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 a 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 help produce renewable fuels, remove nitrogen oxides from diesel engine emissions as well as sulf ur from fuels during the refining process. In 2022, we served global customers across many end uses and, as of December 31, 2022, operated out of ten strategically located manufacturing facilities. On December 14, 2020, we completed the sale of our Performance Materials business to Potters Buyer, LLC, an affiliate of The Jordan Company, L.P., for a purchase price of $650 million. Effective on August 1, 2021, we completed the sale of our Performance Chemicals business to Sparta Aggregator L.P., a partnership with Koch Minerals & Trading, LLC and Cerberus Capital Management, L.P. for $1.1 billion. Additionally, our Board of Directors (the “Board”) declared a special cash dividend of $1.80 per share, paid on December 14, 2020 in connection with the sale of our Performance Materials business and declared a special cash dividend of $3.20 per share, paid on August 23, 2021 in connection with the sale of our Performance Chemicals business. The results of operations, financial condition, and cash flows for the Performance Materials and Performance Chemicals businesses are presented herein as discontinued operations. Refer to Note 4 and Note 5 of our Consolidated Financial Statements for additional information. Impact of Russia’s Invasion of Ukraine on our Business and Results We are continuing to monitor the developments in Russia and Ukraine, as well as the related economic sanctions and export controls imposed on certain industry sectors. Although the current conflict has created global economic and political uncertainties and affected certain supply chain disruptions, we do not believe we have significant exposure in those countries. We have no operations in Russia or Ukraine. We had no sales to customers in Ukraine and our sales to a customer in Russia were immaterial for the year ended December 31, 2022 and have been discontinued. Sales to this customer in Russia represented 2% of total sales for the years ended December 31, 2021 and 2020, respectively. We also did not make any purchases from suppliers in Russia or Ukraine. As Russia’s invasion of Ukraine continues to unfold, we will continue to monitor compliance with sanctions imposed by the U.S. government and other countries. Recent Developments Late in the fourth quarter of 2022, our Ecoservices business was adversely affected by Winter Storm Elliott. The storm disrupted operations at a number of our sites, impacting production and resulting in unplanned maintenance. While the storm had a modest impact on fourth quarter 2022 financial results, we expect the majority of the maintenance and repair costs incurred will be realized in the first quarter of 2023. In addition, we expect that the fourth quarter 2022 production outages will translate into lower availability and sales of virgin sulfuric acid in the first quarter of 2023. Stock Repurchase Program In April 2022, our Board of Directors approved and announced a new stock repurchase program authorizing the repurchase of up to $450 million of the Company’s outstanding common stock over the next four years. This program is expected to be funded using cash on hand and cash generated from operations. We primarily expect to conduct the repurchase program through negotiated transactions with the Company’s equity sponsors, as well as through open market repurchases or other means, including through Rule 10b-18 trading plans or through the use of other techniques such as 43 accelerated share repurchases. The actual timing, number and nature of shares repurchased will depend on a variety of factors, including stock price, trading volume, and general business and market conditions. The repurchase program does not obligate us to acquire any number of shares in any specific period or at all and may be amended, suspended or discontinued at any time at our discretion. On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was signed into law. Among other things, the IRA imposes a 15% corporate alternative minimum tax for certain large corporations with average annual adjusted financial statement income in excess of $1 billion for tax years beginning after December 31, 2022, levies a 1% excise tax on net stock repurchases after December 31, 2022, and provides tax incentives to promote clean energy. Historically we have made discretionary share repurchases under our share repurchase programs. Beginning in 2023, these transactions will be subject to the excise tax of the IRA. Based on our historical net repurchase activity, the excise tax and the other provisions of the IRA are not expected to have a material impact on our results of operations or financial position. From the announcement date of the program in April 2022 through December 31, 2022, the Company repurchased 1,970,763 shares of its common stock on the open market at an average price of $9.82 per share, for a total of $19.4 million. Additionally, in connection with secondary offerings of the Company’s common stock in August and November 2022, the Company repurchased 6,500,000 and 8,000,000 shares of its common stock sold in the offerings, respectively, from the underwriters at a price of $8.36 per share and $7.88 per share, respectively, simultaneous with the closing of the respective offerings, for a total of $117.3 million. As of December 31, 2022, $313.3 million was available for additional share repurchases under the program. 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 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. 44 Key Factors and Trends Affecting Operating Results and Financial Condition Sales Our Ecoservices and Catalyst Technologies segments' sales have grown primarily due to increased demand for our products and services in the markets we serve, expansion into new end use applications, including catalysts used in the production of renewable fuels, polyethylene, and emission control, as well as continued supply share gains and customer contractual pass-through mechanisms. 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 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 demand for catalyst and regeneration. 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, 2022 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 polymers 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, 2022 and 2021 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, 2022 Compared to the Year Ended December 31, 2021 Highlights The following is a summary of our financial performance for the year ended December 31, 2022 compared with the year ended December 31, 2021. Sales Sales increased $209.0 million to $820.2 million. The increase in sales was primarily due to higher average selling prices, including the favorable pass-through of sulfur pricing and higher sales volumes, and increased demands for our products and services. Gross Profit Gross profit increased $48.0 million to $224.7 million. The increase in gross profit was primarily due to increased pricing and higher sales volumes across the portfolio. Inflationary factors increased through the year, namely from higher sulfur, freight and energy indexed costs, but customer contractual pass-through mechanisms preserved earnings in Ecoservices, while targeted price increases helped to mitigate cost pressures in Catalyst Technologies. Operating Income Operating income increased $49.8 million to $104.4 million. The increase in operating income was primarily due to an increase in gross profit and l ower selling, general and administrative expenses, partially offset by higher other operating expenses . Equity in Net Income from Affiliated Companies Equity in net income of affiliated companies for the years ended December 31, 2022 and 2021 was $27.7 million. 46 The following is our consolidated statement of income and a summary of financial results for the years ended December 31, 2022 and 2021. Years ended December 31, Change 2022 2021 $ % (in millions, except percentages) Sales $ 820.2 $ 611.2 $ 209.0 34.2 % Cost of goods sold 595.5 434.5 161.0 37.1 % Gross profit 224.7 176.7 48.0 27.2 % Gross profit margin 27.4 % 28.9 % Selling, general and administrative expenses 85.3 97.8 (12.5) (12.8) % Other operating expense, net 35.0 24.3 10.7 44.0 % Operating income 104.4 54.6 49.8 91.2 % Operating income margin 12.7 % 8.9 % Equity in net income from affiliated companies (27.7) (27.7) — — % Interest expense, net 37.2 37.0 0.2 0.5 % Debt extinguishment costs — 26.9 (26.9) (100.0) % Other expense, net 0.2 4.5 (4.3) (95.6) % Income from continuing operations before income taxes and noncontrolling interest 94.7 13.9 80.8 581.3 % Provision for income taxes 24.9 12.1 12.8 105.8 % Effective tax rate 26.3 % 87.1 % Net income from continuing operations 69.8 1.8 68.0 NM Net income (loss) from discontinued operations, net of tax 3.9 (141.4) 145.3 (102.8) % Net income (loss) 73.7 (139.6) 213.3 (152.8) % Less: Net income attributable to the noncontrolling interest - discontinued operations — 0.3 (0.3) (100.0) % Net income (loss) attributable to Ecovyst Inc. $ 73.7 $ (139.9) $ 213.6 (152.7) % Sales Years ended December 31, Change 2022 2021 $ % (in millions, except percentages) Sales: Ecoservices $ 702.5 $ 500.5 $ 202.0 40.4 % Catalyst Technologies 117.7 110.7 7.0 6.3 % Total sales $ 820.2 $ 611.2 $ 209.0 34.2 % Ecoservices : Sales in Ecoservices for the year ended December 31, 2022 were $702.5 million, an increase of $202.0 million, or 40.4%, compared to sales of $500.5 million for the year ended December 31, 2021. The increase in sales was primarily due to higher average selling price of $178.4 million, including pass-through of higher sulfur costs of $84.8 million, and higher sales volumes of $23.6 million. The increase in average selling price was due to favorable pricing, which was primarily driven by pass-through of higher sulfur costs and higher labor, freight and energy indexed costs. The increase in volumes was due to a higher demand for regeneration services during the year and higher sales of virgin sulfuric acid used in mining and industrial uses. 47 Catalyst Technologies : Sales in Catalyst Technologies for the year ended December 31, 2022 were $117.7 million, an increase of $7.0 million, or 6.3%, compared to sales of $110.7 million for the year ended December 31, 2021. The increase in sales was primarily due to the contribution from higher sales volume of $7.1 million and higher average selling prices of $4.6 million, partially offset by the unfavorable effects of foreign currency translation of $4.7 million. The increase in sales volume was attributable to the continued strong customer demand for polyethylene catalysts and higher sales of niche custom catalysts. Gross Profit Gross profit for the year ended December 31, 2022 was $224.7 million, an increase of $48.0 million, or 27.2%, compared with $176.7 million for the year ended December 31, 2021. The increase in gross profit was due to higher average selling prices of aggregating $183.0 million and the contribution from higher sales volume of $22.8 million which were partially offset by unfavorable raw material and manufacturing costs of $152.1 million and a $5.7 million impact associated with a less-favorable product mix. The unfavorable change in raw materials was driven by higher sulfur costs of approximately $85.0 million and higher natural gas. The unfavorable change in manufacturing costs were driven by the timing of plant maintenance projects, and higher variable, transportation and fixed costs. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2022 were $85.3 million, a decrease of $12.5 million compared with $97.8 million for the year ended December 31, 2021. The decrease in selling, general and administrative expenses was mainly due to a decrease in compensation related costs of $5.2 million and a decrease in stock-based compensation expense of $11.2 million, which consisted of $4.0 million of incremental cost recognized during the year ended December 31, 2021 in connection with the modifications of our equity incentive awards and stock options associated with the special dividend and sale of the Performance Chemicals business in August 2021, with the remaining decrease driven by forfeitures of equity incentive awards in 2022 by former Company executives and employees of the Performance Chemicals business. This was mostly offset by $3.7 million of income generated during the year ended December 31, 2021 from the transition service agreements entered into as part of the sales of the Performance Materials and Performance Chemicals businesses. Other Operating Expense, Net Other operating expense, net for the year ended December 31, 2022 was $35.0 million, an increase of $10.7 million, or 44.0%, compared with $24.3 million for the year ended December 31, 2021. The increase in other operating expense, net was mainly driven by increases of $5.3 million in severance charges associated with former executives and $5.0 million in residual costs from the Performance Chemicals divestiture and other transactions costs. Equity in Net Income from Affiliated Companies Equity in net income from affiliated companies for the year ended December 31, 2022 was $27.7 million, in line with the year ended December 31, 2021. The Zeolyst Joint Venture during the year ended December 31, 2022 as compared to the year ended December 31, 2021, continued to have high demands for hydrocracking and specialty catalyst. Interest Expense, Net Interest expense, net for the year ended December 31, 2022 was $37.2 million, an increase of $0.2 million, as compared with $37.0 million for the year ended December 31, 2021. The increase in interest expense was due to higher interest rates on our variable rate debt. 48 Debt Extinguishment Costs Debt extinguishment costs for the year ended December 31, 2021 was $26.9 million. Effective on August 1, 2021, we completed the sale of our Performance Chemicals business which triggered an obligation to provide partial payment under our 2018 Term Loan Facility and pay in full our 5.75% Senior Unsecured 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. Concurrent with, and using a portion of the net cash proceeds from, the divestiture of the Performance Chemicals business in August 2021, we repaid the remaining balance on our 2016 Term Loan Facility and redeemed the 5.75% Senior Unsecured Notes. In connection with the redemption of the 5.75% Senior Unsecured Notes, we paid a redemption premium of $8.5 million, which was recorded as debt extinguishment costs during the nine months ended September 30, 2021. We wrote off $0.8 million of unamortized deferred financing costs and $2.4 million of original issue discount related to the 2016 Term Loan Facility and $2.3 million of unamortized deferred financing costs and $1.2 million of original issue discount related to the 5.75% Senior Unsecured Notes as debt extinguishment costs during the nine months ended September 30, 2021. In June 2021, we entered into an agreement for a new senior secured term loan facility and used the proceeds to repay a portion of our existing term loan facilities. As a result of this transaction, we recorded $5.7 million of new creditor and third-party financing costs as debt extinguishment costs during the three months ended September 30, 2021. In addition, previous unamortized deferred financing costs of $1.7 million and original issue discount of $3.7 million associated with the previously outstanding debt were written off as debt extinguishment costs. In June 2021, we amended our ABL Credit Agreement to decrease the aggregate amount of revolving loan commitments and extend the maturity date. As a result of the amendment, we wrote off $0.6 million of unamortized deferred financing costs as debt extinguishment costs. Other Expense, Net Other expense, net was $0.2 million for the year ended December 31, 2022, a favorable change of $4.3 million, compared to $4.5 million for the year ended December 31, 2021. The change primarily related to $0.5 million in pension plan benefit and $3.7 million favorable change in foreign currency losses in the current year on the non-permanent intercompany debt denominated in local currency and translated to U.S. dollars. Provision for Income Taxes The provision for income taxes for the year ended December 31, 2022 was a $24.9 million provision compared to a $12.1 million provision for the year ended December 31, 2021. The effective income tax rate for the year ended December 31, 2022 was 26.3% compared to 87.1% for the year ended December 31, 2021. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the year ended December 31, 2022 was mainly due to the impact of the Section 162(m) deduction limitation for “covered” employees with compensation in excess of $1 million, along with the tax deductibility of stock compensation. 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 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. Net Income (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 income attributable to Ecovyst Inc. was $73.7 million for the year ended December 31, 2022 as compared to net loss of $139.9 million for the year ended December 31, 2021. 49 Adjusted EBITDA Summarized EBITDA and Adjusted EBITDA information is shown below in the following table: Years ended December 31, Change 2022 2021 $ % (in millions, except percentages) Adjusted EBITDA (1) : Ecoservices $ 227.8 $ 177.7 $ 50.1 28.2 % Catalyst Technologies (2) 78.0 88.0 (10.0) (11.4) % Unallocated corporate expenses (29.0) (38.1) 9.1 (24.0) % Total $ 276.8 $ 227.6 $ 49.2 21.6 % (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 $50.3 million for the year ended December 31, 2022, which includes $27.9 million of equity in net income, excluding $6.4 million of amortization of investment in affiliate step-up, plus $16.0 million of joint venture depreciation, amortization and interest. 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. Ecoservices : Adjusted EBITDA for the year ended December 31, 2022 was $227.8 million, an increase of $50.1 million, or 28.2%, compared to $177.7 million for the year ended December 31, 2021. The increase in Ecoservices’ Adjusted EBITDA was the result of higher sales volumes for regeneration services and for virgin sulfuric acid, and higher average selling prices that more than covered higher variable costs. Catalyst Technologies: Adjusted EBITDA for the year ended December 31, 2022 was $78.0 million, a decrease of $10.0 million, or 11.4%, compared with $88.0 million for the year ended December 31, 2021. Adjusted EBITDA decreased due higher variable costs arising from inflation and supply chain pressures, along with less-favorable product mix during the year. This was only partially offset by increased volume and higher average selling prices. 50 A reconciliation of net income attributable to Ecovyst Inc. to Adjusted EBITDA is as follows: Years ended December 31, 2022 2021 (in millions) Reconciliation of net income attributable to Ecovyst Inc. to Adjusted EBITDA Net income from continuing operations $ 69.8 $ 1.8 Provision for income taxes 24.9 12.1 Interest expense, net 37.2 37.0 Depreciation and amortization 79.2 79.7 EBITDA 211.1 130.6 Joint venture depreciation, amortization and interest (a) 16.0 15.6 Amortization of investment in affiliate step-up (b) 6.4 6.5 Debt extinguishment costs — 26.9 Net loss on asset disposals (c) 3.6 5.7 Foreign currency exchange loss (d) 1.4 4.7 LIFO benefit (e) (0.2) (1.9) Transaction and other related costs (f) 7.0 2.0 Equity-based compensation 20.6 31.8 Restructuring, integration and business optimization expenses (g) 11.6 3.9 Other (h) (0.7) 1.8 Adjusted EBITDA $ 276.8 $ 227.6 (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 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) Other costs consist of adjustments for defined benefit pension plan (benefit) costs and certain expenses that are not core to our ongoing business operations, including environmental remediation-related costs, capital and franchise taxes. All of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen. 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, 2022 2021 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 from continuing operations $ 94.7 $ 24.9 $ 69.8 $ 13.9 $ 12.1 $ 1.8 Amortization of investment in affiliate step-up (b) 6.4 1.5 4.9 6.5 1.6 4.9 Debt extinguishment costs — — — 26.9 6.6 20.3 Net loss on asset disposals (c) 3.6 0.9 2.7 5.7 1.4 4.3 Foreign currency exchange loss (d) 1.4 0.4 1.0 4.7 1.0 3.7 LIFO benefit (e) (0.2) (0.1) (0.1) (1.9) (0.5) (1.4) Transaction and other related costs (f) 7.0 1.1 5.9 2.0 0.5 1.5 Equity-based compensation 20.6 (0.1) 20.7 31.8 7.7 24.1 Restructuring, integration and business optimization expenses (g) 11.6 2.8 8.8 3.9 0.7 3.2 Other (h) (0.7) (0.2) (0.5) 1.8 0.7 1.1 Adjusted Net Income, including Impact of Discrete Tax Items 144.4 31.2 113.2 95.3 31.8 63.5 Impact of Discrete Tax Items (3) — — — — (6.1) 6.1 Adjusted Net Income $ 144.4 $ 31.2 $ 113.2 $ 95.3 $ 25.7 $ 69.6 (1) We define adjusted net inco me as net 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 intra-period 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 income attributable to Ecovyst Inc. are shown net of each applicable statutory tax rates. 52 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 primarily the result of stronger demand for polyethylene catalysts and higher volume for regeneration services. The global macroeconomic recovery supported demand across both business segments. 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 served to mitigate cost pressures in Catalyst Technologies. Operating Income Operating income increased by $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 from 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. 53 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 expense (income), 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 % 54 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 the contribution from higher sales volumes of $29.2 million and higher average selling prices aggregating $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 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 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 y ear ended December 31, 2020. The increase in gross profit was due to higher average selling prices aggregating $119.5 million and the contribution from higher sales volume of $22.1 million, which was partially offset by unfavorable manufacturing costs of $123.9 million, including approximately $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 raw materials were driven by higher sulfur costs of $49.0 million. The unfavorable change in manufacturing costs were driven by the timing of plant maintenance projects and higher fixed costs arising from the impact of Winter Storm Uri in the Gulf Coast . 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 t he year ended December 31, 2020. The increase in selling, general and administrative expenses was due to an increase in stock compensation expense 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 ex pense, 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. 55 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 2018 Term Loan Facility and pay in full our 5.75% Senior Unsecured 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 2018 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 2018 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 Expense (Income), Net Other expense (income), 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 consisted of $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 provision (benefit) for income taxes for the year ended December 31, 2021 was $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 state and local taxes, 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. 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 a net income of $278.8 million for the year ended December 31, 2020. 56 Adjusted EBITDA Summarized EBITDA and 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. 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 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 catalysts used in renewable fuel applications and higher sales of emission control catalysts and more favorable product mix. 57 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) 3.9 2.0 Other (h) 1.8 2.4 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 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) Other costs consist of adjustments for defined benefit pension plan (benefit) costs and certain expenses that are not core to our ongoing business operations, including environmental remediation-related costs, capital and franchise taxes. All of our defined benefit pension plan obligations are under defined benefit pension plans that are frozen. 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 (loss) 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) 3.9 0.7 3.2 2.0 0.5 1.5 Other (h) 1.8 0.7 1.1 2.4 0.5 1.9 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 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) 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 income attributable to Ecovyst Inc. are shown net of each applicable statutory tax rates. 59 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 (“ABL 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 ABL 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 ABL Facility to meet our future cash needs. As of December 31, 2022, we had cash and cash equivalents of $110.9 million and availability of $59.7 million under our ABL Facility, after giving effect to $4.0 million of outstanding letters of credit and no revolving credit facility borrowings, for a total available liquidity of $170.6 million. Our ABL Facility has one financial covenant to maintain. The first ratio compares the total ABL availability against a threshold: the greater of 10% of the line cap (which is defined as the lesser of our revolving loan commitments and the value of our assets) or $20.0 million. The greater of this threshold cannot be greater than the total availability of the ABL Facility. The second ratio compares the ABL Facility availability of the U.S. revolving credit facility against a $15.0 million threshold. As of December 31, 2022, we were in compliance with all covenants under our debt agreements. The 2021 Term Loan Facility and the ABL Facility contain various non-financial restrictive covenants. Each limits the ability of the Borrower and its restricted subsidiaries to incur certain indebtedness or liens, merge, consolidate or liquidate, dispose of certain property, make investments or declare or pay dividends, make optional payments, modify certain debt instruments, enter into certain transactions with affiliates, enter into certain sales and leasebacks, and certain other non-financial restrictive covenants. During such time, the Company is required to maintain a fixed-charge coverage ratio of at least 1.0 to 1.0. The Company is in compliance with all debt covenants as of December 31, 2022 and 2021, respectively. Included in our cash and cash equivalents balance as of December 31, 2022 was $17.6 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, 2022, our total indebtedness was $886.5 million, with up to $59.7 million of available borrowings under our ABL. Our liquidity requirements are significant, primarily due to debt service requirements. As reported, our cash interest expense for the years ended December 31, 2022, 2021 and 2020 was approximately $35.4 million, $59.0 million and $90.3 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 $8.9 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 $59.5 million using the interest rate effective as of December 31, 2022 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, as well as the hedging impact from our interest rate cap agreements. 60 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. Cash Flow Years ended December 31, 2022 2021 2020 (in millions) Continuing Operations Net cash provided by (used in) Operating activities $ 180.4 $ 137.3 $ 140.1 Investing activities (63.0) 875.7 571.8 Financing activities (148.1) (963.1) (720.2) Discontinued Operations Net cash provided by (used in) Operating activities 6.3 (7.4) 83.5 Investing activities — (40.0) (20.3) Financing activities — (1.1) (2.6) Effect of exchange rate changes on cash, cash equivalents and restricted cash (5.5) 2.3 11.1 Net change in cash, cash equivalents and restricted cash (29.9) 3.7 63.4 Cash, cash equivalents and restricted cash at beginning of period 140.9 137.2 73.9 Cash, cash equivalents and restricted cash at end of period $ 111.0 $ 140.9 $ 137.3 Years ended December 31, 2022 2021 2020 (in millions) Continuing Operations Net income $ 69.8 $ 1.8 $ 54.3 Non-cash and non-operating activities (1) 114.3 156.6 74.6 Changes in working capital (2.2) (18.1) 14.5 Other operating activities (1.5) (3.0) (3.3) Net cash provided by operating activities, continuing operations $ 180.4 $ 137.3 $ 140.1 (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 and provision, net losses on asset disposals, stock compensation, equity in net income and dividends received from affiliated companies. 61 Years ended December 31, 2022 2021 2020 (in millions) Continuing Operations Working capital changes that provided (used) cash: Receivables $ 5.4 $ (33.5) $ 7.0 Inventories 9.9 0.6 (3.0) Prepaids and other current assets — (7.8) (1.4) Accounts payable (10.1) 10.0 6.9 Accrued liabilities (7.4) 12.6 5.0 $ (2.2) $ (18.1) $ 14.5 Years ended December 31, 2022 2021 2020 (in millions) Continuing Operations Purchases of property, plant and equipment $ (58.9) $ (60.0) $ (54.8) Proceeds from business divestitures, net of cash — 978.4 624.3 Payments for business divestiture (3.7) — — Proceeds from sale of assets — — 2.4 Business combinations, net of cash acquired (0.5) (42.6) — Other, net 0.1 (0.1) (0.1) Net cash (used in) provided by investing activities, continuing operations $ (63.0) $ 875.7 $ 571.8 Years ended December 31, 2022 2021 2020 (in millions) Continuing Operations Net cash repayments on debt obligations (9.0) (542.9) (470.3) Dividends paid to stockholders — (435.6) (243.7) Other financing activities (139.1) 15.4 (6.2) Net cash used in financing activities, continuing operations $ (148.1) $ (963.1) $ (720.2) 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, 2022 Compared to the Year Ended December 31, 2021 Net cash provided by operating activities was $180.4 million for the year ended December 31, 2022, compared to $137.3 million provided for the year ended December 31, 2021. Cash generated by net income and non-working capital related activities was higher during the year ended December 31, 2022 by $27.2 million compared to the prior year. Cash used by working capital during the year ended December 31, 2022 was $2.2 million, favorable compared to cash used of $18.1 million for the year ended December 31, 2021. The increase in cash generated by net income and non-working capital related activities of $27.2 million as compared to the prior year period was primarily due to an increase in gross profit driven by higher sales volumes and higher average selling price. In the year ended December 31, 2021, the non-working capital activity included debt extinguishment costs. The $15.9 million increase in cash from working capital as compared to the prior year was primarily due to favorable changes in accounts receivable, inventories, and prepaids, which were offset by unfavorable changes in accounts payable and accrued liabilities. The favorable 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 favorable change in prepaid and other current assets relates to the timing of receivables from related parties, the timing of insurance prepayments, an employee retention credit, and interest receivable on our interest rate caps. The increase in cash provided by inventory was due to the increase in sales within our Ecoservices and Catalyst Technologies segment in the current year period. The unfavorable change in accounts payable is due to the increase in sulfur costs and higher purchase volume. The unfavorable change in accrued liabilities relates to changes in various accruals. Net cash used in investing activities was $63.0 million for the year ended December 31, 2022, compared to net cash provided of $875.7 million during the year ended December 31, 2021. Cash used in investing activities consisted of $58.9 million and $60.0 million to fund capital expenditures during the years ended December 31, 2022 and 2021, 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. Net cash used in financing activities was $148.1 million for the year ended December 31, 2022, compared to $963.1 million used during the year ended December 31, 2021. During the year ended December 31, 2021, as a result of the sale of the Performance Chemicals business, net cash used in financing activities was driven by $542.9 million in net repayments of our debt and revolving credit facility and a dividend payment of $3.20 per common share, which resulted in a cash outflow of $435.6 million. 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 63 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 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. During the year ended December 31, 2020, we divested our Performance Materials business and received $624.3 million in net proceeds. 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, as a result of our sales of the Performance Chemicals and Performance Material businesses. 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, from the sale of the Performance Chemicals business. 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, from the sale of the Performance Materials business. Debt December 31, 2022 2021 (in millions) Senior Secured Term Loan Facility due June 2028 (the "2021 Term Loan Facility") $ 886.5 $ 895.5 ABL Facility — — Total debt 886.5 895.5 Original issue discount (7.5) (8.8) Deferred financing costs (4.1) (4.9) Total debt, net of original issue discount and deferred financing costs 874.9 881.8 Less: current portion (9.0) (9.0) Total long-term debt, excluding current portion $ 865.9 $ 872.8 As of December 31, 2022 our total debt was $886.5 million excluding the original issue discount of $7.5 million and deferred financing fees of $4.1 million for our senior secured credit facilities and notes. Our net debt was $775.6 million, including cash of $110.9 million. Our total available liquidity as of December 31, 2022 was $170.6 million, which represents our cash on hand of $110.9 million plus our excess availability under our ABL of $59.7 million, after giving effect to $4.0 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. ABL Facility On May 4, 2016, we entered a $200.0 million senior secured ABL facility, which provided for $200.0 million in revolving credit commitment (the “ABL Facility”). 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. In addition, there was annual commitment fee equal to 0.375%, with a step-down to 0.25% based on average usage of the revolving credit borrowings available. 64 On June 9, 2021, we amended the ABL Facility to decrease the aggregate amount of revolving loan commitments available to $100.0 million, consisting of $90.0 million in U.S. commitments and $10.0 million in European commitments and extended the maturity date to August 2, 2026. As of December 31, 2022, 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, 2022 and 2021, respectively. We have the availability to request letters of credit under the ABL Facility. We had $4.0 million of letters of credit outstanding as of December 31, 2022, which reduce available borrowings under the ABL Facility by such amounts. On February 17, 2023, we amended the ABL Facility to replace LIBOR with a secured overnight financing rate (“SOFR”) as the benchmark interest rate with respect to U.S. dollar-denominated borrowings. Following this amendment, U.S. dollar-denominated borrowings under the ABL Facility bear interest at a rate equal to an adjusted SOFR rate or the base rate plus a margin of between 1.25% and 1.75% or 0.25% to 0.75%, respectively. 2021 Term Loan Facility On June 9, 2021, we entered into an agreement for a 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, with a maturity date of June 9, 2028. The proceeds from the 2021 Term Loan Facility were used to repay the 2020 Term Loan Facility (as defined below) in full and partially repay the 2018 Term Loan Facility (as defined below). On February 9, 2023, we amended the 2021 Term Loan Facility to replace LIBOR with SOFR as the benchmark interest rate. Following this amendment, the 2021 Term Loan Facility bears interest at an adjusted SOFR rate (with a 0.50% minimum floor) plus 2.75% per annum (or, depending on the Borrower’s first lien net leverage ratio, 2.50%). 2020 Term Loan Facility – Repaid in 2021 On July 22, 2020, we entered into an agreement for a senior secured term loan facility (the “2020 Term Loan Facility”) for an aggregate principal amount of $650.0 million. 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 was fully repaid with the proceeds of the 2021 Term Loan Facility. 2018 Term Loan Facility – Repaid in 2021 On February 8, 2018, we entered into an agreement for a senior secured term loan facility (the “2018 Term Loan Facility”) for an aggregate principal amount of $1,267.0 million. The 2018 Term Loan Facility was amended on February 7, 2020, partially repaid on June 9, 2021 with a portion of the proceeds of the 2021 Term Loan Facility, and fully repaid on August 1, 2021 with a portion of the proceeds from the sale of our Performance Chemicals business. 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”). 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. 65 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, 2022 2021 2020 (in millions) Maintenance capital expenditures $ 46.9 $ 42.8 $ 36.0 Growth capital expenditures 9.0 19.6 10.2 Total capital expenditures $ 55.9 $ 62.4 $ 46.2 Capital expenditures remained at a level sufficient for required maintenance and certain expansion growth initiatives during these periods. Maintenance capital expenditures were higher in the year ended December 31, 2022 as compared to December 31, 2021 due to higher turnaround expenditures. Growth capital expenditures are lower in the year ended December 31, 2022 as compared to December 31, 2021 due to the completion of several expansion projects in 2021. Pension Funding We paid an immaterial amount in cash contributions into our defined benefit pension plans and other postretirement plans in December 31, 2022 and 2021, respectively and $3.3 million in 2020. The net periodic pension and postretirement expense was $1.0 million, $0.3 million, and $0.4 million for those same periods, respectively. As of December 31, 2022 and 2021, our pension plans and other post-retirement benefit plans were underfunded by $6.7 million and $4.2 million, respectively. Off-Balance Sheet Arrangements We had $4.0 million and $17.5 million of outstanding letters of credit on our revolver facility as of December 31, 2022 and 2021, respectively. Critical Accounting Policies and Estimates 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 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. 66 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. 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 67 assessments in 2022 and 2021, 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. 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. 68 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 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 69 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.