Ecovyst Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview We are a leading integrated and innovative global provider of specialty catalysts and services. We believe that our products, which are predominantly inorganic, and services contribute to improving the sustainability of the environment. We conduct operations through two repor ting segments: (1) Ecoservices and (2) Catalyst Technologies (including our 50% interest in the Zeolyst Joint Venture). Ecoservices: We are the leading provider of sulfuric acid recycling services to North American refineries for the production of alkylate, an essential gasoline component for lowering vapor pressure and increasing octane to meet stringent gasoline specifications and fuel efficiency standards. We are also a leading North American producer of on-purpose virgin sulfuric acid for water treatment, mining, and industrial applications. Catalyst Technologies: We are a global supplier of finished silica catalysts and catalyst supports necessary to produce high strength and high stiffness plastics used in packaging films, bottles, containers, and other molded applications. This segment includes our 50% interest in the Zeolyst Joint Venture, where we are a leading global supplier of zeolites used for catalysts that remove nitrogen oxides from diesel engine emissions as well as sulf ur from fuels during the refining process. In 2021, we served global customers across many end uses and, as of December 31, 2021, operated out of 10 strategically located manufacturing facilities. Recent Developments On December 14, 2020, we completed the sale of our Performance Materials business to Potters Buyer, LLC (the “Purchaser”), an affiliate of The Jordan Company, L.P., for a purchase price of $650 million, which was subject to certain adjustments for indebtedness, working capital and cash at the closing of the transaction. The results of operations, financial condition, and cash flows for the Performance Materials businesses are presented herein as discontinued operations. Refer to Note 4 to our Consolidated Financial Statements for additional information. Effective on August 1, 2021, we completed the sale of our Performance Chemicals business for $1.1 billion, subject to certain adjustments set forth in the agreement. We used a portion of the net cash proceeds to repay the entire Senior Secured Term Loan Facility due February 2027 of $231.4 million and the 5.750% Senior Notes due 2025 (the “Senior Notes”) of $295.0 million. The Senior Notes were redeemed at a redemption price equal to the sum of 102.88% of the principal amount of the Senior Notes plus accrued and unpaid interest to, but excluding, August 2, 2021. Additionally, our Board of Directors (the “Board”) declared a special cash dividend of $3.20 per share, paid on August 23, 2021 to shareholders of record as of the close of business on August 12, 2021. The results of operations, financial condition, and cash flows for the Performance Chemicals business are presented herein as discontinued operations. Refer to Note 4 to our Consolidated Financial Statements for additional information. In connection with the closing of the sale of the Performance Chemicals business, we changed our name from “PQ Group Holdings Inc.” to “Ecovyst Inc.”, changed the ticker symbol of our common stock listed on the New York Stock Exchange from “PQG” to “ECVT” and rebranded our former segments from “Refining Services” to “Ecoservices” and “Catalysts” to “Catalyst Technologies.” Financial information presented herein related to the Ecoservices and Catalyst Technologies segments remains unchanged from our previously issued financial statements filed on Form 10-K for the years ended December 31, 2020, 2019 and 2018, respectively. Impact of COVID-19 on our Business and Results The spread of COVID-19 and variants of the virus in the United States and other parts of the world has adversely impacted economic activity and contributed to volatility in financial markets. In response to the COVID-19 pandemic, the federal government, various states, local and foreign governments have issued decrees and orders that have disrupted many businesses and implemented social distancing, travel and other restrictions. In response to these restrictions, we took a variety of actions at the onset of the pandemic, including an international travel ban, distribution of personal protective equipment to employees, and work-at-home requirements for many of our employees who were not an integral part of our manufacturing operations. We also implemented and refined our business continuity plans in an effort to minimize operational disruptions. These measures were in place as of December 31, 2021. 43 During the year ended December 31, 2020, we took actions to mitigate the slowdown in our business as a result of the effects of COVID-19, including adjusting our production levels to meet anticipated customer demand, reducing discretionary spending, furloughs, delaying headcount additions and deferring capital maintenance expenditures. During the year ended December 31, 2021, as the economy began to recover from the global pandemic, the demand for most of our products and services increased. With the increased demand for our products, our businesses began to produce and sell our products to our customers consistent with pre-pandemic levels. Operations and Supply Our manufacturing plants require a limited number of on-site employees in order to continue to operate effectively. We have not experienced any material production issues, but have had limited and temporary shutdowns or slowdowns in some of our facilities. We have also seen limited disruptions in the availability of certain of our raw materials and other supplies, which to date have not had a material impact on production. Coronavirus Aid, Relief and Economic Security (“CARES”) Act On March 27, 2020, the CARES Act was signed into law. The provisions of the CARES Act provide substantial stimulus and financial assistance measures intended to mitigate the impact of the COVID-19 pandemic, including certain tax relief provisions. As permitted within the CARES Act, we began deferring payment of the employer portion of social security taxes in the second qua rter and continued to defer through the end of 2020, with 50% of the deferred amount paid during the year December 31, 2021 and the remaining 50% deferred will be paid during December 31, 2022. This deferral provided approximately $2.0 million in additional liquidity in 2020. Basis of Presentation Our zeolite catalysts product group operates through the Zeolyst Joint Venture, which we account for as an equity method investment in accordance with accounting principles generally accepted in the United States (“GAAP”). We do not record sales by the Zeolyst Joint Venture as revenue and such sales are not consolidated within our results of operations. However, Adjusted EBITDA reflects our share of the earnings of the Zeolyst Joint Venture that have been recorded as equity in net income from affiliated companies in our consolidated statements of income and includes Zeolyst Joint Venture adjustments on a proportionate basis based on our 50% ownership interest. Key Performance Indicators Adjusted EBITDA and Adjusted Net Income Adjusted EBITDA and adjusted net income are financial measures that are not prepared in accordance with GAAP and that we use to evaluate our operating performance, for business planning purposes and to measure our performance relative to that of our competitors. Adjusted EBITDA and adjusted net income are presented as key performance indicators as we believe these financial measures will enhance a prospective investor’s understanding of our results of operations and financial condition. EBITDA consists of net income (loss) attributable t o continuing operations b efore interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA adjusted for (i) non-operating income or expense, (ii) the impact of certain non-cash, nonrecurring or other items included in net income (loss) and EBITDA that we do not consider indicative of our ongoing operating performance, and (iii) depreciation, amortization and interest of our 50% share of the Zeolyst Joint Venture. Adjusted net income consists of net income (loss) attributable to Ecovyst Inc. adjusted for (i) non-operating income or expense and (ii) the impact of certain non-cash, nonrecurring or other items included in net income (loss) that we do not consider indicative of our ongoing operating performance. We believe that these non-GAAP financial measures provide investors with useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. You should not consider adjusted EBITDA or adjusted net income in isolation or as alternatives to the presentation of our financial results in accordance with GAAP. The presentation of adjusted EBITDA and adjusted net income financial measures may differ from similar measures reported by other companies and may not be comparable to other similarly titled measures. In evaluating adjusted EBITDA and adjusted net income, you should be aware that we are likely to incur expenses similar to those eliminated in this presentation in the future and that certain of these items could be considered recurring in nature. Our presentation of adjusted EBITDA and adjusted net income should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Reconciliations of 44 adjusted EBITDA and adjusted net income to GAAP net income (loss) are included in the results of operations discussion that follows for each of the respective periods. Key Factors and Trends Affecting Operating Results and Financial Condition Sales Our Ecoservices and Catalyst Technologies segments' sales have grown primarily due to expansion into new end applications, including emission control catalysts, polymer catalysts, and refining catalysts, as well as continued supply share gains. Sales in our Ecoservices and Catalyst Technologies segments are made on both a purchase order basis and pursuant to long-term contracts. Overall economic demand has significantly rebounded since the 2020 lows that resulted from the impact of COVID-19. Refineries have seen demand return with increasing miles driven, recovery from winter storm Uri and a general increase in economic activity. Polyethylene demand remains strong driven by the growing consumer demand for films and packaging. Higher refinery utilization rates are increasing catalyst demand for both traditional and renewable fuels on the continued recovery in vehicle miles driven. Sales in our Ecoservices and Catalyst Technologies segments are made on both a purchase order basis and pursuant to long-term contracts. Cost of Goods Sold Cost of goods sold consists of variable product costs, fixed manufacturing expenses, depreciation expense and freight expenses. Variable product costs include all raw materials, energy and packaging costs that are directly related to the manufacturing process. Fixed manufacturing expenses include all plant employment costs, manufacturing overhead and periodic maintenance costs. The primary raw materials for our Ecoservices segment include spent sulfuric acid, sulfur, acids, bases (including sodium hydroxide, or “caustic soda”), and certain metals. Spent sulfuric acid for our Ecoservices segment is supplied by customers for a nominal charge as part of their contracts. The primary raw materials used in the manufacture of products in our Catalyst Technologies segment include sodium silicate and cesium hydroxide. Most of our Ecoservices contracts feature take-or-pay volume protection and/or quarterly price adjustments for commodity inputs, labor, the Chemical Engineering Index (U.S. chemical plant construction cost index) and natural gas. Over 80% of our Ecoservices segment sales for the year ended December 31, 2021 were under contracts featuring quarterly price adjustments. The price adjustments generally reflect actual costs for producing acid and tend to protect us from volatility in labor, fixed costs and raw material pricing. The take-or-pay volume protection allows us to cover fixed costs through intermittent, temporary production issues at customer refineries. While natural gas is not a direct feedstock for any product, natural gas powered machinery and equipment are used to heat raw materials and create the chemical reactions necessary to produce end-products. We maintain multiple suppliers wherever possible and structure our customer contracts when possible to allow for the pass-through of raw material and natural gas costs. Joint Ventures We account for our investments in our equity joint ventures under the equity method. Our joint venture, the Zeolyst Joint Venture, manufactures high performance, specialty, zeolite-based catalysts for use in the packaging and engineered plastics, emission control, refining and petrochemical industries and other areas of the broader chemicals industry. Demand for the Zeolyst Joint Venture products fluctuates based upon the timing of our customer’s fixed bed catalyst replacements. We share proportionally in the management of our joint ventures with the other parties to each such joint venture. Seasonality Our regeneration services product group, which is a part of our Ecoservices segment, typically experiences seasonal fluctuations as a result of higher demand for gasoline products in the summer months and lower demand in the winter months. These demand fluctuations results in higher sales and working capital requirements in the second and third quarter. 45 Foreign Currency As a global business, we are subject to the impact of gains and losses on currency translations, which occur when the financial stat ements of foreign operations are translated into U.S. dollars. Approximately 6% of our sales for the years ended December 31, 2021 and 2020 in currencies other than the U.S. dollar. Because our consolidated financial results are reported in U.S. dollars, sales or earnings generated in currencies other tha n the U.S. dollar can result in a significant increase or decrease in the amount of those sales and earnings when translated to U.S. dollars. The foreign currency to which we have the most significant exchange rate exposure is the British Pound. Results of Operations Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 Highlights The following is a summary of our financial performance for the year ended December 31, 2021 compared with the year ended December 31, 2020. Sales Sales increased $115.3 million to $611.2 million. The increase in sales was primarily due to higher sales volumes and pass-through of higher sulfur pricing. The higher volumes were a result of strong demand for polyethylene catalyst and higher regeneration services. The global macroeconomic recovery supported demand across both businesses. Gross Profit Gross profit increased $25.8 million to $176.7 million. The increase in gross profit was primarily due to higher sales volumes across the portfolio and favorable product mix. These factors more than offset headwinds from higher variable costs and elevated fixed costs driven by Winter Storm Uri in early 2021. Inflationary factors increased through the year, namely from higher sulfur and energy costs, but customer contractual pass through mechanisms preserved earnings in Ecoservices, while targeted price increases addressed cost pressures in Catalyst Technologies. Operating Income Operating income increased $3.0 million to $54.6 million. The increase in operating income was primarily due to an increase in gross profit for the year ended December 31, 2021. Equity in Net Income from Affiliated Companies Equity in net income of affiliated companies for the year ended December 31, 2021 was $27.7 million, compared with net income of $21.0 million for the year ended December 31, 2020. The increase was due to higher earnings of $6.4 million generated by the Zeolyst Joint Venture during the year ended December 31, 2021 as compared to the year ended December 31, 2020. 46 The following is our consolidated statement of income and a summary of financial results for the years ended December 31, 2021 and 2020. Years ended December 31, Change 2021 2020 $ % (in millions, except percentages) Sales $ 611.2 $ 495.9 $ 115.3 23.3 % Cost of goods sold 434.5 345.0 89.5 25.9 % Gross profit 176.7 150.9 25.8 17.1 % Gross profit margin 28.9 % 30.4 % Selling, general and administrative expenses 97.8 81.5 16.3 20.0 % Other operating expense, net 24.3 17.8 6.5 36.5 % Operating income 54.6 51.6 3.0 5.8 % Operating income margin 8.9 % 10.4 % Equity in net income from affiliated companies (27.7) (21.0) (6.7) 31.9 % Interest expense, net 37.0 50.4 (13.4) (26.6) % Debt extinguishment costs 26.9 25.0 1.9 7.6 % Other (income) expense, net 4.5 (5.0) 9.5 (190.0) % Income from continuing operations before income taxes and noncontrolling interest 13.9 2.2 11.7 531.8 % Provision (benefit) for income taxes 12.1 (52.1) 64.2 (123.2) % Effective tax rate 87.1 % (2,350.6) % Net income from continuing operations 1.8 54.3 (52.5) (96.7) % Net loss from discontinued operations, net of tax (141.4) (336.0) 194.6 (57.9) % Net loss (139.6) (281.7) 142.1 (50.4) % Less: Net income (loss) attributable to the noncontrolling interest - discontinued operations $ 0.3 $ (2.9) $ 3.2 (110.3) % Net loss attributable to Ecovyst Inc. $ (139.9) $ (278.8) $ 138.9 (49.8) % Sales Years ended December 31, Change 2021 2020 $ % (in millions, except percentages) Sales: Ecoservices $ 500.5 $ 401.9 $ 98.6 24.5 % Catalyst Technologies 110.7 94.0 16.7 17.8 % Total sales $ 611.2 $ 495.9 $ 115.3 23.3 % 47 Ecoservices : Sales in Ecoservices for the year ended December 31, 2021 were $500.5 million, an increase of $98.6 million, or 24.5%, compared to sales of $401.9 million for the year ended December 31, 2020. The increase in sales was primarily due to higher sales volumes of $29.2 million and higher average selling price of $69.4 million, including pass-through of higher sulfur costs of $49.0 million. The increase in volumes was due to a higher demand for regeneration services on the recovery from the global pandemic and improved virgin sulfuric acid used in mining and industrial uses , as well as sales related to the Chem32 acquisition . The favorable pricing was primarily driven by pass-through of higher sulfur costs and higher labor labor and energy indexed costs. Catalyst Technologies : Sales in Catalyst Technologies for the year ended December 31, 2021 were $110.7 million, an increase of $16.7 million, or 17.8%, compared to sales of $94.0 million for the year ended December 31, 2020. The increase in sales was primarily due to higher sales volumes of $14.0 million, higher average selling price from product mix of $1.1 million and the favorable effects of foreign currency translation of $1.6 million. The increase in volumes was due to the continued strong customer demand for polyethylene catalysts. Gross Profit Gross profit for the year ended December 31, 2021 was $176.7 million, an increase of $25.8 million, or 17.1%, compared with $150.9 million for the year ended December 31, 2020. The increase in gross profit was due to favorable average selling price of $70.5 million and higher volumes of $22.1 million which was offset by unfavorable manufacturing costs of $75.5 million includes $49.0 million of higher sulfur costs. Favorable customer pricing was primarily a result of higher average selling prices from pass-through costs and product mix. The increase in volumes was due to an increase in regeneration services, virgin sulfuric acid sales and increased demand for polyethylene catalysts. The unfavorable change in manufacturing costs were driven by the timing of plant maintenance projects and higher fixed costs from the freezing weather in the Gulf of Mexico . Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2021 were $97.8 million, an increase of $16.3 million compared with $81.5 million for the year ended December 31, 2020. The increase in selling, general and administrative expenses was due to an increase in stock compensation and compensation related expenses, partially offset by lower discretionary spending. Other Operating Expense, Net Other operating expense, net for the year ended December 31, 2021 was $24.3 million, an increase of $6.5 million, or 36.5%, compared with $17.8 million for the year ended December 31, 2020. The increase in o ther operating expense, net was primarily due to an increase in amortization expense from the Chem32 acquisition. Equity in Net Income of Affiliated Companies Equity in net income of affiliated companies for the year ended December 31, 2021 was $27.7 million, an increase of $6.7 million, compared with income of $21.0 million for the year ended December 31, 2020. The increase was primarily due to $33.0 million of earnings generated by the Zeolyst Joint Venture during the year ended December 31, 2021 as compared to $26.7 million for the year ended December 31, 2020, which was a result of higher demand for catalyst used in renewable fuels and emission control catalysts, partially offset by lower specialty and hydrocracking catalyst on timing of customer fixed bed change-outs. Interest Expense, Net Interest expense, net for the year ended December 31, 2021 was $37.0 million, a decrease of $13.4 million, as compared with $50.4 million for the year ended December 31, 2020. The decrease in interest expense was due to lower interest rates on our variable rate debt along with lower average debt balances. 48 Debt Extinguishment Costs Debt extinguishment costs for the years ended December 31, 2021 and 2020 were $26.9 million and $25.0 million, respectively. Effective on August 1, 2021, we completed the sale of our Performance Chemicals business which triggered an obligation to provide partial payment under our existing senior secured term loan facility and pay in full our 5.75% senior notes. As a result of the required payments, previous unamortized deferred financing costs of $3.1 million and original issue discount of $3.6 million were written off as debt extinguishment costs. On December 14, 2020, we completed the sale of our Performance Materials business which triggered an obligation to provide partial payment under our existing senior secured term loan facilities. As a result of the required payments, previous unamortized deferred financing costs of $2.7 million and original issue discount of $5.8 million were written off as debt extinguishment costs. On July 22, 2020, we entered into an agreement for a new senior secured term loan facility in an aggregate principal amount of $650.0 million, which was used to repay the remaining outstanding balance of $625.0 million on the 6.75% Senior Secured Notes due 2022. In conjunction with the issuance of the senior secured term loan facility, we paid $10.6 million in prepayment premiums and recorded $0.1 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $2.1 million and original issue discount of $1.2 million associated with the 6.75% Senior Secured Notes due 2022 were written off as debt extinguishment costs. On February 7, 2020, we amended our existing senior secured term loan facility to reduce the applicable interest rates and extend the maturity of the facility to February 2027. We recorded $2.2 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previously unamortized deferred financing costs of $0.1 million and original issue discount of $0.2 million associated with the existing senior secured term loan facility were written off as debt extinguishment costs. During the year ended December 31, 2020 , we prepaid $466.1 million of outstanding principal balance on the 2018 Term Loan Facility and a redemption premium of $10.6 million on the 6.75% Senior Secured Notes. In connection with the 2018 Term Loan Facility prepayment, we wrote off $0.2 million of previously unamortized deferred financing costs and original issue discount of $12.8 million as debt extinguishment costs. In connection with the 6.75% Senior Secured Notes, we wrote off $2 million of previously unamortized deferred financing costs and original issue discount of $1 million as debt extinguishment costs. Other (Income) Expense, Net Other (income) expense, net was expense of $4.5 million for the year ended December 31, 2021, an unfavorable change of $9.5 million, compared with income of $5.0 million for the year ended December 31, 2020. The change primarily related to $4.7 million of foreign currency losses on the non-permanent intercompany debt denominated in local currency and translated to U.S. dollars and transactional currency translation in the current year period as compared to foreign currency gain of $5.3 million in the prior year period. Provision (Benefit) for Income Taxes The (benefit) provision for income taxes for the year ended December 31, 2021 was a $12.1 million provision compared to a $52.1 million benefit for the year ended December 31, 2020. The effective income tax rate for the year ended December 31, 2021 was 87.1% compared to (2,350.6)% for the year ended December 31, 2020. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the year ended December 31, 2021 was mainly due to the impact of the Global Intangible Low Taxed Income (“GILTI”) provisions of U.S. tax reform and the impact of intra-period allocation as a result of the Performance Chemicals business being classified as held for sale. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the year ended December 31, 2020 was mainly due to GILTI, foreign tax credit benefit and the impact of intra-period allocation as a result of the Performance Chemicals and Performance Materials businesses being classified as held for sale. 49 Net Loss Attributable to Ecovyst Inc. For the foregoing reasons and after the effect of the non-controlling interest in earnings of subsidiaries for each period presented, net loss attributable to Ecovyst Inc. was $139.9 million for the year ended December 31, 2021 as compared to net income of $278.8 million for the year ended December 31, 2020. Adjusted EBITDA Summarized Adjusted EBITDA information is shown below in the following table: Years ended December 31, Change 2021 2020 $ % (in millions, except percentages) Adjusted EBITDA (1) : Ecoservices $ 177.7 $ 157.2 $ 20.5 13.0 % Catalyst Technologies (2) 88.0 74.5 13.5 18.1 % Unallocated corporate expenses (38.1) (39.1) 1.0 (2.6) % Total $ 227.6 $ 192.6 $ 35.0 18.2 % (1) We define Adjusted EBITDA as EBITDA adjusted for certain items as noted in the reconciliation below. Our management evaluates the performance of our segments and allocates resources based primarily on Adjusted EBITDA. Adjusted EBITDA does not represent cash flow for periods presented and should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a source of liquidity. Adjusted EBITDA may not be comparable with EBITDA or Adjusted EBITDA as defined by other companies. (2) The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment is $49.9 million for the year ended December 31, 2021, which includes $27.8 million of equity in net income, excluding $6.5 million of amortization of investment in affiliate step-up, plus $15.6 million of joint venture depreciation, amortization and interest. The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment is $42.5 million for the year ended December 31, 2020, which includes $21.2 million of equity in net income, excluding $6.6 million of amortization of investment in affiliate step-up, plus $14.7 million of joint venture depreciation, amortization and interest. (3) Our total Adjusted EBITDA by Segment differs from our total consolidated Adjusted EBITDA due to unallocated corporate expenses. Ecoservices : Adjusted EBITDA for the year ended December 31, 2021 was $177.7 million, an increase of $20.5 million, or 13.0%, compared with $157.2 million for the year ended December 31, 2020. Ecoservices’ adjusted EBITDA increased due to higher demand of regeneration services, favorable pricing, improved cost efficiencies and the benefit of the Chem32 acquisition. Catalyst Technologies : Adjusted EBITDA for the year ended December 31, 2021 was $88.0 million, an increase of $13.5 million, or 18.1%, compared with $74.5 million for the year ended December 31, 2020. Adjusted EBITDA increased due to improved volume on the continued strong demand for polyethylene catalysts, increased demand for catalyst used in renewable fuels and emission control catalysts along with favorable product mix driving improved Adjusted EBITDA margins. 50 A reconciliation of net income attributable to Ecovyst Inc. to Adjusted EBITDA is as follows: Years ended December 31, 2021 2020 (in millions) Reconciliation of net income attributable to Ecovyst Inc. to Adjusted EBITDA Net income from continuing operations $ 1.8 $ 54.3 Provision (benefit) for income taxes 12.1 (52.1) Interest expense, net 37.0 50.4 Depreciation and amortization 79.7 76.9 EBITDA 130.6 129.5 Joint venture depreciation, amortization and interest (a) 15.6 14.7 Amortization of investment in affiliate step-up (b) 6.5 6.6 Debt extinguishment costs 26.9 25.0 Net loss on asset disposals (c) 5.7 4.7 Foreign currency exchange loss (gain) (d) 4.7 (5.3) LIFO benefit (e) (1.9) (5.3) Transaction and other related costs (f) 2.0 1.1 Equity-based compensation 31.8 17.2 Restructuring, integration and business optimization expenses (g) 3.0 2.0 Defined benefit plan pension benefit (h) (0.9) (0.6) Other (i) 3.6 3.0 Adjusted EBITDA $ 227.6 $ 192.6 (a) We use Adjusted EBITDA as a performance measure to evaluate our financial results. Because our Catalyst Technologies segment includes our 50% interest in the Zeolyst Joint Venture, we include an adjustment for our 50% proportionate share of depreciation, amortization and interest expense of the Zeolyst Joint Venture. (b) Represents the amortization of the fair value adjustments associated with the equity affiliate investment in the Zeolyst Joint Venture as a result of the combination of the businesses of PQ Holdings Inc. and Eco Services Operations LLC in May 2016 (the “Business Combination”). We determined the fair value of the equity affiliate investment and the fair value step-up was then attributed to the underlying assets of the Zeolyst Joint Venture. Amortization is primarily related to the fair value adjustments associated with fixed assets and intangible assets, including customer relationships and technical know-how. (c) When asset disposals occur, we remove the impact of net gain/loss of the disposed asset because such impact primarily reflects the non-cash write-off of long-lived assets no longer in use. (d) Reflects the exclusion of the foreign currency transaction gains and losses in the statements of income primarily related to the non-permanent intercompany debt denominated in local currency translated to U.S. dollars. (e) Represents non-cash adjustments to the Company’s LIFO reserves for certain inventories in the U.S. that are valued using the LIFO method, which we believe provides a means of comparison to other companies that may not use the same basis of accounting for inventories. (f) Relates to certain transaction costs, including debt financing, due diligence and other costs related to transactions that are completed, pending or abandoned, that we believe are not representative of our ongoing business operations. (g) Includes the impact of restructuring, integration and business optimization expenses which are incremental costs that are not representative of our ongoing business operations. 51 (h) Represents adjustments for defined benefit pension plan (benefit) costs in our statement of income. All of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen. As such, we do not view such expenses as core to our ongoing business operations. (i) Other costs consist of certain expenses that are not core to our ongoing business operations, including environmental remediation-related costs, capital and franchise taxes. Included in this line-item are rounding discrepancies that may arise from rounding from dollars (in thousands) to dollars (in millions). Adjusted Net Income Summarized adjusted net income information is shown below in the following table: Years ended December 31, 2021 2020 Pre-tax Tax expense (benefit) After-tax Pre-tax Tax expense (benefit) After-tax (in millions) Reconciliation of net income attributable to Ecovyst Inc. to Adjusted Net Income (1)(2) Net income attributable to Ecovyst Inc. $ 13.9 $ 12.1 $ 1.8 $ 2.2 $ (52.1) $ 54.3 Amortization of investment in affiliate step-up (b) 6.5 1.6 4.9 6.6 1.7 4.9 Debt extinguishment costs 26.9 6.6 20.3 25.0 6.3 18.7 Net loss on asset disposals (c) 5.7 1.4 4.3 4.7 1.2 3.5 Foreign currency exchange loss (gain) (d) 4.7 1.0 3.7 (5.3) (0.6) (4.7) LIFO benefit (e) (1.9) (0.5) (1.4) (5.3) (1.3) (4.0) Transaction and other related costs (f) 2.0 0.5 1.5 1.1 0.3 0.8 Equity-based compensation 31.8 7.7 24.1 17.2 4.0 13.2 Restructuring, integration and business optimization expenses (g) 3.0 0.7 2.3 2.0 0.5 1.5 Defined benefit plan pension benefit (h) (0.9) (0.2) (0.7) (0.6) (0.2) (0.4) Other (i) 3.6 0.9 2.7 3.0 0.7 2.3 Adjusted Net Income, including Impact of Discrete Tax Items 95.3 31.8 63.5 50.6 (39.5) 90.1 Impact of Discrete Tax Items (3) — (6.1) 6.1 — — — Adjusted Net Income $ 95.3 $ 25.7 $ 69.6 $ 50.6 $ (39.5) $ 90.1 (1) We define adjusted net inco me as net (loss) income attributable to Ecovyst Inc. adjusted for non-operating income or expense and the impact of certain non-cash or other items that are included in net income that we do not consider indicative of our ongoing operating performance. Adjusted net income is presented as a key performance indicator as we believe it will enhance a prospective investor’s understanding of our results of operations and financial condition. Adjusted net income may not be comparable with net income or adjusted net income as defined by other companies. (2) Ref er to the Adjusted EBITDA notes above for more information with respect to each adjustment. (3) Represents intraperiod allocation rules related to a change in the UK legislature, which increased the UK corporate rate as well as an uncertain tax position related to a foreign entity. The adjustments to net (loss) income attributable to Ecovyst Inc. are shown net of applicable statutory tax rates. 52 Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 Highlights The following is a summary of our financial performance for the year ended December 31, 2020 compared with the year ended December 31, 2019. Sales Sales decreased $36.8 million to $495.9 million. The decrease in sales was primarily due to lower sales volumes and pass-through of lower sulfur pricing. Gross Profit Gross profit decreased $16.3 million to $150.9 million. The decrease in gross profit was primarily due to the lower sales volumes partially offset by favorable fixed manufacturing costs. Operating Income Operating income decreased by $14.4 million to $51.6 million. The decrease in operating income was primarily due to a decrease in gross profit for the year ended December 31, 2020. Equity in Net Income from Affiliated Companies Equity in net income of affiliated companies for the year ended December 31, 2020 was $21.0 million, compared with net income of $45.8 million for the year ended December 31, 2019. The decrease was due to lower earnings of $24.6 million generated by the Zeolyst Joint Venture during the year ended December 31, 2020 as compared to the year ended December 31, 2019. 53 The following is our consolidated statement of income and a summary of financial results for the years ended December 31, 2020 and 2019. Years ended December 31, Change 2020 2019 $ % (in millions, except percentages) Sales $ 495.9 $ 532.7 $ (36.8) (6.9) % Cost of goods sold 345.0 365.5 (20.5) (5.6) % Gross profit 150.9 167.2 (16.3) (9.7) % Gross profit margin 30.4 % 31.4 % Selling, general and administrative expenses 81.5 83.5 (2.0) (2.4) % Other operating expense, net 17.8 17.7 0.1 0.6 % Operating income 51.6 66.0 (14.4) (21.8) % Operating income margin 10.4 % 12.4 % Equity in net income from affiliated companies (21.0) (45.8) 24.8 (54.1) % Interest expense, net 50.4 66.9 (16.5) (24.7) % Debt extinguishment costs 25.0 3.4 21.6 635.3 % Other (income) expense, net (5.0) (1.9) (3.1) 163.2 % Income from continuing operations before income taxes and noncontrolling interest 2.2 43.4 (41.2) (94.9) % (Benefit) provision for income taxes (52.1) 12.3 (64.4) (523.6) % Effective tax rate (2,350.6) % 28.3 % Net income from continuing operations 54.3 31.1 23.2 74.6 % Net (loss) income from discontinued operations, net of tax (336.0) 49.2 (385.2) (782.9) % Net (loss) income (281.7) 80.3 (362.0) (450.8) % Less: Net (loss) income attributable to the noncontrolling interest - discontinued operations $ (2.9) $ 0.8 $ (3.7) (462.5) % Net (loss) income attributable to Ecovyst Inc. $ (278.8) $ 79.5 $ (358.3) (450.7) % Sales Years ended December 31, Change 2020 2019 $ % (in millions, except percentages) Sales: Ecoservices $ 401.9 $ 447.1 $ (45.2) (10.1) % Catalyst Technologies 94.0 85.7 8.3 9.7 % Total sales $ 495.9 $ 532.8 $ (36.9) (6.9) % 54 Ecoservices : Sales in Ecoservices for the year ended December 31, 2020 were $401.9 million, a decrease of $45.2 million, or 10.1%, compared to sales of $447.1 million for the year ended December 31, 2019. The decrease in sales was primarily due to lower sales volumes of $26.7 million and lower average selling price from pass-through costs of $18.5 million. The decrease in volumes was due to lower regeneration services demand from refinery utilization rates driven by COVID-19. The unfavorable pricing was driven by pass-through of lower sulfur costs. Catalyst Technologies : Sales in Catalyst Technologies for the year ended December 31, 2020 were $94.0 million, an increase of $8.3 million, or 9.7%, compared to sales of $85.7 million for the year ended December 31, 2019. The increase in sales was primarily due to higher sales volumes of $10.6 million, partially offset by lower average selling price from product mix of $1.2 million and the unfavorable effects of foreign currency translation of $1.1 million. The increase in sales was due to higher customer demand within our polyethylene catalysts product line. Gross Profit Gross profit for the year ended December 31, 2020 was $150.9 million, a decrease of $16.3 million, or 9.7%, compared with $167.2 million for the y ear ended December 31, 2019. The decrease in gross profit was due to unfavorable average selling price of $19.7 million and lower volumes of $10.9 million which was partly offset by favorable manufacturing costs of $23.1 million. Unfavorable customer pricing was primarily a result of pass-through of lower sulfur costs. The decrease in volumes was due to a decline in sulfuric acid sales which was partially offset by increased customer demand within our polyethylene catalysts product line. The favorable change in manufacturing costs were driven by the timing of plant maintenance projects. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2020 were $81.5 million, a decrease of $2.0 million, or 2.4%, compared with $83.5 million for t he year ended December 31, 2019. The decrease in selling, general and administrative expenses was due to lower discretionary spending partially offset by an increase in stock compensation expense. Other Operating Expense, Net Other operating expense, net for the year ended December 31, 2020 was $17.8 million, an increase of $0.1 million, or 0.6%, compared with $17.7 million for the year ended December 31, 2019. Other operating expense, net was consistent between both periods. Equity in Net Income of Affiliated Companies Equity in net income of affiliated companies for the year ended December 31, 2020 was $21.0 million, a decrease of $24.8 million, compared with income of $45.8 million for the year ended December 31, 2019. The decrease was primarily due to $26.7 million of earnings generated by the Zeolyst Joint Venture during the year ended December 31, 2020 as compared to $52.2 million for the year ended December 31, 2019 which was a result of the timing of hydrocracking catalyst change-outs and lower demand for custom catalysts and emission control catalysts in heavy duty diesel production driven by the COVID-19 pandemic. Interest Expense, Net Interest ex pense, net for the year ended December 31, 2020 was $50.4 million, a decrease of $16.5 million, as compared with $66.9 million for the year ended December 31, 2019. The decrease in interest expense was due to lower interest rates on our variable rate debt along with lower average debt balances and a favorable increase in variable versus fixed rate debt. 55 Debt Extinguishment Costs Debt extinguishment costs for the years ended December 31, 2020 and 2019 were $25.0 million and $3.4 million, respectively. On December 14, 2020, we completed the sale of our Performance Materials business which triggered an obligation to provide partial payment under our existing senior secured term loan facilities. As a result of the required payments, previous unamortized deferred financing costs of $2.7 million and original issue discount of $5.8 million were written off as debt extinguishment costs. On July 22, 2020, we entered into an agreement for a new senior secured term loan facility in an aggregate principal amount of $650.0 million, which was used to repay the remaining outstanding balance of $625.0 million on the 6.75% Senior Secured Notes due 2022. In conjunction with the issuance of the senior secured term loan facility, we paid $10.6 million in prepayment premiums and recorded $0.1 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previous unamortized deferred financing costs of $2.1 million and original issue discount of $1.2 million associated with the 6.75% Senior Secured Notes due 2022 were written off as debt extinguishment costs. On February 7, 2020, we amended our existing senior secured term loan facility to reduce the applicable interest rates and extend the maturity of the facility to February 2027. We recorded $2.2 million of new creditor and third-party financing fees as debt extinguishment costs. In addition, previously unamortized deferred financing costs of $0.1 million and original issue discount of $0.2 million associated with the existing senior secured term loan facility were written off as debt extinguishment costs. During the year ended December 31, 2019, we prepaid $210.0 million of outstanding principal balance on the 2018 Term Loan Facility (as defined below). In connection with this prepayment, we wrote off $1.0 million of previously unamortized deferred financing costs and original issue discount of $2.4 million as debt extinguishment costs. Other (Income) Expense, Net Other (income) expense, net was income of $5.0 million for the year ended December 31, 2020, a favorable change of $3.1 million, compared with income of $1.9 million for the year ended December 31, 2019. The change primarily consisted of $5.3 million of foreign currency gains on the non-permanent intercompany debt denominated in local currency and translated to U.S. dollars and transactional currency translation in the current year period as compared to foreign currency loss of $1.2 million in the prior year period. (Benefit) Provision for Income Taxes The (benefit) provision for income taxes for the year ended December 31, 2020 was $52.1 million benefit compared to a $12.3 million provision for the year ended December 31, 2019. The effective income tax rate for the year ended December 31, 2020 was (2,350.6)% compared to 28.3% for the year ended December 31, 2019. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the year ended December 31, 2020 was mainly due to the impact of the GILTI provisions of U.S. tax reform, foreign tax credit benefit and the impact of intra-period allocation as a result of the Performance Chemicals and Performance Materials businesses being classified as held for sale. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the year ended December 31, 2019 was mainly due to state and local taxes, GILTI and the impact of intra-period allocation as a result of the Performance Chemicals and Performance Materials businesses being classified as held for sale. Net (Loss) Income Attributable to Ecovyst Inc. For the foregoing reasons and after the effect of the non-controlling interest in earnings of subsidiaries for each period presented, net loss attributable to Ecovyst Inc. was $278.8 million for the year ended December 31, 2020 as compared to a net income of $79.5 million for the year ended December 31, 2019. 56 Adjusted EBITDA Summarized Adjusted EBITDA information is shown below in the following table: Years ended December 31, Change 2020 2019 $ % (in millions, except percentages) Adjusted EBITDA (1) : Ecoservices $ 157.2 $ 175.6 $ (18.4) (10.5) % Catalyst Technologies (2) 74.5 107.8 (33.3) (30.9) % Unallocated corporate expenses (39.1) (43.3) 4.2 (9.7) % Total $ 192.6 $ 240.1 $ (47.5) (19.8) % (1) We define Adjusted EBITDA as EBITDA adjusted for certain items as noted in the reconciliation below. Our management evaluates the performance of our segments and allocates resources based primarily on Adjusted EBITDA. Adjusted EBITDA does not represent cash flow for periods presented and should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a source of liquidity. Adjusted EBITDA may not be comparable with EBITDA or Adjusted EBITDA as defined by other companies. (2) The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment is $42.5 million for the year ended December 31, 2020, which includes $21.2 million of equity in net income, excluding $6.6 million of amortization of investment in affiliate step-up plus $14.7 million of joint venture depreciation, amortization and interest. The Adjusted EBITDA from the Zeolyst Joint Venture included in the Catalyst Technologies segment is $68.1 million for the year ended December 31, 2019, which includes $45.9 million of equity in net income, excluding $7.5 million of amortization of investment in affiliate step-up plus $14.7 million of joint venture depreciation, amortization and interest. (3) Our total Adjusted EBITDA by Segment differs from our total consolidated Adjusted EBITDA due to unallocated corporate expenses. Ecoservices : Adjusted EBITDA for the year ended December 31, 2020 was $157.2 million, a decrease of $18.4 million, or 10.5%, compared with $175.6 million for the year ended December 31, 2019. Ecoservices adjusted EBITDA decreased due to lower regeneration services demand as a result of reduced refinery utilization rates, partially offset by fixed and SG&A related cost savings. Catalyst Technologies : Adjusted EBITDA for the year ended December 31, 2020 was $74.5 million, a decrease of $33.3 million, or 30.9%, compared with $107.8 million for the year ended December 31, 2019. Adjusted EBITDA decreased due to lower volumes in the Zeolyst joint venture and unfavorable inventory absorption due to lower production and inventory depletion to align with expected lower demand. 57 A reconciliation of net income attributable to Ecovyst Inc. to Adjusted EBITDA is as follows: Years ended December 31, 2020 2019 (in millions) Reconciliation of net income attributable to Ecovyst Inc. to Adjusted EBITDA Net income from continuing operations $ 54.3 $ 31.1 Provision for income taxes (52.1) 12.3 Interest expense, net 50.4 66.9 Depreciation and amortization 76.9 74.8 EBITDA 129.5 185.1 Joint venture depreciation, amortization and interest (a) 14.7 14.7 Amortization of investment in affiliate step-up (b) 6.6 7.5 Debt extinguishment costs 25.0 3.4 Net loss on asset disposals (c) 4.7 4.6 Foreign currency exchange (gain) loss (d) (5.3) 1.2 LIFO (benefit) expense (e) (5.3) 6.5 Transaction and other related costs (f) 1.1 0.2 Equity-based compensation 17.2 13.3 Restructuring, integration and business optimization expenses (g) 2.0 2.6 Defined benefit plan pension cost (benefit) cost (h) (0.6) 0.6 Other (i) 3.0 0.4 Adjusted EBITDA $ 192.6 $ 240.1 (a) We use Adjusted EBITDA as a performance measure to evaluate our financial results. Because our Catalyst Technologies segment includes our 50% interest in the Zeolyst Joint Venture, we include an adjustment for our 50% proportionate share of depreciation, amortization and interest expense of the Zeolyst Joint Venture. (b) Represents the amortization of the fair value adjustments associated with the equity affiliate investment in the Zeolyst Joint Venture as a result of the Business Combination. We determined the fair value of the equity affiliate investment and the fair value step-up was then attributed to the underlying assets of the Zeolyst Joint Venture. Amortization is primarily related to the fair value adjustments associated with fixed assets and intangible assets, including customer relationships and technical know-how. (c) When asset disposals occur, we remove the impact of net gain/loss of the disposed asset because such impact primarily reflects the non-cash write-off of long-lived assets no longer in use. (d) Reflects the exclusion of the foreign currency transaction gains and losses in the statements of income primarily related to the non-permanent intercompany debt denominated in local currency translated to U.S. dollars. (e) Represents non-cash adjustments to the Company’s LIFO reserves for certain inventories in the U.S. that are valued using the LIFO method, which we believe provides a means of comparison to other companies that may not use the same basis of accounting for inventories. (f) Relates to certain transaction costs, including debt financing, due diligence and other costs related to transactions that are completed, pending or abandoned and that we believe are not representative of our ongoing business operations. (g) Includes the impact of restructuring, integration and business optimization expenses which are incremental costs that are not representative of our ongoing business operations. 58 (h) Represents adjustments for defined benefit pension plan (benefit) costs in our statement of income. All of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen. As such, we do not view such expenses as core to our ongoing business operations. (i) Other costs consist of certain expenses that are not core to our ongoing business operations, including environmental remediation-related costs, capital and franchise taxes. Included in this line-item are rounding discrepancies that may arise from rounding from dollars (in thousands) to dollars (in millions). Adjusted Net Income Summarized adjusted net income information is shown below in the following table: Years ended December 31, 2020 2019 Pre-tax Tax expense (benefit) After-tax Pre-tax Tax expense (benefit) After-tax (in millions) Reconciliation of net (loss) income attributable to Ecovyst Inc. to Adjusted Net Income (1)(2) Net income attributable to Ecovyst Inc. $ 2.2 $ (52.1) $ 54.3 $ 43.4 $ 12.3 $ 31.1 Amortization of investment in affiliate step-up (b) 6.6 1.7 4.9 7.5 1.8 5.7 Debt extinguishment costs 25.0 6.3 18.7 3.4 0.8 2.6 Net loss on asset disposals (c) 4.7 1.2 3.5 4.6 1.2 3.4 Foreign currency exchange (gain) loss (d) (5.3) (0.6) (4.7) 1.2 (0.1) 1.3 LIFO (benefit) expense (e) (5.3) (1.3) (4.0) 6.5 1.7 4.8 Transaction and other related costs (f) 1.1 0.3 0.8 0.2 0.1 0.1 Equity-based compensation 17.2 4.0 13.2 13.3 3.1 10.2 Restructuring, integration and business optimization expenses (g) 2.0 0.5 1.5 2.6 0.7 1.9 Defined benefit plan pension (benefit) cost (h) (0.6) (0.2) (0.4) 0.6 0.2 0.4 Other (i) 3.0 0.7 2.3 0.4 (0.1) 0.5 Adjusted Net Income, including non-cash GILTI tax and Impact of Discrete Tax Items 50.6 (39.5) 90.1 83.7 21.7 62.0 Impact of non-cash GILTI tax (3) — — — — (1.0) 1.0 Impact of Discrete Tax Items (4) — — — — (3.6) 3.6 Adjusted Net Income $ 50.6 $ (39.5) $ 90.1 $ 83.7 $ 17.1 $ 66.6 (1) We define adjusted net income as net (loss) income attributable to Ecovyst Inc. adjusted for non-operating income or expense and the impact of certain non-cash or other items that are included in net income that we do not consider indicative of our ongoing operating performance. Adjusted net income is presented as a key performance indicator as we believe it will enhance a prospective investor’s understanding of our results of operations and financial condition. Adjusted net income may not be comparable with net income or adjusted net income as defined by other companies. (2) Refer to the Adjusted EBITDA notes above for more information with respect to each adjustment. (3) Amount represents the impact to tax expense in net income before non-controlling interest and the related adjustments to net income associated with the GILTI provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”). We were required to record incremental tax provision impact with respect to GILTI as a result of having historical U.S. net operating loss (“NOL”) amounts to offset the GILTI taxable income inclusion. This NOL utilization precluded us from recognizing GILTI credits which would otherwise help offset the tax impacts of GILTI. 59 Beginning with the year ended 2020, we are no longer adjusting for the impact of the GILTI provisions of the TCJA since the NOLs have been fully utilized and GILTI now represents a cash tax impact. (4) Represents the rate change in the Netherlands related to the Dutch Tax Plan 2019 recorded in net income. The adjustments to net income attributable to Ecovyst Inc. are shown net of applicable statutory tax rates. Financial Condition, Liquidity and Capital Resources Our primary sources of liquidity consist of cash flow from operations, existing cash balances as well as funds available under our asset based lending revolving credit facility. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources of funds. Our primary liquidity requirements include funding working capital requirements (primarily inventory and accounts receivable, net of accounts payable and other accrued liabilities), debt service requirements and capital expenditures. Our capital expenditures include both maintenance of business, which includes spending on maintenance and health, safety and environmental initiatives as well as growth, which includes spending to drive organic sales growth and cost savings initiatives. We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our asset based lending revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next 12 months. We may also pursue strategic acquisition opportunities, which may impact our future cash requirements. We may, from time to time, increase borrowings under our asset based lending revolving credit facility to meet our future cash needs. As of December 31, 2021, we had cash and cash equivalents of $140.9 million and availability of $61.3 million under our asset based lending revolving credit facility, after giving effect to $17.5 million of outstanding letters of credit and no revolving credit facility borrowings, for a total available liquidity of $202.2 million. As of December 31, 2021, we were in compliance with all covenants under our debt agreements. Included in our cash and cash equivalents balance as of December 31, 2021 was $13.5 million of cash and cash equivalents held in foreign jurisdictions. We repatriate cash held outside of the United States from certain foreign subsidiaries in order to meet domestic liquidity needs. Depending on domestic and foreign cash balances, we have certain flexibility to repatriate funds in order to meet domestic liquidity needs. In certain cases, the repatriation of foreign cash under previous U.S. tax law had generally been subject to U.S. income taxes at the time of cash distribution. Due to the enactment of the TCJA in December 2017, our overseas earnings repatriation will generally no longer be subject to U.S. federal income taxes at the time of cash distribution. However, future earnings may still be taxed for foreign and state income tax purposes. Over the course of the next twelve months and beyond, we anticipate making significant cash payments for known contractual and other obligations, including: Principal and interest on long-term debt As of December 31, 2021, our total indebtedness was $895.5 million, with up to $61.3 million of available borrowings under our asset based lending revolving credit facility. Our liquidity requirements are significant, primarily due to debt service requirements. As reported, our cash interest expense for the years ended December 31, 2021, 2020 and 2019 was approximately $59.0 million, $90.3 million and $117.8 million, respectively. Before any impact of hedges, a one percent change in assumed interest rates for our variable interest credit facilities would have an annual impact of approximately $9.0 million on interest expense. The principal balance due in the next twelve months is $9.0 million. Interest payments due within the next twelve months are $30.2 million using the interest rate effective as of December 31, 2021 on our variable interest credit facilities. Interest on long-term debt excludes amortization of deferred financing fees and original issue discount. The actual interest payments may differ materially based on actual amounts of long-term debt outstanding and actual interest rates in future periods. Subject to approval by our board of directors, we may raise additional capital or borrowings from time to time or seek to refinance our existing debt. There can be no assurances that future capital or borrowings will be available to us, and the cost and availability of new capital or borrowings could be materially impacted by market conditions. Further, the decision to refinance our existing debt is based on a number of factors, including general market conditions and our ability to refinance on attractive terms at any given point in time. Any attempts to raise additional capital or borrowings or refinance our existing debt could cause us to incur significant charges. Such charges could have a material impact on our financial position, results of operations, or cash flows. 60 Cash Flow Years ended December 31, 2021 2020 2019 (in millions) Continuing Operations Net cash provided by (used in) Operating activities $ 137.3 $ 140.1 $ 133.2 Investing activities 875.7 571.8 (54.6) Financing activities (963.1) (720.2) (214.7) Discontinued Operations Net cash provided by (used in) Operating activities (7.4) 83.5 134.6 Investing activities (40.0) (20.3) 19.4 Financing activities (1.1) (2.6) (1.4) Effect of exchange rate changes on cash, cash equivalents and restricted cash 2.3 11.1 (2.2) Net change in cash, cash equivalents and restricted cash 3.7 63.4 14.3 Cash, cash equivalents and restricted cash at beginning of period 137.2 73.9 59.7 Cash, cash equivalents and restricted cash at end of period $ 140.9 $ 137.3 $ 74.0 Years ended December 31, 2021 2020 2019 (in millions) Continuing Operations Net income $ 1.8 $ 54.3 $ 31.1 Non-cash and non-operating activities (1) 156.6 74.6 94.6 Changes in working capital (18.1) 14.5 10.6 Other operating activities (3.0) (3.3) (3.1) Net cash provided by operating activities, continuing operations $ 137.3 $ 140.1 $ 133.2 (1) Includes depreciation, amortization, amortization of deferred financing costs and original issue discount, debt extinguishment costs, foreign currency exchange gains and losses, pension and postretirement healthcare benefit expense and funding, deferred income tax benefit, net losses on asset disposals, stock compensation expense, equity in net income and dividends received from affiliated companies. 61 Years ended December 31, 2021 2020 2019 (in millions) Continuing Operations Working capital changes that provided (used) cash: Receivables $ (33.5) $ 7.0 $ 4.5 Inventories 0.6 (3.0) (4.2) Prepaids and other current assets (7.8) (1.4) 2.9 Accounts payable 10.0 6.9 0.5 Accrued liabilities 12.6 5.0 6.9 $ (18.1) $ 14.5 $ 10.6 Years ended December 31, 2021 2020 2019 (in millions) Continuing Operations Purchases of property, plant and equipment $ (60.0) $ (54.8) $ (55.3) Proceeds from business divestiture, net of cash and indebtedness 978.4 624.3 — Proceeds from sale of assets — 2.4 — Business combinations, net of cash acquired (42.6) — — Other, net (0.1) (0.1) 0.7 Net cash provided by (used in) investing activities, continuing operations $ 875.7 $ 571.8 $ (54.6) Years ended December 31, 2021 2020 2019 (in millions) Continuing Operations Net cash repayments on debt obligations (542.9) (470.3) (215.0) Dividends paid to stockholders (435.6) (243.7) — Other financing activities 15.4 (6.2) 0.3 Net cash used in financing activities, continuing operations $ (963.1) $ (720.2) $ (214.7) 62 The following discussions related to our cash flows are presented on a continuing operations basis, which excludes the cash flows from our former Performance Chemicals and Performance Materials businesses, which are accounted for as discontinued operations. Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 Net cash provided by operating activities was $137.3 million for the year ended December 31, 2021, compared to $140.1 million provided for the year ended December 31, 2020. Cash generated by net income and non-working capital related activities was higher during the year ended December 31, 2021 by $29.8 million compared to the prior year. Cash used by working capital during the year ended December 31, 2021 was unfavorable compared to the year ended December 31, 2020. Working capital for the year ended December 31, 2021 used cash of $18.1 million, compared to cash provided of $14.5 million for the year ended December 31, 2020. The increase in cash generated by net income and non-working capital related activities of $29.8 million as compared to the prior year period was primarily due to an increase in gross profit driven by higher sales volumes. The $32.6 million decrease in cash from working capital as compared to the prior year was primarily due to favorable changes in accrued liabilities, inventories, and accounts payables, which were offset by unfavorable changes in accounts receivable and prepaids. The unfavorable change in accounts receivable was driven by the increase in sales volumes and higher pass-through pricing within our Ecoservices segment and the timing of sales within our Catalyst Technologies segment. The unfavorable change in prepaid and other current assets relates to the timing of receivables from related parties and the timing of insurance prepayments. The increase in cash provided by inventory was due to the increase in sales within our Catalyst Technologies segment in the current year period. The favorable change in accounts payable is due to the timing of vendor payments as well as capital spending. The favorable change in accrued liabilities relates to changes in various accruals. Net cash provided by investing activities was $875.7 million for the year ended December 31, 2021, compared to net cash provided of $571.8 million during the year ended December 31, 2020. Cash used in investing activities primarily consisted of $60.0 million and $54.8 million to fund capital expenditures during the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, we divested our Performance Chemicals business and received $978.4 million in net proceeds and acquired Chem32 LLC for $42.6 million. We received proceeds of $2.4 million related to the sale of non-core assets during the year ended December 31, 2020. Net cash used in financing activities was $963.1 million for the year ended December 31, 2021, compared to net cash used of $720.2 million during the year ended December 31, 2020. Net cash used in financing activities was primarily driven by $542.9 million and $470.3 million in net repayments of our debt and revolving credit facility made during the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, we paid a dividend of $3.20 per common share, which resulted in a cash outflow of $435.6 million. Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 Net cash provided by operating activities was $140.1 million for the year ended December 31, 2020, compared to $133.2 million provided for the year ended December 31, 2019. Cash generated by net income and non-working capital related activities was higher during the year ended December 31, 2020 by $3.0 million compared to the prior year. Cash provided by working capital during the year ended December 31, 2020 was favorable compared to the year ended December 31, 2019. Working capital for the year ended December 31, 2020 provided cash of $14.5 million, compared to cash provided of $10.6 million for the year ended December 31, 2019. The increase in cash generated by net income and non-working capital related activities of $3.0 million as compared to the prior year period was primarily due to a decrease in gross profit driven by lower sales volumes. The $3.9 million increase in cash from working capital as compared to the prior year was primarily due to unfavorable changes in accrued liabilities and prepaid and other current assets, which were partially offset by favorable changes in accounts receivable, inventories and accounts payable. The unfavorable change in accrued liabilities was primarily due to the timing of interest and employee-related payments. The increased cash flow contribution from accounts receivable was driven by the timing of collections on our receivable balances during the current year period versus prior year period. The favorable change in inventory balances 63 is due to a reduction in inventory in 2020 compared to an inventory build in 2019. We increased inventory levels at the end of the 2019 period within our polyethylene catalyst product group to meet sales demand in the 2020 period. The favorable change in accounts payable is due to timing of capital expenditure payments. Net cash provided by investing activities was $571.8 million for the year ended December 31, 2020, compared to net cash used of $54.6 million during the year ended December 31, 2019. Cash used in investing activities primarily consisted of $54.8 million and $55.3 million to fund capital expenditures during the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, we sold our Performance Materials business for net cash proceeds of $624.3 million and sold additional assets which generated proceeds of $2.4 million. Net cash used in financing activities was $720.2 million for the year ended December 31, 2020, compared to net cash used of $214.7 million during the year ended December 31, 2019. Net cash used in financing activities was primarily driven by $470.3 million and $215.0 million in net repayments of our debt and revolving credit facility made during the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, we paid a dividend of $1.80 per common share, which resulted in a cash outflow of $243.7 million. Debt December 31, 2021 2020 (in millions) the 2018 Term Loan Facility $ — $ 671.7 the 2020 Term Loan Facility — 459.7 the 2021 Term Loan Facility 895.5 — 5.75% Senior Unsecured Notes due 2025 — 295.0 ABL Facility — — Total debt 895.5 1,426.4 Original issue discount (8.8) (15.6) Deferred financing costs (4.9) (10.4) Total debt, net of original issue discount and deferred financing costs 881.8 1,400.4 Less: current portion (9.0) — Total long-term debt, excluding current portion $ 872.8 $ 1,400.4 As of December 31, 2021 our total debt was $895.5 million excluding the original issue discount of $8.8 million and deferred financing fees of $4.9 million for our senior secured credit facilities and notes. Our net debt was $754.6 million, including cash of $140.9 million. Our total available liquidity as of December 31, 2021 was $202.2 million, which represents our cash on hand of $140.9 million plus our excess availability under our asset based lending revolving credit facility of $61.3 million, after giving effect to $17.5 million of outstanding letters of credit and no revolving credit facility borrowings. We may seek, subject to market conditions and other factors, opportunities to repurchase, refinance or otherwise reprice our debt. Senior Secured Credit Facilities On May 4, 2016, we entered into senior secured credit facilities (collectively, the “2016 Senior Secured Credit Facilities”) that were comprised of a $1,200.0 million term loan facility consisting of a $900.0 million U.S. dollar-denominated tranche and a $300.0 million Euro-denominated (or €265.0 million) tranche (the “2016 Term Loan Facility”), and a $200.0 million asset-based revolving credit facility (the “ABL Facility”), which provided for up to $200.0 million in revolving credit borrowings consisting of up to $150.0 million in U.S. available borrowings, up to $10.0 million in Canadian available borrowings and up to $40.0 million of European available borrowings. Borrowings under the ABL Facility bear interest at a rate equal to the LIBOR rate or the base rate elected by us at the time of the borrowing plus a margin of between 1.50%-2.00% or 0.50%-1.00%, respectively, depending on availability under the ABL Facility. In addition, there is an annual commitment fee equal to 0.375%, with a step-down to 0.25% based on the average usage of the revolving credit borrowings available. 64 On February 8, 2018, we refinanced the 2016 Term Loan Facility with a new $1,267.0 million senior secured term loan facility by entering into the Third Amendment Agreement to the 2016 Term Loan Facility, which amended and restated the 2016 Term Loan Facility. Pursuant to the Third Amendment Agreement, the 2018 Term Loan Facility accrued interest at a floating rate of LIBOR (with a zero percent minimum LIBOR floor) plus 2.50% per annum and was scheduled to mature in February 2025. On February 7, 2020, we re-priced the 2018 Term Loan Facility to reduce the applicable interest rate and extend the maturity of the facility to February 2027. The terms of the facility were substantially consistent following the re-pricing, except that borrowings under the term loan bore interest at a rate equal to a floating rate of LIBOR plus 2.25% per annum. On March 20, 2020, we amended the ABL Facility to increase the aggregate amount of the revolving loan commitments available by $50.0 million to $250.0 million, consisting of up to $195.0 million in U.S. commitments, up to $15.0 million in Canadian commitments and up to $40.0 million in European commitments. The maturity of the facility was extended to March 20, 2025. Following the amendment, the borrowings under the amended ABL Facility bear interest at a rate equal to the LIBOR rate or the base rate plus a margin of between 1.25% and 1.75% or 0.25% to 0.75%, respectively. On July 22, 2020, we entered into an agreement for a new senior secured term loan facility (the “2020 Term Loan Facility) for an aggregate principal amount of $650.0 million an original issue discount of 1.5% and interest at a floating rate of LIBOR (with a 1.0% minimum LIBOR floor) plus 3.0% per annum. The proceeds were used to redeem our existing $625.0 million of 6.75% Senior Secured Notes due 2022 and pay the associated early redemption premiums. The 2020 Term Loan Facility required scheduled quarterly amortization payments, each equal to 0.25% of the original principal amount of the loans under the 2020 Term Loan Facility. On June 9, 2021, we entered into another agreement for a new senior secured term loan facility (the “2021 Term Loan Facility”) for an aggregate principal amount of $900.0 million with an original issue discount of 0.25% and interest at a floating rate of LIBOR (with a 0.50% minimum LIBOR floor) plus 2.75% per annum. We also amended the ABL Facility (the “2021 ABL Amendment”). The proceeds from the 2021 Term Loan Facility were used to pay in full the 2020 Term Loan Facility and partially pay the 2018 Term Loan Facility. The 2021 ABL Amendment amended the aggregate amount of revolving loan commitments available to the borrowers to $100 million, consisting of $90 million in U.S. commitments and $10 million in European commitments and extended the maturity date to August 2, 2026. Effective on August 1, 2021, we completed the sale of our Performance Chemicals business for $1.1 billion, subject to certain adjustments as set forth in the agreement. We used a portion of the net cash proceeds to repay the remaining 2018 Term Loan Facility principal amount of $231,363. As of December 31, 2021, there were no revolving credit borrowings under the ABL Facility. Revolving credit borrowings are payable at our option throughout the term of the ABL Facility with the balance due August 2, 2026. We were in compliance with all debt covenants as of December 31, 2021 and 2020, respectively. We have the ability to request letters of credit under the ABL Facility. We had $17.5 million of letters of credit outstanding as of December 31, 2021, which reduce available borrowings under the ABL Facility by such amounts. 6.75% Senior Secured Notes due 2022 - Redeemed in 2020 Concurrent with the Business Combination, we issued $625.0 million of 6.750% Senior Secured Notes due November 2022 (the “6.75% Senior Secured Notes”) in transactions exempt from or not subject to registration under the Securities Act pursuant to Rule 144A and Regulation S under the Securities Act of 1933. Interest on the 6.75% Senior Secured Notes was payable on May 15 and November 15 of each year, commencing November 15, 2016. No principal payments were required with respect to the 6.75% Senior Secured Notes prior to their final maturity. The 6.75% Senior Secured Notes were to mature on November 15, 2022. In July 2020, we entered into an agreement for a new senior secured term loan facility. The proceeds were used to redeem the 6.75% Senior Secured Notes. 65 5.75% Senior Unsecured Notes due 2025 - Redeemed in 2021 On December 11, 2017, we issued $300.0 million aggregate principal amount of 5.75% Senior Unsecured Notes due 2025 (the “5.75% Senior Unsecured Notes”) in a private placement exempt from the registration requirements of the Securities Act. The 5.75% Senior Unsecured Notes mature on December 15, 2025. Interest on the 5.75% Senior Unsecured Notes is to be paid semi-annually on February 15 and August 15, commencing August 15, 2018, at an annual rate of 5.75% per year. On August 1, 2021, we used a portion of the net cash proceeds from the sale of our Performance Chemicals business to redeem the 5.750% Senior Notes. The 5.750% Senior Notes were redeemed at a redemption price equal to the sum of 102.875% of the principal amount outstanding plus accrued and unpaid interest to, but excluding, August 2, 2021. Capital Expenditures Maintenance capital expenditures include spending on maintenance of business, health, safety and environmental initiatives. Growth capital expenditures include spending to drive organic sales growth and cost savings initiatives. These capital expenditures represent our “book” capital expenditures for which the company has recorded, but not necessarily paid for the capital expenditures. Years ended December 31, 2021 2020 2019 (in millions) Maintenance capital expenditures $ 42.8 $ 36.0 $ 41.3 Growth capital expenditures 19.6 10.2 12.7 Total capital expenditures $ 62.4 $ 46.2 $ 54.0 Capital expenditures remained at a level sufficient for required maintenance and certain expansion growth initiatives during these periods. Capital expenditures are higher in the year ended December 31, 2021 as compared to December 31, 2020 as both growth and maintenance expenditures has resumed since COVID-19. Capital expenditures are lower in the year ended December 31, 2020 as compared to December 31, 2019 as both growth and maintenance expenditures were delayed to align with general market conditions. Pension Funding We paid an immaterial amount in cash contributions into our defined benefit pension plans and other postretirement plans in December 31, 2021 and $3.3 million and $5.0 million in 2020 and 2019, respectively. The net periodic pension and postretirement expense was $0.3 million, $0.4 million, and $1.5 million for those same periods, respectively. As of December 31, 2021 and 2020, our pension plans and other post-retirement benefit plans were underfunded by $4.2 million and $12.2 million, respectively. Off-Balance Sheet Arrangements We had $17.5 million and $18.2 million of outstanding letters of credit on our revolver facility as of December 31, 2021 and 2020, respectively. Critical Accounting Policies We prepare our consolidated financial statements in conformity with GAAP and our significant accounting policies are described in Note 2 to our consolidated financial statements. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We base our estimates and judgments on historical experience and other relevant factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We review these matters and reflect changes in estimates as appropriate. We have identified 66 below the accounting policies, estimates and critical judgment areas that we believe could have a material effect on our financial position, liquidity or results of operations. Revenue Recognition In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps: (i) identify the contract with the customer; (ii) determine whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measure the transaction price; (iv) allocate the transaction price to the performance obligations based on estimated selling prices; and (v) recognize revenue when (or as) we satisfy each performance obligation. We identify a contract when an agreement with a customer creates legally enforceable rights and obligations, which occurs when a contract has been approved by both parties, the parties are committed to perform their respective obligations, each party’s rights and payment terms are clearly identified, commercial substance exists and it is probable that we will collect the consideration to which we are entitled. Evidence of a contract with a customer may take the form of a master service agreement (“MSA”), a MSA in combination with an underlying purchase order, a combination of a pricing quote with an underlying purchase order or an individual purchase order received from a customer. Certain of our customers enter into MSAs that establish the terms, including prices, under which orders to purchase goods may be placed. In cases where the MSA contains a distinct order for goods or contains an enforceable minimum quantity to be purchased by the customer, we consider the MSA to be evidence of a contract with a customer as the MSA creates enforceable rights and obligations. In cases where the MSA does not contain a distinct order for goods, evidence of a contract with a customer is the purchase order issued under the MSA. Our customers may also negotiate orders via pricing quotes, which typically detail product pricing, delivery terms and payment information. When a customer procures goods under this method, we consider the combination of the pricing quote and the purchase order to create enforceable rights and obligations. Absent either a MSA or pricing quote, we consider an individual purchase order to create enforceable rights and obligations. We identify a performance obligation in a contract for each promised good that is separately identifiable from other promises in the contract and for which the customer can benefit from the good. The majority of our contracts have a single performance obligation, which is the promise to transfer individual goods to the customer. Certain of our contracts include multiple performance obligations under which the purchase price for each distinct performance obligation is defined in the contract. These distinct performance obligations may include stand-ready provisions, which are arrangements to provide a customer assurance that they will have access to output from our manufacturing facilities, or monthly reservations of capacity fees. We consider stand-ready provisions and reservation of capacity fees to be performance obligations satisfied over time. Revenues related to stand-ready provisions and reservation of capacity fees are recognized on a ratable basis throughout the contract term and billed to the customer on a monthly basis. As described above, our MSAs with our customers may outline prices for individual products or contract provisions. MSAs in the our Ecoservices segment may contain provisions whereby raw materials costs are passed-through to the customer per the terms of their contract. Our exposure to fluctuations in raw materials prices is limited, as the majority of pass-through contract provisions reset based on fluctuations in the underlying raw material price. MSAs in our Ecoservices segment also contain take-or-pay arrangements, whereby the customer would incur a penalty in the form of a shortfall volume fee. Currently there is no history in which customers fail to meet the contractual minimum. Revenue from product sales are recorded at the sales price, which includes estimates of variable consideration for which reserves are established and which result from discounts, returns or other allowances that are offered within contracts with our customers. We recognize revenues when performance obligations under the terms of a contract with our customer are satisfied, which generally occurs at a point in time by transferring control of a product to the customer. We determine the point in time when a customer obtains control of a product and we satisfy the performance obligation by considering factors including when we have a right to payment for the product, the customer has legal title to the product, we have transferred possession of the product, the customer has assumed the risks and rewards of ownership of the product and the customer has accepted the product. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. We do not have any significant payment terms as payment is received at, or shortly after, the point of sale. 67 Goodwill and Intangible Assets Assets and liabilities of acquired businesses are measured at their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired, including identified intangibles, is recorded as goodwill. The determination and allocation of fair value to the assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment, including estimates based on historical information, current market data and future expectations. Goodwill and intangible assets with indefinite lives are not amortized, but are tested for impairment annually or more frequently if events or circumstances exist that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. In performing tests for goodwill impairment, we are able to use our discretion to first perform an optional qualitative assessment about the likelihood of the carrying value of a reporting unit exceeding its fair value. The qualitative assessment need not be applied to all reporting units. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount based on the qualitative assessment, we perform a quantitative goodwill impairment test to identify the potential goodwill impairment and measure the amount of the goodwill impairment loss, if any, to be recognized for that reporting unit. For the annual assessments in 2021 and 2020, we bypassed the option to perform the qualitative assessment and proceeded directly to performing the quantitative goodwill impairment test for each of our reporting units. The quantitative test identifies both the potential existence of impairment and the amount of impairment loss. In applying the quantitative test, the Company calculates and compares the reporting unit’s estimated fair value to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit and the loss establishes a new basis in the goodwill. Subsequent reversal of an impairment loss is not permitted. For the purposes of the quantitative goodwill impairment test, we determine the fair value of our reporting units using a combination of a market approach and an income, or discounted cash flow, approach. Estimating the fair value of a reporting unit requires various assumptions including the use of projections of future cash flows and discount rates that reflect the risks associated with achieving those cash flows. The key assumptions used in estimating the fair value are operating margin growth rates, revenue growth rates, the weighted average cost of capital, the perpetual growth rate, and the estimated earnings market multiples of each reporting unit. The market value is estimated using publicly traded comparable company values by applying their most recent annual adjusted EBITDA multiples to the reporting unit’s adjusted EBITDA for the trailing twelve months. The income approach value is estimated using a discounted cash flow approach. The assumptions about future cash flows and growth rates are based on our assessment of a number of factors including the reporting unit’s recent performance against budget as well as management’s ability to execute planned future strategic initiatives. Discount rate assumptions are based on an assessment of the risk inherent in those future cash flows. For intangible assets other than goodwill, definite-lived intangible assets are amortized over their respective estimated useful lives. Intangible assets with indefinite lives are not amortized, but rather are tested for impairment at least annually or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount. Our indefinite-lived intangible assets include trade names and certain trademarks. Similar to the goodwill impairment test, we may first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we choose to bypass the qualitative assessment, or if the qualitative assessment indicates that the indefinite-lived intangible asset is more likely than not impaired, a quantitative impairment test must be performed. The quantitative test for indefinite-lived intangible assets is a one-step test comparing the fair value of the asset to its carrying amount. If the fair value of the indefinite-lived intangible asset is less than the carrying amount, an impairment loss is recognized in an amount equal to the difference. The unit of accounting used to test our indefinite-lived intangible assets for impairment is at the reporting unit level. The fair values of our indefinite-lived trade names and trademarks are determined for impairment testing purposes based on an income approach using a discounted cash flow valuation model under a relief from royalty methodology. Significant assumptions under the relief from royalty method include the royalty rate a market participant may assume, projected sales and the discount rate applied to the estimated cash flows. 68 For definite-lived intangible assets, we amortize technical know-how over periods that range from fourteen to twenty years, customer relationships over periods that range from seven to fifteen years, trademarks over a fifteen year period, contracts over periods that range from two to sixteen years, and permits over five years. We perform an impairment review of definite-lived intangible assets when facts and circumstances indicate that the carrying value of an asset may not be recoverable from its undiscounted future cash flows. The impairment test for definite-lived intangible assets is consistent with the test applied to property, plant and equipment as described in our policy. Assessment of the potential impairment of goodwill and intangible assets is an integral part of our normal ongoing review of operations. Testing for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management's best estimates at a particular point in time. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time in which such impairments are recognized. In addition, we continually review our diverse portfolio of assets to ensure they are achieving their greatest potential and are aligned with our growth strategy. Strategic decisions involving a particular group of assets may trigger an assessment of the recoverability of the related assets. Such an assessment could result in impairment losses. For further information see Note 16 Goodwill and Other Intangible Assets. Income Taxes We operate within multiple taxing jurisdictions and are subject to tax filing requirements and potential audits within these jurisdictions. Our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. The resolution of these uncertainties may result in adjustments to our tax assets and tax liabilities. We use the asset and liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. We evaluate our deferred tax assets each period to ensure that estimated future taxable income will be sufficient in character (e.g., capital gain versus ordinary income treatment), amount and timing, to result in their realizability. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets, unless it is more likely than not that those assets will be realized. Considerable judgments are required in establishing deferred tax valuation allowances. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforward deferred tax assets become deductible or utilized. We consider the scheduled reversal of taxable temporary differences, projected future taxable income and tax-planning strategies in making this assessment. As events and circumstances change, valuation allowances are adjusted within results from operations when applicable. Generally, APB 23 of ASC Topic 740, Income Taxes (“ASC 740”), provides guidance with respect to establishing deferred income taxes on earnings from foreign subsidiaries, to the extent that these earnings are considered to be available for repatriation. Further, ASC 740-30 requires that deferred taxes be established with respect to the earnings of a foreign subsidiary, unless existing tax law provides a means by which the investment in a subsidiary can be recovered tax-free. We have determined that we are able repatriate the non-permanently reinvested earnings of our foreign subsidiaries in a tax-free manner. As such, we are able to assert for purposes of ASC 740-30 that no deferred income taxes are needed with respect to earnings from foreign subsidiaries. We recognize net tax benefits under the recognition and measurement criteria of ASC 740, which prescribes requirements and other guidance for financial statement recognition and measurement of positions taken or expected to be taken on tax returns. We recognize a financial statement benefit for positions taken for tax return purposes when it will be more likely than not (i.e. greater than 50%) that the positions will be sustained upon tax examination, based solely on the technical merits of the tax positions. Otherwise, no tax benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Tax examinations are often complex as tax authorities may disagree with the treatment of items 69 reported by us and may require several years to resolve. These accrued liabilities represent a provision for taxes that are reasonably expected to be incurred on the basis of available information but which are not certain. Stock-Based Compensation We grant stock-based compensation awards in connection with our stock incentive plans. Under the terms of the incentive plans, we are authorized to issue equity awards to our employees, directors and affiliates. The grants have taken the form of restricted stock awards, restricted stock units, performance stock units and stock options. Restricted stock awards provide the recipient with shares of our stock subject to certain vesting requirements. Restricted stock units and performance stock units provide the recipient with the right to receive shares of our stock at a future date if certain vesting conditions are met. Stock option awards provide the recipient the ability to purchase shares of our stock at a given strike price upon the satisfaction of certain vesting requirements. The vesting requirements associated with the awards include a mix of both service and/or performance conditions. Depending on the award and recipient, the service condition may reflect a cliff vesting provision (e.g., 100% vested upon four years of service) or a graded vesting provision (e.g., 33.3% vested each year over a period of three years). Restricted stock awards and stock options issued with performance conditions vest based on the occurrence of a defined liquidity event upon which certain investment funds affiliated with CCMP receive proceeds exceeding certain thresholds. Although achievement of the performance condition is subject to continued service with us, the terms of awards issued with performance conditions stipulate that the performance vesting condition can be attained for a period of six months following separation from service under certain circumstances, depending on the means of separation from the Company and subject to other factors such as individual separation agreements. The same performance vesting condition for our restricted stock awards also governs the achievement of the performance vesting condition for our stock options. The value of the restricted stock awards granted was based on the average of the high and low trading prices of our common stock on the NYSE on the preceding trading day, in accordance with our policy for valuing such awards. In addition to restricted stock awards, we have granted restricted stock units and performance stock units as part of our equity incentive compensation program. Each restricted stock unit provides the recipient with the right to receive a share of common stock subject to graded vesting terms based on service, which generally requires one year of service for members of our board of directors and three years of service for employees. Performance stock units vest upon the achievement of Company-specific financial performance targets and the provision of service through the vesting date. We recognize compensation expense related to our equity awards with service conditions on a straight-line basis over the stated vesting period for each award. Expense related to our equity awards with performance conditions is recognized in the period in which it becomes probable that the performance target will be achieved. No compensation expense has been recognized to-date on any of our restricted stock awards and stock options subject to vesting based on performance conditions, since a liquidity event triggering vesting of the awards has not occurred, nor is it considered probable. The grant date fair value of restricted stock awards, restricted stock units and performance stock units is based on the value of our common stock as traded on the New York Stock Exchange. The grant date fair value of stock option awards is estimated using a Black-Scholes option pricing model. Determining the fair value of stock option awards at the grant date requires judgment, including estimates of the average risk-free interest rate, dividend yield, volatility and expected term. Since we have limited experience with respect to historical exercise and forfeiture rates or patterns, we have estimated certain assumptions using acceptable simplified methods and through benchmarking to our peer group of companies. Recently Issued Accounting Standards See Note 3 to our consolidated financial statements for a discussion of recently issued accounting standards and their effect on us.