Item 1. Financial Statements
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Net Sales
$
602,688
$
464,480
$
1,735,939
$
1,375,016
Cost of Sales
510,792
367,423
1,423,382
1,100,195
Gross Profit
91,896
97,057
312,557
274,821
Operating Expenses:
Selling
14,786
13,266
44,280
39,719
Administrative
22,828
21,354
69,440
60,957
Research, development and technical services
15,501
14,303
45,638
41,661
Deferred compensation (income) expense
( 1,504
)
5,613
2,148
4,754
51,611
54,536
161,506
147,091
Business restructuring expenses (Note 16)
( 72
)
( 126
)
( 267
)
( 708
)
Operating Income
40,213
42,395
150,784
127,022
Other Income (Expense):
Interest, net
( 1,599
)
( 1,626
)
( 4,690
)
( 4,115
)
Other, net (Note 15)
702
2,629
4,206
3,804
( 897
)
1,003
( 484
)
( 311
)
Income Before Provision for Income Taxes
39,316
43,398
150,300
126,711
Provision for Income Taxes
2,393
10,056
29,463
29,987
Net Income
36,923
33,342
120,837
96,724
Net Income Attributable to Noncontrolling Interest (Note 2)
( 3
)
( 174
)
( 28
)
( 304
)
Net Income Attributable to Stepan Company
$
36,920
$
33,168
$
120,809
$
96,420
Net Income Per Common Share Attributable to Stepan Company
(Note 10):
Basic
$
1.61
$
1.45
$
5.27
$
4.20
Diluted
$
1.59
$
1.43
$
5.19
$
4.15
Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 10):
Basic
22,898
22,907
22,941
22,951
Diluted
23,219
23,237
23,299
23,236
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
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Net Income
$
36,923
$
33,342
$
120,837
$
96,724
Other Comprehensive Income:
Foreign currency translation adjustments (1) (Note 11)
( 19,328
)
8,631
( 22,594
)
( 29,025
)
Defined benefit pension adjustments, net of tax (Note 11)
800
839
2,550
2,455
Derivative instrument activity, net of tax (Note 11)
( 2
)
( 3
)
( 7
)
( 7
)
Total Other Comprehensive Income
( 18,530
)
9,467
( 20,051
)
( 26,577
)
Comprehensive Income
18,393
42,809
100,786
70,147
Comprehensive Income Attributable to Noncontrolling Interest (Note 2)
( 6
)
( 211
)
( 49
)
( 330
)
Comprehensive Income Attributable to Stepan Company
$
18,387
$
42,598
$
100,737
$
69,817
(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)
September 30, 2021
December 31, 2020
Assets
Current Assets:
Cash and cash equivalents
$
105,268
$
349,938
Receivables, net
413,576
301,318
Inventories (Note 6)
290,934
218,783
Other current assets
29,435
35,612
Total current assets
839,213
905,651
Property, Plant and Equipment:
Cost
2,037,206
1,872,650
Less: Accumulated depreciation
( 1,237,810
)
( 1,189,983
)
Property, plant and equipment, net
799,396
682,667
Goodwill, net (Note 17)
98,212
27,972
Other intangible assets, net (Note 17)
62,800
24,068
Long-term investments (Note 3)
32,542
30,652
Operating lease assets (Note 7)
71,210
62,421
Other non-current assets
52,566
18,905
Total assets
$
1,955,939
$
1,752,336
Liabilities and Equity
Current Liabilities:
Current maturities of long-term debt (Note 14)
$
47,656
$
37,857
Accounts payable
314,459
236,750
Accrued liabilities
128,950
141,947
Total current liabilities
491,065
416,554
Deferred income taxes
8,637
20,745
Long-term debt, less current maturities (Note 14)
232,184
160,812
Non-current operating lease liabilities (Note 7)
58,905
51,567
Other non-current liabilities
106,131
114,293
Commitments and Contingencies (Note 8)
Equity:
Common stock, $ 1 par value; authorized 60,000,000 shares;
Issued 26,752,583 shares in 2021 and 26,658,032 shares in 2020
26,753
26,658
Additional paid-in capital
217,015
206,716
Accumulated other comprehensive loss (Note 11)
( 156,953
)
( 136,881
)
Retained earnings
1,124,066
1,023,829
Less: Common treasury stock, at cost, 4,339,780 shares in 2021
and 4,185,242 shares in 2020
( 153,585
)
( 133,629
)
Total Stepan Company stockholders’ equity
1,057,296
986,693
Noncontrolling interest (Note 2)
1,721
1,672
Total equity
1,059,017
988,365
Total liabilities and equity
$
1,955,939
$
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)
Nine Months Ended September 30
2021
2020
Cash Flows From Operating Activities
Net income
$
120,837
$
96,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
67,953
60,859
Deferred compensation
2,148
4,754
Realized and unrealized gains on long-term investments
( 2,497
)
( 2,169
)
Stock-based compensation
8,069
7,414
Deferred income taxes
( 51,542
)
257
Other non-cash items
139
860
Changes in assets and liabilities:
Receivables, net
( 96,830
)
( 28,405
)
Inventories
( 63,769
)
( 2,574
)
Other current assets
( 356
)
( 4,215
)
Accounts payable and accrued liabilities
39,222
12,041
Pension liabilities
( 1,434
)
( 418
)
Environmental and legal liabilities
( 522
)
( 3,388
)
Deferred revenues
( 16
)
( 62
)
Net Cash Provided By Operating Activities
21,402
141,678
Cash Flows From Investing Activities
Expenditures for property, plant and equipment
( 119,541
)
( 84,903
)
Asset acquisition (Note 17)
( 3,503
)
( 2,040
)
Business acquisition, net of cash acquired (Note 17)
( 184,473
)
( 13,519
)
Other, net
1,480
2,332
Net Cash Used In Investing Activities
( 306,037
)
( 98,130
)
Cash Flows From Financing Activities
Revolving debt and bank overdrafts, net (Note 14)
9,799
—
Other debt borrowings (Note 14)
100,000
—
Other debt repayments
( 28,572
)
( 14,286
)
Dividends paid
( 20,572
)
( 18,547
)
Company stock repurchased
( 16,969
)
( 13,753
)
Stock option exercises
1,087
2,835
Other, net
( 1,801
)
( 889
)
Net Cash (Used In) Provided By Financing Activities
42,972
( 44,640
)
Effect of Exchange Rate Changes on Cash
( 3,007
)
( 3,899
)
Net Decrease in Cash and Cash Equivalents
( 244,670
)
( 4,991
)
Cash and Cash Equivalents at Beginning of Period
349,938
315,383
Cash and Cash Equivalents at End of Period
$
105,268
$
310,392
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds/payments
$
85,271
$
27,420
Cash payments of interest
$
6,885
$
6,916
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
September 30, 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 September 30, 2021, and its results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 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 Annual Report on Form 10-K for the year ended December 31, 2020 (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 and nine months ended September 30, 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 at June 30, 2021
1,050,516
26,752
213,969
( 147,494
)
( 138,420
)
1,093,994
1,715
Issuance of 0 shares of common stock under stock option plan
—
—
—
—
—
—
—
Purchase of 53,058 shares of common stock
( 6,074
)
—
—
( 6,074
)
—
—
—
Stock-based and deferred compensation
3,030
1
3,046
( 17
)
—
—
—
Net income
36,923
—
—
—
—
36,920
3
Other comprehensive income
( 18,530
)
—
—
—
( 18,533
)
—
3
Cash dividends paid:
Common stock ($ 0.305 per share)
( 6,848
)
—
—
—
—
( 6,848
)
—
Balance at September 30, 2021
$
1,059,017
$
26,753
$
217,015
$
( 153,585
)
$
( 156,953
)
$
1,124,066
$
1,721
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 at December 31, 2020
$
988,365
$
26,658
$
206,716
$
( 133,629
)
$
( 136,881
)
$
1,023,829
$
1,672
Issuance of 16,565 shares of common stock under stock option plan
1,087
17
1,070
—
—
—
—
Purchase of 135,103 shares of common stock
( 16,969
)
—
—
( 16,969
)
—
—
—
Stock-based and deferred compensation
6,320
78
9,229
( 2,987
)
—
—
—
Net income
120,837
—
—
—
—
120,809
28
Other comprehensive income
( 20,051
)
—
—
—
( 20,072
)
—
21
Cash dividends paid:
Common stock ($ 0.915 per share)
( 20,572
)
—
—
—
—
( 20,572
)
—
Balance at September 30, 2021
$
1,059,017
$
26,753
$
217,015
$
( 153,585
)
$
( 156,953
)
$
1,124,066
$
1,721
(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 at June 30, 2020
898,261
26,552
198,947
( 129,212
)
( 172,203
)
973,345
832
Issuance of 40,435 shares of common stock under stock option plan
2,443
40
2,403
—
—
—
—
Stock-based and deferred compensation
1,899
23
2,613
( 737
)
—
—
—
Net income
33,342
—
—
—
—
33,168
174
Other comprehensive income
9,467
—
—
—
9,430
—
37
Cash dividends paid:
Common stock ($ 0.275 per share)
( 6,176
)
—
—
—
—
( 6,176
)
—
Balance at September 30, 2020
$
939,236
$
26,615
$
203,963
$
( 129,949
)
$
( 162,773
)
$
1,000,337
$
1,043
(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 47,115 shares of common stock under stock option plan
2,835
47
2,788
—
—
—
—
Purchase of 160,780 shares of common stock
( 13,753
)
—
—
( 13,753
)
—
—
—
Stock-based and deferred compensation
6,058
75
8,040
( 2,057
)
—
—
—
Net income
96,724
—
—
—
—
96,420
304
Other comprehensive income
( 26,577
)
—
—
—
( 26,603
)
—
26
Cash dividends paid:
Common stock ($ 0.825 per share)
( 18,547
)
—
—
—
—
( 18,547
)
—
Balance at September 30, 2020
$
939,236
$
26,615
$
203,963
$
( 129,949
)
$
( 162,773
)
$
1,000,337
$
1,043
(1)
Reflects the noncontrolling interest in the Company’s China joint venture.
7
3 .
FAIR VALUE MEASUREMENTS
The following were the financial instruments held by the Company at September 30, 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, Derivative 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.
At September 30, 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 $ 673,000 and $ 617,000 as of September 30, 2021 and December 31, 2020, respectively):
(In thousands)
September 30,
2021
December 31,
2020
Fair value
$
293,628
$
210,370
Carrying value
280,513
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 September 30, 2021, and December 31, 2020, and the level within the fair value hierarchy in which the fair value measurements fall:
(In thousands)
September 30,
2021
Level 1
Level 2
Level 3
Mutual fund assets
$
32,542
$
32,542
$
—
$
—
Derivative assets:
Foreign currency contracts
361
—
361
—
Total assets at fair value
$
32,903
$
32,542
$
361
$
—
Derivative liabilities:
Foreign currency contracts
$
385
$
—
$
385
$
—
8
(In thousands)
December 31, 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 September 30, 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 $ 50,094,000 and $ 48,336,000 , respectively.
The fair values of the derivative instruments held by the Company on September 30, 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- and nine-month periods ended September 30, 2021 and 2020, 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, 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 September 30, 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. 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
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
$
2,723
$
3,223
$
8,069
$
7,414
The decrease in stock-based compensation expense for the three months of 2021 versus the same period in 2020 was due to a decrease in cash-settled SARS compensation expense which reflects a decrease in the market value of Company stock during the third quarter of 2021 versus an increase in the market value of Company stock during the third quarter of 2020. The increase in stock-based compensation expense for the first nine months of 2021 compared to the first nine months of 2020 was primarily attributable to performance awards. The increase in performance awards compensation expense reflects management’s assessment of profitability performance targets.
9
Unrecognized compensation costs for stock options, stock awards and SARs were as follows:
(In thousands)
September 30, 2021
December 31, 2020
Stock options
$
2,739
$
1,993
Stock awards
6,728
5,313
SARs
5,931
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 September 30, 2021, are expected to be recognized over weighted-average periods of 1.8 years for stock options, SARs and stock awards.
6 .
INVENTORIES
The composition of inventories at September 30, 2021, and December 31, 2020, was as follows:
(In thousands)
September 30,
2021
December 31,
2020
Finished goods
$
186,115
$
148,878
Raw materials
104,819
69,905
Total inventories
$
290,934
$
218,783
7.
LEASES
The Company’s operating leases are primarily comprised of real estate, railcar, storage tank, warehouse, auto, trailer and manufacturing/office equipment leases. Real estate and railcars comprise approximately 60 percent and 26 percent, respectively, of the Company’s consolidated right of use (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 consist of the office lease for the corporate headquarters in Northbrook, Illinois and land leases in the Philippines, Singapore and Lake Providence, Louisiana. As of September 30, 2021, the Company had railcar, storage tank, and office equipment leases valued at approximately $ 2,049,000 , that had not commenced. These leases will commence in the fourth quarter of 2021 and the first quarter of 2022.
10
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 ROU asset balance. Lease cost is recognized in both the Cost of Sales and Operating Expenses sections of the Condensed Consolidated Statements of Income .
(In thousands)
Three months ended
September 30, 2021
Nine months ended
September 30, 2021
Lease Cost
Operating lease cost
$
3,949
$
11,519
Short-term lease cost
2,144
4,697
Variable lease cost
220
725
Total lease cost
$
6,313
$
16,941
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases
$
3,837
$
10,814
Right-of-use assets obtained in exchange for operating lease liabilities
4,659
18,289
The following table outlines maturities of lease liabilities as of September 30, 2021:
(In thousands)
Undiscounted Cash Flows:
2021 (excluding the nine months ended September 30, 2021)
$
3,964
2022
14,530
2023
12,027
2024
7,806
2025
5,938
Subsequent to 2025
40,753
Total Undiscounted Cash Flows
$
85,018
Less: Imputed interest
( 12,888
)
Present value
$
72,130
Current operating lease liabilities (1)
13,225
Non-current operating lease liabilities
58,905
Total lease liabilities
$
72,130
(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
2.9 %
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
11
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 September 30, 2021, the Company estimated a range of possible environmental losses and legal losses of $ 22,892,000 to $ 41,264,000 . Within the range of possible environmental losses and legal losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range. These accruals totaled $ 22,892,000 at September 30, 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 $ 2,530,000 and $ 3,781,000 for the nine-month periods ended September 30, 2021 and 2020, respectively.
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 September 30, 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
12
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 recorded liability .
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 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 $ 3,149,000 for the Company’s portion of environmental response costs at the Wilmington site through September 30, 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 recorded liability.
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 recorded liabilities.
9 .
POSTRETIREMENT BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations. The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued.
Components of Net Periodic Benefit Cost
UNITED STATES
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Interest cost
$
1,149
$
1,409
$
3,503
$
4,251
Expected return on plan assets
( 2,590
)
( 2,435
)
( 7,761
)
( 7,309
)
Amortization of net actuarial loss
1,045
1,092
3,333
3,196
Net periodic benefit cost (income)
$
( 396
)
$
66
$
( 925
)
$
138
UNITED KINGDOM
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Interest cost
$
90
$
111
$
269
$
327
Expected return on plan assets
( 80
)
( 137
)
( 242
)
( 404
)
Amortization of net actuarial loss
18
20
53
58
Net periodic benefit cost (income)
$
28
$
( 6
)
$
80
$
( 19
)
13
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, $ 223,000 had been paid related to the non-qualified plans as of September 30, 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, $ 400,000 had been contributed to the plan as of September 30, 2021.
Defined Contribution Plans
The Company sponsors retirement defined contribution plans that cover eligible U.S. and U.K. employees. The Company’s U.S. retirement contribution 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, 2021 and 2020, the Company made contributions into the qualified retirement plans for U.S. employees and for certain non-U.S. employees. Profit sharing contributions were determined using a formula applied to Company earnings. 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.
Defined contribution plan expenses for the Company’s qualified contribution plans were as follows:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Retirement savings contributions
$
2,055
$
1,813
$
6,072
$
5,521
Profit sharing contributions plan
1,376
1,633
5,107
4,090
Total defined contribution plan expenses
$
3,431
$
3,446
$
11,179
$
9,611
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 September 30, 2021, the balance of the trust assets was $ 2,087,000 , 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.
14
10 .
EARNINGS PER SHARE
Below are the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:
(In thousands, except per share amounts)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Computation of Basic Earnings per Share
Net income attributable to Stepan Company
$
36,920
$
33,168
$
120,809
$
96,420
Weighted-average number of common shares
outstanding
22,898
22,907
22,941
22,951
Basic earnings per share
$
1.61
$
1.45
$
5.27
$
4.20
Computation of Diluted Earnings per Share
Net income attributable to Stepan Company
$
36,920
$
33,168
$
120,809
$
96,420
Weighted-average number of shares outstanding
22,898
22,907
22,941
22,951
Add weighted-average net shares from assumed
exercise of options (under treasury stock method) (1)
124
119
139
107
Add weighted-average net shares related to unvested
stock awards (under treasury stock method)
—
1
1
1
Add weighted-average net shares from assumed
exercise of SARs (under treasury stock method) (1)
142
164
168
139
Add weighted-average contingently issuable net
shares related to performance stock awards
(under treasury stock method)
55
46
50
38
Weighted-average shares applicable to diluted
earnings
23,219
23,237
23,299
23,236
Diluted earnings per share
$
1.59
$
1.43
5.19
$
4.15
(1) 69,199 and 207,598 options/SARs to acquire shares of Company common stock were excluded from the computations of diluted earnings per share for the three and nine months ended September 30, 2021, respectively. Options/SARs to acquire 169,912 shares of Company common stock were excluded from the computation of diluted earnings per share for the nine months ended September 30, 2020. Inclusion of the instruments would have had an antidilutive effect on the computation of diluted earnings per share.
15
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 and nine months ended September 30, 2021 and 2020:
(In thousands)
Foreign
Currency
Translation
Adjustments
Defined
Benefit
Pension Plan
Adjustments
Cash Flow
Hedge
Adjustments
Total
Balance at June 30, 2020
$
( 141,682
)
$
( 30,589
)
$
68
$
( 172,203
)
Other comprehensive income before reclassifications
8,594
—
—
8,594
Amounts reclassified from AOCI
—
839
( 3
)
836
Net current-period other comprehensive income
8,594
839
( 3
)
9,430
Balance at September 30, 2020
$
( 133,088
)
$
( 29,750
)
$
65
$
( 162,773
)
Balance at June 30, 2021
$
( 110,367
)
$
( 28,111
)
$
58
$
( 138,420
)
Other comprehensive income before reclassifications
( 19,331
)
—
—
( 19,331
)
Amounts reclassified from AOCI
—
800
( 2
)
798
Net current-period other comprehensive income
( 19,331
)
800
( 2
)
( 18,533
)
Balance at September 30, 2021
$
( 129,698
)
$
( 27,311
)
$
56
$
( 156,953
)
Balance at December 31, 2019
$
( 104,037
)
$
( 32,205
)
$
72
$
( 136,170
)
Other comprehensive income before reclassifications
( 29,051
)
—
—
( 29,051
)
Amounts reclassified from AOCI
—
2,455
( 7
)
2,448
Net current-period other comprehensive income
( 29,051
)
2,455
( 7
)
( 26,603
)
Balance at September 30, 2020
$
( 133,088
)
$
( 29,750
)
$
65
$
( 162,773
)
Balance at December 31, 2020
$
( 107,083
)
$
( 29,861
)
$
63
$
( 136,881
)
Other comprehensive income before reclassifications
( 22,615
)
—
—
( 22,615
)
Amounts reclassified from AOCI
—
2,550
( 7
)
2,543
Net current-period other comprehensive income
( 22,615
)
2,550
( 7
)
( 20,072
)
Balance at September 30, 2021
$
( 129,698
)
$
( 27,311
)
$
56
$
( 156,953
)
Information regarding the reclassifications out of AOCI for the three- and nine-month periods ended September 30, 2021 and 2020, is displayed below:
(In thousands)
Amount Reclassified from AOCI (1)
AOCI Components
Three Months Ended
September 30
Nine Months Ended
September 30
Affected Line Item in
Consolidated Statements
of Income
2021
2020
2021
2020
Amortization of defined benefit pension actuarial losses
$
( 1,063
)
$
( 1,111
)
$
( 3,386
)
$
( 3,253
)
(2)
263
272
836
798
Tax benefit
$
( 800
)
$
( 839
)
$
( 2,550
)
$
( 2,455
)
Net of tax
Gains and losses on cash flow hedges:
Foreign exchange contracts
2
3
7
7
Cost of sales
2
3
7
7
Total before tax
—
—
—
—
Tax benefit
$
2
$
3
$
7
$
7
Net of tax
Total reclassifications for the period
$
( 798
)
$
( 836
)
$
( 2,543
)
$
( 2,448
)
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.
16
12.
SEGMENT REPORTING
The Company has three reportable segments: Surfactants, Polymers and Specialty Products. Net sales by segment for the three and nine months ended September 30, 2021 and 2020, were as follows:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Segment Net Sales
Surfactants
$
387,734
$
333,839
$
1,142,672
$
993,245
Polymers
198,841
116,682
539,764
335,582
Specialty Products
16,113
13,959
53,503
46,189
Total
$
602,688
$
464,480
$
1,735,939
$
1,375,016
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, 2021 and 2020, are summarized below:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Segment Operating Income
Surfactants
$
34,452
$
41,151
$
133,558
$
125,810
Polymers
19,753
22,387
60,729
45,430
Specialty Products
2,442
1,593
12,052
8,803
Segment operating income
56,647
65,131
206,339
180,043
Business restructuring
( 72
)
( 126
)
( 267
)
( 708
)
Unallocated corporate expenses (1)
( 16,362
)
( 22,610
)
( 55,288
)
( 52,313
)
Consolidated operating income
40,213
42,395
150,784
127,022
Other Income (Expense)
Interest, net
( 1,599
)
( 1,626
)
( 4,690
)
( 4,115
)
Other, net
702
2,629
4,206
3,804
Income before provision for income taxes
$
39,316
$
43,398
$
150,300
$
126,711
(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 not used to evaluate segment performance.
13.
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 September 30, 2021, the Company had $ 921,000 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 first nine months of 2021 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 September 30, 2021, no revenue has been recognized from this contract.
17
The tables below provide a geographic disaggregation of net sales for the three and nine months ended September 30, 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, 2021
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
217,481
$
104,055
$
13,913
$
335,449
Europe
73,199
82,872
1,986
158,057
Latin America
81,164
1,095
214
82,473
Asia
15,890
10,819
—
26,709
Total
$
387,734
$
198,841
$
16,113
$
602,688
For the Three Months Ended September 30, 2020
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
202,121
$
68,635
$
12,060
$
282,816
Europe
56,468
38,337
1,899
96,704
Latin America
60,393
723
—
61,116
Asia
14,857
8,987
—
23,844
Total
$
333,839
$
116,682
$
13,959
$
464,480
For the Nine Months Ended September 30, 2021
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
660,061
$
270,524
$
45,668
$
976,253
Europe
209,632
233,625
6,904
450,161
Latin America
221,301
3,071
931
225,303
Asia
51,678
32,544
—
84,222
Total
$
1,142,672
$
539,764
$
53,503
$
1,735,939
For the Nine Months Ended September 30, 2020
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
617,638
$
199,256
$
38,883
$
855,777
Europe
171,940
107,589
7,306
286,835
Latin America
163,097
1,825
—
164,922
Asia
40,570
26,912
—
67,482
Total
$
993,245
$
335,582
$
46,189
$
1,375,016
18
14.
DEBT
At September 30, 2021, and December 31, 2020, debt was comprised of the following:
(In thousands)
Maturity
Dates
September 30,
2021
December 31,
2020
Unsecured private placement notes
3.95% (net of unamortized debt issuance cost of $ 240 and $ 273 for 2021 and 2020, respectively)
2021-2027
$
85,474
$
99,727
3.86% (net of unamortized debt issuance cost of $ 195 and $ 236 for 2021 and 2020, respectively)
2021-2025
56,948
71,193
4.86% (net of unamortized debt issuance cost of $ 78 and $ 108 for 2021 and 2020, respectively)
2021-2023
27,779
27,749
2.30% (net of unamortized debt issuance cost of $ 75 and $ 0 for 2021 and 2020, respectively)
2024-2028
49,925
—
2.37% (net of unamortized debt issuance cost of $ 85 and $ 0 for 2021 and 2020, respectively)
2024-2028
49,915
—
Revolving credit facility borrowing
2021
6,000
—
Debt of foreign subsidiaries
Unsecured bank debt, foreign currency
2021
3,799
—
Total debt
$
279,840
$
198,669
Less current maturities
47,656
37,857
Long-term debt
$
232,184
$
160,812
On June 10, 2021, the Company entered into a note purchase agreement pursuant to which it issued and sold $ 50,000,000 in aggregate principal amount of its 2.30% Senior Notes, Series 2021-A, due June 10, 2028 (the Series 2021-A Notes). The Series 2021-A Notes bear interest at a fixed rate of 2.30 %, with interest to be paid semi-annually and with equal annual principal payments beginning on June 10, 2024 and continuing through final maturity on June 10, 2028 . The proceeds of the issuance of the Series 2021-A Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes. This note purchase agreement requires the maintenance of certain financial ratios and covenants that are substantially similar to the Company’s existing long-term debt and provides for customary events of default. In addition, on September 23, 2021, the Company entered into a note purchase agreement pursuant to which it issued and sold $ 50,000,000 in aggregate principal amount of its 2.37 % Senior Notes, Series 2021-B, due September 23, 2028 (the Series 2021-B Notes). The Series 2021-B Notes bear interest at a fixed rate of 2.37 % with interest to be paid semi-annually and with equal annual principal payments beginning on September 23, 2024 and continuing through final maturity on September 23, 2028 . The proceeds of the issuance of the Series 2021-B Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes. This note purchase agreement requires the maintenance of certain financial ratios and covenants that are substantially similar to the Company’s existing long-term debt and provides for customary events of default.
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 September 30, 2021, the Company had outstanding borrowings totaling $ 6,000,000 and outstanding letters of credit totaling $ 7,067,000 . There was $ 336,933,000 available under the revolving credit agreement as of September 30, 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 $ 458,266,000 and $ 373,884,000 at September 30, 2021 and December 31, 2020, respectively.
19
15.
OTHER, NET
Other, net in the consolidated statements of income included the following:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2021
2020
2021
2020
Foreign exchange gains
$
368
$
476
$
139
$
1,467
Investment income
230
119
725
287
Realized and unrealized (losses) gains on investments
( 264
)
2,094
2,497
2,169
Net periodic pension benefit cost
368
( 60
)
845
( 119
)
Other, net
$
702
$
2,629
$
4,206
$
3,804
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 September 30, 2021, 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 Surfactant operations at 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 September 30, 2021, $ 8,884,000 of aggregate restructuring expense has been recognized, reflecting $ 1,644,000 of termination benefits for approximately 30 employees and $ 7,240,000 for other expenses, principally site decommissioning costs. The Company recognized $ 72,000 and $ 126,000 of decommissioning expenses in the third quarter of 2021 and 2020, respectively. The Company recognized $ 267,000 and $ 629,000 of decommissioning expenses in the first nine months of 2021 and 2020, respectively.
20
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 $ 21,560,000 of working capital and $ 3,000,000 of associated value-added taxes (VAT), and was paid in cash. Immaterial working capital adjustments were finalized and paid during the second quarter of 2021. The working capital acquired included $ 5,900,000 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 nine months of 2021. The assets acquired and liabilities assumed as part of the acquisition were measured and recorded at estimated fair value. 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-how) and multi-period excess earnings method under the income approach (customer relationships). The Company finalized the purchase price allocation during the third quarter of 2021. The following table summarizes the purchase price allocation for the major components of the acquisition:
(In thousands)
Assets:
Property, plant and equipment
$
54,200
Identifiable intangibles assets
46,000
Goodwill
64,800
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 ($ 25,000,000 ). The amortization periods for know-how and trademarks have been estimated to be in the range of 7 to 8 years. The amortization period for customer relationships has been estimated to be in the range of 12 to 14 years. As of September 30, 2021, in addition to the purchase price, the Company also paid $ 4,025,000 of acquisition-related expenses that primarily included legal, consulting, valuation and accounting services. For the three and nine months ended September 30, 2021, the Company incurred $ 474,000 and $ 2,078,000 of acquisition-related expenses, respectively. 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
September 30
Nine Months Ended
September 30
(In thousands)
2021
2020
2021
2020
Net Sales
$
602,688
$
491,480
$
1,748,378
$
1,448,316
Net Income Attributable to Stepan Company
$
37,299
$
36,105
$
123,931
$
99,430
21
The supplemental pro forma information is presented for illustrative purposes only and may not be indicative of the consolidated results that would have been achieved by the Company had the acquisition occurred on January 1, 2020. Furthermore, future results may vary materially 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 related to acquired plant assets, tax expense and management assumptions related to INVISTA’s legacy carved-out financial statements. In addition, non-recurring adjustments to pro forma net income include $ 2,078,000 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 (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 September 30, 2021, $ 14,308,000 , 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
5,165
Property, plant and equipment
175
Total assets acquired
14,940
Liabilities:
Other non-current liabilities
940
Total liabilities assumed
940
Net 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.
22
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 currently utilized any of the optional expedients of exceptions available under this ASU. The Company will continue to assess whether this ASU is applicable throughout the effective period.
23
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.