# STEPAN CO (SCL) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from STEPAN CO's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/94049/000095017024022778/scl-20231231.htm
Accession: 0000950170-24-022778
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SCL/
All MD&A years: /company/SCL/mda/
Previous year: /company/SCL/mda/fy2022/ (FY 2022)
Next year: /company/SCL/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the annual periods included in the accompanying consolidated financial statements.

Presentation of Information

The discussion that follows includes a comparison of the Company’s results of operations and liquidity and capital resources for the fiscal years ended December 31, 2022 and 2023. For a discussion of changes from the fiscal year ended December 31, 2021 to the fiscal year ended December 31, 2022, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (filed February 28, 2023).

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 69 percent of the Company’s consolidated net sales in 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 Brazil and Mexico) and two Asian sites (Philippines and Singapore). Recent significant events include:

•
On September 23, 2022, the Company completed the purchase of PerformanX Specialty Chemicals, LLC’s surfactant business and associated assets. Included in the transaction were intellectual property, customer relationships, inventory and working capital. This acquisition enhanced the Company’s specialty alkoxylates portfolio and provides market diversification opportunities. This acquisition is expected to deliver additional baseload volumes for the Company’s Pasadena, Texas alkoxylation facility that is expected to start up in the third quarter of 2024. See Note 20, Acquisitions, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

•
In February 2021, the Company completed the purchase of a fermentation plant, located in Lake Providence, Louisiana. The Company believes this plant complements the rhamnolipid-based bio-surfactant technology the Company acquired from Logos Technologies in March 2020. Fermentation is a new platform technology for the Company and the Company is focusing efforts to further develop, integrate, produce and commercialize these unique surfactants moving forward. Bio-surfactants, produced via fermentation, are attractive due to their biodegradability, low toxicity, and in some cases, unique antimicrobial properties. These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional cleaning. The acquisition of this industrial scale fermentation plant is a step in the Company’s bio-surfactant commercialization efforts. See Note 20, Acquisitions, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

Polymers - Polymers, which accounted for 28 percent of consolidated net sales in 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 Elwood, Illinois (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 Nanjing, China, plant. Recent significant events include:

•
In January 2021, the Company completed the purchase of INVISTA’s aromatic polyester polyol business and associated assets. Included in the transaction were two manufacturing sites, one in Wilmington, North Carolina and the other in Vlissingen, Netherlands along with intellectual property, customer relationships, inventory and working capital. This acquisition expanded the Company’s manufacturing capabilities in both the United States and Europe and enhanced the Company’s business continuity capabilities for the polymer market. The Company believes that available spare capacity, combined with

22

debottlenecking opportunities in both plants, allows Stepan to support future market growth in a capital efficient way. See Note 20, Acquisitions, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

Specialty Products – Specialty products, which accounted for three percent of consolidated net sales in 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.

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 deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following tables:

[[GREPCENT_TABLE]]
[["","","Income (Expense)"],["","","For the Year Ended December 31,"],["(In millions)","","2023","","","2022","","","Change"],["Deferred Compensation (Administrative expenses)","","$","(4.4",")","","$","9.4","","","$","(13.8",")","(1)"],["Investment Income (Other, net)","","","0.8","","","","1.7","","","","(0.9",")"],["Realized/Unrealized Gains (Losses) on Investments (Other, net)","","","4.3","","","","(8.0",")","","","12.3"],["Pretax Income Effect","","$","0.7","","","$","3.1","","","$","(2.4",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Income (Expense)"],["","","For the Year Ended December 31,"],["(In millions)","","2022","","","2021","","","Change"],["Deferred Compensation (Administrative expenses)","","$","9.4","","","$","(6.9",")","","$","16.3","","(1)"],["Investment Income (Other, net)","","","1.7","","","","2.8","","","","(1.1",")"],["Realized/Unrealized Gains on Investments (Other, net)","","","(8.0",")","","","2.1","","","","(10.1",")"],["Pretax Income Effect","","$","3.1","","","$","(2.0",")","","$","5.1"]]
[[/GREPCENT_TABLE]]

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

Below are the year-end Company common stock market prices used in the computation of deferred compensation income and expense:

[[GREPCENT_TABLE]]
[["","","December 31"],["","","2023","","","2022","","","2021","","","2020"],["Company Stock Price","","$","94.55","","","$","106.46","","","$","124.29","","","$","119.32"]]
[[/GREPCENT_TABLE]]

23

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 year-over-year comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar year-over-year local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following tables present the effects that foreign currency translation had on the year-over-year changes in consolidated net sales and various income statement line items for 2023 compared to 2022 and 2022 compared to 2021:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,","","","","","","Increase Due to Foreign"],["(In millions)","","2023","","","2022","","","Decrease","","","Currency Translation"],["Net Sales","","$","2,325.8","","","$","2,773.3","","","$","(447.5",")","","$","27.1"],["Gross Profit","","","277.6","","","","427.1","","","","(149.5",")","","","2.1"],["Operating Income","","","58.6","","","","207.3","","","","(148.7",")","","","0.6"],["Pretax Income","","","48.4","","","","188.7","","","","(140.3",")","","","0.2"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,","","","","","","Decrease Due to Foreign"],["(In millions)","","2022","","","2021","","","Increase","","","Currency Translation"],["Net Sales","","$","2,773.3","","","$","2,346.0","","","$","427.3","","","$","(95.4",")"],["Gross Profit","","","427.1","","","","395.8","","","","31.3","","","","(11.1",")"],["Operating Income","","","207.3","","","","170.8","","","","36.5","","","","(7.4",")"],["Pretax Income","","","188.7","","","","172.5","","","","16.2","","","","(7.2",")"]]
[[/GREPCENT_TABLE]]

Results of Operations

2023 Compared with 2022

Summary

Net income attributable to the Company in 2023 decreased 73 percent to $40.2 million, or $1.75 per diluted share, from $147.2 million, or $6.38 per diluted share in 2022. Adjusted net income was $50.7 million, or $2.21 per diluted share in 2023 versus $153.5 million, or $6.65 per diluted share in 2022 (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation of reported net income attributable to the Company and reported earnings per diluted share to 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 2023 compared to 2022. A detailed discussion of segment operating performance for 2023, compared to 2022, follows the summary.

Consolidated net sales decreased $447.5 million, or 16 percent, between years. Consolidated sales volume decreased 11 percent and negatively impacted the year-over-year change in net sales by $292.2 million. Sales volume in the Surfactant, Polymer and Specialty Products segments decreased nine, 15 and 19 percent, respectively. Lower average selling prices negatively impacted the year-over-year change in net sales by $182.4 million. Foreign currency translation favorably impacted the year-over-year change in net sales by $27.1 million, primarily due to a weaker U.S. dollar against the European euro, Mexican peso, Brazilian real and Polish zloty.

Operating income in 2023 decreased $148.7 million, or 72 percent, versus operating income in 2022. Surfactant, Polymer and Specialty Products operating income decreased $90.3 million, $22.1 million, and $18.4 million, respectively, year-over-year. Corporate expenses, including deferred compensation, business restructuring, and asset/goodwill/other intangibles impairment charges increased $17.8 million year-over-year. Most of this increase was attributable to $13.8 million of higher deferred compensation expense and a $12.7 million increase in business restructuring and asset/goodwill/other intangibles impairment expenses. Partially offsetting these increases was a $10.5 million reduction in environmental remediation reserve expenses year over year. Foreign currency translation had a $0.6 million positive impact on operating income year-over-year.

24

Operating expenses (including deferred compensation, business restructuring and asset/goodwill/other intangibles impairments) decreased $0.7 million, or less than one percent, year-over-year. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

•
Selling expenses decreased $10.7 million, or 18 percent, between years primarily due to lower salaries and incentive-based compensation expenses.

•
Administrative expenses decreased $9.0 million, or nine percent, year-over-year primarily due to lower environmental remediation reserve ($10.5 million) and incentive-based compensation expenses, partially offset by higher salaries. The higher environmental reserve expenses in 2022 primarily reflected revised remediation cost estimates for the Company’s Maywood, New Jersey site due to USEPA work plan approvals and the receipt of third-party contractor bids during the third quarter of 2022.

•
Research, development and technical service (R&D) expenses decreased $7.6 million, or 11 percent, year-over-year primarily due to lower incentive-based compensation expenses.

•
Deferred compensation expense increased $13.8 million, year-over-year, primarily due to an increase in the market values of mutual fund investment assets held for the plans in 2023 versus a decrease in 2022. An $11.91 per share decrease in the market price of Company common stock during 2023 compared to a $17.83 per share decrease in 2022 also contributed to the year-over-year change. See the Overview and Segment Results - Corporate Expenses sections of this MD&A for further details.

•
Business restructuring and asset impairment expenses were $12.0 million in 2023 versus $0.3 million in 2022. This $11.7 million year-over-year increase was primarily attributable to a $5.5 million restructuring reserve, recorded in the third quarter of 2023, associated with the Company’s voluntary early retirement offering to eligible employees and $2.9 million of restructuring expense, associated with workforce productivity measures, recognized in the fourth quarter of 2023. The Company also recognized $3.2 million of asset impairment charges in the fourth quarter of 2023. These asset impairment charges primarily relate to assets that are no longer in use and to the write-off of engineering costs associated with projects that the Company no longer deems viable. In addition, the Company recorded $0.4 million and $0.3 million of decommissioning costs associated with the Company’s Canadian plant closure during 2023 and 2022, respectively. See Note 22, Business Restructuring, Assets Impairment and Asset Disposition, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

•
Goodwill and other intangibles impairment expense was $2.0 million in 2023 versus $1.0 million in 2022. In 2023, the Company recognized $1.0 million of goodwill impairment expense related to its Colombia reporting unit and $1.0 million of goodwill and other intangibles impairment expense related to its Lipid Nutrition reporting unit. In 2022, the Company recognized $1.0 million of goodwill impairment expense related solely to its Philippines reporting unit. See Note 4, Goodwill and Other Intangible Assets, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

Net interest expense in 2023 increased $2.3 million, or 23 percent, versus the prior year. This increase was primarily attributable to higher outstanding debt balances in 2023 versus 2022 and higher interest rates on the Company’s revolving credit facility in 2023 versus 2022.

Other, net was $1.9 million of income in 2023 versus $8.8 million of expense in 2022. The Company recognized $5.2 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 2023 compared to $6.4 million of losses in 2022. In addition, the Company recognized $3.7 million of foreign exchange losses in 2023 versus $2.9 million of foreign exchange losses in 2022. The Company also recognized $0.4 million of net periodic pension and other retirement obligations income in 2023 versus $0.5 million of income in 2022.

The Company’s effective tax rate was 16.9 percent in 2023 versus 22.0 percent in 2022. This decrease was primarily attributable to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in 2023 and the impact of certain recurring tax benefits (e.g., the research and development income tax credit), the amounts of which did not change materially year-over-year, having a more favorable impact on the tax rate due to the lower pre-tax income in 2023 versus in 2022. See Note 9, Income Taxes, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for a reconciliation of the statutory U.S. federal income tax rate to the effective tax rate.

25

Segment Results

[[GREPCENT_TABLE]]
[["(In thousands)","","For the Year Ended December 31,"],["Net Sales","","2023","","","2022","","","Decrease","","","Percent Change"],["Surfactants","","$","1,602,819","","","$","1,882,745","","","$","(279,926",")","","","-15"],["Polymers","","","642,471","","","","789,080","","","","(146,609",")","","","-19"],["Specialty Products","","","80,478","","","","101,445","","","","(20,967",")","","","-21"],["Total Net Sales","","$","2,325,768","","","$","2,773,270","","","$","(447,502",")","","","-16"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(In thousands)","","For the Year Ended December 31,"],["Operating Income","","2023","","","2022","","","Increase (Decrease)","","","Percent Change"],["Surfactants","","$","72,399","","","$","162,746","","","$","(90,347",")","","","-56"],["Polymers","","","60,770","","","","82,897","","","","(22,127",")","","","-27"],["Specialty Products","","","11,476","","","","29,895","","","","(18,419",")","","","-62"],["Segment Operating Income","","$","144,645","","","$","275,538","","","$","(130,893",")","","","-48"],["Corporate Expenses, Excluding Deferred Compensation, Business Restructuring and Asset Impairment and Goodwill and Other Intangibles impairment","","","67,655","","","","77,287","","","","(9,632",")","","","-12"],["Deferred Compensation Expense (Income)","","","4,371","","","","(9,393",")","","","13,764","","","","-147"],["Business Restructuring and Asset Impairment and Goodwill and Other Intangibles Impairment","","","14,006","","","","308","","","","13,698","","","NM"],["Total Operating Income","","$","58,613","","","$","207,336","","","$","(148,723",")","","","-72"]]
[[/GREPCENT_TABLE]]

Surfactants

Surfactant net sales in 2023 decreased $280.0 million, or 15 percent, versus the prior year. Sales volume declined nine percent and negatively impacted the change in net sales by $169.8 million. The lower sales volume primarily reflects a slow down in demand across most end use markets and significant customer and channel inventory destocking. Lower average selling prices negatively impacted the change in net sales by $130.4 million. The lower average selling prices were primarily due to the pass-through of lower raw material costs, less favorable product mix and increased competitive pressure within certain end-use markets. Foreign currency translation had a $20.2 million favorable impact on the year-over-year change in net sales. A year-over-year comparison of net sales by region follows:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["(In thousands)","","2023","","","2022","","","Decrease","","","Percent Change"],["North America","","$","949,218","","","$","1,099,616","","","$","(150,398",")","","","-14"],["Europe","","","289,010","","","","349,651","","","","(60,641",")","","","-17"],["Latin America","","","304,870","","","","363,799","","","","(58,929",")","","","-16"],["Asia","","","59,721","","","","69,679","","","","(9,958",")","","","-14"],["Total Surfactants Segment","","$","1,602,819","","","$","1,882,745","","","$","(279,926",")","","","-15"]]
[[/GREPCENT_TABLE]]

Net sales for North American operations decreased $150.4 million, or 14 percent, between years. Sales volume declined 14 percent and negatively impacted the year-over-year change in net sales by $150.9 million. The lower sales volume primarily reflects a slow down in demand across most end markets and significant customer and channel destocking. Foreign currency translation negatively impacted the change in net sales by $1.7 million. Higher average selling prices favorably impacted the change in net sales by $2.2 million.

Net sales for European operations decreased $60.6 million, or 17 percent, year-over-year. An 11 percent decrease in sales volume and lower average selling prices negatively impacted the change in net sales by $37.1 million and $26.9 million, respectively. The lower sales volume was primarily due to lower demand for products sold within the consumer products and agricultural end markets. The lower average selling prices were primarily due to the pass-through of lower raw material costs, less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the year-over-year change in net sales by $3.4 million. A weaker U.S. dollar relative to the European euro led to the favorable foreign currency translation effect.

26

Net sales for Latin American operations decreased $58.9 million, or 16 percent, between years primarily due to lower average selling prices which negatively impacted the change in net sales by $91.0 million. The lower average selling prices were primarily due to less favorable product mix, the pass-through of lower raw material costs and increased competitive activity within certain end-use markets. Sales volume increased three percent and favorably impacted the change in net sales by $12.1 million. The higher sales volume primarily reflects higher demand within the consumer products end markets that was partially offset by lower demand within the agricultural end markets due to significant customer and channel inventory destocking. Foreign currency translation positively impacted the change in net sales by $20.0 million. A weaker U.S. dollar relative to the Mexican peso and Brazilian real led to the favorable foreign currency translation.

Net sales for Asian Surfactant operations decreased $10.0 million, or 14 percent, year-over-year. 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 $6.0 million, $2.5 million and $1.5 million, respectively. The decline in sales volume primarily reflects lower demand for products sold within the consumer products end markets that was partially offset by higher demand from our distribution partners.

Surfactant operating income for 2023 decreased $90.3 million, or 56 percent, versus operating income reported in 2022. Gross profit decreased $105.4 million, or 38 percent, and operating expenses decreased $15.1 million, or 13 percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["(In thousands)","","2023","","","2022","","","Decrease","","","Percent Change"],["Gross Profit and Operating Income"],["North America","","$","112,203","","","$","174,097","","","$","(61,894",")","","","-36"],["Europe","","","26,655","","","","41,349","","","","(14,694",")","","","-36"],["Latin America","","","25,232","","","","53,494","","","","(28,262",")","","","-53"],["Asia","","","7,267","","","","7,822","","","","(555",")","","","-7"],["Surfactants Segment Gross Profit","","$","171,357","","","$","276,762","","","$","(105,405",")","","","-38"],["Operating Expenses","","","98,958","","","","114,016","","","","(15,058",")","","","-13"],["Surfactants Segment Operating Income","","$","72,399","","","$","162,746","","","$","(90,347",")","","","-56"]]
[[/GREPCENT_TABLE]]

Gross profit for North American operations decreased $61.9 million, or 36 percent, primarily due to lower average unit margins and a 14 percent decrease in sales volume. These items negatively impacted the year-over-year change in gross profit by $37.9 million and $23.9 million, respectively. The lower average unit margins were mostly attributable to less favorable product mix and high-cost inventory carryover in 2023. Foreign currency translation negatively impacted the change in gross profit by $0.1 million.

Gross profit for European operations decreased $14.7 million, or 36 percent, primarily due to lower average unit margins and an 11 percent decrease in sales volume. These items negatively impacted the year-over-year change in gross profit by $10.6 million and $4.4 million, respectively. The lower average unit margins primarily reflect a less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the year-over-year change in gross profit by $0.3 million.

Gross profit for Latin American operations decreased $28.3 million, or 53 percent, primarily due to lower average unit margins which negatively impacted the year-over-year change in gross profit by $31.0 million. These lower average unit margins were primarily due to less favorable product mix, mostly due to lower demand for products sold into the agricultural end market, and increased competitive activity from imported products. A three percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $1.8 million and $0.9 million, respectively.

Gross profit for Asian Surfactant operations decreased $0.6 million, or seven percent, year-over-year. A nine percent decline in sales volume negatively impacted the change in gross profit by $0.7 million. Higher average unit margins favorably impacted the year-over-year change in gross profit by $0.1 million.

Operating expenses for the Surfactant segment decreased $15.1 million, or 13 percent, year-over-year. Most of this decrease was attributable to lower salaries and incentive-based compensation expenses.

27

Polymers

Polymer net sales in 2023 decreased $146.6 million, or 19 percent, versus the prior year. A 15 percent decrease in sales volume and lower average selling prices negatively impacted the year-over-year change in net sales by $114.5 million and $38.8 million, respectively. Foreign currency translation positively impacted the year-over-year change in net sales by $6.7 million. A year-over-year comparison of net sales by region follows:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["(In thousands)","","2023","","","2022","","","Decrease","","","Percent Change"],["North America","","$","338,979","","","$","437,312","","","$","(98,333",")","","","-22"],["Europe","","","259,491","","","","307,441","","","","(47,950",")","","","-16"],["Asia and Other","","","44,001","","","","44,327","","","","(326",")","","","-1"],["Total Polymers Segment","","$","642,471","","","$","789,080","","","$","(146,609",")","","","-19"]]
[[/GREPCENT_TABLE]]

Net sales for North American operations decreased $98.3 million, or 22 percent, primarily due to a 22 percent decline in sales volume which negatively impacted the change in net sales by $96.8 million. Sales volume of polyols used in rigid foam applications decreased 22 percent year-over-year. Sales volume within the phthalic anhydride and specialty polyols businesses decreased 31 percent and 13 percent, respectively. The year-over-year decline in sales volume primarily reflects customer and channel inventory destocking and reduced construction-related activities. Lower average selling prices negatively impacted the year-over-year change in net sales by $1.5 million.

Net sales for European Polymer operations decreased $48.0 million, or 16 percent, year-over-year. A 10 percent decrease in sales volume and lower average selling prices negatively impacted the change in net sales by $32.1 million and $24.7 million, respectively. The decline in sales volume reflects customer and channel inventory destocking, reduced construction-related activities and customer share loss. The lower average selling prices were primarily due to the pass-through of lower raw material costs and increased competitive activities. Favorable foreign currency translation positively impacted the change in net sales by $8.8 million. A weaker U.S. dollar relative to the Polish zloty led to the favorable foreign currency translation.

Net sales for Asian and Other operations decreased $0.3 million, or one percent. Lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $5.2 million and $2.2 million, respectively. A 16 percent increase in sales volume positively impacted the change in net sales by $7.1 million. The higher sales volume reflects the loosening of COVID lockdowns and restrictions in China during the early part of 2023.

Polymer operating income for 2023 decreased $22.1 million, or 27 percent, versus operating income for 2022. Gross profit decreased $25.9 million, or 23 percent, and operating expenses were down $3.8 million, or 12 percent, year-over-year. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["(In thousands)","","2023","","","2022","","","Increase (Decrease)","","","Percent Change"],["Gross Profit and Operating Income"],["North America","","$","45,012","","","$","63,768","","","$","(18,756",")","","","-29"],["Europe","","","39,373","","","","46,733","","","","(7,360",")","","","-16"],["Asia and Other","","","4,496","","","","4,286","","","","210","","","","5"],["Polymers Segment Gross Profit","","$","88,881","","","$","114,787","","","$","(25,906",")","","","-23"],["Operating Expenses","","","28,111","","","","31,890","","","","(3,779",")","","","-12"],["Polymers Segment Operating Income","","$","60,770","","","$","82,897","","","$","(22,127",")","","","-27"]]
[[/GREPCENT_TABLE]]

Gross profit for North American operations decreased $18.8 million, or 29 percent, due to a 22 percent decline in sales volume and lower average unit margins. These items negatively impacted the year-over-year change in gross profit by $14.1 million and $4.7 million, respectively. The lower unit margins primarily reflect high-cost inventory carryover in 2023.

Gross profit for European Polymer operations decreased $7.4 million, or 16 percent, year-over-year. This decrease was primarily due to a 10 percent decline in sales volume and lower average unit margins. These items negatively impacted the change in gross profit by $4.9 million and $3.7 million, respectively. The lower unit margins primarily reflect high-cost inventory carryover in 2023. Foreign currency translation positively impacted the year-over-year change in gross profit by $1.2 million.

28

Gross profit for Asia and Other operations increased $0.2 million, or five percent, primarily due to a 16 percent increase in sales volume, which positively impacted the year-over-year change in gross profit by $0.7 million. Lower average unit margins and the unfavorable impact of the foreign currency translation negatively impacted the year-over-year change in gross profit by $0.3 million and $0.2 million, respectively.

Operating expenses for the Polymers segment decreased $3.8 million, or 12 percent, year-over-year mainly due to lower salaries and incentive-based compensation expenses.

Specialty Products

Specialty Products net sales in 2023 decreased $21.0 million, or 21 percent, versus net sales in 2022. Gross profit and operating income decreased $19.3 million and $18.4 million, respectively, year-over-year. The year-over-year decline in net sales, gross profit and operating income were mostly attributable to a 19 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 raw material inventory and competitive pressures.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring, asset/goodwill/other intangibles impairment charges and other operating expenses that are not allocated to the reportable segments, increased $17.8 million between years. Corporate expenses were $86.0 million in 2023 versus $68.2 million in 2022. This increase was primarily attributable to $13.8 million of higher deferred compensation expense and a $12.7 million increase in business restructuring and asset/goodwill/other intangibles impairment expenses in 2023 versus 2022. Partially offsetting these increases was a $10.5 million reduction in environmental remediation reserve expenses year over year.

The $13.8 million increased in deferred compensation expense was primarily due to an increase in the market values of mutual fund investment assets held for the plans in 2023 versus a decrease in 2022. An $11.91 per share decrease in the market price of Company common stock during 2023 compared to a $17.83 per share decrease in 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 income/expense in 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","December 31"],["","","2023","","","2022","","","2021","","","2020"],["Company Stock Price","","$","94.55","","","$","106.46","","","$","124.29","","","$","119.32"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Overview

Historically, the Company’s principal sources of liquidity have included cash flows from operating activities, available cash and cash equivalents and the proceeds from debt issuance and borrowings under credit facilities. The Company’s principal uses of cash have included funding operating activities, capital investments and acquisitions. The Company’s generation of cash from operations, cash on hand, committed credit facilities and ability to access capital markets are expected to meet the Company’s short-term and long-term cash requirements for working capital, capital expenditures, debt maturities, contributions to pension plans, dividend distributions to stockholders, share repurchases and other needs.

For 2023, cash generated from operating activities was a cash source of $174.9 million versus a source of $160.8 million in 2022. For 2023, investing cash outflows were $258.7 million versus cash outflows of $308.1 million in 2022. Financing activities were a cash source of $33.3 million in 2023 versus a source of $166.2 million in 2022. Cash and cash equivalents decreased by $43.9 million compared to December 31, 2022, inclusive of a $6.6 million favorable foreign exchange rate impact.

As of December 31, 2023, the Company’s cash and cash equivalents totaled $129.8 million. Cash in U.S. demand deposit accounts and money market funds totaled $6.4 million and $15.1 million, respectively. The Company’s non-U.S. subsidiaries held $108.3 million of cash outside the United States as of December 31, 2023.

29

Operating Activities

Net income decreased by $106.9 million in 2023 versus the prior year. Working capital was a cash source of $13.4 million in 2023 versus a cash use of $75.7 million in 2022.

Accounts receivable were a cash source of $32.0 million in 2023 compared to a use of $26.2 million in 2022. Inventories were a cash source of $144.8 million in 2023 versus a use of $99.4 million in 2022. Accounts payable and accrued liabilities were a cash use of $158.9 million in 2023 compared to a source of $54.2 million in 2022.

Working capital requirements were lower in 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 2023 combined with lower raw material unit costs. It is management’s opinion that the Company’s liquidity is reasonably sufficient to provide for potential increases in working capital requirements during 2024.

Investing Activities

Cash used for investing activities decreased $49.4 million year-over-year. Cash used for capital expenditures was $260.3 million in 2023 versus $301.6 million in 2022. The year-over-year decrease was mainly due to lower capital expenditures in the U.S. for the advancement of the Company’s new alkoxylation plant in Pasadena, Texas. The Company is executing the last phase of its Pasadena, Texas alkoxylation investment, with the facility expected to start up in the third quarter of 2024.

For 2024, the Company estimates that total capital expenditures will be in the range of $120.0 million to $140.0 million. This projected spending includes expenditures associated with the completion of the new alkoxylation plant in Pasadena, Texas, along with growth, infrastructure and optimization initiatives.

Financing Activities

Cash flow from financing activities was a source of $33.3 million in 2023 versus a source of $166.2 million in 2022. The year-over-year change is primarily due to a lower level of borrowings under the Company’s revolving credit facility during 2023.

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. While the amounts involved may be material, such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. During the twelve months ended December 31, 2023, the Company did not purchase any shares of its common stock on the open market. At December 31, 2023, the Company had $125.1 million remaining for future repurchases 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 $654.1 million on December 31, 2023, primarily due to 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 by $110.9 million in 2023, from $413.4 million on December 31, 2022 to $524.3 million on December 31, 2023. This change reflects a debt increase of $67.0 million and a cash decrease of $43.9 million.

As of December 31, 2023, the ratio of net debt to net debt plus shareholders’ equity was 30.1 percent versus 26.2 percent as of December 31, 2022 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details). On December 31, 2023, the Company’s debt included $359.8 million of unsecured notes, with maturities ranging from 2024 through 2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the “Note Purchase Agreements”), a $95.0 million delayed-draw term loan borrowed pursuant to the Company’s credit agreement, $188.0 million of short-term loans borrowed under the Company’s revolving credit facility and $11.3 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.

30

On September 29, 2023, the Company entered into amendments to the Note Purchase Agreements (the NPA Amendments) to primarily provide additional covenant flexibility. The NPA Amendments, among other things, (i) amended the existing maximum net leverage ratio covenant; (ii) expanded the definition of “Qualified Cash”, a metric used to calculate the net leverage ratio, to include 65 percent of unrestricted and unencumbered foreign-based cash or permitted investments; and (iii) included a debt rating requirement and, to the extent the relevant notes are rated below investment grade, a rating fee of 0.75 percent per annum.

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 December 31, 2023, the Company had outstanding loans totaling $283.0 million, inclusive of a $95.0 million delayed draw term loan, and letters of credit totaling $10.9 million under the credit agreement, with $151.1 million remaining available.

On September 29, 2023, the Company entered into an amendment (the Amendment) to the Credit Agreement. The Amendment amends the Credit Agreement to, among other things, (i) provide for a maximum net leverage ratio on substantially the same terms as the corresponding covenant contained in the NPA Amendments; and (ii) expand the definition of “Qualified Cash”, to align with the definition of “Qualified Cash” included in the NPA Amendments.

The Company anticipates that cash from operations, committed credit facilities and cash on hand will be reasonably 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 December 31, 2023, the Company’s foreign subsidiaries had $11.3 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:

[[GREPCENT_TABLE]]
[["","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2.","The Company is required to maintain an existing maximum net leverage ratio, as defined within the agreements, not to exceed 4.00 to 1.00."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","3.","The Company is required to maintain net worth of at least $750.0 million."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","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 6, Debt, of the notes to the Company\u2019s consolidated financial statements (included in Item 8 of this Form 10-K)."]]
[[/GREPCENT_TABLE]]

The Company believes it was in compliance with the covenants under its material debt agreements as of December 31, 2023.

31

Material Cash Requirements

At December 31, 2023, the Company’s material cash requirements included the following contractual obligations (including estimated payments by period):

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["(In thousands)","","Total","","","Less than 1 year","","","1-3 years","","","3 \u2013 5 years","","","More than 5 years"],["Total debt obligations (1)","","$","655,041","","","$","252,898","","","$","135,894","","","$","180,535","","","$","85,714"],["Interest payments on debt obligations (2)","","","39,562","","","$","10,157","","","$","15,453","","","$","8,580","","","$","5,372"],["Operating lease obligations (3)","","","84,914","","","","16,105","","","","21,189","","","","13,065","","","","34,555"],["Purchase obligations (4)","","","4,535","","","","4,125","","","","410","","","","\u2014","","","","\u2014"],["Other (5)","","","68,691","","","","30,564","","","","20,988","","","","5,357","","","","11,782"],["Total","","$","852,743","","","$","313,849","","","$","193,934","","","$","207,537","","","$","137,423"]]
[[/GREPCENT_TABLE]]

(1)
Excludes unamortized debt issuance costs of $0.9 million.

(2)
Interest payments on debt obligations represent interest on all Company debt at December 31, 2023. Future interest rates may change, and, therefore, actual interest payments could differ from those disclosed in the above table.

(3)
The majority of operating lease obligations consist of railcar and real estate leases.

(4)
Purchase obligations consist of raw material, utility and telecommunication service purchases made in the normal course of business.

(5)
The “Other” category comprises deferred revenues that represent commitments to deliver products, expected 2024 required contributions to the Company’s funded defined benefit pension plans, estimated payments related to the Company’s unfunded defined benefit supplemental executive and outside director pension plans, estimated payments (undiscounted) related to the Company’s asset retirement obligations, environmental remediation payments for which amounts and periods can be reasonably estimated and income tax liabilities for which payments and periods can be reasonably estimated, payments related to the Company’s voluntary early retirement plan and involuntary retirement plan.

The above table does not include $32.5 million of other non-current liabilities recorded on the balance sheet at December 31, 2023, as summarized in Note 15, Other Non-Current Liabilities, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K). The significant non-current liabilities excluded from the table are defined benefit pension, deferred compensation, environmental and legal liabilities and unrecognized tax benefits for which payment periods cannot be reasonably determined. In addition, deferred income tax liabilities are excluded from the table due to the uncertainty of their timing.

During the periods covered by this Form 10-K, the Company was not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.

Pension Plans

The Company sponsors a number of defined benefit pension plans, the most significant of which cover employees in the Company’s U.S. and U.K. locations. The U.S. and U.K. plans are frozen, and service benefit accruals are no longer being made. The overfunded status (pretax) of the Company’s U.S and U.K. defined benefit pension plans was $8.5 million at December 31, 2023, versus overfunded status (pretax) of $8.2 million at December 31, 2022. See Note 13, Postretirement Benefit Plans, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

The Company contributed $0.7 million to its U.S. and U.K. defined benefit plans in 2023. In 2024, the Company does not expect to contribute to the U.K. defined benefit plan. As a result of pension funding relief included in the Highway and Transportation Funding Act of 2014, the Company has no 2024 contribution requirement to the U.S. qualified defined benefit plans. The company expects to contribute $0.3 million in 2024 to the unfunded non-qualified U.S. pension plans.

Letters of Credit

The Company maintains standby letters of credit under its workers’ compensation insurance agreements and for other purposes as needed. The insurance letters of credit are renewed annually and amended to the amounts required by the insurance agreements. As of December 31, 2023, the Company had a total of $10.9 million of outstanding standby letters of credit.

32

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 2023, the Company’s expenditures for capital projects related to environmental matters were $8.5 million. 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 $38.3 million for 2023, $37.2 million for 2022 and $34.9 million for 2021.

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, the Company is from time to time involved in routine legal proceedings incidental to the conduct of its business, including personal injury, property damage, tax, trade and labor matters. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these claims. It is the Company’s accounting policy to record liabilities when environmental assessments, remediation expenses or legal proceeding losses 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 environmental 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 from $20.6 million to $49.4 million at December 31, 2023, compared to $32.6 million to $56.4 million at December 31, 2022. Within the range of possible environmental and legal 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. The Company’s environmental and legal accruals totaled $20.6 million at December 31, 2023 as compared to $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. During 2023, cash expenditures related to environmental remediation and certain other legal matters approximated $13.2 million compared to $2.3 million in 2022. The majority of the increase in cash expenditures relates to remediation costs at the Company’s Maywood, New Jersey site.

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.

See Item 3. Legal Proceedings, in this Form 10-K and Note 16, Contingencies, in the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for a summary of the significant environmental proceedings related to certain environmental sites.

Outlook

Management believes sales volumes and margins will improve in 2024 due to continued recovery in Rigid Polyols demand, growth in Surfactant sales volumes driven by contracted business along with the expected recovery of the agricultural business in the second half of the year, and lower raw material costs across the business versus 2023. Management believes its previously shared cost reduction activities to deliver $50 million in pre-tax savings in 2024 will help offset inflationary pressures, increased expenses associated with the commissioning of the Company’s new Pasadena alkoxylation assets and higher incentive-based compensation expenses. The cost reduction activities are centered around the workforce productivity actions already taken and on focused programs to improve operational performance across the Company’s manufacturing network. Management believes continued market recovery, execution of the Company’s strategic initiatives, and the aforementioned cost reductions, should position the Company to deliver adjusted EBITDA growth and positive free cash flow in 2024. Management remains confident in the Company’s long-term growth and innovation initiatives.

33

Climate Change Legislation

Based on currently available information, the Company does not believe that existing or pending climate change legislation or regulation is reasonably likely to have a material effect on the Company’s financial position, results of operations or cash flows.

Critical Accounting Estimates and Policies

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles or GAAP). Preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses at the date of the financial statements and to provide disclosures of contingent assets, liabilities and related amounts of revenues and expenses during the reporting period. The following is a summary of the accounting policies the Company believes are the most important to aid in understanding its financial results:

Environmental Liabilities

It is the Company’s accounting policy to record environmental 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 a range of possible costs is a better estimate than any other amount, the minimum amount in the range 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 discussions with and decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, and remedial action plans developed.

Estimates for environmental liabilities are subject to potentially significant fluctuations as new facts emerge related to the various sites where the Company is exposed to liability for the remediation of environmental contamination. See the Environmental and Legal Matters section of this MD&A for discussion of the Company’s recorded liabilities and range of cost estimates.

Goodwill

The Company’s intangible assets include goodwill acquired as part of business or product line acquisitions. Goodwill represents the excess of cost over the fair value of net assets acquired in a business combination. Goodwill is not amortized but is tested for impairment on a reporting unit level. The Company’s reporting units are typically defined as one level below operating segments and highly correlated to geographic regions. The Company tests goodwill for impairment annually (the Company conducts its goodwill impairment testing during the second quarter of each calendar year), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of the reporting unit to which goodwill relates has declined below its carrying value. In this case, the Company would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. Goodwill is evaluated for impairment using qualitative and/or quantitative testing procedures. The Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company chooses not to complete a qualitative assessment for a given reporting unit, or if the initial assessment indicates that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed.

When estimating a reporting unit’s fair value as part of the quantitative assessment, the Company uses a combination of market and income-based methodologies. The market approach uses a combination of earnings before interest, taxes, depreciation and amortization (EBITDA) and EBITDA multiples to estimate a reporting unit’s fair value. EBITDA multiples typically mirror similar businesses or comparative companies whose securities are actively traded in public markets. Significant degradation of either EBITDA or EBITDA multiples could result in a triggering event, requiring goodwill to be tested for impairment during an interim period. The income approach takes into consideration multiple variables, including forecasted sales volume and operating income, current industry and economic conditions, historical results and other elements to calculate the present value of future cash flows. The income approach fair value calculations include estimates of long-term growth rates and discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units. The Company reported goodwill and other intangible assets impairment expenses during 2023 and goodwill impairment expenses during 2022. See Note 4, Goodwill and Other Intangible Assets, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional information.

At December 31, 2023, the Company conducted additional goodwill testing for its Mexico reporting unit due to a decline in earnings. The decline in earnings was primarily due to a slow down in demand and significant customer and channel inventory destocking. At December 31, 2023, the goodwill related to the Mexico reporting unit was $6.7 million. The Company used both market and income-based methodologies to assess the fair value of its Mexico reporting unit. Both approaches required the Company to make significant economic-related assumptions. Based on the Company’s testing, the fair value of the Mexico reporting units was greater

34

than its carrying value, and as a result, the Company did not record any impairment charge as of December 31, 2023. The Company performed a sensitivity analysis on certain assumptions used in the valuation of its Mexico reporting unit as the fair value was not significantly in excess of the carrying value. Holding all other assumptions constant, a 100 basis point increase in the discount rate would not result in impairment nor would a 1.5 decrease in the multiple used in the market-based computation result in an impairment.

Recent Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for information on recent accounting pronouncements which affect the Company.

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. Management uses these non-GAAP financial measures to assist in analyzing what management views as the Company’s core operating performance for purposes of business decision making. Management believes that presenting these non-GAAP financial measures provides investors with useful supplemental information because they (i) provide meaningful supplemental information regarding financial performance by excluding items affective comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions and evaluate the Company’s core operating performance across periods, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating the Company’s financial results. In addition, the Company believes that the presentation of these non-GAAP financial measures, when considered together with the most directly comparable GAAP financial measures and the reconciliations to those GAAP financial measures, provides investors with additional tools to understand the factors and trends affective the Company’s underlying business than could be obtained absent these disclosures. These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP and there are limitations to using non-GAAP financial measures. For example, the non-GAAP financial measures presented in this Form 10-K may differ from similarly titled non-GAAP financial measures presented by other companies and other companies may not define these non-GAAP financial measures the same way as the Company does.

Reconciliations of Non-GAAP Adjusted Net Income and Dilutive 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 transactions occurred.

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31"],["","","2023","","","2022","","","2021"],["(In millions, except per share amounts)","","Net Income","","","Diluted EPS","","","Net Income","","","Diluted EPS","","","Net Income","","","Diluted EPS"],["Net Income Attributable to the Company as Reported","","$","40.2","","","$","1.75","","","$","147.2","","","$","6.38","","","$","137.8","","","$","5.92"],["Deferred Compensation (Income) Expense (including related investment activity)","","","(0.7",")","","","(0.03",")","","","(3.1",")","","","(0.14",")","","","2.0","","","","0.08"],["Business Restructuring/Asset Impairment Expense and Loss on Asset Disposition","","","12.0","","","","0.52","","","","0.3","","","","0.01","","","","3.3","","","","0.14"],["Goodwill and Other Intangibles Impairment Expense","","","2.0","","","","0.09","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Cash Settled Stock Appreciation Rights","","","(0.1",")","","","\u2014","","","","(0.4",")","","","(0.01",")","","","0.2","","","","0.01"],["Environmental Remediation Expenses","","","1.0","","","","0.04","","","","11.5","","","","0.50","","","","2.0","","","","0.08"],["Cumulative Tax Effect on Above Adjustment Items","","","(3.7",")","","","(0.16",")","","","(2.0",")","","","(0.09",")","","","(1.8",")","","","(0.07",")"],["Adjusted Net Income","","$","50.7","","","$","2.21","","","$","153.5","","","$","6.65","","","$","143.5","","","$","6.16"]]
[[/GREPCENT_TABLE]]

35

Reconciliations of Non-GAAP Net Debt

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

[[GREPCENT_TABLE]]
[["","","December 31"],["(In millions)","","2023","","","2022"],["Current Maturities of Long-Term Debt as Reported","","$","252.9","","","$","132.1"],["Long-Term Debt as Reported","","$","401.2","","","$","455.0"],["Total Debt as Reported","","$","654.1","","","$","587.1"],["Less Cash and Cash Equivalents as Reported","","$","(129.8",")","","$","(173.8",")"],["Net Debt","","$","524.3","","","$","413.3"],["Equity","","$","1,216.5","","","$","1,166.1"],["Net Debt plus Equity","","$","1,740.8","","","$","1,579.4"],["Net Debt/Net Debt plus Equity","","","30","%","","","26","%"]]
[[/GREPCENT_TABLE]]

36