STEPAN CO 10-Q

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the interim periods included in the accompanying condensed consolidated financial statements. Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company’s and its subsidiaries’ (the Company) plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, the Company’s actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “should,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company’s control, that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part II-Item IA - Risk Factors” of this Quarterly Report on Form 10-Q and under “Part I-Item IA. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, including the risks and uncertainties related to the following: • accidents, unplanned production shutdowns or disruptions in any of the Company’s manufacturing facilities; • reduced demand for Company products due to customer product reformulations or new technologies; • the Company’s inability to successfully develop or introduce new products; • compliance with environmental, health and safety, product registration and anti-corruption laws; • the Company’s ability to make acquisitions of suitable candidates and successfully integrate acquisitions; • global competition and the Company’s ability to successfully compete; • volatility of raw material, natural gas and electricity costs as well as any disruption in their supply; • disruptions in transportation or significant changes in transportation costs; • downturns in certain industries and general economic downturns; • international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes; • unfavorable resolution of litigation against the Company; • the Company’s ability to keep and protect its intellectual property rights; • potentially adverse tax consequences due to the international scope of the Company’s operations; • downgrades to the Company’s credit ratings or disruptions to the Company’s ability to access well-functioning capital markets; • conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations; • cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects; • interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data; • the Company’s ability to retain its executive management and other key personnel; • the Company’s ability to operate within the limitations of debt covenants; and • the other factors set forth under “Risk Factors.” 21 These factors are not necessarily all of the important factors that could cause the Company’s actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors could also impact the Company’s results. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements. The “Company,” “we,” “our” or “us” means Stepan Company and one or more of its subsidiaries only. Overview The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business is comprised of three reportable segments: Surfactants – Surfactants, which accounted for 69 percent of consolidated net sales for the first six months of 2024, are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines and Singapore). Polymers – Polymers, which accounted for 28 percent of consolidated net sales for the first six months of 2024, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Elwood, Illinois (Millsdale) and Wilmington, North Carolina sites. Phthalic anhydride is manufactured at the Company’s Millsdale site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. In Europe, polyurethane polyols are manufactured at the Company’s plants in Germany and the Netherlands and specialty polyols are manufactured at the Company’s Poland site. In Asia, polyurethane polyols and specialty polyols are manufactured at the Company’s China plant. Specialty Products – Specialty products, which accounted for three percent of consolidated net sales for the first six months of 2024, include flavors, emulsifiers and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications. Specialty products are primarily manufactured at the Company’s Maywood, New Jersey, site. 22 Deferred Compensation Plans The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company income and expenses. Compensation expense is recognized when the value of the Company's common stock and mutual fund investment assets held for the plans increase, and compensation income is recognized when the value of the Company's common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following table: Income (Expense) For the Three Months Ended June 30, (In millions) 2024 2023 Change Deferred Compensation (Administrative expenses) $ (0.4 ) $ (0.7 ) $ 0.3 (1) Realized/Unrealized Gains on Investments (Other, net) 0.7 1.5 (0.8 ) Investment Income (Other, net) 0.1 0.1 — Pretax Income Effect $ 0.4 $ 0.9 $ (0.5 ) Income (Expense) For the Six Months Ended June 30, (In millions) 2024 2023 Change Deferred Compensation (Administrative expenses) $ (2.2 ) $ (2.3 ) $ 0.1 (1) Realized/Unrealized Gains on Investments (Other, net) 2.9 3.1 (0.2 ) Investment Income (Other, net) 0.2 0.2 — Pretax Income Effect $ 0.9 $ 1.0 $ (0.1 ) (1) See the Segment Results-Corporate Expenses section of this MD&A for details regarding the period-over-period changes in deferred compensation. Effects of Foreign Currency Translation The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three and six months ended June 30, 2024 and 2023: For the Three Months Ended June 30, (In millions) 2024 2023 Increase (Decrease) Increase (Decrease) Due to Foreign Translation Net Sales $ 556.4 $ 580.0 $ (23.6 ) $ 0.8 Gross Profit 69.6 66.4 3.2 (0.2 ) Operating Income 18.7 17.8 0.9 — Pretax Income 17.2 16.3 0.9 (0.1 ) For the Six Months Ended June 30, (In millions) 2024 2023 Increase (Decrease) Increase Due to Foreign Translation Net Sales $ 1,107.8 $ 1,231.4 $ (123.6 ) $ 12.6 Gross Profit 139.8 140.0 (0.2 ) 1.1 Operating Income 38.8 38.9 (0.1 ) 0.6 Pretax Income 36.7 36.2 0.5 0.5 23 RESULTS OF OPERATIONS Three Months Ended June 30, 2024 and 2023 Summary Net income in the second quarter of 2024 was $9.5 million, or $0.42 per diluted share, versus $12.7 million, or $0.55 per diluted share, in the second quarter of 2023. Adjusted net income was $9.4 million, or $0.41 per diluted share, versus $12.1 million, or $0.53 per diluted share in the second quarter of 2023 (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Earnings before interest, taxes, depreciation and amortization (EBITDA) were $47.9 million in the second quarter of 2024, up three percent, versus $46.7 million in the second quarter of 2023. Adjusted EBITDA was $47.7 million, up four percent, versus $45.8 million in the second quarter of 2023 (see the "Reconciliation of non-GAAP EBITDA and Adjusted EBITDA" section of this MD&A for a reconciliation between reported operating income and non-GAAP EBITDA and adjusted EBITDA). Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the second quarter of 2024 compared to the second quarter of 2023. A detailed discussion of segment operating performance for the second quarter of 2024 compared to the second quarter of 2023 follows the summary. Consolidated net sales decreased $23.6 million, or four percent, versus the prior year quarter. Lower average selling prices negatively impacted the year-over-year change in net sales by $49.7 million. The decrease in average selling prices was mainly attributable to the pass-through of lower raw material costs, less favorable product mix and increased competitive activity within Latin American end-markets. Consolidated sales volume increased four percent, which favorably impacted the change in net sales by $25.3 million. Surfactant and Polymer sales volume increased five and two percent, respectively, while sales volume in the Specialty Products segment declined two percent. Foreign currency translation favorably impacted the year-over-year change in net sales by $0.8 million. Operating income in the second quarter of 2024 increased $0.9 million, or five percent, versus operating income in the second quarter of 2023. Surfactant and Specialty Products operating income increased $1.9 million and $3.6 million, respectively, versus the second quarter of 2023. Polymer operating income decreased $2.7 million versus the second quarter of 2023. Corporate expenses, including business restructuring, environmental remediation, deferred compensation and a $3.5 million expense recognized as a result of a criminal social engineering scheme impacting one the Company's subsidiaries in Asia, increased $1.9 million, or 11 percent, year-over-year. See Note 17, Other Matter , of the notes to the Company's consolidated financial statements (included in Item 1 of the Form 10-Q) for additional details regarding the criminal social engineering scheme. Operating expenses (including deferred compensation and business restructuring) increased $2.3 million, or five percent, versus the prior year quarter. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows: • Selling expenses increased $0.7 million, or six percent, year-over-year. • Administrative expenses increased $2.0 million, or nine percent year-over-year, primarily due to a $3.5 million expense recognized as a result of the criminal social engineering scheme impacting one of the Company's subsidiaries in Asia that was partially offset by lower salaries. • Research, development and technical service (R&D) expenses were flat between quarters. • Deferred compensation was $0.4 million of expense in the second quarter of 2024 versus $0.7 million of expense in the prior year quarter. The $0.3 million decrease in deferred compensation expense was primarily due to a smaller appreciation in the market value of mutual fund investment assets held for the plans during the second quarter of 2024 versus the second quarter of 2023. See the Overview and Segment Results-Corporate Expenses section of this MD&A for further details. Net interest expense for the second quarter of 2024 decreased $1.2 million, or 31 percent, versus the second quarter of 2023. This decrease was primarily attributable to higher non-US interest income recognition. Other, net was $1.2 million of income in the second quarter of 2024 versus $2.4 million of income in the second quarter of 2023. The Company recognized $0.8 million of investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the second quarter of 2024 compared to $1.6 million of investment income in the second quarter of 2023. The Company's net periodic pension income was $0.4 million in the second quarter of 2024 versus $0.3 million of income in the second quarter of 2023. In addition, the Company reported less than $0.1 million of foreign exchange losses in the second quarter of 2024 versus $0.4 million of foreign exchange gains in the second quarter of 2023. The Company’s effective tax rate was 44.7 percent in the second quarter of 2024 versus 22.3 percent in the second quarter of 2023. The increase was primarily attributable to the Company’s intention to elect “Bonus Depreciation” for its new alkoxylation facility that is being built in Pasadena, Texas and is expected to start up in the fourth quarter of 2024. As a result of this election, the Company is expected to lose its ability to use its global intangible low-taxed income (GILTI) deduction, related GILTI foreign tax credits, and its foreign-derived intangible income (FDII) deduction for 2024, resulting in a higher effective tax rate. In addition, the Company’s current 24 and forecasted geographic mix of income has driven the effective tax rate higher. The Organisation for Economic Co-operation and Development (OECD) has proposed a global minimum tax of 15 percent on reported profits (entitled "Pillar Two"). The Company does not expect Pillar Two to have a material impact on its financial position, results of operations, cash flow and effective tax rate. Segment Results (Dollars in thousands) For the Three Months Ended June 30, Net Sales 2024 2023 Decrease Percent Change Surfactants $ 379,795 $ 391,686 $ (11,891 ) -3 Polymers 159,757 164,515 (4,758 ) -3 Specialty Products 16,853 23,774 (6,921 ) -29 Total Net Sales $ 556,405 $ 579,975 $ (23,570 ) -4 (Dollars in thousands) For the Three Months Ended June 30, Operating Income 2024 2023 Increase (Decrease) Percent Change Surfactants $ 17,062 $ 15,140 $ 1,922 13 Polymers 13,597 16,321 (2,724 ) -17 Specialty Products 7,319 3,773 3,546 94 Segment Operating Income $ 37,978 $ 35,234 $ 2,744 8 Corporate Expenses, Excluding Deferred Compensation and Restructuring $ 18,916 $ 16,640 $ 2,276 14 Deferred Compensation Expense 395 743 (348 ) -47 Business Restructuring — 42 (42 ) NM Total Operating Income $ 18,667 $ 17,809 $ 858 5 Surfactants Surfactant net sales for the second quarter of 2024 decreased $11.9 million versus net sales for the second quarter of 2023. Lower average selling prices negatively impacted the change in net sales by $31.8 million. The lower average selling prices were mainly attributable to declining raw material costs, less favorable product mix and increased competitive activity within Latin American end-markets. Sales volume increased five percent year-over-year and positively impacted the change in net sales by $20.8 million. Foreign currency translation had a $0.9 million unfavorable impact on the year-over-year change in net sales. A comparison of net sales by region follows: (Dollars in thousands) For the Three Months Ended June 30, Net Sales 2024 2023 Increase (Decrease) Percent Change North America $ 220,520 $ 231,477 $ (10,957 ) -5 Europe 63,460 68,742 (5,282 ) -8 Latin America 83,569 78,217 5,352 7 Asia 12,246 13,250 (1,004 ) -8 Total Surfactants Segment $ 379,795 $ 391,686 $ (11,891 ) -3 Net sales for North American operations decreased $11.0 million, or five percent, year-over-year. Lower average selling prices had a $5.5 million unfavorable impact on the change in net sales and were primarily due to the pass-through of lower raw material costs and less favorable product mix. Sales volume declined two percent and negatively impacted the change in net sales by $5.3 million. The lower sales volume was primarily due to lower demand for products sold into the industrial cleaning and agricultural end markets. In addition, sales volume into the personal care end markets was negatively impacted by operational disruptions, primarily related to a flood event at the Millsdale, Illinois plant site, during the second quarter of 2024. Higher demand for products sold into the laundry and cleaning end markets, the oil field end markets and to our distribution partners, partially offset the above. Foreign currency translation negatively impacted the change in net sales by $0.2 million. Net sales for European operations decreased $5.3 million, or eight percent, primarily due to lower average selling prices that negatively impacted the change in net sales by $14.9 million. The lower average selling prices were primarily due to the pass-through 25 of lower raw material costs, less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation negatively impacted the change in net sales by $0.3 million. Sales volume was up 14 percent year-over-year and positively impacted the change in net sales by $9.9 million. The sales volume improvement was primarily due to higher demand for products sold into the consumer products end markets and to our distribution partners, partially offset by lower demand for products sold into the agricultural end markets. Net sales for Latin American operations increased $5.4 million, or seven percent, largely due to a 15 percent increase in sales volume that positively impacted the change in net sales by $11.7 million. The sales volume improvement was primarily due to higher demand for products sold into the consumer products and agricultural end markets and to our distribution partners. Lower average selling prices negatively impacted the change in net sales by $6.3 million. The lower average selling prices primarily reflect the pass-through of lower raw material costs and increased competitive pressures from imports. Net sales for Asian operations decreased $1.0 million, or eight percent, versus the prior year quarter. Lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $1.6 million and $0.5 million, respectively. An eight percent increase in sales volume positively impacted the change in net sales by $1.1 million. The sales volume improvement was mainly due to higher demand for products sold to our distribution partners and into the agricultural end markets. Surfactant operating income for the second quarter of 2024 increased $1.9 million, or 13 percent, versus operating income for the second quarter of 2023. Gross profit increased $2.3 million, or six percent, and operating expenses increased $0.4 million, or two percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow: (Dollars in thousands) For the Three Months Ended June 30, Gross Profit and Operating Income 2024 2023 Increase (Decrease) Percent Change North America $ 20,378 $ 24,241 $ (3,863 ) -16 Europe 6,480 5,066 1,414 28 Latin America 11,145 7,222 3,923 54 Asia 2,884 2,015 869 43 Surfactants Segment Gross Profit $ 40,887 $ 38,544 $ 2,343 6 Operating Expenses 23,825 23,404 421 2 Surfactants Segment Operating Income $ 17,062 $ 15,140 $ 1,922 13 Gross profit for North American operations decreased $3.9 million, or 16 percent, versus the prior year primarily due to lower average unit margins and a two percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $3.3 million and $0.6 million, respectively. The lower average unit margins were primarily attributable to less favorable product mix, higher pre-operating expenses associated with the alkoxylation production facility that is being built in Pasadena, Texas and higher expenses incurred at the Company's Millsdale, Illinois plant site due to operational issues, primarily related to a flood event, during the second quarter of 2024. Gross profit for European operations increased $1.4 million, or 28 percent, due to higher average unit margins and a 14 percent increase in sales volume. These factors positively affected the change in net sales by $0.7 million each. Gross profit for Latin American operations increased $3.9 million, or 54 percent, primarily due to improved average margins and a 15 percent increase in sales volume. These items positively impacted the year-over-year change in gross profit by $3.0 million and $1.1 million, respectively. The higher average unit margins were primarily due to a more favorable product mix. Foreign currency translation negatively impacted the change in gross profit by $0.2 million. Gross profit for Asia operations increased $0.9 million, or 43 percent, year-over-year primarily due to higher average unit margins and an eight percent increase in sales volume. These items positively impacted the year-over-year change in gross profit by $0.7 million and $0.2 million, respectively. The higher average unit margins reflect a more favorable product mix and lower overhead costs due to the timing of production runs. Operating expenses for the Surfactants segment increased $0.4 million, or two percent, in the second quarter of 2024 versus the second quarter of 2023. 26 Polymers Polymer net sales for the second quarter of 2024 decreased $4.8 million, or three percent, versus net sales for the same period of 2023. Lower average selling prices negatively impacted the change in net sales by $9.6 million. A two percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $3.1 million and $1.7 million, respectively. A comparison of net sales by region follows: (Dollars in thousands) For the Three Months Ended June 30, Net Sales 2024 2023 Increase (Decrease) Percent Change North America $ 79,828 $ 88,149 $ (8,321 ) -9 Europe 67,401 65,896 1,505 2 Asia and Other 12,528 10,470 2,058 20 Total Polymers Segment $ 159,757 $ 164,515 $ (4,758 ) -3 Net sales for North American operations decreased $8.3 million, or nine percent, due to lower average selling prices and a four percent decrease in sales volume. These items negatively impacted the year-over-year change in net sales by $4.9 million and $3.4 million, respectively. The lower average selling prices primarily reflect the pass-through of lower raw material costs. The decline in sales volume is mostly attributable to a 50 percent decrease within the commodity phthalic anhydride business due to operational issues at the Millsdale, Illinois plant site during the second quarter of 2024. Sales volume of specialty polyols increased 25 percent year-over year while sales volume of polyols used in rigid foam applications declined one percent. Net sales for European operations increased $1.5 million, or two percent, versus the second quarter of 2023. This increase was primarily due to the favorable impact of foreign currency translation and a three percent increase in sales volume. These items positively impacted the year-over-year change in net sales by $2.1 million and $2.0 million, respectively. A weaker U.S. dollar relative to the Polish zloty and British pound sterling led to the favorable foreign currency translation effect. Lower average selling prices negatively impacted the year-over-year change in net sales by $2.6 million. The lower average selling prices were primarily due to the pass-through of lower raw material costs and increased competitive activity. Net sales for Asia and Other operations increased $2.1 million, or 20 percent, primarily due to a 28 percent increase in sales volume which positively impacted the year-over-year change in net sales by $2.9 million. The higher sales volume was largely driven by the non-recurrence of COVID lock downs and restrictions that were partially in place during the second quarter of 2023 and higher specialty polyols demand resulting from the Company's product diversification efforts. The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the year-over-year change in net sales by $0.4 million each. Polymer operating income in the second quarter of 2024 decreased $2.7 million, or 17 percent, versus operating income in the second quarter of 2023. Gross profit decreased $2.2 million, or 10 percent and operating expenses increased $0.5 million or eight percent between years. Comparisons of gross profit by region and total segment operating expenses and operating income follow: (Dollars in thousands) For the Three Months Ended June 30, Gross Profit and Operating Income 2024 2023 Increase (Decrease) Percent Change North America $ 11,285 $ 12,417 $ (1,132 ) -9 Europe 7,556 9,899 (2,343 ) -24 Asia and Other 1,805 551 1,254 NM Polymers Segment Gross Profit $ 20,646 $ 22,867 $ (2,221 ) -10 Operating Expenses 7,049 6,546 503 8 Polymers Segment Operating Income $ 13,597 $ 16,321 $ (2,724 ) -17 Gross profit for North American operations decreased $1.1 million, or nine percent, due to lower average unit margins and a four percent decline in sales volume. These items negatively impacted the change in gross profit by $0.6 million and $0.5 million, respectively. The lower average unit margins were primarily due to a non-cash phthalic anhydride related catalyst write-off ($2.1 million) and higher expenses incurred at the Company's Millsdale, Illinois plant site due to operational issues in the second quarter of 2024. Gross profit for European operations decreased $2.3 million, or 24 percent, versus the second quarter of 2023. This decrease was primarily due to lower average unit margins that negatively impacted the change in gross profit by $2.7 million. A three percent increase in sales volume and the favorable effect of foreign currency translation positively impacted the year-over-year change in gross profit by $0.3 million and $0.1 million, respectively. 27 Gross profit for Asia and Other operations increased $1.3 million primarily due to higher average unit margins and a 28 percent increase in sales volume. These items positively impacted the change in gross profit by $1.2 million and $0.2 million, respectively. Foreign currency translation negatively impacted the year-over-year change in gross profit by $0.1 million. Operating expenses for the Polymer segment increased $0.5 million, or eight percent, in the second quarter of 2024 compared to the second quarter of 2023. Specialty Products Specialty Products net sales for the second quarter of 2024 decreased $6.9 million, or 29 percent, versus net sales for the second quarter of 2023. The decrease was due to lower average selling prices and a two percent decrease in sales volume. Gross profit and operating income increased by $3.4 million and $3.5 million, respectively, year-over-year. The year-over-year increases in gross profit and operating income were mostly attributable to higher average unit margins within the medium chain triglycerides (MCT) product line. The higher unit margins reflect the non-recurrence of high-cost inventory carryover experienced in the prior year. Corporate Expenses Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $1.9 million, or 11 percent, year-over-year. Corporate expenses were $19.3 million in the second quarter of 2024 versus $17.4 million in the second quarter of 2023. This increase was primarily due to a $3.5 million expense related to a criminal social engineering scheme that impacted the Company's subsidiary in Asia, that was partially offset by lower deferred compensation expense and productivity measures implemented in late 2023. See Note 17, Other Matter, of the notes to the Company's consolidated financial statements for additional details regarding the criminal social engineering scheme. The $0.3 million decrease in deferred compensation expense was primarily due to a smaller increase in the market value of mutual fund investment assets held for the plans in the second quarter of 2024 versus the second quarter of 2023. This decrease was partially offset by a $6.08 per share decrease in the market price of the Company's common stock in the second quarter of 2024 compared to a $7.47 per share decrease in the second quarter of 2023. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation income/expense for the three months ended June 30, 2024 and 2023: 2024 2023 June 30 March 31 June 30 March 31 Company Common Stock Price $ 83.96 $ 90.04 $ 95.56 $ 103.03 Six Months Ended June 30, 2024 and 2023 Summary Net income in the first half of 2024 was $23.4 million, or $1.02 per diluted share, versus $28.8 million, or $1.25 per diluted share, in the first half of 2023. Adjusted net income was $24.1 million, or $1.05 per diluted share, versus $28.5 million, or $1.24 per diluted share in the prior year (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Earnings before interest, taxes, depreciation and amortization (EBITDA) were $98.0 million in for the first half of 2024 versus $94.9 million in the first half of 2023. Adjusted EBITDA was $98.9 million, up five percent, versus $94.5 million in the first half of 2023 (see the "Reconciliation of non-GAAP EBITDA and Adjusted EBITDA" section of this MD&A for a reconciliation between reported operating income and non-GAAP EBITDA and adjusted EBITDA). Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, expenses and income in the first half of 2024 compared to the first half of 2023. A detailed discussion of segment operating performance for the first half of 2024 compared to the first half of 2023 follows the summary. Consolidated net sales decreased $123.6 million, or 10 percent, year-over-year. Lower average selling prices negatively impacted the year-over-year change in net sales by $166.1 million. The decrease in average selling prices was mainly due to the pass-through of lower raw material costs, less favorable product mix and increased competitive activity primarily within the European and Latin American end markets. Consolidated sales volume increased two percent and favorably impacted the year-over-year change in net sales by $29.9 million. Sales volume in the Surfactant, Polymer and Specialty Products segments increased three percent, two percent and four percent, respectively. Foreign currency translation favorably impacted the year-over-year change in net sales by $12.6 million mainly due to a weaker U.S. dollar against the British pound, Mexican peso, Colombian peso and Polish zloty. Operating income for the first half of 2024 was flat versus operating income for the first half of 2023. Surfactant and Specialty Products operating income increased $0.9 million and $5.3 million, respectively, versus the first half of 2023. Polymer operating income decreased $4.3 million year-over-year. Corporate expenses, including business restructuring, environmental remediation, deferred compensation and a $3.5 million expense recognized for a criminal social engineering scheme at one of the Company's subsidiaries in 28 Asia, increased $1.9 million, or five percent, year-over-year. See Note 17, Other Matter , of the notes to the Company's consolidated financial statements (included in Item 1 of the Form 10-Q) for additional details regarding the criminal social engineering scheme. Foreign currency translation had a $0.6 million favorable impact on operating income in the first half of 2024 versus the first half of 2023. Operating expenses (including deferred compensation and business restructuring expenses) were flat between years. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows: • Selling expenses decreased $1.0 million, or four percent, year-over-year primarily due to lower salaries. • Administrative expenses increased $2.0 million, or four percent, year-over-year. The increase was primarily driven by a $3.5 million expense recognized for a criminal social engineering scheme impacting one of the Company's subsidiaries in Asia and higher environmental reserve expenses. The higher environmental expense reflects a reserve adjustment for environmental costs related to property formerly owned and operated by the Company in Wilmington, Massachusetts. Lower salaries, resulting from productivity measures implemented in late 2023, partially offset the above. • R&D expenses decreased $0.9 million, or three percent, year-over-year primarily due to lower salaries. • Deferred compensation expenses were flat year-over-year. See the Overview and Segment Results-Corporate Expenses section of this MD&A for further details. Net interest expense for the first half of 2024 decreased $1.0 million, or 14 percent, versus the first half of 2023. This decrease was primarily attributable to higher non-U.S. interest income recognition and higher capitalized interest income, partially offset by higher U.S. interest expense. Other, net was $3.6 million of income for the first half of 2024 compared to $4.0 million of income for the first half of 2023. The Company recognized $3.1 million of investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the first half of 2024 compared to $3.3 million of investment income in the first half of 2023. In addition, the Company reported foreign exchange losses of $0.4 million in the first half of 2024 versus $0.1 million of foreign exchange gains in the first half of 2023. The Company also reported $0.2 million of higher net periodic pension income in the first half of 2024 versus the first half of 2023. The Company’s effective tax rate was 36.1 percent in the first half of 2024 versus 20.4 percent in the first half of 2023. The increase was primarily attributable to the Company’s intention to elect “Bonus Depreciation” for its new alkoxylation facility that is being built in Pasadena, Texas and expected to start up in the fourth quarter of 2024. As a result of this election, the Company is expected to lose its ability to use its global intangible low-taxed income (GILTI) deduction, related GILTI foreign tax credits, and its income deduction (FDII) for 2024, resulting in a higher effective tax rate. In addition, the Company’s current and forecasted geographic mix of income has driven the effective tax rate higher. The Organisation for Economic Co-operation and Development (OECD) has proposed a global minimum tax of 15 percent on reported profits (entitled "Pillar Two"). The Company does not expect Pillar Two to have a material impact on its financial position, results of operations, cash flow and effective tax rate. (In thousands) For the Six Months Ended June 30, Net Sales 2024 2023 (Decrease) Percent Change Surfactants $ 770,615 $ 859,514 $ (88,899 ) -10 Polymers 305,265 325,642 (20,377 ) -6 Specialty Products 31,943 46,255 (14,312 ) -31 Total Net Sales $ 1,107,823 $ 1,231,411 $ (123,588 ) -10 (In thousands) For the Six Months Ended June 30, Operating Income 2024 2023 Increase (Decrease) Percent Change Surfactants $ 43,142 $ 42,196 $ 946 2 Polymers 21,979 26,325 (4,346 ) -17 Specialty Products 11,587 6,302 5,285 84 Segment Operating Income $ 76,708 $ 74,823 $ 1,885 3 Corporate Expenses, Excluding Deferred Compensation and Restructuring $ 35,699 $ 33,513 $ 2,186 7 Deferred Compensation Expense 2,173 2,245 (72 ) 3 Business Restructuring — 199 (199 ) NM Total Operating Income $ 38,836 $ 38,866 $ (30 ) 0 29 Segment Results Surfactants Surfactants net sales for the first half of 2024 decreased $88.9 million, or 10 percent, versus net sales for the first half of 2023. Lower average selling prices negatively impacted the change in net sales by $118.7 million. The lower average selling prices were mainly due to declining raw material costs, less favorable product mix and increased competitive activity within the European and Latin American end-markets. Sales volume increased three percent and positively impacted the change in net sales by $23.0 million. Foreign currency translation had a $6.8 million favorable impact on the year-over-year change in net sales. A year-over-year comparison of net sales by region follows: (In thousands) For the Six Months Ended June 30, Net Sales 2024 2023 Increase (Decrease) Percent Change North America $ 450,110 $ 508,617 $ (58,507 ) -12 Europe 134,238 159,861 (25,623 ) -16 Latin America 161,437 159,315 2,122 1 Asia 24,830 31,721 (6,891 ) -22 Total Surfactants Segment $ 770,615 $ 859,514 $ (88,899 ) -10 Net sales for North American operations decreased $58.5 million, or 12 percent, year-over-year. Lower average selling prices had a $38.4 million unfavorable impact on the change in net sales and were primarily attributable to the pass-through of lower raw material costs and less favorable product mix. Sales volume declined four percent and negatively impacted the change in net sales by $19.9 million. The decrease in sales volume primarily reflects lower demand for products sold into the agricultural end markets due to customer and channel inventory destocking. In addition, sales volume into the personal care end markets was negatively impacted by operational issues, partially related to a flood event at the Millsdale, Illinois plant site, during the first half of 2024. Higher demand for products sold into the oil field, construction and industrial solutions, and to our distribution partners partially offset the aforementioned decline. Foreign currency translation negatively impacted the year-over-year change in net sales by $0.2 million. Net sales for European operations decreased $25.6 million, or 16 percent, primarily due to lower average selling prices that negatively impacted the change in net sales by $37.9 million. The lower average selling prices were primarily due to the pass-through of lower raw material costs, less favorable product mix and increased competitive activity within certain end-use markets. Sales volume was up 7 percent and positively impacted the change in net sales by $11.1 million. The higher sales volume was primarily due to higher demand for products sold into the consumer products end markets and to our distribution partners. Foreign currency translation positively impacted the change in net sales by $1.2 million. A weaker U.S. dollar relative to the European euro and British pound sterling led to the favorable foreign currency translation effect. Net sales for Latin American operations increased $2.1 million, or one percent, primarily due to a 16 percent increase in sales volume and the favorable impact of foreign currency translation. These items positively impacted the change in net sales by $25.0 million and $6.4 million, respectively. The higher sales volume was primarily due to higher demand for products sold into the consumer products end markets and to our distribution partners. A weaker U.S. dollar relative to the Mexican and Colombian pesos led to the favorable foreign currency translation effect. Lower average selling prices negatively impacted the change in net sales by $29.3 million and primarily reflect less favorable product mix, lower raw material costs and increased competitive activity within certain end-use markets. Net sales for Asian operations decreased $6.9 million, or 22 percent, year-over-year. Lower average selling prices, a five percent decline in sales volume, and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $4.5 million, $1.7 million and $0.7 million, respectively. The decline in average selling prices primarily reflects the pass-through of lower raw material costs and the decline in volume primarily reflects less demand for products sold into the commodity laundry and cleaning end markets. 30 Surfactant operating income for the first half of 2024 increased $0.9 million, or two percent, versus operating income for the first half of 2023. Gross profit decreased $0.1 million, and operating expenses decreased $1.0 million, or two percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow: (In thousands) For the Six Months Ended June 30, Gross Profit and Operating Income 2024 2023 Increase (Decrease) Percent Change North America $ 51,746 $ 59,454 $ (7,708 ) -13 Europe 14,802 15,286 (484 ) -3 Latin America 19,911 14,394 5,517 38 Asia 4,870 2,298 2,572 NM Surfactants Segment Gross Profit $ 91,329 $ 91,432 $ (103 ) 0 Operating Expenses 48,187 49,236 (1,049 ) -2 Surfactants Segment Operating Income $ 43,142 $ 42,196 $ 946 2 Gross profit for North American operations decreased $7.7 million, or 13 percent, versus the prior year primarily due to lower average unit margins and a four percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $5.4 million and $2.3 million, respectively. The lower average unit margins were mostly attributable to less favorable product mix, higher pre-operating expenses associated with the alkoxylation production facility that is being built in Pasadena, Texas and higher expenses incurred at the Company's Millsdale, Illinois plant site due to operational issues, partially related to a flood event, during the first half of 2024. Gross profit for European operations decreased $0.5 million, or three percent, primarily due to lower average unit margins that negatively impacted the change in gross profit by $1.6 million. Sales volume growth of seven percent and the favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $1.0 million and $0.1 million, respectively. Gross profit for Latin American operations increased $5.5 million, or 38 percent, due to improved average unit margins, sales volume growth of 16 percent and the favorable impact of foreign currency translation. These items positively impacted the year-over-year change in gross profit by $2.7 million, $2.3 million and $0.5 million, respectively. The higher average unit margins were primarily due to a more favorable product mix. Gross profit for Asian operations increased $2.6 million, primarily due to higher average unit margins that positively impacted the year-over-year change in gross profit by $2.7 million. The higher average unit margins were primarily due to lower overhead costs due to the timing of production runs. The five percent decline in sales volume negatively impacted the year-over-year change in gross profit by $0.1 million. Operating expenses for the Surfactant segment decreased $1.0 million, or two percent, year-over-year. This decrease was mainly attributable to lower salaries and bad debt provision expenses. Polymers Polymer net sales for the first half of 2024 decreased $20.4 million, or six percent, versus net sales for the same period of 2023. Lower average selling prices negatively impacted the change in net sales by $31.7 million. A two percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $5.4 million and $5.9 million, respectively. A year-over-year comparison of net sales by region follows: (In thousands) For the Six Months Ended June 30, Net Sales 2024 2023 Increase (Decrease) Percent Change North America $ 149,637 $ 169,318 $ (19,681 ) -12 Europe 131,278 134,953 (3,675 ) -3 Asia and Other 24,350 21,371 2,979 14 Total Polymers Segment $ 305,265 $ 325,642 $ (20,377 ) -6 Net sales for North American operations decreased $19.7 million, or 12 percent, due to lower average selling prices and a four percent decrease in sales volume. These items negatively impacted the year-over-year change in net sales by $12.5 million and $7.2 million, respectively. The lower average selling prices primarily reflect the pass-through of lower raw material costs. Sales volume of polyols used in rigid foam applications and specialty polyols increased one percent and nine percent, respectively year-over-year. These 31 increases were more than offset by a 47 percent decrease within the commodity phthalic anhydride business due to operational issues at the Millsdale, Illinois plant during the first half of 2024. Net sales for European operations decreased $3.7 million, or three percent, year-over-year. Lower average selling prices negatively impacted the year-over-year change in net sales by $15.3 million. The lower average selling prices were primarily due to the pass-through of lower raw material costs and increased competitive activity. Foreign currency translation and a four percent increase in sales volume positively impacted the change in net sales by $6.8 million and $4.8 million, respectively. A weaker U.S. dollar relative to the Polish zloty and British pound sterling led to the favorable foreign currency translation effect. Net sales for Asia and Other operations increased $3.0 million, or 14 percent, primarily due to a 22 percent increase in sales volume which positively impacted the year-over-year change in net sales by $4.6 million. The higher sales volume was driven by the non-recurrence of COVID lock downs and restrictions that were in place in China during the first half of 2023 and higher demand for specialty polyols resulting from the Company's product diversification efforts. The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the year-over-year change in net sales by $1.0 and $0.6 million, respectively. Polymer operating income for the first half of 2024 decreased $4.3 million, or 17 percent, versus operating income for the first half of 2023. Gross profit decreased $4.5 million, or 11 percent, and operating expenses decreased $0.1 million, or one percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow: (In thousands) For the Six Months Ended June 30, Gross Profit and Operating Income 2024 2023 Increase (Decrease) Percent Change North America $ 15,928 $ 18,561 $ (2,633 ) -14 Europe 16,578 20,211 (3,633 ) -18 Asia and Other 3,216 1,418 1,798 127 Polymers Segment Gross Profit $ 35,722 $ 40,190 $ (4,468 ) -11 Operating Expenses 13,743 13,865 (122 ) -1 Polymers Segment Operating Income $ 21,979 $ 26,325 $ (4,346 ) -17 Gross profit for North American operations decreased $2.6 million, or 14 percent, due to lower average unit margins and a four percent decline in sales volume. These items negatively impacted the change in gross profit by $1.8 million and $0.8 million, respectively. The lower average unit margins largely reflect a non-cash phthalic anhydride related catalyst write-off ($2.1 million) and higher expenses incurred at the Company's Millsdale, Illinois plant due to operational issues during the first half of 2024. Gross profit for European operations decreased $3.6 million, or 18 percent, versus the first half of 2023. This decrease was primarily due to lower average unit margins that negatively impacted the change in gross profit by $4.9 million. A four percent increase in sales volume and the favorable effect of foreign currency translation positively impacted the year-over-year change in gross profit by $0.7 million and $0.6 million, respectively. Gross profit for Asia and Other operations increased $1.8 million, primarily due to higher average unit margins and a 22 percent increase in sales volume. These items positively impacted the change in gross profit by $1.6 million and $0.3 million, respectively. Foreign currency translation had a $0.1 million unfavorable impact on the change in gross profit year-over-year. Operating expenses for the Polymers segment decreased $0.1 million, or one percent, year-over-year. Specialty Products Specialty Products net sales for the first half of 2024 decreased $14.3 million, or 31 percent, versus net sales for the first half of 2023. This decrease was primarily due to lower average selling prices that were partially offset by a four percent increase in sales volume. Gross profit and operating income increased $5.0 million and $5.3 million, respectively, year-over-year. The year-over-year increases in gross profit and operating income were mostly attributable to higher unit margins within the medium chain triglycerides (MCT) product line The higher average unit margins reflect the non-recurrence of high-cost inventory carryover experienced in the prior year. Corporate Expenses Corporate expenses, which include deferred compensation, business restructuring, and other operating expenses that are not allocated to the reportable segments, increased $1.9 million, or five percent, between years. The year-over-year increase was primarily attributable to $3.5 million of expenses associated with a criminal social engineering scheme impacting one of the Company's subsidiaries in Asia. See Note 17, Other Matter, of the notes to the Company's consolidated financial statements for additional details regarding the criminal social engineering scheme. Higher environmental reserve expenses also contributed to the year-over-year increase. Environmental reserve expenses were $1.8 million in the first half of 2024 versus $0.5 million in the first half of 2023. The higher environmental 32 expenses in 2024 reflect a reserve adjustment for environmental costs related to property formerly owned and operated by the Company in Wilmington, Massachusetts. These increases were partially offset by lower salaries, related to productivity measures implemented in late 2023, and lower insurance and legal expenses. Deferred compensation expense was $2.2 million in the first six months of both 2024 and 2023. A $10.59 per share decrease in the market price of Company common stock in the first half of 2024 is comparable to a $10.90 per share decrease in the second half of 2023. The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expense/income for the six months ended June 30, 2024 and 2023: 2024 2023 2022 June 30 December 31 June 30 December 31 Company Common Stock Price $ 83.96 $ 94.55 $ 95.56 $ 106.46 LIQUIDITY AND CAPITAL RESOURCES Overview For the six months ended June 30, 2024, operating activities were a cash source of $71.1 million versus a cash source of $35.8 million for the comparable period in 2023. For the first six months of 2024, investing cash outflows totaled $54.0 million versus cash outflows of $158.2 million in the prior year period. Financing activities were a cash use of $16.0 million versus a cash source of $78.0 million in the prior year period. Cash and cash equivalents decreased $5.1 million compared to December 31, 2023, inclusive of a $6.1 million unfavorable foreign exchange rate impact. On June 30, 2024, the Company's cash and cash equivalents totaled $124.7 million including $11.3 million in money market funds, which were rated AAAm by Standard and Poor’s and Aaa-mf by Moody’s. Cash in U.S. demand deposit accounts totaled $2.2 million, and cash and cash equivalents of the Company’s non-U.S. subsidiaries totaled $122.5 million (including UK money market funds of $11.3 million) as of June 30, 2024. Operating Activities Net income during the first six months of 2024 decreased $5.4 million versus the comparable period in 2023. Working capital was a cash use of $15.5 million during the first six months of 2024 versus a cash use of $33.2 million in the comparable period in 2023. Accounts receivable was a cash use of $27.3 million during the first six months of 2024 compared to a cash source of $22.8 million for the comparable period in 2023. Inventories were a cash use of $9.7 million in 2024 versus a cash source of $70.1 million in 2023. Accounts payable and accrued liabilities were a cash source of $26.6 million in 2024 compared to a cash use of $116.5 million for the same period in 2023. Working capital requirements were lower in the first six months of 2024 compared to 2023 primarily due to the changes noted above. The change in inventories working capital primarily reflects the extensive efforts to reduce inventory levels in 2023 (source of cash) versus targeted 2024 inventory builds in advance of the hurricane season and planned plant maintenance turnarounds during the second half of the 2024 (use of cash). The change in accounts payable and accrued liabilities was due in large part to lower 2024 cash outlays required to meet lower incentive-based compensation, tax and other year-end obligations closely linked to lower 2023 earnings. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 2024. Investing Activities Cash used for investing activities decreased $104.2 million year-over-year. Cash used for capital expenditures was $59.9 million in the first six months of 2024 versus $159.9 million in the same period of 2023. The lower capital spending in 2024 was largely attributable to reduced spending required to complete construction of the alkoxylation plant the Company is building at its Pasadena, Texas site. For 2024, the Company estimates that total capital expenditures will be in the range of $120.0 million to $140.0 million. This full year projected spending includes completion of the new alkoxylation plant that is being built in Pasadena, Texas, along with growth initiatives, infrastructure and optimization initiatives. Financing Activities Cash flow from financing activities was a use of $16.0 million in 2024 versus a source of $78.0 million in 2023. The year-over-year change was primarily due to a lower level of borrowings against the Company's revolving credit facility. The Company purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and to mitigate the dilutive effect of new shares issued under its compensation plans. The Company may, from time to time, seek to purchase additional amounts of its outstanding equity and/or retire debt securities through cash purchases and/or exchanges 33 for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to plans meeting the requirements of Rule 10b5-1 promulgated by the SEC. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. The Company did not purchase any shares of its common stock on the open market during the six months ended June 30, 2024. At June 30, 2024, the Company had $125.1 million remaining under the share repurchase program authorized by its Board of Directors. Debt and Credit Facilities Consolidated balance sheet debt increased from $654.1 million on December 31, 2023 to $657.1 million on June 30, 2024, primarily due to domestic borrowings from the Company’s revolving credit facility partially offset by scheduled debt repayments. Net debt (which is defined as total debt minus cash – see the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) increased $8.1 million, from $524.3 million at December 31, 2023 to $532.4 million at June 30, 2024. This change reflects a cash decrease of $5.1 million and a total debt increase of $3.0 million. As of June 30, 2024, the ratio of net debt to net debt plus shareholders’ equity was 31.0 percent versus 30.0 percent at December 31, 2023 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details). On June 30, 2024, the Company’s debt included $335.8 million of unsecured notes, with maturities ranging from 2024 through 2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the “Note Purchase Agreements”), a $92.5 million delayed draw term loan borrowed pursuant to the Company's credit agreement, $220.8 million of short term loans borrowed under the Company's revolving credit facility and $8.0 million of foreign credit line borrowings. The proceeds from the note issuances have been the Company’s primary source of long-term debt financing and are supplemented by borrowings under bank credit facilities to meet short and medium-term liquidity needs. The Company's credit agreement (the Credit Agreement) with a syndicate of banks provides for credit facilities in an initial aggregate principal amount of $450.0 million, consisting of (a) a $350.0 million multi-currency revolving credit facility and (b) a $100.0 million delayed draw term loan credit facility, each of which matures on June 24, 2027. The Company's credit agreement with Credit Industriel et Commercial NY (the CIC Credit Agreement) provides for a credit facility in an aggregate principal amount of $8.7 million. The facility is for the sole purpose of the issuance of standby letters of credit. The Company also maintains import and export letters of credit, and standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the Credit Agreement and under the CIC Credit Agreement. As of June 30, 2024, the Company had outstanding borrowings totaling $313.3 million, inclusive of a $92.5 million delayed draw term loan, and letters of credit totaling $11.7 million under the Credit Agreement, with $117.5 million remaining available. As of June 30, 2024, the Company also had an outstanding letter of credit of $8.7 million under the CIC Credit Agreement. The Company anticipates that cash from operations, committed credit facilities and cash on hand will be sufficient to fund anticipated capital expenditures, working capital, dividends and other planned financial commitments for the foreseeable future. Certain foreign subsidiaries of the Company maintain short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditures and acquisitions. At June 30, 2024, the Company’s foreign subsidiaries had $8.0 million of outstanding debt. The Company is subject to covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth. These debt covenants also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares. Under the most restrictive of these debt covenants: 1. The Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, of 3.50 to 1.00, for the preceding four calendar quarters. 2. The Company is required to maintain an existing maximum net leverage ratio, as defined within the agreements, not to exceed 4.00 to 1.00. 3. The Company is required to maintain net worth of at least $750.0 million. 4. The Company is permitted to pay dividends and purchase treasury shares after June 24, 2022, in amounts of up to $100.0 million plus 100 percent of net income and cash proceeds of stock option exercises, measured cumulatively beginning January 1, 2022. The maximum amount of dividends that could have been paid within this limitation is disclosed as unrestricted retained earnings in Note 14, Debt , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). The Company believes it was in compliance with the covenants under its material debt agreements as of June 30, 2024. 34 ENVIRONMENTAL AND LEGAL MATTERS The Company’s operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first six months of 2024 and 2023, the Company’s expenditures for capital projects related to environmental matters were $3.6 million and $4.4 million, respectively. These projects are capitalized and depreciated over their estimated useful lives, which are typically 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at the Company’s manufacturing locations were $28.6 million and $18.0 million for the six months ended June 30, 2024 and 2023, respectively. Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes. In addition, the Company is from time to time involved in routine legal proceedings incidental to the conduct of its business, including personal injury, property damage, tax, trade and labor matters. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these claims. It is the Company’s accounting policy to record liabilities when environmental assessments, remediation expenses or legal proceeding losses are probable, and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. Estimating the possible costs of environmental remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Some of the factors on which the Company bases its estimates include information provided by decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, and remedial action plans developed. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $20.8 million to $48.1 million at June 30, 2024 and $20.6 million to $49.4 million at December 31, 2023. Within the range of possible environmental and legal losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range. The Company's environmental and legal accruals totaled $20.8 million at June 30, 2024 and $20.6 million at December 31, 2023. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to environmental remediation and certain other legal matters approximated $2.0 million for the six months ended June 30, 2024, compared to $8.9 million for the same period in 2023. For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based on the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no material liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position. Certain of these matters are discussed in Item 1, Part 2, of the Company’s Annual Report on Form 10-K, Legal Proceedings, in this report and in other filings of the Company with the SEC, which are available upon request from the Company. See also Note 8, Contingencies , in the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for a summary of the significant environmental proceedings related to certain sites. OUTLOOK Management expects second half EBITDA to improve versus the prior year based on continued volume growth and a significant reduction in second half operational expenses at the Company's Millsdale, Illinois site, which caused the majority of the significant variance in second quarter expenses. The on-going recovery in Rigid Polyols and the expected second half of the year recovery of the Agricultural Chemicals business should drive improved earnings. Free cash flow should continue to improve versus the prior year driven by the completion of the Company's Pasadena investment, the growth in market volumes, and the Company's continued focus on cost reduction. Management believes the Company is positioned to deliver full year Adjusted EBITDA growth and positive free cash flow. For explanations of non-GAAP measures (EBITDA, Adjusted EBITDA and Free Cash Flow), see NON-GAAP reconciliations discussion below. 35 CRITICAL ACCOUNTING POLICIES There have been no material changes to the critical accounting policies disclosed in the Company’s 2023 Annual Report on Form 10-K. NON-GAAP RECONCILIATIONS The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company’s performance and financial condition. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management’s effectiveness with specific reference to these indicators. Management uses these non-GAAP financial measures to assist in analyzing what management views as the Company’s core operating performance for purposes of business decision making. Management believes that presenting these non-GAAP financial measures provides investors with useful supplemental information because they (i) provide meaningful supplemental information regarding financial performance by excluding items affecting comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions and evaluate the Company’s core operating performance across periods, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating the Company’s financial results. In addition, the Company believes that the presentation of these non-GAAP financial measures, when considered together with the most directly comparable GAAP financial measures and the reconciliations to those GAAP financial measures, provides investors with additional tools to understand the factors and trends affecting the Company’s underlying business than could be obtained absent these disclosures. These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP and there are limitations to using non-GAAP financial measures. For example, the non-GAAP financial measures presented in this Form 10-Q may differ from similarly titled non-GAAP financial measures presented by other companies and other companies may not define these non-GAAP financial measures the same way as the Company does. Reconciliation of Non-GAAP Adjusted Net Income and Earnings Per Share Management uses the non-GAAP adjusted net income metrics to evaluate the Company’s operating performance. Management excludes the items listed in the table below because they are non-operational items. The cumulative tax effect was calculated using the statutory tax rates for the jurisdictions in which the noted transactions occurred. Three Months Ended (In millions, except per share amounts) June 30, 2024 June 30, 2023 Net Income Diluted EPS Net Income Diluted EPS Net Income Attributable to the Company as Reported $ 9.5 $ 0.42 $ 12.7 $ 0.55 Deferred Compensation Income (including related investment activity) (0.4 ) (0.01 ) (0.9 ) (0.03 ) Business Restructuring Expense — — 0.1 — Cash Settled Stock Appreciation Rights (Income) — — (0.1 ) — Environmental Remediation Expense 0.2 — 0.1 — Cumulative Tax Effect on Above Adjustment Items 0.1 — 0.2 0.01 Adjusted Net Income $ 9.4 $ 0.41 $ 12.1 $ 0.53 Six Months Ended (In millions, except per share amounts) June 30, 2024 June 30, 2023 Net Income Diluted EPS Net Income Diluted EPS Net Income Attributable to the Company as Reported $ 23.4 $ 1.02 $ 28.8 $ 1.25 Deferred Compensation (Income)(including related investment activity) (0.9 ) (0.04 ) (1.0 ) (0.04 ) Business Restructuring Expense — — 0.2 0.01 Cash Settled Stock Appreciation Rights (Income) — — (0.1 ) — Environmental Remediation Expense 1.8 0.08 0.5 0.02 Cumulative Tax Effect on Above Adjustment Items (0.2 ) (0.01 ) 0.1 — Adjusted Net Income $ 24.1 $ 1.05 $ 28.5 $ 1.24 36 Reconciliation of Non-GAAP EBITDA and Adjusted EBITDA Management uses the non-GAAP EBITDA and adjusted EBITDA metrics to evaluate the Company's operating performance. Management excludes the items listed in the table below to arrive at adjusted EBITDA because they are non-operational items. Three Months Ended June 30, 2024 ($ in millions) Surfactants Polymers Specialty Products Unallocated Corporate Consolidated Operating Income $ 17.1 $ 13.6 $ 7.3 $ (19.3 ) $ 18.7 Depreciation and Amortization 17.9 8.2 1.5 0.4 28.0 Other, Net Income — — — 1.2 1.2 EBITDA $ 35.0 $ 21.8 $ 8.8 $ (17.7 ) $ 47.9 Deferred Compensation — — — (0.4 ) (0.4 ) Environmental Remediation — — — 0.2 0.2 Adjusted EBITDA $ 35.0 $ 21.8 $ 8.8 $ (17.9 ) $ 47.7 Three Months Ended June 30, 2023 ($ in millions) Surfactants Polymers Specialty Products Unallocated Corporate Consolidated Operating Income $ 15.1 $ 16.3 $ 3.8 $ (17.4 ) $ 17.8 Depreciation and Amortization 16.0 8.3 1.4 0.8 26.5 Other, Net Income — — — 2.4 2.4 EBITDA $ 31.1 $ 24.6 $ 5.2 $ (14.2 ) $ 46.7 Deferred Compensation — — — (0.9 ) (0.9 ) Cash Settled SARs (0.1 ) — — — (0.1 ) Environmental Remediation — — — 0.1 0.1 Adjusted EBITDA $ 31.0 $ 24.6 $ 5.2 $ (15.0 ) $ 45.8 37 Six Months Ended June 30, 2024 ($ in millions) Surfactants Polymers Specialty Products Unallocated Corporate Consolidated Operating Income $ 43.1 $ 22.0 $ 11.6 $ (37.9 ) $ 38.8 Depreciation and Amortization 35.5 16.2 3.0 0.9 55.6 Other, Net Income — — — 3.6 3.6 EBITDA $ 78.6 $ 38.2 $ 14.6 $ (33.4 ) $ 98.0 Deferred Compensation — — — (0.9 ) (0.9 ) Cash Settled SARs — — — — — Business Restructuring — — — — — Environmental Remediation — — — 1.8 1.8 Adjusted EBITDA $ 78.6 $ 38.2 $ 14.6 $ (32.5 ) $ 98.9 Six Months Ended June 30, 2023 ($ in millions) Surfactants Polymers Specialty Products Unallocated Corporate Consolidated Operating Income $ 42.2 $ 26.3 $ 6.3 $ (35.9 ) $ 38.9 Depreciation and Amortization 31.3 16.6 2.8 1.3 52.0 Other, Net Income — — — 4.0 4.0 EBITDA $ 73.5 $ 42.9 $ 9.1 $ (30.6 ) $ 94.9 Deferred Compensation — — — (1.0 ) (1.0 ) Cash Settled SARs (0.1 ) — — — (0.1 ) Business Restructuring — — — 0.2 0.2 Environmental Remediation — — — 0.5 0.5 Adjusted EBITDA $ 73.4 $ 42.9 $ 9.1 $ (30.9 ) $ 94.5 Reconciliation of Non-GAAP Net Debt Management uses the non-GAAP net debt metric to gain a more complete picture of the Company’s overall liquidity, financial flexibility and leverage level. (In millions) June 30, 2024 December 31, 2023 Current Maturities of Long-Term Debt as Reported $ 282.4 $ 252.9 Long-Term Debt as Reported 374.7 401.2 Total Debt as Reported 657.1 654.1 Less Cash and Cash Equivalents as Reported (124.7 ) (129.8 ) Net Debt $ 532.4 $ 524.3 Equity $ 1,192.4 $ 1,216.5 Net Debt plus Equity $ 1,724.8 $ 1,740.8 Net Debt/Net Debt plus Equity 31 % 30 % 38 Item 3 – Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the market risks described in the Company’s 2023 Annual Report on Form 10-K.