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Item 1A. Risk Factors

The following discussion identifies the most significant factors that may materially and adversely affect the Company’s business, financial condition, results of operations and cash flows. These and other factors, many of which are beyond the Company’s control, may cause future results of operations to differ materially from past results or those results currently expected or desired. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (included in Item 7 of this Form 10-K) and the Company’s consolidated financial statements and related notes (included in this Form 10-K).

Business and Operations Risks

The COVID-19 pandemic has had and could continue to have a material adverse impact on our business, financial position, results of operations and cash flows.

The COVID-19 pandemic has disrupted our operations and affected our business and could continue to do so, including as a result of government authorities imposing mandatory closures, work-from-home orders and social distancing protocols, or imposing other restrictions that could materially adversely affect our ability to adequately staff and maintain our operations. Specifically, in 2020 we experienced a temporary facility closure in response to government mandates in one jurisdiction in which we operate. In addition, during 2020 and 2021 at certain times we experienced reduced staffing and reduced production capacity at facilities due to the impact of the COVID-19 pandemic on our employees. We may experience additional closures in the future. The COVID‐19 pandemic, and resulting restrictions and perceptions of health risks, have affected and could have long-term effects on our customers and the economies of countries in which we and our customers operate, and demand for certain of our products could be adversely affected. For example, in 2020 and 2021, construction project delays and cancellations related to the impacts of the COVID-19 pandemic reduced demand for the Company’s rigid polyol products. In addition, our operations have been adversely affected by other impacts of the COVID-19 pandemic, including, disruptions to our supply of raw materials, transportation and delivery of our products and cost inflation. Because the Company cannot predict the duration or broader impact of the COVID-19 pandemic, the impact on the Company cannot be reasonably estimated, but the COVID-19 pandemic has had and could continue to have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

Chemical manufacturing is inherently hazardous and may result in accidents or may require planned or unplanned production slowdowns or shutdowns, which may disrupt our operations or expose us to significant losses or liabilities that may have a material impact on our business, financial position, results of operations and cash flows.

Manufacturing facilities in the Company’s industry are subject to planned and unplanned production slowdowns and shutdowns, turnarounds and outages. Unplanned production disruptions may occur for external reasons, such as natural disasters, weather, disease, strikes, transportation interruption, government regulation, political unrest or terrorism, or internal reasons, such as fire, explosions, mechanical failure, labor-related work stoppages or slowdowns, maintenance, discharges, contamination, environmental remediation or other manufacturing problems. For example, in January 2022, unplanned weather-related production disruptions at the Company’s Millsdale, Illinois facility impacted Polymer operations. Certain of our production facilities are, and production facilities acquired or built in the future may be, located in areas where unplanned disruptions are more likely. Alternative facilities with sufficient capacity may not be available, may cost substantially more or may take a significant amount of time to increase production or qualify with Company customers, each of which could negatively impact the Company’s business, financial position, results of operations and cash flows. Further, some of the Company’s products cannot currently be made, or made in the volume required, at more than one of the Company’s locations. For some of these products, the Company has access to external market suppliers, but the Company cannot guarantee that these products will be available to it in amounts sufficient to meet its requirements or at a cost that is competitive with the Company’s cost of manufacturing these products. Long-term production disruptions may cause Company customers to seek alternative supply, which could further adversely affect Company profitability.

The hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes are inherent in our operations. We cannot eliminate the risk of accidental contamination, discharge or injury resulting from those materials. Also, our suppliers and customers may use and/or generate hazardous materials, and we may be required to indemnify our suppliers, customers or waste disposal contractors against damages and other liabilities arising out of the production, handling or storage of our products or raw materials or the disposal of related wastes. Potential risks include explosions and fires, chemical spills and other discharges or releases of toxic or hazardous substances or gases, and pipeline and storage tank leaks and ruptures. Those hazards may result in personal injury and loss of life, damage to property, damages to public health and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal fines, penalties and other sanctions, cleanup costs, and claims by governmental entities or third parties. Furthermore, the Company is subject to present and future claims with respect to workplace exposure, exposure of toxic or hazardous substances to contractors on Company premises as well as other persons located nearby, workers' compensation and other matters.

We are dependent on the continued operation of our production facilities and the loss or shutdown of operations over an extended period could have a material adverse effect on our business, financial position, results of operations and cash flows. The

Company maintains property, business interruption, products liability and casualty insurance policies, as well as insurance policies covering other types of risks, including pollution legal liability insurance. However, some of these potential manufacturing hazards and risks may not be insurable. Moreover, even when such hazards and risks are insurable, the insurance coverage may not be sufficient to cover all losses resulting from the occurrence of any of these events. Each of these insurance policies is subject to customary exclusions, deductibles and coverage limits, in accordance with industry standards and practices. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only with reduced amounts of coverage. There is also a risk, beyond the reasonable control of the Company, that an insurance carrier may not have the financial resources to cover an insurable loss. As a result, the occurrence of any of these events could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

The volatility of raw material, natural gas and electricity costs, as well as any disruption in their supply may result in increased costs and materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

The costs of raw materials, natural gas and electricity represent a substantial portion of the Company’s operating costs. The principal raw materials used in the Company’s products are petroleum-based or plant-based. Natural gas is used in the Company’s manufacturing sites primarily to generate steam for its manufacturing processes. The prices of many of these raw materials can be subject to periods of rapid and significant instability. These fluctuations in prices may be affected by supply and demand factors, such as general economic conditions, regulatory developments with respect to and restrictions on the transport of raw materials (some of which may be viewed as hazardous), currency exchange rates, political instability or terrorist attacks, all of which are beyond the Company’s control. For example, in 2021, supply chain disruptions and inflationary pressures increased raw material prices for the Company. The Company may not be able to pass increased raw material or energy costs on to customers through increases in product prices as a result of arrangements the Company has with certain customers and competitive pressures in the market. In addition, the Company’s suppliers are subject to planned and unplanned production slowdowns and shutdowns, turnarounds and outages. Unplanned production disruptions may occur for external reasons, such as natural disasters, weather, disease, strikes, transportation interruption, government regulation, political unrest or terrorism, or internal reasons, such as fire, explosions, mechanical failure, labor-related work stoppages or slowdowns, maintenance, discharges, contamination, environmental remediation or other manufacturing problems. Certain of our suppliers’ facilities are located in areas where unplanned disruptions are more likely. In the event of supply disruptions, raw materials may not be available to the Company in amounts sufficient to meet our requirements, and alternative raw materials may not be available, may cost substantially more or may take a significant amount of time to for the Company to qualify. For example, in 2021, severe weather in Texas and the U.S. Gulf Coast caused production disruptions for several of the Company’s suppliers, which resulted in feedstock issues for the Company’s Surfactants segment. If the Company is unable to minimize the effects of increased raw material and energy costs or pass such increased costs on to customers, or manage any interruption to the supply of raw materials or energy, its business, financial position, results of operations and cash flows may be materially and adversely affected.

The Company relies heavily on third-party transportation to deliver raw materials to Company manufacturing facilities and ship products to Company customers. Disruptions in transportation or significant changes in transportation costs have affected and could continue to affect the Company’s business, financial position, results of operations and cash flows.

The Company relies heavily on railroads, ships, and other over-the-road shipping methods to transport raw materials to its manufacturing facilities and to ship finished products to customers. Transport operations are exposed to various risks, such as extreme weather conditions, natural disasters, technological problems, work stoppages, personnel shortages and operating hazards, as well as interstate and international transportation regulations. If the Company, its suppliers or third-party transportation operators experience transportation problems, or if there are significant changes in the cost of these services, the Company may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship finished product, which could result in a material adverse effect on Company revenues, costs and operating results. For example, during the 2021, transportation disruptions due to driver shortages and increased costs negatively impacted results of operations in our Surfactants and Polymers segments.

Conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations related to our industry, could adversely affect the Company’s business.

Conflicts, military actions and terrorist attacks have precipitated economic instability and turmoil in financial markets. Instability and turmoil, particularly in energy-producing nations, may result in raw material cost increases. The uncertainty and economic disruption resulting from hostilities, military action or acts of terrorism may impact any or all of the Company’s facilities and operations or those of its suppliers or customers. Accordingly, any conflict, military action or terrorist attack that impacts the Company or any of its suppliers or customers, or any resulting economic instability resulting from such conflict, military action or terrorist attack, could have a material adverse effect on the Company’s business, results of operations, financial position and cash flows.

Cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects could adversely affect the Company’s business, financial position, results of operations and cash flows.

From time to time, the Company initiates expansion and other significant capital projects. Projects of this type are subject to risks of delay or cost overruns inherent in any large construction project resulting from numerous factors, including the following: shortages of equipment, materials or skilled labor; work stoppages; unscheduled delays in the delivery of ordered materials and equipment; unanticipated cost increases; difficulties in obtaining necessary permits or in meeting permit conditions; difficulties in meeting regulatory requirements or obtaining regulatory approvals; availability of suppliers to certify equipment for existing and enhanced regulations; design and engineering problems; and failure or delay of third-party service providers, civil unrest and labor disputes. Significant cost overruns or delays in completing a capital project could have a material adverse effect on the Company’s return on investment, results of operations and cash flows. In addition, if the Company misjudges its future capacity needs, this too could negatively impact its business, financial position, results of operations and cash flows.

Market, Competition and Strategic Risks

Customer product reformulations or new technologies can reduce the demand for the Company’s existing products, and the Company may not be successful in developing or introducing new products.

The Company’s products are used in a broad range of customer product applications. Changes in customer manufacturing processes, customer product reformulations, development and use of new technologies or changes in regulatory, legislative or industry requirements may lead to reduced consumption of the Company’s products or cause customers to consider some Company products obsolete or less attractive.

For example, increased concerns regarding the safety of 1,4 dioxane in consumer products and its potential impact on human health and the environment may lessen the demand for certain of the Company’s products. 1,4 dioxane is generated as a by-product during the manufacture of certain of the Company’s surfactant products, including alkoxylates and ether sulfates, used by its customers as cleaning agents in household cleaning, personal care and cosmetics products. In their finished form, consumer products that contain ethoxylated surfactants may contain trace amounts of 1,4 dioxane. 1,4 dioxane has been categorized by regulators as a toxic and carcinogenic substance at certain levels. In December 2019, New York adopted a law that, beginning in 2022 and 2023, will permit no more than trace amounts of the chemical in cleaning, personal care and cosmetics products. California and New Jersey, likewise, are also considering regulating 1,4 dioxane. The U.S. Environmental Protection Agency (USEPA) also continues to examine 1,4 dioxane as part of its environmental and occupational regulatory authority. We expect our customers to continue reformulating their personal care, cosmetics and cleaning products to meet New York’s 2022 and 2023 deadlines. These trends and corresponding changes in consumer preferences could reduce demand for our ethoxylated surfactant products, as our customers look to reduce the levels of ethoxylated surfactants in their finished products to stay below the maximum allowed levels or transition to alternative surfactants with lower levels of 1,4 dioxane. We are currently making investments to modify our manufacturing process to reduce 1,4 dioxane content to allow customers to continue to use ethoxylated surfactants at current use levels, while also offering consumer product formulation prototypes that contain low/no dioxane surfactants currently offered by the Company.

It is imperative that the Company continue to develop new products to replace the sales of products that mature and decline in use, though the Company may not be successful in achieving its growth expectations from developing new products. Moreover, the Company cannot be certain that the costs it incurs investing in new product and technology development will result in an increase in revenues or profits commensurate with its investment, and the introduction of any new products may be disrupted or delayed by manufacturing or other technical difficulties. The Company’s business, financial position, results of operations and cash flows could be materially and adversely affected if the Company is unable to successfully manage the maturation of existing products and the successful development and introduction of new products.

To the extent the Company seeks acquisition opportunities, it may not be able to make acquisitions of suitable candidates or integrate acquisitions successfully.

In recent years, the Company has used acquisitions to expand into new markets and to enhance its position in its existing markets. To the extent it seeks to do so in the future it may not be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, obtain financing needed to consummate those acquisitions, complete proposed acquisitions or successfully integrate acquired businesses into its existing operations. In addition, any acquisition, once successfully integrated, may not perform as planned, be accretive to earnings, or otherwise prove beneficial to the Company.

Acquisitions involve numerous risks, including the assumption of undisclosed or unindemnified liabilities, difficulties in the assimilation of the operations and the transfer of all necessary licenses and permits, technologies, services and products of the

acquired companies and the diversion of management’s attention from other business concerns. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses.

The Company faces significant global competition in each of its operating segments. If the Company cannot successfully compete in the marketplace, its business, financial position, results of operations and cash flows may be materially and adversely affected.

The Company faces significant competition from numerous global companies as well as national, regional and local companies in the markets it serves. Many of the Company’s competitors have access to greater financial resources, which may enable them to invest significant capital into their businesses, including expenditures for research and development. Some of the Company’s competitors have their own raw material resources and may be able to produce products more economically. In addition, some of the Company’s customers have internal manufacturing capabilities that allow them to achieve make-versus-buy economics, which may result at times in the Company losing business with these customers in volumes that could adversely affect the Company’s profitability.

To achieve expected profitability levels, the Company must, among other things, maintain the service levels, product quality and performance and competitive pricing necessary to retain existing customers and attract new customers as well as continue to develop and introduce new products. The Company’s inability to do so could place it at a competitive disadvantage relative to its competitors, and if the Company cannot successfully compete in the marketplace, its business, financial position, results of operations and cash flows may be materially and adversely affected.

Downturns in certain industries, in some cases driven by consumer preferences, and general economic downturns may have an adverse effect on the Company’s business, financial position, results of operations and cash flows.

Economic downturns may adversely affect users of some end products that are manufactured using the Company’s products and the industries in which such end products are used. During economic downturns, these users may reduce their volume of purchases of such end products or may purchase alternative products, which would reduce demand for the Company’s products. In addition, increasing concern among consumers, public health professionals and government agencies about health and wellness issues could lead some of the Company’s customers to limit the use of certain of our products or result in harm to the Company’s reputation. Reduced demand from the primary end markets for the Company’s products, such as the consumer products industry, could adversely affect the Company. Additionally, uncertain conditions in the credit markets pose a risk to the overall economy that may impact consumer demand for such end products and customer demand of some of the Company’s products, as well as the Company’s ability to manage normal commercial relationships with its customers, suppliers and creditors. Some of the Company’s customers may not be able to meet the terms of sale and suppliers may not be able to fully perform their contractual obligations due to tighter credit markets or a general slowdown in economic activity.

In the event that economic conditions worsen or result in a prolonged downturn or recession, or consumer‐driven preferences result in reduced demand for our products, the Company’s business, financial position, results of operations and cash flows may be materially and adversely affected.

If the Company is unable to protect its intellectual property rights, the Company’s ability to compete may be negatively impacted.

The Company’s patents and other intellectual property may not prevent competitors from independently developing or selling similar or duplicative products and services, and there can be no assurance that the resources the Company invests to protect its intellectual property will be sufficient or that the Company’s intellectual property portfolio will adequately deter misappropriation or improper use of its technology. The Company could also face competition in some countries where it has not invested in an intellectual property portfolio, or where intellectual property rights are more difficult to obtain and/or assert. In addition, the Company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming. If the Company is found to infringe any third-party rights, it could be required to pay substantial damages or it could be enjoined from offering some of its products and services. Also, there can be no assurances that the Company will be able to obtain or renew from third parties the licenses it may need in the future on reasonable terms or at all.

Regulatory and Legal Risks

The Company is subject to a variety of environmental, health and safety and product registration laws dealing with the production and sale of chemicals that could require us to incur additional costs or to reformulate or discontinue certain of our products, or expose us to liability or enforcement actions.

The Company’s operations are regulated under a number of federal, state, local and foreign environmental, health and safety laws and regulations that govern, among other things, the production and marketing of chemical substances and the discharge, use,

handling, transport, storage and disposal of hazardous materials into the air, soil and water. In the United States, these laws and regulations include, but are not limited to the U.S. Toxic Substances Control Act (TSCA), the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Occupational Safety and Health Act and state and local laws, such as California’s Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65). Analogous laws outside the United States apply to us in many jurisdictions, including, among others, the Registration, Evaluation, Authorization and Restriction of Chemical Substances (REACH) regulationsin the European Union and the United Kingdom and Biocidal Products Regulations in the European Union and the United Kingdom. Compliance with these environmental, health and safety laws and regulations is a major consideration for the Company, and to comply with some of these laws, we may need to alter our product lines or implement different or more costly manufacturing processes (including the installation of pollution control equipment), which could lead to a material adverse effect on our results of operations. In addition, the transportation of certain raw materials is highly regulated and is subject to increased regulation or restrictions. These regulations may restrict or prohibit transport of these raw materials, resulting in these raw materials not being available to the Company in quantities desired by the Company or at costs attractive to the Company, which may restrict or substantially limit the Company’s manufacturing operations.

The REACH regulations are a registration systems that impose obligations on manufacturers and importers of chemicals and other products into the European Union and United Kingdom to compile and file reports and testing data on, and perform safety assessments for, certain chemical substances. Any new substances introduced to the EU or UK markets in the future must be registered. The costs associated with the Company’s compliance with these registrations have been substantial and are expected to increase as product sales increase because higher tonnage bands have higher annual registration fees and require more testing to support the registration. Moreover, if a registration in the future is not submitted by any applicable deadline, our ability to sell those products may be negatively impacted until the registration process has been completed. In addition, the European Chemical Agency is evaluating existing chemical registrations and may require additional testing and data collection. Chemicals may be assessed and removed from EU commerce entirely, potentially requiring the Company to discontinue certain product lines and to reformulate others, which could materially alter our marketplace position or otherwise have a material financial effect on our costs or revenues. Regulators in other countries are also implementing chemical registration regulations similar to the REACH regulations.

Furthermore, some of the laws and regulations applicable to us have changed in recent years to impose new obligations or increasing compliance costs that could also force us to reformulate or discontinue certain of our products. For example, the European Union is now requiring a review of existing active biocide substances, and based on this review, the European Commission or an individual member state may decide not to authorize the product for continued sale. As another example, TSCA now mandates that the USEPA must designate “high priority” chemicals and perform a risk evaluation, which could result in a finding of “unreasonable risk” and a decision to promulgate new regulations to address such risk. As a result of such regulations, our ability to sell certain products may be curtailed and customers may avoid purchasing some products in favor of less regulated, less hazardous or less costly alternatives. It may be impractical for us to continue manufacturing heavily regulated products, and we may incur costs to shut down or transition such operations to alternative products. Additionally, the nature, stringency and timing of any future regulations or changes in regulations are uncertain.

In addition, increasingly stringent regulation of human exposure to ethylene oxide by regulatory authorities in the United States could require material expenditures or changes in our manufacturing operations. We use ethylene oxide at our Winder, Georgia and Millsdale, Illinois facilities. We use ethylene oxide in a closed loop process to manufacture surfactants that are used in products such as laundry detergents. The Company does not manufacture ethylene oxide, nor does it use ethylene oxide as a fumigant. Ethylene oxide is listed as a hazardous air pollutant under the Clean Air Act, as amended, emissions of which are regulated by the USEPA and other regulatory authorities. In 2020, Georgia adopted a law requiring any spill or release of ethylene oxide that occurs outside of normal operations to be reported to the state within 24 hours. Georgia and Illinois legislators have proposed legislation that would impose additional restrictions on the use of ethylene oxide. The USEPA is considering new standards for ethylene oxide emissions. While our production facilities have not yet been materially affected by changes in ethylene oxide regulation, any additional regulatory restrictions on the use or emission of ethylene oxide by facilities could impair our ability to manufacturer certain products in affected locations, including at our Winder, Georgia and Millsdale, Illinois facilities.

Compliance with environmental laws could restrict the Company’s ability to expand its facilities or require the Company to modify its facilities and processes or acquire additional costly pollution control equipment, incur other significant expenses, or expose the Company to greater liability associated with its production processes and products. The Company has incurred and will continue to incur capital expenditures and operating costs in complying with these laws and regulations, as our operations currently use, and have historically used, hazardous materials and generate, and have historically generated, quantities of hazardous waste. Some existing environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at those locations without regard to causation or knowledge of contamination. Certain of our sites have an extended history of industrial use, which may expose us to liability. We are subject to regulatory oversight and investigation, remediation, and monitoring obligations at certain current and former U.S. Superfund sites, as well as third-party disposal sites, under federal laws and their state and local analogues, including the RCRA, the Clean Water Act, the Clean Air Act, and CERCLA, as well

as analogous foreign laws. See Item 3, Legal Proceedings, in this Form 10-K and Note 16, Contingencies, in the Notes to the Company’s Consolidated Financial Statements (included in Item 8 of this Form 10-K) for a summary of current significant environmental proceedings related to certain environmental sites. In the event that new contamination is discovered, including at facilities we may acquire in the future, the Company may become subject to additional obligations. The costs and liabilities associated with these issues may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

The Company is also subject to numerous federal, state, local and foreign laws that regulate the manufacture, storage, distribution and labeling of many of the Company’s products, including some of the Company’s disinfecting, sanitizing and antimicrobial products. Some of these laws require the Company to have operating permits for the Company’s production facilities, warehouse facilities and operations. Various federal, state, local and foreign laws and regulations also require the Company to register the Company’s products and to comply with specified requirements with respect to those products, such as FIFRA, the EU Biocidal Products Regulation and Mexico’s General Law of Ecological Equilibrium and Environmental Protection. Additionally, those requirements, and enforcement of those requirements, may become more stringent in the future. The ultimate cost of compliance with any such requirements could be material.

Although it is our policy to comply with such laws and regulations, it is possible that we have not been or may not be at all times in material compliance with all of those requirements. If the Company has failed to comply or fails to comply in the future with any of these laws and regulations, including permitting and licensing requirements, it may be liable for damages and the costs of remedial actions in excess of the Company’s recorded liabilities, and may also be subject to fines, injunctions or criminal sanctions or to revocation, non-renewal or modification of the Company’s operating permits and revocation of the Company’s product registrations. Any such revocation, modification or non-renewal may require the Company to cease or limit the manufacture and sale of its products at one or more of the Company’s facilities, which may limit or prevent the Company’s ability to meet product demand or build new facilities and may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows. Any such revocation, non-renewal or modification may also result in an event of default under the indenture for the Company’s notes or under the Company’s credit facilities, which, if not cured or waived, may result in the acceleration of all the Company’s indebtedness.

In addition to the costs of complying with environmental, health and safety laws and regulations, the Company has incurred and may incur in the future costs defending against environmental litigation and/or investigations brought by government agencies and private parties, including administrative proceedings. The Company is, and may be in the future, a defendant in lawsuits brought by parties alleging environmental damage, personal injury or property damage. A significant judgment or settlement against the Company, to the extent not covered by existing insurance policies, could have a material adverse effect on its business, financial position, results of operations and cash flows. Although the Company has insurance policies that may cover some of these potential losses, there is always uncertainty as to whether such insurance may be sufficient to cover such losses or available at all to the Company based on case-specific factors and the specific provisions of the Company’s insurance policies.

The potential cost to the Company relating to environmental, health and safety and product registration matters is uncertain due to factors such as the complexity and evolving nature of laws and regulations relating to the environment, health and safety and product registration, including those outside of the United States. Environmental, health and safety and product registration laws and regulations may also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, as well as restricting or prohibiting the sale of existing or new products, which may also negatively impact the Company’s operating results. Without limiting the foregoing, these laws or regulations may also restrict or prohibit the use of non-renewable or carbon-based substances, or impose fees or penalties for the use of these substances. Accordingly, the Company may become subject to additional liabilities and increased operating costs in the future under these laws and regulations. The impact of any such changes, which are unknown at this time, may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

Various liability claims could materially and adversely affect the Company’s financial position, operating results and cash flows.

The Company may be required to pay for losses or injuries purportedly caused by its products. The Company faces an inherent exposure to various types of claims including general liability, product liability, product recall, toxic tort and environmental, among others, if its products, or the end products that are manufactured with the Company’s products, result in property damage, injury or death. In addition, because the Company conducts business in multiple jurisdictions, the Company also faces an inherent exposure to other general claims based on its operations in those jurisdictions and the laws of those jurisdictions, including but not limited to claims arising from its relationship with employees, distributors, agents and customers, and other parties with whom it has a business relationship, directly or indirectly. Many of these claims may be made against the Company even if there is no evidence of a loss from that claim, and these claims may be made by individual persons, groups of persons, or groups of plaintiffs in a class action. Defending these claims could result in significant legal expenses relating to defense costs and/or damage awards and diversion of management’s

time and the Company’s resources. Any claim brought against the Company could materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

The Company’s failure to comply with the anti-corruption laws of the United States and various international jurisdictions could negatively impact its reputation and results of operations.

Doing business on a worldwide basis requires the Company to comply with anti-corruption laws and regulations imposed by governments around the world with jurisdiction over our operations, which may include the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act 2010 (the Bribery Act), as well as the laws of the countries where the Company does business. These laws and regulations can apply to companies and individual directors, officers, employees and agents, and may restrict the Company’s operations, trade practices, investment decisions and partnering activities. Where they apply, the FCPA and the Bribery Act prohibit, among other things, the Company and its officers, directors, employees and business partners, including joint venture partners and agents acting on the Company’s behalf, from corruptly offering, promising, authorizing or providing anything of value to “foreign officials” for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The Bribery Act also prohibits non-governmental “commercial” bribery and accepting bribes. Part of the Company’s business may involve dealings with governments and state-owned business enterprises, the employees and representatives of which may be considered “foreign officials” for purposes of the FCPA and the Bribery Act. The Company is also subject to the jurisdiction of various governments and regulatory agencies around the world, which may bring Company personnel and agents into contact with “foreign officials” responsible for issuing or renewing permits, licenses, or approvals or for enforcing other governmental regulations. The Company’s global operations, including in countries with high levels of perceived corruption, expose it to the risk of violating, or being accused of violating, anti-corruption laws. Any failure on the part of the Company to successfully comply with these laws and regulations may expose the Company to reputational harm as well as significant sanctions, including criminal fines, imprisonment of its employees or representatives, civil penalties, disgorgement of profits, injunctions and debarment from government contracts, as well as other remedial measures. Investigations of alleged violations can be expensive and disruptive. Compliance with these laws can increase the cost of doing business globally. The Company maintains policies and procedures designed to assist the Company and its subsidiaries in complying with applicable anti-corruption laws. However, there can be no guarantee that these policies and procedures will effectively prevent violations by Company employees or representatives for which the Company may be held responsible, and any such violation could materially and adversely affect the Company’s reputation, as well as its business, financial position and results of operations.

International Operations Risks

The Company’s results of operations may be adversely affected by international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes.

The Company has substantial operations outside the United States. In the year ended December 31, 2021, the Company’s sales outside of the United States constituted approximately 45 percent of the Company’s net sales. In addition to the risks described in this Annual Report on Form 10‐K that are common to both the Company’s U.S. and non-U.S. operations, the Company faces, and will continue to face, risks related to the Company’s foreign operations, including:

• high levels of inflation;

• political, economic, financial and market conditions, which may be unstable;

• differing economic cycles and adverse economic conditions;

• greater difficulty enforcing contracts and collecting accounts receivable;

The actual occurrence of any or all of the foregoing could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows in the future.

The international scope of the Company’s operations and corporate structure may expose the Company to potentially adverse tax consequences.

The Company is subject to taxation in and to the tax laws and regulations of multiple jurisdictions as a result of the international scope of its operations and corporate structure. The Company is also subject to intercompany pricing laws, including those relating to the flow of funds between its entities pursuant to, for example, purchase agreements, licensing agreements or other arrangements. Adverse developments in these laws or regulations, or any change in position regarding the application, administration or interpretation of these laws or regulations in any applicable jurisdiction could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows. In addition, the tax authorities in any applicable jurisdiction may disagree with the positions the Company has taken or intends to take regarding the tax treatment or characterization of any of the Company’s transactions, including the tax treatment or characterization of the Company’s indebtedness. If any applicable tax authorities were to successfully challenge the tax treatment or characterization of any of the Company’s transactions, it could result in the disallowance of deductions, the imposition of withholding taxes on internal deemed transfers or other consequences that could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

Fluctuations in foreign currency exchange rates could affect Company financial results.

The Company is also exposed to fluctuations in foreign exchange rates. The Company’s results of operations are reported in U.S. dollars. However, outside the United Sates, the Company’s sales and costs are denominated in a variety of currencies including the European euro, British pound, Canadian dollar, Mexican peso, Colombian peso, Philippine peso, Brazilian real, Polish zloty, and Chinese RMB. The Company translates its local currency financial results into U.S. dollars based on average exchange rates prevailing during the reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, the Company’s reported international sales and earnings may be reduced because the local currency may translate into fewer U.S. dollars. Fluctuations in exchange rates may materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

In all jurisdictions in which the Company operates, the Company is also subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions. These laws and regulations may limit the Company’s ability to repatriate cash as dividends or otherwise to the United States or to efficiently allocate cash to support strategic initiatives, and may limit the Company’s ability to convert foreign currency cash flows into U.S. dollars. A weakening of the currencies in which the Company generates sales relative to the foreign currencies in which the Company’s costs are denominated may lower the Company’s operating profits and cash flows.

Financial Risks

The Company could be adversely affected by downgrades to its credit ratings or disruptions in its ability to access well-functioning credit markets.

Historically, the Company has relied on the debt capital markets to fund portions of its capital investments and other corporate initiatives, as well as access to bank credit facilities as part of its overall financing strategy, including working capital management strategy. The Company’s continued access to these markets, and the terms of such access, depend on multiple factors including the condition of debt capital markets, the Company’s operating performance, and its credit ratings. These ratings are based on a number of factors, which include rating agencies’ assessment of the Company’s financial strength and outlook. There can be no assurance that any particular rating assigned to the Company will remain in effect for any given period of time or that a rating will not be changed or withdrawn by a rating agency, if in that rating agency’s judgment, future circumstances relating to the basis of the rating so warrant. Incurrence of additional debt by the Company could adversely affect its credit ratings. The Company depends on banks and other financial institutions to provide credit to its business and perform under the Company’s agreements with them. Defaults by one or more of these counterparties on their obligations to the Company could materially and adversely affect it. Any downgrade of the Company’s credit ratings could materially and adversely affect its cost of funds, liquidity, competitive position and access to credit

markets and increase the cost of and counterparty risks associated with existing facilities, which could materially and adversely affect the Company’s business, financial position,results of operations and cash flows.

The Company has a significant amount of indebtedness and may incur additional indebtedness, or need to refinance existing indebtedness, in the future, which may adversely affect the Company’s business, financial position, results of operations and cash flows.

The Company has a significant amount of indebtedness and may incur additional indebtedness in the future. As of December 31, 2021, the Company had $363.6 million of debt on its balance sheet consisting of unsecured promissory notes with maturities ranging from 2022 until 2031. In addition, the Company is party to a $350.0 million revolving credit facility; as of December 31, 2021, the Company had no outstanding borrowings and outstanding letters of credit totaling $6.7 million under the facility with $343.3 million remaining available for future borrowings.

Certain of the Company’s foreign subsidiaries periodically maintain bank term loans and short-term bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. As of December 31, 2021, the Company’s foreign subsidiaries had $2.9 million in unsecured bank debt.

The Company’s current indebtedness and any additional indebtedness incurred in the future may materially and adversely affect its business, financial position, results of operations and cash flows. For example, such indebtedness could:

The Company’s debt agreements contain customary covenants and other provisions that, among other things, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. The Company’s ability to comply with these provisions may be affected by events beyond our control. Failure to comply with these provisions could require repayment of outstanding debt or lead to a debt restructuring that could materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

In addition, an increase in interest rates could limit the Company’s ability to incur additional debt to fund the Company’s strategic plans or to refinance maturing debt without incurring significant additional costs and could make borrowings under the Company’s revolving credit facility or other floating rate debt materially more expensive. Further, any future disruptions in the credit and financial markets may reduce the availability of debt financing or refinancing alternatives and increase the costs associated with such financing activities. If the Company is unable to secure financing when needed on satisfactory terms, or at all, its business, financial position, results of operations and cash flows may be materially and adversely affected.

General Risks

The Company relies extensively on information technology (IT) systems to conduct its business. Interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data could harm the Company’s reputation and have an adverse effect on the Company’s business, financial position, results of operations and cash flows.

The Company relies on IT systems in its operations, including production, supply chain, research and development, finance, human resource and regulatory functions. The Company’s ability to effectively manage its business depends on the security, reliability and adequacy of these systems. IT system failures due to events including but not limited to network disruptions, programming errors, computer viruses and security breaches (e.g., cyber-attacks) could impact production activities, impede shipment of products, cause delays or cancellations of customer orders, or hamper the processing of transactions or reporting of financial results. These or similar occurrences, whether accidental or intentional, could result in theft, unauthorized use or publication of our intellectual property or confidential business information of our employees, customers, suppliers or other third parties, which could harm our reputation and competitive position, reduce the value of our investments in research and development and other strategic initiatives, result in a loss of

business, as well as remedial and other costs, fines, investigations, enforcement actions or lawsuits or otherwise materially and adversely affect our business, financial position, results of operations and cash flows.

During the normal course of business, we have experienced and expect to continue to experience attempts to compromise our information and communications technology and related systems. To date, no cybersecurity incident or attack has had a material impact on our business or results of operations. If a material, actual or perceived breach of our security occurs, the public perception of the effectiveness of our security measures could be harmed and we could lose customers or suppliers. Any such material disruptions or breaches of security could have a material adverse effect on our business, financial position, results of operations and cash flows.

The Company continues to develop and enhance controls and security measures designed to protect against the risk of theft, loss or fraudulent or unlawful use of customer, supplier, third party, employee or Company data, and it maintains an ongoing process to re-evaluate the adequacy of its controls and measures. The Company may also be required to expend additional resources to continue to enhance its information privacy and security measures and/or to investigate and remediate any information security vulnerabilities. The Company maintains what it believes to be adequate and collectible insurance in the event of the theft, loss, fraudulent or unlawful use of customer, supplier, third party, employee or Company data, but any such occurrences could result in costs that may not be covered or may be in excess of any available insurance that the Company may have procured. While the Company has a comprehensive program in place for continuously reviewing, maintaining, testing and upgrading its IT systems and security, there can be no assurance that such efforts will prevent breakdowns of or breaches in Company IT systems that could materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

The Company’s success depends on its executive management and other key personnel.

The Company’s future success depends to a significant degree on the skills, experience and efforts of its executive management and other key personnel and their ability to provide the Company with uninterrupted leadership and direction. The availability of highly qualified talent is limited and the competition for talent is robust; as a result, the Company may not be able to recruit and retain the personnel it needs if it were to lose an existing member of executive management or other key personnel. The Company’s future success will depend on its ability to have adequate succession plans in place and to attract, retain and develop qualified personnel. A failure to efficiently replace members of executive management and other key personnel and to attract, retain and develop new qualified personnel could have a material and adverse effect on the Company’s business financial position, results of operations and cash flows.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

The following are the Company’s principal physical properties. Unless otherwise noted, the listed properties are owned by the Company. Management believes that the facilities are suitable and adequate for the Company’s current operations.

Name of Facility Location Site Size Segment

1. Millsdale Millsdale (Joliet), Illinois 492 acres Surfactants/Polymers

2. Winder Winder, Georgia 202 acres Surfactants

3. Maywood Maywood, New Jersey 19 acres Surfactants / Specialty Products

4. Pasadena Pasadena, Texas 51 acres Surfactants

5. Stepan France Voreppe, France 20 acres Surfactants

6. Stepan Ecatepec Ecatepec, Mexico 34 acres Surfactants

8. Stepan Brazil Vespasiano, Minas Gerais, Brazil 27 acres Surfactants

9. Global Technology Center Northfield, Illinois 8 acres N/A

10. Company Headquarters Northbrook, Illinois 1.72 acres (leased) N/A

Item 3. Legal Proceedings

There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company’s business, the majority of which relate to environmental assessment, protection and remediation matters. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The Company’s operations are subject to extensive local, state and federal laws and regulations, including CERCLA and the Superfund amendments of 1986 (Superfund) as well as comparable regulations applicable to the Company’s foreign locations. Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party (PRP) at a number of sites where cleanup costs have been or may be incurred by the Company under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites and claims. While the Company is unable to predict the outcome of these matters, it does not believe, based upon current available facts, that the ultimate resolution of any of these matters will have a material effect on its overall financial position. The Company’s material legal proceedings are described below:

Maywood, New Jersey Site

The Company’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (collectively, the Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of alleged chemical contamination. Pursuant to (i) a September 21, 1987 Administrative Order on Consent entered into between the USEPA and the Company for property formerly owned by the Company at the Maywood site and (ii) the issuance of an order on November 12, 2004 by the USEPA to the Company for property currently owned by the Company at the Maywood site, the Company has completed various Remedial Investigation Feasibility Studies (RI/FS), and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated soil at the Maywood site, which requires the Company to perform remedial cleanup of the soil and buried waste. The USEPA has not yet issued a ROD for chemically-contaminated groundwater at the Maywood site. Based on the most current information available, the Company believes its recorded liability is reasonable having considered the range of estimated costs of remediation for the Maywood site. The estimate of the cost of remediation for the Maywood site could change as the Company continues to hold discussions with the USEPA, as the design of the remedial action is finalized, if a groundwater ROD is issued or if other PRPs are identified. The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil.

In addition, under the terms of a settlement agreement reached on November 12, 2004, the U.S. Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985. Under the Cooperative Agreement, the United States is responsible for the removal of radioactive waste at the Maywood site, including past and future remediation costs at the site. As such, the Company recorded no liability related to this settlement agreement.

D’Imperio Property Site

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances generated by the Company at several sites in New Jersey, including the D’Imperio Property Superfund Site located in New Jersey (the D’Imperio site). The Company was named as a PRP in an October 2, 1998 lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio site. In 2021, the PRPs were provided with updated remediation cost estimates by the PRP group technical consultant and project manager, which the Company considered in its determination of its range of estimated possible losses and liability balance. The changes in range of possible losses and liability balance were immaterial. Remediation work continues at the D’Imperio site. Based on current information, the Company believes that its recorded liability is reasonable having considered the range of estimated cost of remediation for the D’Imperio site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the current recorded liability.

Wilmington Site

The Company is currently contractually obligated to contribute to the environmental response costs associated with the Company’s formerly-owned site in Wilmington, Massachusetts (the Wilmington site). Remediation at this site is being managed by its current owner, to whom the Company sold the property in 1980. Under the Company’s October 1, 1993 agreement with the current owner of the Wilmington site, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. The Company has paid the current owner $3.2 million for the Company’s portion of environmental response costs at the Wilmington site

through December 31, 2021. The Company has recorded a liability for its portion of the estimated remediation costs for the site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the current recorded liability.

The Company and other prior owners of the Wilmington site also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims that may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed.

Other U.S. Sites

Through the regular environmental monitoring of its plant production sites, the Company discovered levels of chemical contamination that were above thresholds allowed by law at its Millsdale, Illinois and Fieldsboro, New Jersey plants. The Company voluntarily reported its results to the applicable state environmental agencies. As a result, the Company is required to perform self-remediation of the affected areas. Based on current information, the Company believes that its recorded liability for the remediation of the affected areas is appropriate based on an estimate of expected costs. However, actual costs could differ materially from current recorded liabilities.

Item 4. Mine Safety Disclosures

Not Applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of January 31, 2022, there were 1,759 holders of record of the Company’s common stock. This number does not include beneficial owners whose shares are held by nominees in street name.

The following stock performance graph compares the yearly change since December 31, 2016, in cumulative return on the common stock of the Company on a dividend reinvested basis to the Dow Jones Chemical Industry Index and the Russell 2000 Index. The Dow Jones Chemical Industry Index is a market-capitalization weighted grouping of 35 chemical companies, including major manufacturers of both basic and specialty products. The Company is not included in the Dow Jones Chemical Industry Index. The Russell 2000 Index is a market-capitalization weighted grouping of 2,000 small to medium sized companies in a broad range of industries. The Company has been included in the Russell 2000 Index since 1992. The graph assumes $100 was invested on December 31, 2016 and shows the cumulative total return as of each December 31 thereafter.

Item 6. (Removed and Reserved)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the annual periods included in the accompanying consolidated financial statements.

Overview

The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business is comprised of three reportable segments:

Surfactants - Surfactants, which accounted for 67 percent of the Company’s consolidated net sales in 2021, are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Brazil and Mexico) and two Asian sites (Philippines and Singapore). Recent significant events include:

Polymers - Polymers, which accounted for 30 percent of consolidated net sales in 2021, include polyurethane polyols, polyesterresins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins areused in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Millsdale, Illinois, and Wilmington, North Carolina sites (see 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. Recent significant events include:

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. Recent significant events include:

2021 Acquisitions

INVISTA

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 expanded the Company’s manufacturing capabilities in both the United States and Europe and enhanced the Company’s business continuity capabilities for the market. The Company believes that INVISTA’s available spare capacity, combined with debottlenecking opportunities in both plants, will allow Stepan to support future market growth in a capital efficient way. This acquisition was accounted for as a business combination, and accordingly, the assets acquired were measured and recorded at their 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 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) For the Year Ended December 31

Deferred Compensation (Operating expenses) $ (6.9 ) $ (10.0 ) $ 3.1 (1)

Investment Income (Other, net) 2.8 1.6 1.2

Realized/Unrealized Gains (Losses) on Investments (Other, net) 2.1 3.1 (1.0 )

Pretax Income Effect $ (2.0 ) $ (5.3 ) $ 3.3

Income (Expense) For the Year Ended December 31

Deferred Compensation (Operating expenses) $ (10.0 ) $ (15.1 ) $ 5.1 (1)

Investment Income (Other, net) 1.6 0.9 0.7

Realized/Unrealized Gains on Investments (Other, net) 3.1 3.8 (0.7 )

Pretax Income Effect $ (5.3 ) $ (10.4 ) $ 5.1

Below are the year-end Company common stock market prices used in the computation of deferred compensation income and expense:

December 31

Effects of Foreign Currency Translation

The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects year-over-year comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar year-to-year local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following tables present the effects that foreign currency translation had on the year-over-year changes in consolidated net sales and various income statement line items for 2021 compared to 2020 and 2020 compared to 2019:

For the Year Ended (Decrease) Due

December 31 Increase to Foreign Currency

Results of Operations

2021 Compared with 2020

Summary

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:

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

Net Sales December 31, 2021 December 31, 2020 Increase Percent Change

(In thousands) For the Year Ended

Surfactants

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) December 31, 2021 December 31, 2020 Increase Percent Change

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

Gross Profit and 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

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) December 31, 2021 December 31, 2020 Increase Percent Change

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

Gross Profit and 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, due to a 45 percent increase in sales volume, higher average unit margins and the favorable impact of foreign currency translation. These items positively impacted the year-over-year change in gross profit by $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:

December 31

2020 Compared with 2019

Summary

Net income attributable to the Company for 2020 increased 23 percent from $103.1 million, or $4.42 per diluted share in 2019 to $126.8 million, or $5.45 per diluted share, in 2020. Adjusted net income increased 11 percent to $132.0 million, or $5.68 per diluted share, from $119.4 million, or $5.12 per diluted share in 2019 (see the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for reconciliations between reported net income attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, expenses and income. A detailed discussion of segment operating performance for 2020 compared to 2019 follows the summary.

Consolidated net sales increased $11.1 million, or one percent, year-over-year. Consolidated sales volume increased three percent, which positively impacted the change in net sales by $49.6 million. Sales volume in the Surfactant segment increased six percent while sales volume in the Polymer and Specialty Products segments decreased five and three percent, respectively. Higher average selling prices positively impacted the change in net sales by $7.1 million. Foreign currency translation negatively impacted the year-over-year change in net sales by $45.7 million primarily due to a stronger U.S. dollar against the Latin American currencies used in certain of the Company’s foreign operations.

Operating income increased $44.3 million, or 35 percent, 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. Deferred compensation expenses and business restructuring expenses decreased $5.2 million and $1.5 million, respectively, year-over-year. Corporate expenses, excluding deferred compensation and business restructuring expenses, were up $4.9 million year-over-year. Most of this increase reflects higher incentive-based compensation and acquisition-related expenses, partially offset by lower environmental remediation expenses. Foreign currency translation had an unfavorable $7.7 million effect on year-over-year consolidated operating income.

Operating expenses (including deferred compensation expense and business restructuring expenses) decreased $0.4 million, or less than one percent, between years. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

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: (a) the recognition of make-whole interest expense associated with the Company’s voluntary prepayment of its 5.88 percent Senior Notes, partially offset by (b) the recognition of interest income associated with a Brazilian VAT tax recovery. Partially offsetting the above was lower interest income earned in 2020 as a result of lower global interest rates.

Other, net was $5.0 million of income in 2020 versus $4.6 million of income in 2019. The Company recognized $4.8 million of investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in 2020 compared to $4.9 million of investment income in 2019. In addition, the Company reported foreign exchange gains of $1.4 million in 2020 versus $0.1 million of foreign exchange gains in 2019. The Company also reported $0.5 million of higher net periodic pension cost expense in 2020 versus 2019. Other miscellaneous items resulted in $0.2 million of higher expense in 2020 versus 2019.

The year-to-date effective tax rate was 25.4 percent in 2020 compared to 18.1 percent in 2019. This increase was primarily attributable to: (a) the non-recurrence of a favorable tax benefit recognized in the third quarter of 2019 on incremental U.S. tax credits identified as part of a research and development tax credit study; (b) a non-recurring unfavorable tax cost in the fourth quarter of 2020 related to cash repatriations to facilitate the 2021 INVISTA acquisition, and (c) a less favorable geographical mix of income in 2020 versus 2019. See Note 9, Income Taxes, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for a reconciliation of the statutory U.S. federal income tax rate to the effective tax rate.

Segment Results

(In thousands) For the Year Ended

Net Sales December 31, 2020 December 31, 2019 Increase (Decrease) Percent Change

(In thousands) For the Year Ended

Surfactants

Surfactant 2020 net sales increased $79.0 million, or six percent, versus 2019 net sales. A six percent increase in sales volume and higher average selling prices positively impacted the change in net sales by $67.2 million and $55.0 million, respectively. The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $43.2 million. A year-over-year comparison of net sales by region follows:

For the Year Ended

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. The sales volume growth was primarily due to higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning, disinfection and personal wash products as a result of COVID-19, partially offset by lower demand in the functional product end markets, principally agriculture and oilfield. Foreign currency translation negatively impacted the change in net sales by $0.4 million.

Net sales for European operations decreased $6.1 million, or three percent, year-over-year. A seven percent decrease in sales volume negatively impacted the change in net sales $16.6 million. The lower sales volume reflects lost business at one customer that was partially offset by higher demand for products from our distribution partners. Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $7.5 million and $3.0 million, respectively. A weaker U.S. dollar relative to the European euro and British pound sterling led to the foreign currency translation effect.

Net sales for Latin American operations increased $22.2 million, or ten percent, between years, primarily due to an 18 percent increase in sales volume and higher average selling prices. These items positively impacted the year-over-year change in net sales by $38.8 million and $31.3 million, respectively. The sales volume growth primarily reflects higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning products, and a fully operational Ecatepec, Mexico facility in 2020. Partially offsetting the above was the unfavorable impact of foreign currency translation which negatively impacted the change in net sales by $47.9 million. The year-over-year strengthening of the U.S dollar against the Brazilian real, Mexican peso and the Colombian peso led to the foreign currency effect.

Net sales for Asian operations increased $2.4 million, or four percent, primarily due to a three percent increase in sales volume and the favorable impact of foreign currency translation. These items favorably impacted the change in net sales by $1.7 million and $2.1 million, respectively. The sales volume growth was mostly due to higher demand for products sold into the agricultural end market. A weaker U.S. dollar relative to the Philippine peso led to the foreign currency translation effect. Lower average selling prices negatively impacted the change in net sales by $1.4 million.

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

For the Year Ended

Gross Profit and Operating Income

Gross profit for North American operations increased $32.9 million, or 23 percent, between years primarily due to higher unit margins that positively impacted the change in gross profit by $25.0 million. The higher unit margins primarily reflect a more favorable customer and product mix largely due to increased volume to the Company’s Tier 2 and Tier 3 customers. A six percent increase in sales volumes positively impacted the change in gross profit by $7.9 million. Most of the sales volume increase was attributable to increased demand for cleaning, disinfection and personal wash products.

Gross profit for European operations increased $3.5 million, or ten percent, primarily due to higher unit margins and the favorable impact of foreign currency translation. These items positively impacted the change in gross profit by $5.4 million and $0.4 million, respectively. The higher unit margins were attributable to a more favorable product and customer mix in 2020 resulting from higher demand for biocidal quaternaries and lower demand for commodity softeners. A seven percent decline in sales volume negatively impacted the change in gross profit by $2.3 million.

Gross profit for Latin American operations increased $14.0 million, or 43 percent, year-over-year primarily due to higher unit margins that contributed $19.0 million to the increase in net sales. The higher unit margins primarily reflect the Company’s Mexican sites being fully operational in 2020 versus the prior year when Mexico incurred higher freight and supply chain expenses as a result of the 2019 sulfonation equipment failure at the Ecatepec, Mexico site. In addition, more favorable customer and product mix favorably impacted gross margins largely due to increased volume to the Company’s Tier 2 and Tier 3 customers. An 18 percent increase in sales volume favorably impacted net sales by $5.9 million. The sales volume growth primarily reflects higher demand for products sold into the consumer products end markets, driven by increased demand for cleaning and disinfection products, and a fully operational Ecatepec, Mexico facility in 2020. The unfavorable impact of foreign currency translation negatively impacted gross margins by $10.9 million.

Gross profit for Asian operations decreased $1.2 million, or nine percent, primarily due to lower unit margins. The lower unit margins negatively impacted the change in gross profit by $1.9 million. The lower unit margins were partially offset by a three percent increase in sales volume and the favorable impact of foreign currency translation. These items positively impacted the change in gross profit by $0.4 million and $0.3 million, respectively.

Operating expenses for the Surfactant segment increased $2.8 million, or three percent, year-over-year. Most of this increase was attributable to higher salaries and incentive-based compensation expense.

Polymers

Polymers 2020 net sales decreased $60.1 million, or 12 percent, versus net sales in 2019. A five percent decrease in sales volume negatively impacted the year-over-year change in net sales by $29.9 million. The unfavorable impact of lower average selling prices and foreign currency translation negatively impacted the year-over-year change in net sales by $27.6 million and $2.6 million, respectively. A year-over-year comparison of net sales by region follows:

For the Year Ended

Net sales for North American operations declined $48.8 million, or 16 percent, primarily due to a 10 percent decrease in sales volume. The decline in sales volume negatively impacted the year-over-year change in net sales by $32.2 million. Sales volume of phthalic anhydride decreased 38 percent due to volume lost as a result of the first quarter 2020 Millsdale, 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. Lower average selling prices negatively impacted the change in net sales by $16.6 million. The lower average selling prices reflect lower raw material market prices.

Net sales for European operations decreased $11.2 million, or seven percent, year-over-year. Lower average selling prices, the unfavorable impact of foreign currency translation and a one percent decrease in sales volume negatively impacted the year-over-year change in net sales by $8.2 million, $1.9 million and $1.0 million, respectively. The lower average selling prices reflect lower raw material costs and a stronger U.S. dollar relative to the Polish zloty led to the foreign currency translation impact. The decline in sales volume principally reflects softer demand during the first half of 2020 due to deferred and canceled construction projects as a result of COVID-19.

Net sales for Asian and Other operations were flat year-over-year. A nine percent increase in sales volume favorably impacted the change in net sales by $3.4 million and was primarily attributable to higher demand in livestock and cold storage end markets within China. Lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $2.7 million and $0.7 million, respectively. The lower average selling prices reflect lower raw material costs.

Polymer operating income for 2020 decreased $1.4 million, or two percent, versus operating income for 2019. Gross profit decreased $2.0 million, or two percent, year-over-year. Operating expenses decreased $0.7 million, or two percent, in 2020 versus 2019. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

For the Year Ended

Gross Profit and Operating Income

Gross profit for North American operations decreased $9.2 million, or 13 percent, primarily due to a 10 percent decline in sales volume and lower unit margins. These two items negatively impacted the year-over-year change in gross profit by $7.1 million and $2.1 million, respectively. The decrease in sales volume primarily reflects lost phthalic anhydride volume due to the first quarter 2020 Millsdale, 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. Partially offsetting the above was a $12.8 million insurance recovery related to the Millsdale power outage.

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

Gross profit for Asia and Other operations improved $3.9 million, or 68 percent, due to higher unit margins, nine percent volume growth and the favorable impact of foreign currency translation. These items positively impacted the year-over-year change in gross profit by $3.2 million, $0.5 million and $0.2 million, respectively. Unit margins benefited from a government reimbursement related to the government-mandated China JV shutdown in 2012 ($3.7 million) and were negatively impacted by the higher cost of outsourcing due to unplanned production issues in the fourth quarter of 2020.

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

Specialty Products

Specialty Products net sales decreased $7.9 million, or 11 percent, versus net sales in 2019. This decrease was primarily due to a three percent decrease in sales volume and lower average selling prices. Gross profit and operating income decreased $2.5 million and $2.4 million, respectively, primarily due to lower margins within the Company’s medium chain triglycerides product line.

Corporate Expenses

Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, decreased $1.7 million between 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. Higher incentive-based compensation and acquisition-related expenses partially offset the decreases above.

Deferred compensation expense decreased $5.2 million between years. This decrease was primarily due to a $16.88 per share increase in the market price of the Company’s common stock in 2020 compared to a $28.44 per share increase in 2019. The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expenses in 2020 and 2019:

December 31

Liquidity and Capital Resources

Overview

Historically, the Company’s principal sources of liquidity have included cash flows from operating activities, available cash and cash equivalents and the proceeds from debt issuance and borrowings under credit facilities. The Company’s principal uses of cash have included funding operating activities, capital investments and acquisitions. 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. Cash in U.S. demand deposit accounts and money market funds totaled $25.3 million and $46.7 million, respectively. The Company’s non-U.S. subsidiaries held $87.2 million of cash outside the United States as of December 31, 2021.

Operating Activity

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

Investing Activity

Cash used for investing activities increased $237.8 million year-over-year. 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 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, theCompany 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 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 purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and to mitigate the dilutive effect of new shares issued under its compensation plans. The Company may, from time to time, seek to 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, 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 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, 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, 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 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:

3. The Company is required to maintain net worth of at least $750.0 million.

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

(In thousands) Total Less than 1 year 1-3 years 3 – 5 years More than 5 years

(1) Excludes unamortized debt issuance costs of $0.7 million.

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

The Company sponsors a number of defined benefit pension plans, the most significant of which cover employees in the Company’s U.S. and U.K. locations. The U.S. and U.K. plans are frozen, and service benefit accruals are no longer being made. The 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.

The Company contributed $0.8 million to its defined benefit plans in 2021. In 2022, the Company expects to contribute a total of $0.5 million to the U.K. defined benefit plan. As a result of pension funding relief included in the Highway and Transportation

Funding Act of 2014, the Company has no 2022 contribution requirement to the U.S. pension plans. Payments to participants in the unfunded non-qualified plans should approximate $0.3 million in 2022, which is similar to payments made in 2021.

Letters of Credit

The Company maintains standby letters of credit under its workers’ compensation insurance agreements and for other purposes as needed. The insurance letters of credit are renewed annually and amended to the amounts required by the insurance agreements. As of December 31, 2021, the Company had a total of $6.7 million of outstanding standby letters of credit.

Environmental and Legal Matters

The Company’s operations are subject to extensive federal, state and local environmental laws and regulations or similar laws in the other countries in which the Company does business. Although the Company’s environmental policies and practices are designed to ensure compliance with these regulations, future developments and increasingly stringent environmental regulations may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During 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 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.

Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites. See the Critical Accounting Policies section that follows for a discussion of the Company’s environmental liabilities accounting policy. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses from $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 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. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. During 2021, cash outlays related to legal and environmental matters approximated $3.5 million compared to $4.5 million expended in 2020.

For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based upon the Company’s present knowledge with respect to its involvement at these sites and the possibility of other viable entities’ responsibilities for cleanup, management believes that the Company has no liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position.

See Item 3. Legal Proceedings, in this Form 10-K and Note 16, Contingencies, in the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for a summary of the significant environmental proceedings related to certain environmental sites.

Outlook

Management believes 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

Based on currently available information, the Company does not believe that existing or pending climate change legislation or regulation is reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

Critical Accounting Policies

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles or GAAP). Preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, 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

The Company sponsors deferred compensation plans that allow management employees to defer receipt of their annual bonuses and outside directors to defer receipt of their fees until retirement, departure from the Company or as elected by the participant. The plans allow for the deferred compensation to grow or decline based on the results of investment options chosen by the participants. The investment options include Company common stock and a limited selection of mutual funds. The Company funds the obligations associated with these plans by purchasing investment assets that match the investment choices made by the plan participants. A sufficient number of shares of treasury stock are maintained on hand to cover the equivalent number of shares that result from participants electing the Company common stock investment option. As a result, the Company must periodically purchase its common shares in the open market or in private transactions. Upon retirement or departure from the Company or at the elected time, participants receive cash amounts equivalent to the payment date value of the investment choices they have made or Company common stock shares equal to the number of share equivalents held in the accounts.

Some plan distributions may be made in cash or Company common stock at the option of the participant. Other plan distributions can only be made in Company common stock. For deferred compensation obligations that may be settled in cash, the Company must record appreciation in the market value of the investment choices made by participants as additional compensation expense. Conversely, declines in the value of Company stock or the mutual funds result in a reduction of compensation expense since such declines reduce the cash obligation of the Company as of the date of the financial statements. These market price movements may result in significant period-to-period fluctuations in the Company’s income. The increases or decreases in compensation expenses attributable to market price movements are reported in the operating expenses section of the consolidated statements of income. Because the obligations that must be settled only in Company common stock are treated as equity instruments, fluctuations in the market price of the underlying Company stock do not affect earnings.

At December 31, 2021 and December 31, 2020, the Company’s deferred compensation liability was $61.2 million and $61.6 million, respectively. In 2021 and 2020, approximately 47 percent and 53 percent, respectively, of deferred compensation liability represented deferred compensation tied to the performance of the Company’s common stock. The remainder of the deferred compensation liability was tied to the chosen mutual fund investment assets. A $1.00 increase in the market price of the Company’s common stock will result in approximately $0.2 million of additional compensation expense. A $1.00 reduction in the market price of the common stock will reduce compensation expense by a like amount. The expense or income associated with the mutual fund component will generally fluctuate in line with the overall percentage increase or decrease of the U.S. stock markets.

The mutual fund assets related to the deferred compensation plans are recorded on the Company’s balance sheet at cost when acquired and adjusted to their market values at the end of each reporting period. As allowed by generally accepted accounting principles, the Company elected the fair value option for recording the mutual fund investment assets. Therefore, market value changes for the mutual fund investment assets are recorded in the income statement in the same periods that the offsetting changes in the deferred compensation liabilities are recorded. Dividends, capital gains distributed by the mutual funds and realized and unrealized gains and losses related to mutual fund shares are recognized as investment income or loss in the other, net line of the consolidated statements of income.

Environmental Liabilities

It is the Company’s accounting policy to record environmental liabilities when environmental assessments and/or remedial efforts are probable, and the cost or range of possible costs can be reasonably estimated. When no amount within a range of possible costs is a better estimate than any other amount, the minimum amount in the range is accrued. Estimating the possible costs of 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.

Estimates for environmental liabilities are subject to potentially significant fluctuations as new facts emerge related to the various sites where the Company is exposed to liability for the remediation of environmental contamination. See the Environmental and Legal Matters section of this MD&A for discussion of the Company’s recorded liabilities and range of cost estimates.

Recent Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for information on recent accounting pronouncements which affect the Company.

Non-GAAP Reconciliations

The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company’s performance and financial condition. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management’s effectiveness with specific reference to these indicators. These measures should be considered in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. The Company’s definitions of these 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

Net Income Diluted EPS Net Income Diluted EPS Net Income Diluted EPS

Voluntary Debt Prepayment 0.0 — — — 1.2 0.05

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) December 31

Current Maturities of Long-Term Debt as Reported $ 40.7 $ 37.9

Long-Term Debt as Reported $ 322.9 $ 160.8

Less Cash and Cash Equivalents as Reported $ (159.2 ) $ (349.9 )

Net Debt/Net Debt plus Equity 16 % -18 %

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

Because the Company operates globally, its cash flows and operating results are subject to movements in foreign currency exchange rates. Except for the financial transactions, balances and forward contracts referred to below, most of the Company’s foreign subsidiaries’ financial instruments are denominated in their respective functional currencies.

The Company uses forward contracts to mitigate the exposure of certain foreign currency transactions and balances to fluctuating exchange rates. At December 31, 2021, the Company had forward contracts with an aggregated notional amount of $51.5 million. Except for the Company’s subsidiaries in Argentina, Brazil, China and Colombia, foreign currency exposures are substantially hedged by forward contracts. The fair value of all forward contracts as of December 31, 2021, was a net asset of $0.1 million. As of December 31, 2021, the potential reduction in the Company’s earnings resulting from the impact of hypothetical adverse changes in exchange rates on the fair value of its outstanding foreign currency contracts of 10 percent for all currencies would have been $4.3 million.

Interest Rates

The Company’s debt was comprised entirely of fixed-rate borrowings totaling $360.7 million and foreign subsidiaries $2.9 million of unsecured debt as of December 31, 2021. A hypothetical 10 percent average change to short-term interest rates would result in less than a $0.1 million increase or decrease to interest expense for 2022.

The fair value of the Company’s long term fixed-rate debt, including current maturities, was estimated to be $366.6 million as of December 31, 2021, which was approximately $5.2 million above the carrying value. Market risk was estimated as the potential increase to the fair value that would result from a hypothetical 10 percent decrease in the Company’s weighted average long-term borrowing rates at December 31, 2021, or $3.9 million.

Commodity Price Risk

Certain raw materials used in the manufacture of the Company’s products are subject to price volatility caused by weather, petroleum price fluctuations, general economic demand and other unpredictable factors. Increased raw material costs are recovered from customers as quickly as the marketplace allows; however, certain contractual arrangements allow for price changes only on a quarterly basis, and competitive pressures sometimes prevent the recovery of cost increases from customers, particularly in periods where there is excess industry capacity. As a result, for some product lines or market segments it may take time to recover raw material price increases. Periodically, firm purchase commitments are entered into which fix the price of a specific commodity that will be delivered at a future time. Forward purchase contracts are used to aid in managing the Company’s natural gas costs. At December 31, 2021, the Company had open forward contracts for the purchase of 1.4 million dekatherms of natural gas at a cost of $5.7 million. Because the Company has agreed to fixed prices for the noted quantity of natural gas, a hypothetical 10 percent fluctuation in the price of natural gas would cause the Company’s actual natural gas cost to be $0.6 million higher or lower than the cost at market price.

Item 8. Financial Statements and Supplementary Data

The following statements and data are included in this item:

Report of Independent Registered Public Accounting Firm (PCAOB ID Number 34) 44

Notes to Consolidated Financial Statements 54

Report of Independent Registered Public Accounting Firm

To the shareholders and Board of Directors of Stepan Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Stepan Company and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2022 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

SCL US Equity

SCL · 10-K · period ended 2021-12-31

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Mine Safety Disclosures

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6. (Removed and Reserved)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

SCL US Equity☆

SCL · 10-K · period ended 2021-12-31

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Mine Safety Disclosures

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6. (Removed and Reserved)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

SCL US Equity