STEPAN CO 10-K

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. 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 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: • 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). 21 • 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 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 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. 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 and phthalic anhydride are manufactured at the Company’s Millsdale, Illinois, site, and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. 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, 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. 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. 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) 22 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 The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company expenses and profits. 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 displayed in the following tables: Income (Expense) For the Year Ended December 31 (In millions) 2020 2019 Change Deferred Compensation (Operating expenses) $ (10.0 ) $ (15.1 ) $ 5.1 (1) Investment Income (Other, net) 1.6 0.9 0.7 Realized/Unrealized Gains (Losses) on Investments (Other, net) 3.1 3.8 (0.7 ) Pretax Income Effect $ (5.3 ) $ (10.4 ) $ 5.1 Income (Expense) For the Year Ended December 31 (In millions) 2019 2018 Change Deferred Compensation (Operating expenses) $ (15.1 ) $ 2.3 $ (17.4 ) (1) Investment Income (Other, net) 0.9 1.5 (0.6 ) Realized/Unrealized Gains on Investments (Other, net) 3.8 (2.7 ) 6.5 Pretax Income Effect $ (10.4 ) $ 1.1 $ (11.5 ) (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: December 31 2020 2019 2018 2017 Company Stock Price $ 119.32 $ 102.44 $ 74.00 $ 78.97 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-to-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 line items for 2020 compared to 2019 and 2019 compared to 2018: For the Year Ended December 31 Increase (Decrease) Due to Foreign Currency (In millions) 2020 2019 Translation Net Sales $ 1,869.8 $ 1,858.7 $ 11.1 $ (45.7 ) Gross Profit 383.6 339.7 43.9 (10.2 ) Operating Income 171.5 127.3 44.2 (7.7 ) Pretax Income 171.1 125.9 45.2 (7.6 ) For the Year Ended (Decrease) Due December 31 Increase to Foreign Currency (In millions) 2019 2018 (Decrease) Translation Net Sales $ 1,858.7 $ 1,993.9 (135.2 ) $ (37.3 ) Gross Profit $ 339.7 $ 339.3 0.4 (5.0 ) Operating Income $ 127.3 $ 149.3 (22.0 ) (2.5 ) Pretax Income $ 125.9 $ 137.8 (11.9 ) (2.4 ) Results of Operations 2020 Compared with 2019 Summary 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. 24 • 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 Net Sales December 31, 2020 December 31, 2019 Increase (Decrease) Percent Change Surfactants $ 1,351,686 $ 1,272,723 $ 78,963 6 Polymers 452,277 512,347 (60,070 ) -12 Specialty Products 65,787 73,675 (7,888 ) -11 Total Net Sales $ 1,869,750 $ 1,858,745 $ 11,005 1 25 (In thousands) For the Year Ended Operating Income December 31, 2020 December 31, 2019 Increase (Decrease) Percent Change Surfactants $ 169,101 $ 122,780 $ 46,321 38 Polymers 68,214 69,567 (1,353 ) -2 Specialty Products 13,966 16,415 (2,449 ) -15 Segment Operating Income $ 251,281 $ 208,762 $ 42,519 20 Corporate Expenses, Excluding Deferred Compensation and Restructuring 68,559 63,618 4,941 8 Deferred Compensation Expense (Income) 9,988 15,140 (5,152 ) -34 Business Restructuring 1,212 2,744 (1,532 ) -56 Total Operating Income $ 171,522 $ 127,260 $ 44,262 35 Surfactants 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) December 31, 2020 December 31, 2019 Increase (Decrease) Percent Change North America $ 826,841 $ 766,341 $ 60,500 8 Europe 234,631 240,711 (6,080 ) -3 Latin America 234,568 212,405 22,163 10 Asia 55,646 53,266 2,380 4 Total Surfactants Segment $ 1,351,686 $ 1,272,723 $ 78,963 6 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. 26 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) December 31, 2020 December 31, 2019 Increase (Decrease) Percent Change Gross Profit and Operating Income North America $ 173,213 $ 140,335 $ 32,878 23 Europe 37,558 34,083 3,475 10 Latin America 46,284 32,292 13,992 43 Asia 12,414 13,622 (1,208 ) -9 Surfactants Segment Gross Profit $ 269,469 $ 220,332 $ 49,137 22 Operating Expenses 100,368 97,552 2,816 3 Operating Income $ 169,101 $ 122,780 $ 46,321 38 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. 27 Polymers 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) December 31, 2020 December 31, 2019 (Decrease) Percent Change North America $ 265,700 $ 314,549 $ (48,849 ) -16 Europe 147,289 158,455 (11,166 ) -7 Asia and Other 39,288 39,343 (55 ) 0 Total Polymers Segment $ 452,277 $ 512,347 $ (60,070 ) -12 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) December 31, 2020 December 31, 2019 Increase (Decrease) Percent Change Gross Profit and Operating Income North America $ 60,161 $ 69,362 $ (9,201 ) -13 Europe 26,555 23,299 3,256 14 Asia and Other 9,691 5,752 3,939 68 Polymers Segment Gross Profit $ 96,407 $ 98,413 $ (2,006 ) -2 Operating Expenses 28,193 28,846 (653 ) -2 Operating Income $ 68,214 $ 69,567 $ (1,353 ) -2 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. 28 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: December 31 2020 2019 2018 2017 Company Stock Price $ 119.32 $ 102.44 $ 74.00 $ 78.97 2019 Compared with 2018 Summary 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 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. A detailed discussion of segment operating performance for 2019 compared to 2018 follows the summary. Consolidated net sales decreased $135.1 million, or seven percent, between years. Lower average selling prices negatively impacted the year-over-year change in net sales by $60.8 million. The decrease in average selling prices was primarily due to the pass through of lower raw material costs. 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 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. Sales volume in the Surfactant segment decreased three percent while sales volume in the Polymer and Specialty Product segments increased four and one percent, respectively. Operating income declined $22.0 million, or 15 percent, between years. The majority of this decrease reflects higher deferred compensation expenses in 2019. Deferred compensation expenses increased $17.5 million year-over-year. Corporate expenses, 29 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. Foreign currency translation had an unfavorable $2.5 million effect on year-over-year consolidated operating income. Operating expenses (including deferred compensation expense and business restructuring expenses) increased $22.4 million, or 12 percent, between years. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows: • Selling expenses increased $0.6 million, or one percent, year over year. • Administrative expenses increased $3.3 million, or four percent, year over year. The increase was primarily due to higher environmental remediation and legal expenses. 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. • Research, development and technical service (R&D) expenses increased $0.8 million, or one percent, year over year. • Deferred compensation expense increased $17.5 million year-over-year primarily due to a $28.44 per share increase in the market price of Company common stock during 2019 compared to a $4.97 per share decrease in 2018. See the Overview and Segment Results - Corporate Expenses sections of this MD&A for further details. • 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 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 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. This decrease was primarily attributable to the combination of higher interest earned on U.S. cash balances and lower interest expense resulting from scheduled debt repayments and the Company’s voluntary prepayment of its 5.88% Senior Notes in the second quarter of 2019. The higher interest on U.S. cash balances was principally due to foreign cash repatriation of $100.0 million to the United States in the fourth quarter of 2018. Other, net was $4.6 million of income in 2019 versus $0.7 million of expense in 2018. The Company recognized $4.9 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 2019 compared to $1.4 million of losses in 2018. In addition, the Company reported foreign exchange gains of $0.1 million in 2019 versus $1.9 million of gains in 2018. The Company also reported $0.9 million of lower net periodic pension cost expense in 2019 versus the prior year. Other miscellaneous items resulted in $0.1 million of higher expense in 2019. 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 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. Segment Results (In thousands) For the Year Ended Net Sales December 31, 2019 December 31, 2018 (Decrease) Percent Change Surfactants $ 1,272,723 $ 1,385,932 $ (113,209 ) -8 Polymers 512,347 527,420 (15,073 ) -3 Specialty Products 73,675 80,505 (6,830 ) -8 Total Net Sales $ 1,858,745 $ 1,993,857 $ (135,112 ) -7 30 (In thousands) For the Year Ended Operating Income December 31, 2019 December 31, 2018 Increase (Decrease) Percent Change Surfactants $ 122,780 $ 133,518 $ (10,738 ) -8 Polymers 69,567 66,373 3,194 5 Specialty Products 16,415 11,661 4,754 41 Segment Operating Income $ 208,762 $ 211,552 $ (2,790 ) -1 Corporate Expenses, Excluding Deferred Compensation and Restructuring 63,618 62,028 1,590 3 Deferred Compensation Expense (Income) 15,140 (2,329 ) 17,469 NM Business Restructuring 2,744 2,588 156 6 Total Operating Income $ 127,260 $ 149,265 $ (22,005 ) -15 Surfactants Surfactants 2019 net sales decreased $113.2 million, or eight percent, versus 2018 net sales. The unfavorable impact of lower sales volume, lower average selling prices and foreign currency translation negatively impact the year-over-year change in net sales by $48.1 million, $40.8 million and $24.3 million, respectively. Sales volume decreased three percent year-over-year. 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: For the Year Ended (In thousands) December 31, 2019 December 31, 2018 (Decrease) Percent Change North America $ 766,341 $ 831,592 $ (65,251 ) -8 Europe 240,711 276,742 (36,031 ) -13 Latin America 212,405 212,824 (419 ) 0 Asia 53,266 64,774 (11,508 ) -18 Total Surfactants Segment $ 1,272,723 $ 1,385,932 $ (113,209 ) -8 Net sales for North American operations decreased $65.3 million, or eight percent, between years. Lower average selling prices, a two percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $44.2 million, $20.4 million and $0.7 million, respectively. Selling prices decreased five percent mostly due to the pass through of lower raw material costs to customers. The decline in sales volume was mostly due to lower personal care commodity demand due to one customer losing an important share of business and lower sales volume to our distribution partners due to lower demand. The foreign currency impact reflected a stronger U.S. dollar relative to the Canadian dollar. Net sales for European operations declined $36.0 million, or 13 percent, primarily due to a nine percent decrease in sales volume and the unfavorable effects of foreign currency translation. These items negatively impacted the year-over-year change in net sales by $24.0 million and $12.8 million, respectively. The lower sales volume was principally due to the Company ceasing Surfactant production at its German site during the fourth quarter of 2018. A stronger U.S. dollar relative to the European euro and British pound sterling led to the foreign currency translation effect. Slightly higher selling prices favorably impacted the year-over-year change in net sales by $0.8 million. Net sales for Latin American operations were flat year-over-year. Higher average selling prices positively impacted the year-over-year change in net sales by $16.9 million. The unfavorable impact of foreign currency translation and a three percent decrease in sales volume negatively impacted the year-over-year change in net sales by $11.6 million and $5.7 million, respectively. The higher average selling prices were partially due to one-time benefits related to a VAT tax recovery in Brazil. The decline in sales volume is mostly attributable to lower sales volume to our distribution partners partially offset by higher demand in the agricultural end markets. The year-over-year strengthening of the U.S. dollar against the Colombian peso and Brazilian real generated most of the unfavorable foreign currency effect. Net sales for Asian operations declined $11.5 million, or 18 percent, primarily due to an 11 percent decline in sales volume and lower selling prices. 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 lower selling prices were mostly due to the pass through of lower raw material costs to customers. The favorable impact of foreign currency translation positively impacted the change in net sales by $0.7 million. Surfactant operating income for 2019 declined $10.7 million, or eight percent, versus operating income reported in 2018. Gross profit 31 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: For the Year Ended (In thousands) December 31, 2019 December 31, 2018 Increase (Decrease) Percent Change Gross Profit and Operating Income North America $ 140,335 $ 154,785 $ (14,450 ) -9 Europe 34,083 30,540 3,543 12 Latin America 32,292 26,574 5,718 22 Asia 13,622 17,030 (3,408 ) -20 Surfactants Segment Gross Profit $ 220,332 $ 228,929 $ (8,597 ) -4 Operating Expenses 97,552 95,411 2,141 2 Operating Income $ 122,780 $ 133,518 $ (10,738 ) -8 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. These items negatively impacted the change in gross profit by $10.6 million and $3.8 million, respectively. The lower unit margins reflect a slightly less favorable customer and product mix and higher one-time inventory costs associated with the Company’s internal Asia-U.S. supply chain. The decline in sales volume was mostly due to lower personal care commodity demand due to one customer losing an important share of business and lower sales volume to our distribution partners due to lower demand. Gross profit for European operations increased $3.5 million, or 12 percent, primarily due to lower overhead costs and higher unit margins resulting from the Company ceasing Surfactant production at its German plant site during the fourth quarter of 2018. Unit margins also benefited from double digit volume growth in the agricultural and oilfield end markets. Higher unit margins favorably impacted the year-over-year change in gross profit by $8.0 million. 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 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 sulfonation equipment failure. Excluding the effect of the above items, average margins were flat between years. The unfavorable impact of foreign currency translation and three percent lower sales volume negatively impacted the year-over-year change in gross profit by $1.4 million and $0.7 million, respectively. Gross profit for Asian operations decreased $3.4 million, or 20 percent, largely due to an 11 percent decline in sales volume and lower unit margins. These items negatively impacted the year-over-year change in gross profit by $1.8 million and $1.7 million, respectively. The decline in sales volume was largely due to lower commodity demand in the laundry and cleaning end markets and lower sales to our distribution partners. The lower unit margins are primarily due to higher unit overhead costs in Singapore due to unfavorable production timing differences. Operating expenses for the Surfactants segment increased $2.1 million, or two percent, year-over-year. Most of this increase was attributable to higher salary and associated fringe benefit expenses. 32 Polymers Polymers 2019 net sales decreased $15.1 million, or three percent, versus net sales for 2018. A four percent increase in sales volume positively impacted the year-over-year change in net sales by $19.6 million. 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. 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: For the Year Ended (In thousands) December 31, 2019 December 31, 2018 Increase (Decrease) Percent Change North America $ 314,549 $ 323,360 $ (8,811 ) -3 Europe 158,455 172,632 (14,177 ) -8 Asia and Other 39,343 31,428 7,915 25 Total Polymers Segment $ 512,347 $ 527,420 $ (15,073 ) -3 Net sales for North American operations declined $8.8 million, or three percent, primarily due to lower average selling prices partially offset by slightly favorable volume growth. The lower average selling prices negatively impacted the change in net sales by $11.6 million. Sales volume growth positively impacted the change in net sales by $2.8 million. 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. Net sales for European operations decreased $14.2 million, or eight percent, year-over-year. Sales volume growth of two percent positively impacted the year-over-year change in net sales by $4.1 million. The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the change in net sales by $10.5 million and $7.8 million, respectively. A stronger U.S. dollar relative to the Polish zloty led to the foreign currency translation effect. Net sales for Asia and Other operations increased $7.9 million, or 25 percent, primarily due to a 37 percent increase in sales volume. The increase in sales volume positively impacted the year-over-year change in net sales by $11.5 million. The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the change in net sales by $1.8 million each. Polymer operating income for 2019 increased $3.2 million, or five percent, versus operating income for 2018. Gross profit increased $3.9 million, or four percent, year-over-year. Operating expenses increased $0.7 million, or two percent, in 2019. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow: For the Year Ended (In thousands) December 31, 2019 December 31, 2018 Increase (Decrease) Percent Change Gross Profit and Operating Income North America $ 69,362 $ 68,868 $ 494 1 Europe 23,299 24,756 (1,457 ) -6 Asia and Other 5,752 892 4,860 545 Polymers Segment Gross Profit $ 98,413 $ 94,516 $ 3,897 4 Operating Expenses 28,846 28,143 703 2 Operating Income $ 69,567 $ 66,373 $ 3,194 5 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 2019 but was largely offset by lower phthalic anhydride and specialty polyols sales volume. Average unit margins were flat year-over-year. The flat margins largely reflect the consumption of higher priced 2018 year-end inventories carried to guard against winter supply disruptions and the non-recurrence of a $2.1 million class action settlement received in the first quarter of 2018. Gross profit for European operations declined $1.5 million, or six percent, year-over-year. Sales volume growth of two percent positively impacted the year-over-year change in gross profit by $0.6 million. The unfavorable impact of foreign currency translation and lower unit margins negatively impacted the year-over-year change in gross profit by $1.5 million and $0.6 million, respectively. Gross profit for Asia and Other operations improved $4.9 million primarily due to higher unit margins and 37 percent sales volume growth year-over-year. 33 Operating expenses for the Polymers segment increased $0.7 million, or two percent, year-over-year. Specialty Products Specialty Products net sales decreased $6.8 million, or eight percent, versus net sales in 2018. A one percent increase in sales volume was more than offset by lower average selling prices. Gross profit increased $4.3 million and operating income increased $4.8 million year-over-year. These increases primarily reflect improved margins within the Company’s medium chain triglycerides (MCTs) product line and lower operating expenses as a result of the 2019 restructuring efforts. Corporate Expenses Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $19.2 million between years. Corporate expenses were $81.5 million in 2019 versus $62.3 million in the prior year. This increase was primarily attributable to higher deferred compensation expense ($17.5 million). 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. This increase was primarily due to a $28.44 per share increase in the market price of the Company’s common stock in 2019 compared to a $4.97 per share decline in 2018. The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expenses in 2019 and 2018: December 31 2019 2018 2017 Company Stock Price $ 102.44 $ 74.00 $ 78.97 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. 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. Cash in U.S. demand deposit accounts and money market funds totaled $76.1 million and $123.7 million, respectively. The Company’s non-U.S. subsidiaries held $150.1 million of cash outside the United States as of December 31, 2020. Operating Activity 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 34 accruals. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 202 1 . Investing Activity Cash used for investing activities increased $26.4 million year-over-year. 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: (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 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. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. For the twelve months ended December 31, 2020, the Company purchased 173,956 shares at a total cost of $15.3 million. At December 31, 2020, there were 175,874 shares remaining under the current share repurchase authorization. Debt and Credit Facilities 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, 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, 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. Certain foreign subsidiaries of the Company periodically maintain short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. At December 31, 2020, the Company’s foreign subsidiaries had no outstanding debt. 35 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: 1. 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. 2. The Company is required to maintain a maximum net leverage ratio, as defined within the agreements, not to exceed 3.50 to 1.00. 3. The Company is required to maintain net worth of at least $325.0 million. 4. 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 debt covenants as of December 31, 2020. Contractual Obligations At December 31, 2020, the Company’s contractual obligations, including estimated payments by period, were as follows: Payments Due by Period (In thousands) Total Less than 1 year 1-3 years 3 – 5 years More than 5 years Long-term debt obligations (1) $ 199,286 $ 37,857 $ 75,714 $ 57,144 $ 28,571 Interest payments on debt obligations (2) 25,401 7,785 10,870 5,053 1,693 Operating lease obligations (5) 75,380 12,704 20,445 9,779 32,452 Purchase obligations (3) 5,952 3,999 1,953 — — Other (4) 35,773 12,093 3,720 3,780 16,180 Total $ 341,792 $ 74,438 $ 112,702 $ 75,756 $ 78,896 (1) Excludes unamortized debt issuance costs of $0.6 million. (2) Interest payments on debt obligations represent interest on all Company debt at December 31, 2020. Future interest rates may change, and, therefore, actual interest payments could differ from those disclosed in the above table. (3) Purchase obligations consist of raw material, utility and telecommunication service purchases made in the normal course of business. (4) 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. (5) 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. 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. 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 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 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. In 2021, the Company expects to contribute a total of $0.5 million to the U.K. defined benefit plan. As a result of pension funding relief included in the Highway and Transportation 36 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 202 1 , which approximates payments made in 20 20 . 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, 2020, the Company had a total of $6.2 million of outstanding standby letters of credit. Off-Balance Sheet Arrangements 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. Environmental and Legal Matters The Company’s operations are subject to extensive federal, state and local environmental laws and regulations or 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 regulations, future developments and increasingly stringent environmental regulations 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 2020, the Company’s expenditures for capital projects related to the environment were $7.8 million. Expenditures for capital projects related to the environment 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, waste disposal and managing environmental compliance in ongoing operations at the Company’s manufacturing locations were approximately $35.4 million for 2020, $31.8 million for 2019 and $28.3 million for 2018. Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites. See the Critical Accounting Policies section that follows for a discussion of the Company’s environmental liabilities accounting policy. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses from $22.9 million to $41.1 million at December 31, 2020, compared to $25.9 million to $43.7 million at December 31, 2019. Within the range of possible environmental losses, management has currently concluded that there are no amounts within the ranges that are likely to occur than any other amounts in the ranges and, thus, has accrued at the lower end of the ranges. 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 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. For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based upon the Company’s present knowledge with respect to its involvement at these sites 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. 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 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 37 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 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 condition, results of operations or cash flows. Critical Accounting 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported 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: Deferred Compensation The Company sponsors deferred compensation plans that allow management employees to defer receipt of their annual bonuses and outside directors to defer receipt of their fees until retirement, departure from the Company or as elected by the participant. The plans allow for the deferred compensation to grow or decline based on the results of investment options chosen by the participants. The investment options include Company common stock and a limited selection of mutual funds. The Company funds the obligations associated with these plans by purchasing investment assets that match the investment choices made by the plan participants. A sufficient number of shares of treasury stock are maintained on hand to cover the equivalent number of shares that result from participants electing the Company common stock investment option. As a result, the Company must periodically purchase its common shares in the open market or in private transactions. Upon retirement or departure from the Company or at the elected time, participants receive cash amounts equivalent to the payment date value of the investment choices they have made or Company common stock shares equal to the number of share equivalents held in the accounts. Some plan distributions may be made in cash or Company common stock at the option of the participant. Other plan distributions can only be made in Company common stock. For deferred compensation obligations that may be settled in cash, the Company must record appreciation in the market value of the investment choices made by participants as additional compensation expense. Conversely, declines in the value of Company stock or the mutual funds result in a reduction of compensation expense since such declines reduce the cash obligation of the Company as of the date of the financial statements. These market price movements may result in significant period-to-period fluctuations in the Company’s income. The increases or decreases in compensation expenses attributable to market price movements are reported in the operating expenses section of the consolidated statements of income. Because the obligations that must be settled only in Company common stock are treated as equity instruments, fluctuations in the market price of the underlying Company stock do not affect earnings. At December 31, 2020 and December 31, 2019, the Company’s deferred compensation liability was $61.6 million and $59.0 million, respectively. In 2020 and 2019, approximately 53 percent and 55 percent, respectively, of deferred compensation liability represented deferred compensation tied to the performance of the Company’s common stock. The remainder of the deferred compensation liability was tied to the chosen mutual fund investment assets. A $1.00 increase in the market price of the Company’s common stock will result in approximately $0.3 million of additional compensation expense. A $1.00 reduction in the market price of the common stock will reduce compensation expense by a like amount. The expense or income associated with the mutual fund component will generally fluctuate in line with the overall percentage increase or decrease of the U.S. stock markets. The mutual fund assets related to the deferred compensation plans are recorded on the Company’s balance sheet at cost when acquired and adjusted to their market values at the end of each reporting period. As allowed by generally accepted accounting principles, the Company elected the fair value option for recording the mutual fund investment assets. Therefore, market value changes for the mutual fund investment assets are recorded in the income statement in the same periods that the offsetting changes in the deferred compensation liabilities are recorded. Dividends, capital gains distributed by the mutual funds and realized and unrealized gains and losses related to mutual fund shares are recognized as investment income or loss in the other, net line of the consolidated statements of income. 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 38 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. 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. Revenue Recognition On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company’s contracts typically have a single performance obligation that is satisfied at the time product is shipped and control passes to the customer as compared to the “risk and rewards” criteria used in prior years. For a small portion of the business, performance obligations are deemed satisfied when product is delivered to a customer location. For arrangements where the Company consigns product to a customer location, revenue is recognized when the customer uses the inventory. The Company accounts for shipping and handling as activities to fulfill a promise to transfer a good. As such, shipping and handling fees billed to customers in a sales transaction are recorded in Net Sales and shipping and handling costs incurred are recorded in Cost of Sales. 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 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, 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 Twelve Months Ended December 31 (In millions, except per share amounts) 2020 2019 2018 Net Income Diluted EPS Net Income Diluted EPS Net Income Diluted EPS Net Income Attributable to the Company as Reported $ 126.8 $ 5.45 $ 103.1 $ 4.42 $ 111.1 $ 4.76 Deferred Compensation (Income) Expense 5.3 0.23 10.5 0.45 (1.0 ) (0.04 ) Business Restructuring 1.2 0.05 2.7 0.12 2.6 0.11 Cash-Settled SARs 0.4 0.02 2.8 0.12 (0.7 ) (0.03 ) Environmental Remediation 0.0 — 4.30 0.18 — — Voluntary Debt Prepayment 0.0 — 1.20 0.05 — — Cumulative Tax Effect on Above Adjustment Items (1.7 ) (0.07 ) (5.2 ) (0.22 ) (0.3 ) (0.01 ) Adjusted Net Income 132.0 $ 5.68 $ 119.4 $ 5.12 $ 111.7 $ 4.79 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. 39 Reconciliations of Non-GAAP Net Debt (In millions) December 31 2020 2019 Current Maturities of Long-Term Debt as Reported $ 37.9 $ 23.6 Long-Term Debt as Reported $ 160.8 $ 198.5 Total Debt as Reported $ 198.7 $ 222.1 Less Cash and Cash Equivalents as Reported $ (349.9 ) $ (315.4 ) Net Debt $ (151.2 ) $ (93.3 ) Equity $ 986.7 $ 891.8 Net Debt plus Equity $ 835.5 $ 798.5 Net Debt/Net Debt plus Equity -18 % -12 % 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. 40