STEPAN CO 10-Q

Item 1 - Financial Statements STEPAN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Unaudited (In thousands, except per share amounts) Three Months Ended March 31, 2024 2023 Net Sales $ 551,418 $ 651,436 Cost of Sales 481,137 577,876 Gross Profit 70,281 73,560 Operating Expenses: Selling 11,388 13,067 Administrative 22,690 22,639 Research, development and technical services 14,256 15,138 Deferred compensation expense 1,778 1,502 50,112 52,346 Business restructuring expense — 157 Operating Income 20,169 21,057 Other Income (Expense): Interest, net ( 3,071 ) ( 2,822 ) Other, net (Note 15) 2,362 1,668 ( 709 ) ( 1,154 ) Income Before Provision for Income Taxes 19,460 19,903 Provision for Income Taxes 5,567 3,761 Net Income 13,893 16,142 Net Income Per Common Share (Note 10): Basic $ 0.61 $ 0.71 Diluted $ 0.61 $ 0.70 Shares Used to Compute Net Income Per Common Share (Note 10): Basic 22,824 22,757 Diluted 22,948 22,994 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 2 STEPAN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Unaudited (In thousands) Three Months Ended March 31, 2024 2023 Net Income $ 13,893 $ 16,142 Other Comprehensive Income: Foreign currency translation adjustments (Note 11) ( 6,551 ) 18,423 Defined benefit pension adjustments, net of tax (Note 11) 58 58 Derivative instrument activity, net of tax (Note 11) 829 ( 1,517 ) Total Other Comprehensive Income ( 5,664 ) 16,964 Comprehensive Income $ 8,229 $ 33,106 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 3 STEPAN COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (Dollars in thousands) March 31, 2024 December 31, 2023 Assets Current Assets: Cash and cash equivalents $ 125,775 $ 129,823 Receivables, net 446,569 422,050 Inventories (Note 6) 257,118 265,558 Other current assets 40,344 34,452 Total current assets 869,806 851,883 Property, Plant and Equipment: Cost 2,605,219 2,585,058 Less: Accumulated depreciation ( 1,399,585 ) ( 1,378,393 ) Property, plant and equipment, net 1,205,634 1,206,665 Goodwill, net 96,309 97,442 Other intangible assets, net 50,564 52,571 Long-term investments (Note 3) 23,466 26,804 Operating lease assets (Note 7) 71,483 70,646 Other non-current assets 55,885 57,343 Total assets $ 2,373,147 $ 2,363,354 Liabilities and Equity Current Liabilities: Current maturities of debt (Note 14) $ 245,861 $ 252,898 Accounts payable 256,880 233,031 Accrued liabilities 126,112 121,941 Total current liabilities 628,853 607,870 Deferred income taxes 10,257 10,373 Long-term debt, less current maturities (Note 14) 400,121 401,248 Non-current operating lease liabilities (Note 7) 59,063 58,026 Other non-current liabilities 60,331 69,347 Commitments and Contingencies (Note 8) Equity: Common stock, $ 1 par value; authorized 60,000,000 shares; 27,124,666 issued shares in 2024 and 27,005,852 issued shares in 2023 27,125 27,006 Additional paid-in capital 248,337 247,032 Accumulated other comprehensive loss (Note 11) ( 136,266 ) ( 130,602 ) Retained earnings 1,262,937 1,257,466 Less: Common treasury stock, at cost, 4,650,882 shares in 2024 and 4,628,072 shares in 2023 ( 187,611 ) ( 184,412 ) Total equity 1,214,522 1,216,490 Total liabilities and equity $ 2,373,147 $ 2,363,354 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 4 STEPAN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In thousands) Three Months Ended March 31, 2024 2023 Cash Flows From Operating Activities Net income $ 13,893 $ 16,142 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 27,604 25,542 Deferred compensation 1,778 1,502 Realized and unrealized gains on long-term investments ( 2,267 ) ( 1,516 ) Stock-based compensation 1,372 999 Deferred income taxes 2,201 ( 660 ) Other non-cash items 650 36 Changes in assets and liabilities: Receivables, net ( 26,043 ) ( 40,420 ) Inventories 3,202 38,265 Other current assets ( 5,931 ) ( 9,222 ) Accounts payable and accrued liabilities 25,965 ( 98,523 ) Pension liabilities ( 502 ) ( 531 ) Environmental and legal liabilities ( 56 ) ( 3,464 ) Deferred revenues ( 312 ) ( 208 ) Net Cash Provided By (Used In) Operating Activities 41,554 ( 72,058 ) Cash Flows From Investing Activities Expenditures for property, plant and equipment ( 30,157 ) ( 92,158 ) Other, net 5,742 1,817 Net Cash Used In Investing Activities ( 24,415 ) ( 90,341 ) Cash Flows From Financing Activities Revolving debt and bank overdrafts, net (Note 14) ( 8,415 ) 123,847 Dividends paid ( 8,422 ) ( 8,160 ) Stock option exercises 865 1,514 Other, net ( 4,012 ) ( 3,665 ) Net Cash Provided By (Used In) Financing Activities ( 19,984 ) 113,536 Effect of Exchange Rate Changes on Cash ( 1,203 ) 2,069 Net Decrease in Cash and Cash Equivalents ( 4,048 ) ( 46,794 ) Cash and Cash Equivalents at Beginning of Period 129,823 173,750 Cash and Cash Equivalents at End of Period $ 125,775 $ 126,956 Supplemental Cash Flow Information Cash payments of income taxes, net of refunds $ 4,818 $ 15,518 Cash payments of interest $ 7,284 $ 6,007 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. 5 STEPAN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 Unaudited 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements included herein have been prepared by Stepan Company (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of March 31, 2024, its results of operations for the three months ended March 31, 2024 and 2023 and cash flows for the three months ended March 31, 2024 and 2023, have been included. These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (2023 Annual Report on Form 10-K). 2. RECONCILIATIONS OF EQUITY Below are reconciliations of total equity for the three months ended March 31, 2024 and 2023: (In thousands, except share and per share amounts) Total Common Stock Additional Paid-in Capital Common Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Balance, December 31, 2023 $ 1,216,490 $ 27,006 $ 247,032 $ ( 184,412 ) $ ( 130,602 ) $ 1,257,466 Issuance of 20,668 shares of common stock under incentive compensation plan 865 21 844 — — — Stock-based and deferred compensation ( 2,640 ) 98 461 ( 3,199 ) — — Net income 13,893 — — — — 13,893 Other comprehensive income ( 5,664 ) — — — ( 5,664 ) — Cash dividends paid: Common stock ($ 0.375 per share) ( 8,422 ) — — — — ( 8,422 ) Balance, March 31, 2024 $ 1,214,522 $ 27,125 $ 248,337 $ ( 187,611 ) $ ( 136,266 ) $ 1,262,937 (In thousands, except share and per share amounts) Total Common Stock Additional Paid-in Capital Common Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Balance, December 31, 2022 $ 1,166,065 $ 26,841 $ 237,202 $ ( 180,596 ) $ ( 167,512 ) $ 1,250,130 Issuance of 25,981 shares of common stock under incentive compensation plan 1,514 26 1,488 — — — Stock-based and deferred compensation ( 2,612 ) 91 895 ( 3,598 ) — — Net income 16,142 — — — — 16,142 Other comprehensive income (loss) 16,964 — — — 16,964 — Cash dividends paid: Common stock ($ 0.365 per share) ( 8,160 ) — — — — ( 8,160 ) Balance, March 31, 2023 $ 1,189,913 $ 26,958 $ 239,585 $ ( 184,194 ) $ ( 150,548 ) $ 1,258,112 3. FAIR VALUE MEASUREMENTS Derivative assets and liabilities include the foreign currency exchange and interest rate swap contracts discussed in Note 4, Derivative Instruments , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this 6 Form 10-Q). Fair value and carrying value were the same because the contracts were recorded at fair value. The fair values of the foreign currency contracts were calculated as the difference between the applicable forward foreign exchange rates at the reporting date and the contracted foreign exchange rates multiplied by the contracted notional amounts. The fair value of the interest rate swap was calculated as the difference between the contracted swap rate and the floating interest rate multiplied by the present value of the notional amount of the contract. At March 31, 2024, and December 31, 2023 , the fair values and related carrying values of debt, including current maturities, were as follows (the fair value and carrying value amounts are presented without regard to unamortized debt issuance costs of $ 772,000 and $ 895,000 as of March 31, 2024 and December 31, 2023, respectively): (In thousands) March 31, 2024 December 31, 2023 Fair value $ 614,024 $ 627,695 Carrying value 646,754 655,041 The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of March 31, 2024, and December 31, 2023, and the level within the fair value hierarchy in which the fair value measurements fall: (In thousands) March 31, 2024 Level 1 Level 2 Level 3 Mutual fund assets $ 23,466 $ 23,466 $ — $ — Derivative assets: Interest rate contracts 7,014 — 7,014 — Foreign currency contracts 630 — 630 — Total assets at fair value $ 31,110 $ 23,466 $ 7,644 $ — Derivative liabilities: Foreign currency contracts $ 738 $ — $ 738 $ — (In thousands) December 31, 2023 Level 1 Level 2 Level 3 Mutual fund assets $ 26,804 $ 26,804 $ — $ — Derivative assets: Interest rate contracts 6,183 — 6,183 — Foreign currency contracts 1,018 — 1,018 — Total assets at fair value $ 34,005 $ 26,804 $ 7,201 $ — Derivative liabilities: Foreign currency contracts $ 928 $ — $ 928 $ — 4. DERIVATIVE INSTRUMENTS At March 31, 2024, and December 31, 2023 , the Company had open forward foreign currency exchange contracts to buy or sell foreign currencies with U.S. dollar equivalent amounts of $ 108,979,000 and $ 106,561,000 , respectively. All forward foreign exchange contracts at March 31, 2024 had durations of one month to three months . The Company is currently exposed to volatility in short-term interest rates and has mitigated certain portions of that risk by using an interest rate swap. The interest rate swap is recognized on the balance sheet as either an asset or a liability measured at fair value. At March 31, 2024 , the Company held an interest rate swap contract with a notional value of $ 100,000,000 that was designated as a cash flow hedge. Period-to-period changes in the fair value of the interest rate swap are initially recognized as gains or losses in other comprehensive income. As the interest rate swap contract is settled, the corresponding gain or loss is reclassified out of accumulated other comprehensive income (AOCI) into earnings. The maturity date of the current interest swap contract is March 10, 2027 , which is closely aligned with the June 24, 2027 maturity of the Company's revolving credit facility. The fair values of the derivative instruments held by the Company on March 31, 2024, and December 31, 2023, are disclosed in Note 3, Fair Value Measurements , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). Derivative instrument gains and losses for the three months ended March 31, 2024 and 2023, were immaterial. For amounts reclassified out of AOCI into earnings for the three months ended March 31, 2024 and 2023, see Note 11, Accumulated Other Comprehensive Income (Loss) , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). 7 5. STOCK-BASED COMPENSATION Compensation expense recorded for all stock options, performance shares, time-based restricted stock units (RSUs) and stock appreciation rights (SARs) was as follows: (In thousands) Three Months Ended March 31, 2024 2023 $ 1,372 $ 999 Unrecognized compensation costs for stock options, performance shares, RSUs and SARs were as follows: (In thousands) March 31, 2024 December 31, 2023 Stock options $ 211 $ 127 Performance shares and RSUs 10,583 3,761 SARs 5,435 3,648 The change in unrecognized compensation costs for stock options, performance shares, RSUs and SARs is due to new grants issued in 2024. The Company granted the following awards in the first three months of 2024: Shares Stock options 3,356 Performance shares (at target) and RSUs 104,282 SARs 89,073 The unrecognized compensation costs at March 31, 2024 , are expected to be recognized over weighted-average periods of 2.2 years for stock options, 2.4 years for performance shares and RSUs and 2.1 years for SARs. 6. INVENTORIES The composition of inventories at March 31, 2024, and December 31, 2023, was as follows: (In thousands) March 31, 2024 December 31, 2023 Finished goods $ 162,398 $ 184,828 Raw materials 94,720 80,730 Total inventories $ 257,118 $ 265,558 7. LEASES Lease cost is recognized in both the Cost of Sales and Operating Expenses sections of the Condensed Consolidated Statements of Income. (In thousands) Three Months Ended March 31, 2024 2023 Lease Cost Operating lease cost $ 4,493 $ 4,349 Short-term lease cost 2,687 2,779 Variable lease cost 443 557 Total lease cost $ 7,623 $ 7,685 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases $ 4,488 $ 4,332 Right-of-use assets obtained in exchange for new operating lease liabilities 989 6,545 8 The following table outlines the maturities of lease liabilities as of March 31, 2024. (In thousands) Undiscounted Cash Flows: 2024 (excluding the three months ended March 31, 2024) $ 12,541 2025 12,911 2026 10,104 2027 7,771 2028 6,827 Subsequent to 2028 35,527 Total Undiscounted Cash Flows $ 85,681 Less: Imputed interest ( 13,080 ) Present value $ 72,601 Current operating lease liabilities (1) 13,538 Non-current operating lease liabilities 59,063 Total lease liabilities $ 72,601 (1) This item is included in the Accrued liabilities line on the Company’s Condensed Consolidated Balance Sheet. Weighted-average remaining lease term-operating leases 9 Years Weighted-average discount rate-operating leases 3.9 % As of March 31, 2024 , the Company had office equipment and automobile leases, valued at approximately $ 922,000 , that had not commenced. These leases will commence during the second and third quarters of 2024 with lease terms ranging from three years to five years . 8. CONTINGENCIES There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company’s business, the majority of which relate to environmental assessment, protection and remediation matters. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The Company’s operations are subject to extensive local, state and federal regulations, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund) as well as comparable regulations applicable to the Company’s foreign locations. Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party at a number of sites where cleanup costs have been or may be incurred by the Company under CERCLA and similar state 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. In determining the appropriate level of environmental reserves, the Company considers several factors such as information obtained from investigatory studies; changes in the scope of remediation; the interpretation, application and enforcement of laws and regulations; changes in the costs of remediation programs; the development of alternative cleanup technologies and methods; and the relative level of the Company’s involvement at various sites for which the Company is allegedly associated. The level of annual expenditures for remedial, monitoring and investigatory activities will change in the future as major components of planned remediation activities are completed and the scope, timing and costs of existing activities are changed. As of March 31, 2024 , the Company estimated a range of possible environmental losses and legal losses of $ 20,792,000 to $ 49,778,000 . Within the range of possible environmental losses and legal losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range. These accruals totaled $ 20,792,000 at March 31, 2024 and $ 20,646,000 at December 31, 2023. A lthough 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 the uncertainties noted above, that additional reserves could be required in the future. Cash expenditures related to environmental remediation and certain other legal matters approximated $ 1,585,000 and $ 3,466,000 for the three months ended March 31, 2024 and 2023, respectively. 9 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. However, in the event of one or more adverse determinations with respect to such sites in any annual or interim period, the effect on the Company’s cash flows and results of operations for those periods could be material. Following are summaries of the Company’s major contingencies at March 31, 2024: Maywood, New Jersey Site The Company’s property in Maywood, New Jersey, property formerly owned by the Company adjacent to its current site and other nearby properties (collectively, the Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of alleged chemical and radiological contamination. Pursuant to (i) a September 21, 1987 Administrative Order on Consent entered into between the U.S. Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company at the Maywood site and (ii) the issuance of an order on May 2, 1991 by the USEPA to the Company for property currently owned by the Company at the Maywood site, the Company has completed various Remedial Investigation/Feasibility Studies of soil and groundwater at the Maywood site. On September 24, 2014, the USEPA issued its Record of Decision (ROD) for chemically-contaminated soil at the Maywood site. The ROD was amended pursuant to an Explanation of Significant Differences in January 2021. On February 29, 2024, the U.S. District Court for the District of New Jersey entered a consent decree among the Company, the United States, the New Jersey Department of Environmental Protection (NJDEP) and the New Jersey Spill Compensation Fund Administrator that requires the Company to take certain actions and to pay certain past costs of the United States and NJDEP. The USEPA has not yet issued a ROD for chemically-contaminated groundwater at the Maywood site. Based on the most current information available, the Company believes its recorded liability is reasonable having considered the range of estimated costs of remediation for the Maywood site. The estimate of the cost of remediation for the Maywood site could change again as the Company continues to hold discussions with the USEPA, as the design of the remedial action is finalized, if a groundwater ROD is issued or if other potentially responsible parties are identified. The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability. D’Imperio Property Site During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances generated by the Company at several sites in New Jersey, including the D’Imperio site. The Company was named as a potentially responsible party in an October 2, 1998 lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Site. The Company is cooperating with other potentially responsible parties to implement the selected remedy. Based on current information, the Company believes that its recorded liability is reasonable having considered the range of estimated cost of remediation for the D’Imperio site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the Company’s current recorded liability. Wilmington Site Property formerly owned and operated by the Company in Wilmington, Massachusetts was listed on the National Priorities List in 2006. The Company, together with the current site owner and another potentially responsible party, entered into an Administrative Order on Consent in July 2007 to undertake a Remedial Investigation and Feasibility Study. A ROD was issued by the USEPA on March 30, 2021. The Company and three other potentially responsible parties entered into a consent decree, dated September 28, 2023, with USEPA and the Commonwealth of Massachusetts that requires the remedial design and remedial action of the remedy selected in the ROD for two operable units and an interim remedy for another operable unit. Remediation at this site is being managed by its current owner, to whom the Company sold the property in 1980. The Company is contractually obligated to contribute up to five percent of the environmental response costs incurred by the current owner, with no limitation on the ultimate amount of contributions. The Company has paid the current owner $ 3,778,000 for the Company’s portion of environmental response costs at the Wilmington site through March 31, 2024. The Company has recorded a liability for its portion of the estimated remediation costs for the site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the current recorded liability. On July 29, 2022, the Company and other potentially responsible parties were notified of a possible joint claim by federal and state trustees for alleged natural resource damages related to the Wilmington site. The alleged damages may result in a range 10 of possible penalties and the Company recorded a liability for this matter during the first quarter of 2024. Depending on the ultimate resolution of this matter, the amount for which the Company is liable could differ materially from the current recorded liability. Millsdale Site On March 26, 2024, the Company received a Notice and Finding of Violation from the USEPA alleging violations of air regulations at the Company’s Elwood, Illinois (Millsdale) facility. The notice alleges violations related to operating parameters and air emission requirements. The notice does not state whether the USEPA intends to pursue financial penalties or operational remedies. The alleged violations may result in a range of possible penalties; however, at this stage of the matter, the Company is unable to predict the ultimate outcome or what impact, if any, the outcome might have on the Company’s financial position, results of operations or cash flows. Other U.S. Sites Through the regular environmental monitoring of its plant production sites, the Company discovered levels of chemical contamination that were above thresholds allowed by law at its Millsdale and Fieldsboro, New Jersey plants. The Company voluntarily reported its results to the applicable state environmental agencies. As a result, the Company is required to perform self-remediation of the affected areas. Based on current information, the Company believes that its recorded liability for the remediation of the affected areas is appropriate based on an estimate of expected costs. However, actual costs could differ materially from the current recorded liability. 9. POSTRETIREMENT BENEFIT PLANS Defined Benefit Pension Plans The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations. The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued. Components of Net Periodic Benefit Cost UNITED STATES (In thousands) Three Months Ended March 31, 2024 2023 Interest cost $ 1,651 $ 1,731 Expected return on plan assets ( 2,116 ) ( 2,133 ) Amortization of net actuarial loss ( 3 ) ( 6 ) Net periodic benefit cost $ ( 468 ) $ ( 408 ) UNITED KINGDOM (In thousands) Three Months Ended March 31, 2024 2023 Interest cost $ 161 $ 164 Expected return on plan assets ( 183 ) ( 170 ) Amortization of net actuarial loss 80 81 Net periodic benefit cost $ 58 $ 75 Employer Contributions U.S. Plans As a result of pension funding relief provisions included in the Highway and Transportation Funding Act of 2014, the Company is not required to make contributions to its funded U.S. qualified defined benefit plans. Approximately $ 316,000 is expected to be paid to the unfunded non-qualified plans in 2024 . Of such amount, $ 129,000 had been paid to the non-qualified plans as of March 31, 2024. U.K. Plan The Company’s U.K. subsidiary does not expect to contribute to its defined benefit pension plan in 2024. 11 Defined Contribution Plans The Company sponsors retirement defined contribution plans that cover eligible U.S. and U.K. employees. The Company’s U.S. retirement plans include two qualified plans, one of which is a 401(k) plan and one of which is an employee stock ownership plan (profit sharing plan), and one non-qualified supplemental executive plan. In the three months ended March 31, 2024 and 2023 , the Company made contributions into the qualified retirement plans for U.S. employees and for certain non-U.S. employees. Profit sharing contributions were determined using a formula applied to Company earnings. Approximately 85 percent of union and non-union employees are eligible for either the Company's sponsored or statutory profit sharing contributions and 100 percent of U.S. based union and non-union employees are eligible for the Company's sponsored profit sharing contributions. In 2023 and 2024, profit sharing contributions for U.S. employees were made to the employee stock ownership plan. Profit sharing contributions are allocated to participant accounts based on participant base earnings. Defined contribution plan expenses for the Company’s qualified contribution plans were as follows: (In thousands) Three Months Ended March 31, 2024 2023 Retirement savings contributions $ 2,125 $ 2,048 Profit sharing contributions 848 707 Total defined contribution plan expenses $ 2,973 $ 2,755 The Company has a rabbi trust to fund the obligations of its non-qualified supplemental executive defined contribution plans (supplemental plans). The trust is comprised of various mutual fund investments selected by the participants of the supplemental plans. In accordance with the accounting guidance for rabbi trust arrangements, the assets of the trust and the obligations of the supplemental plans are reported on the Company’s condensed consolidated balance sheets. The Company elected the fair value option for the mutual fund investment assets so that offsetting changes in the mutual fund values and defined contribution plan obligations would be recorded in earnings in the same period. Therefore, the mutual funds are reported at fair value with any subsequent changes in fair value recorded in the condensed consolidated statements of income. The liabilities related to the supplemental plans increase (i.e., supplemental plan expense is recognized) when the value of the trust assets appreciate and decrease when the value of the trust assets decline (i.e., supplemental plan income is recognized). At March 31, 2024 , the balance of the trust assets was $ 559,000 , which equaled the balance of the supplemental plan liabilities. See the long-term investments section in Note 3, Fair Value Measurements , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for further information regarding the Company’s mutual fund assets. 12 10. EARNINGS PER SHARE Below are the computations of basic and diluted earnings per share for the three months ended March 31, 2024 and 2023: (In thousands, except per share amounts) Three Months Ended March 31, 2024 2023 Computation of Basic Earnings per Share Net income attributable to Stepan Company $ 13,893 $ 16,142 Weighted-average number of common shares outstanding 22,824 22,757 Basic earnings per share $ 0.61 $ 0.71 Computation of Diluted Earnings per Share Net income attributable to Stepan Company $ 13,893 $ 16,142 Weighted-average number of shares outstanding 22,824 22,757 Add weighted-average net shares from assumed exercise of options (under treasury stock method) (1) 47 99 Add weighted-average net shares related to unvested stock awards (under treasury stock method) 3 1 Add weighted-average net shares from assumed exercise of SARs (under treasury stock method) (1) 54 108 Add weighted-average contingently issuable net shares related to performance stock awards (under treasury stock method) 20 29 Weighted-average shares applicable to diluted earnings 22,948 22,994 Diluted earnings per share $ 0.61 $ 0.70 (1) 800,025 and 403,711 options/SARs to acquire shares of the Company's common stock were excluded from the computation of dilutive earnings per share for the three months ended March 31, 2024 and 2023, respectively. The options/SARs' exercise prices were greater than the average market price for the Company's common stock and inclusion of the instruments would have had an antidilutive effect on the computations of the earnings per share. 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Below is the change in the Company’s accumulated other comprehensive income (loss) (AOCI) balance by component (net of income taxes) for the three months ended March 31, 2024 and 2023: (In thousands) Foreign Currency Translation Adjustments Defined Benefit Pension Plan Adjustments Cash Flow Hedge Adjustments Total Balance at December 31, 2022 $ ( 156,835 ) $ ( 19,079 ) $ 8,402 $ ( 167,512 ) Other comprehensive income before reclassifications 18,423 — ( 1,514 ) 16,909 Amounts reclassified from AOCI — 58 ( 3 ) 55 Net current-period other comprehensive income 18,423 58 ( 1,517 ) 16,964 Balance at March 31, 2023 $ ( 138,412 ) $ ( 19,021 ) $ 6,885 $ ( 150,548 ) Balance at December 31, 2023 $ ( 116,412 ) $ ( 20,408 ) $ 6,218 $ ( 130,602 ) Other comprehensive income before reclassifications ( 6,551 ) — 831 ( 5,720 ) Amounts reclassified from AOCI — 58 ( 2 ) 56 Net current-period other comprehensive income ( 6,551 ) 58 829 ( 5,664 ) Balance at March 31, 2024 $ ( 122,963 ) $ ( 20,350 ) $ 7,047 $ ( 136,266 ) 13 Information regarding the reclassifications out of AOCI for the three months ended March 31, 2024 and 2023, is displayed below: (In thousands) Amount Reclassified from AOCI (1) AOCI Components Three Months Ended March 31, Affected Line Item in Condensed Consolidated Statements of Income 2024 2023 Amortization of defined benefit pension actuarial losses $ ( 77 ) $ ( 75 ) (2) 19 17 Tax benefit $ ( 58 ) $ ( 58 ) Net of tax Gains and losses on cash flow hedges: Foreign exchange contracts 2 3 Cost of sales 2 3 Total before tax — — Tax benefit $ 2 $ 3 Net of tax Total reclassifications for the period $ ( 56 ) $ ( 55 ) Net of tax (1) A mounts in parentheses denote expense to the Company’s Condensed Consolidated Statements of Income. (2) This component of accumulated other comprehensive income is included in the computation of net periodic benefit cost. See Note 9, Postretirement Benefit Plans , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for additional details. 12. SEGMENT REPORTING The Company has three reportable segments: Surfactants, Polymers and Specialty Products. Net sales by segment for the three months ended March 31, 2024 and 2023, were as follows: (In thousands) Three Months Ended March 31, 2024 2023 Segment Net Sales Surfactants $ 390,820 $ 467,828 Polymers 145,508 161,127 Specialty Products 15,090 22,481 Total $ 551,418 $ 651,436 14 Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three months ended March 31, 2024 and 2023, are summarized below: (In thousands) Three Months Ended March 31, 2024 2023 Segment Operating Income Surfactants $ 26,079 $ 27,056 Polymers 8,382 10,004 Specialty Products 4,268 2,530 Segment operating income 38,729 39,590 Business restructuring — ( 157 ) Unallocated corporate expenses (1) ( 18,560 ) ( 18,376 ) Total operating income 20,169 21,057 Other Income (Expense) Interest, net ( 3,071 ) ( 2,822 ) Other, net 2,362 1,668 Income before provision for income taxes $ 19,460 $ 19,903 (1) Unallocated corporate expenses are primarily comprised of corporate administrative expenses (e.g., corporate finance, legal, human resources, information systems, deferred compensation and environmental remediation) that are not included in segment operating income and are not used to evaluate segment performance. 13. REVENUE FROM CONTRACTS WITH CUSTOMERS As of March 31, 2024 , the Company had $ 931,000 of contract liabilities and no contract assets. A contract liability would typically arise when an advance or deposit is received from a customer before the Company recognizes revenue. In practice, this is rare as it would require a customer to make a payment prior to a performance obligation being satisfied. When such situations do arise, the Company maintains a deferred revenue liability until the time a performance obligation has been satisfied. The Company recognized $ 688,000 of revenue in the first three months of 2024 from pre-existing contract liabilities at December 31, 2023. In addition, during 2020, the Company recorded $ 10,709,000 of long-term deferred revenue associated with a payment received to defray the cost of capital expenditures necessary to service a customer’s future product needs. At March 31, 2024 , $ 6,093,000 was classified as long-term and $ 2,216,000 was classified as short-term. This deferred revenue is being recognized over the period of the contract and $ 2,400,000 of revenue has been recognized from the beginning of the contract term through March 31, 2024. The tables below provide a geographic disaggregation of net sales for the three months ended March 31, 2024 and 2023. The Company’s business disaggregation by geographic region most effectively captures the nature and economic characteristics of the Company’s revenue streams impacted by economic factors. (In thousands) For the Three Months Ended March 31, 2024 Geographic Market Surfactants Polymers Specialty Total North America $ 229,590 $ 69,809 $ 13,246 $ 312,645 Europe 70,778 63,877 1,835 136,490 Latin America 77,868 417 9 78,294 Asia 12,584 11,405 — 23,989 Total $ 390,820 $ 145,508 $ 15,090 $ 551,418 (In thousands) For the Three Months Ended March 31, 2023 Geographic Market Surfactants Polymers Specialty Total North America $ 277,140 $ 81,169 $ 17,599 $ 375,908 Europe 91,120 69,057 4,872 165,048 Latin America 81,099 785 10 81,894 Asia 18,470 10,116 — 28,586 Total $ 467,828 $ 161,127 $ 22,481 $ 651,436 15 14. DEBT At March 31, 2024 and December 31, 2023, debt was comprised of the following: (In thousands) Maturity Dates March 31, 2024 December 31, 2023 Senior unsecured notes 3.95 % (net of unamortized debt issuance cost of $ 168 and $ 191 for 2024 and 2023, respectively) 2024 - 2027 $ 56,975 $ 56,952 3.86 % (net of unamortized debt issuance cost of $ 81 and $ 105 for 2024 and 2023, respectively) 2024 - 2025 28,490 28,466 2.30 % (net of unamortized debt issuance cost of $ 126 and $ 142 for 2024 and 2023, respectively) 2024 - 2028 49,874 49,858 2.37 % (net of unamortized debt issuance cost of $ 132 and $ 148 for 2024 and 2023, respectively) 2024 - 2028 49,868 49,852 2.73 % (net of unamortized debt issuance cost of $ 149 and $ 175 for 2024 and 2023, respectively) 2025 - 2031 99,851 99,825 2.83 % (net of unamortized debt issuance cost of $ 116 and $ 134 for 2024 and 2023, respectively) 2026 - 2032 74,884 74,866 Revolving credit facility and term loan borrowing 2024 280,000 283,000 Debt of foreign subsidiaries Unsecured bank debt, foreign currency 2024 6,040 11,327 Total debt $ 645,982 $ 654,146 Less current maturities 245,861 252,898 Long-term debt $ 400,121 $ 401,248 The Company's long-term debt financing is comprised of certain senior unsecured notes issued to insurance companies in private placement transactions pursuant to note purchase agreements (the “Note Purchase Agreements”), totaling $ 359,942,000 as of March 31, 2024 . These notes are denominated in U.S. dollars and have fixed interest rates ranging from 2.30 percent to 3.95 percent. The notes had original maturities of seven to 12 years with mandatory principal payments beginning four, five and six years after issuance . The Company will be required to make principal payments on the currently outstanding notes from 2024 to 2032. The Company's credit agreement (the "Credit Agreement") with a syndicate of banks provides for credit facilities in an initial aggregate principal amount of $ 450,000,000 , consisting of (a) a $ 350,000,000 multi-currency revolving credit facility and (b) a $ 100,000,000 delayed draw term loan credit facility, each of which matures on June 24, 2027 . The Company maintains import letters of credit, and standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement. As of March 31, 2024 , the Company had outstanding letters of credit totaling $ 10,979,000 and $ 280,000,000 of outstanding borrowings under the credit agreement, inclusive of a $ 93,750,000 delayed draw term loan ($ 6,250,000 of the term loan principal has been permanently repaid as scheduled). There was $ 152,771,000 available under the credit agreement as of March 31, 2024. The Company’s material debt agreements contain provisions which, among other covenants, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. Based on the loan agreement provisions that place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were $ 240,735,000 and $ 234,399,000 at March 31, 2024 and December 31, 2023 , respectively. 15. OTHER, NET Other, net in the condensed consolidated statements of income included the following: (In thousands) Three Months Ended March 31, 2024 2023 Foreign exchange losses $ ( 375 ) $ ( 324 ) Investment income 60 143 Realized and unrealized gains on investments 2,267 1,516 Net periodic benefit cost 410 333 Other, net $ 2,362 $ 1,668 16 16. NONCASH INVESTING AND FINANCING ACTIVITIES Noncash investing activities included liabilities (accounts payable) incurred for property, plant and equipment expenditures of approximately $ 13,004,000 and $ 27,061,000 that were unpaid at March 31, 2024 and 2023 , respectively. Noncash financing activities included the issuance of 98,146 shares of the Company’s common stock (valued at $ 8,808,000 ) and 88,497 shares of the Company’s common stock (valued at $ 9,607,000 ) under the Company’s equity incentive compensation plan during the three months ended March 31, 2024 and 2023 , respectively. 17. RECENT ACCOUNTING PRONOUNCEMENTS In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effect of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease the burden of implementing the usage of new reference rates. The amendments apply to contract modifications that replace a reference rate affected by reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. If elected, the optional expedients to contract modifications must be applied consistently for all eligible contracts or eligible transactions. The original timeframe for electing optional expedients to contract modifications was between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06 deferring the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The guidance should be applied prospectively. Other than electing select expedients associated with an interest rate swap, the Company has not currently utilized any of the optional expedients of exceptions available under this ASU. The Company will continue to assess whether this ASU is applicable throughout the effective period. In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements, Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative . The amendments in this update represent changes to clarify or improve disclosures and presentation requirements of a variety of topics, including Statement of Cash Flows-Overall (disclosures in annual periods where cash flows associated with derivative instruments and their related gains and losses are presented), Earnings Per Share-Overall (disclosures of the methods used in the diluted earnings-per-share computation for each dilutive security), and Debt-Overall (disclosures of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on outstanding short-term borrowings). The amendments in this update are effective two years after the SEC removes related disclosure requirements from Regulation S-X or Regulation S-K. The implementation of ASU No. 2023-06 will not have an impact on the Company’s financial position, results of operations and cash flow, but will impact the Company’s interim and annual disclosures related to the relevant subtopics in this update. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures . This update requires more enhanced and detailed interim and annual disclosures regarding significant segment expenses and other segment items that are regularly provided to the chief operating decision maker. These items include the difference between segment revenue less the segment expenses that have been already disclosed under the significant expense principle and each reported measure of segment profit and loss. These requirements are in addition to the disclosures that are currently required by Topic 280, Segment reporting . The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and should be applied retrospectively to all periods presented in the financial statements. The implementation of ASU No. 2023-07 will not have an impact on the Company’s financial position, results of operations and cash flow but will impact the Company’s interim and annual segment reporting disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income taxes (Topic 740) Improvement to Income Tax Disclosures . This update requires that public entities on an annual basis disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, the amendments in this update require the disclosure on an annual basis of the amount of income taxes paid (net of refund received) disaggregated by federal, state and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid is equal or greater than five percent of total income taxes paid (net of refunds received). This update requires all entities to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. The amendments in this update are effective for annual periods beginning after December 15, 2024 and should be applied on a prospective basis. The implementation of ASU No. 2023-09 will not have an impact on the Company’s financial position, results of operations and cash flow but will impact the Company’s annual income tax disclosures. The Organisation for Economic Co-operation and Development (OECD) proposed a global minimum tax of 15 percent on reported profits (entitled “Pillar Two”) that has been agreed upon in principle by over 100 countries. During 2023, many countries took steps to incorporate Pillar Two into their domestic laws. Although the OECD’s model provides a framework for applying the minimum tax, countries may enact Pillar Two rules that vary slightly from the model, can adopt a different timeline, and may 17 adjust local tax incentives in response to Pillar Two. While it is uncertain whether the U.S. will enact legislation to adopt Pillar Two, certain countries in which the Company operates have enacted such legislation, and other countries are in the process of introducing legislation to implement Pillar Two. The Company does not expect Pillar Two to have a material impact on its financial position, results of operations, cash flow and effective tax rate. 18