What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-10-29 · 181 added, 259 removed, 417 unchanged (51% of the section changed)

4 unchanged sentences

Three Months Ended

Nine Months Ended

Cost of Sales

2 unchanged sentences

Research, development and technical services

Deferred compensation expense

Deferred compensation (income) expense

Business restructuring expenses (Note 16)

5 unchanged sentences

Provision for Income Taxes

Net (Income) Loss Attributable to Noncontrolling Interests (Note 2)

Net Loss Attributable to Noncontrolling Interests (Note 2)

Net Income Attributable to Stepan Company

Net Income Per Common Share Attributable to Stepan Company

Net Income Per Common Share Attributable to Stepan Company (Note 10):

Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 10):

4 unchanged sentences

Three Months Ended

Nine Months Ended

Other Comprehensive Income:

4 unchanged sentences

Comprehensive Income

Comprehensive income attributable to noncontrolling interests (Note 2)

Comprehensive Income Attributable to Noncontrolling Interest (Note 2)

Comprehensive Income Attributable to Stepan Company

4 unchanged sentences

(Dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

8 unchanged sentences

Property, plant and equipment, net

Goodwill, net

Other intangible assets, net

Goodwill, net (Note 17)

Other intangible assets, net (Note 17)

Long-term investments (Note 3)

27 unchanged sentences

(In thousands)

Nine Months Ended September 30

Three Months Ended March 31

Cash Flows From Operating Activities

3 unchanged sentences

Deferred compensation

Realized and unrealized gains on long-term investments

Realized and unrealized (gains) losses on long-term investments

Stock-based compensation

8 unchanged sentences

Deferred revenues

Net Cash Provided By Operating Activities

Net Cash Used In Operating Activities

Cash Flows From Investing Activities

Expenditures for property, plant and equipment

Asset acquistion (Note 17)

Asset acquisition (Note 17)

Business acquisition, net of cash acquired (Note 17)

2 unchanged sentences

Revolving debt and bank overdrafts, net

Other debt repayments

Dividends paid

1 unchanged sentence

Stock option exercises

Net Cash Used In Financing Activities

Net Cash (Used In) Provided By Financing Activities

Effect of Exchange Rate Changes on Cash

8 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

March 31, 2021

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading.

In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of September 30, 2020, and its results of operations for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019, have been included.

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, 2021, and its results of operations and cash flows for the three months ended March 31, 2021 and 2020, 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 2020 Annual Report on Form 10-K.

RECONCILIATIONS OF EQUITY

Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the three and nine months ended September 30, 2020 and 2019:

(In thousands, except share and per share amounts)

Comprehensive

Income (Loss)

Noncontrolling

Balance at June 30, 2020

Issuance of 40,435 shares of common stock under stock option plan

Stock-based and deferred compensation

Other comprehensive income

Cash dividends paid:

Common stock ($ 0.28 per share)

Balance at September 30, 2020

(In thousands, except share and per share amounts)

Comprehensive

Income (Loss)

Noncontrolling

Balance at December 31, 2019

Issuance of 47,115 shares of common stock under stock option plan

Purchase of 160,780 shares of common stock on the open market

Stock-based and deferred compensation

Other comprehensive income

Cash dividends paid:

Common stock ($ 0.84 per share)

Balance at September 30, 2020

Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the three months ended March 31, 2021 and 2020:

(In thousands, except share and per share amounts)

2 unchanged sentences

Noncontrolling

Balance at June 30, 2019

Balance, December 31, 2020

Issuance of 5,786 shares of common stock under stock option plan

Purchase of 73,821 shares of common stock on the open market

Purchase of 8,300 shares of common stock

Stock-based and deferred compensation

Other comprehensive income

Other comprehensive income (loss)

Cash dividends paid:

Common stock ($ 0.305 per share)

Balance at September 30, 2019

Balance, March 31, 2021

(In thousands, except share and per share amounts)

4 unchanged sentences

Issuance of 2,747 shares of common stock under stock option plan

Purchase of 144,457 shares of common stock on the open market

Purchase of 89,225 shares of common stock

Stock-based and deferred compensation

Other comprehensive income

Other comprehensive income (loss)

Cash dividends paid:

Common stock ($ 0.275 per share)

Balance at September 30, 2019

Balance, March 31, 2020

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

Reflects beginning retained earnings adjustment as a result of the Company’s first quarter 2019 adoption of ASU No.

2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income .

FAIR VALUE MEASUREMENTS

The following were the financial instruments held by the Company at September 30, 2020, and December 31, 2019, and the methods and assumptions used to estimate the instruments’ fair values:

The following were the financial instruments held by the Company at March 31, 2021, and December 31, 2020, and the methods and assumptions used to estimate the instruments’ fair values:

Cash and cash equivalents

2 unchanged sentences

Derivative assets and liabilities

Derivative assets and liabilities include the foreign currency exchange contracts discussed in Note 4.

Derivative assets and liabilities include the foreign currency exchange contracts discussed in Note 4, Derivate Instruments , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q).

Fair value and carrying value were the same because the contracts were recorded at fair value.

2 unchanged sentences

Long-term investments

Long-term investments include the mutual fund assets the Company held to fund a portion of its deferred compensation liabilities and all of its non-qualified supplemental executive defined contribution obligations (see the defined contribution plans section of 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)).

Fair value and carrying value were the same because the mutual fund assets were recorded at fair value.

5 unchanged sentences

The Company’s fair value measurements for debt fall within level 2 of the fair value hierarchy.

At September 30, 2020, and December 31, 2019, 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 $ 651,000 and $ 754,000 as of September 30, 2020 and December 31, 2019, respectively):

At March 31, 2021, and December 31, 2020, 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 $ 582,000 and $ 617,000 as of March 31, 2021 and December 31, 2020, respectively):

(In thousands)

September 30,

Carrying value

The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of September 30, 2020, and December 31, 2019, and the level within the fair value hierarchy in which the fair value measurements fall:

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, 2021, and December 31, 2020, and the level within the fair value hierarchy in which the fair value measurements fall:

(In thousands)

19 unchanged sentences

Gains and losses arising from recording the foreign exchange contracts at fair value are reported in earnings as offsets to the losses and gains reported in earnings arising from the re-measurement of the asset and liability balances into the applicable functional currencies.

At September 30, 2020, and December 31, 2019, the Company had open forward foreign currency exchange contracts, all with durations of one to three months , to buy or sell foreign currencies with U.S.

At March 31, 2021, and December 31, 2020, the Company had open forward foreign currency exchange contracts, all with durations of one to three months , to buy or sell foreign currencies with U.S.

dollar equivalent amounts of $ 46,640,000 and $ 48,336,000 , respectively.

The fair values of the derivative instruments held by the Company on September 30, 2020, and December 31, 2019, are disclosed in Note 3.

Derivative instrument gains and losses for the three- and nine-month periods ended September 30, 2020 and 2019, were immaterial.

For amounts reclassified out of accumulated other comprehensive income (loss) (AOCI) into earnings for the three- and nine-month periods ended September 30, 2020 and 2019, see Note 11.

The fair values of the derivative instruments held by the Company on March 31, 2021, and December 31, 2020, 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-month periods ended March 31, 2021 and 2020, were immaterial.

For amounts reclassified out of accumulated other comprehensive income (loss) (AOCI) into earnings for the three-month periods ended March 31, 2021 and 2020, 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).

STOCK-BASED COMPENSATION

On September 30, 2020, the Company had stock options, stock awards and stock appreciation rights (SARs) outstanding under its 2011 Incentive Compensation Plan.

On March 31, 2021, the Company had stock options, stock awards and stock appreciation rights (SARs) outstanding under its 2011 Incentive Compensation Plan.

SARs granted prior to 2015 are cash-settled, and SARs granted in 2015 and later are stock-settled.

Stock options and SARs granted prior to 2017 generally cliff vested after two years .

Starting in 2017, stock options and SARs have a three-year graded vesting feature, with one-third of the awards vesting each year.

Starting in 2017, stock options and

SARs have a three-year graded vesting feature, with one-third of the awards vesting each year.

The Company has elected the straight-line method of expense attribution for the stock options and SARs with the graded vesting feature.

2 unchanged sentences

Three Months Ended

Nine Months Ended

The increase in stock-based compensation expense for the third quarter of 2020 compared to the third quarter of 2019 was primarily attributable to cash-settled SARs.

The increase in cash-settled SARs compensation expense reflects a larger increase in the market value of Company stock during the third quarter of 2020 versus the increase in the market value of Company stock during the third quarter of 2019.

The increase in stock-based compensation expense for the first quarter of 2021 compared to the first quarter of 2020 was primarily attributable to cash-settled SARs.

The increase in cash-settled SARs compensation expense reflects an increase in the market value of Company stock during the first quarter of 2021 versus a decrease in the market value of Company stock during the first quarter of 2020.

Unrecognized compensation costs for stock options, stock awards and SARs were as follows:

(In thousands)

September 30, 2020

March 31, 2021

December 31, 2020

3 unchanged sentences

Stock awards (at target)

The unrecognized compensation costs at September 30, 2020, are expected to be recognized over a weighted-average period of 1.8 years for stock options and SARs and 1.9 years for stock awards.

The composition of inventories at September 30, 2020, and December 31, 2019, was as follows:

The unrecognized compensation costs at March 31, 2021, are expected to be recognized over weighted-average periods of 2.2 years for stock options, 2.1 years for stock awards and 2.2 years for SARs.

The composition of inventories at March 31, 2021, and December 31, 2020, was as follows:

(In thousands)

September 30,

March 31, 2021

December 31, 2020

Finished goods

1 unchanged sentence

Total inventories

The Company’s operating leases are primarily comprised of railcars, real estate, storage tanks, autos, trailers and manufacturing/office equipment.

The Company’s operating leases are primarily comprised of railcar, real estate, storage tank, auto, trailer and manufacturing/office equipment leases.

Railcars and real estate comprise approximately 24 percent and 62 percent, respectively, of the Company’s consolidated ROU asset balance.

1 unchanged sentence

Real estate lease terms typically range from one to fifty years .

The Company’s two principal real estate leases relate to land leases in the Philippines and Singapore.

The Company’s four principal real estate leases relate to the office lease for the new corporate headquarters in Northbrook, Illinois and land leases in the Philippines, Singapore and Lake Providence, Louisiana.

As of March 31, 2021, the Company had a storage tank lease, valued at approximately $ 168,000 , that had not commenced.

This lease will commence in the second quarter of 2021 with a lease term of two years .

As most of the Company’s leases do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate (IBR) based on the information available at the commencement date in determining the present value of lease payments.

IBRs were specifically determined for the United States, the Philippines, Singapore, Brazil and China, typically for five-year increments.

IBRs were specifically determined for the United States, Philippines, Singapore, Brazil and China, typically for five-year increments.

IBR was used for all other countries as the leases in these countries are not material.

The total value of leases of property in the five countries identified above represents approximately 97 percent of the Company’s consolidated ROU asset balance.

The total value of leases that reside in the five countries identified above represents approximately 98 percent of the Company’s consolidated

ROU asset balance.

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

(In thousands)

Three months ended

September 30, 2020

Nine months ended

September 30, 2020

March 31, 2021

Operating lease cost

8 unchanged sentences

Undiscounted Cash Flows:

2020 (excluding the nine months ended September 30, 2020)

2021 (excluding the three months ended March 31, 2021)

Subsequent to 2025

5 unchanged sentences

Total lease liabilities

This item is included in Accrued liabilities line on the Company’s Condensed Consolidated Balance Sheet.

This item is included in the Accrued liabilities line on the Company’s Condensed Consolidated Balance Sheet.

Weighted-average remaining lease term-operating leases

5 unchanged sentences

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 (PRP) at a number of sites where cleanup costs have been or may be incurred under CERCLA and similar state statutes.

In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites.

7 unchanged sentences

The level of annual expenditures for remedial, monitoring and investigatory activities will change in the future as major components of planned remediation activities are completed and the scope, timing and costs of existing activities are changed.

As of September 30, 2020, the Company estimated a range of possible environmental and legal losses of $ 22,448,000 to $ 41,146,000 .

As of March 31, 2021, the Company estimated a range of possible environmental losses and legal losses of $ 22,866,000 to $ 41,313,000 .

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.

These accruals totaled $ 22,448,000 at September 30, 2020 and $ 25,905,000 at December 31, 2019.

Although the Company believes that its reserves are adequate for environmental contingencies, it is possible due to the uncertainties noted above, that additional reserves could be required in the future.

Cash expenditures related to legal and environmental matters approximated $ 3,781,000 and $ 2,826,000 for the nine-month periods ended September 30, 2020 and 2019, respectively.

accruals totaled $ 22,866,000 at March 31, 2021 and $ 22,884,000 at December 31, 2020.

Although the Company believes that 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 legal matters and environmental matters approximated $ 280,000 and $ 912,000 for the three-month periods ended March 31, 2021 and 2020, respectively.

Most of the first quarter 2020 cash expenditures related to the Maywood, New Jersey site.

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.

3 unchanged sentences

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 September 30, 2020:

Following are summaries of the Company’s major contingencies at March 31, 2021:

Maywood, New Jersey Site

6 unchanged sentences

The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which re quires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil .

Based on the Company’s review and analysis of this order, no changes to the Company’s recorded liability for claims associated with s oil remediation of chemical contamination at the Maywood site were required.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil.

In addition, under the terms of a settlement agreement reached on November 12, 2004, the U.S.

Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985.

Under the Cooperative Agreement, the United States is responsible for the removal of radioactive waste at the Maywood site and it has incurred and will incur future remediation costs at the site.

Under the Cooperative Agreement, the United States is responsible for the removal of radioactive waste at the Maywood site, including past and future remediation costs at the site.

As such, the Company recorded no liability related to this settlement agreement.

11 unchanged sentences

Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980.

Under the Company’s October 1, 1993, agreement with the current owner of the Wilmington site, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions.

The Company has paid the current owner $ 2,965,000 for the Company’s portion of environmental response costs at the Wilmington site through September 30, 2020.

Under the Company’s October 1, 1993, agreement with the current owner of the Wilmington site, once total site remediation costs exceed certain levels, the Company is obligated to

contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions.

The Company has paid the current owner $ 3,078,000 for the Company’s portion of environmental response costs at the Wilmington site through March 31, 2021.

The Company has recorded a liability for its portion of the estimated remediation costs for the site.

13 unchanged sentences

UNITED STATES

(In thousands)

Three Months Ended

Nine Months Ended

Interest cost

Expected return on plan assets

Amortization of net actuarial loss

Net periodic benefit cost (income)

UNITED KINGDOM

1 unchanged sentence

Three Months Ended

Nine Months Ended

Three Months Ended

Interest cost

1 unchanged sentence

Amortization of net actuarial loss

Net periodic benefit cost (income)

Net periodic benefit cost

Employer Contributions

2 unchanged sentences

Approximately $ 274,000 is expected to be paid related to the unfunded non-qualified plans in 2021.

Of such amount, $ 247,000 had been paid related to the non-qualified plans as of September 30, 2020.

Of such amount, $ 119,000 had been paid related to the non-qualified plans as of March 31, 2021.

The Company’s U.K.

subsidiary expects to contribute approximately $ 495,000 to its defined benefit pension plan in 2021.

Of such amount, $ 434,000 had been contributed to the plan as of September 30, 2020.

Of such amount, $ 141,000 had been contributed to the plan as of March 31, 2021.

Defined Contribution Plans

2 unchanged sentences

retirement plans include two qualified plans, one of which is a 401(k) plan and one of which is an employee stock ownership plan, and one non-qualified supplemental executive plan.

In the nine months ended September 30, 2020 and 2019, the Company made profit sharing contributions into the qualified retirement plans for U.S.

In the three months ended March 31, 2021 and 2020, the Company made profit sharing contributions into the qualified retirement plans for U.S.

employees and for certain non-U.S.

6 unchanged sentences

Three Months Ended

Nine Months Ended

Retirement savings contributions

Profit sharing contributions plan

Profit sharing contributions

Total defined contribution plan expenses

The Company has a rabbi trust to fund the obligations of its non-qualified supplemental executive defined contribution plans (supplemental plans).

The trust comprises 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 consolidated balance sheets.

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 consolidated statements of income.

Therefore, the mutual funds are reported at fair value with any subsequent changes in fair value recorded in the condensed consolidated statements of income.

The liabilities related to the supplemental plans increase (i.e., supplemental plan expense is recognized) when the value of the trust assets appreciates and decrease when the value of the trust assets declines (i.e., supplemental plan income is recognized).

At September 30, 2020, the

balance of the trust assets was $ 1,604,000 , which equaled the ba lance of the supplemental plan liabilities (see the long-term investments section in Note 3 for further information regarding the Company’s mutual fund assets).

At March 31, 2021, the balance of the trust assets was $ 2,035,000 , 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).

EARNINGS PER SHARE

Below are the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019:

Below are the computations of basic and diluted earnings per share for the three months ended March 31, 2021 and 2020:

(In thousands, except per share amounts)

Three Months Ended

Nine Months Ended

Computation of Basic Earnings per Share

Net income attributable to Stepan Company

Weighted-average number of common shares

Weighted-average number of common shares outstanding

Basic earnings per share

8 unchanged sentences

exercise of SARs (under treasury stock method) (1)

Add weighted-average contingently issuable net

shares related to performance stock awards

(under treasury stock method)

Weighted-average shares applicable to diluted

Add weighted-average contingently issuable net shares

related to performance stock awards (under treasury stock method)

Weighted-average shares applicable to diluted earnings

Diluted earnings per share

(1) Options/SARs to acquire 169,912 shares of Company common stock were excluded from the computations of diluted earnings per share for the nine months ended September 30, 2020.

Options/SARs to acquire 142,833 shares of Company common stock were excluded from the computations of diluted earnings per share for the nine months ended September 30, 2019.

Inclusion of the instruments would have had antidilutive effects on the computations of the earnings per share.

(1) No options/SARs to acquire shares of Company common stock were excluded from the computation of dilutive earnings per share for the three months ended March 31, 2021.

Options/SARs to acquire 256,288 shares of Company common stock were excluded from the computations of diluted earnings per share for the three months ended March 31, 2020.

Inclusion of the instruments would have had an antidilutive effect on the computations of the earnings per share.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Below is the change in the Company’s AOCI balance by component (net of income taxes) for the three and nine months ended September 30, 2020 and 2019:

Below is the change in the Company’s AOCI balance by component (net of income taxes) for the three months ended March 31, 2021 and 2020:

(In thousands)

Balance at June 30, 2019

Other comprehensive income before reclassifications

Amounts reclassified from AOCI

Net current-period other comprehensive income

Balance at September 30, 2019

Balance at June 30, 2020

Other comprehensive income before reclassifications

Amounts reclassified from AOCI

Net current-period other comprehensive income

Balance at September 30, 2020

Balance at December 31, 2019

Other comprehensive income before reclassifications

Other comprehensive income (loss) before

reclassifications

Amounts reclassified from AOCI

Remeasurement adjustment related to the Tax Act (1)

Net current-period other comprehensive income

Balance at September 30, 2019

Net current-period other comprehensive income (loss)

Balance at March 31, 2020

Balance at December 31, 2020

Other comprehensive income before reclassifications

Other comprehensive income (loss) before

reclassifications

Amounts reclassified from AOCI

Net current-period other comprehensive income

Balance at September 30, 2020

Represents reclassification of the stranded tax effects resulting from the U.S.

Tax Cuts and Jobs Act (Tax Act) from accumulated other comprehensive income (loss) to retained earnings in accordance with ASU 2018-02.

Information regarding the reclassifications out of AOCI for the three- and nine-month periods ended September 30, 2020 and 2019, is displayed below:

Net current-period other comprehensive income (loss)

Balance at March 31, 2021

Information regarding the reclassifications out of AOCI for the three-month periods ended March 31, 2021 and 2020, is displayed below:

(In thousands)

Amount Reclassified from AOCI (a)

Amount Reclassified from AOCI (1)

AOCI Components

Three Months Ended

Nine Months Ended

Affected Line Item in

Consolidated Statements

Condensed Consolidated Statements of Income

Amortization of defined benefit pension actuarial losses

5 unchanged sentences

Amounts in parentheses denote expense to statement of income.

This component of accumulated other comprehensive income is included in the computation of net periodic benefit cost (see Note 9 for additional details).

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).

SEGMENT REPORTING

1 unchanged sentence

Surfactants, Polymers and Specialty Products.

Net sales by segment for the three and nine months ended September 30, 2020 and 2019, were as follows:

Net sales by segment for the three months ended March 31, 2021 and 2020, were as follows:

(In thousands)

Three Months Ended

Nine Months Ended

Segment Net Sales

Specialty Products

Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three and nine months ended September 30, 2020 and 2019, are summarized below:

Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three months ended March 31, 2021 and 2020, are summarized below:

(In thousands)

Three Months Ended

Nine Months Ended

Segment Operating Income

6 unchanged sentences

Income before provision for income taxes

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

REVENUE FROM CONTRACTS WITH CUSTOMERS

3 unchanged sentences

For a small portion of the business, performance obligations are deemed satisfied when product is delivered to a customer location.

As of September 30, 2020, the Company had $ 438,000 of contract liabilities and no contract assets.

As of March 31, 2021, the Company had $ 775,000 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.

1 unchanged sentence

When such situations do arise, the Company would maintain a deferred revenue liability until the time a performance obligation has been satisfied.

The Company recognized $ 350,000 of revenue in the nine months of 2020 from pre-existing contract liabilities at December 31, 2019.

The tables below provide a geographic disaggregation of net sales for the three and nine months ended September 30, 2020 and 2019.

The Company recognized $ 773,000 of revenue in the current period from pre-existing contract liabilities at December 31, 2020.

During 2020 the Company recognized $ 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.

This deferred revenue will be recognized over the period of the contract.

As of March 31, 2021, no revenue has been recognized from this contract.

The tables below provide a geographic disaggregation of net sales for the three months ended March 31, 2021 and 2020.

The Company’s business segmentation by geographic region most effectively captures the nature and economic characteristics of the Company’s revenue streams impacted by economic factors.

For the Three Months Ended September 30, 2020

(In thousands)

Specialty Products

Geographic Market

North America

Latin America

For the Three Months Ended September 30, 2019

(In thousands)

Specialty Products

Geographic Market

North America

Latin America

For the Nine Months Ended September 30, 2020

For the Three Months Ended March 31, 2021

(In thousands)

Specialty Products

Geographic Market

1 unchanged sentence

Latin America

For the Nine Months Ended September 30, 2019

(In thousands)

Specialty Products

For the Three Months Ended March 31, 2020

Geographic Market

1 unchanged sentence

Latin America

At September 30, 2020, and December 31, 2019, debt was comprised of the following:

Debt was comprised of the following at March 31, 2021, and December 31, 2020:

(In thousands)

September 30,

Unsecured private placement notes

2 unchanged sentences

4.86% (net of unamortized debt issuance cost of $ 98 and $ 108 for 2021 and 2020, respectively)

Revolving credit facility borrowing

Debt of foreign subsidiaries

Unsecured bank debt, foreign currency

Less current maturities

1 unchanged sentence

The Company has a committed $ 350,000,000 multi-currency revolving credit agreement that expires on January 30, 2023 .

The Company maintains standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement.

As of September 30, 2020, the Company had outstanding letters of credit totaling $ 5,280,000 and no borrowings under the revolving credit agreement.

There was $ 344,720,000 available under the revolving credit agreement as of September 30, 2020.

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, 2021, the Company had outstanding borrowing totaling $ 45,000,000 with the weighted average interest rate of 1.36 percent and outstanding letters of credit totaling $ 6,767,000 .

There was $ 298,233,000 available under the revolving credit agreement as of March 31, 2021.

The Company’s loan agreements contain provisions which, among others, 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 $ 351,219,000 and $ 283,956,000 at September 30, 2020 and December 31, 2019, respectively .

Other, net in the consolidated statements of income included the following:

Based on the loan agreement provisions that place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were $ 407,026,000 and $ 373,884,000 at March 31, 2021 and December 31, 2020, respectively.

Other, net in the condensed consolidated statements of income included the following:

(In thousands)

Three Months Ended

Nine Months Ended

Foreign exchange gain

Foreign exchange (losses) gains

Investment income

Realized and unrealized gain (loss) on investments

Net periodic pension benefit cost

Gain on sale of asset

Realized and unrealized gains (losses) on investments

Net periodic pension benefit

BUSINESS RESTRUCTURING

In the first quarter of 2019, the Company approved a plan to restructure its Specialty Products office in the Netherlands and eliminate five positions from the site’s supply chain, quality control and research and development areas.

This planned reduction in positions was made to better align the number of personnel with current business requirements and reduce costs at the site.

As a result, severance and early lease termination expenses of $ 396,000 and $ 79,000 , respectively, were recognized during the first quarter of 2019.

2018 Restructuring

During the third quarter of 2018, the Company approved a plan to shut down Surfactant operations at its German plant site.

As of September 30, 2020, an aggregate of $ 2,392,000 shut down related expense has been recognized at the site.

This aggregate expense is comprised of $ 1,404,000 of asset and spare part write downs recognized in 2018 and $ 988,000 of cumulative decommissioning costs.

The Company recognized $ 169,000 in decommissioning expenses in the third quarter of 2019 and did no t incur any decommissioning expenses in the third quarter of 2020.

For the first nine months of 2020 and 2019, the Company recognized $ 79,000 and $ 564,000 of decommissioning expenses, respectively.

In the fourth quarter of 2017, the Company approved a plan to restructure a portion of its Fieldsboro, New Jersey production facility.

As a result, the Company recorded $ 915,000 of restructuring expense which reflected termination benefits for select plant employees.

In the first quarter of 2019, the Company recognized a $ 251,000 favorable adjustment to the amount of termination benefits initially recorded.

In May 2016, the Company announced plans to shut down its Longford Mills, Ontario, Canada (Longford Mills) manufacturing facility, a part of the Surfactant reportable segment, by December 31, 2016.

As of March 31, 2020, an aggregate of $ 2,392,000 shut down related expense has been recognized at the site.

In the first quarter of 2020, the Company recognized $ 79,000 of decommissioning expenses at the site.

The Company finalized shut down of the plant in 2020 and no more expenses associated with the restructuring are expected.

2016 Restructuring

During 2016, the Company shut down its Longford Mills, Ontario, Canada (Longford Mills) manufacturing facility, a part of the Surfactant reportable segment.

The shutdown plan was implemented to improve the Company’s asset utilization in North America and to reduce the Company’s fixed cost base.

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Decommissioning of the assets is expected to continue throughout 2021.

As of September 30, 2020, $ 8,113,000 of aggregate restructuring expense has been recognized, reflecting $ 1,644,000 of termination benefits for approximately 30 employees and $ 6,469,000 for other expenses, principally site decommissioning costs.

The Company recognized $ 126,000 and $ 290,000 of decommissioning expenses in the third quarter of 2020 and 2019, respectively.

The Company recognized $ 629,000 and $ 811,000 of decommissioning expenses in the first nine months of 2020 and 2019, respectively.

As of March 31, 2021, $ 8,698,000 of aggregate restructuring expense has been recognized, reflecting $ 1,644,000 of termination benefits for approximately 30 employees and $ 7,054,000 for other expenses, principally site decommissioning costs.

The Company recognized $ 81,000 and $ 278,000 of decommissioning expenses in the first quarter of 2021 and 2020, respectively.

2021 Acquisitions

INVISTA Acquisition

On January 29, 2021 , the Company and its wholly-owned subsidiaries Stepan Holdings Netherlands B.V.

and Stepan UK Limited (collectively, “Stepan”) entered into a Stock and Asset Purchase Agreement with Arteva Specialties B.V., INV Performance Surfaces, LLC, INVISTA Textiles (U.K.) Limited, INV Management Services, LLC, and INVISTA Equities, LLC (collectively, “INVISTA”) to acquire INVISTA's aromatic polyester polyol business and associated assets.

Included in the transaction were two manufacturing sites, one in Wilmington, North Carolina (U.S.) and the other in Vlissingen, Netherlands, along with intellectual property, customer relationships, inventory and working capital.

This acquisition expands the Company’s manufacturing capabilities in both the United States and Europe and enhances its business continuity capabilities for the market.

The Company believes that INVISTA’s available spare capacity, combined with debottlenecking opportunities for both plants, will allow Stepan to support future market growth in a capital efficient way.

The purchase price was $ 165,000,000 , plus $ 21,000,000 of estimated working capital and $ 3,000,000 of associated value-added taxes (VAT) and was paid in cash.

The working capital acquired included $ 5,000,000 of cash.

The acquisition has been accounted for as a business combination, and the acquired operations are included in the Company’s Polymer segment in the first quarter of 2021.

The assets acquired and liabilities assumed as part of the acquisition were measured and recorded at estimated fair value.

The purchase price allocation remains preliminary as of March 31, 2021 pending finalization of the fair value of intangibles and property, plant and equipment.

The principle valuation techniques employed include cost and market approaches (PP&E), relief from royalty method under the income approach (trade name and technology/know) and multi-period excess earnings method under the income approach (customer relationships).

The following table summarizes the preliminary purchase price allocation for the major components of the acquisition:

(In thousands)

Property, plant and equipment

Identifiable intangible assets

Total assets acquired

The acquired goodwill includes proprietary and intellectual property, brand recognition, business continuity benefits and marketing, manufacturing and supply chain synergies of the new business with the Company’s existing Polymer business.

The acquired goodwill has been assigned to the Polymers segment and is deductible for tax purposes.

Identifiable intangible assets included technology and manufacturing know-how ($ 13,000,000 ), trademarks ($ 8,000,000 ) and customer relationships ($ 24,500,000 ).

The amortization periods for know-how and trademarks has initially been estimated to be in the range of 7 to 8 years.

The amortization period for customer relationships has initially been estimated to be in the range of 12 to 14 years.

As of March 31, 2021, in addition to the purchase price, the Company also paid $ 3,232,000 of acquisition-related expenses that included legal, consulting, valuation and accounting services.

During the first three months of 2021, the Company incurred $ 1,285,000 of acquisition-related expenses.

These costs were included in the Administrative expenses line in the Company’s condensed consolidated statement of income.

The following table reflects pro forma financial information prepared under the assumption that the acquisition of the INVISTA aromatic polyester polyol business occurred on January 1, 2020.

Pro Forma Financial Information

Three Months Ended March 31

(In thousands, except per share amounts)

Net Income Attributable to Stepan Company

The supplemental pro forma information is presented for illustrative purposes only and may not be indicative of the consolidated results that would have actually been achieved by the Company.

Furthermore, future results may vary significantly from the results reflected in the pro forma information.

The pro forma results include adjustments primarily related to amortization of acquired intangible assets, depreciation of the fair value adjustment of acquisition-date plant assets, and tax expense.

In addition, non-recurring adjustments to pro forma net income include $ 1,285,000 of acquisition-related expenses - such expenses were excluded from 2021 pro forma net income and included in 2020 pro forma net income.

Fermentation Plant Acquisition

On February 2, 2021, the Company acquired a fermentation plant, located in Lake Providence, Louisiana (U.S.).

The Company believes this plant complements the rhamnolipid-based bio-surfactant technology the Company acquired from Logos Technologies in March 2020.

Fermentation is a new platform technology for the Company and the Company is focusing efforts to further develop, integrate, produce and commercialize these unique surfactants moving forward.

Bio-surfactants, produced via fermentation, are attractive due to their biodegradability, low toxicity, and in some cases, unique antimicrobial properties.

These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional.

The acquisition of this industrial scale fermentation plant represents the latest step in the Company’s bio-surfactant commercialization efforts.

The purchase price was $ 3,500,000 and was paid in cash.

This acquisition has been accounted for as an asset acquisition.

2020 Acquisitions

Clariant (Mexico) Acquisition

On September 17, 2020, the Company through its subsidiaries in Mexico, acquired Clariant’s (Mexico) S.A.

anionic business and select sulfonation equipment located in Santa Clara, Mexico.

On September 17, 2020, the Company through its subsidiaries in Mexico, acquired Clariant (Mexico) S.A.

de C.V.’s (Clariant) anionic business located in Santa Clara, Mexico.

The acquisition did not include the purchase of a manufacturing site.

The business acquired will be integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec).

The business acquired was integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec).

The purchase price of the acquisition was $ 14,000,000 , plus associated value-added taxes (VAT).

As of September 30, 2020, $ 13,519,000 , inclusive of $ 308,000 net VAT, had been paid with cash on hand.

The acquisition was accounted for as a business combination and the assets were measured and recorded at their preliminary estimated fair value.

As of March 31, 2021, $ 13,519,000 , inclusive of $ 308,000 net VAT, had been paid with cash on hand.

The acquisition was accounted for as a business combination and the assets were measured and recorded at their estimated fair value.

The acquired goodwill is not tax deductible.

All assets acquired are included in the Comp any’s Surfactants segment.

The following table summarizes the preliminary purchase price allocation for the acquisition:

All assets acquired are included in the Company’s Surfactants segment.

The following table summarizes the purchase price allocation for the acquisition:

(In thousands)

September 30, 2020

Identifiable intangible assets:

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Total assets acquired

Pro forma financial information has not been included because revenue and earnings of the Company’s consolidated entity would not have been materially different than reported had the acquisition date been January 1, 2019.

Logos Technologies Acquisition

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Additionally, $ 184,000 of laboratory equipment was acquired.

2019 Acquisition

On December 17, 2019, the Company acquired an oilfield demulsifier product line.

The purchase price of the acquisition was $ 9,000,000 and was paid with cash on hand.

This acquisition was accounted for as a business combination and the assets were measured and recorded at their estimated fair values.

The primary assets acquired were intangibles, mostly comprised of goodwill ($ 3,161,000 ), product know-how ($ 3,300,000 ) and customer relationships ($ 1,900,000 ).

A small amount of inventory was also acquired.

All of the acquired assets are included within the Company’s Surfactants segment.

The average amortization period for the identifiable intangibles assets is 20 years.

Pro forma financial information has not been included because revenues and earnings of the Company’s consolidated entity would not have been materially different than reported had the acquisition date been January 1, 2019.

The acquired business did not impact the Company’s 2019 financial results.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU No.

2016-13 , Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which amends the guidance on the measurement of the impairment of financial instruments.

The new pronouncement replaces the existing model of measuring credit losses with an expected credit loss model referred to as “the Current Expected Credit Loss (CECL) model.” The new model is based on expected losses that should be measured based not only on historical experience but on the combination of historical data, current conditions and reasonable forecasts.

Under this methodology, an entity recognizes as an allowance its estimate of lifetime expected credit losses and is required to apply the new credit loss model to most financial instruments held at amortized cost including trade receivables.

The amendments in the update are effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2019.

The Company adopted ASU No.

2016-13 in the first quarter of 2020.

The adoption of the guidance in ASU No.

2016-13 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU No.

2017-4, Intangibles – Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment , which eliminates Step 2 from the goodwill impairment test.

When an indication of impairment was identified after performing the first step of the goodwill impairment test, Step 2 required that an entity determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) using the same procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.

Under the amendments in ASU No.

2017-4, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value.

An entity would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value.

In addition, an entity must consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The Company adopted the amendments in ASU No.

2017-4 for its annual, or any interim, goodwill impairment tests in the first

quarter of 2020.

The adoption of the guidance in ASU No.

2017-4 has not had an effect on the Company’s fi nancial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement .

This update modifies some disclosure requirements related to fair value measurements used for different levels of instruments in fair value hierarchy (Level 1, Level 2 and Level 3).

The amendments in the update are effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2019.

The Company adopted ASU No.

2018-13 in the first quarter of 2020 and the adoption of this update did not have an effect on the Company’s financial position, results of operations, cash flows or the disclosures made for fair value measurements used by the Company.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles-Goodwill and Other-Internal-Use software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract .

This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

This update requires the entity to determine which implementation costs to capitalize as an asset related to the service contact and which costs to expense over the term of the hosting contract.

The amendments in this update are effective for fiscal years beginning after December 15, 2019.

The Company adopted ASU N0 2018-15 prospectively in the first quarter of 2020.

The adoption of ASU No.2018-15 did not have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU No.

2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20) .

This update removes some disclosures that are no longer considered cost beneficial and adds some disclosures about defined benefit plans that have been identified as relevant.

The amendments in this update are effective for fiscal years ending after December 15, 2020.

The adoption of this update is not expected to have an effect on the Company’s financial position, results of operations and cash flows, but will impact the disclosures made for the Company’s defined benefit retirement plans.

In December 2019, the FASB issued ASU No.

2 unchanged sentences

The amendments in this update are effective for fiscal years beginning after December 15, 2020.

The adoption of this update is not expected to have a material effect on the Company’s financial position, results of operations and cash flows.

The Company adopted ASU.

2019-12 in the first quarter of 2021 and the adoption of this update did not have a material effect on the Company’s financial position, results of operations and cash flows.

In March 2020, the FASB issued ASU No.

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The guidance should be applied prospectively.

The Company has not yet implemented ASU No.

2020-04 and currently is in the process of assessing the potential impact of ASU No.

2020-04 on its financial position, results of operations and cash flows.

The Company has not 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements