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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 383 added, 338 removed, 370 unchanged (66% of the section changed)

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Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Brazil and Mexico) and two Asian sites (Philippines and Singapore).

Recent significant Surfactants events include:

Recent significant events include:

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

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

The acquired business did not impact the Company’s 2019 financial results and had a minimal impact on 2020 and 2021 financial results.

See Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details .

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

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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.

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

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

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

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

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

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

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

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

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

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

This acquisition supports the Company’s growth strategy in Latin America and the Company believes the acquisition will enhance its ability to support customer growth in the Mexican consumer and functional surfactant markets (see Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details).

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

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

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

The Company believes the rhamnolipid technology will further advance the growth and sustainability aspirations of both the Company and its customers (see Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details).

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

The Company continues to focus its efforts to further develop, integrate and commercialize these unique surfactants.

The Company believes the rhamnolipid technology will further advance the growth and sustainability aspirations of both the Company and its customers.

See Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

In 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.

See Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

In February 2021, the Company acquired a fermentation plant, located in Lake Providence, Louisiana.

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

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

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

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

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

The acquired business did not impact the Company’s 2019 financial results and had a m inimal impact on 2020 financial results (see Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details ).

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

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

Decommissioning costs associated with the shutdown were incurred in 2019 and during the first half of 2020 (see Note 22, Business Restructuring , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details ).

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

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

S ee Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

Polymers - Polymers, which accounted for 30 percent of consolidated net sales in 2021, include polyurethane polyols, polyester resins and phthalic anhydride.

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In addition, the Company uses phthalic anhydride internally in the production of polyols.

In the United States, polyurethane polyols and phthalic anhydride are manufactured at the Company’s Millsdale, Illinois, site, and specialty polyols are manufactured at the Company’s Columbus, Georgia, site.

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

In 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 at the Company’s subsidiaries 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.

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

Recent significant Polymers events include:

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

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

Recent significant events include:

The operational issues at the Company’s Millsdale, Illinois facility, described in the Surfactants significant events paragraph above, negatively impacted Polymer earnings during 2020.

This negative impact was partially offset by a related $12.8 million insurance recovery in 2020.

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

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

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

The Company believes that INVISTA’s available spare capacity, combined with debottlenecking opportunities in both plants, will allow Stepan to support future market growth in a capital efficient way (see Note 26, Subsequent Events, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details ).

Specialty Products – Specialty Products, which accounted for four percent of consolidated net sales in 2020, include flavors, emulsifiers, and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications.

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

See Note 20, Acquisitions, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details .

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

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

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

This restructuring was undertaken to better align the number of personnel with current business requirements and reduce costs at the site.

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

2021 Acquisitions

Logos Technologies

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

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

The acquisition was accounted for as an asset acquisition.

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

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

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

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

Clariant (Mexico)

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

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

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

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

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

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

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

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

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

See Note 20, Acquisitions , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

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

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

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

The purchase price of the acquisition was $165.0 million, plus $21.6 million of working capital and $3.0 million of associated value-added taxes (VAT).

The working capital acquired included $5.9 million of cash.

The acquisition was paid with cash on hand.

See Note 20, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

Fermentation Plant - Lake Providence, Louisiana

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 cleaning.

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 20, Acquisitions , of the notes to the Company’s condensed consolidated financial statements (included in Item 8 of this Form 10- K ) for additional details .

Deferred Compensation Plans

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

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

The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following tables:

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

Compensation expense is recognized when the value of Company common stock and mutual fund investment assets held for the plans increase, and compensation income is recognized when the value of Company common stock and mutual fund investment assets decline.

The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following tables:

Income (Expense)

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dollar results).

The following tables present the effects that foreign currency translation had on the year-over-year changes in consolidated net sales and various income line items for 2020 compared to 2019 and 2019 compared to 2018:

The following tables present the effects that foreign currency translation had on the year-over-year changes in consolidated net sales and various income statement line items for 2021 compared to 2020 and 2020 compared to 2019:

For the Year Ended

(Decrease) Due

to Foreign Currency

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2021 Compared with 2020

Net income attributable to the Company in 2021 increased nine percent to $137.8 million, or $5.92 per diluted share, from $126.8 million, or $5.45 per diluted share in 2020.

Adjusted net income increased nine percent to $143.5 million, or $6.16 per diluted share, from $132.0 million, or $5.68 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 year-over-year changes in net sales, expenses and income for 2021 compared to 2020.

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

Consolidated net sales increased $476.2 million, or 25 percent, between years.

Higher average selling prices, a two percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $415.2 million, $36.6 million and $24.4 million, respectively.

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

Sales volume in the Polymer and Specialty Products segments increased 29 percent and six 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 reroofing 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 five percent year-over-year mostly due to lower sales volume in the consumer product end markets.

The consumer product business has been negatively impacted by supply chain disruptions, feedstock supply issues in 2021 (following severe weather in Texas and the U.S.

Gulf Coast area), customer inventory rebalancing efforts and lower demand for consumer cleaning products versus the COVID-19 pandemic peak in 2020.

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

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

Operating income decreased slightly from $171.5 million in 2020 to $170.8 million in 2021.

Surfactant operating income decreased $3.1 million, or two percent, versus operating income reported in 2020.

Polymer and Specialty Products operating income increased $5.4 million and $0.2 million, respectively, year-over-year.

Corporate expenses, including deferred compensation and business restructuring/asset disposition expenses, increased $3.2 million year-over-year.

Deferred compensation expense decreased $3.1 million and business restructuring/asset disposition expenses increased $2.1 million between years.

Corporate expenses, excluding deferred compensation and business restructuring/asset disposition expenses, increased $4.2 million between years largely due to higher insurance premiums, cloud application costs, USEPA environmental oversight costs at the Company’s Maywood, New Jersey site, 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 had a $1.4 million positive impact on operating income in 2021 versus the prior year.

Operating expenses (including deferred compensation and business restructuring/asset disposition expenses) increased $12.9 million, or six percent, year-over-year.

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

Selling expenses increased $3.6 million, or seven percent, between years largely 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.

Administrative expenses increased $5.5 million, or six percent, year-over-year primarily due to higher insurance premiums, salaries, USEPA environmental remediation oversight costs, 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.

Research, development and technical service (R&D) expenses increased $4.7 million, or eight percent, year-over-year primarily due to higher salaries, outside services, corporate headquarter-related expenses (inclusive of the non-recurrence of a sale and use tax refund received in the second quarter of 2020) and the unfavorable impact of foreign currency translation.

Deferred compensation expense decreased $3.1 million, or 31 percent, year-over-year primarily due to a $4.97 per share increase in the market price of Company common stock during 2021 compared to a $16.88 per share increase during 2020.

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

Business restructuring/asset disposition expenses were $3.4 million in 2021 versus $1.2 million in 2020.

The 2021 expenses include a $2.7 million loss on the sale of a corporate headquarter building and $0.7 million of ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada (that ceased operations in the fourth quarter of 2016).

The 2020 restructuring expenses were comprised of decommissioning costs associated with the Canadian plant closure ($1.1 million) and decommissioning costs associated with the Company’s 2018 sulfonation shut down in Germany ($0.1 million).

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

Net interest expense in 2021 increased $0.3 million, or six percent, versus the prior year.

This increase was primarily due to lower interest income earned in 2021 due to lower cash deposits.

Other, net was $7.5 million of income in 2021 versus $5.0 million of income in 2020.

The Company recognized $5.2 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 2021 compared to $4.8 million of investment income in 2020.

The Company also recognized $1.0 million of income related to the dissolution of its China joint venture in 2021.

In addition, the Company recognized $2.1 million of lower net periodic pension costs and other retirement obligations in 2021 versus the prior year along with foreign exchange gains of $0.5 million in 2021 versus $1.4 million of foreign exchange gains in 2020.

The Company’s effective tax rate was 20.1 percent in 2021 compared to 25.4 percent in 2020.

This decrease was primarily attributable to:

(a) an increase in U.S.

tax benefits related to the Company’s 2021 research and development tax credits and FDII/GILTI computations;

(b) an increase in U.S.

tax benefits related to the Company’s prior year research and development tax credits and FDII/GILTI computations;

and (c) a non-recurring unfavorable tax cost in the fourth quarter of 2020 related to cash repatriations to facilitate the 2021 INVISTA acquisition.

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

federal income tax rate to the effective tax rate.

Segment Results

(In thousands)

For the Year Ended

Specialty Products

Total Net Sales

(In thousands)

For the Year Ended

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation

Restructuring and asset disposition

Deferred Compensation Expense (Income)

Business Restructuring and asset disposition

Total Operating Income

Surfactant 2021 net sales increased $211.1 million, or 16 percent, versus 2020 net sales.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $267.4 million and $18.3 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.

A five percent decline in sales volume negatively impacted the change in net sales by $74.6 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 Year Ended

(In thousands)

North America

Latin America

Total Surfactants Segment

Net sales for North American operations increased $77.6 million, or nine percent, between years.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $141.6 million and $2.0 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 eight percent and negatively impacted the year-over-year change in net sales by $66.0 million.

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

Higher demand for products sold into the agricultural, oilfield and institutional cleaning end markets, partially offset the above.

The consumer product business was negatively impacted by supply chain disruptions, inclusive of feedstock supply issues following the first quarter 2021 severe weather in Texas and the third quarter 2021 severe weather in the U.S.

Gulf Coast, customer inventory rebalancing efforts and lower demand for consumer products versus the COVID-19 pandemic peak in 2020.

Net sales for European operations increased $54.1 million, or 23 percent, year-over-year.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $42.2 million and $13.5 million, respectively.

The higher average selling prices were primarily due to the 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.

Sales volume decreased one percent and negatively impacted the change in net sales by $1.6 million year-over-year.

Net sales for Latin American operations increased $65.0 million, or 28 percent, between years.

Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $72.4 million and $2.0 million respectively.

The higher average selling prices reflect more favorable product and customer mix, the pass-through of higher raw material costs, and $3.3 million of revenue recognition in 2021 related to a VAT tax recovery.

Sales volume declined four percent and negatively impacted the change in net sales by $9.4 million.

The decline in sales volume primarily reflects lower demand for products sold into the consumer product end markets that was partially offset by higher demand for products sold into the agricultural end market.

Net sales for Asian operations increased $14.3 million, or 26 percent, year-over-year.

Higher average selling prices, a four percent increase in sales volume, and the favorable impact of foreign currency translation positively impacted the change in net sales by $11.2 million, $2.4 million and $0.7 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 mostly due to higher demand for products sold into the agricultural end market.

Surfactant operating income for 2021 decreased $3.1 million, or two percent, versus operating income reported in 2020.

Gross profit increased $3.5 million, or one percent year-over-year.

Operating expenses increased $6.6 million, or seven percent.

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Latin America

Surfactants Segment Gross Profit

Operating Expenses

Operating Income

Gross profit for North American operations decreased $4.5 million, or three percent, year-over-year primarily due to an eight percent decline in sales volume which negatively affected the change in gross profit by $13.8 million.

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

Higher demand for products sold into the agricultural, oilfield and institutional cleaning end markets, partially offset the above.

Higher unit margins positively impacted the change in gross profit by $9.2 million.

The higher unit margins primarily reflect a more favorable customer and product mix that helped to partially offset higher 2021 supply chain expenses due to raw material availability, inflationary pressures, logistic constraints and higher planned maintenance.

Prior year average unit margins were negatively impacted by high supply chain expenses related to the Millsdale, Illinois plant power outage that were partially offset by $5.2 million of insurance recovery.

Gross profit for European operations increased $0.7 million, or two percent, year-over-year.

The favorable impact of foreign currency translation positively impacted the change in gross profit by $1.8 million.

A weaker U.S.

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

Lower average unit margins and a one percent decline in sales volume negatively impacted the year-over-year change in gross profit by $0.8 million and $0.3 million, respectively.

Gross profit for Latin American operations increased $8.5 million, or 18 percent, primarily due to higher average unit margins.

These higher average unit margins positively impacted the change in gross profit by $10.8 million.

The higher average unit margins primarily reflect more favorable customer and product mix and $3.3 million of revenue recognized in 2021 related to a VAT tax recovery.

A four percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $1.8 million and $0.5 million, respectively.

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

The lower unit margins negatively impacted the year-over-year change in gross profit by $1.8 million.

Sales volume growth of four percent and the favorable impact of foreign currency translation positively impact the change in gross profit by $0.5 million and $0.1 million, respectively.

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

Most of this increase was attributable to higher salaries, outside services, 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 effect of foreign currency translation.

Polymers 2021 net sales increased $261.2 million, or 58 percent, versus net sales in 2020.

A 29 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 $129.1 million, $126.4 million and $5.7 million, respectively.

The higher sales volume primarily reflects the first quarter 2021 acquisition of INVISTA’s polyester polyol business as well as higher demand for specialty polyols and phthalic anhydride.

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

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

For the Year Ended

(In thousands)

North America

Asia and Other

Total Polymers Segment

Net sales for North American operations increased $98.7 million, or 37 percent, due to a 23 percent increase in sales volume and higher average selling prices.

These two items positively impacted the change in net sales by $61.2 million and $37.5 million, respectively.

Sales volume of polyols used in rigid foam applications increased 19 percent year-over-year 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 two percent.

Sales volume of specialty polyols and phthalic anhydride increased 36 percent and 33 percent, respectively, due to stronger demand within these markets.

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

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

Net sales for European operations increased $154.8 million, or 105 percent, year-over-year.

Higher average selling prices, a 45 percent increase in sales volume and the favorable impact of foreign currency translation positively impacted the year-over-year change in net sales by $85.9 million, $66.1million and $2.8 million, respectively.

The increase in sales volume is primarily due to the first quarter 2021 INVISTA polyester polyol business acquisition.

Sales volume, excluding the impact of the INVISTA acquisition, was flat versus prior year.

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

Net sales for Asian and Other operations increased $7.6 million, or 19 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 $5.0 million and $2.9 million, respectively.

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

Sales volume declined one percent year-over-year.

Polymer operating income for 2021 increased $5.4 million, or eight percent, versus operating income for 2020.

Gross profit increased $8.6 million, or nine percent, year-over-year.

Operating expenses increased $3.3 million, or 12 percent, versus prior year.

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Asia and Other

Polymers Segment Gross Profit

Operating Expenses

Operating Income

Gross profit for North American operations decreased $6.6 million, or 11 percent primarily due to lower average unit margins.

The lower average unit margins negatively impacted the year-over-year change in gross profit by $20.4 million.

The lower average unit margins reflect higher feedstock costs, feedstock availability and supply chain inflationary pressures in 2021 that exceeded the year-over-year benefit from the non-recurrence of the power outage at the Company’s Millsdale, Illinois site (partially offset by $12.8 million of insurance recovery) and incremental raw material costs incurred in 2020 as a result of the Illinois River lock closures.

Sales volume increased 23 percent year-over-year and positively impacted the change in gross profit by $13.8 million.

Gross profit for European operations increased $ 19.8 million , or 75 percent, d ue to a 45 percent increase in sales volume, higher average unit margins and the favorable impact of foreign currency translation .

The se items positively impacted the year-over-year change in gross profit by $11.9 million, $7.2 million, and $0.7 million, respectively.

Gross profit for Asia and Other operations declined $4.6 million, or 48 percent, primarily due to lower average unit margins that negatively impacted the change in gross profit by $4.9 million.

The lower unit margins were primarily due to the non-recurrence of $3.7 million of government settlements, related to the government-mandated China JV shutdown in 2012, received in 2020.

A one percent decline in sales volume negatively impacted the change in gross profit by $0.1 million.

The favorable impact of foreign currency translation positively impacted the change in gross profit by $0.4 million.

Operating expenses for the Polymers segment increased $3.3 million, or 12 percent, year-over-year.

The majority of the increase was due to higher salaries and incremental expenses incurred in 2021 due to the INVISTA polyester polyol acquisition.

Specialty Products

Specialty Products net sales increased $3.9 million, or six percent, versus net sales in 2020.

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

Gross profit was flat versus prior year and operating income increased $0.2 million.

Most of the sales volume growth reflects improved volume within the medium chain triglycerides (MCT) product line.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring/asset disposition and other operating expenses that are not allocated to the reportable segments, increased $3.2 million between years.

Corporate expenses were $83.0 million in 2021 versus $79.8 million in the prior year.

This increase was primarily attributable to higher insurance premiums, salaries, USEPA environmental remediation oversight costs at the Company’s Maywood, New Jersey site, 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.

In addition, business restructuring/asset disposition expenses increased $2.1 million between years primarily due to a $2.7 million loss incurred on the sale of a corporate headquarter building in 2021.

Partially offsetting the above were lower deferred compensation expenses, which declined $3.1 million year-over-year.

Deferred compensation expense decreased $3.1 million, or 31 percent, between years.

This decrease was primarily due to a $4.97 per share increase in the market price of the Company’s common stock during 2021 compared to a $16.88 per share increase during 2020.

The following table presents the period-end Company common stock prices used in the computation of deferred compensation expenses in 2021 and 2020:

Company Stock Price

2020 Compared with 2019

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

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

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

Consolidated net sales increased $11.1 million, or one percent, year-over-year.

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

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

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

Operating income increased $44.3 million, or 35 percent, year-over-year.

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

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

Polymer and Specialty Products operating income decreased $1.4 million and

$2.4 million, respectively.

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

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

Administrative expenses increased $ 4.

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

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

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

Administrative expenses increased $4.8 million, or six percent, year-over-year.

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

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

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

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

Net interest expense in 2020 declined $0.5 million, or nine percent, versus prior year.

Net interest expense in 2020 declined $0.5 million, or nine percent, versus 2019.

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

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

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

The Company also reported $0.5 million of higher net periodic pension cost expense in 2020 versus 2019.

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

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Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation

and Restructuring

Corporate Expenses, Excluding Deferred

Compensation and Restructuring

Deferred Compensation Expense (Income)

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Total Surfactants Segment

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

Net sales for North American operations increased $60.5 million, or eight percent, year-over-year.

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

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Surfactant operating income for 2020 increased $46.3 million, or 38 percent, versus operating income reported in 2019.

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

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

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

Operating expenses increased $2.8 million, or three percent.

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

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

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

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

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

12 unchanged sentences

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

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

Operating expenses decreased $0.7 million, or two percent, in 2020 versus 2019.

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

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

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

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

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

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

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

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

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

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

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

2 million and $0.

1 million, respectively.

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

The higher unit margins partially reflect the non-recurrence of a maintenance shutdown at the Company’s Germany site in 2019.

The unfavorable impact of foreign currency translation and a one percent decline in sales volume negatively impacted the change in gross profit by $0.2 million and $0.1 million, respectively.

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

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Corporate Expenses

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

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

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, decreased $1.7 million between 2020 and 2019.

Corporate expenses were $79.8 million in 2020 versus $81.5 million in 2019.

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

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Company Stock Price

2019 Compared with 2018

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

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

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

A detailed discussion of segment operating performance for 2019 compared to 2018 follows the summary.

Consolidated net sales decreased $135.1 million, or seven percent, between years.

Lower average selling prices negatively impacted the year-over-year change in net sales by $60.8 million.

The decrease in average selling prices was primarily due to the pass through of lower raw material costs.

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

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

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

Sales volume in the Surfactant segment decreased three percent while sales volume in the Polymer and Specialty Product segments increased four and one percent, respectively.

Operating income declined $22.0 million, or 15 percent, between years.

The majority of this decrease reflects higher deferred compensation expenses in 2019.

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

Corporate expenses,

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

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

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

Foreign currency translation had an unfavorable $2.5 million effect on year-over-year consolidated operating income.

Operating expenses (including deferred compensation expense and business restructuring expenses) increased $22.4 million, or 12 percent, between years.

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

Selling expenses increased $0.6 million, or one percent, year over year.

Administrative expenses increased $3.3 million, or four percent, year over year.

The increase was primarily due to higher environmental remediation and legal expenses.

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

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

Deferred compensation expense increased $17.5 million year-over-year primarily due to a $28.44 per share increase in the market price of Company common stock during 2019 compared to a $4.97 per share decrease in 2018.

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

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

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

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

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

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

This decrease was primarily attributable to the combination of higher interest earned on U.S.

cash balances and lower interest expense resulting from scheduled debt repayments and the Company’s voluntary prepayment of its 5.88% Senior Notes in the second quarter of 2019.

The higher interest on U.S.

cash balances was principally due to foreign cash repatriation of $100.0 million to the United States in the fourth quarter of 2018.

Other, net was $4.6 million of income in 2019 versus $0.7 million of expense in 2018.

The Company recognized $4.9 million of investment gains (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in 2019 compared to $1.4 million of losses in 2018.

In addition, the Company reported foreign exchange gains of $0.1 million in 2019 versus $1.9 million of gains in 2018.

The Company also reported $0.9 million of lower net periodic pension cost expense in 2019 versus the prior year.

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

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

This decrease was primarily attributable to incremental U.S.

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

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

federal income tax rate to the effective tax rate.

Segment Results

(In thousands)

For the Year Ended

Specialty Products

Total Net Sales

(In thousands)

For the Year Ended

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred

Compensation and Restructuring

Deferred Compensation Expense (Income)

Business Restructuring

Total Operating Income

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

The unfavorable impact of lower sales volume, lower average selling prices and foreign currency translation negatively impact the year-over-year change in net sales by $48.1 million, $40.8 million and $24.3 million, respectively.

Sales volume decreased three percent year-over-year.

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

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

For the Year Ended

(In thousands)

North America

Latin America

Total Surfactants Segment

Net sales for North American operations decreased $65.3 million, or eight percent, between years.

Lower average selling prices, a two percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $44.2 million, $20.4 million and $0.7 million, respectively.

Selling prices decreased five percent mostly due to the pass through of lower raw material costs to customers.

The decline in sales volume was mostly due to lower personal care commodity demand due to one customer losing an important share of business and lower sales volume to our distribution partners due to lower demand.

The foreign currency impact reflected a stronger U.S.

dollar relative to the Canadian dollar.

Net sales for European operations declined $36.0 million, or 13 percent, primarily due to a nine percent decrease in sales volume and the unfavorable effects of foreign currency translation.

These items negatively impacted the year-over-year change in net sales by $24.0 million and $12.8 million, respectively.

The lower sales volume was principally due to the Company ceasing Surfactant production at its German site during the fourth quarter of 2018.

A stronger U.S.

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

Slightly higher selling prices favorably impacted the year-over-year change in net sales by $0.8 million.

Net sales for Latin American operations were flat year-over-year.

Higher average selling prices positively impacted the year-over-year change in net sales by $16.9 million.

The unfavorable impact of foreign currency translation and a three percent decrease in sales volume negatively impacted the year-over-year change in net sales by $11.6 million and $5.7 million, respectively.

The higher average selling prices were partially due to one-time benefits related to a VAT tax recovery in Brazil.

The decline in sales volume is mostly attributable to lower sales volume to our distribution partners partially offset by higher demand in the agricultural end markets.

The year-over-year strengthening of the U.S.

dollar against the Colombian peso and Brazilian real generated most of the unfavorable foreign currency effect.

Net sales for Asian operations declined $11.5 million, or 18 percent, primarily due to an 11 percent decline in sales volume and lower selling prices.

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

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

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

The favorable impact of foreign currency translation positively impacted the change in net sales by $0.7 million.

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

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

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Latin America

Surfactants Segment Gross Profit

Operating Expenses

Operating Income

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

These items negatively impacted the change in gross profit by $10.6 million and $3.8 million, respectively.

The lower unit margins reflect a slightly less favorable customer and product mix and higher one-time inventory costs associated with the Company’s internal Asia-U.S.

supply chain.

Gross profit for European operations increased $3.5 million, or 12 percent, primarily due to lower overhead costs and higher unit margins resulting from the Company ceasing Surfactant production at its German plant site during the fourth quarter of 2018.

Unit margins also benefited from double digit volume growth in the agricultural and oilfield end markets.

Higher unit margins favorably impacted the year-over-year change in gross profit by $8.0 million.

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

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

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

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

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

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

The unfavorable impact of foreign currency translation and three percent lower sales volume negatively impacted the year-over-year change in gross profit by $1.4 million and $0.7 million, respectively.

Gross profit for Asian operations decreased $3.4 million, or 20 percent, largely due to an 11 percent decline in sales volume and lower unit margins.

These items negatively impacted the year-over-year change in gross profit by $1.8 million and $1.7 million, respectively.

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

The lower unit margins are primarily due to higher unit overhead costs in Singapore due to unfavorable production timing differences.

Operating expenses for the Surfactants segment increased $2.1 million, or two percent, year-over-year.

Most of this increase was attributable to higher salary and associated fringe benefit expenses.

Polymers 2019 net sales decreased $15.1 million, or three percent, versus net sales for 2018.

A four percent increase in sales volume positively impacted the year-over-year change in net sales by $19.6 million.

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

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

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

For the Year Ended

(In thousands)

North America

Asia and Other

Total Polymers Segment

Net sales for North American operations declined $8.8 million, or three percent, primarily due to lower average selling prices partially offset by slightly favorable volume growth.

The lower average selling prices negatively impacted the change in net sales by $11.6 million.

Sales volume growth positively impacted the change in net sales by $2.8 million.

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

Net sales for European operations decreased $14.2 million, or eight percent, year-over-year.

Sales volume growth of two percent positively impacted the year-over-year change in net sales by $4.1 million.

The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the change in net sales by $10.5 million and $7.8 million, respectively.

A stronger U.S.

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

Net sales for Asia and Other operations increased $7.9 million, or 25 percent, primarily due to a 37 percent increase in sales volume.

The increase in sales volume positively impacted the year-over-year change in net sales by $11.5 million.

The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the change in net sales by $1.8 million each.

Polymer operating income for 2019 increased $3.2 million, or five percent, versus operating income for 2018.

Gross profit increased $3.9 million, or four percent, year-over-year.

Operating expenses increased $0.7 million, or two percent, in 2019.

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

For the Year Ended

(In thousands)

Gross Profit and Operating Income

North America

Asia and Other

Polymers Segment Gross Profit

Operating Expenses

Operating Income

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

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

Average unit margins were flat year-over-year.

The flat margins largely reflect the consumption of higher priced 2018 year-end inventories carried to guard against winter supply disruptions and the non-recurrence of a $2.1 million class action settlement received in the first quarter of 2018.

Gross profit for European operations declined $1.5 million, or six percent, year-over-year.

Sales volume growth of two percent positively impacted the year-over-year change in gross profit by $0.6 million.

The unfavorable impact of foreign currency translation and lower unit margins negatively impacted the year-over-year change in gross profit by $1.5 million and $0.6 million, respectively.

Gross profit for Asia and Other operations improved $4.9 million primarily due to higher unit margins and 37 percent sales volume growth year-over-year.

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

Specialty Products

Specialty Products net sales decreased $6.8 million, or eight percent, versus net sales in 2018.

A one percent increase in sales volume was more than offset by lower average selling prices.

Gross profit increased $4.3 million and operating income increased $4.8 million year-over-year.

These increases primarily reflect improved margins within the Company’s medium chain triglycerides (MCTs) product line and lower operating expenses as a result of the 2019 restructuring efforts.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $19.2 million between years.

Corporate expenses were $81.5 million in 2019 versus $62.3 million in the prior year.

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

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

Deferred compensation expense increased $17.5 million between years.

This increase was primarily due to a $28.44 per share increase in the market price of the Company’s common stock in 2019 compared to a $4.97 per share decline in 2018.

The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expenses in 2019 and 2018:

Company Stock Price

Liquidity and Capital Resources

1 unchanged sentence

The Company’s principal uses of cash have included funding operating activities, capital investments and acquisitions.

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

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

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

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

The generation of cash from operations and the Company’s ability to access capital markets is expected to meet the Company’s requirements and plans for cash for working capital, capital expenditures, debt maturities, contributions to pension plans, dividend distributions to stockholders, share repurchases and other needs.

For 2021, cash generated from operating activities was a cash source of $72.1 million versus a source of $235.2 million in 2020.

For 2021, investing cash outflows totaled $376.8 million versus a cash outflow of $139.0 million in 2020.

Financing activities were a source of $117.3 million in 2021 versus a use of $64.9 million in 2020.

Cash and cash equivalents decreased by $190.8 million compared to December 31, 2020, inclusive of a $3.4 million unfavorable foreign exchange rate impact.

As of December 31, 2021, the Company’s cash and cash equivalents totaled $159.2 million.

4 unchanged sentences

Net income in 2021 increased by $10.2 million versus the comparable period in 2020.

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

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

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

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

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

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

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

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

Working capital was a cash use of $140.5 million in 2021 versus a cash source of $3.0 million in 2020.

Accounts receivable were a use of $104.2 million in 2021 compared to a use of $23.4 million in 2020.

Inventories were a use of $79.3 million in 2021 versus a use of $15.4 million in 2020.

Accounts payable and accrued liabilities were a source of $44.4 million in 2021 compared to a source of $55.7 million for the same period in 2020.

Working capital requirements were higher in 2021 compared to 2020 primarily due to the changes noted in the preceding paragraph.

The major factors driving the increase in working capital in 2021 were significantly higher raw material costs, sales volume growth of two percent and significantly higher average selling prices.

It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 2022.

2 unchanged sentences

Cash used for capital expenditures was $ 194.5 million in 2021 versus $ 125.8 million in 2020.

This increase is largely attributable to the previously announced alkoxylation plant the Company is building at its Pasadena, Texas site and equipment upgrades to meet new 1,4 Dioxane regulatory requirements.

Other investing activities were a use of $182.3 million in 2021 versus a use of $13.2 million in 2020.

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

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

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

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

The current year increase primarily reflects the Company’s acquisition of INVISTA’s aromatic polyester polyol business and associated assets for $183.7 million, net of cash received, during the first quarter of 2021.

For 2022, the Company estimates that total capital expenditures will range from $350.0 million to $375.0 million.

This projected spending includes the new alkoxylation plant that is being built in Pasadena, Texas, equipment upgrades to meet new 1,4 Dioxane regulatory requirements, growth initiatives, infrastructure, and optimization spending in the United States, Germany and Mexico.

Financing Activity

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

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

The Company purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and to mitigate the dilutive effect of new shares issued under its benefit plans.

The Company may, from time to time, seek to retire or purchase additional amounts of its outstanding equity and/or debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to plans meeting the requirements of Rule 10b5-1 promulgated by the SEC.

Cash flow from financing activities was a source of $117.3 million in 2021 versus a use of $64.9 million in 2020.

The year-over-year change is primarily due to $200.0 million of cash received from the issuance of private placement notes in 2021.

The Company may, from time to time, seek to purchase additional amounts of its outstanding equity and/or retire debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to plans meeting the requirements of Rule 10b5-1 promulgated by the SEC.

Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

The amounts involved may be material.

For the twelve months ended December 31, 2020, the Company purchased 173,956 shares at a total cost of $15.3 million.

At December 31, 2020, there were 175,874 shares remaining under the current share repurchase authorization.

For the twelve months ended December 31, 2021, the Company purchased 135,103 shares of its common stock on the open market at a total cost of $17.0 million.

At December 31, 2021, the Company has $150.0 million remaining under its Board of Directors share repurchase authorization.

Debt and Credit Facilities

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

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

Consolidated balance sheet debt increased by $164.9 million in 2021, from $198.7 million at December 31, 2020 to $363.6 million, 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 $355.7 million in 2021, from a negative $151.3 million to $204.4 million.

This net debt change was due to a cash reduction of $190.8 million and debt increase of $164.9 million.

As of December 31, 2021, the ratio of total debt to total debt plus shareholders’ equity was 25.3 percent compared to 16.8 percent at December 31, 2020.

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

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

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

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

As of December 31, 2021, the ratio of net debt to net debt plus shareholders’ equity was 16.0 percent versus a negative 18.1 percent as of December 31, 2020.

At December 31, 2021, the Company’s debt included $360.7 million of unsecured private placement notes, with maturities ranging from 2022 through 2031, that were issued to insurance companies pursuant to note purchase agreements (the Note Purchase Agreements) and $2.9 million of foreign credit line borrowings.

The proceeds from the private placement notes are the Company’s primary source of long-term debt financing and are supplemented by bank credit facilities to meet short and medium-term liquidity needs.

On June 10, 2021, the Company entered into a note purchase and private shelf agreement (the Prudential note purchase agreement) pursuant to which it issued and sold $50.0 million in aggregate principal amount of its 2.30% Senior Notes, Series 2021-A, due June 10, 2028 (the 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.

On December 10, 2021, pursuant to the Prudential note purchase agreement, the Company issued and sold $50.0 million in aggregate principal amount of its 2.73% Senior Notes, Series 2021-D, due December 10, 2031 (the Series 2021-D Notes).

The Series 2021-D Notes bear interest at a fixed rate of 2.73 percent, with interest to be paid semi-annually and with equal annual principal payments beginning on December 10, 2025 and continuing through final maturity on December 10, 2031 .

On June 10, 2021, the Company entered into a note purchase and master note agreement (the NYL note purchase agreement) pursuant to which, on September 23, 2021, the Company issued and sold $50.0 million in aggregate principal amount of its 2.37% Senior Notes, Series 2021-B, due September 23, 2028 (the Series 2021-B Notes).

The Series 2021-B Notes bear interest at a fixed rate of 2.37 percent, with interest to be paid semi-annually and with equal annual principal payments beginning on September 23, 2024 and continuing through final maturity on September 23, 2028.

On December 10, 2021, pursuant to the NYL note purchase agreement, the Company issued and sold $50.0 million in aggregate principal amount of its 2.73% Senior Notes, Series 2021-C, due December 10, 2031 (the Series 2021-C Notes).

The Series 2021-C Notes bear interest at a fixed rate of 2.73 percent, with interest to be paid semi-annually and with equal annual principal payments beginning on December 10, 2025 and continuing through final maturity on December 10, 2031.

On November 19, 2021, pursuant to the NYL note purchase agreement, the Company agreed to issue $25 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-A, due March 1, 2032 (the Series 2022-A Notes) on March 1, 2022, subject to customary closing conditions.

On November 19, 2021, pursuant to the Prudential note purchase agreement, the Company agreed to issue $50 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-B, due March 1, 2032 (the Series 2022-B Notes) on March 1, 2022, subject to customary closing conditions.

The Series 2022-A Notes and the Series 2022-B Notes will bear interest at a fixed rate of 2.83 percent, with interest to be paid semi-annually and with equal annual principal payments beginning on March 1, 2026 and continuing through final maturity on March 1, 2032.

The proceeds of the issuance of the Series 2021-A Notes, Series 2021-B Notes, Series 2021-C Notes and Series 2021-D Notes are being used and the proceeds of the issuance of the Series 2022-A Notes and the Series 2022-B Notes will be used primarily for capital expenditures, to pay down existing debt and for other corporate purposes.

The Prudential note purchase agreement and the NYL note purchase agreement require the maintenance of certain financial ratios, contain covenants that are substantially similar to the Company’s existing long-term debt and provide for customary events of default.

On January 30, 2018, the Company entered into a five-year committed $350.0 million multi-currency revolving credit facility with a syndicate of banks that matures on January 30, 2023.

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

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

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

As of December 31, 2021, the Company had outstanding letters of credit totaling $6.7 million under the revolving credit agreement and no borrowings, with $343.3 million remaining available.

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

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

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

The Company is subject to covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth.

These agreements also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares.

U nder the most restrictive of these debt covenants:

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 expenditure programs and acquisitions.

At December 31, 2021, the Company’s foreign subsidiaries had outstanding debt of 2.9 million.

The Company has material debt agreements that require the maintenance of minimum interest coverage and minimum net worth.

These agreements also limit the incurrence of additional debt as well as the payment of dividends and repurchase of treasury shares.

As of December 31, 2021, testing for these agreements was based on the Company’s consolidated financial statements.

Under the most restrictive of these debt covenants:

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

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

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

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

Contractual Obligations

At December 31, 2020, the Company’s contractual obligations, including estimated payments by period, were as follows:

The maximum amount of dividends that could have been paid within this limitation is disclosed as unrestricted retained earnings in Note 6, Debt , of the notes to the consolidated financial statements (included in Item 8 of this Form 10-K).

The Company believes it was in compliance with all of its loan agreements as of December 31, 2021.

Material Cash Requirements

At December 31, 2021, the Company’s material cash requirements included the following contractual obligations (including estimated payments by period):

Payments Due by Period

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Future interest rates may change, and, therefore, actual interest payments could differ from those disclosed in the above table.

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

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

The “Other” category comprises deferred revenues that represent commitments to deliver products, expected 2022 required contributions to the Company’s funded defined benefit pension plans, estimated payments related to the Company’s unfunded defined benefit supplemental executive and outside director pension plans, estimated payments (undiscounted) related to the Company’s asset retirement obligations, environmental remediation payments for which amounts and periods can be reasonably estimated and income tax liabilities for which payments and periods can be reasonably estimated.

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

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

The above table does not include $64.6 million of other non-current liabilities recorded on the balance sheet at December 31, 2021, as summarized in Note 15, Other Non-Current Liabilities, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K).

The significant non-current liabilities excluded from the table are defined benefit pension, deferred compensation, environmental and legal liabilities and unrecognized tax benefits for which payment periods cannot be reasonably determined.

In addition, deferred income tax liabilities are excluded from the table due to the uncertainty of their timing.

Off-Balance Sheet Arrangements

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

Pension Plans

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plans are frozen, and service benefit accruals are no longer being made.

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

The overfunded status (pretax) of the Company’s defined benefit pension plans was $7.9 million at December 31, 2021, versus underfunded status (pretax) of $9.1 million at December 31, 2020.

See Note 13, Postretirement Benefit Plans , of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for additional details.

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pension plans.

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

Payments to participants in the unfunded non-qualified plans should approximate $0.3 million in 202 2 , which is similar to payments made in 20 2 1 .

Letters of Credit

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As of December 31, 2021, the Company had a total of $6.7 million of outstanding standby letters of credit.

Off-Balance Sheet Arrangements

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

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

Environmental and Legal Matters

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During 2021, the Company’s expenditures for capital projects related to the environment were $13.4 million.

Expenditures for capital projects related to the environment are capitalized and depreciated over their estimated useful lives, which are typically 10 years.

Expenditures for capital projects related to the environment are capitalized and depreciated over their estimated useful lives, which are typically 10 to 15 years.

Recurring costs associated with the operation and maintenance of facilities for waste treatment, waste disposal and managing environmental compliance in ongoing operations at the Company’s manufacturing locations were approximately $34.9 million for 2021, $35.4 million for 2020 and $31.8 million for 2019.

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After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses from $23.1 million to $41.7 million at December 31, 2021, compared to $22.9 million to $41.1 million at December 31, 2020.

Within the range of possible environmental losses, management has currently concluded that there are no amounts within the ranges that are likely to occur than any other amounts in the ranges and, thus, has accrued at the lower end of the ranges.

Within the range of possible environmental losses, management has currently concluded that there are no amounts within the ranges that are more likely to occur than any other amounts in the ranges and, thus, has accrued at the lower end of the ranges.

The Company’s environmental and legal accruals totaled $23.1 million at December 31, 2021 as compared to $22.9 million at December 31, 2020.

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

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

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

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

Management anticipates that demand will

continue to recover at a modest pace in 2021.

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

Management believes Specialty Products results will improve slightly in 2021.

Management believes that demand for Surfactant products sold into the institutional cleaning, agricultural and oilfield end markets should improve versus 2021.

Management remains cautiously optimistic that consumer consumption of cleaning, disinfection and personal wash products will improve slightly in 2022 after significant de-stocking efforts in 2021.

Management believes the Polymer segment will deliver year-over-year growth in 2022 and that 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 will improve slightly year-over-year.

Despite optimism that demand for the Company’s products will remain strong, management also believes the Company will continue to be challenged by the same external factors that impacted the Company in 2021.

Climate Change Legislation

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The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles or GAAP).

Preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses at the date of the financial statements and to provide disclosures of contingent assets, liabilities and related amounts of revenues and expenses during the reporting period.

The following is a summary of the accounting policies the Company believes are the most important to aid in understanding its financial results:

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 – 15 years;

non-compete agreements – three years;

trademarks – eight to 11 years;

customer relationships – 12 to 20 years and know-how – seven 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.

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.

Deferred Compensation

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When no amount within a range of possible costs is a better estimate than any other amount, the minimum amount in the range is accrued.

Estimating the possible costs of

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

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.

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See the Environmental and Legal Matters section of this MD&A for discussion of the Company’s recorded liabilities and range of cost estimates.

Revenue Recognition

On January 1, 2018, the Company adopted ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606).

This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.

The Company’s contracts typically have a single performance obligation that is satisfied at the time product is shipped and control passes to the customer as compared to the “risk and rewards” criteria used in prior years.

For a small portion of the business, performance obligations are deemed satisfied when product is delivered to a customer location.

For arrangements where the Company consigns product to a customer location, revenue is recognized when the customer uses the inventory.

The Company accounts for shipping and handling as activities to fulfill a promise to transfer a good.

As such, shipping and handling fees billed to customers in a sales transaction are recorded in Net Sales and shipping and handling costs incurred are recorded in Cost of Sales.

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

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

Recent Accounting Pronouncements

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These measures should be considered in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP.

The Company’s definitions of these measures may differ from similarly titled measures used by other entities.

The Company’s definitions of these adjusted measures may differ from similarly titled measures used by other entities.

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

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

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

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

Twelve Months Ended December 31

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Deferred Compensation (Income) Expense

Business Restructuring

Business Restructuring/Asset Disposition

Cash-Settled SARs

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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 transactions occurred.

Reconciliations of Non-GAAP Net Debt

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

(In millions)

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Net Debt/Net Debt plus Equity

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis