What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 200 added, 527 removed, 202 unchanged (78% of the section changed)

38 unchanged sentences

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 66 percent of Company consolidated net sales for the first nine months of 2021, 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.

The overall business comprises three reportable segments:

Surfactants – Surfactants, which accounted for 69 percent of Company consolidated net sales for the first three months of 2022, 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.

1 unchanged sentence

Recent significant events include:

On January 19, 2020, the Company experienced a power disruption that impacted its Millsdale, Illinois facility.

This power outage combined with below freezing temperatures led to significant production and operational challenges that impacted both Surfactants and Polymers produced at the site.

The Millsdale facility operated on a partial basis and used existing inventories to serve the Company’s customers.

However, on February 17, 2020, power outage-related operational issues impacted the Millsdale site’s waste water treatment plant (WWTP) and forced the Company to stop production at the site.

As a result, the Company declared force majeure for the supply of phthalic anhydride (Polymers) and certain surfactant product lines.

All production lines were fully operational prior to the end of the first quarter of 2020.

The Company finalized an insurance settlement related to this power outage in the second half of 2020.

In March 2020, the Company acquired certain assets of Logos Technologies LLC's NatSurFact® business, a rhamnolipid-based line of bio-surfactants derived from renewable sources.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional.

The Company continues to focus its efforts to further develop, integrate and commercialize these unique surfactants.

The Company believes the rhamnolipid technology will further advance the growth and sustainability aspirations of both the Company and its customers.

See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

In September 2020, the Company, through its subsidiaries in Mexico, acquired Clariant’s anionic surfactant business located in Santa Clara, Mexico.

The acquisition did not include the purchase of a manufacturing site.

The business acquired was integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec).

This acquisition supports the Company’s growth strategy in Latin America and the Company believes the acquisition enhances its ability to support customer growth in the Mexican consumer and functional surfactant markets.

In February 2021, the Company acquired a fermentation plant located in Lake Providence, Louisiana.

2 unchanged sentences

Bio-surfactants, produced via fermentation, are attractive due to their biodegradability, low toxicity, and in some cases, unique antimicrobial properties.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional cleaning.

The acquisition of this industrial scale fermentation plant represents the latest step in the Company’s bio-surfactant commercialization efforts.

See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

Polymers – Polymers, which accounted for 31 percent of consolidated net sales for the first nine months of 2021, include polyurethane polyols, polyester resins and phthalic anhydride.

Polymers – Polymers, which accounted for 28 percent of consolidated net sales for the first three months of 2022, 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).

5 unchanged sentences

Phthalic anhydride is manufactured at the Company’s Millsdale, Illinois site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site.

In Europe, polyurethane polyols are manufactured at the Company’s subsidiaries in Germany and Vlissingen, Netherlands (see the INVISTA acquisition discussion below) and specialty polyols are manufactured by the Company’s Poland subsidiary.

In China, polyurethane polyols and specialty polyols are manufactured at the Company’s Nanjing, China, plant.

In Europe, polyurethane polyols are manufactured at the Company’s plants in Germany and the Netherlands (see the INVISTA acquisition discussion below) 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.

Recent significant events include:

The operational issues at the Company’s Millsdale, Illinois facility, described in the Surfactants significant events paragraph above, negatively impacted Polymer’s earnings during the first nine months of 2020.

In January 2021, the Company purchased INVISTA’s aromatic polyester polyol business and associated assets.

1 unchanged sentence

This acquisition expanded the Company’s manufacturing capabilities in both the United States and Europe and enhanced the Company’s business continuity capabilities for the market.

The Company believes that INVISTA’s available spare capacity, combined with debottlenecking opportunities in both plants, will allow Stepan to support future market growth in a capital efficient way.

The Company believes that the facilities’ available spare capacity, combined with debottlenecking opportunities in both plants, will allow Stepan to support future market growth in a capital efficient way.

See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

Specialty Products – Specialty products, which accounted for three percent of consolidated net sales for the first nine months of 2021, include flavors, emulsifiers and solubilizers used in food, flavoring, nutritional supplement, and pharmaceutical applications.

Specialty Products – Specialty products, which accounted for three percent of consolidated net sales for the first three months of 2022, 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 and, in some instances, by third-party contractors.

2021 Acquisitions

In January 2021, the Company purchased INVISTA’s aromatic polyester polyol business and associated assets.

Included in the transaction were two manufacturing sites, one in Wilmington, North Carolina and the other in Vlissingen, Netherlands along with intellectual property, customer relationships, inventory and working capital.

This acquisition expanded the Company’s manufacturing capabilities in both the United States and Europe and enhanced the Company’s business continuity capabilities for the market.

This acquisition was accounted for as a business combination, and accordingly, the assets acquired were measured and recorded at their preliminary fair values.

The purchase price of the acquisition was $165.0 million, plus $21.5 million of working capital and $3.0 million of associated value-added taxes (VAT).

The working capital acquired included $5.9 million of cash.

The acquisition was paid with cash on hand.

See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

In February 2021, the Company acquired a fermentation plant located in Lake Providence, Louisiana.

The Company believes this plant complements the rhamnolipid-based bio-surfactant technology the Company acquired from Logos Technologies in March 2020.

Fermentation is a new platform technology for the Company and the Company is focusing efforts to further develop, integrate, produce and commercialize these unique surfactants moving forward.

Bio-surfactants, produced via fermentation, are attractive due to their biodegradability, low toxicity, and in some cases, unique antimicrobial properties.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional.

The acquisition of this industrial scale fermentation plant represents the latest step in the Company’s bio-surfactant commercialization efforts.

This acquisition was accounted for as an asset acquisition.

The purchase price of the acquisition was $3.5 million and was paid with cash on hand.

See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

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 results when the values of Company common stock and mutual fund investment assets held for the plans increase, and compensation income results when the values of Company 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 tables:

Compensation expense is recognized when the value of Company common stock and mutual fund investment assets held for

the plans increase, and compensation income is recognized when the value of Company common stock and mutual fund investment assets decline.

Income (Expense)

For the Three Months

Ended September 30

(In millions)

Deferred Compensation (Administrative expenses)

Realized/Unrealized Gains (Losses) on Investments (Other, net)

Investment Income (Other, net)

Pretax Income Effect

Income (Expense)

For the Nine Months

Ended September 30

Ended March 31

(In millions)

Deferred Compensation (Administrative expenses)

Deferred Compensation (Administrative expense)

Realized/Unrealized Gains on Investments (Other, net)

1 unchanged sentence

Pretax Income Effect

See the Segment Results-Corporate Expenses sections of this MD&A for details regarding the period-over-period changes in deferred compensation expense.

Effects of Foreign Currency Translation

5 unchanged sentences

dollar results).

The following tables present 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 nine months ended September 30, 2021 and 2020:

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 months ended March 31, 2022 and 2021:

Three Months Ended

(In millions)

Increase due to Foreign

Operating Income

Pretax Income

Nine Months Ended

(In millions)

Due to Foreign

2 unchanged sentences

RESULTS OF OPERATIONS

Three Months Ended September 30, 2021 and 2020

Net income attributable to the Company in the third quarter of 2021 increased 11 percent to $36.9 million, or $1.59 per diluted share, from $33.2 million, or $1.43 per diluted share, in the third quarter of 2020.

Adjusted net income was $36.4 million in both the third quarter of 2021 and 2020, or $1.57 and $1.56 per diluted share, respectively (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 attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share).

Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the third quarter of 2021 compared to the third quarter of 2020.

A detailed discussion of segment operating performance for the third quarter of 2021 compared to the third quarter of 2020 follows the summary.

Consolidated net sales increased $138.2 million, or 30 percent, between quarters.

Higher average selling prices favorably impacted the quarter-over-quarter change in net sales by $126.0 million.

The increase in average selling prices was mainly due to the pass-through of higher raw material costs and more favorable customer and product mix.

Consolidated sales volume increased one percent, which had a $6.3 million favorable impact on the change in net sales.

Sales volume in the Polymer and Specialty Products segments increased 27 percent and nine percent, respectively.

The increase in Polymer sales volume was primarily attributable to the first quarter 2021 INVISTA polyester polyol acquisition.

The Specialty Products sales volume growth primarily reflects order timing differences within the food and flavor business and higher customer demand for medium chain triglycerides products.

Sales volume in the Surfactant segment decreased six percent quarter-over-quarter mostly due to lower sales volume in the consumer product end markets.

The consumer product business was negatively impacted by supply chain disruptions, feedstock supply issues following third quarter 2021 severe weather in the U.S.

Gulf Coast area and lower demand for consumer cleaning products versus the COVID-19 pandemic peak in 2020.

Foreign currency translation favorably impacted the change in net sales by $5.9 million due to a weaker U.S.

dollar against most currencies where the Company has foreign operations.

Operating income for the third quarter of 2021 decreased $2.2 million, or five percent, versus operating income for the third quarter of 2020.

Surfactant and Polymer operating income decreased $6.7 million and $2.6 million, respectively.

Specialty Products operating income increased $0.8 million versus the third quarter of 2020.

Surfactant and Polymer operating income in the third quarter of 2020 benefited from $2.2 million and $2.8 million, respectively, of partial insurance recovery related to the first quarter 2020 Millsdale, IL power outage.

Corporate expenses, including business restructuring and deferred compensation expenses, decreased $6.3 million quarter-over-quarter.

Deferred compensation and business restructuring expenses decreased $7.1 million and $0.1 million, respectively.

Corporate expenses (excluding deferred compensation and business restructuring expenses) increased $0.9 million quarter-over-quarter.

Foreign currency translation has a $0.5 million positive impact on operating income in the third quarter of 2021 versus the prior year quarter.

Operating expenses (including deferred compensation and business restructuring expenses) decreased $3.0 million, or five percent between quarters.

Three Months Ended March 31, 2022 and 2021

Net income attributable to the Company in the first quarter of 2022 increased 10 percent to $44.8 million, or $1.93 per diluted share, from $40.6 million, or $1.74 per diluted share, in the first quarter of 2021.

Adjusted net income declined four percent to $40.7 million, or $1.76 per diluted share, from $42.4 million, or $1.82 per diluted share in 2021 (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 attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share).

Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the first quarter of 2022 compared to the first quarter of 2021.

A detailed discussion of segment operating performance for the first quarter of 2022 compared to the first quarter of 2021 follows the summary.

Consolidated net sales increased $137.5 million, or 26 percent, from the prior year quarter.

Higher average selling prices favorably impacted the year-over-year change in net sales by $151.1 million.

The increase in average selling prices was mainly attributable to the pass-through of higher raw material costs and more favorable product and customer mix.

Consolidated sales volume was flat in the first quarter of 2022 versus the first quarter of 2021.

Sales volume in the Polymer segment increased two percent while sales volume in the Surfactant and Specialty Products segments decreased one percent and 12 percent, respectively.

Foreign currency translation negatively impacted the year-over-year change in net sales by $11.6 million due to a stronger U.S.

dollar against most currencies in locations where the Company has foreign operations.

Operating income for the first quarter of 2022 increased $9.4 million, or 17 percent, versus operating income for the first quarter of 2021.

Surfactant and Specialty Products operating income increased $0.6 million and $1.1 million, respectively.

Polymer operating income decreased $3.8 million versus the first quarter of 2021.

The Polymer decrease was primarily attributable to a first quarter 2022 power outage at the Company’s Millsdale, Illinois plant site that negatively impacted production.

The production disruption resulted in the declaration of force majeure for select products.

Production resumed in February and the force majeure was lifted on April 15, 2022.

Corporate expenses, including business restructuring and deferred compensation expenses, decreased $11.6 million year-over-year.

Deferred compensation expenses decreased $10.2 million.

Corporate expenses (excluding deferred compensation and business

restructuring expenses) decreased $ 1.4 million primarily due to lower acquisition-related ex penses.

F oreig n currency translation had a $1.1 million negative impact on operating income in the first quarter of 2022 versus the prior year quarter .

Operating expenses (including deferred compensation and business restructuring expense) decreased $9.2 million, or 17 percent, from 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 $1.5 million, or 11 percent, primarily due to higher salaries and a higher bad debt provision expense.

Administrative expenses increased $1.5 million, or seven percent, primarily due to higher USEPA environmental remediation oversight costs, insurance premiums and salaries.

Research, development, and technical service (R&D) expenses increased $1.2 million, or eight percent, primarily due to higher salaries.

Deferred compensation expense decreased $7.1 million quarter-over-quarter primarily due to a $7.33 per share decrease in the market price of Company common stock in the third quarter of 2021 compared to an $11.90 per share increase in the third quarter of 2020.

See the Overview and Segment Results-Corporate Expenses sections of this MD&A for further details.

Business restructuring charges were $0.1 million in both the third quarter of 2021 and 2020.

Selling expenses increased $0.8 million, or five percent, primarily due to higher bad debt provision expenses related to higher global accounts receivable balances and the ongoing conflict in Ukraine.

Administrative expenses decreased $1.1 million, or five percent, primarily due to lower acquisition-related expenses.

Research, development and technical service (R&D) expenses increased $1.3 million, or nine percent, primarily due to higher salaries and associated fringe benefit expenses.

Deferred compensation expense decreased $10.2 million, primarily due to a $25.48 per share decrease in the market price of Company common stock in the first quarter of 2022 compared to a $7.79 per share increase in the first quarter of 2021.

See the Overview and Segment Results-Corporate Expenses section of this MD&A for further details.

Business restructuring expenses were $0.1 million in the first quarters of both 2022 and 2021.

The 2022 and 2021 restructuring charges reflect ongoing decommissioning costs associated with the Company’s Canadian plant closure.

See Note 16, Business Restructuring , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

Net interest expense for the third quarter of 2021 decreased two percent versus the third quarter of 2020.

Other, net was $0.7 million of income in the third quarter of 2021 versus $2.6 million of income in the third quarter of 2020.

The Company recognized less than $0.1 million of investment losses (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the third quarter of 2021 compared to $2.2 million of investment income in the third quarter of 2020.

In addition, the Company reported $0.4 million of foreign exchange gains in the third quarter of 2021 versus $0.5 million of foreign exchange gains in the third quarter of 2020.

The Company also reported $0.4 million of lower net periodic pension costs in the third quarter of 2021 versus the prior year quarter.

The Company’s effective tax rate was 6.1 percent for the third quarter of 2021 compared to 23.2 percent for the third quarter of 2020.

The decrease was primarily attributable to:

(a) a non-recurring favorable tax benefit recognized in the third quarter of 2021 related to the merger of the Company’s three Brazilian entities into a single entity;

and (b) non-recurring favorable U.S.

tax benefits recognized in the third quarter of 2021 related to the Company’s research and development tax credits and foreign-derived intangible income (FDII)/global intangible low-taxed income (GILTI) computations.

The tax benefit recognized in Brazil reflects the eligibility of Brazilian intangibles to be amortized for tax purposes subsequent to the merger of the Company’s three legal Brazilian entities into a single entity.

Net interest expense for the first quarter of 2022 increased $0.8 million, or 51 percent, versus the first quarter of 2021.

This increase was primarily attributable to higher interest expense associated with the Company’s new debt borrowings in 2021 and during the first quarter of 2022.

Other, net was $1.7 million of expense in the first quarter of 2022 versus $0.7 million of income in the first quarter of 2021.

The Company recognized $2.3 million of investment losses (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the first quarter of 2022 compared to $0.8 million of investment income in the first quarter of 2021.

In addition, the Company reported $0.3 million of foreign exchange gains in the first quarter of 2022 versus $0.3 million of foreign exchange losses in the first quarter of 2021.

The Company also reported $0.2 million of higher net periodic pension income in the first quarter of 2022 versus the prior year first quarter.

The Company’s effective tax rate was 24.6 percent in the first quarter of 2022 versus 23.6 percent in the first quarter of 2021.

The increase was primarily attributable to less favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2022 and a less favorable geographical mix of income in the first quarter of 2022.

Segment Results

For the Three Months Ended

(Dollars in thousands)

For the Three Months Ended

Specialty Products

2 unchanged sentences

(Dollars in thousands)

September 30,

Operating Income

6 unchanged sentences

Total Operating Income

Surfactant net sales for the third quarter of 2021 increased $53.9 million, or 16 percent, versus net sales for the third quarter of 2020.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $68.3 million and $6.2 million, respectively.

The higher average selling prices were mainly due to more favorable product and customer mix and the pass-through of higher raw material costs.

A six percent decrease in sales volume negatively impacted the change in net sales by $20.6 million.

Lower sales volume in the consumer product end markets accounted for most of the sales volume decrease.

Surfactant net sales for the first quarter of 2022 increased $97.3 million, or 26 percent, versus net sales for the first quarter of 2021.

Higher average selling prices positively impacted the change in net sales by $107.7 million.

The higher average selling prices were mainly attributable to the pass-through of higher raw material costs and improved product and customer mix.

Foreign currency translation had a $6.1 million unfavorable impact on the change in net sales quarter-over-quarter.

Sales volume declined one percent year over year and negatively impacted the change in net sales by $4.3 million.

A comparison of net sales by region follows:

1 unchanged sentence

(Dollars in thousands)

September 30,

North America

1 unchanged sentence

Total Surfactants Segment

Net sales for North American operations increased $15.4 million, or eight percent, between quarters.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $39.4 million and $0.4 million, respectively.

The higher average selling prices were mainly due to more favorable product and customer mix and the pass-through of higher raw material costs.

Sales volume declined 12 percent and negatively impacted the change in net sales by $24.4 million.

Lower sales volume in the consumer product end markets accounted for most of the decline.

Higher customer demand for products sold into the agricultural, oilfield and institutional cleaning end markets partially offset the foregoing decline.

The consumer products business was negatively impacted by supply chain disruptions, feedstock supply issues following the third quarter 2021 severe weather in the U.S.

Gulf Coast and lower demand for consumer cleaning products versus the pandemic peak in 2020.

Net sales for European operations increased $16.7 million, or 30 percent, between quarters.

Higher average selling prices, a four percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $12.4 million, $2.2 million and $2.1 million, respectively.

The higher average selling prices were primarily due to more favorable product and customer mix and the pass-through of higher raw material costs.

The increase in sales volume was primarily due to higher customer demand for products sold into the agricultural and oilfield end markets.

A weaker U.S.

dollar relative to the European euro and British pound sterling led to the positive foreign currency translation effect.

Net sales for Latin American operations increased $20.8 million, or 34 percent, due to higher average selling prices, the favorable impact of foreign currency translation and a three percent increase in sales volume.

These items positively impacted the change in net sales by $14.9 million, $4.0 million, and $1.9 million, respectively.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

A weaker U.S.

dollar relative to the Mexican peso and Brazilian real led to most of the favorable foreign currency effect.

The sales volume increase reflects higher demand for products sold to our distribution partners, Tier 2 and Tier 3 customers and into the agricultural and consumer products end markets.

Net sales for Asian operations increased $1.0 million, or seven percent, quarter-over-quarter.

Higher average selling prices positively impacted the change in net sales by $2.9 million.

Net sales for North American operations increased $52.3 million, or 24 percent, year over year.

Higher average selling prices and a one percent increase in sales volume positively impacted the change in net sales by $49.9 million and $2.4 million, respectively.

The higher average selling prices were mainly attributable to the pass-through of higher raw material costs and improved product and customer mix.

Higher customer demand for products sold into the functional product and personal care end markets, along with higher demand within the Tier 2 and Tier 3 customer channel, offset lower demand for laundry products within the consumer products business.

Net sales for European operations increased $19.9 million, or 28 percent, from the prior year quarter.

Higher average selling prices favorably impacted the year-over-year change in net sale by $26.8 million.

The higher average selling prices were primarily due to the pass-through of higher raw material costs and improved product and customer mix.

The unfavorable impact of foreign currency translation and a two percent decrease in sales volume negatively impacted the change in net sales by $5.3 million and $1.6 million, respectively.

A stronger U.S.

dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect.

The two percent decline in sales volume reflects lower demand for laundry products within the consumer products business that was mostly offset by higher demand for products sold into the functional product and institutional cleaning end markets and higher demand for products sold to our distribution partners.

Net sales for Latin American operations increased $25.3 million, or 42 percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation.

These items positively impacted the change in net sales by $26.4 million and $0.3 million respectively.

The higher average selling prices were primarily due to the pass-through of higher raw material costs and improved product and customer mix.

Sales volume declined two percent and negatively impacted the change in net sales by $1.4 million.

Net sales for Asian operations decreased $0.2 million, or one percent, from the prior year quarter.

A 14 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $2.7 million and $1.1 million, respectively.

Higher average selling prices positively impacted the change in net sales by $3.6 million.

The decline in sales volume primarily reflects lower demand for products sold into the laundry and personal care end markets partially offset by higher demand for products sold into the functional products end market.

The higher average selling prices primarily reflect the pass-through of higher raw material costs.

The decline in sales volume was largely due to supply disruptions inclusive of feedstock sourcing constraints.

Surfactant operating income for the third quarter of 202 1 decreased $ 6.7 million, or 16 percent, versus operating income for the third quarter of 20 20 .

Gross profit decreased $ 4.3 million in the third quarter of 202 1 versus the third quarter of 20 20 and operating expenses increased $ 2.4 million, or 1 0 percent.

Supply chain disruptions negatively impacted Surfactant gross profit and operating income d uring the third quarter of 2021 .

Surfactant operating income for the first quarter of 2022 increased $0.6 million, or one percent, versus operating income for the first quarter of 2021.

Gross profit increased $2.2 million in the first quarter of 2022 versus the first quarter of 2021 and operating expenses increased $1.7 million, or six percent.

Comparisons of gross profit by region and total segment operating expenses and operating income follow:

1 unchanged sentence

(Dollars in thousands)

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Gross Profit and Operating Income

4 unchanged sentences

Surfactants Segment Operating Income

Gross profit for North American operations decreased $4.4 million, or 11 percent, between quarters primarily due to a 12 percent decline in sales volume.

The decline in sales volume negatively impacted the change in gross profit by $4.9 million.

Lower sales volume into the consumer products end markets accounted for most of the decline.

Higher customer demand for products sold into the agricultural, oilfield and institutional cleaning end markets partially offset the above.

Higher average unit margins positively impacted the change in gross profit by $0.5 million.

The higher unit margins reflect a more favorable product and customer mix that was largely offset by higher supply chain costs due to inflationary pressures (inclusive of transportation costs) and higher planned maintenance expenses.

The prior year third quarter benefited from a $2.2 million partial insurance recovery related to the first quarter 2020 Millsdale, IL plant power outage.

Gross profit for European operations increased $0.8 million, or nine percent, due to a four percent increase in sales volume, the favorable impact of foreign currency translation and higher average unit margins.

These items favorably impacted the change in gross profit by $0.4 million, $0.2 million, and $0.2 million, respectively.

Most of the sales volume increase reflects higher demand for products sold into the agricultural and oilfield end markets.

The favorable impact of foreign currency translation reflects a weaker U.S.

dollar relative to the European euro and British pound sterling.

Gross profit for Latin American operations decreased $1.1 million, or nine percent, between quarters primarily due to lower average unit margins.

Lower average unit margins negatively impacted the change in gross profit by $2.0 million.

The lower unit margins primarily reflect supply chain disruptions which necessitated securing higher cost feedstocks.

The favorable impact of foreign currency translation and a three percent increase in sales volume positively impacted the change in gross profit by $0.5 million and $0.4 million, respectively.

Gross profit for Asia operations increased $0.5 million or 16 percent, between quarters primarily due to higher average unit margins.

The higher average unit margins positively impacted the change in gross profit by $0.8 million.

The higher unit margins partially reflect lower unit overhead costs in Singapore due to favorable production timing differences.

Gross profit for North American operations decreased $0.9 million, or two percent, from the prior year quarter primarily due to lower average unit margins.

The lower average unit margins negatively impacted the change in gross profit by $1.5 million and were mostly attributable to higher 2022 supply chain expenses due to raw material availability, inflationary pressures and transportation constraints.

Sales volume increased one percent and favorably impacted the change in gross profit by $0.6 million.

Gross profit for European operations increased $1.9 million, or 17 percent, primarily due to higher average unit margins.

The higher average unit margins positively impacted the change in gross profit by $2.9 million and primarily reflect improved customer and product mix.

The unfavorable impact of foreign currency translation and a two percent decline in sales volume negatively impacted the change in gross profit by $0.7 million and $0.3 million, respectively.

A weaker U.S.

dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect.

Gross profit for Latin American operations increased $0.8 million, or seven percent, from the prior year quarter due to higher average unit margins.

The higher average unit margins positively impacted the change in gross profit by $1.1 million and primarily reflect a more favorable product and customer mix partially due to higher demand for products sold into the agricultural end market.

Sales volume declined two percent year over year and negatively impacted the change in gross profit by $0.3 million.

Gross profit for Asia operations increased $0.4 million, or 16 percent, from the prior year quarter primarily due to higher average unit margins.

The higher unit margins positively impacted the change in gross profit by $0.7 million.

A 14 percent decline in sales volume negatively impacted the change in gross profit by $0.3 million.

Operating expenses for the Surfactant segment increased $2.4 million, or 10 percent, in the third quarter of 2021 versus the third quarter of 2020.

This increase was mainly due to higher salaries, a higher bad debt provision expense and the unfavorable impact of foreign currency translation.

Polymer net sales for the third quarter of 2021 increased $82.2 million, or 70 percent, versus net sales for the same period of 2020.

Higher average selling prices and a 27 percent increase in sales volume favorably impacted the change in net sales by $51.2 million and $31.3 million, respectively.

Operating expenses for the Surfactant segment increased $1.7 million, or six percent, in the first quarter of 2022 versus the first quarter of 2021.

This increase was mainly attributable to higher salaries and associated fringe benefits, higher bad debt provision expense and the unfavorable impact of foreign currency translation.

Polymer net sales for the first quarter of 2022 increased $36.7 million, or 24 percent, versus net sales for the same period of 2021.

Higher average selling prices and a two percent increase in sales volume favorably impacted the change in net sales by $38.4 and $3.6 million, respectively.

The higher average selling prices were mainly due to the pass through of higher raw material costs.

The sales volume growth primarily reflects the first quarter 2021 acquisition of INVISTA’s aromatic polyester polyol business.

The unfavorable impact of foreign currency translation had a $0.3 million negative impact on the change in net sales.

The increase in sales volume was primarily due to the 2021 INVISTA polyester polyol acquisition, which closed at the end of January 2021.

The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $5.3 million.

A comparison of net sales by region follows:

4 unchanged sentences

Total Polymers Segment

Net sales for North American operations increased $35.4 million, or 52 percent, primarily due to higher average selling prices and a 21 percent increase in sales volume.

These two items positively impacted the change in net sales by $21.3 million and $14.1 million, respectively.

Net sales for North American operations increased $24.0 million, or 34 percent, primarily due to higher average selling prices that positively impacted the change in net sales by $25.2 million.

The higher average selling prices were mainly due to the pass-through of higher raw material costs.

Sales volume of polyols used in rigid foam applications increased 32 percent during the quarter primarily due to first quarter 2021 INVISTA polyester polyol acquisition.

Sales volume of polyols used in rigid foam applications, excluding the impact of the INVISTA acquisition, increased six percent.

Sales volume of specialty polyols increased 18 percent due to stronger demand within this market following reduced demand in 2020 caused by the impacts of the COVID-19 pandemic.

Sales volume of phthalic anhydride declined five percent.

Net sales for European operations increased $44.5 million, or 116 percent, quarter-over-quarter.

Sales volume declined two percent and negatively impacted the year-over-year change in net sales by $1.2 million.

North American sales volume was negatively impacted by a January 2022 power outage at the Company’s Millsdale, Illinois plant site that negatively impacted Polymer production.

The production disruption resulted in the declaration of force majeure for select products.

Production resumed in February and the force majeure was lifted on April 15, 2022.

Net sales for European operations increased $12.5 million, or 18 percent, year over year.

Higher average selling prices and a 10 percent increase in sales volume positively impacted the change in net sales by $11.0 million and $7.1 million, respectively.

The increase in sales volume is due to the first quarter 2021 INVISTA polyester polyol acquisition.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

The higher average selling prices were primarily due to pass-through of higher raw material costs.

The increase in sales volume primarily reflects 13 percent rigid polyol growth due to the prior year INVISTA polyester polyol acquisition that closed at the end of January 2021.

The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $5.6 million.

Net sales for Asia and Other operations increased $2.2 million, or 23 percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation.

Net sales for Asia and Other operations increased $0.2 million, or two percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation.

These items positively impacted the change in net sales by $1.3 million and $0.3 million, respectively.

Sales volume declined two percent quarter-over-quarter and negatively impacted the change in net sales by $0.2 million.

Polymer operating income for the third quarter of 2021 decreased $2.6 million, or 12 percent, versus operating income for the third quarter of 2020.

Gross profit decreased $1.5 million, or five percent, and operating expenses were up $1.2 million, or 17 percent.

The decline in 2021 third quarter earnings primarily reflects the non-recurrence of two third quarter 2020 events:

(i) a $2.8 million partial insurance recovery related to the first quarter 2020 Millsdale, IL plant power outage, and (ii) a $1.2 million partial settlement received from the Chinese government as compensation for the government-mandated China JV shutdown in 2012.

In addition, supply chain disruptions negatively impacted Polymer gross profit and operating income during the third quarter of 2021.

Sales volume declined 12 percent year over year and negatively impacted the change in net sales by $1.4 million.

The decline in sales volume was primarily attributable to supply and logistic disruptions resulting from recent COVID lockdowns.

Polymer operating income for the first quarter of 2022 decreased $3.8 million, or 21 percent, versus operating income for the first quarter of 2021.

The decline in operating income was primarily attributable to a January 2022 power outage at the Company’s Millsdale, Illinois plant site that negatively impacted production and resulted in higher sourcing, logistic and maintenance costs.

Gross profit decreased $3.2 million, or 13 percent, and operating expenses were up $0.6 million, or eight percent.

Comparisons of gross profit by region and total segment operating expenses and operating income follow:

1 unchanged sentence

(Dollars in thousands)

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Gross Profit and Operating Income

4 unchanged sentences

Polymers Segment Operating Income

Gross profit for North American operations decreased $4.9 million, or 26 percent, primarily due to lower average unit margins.

These lower unit margins negatively impacted the change in gross profit by $8.8 million.

These lower unit margins were due in large part to the non-recurrence of a $2.8 million partial insurance recovery, related to the first quarter 2020 Millsdale, IL plant power outage, in the third quarter of 2020.

The lower unit margins in 2021 also reflect higher supply chain costs due to feedstock costs, feedstock availability and inflationary pressures (inclusive of transportation costs).

A 21 percent increase in sales volume partially offset the above and favorably impacted the change in gross profit by $3.9 million.

Gross profit for European operations increased $4.6 million, or 58 percent, versus the third quarter of 2021.

A 44 percent increase in sales volume and higher average unit margins favorably impacted the quarter-over-quarter change in gross profit by $3.5 million and $1.1 million, respectively.

The increase in sales volume is due to the first quarter 2021 INVISTA polyester polyol acquisition.

Gross profit for Asia and Other operations declined $1.2 million, or 49 percent, between quarters primarily due to lower average unit margins.

The lower average unit margins negatively impacted the quarter-over-quarter change in gross profit by $1.2 million.

The lower unit margins were primarily due to the non-recurrence of a third quarter 2020 partial government settlement related to the government-mandated China JV shutdown in 2012 ($1.2 million).

Foreign currency translation positively impacted the change in gross profit by $0.1 million and a two percent decline in sales volume had a negative $0.1 million quarter-over-quarter impact.

Operating expenses for the Polymers segment increased $1.2 million, or 17 percent, in the third quarter of 2021 versus the third quarter of 2020.

The majority of the increase was due to higher salaries and incremental expenses incurred in 2021 due to the INVISTA polyester polyol acquisition.

Gross profit for North American operations decreased $5.0 million, or 38 percent, primarily due to lower unit margins that negatively impacted the year-over-year change in gross profit by $4.8 million.

The lower unit margins were mainly due to a January 2022 power outage at the Company’s Millsdale, Illinois plant site that negatively impacted production of rigid polyols and phthalic anhydride.

The production disruption resulted in the declaration of force majeure for select Polymer products and higher sourcing, logistic and maintenance costs.

Sales volume declined two percent year-over-year and negatively impacted the change in gross profit by $0.2 million.

Gross profit for European operations increased $1.9 million, or 17 percent, versus the first quarter of 2021.

The increase was primarily due to higher unit margins and a 10 percent increase in sales volume due to the 2021 INVISTA polyester polyol acquisition, which closed at the end of January 2021.

These two items favorably impacted the year-over-year change in gross profit by $1.6 million and $1.1 million respectively.

The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $0.8 million.

Gross profit for Asia and Other operations decreased $0.1 million, or seven percent, from the prior year quarter.

Most of this decrease reflects a 12 percent decline in sales volume that negatively impacted the quarter-over-quarter change in gross profit by $0.2 million.

Higher average unit margins and the favorable impact of foreign currency translation partially offset the decline in sales volume.

Operating expenses for the Polymer segment increased $0.6 million, or eight percent, year over year.

This increase was mainly attributable to higher salaries and fringe benefits and higher bad debt provision expense.

Specialty Products

Net sales for the third quarter of 2021 increased $2.2 million, or 15 percent, versus net sales for the third quarter of 2020.

This increase reflects sales volume growth of nine percent and higher average selling prices.

Gross profit and operating income increased $0.8 million each.

The improvements in gross profit and operating income were primarily attributable to order timing differences within the food and flavor business and improved volume and margins within the medium chain triglycerides (MCT) product line.

Specialty Products net sales for the first quarter of 2022 increased $3.5 million, or 21 percent, versus net sales for the first quarter of 2021.

This increase reflects higher average selling prices that were partially offset by a 12 percent decline in sales volume.

Gross profit and operating income increased by $1.0 million and $1.1 million, respectively.

The year-over-year improvements in gross profit and operating income were primarily attributable to order timing differences within the food and flavor business and improved margins within the medium chain triglycerides (MCTs) product line.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, decreased $11.6 million between quarters.

Corporate expenses were $16.4 million in the third quarter of 2021 versus $22.7 million in 2020.

This decrease was primarily attributable to lower deferred compensation expense ($7.1 million) that was partially offset by higher environmental remediation reserve expenses and higher insurance premiums.

The $7.1 million decrease in deferred compensation expense was primarily due to a $7.73 per share decrease in the market price of Company common stock in the third quarter of 2021 compared to an $11.90 per share increase in the third quarter of 2020.

The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation expenses for the three months ended September 30, 2021 and 2020:

Company Common Stock Price

Nine Months Ended September 30, 2021 and 2020

Net income attributable to the Company in the first nine months of 2021 increased $24.4 million, or 25 percent, to $120.8 million, or $5.19 per diluted share, from $96.4 million, or $4.15 per diluted share, in the first nine months of 2020.

Adjusted net income was $121.0 million, or $5.20 per diluted share, versus $98.9 million or $4.25 per diluted share, in the prior year (see the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share).

Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, expenses and income.

A detailed discussion of segment operating performance for the first nine months of 2021 compared to the first nine months of 2020 follows the summary.

Consolidated net sales increased $ 360.9 million, or 2 6 percent, between years .

Higher average selling prices , a four percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $ 273.1 million , $5 7.3 million, and $ 30.5 million, respectively.

The increase in average selling prices was primarily due to more favorable product and customer mix and the pass-through of higher raw material costs.

Sales volume in the Polymer and Specialty Product s segments increased 3 4 percent and 1 0 percent, respectively.

The increase in Polymer sales volume was primarily attributable to the first quarter 2021 INVISTA aromatic polyester polyol acquisition, the gradual recovery from COVID-19 delays and cancellations of re-roofing and new construction projects, and the non-recurrence of the power outage at the Company’s Millsdale , Illinois facility in the first quarter of 2020.

Sales volume for the Surfactant segment declined four p ercent year-over-year mostly due to lower volumes in the consumer product end markets.

The consumer product business has been negatively impacted by supply chain disruptions, feedstock supply issues in 2021 ( following severe weather in Texas and the U.S.

G ulf Coast area) , customer inventory rebalancing efforts and lower demand for consumer cleaning products versus the COVID-19 pandemic peak in 2020 .

The favorable foreign currency translation reflects a weaker U.S.

dollar against the majority of currencies where the Company has foreign operations.

Operating income for the first nine months of 2021 increased $23.8 million, or 19 percent, versus operating income for the first nine months of 2020.

Polymer, Surfactant and Specialty Products operating income increased $15.3 million, $7.7 million, and $3.2 million, respectively.

Corporate expenses, including business restructuring and deferred compensation expenses, increased $2.5 million year-over-year.

Deferred compensation expense decreased $2.6 million and business restructuring expenses decreased $0.4 million between years.

Corporate expenses (excluding deferred compensation and business restructuring expenses) increased $5.6 million between years largely due to higher acquisition-related expenses, insurance premiums, USEPA environmental remediation oversight costs, cloud application costs and corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020).

Foreign currency translation had a $2.2 million positive impact on operating income in the first nine months of 2021 versus the prior year.

Operating expenses (including deferred compensation and business restructuring expenses) increased $14.0 million, or nine percent, between years.

Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

Selling expenses increased $4.6 million, or 11 percent, year-over-year mainly due to higher salaries, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Administrative expenses increased $8.5 million, or 14 percent, year-over-year primarily due to higher acquisition-related expenses, USEPA environmental remediation oversight costs, insurance premiums, salaries, cloud application costs, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

R&D expenses increased $4.0 million, or 10 percent, year-over-year primarily due to higher salaries, outside services, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Deferred compensation expense decreased $2.6 million year-over-year primarily due to a $6.38 per share decrease in the market price of Company common stock during the first nine months of 2021 compared to a $6.56 per share increase in the first nine months of 2020.

See the Overview and Segment Results-Corporate Expenses section of this MD&A for further details.

Business restructuring expenses were $0.3 million in the first nine months of 2021 compared to $0.7 million in the first nine months of 2020.

The 2021 restructuring charges reflect ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada.

The 2020 restructuring expenses were comprised of decommissioning costs associated with the 2016 Canadian plant closure ($0.6 million) and decommissioning costs associated with the Company’s 2018 sulfonation shut down in Germany ($0.1 million).

Net interest expense for the first nine months of 2021 increased $0.6 million, or 14 percent, compared to net interest expense for the first nine months of 2020.

This increase primarily reflects lower interest income earned in 2021 due to lower cash deposits.

Other, net was $4.2 million of income for the first nine months of 2021 compared to $3.8 million of income for the first nine months of 2020.

The Company recognized $3.2 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 nine months of 2021 compared to $2.5 million of income in the first nine months of 2020.

In addition, the Company reported foreign exchange gains of $0.1 million in the first nine months of 2021 versus $1.5 million of foreign exchange gains in the first nine months of 2020.

Company also reported $ 1.1 million of lower net periodic pension cost s in the first nine months of 202 1 versus the first nine months of the prior year .

The Company’s effective tax rate was 19.6 percent in the first nine months of 2021 compared to 23.7 percent in the first nine months of 2020.

The year-over-year decrease was primarily attributable to :

(a) a non-recurring favorable tax benefit recognized in the third quarter of 2021 related to the merger of the Company’s three Brazilian entities into a single entity;

and (b) non-recurring favorable U.S.

tax benefits recognized in the third quarter of 2021 related to the Company’s research and development tax credits and FDII/GILTI computations.

For the Nine Months Ended

(In thousands)

September 30,

Specialty Products

Total Net Sales

For the Nine Months Ended

(In thousands)

September 30,

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation and Restructuring

Deferred Compensation Expense

Business Restructuring

Total Operating Income

Segment Results

Surfactant net sales for the first nine months of 2021 increased $149.4 million, or 15 percent, versus net sales for the first nine months of 2020.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $173.8 million and $22.1 million, respectively.

The higher average selling prices were mainly due to more favorable product and customer mix and the pass-through of higher raw material costs.

A four percent decrease in sales volume negatively impacted the year-over-year change in net sales by $46.5 million.

Lower sales volume in the consumer product end markets accounted for most of the sales volume decrease.

A year-over-year comparison of net sales by region follows:

For the Nine Months Ended

(In thousands)

September 30, 2021

September 30, 2020

North America

Latin America

Total Surfactants Segment

Net sales for North American operations increased $42.4 million, or seven percent, year-over-year.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $94.3 million and $1.7 million, respectively.

The higher average selling prices were primarily due to more favorable product and customer mix and the pass-through of higher raw material costs.

Sales volume declined nine percent and negatively impacted the year-over-year change in net sales by $53.6 million.

Lower sales volume in the consumer products end markets accounted for most of the decline.

Higher customer demand for products sold to our distribution partners, Tier 2 and Tier 3 customers and into the agricultural, oilfield and institutional

cleaning end markets partially offset the above.

The consumer products business was negatively impacted by supply chain disruptions inclusive of feedstock supply issues following the first quarter 2021 severe weather in Texas and the third quarter 2021 severe weather in the U.S.

G ulf C oast, customer inventory rebalancing efforts and lower demand for consumer cleaning products versus the COVID-19 pandemic peak in 2020.

Net sales for European operations increased $37.7 million, or 22 percent, year-over-year.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $23.4 million and $15.1 million, respectively.

A weaker U.S.

dollar relative to the European euro and British pound sterling led to the favorable foreign currency translation effect.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

Sales volume decreased slightly and negatively impacted the change in net sales by $0.8 million year-over-year.

Net sales for Latin American operations increased $58.2 million, or 36 percent, due to higher average selling prices, a three percent increase in sales volume and the favorable impact of foreign currency translation.

These items positively impacted the year-over-year change in net sales by $49.0 million, $5.3 million, and $3.9 million, respectively.

The higher average selling prices reflect more favorable product and customer mix, the pass-through of higher raw material costs, and $2.1 million of revenue recognition in the second quarter of 2021 related to a VAT tax recovery.

The year-over-year increase in sales volume was mainly due to higher demand for products sold into the agricultural and consumer products end markets.

Net sales for Asian operations increased $11.1 million, or 27 percent, year-over-year.

Higher average selling prices, a six percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $7.1 million, $2.6 million, and $1.4 million, respectively.

The higher average selling prices were primarily due to the pass through of higher raw material costs and more favorable product and customer mix.

The sales volume growth was largely due to higher demand for products sold to our distribution partners, Tier 2 and Tier 3 customers and into the agricultural end market.

Surfactant operating income for the first nine months of 2021 increased $7.7 million, or six percent, versus operating income for the first nine months of 2020.

Gross profit increased $16.8 million, or nine percent, year-over-year and operating expenses increased $9.0 million, or 13 percent.

Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

For the Nine Months Ended

(In thousands)

September 30, 2021

September 30, 2020

Gross Profit and Operating Income

North America

Latin America

Surfactants Segment Gross Profit

Operating Expenses

Surfactants Segment Operating Income

Gross profit for North American operations increased $6.7 million or five percent year-over-year primarily due to higher average unit margins.

The higher average unit margins positively impacted the change in gross profit by $17.8 million and are primarily due to a more favorable product and customer mix.

Higher 2021 supply chain expenses due to raw material availability, inflationary pressures, logistic constraints and higher planned maintenance were largely offset by high supply chain expenses in 2020 due to the Millsdale, Illinois plant power outage in the first quarter of 2020.

A nine percent decline in sales volume negatively impacted the change in gross profit by $11.1 million.

Lower sales volume into the consumer product end markets, partially offset by higher customer demand for products sold to our distribution partners, Tier 2 and Tier 3 customers and into the agricultural, oilfield and institutional cleaning end markets, accounted for most of the sales volume decline.

Gross profit for European operations increased $1.6 million, or six percent year-over-year.

The favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $1.9 million.

A weaker U.S.

dollar relative to the European euro and British pound sterling led to the favorable foreign currency translation effect.

Lower average unit margins and a slight decrease in sales volume negatively impacted the year-over-year change in gross profit by $0.2 million and $0.1 million, respectively.

Gross profit for Latin American operations increased $9.1 million, or 28 percent, primarily due to higher average unit margins and a three percent increase in sales volume.

These items positively impacted the change in gross profit by $8.0 million and $1.0 million, respectively.

The higher unit margins primarily reflect more favorable customer and product mix and $2.1 million of revenue

recognition in the second quarter of 2021 related to a VAT tax recovery.

The sales volume growth was primarily driven by higher demand for products sold into the agricultural and consumer product s end markets .

The favorable impact of foreign currency translation positively impacted the change in gross profit by $ 0.

Gross profit for Asian operations decreased $0.7 million, or eight percent, primarily due to lower average unit margins.

The lower unit margins negatively impacted the year-over-year change in gross profit by $1.4 million.

Sales volume growth of six percent and the favorable impact of foreign currency translation positively impacted the change in gross profit by $0.6 million and $0.1 million, respectively.

Operating expenses for the Surfactant segment increased $9.0 million, or 13 percent, year-over-year.

Most of the increase was due to higher salaries, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Polymer net sales for the first nine months of 2021 increased $204.2 million, or 61 percent, versus net sales for the same period of 2020.

A 34 percent increase in sales volume, higher selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $115.0 million, $81.2 million and $8.0 million, respectively.

The higher sales volume primarily reflects the first quarter 2021 acquisition of INVISTA’s polyester polyol business as well as organic market growth driven by the recovery from COVID-19 related delays and cancellations of re-roofing and new construction projects in the prior year.

The higher average selling prices were mainly due to the pass-through of higher raw material costs.

A year-over-year comparison of net sales by region follows:

For the Nine Months Ended

(Dollars in thousands)

North America

Asia and Other

Total Polymers Segment

Net sales for North American operations increased $71.3 million, or 36 percent, due to a 28 percent increase in sales volume and higher average selling prices.

These two items positively impacted the change in net sales by $55.6 million and $15.7 million, respectively.

Sales volume of polyols used in rigid foam applications increased 23 percent during the first nine months of 2021 primarily due to the first quarter 2021 INVISTA polyester polyol acquisition and the gradual recovery from COVID-19 related delays of re-roofing and new construction projects.

Sales volume of polyols used in rigid foam applications, excluding the impact of the INVISTA acquisition, increased three percent.

Sales volume of phthalic anhydride and specialty polyols increased 40 percent and 39 percent, respectively, due to stronger demand within these markets following reduced demand in 2020 caused by the impacts of the COVID-19 pandemic.

The phthalic anhydride sales volume improvement was also attributable to the non-recurrence of the Millsdale, IL plant power outage in 2020.

Higher average selling prices were primarily due to the pass-through of higher raw material costs.

Net sales for European operations increased $126.0 million, or 117 percent, year-over-year.

Higher average selling prices, a 52 percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $64.2 million, $56.4 million and $5.4 million, respectively.

The increase in sales volume is primarily due to the first quarter 2021 INVISTA polyester polyol business acquisition and the recovery from COVID-19 related delays of re-roofing and new construction projects.

Sales volume, excluding the impact of the INVISTA acquisition, increased seven percent.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

Net sales for Asia and Other operations increased $6.9 million, or 24 percent, due to the higher average selling prices, the favorable impact of foreign currency translation, and a four percent increase in sales volume.

These items positively impacted the change in net sales by $3.3 million, $2.6 million, and $1.0 million, respectively.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

Polymer operating income for the first nine months of 202 1 increased $1 5.3 million, or 34 percent, versus operating income for the first nine months of 20 20 .

Gross profit increased $1 7.9 million, or 27 percent, and operating expenses were up $ 2.6 million, or 1 3 percent , year-over-year.

Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

For the Nine Months Ended

(In thousands)

September 30, 2021

September 30, 2020

Gross Profit and Operating Income

North America

Asia and Other

Polymers Segment Gross Profit

Operating Expenses

Polymers Segment Operating Income

Gross profit for North American operations increased $3.8 million, or 10 percent, primarily due to a 28 percent increase in sales volume.

The higher sales volume positively impacted the year-over-year change in gross profit by $11.0 million.

Lower average unit margins negatively impacted the change in gross profit by $7.2 million.

The lower average unit margins primarily reflect higher feedstock costs, feedstock availability and supply chain inflationary pressures.

The unfavorable impact of the current year headwinds exceeded benefits from the non-recurrence of higher maintenance, supply chain costs and unit overhead rates incurred in 2020 as result of the power outage at the Company’s Millsdale, IL site and incremental raw material costs incurred in 2020 as a result of the Illinois River lock closures.

Gross profit for European operations increased $17.0 million, or 86 percent, due to a 52 percent increase in sales volume, higher average unit margins and the favorable impact of foreign currency translation.

These items positively impacted the year-over-year change in gross profit by $10.4 million, $5.6 million, and $1.0 million, respectively.

Gross profit for Asia and Other operations declined $2.9 million, or 43 percent, primarily due to lower average unit margins that negatively impacted the change in gross profit by $3.5 million.

The lower average unit margins were primarily due to the non-recurrence of $2.3 million of partial government settlements, related to the government-mandated China JV shutdown in 2012, received in the first nine months of 2020.

A four percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $0.3 million each.

Operating expenses for the Polymers segment increased $2.6 million, or 13 percent, year-over-year.

The majority of the increase was due to higher salaries, the unfavorable impact of foreign currency translation and incremental expenses incurred in 2021 due to the INVISTA polyester polyol acquisition.

Specialty Products

Net sales for the first nine months of 2021 increased $7.3 million, or 16 percent, versus net sales for the first nine months of 2020.

This increase reflects sales volume growth of 10 percent and higher average selling prices.

Gross profit and operating income increased $3.1 million and $3.2 million, respectively, year-over-year.

The improvements in gross profit and operating income were primarily due to order timing differences within the food and flavor business and improved volume within the medium chain triglycerides (MCT) product line.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $2.5 million between years.

Corporate expenses were $55.6 million in the first nine months of 2021 versus $53.0 million in the first nine months of 2020.

This increase was primarily attributable to higher acquisition-related expenses, insurance premiums, environmental remediation reserve expenses, salaries, cloud application costs and corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) during the first nine months of 2021.

Partially offsetting the above were lower deferred compensation and business restructuring expenses, which declined $2.6 million and $0.4 million, respectively, year-over-year.

Deferred compensation expense decreased $ 2.6 million between years.

This decrease was primarily due to a $ 6.38 per share decrease in the market price of the Company’s common stock in the first nine months of 202 1 compared to a $ 6.56 per share increase in the first nine months of 20 20 .

The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expense /income for the nine months ended September 30, 202 1 and 20 20 :

Corporate expenses were $8.3 million in the first quarter of 2022 versus $19.9 million in the first quarter of 2021.

This decrease was primarily attributable to $7.5 million of deferred compensation income recognized in the first quarter of 2022 versus $2.7 million of deferred compensation expense in the first quarter of 2021.

In addition, the Company also incurred lower acquisition-related expenses year over year.

The $10.2 million decrease in deferred compensation expense was primarily due to a $25.48 per share decrease in the market price of Company common stock in the first quarter of 2022 compared to a $7.79 per share increase in the first quarter of 2021.

The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation expenses for the three months ended March 31, 2022 and 2021:

Company Common Stock Price

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended September 30, 2021, operating activities were a cash source of $21.4 million versus a source of $141.7 million for the comparable period in 2020.

For the three months ended March 31, 2022, operating activities were a cash use of $20.9 million versus a use of $11.7 million for the comparable period in 2021.

For the current year period, investing cash outflows totaled $57.1 million versus a cash outflow of $223.8 million in the prior year period.

Financing activities were a source of $43.0 million versus a use of $44.6 million in the prior year period.

Cash and cash equivalents decreased by $244.7 million compared to December 31, 2020, inclusive of a $3.0 million unfavorable foreign exchange rate impact.

On September 30, 2021, the Company’s cash and cash equivalents totaled $105.3 million.

Financing activities were a source of $154.8 million versus a source of $39.9 million in the prior year period.

Cash and cash equivalents increased by $76.9 million compared to December 31, 2021, inclusive of a $0.1 million favorable foreign exchange rate impact.

On March 31, 2022, the Company’s cash and cash equivalents totaled $236.0 million.

demand deposit accounts and money market funds totaled $24.3 million and $120.0 million, respectively.

The Company’s non-U.S.

subsidiaries held $81.7 million of cash outside the United States as of September 30, 2021.

subsidiaries held $91.7 million of cash outside the United States as of March 31, 2022.

Operating Activity

Net income increased by $24.1 million versus the comparable period in 2020.

Working capital was a cash use of $121.7 million during the first nine months of 2021 versus a use of $23.2 million for the comparable period in 2020.

Accounts receivable were a use of $96.8 million during the first nine months of 2021 compared to a use of $28.4 million for the comparable period in 2020.

Inventories were a use of $63.8 million in 2021 versus a use of $2.6 million in 2020.

Accounts payable and accrued liabilities were a source of $39.2 million in 2021 compared to a source of $12.0 million for the same period in 2020.

Working capital requirements were higher in the first nine months of 2021 compared to 2020 primarily due to the changes noted above.

The major factors driving the increase in working capital in 2021 were significantly higher raw material costs, sales volume growth of four percent and significantly higher average selling prices.

Net income in 2022 increased $4.2 million versus the comparable period in 2021.

Working capital was a cash use of $85.0 million in 2022 versus a use of $81.0 million in 2021.

Accounts receivable were a use of $80.3 million during the first three months of 2022 compared to a use of $63.2 million for the comparable period of 2021.

Inventories were a source of $0.5 million in 2022 versus a use of $7.5 million in 2021.

Accounts payable and accrued liabilities were a use of $1.2 million in 2022 compared to a use of $9.4 million for the same period in 2021.

Working capital requirements were slightly higher in the first three months of 2022 compared to 2021 primarily due to the changes noted above.

It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 2022.

Investing Activity

Cash used for investing activities increased by $207.9 million year-over-year.

In the first nine months of 2021, the Company acquired INVISTA’s aromatic polyester polyol business and associated asset for $183.7 million, net of cash received.

The Company also paid $0.8 million for a portion of the 2020 acquisition of Clariant’s Mexico anionic surfactant business.

During the first nine months of 2021, the Company also acquired a fermentation plant located in Lake Providence, Louisiana for $3.5 million.

Cash used for capital expenditures was $119.5 million in the first nine months of 2021 versus $84.9 million for the comparable period in 2020.

For 2021, the Company estimates that total capital expenditures will range from $200 million to $220 million including growth initiatives, infrastructure and optimization spending in the United States, Germany and Mexico.

The increase in the projected full year capital spending range is primarily attributable to a new alkoxylation plant the Company intends to build at its existing Pasadena, Texas site.

Cash used for investing activities decreased $166.6 million year-over-year.

Most of this decrease reflects the Company’s acquisition of INVISTA’s aromatic polyester polyol business and associated assets for $183.7 million, net of cash received, during the first quarter of 2021.

Cash used for capital expenditures was $60.3 million in the first quarter of 2022 versus $37.6 million in 2021.

This capital expenditure increase is largely attributable to the alkoxylation plant the Company is building at its Pasadena, Texas site and equipment upgrades to meet future regulatory limits on 1,4 Dioxane in the United States.

For 2022, the Company estimates that total capital expenditures will range from $350 million to $375 million.

This projected spending includes the new alkoxylation plant that is being built in Pasadena, Texas, equipment upgrades to meet future regulatory limits on 1,4 Dioxane in the United States, growth initiatives, infrastructure and optimization spending in the United States, Germany and Mexico.

Financing Activity

Cash flow from financing activities was a source of $43.0 million in 2021 versus a use of $44.6 million in 2020.

The year-over-year change is primarily due to $100.0 million of cash received from the issuance of private placement notes during the first nine months of 2021.

The Company purchases shares of its common stock in the open market and 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.

Cash flow from financing activities was a source of $154.8 million in 2022 versus a source of $39.9 million in 2021.

The year-over-year change is primarily due to $75.0 million of cash received from the issuance of private placement notes and a higher level of borrowing from the Company’s revolving credit facility during the first three months of 2022 versus the same period in 2021.

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 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.

1 unchanged sentence

The amounts involved may be material.

In the nine months ended September 30, 20 21 , the Company purchased 135,103 shares of its common stock on the open market at a total cost of $ 17.0 million.

As of September 30, 202 1 , there were 40,771 shares remaining under the then-existing share repurchase authorization.

On October 19, 2021, the Company’s Board of Directors authorized a new share repurchase program for up to $150.0 million of the Company’s common stock and terminated the prior share repurchase authorization.

For the three months ended March 31, 2022, the Company purchased 98,206 shares of its common stock on the open market at a total cost of $9.9 million.

At March 31, 2022, the Company had $140.1 million remaining under the share repurchase program authorized by the Board of Directors.

Debt and Credit Facilities

Consolidated balance sheet debt increased from $198.7 million on December 31, 2020 to $279.8 million on September 30, 2021, an $81.1 million increase, primarily due to higher domestic debt.

Net debt (which is defined as total debt minus cash – see the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) increased by $325.8 million in the first nine months of 2021, from a negative $151.2 million to $174.6 million.

This net debt change was due to a cash reduction of $244.6 million and a debt increase of $81.2 million.

The cash reduction was mostly due to the first quarter 2021 acquisition of INVISTA’s aromatic polyester polyol business combined with higher capital expenditures and working capital requirements in the first nine months of 2021.

As of September 30, 2021, the ratio of total debt to total debt plus shareholders’ equity was 20.9 percent compared to 16.8 percent on December 31, 2020.

As of September 30, 2021, the ratio of net debt to net debt plus shareholders’ equity was 14.2 percent versus a negative 18.1 percent as of December 31, 2020 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details).

On September 30, 2021, the Company’s debt included $270.0 million of unsecured notes with maturities ranging from 2021 through 2028, which were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the Note Purchase Agreements), a $6 million loan from its revolving credit facility and $3.8 million of foreign credit line borrowings.

Consolidated balance sheet debt increased from $363.6 million on December 31, 2021 to $537.1 million on March 31, 2022, primarily due to higher domestic debt, which includes borrowings from the Company’s revolving credit agreement and new private placement notes issued during the first quarter of 2022.

Net debt (which is defined as total debt minus cash – see the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) increased by $96.7 million in the first quarter of 2022, from $204.4 million at December 31, 2021 to $301.1 million at March 31, 2022.

This net debt change was due to a debt increase of $173.5 and a cash increase of $76.8 million.

The cash increase reflects the new debt borrowings partially offset by higher working capital requirements and capital expenditures.

As of March 31, 2022, the ratio of total debt to total debt plus shareholders’ equity was 32.5 percent compared to 25.3 percent at December 31, 2021.

As of March 31, 2022, the ratio of net debt to net debt plus shareholders’ equity was 21.2 percent versus 16.0 percent at December 31, 2021 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details).

On March 31, 2022, the Company’s debt included $435.6 million of unsecured notes, with maturities ranging from 2022 through 2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the Note Purchase Agreements), a $100.0 million short term loan borrowed under its revolving credit facility, and $1.5 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.

On September 23, 2021, the Company entered into a note purchase agreement pursuant to which it issued and sold $50.0 million in aggregate principal amount of its Series 2021-B Notes.

The Series 2021-B Notes bear interest at a fixed rate of 2.37 percent, with interest to be paid semi-annually and with equal annual principal payments beginning on September 23, 2024 and continuing through final maturity on September 23, 2028.

The proceeds of the issuance of the Series 2021-B Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes.

This note purchase agreement requires the maintenance of certain financial ratios and covenants that are substantially similar to the Company’s existing long-term debt and provides for customary events of default.

On June 10, 2021, the Company entered into a note purchase agreement pursuant to which it issued and sold $50.0 million in aggregate principal amount of its Series 2021-A Notes.

The Series 2021-A Notes bear interest at a fixed rate of 2.30 percent, with interest to be paid semi-annually and with equal annual principal payments beginning on June 10, 2024 and continuing through final maturity on June 10, 2028.

The proceeds of the issuance of the Series 2021-A Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes.

On March 1, 2022, pursuant to a note purchase and master note agreement dated as of June 10, 2021 (the NYL note purchase agreement), the Company issued and sold $25.0 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-A, due March 1, 2032 (the Series 2022-A Notes).

In addition, on March 1, 2022, pursuant to a note purchase and private shelf agreement dated as of June 10, 2021 (the Prudential note purchase agreement), the Company issued and sold $50.0 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-B, due March 1, 2032 (the Series 2022-B Notes).

The Series 2022-A Notes and the Series 2022-B Notes bear interest at a fixed rate of 2.83%, with interest to be paid semi-annually and with equal annual principal payments beginning on March 1, 2026 and continuing through final maturity on March 1, 2032.

The proceeds of the issuance of the Series 2022-A Notes and the Series 2022-B Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes.

The NYL note purchase agreement and the Prudential note purchase agreement require the maintenance of certain financial ratios and covenants that are substantially similar to the Company’s existing long-term debt and provide for customary events of default.

On January 30, 2018, the Company entered a five-year committed $350.0 million multi-currency revolving credit facility with a syndicate of banks that matures on January 30, 2023.

1 unchanged sentence

This unsecured facility is the Company’s primary source of short-term borrowings.

As of September 30, 2021, the Company had outstanding letters of credit totaling $7.1 million under the revolving credit agreement and $6.0 million of borrowings, with $336.9 million remaining available.

As of March 31, 2022, the Company had outstanding loans totaling $100.0 million and letters of credit totaling $7.0 million under the revolving credit facility, with $243.0 million remaining available.

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 expenditure programs and acquisitions.

On September 30, 2021, the Company’s foreign subsidiaries had outstanding debt of $3.8 million.

The Company is subject to certain covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth.

At March 31, 2022, the Company’s foreign subsidiaries had $1.5 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 agreements also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares.

2 unchanged sentences

The Company is required to maintain a maximum net leverage ratio, as defined within the agreements, not to exceed 3.50 to 1.00.

The Company is required to maintain a net worth (as defined in the agreements) of at least $750.0 million.

The Company is required to maintain net worth of at least $750.0 million.

The Company is permitted to pay dividends and purchase treasury shares after December 31, 2017, in amounts of up to $100.0 million plus 100 percent of net income and cash proceeds of stock option exercises, measured cumulatively beginning December 31, 2017.

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 all of its debt covenants as of September 30, 2021.

The Company believes it was in compliance with all of its debt covenants as of March 31, 2022.

ENVIRONMENTAL AND LEGAL MATTERS

2 unchanged sentences

The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations.

During the first nine months of 2021 and 2020, the Company’s expenditures for capital projects related to the environment were $8.8 million and $4.2 million, respectively.

During the first three months of 2022 and 2021, the Company’s expenditures for capital projects related to the environment were $2.5 million and $3.0 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 $24.8 million and $26.5 million for the nine months ended September 30, 2021 and 2020, respectively.

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 $ 8.2 million and $ 8.3 million for the three months ended March 31, 202 2 and 20 2 1 , 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.

5 unchanged sentences

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 losses and legal losses of $22.9 million to $41.3 million at September 30, 2021, compared to $22.9 million to $41.1 million at December 31, 2020.

Within the range of possible environmental losses, management 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;

these accruals totaled $22.9 million at September 30, 2021 and $22.9 million at December 31, 2020.

Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts recorded.

Cash expenditures for such reserved U.S.

environmental and legal matters were $2.5 million for the nine months ended September 30, 2021, compared to $3.8 million for the same period in 2020.

Cash expenditures for such reserved foreign environmental and legal matters were immaterial.

After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $23.1 million to $41.7 million at March 31, 2022 and December 31, 2021.

Within the range of possible environmental 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;

these accruals totaled $23.1 million at March 31, 2022 and December 31, 2021.

Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported.

Cash expenditures related to legal and environmental matters were $0.4 million for the three-month period ended March 31, 2022, compared to $0.3 million for the same period in 2021.

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.

2 unchanged sentences

Based upon 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 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 SEC, which are available upon request from the Company.

See also Note 8, Contingencies , to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for a summary of the environmental proceedings related to certain environmental sites.

Management believes that demand for Surfactant products sold into the institutional cleaning, agricultural and oilfield end markets should improve versus 2020.

However, management does not believe this higher demand will compensate for lower consumer consumption of cleaning, disinfection and personal wash products versus the COVID-19 pandemic peak in 2020.

Global demand for rigid polyols continues to recover from pandemic-related delays and cancellations of re-roofing and new construction projects.

This recovery, combined with the first quarter 2021 acquisition of INVISTA’s aromatic polyester polyol business, should position the Company’s Polymer segment to deliver growth versus the prior year.

Management believes the long-term prospects for the Polymer segment remain attractive as energy conservation efforts and more stringent building codes are expected to continue.

Management believes its Specialty Products segment will improve slightly year-over-year.

Despite supply chain disruptions continuing to impact the Company, management remains optimistic about delivering full year earnings growth.

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 environmental sites.

Management believes that demand for Surfactant products sold into the functional product end-markets, inclusive of agricultural and oilfield, should improve versus 2021.

Management believes the Polymer segment will deliver growth versus 2021 and that the long-term prospects for this segment remain attractive as energy conservation efforts and more stringent building codes are expected to continue.

Management believes its Specialty Product segment will improve slightly versus 2021.

Despite optimism that demand for the Company’s products will remain strong, management also believes the Company will continue to be challenged by external supply chain issues including raw material availability, inflationary pressures, and transportation constraints.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to the critical accounting policies disclosed in the Company’s 2020 Annual Report on Form 10-K, except for the addition of the following:

Business Combinations

The Company makes acquisitions from time to time.

When such acquisitions occur, the Company applies the accounting guidance per FASB ASC Topic 805, Business Combinations (ASC 805), to determine whether the acquisition should be treated as an asset acquisition or a business combination.

When the acquisition meets the criteria of a business combination the Company recognizes the identifiable assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition.

The Company recognizes goodwill for any portion of the purchase price that exceeds the sum of the net fair value of all the assets purchased in the acquisition and the liabilities assumed.

Considerable estimates, complex judgments and assumptions are typically required to arrive at the fair value of elements acquired in a business combination, inclusive of discount rates, customer attrition rates, royalty rates, economic lives, and estimated future cash flows expected to be generated from the assets acquired.

These items are typically most relevant to the fair valuation of identifiable intangible assets and property, plant and equipment.

In some instances, the purchase price allocation of an acquisition is not complete by the end of a reporting period.

This situation most typically arises when an acquisition is complex and/or completed very close to the end of a reporting period and all necessary information is not available by the end of the reporting period in which the acquisition occurs.

In these instances, the Company reports provisional amounts for any incomplete items and makes subsequent adjustments as necessary information becomes available or determines that additional information is not obtainable.

Any subsequent adjustments could have a material impact on the Company’s financial condition or results of operations as they could impact the initial fair values assigned to intangible assets and property, plant and equipment and/or their estimated economic lives.

ASC 805 requires purchase price allocations to be finalized within one year from the acquisition date.

Goodwill and Intangible Assets

The Company’s intangible assets include patents, agreements not to compete, trademarks, customer lists and relationships, technological and manufacturing know-how and goodwill, all of which were acquired as part of business combinations or asset acquisitions.

Goodwill represents the excess of cost over the fair value of net assets acquired in a business combination.

Intangible assets, other than goodwill, are determined to have either finite or indefinite useful lives.

The Company currently has no indefinite-life intangible assets other than goodwill.

Intangible assets with finite lives are amortized over the useful lives of the assets.

Currently, the useful lives for the Company’s finite-life intangible assets are as follows:

patents – 10 to15 years;

non-compete agreements – three to five years;

trademarks – five to 11 years;

customer relationships – five to 20 years and know-how – five to 20 years.

Finite-life intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable.

Goodwill is not amortized but is tested for impairment on a reporting unit level.

The Company’s reporting units are typically defined as one level below operating segments and highly correlated to geographic regions.

The Company tests goodwill for impairment annually (the Company conducts its goodwill impairment testing during the second quarter of each calendar year), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of the reporting unit to which goodwill relates has declined below its carrying value.

In this case, the Company would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value.

Goodwill is evaluated for impairment using qualitative and/or quantitative testing procedures.

The Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

If the Company chooses not to complete a qualitative assessment for a given reporting unit, or if the initial assessment indicates that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed.

When estimating a reporting unit’s fair value as part of the quantitative assessment, the Company uses a combination of market and income-based methodologies.

The market approach uses a combination of earnings before interest, taxes, depreciation and amortization (EBITDA) and EBITDA multiples to estimate a reporting unit’s fair value.

EBITDA multiples typically mirror similar businesses or comparative companies whose securities are actively traded in public markets.

Significant degradation of either EBITDA or EBITDA multiples could result in a triggering event, requiring goodwill to be tested for impairment during an interim period.

The income approach takes into consideration multiple variables, including forecasted sales volume and operating income, current industry and economic conditions, historical results and other elements to calculate the present value of future cash flows.

The income approach fair value calculations include estimates of long-term growth rates and discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units.

The Company reported no goodwill or intangible asset impairments in any of the periods presented in these condensed consolidated financial statements.

The Company no longer considers the prior year (a) Business Combinations and (b) Goodwill and Intangible Assets accounting policies as continuing to be critical during the first quarter of 2022 since the Company has made no current year acquisitions.

Other than these items there have been no material changes to the critical accounting policies disclosed in the Company’s 2021 Annual Report on Form 10-K.

NON-GAAP RECONCILIATIONS

1 unchanged sentence

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.

These measures should be considered in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP.

The Company’s definitions of these adjusted measures may differ from similarly titled measures used by other entities.

These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP.

The Company’s definitions of these measures may differ from similarly titled measures used by other entities.

Reconciliation of Non-GAAP Adjusted Net Income and Earnings Per Share

Management uses the non-GAAP adjusted net income metric to evaluate the Company’s operating performance.

Management excludes the items listed in the table below because they are non-operational items.

Management uses the non-GAAP adjusting net income metric to evaluate the Company’s operating performance.

Management excludes the items listed in the table above 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 September 30

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported

Deferred Compensation Expense (Income) (including

related investment activity)

Business Restructuring

Cash Settled Stock Appreciation Rights

Remediation Expense

Cumulative Tax Effect on Above Adjustment Items

Adjusted Net Income

Nine Months Ended September 30

Three Months Ended March 31

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported (1)

Deferred Compensation (Income) Expense (including

related investment activity)

Deferred Compensation Expense (Income) (including related investment activity)

Business Restructuring

Cash Settled Stock Appreciation Rights

Remediation Expense

Environmental Remediation

Cumulative Tax Effect on Above Adjustment Items

3 unchanged sentences

(In millions)

September 30,

Current Maturities of Long-Term Debt as Reported

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis