021, we repurchased $28.7 million and $68.1 million in common stock, representing 356,116 and 883,666 shares of our common stock at a weighted average cost per share of $80.50 and $77.00, respectively.

At June 30, 2021, $344.0 million remained unused under our Board-authorized repurchase program.

During the three and nine months ended September 30, 2021, we repurchased $32.2 million and $100.3 million in common stock, representing 414,501 and 1,298,167 shares of our common stock at a weighted average cost per share of $77.77 and $77.25, respectively.

At September 30, 2021, $311.7 million remained unused under our Board-authorized repurchase program.

Capital Expenditures

Projected 2021 capital expenditures are $100 - $115 million.

We have no material commitments associated with these projected capital expenditures as of June 30, 2021 .

Cash flow comparison of Six Months Ended June 30, 2021 and 2020

Six Months Ended June 30,

We have no material commitments associated with these projected capital expenditures as of September 30, 2021 .

Cash flow comparison of Nine Months Ended September 30, 2021 and 2020

Nine Months Ended September 30,

In millions 2021 2020

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Cash flows provided by (used in) operating activities

During the first six months of 2021, cash flow provided by operations increased primarily due to higher earnings driven by the increase in net sales.

During the first nine months of 2021, cash flow provided by operations increased primarily due to higher earnings driven by the increase in net sales.

The increase in net sales also drove higher accounts receivable and corresponding plant production that resulted in higher inventory levels, which negatively impacted the cash flow provided by operations compared to 2020.

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

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

current assets and current liabilities).

Current Assets and Liabilities

In millions June 30, 2021 December 31, 2020

In millions September 30, 2021 December 31, 2020

Cash and cash equivalents $ 269.4 $ 257.7

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Total current assets $ 720.3 $ 628.7

Current assets as of June 30, 2021 increased $40.9 million compared to December 31, 2020, primarily due to increases in Accounts receivable, net and Inventories, net.

Accounts receivable, net as of June 30, 2021, increased $29.3 million due to increased sales during the quarter ended June 30, 2021 compared to the quarter ended December 31, 2020.

Current assets as of September 30, 2021 increased $91.6 million compared to December 31, 2020, primarily due to increases in Accounts receivable, net and Inventories, net.

Accounts receivable, net as of September 30, 2021, increased $27.8 million due to increased sales during the quarter ended September 30, 2021 compared to the quarter ended December 31, 2020.

Inventories increased by $39.3 million mainly due to the build of inventory to support forecasted sales.

These increases were offset by a decrease in Cash and cash equivalents of $24.4 million compared to the balance at December 31, 2020.

Additionally, Prepaid and other current assets increased by $10.5 million, primarily related to prepaid insurance and services.

In millions June 30, 2021 December 31, 2020

Additionally, Cash and cash equivalents increased by $11.7 million, and Prepaid and other current assets increased by $12.8 million, primarily related to prepaid insurance and services.

In millions September 30, 2021 December 31, 2020

Accounts payable $ 127.4 $ 104.2

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Total current liabilities $ 247.6 $ 223.4

Current liabilities as of June 30, 2021, increased by $9.4 million compared to December 31, 2020, primarily driven by an increase in Accounts payable and Accrued payroll and employee benefits.

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

Current liabilities as of September 30, 2021, increased by $24.2 million compared to December 31, 2020, primarily driven by an increase in Accounts payable and Accrued payroll and employee benefits.

This increase was offset partially by decreases in 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 six months ended June 30, 2021 was $57.2 million and was primarily driven by capital expenditures.

In the six months ended June 30, 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).

Also, during six months ended June 30, 2021, we acquired a strategic equity investment in a privately-held company for $16.5 million.

Capital expenditure categories Six Months Ended June 30,

Cash used by investing activities in the nine months ended September 30, 2021 was $83.4 million and was primarily driven by capital expenditures.

In the nine months ended September 30, 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 (refer to Note 12 within the condensed consolidated financial statements for more information).

Also, during nine months ended September 30, 2021, we acquired a strategic equity investment in a privately-held company for $16.5 million.

Capital expenditure categories Nine Months Ended September 30,

In millions 2021 2020

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Cash flows provided by (used in) financing activities

Cash used in financing activities in the six months ended June 30, 2021 was $83.6 million and was driven by the repurchase of common stock of $68.1 million, payments on long-term borrowings of $14.1 million, and tax payments related to withholdings on restricted stock unit vestings of $2.3 million.

Cash provided by financing activities in the six months ended June 30, 2020 was $45.9 million and was primarily driven by net borrowings of $88.8 million from 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 used in financing activities in the nine months ended September 30, 2021 was $120.3 million and was driven by the repurchase of common stock of $100.3 million, payments on long-term borrowings of $18.8 million, and tax payments related to withholdings on restricted stock unit vestings of $2.4 million.

Cash provided by financing activities in the nine months ended September 30, 2020 was $14.8 million and was primarily driven by net borrowings of $38.8 million from 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.

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 six months ended June 30, 2021.

Except as described above, there have been no material changes to our contractual commitments during the nine months ended September 30, 2021.

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