STEPAN CO - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

(MARK ONE)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

OR

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 1-4462

STEPAN COMPANY

(Exact name of registrant as specified in its charter)

Registrant’s telephone number including area code: 847-446-7500

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

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes  ☐    No  ☒

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K.  ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 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  ☒

Aggregate market value at June 30, 2016, of voting and non-voting common stock held by nonaffiliates of the registrant: $ 1,159,775,366*

Number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2017:

Documents Incorporated by Reference

* Based on reported ownership by all directors and executive officers at June 30, 2016.

STEPAN COMPANY

ANNUAL REPORT ON FORM 10-K

December 31, 2016

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K, 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, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “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 our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part I-Item IA. Risk Factors” and “Part II-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and 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 our actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or persons acting on our 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 we do 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 we update one or more forward-looking statements, no inference should be drawn that we 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.

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PART I

Item 1.  Business

Stepan Company, which was incorporated under the laws of the state of Delaware on February 19, 1959, and its subsidiaries produce specialty and intermediate chemicals, which are sold to other manufacturers and used in a variety of end products.  The Company has three reportable segments: Surfactants, Polymers and Specialty Products.

Surfactants are chemical agents that affect the interaction between two surfaces; they can provide actions such as detergency (i.e., the ability of water to remove soil from another surface), wetting and foaming, dispersing, emulsification (aiding two dissimilar liquids to mix), demulsification, viscosity modifications and biocidal disinfectants. Surfactants are the basic cleaning agent in detergents for washing clothes, dishes, carpets, fine fabrics, floors and walls.  Surfactants are also used for the same purpose in shampoos, body wash and conditioners, fabric softeners, toothpastes, cosmetics and other personal care products.  Commercial and industrial applications include emulsifiers for agricultural products, emulsion polymers such as floor polishes and latex foams and coatings, wetting and foaming agents for wallboard manufacturing and surfactants for enhanced oil recovery.  In 2016, the Company’s subsidiary in Brazil purchased the commercial business of Tebras Tensoativos do Brazil Ltda. (Tebras) and the sulfonation production facility of PBC Industria Quimica Ltda. (PBC).  The acquisition is expected to expand and diversify the Company’s customer base for sulfonated products in Brazil and to provide an opportunity to sell the Company’s broader surfactants portfolio to over 1,200 new customers who management believes will benefit from the Company’s technical service and formulation support.

Polymers, which include polyurethane polyols, polyester resins and phthalic anhydride, are used in a variety of applications.  Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry.  They are also a raw material base for coatings, adhesives, sealants and elastomers (CASE) applications.  Polyester resins, which include liquid and powdered products, are used in CASE and polyurethane systems house applications. Phthalic anhydride is used in polyester resins, alkyd resins, and plasticizers for applications in construction materials and components of automotive, boating, and other consumer products and internally in the Company’s polyols.  

Specialty Products are chemicals used in food, flavoring, nutritional supplement and pharmaceutical applications.  

MARKETING AND COMPETITION

Principal customers for surfactants are manufacturers of detergents, shampoos, body wash, fabric softeners, toothpastes and cosmetics.  In addition, surfactants are sold to the producers of agricultural herbicides and insecticides and lubricating products.  Surfactants are also sold into the enhanced oil recovery end markets.  Polymers are used in the construction and appliance industries, as well as in applications for the coatings, adhesives, sealants and elastomers industries.  Phthalic anhydride, a Polymer product, is also used by automotive, boating and other consumer product companies. Specialty products are used primarily by food, nutritional supplement and pharmaceutical manufacturers.

The Company does not sell directly to the retail market, but sells to a wide range of manufacturers in many industries and has many competitors.  The principal methods of competition are product performance, price, technical assistance and adaptability to the specific needs of individual customers.  These factors allow the Company to compete on bases other than price alone, reducing the severity of competition as experienced in the sales of commodity chemicals having identical performance characteristics.  The Company is one of the leading merchant producers of surfactants in the world.  In the case of surfactants, much of the Company’s competition comes from several large global and regional producers and the internal divisions of larger customers.  In the manufacture of polymers, the Company competes with the chemical divisions of several large companies, as well as with other small specialty chemical manufacturers.  In specialty products, the Company competes with several large firms plus numerous small companies.  

MAJOR CUSTOMER AND BACKLOG

The Company did not have any one customer whose business represented more than 10 percent of the Company’s consolidated revenue in 2016, 2015 or 2014.  The Company has contract arrangements with certain customers, but volumes are generally contingent on purchaser requirements. Much of the Company’s business is essentially on a “spot delivery basis” and does not involve a significant backlog.  

ENERGY SOURCES

Substantially all of the Company’s manufacturing plants operate on electricity and interruptible natural gas.  During peak heating demand periods, gas service to all plants may be temporarily interrupted for varying periods ranging from a few days to several months.  The plants operate on fuel oil during these periods of interruption.  The Company’s operations have not experienced any

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plant shutdowns or adverse effects upon its business in recent years that were caused by a lack of available energy sources, other than temporary service interruptions brought on by mechanical failure.  

RAW MATERIALS

The principal raw materials used by the Company are petroleum or plant based.  For 2017, the Company has contracts with suppliers that cover the majority of its forecasted requirements for major raw materials and is not substantially dependent upon any one supplier.  

RESEARCH AND DEVELOPMENT

The Company maintains an active research and development program to assist in the discovery and commercialization of new knowledge with the intent that such efforts will be useful in developing a new product or in bringing about a significant improvement to an existing product or process.  Total expenses for research and development during 2016, 2015 and 2014 were $34.9 million, $30.3 million, and $27.2 million, respectively. The remainder of research, development and technical service expenses reflected in the consolidated statements of income relates to technical services, which include routine product testing, analytical methods development and sales support service.

ENVIRONMENTAL COMPLIANCE

Compliance with applicable country, state and local regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, resulted in capital expenditures by the Company of approximately $1.7 million during 2016.  These expenditures represented approximately 2 percent of the Company’s total 2016 capital expenditures.  Capitalized environmental expenditures are depreciated and charged on a straight-line basis to pretax earnings over their estimated useful lives, which are typically 10 years.  Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing locations were approximately $25.0 million in 2016.  Compliance with such regulations is not expected to have a material adverse effect on the Company’s earnings and competitive position in the foreseeable future.

EMPLOYMENT

At December 31, 2016 and 2015, the Company employed 2,145 and 2,073 persons, respectively. The Company has collective bargaining agreements with employees at some of its manufacturing locations. While the Company has experienced occasional work stoppages as a result of the collective bargaining process and may experience some work stoppages in the future, management believes that it will be able to negotiate all labor agreements on satisfactory terms. Past work stoppages have not had a significant impact on the Company’s operating results. Overall, the Company believes it has good relationships with its employees.

FOREIGN OPERATIONS AND REPORTING SEGMENTS

See Note 17, Segment Reporting, of the Consolidated Financial Statements (Item 8 of this Form 10-K).

ACQUISITIONS AND DISPOSITIONS

See Note 20, Acquisitions, of the Consolidated Financial Statements (Item 8 of this Form 10-K). See also Note 21, Sale of Product Line, of the Consolidated Financial Statements (Item 8 of this Form 10-K).

WEBSITE

The Company’s website address is www.stepan.com.  The Company makes available free of charge on or through its website its code of conduct, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  The website also includes the Company’s corporate governance guidelines and the charters for the audit, nominating and corporate governance and compensation and development committees of the Board of Directors.

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Executive Officers of the Registrant

The Company’s executive officers are elected annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders to serve through the next annual meeting of the Board and until their respective successors are duly elected and qualified.

The executive officers of the Company, their ages and certain other information as of February 24, 2017, are as follows:

F. Quinn Stepan, Jr. assumed the position of Chairman of the Company’s Board of Directors on of January 1, 2017. He continues to serve the Company as President and Chief Executive Officer, as he has done since January 2006.  He served the Company as President and Chief Operating Officer from 1999 through 2005.  From January 1997 until February 1999 he served as Vice President and General Manager – Surfactants.  From May 1996 until January 1997 he served as Vice President – Global Laundry and Cleaning Products.  From May 1992 until May 1996 he served as Director – Business Management.

Frank Pacholec has served the Company as Vice President, Strategy and Corporate Development since June 2016. He served as Vice President, Research and Development and Corporate Sustainability Officer from May 2010 until June 2016. From April 2003 until May 2010 he served as Vice President, Research and Development.

Gregory Servatius has served the Company as Vice President, Human Resources since February 2006.  From April 2003 until January 2006, he served as Vice President, Surfactant Sales.  From October 2001 until April 2003, he served as Vice President Functional Products.  From 1998 to 2001, he served as the Managing Director of the Company’s European operations.

Scott C. Mason has served the Company as Vice President, Supply Chain since March 2010.  From January 2006 until December 2009, he served as Senior Vice President Global Supply Chain and President, Alternative Channels of Nalco Company.

Scott D. Beamer has served the Company as Vice President and Chief Financial Officer since August 2013.  From January 2012 until July 2013, he served as Assistant Corporate Controller at PPG Industries, Inc.  From June 2008 until December 2011 he served as Chief Financial Officer and Director of Finance – PPG Europe at PPG Industries, Inc.

Arthur W. Mergner has served the Company as Vice President and General Manager – Polymers since April 2014.  From June 2013 until April 2014, he served as Vice President – North America Polymers.  From July 2008 through June 2013 he served as Vice President, Procurement.

Scott R. Behrens has served the Company as Vice President and General Manager – Surfactants since September 2014.  From January 2010 to September 2014 he served as Vice President – Business Management.  From November 2008 to January 2010 he served as Vice President – Functional Products.

Debra A. Stefaniak has served the Company as Vice President, Business Transformation since February 2014.  From May 2009 to February 2014, she served as Vice President, Global Logistics.  From July 2006 to May 2009, she served as Director, Global Logistics.

Jennifer A. Hale has served the Company as Vice President, General Counsel and Secretary since January 2016.  From 2013 through 2015, she served as Vice President, Global General Counsel and Strategic Business Consultant at Vita-Mix Holdings Company.  From 2007 to 2013, she served as Vice President, General Counsel and Secretary at Dyson, Inc.

Robert V. Slone has served the Company as Vice President, Chief Technology and Sustainability Officer since June 2016.  From November 2013 until June 2016, he served as Vice President of Surfactants Product Development.  From 2011 to 2013, he served as Director of Technology at British Petroleum/Castrol innoVentures.   From 2009 to 2011, he served as R&D Director – Formulations and Materials Science at Dow Chemical.

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Item 1A. Risk Factors

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

RISKS RELATED TO OUR BUSINESS

Disruptions in production or accidents at, or loss of, any of our manufacturing facilities may have a material impact on our business, financial position, results of operations and cash flows.

Manufacturing facilities in the Company’s industry are subject to planned and unplanned production shutdowns, turnarounds and outages.  Unplanned production disruptions may occur for external reasons, such as natural disasters, weather, disease, strikes, transportation interruption, government regulation, political unrest or terrorism, or internal reasons, such as fire, unplanned maintenance or other manufacturing problems.  Certain of our production facilities are, and production facilities acquired or built in the future may be, located in areas where unplanned disruptions are more likely.  Alternative facilities with sufficient capacity may not be available, may cost substantially more or may take a significant amount of time to increase production or qualify with Company customers, each of which could negatively impact the Company’s business, financial position, results of operations and cash flows. Further, some of the Company’s products cannot currently be made, or made in the volume required, at more than one of the Company’s locations. For some of these products, the Company has access to external market suppliers, but the Company cannot guarantee that these products will be available to it in amounts sufficient to meet its requirements or at a cost that is competitive with the Company’s cost of manufacturing these products. Long-term production disruptions may cause Company customers to seek alternative supply, which could further adversely affect Company profitability. Although the Company takes precautions to enhance the safety of its operations and minimize the risk of disruptions, the Company’s operations are subject to hazards inherent in the manufacturing of chemical products. These hazards include: chemical spills, pipeline leaks and ruptures, storage tank leaks, discharges or releases of toxic or hazardous substances or gases and other hazards incident to the manufacturing, processing, handling, transportation and storage of dangerous chemicals. Many potential hazards can cause bodily injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties and liabilities. Furthermore, the Company is subject to present and future claims with respect to workplace exposure, exposure of contractors on Company premises as well as other persons located nearby, workers' compensation and other matters.

The Company maintains property, business interruption, products liability and casualty insurance policies which we believe are in accordance with customary industry practices, as well as insurance policies covering other types of risks, including pollution legal liability insurance.  However, some of these potential manufacturing hazards and risks may not be insurable, and when they are insurable, there can be no assurance that the insurance coverage would be sufficient to cover any or all losses resulting from the occurrence of any of these events or that insurance carriers would not deny coverage for these losses even if they are insured.  Each of these insurance policies is subject to customary exclusions, deductibles and coverage limits, in accordance with industry standards and practices.  As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. There is also a risk, beyond the reasonable control of the Company, that an insurance carrier may not have the financial resources to cover an insurable loss.  As a result, the occurrence of any of these events could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

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

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

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

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

The costs of raw materials, natural gas and electricity represent a substantial portion of the Company’s operating costs.  The principal raw materials used in the Company’s products are petroleum-based or plant-based.  Natural gas is used in the Company’s manufacturing sites primarily to generate steam for its manufacturing processes.  The prices of many of these raw materials have recently increased and been very volatile.  These fluctuations in prices may be affected by supply and demand factors, such as general economic conditions, manufacturers’ ability to meet demand, restrictions on the transport of raw material (some of which may be viewed as hazardous), currency exchange rates, political instability or terrorist attacks, all of which are beyond the Company’s control.  The Company may not be able to pass increased raw material or energy costs on to customers through increases in product prices as a result of arrangements the Company has with certain customers and competitive pressures in the market.  If the Company is unable to minimize the effects of increased raw material and energy costs or pass such increased costs on to customers, or manage any interruption to the supply of raw materials or energy, its business, financial position, results of operations and cash flows may be materially and adversely affected.

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

The Company relies heavily on railroads, barges and other over-the-road shipping methods to transport raw materials to its manufacturing facilities and to ship finished product to customers. Transport operations are exposed to various risks, such as extreme weather conditions, natural disasters, work stoppages and operating hazards, as well as interstate transportation regulations. If the Company experiences transportation problems, or if there are significant changes in the cost of these services, the Company may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship finished product, which could result in an adverse effect on Company revenues, costs and operating results.

Customer product reformulations or new technologies can reduce the demand for the Company’s products.

The Company’s products are used in a broad range of customer product applications. Customer product reformulations or development and use of new technologies may lead to reduced consumption of Company-produced products or make some Company products obsolete. It is imperative that the Company develops new products to replace the sales of products that mature and decline in use. The Company’s business, financial position, results of operations and cash flows could be materially and adversely affected if the Company is unable to manage successfully the maturation of existing products and the introduction of new products.

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

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

Acquisitions involve numerous risks, including the assumption of undisclosed or unindemnified liabilities, difficulties in the assimilation of the operations, technologies, services and products of the acquired companies and the diversion of management’s attention from other business concerns. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses.

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

The Company’s patents and other intellectual property may not prevent competitors from independently developing or selling similar or duplicative products and services, and there can be no assurance that the resources the Company invests to protect its intellectual property will be sufficient or that the Company’s intellectual property portfolio will adequately deter misappropriation or improper use of its technology. The Company could also face competition in some countries where it has not invested in an intellectual property

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portfolio, or where intellectual property rights are more difficult to obtain and/or assert. In addition, the Company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming. If the Company is found to infringe any third-party rights, it could be required to pay substantial damages or it could be enjoined from offering some of its products and services. Also, there can be no assurances that the Company will be able to obtain or renew from third parties the licenses it may need in the future, and there is no assurance that such licenses can be obtained on reasonable terms.

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

The Company has substantial operations outside the U.S.  In the year ended December 31, 2016, the Company’s sales outside of the U.S. constituted approximately 39 percent of the Company’s net sales.  In addition to the risks described in this Annual Report on Form 10‑K that are common to both the Company’s U.S. and non-U.S. operations, the Company faces, and will continue to face, risks related to the Company’s foreign operations such as:

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

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

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

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

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

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

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

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

The Company is subject to a variety of environmental, health and safety and product registration laws that expose it to potential financial liability and increased operating costs.

The Company’s operations are regulated under a number of federal, state, local and foreign environmental, health and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air, soil and water as well as the use, handling, storage and disposal of these materials.  These laws and regulations include, but are not limited to, the U.S. Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, as well as analogous foreign, state and local laws such as Proposition 65, and the Registration, Evaluation, Authorization and Restriction of Chemical Substances Act (REACH).  Compliance with these environmental laws and regulations is a major consideration for the Company because the Company is a chemical manufacturing company and uses hazardous materials in some of the Company’s manufacturing processes.  In addition, compliance with environmental laws could restrict the Company’s ability to expand its facilities or require the Company to modify its facilities or acquire additional costly pollution control equipment, incur other significant expenses, modify its manufacturing processes or expose the Company to greater liability associated with its production processes and products.  The Company has incurred and will continue to incur capital expenditures and operating costs in complying with these laws and regulations.  In addition, because the Company generates hazardous wastes during some of its manufacturing processes, the Company, along with any other entity that disposes or arranges for the disposal of the Company’s wastes, may be subject to financial exposure for costs associated with any investigation and remediation of sites at which the Company has disposed or arranged for the disposal of hazardous wastes if those sites become contaminated, even if the Company fully complied with applicable environmental laws at the time of disposal.  In the event that new

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contamination is discovered, the Company may become subject to additional requirements with respect to existing contamination or the Company’s clean-up obligations.

The transportation of certain raw materials is highly regulated and is subject to increased regulation or restrictions, which may restrict or prohibit transport of these raw materials, resulting in these raw materials not being available to the Company in quantities desired by the Company or at costs attractive to the Company, which may restrict or substantially limit the Company’s manufacturing operations.

The Company is also subject to numerous federal, state, local and foreign laws that regulate the manufacture, storage, distribution and labeling of many of the Company’s products, including some of the Company’s disinfecting, sanitizing and antimicrobial products.  Some of these laws require the Company to have operating permits for the Company’s production facilities, warehouse facilities and operations.  Various federal, state, local and foreign laws and regulations also require the Company to register the Company’s products and to comply with specified requirements with respect to those products.  If the Company fails to comply with any of these laws and regulations, it may be liable for damages and the costs of remedial actions in excess of the Company’s recorded liabilities, and may also be subject to fines, injunctions or criminal sanctions or to revocation, non-renewal or modification of the Company’s operating permits and revocation of the Company’s product registrations.  Any such revocation, modification or non-renewal may require the Company to cease or limit the manufacture and sale of its products at one or more of the Company’s facilities, which may limit or prevent the Company’s ability to meet product demand or build new facilities and may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows. Any such revocation, non-renewal or modification may also result in an event of default under the indenture for the Company’s notes or under the Company’s credit facilities, which, if not cured or waived, may result in the acceleration of all the Company’s indebtedness.

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

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

The Company’s inability to accurately estimate and maintain appropriate levels of recorded liabilities for existing and future contingencies may materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

The liabilities recorded by the Company for pending and threatened legal proceedings are estimates based on various assumptions.  An adverse ruling or external forces, such as changes in the rate of inflation, the regulatory environment and other factors that could prove such assumptions to be no longer appropriate, may affect the accuracy of these estimates.  Given the uncertainties inherent in such estimates, the Company’s actual liabilities could differ significantly from the estimated amounts the Company records in its financial statements with respect to existing and future contingencies.  If the Company’s actual liability is higher than estimated or any new legal proceeding is initiated or other contingency occurs, it could materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

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

The Company has a significant amount of indebtedness and may incur additional indebtedness in the future.  As of December 31, 2016, the Company had $317.0 million of debt on its balance sheet.  U.S. debt included $309.6 million in unsecured promissory notes with maturities extending from 2017 until 2027.

The Company’s foreign subsidiaries also maintain bank term loans and short-term bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions.  As of December 31, 2016, the Company’s foreign subsidiaries’ aggregate outstanding debt totaled $7.4 million.

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

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.  Failure to comply with these loan agreements would require debt restructuring that could be materially adverse to the Company’s financial position, results of operations and cash flows.  

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

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

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

Downturns in certain industries and general economic downturns may have an adverse effect on the Company’s business, financial position, results of operations and cash flows      

Economic downturns may adversely affect users of some end products that are manufactured using the Company’s products and the industries in which such end products are used.  These users may reduce their volume of purchases of such end products during economic downturns, which would reduce demand for the Company’s products.  Additionally, uncertain conditions in the credit

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markets pose a risk to the overall economy that may impact consumer and customer demand of some of the Company’s products, as well as the Company’s ability to manage normal commercial relationships with its customers, suppliers and creditors.  Some of the Company’s customers may not be able to meet the terms of sale and suppliers may not be able to fully perform their contractual obligations due to tighter credit markets or a general slowdown in economic activity.  

In the event that economic conditions worsen or result in a prolonged downturn or recession, the Company’s business, financial position, results of operations and cash flows may be materially and adversely affected.

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

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

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

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

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

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments

None

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Item 2.  Properties

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

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Item 3. Legal Proceedings

There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company’s business, the majority of which relate to environmental 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).  Over the years, the Company has received requests for information relative 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 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 may incur with respect to these sites.  For most of these sites, the involvement of the Company is expected to be minimal.  The most significant sites are described below:

Maywood, New Jersey Site

The Company’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of certain alleged chemical contamination.  Pursuant to an Administrative Order on Consent entered into between the U.S. Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, 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.  USEPA has not yet issued a ROD for chemically-contaminated groundwater for the Maywood site.  Based on the most current information available, the Company believes its recorded liability represents its best estimate of the cost of remediation for the Maywood site.  The best estimate of the cost of remediation for the Maywood site could change as the Company continues to hold discussions with USEPA, as the design of the remedial action progresses, if a groundwater ROD is issued or if other PRPs are identified.  The ultimate amount for which the Company is liable could differ 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.  Based on the Company’s review and analysis of this order, no changes to the Company’s current recorded liability for claims associated with soil remediation of chemical contamination were required.

In addition, under the terms of a settlement agreement reached on November 12, 2004, the United States Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985 under which the United States will take title to and responsibility for radioactive waste removal at the Maywood site, including past and future remediation costs incurred by the United States.  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 at several sites in New Jersey.  The Company was named as a PRP in a lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Property Site located in New Jersey.  In 2016, the PRPs were provided with updated remediation cost estimates which were considered in the Company’s 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 is continuing at this site.  Based on current information, the Company believes that its recorded liability represents its best estimate of the 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 from the current estimates.

Wilmington Site

The Company is currently contractually obligated to contribute to the response costs associated with the Company’s formerly-owned site at 51 Eames Street, Wilmington, Massachusetts.  Remediation at this site is being managed by its current owner, to whom the Company sold the property in 1980.  Under the agreement, 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 had paid the current owner $2.5 million for the Company’s portion of environmental response costs through December 31, 2016.  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 from the current estimates.

The Company and other prior owners 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

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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.

The Company believes that based on current information it has adequate reserves for the claims related to this site.  However, depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

Other Matters

The Company has been named as a de minimis PRP at other sites, and as such the Company believes that a resolution of its liability will not have a material impact on the financial position, results of operations or cash flows of the Company.

Item 4. Mine Safety Disclosures

Not Applicable.

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PART II

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

On February 19, 2013, the Board of Directors of Stepan Company authorized the Company to repurchase up to 1,000,000 shares of its outstanding common stock.  During 2016, 43,835 shares of Company common stock were purchased in the open market.  These shares were recorded as treasury stock in the Company’s balance sheet.  At December 31, 2016, 717,929 shares remained available for repurchase under the February 19, 2013, authorization. The timing and amount of the repurchases are determined by the Company’s management based on its evaluation of market conditions and share price. Shares will be repurchased with cash in open market or private transactions in accordance with applicable securities and stock exchange rules.

Dividends Declared Per Common Share

The Company has increased its dividends for 49 consecutive years.

The Company has material debt agreements that restrict the payment of dividends. See the Liquidity and Financial Condition section of Part II, Item 7, Management’s Discussion and Analysis, for a description of the restrictions. See also Note 6, Debt, of the consolidated financial statements (Item 8 of this Form 10-K) for the amount of retained earnings available for dividend distribution at December 31, 2016.

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The following stock performance graph compares the yearly change since December 31, 2011, in cumulative return on the common stock of the Company on a dividend reinvested basis to the Dow Jones Chemical Industry Index and the Russell 2000 Index. The Dow Jones Chemical Industry Index is a market-capitalization weighted grouping of 35 chemical companies, including major manufacturers of both basic and specialty products. The Company is not included in the Dow Jones Chemical Industry Index. The Russell 2000 Index is a market-capitalization weighted grouping of 2,000 small to medium sized companies in a broad range of industries. The Company has been included in the Russell 2000 Index since 1992. The graph assumes $100 was invested on December 31, 2011, and shows the cumulative total return as of each December 31 thereafter.

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Item 6. Selected Financial Data

(In thousands, except per share data)

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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 comprises three reportable segments:

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2016 Business Acquisition

On October 3, 2016, the Company’s subsidiary in Brazil acquired the commercial business of Tebras Tensoativos do Brazil Ltda. (Tebras) and the sulfonation production facility of PBC Industria Quimica Ltda. (PBC). The purchase price of the acquisitions, including adjustments for working capital, was approximately $29.1 million. The combined entities have 25,000 metric tons of sulfonation capacity and a large, diverse customer portfolio.  The acquisition is expected to expand and diversify the Company’s customer base for sulfonated products in Brazil and to provide an opportunity to sell the Company’s broader surfactant portfolio to over 1,200 new customers who could benefit from the Company’s technical service and formulation support. The acquired businesses are included in the Company’s Surfactants segment. The acquired entities’ contributions to Company net sales and net income for the year ended December 31, 2016, were insignificant. See Note 20 to the consolidated financial statements for further information regarding the business acquisition.

Deferred Compensation Plans

The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company expenses and profits. Compensation expense results when the values of Company common stock and mutual fund investment assets held for the plans increase, and compensation income results when the values of Company common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are presented in the following table:

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

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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 line items for 2016 compared to 2015 and 2015 compared to 2014:

Results of Operations

2016 Compared with 2015

Summary

Net income attributable to the Company for 2016 increased 13 percent to $86.2 million, or $3.73 per diluted share, from $76.0 million, or $3.32 per diluted share, for 2015. Adjusted net income increased 24 percent to $98.2 million, or $4.25 per diluted share, from $79.4 million, or $3.46 per diluted share (See the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for reconciliations between reported net income attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, profits and expenses.  A detailed discussion of segment operating performance for 2016 compared to 2015 follows the summary.

Consolidated net sales declined $10.0 million, or one percent, between years. Sales volume increased six percent, which had a $114.0 million favorable effect on the year-over-year change in net sales. All three reportable segments contributed to the consolidated sales volume improvement. By segment, sales volume increased five percent, 12 percent and eight percent for Surfactants, Polymers and Specialty Products, respectively. The effect of increased consolidated sales volume was more than offset by lower selling prices and the unfavorable effects of foreign currency translation, which negatively affected the year-over-year net sales change by $81.1 million and $42.9 million, respectively. The decreased selling prices were primarily attributable to declines in raw material costs. Overall unit margins improved slightly between years. The unfavorable foreign currency translation effect reflected a stronger U.S. dollar against all currencies for countries where the Company has foreign operations.  

Operating income for 2016 improved $3.4 million, or three percent, over operating income for 2015 despite current year restructuring and asset impairment charges of $7.1 million and increased deferred compensation expense of $10.3 million. Operating income improved for Polymers and Specialty Products. Surfactant segment operating income declined four percent largely due to the settlement of two customer claims and accelerated depreciation related to the cessation of manufacturing operations at the Company’s Canadian plant. Last year’s operating income included a $2.9 million gain on the sale of the Company’s specialty polyurethane systems product line. Foreign currency translation had an unfavorable $3.7 million effect on the year-over-year consolidated operating income change.

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Operating expenses (including the business restructuring and asset impairment expenses) increased $24.0 million, or 13 percent, between years. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

Net interest expense for 2016 declined $1.3 million, or nine percent, from net interest expense for 2015. The decline in interest expense was principally attributable to higher interest income earned on excess cash. Lower average debt levels due to scheduled repayments also contributed.

In the fourth quarter of 2015, the Company and its partner agreed to dissolve the TIORCO joint venture and, therefore, the Company has reported no results in the loss from equity joint venture line in 2016. The Company’s share of TIORCO’s loss for the 2015 was $7.0 million.

Other, net income for 2016 declined $0.8 million, or 48 percent, from other, net income for 2015. Foreign exchange activity resulted in an insignificant loss in 2016 compared to a $0.7 million gain in 2015. Investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets declined $0.1 million between years to $0.8 million in 2016 from $0.9 million in 2015.

The effective tax rate was 24.3 percent in 2016 compared to 26.1 percent in 2015. The decrease was attributable to the following items: 1) a tax benefit derived from the early adoption of Accounting Standards Update No. 2016-9, Compensation – Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting (see Recent Accounting Pronouncements in Note1 to the consolidated financial statements); 2) an unrecognized tax benefit recorded in 2015 that was nonrecurring in 2016; and 3) a more favorable geographical mix of income in 2016.  This decrease was partially offset by the 2011 and 2012 Agricultural Chemicals Security Credit tax benefit recorded in 2015 that was nonrecurring in 2016.  See Note 9 to the consolidated financial statements for a reconciliation of the statutory U.S. federal income tax rate to the effective tax rate.

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Segment Results

Surfactants

Surfactants 2016 net sales declined $24.3 million, or two percent, from net sales reported in 2015. Sales volume increased five percent between years, which had a $58.5 million positive effect on the year-over-year net sales change. All regions, except Europe, contributed to the sales volume improvement. Decreased selling prices and foreign currency translation had negative effects of $48.3 million and $34.5 million, respectively, on the net sales change. North American operations accounted for most of the decline in selling prices, which reflected lower year-over-year costs for major raw materials and a less favorable sales mix. The foreign currency translation effect resulted from a stronger U.S. dollar compared to all currencies of the segment’s foreign operations. A year-over-year comparison of net sales by region follows:

Net sales for North American operations declined two percent between years. Sales volume increased seven percent, which favorably affected the year-over-year change in net sales by $49.7 million. The effect of the increased sales volume was more than offset by an eight percent decline in selling prices and the unfavorable impact of foreign currency translation, which negatively affected the change in net sales by $61.1 million and $1.7 million, respectively. Most of the sales volume growth occurred in the first three quarters of 2016. For the full year, laundry and cleaning products were the largest contributors to the sales volume improvement, as the Company derived the full-year benefits of a supply agreement with a large customer that commenced during the third quarter of 2015. Sales volume for products used in personal care applications declined, primarily due to weaker demand in the second half of 2016 coupled with some lost business. In addition, lower crude oil prices led to a decrease in sales volumes of oil field products used in EOR applications. The year-over-year decline in sales prices primarily reflected decreased raw material costs, particularly for the first half of 2016, and a less favorable sales mix. The foreign currency impact reflected a stronger U.S. dollar relative to the Canadian dollar.

Net sales for European operations declined eight percent. Reducing 2016 net sales was $7.4 million of settlements for two customer claims (see Note 23 to the consolidated financial statements for further information). In addition, the unfavorable effects of foreign currency translation and a two percent decline in sales volume unfavorably impacted the change in net sales by $12.5 million

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and $4.6 million, respectively. Selling prices averaged one percent higher, which had a $3.1 million favorable effect on the year-over-year net sales change. A weaker British pound sterling relative to the U.S. dollar accounted for most of the foreign currency effect. The decline in sales volume was mainly attributable to weaker demand for agricultural chemicals, laundry and cleaning products and personal care products. Sales volumes of general surfactants sold through distributors increased year over year.

Net sales for Latin American operations increased two percent. Included in fourth quarter and full year 2016 net sales was $4.3 million in compensation for future lost revenue related to a negotiated settlement with a major customer under contract with the region’s Bahia, Brazil, plant that exited the product line for which the Company supplied them product (see Note 22 to the consolidated financial statements for further information). A six percent increase in sales volume and higher selling prices favorably affected the year-over-year change in net sales by $8.7 million and $6.4 million, respectively. The unfavorable effects of currency translation offset the positive impacts of increased sales prices and volumes by $17.0 million. Improved laundry and cleaning and agricultural chemical sales volumes in Brazil accounted for most of the improvement in Latin America. New business related to the fourth quarter 2016 acquisitions of Tebras and PBC also contributed to the growth in sales volumes and net sales dollars. The higher selling prices reflected increased raw material costs and a more favorable mix of sales. The year-over-year weakening of the Brazilian real, Mexican peso and Colombian peso against the U.S. dollar led to the foreign currency translation effect.

Net sales for Asian operations increased 13 percent primarily due to a nine percent increase in average selling prices and a seven percent growth in sales volume, which positively affected the year-over-year change in net sales by $6.1 million and $4.4 million, respectively. An improved mix of sales coupled with the effects of increased raw material costs led to the higher average selling prices. Most of the sales volume improvement was attributable to new business and increased demand from existing customers of the Company’s Philippine operations. Sales volume also increased from Singapore. Foreign currency translation had a $2.8 million unfavorable effect on the net sales change.

Surfactant operating income for 2016 declined $4.3 million, or four percent, from operating income reported in 2015. Operating income for 2016 was negatively affected by accelerated depreciation related to the Canadian plant shutdown and by the settlement of customer claims in Europe. Gross profit increased $4.5 million, or two percent, largely due to higher sales volumes. The effects of foreign currency translation had an unfavorable $4.6 million impact on the year-over-year gross profit change. Operating expenses increased $8.8 million, or 10 percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations increased one percent principally as the result of the seven percent year-over-year improvement in sales volume. The favorable effect of the growth in sales volume was largely offset by $4.5 million of accelerated depreciation associated with the shutdown of manufacturing operations at the Company’s Canadian plant.

Gross profit for European operations declined 26 percent between years largely due to the aforementioned $7.4 million customer claim settlements and a two percent decline in sales volume. The region also incurred approximately $0.6 million of expenses associated with a planned 30-day mandatory inspection shutdown of the Company’s plant in Germany. There was no such inspection in 2015. Foreign currency translation negatively affected the change in gross profit by $1.0 million.

Gross profit for Latin American operations improved twelve percent mainly due to the $4.3 million settlement noted earlier and the effects of the six percent increase in sales volume. Foreign currency translation negatively impacted gross profit by $2.8 million. The contribution from the Tebras and PBC acquisitions was insignificant for 2016.

Asia gross profit increased 66 percent largely due to the seven percent increase in sales volume and to margin improvement, particularly for the Company’s Philippine operations. A more favorable product mix, higher selling prices and greater utilization of the plant in the Philippines led to the margin improvement.

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Operating expenses for the Surfactants segment increased $8.8 million, or 10 percent, year over year. Expenses increased for all regions, reflecting the additional resources and expenditures necessary to support the segment’s global organization and growth initiatives. In addition, U.S. incentive-based compensation (which includes stock-based compensation, bonuses and profit sharing) increased between years due to improved Company financial performance and higher common stock prices. The favorable effects of foreign currency translation reduced the year-over-year change in operating expenses by $1.6 million.

Polymers

Polymer net sales for 2016 increased $7.3 million, or one percent, over net sales for 2015.  Sales volume increased 12 percent, which had a $58.5 million favorable effect on the year-over-year net sales change. All regions contributed to the sales volume improvement. Lower selling prices and the effects of foreign currency translation unfavorably affected the net sales change by $42.9 million and $8.3 million, respectively. Year-over-year raw material cost declines led to the decrease in selling prices. The foreign currency translation effect reflected a stronger U.S. dollar against the currencies of the segment’s foreign operations. A year-over-year comparison of net sales by region follows:

Net sales for North American operations increased one percent. Sales volume increased nine percent, which had a $29.7 million favorable effect on the year-over-year net sales change. Selling prices declined eight percent, which offset the impact of higher sales volume by $27.5 million. The sales volume improvement was attributable to a 20 percent increase for polyols used in rigid foam applications. New business and the continued growth in demand for rigid foam insulation led to the polyol sales volume growth. Sales volume of phthalic anhydride and specialty polyols declined three and five percent, respectively, between years. Year-over-year decreases in the cost of raw materials drove the decline in selling prices.

Net sales for European operations increased two percent. Sales volume grew 14 percent, which had a $20.8 million favorable effect on the year-over-year net sales change. The sales volume improvement was driven by new business and increased demand for polyols used in rigid foam insulation and insulated metal panels. The impact of higher sales volume was partially offset by the effects of lower selling prices and foreign currency translation, which negatively affected the change in net sales by $10.6 million and $6.9 million, respectively. Lower raw material costs led to the decline in selling prices.

Net sales for Asia and Other operations increased eight percent between years due to a 29 percent increase in sales volume, which had a $6.8 million positive impact on the year-over-year net sales change. Business gained from efforts to fill the capacity of the Company’s new plant in Nanjing, China, accounted for most of the sales volume increase. The unfavorable effects of lower selling prices and foreign currency translation negatively impacted the change in net sales by $3.5 million and $1.5 million, respectively.

Polymer operating income for 2016 increased $15.8 million, or 20 percent, over operating income for 2015. Results for 2015 included a $2.9 million gain from the sale of Company’s specialty polyurethane systems product line. Gross profit increased $20.3 million, or 19 percent, due to the 12 percent increase in sales volume and to improved margins resulting primarily from lower raw material costs and an improved product mix. Year-over-year 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 increased 19 percent year over year.  The nine percent increase in sales volume, the positive effects of lower raw material costs and a more favorable mix of sales all contributed to the improved gross profit. Production efficiencies were also a positive factor as unit manufacturing overhead costs declined as a result of production volume increases that outpaced a five percent year-over-year increase in plant expenses.

Gross profit for European operations increased 24 percent primarily due to the 14 percent increase in sales volume and to lower raw material costs. The 2016 results were negatively affected by higher plant expenses that resulted from the planned 30-day mandatory inspection shutdown of manufacturing operations in Germany during the third quarter of 2016. As a result of the shutdown, 2016 plant expenses included $2.4 million of inspection and storage expenses not incurred in 2015. The unfavorable effects of foreign currency translation negatively impacted the year-over-year change in gross profit by $1.0 million.

Gross profit for Asia and Other operations declined 24 percent despite a 29 percent increase in sales volume. Higher overhead costs due to operating the new China plant at partial capacity led to the decline in gross profit. Most of the decline occurred in the fourth quarter when it was no longer necessary for the plant to manufacture product for other Company locations as it had done for a large period of 2016.

Operating expenses for the Polymers segment increased $1.6 million, or five percent, year over year largely due to higher U.S. incentive-based compensation resulting from improved year-over-year Company financial performance and common stock prices.

Specialty Products

Net sales for 2016 increased $6.9 million, or nine percent, over net sales for 2015. An eight percent increase in sales volume accounted for most of the net sales improvement. Selling prices increased approximately one percent. Most of the sales volume increase was attributable to increased demand for products used in food ingredient applications. Operating income increased $6.3 million year over year due to increased sales volume and lower manufacturing and operating expenses. The decline in expenses reflected actions taken in 2015 to reduce the segment’s cost structure. Approximately half of the year-over-year operating income improvement occurred in the fourth quarter due to higher sales volumes and selling prices and lower costs for food ingredient products.

Corporate Expenses

Corporate expenses increased $14.5 million to $81.1 million for 2016 from $66.6 million for 2015. The increase was primarily attributable to increased expenses for deferred compensation ($10.3 million), fringe benefits ($1.4 million) and salaries ($1.2 million) expenses and the previously discussed restructuring and impairment charges ($7.1 million). Increased incentive-based compensation expenses, driven by improved year-over-year Company financial results and increased Company common stock values, led to the higher fringe benefit expenses. Consulting expenses declined $5.2 million between years principally due to no external resources being used in 2016 for the Company’s DRIVE efficiency efforts.

Deferred compensation was $16.8 million of expense for 2016 compared to $6.5 million of expense for 2015. The higher expense primarily resulted from a $31.79 per share increase in the value of Company common stock over the twelve months ended December 31, 2016, compared to a $9.61 per share increase for the same period of 2015. The following table presents the year-end Company common stock market prices used in the computation of deferred compensation expense:

2015 Compared with 2014

Summary

Net income attributable to the Company for 2015 increased 33 percent to $76.0 million, or $3.32 per diluted share, from $57.1 million, or $2.49 per diluted share, for 2014. Adjusted net income for 2015 increased 38 percent to $79.4 million, or $3.46 per diluted share, from $57.7 million, or $2.52 per diluted share, for 2014 (See the “Reconciliations of Non-GAAP Adjusted Net Income and Dilutive Earnings per Share” section of this MD&A for reconciliations between non-GAAP adjusted net income and adjusted earnings per diluted share and reported net income attributable to the Company and reported earnings per diluted share). Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, profits and expenses.  A detailed discussion of segment operating performance for 2015 compared to 2014 follows the summary.

Consolidated net sales for 2015 declined $151.0 million, or eight percent, from consolidated net sales for 2014. A five percent increase in sales volume favorably affected the year-over-year net sales change by $96.6 million. All three segments contributed to the

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consolidated sales volume improvement. Sales volumes for Surfactants and Polymers grew five percent each, and sales volumes for the Specialty Products segment increased two percent. The positive effect of increased sales volume was more than offset by the unfavorable effects of foreign currency translation and lower selling prices, which accounted for $131.8 million and $115.8 million, respectively, of the year-over-year net sales decline. The unfavorable foreign currency translation effect reflected a stronger U.S. dollar against all currencies of countries where the Company has foreign operations. Selling prices were lower primarily related to certain pass-through contract requirements associated with lower raw materials costs. Overall margins improved slightly. The decline in raw material costs reflected the impacts of decreases in the cost of crude oil and of diminished demand from sluggish economies in China and other emerging market countries.

Operating income for 2015 increased $32.1 million, or 35 percent, over operating income reported for 2014, largely due to improved results for Surfactants and Polymers. Increased deferred compensation expense and the effects of foreign currency translation negatively affected the year-over-year operating income change by $18.4 million and $13.2 million, respectively. Included in the 2015 results was a $2.9 million gain on the divestiture of the Company’s specialty polyurethane systems product line (part of the Polymers segment). See Note 21 to the consolidated financial statements for additional information regarding the sale. In addition, operating income for 2014 was unfavorably affected by $4.0 million of restructuring and asset impairment charges and a $2.4 million bad debt charge necessitated when a major Polymer customer filed for bankruptcy protection.

Operating expenses for 2015 increased $33.5 million, or 22 percent, over operating expenses for 2014. Higher deferred compensation, incentive-based compensation and consulting expenses were the major contributors to the increase. The following summarizes the year-over-year changes in the individual income statement line items that comprise the Company’s operating expenses:  

The increase in consulting expenses was related to the Company’s ongoing initiative to improve efficiency across the Company’s global organization (the initiative is referred to as DRIVE within the Company). Higher incentive-based compensation costs accounted for the increase in fringe benefit expenses. With respect to the decline in environmental remediation expenses, 2014 included a $7.1 million charge to increase the remediation liability for the Company’s Maywood, New Jersey, site. The U.S. Environmental Protection Agency issued its record of decision for soil remediation at that site in September 2014, which led to the higher liability compared to 2015.

Net interest expense for 2015 increased $3.1 million, or 27 percent, over net interest expense for 2014. Higher average debt levels resulting from the July 2015 issuance of $100.0 million in unsecured debt was the principal contributor to the increase. See Note 6 to the consolidated financial statements for further information regarding the 2015 private placement debt.

The loss from the Company’s 50-percent equity joint venture (TIORCO) increased $2.0 million year over year largely due to the Company’s $2.4 million-share of exit costs recorded by TIORCO in the fourth quarter of 2015. The costs were precipitated by the joint venture partners’ agreement to dissolve the venture. See Note 24 to the consolidated financial statements for further information regarding the dissolution of TIORCO.

Other, net income for 2015 increased $0.3 million, or 23 percent, over other, net income for 2014. Foreign exchange activity resulted in a $0.7 million gain in 2015 compared to a $0.2 million loss in 2014. Investment income (including realized and unrealized

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gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets declined $0.6 million between years to $0.9 million in 2015 from $1.5 million in 2014.

The effective tax rate was 26.1 percent in 2015 compared to 24.4 percent in 2014.  The increase was attributable to certain favorable foreign tax benefits recorded in 2014 that were nonrecurring in 2015, an unrecognized tax benefit recorded in 2015 for prior tax years, and a less favorable geographical mix of income in 2015.  The 2015 tax rate was also negatively impacted by the lower tax benefit realized on nontaxable foreign interest income due to higher consolidated income.  These items were partially offset by higher U.S. tax credits recorded in 2015.  U.S. tax credits included the current year R&D credit, which was permanently extended on December 18, 2015, and the Agricultural Chemicals Security Credit related to the 2011 and 2012 tax returns.  See Note 9 to the consolidated financial statements for a reconciliation of the statutory U.S. federal income tax rate to the effective tax rate.

Segment Results

Surfactants

Surfactants 2015 net sales declined $90.8 million, or seven percent, from 2014 net sales. Sales volume increased five percent between years, which had a $67.0 million positive effect on the year-over-year net sales change. All regions contributed to the sales volume improvement. Foreign currency translation and decreased selling prices had negative effects of $97.9 million and $59.9 million, respectively, on the net sales change. Compared to 2014, the U.S. dollar was stronger against all currencies of the segment’s foreign operations. Selling prices were lower primarily related to certain pass-through contract requirements associated with lower raw materials costs. Overall margins improved slightly. A year-over-year comparison of net sales by region follows:

Net sales for North American operations declined seven percent between years. Sales volume increased three percent, which favorably affected the change in net sales by $26.2 million. The sales volume impact was more than offset by a nine percent decline in average selling prices and the unfavorable effects of foreign currency translation, which led to year-over-year net sales decreases of $72.8 million and $7.9 million, respectively. The improved sales volume resulted from increased sales of laundry and cleaning and personal care products, partially offset by decreased sales of functional surfactants and household, industrial and institutional (HI&I) products. The increase in laundry and cleaning sales volume was largely due to additional volumes resulting from the Company’s 2015 long-term supply agreement with a large customer. Personal care sales volumes increased principally due to higher demand from

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existing customers. The decline in sales volumes for functional surfactants was principally due to lower sales of products used in oil field and agricultural applications. Decreased sales volumes to EOR customers, driven by the decline in crude oil prices, led to the lower oil field sales volume. The decline in agricultural chemicals sales volume was largely due to customers’ carryover inventory from 2014 and to farmers’ efforts to reduce spraying costs due to lower crop prices.  HI&I sales volume was down mainly due to some lost business. The drop in selling prices was primarily attributable to decreases in raw material costs. The negative foreign currency translation effect reflected a stronger U.S. dollar relative to the Canadian dollar.

Net sales for European operations declined ten percent between years. Sales volume was up six percent, which favorably affected year-over-year net sales by $16.8 million. The sales volume impact was more than offset by the unfavorable effects of foreign currency translation and a two percent decline in selling prices, which accounted for $40.7 million and $4.9 million of the year-over-year net sales decline. An increase in sales of laundry and cleaning and agricultural chemical products, due to stronger demand from existing customers and new business, led to the improvement in sales volume. A stronger U.S. dollar against the European euro and British pound sterling led to the foreign currency translation result.

Net sales for Latin American operations declined seven percent between years due to a $48.0 million unfavorable effect of foreign currency translation. A 12 percent increase in sales volume and a 10 percent increase in selling prices offset the foreign currency translation impact by $18.8 million and $17.9 million, respectively. Brazil operations accounted for most of the increased Latin American sales volume, with stronger demand from existing customers and business gained as a result of the P&G Brazil acquisition finalized in the second quarter of 2015. Sales volume was up for Colombia operations but was partially offset by a decline in sales volume in Mexico. The foreign currency translation effect resulted from the year-over-year weakening of the Brazilian real as well as the Colombian and Mexican pesos against the U.S. dollar.

Net sales for Asian operations increased seven percent due to increased selling prices and a three percent increase in sales volume, which accounted for $3.4 million and $1.7 million, respectively, of the year-over-year increase in net sales. The increase in sales volume was primarily attributable to the Company’s Philippines operation, partially offset by lower sales volume for Singapore operations. The unfavorable effects of foreign currency translation offset the effects of higher sales volume and selling prices by $1.3 million.

Surfactants operating income for 2015 increased $43.3 million, or 71 percent, over operating income for 2014.  Gross profit increased $48.0 million largely due to strong improvement for North American operations. All other regions except Asia also reported increased profits. Foreign currency translation reduced the year-over-year gross profit and operating income increase by $16.7 million and $10.4 million, respectively. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations increased 48 percent year over year primarily due to improved operations, the three percent sales volume increase and better sales margins.  The improved sales margin resulted from lower raw material and transportation costs. Costs for all major surfactant raw materials declined year-over-year. In 2014, the Company incurred additional transportation expenses due to higher fuel costs and to carrier delays and suboptimal supply chain movements related to the effects of severe winter weather and to upgrades at the Anaheim, California, plant that resulted in shifting production to other Company locations. Other items contributing to the year-over-year increase in gross profit were the favorable 2015 resolution of a previously recorded customer claim and $1.8 million of accelerated depreciation recorded in 2014 related to the Company’s 2013 restructuring plan. The effect of foreign currency translation on the year-over-year change in gross profit was an unfavorable $1.7 million.

Gross profit for European operations increased 14 percent between years principally due to the six percent increase in sales volume and to sales margin improvement. The margin improvement reflected a more favorable mix of sales (growth in agricultural sales volume) and declines in raw material costs. Foreign currency translation had a $5.4 million unfavorable effect on the year-over-year change in gross profit.

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Gross profit for Latin American operations increased 28 percent largely due to a more profitable mix of sales, higher selling prices and the 12 percent increase in sales volume that more than offset an unfavorable foreign currency translation impact of $9.5 million.

Asia gross profit declined 14 percent largely due to a less profitable mix of sales reflecting lower sales out of Singapore.

Operating expenses for the Surfactants segment increased $4.7 million, or six percent, year over year. Excluding the effects of foreign currency translation, operating expenses increased $11.1 million. North American operations, European operations and Latin American operations accounted for $7.1 million, $1.9 million and $1.7 million of the increase, respectively. Higher fringe benefits, particularly incentive-based compensation, accounted for a large portion of the operating expense increases. Reimbursement from new consortium members of past European product registration fees ($1.3 million) favorably impacted current year expenses.

Polymers

Polymers net sales for 2015 declined $59.5 million, or 11 percent, from net sales for 2014. Sales volume was up five percent, which had a $25.2 million favorable effect on the year-over-year change in net sales.  All regions reported improved volumes. Lower selling prices and the effects of foreign currency translation negatively impacted the year-over-year net sales change by $53.4 million and $31.3 million, respectively. Selling prices were lower primarily related to certain pass-through contract requirements associated with lower raw materials costs. Overall margins improved slightly. The foreign currency translation effect reflected a stronger U.S. dollar against the currencies of the segment’s foreign operations. A year-over-year comparison of net sales by region follows:

Net sales for North American operations declined nine percent. Sales volume increased three percent, which had a $10.0 million favorable effect on the year-over-year net sales change. Selling prices declined 11 percent, which unfavorably affected year-over-year net sales by $39.9 million. Sales volume of polyols used in rigid foam applications increased one percent, while sales volume of specialty polyols declined five percent. A drop in sales for products used in lower-margin flexible foam applications led to the decline in specialty polyol sales volume. Phthalic anhydride sales volume increased 10 percent as the result of new business coupled with stronger demand from existing customers. The reduction in sales prices reflected decreases in the costs of major raw materials.

Net sales for European operations declined 14 percent between years. Sales volume increased eight percent, which positively affected the year-over-year net sales change by $14.3 million. Increased sales of rigid polyols used in insulation board and metal panels accounted for the volume improvement. The unfavorable effects of foreign currency translation and a five percent decline in selling prices negatively affected the year-over-year change in net sales by $29.7 million and $9.8 million, respectively. The foreign currency translation effect reflected a stronger U.S. dollar relative to the Polish zloty. The selling price decline was principally attributable to decreases in raw material costs.

Net sales for Asia and Other operations declined 16 percent due to lower selling prices and the unfavorable effects of foreign currency translation, which accounted for $3.3 million and $1.5 million of the year-over-year net sales decrease, respectively. Reduced raw material costs led to the lower selling prices. Sales volume increased two percent, which had a $0.5 million positive impact on the net sales change. The volume gain reflected increased sales volume in Asia.

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Polymer 2015 operating income increased $20.3 million, or 33 percent, over 2014 operating income. The $2.9 million gain on the sale of the Company’s specialty polyurethane systems product line, the effects of lower raw material costs, the five percent sales volume increase and reduced 2015 bad debt expense, partially offset by a $3.1 million unfavorable effect of foreign currency translation and by higher incentive-based compensation, led to the improvement in operating income. Bad debt expense for 2014 included a $2.4 million charge for a customer that filed for bankruptcy protection. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations increased 29 percent year over year due to improved sales margins, increased sales volume and operating efficiencies. The sales margin improvement reflected lower costs for all major raw materials, better inventory cost positions throughout the year and manufacturing fee increases aimed at partially offsetting the increasing cost of maintaining the polymer production facilities.  Less outsourcing during the year also contributed to the more favorable results. In addition to the foregoing, 2015 gross profit included the recognition of $1.0 million of previously deferred revenue due to the satisfaction of contractual requirements.

Gross profit for European operations increased one percent. The effects of the eight percent sales volume increase and lower raw material costs were largely offset by an unfavorable $4.4 million foreign currency translation impact.

The increase in gross profit for Asia and Other operations was primarily due to lower outsourcing and raw material costs and increased sales volume that more than offset the negative effects of foreign currency translation.

Operating expenses for the Polymers segment increased $1.9 million, or seven percent, year over year. Much of the increase was attributable to higher incentive-based pay. In addition, operating expenses in China, where a new plant was being constructed, increased $1.1 million year over year. The higher expenses were partially offset by a $2.2 million decrease in bad debt expense. Bad debt expense for 2014 included a $2.4 million bad debt charge for a customer that filed for bankruptcy. Foreign exchange translation had a favorable $1.6 million effect on the year-over-year operating expense change.

Specialty Products

Net sales for 2015 declined $0.8 million, or one percent, from net sales for 2014. The decline in net sales was due to a $2.7 million unfavorable foreign currency translation effect partially offset by higher average selling prices and a two percent increase in sales volume. All product lines reported slightly improved sales volumes year over year, principally due to a stronger fourth quarter. The increase in average selling prices reflected a more favorable mix of sales. Operating income decreased $6.1 million, or 58 percent, between years due to higher raw material costs and operating expenses, particularly for the food ingredient and nutritional supplement product lines. Fourth quarter 2015 operating income improved $1.0 million over fourth quarter 2014 operating income largely due to a 26 percent increase in sales volume and to a more profitable mix of sales.

Corporate Expenses

Corporate expenses increased $29.4 million to $66.6 million for 2015 from $37.2 million for 2014. The significant contributors to the year-over-year increase in corporate expenses included higher deferred compensation ($18.4 million), consulting ($5.9 million), fringe benefit ($5.4 million), talent acquisition/relocation ($1.5 million), expatriate ($0.8 million) and salaries ($0.7 million) expenses, along with the accumulation of a number of smaller expense increases. The increased expenses were partially offset by lower environmental remediation charges ($6.4 million).

Deferred compensation was $6.5 million of expense for 2015 compared to $11.9 million of income for 2014. The change between years was largely attributable to a $9.61 per share increase in the value of Company common stock in 2015 compared to a $25.55 per

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share decrease in 2014. The following table presents the year-end Company common stock market prices used in the computation of deferred compensation expense:

The increase in fringe benefit expenses resulted primarily from higher incentive-based compensation (both short- and long-term). In 2014, a limited amount of annual bonuses were paid because the Company failed to meet its financial performance targets. Consulting expenses increased largely due to the Company’s ongoing DRIVE initiative to improve efficiency across the Company’s global organization.  

With respect to the decline in environmental remediation expenses, 2014 included $7.1 million of charges to increase the best estimate of the remediation liability for the Company’s Maywood site. The U.S. Environmental Protection Agency issued its record of decision for soil remediation at that site in September 2014, which led to the higher 2014 liability.

Liquidity and Financial Condition

Overview

Historically, the Company's principal sources of liquidity have included cash flows from operating activities, available cash and cash equivalents and the use of available borrowing facilities. The Company's principal uses of cash have included funding operating activities, capital investments and acquisitions.

For the year ended December 31, 2016, operating activities were a source of $212.2 million versus a source of $183.3 million for the comparable period in 2015. For the current year, investing cash outflows totaled $130.5 million and financing activities were a use of $29.8 million. Cash increased by $49.6 million with exchange rates reducing cash by $2.3 million.

At December 31, 2016, the Company’s cash and cash equivalents totaled $225.7 million including $38.6 million in two separate money market funds, each of which was rated AAA by Standard and Poor’s and/or Aaa by Moody’s.  Cash in U.S. demand deposit accounts totaled $88.9 million and cash of the Company’s non-U.S. subsidiaries held outside the U.S. totaled $98.2 million as of December 31, 2016.

Operating Activity

For 2016, net income increased by $10.2 million and working capital was a source of $18.8 million versus a source of $24.8 million in 2015. The Company’s working capital investment is heavily influenced by the cost of crude oil and natural oils, from which many of its raw materials are derived. Fluctuations in raw material costs translate directly to inventory carrying costs and indirectly to customer selling prices and accounts receivable.

Working capital requirements were lower in 2016 compared to the same period in 2015 due to higher accounts payable and accrued liabilities, partially offset by increased inventory quantities and price.

For 2016, accounts receivable were a use of $17.2 million compared to a source of $4.2 million for the comparable period in 2015. Inventories were a use of $3.8 million in 2016 versus a source of $2.9 million in 2015. Accounts payable and accrued liabilities were a source of $38.3 million in 2016 compared to a source of $21.2 million in 2015.

The 2016 accounts receivable increase was principally driven by higher sales quantities. The inventory increase for the year was driven by higher raw material prices and higher inventory levels resulting from planned increases to support customer service levels. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital during 2017.

Investing Activity

Cash outflows for investing activities increased by $4.6 million year over year.

Cash outflows from investing activities for the current year included capital expenditures of $103.1 million compared to $119.3 million for the comparable period last year. All other investing activities consumed $27.4 million in 2016 versus $6.6 million in 2015. Other investing activities in 2016 included $23.5 million used to acquire a production facility (Tebras) and a commercial business (PBC) in Brazil.

For 2017, the Company estimates that capital expenditures will range from $100 million to $120 million including capacity expansions in the United States and Germany.

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Financing Activity

Cash flow from financing activities was a use of $29.8 million in 2016 compared to a source of $42.9 million in 2015. The year-over-year swing in financing activity was primarily the result of borrowing $100.0 million via an unsecured private placement loan in 2015. No such borrowings were made in 2016. The effect of the borrowing on the year-over-year change in financing activity was partially offset by lower debt repayments made in 2016 compared to 2015.

The Company purchases its common stock in the open market from time to time to fund its own benefit plans and also to mitigate the dilutive effect of new shares issued under its benefit plans. The Company may, from time to time, seek to retire or purchase additional amounts of the Company’s outstanding equity and/or debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to a Rule 10b5-1 plan. 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, 2016, the Company purchased 43,835 shares in the open market at a total cost of $2.4 million.  At December 31, 2016, there were 717,929 shares remaining under the current share repurchase authorization.

Debt and Credit Facilities

Consolidated balance sheet debt (including debt issuance costs) decreased by $14.4 million for the current year, from $331.4 million to $317.0 million primarily due to a decrease of domestic debt by $11.3 million. Net debt (which is defined as total debt minus cash – See the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) decreased by $63.9 million for the current year, from $155.2 million to $91.3 million.

As of December 31, 2016, the ratio of total debt to total debt plus shareholders’ equity was 33.3 percent compared to 37.3 percent at December 31, 2015. As of December 31, 2016, the ratio of net debt to net debt plus shareholders’ equity was 12.6 percent, compared to 21.8 percent at December 31, 2015. At December 31, 2016, the Company’s debt included $310.7 million of unsecured private placement loans with maturities extending from 2017 through 2027. These loans are the Company’s primary source of long-term debt financing and are supplemented by bank credit facilities to meet short and medium-term needs.

The Company has a committed $125.0 million multi-currency syndicated revolving credit agreement. The credit agreement allows the Company to make unsecured borrowings, as requested from time to time, for working capital and other corporate purposes. This unsecured facility is the Company’s primary source of short-term borrowings and is committed through July 10, 2019. As of December 31, 2016, the Company had outstanding letters of credit of $4.8 million under this agreement, and no borrowings, with $120.2 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, 2016, the Company’s foreign subsidiaries had outstanding debt of $7.4 million based on the applicable ending currency exchange rates at that date.

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. Testing for these agreements is based on the combined financial statements of the U.S. operations of the Company, Stepan Canada Inc., Stepan Quimica Ltda., Stepan Specialty Products, LLC, Stepan Specialty Products B.V. and Stepan Asia Pte. Ltd. (collectively, the “Restricted Group”). Under the most restrictive of these debt covenants:

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The Company believes it was in compliance with all of its loan agreements as of December 31, 2016. Based on current projections, the Company believes it will be in compliance with its loan agreements throughout 2017.

Contractual Obligations

At December 31, 2016, the Company’s contractual obligations, including estimated payments by period, were as follows: