# Stepan Co: Form 10-Q for the period ended Jun 30, 2023

- Company: [Stepan Co](/companies/scl.md) (CIK 94049)
- Form: 10-Q
- Filed: 2023-08-03
- Accepted by EDGAR: Aug 3, 2023, 10:33 ET
- Period: 2023-06-30
- Accession: 0000950170-23-037671
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/94049/000095017023037671/scl-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/94049/000095017023037671/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $580.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $1.23bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $513.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $1.09bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $66.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $140.0m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $17.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $38.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $3.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $7.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $12.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $28.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.55 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.25 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.56 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.27 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 22,945,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 22,970,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $35.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $159.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $16.3m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-06-30 | $133.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $938.7m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $2.43bn | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $642.0m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-06-30 | $438.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-06-30 | $244.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-06-30 | $1.22bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 72,367 characters.

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, 2022, including the risks and uncertainties related to the following:

- accidents, unplanned production shutdowns or disruptions in any of the Company’s manufacturing facilities;
- reduced demand for Company products due to customer product reformulations or new technologies;
- the Company’s inability to successfully develop or introduce new products;
- compliance with environmental, health and safety, product registration and anti-corruption laws;
- the Company’s ability to make acquisitions of suitable candidates and successfully integrate acquisitions;
- global competition and the Company’s ability to successfully compete;
- volatility of raw material, natural gas and electricity costs as well as any disruption in their supply;
- disruptions in transportation or significant changes in transportation costs;
- downturns in certain industries and general economic downturns;
- international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes;
- unfavorable resolution of litigation against the Company;
- the Company’s ability to keep and protect its intellectual property rights;
- potentially adverse tax consequences due to the international scope of the Company’s operations;
- downgrades to the Company’s credit ratings or disruptions to the Company’s ability to access well-functioning capital markets;
- conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations;
- cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects;
- interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data;
- the Company’s ability to retain its executive management and other key personnel;
- the Company’s ability to operate within the limitations of debt covenants; and
- the other factors set forth under “Risk Factors.”

These factors are not necessarily all of the important factors that could cause the Company’s actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors could also impact the Company’s results. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements.

The “Company,” “we,” “our” or “us” means Stepan Company and one or more of its subsidiaries only.

### Overview

The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business is comprised of three reportable segments:

Surfactants – Surfactants, which accounted for 70 percent of consolidated net sales for the first six months of 2023, are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines and Singapore).

Polymers – Polymers, which accounted for 26 percent of consolidated net sales for the first six months of 2023, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Elwood, Illinois (Millsdale) and Wilmington, North Carolina sites. Phthalic anhydride is manufactured at the Company’s Millsdale site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. In Europe, polyurethane polyols are manufactured at the Company’s plants in Germany and the Netherlands and specialty polyols are manufactured at the Company’s Poland site. In Asia, polyurethane polyols and specialty polyols are manufactured at the Company’s China plant.

Specialty Products – Specialty products, which accounted for four percent of consolidated net sales for the first six months of 2023, 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 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:

*(In millions)*

|  | Income (Expense) For the Three Months Ended June 30, 2023 | 2022 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Deferred Compensation (Administrative expenses) | $(0.7) | $3.4 | $(4.1) | (1) |
| Realized/Unrealized Gains (Losses) on Investments (Other, net) | 1.5 | (4.3) | 5.8 |  |
| Investment Income (Other, net) | 0.1 | 0.2 | (0.1) |  |
| Pretax Income Effect | $0.9 | $(0.7) | $1.6 |  |

*(In millions)*

|  | Income (Expense) For the Six Months Ended June 30, 2023 | 2022 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Deferred Compensation (Administrative expense) | $(2.3) | $10.9 | $(13.2) | (1) |
| Realized/Unrealized Gains (Losses) on Investments (Other, net) | 3.1 | (6.8) | 9.9 |  |
| Investment Income (Other, net) | 0.2 | 0.4 | (0.2) |  |
| Pretax Income Effect | $1.0 | $4.5 | $(3.5) |  |

(1) See the *Segment Results-Corporate Expenses* section of this MD&A for details regarding the period-over-period changes in deferred compensation.

#### Effects of Foreign Currency Translation

The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three and six months ended June 30, 2023 and 2022:

*(In millions)*

|  | For the Three Months Ended June 30, 2023 | 2022 | Decrease | Increase Due to Foreign Translation |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $580.0 | $751.6 | $(171.6) | $4.4 |
| Gross Profit | 66.4 | 131.6 | (65.2) | 0.5 |
| Operating Income | 17.8 | 77.6 | (59.8) | 0.3 |
| Pretax Income | 16.3 | 69.5 | (53.2) | 0.2 |

*(In millions)*

|  | For the Six Months Ended June 30, 2023 | 2022 | Decrease | Decrease Due to Foreign Translation |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $1,231.4 | $1,426.9 | $(195.5) | $(8.0) |
| Gross Profit | 140.0 | 240.8 | (100.8) | (1.1) |
| Operating Income | 38.9 | 141.0 | (102.1) | (0.8) |
| Pretax Income | 36.2 | 128.9 | (92.7) | (0.9) |

22

RESULTS OF OPERATIONS

#### Three Months Ended June 30, 2023 and 2022

### Summary

Net income in the second quarter of 2023 was $12.7 million, or $0.55 per diluted share, versus $52.1 million, or $2.26 per diluted share, in the second quarter of 2022. Adjusted net income was $12.1 million, or $0.53 per diluted share, versus $53.0 million, or $2.30 per diluted share in the second quarter of 2022 (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the second quarter of 2023 compared to the second quarter of 2022. A detailed discussion of segment operating performance for the second quarter of 2023 compared to the second quarter of 2022 follows the summary.

Consolidated net sales decreased $171.7 million, or 23 percent, versus the prior year quarter. Consolidated sales volume declined 19 percent, which negatively impacted the change in net sales by $143.9 million. Sales volume in the Surfactant, Polymer and Specialty Products segments decreased 15 percent, 29 percent and 16 percent, respectively. The decline in sales volume was primarily due to lower market demand and continued customer and channel inventory destocking. Lower average selling prices negatively impacted the year-over-year change in net sales by $32.2 million. The decrease in average selling prices was mainly attributable to less favorable product mix, declining raw material prices and increased competitive activity within certain end-use markets. Foreign currency translation favorably impacted the year-over-year change in net sales by $4.4 million mainly due to a weaker U.S. dollar against the European euro, Mexican peso, and Polish zloty.

Operating income in the second quarter of 2023 decreased $59.8 million, or 77 percent, versus operating income in the second quarter of 2022. Surfactant, Polymer and Specialty Products operating income decreased $33.1 million, $17.6 million, and $6.1 million, respectively, versus the second quarter of 2022. Corporate expenses, including business restructuring and deferred compensation expenses, increased $3.0 million year-over-year. Most of this increase was attributable to $4.1 million of higher deferred compensation expense in the current year quarter. Corporate expenses, excluding deferred compensation and business restructuring expenses, decreased $1.1 million. This decrease was primarily due to lower incentive-based compensation expenses in the second quarter of 2023. Foreign currency translation had a $0.3 million favorable impact on operating income in the second quarter of 2023 versus the prior year.

Operating expenses (including deferred compensation, business restructuring and goodwill impairment) decreased $5.4 million, or 10 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 decreased $4.4 million, or 29 percent, primarily due to lower incentive-based compensation and bad debt provision expenses.
- Administrative expenses decreased $1.5 million, or six percent, primarily due lower incentive-based compensation expenses that were partially offset by higher salaries.
- Research, development and technical service (R&D) expenses decreased $2.6 million, or 15 percent, primarily due to lower incentive-based compensation expenses.
- Deferred compensation was $0.7 million of expense in the second quarter of 2023 versus $3.4 million of income in the prior year quarter. The $4.1 million increase in deferred compensation expense was primarily due to an increase in the market values of mutual fund investment assets held for the plans in the second quarter of 2023, versus a decrease in the second quarter of 2022. This increase was partially offset by a $7.47 per share decrease in the market price of Company common stock in the second quarter of 2023 compared to a $2.54 per share increase in the second quarter of 2022. See the *Overview* and *Segment Results-Corporate Expenses* section of this MD&A for further details.
- Business restructuring expenses were negligible in the second quarter of 2023 versus $0.1 million in the second quarter of 2022. The restructuring costs in both years relate to decommissioning costs associated with the Company’s Canadian plant closure.
- The Company recognized $1.0 million of goodwill impairment expense, related solely to its Philippines reporting unit, during the second quarter of 2022. The Company did not recognize any goodwill impairment charges during the second quarter of 2023. See Note 16, *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 2023 increased $1.1 million, or 42 percent, versus the second quarter of 2022. This increase was primarily attributable to higher outstanding debt balances and higher interest rates on the revolving credit facility in 2023 versus 2022.

Other, net was $2.4 million of income in the second quarter of 2023 versus $5.4 million of expense in the second quarter of 2022. The Company recognized $1.6 million of investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the second quarter of 2023 compared to $4.3 million of investment losses in the second quarter of 2022. In addition, the Company reported $0.4 million of foreign exchange gains in the second quarter of 2023 versus $1.5 million of foreign exchange losses in the second quarter of 2022. The Company's net periodic pension income was flat between years.

The Company’s effective tax rate was 22.3 percent in the second quarter of 2023 versus 25.0 percent in the second quarter of 2022. This decrease was primarily attributable to the impact of certain recurring favorable tax benefits (e.g. research and development income tax credit), whose amounts did not change materially year-over-year, having a more favorable impact on the tax rate due to the lower pre-tax income in the second quarter of 2023 versus the second quarter of 2022.

### Segment Results

*(Dollars in thousands)*

| Net Sales | For the Three Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Surfactants | $391,686 | $485,084 | $(93,398) | -19 |
| Polymers | 164,515 | 238,885 | (74,370) | -31 |
| Specialty Products | 23,774 | 27,664 | (3,890) | -14 |
| Total Net Sales | $579,975 | $751,633 | $(171,658) | -23 |

*(Dollars in thousands)*

| Operating Income | For the Three Months Ended June 30, 2023 | 2022 | Increase (Decrease) | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Surfactants | $15,140 | $48,249 | $(33,109) | -69 |
| Polymers | 16,321 | 33,912 | (17,591) | -52 |
| Specialty Products | 3,773 | 9,866 | (6,093) | -62 |
| Segment Operating Income | $35,234 | $92,027 | $(56,793) | -62 |
| Corporate Expenses, Excluding Deferred Compensation and Restructuring | $16,640 | $17,712 | $(1,072) | -6 |
| Deferred Compensation Expense (Income) | 743 | (3,406) | 4,149 | -122 |
| Business Restructuring | 42 | 81 | (39) | -48 |
| Total Operating Income | $17,809 | $77,640 | $(59,831) | -77 |

#### Surfactants

Surfactant net sales for the second quarter of 2023 decreased $93.4 million versus net sales for the second quarter of 2022. Sales volume declined 15 percent and negatively impacted the change in net sales by $72.1 million. Lower average selling prices negatively impacted the change in net sales by $24.4 million. The lower average selling prices were mainly attributable to declining raw material costs, less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation had a $3.1 million favorable impact on the year-over-year change in net sales. A comparison of net sales by region follows:

*(Dollars in thousands)*

| Net Sales | For the Three Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $231,477 | $278,310 | $(46,833) | -17 |
| Europe | 68,742 | 92,591 | (23,849) | -26 |
| Latin America | 78,217 | 97,987 | (19,770) | -20 |
| Asia | 13,250 | 16,196 | (2,946) | -18 |
| Total Surfactants Segment | $391,686 | $485,084 | $(93,398) | -19 |

24

Net sales for North American operations decreased $46.8 million, or 17 percent, year-over-year. Sales volume declined 19 percent and negatively impacted the change in net sales by $52.6 million. The lower sales volume was primarily due to lower demand for commodity laundry products, products sold into the personal care and agricultural end markets, along with continued customer and channel inventory destocking. In addition, the backward integration by one customer, associated with the low 1,4 dioxane transition, in the third quarter of 2022 also contributed to the year-over-year decline in sales volume. Higher average selling prices favorably impacted the change in net sales by $6.3 million whereas foreign currency translation negatively impacted the change in net sales by $0.5 million.

Net sales for European operations decreased $23.8 million, or 26 percent, primarily due to an 18 percent decreases in sales volume and lower average selling prices. These items negatively impacted the change in net sales by $16.9 million and $7.9 million, respectively. The lower sales volume was primarily due to lower demand for products sold into the consumer products end markets, mostly commodity laundry, the agricultural end market and to our distribution partners. The lower average selling prices were primarily due to declining raw material costs and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the change in net sales by $1.0 million. A weaker U.S. dollar relative to the European euro led to the favorable foreign currency translation effect.

Net sales for Latin American operations decreased $19.8 million, or 20 percent, primarily due to lower average selling prices and a four percent decrease in sales volume. These items negatively impacted the change in net sales by $19.6 million and $3.5 million, respectively. The lower average selling prices primarily reflect less favorable product mix, declining raw material costs and increased competitive activity within certain end-use markets. The lower sales volume was primarily due to a decline in demand for products sold into the agricultural end market. Foreign currency translation positively impacted the change in net sales by $3.3 million. A weaker U.S. dollar relative to the Mexican peso led to the favorable foreign currency translation effect.

Net sales for Asian operations decreased $2.9 million, or 18 percent, versus the prior year quarter. A nine percent decline in sales volume, lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $1.4 million, $0.8 million and $0.7 million, respectively.

Surfactant operating income for the second quarter of 2023 decreased $33.1 million, or 69 percent, versus operating income for the second quarter of 2022. Gross profit decreased $39.5 million, or 51 percent, and operating expenses decreased $6.4 million, or 22 percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

*(Dollars in thousands)*

| Gross Profit and Operating Income | For the Three Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $24,241 | $47,188 | $(22,947) | -49 |
| Europe | 5,066 | 11,620 | (6,554) | -56 |
| Latin America | 7,222 | 15,567 | (8,345) | -54 |
| Asia | 2,015 | 3,692 | (1,677) | -45 |
| Surfactants Segment Gross Profit | $38,544 | $78,067 | $(39,523) | -51 |
| Operating Expenses | 23,404 | 29,818 | (6,414) | -22 |
| Surfactants Segment Operating Income | $15,140 | $48,249 | $(33,109) | -69 |

Gross profit for North American operations decreased $22.9 million, or 49 percent, versus the prior year due to lower average unit margins and a 19 percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $14.0 million and $8.9 million, respectively. The lower average unit margins were primarily attributable to less favorable product mix, high-cost inventory carryover and increased competitive activity within certain end-use markets.

Gross profit for European operations decreased $6.6 million, or 56 percent, primarily due to lower average unit margins and an 18 percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $4.6 million and $2.1 million, respectively. The lower average unit margins primarily reflect less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the change in gross profit by $0.1 million.

Gross profit for Latin American operations decreased $8.3 million, or 54 percent, mostly due to lower average unit margins. These lower unit margins negatively impacted the change in gross profit by $8.0 million and primarily reflect a less favorable product mix, mostly due to lower demand for products sold into the agricultural end market, and increased competitive activity. A four percent decline in sales volume negatively impacted the year-over-year change in gross profit by $0.5 million. Foreign currency translation positively impacted the change in gross profit by $0.2 million.

Gross profit for Asia operations decreased $1.7 million, or 45 percent, due to lower average unit margins and a nine percent decline in sales volume. These items negatively impacted the change in gross profit by $1.4 million and $0.3 million, respectively.

Operating expenses for the Surfactant segment decreased $6.4 million, or 22 percent, in the second quarter of 2023 versus the second quarter of 2022. This decrease was mostly attributable to lower incentive-based compensation expenses in the second quarter of 2023 and the non-recurrence of a $1.0 million goodwill impairment charge at the Company's Philippines subsidiary in the second quarter of 2022.

#### Polymers

Polymer net sales for the second quarter of 2023 decreased $74.4 million, or 31 percent, versus net sales for the same period of 2022. A 29 percent decline in sales volume and lower average selling prices negatively impacted the change in net sales by $69.7 million and $6.0 million, respectively. Foreign currency translation had a $1.3 million favorable impact on the year-over-year change in net sales. A comparison of net sales by region follows:

*(Dollars in thousands)*

| Net Sales | For the Three Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $88,149 | $133,455 | $(45,306) | -34 |
| Europe | 65,896 | 94,424 | (28,528) | -30 |
| Asia and Other | 10,470 | 11,006 | (536) | -5 |
| Total Polymers Segment | $164,515 | $238,885 | $(74,370) | -31 |

Net sales for North American operations decreased $45.3 million, or 34 percent, primarily due to a 36 percent decrease in sales volume. The decline in sales volume negatively impacted the change in net sales by $47.6 million. Sales volume of polyols used in rigid foam applications decreased 35 percent year-over-year. Sales volume within the phthalic anhydride and specialty polyols businesses decreased 45 percent and 31 percent, respectively. The year-over-year decline in sales volume reflects continued customer and channel inventory destocking and reduced construction-related activities. Slightly higher average selling prices positively impacted the change in net sales by $2.3 million.

Net sales for European operations decreased $28.5 million, or 30 percent, year-over-year. A 26 percent decline in sales volume negatively impacted the change in net sales by $24.6 million. The decline in sales volume reflects customer and channel inventory destocking, reduced construction-related activities and customer share loss. Lower average selling prices negatively impacted the change in net sales by $5.9 million. The lower average selling prices were primarily due to the pass-through of lower raw material costs and increased competitive activity. Foreign currency translation had a positive $2.0 million impact on the year-over-year change in net sales. A weaker U.S. dollar relative to the Polish zloty led to the favorable foreign currency translation effect.

Net sales for Asia and Other operations decreased $0.5 million, or five percent, primarily due to lower average selling prices and the unfavorable impact of foreign currency translation. These items negatively impacted the year-over-year change in net sales by $0.7 million and $0.6 million, respectively. Sales volume increased eight percent and positively impacted the change in net sales by $0.8 million. The higher sales volume reflects the loosening of COVID lockdowns and restrictions in China.

Polymer operating income in the second quarter of 2023 decreased $17.6 million, or 52 percent, versus operating income in the second quarter of 2022. Gross profit decreased $19.5 million, or 46 percent and operating expenses decreased $1.9 million or 23 percent between years. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

*(Dollars in thousands)*

| Gross Profit and Operating Income | For the Three Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $12,417 | $25,787 | $(13,370) | -52 |
| Europe | 9,899 | 15,459 | (5,560) | -36 |
| Asia and Other | 551 | 1,118 | (567) | -51 |
| Polymers Segment Gross Profit | $22,867 | $42,364 | $(19,497) | -46 |
| Operating Expenses | 6,546 | 8,452 | (1,906) | -23 |
| Polymers Segment Operating Income | $16,321 | $33,912 | $(17,591) | -52 |

Gross profit for North American operations decreased $13.4 million, or 52 percent. This decrease was due to a 36 percent decline in sales volume and lower average unit margins. These items negatively impacted the change in gross profit by $9.2 million and $4.2 million, respectively. The lower average unit margins primarily reflect high-cost inventory carryover.

Gross profit for European operations decreased $5.6 million, or 36 percent, versus the second quarter of 2022. The decrease was primarily due to a 26 percent decline in sales volume and lower average unit margins. These items negatively impacted the year-over-year change in gross margins by $4.0 million and $1.8 million, respectively. The favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $0.2 million.

Gross profit for Asia and Other operations decreased $0.6 million, or 51 percent, primarily due to lower average unit margins which negatively impacted the change in gross profit by $0.6 million.

Operating expenses for the Polymers segment decreased $1.9 million, or 23 percent, in the second quarter of 2023 versus the second quarter of 2022. This decrease was mainly attributable to lower incentive-based compensation expenses.

#### Specialty Products

Specialty Products net sales for the second quarter of 2023 decreased $3.9 million, or 14 percent, versus net sales for the second quarter of 2022. This decrease reflects a 16 percent decline in sales volume that was partially offset by higher average selling prices. Gross profit and operating income decreased $6.4 million and $6.1 million, respectively, year-over-year. The year-over-year declines in gross profit and operating income were mostly attributable to the 16 percent decline in sales volume and lower unit margins within the medium chain triglycerides (MCT) product line. The lower unit margins were primarily due to high-cost inventory carryover.

#### Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $3.0 million between quarters. Corporate expenses were $17.4 million in the second quarter of 2023 versus $14.4 million in the second quarter of 2022. This year-over-year increase was primarily attributable to $4.1 million of higher deferred compensation expense, partially offset by lower incentive-based compensation expenses, in the second quarter of 2023.

The $4.1 million increase in deferred compensation expense was primarily due to a year-over-year increase in the market values of mutual fund investment assets held for the plans in the second quarter of 2023 versus a decrease in the second quarter of 2022. This increase was partially offset by a $7.47 per share decrease in the market price of Company common stock in the second quarter of 2023 compared to a $2.54 per share increase in the second quarter of 2022. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation income/expense for the three months ended June 30, 2023 and 2022:

|  | 2023 June 30 | March 31 | 2022 June 30 | March 31 |
| --- | ---: | ---: | ---: | ---: |
| Company Common Stock Price | $95.56 | $103.03 | $101.35 | $98.81 |

#### Six Months Ended June 30, 2023 and 2022

### Summary

Net income in the first half of 2023 decreased 70 percent to $28.8 million, or $1.25 per diluted share, from $96.9 million, or $4.19 per diluted share, in the first half of 2022. Adjusted net income decreased 70 percent to $28.5 million, or $1.24 per diluted share, from $93.7 million, or $4.05 per diluted share in the prior year (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). 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 2023 compared to the first half of 2022. A detailed discussion of segment operating performance for the first half of 2023 compared to the first half of 2022 follows the summary.

Consolidated net sales decreased $195.5 million, or 14 percent, year-over-year. Consolidated sales volume declined 17 percent and negatively impacted the year-over-year change in net sales by $239.7 million. Sales volume in the Surfactant, Polymer and Specialty Products segments decreased 14 percent, 24 percent and 12 percent, respectively. Foreign currency translation negatively impacted the year-over-year change in net sales by $8.0 million due to a stronger U.S. dollar against the majority of currencies where the Company has foreign operations. Higher average selling prices positively impacted the change in net sales by $52.2 million.

Operating income for the first half of 2023 decreased $102.1 million, or 72 percent, versus operating income for the first half of 2022. Surfactant, Polymer and Specialty Products operating income decreased $59.8 million, $21.7 million, and $7.3 million, respectively. Corporate expenses, including business restructuring and deferred compensation expenses, increased $13.3 million year-over-year. Most of this increase was attributable to a $13.2 million increase in deferred compensation expenses. Foreign currency translation had an $0.8 million unfavorable impact on operating income in the first half of 2023 versus the first half of 2022.

Operating expenses (including deferred compensation, business restructuring and goodwill impairment) increased $1.2 million, or one percent, between years. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

- Selling expenses decreased $6.7 million, or 22 percent, year-over-year primarily due to lower incentive-based compensation and bad debt provision expenses.
- Administrative expenses decreased $0.4 million, or one percent, year-over-year.
- R&D expenses decreased $3.9 million, or 12 percent, year-over-year primarily due to lower incentive-based compensation expenses.
- Deferred compensation expenses increased $13.2 million, year-over-year, primarily due to an increase in the market values of mutual fund investment assets held for the plans in the first half of 2023 versus a decrease in the first half of 2022. A $10.90 per share decrease in the market price of Company common stock in the first half of 2023 compared to a $22.94 per share decrease in the first half of 2022 also contributed to the year-over-year change. See the *Overview* and *Segment Results-Corporate Expenses* section of this MD&A for further details.
- Business restructuring expenses were $0.2 million in the first half of 2023 versus $0.1 million in the first half of 2022. The restructuring charges in both years relate to ongoing decommissioning costs associated with the Company’s Canadian plant closure.
- The Company recognized $1.0 million of goodwill impairment expense, related solely to its Philippines reporting unit, during the first half of 2022. The Company did not recognize any goodwill impairment charges during the first half of 2023. See Note 16, *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 2023 increased $1.7 million, or 33 percent, compared to net interest expense for the first half of 2022. This increase was primarily attributable to higher outstanding debt balances and higher interest rates on the revolving credit facility in 2023 versus 2022.

Other, net was $4.0 million of income for the first half of 2023 compared to $7.0 million of expense for the first half of 2022. The Company recognized $3.3 million of investment gains (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 2023 compared to $6.6 million of investment losses in the first half of 2022. In addition, the Company reported foreign exchange gains of $0.1 million in the first half of 2023 versus $1.2 million of foreign exchange losses in the first half of 2022. The Company also reported $0.1 million of lower net periodic pension income in the first half of 2023 versus the first half of 2022.

The Company’s effective tax rate was 20.4 percent in the first half of 2023 versus 24.8 percent in the first half of 2022. This decrease was primarily attributable to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first half of 2023 and the impact of certain recurring favorable tax benefits (e.g. research and development income tax credit), whose amounts did not change materially year-over-year, having a more favorable impact on the tax rate due to the lower pre-tax income in the first half of 2023 versus the first half of 2022.

*(In thousands)*

| Net Sales | For the Six Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Surfactants | $859,514 | $953,350 | $(93,836) | -10 |
| Polymers | 325,642 | 425,964 | (100,322) | -24 |
| Specialty Products | 46,255 | 47,595 | (1,340) | -3 |
| Total Net Sales | $1,231,411 | $1,426,909 | $(195,498) | -14 |

28

*(In thousands)*

| Operating Income | For the Six Months Ended June 30, 2023 | 2022 | Increase (Decrease) | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| Surfactants | $42,196 | $102,018 | $(59,822) | -59 |
| Polymers | 26,325 | 48,041 | (21,716) | -45 |
| Specialty Products | 6,302 | 13,561 | (7,259) | -54 |
| Segment Operating Income | $74,823 | $163,620 | $(88,797) | -54 |
| Corporate Expenses, Excluding Deferred Compensation and Restructuring | $33,513 | $33,408 | $105 | 0 |
| Deferred Compensation Expense (Income) | 2,245 | (10,907) | 13,152 | NM |
| Business Restructuring | 199 | 133 | 66 | 50 |
| Total Operating Income | $38,866 | $140,986 | $(102,120) | -72 |

### Segment Results

#### Surfactants

Surfactants net sales for the first half of 2023 decreased $93.8 million, or 10 percent, versus net sales for the first half of 2022. Sales volume declined 14 percent and negatively impacted the change in net sales by $133.8 million. Foreign currency translation had a $2.9 million unfavorable impact on the year-over-year change in net sales. Higher average selling prices positively impacted the change in net sales by $42.9 million. A year-over-year comparison of net sales by region follows:

*(In thousands)*

| Net Sales | For the Six Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $508,617 | $551,538 | $(42,921) | -8 |
| Europe | 159,861 | 183,608 | (23,747) | -13 |
| Latin America | 159,315 | 183,421 | (24,106) | -13 |
| Asia | 31,721 | 34,783 | (3,062) | -9 |
| Total Surfactants Segment | $859,514 | $953,350 | $(93,836) | -10 |

Net sales for North American operations decreased $42.9 million, or eight percent, year-over-year. An 18 percent decrease in sales volume negatively impacted the change in net sales by $100.4 million. The decrease in sales volume primarily reflects lower overall demand, customer and channel inventory destocking, and the backward integration by one customer, associated with the low 1,4 dioxane transition, in the third quarter of 2022. Higher average selling prices favorably impacted the change in net sales by $58.9 million and foreign currency translation negatively impacted the change in net sales by $1.4 million.

Net sales for European operations decreased $23.7 million, or 13 percent, year-over-year. A 13 percent decrease in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $24.3 million and $4.6 million, respectively. The lower sales volume was primarily due to lower demand for demand for products sold into the consumer products end markets, mostly commodity laundry products, the functional products and personal care end markets and to our distribution partners. A stronger U.S. dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect. Higher average selling prices positively impacted the year-over-year change in net sales by $5.2 million.

Net sales for Latin American operations decreased $24.1 million, or 13 percent, primarily due to lower average selling prices and a four percent decline in sales volume. These items negatively impacted the change in net sales by $21.5 million and $7.6 million, respectively. The lower average selling prices primarily reflect less favorable product mix and increased competitive activity within certain end-use markets. The lower sales volume was primarily due to lower demand for commodity laundry products within the consumer products business and lower demand for products sold into the agricultural end market. Foreign currency translation had a $5.0 million favorable impact on the change in net sales between years. A weaker U.S. dollar relative to the Mexican peso led to the favorable foreign currency translation effect.

Net sales for Asian operations decreased $3.1 million, or nine percent, year-over-year. A 13 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $4.6 million and $1.8 million, respectively. The decline in sales volume was primarily due to lower demand for products sold into the personal care and agricultural end markets. Higher average selling prices positively impacted the change in net sales by $3.3 million.

Surfactant operating income for the first half of 2023 decreased $59.8 million, or 59 percent, versus operating income for the first half of 2022. Gross profit decreased $68.7 million, or 43 percent, and operating expenses decreased $8.9 million, or 15 percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

*(In thousands)*

| Gross Profit and Operating Income | For the Six Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $59,454 | $100,356 | $(40,902) | -41 |
| Europe | 15,286 | 24,779 | (9,493) | -38 |
| Latin America | 14,394 | 28,706 | (14,312) | -50 |
| Asia | 2,298 | 6,333 | (4,035) | -64 |
| Surfactants Segment Gross Profit | $91,432 | $160,174 | $(68,742) | -43 |
| Operating Expenses | 49,236 | 58,156 | (8,920) | -15 |
| Surfactants Segment Operating Income | $42,196 | $102,018 | $(59,822) | -59 |

Gross profit for North American operations decreased $40.9 million, or 41 percent, versus the prior year primarily due to lower average unit margins and an 18 percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $22.5 million and $18.3 million, respectively. The lower average unit margins were mostly attributable to high-cost inventory carryover and increased competitive activity within certain end-use markets.

Gross profit for European operations decreased $9.5 million, or 38 percent, due to lower average unit margins, a 13 percent decline in sales volume and the unfavorable impact of foreign currency translation. These items negatively impacted the year-over-year change in gross profit by $5.7 million, $3.3 million and $0.5 million, respectively. The lower average unit margins primarily reflect less favorable product mix and increased competitive activity within certain end-use markets.

Gross profit for Latin American operations decreased $14.3 million, or 50 percent, primarily due to lower unit margins and a four percent decline in sales volume. These factors negatively impacted the change in gross profit by $13.3 million and $1.2 million, respectively. The lower unit margins primarily reflect a less favorable product mix, mostly due to lower demand for products sold into the agricultural end market, and increased competitive activity. The favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $0.2 million.

Gross profit for Asian operations decreased $4.0 million, or 64 percent, primarily due to lower average unit margins and a 13 percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $3.1 million and $0.8 million, respectively. Foreign currency translation negatively impacted the year-over-year change in gross profit by $0.1 million.

Operating expenses for the Surfactant segment decreased $8.9 million, or 15 percent, year-over-year. This decrease was mainly attributable to lower incentive-based compensation expenses in the second quarter of 2023 and the non-recurrence of a $1.0 million goodwill impairment charge at the Company's Philippines subsidiary in the second quarter of 2022.

#### Polymers

Polymers net sales for the first half of 2023 decreased $100.3 million, or 24 percent, versus net sales for the same period of 2022. A 24 percent decrease in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $103.1 million and $5.0 million, respectively. Higher average selling prices positively impacted the change in net sales by $7.8 million. A year-over-year comparison of net sales by region follows:

*(In thousands)*

| Net Sales | For the Six Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $169,318 | $228,311 | $(58,993) | -26 |
| Europe | 134,953 | 175,207 | (40,254) | -23 |
| Asia and Other | 21,371 | 22,446 | (1,075) | -5 |
| Total Polymers Segment | $325,642 | $425,964 | $(100,322) | -24 |

Net sales for North American operations decreased $59.0 million, or 26 percent, primarily due to a 31 percent decline in sales volume. The decline in sales volume negatively impacted the change in net sales by $70.8 million. Sales volume of polyols used in rigid foam applications decreased 33 percent year-over-year. Sales volume within the phthalic anhydride and specialty polyols businesses decreased 32 percent and 21 percent, respectively. The year-over-year decline in sales volume primarily reflects customer and channel inventory destocking and reduced construction-related activities. Higher average selling prices positively impacted the year-over-year change in net sales by $11.8 million.

Net sales for European operations decreased $40.3 million, or 23 percent, year-over-year. A 22 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $37.7 million and $3.6 million, respectively. The decline in sales volume reflects customer and channel inventory destocking, reduced construction-related activities and customer share loss. A stronger U.S. dollar relative to the Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect. Higher average selling prices favorably impacted the change in net sales by $1.0 million.

Net sales for Asia and Other operations decreased $1.1 million, or five percent, primarily due to a decline in average selling prices and the unfavorable impact of foreign currency translation. These items negatively impacted the year-over-year change in net sales by $2.3 million and $1.4 million, respectively. Sales volume increased 12 percent and positively impacted the year-over-year change in net sales by $2.6 million. The higher sales volume reflects the loosening of COVID lockdowns and restrictions in China.

Polymer operating income for the first half of 2023 decreased $21.7 million, or 45 percent, versus operating income for the first half of 2022. Gross profit decreased $24.5 million, or 38 percent, and operating expenses decreased $2.8 million, or 17 percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

*(In thousands)*

| Gross Profit and Operating Income | For the Six Months Ended June 30, 2023 | 2022 | Decrease | Percent Change |
| --- | ---: | ---: | ---: | ---: |
| North America | $18,561 | $34,067 | $(15,506) | -46 |
| Europe | 20,211 | 28,320 | (8,109) | -29 |
| Asia and Other | 1,418 | 2,289 | (871) | -38 |
| Polymers Segment Gross Profit | $40,190 | $64,676 | $(24,486) | -38 |
| Operating Expenses | 13,865 | 16,635 | (2,770) | -17 |
| Polymers Segment Operating Income | $26,325 | $48,041 | $(21,716) | -45 |

Gross profit for North American operations decreased $15.5 million, or 46 percent, due to a 31 percent decrease in sales volume and lower average unit margins. These items negatively impacted the change in gross profit by $10.6 million and $4.9 million, respectively. The lower average unit margins primarily reflect high-cost inventory carryover.

Gross profit for European operations decreased $8.1 million, or 29 percent, versus the first half of 2022. The decrease was primarily due to a 22 percent decrease in sales volume, lower average unit margins and the unfavorable impact of foreign currency translation. These items negatively impacted the change in gross profit by $6.1 million, $1.5 million and $0.5 million, respectively.

Gross profit for Asia and Other operations declined $0.9 million, or 38 percent, primarily due to lower average unit margins and the unfavorable impact of foreign currency translation. These items negatively impacted the change in gross profit by $1.0 million and $0.1 million, respectively. Sales volume increased 12 percent and positively impacted the change in gross profit by $0.2 million.

Operating expenses for the Polymers segment decreased $2.8 million, or 17 percent, year-over-year mainly due to lower incentive-based compensation expenses.

#### Specialty Products

Specialty Products net sales for the first half of 2023 decreased $1.3 million, or three percent, versus net sales for the first half of 2022. This decrease reflects a 12 percent decline in sales volume that was partially offset by higher average selling prices. Gross profit and operating income decreased $7.8 million and $7.3 million, respectively, year-over-year. The year-over-year declines in gross profit and operating income were mostly attributable to the 12 percent decline in sales volume and lower unit margins within the medium chain triglycerides (MCT) product line. The lower unit margins were primarily due to high-cost inventory carryover.

#### Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring, and other operating expenses that are not allocated to the reportable segments, increased $13.3 million between years. Corporate expenses were $35.9 million in the first half of 2023 versus $22.6 million in the first half of 2022. This year-over-year increase was primarily attributable to $13.2 million of higher deferred compensation expense, partially offset by lower incentive-based compensation expenses, in the first half of 2023.

The $13.2 million increase in deferred compensation expense was primarily due to an increase in the market values of mutual fund investment assets held for the plans in the first half of 2023 versus a decrease in the first half of 2022. A $10.90 per share decrease in the market price of Company common stock in the first half of 2023 compared to a $22.94 per share decrease in the second half of

2022 also contributed to the year-over-year change. 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, 2023 and 2022:

|  | 2023 June 30 | 2022 December 31 | June 30 | 2021 December 31 |
| --- | ---: | ---: | ---: | ---: |
| Company Common Stock Price | $95.56 | $106.46 | $101.35 | $124.29 |

#### LIQUIDITY AND CAPITAL RESOURCES

#### Overview

For the six months ended June 30, 2023, operating activities were a cash source of $35.8 million versus a cash source of $38.2 million for the comparable period in 2022. For the first six months of 2023, investing cash outflows totaled $158.2 million versus cash outflows of $126.3 million in the prior year period. Financing activities were a cash source of $78.0 million versus a cash source of $128.1 million in the prior year period.

Cash and cash equivalents, inclusive of a $4.7 million favorable foreign exchange rate impact, decreased $39.8 million compared to December 31, 2022. Cash in U.S. demand deposit accounts totaled $6.5 million and cash in U.S. money market funds totaled $26.8 million. The Company’s non-U.S. subsidiaries held $100.6 million of cash as of June 30, 2023.

#### Operating Activities

Net income during the first six months of 2023 decreased $68.1 million versus the comparable period in 2022. Working capital was a cash use of $33.2 million during the first six months of 2023 versus a cash use of $111.1 million in the comparable period in 2022.

Accounts receivable were a cash source of $22.8 million during the first six months of 2023 compared to a cash use of $111.1 million for the comparable period in 2022. Inventories were a cash source of $70.1 million in 2023 versus a cash use of $38.6 million in 2022. Accounts payable and accrued liabilities were a cash use of $116.5 million in 2023 compared to a cash source of $43.3 million for the same period in 2022.

Working capital requirements were lower in the first six months of 2023 compared to 2022 primarily due to the changes noted above. The change in accounts receivable working capital primarily reflects lower sales volume due to a reduction in demand across most end use markets along with extensive customer and channel inventory destocking. The change in inventories reflects lower quantities and unit costs in 2023. The change in accounts payable primarily reflects lower raw material quantities purchased during the first half of 2023 combined with lower raw material unit costs. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 2023.

#### Investing Activities

Cash used for investing activities increased $31.9 million year-over-year. Cash used for capital expenditures was $159.9 million in the first six months of 2023 versus $129.5 million in the same period of 2022. The higher capital spending in 2023 is largely attributable to the alkoxylation plant the Company is building at its Pasadena, Texas site.

For 2023, the Company estimates that total capital expenditures will be in the range of $240.0 million to $250.0 million. This projected spending includes the new alkoxylation plant that is being built in Pasadena, Texas, equipment upgrades to meet new regulatory limits on 1,4 Dioxane in the United States, growth initiatives, infrastructure and optimization spending in the United States and Mexico. The equipment upgrades to meet the new regulatory limits on 1,4 Dioxane were substantially complete as of June 30, 2023 and the new alkoxylation plant is expected to start up in mid-year 2024.

#### Financing Activities

Cash flow from financing activities was a source of $78.0 million in 2023 versus a source of $128.1 million in 2022. The year-over-year change was primarily due to a lower level of borrowings.

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 six months ended June 30, 2023, the Company did not purchase any shares of its common stock on the open market. At June 30, 2023, the Company had $125.1 million remaining under the share repurchase program authorized by its Board of Directors.

#### Debt and Credit Facilities

Consolidated balance sheet debt increased from $587.1 million on December 31, 2022 to $682.6 million on June 30, 2023, primarily due to higher domestic borrowings from the Company’s revolving credit facility. Net debt (which is defined as total debt minus cash – see the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) increased $135.4 million, from $413.3 million at December 31, 2022 to $548.7 million at June 30, 2023. This change reflects a debt increase of $95.5 million and a cash decrease of $39.9 million.

As of June 30, 2023, the ratio of net debt to net debt plus shareholders’ equity was 31.1 percent versus 26.2 percent at December 31, 2022 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details). On June 30, 2023, the Company’s debt included $383.6 million of unsecured notes, with maturities ranging from 2023 through 2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements, a $97.5 million delayed draw term loan borrowed pursuant to the Company's credit agreement, $196.5 million of short term loans borrowed under its revolving credit facility and $5.0 million of foreign credit line borrowings. The proceeds from the note issuances have been the Company’s primary source of long-term debt financing and are supplemented by borrowings under bank credit facilities to meet short and medium-term liquidity needs.

The Company's credit agreement with a syndicate of banks provides for credit facilities in an initial aggregate principal amount of $450.0 million, consisting of (a) a $350.0 million multi-currency revolving credit facility and (b) a $100.0 million delayed draw term loan credit facility, each of which matures on June 24, 2027. The Company maintains import letters of credit, and standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement. As of June 30, 2023, the Company had outstanding loans totaling $294.0 million, inclusive of a $97.5 million delayed draw term loan, and letters of credit totaling $11.3 million, under the credit agreement, with $142.2 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 June 30, 2023, the Company’s foreign subsidiaries had $5.0 million of outstanding debt.

The Company is subject to covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth. These debt covenants also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares. Under the most restrictive of these debt covenants:

1\. The Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, of 3.50 to 1.00, for the preceding four calendar quarters.

2\. The Company is required to maintain 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 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 June 30, 2023.

#### ENVIRONMENTAL AND LEGAL MATTERS

The Company’s operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first six months of 2023 and 2022, the Company’s expenditures for capital projects related to environmental matters were $4.4 million and $5.8 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 $18.0 million and $17.0 million for the six months ended June 30, 2023 and 2022, 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 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. 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 $24.0 million to $48.0 million at June 30, 2023 and $32.6 million to $56.4 million at December 31, 2022. 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 $24.0 million at June 30, 2023 and $32.6 million at December 31, 2022. This decrease primarily reflects payments for remediation work conducted at the Maywood, New Jersey site. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to environmental remediation and certain legal matters were $8.9 million for the six months ended June 30, 2023, compared to $1.1 million for the same period in 2022.

For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based on the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no material liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position. Certain of these matters are discussed in Item 1, Part 2, of the Company’s Annual Report on Form 10-K, Legal Proceedings, in this report and in other filings of the Company with the SEC, which are available upon request from the Company. See also Note 8, *Contingencies*, in the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for a summary of the significant environmental proceedings related to certain environmental sites.

#### OUTLOOK

Management believes the Company's second half 2023 sales volume and margins will incrementally improve versus the first half of 2023, driven by continued gradual recovery in Rigid Polyol demand, growth in Surfactant volumes associated with new contracted business and sequentially lower raw material costs. Management is implementing further cost control and cash management initiatives to supplement the headcount and discretionary expense controls that have been in place since the first quarter of 2023. Capital spending is projected to be significantly lower during the second half of the year, as spending on the Company's low 1,4 dioxane investments nears completion and lower capital outlays will be required to complete the Pasadena, Texas alkoxylation facility which is expected to be operational mid-year 2024. While management acknowledges the current environment has been challenging, it remains confident in the Company's long-term strategic growth and innovation initiatives.

#### CRITICAL ACCOUNTING POLICIES

There have been no material changes to the critical accounting policies disclosed in the Company’s 2022 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 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.

*(In millions, except per share amounts)*

|  | Three Months Ended June 30, 2023 Net Income | Diluted EPS | June 30, 2022 Net Income | Diluted EPS |
| --- | ---: | ---: | ---: | ---: |
| **Net Income Attributable to the Company as Reported** | **$12.7** | **$0.55** | **$52.1** | **$2.26** |
| Deferred Compensation (Income) Expense (including related investment activity) | (0.9) | (0.03) | 0.7 | 0.03 |
| Business Restructuring | 0.1 | — | 0.1 | — |
| Cash Settled Stock Appreciation Rights | (0.1) | — | 0.1 | — |
| Remediation Expenses | 0.1 | — | 0.3 | 0.01 |
| Cumulative Tax Effect on Above Adjustment Items | 0.2 | 0.01 | (0.3) | — |
| Adjusted Net Income | $12.1 | $0.53 | $53.0 | $2.30 |

*(In millions, except per share amounts)*

|  | Six Months Ended June 30, 2023 Net Income | Diluted EPS | June 30, 2022 Net Income | Diluted EPS |
| --- | ---: | ---: | ---: | ---: |
| **Net Income Attributable to the Company as Reported** | **$28.8** | **$1.25** | **$96.9** | **$4.19** |
| Deferred Compensation (Income) Expense (including related investment activity) | (1.0) | (0.04) | (4.5) | (0.20) |
| Business Restructuring | 0.2 | 0.01 | 0.1 | 0.01 |
| Cash Settled Stock Appreciation Rights | (0.1) | — | (0.4) | (0.02) |
| Remediation Expenses | 0.5 | 0.02 | 0.6 | 0.03 |
| Cumulative Tax Effect on Above Adjustment Items | 0.1 | — | 1.0 | 0.04 |
| Adjusted Net Income | $28.5 | $1.24 | $93.7 | $4.05 |

#### Reconciliation of Non-GAAP Net Debt

Management uses the non-GAAP net debt metric to gain a more complete picture of the Company’s overall liquidity, financial flexibility and leverage level.

*(In millions)*

|  | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Current Maturities of Long-Term Debt as Reported | $244.3 | $132.1 |
| Long-Term Debt as Reported | 438.3 | 455.0 |
| Total Debt as Reported | 682.6 | 587.1 |
| Less Cash and Cash Equivalents as Reported | (133.9) | (173.8) |
| Net Debt | $548.7 | $413.3 |
| Equity | $1,215.1 | $1,166.1 |
| Net Debt plus Equity | $1,763.8 | $1,579.4 |
| Net Debt/Net Debt plus Equity | 31% | 26% |

35

## Controls and procedures

As filed, 1,281 characters.

a. Evaluation of Disclosure Controls and Procedures

We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30, 2023. Based on this evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2023, such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

b. Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Aug 3, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-037671. Last ingested by Listed: Oct 28, 2026, 07:01 ET. No prices; not investment advice.