UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 20182019
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-4462
STEPAN COMPANY
(Exact name of registrant as specified in its charter)
Delaware |
| 36-1823834 |
(State or other jurisdiction |
| (I.R.S. Employer |
of incorporation or organization) |
| Identification Number) |
Edens and Winnetka Road, Northfield, Illinois 60093
(Address of principal executive offices)
Registrant’s telephone number (847) 446-7500
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common Stock, $1 par value | SCL | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| ☒ |
| Accelerated filer |
| ☐ |
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| |||
Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☐ |
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Emerging growth company |
| ☐ |
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|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at April |
Common Stock, $1 par value |
|
|
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 As Adjusted |
| ||||
Net Sales |
| $ | 499,335 |
|
| $ | 468,269 |
|
| $ | 489,170 |
|
| $ | 499,335 |
|
Cost of Sales |
|
| 409,765 |
|
|
| 376,150 |
|
|
| 404,561 |
|
|
| 408,137 |
|
Gross Profit |
|
| 89,570 |
|
|
| 92,119 |
|
|
| 84,609 |
|
|
| 91,198 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
| 14,890 |
|
|
| 13,456 |
|
|
| 13,969 |
|
|
| 14,890 |
|
Administrative |
|
| 19,439 |
|
|
| 17,892 |
|
|
| 19,306 |
|
|
| 19,439 |
|
Research, development and technical services |
|
| 13,614 |
|
|
| 13,379 |
|
|
| 13,390 |
|
|
| 13,614 |
|
Deferred compensation expense |
|
| 1,614 |
|
|
| 376 |
|
|
| 7,473 |
|
|
| 1,614 |
|
|
|
| 49,557 |
|
|
| 45,103 |
|
|
| 54,138 |
|
|
| 49,557 |
|
Business restructuring expenses (Note 15) |
|
| (358 | ) |
|
| (786 | ) | ||||||||
Business restructuring expenses (Note 17) |
|
| (733 | ) |
|
| (358 | ) | ||||||||
Operating Income |
|
| 39,655 |
|
|
| 46,230 |
|
|
| 29,738 |
|
|
| 41,283 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
| (3,151 | ) |
|
| (2,992 | ) |
|
| (1,853 | ) |
|
| (3,151 | ) |
Other, net(a) (Note 14) |
|
| 1,160 |
|
|
| 1,092 |
| ||||||||
Other, net (Note 16) |
|
| 3,145 |
|
|
| 1,160 |
| ||||||||
|
|
| (1,991 | ) |
|
| (1,900 | ) |
|
| 1,292 |
|
|
| (1,991 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Provision for Income Taxes |
|
| 37,664 |
|
|
| 44,330 |
|
|
| 31,030 |
|
|
| 39,292 |
|
Provision for Income Taxes (Note 17) |
|
| 6,948 |
|
|
| 12,418 |
| ||||||||
Provision for Income Taxes(1) |
|
| 6,052 |
|
|
| 7,347 |
| ||||||||
Net Income |
|
| 30,716 |
|
|
| 31,912 |
|
|
| 24,978 |
|
|
| 31,945 |
|
Net Loss Attributable to Noncontrolling Interests (Note 2) |
|
| 7 |
|
|
| 1 |
| ||||||||
Net Loss Attributable to Noncontrolling Interests (Note 3) |
|
| 6 |
|
|
| 7 |
| ||||||||
Net Income Attributable to Stepan Company |
| $ | 30,723 |
|
| $ | 31,913 |
|
| $ | 24,984 |
|
| $ | 31,952 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
Net Income Per Common Share Attributable to Stepan Company (Note 9): |
|
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| ||||||||
Net Income Per Common Share Attributable to Stepan Company (Note 11): |
|
|
|
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|
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Basic(1) |
| $ | 1.08 |
|
| $ | 1.38 |
| ||||||||
Diluted(1) |
| $ | 1.07 |
|
| $ | 1.37 |
| ||||||||
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|
| ||||||||
Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 11): |
|
|
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| ||||||||
Basic |
| $ | 1.33 |
|
| $ | 1.39 |
|
|
| 23,099 |
|
|
| 23,082 |
|
Diluted |
| $ | 1.31 |
|
| $ | 1.37 |
|
|
| 23,332 |
|
|
| 23,389 |
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|
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| ||||||||
Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 9): |
|
|
|
|
|
|
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| ||||||||
Basic |
|
| 23,082 |
|
|
| 22,901 |
| ||||||||
Diluted |
|
| 23,389 |
|
|
| 23,331 |
| ||||||||
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|
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|
|
|
| ||||||||
Dividends Declared Per Common Share |
| $ | 0.23 |
|
| $ | 0.21 |
|
| The |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
23
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In thousands) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 As Adjusted |
| ||||
Net income |
| $ | 30,716 |
|
| $ | 31,912 |
|
| $ | 24,978 |
|
| $ | 31,945 |
|
Other comprehensive income : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Foreign currency translation adjustments (Note 10) |
|
| 8,817 |
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|
| 10,454 |
| ||||||||
Defined benefit pension adjustments, net of tax (Note 10) |
|
| 753 |
|
|
| 565 |
| ||||||||
Derivative instrument activity, net of tax (Note 10) |
|
| (3 | ) |
|
| (2 | ) | ||||||||
Foreign currency translation adjustments(2) (Note 12) |
|
| 3,707 |
|
|
| 8,817 |
| ||||||||
Defined benefit pension adjustments, net of tax (Note 12) |
|
| 543 |
|
|
| 753 |
| ||||||||
Derivative instrument activity, net of tax (Note 12) |
|
| (2 | ) |
|
| (3 | ) | ||||||||
Total other comprehensive income |
|
| 9,567 |
|
|
| 11,017 |
|
|
| 4,248 |
|
|
| 9,567 |
|
Comprehensive income |
|
| 40,283 |
|
|
| 42,929 |
|
|
| 29,226 |
|
|
| 41,512 |
|
Comprehensive income attributable to noncontrolling interests (Note 2) |
|
| (25 | ) |
|
| (12 | ) | ||||||||
Comprehensive income attributable to noncontrolling interests (Note 3) |
|
| (14 | ) |
|
| (25 | ) | ||||||||
Comprehensive income attributable to Stepan Company |
| $ | 40,258 |
|
| $ | 42,917 |
|
| $ | 29,212 |
|
| $ | 41,487 |
|
(1) | The 2018 amounts for the noted line items have been changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S. inventory valuation from LIFO to FIFO. |
(2) | 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.
34
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands) |
| March 31, 2018 |
|
| December 31, 2017 |
| ||||||||||
(Dollars in thousands) |
| March 31, 2019 |
|
| December 31, 2018 As Adjusted |
| ||||||||||
Assets |
|
|
|
|
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|
|
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|
|
|
|
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Current Assets: |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 244,581 |
|
| $ | 298,894 |
|
| $ | 269,459 |
|
| $ | 300,194 |
|
Receivables, net |
|
| 325,276 |
|
|
| 293,541 |
|
|
| 298,932 |
|
|
| 280,025 |
|
Inventories (Note 6) |
|
| 187,737 |
|
|
| 172,748 |
| ||||||||
Inventories(1) (Note 2)(Note 7) |
|
| 215,028 |
|
|
| 231,528 |
| ||||||||
Other current assets |
|
| 24,416 |
|
|
| 23,553 |
|
|
| 24,717 |
|
|
| 22,146 |
|
Total current assets |
|
| 782,010 |
|
|
| 788,736 |
|
|
| 808,136 |
|
|
| 833,893 |
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
| 1,642,783 |
|
|
| 1,603,286 |
|
|
| 1,679,669 |
|
|
| 1,666,790 |
|
Less: Accumulated depreciation |
|
| (1,026,732 | ) |
|
| (1,004,843 | ) |
|
| (1,074,309 | ) |
|
| (1,057,898 | ) |
Property, plant and equipment, net |
|
| 616,051 |
|
|
| 598,443 |
|
|
| 605,360 |
|
|
| 608,892 |
|
Goodwill, net |
|
| 25,113 |
|
|
| 25,118 |
|
|
| 22,808 |
|
|
| 22,954 |
|
Other intangible assets, net |
|
| 17,731 |
|
|
| 18,538 |
|
|
| 13,417 |
|
|
| 14,244 |
|
Long-term investments (Note 3) |
|
| 26,725 |
|
|
| 28,270 |
| ||||||||
Other non-current assets |
|
| 13,003 |
|
|
| 11,756 |
| ||||||||
Total assets |
| $ | 1,480,633 |
|
| $ | 1,470,861 |
| ||||||||
Long-term investments (Note 4) |
|
| 25,615 |
|
|
| 25,082 |
| ||||||||
Operating lease assets |
|
| 40,332 |
|
|
| — |
| ||||||||
Other non-current assets(1) |
|
| 10,332 |
|
|
| 9,549 |
| ||||||||
Total assets(1) |
| $ | 1,526,000 |
|
| $ | 1,514,614 |
| ||||||||
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt (Note 13) |
| $ | 22,640 |
|
| $ | 22,500 |
| ||||||||
Current maturities of long-term debt (Note 15) |
| $ | 32,799 |
|
| $ | 37,058 |
| ||||||||
Accounts payable |
|
| 202,432 |
|
|
| 204,977 |
|
|
| 175,641 |
|
|
| 205,954 |
|
Accrued liabilities |
|
| 74,482 |
|
|
| 92,776 |
|
|
| 87,008 |
|
|
| 95,570 |
|
Total current liabilities |
|
| 299,554 |
|
|
| 320,253 |
|
|
| 295,448 |
|
|
| 338,582 |
|
Deferred income taxes |
|
| 11,932 |
|
|
| 10,962 |
| ||||||||
Long-term debt, less current maturities (Notes 13) |
|
| 268,173 |
|
|
| 268,299 |
| ||||||||
Deferred income taxes(1) |
|
| 24,158 |
|
|
| 24,961 |
| ||||||||
Long-term debt, less current maturities (Note 15) |
|
| 239,063 |
|
|
| 239,022 |
| ||||||||
Non-current operating lease liabilities |
|
| 31,361 |
|
|
| — |
| ||||||||
Other non-current liabilities |
|
| 125,548 |
|
|
| 130,433 |
|
|
| 103,749 |
|
|
| 103,864 |
|
Commitments and Contingencies (Note 7) |
|
|
|
|
|
|
|
| ||||||||
Commitments and Contingencies (Note 9) |
|
|
|
|
|
|
|
| ||||||||
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $1 par value; authorized 60,000,000 shares; issued 26,268,311 shares in 2018 and 26,070,787 shares in 2017 |
|
| 26,268 |
|
|
| 26,071 |
| ||||||||
Common stock, $1 par value; authorized 60,000,000 shares; Issued 26,440,690 shares in 2019 and 26,308,668 shares in 2018 |
|
| 26,441 |
|
|
| 26,309 |
| ||||||||
Additional paid-in capital |
|
| 175,211 |
|
|
| 170,408 |
|
|
| 185,911 |
|
|
| 182,881 |
|
Accumulated other comprehensive loss (Note 10) |
|
| (90,028 | ) |
|
| (99,563 | ) | ||||||||
Retained earnings |
|
| 747,174 |
|
|
| 721,741 |
| ||||||||
Less: Common treasury stock, at cost, 3,622,533 shares in 2018 and 3,561,509 shares in 2017 |
|
| (84,042 | ) |
|
| (78,561 | ) | ||||||||
Total Stepan Company stockholders’ equity |
|
| 774,583 |
|
|
| 740,096 |
| ||||||||
Noncontrolling interests (Note 2) |
|
| 843 |
|
|
| 818 |
| ||||||||
Total equity |
|
| 775,426 |
|
|
| 740,914 |
| ||||||||
Total liabilities and equity |
| $ | 1,480,633 |
|
| $ | 1,470,861 |
| ||||||||
Accumulated other comprehensive loss(2) (Note 12) |
|
| (142,580 | ) |
|
| (141,483 | ) | ||||||||
Retained earnings(1)(2) |
|
| 861,773 |
|
|
| 837,107 |
| ||||||||
Less: Common treasury stock, at cost, 3,826,739 shares in 2019 and 3,803,043 shares in 2018 |
|
| (100,098 | ) |
|
| (97,389 | ) | ||||||||
Total Stepan Company stockholders’ equity(1) |
|
| 831,447 |
|
|
| 807,425 |
| ||||||||
Noncontrolling interests (Note 3) |
|
| 774 |
|
|
| 760 |
| ||||||||
Total equity(1) |
|
| 832,221 |
|
|
| 808,185 |
| ||||||||
Total liabilities and equity(1) |
| $ | 1,526,000 |
|
| $ | 1,514,614 |
|
(1) | The 2018 amounts for the noted line items have been changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S. inventory valuation from LIFO to FIFO. |
(2) | The 2019 amounts for the noted line items include an adjustment related to the Company’s first quarter 2019 adoption of ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
45
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 As Adjusted |
| ||||
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 30,716 |
|
| $ | 31,912 |
|
| $ | 24,978 |
|
| $ | 31,945 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 19,948 |
|
|
| 18,707 |
|
|
| 19,403 |
|
|
| 19,948 |
|
Deferred compensation |
|
| 1,614 |
|
|
| 376 |
|
|
| 7,473 |
|
|
| 1,614 |
|
Realized and unrealized gains on long-term investments |
|
| (97 | ) |
|
| (1,645 | ) |
|
| (2,404 | ) |
|
| (97 | ) |
Stock-based compensation |
|
| 2,232 |
|
|
| 1,385 |
|
|
| 2,596 |
|
|
| 2,232 |
|
Deferred income taxes |
|
| 357 |
|
|
| 2,543 |
|
|
| (1,857 | ) |
|
| 756 |
|
Other non-cash items |
|
| 31 |
|
|
| 721 |
|
|
| 1,443 |
|
|
| 31 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
| (24,225 | ) |
|
| (20,263 | ) |
|
| (17,434 | ) |
|
| (24,225 | ) |
Inventories |
|
| (8,993 | ) |
|
| (14,396 | ) |
|
| 16,231 |
|
|
| (10,621 | ) |
Other current assets |
|
| (684 | ) |
|
| (1,694 | ) |
|
| (3,247 | ) |
|
| (684 | ) |
Accounts payable and accrued liabilities |
|
| (19,518 | ) |
|
| (14,184 | ) |
|
| (42,279 | ) |
|
| (19,518 | ) |
Pension liabilities |
|
| (116 | ) |
|
| (127 | ) |
|
| (392 | ) |
|
| (116 | ) |
Environmental and legal liabilities |
|
| (225 | ) |
|
| 24 |
|
|
| 6 |
|
|
| (225 | ) |
Deferred revenues |
|
| (81 | ) |
|
| (81 | ) |
|
| (81 | ) |
|
| (81 | ) |
Net Cash Provided By Operating Activities |
|
| 959 |
|
|
| 3,278 |
|
|
| 4,436 |
|
|
| 959 |
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment |
|
| (27,358 | ) |
|
| (20,396 | ) |
|
| (25,741 | ) |
|
| (27,358 | ) |
Business acquisition (Note 16) |
|
| (21,475 | ) |
|
| (4,339 | ) | ||||||||
Business acquisition (Note 18) |
|
| - |
|
|
| (21,475 | ) | ||||||||
Other, net |
|
| 1,781 |
|
|
| (1,887 | ) |
|
| 2,037 |
|
|
| 1,781 |
|
Net Cash Used In Investing Activities |
|
| (47,052 | ) |
|
| (26,622 | ) |
|
| (23,704 | ) |
|
| (47,052 | ) |
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving debt and bank overdrafts, net |
|
| 79 |
|
|
| — |
|
|
| (4,230 | ) |
|
| 79 |
|
Other debt repayments |
|
| — |
|
|
| (441 | ) | ||||||||
Dividends paid |
|
| (5,092 | ) |
|
| (4,606 | ) |
|
| (5,643 | ) |
|
| (5,092 | ) |
Company stock repurchased |
|
| (2,500 | ) |
|
| (1,500 | ) |
|
| (77 | ) |
|
| (2,500 | ) |
Stock option exercises |
|
| 3,155 |
|
|
| 835 |
|
|
| 1,890 |
|
|
| 3,155 |
|
Other, net |
|
| (4,395 | ) |
|
| (1,486 | ) |
|
| (2,718 | ) |
|
| (4,395 | ) |
Net Cash Used In Financing Activities |
|
| (8,753 | ) |
|
| (7,198 | ) |
|
| (10,778 | ) |
|
| (8,753 | ) |
Effect of Exchange Rate Changes on Cash |
|
| 533 |
|
|
| 2,608 |
|
|
| (689 | ) |
|
| 533 |
|
Net Decrease in Cash and Cash Equivalents |
|
| (54,313 | ) |
|
| (27,934 | ) |
|
| (30,735 | ) |
|
| (54,313 | ) |
Cash and Cash Equivalents at Beginning of Period |
|
| 298,894 |
|
|
| 225,743 |
|
|
| 300,194 |
|
|
| 298,894 |
|
Cash and Cash Equivalents at End of Period |
| $ | 244,581 |
|
| $ | 197,809 |
|
| $ | 269,459 |
|
| $ | 244,581 |
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments of income taxes, net of refunds/payments |
| $ | 3,345 |
|
| $ | 5,603 |
|
| $ | 3,018 |
|
| $ | 3,345 |
|
Cash payments of interest |
| $ | 2,071 |
|
| $ | 2,164 |
|
| $ | 2,131 |
|
| $ | 2,071 |
|
(1) | The 2018 amounts for the noted line items have been changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S. inventory valuation from LIFO to FIFO. |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
56
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20182019
Unaudited
1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
The condensed consolidated financial statements included herein have been prepared by Stepan Company (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of March 31, 2018,2019, and its results of operations and cash flows for the three months ended March 31, 20182019 and 2017,2018, 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 20172018 Annual Report on Form 10-K.
2. | CHANGE IN METHOD OF ACCOUNTING FOR INVENTORY VALUTION |
On January 1, 2019, the Company elected to change its method of accounting for U.S. inventories from the LIFO basis to the FIFO basis. Total U.S. inventories accounted for using the LIFO cost flow assumption, prior to the accounting method change, comprised 68 percent of the Company’s total inventories as of December 31, 2018. Non-U.S. inventories have historically been maintained on the FIFO basis. The Company believes that this change to the FIFO method of inventory valuation is preferable as it provides a better matching of costs with the physical flow of goods, more accurately reflects the current market value of inventory presented on the Company’s consolidated balance sheets, standardizes the Company’s inventory valuation methodology and improves comparability with the Company’s industry peers.
In accordance with ASC 250, Accounting Changes and Error Corrections, this change in method of accounting for U.S. inventories has been retrospectively applied to all prior periods presented herein. Prior period financial statements and financial comparables have been adjusted to reflect what results would have been had the Company always used the FIFO method of inventory valuation for U.S. inventories. The cumulative effect on retained earnings for these changes was $23.7 million at December 31, 2018.
The following tables present the prior year financial statement line items that have been affected by the retrospective change in accounting principle:
Income Statement
(In thousands, except per share amounts) |
| Three Months Ended March 31, 2018 |
| |||||||||
|
| As originally reported under LIFO |
|
| Effect of change |
|
| As adjusted under FIFO |
| |||
Cost of Sales |
| $ | 409,765 |
|
| $ | (1,628 | ) |
| $ | 408,137 |
|
Gross Profit |
|
| 89,570 |
|
|
| 1,628 |
|
|
| 91,198 |
|
Operating Income |
|
| 39,655 |
|
|
| 1,628 |
|
|
| 41,283 |
|
Income Before Provision for Income Taxes |
|
| 37,664 |
|
|
| 1,628 |
|
|
| 39,292 |
|
Provision for Income Taxes |
|
| 6,948 |
|
|
| 399 |
|
|
| 7,347 |
|
Net Income |
|
| 30,716 |
|
|
| 1,229 |
|
|
| 31,945 |
|
Net Income Attributable to Stepan Company |
|
| 30,723 |
|
|
| 1,229 |
|
|
| 31,952 |
|
Net Income Per Diluted Common Share Attributable to Stepan Company |
| $ | 1.31 |
|
| $ | 0.06 |
|
| $ | 1.37 |
|
7
(In thousands) |
| December 31, 2018 |
| |||||||||
|
| As originally reported under LIFO |
|
| Effect of change |
|
| As adjusted under FIFO |
| |||
Inventories |
| $ | 200,165 |
|
| $ | 31,363 |
|
| $ | 231,528 |
|
Other Non-Current Assets |
|
| 10,964 |
|
|
| (1,415 | ) |
|
| 9,549 |
|
Total Assets |
|
| 1,484,666 |
|
|
| 29,948 |
|
|
| 1,514,614 |
|
Deferred Income Taxes |
| $ | 18,672 |
|
| $ | 6,289 |
|
| $ | 24,961 |
|
Retained Earnings |
|
| 813,448 |
|
|
| 23,659 |
|
|
| 837,107 |
|
Total Liabilities and Equity |
|
| 1,484,666 |
|
|
| 29,948 |
|
|
| 1,514,614 |
|
Statement of Cash Flows
(In thousands) |
| Three Months Ended March 31, 2018 |
| |||||||||
|
| As originally reported under LIFO |
|
| Effect of change |
|
| As adjusted under FIFO |
| |||
Net Income |
| $ | 30,716 |
|
| $ | 1,229 |
|
| $ | 31,945 |
|
Deferred Income Taxes |
|
| 357 |
|
|
| 399 |
|
|
| 756 |
|
Change in Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
| (8,993 | ) |
|
| (1,628 | ) |
|
| (10,621 | ) |
The following tables present what current year financial statement line items would have been had the Company not changed its method of accounting for U.S. inventories from LIFO to FIFO basis:
Income Statement
(In thousands, except per share amounts) |
| Three Months Ended March 31, 2019 |
| |||||||||
|
| As reported under FIFO |
|
| Effect of change |
|
| As computed under LIFO |
| |||
Cost of Sales |
| $ | 404,561 |
|
| $ | 1,500 |
|
| $ | 406,061 |
|
Gross Profit |
|
| 84,609 |
|
|
| (1,500 | ) |
|
| 83,109 |
|
Operating Income |
|
| 29,738 |
|
|
| (1,500 | ) |
|
| 28,238 |
|
Income Before Provision for Income Taxes |
|
| 31,030 |
|
|
| (1,500 | ) |
|
| 29,530 |
|
Provision for Income Taxes |
|
| 6,052 |
|
|
| (368 | ) |
|
| 5,684 |
|
Net Income |
|
| 24,978 |
|
|
| (1,132 | ) |
|
| 23,846 |
|
Net Income Attributable to Stepan Company |
|
| 24,984 |
|
|
| (1,132 | ) |
|
| 23,852 |
|
Net Income Per Diluted Common Share Attributable to Stepan Company |
| $ | 1.07 |
|
| $ | (0.05 | ) |
| $ | 1.02 |
|
Balance Sheet
(In thousands) |
| March 31, 2019 |
| |||||||||
|
| As reported under FIFO |
|
| Effect of change |
|
| As computed under LIFO |
| |||
Inventories |
| $ | 215,028 |
|
| $ | (32,863 | ) |
| $ | 182,165 |
|
Other Non-Current Assets |
|
| 10,332 |
|
|
| 1,483 |
|
|
| 11,815 |
|
Total Assets |
|
| 1,526,000 |
|
|
| (31,380 | ) |
|
| 1,494,620 |
|
Deferred Income Taxes |
| $ | 24,158 |
|
| $ | (6,589 | ) |
| $ | 17,569 |
|
Retained Earnings |
|
| 861,773 |
|
|
| (24,791 | ) |
|
| 836,982 |
|
Total Liabilities and Equity |
|
| 1,526,000 |
|
|
| (31,380 | ) |
|
| 1,494,620 |
|
8
(In thousands) |
| Three Months Ended March 31, 2019 |
| |||||||||
|
| As reported under FIFO |
|
| Effect of change |
|
| As computed under LIFO |
| |||
Net Income |
| $ | 24,978 |
|
| $ | (1,132 | ) |
| $ | 23,846 |
|
Deferred Income Taxes |
|
| (1,857 | ) |
|
| (368 | ) |
|
| (2,225 | ) |
Change in Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
| 16,231 |
|
|
| 1,500 |
|
|
| 17,731 |
|
3. | RECONCILIATIONS OF EQUITY |
Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the three months ended March 31, 20182019 and 2017:2018:
(In thousands) |
| Total Equity |
|
| Stepan Company Equity |
|
| Noncontrolling Interests’ Equity (3) |
| |||
Balance at January 1, 2018 |
| $ | 740,914 |
|
| $ | 740,096 |
|
| $ | 818 |
|
Net income |
|
| 30,716 |
|
|
| 30,723 |
|
|
| (7 | ) |
Dividends |
|
| (5,092 | ) |
|
| (5,092 | ) |
|
|
|
|
Common stock purchases (1) |
|
| (5,667 | ) |
|
| (5,667 | ) |
|
|
|
|
Stock option exercises |
|
| 3,155 |
|
|
| 3,155 |
|
|
|
|
|
Defined benefit pension adjustments, net of tax |
|
| 753 |
|
|
| 753 |
|
|
|
|
|
Translation adjustments |
|
| 8,817 |
|
|
| 8,785 |
|
|
| 32 |
|
Derivative instrument activity, net of tax |
|
| (3 | ) |
|
| (3 | ) |
|
| — |
|
Other (2) |
|
| 1,833 |
|
|
| 1,833 |
|
|
| — |
|
Balance at March 31, 2018 |
| $ | 775,426 |
|
| $ | 774,583 |
|
| $ | 843 |
|
(In thousands, except share and per share amounts) |
| Total |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Retained Earnings |
|
| Noncontrolling Interest (1) |
| |||||||
Balance, December 31, 2018 (2) |
| $ | 808,185 |
|
| $ | 26,309 |
|
| $ | 182,881 |
|
| $ | (97,389 | ) |
| $ | (141,483 | ) |
| $ | 837,107 |
|
| $ | 760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 38,706 shares of common stock under stock option plan |
|
| 1,890 |
|
|
| 39 |
|
|
| 1,851 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 900 shares of common stock |
|
| (77 | ) |
|
| — |
|
|
| — |
|
|
| (77 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based and deferred compensation |
|
| (1,360 | ) |
|
| 93 |
|
|
| 1,179 |
|
|
| (2,632 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 24,978 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24,984 |
|
|
| (6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
| 4,248 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,228 |
|
|
| — |
|
|
| 20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.25 per share) |
|
| (5,643 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,643 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (3) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,325 | ) |
|
| 5,325 |
|
|
| — |
|
Balance, March 31, 2019 |
| $ | 832,221 |
|
| $ | 26,441 |
|
| $ | 185,911 |
|
| $ | (100,098 | ) |
| $ | (142,580 | ) |
| $ | 861,773 |
|
| $ | 774 |
|
9
(In thousands) |
| Total Equity |
|
| Stepan Company Equity |
|
| Noncontrolling Interests’ Equity (3) |
| |||
Balance at January 1, 2017 |
| $ | 635,916 |
|
| $ | 634,604 |
|
| $ | 1,312 |
|
Net income |
|
| 31,912 |
|
|
| 31,913 |
|
|
| (1 | ) |
Dividends |
|
| (4,606 | ) |
|
| (4,606 | ) |
|
| — |
|
Common stock purchases (1) |
|
| (2,991 | ) |
|
| (2,991 | ) |
|
| — |
|
Stock option exercises |
|
| 835 |
|
|
| 835 |
|
|
| — |
|
Defined benefit pension adjustments, net of tax |
|
| 565 |
|
|
| 565 |
|
|
| — |
|
Translation adjustments |
|
| 10,454 |
|
|
| 10,441 |
|
|
| 13 |
|
Derivative instrument activity, net of tax |
|
| (2 | ) |
|
| (2 | ) |
|
| — |
|
Other (2) |
|
| 2,474 |
|
|
| 2,474 |
|
|
| — |
|
Balance at March 31, 2017 |
| $ | 674,557 |
|
| $ | 673,233 |
|
| $ | 1,324 |
|
(In thousands, except share and per share amounts) |
| Total |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Retained Earnings |
|
| Noncontrolling Interest (1) |
| |||||||
Balance, December 31, 2017 (2) |
| $ | 766,218 |
|
| $ | 26,071 |
|
| $ | 170,408 |
|
| $ | (78,561 | ) |
| $ | (99,563 | ) |
| $ | 747,045 |
|
| $ | 818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 77,474 shares of common stock under stock option plan |
|
| 3,155 |
|
|
| 77 |
|
|
| 3,078 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 6,107 shares of common stock |
|
| (2,500 | ) |
|
| — |
|
|
| — |
|
|
| (2,500 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based and deferred compensation |
|
| (1,136 | ) |
|
| 120 |
|
|
| 1,725 |
|
|
| (2,981 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (2) |
|
| 31,945 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31,952 |
|
|
| (7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
| 9,567 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,535 |
|
|
| — |
|
|
| 32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.23 per share) |
|
| (5,092 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,092 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (4) |
|
| (198 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (198 | ) |
|
| — |
|
Balance, March 31, 2018 |
| $ | 801,959 |
|
| $ | 26,268 |
|
| $ | 175,211 |
|
| $ | (84,042 | ) |
| $ | (90,028 | ) |
| $ | 773,707 |
|
| $ | 843 |
|
| (1) |
|
|
| (2) |
|
(3) | Reflects beginning retained earnings adjustment as a result of the Company’s first quarter 2019 adoption of ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See Note 19 for more details. |
(4) | Reflects beginning retained earnings adjustment as a result of the Company’s first quarter 2018 adoption of ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. |
|
|
|
6
The following were the financial instruments held by the Company at March 31, 2018,2019, and December 31, 2017,2018, 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.
Derivative assets and liabilities
Derivative assets and liabilities included the foreign currency exchange contracts discussed in Note 4.5. 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 follows thedescribes financial instrument descriptionsassets and liabilities measured on a recurring basis for the reported fair values of derivative assets and liabilities.
Long-term investments
Long-term investments included 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 8)10). 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
10
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 March 31, 2018,2019, and December 31, 2017,2018, 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 $1,113,000$938,000 and $987,000$978,000 as of March 31, 20182019 and December 31, 2017,2018, respectively):
(In thousands) |
| March 31, 2018 |
|
| December 31, 2017 |
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||||
Fair value |
| $ | 289,316 |
|
| $ | 293,272 |
|
| $ | 272,625 |
|
| $ | 274,119 |
|
Carrying value |
|
| 291,926 |
|
|
| 291,786 |
|
|
| 272,800 |
|
|
| 277,058 |
|
The following tables present financial assets and liabilities measured on a recurring basis at fair value as of March 31, 2018,2019, and December 31, 2017,2018, and the level within the fair value hierarchy in which the fair value measurements fall:
(In thousands) |
| March 2018 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| March 2019 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
Mutual fund assets |
| $ | 26,725 |
|
| $ | 26,725 |
|
| $ | — |
|
| $ | — |
|
| $ | 25,615 |
|
| $ | 25,615 |
|
| $ | — |
|
| $ | — |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
| 97 |
|
|
| — |
|
|
| 97 |
|
|
| — |
|
|
| 31 |
|
|
| — |
|
|
| 31 |
|
|
| — |
|
Total assets at fair value |
| $ | 26,822 |
|
| $ | 26,725 |
|
| $ | 97 |
|
| $ | — |
|
| $ | 25,646 |
|
| $ | 25,615 |
|
| $ | 31 |
|
| $ | — |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
| $ | 88 |
|
| $ | — |
|
| $ | 88 |
|
| $ | — |
|
| $ | 61 |
|
| $ | — |
|
| $ | 61 |
|
| $ | — |
|
7
| December 2017 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| December 2018 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||||||
Mutual fund assets |
| $ | 28,270 |
|
| $ | 28,270 |
|
| $ | — |
|
| $ | — |
|
| $ | 25,082 |
|
| $ | 25,082 |
|
| $ | — |
|
| $ | — |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
| 335 |
|
|
| — |
|
|
| 335 |
|
|
| — |
|
|
| 185 |
|
|
| — |
|
|
| 185 |
|
|
| — |
|
Total assets at fair value |
| $ | 28,605 |
|
| $ | 28,270 |
|
| $ | 335 |
|
| $ | — |
|
| $ | 25,267 |
|
| $ | 25,082 |
|
| $ | 185 |
|
| $ | — |
|
Derivative liabilities : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency contracts |
| $ | 94 |
|
| $ | — |
|
| $ | 94 |
|
| $ | — |
|
| $ | 10 |
|
| $ | — |
|
| $ | 10 |
|
| $ | — |
|
| DERIVATIVE INSTRUMENTS |
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by the use of derivative instruments is foreign currency exchange risk. The Company holds forward foreign currency exchange contracts that are not designated as any type of accounting hedge as defined by GAAP. The Company uses these contracts to manage its exposure to exchange rate fluctuations on certain Company subsidiary cash, accounts receivable, accounts payable and other obligation balances that are denominated in currencies other than the entities’ functional currencies. The forward foreign exchange contracts are recognized on the balance sheet as either an asset or a liability measured at fair value. Gains and losses arising from recording the foreign exchange contracts at fair value are reported in earnings as offsets to the losses and gains reported in earnings arising from the re-measurement of the asset and liability balances into the applicable functional currencies. At March 31, 2018,2019, and December 31, 2017,2018, 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 $52,718,000$24,164,006 and $41,197,000,$28,870,081, respectively.
The fair values of the derivative instruments held by the Company on March 31, 2018,2019, and December 31, 2017,2018, are disclosed in Note 3.4. Derivative instrument gains and losses for the three-month periods ended March 31, 20182019 and 2017,2018, were immaterial. For amounts reclassified out of accumulated other comprehensive income (loss) (AOCI) into earnings for the three-month periods ended March 31, 20182019 and 2017,2018, see Note 10.12.
| STOCK-BASED COMPENSATION |
On March 31, 2018,2019, the Company had stock options and stock awards outstanding under its 2006 Incentive Compensation Plan and 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 after 2014 are stock-settled. Stock options and SARs granted prior to 2017 generally cliff vested after two years. Starting in 2017, stock options and SARs
11
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) | (In thousands) |
| (In thousands) |
| ||||||||
Three Months Ended March 31 | Three Months Ended March 31 |
| Three Months Ended March 31 |
| ||||||||
2018 |
|
| 2017 |
| ||||||||
2019 | 2019 |
|
| 2018 |
| |||||||
$ | 2,232 |
|
| $ | 1,385 |
| 2,596 |
|
| $ | 2,232 |
|
The year-over-yearquarter-over-quarter increase in stock-based compensation expense was primarily attributable to cash-settled SARs. The quarterly increase in cash-settled SARs compensation expense increased due to an increase in the fair values of cash-settled SARs that resulted fromreflects a larger rise in the market value of Company common stock during the first quarter of 2018. The market value of Company common stock decreased during2019 versus the first quarter of 2017.2018. This increase was partially offset by a quarter-over-quarter decrease in stock-based compensation expense related to performance stock awards.
Unrecognized compensation costs for stock options, stock awards and SARs were as follows:
(In thousands) |
| March 31, 2018 |
|
| December 31, 2017 |
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||||
Stock options |
| $ | 2,424 |
|
| $ | 1,179 |
|
| $ | 2,935 |
|
| $ | 1,655 |
|
Stock awards |
|
| 6,022 |
|
|
| 3,737 |
|
|
| 5,712 |
|
|
| 3,180 |
|
SARs |
|
| 5,191 |
|
|
| 2,398 |
|
|
| 6,260 |
|
|
| 3,566 |
|
8
The increases in unrecognized compensation costs for stock options, stock awards and SARs reflected the 20182019 grants of:
|
| Shares |
| |
Stock options |
|
|
|
|
Stock awards (at target) |
|
|
|
|
SARs |
|
|
|
|
The unrecognized compensation costs at March 31, 2018,2019, are expected to be recognized over weighted-average periods of 2.4 years, 2.0 years and 2.42.2 years for stock options, stock awards and SARs, respectively.SARs.
| INVENTORIES |
The composition of inventories at March 31, 2018,2019, and December 31, 2017,2018, was as follows:
(In thousands) |
| March 31, 2018 |
|
| December 31, 2017 |
|
| March 31, 2019 |
|
| December 31, 2018 As Adjusted |
| ||||
Finished goods |
| $ | 128,474 |
|
| $ | 117,529 |
|
| $ | 154,758 |
|
| $ | 163,617 |
|
Raw materials |
|
| 59,263 |
|
|
| 55,219 |
|
|
| 60,270 |
|
|
| 67,911 |
|
Total inventories |
| $ | 187,737 |
|
| $ | 172,748 |
|
| $ | 215,028 |
|
| $ | 231,528 |
|
Inventories are priced primarily usingEffective January 1, 2019, the last-in, first-outCompany elected to change its method of accounting for U.S. inventories from the LIFO basis to the FIFO basis. Non-U.S. inventories have historically been maintained on the FIFO basis. Prior period financial statements have been adjusted to reflect what results would have been had the Company always used the FIFO method of inventory valuation method. Iffor U.S. inventories. See Note 2 for additional details.
8. | LEASES |
The Company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019. This new accounting standard requires a dual approach for lessee accounting whereby a lessee accounts for lease arrangements as either finance leases or operating leases. The lease classification affects the first-in, first-out inventory valuation method hadpattern of expense recognition in the income statement. The most significant impact of adopting ASU No. 2016-02, Leases (Topic 842) is that a lessee is now required to recognize a “right-of-use” (ROU) asset and corresponding lease liability for operating lease agreements. ROU assets represent a right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating leases are expensed on a straight-line basis over the life of the lease beginning on the date the Company takes possession of the property.
12
As the Company elected to apply the standard at adoption as allowed under ASU No. 2018-11, the Company did not retrospectively adjust prior periods presented. The Company elected the practical expedient to not separate non-lease components from lease components for all asset classes and the practical expedient which permits a Company to not reassess prior conclusions about lease identification, lease classifications and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable to the Company. In addition, the Company made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. Upon adoption of ASC 842, the Company recognized $42.4 million of ROU assets and related operating lease liabilities on its balance sheet. There was no cumulative catch-up adjustment made to beginning retained earnings.
Significant judgments used by the Company to determine whether a contract is or contains a lease include: (i) determining whether any explicitly or implicitly identified assets have been identified in the contract and (ii) determining whether the Company obtains substantially all of the economic benefits from the use of the underlying asset and directs how and for what purpose the asset is used during the term of the contract.
The Company’s operating leases are primarily comprised of railcars, real estate, storage tanks, autos, trailers and manufacturing/office equipment. Railcars and real estate comprise approximately 49 percent and 36 percent, respectively, of the Company’s consolidated ROU asset balance. With the exception of 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 two principal real estate leases relate to land leases in the Philippines and Singapore. The Company is not currently party to any leases that have not commenced but that have created significant rights and obligations for the Company.
Variability associated with the Company’s lease obligations typically relates to: (i) additional charges based on usage (i.e. railcar mileage in excess of a specified amount) and, (ii) periodic increases associated with Consumer Price Index (“CPI”) changes (i.e. land rental payments). Appropriate CPI indexes at the inception of a lease are reflected in the Company’s lease liability balances whereas variability based on usage is typically excluded from lease liability amounts. Some of the Company’s leases include options to extend the lease term but these are typically not recognized as part of the ROU asset or lease liability at inception unless it is reasonably certain the renewal option will be exercised. Determining whether a renewal option is reasonably certain to be exercised requires judgment based on the existing facts and circumstances as well as expectations about future business needs. Renewal options are typically re-assessed within one year or less prior to lease termination when the Company is able to more accurately forecast future business needs. Some of the Company’s lease contracts include options to terminate leases early but these are typically not considered unless it is reasonably certain the early termination option will be exercised. The Company’s leases do not typically carry any residual value guarantees and typically payment is not considered probable when such guarantees are included in the contract.
Initial implementation of ASU No. 2016-02, Leases (Topic 842) did not impact compliance with any of the Company’s debt-covenants nor is it expected to in the future. The majority of the Company’s debt agreements contain language that excludes the impact of any new GAAP accounting change.
As most of the Company’s leases do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate (IBR) based on the information available at the commencement date in determining the present value of lease payments. IBRs were specifically determined for the United States, the Philippines, Singapore and China, typically for five-year increments. The U.S. IBR was used for all inventories, inventory balances would have beenother countries as the leases in these countries are not material. The total value of leases that reside in the four countries identified above represents approximately $35,145,000 and $33,518,000 higher than reported93 percent of the Company’s consolidated ROU asset balance.
(In thousands) |
| March 31, 2019 |
| |
Lease Cost |
|
|
|
|
Operating lease cost |
| $ | 2,688 |
|
Short-term lease cost |
|
| 970 |
|
Variable lease cost |
|
| 348 |
|
Total lease cost |
| $ | 4,006 |
|
Other Information |
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flow from operating leases |
| $ | 2,696 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
| 294 |
|
Weighted-average remaining lease term-operating leases |
| 9 Years |
| |
Weighted-average discount rate-operating leases |
|
| 3.9 | % |
13
|
|
|
| |
|
|
|
|
|
(In thousands) |
|
|
|
|
Undiscounted Cash Flows: |
|
|
|
|
2019 (excluding the three months ended March 31, 2019) |
| $ | 7,870 |
|
2020 |
|
| 9,192 |
|
2021 |
|
| 6,427 |
|
2022 |
|
| 5,317 |
|
2023 |
|
| 4,145 |
|
Subsequent to 2023 |
|
| 17,231 |
|
Total Undiscounted Cash Flows |
| $ | 50,182 |
|
Less: Imputed interest |
|
| (9,846 | ) |
Present value |
| $ | 40,336 |
|
Current operating lease liabilities (1) |
|
| 8,975 |
|
Non-current operating lease liabilities |
|
| 31,361 |
|
Total lease liabilities |
| $ | 40,336 |
|
(1) | This item is included in Accrued liabilities line on the Company’s Condensed Consolidated Balance Sheet. |
ASC 840 Disclosure
As required in transition, the table below summarizes the Company’s future minimum lease payments at MarchDecember 31, 2018 and December 31, 2017, respectively.under ASC 840.
(In thousands) |
|
|
|
|
Year |
|
|
|
|
2019 |
| $ | 9,740 |
|
2020 |
|
| 8,294 |
|
2021 |
|
| 6,027 |
|
2022 |
|
| 5,242 |
|
2023 |
|
| 4,101 |
|
Subsequent to 2023 |
|
| 16,593 |
|
Total minimum future rental payments |
| $ | 49,997 |
|
| CONTINGENCIES |
There are a variety of legal proceedings pending or threatened against the Company.Company that occur in the normal course of the Company’s business, the majority of which relate to environmental 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 similarcomparable regulations in other countries whereapplicable to the Company operates.Company’s foreign locations. Over the years, the Company has received requests for information related to or has been named by the government authorities as a potentially responsible party (PRP) at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it mayis likely to incur with respect to these sites.
As of March 31, 2018,2019, the Company estimated a range of possible environmental and legal losses of $23.9$23.4 million to $45.2$44.7 million. At March 31, 2018, and December 31, 2017,Within the Company’s accrued liability for such losses, which represented the Company’s best estimate within the estimated range of possible environmental and legal losses, was $23.9currently management has concluded that there are no amounts within the ranges that are more likely to occur than any other amounts in the ranges and, thus, has accrued at the lower end of the ranges; that accrual totaled $23.4 million at both March 31, 2019 and $24.2 million, respectively.December 31, 2018. Cash outlaysexpenditures related to legal and environmental matters approximated $0.2 million and $0.4 million for each of the three-month periods ended March 31, 20182019 and 2017, respectively. 2018.
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. Given the information available, management believes the Company has no liability at these sites. 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. Based upon the Company’s present knowledge with respect to its involvement at these sites, the
14
possibility of other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company believeshas no 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.
9
Following are summaries of the material contingencies at March 31, 2018:2019:
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 (Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between the U.S. Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company has completed various Remedial Investigation Feasibility Studies (RI/FS), and on September 24, 2014, the USEPA issued its Record of Decision (ROD) for chemically-contaminated soil. The USEPA has not yet issued a ROD for chemically-contaminated groundwater for the Maywood site. Based on the most current information available, the Company believes its recorded liability represents its best estimateis reasonable having considered the range of theestimated cost of remediation for the Maywood site. The best 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 progresses, if a groundwater ROD is issued or if other PRPs are identified. The ultimate amount for which the Company is liable could differ from the Company’s current recorded liability.
In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with the USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil. Based on the Company’s review and analysis of this order, no changes to the Company’s recorded liability for claims associated with soil remediation of chemical contamination were required.
In addition, under the terms of a settlement agreement reached on November 12, 2004, the U. S.U.S. Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985 under which the United States will take title to and responsibility for radioactive waste removal at the Maywood site, including past and future remediation costs incurred by the United States. 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 at several sites in New Jersey. The Company was named as a PRP in a lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Property Site located in New Jersey. In 2016, the PRPs were provided with updated remediation cost estimates, which were considered in the Company’s 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 is continuing at this site. Based on current information, the Company believes that its recorded liability represents its best estimateis reasonable having considered the range of theestimated 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 from the current estimates.
Wilmington Site
The Company is currently contractually obligated to contribute to the response costs associated with the Company’s formerly-owned site in Wilmington, Massachusetts. Remediation at this site is being managed by its current owner, to whom the Company sold the property in 1980. Under the agreement, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. The Company has paid the current owner $2.6$2.7 million for the Company’s portion of environmental response costs through March 31, 2018.2019. 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 from the current estimates.
The Company and other prior owners 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.
15
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 two of its U.S 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. In the fourth quarter of 2016, the Company recognized a charge for the estimated cost of remediating the sites. Based on
10
current information, the Company believes that its recorded liability for the remediation of the affected areas is adequate.appropriate based on estimate of expected costs. However, actual costs could differ from current estimates.
| POSTRETIREMENT BENEFIT PLANS |
Defined Benefit Pension Plans
The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations. The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued.
Components of Net Periodic Benefit Cost
|
| United States |
|
| United Kingdom |
|
| UNITED STATES |
|
| UNITED KINGDOM |
| ||||||||||||||||||||
(In thousands) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Interest cost |
| $ | 1,539 |
|
| $ | 1,661 |
|
| $ | 148 |
|
| $ | 143 |
|
| $ | 1,661 |
|
| $ | 1,539 |
|
| $ | 142 |
|
| $ | 148 |
|
Expected return on plan assets |
|
| (2,321 | ) |
|
| (2,321 | ) |
|
| (231 | ) |
|
| (192 | ) |
|
| (2,361 | ) |
|
| (2,321 | ) |
|
| (201 | ) |
|
| (231 | ) |
Amortization of net actuarial loss |
|
| 937 |
|
|
| 788 |
|
|
| 57 |
|
|
| 92 |
|
|
| 652 |
|
|
| 937 |
|
|
| 63 |
|
|
| 57 |
|
Net periodic benefit cost (income) |
| $ | 155 |
|
| $ | 128 |
|
| $ | (26 | ) |
| $ | 43 |
| ||||||||||||||||
Net periodic benefit cost |
| $ | (48 | ) |
| $ | 155 |
|
| $ | 4 |
|
| $ | (26 | ) |
In the first quarter of 2018, the Company implemented ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amended the guidance for the presentation of the components of net periodic cost in the income statement. The guidance requires the service cost component of net periodic benefit cost to be included in employee compensation costs in the income statement and all other components elsewhere in the income statement outside of income from operations. The Company does not have a service component of the net periodic benefit cost because the defined benefit plans (both U.S. and U.K. locations) are frozen. The other components of net periodic benefit cost such as interest cost, amortization of net actuarial loss and expected return on plan assets are included in the line item Other, net within Other Income (Expense) section of the Income statement. See Note 14 for more details.
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 the funded U.S. qualified defined benefit plans. Approximately $312,000 is expected to be paid related to the unfunded non-qualified plans in 2018.2019. Of such amount, $143,000 had been paid related to the non-qualified plans as of March 31, 2018.2019.
U.K. Plan
The Company’s U.K. subsidiary expects to contribute approximately $500,000$476,000 to its defined benefit pension plan in 2018.2019. Of such amount, $138,000$173,000 had been contributed to the plan as of March 31, 2018.2019.
Defined Contribution Plans
The Company sponsors retirement savings defined contribution plans that cover eligible U.S. and U.K. employees. The Company’s U.S. retirement plans include two qualified plans, one of which is a 401(k) plan and one of which is an employee stock ownership plan, and one non-qualified supplemental executive plan. Historically,In the three months ended March 31, 2019 and 2018, the Company has made profit sharing contributions into the qualified retirement plans for its U.S. employees and for certain non-U.S. employees. Profit sharing contributions were determined each year using a formula that was applied to Company earnings. TheIn 2018, profit sharing contributions whichfor U.S. employees, who received the majority of profit sharing contributions, were made partly in cash paid to the 401(k) plan and partly in Company common stock,stock. In 2019, profit sharing contributions were made in Company common stock. Profit sharing contributions are allocated to participant accounts on the basis of participant base earnings.
Defined contribution plan expenses for the Company’s retirement savings and profit sharingqualified contribution plans were as follows:
(In thousands) |
| Three Months Ended March 31 |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Retirement savings contributions |
| $ | 2,409 |
|
| $ | 1,757 |
|
Profit sharing contributions |
|
| 882 |
|
|
| 942 |
|
Total defined contribution plan expenses |
| $ | 3,291 |
|
| $ | 2,699 |
|
1116
| Three Months Ended March 31 |
| ||||||
|
| 2018 |
|
| 2017 |
| ||
Retirement savings plans |
| $ | 1,757 |
|
| $ | 1,259 |
|
Profit sharing plan |
|
| 942 |
|
|
| 1,843 |
|
Total defined contribution expense |
| $ | 2,699 |
|
| $ | 3,102 |
|
The Company has a rabbi trust to fund the obligations of its non-qualified supplemental executive defined contribution plans (supplemental plans). The trust comprises various mutual fund investments selected by the participants of the supplemental plans. In accordance with the accounting guidance for rabbi trust arrangements, the assets of the trust and the obligations of the supplemental plans are reported on the Company’s consolidated balance sheets. The Company elected the fair value option for the mutual fund investment assets so that offsetting changes in the mutual fund values and defined contribution plan obligations would be recorded in earnings in the same period. Therefore, the mutual funds are reported at fair value with any subsequent changes in fair value recorded in the consolidated statements of income. The liabilities related to the supplemental plans increase (i.e., supplemental plan expense is recognized) when the value of the trust assets appreciates and decrease when the value of the trust assets declines (i.e., supplemental plan income is recognized). At March 31, 2018,2019, the balance of the trust assets was $1,641,000,$1,677,000, which equaled the balance of the supplemental plan liabilities (see the long-term investments section in Note 34 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 months ended March 31, 20182019 and 2017:2018:
(In thousands, except per share amounts) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 As Adjusted |
| ||||
Computation of Basic Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Stepan Company |
| $ | 30,723 |
|
| $ | 31,913 |
|
| $ | 24,984 |
|
| $ | 31,952 |
|
Weighted-average number of common shares outstanding |
|
| 23,082 |
|
|
| 22,901 |
|
|
| 23,099 |
|
|
| 23,082 |
|
Basic earnings per share |
| $ | 1.33 |
|
| $ | 1.39 |
|
| $ | 1.08 |
|
| $ | 1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Stepan Company |
| $ | 30,723 |
|
| $ | 31,913 |
|
| $ | 24,984 |
|
| $ | 31,952 |
|
Weighted-average number of shares outstanding |
|
| 23,082 |
|
|
| 22,901 |
|
|
| 23,099 |
|
|
| 23,082 |
|
Add weighted-average net shares from assumed exercise of options (under treasury stock method) |
|
| 119 |
|
|
| 183 |
|
|
| 92 |
|
|
| 119 |
|
Add weighted-average net shares related to unvested stock awards (under treasury stock method) |
|
| 2 |
|
|
| 8 |
|
|
| 3 |
|
|
| 2 |
|
Add weighted-average net shares from assumed exercise of SARs (under treasury stock method) |
|
| 122 |
|
|
| 142 |
|
|
| 108 |
|
|
| 122 |
|
Add weighted-average contingently issuable net shares related to performance stock awards (under treasury stock method) |
|
| 64 |
|
|
| 97 |
|
|
| 30 |
|
|
| 64 |
|
Weighted-average shares applicable to diluted earnings |
|
| 23,389 |
|
|
| 23,331 |
|
|
| 23,332 |
|
|
| 23,389 |
|
Diluted earnings per share |
| $ | 1.31 |
|
| $ | 1.37 |
|
| $ | 1.07 |
|
| $ | 1.37 |
|
(1) | The 2018 amounts for the noted line items have been changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S. inventory valuation from LIFO to FIFO. |
(1)(2) Options/SARs to acquire 2,807214,241 and 74,5212,807 shares of Company common stock were excluded from the computations of diluted earnings per share for the three months ended March 31, 20182019 and March 31, 2017,2018, because the effect of including the instruments would have been antidilutive.
1217
In conjunction with the adoption of ASU 2018-02, the Company reclassified $5,325,000 of other comprehensive loss, associated with post retirement plans, from accumulated other comprehensive loss to retained earnings effective January 1, 2019. Below is the change in the Company’s AOCI balance by component (net of income taxes) for the three months ended March 31, 20182019 and 2017:2018:
(In thousands) |
| Foreign Currency Translation Adjustments |
|
| Defined Benefit Pension Plan Adjustments |
|
| Cash Flow Hedge Adjustments |
|
| Total |
|
| Foreign Currency Translation Adjustments |
|
| Defined Benefit Pension Plan Adjustments |
|
| Cash Flow Hedge Adjustments |
|
| Total |
| ||||||||
Balance at December 31, 2016 |
| $ | (96,775 | ) |
| $ | (30,790 | ) |
| $ | 100 |
|
| $ | (127,465 | ) | ||||||||||||||||
Other comprehensive income before reclassifications |
|
| 10,441 |
|
|
| — |
|
|
| — |
|
|
| 10,441 |
| ||||||||||||||||
Amounts reclassified from AOCI |
|
| — |
|
|
| 565 |
|
|
| (2 | ) |
|
| 563 |
| ||||||||||||||||
Net current-period other comprehensive income |
|
| 10,441 |
|
|
| 565 |
|
|
| (2 | ) |
|
| 11,004 |
| ||||||||||||||||
Balance at March 31, 2017 |
| $ | (86,334 | ) |
| $ | (30,225 | ) |
| $ | 98 |
|
| $ | (116,461 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance at December 31, 2017 |
| $ | (70,561 | ) |
| $ | (29,093 | ) |
| $ | 91 |
|
| $ | (99,563 | ) |
| $ | (70,561 | ) |
| $ | (29,093 | ) |
| $ | 91 |
|
| $ | (99,563 | ) |
Other comprehensive income before reclassifications |
|
| 8,785 |
|
|
| — |
|
|
| — |
|
|
| 8,785 |
|
|
| 8,785 |
|
|
| — |
|
|
| — |
|
|
| 8,785 |
|
Amounts reclassified from AOCI |
|
| — |
|
|
| 753 |
|
|
| (3 | ) |
|
| 750 |
|
|
| — |
|
|
| 753 |
|
|
| (3 | ) |
|
| 750 |
|
Net current-period other comprehensive income |
|
| 8,785 |
|
|
| 753 |
|
|
| (3 | ) |
|
| 9,535 |
|
|
| 8,785 |
|
|
| 753 |
|
|
| (3 | ) |
|
| 9,535 |
|
Balance at March 31, 2018 |
| $ | (61,776 | ) |
| $ | (28,340 | ) |
| $ | 88 |
|
| $ | (90,028 | ) |
| $ | (61,776 | ) |
| $ | (28,340 | ) |
| $ | 88 |
|
| $ | (90,028 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance at December 31, 2018 |
| $ | (108,481 | ) |
| $ | (33,083 | ) |
| $ | 81 |
|
| $ | (141,483 | ) | ||||||||||||||||
Other comprehensive income before reclassifications |
|
| 3,687 |
|
|
| — |
|
|
| — |
|
|
| 3,687 |
| ||||||||||||||||
Amounts reclassified from AOCI |
|
| — |
|
|
| 543 |
|
|
| (2 | ) |
|
| 541 |
| ||||||||||||||||
Reclassification adjustment related to the Tax Act (1) |
|
| — |
|
|
| (5,325 | ) |
|
| — |
|
|
| (5,325 | ) | ||||||||||||||||
Net current-period other comprehensive income |
|
| 3,687 |
|
|
| (4,782 | ) |
|
| (2 | ) |
|
| (1,097 | ) | ||||||||||||||||
Balance at March 31, 2019 |
| $ | (104,794 | ) |
| $ | (37,865 | ) |
| $ | 79 |
|
| $ | (142,580 | ) |
(1) | Represents reclassification of the stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (Tax Act) from accumulated other comprehensive income (loss) to retained earnings in accordance with ASU 2018-02. See Note 19 for more details. |
Information regarding the reclassifications out of AOCI for the three month periods ended March 31, 20182019 and 2017,2018, is displayed below:
(In thousands) |
| Amount Reclassified from AOCI (a) |
|
| Amount Reclassified from AOCI (a) |
| ||||||||||||||
AOCI Components |
| Three Months Ended March 31 |
|
| Affected Line Item in Consolidated Statements of Income |
| Three Months Ended March 31 |
|
| Affected Line Item in Consolidated Statements of Income | ||||||||||
|
| 2018 |
|
| 2017 |
|
|
|
| 2019 |
|
| 2018 |
|
|
| ||||
Amortization of defined benefit pension actuarial losses |
| $ | (994 | ) |
| $ | (880 | ) |
| (b) |
| $ | (715 | ) |
| $ | (994 | ) |
| (b) |
|
|
| 241 |
|
|
| 315 |
|
| Tax benefit |
|
| 172 |
|
|
| 241 |
|
| Tax benefit |
|
| $ | (753 | ) |
| $ | (565 | ) |
| Net of tax |
| $ | (543 | ) |
| $ | (753 | ) |
| Net of tax |
Gains and losses on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
| 3 |
|
|
| 2 |
|
| Cost of sales |
|
| 2 |
|
|
| 3 |
|
| Cost of sales |
|
|
| 3 |
|
|
| 2 |
|
| Total before tax |
|
| 2 |
|
|
| 3 |
|
| Total before tax |
|
|
| — |
|
|
| — |
|
| Tax benefit |
|
| — |
|
|
| — |
|
| Tax benefit |
|
| $ | 3 |
|
| $ | 2 |
|
| Net of tax |
| $ | 2 |
|
| $ | 3 |
|
| Net of tax |
Total reclassifications for the period |
| $ | (750 | ) |
| $ | (563 | ) |
| Net of tax |
| $ | (541 | ) |
| $ | (750 | ) |
| Net of tax |
| (a) | Amounts in parentheses denote expense to statement of income. |
| (b) | This component of accumulated other comprehensive income is included in the computation of net periodic benefit cost (see Note |
|
18
| SEGMENT REPORTING |
The Company has three reportable segments: Surfactants, Polymers and Specialty Products. Net sales by segment for the three months ended March 31, 20182019 and 2017,2018, were as follows:
(In thousands) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Segment Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surfactants |
| $ | 358,940 |
|
| $ | 322,603 |
|
| $ | 349,650 |
|
| $ | 358,940 |
|
Polymers |
|
| 121,933 |
|
|
| 126,610 |
|
|
| 120,179 |
|
|
| 121,933 |
|
Specialty Products |
|
| 18,462 |
|
|
| 19,056 |
|
|
| 19,341 |
|
|
| 18,462 |
|
Total |
| $ | 499,335 |
|
| $ | 468,269 |
|
| $ | 489,170 |
|
| $ | 499,335 |
|
13
Segment operating income and reconciliations of segment operating income to consolidated income before income taxes for the three months ended March 31, 20182019 and 2017,2018, are summarized below:
(In thousands) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 As Adjusted |
| ||||
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surfactants |
| $ | 40,251 |
|
| $ | 38,371 |
|
| $ | 37,167 |
|
| $ | 41,468 |
|
Polymers |
|
| 16,894 |
|
|
| 21,425 |
|
|
| 12,105 |
|
|
| 17,305 |
|
Specialty Products |
|
| (350 | ) |
|
| 1,286 |
|
|
| 3,131 |
|
|
| (350 | ) |
Segment operating income |
|
| 56,795 |
|
|
| 61,082 |
|
|
| 52,403 |
|
|
| 58,423 |
|
Business restructuring |
|
| (358 | ) |
|
| (786 | ) |
|
| (733 | ) |
|
| (358 | ) |
Unallocated corporate expenses (1) (2) |
|
| (16,782 | ) |
|
| (14,066 | ) | ||||||||
Unallocated corporate expenses (2) |
|
| (21,932 | ) |
|
| (16,782 | ) | ||||||||
Consolidated operating income |
|
| 39,655 |
|
|
| 46,230 |
|
|
| 29,738 |
|
|
| 41,283 |
|
Interest expense, net |
|
| (3,151 | ) |
|
| (2,992 | ) |
|
| (1,853 | ) |
|
| (3,151 | ) |
Other, net |
|
| 1,160 |
|
|
| 1,092 |
|
|
| 3,145 |
|
|
| 1,160 |
|
Consolidated income before income taxes |
| $ | 37,664 |
|
| $ | 44,330 |
|
| $ | 31,030 |
|
| $ | 39,292 |
|
(1) The 2018 amounts for the noted line items have been changed from the amounts originally reported as a result of the Company’s first quarter 2019 change in method of accounting for U.S. inventory valuation from LIFO to FIFO.
|
| 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. |
|
(2) The 2017 data has been immaterially changed from the amounts originally reported as a result of the Company’s first quarter 2018 adoption of ASU No. 2017-7, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
12. REVENUE FROM CONTRACTS WITH CUSTOMERS
14. | REVENUE FROM CONTRACTS WITH CUSTOMERS |
In the majority of instances 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.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. Revenue is recognized when performance obligations under terms of a contract with a customer have been satisfied, which is predominantly at a point in time. With the 2018 adoption of ASU 2014-09, revenue is currently recognized when a customer obtains control of a product as compared to the “risk and rewards” criteria used in prior years. However, the adoption of ASU 2014-09 did not have a material impact on the Company’s financial position or results of operations during the first quarter of 2018.
Payment terms on sales of product typically range from 30 to 60 days and ordinarily do not exceed 75 days. As a result, the Company has concluded it does not provide any significant benefits of financing to its customers.
The Company has elected to account for shipping and handling as activities to fulfill a promise to transfer the good. As such, shipping and handling fees billed to customers in a sales transaction are recorded in Net Sales and shipping and handling costs incurred are recorded in Cost of Sales. The Company has elected to exclude from Net Sales any value added, sales and other taxes that it collects concurrently with revenue producing activities. These accounting policy elections are consistent with the manner in which the Company has historically recorded shipping and handling fees and taxes.
In some instances, a customer may qualify for a rebate based on the volume of purchases made over a specified period of time, typically a quarterly or annual period. The Company estimates the expected volume of total purchases using actual volumes, customer projections and historical order patterns and accrues for these rebates based on the best available information at the time. These estimated rebates are treated as a reduction to Net Sales with the offset being recognized within Current Liabilities. This methodology is consistent with the manner in which the Company has historically estimated and recorded volume based rebates. In other instances, discounts for early payments are offered to certain customers. These discounts are principally accrued for based on a customer’s historical use of discounts. These estimated early payment discounts are accounted for similarly to volume rebates. These forms of variable consideration are considered part of the transaction price.
14
The Company warrants its products from defects. The Company has concluded that these represent assurance-type warranties as opposed to service-type warranties. Product defects are rare in occurrence. As a result, the Company does not maintain any warranty accruals until such time as it is probable a product defect exists.
As of March 31, 2018,2019, the Company did not have any contract assets or contract liabilities. 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 extremely rare as it would require a customer to make a payment prior to a performance obligation being satisfied. If such a situation did arise the Company would maintain a deferred revenue liability until the time a performance obligation has been satisfied. The Company did not recognize any revenue in the current period from any pre-existing contract liability balance.
19
The tables below provides a geographic disaggregation of net sales for the three months ended March 31, 20182019 and 2017.2018. 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. This regional data is the predominant information used by senior management to assess the financial performance of operating segments and make resource allocation decisions.
|
| For the Three Months Ended March 31, 2019 |
| |||||||||||||
(In thousands) |
|
|
|
|
|
|
| |||||||||
|
| Surfactants |
|
| Polymers |
|
| Specialty |
|
| Total |
| ||||
Geographic Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 214,297 |
|
| $ | 71,323 |
|
| $ | 16,025 |
|
| $ | 301,645 |
|
Europe |
|
| 71,478 |
|
|
| 42,105 |
|
|
| 3,316 |
|
|
| 116,899 |
|
Latin America |
|
| 50,812 |
|
|
| 197 |
|
|
| — |
|
|
| 51,009 |
|
Asia |
|
| 13,063 |
|
|
| 6,554 |
|
|
| — |
|
|
| 19,617 |
|
Total |
| $ | 349,650 |
|
| $ | 120,179 |
|
| $ | 19,341 |
|
| $ | 489,170 |
|
|
| For the Three Months Ended March 31, 2018 |
| |||||||||||||
(In thousands) |
|
|
|
|
|
|
| |||||||||
|
| Surfactants |
|
| Polymers |
|
| Specialty |
|
| Total |
| ||||
Geographic Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 220,405 |
|
| $ | 73,474 |
|
| $ | 14,814 |
|
| $ | 308,693 |
|
Europe |
|
| 78,371 |
|
|
| 41,784 |
|
|
| 3,648 |
|
|
| 123,803 |
|
Latin America |
|
| 41,688 |
|
|
| 827 |
|
|
| — |
|
|
| 42,515 |
|
Asia |
|
| 18,476 |
|
|
| 5,848 |
|
|
| — |
|
|
| 24,324 |
|
Total |
| $ | 358,940 |
|
| $ | 121,933 |
|
| $ | 18,462 |
|
| $ | 499,335 |
|
|
| For the Three Months Ended March 31, 2017 |
| |||||||||||||
(In thousands) |
|
|
|
|
|
|
| |||||||||
|
| Surfactants |
|
| Polymers |
|
| Specialty |
|
| Total |
| ||||
Geographic Market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 198,243 |
|
| $ | 78,364 |
|
| $ | 14,935 |
|
| $ | 291,542 |
|
Europe |
|
| 63,423 |
|
|
| 42,403 |
|
|
| 4,121 |
|
|
| 109,947 |
|
Latin America |
|
| 43,505 |
|
|
| 1,298 |
|
|
| — |
|
|
| 44,803 |
|
Asia |
|
| 17,432 |
|
|
| 4,545 |
|
|
| — |
|
|
| 21,977 |
|
Total |
| $ | 322,603 |
|
| $ | 126,610 |
|
| $ | 19,056 |
|
| $ | 468,269 |
|
15
At March 31, 2018,2019, and December 31, 2017,2018, debt comprised the following:
(In thousands) |
| Maturity Dates |
| March 31, 2018 |
|
| December 31, 2017 |
|
| Maturity Dates |
| March 31, 2019 |
|
| December 31, 2018 |
| ||||
Unsecured private placement notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.95% (net of unamortized debt issuance cost of $392 and $346 for 2018 and 2017, respectively) |
| 2021-2027 |
| $ | 99,608 |
|
| $ | 99,654 |
| ||||||||||
3.86% (net of unamortized debt issuance cost of $388 and $343 for 2018 and 2017, respectively) |
| 2019-2025 |
|
| 99,612 |
|
|
| 99,657 |
| ||||||||||
4.86% (net of unamortized debt issuance cost of $215 and $191 for 2018 and 2017, respectively) |
| 2018-2023 |
|
| 55,499 |
|
|
| 55,523 |
| ||||||||||
5.88% (net of unamortized debt issuance cost of $106 and $95 for 2018 and 2017, respectively) |
| 2018-2022 |
|
| 28,465 |
|
|
| 28,476 |
| ||||||||||
5.69% (net of unamortized debt issuance cost of $12 for 2018 and 2017) |
| 2018 |
|
| 5,703 |
|
|
| 5,703 |
| ||||||||||
3.95% (net of unamortized debt issuance cost of $349 and $360 for 2019 and 2018, respectively) |
| 2021-2027 |
| $ | 99,651 |
|
| $ | 99,640 |
| ||||||||||
3.86% (net of unamortized debt issuance cost of $333 and $347 for 2019 and 2018, respectively) |
| 2019-2025 |
|
| 99,667 |
|
|
| 99,653 |
| ||||||||||
4.86% (net of unamortized debt issuance cost of $176 and $186 for 2019 and 2018, respectively) |
| 2019-2023 |
|
| 46,253 |
|
|
| 46,243 |
| ||||||||||
5.88% (net of unamortized debt issuance cost of $80 and $85 for 2019 and 2018, respectively) |
| 2019-2022 |
|
| 22,777 |
|
|
| 22,772 |
| ||||||||||
Debt of foreign subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured bank debt, foreign currency |
| 2018 |
|
| 1,926 |
|
|
| 1,786 |
|
| 2019 |
|
| 3,514 |
|
|
| 7,772 |
|
Total debt |
|
|
| $ | 290,813 |
|
| $ | 290,799 |
|
|
|
| $ | 271,862 |
|
| $ | 276,080 |
|
Less current maturities |
|
|
|
| 22,640 |
|
|
| 22,500 |
|
|
|
|
| 32,799 |
|
|
| 37,058 |
|
Long-term debt |
|
|
| $ | 268,173 |
|
| $ | 268,299 |
|
|
|
| $ | 239,063 |
|
| $ | 239,022 |
|
On January 30, 2018, theThe Company entered intohas a five year committed $350 million$350,000,000 multi-currency revolving credit facilityagreement that maturesexpires on January 30, 2023 with a syndicate of banks. This credit facility replaced the Company’s prior $125 million credit agreement. The Company’s outstanding Note Purchase Agreements were amended effective January 30, 2018 to make certain covenants consistent with those included in the credit agreement.2023. The Company maintains standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement. As of March 31, 2018,2019, the Company had outstanding letters of credit totaling $4,927,000$5,271,000 and no outstanding debt under this agreement. There was $345,073,000$344,729,000 available under the revolving credit agreement as of March 31, 2018.2019.
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 $136,167,000$235,249,000 and $190,495,000$214,101,000 at March 31, 20182019 and December 31, 2017,2018, respectively.
20
Other, net in the consolidated statements of income included the following:
(In thousands) |
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Foreign exchange gains (losses) |
| $ | 1,053 |
|
| $ | (484 | ) | ||||||||
Foreign exchange gains |
| $ | 600 |
|
| $ | 1,053 |
| ||||||||
Investment income |
|
| 139 |
|
|
| 102 |
|
|
| 97 |
|
|
| 139 |
|
Realized and unrealized gains on investments |
|
| 97 |
|
|
| 1,645 |
|
|
| 2,404 |
|
|
| 97 |
|
Net periodic benefit cost |
|
| (129 | ) |
|
| (171 | ) |
|
| 44 |
|
|
| (129 | ) |
Other, net |
| $ | 1,160 |
|
| $ | 1,092 |
|
| $ | 3,145 |
|
| $ | 1,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on requirements of ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, the Company reclassified Net periodic benefit cost outside of income from operations. See Note 8 for more details for the components of Net periodic benefit cost.
| BUSINESS RESTRUCTURING |
In the first quarter of 2019, the Company approved a plan to close its Specialty Products office in the Netherlands and eliminate five positions from the site’s supply chain, quality control and research and development areas. This planned reduction in positions was made to better align the number of personnel with current business requirements and reduce costs at the site. As a result, severance and early lease termination expenses of $396,000 and $79,000, respectively, were recognized during the first quarter of 2019.
During the third quarter of 2018, the Company approved a plan to shut down Surfactant operations at its German plant site. As of March 31, 2019, an aggregate of $1,591,000 shut down related expense has been recognized at the site. This aggregate expense is comprised of $1,404,000 of asset and spare part write downs recognized in 2018 and $187,000 of decommissioning costs recognized in the first quarter of 2019. Decommissioning costs associated with the shutdown are expected to continue throughout the remainder of 2019.
In the fourth quarter of 2017, the Company approved a plan to restructure a portion of its Fieldsboro, New Jersey production facility. As a result, the Company recorded $915,000 of restructuring expense which reflected termination benefits for select plant employees. In the first quarter of 2019, the Company recognized a $251,000 favorable adjustment to the amount of termination benefits initially recorded.
In May 2016, the Company announced plans to shut down its Longford Mills, Ontario, Canada (Longford Mills) manufacturing facility, a part of the Surfactant reportable segment, by December 31, 2016. The shutdown plan was developed as an effortimplemented 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 2018.2019. As of March 31, 2018, $5,197,0002019, $6,346,000 of aggregate restructuring expense has been recognized, reflecting $1,594,000 of termination benefits for approximately 30 employees and $3,603,000$4,752,000 for other expenses, principally assetsite decommissioning costs.
Below is a reconciliation of the December 31, 20172018 and the March 31, 20182019 restructuring liabilities:
(In thousands) |
| Termination Benefits |
|
| Other Expense |
|
| Total |
|
| Termination Benefits |
|
| Other Expense |
|
| Total |
| ||||||
Restructuring liability at December 31, 2017 |
| $ | 592 |
|
| $ | 99 |
|
| $ | 691 |
| ||||||||||||
Restructuring liability at December 31, 2018 |
| $ | 260 |
|
| $ | 83 |
|
| $ | 343 |
| ||||||||||||
Expense recognized |
|
| — |
|
|
| 358 |
|
|
| 358 |
|
|
| — |
|
|
| 322 |
|
|
| 322 |
|
Amounts paid |
|
| (140 | ) |
|
| (409 | ) |
|
| (549 | ) |
|
| (79 | ) |
|
| (322 | ) |
|
| (401 | ) |
Foreign currency translation |
|
| (3 | ) |
|
| (4 | ) |
|
| (7 | ) |
|
| 6 |
|
|
| 2 |
|
|
| 8 |
|
Restructuring liability at March 31, 2018 |
| $ | 449 |
|
| $ | 44 |
|
| $ | 493 |
| ||||||||||||
Restructuring liability at March 31, 2019 |
| $ | 187 |
|
| $ | 85 |
|
| $ | 272 |
|
| ACQUISITION |
2018 Acquisition
On March 26, 2018, the Company through a subsidiary in Mexico closed on a previously announced agreement with BASF Mexicana, S.A.DE C.V.toC.V. (BASF) to acquire their surfactants production facility in Ecatepec, Mexico and a portion of their associated surfactants business. The facility is located close to Mexico City and has over 50,000 metric tons of capacity, 124,000 square footage of warehouse space, a large laboratory and office space. The acquired assets and business are included in the Company’s Surfactants segment. The purchase price of the acquisition was $21,475,000$22,852,000 and was paid with cash on hand. The primary assets acquired were land, buildings, machinery and equipment and inventory. The acquisition was accounted for
21
as a business combination, and, accordingly, the assets acquired were measured and recorded at their estimated fair values. No intangible assets were identified as part of the acquisition. The purchase price allocations are preliminary as of March 31, 2018 becausefollowing table summarizes the valuations necessary to assess the fair values of net assets acquired are still in process.as a result of the acquisition:
(In thousands) |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
| $ | 14,464 |
|
| $ | 14,464 |
|
Inventory |
|
| 4,500 |
|
|
| 5,687 |
|
Value-added tax receivables |
|
| 2,511 |
|
|
| 2,701 |
|
Total assets acquired |
| $ | 21,475 |
|
| $ | 22,852 |
|
The acquired business is expected to havehad minimal impact on the Company’s 2018 financial results. Pro forma financial information for the first quarter 2017 and 2018 has not been included because revenues and earnings of the Company would not have been significantly different than reported had the acquisition date been January 1, 2017.
17. INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act made broad and complex changes to the U.S. tax code. For various reasons that are discussed more fully below, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, we recorded provisional adjustments. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act.
17
Our accounting for the Tax Act is incomplete. As noted at year-end, we were able to reasonably estimate certain effects and, therefore, recorded the provisional adjustments related to the following:
Reduction of U.S. federal corporate tax rate: The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. We recorded a provisional adjustment for certain of our deferred tax assets and liabilities associated with the tax rate reduction for the year ended December 31, 2017.
We have not made any additional measurement-period adjustments in the quarter because such adjustments may be affected by other analyses related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences. However, we are continuing to gather additional information to complete our accounting for this item and expect to complete our accounting within the prescribed measurement period.
Deemed Repatriation Transition Tax: The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits of certain of our foreign subsidiaries. We recorded a provisional Transition Tax obligation for the year ended December 31, 2017.
We have not made any additional measurement-period adjustments in the quarter because we are continuing to gather additional information to more precisely compute the amount of the Transition Tax. However, we expect to complete our accounting within the prescribed measurement period.
Our accounting for the Tax Act is incomplete. As noted at year-end, we were not yet able to reasonably estimate the effects for the following items: Therefore, no provisional adjustments were recorded:
Global intangible low taxed income (GILTI): The Tax Act requires the Company to include certain income (GILTI) of its foreign subsidiaries in gross income. The amount of this inclusion is determined under complex rules, and depends, in part, on the character of income earned by the foreign subsidiaries, the tax bases of those subsidiaries’ assets and the amount of certain interest expenses.
Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future income inclusions related to GILTI as a current-period expense when incurred (the period cost method) or (2) accounting for such amounts in measuring deferred taxes (the deferred method). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future income inclusions related to GILTI and, if so, what the impact is expected to be. These determinations depend not only on our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business. Therefore, we have not made any adjustments or estimates related to any potential deferred tax liabilities related to GILTI in our financial statements and have not made a policy decision regarding whether to record deferred tax liabilities related to GILTI.
Deductibility of Executive Compensation: The Tax Act amended certain aspects of Section 162(m) of the Internal Revenue Code (Section 162(m)), which generally disallows a tax deduction for annual compensation paid to “covered employees” in excess of $1 million, including eliminating an exception to the deduction limit for “qualified performance-based compensation,” effective for tax years beginning after December 31, 2017. The Tax Act provides for a grandfather provision, pursuant to which remuneration that is provided pursuant to a written binding contract in effect on November 2, 2017, and which has not been modified in any material respect on or after that date, will not be subject to the amendments made to Section 162(m) by the Tax Act and will remain eligible for deduction as qualified performance-based compensation. To the extent available, we intend to continue to treat “qualified performance-based compensation” that is grandfathered under the Tax Act as deductible compensation. We have not yet completed our evaluation of our existing compensation arrangements to determine whether any amounts payable to our Section 162(m) covered employees may continue to constitute qualified performance-based compensation under Section 162(m) and qualify under the grandfather provision. Therefore, we have not made any adjustments or estimates related to any potential tax liabilities in our financial statements related to the amendments to Section 162(m).
Cost recovery: We have not yet completed all of the computations necessary or completed an inventory of our 2017 expenditures that qualify for immediate expensing. Therefore, we have not made any adjustments or estimates related to any potential tax liabilities in our financial statements related to immediate expensing.
Valuation allowances: The Company must assess whether valuation allowances assessments are affected by various aspects of the Tax Act (e.g., GILTI inclusions and new categories of foreign tax credits). Because, as discussed herein, the Company
18
has recorded no amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance has not been completed and no changes to valuation allowances as a result of the Tax Act have been recorded.
| RECENT ACCOUNTING PRONOUNCEMENTS |
In May 2014,February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606). The new update was later amended by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. In addition, the ASU requires expanded disclosures about revenue recognition that enable the users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 supersedes most of the previous revenue recognition guidance. For public entities, the new guidance, as amended, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. On January, 1, 2018, the Company adopted ASU No. 2014-9, which did not have a material effect on the Company’s financial position, results of operations or cash flows. The Company has added Note 12 – Revenue from Contracts with Customers to comply with the expanded disclosure requirements of ASU No. 2014-9.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842). This guidance requires a dual approach for lessee accounting whereby a lessee will account for lease arrangements with terms greater than 12 months as either finance leases or operating leases. Both finance leases and operating leases will beare recognized on the lessee’s balance sheet as right-of-use assets and corresponding lease liabilities, with differing methodologies for income statement recognition. In addition, the ASU requires expanded qualitative and quantitative disclosures about the Company’s lease arrangements. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. Most of the Company’s operating leases will be required to be placed on the balance sheet. The Company is assessing the quantitativemost significant impact that adoption of ASU No. 2016-2, willLeases (Topic 842) is that a lessee is required to recognize a “right-of-use” asset and corresponding lease liability for operating leases agreements. The Company adopted the new lease standard on January 1, 2019 by recognizing lease assets and the corresponding lease liabilities. The adoption of these guidelines did not have an impact on its financial position,retained earnings, the Company’s results of operations andor cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which adds or clarifies guidance on the classification of eight specific types of cash flows. The update is intended to reduce the existing diversity in practice with respect to the specific cash flow items. The amendments in ASU No. 2016-15 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. On January 1, 2018, the Company adopted ASU No. 2016-15, which had an immaterial impact on the cash flow presentation andflows, but it did not impact the Company’s financial position or results of operations.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current accounting guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments in ASU No. 2016-16 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. On January 1, 2018, the Company adopted ASU No. 2016-16, which did not have a material effectimpact on the Company’s financial position or results of operations and cash flows.
specific balance sheet line items. See Note 8 – Leases for more details.
In January 2017, the FASB issued ASU No. 2017-4, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. When an indication of impairment was identified after performing the first step of the goodwill impairment test, Step 2 required that an entity determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) using the same procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in ASU No. 2017-4, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value. An entity would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. In addition, an entity must consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. A public business entity thatThe Company is a SEC filer shouldrequired to adopt the amendments in ASU No. 2017-4 for its annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. It is not expected that the adoption of the guidance in ASU No. 2017-4 will have a material effect on the Company’s financial position, results of operations or cash flows.
19
In January 2017, the FASB issued ASU No.2017-1, Business Combination (Topic 805): Clarifying the Definition of a Business, with the objective of adding guidance to assist with evaluating whether transactions should be accounted for as an acquisition (or disposal) of assets or a business. This Update provides criteria to help determine when a set of assets and activities comprise a business as opposed to an acquisition of assets. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. On January 1, 2018, the Company adopted ASU No. 2017-1, which did not have a material effect on the Company’s financial position, results of operations or cash flows.
In March 2017, the FASB issued ASU No. 2017-7, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends existing guidance for the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The amended guidance requires entities to include the current service component of net periodic benefit cost in employee compensation costs in the income statement and to include all other components elsewhere in the income statement outside of income from operations. In addition, only the service cost component of net benefit cost is eligible for capitalization. For the Company, ASU No. 2017-7 is effective for interim and annual periods beginning after December 31, 2017, with early adoption permitted as of the beginning of any annual period for which an entity’s financial statements have not been issued. The requirements for the separate presentation of the service cost component and the other components of net periodic benefit cost must be adopted on a retrospective basis. The requirement to capitalize only the service component of net periodic benefit cost must be adopted on a prospective basis. On January 1, 2018, the Company adopted ASU No. 2017-7, which did not have a material effect on the Company’s financial position or cash flows but affected the presentation of the Company’s results of operations. For amounts reclassified on the Company’s statements of the results of operations, see Note 8 and Note 14.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends previous guidance regarding hedge accounting recognition and presentation requirements. The updated guidance alters the hedge accounting model to make achieving hedge accounting easier for an entity and to have such accounting better reflect an entity’s risk management activities. ASU No. 2017-12 also adds new, and amends previous, disclosure requirements. For the Company, ASU No. 2017-12 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. Entities must apply a modified retrospective approach to existing hedging relationships as of the adoption date. At present, because the Company has not entered into any transactions designated as accounting hedges, adoption of ASU No. 2017-12 is not expected to have a material effect on the Company’s financial position, results of operations and cash flows.
In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which permits an entity to select an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. An entity that elects this practical expedient should apply the practical expedient consistently to all of its existing or expired land easements that were not previously accounted for as leases under Topic 840. Once an entity adopts Topic 842, it should apply that Topic prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. An entity should continue to apply its current accounting policy for accounting for land easements that existed before the entity’s adoption of Topic 842. This update is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is assessing the quantitative impact that adoption of ASU No. 2018-01 will have on its financial position, results of operations and cash flows.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the Updateupdate eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act and willshould improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Acts,Act, the underlying guidance that requires that the effects of the change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. This update is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018. EarlyThe Company adopted this guidance and recorded a $5,325,000 adjustment to the opening balance of retained earnings with the corresponding offset to AOCI. See Note 12 – Accumulated Other Comprehensive Income (Loss) for more details.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This update modifies some disclosure requirements related to fair value measurements used for different levels of instruments in fair value hierarchy (Level 1, Level 2 and Level 3). The amendments in the update are effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2019. The adoption of this update is permitted.not expected have an effect on the Company’s financial position, results of operations and cash flows but may impact the disclosures made for fair value measurements used by the Company.
22
In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). This update removes some disclosures that are no longer considered cost beneficial and adds some disclosures about defined benefit plans that have been identified as relevant. The amendments in this update are effective for fiscal years ending after December 15, 2020. The adoption of this update is not expected to have an effect on the Company’s financial position, results of operations and cash flows but will impact the disclosures made for the Company’s defined benefit retirement plans.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update requires the entity to determine which implementation costs to capitalize as an asset related to the service contact and which costs to expense over the term of the hosting contract. The amendments in this update are effective for fiscal years beginning after December 15, 2019. The Company is assessing the quantitative impact that adoption of ASU No. 2018-022018-15 will have on its financial position, results of operations and cash flows.
2023
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the interim periods included in the accompanying condensed consolidated financial statements.
Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company’s and its subsidiaries’ (the Company) plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, the Company’s actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “should,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company’s control, that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.
Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part I-Item IA. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172018 inclusive of: (a) the risks and uncertainties related to accidents, unplanned production shutdowns or disruptions in any of the Company’s manufacturing facilities; (b) global competition and the Company’s ability to successfully compete; (c) volatility of raw material, natural gas and electricity costs as well as any disruption in their supply; (d) disruptions in transportation or significant changes in transportation costs; (e) reduced demand for Company products due to customer product reformulations or new technologies; (f) the Company’s ability to make acquisitions of suitable candidates and successfully integrate acquisitions; (g) the Company’s ability to keep and protect its intellectual property rights; (h) international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes; (i) potentially adverse tax consequences due to the international scope of the Company’s operations; (j) the impact of changes in the tax code as a result of recent U.S. federal tax legislation and uncertainty as to how some of those changes may be applied; (k) compliance with anti-corruption, environmental, health and safety and product registration laws; (l) the Company’s inability to accurately estimate and maintain appropriate levels of recorded liabilities for existing and future contingencies; (m)(k) the Company’s ability to operate within the limitations of its debt covenants; (n)(l) downgrades to the Company’s credit ratings or disruptions to the Company’s ability to access well-functioning capital markets; (o)(m) downturns in certain industries and general economic downturns; (p)(n) conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations; (q)(o) cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects; (r)(p) interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data; (s)(q) unfavorable resolution of litigation against the Company; (t)(r) and the Company’s ability to retain its executive management and other key personnel.
These factors are not necessarily all of the important factors that could cause the Company’s actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors also could harm the Company’s results. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements. The “Company,” “we,” “our” or “us” means Stepan Company and one or more of its subsidiaries only.
Overview
The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business comprises three reportable segments: