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 2021 2020 Net Sales $ 537,740 $ 449,987 Cost of Sales 428,760 370,718 Gross Profit 108,980 79,269 Operating Expenses: Selling 14,504 13,532 Administrative 22,638 18,872 Research, development and technical services 15,149 13,827 Deferred compensation (income) expense 2,694 ( 7,323 ) 54,985 38,908 Business restructuring expenses (Note 16) ( 81 ) ( 357 ) Operating Income 53,914 40,004 Other Income (Expense): Interest, net ( 1,524 ) ( 1,230 ) Other, net (Note 15) 746 ( 3,262 ) ( 778 ) ( 4,492 ) Income Before Provision for Income Taxes 53,136 35,512 Provision for Income Taxes 12,525 7,973 Net Income 40,611 27,539 Net Loss Attributable to Noncontrolling Interests (Note 2) — 6 Net Income Attributable to Stepan Company $ 40,611 $ 27,545 Net Income Per Common Share Attributable to Stepan Company (Note 10): Basic $ 1.77 $ 1.20 Diluted $ 1.74 $ 1.18 Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 10): Basic 22,974 23,023 Diluted 23,330 23,285 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 2021 2020 Net Income $ 40,611 $ 27,539 Other Comprehensive Income: Foreign currency translation adjustments (1) (Note 11) ( 18,441 ) ( 41,195 ) Defined benefit pension adjustments, net of tax (Note 11) 874 808 Derivative instrument activity, net of tax (Note 11) ( 2 ) ( 2 ) Total Other Comprehensive Income ( 17,569 ) ( 40,389 ) Comprehensive Income 23,042 ( 12,850 ) Comprehensive Income Attributable to Noncontrolling Interest (Note 2) 8 19 Comprehensive Income Attributable to Stepan Company $ 23,050 $ ( 12,831 ) (1) Includes foreign currency translation adjustments related to noncontrolling interest. 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, 2021 December 31, 2020 Assets Current Assets: Cash and cash equivalents $ 150,692 $ 349,938 Receivables, net 380,649 301,318 Inventories (Note 6) 235,062 218,783 Other current assets 31,250 35,612 Total current assets 797,653 905,651 Property, Plant and Equipment: Cost 1,949,681 1,872,650 Less: Accumulated depreciation ( 1,203,302 ) ( 1,189,983 ) Property, plant and equipment, net 746,379 682,667 Goodwill, net (Note 17) 96,252 27,972 Other intangible assets, net (Note 17) 66,813 24,068 Long-term investments (Note 3) 30,212 30,652 Operating lease assets 72,157 62,421 Other non-current assets 18,473 18,905 Total assets $ 1,827,939 $ 1,752,336 Liabilities and Equity Current Liabilities: Current maturities of long-term debt (Note 14) $ 87,525 $ 37,857 Accounts payable 264,192 236,750 Accrued liabilities 112,372 141,947 Total current liabilities 464,089 416,554 Deferred income taxes 29,876 20,745 Long-term debt, less current maturities (Note 14) 160,847 160,812 Non-current operating lease liabilities 60,433 51,567 Other non-current liabilities 108,748 114,293 Commitments and Contingencies (Note 8) Equity: Common stock, $ 1 par value; authorized 60,000,000 shares; Issued 26,725,620 shares in 2021 and 26,658,032 shares in 2020 26,726 26,658 Additional paid-in capital 209,471 206,716 Accumulated other comprehensive loss (Note 11) ( 154,442 ) ( 136,881 ) Retained earnings 1,057,579 1,023,829 Less: Common treasury stock, at cost, 4,208,867 shares in 2021 and 4,185,242 shares in 2020 ( 137,052 ) ( 133,629 ) Total Stepan Company stockholders’ equity 1,002,282 986,693 Noncontrolling interests (Note 2) 1,664 1,672 Total equity 1,003,946 988,365 Total liabilities and equity $ 1,827,939 $ 1,752,336 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 2021 2020 Cash Flows From Operating Activities Net income $ 40,611 $ 27,539 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,060 20,023 Deferred compensation 2,694 ( 7,323 ) Realized and unrealized (gains) losses on long-term investments ( 534 ) 3,875 Stock-based compensation 2,539 1,202 Deferred income taxes 2,481 131 Other non-cash items ( 40 ) 395 Changes in assets and liabilities: Receivables, net ( 63,243 ) ( 30,767 ) Inventories ( 7,476 ) ( 447 ) Other current assets ( 861 ) ( 3,180 ) Accounts payable and accrued liabilities ( 9,377 ) ( 16,583 ) Pension liabilities ( 451 ) ( 236 ) Environmental and legal liabilities ( 21 ) ( 947 ) Deferred revenues ( 80 ) ( 157 ) Net Cash Used In Operating Activities ( 11,698 ) ( 6,475 ) Cash Flows From Investing Activities Expenditures for property, plant and equipment ( 37,632 ) ( 33,202 ) Asset acquisition (Note 17) ( 3,503 ) ( 2,040 ) Business acquisition, net of cash acquired (Note 17) ( 184,000 ) — Other, net 1,379 2,331 Net Cash Used In Investing Activities ( 223,756 ) ( 32,911 ) Cash Flows From Financing Activities Revolving debt and bank overdrafts, net 49,668 — Dividends paid ( 6,861 ) ( 6,202 ) Company stock repurchased ( 989 ) ( 7,243 ) Stock option exercises 381 155 Other, net ( 2,272 ) ( 1,128 ) Net Cash (Used In) Provided By Financing Activities 39,927 ( 14,418 ) Effect of Exchange Rate Changes on Cash ( 3,719 ) ( 7,240 ) Net Decrease in Cash and Cash Equivalents ( 199,246 ) ( 61,044 ) Cash and Cash Equivalents at Beginning of Period 349,938 315,383 Cash and Cash Equivalents at End of Period $ 150,692 $ 254,339 Supplemental Cash Flow Information Cash payments of income taxes, net of refunds/payments $ 6,638 $ 3,316 Cash payments of interest $ 2,242 $ 2,122 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, 2021 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, 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. 2 . RECONCILIATIONS OF EQUITY 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) Total Common Stock Additional Paid-in Capital Common Treasury Stock Accumulated Other Comprehensive Income (Loss) Retained Earnings Noncontrolling Interest (1) Balance, December 31, 2020 $ 988,365 $ 26,658 $ 206,716 $ ( 133,629 ) $ ( 136,881 ) $ 1,023,829 $ 1,672 Issuance of 5,786 shares of common stock under stock option plan 381 6 375 — — — — Purchase of 8,300 shares of common stock ( 989 ) — — ( 989 ) — — — Stock-based and deferred compensation 8 62 2,380 ( 2,434 ) — — — — Net income 40,611 — — — — 40,611 — Other comprehensive income (loss) ( 17,569 ) — — — ( 17,561 ) — ( 8 ) Cash dividends paid: Common stock ($ 0.305 per share) ( 6,861 ) — — — — ( 6,861 ) — Balance, March 31, 2021 $ 1,003,946 $ 26,726 $ 209,471 $ ( 137,052 ) $ ( 154,442 ) $ 1,057,579 $ 1,664 6 (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 Noncontrolling Interest (1) Balance, December 31, 2019 $ 892,496 $ 26,493 $ 193,135 $ ( 114,139 ) $ ( 136,170 ) $ 922,464 $ 713 Issuance of 2,747 shares of common stock under stock option plan 155 3 152 — — — — Purchase of 89,225 shares of common stock ( 7,243 ) — — ( 7,243 ) — — — Stock-based and deferred compensation 1,116 45 2,374 ( 1,303 ) — — — Net income 27,539 — — — — 27,545 ( 6 ) Other comprehensive income (loss) ( 40,389 ) — — — ( 40,376 ) — ( 13 ) Cash dividends paid: Common stock ($ 0.275 per share) ( 6,202 ) — — — — ( 6,202 ) — Balance, March 31, 2020 $ 867,472 $ 26,541 $ 195,661 $ ( 122,685 ) $ ( 176,546 ) $ 943,807 $ 694 (1) Reflects the noncontrolling interest in the Company’s China joint venture. 3 . FAIR VALUE MEASUREMENTS 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 Carrying value approximated fair value because of the short maturity of the instruments. Fair value of cash and cash equivalents is a Level 1 measurement. Derivative assets and liabilities 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. 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. See the table below that describes financial assets and liabilities measured on a recurring basis for the reported fair values of derivative assets and liabilities. 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. Fair values for the mutual funds were calculated using the published market price per unit at the reporting date multiplied by the number of units held at the reporting date. See the table that follows the financial instrument descriptions for the reported fair value of long-term investments. Debt obligations The fair value of debt with original maturities greater than one year comprised the combined present values of scheduled principal and interest payments for each of the various loans, individually discounted at rates equivalent to those which could be obtained by the Company for new debt issues with durations equal to the average life to maturity of each loan. The fair values of the remaining Company debt obligations approximated their carrying values due to the short-term nature of the debt. The Company’s fair value measurements for debt fall within level 2 of the fair value hierarchy. 7 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) March 31, 2021 December 31, 2020 Fair value $ 259,889 $ 210,370 Carrying value 248,954 199,286 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) March 2021 Level 1 Level 2 Level 3 Mutual fund assets $ 30,212 $ 30,212 $ — $ — Derivative assets: Foreign currency contracts 231 — 231 — Total assets at fair value $ 30,443 $ 30,212 $ 231 $ — Derivative liabilities: Foreign currency contracts $ 196 $ — $ 196 $ — (In thousands) December 2020 Level 1 Level 2 Level 3 Mutual fund assets $ 30,652 $ 30,652 $ — $ — Derivative assets: Foreign currency contracts 335 — 335 — Total assets at fair value $ 30,987 $ 30,652 $ 335 $ — Derivative liabilities: Foreign currency contracts $ 566 $ - $ 566 $ — 4 . DERIVATIVE INSTRUMENTS The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by the use of derivative instruments is foreign currency exchange risk. The Company holds forward foreign currency exchange contracts that are not designated as any type of accounting hedge as defined by GAAP. The Company uses these contracts to manage its exposure to exchange rate fluctuations on certain Company subsidiary cash, accounts receivable, accounts payable and other obligation balances that are denominated in currencies other than the entities’ functional currencies. The forward foreign exchange contracts are recognized on the balance sheet as either an asset or a liability measured at fair value. 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 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 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). 5 . STOCK-BASED COMPENSATION 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 8 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. Compensation expense recorded for all stock options, stock awards and SARs was as follows: (In thousands) Three Months Ended March 31 2021 2020 $ 2,540 $ 1,202 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) March 31, 2021 December 31, 2020 Stock options $ 3,780 $ 1,993 Stock awards 8,674 5,313 SARs 8,176 4,341 The increases in unrecognized compensation costs for stock options, stock awards and SARs reflected the 2021 grants of: Shares Stock options 66,134 Stock awards (at target) 41,228 SARs 142,451 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. 6 . INVENTORIES The composition of inventories at March 31, 2021, and December 31, 2020, was as follows: (In thousands) March 31, 2021 December 31, 2020 Finished goods $ 156,228 $ 148,878 Raw materials 78,834 69,905 Total inventories $ 235,062 $ 218,783 7 . LEASES 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. Except for real estate, typical lease terms range from one to ten years . Real estate lease terms typically range from one to fifty years . 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, Philippines, Singapore, Brazil and China, typically for five-year increments. The U.S. IBR was used for all other countries as the leases in these countries are not material. The total value of leases that reside in the five countries identified above represents approximately 98 percent of the Company’s consolidated 9 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) March 31, 2021 Lease Cost Operating lease cost $ 3,726 Short-term lease cost 1,269 Variable lease cost 283 Total lease cost $ 5,278 Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases $ 3,289 Right-of-use assets obtained in exchange for new operating lease liabilities 12,627 (In thousands) Undiscounted Cash Flows: 2021 (excluding the three months ended March 31, 2021) $ 10,753 2022 13,081 2023 10,847 2024 6,935 2025 5,306 Subsequent to 2025 39,647 Total Undiscounted Cash Flows $ 86,569 Less: Imputed interest ( 13,765 ) Present value $ 72,804 Current operating lease liabilities (1) 12,371 Non-current operating lease liabilities 60,433 Total lease liabilities $ 72,804 (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 10 years Weighted-average discount rate-operating leases 3.0 % 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 (PRP) 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, 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. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites and 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, 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 10 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. 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 upon 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, 2021: Maywood, New Jersey Site The Company’s property in Maywood, New Jersey and 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 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 November 12, 2004 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 (RI/FS), and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated soil at the Maywood site, which requires the Company to perform remedial cleanup of the soil and buried waste. 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 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 PRPs are identified. 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 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, including past and future remediation costs at the site. As such, the Company recorded no liability related to this settlement agreement. 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 PRP in an October 2, 1998, lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Site. In 2020, the PRPs were provided with updated remediation cost estimates by the PRP group technical consultant and project manager, which the Company considered in its determination of its range of estimated possible losses and liability balance. The changes in range of possible losses and liability balance were immaterial. Remediation work continues at the D’Imperio site. 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 current estimates. Wilmington Site The Company is currently contractually obligated to contribute to the environmental response costs associated with the Company’s formerly-owned site in Wilmington, Massachusetts (the Wilmington site). 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 11 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. 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 estimates. The Company and other prior owners of the Wilmington site also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed. 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, Illinois 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 current estimates. 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 UNITED KINGDOM (In thousands) Three Months Ended March 31 Three Months Ended March 31 2021 2020 2021 2020 Interest cost $ 1,177 $ 1,421 $ 88 $ 109 Expected return on plan assets ( 2,586 ) ( 2,437 ) ( 81 ) ( 134 ) Amortization of net actuarial loss 1,144 1,052 17 19 Net periodic benefit cost $ ( 265 ) $ 36 $ 24 $ ( 6 ) 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 $ 274,000 is expected to be paid related to the unfunded non-qualified plans in 2021. Of such amount, $ 119,000 had been paid related to the non-qualified plans as of March 31, 2021. U.K. Plan The Company’s U.K. subsidiary expects to contribute approximately $ 495,000 to its defined benefit pension plan in 2021. Of such amount, $ 141,000 had been contributed to the plan as of March 31, 2021. Defined Contribution Plans The Company sponsors retirement savings 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, and one non-qualified supplemental executive plan. 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. employees. Profit sharing contributions were determined using a formula applied to Company earnings. In 2020 and 2021, 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. 12 Defined contribution plan expenses for the Company’s qualified contribution plans were as follows: (In thousands) Three Months Ended March 31 2021 2020 Retirement savings contributions $ 2,039 $ 1,758 Profit sharing contributions 1,866 975 Total defined contribution plan expenses $ 3,905 $ 2,733 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 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 appreciates and decrease when the value of the trust assets declines (i.e., supplemental plan income is recognized). 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). 10 . EARNINGS PER SHARE 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 March 31 2021 2020 Computation of Basic Earnings per Share Net income attributable to Stepan Company $ 40,611 $ 27,545 Weighted-average number of common shares outstanding 22,974 23,023 Basic earnings per share $ 1.77 $ 1.20 Computation of Diluted Earnings per Share Net income attributable to Stepan Company $ 40,611 $ 27,545 Weighted-average number of shares outstanding 22,974 23,023 Add weighted-average net shares from assumed exercise of options (under treasury stock method) (1) 140 102 Add weighted-average net shares related to unvested stock awards (under treasury stock method) 1 1 Add weighted-average net shares from assumed exercise of SARs (under treasury stock method) (1) 171 128 Add weighted-average contingently issuable net shares related to performance stock awards (under treasury stock method) 44 31 Weighted-average shares applicable to diluted earnings 23,330 23,285 Diluted earnings per share $ 1.74 $ 1.18 (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. 13 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 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) Foreign Currency Translation Adjustments Defined Benefit Pension Plan Adjustments Cash Flow Hedge Adjustments Total Balance at December 31, 2019 $ ( 104,037 ) $ ( 32,205 ) $ 72 $ (136,170 ) Other comprehensive income (loss) before reclassifications ( 41,182 ) 808 — ( 40,374 ) Amounts reclassified from AOCI — — ( 2 ) ( 2 ) Net current-period other comprehensive income (loss) ( 41,182 ) 808 ( 2 ) ( 40,376 ) Balance at March 31, 2020 $ ( 145,219 ) $ ( 31,397 ) $ 70 $ (176,546 ) Balance at December 31, 2020 $ ( 107,083 ) $ ( 29,861 ) $ 63 $ (136,881 ) Other comprehensive income (loss) before reclassifications ( 18,433 ) 874 — ( 17,559 ) Amounts reclassified from AOCI — — ( 2 ) ( 2 ) Net current-period other comprehensive income (loss) ( 18,433 ) 874 ( 2 ) ( 17,561 ) Balance at March 31, 2021 $ ( 125,516 ) $ ( 28,987 ) $ 61 $ (154,442 ) 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 (1) AOCI Components Three Months Ended March 31 Affected Line Item in Condensed Consolidated Statements of Income 2021 2020 Amortization of defined benefit pension actuarial losses $ ( 1,161 ) $ ( 1,071 ) (2) 287 263 Tax benefit $ ( 874 ) $ ( 808 ) Net of tax Gains and losses on cash flow hedges: Foreign exchange contracts 2 2 Cost of sales 2 2 Total before tax — — Tax benefit $ 2 $ 2 Net of tax Total reclassifications for the period $ ( 872 ) $ ( 806 ) Net of tax ( 1 ) Amounts in parentheses denote expense to statement 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). 14 1 2 . SEGMENT REPORTING The Company has three reportable segments: Surfactants, Polymers and Specialty Products. Net sales by segment for the three months ended March 31, 2021 and 2020, were as follows: (In thousands) Three Months Ended March 31 2021 2020 Segment Net Sales Surfactants $ 370,936 $ 327,071 Polymers 150,385 106,491 Specialty Products 16,419 16,425 Total $ 537,740 $ 449,987 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 March 31 2021 2020 Segment Operating Income Surfactants $ 53,210 $ 36,156 Polymers 17,951 7,516 Specialty Products 2,633 3,984 Segment operating income 73,794 47,656 Business restructuring ( 81 ) ( 357 ) Unallocated corporate expenses (1) ( 19,799 ) ( 7,295 ) Consolidated operating income 53,914 40,004 Interest expense, net ( 1,524 ) ( 1,230 ) Other, net 746 ( 3,262 ) Income before provision for income taxes $ 53,136 $ 35,512 (1) 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 are not used to evaluate segment performance. 1 3 . REVENUE FROM CONTRACTS WITH CUSTOMERS The Company deems a contract with a customer to exist when a purchase order is received from a customer for a specified quantity of product or products and the Company acknowledges receipt of such purchase order. In some instances the Company has entered into manufacturing supply agreements with customers but these agreements typically do not bind a customer to any purchase volume requirements and thus an obligation is not created until the customer submits a purchase order to the Company. The Company’s contracts typically have a single performance obligation that is satisfied at the time a product is shipped and control passes to the customer. For a small portion of the business, performance obligations are deemed satisfied when product is delivered to a customer location. 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. 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 would maintain a deferred revenue liability until the time a performance obligation has been satisfied. 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. 15 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 March 31, 2021 (In thousands) Surfactants Polymers Specialty Total Geographic Market North America $ 220,935 $ 70,878 $ 13,937 $ 305,750 Europe 71,094 68,300 2,482 141,876 Latin America 60,169 990 — 61,159 Asia 18,738 10,217 — 28,955 Total $ 370,936 $ 150,385 $ 16,419 $ 537,740 (In thousands) For the Three Months Ended March 31, 2020 Surfactants Polymers Specialty Total Geographic Market North America $ 207,946 $ 61,841 $ 13,494 $ 283,281 Europe 59,660 36,560 2,931 99,151 Latin America 46,510 639 — 47,149 Asia 12,955 7,451 — 20,406 Total $ 327,071 $ 106,491 $ 16,425 $ 449,987 14. DEBT Debt was comprised of the following at March 31, 2021, and December 31, 2020: (In thousands) Maturity Dates March 31, 2021 December 31, 2020 Unsecured private placement notes 3.95% (net of unamortized debt issuance cost of $ 262 and $ 273 for 2021 and 2020, respectively) 2021-2027 $ 99,738 $ 99,727 3.86% (net of unamortized debt issuance cost of $ 222 and $ 236 for 2021 and 2020, respectively) 2021-2025 71,207 71,193 4.86% (net of unamortized debt issuance cost of $ 98 and $ 108 for 2021 and 2020, respectively) 2021-2023 27,759 27,749 Revolving credit facility borrowing 2021 45,000 — Debt of foreign subsidiaries Unsecured bank debt, foreign currency 2021 4,668 — Total debt $ 248,372 $ 198,669 Less current maturities 87,525 37,857 Long-term debt $ 160,847 $ 160,812 The Company has a committed $ 350,000,000 multi-currency revolving credit agreement that expires on January 30, 2023 . 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 $ 407,026,000 and $ 373,884,000 at March 31, 2021 and December 31, 2020, respectively. 16 15. OTHER, NET Other, net in the condensed consolidated statements of income included the following: (In thousands) Three Months Ended March 31 2021 2020 Foreign exchange (losses) gains $ ( 335 ) $ 568 Investment income 306 75 Realized and unrealized gains (losses) on investments 534 ( 3,875 ) Net periodic pension benefit 241 ( 30 ) Other, net $ 746 $ ( 3,262 ) 16. BUSINESS RESTRUCTURING 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 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. Manufacturing operations of the Longford Mills plant ceased by the end of 2016, and production of goods manufactured at the facility was transferred to other Company North American production sites. Decommissioning of the assets is expected to continue throughout 2021. 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. 17 17. ACQUISITIONS 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) Assets: Property, plant and equipment $ 54,400 Identifiable intangible assets 45,500 Goodwill 65,100 Total assets acquired $ 165,000 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 Unaudited Three Months Ended March 31 (In thousands, except per share amounts) 2021 2020 Net Sales $ 550,179 $ 475,887 Net Income Attributable to Stepan Company $ 43,112 $ 28,602 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. 18 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 (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 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 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 Company’s Surfactants segment. The following table summarizes the purchase price allocation for the acquisition: (In thousands) Assets: Identifiable intangible assets: Customer lists $ 8,000 Trademarks and know-how 1,300 Non-compete agreement 300 Goodwill 4,225 Property, plant and equipment 175 Total assets acquired $ 14,000 Logos Technologies Acquisition On March 13, 2020, the Company acquired certain assets of Logos Technologies LLC's NatSurFact® business, a rhamnolipid-based line of bio-surfactants derived from renewable sources. These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional. The acquisition was accounted for as an asset acquisition. The purchase price of the acquisition was $ 2,040,000 and was paid with cash on hand. All assets acquired are included in the Company’s Surfactants segment. The assets acquired were primarily intangibles, including trademarks and know-how ($ 1,392,000 ) and patents ($ 464,000 ). Additionally, $ 184,000 of laboratory equipment was acquired. 18. RECENT ACCOUNTING PRONOUNCEMENTS In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This update provides guidance to reduce complexity in certain areas of accounting for income taxes. The amendments in this update are effective for fiscal years beginning after December 15, 2020. The Company adopted ASU. No. 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. 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 amendments in this update may be implemented between March 12, 2020 and December 31, 2022. The guidance should be applied prospectively. 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. 19