☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Edens and Winnetka Road, Northfield,~~ 1101 Skokie Boulevard, Suite 500, Northbrook, Illinois ~~60093~~60062

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting ~~company”~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

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


(In thousands, except per share amounts)	Three Months Ended September 30						Nine Months Ended September 30						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2023			2022			2023			2022
Net Sales	$	487,814		$	445,030		$	1,451,184		$	1,345,530		$	579,975		$	751,633		$	1,231,411		$	1,426,909
Cost of Sales		412,212			361,635			1,193,518			1,075,705			513,578			620,019			1,091,454			1,186,076
Gross Profit		75,602			83,395			257,666			269,825			66,397			131,614			139,957			240,833
Operating Expenses:
Selling		13,740			13,990			40,484			42,252			11,109			15,552			24,176			30,829
Administrative		18,557			18,958			54,376			55,350			22,589			24,079			45,228			45,651
Research, development and technical services		12,699			14,268			40,416			42,306			14,105			16,690			29,243			33,163
Deferred compensation expense		(129	)		7,441			5,263			12,595
Deferred compensation (income) expense														743			(3,406	)		2,245			(10,907	)
		44,867			54,657			140,539			152,503			48,546			52,915			100,892			98,736

Business restructuring expenses (Note 14)		426			—			1,798			1,061

Goodwill impairment (Note 16)														—			978			—			978
Business restructuring expenses														42			81			199			133
Operating Income		30,309			28,738			115,329			116,261			17,809			77,640			38,866			140,986
Other Income (Expense):
Interest, net		(2,763	)		(2,824	)		(8,618	)		(9,855	)		(3,865	)		(2,727	)		(6,687	)		(5,033	)
Other, net (Note 13)		1,766			1,229			3,994			401
Other, net (Note 15)														2,370			(5,369	)		4,038			(7,019	)
		(997	)		(1,595	)		(4,624	)		(9,454	)		(1,495	)		(8,096	)		(2,649	)		(12,052	)

Income Before Provision for Income Taxes		29,312			27,143			110,705			106,807			16,314			69,544			36,217			128,934
Provision for Income Taxes^(a)		7,459			5,776			29,044			29,020			3,630			17,418			7,391			31,999
Net Income^(a)		21,853			21,367			81,661			77,787			12,684			52,126			28,826			96,935
Net (Income) Loss Attributable to Noncontrolling Interests (Note 2)		46			(5	)		33			(13	)
Net Income Attributable to Stepan Company^(a)	$	21,899		$	21,362		$	81,694		$	77,774

Net Income Per Common Share Attributable to Stepan Company (Note 9):
Basic^(a)	$	0.95		$	0.94		$	3.56		$	3.42
Diluted^(a)	$	0.94		$	0.92		$	3.50		$	3.38
Net Income Per Common Share (Note 10):
Basic													$	0.56		$	2.29		$	1.27		$	4.24
Diluted													$	0.55		$	2.26		$	1.25		$	4.19

Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 9):
Shares Used to Compute Net Income Per Common Share (Note 10):
Basic		22,971			22,819			22,941			22,771			22,768			22,792			22,763			22,842
Diluted^(a)		23,374			23,148			23,361			23,017

Dividends Declared Per Common Share	$	0.21		$	0.19		$	0.62		$	0.57
Diluted														22,945			23,055			22,970			23,115

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

(In thousands)

September 30, 2017

December 31, 2016

Assets

Current Assets:

Cash and cash equivalents

$
264,100

$
225,743

Receivables, net

314,125

263,408

Inventories (Note 6)

163,716

173,663

Other current assets

23,718

22,727

Total current assets

765,659

685,541

Property, Plant and Equipment:

Cost

1,588,996

1,513,478

Less:  accumulated depreciation

(997,122
)

(930,764
)
Property, plant and equipment, net

591,874

582,714

Goodwill, net

25,724

25,308

Other intangible assets, net

19,810

22,339

Long-term investments (Note 3)

26,335

24,055

Other non-current assets

13,429

13,933

Total assets

$
1,442,831

$
1,353,890

Liabilities and Equity

Current Liabilities:

Current maturities of long-term debt  (Note 12)

$
21,165

$
28,154

Accounts payable

172,384

158,316

Accrued liabilities

96,421

110,795

Total current liabilities

289,970

297,265

Deferred income taxes

19,729

12,497

Long-term debt, less current maturities  (Note 12)

283,261

288,859

Other non-current liabilities

113,600

119,353

Commitments and Contingencies  (Note 7)

Equity:

Common stock, $1 par value; authorized 60,000,000 shares;
   Issued  shares 26,063,641 in 2017 and 25,894,782  shares in 2016

26,064

25,895

Additional paid-in capital

168,548

158,042

Accumulated other comprehensive loss (Note 10)

(99,572
)

(127,465
)
Retained earnings

716,923

649,070

Less:  Common treasury stock, at cost, 3,542,333 shares in 2017
   and 3,470,084  shares in 2016

(77,030
)

(70,938
)
Total Stepan Company stockholders’ equity

734,933

634,604

Noncontrolling interests (Note 2)

1,338

1,312

Total equity

736,271

635,916

Total liabilities and equity

$
1,442,831

$
1,353,890

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


(In thousands)	Nine Months Ended September 30						Six Months Ended June 30,
	2017			2016			2023			2022
Cash Flows From Operating Activities
Net income	$	81,661		$	77,787		$	28,826		$	96,935
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		57,121			55,196			52,011			46,252
Deferred compensation		5,263			12,595			2,245			(10,907	)
Realized and unrealized gains on long-term investments		(3,677	)		(720	)
Realized and unrealized (gains) losses on long-term investments								(3,079	)		6,972
Stock-based compensation		6,248			8,055			2,158			6,955
Deferred income taxes		7,132			4,169			(3,196	)		2,241
Goodwill impairment (Note 16)								—			978
Other non-cash items		3,738			292			681			1,142
Changes in assets and liabilities:
Receivables, net		(37,713	)		(30,270	)		22,760			(111,051	)
Inventories		14,789			(12,485	)		70,069			(38,564	)
Other current assets		(631	)		(308	)		(9,543	)		(4,838	)
Accounts payable and accrued liabilities		(5,872	)		5,142			(116,527	)		43,326
Pension liabilities		(2,141	)		415			(998	)		(1,113	)
Environmental and legal liabilities		(392	)		498			(8,612	)		(379	)
Deferred revenues		(843	)		(846	)		(993	)		203
Net Cash Provided By Operating Activities ^(a)		124,683			119,520
Net Cash Provided By Operating Activities								35,802			38,152
Cash Flows From Investing Activities
Expenditures for property, plant and equipment		(57,902	)		(69,761	)		(159,900	)		(129,463	)
Business acquisition (Note 15)		(4,339	)		—
Other, net		(759	)		(2,788	)		1,669			3,156
Net Cash Used In Investing Activities		(63,000	)		(72,549	)		(158,231	)		(126,307	)
Cash Flows From Financing Activities
Revolving debt and bank overdrafts, net		(7,309	)		1,014
Revolving debt and bank overdrafts, net (Note 14)								109,448			101,771
Other debt borrowings (Note 14)								—			75,000
Other debt repayments		(5,714	)		(6,193	)		(14,286	)		(14,286	)
Dividends paid		(13,841	)		(12,732	)		(16,317	)		(14,985	)
Company stock repurchased		(4,500	)		(2,408	)		—			(16,976	)
Stock option exercises		3,127			3,290			1,916			185
Other, net		(1,649	)		(275	)		(2,805	)		(2,612	)
Net Cash Used In Financing Activities ^(a)		(29,886	)		(17,304	)
Net Cash Provided By Financing Activities								77,956			128,097
Effect of Exchange Rate Changes on Cash		6,560			1,190			4,652			(4,543	)
Net Increase in Cash and Cash Equivalents		38,357			30,857
Net Increase (Decrease) in Cash and Cash Equivalents								(39,821	)		35,399
Cash and Cash Equivalents at Beginning of Period		225,743			176,143			173,750			159,186
Cash and Cash Equivalents at End of Period	$	264,100		$	207,000		$	133,929		$	194,585
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds	$	22,377		$	18,577		$	19,777		$	19,353
Cash payments of interest	$	9,113		$	9,592		$	13,492		$	7,184

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

1.	~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein have been prepared by Stepan Company (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of ~~September~~June 30, ~~2017,~~2023, its results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022 and cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, have been included. These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016 (2016~~2022 (2022 Annual Report on Form 10-K).

2.	2. RECONCILIATIONS OF EQUITY

Below are reconciliations of total equity ~~Company equity and equity attributable to noncontrolling interests~~ for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:


(In thousands, except share and per share amounts)	Total			Common Stock		Additional Paid-in Capital		Common Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings
Balance, March 31, 2023	$	1,189,913		$	26,958	$	239,585	$	(184,194	)	$	(150,548	)	$	1,258,112

Issuance of 6,791 shares of common stock under incentive compensation plan		402			7		395		—			—			—

Stock-based and deferred compensation		2,077			13		2,235		(171	)		—			—

Net income		12,684			—		—		—			—			12,684

Other comprehensive income		18,178			—		—		—			18,178			—

Cash dividends paid:
Common stock ($0.365 per share)		(8,157	)		—		—		—			—			(8,157	)
Balance, June 30, 2023	$	1,215,097		$	26,978	$	242,215	$	(184,365	)	$	(132,370	)	$	1,262,639


(In thousands, except share and per share amounts)	Total			Common Stock		Additional Paid-in Capital		Common Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings
Balance, December 31, 2022	$	1,166,065		$	26,841	$	237,202	$	(180,596	)	$	(167,512	)	$	1,250,130

Issuance of 32,772 shares of common stock under incentive compensation plan		1,916			33		1,883		—			—			—

Stock-based and deferred compensation		(535	)		104		3,130		(3,769	)		—			—

Net income		28,826			—		—		—			—			28,826

Other comprehensive income		35,142			—		—		—			35,142			—

Cash dividends paid:
Common stock ($0.730 per share)		(16,317	)		—		—		—			—			(16,317	)
Balance, June 30, 2023	$	1,215,097		$	26,978	$	242,215	$	(184,365	)	$	(132,370	)	$	1,262,639


(In thousands, except share and per share amounts)	Total			Common Stock		Additional Paid-in Capital		Common Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings
Balance, March 31, 2022	$	1,116,738		$	26,814	$	224,500	$	(165,239	)	$	(140,183	)	$	1,170,846

Issuance of 1,133 shares of common stock under incentive compensation plan		71			1		70		—			—			—

Purchase of 69,734 shares of common stock		(7,041	)		—		—		(7,041	)		—			—

Stock-based and deferred compensation		4,908			10		4,940		(42	)		—			—

Net income		52,126			—		—		—			—			52,126

Other comprehensive income (loss)		(33,619	)		—		—		—			(33,619	)		—

Cash dividends paid:
Common stock ($0.335 per share)		(7,472	)		—		—		—			—			(7,472	)
Balance, June 30, 2022	$	1,125,711		$	26,825	$	229,510	$	(172,322	)	$	(173,802	)	$	1,215,500


(In thousands, except share and per share amounts)	Total			Common Stock		Additional Paid-in Capital		Common Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings
Balance, December 31, 2021	$	1,074,193		$	26,761	$	220,820	$	(153,702	)	$	(153,236	)	$	1,133,550

Issuance of 2,647 shares of common stock under incentive compensation plan		185			3		182		—			—			—

Purchase of 167,940 shares of common stock		(16,976	)		—		—		(16,976	)		—			—

Stock-based and deferred compensation		6,925			61		8,508		(1,644	)		—			—

Net income		96,935			—		—		—			—			96,935

Other comprehensive income		(20,566	)		—		—		—			(20,566	)		—

Cash dividends paid:
Common stock ($0.670 per share)		(14,985	)		—		—		—			—			(14,985	)
Balance, June 30, 2022	$	1,125,711		$	26,825	$	229,510	$	(172,322	)	$	(173,802	)	$	1,215,500

(In thousands)

Total Equity

Stepan
Company
Equity

Noncontrolling Interests’
Equity ⁽³⁾

Balance at January 1, 2017

$
635,916

$
634,604

$
1,312

Net income

81,661

81,694

(33
)
Dividends

(13,841
)

(13,841
)

—

Common stock purchases ⁽¹⁾

(6,255
)

(6,255
)

—

Stock option exercises

3,127

3,127

—

Defined benefit pension adjustments, net of tax

1,671

1,671

—

Translation adjustments

26,288

26,229

59

Derivative instrument activity, net of tax

(7
)

(7
)

—

Other ⁽²⁾

7,711

7,711

—

Balance at September 30, 2017

$
736,271

$
734,933

$
1,338

FAIR VALUE MEASUREMENTS

(In thousands)

Total Equity

Stepan
Company
Equity

Noncontrolling Interests’
Equity ⁽³⁾

Balance at January 1, 2016

$
558,384

$
556,984

$
1,400

Net income

77,787

77,774

13

Dividends

(12,732
)

(12,732
)

—

Common stock purchases ⁽¹⁾

(2,643
)

(2,643
)

—

Stock option exercises

3,290

3,290

—

Defined benefit pension adjustments, net of tax

1,626

1,626

—

Translation adjustments

7,685

7,722

(37
)
Derivative instrument activity, net of tax

(27
)

(27
)

—

Other ⁽²⁾⁽⁴⁾

6,362

6,362

—

Balance at September 30, 2016

$
639,732

$
638,356

$
1,376

~~(1)~~

Includes the value of shares of the Company’s common stock purchased in the open market and tendered by employees to settle statutory withholding taxes related to the receipt of performance awards, the receipt of deferred compensation distributions and the exercises of stock appreciation rights (SARs).

~~(2)~~

~~Primarily comprised of activity related to stock-based compensation and deferred compensation.~~

~~(3)~~

~~Reflects the noncontrolling interest in the Company’s China joint venture.~~

~~(4)~~

~~Amounts for the noted line items have been immaterially changed from the amounts originally reported as a result of the Company’s fourth quarter 2016 adoption of ASU No. 2016-9,~~ ~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.~~

3.	~~FAIR VALUE MEASUREMENTS~~

~~The following describe the financial instruments held by the Company at September 30, 2017, and December 31, 2016, and the methods and assumptions used to estimate the instruments’ fair values:~~

~~Cash and cash equivalents~~

~~Carrying value approximated fair value because of the short maturity of the instruments.~~

~~Derivative assets and liabilities~~

Derivative assets and liabilities ~~included~~include the foreign currency exchange and interest rate swap contracts ~~are~~ discussed in Note 4.4, Derivative Instruments, of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). Fair value and carrying value were the same because the contracts were recorded at fair value. The fair values of the foreign currency contracts were calculated as the difference between the applicable forward foreign exchange rates at the reporting date and the contracted foreign exchange rates multiplied by the contracted notional amounts. ~~See the table that follows the financial instrument descriptions for the reported fair values of derivative assets and liabilities.~~

~~Long-term investments~~

Long-term investments included the mutual fund assets the Company held to fund a portion of its deferred compensation liabilities and all of its non-qualified supplemental executive defined contribution obligations. Fair value and carrying value were the same because the mutual fund assets were recorded at fair value. Fair values for the mutual funds were calculated using the published market price per unit at the reporting date multiplied by the number of units held at the reporting date. See the table that follows the financial instrument descriptions for the reported fair value of long-term investments.

~~Debt obligations~~

The fair value of ~~debt with original maturities greater than one year comprised~~ the ~~combined~~interest rate swaps was calculated as the difference between the contracted swap rate and the floating interest rate multiplied by the present ~~values of scheduled principal and interest payments for each~~value of the various loans, individually discounted at rates equivalent to those which could be obtained by the Company for new debt issues with durations equal to the average life to maturity of each loan. The fair valuesnotional amount of the remaining Company debt obligations approximated their carrying values due to the short-term nature of the debt. The Company’s fair value measurements for debt fall in level 2 of the fair value hierarchy.contract.

At ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, the fair values ~~of debt~~ and ~~the~~ related carrying values of debt, including current maturities, were as follows (the fair value and carrying value amounts are presented without regard to unamortized debt issuance costs of ~~$1,025,000~~$660,000 and ~~$1,141,000~~$686,000 as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively):


(In thousands)	June 30, 2023		December 31, 2022
Fair value	$	640,890	$	541,029
Carrying value		683,289		587,826

(In thousands)

September 30,
2017

December 31,
2016

Fair value

$
309,587

$
316,364

Carrying value

305,451

318,154

The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, and the level within the fair value hierarchy in which the fair value measurements fall:


(In thousands)	June 30, 2023		Level 1		Level 2		Level 3
Mutual fund assets	$	25,029	$	25,029	$	—	$	—
Derivative assets:
Interest rate contracts		8,466		—		8,466		—
Foreign currency contracts		739		—		739		—
Total assets at fair value	$	34,234	$	25,029	$	9,205	$	—
Derivative liabilities:
Foreign currency contracts	$	398	$	—	$	398	$	—


(In thousands)	December 31, 2022		Level 1		Level 2		Level 3
Mutual fund assets	$	23,294	$	23,294	$	—	$	—
Derivative assets:
Interest rate contracts		8,357		—		8,357		—
Foreign currency contracts		513		—		513		—
Total assets at fair value	$	32,164	$	23,294	$	8,870	$	—
Derivative liabilities:
Foreign currency contracts	$	525	$	—	$	525	$	—

(In thousands)

September 30,
2017

Level 1

Level 2

Level 3

Mutual fund assets

$
26,335

$
26,335

$
—

$
—

Derivative assets:

Foreign currency contracts

161

—

161

—

Total assets at fair value

$
26,496

$
26,335

$
161

$
—

Derivative liabilities:

Foreign currency contracts

$
342

$
—

$
342

$
—

DERIVATIVE INSTRUMENTS

(In thousands)

December 31,
2016

Level 1

Level 2

Level 3

Mutual fund assets

$
24,055

$
24,055

$
—

$
—

Derivative assets:

Foreign currency contracts

453

—

453

—

Total assets at fair value

$
24,508

$
24,055

$
453

$
—

Derivative liabilities :

Foreign currency contracts

$
469

$
—

$
469

$
—

4.	~~DERIVATIVE INSTRUMENTS~~

~~The~~At June 30, 2023, and December 31, 2022, the Company ~~is exposed to certain risks relating to its ongoing business operations. The primary risk managed by the use of derivative instruments is foreign currency exchange risk. The Company holds~~had open forward foreign currency exchange contracts, ~~that are not designated as any type~~all with duration of ~~accounting hedge as defined by GAAP.~~ one to two months, to buy or sell foreign currencies with U.S. dollar equivalent amounts of $90,674,000 and $56,746,000, respectively.

The Company ~~uses these contracts~~is currently exposed to ~~manage its exposure to exchange~~volatility in short-term interest rates and has mitigated certain portions of that risk by using an interest rate fluctuations on certain Company subsidiary cash, accounts receivable, accounts payable and other obligation balances that are denominated in currencies other than the entities’ functional currencies.swap. The ~~forward foreign exchange contracts are~~interest rate swap is recognized on the balance sheet as either an asset or a liability measured at fair value. ~~Gains and losses arising from recording~~At June 30, 2023, the ~~foreign exchange contracts at~~Company held an interest rate swap contract with a notional value of $100,000,000 that was designated as a cash flow hedge. Period-to-period changes in the fair value ~~are reported in earnings as offsets to the losses and gains reported in earnings arising from the re-measurement~~ of the ~~asset and liability balances~~interest rate swap are initially recognized as gains or losses in other comprehensive income. As the interest rate swap contract is settled, the corresponding gain or loss is reclassified out of accumulated other comprehensive income (AOCI) into earnings. The maturity date of the ~~applicable functional currencies. At September 30, 2017, and December 31, 2016,~~current interest swap contract is March 10, 2027, which is closely aligned with the ~~Company had open forward foreign currency exchange contracts, all with durations~~June 24, 2027 maturity of ~~approximately one to three months, to buy or sell foreign currencies with U.S. dollar equivalent amounts of $39,220,000 and $33,372,000, respectively.~~the Company's revolving credit facility.

The fair values of the derivative instruments held by the Company on ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, are disclosed in Note 3.3, Fair Value Measurements, of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). Derivative instrument gains and losses for the ~~three-~~three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, were immaterial. For amounts reclassified out of ~~accumulated other comprehensive income (loss) (AOCI)~~AOCI into earnings for the ~~three-~~three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, see Note ~~10.~~

5.	~~STOCK-BASED COMPENSATION~~

On September 30, 2017, the Company had stock options outstanding under its 2006 Incentive Compensation Plan and stock options, stock awards and SARs outstanding under its 2011 Incentive Compensation Plan. SARs granted prior to 2015 are cash-settled, and SARs granted in 2015 and thereafter are settled in shares of Company common stock. Stock options and SARs granted prior to 2017 cliff vest after two years. Stock options and SARs granted in 2017 have a three-year graded vesting feature, with one-third11, Accumulated Other Comprehensive Income (Loss), of the ~~awards vesting each year. The Company has elected~~notes to the ~~straight-line method~~Company’s condensed consolidated financial statements (included in Item 1 of ~~expense attribution for the stock options and SARs with the graded vesting feature.~~this Form 10-Q).

STOCK-BASED COMPENSATION

Compensation expense recorded for all stock options, performance shares, restricted stock ~~awards~~units (RSUs) and ~~SARs~~stock appreciation rights (SARs) was as follows:


(In thousands)	(In thousands)							(In thousands)
Three Months Ended September 30				Nine Months Ended September 30
2017		2016		2017		2016
Three Months Ended June 30,								Three Months Ended June 30,			Six Months Ended June 30,
2023								2023	2022		2023		2022
$	1,697	$	3,607	$	6,248	$	8,055	1,158	$	3,998	$	2,157	$	6,955

The decrease in stock-based compensation expense ~~between~~for both the ~~three-month~~second quarter and first six months of 2023, compared to the same periods ~~ended September 30, 2017 and 2016,~~of 2022, was primarily attributable to ~~a decrease in cash-settled SARs compensation resulting from a decrease in~~Company management lowering its assessment of the ~~market price~~achievement of ~~Company common stock in~~

performance targets for certain grants and the ~~third quarter~~non-recurrence of ~~2017 versus an increase in the stock price~~accelerated vesting of ~~Company common stock in the third quarter of 2016. The above decrease in cash-settled SARs compensation was also the primary reason~~certain equity grants for the ~~decline in stock-based compensation expense between the nine-month periods ended September 30, 2017 and 2016.~~Company's former Chief Executive Officer, who retired on April 25, 2022.

Unrecognized compensation costs for stock options, ~~stock awards~~performance shares, RSUs and SARs were as follows:


(In thousands)	June 30, 2023		December 31, 2022
Stock options	$	449	$	692
Performance shares and RSUs		5,596		6,144
SARs		5,909		5,211

(In thousands)

September 30,
2017

December 31,
2016

Stock options

$
1,533

$
895

Stock awards

4,632

5,514

SARs

3,178

1,859

The change in unrecognized compensation costs reflects the new 2023 grants of stock options, performance shares, RSUs and SARs and Company management lowering its assessment of the achievement of performance targets for certain grants.

The new 2023 grants were as follows:


	Shares
Stock options		2,777
Performance shares (at target) and RSUs		86,118
SARs		77,006

~~The~~The unrecognized compensation costs at ~~September~~June 30, ~~2017,~~2023, are expected to be recognized over weighted-average periods of ~~2.0 years, 1.6 years and 2.0~~1.1 years for stock options, ~~stock awards~~1.9 years for performance shares and ~~SARs, respectively.~~RSUs and 1.9 years for SARs.

~~Grants of the following awards were made during the nine months ended September 30, 2017:~~

	~~Shares~~
~~Stock options~~		~~71,434~~
~~Stock awards (at target)~~		~~44,599~~
~~SARs~~		~~148,723~~

INVENTORIES

6.	~~INVENTORIES~~

The composition of inventories at ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, was as follows:


(In thousands)	June 30, 2023		December 31, 2022
Finished goods	$	219,494	$	250,373
Raw materials		120,467		152,158
Total inventories	$	339,961	$	402,531

(In thousands)

September 30, 2017

December 31, 2016

Finished goods

$
106,881

$
127,597

Raw materials

56,835

46,066

Total inventories

$
163,716

$
173,663

LEASES

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

~~Inventories are priced primarily using~~


(In thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Lease Cost
Operating lease cost	$	4,458	$	3,943	$	8,807	$	8,051
Short-term lease cost		2,739		1,362		5,518		2,700
Variable lease cost		603		223		1,160		425
Total lease cost	$	7,800	$	5,528	$	15,485	$	11,176
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases	$	4,497	$	3,930	$	8,829	$	8,005
Right-of-use assets obtained in exchange for new operating lease liabilities		875		743		7,420		3,562

The following table outlines the ~~last-in, first-out inventory valuation method. If~~maturities of lease liabilities as of June 30, 2023.


(In thousands)
Undiscounted Cash Flows:
2023 (excluding the six months ended June 30, 2023)	$	8,477
2024		13,079
2025		9,077
2026		6,773
2027		6,266
Subsequent to 2027		38,348
Total Undiscounted Cash Flows	$	82,020
Less: Imputed interest		(12,719	)
Present value	$	69,301
Current operating lease liabilities (1)		13,378
Non-current operating lease liabilities		55,923
Total lease liabilities	$	69,301

(1)

This item is included in the first-in, first-out inventory valuation method had been used for all inventories, total inventory balances would have been approximately $33,606,000 and $25,872,000 higher than reported at September 30, 2017, and December 31, 2016, respectively.

Accrued liabilities line on the Company’s Condensed Consolidated Balance Sheet.


7.Weighted-average remaining lease term-operating leases	~~CONTINGENCIES~~	9 Years
Weighted-average discount rate-operating leases			3.5	%

As of June 30, 2023, the Company had equipment and railcars leases, valued at approximately $6,127,000, that had not commenced. These leases will commence during the third and the fourth quarters of 2023 with lease terms ranging 1 year to 7 years.

CONTINGENCIES

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

In determining the appropriate level of environmental reserves, the Company considers several factors such as information obtained from investigatory studies; changes in the scope of remediation; the interpretation, application and enforcement of laws and regulations; changes in the costs of remediation programs; the development of alternative cleanup technologies and methods; and the relative level of the Company’s involvement at various sites for which the Company is allegedly associated. The level of annual expenditures for remedial, monitoring and investigatory activities will change in the future as major components of planned remediation activities are completed and the scope, timing and costs of existing activities are changed. As of ~~September~~June 30, ~~2017,~~2023, the Company estimated a range of possible environmental losses and legal losses of ~~$25.0 million~~$24,020,000 to ~~$46.1 million. At September~~$48,048,000. Within the range of possible environmental losses and legal losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range. These accruals totaled $24,020,000 at June 30, ~~2017,~~2023 and $32,628,000 at December 31, ~~2016,~~2022. Although the ~~Company’s accrued liability for such losses, which represented the Company’s best estimate within the~~Company believes that its estimated range of possible environmental losses and legal losses ~~was $25.0 million~~ and ~~$25.8 million, respectively. During~~its reserves are adequate for contingencies, it is possible due to the ~~nine-month period ended September 30, 2017, cash outlays~~uncertainties noted above, that additional reserves could be required in the future. Cash expenditures related to ~~legal~~environmental remediation and ~~environmental~~certain other legal matters approximated ~~$1.4 million compared to $1.0 million~~$8,882,000 and $1,080,000 for the ~~same period in 2016.~~six months ended June 30, 2023 and 2022, respectively.

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

Following are summaries of the ~~material~~Company’s major contingencies at ~~September~~June 30, ~~2017:~~2023:

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~~(collectively, the 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(i) a September 21, 1987 Administrative Order on Consent entered into between ~~United States Environmental Protection Agency (USEPA)~~the USEPA and the Company for property formerly owned by the Company at the Maywood site and (ii) the issuance of an order on November 12, 2004 by the USEPA to the Company for property currently owned by the Company at the

Maywood site, the Company has completed various Remedial Investigation Feasibility Studies (RI/FS), and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated ~~soil.~~soil at the Maywood site, which requires the Company to perform remedial cleanup of the soil and buried waste. The USEPA has not yet issued a ROD for chemically-contaminated groundwater ~~for~~at the Maywood site. Based on the most current information available, the Company believes its recorded liability ~~represents its best estimate~~is reasonable having considered the range of ~~the cost~~estimated costs of remediation for the Maywood site. The ~~best~~ estimate of the cost of remediation for the Maywood site could change again as the Company continues to hold discussions with the USEPA, as the design of the remedial action ~~progresses~~is finalized, if a groundwater ROD is issued or if other PRPs are identified. The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil. ~~Based on the Company’s review and analysis of this order, no changes to the Company’s 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 U.S. Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in ~~1985 under which~~1985. Under the Cooperative Agreement, the United States ~~will take title to and responsibility~~is responsible for the removal of radioactive waste ~~removal~~ at the Maywood site, including past and future remediation costs ~~incurred by~~at the ~~United States.~~site. As such, the Company recorded no liability related to this settlement agreement.

D’Imperio Property Site

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances generated by the Company at several sites in New ~~Jersey.~~Jersey, including the D’Imperio site. The Company was named as a PRP in aan October 2, 1998, lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio ~~Property Site located in New Jersey.~~Site. In ~~2016,~~2022, the PRPs were provided with updated remediation cost estimates by the PRP group technical consultant and project manager, which ~~were~~the Company considered in ~~the Company’s~~its determination of its range of estimated possible losses and liability balance. The changes in range of possible losses and liability balance were immaterial. Remediation work ~~is continuing~~continues at ~~this~~the D’Imperio site. Based on current information, the Company believes that its recorded liability ~~represents its best estimate~~is reasonable having considered the range of ~~the~~estimated cost of remediation for the D’Imperio site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the Company’s current ~~estimates.~~recorded liability.

Wilmington Site

The Company is currently contractually obligated to contribute to the environmental response costs associated with the Company’s formerly-owned site ~~at 51 Eames Street,~~in Wilmington, ~~Massachusetts.~~Massachusetts (the Wilmington site). Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980. Under the Company’s October 1, 1993, agreement with the current owner of the Wilmington site, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. ~~To date, the~~The Company has paid the current owner ~~$2.5 million~~$3,530,000 for the Company’s portion of environmental response ~~costs.~~costs at the Wilmington site through June 30, 2023. The Company has recorded a liability for its portion of the estimated remediation costs for the ~~site. The Company believes that based on current information its recorded liability represents the best estimate of its share of the remediation costs at this~~ site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the

current recorded liability. On July 29, 2022, the Company and other potentially responsible parties were notified of a possible joint claim by federal and state trustees for alleged natural resource damages related to the Wilmington site. The alleged damages may result in a range of possible penalties and the Company believes it is probable that it will have exposure for this claim; however, at this stage, the Company is unable to predict the ultimate outcome of this claim, the allocation of costs among the potentially responsible parties or what impact, if any, the outcome might have on the Company’s results of operations or cash flows.

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

Other U.S. Sites

Through the regular environmental monitoring of its plant production sites, the Company discovered levels of chemical contamination that were above thresholds allowed by law at ~~two of~~ its ~~U.S.~~Elwood, Illinois (Millsdale) and Fieldsboro, New Jersey plants. The Company voluntarily reported its results to the applicable state environmental agencies. As a result, the Company is required to perform self-remediation of the affected areas. ~~In the fourth quarter of 2016, the Company established a liability for the estimated cost of remediating the sites.~~ Based on current information, the Company believes that its recorded liability ~~represents its best~~for the remediation of the affected areas is appropriate based on an estimate of ~~the cost of remediation for these sites. The ultimate cost of the remediation at this site~~expected costs. However, actual costs could differ materially from the ~~Company’s~~ current recorded liability.

8.	~~POSTRETIREMENT BENEFIT PLANS~~

POSTRETIREMENT BENEFIT PLANS

Defined Benefit Pension Plans

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

Components of Net Periodic Benefit Cost


	UNITED STATES												UNITED STATES
(In thousands)	Three Months Ended September 30						Nine Months Ended September 30						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2023			2022			2023			2022
Interest cost	$	1,665		$	1,741		$	4,988		$	5,200		$	1,731		$	1,235		$	3,462		$	2,469
Expected return on plan assets		(2,323	)		(2,251	)		(6,966	)		(6,759	)		(2,133	)		(2,201	)		(4,266	)		(4,401	)
Amortization of net actuarial loss		738			776			2,314			2,540			(6	)		577			(12	)		1,154
Net periodic benefit cost	$	80		$	266		$	336		$	981		$	(408	)	$	(389	)	$	(816	)	$	(778	)


	UNITED KINGDOM
(In thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Interest cost	$	169		$	95		$	333		$	196
Expected return on plan assets		(175	)		(100	)		(345	)		(207	)
Amortization of net actuarial loss		84			2			165			5
Net periodic benefit cost	$	78		$	(3	)	$	153		$	(6	)

UNITED KINGDOM

(In thousands)

Three Months Ended
September 30

Nine Months Ended
September 30

2017

2016

2017

2016

Interest cost

$
151

$
177

$
441

$
564

Expected return on plan assets

(203
)

(218
)

(593
)

(694
)
Amortization of net actuarial loss

97

18

284

58

Net periodic benefit (income) cost

$
45

$
(23
)

$
132

$
(72
)

Employer Contributions

U.S. Plans

~~The~~As a result of pension funding relief provisions included in the Highway and Transportation Funding Act of 2014, the Company ~~made a $2,100,000 voluntary contribution~~is not required to make contributions to its funded U.S. qualified defined benefit ~~plans in the three- and nine-month periods ended September 30, 2017. No other contributions are expected to be made to the funded plans in 2017.~~plans. Approximately ~~$312,000~~$256,000 is expected to be paid ~~related~~ to the unfunded non-qualified plans in ~~2017.~~2023. Of such amount, ~~$256,000~~$162,000 had been paid to the non-qualified plans as of ~~September~~June 30, ~~2017.~~2023.

U.K. Plan

The Company’s U.K. subsidiary expects to contribute approximately ~~$360,000~~$451,000 to its defined benefit pension plan in ~~2017.~~2023. Of such amount, ~~$281,000~~$230,000 had been contributed to the plan as of ~~September~~June 30, ~~2017.~~2023.

Defined Contribution Plans

The Company sponsors retirement ~~savings~~ defined contribution plans that cover eligible U.S. and U.K. employees. The ~~Company also sponsors a qualified profit sharing plan for its~~Company’s U.S. ~~employees. The~~ retirement ~~savings and profit sharing defined contribution~~ plans include two qualified plans, one of which is a ~~qualified~~401(k) plan and aone of which is an employee stock ownership plan (profit sharing plan), and one non-qualified supplemental executive plan. In the six months ended June 30, 2023 and 2022, the Company made contributions into the qualified retirement plans for U.S. employees and for certain non-U.S. employees. Profit sharing contributions were determined using a formula applied to Company earnings. In all Company locations, approximately 85 percent of union and non-union employees are eligible for either the Company's sponsored or statutory profit sharing contributions and 100 percent of U.S. based union and non-union employees are eligible for the Company's sponsored profit sharing contributions. In 2022 and 2023, profit sharing contributions for U.S. employees were made to the employee stock ownership plan. Profit sharing contributions are allocated to participant accounts based on participant base earnings.

Defined contribution plan expenses for the Company’s ~~retirement savings and profit sharing~~qualified contribution plans were as follows:

(In thousands)

Three Months Ended
September 30

Nine Months Ended
September 30

2017

2016

2017

2016

Retirement savings plans

$
1,275

$
1,304

$
3,758

$
3,849

Profit sharing plan

1,308

1,595

5,259

5,098

Total defined contribution expense

$
2,583

$
2,899

$
9,017

$
8,947


(In thousands)	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Retirement savings contributions	$	2,170	$	1,947	$	4,218	$	4,145
Profit sharing contributions		163		1,959		870		3,425
Total defined contribution plan expenses	$	2,333	$	3,906	$	5,088	$	7,570

The Company ~~funds~~has a rabbi trust to fund the obligations of its non-qualified supplemental executive defined contribution plans (supplemental plans) ~~through a rabbi trust.~~. The trust ~~comprises~~is comprised of various mutual fund investments selected by the participants of the supplemental plans. In accordance with the accounting guidance for rabbi trust arrangements, the assets of the trust and the obligations of the supplemental plans are reported on the Company’s condensed consolidated balance sheets. The Company elected the fair value option for the mutual fund investment assets so that offsetting changes in the mutual fund values and defined contribution

plan obligations would be recorded in earnings in the same period. Therefore, the mutual funds are reported at fair value with any subsequent changes in fair value recorded in the condensed consolidated statements of income. The liabilities related to the supplemental plans increase (i.e., supplemental plan expense is recognized) when the value of the trust assets ~~appreciates~~appreciate and decrease when the value of the trust assets ~~declines~~decline (i.e., supplemental plan income is recognized). At ~~September~~June 30, ~~2017,~~2023, the balance of the trust assets was ~~$1,502,000,~~$527,000, which equaled the balance of the supplemental plan liabilities. See the long-term investments section in Note 3, Fair Value Measurements, of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for further information regarding the Company’s mutual fund assets.

9.	10. EARNINGS PER SHARE

Below are the computations of basic and diluted earnings per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:


(In thousands, except per share amounts)	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Computation of Basic Earnings per Share
Net income attributable to Stepan Company	$	12,684	$	52,126	$	28,826	$	96,935
Weighted-average number of common shares outstanding		22,768		22,792		22,763		22,842
Basic earnings per share	$	0.56	$	2.29	$	1.27	$	4.24

Computation of Diluted Earnings per Share
Net income attributable to Stepan Company	$	12,684	$	52,126	$	28,826	$	96,935
Weighted-average number of shares outstanding		22,768		22,792		22,763		22,842
Add weighted-average net shares from assumed exercise of options (under treasury stock method)(1)		71		102		85		106
Add weighted-average net shares related to unvested stock awards (under treasury stock method)		3		—		2		—
Add weighted-average net shares from assumed exercise of SARs (under treasury stock method)(1)		73		106		90		113
Add weighted-average contingently issuable net shares related to performance stock awards (under treasury stock method)		30		55		30		54
Weighted-average shares applicable to diluted earnings		22,945		23,055		22,970		23,115
Diluted earnings per share	$	0.55	$	2.26	$	1.25	$	4.19

(1)

644,962 and 524,337 options/SARs to acquire shares of the Company's common stock were excluded from the computation of dilutive earnings per share for the three and six months ended June 30, 2023, respectively. The options/SARs' exercise prices were greater than the average market price for the Company's common stock and inclusion of the instruments would have had an antidilutive effect on the computations of the earnings per share. 337,056 and 350,703 options/SARs to acquire shares of Company common stock were excluded from the computation of dilutive earnings per share for the three and six months ended June 30, 2022, respectively.

(In thousands, except per share amounts)

Three Months Ended
September 30

Nine Months Ended
September 30

2017

2016

2017

2016

Computation of Basic Earnings per Share

Net income attributable to Stepan Company

$
21,899

$
21,362

$
81,694

$
77,774

Weighted-average number of common shares outstanding

22,971

22,819

22,941

22,771

Basic earnings per share

$
0.95

$
0.94

$
3.56

$
3.42

Computation of Diluted Earnings per Share

Net income attributable to Stepan Company

$
21,899

$
21,362

$
81,694

$
77,774

Weighted-average number of shares outstanding

22,971

22,819

22,941

22,771

Add weighted-average net shares issuable from assumed
    exercise of options (under treasury stock method)⁽¹⁾

147

162

167

151

Add weighted-average net shares related to unvested
   stock awards (under treasury stock method)

8

7

8

6

Add weighted-average net shares from assumed exercise
   of SARs (under treasury stock method) ⁽¹⁾

140

93

142

45

Add weighted-average contingently issuable net shares
    related to performance stock awards (under treasury
    stock method)

108

67

103

44

Weighted-average shares applicable to diluted earnings

23,374

23,148

23,361

23,017

Diluted earnings per share

$
0.94

$
0.92

$
3.50

$
3.38

11.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

⁽¹⁾

Options/SARs to acquire 24,840 shares of Company common stock were excluded from the computations of diluted earnings per share for the nine months ended September 30, 2017. Options/SARs to acquire 58,287 shares of Company common stock were excluded from the computations of diluted earnings per share for the nine months ended September 30, 2016. Inclusion of the instruments would have had antidilutive effects on the computations of earnings per share.

~~10.~~

~~ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)~~

Below ~~are~~is the ~~changes~~change in the Company’s ~~AOCI balances~~accumulated other comprehensive income (loss) (AOCI) balance by component (net of income taxes) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2023 and ~~2017:~~2022:


(In thousands)	Foreign Currency Translation Adjustments			Defined Benefit Pension Plan Adjustments			Cash Flow Hedge Adjustments			Total
Balance at March 31, 2022	$	(125,439	)	$	(17,586	)	$	2,842		$	(140,183	)
Other comprehensive income before reclassifications		(36,096	)		—			2,045			(34,051	)
Amounts reclassified from AOCI		—			434			(2	)		432
Net current-period other comprehensive income		(36,096	)		434			2,043			(33,619	)
Balance at June 30, 2022	$	(161,535	)	$	(17,152	)	$	4,885		$	(173,802	)

Balance at March 31, 2023	$	(138,412	)	$	(19,021	)	$	6,885		$	(150,548	)
Other comprehensive income before reclassifications		16,497			—			1,623			18,120
Amounts reclassified from AOCI		—			60			(2	)		58
Net current-period other comprehensive income		16,497			60			1,621			18,178
Balance at June 30, 2023	$	(121,915	)	$	(18,961	)	$	8,506		$	(132,370	)

Balance at December 31, 2021	$	(135,268	)	$	(18,022	)	$	54		$	(153,236	)
Other comprehensive income before reclassifications		(26,267	)		—			4,836			(21,431	)
Amounts reclassified from AOCI		—			870			(5	)		865
Net current-period other comprehensive income		(26,267	)		870			4,831			(20,566	)
Balance at June 30, 2022	$	(161,535	)	$	(17,152	)	$	4,885		$	(173,802	)

Balance at December 31, 2022	$	(156,835	)	$	(19,079	)	$	8,402		$	(167,512	)
Other comprehensive income before reclassifications		34,920			—			109			35,029
Amounts reclassified from AOCI		—			118			(5	)		113
Net current-period other comprehensive income		34,920			118			104			35,142
Balance at June 30, 2023	$	(121,915	)	$	(18,961	)	$	8,506		$	(132,370	)

(In thousands)

Foreign
Currency
Translation
Adjustments

Defined
Benefit
Pension Plan
Adjustments

Cash Flow
Hedge
Adjustments

Total

Balance at June 30, 2016

$
(78,406
)

$
(35,696
)

$
47

$
(114,055
)
Other comprehensive income before reclassifications

(2,209
)

—

(2
)

(2,211
)
Amounts reclassified from AOCI

—

497

2

499

Net current-period other comprehensive income

(2,209
)

497

—

(1,712
)
Balance at September 30, 2016

$
(80,615
)

$
(35,199
)

$
47

$
(115,767
)

Balance at June 30, 2017

$
(80,357
)

$
(29,658
)

$
95

$
(109,920
)
Other comprehensive income before reclassifications

9,811

—

—

9,811

Amounts reclassified from AOCI

—

539

(2
)

537

Net current-period other comprehensive income

9,811

539

(2
)

10,348

Balance at September 30, 2017

$
(70,546
)

$
(29,119
)

$
93

$
(99,572
)

Balance at December 31, 2015

$
(88,337
)

$
(36,825
)

$
74

$
(125,088
)
Other comprehensive income before reclassifications

7,722

—

(34
)

$
7,688

Amounts reclassified from AOCI

—

1,626

7

$
1,633

Net current-period other comprehensive income

7,722

1,626

(27
)

9,321

Balance at September 30, 2016

$
(80,615
)

$
(35,199
)

$
47

$
(115,767
)

Balance at December 31, 2016

$
(96,775
)

$
(30,790
)

$
100

$
(127,465
)
Other comprehensive income before reclassifications

26,229

—

—

26,229

Amounts reclassified from AOCI

—

1,671

(7
)

1,664

Net current-period other comprehensive income

26,229

1,671

(7
)

27,893

Balance at September 30, 2017

$
(70,546
)

$
(29,119
)

$
93

$
(99,572
)

Information regarding the reclassifications out of AOCI for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, is displayed below:

~~(a)~~

~~Amounts in parentheses denote expense to statement of income.~~

12.

SEGMENT REPORTING

~~(b)~~

~~This component of accumulated other comprehensive income is included in the computation of net periodic benefit cost (see Note 8 for additional details).~~

~~11.~~

~~SEGMENT REPORTING~~

The Company has three reportable segments: Surfactants, Polymers and Specialty Products. Net sales by segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, were as follows:


(In thousands)	Three Months Ended September 30				Nine Months Ended September 30				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2023		2022		2023		2022
Segment Net Sales
Surfactants	$	321,444	$	290,467	$	973,381	$	899,014	$	391,686	$	485,084	$	859,514	$	953,350
Polymers		147,754		134,144		415,551		382,540		164,515		238,885		325,642		425,964
Specialty Products		18,616		20,419		62,252		63,976		23,774		27,664		46,255		47,595
Total	$	487,814	$	445,030	$	1,451,184	$	1,345,530	$	579,975	$	751,633	$	1,231,411	$	1,426,909

(In thousands)

Three Months Ended
September 30

Nine Months Ended
September 30

2017

2016

2017

2016

Segment Operating Income

Surfactants

$
22,466

$
20,737

$
91,733

$
85,214

Polymers

21,116

27,087

63,772

80,278

Specialty Products

988

2,328

7,702

6,449

Segment operating income

44,570

50,152

163,207

171,941

Business restructuring

(426
)

—

(1,798
)

(1,061
)
Unallocated corporate expenses ⁽¹⁾

(13,835
)

(21,414
)

(46,080
)

(54,619
)
Consolidated operating income

30,309

28,738

115,329

116,261

Interest expense, net

(2,763
)

(2,824
)

(8,618
)

(9,855
)
Other, net

1,766

1,229

3,994

401

Consolidated income before income taxes

$
29,312

$
27,143

$
110,705

$
106,807

13.

REVENUE FROM CONTRACTS WITH CUSTOMERS

As of June 30, 2023, the Company had $647,000 of contract liabilities and no contract assets. A contract liability would typically arise when an advance or deposit is received from a customer before the Company recognizes revenue. In practice, this is rare as it would require a customer to make a payment prior to a performance obligation being satisfied. When such situations do arise, the Company maintains a deferred revenue liability until the time a performance obligation has been satisfied. The Company recognized $739,000 of revenue in the first six months of 2023 from pre-existing contract liabilities at December 31, 2022. During 2020, the Company recorded $10,709,000 of long-term deferred revenue associated with a payment received to defray the cost of capital expenditures necessary to service a customer’s future product needs. At June 30, 2023, $7,755,000 was classified as long-term and $2,216,000 was classified as short-term. This deferred revenue is being recognized over the period of the contract and $738,000 of revenue has been recognized from this contract as of June 30, 2023.

~~(1)~~

Unallocated corporate expenses are primarily comprised of corporate administrative expenses (e.g., corporate finance, legal, human resources, information systems, deferred compensation and environmental remediation) that are not included in segment operating income and not used to evaluate segment performance.

The tables below provide a geographic disaggregation of net sales for the three and six months ended June 30, 2023 and 2022. The Company’s business segmentation by geographic region most effectively captures the nature and economic characteristics of the Company’s revenue streams impacted by economic factors.


(In thousands)	For the Three Months Ended June 30, 2023
Geographic Market	Surfactants		Polymers		Specialty		Total
North America	$	231,477	$	88,149	$	20,498	$	340,124
Europe		68,742		65,896		3,174		137,812
Latin America		78,217		273		102		78,592
Asia		13,250		10,197		—		23,447
Total	$	391,686	$	164,515	$	23,774	$	579,975


(In thousands)	For the Three Months Ended June 30, 2022
Geographic Market	Surfactants		Polymers		Specialty		Total
North America	$	278,310	$	133,455	$	23,004	$	434,769
Europe		92,591		94,424		4,121		191,136
Latin America		97,987		1,149		539		99,675
Asia		16,196		9,857		—		26,053
Total	$	485,084	$	238,885	$	27,664	$	751,633


(In thousands)	For the Six Months Ended June 30, 2023
Geographic Market	Surfactants		Polymers		Specialty		Total
North America	$	508,617	$	169,318	$	38,097	$	716,032
Europe		159,861		134,953		8,046		302,860
Latin America		159,315		1,058		112		160,485
Asia		31,721		20,313		—		52,034
Total	$	859,514	$	325,642	$	46,255	$	1,231,411


(In thousands)	For the Six Months Ended June 30, 2022
Geographic Market	Surfactants		Polymers		Specialty		Total
North America	$	551,538	$	228,311	$	39,680	$	819,529
Europe		183,608		175,207		7,253		366,068
Latin America		183,421		2,369		662		186,452
Asia		34,783		20,077		—		54,860
Total	$	953,350	$	425,964	$	47,595	$	1,426,909

At ~~September~~June 30, ~~2017,~~2023 and December 31, ~~2016,~~2022, debt was comprised of the following:

(In thousands)

Maturity
Dates

September 30,
2017

December 31,
2016

Unsecured private placement notes

3.95% (net of unamortized debt issuance cost of
    $354 and $382 for 2017 and 2016, respectively)

2021-2027

$
99,646

$
99,618

3.86% (net of unamortized debt issuance cost of
    $355 and $390 for 2017 and 2016, respectively)

2019-2025

99,645

99,610

4.86% (net of unamortized debt issuance cost of
    $200 and $225 for 2017 and 2016, respectively)

2017-2023

64,800

64,775

5.88% (net of unamortized debt issuance cost of
    $100 and $116 for 2017 and 2016, respectively)

2017-2022

28,471

34,170

5.69% (net of unamortized debt issuance cost of
    $16 and $28 for 2017 and 2016, respectively)

2017-2018

11,412

11,400

Debt of foreign subsidiaries

Unsecured bank term loan, foreign currency

2017

452

432

Secured bank debt, foreign currency

2017

—

7,008

Total debt

$
304,426

$
317,013

Less current maturities

21,165

28,154

Long-term debt

$
283,261

$
288,859


(In thousands)	Maturity Dates	June 30, 2023		December 31, 2022
Senior unsecured notes
3.95% (net of unamortized debt issuance cost of $164 and $186 for 2023 and 2022, respectively)	2023-2027	$	71,265	$	71,243
3.86% (net of unamortized debt issuance cost of $98 and $125 for 2023 and 2022, respectively)	2023-2025		28,473		42,732
4.86% (net of unamortized debt issuance cost of $0 and $30 for 2023 and 2022, respectively)	2023		9,286		9,260
2.30% (net of unamortized debt issuance cost of $110 and $122 for 2023 and 2022, respectively)	2024-2028		49,890		49,878
2.37% (net of unamortized debt issuance cost of $117 and $128 for 2023 and 2022, respectively)	2024-2028		49,883		49,872
2.73% (net of unamortized debt issuance cost of $97 and $55 for 2023 and 2022, respectively)	2025-2031		99,903		99,945
2.83% (net of unamortized debt issuance cost of $74 and $40 for 2023 and 2022, respectively)	2026-2032		74,926		74,960
Revolving credit facility and term loan borrowing	2023-2027		294,000		189,250
Debt of foreign subsidiaries
Unsecured bank debt, foreign currency	2023		5,003		—
Total debt		$	682,629	$	587,140
Less current maturities			244,360		132,111
Long-term debt		$	438,269	$	455,029

The Company's long-term debt financing is currently comprised of certain senior unsecured notes issued to insurance companies in private placement transactions, totaling $383,626,000 as of June 30, 2023. These notes are denominated in U.S. dollars and have fixed interest rates ranging from 2.30 percent to 4.86 percent. The notes had original maturities of seven to 12 years with mandatory principal payments beginning four, five and six years after issuance. The Company ~~has~~will be required to make principal payments on the currently outstanding notes from 2023 to 2032.

The Company's credit agreement with a ~~committed $125,000,000~~syndicate of banks provides for credit facilities in an initial aggregate principal amount of $450,000,000, consisting of (a) a $350,000,000 multi-currency revolving credit ~~agreement that expires~~facility and (b) a $100,000,000 delayed draw term loan credit facility, each of which matures on ~~July 10, 2019.~~June 24, 2027. The Company maintains import letters of credit, and standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement. As of ~~September~~June 30, ~~2017,~~2023, the Company had outstanding letters of credit totaling ~~$4,677,000~~ a~~nd no~~$11,331,000 and $294,000,000 of outstanding ~~borrowing~~borrowings under the ~~revolving~~ credit ~~agreement.~~agreement, inclusive of a $97,500,000 delayed draw term loan ($2,500,000 of the term loan principal has been permanently repaid as scheduled). There was ~~$120,323,000~~$142,169,000 available under the ~~revolving~~ credit agreement as of ~~September~~June 30, ~~2017.~~2023.

The ~~various loan~~Company’s material debt agreements contain provisions which, among ~~others,~~other covenants, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. Based on the loan agreement provisions that place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were ~~$200,112,000~~$238,614,000 and ~~$157,606,000~~$224,189,000 at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively.

~~13.~~

15.

OTHER, NET

(In thousands)

Three Months Ended
September 30

Nine Months Ended
September 30

2017

2016

2017

2016

Foreign exchange (losses) gains

$
596

$
286

$
97

$
(489
)
Investment income

69

18

220

170

Realized and unrealized gains on investments

1,101

925

3,677

720

Other, net

$
1,766

$
1,229

$
3,994

$
401

16.

GOODWILL IMPAIRMENT

~~14.~~

~~BUSINESS RESTRUCTURING~~

~~In May 2016,~~The Company typically tests its goodwill balances for impairment in the second quarter of each calendar year. Testing is completed more frequently when triggering events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit to which goodwill relates has declined below its carrying value. During the second quarter of 2023 the Company ~~announced plans to shut down~~completed its ~~Longford Mills, Ontario, Canada (Longford Mills) manufacturing facility, a part~~annual goodwill impairment testing and concluded that there was no goodwill impairment at any of its reporting units.

During the Surfactant reportable segment, by December 31, 2016. The shutdown plan was developed as an effort to improve the Company’s asset utilization in North America and to reduce the Company’s fixed cost base. Manufacturing operationssecond quarter of the Longford Mills plant ceased by the end of 2016, and production of goods manufactured at the facility was transferred to other Company North American production sites. Decommissioning of the assets is expected to continue throughout the remainder of 2017. As of September 30, 2017, an aggregate of $4,483,000 of expense has been recognized since the beginning of the restructuring, reflecting $1,594,000 of termination benefits for approximately 30 employees and $2,889,000 for other expenses, principally asset decommissioning costs. The spending for the decommissioning of the assets is nearly complete.

~~Below is a reconciliation of the December 31, 2016 and the September 30, 2017 restructuring liabilities:~~

(In thousands)

Termination
Benefits

Other
Expense

Total

Restructuring liability at December 31, 2016

$
1,548

$
437

$
1,985

Expense recognized

—

786

786

Amounts paid

(550
)

(928
)

(1,478
)
Foreign currency translation

17

6

23

Restructuring liability at March 31, 2017

$
1,015

$
301

$
1,316

Expense recognized

—

454

454

Amounts paid

(168
)

(615
)

(783
)
Foreign currency translation

20

3

23

Restructuring liability at June 30, 2017

$
867

$
143

$
1,010

Expense recognized

—

426

426

Amounts paid

(126
)

(444
)

(570
)
Foreign currency translation

37

14

51

Restructuring liability at September 30, 2017

$
778

$
139

$
917

~~In addition to the above,~~2022 the Company ~~eliminated 11 positions from manufacturing operations at~~completed its ~~Singapore plant in June 2017.~~annual goodwill impairment testing and concluded that the goodwill related to its Philippines reporting unit was impaired. The ~~Singapore plant~~Philippines reporting unit is part of the Company’s Surfactant segment. ~~The reduction in positions~~Goodwill impairment was ~~made to better align the number of personnel with current business requirements and to reduce costs at that site. As~~recognized as a result of the ~~reduction in workforce, termination expense~~reporting unit’s fair value declining below its carrying value. The Company estimates the fair value of ~~$132,000 was recognized~~each of its reporting units based on the average of market and income-based computations. The Philippines impairment primarily resulted from lost market share at one major customer combined with higher unit overhead costs. The Company recorded a non-cash charge of $978,000 in the ~~second quarter~~Condensed Consolidated Statements of Income for the three and six months ended June 30, ~~2017. As~~2022. The impairment charge equaled the entire balance of ~~September~~the Philippines’ goodwill.

17.

NONCASH INVESTING AND FINANCING ACTIVITIES

Noncash investing activities included liabilities (accounts payable) incurred for property, plant and equipment expenditures of approximately $24,101,000 and $29,032,000 that were unpaid at June 30, ~~2017, there was no remaining liability for~~2023 and 2022, respectively. Noncash financing activities included the ~~termination pay.~~

~~15.~~

~~ACQUISITIONS~~

~~2017 Acquisition Agreement~~

~~On June 13, 2017, the Company announced that it had reached an agreement with BASF Mexicana, S.A. DE C.V. (BASF) to acquire BASF’s production facility in Ecatepec, Mexico, and a portion~~issuance of ~~its related surfactants business. The facility, which is near Mexico City, has over 50,000 metric tons~~97,590 shares of capacity, 124,000 square feet of warehouse space, a laboratory and office space. The acquisition is currently expected to be completed in the first quarter of 2018, subject to closing conditions. The acquired facility and business will be included in the Company’s ~~Surfactant segment.~~

~~2016 Business Acquisition~~

O~~n October 3, 2016,~~common stock (valued at $10,463,000) and 58,441 shares of the Company’s ~~subsidiary~~common stock (valued at $6,095,000) 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 acquired businesses are included in~~connection with the Company’s ~~Surfactants segment.~~ The original purchase price of the acquisitions was R$93,309,000 (approximately $29,075,000), of which R$70,000,000 (approximately $21,812,000) was paid from cash on hand, R$9,000,000 (approximately $2,804,000) was deposited in escrow to cover certain potential losses as specified in the purchase agreement and R$14,309,000 (approximately $4,459,000) for working capital adjustments was unpaid pending agreement on the adjustment amounts.

In the first quarter of 2017, the Company settled on and paid the working capital adjustment amounts that were outstanding at December 31, 2016. The payment totaled R$13,925,000 (approximately $4,339,000), which made the adjusted purchase price of the acquisitions R$92,925,000 (approximately $28,955,000).

As a result of the change in purchase price, the amount of the purchase price allocated to goodwill changed from $14,327,000 to $14,207,000. The values of all other assets acquired and liabilities assumed remained as previously reported. In addition, the change in purchase price had no impact on the Company’s current or previously reported results of operations. The following table summarizes the assets acquired and liabilities assumed:

(In thousands)

Assets:

Current assets

$
5,165

Property, plant and equipment

5,716

Identifiable intangible assets

7,354

Goodwill

14,207

Total assets acquired

$
32,442

Liabilities:

Current liabilities

$
408

Deferred tax liability

3,079

Total liabilities assumed

$
3,487

Net assets acquired

$
28,955

The acquired goodwill, which was assigned entirely to the Company’s Surfactant segment, is not currently tax deductible. The goodwill reflects the opportunity of introducing the Company’s broad line of surfactant products to the acquired entities’ large customer base. Identifiable intangible assets included customer relationships ($4,331,000), a supply contract ($2,555,000) and non-compete agreements ($468,000). The amortization period for these intangibles at the time of acquisition were 13 years, four years and five years, respectively. The Company continues to evaluate the purchase price allocation, including the estimated fair values of assets acquired and liabilities assumed. Any changes to these amountsequity incentive compensation plan during the ~~measurement~~ period ~~may result in an adjustment to the recorded amount of goodwill.~~ended June 30, 2023 and 2022, respectively.

~~16.~~

18.

RECENT ACCOUNTING PRONOUNCEMENTS

In ~~May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-9,~~ ~~Revenue from Contracts with Customers (Topic 606). The new update was later amended by ASU No. 2015-14,~~ ~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. In addition, the ASU requires expanded disclosures about revenue recognition that enable the users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 supersedes most of the previous revenue recognition guidance. For public entities, the new guidance, as amended, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. An entity may use either a full retrospective or a modified retrospective approach to adopt the requirements of the new standard. The Company expects to apply the modified retrospective approach. Although the Company continues the process of determining the effects, if any, that adoption of ASU No. 2014-9 will have on Company financial statements, adoption of the new guidance is not currently expected to have a material effect on the Company’s financial position, results of operations and cash flows. However, adoption of ASU No. 2014-9 is expected to affect the Company’s disclosures by requiring further disaggregation of revenue and additional insight about performance obligations.

~~In July 2015,~~March 2020, the FASB issued ASU No. ~~2015-11,~~ ~~Inventory~~2020-04, Reference Rate Reform (Topic ~~330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory within the scope~~848) Facilitation of the Effect of Reference Rate Reform on Financial Reporting. This update atprovides optional guidance for a limited period of time to ease the ~~lower~~burden of ~~cost~~implementing the usage of new reference rates. The amendments apply to contract modifications that replace a reference rate affected by reference rate reform and ~~net realizable value. Prior guidance required inventory~~contemporaneous modifications of other contract terms related to the replacement of the reference rate. If elected the optional expedients to contract modifications must be ~~measured at the lower of cost~~applied consistently for all eligible contracts or ~~market. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,~~eligible transactions. The original timeframe for electing optional expedients to contract modifications was between March 12, 2020 and transportation. Subsequent measurement is unchanged for inventory measured using the last-in, first-out method or the retail inventory method. For public entities, ASU No. 2015-11 is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. On January 1, 2017, the Company adopted ASU No. 2015-11, which did not have a material effect on the Company’s financial position, results of operations or cash flows.

31, 2022. In ~~February 2016,~~December 2022, the FASB issued ASU No. ~~2016-2,~~ ~~Leases (Topic 842). This~~2022-06 deferring the sunset date of Topic 848 from December 31, 2022, to December 31, 2024. The guidance requires a dual approach for lessee accounting whereby a lessee will account for lease arrangements with terms greater than 12 months as either finance leases or operating leases. Both finance leases and operating leases will be recognized on the lessee’s balance sheet as right-of-use assets and corresponding lease liabilities, with differing methodologies for income statement recognition. In addition, the ASU requires expanded qualitative and quantitative disclosures about the Company’s lease arrangements. This guidance is

effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. Most of the Company’s operating leases will be required to be placed on the balance sheet. The Company is assessing the quantitative impact that adoption of ASU No. 2016-2 will have on its financial position, results of operations and cash flows.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~, which adds or clarifies guidance on the classification of eight specific types of cash flows. The update is intended to reduce the existing diversity in practice with respect to the specific cash flow items. The amendments in ASU No. 2016-15 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing the impact that adoption of ASU No. 2016-15 will have on its cash flow presentation. ASU No. 2016-15 is not expected to have an effect on the Company’s financial position or results of operations.

~~In October 2016, the FASB issued ASU No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~. The update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current accounting guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments in ASU No. 2016-16 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in this update willshould be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is assessing the impact that adoption of ASU No. 2016-16 will have on its financial position, results of operations and cash flows.

~~In January 2017, the FASB issued ASU No. 2017-4,~~ ~~Intangibles – Goodwill and~~prospectively. Other ~~(Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. When~~than electing select expedients associated with an indication of impairment was identified after performing the first step of the goodwill impairment test, Step 2 required that an entity determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) using the same procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in ASU No. 2017-4, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value. An entity would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. In addition, an entity must consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in ASU No. 2017-4 for annual, or any interim, goodwill impairment tests will be effective for fiscal years beginning after December 15, 2019. It is not expected that the adoption of the guidance in ASU No. 2017-4 will have a material effect on the Company’s financial position, results of operations or cash flows.

~~In March 2017, the FASB issued ASU No. 2017-7,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which amends existing guidance for the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The amended guidance requires entities to include the current service component of net periodic benefit cost in employee compensation costs in the income statement and to include all other components elsewhere in the income statement outside of income from operations. In addition, only the service cost component of net benefit cost is eligible for capitalization. For the Company, ASU No. 2017-7 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of any annual period for which an entity’s financial statements have not been issued. The requirements for the separate presentation of the service cost component and the other components of net periodic benefit cost must be adopted on a retrospective basis. The requirement to capitalize only the service component of net periodic benefit cost must be adopted on a prospective basis. Adoption of ASU No. 2017-7 will affect the presentation of the Company’s results of operations but will not have a material effect on the Company’s financial position or cash flows.

~~In August 2017, the FASB issued ASU No. 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~, which amends previous guidance regarding hedge accounting recognition and presentation requirements. The updated guidance alters the hedge accounting model to make achieving hedge accounting easier for an entity and to have such accounting better reflect an entity’s risk management activities. ASU No. 2017-12 also adds new, and amends previous, disclosure requirements. For the Company, ASU No. 2017-12 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. Entities must apply a modified retrospective approach to existing hedging relationships as of the adoption date. At present, becauseinterest rate swap, the Company has not ~~entered into~~currently utilized any ~~transactions designated as accounting hedges, adoption~~ of the optional expedients of exceptions available under this ASU. The Company will continue to assess whether this ASU ~~No. 2017-12~~ is ~~not expected to have a material effect on~~applicable throughout the ~~Company’s financial position, results of operations and cash flows.~~effective period.

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

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

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

Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part II-Item IA - Risk Factors” of this Quarterly Report on Form 10-Q and under “Part I-Item IA. Risk Factors” in the Company’s ~~2016~~ Annual Report on Form ~~10-K:~~10-K for the year ended December 31, 2022, including the risks and uncertainties related to the following:

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

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

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

On June 13, 2017, the Company announced that it had reached an agreement with BASF Mexicana, S.A. DE C.V. (BASF) to acquire BASF’s production facility in Ecatepec, Mexico, and a portion of its related surfactants business. The facility, which is near Mexico City, has over 50,000 metric tons of capacity, 124,000 square feet of warehouse space, a laboratory and office space. The acquisition is currently expected to be completed in the first quarter of 2018, subject to closing conditions. The acquisition supports the Company’s growth strategy in Latin America. The Company believes that this acquisition should enhance its market position and supply capabilities for surfactants in Mexico and positions the Company to grow in both the consumer and functional surfactants markets.21

The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company ~~expenses~~income and ~~profits.~~expenses. Compensation expense ~~results~~is recognized when the ~~values~~value of Company common stock and mutual fund investment assets held for the plans increase, and compensation income ~~results~~is recognized when the ~~values~~value of Company common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities ~~for~~(including realized and unrealized gains and losses on the ~~three and nine months ended September 30, 2017 and 2016~~mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following ~~tables:~~table:

The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:

Net income ~~attributable to~~in the ~~Company for the third~~second quarter of ~~2017 increased three percent to $21.9~~2023 was $12.7 million, or ~~$0.94~~$0.55 per diluted share, ~~from $21.4~~versus $52.1 million, or ~~$0.92~~$2.26 per diluted share, ~~for~~in the ~~third~~second quarter of ~~2016.~~2022. Adjusted net income ~~declined 16 percent to $21.4~~was $12.1 million, or ~~$0.92~~$0.53 per diluted share, ~~from $25.4~~versus $53.0 million, or ~~$1.10~~$2.30 per diluted share in the second quarter of 2022 (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for ~~reconciliations~~a reconciliation between reported net income ~~attributable to the Company~~ and ~~related~~reported earnings per diluted share and non-GAAP adjusted net income and ~~related~~adjusted earnings per diluted share). Below is a summary discussion of the major factors leading to the ~~quarter-over-quarter~~ changes in net sales, ~~profits~~expenses and ~~expenses.~~income in the second quarter of 2023 compared to the second quarter of 2022. A detailed discussion of segment operating performance for the ~~third~~second quarter of ~~2017~~2023 compared to the ~~third~~second quarter of ~~2016~~2022 follows the summary.

Consolidated net sales decreased $171.7 million, or 23 percent, versus the prior year quarter. Consolidated sales volume declined 19 percent, which negatively impacted the change in net sales by $143.9 million. Sales volume in the Surfactant, Polymer and Specialty Products segments decreased 15 percent, 29 percent and 16 percent, respectively. The decline in sales volume was primarily due to lower market demand and continued customer and channel inventory destocking. Lower average selling prices negatively impacted the year-over-year change in net sales by $32.2 million. The decrease in average selling prices was mainly attributable to less favorable product mix, declining raw material prices and increased ~~$42.8~~competitive activity within certain end-use markets. Foreign currency translation favorably impacted the year-over-year change in net sales by $4.4 million mainly due to a weaker U.S. dollar against the European euro, Mexican peso, and Polish zloty.

Operating income in the second quarter of 2023 decreased $59.8 million, or 77 percent, versus operating income in the second quarter of 2022. Surfactant, Polymer and Specialty Products operating income decreased $33.1 million, $17.6 million, and $6.1 million, respectively, versus the second quarter of 2022. Corporate expenses, including business restructuring and deferred compensation expenses, increased $3.0 million year-over-year. Most of this increase was attributable to $4.1 million of higher deferred compensation expense in the current year quarter. Corporate expenses, excluding deferred compensation and business restructuring expenses, decreased $1.1 million. This decrease was primarily due to lower incentive-based compensation expenses in the second quarter of 2023. Foreign currency translation had a $0.3 million favorable impact on operating income in the second quarter of 2023 versus the prior year.

Operating expenses (including deferred compensation, business restructuring and goodwill impairment) decreased $5.4 million, or 10 percent, ~~between quarters. The increase was attributable to higher selling prices,~~versus the favorable effects of foreign currency translation and a one percent increase in sales volume, which accounted for $34.2 million, $6.1 million and $2.5 million, respectively, of the quarter-over-quarter change in net sales. The higher selling prices reflected the pass through to customers of increased costs for certain raw materials. Surfactant sales volume increased one percent between quarters, while Polymer and Specialty Products sales volumes declined one percent and nine percent, respectively.

Operating income for the third quarter of 2017 improved $1.6 million, or five percent, from operating income for the third quarter of 2016. Consolidated operating income was favorably affected by deferred compensation expense which declined $7.5 million quarter overprior year quarter. ~~With respect to the segments, Surfactant operating income improved but was more than offset by declines in Polymer and Specialty Products results.~~

Operating expenses (including business restructuring expenses) for the third quarter of 2017 decreased $9.4 million, or 17 percent, from operating expenses for the third quarter of 2016. Deferred compensation accounted for $7.5 million of the decline. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

second quarter of 2023 increased $1.1 million, or 42 percent, versus the second quarter of 2022. This increase was primarily attributable to higher outstanding debt balances and higher interest rates on the revolving credit facility in 2023 versus 2022.

Other, net was ~~$1.8~~$2.4 million of income ~~for~~in the ~~third~~second quarter of ~~2017 compared to $1.2~~2023 versus $5.4 million of ~~income for~~expense in the ~~same period~~second quarter of ~~2016.~~2022. The Company ~~reported foreign exchange gains~~recognized $1.6 million of ~~$0.6 million in the third quarter of 2017 compared to gains of $0.3 million in third quarter of 2016. In addition,~~ investment ~~gains~~income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets ~~totaled $1.2 million~~ in the ~~third~~second quarter of ~~2017~~2023 compared to ~~$0.9~~$4.3 million of investment losses in the second quarter of 2022. In addition, the Company reported $0.4 million of foreign exchange gains in the second quarter of 2023 versus $1.5 million of foreign exchange losses in the second quarter of 2022. The Company's net periodic pension income ~~in last year’s third quarter.~~was flat between years.

The Company’s effective tax rate was 2522.3 percent ~~for~~in the ~~third~~second quarter of ~~2017 compared to 21~~2023 versus 25.0 percent ~~for~~in the ~~third~~second quarter of ~~2016. The increase~~2022. This decrease was primarily attributable to the ~~following items: (1) lower excess~~impact of certain recurring favorable tax benefits ~~derived from stock-based compensation awards exercised or distributed in~~(e.g. research and development income tax credit), whose amounts did not change materially year-over-year, having a more favorable impact on the ~~third quarter of 2017 versus~~tax rate due to the ~~third quarter of 2016; and (2) a less favorable geographical mix of~~lower pre-tax income in the ~~third~~second quarter of ~~2017~~2023 versus the ~~third~~second quarter of ~~2016.~~2022.

	For the Three Months Ended
(Dollars in thousands)	September 30,			September 30,		Increase			Percent		For the Three Months Ended June 30,
Operating Income	2017			2016		(Decrease)			Change		2023		2022			Increase (Decrease)			Percent Change
Surfactants	$	22,466		$	20,737	$	1,729			8	$	15,140	$	48,249		$	(33,109	)		-69
Polymers		21,116			27,087		(5,971	)		-22		16,321		33,912			(17,591	)		-52
Specialty Products		988			2,328		(1,340	)		-58		3,773		9,866			(6,093	)		-62
Segment Operating Income	$	44,570		$	50,152	$	(5,582	)		-11	$	35,234	$	92,027		$	(56,793	)		-62
Corporate Expenses, Excluding Deferred Compensation and Restructuring		13,964			13,973		(9	)		—	$	16,640	$	17,712		$	(1,072	)		-6
Deferred Compensation (Income) Expense		(129	)		7,441		(7,570	)		-102
Deferred Compensation Expense (Income)												743		(3,406	)		4,149			-122
Business Restructuring		426			—		426		NM			42		81			(39	)		-48
Total Operating Income	$	30,309		$	28,738	$	1,571			5	$	17,809	$	77,640		$	(59,831	)		-77

Surfactant net sales for the ~~third~~second quarter of ~~2017 increased $31.0~~2023 decreased $93.4 million ~~or 11 percent, over~~versus net sales for the ~~third~~second quarter of ~~2016. Higher~~2022. Sales volume declined 15 percent and negatively impacted the change in net sales by $72.1 million. Lower average selling prices ~~a one percent increase~~negatively impacted the change in net sales ~~volume~~by $24.4 million. The lower average selling prices were mainly attributable to declining raw material costs, less favorable product mix and ~~the favorable effects of foreign~~increased competitive activity within certain end-use markets. Foreign currency translation ~~accounted for $25.1~~had a $3.1 million ~~$3.6 million and $2.3 million, respectively, of~~favorable impact on the ~~quarter-over-quarter increase~~year-over-year change in net sales. The increase in selling prices reflected the pass through to customers of higher costs for certain raw materials. The increase in sales volume was principally attributable to sales associated with the Latin American region’s October 2016 acquisitions of Tebras and PBC. A ~~quarter-over-quarter~~ comparison of net sales by region follows:

Net sales for North American operations ~~increased five~~decreased $46.8 million, or 17 percent, ~~between quarters. Higher selling prices~~year-over-year. Sales volume declined 19 percent and negatively impacted the ~~favorable effect of foreign currency translation positively affected the quarter-over-quarter~~ change in net sales by ~~$11.2 million~~$52.6 million. The lower sales volume was primarily due to lower demand for commodity laundry products, products sold into the personal care and ~~$0.3 million, respectively. A~~agricultural end markets, along with continued customer and channel inventory destocking. In addition, the backward integration by one ~~percent~~customer, associated with the low 1,4 dioxane transition, in the third quarter of 2022 also contributed to the year-over-year decline in sales ~~volume offset the impacts of~~volume. Higher average selling prices ~~and~~favorably impacted the change in net sales by $6.3 million whereas foreign currency translation negatively impacted the change in net sales by ~~$1.9~~$0.5 million. Selling prices increased six percent quarter over quarter mainly due to the pass through of certain increased raw material costs to customers and to a more favorable mix of sales. The one percent decline in sales volume reflected decreased sales of commodity products used in laundry and cleaning and personal care applications largely offset by increased sales of products used in household, industrial and institutional (HI&I), agricultural chemical and oilfield applications. Sales volumes of general surfactants sold to distributors also increased quarter over quarter.

Net sales for European operations ~~increased 13~~decreased $23.8 million, or 26 percent, primarily due to ~~a seven~~an 18 percent ~~increase~~decreases in sales volume and lower average selling prices. These items negatively impacted the change in net sales by $16.9 million and $7.9 million, respectively. The lower sales volume was primarily due to lower demand for products sold into the consumer products end markets, mostly commodity laundry, the agricultural end market and to our distribution partners. The lower average selling prices were primarily due to declining raw material costs and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the change in net sales by $1.0 million. A weaker U.S. dollar relative to the European euro led to the favorable ~~effects of~~ foreign currency translation and a two percent increase in sales volume, which accounted for $4.6 million, $2.2 million and $1.1 million of the quarter-over-quarter improvement in net sales, respectively. The increase in selling prices primarily resulted from the pass through of higher costs for certain raw materials. The increase in sales volume was largely attributable to higher demand for laundry and cleaning products and agricultural chemicals, partially offset by reduced sales volumes of general surfactants sold to distributors. A quarter-over-quarter strengthening of the European euro relative to the U.S. dollar led to the foreign currency translation effect.

Net sales for Latin American operations ~~increased 42~~decreased $19.8 million, or 20 percent, primarily due to ~~higher~~lower average selling prices a 19 percent increase in sales volume and the favorable effects of foreign currency translation, which accounted for $7.6 million, $6.7 million and $0.9 million, respectively, of the quarter-over-quarter increase in net sales. Selling prices increased 17 percent due to the pass through to customers of higher quarter-over-quarter raw material costs and a more favorable mix of sales. The improved sales volume reflected new business associated with the October 2016 acquisitions of Tebras and PBC, partially offset by lower demand and lost commodity business for products used in laundry and cleaning applications. The foreign currency translation effect primarily resulted from the quarter-over-quarter strengthening of the Brazilian real and Mexican peso relative to the U.S. dollar.

~~Net sales for Asian operations declined nine percent largely due to a 20~~four percent decrease in sales ~~volume and the unfavorable effects of foreign currency translation, which~~volume. These items negatively affected the quarter-over-quarter change in net sales by $3.5 million and $1.2 million, respectively. Higher average selling prices, primarily resulting from the pass through of certain increased raw material costs to customers, favorably affectedimpacted the change in net sales by ~~$3.1 million.~~$19.6 million and $3.5 million, respectively. The lower average selling prices primarily reflect less favorable product mix, declining raw material costs and increased competitive activity within certain end-use markets. The lower sales volume ~~decline~~ was primarily due to ~~weaker~~a decline in demand for ~~commodity laundry and cleaning products.~~products sold into the agricultural end market. Foreign currency translation positively impacted the change in net sales by $3.3 million. A weaker ~~Philippine peso~~U.S. dollar relative to the ~~U.S. dollar caused~~Mexican peso led to the ~~negative~~favorable foreign currency translation effect.

Net sales for Asian operations decreased $2.9 million, or 18 percent, versus the prior year quarter. A nine percent decline in sales volume, lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $1.4 million, $0.8 million and $0.7 million, respectively.

Surfactant operating income for the ~~third~~second quarter of ~~2017 increased $1.7~~2023 decreased $33.1 million, or ~~eight~~69 percent, ~~over~~versus operating income for the ~~third~~second quarter of ~~2016.~~2022. Gross profit ~~for the third quarter of 2017 remained essentially unchanged from gross profit for same quarter of 2016, as improvement in Latin America was offset by a decline in Asia. Operating~~decreased $39.5 million, or 51 percent, and operating expenses decreased ~~$1.7~~$6.4 million, or ~~seven~~22 percent. ~~Quarter-over-quarter comparisons~~Comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations decreased $22.9 million, or 49 percent, versus the prior year due to lower average unit margins and a 19 percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $14.0 million and $8.9 million, respectively. The lower average unit margins were primarily attributable to less favorable product mix, high-cost inventory carryover and increased ~~less than one~~competitive activity within certain end-use markets.

Gross profit for European operations decreased $6.6 million, or 56 percent, primarily due to lower ~~manufacturing overhead costs resulting from the closure of the Company’s Canada manufacturing operations in the fourth quarter of 2016.~~

~~Gross profit for European operations declined two~~average unit margins and an 18 percent ~~between quarters largely due to the impact of increased raw material costs that more than offset the effects of the two percent increase~~decline in sales ~~volume~~volume. These items negatively impacted the year-over-year change in gross profit by $4.6 million and $2.1 million, respectively. The lower ~~quarter-over-quarter manufacturing costs. Prior year manufacturing costs included approximately $0.7 million of expense related to a mandatory 30-day inspection shutdown of~~average unit margins primarily reflect less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the ~~Germany manufacturing plant.~~change in gross profit by $0.1 million.

Gross profit for Latin American operations ~~increased $2.4~~decreased $8.3 million, or 4654 percent, mostly due to lower average unit margins. These lower unit margins negatively impacted the 19change in gross profit by $8.0 million and primarily reflect a less favorable product mix, mostly due to lower demand for products sold into the agricultural end market, and increased competitive activity. A four percent ~~improvement~~decline in sales volume ~~a more profitable mix of sales and a~~negatively impacted the year-over-year change in gross profit by $0.5 million. Foreign currency translation positively impacted the change in gross profit by $0.2 ~~million favorable effect of foreign currency translation.~~million.

Gross profit for Asia ~~declined $2.4~~operations decreased $1.7 million, or 3845 percent, ~~quarter over quarter primarily~~ due to ~~the 20~~lower average unit margins and a nine percent ~~decrease~~decline in sales volume. ~~Gross~~These items negatively impacted the change in gross profit ~~was also negatively affected~~ by ~~higher unit manufacturing costs caused by the lower utilization of the Singapore plant.~~$1.4 million and $0.3 million, respectively.

Operating expenses for the Surfactant segment ~~declined $1.7~~decreased $6.4 million, or ~~seven~~22 percent, in the second quarter ~~over~~of 2023 versus the second quarter ~~principally due~~of 2022. This decrease was mostly attributable to lower ~~R&D expenses. A decline in U.S.~~ incentive-based compensation ~~was~~expenses in the ~~major contributor to~~second quarter of 2023 and the ~~decreased R&D expenses.~~non-recurrence of a $1.0 million goodwill impairment charge at the Company's Philippines subsidiary in the second quarter of 2022.

Polymer net sales for the ~~third~~second quarter of ~~2017 increased $13.6~~2023 decreased $74.4 million, or 1031 percent, ~~over~~versus net sales for the ~~third quarter~~same period of ~~2016. Higher~~2022. A 29 percent decline in sales volume and lower average selling prices resulting from the pass through of increased costs for certain raw materials, and the positive effects of foreign currency translation favorably affected the quarter-over-quarter net sales change by $11.5 million and $3.6 million, respectively. Sales

~~volume declined one percent, which~~ negatively impacted the change in net sales by ~~$1.5 million. North American operations accounted for~~$69.7 million and $6.0 million, respectively. Foreign currency translation had a $1.3 million favorable impact on the ~~sales volume decline.~~year-over-year change in net sales. A ~~quarter-over-quarter~~ comparison of net sales by region follows:

Net sales for North American operations ~~increased one~~decreased $45.3 million, or 34 percent, primarily due to ~~higher selling prices, partially offset by lower~~a 36 percent decrease in sales volume. ~~Selling prices increased four percent, which had a $3.7 million positive effect on~~The decline in sales volume negatively impacted the ~~quarter-over-quarter~~ change in net sales. The pass through of certain higher quarter-over-quarter raw material costs to customers led to the increased selling prices. Sales volume declined four percent, which unfavorably impacted the net sales ~~change~~ by ~~$3.2~~$47.6 million. Sales volume of polyols used in rigid foam applications ~~declined seven~~decreased 35 percent ~~mainly due to lost share from a major customer. Phthalic~~year-over-year. Sales volume within the phthalic anhydride and specialty polyols businesses decreased 45 percent and 31 percent, respectively. The year-over-year decline in sales volume ~~declined two percent. Sales volume of specialty polyols increased seven percent due to greater demand for product used~~reflects continued customer and channel inventory destocking and reduced construction-related activities. Slightly higher average selling prices positively impacted the change in ~~powdered resins and CASE applications.~~net sales by $2.3 million.

Net sales for European operations ~~increased 28~~decreased $28.5 million, or 30 percent, ~~due to higher selling prices, the favorable effects of foreign currency translation and a two~~year-over-year. A 26 percent ~~increase~~decline in sales volume ~~which accounted for $7.3 million, $3.6 million and $0.7 million, respectively, of~~negatively impacted the ~~quarter-over-quarter~~change in net sales ~~increase. Selling~~by $24.6 million. The decline in sales volume reflects customer and channel inventory destocking, reduced construction-related activities and customer share loss. Lower average selling prices ~~increased 17 percent~~negatively impacted the change in net sales by $5.9 million. The lower average selling prices were primarily due to the ~~pass through~~pass-through of lower raw material costs and increased competitive activity. Foreign currency translation had a positive $2.0 million impact on the year-over-year change in net sales. A weaker U.S. dollar relative to ~~customers of cost increases for certain raw materials. The sales improvement was primarily attributable~~the Polish zloty led to ~~increased sales volume of specialty polyols, which reflected~~ the ~~Company’s successful efforts to utilize the capacity of its new reactor in Poland.~~favorable foreign currency translation effect.

Net sales for Asia and Other operations ~~increased 22 percent quarter over quarter due to higher selling prices and a seven percent improvement in sales volume. Sales volumes related to China operations increased 11 percent.~~

~~Polymer operating income for the third quarter of 2017 declined $6.0~~decreased $0.5 million, or ~~22 percent, from operating income for the same period of last year. Gross profit decreased $6.2 million, or 18~~five percent, primarily due to ~~higher material costs~~lower average selling prices and ~~lower~~the unfavorable impact of foreign currency translation. These items negatively impacted the year-over-year change in net sales by $0.7 million and $0.6 million, respectively. Sales volume increased eight percent and positively impacted the change in net sales by $0.8 million. The higher sales volume ~~particularly for North American operations. European operations reported significant gross profit improvement due principally to lower manufacturing costs. Operating expenses declined $0.2~~reflects the loosening of COVID lockdowns and restrictions in China.

Polymer operating income in the second quarter of 2023 decreased $17.6 million, or ~~three~~52 percent, versus operating income in the second quarter of 2022. Gross profit decreased $19.5 million, or 46 percent and operating expenses decreased $1.9 million or 23 percent between ~~quarters. Quarter-over-quarter comparisons~~years. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations ~~declined 33 percent quarter over quarter primarily~~decreased $13.4 million, or 52 percent. This decrease was due to ~~reduced margins and the four~~a 36 percent decline in sales ~~volume.~~volume and lower average unit margins. These items negatively impacted the change in gross profit by $9.2 million and $4.2 million, respectively. The ~~decline in~~lower average unit margins reflected the effect of higher raw material costs that, due to competitive reasons, could not entirely be passed on to customers. Unit overhead costs were also higher between quarters due to phthalic anhydride equipment issues that caused periodic outages and slowdowns of manufacturing operations.primarily reflect high-cost inventory carryover.

Gross profit for European operations ~~increased 74~~decreased $5.6 million, or 36 percent, versus the second quarter ~~over quarter. Increased margins,~~of 2022. The decrease was primarily due to ~~lower unit manufacturing costs, and increased~~a 26 percent decline in sales volume ~~led to the gross profit improvement. Last year’s third quarter gross profit was~~and lower average unit margins. These items negatively impacted the year-over-year change in gross margins by ~~a mandatory 30-day inspection shutdown of the Company’s plant in Germany, which resulted in additional plant expenses (approximately $1.5~~$4.0 million ~~greater than in the third quarter of 2017)~~ and ~~limited production.~~$1.8 million, respectively. The favorable ~~effects~~impact of foreign currency translation ~~contributed $0.6 million to~~positively impacted the ~~increased~~year-over-year change in gross ~~profit.~~profit by $0.2 million.

Gross profit for Asia and Other operations ~~declined 68~~decreased $0.6 million, or 51 percent, primarily due to ~~higher overhead costs resulting from~~ lower ~~production at~~average unit margins which negatively impacted the ~~Company’s plant~~change in ~~Nanjing, China, and to higher raw material costs. In 2016, the Nanjing plant supplied product to other Company locations as a result of the mandatory inspection shutdown at the Germany plant.~~gross profit by $0.6 million.

Operating expenses for the Polymers segment ~~declined $0.2~~decreased $1.9 million, or ~~three~~23 percent, ~~quarter over quarter.~~

~~Net sales for~~in the ~~third~~second quarter of ~~2017 declined $1.8 million, or nine percent, from~~2023 versus the second quarter of 2022. This decrease was mainly attributable to lower incentive-based compensation expenses.

Specialty Products net sales for the ~~third~~second quarter of ~~2016. A less favorable mix~~2023 decreased $3.9 million, or 14 percent, versus net sales for the second quarter of ~~sales resulting from the timing of orders for certain products used in flavor and pharmaceutical applications and~~2022. This decrease reflects a ~~nine~~16 percent decline in sales volume ~~led to the lower net sales. Operating income declined $1.3 million quarter over quarter due to the less favorable mix of sales~~that was partially offset by ~~improved~~higher average selling prices. Gross profit and operating income decreased $6.4 million and $6.1 million, respectively, year-over-year. The year-over-year declines in gross profit and operating income were mostly attributable to the 16 percent decline in sales volume and lower unit margins ~~for food ingredient and nutritional supplement products.~~within the medium chain triglycerides (MCT) product line. The lower unit margins were primarily due to high-cost inventory carryover.

Corporate expenses, which ~~are comprised of~~include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, ~~declined $7.1~~increased $3.0 million between ~~quarters to $14.3~~quarters. Corporate expenses were $17.4 million ~~for~~in the ~~third~~second quarter of ~~2017 from $21.4~~2023 versus $14.4 million ~~for~~in the ~~third~~second quarter of ~~2016. The decline in corporate expense~~2022. This year-over-year increase was primarily attributable to ~~a $7.5~~$4.1 million ~~favorable change in~~of higher deferred compensation ~~expense. Deferred compensation was $0.1 million of income for the third quarter of 2017 compared to $7.4 million of~~ expense, for the same quarter of last year. In addition to deferred compensation, fringe benefits declined between quarters by $1.2 million, largely due to a decline in expense for incentive-based compensation. The foregoing items were partially offset by ~~increased legal and environmental~~lower incentive-based compensation expenses, ~~($1.0 million) and~~in the ~~previously discussed restructuring expenses ($0.4 million).~~second quarter of 2023.

The ~~$7.5~~$4.1 million ~~favorable change~~increase in deferred compensation expense ~~reflected~~was primarily due to a ~~$3.48~~year-over-year increase in the market values of mutual fund investment assets held for the plans in the second quarter of 2023 versus a decrease in the second quarter of 2022. This increase was partially offset by a $7.47 per share decrease in the market price of Company common stock in the ~~third~~second quarter of ~~2017~~2023 compared to a ~~$13.13~~$2.54 per share increase ~~for~~in the ~~third~~second quarter of ~~2016.~~2022. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation ~~expenses~~income/expense for the three months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:

Net income ~~attributable to the Company for~~in the first ~~three quarters~~half of ~~2017 increased five~~2023 decreased 70 percent to ~~$81.7~~$28.8 million, or ~~$3.50~~$1.25 per diluted share, from ~~$77.8~~$96.9 million, or ~~$3.38~~$4.19 per diluted share, ~~for~~in the first ~~three quarters~~half of ~~2016.~~2022. Adjusted net income ~~declined two~~decreased 70 percent to ~~$84.0~~$28.5 million, or ~~$3.60~~$1.24 per diluted share, from ~~$85.9~~$93.7 million, or ~~$3.73~~$4.05 per diluted share in the prior year (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for ~~reconciliations~~a reconciliation between reported net income ~~attributable to the Company~~ and ~~related~~reported earnings per diluted share and non-GAAP adjusted net income and ~~related~~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~~expenses and ~~expenses.~~income in the first half of 2023 compared to the first half of 2022. A detailed discussion of segment operating performance for the first ~~nine months~~half of ~~2017~~2023 compared to the first ~~nine months~~half of ~~2016~~2022 follows the summary.

Consolidated net sales ~~increased $105.7~~decreased $195.5 million, or ~~eight~~14 percent, between years, primarily due to higher selling prices that were precipitated by the pass through to customers of increased costs for certain raw materials. The increased selling prices favorably affectedyear-over-year. Consolidated sales volume declined 17 percent and negatively impacted the year-over-year change in net sales by ~~$140.1~~$239.7 million. Sales volume ~~declined two percent, which had a $31.9 million unfavorable effect on~~in the ~~change in net sales. Sales volume declined three percent and four percent for the~~ Surfactant, Polymer and Specialty Products segments ~~respectively,~~decreased 14 percent, 24 percent and ~~was essentially flat between years for the Polymer segment.~~12 percent, respectively. Foreign currency translation negatively impacted the year-over-year change in net sales by $8.0 million due to a stronger U.S. dollar against the majority of currencies where the Company has foreign operations. Higher average selling prices positively impacted the change in net sales by ~~$2.5~~$52.2 million.

Operating income for the first ~~three quarters~~half of ~~2017 declined $0.9~~2023 decreased $102.1 million, or 72 percent, versus operating income for the first half of 2022. Surfactant, Polymer and Specialty Products operating income decreased $59.8 million, $21.7 million, and $7.3 million, respectively. Corporate expenses, including business restructuring and deferred compensation expenses, increased $13.3 million year-over-year. Most of this increase was attributable to a $13.2 million increase in deferred compensation expenses. Foreign currency translation had an $0.8 million unfavorable impact on operating income in the first half of 2023 versus the first half of 2022.

Operating expenses (including deferred compensation, business restructuring and goodwill impairment) increased $1.2 million, or one percent, from operating income reported for the first three quarters of 2016. Surfactant and Specialty Product operating incomes improved year over year but were more than offset by a decline in Polymer results. Polymer operating income was negatively impacted by higher raw material costs that could not entirely be recouped through selling price increases.

~~Operating expenses (including business restructuring expenses) declined $11.2 million, or seven percent,~~ between years. ~~Lower deferred compensation expense accounted for $7.3 million of the operating expense decrease.~~ Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

Net interest expense for the first ~~three quarters~~half of ~~2017 declined $1.2~~2023 increased $1.7 million, or 1333 percent, ~~from~~compared to net interest expense for the first ~~three quarters~~half of ~~2016~~2022. This increase was primarily ~~due~~attributable to ~~lower average~~higher outstanding debt ~~levels~~balances and higher interest ~~income earned~~rates on ~~excess cash.~~the revolving credit facility in 2023 versus 2022.

Other, net was $4.0 million of income for the first ~~three quarters~~half of ~~2017~~2023 compared to ~~$0.4~~$7.0 million of ~~income~~expense for the ~~same period~~first half of ~~last year.~~2022. The Company ~~posted $3.9~~recognized $3.3 million of investment gains (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the first ~~three quarters~~half of ~~2017~~2023 compared to ~~$0.9~~$6.6 million of ~~income~~investment losses in the first ~~three quarters~~half of ~~2016.~~2022. In addition, the Company reported foreign exchange gains of $0.1 million in the first ~~three quarters~~half of ~~2017 compared to~~2023 versus $1.2 million of foreign exchange losses in the first half of ~~$0.5~~2022. The Company also reported $0.1 million ~~for~~of lower net periodic pension income in the ~~same period a year ago.~~first half of 2023 versus the first half of 2022.

The Company’s effective tax rate was 2620.4 percent ~~for~~in the first ~~three quarters~~half of ~~2017 compared to 27~~2023 versus 24.8 percent ~~for~~in the first ~~three quarters~~half of ~~2016. The~~2022. This decrease was primarily attributable to ~~the following items: (1) higher excess~~more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first ~~three quarters~~half of ~~2017~~2023 and the impact of certain recurring favorable tax benefits (e.g. research and development income tax credit), whose amounts did not change materially year-over-year, having a more favorable impact on the tax rate due to the lower pre-tax income in the first half of 2023 versus the first ~~three quarters~~half of ~~2016; and (2) an unfavorable tax settlement related to a foreign income tax audit recorded in the first quarter of 2016 that did not recur in 2017.~~2022.

~~Surfactant~~Surfactants net sales for the first ~~three quarters~~half of ~~2017 increased $74.4~~2023 decreased $93.8 million, or ~~eight~~10 percent, ~~over~~versus net sales for the first ~~three quarters~~half of ~~2016. Higher selling prices, resulting primarily from~~2022. Sales volume declined 14 percent and negatively impacted the ~~pass through of higher costs on certain raw materials to customers,~~change in net sales by $133.8 million. Foreign currency translation had a ~~favorable $106.3~~$2.9 million ~~effect~~unfavorable impact on the year-over-year change in net sales. ~~A three percent decline in sales volume and the unfavorable effects of foreign currency translation offset the impact of increased~~Higher average selling prices positively impacted the change in net sales by $26.6 million and $5.3 million, respectively. The Latin America region reported improved sales volume due to sales associated with the October 2016 acquisitions of Tebras and PBC, while sales volumes for the other regions declined.$42.9 million. A year-over-year comparison of net sales by region follows:

Net sales for North American operations ~~increased five~~decreased $42.9 million, or eight percent, ~~year over year.~~year-over-year. An 18 percent decrease in sales volume negatively impacted the change in net sales by $100.4 million. The decrease in sales volume primarily reflects lower overall demand, customer and channel inventory destocking, and the backward integration by one customer, associated with the low 1,4 dioxane transition, in the third quarter of 2022. Higher average selling prices favorably impacted the change in net sales by $50.7 million. Sales volume declined five percent, which offset the effect of increased selling prices by $25.2 million. Average selling prices increased 10 percent between years, reflecting the pass through of certain higher raw material costs to customers$58.9 million and a more favorable mix of sales. The five percent decline in sales volume was largely attributable to decreases in sales volumes for commodity products used in laundry and cleaning and personal care applications. The lower commodity product volumes were partially offset by increased sales for products used in HI&I, agricultural chemicals and oilfield applications. The favorable effect of foreign currency translation ~~added $0.3 million to~~negatively impacted the ~~year-over-year~~ change in net ~~sales.~~sales by $1.4 million.

Net sales for European operations ~~increased nine~~decreased $23.7 million, or 13 percent, ~~due to a 16~~year-over-year. A 13 percent ~~increase~~decrease in ~~selling prices, partially offset by~~sales volume and the unfavorable ~~effects~~impact of foreign currency translation negatively impacted the change in net sales by $24.3 million and ~~a three percent decline in~~$4.6 million, respectively. The lower sales ~~volume. The higher~~volume was primarily due to lower demand for demand for products sold into the consumer products end markets, mostly commodity laundry products, the functional products and personal care end markets and to our distribution partners. A stronger U.S. dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect. Higher average selling prices ~~which resulted from the pass through to customers of certain increased raw material costs, favorably~~positively impacted the year-over-year change in net sales by $28.0 million, while foreign currency translation and lower sales volume unfavorably affected the net sales change by $6.8 million and $5.6 million, respectively. A stronger U.S. dollar relative to the British pound sterling led to the foreign currency translation effect. The three percent decrease in sales volume primarily resulted from declines in commodity personal care sales volume and general surfactants sold to distributors.$5.2 million.

Net sales for Latin American operations ~~increased 30~~decreased $24.1 million, or 13 percent, primarily due to ~~increased~~lower average selling prices and a ~~nine~~four percent ~~improvement~~decline in sales volume. These items negatively impacted the change in net sales by $21.5 million and $7.6 million, respectively. The lower average selling prices primarily reflect less favorable product mix and increased competitive activity within certain end-use markets. The lower sales volume was primarily due to lower demand for commodity laundry products within the consumer products business and lower demand for products sold into the agricultural end market. Foreign currency translation had a $5.0 million favorable impact on the change in net sales between years. A weaker U.S. dollar relative to the Mexican peso led to the favorable ~~effects of~~ foreign currency translation which accounted for $19.4 million, $9.5 million and $4.5 million, respectively, of the year-over-year increase in net sales. The higher selling prices reflected the pass through to customers of increased raw material costs and a more favorable mix of sales. The improved sales volume reflected new business associated with the October 2016 acquisitions of Tebras and PBC and increased sales volume for agricultural chemical products, partially offset by lower demand and lost business for commodity products used in laundry and cleaning applications. The foreign currency translation effect reflected the year-over-year strengthening of the Brazilian real and Colombian peso relative to the U.S. dollar, partially offset by a weaker Mexican peso.effect.

Net sales for Asian operations ~~declined one~~decreased $3.1 million, or nine percent, ~~due to a 17~~year-over-year. A 13 percent decline in sales volume and the unfavorable ~~effects~~impact of foreign currency translation ~~which~~ negatively impacted the ~~year-over-year~~ change in net sales by ~~$8.7~~$4.6 million and ~~$3.2~~$1.8 million, respectively. ~~Lower volumes of commodity laundry and cleaning~~The decline in sales volume was primarily due to lower demand for products sold ~~from~~into the ~~Philippine location~~personal care and overall lower volumes sold from the Singapore location led to the sales volume decline for Asian operations. A weaker Philippine peso relative to the U.S. dollar caused the negative foreign currency translation effect.agricultural end markets. Higher average selling prices ~~which reflected~~positively impacted the ~~pass through to customers of certain increased raw material costs, offset the effects of~~change in net sales ~~volume and currency translation~~ by ~~$11.4~~$3.3 million.

Surfactant operating income for the first ~~three quarters~~half of ~~2017 increased $6.5~~2023 decreased $59.8 million, or ~~eight~~59 percent, ~~over~~versus operating income for the first ~~three quarters~~half of ~~2016.~~2022. Gross profit ~~increased $3.4~~decreased $68.7 million, or ~~two~~43 percent, ~~primarily due to improved results for North American~~ and ~~Latin American operations. Operating~~operating expenses decreased ~~$3.2~~$8.9 million, or ~~four~~15 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 decreased $40.9 million, or 41 percent, versus the prior year primarily due to lower average unit margins and an 18 percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $22.5 million and $18.3 million, respectively. The lower average unit margins were mostly attributable to high-cost inventory carryover and increased six percent between years. The effect of improved margins more than offset the impact of the five percent sales volume decline. The margin improvement reflected a more profitable mix of sales and reduced manufacturing overhead costs resulting primarily from the closure of the Company’s Canada manufacturing operations in the fourth quarter of 2016.competitive activity within certain end-use markets.

Gross profit for European operations ~~declined 15~~decreased $9.5 million, or 38 percent, ~~year over year primarily~~ due to ~~reduced sales~~lower average unit margins, ~~the three~~a 13 percent decline in sales volume ~~decline~~ and ~~a $0.5 million~~the unfavorable impact of foreign currency ~~translation impact. The lower sales margins reflected~~translation. These items negatively impacted the ~~effect of increased raw material costs that could not be entirely passed on to customers through selling price increases. The~~ year-over-year change in gross profit ~~benefitted from 2016 charges for customer claims that did not recur in 2017.~~by $5.7 million, $3.3 million and $0.5 million, respectively. The lower average unit margins primarily reflect less favorable product mix and increased competitive activity within certain end-use markets.

Gross profit for Latin American operations ~~increased 21~~decreased $14.3 million, or 50 percent, primarily due to lower unit margins and a four percent decline in sales volume. These factors negatively impacted the ~~contributions from~~change in gross profit by $13.3 million and $1.2 million, respectively. The lower unit margins primarily reflect a less favorable product mix, mostly due to lower demand for products sold into the ~~October 2016 acquisitions of Tebras~~agricultural end market, and ~~PBC and to a more profitable mix of sales. A $0.9 million~~increased competitive activity. The favorable ~~effect~~impact of foreign currency translation ~~also contributed to~~positively impacted the year-over-year change in gross profit ~~improvement.~~by $0.2 million.

~~Asia gross~~Gross profit ~~declined 25~~for Asian operations decreased $4.0 million, or 64 percent, ~~largely~~primarily due to ~~the 17~~lower average unit margins and a 13 percent decline in sales ~~volume~~volume. These items negatively impacted the year-over-year change in gross profit by $3.1 million and ~~to a year-over-year decline in production volume in Singapore, which led to higher unit overhead costs. A $0.6~~$0.8 million, ~~unfavorable foreign~~respectively. Foreign currency translation ~~effect also contributed to~~negatively impacted the ~~decline~~year-over-year change in gross ~~profit. The Company’s plan to lower inventory levels in the region led to the decrease in Singapore production.~~profit by $0.1 million.

Operating expenses for the Surfactant segment ~~declined $3.2~~decreased $8.9 million, or ~~four~~15 percent, ~~year over year. R&D and selling expenses declined $2.6 million and $0.5 million, respectively, due primarily~~year-over-year. This decrease was mainly attributable to lower ~~overall~~incentive-based compensation expenses in the ~~U.S. partially offset by increased~~second quarter of 2023 and the non-recurrence of a $1.0 million goodwill impairment charge at the Company's Philippines subsidiary in the second quarter of 2022.

~~expenses related to Tebras and PBC, which were acquired in October 2016. A decline in incentive-based compensation was a factor for the lower U.S. expenses.~~Polymers

~~Polymer~~ net sales for the first ~~three quarters~~half of ~~2017 increased $33.0~~2023 decreased $100.3 million, or ~~nine~~24 percent, ~~over~~versus net sales for the same period of ~~2016. Higher selling prices~~2022. A 24 percent decrease in sales volume and the ~~effects~~unfavorable impact of foreign currency translation negatively impacted the change in net sales by $103.1 million and $5.0 million, respectively. Higher average selling prices positively impacted the change in net sales ~~change~~ by $31.7 million and $2.8 million, respectively. The selling price increases reflected the pass through to customers of certain increased raw material costs. Polymer sales volume declined less than one percent between years, which resulted in a negative $1.5 million impact on the net sales change.$7.8 million. A year-over-year comparison of net sales by region follows:

Net sales for North American operations ~~increased two~~decreased $59.0 million, or 26 percent, primarily due to ~~higher selling prices, which favorably affected~~a 31 percent decline in sales volume. The decline in sales volume negatively impacted the ~~year-over-year~~change in net sales ~~change~~ by $12.2 million. Selling prices increased five percent, largely as a result of the pass through of higher raw material costs. Sales volume declined three percent between years, which unfavorably affected the net sales change by $6.2$70.8 million. Sales volume of polyols used in rigid foam applications ~~declined two~~decreased 33 percent ~~mainly due to lost business at a major customer. Phthalic~~year-over-year. Sales volume within the phthalic anhydride and specialty polyols businesses decreased 32 percent and 21 percent, respectively. The year-over-year decline in sales volume ~~declined eight percent due to lower volumes provided to phthalic anhydride co-producers~~primarily reflects customer and channel inventory destocking and reduced construction-related activities. Higher average selling prices positively impacted the year-over-year change in ~~2017 than in 2016 and to less demand from a major customer. Specialty polyols~~net sales ~~volume improved five percent on increased volumes for product used in CASE applications.~~by $11.8 million.

Net sales for European operations ~~increased 20~~decreased $40.3 million, or 23 percent, ~~due to higher selling prices,~~year-over-year. A 22 percent decline in sales volume and the ~~favorable effects~~unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $37.7 million and ~~a two percent increase~~$3.6 million, respectively. The decline in sales volume ~~which accounted for $17.9 million, $3.0 million~~reflects customer and ~~$2.7 million, respectively, of~~channel inventory destocking, reduced construction-related activities and customer share loss. A stronger U.S. dollar relative to the ~~year-over-year~~Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect. Higher average selling prices favorably impacted the change in net sales increase. Selling prices increased 15 percent primarily due to the pass through of certain raw material cost increases to customers. Specialty polyols used in CASE applications accounted for most of the sales volume increase, as sales volume for polyols used in rigid foam insulation and insulated metal panels was essentially flat year-over-year. The increase in CASE sales volumes reflected the Company’s successful efforts to utilize the capacity of its new reactor in Poland.by $1.0 million.

Net sales for Asia and Other operations ~~increased 19~~decreased $1.1 million, or five percent, ~~between years~~primarily due to ~~higher~~a decline in average selling prices and ~~a five percent increase in sales volume, which accounted for $2.6 million and $1.0 million, respectively,~~the unfavorable impact of the year-over-year net sales change. Increased raw material costs drove the selling price increase. Most of the sales volume increase reflected new business for the Company’s manufacturing facility in Nanjing, China, that commenced operations in early 2016. Foreignforeign currency ~~translation had a $0.2 million negative effect on~~translation. These items negatively impacted the year-over-year change in net ~~sales.~~sales by $2.3 million and $1.4 million, respectively. Sales volume increased 12 percent and positively impacted the year-over-year change in net sales by $2.6 million. The higher sales volume reflects the loosening of COVID lockdowns and restrictions in China.

Polymer operating income for the first ~~three quarters~~half of ~~2017 declined $16.5~~2023 decreased $21.7 million, or 2145 percent, ~~from~~versus operating income for the first ~~three quarters~~half of ~~2016.~~2022. Gross profit decreased ~~$16.6~~$24.5 million, or 1638 percent, ~~due to lower margins primarily caused by higher material costs. Operating~~and operating expenses decreased ~~$0.1~~$2.8 million, or ~~one percent between years.~~17 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 ~~declined 21~~decreased $15.5 million, or 46 percent, ~~year over year primarily as~~due to a ~~result of reduced margins and the three~~31 percent ~~decline~~decrease in sales ~~volume.~~volume and lower average unit margins. These items negatively impacted the change in gross profit by $10.6 million and $4.9 million, respectively. The ~~margin decline reflected the effects of higher raw material costs that could not be completely passed on to customers due to competitive pressures. In addition,~~lower average unit ~~overhead costs were higher between years due to phthalic anhydride equipment issues that caused periodic outages and slowdowns of manufacturing operations in the third quarter of 2017.~~margins primarily reflect high-cost inventory carryover.

Gross profit for European operations ~~increased 11~~decreased $8.1 million, or 29 percent, versus the first half of 2022. The decrease was primarily due to ~~the two~~a 22 percent decrease in sales volume, ~~increase~~lower average unit margins and ~~to lower manufacturing expenses that more than offset~~ the unfavorable impact of ~~higher raw material costs. In addition,~~ foreign currency ~~translation had a $0.4 million positive effect on Europe’s gross profit. With respect to~~translation. These items negatively impacted the ~~reduced manufacturing expenses, 2016 third quarter~~change in gross profit ~~was negatively impacted~~ by ~~a mandatory 30-day inspection shutdown of the Germany plant, which resulted in additional plant expenses (approximately~~$6.1 million, $1.5 million ~~greater than in the third quarter of 2017)~~ and ~~limited production.~~$0.5 million, respectively.

Gross profit for Asia and Other operations declined ~~$2.3~~$0.9 million, or 38 percent, primarily due to ~~higher overhead costs resulting from~~ lower ~~utilization~~average unit margins and the unfavorable impact of foreign currency translation. These items negatively impacted the ~~plant~~change in ~~Nanjing, China, as the 2016~~ gross profit ~~benefited from production of polyol to build up inventory to support~~by $1.0 million and $0.1 million, respectively. Sales volume increased 12 percent and positively impacted the ~~Company’s Germany plant~~change in ~~advance of its mandatory third quarter 2016 inspection shutdown. Higher raw material costs also negatively impacted year-over-year~~ gross ~~profit.~~profit by $0.2 million.

~~Net sales~~Operating expenses for the ~~first three quarters of 2017 declined $1.7~~Polymers segment decreased $2.8 million, or ~~three~~17 percent, ~~from~~year-over-year mainly due to lower incentive-based compensation expenses.

Specialty Products net sales for the first ~~three quarters~~half of ~~2016. Sales volume declined four percent due to lower sales volumes of products used in food ingredient and nutritional supplement applications. Operating income increased~~2023 decreased $1.3 million, or 19three percent, ~~due to a more favorable mix of~~versus net sales resulting from the timing of orders for certain products used in flavoring applications, to improved margins for food ingredient and nutritional supplement products and to lower operating expenses of $0.5 million.

~~Corporate expenses declined $7.8 million to $47.9 million~~ for the first ~~three quarters~~half of ~~2017 from $55.7~~2022. This decrease reflects a 12 percent decline in sales volume that was partially offset by higher average selling prices. Gross profit and operating income decreased $7.8 million ~~for~~and $7.3 million, respectively, year-over-year. The year-over-year declines in gross profit and operating income were mostly attributable to the 12 percent decline in sales volume and lower unit margins within the medium chain triglycerides (MCT) product line. The lower unit margins were primarily due to high-cost inventory carryover.

Corporate expenses, which include deferred compensation, business restructuring, and other operating expenses that are not allocated to the reportable segments, increased $13.3 million between years. Corporate expenses were $35.9 million in the first ~~three quarters~~half of ~~2016. The decline~~2023 versus $22.6 million in the first half of 2022. This year-over-year increase was primarily attributable to ~~lower expenses for~~$13.2 million of higher deferred compensation ~~($7.3 million), fringe benefits ($1.5 million) and relocation ($0.7 million),~~expense, partially offset by ~~increased expenses for consulting and environmental ($1.6 million) and the previously discussed business restructuring ($0.7 million). Lower year-over-year~~lower incentive-based compensation expenses, ~~led~~in the ~~lower fringe benefits.~~ first half of 2023.

The $13.2 million increase in ~~consulting and environmental expenses reflected external resources engaged in 2017 to support various corporate projects.~~

~~Deferred~~deferred compensation expense ~~declined $7.3 million between years. The result reflected~~was primarily due to an increase in the market values of mutual fund investment assets held for the plans in the first half of 2023 versus a ~~smaller year-over-year increase~~decrease in the first half of 2022. A $10.90 per share decrease in the market price of Company common stock ~~($2.18~~in the first half of 2023 compared to a $22.94 per share ~~increase for the first three quarters of 2017 compared to $22.97 per share increase for the first three quarters of 2016), partially offset by larger year-over-year increases~~decrease in the ~~market values~~second half of

2022 also contributed to the ~~mutual funds held for the deferred compensation plan.~~year-over-year change. The following table presents the period-end Company common stock market prices used in the computation of deferred compensation ~~expenses~~expense/income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, operating activities were a cash source of ~~$124.7~~$35.8 million versus a cash source of ~~$119.5~~$38.2 million for the comparable period in ~~2016.~~2022. For the ~~current year,~~first six months of 2023, investing ~~activities were a use~~cash outflows totaled $158.2 million versus cash outflows of ~~$63.0 million, as compared to a use of $72.5 million in the prior year period, and financing activities were a use of $29.9 million, as compared to a use of $17.3~~$126.3 million in the prior year period. Financing activities were a cash source of $78.0 million versus a cash source of $128.1 million in the prior year period.

Cash and cash equivalents, ~~increased by $38.4~~inclusive of a $4.7 million favorable foreign exchange rate impact, decreased $39.8 million compared to December 31, ~~2016, including a favorable exchange rate impact of $6.6 million.~~

~~As of September 30, 2017, the Company’s cash and cash equivalents totaled $264.1 million, including $15.1 million in a U.S. money market fund, which was rated AAA by Standard and Poor’s.~~2022. Cash in U.S. demand deposit accounts totaled ~~$115.6~~$6.5 million and cash ~~of the~~in U.S. money market funds totaled $26.8 million. The Company’s non-U.S. subsidiaries held ~~outside the U.S. totaled $133.4~~$100.6 million of cash as of ~~September~~June 30, ~~2017.~~2023.

Net income ~~increased by $3.9~~during the first six months of 2023 decreased $68.1 million versus the comparable period in ~~2016.~~2022. Working capital was a cash use of ~~$30.0~~$33.2 million during the first six months of 2023 versus a cash use of ~~$37.9~~$111.1 million ~~for~~in the comparable ~~year-ago period.~~period in 2022.

~~Year-to-date accounts~~Accounts receivable were a ~~use~~cash source of ~~$37.7~~$22.8 million during the first six months of 2023 compared to a cash use of ~~$30.2~~$111.1 million for the comparable period in ~~2016.~~2022. Inventories were a cash source of ~~$14.8~~$70.1 million in ~~2017~~2023 versus a cash use of ~~$12.5~~$38.6 million in ~~2016.~~2022. Accounts payable and accrued liabilities were a cash use of ~~$6.5~~$116.5 million in ~~2017~~2023 compared to a cash source of ~~$5.1~~$43.3 million for the same period in ~~2016.~~2022.

Working capital requirements were ~~higher year-to-date,~~lower in the first six months of 2023 compared to ~~the same period in 2016~~2022 primarily due to the ~~above~~changes noted above. The change in accounts receivable working capital primarily reflects lower sales volume due to a reduction in demand across most end use markets along with extensive customer and channel inventory destocking. The change in inventories reflects lower quantities and unit costs in 2023. The change in accounts payable ~~and accrued liabilities. The year-to-date accounts receivables increase was~~ primarily ~~due to selling price increases. The year-to-date inventory decrease was mainly due to~~reflects lower ~~quantities.~~raw material quantities purchased during the first half of 2023 combined with lower raw material unit costs. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during ~~2017.~~2023.

Cash ~~outflows from~~used for investing activities ~~were down by $9.5~~increased $31.9 million year-over-year. Cash ~~outflows from investing activities year-to-date included~~used for capital expenditures ~~of $57.9 million compared to $69.8 million for the comparable period last year. Other investing activities consumed $5.1~~was $159.9 million in ~~2017~~the first six months of 2023 versus ~~a use of $2.8~~$129.5 million in ~~2016.~~the same period of 2022. The ~~increase~~higher capital spending in ~~other investing activities was primarily~~2023 is largely attributable to the ~~$4.3 million purchase price working capital adjustment payment made in~~alkoxylation plant the ~~first quarter of 2017 related to the 2016 fourth quarter acquisitions of Tebras and PBC.~~ Company is building at its Pasadena, Texas site.

For ~~2017,~~2023, the Company estimates that total capital expenditures will be in the range ~~from $85~~of $240.0 million to ~~$95 million including capacity expansions~~$250.0 million. This projected spending includes the new alkoxylation plant that is being built in Pasadena, Texas, equipment upgrades to meet new regulatory limits on 1,4 Dioxane in the United States, ~~Brazil~~growth initiatives, infrastructure and ~~Germany.~~optimization spending in the United States and Mexico. The equipment upgrades to meet the new regulatory limits on 1,4 Dioxane were substantially complete as of June 30, 2023 and the new alkoxylation plant is expected to start up in mid-year 2024.

Cash flow ~~used for~~from financing activities was a ~~use~~source of ~~$29.9~~$78.0 million in ~~2017~~2023 versus a ~~use~~source of ~~$17.3~~$128.1 million in ~~2016.~~ 2022. The year-over-year change was primarily due to a lower level of borrowings.

The Company purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and ~~also~~ to mitigate the dilutive effect of new shares issued under its ~~benefit~~compensation plans. The Company may, from time to time, seek to ~~retire or~~ purchase additional amounts of its outstanding equity and/or retire debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to aplans meeting the requirements of Rule 10b5-1 ~~plan.~~promulgated by the SEC. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, the Company ~~purchased 57,963~~did not purchase any shares inof its common stock on the open ~~market at a total cost of $4.5 million.~~market. At ~~September~~June 30, ~~2017, there were 659,966 shares~~2023, the Company had $125.1 million remaining under the ~~current~~ share repurchase ~~authorization.~~program authorized by its Board of Directors.

Consolidated balance sheet debt ~~decreased by $12.6~~increased from $587.1 million ~~for the current year, from $317.0~~on December 31, 2022 to $682.6 million ~~to $304.4 million~~on June 30, 2023, primarily due to ~~a decrease of both~~higher domestic ~~and foreign debt. Since December 31, 2016, net~~borrowings from the Company’s revolving credit facility. 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 $51.0~~increased $135.4 million, from ~~$91.3~~$413.3 million ~~to $40.3 million.~~

~~As of September 30, 2017, the ratio of total debt to total debt plus shareholders’ equity was 29.3 percent compared to 33.3 percent~~ at December 31, ~~2016.~~ 2022 to $548.7 million at June 30, 2023. This change reflects a debt increase of $95.5 million and a cash decrease of $39.9 million.

As of ~~September~~June 30, ~~2017,~~2023, the ratio of net debt to net debt plus shareholders’ equity was ~~5.2~~31.1 percent ~~compared to 12.6~~versus 26.2 percent at December 31, ~~2016. At September~~2022 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details). On June 30, ~~2017,~~2023, the Company’s debt included ~~$305.0~~$383.6 million of unsecured ~~private placement loans~~notes, with maturities ranging from ~~2017~~2023 through ~~2027. These~~2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements, a $97.5 million delayed draw term loan borrowed pursuant to the Company's credit agreement, $196.5 million of short term loans ~~are~~borrowed under its revolving credit facility and $5.0 million of foreign credit line borrowings. The proceeds from the note issuances have been the Company’s primary source of long-term debt financing and are supplemented by borrowings under bank credit facilities to meet short and medium-term liquidity needs.

The Company's credit agreement with a syndicate of banks provides for credit facilities in an initial aggregate principal amount of $450.0 million, consisting of (a) a $350.0 million multi-currency revolving credit facility and (b) a $100.0 million delayed draw term loan credit facility, each of which matures on June 24, 2027. The Company ~~has a committed $125.0 million multi-currency syndicated revolving~~maintains import letters of credit, ~~agreement. The~~and standby letters of credit ~~agreement allows the Company to make unsecured borrowings,~~under its workers’ compensation insurance agreements and for other purposes, as ~~requested~~needed from time to time, ~~for working capital and other corporate purposes. This unsecured facility is~~which are issued under the Company’s primary source of short-term borrowings and is committed through July 10, 2019, with terms and conditions that are substantially equivalent to those of the Company’s other U.S. loan agreements.revolving credit agreement. As of ~~September~~June 30, ~~2017,~~2023, the Company had outstanding loans totaling $294.0 million, inclusive of a $97.5 million delayed draw term loan, and letters of credit ~~of $4.7~~totaling $11.3 million, under the ~~revolving~~ credit agreement, ~~and no borrowings,~~ with ~~$120.3~~$142.2 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 ~~term loans and~~ short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital ~~expenditure programs~~expenditures and acquisitions. At ~~September~~June 30, ~~2017,~~2023, the Company’s foreign subsidiaries had $5.0 million of outstanding ~~debt of $0.5 million.~~debt.

The Company ~~has~~is subject to covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth. These ~~agreements~~debt covenants 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. (the Restricted Group). Under the most restrictive of these debt covenants:

The Company believes it was in compliance with all of its ~~loan agreements~~debt covenants as of ~~September~~June 30, ~~2017. Based on current projections, the Company believes it will be in compliance with its loan agreements throughout 2017~~.2023.

The Company’s operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ~~address~~ensure compliance with these laws and regulations, ~~these policies and practices may not be effective, or~~ future developments and increasingly stringent environmental regulation ~~could~~may require the Company to make additional unforeseen environmental expenditures. The Company ~~expects to~~will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. ~~For~~During the ~~nine~~first six months ~~ended September 30, 2017~~of 2023 and ~~2016,~~2022, the Company’s expenditures for capital projects related to ~~the environment~~environmental matters were ~~$1.8~~$4.4 million and ~~$0.9~~$5.8 million, respectively. These projects are capitalized and depreciated 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 the Company’s manufacturing locations were ~~$20.3~~$18.0 million and ~~$18.2~~$17.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it ~~may~~is likely to incur with respect to ~~the~~these sites. It is the Company’s accounting policy to record liabilities when environmental assessments and/or remedial efforts are probable, and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. Estimating the possible costs of remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Some of the factors on which the Company bases its estimates include information provided by decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, ~~potentially responsible party negotiations~~ and ~~the development of~~ remedial action ~~plans.~~plans developed. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of ~~$25.0~~$24.0 million to ~~$46.1~~$48.0 million at ~~September~~June 30, ~~2017 compared to $25.7~~2023 and $32.6 million to ~~$46.5~~$56.4 million at December 31, ~~2016. At September 30, 2017, and December 31, 2016,~~2022. Within the ~~Company's accrued liability for such losses, which represented the Company’s best estimate within the estimated~~ range of possible environmental losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, ~~legal losses, was $25.0~~thus, has accrued at the lower end of the range; these accruals totaled $24.0 million at June 30, 2023 and ~~$25.8~~$32.6 million ~~respectively. During~~at December 31, 2022. This decrease primarily reflects payments for remediation work conducted at the ~~nine-month period ended September 30, 2017, cash outlays~~Maywood, New Jersey site. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to environmental remediation and certain legal ~~and environmental~~ matters ~~approximated $1.4~~were $8.9 million for the six months ended June 30, 2023, compared to ~~$1.0~~$1.1 million for the same period in ~~2016.~~2022.

~~Reported net income for~~Management believes the Company's second half 2023 sales volume and margins will incrementally improve versus the first ~~nine months~~half of ~~2017 was up five percent, while adjusted net income was slightly below~~2023, driven by continued gradual recovery in Rigid Polyol demand, growth in Surfactant volumes associated with new contracted business and sequentially lower raw material costs. Management is implementing further cost control and cash management initiatives to supplement the ~~record~~headcount and discretionary expense controls that have been in place since the first ~~nine months of 2016. The fourth~~ quarter of ~~2016 was negatively impacted by expenses that are not~~2023. Capital spending is projected to be significantly lower during the second half of the year, as spending on the Company's low 1,4 dioxane investments nears completion and lower capital outlays will be required to complete the Pasadena, Texas alkoxylation facility which is expected to ~~recur~~be operational mid-year 2024. While management acknowledges the current environment has been challenging, it remains confident in the ~~fourth quarter of 2017. In addition, the Company believes its diversification efforts~~Company's long-term strategic growth and enhanced internal efficiencies should positively impact the fourth quarter of 2017. Although increased competitive activity in North America will persist, the Company has begun to recover higher raw material costs within its Polymer segment and continues to benefit from growing global market volumes for insulation materials. Management remains optimistic that the Company will deliver full year adjusted earnings growth.innovation initiatives.

There have been no material changes to the critical accounting policies disclosed in the Company’s ~~2016~~2022 Annual Report on Form 10-K.

~~RECONCILIATIONS OF~~ NON-GAAP ~~ADJUSTED NET INCOME AND EARNINGS PER SHARE~~RECONCILIATIONS

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

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

Management uses the non-GAAP net debt metric to gain a more complete picture of the Company’s overall liquidity, financial flexibility and leverage level. This adjusted measure should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. The Company's definition of this adjusted measure may differ from similarly titled measures used by other entities.

There have been no material changes to the market risks ~~disclosed~~described in the Company’s ~~2016~~2022 Annual Report on Form 10-K.

We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of ~~September~~June 30, ~~2017.~~2023. Based on this evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~September~~June 30, ~~2017,~~2023, such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended ~~September~~June 30, ~~2017,~~2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

In addition, there have been no ~~other~~ material changes to the legal proceedings disclosed in the Company’s ~~2016~~2022 Annual Report on Form ~~10-K and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.~~10-K.

There have been no material changes to the risk factors disclosed in the Company’s ~~2016~~2022 Annual Report on Form 10-K.

Below is ~~the~~a summary by month of ~~common stock purchases~~share purchase by the Company during the ~~third~~second quarter ~~ended September 30, 2017:~~of 2023:

~~None~~During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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


Delaware		36-1823834
(State or other jurisdiction		~~(I.R.S. Employer~~
of incorporation or organization)		(I.R.S. Employer Identification Number)


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $1 par value	SCL	New York Stock Exchange


Class		Outstanding at ~~October 19, 2017~~July 26, 2023
Common Stock, $1 par value		~~22,522,579~~ 22,351,168Shares


(In thousands)	Amount Reclassified from AOCI (1)
AOCI Components	Three Months Ended June 30,						Six Months Ended June 30,						Affected Line Item in Condensed Consolidated Statements of Income
	2023			2022			2023			2022
Amortization of defined benefit pension actuarial losses	$	(78	)	$	(579	)	$	(153	)	$	(1,159	)	(2)
		18			145			35			289		Tax benefit
	$	(60	)	$	(434	)	$	(118	)	$	(870	)	Net of tax
Gains and losses on cash flow hedges:
Foreign exchange contracts		2			2			5			5		Cost of sales
		2			2			5			5		Total before tax
		—			—			—			—		Tax benefit
	$	2		$	2		$	5		$	5		Net of tax
Total reclassifications for the period	$	(58	)	$	(432	)	$	(113	)	$	(865	)	Net of tax

(In thousands)	September 30, 2017			December 31, 2016
Assets
Current Assets:
Cash and cash equivalents	$	264,100		$	225,743
Receivables, net		314,125			263,408
Inventories (Note 6)		163,716			173,663
Other current assets		23,718			22,727
Total current assets		765,659			685,541
Property, Plant and Equipment:
Cost		1,588,996			1,513,478
Less: accumulated depreciation		(997,122	)		(930,764	)
Property, plant and equipment, net		591,874			582,714
Goodwill, net		25,724			25,308
Other intangible assets, net		19,810			22,339
Long-term investments (Note 3)		26,335			24,055
Other non-current assets		13,429			13,933
Total assets	$	1,442,831		$	1,353,890
Liabilities and Equity
Current Liabilities:
Current maturities of long-term debt (Note 12)	$	21,165		$	28,154
Accounts payable		172,384			158,316
Accrued liabilities		96,421			110,795
Total current liabilities		289,970			297,265
Deferred income taxes		19,729			12,497
Long-term debt, less current maturities (Note 12)		283,261			288,859
Other non-current liabilities		113,600			119,353
Commitments and Contingencies (Note 7)
Equity:
Common stock, $1 par value; authorized 60,000,000 shares; Issued shares 26,063,641 in 2017 and 25,894,782 shares in 2016		26,064			25,895
Additional paid-in capital		168,548			158,042
Accumulated other comprehensive loss (Note 10)		(99,572	)		(127,465	)
Retained earnings		716,923			649,070
Less: Common treasury stock, at cost, 3,542,333 shares in 2017 and 3,470,084 shares in 2016		(77,030	)		(70,938	)
Total Stepan Company stockholders’ equity		734,933			634,604
Noncontrolling interests (Note 2)		1,338			1,312
Total equity		736,271			635,916
Total liabilities and equity	$	1,442,831		$	1,353,890


(Dollars in thousands)	June 30, 2023			December 31, 2022
Assets
Current Assets:
Cash and cash equivalents	$	133,929		$	173,750
Receivables, net		423,399			436,914
Inventories (Note 6)		339,961			402,531
Other current assets		41,433			31,607
Total current assets		938,722			1,044,802
Property, Plant and Equipment:
Cost		2,517,028			2,370,552
Less: Accumulated depreciation		(1,351,244	)		(1,297,255	)
Property, plant and equipment, net		1,165,784			1,073,297
Goodwill, net (Note 16)		98,523			95,922
Other intangible assets, net		56,501			58,026
Long-term investments (Note 3)		25,029			23,294
Operating lease assets (Note 7)		68,202			62,540
Other non-current assets		78,057			75,291
Total assets	$	2,430,818		$	2,433,172
Liabilities and Equity
Current Liabilities:
Current maturities of long-term debt (Note 14)	$	244,360		$	132,111
Accounts payable		287,567			375,726
Accrued liabilities		110,110			162,812
Total current liabilities		642,037			670,649
Deferred income taxes		9,071			10,179
Long-term debt, less current maturities (Note 14)		438,269			455,029
Non-current operating lease liabilities (Note 7)		55,923			50,559
Other non-current liabilities		70,421			80,691
Commitments and Contingencies (Note 8)
Equity:
Common stock, $1 par value; authorized 60,000,000 shares; 26,978,171 issued shares in 2023 and 26,840,843 issued shares in 2022		26,978			26,841
Additional paid-in capital		242,215			237,202
Accumulated other comprehensive loss (Note 11)		(132,370	)		(167,512	)
Retained earnings		1,262,639			1,250,130
Less: Common treasury stock, at cost, 4,627,565 shares in 2023 and 4,605,858 shares in 2022		(184,365	)		(180,596	)
Total equity		1,215,097			1,166,065
Total liabilities and equity	$	2,430,818		$	2,433,172

(In thousands)	Total Equity			Stepan Company Equity			Noncontrolling Interests’ Equity ⁽³⁾
Balance at January 1, 2017	$	635,916		$	634,604		$	1,312
Net income		81,661			81,694			(33	)
Dividends		(13,841	)		(13,841	)		—
Common stock purchases ⁽¹⁾		(6,255	)		(6,255	)		—
Stock option exercises		3,127			3,127			—
Defined benefit pension adjustments, net of tax		1,671			1,671			—
Translation adjustments		26,288			26,229			59
Derivative instrument activity, net of tax		(7	)		(7	)		—
Other ⁽²⁾		7,711			7,711			—
Balance at September 30, 2017	$	736,271		$	734,933		$	1,338

(In thousands)	September 30, 2017		Level 1		Level 2		Level 3
Mutual fund assets	$	26,335	$	26,335	$	—	$	—
Derivative assets:
Foreign currency contracts		161		—		161		—
Total assets at fair value	$	26,496	$	26,335	$	161	$	—
Derivative liabilities:
Foreign currency contracts	$	342	$	—	$	342	$	—

(In thousands)	December 31, 2016		Level 1		Level 2		Level 3
Mutual fund assets	$	24,055	$	24,055	$	—	$	—
Derivative assets:
Foreign currency contracts		453		—		453		—
Total assets at fair value	$	24,508	$	24,055	$	453	$	—
Derivative liabilities :
Foreign currency contracts	$	469	$	—	$	469	$	—

(In thousands)	Amount Reclassified from AOCI ^(a)
AOCI Components	Three Months Ended September 30						Nine Months Ended September 30						Affected Line Item in Consolidated Statements of Income
	2017			2016			2017			2016
Amortization of defined benefit pension actuarial losses	$	(835	)	$	(794	)	$	(2,598	)	$	(2,598	)	^(b)
		296			297			927			972		Tax benefit
	$	(539	)	$	(497	)	$	(1,671	)	$	(1,626	)	Net of tax
Gains and losses on cash flow hedges:
Interest rate contracts	$	—		$	(7	)	$	—		$	(20	)	Interest, net
Foreign exchange contracts		2			3			7			7		Cost of sales
		2			(4	)		7			(13	)	Total before tax
		—			2			—			6		Tax benefit
	$	2		$	(2	)	$	7		$	(7	)	Net of tax
Total reclassifications for the period	$	(537	)	$	(499	)	$	(1,664	)	$	(1,633	)	Net of tax

(In thousands)	Termination Benefits			Other Expense			Total
Restructuring liability at December 31, 2016	$	1,548		$	437		$	1,985
Expense recognized		—			786			786
Amounts paid		(550	)		(928	)		(1,478	)
Foreign currency translation		17			6			23
Restructuring liability at March 31, 2017	$	1,015		$	301		$	1,316
Expense recognized		—			454			454
Amounts paid		(168	)		(615	)		(783	)
Foreign currency translation		20			3			23
Restructuring liability at June 30, 2017	$	867		$	143		$	1,010
Expense recognized		—			426			426
Amounts paid		(126	)		(444	)		(570	)
Foreign currency translation		37			14			51
Restructuring liability at September 30, 2017	$	778		$	139		$	917

(In thousands)
Assets:
Current assets	$	5,165
Property, plant and equipment		5,716
Identifiable intangible assets		7,354
Goodwill		14,207
Total assets acquired	$	32,442
Liabilities:
Current liabilities	$	408
Deferred tax liability		3,079
Total liabilities assumed	$	3,487
Net assets acquired	$	28,955


	Income (Expense)
	For the Three Months Ended June 30,
(In millions)	2023			2022			Change
Deferred Compensation (Administrative expenses)	$	(0.7	)	$	3.4		$	(4.1	)	(1)
Realized/Unrealized Gains (Losses) on Investments (Other, net)		1.5			(4.3	)		5.8
Investment Income (Other, net)		0.1			0.2			(0.1	)
Pretax Income Effect	$	0.9		$	(0.7	)	$	1.6


	Income (Expense)
	For the Six Months Ended June 30,
(In millions)	2023			2022			Change
Deferred Compensation (Administrative expense)	$	(2.3	)	$	10.9		$	(13.2	)	(1)
Realized/Unrealized Gains (Losses) on Investments (Other, net)		3.1			(6.8	)		9.9
Investment Income (Other, net)		0.2			0.4			(0.2	)
Pretax Income Effect	$	1.0		$	4.5		$	(3.5	)

	Income (Expense)
(In millions)	For the Three Months Ended September 30
	2017		2016			Change
Deferred Compensation (Operating expenses)	$	0.1	$	(7.4	)	$	7.5	⁽¹⁾
Realized/Unrealized Gains on Investments (Other, net)		1.0		0.8			0.2
Investment Income (Other, net)		0.1		—			0.1
Pretax Income Effect	$	1.2	$	(6.6	)	$	7.8

	Income (Expense)
(In millions)	For the Nine Months Ended September 30
	2017			2016			Change
Deferred Compensation (Operating expenses)	$	(5.3	)	$	(12.6	)	$	7.3	⁽¹⁾
Realized/Unrealized Gains on Investments (Other, net)		3.5			0.6			2.9
Investment Income (Other, net)		0.2			0.2			—
Pretax Income Effect	$	(1.6	)	$	(11.8	)	$	10.2


	Nine Months Ended September 30							Increase (Decrease)			For the Six Months Ended June 30,
(In millions)	2017		2016		Increase (Decrease)			Due to Foreign Currency Translation			2023		2022		Decrease			Decrease Due to Foreign Translation
Net Sales	$	1,451.2	$	1,345.5	$	105.7		$	(2.5	)	$	1,231.4	$	1,426.9	$	(195.5	)	$	(8.0	)
Gross Profit		257.7		269.8		(12.1	)		0.4			140.0		240.8		(100.8	)		(1.1	)
Operating Income		115.3		116.3		(1.0	)		0.3			38.9		141.0		(102.1	)		(0.8	)
Pretax Income		110.7		106.8		3.9			0.2			36.2		128.9		(92.7	)		(0.9	)


(Dollars in thousands)	For the Three Months Ended June 30,
Gross Profit and Operating Income	2023		2022		Decrease			Percent Change
North America	$	24,241	$	47,188	$	(22,947	)		-49
Europe		5,066		11,620		(6,554	)		-56
Latin America		7,222		15,567		(8,345	)		-54
Asia		2,015		3,692		(1,677	)		-45
Surfactants Segment Gross Profit	$	38,544	$	78,067	$	(39,523	)		-51
Operating Expenses		23,404		29,818		(6,414	)		-22
Surfactants Segment Operating Income	$	15,140	$	48,249	$	(33,109	)		-69

	2017				2016
	September 30		June 30		September 30		June 30
Company Common Stock Price	$	83.66	$	87.14	$	72.66	$	59.53


(In thousands)	For the Six Months Ended June 30,
Net Sales	2023		2022		Decrease			Percent Change
Surfactants	$	859,514	$	953,350	$	(93,836	)		-10
Polymers		325,642		425,964		(100,322	)		-24
Specialty Products		46,255		47,595		(1,340	)		-3
Total Net Sales	$	1,231,411	$	1,426,909	$	(195,498	)		-14

	For the Nine Months Ended
(Dollars in thousands)	September 30,		September 30,		Increase			Percent
Net Sales	2017		2016		(Decrease)			Change
Surfactants	$	973,381	$	899,014	$	74,367			8
Polymers		415,551		382,540		33,011			9
Specialty Products		62,252		63,976		(1,724	)		-3
Total Net Sales	$	1,451,184	$	1,345,530	$	105,654			8

	2017		2016				2015
	September 30		December 31		September 30		December 31
Company Common Stock Price	$	83.66	$	81.48	$	72.66	$	49.69


	2023		2022				2021
	June 30		December 31		June 30		December 31
Company Common Stock Price	$	95.56	$	106.46	$	101.35	$	124.29


	1.	The ~~Restricted Group must~~Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, of ~~1.75~~3.50 to 1.00, for the preceding four calendar quarters.


	3.	The Company is required to maintain net worth of at least ~~$325.0~~$750.0 million.


	3.4.	The ~~Restricted Group must maintain a ratio of long-term debt~~Company is permitted to ~~total capitalization, as defined in the agreements, not to exceed 60 percent.~~

	Three Months Ended September 30
(In millions, except per share amounts)	2017						2016
	Net Income			Diluted EPS			Net Income			Diluted EPS
Net Income Attributable to the Company as Reported	$	21.9		$	0.94		$	21.4		$	0.92

Deferred Compensation (Income) Expense, Including Investment Gains/Losses		(1.2	)		(0.06	)		6.6			0.29
Business Restructuring		0.4			0.02			—			—
Cumulative Tax Effect on Above Adjustment Items		0.3			0.02			(2.6	)		(0.11	)
Adjusted Net Income	$	21.4		$	0.92		$	25.4		$	1.10


	Three Months Ended
(In millions, except per share amounts)	June 30, 2023						June 30, 2022
	Net Income			Diluted EPS			Net Income			Diluted EPS
Net Income Attributable to the Company as Reported	$	12.7		$	0.55		$	52.1		$	2.26

Deferred Compensation (Income) Expense (including related investment activity)		(0.9	)		(0.03	)		0.7			0.03
Business Restructuring		0.1			—			0.1			—
Cash Settled Stock Appreciation Rights		(0.1	)		—			0.1			—
Remediation Expenses		0.1			—			0.3			0.01
Cumulative Tax Effect on Above Adjustment Items		0.2			0.01			(0.3	)		—
Adjusted Net Income	$	12.1		$	0.53		$	53.0		$	2.30


	Six Months Ended
(In millions, except per share amounts)	June 30, 2023						June 30, 2022
	Net Income			Diluted EPS			Net Income			Diluted EPS
Net Income Attributable to the Company as Reported	$	28.8		$	1.25		$	96.9		$	4.19

Deferred Compensation (Income) Expense (including related investment activity)		(1.0	)		(0.04	)		(4.5	)		(0.20	)
Business Restructuring		0.2			0.01			0.1			0.01
Cash Settled Stock Appreciation Rights		(0.1	)		—			(0.4	)		(0.02	)
Remediation Expenses		0.5			0.02			0.6			0.03
Cumulative Tax Effect on Above Adjustment Items		0.1			—			1.0			0.04
Adjusted Net Income	$	28.5		$	1.24		$	93.7		$	4.05


Month	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (1)
April 2023		—		$	—		—	$	125,050,905
May 2023		1,580	(2)	$	97.42		—	$	125,050,905
June 2023		174	(2)	$	97.49		—	$	125,050,905

Total		1,754		$	97.43		—	$	125,050,905


Exhibit No.		Description

31.1	–	Certification of President and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

31.2	–	Certification of Vice President and Chief Financial Officer pursuant to Exchange Act Rule 13a- 14(a)/15d-14(a)

32	–	Certification pursuant to 18 U.S.C. Section 1350

101.INS	–	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document

101.SCH	–	Inline XBRL Taxonomy Extension Schema Document

101.CAL	–	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	–	Inline XBRL Taxonomy Extension Definition Document

101.LAB	–	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	–	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104	–	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Exhibit No.		Description

10.1	–	Separation Agreement and Release, dated as of August 15, 2017, by and between Stepan Company and Scott Mason (filed with the Company’s Current Report on Form 8-K filed on August 17, 2017 (File No. 001-4462) and incorporated herein by reference)

31.1	–	Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

31.2	–	Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

32	–	Certification pursuant to 18 U.S.C. Section 1350

101.INS	–	XBRL Instance Document

101.SCH	–	XBRL Taxonomy Extension Schema Document

101.CAL	–	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	–	XBRL Taxonomy Extension Definition Document

101.LAB	–	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	–	XBRL Taxonomy Extension Presentation Linkbase Document

~~(Check one):~~ Large accelerated filer

Accelerated filer

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(~~Do not check if a smaller reporting company)~~

Smaller reporting company

Emerging growth company