STEPAN CO (SCL)

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 1A - Risk Factors” of this Quarterly Report on Form 10-Q and under “Part I-Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025, including the risks and uncertainties related to the following:

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the Company's ability to realize the anticipated cost savings or operating efficiencies associated with strategic initiatives, including Project Catalyst;

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accidents, unplanned production shutdowns or disruptions in any of the Company’s manufacturing facilities;

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reduced demand for Company products due to customer product reformulations or new technologies;

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the Company’s ability to successfully develop or introduce new products;

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compliance with laws and other legal restrictions, including those relating to the international scope of our business;

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the Company’s ability to make acquisitions of suitable candidates and successfully integrate acquisitions;

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domestic and global competition and the Company’s ability to successfully compete;

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volatility of raw material, natural gas and electricity costs as well as any disruption in their supply;

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disruptions in transportation or significant changes in transportation costs;

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downturns in certain industries and general economic downturns;

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international business risks, including changes in global trade policies, tariffs, retaliatory measures and countermeasures, currency exchange controls, fluctuations in currency exchange rates, legal restrictions and taxes;

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unfavorable resolution of litigation against the Company;

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the Company’s ability to keep and protect its intellectual property rights;

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changes in tax policy and potentially adverse tax consequences due to the international scope of the Company’s operations;

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downgrades to the Company’s credit ratings or disruptions to the Company’s ability to access well-functioning credit or capital markets;

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conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations;

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cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects;

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interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data or illegal or fraudulent activities committed against the Company;

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the Company’s ability to retain its executive management and other key personnel;

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the Company’s ability to operate within the limitations of debt covenants; and

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the other factors set forth under “Risk Factors.”

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 the Company's forward-looking statements. Other unknown or unpredictable factors could also 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.

Overview

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

Surfactants – Surfactants, which accounted for 73 percent of consolidated net sales for the first six months of 2026, are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and one Asian site (Singapore).

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In February 2026, the Company announced Project Catalyst, a comprehensive operational and efficiency plan. As part of Project Catalyst, the Board of Directors approved plans to shut down the Company's Fieldsboro, New Jersey site and decommission select assets at its Elwood, Illinois (Millsdale) and Stalybridge, U.K. facilities during the first half of 2026. The Company is mostly consolidating impacted operations into its existing network, improving its asset utilization and reducing its fixed cost basis, while maintaining ongoing supply for its customers. The Company recognized $5.1 million and $70.5 million of pre-tax business restructuring expense related to these asset shutdowns during the second quarter and the first six months of 2026, respectively. This restructuring expense is captured on a separate Business Restructuring line item on the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2026. See Note 16, Business Restructuring, of the notes to the Company's consolidated financial statements for more details.

Polymers – Polymers, which accounted for 24 percent of consolidated net sales for the first six months of 2026, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Elwood, Illinois (Millsdale) and Wilmington, North Carolina sites. Phthalic anhydride is manufactured at the Company’s Millsdale site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. In Europe, polyurethane polyols are manufactured at the Company’s plants in Germany and the Netherlands and specialty polyols are manufactured at the Company’s Poland site. In Asia, polyurethane polyols and specialty polyols are manufactured at the Company’s China plant.

Specialty Products – Specialty products, which accounted for three percent of consolidated net sales for the first six months of 2026, include flavors, emulsifiers and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications. Specialty products are primarily manufactured at the Company’s Maywood, New Jersey, site.

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Deferred Compensation Plans

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

(1)
See the Segment Results-Corporate Expenses section of this MD&A for de

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

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

Presentation of Information

The discussion that follows includes a comparison of the Company’s results of operations and liquidity and capital resources for the fiscal years ended December 31, 2024 and 2025. For a discussion of changes from the fiscal year ended December 31, 2023 to the fiscal year ended December 31, 2024, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024 (filed February 27, 2025).

Overview

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

Surfactants - Surfactants, which accounted for 71 percent of the Company’s consolidated net sales in 2025, are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Brazil and Mexico) and one Asian site (Singapore).

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During the fourth quarter of 2025, the Company completed the sale of its Stepan Philippines Quaternaries, Inc. (SPQI) manufacturing assets located in Bauan, Batangas, Philippines to Masurf, Inc, a subsidiary of Musim Mas Holdings Pte. Ltd. As part of the transaction, SPQI entered into a tolling agreement with Masurf, Inc. for the continued service of SPQI customers in Southeast Asia. See Note 20, Sales of Assets, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for more details.

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During the fourth quarter of 2025, the Company successfully closed on the sale of its manufacturing assets located in Lake Providence, Louisiana. This transaction followed the Company’s sale of its SPQI manufacturing assets in the Philippines, representing the Company's ongoing footprint optimization efforts and focus on core growth opportunities. See Note 20, Sales of Assets, of the notes to the Company’s consolidated financial statements (included in Item 8 of this Form 10-K) for more details.

Polymers - Polymers, which accounted for 25 percent of consolidated net sales in 2025, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Elwood, Illinois (Millsdale) and Wilmington, North Carolina sites. Phthalic anhydride is manufactured at the Company’s Millsdale site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. In Europe, polyurethane polyols are manufactured at the Company’s plants in Germany and the Netherlands and specialty polyols are manufactured at the Company’s Poland site. In Asia, polyurethane polyols and specialty polyols are manufactured at the Company’s Nanjing, China, plant.

Specialty Products – Specialty products, which accounted for four percent of consolidated net sales in 2025, include flavors, emulsifiers and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications. Specialty products are primarily manufactured at the Company’s Maywood, New Jersey site.

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Deferred Compensation Plans

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

(1)
See the Segment Results – Corporate Expenses section of this MD&A for details regarding the period-over-period changes in deferred compensation.

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

Effects of Foreign Currency Translation

The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects year-over-year comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar year-over-year local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following tables present the effects that foreign currency translation had on the year-over-year changes in consolidated net sales and various income statement line items for 2025 compared to 2024 and 2024 compared to 2023:

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Results of Operations

2025 Compared with 2024

Summary

Net income in 2025 decreased $3.5 million, or seven percent, to $46.9 million, or $2.05 per diluted share, from $50.4 million, or $2.20 per diluted share in 2024. Adjusted net income was $41.7 million, or $1.82 per diluted share in 2025 versus $50.5 million, or $2.20 per diluted share in 2024 (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Earnings before interest, taxes, depreciation and amortization (EBITDA) were $208.0 million in 2025, up 11 percent, versus $186.9 million in 2024. Adjusted EBITDA was $198.9 million in 2025, up six percent, versus $187.0 million in 2024. (See the “Reconciliation of non-GAAP EBITDA and Adjusted EBITDA” section of this MD&A for a reconciliation between reported operating income and non-GAAP EBITDA and Adjusted EBITDA). Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in 2025 compared to 2024. A detailed discussion of segment operating performance for 2025, compared to 2024, follows the summary.

Consolidated net sales increased $151.8 million, or seven percent, between years. Higher average selling prices positively impacted the year-over-year change in net sales by $130.7 million. The increase in average selling prices was mainly attributable to the pass-through of higher raw material costs and more favorable product mix. Consolidated sales volume increased one percent and positively impacted the year-over-year change in net sales by $16.5 million. Consolidated sales volume, excluding the impact of the Philippines asset divestiture, increased two percent. Polymer and Specialty Products sales volume increased eight percent and 15 percent, respectively. Surfactant sales volume decreased two percent. Foreign currency translation favorably impacted the year-over-year change in net sales by $4.6 million, primarily due to a weaker U.S. dollar against the European euro, British pound sterling and Polish zloty, partially offset by a stronger U.S. dollar against the Mexican peso and Brazilian real.

Operating income in 2025 increased $8.1 million, or 11 percent, versus operating income in 2024. Polymer and Specialty Products operating income increased $2.6 million and $4.7 million, respectively, year-over-year. Surfactant operating income decreased $18.2 million in 2025 versus 2024. Corporate expenses, including deferred compensation, environmental remediation, a $6.2 million goodwill impairment charge and $15.9 million of gains recognized on the sale of assets, decreased $19.0 million, or 25 percent, year-over-year. Prior year corporate expenses included a $6.8 million charge associated with an external criminal social engineering fraud scheme. Foreign currency translation had a $0.

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