The following is Management's Discussion and Analysis of certain significant factors that have affected the Company's financial condition and results of operations during the interim period included in the accompanying condensed consolidated financial statements.

Overview

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

• Surfactants - Surfactants, which accounted for 82 percent of consolidated net sales for the first quarter of 2009, are principal ingredients in consumer and industrial cleaning products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos, body washes, toothpastes and fabric softeners. Other applications include germicidal quaternary compounds, lubricating ingredients, emulsifiers (for spreading agricultural products), plastics and composites and biodiesel. Surfactants are manufactured at six North American sites (five in the U.S. and one in Canada), three European sites (United Kingdom, France and Germany) and three Latin American sites (Mexico, Brazil and Colombia). The Company holds a 50 percent ownership interest in two joint ventures, Stepan Philippines and TIORCO, LLC, that are excluded from surfactant segment operating results as they are accounted for under the equity method of accounting.

• Polymers - Polymers, which accounted for 15 percent of consolidated net sales for the first quarter of 2009, include two primary product lines: polyols and phthalic anhydride. Polyols are used in the manufacture of laminate insulation board for the construction industry and are also sold to the appliance, flexible foam and coatings, adhesives, sealants and elastomers (C.A.S.E.) industries. Phthalic anhydride is used in polyester alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In the U.S., polymer product lines are manufactured at the Company's Millsdale, Illinois, site. Polyols are also manufactured at the Company's Wesseling (Cologne), Germany facility, as well as at its 80-percent owned joint venture in Nanjing, China (which is included in consolidated results). The Company also has a polymer sales office in Brazil; no polymer manufacturing facilities are located in Brazil.

• Specialty Products - Specialty products, which accounted for three percent of consolidated net sales for the first quarter of 2009, include flavors, emulsifiers and solubilizers used in the food and pharmaceutical industries. Specialty products are manufactured primarily at the Company's Maywood, New Jersey, site.

Deferred compensation plan activity contributed significantly to the Company's improved quarter-to-quarter operating results. Pretax income for the first quarter of 2009 benefited from $5.2 million of deferred compensation related income compared to $1.9 million of expense in the prior year quarter, a $7.1 million favorable swing. The pretax effect of all deferred compensation related activities and the income statement line item in which the effects are recorded are displayed below (see the 'Corporate Expenses' section of this management discussion and analysis for further details):

                                                              (Income) / Expense
                                                             For the Three Months
 (Dollars in millions)                                          Ended March 31
                                                             2009             2008
 Deferred Compensation (Administrative expense)           $     (5.5 )     $      0.7
 Investment Income (Other, net)                                 (0.1 )           (0.1 )
 Realized/Unrealized Losses on Investments (Other, net)          0.4              1.3

 Net Pretax Income Effect                                 $     (5.2 )     $      1.9

The impact of foreign currency translation reduced the quarter-over-quarter improvement in pretax income by about $2.8 million. The translation effect resulted from the strengthening of the U.S. dollar against the various currencies in which the Company does business.

Three Months Ended March 31, 2009 and 2008

Summary

Net income for the first quarter of 2009 improved 73 percent to $15.2 million, or $1.43 per diluted share, compared to $8.7 million, or $0.85 per diluted share, for the same period of 2008. Approximately $4.4 million ($7.1 million pretax) of the improvement resulted from the previously discussed favorable swing in deferred compensation expense. Below is a summary discussion of the major factors leading to the year-to-year changes in net sales, profits and expenses. A detailed discussion of segment operating performance for the first quarter of 2009 follows the summary.

Consolidated net sales declined $63.3 million, or 17 percent, between quarters. All reportable segments reported quarter-to-quarter decreases in net sales. Lower sales volume and the unfavorable effects of foreign currency translation accounted for approximately $49.2 million and $26.6 million, respectively, of the net sales reduction. Sales volume fell 13 percent between quarters as all segments posted sales volume declines due in large part to the global economic recession. The foreign currency translation effect reflected the weakening against the U.S. dollar of nearly all currencies in which the Company does business. In most instances, selling prices have fallen since the end of the third quarter of 2008 in response to falling raw material costs. However, first quarter 2009 selling prices remained higher on average than selling prices for the first quarter of 2008.

Operating income for the first quarter of 2009 was $9.3 million, or 55 percent, greater than operating income for the first quarter of 2008. Gross profit was up $2.8 million, or six percent, between quarters. Surfactants segment gross profit was up 21 percent from quarter to quarter due primarily to the effects of lower raw material costs. Polymer gross profit fell 37 percent due to lower sales volume that resulted from a slowdown in the housing, automotive, recreational vehicle and boating industries. Gross profit for the specialty products segment was up seven percent.

Operating expenses declined $6.5 million, or 22 percent, between quarters. Major items accounting for the expense reduction were as follows:

                                                     Increase /
                  (Dollars in millions)              (Decrease)
                  Deferred Compensation Expense      $      (6.2 )
                  Foreign Currency Translation              (1.4 )
                  Travel and Entertainment Expense          (0.5 )
                  Bad Debt Provision                         0.5
                  Salary Expense                             0.6
                  Other                                      0.5

                  Total                              $      (6.5 )

Interest expense for the first quarter of 2009 was $0.5 million, or 22 percent, lower than interest expense for the same period of 2008. Lower average interest rates coupled with lower foreign debt levels caused the decline.

The loss from equity joint ventures, which includes results for the 50-percent owned Stepan Philippines Inc. (SPI) and TIORCO, LLC (TIORCO) joint ventures, increased $0.5 million between quarters. TIORCO, which was formed in September 2008, contributed $0.6 million to the quarter-to-quarter increase in losses. Start-up expenses drove the TIORCO result. The loss for SPI declined $0.1 million between quarters.

Other, net expense declined $1.2 million from quarter to quarter. A $0.9 million reduction in investment related expense and a $0.3 million favorable swing in foreign exchange gains and losses, accounted for the other, net expense change. Losses related to the mutual funds held for the Company's deferred compensation plans were $0.4 million for the first quarter of 2009 compared to $1.3 million for the first quarter of 2008. Foreign exchange activity resulted in $0.1 million of gains for the first quarter of 2009 compared to $0.2 million of losses for the same period of 2008.

The effective tax rate was 34.8 percent for the first quarter of 2009 compared to 31.8 percent for the first quarter of 2008. The increase in the effective tax rate was primarily attributable to higher foreign tax provisions and reduced U.S. tax credits recognized in 2009.

Segment Results



                                                                         Specialty     Segment
(Dollars in thousands)                       Surfactants    Polymers     Products      Results    Corporate       Total
For the three months ended March 31, 2009
Net sales                                   $     259,634   $  48,713   $     9,796   $ 318,143          -      $ 318,143
Operating income                                   24,186       2,603         1,663      28,452      (2,283 )      26,169

For the three months ended March 31, 2008
Net sales                                   $     290,324   $  80,836   $    10,291   $ 381,451          -      $ 381,451
Operating income                                   17,184       6,073         1,597      24,854      (7,976 )      16,878

Surfactants net sales for the first quarter of 2009 declined $30.7 million, or 11 percent, from net sales for the first quarter of 2008. A nine percent drop in sales volume and the unfavorable effects of foreign currency translation accounted for approximately $26.7 million and $24.4 million, respectively, of the quarter-to-quarter change. An eight percent increase in average selling prices offset the impact of lower sales volume and foreign currency translation by $20.4 million. A quarter-to-quarter comparison of net sales by region follows:

 (Dollars in thousands)          For the Three Months Ended
                                                                   Increase /      Percent
                             March 31, 2009     March 31, 2008     (Decrease)      Change
 North America               $       175,436    $       194,437   $    (19,001 )       -10
 Europe                               59,036             69,790        (10,754 )       -15
 Latin America                        25,162             26,097           (935 )        -4

 Total Surfactants Segment   $       259,634    $       290,324   $    (30,690 )       -11

North American operations net sales declined 10 percent between quarters due to a 12 percent decrease in sales volume and the unfavorable effects of foreign currency translation, which accounted for $23.9 million and $2.9 million, respectively, of the net sales reduction. A five percent increase in average selling prices favorably affected net sales by $7.8 million. While laundry and personal care sales volumes held up well, sales of functional surfactants with industrial or construction applications were adversely affected by the economy. A significant drop in biodiesel sales volume accounted for over 40 percent of the total decrease in North American volume. Because of the current unprofitable environment for biodiesel, the Company continued to focus its manufacturing resources on more profitable business. As noted above, selling prices for the first quarter of 2009 averaged five percent higher than selling prices for the first quarter of 2008. The higher average prices reflected price increases made throughout the first three quarters of 2008 that were precipitated by rising raw material costs. Average selling prices have fallen since the third quarter of 2008 as raw material costs have declined.

The 15 percent decrease in net sales for European operations was attributable to the unfavorable effects of foreign currency translation partially offset by a four percent increase in average selling prices. Foreign currency translation accounted for $13.5 million of the net sales decline, while the effect of higher prices reduced the decline by about $2.9 million. Sales volume remained essentially unchanged from quarter to quarter. The foreign currency translation effect reflected a weakening of both the European euro and the British pound sterling against the U.S. dollar. The higher average selling prices resulted from price increases made throughout the first three quarters of 2008 brought on by rising material costs. While average selling prices are up between the first quarter of 2009 and the first quarter of 2008, prices have declined since the third quarter of 2008 in response to falling raw material costs.

Net sales for Latin American operations declined four percent from quarter to quarter due to a six percent decrease in sales volume. The impact of the global economic slowdown drove the drop in sales volume.

 (Dollars in thousands)          For the Three Months Ended
                                                                   Increase /      Percent
                             March 31, 2009     March 31, 2008     (Decrease)      Change
 Gross Profit
 North America               $        27,197    $        23,870   $      3,327         +14
 Europe                                8,880              5,716          3,164         +55
 Latin America                         4,404              3,953            451         +11

 Total Surfactants Segment   $        40,481    $        33,539   $      6,942         +21

 Operating Expenses                   16,295             16,355            (60 )        NM


 Operating Income            $        24,186    $        17,184   $      7,002         +41

Gross profit for North American operations improved 14 percent between quarters despite the 12 percent decline in sales volume. The gross profit growth was largely attributable to the effect of lower raw material costs. The decline in material costs resulted from the global economic slowdown. A more favorable product mix also contributed to the gross profit result as sales of the low margin biodiesel products were down substantially from quarter to quarter.

Gross profit for European operations increased 55 percent due to the combined effects of lower raw material costs and the aforementioned higher average selling prices. The unfavorable effects of foreign currency translation reduced Europe's quarter-to-quarter profit improvement by approximately $1.9 million.

Gross profit for Latin American operations increased 11 percent despite a six percent decrease in sales volume. Favorable pricing relative to raw material costs drove most of the improvement. The unfavorable effects of foreign currency translation reduced Latin America's quarter-to-quarter profit improvement by approximately $1.4 million.

Operating expenses for the surfactants segment were down $0.1 million between quarters. Excluding the effects of foreign currency translation operating expenses increased $1.2 million, or seven percent. European operations accounted for $0.8 million of the operating expense increase, as marketing and administrative expenses were up $0.6 million and $0.2 million, respectively, between years. Increased salary and fringe benefit expenses drove most of the rise in marketing expense. Higher salary expense also accounted for most of the increase in European administrative expenses. Operating expenses for North American operations were up $0.3 million from quarter to quarter due primarily to higher research and development expenses.

Polymers net sales for the first quarter of 2009 declined $32.1 million, or 40 percent, from net sales for the first quarter of 2008. A 32 percent drop in sales volume, driven by the economic recession, accounted for $26.2 million of the net sales decline. Reduced average selling prices and the unfavorable effects of foreign currency translation contributed $3.7 million and $2.2 million, respectively, to the decrease in net sales. A quarter-to-quarter comparison of net sales by region is displayed below:

   (Dollars in thousands)       For the Three Months Ended
                                                                  Increase /      Percent
                            March 31, 2009     March 31, 2008     (Decrease)      Change
   North America            $        32,593    $        54,020   $    (21,427 )       -40
   Europe                            14,681             24,677         (9,996 )       -41
   Asia and Other                     1,439              2,139           (700 )       -33

   Total Polymers Segment   $        48,713    $        80,836   $    (32,123 )       -40

Net sales for North American operations fell 40 percent due to a 35 percent decline in sales volume and an eight percent decline in average selling prices, which accounted for $18.8 million and $2.6 million, respectively, of the reduction in net sales. The effects of the economic slowdown led to a 34 percent decline in sales volume for polyols and a 32 percent decline in sales volume for phthalic anhydride. Polyols and phthalic anhydride compose 52 percent and 46 percent, respectively, of North American polymer sales volume. Sales volume of polyurethane systems fell 76 percent as a result of the July 2008 sale of the Company's commodity system product lines. The eight percent decrease in average selling prices for North American operations was primarily attributable to lower raw material costs, particularly for phthalic anhydride.

Net sales for European operations declined 41 percent due to a 27 percent decrease in polyol sales volume, a seven percent drop in average selling prices and the unfavorable effects of foreign currency translation, which accounted for $6.6 million, $1.2 million and $2.2 million, respectively, of the reduction in net sales. The quarter-to-quarter drop in sales volume reflected the effects of the global recession, as sales to most major customers were down between quarters. Lower raw material costs led to the decline in average selling prices.

Asia and Other regions net sales were down 33 percent from quarter to quarter due to a 23 percent decline in sales volume and a 13 percent decline in average selling prices. The drops in sales volume and selling prices contributed $0.5 million and $0.2 million, respectively, to the decrease in net sales.

Polymer operating income for the first quarter of 2009 declined $3.5 million, or 57 percent, from operating income for the first quarter of 2008. Gross profit declined $3.9 million, or 37 percent. The 32 percent drop in sales volume drove the reduction of profits. Below are quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income:

  (Dollars in thousands)       For the Three Months Ended
                                                                  Increase /      Percent
                            March 31, 2009     March 31, 2008     (Decrease)      Change
  Gross Profit
  North America            $          2,815    $         6,174   $     (3,359 )       -54
  Europe                              3,735              4,305           (570 )       -13
  Asia and Other                        131                 74             57         +77

  Total Polymers Segment   $          6,681    $        10,553   $     (3,872 )       -37

  Operating Expenses                  4,078              4,480           (402 )        -9


  Operating Income         $          2,603    $         6,073   $     (3,470 )       -57

Gross profit for European operations declined 13 percent due to the 27 percent decrease in sales volume.

The $0.4 million decline in operating expenses resulted from a $0.2 million decrease in U.S. operating expenses and $0.2 million of foreign currency translation. Lower marketing expenses led to the U.S. operating expense result.

Specialty Products

Net sales for the first quarter of 2009 were $0.5 million, or five percent, lower than net sales for the same period of 2008. A decline in sales volume for the segment's food ingredient products led to the net sales decline. Despite the decrease in net sales, operating income was up $0.1 million between quarters as an increase in sales of the segment's higher margin pharmaceutical products more than offset the effect of the lower food ingredient sales volume.

Corporate Expenses

Corporate expenses declined $5.7 million, or 71 percent, to $2.3 million for the first quarter of 2009 from $8.0 million for the first quarter of 2008. Deferred compensation expense accounted for the quarter-to-quarter corporate expense decline, as the Company recorded $5.5 million of income in 2009 compared to $0.7 million of expense in 2008. The $6.2 million favorable swing resulted from declines in the values of Company common stock and mutual funds to which the deferred compensation liabilities are tied. The price of Company common stock fell $19.69 per share from December 31, 2008, to March 31, 2009, and increased $5.70 per share from December 31, 2007, to March 31, 2008. Higher fringe benefit expenses partially offset the effect of deferred compensation.

Cash flow from operating activities for the first quarter of 2009 was a source of $15.3 million compared to a use of $20.2 million for the same period in 2008. For the current year quarter, net income was up by $6.4 million and working capital requirements were down by $30.9 million, versus the comparable prior year quarter, mainly due to lower raw material costs, lower sales volumes and improved accounts receivable turnover compared to year-end 2008. For the balance of 2009, it is management's view that lower raw material costs will continue to produce favorable year-to-year working capital changes.

Investing activities for the first quarter of 2009 included capital expenditures of $15.7 million compared to $10.6 million for the first quarter of 2008. During 2009, the Company completed an Internal Revenue Code 1031 tax deferred, like-kind exchange begun in 2008, which had included the sale of land at the Company's Millsdale manufacturing site and the deposit of the land sale proceeds of $8.6 million in a restricted cash investment fund as of December 31, 2008. During the first quarter of 2009, this exchange was consummated and the Company recovered the restricted cash balance of $8.5 million as an investing source of funds. Also during the first quarter of 2009, investments for deferred compensation plans were reduced, resulting in a cash source of $4.4 million. Looking ahead, management projects that capital spending for full year 2009 will total approximately $42.0 million to $46.0 million.

Consolidated debt decreased by $10.9 million during the first quarter of 2009, from $143.0 million to $132.1 million. During the current year quarter, foreign debt decreased by $12.0 million and U.S. debt increased by $1.1 million. As of March 31, 2009, the ratio of total debt to total debt plus shareholders' equity was 37.9 percent, compared to 40.7 percent at December 31, 2008. Net debt, total debt minus cash and cash equivalents and restricted cash, was $125.3 million as of March 31, 2009, compared to $126.3 million as of December 31, 2008, a decrease of $1.0 million. The ratio of net debt to net debt plus shareholders' equity was 36.7 percent at March 31, 2009, versus 37.8 percent as of December 31, 2008.

As of March 31, 2009, Company debt included $80.9 million of unsecured private placement loans with maturities extending through 2018. These loans are the Company's primary source of long-term debt financing, and are supplemented by bank credit facilities to meet short and medium term needs. In addition, the Company's debt as of March 31, 2009 included a $30.0 million term loan with its U.S. banks, which has maturities through 2013.

The Company maintains contractual relationships with its U.S. banks that provide for unsecured, revolving credit of up to $60.0 million, which may be drawn upon as needed for general corporate purposes through April 20, 2011 under a revolving credit agreement. At March 31, 2009, the Company had outstanding debt of $1.7 million and outstanding letters of credit totaling $1.5 million under this agreement; as a result, there was $56.8 million available under this . . .