STEPAN COMPANY 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 aboutStepan 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 endedDecember 31, 2021 , including the risks and uncertainties related to the following:
• the impact of the COVID-19 pandemic;
• accidents, unplanned production shutdowns or disruptions in any of the
Company's manufacturing facilities;
• reduced demand for Company products due to customer product reformulations
or new technologies;
• the Company's inability to successfully develop or introduce new products;
• compliance with environmental, health and safety, product registration and
anti-corruption laws;
• the Company's ability to make acquisitions of suitable candidates and
successfully integrate acquisitions;
• global competition and the Company's ability to successfully compete;
• volatility of raw material, natural gas and electricity costs as well as
any disruption in their supply;
• disruptions in transportation or significant changes in transportation costs;
• downturns in certain industries and general economic downturns;
• international business risks, including fluctuations in currency exchange
rates, legal restrictions and taxes;
• unfavorable resolution of litigation against the Company;
• the Company's ability to keep and protect its intellectual property rights;
• potentially adverse tax consequences due to the international scope of the
Company's operations;
• downgrades to the Company's credit ratings or disruptions to the Company's
ability to access well-functioning capital markets;
• conflicts, military actions, terrorist attacks and general instability,
particularly in certain energy-producing nations, along with increased
security regulations;
• cost overruns, delays and miscalculations in capacity needs with respect to
the Company's expansion or other capital projects;
• interruption of, damage to or compromise of the Company's IT systems and
failure to maintain the integrity of customer, colleague or Company data;
• the Company's ability to retain its executive management and other keypersonnel;
• the Company's ability to operate within the limitations of debt covenants;
and
• the other factors set forth under "Risk Factors."
20-------------------------------------------------------------------------------- These factors are not necessarily all of the important factors that could cause the Company's actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors also could harm the Company's results. All forward-looking statements attributable to the Company or persons acting on the Company's behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements.
The "Company," "we," "our" or "us" means
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 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. Surfactants are manufactured at five sites inthe United States , two European sites (United Kingdom andFrance ), five Latin American sites (one site inColombia and two sites in each ofMexico andBrazil ) and two Asian sites (Philippines andSingapore ). Recent significant events include:
o In
Providence,
rhamnolipid-based bio-surfactant technology the Company acquired from Logos
Technologies in
the Company and the Company is focusing efforts to further develop,
integrate, produce and commercialize these unique surfactants moving
forward. Bio-surfactants, produced via fermentation, are attractive due to
their biodegradability, low toxicity, and in some cases, unique
antimicrobial properties. These bio-surfactants offer synergies in several
strategic end use markets including oilfield, agriculture, personal care
and household, industrial and institutional cleaning. The acquisition of
this industrial scale fermentation plant represents the latest step in the
Company's bio-surfactant commercialization efforts. See Note 17,
Acquisitions, of the notes to the Company's condensed consolidated
financial statements (included in Item 1 of this Form 10-Q) for additional
details.
Polymers - Polymers, which accounted for 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). 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. Inthe United States , polyurethane polyols are manufactured at the Company'sElwood, Illinois (Millsdale) andWilmington, 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'sColumbus, Georgia , site. InEurope , polyurethane polyols are manufactured at the Company's plants inGermany andthe Netherlands (see the INVISTA acquisition discussion below) and specialty polyols are manufactured at the Company'sPoland site. InAsia , polyurethane polyols and specialty polyols are manufactured at the Company'sChina plant. Recent significant events include:
o In
business and associated assets. Included in the transaction were two
manufacturing sites, one in Wilmington, North Carolina and the other in
Vlissingen, Netherlands , along with intellectual property, customerrelationships, inventory and working capital. This acquisition expanded the
Company's manufacturing capabilities in both
and enhanced the Company's business continuity capabilities for the market.
The Company believes that the facilities' available spare capacity,
combined with debottlenecking opportunities in both plants, will allow
Stepan to support future market growth in a capital efficient way. See Note
17, Acquisitions, of the notes to the Company's condensed consolidated
financial statements (included in Item 1 of this Form 10-Q) for additional
details.
Specialty Products - Specialty products, which accounted for three percent of consolidated net sales for the first 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'sMaywood, New Jersey , site and, in some instances, by third-party contractors. 21
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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:
Income (Expense)
For the Three Months
Ended June 30
(In millions) 2022 2021 Change
Deferred Compensation (Administrative
expenses) $ 3.4 $ (1.0 ) $ 4.4 (1)
Realized/Unrealized Gains (Losses) on
Investments (Other, net) (4.3 ) 2.2 (6.5 )
Investment Income (Other, net) 0.2 0.2 -
Pretax Income Effect $ (0.7 ) $ 1.4 $ (2.1 )
Income (Expense)
For the Six Months
Ended June 30
(In millions) 2022 2021 Change
Deferred Compensation (Administrative
expense) $ 10.9 $ (3.7 ) $ 14.6 (1)
Realized/Unrealized Gains (Losses) on
Investments (Other, net) (6.8 ) 2.6 (9.4 )
Investment Income (Other, net) 0.4 0.5 (0.1 )
Pretax Income Effect $ 4.5 $ (0.6 ) $ 5.1
(1) 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
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 intoU.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against theU.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 differentU.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 endedJune 30, 2022 and 2021: Three Months Ended June 30 (Decrease) Due to Foreign (In millions) 2022 2021 Increase Translation Net Sales$ 751.6 $ 595.5 $ 156.1 $ (25.6 ) Gross Profit 131.6 111.7 19.9 (3.5 ) Operating Income 77.6 56.7 20.9 (2.5 ) Pretax Income 69.5 57.8 11.7 (2.5 ) 22
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Six Months Ended
June 30
(Decrease)
Due to Foreign
(In millions) 2022 2021 Increase Translation
Net Sales $ 1,426.9 $ 1,133.3 $ 293.6 $ (37.3 )
Gross Profit 240.8 220.7 20.1 (5.2 )
Operating Income 141.0 110.6 30.4 (3.6 )
Pretax Income 128.9 111.0 17.9 (3.7 )
RESULTS OF OPERATIONS
Three Months Ended
Summary
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 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 strongerU.S. 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. 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
higher incentive-based compensation expenses.
• Administrative expenses were flat year-over-year.
• Research, development and technical service (R&D) expenses increased
million, or 11 percent, primarily due to higher incentive-based
compensation expenses.
• Deferred compensation expense decreased
decrease in the value of mutual fund investment assets held for the
plans. This decrease was partially offset by a
the market price of Company common stock in the second quarter of 2022
compared to a
the Overview and Segment Results-Corporate Expenses section of this MD&A
for further details.
• Business restructuring expenses were
quarter of 2022 and 2021. The restructuring costs in both years relate to
ongoing decommissioning costs associated with the Company's Canadian plant
closure.
•
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.
23--------------------------------------------------------------------------------
Net interest expense for the second quarter of 2022 increased
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
(Dollars in thousands) For the Three Months Ended
June 30, June 30, Percent
Net Sales 2022 2021 Increase Change
Surfactants $ 485,084 $ 384,002 $ 101,082 26
Polymers 238,885 190,538 48,347 25
Specialty Products 27,664 20,971 6,693 32
Total Net Sales $ 751,633 $ 595,511 $ 156,122 26
(Dollars in thousands) For the Three Months Ended
June 30, June 30, Increase Percent
Operating Income 2022 2021 (Decrease) Change
Surfactants $ 48,249 $ 45,896 $ 2,353 5
Polymers 33,912 23,025 10,887 47
Specialty Products 9,866 6,977 2,889 41
Segment Operating Income $ 92,027 $ 75,898 $ 16,129 21
Corporate Expenses, Excluding Deferred
Compensation
and Restructuring $ 17,712 $ 18,169 $ (457 ) -3
Deferred Compensation Expense (Income) (3,406 ) 958 (4,364 ) NM
Business Restructuring 81 114 (33 ) -29
Total Operating Income $ 77,640 $ 56,657 $ 20,983 37
Surfactants
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 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:
(Dollars in thousands) For the Three Months Ended
June 30, June 30, Increase Percent
Net Sales 2022 2021 (Decrease) Change
North America $ 278,310 $ 221,645 $ 56,665 26
Europe 92,591 65,339 27,252 42
Latin America 97,987 79,968 18,019 23
Asia 16,196 17,050
(854 ) -5
Total Surfactants Segment
24
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Net sales for North American operations increased $56.7 million , or 26 percent,
year over year. 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 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.
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. These items positively impacted the change in net
sales by $22.1 million and $2.0 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 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 higher average selling prices primarily reflect the
pass-through of higher raw material costs.
Surfactant operating income for the second quarter of 2022 increased
(Dollars in thousands) For the Three Months Ended
June 30, June 30, Increase Percent
Gross Profit and Operating Income 2022 2021 (Decrease) Change
North America $ 47,188 $ 44,412 $ 2,776 6
Europe 11,620 8,478 3,142 37
Latin America 15,567 17,330 (1,763 ) -10
Asia 3,692 2,837 855 30
Surfactants Segment Gross Profit $ 78,067 $ 73,057 $ 5,010 7
Operating Expenses 29,818 27,161 2,657 10
Surfactants Segment Operating Income
5
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 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 .
25
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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 31
percent decline in sales volume negatively impacted the change in gross profit
by $0.8 million . 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.
Polymers
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. Foreign currency translation had a$13.7 million unfavorable impact on the year-over-year change in net sales. A comparison of net sales by region follows: (Dollars in thousands) For the Three Months Ended June 30, June 30, Increase Percent Net Sales 2022 2021 (Decrease) Change North America$ 133,455 $ 95,591 $ 37,864 40 Europe 94,424 82,453 11,971 15 Asia and Other 11,006 12,494 (1,488 ) -12 Total Polymers Segment$ 238,885 $ 190,538 $ 48,347 25 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. 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 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 unfavorable impact of foreign currency translation negatively impacted the change in net sales by$13.6 million . A strongerU.S. dollar relative to the Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect. Net sales forAsia 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 inChina . 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$0.8 million , or 11 percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow: (Dollars in thousands) For the Three Months Ended June 30, June 30, Increase Percent Gross Profit and Operating Income 2022 2021 (Decrease) Change North America$ 25,787 $ 15,869 $ 9,918 62 Europe 15,459 13,314 2,145 16 Asia and Other 1,118 1,479 (361 ) -24 Polymers Segment Gross Profit$ 42,364 $ 30,662 $ 11,702 38 Operating Expenses 8,452 7,637 815 11
Polymers Segment Operating Income
Gross profit for North American operations increased
26--------------------------------------------------------------------------------
Gross profit for European operations increased
Gross profit forAsia 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
Specialty Products
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$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. 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$6.84 per share decrease in the second quarter of 2021. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation expenses for the three months endedJune 30, 2022 and 2021: 2022 2021 June 30 March 31 June 30 March 31 Company Common Stock Price$ 101.35 $ 98.81 $ 120.27 $ 127.11
Six Months Ended
Summary
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 strongerU.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. 27 -------------------------------------------------------------------------------- Operating expenses (including deferred compensation, business restructuring and goodwill impairment) decreased$10.2 million , or nine percent, between years. Changes in the individual income statement line items that comprise the Company's operating expenses were as follows:
• Selling expenses increased
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
primarily due to higher salaries and incentive-based compensation expenses.
• Deferred compensation expense decreased
primarily due to a decrease in the value of the mutual fund investment
assets held for the plans and a
price of Company common stock in the first half of 2022 compared to a
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
versus
in both years relate to ongoing decommissioning costs associated with the
Company's Canadian plant closure.
•
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
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$0.3 million higher of net periodic pension income in the first half of 2022 versus the first half of the prior year. The Company's effective tax rate was 24.8 percent in the first half of 2022 versus 24.4 percent in the first half of 2021. The year-over-year increase was primarily attributable to a less favorable geographical mix of income and less favorable tax benefits derived from stock-based compensation awards, exercised or distributed, in the first half of 2022 versus the first half of 2021. (In thousands) For the Six Months Ended June 30, June 30, Percent Net Sales 2022 2021 Increase Change Surfactants$ 953,350 $ 754,938 $ 198,412 26 Polymers 425,964 340,923 85,041 25 Specialty Products 47,595 37,390 10,205 27 Total Net Sales$ 1,426,909 $ 1,133,251 $ 293,658 26 (In thousands) For the Six Months Ended June 30, June 30, Increase Percent Operating Income 2022 2021 (Decrease) Change Surfactants$ 102,018 $ 99,106 $ 2,912 3 Polymers 48,041 40,976 7,065 17 Specialty Products 13,561 9,610 3,951 41 Segment Operating Income$ 163,620 $ 149,692 $ 13,928 9 Corporate Expenses, Excluding Deferred Compensation and Restructuring$ 33,408 $ 35,274 $ (1,866 ) -5 Deferred Compensation Expense (Income) (10,907 ) 3,652 (14,559 ) NM Business Restructuring 133 195 (62 ) Total Operating Income$ 140,986 $ 110,571 $ 30,415 28 28
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Segment Results Surfactants 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$14.6 million . A year-over-year comparison of net sales by region follows: (In thousands) For the Six Months Ended June 30, June 30, Increase Percent Net Sales 2022 2021 (Decrease) Change North America$ 551,538 $ 442,580 $ 108,958 25 Europe 183,608 136,433 47,175 35 Latin America 183,421 140,137 43,284 31 Asia 34,783 35,788 (1,005 ) -3 Total Surfactants Segment$ 953,350 $ 754,938 $ 198,412
26
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 strongerU.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 weakerU.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 . 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$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. 29 -------------------------------------------------------------------------------- Surfactant operating income for the first half of 2022 increased$2.9 million , or three percent, versus operating income for the first half of 2021. Gross profit increased$7.2 million , or five percent, and operating expenses increased$4.3 million , or eight percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow: (In thousands) For the Six Months Ended June 30, June 30, Increase Percent Gross Profit and Operating Income 2022 2021 (Decrease) Change North America$ 100,356 $ 98,468 $ 1,888 2 Europe 24,779 19,741 5,038 26 Latin America 28,706 29,627 (921 ) -3 Asia 6,333 5,104 1,229 24 Surfactants Segment Gross Profit$ 160,174 $ 152,940 $ 7,234 5 Operating Expenses 58,156 53,834 4,322 8
Surfactants Segment Operating Income
$ 2,912 3 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 strongerU.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
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'sPhilippines subsidiary and higher bad debt provision expense.
Polymers
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 ofJanuary 2021 . Foreign currency translation had a$19.1 million unfavorable impact on the year-over-year change in net sales. A year-over-year comparison of net sales by region follows: (In thousands) For the Six Months Ended June 30, June 30, Increase Percent Net Sales 2022 2021 (Decrease) Change North America$ 228,311 $ 166,469 $ 61,842 37 Europe 175,207 150,753 24,454 16 Asia and Other 22,446 23,701 (1,255 ) -5 Total Polymers Segment$ 425,964 $ 340,923 $ 85,041 25 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 aJanuary 2022 power outage at the Company'sElwood, Illinois (Millsdale) plant site that negatively impacted Polymer production. The production disruption resulted in the declaration of force majeure for select products. Production resumed inFebruary 2022 and the force majeure was lifted inApril 2022 . 30 -------------------------------------------------------------------------------- Net sales for European operations increased$24.5 million , or 16 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 ofJanuary 2021 . The unfavorable impact of foreign currency translation negatively impacted the change in net sales by$19.2 million . A strongerU.S. dollar relative to the Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect. Net sales forAsia 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 inChina . 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$1.4 million , or nine percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow: (In thousands) For the Six Months Ended June 30, June 30, Increase Percent Gross Profit and Operating Income 2022 2021 (Decrease) Change North America$ 34,067 $ 29,140 $ 4,927 17 Europe 28,320 24,310 4,010 16 Asia and Other 2,289 2,742 (453 ) -17 Polymers Segment Gross Profit$ 64,676 $ 56,192 $ 8,484 15 Operating Expenses 16,635 15,216 1,419 9
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 forAsia 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
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. 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$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 endedJune 30, 2022 and 2021: 31 --------------------------------------------------------------------------------
2022 2021 2020
June 30 December 31 June 30 December 31
Company Common Stock Price $ 101.35 $ 124.29 $ 120.27 $ 119.32 LIQUIDITY AND CAPITAL RESOURCES
Overview
For the six months endedJune 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$35.4 million compared toDecember 31, 2021 , inclusive of a$4.5 million unfavorable foreign exchange rate impact.
On
Operating Activity
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.
Investing Activity
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$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 itsPasadena, Texas site and equipment upgrades to meet future regulatory limits on 1,4 Dioxane inthe United States . 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 inPasadena, Texas , equipment upgrades to meet future regulatory limits on 1,4 Dioxane inthe United States , growth initiatives, infrastructure and optimization spending inthe United States ,Germany andMexico .
Financing Activity
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 six months of 2022 versus the same period in 2021. The Company purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and to mitigate the dilutive effect of new shares issued under its compensation plans. The Company may, from time to time, seek to purchase additional amounts of its outstanding equity and/or retire debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to plans meeting the requirements of Rule 10b5-1 promulgated by theSEC . 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 endedJune 30, 2022 , the Company purchased 167,940 shares of its common stock on the open market at a total cost of$17.0 million . AtJune 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 onDecember 31, 2021 to$526.0 million onJune 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- 32 -------------------------------------------------------------------------------- GAAP Net Debt" section of this MD&A) increased$127.0 million , from$204.4 million atDecember 31, 2021 to$331.4 million atJune 30, 2022 . This 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 repayments, higher working capital requirements and capital expenditures. As ofJune 30, 2022 , the ratio of net debt to net debt plus shareholders' equity was 22.7 percent versus 16.0 percent atDecember 31, 2021 (see the "Reconciliation of Non-GAAP Net Debt" section in this MD&A for further details). OnJune 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. OnMarch 1, 2022 , pursuant to a note purchase and master note agreement dated as ofJune 10, 2021 (the NYL note purchase agreement), the Company issued and sold$25.0 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-A, dueMarch 1, 2032 (the Series 2022-A Notes). In addition, onMarch 1, 2022 , pursuant to a note purchase and private shelf agreement dated as ofJune 10, 2021 (the Prudential note purchase agreement), the Company issued and sold$50.0 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-B, dueMarch 1, 2032 (the Series 2022-B Notes). The Series 2022-A Notes and the Series 2022-B Notes bear interest at a fixed rate of 2.83%, with interest to be paid semi-annually and with equal annual principal payments beginning onMarch 1, 2026 and continuing through final maturity onMarch 1, 2032 . The proceeds of the issuance of the Series 2022-A Notes and the Series 2022-B Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes. The NYL note purchase agreement and the Prudential note purchase agreement require the maintenance of certain financial ratios and covenants that are substantially similar to the Company's existing long-term debt and provide for customary events of default. OnJune 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 onJune 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 ofJune 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. AtJune 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. These agreements also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares. Under the most restrictive of these debt covenants: 1. The Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, of 3.50 to 1.00, for the preceding four calendar quarters.
2. The Company is required to maintain a maximum net leverage ratio, as defined
within the agreements, not to exceed 3.50 to 1.00.
3. The Company is required to maintain net worth of at least
4. The Company is permitted to pay dividends and purchase treasury shares after
income and cash proceeds of stock option exercises, measured cumulatively
beginning
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
33--------------------------------------------------------------------------------
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 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$17.0 million and$17.1 million for the six months endedJune 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 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$23.0 million to$42.6 million atJune 30, 2022 and$23.1 million to$41.7 million atDecember 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$23.0 million atJune 30, 2022 and$23.1 million atDecember 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$1.1 million for the six months endedJune 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. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company's share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company's financial position, cash flows and results of operations. Based upon the Company's present knowledge with respect to its involvement at these sites, the possibility of other viable entities' responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no 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 theSEC , 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. 34
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OUTLOOK
Management believes that demand for Surfactant products sold into the functional product end-markets, inclusive of agricultural and oilfield, should improve versus 2021. Management believes the Polymer segment will deliver growth versus 2021 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 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. 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.
Three Months Ended June 30
(In millions, except per share amounts) 2022 2021
Net Income Diluted EPS Net Income Diluted EPS
Net Income Attributable to the Company
as Reported $ 52.1 $ 2.26
$ -
Deferred Compensation Expense (Income)
Expense (including related investment
activity) 0.7 0.03 (1.4 ) (0.06 )
Business Restructuring 0.1 - 0.1 -
Cash Settled Stock Appreciation Rights 0.1 - (0.1 ) -
Environmental Remediation 0.3 0.02 - -
Cumulative Tax Effect on Above
Adjustment Items (0.3 ) (0.01 ) 0.3 0.02
Adjusted Net Income $ 53.0 $ 2.30 $ 42.2 $ 1.81
35
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Six Months Ended June 30
(In millions, except per share amounts) 2022 2021
Net Income Diluted EPS Net Income Diluted EPS
Net Income Attributable to the Company
as Reported $ 96.9 $ 4.19
$ -
Deferred Compensation Expense (Income)
Expense (including related investment
activity) (4.5 ) (0.20 ) 0.6 0.03
Business Restructuring 0.1 0.01 0.2 0.01
Cash Settled Stock Appreciation Rights (0.4 ) (0.02 ) 0.1 -
Environmental Remediation 0.6 0.03 - -
Cumulative Tax Effect on Above
Adjustment Items 1.0 0.04 (0.2 ) (0.01 )
Adjusted Net Income $ 93.7 $ 4.05 $ 84.6 $ 3.62 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.
June 30 , December
31,
(In millions) 2022 2021 Current Maturities of Long-Term Debt as Reported$ 142.5 $ 40.7 Long-Term Debt as Reported 383.5 322.9 Total Debt as Reported 526.0 363.6 Less Cash and Cash Equivalents as Reported (194.6 ) (159.2 ) Net Debt$ 331.4 $ 204.4 Equity$ 1,125.7 $ 1,074.2 Net Debt plus Equity$ 1,457.1 $ 1,278.6 Net Debt/(Net Debt plus Equity) 23 % 16 % 36
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