Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

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:

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 71 percent of consolidated net sales for the first nine 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).

Polymers - Polymers, which accounted for 25 percent of consolidated net sales for the first nine 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 four percent of consolidated net sales for the first nine 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.

Project Catalyst

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. Each of these footprint initiatives impacted assets within the Surfactant segment. 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.

On July 28, 2026, the Company's Board of Directors approved a plan (as part of Project Catalyst) to reduce the Company's global salaried workforce by around 100 roles, or seven percent of global salaried headcount. These role reductions were completed during the third quarter and the impacted roles were across all Company segments and its Corporate headquarters. The Company estimates that it will incur $4.0 million to $6.0 million of charges in connection with the workforce reduction, consisting primarily of employee severance, benefits and related costs. The Company expects substantially all of these workforce reduction charges to result in cash expenditures. The Company expects to recognize the majority of these charges prior to the end of 2026.

The Company recognized $5.6 million and $76.1 million of total pre-tax business restructuring expense related to these asset shutdowns and workforce reductions during the third quarter and the first nine months of 2026, respectively. These restructuring expenses are captured on a separate Business Restructuring line item on the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2026. The Company anticipates recognizing total restructuring expenses in the range of $77.0 million to $80.0 million for full year 2026.

See Note 16, Business Restructuring, of the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for more details about Project Catalyst.

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:

Effects of Foreign Currency Translation

The Company's foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three and nine months ended September 30, 2026 and 2025:

RESULTS OF OPERATIONS

Three Months Ended September 30, 2026 and 2025

Summary

Net income in the third quarter of 2026 was $17.8 million, or $0.78 per diluted share, versus $10.8 million, or $0.47 per diluted share, in the third quarter of 2025. Adjusted net income was $21.7 million, or $0.94 per diluted share, versus $10.9 million, or $0.48 per diluted share in the third quarter of 2025 (see the "Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share" section of this MD&A for a reconciliation between reported net income (loss) and reported earnings (loss) per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Earnings before interest, taxes, depreciation and amortization (EBITDA) were $57.5 million in the third quarter of 2026, up two percent, versus $56.1 million in the third quarter of 2025. Adjusted EBITDA was $66.3 million, up 18 percent, versus $56.2 million in the third quarter of 2025 (see the "Reconciliations of Non-GAAP EBITDA and Adjusted EBITDA" section of this MD&A for a reconciliation between reported net 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 the third quarter of 2026 compared to the third quarter of 2025. A detailed discussion of segment operating performance for the third quarter of 2026, compared to the third quarter of 2025, follows the summary.

Consolidated net sales increased $101.9 million, or 17 percent, year-over-year. Higher average selling prices favorably impacted the year-over-year change in net sales by $76.8 million. The increase in average selling prices was mostly attributable to the pass-through of higher raw material costs and pricing actions. Consolidated sales volume increased three percent and positively impacted the change in net sales by $16.6 million. Surfactant and Polymer sales volume increased three percent each and Specialty Products sales volume increased 20 percent, year-over-year. Organic sales volume (excluding the divestiture of assets in the Philippines and the exit of a product line in the U.K.) increased seven percent year-over-year. Foreign currency translation positively impacted the year-over-year change in net sales by $8.5 million, primarily due to a weaker U.S. dollar against the currencies in Latin American countries where the Company conducts its business.

Operating income in the third quarter of 2026 increased $4.2 million, or 19 percent, versus operating income in the third quarter of 2025. Surfactant, Polymer and Specialty Products operating income increased $11.7 million, $0.5 million and $0.6 million, respectively, year-over-year. Corporate expenses, including business restructuring, environmental remediation and deferred compensation expenses increased $8.6 million, year-over-year. Business restructuring expenses were $5.6 million in the third quarter of 2026 versus no restructuring expenses recognized during the third quarter of 2025. Foreign currency translation had a $0.4 million positive impact on operating income year-over-year.

Operating expenses (excluding business restructuring) increased $6.8 million, or 14 percent, year-over-year. Changes in the individual income statement line items that comprise the Company's operating expenses were as follows:

Net interest expense for the third quarter of 2026 decreased $0.5 million, or seven percent, versus the third quarter of 2025.

Other, net was $0.2 million of income in the third quarter of 2026 versus $1.5 million of income in the third quarter of 2025. The Company recognized less than $0.1 million of investment losses (including realized and unrealized gains and losses) for the Company's deferred compensation and supplemental defined contribution mutual fund assets in the third quarter of 2026 compared to $1.1 million of investment gains in the third quarter of 2025. In addition, the Company reported $0.2 million of foreign exchange gains in both the third quarter of 2026 and 2025. The Company's net periodic pension income was less than $0.1 million of income in the third quarter of 2026 versus $0.3 million of income in the third quarter of 2025.

The Company's effective tax rate was 10.2 percent in the third quarter of 2026 versus 34.4 percent in the third quarter of 2025. The decrease was primarily due to the forecasted geographical mix of income and provision-to-tax-return adjustments (R&D tax credits and executive compensation limits) quarter-over-quarter.

Segment Results

Surfactants

Surfactant net sales for the third quarter of 2026 increased $64.3 million, or 15 percent, versus net sales for the third quarter of 2025. Higher average selling prices had a $44.0 million favorable impact on the change in net sales. The higher average selling prices were mainly attributable to the pass through of higher raw material costs and pricing actions. Sales volume increased three percent and had an $11.2 million favorable impact on the change in net sales. Organic sales volume (excluding the divestiture of assets in the Philippines and the exit of a product line in the U.K.) increased eight percent year-over-year. Foreign currency translation had a $9.1 million favorable impact on the year-over-year change in net sales. A comparison of net sales by region follows:

Net sales for North American operations increased $34.6 million, or 15 percent, year-over-year. Higher average selling prices positively impacted the change in net sales by $26.3 million and were primarily due to the pass-through of higher raw material costs, more favorable product mix and pricing actions. Sales volume increased four percent and positively impacted the change in net sales by $8.4 million. The higher sales volume was primarily due to higher demand for products sold into the consumer products and oilfield end markets and to our Tier 2/3 customer base. Foreign currency translation had a $0.1 million unfavorable impact on the year-over-year change in net sales.

Net sales for European operations increased $1.6 million, or two percent, year-over-year. Higher average selling prices positively impacted the change in net sales by $7.3 million and were primarily driven by the pass-through of higher raw material costs and pricing actions. Sales volume decreased six percent and negatively impacted the change in net sales by $4.8 million. The lower sales volume was primarily due to lower demand for products sold into the crop productivity end markets. Foreign currency translation had a $0.9 million unfavorable impact on the year-over-year change in net sales. A stronger U.S. dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect.

Net sales for Latin American operations increased $38.8 million, or 39 percent, due to a 21% increase in sales volume, the favorable impact of foreign currency translation and higher average selling prices. These items positively impacted the change in net sales by $21.1 million, $10.1 million, and $7.6 million, respectively. The increase in sales volume was primarily due to higher demand for products sold into the consumer products and oilfield end markets and to our distribution partners. A weaker U.S. dollar relative to all currencies within the region led to the favorable foreign currency translation effect. The higher average selling prices were primarily due to the pass-through of higher raw material costs and pricing actions.

Net sales for Asian operations decreased $10.7 million, or 66 percent, versus the prior year quarter. An 80 percent decrease in sales volume negatively impacted the year-over-year change in net sales by $13.0 million. The lower sales volume was mainly due to the divestiture of assets in the Philippines during the fourth quarter of 2025. Higher average selling prices positively impacted the change in net sales by $2.2 million. Foreign currency translation had a $0.1 million favorable impact on the change in net sales year-over-year.

Surfactant operating income for the third quarter of 2026 increased $11.7 million, or 75 percent, versus operating income for the third quarter of 2025. Gross profit increased $14.7 million, or 37 percent, and operating expenses increased $2.9 million, or 12 percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations increased $11.3 million, or 58 percent, versus the prior year primarily due to higher average unit margins. The higher average unit margins favorably impacted the change in gross profit by $10.6 million and were primarily attributable to favorable pricing actions, tariff refunds and benefits from Project Catalyst actions. The four percent increase in sales volume positively impacted the year-over-year change in gross profit by $0.7 million.

Gross profit for European operations increased $0.2 million, or 2 percent, primarily due to higher average unit margins. The higher average unit margins positively impacted the change in gross profit by $0.8 million. The six percent decrease in sales volume and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in gross profit by $0.5 million and $0.1 million, respectively.

Gross profit for Latin American operations increased $3.4 million, or 32 percent. The 21% increase in sales volume, the favorable impact of foreign currency translation and higher average unit margins positively impacted the year-over-year change in gross profit by $2.3 million, $0.8 million and $0.3 million, respectively.

Gross profit for Asia operations decreased $0.2 million, or eight percent, year-over-year primarily due to the double-digit decrease in sales volume resulting from the asset divestiture in the Philippines during the fourth quarter of 2025. The decline in sales volume negatively impacted the year-over-year change in gross profit by $1.5 million but was largely offset by higher average unit margins. The higher average unit margins positively impacted the change in gross profit by $1.3 million and primarily reflect lower overhead expenses, partially due to production timing differences, and more favorable product mix.

Operating expenses for the Surfactants segment increased $3.0 million, or 12 percent, in the third quarter of 2026 versus the third quarter of 2025. This increase was largely due to higher incentive-based compensation expenses and the non-recurrence of USEPA penalty recoveries from third parties in the third quarter of 2025. In addition, foreign currency translation had a $0.3 million unfavorable impact on the year-over-year change in operating expenses.

Polymers

Polymer net sales for the third quarter of 2026 increased $34.7 million, or 24 percent, versus net sales for the same period of 2025. Higher average selling prices and a three percent increase in sales volume positively impacted the year-over-year change in net sales by $31.3 million and $4.0 million, respectively. Foreign currency translation had a $0.6 million unfavorable impact on the year-over-year change in net sales. A comparison of net sales by region follows:

Net sales for North American operations increased $26.9 million, or 34 percent, year-over-year. Sales volume increased 18 percent and positively impacted the year-over-year change in net sales by $14.1 million. Sales volume of polyols used in rigid foam applications and within the commodity phthalic anhydride business increased 23 percent and 15 percent, respectively, year-over-year. Within rigid applications, spray foam sales volume increased by double digits. Higher average selling prices positively impacted the change in net sales by $12.8 million. The higher average selling prices were primarily due to the pass-through of higher raw material costs, more favorable product mix and pricing actions.

Net sales for European operations increased $5.8 million, or 11 percent, year-over-year. Higher average selling prices positively impacted the year-over-year change in net sales by $14.3 million. The higher average selling prices were mainly attributable to the pass through of higher raw material costs. A 13 percent decrease in sales volume and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $7.2 million and $1.3 million, respectively. The lower sales volume reflects lower construction demand largely related to the macroeconomic environment and the ongoing economic uncertainties. A stronger U.S. dollar relative to the Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect.

Net sales for Asia and Other operations increased $2.0 million, or 18 percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation. These items positively impacted the change in net sales by $2.5 million and $0.7 million, respectively. An 11 percent decrease in sales volume negatively impacted the year-over-year change in net sales by $1.2 million.

Polymer operating income in the third quarter of 2026 increased $0.5 million, or three percent, versus operating income in the third quarter of 2025. Gross profit increased $1.4 million, or seven percent, and operating expenses increased $0.9 million, or 14 percent, year-over-year. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations increased $4.0 million year-over-year. The 18% increase in sales volume and higher average unit margins positively impacted the change in gross profit by $2.2 million and $1.8 million, respectively.

Gross profit for European operations decreased $2.0 million, or 30 percent, versus the third quarter of 2025. This decrease was primarily due to lower average unit margins and the 13 percent decrease in sales volume. These two factors negatively impacted the change in gross profit by $1.1 million and $0.9 million, respectively. The lower unit margins were primarily due to higher expenses associated with regulatory-mandated maintenance turnaround costs, that typically occur every five years, at the Company's site in Germany and higher storage costs related to inventory builds in advance of the plant shutdown.

Gross profit for Asia and Other operations decreased $0.6 million, or 29 percent, primarily due to lower average unit margins and the 11 percent decrease in sales volume. These items negatively impacted the year-over-year change in gross profit by $0.4 million and $0.2 million, respectively. Foreign currency translation positively impacted the change in gross profit by $0.1 million.

Operating expenses for the Polymer segment increased $0.9 million, or 14 percent, in the third quarter of 2026 versus the third quarter of 2025 primarily due to higher incentive-based compensation expenses.

Specialty Products

Specialty Products net sales for the third quarter of 2026 increased $2.9 million, or 12 percent, versus net sales for the third quarter of 2025. Gross profit and operating income both increased $0.6 million, respectively, year-over-year. The year-over-year increases in gross profit and operating income were primarily due to higher sales volume within the medium chain triglycerides (MCT) product line that was partially offset by less favorable product mix.

Corporate Expenses

Corporate expenses, which include business restructuring, deferred compensation and other operating expenses that are not allocated to the reportable segments, increased $8.6 million year-over-year. Corporate expenses were $26.2 million in the third quarter of 2026 versus $17.7 million in the third quarter of 2025. This increase was primarily due to a $5.6 million restructuring charge recognized in the third quarter of 2026, higher estimated remediation costs related to the Company's Maywood, NJ site and higher year-over-year incentive-based compensation expenses. See Note 16, Business Restructuring, of the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for more details regarding the restructuring charge.

Deferred compensation expense decreased $0.8 million year-over-year. This decrease was primarily due to a smaller increase in the market value of mutual fund investment assets during the third quarter of 2026 versus the third quarter of 2025. Partially offsetting the above, the market price of the Company's common stock increased $6.67 per share in the third quarter of 2026 versus a $6.88 per share decrease in the third quarter of 2025.

The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation income/expense for the three months ended September 30, 2026 and 2025:

Nine Months Ended September 30, 2026 and 2025

Summary

The Company incurred a $0.7 million net loss in the first nine months of 2026, or a loss of $0.03 per diluted share, versus net income of $41.9 million, or $1.83 income per diluted share, in the first nine months of 2025. The current year loss resulted from $56.6 million of after-tax restructuring charges recognized in 2026. Adjusted net income was $59.1 million, or $2.58 per diluted share, versus $42.2 million, or $1.84 per diluted share in the first nine months of 2025 (see the "Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share" section of this MD&A for a reconciliation between reported net income (loss) and reported earnings (loss) per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Earnings before interest, taxes, depreciation and amortization (EBITDA) were $110.1 million in the first nine months of 2026, down 33 percent, from $164.7 million in the first nine months of 2025. Adjusted EBITDA was $190.3 million, up 15 percent, from $165.1 million in the first nine months of 2025 (see the "Reconciliations of Non-GAAP EBITDA and Adjusted EBITDA" section of this MD&A for a reconciliation between reported net 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 the first nine months of 2026 compared to the first nine months of 2025. A detailed discussion of segment operating performance for the first nine months of 2026, compared to the first nine months of 2025, follows the summary.

Consolidated net sales increased $202.6 million, or 11 percent, year-over-year. Higher average selling prices favorably impacted the year-over-year change in net sales by $133.3 million. The increase in average selling prices was mainly attributable

to the pass-through of higher raw material costs, more favorable product mix and pricing actions. Foreign currency translation positively impacted the year-over-year change in net sales by $51.0 million, primarily due to a weaker U.S. dollar against the currencies in Latin American countries where the Company conducts its business. Consolidated sales volume increased one percent and positively impacted the change in net sales by $18.3 million. Organic sales volume (excluding the divestiture of assets in the Philippines and the exit of a product line in the U.K.) was up four percent year-over-year.

Operating income for the first nine months of 2026 was $13.5 million versus $68.0 million of operating income in the first nine months of 2025. Surfactant and Polymer operating income increased $22.3 million and $6.6 million, respectively, year-over-year. Specialty Products operating income decreased $0.5 million between years. Corporate expenses, including business restructuring, environmental remediation and deferred compensation expenses increased $82.9 million, year-over-year. Business restructuring expenses were $76.1 million in the first nine months of 2026 versus no restructuring expenses recognized in the first nine months of 2025. Foreign currency translation had a $3.8 million favorable impact on operating income year-over-year.

Operating expenses (excluding business restructuring) increased $12.4 million or eight percent, year-over-year. Changes in the individual income statement line items that comprise the Company's operating expenses were as follows:

Net interest expense for the first nine months of 2026 increased $0.6 million, or four percent, versus the first nine months of 2025. This increase was primarily attributable to lower U.S. capitalized interest income recognized in 2026 as the Company's new specialty alkoxylation facility in Pasadena, Texas started up in April 2025, partially offset by a combination of lower interest expense and higher interest income in 2026.

Other, net was $1.4 million of income in the first nine months of 2026 versus $3.3 million of income in the first nine months of 2025. The Company recognized $1.3 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 nine months of 2026 compared to $2.4 million of investment gains in the first nine months of 2025. In addition, the Company reported less than $0.1 million of foreign exchange gains in the first nine months of 2026 versus $0.2 million of foreign exchange gains in the first nine months of 2025. The Company's net periodic pension income was $0.1 million in the first nine months of 2026 versus $0.8 million in the first nine months of 2025.

The Company's effective tax rate was 67.7 percent in the first nine months of 2026 versus 23.8 percent in the first nine months of 2025. The increase was primarily attributable to the geographical mix of income, discrete items and permanent differences. The discrete and permanent items were not significantly different from the prior year but had a pronounced impact on the effective tax rate due to the small global pre-tax loss in 2026.

Segment Results

Surfactants

Surfactant net sales for the first nine months of 2026 increased $160.1 million, or 13 percent, versus net sales for the first nine months of 2025. Higher average selling prices favorably impacted the change in net sales by $101.1 million. The higher average selling prices were mainly attributable to the pass through of higher raw material costs, more favorable product mix and pricing actions. Sales volume increased one percent and positively impacted the year-over-year change in net sales by $14.1 million. Organic sales volume (excluding the divestiture of assets in the Philippines and the exit of a product line in the U.K.) increased six percent year-over-year. Foreign currency translation positively impacted the year-over-year change in net sales by $44.9 million. A comparison of net sales by region follows:

Net sales for North American operations increased $81.2 million, or 11 percent, year-over-year. Higher average selling prices had a $62.7 million favorable impact on the change in net sales and were primarily due to the pass-through of higher raw material costs, more favorable product mix and pricing actions. Sales volume increased three percent and positively impacted the change in net sales by $18.3 million. The higher sales volume was primarily due to higher demand for products sold into the industrial cleaning, crop productivity, personal care and oilfield end markets and to our Tier 2/3 customer base. Foreign currency translation favorably impacted the change in net sales by $0.2 million.

Net sales for European operations increased $21.6 million, or nine percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation. These items positively impacted the change in net sales by $12.7 million and $9.2 million, respectively. The higher average selling prices were primarily due to the pass-through of higher raw material costs and pricing actions. A weaker U.S. dollar relative to the European euro and British pound sterling led to the favorable foreign currency translation effect. Sales volume declined less than one percent year-over-year and negatively impacted the change in net sales by $0.3 million.

Net sales for Latin American operations increased $85.6 million, or 32 percent, due to a 13 percent increase in sales volume, the favorable impact of foreign currency translation and higher average selling prices. These items positively impacted the change in net sales by $35.9 million, $35.3 million and $14.4 million, respectively. The increase in sales volume was primarily due to higher demand for products sold into the commodity laundry and cleaning, industrial cleaning and crop productivity end markets and to our distribution partners. A weaker U.S. dollar relative to all currencies within the region led to the favorable foreign currency translation effect. The higher average selling prices were primarily due to the pass-through of higher raw material costs, more favorable product mix and pricing actions.

Net sales for Asian operations decreased $28.3 million, or 67 percent, year-over-year. An 80 percent decrease in sales volume negatively impacted the year-over-year change in net sales by $34.1 million. The lower sales volume was mainly due to the divestiture of assets in the Philippines during the fourth quarter of 2025. Higher average selling prices positively impacted the change in net sales by $5.6 million. Foreign currency translation positively impacted the year-over-year change in net sales by $0.1 million.

Surfactant operating income for the first nine months of 2026 increased $22.3 million, or 38 percent, versus operating income for the first nine months of 2025. Gross profit increased $27.5 million, or 20 percent, and operating expenses increased $5.2 million, or seven percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations increased $19.8 million, or 30 percent, versus the prior year primarily due to higher average unit margins. The higher average unit margins positively impacted the year-over-year change in gross profit by $18.1 million and were primarily attributable to more favorable product mix, pricing actions, tariff refunds, the initial benefits from Project Catalyst actions and the non-recurrence of an environmental reserve adjustment recognized in the second quarter of 2025. A three percent increase in sales volume positively impacted the year-over-year change in gross profit by $1.7 million.

Gross profit for European operations increased $2.7 million, or 10 percent, primarily due to higher average units margins and the favorable impact of foreign currency translation. These items positively impacted the year-over-year change in gross profit by $1.5 million and $1.2 million, respectively. The change in sales volume had a negligible impact on gross profit year-over-year.

Gross profit for Latin American operations increased $10.7 million, or 32 percent, due to a 13 percent increase in sales volume, the favorable impact of foreign currency translation and higher average unit margins. These items positively impacted the year-over-year change in gross profit by $4.4 million, $4.1 million and $2.2 million, respectively. The higher average unit margins were primarily due to a more favorable product mix and pricing actions.

Gross profit for Asia operations decreased $5.7 million, year-over-year, primarily due to the double-digit decrease in sales volume resulting from the asset divestiture in the Philippines during the fourth quarter of 2025. The decline in sales volume negatively impacted the year-over-year change in gross profit by $7.3 million. Higher average unit margins positively impacted the change in gross profit by $1.6 million.

Operating expenses for the Surfactants segment increased $5.2 million, or seven percent, in the first nine months of 2026 versus the first nine months of 2025. This increase primarily reflects higher incentive-based compensation expenses incurred in 2026. In addition, foreign currency translation had a $1.9 million unfavorable impact on the change in operating expenses year-over-year.

Polymers

Polymers net sales for the first nine months of 2026 increased $33.9 million, or seven percent, versus net sales for the same period of 2025. Higher average selling prices positively impacted the year-over-year change in net sales by $26.6 million. Sales volume increased slightly and positively impacted the change in net sales by $1.6 million. Foreign currency translation positively impacted the change in net sales by $5.7 million. A comparison of net sales by region follows:

Net sales for North American operations increased $36.9 million, or 15 percent, year-over-year. Sales volume increased 13 percent and positively impacted the year-over-year change in net sales by $30.8 million. Sales volume of polyols used in rigid foam applications and commodity phthalic anhydride increased 17 percent and 12 percent, respectively, year-over-year. Within rigid

applications, spray foam sales volume increased triple digits. Sales volume of specialty polyols decreased four percent. Higher average selling prices positively impacted the year-over-year change in net sales by $6.1 million.

Net sales for European operations decreased $3.8 million, or two percent, year-over-year. A 12 percent decrease in sales volume negatively impacted the year-over-year change in net sales by $21.1 million. The lower sales volume reflects lower construction demand related to the macroeconomic environment and ongoing economic uncertainties. Higher average selling prices and favorable foreign currency translation positively impacted the change in net sales by $13.6 million and $3.7 million, respectively. The higher average selling prices were mainly attributable to the pass through of higher raw material costs. A weaker U.S. dollar relative to the Polish zloty and British pound sterling led to the favorable foreign currency translation effect.

Net sales for Asia and Other operations increased $0.8 million, or two percent, primarily due to higher average selling prices and the favorable impact of foreign currency translation. These items positively impacted the year-over-year change in net sales by $2.2 million and $1.9 million, respectively. Sales volume decreased 10 percent and negatively impacted the year-over-year change in net sales by $3.3 million.

Polymer operating income in the first nine months of 2026 increased $6.6 million, or 17 percent, versus operating income in the first nine months of 2025. Gross profit increased $8.3 million, or 14 percent, and operating expenses increased $1.7 million, or eight percent, year-over-year. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

Gross profit for North American operations increased $14.5 million, or 47 percent, year-over-year. This increase was primarily due to higher average unit margins and the 13 percent increase in sales volume. These items positively impacted the year-over-year change in gross profit by $10.6 million and $3.9 million, respectively. The higher average unit margins primarily reflect the non-recurrence of high cost inventory carryover incurred in the prior year and more favorable product mix.

Gross profit for European operations decreased $5.1 million, or 22 percent, versus the first nine months of 2025. This decrease was primarily due to lower average unit margins and the 12 percent decrease in sales volume. These items negatively impacted the year-over-year change in gross profit by $2.8 million each. The lower unit margins were primarily due to higher expenses associated with regulatory-mandated maintenance turnaround costs, that typically occur every five years, at the Company's site in Germany and higher storage costs related to inventory builds in advance of the plant shutdown. Foreign currency translation positively impacted the change in gross profit by $0.5 million.

Gross profit for Asia and Other operations decreased $1.1 million, or 16 percent, year-over-year. This decrease was primarily due to lower average unit margins and the 10 percent decrease in sales volume. These items negatively impacted the change in gross profit by $0.8 million and $0.6 million, respectively. Foreign currency translation positively impacted the change in gross profit by $0.3 million.

Operating expenses for the Polymer segment increased $1.7 million, or eight percent, year-over-year. Most of this increase reflects higher incentive-based compensation expenses in 2026.

Specialty Products

Specialty Products net sales for the first nine months of 2026 increased $8.6 million, or 14 percent, versus net sales for the first nine months of 2025. The increase was primarily due to a 17 percent increase in sales volume. Gross profit and operating income decreased by $0.4 and $0.5 million, respectively. The year-over-year decrease in both gross profit and operating income was primarily due to less favorable product mix within the MCT product line that was partially offset by higher MCT volume and higher earnings in the food and flavor business.

Corporate Expenses

Corporate expenses, which include business restructuring, deferred compensation, and other operating expenses that are not allocated to the reportable segments, increased $82.9 million, year-over-year. Corporate expenses were $132.6 million in the first nine months of 2026 versus $49.6 million in the first nine months of 2025. The increase was primarily due to a $76.1 million restructuring charge recognized in the first nine months of 2026, higher estimated remediation costs at the Company's Maywood, NJ site and higher year-over-year incentive-based compensation expenses. See Note 16, Business Restructuring, of the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for more details regarding the restructuring charge.

Deferred compensation expense was $2.0 million in the first nine months of 2026 versus $1.6 during the first nine months of 2025. This $0.4 million increase was primarily due to a $15.02 per share increase in the market price of the Company's common stock during the first nine months of 2026 versus a $17.00 per share decrease in the market price during the first nine months of 2025. A smaller increase in the market value of mutual fund investment assets during the first nine months of 2026 versus the first nine months of 2025 partially offset the above.

The following table presents the period-end Company common stock market prices used in the computation of deferred compensation income/expense for the nine months ended September 30, 2026 and 2025:

LIQUIDITY AND CAPITAL RESOURCES

Overview

For the nine months ended September 30, 2026, operating activities were a cash source of $54.6 million versus a cash source of $87.9 million for the comparable period in 2025. For the first nine months of 2026, investing cash outflows totaled $67.5 million versus cash outflows of $81.0 million in the prior year period. Financing activities were a cash outflow of $22.8 million versus a cash source of $2.3 million in the prior year period.

Cash and cash equivalents decreased $34.6 million compared to December 31, 2025, inclusive of a $1.0 million favorable foreign exchange rate impact. On September 30, 2026, the Company's cash and cash equivalents totaled $98.1 million. Cash in U.S. and non-U.S. money market funds, which were rated AAAm by Standard and Poor's, Aaa-mf by Moody's and AAAmmf by Fitch, totaled $9.1 million and cash in U.S. demand deposit accounts totaled $3.8 million. The Company's non-U.S. subsidiaries held $85.2 million of cash and cash equivalents as of September 30, 2026.

Operating Activities

Net income during the first nine months of 2026 decreased $42.6 million versus the comparable period in 2025. Working capital was a cash use of $99.0 million during the first nine months of 2026 versus a cash use of $51.0 million in the comparable period in 2025.

Accounts receivable were a cash use of $118.0 million during the first nine months of 2026 compared to a cash use of $25.3 million for the comparable period in 2025. Inventories were a cash use of $41.0 million in 2026 versus a cash use of $24.8 million in 2025. Accounts payable and accrued liabilities were a cash source of $62.9 million in 2026 compared to a cash source of $6.5 million for the same period in 2025.

Working capital requirements were higher in the first nine months of 2026 compared to 2025 primarily due to the changes noted above. The change in accounts receivable working capital primarily reflects higher sales volume and higher selling prices. The change in inventories is primarily related to higher costs and inventory builds in advance of a mandated plant inspection in Germany and a plant maintenance turnaround in the U.S. The change in accounts payable and accrued liabilities primarily reflects higher trade payables due to escalating raw material costs. It is management's opinion that the Company's liquidity is sufficient to provide for potential increases in working capital requirements during 2026.

Investing Activities

Cash used for investing activities decreased $13.5 million year-over-year primarily due to lower capital expenditures in the first nine months of 2026 versus the same period of 2025.

For 2026, the Company estimates that total capital expenditures will be in the range of $100.0 million to $105.0 million.

Financing Activities

Cash flow from financing activities was a use of $22.8 million in 2026 versus a source of $2.3 million in 2025. The year-over-year change was primarily due to the non-recurrence of $75.0 million of senior unsecured notes issued in the prior year partially offset by higher borrowings from the Company's revolving credit facility during the first nine months of 2026.

The Company purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and to mitigate the dilutive effect of new shares issued under its compensation plans. The Company may, from time to time, seek to purchase additional amounts of its outstanding equity and/or retire debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to plans meeting the requirements of Rule 10b5-1 promulgated by the SEC. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. The Company did not purchase any shares of its common stock on the open market during the nine months ended September 30, 2026. At September 30, 2026, the Company had $125.1 million remaining under the share repurchase program authorized by its Board of Directors.

Debt and Credit Facilities

Consolidated balance sheet debt increased $7.4 million, from $626.7 million on December 31, 2025 to $634.1 million on September 30, 2026, primarily due to higher domestic borrowings from the Company's revolving credit facility. Net debt (which is defined as total debt minus cash - see the "Reconciliations of Non-GAAP Net Debt" section of this MD&A) was $536.0 million at September 30, 2026 versus $494.0 million at December 31, 2025.

On September 25, 2026, the Company entered into a new credit agreement (the Credit Agreement) with a syndicate of banks. The Credit Agreement provides for credit facilities in an initial aggregate principal amount of $500.0 million, consisting of (a) a $350.0 million multi-currency revolving credit facility and (b) a $150.0 million delayed-draw term loan credit facility, each of which matures on September 25, 2031. The Credit Agreement replaced the Company's prior $450.0 million credit agreement entered into on June 24, 2022, consisting of a $350.0 million multi-currency revolving credit facility and a $100.0 million delayed-draw term loan facility. The Credit Agreement provides for an expansion option that will allow the Company, subject to certain requirements, to request an increase to the revolving credit facility or to enter into one or more trances of incremental term loans in an aggregate amount of up to an additional $250.0 million.

As of September 30, 2026, the ratio of net debt to net debt plus shareholders' equity was 31.0 percent versus 28.0 percent at December 31, 2025 (see the "Reconciliations of Non-GAAP Net Debt" section in this MD&A for further details). On September 30, 2026, the Company's debt included $279.1 million of unsecured notes, with maturities ranging from 2026 through 2033, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the "Note Purchase Agreements"), a $125.0 million delayed-draw term loan borrowed pursuant to the Credit Agreement, $230.0 million of short term loans borrowed under the Company's revolving credit facility and no foreign credit line borrowings. As of September 30, 2026, the Company had outstanding letters of credit of $13.1 million, inclusive of $4.4 million under the Company's revolving credit facility. 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 Credit Industriel et Commercial NY (the CIC Credit Agreement) provides for a credit facility in an aggregate principal amount of $8.7 million. The facility is for the sole purpose of the issuance of standby letters of credit. As of September 30, 2026, the Company had an outstanding letter of credit of $8.7 million under the CIC Credit Agreement. The Company also maintains import and export 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 Credit Agreement. These outstanding letters of credit totaled $4.4 million at September 30, 2026.

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

Certain foreign subsidiaries of the Company maintain short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditures and acquisitions. At September 30, 2026, the Company's foreign subsidiaries had no outstanding debt.

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

The Company believes it was in compliance with the covenants under its material debt agreements as of September 30, 2026.

ENVIRONMENTAL AND LEGAL MATTERS

The Company's operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first nine months of 2026 and 2025, the Company's expenditures for capital projects related to environmental matters were $2.5 million and $7.2 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 $33.6 million and $32.8 million for the nine months ended September 30, 2026 and 2025, 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, the Company is from time to time involved in routine legal proceedings incidental to the conduct of its business, including personal injury, property damage, tax, trade and labor matters. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these claims. It is the Company's accounting policy to record liabilities when environmental assessments, remediation expenses or legal proceeding losses 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 environmental remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Some of the factors on which the Company bases its estimates include information provided by decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, and remedial action plans developed. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $21.8 million to $48.7 million at September 30, 2026 and $19.3 million to $46.0 million at December 31, 2025. Within the range of possible environmental 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. The Company's environmental and legal accruals totaled $21.8 million at September 30, 2026 and $19.3 million at December 31, 2025. In the third quarter of 2026, the Company accrued an additional $2.7 million for remediation expenses at the Company's Maywood, New Jersey site due to a change in cost estimates and scope of ongoing remediation activities. Although the Company believes that its estimated range of possible environmental losses and legal losses and its reserves are adequate for contingencies, it is possible, due to uncertainties including those noted above, that additional reserves could be required in the future. Cash expenditures related to environmental remediation and certain other legal matters approximated $2.3 million for the nine months ended September 30, 2026, compared to $4.0 million for the same period in 2025.

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 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 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. Certain of these matters are discussed in Part I, Item 3, of the Company's Annual Report on Form 10-K, Legal Proceedings, in this report and in other filings of the Company with the SEC, which are available upon request from the Company. See also Note 8, Contingencies, in the notes to the Company's condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for a summary of the significant environmental proceedings related to certain sites.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to the critical accounting policies disclosed in the Company's 2025 Annual Report on Form 10-K.

NON-GAAP RECONCILIATIONS

The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company's performance and financial condition. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management's effectiveness with specific reference to these indicators. Management uses these non-GAAP financial measures to assist in analyzing what management views as the Company's core operating performance for purposes of business decision making. Management believes that presenting these non-GAAP financial measures provides investors with useful supplemental information because they (i) provide meaningful supplemental information regarding financial performance by excluding items affecting comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions and evaluate the Company's core operating performance across periods, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating the Company's financial results. In addition, the Company believes that the presentation of these non-GAAP financial measures, when considered together with the most directly comparable GAAP financial measures and the reconciliations to those GAAP financial measures, provides investors with additional tools to understand the factors and trends affecting the Company's underlying business than could be obtained absent these disclosures. These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP and there are limitations to using non-GAAP financial measures. For example, the non-GAAP financial measures presented in this Form 10-Q may differ from similarly titled non-GAAP financial measures presented by other companies and other companies may not define these non-GAAP financial measures the same way as the Company does.

Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share

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

Reconciliations of Non-GAAP EBITDA and Adjusted EBITDA

Management uses the non-GAAP EBITDA and adjusted EBITDA metric to evaluate the Company's operating performance. Management excludes the items listed in the table below because they are non-operational items.

Reconciliations of Non-GAAP Net Debt

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