What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-27 · 338 added, 314 removed, 370 unchanged (64% of the section changed)

2 unchanged sentences

The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide.

The overall business comprises three reportable segments:

Surfactants – Surfactants, which accounted for 68 percent of the Company’s consolidated net sales in 2019, are principal ingredients in consumer and industrial cleaning 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, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites.

Surfactants are manufactured at five U.S.

sites, two European sites (United Kingdom and France), five Latin American sites (Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines and Singapore).

The overall business is comprised of three reportable segments:

Surfactants - Surfactants, which accounted for 72 percent of the Company’s consolidated net sales in 2020, 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 Surfactants events include:

During January 2019, the Company’s plant in Ecatepec, Mexico experienced a sulfonation equipment failure that contributed to an operating loss at the site in 2019.

The Ecatepec facility is now fully operational and, in December 2019, the Company received insurance recovery proceeds for damaged equipment, incremental supply chain expenses and business interruption.

This plant, and a portion of its related surfactant business, was acquired from BASF in March 2018 (see Note 21, Acquisitions and Note 24, Insurance Recovery for additional details).

On January 19, 2020, the Company experienced a power disruption that impacted its Millsdale, Illinois facility.

This power outage, combined with below freezing temperatures, led to significant production and operational challenges that impacted both Surfactants and Polymers produced at the site.

The Millsdale facility operated on a partial basis and used existing inventories to serve the Company’s customers.

However, on February 17, 2020, power outage-related operational issues impacted the Millsdale site’s waste water treatment plant (WWTP) and forced the Company to stop production at the site.

As a result, the Company declared force majeure for the supply of phthalic anhydride (Polymers) and certain surfactant product lines.

All production lines were fully operational prior to the end of the first quarter of 2020.

These operational issues negatively impacted the Company’s 2020 earnings.

The Company finalized an insurance settlement related to this power outage during 2020 and recognized $18.0 million of pre-tax insurance recovery.

This insurance recovery was recognized as a reduction of expenses within cost of sales.

The Surfactant and Polymer segments recognized $5.2 million and $12.8 million, respectively, of the insurance settlement.

All expenses, business interruptions and insurance recoveries associated with the Millsdale power outage were recorded in the full year 2020.

In September 2020 the Company, through its subsidiaries in Mexico, acquired Clariant (Mexico) S.A.

de C.V.’s (Clariant) anionic surfactant business located in Santa Clara, Mexico.

The acquisition did not include the purchase of a manufacturing site.

The business acquired is being integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec).

This acquisition supports the Company’s growth strategy in Latin America and the Company believes the acquisition will enhance its ability to support customer growth in the Mexican consumer and functional surfactant markets (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 March 2020, the Company acquired certain assets of Logos Technologies LLC's NatSurFact® business, a rhamnolipid-based line of bio-surfactants derived from renewable sources.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care, and household, industrial and institutional.

The Company is focusing efforts to further develop, integrate and commercialize these unique surfactants moving forward.

The Company believes the rhamnolipid technology will further advance the growth and sustainability aspirations of both the Company and its customers (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 acquired a fermentation plant, located in Lake Providence, Louisiana.

The Company believes this plant complements the rhamnolipid-based bio-surfactant technology the Company acquired from Logos Technologies in March 2020.

Fermentation is a new platform technology for the Company and the Company is focusing efforts to further develop, integrate, produce and commercialize these unique surfactants moving forward.

Bio-surfactants, produced via fermentation, are attractive due to their biodegradability, low toxicity, and in some cases, unique antimicrobial properties.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional.

The acquisition of this industrial scale fermentation plant represents the latest step in the Company’s bio-surfactant commercialization efforts (see Note 26, Subsequent Events , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details).

In December 2019 , the Company acquired an oilfield demulsifier product line.

The Company believes this acquisition will accelerate its strategy to diversify into additional application segments within the oilfield markets.

The acquired business did not impact the Company’s 2019 financial results nor is it expected to be accretive to earnings in 2020 (see Note 21, Acquisitions , for additional details)

The Company believes this acquisition will accelerate its strategy to diversify into additional application segments within the oilfield end markets.

The acquired business did not impact the Company’s 2019 financial results and had a m inimal impact on 2020 financial results (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 ).

During the fourth quarter of 2018, the Company shut down Surfactant operations at its plant site in Germany.

The Company ceased Surfactant production at this site to further reduce its fixed cost base, refocus Surfactant resources on higher margin end markets and allow for select assets to be repurposed to support future polyol growth.

Decommissioning costs associated with the shutdown were incurred throughout 2019 (see Note 23, Business Restructuring , for additional details).

In 2016, the Company shut down its production facility in Canada, moving the production of goods previously manufactured in Canada to other Company North American production sites.

Manufacturing operations at the facility ceased in the fourth quarter of 2016, but decommissioning activities have been ongoing since 2017 and will continue throughout 2020 (see Note 23, Business Restructuring , for additional details).

Decommissioning costs associated with the shutdown were incurred in 2019 and during the first half of 2020 (see Note 22, Business Restructuring , 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 24 percent of consolidated net sales in 2020, include polyurethane polyols, polyester resins and phthalic anhydride.

6 unchanged sentences

In Europe, polyurethane polyols are manufactured by the Company’s subsidiary in Germany, and specialty polyols are manufactured by the Company’s Poland subsidiary.

In China, polyurethane polyols and specialty polyols are manufactured at the Company’s Nanjing, China, manufacturing plant.

In China, polyurethane polyols and specialty polyols are manufactured at the Company’s Nanjing, China, plant.

Additional manufacturing sites were acquired in 2021 as part of the INVISTA polyol acquisition described below.

Recent significant Polymers events include:

The operational issues at the Company’s Millsdale, Illinois facility, described in the Surfactants significant events paragraph above, negatively impacted Polymers earnings during the year.

The Polymers segment recognized a $12.8 million insurance recovery related to the Millsdale incident in 2020 (see above).

In January 2021, the Company purchased INVISTA’s aromatic polyester polyol business and associated assets.

Included in the transaction were two manufacturing sites, one in Wilmington, North Carolina and the other in Vlissingen, Netherlands along with intellectual property, customer relationships, inventory and working capital.

This acquisition expands the Company’s manufacturing capabilities in both the United States and Europe and enhances the Company’s business continuity capabilities for the market.

The Company believes that INVISTA’s 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 26, Subsequent Events, 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 four percent of consolidated net sales in 2020, include flavors, emulsifiers, and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications.

products are primarily manufactured at the Company’s Maywood, New Jersey, site and, in some instances, by third-party contractors.

During 2019, the Company restructured its Specialty Products office in the Netherlands and eliminate positions from the site’s supply chain, quality control and research and development areas.

This restructuring was designed to better align the number of personnel with current business requirements and reduce costs at the site (see Note 23, Business Restructuring, for additional details).

Change in Accounting Principle

During the first quarter of 2019 the Company elected to change its method of accounting for U.S.

inventory valuation from the LIFO basis to the FIFO basis.

inventories have historically been maintained on the FIFO basis.

The Company believes that this change to the FIFO method of inventory valuation is preferable as it provides a better matching of costs with the physical flow of goods, more accurately reflects the current market value of inventory presented on the Company’s consolidated balance sheet, standardizes the Company’s inventory valuation methodology and improves comparability with the Company’s industry peers.

The Company has retrospectively applied this change to its prior year financial statement comparables.

(See Note 2, Change in Method of Accounting for Inventory Valuation, for additional details).

2019 Acquisition

On December 17, 2019, the Company acquired an oilfield demulsifier product line.

Specialty products are primarily manufactured at the Company’s Maywood, New Jersey, site and, in some instances, by third-party contractors.

Recent significant events include:

During 2019, the Company restructured its Specialty Products office in the Netherlands and eliminated positions from the site’s supply chain, quality control and research and development areas.

This restructuring was undertaken to better align the number of personnel with current business requirements and reduce costs at the site (see Note 22, Business Restructuring, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details ).

2020 Acquisitions

Logos Technologies

On March 13, 2020, the Company acquired certain assets of Logos Technologies LLC's NatSurFact® business, a rhamnolipid-based line of bio-surfactants derived from renewable sources.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional.

The acquisition was accounted for as an asset acquisition.

The purchase price of the acquisition was $2,040,000 and was paid with cash on hand.

This acquisition was accounted for as a business combination and the assets were measured and recorded at their estimated fair values.

The primary assets acquired were intangibles, mostly comprised of goodwill ($3,497,000), product know-how ($1,500,000) and customer relationships ($3,200,000).

A small amount of inventory was also acquired.

All the acquired assets are included within the Company’s Surfactants segment.

The fair value analysis remains in process and is expected to be finalized during the first half of 2020.

The acquired business did not impact the Company’s 2019 financial results.

All assets acquired are included in the Company’s Surfactants segment.

The assets acquired were primarily intangibles, including trademarks and know-how ($1,392,000) and patents ($464,000).

Additionally, $184,000 of laboratory equipment was acquired (see Note 20, Acquisitions , for additional details).

Clariant (Mexico)

On September 17, 2020 the Company, through its subsidiaries in Mexico, acquired Clariant’s anionic surfactant business lo cated in Santa Clara, Mexico.

The acquisition did not include the purchase of a manufacturing site.

The business acquired is being integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec).

The Company believes the purchase of Clariant’s surfactants business will enhance its ability to support customer growth in consumer and functional products end markets within Mexico.

The acquisition was accounted for as a business combination, and accordingly, the assets acquired were measured and recorded at their estimated fair values.

The purchase price of the acquisition was $14,000,000 plus associated value-added taxes (VAT).

As of December 3 1 , 2020, $13,519,000, inclusive of $308,000 net VAT, had been paid with cash on hand.

All assets acquired are included in the Company’s Surfactants segment.

The assets acquired as of December 31 , 2020 were intangibles, including trademarks and know-how ($1,300,000), customer lists ($8,000,000), a non-compete agreement ($300,000) and goodwill ($4,225,000).

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.

Deferred Compensation Plans

1 unchanged sentence

Compensation expense results when the value of Company common stock and mutual fund investment assets held for the plans increase, and compensation income results 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 presented in the following table:

Income (Expense)

30 unchanged sentences

For the Year Ended

(Decrease) Due

to Foreign Currency

2 unchanged sentences

Pretax Income

The 2018 and 2017 gross profit, operating income and pretax income line items have been retrospectively changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S.

inventory valuation from LIFO to FIFO.

Results of Operations

2020 Compared with 2019

Net income attributable to the Company for 2020 increased 23 percent from $103.1 million, or $4.42 per diluted share in 2019 to $126.8 million, or $5.45 per diluted share, in 2020.

Adjusted net income increased 11 percent to $132.0 million, or $5.68 per diluted share, from $119.4 million, or $5.12 per diluted share in 2019 (see the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for reconciliations 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.

A detailed discussion of segment operating performance for 2020 compared to 2019 follows the summary.

Consolidated net sales increased $11.1 million, or one percent, between years.

Consolidated sales volume increased three percent, which positively impacted the change in net sales by $49.6 million.

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

Higher average selling prices positively impacted the change in net sales by $7.1 million.

Foreign currency translation negatively impacted the year-over-year change in net sales by $45.7 million primarily due to a stronger U.S.

dollar against the Latin American currencies used in certain of the Company’s foreign operations.

Operating income increased $44.3 million, or 35 percent, between years.

Surfactant operating income increased $46.3 million, or 38 percent versus operating income reported in 2019.

Polymer and Specialty Products operating income decreased $1.4 million and $2.4 million, respectively.

Deferred compensation expenses and business restructuring expenses decreased $5.2 million and $1.5 million, respectively, year-over-year.

Corporate expenses, excluding deferred compensation and business restructuring expenses, were up $4.9 million year-over-year.

Most of this increase reflects higher incentive-based compensation and acquisition-related expenses, partially offset by lower environmental remediation expenses.

Foreign currency translation had an unfavorable $7.7 million effect on year-over-year consolidated operating income.

Operating expenses (including deferred compensation expense and business restructuring expenses) decreased $0.4 million, or less than one percent, between years.

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

Selling expenses decreased $1.4 million, or two percent, year-over-year largely due to lower travel and entertainment expenses as a result of COVID-19 restrictions.

Administrative expenses increased $ 4.

8 million, or six percent, year - over - year.

Th is increase was primarily due to higher incentive-based compensation and acquisition-related expenses in 2020 that were partially offset by non-recurring 2019 environmental remediation costs .

The majority of the environmental remediation costs in 2019 relate d to the Company’s Maywood, New Jersey site and the Company’s formerly-owned site in Wilmington, Massachusetts.

Research, development and technical service (R&D) expenses increased $2.9 million, or five percent, year-over-year primarily due to higher incentive-based compensation expenses.

Deferred compensation expense decreased $5.2 million primarily due to a $16.88 per share increase in the market price of Company common stock during 2020 compared to a $28.44 per share increase in 2019.

See the Overview and Segment Results - Corporate Expenses sections of this MD&A for further details.

Business restructuring expenses were $1.2 million in 2020 versus $2.7 million in 2019.

The 2020 restructuring expenses were primarily comprised of ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada that ceased operations in the fourth quarter of 2016 ($1.1 million) and decommissioning expenses associated with the Company’s 2018 sulfonation shut down in Germany ($0.1 million).

The 2019 restructuring expenses were primarily comprised of severance and office shutdown expenses related to the Specialty Products Netherland office restructuring ($0.7 million), decommissioning costs associated with the Company’s Canadian plant closure ($1.4 million), and decommissioning expenses associated with the Company’s sulfonation shut down in Germany ($0.9 million).

See Note 22, Business Restructuring , 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 2020 declined $0.5 million, or nine percent, versus prior year.

This decrease was primarily attributable to lower interest expense resulting from scheduled debt repayments and the non-recurrence of two one-time events in 2019:

(a) the recognition of make-whole interest expense associated with the Company’s voluntary prepayment of its 5.88 percent Senior Notes, partially offset by (b) the recognition of interest income associated with a Brazilian VAT tax recovery.

Partially offsetting the above was lower interest income earned in 2020 as a result of lower global interest rates.

Other, net was $5.0 million of income in 2020 versus $4.6 million of income in 2019.

The Company recognized $4.8 million of investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in 2020 compared to $4.9 million of investment income in 2019.

In addition, the Company reported foreign exchange gains of $1.4 million in 2020 versus $0.1 million of foreign exchange gains in 2019.

The Company also reported $0.5 million of higher net periodic pension cost expense in 2020 versus the prior year.

Other miscellaneous items resulted in $0.2 million of higher expense in 2020 versus 2019.

The year-to-date effective tax rate was 25.4 percent in 2020 compared to 18.1 percent in 2019.

This increase was primarily attributable to:

(a) the non-recurrence of a favorable tax benefit recognized in the third quarter of 2019 on incremental U.S.

tax credits identified as part of a research and development tax credit study;

(b) a non-recurring unfavorable tax cost in the fourth quarter of 2020 related to cash repatriations to facilitate the 2021 INVISTA acquisition, and (c) a less favorable geographical mix of income in 2020 versus 2019 .

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.

Segment Results

(In thousands)

For the Year Ended

Specialty Products

Total Net Sales

(In thousands)

For the Year Ended

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation

and Restructuring

Deferred Compensation Expense (Income)

Business Restructuring

Total Operating Income

Surfactant 2020 net sales increased $79.0 million, or six percent, versus 2019 net sales.

A six percent increase in sales volume and higher average selling prices positively impacted the change in net sales by $67.2 million and $55.0 million, respectively.

The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $43.2 million.

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

For the Year Ended

(In thousands)

North America

Latin America

Total Surfactants Segment

Net sales for North American operations increased $60.5 million, or eight percent, between years.

A six percent increase in sales volume and higher average selling prices positively impacted the change in net sales by $43.3 million and $17.6 million, respectively.

The sales volume growth was primarily due to higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning, disinfection and personal wash products as a result of COVID-19, partially offset by lower demand in the functional product end markets, principally agriculture and oilfield.

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

Net sales for European operations decreased $6.1 million, or three percent, year-over-year.

A seven percent decrease in sales volume negatively impacted the change in net sales $16.6 million.

The lower sales volume reflects lost business at one customer that was partially offset by higher demand for products from our distribution partners.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $7.5 million and $3.0 million, respectively.

A weaker U.S.

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

Net sales for Latin American operations increased $22.2 million, or ten percent, between years, primarily due to an 18 percent increase in sales volume and higher average selling prices.

These items positively impacted the year-over-year change in net sales by $38.8 million and $31.3 million, respectively.

The sales volume growth primarily reflects higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning products, and a fully operational Ecatepec, Mexico facility in 2020.

Partially offsetting the above was the unfavorable impact of foreign currency translation which negatively impacted the change in net sales by $47.9 million.

The year-over-year strengthening of the U.S dollar against the Brazilian real, Mexican peso and the Colombian peso led to the foreign currency effect.

Net sales for Asian operations increased $2.4 million, or four percent, primarily due to a three percent increase in sales volume and the favorable impact of foreign currency translation.

These items favorably impacted the change in net sales by $1.7 million and $2.1 million, respectively.

The sales volume growth was mostly due to higher demand for products sold into the agricultural end market.

A weaker U.S.

dollar relative to the Philippine peso led to the foreign currency translation effect.

Lower average selling prices negatively impacted the change in net sales by $1.4 million.

Surfactant operating income for 20 20 increased $ 46.3 million, or 38 percent, versus operating income reported in 201 9 .

Gross profit increased $ 49.1 mi llion, or 22 percent year-over-year .

Operating e xpenses increased $ 2.8 million, or t hree percent.

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Latin America

Surfactants Segment Gross Profit

Operating Expenses

Operating Income

Gross profit for North American operations increased $32.9 million, or 23 percent, between years primarily due to higher unit margins that positively impacted the change in gross profit by $25.0 million.

The higher unit margins primarily reflect a more favorable customer and product mix largely due to increased volume to the Company’s Tier 2 and Tier 3 customers.

A six percent increase in sales volumes positively impacted the change in gross profit by $7.9 million.

Most of the sales volume increase was attributable to increased demand for cleaning, disinfection and personal wash products.

Gross profit for European operations increased $3.5 million, or ten percent, primarily due to higher unit margins and the favorable impact of foreign currency translation.

These items positively impacted the change in gross profit by $5.4 million and $0.4 million, respectively.

The higher unit margins were attributable to a more favorable product and customer mix in 2020 resulting from higher demand for biocidal quaternaries and lower demand for commodity softeners.

A seven percent decline in sales volume negatively impacted the change in gross profit by $2.3 million.

Gross profit for Latin American operations increased $14.0 million, or 43 percent, year-over-year primarily due to higher unit margins that contributed $19.0 million to the increase in net sales.

The higher unit margins primarily reflect the Company’s Mexican sites being fully operational in 2020 versus the prior year when Mexico incurred higher freight and supply chain expenses as a result of the 2019 sulfonation equipment failure at the Ecatepec, Mexico site.

In addition, more favorable customer and product mix favorably impacted gross margins largely due to increased volume to the Company’s Tier 2 and Tier 3 customers.

An 18 percent increase in sales volume favorably impacted net sales by $5.9 million.

The sales volume growth primarily reflects higher demand for products sold into the consumer products end markets, driven by increased demand for cleaning and disinfection products, and a fully operational Ecatepec, Mexico facility in 2020.

The unfavorable impact of foreign currency translation negatively impacted gross margins by $10.9 million.

Gross profit for Asian operations decreased $1.2 million, or nine percent, primarily due to lower unit margins.

The lower unit margins negatively impacted the change in gross profit by $1.9 million.

The lower unit margins were partially offset by a three percent increase in sales volume and the favorable impact of foreign currency translation.

These items positively impacted the change in gross profit by $0.4 million and $0.3 million, respectively.

Operating expenses for the Surfactant segment increased $2.8 million, or three percent, year-over-year.

Most of this increase was attributable to higher salaries and incentive-based compensation expense.

Polymers 2020 net sales decreased $60.1 million, or 12 percent, versus net sales in 2019.

A five percent decrease in sales volume negatively impacted the year-over-year change in net sales by $29.9 million.

The unfavorable impact of lower average selling prices and foreign currency translation negatively impacted the year-over-year change in net sales by $27.6 million and $2.6 million, respectively.

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

For the Year Ended

(In thousands)

North America

Asia and Other

Total Polymers Segment

Net sales for North American operations declined $48.8 million, or 16 percent, primarily due to a 10 percent decrease in sales volume.

The decline in sales volume negatively impacted the year-over-year change in net sales by $32.2 million.

Sales volume of phthalic anhydride decreased 38 percent due to volume lost as a result of the first quarter 2020 Millsdale, IL plant power outage, share loss at one customer and soft market demand.

Sales volume of polyols used in rigid foam applications decreased two percent due to COVID-19 related construction project delays and cancellations.

Lower average selling prices negatively impacted the change in net sales by $16.6 million.

The lower average selling prices reflect lower raw material market prices.

Net sales for European operations decreased $11.2 million, or seven percent, year-over-year.

Lower average selling prices, the unfavorable impact of foreign currency translation and a one percent decrease in sales volume negatively impacted the year-over-year change in net sales by $8.2 million, $1.9 million and $1.0 million, respectively.

The lower average selling prices reflect lower raw material costs and a stronger U.S.

dollar relative to the Polish zloty led to the foreign currency translation impact.

The decline in sales volume principally reflects softer demand during the first half of 2020 due to deferred and canceled construction projects as a result of COVID-19.

Net sales for Asian and Other operations were flat year-over-year.

A nine percent increase in sales volume favorably impacted the change in net sales by $3.4 million and was primarily attributable to higher demand in livestock and cold storage end markets within China.

Lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $2.7 million and $0.7 million, respectively.

The lower average selling prices reflect lower raw material costs.

Polymer operating income for 2020 decreased $1.4 million, or two percent, versus operating income for 2019.

Gross profit decreased $2.0 million, or two percent, year-over-year.

Operating expenses decreased $0.7 million, or two percent, in 2020.

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Asia and Other

Polymers Segment Gross Profit

Operating Expenses

Operating Income

Gross profit for North American operations decreased $9.2 million, or 13 percent, primarily due to a 10 percent decline in sales volume and lower unit margins.

These two items negatively impacted the year-over-year change in gross profit by $7.1 million and $2.1 million, respectively.

The decrease in sales volume primarily reflects lost phthalic anhydride volume due to the first quarter 2020 Millsdale, IL power outage and share loss at one customer, combined with lower rigid polyols demand as a result of COVID-19 related construction project delays and cancellations.

The lower unit margins were primarily attributable to the first quarter 2020 power outage at the Company’s Millsdale, IL facility, which forced a temporary production shutdown and resulted in higher maintenance, supply chain costs and unit overhead rates.

In addition, incremental raw material costs were incurred in 2020 as a result of the Illinois River lock closures.

Partially offsetting the above was a $12.8 million insurance recovery related to the Millsdale power outage.

Gross profit for European operations increased $ 3.3 million, or 14 percent, primarily due to higher unit margins.

The higher unit margins positively impact ed the year-over-year change in gross profit by $3.6 million.

The higher unit margins partially reflect the non-recurrence of a m aintenance shutdown at the Company’s G ermany site in 2019 .

The unfavorable impact of foreign currency translation and a one percent decline in sales volume negatively i mpacted the change in gross profit by $0.

2 million and $0.

1 million, respectively.

The decline in sales volume primarily reflects lower demand for polyols used in rigid foam applications during the first half of 2020 due to deferred or canceled construction projects as a result of COVID-19.

Gross profit for Asia and Other operations improved $3.9 million, or 68 percent, due to higher unit margins, nine percent volume growth and the favorable impact of foreign currency translation.

These items positively impacted the year-over-year change in gross profit by $3.2 million, $0.5 million and $0.2 million, respectively.

Unit margins benefited from a government reimbursement related to the government-mandated China JV shutdown in 2012 ($3.7 million) and were negatively impacted by the higher cost of outsourcing due to unplanned production issues in the fourth quarter of 2020.

Operating expenses for the Polymers segment decreased $0.7 million, or two percent, year-over-year.

Specialty Products

Specialty Products net sales decreased $7.9 million, or 11 percent, versus net sales in 2019.

This decrease was primarily due to a three percent decrease in sales volume and lower average selling prices.

Gross profit and operating income decreased $2.5 million and $2.4 million, respectively, primarily due to lower margins within the Company’s medium chain triglycerides product line.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, decreased $1.7 million between years.

Corporate expenses were $79.8 million in 2020 versus $81.5 million in the prior year.

This decrease was primarily attributable to lower deferred compensation ($5.2 million), business restructuring ($1.5 million) and environmental remediation expenses ($3.7 million) in 2020.

Higher incentive-based compensation and acquisition-related expenses partially offset the decreases above.

Deferred compensation expense decreased $5.2 million between years.

This decrease was primarily due to a $16.88 per share increase in the market price of the Company’s common stock in 2020 compared to a $28.44 per share increase in 2019.

The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expenses in 2020 and 2019:

Company Stock Price

2019 Compared with 2018

Net income attributable to the Company for 2019 decreased seven percent from $111.1 million, or $4.76 per diluted share in 2018 to $103.1 million, or $4.42 per diluted share, in 2019.

Adjusted net income increased seven percent to $119.4 million, or $5.12 per diluted share, from $111.7 million, or $4.79 per diluted share in 2018 (see the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for reconciliations 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).

Adjusted net income increased seven percent to $119.4 million, or $5.12 per diluted share in 2019, from $111.7 million, or $4.79 per diluted share in 2018 (see the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for reconciliations 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, profits and expenses.

4 unchanged sentences

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

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

dollar against most currencies used in the Company’s foreign operations.

Consolidated sales volume decreased two percent and negatively impacted the change in net sales by $37.0 million.

3 unchanged sentences

Deferred compensation expenses increased $17.5 million year-over-year.

Corporate expenses, excluding deferred compensation and business restructuring expenses, were up $1.6 million year-over-year.

The majority of this

increase reflects higher environmental remediation expense recognized in 2019.

Corporate expenses,

excluding deferred compensation and business restructuring expenses, were up $1.6 million year-over-year.

Most of this increase reflects higher environmental remediation expense recognized in 2019.

From a segment perspective, Specialty Product and Polymer operating income improved by $4.8 million and $3.2 million, respectively, whereas Surfactant operating income declined by $10.7 million.

6 unchanged sentences

The majority of the environmental remediation costs relate to the Company’s Maywood, New Jersey site and the Company’s formerly-owned site in Wilmington, Massachusetts.

Non-recurring employee separation costs incurred in 2018 partially offset the above.

Research, development and technical service (R&D) expenses increased $0.8 million, or one percent, year over year.

2 unchanged sentences

Business restructuring expenses were $2.7 million in 2019 versus $2.6 million in 2018.

The 2019 restructuring expenses were primarily comprised of severance and office shutdown expenses related to the Specialty Products segment restructuring ($0.7 million), ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada that ceased operations in the fourth quarter of 2016 ($1.4 million), and decommissioning expenses associated with the Company’s 2018 sulfonation shut down in Germany ($0.9 million).

The 2019 restructuring expenses were primarily comprised of severance and office shutdown expenses related to the Specialty Products Netherlands office restructuring ($0.7 million), ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada that ceased operations in the fourth quarter of 2016 ($1.4 million), and decommissioning expenses associated with the Company’s 2018 sulfonation shut down in Germany ($0.9 million).

The 2018 restructuring expenses were comprised of asset and spare parts write-downs related to the Company’s decision to cease Surfactant operations in Germany ($1.4 million) and decommissioning costs associated with the Canadian plant closure ($1.2 million).

See Note 23 to the consolidated financial statements for additional information.

See Note 22, Business Restructuring, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional information.

Net interest expense in 2019 declined $4.8 million, or 45 percent, versus prior year.

8 unchanged sentences

Other miscellaneous items resulted in $0.1 million of higher expense in 2019.

The year-to-date effective tax rate was 18.1 percent in 2019 compared to 19.4 percent in 2018.

The effective tax rate was 18.1 percent in 2019 compared to 19.4 percent in 2018.

This decrease was primarily attributable to incremental U.S.

research and development tax credits, partially offset by other non-recurring favorable tax benefits recognized in 2018.

See Note 10 to the consolidated financial statements for a reconciliation of the statutory U.S.

See Note 9, Income Taxes, of the notes to the Company’s consolidated financial statements (included in Item 8 of this From 10-K) for a reconciliation of the statutory U.S.

federal income tax rate to the effective tax rate.

9 unchanged sentences

Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation

and Restructuring

Corporate Expenses, Excluding Deferred

Compensation and Restructuring

Deferred Compensation Expense (Income)

1 unchanged sentence

Total Operating Income

The 2018 segment and total operating income line items have been retrospectively changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S.

inventory valuation from LIFO to FIFO.

Surfactants 2019 net sales decreased $113.2 million, or eight percent, versus 2018 net sales.

1 unchanged sentence

Sales volume decreased three percent year-over-year.

Approximately 46 percent of the decline in sales volume was due to the Company’s exit from its sulfonation business in Germany during the fourth quarter of 2018.

Approximately 46 percent of the decline in sales volume was due to the Company’s sulfonation shut down in Germany during the fourth quarter of 2018.

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

25 unchanged sentences

These items negatively impacted the year-over-year change in net sales by $6.9 million and $5.3 million, respectively.

The decline in sales volume was largely due to lower commodity demand in the laundry and cleaning end markets and

lower sales volume to our distribution partners.

The decline in sales volume was largely due to lower commodity demand in the laundry and cleaning end markets and lower sales volume to our distribution partners.

The lower selling prices were mostly due to the pass through of lower raw material costs to customers.

1 unchanged sentence

Surfactant operating income for 2019 declined $10.7 million, or eight percent, versus operating income reported in 2018.

Gross profit declined $8.6 million, or four percent, and operating expenses increased two percent year-over-year.

declined $8.6 million, or four percent, and operating expenses increased two percent year-over-year.

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

7 unchanged sentences

Operating Income

The 2018 gross profit and operating income line items have been retrospectively changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S.

inventory valuation from LIFO to FIFO.

Gross profit for North American operations decreased $14.5 million, or nine percent, between years primarily due to lower unit margins and a two percent decline in sales volumes.

7 unchanged sentences

A nine percent decline in sales volume and the unfavorable effect of foreign currency translation negatively impacted the current year by $2.7 million and $1.8 million, respectively.

The lower sales volume is primarily attributable to the Company’s exit from the sulfonation in Germany during the fourth quarter of 2018, partially offset by volume growth in the agricultural and oilfield end markets.

The lower sales volume is primarily attributable to the Company’s sulfonation shut down in Germany during the fourth quarter of 2018, partially offset by volume growth in the agricultural and oilfield end markets.

Gross profit for Latin American operations increased $5.7 million, or 22 percent, year-over-year primarily due to higher unit margins.

Higher unit margins positively impacted the year-over-year change in gross profit by $7.8 million.

The higher unit margins partially reflect one-time benefits related to a VAT tax recovery in Brazil and insurance recovery related to the Ecatepec, Mexico incident.

The higher unit margins partially reflect one-time benefits related to a VAT tax recovery in Brazil and insurance recovery related to the Ecatepec, Mexico sulfonation equipment failure.

Excluding the effect of the above items, average margins were flat between years.

9 unchanged sentences

Sales volume of polyols used in rigid foam applications increased nine percent during the year but was partially offset by lower phthalic anhydride sales volume.

unfavorable impact of lower average selling prices and foreign currency translation negatively impacted the year-over-year change in net sales by $22.4 million and $12.3 million, respectively.

The unfavorable impact of lower average selling prices and foreign currency translation negatively impacted the year-over-year change in net sales by $22.4 million and $12.3 million, respectively.

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

28 unchanged sentences

Operating Income

inventory valuation from LIFO to FIFO.

Gross profit for North American operations increased $0.5 million, or one percent, due to slightly higher sales volume.

Sales volume of polyols used in rigid foam applications increased 12 percent during the year but was largely offset by lower phthalic anhydride and specialty polyols sales volume.

Sales volume of polyols used in rigid foam applications increased 12 percent during 2019 but was largely offset by lower phthalic anhydride and specialty polyols sales volume.

Average unit margins were flat year-over-year.

14 unchanged sentences

This increase was primarily attributable to higher deferred compensation expense ($17.5 million).

Higher environmental remediation expenses in 2019, partially offset by the non-recurrence of 2018 employee separation costs and costs associated with the Company’s 2018 first quarter acquisition in Mexico, also contributed to the year-over-year increase.

Higher environmental remediation expenses in 2019, partially offset by the costs associated with the Company’s 2018 first quarter acquisition in Mexico, also contributed to the year-over-year increase.

Deferred compensation expense increased $17.5 million between years.

2 unchanged sentences

Company Stock Price

2018 Compared with 2017

Net income attributable to the Company for 2018 increased ten percent to $111.1 million, or $4.76 per diluted share, from $100.8 million, or $4.31 per diluted share, for 2017.

Adjusted net income in 2018 decreased five percent to $111.7 million, or $4.79 per diluted share, from $117.5 million, or $5.03 per diluted share in 2017 (see the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for reconciliations 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, profits and expenses.

A detailed discussion of segment operating performance for 2018 compared to 2017 follows the summary.

Consolidated net sales increased $68.9 million, or four percent, between years.

Higher sales volume, higher selling prices and the favorable impact of foreign currency translation positively impacted net sales by $64.7 million, $4.1 million and $0.1 million, respectively.

Total Company sales volume increased three percent.

Sales volume increased five percent and three percent for the Surfactants and Specialty Products segments, respectively.

Sales volume declined three percent for the Polymers segment.

Unit margins improved for Surfactants and Specialty Products and declined for Polymers.

Operating income declined $5.6 million, or four percent, between years.

Operating income declined for the Polymers segment and improved for Surfactants and Specialty Products segments.

Corporate expenses were down $4.3 million between years.

Business restructuring expenses were $0.5 million lower in 2018 versus 2017.

In addition, 2018 deferred compensation expense declined by $7.1 million versus the 2017 balance.

Foreign currency translation had an unfavorable $0.6 million effect on year-over-year consolidated operating income.

Operating expenses (including deferred compensation expense and business restructuring expenses) decreased $1.2 million, or one percent, between years.

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

Selling expenses increased $2.2 million, or four percent, year over year largely due to higher salaries and cloud-based application expense.

A portion of the higher salaries is attributable to the 2018 acquisition in Mexico.

Administrative expenses increased $3.6 million, or five percent, year over year.

The increase was primarily due to higher employee separation costs and salaries.

Research, development and technical service (R&D) expenses increased $0.6 million, or one percent, year over year.

Deferred compensation was income of $2.3 million in 2018 versus expense of $4.9 million in 2017.

See the “Overview” and “Segment Results - Corporate Expenses” sections of this MD&A for further details.

Business restructuring expenses were $2.6 million in 2018 versus $3.1 million in 2017.

2018 restructuring charges were comprised of asset and spare part write-downs related to the Company’s decision to cease Surfactant operations in Germany ($1.4 million) and decommissioning costs associated with the Company’s manufacturing facility in Canada, which ceased operations in the fourth quarter of 2016 ($1.2 million).

The 2017 restructuring charges related to decommissioning costs associated with the Canadian plant closure ($2.0 million), severance costs related to a partial restructuring of the Company’s production facility in Fieldsboro, New Jersey ($0.9 million) and workforce reduction expense at the Company’s Singapore plant.

These business restructuring charges were excluded from the determination of segment operating income.

See Note 23 to the consolidated financial statements for additional information.

Net interest expense for 2018 declined $0.7 million, or six percent, from net interest expense for 2017.

The decline in interest expense was principally attributable to higher interest income earned on excess cash and lower average debt levels due to scheduled repayments.

Other, net was $0.7 million of expense in 2018 versus $3.5 million of income in 2017.

The Company recognized $1.4 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 2018 compared to $5.1 million of gains in 2017.

Partially offsetting this decrease was foreign exchange gains of $1.9 million in 2018 compared to foreign exchange losses of $0.6 million in 2017.

In addition, the Company reported $1.2 million of net periodic pension cost in 2018 versus $1.0 million of net periodic pension cost in 2017.

The year-to-date effective tax rate was 19.4 percent in 2018 compared to 31.4 percent in 2017.

This decrease was primarily attributable to the following items:

(a) a lower U.S.

statutory tax rate of 21 percent in 2018 versus a rate of 35 percent in 2017;

and (b) the enactment of U.S.

tax reform, which resulted in a net tax cost of $10.3 million in 2017 that did not recur in 2018.

The 2018 benefits were partially offset by certain unfavorable U.S.

tax reform changes that became effective on January 1, 2018 (i.e., global intangible low-taxed income, non-deductible executive compensation, and the repeal of the domestic production activities deduction).

In addition, during the third quarter of 2018, the Company filed applications to automatically change certain tax accounting methods related to the 2017 tax year.

These method changes provided a favorable tax benefit that was partially offset by the negative tax impact recognized as a result of the Company’s decision to repatriate approximately $100.0 million of foreign cash in the fourth quarter of 2018.

See Note 10 to the consolidated financial statements for a reconciliation of the statutory U.S.

federal income tax rate to the effective tax rate.

Segment Results

(In thousands)

For the Year Ended

Specialty Products

Total Net Sales

(In thousands)

For the Year Ended

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred

Compensation and Restructuring

Deferred Compensation Expense (Income)

Business Restructuring

Total Operating Income

The 2018 and 2017 gross profit and operating income line items have been retrospectively changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S.

inventory valuation from LIFO to FIFO.

Surfactants 2018 net sales increased $88.4 million, or seven percent, over net sales reported in 2017.

Higher sales volume and selling prices accounted for $69.5 million and $26.2 million, respectively, of the year-over-year increase in net sales.

Sales volume increased five percent year-over-year.

The unfavorable effects of foreign currency translation negatively impacted the year-over-year change in net sales by $7.3 million.

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

For the Year Ended

(In thousands)

North America

Latin America

Total Surfactants Segment

Net sales for North American operations increased nine percent between years.

Sales volume increased six percent, which favorably impacted the change in net sales by $42.0 million.

The sales volume growth was largely driven by higher sales volume of products used in personal care and oilfield applications.

Sales volume of general surfactants to our distribution partners also increased.

Average selling prices increased three percent between years and positively impacted the year-over-year change in net sales by $26.4 million.

The increase in selling prices was largely due to a more favorable mix of sales.

Foreign currency translation positively impacted the change in net sales by $0.1 million.

The foreign currency impact reflected a weaker U.S.

dollar relative to the Canadian dollar.

Net sales for European operations increased one percent versus prior year.

The favorable effects of foreign currency translation positively impacted the year-over-year change in net sales by $11.8 million.

A weaker U.S.

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

Lower selling prices of four percent unfavorably impacted the year-over-year change in net sales by $10.5 million.

Sales volume was flat versus the prior year.

Net sales in 2017 were positively impacted by $4.7 million related to a favorable resolution of a prior year customer claim (see Note 25 to the consolidated financial statements for further information).

Net sales for Latin American operations increased $22.0 million, or 12 percent, primarily due a 12 percent increase in sales volume and higher selling prices.

These two items accounted for $22.5 million and $16.1 million, respectively, of the year-over-year change in net sales.

The higher volume is mostly related to the Company’s first quarter 2018 acquisition in Ecatepec, Mexico and partially offset by lower demand and lost commodity business in Brazil.

The higher selling prices primarily reflect the pass through to customers of increased raw material costs.

Foreign currency translation negatively impacted the year-over-year change in net sales by $16.6 million.

The foreign currency translation primarily reflects the year-over-year weakening of the Brazilian real and Mexican peso relative to the U.S.

Net sales for Asian operations declined $3.8 million, or six percent, primarily due to the negative impact of foreign currency translation and lower average selling prices.

These items negatively impacted the year-over-year change in net sales by $2.5 million and $2.0 million, respectively.

The foreign currency impact primarily reflected a weaker Philippine peso relative to the U.S.

Sales volume increased one percent, which positively impacted the year-over year change in net sales by $0.7 million.

The sales volume increase was mostly due to higher sales of general surfactants to our distribution partners.

Surfactant operating income for 2018 increased $7.8 million, or six percent, versus operating income reported in 2017.

Gross profit increased $11.2 million due to improved results for North American operations.

Operating expenses increased $3.4 million, or four percent.

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Latin America

Surfactants Segment Gross Profit

Operating Expenses

Operating Income

inventory valuation from LIFO to FIFO.

Gross profit for North American operations increased 13 percent, or $17.3 million, between years primarily due to higher unit margins and higher sales volumes.

These items positively impacted the year-over-year change in gross profit by $9.5 million and $7.8 million, respectively.

The higher unit margins were primarily due to a more favorable customer and product mix.

Higher year-over-year sales of products used in personal care, agricultural and oilfield applications, along with products sold to our distribution partners contributed to the 2018 volume growth.

Gross profit for European operations decreased four percent between years principally due to the aforementioned non-recurring $4.7 million favorable customer claim resolution in 2017.

Lower unit margins, principally due to the non-recurrence of the prior year favorable customer claim resolution, negatively impacted the year-over-year change in gross profit by $2.5 million.

Foreign currency translation positively affected the change in gross profit by $1.3 million.

Sales volume was flat year-over-year.

Gross profit for Latin American operations decreased $2.5 million, or nine percent, year-over-year primarily due to lower unit margins and the negative impact of foreign currency translation.

These items unfavorably impacted the change in year-over-year gross profit by $3.1 million and $2.8 million, respectively.

The lower unit margins principally related to higher integration and start-up costs associated with the Company’s first quarter 2018 acquisition in Ecatepec, Mexico.

Sales volume growth of 12 percent positively impacted current year gross profit by $3.4 million.

This growth primarily reflects the Company’s first quarter acquisition in Mexico partially offset by lower demand and lost commodity business in Brazil.

The Ecatepec, Mexico acquisition was slightly accretive to Latin America gross profit in 2018.

Asia gross profit decreased 13 percent largely due to lower unit margins and the unfavorable impact of foreign currency translation.

These items unfavorably impacted the year-over-year change in gross profit by $2.3 million and $0.4 million, respectively.

Sales volume growth of one percent positively impacted the year-over-year change in gross profit by $0.2 million.

Operating expenses for the Surfactants segment increased $3.4 million, or four percent, year-over-year.

Most of this increase was attributable to higher North American expenses.

The higher North American expenses were primarily due to higher consulting fees, salaries, and cloud-based application expense.

Polymer net sales for 2018 decreased $19.2 million, or four percent, over net sales for 2017.

Lower sales volumes and selling prices negatively impacted the year-over-year change in net sales by $16.9 million and $9.0 million, respectively.

The favorable effects of foreign currency translation positively impacted the year-over-year change in net sales by $6.7 million.

The foreign currency effect reflected a weaker U.S.

dollar relative to the Polish zloty.

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

For the Year Ended

(In thousands)

North America

Asia and Other

Total Polymers Segment

Net sales for North American operations increased three percent due to higher selling prices, partially offset by lower sales volumes.

Selling prices increased five percent, which had a $15.4 million positive effect on the year-over-year change in net sales.

The pass through of certain higher raw material costs to customers led to increased selling prices.

Sales volume declined two percent which unfavorably impacted the net sales change by $5.5 million.

Sales volume of polyols used in rigid foam applications declined two percent mainly due to lost share from one major customer.

Phthalic anhydride sales volume declined seven percent.

Sales volume of specialty polyols increased eight percent due to greater demand for product used in CASE applications and powdered resins.

Net sales for European operations increased 22 percent due to higher selling prices, the favorable effect of foreign currency translation and a three percent increase in sales volumes, which accounted for $22.4 million, $7.9 million and $4.0 million, respectively, of the year-over-year net sales increase.

Selling prices increased 14 percent primarily due to the pass through to customers of cost increases for certain raw materials.

The sales volume improvement was primarily attributable to increased sales of specialty polyols, which reflected the Company’s successful efforts to utilize the production capacity of its new reactor in Poland.

Sales volume also grew slightly due to increased demand for polyols used in rigid foam insulation and insulated metal panels.

Net sales for Asia and Other operations increased 15 percent between years due to higher selling prices, a two percent increase in sales volume and the favorable effect of foreign currency, which accounted for $3.1 million, $0.5 million and $0.1 million, respectively, of the year-over-year net sales increase.

Polymer operating income for 2018 declined $19.4 million, or 23 percent, compared to operating income in 2017.

Gross profit decreased $19.4 million, or 17 percent, primarily due to a three percent decline in sales volumes and lower unit margins.

Operating expenses were flat versus prior year.

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Asia and Other

Polymers Segment Gross Profit

Operating Expenses

Operating Income

inventory valuation from LIFO to FIFO.

Gross profit for North American operations declined 16 percent primarily due to lower unit margins and a two percent decline in sales volume.

These two items negatively impacted the year-over-year change in gross profit by $12.1 million and $1.4 million, respectively.

The decline in margins primarily reflected competitive market pressures.

Gross profit for European operations declined 21 percent primarily due to lower unit sales margins and a seven percent decline in sales volume.

These items negatively impacted the year-over-year change in gross profit by $5.6 million and $2.1 million, respectively.

The lower margins were primarily due to higher overhead resulting from lower production throughput in 2018 versus 2017.

The favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $1.0 million.

Gross profit for Asia and Other operations improved $0.8 million primarily due to higher unit margins and the favorable impact of foreign currency translation.

These items positively impacted the year-over-year change in gross profit by $0.7 million and $0.1 million, respectively.

Operating expenses for the Polymers segment decreased $0.1 million year-over-year.

Specialty Products

Net sales for 2018 were flat with the prior year.

Sales volume was up three percent versus the prior year.

Operating income increased $1.7 million versus prior year primarily due to the higher sales volume and improved unit margins.

Corporate Expenses

Corporate expenses, which include deferred compensation and other operating expenses that are not allocated to the reportable segments, declined $4.3 million year-over-year to $62.3 million in 2018 from $66.6 million in 2017.

The decline in corporate expenses was primarily attributable to lower deferred compensation expense ($7.2 million) and business restructuring expense ($0.5 million).

These decreases were partially offset by higher 2018 employee separation costs and salaries.

Deferred compensation was $2.3 million of income in 2018 compared to $4.9 million of expense in 2017.

The favorable year-over-year change was primarily due to less mutual fund related expense incurred in the current year combined with a steeper drop in Stepan share price in 2018 versus 2017.

Company Stock Price

Liquidity and Capital Resources

Historically, the Company’s principal sources of liquidity have included cash flows from operating activities, available cash and cash equivalents and the use of available borrowing facilities.

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.

For the twelve months ended December 31, 2019, operating activities were a cash source of $218.4 million versus a source of $171.1 million for the comparable period in 2018.

For the current year, investing cash outflows totaled $112.7 million, as compared to an outflow of $107.8 million in the prior year period, and financing activities were a use of $90.5 million, as compared to a use of $51.6 million in the prior year period.

Cash and cash equivalents increased by $15.2 million compared to December 31, 2018, including an unfavorable exchange rate impact of $0.1 million.

For 2020, cash generated from operating activities was $235.2 million compared to cash generated of $218.4 million in 2019.

For 2020, investing cash outflows totaled $139.0 million, as compared to an outflow of $112.7 million in the prior year period.

Financing activities were a use of $64.9 million in 2020, as compared to a use of $90.5 million in 2019.

Cash and cash equivalents as of December 31, 2020 increased by $34.6 million compared to December 31, 2019, including a favorable exchange rate impact of $3.3 million.

As of December 31, 2020, the Company’s cash and cash equivalents totaled $349.9 million.

demand deposit accounts, certificate of deposit accounts and money market funds totaled $64.7 million, $41.0 million and $110.7 million, respectively.

demand deposit accounts and money market funds totaled $76.1 million and $123.7 million, respectively.

The Company’s non-U.S.

1 unchanged sentence

Operating Activity

Net cash provided by operating activities was $218.4 million in 2019, a 28 percent increase versus $171.1 million in 2018.

Net income in 2019 decreased by $8.0 million versus the comparable period in 2018.

Working capital was a cash source of $17.6 million in 2019 versus a use of $37.7 million in 2018.

Accounts receivable were a source of $4.9 million in 2019 compared to a source of $5.2 million in 2018.

Inventories were a source of $28.5 million in 2019 versus a use of $24.7 million in 2018.

Accounts payable and accrued liabilities were a use of $15.1 million in 2019 compared to a use of $19.0 million for the same period in 2018.

Working capital requirements were lower in 2019 compared to 2018 primarily due to the changes noted above.

The current year inventory source of cash reflects lower quantities and prices.

The current year accounts payable and accrued liabilities cash usage reflects lower quantities purchased and prices.

Net income in 2020 increased by $24.6 million versus the comparable period in 2019.

Working capital was a cash source of $2.4 million in 2020 versus a cash source of $17.6 million in 2019.

Accounts receivable were a use of $23.4 million in 2020 compared to a source of $4.9 million in 2019.

Inventories were a use of $15.4 million in 2020 versus a source of $28.5 million in 2019.

Accounts payable and accrued liabilities were a source of $55.7 million in 2020 compared to a use of $15.1 million for the same period in 2019.

Working capital requirements were higher in 2020 compared to 2019 primarily due to the changes noted above.

The higher accounts receivables cash usage in 2020 was primarily due to higher sales volume within the consumer product end markets to support increased demand for cleaning, disinfection and personal wash products.

The 2020 increase in inventories cash usage reflects inventory builds to support higher finished goods demand within the consumer product end markets.

The 2020 accounts payable and accrued liabilities higher cash source reflect higher raw material quantities and prices and higher incentive-based compensation

It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 202 1 .

1 unchanged sentence

Cash used for investing activities increased $26.4 million year-over-year.

Cash outflows from investing activities included capital expenditures of $ 105.6 million compared to $ 86 .6 million in 2018.

Cash used for capital expenditures was $ 125.8 million in 2020 versus $ 105.6 million in 2019.

Other investing activities were a use of $13.2 million in 2020 versus a use of $7.1 million in 2019.

The current year cash use in other investing activities was primarily attributable to the $9.0 million acquisition of an oilfield demulsifier product line during the fourth quarter of 2019.

The cash use in other investing activities in 2018 was primarily attributable to the $22.9 million acquisition of a surfactant production facility, and a portion of the related surfactant business, in Ecatepec, Mexico.

For 2020, the Company estimates that total capital expenditures will range from $110 million to $130 million including infrastructure and optimization spending in the United States, Germany and Mexico.

The current year cash use in other investing activities was primarily attributable to:

(a) the Company’s first quarter 2020 acquisition of certain assets from Logos Technologies LLC’s NatSurFact business, a rhamnolipid-based line of bio-surfactants derived from renewable resources ($2.0 million) and (b) the Company’s third quarter 2020 acquisition of Clariant’s Mexico anionic surfactant business ($13.5 million).

The cash use in other investing activities in 2019 was primarily attributable to the $9.0 million acquisition of an oilfield demulsifier product line during the fourth quarter of 2019.

For 2021, the Company estimates that total capital expenditures will range from $150 million to $170 million, including growth initiatives, infrastructure and optimization spending in the United States, Germany and Mexico.

Financing Activity

Cash flow from financing activities was a use of $64.9 million in 2020 versus a use of $90.5 million in 2019.

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 also to mitigate the dilutive effect of new shares issued under its benefit plans.

The lower cash usage in 2020 primarily reflects the non-recurrence of the Company’s voluntary prepayment of $17.1 million of outstanding principal balance of its 5.88 percent senior notes in 2019.

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 benefit plans.

The Company may, from time to time, seek to retire or purchase additional amounts of its outstanding equity and/or 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.

4 unchanged sentences

Debt and Credit Facilities

Consolidated balance sheet debt decreased by $54.0 million for 2019, from $276.1 million to $222.1 million, primarily due to lower domestic debt .

Cash balance as of December 31, 2019 was $315.4 million versus $300.2 million as of December 31, 2018.

In 2019, net debt (which is defined as total debt minus cash – See the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) decreased by $69.2 million, from a negative $24.1 million to a negative $93.3 million.

Consolidated balance sheet debt decreased by $23.4 million for 2020, from $222.1 million to $198.7 million, primarily due to scheduled debt repayments .

In 2020, net debt (which is defined as total debt minus cash – See the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) decreased by $57.9 million, from a negative $93.3 million to a negative $151.2 million, as cash balances of $349.9 million exceeded total debt of $198.7 million.

As of December 31, 2020, the ratio of total debt to total debt plus shareholders’ equity was 16.8 percent compared to 19.9 percent at December 31, 2019 .

As of December 31, 2020, the ratio of net debt to net debt plus shareholders’ equity was negative 18.1 percent, compared to negative 11.7 percent at December 31, 2019.

At December 31, 2019, the Company’s debt included $222.1 million of unsecured private placement loans with maturities ranging from 2020 through 2027 which were issued to insurance companies pursuant to note purchase agreements (the Note Purchase Agreements).

These notes are the Company’s primary source of long-term debt financing and are supplemented by bank credit facilities to meet short and medium-term needs.

On January 30, 2018, the Company entered into a five year committed $350 million multi-currency revolving credit facility with a syndicate of banks that matures on January 30, 2023.

This revolving credit facility replaced the Company’s prior $125 million credit agreement.

At December 31, 2020, the Company’s debt included $198.7 million of unsecured notes with maturities ranging from 2021 through 2027, which were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the Note Purchase Agreements).

The proceeds from these note issuances have been the Company’s primary source of long-term debt financing and are supplemented by borrowings under bank credit facilities to meet short and medium-term liquidity needs.

On January 30, 2018, the Company entered a five-year committed $350 million multi-currency revolving credit facility with a syndicate of banks that matures on January 30, 2023.

This credit agreement allows the Company to make unsecured borrowings, as requested from time to time, to finance working capital needs, permitted acquisitions, capital expenditures and for general corporate purposes.

This unsecured facility is the Company’s primary source of short-term borrowings.

As of December 31, 2019, the Company had outstanding letters of credit totaling $4.9 million under the revolving credit agreement and no borrowings, with $345.1 million remaining available.

As of December 31, 2020, the Company had outstanding letters of credit totaling $6.2 million under the revolving credit facility and no borrowings, with $343.8 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.

1 unchanged sentence

At December 31, 2020, the Company’s foreign subsidiaries had no outstanding debt.

The Company has 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 treasury shares.

As of December 31, 2019, testing for these agreements was based on the Company’s consolidated financial statements.

Under the most restrictive of these debt covenants:

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.

U nder the most restrictive of these debt covenants:

The Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, not to exceed 3.50 to 1.00, for the preceding four calendar quarters.

1 unchanged sentence

The Company is required to maintain net worth of at least $325.0 million.

The Company is permitted to pay dividends and purchase treasury shares after December 31, 2017, in amounts of up to $100.0 million plus 100 percent of net income and cash proceeds of stock option exercises, measured cumulatively

beginning December 31, 2017.

The maximum amount of dividends that could have been paid within this limitation is disclosed as unrestricted retained earnings in Note 6 to the consolidated financial statements.

The Company believes it was in compliance with all of its loan agreements as of December 31, 2019.

The Company believes it was in compliance with all of its debt covenants as of December 31, 2020.

Contractual Obligations

11 unchanged sentences

The “Other” category comprises deferred revenues that represent commitments to deliver products, expected 2021 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.

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

The above table does not include $78.2 million of other non-current liabilities recorded on the balance sheet at December 31, 2020, as summarized in Note 15 to the consolidated financial statements.

5 unchanged sentences

The underfunded status (pretax) of the Company’s defined benefit pension plans was $9.1 million at December 31, 2020 versus $13.6 million at December 31, 2019.

See Note 14, Postretirement Benefit Plans, to the consolidated financial statements for additional details.

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 $0.8 million to its defined benefit plans in 2020.

1 unchanged sentence

defined benefit plan.

As a result of pension funding relief included in the Highway and Transportation Funding Act of 2014, the Company has no 2020 contribution requirement to the U.S.

As a result of pension funding relief included in the Highway and Transportation

Funding Act of 2014, the Company has no 2021 contribution requirement to the U.S.

pension plans.

Payments to participants in the unfunded non-qualified plans should approximate $0.3 million in 2020, which is the same as payments made in 2019.

Payments to participants in the unfunded non-qualified plans should approximate $0.3 million in 202 1 , which approximates payments made in 20 20 .

Letters of Credit

3 unchanged sentences

Off-Balance Sheet Arrangements

The Securities and Exchange Commission requires disclosure of off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or

expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

The SEC requires disclosure of off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

During the periods covered by this Form 10-K, the Company was not party to any such off-balance sheet arrangements.

13 unchanged sentences

The Company’s environmental and legal accruals totaled $22.9 million at December 31, 2020 as compared to $25.9 million at December 31, 2019.

Because the liabilities accrued are estimates, actual amounts could differ from the amounts reported.

Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported.

During 2020, cash outlays related to legal and environmental matters approximated $4.5 million compared to $3.8 million expended in 2019.

3 unchanged sentences

Based upon the Company’s present knowledge with respect to its involvement at these sites and the possibility of other viable entities’ responsibilities for cleanup, management believes that the Company has no liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position.

Legal Proceedings, in this Form 10-K and Note 17, Contingencies, in the Notes to Consolidated Financial Statements for a summary of the significant environmental proceedings related to certain environmental sites.

Management anticipates a very challenging first quarter of 2020 due to operational issues at its plant in Millsdale, Illinois (see Note 27, Subsequent Events, in the Notes to Consolidated Financial Statements for additional details).

Despite the challenging start to 2020, management believes its Surfactant strategy, inclusive of its focus on end market diversification, Tier 2 and Tier 3 customers and cost out activities will continue to contribute to margin improvement.

Management believes Polymers will continue to benefit from energy conservation efforts and the growing market for insulation materials around the globe.

Management believes full year Specialty Products results will approximate 2019 results.

Additional headwinds anticipated in 2020 include the negative impact of the Coronavirus in China as well as higher raw material sourcing costs due to the Illinois River lock closures scheduled during the second half of 2020.

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.

Management believes the Company’s Surfactant segment should continue to benefit from continued heightened demand for cleaning, disinfection and personal wash products.

Management believes the demand for surfactants within the agricultural and oilfield markets will improve slightly in 2021.

The demand for rigid polyols slowly recovered from pandemic-related delays and cancellations of re-roofing and new construction projects during the latter part of 2020.

Management anticipates that demand will

continue to recover at a modest pace in 2021.

Management believes the long-term prospects for the Polymer segment remain attractive because of energy conservation efforts and more stringent building codes.

Management believes Specialty Products results will improve slightly in 2021.

Climate Change Legislation

33 unchanged sentences

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 required making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation.

Estimating the possible costs of

remediation require s 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.

11 unchanged sentences

Volume and cash discounts due to customers are estimated and recorded in the same period as the sales to which the discounts relate and are reported as reductions of revenue in the consolidated statements of income.

See Note 22 to the consolidated financial statements for more details.

See Note 21, Revenue from Contracts with Customers, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for more details.

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements, included in Part II-Item 8, for information on recent accounting pronouncements which affect the Company.

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.

These measures should be considered in addition to, not a substitute 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.

Reconciliations of Non-GAAP Adjusted Net Income and Dilutive Earnings per Share

8 unchanged sentences

Cumulative Tax Effect on Above Adjustment Items

US Tax Reform Impact

Adjusted Net Income

The 2018 and 2017 amounts have been retrospectively changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S.

inventory valuation from LIFO to FIFO.

The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company’s operating performance and provide better clarity on the impact of non-operational items.

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 a substitute for or superior to, measures of financial performance prepared in accordance with GAAP.

Management uses the non-GAAP adjusting net income metric to evaluate the Company’s operating performance.

Management excludes the items listed in the table above because they are non-operational items.

The cumulative tax effect was calculated using the statutory tax rates for the jurisdictions in which the transactions occurred.

5 unchanged sentences

Less Cash and Cash Equivalents as Reported

Net Debt plus Equity

Net Debt/Net Debt plus Equity

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.

This adjusted measure should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP.

The Company's definition of this measure may differ from similarly titled measures used by other entities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis