What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-06 · 409 added, 197 removed, 280 unchanged (68% of the section changed)

38 unchanged sentences

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

The overall business comprises three reportable segments:

Surfactants – Surfactants, which accounted for 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.

The overall business is comprised of three reportable segments:

Surfactants – Surfactants, which accounted for 67 percent of Company consolidated net sales for the first six months of 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.

22 unchanged sentences

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).

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.

The acquisition of this industrial scale fermentation plant represents the latest step in the Company’s bio-surfactant commercialization efforts.

See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

Polymers – Polymers, which accounted for 30 percent of consolidated net sales for the first six months of 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).

3 unchanged sentences

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).

In the United States, polyurethane polyols are manufactured at the Company’s Millsdale, Illinois, and Wilmington, North Carolina sites (see the 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 Europe, polyurethane polyols are manufactured by the Company’s subsidiary in Germany and Vlissingen, Netherlands (see the 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:

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.

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

1 unchanged sentence

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.

See Note 17, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

Specialty Products – Specialty products, which accounted for three percent of consolidated net sales for the first six months of 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.

5 unchanged sentences

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 purchase price of the acquisition was $165.0 million, plus $21.5 million of working capital and $3.0 million of associated value-added taxes (VAT).

The working capital acquired included $5.0 million of cash.

11 unchanged sentences

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

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:

The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company income and expenses.

Compensation expense results when the values of Company common stock and mutual fund investment assets held for the plans increase, and compensation income results when the values of Company common stock and mutual fund investment assets

Income (Expense)

For the Three Months

Ended March 31

Ended June 30

(In millions)

Deferred Compensation (Administrative expense)

Deferred Compensation (Administrative expenses)

Realized/Unrealized Gains on Investments (Other, net)

1 unchanged sentence

Pretax Income Effect

Income (Expense)

For the Six Months

Ended June 30

(In millions)

Deferred Compensation (Administrative expenses)

Realized/Unrealized Gains on Investments (Other, net)

Investment Income (Other, net)

Pretax Income Effect

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

Effects of Foreign Currency Translation

5 unchanged sentences

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:

The following tables present the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three and six months ended June 30, 2021 and 2020:

Three Months Ended

3 unchanged sentences

Pretax Income

Six Months Ended

(In millions)

Due to Foreign

Operating Income

Pretax Income

RESULTS OF OPERATIONS

Three Months Ended March 31, 2021 and 2020

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.

Three Months Ended June 30, 2021 and 2020

Net income attributable to the Company in the second quarter of 2021 increased 21 percent to $43.3 million, or $1.85 per diluted share, from $35.7 million, or $1.54 per diluted share, in the second quarter of 2020.

Adjusted net income increased 10 percent to $42.2 million, or $1.81 per diluted share, from $38.3 million, or $1.65 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.

Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the second quarter of 2021 compared to the second quarter of 2020.

A detailed discussion of segment operating performance for the second quarter of 2021 compared to the second quarter of 2020 follows the summary.

Consolidated net sales increased $135.0 million, or 29 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.

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.

Higher average selling prices favorably impacted the quarter-over-quarter change in net sales by $92.0 million.

The increase in average selling prices was mainly due to the pass-through of higher raw material costs and more favorable customer and product mix.

Consolidated sales volume increased five percent, which had an $22.7 million favorable impact on the change in net sales.

Sales volume in the Polymer and Specialty Products segments increased 44 percent and 17 percent, respectively.

The increase in Polymer sales volume was primarily attributable to the first quarter 2021 INVISTA polyester polyol acquisition and the gradual recovery from COVID-19 delays and cancellations of re-roofing and new construction projects.

The Specialty Products sales volume growth primarily reflects order timing differences within the food and flavor business.

Sales volume in the Surfactant segment decreased six percent quarter-over-quarter mostly due to lower sales volume in the consumer product end markets.

The consumer product business was negatively impacted by feedstock supply issues following the first quarter 2021 severe weather in Texas, customer inventory rebalancing efforts and lower demand for consumer cleaning products versus the pandemic peak in 2020.

Foreign currency translation favorably impacted the change in net sales by $20.3 million due to a weaker U.S.

dollar against all currencies where the Company has foreign operations.

Operating income for the second quarter of 2021 increased $12.0 million, or 27 percent, versus operating income for the second quarter of 2020.

Polymer and Specialty Products operating income increased $7.5 million and $3.8 million, respectively.

Surfactant operating income decreased $2.6 million versus the second quarter of 2020.

Corporate expenses, including business restructuring and deferred compensation expenses, decreased $3.4 million quarter-over-quarter.

Deferred compensation and business restructuring expenses decreased $5.5 million and $0.1 million, respectively.

Corporate expenses (excluding deferred compensation and business restructuring expenses) increased $2.2 million quarter-over-quarter.

Foreign currency translation has a $1.7 million positive impact on operating income in the second quarter of 2021 versus the prior year quarter.

Operating expenses (including deferred compensation and business restructuring expenses) increased $1.2 million, or two 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.

Selling expenses increased $2.1 million, or 16 percent, primarily due higher salaries, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Administrative expenses increased $3.2 million, or 16 percent, primarily due to higher acquisition-related expenses, insurance premiums, cloud application costs and corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020).

Research, development, and technical service (R&D) expenses increased $1.5 million, or 11 percent primarily due to higher salaries, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Deferred compensation expense decreased $5.5 million quarter-over-quarter primarily due to a $6.84 per share decrease in the market price of Company common stock in the second quarter of 2021 compared to a $8.64 per share increase in the second quarter of 2020.

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

Business restructuring charges totaled $0.1 million in the second quarter of 2021 versus $0.2 million in the second quarter of 2020.

The 2021 and 2020 restructuring charges reflect ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada.

See Note 16, Business Restructuring , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details.

Net interest expense for the second quarter of 202 1 increased $0.

3 million, or 2 4 percent, versus the second quarter of 2020 .

This increase was primarily due to lower interest income r esulting from lower interest rates due to global market conditions and higher interest expense related to revolving credit agreement borrowings .

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 .

Other, net was $2.8 million of income in the second quarter of 2021 versus $4.4 million of income in the second quarter of 2020.

The Company recognized $2.4 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 second quarter of 2021 compared to $4.0 million of investment income in the second quarter of 2020.

In addition, the Company reported $0.1 million of foreign exchange gains in the second quarter of 2021 versus $0.4 million of foreign exchange gains in the second quarter of 2020.

The Company also reported $0.2 million of higher net periodic pension cost benefits in the second quarter of 2021 versus the prior year quarter.

The Company’s effective tax rate was 25.1 percent for the second quarter of 2021 compared to 25.0 percent for the second quarter of 2020.

Segment Results

13 unchanged sentences

Total Operating Income

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.

Surfactant net sales for the second quarter of 2021 increased $51.7 million, or 16 percent, versus net sales for the second quarter of 2020.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $58.6 million and $14.4 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.

The higher average selling prices were mainly due to more favorable product and customer mix and the pass-through of higher raw material costs.

A six percent decrease in sales volume negatively impacted the change in net sales by $21.3 million.

Lower sales volume in the consumer product end markets accounted for most of the sales volume decrease.

A comparison of net sales by region follows:

4 unchanged sentences

Total Surfactants Segment

Net sales for North American operations increased $13.0 million, or six percent, year over year.

Net sales for North American operations increased $14.1 million, or seven percent, between quarters.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $32.4 million and $0.9 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.

The higher average selling prices were mainly due to more favorable product and customer mix and the pass-through of higher raw material costs.

Sales volume declined nine percent and negatively impacted the change in net sales by $19.2 million.

Lower sales volume in the consumer product end markets accounted for most of the decline.

Higher customer demand for products sold to our distribution partners and into the functional product and institutional cleaning end markets partially offset the foregoing decline.

The consumer products business was negatively impacted by feedstock supply issues following the first quarter 2021 severe weather in Texas, customer inventory rebalancing efforts and lower demand for consumer cleaning products versus the pandemic peak in 2020.

Net sales for European operations increased $9.5 million, or 17 percent, between quarters.

The favorable impact of foreign currency translation and higher average selling prices positively impacted the change in net sales by $7.3 million and $5.7 million, respectively.

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.

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

The higher average selling prices were primarily due to more favorable product and customer mix and the pass-through of higher raw material costs.

Sales volume declined six percent and negatively impacted the change in net sales by $3.4 million.

Most of the sales volume decline reflects lower demand for consumer cleaning products versus the pandemic demand peak in 2020.

Net sales for Latin American operations increased $23.8 million, or 42 percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation.

These items positively impacted the change in net sales by $18.8 million and $5.5 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 higher average selling prices were primarily due to the pass-through of higher raw material costs and $2.1 million of revenue recognition related to a VAT tax recovery.

A weaker U.S.

dollar relative to the Mexican peso led to most of the favorable foreign currency effect.

Sales volume declined one percent and had a $0.5 million unfavorable impact on the change in net sales.

The sales volume decline was largely attributable to lower ether sulfate sales due to feedstock supply constraints in Mexico.

Net sales for Asian operations increased $4.3 million, or 34 percent, quarter-over-quarter.

A 15 percent increase in sales volume, higher average selling prices, and the favorable impact of foreign currency translation positively impacted the change in net sales by $1.9 million, $1.6 million and $0.8 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

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:

The higher average selling prices were primarily due to pass-through of higher raw material costs and more favorable product and customer mix.

Surfactant operating income for the second quarter of 2021 decreased $2.6 million, or five percent, versus operating income for the second quarter of 2020.

Gross profit increased $1.0 million in the second quarter of 2021 versus the second quarter of 2020 and operating expenses increased $3.6 million, or 15 percent.

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

June 30, 2021

June 30, 2020

Gross Profit and Operating Income

4 unchanged sentences

Surfactants Segment Operating Income

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.

Gross profit for North American operations decreased four percent, or $1.8 million, between quarters primarily due to a nine percent decline in sales volume.

The decline in sales volume negatively impacted the change in gross profit by $4.3 million.

Lower sales volume in the consumer product end markets accounted for most of the decline.

Higher customer demand for products sold to our distribution partners and into the functional product and institutional cleaning end markets partially offset the above.

Higher average unit margins positively impacted the change in gross profit by $2.5 million.

The higher unit margins reflect a more favorable product and customer mix that was largely offset by higher supply chain costs due to inflationary pressures (inclusive of transportation costs) and higher planned maintenance ($2.2 million).

Gross profit for European operations decreased $0.9 million, or ten percent, primarily due to lower average unit margins and a six percent decline in sales volume.

These items negatively impacted the change in gross profit by $1.1 million and $0.6 million, respectively.

Most of the sales volume decline reflects lower demand for consumer cleaning products versus the pandemic peak in

The favorable impact of foreign currency translation positively impacted the change in gross profit by $0.8 million and reflects a weaker U.S.

dollar relative to the European euro and British pound sterling.

Gross profit for Latin American operations increased $5.0 million, or 41 percent, between quarters primarily due to higher average unit margins and the favorable impact of foreign currency translation.

These items positively impacted the change in gross profit by $4.1 million and $1.0 million, respectively.

The higher unit margins were largely due to $2.1 million of revenue recognition related to a VAT tax recovery during the second quarter of 2021.

Slightly lower sales volume negatively impacted the change in gross profit by $0.1 million.

Gross profit for Asia operations decreased $1.3 million or 31 percent, between quarters primarily due to lower average unit margins.

The lower unit margins negatively impacted the change in gross profit by $1.9 million and primarily reflect higher raw material costs and higher unit overhead costs in Singapore due to unfavorable production timing differences.

Sales volume growth of 15 percent partially offset the above and positively impacted the change in gross profit by $0.6 million.

Operating expenses for the Surfactant segment increased $3.6 million, or 15 percent, in the second quarter of 2021 versus the second quarter of 2020.

This increase was mainly due to higher salaries, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Polymers net sales for the second quarter of 2021 increased $78.1 million, or 70 percent, versus net sales for the same period of 2020.

A 44 percent increase in sales volume favorably impacted the change in net sales by $48.9 million.

The sales volume growth primarily reflects the first quarter 2021 acquisition of INVISTA’s aromatic polyester polyol business and ongoing recovery from COVID-19 related delays and cancellations of re-roofing and new construction projects.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $23.5 million and $5.7 million, respectively.

A comparison of net sales by region follows:

For the Three Months Ended

(Dollars in thousands)

North America

Asia and Other

Total Polymers Segment

Net sales for North American operations increased $26.8 million, or 39 percent, primarily due to a 35 percent increase in sales volume.

The increase in sales volume positively impacted the change in net sales by $24.2 million.

Sales volume of polyols used in rigid foam applications increased 23 percent during the quarter primarily due to the first quarter 2021 INVISTA polyester polyol acquisition and the gradual recovery from COVID-19 related delays of re-roofing and new construction projects.

Sales volume of polyols used in rigid foam applications, excluding the impact of the INVISTA acquisition, increased 2 percent.

Sales volume of phthalic anhydride and specialty polyols increased 71 percent and 85 percent, respectively, due to stronger demand within these markets following the peak of the COVID-19 pandemic.

The phthalic anhydride sales volume improvement was also attributable to the non-recurrence of the Millsdale plant power outage in 2020.

Higher average selling prices positively impacted the change in net sales by $2.6 million.

The higher average selling prices were mainly due to the pass-through of higher raw material costs.

Net sales for European operations increased $49.8 million, or 152 percent, quarter-over-quarter.

A 79 percent increase in sales volume and higher average selling prices positively impacted the change in net sales by $25.8 million and $19.6 million, respectively.

The increase in sales volume is primarily due to the first quarter 2021 INVISTA polyester polyol acquisition and the gradual recovery from COVID-19 related delays of re-roofing and new construction projects.

Sales volume, excluding the impact of the INVISTA acquisition, increased 23 percent.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

The favorable impact of foreign currency translation positively impacted the change in net sales by $4.4 million.

Net sales for Asia and Other operations increased $1.6 million, or 14 percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation.

These items positively impacted the change in net sales by $1.3 million each.

Sales volume declined 10 percent quarter-over-quarter and negatively impacted the change in net by $1.0 million.

Polymers operating income for the second quarter of 202 1 increased $7.

5 million, or 48 percent, versus operating income for the second quarter of 20 20 .

Gross profit increased $ 8 .4 million, or 38 percent , and operating expenses were up $0.8 million , or 13 percent .

Comparisons of gross profit by region and total segment operating expenses and operating income follow:

For the Three Months Ended

(Dollars in thousands)

June 30, 2021

June 30, 2020

Gross Profit and Operating Income

North America

Asia and Other

Polymers Segment Gross Profit

Operating Expenses

Polymers Segment Operating Income

Gross profit for North American operations increased $3.2 million, or 25 percent, primarily due to a 35 percent increase in sales volume.

The higher sales volume positively impacted the quarter-over-quarter change in gross profit by $4.5 million.

Partially offsetting the higher volume were lower average unit margins, which negatively impacted the change in gross profit by $1.3 million.

The lower unit margins in 2021 primarily reflect higher supply chain costs due to inflationary pressures (inclusive of transportation costs), higher planned maintenance ($0.3 million) and the rapid rise in feedstock costs.

Gross profit for European operations increased $7.1 million, or 115 percent, versus the second quarter of 2021.

A 79% increase in sales volume, higher average unit margins and the favorable impact of foreign currency translation positively impacted the quarter-over-quarter change in gross profit by $4.9 million, $1.5 million and $0.7 million, respectively.

Gross profit for Asia and Other operations declined $1.9 million, or 56 percent, between quarters.

Lower average unit margins and a 10 percent decline in sales volume negatively impacted the quarter-over-quarter change in gross profit by $1.8 million and $0.3 million, respectively.

The lower unit margins are primarily due to the non-recurrence of a second quarter 2020 partial government reimbursement related to the government-mandated China joint venture (JV) shutdown in 2012 ($1.1 million).

The favorable impact of foreign currency translation positively impacted the change in gross profit by $0.2 million.

Operating expenses for the Polymers segment increased $0.9 million, or 13 percent, in the second quarter of 2021 versus the second quarter of 2020.

Specialty Products

Net sales for the second quarter of 2021 increased $5.2 million, or 33 percent, versus net sales for the second quarter of 2020.

This increase reflects sales volume growth of 17 percent and higher average selling prices.

Gross profit and operating income increased $3.7 million and $3.8 million, respectively.

The improvements in gross profit and operating income were primarily attributable to order timing differences within the food and flavor business and improved margins within the medium chain triglycerides (MCT) 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 $3.4 million between quarters.

Corporate expenses were $19.2 million in the second quarter of 2021 versus $22.6 million in 2020.

This decrease was primarily attributable to lower deferred compensation expense ($5.5 million) that was partially offset by higher acquisition-related expenses, insurance premiums, cloud application costs and corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020).

The $5.5 million decrease in deferred compensation expense was primarily due to a $6.84 per share decrease in the market price of Company common stock in the second quarter of 2021 compared to a $8.64 per share increase in the second 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 June 30, 2021 and 2020:

Company Common Stock Price

Six Months Ended June 30, 2021 and 2020

Net income attributable to the Company in the first half of 2021 increased 33 percent to $83.9 million, or $3.59 per diluted share, from $63.3 million, or $2.72 per diluted share, in the first half of 2020.

Adjusted net income was $84.6 million, or 3.62 per diluted share, versus $62.5 million or $2.69 per diluted share, in the prior year (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share).

Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, expenses and income.

A detailed discussion of segment operating performance for the first half of 2021 compared to the first half of 2020 follows the summary.

Consolidated net sales increased $222.7 million, or 24 percent, between years.

Higher average selling prices, a six percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $146.9 million, $51.3 million, and $24.5 million, respectively.

The increase in average selling prices was primarily due to more favorable product and customer mix and the pass-through of higher raw material costs.

Sales volume in the Polymer and Specialty Product segments increased 39 percent and 11 percent, respectively.

The increase in Polymer sales volume was primarily attributable to the first quarter 2021 INVISTA aromatic polyester polyol acquisition, the gradual recovery from COVID-19 delays and cancellations of re-roofing and new construction projects, and the non-recurrence of the power outage at the Company’s Millsdale, Illinois facility in the first quarter of 2020.

Sales volume for the Surfactant segment declined 3 percent year-over-year mostly due to lower volumes in the consumer product end markets.

The favorable foreign currency translation reflects a weaker U.S.

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

Operating income for the first half of 2021 increased $25.9 million, or 31 percent, versus operating income for the first half of 2020.

Polymer, Surfactant and Specialty Products operating income increased $17.9 million, $14.4 million, and $2.4 million, respectively.

Corporate expenses, including business restructuring and deferred compensation expenses, increased $8.8 million year-over-year.

Deferred compensation expense increased $4.5 million while business restructuring expenses decreased $0.4 million between years.

Corporate expenses (excluding deferred compensation and business restructuring expenses) increased $4.7 million between years largely due to higher acquisition-related expenses, insurance premiums, cloud application costs and corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020).

Foreign currency translation has a $1.6 million positive impact on operating income in the second quarter of 2021 versus the prior year quarter.

Operating expenses (including deferred compensation and business restructuring expenses) increased $17.0 million, or 18 percent, between years.

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

Selling expenses increased $3.0 million, or 11 percent, year-over-year mainly due to higher salaries and incentive-based compensation expenses, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Administrative expenses increased $7.0 million, or 18 percent, year-over-year primarily due to higher acquisition-related expenses, insurance premiums, salaries and incentive-based compensation expenses, cloud application costs, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

R&D expenses increased $2.8 million, or 10 percent, year-over-year primarily due to higher salaries and incentive-based compensation expenses, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Deferred compensation expense increased $4.5 million year-over-year primarily due to a $0.95 per share increase in the market price of Company common stock during the first six months of 2021 compared to a $5.34 per share decrease in the first half of 2020.

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

Business restructuring expenses were $0.2 million in the first half of 2021 compared to $0.6 million in the first half of 2020.

The 2021 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 2016 Canadian plant closure ($0.5 million) and decommissioning costs associated with the Company’s 2018 sulfonation shut down in Germany ($0.1 million).

Net interest expense for the first half of 202 1 increased $ 0.6 million, or 24 percent, compared to net interest expense for the first half of 20 20 .

This increase was primarily due to lower interest income resulting from lower interest rates due to global market conditions and higher interest expense related to rev olv ing credit agreement borrowings .

Partially offsetting the above was lower interest expense resulting from scheduled debt repayments.

Other, net was $3.5 million of income for the first half of 2021 compared to $1.2 million of income for the first half of 2020.

The Company recognized $3.3 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 half of 2021 compared to $0.2 million of income in the first half of 2020.

In addition, the Company reported foreign exchange losses of $0.2 million in the first half of 2021 versus $1.0 million of foreign exchange gains in the first half of 2020.

The Company also reported $0.5 million of lower net periodic pension costs in the first half of 2021 versus the first half of the prior year.

The Company’s effective tax rate was 24.4 percent in the first half of 2021 compared to 23.9 percent in the first half of 2020.

For the Six Months Ended

(In thousands)

Specialty Products

Total Net Sales

For the Six Months Ended

(In thousands)

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation and Restructuring

Deferred Compensation Expense

Business Restructuring

Total Operating Income

Segment Results

Surfactants net sales for the first half of 2021 increased $95.5 million, or 14 percent, versus net sales for the first half of 2020.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $104.1 and $15.9 million, respectively.

The higher average selling prices were mainly due to more favorable product and customer mix and the pass-through of higher raw material costs.

A three percent decrease in sales volume negatively impacted the year-over-year change in net sales by $24.5 million.

Lower sales volume in the consumer product end markets accounted for most of the sales volume decrease.

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

For the Six Months Ended

(In thousands)

June 30, 2021

June 30, 2020

North America

Latin America

Total Surfactants Segment

Net sales for North American operations increased $27.1 million, or seven percent, year-over-year.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $54.8 million and $1.3 million, respectively.

The higher average selling prices were primarily due to more favorable product and customer mix and the pass-through of higher raw material costs.

Sales volume declined seven percent and negatively impacted the year-over-year change in net sales by $29.0 million.

Lower sales volume in the consumer product end markets accounted for most of the decline.

Higher customer demand for products sold to our distribution partners and into the functional product and institutional cleaning end markets partially offset the above.

Net sales for European operations increased $21.0 million, or 18 percent, year-over-year.

The favorable impact of foreign currency translation and higher average selling prices positively impacted the change in net sales by $13.0 million and $10.9 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.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

Sales volume decreased three percent and negatively impacted the change in net sales by $2.9 million year-over-year.

Most of the sales volume decline reflects lower demand for consumer cleaning products versus the pandemic peak in 2020.

Net sales for Latin American operations increased $37.4 million, or 36 percent, primarily due to higher average selling prices and a three percent increase in sales volume.

These items positively impacted the year-over-year change in net sales by $34.2 million and $3.3 million, respectively.

The higher average selling prices reflect more favorable product and customer mix, the pass-through of higher raw material costs, and $2.1 million of revenue recognition in the second quarter of 2021 related to a VAT tax recovery.

The year-over-year increase in sales volume was mainly due to higher demand for products sold into the functional product end markets.

The unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $0.1 million.

Net sales for Asian operations increased $10.1 million, or 39 percent, year-over-year.

Higher average selling prices, a 16 percent increase in sales volume and the favorable impact of foreign exchange translation positively impacted the change in net sales by $4.3 million, $4.1 million, and $1.7 million, respectively.

The higher average selling prices were primarily due to the pass through of higher raw material costs and more favorable product and customer mix.

The sales volume growth was largely due to higher demand for products sold to our distribution partners and into the agricultural end market.

Surfactant operating income for the first half of 202 1 increased $1 4 .4 million, or 17 percent, versus operating income for the first half of 20 20 .

Gross profit increased $ 21.0 million, or 1 6 percent, year-over-year and operating expenses increased $ 6 .7 million, or 14 percent.

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

For the Six Months Ended

(In thousands)

June 30, 2021

June 30, 2020

Gross Profit and Operating Income

North America

Latin America

Surfactants Segment Gross Profit

Operating Expenses

Surfactants Segment Operating Income

Gross profit for North American operations increased $11.1 million, or 13 percent, year-over-year primarily due to higher average unit margins.

The higher average unit margins positively impacted the change in gross profit by $17.2 million and are primarily due to a more favorable product and customer mix.

Lower supply chain expenses, due to the non-recurrence of the Millsdale, Illinois plant power outage in the first quarter of 2020, partially offset by supply chain inflationary pressures (inclusive of transportation costs) and higher planned maintenance in the first half of 2021, also contributed to the higher unit margins.

A seven percent decline in sales volume negatively impacted the change in gross profit by $6.1 million.

Lower sales volume in the consumer product end markets, partially offset by higher customer demand for products sold to our distribution partners and into the functional product and institutional cleaning end markets, accounted for most of the sales volume decline.

Gross profit for European operations increased $0.9 million, or five percent year-over-year.

The favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $1.7 million.

A three percent decrease in sales volume and lower average unit margins negatively impacted the year-over-year change in gross profit by $0.4 million each.

Gross profit for Latin American operations increased $10.3 million, or 53 percent, primarily due to higher average unit margins and a three percent increase in sales volume.

These items positively impacted the change in gross profit by $10.0 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 higher unit margins primarily reflect more favorable customer and product mix and $2.1 million of revenue recognition in the second quarter of 2021 related to a VAT tax recovery.

The sales volume growth was primarily driven by higher demand for products sold into the functional product end markets.

The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $0.3 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.

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.

Gross profit for Asian operations decreased $1.2 million, or 19 percent, primarily due to lower average unit margins.

The lower unit margins negatively impacted the year-over-year change in gross profit by $2.3 million.

Sales volume growth of 16 percent and the favorable impact of foreign currency translation positively impacted the change in gross profit by $1.0 million and $0.1 million, respectively.

Operating expenses for the Surfactant segment increased $6.6 million, or 14 percent, year-over-year.

Most of the increase was due to higher salaries and incentive-based compensation expenses, corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Polymers net sales for the first half of 2021 increased $122.0 million, or 56 percent, versus net sales for the same period of 2020.

A 39 percent increase in sales volume favorably impacted the year-over-year change in net sales by $84.3 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.

The higher sales volume primarily reflects the first quarter 2021 acquisition of INVISTA’s polyester polyol business as well as organic market growth driven by the ongoing recovery from COVID-19 related delays and cancellations of re-roofing and new construction projects.

Higher average selling prices and the favorable impact of foreign currency translation positively affected the year-over-year change in net sales by $29.4 million and $8.3 million, respectively.

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

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

4 unchanged sentences

The increase in sales volume positively impacted the change in net sales by $42.0 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

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 .

Sales volume of polyols used in rigid foam applications increased 23 percent during the first half of 2021 primarily due to the first quarter 2021 INVISTA polyester polyol acquisition and the gradual recovery from COVID-19 related delays of re-roofing and new construction projects.

Sales volume of polyols used in rigid foam applications, excluding the impact of the INVISTA acquisition, increased four percent.

Sales volume of phthalic anhydride and specialty polyols increased 74 percent and 40 percent, respectively, due to stronger demand within these markets following the peak of the COVID-19 pandemic.

The phthalic anhydride sales volume improvement was also attributable to the non-recurrence of the Millsdale plant power outage in 2020.

Lower average selling prices negatively impacted the change in net sales by $6.2 million.

Net sales for European operations increased $81.5 million, or 118 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.

A 57 percent increase in sales volume and higher average selling prices positively impacted the change in net sales by $39.6 million and $35.5 million, respectively.

The increase in sales volume is primarily due to the first quarter 2021 INVISTA polyester polyol business acquisition and the gradual recovery from COVID-19 related delays of re-roofing and new construction projects.

Sales volume, excluding the impact of the INVISTA acquisition, increased 14 percent.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

The favorable impact of foreign currency translation positively impacted the change in net sales by $6.4 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

Net sales for Asia and Other operations increased $4.7 million, or 25 percent, due to the favorable impact of foreign currency translation, higher average selling prices and a seven percent increase in sales volume.

These items positively impacted the change in net sales by $1.8 million, $1.6 million, and $1.3 million, respectively.

The higher average selling prices were primarily due to the pass-through of higher raw material costs.

Polymer operating income for the first half of 2021 increased $17.9 million, or 78 percent, versus operating income for the first half of 2020.

Gross profit increased $19.4 million, or 53 percent, and operating expenses were up $1.5 million, or 11 percent, year-over-year.

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

For the Six Months Ended

(In thousands)

June 30, 2021

June 30, 2020

Gross Profit and Operating Income

4 unchanged sentences

Polymers Segment Operating Income

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.

Gross profit for North American operations increased $8.7 million, or 43 percent, primarily due to a 32 percent increase in sales volume.

The higher sales volume positively impacted the year-over-year change in gross profit by $6.6 million.

Higher average unit margins also positively impacted the change in gross profit by $2.1 million.

A rapid rise in feedstock costs during the first half of 2021 resulted in lower average unit margins but this decline was more than offset by the non-recurrence of the of the first quarter 2020 power outage at the Company’s Millsdale, Illinois facility (which caused a temporary production shutdown and resulted in higher maintenance, supply chain costs and unit overhead rates).

Gross profit for European operations increased $ 12.5 million, or 105 percent, due to a 57 percent increase in sales volume , higher average unit margins and the favorable impact of foreign currency translation .

These items positively impacted the year-over-year change in gross profit by $6.8 million , $4.6 million and $1.1 million , respectively.

Gross profit for Asia and Other operations declined $1.8 million, or 39 percent, primarily due to lower average unit margins that negatively impacted the change in gross profit by $2.3 million.

The lower unit margins were partially due to the non-recurrence of a second quarter 2020 partial government reimbursement related to the government-mandated China JV shutdown in 2012 ($1.1 million).

A seven percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the year-over-year change in gross profit by $0.3 million and $0.2 million, respectively.

Operating expenses for the Polymers segment increased $1.5 million, or 11 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.

Net sales for the first half of 2021 increased $5.2 million, or 16 percent, versus net sales for the first half of 2020.

This increase reflects sales volume growth of 11 percent and higher selling prices.

Gross profit and operating income increased $2.3 million and $2.4 million, respectively, year-over-year.

The improvements in gross profit and operating income were primarily due to order timing differences within the food and flavor business and improved margins within the medium chain triglycerides (MCT) product line.

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:

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $8.8 million between years.

Corporate expenses were $39.1 million in the first half of 2021 versus $30.3 million in the first half of 2020.

This increase was primarily attributable to higher deferred compensation expense ($4.5 million), acquisition-related expenses, insurance premiums, salaries and incentive-based compensation expenses, cloud application costs and corporate headquarter-related expenses (inclusive of the non-recurrence of a sales and use tax refund received in the second quarter of 2020) during the first half of 2021.

The $4.5 million increase in deferred compensation expense was primarily due to a $0.95 per share increase in the market price of the Company’s common stock in the first half of 2021 compared to a $5.34 per share decrease in the first half of 2020.

The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expense/income for the six months ended June 30, 2021 and 2020:

Company Common Stock Price

LIQUIDITY AND CAPITAL RESOURCES

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 six months ended June 30, 2021, operating activities were a cash source of $24.7 million versus a source of $58.5 million for the comparable period in 2020.

For the current year period, investing cash outflows totaled $261.5 million versus a cash outflow of $54.4 million in the prior year period.

1 unchanged sentence

Cash and cash equivalents decreased by $222.9 million compared to December 31, 2020, inclusive of a $0.8 million unfavorable foreign exchange rate impact.

At March 31, 2020, the Company’s cash and cash equivalents totaled $150.7 million.

money market funds and demand deposit accounts totaled $33.4 million and $1.8 million, respectively.

On June 30, 2021, the Company’s cash and cash equivalents totaled $127.1 million.

demand deposit accounts and money market funds totaled $15.6 million and $3.0 million, respectively.

The Company’s non-U.S.

subsidiaries held $115.5 million of cash outside the United States as of March 31, 2021.

subsidiaries held $108.5 million of cash outside the United States as of June 30, 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.

Net income increased by $20.5 million versus the comparable period in 2020.

Working capital was a cash use of $69.8 million during the first half of 2021 versus a use of $47.4 million for the comparable period in 2020.

Accounts receivable were a use of $68.0 million during the first half of 2021 compared to a use of $23.3 million for the comparable period in 2020.

Inventories were a use of $35.7 million in 2021 versus a use of $9.7 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.

Accounts payable and accrued liabilities were a source of $34.0 million in 2021 compared to a use of $8.3 million for the same period in 2020.

Working capital requirements were higher in the first half of 2021 compared to 2020 primarily due to the changes noted above.

The two major factors impacting all the working capital components were significantly higher raw material costs in 2021 versus 2020 and the impact of the first quarter 2021 acquisition of INVISTA’s polyester polyols business.

I t 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.

Cash used for investing activities increased by $207.1 million year-over-year.

In the first half of 2021, the Company acquired INVISTA’s aromatic polyester polyol business and associated asset for $184.6 million, net of cash received.

During the first half of 2021, the Company also acquired a fermentation plant located in Lake Providence, Louisiana for $3.5 million.

Cash used for capital expenditures was $74.9 million in the first half of 2021 versus $54.7 million for the comparable period in 2020.

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.

1 unchanged sentence

Cash flow from financing activities was a source of $14.8 million in 2021 versus a use of $40.4 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 year-over-year change is primarily due to $50.0 million of cash received from an unsecured private placement loan on June 10, 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.

1 unchanged sentence

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

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.

The amounts involved may be material.

In the six months ended June 30, 2021, the Company purchased 82,045 shares of its common stock on the open market at a total cost of $10.9 million.

As of June 30, 2021, there were 93,829 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.

Consolidated balance sheet debt increased from $198.7 million on December 31, 2020 to $238.9 million on June 30, 2021, a $40.2 million increase, primarily due to higher domestic debt.

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 $263.0 million in the first half of 2021, from a negative $151.2 million to $111.8 million.

This net debt change was due to a cash reduction of $222.9 million and a debt increase of $40.2 million.

The cash reduction primarily reflects the first quarter 2021 acquisition of INVISTA’s aromatic polyester polyol business combined with higher capital expenditures and working capital requirements in the first half of 2021.

As of June 30, 2021, the ratio of total debt to total debt plus shareholders’ equity was 18.6 percent compared to 16.8 percent on December 31, 2020.

As of June 30, 2021, the ratio of net debt to net debt plus shareholders’ equity was 9.6 percent versus a negative 18.1 percent as of December 31, 2020 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details).

On June 30, 2021, the Company’s debt included $234.4 million of unsecured notes, with maturities ranging from 2021 through 2028, which were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the Note Purchase Agreements) and $4.5 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 June 10, 2021, the Company entered into a note purchase agreement pursuant to which it issued and sold $50 million in aggregate principal amount of Series 2021-A Notes.

The Series 2021-A Notes bear interest at a fixed rate of 2.30 percent, with interest to be paid semi-annually and with equal annual principal payments beginning on June 10, 2024 and continuing through final maturity on June 10, 2028.

The proceeds of the issuance of the Series 2021-A Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes.

This note purchase agreement requires the maintenance of certain financial ratios and covenants that are substantially similar to the Company’s existing long-term debt and provides for customary events of default.

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.

1 unchanged sentence

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.

As of June 30, 2021, the Company had

outstanding letters of credit totaling $ 7.0 million under the revolving credit agreement and no borrowings, with $ 343.0 million remaining available.

The Company anticipates that cash from operations, committed credit facilities and cash on hand will be sufficient to fund anticipated capital expenditures, working capital, dividends and other planned financial commitments for the foreseeable future.

Certain foreign subsidiaries of the Company maintain short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditures and acquisitions.

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.

On June 30, 2021, the Company’s foreign subsidiaries had outstanding debt of $4.5 million.

The Company is subject 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.

5 unchanged sentences

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.

The Company believes it was in compliance with all of its debt covenants as of June 30, 2021.

ENVIRONMENTAL AND LEGAL MATTERS

2 unchanged sentences

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.

During the first six months of 2021 and 2020, the Company’s expenditures for capital projects related to the environment were $5.5 million and $2.1 million, respectively.

These projects are capitalized and depreciated over their estimated useful lives, which are typically 10 years.

Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing

operations at the Company’s manufacturing locations were $ 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.

Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at the Company’s manufacturing locations were $17.1 million and $17.6 million for the six months ended June 30, 2021 and 2020, 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 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.

4 unchanged sentences

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.

After partial remediation payments at certain sites, the Company has estimated a range of possible environmental losses and legal losses of $22.5 million to $40.9 million at June 30, 2021, compared to $22.9 million to $41.1 million at December 31, 2020.

Within the range of possible environmental losses, management 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 $22.5 million at June 30, 2021 and $22.9 million at December 31, 2020.

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

Cash expenditures related to legal and environmental matters were $1.3 million for the six months ended June 30, 2021, compared to $3.1 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.

4 unchanged sentences

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.

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.

Management believes that demand for Surfactant products sold into the Company’s institutional cleaning, agricultural and oilfield markets should improve versus 2020.

However, management does not believe this higher demand will compensate for lower consumer consumption of cleaning, disinfection and personal wash products versus the pandemic peak in 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.

This recovery, combined with the 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 .

Management believes its Specialty Product segment results will improve slightly year-over-year.

Management remains cautiously optimistic about the remainder of the year despite continued raw material price increases, supply chain inflationary pressures and planned second half maintenance expenses.

CRITICAL ACCOUNTING POLICIES

41 unchanged sentences

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.

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 adjusted 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

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.

Three Months Ended June 30

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported

Deferred Compensation Expense (Income) (including related investment activity)

Business Restructuring

Cash Settled Stock Appreciation Rights

Deferred Compensation Expense (including

related investment activity)

Business Restructuring Expense

Cash-settled SARs Expense

Cumulative Tax Effect on Above Adjustment Items

Adjusted Net Income

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.

Six Months Ended June 30

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported

Deferred Compensation (Income) Expense (including

related investment activity)

Business Restructuring Expense

Cash-settled SARs (Income) Expense

Cumulative Tax Effect on Above Adjustment Items

Adjusted Net Income

RECONCILIATION OF NON-GAAP NET DEBT

10 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis