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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 368 added, 169 removed, 233 unchanged (70% 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 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.

The overall business is comprised of three reportable segments:

Surfactants – Surfactants, which accounted for 67 percent of Company consolidated net sales for the first six 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.

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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.

Polymers – Polymers, which accounted for 30 percent of consolidated net sales for the first six 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).

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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 the United States, polyurethane polyols are manufactured at the Company’s Elwood, Illinois (Millsdale) and Wilmington, North Carolina sites (see the INVISTA acquisition discussion below).

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

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

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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 – Specialty products, which accounted for three percent of consolidated net sales for the first six 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.

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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

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

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.

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:

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For the Three Months

Ended March 31

Ended June 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 Six Months

Ended June 30

(In millions)

Deferred Compensation (Administrative expense)

Realized/Unrealized Gains on Investments (Other, net)

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

Investment Income (Other, net)

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.

Effects of Foreign Currency Translation

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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

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Pretax Income

Six Months Ended

(In millions)

Due to Foreign

Operating Income

Pretax Income

RESULTS OF OPERATIONS

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.

Three Months Ended June 30, 2022 and 2021

Net income attributable to the Company in the second quarter of 2022 increased 20 percent to $52.1 million, or $2.26 per diluted share, from $43.3 million, or $1.85 per diluted share, in the second quarter of 2021.

Adjusted net income increased 26 percent to $53.0 million, or $2.30 per diluted share, from $42.2 million, or $1.81 per diluted share in the second quarter of 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 second quarter of 2022 compared to the second quarter of 2021.

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

Consolidated net sales increased $156.1 million, or 26 percent, from the prior year quarter.

Higher average selling prices favorably impacted the year-over-year change in net sales by $190.3 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.

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

Consolidated sales volume declined one percent, which negatively impacted the change in net sales by $8.6 million.

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

Foreign currency translation negatively impacted the year-over-year change in net sales by $25.6 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.

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

Operating income in the second quarter of 2022 increased $21.0 million, or 37 percent, versus operating income in the second quarter of 2021.

Polymer, Specialty Products and Surfactant operating income increased $10.9 million, $2.9 million, and $2.4 million, respectively, versus the second quarter of 2021.

Corporate expenses, including business restructuring and deferred compensation expenses, decreased $4.9 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.

Most of this decrease was attributable to a $4.4 million decrease in deferred compensation expenses.

Corporate expenses (excluding deferred compensation and business restructuring expenses) decreased $0.5 million year-over-year primarily due to lower acquisition-related expenses.

Foreign currency translation had a $2.5 million negative impact on operating income in the second quarter of 2022 versus the prior year quarter.

Operating expenses (including deferred compensation, business restructuring and goodwill impairment) decreased $1.1 million, or two percent, versus the prior year quarter.

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

Selling expenses increased $0.8 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.

Selling expenses increased $0.6 million, or four percent, primarily due to higher incentive-based compensation expenses.

Administrative expenses were flat year-over-year.

Research, development and technical service (R&D) expenses increased $1.7 million, or 11 percent, primarily due to higher incentive-based compensation expenses.

Deferred compensation expense decreased $4.4 million, primarily due to a decrease in the value of mutual fund investment assets held for the plans.

This decrease was partially offset by a $2.54 per share increase in the market price of Company common stock in the second quarter of 2022 compared to a $6.84 per share decrease in the second 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.

Business restructuring expenses were $0.1 million in both the second quarter of 2022 and 2021.

The restructuring costs in both years relate to ongoing decommissioning costs associated with the Company’s Canadian plant closure.

Goodwill impairment expenses were $1.0 million in the second quarter of 2022 versus no impairment expense recognition in the prior year quarter.

See Note 18, Goodwill Impairment , 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 second quarter of 202 2 increased $1.2 million, or 74 percent, versus the second quarter of 2021.

This increase was primarily attributable to higher borrowings in 2022 and in the second half of 2021 .

Other, net was $5.4 million of expense in the second quarter of 2022 versus $2.8 million of income in the second quarter of 2021.

The Company recognized $4.3 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 second quarter of 2022 compared to $2.4 million of investment income in the second quarter of 2021.

In addition, the Company reported $1.5 million of foreign exchange losses in the second quarter of 2022 versus $0.1 million of foreign exchange gains in the second quarter of 2021.

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

The Company’s effective tax rate was 25.0 percent in the second quarter of 2022 compared to 25.1 percent in the second quarter of 2021.

Segment Results

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Total Net Sales

For the Three Months Ended

(Dollars in thousands)

For the Three Months Ended

Operating Income

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and Restructuring

Deferred Compensation Expense

Deferred Compensation Expense (Income)

Business Restructuring

Total Operating Income

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.

Surfactant net sales for the second quarter of 2022 increased $101.1 million, or 26 percent, versus net sales for the second quarter of 2021.

Higher average selling prices positively impacted the change in net sales by $122.9 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.

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

Foreign currency translation had an $11.3 million unfavorable impact on the year-over-year change in net sales.

Sales volume declined three percent and negatively impacted the change in net sales by $10.5 million.

A comparison of net sales by region follows:

For the Three Months Ended

(Dollars in thousands)

For the Three Months Ended

North America

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Net sales for North American operations increased $56.7 million, or 26 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.

Higher average selling prices positively impacted the change in net sales by $57.4 million.

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

Sales volume was flat between years as higher demand for products sold into the functional products end markets, along with higher demand within the Tier 2 and Tier 3 customer channel, offset lower demand for commodity laundry products within the consumer products business.

Continued raw material and logistics constraints also negatively impacted sales volume.

Foreign currency translation negatively impacted the change in net sales by $0.3 million.

Net sales for European operations increased $27.3 million, or 42 percent, versus the prior year quarter.

Higher average selling prices and a seven percent increase in sales volume favorably impacted the year-over-year change in net sales by $34.6 million and $4.3 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.

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.

The seven percent increase in sales volume primarily reflects higher demand for products sold into the functional products and institutional cleaning end markets.

Foreign currency translation negatively impacted the change in net sales by $11.6 million.

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 $18.0 million, or 23 percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation.

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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 weaker U.S.

dollar relative to the Brazilian real led to the favorable foreign currency translation effect.

Sales volume declined eight percent and negatively impacted the change in net sales by $6.1 million.

The sales volume decline was primarily due to lower demand for commodity laundry products within the consumer products business partially offset by higher demand for products sold into the functional products end markets.

Net sales for Asian operations decreased $0.9 million, or five percent, from the prior year quarter.

A 31 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $5.2 million and $1.4 million, respectively.

The decline in sales volume primarily reflects lower demand for commodity laundry products sold within the consumer products business and lower demand from our distribution partners.

Higher average selling prices positively impacted the change in net sales by $5.7 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.

Surfactant operating income for the second quarter of 2022 increased $2.4 million, or five percent, versus operating income for the second quarter of 2021.

Gross profit increased $5.0 million, or seven percent, and operating expenses increased $2.7 million, or 10 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

For the Three Months Ended

Gross Profit and Operating Income

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Surfactants Segment Operating Income

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.

Gross profit for North American operations increased $2.8 million, or six percent, from the prior year quarter primarily due to higher average unit margins.

The higher average unit margins favorably impacted the change in gross profit by $2.9 million and were mostly attributable to more favorable product and customer mix that was partially offset by ongoing supply chain challenges, inclusive of raw material and logistics constraints, and inflationary pressures.

Gross profit for European operations increased $3.1 million, or 37 percent, due to higher average unit margins and a seven percent increase in sales volume.

These items positively impacted the change in net sales by $4.0 million and $0.5 million, respectively.

The higher average unit margins primarily reflect improved customer and product mix.

The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $1.4 million.

A stronger 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.

Gross profit for Latin American operations decreased $1.8 million, or ten percent, due to an eight percent decline in sales volume and lower average unit margins.

These items negatively impacted the change in gross profit by $1.3 million and $0.8 million, respectively.

The lower average unit margins were primarily due to the non-recurrence of a $2.1 million VAT tax recovery during the second quarter of 2021.

Foreign currency translation favorably impacted the year-over-year change in gross profit by $0.3 million.

Gross profit for Asia operations increased $ 0.

9 million, or 30 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 $ 1 .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.

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.

A 31 percent decline in sales volume negatively impacted the change in gross profit by $0.

The lower volume primarily reflects lost market share at one major customer.

Operating expenses for the Surfactant segment increased $2.7 million, or ten percent, in the second quarter of 2022 versus the second quarter of 2021.

This increase was mainly attributable to higher incentive-based compensation expenses, a goodwill impairment charge at the Company’s Philippines subsidiary and higher bad debt provision expense.

Polymer net sales for the second quarter of 2022 increased $48.3 million, or 25 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 $58.4 million 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.

Foreign currency translation had a $13.7 million unfavorable impact on the year-over-year change in net sales.

A comparison of net sales by region follows:

For the Three Months Ended

(Dollars in thousands)

For the Three Months Ended

North America

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Total Polymers Segment

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.

Net sales for North American operations increased $37.9 million, or 40 percent, due to higher average selling prices and a three percent increase in sales volume.

These items positively impacted the change in net sales by $34.6 million and $3.3 million, respectively.

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.

The higher sales volume reflects rigid polyol growth of eight percent that was partially offset by lower demand within the phthalic anhydride and specialty polyols businesses.

Net sales for European operations increased $12.0 million, or 15 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.

Higher average selling prices and a three percent increase in sales volume positively impacted the change in net sales by $22.9 million and $2.7 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 $13.6 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.

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.

A stronger U.S.

dollar relative to the Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect.

Net sales for Asia and Other operations decreased $1.5 million, or 12 percent, primarily due to a 17 percent decline in sales volume which had a $2.1 million negative impact on the year-over-year change in net sales.

The decline in sales volume was primarily attributable to recent COVID lockdowns and restrictions in China.

Higher average selling prices positively impacted the change in net sales by $0.7 million.

The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $0.1 million.

Polymer operating income in the second quarter of 2022 increased $10.9 million, or 47 percent, versus operating income in the second quarter of 2021.

Gross profit increased $11.7 million, or 38 percent, and operating expenses were up $0.8 million, or 11 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

For the Three Months Ended

Gross Profit and Operating Income

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Polymers Segment Operating Income

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.

Gross profit for North American operations increased $9.9 million, or 62 percent, due to higher average unit margins and a three percent increase in sales volume.

These items positively impacted the change in gross profit by $9.4 million and $0.5 million, respectively.

The higher average unit margins primarily reflect partial margin recovery and more favorable product and customer mix as higher rigid polyols sales volume more than offset lower phthalic anhydride sales volume.

Gross profit for European operations increased $ 2.1 million, or 1 6 percent, versus the second quarter of 202 1 .

The increase was primarily due to higher average unit margins and a three percent increase in sales volume .

These two items favorably impacted the year-over-year change in gross profit by $ 3.8 million and $ 0.

4 million respectively.

The un favorable impact of foreign currency translation negatively impacted the change in gross profit by $ 2.1 million.

Gross profit for Asia and Other operations decreased $0.4 million, or 24 percent, due to a 17 percent decline in sales volume and slightly lower average unit margins.

These items negatively impacted the year-over-year change in gross profit by $0.3 million and $0.1 million, respectively.

Operating expenses for the Polymer segment increased $0.8 million, or 11 percent, year over year.

This increase was mainly attributable to higher incentive-based compensation and travel-related expenses.

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.

Specialty Products net sales for the second quarter of 2022 increased $6.7 million, or 32 percent, versus net sales for the second quarter of 2021.

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

Gross profit and operating income both increased by $2.9 million year-over-year.

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

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, decreased $4.9 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:

Corporate expenses were $14.4 million in the second quarter of 2022 versus $19.2 million in the second quarter of 2021.

This decrease was primarily attributable to $3.4 million of deferred compensation income recognized in the second quarter of 2022 versus $1.0 million of deferred compensation expense recognized in the second quarter of 2021.

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

The $4.4 million decrease in deferred compensation expense was primarily due to a decrease in the value of mutual fund investment assets held for the plans.

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 June 30, 2022 and 2021:

Company Common Stock Price

Six Months Ended June 30, 2022 and 2021

Net income attributable to the Company in the first half of 2022 increased 16 percent to $96.9 million, or $4.19 per diluted share, from $83.9 million, or $3.59 per diluted share, in the first half of 2021.

Adjusted net income increased 11 percent to $93.7 million, or $4.05 per diluted share, versus $84.6 million or $3.62 per diluted share, in the prior year (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income 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 in the first half of 2022 compared to the first half of 2021.

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

Consolidated net sales increased $293.7 million, or 26 percent, year-over-year.

Higher average selling prices positively impacted the change in net sales by $341.3 million.

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

Consolidated sales volume declined one percent and negatively impacted the year-over-year change in net sales by $10.3 million.

Sales volume in the Polymer segment increased two percent while sales volume in the Surfactant and Specialty Products segments declined two percent and nine percent, respectively.

Foreign currency translation negatively impacted the year-over-year change in net sales by $37.3 million due to a stronger U.S.

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

Operating income for the first half of 2022 increased $30.4 million, or 28 percent, versus operating income for the first half of 2021.

Polymer, Specialty Products and Surfactant operating income increased $7.1 million, $4.0 million, and $2.9 million, respectively.

Corporate expenses, including business restructuring and deferred compensation expenses, decreased $16.4 million year-over-year.

Most of this decrease was attributable to a $14.6 million decrease in deferred compensation expenses.

Corporate expenses (excluding deferred compensation and business restructuring expenses) decreased $1.9 million between years largely due to lower acquisition-related expenses that were partially offset by higher incentive-based compensation expenses.

Foreign currency translation had a $3.6 million negative impact on operating income in the first half of 2022 versus the first half of 2021.

Operating expenses (including deferred compensation , business restructuring and goodwill impairment ) decreased $ 10.2 million, or nine p ercent, between years.

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

Selling expenses increased $1.3 million, or five percent, year-over-year mainly due to higher incentive-based compensation expenses and higher bad debt provision expenses related to higher global accounts receivable balances and the ongoing conflict in Ukraine.

Administrative expenses decreased $1.0 million, or two percent, year-over-year primarily due to lower acquisition-related expenses that were partially offset by higher incentive-based compensation expenses.

R&D expenses increased $3.0 million, or 10 percent, year-over-year primarily due to higher salaries and incentive-based compensation expenses.

Deferred compensation expense decreased $14.6 million, year-over-year, primarily due to a decrease in the value of the mutual fund investment assets held for the plans and a $22.94 per share decrease in the market price of Company common stock in the first half of 2022 compared to a $0.95 per share increase in the first half 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 half of 2022 versus $0.2 million in the first half of 2021.

The restructuring charges in both years relate to ongoing decommissioning costs associated with the Company’s Canadian plant closure.

Goodwill impairment expenses were $1.0 million in the first half of 2022 versus no impairment expense recognition in the prior year.

See Note 18, Goodwill Impairment , 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 first half of 2022 increased $1.9 million, or 63 percent, compared to net interest expense for the first half of 2021.

This increase was primarily attributable to higher borrowings in 2022 and in the second half of 2021.

Other, net was $7.0 million of expense for the first half of 2022 compared to $3.5 million of income for the first half of 2021.

The Company recognized $6.6 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 half of 2022 compared to $3.3 million of income in the first half of 2021.

In addition, the Company reported foreign exchange losses of $1.2 million in the first half of 2022 versus $0.2 million of foreign exchange losses in the first half of 2021.

The Company also reported $0.3 million higher of net periodic pension income in the first half of 2022 versus the first half of the prior year.

The Company’s effective tax rate was 24.8 percent in the first half of 2022 versus 24.4 percent in the first half of 2021.

The year-over-year increase was primarily attributable to a less favorable geographical mix of income and less favorable tax benefits derived from stock-based compensation awards, exercised or distributed, in the first half of 2022 versus the first half of 2021.

(In thousands)

For the Six Months Ended

Specialty Products

Total Net Sales

(In thousands)

For the Six Months Ended

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation

and Restructuring

Deferred Compensation Expense (Income)

Business Restructuring

Total Operating Income

Segment Results

Surfactants net sales for the first half of 2022 increased $198.4 million, or 26 percent, versus net sales for the first half of 2021.

Higher average selling prices positively impacted the change in net sales by $230.4 million.

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

Foreign currency translation had a $17.4 million unfavorable impact on the year-over-year change in net sales.

Sales volume declined two percent and negatively impacted the change in net sales by $14.6 million.

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

(In thousands)

For the Six Months Ended

North America

Latin America

Total Surfactants Segment

Net sales for North American operations increased $109.0 million, or 25 percent, year-over-year.

Higher average selling prices and slightly higher sales volume favorably impacted the change in net sales by $107.3 million and $2.1 million, respectively.

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

The slight increase in sales volume primarily reflects higher demand for products sold into the functional products end markets, along with higher demand within the Tier 2 and Tier 3 customer channel, that was mostly offset by lower demand for commodity laundry products within the consumer products business.

Continued raw material supply and logistics constraints also negatively impacted sales volume.

Foreign currency translation negatively impacted the change in net sales by $0.4 million year-over-year.

Net sales for European operations increased $47.2 million, or 35 percent, year-over-year.

Higher average selling prices and a two percent increase in sales volume positively impacted the year-over-year change in net sales by $61.5 million and $2.6 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.

The two percent increase in sales volume primarily reflects higher demand for products sold into the functional products and institutional cleaning end markets, partially offset by lower demand for consumer cleaning products.

Foreign currency translation negatively impacted the change in net sales by $16.9 million.

A stronger U.S.

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

Net sales for Latin American operations increased $43.3 million, or 31 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 $48.1 million and $2.3 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.

A weaker U.S.

dollar relative to the Brazilian real led to the favorable foreign currency translation effect.

Sales volume declined five percent and negatively impacted the change in net sales by $7.1 million.

Net sales for Asian operations decreased $1.0 million, or three percent, year-over-year.

A 22 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $7.9 million and $2.5 million, respectively.

The decline in sales volume primarily reflects lower demand for commodity laundry products sold within the consumer products business and lower demand from our distribution partners.

Higher average selling prices positively impacted the change in net sales by $9.4 million.

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

Surfactant operating income for the first half of 202 2 increased $ 2.9 million, or three percent, versus operating income for the first half of 202 1 .

Gross profit increased $ 7.2 million, or five percent, and operating expenses increased $ 4.3 million, or eight percent.

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

(In thousands)

For the Six Months Ended

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 $1.9 million, or two percent, year-over-year primarily due to higher average unit margins and slightly higher sales volume.

These items favorably impacted the change in gross profit by $1.4 million and $0.5 million, respectively.

The higher average unit margins were mostly attributable to more favorable product and customer mix that was partially offset by ongoing supply chain challenges and inflationary pressures.

Gross profit for European operations increased $5.0 million, or 26 percent year-over-year.

Higher average unit margins and a two percent increase in sales volume favorably impacted the year-over-year change in gross profit by $6.8 million and a $0.4 million, respectively.

The higher average unit margins primarily reflect a more favorable product and customer mix.

The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $2.2 million.

A stronger 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 decreased $0.9 million, or three percent, primarily due to a five percent decrease in sales volume that negatively impacted the year-over-year change in gross profit by $1.5 million.

Slightly higher unit margins and the favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $0.3 million each.

Gross profit for Asian operations increased $1.2 million, or 24 percent, primarily due to higher average unit margins.

The higher unit margins positively impacted the year-over-year change in gross profit by $2.3 million.

A 22 percent decline in sales volume negatively impacted the change in gross profit by $1.1 million.

The lower volume primarily reflects lost market share at one major customer.

Operating expenses for the Surfactant segment increased $4.3 million, or eight percent, year-over-year.

This increase was mainly attributable to higher salaries and incentive-based compensation expenses, a goodwill impairment charge at the Company’s Philippines subsidiary and higher bad debt provision expense.

Polymers net sales for the first half of 2022 increased $85.0 million, or 25 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 year-over-year change in net sales by $96.9 million and a $7.2 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 partially due to the 2021 INVISTA polyester polyol acquisition, which closed at the end of January 2021.

Foreign currency translation had a $19.1 million unfavorable impact on the year-over-year change in net sales.

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

(In thousands)

For the Six Months Ended

North America

Asia and Other

Total Polymers Segment

Net sales for North American operations increased $61.8 million, or 37 percent, primarily due to higher average selling prices and a one percent increase in sales volume.

These items positively impacted the change in net sales by $59.8 million and $2.0 million, respectively.

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

The sales volume growth reflects rigid polyol growth of five percent that was partially offset by lower sales volume within the phthalic anhydride business.

Sales volume during the first half of 2022 was also impacted by a January 2022 power outage at the Company’s Elwood, Illinois (Millsdale) plant site that negatively impacted Polymer production.

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

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

Net sales for European operations increased $ 24.5 million, or 1 6 percent, year-over-year.

Higher average selling prices and a seven percent increase in sales volume favorably impacted the change in net sales by $33.9 million and $9.8 million, respectively .

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

The increase in sales volume was partially 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 $19.2 million.

A stronger U.S.

dollar relative to the Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect.

Net sales for Asia and Other operations decreased $1.3 million, or five percent, largely due to a 15 percent decline in sales volume which had a $3.5 million negative impact on the year-over-year change in net sales.

The decline in sales volume was primarily attributable to recent COVID lockdowns and restrictions in China.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the year-over-year change in net sales by $2.1 million and $0.1 million, respectively.

Polymer operating income for the first half of 2022 increased $7.1 million, or 17 percent, versus operating income for the first half of 2021.

Gross profit increased $8.5 million, or 15 percent, and operating expenses were up $1.4 million, or nine percent.

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

(In thousands)

For the Six Months Ended

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 $4.9 million, or 17 percent, due to higher average unit margins and a one percent increase in sales volume.

These items positively impacted the change in gross profit by $4.6 million and $0.3 million, respectively.

The higher average unit margins reflect partial margin recovery and more favorable product and customer mix as higher rigid polyol sales volume more than offset lower phthalic anhydride sales volume.

Gross profit for European operations increased $4.0 million, or 16 percent, primarily due to higher average unit margins and a seven percent increase in sales volume.

These items positively impacted the change in gross profit by $5.3 million and $1.6 million, respectively.

The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $2.9 million.

Gross profit for Asia and Other operations declined $0.5 million, or 17 percent, primarily due to a 15 percent decline in sales volume and slightly lower average unit margins.

These items negatively impacted the year-over-year changes in gross profit by $0.4 million and a $0.1 million, respectively.

Operating expenses for the Polymers segment increased $1.4 million, or nine percent, year-over-year mainly due to higher incentive-based compensation and travel-related expenses.

Specialty Products

Specialty Products net sales for the first half of 2022 increased $10.2 million, or 27 percent, versus net sales for the first half of 2021.

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

Gross profit and operating income increased by $3.9 and $4.0 million, respectively.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, decreased $16.5 million between years.

Corporate expenses were $22.6 million in the first half of 2022 versus $39.1 million in the first half of 2021.

This decrease was primarily attributable to $10.9 million of deferred compensation income recognized in the first half of 2022 versus $3.7 million of deferred compensation expense recognized in the first half of 2021.

In addition, the Company also incurred lower acquisition-related expenses year-over-year that were partially offset by higher incentive-based compensation expenses.

The $14.6 million decrease in deferred compensation expense was primarily due to a decrease in the value of mutual fund investment assets held for the plans.

In addition, during the first half of 2022 the market price of the Company’s common stock decreased $22.94 per share versus a $0.95 per share increase during the first half of 2021.

The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expense/income for the six months ended June 30, 2022 and 2021:

Company Common Stock Price

LIQUIDITY AND CAPITAL RESOURCES

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 six months ended June 30, 2022, operating activities were a cash source of $38.2 million versus a source of $24.7 million for the comparable period in 2021.

For the current year period, investing cash outflows totaled $126.3 million versus a cash outflow of $261.5 million in the prior year period.

Financing activities were a source of $128.1 million versus a source of $14.8 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 and cash equivalents increased $35.4 million compared to December 31, 2021, inclusive of a $4.5 million unfavorable foreign exchange rate impact.

On June 30, 2022, the Company’s cash and cash equivalents totaled $194.6 million.

demand deposit accounts and money market funds totaled $59.7 million and $40.3 million, respectively.

The Company’s non-U.S.

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

subsidiaries held $94.6 million of cash as of June 30, 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.

Net income during the first six months of 2022 increased $13.0 million versus the comparable period in 2021.

Working capital was a cash use of $111.1 million during the first six months of 2022 versus a use of $69.8 million in the comparable period in 2021.

Accounts receivable were a use of $111.1 million during the first six months of 2022 compared to a use of $68.0 million for the comparable period of 2021.

Inventories were a use of $38.6 million in 2022 versus a use of $35.7 million in 2021.

Accounts payable and accrued liabilities were a source of $43.3 million in 2022 compared to a source of $34.0 million for the same period in 2021.

Working capital requirements were higher in the first six 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.

1 unchanged sentence

Cash used for investing activities decreased $135.2 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.

Most of this decrease reflects the Company’s acquisition of INVISTA’s aromatic polyester polyol business and associated assets for $184.6 million, net of cash received, during the first half of 2021.

Cash used for capital expenditures was $129.5 million in the first half of 2022 versus $74.9 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.

For 2022, the Company estimates that total capital expenditures will be in the range of $350.0 million to $375.0 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.

1 unchanged sentence

Cash flow from financing activities was a source of $128.1 million in 2022 versus a source of $14.8 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.

2 unchanged sentences

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.

For the six months ended June 30, 2022, the Company purchased 167,940 shares of its common stock on the open market at a total cost of $17.0 million.

At June 30, 2022, the Company had $133.0 million remaining under the share repurchase program authorized by its 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.

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.

Consolidated balance sheet debt increased from $363.6 million on December 31, 2021 to $526.0 million on June 30, 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 $ 127.0 million , f rom $204.4 million at December 31, 2021 to $ 331.4 million at June 30, 2022 .

T his change was due to a debt increase of $ 162.4 partially offset by a cash increase of $ 35.4 million.

The cash increase reflects the new debt borrowings partially offset by scheduled debt repa y ments, higher working capital requirements and capital expenditures.

As of June 30, 2022, the ratio of net debt to net debt plus shareholders’ equity was 22.7 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 June 30, 2022, the Company’s debt included $421.4 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 $4.6 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.

4 unchanged sentences

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.

On June 24, 2022, the Company entered into a credit agreement with a syndicate of banks.

The credit agreement provides for credit facilities in an initial aggregate principal amount of $450.0 million, consisting of (a) a $350.0 million multi-currency revolving credit facility and (b) a $100.0 million delayed draw term loan credit facility, each of which matures on June 24, 2027.

This credit agreement replaced the Company’s prior $350.0 million revolving credit agreement.

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.

As of June 30, 2022, the Company had outstanding loans totaling $100.0 million and letters of credit totaling $7.0 million under the credit agreement, with $343.0 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.

At June 30, 2022, the Company’s foreign subsidiaries had $4.6 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.

4 unchanged sentences

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 Company is permitted to pay dividends and purchase treasury shares after June 24, 2022, in amounts of up to $100.0 million plus 100 percent of net income and cash proceeds of stock option exercises, measured cumulatively beginning January 1, 2022.

The maximum amount of dividends that could have been paid within this limitation is disclosed as unrestricted retained earnings in Note 14, Debt , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q).

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

The Company believes it was in compliance with all of its debt covenants as of June 30, 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 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.

During the first six months of 2022 and 2021, the Company’s expenditures for capital projects related to the environment were $5.8 million and $5.5 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 $ 8.2 million and $ 8.3 million for the three months ended March 31, 202 2 and 20 2 1 , 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 $17.0 million and $17.1 million for the six months ended June 30, 2022 and 2021, 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.

The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these 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.

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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.

After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $23.0 million to $42.6 million at June 30, 2022 and $23.1 million to $41.7 million at 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.

these accruals totaled $23.0 million at June 30, 2022 and $23.1 million at 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.

Cash expenditures related to legal and environmental matters were $1.1 million for the six months ended June 30, 2022, compared to $1.3 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.

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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.

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 material liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position.

Certain of these matters are discussed in Item 1, Part 2, of the Company’s Annual Report on Form 10-K, Legal Proceedings, in this report and in other filings of the Company with the SEC, which are available upon request from the Company.

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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.

Management believes the Polymer segment will deliver growth versus 2021 as energy conservation efforts and more stringent building codes should have a continued positive impact on demand for rigid polyols.

Management believes its Specialty Product segment results should improve versus 2021.

Despite optimism that demand for the Company’s products will remain healthy, management also believes the Company will continue to be challenged by the current inflationary environment and ongoing supply chain challenges, inclusive of raw material availability 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.

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 six months of 2022 because the Company has made no acquisitions in 2022.

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.

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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.

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.

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

Three Months Ended June 30

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported

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

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

Business Restructuring

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Adjusted Net Income

Six Months Ended June 30

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported

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

Business Restructuring

Cash Settled Stock Appreciation Rights

Environmental Remediation

Cumulative Tax Effect on Above Adjustment Items

Adjusted Net Income

Reconciliation of Non-GAAP Net Debt

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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