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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:

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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

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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:

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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:

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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

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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.

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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.

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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.

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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

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$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.

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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.

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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.

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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.

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

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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

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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.

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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

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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.

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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.

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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.

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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 %

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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.

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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

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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.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Contingencies — Refer to Note 16 to the financial statements

Critical Audit Matter Description

The Company is involved in several property sites where the Company may be exposed to liabilities for the remediation of environmental contamination. Environmental loss contingencies are evaluated based on the likelihood of the Company incurring a liability and whether a loss or range of losses is reasonably estimable. The likelihood and amount of a loss or range of losses are estimated based on currently available information and assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Past estimates for environmental liabilities are subject to adjustment as new facts emerge during the investigatory and remediation processes.

Given the subjectivity of estimating the likelihood of a loss, the range of potential loss, and the amount of liability to recognize, performing audit procedures to evaluate whether environmental loss contingencies were appropriately recorded and disclosed as of December 31, 2021, required especially challenging, subjective and complex auditor judgment and an increased extent of effort.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the environmental loss contingencies included the following, among others:

Acquisitions — Refer to Note 20 to the financial statements

Critical Audit Matter Description

The Company completed the acquisition of Arteva Specialties B.V., INV Performance, LLC, INVISTA Textiles (U.K.) Limited, INV Management Services, LLC, and INVISTA Equities, LLC (collectively, “INVISTA”) to acquire INVISTA’s aromatic polyester polyol business and associated assets. The acquisition has been accounted for under the acquisition method of accounting for business combinations. The net purchase price was comprised of the $165.0 million cash purchase price paid to the seller and $21.6 million of working capital measured at its fair value as of the acquisition date. Accordingly, the purchase price was allocated to the polyester polyol operations of the business using a discounted cash flow model. Following, the operations allocation, the purchase price was then allocated to the assets acquired and liabilities assumed compromising the polyester polyol operations business based on their respective fair values, including $64.8 million in goodwill and $46.0 million in intangibles. The operations allocation required management to make significant estimates and assumptions related to forecasts of future revenues and earnings before interest, taxes, depreciation, and amortization (EBITDA) and discount rates.

Given the operations allocation required management to make significant estimates and assumptions related to the forecasts of future costs, revenues, and EBITDA (the “forecasts”), as well as the selection of the discount rates, and considering the sensitivity of business assumptions used in the valuation, performing audit procedures to evaluate the reasonableness of the forecasts and selected discount rates required a high degree of auditor judgement and an increased extent of effort, including the need to involve fair value specialists.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the acquisition included the following, among others:

• We read and evaluated the purchase agreement and supporting schedules

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/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Chicago, Illinois

February 25, 2022

We have served as the Company’s auditor since 2002.

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Stepan Company

Consolidated Statements of Income

For the years ended December 31, 2021, 2020 and 2019

Operating Expenses:

Other Income (Expense):

Net Income Per Common Share Attributable to Stepan Company (Note 18):

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Stepan Company

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2021, 2020 and 2019

Other Comprehensive Income:

Defined benefit pension plans:

Cash flow hedges:

Reclassifications to income in period (9 ) (9 ) (9 )

Net cash flow hedge activity (Note 19) (9 ) (9 ) (9 )

Comprehensive Income Attributable to Noncontrolling Interest (122 ) (959 ) 47

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Stepan Company

Consolidated Balance Sheets

December 31, 2021 and 2020

Assets

Current Assets:

Property, Plant and Equipment:

Liabilities and Equity

Current Liabilities:

Current maturities of long-term debt (Note 6) $ 40,718 $ 37,857

Non-current operating lease liability (Note 7) 56,668 51,567

Commitments and Contingencies (Note 16)

Equity (Note 10):

Noncontrolling interest — 1,672

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Stepan Company

Consolidated Statements of Cash Flows

For the years ended December 31, 2021, 2020 and 2019

Cash Flows From Operating Activities

Realized and unrealized gain on long-term investments (2,289 ) (3,143 ) (3,955 )

Changes in assets and liabilities, excluding effects of acquisitions:

Cash Flows From Investing Activities

Proceeds from asset disposition 4,149 — —

Cash Flows From Financing Activities

Revolving debt and bank overdrafts, net (Note 6) 2,861 — (7,495 )

Other debt borrowings (Note 6) 200,000 — —

Effect of Exchange Rate Changes on Cash (3,391 ) 3,307 (78 )

Supplemental Cash Flow Information

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Stepan Company

Consolidated Statements of Equity

For the year ended December 31, 2019

STEPAN COMPANY STOCKHOLDERS

Cash dividends paid:

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Stepan Company

Consolidated Statements of Equity

For the year ended December 31, 2020

STEPAN COMPANY STOCKHOLDERS

Other comprehensive income (638 ) — — — (711 ) — 73

Cash dividends paid:

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Stepan Company

Consolidated Statements of Equity

For the year ended December 31, 2021

STEPAN COMPANY STOCKHOLDERS

Cash dividends paid:

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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Notes to Consolidated Financial Statements

For the years ended December 31, 2021, 2020 and 2019

1. Summary of Significant Accounting Policies

Nature of Operations

Stepan Company’s (the Company) operations consist predominantly of the production and sale of specialty and intermediate chemicals, which are sold to other manufacturers for use in a variety of end products. Principal markets for all products are manufacturers of cleaning and washing compounds (including detergents, shampoos, fabric softeners, toothpastes and household cleaners), paints, cosmetics, food, beverages, nutritional supplements, agricultural products, plastics, furniture, automotive equipment, insulation and refrigeration.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires Company management 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. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all wholly and majority-owned subsidiaries in which the Company exercises controlling influence. The equity method is used to account for investments in which the Company exercises significant but noncontrolling influence. Intercompany balances and transactions are eliminated in consolidation.

Prior to the fourth quarter of 2021, the Company had an 80 percent ownership interest in the Nanjing Stepan Jinling Chemical Limited Liability Company (a joint venture) and exercised controlling influence over the entity. As a result, the China joint venture results were included in the Company’s consolidated financial statements. The partner’s interest in the joint venture’s net income was reported in the net income attributable to noncontrolling interest line of the consolidated statements of income and its interest in the net assets of the joint venture was reported in the noncontrolling interest line (a component of equity separate from Company equity) of the consolidated balance sheets. The joint venture was dissolved during the fourth quarter of 2021.

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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with purchased maturities of three months or less to be cash equivalents.

At December 31, 2021, the Company’s cash and cash equivalents totaled $159,186,000 including $46,689,000 in money market funds, each of which was rated AAAm by Standard and Poor’s, Aaa-mf by Moody’s and AAAmmf by Fitch. Cash in U.S. demand deposit accounts totaled $25,253,000 and cash of the Company’s non-U.S. subsidiaries held outside the U.S. totaled $87,244,000 as of December 31, 2021. At December 31, 2020, the Company’s cash and cash equivalents totaled $349,938,000 including $123,695,000 in money market funds, each of which was rated AAAm by Standard and Poor’s, Aaa-mf by Moody’s and AAAmmf by Fitch. Cash in U.S. demand

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deposit accounts totaled $76,164,000 and cash of the Company’s non-U.S. subsidiaries held outside the U.S. totaled $150,079,000 as of December 31, 2020.

Receivables and Credit Risk/Losses

Receivables are stated net of allowances for doubtful accounts and other allowances and primarily include trade receivables from customers, as well as nontrade receivables from suppliers, governmental tax agencies and others.

The Company is exposed to both credit risk and losses on accounts receivable balances. The Company’s credit risk and loss exposure predominately relates to the sale of products to its customers. When extending credit to customers the Company evaluates a customer’s credit worthiness based on a combination of qualitative and quantitative factors, inclusive of, but not limited to, a customer’s credit rating from external providers, financial condition and past payment experience. The Company performs credit reviews on all customers at inception and on a scheduled basis thereafter dependent on customer risk and the level of credit extended. Payment terms extended are short term in duration, typically ranging from 30 to 60 days. The majority of the Company’s sales are made to large companies that are able to weather periodic changes in economic conditions. This risk of losses is further mitigated by the Company’s diverse customer base, which is dispersed over various geographic regions and industrial sectors. No single customer comprised more than 10 percent of the Company’s consolidated net sales in 2021, 2020 or 2019.

The Company maintains allowances for potential credit losses. With the adoption of ASU No. 2016-13, Financial Instruments – Credit Losses, the Company assesses the likelihood of default based on various factors, including the length of time receivables are past due, historical experience, existing economic conditions and forward-looking economic forecasts. The Company also evaluates expected losses based on portfolios of data inclusive of geographical areas, specific end market uses of its products, etc. Although the Company’s historical credit loss experience has not been significant, its exposure to credit losses may increase if customers are adversely affected by economic pressures or uncertainty due to domestic or global economic recessions, disruptions due to COVID-19, or other adverse global/regional events and customer specific factors. Specific customer allowances are recorded when a review of customer creditworthiness and current economic conditions indicate that collection is doubtful. General allowances are also maintained based on historical averages and trade receivable levels and incorporate existing economic conditions and forecast assumptions, when warranted. The Company reviews its reserves for credit losses on a quarterly basis. The Company also maintains other customer allowances that occur in the normal course of business. The adoption of ASU No. 2016-13 has not had a material impact on the Company’s allowances for potential credit losses.

The following is an analysis of the allowance for doubtful accounts and other accounts receivable allowances for the years ended December 31, 2021, 2020 and 2019:

Accounts written off, net of recoveries (919 ) (56 ) (358 )

Inventories

Inventories are valued at cost, which is not in excess of market value, and include material, labor and plant overhead costs. Currently, the first in, first out (FIFO) method is used to determine the cost of the Company’s inventory.

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Property, Plant and Equipment

Depreciation of property, plant and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Lives used for calculating depreciation are generally 30 years for buildings and 15 years for building improvements. For assets classified as machinery and equipment, lives generally used for calculating depreciation expense range from 10 to 15 years for manufacturing equipment, five to 10 years for furniture and fixtures, three to five years for vehicles and three to 10 years for computer equipment and software. Manufacturing of chemicals is capital intensive and a large majority of the assets included within machinery and equipment represent manufacturing equipment. Major renewals and betterments are capitalized in the property accounts, while maintenance and repairs ($75,351,000, $69,234,000, and $58,464,000 in 2021, 2020 and 2019, respectively), which do not renew or extend the life of the respective assets, are charged to operations as incurred. Land is not depreciated. The cost of property retired or sold, and the related accumulated depreciation, are removed from the accounts and any resulting gain or loss is reflected in income. Long-lived assets are reviewed for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. Such conditions could include significant adverse changes in the business environment, significant declines in forecasted operations or an approved plan to discontinue an asset or an asset group before the end of its useful life.

Included in the computer equipment and software component of machinery and equipment are costs related to the acquisition and development of internal-use software. Capitalized costs for internal-use software include external direct costs of materials and services consumed in obtaining and developing the software. For development projects where major internal resources are committed, payroll and payroll-related costs incurred during the application development phase of the project are also capitalized. The capitalized costs are amortized over the useful lives of the software, which are generally three to 10 years. Costs incurred in the preliminary project phase are expensed. The Company adopted ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract in the first quarter of 2020. As a result, deferred implementation costs for hosted cloud computing service arrangements are now stated at historical cost and amortized on a straight-line basis over the term of the hosting arrangement.

Interest charges on borrowings applicable to major construction projects are capitalized.

Fair Value Measurements

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Furthermore, GAAP establishes a framework, in the form of a three-level hierarchy, for measuring fair value that prioritizes the inputs to valuation techniques used to measure fair value. The following describes the hierarchy levels:

Level 1 - quoted prices in active markets for identical assets and liabilities.

Level 2 - inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - unobservable inputs which reflect the entity’s own assumptions about the assumptions market participants use in pricing the assets and liabilities.

The Company applies the fair value measurement provisions of GAAP to any of its financial assets and liabilities that are carried at fair value on the consolidated balance sheets (see Note 2, Fair Value Measurements, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K)), its outstanding debt for disclosure purposes (see Note 2, Fair Value Measurements, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K)) and its pension plan assets (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)).

The Company also applies fair value measurements to nonfinancial assets and liabilities recorded in conjunction with business combinations and as part of impairment reviews for goodwill and other long-lived assets.

Revenue Recognition

The Company’s contracts typically have a single performance obligation that is satisfied at the time product is shipped and control passes to the customer. For a small portion of the business, performance obligations are deemed satisfied when product is delivered to a customer location. For arrangements where the Company consigns product to a customer location, revenue is recognized when the customer uses the inventory. The Company accounts for shipping and handling as activities to fulfill a promise to transfer a good. As such, shipping and handling fees billed to customers in a sales transaction are recorded in Net Sales and shipping and handling costs incurred are recorded in Cost of Sales. Volume and cash discounts due customers are estimated and recorded in the same period as the sales to which the discounts relate and are reported as reductions of revenue in the consolidated

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

Cost of Sales

Cost of sales is comprised of raw material costs (including inbound freight expense to deliver the raw materials), manufacturing plant labor expenses and various manufacturing overhead expenses, such as utilities, maintenance, operating supplies, amortization and manufacturing asset depreciation expenses. Cost of sales also includes outbound shipping and handling expenses, inter-plant transfer costs, warehouse expenses and rail car rental expenses.

Operating Expenses

Selling expense is comprised of salaries and related fringe benefit expenses for marketing and sales personnel and operating costs, such as outside agent commissions, automobile rental and travel-related expenses, which support the sales and marketing functions. Bad debt charges and any depreciation expenses related to marketing assets (e.g., computers) are also classified as selling expense.

Administrative expense is comprised of salaries and related fringe benefit expenses and operating costs for the Company’s various administrative functions, which include information services, finance, legal, and human resources. The majority of environmental remediation expenses are also classified as administrative expense.

The Company’s research and development costs are expensed as incurred. These expenses are aimed at discovery and commercialization of new knowledge with the intent that such effort will be useful in developing a new product or in bringing about a significant improvement to an existing product or process. Total research and development expenses were $38,778,000, $35,999,000, and $34,139,000in 2021, 2020 and 2019, respectively. The remainder of research, development and technical service expenses reflected on the consolidated statements of income relate to technical services, which include routine product testing, quality control and sales service support.

Compensation expense or income related to the Company’s deferred compensation plans is presented in the deferred compensation expense line in the Consolidated Statements of Income. For more details, see Note 12, Deferred Compensation, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K).

Environmental Expenditures

Environmental expenditures that relate to current operations are typically recorded in cost of sales. Expenditures that mitigate or prevent environmental contamination and that benefit future operations are capitalized as assets and depreciated on a straight-line basis over the estimated useful lives of the assets, which are typically 10 years.

Estimated future expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are recorded as liabilities, with the corresponding charge typically recorded in administrative expenses, when environmental assessments and/or remedial efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum 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 feasibility studies, potentially responsible party negotiations and the development of remedial action plans. Legal costs related to environmental matters are expensed as incurred. See Note 16, Contingencies, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for environmental contingencies details.

Goodwill and Other Intangible Assets

The Company’s intangible assets include patents, agreements not to compete, trademarks, customer lists and relationships, technological and manufacturing know-how, supply contracts and goodwill, all of which were acquired as part of business or product line acquisitions. 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. The values for intangible assets with finite lives are amortized over the useful lives of the assets. Currently, the useful lives for the Company’s finite-lived 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. In addition, 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 at least annually, or more frequently, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit to which goodwill relates below the reporting unit’s carrying value. See Note 4, Goodwill and Other Intangibles, of

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the notes to the Company’s consolidated financial statements(included in Item 8 of this Form 10-K) for detailed information about goodwill and other intangible assets.

Income Taxes

Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Deferred tax assets are recognized to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

Uncertain tax positions are recorded in accordance with ASC 740, Income Taxes, on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Operations. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet. 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 more information about the Company’s income taxes.

Translation of Foreign Currencies

For the Company’s consolidated foreign subsidiaries whose functional currency is the local foreign currency, assets and liabilities are translated into U.S. dollars at exchange rates in effect at year end and revenues and expenses are translated at average exchange rates for the year. Any resulting translation adjustments are included in the consolidated balance sheets in the accumulated other comprehensive loss line of stockholders’ equity. Gains or losses on foreign currency transactions are reflected in the other, net caption of the consolidated statements of income. The Company has four foreign subsidiaries whose functional currencies are the U.S. dollar. For these subsidiaries, nonmonetary assets and liabilities are translated at historical rates, monetary assets and liabilities are translated at exchange rates in effect at year end, revenues and expenses are translated at average exchange rates for the year and translation gains and losses are included in the other, net caption of the consolidated statements of income.

Stock-Based Compensation

The Company grants stock options, stock awards (including performance-based stock awards) and SARs to certain employees under its incentive compensation plans. The Company calculates the fair values of stock options, stock awards and SARs on the date such instruments are granted. The fair values of the stock options and stock awards are then recognized as compensation expense over the vesting periods of the instruments. The Company’s SARs granted prior to 2015 are cash-settled, and SARs granted in 2015 and later are stock-settled. The cash-settled SARs are accounted for as liabilities that must be re-measured at fair value at the end of each reporting period. Compensation expense for each reporting period is calculated as the period-to-period change (or portion of the change, depending on the proportion of the vesting period that has been completed at the reporting date) in the fair value of the cash-settled SARs. Compensation expense for the stock-settled SARs is calculated in the same way as compensation expense for stock options. See Note 11, Stock-based Compensation, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for detailed information about the Company’s stock-based compensation.

Earnings Per Share

Basic earnings per share amounts are computed as net income attributable to the Company divided by the weighted-average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted-average number of common shares outstanding plus the weighted-average of net common shares (under the treasury stock method) that would be outstanding assuming the exercise of outstanding stock options and stock-settled SARs, the vesting of unvested stock awards that have no performance or market condition and the issuance of contingent performance stock awards. See Note 18, Earnings Per Share, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for detailed information about the Company’s earnings per share calculations.

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Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive income includes net income and all other non-owner changes in equity that are not reported in net income. Comprehensive income is disclosed in the consolidated statements of comprehensive income. Accumulated other comprehensive income (AOCI) is reported as a component of stockholders’ equity in the Company’s consolidated balance sheets. See Note 19, Accumulated Other Comprehensive Income (Loss), of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for detailed information regarding changes in the Company’s AOCI and reclassifications out of AOCI to income.

Segment Reporting

The Company reports financial and descriptive information about its reportable operating segments. Operating segments are components of the Company that have separate financial information that is regularly evaluated by the chief operating decision maker to assess segment performance and allocate resources. The Company discloses segment revenue, operating income, assets, capital expenditures and depreciation and amortization expenses. Enterprise-wide financial information about the geographic locations in which the Company earns revenues and holds assets is also disclosed. See Note 17, Segment Reporting, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for detailed information about the Company’s segment reporting.

Derivative Instruments

Derivative instruments are recognized in the consolidated balance sheets as either assets or liabilities measured at fair value. For derivative instruments that are not designated as hedging instruments, changes in the fair values of the derivative instruments are recognized currently in earnings. For derivative instruments designated as hedging instruments, depending on the nature of the hedge, changes in the fair values of the derivative instruments are either offset in earnings against changes in the fair values of the hedged items or recognized in AOCI until the hedged transaction is recognized in earnings. At the time a hedging relationship is designated, the Company establishes the method it will use for assessing the effectiveness of the hedge and the measurement approach for determining the ineffective aspect of the hedge. Company policy prohibits the use of derivative instruments for trading or speculative purposes. See Note 3, Derivative Instruments, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for further information regarding the Company’s use of derivatives.

At December 31, 2021, the Company held open forward contracts for the purchase of 1.4 million dekatherms of natural gas in 2022 at a cost of $5,712,000. The Company uses forward contracts to minimize its exposure to volatile natural gas prices. Because the Company anticipates taking delivery of the natural gas for use in its operations, the forward contracts qualify for the normal purchase exception provided under U.S. GAAP for derivative instruments. The Company has elected the exception for such contracts. As a result, the forward contracts are not accounted for as derivative instruments. The cost of natural gas is charged to expense at the time the natural gas is delivered and used.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This update provides guidance to reduce complexity in certain areas of accounting for income taxes. The amendments in this update are effective for fiscal years beginning after December 15, 2020. The adoption of this update did not have a material effect on the Company’s financial position, results of operations and cash flows.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effect of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease the burden of implementing the usage of new reference rates. The amendments apply to contract modifications that replace a reference rate affected by reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. If elected the optional expedients to contract modifications must be applied consistently for all eligible contracts or eligible transactions. The amendments in this update may be implemented between March 12, 2020 and December 31, 2022. The guidance should be applied prospectively. The Company has not currently utilized any of the optional expedients of exceptions available under this ASU. The Company will continue to assess whether this ASU is applicable throughout the effective period.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which improves the accounting for acquired revenue contracts with customers in a business combination by addressing current inconsistencies in recognition of an acquired contract liabilities as well as payment terms and their effect on subsequent revenue recognized by the acquirer. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) at fair value on the acquisition date. This amendment requires acquiring entities to apply Topic

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606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments in this update are effective for fiscal years beginning after December 31, 2022 and should be applied prospectively. The Company is in the process of assessing the impact that adoption of ASU No. 2021-08 may have on its financial position, results of operations and cash flows.

2. Fair Value Measurements

The following were the financial instruments held by the Company at December 31, 2021 and 2020, and the methods and assumptions used to estimate the instruments’ fair values:

Cash and cash equivalents

Carrying value approximated fair value because of the short maturity of the instruments. Fair value of cash and cash equivalents is a Level 1 measurement.

Derivative assets and liabilities

Derivative assets and liabilities include the foreign currency exchange contracts discussed in Note 3, Derivative Instruments, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K). Fair value and carrying value were the same because the contracts were recorded at fair value. The fair values of the foreign currency contracts were calculated as the difference between the applicable forward foreign exchange rates at the reporting date and the contracted foreign exchange rates multiplied by the contracted notional amounts. The Company’s fair value measurements for derivative assets and liabilities fall within Level 2 of the fair value hierarchy.

See the table that follows the financial instrument descriptions for the reported fair values of derivative assets and liabilities.

Long-term investments

Long-term investments include the mutual fund assets the Company held to fund a portion of its deferred compensation liabilities and all of its non-qualified supplemental executive defined contribution obligations. See the defined contribution plans section of Note 13, Postretirement Benefit Plans, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K). Fair value and carrying value were the same because the mutual fund assets were recorded at fair value in accordance with the FASB’s fair value option guidance. Fair values for the mutual funds were calculated using the published market price per unit at the reporting date multiplied by the number of units held at the reporting date and therefore its fair value measurements for mutual fund assets fall within Level 1 of the fair value hierarchy.

See the table that follows the financial instrument descriptions for the reported fair value of long-term investments.

Debt obligations

The fair value of debt with original maturities greater than one year reflects the combined present values of scheduled principal and interest payments for each of the various loans, individually discounted at rates equivalent to those which could be obtained by the Company for new debt issues with durations equal to the average life to maturity of each loan. The fair values of the remaining Company debt obligations approximated their carrying values due to the short-term nature of the debt. The Company’s fair value measurements for debt fall within Level 2 of the fair value hierarchy.

At December 31, 2021 and 2020, the fair values and related carrying values of debt, including current maturities, were as follows (the fair value and carrying value amounts are presented without regard to unamortized debt issuance costs of $710,000, and $617,000 as of December 31, 2021 and 2020, respectively):

(In thousands) December 31

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The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of December 31, 2021 and 2020, and the level within the fair value hierarchy in which the fair value measurement falls:

(In thousands) December 2021 Level 1 Level 2 Level 3

Derivative assets:

Foreign currency contracts 436 — 436 —

Derivative liabilities:

Foreign currency contracts $ 338 $ — $ 338 $ —

(In thousands) December 2020 Level 1 Level 2 Level 3

Derivative assets:

Foreign currency contracts 335 — 335 —

Derivative liabilities:

Foreign currency contracts $ 566 $ — $ 566 $ —

3. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by the use of derivative instruments is foreign currency exchange risk. The Company holds forward foreign currency exchange contracts that are not designated as any type of accounting hedge as defined by U.S. generally accepted accounting principles. The Company uses these contracts to manage its exposure to exchange rate fluctuations on certain Company subsidiary cash, accounts receivable, accounts payable and other obligation balances that are denominated in currencies other than the entities’ functional currencies. The forward foreign exchange contracts are recognized on the balance sheet as either an asset or a liability measured at fair value. Gains and losses arising from recording the foreign exchange contracts at fair value are reported in earnings as offsets to the losses and gains reported in earnings arising from the re-measurement of the receivable and payable balances into the applicable functional currencies. At December 31, 2021 and 2020, the Company had open forward foreign currency exchange contracts, all with durations of one to three months, to buy or sell foreign currencies with a U.S. dollar equivalent of $51,542,000 and $48,336,000, respectively.

The fair values of the derivative instruments held by the Company on December 31, 2021, and December 31, 2020, are disclosed in Note 2, Fair Value Measurements, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K). Derivative instrument gains and losses for the years ended December 31, 2021, 2020 and 2019, were immaterial. For amounts reclassified out of AOCI into earnings for the years ended December 31, 2021, 2020 and 2019, see Note 19, Accumulated Other Comprehensive Income (Loss), of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K).

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4.Goodwill and Other Intangible Assets

The changes in the carrying value of goodwill for the years ended December 31, 2021 and 2020, were as follows:

Balance as of January 1

Goodwill measurement period adjustment (1) 940 (336 ) — — — — 940 (336 )

Balance as of December 31

The Company tests its goodwill balances for impairment in the second quarter of each calendar year. The 2021 and 2020 tests indicated no impairment.

The following table presents the components of other intangible assets, all of which have finite lives, as of December 31, 2021 and 2020. The year-over-year changes in gross carrying values mainly resulted from acquisitions that took place in 2021 and the effects of foreign currency translation.

(In thousands) Gross Carrying Value Accumulated Amortization

December 31 December 31

Other Intangible Assets:

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Aggregate amortization expense for the years ended December 31, 2021, 2020 and 2019, was $7,292,000, $3,621,000, and $3,399,000, respectively. Estimated amortization expense for identifiable intangibles assets for each of the five succeeding fiscal years is as follows:

(In thousands)

5. Inventories

The composition of inventories was as follows:

December 31

6. Debt

Debt comprised the following at December 31, 2021 and 2020:

(In thousands) Maturity Dates December 31, 2021 December 31, 2020

Unsecured private placement notes

Debt of foreign subsidiaries

Unsecured bank debt, foreign currency 2022 2,861 —

The Company’s long-term debt financing is currently comprised of certain unsecured private placement notes issued to insurance companies, totaling $360,719,000 as of December 31, 2021. These notes are denominated in U.S. dollars and have fixed interest rates ranging from 2.30 percent to 4.86 percent. The notes had original maturities of seven to 12 years with mandatory amortization of principal beginning four, five and six years after issuance. The Company will be required to make amortization payments on the currently outstanding notes from 2022 to 2031.

On June 10, 2021, the Company entered into the Prudential note purchase agreement pursuant to which it issued and sold $50,000,000 in aggregate principal amount of its Series 2021-A Notes. The Series 2021-A Notes bear interest at a fixed rate of 2.30%, 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

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sold $50,000,000 in aggregate principal amount of its Series 2021-D Notes. The Series 2021-D Notes bear interest at a fixed rate of 2.73%, 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 the NYL note purchase agreement pursuant to which, on September 23, 2021, the Company issued and sold $50,000,000 in aggregate principal amount of its Series 2021-B Notes. The Series 2021-B Notes bear interest at a fixed rate of 2.37% 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 $50,000,000 in aggregate principal amount of its Series 2021-C Notes. The Series 2021-C Notes bear interest at a fixed rate of 2.73% 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.

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 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.

The Company has a committed $350,000,000 multi-currency revolving credit agreement that expires on January 30, 2023. The Company maintains import letters of credit and standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement. As of December 31, 2021, the Company had outstanding letters of credit totaling $6,720,000 and no outstanding borrowings under the revolving credit agreement. There was $343,280,000available under the revolving credit agreement as of December 31, 2021.

Loans under the credit agreement may be incurred, at the discretion of the Company, with terms to maturity of one month, three months or six months. The Company may choose from two interest rate options: (1) LIBOR applicable to each currency plus spreads ranging from 1.25 percent to 1.875 percent, depending on the Company’s net leverage ratio, or (2) the prime rate plus 0.25 percent to 0.875 percent, depending on the Company’s net leverage ratio. The credit agreement requires the Company to pay a commitment fee ranging from 0.15 percent to 0.325 percent per annum, which also depends on the Company’s net leverage ratio. The credit agreement requires the maintenance of certain financial ratios and compliance with certain other covenants that are similar to the Company’s existing debt agreements, including net worth, interest coverage and leverage financial covenants and limitations on restricted payments, indebtedness and liens.

The Company’s foreign subsidiaries had $2,861,000 of unsecured debt at December 31, 2021.

The Company’s loan agreements contain provisions, which, among others, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. Based on the loan agreement provisions that place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were $468,095,000 and $373,884,000 at December 31, 2021 and 2020, respectively.

Debt at December 31, 2021, matures as follows: $40,718,000 in 2022; $37,857,000 in 2023; $48,572,000 in 2024; $62,858,000 in 2025; $48,572,000 in 2026 and $125,713,000 after 2026. Debt maturing in 2022 includes $37,857,000 of scheduled repayments under long-term debt agreements.The Company’s foreign subsidiaries routinely have short-term working capital loans. These short-term loan agreements could be supplemented, if necessary, by the Company’s $350,000,000 revolving credit agreement entered into on January 30, 2018.

Net interest expense for the years ended December 31, 2021, 2020 and 2019, comprised the following:

7. Leases

The Company’s operating leases are primarily comprised of real estate, railcar, storage tank, warehouse, auto, trailer and manufacturing/office equipment leases. Real estate and railcars comprise approximately 60 percent and 25 percent, respectively, of the Company’s consolidated right of use (ROU) asset balance. Except for real estate, typical lease terms range from one to ten years. Real

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estate lease terms typically range from one to fifty years. The Company’s four principal real estate leases consist of the office lease for the corporate headquarters in Northbrook, Illinois and land leases in the Philippines, Singapore and Lake Providence, Louisiana.As of December 31, 2021, the Company had railcar and storage tank leases valued at approximately $1,208,000, that had not commenced. These leases will commence in the first quarter of 2022.

As most of the Company’s leases do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate (IBR) based on the information available at the commencement date in determining the present value of lease payments. IBRs were specifically determined for the United States, Philippines, Singapore, Brazil and China, typically for five-year increments. The U.S. IBR was used for all other countries as the leases in these countries are not material. The total value of leases that reside in the five countries identified above represents approximately 98 percent of the Company’s consolidated ROU asset balance. Lease cost is recognized in both the Cost of Sales and Operating Expenses sections of the Consolidated Statements of Income.

(In thousands) Year ended December 31, 2021 Year ended December 31, 2020

Lease Cost

Other Information

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flow from operating leases $ 14,885 $ 11,843

The following table outlines maturities of lease liabilities as of December 31, 2021:

(In thousands)

Undiscounted Cash Flows:

Total Undiscounted Cash Flows $ 83,021

Less: Imputed interest (12,447 )

Current operating lease liabilities (1) 13,906

Non-current operating lease liabilities 56,668

Total lease liabilities $ 70,574

Weighted-average remaining lease term-operating leases 10 Years

Weighted-average discount rate-operating leases 2.9 %

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8. Other, Net

Other, net in the Consolidated Statements of Income included the following for the years ended December 31, 2021, 2020 and 2019:

Realized and unrealized gains on investments 2,289 3,143 3,955

Gain on sale of asset — — 570

Gain on dissolution of the China joint venture 972 — —

9. Income Taxes

The provisions for taxes on income and the related income before taxes for the years ended December 31, 2021, 2020 and 2019, were as follows:

Taxes on Income

Federal

State

Foreign

Income before Taxes

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The variations between the effective and statutory U.S. federal income tax rates are summarized as follows:

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At December 31, 2021 and 2020, the tax effects of significant temporary differences representing deferred tax assets and liabilities were as follows:

Deferred Tax Assets:

Legal and environmental accruals 7,385 7,055

Non-U.S. subsidiaries net operating loss carryforwards 1,494 2,495

Amortization of intangibles 5,092 —

Deferred Tax Liabilities:

Unrealized foreign exchange loss (2,908 ) (2,444 )

Amortization of intangibles — (842 )

Inventories — (2,504 )

Valuation Allowance $ (862 ) $ (896 )

Net Deferred Tax Assets (Liabilities) $ 8,453 $ (13,784 )

Reconciliation to Consolidated Balance Sheet:

Non-current deferred tax assets (in other non-current assets) 20,944 6,961

Non-current deferred tax liabilities (12,491 ) (20,745 )

Net Deferred Tax Assets (Liabilities) $ 8,453 $ (13,784 )

Earnings generated by a foreign subsidiary are presumed to ultimately be transferred to the parent company. Therefore, the establishment of deferred taxes may be required with respect to the excess of the investment value for financial reporting over the tax basis of investments in those foreign subsidiaries (also referred to as book-over-tax outside basis differences). A company may overcome this presumption and forgo recording a deferred tax liability in its financial statements if it can assert that management has the intent and ability to indefinitely reinvest the earnings of its foreign subsidiaries. Pursuant to the 2017 U.S. Tax Cuts and Jobs Act (Tax Act), the Company’s foreign earnings have been subject to U.S. federal taxes. The Company now has the ability to repatriate to the U.S. parent the cash associated with these foreign earnings with little additional U.S. federal taxes. This cash may, however, be subject to foreign income and/or local country taxes if repatriated to the United States. In addition, repatriation of some foreign cash balances may be further restricted by local laws. As such, the Company intends to limit its distributions to earnings previously taxed in the U.S. or earnings that would qualify for the 100 percent dividends received deduction provided for in the Tax Act as long as such distributions would not result in any significant foreign taxes. In 2021, the Company repatriated $15,340,000 between May and December from its Brazilian, Colombian, and Mexican subsidiaries. The Company did not incur any incremental taxes as a result of this repatriation. In anticipation of the INVISTA acquisition, the Company’s Philippines entities declared a cash dividend of approximately $20,700,000 to the U.S. parent in December 2020. The Company recorded $2,384,000 of additional income tax expense in 2020 as a result of the expected repatriation. The Company’s U.S. parent received the cash in 2021. The effect of the adjustment on the 2020 effective tax rate was an increase of approximately 1.4 percent.

The Company evaluated its indefinite reinvestment assertion with regards to certain accumulated foreign earnings as of December 31, 2021. The Company does not consider the undistributed earnings of its Canadian subsidiary to be indefinitely reinvested in foreign operations to the extent of the subsidiary’s paid-up capital (PUC) as determined under Canadian tax law which is used to determine tax-free distributions for Canadian tax purposes. The Company also does not consider the undistributed earnings of one of its Dutch subsidiaries, and one of its Singapore subsidiaries to be indefinitely reinvested in foreign operations. A distribution from any of these subsidiaries should not result in any significant foreign taxes to the extent of the distribution limitations discussed aboveand therefore, the Company has not recognized a deferred tax liability for these undistributed earnings as of December 31, 2021. In 2021, the Company dissolved its China joint venture that prior to dissolution had not been considered indefinitely reinvested. The dissolution resulted in $142,000 of additional income tax expense in 2021. The Company considers the undistributed earnings of

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its remaining foreign subsidiaries to be indefinitely reinvested in foreign operations. At this time, the determination of deferred tax liabilities on this amount is not practicable.

The Company had non-U.S. tax loss carryforwards of $3,351,000 (pretax) as of December 31, 2021, and $6,551,000 as of December 31, 2020, that are available for use by the Company between 2022 and 2029. The Company had tax credit carryforwards of $2,829,000 as of December 31, 2021, and $4,713,000 as of December 31, 2020, that are available for use by the Company between 2022 and 2034. The Company had non-U.S. capital loss carryforwards of $638,000 as of December 31, 2021, and $633,000 as of December 31, 2020. The Company’s capital loss carryforwards do not expire.

As of December 31, 2021, and 2020, the Company had valuation allowances of $862,000 and $896,000, respectively, which were attributable to deferred tax assets in Canada, India, the Philippines and Singapore. The realization of deferred tax assets is dependent on the generation of sufficient taxable income in the appropriate tax jurisdictions. The Company believes that it is more likely than not that the related deferred tax assets will not be realized.

As of December 31, 2021, 2020 and 2019, unrecognized tax benefits totaled $7,292,000, $4,735,000 and $3,273,000, respectively. The amount of unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future periods, net of the federal benefit on state issues, was approximately $6,973,000, $4,545,000 and $3,105,000 at December 31, 2021, 2020 and 2019, respectively. The Company does not believe that the amount of unrecognized tax benefits related to its current uncertain tax positions will change significantly over the next 12 months.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. In 2021, the Company recognized net interest and penalty expense of $260,000 compared to $31,000 of net interest and penalty expense in 2020 and $19,000 of net interest and penalty expense in 2019. At December 31, 2021 the liability for interest and penalties was $340,000 compared to $80,000 at December 31, 2020.

The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is not subject to U.S. federal income tax examinations by tax authorities for years before 2016. Some foreign jurisdictions and various U.S. states jurisdictions may be subject to examination back to 2014.

During 2021, the Internal Revenue Service started its audit of the 2016-2019 tax years. As of December 31, 2021, these audits were still open and the Company had not been notified of any significant proposed adjustments.

Below are reconciliations of the January 1 and December 31 balances of unrecognized tax benefits for 2021, 2020 and 2019:

Unrecognized tax benefits, opening balance $ 4,735 $ 3,273 $ 168

Gross increases – tax positions in prior period 938 190 2,760

Gross increases – current period tax positions 1,662 1,288 355

Foreign currency translation (14 ) 15 7

Lapse of statute of limitations (29 ) (31 ) (17 )

Unrecognized tax benefits, ending balance $ 7,292 $ 4,735 $ 3,273

10. Stockholders’ Equity

At December 31, 2021 and 2020, treasury stock consisted of 4,340,729 shares and 4,185,242 shares of common stock, respectively. During 2021, 135,103 shares of Company common stock were purchased in the open market. In addition, 26,875 shares were received to settle employees’ minimum statutory withholding taxes related to performance stock awards, exercised SARs and deferred compensation distributions. Also, 6,491 shares of treasury stock were distributed to participants under the Company’s deferred compensation plan.

11. Stock-based Compensation

On December 31, 2021, the Company had outstanding stock options, stock awards and stock appreciation rights (SARs) awarded under its 2011 Incentive Compensation Plan (2011 Plan). Stock options, stock awards and SARs are currently granted to Company executives and other key employees. In addition, stock awards are currently granted to non-employee directors of the Company. The 2011 Plan authorized the award of 2,600,000 shares of the Company’s common stock for stock options, SARs and stock awards. At December 31, 2021, there were 528,479 shares available for grant under the 2011 Plan.

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Compensation expense recorded in the consolidated statements of income for all plans was $11,716,000, $10,080,000, and $8,872,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The increase in stock-based compensation in 2021 versus 2020 was primarily due to higher compensation expenses related to performance awards. Management’s assessment that higher profitability performance targets for certain grants would be achieved led to the increase of compensation expenses for performance awards.

The total income tax benefit recognized in the income statement for share-based compensation arrangements was $2,867,000, $2,390,000, and $1,501,000for the years ended December 31, 2021, 2020 and 2019, respectively.

Stock Options