STEPAN CO 10-Q

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the interim periods included in the accompanying condensed consolidated financial statements. Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company’s and its subsidiaries’ (the Company) plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, the Company’s actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “should,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company’s control, that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part II-Item IA - Risk Factors” of this Quarterly Report on Form 10-Q and under “Part I-Item IA. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, including the risks and uncertainties related to the following: • the impact of the COVID-19 pandemic; • accidents, unplanned production shutdowns or disruptions in any of the Company’s manufacturing facilities; • reduced demand for Company products due to customer product reformulations or new technologies; • the Company’s inability to successfully develop or introduce new products; • compliance with environmental, health and safety, product registration and anti-corruption laws; • the Company’s ability to make acquisitions of suitable candidates and successfully integrate acquisitions; • global competition and the Company’s ability to successfully compete; • volatility of raw material, natural gas and electricity costs as well as any disruption in their supply; • disruptions in transportation or significant changes in transportation costs; • downturns in certain industries and general economic downturns; • international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes; • unfavorable resolution of litigation against the Company; • the Company’s ability to keep and protect its intellectual property rights; • potentially adverse tax consequences due to the international scope of the Company’s operations; • downgrades to the Company’s credit ratings or disruptions to the Company’s ability to access well-functioning capital markets; • conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations; • cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects; • interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data; • the Company’s ability to retain its executive management and other key personnel; • the Company’s ability to operate within the limitations of debt covenants; and • the other factors set forth under “Risk Factors.” 19 These factors are not necessarily all of the important factors that could cause the Company’s actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors also could harm the Company’s results. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements. The “Company,” “we,” “our” or “us” means Stepan Company and one or more of its subsidiaries only. Overview The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business 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. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines and Singapore). Recent significant events include: o 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 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 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). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Millsdale, Illinois and Wilmington, North Carolina sites (see the INVISTA acquisition discussion below). 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 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: o 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. 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 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. Deferred Compensation Plans The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company income and expenses. Compensation expense is recognized when the value of Company common stock and mutual fund investment assets held for 20 the plans increase, and compensation income is recognized when the value 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 table: Income (Expense) For the Three Months Ended March 31 (In millions) 2022 2021 Change Deferred Compensation (Administrative expense) $ 7.5 $ (2.7 ) $ 10.2 Realized/Unrealized Gains on Investments (Other, net) (2.5 ) 0.4 (2.9 ) Investment Income (Other, net) 0.2 0.3 (0.1 ) Pretax Income Effect $ 5.2 $ (2.0 ) $ 7.2 Effects of Foreign Currency Translation The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three months ended March 31, 2022 and 2021: Three Months Ended March 31 (Decrease) (In millions) 2022 2021 Increase Due to Foreign Translation Net Sales $ 675.3 $ 537.7 $ 137.6 $ (11.6 ) Gross Profit 109.2 109.0 0.2 (1.7 ) Operating Income 63.3 53.9 9.4 (1.1 ) Pretax Income 59.4 53.1 6.3 (1.1 ) RESULTS OF OPERATIONS Three Months Ended March 31, 2022 and 2021 Summary 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 21 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 $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. 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 (Dollars in thousands) For the Three Months Ended Net Sales March 31, 2022 March 31, 2021 Increase (Decrease) Percent Change Surfactants $ 468,266 $ 370,936 $ 97,330 26 Polymers 187,079 150,385 36,694 24 Specialty Products 19,931 16,419 3,512 21 Total Net Sales $ 675,276 $ 537,740 $ 137,536 26 For the Three Months Ended (Dollars in thousands) March 31, March 31, Increase Percent Operating Income 2022 2021 (Decrease) Change Surfactants $ 53,769 $ 53,210 $ 559 1 Polymers 14,129 17,951 (3,822 ) -21 Specialty Products 3,695 2,633 1,062 40 Segment Operating Income $ 71,593 $ 73,794 $ (2,201 ) -3 Corporate Expenses, Excluding Deferred Compensation and Restructuring 15,696 17,105 (1,409 ) -8 Deferred Compensation Expense (7,501 ) 2,694 (10,195 ) NM Business Restructuring 52 81 (29 ) -36 Total Operating Income $ 63,346 $ 53,914 $ 9,432 17 22 Surfactants 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: For the Three Months Ended (Dollars in thousands) March 31, March 31, Increase Percent Net Sales 2022 2021 (Decrease) Change North America $ 273,228 $ 220,935 $ 52,293 24 Europe 91,017 71,094 19,923 28 Latin America 85,434 60,169 25,265 42 Asia 18,587 18,738 (151 ) -1 Total Surfactants Segment $ 468,266 $ 370,936 $ 97,330 26 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. 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: For the Three Months Ended (Dollars in thousands) March 31, 2022 March 31, 2021 Increase (Decrease) Percent Change Gross Profit and Operating Income North America $ 53,168 $ 54,056 $ (888 ) -2 Europe 13,159 11,263 1,896 17 Latin America 13,139 12,297 842 7 Asia 2,641 2,267 374 16 Surfactants Segment Gross Profit $ 82,107 $ 79,883 $ 2,224 3 Operating Expenses 28,338 26,673 1,665 6 Surfactants Segment Operating Income $ 53,769 $ 53,210 $ 559 1 23 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 $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. Polymers 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 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: For the Three Months Ended (Dollars in thousands) March 31 March 31 Increase Percent Net Sales 2022 2021 change North America $ 94,856 $ 70,878 $ 23,978 34 Europe 80,783 68,300 12,483 18 Asia and Other 11,440 11,207 233 2 Total Polymers Segment $ 187,079 $ 150,385 $ 36,694 24 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 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 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 $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 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. 24 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: For the Three Months Ended (Dollars in thousands) March 31, 2022 March 31, 2021 Increase (Decrease) Percent Change Gross Profit and Operating Income North America $ 8,280 $ 13,271 $ (4,991 ) -38 Europe 12,861 10,996 1,865 17 Asia and Other 1,171 1,263 (92 ) -7 Polymers Segment Gross Profit $ 22,312 $ 25,530 $ (3,218 ) -13 Operating Expenses 8,183 7,579 604 8 Polymers Segment Operating Income $ 14,129 $ 17,951 $ (3,822 ) -21 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 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 $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: 2022 2021 2020 March 31 December 31 March 31 December 31 Company Common Stock Price $ 98.81 $ 124.29 $ 127.11 $ 119.32 25 LIQUIDITY AND CAPITAL RESOURCES Overview 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 $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. Cash in U.S. demand deposit accounts and money market funds totaled $24.3 million and $120.0 million, respectively. The Company’s non-U.S. subsidiaries held $91.7 million of cash outside the United States as of March 31, 2022. Operating Activity 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 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 $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. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 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 $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. 26 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 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. This credit agreement allows the Company to make unsecured borrowings, as requested from time to time, to finance working capital needs, permitted acquisitions, capital expenditures and for general corporate purposes. This unsecured facility is the Company’s primary source of short-term borrowings. 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 expenditures and acquisitions. 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. Under the most restrictive of these debt covenants: 1. The Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, of 3.50 to 1.00, for the preceding four calendar quarters. 2. The Company is required to maintain a maximum net leverage ratio, as defined within the agreements, not to exceed 3.50 to 1.00. 3. The Company is required to maintain net worth of at least $750.0 million. 4. The Company is permitted to pay dividends and purchase treasury shares after 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 March 31, 2022. ENVIRONMENTAL AND LEGAL MATTERS The Company’s operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first 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 27 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. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to the sites. It is the Company’s accounting policy to record liabilities when environmental assessments and/or remedial efforts are probable, and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. Estimating the possible costs of remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Some of the factors on which the Company bases its estimates include information provided by decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, and remedial action plans developed. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $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. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based 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 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. 28 OUTLOOK 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 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 The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company’s performance and financial condition. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management’s effectiveness with specific reference to these indicators. 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 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 March 31 (In millions, except per share amounts) 2022 2021 Net Income Diluted EPS Net Income Diluted EPS Net Income Attributable to the Company as Reported (1) $ 44.8 $ 1.93 $ 40.6 $ 1.74 Deferred Compensation Expense (Income) (including related investment activity) (5.2 ) (0.22 ) 2.0 0.09 Business Restructuring — — 0.1 — Cash Settled Stock Appreciation Rights (0.5 ) (0.02 ) 0.3 0.01 Environmental Remediation 0.3 0.01 — — Cumulative Tax Effect on Above Adjustment Items 1.3 0.06 (0.6 ) (0.02 ) Adjusted Net Income (1) $ 40.7 $ 1.76 $ 42.4 $ 1.82 29 Reconciliation of Non-GAAP Net Debt Management uses the non-GAAP net debt metric to gain a more complete picture of the Company’s overall liquidity, financial flexibility and leverage level. (In millions) March 31, 2022 December 31, 2021 Current Maturities of Long-Term Debt as Reported $ 139.3 $ 40.7 Long-Term Debt as Reported 397.8 322.9 Total Debt as Reported 537.1 363.6 Less Cash and Cash Equivalents as Reported (236.0 ) (159.2 ) Net Debt $ 301.1 $ 204.4 Equity $ 1,116.7 $ 1,074.2 Net Debt plus Equity $ 1,417.8 $ 1,278.6 Net Debt/(Net Debt plus Equity) 21 % 16 % 30 Item 3 – Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the market risks described in the Company’s 2021 Annual Report on Form 10-K.