STEPAN CO 10-Q

Item 2 - 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 interim periods included in the accompanying condensed consolidated financial statements. Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company’s and its subsidiaries’ (the Company) plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, the Company’s actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “should,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company’s control, that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part II-Item IA - Risk Factors” of this Quarterly Report on Form 10-Q and under “Part I-Item IA. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, including the risks and uncertainties related to the following: • the impact of the COVID-19 pandemic; • accidents, unplanned production shutdowns or disruptions in any of the Company’s manufacturing facilities; • reduced demand for Company products due to customer product reformulations or new technologies; • the Company’s inability to successfully develop or introduce new products; • compliance with environmental, health and safety, product registration and anti-corruption laws; • the Company’s ability to make acquisitions of suitable candidates and successfully integrate acquisitions; • global competition and the Company’s ability to successfully compete; • volatility of raw material, natural gas and electricity costs as well as any disruption in their supply; • disruptions in transportation or significant changes in transportation costs; • downturns in certain industries and general economic downturns; • international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes; • unfavorable resolution of litigation against the Company; • the Company’s ability to keep and protect its intellectual property rights; • potentially adverse tax consequences due to the international scope of the Company’s operations; • downgrades to the Company’s credit ratings or disruptions to the Company’s ability to access well-functioning capital markets; • conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations; • cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects; • interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data; • the Company’s ability to retain its executive management and other key personnel; • the Company’s ability to operate within the limitations of debt covenants; and • the other factors set forth under “Risk Factors.” 20 These factors are not necessarily all of the important factors that could cause the Company’s actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors also could harm the Company’s results. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements. The “Company,” “we,” “our” or “us” means Stepan Company and one or more of its subsidiaries only. Overview The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business comprises three reportable segments: Surfactants – Surfactants, which accounted for 69 percent of Company consolidated net sales for the first three months of 2021 are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines and Singapore). Recent significant events include: o 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. The Company finalized an insurance settlement related to this power outage in the second half of 2020. o 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 has focused its 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 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details). o In September 2020, the Company, through its subsidiaries in Mexico, acquired Clariant’s anionic surfactant business located in Santa Clara, Mexico. The acquisition did not include the purchase of a manufacturing site. The business acquired was 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 enhances its ability to support customer growth in the Mexican consumer and functional surfactant markets. o 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 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details). 21 o Polymers – Polymers, which accounted for 28 percent of consolidated net sales for the first three months of 2021, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Millsdale, Illinois, and Wilmington, North Carolina sites (see INVISTA acquisition discussion below). Phthalic anhydride is 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 Vlissingen, Netherlands (see INVISTA acquisition discussion below) 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. Recent significant events include: o The operational issues at the Company’s Millsdale, Illinois facility, described in the Surfactants significant events paragraph above, negatively impacted Polymers earnings during the first quarter of 2020. o 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 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details). Specialty Products – Specialty products, which accounted for three percent of consolidated net sales for the first three months of 2021, 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. 2021 Acquisitions 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. This acquisition was accounted for as a business combination, and accordingly, the assets acquired were measured and recorded at their preliminary fair values. The purchase price of the acquisition was $165.0 million, plus $21.0 million of estimated working capital and $3.0 million of associated value-added taxes (VAT). The working capital acquired included $5.0 million of cash. The acquisition was paid with cash on hand. (See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details). 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. This acquisition was accounted for as an asset acquisition. The purchase price of the acquisition was $3.5 million and was paid with cash on hand. (See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details). 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 values of Company common stock and mutual fund investment assets held for the 22 plans increase, and compensation income results when the values of Company common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following table: Income (Expense) For the Three Months Ended March 31 (In millions) 2021 2020 Change Deferred Compensation (Administrative expense) $ (2.7 ) $ 7.3 $ (10.0 ) Realized/Unrealized Gains on Investments (Other, net) 0.4 (3.6 ) 4.0 Investment Income (Other, net) 0.3 0.1 0.2 Pretax Income Effect $ (2.0 ) $ 3.8 $ (5.8 ) Effects of Foreign Currency Translation The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three months ended March 31, 2021 and 2020: Three Months Ended March 31 Increase (In millions) 2021 2020 Increase Due to Foreign Translation Net Sales $ 537.7 $ 450.0 $ 87.7 $ 4.2 Gross Profit 109.0 79.3 29.7 0.2 Operating Income 53.9 40.0 13.9 0.0 Pretax Income 53.1 35.5 17.6 0.0 RESULTS OF OPERATIONS Three Months Ended March 31, 2021 and 2020 Summary Net income attributable to the Company for the first quarter of 2021 increased 47 percent to $40.6 million, or $1.74 per diluted share, from $27.5 million, or $1.18 per diluted share, for the first quarter of 2020. Adjusted net income increased 75 percent to $42.4 million, or $1.82 per diluted share, from $24.2 million, or $1.04 per diluted share in 2020 (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the first quarter of 2021 compared to the first quarter of 2020. A detailed discussion of segment operating performance for the first quarter of 2021 compared to the first quarter of 2020 follows the summary. Consolidated net sales increased $87.8 million, or 20 percent, between quarters. Higher average selling prices favorably impacted the year-over-year change in net sales by $55.0 million. The increase in average selling prices was mainly attributable to improved product and customer mix and the pass-through of higher raw material costs. Consolidated sales volume increased six percent, which had a $28.6 million favorable impact on the year-over-year change in net sales. Sales volume in the Polymer and Specialty Products segments increased 32 percent and four percent, respectively. The increase in Polymers sales volume reflects a gradual recovery from COVID-19 delays and cancellations of re-roofing and new construction projects, the 2021 acquisition of INVISTA’s aromatic polyester polyol business, and the non-recurrence of the plant power outage at the Company’s Millsdale, Illinois facility in the first quarter of 2020. Sales volume for the Surfactant segment was flat between quarters. Higher Surfactant sales volume in Europe, Latin America, and Asia was offset by lower North American sales volume. North American sales volume was negatively impacted by supply chain disruptions caused by the severe weather in Texas. Foreign currency translation favorably impacted the year-over-year change in net sales by $4.2 million primarily due to a strengthening of European currencies versus the U.S. dollar. 23 Operating income for the first quarter of 202 1 increased $1 3.9 million, or 35 percent, versus operating income for the first quarter of 20 20 . Surfactant and Polymer operating income increased $17.1 million and $10.4 million, respectively. Specialty Products operating income decreased $ 1.4 million. Corporate expenses, including business restructuring and deferred compensation expenses, increased $12.2 million year - over - year . Deferred compensation expenses increased $10.0 million while business restructuring expenses declined $0.3 million. Corporate expenses (excluding deferred compensation and business restructuring expenses) increased $2.5 million mostly due to higher acquisition-related costs and incentive-based compensation expenses. The impact of foreig n currency translation on operating income was negligible between quarters. Operating expenses (including deferred compensation and business restructuring expense) increased $15.8 million, or 40 percent, between quarters. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows: • Selling expenses increased $1.0 million, or seven percent, year-over-year. Most of this increase reflects higher salaries and incentive-based compensation expenses in 2021. • Administrative expenses increased $3.8 million, or 20 percent, year-over-year. This increase is primarily due to higher acquisition-related costs and incentive-based compensation expenses in 2021. • Research, development and technical service (R&D) expenses increased $1.3 million, or 10 percent, year-over-year. Most of this increase reflects higher salaries and incentive-based compensation expenses in 2021. • Deferred compensation expense increased $10 million, year-over-year, primarily due to a $7.79 per share increase in the market price of Company common stock in the first quarter of 2021 compared to a $13.98 per share decrease in the first quarter of 2020. See the Overview and Segment Results-Corporate Expenses section of this MD&A for further details. • Business restructuring expenses totaled $0.1 million in the first quarter of 2021 versus $0.4 million in the first quarter of 2020. The 2021 business restructuring charges reflect ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada. The 2020 restructuring expenses were comprised of decommissioning costs associated with the Company’s manufacturing facility in Canada ($0.3 million) and decommissioning costs associated with Company’s sulfonation shut down in Germany ($0.1 million). Net interest expense for the first quarter of 2021 increased $0.3 million, or 24 percent, versus the first quarter of 2020. This increase was primarily attributable to lower interest income resulting from lower interest rates due to global market conditions. Partially offsetting the above was lower interest expense resulting from scheduled debt repayments. Other, net was $0.7 million of income in the first quarter of 2021 versus $3.3 million of expense in the first quarter of 2020. The Company recognized $0.8 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 the first quarter of 2021 compared to $3.8 million of investment losses in last year’s first quarter. In addition, the Company reported $0.3 million of foreign exchange losses in the first quarter of 2021 versus $0.6 million of foreign exchange gains in the first quarter of 2020. The Company also reported $0.3 million of lower net periodic pension cost benefits in the first quarter of 2021 versus the prior year first quarter. The Company’s effective tax rate was 23.6 percent in the first quarter of 2021 versus 22.5 percent in the first quarter of 2020. The year-over-year increase was primarily attributable to a less favorable geographical mix of income in 2021 that was partially offset by higher tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2021 versus the first quarter of 2020 . Segment Results For the Three Months Ended (Dollars in thousands) March 31, March 31, Percent Net Sales 2021 2020 Increase (Decrease) Change Surfactants $ 370,936 $ 327,071 $ 43,865 13 Polymers 150,385 106,491 43,894 41 Specialty Products 16,419 16,425 (6 ) 0 Total Net Sales $ 537,740 $ 449,987 $ 87,753 20 24 For the Three Months Ended (Dollars in thousands) March 31, March 31, Increase Percent Operating Income 2021 2020 (Decrease) Change Surfactants $ 53,210 $ 36,156 $ 17,054 47 Polymers 17,951 7,516 10,435 139 Specialty Products 2,633 3,984 (1,351 ) -34 Segment Operating Income $ 73,794 $ 47,656 $ 26,138 55 Corporate Expenses, Excluding Deferred Compensation and Restructuring 17,105 14,618 2,487 17 Deferred Compensation Expense 2,694 (7,323 ) 10,017 -137 Business Restructuring 81 357 (276 ) -77 Total Operating Income $ 53,914 $ 40,004 $ 13,910 35 Surfactants Surfactant net sales for the first quarter of 2021 increased $43.9 million, or 13 percent, versus net sales for the first quarter of 2020. Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $42.5 million and $1.5 million, respectively. The higher average selling prices were mainly attributable to improved product and customer mix and the pass-through of higher raw material costs. Sales volume was essentially flat year-over-year and negatively impacted the change in net sales by $0.1 million. Higher sales volume in Europe, Latin American and Asia was offset by lower sales volume in North America due to supply chain disruptions caused by the severe weather in Texas. A comparison of net sales by region follows: For the Three Months Ended (Dollars in thousands) March 31, March 31, Percent Net Sales 2021 2020 Increase Change North America $ 220,935 $ 207,946 $ 12,989 6 Europe 71,094 59,660 11,434 19 Latin America 60,169 46,510 13,659 29 Asia 18,738 12,955 5,783 45 Total Surfactants Segment $ 370,936 $ 327,071 $ 43,865 13 Net sales for North American operations increased $13.0 million, or six percent, year over year. Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $22.3 million and $0.5 million, respectively. The higher average selling prices were mainly attributable to improved product and customer mix and the pass-through of higher raw material costs. Sales volume declined five percent and negatively impacted the year-over-year change in net sales by $9.8 million. Higher customer demand for products sold into the agricultural and oilfield end markets was more than offset by lower volume of products sold into the consumer product end markets due to supply chain disruptions caused by the severe weather in Texas. Net sales for European operations increased $11.4 million, or 19 percent, year-over-year. The favorable impact of foreign currency translation, higher average selling prices and a one percent increase in sales volume positively impacted the year-over-year change in net sale by $5.7 million, $5.1 million and $0.6 million, respectively. Higher average selling prices are primarily due to pass-through of higher raw material costs. A weaker U.S. dollar relative to the European euro and British pound sterling led to the favorable foreign currency translation effect. The increase in sales volume was primarily due to increased demand for cleaning and disinfection products that was partially offset by lower demand for products sold to our distribution partners. Net sales for Latin American operations increased $13.7 million, or 29 percent, primarily due higher average selling prices and an eight percent increase in sales volume. These items positively impacted the change in net sales by $15.4 million and $3.8 million, respectively. The sales volume growth was mostly due to higher demand for products sold into the consumer products and agricultural end markets. Partially offsetting the above was the unfavorable impact of foreign currency translation which negatively impacted the change in net sales by $5.6 million. A stronger U.S. dollar relative to the Brazilian real and Mexican peso led to the unfavorable foreign currency effect. Net sales for Asian operations increased $5.8 million, or 45 percent year-over-year. Higher average selling prices and a 17 percent increase in sales volume positively impacted the change in net sales by $2.7 million and $2.2 million, respectively. The sales volume growth was largely due to higher demand for products sold to our distribution partners and into the agricultural end market. The favorable impact of foreign currency translation positively impacted the change in net sales by $0.9 million 25 Surfactant operating income for the first quarter of 202 1 increased $1 7.1 million, or 47 percent, versus operating income for the first quarter of 20 20 . Gross profit increased $ 20.0 million year - over - year and operating expenses we r e up $3.0 million. C omparisons of gross profit by region and total segment operating expenses and operating income follow: For the Three Months Ended (Dollars in thousands) March 31, 2021 March 31, 2020 Increase Percent Change Gross Profit and Operating Income North America $ 54,056 $ 41,163 $ 12,893 31 Europe 11,263 9,498 1,765 19 Latin America 12,297 7,036 5,261 75 Asia 2,267 2,157 110 5 Surfactants Segment Gross Profit $ 79,883 $ 59,854 $ 20,029 33 Operating Expenses 26,673 23,698 2,975 13 Surfactants Segment Operating Income $ 53,210 $ 36,156 $ 17,054 47 Gross profit for North American operations increased $12.9 million, or 31 percent, between quarters primarily due to higher unit margins. The higher unit margins positively impacted the change in gross profit by $14.8 million and were mostly attributable to a more favorable product and customer mix and lower supply chain expenses due to the non-recurrence of the Millsdale, Illinois plant power outage in the first quarter of 2020. Sales volume declined five percent and negatively impacted the change in gross profit by $1.9 million. The decline in sales volume was mostly due to supply chain disruptions caused by the severe weather in Texas. Gross profit for European operations increased $1.8 million, or 19 percent, due to the favorable impact of foreign currency translation, higher unit margins and slightly higher sales volumes. These items positively impacted the year-over-year change in gross profits by $0.9 million, $0.7 million and $0.1 million, respectively. A weaker U.S. dollar relative to the European euro and British pound sterling led to the favorable foreign currency translation effect. Gross profit for Latin American operations increased $5.3 million, or 75 percent, between quarters primarily due to higher average unit margins and an eight percent increase in sales volume. These items positively impacted the change in gross profit by $6.0 million and $0.6 million, respectively. The higher unit margins primarily reflect a more favorable product and customer mix partially due to higher demand for products sold into the agricultural end market. The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $1.3 million. Gross profit for Asia operations increased $0.1 million, or five percent, between quarters. Sales volume increased 17 percent year over year but was largely offset by lower average unit margins. The higher sales volume positively impacted the change in gross profit by $0.4 million whereas the lower average unit margins negatively impacted the change in gross profit by $0.3 million. Lower unit margins were mostly due to higher raw material cost. Operating expenses for the Surfactants segment increased $3.0 million, or 13 percent, year-over-year. Most of the increase was due to higher salaries and fringe benefits. Polymers Polymer net sales for the first quarter of 2021 increased $43.9 million, or 41 percent, versus net sales for the same period of 2020. A 32 percent increase in sales volume favorably impacted the year-over-year change in net sales by $34.3 million. The increase in Polymer sales volume reflects a gradual recovery from COVID-19 related delays and cancellations of re-roofing and new construction projects, the 2021 acquisition of INVISTA’s aromatic polyester polyol business, and the non-recurrence of the plant power outage at the Company’s Millsdale, Illinois facility in the first quarter of 2020. Higher average selling prices and favorable impact of foreign currency translation positively impacted the change in net sales by $7.0 million and $2.6 million, respectively. A year-over-year comparison of net sales by region follows: For the Three Months Ended (Dollars in thousands) March 31 March 31 Increase Percent Net Sales 2021 2020 change North America $ 70,878 $ 61,841 $ 9,037 15 Europe 68,300 36,560 31,740 87 Asia and Other 11,207 8,090 3,117 39 Total Polymers Segment $ 150,385 $ 106,491 $ 43,894 41 Net sales for North American operations increased $9.0 million, or 15 percent, primarily due to a 28 percent increase in sales volume. The increase in sales volume positively impacted the change in net sales by $17.6 million. Sales volume of polyols used in rigid foam applications increased 25 percent during the quarter due to a gradual recovery from COVID-19 related delays of re-roofing 26 and new construction projects and the first quarter 2021 INVISTA acquisition. Sales volume of polyols used in rigid foam applications , excluding the impact of the INVISTA acquisition, increased eight percent . Sales volume of phthalic anhydride and specialty polyols increased 78 percent and 10 percent, respectively. The phthalic anhydride sales volume increase was largely due to the non-recurrence of the Millsdale plant power outage in 2020 , which resulted in the Company declaring force majeure within this market . Lower average selling prices negatively impacted the change in net sales by $8.6 million. Net sales for European operations increased $31.7 million, or 87 percent, year-over-year. Higher average selling prices and a 37 percent increase in sales volume favorably impacted the change in net sales by $16.1 million and $13.6 million, respectively. The higher average selling prices were primarily due to pass-through of higher raw material costs. The increase in sales volume reflects a gradual recovery from COVID-19 related delays of re-roofing and new construction projects and the first quarter 2021 INVISTA acquisition. Sales volume, excluding the impact of the INVISTA acquisition, increased seven percent. The favorable impact of foreign currency translation positively impacted the change in net sales by $2.0 million. Net sales for Asia and Other operations increased $3.1 million, or 39 percent, due to a 33 percent increase in sales volume and the favorable impact of foreign currency translation. These items positively impacted the change in net sales by $2.7 million and $0.5 million, respectively. The sales volume growth was primarily attributable to higher demand within the livestock and cold storage markets within China. Lower average selling prices negatively impacted the change in net sales by $0.1 million . Polymers operating income for the first quarter of 2021 increased $10.4 million, or 139%, versus operating income for the first quarter of 2020. Gross profit increased $11.0 million, or 76 percent, and operating expenses were up $0.6 million. Comparisons of gross profit by region and total segment operating expenses and operating income follow: For the Three Months Ended (Dollars in thousands) March 31, 2021 March 31, 2020 Increase Percent Change Gross Profit and Operating Income North America $ 13,271 $ 7,732 $ 5,539 72 Europe 10,996 5,652 5,344 95 Asia and Other 1,263 1,131 132 12 Polymers Segment Gross Profit $ 25,530 $ 14,515 $ 11,015 76 Operating Expenses 7,579 6,999 580 8 Polymers Segment Operating Income $ 17,951 $ 7,516 $ 10,435 139 Gross profit for North American operations increased $5.5 million, or 72 percent, due to higher unit margins and a 28 percent increase in sales volume. These two items favorably impacted the year-over-year change in gross profit by $3.3 million and $2.2 million, respectively. The higher unit margins are primarily due to the non-recurrence of the plant power outage at the Company’s Millsdale, Illinois facility in the first quarter of 2020 which resulted in higher maintenance, supply chain costs and unit overhead rates. Gross profit for European operations increased $5.3 million, or 95 percent, versus the first quarter of 2020. The increase was primarily due to higher unit margins and 37 percent increase in sales volume. These two items favorably impacted the year-over-year change in gross profit by $2.8 million and $2.1 million respectively. A large part of the sales volume increase resulted from the 2021 INVISTA acquisition which also contributed to a more favorable product mix. The favorable impact of foreign currency translation positively impacted the change in gross profit by $0.4 million. Gross profit for Asia and Other operations improved $0.1 million, or 12 percent, between quarters. Sales volume increased 33 percent year-over-year but was offset by lower average unit margins. The higher sales volume positively impacted the change in gross profit by $0.3 million and the lower unit margins negatively impacted the change in gross profit by $0.3 million. The lower unit margins reflect higher one-time tolling fees incurred during the first quarter of 2021. Foreign currency translation positively impacted the change in gross profit by $0.1 million. Operating expenses for the Polymers segment increased $0.6 million, or eight percent, year-over-year. Specialty Products Specialty Products net sales were flat year-over-year. A four percent increase in sales volume was offset by lower average selling prices. Gross profit and operating income each decreased by $1.4 million. These decreases primarily reflect lower unit margins, attributable to raw material shortages and manufacturing challenges, within the Company’s medium chain triglycerides product line. 27 Corporate Expenses Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $12.2 million between quarters. Corporate expenses were $19.9 million in the first quarter of 2021 versus $7.7 million in 2020. This increase was primarily attributable to higher deferred compensation expense ($10.0 million), acquisition-related expenses ($1.0 million) and incentive-based compensation expenses. The $10.0 million increase in deferred compensation expense was primarily due to a $7.79 per share increase in the market price of Company common stock in the first quarter of 2021 compared to a $13.98 per share decrease in the first quarter of 2020. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation expenses for the three months ended March 31, 2021 and 2020: 2021 2020 2019 March 31 December 31 March 31 December 31 Company Common Stock Price $ 127.11 $ 119.32 $ 88.46 $ 102.44 LIQUIDITY AND CAPITAL RESOURCES Overview For the three months ended March 31, 2021, operating activities were a cash use of $11.7 million versus a use of $6.5 million for the comparable period in 2020. For the current year period, investing cash outflows totaled $223.8 million versus a cash outflow of $32.9 million in the prior year period. Financing activities were a source of $39.9 million versus a use of $14.4 million in the prior year period. Cash and cash equivalents decreased by $199.2 million compared to December 31, 2020, inclusive of a $3.7 million unfavorable foreign exchange rate impact. At March 31, 2020, the Company’s cash and cash equivalents totaled $150.7 million. Cash in U.S. money market funds and demand deposit accounts totaled $33.4 million and $1.8 million, respectively. The Company’s non-U.S. subsidiaries held $115.5 million of cash outside the United States as of March 31, 2021. Operating Activity Net income in 2021 increased by $13.1 million versus the comparable period in 2020. Working capital was a cash use of $81.0 million in 2021 versus a use of $51.0 million in 2020. Accounts receivable were a use of $63.2 million in 2021 compared to a use of $30.8 million for the comparable period of 2020. Inventories were a use of $7.5 million in 2021 versus a use of $0.4 million in 2020. Accounts payable and accrued liabilities were a use of $9.4 million in 2021 compared to a use of $16.6 million for the same period in 2020. Working capital requirements were higher in 2021 compared to 2020 primarily due to the changes noted above. The higher accounts receivable cash usage in 2021 was largely due to higher sales volume related to the INVISTA acquisition. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 2021. Investing Activity Cash used for investing activities increased $190.8 million year-over-year. In the first quarter of 2021, the Company acquired INVISTA’s aromatic polyester polyol business and associated asset for $184.0 million, net of cash received. During the first quarter of 2021, the Company also acquired a fermentation plant located in Lake Providence, Louisiana for $3.5 million. Cash used for capital expenditures was $37.6 million in the first quarter of 2021 versus $33.2 million in the comparable prior year period. 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 source of $39.9 million in 2021 versus a use of $14.4 million in 2020. The increase in cash source is primarily due to borrowings from the Company’s revolving credit facility during the first quarter of 2021. The Company purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and to mitigate the dilutive effect of new shares issued under its compensation plans. The Company may, from time to time, seek to 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 28 material. In the three months ended March 31, 2021 , the Company purchased 8,300 shares on the open market at a total cost of $ 1.0 million. At March 31, 2021 , there were 167,574 shares remaining under the current share repurchase authorization. Debt and Credit Facilities Consolidated balance sheet debt increased by $49.7 million from $198.7 million to $248.4 million, primarily due to higher domestic debt which reflects borrowings from the Company’s revolving credit agreement during the first quarter of 2021. In 2021, net debt (which is defined as total debt minus cash – see the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) increased by $248.9 million in the first quarter of 2021, from a negative $151.2 million to $97.7 million. As of March 31, 2021, the ratio of total debt to total debt plus shareholders’ equity was 19.9 percent compared to 16.8 percent at December 31, 2020. As of March 31, 2021, the ratio of net debt to net debt plus shareholders’ equity was 8.9 percent, versus a negative 18.1 percent at December 31, 2020. See the “Reconciliation of Non-GAAP Net Debt” section in this MD&A. At March 31, 2021, the Company’s debt included $198.7 million of unsecured notes, with maturities ranging from 2021 through 2027, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the Note Purchase Agreements), $45.0 million of short term loans borrowed under the revolving credit facility, and $4.7 million of foreign credit line borrowings. 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 March 31, 2021, the Company had outstanding loans totaling $45.0 million and letters of credit totaling $6.8 million under the revolving credit facility, with $298.2 million remaining available. The Company anticipates that cash from operations, committed credit facilities and cash on hand will be sufficient to fund anticipated capital expenditures, working capital, dividends and other planned financial commitments for the foreseeable future. Certain foreign subsidiaries of the Company maintain short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditures and acquisitions. At March 31, 2021, the Company’s foreign subsidiaries had $4.7 million of outstanding debt. The Company is subject to covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth. These agreements also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares. Under the most restrictive of these debt covenants: 1. The Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, of 3.50 to 1.00, for the preceding four calendar quarters. 2. The Company is required to maintain a maximum net leverage ratio, as defined within the agreements, not to exceed 3.50 to 1.00. 3. The Company is required to maintain net worth of at least $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 14, Debt , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). The Company believes it was in compliance with all of its debt covenants as of March 31, 2021. ENVIRONMENTAL AND LEGAL MATTERS The Company’s operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first three months of 2021 and 2020, the Company’s expenditures for capital projects related to the environment were $3.0 million and $0.7 million, respectively. These projects are capitalized and depreciated over their estimated useful lives, which are typically 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing 29 operations at the Company’s manufacturing locations were $ 8.3 million and $ 10.0 million for the three months ended March 31, 202 1 and 20 20 , respectively. Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to the sites. It is the Company’s accounting policy to record liabilities when environmental assessments and/or remedial efforts are probable, and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. Estimating the possible costs of remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Some of the factors on which the Company bases its estimates include information provided by decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, and remedial action plans developed. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $22.9 million to $41.3 million at March 31, 2021 versus $22.9 million to $41.1 million at December 31, 2020. Within the range of possible environmental losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range; these accruals totaled $22.9 million at March 31, 2021 and December 31, 2020. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to legal and environmental matters were $0.3 million for the three-month period ended March 31, 2021 compared to $0.9 million for the same period in 2020. For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based upon the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position. Certain of these matters are discussed in Item 1, Part 2, of the Company’s Annual Report on Form 10-K, Legal Proceedings, in this report and in other filings of the Company with SEC, which are available upon request from the Company. See also Note 8, Contingencies , to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for a summary of the environmental proceedings related to certain environmental sites. 30 OUTLOOK Management believes the Company’s Surfactant volumes in the North American consumer product end markets should recover following the supply chain disruptions caused by the severe weather in Texas during the first quarter of 2021. Additionally, management believes that heightened global consumer demand for disinfection, cleaning and personal wash products will continue and that demand for surfactants within the agricultural and oilfield markets will improve versus 2020. Global demand for rigid polyols continues to recover from pandemic-related delays and cancellations of re-roofing and new construction projects. This gradual recovery, combined with the Company’s first quarter 2021 acquisition of INVISTA's aromatic polyester polyol business, should position the Company’s Polymer segment to deliver growth versus prior year. Management believes the long-term prospects for the Polymer segment remain attractive as energy conservation efforts and more stringent building codes are expected to continue. Management believes its Specialty Products segment results will improve slightly year-over-year . CRITICAL ACCOUNTING POLICIES There have been no material changes to the critical accounting policies disclosed in the Company’s 2020 Annual Report on Form 10-K, except for the addition of the following: Business Combinations The Company makes acquisitions from time to time. When such acquisitions occur, the Company applies the accounting guidance per FASB ASC Topic 805, Business Combinations (ASC 805), to determine whether the acquisition should be treated as an asset acquisition or a business combination. When the acquisition meets the criteria of a business combination the Company recognizes the identifiable assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition. The Company recognizes goodwill for any portion of the purchase price that exceeds the sum of the net fair value of all the assets purchased in the acquisition and the liabilities assumed. Considerable estimates, complex judgments and assumptions are typically required to arrive at the fair value of elements acquired in a business combination, inclusive of discount rates, customer attrition rates, royalty rates, economic lives, and estimated future cash flows expected to be generated from the assets acquired. These items are typically most relevant to the fair valuation of identifiable intangible assets and property, plant and equipment. In some instances, the purchase price allocation of an acquisition is not complete by the end of a reporting period. This situation most typically arises when an acquisition is complex and/or completed very close to the end of a reporting period and all necessary information is not available by the end of the reporting period in which the acquisition occurs. In these instances, the Company reports provisional amounts for any incomplete items and makes subsequent adjustments as necessary information becomes available or determines that additional information is not obtainable. Any subsequent adjustments could have a material impact on the Company’s financial condition or results of operations as they could impact the initial fair values assigned to intangible assets and property, plant and equipment and/or their estimated economic lives. ASC 805 requires purchase price allocations to be finalized within one year from the acquisition date. Goodwill and Intangible Assets The Company’s intangible assets include patents, agreements not to compete, trademarks, customer lists and relationships, technological and manufacturing know-how and goodwill, all of which were acquired as part of business combinations or asset acquisitions. Goodwill represents the excess of cost over the fair value of net assets acquired in a business combination. Intangible assets, other than goodwill, are determined to have either finite or indefinite useful lives. The Company currently has no indefinite-life intangible assets other than goodwill. Intangible assets with finite lives are amortized over the useful lives of the assets. Currently, the useful lives for the Company’s finite-life intangible assets are as follows: patents – 10 to15 years; non-compete agreements – three to five years; trademarks – five to 11 years; customer relationships – five to 20 years and know-how – five to 20 years. Finite-life intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable. Goodwill is not amortized but is tested for impairment on a reporting unit level. The Company’s reporting units are typically defined as one level below operating segments and highly correlated to geographic regions. The Company tests goodwill for impairment annually (the Company conducts its goodwill impairment testing during the second quarter of each calendar year), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of the reporting unit to which goodwill relates has declined below its carrying value. In this case, the Company would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. Goodwill is evaluated for impairment using qualitative and/or quantitative testing procedures. The Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company chooses not to complete a qualitative assessment for a given reporting unit, or if the initial assessment indicates that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed. 31 When estimating a reporting unit’s fair value as part of the quantitative assessment, the Company uses a combination of market and income-based methodologies. The market approach uses a combination of earnings before interest, taxes, depreciation and amortization (EBITDA) and EBITDA multiples to estimate a reporting unit’s fair value. EBITDA multiples typically mirror similar businesses or comparative companies whose securities are actively traded in public markets. Significant degradation of either EBITDA or EBITDA multiples could result in a triggering event, requiring goodwill to be tested for impairment during an interim period. The income approach takes into consideration multiple variables, including forecasted sales volume and operating income, current industry and economic conditions, historical results and other elements to calculate the present value of future cash flows. The income approach fair value calculations include estimates of long-term growth rates and discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units. The Company reported no goodwill or intangible asset impairments in any of the periods presented in these condensed consolidated financial statements. NON-GAAP RECONCILIATIONS The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company’s performance and financial condition. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management’s effectiveness with specific reference to these indicators. These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP. The Company’s definitions of these measures may differ from similarly titled measures used by other entities. Reconciliation of Non-GAAP Adjusted Net Income and Earnings Per Share Three Months Ended March 31 (In millions, except per share amounts) 2021 2020 Net Income Diluted EPS Net Income Diluted EPS Net Income Attributable to the Company as Reported $ 40.6 $ 1.74 $ 27.5 $ 1.18 Deferred Compensation Expense (Income) (including related investment activity) 2.0 0.09 (3.7 ) (0.16 ) Business Restructuring 0.1 — 0.4 0.02 Cash Settled Stock Appreciation Rights 0.3 0.01 (1.1 ) (0.04 ) Cumulative Tax Effect on Above Adjustment Items (0.6 ) (0.02 ) 1.1 0.04 Adjusted Net Income $ 42.4 $ 1.82 $ 24.2 $ 1.04 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 noted transactions occurred. Reconciliation of Non-GAAP Net Debt Management uses the non-GAAP net debt metric to gain a more complete picture of the Company’s overall liquidity, financial flexibility and leverage level. (In millions) March 31, 2021 December 31, 2020 Current Maturities of Long-Term Debt as Reported $ 87.5 $ 37.9 Long-Term Debt as Reported 160.9 160.8 Total Debt as Reported 248.4 198.7 Less Cash and Cash Equivalents as Reported (150.7 ) (349.9 ) Net Debt $ 97.7 $ (151.2 ) Equity $ 1,002.3 $ 986.7 Net Debt plus Equity $ 1,100.0 $ 835.5 Net Debt/(Net Debt plus Equity) 9 % -18 % 32 Item 3 – Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the market risks described in the Company’s 2020 Annual Report on Form 10-K.