What changed in this filing

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Item 1. Financial Statements

2022-05-05 compared with 2021-11-04 · 133 added, 291 removed, 396 unchanged (52% of the section changed)

4 unchanged sentences

Three Months Ended

Nine Months Ended

Cost of Sales

10 unchanged sentences

Provision for Income Taxes

Net Income Attributable to Noncontrolling Interest (Note 2)

Net Income Attributable to Stepan Company

Net Income Per Common Share Attributable to Stepan Company

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

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

4 unchanged sentences

Three Months Ended

Nine Months Ended

Other Comprehensive Income:

6 unchanged sentences

Comprehensive Income Attributable to Stepan Company

(1) Includes foreign currency translation adjustments related to noncontrolling interest.

The prior year includes foreign currency translation adjustments related to noncontrolling interest.

The 2021 noncontrolling interest was related to the Company’s China joint venture, which was dissolved in the fourth quarter of 2021.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

2 unchanged sentences

(Dollars in thousands)

September 30, 2021

March 31, 2022

December 31, 2021

26 unchanged sentences

authorized 60,000,000 shares;

Issued 26,752,583 shares in 2021 and 26,658,032 shares in 2020

Issued 26,813,581 shares in 2022 and 26,760,714 issued shares in 2021

Additional paid-in capital

4 unchanged sentences

Total Stepan Company stockholders’ equity

Noncontrolling interest (Note 2)

Total liabilities and equity

3 unchanged sentences

(In thousands)

Nine Months Ended September 30

Three Months Ended March 31

Cash Flows From Operating Activities

Adjustments to reconcile net income to net cash

provided by operating activities:

provided by (used in) operating activities:

Depreciation and amortization

Deferred compensation

Realized and unrealized gains on long-term investments

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

Stock-based compensation

8 unchanged sentences

Deferred revenues

Net Cash Provided By Operating Activities

Net Cash Used In Operating Activities

Cash Flows From Investing Activities

6 unchanged sentences

Other debt borrowings (Note 6)

Other debt repayments

Dividends paid

1 unchanged sentence

Stock option exercises

Net Cash (Used In) Provided By Financing Activities

Net Cash Provided By Financing Activities

Effect of Exchange Rate Changes on Cash

Net Decrease in Cash and Cash Equivalents

Net Increase (Decrease) in Cash and Cash Equivalents

Cash and Cash Equivalents at Beginning of Period

6 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

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

In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of September 30, 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.

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, 2022, and its results of operations and cash flows for the three months ended March 31, 2022 and 2021, 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, 2021 (2021 Annual Report on Form 10-K).

RECONCILIATIONS OF EQUITY

Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the three and nine months ended September 30, 2021 and 2020:

(In thousands, except share and per share amounts)

Comprehensive

Income (Loss)

Noncontrolling

Balance at June 30, 2021

Issuance of 0 shares of common stock under stock option plan

Purchase of 53,058 shares of common stock

Stock-based and deferred compensation

Other comprehensive income

Cash dividends paid:

Common stock ($ 0.305 per share)

Balance at September 30, 2021

Below are reconciliations of total equity for the three months ended March 31, 2022 and 2021:

(In thousands, except share and per share amounts)

1 unchanged sentence

Income (Loss)

Noncontrolling

Balance at December 31, 2020

Balance, December 31, 2021

Issuance of 1,514 shares of common stock under stock option plan

4 unchanged sentences

Common stock ($ 0.335 per share)

Balance at September 30, 2021

(In thousands, except share and per share amounts)

Comprehensive

Income (Loss)

Noncontrolling

Balance at June 30, 2020

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

Stock-based and deferred compensation

Other comprehensive income

Cash dividends paid:

Common stock ($ 0.275 per share)

Balance at September 30, 2020

Balance, March 31, 2022

(In thousands, except share and per share amounts)

6 unchanged sentences

Stock-based and deferred compensation

Other comprehensive income

Other comprehensive income (loss)

Cash dividends paid:

Common stock ($ 0.305 per share)

Balance at September 30, 2020

Balance, March 31, 2021

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

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).

Derivative assets and liabilities include the foreign currency exchange and interest rate swap 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.

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):

The fair value of the interest rate swaps was calculated as the difference between the contracted swap rate and the floating interest rate multiplied by the present value of the notional amount of the contract.

At March 31, 2022, and December 31, 2021, 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 $ 812,000 and $ 710,000 as of March 31, 2022 and December 31, 2021, respectively):

(In thousands)

September 30,

Carrying value

The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of September 30, 2021, and December 31, 2020, and the level within the fair value hierarchy in which the fair value measurements fall:

The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of March 31, 2022, and December 31, 2021, and the level within the fair value hierarchy in which the fair value measurements fall:

(In thousands)

September 30,

Mutual fund assets

Derivative assets:

Interest rate contracts

Foreign currency contracts

1 unchanged sentence

Derivative liabilities:

Interest rate contracts

Foreign currency contracts

Total liabilities at fair value

(In thousands)

December 31, 2020

Mutual fund assets

5 unchanged sentences

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.

At March 31, 2022, and December 31, 2021, 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 $ 45,923,000 and $ 51,542,000 , 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).

The Company is currently exposed to volatility in short-term interest rates and has mitigated certain portions of that risk by using an interest rate swap.

The interest rate swap is recognized on the balance sheet as either an asset or a liability measured at fair value.

At March 31, 2022, the Company held an interest rate swap contract with a notional value of $ 100,000,000 that was designated as a cash flow hedge.

Period-to-period changes in the fair value of the interest rate swap are initially recognized as gains or losses in other comprehensive income.

As the interest rate swap contract is settled, the corresponding gain or loss is reclassified out of accumulated other comprehensive income (AOCI) into earnings.

The maturity date of the current interest swap contract is March 10, 2027 .

The fair values of the derivative instruments held by the Company on March 31, 2022, and December 31, 2021, 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, 2022 and 2021, were immaterial.

For amounts reclassified out of AOCI into earnings for the three-month periods ended March 31, 2022 and 2021, see Note 11, Accumulated Other Comprehensive Income (Loss) , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q).

STOCK-BASED COMPENSATION

On September 30, 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:

Compensation expense recorded for all stock options, stock awards and stock appreciation rights (SARs) was as follows:

(In thousands)

Three Months Ended

Nine Months Ended

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.

The increase in stock-based compensation expense for the first quarter of 2022 compared to the first quarter of 2021 was primarily attributable to the previously-disclosed accelerated vesting of certain equity grants for the Company’s Chief Executive Officer, who retired effective on April 25, 2022, that were partially offset by lower cash-settled SARs-related compensation expense.

The lower cash-settled SARs compensation expense reflects a $ 25.48 per share decrease in the market price of Company common stock in the first quarter of 2022 compared to a $ 7.79 per share increase in the first quarter of 2021.

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

(In thousands)

September 30, 2021

March 31, 2022

December 31, 2021

3 unchanged sentences

Stock awards (at target)

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.

The composition of inventories at September 30, 2021, and December 31, 2020, was as follows:

The unrecognized compensation costs at March 31, 2022, are expected to be recognized over weighted-average periods of 1.3 years for stock options, 2.0 years for stock awards and 2.0 years for SARs.

The composition of inventories at March 31, 2022, and December 31, 2021, was as follows:

(In thousands)

September 30,

March 31, 2022

December 31, 2021

Finished goods

1 unchanged sentence

Total inventories

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.

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.

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.

As of March 31, 2022, the Company had railcar leases, valued at approximately $ 79,000 , that had not commenced.

These leases will commence in the second quarter of 2022 with lease terms of three years .

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

March 31, 2022

Operating lease cost

5 unchanged sentences

Operating cash flow from operating leases

Right-of-use assets obtained in exchange for operating lease liabilities

The following table outlines maturities of lease liabilities as of September 30, 2021:

Right-of-use assets obtained in exchange for new operating lease liabilities

The following table outlines the maturities of lease liabilities as of March 31, 2022.

(In thousands)

Undiscounted Cash Flows:

2021 (excluding the nine months ended September 30, 2021)

2022 (excluding the three months ended March 31, 2022)

Subsequent to 2026

13 unchanged sentences

Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund) as well as comparable regulations applicable to the Company’s foreign locations.

Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party (PRP) at a number of sites where cleanup costs have been or may be incurred by the Company under CERCLA and similar state

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

7 unchanged sentences

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

As of September 30, 2021, the Company estimated a range of possible environmental losses and legal losses of $ 22,892,000 to $ 41,264,000 .

As of March 31, 2022, the Company estimated a range of possible environmental losses and legal losses of $ 23,139,000 to $ 41,695,000 .

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.

These accruals totaled $ 23,139,000 at March 31, 2022 and $ 23,127,000 at December 31, 2021.

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.

Cash expenditures related to legal matters and environmental matters approximated $ 428,000 and $ 280,000 for the three-month periods ended March 31, 2022 and 2021, 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.

3 unchanged sentences

However, in the event of one or more adverse determinations with respect to such sites in any annual or interim period, the effect on the Company’s cash flows and results of operations for those periods could be material.

Following are summaries of the Company’s major contingencies at September 30, 2021:

Following are summaries of the Company’s major contingencies at March 31, 2022:

Maywood, New Jersey Site

15 unchanged sentences

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.

In 2021, 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.

1 unchanged sentence

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 .

Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the Company’s current recorded liability.

Wilmington Site

2 unchanged sentences

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 paid the current owner $ 3,364,000 for the Company’s portion of environmental response costs at the Wilmington site through March 31, 2022.

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

6 unchanged sentences

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.

However, actual costs could differ materially from the current recorded liability.

POSTRETIREMENT BENEFIT PLANS

4 unchanged sentences

UNITED STATES

(In thousands)

Three Months Ended

Nine Months Ended

Interest cost

Expected return on plan assets

Amortization of net actuarial loss

Net periodic benefit cost (income)

UNITED KINGDOM

1 unchanged sentence

Three Months Ended

Nine Months Ended

Three Months Ended

Interest cost

1 unchanged sentence

Amortization of net actuarial loss

Net periodic benefit cost (income)

Net periodic benefit cost

Employer Contributions

2 unchanged sentences

Approximately $ 276,000 is expected to be paid related to the unfunded non-qualified plans in 2022.

Of such amount, $ 223,000 had been paid related to the non-qualified plans as of September 30, 2021.

Of such amount, $ 119,000 had been paid related to the non-qualified plans as of March 31, 2022.

The Company’s U.K.

subsidiary expects to contribute approximately $ 505,000 to its defined benefit pension plan in 2022.

Of such amount, $ 400,000 had been contributed to the plan as of September 30, 2021.

Of such amount, $ 136,000 had been contributed to the plan as of March 31, 2022.

Defined Contribution Plans

1 unchanged sentence

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.

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, 2022 and 2021, the Company made contributions into the qualified retirement plans for U.S.

employees and for certain non-U.S.

6 unchanged sentences

Three Months Ended

Nine Months Ended

Retirement savings contributions

Profit sharing contributions plan

Profit sharing contributions

Total defined contribution plan expenses

4 unchanged sentences

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.

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

At March 31, 2022, the balance of the trust assets was $ 2,281,000 , which equaled the balance of the supplemental plan liabilities.

See the long-term investments section in Note 3, Fair Value Measurements , of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for further information regarding the Company’s mutual fund assets.

EARNINGS PER SHARE

Below are the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:

Below are the computations of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:

(In thousands, except per share amounts)

Three Months Ended

Nine Months Ended

Computation of Basic Earnings per Share

Net income attributable to Stepan Company

Weighted-average number of common shares

Weighted-average number of common shares outstanding

Basic earnings per share

8 unchanged sentences

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

Add weighted-average contingently issuable net

shares related to performance stock awards

(under treasury stock method)

Weighted-average shares applicable to diluted

Add weighted-average contingently issuable net shares

related to performance stock awards (under treasury stock method)

Weighted-average shares applicable to diluted earnings

Diluted earnings per share

(1) 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.

364,350 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, 2022.

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

No options/SARs to acquire shares of Company common stock were excluded from the computations of diluted earnings per share for the three months ended March 31, 2021.

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:

Below is the change in the Company’s AOCI balance by component (net of income taxes) for the three months ended March 31, 2022 and 2021:

(In thousands)

Balance at June 30, 2020

Other comprehensive income before reclassifications

Amounts reclassified from AOCI

Net current-period other comprehensive income

Balance at September 30, 2020

Balance at June 30, 2021

Other comprehensive income before reclassifications

Amounts reclassified from AOCI

Net current-period other comprehensive income

Balance at September 30, 2021

Balance at December 31, 2020

Other comprehensive income before reclassifications

Other comprehensive income before

reclassifications

Amounts reclassified from AOCI

Net current-period other comprehensive income

Balance at September 30, 2020

Balance at March 31, 2021

Balance at December 31, 2021

Other comprehensive income before reclassifications

Other comprehensive income before

reclassifications

Amounts reclassified from AOCI

Net current-period other comprehensive income

Balance at September 30, 2021

Information regarding the reclassifications out of AOCI for the three- and nine-month periods ended September 30, 2021 and 2020, is displayed below:

Balance at March 31, 2022

Information regarding the reclassifications out of AOCI for the three-month periods ended March 31, 2022 and 2021, is displayed below:

(In thousands)

2 unchanged sentences

Three Months Ended

Nine Months Ended

Affected Line Item in

Consolidated Statements

Amortization of defined benefit pension actuarial losses

Condensed Consolidated Statements of Income

Amortization of defined benefit pension actuarial

Gains and losses on cash flow hedges:

3 unchanged sentences

Total reclassifications for the period

Amounts in parentheses denote expense to statement of income.

A mounts in parentheses denote expense to the Company’s Condensed Consolidated Statements of Income .

This component of accumulated other comprehensive income is included in the computation of net periodic benefit cost.

3 unchanged sentences

Surfactants, Polymers and Specialty Products.

Net sales by segment for the three and nine months ended September 30, 2021 and 2020, were as follows:

Net sales by segment for the three months ended March 31, 2022 and 2021, were as follows:

(In thousands)

Three Months Ended

Nine Months Ended

Segment Net Sales

Specialty Products

Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three and nine months ended September 30, 2021 and 2020, are summarized below:

Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three months ended March 31, 2022 and 2021, are summarized below:

(In thousands)

Three Months Ended

Nine Months Ended

Segment Operating Income

7 unchanged sentences

Income before provision for income taxes

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

REVENUE FROM CONTRACTS WITH CUSTOMERS

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.

As of March 31, 2022, the Company had $ 1,878,000 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.

The tables below provide a geographic disaggregation of net sales for the three and nine months ended September 30, 2021 and 2020.

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

The Company recognized $ 1,376,000 of revenue in the current period from pre-existing contract liabilities at December 31, 2021.

During 2020 the Company recorded $ 10,709,000 of long-term deferred revenue associated with a payment received to defray the cost of capital expenditures necessary to service a customer’s future product needs.

On March 31, 2022, $ 9,248,000 continued to be classified as long-term and $ 1,461,000 was classified as short-term.

This deferred revenue will be recognized over the period of the contract and no revenue has been recognized from this contract as of March 31, 2022.

The tables below provide a geographic disaggregation of net sales for the three months ended March 31, 2022 and 2021.

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)

Specialty Products

Geographic Market

North America

Latin America

For the Three Months Ended September 30, 2020

(In thousands)

Specialty Products

Geographic Market

North America

Latin America

For the Nine Months Ended September 30, 2021

For the Three Months Ended March 31, 2022

(In thousands)

Specialty Products

Geographic Market

1 unchanged sentence

Latin America

For the Nine Months Ended September 30, 2020

For the Three Months Ended March 31, 2021

(In thousands)

Specialty Products

Geographic Market

1 unchanged sentence

Latin America

At September 30, 2021, and December 31, 2020, debt was comprised of the following:

At March 31, 2022 and December 31, 2021, debt was comprised of the following:

(In thousands)

September 30,

Unsecured private placement notes

4 unchanged sentences

2.37% (net of unamortized debt issuance cost of $ 145 and $ 108 for 2022 and 2021, respectively)

2.73% (net of unamortized debt issuance cost of $ 62 and $ 22 for 2022 and 2021, respectively)

2.83% (net of unamortized debt issuance cost of $ 22 and $ 0 for 2022 and 2021, respectively)

Revolving credit facility borrowing

3 unchanged sentences

Long-term debt

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.

On March 1, 2022, pursuant to a note purchase and master note agreement dated as of June 10, 2021 (the NYL note purchase agreement), the Company issued and sold $ 25,000,000 in aggregate principal amount of its 2.83 % Senior Notes, Series 2022-A, due March 1, 2032 (the Series 2022-A Notes).

In addition, on March 1, 2022, pursuant to a note purchase and private shelf agreement dated as of June 10, 2021 (the Prudential note purchase agreement), the Company issued and sold $ 50,000,000 in aggregate principal amount of its 2.83 % Senior Notes, Series 2022-B, due March 1, 2032 (the Series 2022-B Notes).

The Series 2022-A Notes and the Series 2022-B Notes bear interest at a fixed rate of 2.83%, with interest to be paid semi-annually and with equal annual principal payments beginning on March 1, 2026 and continuing through final maturity on March 1, 2032.

The proceeds of the issuance of the Series 2022-A Notes and the Series 2022-B Notes are being used primarily for capital expenditures, to pay down existing debt and for other corporate purposes.

The NYL note purchase agreement and the Prudential note purchase agreement require the maintenance of certain financial ratios and covenants that are substantially similar to the Company’s existing long-term debt and provide 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.

As of March 31, 2022, the Company had outstanding letters of credit totaling $ 6,993,000 and $ 100,000,000 outstanding borrowings under the revolving credit agreement.

There was $ 243,007,000 available under the revolving credit agreement as of March 31, 2022.

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.

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

Based on the loan agreement provisions that

place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were $ 495,572,000 and $ 468,095,000 at March 31, 202 2 and December 31, 20 2 1 , respectively .

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

(In thousands)

Three Months Ended

Nine Months Ended

Foreign exchange gains

Foreign exchange gains (losses)

Investment income

Realized and unrealized (losses) gains on investments

Net periodic pension benefit cost

Realized and unrealized gains (losses) on investments

Net periodic pension benefit income

BUSINESS RESTRUCTURING

2016 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.

2 unchanged sentences

Decommissioning of the assets is expected to continue throughout 2022.

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.

As of March 31, 2022, $ 9,302,000 of aggregate restructuring expense has been recognized, reflecting $ 1,644,000 of termination benefits for approximately 30 employees and $ 7,658,000 for other expenses, principally site decommissioning costs.

The Company recognized $ 52,000 and $ 81,000 of decommissioning expenses in the first quarter of 2022 and 2021, respectively.

2021 Acquisitions

1 unchanged sentence

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.

and Stepan UK Limited 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.

2 unchanged sentences

Property, plant and equipment

Identifiable intangibles assets

Identifiable intangible assets

Total assets acquired

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

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

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

Three Months Ended

Nine Months Ended

(In thousands)

Net Income Attributable to Stepan Company

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

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

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

1 unchanged sentence

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.

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

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)

Identifiable intangible assets:

Customer lists

Trademarks and know-how

Non-compete agreement

Property, plant and equipment

Total assets acquired

Other non-current liabilities

Total liabilities assumed

Net assets acquired

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.

NONCASH INVESTING ACTIVITIES

Noncash investing activities included liabilities (accounts payable) incurred for property, plant and equipment expenditures of approximately $ 37,154,000 and $ 13,822,000 that were unpaid at March 31, 2022 and 2021, respectively.

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.

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.

5 unchanged sentences

The guidance should be applied prospectively.

The Company has not currently utilized any of the optional expedients of exceptions available under this ASU.

Other than electing select expedients associated with an interest rate swap, the Company has not currently utilized any of the optional expedients of exceptions available under this ASU.

The Company will continue to assess whether this ASU is applicable throughout the effective period.

In October 2021, the FASB issued ASU No.

2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which improves the accounting for acquired revenue contracts with customers in a business combination by addressing current inconsistencies in the recognition of acquired contract liabilities as well as payment terms and their effect on subsequent revenue recognized by the acquirer.

Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606) at fair value on the acquisition date.

This amendment requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

The amendments in this update are effective for fiscal years beginning after December 31, 2022 and should be applied prospectively.

The Company is in the process of assessing the impact that adoption of ASU No.

2021-08 may have on its financial position, results of operations and cash flows.

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

What changed 10-Q

Item 1. Financial Statements