Quarterly Report (Form 10-Q)

scl-10q_20220331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 1-4462

STEPAN COMPANY

(Exact name of registrant as specified in its charter)

1101 Skokie Boulevard, Suite 500, Northbrook, Illinois60062

(Address of principal executive offices)

Registrant's telephone number (847) 446-7500

Securities registered pursuant to Section 12(b) of the Exchange Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Part I FINANCIAL INFORMATION

Item 1 - Financial Statements

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited

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

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STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

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

3

STEPAN COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

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

4

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

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

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STEPAN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

Unaudited

The condensed consolidated financial statements included herein have been prepared by Stepan Company (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company's financial position as of March 31, 2022, and its results of operations and cash flows for the three months ended March 31, 2022 and 2021, have been included. These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Annual Report on Form 10-K).

Below are reconciliations of total equity for the three months ended March 31, 2022 and 2021:

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Derivative assets and liabilities include the foreign currency exchange and interest rate swap contracts discussed in Note 4, Derivate Instruments, of the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q). 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 fair value of the interest rate swaps was calculated as the difference between the contracted swap rate and the floating interest rate multiplied by the present value of the notional amount of the contract.

At March 31, 2022, and December 31, 2021, 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 $812,000 and $710,000 as of March 31, 2022 and December 31, 2021, respectively):

The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of March 31, 2022, and December 31, 2021, and the level within the fair value hierarchy in which the fair value measurements fall:

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At March 31, 2022, and December 31, 2021, the Company had open forward foreign currency exchange contracts, all with durations of one to three months, to buy or sell foreign currencies with U.S. dollar equivalent amounts of $45,923,000 and $51,542,000, respectively.

The Company is currently exposed to volatility in short-term interest rates and has mitigated certain portions of that risk by using an interest rate swap. The interest rate swap is recognized on the balance sheet as either an asset or a liability measured at fair value. At March 31, 2022, the Company held an interest rate swap contract with a notional value of $100,000,000 that was designated as a cash flow hedge. Period-to-period changes in the fair value of the interest rate swap are initially recognized as gains or losses in other comprehensive income. As the interest rate swap contract is settled, the corresponding gain or loss is reclassified out of accumulated other comprehensive income (AOCI) into earnings. The maturity date of the current interest swap contract is March 10, 2027.

The fair values of the derivative instruments held by the Company on March 31, 2022, and December 31, 2021, are disclosed in Note 3, Fair Value Measurements, of the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q). Derivative instrument gains and losses for the three-month periods ended March 31, 2022 and 2021, were immaterial. For amounts reclassified out of AOCI into earnings for the three-month periods ended March 31, 2022 and 2021, see Note 11, Accumulated Other Comprehensive Income (Loss), of the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q).

Compensation expense recorded for all stock options, stock awards and stock appreciation rights (SARs) was as follows:

The increase in stock-based compensation expense for the first quarter of 2022 compared to the first quarter of 2021 was primarily attributable to the previously-disclosed accelerated vesting of certain equity grants for the Company's Chief Executive Officer, who retired effective on April 25, 2022, that were partially offset by lower cash-settled SARs-related compensation expense. The lower cash-settled SARs compensation expense reflects a $25.48 per share decrease in the market price of Company common stock in the first quarter of 2022 compared to a $7.79 per share increase in the first quarter of 2021.

Unrecognized compensation costs for stock options, stock awards and SARs were as follows:

The increases in unrecognized compensation costs for stock options, stock awards and SARs reflected the 2022 grants of:

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The unrecognized compensation costs at March 31, 2022, are expected to be recognized over weighted-average periods of 1.3 years for stock options, 2.0 years for stock awards and 2.0 years for SARs.

The composition of inventories at March 31, 2022, and December 31, 2021, was as follows:

As of March 31, 2022, the Company had railcar leases, valued at approximately $79,000, that had not commenced. These leases will commence in the second quarter of 2022 with lease terms of three years.

Lease cost is recognized in both the Cost of Sales and Operating Expenses sections of the Condensed Consolidated Statements of Income.

The following table outlines the maturities of lease liabilities as of March 31, 2022.

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There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company's business, the majority of which relate to environmental assessment, protection and remediation matters. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The Company's operations are subject to extensive local, state and federal regulations, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund) as well as comparable regulations applicable to the Company's foreign locations. Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party (PRP) at a number of sites where cleanup costs have been or may be incurred by the Company under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites and claims.

In determining the appropriate level of environmental reserves, the Company considers several factors such as information obtained from investigatory studies; changes in the scope of remediation; the interpretation, application and enforcement of laws and regulations; changes in the costs of remediation programs; the development of alternative cleanup technologies and methods; and the relative level of the Company's involvement at various sites for which the Company is allegedly associated. The level of annual expenditures for remedial, monitoring and investigatory activities will change in the future as major components of planned remediation activities are completed and the scope, timing and costs of existing activities are changed. As of March 31, 2022, the Company estimated a range of possible environmental losses and legal losses of $23,139,000 to $41,695,000. Within the range of possible environmental losses and legal losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range. These accruals totaled $23,139,000 at March 31, 2022 and $23,127,000 at December 31, 2021. Although the Company believes that its reserves are adequate for contingencies, it is possible due to the uncertainties noted above, that additional reserves could be required in the future. Cash expenditures related to legal matters and environmental matters approximated $428,000 and $280,000 for the three-month periods ended March 31, 2022 and 2021, respectively.

For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company's stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company's share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company's financial position, cash flows and results of operations. Based upon the Company's present knowledge with respect to its involvement at these sites, the possibility of other viable entities' responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no material 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. However, in the event of one or more adverse determinations with respect to such sites in any annual or interim period, the effect on the Company's cash flows and results of operations for those periods could be material.

Following are summaries of the Company's major contingencies at March 31, 2022:

Maywood, New Jersey Site

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

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

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

D'Imperio Property Site

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

Wilmington Site

The Company is currently contractually obligated to contribute to the environmental response costs associated with the Company's formerly-owned site in Wilmington, Massachusetts (the Wilmington site). Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980. Under the Company's October 1, 1993, agreement with the current owner of the Wilmington site, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. The Company has paid the current owner $3,364,000 for the Company's portion of environmental response costs at the Wilmington site through March 31, 2022. The Company has recorded a liability for its portion of the estimated remediation costs for the site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the current recorded liability.

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

Other U.S. Sites

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

Defined Benefit Pension Plans

The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations. The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued.

Components of Net Periodic Benefit Cost

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Employer Contributions

U.S. Plans

As a result of pension funding relief provisions included in the Highway and Transportation Funding Act of 2014, the Company is not required to make contributions to its funded U.S. qualified defined benefit plans. Approximately $276,000 is expected to be paid related to the unfunded non-qualified plans in 2022. Of such amount, $119,000 had been paid related to the non-qualified plans as of March 31, 2022.

U.K. Plan

The Company's U.K. subsidiary expects to contribute approximately $505,000 to its defined benefit pension plan in 2022. Of such amount, $136,000 had been contributed to the plan as of March 31, 2022.

Defined Contribution Plans

The Company sponsors retirement defined contribution plans that cover eligible U.S. and U.K. employees. The Company's U.S. retirement plans include two qualified plans, one of which is a 401(k) plan and one of which is an employee stock ownership plan, and one non-qualified supplemental executive plan. In the three months ended March 31, 2022 and 2021, the Company made contributions into the qualified retirement plans for U.S. employees and for certain non-U.S. employees. Profit sharing contributions were determined using a formula applied to Company earnings. In 2021 and 2022, profit sharing contributions for U.S. employees were made to the employee stock ownership plan. Profit sharing contributions are allocated to participant accounts based on participant base earnings.

Defined contribution plan expenses for the Company's qualified contribution plans were as follows:

The Company has a rabbi trust to fund the obligations of its non-qualified supplemental executive defined contribution plans (supplemental plans). The trust comprises various mutual fund investments selected by the participants of the supplemental plans. In accordance with the accounting guidance for rabbi trust arrangements, the assets of the trust and the obligations of the supplemental plans are reported on the Company's condensed consolidated balance sheets. The Company elected the fair value option for the mutual fund investment assets so that offsetting changes in the mutual fund values and defined contribution plan obligations would be recorded in earnings in the same period. Therefore, the mutual funds are reported at fair value with any subsequent changes in fair value recorded in the condensed consolidated statements of income. The liabilities related to the supplemental plans increase (i.e., supplemental plan expense is recognized) when the value of the trust assets appreciate and decrease when the value of the trust assets decline (i.e., supplemental plan income is recognized). At March 31, 2022, the balance of the trust assets was $2,281,000, which equaled the balance of the supplemental plan liabilities. See the long-term investments section in Note 3, Fair Value Measurements, of the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for further information regarding the Company's mutual fund assets.

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Below are the computations of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:

Below is the change in the Company's AOCI balance by component (net of income taxes) for the three months ended March 31, 2022 and 2021:

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Information regarding the reclassifications out of AOCI for the three-month periods ended March 31, 2022 and 2021, is displayed below:

The Company has three reportable segments: Surfactants, Polymers and Specialty Products. Net sales by segment for the three months ended March 31, 2022 and 2021, were as follows:

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Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three months ended March 31, 2022 and 2021, are summarized below:

As of March 31, 2022, the Company had $1,878,000 of contract liabilities and no contract assets. A contract liability would typically arise when an advance or deposit is received from a customer before the Company recognizes revenue. In practice, this is rare as it would require a customer to make a payment prior to a performance obligation being satisfied. When such situations do arise, the Company maintains a deferred revenue liability until the time a performance obligation has been satisfied. The Company recognized $1,376,000 of revenue in the current period from pre-existing contract liabilities at December 31, 2021. During 2020 the Company recorded $10,709,000 of long-term deferred revenue associated with a payment received to defray the cost of capital expenditures necessary to service a customer's future product needs. On March 31, 2022, $9,248,000 continued to be classified as long-term and $1,461,000 was classified as short-term. This deferred revenue will be recognized over the period of the contract and no revenue has been recognized from this contract as of March 31, 2022.

The tables below provide a geographic disaggregation of net sales for the three months ended March 31, 2022 and 2021. The Company's business segmentation by geographic region most effectively captures the nature and economic characteristics of the Company's revenue streams impacted by economic factors.

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At March 31, 2022 and December 31, 2021, debt was comprised of the following:

On March 1, 2022, pursuant to a note purchase and master note agreement dated as of June 10, 2021 (the NYL note purchase agreement), the Company issued and sold $25,000,000 in aggregate principal amount of its 2.83% Senior Notes, Series 2022-A, due March 1, 2032 (the Series 2022-A Notes). In addition, on March 1, 2022, pursuant to a note purchase and private shelf agreement dated as of June 10, 2021 (the Prudential note purchase agreement), the Company issued and sold $50,000,000 in aggregate principal amount of its 2.83% Senior Notes, Series 2022-B, due March 1, 2032 (the Series 2022-B Notes). The Series 2022-A Notes and the Series 2022-B Notes bear interest at a fixed rate of 2.83%, 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 2022-A Notes and the Series 2022-B Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes. The NYL note purchase agreement and the Prudential note purchase agreement require the maintenance of certain financial ratios and 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 March 31, 2022, the Company had outstanding letters of credit totaling $6,993,000 and $100,000,000 outstanding borrowings under the revolving credit agreement. There was $243,007,000 available under the revolving credit agreement as of March 31, 2022.

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

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place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were $495,572,000and $468,095,000 atMarch 31, 2022and December 31, 2021, respectively.

Other, net in the condensed consolidated statements of income included the following:

2016 Restructuring

During 2016, the Company shut down its Longford Mills, Ontario, Canada (Longford Mills) manufacturing facility, a part of the Surfactant reportable segment. The shutdown plan was implemented to improve the Company's asset utilization in North America and to reduce the Company's fixed cost base. Manufacturing operations of the Longford Mills plant ceased by the end of 2016, and production of goods manufactured at the facility was transferred to other Company North American production sites. Decommissioning of the assets is expected to continue throughout 2022. As of March 31, 2022, $9,302,000 of aggregate restructuring expense has been recognized, reflecting $1,644,000 of termination benefits for approximately 30 employees and $7,658,000 for other expenses, principally site decommissioning costs. The Company recognized $52,000 and $81,000 of decommissioning expenses in the first quarter of 2022 and 2021, respectively.

2021 Acquisitions

INVISTA Acquisition

On January 29, 2021, the Company and its wholly-owned subsidiaries Stepan Holdings Netherlands B.V. and Stepan UK Limited entered into a Stock and Asset Purchase Agreement with Arteva Specialties B.V., INV Performance Surfaces, 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. Included in the transaction were two manufacturing sites, one in Wilmington, North Carolina (U.S.) and the other in Vlissingen, Netherlands, along with intellectual property, customer relationships, inventory and working capital. The purchase price was $165,000,000, plus $21,560,000 of working capital and $3,000,000 of associated value-added taxes (VAT) and was paid in cash. The working capital acquired included $5,900,000 of cash. The Company finalized the purchase price allocation during the third quarter of 2021. The following table summarizes the purchase price allocation for the major components of the acquisition:

Fermentation Plant Acquisition

On February 2, 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

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step in the Company's bio-surfactant commercialization efforts. The purchase price was $3,500,000and was paid in cash. This acquisition has been accounted for as an asset acquisition.

Noncash investing activities included liabilities (accounts payable) incurred for property, plant and equipment expenditures of approximately $37,154,000 and $13,822,000 that were unpaid at March 31, 2022 and 2021, respectively.

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. Other than electing select expedients associated with an interest rate swap, 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 Customerswhich improves the accounting for acquired revenue contracts with customers in a business combination by addressing current inconsistencies in the recognition of 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 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.

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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company's and its subsidiaries' (the Company) plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, the Company's actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "guidance," "predict," "potential," "continue," "likely," "will," "would," "should," "illustrative" and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company's control, that could cause the Company's actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under "Part II-Item IA - Risk Factors" of this Quarterly Report on Form 10-Q and under "Part I-Item IA. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, including the risks and uncertainties related to the following:

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These factors are not necessarily all of the important factors that could cause the Company's actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors also could harm the Company's results. All forward-looking statements attributable to the Company or persons acting on the Company's behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements.

The "Company," "we," "our" or "us" means Stepan Company and one or more of its subsidiaries only.

Overview

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

Surfactants- Surfactants, which accounted for 69 percent of Company consolidated net sales for the first three months of 2022, are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines and Singapore). Recent significant events include:

Polymers- Polymers, which accounted for 28 percent of consolidated net sales for the first three months of 2022, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company's Millsdale, Illinois and Wilmington, North Carolina sites (see 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 plants in Germany and the Netherlands (see the INVISTA acquisition discussion below) and specialty polyols are manufactured at the Company's Poland site. In Asia, polyurethane polyols and specialty polyols are manufactured at the Company's China plant. Recent significant events include:

Specialty Products- Specialty products, which accounted for three percent of consolidated net sales for the first three months of 2022, 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.

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

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the plans increase, and compensation income is recognizedwhen the value of Company common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following table:

Effects of Foreign Currency Translation

The Company's foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three months ended March 31, 2022 and 2021:

RESULTS OF OPERATIONS

Three Months Ended March 31, 2022 and 2021

Summary

Net income attributable to the Company in the first quarter of 2022 increased 10 percent to $44.8 million, or $1.93 per diluted share, from $40.6 million, or $1.74 per diluted share, in the first quarter of 2021. Adjusted net income declined four percent to $40.7 million, or $1.76 per diluted share, from $42.4 million, or $1.82 per diluted share in 2021 (see the "Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share" section of this MD&A for a reconciliation between reported net income attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the first quarter of 2022 compared to the first quarter of 2021. A detailed discussion of segment operating performance for the first quarter of 2022 compared to the first quarter of 2021 follows the summary.

Consolidated net sales increased $137.5 million, or 26 percent, from the prior year quarter. Higher average selling prices favorably impacted the year-over-year change in net sales by $151.1 million. The increase in average selling prices was mainly attributable to the pass-through of higher raw material costs and more favorable product and customer mix. Consolidated sales volume was flat in the first quarter of 2022 versus the first quarter of 2021. Sales volume in the Polymer segment increased two percent while sales volume in the Surfactant and Specialty Products segments decreased one percent and 12 percent, respectively. Foreign currency translation negatively impacted the year-over-year change in net sales by $11.6 million due to a stronger U.S. dollar against most currencies in locations where the Company has foreign operations.

Operating income for the first quarter of 2022 increased $9.4 million, or 17 percent, versus operating income for the first quarter of 2021. Surfactant and Specialty Products operating income increased $0.6 million and $1.1 million, respectively. Polymer operating income decreased $3.8 million versus the first quarter of 2021. The Polymer decrease was primarily attributable to a first quarter 2022 power outage at the Company's Millsdale, Illinois plant site that negatively impacted production. The production disruption resulted in the declaration of force majeure for select products. Production resumed in February and the force majeure was lifted on April 15, 2022. Corporate expenses, including business restructuring and deferred compensation expenses, decreased $11.6 million year-over-year. Deferred compensation expenses decreased $10.2 million. Corporate expenses (excluding deferred compensation and business

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restructuring expenses) decreased$1.4million primarily due to loweracquisition-related expenses. Foreign currency translation had a $1.1 million negative impact on operating income in the first quarter of 2022 versus the prior year quarter.

Operating expenses (including deferred compensation and business restructuring expense) decreased $9.2 million, or 17 percent, from the prior year quarter. Changes in the individual income statement line items that comprise the Company's operating expenses were as follows:

Net interest expense for the first quarter of 2022 increased $0.8 million, or 51 percent, versus the first quarter of 2021. This increase was primarily attributable to higher interest expense associated with the Company's new debt borrowings in 2021 and during the first quarter of 2022.

Other, net was $1.7 million of expense in the first quarter of 2022 versus $0.7 million of income in the first quarter of 2021. The Company recognized $2.3 million of investment losses (including realized and unrealized gains and losses) for the Company's deferred compensation and supplemental defined contribution mutual fund assets in the first quarter of 2022 compared to $0.8 million of investment income in the first quarter of 2021. In addition, the Company reported $0.3 million of foreign exchange gains in the first quarter of 2022 versus $0.3 million of foreign exchange losses in the first quarter of 2021. The Company also reported $0.2 million of higher net periodic pension income in the first quarter of 2022 versus the prior year first quarter.

The Company's effective tax rate was 24.6 percent in the first quarter of 2022 versus 23.6 percent in the first quarter of 2021. The increase was primarily attributable to less favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2022 and a less favorable geographical mix of income in the first quarter of 2022.

Segment Results

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Surfactants

Surfactant net sales for the first quarter of 2022 increased $97.3 million, or 26 percent, versus net sales for the first quarter of 2021. Higher average selling prices positively impacted the change in net sales by $107.7 million. The higher average selling prices were mainly attributable to the pass-through of higher raw material costs and improved product and customer mix. Foreign currency translation had a $6.1 million unfavorable impact on the change in net sales quarter-over-quarter. Sales volume declined one percent year over year and negatively impacted the change in net sales by $4.3 million. A comparison of net sales by region follows:

Net sales for North American operations increased $52.3 million, or 24 percent, year over year. Higher average selling prices and a one percent increase in sales volume positively impacted the change in net sales by $49.9 million and $2.4 million, respectively. The higher average selling prices were mainly attributable to the pass-through of higher raw material costs and improved product and customer mix. Higher customer demand for products sold into the functional product and personal care end markets, along with higher demand within the Tier 2 and Tier 3 customer channel, offset lower demand for laundry products within the consumer products business.

Net sales for European operations increased $19.9 million, or 28 percent, from the prior year quarter. Higher average selling prices favorably impacted the year-over-year change in net sale by $26.8 million. The higher average selling prices were primarily due to the pass-through of higher raw material costs and improved product and customer mix. The unfavorable impact of foreign currency translation and a two percent decrease in sales volume negatively impacted the change in net sales by $5.3 million and $1.6 million, respectively. A stronger U.S. dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect. The two percent decline in sales volume reflects lower demand for laundry products within the consumer products business that was mostly offset by higher demand for products sold into the functional product and institutional cleaning end markets and higher demand for products sold to our distribution partners.

Net sales for Latin American operations increased $25.3 million, or 42 percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation. These items positively impacted the change in net sales by $26.4 million and $0.3 million respectively. The higher average selling prices were primarily due to the pass-through of higher raw material costs and improved product and customer mix. Sales volume declined two percent and negatively impacted the change in net sales by $1.4 million.

Net sales for Asian operations decreased $0.2 million, or one percent, from the prior year quarter. A 14 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $2.7 million and $1.1 million, respectively. Higher average selling prices positively impacted the change in net sales by $3.6 million. The decline in sales volume primarily reflects lower demand for products sold into the laundry and personal care end markets partially offset by higher demand for products sold into the functional products end market. The higher average selling prices primarily reflect the pass-through of higher raw material costs.

Surfactant operating income for the first quarter of 2022 increased $0.6 million, or one percent, versus operating income for the first quarter of 2021. Gross profit increased $2.2 million in the first quarter of 2022 versus the first quarter of 2021 and operating expenses increased $1.7 million, or six percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

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Gross profit for North American operations decreased $0.9 million, or two percent, from the prior year quarter primarily due to lower average unit margins. The lower average unit margins negatively impacted the change in gross profit by $1.5 million and were mostly attributable to higher 2022 supply chain expenses due to raw material availability, inflationary pressures and transportation constraints. Sales volume increased one percent and favorably impacted the change in gross profit by $0.6 million.

Gross profit for European operations increased $1.9 million, or 17 percent, primarily due to higher average unit margins. The higher average unit margins positively impacted the change in gross profit by $2.9 million and primarily reflect improved customer and product mix. The unfavorable impact of foreign currency translation and a two percent decline in sales volume negatively impacted the change in gross profit by $0.7 million and $0.3 million, respectively. A weaker U.S. dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect.

Gross profit for Latin American operations increased $0.8 million, or seven percent, from the prior year quarter due to higher average unit margins. The higher average unit margins positively impacted the change in gross profit by $1.1 million and primarily reflect a more favorable product and customer mix partially due to higher demand for products sold into the agricultural end market. Sales volume declined two percent year over year and negatively impacted the change in gross profit by $0.3 million.

Gross profit for Asia operations increased $0.4 million, or 16 percent, from the prior year quarter primarily due to higher average unit margins. The higher unit margins positively impacted the change in gross profit by $0.7 million. A 14 percent decline in sales volume negatively impacted the change in gross profit by $0.3 million.

Operating expenses for the Surfactant segment increased $1.7 million, or six percent, in the first quarter of 2022 versus the first quarter of 2021. This increase was mainly attributable to higher salaries and associated fringe benefits, higher bad debt provision expense and the unfavorable impact of foreign currency translation.

Polymers

Polymer net sales for the first quarter of 2022 increased $36.7 million, or 24 percent, versus net sales for the same period of 2021. Higher average selling prices and a two percent increase in sales volume favorably impacted the change in net sales by $38.4 and $3.6 million, respectively. The higher average selling prices were mainly due to the pass through of higher raw material costs. The increase in sales volume was primarily due to the 2021 INVISTA polyester polyol acquisition, which closed at the end of January 2021. The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $5.3 million. A comparison of net sales by region follows:

Net sales for North American operations increased $24.0 million, or 34 percent, primarily due to higher average selling prices that positively impacted the change in net sales by $25.2 million. The higher average selling prices were mainly due to the pass-through of higher raw material costs. Sales volume declined two percent and negatively impacted the year-over-year change in net sales by $1.2 million. North American sales volume was negatively impacted by a January 2022 power outage at the Company's Millsdale, Illinois plant site that negatively impacted Polymer production. The production disruption resulted in the declaration of force majeure for select products. Production resumed in February and the force majeure was lifted on April 15, 2022.

Net sales for European operations increased $12.5 million, or 18 percent, year over year. Higher average selling prices and a 10 percent increase in sales volume positively impacted the change in net sales by $11.0 million and $7.1 million, respectively. The higher average selling prices were primarily due to pass-through of higher raw material costs. The increase in sales volume primarily reflects 13 percent rigid polyol growth due to the prior year INVISTA polyester polyol acquisition that closed at the end of January 2021. The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $5.6 million.

Net sales for Asia and Other operations increased $0.2 million, or two percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation. These items positively impacted the change in net sales by $1.3 million and $0.3 million, respectively. Sales volume declined 12 percent year over year and negatively impacted the change in net sales by $1.4 million. The decline in sales volume was primarily attributable to supply and logistic disruptions resulting from recent COVID lockdowns.

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Polymer operating income for the first quarter of 2022 decreased $3.8 million, or 21 percent, versus operating income for the first quarter of 2021. The decline in operating income was primarily attributable to a January 2022 power outage at the Company's Millsdale, Illinois plant site that negatively impacted production and resulted in higher sourcing, logistic and maintenance costs. Gross profit decreased $3.2 million, or 13 percent, and operating expenses were up $0.6 million, or eight percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations decreased $5.0 million, or 38 percent, primarily due to lower unit margins that negatively impacted the year-over-year change in gross profit by $4.8 million. The lower unit margins were mainly due to a January 2022 power outage at the Company's Millsdale, Illinois plant site that negatively impacted production of rigid polyols and phthalic anhydride. The production disruption resulted in the declaration of force majeure for select Polymer products and higher sourcing, logistic and maintenance costs. Sales volume declined two percent year-over-year and negatively impacted the change in gross profit by $0.2 million.

Gross profit for European operations increased $1.9 million, or 17 percent, versus the first quarter of 2021. The increase was primarily due to higher unit margins and a 10 percent increase in sales volume due to the 2021 INVISTA polyester polyol acquisition, which closed at the end of January 2021. These two items favorably impacted the year-over-year change in gross profit by $1.6 million and $1.1 million respectively. The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $0.8 million.

Gross profit for Asia and Other operations decreased $0.1 million, or seven percent, from the prior year quarter. Most of this decrease reflects a 12 percent decline in sales volume that negatively impacted the quarter-over-quarter change in gross profit by $0.2 million. Higher average unit margins and the favorable impact of foreign currency translation partially offset the decline in sales volume.

Operating expenses for the Polymer segment increased $0.6 million, or eight percent, year over year. This increase was mainly attributable to higher salaries and fringe benefits and higher bad debt provision expense.

Specialty Products

Specialty Products net sales for the first quarter of 2022 increased $3.5 million, or 21 percent, versus net sales for the first quarter of 2021. This increase reflects higher average selling prices that were partially offset by a 12 percent decline in sales volume. Gross profit and operating income increased by $1.0 million and $1.1 million, respectively. The year-over-year improvements in gross profit and operating income were primarily attributable to order timing differences within the food and flavor business and improved margins within the medium chain triglycerides (MCTs) 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 $11.6 million between quarters. Corporate expenses were $8.3 million in the first quarter of 2022 versus $19.9 million in the first quarter of 2021. This decrease was primarily attributable to $7.5 million of deferred compensation income recognized in the first quarter of 2022 versus $2.7 million of deferred compensation expense in the first quarter of 2021. In addition, the Company also incurred lower acquisition-related expenses year over year.

The $10.2 million decrease in deferred compensation expense was primarily due to a $25.48 per share decrease in the market price of Company common stock in the first quarter of 2022 compared to a $7.79 per share increase in the first quarter of 2021. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation expenses for the three months ended March 31, 2022 and 2021:

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LIQUIDITY AND CAPITAL RESOURCES

Overview

For the three months ended March 31, 2022, operating activities were a cash use of $20.9 million versus a use of $11.7 million for the comparable period in 2021. For the current year period, investing cash outflows totaled $57.1 million versus a cash outflow of $223.8 million in the prior year period. Financing activities were a source of $154.8 million versus a source of $39.9 million in the prior year period. Cash and cash equivalents increased by $76.9 million compared to December 31, 2021, inclusive of a $0.1 million favorable foreign exchange rate impact.

On March 31, 2022, the Company's cash and cash equivalents totaled $236.0 million. Cash in U.S. demand deposit accounts and money market funds totaled $24.3 million and $120.0 million, respectively. The Company's non-U.S. subsidiaries held $91.7 million of cash outside the United States as of March 31, 2022.

Operating Activity

Net income in 2022 increased $4.2 million versus the comparable period in 2021. Working capital was a cash use of $85.0 million in 2022 versus a use of $81.0 million in 2021.

Accounts receivable were a use of $80.3 million during the first three months of 2022 compared to a use of $63.2 million for the comparable period of 2021. Inventories were a source of $0.5 million in 2022 versus a use of $7.5 million in 2021. Accounts payable and accrued liabilities were a use of $1.2 million in 2022 compared to a use of $9.4 million for the same period in 2021.

Working capital requirements were slightly higher in the first three months of 2022 compared to 2021 primarily due to the changes noted above. 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 decreased $166.6 million year-over-year. Most of this decrease 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. Cash used for capital expenditures was $60.3 million in the first quarter of 2022 versus $37.6 million in 2021. This capital expenditure increase is largely attributable to the alkoxylation plant the Company is building at its Pasadena, Texas site and equipment upgrades to meet future regulatory limits on 1,4 Dioxane in the United States.

For 2022, the Company estimates that total capital expenditures will range from $350 million to $375 million. This projected spending includes the new alkoxylation plant that is being built in Pasadena, Texas, equipment upgrades to meet future regulatory limits on 1,4 Dioxane in the United States, growth initiatives, infrastructure and optimization spending in the United States, Germany and Mexico.

Financing Activity

Cash flow from financing activities was a source of $154.8 million in 2022 versus a source of $39.9 million in 2021. The year-over-year change is primarily due to $75.0 million of cash received from the issuance of private placement notes and a higher level of borrowing from the Company's revolving credit facility during the first three months of 2022 versus the same period 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 three months ended March 31, 2022, the Company purchased 98,206 shares of its common stock on the open market at a total cost of $9.9 million. At March 31, 2022, the Company had $140.1 million remaining under the share repurchase program authorized by the Board of Directors.

Debt and Credit Facilities

Consolidated balance sheet debt increased from $363.6 million on December 31, 2021 to $537.1 million on March 31, 2022, primarily due to higher domestic debt, which includes borrowings from the Company's revolving credit agreement and new private placement notes issued during the first quarter of 2022. 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 $96.7 million in the first quarter of 2022, from $204.4 million at December 31, 2021 to $301.1 million at March 31, 2022. This net debt change was due to a debt increase of $173.5 and a cash increase of $76.8 million. The cash increase reflects the new debt borrowings partially offset by higher working capital requirements and capital expenditures.

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As of March 31, 2022, the ratio of total debt to total debt plus shareholders' equity was 32.5 percent compared to 25.3 percent at December 31, 2021. As of March 31, 2022, the ratio of net debt to net debt plus shareholders' equity was 21.2 percent versus 16.0 percent at December 31, 2021 (see the "Reconciliation of Non-GAAP Net Debt" section in this MD&A for further details). On March 31, 2022, the Company's debt included $435.6 million of unsecured notes, with maturities ranging from 2022 through 2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the Note Purchase Agreements), a $100.0 million short term loan borrowed under its revolving credit facility, and $1.5 million of foreign credit line borrowings. The proceeds from the note issuances have been the Company's primary source of long-term debt financing and are supplemented by borrowings under bank credit facilities to meet short and medium-term liquidity needs.

On March 1, 2022, pursuant to a note purchase and master note agreement dated as of June 10, 2021 (the NYL note purchase agreement), the Company issued and sold $25.0 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-A, due March 1, 2032 (the Series 2022-A Notes). In addition, on March 1, 2022, pursuant to a note purchase and private shelf agreement dated as of June 10, 2021 (the Prudential note purchase agreement), the Company issued and sold $50.0 million in aggregate principal amount of its 2.83% Senior Notes, Series 2022-B, due March 1, 2032 (the Series 2022-B Notes). The Series 2022-A Notes and the Series 2022-B Notes bear interest at a fixed rate of 2.83%, 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 2022-A Notes and the Series 2022-B Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes. The NYL note purchase agreement and the Prudential note purchase agreement require the maintenance of certain financial ratios and 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 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 March 31, 2022, the Company had outstanding loans totaling $100.0 million and letters of credit totaling $7.0 million under the revolving credit facility, with $243.0 million remaining available.

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

Certain foreign subsidiaries of the Company maintain short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditures and acquisitions. At March 31, 2022, the Company's foreign subsidiaries had $1.5 million of outstanding debt.

The Company is subject to covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth. These agreements also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares. Under the most restrictive of these debt covenants:

The Company believes it was in compliance with all of its debt covenants as of March 31, 2022.

ENVIRONMENTAL AND LEGAL MATTERS

The Company's operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first three months of 2022 and 2021, the Company's expenditures for capital projects related to the environment were $2.5 million and $3.0 million, respectively. These projects are capitalized and depreciated over their estimated useful lives, which are typically 10 years. Recurring costs associated with

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the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at the Company's manufacturing locations were $8.2million and $8.3million for the three months ended March 31, 2022and 2021, respectively.

Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to the sites. It is the Company's accounting policy to record liabilities when environmental assessments and/or remedial efforts are probable, and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. Estimating the possible costs of remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Some of the factors on which the Company bases its estimates include information provided by decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, and remedial action plans developed. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $23.1 million to $41.7 million at March 31, 2022 and December 31, 2021. Within the range of possible environmental losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range; these accruals totaled $23.1 million at March 31, 2022 and December 31, 2021. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to legal and environmental matters were $0.4 million for the three-month period ended March 31, 2022, compared to $0.3 million for the same period in 2021.

For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company's stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company's share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company's financial position, cash flows and results of operations. Based upon the Company's present knowledge with respect to its involvement at these sites, the possibility of other viable entities' responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company's financial position. Certain of these matters are discussed in Item 1, Part 2, of the Company's Annual Report on Form 10-K, Legal Proceedings, in this report and in other filings of the Company with the SEC, which are available upon request from the Company. See also Note 8, Contingencies, in the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for a summary of the significant environmental proceedings related to certain environmental sites.

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OUTLOOK

Management believes that demand for Surfactant products sold into the functional product end-markets, inclusive of agricultural and oilfield, should improve versus 2021. Management believes the Polymer segment will deliver growth versus 2021 and that the long-term prospects for this segment remain attractive as energy conservation efforts and more stringent building codes are expected to continue. Management believes its Specialty Product segment will improve slightly versus 2021. Despite optimism that demand for the Company's products will remain strong, management also believes the Company will continue to be challenged by external supply chain issues including raw material availability, inflationary pressures, and transportation constraints.

CRITICAL ACCOUNTING POLICIES

The Company no longer considers the prior year (a) Business Combinations and (b) Goodwill and Intangible Assets accounting policies as continuing to be critical during the first quarter of 2022 since the Company has made no current year acquisitions. Other than these items there have been no material changes to the critical accounting policies disclosed in the Company's 2021 Annual Report on Form 10-K.

NON-GAAP RECONCILIATIONS

The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company's performance and financial condition. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management's effectiveness with specific reference to these indicators. These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP. The Company's definitions of these measures may differ from similarly titled measures used by other entities.

Reconciliation of Non-GAAP Adjusted Net Income and Earnings Per Share

Management uses the non-GAAP adjusting net income metric to evaluate the Company's operating performance. Management excludes the items listed in the table above because they are non-operational items. The cumulative tax effect was calculated using the statutory tax rates for the jurisdictions in which the noted transactions occurred.

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Reconciliation of Non-GAAP Net Debt

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

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Item 3 - Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the market risks described in the Company's 2021 Annual Report on Form 10-K.

Item 4 - Controls and Procedures

We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2022. Based on this evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2022, such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

There were no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II OTHER INFORMATION

Item 1 - Legal Proceedings

SEC regulations require the Company to disclose certain information about administrative or judicial proceedings involving certain environmental matters to which a governmental authority is a party if the Company reasonably believes that such proceedings may result in monetary sanctions above a specified threshold. Pursuant to SEC regulations, the Company has adopted a threshold of $1.0 million for purposes of determining whether disclosure of any such proceedings is required. The Company believes that this threshold is reasonably designed to result in disclosure of any such proceedings that are material to its business or financial condition. Applying this threshold, there are no new environmental proceedings for the period covered by this report to disclose.

In addition, there have been no material changes to the legal proceedings disclosed in the Company's 2021 Annual Report on Form 10-K.

Item 1A - Risk Factors

There have been no material changes to the risk factors disclosed in the Company's 2021 Annual Report on Form 10-K.

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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Below is a summary by month of share purchase by the Company during the first quarter of 2022:

Item 3 - Defaults Upon Senior Securities

None

Item 4 - Mine Safety Disclosures

Not applicable

Item 5 - Other Information

None

Item 6 - Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 5, 2022

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